UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
June 30, 2003
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 / /
Indicate by check mark whether the registrant is an accelerated filer
(as defined in rule 12b-2 of the Exchange Act). Yes /X/ No / /
There were 29,676,818 shares of the Company's Common Stock, par value
$.001 per share, outstanding on August 8, 2003.
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002.................... 1
Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 2003 and 2002.......................................................................... 2
Condensed Consolidated Statements of Cash Flows for the three and six months ended
June 30, 2003 and 2002.......................................................................... 3
Notes to Condensed Consolidated Financial Statements............................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 8
Factors That May Affect Future Results............................................................. 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................ 21
Item 4. Controls and Procedures........................................................................... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................. 23
Item 2. Change in Securities and Use of Proceeds.......................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders............................................... 23
Item 6. Exhibits and Reports on Form 8-K.................................................................. 23
SIGNATURES and EXHIBITS........................................................................................ S-1
ii
PART I
ITEM 1. FINANCIAL STATEMENTS
LUMINEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2003 2002
---------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 38,696 $ 40,482
Accounts receivable, net................................................. 3,092 2,460
Inventory, net........................................................... 4,648 6,764
Other.................................................................... 1,258 773
---------- -----------
Total current assets.................................................. 47,694 50,479
Property and equipment, net................................................. 1,951 2,397
Other....................................................................... 933 747
---------- -----------
Total assets.......................................................... $ 50,578 $ 53,623
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 1,929 $ 1,080
Accrued liabilities...................................................... 1,638 3,107
Deferred revenue......................................................... 793 971
---------- -----------
Total current liabilities............................................. 4,360 5,158
Deferred revenue............................................................ 2,852 2,894
---------- -----------
Total liabilities..................................................... 7,212 8,052
---------- -----------
Stockholders' equity:
Common stock............................................................. 30 29
Additional paid-in capital............................................... 122,385 121,702
Accumulated other comprehensive loss..................................... (163) (79)
Accumulated deficit...................................................... (78,886) (76,081)
---------- -----------
Total stockholders' equity............................................ 43,366 45,571
---------- -----------
Total liabilities and stockholders' equity............................ $ 50,578 $ 53,623
========== ===========
LUMINEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ------------------------
2003 2002 2003 2002
--------- -------- --------- ---------
(unaudited) (unaudited)
Revenue............................................................ $ 5,642 $ 3,177 $ 10,744 $ 5,464
Cost of revenue.................................................... 3,705 2,648 7,327 4,643
--------- -------- --------- ---------
Gross profit.................................................. 1,937 529 3,417 821
Operating expenses:
Research and development...................................... 881 2,144 1,712 4,138
Selling, general and administrative........................... 3,051 4,809 6,556 9,951
--------- -------- --------- ---------
Total operating expenses................................... 3,932 6,953 8,268 14,089
--------- -------- --------- ---------
Loss from operations............................................... (1,995) (6,424) (4,851) (13,268)
Other income, net............................................. 96 182 206 402
Settlement of litigation...................................... - - 1,840 -
--------- -------- --------- ---------
Net loss........................................................... $ (1,899) $ (6,242) $ (2,805) $ (12,866)
========= ======== ========= =========
Net loss per share, basic and diluted.............................. $ (0.06) $ (0.21) $ (0.09) $ (0.44)
========= ======== ========= =========
Shares used in computing net loss
per share, basic and diluted..................................... 29,642 29,293 29,590 29,123
2
LUMINEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------
2003 2002 2003 2002
----------- -------- -------- --------
(unaudited) (unaudited)
Operating activities:
Net loss.................................................................. $ (1,899) $ (6,242) $ (2,805) $(12,866)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization............................................ 278 434 593 833
Stock based compensation and other....................................... 70 196 162 495
Changes in operating assets and liabilities:
Accounts receivable, net................................................. 369 1,490 (632) 4,402
Inventory, net........................................................... 195 870 2,116 (157)
Other assets............................................................. (800) (645) (502) (487)
Accounts payable......................................................... 1,017 (273) 849 (1,616)
Accrued liabilities...................................................... 323 821 (1,469) 303
Deferred revenue......................................................... (197) (21) (220) 299
----------- -------- -------- --------
Net cash used in operating activities....................................... (644) (3,370) (1,908) (8,794)
----------- -------- -------- --------
Investing activities:
Purchase of property and equipment........................................ (113) (306) (141) (1,037)
Net maturities of short-term investments.................................. - - - 16,122
Other investing activities................................................ (50) (75) (181) (75)
----------- -------- -------- --------
Net cash (used in) provided by investing activities......................... (163) (381) (322) 15,010
----------- -------- -------- --------
Financing activities:
Proceeds from issuance of common stock.................................... 80 228 526 678
----------- -------- -------- --------
Net cash provided by financing activities................................... 80 228 526 678
----------- -------- -------- --------
Effect of foreign currency exchange rate on cash............................ (57) (42) (82) (40)
Change in cash and cash equivalents......................................... (784) (3,565) (1,786) 6,854
Cash and cash equivalents, beginning of period.............................. 39,480 45,349 40,482 34,930
----------- -------- -------- --------
Cash and cash equivalents, end of period.................................... $ 38,696 $ 41,784 $ 38,696 $ 41,784
=========== ======== ======== ========
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 the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. In the opinion of management, all adjustments (consisting of
normal recurring entries) considered necessary for a fair presentation have been
included. Operating results for the three and six months ended June 30, 2003 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2003. 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, 2002.
NOTE 2 - INVENTORY, NET
Inventory consisted of the following (in thousands):
JUNE 30, DECEMBER 31,
2003 2002
-------- ------------
Parts and supplies............................................ $ 4,547 $ 6,995
Work-in-progress.............................................. 487 304
Finished goods................................................ 914 965
-------- ------------
5,948 8,264
Less: Allowance for excess and obsolete inventory............. (1,300) (1,500)
-------- ------------
$ 4,648 $ 6,764
======== ============
NOTE 3 - BUSINESS RESTRUCTURING COSTS
In November 2002, the Company's management approved a business
restructuring plan to reduce headcount and infrastructure. Components of
business restructuring charges and the remaining accruals as of June 30, 2003
were as follows (in thousands):
EMPLOYEE FACILITY
SEPARATION COSTS RESTRUCTURING COSTS TOTALS
---------------- ------------------- -----------
Total business restructuring costs..................... $ 1,401 $ 928 $ 2,329
Cash activitiy......................................... (364) - (364)
Non-cash activitiy..................................... - (136) (136)
---------------- ------------------- -----------
Balance at December 31, 2002........................... 1,037 792 1,829
Cash activity.......................................... (850) (792) (1,642)
Non-cash activity...................................... (100) - (100)
---------------- ------------------- -----------
Balance at March 31, 2003.............................. 87 - 87
Adjustment to accrual.................................. (52) - (52)
---------------- ------------------- -----------
Balance at June 30, 2003............................... $ 35 $ - $ 35
================ =================== ===========
4
Remaining cash expenditures resulting from the restructuring are
estimated to be $35,000 and consist of final settlement of employee separation
costs that were incurred as part of the reduction in force during the fourth
quarter of 2002. We expect to incur all of the remaining cash expenditures
related to the business restructuring in the third quarter of 2003. The Company
has substantially completed the business restructuring initiated during the
fourth quarter of 2002. There can be no assurance that the estimated costs of
the Company's business restructuring plan will not change.
NOTE 4 - ACCRUED WARRANTY COSTS
Sales of the Company's systems are subject to a warranty. System
warranties typically extend for a period of twelve months from the date of
installation. The Company estimates the amount of warranty claims on sold
product that may be incurred based on current and historical data. The actual
warranty expense could differ from the estimates made by the Company based on
product performance. Warranty expenses are evaluated and adjusted periodically.
Warranty expenses and accruals for the six months ended June 30, 2003 were as
follows (in thousands):
Accrued warranty costs at December 31, 2002............ $ 312
Warranty expenses...................................... (257)
Accrual for warranty costs............................. 510
-------
Accrued warranty costs at June 30, 2003................ $ 565
=======
NOTE 5 - SETTLEMENT OF LITIGATION
As a result of a procedural omission, the Company is unable to pursue a
patent in Japan, which corresponds to some of the Company's issued U.S. patents
related to the Company's method of "real time" detection and quantification of
multiple analytes from a single sample. On January 31, 2000, the Company filed a
lawsuit in Travis County, Texas state district court alleging negligence and
breach of contract on the part of the Company's prior patent counsel in this
matter. On March 7, 2003, the parties executed a full, final and complete
release regarding such action, without an admission of liability or wrongdoing
on the part of the defendants. As consideration in connection with the
settlement and release, the Company received approximately $1.8 million, net of
legal and related costs and expenses.
NOTE 6 - NET LOSS PER SHARE
In accordance with Statement of Financial Accounting Standards ("SFAS")
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 2,315,773 and 2,388,976 for the three and six months
ended June 30, 2003, respectively, and 2,191,754 and 2,202,504 for the three and
six months ended June 30, 2002, respectively.
NOTE 7 - STOCK BASED COMPENSATION
During the three and six months ended June 30, 2003, the Company
granted options to purchase 108,250 shares of common stock with exercise prices
per share between $5.15 and $6.17 and 1,324,500 shares of common stock with
exercise prices per share between $4.00 and $6.17, respectively. During the
three and six months ended June 30, 2002, the Company granted options to
purchase 795,500 shares of common stock with exercise prices per share between
$6.37 and $7.51 and 899,000 shares of common stock with exercise prices per
share between $6.37 and $18.00, respectively. For the three and six months ended
June 30, 2003, the Company recorded stock compensation expense related to these
issuances of $71,000 and $157,000, respectively. Comparatively, the Company
recorded
5
stock compensation expense related to issuances for the three and six months
ended June 30, 2002 of $180,000 and $360,000, respectively.
SFAS No. 123 prescribes accounting and reporting standards for all
stock-based compensation plans, including employee stock options. As allowed by
SFAS No. 123, the Company has elected to continue to account for its employee
stock-based compensation using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25").
SFAS No. 123 allows companies to estimate the pro forma fair value of
their stock-based compensation using a generally recognized option pricing model
and provide those results in the form of footnote disclosure. The fair value of
each option grant was estimated using the Black-Scholes Option-Pricing model
based on the date of grant and the following weighted average assumptions at
June 30:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2003 2002 2003 2002
-------- ------- ------- ------
Dividend yield..................................... 0.0% 0.0% 0.0% 0.0%
Expected volatility................................ 0.9% 0.9% 0.9% 0.9%
Risk-free rate of return........................... 5.0% 5.0% 5.0% 5.0%
Expected life...................................... 10 yrs 10 yrs 10 yrs 10 yrs
Weighted average fair
value at grant date......................... $ 5.19 $ 5.62 $ 4.21 $ 6.43
======== ======= ====== =======
For purposes of pro forma disclosures, the estimated fair value of the
options is expensed over the options' vesting periods. Because, for pro forma
purposes, the estimated fair value of the Company's employee stock options is
treated as if amortized to expense over the options vesting period, the effects
of applying SFAS No. 123 for pro forma disclosure are not necessarily indicative
of future amounts (in thousands, except per share amounts):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2003 2002 2003 2002
-------- -------- ----------- ----------
Net loss, as reported............................................ $ (1,899) $ (6,242) $ (2,805) $ (12,866)
Add: Stock based employee compensation expense included in
reported net loss......................................... - 16 - 135
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards... (1,499) (2,777) (2,683) (5,348)
-------- -------- ----------- ---------
Pro forma net loss............................................... $ (3,398) $ (9,003) $ (5,488) $ (18,079)
======== ======== =========== ==========
Earnings per share
Basic and Diluted - as reported........................... $ (0.06) $ (0.21) $ (0.09) $ (0.44)
Basic and Diluted - pro forma............................. $ (0.11) $ (0.31) $ (0.19) $ (0.62)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, this option valuation model requires
the input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the Black-Scholes model does not necessarily provide a
reliable single measure of the fair value of its employee stock options.
6
NOTE 8 - COMPREHENSIVE LOSS
In accordance with the disclosure requirements of SFAS No. 130,
"Reporting Comprehensive Income," the Company's comprehensive loss is comprised
of net loss and foreign currency translation. Comprehensive loss for the three
months ended June 30, 2003 and 2002 was approximately $2.0 million and $6.3
million, respectively. Comprehensive loss for the six months ended June 30, 2003
and 2002 was approximately $2.9 million and $12.9 million, respectively.
NOTE 9 - GUARANTEES
The terms and conditions of the Company's development and supply and
license agreements with its partners generally provide for a limited
indemnification of such partners, arising from the sale of Luminex systems and
consumables, against losses, expenses and liabilities resulting from third-party
claims based on an alleged infringement on an intellectual property right of
such third party. The terms of such indemnification provisions generally limit
the scope of and remedies for such indemnification obligations. To date, the
Company has not had to reimburse any of its partners for any losses arising from
such indemnification obligations.
NOTE 10 - ADOPTION OF NEW ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51 (FIN 46). FIN 46 requires the consolidation of entities in which an
enterprise absorbs a majority of the entity's expected losses, received a
majority of the entity's expected residual returns, or both, as a result of
ownership, contractual or other interests in the entity. Currently, entities are
generally consolidated by an enterprise when it has a controlling financial
interest through ownership of a majority voting interest in the entity. The
consolidation requirements of FIN 46 apply to variable interest entities created
after January 31, 2003. The consolidation requirements apply to older entities
in the first fiscal year or interim period beginning after June 15, 2003.
Although the Company does not believe the full adoption of FIN 46 will
have any effect on its financial position or results of operations, the Company
cannot make any definitive conclusion until it completes its evaluation.
7
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, 2002 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,
commercialization and distribution of products, fluctuations in quarterly
results due to a lengthy and unpredictable sales cycle, our ability to scale up
manufacturing operations, potential shortages of components, competition, the
timing of regulatory approvals and any modification of the Company's operating
plan in response to its ongoing evaluation of its business and search for a new
chief executive officer. 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
During 2003, we (i) are experiencing significant increases in revenue
versus the prior year, (ii) are realizing the benefits of the cost control
measures that were taken in 2002 and (iii) have received the final report from a
strategic consulting firm with extensive experience in the life sciences
industry to assist management in evaluating and refining the core focus and
operating plans for the Company. In addition, the Management Evaluation and
Search Committee, with the assistance of a nationally known management
recruiting firm, continues to evaluate candidates for the Company's chief
executive officer position.
For the six months ended June 30, 2003 and 2002, we had net losses of
approximately $2.8 and $12.9 million, respectively. For the quarters ended June
30, 2003 and 2002, the net losses were approximately $1.9 million and $6.2
million, respectively. We currently expect to continue to experience quarterly
net losses and anticipate that our quarterly results of operations will continue
to 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, customer
concentration and continued fluctuations in buying patterns of our strategic
partners make accurate predictions of future operations difficult.
Our ability to achieve sustained profitability continues to depend upon
our ability to establish meaningful and successful strategic partnership
arrangements with companies that will develop and market products incorporating
our technology and market and distribute our systems and consumables. Strategic
partners will develop application-specific bioassay kits for use on our systems
that they will sell to their customers generating royalties for us. Strategic
partners may also perform testing services for third parties using our
technology that will also result in royalties for us. Some strategic partners
will also buy our products and then resell those products to their customers.
Through June 30, 2003, we have 17 strategic partners who are paying royalties
and have either released commercialized products based on the Luminex platform
or are reselling our products. Our strategic partner relationships accounted for
91% of the Company's revenues for the second quarter of 2003.
We believe actions taken in the third and fourth quarter of 2002 to
right size our infrastructure and reduce the cash burn rate have allowed, and
will better allow, management to further develop our technology, more
effectively
8
deliver our products and serve our customers' needs. In the near future, we
anticipate, among other things: (i) hiring a new chief executive officer, (ii)
continuing to refine our strategic and operating focus, (iii) continuing to
improve our customer and strategic partner relationships and (iv) finalizing the
formulation of a strategic plan to act on the results of our consulting study.
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 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 each system's sale will generate a
recurring revenue stream from the sale of consumable products.
Royalty revenue is generated when a partner sells products
incorporating our technology or provides testing services to
third parties using our technology. Royalty revenue is
recognized as it is reported to us by our partners, and
payment is typically submitted concurrently with the report.
We also sell to our customers extended service contracts for
maintenance and support of our products. Revenue for service
contracts is recognized ratably over the term of the
agreement. For the three and six months ended June 30, 2003,
six customers represented 57% and 56% of the Company's
revenue, respectively. We believe these customer relationships
continue to be good; however, the loss of a significant
customer, a significant reduction in product purchases or
financial difficulty for a significant customer could have a
material adverse effect on our business, financial condition
and results of operations. We believe these customers will
continue as significant customers for the remainder of 2003.
Total deferred revenue as of June 30, 2003 was $3.6 million
and consisted of (i) payments received for sales to customers
with rights of return that had not yet expired in the amount
of $86,000, (ii) upfront payments from strategic partners to
be used for the purchase of products or to be applied towards
future royalty payments in the amount of $1.1 million, (iii)
unamortized revenue related to extended service contracts in
the amount of $410,000 and (iv) unamortized license fees in
the amount of $2.0 million. 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. Nonrefundable license
fees are amortized into revenue over the estimated life of the
license agreements.
- Inventories are valued at the lower of cost or market value
and have been reduced by an allowance for excess and obsolete
inventories. At June 30, 2003, there were two major components
of the allowance for excess and obsolete inventory. First, the
Company has a specific reserve for inventory components that
we no longer use in the manufacture of our systems. 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.
- 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 we have identified. While such credit losses
historically have been within our expectations, there can be
no assurance 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
significant customers, or a further
9
deterioration in the economic environment, in general, could
have a material adverse impact on the collectibility of our
accounts receivable and our future operating results,
including a reduction in future revenues and additional
allowances for doubtful accounts.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Revenue. Total revenue increased to $5.6 million for the three months
ended June 30, 2003 from $3.2 million for the comparable period in 2002. The
increase was primarily attributable to increased instrument sales, as well as
increased consumable sales.
A breakdown of revenue for the three months ended June 30, 2003 and
2002 is as follows (in thousands):
THREE MONTHS ENDED
JUNE 30,
--------------------
2003 2002
-------- -------
Instrument sales..................................... $ 3,482 $ 1,582
Consumable sales..................................... 1,235 1,008
Service contracts.................................... 265 172
Royalty revenue...................................... 285 186
Other revenue........................................ 375 229
-------- -------
$ 5,642 $ 3,177
======== =======
Instrument sales and peripheral component sales increased to $3.5
million for the three months ended June 30, 2003 from $1.6 million for the
second quarter of 2002. Instrument placements increased to 140 for the second
quarter of 2003 as compared to 60 placements for the corresponding prior year
period. The increase in instrument placements is primarily due to the increase
in commercialized partners.
Consumable sales, comprised of microspheres and sheath fluid, increased
to $1.2 million during the second quarter of 2003 up from $1.0 million for the
second quarter of 2002. The increase is primarily the result of the increased
installed base of Luminex systems as compared to the prior year period.
Service contracts, comprised of extended warranty contracts earned
ratably over the term of the agreement, increased to $265,000 during the second
quarter of 2003 from $172,000 for the second quarter of 2002. 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 systems as
compared to the prior year period. At June 30, 2003, we had 171 Luminex systems
covered under an extended service agreement.
Royalty revenue increased to $285,000 during the three months ended
June 30, 2003 from $186,000 for the three months ended June 30, 2002. 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 three months ended June
30, 2003, we had 15 commercial partners pay royalties as compared with 10 for
the three months ended June 30, 2002. Additionally, the 10 partners for whom we
recognized royalties in the second quarter of 2002 represented approximately
$251,000 or 88% of the second quarter 2003 total, an increase of approximately
35% over their prior year payments.
Other revenues, comprised of training revenue, shipping revenue and
miscellaneous parts sales, increased to $375,000 for the three months ended June
30, 2003 from $229,000 for the three months ended June 30, 2002. This increase
is primarily the result of increased miscellaneous part sales as our partners
perform service work on Luminex instruments that are outside the Company's
standard one-year warranty period.
Gross Profit. Gross profit increased to $1.9 million for the three
months ended June 30, 2003, as compared to $529,000 for the three months ended
June 30, 2002. The gross margin rate (gross profit as a percentage of total
revenue) increased to 34% for the three months ended June 30, 2003 from 17% for
the three months ended June 30,
10
2002. The rate increase in gross margin was primarily attributable to reductions
in our fixed costs as part of the restructuring efforts undertaken by the
Company in 2002 and the allocation of our remaining fixed costs over a higher
revenue base. In addition, the gross margin rate for the three months ended June
30, 2002 was adversely affected by the inclusion of costs associated with the
cancellation or delay of inventory items. Our production schedule was adjusted
during that period to reflect a lower rate of system orders.
Research and Development Expense. Research and development expenses
decreased to $881,000 for the three months ended June 30, 2003 from $2.1 million
for the comparable period in 2002. The decrease was primarily attributable to
the elimination of expenditures related to our Rules-Based Medicine research and
development project ("RBM") as of September 2002, coupled with the effects of
our restructuring efforts in the fourth quarter of 2002. RBM expenses totaled
approximately $850,000 for the second quarter of 2002. The specific component
contributing to this net decrease, exclusive of the elimination of RBM
expenditures during the second three months of 2003, was a reduction in research
and development personnel costs of $372,000. We currently expect research and
development expenses related to the ongoing development of our xMAP technology
and consumables to be $1.0 to $1.5 million per quarter for the remainder of 2003
and $3.7 to $4.7 million on an annual basis for 2003.
Selling, General and Administrative Expense. Selling, general and
administrative expenses decreased to $3.1 million for the three months ended
June 30, 2003 from $4.8 million for the comparable period in 2002. The decrease
was primarily attributable to our restructuring and cost control efforts and
included reduced personnel costs of approximately $883,000, a decrease in legal
and professional fees of $112,000, a decrease in stock compensation expense of
$125,000 and reductions in travel, entertainment and marketing expenses of
$503,000. Selling, general and administrative expenses currently are expected to
be in the range of $3.0 to $4.0 million per quarter for the remainder of 2003
and $12.6 to $14.6 million on an annual basis for 2003.
Other Income, net. Other income decreased to $96,000 for the three
months ended June 30, 2003 from $182,000 for the comparable period in 2002. The
decrease was primarily attributable to a decrease in the average cash and cash
equivalents balances and a lower yield on the investment balances. The average
rate on current invested balances fell to 1.0% at June 30, 2003 from 1.8% at
June 30, 2002.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Revenue. Total revenue increased to $10.7 million for the six months
ended June 30, 2003 from $5.5 million for the comparable period in 2002. The
increase was primarily attributable to increased instrument sales, as well as
increased consumable sales.
A breakdown of revenue for the six months ended June 30, 2003 and 2002
is as follows (in thousands):
SIX MONTHS ENDED
JUNE 30,
--------------------
2003 2002
-------- -------
Instrument sales..................................... $ 6,523 $ 2,856
Consumable sales..................................... 2,412 1,714
Service contracts.................................... 519 301
Royalty revenue...................................... 504 245
Other revenue........................................ 786 348
-------- -------
$ 10,744 $ 5,464
======== =======
Instrument sales and peripheral component sales increased to $6.5
million for the six months ended June 30, 2003 from $2.9 million for the first
half of 2002. Instrument placements increased to 271 for the first half of 2003
as compared to 96 placements for the corresponding prior year period. The
increase in instrument placements is primarily due to the increase in
commercialized partners.
11
Consumable sales, comprised of microspheres and sheath fluid, increased
to $2.4 million during the first half of 2003 up from $1.7 million for the first
half of 2002. The increase is primarily the result of the increased installed
base of Luminex systems as compared to the prior year period.
Service contracts, comprised of extended warranty contracts earned
ratably over the term of the agreement, increased to $519,000 during the first
half of 2003 from $301,000 for the first half of 2002. 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 systems as
compared to the prior year period. At June 30, 2003, we had 171 Luminex systems
under an extended service agreement.
Royalty revenue increased to $504,000 during the six months ended June
30, 2003 from $245,000 for the six months ended June 30, 2002. 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 six months ended June 30, 2003, we had 17 commercial
partners pay royalties as compared with 11 for the six months ended June 30,
2002. Additionally, the 11 partners for whom we recognized royalties in the six
months ended June 30, 2002 represented approximately $465,000 or 92% of the
total for the six months ended June 30, 2003, an increase of approximately 47%
over their prior year payments.
Other revenues, comprised of training revenue, shipping revenue and
miscellaneous parts sales, increased to $786,000 for the six months ended June
30, 2003 from $348,000 for the six months ended June 30, 2002. This increase is
primarily the result of increased miscellaneous part sales as our partners
perform service work on Luminex instruments that are outside the Company's
standard one-year warranty period.
Gross Profit. Gross profit increased to $3.4 million for the six months
ended June 30, 2003, as compared to $821,000 for the six months ended June 30,
2002. The gross margin rate increased to 32% for the six months ended June 30,
2003 from 15% for the six months ended June 30, 2002. The rate increase in gross
margin was primarily attributable to reductions in our fixed costs as part of
the restructuring efforts undertaken by the Company in 2002 and the allocation
of our remaining fixed costs over a higher revenue base. In addition, the gross
margin rate for the six months ended June 30, 2002 was adversely affected by the
inclusion of costs associated with the cancellation or delay of inventory items.
Our production schedule was adjusted during that period to reflect a lower rate
of system orders.
Research and Development Expense. Research and development expenses
decreased to $1.7 million for the six months ended June 30, 2003 from $4.1
million for the comparable period in 2002. The decrease was primarily
attributable to the elimination of expenditures related to RBM as of September
2002, coupled with the effects of our restructuring efforts in the fourth
quarter of 2002. RBM research and development expenses totaled approximately
$1.5 million for the first half of 2002. Specific components contributing to
this net decrease, exclusive of the elimination of RBM expenditures during the
first six months of 2003, were a reduction in research and development personnel
costs of $796,000 and a reduction in professional fees of $149,000. We currently
expect research and development expenses related to the ongoing development of
our xMAP technology and consumables to be $1.0 to $1.5 million per quarter for
the remainder of 2003 and $3.7 to $4.7 million on an annual basis for 2003.
Selling, General and Administrative Expense. Selling, general and
administrative expenses decreased to $6.6 million for the six months ended June
30, 2003 from $10.0 million for the comparable period in 2002. The decrease was
primarily attributable to our restructuring and cost control efforts and
included reduced personnel costs of approximately $2.2 million, a decrease in
consumable supplies of $148,000, a decrease in stock compensation expense of
$340,000 and reductions in travel, entertainment and marketing expenses of
$672,000. These expense reductions were partially offset by an increase of
$328,000 in professional fees primarily related to the engagement of the
strategic consulting firm to assist management in evaluating the core focus and
operating plans for the Company. Selling, general and administrative expenses
currently are expected to be in the range of $3.0 to $4.0 million per quarter
for the remainder of 2003 and $12.6 to $14.6 million on an annual basis for
2003.
Other Income, net. Other income decreased to $206,000 for the six
months ended June 30, 2003 from $402,000 for the comparable period in 2002. The
decrease was primarily 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 1.0% at June 30, 2003 from
1.8% at June 30, 2002.
12
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, we held cash and cash equivalents of $38.7 million
and had working capital of $43.3 million. At December 31, 2002, we held cash and
cash equivalents of $40.5 million and had working capital of $45.3 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 $1.9 million for the six months ended June
30, 2003, compared with $8.8 million for the six months ended June 30, 2002. In
the first quarter of 2003, we settled a pending lawsuit and entered into a full,
final and complete release with our prior patent counsel, without an admission
of liability or wrongdoing on the part of the defendants. As consideration for
the settlement and release, the Company received approximately $1.8 million, net
of legal and related costs and expenses. This cash infusion significantly offset
payment of approximately $1.6 million in restructuring obligations, which were
accrued in the fourth quarter of 2002. Additionally, we currently expect to
receive an additional $600,000 in nonrefundable license fees from strategic
partners during 2003. Such license fees are amortized into income over the life
of the agreement.
Our research and development expenses during the six months ended June
30, 2003 were $1.7 million. Research and development expenses related to the
ongoing development of our xMap technology and consumables are currently
expected to be in the range of $1.0 million to $1.5 million per quarter and
between $3.7 million and $4.7 million on an annual basis for 2003.
Selling, general and administrative expenses for 2003 should continue
to be lower than 2002 primarily as a result of the restructuring efforts taken
in the fourth quarter of 2002. We currently expect total selling, general and
administrative expenses to be in the range $3.0 million to $4.0 million per
quarter and $12.6 to $14.6 million for 2003.
We have non-cancellable purchase commitments with certain of our
component suppliers. Should our production requirements fall below the level of
our commitments, we could be required to take delivery of inventory for which we
have no immediate need or incur an increased cost per unit going forward. We are
not otherwise committed to scheduled purchase requirements. However, because of
a long lead-time to delivery, we are required to place orders for a variety of
items well in advance of scheduled production runs. We made a conscious effort
to manage our inventory levels down in light of the relatively large balances on
hand during the first half of 2002 and the lower volume of sales during 2002.
The effort to manage our inventory, coupled with sales during the first half of
2003, placed a constraint on our ability to produce systems for sale. However,
based on our current supply of certain long lead-time to deliver components, we
believe the Company has the ability to meet delivery requirements for existing
customer orders during the third quarter of 2003. We attempt to match our parts
inventory and production capabilities to estimates of marketplace demand. To the
extent system orders materially vary from our estimates, we may experience
constraints in our systems delivery capacity, which would adversely impact
revenue in a given fiscal period. Should the Company's need for raw materials
and components used in production continue to fluctuate, we could incur
additional costs associated with either expediting or postponing delivery of
those materials.
13
We currently have approximately $3.4 million in non-cancellable
obligations for the remainder of 2003. These obligations are included in our
estimated cash usage during 2003.
REMAINING
2003 2004 2005 2006 2007 THEREAFTER TOTAL
--------- -------- -------- ------- -------- ---------- --------
Non-cancellable rental
obligations............................... $ 385 $ 770 $ 794 $ 806 $ 824 $ 1,980 $ 5,559
Non-cancellable purchase
obligations................................ 3,045 1,652 - - - - 4,697
--------- -------- -------- ------- -------- ---------- --------
Anticipated liquidity impact as of
June 30, 2003............................. $ 3,430 $ 2,422 $ 794 $ 806 $ 824 $ 1,980 $10,256
========= ======== ======== ======= ======== ======== =======
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. Additionally, any actions taken based on
recommendations of the strategic consulting firm hired in November 2002 to
evaluate and refine the focus and operating plans for the Company could result
in expenditures not currently contemplated in our estimates for 2003. We
believe, however, that our existing cash and cash equivalents will be sufficient
to fund our operating expenses and capital equipment requirements for 2003.
Based upon our current operations, management anticipates total cash use for
2003, to be approximately $6.0 to $9.0 million, giving us an anticipated balance
at December 31, 2003 of $31.0 to $34.0 million.
We have no credit facility or other committed sources of capital. To
the extent capital resources are insufficient to meet future capital
requirements, we will have to raise additional funds to continue the development
of our technologies. There can be no assurance that debt or equity funds will be
available on favorable terms, if at all. To the extent that additional capital
is raised through the sale of equity or convertible debt securities, the
issuance of those securities could result in dilution to our stockholders.
Moreover, incurring debt financing could result in a substantial portion of our
operating cash flow being dedicated to the payment of principal and interest on
such indebtedness, could render us more vulnerable to competitive pressures and
economic downturns and could impose restrictions on our operations. If adequate
funds are not available, we may be required to curtail operations significantly
or to obtain funds through entering into agreements on unattractive terms.
FACTORS THAT MAY AFFECT FUTURE RESULTS
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT OF APPROXIMATELY $78.9
MILLION AS OF JUNE 30, 2003.
We have incurred significant net losses since our inception, including
losses of $2.8 million for the six months ended June 30, 2003, $24.9 million in
2002 and $15.7 million in 2001. At June 30, 2003, we had an accumulated deficit
of approximately $78.9 million. To achieve profitability, we will need to
generate and sustain substantially higher revenue while achieving 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 available
to the Company. As of June 30, 2003, cash and cash equivalents totaled $38.7
million, a decrease of $1.8 million, from $40.5 million at December 31, 2002. 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 relatively new
and unproven, and the use of our technology by life sciences companies is
limited. The commercial success of our
14
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 SUCCESS DEPENDS LARGELY ON THE ESTABLISHMENT OF MEANINGFUL AND SUCCESSFUL
RELATIONSHIPS WITH OUR STRATEGIC PARTNERS.
The development and commercialization of our xMAP technology is highly
dependent on our ability to establish successful strategic relationships with a
number of partners. As of June 30, 2003, we had 17 strategic partners who were
paying royalties and had either commercialized products using the Luminex
platform or were reselling our products. Furthermore, for the three and six
months ended June 30, 3003, six customers represented 57% and 56% of the
Company's revenue, respectively. The loss of any of our significant strategic
partners, or any of our significant customers, 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 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 strategic 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 strategic 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.
The vast majority of our future revenues will come from sales of our
systems and the development and sale of bioassay kits utilizing our technology
by our strategic partners and from use of our technology by our strategic
partners in performing services offered to third parties. We believe that our
strategic partners will have economic incentives to develop and market these
products, but we cannot predict future sales and royalty revenues because our
existing strategic partner agreements do not include minimum purchase
requirements. In addition, we do not have the right or ability to provide
incentives to our strategic partners' sales personnel to sell products based on
xMAP technology or to control the timing of the release of products by our
strategic partners. The amount of these revenues will depend on a variety of
factors that are outside our control, including the amount and timing of
resources that current and future strategic partners devote to develop and
market products incorporating our technology. Further, the development and
marketing of certain bioassay kits will require our strategic partners to obtain
governmental approvals, which could delay or prevent their commercialization
efforts. If our current or future strategic partners do not successfully develop
and market products based on our technology and obtain necessary government
approvals, our revenues from product sales and royalties will be significantly
reduced.
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. The level of our revenues will depend
upon the rate and timing of the
15
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 currently anticipate that the vast majority 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.
OUR SUCCESS WILL DEPEND ON OUR ABILITY TO ATTRACT AND TO RETAIN OUR MANAGEMENT
AND STAFF.
In March 2002, we created a Management Evaluation and Search Committee
to evaluate our existing management team and organizational structure and to
provide recommendations regarding changes and additions to our management team
and organizational structure, if deemed appropriate. From that process (which is
ongoing), we are actively seeking a new chief executive officer and have engaged
in significant staff reductions (including restructuring our management team and
organizational structure during 2002) to align our operating costs with the
Company's current business.
During 2002, there was a significant turnover of senior management, as
eight officers ceased to be employed by the Company, including those whose
employment terminated in connection with the September 2002 sale of RBM to a
newly formed company headed by Dr. Mark Chandler, the Company's then chairman,
chief executive officer and co-founder. In connection with Dr. Chandler's
departure following the closing of the RBM transaction, Thomas W. Erickson was
engaged in September 2002 to serve as Interim President and Chief Executive
Officer while the Management Evaluation and Search Committee sought a new chief
executive officer. Mr. Erickson is currently under contract with us through
December 2003. Additionally, as a result of the management restructuring,
certain of the remaining members of management have taken on additional
responsibilities and the Company has employed interim personnel and third-party
consultants to fill the vacated positions.
We have reduced the overall work force from 164 at June 30, 2002 to 123
at June 30, 2003. The reduction in force was designed to reduce overhead costs
and align staffing and personnel costs with the Company's current business. This
reduction in force required remaining employees to assume additional
responsibilities and, when combined with the changes in senior management, has
created challenges in maintaining continuity of customer relationships, research
and development and strategic planning for the Company.
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 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 necessary to achieve our
business objectives.
16
WE EXPECT OUR OPERATING RESULTS TO CONTINUE TO FLUCTUATE SIGNIFICANTLY FROM
QUARTER TO QUARTER.
The sale of bioassay testing devices typically involves a significant
technical evaluation and commitment of capital by customers. Accordingly, the
sales cycle associated with our products typically is lengthy and subject to a
number of significant risks, including customers' budgetary constraints and
internal acceptance reviews that are beyond our control. As a result of this
lengthy and unpredictable sales cycle, our operating results have historically
fluctuated significantly from quarter to quarter. We expect this trend to
continue for the foreseeable future.
The vast majority of our system sales are made to our strategic
partners. Our partners typically purchase instruments in three phases during
their commercialization cycle: first, instruments necessary to support internal
assay development; second, instruments for sales force demonstrations; and
finally, instruments for resale to their customers. As a result, most of our
system placements are highly dependent on the commercialization timetables of
our strategic partners and can fluctuate from quarter to quarter as our
strategic partners move from phase to phase. We expect this trend to continue
for the foreseeable future.
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 desired revenue growth. 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 manufacturers. We have non-cancelable purchase requirements with
certain of our components suppliers which require us to take delivery of a
minimum number of component parts for our products or the cost per unit will
increase, which would adversely impact our gross margin. We are not otherwise
committed to scheduled purchase requirements. However, because of a long
lead-time to delivery, we are required to place orders for a variety of items
well in advance of scheduled production runs. We made a conscious effort to
manage our inventory levels down in light of the relatively large balances on
hand during the first half of 2002 and the lower volume of sales during 2002.
The effort to manage our inventory, coupled with sales during the first half of
2003, placed a constraint on our ability to produce systems for sale. However,
based on our current supply of certain long lead-time to deliver components, we
believe the Company has the ability to meet delivery requirements for existing
customer orders during the third quarter of 2003. We attempt to match our parts
inventory and production capabilities to estimates of marketplace demand. To the
extent system orders materially vary from our estimates, we may experience
constraints in our systems delivery capacity, which would adversely impact
revenue in a given fiscal period. Should the Company's need for raw materials
and components used in productions continue to fluctuate, we could incur
additional costs associated with either expediting or postponing delivery of
those materials.
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 providers. 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
17
- - 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.
BECAUSE WE RECEIVE REVENUES PRINCIPALLY FROM LIFE SCIENCES 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 volatility in revenue. Therefore, our operating results can be
materially affected (negatively and positively) by the spending policies and
priorities of our customers.
THE LIFE SCIENCES INDUSTRY IS HIGHLY COMPETITIVE AND SUBJECT TO RAPID
TECHNOLOGICAL CHANGE AND WE MAY NOT HAVE THE RESOURCES NECESSARY TO SUCCESSFULLY
COMPETE.
We compete with companies in the United States and abroad that are
engaged in the development and production of similar products. We will continue
to face intense competition from existing competitors, as well as other
companies seeking to develop new technologies. Many of our competitors have
access to greater financial, technical, scientific, research, marketing, sales,
distribution, service and other resources than we do. These companies may
develop technologies that are superior alternatives to our technologies or may
be more effective at commercializing their technologies in products.
The life sciences industry is characterized by rapid and continuous
technological innovation. We may need to develop new technologies for our
products to remain competitive. Our present or future products could be rendered
obsolete or uneconomical by technological advances by one or more of our current
or future competitors. In addition, the introduction or announcement of new
products by us or by others could result in a delay of or decrease in sales of
existing products, as customers evaluate these new products. Our future success
will depend on our ability to compete effectively against current technologies,
as well as to respond effectively to technological advances.
THE INTELLECTUAL PROPERTY RIGHTS WE RELY UPON TO PROTECT THE TECHNOLOGY
UNDERLYING OUR PRODUCTS MAY NOT BE ADEQUATE TO MAINTAIN MARKET EXCLUSIVITY.
INADEQUATE INTELLECTUAL PROPERTY PROTECTION COULD ENABLE THIRD PARTIES TO
EXPLOIT OUR TECHNOLOGY OR USE VERY SIMILAR TECHNOLOGY AND COULD REDUCE OUR
ABILITY TO DISTINGUISH OUR PRODUCTS IN THE MARKET.
Our success will depend on our ability to obtain, protect and enforce
patents on our technology and to protect our trade secrets. Any patents we own
may not afford full protection for our technology and products. Others may
challenge our patents and, as a result, our patents could be narrowed or
invalidated. 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 15 patents in the United States and one in Japan
directed to various aspects and applications of our technology. We have 17
pending applications in the United States and 24 in foreign jurisdictions.
In Japan, due to a procedural omission, 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.
18
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. In addition, the Company
has implemented a patent process to file patent applications on its key
technology. However, we cannot guarantee that these agreements or this patent
process 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. Furthermore, litigation is time
consuming and could divert management attention and resources away from our
business. If we do not prevail in any litigation, we may have to pay damages and
could be required to stop the infringing activity or obtain a license. Any
required license may not be available to us on acceptable terms, if at all.
Moreover, 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 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.
IF WE FAIL TO COMPLY WITH THE EXTENSIVE GOVERNMENT 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 testing, 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 strategic partners have obtained such
approvals or clearances. 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.
19
Approved or cleared products are subject to continuing FDA requirements
relating to, among others, quality control and quality assurance, maintenance of
records and documentation, adverse event and other reporting, 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 our organization to operate
on an established quality management system compliant with FDA quality system
regulations and industry standards, such as ISO 9000. We became ISO 9001:2000
certified in March 2002. Subsequent audits are carried out at six-month
intervals to ensure we maintain our system in substantial compliance with ISO
standards. Failure to maintain compliance with 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 OPERATING RESULTS MAY BE AFFECTED BY CURRENT ECONOMIC AND POLITICAL
CONDITIONS.
With the current events in the Middle East and continuing concern for
future terrorist attacks, there exist many economic and political uncertainties.
These uncertainties 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:
20
- - general economic conditions and interest rates;
- - instability in the United States and other financial markets and the
possibility of war, other 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 securities
analysts;
- - announcements of technological innovations or new products or services
by us or our competitors;
- - changes in financial estimates 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 OFFICERS HAVE A SIGNIFICANT OWNERSHIP POSITION IN THE
COMPANY'S COMMON STOCK, WHICH COULD DELAY OR PREVENT A MERGER OR OTHER CHANGE IN
CONTROL TRANSACTION.
Our directors and executive officers beneficially owned approximately
12% of our outstanding common stock as of August 8, 2003. 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 ownership position could 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. We are
also subject to certain provisions of Delaware law that could delay, deter or
prevent a change in control of us. These provisions could limit the price that
investors might be willing to pay in the future for shares of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our interest income is sensitive to changes in the general level of
domestic interest rates, particularly since the majority of our investments are
in short-term instruments held to maturity. A 25 basis point fluctuation from
average investment returns at June 30, 2003 would yield an approximate 25%
variance in overall investment return. Due to the nature of our short-term
investments, we have concluded that there is no material market risk exposure.
All payments for our products, including sales to foreign customers, are
required to be made in U.S. dollars; therefore, we do not engage in any foreign
currency hedging activities. Accordingly, our foreign currency market risk is
limited.
21
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our senior
management, including our Interim President and Chief Executive Officer and
Acting Chief Financial Officer, we conducted an evaluation of our disclosure
controls and procedures, as defined in Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act"), as of the end of the
period covered by this Report. Based on that evaluation, our Interim President
and Chief Executive Officer and Acting Chief Financial Officer concluded that
our disclosure controls and procedures effectively and timely provide them with
material information relating to the Company required to be disclosed in the
reports the Company files or submits under the Exchange Act.
22
PART II
ITEM 1. LEGAL PROCEEDINGS
As a result of a procedural omission, we are unable to pursue a patent
in Japan which corresponds to some of our issued U.S. patents related to our
method of "real time" detection and quantification of multiple analytes from a
single sample. On January 31, 2000, we filed a lawsuit in Travis County, Texas
state district court alleging negligence and breach of contract on the part of
our prior patent counsel in this matter. On March 7, 2003, we reached a
settlement with the defendants and executed and entered into a full, final and
complete release regarding such action, without an admission of liability or
wrongdoing on the part of the defendants. As consideration in connection with
the settlement and release, the Company received approximately $1.8 million, net
of legal and related costs and expenses.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) During the second quarter of 2003, we issued 20,400 shares of the
Company's common stock pursuant to the exercise of options granted to our
directors, employees and consultants pursuant to our 1996 Stock Option Plan for
an exercise price of $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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2003 Annual Meeting of Stockholders, which was held on
May 22, 2003, the stockholders of the Company elected G. Walter Loewenbaum II
and Kevin M. McNamara to serve as a Class II director for a term of three years
by the following votes:
Number of Shares
----------------------
For Withheld
---------- ---------
G. Walter Loewenbaum.......................... 23,160,976 3,996,638
Kevin M. McNamara............................. 23,616,201 3,541,413
The other directors whose terms of office as a director continue after
the meeting are as follows: C. Thomas Caskey, M.D., Robert J. Cresci, Fred C.
Goad, Jr., Laurence E. Hirsch, Jim D. Kever and William L. Roper, M.D.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------- ------------------------
10.1 Second Amendment to Management Services Agreement by and
between Luminex Corporation and Thomas W. Erickson, effective
as of September 1, 2003.
31.1 Certification by CEO pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification by CFO pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification by CEO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of CFO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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(b) Reports on Form 8-K:
A Form 8-K was filed April 21, 2003 relating to the Company's April 21,
2003 press release setting forth the Company's first quarter 2003 earnings.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on August 14, 2003.
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)
S-1