Luminex Corporation
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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Quarterly Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
for the
quarterly period ended September 30,
2007
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or |
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o |
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Transition Report Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of
1934
for
the transition period from to .
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Commission File No. 000-30109
LUMINEX CORPORATION
(Exact name of Registrant as specified in its charter)
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DELAWARE
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74-2747608 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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12212 TECHNOLOGY BLVD., AUSTIN, TEXAS
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78727 |
(Address of principal executive offices)
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(Zip Code) |
(512) 219-8020
(Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
There were 36,605,214 shares of the Companys Common Stock, par value $0.001 per share,
outstanding on November 2, 2007.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LUMINEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
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September 30, |
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December 31, |
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2007 |
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2006 |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
9,725 |
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$ |
27,414 |
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Short-term investments |
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3,281 |
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10,956 |
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Accounts receivable, net |
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12,355 |
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8,237 |
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Inventory, net |
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7,602 |
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4,571 |
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Other |
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1,693 |
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1,917 |
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Total current assets |
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34,656 |
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53,095 |
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Property and equipment, net |
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12,335 |
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4,985 |
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Intangible assets, net |
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17,480 |
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Long-term investments |
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5,311 |
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7,346 |
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Goodwill |
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39,599 |
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Other |
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1,433 |
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1,270 |
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Total assets |
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$ |
110,814 |
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$ |
66,696 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
3,286 |
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$ |
3,255 |
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Accrued liabilities |
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8,635 |
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2,905 |
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Deferred revenue and other |
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2,590 |
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2,756 |
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Total current liabilities |
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14,511 |
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8,916 |
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Long-term debt |
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2,940 |
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Deferred revenue and other |
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3,754 |
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3,621 |
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Total liabilities |
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21,205 |
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12,537 |
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Stockholders equity: |
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Common stock |
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35 |
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32 |
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Additional paid-in capital |
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188,235 |
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139,116 |
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Accumulated other comprehensive (loss) gain |
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|
165 |
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|
65 |
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Accumulated deficit |
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|
(98,826 |
) |
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(85,054 |
) |
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Total stockholders equity |
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89,609 |
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54,159 |
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Total liabilities and stockholders equity |
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$ |
110,814 |
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$ |
66,696 |
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See the accompanying notes which are an integral part of
these Condensed Consolidated Financial Statements.
LUMINEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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(unaudited) |
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(unaudited) |
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Revenue |
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$ |
19,353 |
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$ |
12,514 |
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$ |
53,508 |
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$ |
38,779 |
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Cost of revenue |
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7,336 |
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4,732 |
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20,724 |
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15,077 |
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Gross profit |
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12,017 |
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7,782 |
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32,784 |
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23,702 |
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Operating expenses: |
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Research and development |
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4,464 |
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2,348 |
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11,035 |
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6,335 |
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Selling, general and administrative |
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10,011 |
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5,869 |
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28,823 |
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17,956 |
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In-process research and development expense |
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(600 |
) |
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7,400 |
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Total operating expenses |
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13,875 |
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8,217 |
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47,258 |
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24,291 |
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Income (loss) from operations |
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(1,858 |
) |
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|
(435 |
) |
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(14,474 |
) |
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|
(589 |
) |
Interest expense from long-term debt |
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(253 |
) |
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(685 |
) |
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Other income, net |
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309 |
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544 |
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|
1,350 |
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1,511 |
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Income taxes |
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(50 |
) |
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2 |
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37 |
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(14 |
) |
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Net income (loss) |
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$ |
(1,852 |
) |
|
$ |
111 |
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$ |
(13,772 |
) |
|
$ |
908 |
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Net income (loss) per share, basic |
|
$ |
(0.05 |
) |
|
$ |
0.00 |
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|
$ |
(0.40 |
) |
|
$ |
0.03 |
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Shares used in computing net income (loss)
per share, basic |
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35,097 |
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31,507 |
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|
34,043 |
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31,358 |
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Net income (loss) per share, diluted |
|
$ |
(0.05 |
) |
|
$ |
0.00 |
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|
$ |
(0.40 |
) |
|
$ |
0.03 |
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Shares used in computing net income (loss)
per share, diluted |
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35,097 |
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|
|
33,155 |
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|
34,043 |
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|
|
32,682 |
|
See the accompanying notes which are an integral part of
these Condensed Consolidated Financial Statements.
2
LUMINEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
|
|
|
2007 |
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|
2006 |
|
|
2007 |
|
|
2006 |
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|
|
(unaudited) |
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|
(unaudited) |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
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|
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Net income (loss) |
|
$ |
(1,852 |
) |
|
$ |
111 |
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|
$ |
(13,772 |
) |
|
$ |
908 |
|
Adjustments to reconcile net income to net cash
(used in) provided by operating activities: |
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|
|
|
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Depreciation and amortization |
|
|
1,067 |
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|
339 |
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|
|
3,445 |
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|
1,086 |
|
In-process research and development expense |
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|
(600 |
) |
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|
|
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|
7,400 |
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|
|
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Stock-based compensation and other |
|
|
1,744 |
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|
|
1,433 |
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|
|
4,843 |
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|
|
3,857 |
|
Loss (gain) on disposal of assets |
|
|
|
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|
|
|
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|
88 |
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|
25 |
|
Other |
|
|
1 |
|
|
|
(2 |
) |
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|
3 |
|
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|
(12 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Accounts receivable, net |
|
|
(741 |
) |
|
|
(240 |
) |
|
|
(2,398 |
) |
|
|
(1,716 |
) |
Inventory, net |
|
|
(503 |
) |
|
|
(318 |
) |
|
|
(1,223 |
) |
|
|
(180 |
) |
Prepaids and other |
|
|
361 |
|
|
|
(113 |
) |
|
|
242 |
|
|
|
(84 |
) |
Accounts payable |
|
|
(342 |
) |
|
|
(27 |
) |
|
|
(4,159 |
) |
|
|
(1,532 |
) |
Accrued liabilities |
|
|
536 |
|
|
|
457 |
|
|
|
(1,817 |
) |
|
|
(378 |
) |
Deferred revenue |
|
|
(545 |
) |
|
|
(150 |
) |
|
|
(402 |
) |
|
|
(374 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(874 |
) |
|
|
1,490 |
|
|
|
(7,750 |
) |
|
|
1,600 |
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
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|
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Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
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|
Maturities (purchases) of held-to-maturity investments |
|
|
33 |
|
|
|
(1,364 |
) |
|
|
9,743 |
|
|
|
(2,409 |
) |
Purchase of property and equipment |
|
|
(2,002 |
) |
|
|
(442 |
) |
|
|
(5,331 |
) |
|
|
(1,970 |
) |
Acquisition of business, net of cash acquired |
|
|
50 |
|
|
|
|
|
|
|
(2,686 |
) |
|
|
|
|
Acquired technology rights |
|
|
|
|
|
|
|
|
|
|
(265 |
) |
|
|
|
|
Proceeds from sale of assets |
|
|
(5 |
) |
|
|
17 |
|
|
|
(5 |
) |
|
|
24 |
|
Other investing activities |
|
|
|
|
|
|
(25 |
) |
|
|
30 |
|
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(1,924 |
) |
|
|
(1,814 |
) |
|
|
1,486 |
|
|
|
(4,380 |
) |
|
|
|
|
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|
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|
|
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|
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|
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|
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Financing activities: |
|
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|
|
|
|
|
|
|
|
|
|
|
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Payments on debt |
|
|
(4 |
) |
|
|
|
|
|
|
(12,349 |
) |
|
|
|
|
Proceeds from issuance of common stock |
|
|
459 |
|
|
|
1,000 |
|
|
|
632 |
|
|
|
2,434 |
|
Other |
|
|
4 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
459 |
|
|
|
1,000 |
|
|
|
(11,704 |
) |
|
|
2,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate on cash |
|
|
228 |
|
|
|
4 |
|
|
|
279 |
|
|
|
26 |
|
Change in cash and cash equivalents |
|
|
(2,111 |
) |
|
|
680 |
|
|
|
(17,689 |
) |
|
|
(320 |
) |
Cash and cash equivalents, beginning of period |
|
|
11,836 |
|
|
|
24,206 |
|
|
|
27,414 |
|
|
|
25,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
9,725 |
|
|
$ |
24,886 |
|
|
$ |
9,725 |
|
|
$ |
24,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cashflow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and penalties paid |
|
$ |
1 |
|
|
$ |
|
|
|
$ |
1,336 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash effect of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase price |
|
$ |
(1,182 |
) |
|
$ |
|
|
|
$ |
(48,928 |
) |
|
$ |
|
|
Common stock issued |
|
|
|
|
|
|
|
|
|
|
41,755 |
|
|
|
|
|
Conversion of Tm options and warrants |
|
|
|
|
|
|
|
|
|
|
2,315 |
|
|
|
|
|
Forgiveness
of receivable from acquired company |
|
|
1,232 |
|
|
|
|
|
|
|
1,232 |
|
|
|
|
|
Cash acquired |
|
|
|
|
|
|
|
|
|
|
940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition, net of cash acquired |
|
$ |
50 |
|
|
$ |
|
|
|
$ |
(2,686 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 or Luminex) in accordance with United States generally
accepted accounting principles 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 United States generally accepted accounting principles for complete financial
statements. The condensed 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 nine months ended September 30, 2007 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2007. These financial statements
should be read in conjunction with the financial statements and notes thereto included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2006.
The acquisition of Tm Bioscience Corporation, or Tm, now known as Luminex Molecular
Diagnostics, or LMD, was completed on March 1, 2007; therefore, the results of operations of LMD in
our consolidated financial statements only include LMD results since this date.
Historically the Company has operated as a single segment. Subsequent to the acquisition of
LMD, we now have two segments for financial reporting purposes: the Technology Segment and the
Assay Segment. See Note 7 Segment Information.
NOTE 2 BUSINESS COMBINATIONS
Acquisition
On March 1, 2007, the Company completed the acquisition of Tm, a DNA-based research and
diagnostics company headquartered in Toronto, Canada. The acquired company is referred to as LMD
and is included in our Assay Segment for financial reporting purposes. The focus of LMD is to
design, develop, manufacture and commercialize nucleic-acid based testing products for use in the
genetic testing, personalized medicine and infectious disease markets.
Upon the closing of the acquisition, we exchanged 0.06 shares of Luminex common stock for each
outstanding Tm share, which resulted in the issuance of approximately 3.2 million shares of Luminex
common stock. The value of the approximately 3.2 million common shares issued was determined based
on the average market price of our common stock over the period including five days before and
after the terms of the acquisition were agreed to and announced in accordance with SFAS No. 141,
Business Combinations (SFAS 141). We also agreed to assume all outstanding Tm options and
warrants according to the applicable Tm plan provisions, which options and warrants are potentially
exercisable for approximately 692,000 additional shares of Luminex common stock on an as-converted
basis. The estimated fair value of Luminex replacement options and warrants is calculated using
the Black-Scholes model. In accordance with Statement of Financial Accounting Standards No. 123R,
Share-based Payments (SFAS 123R), the portion of the estimated fair value of unvested Tm options
related to future service (approximately $242,000) is deducted from the purchase price
consideration and will be recognized as compensation expense over those awards remaining vesting
period.
Immediately subsequent to the acquisition, we retired approximately $13.2 million of Tm debt,
including an approximately $1.0 million related contractual penalty, by using existing cash
reserves. Under the terms of one of the retired debt instruments, the balance of the note became
callable upon the acquisition and was subject to a contractual penalty if either called by the debt
holder or prepaid by Tm. The penalty was triggered when the Tm
4
LUMINEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
shareholders ratified the acquisition of Tm by Luminex on February 21, 2007. The penalty was
recorded by Tm prior to Luminex acquisition based on the penalty amount agreed by the debt holder,
and was reflected in the opening balance of Other current liabilities assumed.
The acquisition is being accounted for as a purchase business combination in accordance with
SFAS 141 and LMD results of operations are included with the Companys from the date of
acquisition, March 1, 2007. The purchase price of the
acquisition was approximately $48.9 million,
including common stock valued at $41.8 million and transaction costs of approximately $3.6 million.
The purchase price has been allocated to the net assets acquired based on estimates of the fair
values at the date of the acquisition.
Luminex
has completed the process of allocating
fair values for certain tangible and intangible assets and in-process research and development
(IPR&D) identified during the acquisition. The excess purchase price over the fair values of the
net tangible assets, identified intangible assets and liabilities was allocated to goodwill.
Luminex currently has $39.6 million of goodwill recorded related to the Tm acquisition. Goodwill
was adjusted in the second and third quarters of 2007 to allocate the estimated fair value of
certain tangible assets, intangibles and IPR&D identified as part of the acquisition. As required by SFAS 142, the Company
will begin testing of this goodwill balance on an annual basis and on an interim basis if
circumstances indicate that necessity. No assurances can be given as to the size of any subsequent
goodwill adjustment, if any, at this time. Goodwill is not expected to be deductible for tax
purposes.
The following table summarizes the estimated fair values of net assets at the date of
acquisition (in thousands). Certain tangible and intangible assets
and liabilities were adjusted to their
estimated fair market values upon the final analysis of these values during the current quarter. Based on
SFAS 141, the following intangible assets evaluated were: trade name (Tag-It), customer
list/contracts, technology/trade secrets, and in-process research and development. IPR&D has been
recorded at its estimated fair market value and charged to expense in the second and third quarters
of 2007.
|
|
|
|
|
Cash |
|
$ |
940 |
|
Other current assets |
|
|
3,157 |
|
Other assets |
|
|
28 |
|
Property and equipment |
|
|
3,518 |
|
Purchased
intangible assets |
|
|
18,800 |
|
In-process research and development |
|
|
7,400 |
|
Goodwill |
|
|
39,599 |
|
|
|
|
|
Total assets |
|
$ |
73,442 |
|
|
|
|
|
|
|
|
|
|
Current portion of debt assumed |
|
$ |
12,447 |
|
Accrued severance assumed |
|
|
2,120 |
|
Other current liabilities assumed |
|
|
7,418 |
|
Long-term debt assumed |
|
|
2,295 |
|
Other long-term liabilities assumed |
|
|
234 |
|
|
|
|
|
Total liabilities |
|
|
24,514 |
|
|
|
|
|
Purchase price |
|
$ |
48,928 |
|
|
|
|
|
5
LUMINEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Pro Forma Information
The financial information in the table below summarizes the combined results of operations of
Luminex and LMD, on a pro forma basis, as though the companies had been combined at the beginning
of 2006.
The pro forma financial information is presented for informational purposes only and is not
indicative of the results of operation that would have been achieved if the acquisition of LMD had
taken place at the beginning of fiscal 2006.
The following table summarizes the pro forma financial information for the three months ended
September 30, 2006 and the nine months ended September 30, 2006 and 2007 and the actual results for
the three months ended September 30, 2007 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Revenues |
|
$ |
19,353 |
|
|
$ |
13,934 |
|
|
$ |
53,827 |
|
|
$ |
43,835 |
|
Net loss |
|
$ |
(1,852 |
) |
|
$ |
(5,790 |
) |
|
$ |
(20,149 |
) |
|
$ |
(13,913 |
) |
Net loss per share, basic and diluted |
|
$ |
(0.05 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.58 |
) |
|
$ |
(0.40 |
) |
Purchased Intangible Assets
As of September 30, 2007, we had unamortized identifiable intangible assets of $18.8 million.
The following table details amounts relating to those assets (in thousands except weighted average
lives):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying |
|
|
Accumulated |
|
|
Weighted |
|
|
|
amount |
|
|
amortization |
|
|
average life |
|
Technology/trade secrets |
|
$ |
17,400 |
|
|
$ |
1,102 |
|
|
|
9 |
|
Customer lists/contracts |
|
|
1,100 |
|
|
|
43 |
|
|
|
15 |
|
Trade name |
|
|
300 |
|
|
|
175 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18,800 |
|
|
$ |
1,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortization expense related to purchased intangible assets for the three and nine months
ended September 30, 2007 was $461,000 and $1.3 million, respectively. The estimated amortization
expense for the current year and the next five years is as follows (in thousands):
6
LUMINEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
|
|
|
|
|
|
|
For the year |
|
|
ending December |
|
|
31, |
2007 |
|
$ |
1,886 |
|
2008 |
|
|
2,013 |
|
2009 |
|
|
1,963 |
|
2010 |
|
|
1,963 |
|
2011 |
|
|
1,963 |
|
2012 |
|
|
1,963 |
|
In-process Research and Development (IPR&D)
IPR&D was allocated to each IPR&D project using the estimated fair value based on an income
approach using discounted cash flows related to the products that would result from each of the
projects. The discounted cash flows were estimated based on relevant market size and growth
factors, expected industry trends, individual product sales cycles, the estimated life of each
products underlying technology, historical pricing, costs to complete the projects, costs of
production, R&D costs required to maintain the products once they have been introduced into the
market and related selling and marketing costs. The discount rates used to discount the projected
net returns were based on an internal rate of return of capital relative to the Company and the
bio-technology industry, as well as the product-specific risk associated with the IPR&D projects.
Product-specific risk includes the stage of completion of each product, the complexity of the
development work completed to date, the likelihood of achieving technological feasibility, and
market acceptance. The forecast data employed in the analyses for IPR&D was based upon both
forecast information maintained by the acquired companies and the Companys estimate of future
performance of the business. The inputs used by the Company in assessing the value of IPR&D were
based upon assumptions that the Company believes to be reasonable but which are inherently
uncertain and unpredictable.
In conjunction with the acquisition, the Company has recorded total IPR&D expense of $7.4
million for acquired IPR&D which was not technologically feasible as of the acquisition date and
had no alternative future use. IPR&D was charged to net loss during the nine months ended
September 30, 2007. At June 30, 2007 the company had estimated
total IPR&D charges to be $8.0 million. During the quarter ended
September 30, 2007, and in conjunction with the completion of our
purchase price allocation, the company recorded a $600,000 adjustment
to our previous estimate.
NOTE 3 INVESTMENTS
Held-to-maturity securities as of September 30, 2007 consisted of $8.6 million of federal
agency debt securities. Amortized cost approximates fair value of these investments.
The amortized costs of held-to-maturity debt securities at September 30, 2007, by contractual
maturity, are shown below (in thousands). Expected maturities may differ from contractual
maturities because the issuers of the securities may have the right to prepay obligations without
prepayment penalties.
7
LUMINEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost |
|
|
Accrued Interest |
|
|
Amortized Cost |
|
Due in one year or less |
|
$ |
3,281 |
|
|
$ |
37 |
|
|
$ |
3,318 |
|
Due after one year through two years |
|
|
5,311 |
|
|
|
90 |
|
|
|
5,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,592 |
|
|
$ |
127 |
|
|
$ |
8,719 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 4 INVENTORY, NET
Inventory consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Parts and
supplies |
|
$ |
4,338 |
|
|
$ |
3,504 |
|
Work-in-progress |
|
|
2,104 |
|
|
|
555 |
|
Finished
goods |
|
|
1,826 |
|
|
|
932 |
|
|
|
|
|
|
|
|
|
|
|
8,268 |
|
|
|
4,991 |
|
Less: Allowance for excess and obsolete
inventory |
|
|
(666 |
) |
|
|
(420 |
) |
|
|
|
|
|
|
|
|
|
$ |
7,602 |
|
|
$ |
4,571 |
|
|
|
|
|
|
|
|
NOTE 5 EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per
Share, basic and diluted net income per share is computed by dividing the net income for the
period by the weighted average number of common shares outstanding during the period.
A reconciliation of the denominators used in computing per share net income, or EPS, is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(1,852 |
) |
|
$ |
111 |
|
|
$ |
(13,772 |
) |
|
$ |
908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per share
weighted average common stock
outstanding |
|
|
35,097 |
|
|
|
31,507 |
|
|
|
34,043 |
|
|
|
31,358 |
|
Dilutive common stock equivalents common stock
options and awards |
|
|
|
|
|
|
1,648 |
|
|
|
|
|
|
|
1,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demominator
for diluted net income (loss) per share weighted average
common stock outstanding and dilutive common stock equivalents |
|
|
35,097 |
|
|
|
33,155 |
|
|
|
34,043 |
|
|
|
32,682 |
|
|
Basic net income (loss) per share |
|
$ |
(0.05 |
) |
|
$ |
0.00 |
|
|
$ |
(0.40 |
) |
|
$ |
0.03 |
|
Diluted net income (loss) per share |
|
$ |
(0.05 |
) |
|
$ |
0.00 |
|
|
$ |
(0.40 |
) |
|
$ |
0.03 |
|
8
LUMINEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Restricted stock awards, or RSAs, and stock options to acquire 1.4 million and 265,000 shares,
respectively, for the three months ended September 30, 2007 and 2006 and 1.4 million and 626,000,
respectively, for the nine months ended September 30, 2007 and 2006 were excluded from the
computations of diluted EPS because the effect of including the RSAs and stock options would have
been anti-dilutive.
NOTE 6 STOCK-BASED COMPENSATION
The Company assumed the Tm Bioscience Corporation Share Option Plan (the Tm Plan), a
stock-based employee compensation plan, in connection with the Tm acquisition. The Tm Plan governs
the former Tm options which were exchanged for options to purchase shares of Luminex common stock
in connection with the acquisition. The Tm Plan will be administered by the Compensation Committee
of the Board of Directors of Luminex. There are currently options to purchase 95,719 shares of
Luminex common stock outstanding under the Tm Plan at a weighted average exercise price of $24.15
per share expiring on or before October 2011. No new equity awards may be issued under the Tm
Plan.
Also in connection with the Tm acquisition, warrants for the purchase of Tm common stock were
converted to the right to acquire shares of Luminex common stock. There are currently outstanding
warrants to purchase up to approximately 458,000 shares of Luminex common stock with a weighted
average exercise price of $20.64 per share expiring on or before November 2011.
On March 25, 2007, the Compensation Committee approved an amendment to the restricted stock
agreement, dated May 17, 2004 (the Restricted Stock Agreement), of our CEO, Patrick J. Balthrop.
The Company and Mr. Balthrop initially entered into the Restricted Stock Agreement in connection
with the hiring of Mr. Balthrop as the President and Chief Executive Officer of the Company. The
Restricted Stock Agreement provided for the grant of 200,000 restricted shares, which would vest in
portions based on the attainment of certain performance goals related to Company revenue, earnings
and stock price. If the goals provided for in the Restricted Stock Agreement were not achieved by
the end of the fifth anniversary of the date of the Restricted Stock Agreement, all non-vested
shares would be forfeited. The amendment provides for the automatic vesting of all unvested
restricted shares immediately prior to the fifth anniversary of the date of the Restricted Stock
Agreement, to the extent any or all of the performance measures have not been previously achieved.
Mr. Balthrops 200,000 share restricted stock award, as amended, has market, service or performance
criteria for vesting of all shares. We have assumed that vesting will occur at the end of the five
years based on achievement of the service criteria so all expense is being amortized straight-line
over the five-year period from May 17, 2004 through 2009. Pursuant to the amendment to this award,
the award was revalued to the market price on the date of amendment of $14.39. This resulted in
additional expense to the Company of approximately $356,000 of which approximately $205,000 was
recognized in the first quarter of 2007 and approximately $151,000 of which will be recognized
pro-rata over the remaining term of the award.
Stock-based compensation costs are generally based on the fair value calculated from the
Black-Scholes option-pricing model on the date of grant for stock options and intrinsic value on
the date of grant for RSAs.
Calculation of expected volatility is based on historical volatility. The expected term is
calculated based on an analysis of historical exercises of stock options. The estimate of
risk-free rate is based on the U.S. Treasury yield
curve in effect at the time of grant. The Company has never paid cash dividends and does not
currently intend to pay cash dividends, thus has assumed a 0% dividend yield. The assumptions used
are summarized in the following table:
9
LUMINEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Expected volatility |
|
|
0.5 |
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
0.5 |
|
Risk-free rate of return |
|
|
5.0 |
% |
|
|
5.0 |
% |
|
|
5.0 |
% |
|
|
5.0 |
% |
Expected life |
|
7 yrs. |
|
6 yrs. |
|
4 yrs. |
|
6 yrs. |
Weighted average fair value at grant date |
|
$ |
7.40 |
|
|
|
N/A |
[1] |
|
$ |
4.70 |
|
|
|
N/A |
[1] |
|
|
|
[1] |
|
No stock options were issued to employees during these periods. |
The Companys stock option activity for the nine months ended September 30, 2007 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Shares |
|
|
Exercise |
|
Stock Options |
|
(in thousands) |
|
|
Price |
|
Outstanding at December 31,
2006 |
|
|
3,163 |
|
|
$ |
9.76 |
|
Granted |
|
|
822 |
(1) |
|
|
20.91 |
|
Exercised |
|
|
(117 |
) |
|
|
5.38 |
|
Cancelled or
expired |
|
|
(147 |
) |
|
|
25.68 |
|
|
|
|
|
|
|
|
Outstanding at September 30,
2007 |
|
|
3,721 |
|
|
$ |
11.73 |
|
|
|
|
(1) |
|
Includes shares reserved with respect to the Tm options assumed in the acquisition. |
The Company had $2.0 million of total unrecognized compensation costs related to stock options
at September 30, 2007 that are expected to be recognized over a weighted-average period of 1.1
years.
The Companys non-vested shares activity for the nine months ended September 30, 2007 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
Shares |
|
|
Grant-Date |
|
Restricted Stock Awards |
|
(in thousands) |
|
|
Fair Value |
|
Non-vested at December 31,
2006 |
|
|
798 |
|
|
$ |
12.46 |
|
Granted |
|
|
775 |
|
|
|
13.23 |
|
Vested |
|
|
(199 |
) |
|
|
13.46 |
|
Cancelled or
expired |
|
|
(11 |
) |
|
|
13.58 |
|
|
|
|
|
|
|
|
Non-vested at September 30,
2007 |
|
|
1,363 |
|
|
$ |
13.37 |
|
As of September 30, 2007, there was $15.0 million of unrecognized compensation cost related to
RSAs. That cost is expected to be recognized over a weighted average-period of 2.1 years.
10
LUMINEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following are the stock-based compensation costs recognized in the Companys condensed
consolidated statements of income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Cost of revenue |
|
$ |
105 |
|
|
$ |
68 |
|
|
$ |
253 |
|
|
$ |
226 |
|
Research and development |
|
|
216 |
|
|
|
155 |
|
|
|
558 |
|
|
|
394 |
|
Selling, general and
administrative |
|
|
1,423 |
|
|
|
1,210 |
|
|
|
4,027 |
|
|
|
3,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
costs |
|
$ |
1,744 |
|
|
$ |
1,433 |
|
|
$ |
4,838 |
|
|
$ |
3,857 |
|
NOTE 7 SEGMENT INFORMATION
Management has determined that we have two segments for financial reporting purposes: the
Technology Segment and the Assay Segment. As described in Note 2 Business Combinations, the
acquisition of LMD (formerly Tm) was completed on March 1, 2007; therefore, the results of
operation of LMD are only included in our consolidated financial statements since this date.
Following is selected information for the three months ended September 30, 2007 or at
September 30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment |
|
|
Technology Group |
|
Assay Group |
|
Eliminations |
|
Consolidated |
Revenues from external
customers |
|
$ |
16,769 |
|
|
$ |
3,349 |
|
|
$ |
|
|
|
$ |
20,118 |
|
Intersegment revenue |
|
|
742 |
|
|
|
23 |
|
|
|
(765 |
) |
|
|
(765 |
) |
Depreciation and
amortization |
|
|
576 |
|
|
|
610 |
|
|
|
(75 |
) |
|
|
1,111 |
|
Segment profit (loss) |
|
|
1,220 |
|
|
|
(3,296 |
) |
|
|
224 |
|
|
|
(1,852 |
) |
Segment assets |
|
|
58,308 |
|
|
|
66,135 |
|
|
|
(13,629 |
) |
|
|
110,814 |
|
Following is selected information for the nine months ended September 30, 2007 or at September
30, 2007 (in thousands), with recognition that the LMD impact is only for the period of March 1,
2007 through September 30, 2007:
11
LUMINEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology |
|
Assay |
|
Intersegment |
|
|
|
|
Group |
|
Group |
|
Eliminations |
|
Consolidated |
Revenues from external customers |
|
$ |
47,329 |
|
|
$ |
8,549 |
|
|
$ |
|
|
|
$ |
55,878 |
|
Intersegment revenue |
|
|
2,322 |
|
|
|
48 |
|
|
|
(2,370 |
) |
|
|
(2,370 |
) |
Depreciation and amortization |
|
|
1,514 |
|
|
|
2,124 |
|
|
|
(161 |
) |
|
|
3,477 |
|
Segment profit (loss) |
|
|
2,894 |
|
|
|
(16,504 |
) |
|
|
(162 |
) |
|
|
(13,772 |
) |
Segment assets |
|
|
58,308 |
|
|
|
66,135 |
|
|
|
(13,629 |
) |
|
|
110,814 |
|
NOTE 8 INCOME TAXES
The Company adopted the Financial Accounting Standards Board (FASB) Interpretation (FIN) 48,
Accounting for Uncertainty in Income Taxes (FIN 48) at the beginning of fiscal year 2007. As a
result of the assessment performed during the implementation of FIN 48, the Company determined that
it had no unrecognized tax benefits.
The Company recognizes interest and penalties related to uncertain tax positions in the
provision for income taxes. The Company has not recognized any interest or penalties related to
uncertain tax positions to date.
The tax years 2002 through 2006 remain open to examination by the major taxing jurisdictions
to which the Company is subject.
Income taxes decreased by approximately $125,000 during the nine months ended September 30,
2007 as a result of Texas HB 3928, effective June 15, 2007, which required the Company to recognize
changes in deferred tax assets related to a computational change of the temporary credit.
NOTE 9
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which
defines fair value, establishes a framework for using fair value to measure assets and liabilities,
and expands disclosures about fair value measurements. The Statement applies whenever other
statements require or permit assets or liabilities to be measured at fair value. SFAS 157 is
effective for fiscal years beginning after November 15, 2007. We are currently evaluating the
impact this statement will have on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB Statement No. 115 (SFAS 159). SFAS 159
permits entities to choose to measure many financial instruments and certain other items at fair
value, with unrealized gains and losses related to these financial instruments reported in earnings
at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November
15, 2007. We are currently evaluating the impact this statement will have on our consolidated
financial statements.
12
LUMINEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE
10 SUBSEQUENT EVENT
The Company settled its pending litigation with Rules Based Medicine, Inc. (RBM) on October
15, 2007. As part of the settlement, Luminex received a cash payment of $12.5 million. The cash
payment was made by RBM in exchange for resolution of the dispute between the companies regarding
Biophysical Corporation as well as the retirement of Luminex stock ownership in RBM and the grant
of certain additional licensing rights from Luminex. All other terms of the agreement are
confidential. The parties formally dismissed the lawsuit on October 24, 2007, as required by the
settlement agreement.
13
ITEM 2. MANAGEMENTS 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 Part I Item 1 of this Report, the Risk
Factors referenced in Part II Item 1A of this and our other Quarterly Reports on Form 10-Q and our
Annual Report on Form 10-K for the year ended December 31, 2006.
SAFE HARBOR CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q contains statements that are forward-looking statements as
defined within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended. Forward-looking statements give our current
expectations of forecasts of future events. All statements other than statements of current or
historical fact contained in this report, including statements regarding our future financial
position, business strategy, budgets, projected costs, and plans and objectives of management for
future operations, are forward-looking statements. The words anticipate, believe, continue,
estimate, expect, intend, may, plan, projects, will, and similar expressions, as they
relate to us, are intended to identify forward-looking statements. These statements are based on
our current plans and actual future activities, and our results of operations may be materially
different from those set forth in the forward-looking statements as a result of known or unknown
risks and uncertainties, including, among other things:
|
|
|
risks and uncertainties relating to market demand and acceptance of our products and
technology, |
|
|
|
|
dependence on strategic partners for development, commercialization and distribution of
products, |
|
|
|
|
concentration of the Companys revenue in a limited number of strategic partners, |
|
|
|
|
fluctuations in quarterly results due to a lengthy and unpredictable sales cycle and
bulk purchases of consumables, |
|
|
|
|
our ability to scale manufacturing operations and manage operating expenses, gross
margins and inventory levels, |
|
|
|
|
potential shortages of components, |
|
|
|
|
competition, |
|
|
|
|
the timing of regulatory approvals, |
|
|
|
|
the implementation, including any modification, of the Companys strategic operating
plans, |
|
|
|
|
risks and uncertainties associated with implementing our acquisition strategy and the
ability to integrate acquired companies, including LMD, or selected assets into our
consolidated business operations, including the ability to recognize the benefits of our
acquisitions, |
|
|
|
|
our ability to develop, manufacture and commercialize products within our Assay Segment,
and |
|
|
|
|
the current status of the credit markets generally, which could effect our ability to
obtain debt or equity funds on favorable terms, if at all. |
Any or all of our forward-looking statements in this report may turn out to be inaccurate. We
have based these forward-looking statements largely on our current expectations and projections
about future events and financial trends that we believe may affect our financial condition,
results of operations, business strategy and financial needs. They can be affected by inaccurate
assumptions we might make or by known or unknown risks, uncertainties and assumptions, including
the risks, uncertainties and assumptions outlined above and referenced in the section titled Risk
Factors below. In light of these risks, uncertainties and assumptions, the forward-looking events
and circumstances discussed in this report may not occur and actual results could differ materially
from those anticipated or implied in the forward-looking statements. When you consider these
forward-looking statements, you should keep in mind these risk factors and other cautionary
statements in this report.
Our forward-looking statements speak only as of the date made. We undertake no obligation to
publicly update or revise forward-looking statements, whether as a result of new information,
future events or otherwise. All subsequent written and oral forward-looking statements attributable
to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary
statements contained in this report. Unless the context requires
14
otherwise, references in this Quarterly Report on Form 10-Q to Luminex, the Company, we, us
and our refer to Luminex Corporation and its subsidiaries.
OVERVIEW
We develop, manufacture and sell proprietary biological testing technologies with applications
throughout the life sciences industry. Our xMAP® technology, an open architecture, multiplexing
technology, allows simultaneous analysis of up to 100 bioassays from a small sample volume,
typically a single drop of fluid, by reading biological tests on the surface of microscopic
polystyrene beads called microspheres. xMAP technology combines this miniaturized liquid array
bioassay capability with small lasers, digital signal processors and proprietary software to create
a system offering advantages in speed, precision, flexibility and cost. Our xMAP technology is
currently being used within various segments of the life sciences industry which includes the
fields of drug discovery and development, clinical diagnostics, genetic analysis, bio-defense,
protein analysis and biomedical research.
Our end-user customers and partners, which include laboratory professionals performing
research, clinical laboratories performing tests on patients as ordered by a physician and other
laboratories, have a fundamental need to perform high quality testing as efficiently as possible.
Luminex has adopted a business model built around strategic partnerships. We have licensed our
xMAP technology to other companies, who then develop products that incorporate the xMAP technology
into products that they sell to the end-user. Luminex develops and manufactures the proprietary
xMAP laboratory instrumentation and the proprietary xMAP microspheres and sells these products to
our partners. Our partners then sell xMAP instrumentation and xMAP-based reagent consumable
products, which run on the instrumentation, to the end-user laboratory. Luminex was founded on
this model, and our success to date has been due to this model. As of September 30, 2007, Luminex
had over 50 strategic partners, 31 of which have released commercialized reagent-based products
using our technology, and these partners have sold and placed over 4,700 xMAP-based instruments in
laboratories worldwide.
Luminex has several forms of revenue that result from this partner model:
|
|
|
System revenue is generated from the sale of our xMap systems and peripherals.
Currently, system revenue is derived from the sale of the Luminex 100 and 200 analyzers,
often coupled with an optional XY Platform and/or Sheath Delivery System. We currently
expect the average system price to be between $25,000 and $30,000 in a given reporting
period. This metric includes all configurations of our xMAP systems including refurbished
systems, demonstration systems and modular components. |
|
|
|
|
Consumable revenue is generated from the sale of our dyed polystyrene microspheres and
sheath fluid. Our larger commercial and development partners often purchase these
consumables in bulk to minimize the number of incoming qualification events and to allow
for longer development and production runs. |
|
|
|
|
Royalty revenue is generated when a partner sells a kit incorporating our proprietary
microspheres to an end user or when a partner utilizes a kit to provide a testing result to
a user. End users can be facilities such as testing labs, development facilities and
research facilities who buy prepared kits and have specific testing needs or testing
service companies that provide assay results to pharmaceutical research companies or
physicians. |
|
|
|
|
Service revenue is generated when a partner or other owner of a system purchases a
service contract from us after the warranty has expired. Service contract revenue is
amortized over the life of the contract and the costs associated with those contracts are
recognized as incurred. |
|
|
|
|
Assay revenue is generated from the sale of our kits which is a combination of chemical
and biological reagents and our proprietary bead technology used to perform diagnostic and
research assays on samples. For the nine months ended September 30, 2007, assay revenue
includes revenue since March 1, 2007 from Luminex Molecular Diagnostics, or LMD, formerly
Tm Bioscience Corporation, or Tm, as a result of our acquisition which was effective March
1, 2007. Assay revenue generated from the Luminex Bioscience Group, or LBG, is also
classified here. Previously, assay revenue generated from the LBG was recorded in other
revenue as it did not constitute a material amount of total revenue. |
|
|
|
|
Other revenue consists of items such as training, shipping, parts sales, license
revenue, grant revenue, contract research and development fees and milestone revenue and
other items that individually amount to less than 5% of total revenue. |
15
Third Quarter 2007 Highlights
|
|
|
Consolidated total revenue of $19.4 million, a 55 percent increase year-over-year |
|
|
|
|
System shipments surpass 200 for the quarter, for an installed base total in excess of
4,700, up 20 percent from a year ago |
|
|
|
|
Consumables and royalty revenue up 64 and 22 percent, respectively, from the prior year
period. On a pro forma basis, adjusting for the acquisition of Tm, royalties grew by over
35% over the third quarter of 2006 |
|
|
|
|
Consolidated gross profit margin of 62 percent |
|
|
|
|
Fifth Annual Planet XMap Europe, our European end-user symposium in Amsterdam attracted
over 400 participants |
Acquisition of TM Bioscience
As previously discussed in Note 2 Business Combinations, on March 1, 2007, we completed our
acquisition of Tm. The acquired company, now referred to as Luminex Molecular Diagnostics, or LMD,
is a DNA-based research and diagnostics company located in Toronto, Canada. In connection with
closing the acquisition, we paid off $13.2 million of Tms debt, related fees and paid transactions
expenses of approximately $5.7 million (including $3.6 million of transaction costs included as
part of the purchase price and $2.1 million of LMD transaction costs incurred prior to March 1,
2007). Primarily as a result of this transaction, our cash, cash equivalents and investments have
been reduced by approximately $25.3 million during the nine months ended September 30, 2007. To
support our cash and investments position, the Company secured a revolving credit facility for up
to $15.0 million in conjunction with the Tm acquisition, which, as of September 30, 2007 and
subject to the borrowing base requirements, would allow for
borrowings of up to approximately $10.6
million.
Segment Information
As described in Note 7 Segment Information, management has chosen to organize the Company by
business segments, and as a result has determined we have two segments for financial reporting
purposes: the Technology Segment and the Assay Segment.
Future Operations
We expect continued revenue growth for the remainder of 2007 to be driven by sustained
adoption of our core technology coupled with assay introduction and commercialization by the Assay
Segment. The anticipated continued shift in revenue concentration towards higher margin items,
such as assays, consumables and royalties, should provide favorable gross margins. Additionally,
we believe that a sustained investment into R&D is necessary in order to meet the needs of our
marketplace and estimate that spending on R&D for the full year of 2007 will approximate 20% of
total revenues.
We expect our primary challenges to be increasing traction of partner products incorporating
Luminex technology, capitalizing on the realized synergies of the Tm acquisition, commercialization
and market adoption of output from the Assay Segment and expanding our footprint and reputation
within our identified target market segments.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based
upon our condensed consolidated financial statements, which have been prepared in accordance with
United States generally accepted accounting principles. 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
16
assumptions are reviewed periodically. Actual results may differ from these estimates under
different assumptions or conditions.
Revenue Recognition. 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. If the
criteria for revenue recognition are not met at the time of shipment, the revenue is deferred until
all criteria are met. Royalty revenue is generated when a partner sells products incorporating our
technology, provides testing services to third parties using our technology or resells our
consumables. Royalty revenue is recognized as it is reported to us by our partners; therefore, the
underlying end-user sales may be related to prior periods. We also sell extended service contracts
for maintenance and support of our products. Revenue for service contracts is recognized ratably
over the term of the agreement.
Total deferred revenue as of September 30, 2007 was $6.3 million and primarily consisted of
(i) unamortized license fees for non-exclusive licenses and patent rights to certain Luminex
technologies in the amount of $3.9 million, (ii) unamortized revenue related to extended service
contracts in the amount of $2.1 million, and (iii) 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
$110,000. 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.
Inventory Valuation. Inventories are valued at the lower of cost or market value and have
been reduced by an allowance for excess and obsolete inventories. At September 30, 2007, the two
major components of the allowance for excess and obsolete inventory were (i) a specific reserve for
inventory items that we no longer use in the manufacture of our products or that no longer meet our
specifications and (ii) a reserve against slow moving items for potential obsolescence. The total
estimated allowance is reviewed on a regular basis and adjusted based on managements review of
inventories on hand compared to estimated future usage and sales. While management believes that
adequate write-downs for inventory obsolescence have been made in the consolidated financial
statements, scientific and technological advances will continue and the Company could experience
additional inventory write-downs in the future. However, the Company does not believe this
estimate is subject to significant variability.
Warranties. We provide for the estimated cost of product warranties at the time revenue is
recognized. While we engage in product quality programs and processes, our warranty obligation is
affected by product failure rates, material usage and service delivery costs incurred in correcting
a product failure. Should actual product failure rates, material usage or service delivery costs
differ from our estimates, revisions to the estimated warranty liability would be required.
However, the Company does not believe this estimate is subject to significant variability.
Accounts Receivable and Allowance for Doubtful Accounts. We continuously monitor collections
and payments from our customers and maintain allowances for doubtful accounts based upon our
historical experience and any specific customer collection issues that we have identified. While
such credit losses historically have been within our expectations, there can be no assurance that
we will continue to experience the same level of credit losses that we have in the past. A
significant change in the liquidity or financial position of any one of our significant customers,
or a 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. However, the Company
does not believe this estimate is subject to significant variability.
Purchase Price Allocation, Intangibles and Goodwill. The purchase price allocation for
acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase
price to the identifiable tangible and intangible assets acquired, including in-process research
and development (IPR&D), and liabilities assumed based on their respective fair values.
17
On
March 1, 2007, we acquired Tm for an aggregate purchase price of
approximately $48.9 million. The purchase price for the acquisition was allocated to tangible and intangible assets
acquired and liabilities assumed based on their estimated fair values at the acquisition date. We
have completed the process of determining the estimated fair values of IPR&D, identifiable intangible
assets and certain tangible assets. Such a
valuation requires significant estimates and assumptions, including but not limited to, determining
the timing and estimated costs to complete the in-process projects, projecting regulatory
approvals, estimating future cash flows, and developing appropriate discount rates. We believe the
estimated fair values assigned to the assets acquired and liabilities assumed are based on
reasonable assumptions.
We evaluate the impairment of goodwill under the guidance of SFAS No. 142 Goodwill and Other
Intangible Assets for each of our reporting units. During the first quarter of 2007, we
established our initial goodwill balance related to our acquisition of LMD. The Company will begin
testing of this goodwill balance on an annual basis and on an interim basis if circumstances
indicate that necessity.
Intangible assets acquired are amortized over the assets estimated useful lives using the
straight-line method. The Company periodically reviews the estimated useful lives of its
identifiable intangible assets, taking into consideration any events or circumstances that might
result in a diminished fair value or revised useful life.
IPR&D represents the value, on closing of a business combination, of acquired research and
development projects which were not technologically feasible as of the acquisition date and had no
alternative future use. Projects totaling $7.4 million that were deemed not technologically
feasible were charged to net loss during the nine months ended
September 30, 2007 as IPR&D expense. At June 30, 2007 the
company had estimated total IPR&D charges to be $8.0 million. During
the quarter ended September 30, 2007, and in conjunction with the
completion of our purchase price allocation, the company recorded a
$600,000 adjustment to our previous estimate.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2006
Consolidated
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
September 30, |
|
|
2007 |
|
2006 |
Revenue |
|
$ |
19,353 |
|
|
$ |
12,514 |
|
Gross profit |
|
$ |
12,017 |
|
|
$ |
7,782 |
|
Gross profit margin percentage |
|
|
62 |
% |
|
|
62 |
% |
Operating expenses |
|
$ |
13,875 |
|
|
$ |
8,217 |
|
Net operating (loss) income |
|
$ |
(1,858 |
) |
|
$ |
(435 |
) |
Total revenue increased 55% to $19.4 million for the three months ended September 30, 2007
from $12.5 million for the comparable period in 2006. The increase in revenue was primarily
attributable to the Assay Segment including the acquisition of LMD which contributed $3.3 million
of the overall increase and an increase of $2.7 million in consumable and royalty revenues in the
Technology Segment. Operating expenses increased primarily as a result of the acquisition of LMD
which contributed $2.9 million of the increase. This $2.9 million includes a reduction of $600,000
in expense as a result of a revision to our estimate of in-process research and development, see
Note 2 Business Combinations for more information. The Technology Segment contributed $2.1
million of the increase in operating expenses which was primarily attributable to increased
headcount. Net operating income decreased due to the dilutive effect of the LMD acquisition.
We manage our operations through two business segments: the Technology Segment and the Assay
Segment.
18
Technology Segment
Selected financial data for the three months ended September 30, 2007 and 2006 of our
Technology Segment is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
September 30, |
|
|
2007 |
|
2006 |
Revenue |
|
$ |
16,027 |
|
|
$ |
12,514 |
|
Gross profit |
|
$ |
10,085 |
|
|
$ |
7,782 |
|
Gross profit margin |
|
|
63 |
% |
|
|
62 |
% |
Operating expenses |
|
$ |
9,875 |
|
|
$ |
7,758 |
|
Net operating income |
|
$ |
210 |
|
|
$ |
24 |
|
Revenue. Total revenue increased 28% to $16.0 million for the three months ended September 30,
2007 from $12.5 million for the comparable period in 2006. The increase in revenue was primarily
attributable to an increase in consumables revenues as well as continued acceptance and utilization
of our technology in the marketplace as evidenced by our continued increase in royalty revenue. As
previously disclosed in our Annual Report on Form 10-K, we continue to experience revenue
concentration in a limited number of strategic partners. Three customers accounted for 47% of total
revenue in the third quarter of 2007 (24%, 13%, and 10% respectively). For comparative purposes,
these same three customers accounted for 36% of total revenue (18%, 10% and 8%, respectively) in
the third quarter of 2006. No other customer accounted for more than 10% of total revenue in this
quarter. Several of our partners have had significant success with our technology in the
marketplace. We currently expect that other existing partners will have similar success in the
future thus decreasing the overall relative concentration among these top three partners.
A breakdown of revenue in the Technology Segment for the three months ended September 30, 2007
and 2006 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
System sales |
|
$ |
5,148 |
|
|
$ |
4,924 |
|
Consumable sales |
|
|
5,655 |
|
|
|
3,455 |
|
Royalty revenue |
|
|
2,667 |
|
|
|
2,193 |
|
Service contracts |
|
|
1,167 |
|
|
|
928 |
|
Other revenue |
|
|
1,390 |
|
|
|
1,014 |
|
|
|
|
|
|
|
|
|
|
$ |
16,027 |
|
|
$ |
12,514 |
|
|
|
|
|
|
|
|
System and peripheral component sales increased 5% to $5.1 million for the three months ended
September 30, 2007 from $4.9 million for the comparable period of 2006. The increase in revenue is
primarily attributable to an increase in the number of units sold. The increase in revenue was
partially offset due to a decrease in average system price attributable to partner mix for the
three months ended September 30, 2007 as compared to the three months ended September 30, 2006.
System sales for the third quarter of 2007 increased to 195 LX Systems from 164 LX Systems for the
corresponding prior year period bringing total system sales since inception to over 4,700 as of
September 30, 2007. For the three months ended September 30, 2007, four of our partners accounted
for 169, or 87%, of total system sales for the period. These four partners purchased 107, or 65%,
of total system sales in the three months ended September 30, 2006.
Consumable sales comprised of microspheres and sheath fluid, increased 64% to $5.7 million for
the three months ended September 30, 2007 from $3.5 million for the three months ended September
30, 2006. The increase is primarily the result of an increase in bulk purchases. During the three
months ended September 30, 2007, we had 11 bulk purchases totaling approximately $4.5 million as
compared with eight bulk purchases totaling approximately
19
$2.1 million during the three months
ended September 30, 2006. During the three months ended September 30, 2007 one customer accounted
for $2.1 million, or 37%, of total consumable revenue. A bulk purchase is defined as the purchase
of $100,000 or more of consumables in a quarter. Partners who reported royalty bearing sales
accounted for $4.9 million, or 86%, of total consumable sales for the three months ended September
30, 2007.
Royalty revenue increased 22% to $2.7 million for the three months ended September 30, 2007
compared with $2.2 million for the three months ended September 30, 2006. For the three months
ended September 30, 2007, we had 31 commercial partners submitting royalties as compared to 26 for
the three months ended September 30, 2006. One of our partners reported royalties totaling
approximately $894,000, or 34% of total royalties for the current quarter. One other customer
reported royalties totaling approximately $347,000, or 13%, of total royalties for the current
quarter. No other customer accounted for more than 10% of total royalty revenue for the current
quarter. Total royalty bearing sales were $49 million for the quarter ended September 30, 2007 and
$197 million on an annualized basis, compared with $35 million for the quarter ended September 30,
2006 and $142 million on an annualized basis.
Service contracts comprised of extended warranty contracts earned ratably over the term of the
agreement, increased 26% to $1.2 million for the third quarter of 2007 from $928,000 for the third
quarter of 2006. This increase is attributable to increased sales of extended service agreements,
which are primarily a result of the increase in the commercial base of Luminex systems as compared
to the prior year period. At September 30, 2007, we had 857 Luminex systems covered under extended
service agreements and $2.0 million in deferred revenue related to those contracts. At September
30, 2006, we had 702 Luminex systems covered under extended service agreements and $1.8 million in
deferred revenue related to those contracts.
Other revenues, comprised of training revenue, shipping revenue, miscellaneous parts sales,
amortized license fees, and grant revenue, increased 37% to $1.4 million for the three months ended
September 30, 2007 from $1.0 million the three months ended September 30, 2006. This increase is
primarily the result of recognition of an advanced royalty payment which expired in the amount of
$438,000 in the three months ended September 30, 2007. This increase was partially offset by a
decrease in part sales and grant revenue. For the quarter ended September 30, 2007, we had
$494,000 of parts sales, $438,000 related to the recognition of an expired advanced royalty
payment, $158,000 of shipping revenue, $138,000 of license revenue, $60,000 of grant revenue, and
$101,000 of other revenue.
Gross profit. The gross profit margin (gross profit as a percentage of total revenue)
increased slightly to 63% for the three months ended September 30, 2007 from 62% for the three
months ended September 30, 2006. Gross profit increased to $10.1 million for the three months ended
September 30, 2007 from $7.8 million for the three months ended September 30, 2006. The increase in
gross profit margin was primarily attributable to changes in our revenue mix between higher and
lower gross margin items. The increase in gross profit was attributable to the overall increase in
revenue at a similar gross profit margin as the comparable prior year period. Consumables and
royalties comprised $8.3 million, or 52%, of revenue for the current quarter and $5.6 million, or
45%, for the quarter ended September 30, 2006. We anticipate continued fluctuation in gross profit
margin and related gross profit primarily as a result of variability in partner bulk purchases and
absolute number of sales of quarterly system sales.
Operating expenses. Research and development expenses increased to $2.4 million for the three
months ended September 30, 2007 from $2.1 million for the comparable period in 2006. The increase
was primarily related to additional personnel costs associated with the increase in employees to 64
at September 30, 2007 from 58 at September 30, 2006. The increase in the number of employees has
allowed us to increase our focus on development of our system, consumable and software products and
the expansion of applications for use on our platforms.
Selling, general and administrative expenses increased to $7.5 million for the three months
ended September 30, 2007 from $5.6 million for the comparable period in 2006. The increase was
primarily related to additional personnel costs associated with the increase in employees to 80 at
September 30, 2007 from 69 at September 30, 2006.
20
Assay Segment
Selected financial data for the three months ended September 30, 2007 and 2006 of our Assay
Segment is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
September 30, |
|
|
2007 |
|
2006 |
Revenue |
|
$ |
3,326 |
|
|
$ |
|
|
Gross profit |
|
$ |
1,932 |
|
|
$ |
|
|
Gross profit margin |
|
|
58 |
% |
|
$ |
|
|
Operating expenses |
|
$ |
4,000 |
|
|
$ |
459 |
|
Net operating loss |
|
$ |
(2,068 |
) |
|
$ |
(459 |
) |
A breakdown of revenue in the Assay Segment for the three months ended September 30, 2007 and
2006 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
Assays |
|
$ |
2,945 |
|
|
$ |
|
|
Other revenue |
|
|
381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,326 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Revenue. Revenues for the three months ended September 30, 2007 were derived from LMD and LBG.
Assay revenue consists primarily of kits, of which the majority relate to our Cystic Fibrosis
products. System sales during the third quarter of 2007 in the Assay Segment were eight LX Systems.
Other revenue includes contract research and development fees and commercial milestone revenue.
Two customers accounted for 47% of revenue for the third quarter of 2007 (34% and 12%,
respectively). No other customer accounted for more than 10% of total revenue in this quarter.
Operating Expenses. Research and development expenses were $2.1 million and $214,000 for the
three months ended September 30, 2007 and 2006, respectively. The increase in research and
development expenses can be primarily attributed to the addition of the acquisition of LMD and to a
lesser extent as a result of increased activity by the LBG related to product development. LMD
contributed approximately 62% of all research and development expenses. The LBG division
contributed the remaining 38%. The LBG division research and development expenses increased to
$811,000 for the three months ended September 30, 2007 from $214,000 from the three months ended
September 30, 2006. This increase was primarily attributable to an increase in the utilization of
external research and development fees.
Selling, general and administrative expenses were $2.5 million and $245,000 for the three
months ended September 30, 2007 and 2006, respectively. The overall increase in selling, general
and administrative expenses can be primarily attributed to the addition of the acquisition of LMD.
LMD contributed approximately 89% of all selling, general and administrative expenses. The LBG
division contributed the remaining 11%.
As
a result of the revision to our estimate of in-process research and development, the
initial write-off of $8.0 million was reduced to $7.4 million resulting in a decrease to expense of
$600,000 during the quarter ended September 30, 2007. See Note 2 Business Combinations for
more information.
21
NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2006
Consolidated
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, |
|
|
2007 |
|
2006 |
Revenue |
|
$ |
53,508 |
|
|
$ |
38,779 |
|
Gross profit |
|
$ |
32,784 |
|
|
$ |
23,702 |
|
Gross profit margin percentage |
|
|
61 |
% |
|
|
61 |
% |
Operating expenses |
|
$ |
47,258 |
|
|
$ |
24,291 |
|
Net operating (loss) income |
|
$ |
(14,474 |
) |
|
$ |
(589 |
) |
Total revenue increased 38% to $53.5 million for the nine months ended September 30, 2007 from
$38.8 million for the comparable period in 2006. The increase in revenue was primarily attributable
to the Assay Segment, including the acquisition of LMD and increased activity by LBG, which
contributed $8.5 million of the increase and to a lesser extent increases in consumable and royalty
revenues and system sales in the Technology Segment. Operating expenses increased primarily as a
result of the acquisition of LMD, which contributed approximately
$16.8 million of the $23.0
million increase. Operating expenses for the nine months ended September 30, 2007 includes $7.4
million of write-offs of in-process research and development.
Technology Segment
Selected financial data for the nine months ended September 30, 2007 and 2006 of our
Technology Segment is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, |
|
|
2007 |
|
2006 |
Revenue |
|
$ |
45,007 |
|
|
$ |
38,765 |
|
Gross profit |
|
$ |
27,527 |
|
|
$ |
23,690 |
|
Gross profit margin |
|
|
61 |
% |
|
|
61 |
% |
Operating expenses |
|
$ |
28,092 |
|
|
$ |
22,880 |
|
Net
operating income (loss) |
|
$ |
(565 |
) |
|
$ |
810 |
|
Revenue. Total revenue increased 16% to $45.0 million for the nine months ended September 30,
2007 from $38.8 million for the comparable period in 2006. The increase in revenue was primarily
attributable to an increase in system sales and consumable revenue as well as the continued
acceptance and utilization of our technology in the marketplace as evidenced by our continued
increase in royalty revenue. Two customers accounted for 39% of total revenue in the nine months
ended September 30, 2007 (23% and 16%, respectively). No other customer accounted for more than
10% of total revenue in this period. For comparative purposes, these same two customers accounted
for 35% of total revenue (19% and 16%, respectively) in the nine months ended September 30, 2006.
A breakdown of revenue in the Technology Segment for the nine months ended September 30, 2007
and 2006 is as follows (in thousands):
22
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
System sales |
|
$ |
16,236 |
|
|
$ |
14,727 |
|
Consumable sales |
|
|
13,771 |
|
|
|
12,010 |
|
Royalty revenue |
|
|
7,409 |
|
|
|
5,984 |
|
Service contracts |
|
|
3,257 |
|
|
|
2,547 |
|
Other revenue |
|
|
4,334 |
|
|
|
3,497 |
|
|
|
|
|
|
|
|
|
|
$ |
45,007 |
|
|
$ |
38,765 |
|
|
|
|
|
|
|
|
System and peripheral component sales increased 10% to $16.2 million for the nine months ended
September 30, 2007 from $14.7 million for the comparable period of 2006. System sales for the nine
months ended September 30, 2007 increased to 599 LX Systems from 512 (511 LX Systems and 1 HTS) for
the corresponding prior year period bringing total system sales since inception to over 4,700 as of
September 30, 2007. For the nine months ended September 30, 2007, four of our partners accounted
for 478, or 80%, of total system sales for the period. These four partners purchased 344, or 67%,
of total system sales in the nine months ended September 30, 2006.
Consumable sales comprised of microspheres and sheath fluid, increased 15% to $13.8 million
for the nine months ended September 30, 2007 from $12.0 million for the comparable period of 2006.
The increase is primarily the result of an increase in bulk purchases which included a $2.1 million
bulk purchase by a single customer. During the nine months ended September 30, 2007, we had 32
bulk purchases of consumables totaling approximately $10.0 million as compared with 22 bulk
purchases totaling approximately $8.1 million in the nine months ended September 30, 2006.
Partners who reported royalty bearing sales accounted for $11.4 million, or 83%, of total
consumable sales for the nine months ended September 30, 2007. As the number of applications
available on our platform expands, we anticipate that the overall level of consumable sales, and
related bulk purchases, will continue to fluctuate.
Royalty revenue increased 24% to $7.4 million for the nine months ended September 30, 2007
compared with $6.0 million for the nine months ended September 30, 2006. We believe this increase
is primarily the result of the increased use and acceptance of our technology. For the nine months
ended September 30, 2007, we had 32 commercial partners submitting royalties as compared to 30 for
the nine months ended September 30, 2006. One of our partners reported royalties totaling
approximately $2.4 million, or 34% of total royalties for the period. One other customer reported
royalties totaling approximately $869,000 or 13% of total royalties for the nine months ended
September 30, 2007. No other customer accounted for more than 10% of total royalty revenue for the
current period. Total royalty bearing sales by our partners were $123 million for the nine months
ended September 30, 2007 compared with $93 million for the nine months ended September 30, 2006.
Service contracts, comprised of extended warranty contracts earned ratably over the term of
the agreement, increased 28% to $3.3 million for the nine months ended September 30, 2007 from $2.5
million for the nine months ended September 30, 2006. This increase is attributable to increased
sales of extended service agreements, which are primarily a result of the increase in the
commercial base of Luminex systems as compared to the prior year period.
Other revenues, comprised of training revenue, shipping revenue, miscellaneous parts sales,
amortized license fees, and grant revenue, increased 24% to $4.3 million for the nine months ended
September 30, 2007 from $3.5 million for the nine months ended September 30, 2006. This increase is
primarily the result of the addition of grant revenue. For the nine months ended September 30,
2007, we had $1.9 million of parts sales, $862,000 of grant revenue, $444,000 of shipping revenue,
$438,000 related to the recognition of an expired advanced royalty payment, $404,000 of license
revenue and $332,000 of other revenue.
Gross profit. The gross profit margin rate (gross profit as a percentage of total revenue) was
flat at 61% for the nine months ended September 30, 2007 and 2006. Gross profit, in dollar amount,
increased to $27.5 million for the nine months ended September 30, 2007, as compared to $23.7
million for the nine months ended September 30, 2006. The flat gross margin rate was primarily
attributable to a similar product mix in the nine months ended September 30, 2007 as compared to
the nine months ended September 30, 2006. The increase in gross profit, in dollar amount, was
primarily attributable to the overall increase in revenue. Consumables and royalties comprised
23
$21.2 million, or 47%, of revenue for the nine months ended September 30, 2007 and $18.0
million, or 46%, for the nine months ended September 30, 2006. We anticipate continued fluctuation
in gross profit margin and related gross profit primarily as a result of variability in partner
bulk purchases and absolute number of sales of quarterly system sales.
Operating expenses. Research and development expenses increased to $6.6 million for the nine
months ended September 30, 2007 from $5.5 million for the comparable period in 2006. The increase
was primarily related to additional personnel costs associated with the increase in employees to 64
at September 30, 2007 from 58 at September 30, 2006. This increase was partially offset by a
decrease in costs related to direct materials and consumables utilized in the research and
development process. The increase in the number of employees has allowed us to increase our focus
on development of our system, consumable and software products and the expansion of applications
for use on our platforms.
Selling, general and administrative expenses increased to $21.5 million for the nine months
ended September 30, 2007 from $17.4 million for the comparable period in 2006. The increase was
primarily related to additional personnel costs associated with the increase in employees to 80 at
September 30, 2007 from 69 at September 30, 2006, and to a lesser extent, an increase in stock
compensation expense attributable to additional issuances of equity subsequent to the third quarter
of 2006.
Assay Segment
Selected financial data for the nine months ended September 30, 2007 and 2006 of our Assay
Segment is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, |
|
|
2007 |
|
2006 |
Revenue |
|
$ |
8,501 |
|
|
$ |
14 |
|
Gross profit |
|
$ |
5,257 |
|
|
$ |
12 |
|
Gross profit margin |
|
|
62 |
% |
|
|
86 |
% |
Operating expenses |
|
$ |
19,166 |
|
|
$ |
1,411 |
|
Net
operating (loss) |
|
$ |
(13,909 |
) |
|
$ |
(1,399 |
) |
A breakdown of revenue in the Assay Segment for the three months ended September 30, 2007 and
2006 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
Assays |
|
$ |
7,826 |
|
|
$ |
14 |
|
Other revenue |
|
|
675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,501 |
|
|
$ |
14 |
|
|
|
|
|
|
|
|
Revenue. Revenues were derived from LBG for the nine months ended September 30, 2007 and 2006
and also from LMD for the current year from March 1, 2007 through September 30, 2007. Assay
revenue consists primarily of kits of which the majority relate to our Cystic Fibrosis products.
System sales during the nine months ended 2007 in the Assay Segment were 13 LX Systems. Other
revenue includes contract research and development fees and commercial milestone revenue. Two
customers accounted for 45% of total revenue in the nine months ended September 30, 2007 (34% and
12%, respectively).
Operating Expenses. Research and development expenses were $4.5 million and $818,000 for the
nine months ended September 30, 2007 and 2006, respectively. The increase in research and
development expenses can be primarily attributed to the addition of the acquisition of LMD. LMD
contributed approximately 66% of all research and development expenses. The LBG division
contributed the remaining 34%. The LBG division research and
24
development expenses increased 85% to $1.5 million primarily as a result of increased activity
related to product development.
Selling, general and administrative expenses were $7.3 million and $593,000 for the nine
months ended September 30, 2007 and 2006, respectively. As previously discussed, the expenses for
the nine months ended September 30, 2007 include expenses related to LBG for the entire nine months
and expenses related to LMD from March 1, 2007 to September 30, 2007 only. The overall increase in
selling, general and administrative expenses was primarily attributable to the addition of the LMD
division and to a lesser extent increased activity by the LBG. The LMD division contributed $6.5
million of selling, general and administrative expenses, or 89%. The LBG division contributed the
remaining 11%. The LBG division selling, general and administrative expenses increased 37% to
$815,000 primarily as a result of increased headcount.
In-process research and development in connection with the Tm acquisition of $7.4 million was
written-off during the current period.
LIQUIDITY AND CAPITAL RESOURCES
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Cash and cash equivalents |
|
$ |
9,725 |
|
|
$ |
27,414 |
|
Short-term investments |
|
|
3,281 |
|
|
|
10,956 |
|
Long-term investments |
|
|
5,311 |
|
|
|
7,346 |
|
|
|
|
|
|
|
|
|
|
$ |
18,317 |
|
|
$ |
45,716 |
|
|
|
|
|
|
|
|
At September 30, 2007, we held cash, cash equivalents, and short-term and long-term
investments of $18.3 million and had working capital of $20.1 million. At December 31, 2006, we
held cash, cash equivalents, and short-term and long-term investments of $45.7 million and had
working capital of $44.2 million. In connection with closing the Tm acquisition, we paid off $13.2
million of Tms debt and related fees and paid transaction expenses of approximately $5.7 million
(including $3.6 million of transaction costs included as part of the purchase price and $2.1
million of LMD transaction costs incurred prior to March 1, 2007). Primarily as a result of this
transaction, our cash, cash equivalents and investments were reduced by approximately $25.3 million
through September 30, 2007. In October 2007, we received a cash payment of $12.5 million in
connection with the settlement of the RBM litigation.
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 and long-term,
interest-bearing instruments, including obligations of the United States government or agencies
thereof and U.S. corporate debt securities. We do not have any investments in asset-backed
commercial paper.
Cash used in operations was $7.8 million for the nine months ended September 30, 2007,
compared with cash provided by operations of $1.6 million for the nine months ended September 30,
2006.
Our operating expenses during the nine months ended September 30, 2007 were $47.3 million, of
which $11.0 million was research and development expense, $28.8 million was selling, general and
administrative expense and $7.4 million was reflected in in-process research and development
write-offs. We expect research and development expenses to be between 20% and 22% of total revenue
for the remainder of 2007. Our increase in research and development expenses for 2007 relative to
2006 is a result of our continued investment in the research and development pipeline to support
our content strategy, expanded focus on product development, and expenses related to the
acquisition of LMD and increased activity in LBG. Our increase in selling, general and
administrative expenses over those of 2006 is primarily attributable to the addition of LMD. We
believe that the dilutive effect of the LMD acquisition and the related use of our cash revenues is
short term in nature and that the company will return to profitability and positive cash flow by
early 2008.
25
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 need to acquire licenses to new technology, costs
associated with strategic acquisitions including integration costs and assumed liabilities, the
status of competitive products and potential cost associated with both protecting and defending our
intellectual property. Additionally, actions taken as a result of the ongoing internal evaluation
of our business could result in expenditures not currently contemplated in our estimates for the
next 12 months. We believe, however, that our existing cash and cash equivalents together with
availability under our new credit facility as described below are sufficient to fund our operating
expenses, capital equipment requirements and other expected liquidity requirements for the next 12
months. Based upon our current operating plan and structure, management anticipates total cash use
for the next 12 months to be no more than $5 million, giving us an anticipated balance in cash,
cash equivalents, short-term and long-term investments, including cash received in conjunction with
the RBM Settlement, at September 30, 2008 of $25 million to $30 million. Factors that could affect
this estimate, in addition to those listed above, include: (i) continued collections of accounts
receivable consistent with our historical experience, (ii) our ability to manage our inventory
levels consistent with past practices, (iii) signing of partnership agreements which include
significant up front license fees, and (iv) unanticipated costs associated with, and the negative
operating cash flows resulting from, the LMD acquisition.
On March 1, 2007, the Company entered into a senior revolving credit facility with JPMorgan
Chase Bank, N.A., which provides borrowings of up to a maximum aggregate principal amount
outstanding of $15.0 million based on availability under a borrowing base consisting of eligible
accounts and inventory. The obligations under the senior revolving credit facility are guaranteed
by the wholly-owned domestic subsidiaries of the Company and secured by all of the accounts,
equipment inventory and general intangibles (excluding intellectual property) of the Company and
the guarantors including the pledge of an intercompany note from Tm and payable to the Company.
Loans under the senior credit facility accrue interest on the basis of either a base rate or a
LIBOR rate. The base rate is calculated daily and is the greater of (i) prime minus 1.00% and (ii)
federal funds rate plus .50%. Borrowings at the LIBOR rate are based on one, two or three month
periods and interest is calculated by taking the sum of (i) the product of LIBOR for such period
and statutory reserves plus (ii) 1.75%. We pay a fee of 0.125% per annum on the unfunded portion
of the lenders aggregate commitment under the facility.
Approximately $10.6 million is available
for borrowing at September 30, 2007.
The senior credit facility contains conditions to making loans, representations, warranties
and covenants, including financial covenants customary for a transaction of this type. Financial
covenants include (i) a tangible net worth covenant of $25.0 million following the acquisition and
(ii) a liquidity requirement of availability not less than the funded debt of the Company and its
subsidiaries (including Tm) calculated using the unencumbered cash, cash equivalents and marketable
securities of the Company and the guarantors. The senior credit facility also contains customary
events of default as well as restrictions on undertaking certain specified corporate actions,
including, among others, asset dispositions, acquisitions and other investments, dividends,
fundamental corporate changes such as mergers and consolidations, incurrence of additional
indebtedness, creation of liens and negative pledges, transactions with affiliates and agreements
as to certain subsidiary restrictions and the creation of additional subsidiaries. If an event of
default occurs that is not otherwise waived or cured, the lender may terminate its obligations to
make loans under the senior credit facility and may declare the loans then outstanding under the
senior credit facility to be due and payable. We believe we are currently in compliance with our
financial and other covenants under the senior credit facility. As of September 30, 2007, no
amounts were outstanding under the senior revolving credit facility.
To the extent capital resources are insufficient to meet future capital requirements we will
have to raise additional funds to continue the development and deployment 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 (under our new credit facility or otherwise) 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.
26
Contractual Obligations
We currently have approximately $6.0 million in non-cancelable obligations for the next 12
months. These obligations are included in our estimated cash usage described above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due By Period |
|
|
|
|
|
|
|
Less Than |
|
|
|
|
|
|
|
|
|
|
More Than |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
Non-cancelable rental
obligations |
|
$ |
4,812 |
|
|
$ |
2,327 |
|
|
$ |
2,485 |
|
|
$ |
|
|
|
$ |
|
|
Non-cancelable purchase
obligations (1) |
|
|
4,169 |
|
|
|
3,568 |
|
|
|
601 |
|
|
|
|
|
|
|
|
|
Long-term debt
obligations (2) |
|
|
7,376 |
|
|
|
145 |
|
|
|
2,728 |
|
|
|
4,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,357 |
|
|
$ |
6,040 |
|
|
$ |
5,814 |
|
|
$ |
4,503 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(1) |
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Purchase obligations include contractual arrangements in the form of purchase
orders primarily a result of normal inventory purchases or minimum payments due resulting
when minimum purchase commitments are not met. Purchase obligations relating to purchase
orders do not extend beyond a year; however, we would expect future years to have these
purchase commitments that will arise in the ordinary course of business and will
generally increase or decrease according to fluctuations in overall sales volume. |
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(2) |
|
On December 12, 2003, LMD entered into an agreement with the Ministry of
Industry of the Government of Canada under which the Government agreed to invest up to
Canadian (Cdn) $7,300,000 relating to the development of several genetic tests. Funds
were advanced from Technology Partnerships Canada (TPC), a special operating program.
The actual payments received by the Company were predicated on eligible expenditures made
during the project period which ended July 31, 2006. LMD has received Cdn. $5,739,000
from TPC which is expected to be repaid along with approximately Cdn. $1,577,000 of
imputed interest for a total of approximately Cdn. $7,316,000. |
|
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|
LMD has agreed to repay the TPC funding through a royalty on specific assay revenue related
to the funded product development. Royalty payments commence in 2007 at a rate of 1% of
assay revenue and at a rate of 2.5% for 2008 and thereafter. Aggregate royalty repayment
will continue until total advances plus imputed interest has been repaid or until April 30,
2015, whichever is earlier. The repayment obligation expires on April 30, 2015 and any
unpaid balance will be cancelled and forgiven on that date. Should the term of repayment
be shorter than we expect due to higher than expected assay revenue, the effective interest
rate would increase as repayment is accelerated. Repayments denominated in U.S. Dollars
are currently projected to be as shown in the table above, but actual future sales
generating a repayment obligation will vary from this projection and are subject to the
risks and uncertainties described elsewhere in this report, including under Risk Factors
and Safe Harbor Cautionary Statement. Furthermore, payment reflected in U.S. Dollars is
subject to adjustment based upon applicable exchange rates as of the reporting date. |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. Our interest income is sensitive to changes in the general level of
domestic interest rates, particularly since our investments are in short-term and long-term
instruments held to maturity. A 50 basis point fluctuation from average investment returns at
September 30, 2007 would yield an approximate 10% variance in
27
overall investment return. Due to the
nature of our investments, we have concluded that there is no material market risk exposure.
Our revolving credit facility also will be affected by fluctuations in interest rates as it is
based on prime minus 1% or the Federal Funds Effective Rate in effect plus 0.50%. As of September
30, 2007, the Company has not drawn on this facility.
Foreign
Currency Risk. As of September 30, 2007, as a result of our foreign operations, we
have costs, assets and liabilities that are denominated in foreign currencies, primarily Canadian
dollars and to a lesser extent the Euro. For example, some fixed asset purchases and certain
expenses of our Canadian subsidiary, LMD, are denominated in Canadian dollars while sales of
products are primarily denominated in U.S. dollars. All transactions in our Netherlands subsidiary
are denominated in Euros. As a consequence, movements in exchange rates could cause our foreign
currency denominated expenses to fluctuate as a percentage of net revenue, affecting our
profitability and cash flows.
In addition, the indirect effect of fluctuations in interest rates and foreign currency
exchange rates could have a material adverse effect on our business financial condition and results
of operations. For example, currency exchange rate fluctuations could affect international demand
for our products. In addition, interest rates fluctuations could affect our customers buying
patterns. Furthermore, interest rate and currency exchange rate fluctuations may broadly influence
the United States and foreign economies resulting in a material adverse effect on our business,
financial condition and results of operations. As a result, we cannot give any assurance as to the
effect that future changes in foreign currency rates will have on our consolidated financial
position, results of operations or cash flows; however, foreign currency fluctuations did not have
a material effect on our consolidated results for the three and nine months ended September 30,
2007.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our senior management, including our
President and Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of
the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934 (the Exchange Act), as of the end
of the period covered by this quarterly report. Based on that evaluation, our senior management,
including our President and Chief Executive Officer and Chief Financial Officer, concluded that as
of the end of the period covered by this quarterly report our disclosure controls and procedures
effectively and timely provide them with material information relating to the Company (and its
consolidated subsidiaries) required to be disclosed in the reports the Company files or submits
under the Exchange Act.
Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting identified in connection
with the evaluation required by Exchange Act Rule 13a-15(d) during the period covered by this
quarterly report that have materially affected, or are reasonably likely to materially affect, our
existing internal control over financial reporting.
Due to the acquisition of LMD, we are required to implement internal controls related to those
operations. As of September 30, 2007, we have not tested the operating effectiveness of the
internal controls related to LMD or the integration of LMD. In compliance with PCAOB and SEC
regulations and guidance, we will not report on the effectiveness of LMD internal controls over
financial reporting under Sarbanes-Oxley until our Annual Report on Form 10-K for fiscal 2008.
28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 26, 2005, the Company was served with a complaint, filed by Rules Based Medicine,
Inc. (RBM) in state district court in Travis County, Texas seeking a declaratory judgment that
the formation of HealthMAP Laboratories, Inc. (subsequently renamed the Biophysical Corporation)
did not constitute a usurpation of an RBM corporate opportunity and that RBM has the necessary
contractual license rights under its existing agreement with the Company to perform certain testing
services on behalf of BioPhysical Corporation. On May 19, 2005, we filed an answer to this
complaint denying all claims brought by RBM. On June 21, 2005, the parties entered into an
agreement, which was subsequently entered with the court on June 22, 2005. Pursuant to this
agreement, the parties agreed that RBM would not file any claims related to this matter against the
Company until August 1, 2005, and that the Company would not file any claims related to this matter
against RBM until August 16, 2005, in order to continue to pursue settlement negotiations. The
parties were unable to reach agreement on the terms of settlement. RBM re-filed a lawsuit against
us on August 12, 2005, seeking a declaratory judgment against the Company as set forth above. In
response, we filed an answer and counterclaims against RBM, as well as new claims against Mark
Chandler and Craig Benson, officers of RBM, on August 19, 2005. The parties continued with
discovery until late January 2007, at which point settlement discussions began.
The Company settled its pending litigation with RBM on October 15, 2007. As part of the
settlement, Luminex received a cash payment of $12.5 million. The cash payment was made by RBM in
exchange for resolution of the dispute between the companies regarding Biophysical Corporation as
well as the retirement of Luminexs stock ownership in RBM and the grant of certain additional
licensing rights from Luminex. All other terms of the agreement are confidential. The parties
formally dismissed the lawsuit on October 24, 2007, as required by the settlement agreement.
ITEM 1A. RISK FACTORS
Reference is made to the factors set forth under the caption Safe Harbor Cautionary
Statement in Part I Item 2 of this report and other risk factors described in our Annual Report on
Form 10-K and in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2007 and June
30, 2007, which are incorporated herein by reference.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The stock repurchase activity for the third quarter of 2007 was as follows:
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ISSUER PURCHASES OF EQUITY SECURITIES |
|
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|
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|
|
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Total Number of Shares |
|
|
Approximate Dollar Value of |
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|
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Total Number of |
|
|
Average Price |
|
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Purchased as Part of |
|
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Shares that May Yet Be |
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Shares |
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Paid per Share |
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Publicly Announced |
|
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Purchased Under the Plans or |
|
Period |
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Purchased |
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|
(1)($) |
|
|
Plans of Programs |
|
|
Programs |
|
|
07/01/07 - 07/31/07 |
|
|
1,030 |
|
|
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12.31 |
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|
|
|
|
|
|
|
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08/01/07 - 08/31/07 |
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|
|
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|
|
|
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|
|
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|
|
09/01/07 - 09/30/07 |
|
|
1,216 |
|
|
|
15.71 |
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| |
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Total Third Quarter |
|
|
2,246 |
|
|
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14.15 |
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(1) |
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Shares purchased are attributable to the withholding of shares by Luminex to satisfy the payment of tax obligations related to the vesting of restricted shares. |
29
ITEM 6. EXHIBITS
The following exhibits are filed herewith:
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Exhibit |
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Number |
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Description of Documents |
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31.1
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Certification by CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification by CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification by CEO 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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32.2
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Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
30
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.
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LUMINEX CORPORATION
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Date: November 9, 2007 |
By: |
/s/ HARRISS T. CURRIE
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Harriss T. Currie |
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Vice President, Finance and Chief
Financial Officer (Principal Financial Officer) |
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By: |
/s/ PATRICK J. BALTHROP
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Patrick J. Balthrop |
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President and Chief Executive Officer
(Principal Executive Officer) |
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S-1