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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____ to _____.
Commission File No. 000-30109
----------------
LUMINEX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 74-2747608
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12212 TECHNOLOGY BLVD., AUSTIN, TEXAS 78727
(Address of principal executive offices) (Zip Code)
(512) 219-8020
(Registrant's telephone number, including area code)
-----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
There were 29,404,218 shares of the Company's Common Stock, par value
$.001 per share, outstanding on August 9, 2002.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001...................................................................1
Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 2002 and 2001..............................................................2
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002
and 2001............................................................................3
Notes to Condensed Consolidated Financial Statements.........................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........5
Factors That May Affect Future Results......................................................11
Item 3 Quantitative and Qualitative Disclosure about Market Risk...................................19
PART II. OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds ...................................................20
Item 4. Submission of Matters to a Vote of Security Holders ........................................20
Item 6. Exhibits and Reports on Form 8-K ...........................................................20
SIGNATURES ...................................................................................................22
i
PART I
ITEM 1. FINANCIAL STATEMENTS
LUMINEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
2002 2001
--------------- -----------------
(unaudited)
Current assets:
Cash and short-term investments....................................... $ 41,784 $ 51,052
Accounts receivable, net.............................................. 2,844 7,246
Inventory ......................................................... 8,905 8,748
Other ......................................................... 1,101 614
--------------- -----------------
Total current assets.............................................. 54,634 67,660
Property and equipment, net................................................ 3,801 3,577
Other assets ......................................................... 891 836
--------------- -----------------
Total assets...................................................... $ 59,326 $ 72,073
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.............................. $ 2,850 $ 4,163
Deferred revenue...................................................... 796 479
--------------- -----------------
Total current liabilities......................................... 3,646 4,642
Long-term deferred revenue and other.................................. 158 176
--------------- -----------------
Total liabilities................................................. 3,804 4,818
Stockholders' equity:
Common stock 29 29
Additional paid in capital............................................ 119,185 118,995
Deferred stock compensation........................................... -- (623)
Accumulated other comprehensive income................................ (39) 1
Accumulated deficit................................................... (63,653) (51,147)
--------------- -----------------
Total stockholders' equity........................................ 55,522 67,255
--------------- -----------------
Total liabilities and stockholders' equity........................ $ 59,326 $ 72,073
=============== =================
1
LUMINEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, June 30,
---------------------------------- ------------------------------
2002 2001 2002 2001
-------------- ------------- ------------ -------------
(unaudited) (unaudited)
Revenue:
Product .............................. $ 3,177 $ 4,489 $ 5,464 $ 8,084
Grant .............................. --- 223 --- 492
-------------- ------------- ------------ -------------
Total revenue...................... 3,177 4,712 5,464 8,576
Cost of product revenue..................... 2,648 3,918 4,643 6,528
-------------- ------------- ------------ -------------
Gross margin....................... 529 794 821 2,048
Operating expenses:
Research and development............... 2,144 1,806 4,138 4,638
Selling, general and administrative.... 4,629 4,134 9,591 7,584
-------------- ------------- ------------ -------------
Total operating expenses........... 6,773 5,940 13,729 12,222
Loss from operations........................ (6,244) (5,146) (12,908) (10,174)
Other income........................... 182 777 402 1,856
-------------- ------------- ------------ -------------
Net loss .............................. $ (6,062) $ (4,369) $(12,506) $ (8,318)
============== ============= ============ =============
Net loss per share, basic and diluted....... $ (0.21) $ $ (0.43) $
(0.15) (0.30)
============== ============= ============ =============
Shares used in computing net loss per share,
basic and diluted...................... 29,293 28,258 29,123 28,079
============== ============= ============ =============
2
LUMINEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Six Months Ended
June 30,
------------------------------------
2002 2001
--------------- -----------------
(unaudited)
Operating activities:
Net loss ......................................................... $ (12,506) $ (8,318)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization..................................... 833 751
Stock compensation................................................ 135 478
Changes in operating assets and liabilities:
Accounts receivable, net.......................................... 4,402 (1,549)
Inventory, net.................................................... (157) (2,750)
Other ......................................................... (487) 347
Accounts payable and accrued liabilities.......................... (1,313) (1,040)
Deferred revenue.................................................. 299 (268)
--------------- -----------------
Net cash used in operating activities...................................... (8,794) (12,349)
Investing activities:
Net maturities of short-term investments.............................. 16,122 52,136
Purchase of property and equipment.................................... (1,037) (1,553)
Acquired technology rights............................................ (75) --
Notes receivable - related parties.................................... -- (400)
--------------- -----------------
Net cash provided by investing activities.................................. 15,010 50,183
--------------- -----------------
Financing activities:
Proceeds from issuance of common stock................................ 678 1,967
--------------- -----------------
Net cash provided by financing activities.................................. 678 1,967
--------------- -----------------
Effect of exchange rate on cash............................................ (40) --
Increase in cash and cash equivalents...................................... 6,854 39,801
Cash and cash equivalents, beginning of period............................. 34,930 7,106
--------------- -----------------
Cash and cash equivalents, end of period................................... $ 41,784 $ 46,907
=============== =================
3
LUMINEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by Luminex Corporation (the "Company") in accordance with
accounting principles generally accepted in the United States for interim
financial information and the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. The consolidated financial statements
include the accounts of Luminex Corporation and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation. In the opinion of management, all adjustments (consisting of
normal recurring entries) considered necessary for a fair presentation have been
included. Operating results for the three and six months ended June 30, 2002 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2002. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 2001.
NOTE 2--INVENTORY
Inventory consisted of the following (in thousands):
June 30, December 31,
2002 2001
--------------- -----------------
Parts and supplies........................ $ 7,411 $ 7,225
Work-in-progress.......................... 760 735
Finished goods............................ 1,354 1,288
--------------- -----------------
9,525 9,248
Less: Allowance for obsolete inventory... (620) (500)
--------------- -----------------
$ 8,905 $ 8,748
=============== =================
NOTE 3--NET LOSS PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
Earnings Per Share, basic and diluted net loss per share is computed by dividing
the net loss for the period by the weighted average number of common shares
outstanding during the period.
The Company has excluded all potentially dilutive securities such as
convertible preferred stock, outstanding stock options and outstanding warrants
to purchase common stock from the calculation of diluted loss per common share
because such securities are anti-dilutive due to the Company's net loss for all
periods presented. The total shares excluded from the calculations of diluted
net loss per share, prior to application of the treasury stock method for
options and warrants, were 2,191,754 and 2,202,504 for the three and six months
ended June 30, 2002, respectively, and 3,800,960 and 3,933,234 for the three and
six months ended June 30, 2001, respectively.
4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the
condensed consolidated financial statements and the accompanying notes included
in Item 1 of this quarterly report, our Annual Report on Form 10-K for the year
ended December 31, 2001 and "Factors That May Affect Future Results" included in
this quarterly report.
SAFE HARBOR CAUTIONARY STATEMENT
All statements in this quarterly report that do not discuss past
results are forward-looking statements. Generally, the words "believe,"
"expect," "intend," "estimate," "anticipate," "will" and similar expressions
identify forward-looking statements. All statements which address our outlook
for our businesses and their respective markets, such as projections of future
performance, statements of management's plans and objectives, forecasts of
market trends and other matters are forward-looking statements. It is important
to note that our actual results or performance could differ materially from
those projected in such forward-looking statements. Forward-looking statements
are based on management's current expectations and are therefore subject to
certain risks and uncertainties, including those discussed under the section
titled "Factors That May Affect Future Results" included in this quarterly
report. Specific uncertainties which could cause our actual results to differ
materially from those projected include risks and uncertainties relating to
market demand and acceptance, the dependence on strategic partners for
development and distribution of products, fluctuations in quarterly results due
to a lengthy and unpredictable sales cycle, competition, our ability to scale
manufacturing operations, potential shortages of components and the timing of
regulatory approvals. We expressly disclaim any intent, obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained in this quarterly report to reflect any change in our
expectations with regard to such statements or any change in events, conditions
or circumstances on which any such statements are based.
RECENT DEVELOPMENTS
On August 14, 2002, the Company entered into a non-binding
letter of intent to divest its RBM unit to a newly-formed company to be headed
by Mark Chandler, the Company's current Chairman, President and Chief Executive
Officer. Pursuant to the terms of the letter of intent, the Company will
transfer the assets and liabilities of RBM to a newly-formed company that will,
independent of the Company, capitalize and fund the development of RBM. In the
proposed transaction, it is anticipated the Company will receive both a
preferred stock and common stock equity interest in the newly-formed company. In
addition, the letter of intent anticipates the Company will license certain
technology and supply microspheres to the buyer. The parties anticipate
execution of definitive agreements later this month.
In connection with the transaction, Mark Chandler will resign as
Chairman of the Board, Chief Executive Officer and President to become Chairman
and Chief Executive Officer of the newly-formed company. Dr. Chandler will
continue to serve as a director and will enter into a one year consulting
agreement with the Company. The Company also announced that Thomas W. Erickson
has joined the Company and will serve as Interim President and Chief Executive
Officer until finding a permanent replacement for Dr. Chandler.
OVERVIEW
For the three months ended June 30, 2002 and 2001, we had net losses of
$6.1 million and $4.4 million, respectively. We anticipate that our quarterly
results of operations will fluctuate for the foreseeable future as a result of
several factors, including the rate of market acceptance of current and new
products, the timing of the introduction by our strategic partners of commercial
products based on our technology, a lengthy and unpredictable sales cycle for
our product offerings, the introduction of new products by our competitors, our
ability to scale manufacturing operations and avoid component shortages, the
timing of regulatory approvals, the timing, extent and capital needs of our
research and development efforts and the timing of significant orders. Our
limited operating history, fluctuations in purchases of systems, customer
concentration and development of royalty revenue continue to make accurate
predictions of future operations difficult.
Our ability to achieve sustained profitability continues to depend upon
our ability to enter into strategic partnerships with companies that will
develop and market products incorporating our technology and market and
distribute our systems and consumables. Strategic partners will develop
application-specific bioassay kits for use on our systems that they will sell to
their customers generating royalties for us. Strategic partners may also perform
testing services for third parties using our technology that will also result in
royalties for us. Some strategic partners will also buy our products and then
resell those products to their customers. Through June 30, 2002, we have entered
into strategic partnerships with 40 companies. Of our 40 strategic partners,
only 18 have released commercialized products utilizing the Luminex platform.
Revenue from sales of our products is recognized when persuasive
evidence of an agreement exists, delivery has occurred, the fee is fixed and
determinable and collectibility is probable. Generally, these criteria are met
at the time our product is shipped. We expect that each system's sale will
generate a recurring revenue stream from the sale of consumable products. In
addition, we recognized royalty revenues for the first time from some of our
strategic partners during 2001. Royalty revenue is generated when a partner
sells products incorporating our technology or provides testing services to
third parties using our technology. Royalty revenue is recognized as it is
reported to us by our partners and payment is typically submitted concurrently
with the report. During 2001, we also began selling to our customers extended
service contracts for maintenance and support of our products. In accordance
with the
5
terms of a federal grant from which the Company withdrew on July 1, 2001, grant
revenue was recorded as research expenses relating to the grant were incurred,
provided that the amounts received were not refundable if the research was not
successful. Two customers accounted for 29% of product revenue in fiscal 2001.
These customers represented 16% and 13% of the Company's 2001 revenues,
respectively. We believe these customer relationships to be good; however, the
loss of either customer, a significant reduction in product purchases or
financial difficulty for either customer could have a material adverse effect on
our business, financial condition and results of operations. We believe these
customers will continue as significant customers in 2002; however, we do not
currently expect such customers to maintain purchases in 2002 at the same level
as 2001. Those customers represented 3% and 15%, respectively, of the Company's
revenues for the first six months of 2002.
Cost of product revenue consists of direct and indirect manufacturing,
quality control, training, customer service and warranty costs. Our operating
expenses have consisted primarily of costs incurred in research and development,
manufacturing and business development and from general and administrative costs
associated with our operations. If the proposed sale of the Rules-Based-Medicine
("RBM") unit is consummated, research and development expenses should decline
for the remainder of 2002 as compared to 2001. Non-RBM research and development
expenses should remain comparable with 2001. Our selling and marketing expenses
could increase as we continue to penetrate our target markets and assist our
partners in their commercialization efforts. During the second quarter of 2002,
we effected a reduction in force of approximately 25 employees or 13% of our
total workforce. We anticipate savings to the Company as a result of this
reduction in force to be approximately $1.2 million per year.
Deferred stock compensation represents the difference between the
deemed fair value of our common stock and the exercise price of options or
warrants or the fair market value of restricted stock grants. For options
granted to employees and directors, this difference is calculated as of the
grant date and amortized ratably over the vesting period. For options or
warrants granted to consultants, the difference is recognized as of the vesting
date with adjustments made to the recognized deferred stock compensation amount
up and until that time based on the market value of our common stock. As a
result of stock options, warrants and restricted stock grants, we recorded $0
and $245,000 in deferred stock compensation expense in the quarters ended June
30, 2002 and 2001, respectively. Total unamortized deferred stock compensation
as of June 30, 2002 and as of December 31, 2001 was $0 and $623,000
respectively.
Total deferred revenue as of June 30, 2002 was $935,000 and consisted
of (i) payments received for sales to customers with rights of return that had
not yet expired, (ii) upfront payments from strategic partners to be used for
the purchase of instruments or to be applied towards future royalty payments and
(iii) unamortized revenue related to extended service contracts. Upfront
payments from our strategic partners are nonrefundable and will be recognized as
revenue as our strategic partners purchase systems or apply such amounts against
royalty payments or instrument purchases.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally
6
accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Estimates and assumptions are reviewed periodically. Actual
results may differ from these estimates under different assumptions or
conditions.
We believe the following represent our critical accounting policies:
- Revenue from sales of the Company's products are recognized when
persuasive evidence of an agreement exists, delivery of the product has
occurred, the fee is fixed and determinable and collectibility is probable.
Generally, these criteria are met at the time the product is shipped. Revenues
from royalties related to agreements with strategic partners are recognized when
such amounts are either reported to the Company or accrued based on shipment
activity provided by the respective strategic partner. Revenue from extended
service agreements are deferred and recognized ratably over the term of the
agreement.
- In accordance with the terms of a federal grant in which the Company
participated, grant revenue was recognized as research expenses relating to the
grant were incurred, provided that the amounts received were not refundable if
the research was not successful. No further grant revenue is anticipated.
- Amounts billed or collected in excess of revenue recognized are
recorded as deferred revenue.
- We continuously monitor collections and payments from our customers and
maintain allowances for doubtful accounts based upon our historical experience
and any specific customer collection issues that we have identified. While such
credit losses have historically been within our expectations, there can be no
assurance that we will continue to experience the same level of credit losses
that we have in the past. A significant change in the liquidity or financial
position of any one of our customers, or a further deterioration in the economic
environment, in general, could have a material adverse impact on the
collectibility of our accounts receivable and our future operating results,
including a reduction in future revenues and additional allowances for doubtful
accounts.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Revenue. Total revenue decreased 33% to $3.2 million for the three
months ended June 30, 2002 as compared with $4.7 million for the three months
ended June 30, 2001. The decrease was primarily attributable to decreased sales
of Luminex 100 systems. In addition, we recorded no grant revenue during the
current period.
A breakdown of revenue for the three months ended June 30, 2002 and
2001 is as follows (in thousands):
Three Months Ended
June 30,
---------------------------------------
2002 2001
------------- ------------------
Instrument sales ............................ $ 1,582 $ 3,502
Consumable sales............................. 1,008 711
Grant revenue................................ -- 223
Royalty revenue.............................. 186 15
Other revenue................................ 401 261
------------- ------------------
Total revenue.......................... $ 3,177 $ 4,712
============= ==================
During the three months ended June 30, 2002 we placed 60 Luminex 100
systems compared with 174 during the second quarter of 2001. Approximately 48%
of the systems placed and 46% of system revenues for the second quarter occurred
during June 2002 as compared to approximately 80% and 71%, respectively, in June
2001. In addition, sales of the Luminex XY Platform decreased to 40 units in the
second quarter of 2002 as compared with 107
7
in the second quarter of 2001, and sales of the Luminex Sheath Delivery
("Luminex SD") unit decreased to 59 for the second quarter of 2002 as compared
to 91 in the second quarter of 2001. The reduction in system placements and
peripheral components was partially offset by an increase in the average price
of the Luminex 100 system. Our revenues continue to be affected by delays in
commercialization by strategic partners through slower than anticipated product
roll-outs and placements of our systems by such strategic partners. The
following table summarizes instrument placements for the three months ended June
30, 2002 and 2001, respectively:
Three Months Ended
June 30,
---------------------------------------
2002 2001
------------- ------------------
Luminex 100 ....................................... 60 174
Luminex XY Platform............................. 40 107
Luminex SD...................................... 59 91
Consumable sales, comprised of microspheres and sheath fluid, increased
by 42% to $1.0 million during the second quarter of 2002 from $711,000 for the
second quarter of 2001. The increase is attributable to an increase in the
installed base of Luminex 100 systems.
Other revenues increased 54% to $401,000 for the three months ended
June 30, 2002 from $261,000 for the three months ended June 30, 2001. Other
revenue consists of training revenue, service contract revenue, shipping revenue
and miscellaneous parts sales. Although shipping revenues were down for the
period as a result of the reduction in instrument placements from the
corresponding prior year period, increases in service contract revenue and
miscellaneous parts sales offset this decrease and contributed to the increase
for the quarter compared with the second quarter of 2001.
During the second quarter of 2002, we had $186,000 of royalty revenue
as compared with $15,000 during the second quarter of 2001. The increase is
attributable to increased sales of royalty bearing commercial products by our
partners and an increase in the commercial base. For the quarter ended June 30,
2002, we had ten commercial partners submit royalties as compared with two for
the quarter ended June 30, 2001.
Finally, as discussed above, we permanently withdrew from our grant
arrangement with the National Institute of Standards and Technology on July 1,
2001. Accordingly, no grant revenue was recorded during the second quarter of
2002, and no further grant revenue is expected.
Gross Profit. Gross profit was $529,000 for the three months ended June
30, 2002 as compared with $794,000 for the three months ended June 30, 2001.
Gross margin (gross profit as a percentage of total revenue) for the three
months ended June 30, 2002 was equivalent to the gross margin for the three
months ended June 30, 2001 at 17%. For the second quarter of 2002, 29% of the
total cost of sales was comprised of fixed components and 71% was variable in
nature. For the second quarter of 2001, these fixed and variable components were
13% and 87%, respectively. The variable cost of sales as a percentage of total
sales revenue dropped to 59% for the three months ended June 30, 2002 from 76%
for the three months ended June 30, 2001. This reduction is attributable to a
reduction in our overall manufacturing capacity and thus less idle capacity
adversely impacting our gross margins. This factor coupled with an increase in
the average price of a Luminex system was offset by the spread of our fixed
costs of sales over a lower revenue base and contributed to the comparable
margins for the periods.
Research and Development Expense. Research and development expenses
increased by 19% to $2.1 million for the three months ended June 30, 2002 from
$1.8 million for the three months ended June 30, 2001. The increase was
primarily attributable to an increase in expenditures related to the RBM
initiative offset by net reductions in all other research and development areas.
As a result of the proposed sale of the RBM unit, research and development
expenses for the remainder of 2002 should decrease as compared with the
corresponding prior year period.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased by 12% to $4.6 million for the three months
ended June 30,
8
2002 from $4.1 million for the three months ended June 30, 2001. The increase
was attributable to several factors, including (i) increased personnel costs of
$534,000 due to an increase in the number of employees as compared with the
prior year period, (ii) increased professional expenses of $91,000 including
marketing activities, (iii) increased corporate insurance costs of $120,000 and
(iv) increased sales and marketing expenses, including travel and entertainment,
of $124,000 incurred to support business development activities. These increases
were partially offset by a $211,000 reduction of non-cash stock compensation
expenses.
Other Income. Other income decreased by 77% to $182,000 for the three
months ended June 30, 2002 from $777,000 for the three months ended June 30,
2001. The decrease primarily was attributable to a decrease in interest income
arising from a decline in the average cash and short-term investment balance and
an overall reduction of short-term interest rates. The average rate on current
invested balances fell to 1.8% at June 30, 2002 from 4.1% at June 30, 2001. Our
cash reserves are held directly or indirectly in a variety of short-term,
interest-bearing instruments, including obligations of the United States
government or agencies thereof and highly rated U.S. corporate debt securities.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Revenue. Total revenue decreased 36% to $5.5 million for the six months
ended June 30, 2002 as compared with $8.6 million for the six months ended June
30, 2001. The decrease was primarily attributable to decreased sales of Luminex
100 systems. In addition, we recorded no grant revenue during the current
period.
A breakdown of revenue for the six months ended June 30, 2002 and 2001
is as follows (in thousands):
Six Months Ended
June 30,
---------------------------------------
2002 2001
------------- ------------------
Instrument sales ............................ $ 2,856 $ 6,286
Consumable sales............................. 1,714 1,345
Grant revenue................................ -- 492
Royalty revenue.............................. 245 40
Other revenue................................ 649 413
------------- ------------------
Total revenue.......................... $ 5,464 $ 8,576
============= ==================
During the six months ended June 30, 2002 we placed 96 Luminex 100
systems compared with 289 during the six months ended June 30, 2001. In
addition, sales of the Luminex XY Platform decreased to 97 units in the six
months ended June 30, 2002 as compared with 197 in the six months ended June 30,
2001, and sales of the Luminex SD unit increased to 122 from 115 for the same
periods. The reduction in system placements and peripheral components was
partially offset by an increase in the average price of the Luminex 100 system.
Our revenues continue to be affected by delays in commercialization by strategic
partners through slower than anticipated product roll-outs and placements of our
systems by such strategic partners. The following table summarizes instrument
placements for the six months ended June 30, 2002 and 2001, respectively:
Six Months Ended
June 30,
---------------------------------------
2002 2001
------------- ------------------
Luminex 100 ....................................... 96 289
Luminex XY Platform............................. 97 197
Luminex SD...................................... 122 115
Consumable sales, comprised of microspheres and sheath fluid, increased
by 27% to $1.7 million for the six months ended June 30, 2002 from $1.3 million
for the six months ended June 30, 2001. The increase is attributable to an
increase in the installed base of Luminex 100 systems.
Other revenues increased 57% to $649,000 for the six months ended June
30, 2002 from $413,000 for the six months ended June 30, 2001. Other revenue
consists of training revenue, service contract revenue, shipping
9
revenue and miscellaneous parts sales. Although shipping revenues were down for
the period as a result of the reduction in instrument placements from the
corresponding prior year period, increases in service contract revenue and
miscellaneous parts sales offset this decrease and contributed to the increase
for the period as compared with the six months ended June 30, 2001.
For the six months ended June 30, 2002, we had $245,000 of royalty
revenue as compared with $40,000 for the six months ended June 30, 2001. The
increase is attributable to increased sales of royalty bearing commercial
products by our partners and an increase in the commercial base. As of June 30,
2002, we had 12 commercial partners submit royalties as compared with two as of
June 30, 2001.
Finally, as discussed above, we permanently withdrew from our grant
arrangement with the National Institute of Standards and Technology on July 1,
2001. Accordingly, no grant revenue was recorded during the six months ended
June 30, 2002 and no further grant revenue is expected.
Gross Profit. Gross profit was $821,000 for the six months ended June
30, 2002 as compared with $2.0 million for the six months ended June 30, 2001.
Gross margin (gross profit as a percentage of total revenue) for the six months
ended June 30, 2002 decreased to 15% as compared to 24% for the six months ended
June 30, 2001. For the six months ended June 30, 2002, 31% of the total cost of
sales was comprised of fixed components and 69% was variable in nature. For the
six months ended June 30, 2001, these fixed and variable components were 15% and
85%, respectively. The variable cost of sales as a percentage of total sales
revenue dropped to 58% for the six months ended June 30, 2002 from 68% for the
six months ended June 30, 2001. This reduction is attributable to a reduction in
our overall manufacturing capacity and thus less idle capacity adversely
impacting our gross margins. This factor coupled with lower instrument sales and
an increase in the average price of a Luminex system was offset by the spread of
our fixed costs of sales over a lower revenue base and contributed to lower
margins for the current period.
Research and Development Expense. Research and development expenses
decreased by 11% to $4.1 million for the six months ended June 30, 2002 from
$4.6 million for the six months ended June 30, 2001. The decrease was primarily
attributable to the completion of several research and development initiatives
completed in the first half of 2001 and our withdrawal from our grant
arrangement with the National Institute of Standards and Technology. These
savings were partially offset by increased research and development activity
associated with our RBM initiative. Non-RBM research and development expenses
are expected to remain comparable with 2001.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased by 26%, or $2.0 million, to $9.6 million for
the six months ended June 30, 2002 from $7.6 million for the six months ended
June 30, 2001. The increase was attributable to several factors, including (i)
increased personnel costs of $1.7 million due to an increase in the number of
employees as compared with the corresponding prior year period, (ii) increased
corporate insurance costs of $374,000 and (iii) increased sales and marketing
expenses, including travel and entertainment, of $152,000 incurred to support
business development activities. These increases were partially offset by a
$317,000 reduction of non-cash stock compensation expenses.
Other Income. Other income decreased by 78% to $402,000 for the six
months ended June 30, 2002 from $1.9 million for the six months ended June 30,
2001. The decrease primarily was attributable to a decrease in interest income
arising from a decline in the average cash and short-term investment balance and
an overall reduction of short-term interest rates.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, we held cash, cash equivalents and short-term
investments of $41.8 million and had working capital of $51.0 million. At
December 31, 2001, we held cash, cash equivalents and short-term investments of
$51.1 million and had working capital of $63.0 million. We have funded our
operations to date primarily through the issuance of equity securities. Our cash
reserves are held directly or indirectly in a variety of short-term,
interest-bearing instruments, including obligations of the United States
Government or agencies thereof and U.S. corporate debt securities.
Cash used in operations was $8.8 million during the six months ended
June 30, 2002, compared with $12.3 million during the six months ended June 30,
2001. Cash used year-to-date included a $12.5 million net loss, a
10
decrease in receivables of $4.4 million and decreases in accounts payable of
$1.3 million. Purchases of property and equipment through June 30, 2002 totaled
$1.0 million, compared with $1.6 million for the first half of 2001.
At June 30, 2002, we held inventories of approximately $8.9 million
compared to $8.7 million at December 31, 2001. We have postponed future
deliveries in an attempt to reduce on hand inventory and more closely match raw
material delivery with our current production schedule. We believe that the
inventory on hand is properly valued and that there is minimal risk of inventory
writedowns in the future as a result of obsolescence.
We have contractual minimum purchase commitments with one of our
contract manufacturers. Should our production requirements fall below the level
of our commitments we could be required to take delivery of inventory for which
we have no immediate need or incur an increased cost per unit going forward. The
Company is not otherwise committed to scheduled purchase requirements. However,
because of a long lead-time to delivery, we are required to place orders for a
variety of items well in advance of scheduled production runs. Should the
Company's need for raw materials and components used in production continue to
fluctuate, we could incur additional costs associated with either expediting or
postponing delivery of those materials. We don't believe that our current
purchase commitments will interfere with our initiative to reduce on-hand
inventory.
Our research and development expenses during the six months ended June
30, 2002 were $9.6 million, of which the RBM project was approximately $1.4
million. In 2002, we expect non-RBM research and development expenses to remain
comparable with the prior year. With respect to RBM, if the proposed transaction
is completed, the Company would no longer incur RBM related research and
development expenses. If and until such a transaction occurs, the research and
development expenses associated with RBM will continue to be incurred by the
Company. Based on current estimates and assuming completion of the proposed
transaction during the third quarter of 2002, anticipated research and
development expenses for RBM in 2002 are expected to be in the range of $2.0 to
$2.5 million.
Our future capital requirements will depend on a number of factors,
including the timing and nature of future personnel decisions, production and
commercialization timetables, our success in developing and expanding markets
for our products, payments under possible future strategic arrangements,
continued progress of our research and development of potential products, the
timing and outcome of regulatory approvals, the costs involved in preparing,
filing, prosecuting, maintaining, defending and enforcing patent claims and
other intellectual property rights, the need to acquire licenses to new
technology and the status of competitive products. We believe that our existing
cash, cash equivalents and short-term investments are sufficient to fund our
current operating expenses and capital equipment requirements for 2002.
We have no credit facility or other committed sources of capital. To
the extent capital resources are insufficient to meet future capital
requirements, we will have to raise additional funds to continue the development
of our technologies. There can be no assurance that debt or equity funds will be
available on favorable terms, if at all. To the extent that additional capital
is raised through the sale of equity or convertible debt securities, the
issuance of those securities could result in dilution to our stockholders.
Moreover, incurring debt financing could result in a substantial portion of our
operating cash flow being dedicated to the payment of principal and interest on
such indebtedness, could render us more vulnerable to competitive pressures and
economic downturns and could impose restrictions on our operations. If adequate
funds are not available, we may be required to curtail operations significantly
or to obtain funds through entering into agreements on unattractive terms.
FACTORS THAT MAY AFFECT FUTURE RESULTS
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT OF APPROXIMATELY $63.7
MILLION AS OF JUNE 30, 2002.
We have incurred significant net losses since our inception, including
losses of $12.5 million for the six months ended June 30, 2002, $15.7 million in
2001, $12.5 million in 2000 and $12.6 million in 1999. At June 30, 2002, we had
an accumulated deficit of approximately $63.7 million. To achieve profitability,
we will need to generate and sustain substantially higher revenue while
maintaining reasonable cost and expense levels. If we fail to achieve
profitability within the time frame expected by securities analysts or
investors, the market price of our common stock will likely decline. We do not
know when or if we will become profitable. If we do achieve profitability, we
may not be able to sustain or increase profitability on a quarterly or an annual
basis.
11
IF OUR TECHNOLOGY AND PRODUCTS DO NOT BECOME WIDELY USED IN THE LIFE SCIENCES
INDUSTRY, IT IS UNLIKELY THAT WE WILL EVER BECOME PROFITABLE.
Life sciences companies have historically conducted biological tests
using a variety of technologies, including bead-based analysis. However,
compared to certain other technologies, our xMAP technology is new and
relatively unproven, and the use of our technology by life sciences companies is
limited. The commercial success of our technology will depend upon its
widespread adoption as a method to perform bioassays. In order to be successful,
we must convince potential customers to utilize our system instead of competing
technologies. Market acceptance will depend on many factors, including our
ability to:
- - convince prospective strategic partners and customers that our
technology is an attractive alternative to other technologies for
pharmaceutical, research, clinical and biomedical testing and analysis;
- - manufacture products in sufficient quantities with acceptable quality
and at an acceptable cost; and
- - place and service sufficient quantities of our products.
Because of these and other factors, our products may not gain sufficient market
acceptance to achieve profitability.
OUR BUSINESS PLAN MAY NOT SUCCEED UNLESS WE ESTABLISH MEANINGFUL AND SUCCESSFUL
RELATIONSHIPS WITH OUR STRATEGIC PARTNERS.
Our strategy for the development and commercialization of our xMAP
technology is highly dependent on our ability to establish successful strategic
relationships with a number of partners. As of June 30, 2002, we had entered
into strategic partnerships with 40 companies, yet only 18 of these partners
have released commercialized products utilizing the Luminex platform.
Furthermore, two of our customers accounted for 29% of the Company's revenues
for the year ended December 31, 2001. For the first six months of 2002, these
two customers accounted for 3% and 15% of revenues, respectively. The loss of
any of our significant strategic partners, or either of our two largest
customers during 2001, would have a material adverse effect on our growth and
future results of operations. Delays in implementation, changes in strategy or
the financial difficulty of any of our strategic partners for any reason could
have a material adverse effect on our business, financial condition and results
of operations.
Our ability to enter into agreements with additional partners depends
in part on convincing them that our technology can help achieve and accelerate
their goals or efforts. We will expend substantial funds and management efforts
with no assurance that any additional strategic relationships will result. We
cannot assure you that we will be able to negotiate additional strategic
agreements in the future on acceptable terms, if at all, or that current or
future partners will not pursue or develop alternative technologies either on
their own or in collaboration with others. Some of the companies we are
targeting as strategic partners offer products competitive with our xMAP
technology, which may hinder or prevent strategic relationships. Termination of
strategic relationships, or the failure to enter into a sufficient number of
additional agreements on favorable terms, could reduce sales of our products,
lower margins on our products and limit the creation of market demand and
acceptance.
Our business plan contemplates that a significant portion of our future
revenues will come from sales of our systems and the development and sale of
bioassay kits utilizing our technology by our strategic partners and from use of
our technology by our strategic partners in performing services offered to third
parties. We believe that our strategic partners will have economic incentives to
develop and market these products, but we cannot predict future sales and
royalty revenues because our existing strategic partner agreements do not
include minimum purchase requirements. In addition, we do not have the right or
ability to provide incentives to our strategic partners' sales personnel to sell
products based on xMAP technology or to control the timing of the release of
products by our strategic partners. The amount of these revenues will depend on
a variety of factors that are outside our control, including the amount and
timing of resources that current and future strategic partners devote to develop
and market products incorporating our technology. Further, the development and
marketing of certain bioassay kits will require our strategic partners to obtain
governmental approvals, which could delay or prevent their commercialization
efforts. If our current or future strategic partners do not successfully develop
and market products based on our technology and obtain necessary government
approvals, our revenues from product sales and royalties will be significantly
reduced.
12
OUR LIMITED OPERATING HISTORY AND RELIANCE ON STRATEGIC PARTNERS TO MARKET OUR
PRODUCTS MAKES FORECASTING DIFFICULT.
Because of our limited operating history, it is difficult to accurately
forecast future operating results. Our operating expenses are largely based on
anticipated revenue trends and a high percentage of our expenses are, and will
continue to be, fixed in the short-term. As a result, if we do not achieve our
expected revenues, our operating results will be below our expectations. The
level of our revenues will depend upon the rate and timing of the adoption of
our technology as a method to perform bioassays. Due to our limited operating
history, predicting this timing and rate of adoption is difficult.
In addition, we anticipate that a large percentage of future sales of
our products, and products incorporating our technology, will be made by our
strategic partners. For the following reasons, estimating the timing and amount
of sales of these products that may be made by our strategic partners is
particularly difficult:
- - We have no control over the timing or extent of product development,
marketing or sale of our products by our strategic partners.
- - Our strategic partners are not committed to minimum purchase
commitments and we do not control the incentives provided by our
strategic partners to their sales personnel.
- - A significant number of our strategic partners intend to produce
clinical diagnostic applications that may need to be approved by the
Food and Drug Administration, or FDA.
- - Certain strategic partners may have unique requirements for their
applications and systems. Assisting the various strategic partners may
strain our research and development and manufacturing resources. To the
extent that we are not able to timely assist our strategic partners,
the commercialization of their products will likely be delayed.
We have and expect to maintain a limited marketing, sales and distribution
staff. As a result, if our strategic partners fail to achieve projected levels
of sales, we will likely not achieve our estimated operating results.
WE EXPECT OUR OPERATING RESULTS TO CONTINUE TO FLUCTUATE SIGNIFICANTLY FROM
QUARTER TO QUARTER.
The sale of bioassay testing devices typically involves a significant
technical evaluation and commitment of capital by customers. Accordingly, the
sales cycle associated with our products typically is lengthy and subject to a
number of significant risks, including customers' budgetary constraints and
internal acceptance reviews that are beyond our control. As a result of this
lengthy and unpredictable sales cycle, our operating results have historically
fluctuated significantly from quarter to quarter. We expect this trend to
continue for the foreseeable future.
The vast majority of our system sales are made to our strategic
partners. Our partners typically purchase instruments in three phases during
their commercialization cycle: first, instruments necessary to support internal
assay development; second, instruments for sales force demonstrations; and
finally, instruments for resale to their customers. As a result, most of our
system placements are highly dependent on the commercialization timetables of
our strategic partners and can fluctuate from quarter to quarter as our
strategic partners move from phase to phase. We expect this trend to continue
for the foreseeable future.
BECAUSE WE RECEIVE REVENUES PRINCIPALLY FROM LIFE SCIENCE COMPANIES, THE CAPITAL
SPENDING POLICIES OF THESE ENTITIES HAVE A SIGNIFICANT EFFECT ON THE DEMAND FOR
OUR PRODUCTS.
Our customers include clinical diagnostic, pharmaceutical,
biotechnological, chemical and industrial companies, and the capital spending
policies of these companies can have a significant effect on the demand for our
products. These policies are based on a wide variety of factors, including
governmental regulation or price controls, the resources available for
purchasing research equipment, the spending priorities among various types of
analytical equipment and the policies regarding capital expenditures during
recessionary periods. Any decrease in capital spending by life sciences
companies could cause our revenues to decline. As a result, we are subject to
significant
13
quarter to quarter volatility in revenue expectations and actual revenue
results. Therefore, our quarterly operating results can be materially affected
(negatively and positively) by the spending policies and priorities of our
customers.
THE LIFE SCIENCES INDUSTRY IS HIGHLY COMPETITIVE AND SUBJECT TO RAPID
TECHNOLOGICAL CHANGE AND WE MAY NOT HAVE THE RESOURCES NECESSARY TO SUCCESSFULLY
COMPETE.
We compete with companies in the United States and abroad that are
engaged in the development and production of similar products. We will continue
to face intense competition from existing competitors, as well as other
companies seeking to develop new technologies. Many of our competitors have
access to greater financial, technical, scientific, research, marketing, sales,
distribution, service and other resources than we do. These companies may
develop technologies that are superior alternatives to our technologies or may
be more effective at commercializing their technologies in products.
The life sciences industry is characterized by rapid and continuous
technological innovation. We may need to develop new technologies for our
products to remain competitive. Our present or future products could be rendered
obsolete or uneconomical by technological advances by one or more of our current
or future competitors. In addition, the introduction or announcement of new
products by us or by others could result in a delay of or decrease in sales of
existing products, as customers evaluate these new products. Our future success
will depend on our ability to compete effectively against current technologies,
as well as to respond effectively to technological advances.
THE INTELLECTUAL PROPERTY RIGHTS WE RELY UPON TO PROTECT THE TECHNOLOGY
UNDERLYING OUR PRODUCTS MAY NOT BE ADEQUATE TO MAINTAIN MARKET EXCLUSIVITY.
INADEQUATE INTELLECTUAL PROPERTY PROTECTION COULD ENABLE THIRD PARTIES TO
EXPLOIT OUR TECHNOLOGY OR USE VERY SIMILAR TECHNOLOGY AND COULD REDUCE OUR
ABILITY TO DISTINGUISH OUR PRODUCTS IN THE MARKET.
Our success will depend on our ability to obtain, protect and enforce
patents on our technology and to protect our trade secrets. Any patents we own
may not afford full protection for our technology and products. Others may
challenge our patents and, as a result, our patents could be narrowed,
invalidated or rendered unenforceable. In addition, our current and future
patent applications may not result in the issuance of patents in the United
States or foreign countries. Competitors may develop products that are not
covered by our patents. Further, there is a substantial backlog of patent
applications at the U.S. Patent and Trademark Office, and the approval or
rejection of patent applications may take several years.
We have obtained eight patents in the United States directed to various
aspects and applications of our technology. We have 19 pending applications in
the United States, two of which have been allowed. One of the pending United
States applications has been published. Moreover, we have two published and 21
pending applications in certain foreign jurisdictions. In Japan, due to a
procedural omission by our previous patent counsel, we are unable to obtain
patent protection for our method of "real time" detection and quantification of
multiple analytes from a single sample similar to the protection we have
obtained in the United States. Although we are pursuing patent protection in
Japan for other aspects of our technology, we may not be able to prevent
competitors from developing and marketing technologies similar to our xMAP
technology in Japan.
We require our employees, consultants, strategic partners and other
third parties to execute confidentiality agreements. Our employees and
third-party consultants also sign agreements requiring that they assign to us
their interests in inventions and original expressions and any corresponding
patents and copyrights arising from their work for us. However, we cannot
guarantee that these agreements will provide us with adequate protection against
improper use of our intellectual property or disclosure of confidential
information. In addition, in some situations, these agreements may conflict
with, or be subject to, the rights of third parties with whom our employees,
consultants or advisors have prior employment or consulting relationships.
Further, others may independently develop substantially equivalent proprietary
technology and techniques, or otherwise gain access to our trade secrets. Our
failure to protect our proprietary information and techniques may inhibit or
limit our ability to exclude certain competitors from the market.
In order to protect or enforce our patent rights, we may have to
initiate legal proceedings against third parties, such as infringement suits or
interference proceedings. These legal proceedings could be expensive, take
significant time and divert management's attention from other business concerns.
If we lose, we may lose the benefit
14
of some of our intellectual property rights, the loss of which may inhibit or
preclude our ability to exclude certain competitors from the market. We also may
provoke these third parties to assert claims against us. The patent position of
companies like ours generally is highly uncertain, involves complex legal and
factual questions, and has recently been the subject of much litigation. No
consistent policy has emerged from the U.S. Patent and Trademark Office or the
courts regarding the breadth of claims allowed or the degree of protection
afforded under patents like ours.
OUR SUCCESS WILL DEPEND PARTLY ON OUR ABILITY TO OPERATE WITHOUT INFRINGING ON
OR MISAPPROPRIATING THE PROPRIETARY RIGHTS OF OTHERS.
We may be sued for infringing on the intellectual property rights of
others. In addition, we may find it necessary, if threatened, to initiate a
lawsuit seeking a declaration from a court that we do not infringe the
proprietary rights of others or that their rights are invalid or unenforceable.
Intellectual property litigation is costly, and, even if we prevail, the cost of
such litigation could affect our profitability. In addition, litigation is time
consuming and could divert management attention and resources away from our
business. If we do not prevail in any litigation, in addition to any damages we
might have to pay, we could be required to cease the infringing activity or
obtain a license. Any required license may not be available to us on acceptable
terms, if at all. In addition, some licenses may be nonexclusive, and therefore,
our competitors may have access to the same technology licensed to us. If we
fail to obtain a required license or are unable to design around a patent, we
may be unable to sell some of our products, which could have a material adverse
effect on our business, financial condition and results of operations.
We are aware of a European patent granted to Dr. Ioannis Tripatzis,
which covers certain testing agents and certain methods of their use. Dr.
Tripatzis has publicly stated his belief that his European patent covers aspects
of our technology if practiced in Europe. This European patent expires in 2004.
We cannot assure you that a dispute with Dr. Tripatzis will not arise involving
our European activities or that any dispute with him will be resolved in our
favor.
WE HAVE ONLY PRODUCED OUR PRODUCTS IN LIMITED QUANTITIES AND WE MAY EXPERIENCE
PROBLEMS IN SCALING OUR MANUFACTURING OPERATIONS OR DELAYS OR COMPONENT
SHORTAGES THAT COULD LIMIT THE GROWTH OF OUR REVENUE.
To date, we have produced our products in limited quantities compared
to the quantities necessary to achieve projected revenues. We may not be able to
produce sufficient quantities or maintain consistency between differing lots of
consumables. If we encounter difficulties in scaling our manufacturing
operations due to, among other things, quality control and quality assurance and
component and raw material supplies, we will likely experience reduced sales of
our products, increased repair or re-engineering costs due to product returns
and defects and increased expenses due to switching to alternate suppliers, any
of which would reduce our revenues and gross margins.
We presently outsource certain aspects of the assembly of our systems
to contract manufacturers. We have a minimum purchase requirement with one of
our contract manufactures which requires us to take delivery of a minimum number
of products or the cost per unit will increase, which would adversely impact our
gross margin. In addition, certain key components of our product line are
currently purchased from a limited number of outside sources and may only be
available through a limited number of sources. We do not have agreements with
all of our suppliers. Our reliance on our suppliers and contract manufacturers
exposes us to risks including:
- - the possibility that one or more of our suppliers or our assemblers
could terminate their services at any time without penalty;
- - the potential inability of our suppliers to obtain required components;
- - the potential delays and expenses of seeking alternate sources of
supply or manufacturing services;
- - reduced control over pricing, quality and timely delivery due to the
difficulties in switching to alternate suppliers or assemblers; and
- - increases in prices of raw materials and key components.
15
Consequently, in the event that supplies of components or work performed by
any of our assemblers are delayed or interrupted for any reason, our ability to
produce and supply our products could be impaired.
RBM IS SUBJECT TO ADDITIONAL RISKS AND UNCERTAINTIES AND HAS SIGNIFICANT HUMAN
AND CAPITAL RESOURCE REQUIREMENTS.
So long as RBM remains a business unit within the Company, the
continuing need for human resources and funding could detract from revenue
producing opportunities of the Company and materially adversely impact our
operating margin and net loss. RBM seeks to identify associations among the
proteins in blood that cause disease. RBM intends to identify these associations
by testing different blood samples for a large number of protein markers. In
addition, RBM will need to create large panels of bioassays to test the blood
samples. To the extent RBM is unable to obtain sufficient quantities of relevant
blood samples and medical histories, or cannot develop a large panel of
bioassays to test the samples, RBM will not be able to produce meaningful
information.
If RBM, or any third-party collaborators, encounter difficulties in
developing the software that will be used to analyze the information, RBM's
ability to identify useful information will be adversely affected. There can be
no assurance that RBM's efforts will lead to useful scientific information or
that RBM will be able to attract customers for this information. In addition,
because RBM will require manipulating and analyzing large amounts of data, RBM
will be dependent on the continuous, effective, reliable and secure operation of
computer hardware, software, networks and related infrastructure. In addition,
as discussed further in the following risk factor, some or all of the products
that may result from RBM may be subject to FDA regulation and, therefore, may be
subject to premarket controls such as premarket clearance. There can be no
assurance that the FDA will clear such products.
IF WE FAIL TO COMPLY WITH THE EXTENSIVE GOVERNMENTAL REGULATIONS THAT AFFECT OUR
BUSINESS, WE COULD BE SUBJECT TO ENFORCEMENT ACTIONS, INJUNCTIONS AND CIVIL AND
CRIMINAL PENALTIES THAT COULD DELAY OR PREVENT MARKETING OF OUR PRODUCTS.
The production, labeling, distribution and marketing of our products
for some purposes and products based on our technology expected to be produced
by our strategic partners are subject to governmental regulation by the Food and
Drug Administration in the United States and by similar agencies in other
countries. Some of our products and products based on our technology expected to
be produced by our strategic partners for in vitro diagnostic purposes are
subject to approval or clearance by the FDA prior to marketing for commercial
use. To date, only two such approvals or clearances have been obtained by our
strategic partners. The process of obtaining necessary FDA clearances or
approvals can be time-consuming, expensive and uncertain. Further, clearance or
approval may place substantial restrictions on the indications for which the
product may be marketed or to whom it may be marketed. In addition, we are also
required to comply with FDA requirements relating to laser safety.
Approved or cleared products are subject to continuing FDA requirements
relating to quality control and quality assurance, maintenance of records and
documentation and labeling and promotion of medical devices. Our inability, or
the inability of our strategic partners, to obtain required regulatory approval
or clearance on a timely or acceptable basis could harm our business. In
addition, failure to comply with applicable regulatory requirements could
subject us or our strategic partners to enforcement action, including product
seizures, recalls, withdrawal of clearances or approvals, restrictions on or
injunctions against marketing our products or products based on our technology,
and civil and criminal penalties.
Medical device laws and regulations are also in effect in many
countries outside the United States. These range from comprehensive device
approval requirements for some or all of our medical device products to requests
for product data or certifications. The number and scope of these requirements
are increasing. Failure to comply with applicable federal, state and foreign
medical device laws and regulations may harm our business, financial condition
and results of operations. We are also subject to a variety of other laws and
regulations relating to, among other things, environmental protection and work
place safety.
16
RBM will also be subject to various governmental regulations, which may
delay or prohibit certain planned activities. Certain biological testing has
raised issues regarding confidentiality and the appropriate uses of the
resulting information. For example, concerns have been expressed towards
insurance carriers and employers using such tests to discriminate on the basis
of such information, resulting in barriers to the acceptance of such tests by
consumers. These concerns could lead to governmental authorities calling for
limits on or regulation of the use of testing of the type proposed to be
performed. Such regulations would likely reduce the potential markets for any
products that might be developed.
Our strategic partners and customers expect that our organization
operates to an established quality management system compliant with FDA quality
system regulations and industry standards, such as ISO 9000. We completed the
two stage ISO 9001:2000 standard registration process in February and March
2002. Subsequent audits will be carried out at six-month intervals to ensure we
maintain our system in compliance with ISO standards. Failure to maintain
compliance to FDA regulations and ISO registration could reduce our competitive
advantage in the international market and also decrease satisfaction and
confidence levels with our partners.
OUR SUCCESS WILL DEPEND ON OUR ABILITY TO ATTRACT AND TO RETAIN OUR MANAGEMENT
AND STAFF.
We depend on the principal members of our management and scientific
staff, including our research and development, customer support, technical
service and sales staff. The loss of services of any of our key members of
management could delay or reduce our product development, sales and customer
support efforts. In addition, recruiting and retaining qualified scientific and
other personnel to perform research and development, customer support, technical
service and sales work will be critical to our success. There is a shortage in
our industry of qualified management and scientific personnel, and competition
for these individuals is intense. In addition, in March 2002, we created a
Management Evaluation and Search Committee to evaluate our existing management
team and organizational structure and to provide recommendations regarding
changes and additions to our management team and organizational structure, if
deemed appropriate. There can be no assurance that we will be able to attract
additional and retain existing personnel necessary to achieve our business
objectives. In connection with the proposed RBM transaction, Mark Chandler, a
co-founder and the Company's current Chairman, President and Chief Executive
Officer, will resign as Chairman, President and Chief Executive Officer to
become Chairman and Chief Executive Officer of the company acquiring the RBM
business. To assume Dr. Chandler's responsibilities, Thomas W. Erickson has
joined the Company and will serve as Interim President and Chief Executive
Officer until a permanent replacement for Dr. Chandler is found. No assurance
can be given that the transition of management responsibilities will be effected
without any adverse consequences to the Company and its business.
IF WE BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS, WE MAY BE REQUIRED TO PAY
DAMAGES THAT EXCEED OUR INSURANCE COVERAGE.
Our business exposes us to potential product liability claims that are
inherent in the testing, production, marketing and sale of human diagnostic and
therapeutic products. While we believe that we are reasonably insured against
these risks, there can be no assurance that we will be able to obtain insurance
in amounts or scope sufficient to provide us with adequate coverage against all
potential liabilities. A product liability claim in excess of our insurance
coverage or a recall of one of our products would have to be paid out of our
cash reserves.
IF THIRD-PARTY PAYORS INCREASINGLY RESTRICT PAYMENTS FOR HEALTHCARE EXPENSES OR
FAIL TO ADEQUATELY PAY FOR MULTI-ANALYTE TESTING, WE MAY EXPERIENCE REDUCED
SALES WHICH WOULD HURT OUR BUSINESS AND OUR BUSINESS PROSPECTS.
Third-party payors, such as government entities, health maintenance
organizations and private insurers, are restricting payments for healthcare.
These restrictions may decrease demand for our products and the price we can
charge. Increasingly, Medicaid and other third-party payors are challenging the
prices charged for medical services, including clinical diagnostic tests. They
are also attempting to contain costs by limiting coverage and the reimbursement
level of tests and other healthcare products. Without adequate coverage and
reimbursement, consumer demand for tests will decrease. Decreased demand could
cause sales of our products, and sales and services by our strategic partners,
to fall. In addition, decreased demand could place pressure on us or our
strategic partners to lower prices on these products or services, resulting in
lower margins. Reduced sales or margins by us or our strategic partners would
hurt our business, profitability and business prospects.
17
OUR STOCK PRICE HAS BEEN AND IS LIKELY TO CONTINUE TO BE VOLATILE.
The trading price of our common stock has been and is likely to
continue to be highly volatile and subject to wide fluctuations in price. This
volatility is in response to various factors, many of which are beyond our
control, including:
- - general economic conditions and interest rates;
- - instability in the United States and other financial markets as a
result of the terrorist attacks on September 11, 2001 and the
possibility of armed hostilities or further acts of terrorism in the
United States or elsewhere;
- - actual or anticipated variations in quarterly operating results from
historical results or estimates of results prepared by us or by
securities analysts;
- - announcements of technological innovations by us or our competitors;
- - new products or services introduced or announced by us or our
competitors;
- - changes in financial estimates by us or by securities analysts;
- - conditions or trends in the life science, biotechnology and
pharmaceutical industries;
- - announcements by us of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
- - additions or departures of key personnel; and
- - sales of our common stock.
In addition, the stock market in general, and The Nasdaq Stock Market and
the market for technology companies in particular, has experienced significant
price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of those companies. Further, there has been
particular volatility in the market prices of securities of life sciences
companies. These broad market and industry factors may seriously harm the market
price of our common stock, regardless of our operating performance. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted. A securities class
action suit against us could result in substantial costs, potential liabilities
and the diversion of management's attention and resources.
OUR DIRECTORS AND EXECUTIVE OFFICERS HAVE SUBSTANTIAL CONTROL OVER LUMINEX,
WHICH COULD DELAY OR PREVENT A MERGER OR OTHER CHANGE IN CONTROL TRANSACTION.
Our directors and executive officers beneficially owned approximately
34.4% of our outstanding common stock as of August 9, 2002. These persons will
be able to exercise significant influence over all matters requiring stockholder
approval, including the election of directors and the approval of significant
corporate transactions. This concentration of ownership may also delay or
prevent a change in control of the Company even if beneficial to our
stockholders.
ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION, BYLAWS AND
STOCKHOLDER RIGHTS PLAN AND DELAWARE LAW COULD MAKE A THIRD-PARTY ACQUISITION OF
US DIFFICULT.
Our certificate of incorporation, bylaws and stockholder rights plan
contain provisions that could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders. These
provisions could limit the price that investors might be willing to pay in the
future for shares of our common stock. We are also subject to certain provisions
of Delaware law that could delay, deter or prevent a change in control of us.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our interest income is sensitive to changes in the general level of
U.S. interest rates, particularly since the majority of our investments are in
short-term instruments held to maturity. Due to the nature of our short-term
investments, we have concluded that we are not subject to material market risk
exposure.
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) During the second quarter of 2002, we issued 68,150 shares of
common stock pursuant to the exercise of options granted to our directors,
employees and consultants pursuant to our 1996 Stock Option Plan for exercise
prices ranging from $5.96 to $7.426 per share. These shares were issued in
reliance upon the exemption from the registration requirements of the Securities
Act of 1933 set forth in Section 4(2) or Rule 701 thereof.
(b) On March 29, 2000, in connection with our initial public
offering, the Securities and Exchange Commission declared our Registration
Statement on Form S-1 (No. 333-96317) effective. The net proceeds of the initial
public offering were approximately $77.0 million. As of June 30, 2002, we had
used approximately $39 million of this amount to fund our operations, including
continued development and manufacturing of existing products, research and
development of additional products, hiring additional personnel and expanding
our facilities. Pending their use, the remaining net proceeds are currently
invested in short-term, interest-bearing, investment grade securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2002 Annual Meeting of Stockholders, which was held on
May 23, 2002, the stockholders of the Company elected Fred C. Goad, Jr.,
Laurence E. Hirsch and Jim D. Kever to serve as Class II directors for a term of
three years by the following votes:
Number of Shares
--------------------------------------------
For Against
---------------- ------------------
Fred C. Goad, Jr.................. 25,778,711 698,865
Laurence E. Hirsch................ 24,652,333 1,825,243
Jim D. Kever...................... 25,772,091 705,485
The other directors whose terms of office as a director continue after
the meeting are as follows: C. Thomas Caskey, M.D., Robert J. Cresci, William H.
Roper, M.D., Mark B. Chandler, Ph.D., John E. Koerner, III and G. Walter
Loewenbaum.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description of Documents
- ------ ------------------------
10.1 Form of Amended and Restated Employment Agreement between the Company
and each of Gail S. Page, Van S. Chandler, Randel S. Marfin, Ralph L.
McDade, Ph.D., James E. Schepp, James W. Jacobson, Ph.D. and Oliver H.
Meek.
10.2 Form of Indemnification Agreement dated May 22, 2002 between the
Company and each of the directors and officers of the Company
10.3 Sublease Agreement dated as of May 2, 2002 by and between the Company
and American Innovations, Ltd., for facilities situated at 12112
Technology Boulevard, Austin, Texas 78727.
10.4 First Amendment to Lease Agreement between Aetna Life Insurance
Company, as Landlord, and Luminex Corporation as Tenant dated July 25,
2002.
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(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on August 14, 2002.
LUMINEX CORPORATION
By: /s/ Harriss T. Currie
-----------------------------------------------------
Harris T. Currie
Acting Chief Financial Officer and
Controller
(Principal Financial and
Accounting Officer)
By: /s/ Mark B. Chandler, Ph.D.
------------------------------------------------------
Mark B. Chandler, Ph.D.
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
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