Filed Pursuant to Rule 424(b)(5)

Registration No. 333-151691

PRELIMINARY PROSPECTUS SUPPLEMENT (Subject to Completion, dated June 16, 2008)

 

(To Prospectus dated June 16, 2008)

 

3,500,000 Shares

 

 

Common Stock

 

 

We are offering 3,500,000 shares of our common stock. Our common stock is listed on the NASDAQ Global Market under the symbol “LMNX.” On June 13, 2008, the last reported sale price of our common stock as reported on the NASDAQ Global Market was $22.27 per share.

 

 

Investing in our common stock involves risks. Before buying any shares, you should read carefully the discussion of material risks of investing in our common stock under the heading “Risk Factors” beginning on page S-9 of this prospectus supplement and in the documents incorporated by reference in this prospectus supplement and the accompanying prospectus.

 

 

 

 

We have granted to the underwriters the right to purchase up to an additional 525,000 shares to cover any over-allotments. The underwriters can exercise this right at any time within 30 days after this offering.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus supplement or the accompanying prospectus. Any representation to the contrary is a criminal offense.

 

 

The underwriters expect to deliver the shares against payment on          , 2008.

 

 

 

Joint Book-Running Managers

 

 

The date of this prospectus supplement is June   , 2008

 

TABLE OF CONTENTS

 

PROSPECTUS SUPPLEMENT

 

 

PROSPECTUS

 

You should rely only on the information contained or incorporated by reference in this prospectus supplement, the accompanying prospectus and any related free writing prospectus required to be filed with the Securities and Exchange Commission, or the SEC. We have not, and the underwriters have not, authorized any other person to provide you with different or additional information. If anyone provides you with different or additional information, you should not rely on it. We are not, and the Underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus supplement, the accompanying prospectus, any such free writing prospectus and the documents incorporated by reference therein is accurate only as of their respective dates, regardless of the time of delivery of this prospectus supplement and the accompanying prospectus or any sales of the shares of common stock. Our business, financial condition, results of operations and prospects may have changed since those dates.

 

 

This document is in two parts. The first part is the prospectus supplement, which describes the specific terms of the common stock we are offering and certain other matters relating to us and our financial condition. The second part, the accompanying prospectus, gives more general information about securities we may offer from time to time, some of which may not apply to the common stock offered by this prospectus supplement and the accompanying prospectus. For information about our common stock, including the rights which accompany each outstanding share of our common stock, see “Description of Common Stock” in the accompanying prospectus.

 

If the description of the offering varies between this prospectus supplement and the accompanying prospectus, you should rely on the information in this prospectus supplement. The information contained or incorporated by reference in this prospectus supplement supersedes any inconsistent information included or incorporated by reference in the accompanying prospectus.

 

In various places in this prospectus supplement and the accompanying prospectus, we refer you to other sections of such documents for additional information by indicating the caption heading of such other sections. The page on which each principal caption included in this prospectus supplement and the accompanying prospectus can be found is listed in the table of contents above. All such cross references in this prospectus supplement are to captions contained in this prospectus supplement and not in the accompanying prospectus, unless otherwise stated.

 

You should read both this prospectus supplement and the accompanying prospectus together with the additional information described under the heading “Incorporation of Information by Reference.”

 

Unless we have indicated otherwise, all information in this prospectus supplement assumes that the underwriters do not exercise their option to purchase additional shares from us to cover any over-allotments.

 

 

 

PROSPECTUS SUPPLEMENT SUMMARY

•	measure the presence and quantity of substances such as infectious agents, antigens for histocompatibility, hormones, cancer markers and other proteins in a patient’s blood, other body fluid or tissue to assist physicians in diagnosing, treating or monitoring disease conditions;
•	detect genetic variations, such as single nucleotide polymorphisms or genetic mutations present in inherited diseases;
•	measure the response to a compound or dosage by measuring cellular activity for drug discovery and development; and
•	assist physicians in prescribing the appropriate tailored drug therapy based on the patient’s unique genetic makeup, a process known as pharmacogenetics.

Key Technologies		Description		Markets Served
BioChips/Microarrays		High-density arrays of DNA fragments or proteins attached to a flat glass or silicon surface		Biomedical research and select clinical diagnostics
Automated Immunoassays		Automated test tube-based instruments used for detecting antibodies, proteins and other analytes		Clinical diagnostics
Gels and blots		Physical separation of molecules or analytes for visualization		Clinical diagnostics and biomedical research
PCR methods		Tests which use polymerase chain reaction (PCR) technology to test for DNA and RNA		Nucleic acid testing in clinical diagnostics and biomedical research
Microfluidics chips		Miniaturized liquid handling system on a chip		Biomedical research
Microtiter-plate based assays		Plastic trays with discrete wells in which different types of assays are performed, usually Enzyme-Linked Immuno-Sorbent Assay (ELISA) tests		Drug discovery, clinical diagnostics and biomedical research
Genotyping technologies		DNA primers or probes designed to identify small differences between DNA targets using methods such as ligation assays, cleavage assays and hybridization assays		Drug discovery, clinical diagnostics and biomedical research

•	Multi-analyte/multi-format
•	Flexibility/scalability
•	Both protein and nucleic acid applications
•	High throughput
•	Ease of use
•	Cost effective

Technology Segment						Assay Segment
Instruments		Consumables		Software		LBG Kits		LMD Kits
Luminex® 100tm and Luminex® 200tm Luminex® XYPtm (XY Platform) and the Luminex® SDtm (Luminex® Sheath Delivery System) Luminex® HTStm		MagPlextm Microspheres xTAGtm Microspheres SeroMAPtm Microspheres Calibration and Control Microspheres		LXR xPONENT®		FlexmiRtm MicroRNA Labeling Kit FlexmiRtm MicroRNA Human Panel FlexmiRtm MicroRNA Mouse/Rat Extension Panel FlexmiRtm Select FlexmiRtm Reagent Pak FlexmiRtm MicroRNA Control Set Pneumococcal Assay1		xTAGtm Respiratory Viral Panel1 xTAGtm Ashkenazi Jewish Panel2 xTAGtm Cystic Fibrosis Kit — CF 391 xTAGtm CFTR 70+6 Mutation Detection Kit3 CF 973 xTAGtm Mutation Detection Products for Coagulation2 xTAGtm Mutation Detection Kit for P450-2C192 xTAGtm Mutation Detection Kit for P450-2C92 xTAGtm Mutation Detection Kit for P450-2D62 xTAGtm Mutation Detection Kit for P450-2C9 and VKORCI2

1		FDA Cleared
2		Investigational Use Only
3		Analyte Specific Reagent

 

The Offering

Common stock offered		3,500,000 shares
Common stock to be outstanding after this offering		40,676,337 shares(1)
Use of proceeds		We expect to use the net proceeds from this offering for general corporate purposes, which include research and development, potential acquisitions of, or investments in, companies, technologies or products that complement our business, capital expenditures and additions to working capital. See “Use of Proceeds.”
Risk factors		See “Risk Factors” beginning on page S-9 of this prospectus supplement for a discussion of factors you should consider carefully before deciding to invest in shares of our common stock.
NASDAQ Global Market symbol		LMNX

														Three Months
														Ended
		Year Ended December 31,												March 31,
		2005				2006				2007				2007				2008
														(unaudited)
		(in thousands, except per share data)
Consolidated Results of Operations Data:
Total revenue		$	42,313			$	52,989			$	75,010			$	16,607			$	23,012
Gross profit			22,321				32,252				46,094				10,356				15,257
Loss from operations			(3,496	)			(581	)(1)			(17,418	)			(372	)			(1,268	)
Net income (loss)			(2,666	)			1,507	(1)			(2,711	)			136				(1,166	)
Net income (loss) per common share, basic		$	(.09	)		$	.05	(1)		$	(.08	)		$	.00			$	(.03	)
Net income (loss) per common share, diluted		$	(.09	)		$	.05	(1)		$	.(08	)		$	.00			$	(.03	)
Shares used in computing net income (loss) per share, basic			30,990				31,434				34,361				31,970				35,422
Shares used in computing net income (loss) per share, diluted			30,990				32,988				34,361				33,077				35,422

		As of March 31, 2008
		Actual				As Adjusted
		(unaudited)
		(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents		$	26,360			$	98,628
Short-term investments			7,924				7,924
Long-term investments			—				—
Working capital			43,261				115,529
Total assets			124,009				196,277
Total long-term debt			3,566				3,566
Total stockholders’ equity			104,375				176,643

 

An investment in our common stock involves risks. The following risk factors relate to our business and this offering. The risks described below are not the only ones facing our company. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations. Our business, financial condition, results of operations or prospects could be materially adversely affected by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. This prospectus supplement and the accompanying prospectus, including the documents incorporated by reference herein or therein, also contain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this prospectus supplement.

 

Risks Related to Our Business

 

We have a limited history of profitability and had an accumulated deficit of approximately $88.9 million as of March 31, 2008.

 

We have incurred significant net losses since our inception, including a loss of $2.7 million for the year ended December 31, 2007 and a loss of $1.2 million for the quarter ended March 31, 2008. At March 31, 2008, we had an accumulated deficit of approximately $88.9 million. Prior to our acquisition of LMD in March 2007, LMD had an accumulated deficit of approximately $74.6 million. In order to become profitable, we need to generate and sustain substantially higher revenue while achieving reasonable cost and expense levels. If we fail to achieve operating results in line with the expectations of securities analysts or investors, the market price of our common stock will likely decline. Furthermore, as we continue to utilize cash to support operations, acquisitions and research and development efforts, we may further decrease the cash available to us. As of March 31, 2008, cash, cash equivalents and short-term and long-term investments totaled $34.3 million, compared to $34.2 million at December 31, 2007 and $45.7 million at December 31, 2006, which decrease since December 31, 2006 is primarily attributable to the cash used in the acquisition of LMD.

 

We expect our operating results to continue to fluctuate from quarter to quarter.

 

The sale of our instrumentation and assay products typically involves a significant technical evaluation and commitment of capital by us, our partners and the end-user. Accordingly, the sales cycle associated with our products typically is lengthy and subject to a number of significant risks, all of which are beyond our control, including partners’ budgetary constraints, inventory management practices, regulatory approval and internal acceptance reviews. As a result of this lengthy and unpredictable sales cycle, our operating results have historically fluctuated significantly from quarter to quarter. We expect this trend to continue for the foreseeable future.

 

The vast majority of our system sales are made to our strategic partners. Our partners typically purchase instruments in three phases during their commercialization cycle: first, instruments necessary to support internal assay development; second, instruments for sales force demonstrations; and finally, instruments for resale to their customers. As a result, most of our system placements are highly dependent on the continued commercial success of our strategic partners and can fluctuate from quarter to quarter as our strategic partners move from phase to phase. We expect this trend to continue for the foreseeable future.

 

Our assay products are sometimes sold to large customers. The ordering and consumption patterns of these customers can fluctuate, affecting the timing or shipments and revenue recognition. In addition, certain products assist in the diagnosis of illnesses that are seasonal, and customer orders can fluctuate for this reason.

 

Because of the effect of bulk purchases and the introduction of seasonal components to our assay menus, we experience fluctuations in the percentage of our quarterly revenues derived from our highest margin items, consumables, royalties and assays. Our gross margin percentage is highly dependent upon the mix of revenue components each quarter. These fluctuations contribute to the variability and lack of predictability of both gross margin percentage and total gross profit from quarter to quarter. We expect this trend to continue for the foreseeable future.

Due to the early stage of the market for molecular tests, projected growth scenarios for LMD are highly volatile and are based on a number of underlying assumptions that may or may not prove to be valid, including the performance of strategic partners that distribute LMD products.

 

Our success depends significantly on the establishment and maintenance of successful relationships with our strategic partners. Currently, a limited number of strategic partners constitute a majority of our revenue and the loss of any one of these partners could have a material adverse effect on our business, financial condition and results of operations.

 

The development and commercialization of our xMAP technology is highly dependent on our ability to establish successful strategic relationships with a number of partners. For the three months ended March 31, 2008, we had 31 strategic partners submitting royalties as compared to 32 for the three months ended March 31, 2007. Two customers, Bio-Rad Laboratories, Inc. and One Lambda, Inc., accounted for 32% of consolidated total revenue in the first quarter of 2008 (17% and 15%, respectively). For comparative purposes, these same two customers accounted for 35% of total revenue (23% and 12%, respectively) in the three months ended March 31, 2007. No other customer accounted for more than 10% of total revenue during the three months ended March 31, 2008. As of December 31, 2007, we had 30 strategic partners who were paying royalties and had either developed products using the Luminex platform or were reselling our products. Furthermore, for the year ended December 31, 2007, two partners collectively represented 35% of total revenue (Bio-Rad Laboratories, Inc. - 20%; One Lambda, Inc. - 15%). We had two additional partners who individually represented 5% or more of our total revenue and collectively represented 13% of our revenue for the year ended December 31, 2007. In total, for the year ended December 31, 2007, we had five partners who represented 52% of our total revenue. For comparative purposes for the year ended December 31, 2006, two partners individually represented greater than 10% of our revenue and collectively represented 34% of our total revenue. We had four additional partners who individually represented 5% or more of our total revenue and collectively represented 27% of our revenue for the year ended December 31, 2006. In total, for the year ended December 31, 2006, we had six partners who represented 61% of our total revenue. The loss of any of our significant strategic partners, or any of our significant customers, could have a material adverse effect on our growth and future results of operations. LMD is dependent on a few significant customers with respect to sales of its genetic test kits. If any significant customer discontinues its relationship with LMD for any reason, or reduces or postpones current or expected purchase commitments for LMD’s products, LMD’s results from operations could be materially adversely affected.

 

Delays in implementation, delays in obtaining regulatory approval, changes in strategy or the financial difficulty of our strategic partners for any reason could have a material adverse effect on our business, financial condition and results of operations.

 

Our ability to enter into agreements with additional strategic partners depends in part on convincing them that our technology can help achieve and accelerate their goals or efforts. We will expend substantial funds and management efforts, including through LBG and LMD, with no assurance that any additional strategic relationships will result. We cannot assure you that we will be able to negotiate additional strategic agreements in the future on acceptable terms, if at all, or that current or future strategic partners will not pursue or develop alternative technologies either on their own or in collaboration with others. Some of the companies we are targeting as strategic partners offer products competitive with our xMAP technology, which may hinder or prevent strategic relationships. Termination of strategic relationships, or the failure to enter into a sufficient number of additional agreements on favorable terms, could reduce sales of our products, lower margins on our products and limit the creation of market demand and acceptance.

 

In addition, we have entered into non-exclusive relationships with most of our existing strategic partners. The lack of exclusivity could deter existing strategic partners from commercializing xMAP technology and may deter new strategic partners from entering into agreements with us.

 

A significant portion of our future revenues will come from sales of our systems and the development and sale of bioassay kits utilizing our technology by our strategic partners and from use of our technology by our strategic partners in performing services offered to third parties. We believe that our strategic partners will

have economic incentives to develop and market these products, but we cannot accurately predict future sales and royalty revenues because most of our existing strategic partner agreements do not include minimum purchase requirements or royalty commitments. In addition, we have no control with respect to our strategic partners’ sales personnel and how they prioritize products based on xMAP technology nor can we control the timing of the release of products by our strategic partners. The amount of these revenues depends on a variety of factors that are outside our control, including the amount and timing of resources that current and future strategic partners devote to develop and market products incorporating our technology. Further, the development and marketing of certain bioassay kits will require our strategic partners to obtain governmental approvals, which could delay or prevent their commercialization efforts. If our current or future strategic partners do not successfully develop and market products based on our technology and obtain necessary government approvals, our revenues from product sales and royalties will be significantly reduced.

 

If the FDA or other governmental laws and regulations change in ways that we do not anticipate and we fail to comply with those regulations that affect our business, we could be subject to enforcement actions, injunctions and civil and criminal penalties or otherwise be subject to increased costs that could delay or prevent marketing of our products.

 

The production, testing, labeling, marketing and distribution of our products for some purposes and products based on our technology are subject to governmental regulation by the United States Food and Drug Administration (FDA) and by similar agencies in other countries. Some of our products and products based on our technology for in vitro diagnostic purposes are subject to clearance by the FDA prior to marketing for commercial use. To date, eight strategic partners have obtained such clearances. Others are anticipated. The process of obtaining necessary FDA clearances can be time-consuming, expensive and uncertain. Further, clearance may place substantial restrictions on the indications for which the product may be marketed or to whom it may be marketed. In addition, because some of our products employ laser technology, we are also required to comply with FDA requirements relating to radiation performance safety standards (21 CFR 1040.1 and 1040.11).

 

Periodically the FDA issues guidance documents that represent the FDA’s current thinking on a topic. These issues are initially issued in draft form prior to final rule generally with enforcement discretion for some grace period of time. Changes made through this process may impact the release status of products offered and our ability to market those products affected by the change.

 

For example, the FDA released on September 14, 2007 the final document “Guidance for Industry and FDA Staff Commercially Distributed Analyte Specific Reagents (ASRs): Frequently Asked Questions.” This guidance may limit or delay distribution of assays on our platform, including assays developed and distributed by LMD, to the extent additional regulatory clearance is required prior to distribution. The final document was released with an enforcement discretion period of one year from date of issue.

 

Cleared medical device products are subject to continuing FDA requirements relating to, among others, manufacturing quality control and quality assurance, maintenance of records and documentation, registration and listing, import/export, adverse event and other reporting, distribution, labeling and promotion and advertising of medical devices. Our inability, or the inability of our strategic partners, to obtain required regulatory approval or clearance on a timely or acceptable basis could harm our business. In addition, failure to comply with applicable regulatory requirements could subject us or our strategic partners to regulatory enforcement action, including warning letters, product seizures, recalls, withdrawal of clearances, restrictions on or injunctions against marketing our products or products based on our technology, and civil and criminal penalties.

 

Medical device laws and regulations are in effect within the United States and also in many countries outside the United States. These range from comprehensive device clearance requirements for some or all of our medical device products to requests for product data or certifications to the hazardous material content of our products. As part of the European Council Directive 2002/96 of February 13, 2003 (WEEE), we are expected to comply with certain requirements regarding the collection, recycling and labeling of our products containing electronic devices beginning on August 13, 2005 in each of the European Union, or EU, member states where our regulated products are distributed. While we are taking steps to comply with the requirements of WEEE, we cannot be certain that we will comply with the national stage implementation of WEEE in all

member states. Our products are currently exempt from the European Council Directive 2002/95 of January 27, 2003, Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (RoHS), which requires the removal of certain specified hazardous substances from certain products beginning July 1, 2006 in each of the member states. However, the EU has indicated that it may, and it is generally expected it will, include medical devices, including some of our products, under the jurisdiction of RoHS. If this exemption is revoked, it could result in increased costs to us and we cannot assure you we will ultimately be able to comply with RoHS or related requirements in other jurisdictions. In addition, the State of California adopted the Electronic Waste Recycling Act, effective January 1, 2007, which requires the California Department of Toxic Substances Control to adopt regulations to prohibit the sale of electronic devices in California if they are also prohibited from sale in the EU under the RoHS directive because they contain certain heavy metals. The number and scope of these requirements are increasing and we will likely become subject to further similar laws in other jurisdictions. Failure to comply with applicable federal, state and foreign medical device laws and regulations may harm our business, financial condition and results of operations. We are also subject to a variety of other laws and regulations relating to, among other things, environmental protection and workplace health and safety.

 

Our strategic partners and customers expect our organization to operate on an established quality management system compliant with FDA Quality System Regulations and industry standards, the In Vitro Diagnostic Directive 98/79/EC of 27 October 1998 (“Directive”) as implemented nationally in the EU member states and industry standards, such as ISO 9000. We became ISO 9001:2000 certified in March 2002 and self-declared our Luminex 100 and Luminex 200 devices are in conformity with Article 1, Article 9, Annex I (Essential Requirements), and Annex III, and the additional provisions of the Directive as of December 7, 2003. Subsequent audits are carried out annually to ensure we maintain our system in substantial compliance with ISO and other applicable regulations and industry standards. We became ISO 13485:2003 and Canadian Medical Device Conformity Assessment System (CMDCAS) certified in July 2005. In August 2006 a Level II QSIT contract inspection was conducted in accordance with CPGM 7382.845, Inspection of Medical Device Manufacturers, PAC 82845B, Medical Device Level II Inspections pursuant to the FDA Dallas District Office FY 06 Workplan and the DSHS Drugs & Medical Device Group FY 06 Workplan. The inspection is “closed” under 21 C.F.R. 20.64 (d) (3) and the Establishment Inspection Report No. 3002524000 provided in accordance with the FOIA and 21 C.F.R. Part 20. No DSHS form E-14 or FDA form 483 was issued. Failure to maintain compliance with FDA, CMDCAS and EU regulations and other medical device laws, or to obtain applicable registrations where required, could reduce our competitive advantage in the markets in which we compete and also decrease satisfaction and confidence levels with our partners.

 

If our technology and products do not become widely used in the life sciences industry, it is unlikely that we can maintain or increase profitability.

 

Life sciences companies have historically conducted biological tests using a variety of technologies, including bead-based analysis. In certain testing areas, our xMAP technology is relatively new and unproven, and the use of our technology by life sciences companies is limited. The commercial success of our technology depends upon its widespread adoption as a method to perform bioassays. In order to be successful, we must convince potential partners to utilize our system instead of competing technologies. Market acceptance depends on many factors, including our ability to:

 

 

Because of these and other factors, our products may not gain or sustain sufficient market acceptance to again achieve, maintain or increase profitability.

 

Our reliance on strategic partners to market our products makes forecasting difficult.

 

Primarily as a result of our reliance on partner performance, it is difficult to accurately forecast future operating results. Our operating expenses are largely based on anticipated revenue trends, and a high percentage of our expenses are, and will continue to be, fixed in the short-term. The level of our revenues depends upon the rate and timing of the adoption of our technology as a method to perform bioassays. In addition, we currently anticipate that the vast majority of future sales of our products and products incorporating our technology will be made by our strategic partners. For the following reasons, estimating the timing and amount of sales of these products that may be made by our strategic partners is particularly difficult:

 

 

The life sciences industry is highly competitive and subject to rapid technological change, and we may not have the resources necessary to compete successfully.

 

We compete with companies in the United States and abroad that are engaged in the development and production of similar products. We will continue to face intense competition from existing competitors and other companies seeking to develop new technologies. Many of our competitors have access to greater financial, technical, scientific, research, marketing, sales, distribution, service and other resources than we do. These companies may develop technologies that are superior alternatives to our technologies or may be more effective at commercializing their technologies in products.

 

The life sciences industry is characterized by rapid and continuous technological innovation. We may need to develop new technologies for our products to remain competitive. One or more of our current or future competitors could render our present or future products obsolete or uneconomical by technological advances. In addition, the introduction or announcement of new products by us or others could result in a delay of or decrease in sales of existing products, as we await regulatory approvals and as customers evaluate these new products. We may also encounter other problems in the process of delivering new products to the marketplace, including products from LBG and LMD, such as problems related to design, development or manufacturing of such products, and as a result we may be unsuccessful in selling such products. Our future success depends on our ability to compete effectively against current technologies, as well as to respond effectively to technological advances by developing and marketing products that are competitive in the continually changing technological landscape.

Our success depends on our ability to service and support our products directly or in collaboration with our strategic partners.

 

To the extent that we or our strategic partners fail to maintain a high quality level of service and support for xMAP technology products, there is a risk that the perceived quality of our xMAP technology products will be diminished in the marketplace. Likewise, we may fail to provide the level, quantity or quality of service expected by the marketplace. This could result in slower adoption rates and lower than anticipated utilization of xMAP products which could have a material adverse affect on our business, financial condition and results of operations.

 

The property rights we rely upon to protect the technology underlying our products may not be adequate to maintain market exclusivity. Inadequate intellectual property protection could enable third parties to exploit our technology or use very similar technology and could reduce our ability to distinguish our products in the market.

 

Our success depends, in part, on our ability to obtain, protect and enforce patents on our technology and products and to protect our trade secrets, including the intellectual property of entities we may acquire. Any patents we own may not afford full protection for our technology and products. Others may challenge our patents and, as a result, our patents could be narrowed or invalidated. In addition, our current and future patent applications may not result in the issuance of patents in the United States or foreign countries. Competitors may develop products that are not covered by our patents. Further, there is a substantial backlog of patent applications at the U.S. Patent and Trademark Office and certain patent offices in foreign jurisdictions, and the approval or rejection of patent applications may take several years.

 

We have obtained 62 patents in the United States and foreign jurisdictions directed to various aspects and applications of our products and technology. We have 196 pending applications in the United States and foreign jurisdictions. In Japan, due to a procedural omission, we are unable to obtain patent protection for our method of “real time” detection and quantification of multiple analytes from a single sample on our platform technology similar to the protection we have obtained in the United States. Although we are pursuing patent protection in Japan for other aspects of our technology and products, we may not be able to prevent competitors from developing and marketing technologies and products similar to our xMAP technology in Japan. We also have patents covering key aspects of xTAG^tm technology utilized in LMD’s assay products.

 

We require our employees, consultants, strategic partners and other third parties to execute confidentiality agreements. Our employees and third-party consultants also sign agreements requiring that they assign to us their interests in inventions and original expressions and any corresponding patents and copyrights arising from their work for us. In addition, we have implemented a patent process to file patent applications on our key technology. However, we cannot guarantee that these agreements or this patent process will provide us with adequate protection against improper use of our intellectual property or disclosure of confidential information. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisors have prior employment or consulting relationships. Further, others may independently develop substantially equivalent proprietary technology, techniques and products or otherwise gain access to our trade secrets. Our failure to protect our proprietary information and techniques may inhibit or limit our ability to exclude certain competitors from the market.

 

In order to protect or enforce our patent rights, we may have to initiate legal proceedings against third parties, such as infringement suits or interference proceedings. These legal proceedings could be expensive, take significant time and/or divert management’s attention from other business concerns. These proceedings may cause us to lose the benefit of some of our intellectual property rights, the loss of which may inhibit or preclude our ability to exclude certain competitors from the market. We also may provoke these third parties to assert claims against us. The patent position of companies like ours generally is highly uncertain, involves complex legal and factual questions and has recently been the subject of much litigation. No consistent policy has emerged from the U.S. Patent and Trademark Office or the courts regarding the breadth of claims allowed or the degree of protection afforded under patents like ours.

Our success depends partly on our ability to operate without infringing on or misappropriating the proprietary rights of others.

 

We have been (and from time to time we may be) notified that third parties consider their patents or other intellectual property relevant to our products. We may be sued for infringing the intellectual property rights of others, including claims with respect to intellectual property of entities we may acquire. We are currently party to such a suit with The Research Foundation of the State University of New York as described in our Quarterly Report on Form 10-Q for the period ended March 31, 2008 incorporated by reference in this prospectus supplement. In addition, we may find it necessary, if threatened, to initiate a lawsuit seeking a declaration from a court that we do not infringe on the proprietary rights of others or that their rights are invalid or unenforceable. Intellectual property litigation is costly, and, even if we prevail, the cost of such litigation could affect our profitability. Furthermore, litigation is time consuming and could divert management’s attention and resources away from our business. If we do not prevail in any litigation, we may have to pay damages and could be required to stop the infringing activity or obtain a license. Any required license may not be available to us on acceptable terms, if at all. Moreover, some licenses may be nonexclusive, and therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around a patent, we may be unable to sell some of our products, which could have a material adverse affect on our business, financial condition and results of operations.

 

We require collaboration with other organizations in obtaining relevant biomarkers, access to oligonucleotides and enzymes that are patented or controlled by others. If we cannot continue to obtain access to these areas or identify freedom to operate opportunities this could affect our future sales and profits.

 

We have only produced our products in limited quantities, and we may experience problems in scaling our manufacturing operations or delays or component shortages that could limit the growth of our revenue.

 

To date, we have produced our products in limited quantities relative to the quantities necessary to achieve desired revenue growth. We may not be able to produce sufficient quantities or maintain consistency between differing lots of consumables. If we encounter difficulties in scaling our manufacturing operations as a result of, among other things, quality control and quality assurance and availability of component and raw material supplies, we will likely experience reduced sales of our products, increased repair or re-engineering costs due to product returns and defects and increased expenses due to switching to alternate suppliers, any of which would reduce our revenues and gross margins.

 

We presently outsource certain aspects of the assembly of our systems to contract manufacturers. Because of a long lead-time to delivery, we are required to place orders for a variety of items well in advance of scheduled production runs. We recently increased our flexibility to purchase strategic components within shorter lead times by entering into supply agreements with the suppliers of these components. Although we attempt to match our parts inventory and production capabilities to estimates of marketplace demand, to the extent system orders materially vary from our estimates, we may experience continued constraints in our systems production and delivery capacity, which could adversely impact revenue in a given fiscal period. Should our need for raw materials and components used in production continue to fluctuate, we could incur additional costs associated with either expediting or postponing delivery of those materials. In an effort to control costs, during the last quarter of 2005 we implemented a lean production system. Managing the change from discrete to continuous flow production requires time and management commitment. Lean initiatives and limitations in our supply chain capabilities may result in part shortages that delay shipments and cause fluctuations in revenue in a given period.

 

We currently purchase certain key components of our product line from a limited number of outside sources and may only be available through a limited number of providers. We do not have agreements with all of our suppliers. Our reliance on our suppliers and contract manufacturers exposes us to risks including:

 

 

 

Consequently, in the event that supplies of components or work performed by any of our assemblers are delayed or interrupted for any reason, our ability to produce and supply our products could be impaired.

 

The capital spending policies of our customers has a significant effect on the demand for our products.

 

Our customers include clinical diagnostic, pharmaceutical, biotechnological, chemical and industrial companies, and the capital spending policies of these companies can have a significant effect on the demand for our products. These policies are based on a wide variety of factors, including governmental regulation or price controls, the resources available for purchasing research equipment, the spending priorities among various types of analytical equipment and the policies regarding capital expenditures during recessionary periods. Any decrease in capital spending by life sciences companies could cause our revenues to decline. As a result, we are subject to significant volatility in revenue. Therefore, our operating results can be materially affected (negatively and positively) by the spending policies and priorities of our customers.

 

If we become subject to product liability claims, we may be required to pay damages that exceed our insurance coverage.

 

Our business exposes us to potential product liability claims that are inherent in the testing, production, marketing and sale of biotechnological, human (including genetic) diagnostic and therapeutic products. Although we believe that we are reasonably insured against these risks and we generally have limited indemnity protections in our supplier agreements, there can be no assurance that we will be able to obtain insurance in amounts or scope sufficient to provide us with adequate coverage against all potential liabilities. A product liability claim in excess of our insurance coverage or claim that is outside or exceeds our indemnity protections in our supplier agreements or a recall of one of our products would have to be paid out of our cash reserves.

 

If third-party payors increasingly restrict payments for healthcare expenses or fail to adequately pay for multi-analyte testing, we may experience reduced sales which would hurt our business and our business prospects.

 

Third-party payors, such as government entities and healthcare programs, health maintenance organizations and private insurers, are continually seeking to reduce healthcare expenses. The federal government has also recently reduced the funding for certain government sponsored healthcare programs which has caused these third party payors to seek further reduction in medical expenses. These reductions may decrease demand for our products and the price we can charge. Increasingly, Medicaid and other third-party payors are challenging the prices charged for medical services, including clinical diagnostic tests. They are also attempting to contain costs by limiting coverage and the reimbursement level of tests and other healthcare products. In addition, cost containment initiatives by governmental or educational entities or programs may reduce funding for genetic research and development activities and retard the growth of the genetic testing marketing. Without adequate coverage and reimbursement, consumer demand for tests will decrease. Decreased demand could cause sales of our products, and sales and services by our strategic partners, to fall. In addition, decreased demand could place pressure on us, or our strategic partners, to lower prices on these products or services, resulting in lower margins. Reduced sales or margins by us, or our strategic partners, would hurt our business, profitability and business prospects.

We may in the future incur substantial debt that could restrict our operations.

 

We may incur indebtedness in the future for, among other purposes, funding operating expenses and/or costs related to future expansions and acquisitions. This indebtedness could have adverse consequences on us, including:

 

 

To the extent incurred, our debt service obligations will require us to use a portion of our operating cash flow to pay interest and principal on indebtedness instead of for other corporate purposes, including funding future expansion of our business and ongoing capital expenditures. Our ability to repay or refinance our debt depends on our successful financial and operating performance. Our financial and operating performance depends upon a number of factors, many of which are beyond our control, as further described in these “Risk Factors.”

 

We may be unsuccessful in implementing our acquisition strategy. We may face difficulties integrating acquired entities with our existing businesses.

 

Acquisitions of assets or entities designed to accelerate the implementation of our strategic plan are an element of our long-term strategy. We may be unable to identify and complete appropriate future acquisitions in a timely manner and no assurance can be provided that the market price of potential business acquisitions will be acceptable. In addition, many of our competitors have greater financial resources than we have and may be willing to pay more for these businesses or selected assets. In the future, should we identify suitable acquisition targets, we may be unable to complete acquisitions or obtain the financing, if necessary, for these acquisitions on terms favorable to us. Generally, potential acquisitions pose a number of risks, including, among others, that:

 

 

Other risks of integration include:

 

 

 

We rely on the innovation and resources of larger industry participants and public programs to advance genomic research and educate physicians/clinicians on genetic diagnostics.

 

The linkages between genetic anomalies that our products detect and the underlying disease states are not always fully medically correlated. Additionally, the availability of correlated genetic markers is dependent on significant investment in genomic research, often funded through public programs for which there are no assurances of on-going support. Should any government limit patent rights to specific genetic materials, private investment in this area could also be significantly curtailed. In addition, the adoption of genetic diagnostics is dependent to a great extent on the education and training of physicians and clinicians. We do not have the resources to undertake such training, and are relying on larger industry participants and professional medical colleges to establish, communicate and educate physicians and clinicians on best practices related to genetic diagnostics.

 

We are subject to evolving legislative, judicial and ethical standards on use of technology and biotechnology.

 

The adoption of genetic testing is occurring within the broader context of a myriad of decisions related to genetic patenting and genotyping. Issues associated with health insurance, data access, intellectual property protection, national and international legislative initiatives and other variables may have a significant impact on the wide spread adoption of genetic testing or on specific segments or tests within the genetic testing market.

 

Our operating results may be affected by current economic and political conditions.

 

The ongoing uncertainty in the domestic and global finance markets and events in the Middle East and concern for future terrorist attacks leave many economic and political uncertainties. Furthermore, foreign stock markets have been volatile and equally sensitive to global geopolitical concerns and terrorist threats. These uncertainties could adversely affect our business and revenues in the short or long term in ways that cannot presently be predicted.

 

International business operations create additional operational and legal risk.

 

Our operations outside the United States are subject to additional risks, including:

 

 

 

Our success depends on our ability to attract and retain our management and staff.

 

We depend on the principal members of our management and scientific staff, including our chief executive officer, Patrick Balthrop, and our operations, marketing, research and development, technical support, technical service and sales staff. The loss of services of key members of management could delay or reduce our product development, marketing and sales and technical support efforts. In addition, recruiting and retaining qualified scientific and other personnel to perform research and development, technical support, technical service and marketing and sales work will be critical to our success. There is a shortage in our industry of qualified management and scientific personnel, and competition for these individuals is intense. There can be no assurance that we will be able to attract additional and retain existing personnel necessary to achieve our business objectives.

 

Risks Related to This Offering

 

Sales of a significant number of shares of our common stock in the public markets, or the perception of such sales, could depress the market price of our common stock.

 

Sales of a substantial number of shares of our common stock in the public markets and the availability of those shares for sale could adversely affect the market price of our common stock. In addition, future issuances of equity securities, including pursuant to outstanding options, could dilute the interests of our existing stockholders, including you, and could cause the market price of our common stock to decline. We may issue equity securities in the future for a number of reasons, including to finance our operations and business strategy, to adjust our ratio of debt to equity, to satisfy our obligations upon the exercise of outstanding warrants or options or for other reasons. We cannot predict the effect that future sales of our common stock would have on the market price of our common stock.

 

Our stock price has been and is likely to continue to be volatile, which could cause the value of your investment to decline.

 

The trading price of our common stock has been and is likely to continue to be highly volatile and subject to wide fluctuations in price. This volatility is in response to various factors, many of which are beyond our control, including:

 

 

 

In addition, the stock market in general, and the NASDAQ Global Market and the market for technology companies in particular, has experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, there has been particular volatility in the market prices of securities of life sciences companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of management’s attention and resources. As a result of these factors, among others, the value of your investment may decline, and you may be unable to sell your shares of our common stock at or above the offering price.

 

We do not pay dividends on our common stock and do not intend to pay cash dividends on our common stock in the foreseeable future.

 

We have never declared or paid any cash dividend on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Our ability to declare dividends may also from time to time be limited by the terms of our credit facility. Because we do not anticipate paying cash dividends for the foreseeable future, holders of our common stock will not realize a return on their investment unless the trading price of our common stock appreciates, which we cannot assure.

 

Anti-takeover provisions in our restated certificate of incorporation, bylaws and stockholder rights plan and Delaware law could make a third party acquisition of us difficult.

 

Our restated certificate of incorporation, bylaws and stockholder rights plan contain provisions that could make it more difficult for a third party to acquire us (even if doing so would be beneficial to our stockholders) and for holders of our securities to receive any related takeover premium for their securities. We are also subject to certain provisions of Delaware law that could delay, deter or prevent a change in control of us. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. See “Description of Common Stock” in the accompanying prospectus.

 

We may invest or spend the proceeds in this offering in ways with which you may not agree and in ways that may not earn a profit.

 

We intend to use the net proceeds of this offering for general corporate purposes, which include research and development, potential acquisitions of, or investments in companies and technologies that complement our business, capital expenditures and additions to working capital. However, we will retain broad discretion over the use of the proceeds from this offering and may use them for purposes other than those contemplated at the time of this offering. You may not agree with the ways we decide to use these proceeds, and our use of the proceeds may not yield any profits.

If you purchase our common stock in this offering, you may incur immediate and substantial dilution in the book value of your shares.

 

If you purchase shares in this offering, the value of your shares based on our actual book value will immediately be less than the offering price you paid. This reduction in the value of your equity is known as dilution. This dilution occurs in large part because many of our earlier investors paid less than the current offering price when they purchased their shares. Investors purchasing common stock in this offering will incur immediate dilution of $      per share of common stock. As a result of this dilution, investors purchasing stock in this offering may receive significantly less than the purchase price paid in this offering in the event of liquidation. Investors will incur additional dilution upon the exercise of stock options or other equity-based awards under our equity incentive plans. In addition, if we issue additional shares, including options, warrants, preferred stock or other convertible securities, in the future to acquired entities and their equityholders, our business associates, or other strategic partners or in follow-on public and private offerings, the newly issued shares will further dilute your percentage ownership of our company.

 

We estimate that the net proceeds from the sale of the 3,500,000 shares of common stock by us will be approximately $72.3 million, or approximately $83.3 million if the underwriters exercise their over-allotment option in full, based on an assumed offering price of $22.27 per share and after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us.

 

We intend to use the net proceeds of this offering for general corporate purposes, which include research and development, potential acquisitions of, or investments in, companies and technologies that complement our business, capital expenditures and additions to working capital. Pending the application of funds as described above, we will invest the net proceeds from this offering in U.S. government obligations, bank deposits or other secure, short-term investments.

 

Our common stock is traded on the NASDAQ Global Market under the symbol “LMNX.” The following table sets forth the high and low sales prices of the common stock for the periods indicated, as reported by the NASDAQ Global Market.

 

 

 

 

On June 13, 2008, the closing price of our common stock, as reported by the NASDAQ Global Market, was $22.27 per share. On that date, there were approximately 618 holders of record of our common stock.

 

We have never declared or paid cash dividends on our common stock and, while this policy is subject to periodic review by our board of directors, we currently intend to retain any earnings for use in our business and do not anticipate paying cash dividends in the foreseeable future. Our ability to declare dividends may also from time to time be limited by the terms of our existing or future credit facilities.

 

You should read this table in conjunction with our historical financial statements, and the notes thereto contained in this prospectus supplement or incorporated herein by reference.

 

The following table sets forth our capitalization as of March 31, 2008:

 

• on an actual basis; and

 

• on an as adjusted basis to reflect the issuance and sale of 3,500,000 shares of our common stock by us in this offering at an assumed public offering price of $22.27 per share, less estimated underwriting discounts and commissions and offering expenses payable by us and assuming no exercise of the underwriters’ over-allotment option.

 

 

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial data included elsewhere in this prospectus supplement, as well as our historical audited financial statements and the related notes thereto which are incorporated by reference in this prospectus supplement. The consolidated results of operations data for the years ended December 31, 2005, 2006 and 2007 and the consolidated balance sheet data as of December 31, 2006 and 2007 are derived from the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2007 and incorporated by reference in this prospectus supplement. The consolidated results of operations data for the three months ended March 31, 2007 and 2008 and the consolidated balance sheet data as of March 31, 2008 have been derived from our unaudited condensed consolidated financial statements and related notes included in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008 and incorporated by reference in this prospectus supplement. The consolidated results of operations data for the years ended December 31, 2003 and 2004 and the consolidated balance sheet data as of December 31, 2003, 2004 and 2005 is derived from the audited consolidated financial statements for these years which are not included or incorporated by reference herein.

 

 

(1) As discussed in Note 14 to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2007, effective January 1, 2006, we changed our method of accounting for stock-based compensation to conform to Statement of Financial Accounting Standards No. 123(R) “Share-Based Payment.”

 

This prospectus supplement, including the accompanying prospectus and the documents incorporated by reference herein and therein, contains statements that are forward-looking statements as defined within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). Forward-looking statements give our current expectations or forecasts of future events. All statements other than statements of current or historical fact contained in this prospectus supplement or the accompanying prospectus, 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 not guarantees of future performance and 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:

 

 

Many of these risks, uncertainties and other factors are beyond our control and are difficult to predict. New factors may also emerge from time to time that could adversely affect our business. It is not possible for us to predict all of the factors that may from time to time affect our business or to assess the potential impact of each such factor. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date on which they are made, and, except to fulfill our obligations under the United States securities laws, we undertake no obligation to update any such statement to reflect events or circumstances after the date on which it is made. We qualify all of the information presented in this prospectus supplement and the accompanying prospectus (and the information incorporated by reference herein or therein) and particularly our forward-looking statements, by the cautionary statements described above and in the section of this prospectus supplement entitled “Risk Factors.”

 

The following information should be read in conjunction with the financial information contained in this prospectus supplement, any free writing prospectus and the financial information, including the notes thereto, incorporated herein by reference. Additionally, the following information should be read in conjunction with “Risk Factors” contained in this prospectus supplement.

 

Overview

 

We develop, manufacture and sell proprietary biological testing technologies and products with applications throughout the life sciences and diagnostics industries. These industries depend on a broad range of tests, called bioassays, to perform diagnostic tests, discover and develop new drugs and identify genes. Our xMAP^® technology, an open architecture, proprietary 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. We have adopted a business model built around strategic partnerships. We have licensed our xMAP technology to companies, who then develop products that incorporate the xMAP technology into products that they sell to the end-user. We develop and manufacture the proprietary xMAP laboratory instrumentation and the proprietary xMAP microspheres and sell 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. We earn a contractually-determined royalty on the sales of these xMAP-based reagent consumable products. We were founded on this model, and much of our success to date has been due to this model. As of March 31, 2008, we had over 60 strategic partners, 30 of which have developed reagent-based products using our technology, and these partners had sold and placed 5,199 xMAP-based instruments in laboratories worldwide.

 

Beginning in 2006, we began developing proprietary assays through LBG. This development was supplemented by our March 1, 2007 acquisition of Tm Bioscience Corporation, which we refer to as Luminex Molecular Diagnostics, or LMD. Our newly formed Assay Segment is focusing on the molecular diagnostics market through LMD and in certain specialty markets through LBG.

 

We have several forms of revenue that result from this partner model:

 

 

Acquisition of LMD

 

On March 1, 2007, we completed our acquisition of LMD for $49.4 million. Upon closing the acquisition, we exchanged 0.06 shares of our common stock for each outstanding share of common stock of Tm Bioscience, which resulted in the issuance of approximately 3.2 million shares of our common stock valued at $41.8 million. We retired debt of $13.2 million and incurred approximately $5.6 million of expense associated with advisors, consultants, and other transaction related costs.

 

First Quarter of 2008 Highlights

 

 

2007 Highlights

 

 

Segment Information

 

We have two reportable segments: The Technology Segment and the Assay Segment. The Technology Segment, which is our base business, consists of system sales to partners, raw bead sales, royalties, service and support of the technology, and other miscellaneous items. The Assay Segment consists of LBG and LMD. This segment is primarily involved in the development and sale of assays on xMAP technology for use on our installed base of systems.

 

Future Operations

 

We expect 2008 revenue growth will be driven by continued 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 in R&D is necessary to meet the needs of our marketplace; however, we estimate that R&D expenditures for 2008 will decline as a percentage of revenue from 2007 towards our long term target of 15% of revenue. Finally, we believe our partner model allows us to leverage our operating expenses which, assuming revenue increases and R&D expense described above, should allow us to generate increased operating income for 2008 as a percentage of total revenue of our core business.

 

We expect our primary challenges will be increasing traction of partner products incorporating Luminex technology, capitalizing on the realized synergies of the LMD 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

 

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with 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. A summary of our significant accounting policies is described in Note 1 of our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2007. Estimates and 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 collectability 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.

 

Upfront payments from our strategic partners are nonrefundable and will be recognized as revenue as our strategic partners purchase products or applied against royalty payments. Nonrefundable license fees are amortized into revenue over the estimated life of the license agreements.

 

Grant revenue consists of amounts earned under research agreements with government grants, which is recognized in the period during which the related costs are incurred.

 

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. The two major components of the allowance for excess and obsolete inventory are (i) a specific reserve for inventory items that we no longer use in manufacturing 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 management’s 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 we could experience additional inventory write-downs in the future. However, we do 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. If actual

product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required. However, we do 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 collectability of our accounts receivable and our future operating results, including a reduction in future revenues and additional allowances for doubtful accounts. However, we do 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, or IPR&D, and liabilities assumed based on their respective fair values. Intangible assets with definite lives are amortized over the assets’ estimated useful lives using the straight-line method. We periodically review the estimated useful lives of our identifiable intangible assets, taking into consideration any events or circumstances that might result in a diminished fair value or revised useful life.

 

On March 1, 2007, we acquired LMD for an aggregate purchase price of approximately $49.4 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 completed the process of determining the estimated fair values of IPR&D, identifiable intangible assets and certain tangible assets. Such a valuation required 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 were based on reasonable assumptions.

 

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 with a value of $7.4 million that were in process at LMD prior to the acquisition were deemed not technologically feasible and were charged to net loss during the twelve months ended December 31, 2007 as IPR&D expense.

 

SFAS No. 142 “Goodwill and Other Intangible Assets” requires that goodwill and certain intangible assets be assessed for impairment at a reporting unit level at least annually. We evaluate the carrying value of goodwill and other intangible assets annually or more frequently if there is evidence that certain events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. If the carrying amount of a reporting unit exceeds its fair value, then a goodwill impairment test is performed to measure the amount of the impairment loss, if any. We would recognize an impairment charge for any amount by which the carrying amount of goodwill exceeds its fair value. Determining the fair value of goodwill is judgmental in nature and often involves the use of estimates and assumptions. Estimates of fair value are primarily determined using discounted cash flows and market comparisons. As of March 31, 2008, we had $39.6 million of goodwill, which has been allocated to the Assay Segment which includes LMD. We performed our annual test of goodwill and determined that there had been no impairment of goodwill as of December 31, 2007.

The following discussion of our financial performance should be read in conjunction with financial data included elsewhere in this prospectus supplement, as well as our historical audited financial statements and the related notes thereto which are incorporated by reference in this prospectus supplement.

 

Percentage of Total Revenue of Certain Items in the Consolidated Results of Operations

 

The following table sets forth the percentage of total revenue of certain items in the Consolidated Results of Operations.

 

 

Consolidated Results of Operations

 

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2008

 

Selected consolidated financial data for the three months ended March 31, 2007 and 2008:

 

 

Total revenue increased by 39% to $23.0 million for the three months ended March 31, 2008 from $16.6 million for the comparable period in 2007. The increase in revenue was attributable to growth in the Assay Segment, including the effects of the acquisition of LMD, which contributed $3.2 million of the overall increase, and an increase of $2.7 million in consumable and royalty revenues in the Technology Segment. In addition, system sales for the first quarter of 2008 increased to 220 LX Systems from 205 LX Systems for the comparable period in 2007 bringing total system sales since our inception to 5,199 as of March 31, 2008.

We continued to experience revenue concentration in a limited number of strategic partners. Two customers accounted for 32% of consolidated total revenue in the first quarter of 2008 (17% and 15%, respectively). For comparative purposes, these same two customers accounted for 35% of total revenue (23% and 12%, respectively) in the first quarter of 2007. No other customer accounted for more than 10% of total revenue in the first quarter of 2008.

 

Gross profit margin percentage increased to 66% for the three months ended March 31, 2008 from 62% for the comparable period in 2007 due to the continued shift in revenue concentration towards higher margin items such as assays, consumables and royalties. The increase in operating expenses from $10.7 million for the first quarter of 2007 to $16.5 million for the three months ended March 31, 2008 reflects growth in the Assay Segment including the incorporation of the results of LMD for the full quarter in 2008 compared to the inclusion of only one month of operating results of LMD in the quarter ended March 31, 2007 as the acquisition was consummated on March 1, 2007. The increase in operating expenses also resulted from additional personnel costs associated with the increase in research and development and selling, general, and administrative employees to 230 at March 31, 2008 from 204 at March 31, 2007. Net operating income decreased due to the dilutive effect of the LMD acquisition. See additional discussions by segment below.

 

Segment Results of Operations for the Three Months Ended March 31, 2007 and 2008

 

Technology Segment

 

Selected financial data for our Technology Segment for the three months ended March 31, 2007 and 2008:

 

 

Revenue. Total revenue for our Technology Segment increased by 21% to $18.7 million for the three months ended March 31, 2008 from $15.4 million for the comparable period in 2007. The increase in revenue was primarily attributable to an increase in consumable and royalty revenue due to the continued acceptance and utilization of our technology in the marketplace. Two customers accounted for 40% of total Technology Segment revenue in the first quarter of 2008 (21% and 19%, respectively). For comparative purposes, these same two customers accounted for 35% of total Technology Segment revenue (12% and 23%, respectively) in the first quarter of 2007.

A breakdown of revenue in the Technology Segment for the three months ended March 31, 2007 and 2008 is as follows:

 

 

System and peripheral component sales increased by 8% to $6.2 million for the three months ended March 31, 2008 from $5.7 million for the comparable period of 2007. The Technology Segment sold 210 of the 220 total system sales in the three months ended March 31, 2008. For the three months ended March 31, 2008, five of our partners accounted for 162, or 74%, of total Technology Segment system sales for the period. These five partners purchased 170, or 81%, of total technology segment system sales in the three months ended March 31, 2007.

 

Consumable sales increased by 36% to $6.5 million for the three months ended March 31, 2008 from $4.8 million for the three months ended March 31, 2007. This is primarily the result of an increase in bulk purchases due to increased commercial activity by our partners. A bulk purchase is defined as the purchase of $100,000 or more of consumables in a quarter. During the three months ended March 31, 2008, we had 11 bulk purchases of consumables totaling approximately $5.2 million as compared with 11 bulk purchases totaling approximately $3.4 million in the three months ended March 31, 2007. Partners who reported royalty bearing sales accounted for $6.1 million, or 93%, of total consumable sales for the three months ended March 31, 2008. 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 by 39% to $3.5 million for the three months ended March 31, 2008 compared with $2.5 million for the three months ended March 31, 2007. We believe this is primarily the result of the increased use and acceptance of our technology. We expect modest fluctuations in the number of commercial partners submitting royalties quarter to quarter based upon the varying contractual terms, consolidations among partners, differing reporting and payment requirements and the addition of new partners. For the three months ended March 31, 2008, we had 31 commercial partners submitting royalties as compared to 32 for the three months ended March 31, 2007. One of our partners reported royalties totaling approximately $950,000, or 25% of total royalties for the three months ended March 31, 2008. Two other customers reported royalties totaling approximately $807,000 or 21% (11% and 10%, respectively) of total royalties for the three months ended March 31, 2008. No other customer accounted for more than 10% of total royalty revenue for the three months ended March 31, 2008. Total royalty bearing sales reported to us by our partners were over $53 million for the quarter ended March 31, 2008 or over $215 million on an annualized basis, compared with over $41 million for the quarter ended March 31, 2007 and over $167 million for the year ended December 31, 2007.

 

Service contracts revenue increased by 21% to $1.2 million for the three months ended March 31, 2008 from $1.0 million for the three months ended March 31, 2007. 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 March 31, 2008, we had 841 Luminex systems covered under extended service agreements and $2.3 million in deferred revenue related to those contracts. At March 31, 2007, we had 747 Luminex systems covered under extended service agreements and $2.2 million in deferred revenue related to those contracts.

Other revenues decreased by 12% to $1.2 million for the three months ended March 31, 2008 from $1.4 million for the three months ended March 31, 2007. This decrease is primarily the result of a decrease in part sales and a decrease in grant revenue.

 

Gross profit. The gross profit margin percentage (gross profit as a percentage of total revenue) for the Technology Segment increased to 64% for the three months ended March 31, 2008 from 63% for the three months ended March 31, 2007. Gross profit for the Technology Segment increased to $12.0 million for the three months ended March 31, 2008, as compared to $9.7 million for the three months ended March 31, 2007. The increase in gross profit margin percentage was primarily attributable to changes in revenue mix between our higher and lower gross margin items. The increase in gross profit was primarily attributable to the overall increase in revenue coupled with the increase in gross margin. Consumables and royalties, two of our higher margin items, comprised $10.1 million, or 54%, of Technology Segment revenue for the current quarter and $7.3 million, or 47%, of Technology Segment revenue for the quarter ended March 31, 2007. We anticipate continued fluctuation in gross margin rate and related gross profit for the Technology Segment primarily as a result of variability in partner bulk purchases and absolute number of quarterly system sales.

 

Research and development expense. Research and development expenses for the Technology Segment increased to $2.7 million for the three months ended March 31, 2008 from $2.0 million for the comparable period in 2007. The increase was primarily related to an increase in materials and supplies and additional personnel costs associated with the addition of employees and contract employees in the Technology Segment to 69 at March 31, 2008 from 60 at March 31, 2007. The increase in materials and supplies and the number of employees has allowed us to enhance 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 expense. Selling, general and administrative expense for the Technology Segment increased to $8.4 million for the three months ended March 31, 2008 from $6.8 million for the comparable period in 2007. The increase was primarily related to additional personnel costs and the related stock compensation and travel costs associated with the increase in employees and contract employees of the Technology Segment to 84 at March 31, 2008 from 75 at March 31, 2007 and higher legal and professional fees.

 

Other income, net. Other income, net decreased to $320,000 for the three months ended March 31, 2008 from $521,000 for the comparable period in 2007. The average rate earned on current invested balances decreased to 3.7% at March 31, 2008 from 5.0% at March 31, 2007. This decrease in the average rate earned is the result of an overall decrease in market rates compared to the prior year period.

 

Assay Segment

 

Selected financial data for our Assay Segment for the three months ended March 31, 2007 and 2008:

 

A breakdown of revenue in the Assay Segment for the three months ended March 31, 2007 and 2008 is as follows:

 

 

Revenue. Revenues for our Assay Segment for the three months ended March 31, 2008 include three months of revenues from LMD and LBG. Revenues for the three months ended March 31, 2007 include three months of LBG, but only one month of revenues from LMD, as the LMD acquisition was consummated on March 1, 2007. The majority of our Assay Segment revenues are generated from the sales of kits, most of which are from our Cystic Fibrosis product line. The top five customers, by revenue, accounted for 66% of total Assay Segment revenue for the three months ended March 31, 2008. In particular, three customers accounted for 44% of total Assay Segment revenue (20%, 19%, and 14% respectively) for the three months ended March 31, 2008. No other customer accounted for more than 10% of total Assay Segment revenue. During the three months ended March 31, 2008, our Assay Segment sold 10 LX Systems. Other revenue includes shipping revenue and training revenue.

 

Gross profit. The gross margin rate (gross profit as a percentage of total revenue) for the Assay Segment increased to 75% for the three months ended March 31, 2008 from 55% for the three months ended March 31, 2007. Gross profit for the Assay Segment increased to $3.3 million for the three months ended March 31, 2008, as compared to $0.6 million for the three months ended March 31, 2007. The increase in gross margin rate was primarily attributable to increased utilization and capacity at LMD, increased sales of higher gross margin assays, and changes in revenue mix between our higher and lower gross margin items. The increase in gross profit was primarily attributable to the overall increase in revenue coupled with the increase in gross margin.

 

Research and development expense. Research and development expenses for our Assay Segment were $1.7 million and $0.7 million for the three months ended March 31, 2008 and 2007, respectively. The increase in research and development expenses was primarily due to incorporation of the results of LMD for the full quarter in 2008 compared to the inclusion of only one month of operating results of LMD in the quarter ended March 31, 2007 as the acquisition was consummated on March 1, 2007, and to a lesser extent, to increased activity by LBG related to product development.

 

Selling, general and administrative expense. Selling, general and administrative expenses for the Assay Segment were $3.2 million and $1.2 million for the three months ended March 31, 2008 and 2007, respectively. The overall increase in selling, general, and administrative expenses is primarily due to the addition of costs associated with LMD. As previously discussed, the expenses for the three months ended March 31, 2007 include expenses related to LBG for the entire three months and expenses related to LMD for the month of March only. In addition, the increase is due to the impact of foreign exchange on foreign denominated balances of approximately $0.6 million for the three months ended March 31, 2008 compared to $15,000 for the three months ended March 31, 2007.

 

Cash provided by operations was $52,000 for the three months ended March 31, 2008, compared with cash used in operations of $2.9 million for the three months ended March 31, 2007. Significant items affecting operating cash flows for the three months ended March 31, 2008 were our net loss of $1.2 million,

depreciation and amortization of $1.7 million and stock compensation of $1.7 million, offset by a decrease in accrued liabilities of $2.4 million as a result of payments of bonuses and commissions related to 2007 activity.

 

Our operating expenses during the three months ended March 31, 2008 were $16.5 million, of which $4.4 million was research and development expense and $12.1 million was selling, general and administrative expense. We expect research and development expense as a percent of revenue to be between 15% and 20% of total revenue for the remainder of 2008. While research and development expense as a percentage of revenue is expected to decrease, we expect the absolute dollars of research and development expense to scale with our revenue growth as a result of our continuing investment in the research and development pipeline to support our strategy and expanded focus on product and platform development. We do not currently expect selling, general, and administrative expenses in 2008, excluding the impact of foreign exchange on foreign denominated balances, to increase at the same rate as in prior years.

 

Year Ended December 31, 2006 Compared to Year Ended December 31, 2007

 

 

Revenue. Total revenue increased to $75.0 million for the year ended December 31, 2007 from $53.0 million in 2006. The increase in revenue was primarily attributable to the Assay Segment (including the acquisition of LMD and increased activity by LBG) and, in addition, to a lesser extent increases in consumable and royalty revenues and system sales in the Technology Segment.

 

A breakdown of consolidated revenue for the years ended December 31, 2006 and 2007 is as follows:

 

 

We continued to have revenue concentration in a limited number of strategic partners, as the top five customers, by revenue, accounted for 52% of total revenue in 2007. In particular, two customers accounted for 35% of 2007 total revenue (20% and 15%, respectively). No other customer accounted for more than 10% of total revenue. See the segment discussions that follow on page S-   of this prospectus supplement for additional revenue discussion.

 

Gross profit. Gross profit increased to $46.1 million for the year ended December 31, 2007, as compared to $32.3 million for the year ended December 31, 2006. The gross profit margin rate (gross profit as a percentage of total revenue) was 61% for the year ended December 31, 2007, consistent with the year ended December 31, 2006. The flat gross margin rate was primarily attributable to the acquisition of a company with

lower gross margins offset by an increase in high margin consumables and royalty revenue. The increase in gross profit, in dollar amount was primarily attributable to the overall increase in revenue.

 

Research and development expense. Research and development expenses increased to $15.4 million for the year ended December 31, 2007 from $8.7 million for the year ended December 31, 2006. The increase was primarily attributable to increases in personnel costs associated with the addition of employees in 2007 related to the LMD acquisition. Research and development headcount at December 31, 2007 was 111 as compared to 61 at December 31, 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. As a percentage of revenue, research and development expense increased to 21% in 2007 as compared with 16% in 2006. Our current expectation is for research and development expenses to be between 15% and 20% of total revenue for 2008.

 

Selling, general and administrative expense. Selling, general and administrative expenses increased to $40.7 million for the year ended December 31, 2007 from $24.2 million for the comparable period in 2006. The increase was primarily attributable to the acquisition of the LMD and to a lesser extent an increase in stock compensation expense and the impact of foreign exchange transaction losses related to foreign currency denominated balances. As a percentage of revenue, selling, general and administrative expenses were 54% in 2007 and 46% in 2006. We intend to manage our 2008 quarterly operational expenses towards the same amount that we reported for the fourth quarter of 2007, excluding the impact of foreign exchange transaction losses related to foreign currency denominated balances.

 

Other Income, net. Other income, consisting primarily of interest in our cash and investment balances, decreased to $1.7 million for the year ended December 31, 2007 from $2.1 million for the year ended December 31, 2006.

 

Settlement of litigation. We settled our pending litigation with RBM on October 15, 2007. As part of the settlement, We received a cash payment of $12.5 million. $11.5 million was recognized as part of net income, while $1.0 million was deferred for licensing rights granted to RBM from us.

 

Gain on settlement of liability. $2.3 million was recognized in the year ended December 31, 2007 related to the settlement of a liability related to the renegotiation of a contract acquired as part of the acquisition of LMD.

 

Segment Results of Operations for the year ended December 31, 2006 and 2007

 

Technology Segment

 

Selected financial data for the year ended December 31, 2006 and 2007 of our Technology Segment is as follows:

 

 

Revenue. Total revenue increased 18% to $62.4 million for the year ended December 31, 2007 from $53.0 million in 2006. The increase in revenue was primarily attributable to an increase in system sales and consumable revenue as will as the continued acceptance and utilization of our technology in the marketplace as evidenced by our continued increase in royalty revenue.

A breakdown of revenue in the Technology Segment for the years ended December 31, 2006 and 2007 is as follows:

 

 

The top five customers, by revenue, accounted for 61% of total revenue in 2007. In particular, two customers accounted for 42% of 2007 total technology segment revenue (24% and 18%, respectively). No other customer accounted for more than 10% of total technology segment revenue.

 

System and peripheral component sales increased 13% to $23.3 million for the year ended December 31, 2007 from $20.6 million for the year ended December 31, 2006. System sales increased to 838 LX systems for 2007 as compared to 718 (717 LX systems and 1 HTS) in the prior year, bringing total system sales to 4,979 as of December 31, 2007.

 

Consumable sales, comprised of microspheres and sheath fluid, increased 22% to $19.2 million during 2007 from $15.7 million in 2006. We believe the increase was primarily the result of the increased use and acceptance of our technology and the increased installed base of our systems. Partners who reported royalty bearing sales accounted for $16.1 million, or 84%, of total consumable sales for the year ended December 31, 2007. In addition, during 2007 we had 41 bulk purchases of consumables totaling approximately $14.3 million as compared with 31 bulk purchases totaling approximately $10.4 million in the prior year.

 

Royalty revenue increased 24% to $10.2 million for the year ended December 31, 2007 from $8.2 million for the year ended December 31, 2006. We believe this increase is primarily the result of the increased use and acceptance of our technology. For the year ended December 31, 2007, we had 30 commercial partners submit royalties as compared with 32 for the year ended December 31, 2006. Additionally, the 30 partners from whom we recognized $8.2 million in royalties in 2006 represented approximately $9.9 million of the total royalties in 2007, an increase of approximately 21% over their prior year payments. Total royalty bearing sales reported to us by our partners were approximately $167 million for the year ended December 31, 2007 as compared to $132.0 million for the year ended December 31, 2006.

 

Service contracts, comprised of extended warranty contracts earned ratably over the term of a contract, increased to $4.4 million during 2007 from $3.5 million in 2006. This increase was attributable to increased sales of extended service contracts, which are primarily a result of the increase in the commercial base of Luminex systems as compared to the prior year period. At December 31, 2007, we had 799 Luminex systems covered under extended service agreements and $1.8 million in deferred revenue related to those contracts. At December 31, 2006, we had 651 Luminex systems covered under extended service agreements and $1.8 million in deferred revenue related to those contracts.

 

Other revenue, comprised of training revenue, shipping revenue, miscellaneous part sales, amortized license fees, reagent sales and grant revenue, increased to $5.3 million for the year ended December 31, 2007 from $5.0 million for the year ended December 31, 2006. The increase was primarily attributable to an increase in grant revenue. Grant revenue increased to $932,000 for the year ended December 31, 2007 from $352,000 for the year ended December 31, 2006. During 2007, we were awarded an additional government grant from the Defense Advanced Research Projects Agency (“DARPA”) in addition to successfully completing grants from DARPA and the Homeland Security Advance Research Projects Agency that we were awarded in 2006. The additional grant from DARPA awarded in 2007 is to develop a multiplex assay system platform

which can be employed to quickly determine clinically relevant biological exposure and accurately identify biological agents in the environment. This platform could lead to a high-performance, low-cost and portable instrument with applications in biological agent sensing and military diagnostics. This grant will allow us to accelerate our product development of related commercial products (such as a point-of-care diagnostic instrument) and is specifically designed to shrink both the cost and size of our current instrument. We believe government grants are significant because they help support our R&D efforts, establish our footprint in the Bio-Defense sector and open the door for future grants.

 

Gross profit. The gross profit margin rate (gross profit as a percentage of total revenue) was flat at 61% for the year ended December 31, 2007 and 2006. Gross profit, in dollar amount, increased to $37.9 million for the year ended December 31, 2007, as compared to $32.2 million for the year ended December 31, 2006. The flat gross margin rate was primarily attributable to a similar product mix in the year ended December 31, 2007 as compared to the year ended December 31, 2006. The increase in gross profit, in dollar amount, was primarily attributable to the overall increase in revenue. Consumables and royalties comprised $29.4 million, or 47%, of revenue for the year ended December 31, 2007 and $23.9 million, or 45%, for the year ended December 31, 2006.

 

Operating expenses. Research and development expenses increased to $8.9 million for the year ended December 31, 2007 from $7.5 million for the year ended December 31, 2006. The increase was primarily attributable to increases in personnel costs associated with the addition of employees in 2007. Research and development headcount at December 31, 2007 was 70 as compared to 57 at December 31, 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. As a percentage of revenue, research and development expense remained flat at 14% in 2007 as compared with 2006.

 

Selling, general and administrative expenses. Selling, general and administrative expenses increased to $29.4 million for the year ended December 31, 2007 from $23.5 million for the comparable period in 2006. The increase was primarily attributable to additional personnel cost associated with the increase in employees to 81 at December 31, 2007 from 70 at December 31, 2006 and to a lesser extent, an increase in stock compensation expense. As a percentage of revenue, selling, general and administrative expenses were 47% in 2007 and 44% in 2006.

 

Settlement of litigation. We settled our pending litigation with RBM on October 15, 2007. As part of the settlement, we received a cash payment of $12.5 million. $11.5 million was recognized as part of net income, while $1.0 million was deferred for licensing rights granted to RBM from us.

 

Assay Segment

 

Selected financial data for the year ended December 31, 2006 and 2007 of our Assay Segment is as follows:

 

 

Revenue. Revenues were derived from LBG for the twelve months ended December 31, 2006 and 2007 and also from LMD from March 1, 2007 through December 31, 2007.

A breakdown of revenue in the Assay Segment for the years ended December 31, 2006 and 2007 is as follows:

 

 

The top five customers, by revenue, accounted for 64% of total revenue in 2007. In particular, two customers accounted for 46% of 2007 total revenue (33% and 13%, respectively). No other customer accounted for more than 10% of total revenue. Assay revenue consists primarily of kits of which the majority relates to our Cystic Fibrosis products. System sales during the twelve months ended 2007 in the Assay Segment were 24 LX Systems. Other revenue includes contract research and development fees and commercial milestone revenue.

 

Operating expenses. Research and development expenses increased to $6.4 million for the year ended December 31, 2007 from $1.2 million for the year ended December 31, 2006. The increase in research and development expenses can be primarily attributed to the addition of the acquisition of LMD. LMD contributed approximately 60% of all research and development expenses. The LBG division contributed the remaining 40%. The LBG division research and development expenses increased 117% to $2.6 million primarily as a result of increased activity related to product development.

 

Selling, general and administrative expenses. Selling, general and administrative expenses increased to $9.6 million for the year ended December 31, 2007 from $863,000 for the comparable period in 2006. As previously discussed, the expenses for the twelve months ended December 31, 2007 include expenses related to LBG for the entire twelve months and expenses related to LMD from March 1, 2007, the date of acquisition, to December 31, 2007. 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 and the impact of foreign exchange transaction losses related to foreign currency denominated balances. The LMD division contributed $8.5 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 36% to $1.1 million primarily as a result of increased headcount.

 

Gain on settlement of liability. $2.3 million was recognized in the year ended December 31, 2007 related to the settlement of a liability related to the renegotiation of a contract acquired as part of the acquisition of LMD.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2006

 

 

Revenue. Total revenue increased to $53.0 million for the year ended December 31, 2006 from $42.3 million in 2005. The increase in revenue was primarily attributable to our continued increase in royalty revenue, an indicator of increased acceptance and utilization of our technology in the marketplace.

 

A breakdown of revenue for the years ended December 31, 2005 and 2006 is as follows:

 

 

In 2006, we continued to have revenue concentration in a limited number of strategic partners, as the top five customers, by revenue, accounted for 56% of total revenue in 2006. In particular, two customers accounted for 34% of 2006 total revenue (19% and 15%, respectively). No other customer accounted for more than 10% of total revenue.

 

System and peripheral component sales increased to $20.6 million for the year ended December 31, 2006. System sales increased to 718 (717 LX systems and 1 HTS) for 2006 as compared to 698 (693 LX systems and 5 HTS) in the prior year.

 

Consumable sales comprised of microspheres and sheath fluid, increased 20% to $15.7 million during 2006 from $13.1 million in 2005. We believe this increase was primarily the result of the increased use and acceptance of our technology and the increased installed base of our systems. Partners who reported royalty bearing sales accounted for $11.8 million, or 75%, of total consumable sales for the year ended December 31, 2006. In addition, during 2006, we had 31 bulk purchases of consumables totaling approximately $10.4 million as compared with 28 bulk purchases totaling approximately $9.2 million in the prior year.

 

Royalty revenue increased 57% to $8.2 million for the year ended December 31, 2006 from $5.3 million for the year ended December 31, 2005. We believe this increase was also primarily the result of the increased use and acceptance of our technology. For the year ended December 31, 2006, we had 32 commercial partners submit royalties as compared with 24 for the year ended December 31, 2005. Additionally, the 24 partners from whom we recognized $5.3 million in royalties in 2005 represented approximately $7.6 million of the total royalties in 2006, an increase of approximately 45% over their prior year payments. Total royalty bearing sales reported to us by our partners were approximately $132 million for the year ended December 31, 2006.

Service contracts, comprised of extended warranty contracts earned ratably over the term of a contract, increased to $3.5 million during 2006 from $2.4 million in 2005. This increase was attributable to increased sales of extended service contracts, which is a direct result of the increase in the commercial base of Luminex systems as compared to the prior year period.

 

Other revenue, comprised of training revenue, shipping revenue, miscellaneous part sales, amortized license fees, reagent sales and grant revenue, increased to $5.0 million for the year ended December 31, 2006 from $2.7 million for the year ended December 31, 2005. The increase was primarily attributable to an increase in miscellaneous part sales, license fees and grant revenue. For the year ended December 31, 2006, we had $2.5 million of part sales, $552,000 of shipping revenue, $861,000 in amortized license fees, $352,000 in grant revenue, a $300,000 milestone payment from a partner, $256,000 in training revenue and $138,000 of other miscellaneous revenue.

 

Gross profit. Gross profit increased to $32.3 million for the year ended December 31, 2006, as compared to $22.3 million for the year ended December 31, 2005. The gross margin percentage increased to 61% for the year ended December 31, 2006 from 53% for the year ended December 31, 2005. The increase in gross margin was primarily attributable to the increase in royalties as a percentage of total revenue, an increase in the average system sales price which is a result of partner mix and system configuration fluctuations and to a lesser extent the $352,000 of grant revenue and a $300,000 milestone payment from a partner.

 

Research and development expense. Research and development expenses increased to $8.7 million for the year ended December 31, 2006 from $5.6 million for the year ended December 31, 2005. The increase was primarily attributable to increases in personnel costs associated with the addition of employees in 2006 and to a lesser extent increased costs related to direct materials and consumable supplies utilized in the research and development process and increased stock compensation expense resulting from the adoption of SFAS 123(R). Research and development headcount at December 31, 2006 was 61 as compared to 42 at December 31, 2005. As a percentage of revenue, research and development expense increased to 16% in 2006 as compared with 13% in 2005.

 

Selling, general and administrative expense. Selling, general and administrative expenses increased to $24.2 million for the year ended December 31, 2006 from $20.2 million for the comparable period in 2005. The increase was primarily attributable to increased stock compensation expense resulting from the adoption of SFAS 123(R). Stock compensation increased to $4.6 million for the year ended December 31, 2006 from $1.5 million for fiscal 2005. To a lesser extent, the increase in selling, general and administrative expenses was a result of additional personnel cost associated with the increase in employees to 73 at December 31, 2006 from 70 at December 31, 2005. As a percentage of revenue, selling, general and administrative expenses were 46% in 2006 and 48% in 2005.

 

Other income, net. Other income, consisting primarily of interest in our cash and investment balances, increased to $2.1 million for the year ended December 31, 2006 from $1.2 million for the year ended December 31, 2005.

 

We operated under one segment through the end of 2006. As such, we have not included a 2006 to 2005 comparison by segment.

 

Liquidity and Capital Resources

 

At March 31, 2008, December 31, 2007 and December 31, 2006, we had working capital of $43.3 million, $40.8 million and $44.2 million, respectively. The purchase price of the LMD acquisition was approximately $49.4 million, including common stock valued at $41.8 million. In connection with closing the acquisition, we paid off $13.2 million of LMD’s debt and related fees and paid transaction expenses of approximately $5.6 million (including $3.6 million of transaction costs included as part of the purchase price and approximately $2.0 million of LMD transaction costs incurred prior to March 1, 2007). Our cash, cash equivalents and investments were reduced by approximately $11.5 million during the year ended December 31, 2007 due primarily to the $18.9 million of specifically indentified costs associated with the acquisition, our purchase of property, plant and equipment of $6.7 million primarily for our manufacturing expansion in preparation for new product offers and expansion of capacity and facility expansion to accommodate our growth, all of which were partially offset by the receipt of $12.5 million in the RBM settlement in the fourth quarter of 2007. During the three months ended March 31, 2008, our total cash, cash equivalents and investments balance remained essentially unchanged as a result of our modest loss of $1.2 million, which contained non-cash charges of approximately $3.4 million, which was offset by accrued liability reductions of approximately $2.4 million.

 

We have funded our operations to date primarily through the issuance of equity securities (in conjunction with an initial public offering in 2000 and subsequent option exercises) and cash generated from operations. Our cash reserves are held directly or indirectly in a variety of short-term, interest-bearing instruments, including obligations of the United States government or agencies thereof. We do not have any investments in asset-backed commercial paper.

 

Cash provided by operations was $52,000 for the three months ended March 31, 2008, compared with cash used in operations of $2.9 million for the three months ended March 31, 2007. Significant items affecting operating cash flows for the three months ended March 31, 2008 were our net loss of $1.2 million, depreciation and amortization of $1.7 million and stock compensation of $1.7 million, offset by a decrease in accrued liabilities of $2.4 million as a result of payments of bonuses and commissions related to 2007 activity. Cash provided by operations was $8.4 million for the year ended December 31, 2007. Significant items affecting operating cash flows for the period were our net loss of $2.7 million and adjustments for depreciation and amortization of $5.1 million, the write-off of in-process research and development of $7.4 million, and stock compensation of $6.6 million, offset by an increase in accounts receivable of $3.3 million and a gain on settlement of liability of $2.3 million.

 

Our operating expenses during the three months ended March 31, 2008 were $16.5 million, of which $4.4 million was research and development expense and $12.1 million was selling, general and administrative expense. We expect research and development expense as a percentage of revenue to be between 15% and 20% of total revenue for the remainder of 2008. While research and development expense as a percentage of revenue is expected to decrease, we expect the absolute dollars of research and development expense to scale with our revenue growth as a result of our continuing investment in the research and development pipeline to support our strategy and expanded focus on product and platform development. We do not currently expect selling, general, and administrative expenses in 2008, excluding the impact of the foreign exchange on foreign denominated balances, to increase at the same rate as in prior years.

 

Cash used in investing was $1.8 million for the three months ended March 31, 2008 as compared with cash provided by investing of $3.9 million for the three months ended March 31, 2007. Cash provided by investing was $1.8 million for the year ended December 31, 2007 as compared with cash used in investing of $4.5 million for the year ended December 31, 2006. In 2007, our capital expenditures for property, plant and equipment increased significantly to $6.7 million from $2.6 million in 2006, primarily as a result our manufacturing expansion in preparation for the introduction of new products, expansion of capacity, and facility and ERP expansion to accommodate our growth and LMD. Currently, exclusive of changes in investments, we expect cash used in investing activities to be primarily for purchases of property, plant and equipment and for it to decrease towards historical levels.

 

Cash provided by financing activities was $.8 million for the quarter ended March 31, 2008 as compared with cash used in financing activities of $12.2 million for the quarter ended March 31, 2007. Cash used in

financing activities was $10.5 million for the year ended December 31, 2007 as compared with cash provided by financing activities of $2.6 million for the year ended December 31, 2006. In 2007, our payments on debt were $12.3 million for LMD debt retired in connection with the acquisition.

 

Our future capital requirements 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, litigation expenses, 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 2008. We believe, however, that our existing cash and cash equivalents together with availability under our revolving credit facility as described below are sufficient to fund our operating expenses, capital equipment requirements and other expected liquidity requirements for the coming twelve months. Based upon our current operating plan and structure, and excluding the effect of this offering, management anticipates the total cash, cash equivalents and investment balance to remain substantially equivalent to March 31, 2008 levels, in the aggregate, giving us an anticipated balance in cash, cash equivalents, short-term and long-term investments at December 31, 2008 of approximately $35.0 million, without giving effect to this offering. 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, we 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 our wholly-owned domestic subsidiaries and secured by all of our accounts, equipment inventory and general intangibles (excluding intellectual property) and those of the guarantors including the pledge of an intercompany note from LMD and payable to us. 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 lender’s aggregate commitment under the facility. Approximately, $9.8 million was available for borrowing at March 31, 2008. This credit facility currently has a maturity of February 26, 2009.

 

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 $35.0 million and (ii) a liquidity requirement of availability not less than the funded debt of us and our subsidiaries (including LMD) calculated using the unencumbered cash, cash equivalents and marketable securities of us and our 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 June 13, 2008, 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.

 

Contractual Obligations

 

As of March 31, 2008, we had approximately $7.0 million in non-cancellable obligations for the next 12 months. These obligations are included in our estimated cash usage described herein.

 

 

 

Inflation

 

We do not believe that inflation has had a direct adverse effect on our operations through March 31, 2008. However, a substantial increase in product and manufacturing costs and personnel related expenses could have an adverse impact on our results of operations in the event these expenses increase at a faster pace than we can increase our system, consumable and royalty rates.

 

Recent Accounting Pronouncements

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued FAS No. 157, “Fair Value Measurements” (FAS 157). FAS 157 provides enhanced guidance for using fair value to measure assets and liabilities. It does not require any new fair value measurements, but does require expanded disclosures to provide information about the extent to which fair value is used to measure assets and liabilities, the methods and assumptions used to measure fair value, and the effect of fair value measures on earnings. FAS 157 is

effective for financial assets and financial liabilities for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position FAS 157-2, “Effective Date of FASB Statement No. 157” (the “FSP”). The FSP delayed, for one year, the effective date of FAS 157 for all nonfinancial assets and liabilities, except those that are recognized or disclosed in the financial statements on at least an annual basis. The implementation of SFAS No. 157 for financial assets and financial liabilities, effective January 1, 2008, did not have a material impact on our consolidated financial position and results of operations for the first quarter. We will disclose the fair value of our debt in our Annual Report on Form 10-K for the year ended December 31, 2008. We are currently assessing the impact of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities on its consolidated financial position and results of operations.

 

In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (FAS 159). FAS No. 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. FAS No. 159 is effective for fiscal years beginning after November 15, 2007. The implementation of this standard did not have a material impact on our consolidated financial position and results of operations.

 

In December 2007, the FASB issued FAS No. 141 (Revised 2007), “Business Combinations” (FAS 141R) which replaces FAS No. 141, “Business Combinations” and FAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (FAS 160). FAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. FAS 141R also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. FAS 160 clarifies the classification of noncontrolling interests in the financial statements and the accounting for and reporting of transactions between the reporting entity and holders of such noncontrolling interests. FAS 141R and FAS 160 are effective for our fiscal year 2009 and must be applied prospectively to all new acquisitions closing on or after January 1, 2009. We are currently evaluating the potential impact, if any, of FAS 141R and FAS 160 on our consolidated financial position and results of operations.

 

In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS No. 142, “Goodwill and Other Intangible Assets” (FAS 142). The intent of the position is to improve the consistency between the useful life of a recognized intangible asset under FAS 142 and the period of expected cash flows used to measure the fair value of the asset under FAS 141R, and other U.S. generally accepted accounting principles. The provisions of FSP FAS 142-3 are effective for fiscal years beginning after December 15, 2008. FSP FAS 142-3 is effective for the Company’s fiscal year ending December 31, 2009. We will evaluate the impact, if any, that the adoption of FSP FAS 142-3 could have on our consolidated financial statements.

 

Quantitative and Qualitative Disclosure 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 March 31, 2008 would yield an approximate 7% variance in overall investment return. Due to our intention to hold our investments to maturity, 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 LIBOR, prime minus 1% or the Federal Funds Effective Rate in effect plus 0.50%. As of March 31, 2008, we had not drawn on this facility.

 

Foreign currency risk. As of March 31, 2008, 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, certain expenses, and the TPC debt 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. A significant majority of our revenues are denominated in U.S. dollars. The impact of foreign exchange on foreign denominated balances will vary in relation to changes between the U.S. and Canadian dollar exchange rates. A 10% change in the Canadian dollar in relation to the U.S. dollar could result in a foreign exchange impact of approximately $410,000 dollars for the three months ended March 31, 2008.

 

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. Our aggregate foreign currency transaction loss of $574,000 was included in determining our consolidated results of operations for the three months ended March 31, 2008.

 

 

G. Walter Loewenbaum II. Mr. Loewenbaum has served as a member of the board of directors since May 1995 and as Chairman of the board of directors since September 2002. He served as Vice Chairman of the board of directors from April 1998 until January 2000. Mr. Loewenbaum currently serves as Chairman and Chief Executive Officer of Mumboe Corp. (f/k/a Finetooth Corp.), a provider of contract management solutions. Additionally, from July 1999 through 2003, he served as a Member of LeCorgne Loewenbaum & Co., LLC, an investment banking firm. From April 1990 until June 1999, he served as the President, Chairman and Chief Executive Officer of Loewenbaum & Company, Inc. (f/k/a Southcoast Capital), an investment banking company. Mr. Loewenbaum also has served as Chairman of the board of directors of 3D Systems Corporation, a global provider of solid imaging solutions, since September 1999, and was previously Chairman of the board of directors of Envoy Corporation (‘‘Envoy”), a provider of electronic transaction processing services for the healthcare industry. He received a B.A. from the University of North Carolina.

 

Patrick J. Balthrop, Sr. Mr. Balthrop has served as our President and Chief Executive Officer since May 2004 and has served as a member of the board of directors and the Executive Committee since September 2004. Prior to joining us, he was employed by Fisher Scientific International Inc. where, since 2002, he served as President of Fisher Healthcare, a Fisher Scientific company that focuses on diagnostic testing needs in the healthcare industry. Prior to Fisher Scientific International, Mr. Balthrop served in a number of leadership positions for over 20 years with Abbott Laboratories, a global, broad-based healthcare company, primarily in Abbott’s Diagnostics Division. Mr. Balthrop’s most recent positions at Abbott were as head of worldwide commercial diagnostics operations and as head of Abbott Vascular. His experience at Abbott and Fisher included sales, marketing, manufacturing operations, international experience, research and development and senior management. Mr. Balthrop holds an M.B.A. from the Kellogg Graduate School of Management of Northwestern University, and a B.S. in Biology from Spring Hill College.

 

Robert J. Cresci. Mr. Cresci has served as a member of the board of directors since December 1996. He has been a Managing Director of Pecks Management Partners Ltd., an investment management firm, since September 1990. Mr. Cresci currently serves on the boards of directors of Sepracor Inc., a research-based pharmaceutical company, j2 Global Communications, Inc., a global provider of outsourced value-added messaging and communications services, and ContinuCare Corporation, a provider of primary care physician

services. Mr. Cresci received his undergraduate degree from the United States Military Academy at West Point and received his M.B.A. in Finance from the Columbia University Graduate School of Business.

 

Thomas W. Erickson. Mr. Erickson has served as a member of the board of directors since May 2004. Mr. Erickson served as our Interim President and Chief Executive Officer from September 2002 until our hiring of Mr. Balthrop in May 2004. He is currently a Senior Advisor to New Mountain Capital, LLC, a private equity firm. Previously, he served as Chairman of the board and Interim Chief Executive Officer of National Medical Health Card Systems, Inc., a pharmacy benefits manager, Chairman of the board of PATHCare, Inc., an operator of long term care facilities, Chairman of the board of TransHealthcare, Inc., an operator of nursing homes, skilled nursing facilities and long term care facilities, Chairman and Interim President and CEO of LifeCare Holdings, Inc., an operator of long-term acute care hospitals, and Interim President and CEO of Omega Healthcare Investors, Inc., a healthcare focused real estate investment trust. Mr. Erickson was also co-founder, President and CEO of CareSelect Group, Inc., a physician practice management company. Earlier in his career, he held several management positions at American Hospital Supply Corporation. Mr. Erickson holds a Bachelors degree from University of Iowa and an M.B.A. from Southern Methodist University.

 

Fred C. Goad, Jr. Mr. Goad has served as a member of the board of directors since September 1997. Since August 2001, he has been a member in Voyent Partners, L.L.C., a private investment company. Mr. Goad served as Co-Chief Executive Officer of the transaction services division of WebMD Corporation (“WebMD”), a provider of healthcare transaction, information and technology services, from June 2000 through March 2001. From March 1999 through May 2000, Mr. Goad served as Senior Advisor to the Office of the President of the transaction services division of Quintiles Transnational Corporation (“Quintiles”), a provider of integrated product and commercial development solutions to the pharmaceutical, biotechnology and medical device industries. Mr. Goad served as Co-Chief Executive Officer and Chairman of Envoy from June 1996 until Envoy was acquired by Quintiles in March 1999. From 1985 to June 1996, Mr. Goad served as President and Chief Executive Officer of Envoy. Mr. Goad serves on the boards of directors of Performance Food Group Company, Emageon Inc. and several private companies.

 

Jay B. Johnston. Mr. Johnston has served as a member of the board of directors since February 2005. Mr. Johnston currently serves as Chairman of QuesTek Innovations, LLC, a privately-held company that designs and markets high tech materials. From 1975-1999, he held numerous positions at Abbott Laboratories, most recently Corporate Vice President for Diagnostic Assays and Systems. He held numerous other positions with Abbott Laboratories, including President of Dainabot Co. Ltd. and Vice President Asia Pacific. Mr. Johnston has experience in general management, product development, technology management, strategic marketing and business development. He holds an M.B.A. in General Management from the Amos Tuck School of Business Administration and a B.A. degree in Public Administration from Dartmouth College.

 

Jim D. Kever. Mr. Kever has served as a member of the board of directors since December 1996. He has been a member in Voyent Partners, L.L.C. since August 2001. Mr. Kever served as Co-Chief Executive Officer of the transaction services division of WebMD from June 2000 to March 2001. From March 1999 through May 2000, Mr. Kever served as Chief Executive Officer of the transaction services division of Quintiles. From August 1995 through March 1999, Mr. Kever was the President and Co-Chief Executive Officer of Envoy. Mr. Kever joined Envoy as Treasurer and General Counsel in October 1981. Mr. Kever serves on the boards of directors of 3D Systems Corporation, Transaction Systems Architects, Inc., a provider of electronic software and services payment, and Tyson Foods, Inc., a leading food production company. Mr. Kever received a B.S. in business and administration from the University of Arkansas in 1974 and a J.D. from the Vanderbilt University School of Law in 1977.

 

Kevin M. McNamara. Mr. McNamara has served as a member of the board of directors since May 2003. In addition, he provided financial and strategic consulting services to us from October 2001 through December 2002. Mr. McNamara has served as Executive Vice President, Chief Financial Officer and Treasurer of HealthSpring, Inc., a managed care company, since April 2005. Mr. McNamara also served as non-executive chairman from April 2005 through January 2006 of MedAvant Healthcare Solutions (f/k/a ProxyMed, Inc.), a provider of automated healthcare business and cost containment solutions for financial, administrative and

clinical transactions in the healthcare payments marketplace, and served as Interim Chief Executive Officer of ProxyMed, Inc. from December 2004 through June 2005. Mr. McNamara previously served as Chief Financial Officer of HCCA International, Inc., a healthcare management and recruitment company from October 2002 to April 2005. Mr. McNamara serves on the board of directors of Tyson Foods, Inc. Mr. McNamara is a Certified Public Accountant (inactive) and holds a B.S. in Accounting from Virginia Commonwealth University and a M.B.A. from the University of Richmond.

 

J. Stark Thompson. Mr. Thompson has served as a member of the board of directors since June 2005. Mr. Thompson has served as Non-Executive Chairman of the board of directors of Ore Pharmaceuticals Inc. (f/k/a Gene Logic, Inc.), a commercial drug development company, since November 2004 and as a director since February 2002. Mr. Thompson is the sole proprietor of Black Horse Yachts, LLC, a manufacturer of semi-custom yachts. Mr. Thompson most recently served as President, Chief Executive Officer and Director of Life Technologies, Inc., a developer, manufacturer and supplier of products and services for life science researchers and biotechnology companies, from 1988 until his retirement in 2000. He previously held a number of research, sales, product development, operations and other positions over a 21 year career with the E. I. du Pont de Nemours and Company. He serves on the board of various private and civic organizations. Mr. Thompson has a Bachelor of Science degree from Muskingum College and a Masters of Science and Ph.D. in Physiological Chemistry from the Ohio State University.

 

Gerard Vaillant. Mr. Vaillant has served as a member of the board of directors since February 2005. Mr. Vaillant held a number of positions within Johnson & Johnson, a manufacturer of health care products, from 1981 through 2004. Most recently, Mr. Vaillant served as Company Group Chairman until he retired. He also served as Chairman for Ortho-Clinical Diagnostics, Inc., Veridex LLC and Therakos, Inc, and as a member of several other operating committees within Johnson & Johnson during that period. In addition, from 1992-1995, he was the Worldwide President of LifeScan, a company dedicated to improving the quality of life for people with diabetes by developing, manufacturing and marketing a wide range of blood glucose monitoring systems and software. He currently serves on the board of directors of Sensors for Medicine and Science, Inc., a development stage biotechnology company, and Tecan AG, a global provider storage and logistics systems to the life science supply industry. He holds a Masters Degree & Superior Certificate in Biochemistry & Industrial Chemistry from Paris University of Sciences and a Degree in Marketing from Ecole Superieure de Commerce de Paris.

 

Douglas C. Bryant. Mr. Bryant has served as Executive Vice President and Chief Operating Officer since July 2007. Previously, Mr. Bryant served as Vice President, Abbott Vascular, Asia and Japan, a division of Abbott Laboratories. Mr. Bryant previously served as Vice President, Global Commercial Operations for Abbott Diagnostics and Abbott Molecular and also ran Abbott’s Diagnostics Operations in Asia Pacific and Europe Africa and the Middle East. Mr. Bryant has over 23 years of industry experience in sales and marketing, product development, manufacturing and service and support in both the life sciences and diagnostics markets. Mr. Bryant has a Bachelor of Arts in Economics from the University of California, Davis.

 

Russell W. Bradley. Mr. Bradley has served as Vice President of Business Development and Strategic Planning since May 2005. Previously, Mr. Bradley spent 17 years at Beckman Coulter Corp. where he served as the Director of the Beckman Coulter CARES initiative, involved in the company’s clinical HIV/AIDS monitoring business in developing regions around the globe. During his tenure at Beckman Coulter, Mr. Bradley was involved in the evaluation, market assessment and successful commercial launch of multiple life science technologies and applications. Mr. Bradley holds a B.S. in Immunology and Biochemistry from Monash University, Melbourne, Australia.

 

Jeremy Bridge-Cook, Ph.D. Dr. Bridge-Cook has served as Vice President of Luminex Molecular Diagnostics since March 2007. Previously, Dr. Bridge-Cook served as Sr. Vice President, Corporate Development of Tm Bioscience Corporation. Dr. Bridge-Cook joined Tm Bioscience in July 2000 as Director of Business Development and served in various capacities thereafter, including Vice President of Business Development, Vice President of Marketing & Business Development, and finally Sr. Vice President, Corporate Development. Prior to joining Tm Bioscience, Dr. Bridge-Cook worked for three years as an Investment

Analyst at MDS Capital Corp. and University Medical Discoveries Inc. Dr. Bridge-Cook has a Ph.D. in immunology from the University of Toronto.

 

John C. Carrano, Ph.D. Dr. Carrano has served as Vice President, Research and Development since July 2006 and joined Luminex in July 2005. Dr. Carrano formerly served as Executive Director, Research and Development. Prior to joining Luminex, Dr. Carrano was a program manager at the Defense Advance Research Projects Agency where he led several major Defense Department programs related to biological and chemical sensing. His other recent positions include Assistant Professor of Electrical Engineering, Department of Electrical Engineering and Computer Science, United States Military Academy, and Research Scientist, U.S. Army Research Laboratory, Adelphi MD. In June 2005, Dr. Carrano retired from the military as a Lieutenant Colonel after 24 years of service. Dr. Carrano received his B.S., from the United States Military Academy, West Point, in 1981, and received his M.S. and Ph.D. in Electrical Engineering from the University of Texas at Austin. Dr. Carrano is also a graduate of the U.S. Army Command and General Staff College.

 

Harriss T. Currie. Mr. Currie has served as Vice President, Finance, Treasurer and Chief Financial Officer since October 2003. Since joining us in November of 1998, Mr. Currie previously served in the capacities of Controller, Treasurer and Acting Chief Financial Officer. Prior to joining us, he was employed as the Chief Financial Officer, Secretary and Treasurer of SpectraCell Laboratories, a specialized clinical testing laboratory company, from 1993 to 1998 where he also served as Vice President of Finance for two subsidiary companies. Mr. Currie earned his B.B.A. from Southwestern University and his M.B.A. in Finance and Marketing from The University of Texas at Austin. Prior to returning to graduate school for his M.B.A., Mr. Currie was a certified public accountant with Deloitte & Touche LLP.

 

Gregory J. Gosch. Mr. Gosch has served as Vice President, Luminex Bioscience Group since March 2008. Mr. Gosch previously served in the capacity of Vice President, Marketing and Sales and joined us in October 2004. Before joining Luminex, Mr. Gosch served as Senior Director of Sales and Marketing for Nanogen, a provider of advanced diagnostic products, from 1999 to 2004 where he was responsible for worldwide marketing and U.S. sales. From 1997 to 1999, he served as Market Development Manager for Chiron Corporation, a global biopharmaceutical company. In addition, Mr. Gosch has held various sales and marketing positions at Meridian Diagnostics and Bio-Rad Laboratories, Inc. Mr. Gosch holds an M.B.A. from the Carlson School of Management, a Masters of Health Care Administration from the School of Public Health, both of the University of Minnesota, and a B.A. in Molecular, Cellular and Developmental Biology from the University of Colorado.

 

David S. Reiter. Mr. Reiter has served as Vice President, General Counsel and Corporate Secretary since October 2003. Prior to becoming General Counsel, Mr. Reiter was in private practice with the firm of Phillips & Reiter, PLLC, which provides outsourced general counsel services for technology companies. Before co-founding the firm, Mr. Reiter was Vice President and General Counsel for 724 Solutions Inc., a provider of mobile commerce software solutions and applications (NASDAQ: SVNX). Earlier in his career, Mr. Reiter served as senior counsel for Compaq Computer Corporation, supporting the Worldwide Sales & Services, Supply Chain Management and Consumer Products Group. Mr. Reiter is a graduate of the University of Southern California (Juris Doctorate/Master of International Relations), holds an M.B.A. from the University of Sheffield, UK and a B.A. in Government from the University of Notre Dame. Mr. Reiter is a member of the Texas Bar and the American Bar Association and is on the Board of Directors for the Austin Chamber of Commerce.

 

The following table sets forth certain information known to us regarding the ownership of our common stock as of May 31, 2008 (except as otherwise indicated below) by (i) each director, (ii) each executive officer, (iii) all directors and executive officers as a group and (iv) each person known to us to own beneficially 5% or more of our outstanding common stock.

 

The information set forth below includes shares of common stock directly and indirectly owned and shares of common stock underlying currently exercisable options, as well as those options which will become exercisable within 60 days of May 31, 2008. Except as otherwise indicated, the named persons below have sole voting and dispositive power with respect to beneficially owned shares.