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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
September 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 29,446,218 shares of the Company's Common Stock, par value
$.001 per share, outstanding on November 8, 2002.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2002 and
December 31, 2001 ...................................................................... 1
Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2002 and 2001............................................................. 2
Condensed Consolidated Statements of Cash Flows for the three and nine months ended
September 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............................................................... 6
Factors That May Affect Future Results...................................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................. 19
Item 4. Controls and Procedures..................................................................... 20
PART II. OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds.................................................... 21
Item 6. Exhibits and Reports on Form 8-K............................................................ 21
SIGNATURES................................................................................................ 22
CERTIFICATIONS............................................................................................ 22
i
PART I
ITEM 1. FINANCIAL STATEMENTS
LUMINEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
September 30, December 31,
2002 2001
------------ -----------
(unaudited)
Current assets:
Cash and short-term investments .................. $ 40,273 $ 51,052
Accounts receivable, net ......................... 2,152 7,246
Inventory, net ................................... 7,656 8,748
Other assets ..................................... 771 614
--------- ---------
Total current assets ...................... 50,852 67,660
Property and equipment, net .............................. 2,958 3,577
Investment ............................................... 1,552 --
Other long-term assets ................................... 990 836
--------- ---------
Total assets .............................. $ 56,352 $ 72,073
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ......... $ 2,821 $ 4,163
Deferred revenue ................................. 952 479
--------- ---------
Total current liabilities ................. 3,773 4,642
Long-term deferred revenue ............................... 719 176
--------- ---------
Total liabilities ......................... 4,492 4,818
Stockholders' equity:
Common stock ..................................... 29 29
Additional paid in capital ....................... 121,033 118,995
Deferred stock compensation ...................... -- (623)
Accumulated deficit and other comprehensive income (69,202) (51,146)
--------- ---------
Total stockholders' equity ................ 51,860 67,255
--------- ---------
Total liabilities and stockholders' equity $ 56,352 $ 72,073
========= =========
1
LUMINEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(unaudited) (unaudited)
Revenue:
Product ........................... $ 3,582 $ 6,188 $ 9,046 $ 14,272
Grant ............................. -- -- -- 492
-------- -------- -------- --------
Total revenue ................. 3,582 6,188 9,046 14,764
Cost of product revenue ........... 2,969 4,182 7,612 10,710
-------- -------- -------- --------
Gross profit .................. 613 2,006 1,434 4,054
Operating expenses:
Research and development .......... 1,245 1,857 5,383 6,495
Selling, general and administrative 5,052 4,355 14,643 11,939
-------- -------- -------- --------
Total operating expenses ...... 6,297 6,212 20,026 18,434
Loss from operations ................... (5,684) (4,206) (18,592) (14,380)
Interest income ................... 168 585 570 2,441
-------- -------- -------- --------
Net loss ............................... $ (5,516) $ (3,621) $(18,022) $(11,939)
======== ======== ======== ========
Net loss per share, basic and diluted .. $ (0.19) $ (0.13) $ (0.62) $ (0.42)
======== ======== ======== ========
Shares used in computing net loss per
share, basic and diluted .......... 29,400 28,435 29,216 28,199
======== ======== ======== ========
2
LUMINEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(unaudited) (unaudited)
Operating activities:
Net loss ................................... $ (5,516) $ (3,621) $(18,022) $(11,939)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization .......... 367 405 1,200 1,156
Stock compensation ..................... 1,597 228 1,732 706
Gain on sale of asset .................. (16) -- (16) --
Changes in operating assets and liabilities:
Accounts receivable, net ............... 692 (2,109) 5,094 (3,658)
Inventory, net ......................... 1,249 (2,406) 1,092 (5,156)
Other .................................. 218 750 (269) 1,097
Accounts payable and accrued
liabilities ....................... (29) 2,218 (1,342) 1,178
Deferred revenue ....................... 717 (328) 1,016 (596)
-------- -------- -------- --------
Net cash used in operating activities ........... (721) (4,863) (9,515) (17,212)
-------- -------- -------- --------
Investing activities:
Purchase of property and equipment ......... (72) (401) (1,109) (1,954)
Net maturities (purchases) of short-
term investments ..................... -- (5,226) 16,122 46,910
Investment ................................. (1,100) -- (1,100) --
Proceeds from sale of assets ............... 125 -- 125 --
Acquired technology rights ................. -- (600) (75) (600)
Notes receivable - related party ........... -- -- -- (400)
-------- -------- -------- --------
Net cash used in investing activities ........... (1,047) (6,227) 13,963 43,956
-------- -------- -------- --------
Financing activities:
Proceeds from issuance of common stock ..... 251 682 929 2,649
-------- -------- -------- --------
Net cash provided by financing activities ....... 251 682 929 2,649
-------- -------- -------- --------
Effect of exchange rate on cash ................. 6 -- (34) --
Increase (Decrease) in cash and cash
equivalents ................................ (1,511) (10,408) 5,343 29,393
Cash and cash equivalents, beginning of
period ..................................... 41,784 46,907 34,930 7,106
-------- -------- -------- --------
Cash and cash equivalents, end of period ........ $ 40,273 $ 36,499 $ 40,273 $ 36,499
======== ======== ======== ========
Supplemental disclosure of non-cash activity:
Transfer of assets to investment............ $ 452 -- $ 452 --
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 nine months ended September 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 Annual Report on Form 10-K for the year ended December 31, 2001.
NOTE 2 - CASH AND SHORT-TERM INVESTMENTS
Cash and short-term investments consisted of the following (in
thousands):
September 30, December 31,
2002 2001
------------ -----------
Cash and cash equivalents............... $40,273 $34,930
Short-term investments.................. -- 16,122
------- -------
Total cash and short-term investments... $40,273 $51,052
======= =======
NOTE 3 - INVENTORY, NET
Inventory consisted of the following (in thousands):
September 30, December 31,
2002 2001
-------------- -----------
Parts and supplies........................ $ 6,567 $ 7,225
Work-in-progress.......................... 913 735
Finished goods............................ 1,411 1,288
------------ ----------
$ 8,891 $ 9,248
Less: Allowance for excess and obsolete
inventory................................. (1,235) (500)
------------ ----------
$ 7,656 $ 8,748
============ ==========
NOTE 4 - INVESTMENT
On September 5, 2002, the Company completed the sale of its Rules-Based
Medicine(TM) research and development project. In addition to the sale of
assets, the Company entered into a Development and Supply Agreement pursuant to
which the Company licensed the Company's proprietary xMAP(R) technology to RBM
Acquisition, Inc. ("RBM") and agreed to sell RBM instruments and microspheres.
In exchange for $1.1 million of cash and cash related items, property and
equipment (with a net book value of $452,000) and assumption of certain
liabilities by RBM, the Company received 990,000 shares of Series A Preferred
Stock of RBM, with a liquidation value of approximately $4.4 million, and
901,000 shares of RBM common stock, representing a 10% equity interest in RBM
that is not subject to dilution except subsequent to a qualified public offering
by RBM. The carrying value of the investment in RBM will be periodically
reviewed by management for potential impairment.
NOTE 5 - STOCK COMPENSATION EXPENSE
In connection with the transaction discussed in Note 4, the Company
extended the exercise period of fully vested options by the former Company
employees who left to join RBM for the lesser of two years or the stated
expiration of such vested options. As a result, the Company incurred a one-time,
non-cash stock compensation charge in the third quarter of 2002 in connection
with the RBM transaction of approximately $1.6 million.
4
NOTE 6 - 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 2,105,670 and 1,919,491 for the three and nine months
ended September 30, 2002, respectively, and 3,861,440 and 3,980,149 for the
three and nine months ended September 30, 2001, respectively.
5
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 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
report.
SAFE HARBOR CAUTIONARY STATEMENT
All statements in this 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 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, our ability to attract and retain our management and
staff, 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 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
RBM Transaction. On September 5, 2002, the Company completed the sale
of its Rules-Based Medicine(TM) research and development project to a newly
formed company, RBM Acquisition, Inc. ("RBM"), headed by Dr. Mark Chandler. Upon
the closing of the RBM transaction, Dr. Chandler resigned as Chairman, Chief
Executive Officer and President of the Company, as well as in his role as a
director, in order to focus his efforts on RBM. In addition to the asset sale
and the assumption of certain liabilities, the Company entered into a
Development and Supply Agreement pursuant to which RBM licensed the Company's
proprietary xMAP technology and the Company agreed to sell RBM instruments and
microspheres. In exchange for $1.1 million of cash and cash related items,
property and equipment (with a net book value of $452,000) and assumption of
certain liabilities, the Company received 990,000 shares of Series A Preferred
Stock of RBM, with a liquidation value of approximately $4.4 million, and
901,000 shares of common stock of RBM, representing a 10% equity interest that
is not subject to dilution except subsequent to a qualified public offering by
RBM. In connection with the RBM transaction, 14 employees resigned from the
Company to join RBM. The Company agreed to extend the exercise period of fully
vested options held by the former employees for the lesser of two years or the
stated expiration of such vested options. As a result, the Company incurred a
one-time, non-cash stock compensation charge in the quarter ended September 30,
2002 of approximately $1.6 million.
Simultaneous with closing the RBM transaction, Thomas W. Erickson was
elected Interim President and Chief Executive Officer of the Company pursuant to
a six month management services agreement. In addition, G. Walter Loewenbaum, an
existing director and Chairman of the Executive Committee of the Board of
Directors, was elected Chairman of the Board of Directors of the Company.
Reduction in Force. The Company, in an effort to better align its cost
structure with current revenues, is reducing its employee base by approximately
35 persons, equal to approximately 23% of the Company's total employment as of
the date hereof. The staff reductions are occurring throughout the Company and
are not concentrated in any one area. The Company anticipates severance and
related costs associated with the reduction in force to total approximately $1.2
million, of which approximately $650,000 will be paid in the fourth quarter of
2002. These measures are anticipated to result in projected cost reductions of
approximately $3.0 million for 2003. Management believes, following this staff
reduction and restructuring of the Company's management team, the Company's
personnel and organizational structure will be appropriate and adequate to
effectively conduct the Company's business.
6
The Management Evaluation and Search Committee of the Board of
Directors, formed in March 2002, continues its search to obtain a permanent
chief executive officer. In connection with this future hiring, it is
anticipated that the new chief executive officer will further evaluate the
senior management team to ensure that the Company has the proper personnel to
execute the Company's business plan and lead the Company's growth and
development. During this transition period (while the Company seeks a permanent
chief executive officer), current management, with the directors' support, is
evaluating the Company's strategic position, market opportunities and further
evaluating the infrastructure needs of the Company.
OVERVIEW
For the three months ended September 30, 2002 and 2001, we had net
losses of $5.5 million and $3.6 million, respectively. We anticipate that our
quarterly results of operations will fluctuate for the foreseeable future as a
result of several factors, including the risks discussed below in this report
under the heading "Factors That May Affect Future Results." 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 September 30, 2002, we have
entered into strategic partnerships with 43 companies. Of our 43 strategic
partners, only 19 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, royalty revenue is generated when a partner sells products
incorporating our technology or provides testing services to third parties using
our technology. 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.
We also sell to our customers extended service contracts for maintenance and
support of our products. 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 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. For the first nine months of 2002, two customers represented 24% of
the Company's revenues, 11% and 13%, 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.
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. As a result of the RBM transaction and the
reduction in force associated with the restructuring of the Company, we expect
total operating expenses, exclusive of non-recurring charges, to decline
relative to the third quarter of 2002. Exclusive of non-recurring items, we
currently expect operating expenses to be $4.0 to $5.0 million per quarter, and
to be $16.0 to $20.0 million on an annual basis for 2003.
7
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. Total unamortized
deferred stock compensation as of September 30, 2002 and as of December 31, 2001
was $0 and $623,000, respectively.
Total deferred revenue as of September 30, 2002 was $1.7 million 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 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.
- Inventories are valued at the lower of cost or market value and have
been reduced by an allowance for excess and obsolete inventories. At
September 30, 2002, there were two major components of the allowance
for excess and obsolete inventory. First, the Company has a specific
reserve for inventory components of systems that we no longer
manufacture at our facilities. Second, we have a reserve against slow
moving items for potential obsolescence. The total estimated allowance
is reviewed on a regular basis and adjusted based on management's
review of inventories on hand compared to estimated future usage and
sales. The Company believes that its inventory is properly valued based
on current market conditions.
- 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
8
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 SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
Revenue. Total revenue decreased 42.1% to $3.6 million for the three
months ended September 30, 2002 from $6.2 million for the comparable period in
2001. The decrease was primarily attributable to decreased system sales, as well
as decreased consumable sales.
A breakdown of revenue for the three months ended September 30, 2002
and 2001 is as follows (in thousands):
Three Months Ended
September 30,
----------------------------
2002 2001
---------- -----------
Instrument sales.......................... $ 1,749 $ 4,420
Consumable sales.......................... 1,267 1,457
Service contracts......................... 239 38
Royalty revenue........................... 181 32
Other revenue............................. 146 241
---------- -----------
$ 3,582 $ 6,188
========== ===========
During the three months ended September 30, 2002, we placed 68 Luminex
systems, including 1 HTS system, a 61% decrease as compared with 176 Luminex
systems placed in the third quarter 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 (i) delays in
commercialization by our strategic partners and (ii) slower than expected
product rollouts and system placements by strategic partners (that have released
commercial products incorporating our technology) with end users. As a result, a
number of strategic partners continue to have excess instruments in stock,
resulting in reduced current period purchases of additional instruments from the
Company. As strategic partners place the instruments currently held in inventory
with end users, we believe that instrument sales by the Company to such
strategic partners will increase.
Consumable sales, comprised of microspheres and sheath fluid, decreased
by 13% to $1.3 million during the third quarter of 2002 from $1.5 million for
the third quarter of 2001. The decrease is primarily the result of two large
orders placed in the third quarter 2001 by a strategic partner for use in kit
manufacturing and development as compared to one large order in the third
quarter 2002. This decrease was partially offset by an increase in consumable
purchases as a result of the increased installed base of Luminex 100 systems as
compared to the prior year period.
Service contracts, comprised of extended warranty contracts earned
ratably over the term of the agreement, increased 529% to $239,000 during the
third quarter of 2002 from $38,000 for the third quarter of 2001. This increase
is attributable to increased sales of extended service agreements, which is a
direct result of the increase in the commercial base of Luminex 100 systems as
compared to the prior year period.
Royalty revenue increased 466% to $181,000 during the three months ended
September 30, 2002 from $32,000 for the three months ended September 30, 2001.
This increase is attributable to increased sales of royalty bearing commercial
products by our partners and an increase in the commercial base of Luminex
systems as compared to the prior year. For the three months ended September 30,
2002, we had 11 commercial partners submit royalties as compared with four for
the three months ended September 30, 2001.
Other revenues, comprised of training revenue, shipping revenue and
miscellaneous parts sales, decreased 39% to $146,000 for the three months ended
September 30, 2002 from $241,000 for the three months ended September 30, 2001.
This decrease is primarily the result of decreased shipping revenue caused by
the reduction in instrument placements from the corresponding prior year
period.
9
Gross Profit. Gross profit decreased 69% to $613,000 for the three
months ended September 30, 2002, as compared to $2.0 million for the three
months ended September 30, 2001. The gross margin rate (gross profit as a
percentage of total revenue) decreased to 17% for the three months ended
September 30, 2002 from 32% for the three months ended September 30, 2001. The
rate decrease in gross margin was primarily attributable to an approximately
$600,000 charge in the third quarter of 2002 to increase the Company's allowance
for excess and obsolete inventory. The increase in our provision for excess and
obsolete inventory was conditioned upon management's assessment during the
quarter ended September 30, 2002 of the following factors: (i) the falling
market value for items held in inventory related to components that we no longer
manufacture at our facilities, (ii) attempts to sell these items to our
component manufacturers are progressing at a slower than anticipated rate, and
(iii) overall economic conditions and the low level of current sales. We have
adjusted our delivery schedule to reflect current forecasts of demand.
Research and Development Expense. Research and development expenses
decreased 33% to $1.2 million for the three months ended September 30, 2002 from
$1.9 million for the comparable period in 2001. The decrease was primarily
attributable to decreased personnel cost of $406,000 and decreased consumption
of parts and supplies of $233,000, each as a result of the sale of RBM.
Following the sale of RBM, research and development expenses are expected to
decline for the remainder of 2002 as compared to 2001. Exclusive of
non-recurring items, we expect research and development expenses to be $1.0 to
$1.5 million per quarter and $4.0 to $6.0 million on an annual basis for 2003.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased by 16% to $5.1 million for the three months
ended September 30, 2002 from $4.4 million for the comparable period in 2001.
The increase was primarily attributable to a one-time $1.6 million non-cash
stock compensation charge associated with the RBM transaction and increased
corporate insurance costs of approximately $100,000. Excluding these charges,
selling, general and administrative expenses declined by approximately $900,000
as compared to the prior year period. The decrease primarily consisted of
reduced personnel costs of approximately $600,000 and marketing costs of
approximately $200,000 as a result of the smaller employee base as compared to
the corresponding prior year period. The anticipated severance cost associated
with the fourth quarter 2002 reduction in force is currently expected to be
approximately $1.2 million, of which approximately $650,000 shall be paid in the
fourth quarter of 2002. Exclusive of non-recurring items and the anticipated
severance cost to be incurred for the fourth quarter of 2002, selling, general
and administrative expenses are expected to be in the range of $4.0 to $5.0
million per quarter and $16.0 to $20.0 million on an annual basis for 2003.
Interest Income. Interest income decreased by 71% to $168,000 for the
three months ended September 30, 2002 from $585,000 for the comparable period in
2001. The decrease was attributable to a decrease in the average cash and
short-term investment balances and a lower yield on the investment balances. The
average rate on current invested balances fell to 1.77% at September 30, 2002
from 3.42% at September 30, 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
Revenue. Total revenue decreased 39% to $9.0 million for the nine
months ended September 30, 2002 from $14.8 million for the comparable period in
2001. The decrease was primarily attributable to decreased system sales.
A breakdown of revenue for the nine months ended September 30, 2002 and
2001 is as follows (in thousands):
Nine Months Ended
September 30,
-------------------------
2002 2001
--------- ----------
Instrument sales.......................... $ 4,605 $ 10,707
Consumable sales.......................... 2,982 2,796
Service contracts......................... 540 80
Royalty revenue........................... 426 73
Other revenue............................. 493 616
Grant revenue............................. -- 492
-------- ----------
Total revenue........................ $ 9,046 $ 14,764
======== ==========
During the nine months ended September 30, 2002 we placed 164 Luminex
systems, including 1 HTS system, a 65% decrease as compared with 467 Luminex
systems placed during the nine months ended September 30, 2001. The reduction in
system placements was partially offset by an increase in the average price of
the Luminex 100 system. Our revenues continue to be affected by (i) delays in
commercialization by our strategic partners and (ii)
10
slower than expected product rollouts and system placements by strategic
partners (that have released commercial products incorporating our technology)
with end users. As a result released, a number of strategic partners continue to
have excess instruments in stock, resulting in reduced current period purchases
of additional instruments from the Company. As strategic partners place the
instruments currently held in inventory with end users, we currently believe
that instrument sales by the Company to such strategic partners will increase.
Consumable sales increased by 7% to $3.0 million for the nine months
ended September 30, 2002 from $2.8 million for the nine months ended September
30, 2001. The increase is attributable to an increase in the installed base of
Luminex 100 systems as compared to the prior year period.
Service contracts increased 575% to $540,000 during the nine months
ended September 30, 2002 from $80,000 for the nine months ended September 30,
2001. This increase is attributable to increased sales of extended service
agreements, which is a direct result of the increase in the commercial base of
Luminex 100 systems as compared to the prior year period.
Royalty revenue increased 484% to $426,000 during the nine months ended
September 30, 2002 from $73,000 for the nine months ended September 30, 2001.
This increase is attributable to increased sales of royalty bearing commercial
products by our partners and an increase in the commercial base of Luminex
systems as compared to the prior year period. For the nine months ended
September 30, 2002, we had 12 commercial partners submit royalties as compared
with four for the nine months ended September 30, 2001.
Other revenues, comprised of training revenue, shipping revenue and
miscellaneous parts sales, decreased 20% to $493,000 for the nine months ended
September 30, 2002 from $616,000 for the nine months ended September 30, 2001.
This decrease is primarily the result of decreased shipping revenue caused by
the reduction in instrument placements from the corresponding prior year period.
Finally, as discussed above in "Overview", 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 nine months
ended September 30, 2002 and no further grant revenue is expected.
Gross Profit. Gross profit decreased by 65% to $1.4 million for the nine
months ended September 30, 2002 from $4.1 million for the comparable period in
2001. The gross margin rate decreased to 16% of revenues for the nine months
ended September 30, 2002 from 27% of revenues for the nine months ended
September 30, 2001. The rate decrease in gross margin was attributable to
several factors, including (i) a charge of approximately $700,000 to increase
the Company's allowance for excess and obsolete inventory and (ii) increased
expediting, cancellation, scrap and rework fees of $373,000. The increase in our
provision for excess and obsolete inventory was conditioned upon management's
assessment during the quarter ended September 30, 2002 of the following factors:
(i) the falling market value for items held in inventory related to components
that we no longer manufacture in house, (ii) attempts to sell these items to our
component manufacturers are progressing at a slower than anticipated rate and
(iii) overall economic conditions and the low level of current sales. We have
adjusted our delivery schedule to reflect current forecasts of demand.
Research and Development Expense. Research and development expenses
decreased 17% to $5.4 million for the nine months ended September 30, 2002 from
$6.5 million for the comparable period in 2001. The decrease was primarily
attributable to the completion of several initiatives during 2001, including our
withdrawal from our grant arrangement with the National Institute of Standards
and Technology, as well as a decrease in overall research and development
activity during 2002. The overall decrease in research and development activity
was partially offset by an increase in activity of approximately $900,000
attributable to RBM. As a result of the sale of RBM, research and development
expenses are expected to decline for the remainder of 2002 and 2003, as compared
to 2001. Exclusive of non-recurring items, research and development expenses are
currently expected to be in the range of $1.0 to $1.5 million per quarter and
$4.0 million to $6.0 million on an annual basis for 2003.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased by 23% to $14.6 million for the nine months
ended September 30, 2002 from $11.9 million for the corresponding prior year
period. The increase was primarily attributable to (i) a one-time, non-cash $1.6
million stock compensation expense associated with the RBM transaction and (ii)
approximately $1.1 million of severance costs associated with employee count
reductions during the first three quarters of 2002. Such severance costs do not
reflect the staff reductions effected during the fourth quarter of 2002.
11
Exclusive of non-recurring items and the anticipated severance costs to be
incurred for the fourth quarter of 2002, selling, general and administrative
expenses are expected to be in the range of $4.0 to $5.0 million per quarter and
$16.0 to $20.0 million on an annual basis for 2003. The anticipated severance
cost associated with the reduction in force is currently expected to be
approximately $1.2 million, of which approximately $650,000 shall be paid in the
fourth quarter of 2002.
Interest Income. Interest income decreased by 77% to $570,000 for the
nine months ended September 30, 2002. The decrease was attributable to a
decrease in the average cash and short-term investment balances and a lower
yield on investment balances. The average rate on current invested balances fell
to 1.77% at September 30, 2002 from 3.42% at September 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, we held cash and short-term investments of $40.3
million and had working capital of $47.1 million. At December 31, 2001, we held
cash 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 $9.5 million for the nine months ended
September 30, 2002, compared with $17.2 million for the nine months ended
September 30, 2001. During the third quarter of 2002, the Company made an
investment valued at approximately $1.5 million in connection with the RBM
transaction, of which $1.1 million consisted of cash and cash related items.
Purchases of property and equipment for the nine months ended September 30, 2002
totaled $1.1 million, compared with $2.0 million for the nine months ended
September 30, 2001. Management anticipates total cash use for 2002 to be
approximately $13.0 to $14.0 million, giving us an anticipated balance at
December 31, 2002 of $37.0 to 38.0 million.
Our research and development expenses during the nine months ended
September 30, 2002 were $5.4 million, of which $1.8 million were related to the
RBM project. As a result of the sale of RBM, research and development expenses
are expected to decline for the remainder of 2002 and 2003, as compared to 2001.
Exclusive of non-recurring items, research and development expenses are
currently expected to be in the range of $1.0 million to $1.5 million per
quarter and between $4.0 million and $6.0 million on an annual basis for 2003.
Our future capital requirements will depend on a number of factors,
including our success in developing and expanding markets for our products,
payments under possible future strategic arrangements, continued progress of our
research and development of potential products, the timing and outcome of
regulatory approvals, the 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 and short-term
investments will be sufficient to fund our operating expenses and capital
equipment requirements through at least 2003.
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. There can be no assurance
that additional 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.
12
FACTORS THAT MAY AFFECT FUTURE RESULTS
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT OF APPROXIMATELY $69.2
MILLION AS OF SEPTEMBER 30, 2002.
We have incurred significant net losses since our inception, including
losses of $18.0 million for the nine months ended September 30, 2002, $15.7
million in 2001 and $12.5 million in 2000. At September 30, 2002, we had an
accumulated deficit of approximately $69.2 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. Furthermore, as we continue to incur
losses and utilize cash to support operations, we further decrease the cash and
short-term investments available to the Company. As of September 30, 2002, cash
and short-term investments totaled $40.3 million, a decrease of $10.8 million,
from $51.1 million at December 31, 2001. 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.
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 September 30, 2002, we had
entered into strategic partnerships with 43 companies, yet only 19 of these
partners have released commercialized products utilizing the Luminex platform.
For the first nine months of 2002, two customers accounted for 24% of revenues,
11% and 13%, respectively. The loss of any of our significant strategic partners
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.
13
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
royalties and consumables derived 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.
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
14
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.
OUR SUCCESS WILL DEPEND ON OUR ABILITY TO ATTRACT AND RETAIN OUR MANAGEMENT AND
STAFF.
We depend on the principal members of our management and scientific
staff, including our research and development, customer support, technical
service and sales staff. The loss of services of key members of management could
delay or reduce our product development, sales and customer support efforts. In
addition, recruiting and retaining qualified senior management personnel,
including our current search for a permanent CEO, and the restructuring of our
management team and organizational structure, scientific and other personnel to
perform research and development, customer support, technical service and sales
work will be critical to our success.
In connection with the RBM transaction, Mark Chandler, a co-founder and
the Company's Chairman, President and Chief Executive Officer, resigned. Thomas
W. Erickson joined the Company and will serve as Interim President and Chief
Executive Officer pursuant to a six month management services agreement. No
assurance can be given that the transition of management responsibilities will
be effected without any adverse consequences to the Company and its business.
In March 2002, we created the Management Evaluation and Search
Committee of the Company's Board of Directors 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. From that process, which is ongoing, we are
actively seeking a permanent chief executive officer and we have engaged in
significant staff reductions (including restructuring our management team and
organizational structure) to align our operating costs with current revenues
(See "Recent Developments - Reduction in Force"). There can be no assurance that
we will be able to attract additional, and retain existing, personnel necessary
to achieve our business objectives.
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 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
15
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 nine patents in the United States directed to various
aspects and applications of our technology. We have 37 pending applications in
the United States, one of which has been allowed. Two of the pending United
States applications have been published. Moreover, we have 25 pending
applications in certain foreign jurisdictions, nine of which have been
published, including international applications filed under the Patent
Cooperation Treaty (PCT). 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 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
16
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.
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.
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 three 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
17
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.
Our strategic partners and customers expect that our organization
operates to an established quality management system substantially compliant
with FDA quality system regulations and industry standards, such as ISO 9000. We
completed the ISO 9001:2000 standard registration process in March 2002.
Subsequent audits will be carried out at six-month intervals to ensure we
maintain our system in substantial compliance with ISO standards. Failure to
maintain substantial 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.
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.
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
18
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
20.1% of our outstanding common stock as of November 8, 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.
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.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Within 90 days prior
to the date of this quarterly report (the "Evaluation Date"), our Interim Chief
Executive Officer and Acting Chief Financial Officer carried out an evaluation
of the effectiveness of the Company's "disclosure controls and procedures" (as
defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15(d)-14(c)).
Based on that evaluation, these officers have concluded that as of the
Evaluation Date, the Company's disclosure controls and procedures were adequate
and designed to ensure that material information relating to the Company would
be made known to them by others within Company.
Changes in Internal Controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
the Company's disclosure controls and procedures subsequent to the Evaluation
Date.
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PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) During the third quarter of 2002, we issued 111,400 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 $1.96 to $3.92 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 September 30, 2002, we had used
approximately $44.0 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description of Documents
- ------- ------------------------
99.1 Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
On August 14, 2002, the Company filed a Current Report on Form 8-K
which included the certifications of Mark B. Chandler, Ph.D. as Chief Executive
Officer and Harriss T. Currie as Acting Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
On September 10, 2002, the Company filed a Current Report on Form 8-K
which announced the completion of the RBM transaction.
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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 November 13, 2002.
LUMINEX CORPORATION
By: /s/ HARRISS T. CURRIE
---------------------------------------
Harriss T. Currie
Acting Chief Financial Officer and
Controller
(Principal Financial
and Accounting Officer)
By: /s/ THOMAS W. ERICKSON
--------------------------------------
Thomas W. Erickson
Interim President and
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATIONS
I, Thomas W. Erickson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Luminex Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
22
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ THOMAS W. ERICKSON
---------------------------------------------
Thomas W. Erickson
Interim President and Chief Executive Officer
I, Harriss T. Currie, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Luminex Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
23
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ HARRISS T. CURRIE
--------------------------------------------
Harriss T. Currie
Acting Chief Financial Officer and Controller
24