<PAGE>
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, 2000
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 27,535,364 shares of the Company's Common Stock, par value $.001
per share, outstanding on November 7, 2000.
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INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 .......................................................................... 1
Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2000 and 1999................................................................. 2
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999................................................................. 3
Notes to Condensed Consolidated Financial Statements........................................... 4
Independent Accountants' Review Report......................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................... 8
Factors That May Affect Future Results......................................................... 12
Item 3. Quantitative and Qualitative Disclosure about Market Risk...................................... 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................................................. 20
SIGNATURES............................................................................................... 21
</TABLE>
i
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PART I
ITEM 1. FINANCIAL STATEMENTS
LUMINEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 15,542 $ 4,083
Short-term investments................................ 61,319 4,929
Accounts receivable, net.............................. 2,084 1,341
Inventory............................................. 1,237 663
Other................................................. 1,598 181
-------------- -------------
Total current assets............................. 81,780 11,197
Property and equipment, net................................. 2,532 1,369
Other long-term assets...................................... 39 -
-------------- -------------
Total assets..................................... $ 84,351 $ 12,566
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 1,124 $ 373
Accrued liabilities................................... 535 278
Deferred revenue...................................... 115 120
-------------- -------------
Total current liabilities........................ 1,774 771
Long-term deferred revenue.................................. 1,346 600
-------------- -------------
Total liabilities................................ 3,120 1,371
Stockholders' equity:
Preferred stock....................................... - 28,946
Common stock.......................................... 27 13
Warrants to purchase common stock..................... 151 180
Additional paid-in capital............................ 114,318 5,511
Deferred stock compensation........................... (1,292) (467)
Accumulated deficit................................... (31,973) (22,988)
-------------- -------------
Total stockholders' equity....................... 81,231 11,195
-------------- -------------
Total liabilities and stockholders' equity....... $ 84,351 $ 12,566
============== =============
</TABLE>
See Independent Accountants' Review Report.
1
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LUMINEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
2000 1999 2000 1999
--------- -------- --------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue:
Product.......................................... $ 2,190 $ 333 $ 4,974 $ 1,186
Grant............................................ 125 123 125 506
--------- -------- --------- --------
Total revenue................................. 2,315 456 5,099 1,692
Cost of product revenue............................... 1,416 162 3,124 508
--------- -------- --------- --------
Gross profit.......................................... 899 294 1,975 1,184
Operating expenses:
Research and development......................... 2,284 1,478 6,025 4,212
Selling, general and administrative.............. 2,656 1,901 7,559 3,655
--------- -------- --------- --------
Total operating expenses...................... 4,940 3,379 13,584 7,867
--------- -------- --------- --------
Loss from operations.................................. (4,041) (3,085) (11,609) (6,683)
Interest income.................................. 1,311 58 2,624 193
--------- -------- --------- --------
Net loss.............................................. $ (2,730) $ (3,027) $ (8,985) $ (6,490)
========= ======== ========= ========
Net loss per share, basic and diluted................. $ (0.10) $ (0.23) $ (0.40) $ (0.49)
========= ======== ========= ========
Shares used in computing net loss
per share, basic and diluted..................... 27,197 13,156 22,553 13,139
</TABLE>
See Independent Accountants' Report.
2
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LUMINEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
Operating activities:
Net loss............................................................. $ (8,985) $ (6,490)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 666 353
Stock compensation............................................. 2,273 765
Changes in operating assets and liabilities:
Accounts receivable............................................ (743) (620)
Inventory...................................................... (574) (643)
Other.......................................................... (1,382) (91)
Accounts payable............................................... 751 190
Accrued liabilities............................................ 239 124
Deferred revenue............................................... 741 407
------------ ------------
Net cash used in operating activities........................................ (7,014) (6,005)
------------ ------------
Investing activities:
Net purchases of short-term investments.............................. (56,390) -
Purchase of property and equipment................................... (1,829) (957)
Other................................................................ (74) -
------------ ------------
Net cash used in investing activities........................................ (58,293) (957)
------------ ------------
Financing activities:
Proceeds from issuance of common stock............................... 78,008 45
Proceeds from issuance of preferred stock............................ - 5,682
Stock issuance costs................................................. (1,242) (7)
------------ ------------
Net cash provided by financing activities.................................... 76,766 5,720
------------ ------------
Increase (decrease) in cash and cash equivalents............................. 11,459 (1,242)
Cash and cash equivalents, beginning of period............................... 4,083 8,537
------------ ------------
Cash and cash equivalents, end of period..................................... $ 15,542 $ 7,295
============ ============
Supplemental disclosure of noncash activities:
Conversion of preferred stock........................................ $ 28,946 $ -
Accrued stock issuance costs......................................... $ 18 $ -
</TABLE>
See Independent Accountants' Review Report.
3
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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 subsidiary. 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,
2000 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Registration Statement on Form S-1 (File No. 333-96317) and related
Prospectus dated March 30, 2000.
NOTE 2--INVENTORY
Inventories consisted of the following (in thousands):
September 30, December 31,
2000 1999
------------- ------------
Parts and supplies................... $ 991 $ 663
Work-in-progress and finished goods.. 246 -
------------- ----------
1,237 663
============= ==========
NOTE 3--INITIAL PUBLIC OFFERING
On March 30, 2000, trading of the Company's common stock on the Nasdaq
National Market commenced in conjunction with the Company's initial public
offering of 4,500,000 shares of common stock at $17 per share. Cash proceeds
from the offering, net of underwriting discounts and commissions, totaled
approximately $71.1 million and were received by the Company upon closing of the
offering on April 4, 2000. Concurrent with the initial public offering, a total
of 841,359 shares of convertible preferred stock, representing all of the
Company's issued and outstanding preferred stock, were converted into 8,768,582
shares of common stock.
On April 27, 2000, the underwriters exercised a portion of their over-
allotment option and purchased an additional 369,000 shares of the Company's
common stock, generating additional proceeds of approximately $5.8 million, net
of underwriting discounts and commissions.
NOTE 4--NET LOSS PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", basic and diluted net loss per share was computed by
dividing the net loss for the period by the weighted average number of common
shares outstanding during the period.
See Independent Accountants' Review Report.
4
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LUMINEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 4--NET LOSS PER SHARE (Continued)
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 2,902,082 and 12,229,099 for the three and nine months ended
September 30, 2000, respectively, and 11,402,914 and 10,447,796 for the three
and nine months ended September 30, 1999, 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 closing of the 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):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -----------------------
2000 1999 2000 1999
----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Net loss per share, basic and diluted:
Net loss........................................................ $ (2,730) $ (3,027) $ (8,985) $ (6,490)
Weighted average shares of common stock outstanding............. 27,197 13,156 22,553 13,139
Net loss per share, basic and diluted........................... $ (0.10) $ (0.23) $ (0.40) $ (0.49)
=========== =========== ========= ===========
Pro forma net loss per share, basic and diluted:
Shares used above......................................... 27,197 13,156 22,553 13,139
Add: Pro forma adjustment to reflect assumed
conversion of preferred stock................... - 7,342 2,880 7,131
----------- ----------- --------- -----------
Shares used in computing pro forma net loss
per share, basic and diluted........................ 27,197 20,498 25,433 20,270
Pro forma net loss per share, basic and diluted........... $ (0.10) $ (0.15) $ (0.35) $ (0.32)
=========== =========== ========= ===========
</TABLE>
See Independent Accountants' Review Report.
5
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LUMINEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 5--COMMON STOCK
As of September 30, 2000, there were 27,318,820 shares of common stock
issued and outstanding. This share number includes the conversion of all
outstanding shares of preferred stock on March 30, 2000 into shares of common
stock and the issuance of common stock in the Company's initial public offering.
The Company is authorized to issue 200,000,000 shares of common stock, par value
$.001 per share, and 5,000,000 shares of preferred stock, par value $.001 per
share.
In March 2000, the Company effected a 2.04 for 1 stock split of its
outstanding common stock. All common stock and per share amounts have been
adjusted to reflect the stock split as if such split had taken place at the
beginning of the periods presented.
See Independent Accountants' Review Report.
6
<PAGE>
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, 2000, the related condensed consolidated
statements of operations for the three and nine months then ended and the
related condensed consolidated statements of cash flows for the nine months then
ended. These financial statements are the responsibility of the Company's
management. We did not make a similar review of the condensed consolidated
statements of operations for the three and nine months ended September 30, 1999
or the condensed consolidated statements of cash flows for the nine months ended
September 30, 1999.
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 consolidated 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 consolidated financial statements at
September 30, 2000, and for the three and nine month periods then ended 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, 1999, 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 28, 2000, except
for Notes 4 and 10, as to which the date is March 9, 2000, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1999, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
Austin, Texas
October 19, 2000
7
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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 Registration Statement on Form S-1 (File No. 333-
96317) and related Prospectus dated March 30, 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 and acceptance, the dependence
on strategic partners for development and distribution of products, competition,
potential shortages of components and the timing of regulatory approvals. We
expressly disclaim any intent, obligation or undertaking to release publicly any
updates or revisions to any forward-looking statements contained in this report
to reflect any change in our expectations with regard to such statements or any
change in events, conditions or circumstances on which any such statements are
based.
Overview
We commenced marketing our first generation system, the Luminex R/O
system, in 1997 and our second generation technology, the LabMAPTM system, in
1999. Prior to 1999, we were considered a development stage company. 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. In accordance with the terms of a federal grant
which we have received, grant revenue is recorded as research expenses relating
to the grant are incurred, provided that the amounts received are not refundable
if the research is not successful. We expect that each system 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 services to third parties
using our technology.
Cost of product revenue consists of direct and indirect manufacturing,
quality control, training, customer service and warranty costs. Our operating
expenses have consisted primarily of costs incurred in research and development,
manufacturing scale-up and business development and from general and
administrative costs associated with our operations. We expect our research and
development expenses to increase in the future as we continue to develop new
products and our bioinformatics business unit. 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.
We have a limited history of operations. Since inception, we have
incurred significant losses and, as of September 30, 2000, we had an accumulated
deficit of $32.0 million. We anticipate incurring additional losses, which may
increase, for at least the next 12 months. In addition, we anticipate that our
quarterly results of operations will fluctuate for the foreseeable future due to
several factors, including market evaluation and acceptance of current or new
products, which may result in a lengthy sales cycle, the timing of the
introduction by our strategic partners of commercial products based on our
technology, the timing of regulatory approvals, 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 limited operating history
makes accurate predictions of future operations difficult or impossible.
Our ability to achieve sustained profitability will be dependent upon
our ability to continue to enter into
8
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strategic partnerships with companies that will develop and market products
incorporating our technology and market and distribute our systems and
consumables. Strategic partners will develop application-specific bioassay kits
for use on our systems that they will sell to their customers generating
royalties for Luminex. Strategic partners may also perform services for third
parties using our technology that will also result in royalties for Luminex.
Some strategic partners will also buy our products and then resell those
products to their customers. To date, we have entered into strategic
partnerships with 24 companies. Although we are actively seeking to enter into
additional strategic partnerships, there can be no assurance that we will be
able to negotiate such additional relationships on acceptable terms, if at all,
or that such current or future strategic partnerships will be successful and
provide us with expected benefits.
Deferred stock compensation represents the difference between the
deemed fair value of our common stock and the exercise price of options or
warrants. For options granted to employees and directors, this difference is
calculated as of the grant date and amortized ratably over the vesting period.
For options or warrants granted to consultants, the difference is recognized as
of the vesting date with adjustments made to the recognized deferred
compensation amount up and until that time based on the market value of our
common stock. As a result of stock options and warrants granted, we recorded
$200,000 and $2.3 million in deferred stock compensation expense in the third
quarter and first nine months of 2000, respectively. Total unamortized deferred
stock compensation as of September 30, 2000 was $1.3 million.
Total deferred revenue as of September 30, 2000 was $1.5 million.
Short-term deferred revenue of $115,000 as of September 30, 2000, represented
revenues from system sales to customers with a short-term right of return
privilege that had not yet expired. Long-term deferred revenue, which was $1.3
million as of September 30, 2000, represented upfront payments from our
strategic partners to be applied towards future system purchases and future
royalty payments. The amounts recorded as long-term deferred revenue are
nonrefundable and will be recognized as revenue as our strategic partners
purchase systems or apply such amounts against royalty payments, which is not
expected to occur before September 30, 2001.
Luminex has formed a bioinformatics business unit that intends to
develop a database of protein-based information using our LabMAP technology,
which makes it possible to perform large-scale multi-analyte profiles on a small
sample of blood. We expect to create the database by performing these large-
scale multiplexed assays in order to detect proteins, and their varying
expression levels, in both normal and diseased blood samples. The database will
be analyzed using bioinformatics software techniques intended to identify the
combinations, levels or absences of proteins associated with various disease
states. As protein patterns are identified, we intend to patent the association
of such patterns with the associated disease state.
Our bioinformatics business unit will be incurring research and
development expenses, including expenses related to the acquisition of blood
samples, development of the assays, development of the software that will
capture the data and analyze the results and establishment of the laboratory. We
intend to market the database information to pharmaceutical companies seeking
new drug targets, and also believe that the information will have commercial
applications in the area of predictive medicine. We do not expect to generate
revenue from this business unit in 2001.
We are seeking to enter into one or more strategic partnerships or
collaborations with life sciences or other technology companies that can assist
in the development of the database or desire access to the database information.
These transactions may involve the sale of equity in the bioinformatics business
unit or the sale of access to the database information.
Results of Operations
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Revenue. Product revenue increased 558% to $2.2 million for the three
months ended September 30, 2000. The increase was primarily attributable to
increased sales of Luminex 100 systems, with 90 systems placed in the third
quarter of 2000 compared with 9 systems placed in the third quarter of 1999. We
also placed 49 Luminex XY Platforms in the third quarter of 2000 compared with
one placed in the third quarter of 1999. In addition,
9
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consumable sales increased by 277% to $275,000 which is attributable to the
increase in the installed base of Luminex 100 systems.
Grant revenue increased by 2% to $125,000 for the three months ended
September 30, 2000. The government grant was reinstated July 1, 2000 with a new
joint venture partner after being temporarily suspended in September 1999 when
our prior joint venture partner withdrew due to a change in its business
strategy. The extension of the grant will span three years and will fund
approximately 80% of Luminex's estimated total direct project costs.
A breakdown of revenue for the three months ended September 30, 2000
and 1999 is as follows (in thousands):
Three Months Ended
September 30,
------------------
2000 1999
-------- -------
System sales................ $ 1,883 $ 242
Consumable sales............ 275 73
Grant revenue............... 125 123
Other revenue............... 32 18
-------- -------
Total revenue............ $ 2,315 $ 456
======== =======
Gross Profit. Gross profit increased by 206% to $899,000 for the three
months ended September 30, 2000. Gross margin (gross profit as a percentage of
total revenue) decreased from 64% for the three months ended September 30, 1999
to 39% for the three months ended September 30, 2000. The decrease in gross
margin was primarily attributable to lower average selling prices of our
systems, resulting from an increase in discounted sales to strategic partners.
Also, higher costs of product revenue in the current year quarter resulted from
an increase in material costs and higher customer service and maintenance costs.
Research and Development Expense. Research and development expenses
increased 55% to $2.3 million for the three months ended September 30, 2000. The
increase was attributable to several factors, including increased personnel cost
of $343,000 due to an increased number of employees and increased consumption of
parts and supplies of $580,000 related to the development of new products.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased by 40% to $2.7 million for the three months
ended September 30, 2000. The increase was attributable to several factors,
including increased personnel costs of $527,000 due to growth in employment from
19 at September 30, 1999 to 38 at September 30, 2000, increased sales and
marketing expenses of $319,000 incurred to support higher sales volume and
increased advertising and public relations activities, increased professional
expenses of $226,000 and increased facilities costs of $97,000 due to the
continued expansion of our facilities. These increases in SG&A expenses were
partially offset by a $487,000 reduction of non-cash stock compensation
expenses.
Interest Income. Interest income increased by 2160% to $1.3 million for
the three months ended September 30, 2000. The increase was attributable to an
increase in the average cash and short-term investment balances, resulting from
investment of the net proceeds of our initial public offering received in April
2000.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Revenue. Product revenue increased 319% to $5.0 million for the nine
months ended September 30, 2000. The increase was primarily attributable to
increased sales of Luminex 100 systems with 177 systems placed in the first nine
months of 2000 compared with 40 systems placed in the first nine months of 1999.
We also placed 158 Luminex XY Platforms in the first nine months of 2000
compared with one placed in the 1999 period. In addition, consumable sales
increased by 250% to $620,000 which was attributable to the increase in the
installed base of systems.
10
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Grant revenue decreased by 75% to $125,000 for the nine months ended
September 30, 2000. The grant was reinstated July 1, 2000 with a new joint
venture partner after being temporarily suspended in September 1999 when our
prior joint venture partner withdrew due to a change in its business strategy.
A breakdown of revenue for the nine months ended September 30, 2000 and
1999 is as follows (in thousands):
Nine Months Ended
September 30,
------------------
2000 1999
-------- -------
System sales................ $ 4,246 $ 990
Consumable sales............ 620 177
Grant revenue............... 125 506
Other revenue............... 108 19
-------- -------
Total revenue............ $ 5,099 $ 1,692
======== =======
Gross Profit. Gross profit increased by 515% to $2.0 million for the
nine months ended September 30, 2000. Gross margin (gross profit as a percentage
of total revenue) decreased from 70% for the nine months ended September 30,
1999 to 39% for the nine months ended September 30, 2000. The decrease in gross
margin was primarily attributable to a reduction in the average selling price of
our systems, resulting from an increase in discounted sales to strategic
partners, and an increase in cost of product revenue caused by higher material
costs and the absence of grant revenue in the first six months of 2000.
Research and Development Expense. Research and development expenses
increased 43% to $6.0 million for the nine months ended September 30, 2000. The
increase was attributable to several factors, including increased personnel cost
of $932,000 due to an increased number of employees, increased consumption of
parts and supplies of $539,000 related to the development of new products, and
increased non-cash stock compensation charges of $425,000 for options issued to
consultants. These expenses were partially offset with a $309,000 reduction in
consulting and professional expenses for the nine months ended September 30,
2000.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased by 107% to $7.6 million for the nine months
ended September 30, 2000. The increase was attributable to several factors,
including increased personnel costs of $1.2 million due to growth in employment
from 19 at September 30, 1999 to 38 at September 30, 2000, increased non-cash
stock compensation expenses of $1.2 million, increased sales and marketing
expenses of $409,000 incurred to support higher sales volumes and increased
advertising and public relations activities, increased professional fees of
$344,000 and increased facilities costs of $205,000 due to the continued
expansion of our facilities.
Interest Income. Interest income increased by 1260% to $2.6 million for
the nine months ended September 30, 2000. The increase was attributable to an
increase in the average cash and short-term investment balances, resulting from
investment of the proceeds of our initial public offering received in April
2000.
Liquidity and Capital Resources
At September 30, 2000, we held cash, cash equivalents and short-term
investments of $76.9 million and had working capital of $80.0 million. We have
funded our operations to date primarily through the issuance of equity
securities. Our cash reserves are held directly or indirectly in a variety of
short-term, interest-bearing instruments, including obligations of the U.S.
Government or agencies thereof and U.S. corporate debt securities.
Cash used in operations was $7.0 million for the nine months ended
September 30, 2000, compared with $6.0 million for the nine months ended
September 30, 1999. Purchases of property and equipment for the nine months
ended September 30, 2000 were $1.8 million, compared with $1.0 million for the
nine months ended September 30, 1999.
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We expect to have negative cash flow through at least December 31, 2001. We
also expect to incur increasing research and development expenses and selling,
general and administrative expenses, including expenses related to additions to
personnel, increased production and commercialization efforts and increased
expenditures for product development and for the development of our
bioinformatics business unit. 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, the
availability of government research grants, 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 December 31, 2001.
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 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
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 screening. However, compared to
certain other technologies, our LabMAP technology is new and unproven, and the
use of our technology by life sciences companies is limited. The commercial
success of our technology will depend upon the adoption of this technology 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, 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 market
acceptance.
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 depends in part upon our ability to establish 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 effort with no assurance that a strategic relationship 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
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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.
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. 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
effectively develop and market products based on our technology and obtain any
necessary government approvals, our revenues from product sales and royalties
will be significantly reduced.
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 organizations may
develop technologies that are superior alternatives to our technologies or may
be more effective at implementing their technologies to develop commercial
products.
The life sciences industry is characterized by rapid and continuous
technological innovation. We may need to develop new applications 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 technology as
well as to respond effectively to technological advances.
Our newly formed bioinformatics business unit is subject to additional risks and
uncertainties.
Our bioinformatics business unit 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 the 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 samples from persons who developed diseases over the period of time
over which the samples were collected. In addition, we will need to create large
panels of assays 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 assays to test the samples, we will not be able
to produce relevant information from the database.
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 analysis thereof within the expected
time frames. In addition, because the our bioinformatics business will require
manipulating and analyzing
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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.
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 a patent in the United States and have pending
applications in certain foreign jurisdictions, except Japan, for our method of
"real time" detection and quantification of multiple analytes from a single
sample. As a result of a procedural omission, we are unable to obtain comparable
patent protection in Japan. Although we intend to pursue 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 LabMAP
technology in Japan.
We require our employees, consultants and advisors 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 those we own.
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 these 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.
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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
manufacturing problems 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 at an acceptable cost. If we encounter
difficulties in production due to, among other things, quality control and
assurance and component supply, 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 alternative suppliers, any of
which would reduce our revenues and gross margins.
We presently outsource most of the assembly of our products to a contract
assembler. 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 any of our suppliers. Our
reliance on our suppliers and contract assembler exposes us to risks including:
. the possibility that one or more of our suppliers or our assembler
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 alternative sources of
supply or manufacturing services; and
. reduced control over pricing, quality and timely delivery due to the
difficulties in switching to alternative suppliers or assemblers.
Consequently, in the event that supplies of components or work performed by our
assembler are delayed or interrupted for any reason, our ability to produce and
supply our products could be impaired.
Our success will depend on our ability to retain principal members of our
management and scientific 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 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 future 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 United
States 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. No such approvals or clearances have yet been obtained by us or
by any of 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
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to whom it may be marketed. In addition, we are also required to comply with FDA
requirements relating to laser safety.
Approved or cleared products are subject to continuing FDA requirements
relating to quality control and quality assurance, maintenance of records and
documentation and labeling and promotion of medical devices. Our inability, or
the inability of our strategic partners, to obtain required regulatory approval
or clearance on a timely or acceptable basis could harm our business. In
addition, failure to comply with applicable regulatory requirements could
subject us or our strategic partners to enforcement action, including product
seizures, recalls, withdrawal of clearances or approvals, restrictions on or
injunctions against marketing our products or products based on our technology,
and civil and criminal penalties.
Medical device laws and regulations are also in effect in many
countries outside the United States. These range from comprehensive device
approval requirements for some or all of our medical device products to requests
for product data or certifications. The number and scope of these requirements
are increasing. Failure to comply with applicable federal, state and foreign
medical device laws and regulations may harm our business, financial condition
and results of operations. We are also subject to a variety of other laws and
regulations relating to, among other things, environmental protection and work
place safety.
Our bioinformatics business unit 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 pharmaceutical, biotechnology, 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 research 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
and impact our profitability.
If third-party payors increasingly restrict payments for health care expenses,
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 health care.
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 health care 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
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our strategic partners would hurt our business, profitability and business
prospects.
We cannot assure you that we will ever achieve or sustain profitability or that
our operating losses will not increase in the future.
We have incurred operating losses and negative cash flow from operations
since our inception. As of September 30, 2000, we had an accumulated deficit of
$32.0 million. For the year ended December 31, 1999 and the nine months ended
September 30, 2000, we had net losses of $12.6 million and $8.9 million,
respectively. We expect to continue to incur operating and net losses and
negative cash flow from operations, which may increase, for the foreseeable
future due in part to anticipated increases in expenses for research and product
development and expansion of our facilities and sales and marketing
capabilities. We anticipate that our business will generate operating losses
until we successfully implement our commercial development strategy and generate
significant additional revenues to support our level of operating expenses.
Our limited operating history and reliance on strategic partners to market our
products makes forecasting difficult.
Because of our limited operating history, there is limited meaningful
financial data upon which to base planned operating expenses. As a result, it is
difficult to accurately forecast revenues. 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.
We anticipate that a large percentage of future sales of our products will
be made by our strategic partners. For the following reasons, estimating the
amount of sales 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 by our strategic partners.
. Our strategic partners are not committed to minimum purchase
commitments.
. Of our 24 strategic partners, 14 intend to produce clinical diagnostic
applications that will need to be approved by the United States Food
and Drug Administration. As a result, these applications will not be
commercially available until our device master file for our system is
accepted by the FDA and the FDA submission for each application is
approved.
. 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 a limited direct marketing, sales and distribution staff. As a
result, if our strategic partners fail to achieve projected levels of sales, we
likely not achieve the level of estimated revenues.
Our products have lengthy sales cycles, which could cause our operating results
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. Due to this lengthy and
unpredictable sales cycle, our operating results could fluctuate significantly
from quarter to quarter.
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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:
. actual or anticipated variations in quarterly operating results from
historical results or estimates of results prepared by securities
analysts;
. announcements of technological innovations by us or our competitors;
. new products or services introduced or announced by us or our
competitors;
. changes in financial estimates by securities analysts;
. conditions or trends in the 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 48%
of our outstanding common stock as of October 31, 2000. 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 could make a
third-party acquisition of us difficult.
Our certificate of incorporation and bylaws contain provisions that could
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our stockholders. These provisions could limit the price that
investors might be willing to pay in the future for shares of our common stock.
We are also subject to certain provisions of Delaware law that could delay,
deter or prevent a change in control of us.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in short-
term instruments held to maturity. Due to the nature of our short-term
investments, we have concluded that there is no material market risk exposure.
We currently have no foreign operations and sales to customers outside the
United States are insignificant. Accordingly, our foreign currency market risk
is limited.
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PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibit listed in the accompanying Exhibit Index is 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, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 13, 2000.
LUMINEX CORPORATION
By: /s/ Michael L. Bengtson
----------------------------------------------
Michael L. Bengtson
Executive Vice President and General Counsel
By: /s/ James L. Persky
----------------------------------------------
James L. Persky
Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
Exhibit
Number Description Of Document
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27.1 Financial Data Schedule.
22
