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, 2001
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 28,676,435 shares of the Company's Common Stock, par value $.001
per share, outstanding on November 6, 2001.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30,
2001 and December 31, 2000............................... 1
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2001 and 2000.. 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2001 and 2000............ 3
Notes to Condensed Consolidated Financial Statements.......... 4
Independent Accountants' Review Report........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 7
Factors That May Affect Future Results........................ 11
Item 3. Quantitative and Qualitative Disclosure about Market Risk..... 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................. 18
SIGNATURES.............................................................. 19
i
PART I
ITEM 1. FINANCIAL STATEMENTS
LUMINEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
September 30, December 31,
2001 2000
------------- -------------
(unaudited)
Current assets:
Cash and cash equivalents............................................... $ 36,499 $ 7,106
Short-term investments.................................................. 19,611 66,521
Accounts receivable, net................................................ 6,743 3,085
Inventories............................................................. 7,564 2,408
Other................................................................... 642 1,739
------------- -------------
Total current assets................................................ 71,059 80,859
Property and equipment, net .................................................. 3,572 2,770
Intangible assets, net ....................................................... 596 -
Notes receivable - related parties............................................ 439 39
------------- -------------
Total assets........................................................ $ 75,666 $ 83,668
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 2,942 $ 2,741
Accrued liabilities..................................................... 1,650 673
Deferred revenue........................................................ 679 666
------------- -------------
Total current liabilities........................................... 5,271 4,080
Long-term deferred revenue ................................................... 291 900
------------- -------------
Total liabilities................................................... 5,562 4,980
Stockholders' equity:
Common stock............................................................ 29 28
Additional paid-in capital.............................................. 118,279 115,651
Deferred stock compensation............................................. (803) (1,529)
Accumulated deficit..................................................... (47,401) (35,462)
------------- -------------
Total stockholders' equity.......................................... 70,104 78,688
------------- -------------
Total liabilities and stockholders' equity.......................... $ 75,666 $ 83,668
============= =============
See Independent Accountants' Review Report.
1
LUMINEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
(unaudited) (unaudited)
Revenue:
Product..................................... $ 6,188 $ 2,190 $ 14,272 $ 4,974
Grant....................................... - 125 492 125
-------- -------- -------- --------
Total revenue.......................... 6,188 2,315 14,764 5,099
Cost of product revenue..................... 4,182 1,416 10,710 3,124
-------- -------- -------- --------
Gross profit........................... 2,006 899 4,054 1,975
Operating expenses:
Research and development ................... 1,857 2,284 6,495 6,025
Selling, general and administrative ........ 4,355 2,656 11,939 7,559
-------- -------- -------- --------
Total operating expenses............... 6,212 4,940 18,434 13,584
Loss from operations ............................ (4,206) (4,041) (14,380) (11,609)
Interest income ............................ 585 1,311 2,441 2,624
-------- -------- -------- --------
Net loss......................................... $ (3,621) $ (2,730) $(11,939) $ (8,985)
======== ======== ======== ========
Net loss per share, basic and diluted ........... $ (0.13) $ (0.10) $ (0.42) $ (0.40)
======== ======== ======== ========
Shares used in computing net loss
per share, basic and diluted ............... 28,435 27,197 28,199 22,553
See Independent Accountants' Review Report.
2
LUMINEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
-------------------------
2001 2000
-------- --------
(unaudited)
Operating activities:
Net loss................................................ $(11,939) $ (8,985)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization....................... 1,156 666
Stock compensation.................................. 706 2,273
Changes in operating assets and liabilities:
Accounts receivable................................. (3,658) (743)
Inventories ........................................ (5,156) (574)
Other............................................... 1,097 (1,382)
Accounts payable.................................... 201 751
Accrued liabilities ................................ 977 239
Deferred revenue ................................... (596) 741
-------- --------
Net cash used in operating activities ........................ (17,212) (7,014)
-------- --------
Investing activities:
Net maturities (purchases) of short-term investments.... 46,910 (56,390)
Purchase of property and equipment...................... (1,954) (1,829)
Notes receivable - related parties...................... (400) (74)
Acquired technology rights.............................. (600) -
-------- --------
Net cash provided by (used in) investing activities .......... 43,956 (58,293)
-------- --------
Financing activities:
Proceeds from issuance of common stock.................. 2,649 78,008
Stock issuance costs.................................... - (1,242)
-------- --------
Net cash provided by financing activities .................... 2,649 76,766
-------- --------
Increase in cash and cash equivalents ........................ 29,393 11,459
Cash and cash equivalents, beginning of period ............... 7,106 4,083
-------- --------
Cash and cash equivalents, end of period ..................... $ 36,499 $ 15,542
======== ========
Supplemental disclosure of noncash activities:
Conversion of preferred stock........................... $ - $ 28,946
Accrued stock issuance cost............................. $ - $ 18
See Independent Accountants' Review Report.
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,
2001 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2001. 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, 2000.
NOTE 2--INVENTORIES
Inventories consisted of the following (in thousands):
September 30, December 31,
2001 2000
------------- ------------
Parts and supplies............................ $ 5,381 $ 2,002
Work-in-progress and finished goods........... 2,183 406
------------- ------------
$ 7,564 $ 2,408
============= ============
NOTE 3--INTANGIBLE ASSETS, NET
In March 2001, the Company entered into an agreement that provides the
Company with a license to commercialize products incorporating certain patented
technology. Under the terms of the agreement, the Company made $600,000 in
milestone payments through September 30, 2001, and has agreed to make additional
payments of $400,000 in the aggregate upon the achievement of additional
milestones. In addition, the Company will make royalty payments based on sales
of the developed products incorporating the licensed technology. The costs of
the technology rights acquired were capitalized and are being amortized on a
straight-line basis over their estimated useful life.
NOTE 4--NOTES RECEIVABLE - RELATED PARTIES
Notes receivable - related parties at September 30, 2001, consisted of
notes from two officers of the Company. One note was executed in connection
with the relocation and employment of an officer. This note had an original
principal amount of $400,000, and is secured by mortgaged real property. The
promissory note is non-interest bearing and is due on the earlier of (i) the
termination of the officer or (ii) May 9, 2011. Contingent upon the continued
employment of the officer, beginning October 2, 2001, the principal amount will
be forgiven to the extent of $50,000 each year until October 2, 2004, for a
total possible reduction of $200,000.
NOTE 5--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.
4
LUMINEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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 3,861,440 and 3,980,149 for the three and nine months
ended September 30, 2001, respectively, and 2,902,082 and 12,229,099 for the
three and nine months ended September 30, 2000, respectively.
Pro forma net loss per share amounts have been computed as described above
and give effect to common equivalent shares arising from preferred stock that
automatically converted upon the April 3, 2000 closing of the Company's initial
public offering as if the preferred shares had converted at the original date of
issuance.
The following is a reconciliation of the numerator and denominator of basic
and diluted net loss per share (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
2001 2000 2001 2000
-------- --------- -------- --------
Basic and diluted:
Net loss ............................................................ $ (3,621) $ (2,730) $(11,939) $(8,985)
Weighted average shares of common stock outstanding.................. 28,435 27,197 28,199 22,553
Net loss per share, basic and diluted ............................... $ (0.13) $ (0.10) $ (0.42) $ (0.40)
======== ======== ======== =======
Net loss per share, basic and diluted:
Shares used above............................................... 28,435 27,197 28,199 22,553
Add: Pro forma adjustment to reflect weighted
average effect of assumed conversion of preferred stock... - - - 2,880
-------- --------- -------- -------
Shares used in computing basic and diluted pro forma net loss
per share, basic and diluted pro forma.................... 28,435 27,197 28,199 25,433
Net loss per share, basic and diluted pro forma................. $ (0.13) $ (0.10) $ (0.42) $ (0.35)
======== ======== ======== =======
NOTE 6--STOCKHOLDERS' RIGHTS PLAN
On June 20, 2001, the Company's Board of Directors declared a dividend of
one right for each outstanding share of the Company's common stock to
stockholders of record at the close of business on July 2, 2001. Each right
entitles the registered holder, upon the occurrence of certain triggering
events, to purchase from the Company one one-hundredth of a share of Series A
Junior Participating Preferred Stock, par value $.001 per share, at a purchase
price of $100 per fractional share, subject to adjustment.
5
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To The Board of Directors of
Luminex Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
Luminex Corporation as of September 30, 2001, the related condensed consolidated
statements of operations for the three and nine months ended September 30, 2001
and 2000, and the related condensed consolidated statements of cash flows for
the nine months ended September 30, 2001 and 2000. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements at September 30, 2001,
and for the three and nine month periods ended September 30, 2001 and 2000, for
them to be in conformity with accounting principles generally accepted in the
United States.
We have previously audited in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Luminex
Corporation as of December 31, 2000, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended [not
presented herein] and in our report dated January 26, 2001, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 2000, is fairly stated, in all material aspects, in relation
to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
Austin, Texas
October 18, 2001
6
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 Form 10-K for the year ended December 31, 2000 and "Factors
That May Affect Future Results" 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 for and acceptance of
our products, our dependence on strategic partners for development and
distribution of products, competition, our ability to scale-up manufacturing
operations, potential shortages of components and the timing and content of
regulatory approvals and rulings. 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.
Overview
Since inception, we have incurred significant losses and, as of September
30, 2001, we had an accumulated deficit of $47.4 million. Our limited operating
history makes accurate predictions of future operations difficult. Moreover, we
anticipate that our quarterly results of operations will fluctuate for the
foreseeable future due to 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, the timing of
regulatory approvals, our ability to scale up manufacturing operations and avoid
component shortages, the introduction of new products by our competitors, the
timing and extent of our research and development efforts and the timing of
significant orders.
Our ability to achieve sustained profitability will depend upon our ability
to continue to enter into strategic partnerships with companies that will
develop and market products incorporating our technology and market and
distribute our systems and consumables. Certain of our strategic partners
develop application-specific bioassay kits for use on our systems that they sell
to their customers generating royalties for us. Other strategic partners
perform testing services for third parties using our technology that also result
in royalties for us. Some strategic partners buy our products and then resell
those products to their customers. Through September 30, 2001, we have entered
into strategic partnerships with 32 companies.
Revenue on 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 our systems sales will generate a
recurring revenue stream from the sale of consumable products. In addition, we
expect to generate royalty revenue from some of our strategic partners as they
sell products incorporating our technology or provide testing services to third
parties using our technology.
Cost of product revenue consists of direct and indirect instrument and
reagent manufacturing, quality control, training, field service, customer
service and warranty costs. Our operating expenses have consisted primarily of
costs incurred in research and development, manufacturing scale-up and business
development and from general and administrative costs associated with our
operations. We expect our research and development expenses for the next
quarter to approximate our third quarter 2001 spending level. Our selling and
marketing expenses will increase as we continue to commercialize our products,
and general and administrative expenses will increase as we add personnel and
expand our facilities.
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 and restricted
stock 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 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 $228,000 and
$200,000 in deferred stock compensation expense for the three months ended
September 30, 2001 and 2000, respectively, and $706,000 and $2.3 million in
deferred stock compensation expense for the nine months ended September 30, 2001
and 2000, respectively. Total unamortized deferred stock compensation as of
September 30, 2001 was $803,000.
Total deferred revenue as of September 30, 2001 was $970,000, 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 products or to be applied towards future royalty payments and
(iii) payments received for service, maintenance and training revenue not yet
earned. Upfront payments from our strategic partners are nonrefundable and will
be recognized as revenue as our strategic partners purchase products or apply
such amounts against royalty payments.
Results of Operations
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
Revenue. Product revenue increased 183% to $6.2 million for the three
months ended September 30, 2001. The increase was primarily attributable to
increased system sales, as well as increased consumable sales. During the third
quarter of 2001, we placed 175 Luminex 100 systems, 1 HTS system, 149 Luminex XY
Platforms and 135 SD units compared with 90 Luminex 100 systems, 49 XY Platforms
and no HTS systems or SD units placed in the third quarter of 2000. Consumable
sales increased by 430% to $1.5 million, which is attributable to the increase
in the installed base of Luminex systems and purchases by strategic partners for
use in kit manufacturing and development.
After being temporarily suspended in September 1999, our government grant
was reinstated July 1, 2000 with a new joint venture partner. On July 1, 2001,
the reinstated grant was suspended due to the withdrawal of the new joint
venture partner. As a result, we did not recognize any grant revenue in the
third quarter of 2001 and do not expect to realize any further grant revenue in
future periods.
A breakdown of revenue for the three months ended September 30, 2001 and
2000 is as follows (in thousands):
Three Months Ended
September 30,
------------------
2001 2000
------ ------
System sales............ $4,420 $1,883
Consumable sales......... 1,457 275
Grant revenue............ - 125
Other revenue............ 311 32
------ ------
Total revenue...... $6,188 $2,315
====== ======
Gross Profit. Gross profit increased by 123% to $2.0 million for the
three months ended September 30, 2001. Gross margin (gross profit as a
percentage of total revenue) decreased from 39% for the three months ended
September 30, 2000 to 32% for the three months ended September 30, 2001. The
decrease in gross margin was attributable to the loss of grant revenue,
increased indirect personnel costs and indirect overhead costs, which were
partially offset by an increase in the sales of consumables, which have a
higher gross margin than system sales.
8
Research and Development Expense. Research and development expenses
decreased 19% to $1.9 million for the three months ended September 30, 2001.
The decrease was attributable to several factors, including decreased
consumption of parts and supplies of $578,000 and decreased stock compensation
expense of $83,000, which was offset by increased personnel cost of $129,000 due
to an increased number of employees. The decrease in consumption of parts and
supplies was attributable to the completion of certain projects.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased by 64% to $4.4 million for the three months
ended September 30, 2001. The increase was attributable to several factors,
including (i) increased personnel costs of $891,000 due to growth in employment,
(ii) increased professional expenses of $251,000 including marketing activities,
(iii) increased corporate insurance costs of $220,000, (iv) increased non-cash
stock compensation expense of $118,000 and (v) increased travel and
entertainment costs of $105,000 incurred to support business development
activities.
Interest Income. Interest income decreased by 33% to $585 for the three
months ended September 30, 2001. The decrease was attributable to a decrease in
the average cash and short-term investment balances, resulting from increased
operating expenses, and a lower yield on the investment balances.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,
2000
Revenue. Product revenue increased 187% to $14.3 million for the nine
months ended September 30, 2001. The increase was primarily attributable to
increased system sales, as well as increased consumable sales. During the first
nine months of 2001, we placed 464 Luminex 100 systems, 3 HTS systems, 346
Luminex XY Platforms and 250 SD units compared with 177 Luminex 100 systems, 158
XY Platforms and no HTS systems or SD units placed in the first nine months of
2000. Consumable sales increased by 351% to $2.8 million, which is attributable
to the increase in the installed base of Luminex systems and purchases by
strategic partners for use in kit manufacturing and development.
After being temporarily suspended in September of 1999, the original
government grant was reinstated July 1, 2000 with a new joint venture partner.
On July 1, 2001, the reinstated grant was suspended due to the withdrawal of the
new joint venture partner. As a result, we do not expect to realize any further
grant revenue in future periods.
A breakdown of revenue for the nine months ended September 30, 2001 and
2000 is as follows (in thousands):
Nine Months Ended
September 30,
-----------------------
2001 2000
-------- --------
System sales.................... $ 10,707 $ 4,246
Consumable sales................ 2,796 620
Grant revenue................... 492 125
Other revenue................... 769 108
-------- --------
Total revenue............. $ 14,764 $ 5,099
======== ========
Gross Profit. Gross profit increased by 105% to $4.1 million for the nine
months ended September 30, 2001. Gross margin (gross profit as a percentage of
total revenue) decreased from 39% for the nine months ended September 30, 2000
to 27% for the nine months ended September 30, 2001. The decrease in gross
margin was attributable to several factors including (i) lower average selling
prices of our systems, resulting from discounted sales to early adopting
strategic partners, (ii) increased indirect personnel costs and (iii) increased
indirect overhead costs. This increase was partially offset by a favorable
change in product mix.
Research and Development Expense. Research and development expenses
increased 8% to $6.5 million for the nine months ended September 30, 2001. The
increase was primarily attributable to an increased personnel costs of $709,000
due to an increased number of employees. This increase was partially offset by
a $534,000 reduction of non-cash stock compensation expense.
9
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased by 58% to $12.0 million for the nine months
ended September 30, 2001. The increase was attributable to several factors,
including (i) increased personnel costs of $2.5 million due to growth in
employment, (ii) increased corporate insurance costs of $962,000, (iii)
increased professional expenses of $926,000 and (iv) increased sales and
marketing expenses including travel and entertainment of $743,000 incurred to
support business development activities. These increases were partially offset
by a $1.0 million reduction of non-cash stock compensation expenses.
Interest Income. Interest income decreased by 7% to $2.4 million for the
nine months ended September 30, 2001. The decrease was attributable to a
decrease in the average cash and short-term investment balances, and a lower
yield on investment balances.
Liquidity and Capital Resources
We have funded our operations to date primarily through the issuance of
equity securities. At September 30, 2001, we held cash, cash equivalents and
short-term investments of $56.1 million and had working capital of $65.8
million. At December 31, 2000, we held cash, cash equivalents and short-term
investments of $73.6 million. 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 $17.2 million for the nine months ended
September 30, 2001, compared with $7.0 million for the nine months ended
September 30, 2000. Purchases of property and equipment for the nine months
ended September 30, 2001 totaled $2.0 million, compared with $1.8 million for
the nine months ended September 30, 2000.
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, cash equivalents
and short term-investments will be sufficient to fund our operating expenses and
capital equipment requirements through at least September 30, 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. 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.
10
FACTORS THAT MAY AFFECT FUTURE RESULTS
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 LabMAP(TM) 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 LabMAP
technology is highly dependent on our ability to establish successful strategic
relationships with a number of partners. 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 LabMAP 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 LabMAP 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.
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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, which could enable third parties to
use our technology or very similar technology and could reduce our ability to
compete 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 meaningful 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 similar to ours
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 and filed a number of patents in the United States on
various aspects and applications of our technology and have 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 analyses 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. As a result, we may not be able to prevent competitors from
developing and marketing technologies similar to our LabMAP technology in Japan.
We require our employees and consultants to execute confidentiality
agreements. However, we cannot guarantee that these agreements will provide us
with adequate protection against improper use 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
information 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 remove our ability to exclude certain
competitors from the market. We may also 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.
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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 stop the infringing activity or
obtain a license. Any required license may not be available to us on acceptable
terms, or 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 affect 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 patent covers aspects of our technology.
This patent expires in 2004. We cannot assure you that a dispute with Dr.
Tripatzis will not arise 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 up 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 up 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 assemblers. 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 few sources. We do not have agreements with all of our
suppliers. Our reliance on our suppliers and contract assemblers 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; and
. reduced control over pricing, quality and timely delivery due to the
difficulties in switching to alternate suppliers or assemblers.
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.
Our bioinformatics group is subject to additional risks and uncertainties.
Our bioinformatics group seeks to identify associations among the proteins
in blood that cause disease. We intend to identify these associations by
testing different blood samples for a large number of protein markers. The
creation of this database will be dependent on our ability to obtain a
sufficient number of blood samples and related medical histories to permit the
observation of these associations. These blood samples may need to include
multiple
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samples from persons who developed diseases over the period of time during which
the samples were collected. In addition, we will need to create large panels of
bioassays to test the blood samples. To the extent we are unable to obtain
sufficient quantities of relevant blood samples and medical histories, or cannot
develop a large panel of bioassays to test the samples, we will not be able to
create the database or to produce meaningful information from it.
If we encounter difficulties in developing the bioinformatics software that
will be used to analyze the database information or in maintaining the database,
our ability to identify useful information from the database will be adversely
affected. Our efforts to create the database and create algorithms to analyze
the information that will be contained in the database have only recently begun.
There can be no assurance that these efforts will be successful or lead to
useful scientific information. Our ability to attract customers for any
information that may be developed will be heavily dependent upon the successful
completion of the database and the analyses thereof within the expected time
frames. In addition, because our bioinformatics business will require
manipulating and analyzing large amounts of data, we will be dependent on the
continuous, effective, reliable and secure operation of our computer hardware,
software, networks and related infrastructure. We expect that this database and
the bioinformatics software will be complex and sophisticated, and as such,
could contain data, design or software errors that could be difficult to detect
and correct.
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. There can be no assurance that we will be able to
attract additional and retain existing personnel.
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 one such approval or clearance has 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.
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Our bioinformatics group 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. This 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.
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.
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.
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 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:
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. 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 have control over 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 United States
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.
Our operating results may 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. Due to this lengthy
and unpredictable sales cycle, our operating results could fluctuate
significantly from quarter to quarter.
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.
Our operating results may be affected by current economic and political
conditions.
On September 11, 2001, the United States was the target of unprecedented
terrorist attacks. These attacks have created many economic and political
uncertainties, some of which may adversely affect our business and revenues.
While we do not believe that the attacks had an adverse effect on our operations
during the third quarter, the long-term effects of the attacks on our business
and revenues are unknown. The potential for future terrorist attacks, the
national and international responses to terrorist attacks, and other acts of war
or hostility have created many economic and political uncertainties, which also
could adversely affect our business and revenues in the short or long term in
ways that cannot presently be predicted.
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;
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. 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 National 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 43%
of our outstanding common stock as of November 6, 2001. 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 charter and bylaws and Delaware law and our
stockholder rights plan 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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PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibits listed in the accompanying Exhibit Index are filed as part of
this Quarterly Report on Form 10-Q.
(b) Reports on Form 8-K:
The Company did not file any report on Form 8-K during the three months
ended September 30, 2001.
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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 9, 2001.
LUMINEX CORPORATION
By: /s/ Frank J. Reeves
-----------------------------------------
Frank J. Reeves
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
Exhibit
Number Description Of Document
- ------ -----------------------
10.18 Lease Agreement dated October 19, 2001 between Aetna
Life Insurance Company and Luminex Corporation.
23.10 Acknowledgement of Independent Accountants.
20