Luminex Corporation
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the quarterly period ended March 31, 2007
or
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the transition period from to .
Commission File No. 000-30109
LUMINEX CORPORATION
(Exact name of Registrant as specified in its charter)
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DELAWARE
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74-2747608 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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12212 TECHNOLOGY BLVD., AUSTIN, TEXAS
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78727 |
(Address of principal executive offices)
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(Zip Code) |
(512) 219-8020
(Registrants telephone number, including area code)
_______________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
There
were 35,828,405 shares of the Companys Common Stock, par value $0.001 per share,
outstanding on May 4, 2007.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LUMINEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
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March 31, |
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December 31, |
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2007 |
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2006 |
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(unaudited) |
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ASSETS
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Current assets: |
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Cash and cash
equivalents |
|
$ |
16,195 |
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$ |
27,414 |
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Short-term
investments |
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3,493 |
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10,956 |
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Accounts
receivable, net |
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10,789 |
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8,237 |
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Inventory, net |
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6,145 |
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4,571 |
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Other |
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1,639 |
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1,917 |
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Total current assets |
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38,261 |
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53,095 |
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Property and equipment, net |
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8,981 |
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4,985 |
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Intangible assets, net |
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2,041 |
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Long-term investments |
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7,315 |
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7,346 |
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Goodwill |
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64,618 |
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Other |
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1,286 |
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1,270 |
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Total assets |
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$ |
122,502 |
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$ |
66,696 |
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities: |
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Accounts
payable |
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$ |
5,555 |
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$ |
3,255 |
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Accrued liabilities |
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6,784 |
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|
2,905 |
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Deferred
revenue |
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3,247 |
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2,756 |
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Other |
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|
170 |
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Total current
liabilities |
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15,756 |
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8,916 |
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Long-term debt |
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3,369 |
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Deferred revenue and other |
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3,820 |
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3,621 |
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Total liabilities |
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22,945 |
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12,537 |
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Stockholders equity: |
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Common stock |
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35 |
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32 |
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Additional paid-in
capital |
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184,456 |
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139,116 |
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Accumulated other
comprehensive gain |
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(16 |
) |
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65 |
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Accumulated deficit |
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(84,918 |
) |
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(85,054 |
) |
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Total stockholders
equity |
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99,557 |
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54,159 |
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Total liabilities and stockholders equity |
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$ |
122,502 |
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$ |
66,696 |
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|
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|
See the accompanying notes which are an integral part of these
Condensed Consolidated Financial Statements.
LUMINEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
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Three Months Ended |
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March 31, |
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2007 |
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2006 |
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(unaudited) |
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Revenue |
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$ |
16,607 |
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$ |
12,997 |
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Cost of revenue |
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6,178 |
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4,737 |
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Gross profit |
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10,429 |
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8,260 |
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Operating expenses: |
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Research and
development |
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2,705 |
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2,197 |
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Selling, general and
administrative |
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8,096 |
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5,950 |
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Total operating
expenses |
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10,801 |
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|
8,147 |
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Income (loss) from operations |
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(372 |
) |
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113 |
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Interest expense from
long-term
debt |
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(84 |
) |
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Other income, net |
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606 |
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|
416 |
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Income
taxes |
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(14 |
) |
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(3 |
) |
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Net income |
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$ |
136 |
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$ |
526 |
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Net income per share, basic |
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$ |
0.00 |
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$ |
0.02 |
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Shares used in computing net income
per share, basic |
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31,970 |
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|
31,201 |
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Net income per share, diluted |
|
$ |
0.00 |
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$ |
0.02 |
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Shares used in computing net income
per share, diluted |
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33,077 |
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32,379 |
|
See the accompanying notes which are an integral part of these
Condensed Consolidated Financial Statements.
2
LUMINEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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Three Months Ended |
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March 31, |
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2007 |
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2006 |
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(unaudited) |
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Operating activities: |
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Net income |
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$ |
136 |
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$ |
526 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
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Depreciation and
amortization |
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|
540 |
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|
363 |
|
Stock-based
compensation and
other |
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|
1,507 |
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|
1,165 |
|
Loss on disposal of
assets |
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|
54 |
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27 |
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Other |
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1 |
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(2 |
) |
Changes in operating assets and liabilities: |
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Accounts receivable,
net |
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|
(1,077 |
) |
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1,659 |
|
Inventory,
net |
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|
(32 |
) |
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(322 |
) |
Prepaids and
other |
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|
340 |
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|
428 |
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Accounts
payable |
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|
(1,554 |
) |
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|
(1,253 |
) |
Accrued
liabilities |
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|
(3,126 |
) |
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|
(1,169 |
) |
Deferred
revenue |
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|
360 |
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(229 |
) |
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Net cash (used in) provided by operating activities |
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(2,851 |
) |
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|
1,193 |
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Investing activities: |
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Net purchases of held-to-maturity investments |
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7,525 |
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(2,000 |
) |
Purchase of property and equipment |
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(1,605 |
) |
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(884 |
) |
Acquisition of business, net of cash
acquired |
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(1,991 |
) |
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Proceeds from sale of assets |
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5 |
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Net cash provided by (used in) investing activities |
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3,929 |
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(2,879 |
) |
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Financing activities: |
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Payments on debt |
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(12,227 |
) |
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Proceeds from issuance of common
stock |
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|
14 |
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|
1,076 |
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Net cash (used in) provided by financing activities |
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(12,213 |
) |
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|
1,076 |
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Effect of foreign currency exchange rate on cash |
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(84 |
) |
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|
6 |
|
Change in cash and cash equivalents |
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|
(11,219 |
) |
|
|
(604 |
) |
Cash and cash equivalents, beginning of period |
|
|
27,414 |
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|
|
25,206 |
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|
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|
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Cash and cash equivalents, end of period |
|
$ |
16,195 |
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$ |
24,602 |
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Supplemental disclosure of
cash flow information: |
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Interest and
penalties paid |
|
$ |
1,081 |
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|
$ |
|
|
|
|
|
|
|
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Supplemental disclosure of
non-cash effect of acquisitions: |
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Purchase
price |
|
$ |
(47,001 |
) |
|
$ |
|
|
Comon stock issued |
|
|
41,755 |
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|
|
|
|
Conversion of Tm options and warrants |
|
|
2,315 |
|
|
|
|
|
Cash acquired |
|
|
940 |
|
|
|
|
|
|
|
|
|
|
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Acquisition, net of cash acquired |
|
$ |
(1,991 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
See the accompanying notes which are an integral part of these
Condensed Consolidated Financial Statements.
3
LUMINEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared by
Luminex Corporation (the Company or Luminex) in accordance with United States generally
accepted accounting principles for interim financial information and the rules and regulations of
the Securities and Exchange Commission. Accordingly, they do not include all of the information and
footnotes required by United States generally accepted accounting principles for complete financial
statements. The condensed consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal
recurring entries) considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 2007 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2007. These financial statements should be
read in conjunction with the financial statements and notes thereto included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2006.
The acquisition of Tm Bioscience Corporation, or Tm, now known as Luminex Molecular
Diagnostics or LMD, was completed on March 1, 2007; therefore, the results of operations of LMD in
our consolidated financial statements include only results since this date.
Historically the Company has operated as a single segment. Subsequent to the acquisition of
LMD, we now have two segments for financial reporting purposes: the Technology Segment and the
Assay Segment. See Note 7 Segment Information.
NOTE 2 ACQUISITIONS
On March 1, 2007, the Company completed the acquisition of Tm, a DNA-based research and
diagnostics company headquartered in Toronto, Canada. We believe this acquisition is a logical
extension of our strategy to penetrate the molecular diagnostics market. The acquired company is
referred to as LMD and is included in our Assay Segment for financial reporting purposes. The
focus of LMD is to design, develop, manufacture and commercialize nucleic-acid based testing
products in genetic testing, personalized medicine and infectious disease.
Upon the closing of the plan of arrangement, we exchanged 0.06 Luminex common shares for each
outstanding Tm share, which resulted in the issuance of approximately 3.2 million shares of Luminex
common stock. The value of the approximately 3.2 million common shares issued was determined based
on the average market price of our common shares over the period including five days before and
after the terms of the acquisition were agreed to and announced in
accordance with SFAS No. 141 Business Combinations
(SFAS 141). We also agreed to assume all
outstanding Tm options and warrants according to the applicable Tm plan provisions, which options
and warrants are potentially exercisable for approximately 692,000 additional shares of Luminex
common stock on an as-converted basis. The estimated fair value of
Luminex replacement options and warrants is calculated using
the Black-Scholes model. In accordance with Statement of Financial
Accounting Standards No. 123R, Share-based Payments (SFAS
123R), the portion of the estimated fair value of unvested Tm
options related to future service (approximately $242,000) is
deducted from the purchase price consideration and will be recognized
as compensation expense over those awards remaining vesting
period.
Immediately subsequent to the acquisition, we retired approximately $13.2 million of Tm debt,
including approximately $1.0 million of related fees, by using existing cash reserves. The impact
of the acquisition on our liquidity is more fully described under Liquidity and Capital
Resources.
The acquisition is SFAS 141 being accounted for as a purchase business combination in accordance with
SFAS 141 and LMD results of operations are included with
the Companys from the date of acquisition, March 1, 2007. The purchase price of the acquisition
was approximately $47.0 million, including common stock valued at
4
LUMINEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
$41.8 million, which will be
adjusted for the valuation of certain conversions of Tm options and warrants and final
transaction-related costs. The purchase price will be allocated to the net assets acquired based
on estimates of the fair values at the date of the acquisition. Luminex is in the process of
allocating fair values for certain intangible assets using an independent valuation expert. The
excess purchase price over the fair values of the net tangible assets, identified intangible assets
and liabilities will be allocated to goodwill. Luminex currently has $64.6 million of goodwill
recorded related to the Tm acquisition. This balance is subject to
adjustment over the course of the next three quarters as Luminex completes certain standard activities around the
transaction such as: 1) recording of all transaction related costs, 2) allocation of the purchase
price based on an expert valuation of Tms assets and liabilities and 3) evaluation of potential
impairment of the remaining goodwill balance. No assurances can be given as to the size of any
subsequent goodwill adjustment, if any, at this time. Goodwill is not
expected to be deductible for tax purposes.
The following table summarizes the estimated fair values of net assets at the date of
acquisition (in thousands). Any change in the fair value of the net assets of LMD is expected to
change the amount of the purchase price allocable to goodwill.
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Amount |
|
Cash |
|
|
940 |
|
Other current assets |
|
|
3,102 |
|
Other assets |
|
|
56 |
|
Property and equipment |
|
|
2,884 |
|
Identifiable
intangible assets |
|
|
2,063 |
|
Goodwill |
|
|
64,618 |
|
|
|
|
|
Total assets |
|
|
73,663 |
|
|
|
|
|
|
|
|
|
|
Current portion of debt assumed |
|
|
12,447 |
|
Accrued
severance assumed |
|
|
2,120 |
|
Other current liabilities assumed |
|
|
8,510 |
|
Long-term debt assumed |
|
|
3,351 |
|
Other long-term liabilities assumed |
|
|
234 |
|
|
|
|
|
Total liabilities |
|
|
26,662 |
|
|
|
|
|
|
Purchase
price |
|
$ |
47,001 |
|
|
|
|
|
Pro Forma Information
The
financial information in the table below summarizes the combined
results of operations of Luminex and LMD, on a pro forma basis, as
though the companies had been combined at the beginning of 2007.
The
pro forma financial information is presented for informational
purposes only and is not indicative of the results of operation that
would have been achieved if the acquisition of LMD had taken place at
the beginning of fiscal 2007.
The
following table summarizes the pro forma financial information (in
thousands, except per share amounts):
|
|
|
|
|
|
|
Three
Months Ended March 31, 2007 |
|
Revenues |
|
$ |
16,926 |
|
Net loss |
|
$ |
(6,241 |
) |
Net loss
per share, basic and diluted |
|
$ |
(0.18 |
) |
5
LUMINEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3 INVESTMENTS
Held-to-maturity securities as of March 31, 2007 consisted of $10.8 million of federal agency
debt securities. Amortized cost approximates fair value of these investments.
The amortized costs of held-to-maturity debt securities at March 31, 2007, by contractual
maturity, are shown below (in thousands). Expected maturities may differ from contractual
maturities because the issuers of the securities may have the right to prepay obligations without
prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
Amortized |
|
|
|
Cost |
|
|
Interest |
|
|
Cost |
|
Due in one year or less |
|
$ |
3,493 |
|
|
$ |
73 |
|
|
$ |
3,566 |
|
Due after one year through two years |
|
|
7,315 |
|
|
|
121 |
|
|
$ |
7,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,808 |
|
|
$ |
194 |
|
|
$ |
11,002 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 4 INVENTORY, NET
Inventory consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Parts and supplies |
|
$ |
3,419 |
|
|
$ |
3,504 |
|
Work-in-progress |
|
|
1,682 |
|
|
|
555 |
|
Finished goods |
|
|
1,801 |
|
|
|
932 |
|
|
|
|
|
|
|
|
|
|
|
6,902 |
|
|
|
4,991 |
|
Less: Allowance for excess and obsolete inventory |
|
|
(757 |
) |
|
|
(420 |
) |
|
|
|
|
|
|
|
|
|
$ |
6,145 |
|
|
$ |
4,571 |
|
|
|
|
|
|
|
|
NOTE 5 EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per
Share, basic and diluted net income per share is computed by dividing the net income for the
period by the weighted average number of common shares outstanding during the period.
6
LUMINEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
A reconciliation of the denominators used in computing per share net income, or EPS, is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Numerator: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
136 |
|
|
$ |
526 |
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Denominator for basic net income per share -
weighted average common stock outstanding |
|
|
31,970 |
|
|
|
31,201 |
|
Dilutive common stock equivalents - common stock
options and awards |
|
|
1,107 |
|
|
|
1,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per share -
weighted average common stock outstanding and
dilutive common stock equivalents |
|
|
33,077 |
|
|
|
32,379 |
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.00 |
|
|
$ |
0.02 |
|
Diluted net income per share |
|
$ |
0.00 |
|
|
$ |
0.02 |
|
Restricted stock awards, or RSAs, and stock options to acquire 989,000 and 1.4 million shares,
respectively, for the three months ended March 31, 2007 and 2006 were excluded from the computations
of diluted EPS because the effect of including the RSAs and stock options would have been
anti-dilutive.
NOTE 6 STOCK-BASED COMPENSATION
During the three months ended March 31, 2007, the Company assumed the Tm Bioscience
Corporation Share Option Plan (the Tm Plan) a stock-based employee compensation plan in
connection with the Tm acquisition. The Tm Plan is intended to govern the former Tm options which
were exchanged for options to purchase shares of Luminex common stock
in connection with the
acquisition. The Tm Plan will be administered by the Compensation Committee of the Board of
Directors of Luminex. There are currently options to purchase up to approximately 233,000 shares
of Luminex common stock outstanding under the Tm Plan at a weighted average exercise price of
$25.31 per share. No new equity awards may be issued under the Tm Plan.
Also in connection with the Tm acquisition, warrants for the purchase of Tm common
stock were converted to the right to acquire shares
of Luminex common stock. There are currently outstanding warrants to purchase up to approximately 458,000
shares of Luminex common stock with a weighted average exercise price of $20.64 per
share.
On March 25, 2007, the Compensation Committee approved an amendment to the restricted stock
agreement, dated May 17, 2004 (the Restricted Stock Agreement), of Mr. Balthrop. The Company and
Mr. Balthrop initially entered into the Restricted Stock Agreement in connection with the hiring of Mr. Balthrop as the
President and Chief Executive Officer of the Company. The Restricted Stock Agreement provided for
the grant of 200,000 restricted shares, which would vest in portions based on the attainment of
certain performance goals related to Company revenue, earnings and stock price. If the goals
provided for in the Restricted Stock Agreement were not achieved by the end of the fifth
anniversary of the date of the Restricted Stock Agreement, all non-vested shares would be
forfeited. The amendment provides for the automatic vesting of all unvested restricted shares
immediately prior to the fifth anniversary of the date of the Restricted Stock Agreement, to the
extent any or all of the performance measures have not been previously achieved. Mr. Balthrops
200,000 share restricted stock award, as amended, has market, service or performance criteria for
vesting of all shares. We have assumed that vesting will occur at the end
7
LUMINEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
of the five years based
on achievement of the service criteria so all expense is being amortized straight-line over the
five-year period ending May 17, 2004 through 2009. Pursuant to the amendment to this award, the
award was revalued to the market price on the date of amendment of $14.39. This resulted in
additional expense to the Company of approximately $356,000 of which approximately $205,000 was
recognized in the first quarter of 2007 and approximately $151,000 of which will be recognized
pro-rata over the remaining term of the award.
The Companys stock option activity for the quarter ended March 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Shares |
|
|
Exercise |
|
Stock Options |
|
(in thousands) |
|
|
Price |
|
Outstanding at December 31, 2006 |
|
|
3,163 |
|
|
$ |
9.76 |
|
Granted |
|
|
790 |
(1) |
|
|
21.26 |
|
Exercised |
|
|
(2 |
) |
|
|
5.61 |
|
Cancelled or expired |
|
|
(63 |
) |
|
|
25.38 |
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 |
|
|
3,888 |
|
|
$ |
11.84 |
|
|
|
|
(1) |
|
Includes shares reserved with respect to the Tm options assumed in the acquisition. |
The Company had $2.2 million of total unrecognized compensation costs related to stock options
at March 31, 2007 that are expected to be recognized over a weighted-average period of 1.1 years.
The Companys non-vested shares activity for the quarter ended March 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
Shares |
|
|
Grant-Date |
|
Restricted Stock Awards/Units |
|
(in thousands) |
|
|
Fair Value |
|
Non-vested at December 31, 2006 |
|
|
798 |
|
|
$ |
12.46 |
|
Granted |
|
|
312 |
|
|
|
14.11 |
|
Vested |
|
|
(74 |
) |
|
|
12.60 |
|
Cancelled or expired |
|
|
(2 |
) |
|
|
11.34 |
|
|
|
|
|
|
|
|
Non-vested at March 31, 2007 |
|
|
1,034 |
|
|
$ |
12.95 |
|
As of March 31, 2006, there was $11.1 million of unrecognized compensation cost related to
RSAs. That cost is expected to be recognized over a weighted average-period of 2.2 years.
The following are the stock-based compensation costs recognized in the Companys condensed
consolidated statements of income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Cost of revenue |
|
$ |
70 |
|
|
$ |
79 |
|
Research and development |
|
|
178 |
|
|
|
102 |
|
Selling, general and administrative |
|
|
1,254 |
|
|
|
984 |
|
|
|
|
|
|
|
|
Total stock-based compensation costs |
|
$ |
1,502 |
|
|
$ |
1,165 |
|
8
LUMINEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7 SEGMENT INFORMATION
Management has determined that we have two segments for financial reporting purposes: the
Technology Segment and the Assay Segment. As described in Note 2 Acquisitions, the acquisition
of LMD (formerly Tm) was completed on March 1, 2007; therefore, the results of operation of LMD in
our consolidated financial statements include only results since this date. The accounting
principles of the segments are the same as those described in the Summary of Significant Policies
in our Annual Report on Form 10-K and in this report. Following is selected
information for the three months ended March 31, 2007 or at March 31, 2007 (in thousands),
with recognition that the LMD impact is only for the one month period ended March 31, 1007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology |
|
Assay |
|
Intersegment |
|
|
|
|
Group |
|
Group |
|
Eliminations |
|
Consolidated |
Revenues from external customers |
|
$ |
15,415 |
|
|
$ |
1,192 |
|
|
$ |
|
|
|
$ |
16,607 |
|
Intersegment revenue |
|
|
323 |
|
|
|
8 |
|
|
|
(331 |
) |
|
|
(331 |
) |
Depreciation and amortization |
|
|
415 |
|
|
|
137 |
|
|
|
(20 |
) |
|
|
532 |
|
Segment profit (loss) |
|
|
1,660 |
|
|
|
(1,460 |
) |
|
|
(64 |
) |
|
|
136 |
|
Segment assets |
|
|
111,463 |
|
|
|
12,749 |
|
|
|
(1,710 |
) |
|
|
122,502 |
|
NOTE 8
INCOME TAXES
The
Company adopted the Financial Accounting Standards Board
(FASB) Interpretation (FIN) 48, Accounting for
Uncertainty in Income Taxes (FIN 48) at the
beginning of fiscal year 2007. As a result of the implementation of
FIN 48, the Company had no unrecognized tax benefits.
The
Company recognizes interest and penalties related to
uncertain tax positions in the provision for income taxes. The
Company has not recognized any interest or penalties related to
uncertain tax positions to date.
The tax
years 2002 through 2006 remain open to examination by the major
taxing jurisdictions to which the Company is subject.
NOTE 9 RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which
defines fair value, establishes a framework for using fair value to measure assets and liabilities,
and expands disclosures
about fair value measurements. The Statement applies whenever other statements require or
permit assets or liabilities to be measured at fair value. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. We are currently evaluating the impact this statement will have
on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB Statement No. 115 (SFAS 159). SFAS 159
permits entities to choose to measure many financial instruments and certain other items at fair
value, with unrealized gains and losses related to these financial instruments reported in earnings
at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November
15, 2007. We are currently evaluating the impact this statement will have on our consolidated
financial statements.
9
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following information should be read in conjunction with the condensed consolidated
financial statements and the accompanying notes included in Part I Item 1 of this Report, the Risk
Factors included in Part II Item 1A of this Report and our Annual Report on Form 10-K for the year
ended December 31, 2006.
SAFE HARBOR CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q contains statements that are forward-looking statements as
defined within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended. Forward-looking statements give our current
expectations of forecasts of future events. All statements other than statements of current or
historical fact contained in this report, including statements regarding our future financial
position, business strategy, budgets, projected costs, and plans and objectives of management for
future operations, are forward-looking statements. The words anticipate, believe, continue,
estimate, expect, intend, may, plan, projects, will, and similar expressions, as they
relate to us, are intended to identify forward-looking statements. These statements are based on
our current plans and actual future activities, and our results of operations may be materially
different from those set forth in the forward-looking statements as a result of known or unknown
risks and uncertainties, including, among other things:
|
|
|
risks and uncertainties relating to market demand and acceptance of our products and technology, |
|
|
|
|
dependence on strategic partners for development, commercialization and distribution of products, |
|
|
|
|
concentration of the Companys revenue in a limited number of strategic partners, |
|
|
|
|
fluctuations in quarterly results due to a lengthy and unpredictable sales cycle and
bulk purchases of consumables, |
|
|
|
|
our ability to scale manufacturing operations and manage operating expenses, gross
margins and inventory levels, |
|
|
|
|
potential shortages of components, |
|
|
|
|
competition, |
|
|
|
|
the timing of regulatory approvals, |
|
|
|
|
the implementation, including any modification, of the Companys strategic operating plans, and |
|
|
|
|
risks and uncertainties associated with implementing our acquisition strategy and the
ability to integrate acquired companies, including LMD, or selected assets into our
consolidated business operations, including the ability to recognize the benefits of our
acquisitions. |
Any or all of our forward-looking statements in this report may turn out to be inaccurate. We
have based these forward-looking statements largely on our current expectations and projections
about future events and financial trends that we believe may affect our financial condition,
results of operations, business strategy and financial needs. They can be affected by inaccurate
assumptions we might make or by known or unknown risks, uncertainties and assumptions, including
the risks, uncertainties and assumptions outlined above and described in the section titled Risk
Factors below. In light of these risks, uncertainties and assumptions, the forward-looking events
and circumstances discussed in this report may not occur and actual results could differ materially
from those anticipated or implied in the forward-looking statements. When you consider these forward-looking statements,
you should keep in mind these risk factors and other cautionary statements in this report.
Our forward-looking statements speak only as of the date made. We undertake no obligation to
publicly update or revise forward-looking statements, whether as a result of new information,
future events or otherwise. All subsequent written and oral forward-looking statements attributable
to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary
statements contained in this report. Unless the context requires otherwise, references in this
Quarterly Report on Form 10-Q to Luminex, the Company, we, us and our refer to Luminex
Corporation and its subsidiaries.
10
OVERVIEW
We develop, manufacture and sell proprietary biological testing technologies with applications
throughout the life sciences industry. Our xMAP® technology, an open architecture, multiplexing
technology, allows simultaneous analysis of up to 100 bioassays from a small sample volume,
typically a single drop of fluid, by reading biological tests on the surface of microscopic
polystyrene beads called microspheres. xMAP technology combines this miniaturized liquid array
bioassay capability with small lasers, digital signal processors and proprietary software to create
a system offering advantages in speed, precision, flexibility and cost. Our xMAP technology is
currently being used within various segments of the life sciences industry which includes the
fields of drug discovery and development, clinical diagnostics, genetic analysis, bio-defense,
protein analysis and biomedical research.
Our end-user customers and partners, which include laboratory professionals performing
research, clinical laboratories performing tests on patients as ordered by a physician and other
laboratories, have a fundamental need to perform high quality testing as efficiently as possible.
Luminex has adopted a business model built around strategic partnerships. The Company has licensed
its xMAP technology to other companies, who then develop products that incorporate the xMAP
technology into products that they sell to the end-user. Luminex develops and manufactures the
proprietary xMAP laboratory instrumentation and the proprietary xMAP microspheres and sells these
products to its partners. Our partners then sell xMAP instrumentation and xMAP-based reagent
consumable products, which run on the instrumentation, to the end-user laboratory. The Company was
founded on this model, and our success to date has been due to this model. As of March 31, 2007,
Luminex had over 50 strategic partners, 32 of which have released commercialized reagent-based
products using our technology, and these partners have sold and placed over 4,300 xMAP-based
instruments in laboratories worldwide.
Luminex has several forms of revenue that result from this partner model:
|
|
|
System revenue is generated from the sale of our xMap systems and peripherals.
Currently system revenue is derived from the sale of the Luminex 100 and 200 analyzers,
often coupled with an optional XY Platform and/or Sheath Delivery System. We currently
expect the average system price to be between $25,000 and $30,000 in a given reporting
period. This metric includes all configurations of our xMAP systems including refurbished
systems, demonstration systems and modular components. |
|
|
|
|
Consumable revenue is generated from the sale of our dyed polystyrene microspheres and
sheath fluid. Our larger commercial and development partners often purchase these
consumables in bulk to minimize the number of incoming qualification events and to allow
for longer development and production runs. |
|
|
|
|
Royalty revenue is generated when a partner sells a kit incorporating our proprietary
microspheres to an end user or when a partner utilizes a kit to provide a testing result to
a user. End users can be facilities such as testing labs, development facilities and
research facilities who buy prepared kits and have specific testing needs or testing
service companies that provide assay results to pharmaceutical research companies or
physicians. |
|
|
|
|
Service revenue is generated when a partner or other owner of a system purchases a
service contract from us after the warranty has expired. Service contract revenue is
amortized over the life of the contract and the costs associated with those contracts are
recognized as incurred. |
|
|
|
|
Assay revenue is generated from the sale of our kits which is a combination of chemical
and biological reagents and our proprietary bead technology used to perform diagnostic and
research assays on samples. For the three months ended March 31,
2007, assay revenue also
includes revenue for the month of March 2007 from Luminex
Molecular Diagnostics, or LMD, formerly Tm Bioscience Corporation or
Tm Bioscience, as a result
of our acquisition of Tm Bioscience, which was effective March 1, 2007. Assay revenue generated from the Luminex Bioscience
Group, or LBG, is also classified here. Previously, assay revenue generated from the LBG was
recorded in other revenue as it did not constitute a material amount of total revenue. |
|
|
|
|
Other revenue consists of items such as training, shipping, parts sales, license
revenue, grant revenue and other items that individually amount to less than 5% of total
revenue. |
11
First Quarter 2007 Highlights
|
|
|
Consolidated revenue of over $16.6 million, a 28% increase over the 1st quarter of 2006
and a 17% increase over the 4th quarter of 2006 |
|
|
|
|
Consolidated gross margins of 63% |
|
|
|
|
Aggregate shipments of xMAP systems exceeds 4,300 |
|
|
|
|
Completion of the acquisition of Tm Bioscience |
|
|
|
|
Secured a line of credit of up to $15 million to support potential short term liquidity needs |
|
|
|
|
Annualized end user sales on xMAP technology reported to us by our partners of over $165 million |
|
|
|
|
New product introductions by both the Technology segment and the Luminex Bioscience
Group |
Recent Acquisition of TM Bioscience
As previously discussed in Note 2 Acquisitions, on March 1, 2007, we completed our
acquisition of Tm Bioscience. The acquired company, now referred to as LMD, is a DNA-based
research and diagnostics company located in Toronto, Canada. This was a stock-for-stock
acquisition, and it is, what we believe to be, a logical extension of our strategy. In connection
with closing the acquisition, we paid off $13.2 million of Tm Biosciences debt, related fees and
paid transactions expenses of approximately $5.0 million
(including $2.9 million of transaction costs included as part of the
purchase price and $2.1 million of LMD transaction costs incurred
prior to March 1, 2007). As a result of this transaction, our
cash, cash equivalents and investments were reduced by approximately $18.7 million during the
quarter ended March 31, 2007. To support our cash and investments position, the Company secured a revolving credit
facility for up to $15.0 in conjunction with the Tm Bioscience
acquisition, which, as of March 31, 2007 and subject to the
borrowing base requirements, would allow for borrowings of up to
approximately $8.9
million.
Segment Information
As described in Note 7 Segment Information, management has chosen to organize the Company
by business segments, and as a result has determined we have two segments for financial reporting
purposes: the Technology Segment and the Assay Segment.
Future Operations
We expect continued revenue growth for 2007 to be driven by sustained adoption of our core
technology coupled with assay introduction and commercialization by the Assay Segment. The
anticipated continued shift in revenue concentration towards higher margin items, such as assays,
consumables and royalties, should provide favorable gross margins. Additionally, we believe that a
sustained investment into R&D is necessary in order to meet the needs of our marketplace and
estimate that spending on R&D will approximate 10 18% of total revenues. Finally, we believe
our partner model allows us to leverage our operating expenses which, assuming the revenue
increases and R&D expense described above, should allow us to generate increased operating income
for 2007 as a percentage of total revenue from our core business.
We expect our primary challenges throughout the remainder of 2007 to be increased traction of
partner products incorporating Luminex technology, realizing the anticipated synergies of the Tm
Bioscience acquisition and associated integration risks, commercialization and market adoption of
output from the Assay Segment and expanding our footprint and reputation within our identified
target market segments.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based
upon our condensed consolidated financial statements, which have been prepared in accordance with
United States generally accepted accounting principles. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We
base our estimates on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other
sources. Estimates and assumptions are reviewed periodically. Actual results may differ from these
estimates under different assumptions or conditions.
12
Revenue Recognition. Revenue on sales of our products is recognized when persuasive evidence
of an agreement exists, delivery has occurred, the fee is fixed and determinable and collectibility
is probable. Generally, these criteria are met at the time our product is shipped. If the
criteria for revenue recognition are not met at the time of shipment, the revenue is deferred until
all criteria are met. Royalty revenue is generated when a partner sells products incorporating our
technology, provides testing services to third parties using our technology or resells our
consumables. Royalty revenue is recognized as it is reported to us by our partners; therefore, the
underlying end-user sales may be related to prior periods. We also sell extended service contracts
for maintenance and support of our products. Revenue for service contracts is recognized ratably
over the term of the agreement.
Total deferred revenue as of March 31, 2007 was $6.8 million and primarily consisted of (i)
unamortized license fees for non-exclusive licenses and patent rights to certain Luminex
technologies in the amount of $3.9 million, (ii) unamortized revenue related to extended service
contracts in the amount of $2.2 million, and (iii) upfront payments from strategic partners to be
used for the purchase of products or to be applied towards future royalty payments in the amount of
$450,000. Upfront payments from our strategic partners are nonrefundable and will be recognized as
revenue as our strategic partners purchase products or apply such amounts against royalty payments.
Nonrefundable license fees are amortized into revenue over the estimated life of the license
agreements.
Inventory Valuation. Inventories are valued at the lower of cost or market value and have
been reduced by an allowance for excess and obsolete inventories. At March 31, 2007, the two major
components of the allowance for excess and obsolete inventory were (i) a specific reserve for
inventory items that we no longer use in the manufacture of our products or that no longer meet our
specifications and (ii) a reserve against slow moving items for potential obsolescence. The total
estimated allowance is reviewed on a regular basis and adjusted based on managements review of
inventories on hand compared to estimated future usage and sales.
Warranties. We provide for the estimated cost of product warranties at the time revenue is
recognized. While we engage in product quality programs and processes, our warranty obligation is
affected by product failure rates, material usage and service delivery costs incurred in correcting
a product failure. Should actual product failure rates, material usage or service delivery costs
differ from our estimates, revisions to the estimated warranty liability would be required.
Accounts Receivable and Allowance for Doubtful Accounts. We continuously monitor collections
and payments from our customers and maintain allowances for doubtful accounts based upon our
historical experience and any specific customer collection issues that we have identified. While
such credit losses historically have been within our expectations, there can be no assurance that
we will continue to experience the same level of credit losses that we have in the past. A
significant change in the liquidity or financial position of any one of our significant customers,
or a deterioration in the economic environment, in general, could have a material adverse impact on
the collectibility of our accounts receivable and our future operating results, including a
reduction in future revenues and additional allowances for doubtful accounts.
Goodwill. We evaluate the impairment of goodwill under the guidance of SFAS No. 142 Goodwill
and Other Intangible Assets for each of our reporting segments. During the first quarter of 2007,
we established our initial goodwill balance related to our acquisition of LMD. This balance will
be tested for impairment concurrent with finalizing the purchase price allocation for the
acquisition which will be ongoing through 2007.
13
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED MARCH 31, 2006
Consolidated
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2007 |
|
2006 |
Revenue |
|
$ |
16,607 |
|
|
$ |
12,997 |
|
Gross profit |
|
$ |
10,429 |
|
|
$ |
8,260 |
|
Gross margin percentage |
|
|
63 |
% |
|
|
64 |
% |
Operating expenses |
|
$ |
10,801 |
|
|
$ |
8,147 |
|
Net operating income (loss) |
|
$ |
(372 |
) |
|
$ |
113 |
|
Total revenue increased 28% to $16.6 million for the three months ended March 31, 2007
from $13.0 million for the comparable period in 2006. The increase in revenue was primarily
attributable to an increase in system sales as well as the continued acceptance and utilization of
our technology in the marketplace as evidenced by our continued increase in royalty revenue.
Operating expenses increased due to the incorporation of the results of LMD for the month of March
2007. Net operating income decreased due to the dilutive effect of acquiring LMD. See additional
discussions by segment below.
We manage our operations through two business segments: the Technology Segment and the Assay
Segment.
Technology Segment
Selected financial data for the three months ended March 31, 2007 and 2006 of our Technology
Segment results follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2007 |
|
2006 |
Revenue |
|
$ |
15,415 |
|
|
$ |
12,997 |
|
Gross profit |
|
$ |
9,702 |
|
|
$ |
8,267 |
|
Gross margin percentage |
|
|
63 |
% |
|
|
64 |
% |
Operating expenses |
|
$ |
8,869 |
|
|
$ |
7,712 |
|
Net operating income |
|
$ |
833 |
|
|
$ |
555 |
|
Revenue. Total revenue increased 19% to $15.4 million for the three months ended March
31, 2007 from $13.0 million for the comparable period in 2006. The increase in revenue was
primarily attributable to an increase in system sales as well as the continued acceptance and
utilization of our technology in the marketplace as evidenced by our continued increase in royalty
revenue. As previously disclosed in our Annual Report on Form 10-K, we continue to experience
revenue concentration in a limited number of strategic partners. Two customers accounted for 35% of
total revenue in the first quarter of 2007 (23% and 12%, respectively). No other customer
accounted for more than 10% of total revenue in this quarter. For comparative purposes, these same
two customers accounted for 47% of total revenue (17% and 30%, respectively) in the first quarter
of 2006.
A breakdown of revenue in the Technology Segment for the three months ended March 31, 2007 and
2006 is as follows (in thousands):
14
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
System sales |
|
$ |
5,692 |
|
|
$ |
3,992 |
|
Consumable sales |
|
|
4,811 |
|
|
|
5,502 |
|
Royalty revenue |
|
|
2,532 |
|
|
|
1,790 |
|
Service contracts |
|
|
1,003 |
|
|
|
808 |
|
Other revenue |
|
|
1,377 |
|
|
|
905 |
|
|
|
|
|
|
|
|
|
|
$ |
15,415 |
|
|
$ |
12,997 |
|
|
|
|
|
|
|
|
System and peripheral component sales increased 43% to $5.7 million for the three months
ended March 31, 2007 from $4.0 million for the comparable period of 2006. System sales for the
first quarter of 2007 increased to 205 LX Systems from 142 LX Systems for the corresponding prior
year period bringing total system sales since inception to over 4,300 as of March 31, 2007. For
the three months ended March 31, 2007, five of our partners accounted for 170, or 83%, of total
system sales for the period. These five partners purchased 84, or 59%, of total system sales in
the three months ended March 31, 2006.
Consumable sales comprised of microspheres and sheath fluid, decreased 13% to $4.8 million for
the three months ended March 31, 2007 from $5.5 million for the three months ended March 31, 2006.
The decrease is primarily the result of a decrease in bulk purchases as the prior year period
included a $2.8 million bulk purchase by a single customer and to a lesser extent the elimination
of intercompany sales from LMD for March. 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, 2007, we had 11 bulk
purchases of consumables totaling approximately $3.4 million as compared with eight bulk purchases
totaling approximately $4.3 million in the three months ended March 31, 2006. Partners who
reported royalty bearing sales accounted for $4.1 million, or 85%, of total consumable sales for
the three months ended March 31, 2007. Although consumable sales decreased for the three months
ended March 31, 2007 as compared to March 31, 2006, consumable sales increased sequentially over
the fourth quarter of 2006 by approximately $1.1 million. 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 41% to $2.5 million for the three months ended March 31, 2007
compared with $1.8 million for the three months ended March 31, 2006. We believe this increase is
primarily the result of the increased use and acceptance of our technology. For the three months
ended March 31, 2007, we had 32 commercial partners submitting royalties as compared to 22 for the
three months ended March 31, 2006. One of our partners reported royalties totaling approximately
$723,000, or 29% of total royalties for the current quarter. Two other customers reported
royalties totaling approximately $562,000, or 22% (12% and 10%, respectively) of total royalties
for the current quarter. No other customer accounted for more than 10% of total royalty revenue
for the current quarter. Total royalty bearing sales by our partners were over $41 million for the
quarter ended March 31, 2007 and over $165 million on an annualized basis, compared with over $25
million for the quarter ended March 31, 2006 and over $100 million on an annualized basis.
Service contracts, comprised of extended warranty contracts earned ratably over the term of
the agreement, increased 24% to $1.0 million for the first quarter of 2007 from $808,000 for the
first quarter of 2006. This increase is attributable to increased sales of extended service
agreements, which are primarily a result of the increase in the commercial base of Luminex systems
as compared to the prior year period. At March 31, 2007, we had 747 Luminex systems covered under
extended service agreements and $2.2 million in deferred revenue related to those contracts. At
March 31, 2006, we had 649 Luminex systems covered under extended service agreements and $1.9
million in deferred revenue related to those contracts.
Other revenues, comprised of training revenue, shipping revenue, miscellaneous parts sales,
amortized license fees, and grant revenue, increased 52% to $1.4 for the three months ended March
31, 2007 from $905,000 for the three months ended March 31, 2006. This increase is primarily the result of an increase in
miscellaneous part sales and the addition of grant revenue. For the quarter ended March 31, 2007,
we had $820,000 of parts sales, $197,000 of grant revenue, $157,000 of shipping revenue, $133,000
of license revenue and $74,000 of other revenue.
15
Gross profit. The gross margin rate (gross profit as a percentage of total revenue) decreased
slightly to 63% for the three months ended March 31, 2007 from 64% for the three months ended March
31, 2006. Gross profit increased to $9.7 million for the three months ended March 31, 2007, as
compared to $8.3 million for the three months ended March 31, 2006. The decrease in gross margin
rate 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 only a slight decrease in gross margin. Consumables and royalties comprised $7.3
million, or 47%, of revenue for the current quarter and $7.3 million, or 56%, for the quarter ended
March 31, 2006. We anticipate continued fluctuation in gross margin rate and related gross profit
primarily as a result of variability in partner bulk purchases and absolute number of sales of
quarterly system sales.
Research and development expense. Research and development expenses increased to $2.0 million
for the three months ended March 31, 2007 from $1.9 million for the comparable period in 2006. The
increase was primarily related to additional personnel costs associated with the increase in
employees to 60 at March 31, 2007 from 43 at March 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.
Selling, general and administrative expense. Selling, general and administrative expenses
increased to $6.8 million for the three months ended March 31, 2007 from $5.8 million for the
comparable period in 2006. The increase was primarily related to additional personnel costs
associated with the increase in employees to 75 at March 31, 2007 from 65 at March 31, 2006.
Other income, net. Other income increased to $521,000 for the three months ended March 31,
2007 from $416,000 for the comparable period in 2006. The average rate earned on current invested
balances increased to 5.0% at March 31, 2007 from 4.1% at March 31, 2006. This increase in the
average rate earned is the result of an overall increase in market rates compared to the prior year
period.
Assay Segment
Selected financial data for the three months ended March 31, 2007 and 2006 of our Assay Segment
results follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2007 |
|
2006 |
Revenue |
|
$ |
1,192 |
|
|
$ |
|
|
Gross profit |
|
$ |
727 |
|
|
$ |
(7 |
) |
Gross margin percentage |
|
|
61 |
% |
|
|
|
|
Operating expenses |
|
$ |
1,932 |
|
|
$ |
435 |
|
Net operating (loss) |
|
$ |
(1,205 |
) |
|
$ |
(442 |
) |
Revenue. Revenues for the period were derived from LBG for the three months ended March
31, 2007 and from LMD for the month ended March 31, 2007. These revenues consist primarily of kits
of which the majority relate to our Cystic Fibrosis products.
Expense. Research and development expenses were $678,000 and $333,000 for the three months
ended March 31, 2007 and 2006, respectively. Selling, general and administrative expenses were
$1.3 million and $102,000 for the three months ended March 31, 2007 and 2006, respectively. 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.
The overall increase in operating expenses was primarily attributable to the addition of the LMD
division which contributed $1.4 million of operating expenses, or 71%. The LBG division
operating expenses increased 26% to $547,000, primarily as a result of increased activity
related to product development.
16
LIQUIDITY AND CAPITAL RESOURCES
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Cash and cash equivalents |
|
$ |
16,195 |
|
|
$ |
27,414 |
|
Short-term investments |
|
|
3,493 |
|
|
|
10,956 |
|
Long-term investments |
|
|
7,315 |
|
|
|
7,346 |
|
|
|
|
|
|
|
|
|
|
$ |
27,003 |
|
|
$ |
45,716 |
|
|
|
|
|
|
|
|
At March 31, 2007, we held cash, cash equivalents, and short-term and long-term
investments of $27.0 million and had working capital of $22.5 million. At December 31, 2006, we
held cash, cash equivalents, and short-term and long-term investments of $45.7 million and had
working capital of $44.2 million. In connection with closing the Tm Bioscience acquisition, we paid
off $13.2 million of Tm Biosciences debt, related fees and paid transactions expenses of
approximately $5.0 million (including $2.9 million of transaction
costs included as part of the purchase price and $2.1 million of LMD
transaction costs incurred prior to March 1, 2007). As a result of this transaction, our cash, cash equivalents and
investments were reduced by approximately $18.7 million during the quarter.
We have funded our operations to date primarily through the issuance of equity securities. Our
cash reserves are held directly or indirectly in a variety of short-term and long-term,
interest-bearing instruments, including obligations of the United States government or agencies
thereof and U.S. corporate debt securities.
Cash used in operations was $2.9 million for the three months ended March 31, 2007, compared
with cash provided by operations of $1.2 million for the three months ended March 31, 2006.
Our operating expenses during the three months ended March 31, 2007 were $10.8 million,
of which $2.7 million was research and development expense and $8.1 million was selling, general
and administrative expense. We expect research and development expenses to be between 10% and 18%
of total revenue for the remainder of 2007. Our expected increase in research and development
expenses for 2007 relative to 2006 is a result of our investing in the research and development
pipeline to support our content strategy, expanded focus on product development, and expenses
related to LMD. Our expected increase in selling, general and administrative expenses over those
of 2006 is primarily attributable to the addition of LMD.
Our future capital requirements will depend on a number of factors, including our success in
developing and expanding markets for our products, payments under possible future strategic
arrangements, continued progress of our research and development of potential products, the timing
and outcome of regulatory approvals, the need to acquire licenses to new technology, costs
associated with strategic acquisitions including integration costs and assumed liabilities, the
status of competitive products and potential cost associated with both protecting and defending our
intellectual property. Additionally, actions taken based on recommendations of our strategic
consulting study or the ongoing internal evaluation of our business could result in expenditures
not currently contemplated in our estimates for 2007. We believe, however, that our existing cash
and cash equivalents together with availability under our new credit facility as described below
are sufficient to fund our operating expenses, capital equipment requirements and other expected
liquidity requirements through 2007. Based upon our current operating plan and structure,
management anticipates total cash use for 2007 to be approximately $18 to $23 million, giving us an
anticipated balance in cash, cash equivalents, short-term and long-term investments at December 31,
2007 of $22 to $27 million. Factors that could affect this estimate, in addition to those listed
above, include: (i) continued collections of accounts receivable consistent with our historical
experience, (ii) our ability to manage our inventory levels consistent with past practices, (iii)
settlement of other accrued liabilities, (iv) signing of partnership agreements which include
significant up front license fees, and (v) unanticipated costs associated with, and the negative
operating cash flows resulting from, the LMD acquisition. See also the Safe Harbor Cautionary
Statement of this report and the Risk Factors in the Companys Annual Report on Form 10-K for the
year ended December 31, 2006.
On March 1, 2007, the Company entered into a senior revolving credit facility with JPMorgan
Chase Bank, N.A., which provides borrowings of up to a maximum aggregate principal amount
outstanding of $15.0 million based on availability under a borrowing base consisting of eligible
accounts and inventory. The obligations under the senior
17
revolving credit facility are guaranteed by the wholly-owned domestic subsidiaries of the Company
and secured by all of the accounts, equipment inventory and general intangibles (excluding
intellectual property) of the Company and the guarantors including the pledge of an intercomany
note from Tm Bioscience and payable to the Company. Loans under the senior credit facility accrue
interest on the basis of either a base rate or a LIBOR rate. The base rate is calculated daily and
is the greater of (i) prime minus 1.00% and (ii) federal funds rate plus .50%. Borrowings at the
LIBOR rate are based on one, two or three month periods and interest is calculated by taking the
sum of (i) the product of LIBOR for such period and statutory reserves plus (ii) 1.75%. We pay a
fee of 0.125% per annum on the unfunded portion of the lenders aggregate commitment under the
facility. Based on current calculations, approximately $8.9 million is available for borrowing at March 31,
2007.
The senior credit facility contains conditions to making loans, representations,
warranties and covenants, including financial covenants customary for a transaction of this type.
Financial covenants include (i) a tangible net worth covenant of $45.0 million prior to the
acquisition Tm Bioscience and $25.0 million following the acquisition and (ii) a liquidity
requirement of availability not less than the funded debt of the Company and its subsidiaries
(including Tm Bioscience) calculated using the unencumbered cash, cash equivalents and marketable
securities of the Company and the guarantors. The senior credit facility also contains customary
events of default as well as restrictions on undertaking certain specified corporate actions,
including, among others, asset dispositions, acquisitions and other investments, dividends,
fundamental corporate changes such as mergers and consolidations, incurrence of additional
indebtedness, creation of liens and negative pledges, transactions with affiliates and agreements
as to certain subsidiary restrictions and the creation of additional subsidiaries. If an event of
default occurs that is not otherwise waived or cured, the lender may terminate its obligations to
make loans under the senior credit facility and may declare the loans then outstanding under the
senior credit facility to be due and payable. We believe we are currently in compliance with our
financial and other covenants under the senior credit facility. As of March 31, 2007, no amounts
were outstanding under the senior revolving credit facility.
To the extent capital resources are insufficient to meet future capital requirements, we will
have to raise additional funds to continue the development and deployment of our technologies.
There can be no assurance that debt or equity funds will be available on favorable terms, if at
all. To the extent that additional capital is raised through the sale of equity or convertible debt
securities, the issuance of those securities could result in dilution to our stockholders.
Moreover, incurring debt financing (under our new credit facility or otherwise) could result in a
substantial portion of our operating cash flow being dedicated to the payment of principal and
interest on such indebtedness, could render us more vulnerable to competitive pressures and
economic downturns and could impose restrictions on our operations. If adequate funds are not
available, we may be required to curtail operations significantly or to obtain funds through
entering into agreements on unattractive terms.
Contractual Obligations
We currently have approximately $6.9 million in non-cancelable obligations for the next 12
months. These obligations are included in our estimated cash usage described below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due By Period |
|
|
|
|
|
|
|
Less Than |
|
|
|
|
|
|
|
|
|
|
More Than |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
Non-cancelable rental obligations |
|
$ |
5,962 |
|
|
$ |
2,318 |
|
|
$ |
3,544 |
|
|
$ |
100 |
|
|
$ |
|
|
Non-cancelable purchase
obligations (1) |
|
|
5,180 |
|
|
|
4,580 |
|
|
|
600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,142 |
|
|
$ |
6,898 |
|
|
$ |
4,144 |
|
|
$ |
100 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
(1) |
|
Purchase obligations include contractual arrangements in the form of
purchase orders primarily a result of normal inventory purchases or minimum payments due resulting
when minimum purchase commitments are not met. Purchase obligations relating to purchase orders do
not extend beyond a year; however, we would expect future years to have these purchase commitments
that will arise in the ordinary course of business and will generally increase or decrease
according to fluctuations in overall sales volume. |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. Our interest income is sensitive to changes in the general level of
domestic interest rates, particularly since our investments are in short-term and long-term
instruments held to maturity. A 50 basis point fluctuation from average investment returns at March
31, 2007 would yield an approximate 11% variance in overall investment return. Due to the nature of
our investments, we have concluded that there is no material market risk exposure.
Our
revolving credit facility also will be affected by fluctuations in interest rates as it is
based on prime minus 1% or the Federal Funds Effective Rate in effect plus 0.50%. As of March 31,
2007, the Company has not drawn on this facility.
Foreign Exchange Risk. As of March 31, 2007, as a result of our foreign operations, we have
costs, assets and liabilities that are denominated in foreign currencies, primarily Canadian
dollars and to a lesser extent the Euro. For example, some fixed asset purchases and certain
expenses of our Canadian subsidiary, LMD, are denominated in Canadian dollars while sales of
products are primarily denominated in U.S. dollars. All transactions in our Netherlands subsidiary
are denominated in Euros. As a consequence, movements in exchange rates could cause our foreign currency denominated
expenses to fluctuate as a percentage of net revenue, affecting our profitability and cash flows.
In addition, the indirect effect of fluctuations in interest rates and foreign currency
exchange rates could have a material adverse effect on our business financial condition and results
of operations. For example currency exchange rate fluctuations could affect international demand
for our products. In addition, interest rates fluctuations could affect our customers buying
patterns. Furthermore, interest rate and currency exchange rate fluctuations may broadly influence
the United States and foreign economies resulting in a material adverse effect on our business,
financial condition and results of operations. As a result, we cannot give any assurance as to the
effect that future changes in foreign currency rates will have on our consolidated financial
position, results of operations or cash flows; however, foreign currency fluctuations did not have
a material effect on our consolidated results for the quarter ended March 31, 2007.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our senior management, including our
President and Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of
the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934 (the Exchange Act), as of the end
of the period covered by this quarterly report. Based on that evaluation, our senior management,
including our President and Chief Executive Officer and Chief Financial Officer, concluded that as
of the end of the period covered by this quarterly report our disclosure controls and procedures
effectively and timely provide them with material information relating to the Company (and its
consolidated subsidiaries) required to be disclosed in the reports the Company files or submits
under the Exchange Act.
Due to the acquisition of LMD we were required to implement processes and controls over
transactions related to those operations. As of March 31, 2007, we have not tested the operating
effectiveness of the internal controls related to the integration of LMD. In compliance with PCAOB regulations, evaluation of LMD controls
under Sarbanes-Oxley are not required until the fourth quarter of 2008.
19
Changes in Internal Control over Financial Reporting
Other than stated above, there were no changes in internal control over financial reporting
identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) during the
period covered by this quarterly report that have materially affected, or are reasonably likely to
materially affect, our existing internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 26, 2005, the Company was served with a complaint, filed by Rules Based Medicine,
Inc. (RBM) in state district court in Travis County, Texas seeking a declaratory judgment that
the formation of HealthMAP Laboratories, Inc. (subsequently renamed the Biophysical Corporation)
did not constitute a usurpation of an RBM corporate opportunity and that RBM has the necessary
contractual license rights under its existing agreement with the Company to perform certain testing
services on behalf of BioPhysical Corporation. On May 19, 2005, we filed an answer to this
complaint denying all claims brought by RBM. On June 21, 2005, the parties entered into an
agreement, which was subsequently entered with the court on June 22, 2005. Pursuant to this
agreement, the parties agreed that RBM would not file any claims related to this matter against the
Company until August 1, 2005, and that the Company would not file any claims related to this matter
against RBM until August 16, 2005, in order to continue to pursue settlement negotiations. The
parties were unable to reach agreement on the terms of settlement. RBM re-filed a lawsuit
against us on August 12, 2005, seeking a declaratory judgment against the Company as set forth
above. In response, we filed an answer and counterclaims against RBM, as well as new claims
against Mark Chandler and Craig Benson, officers of RBM, on August 19, 2005. The parties continued
with discovery until late January 2007, at which point settlement discussions began. A
confidential settlement agreement has been entered into, the terms of which are subject to certain
conditions. The parties anticipate that if all conditions called for are met, this matter will be
formally dismissed in October of 2007. Currently the parties anticipate that the matter
will be abated at that time.
ITEM 1A. RISK FACTORS
Reference is made to the factors set forth under the caption Safe Harbor Cautionary
Statement in Part I Item 2 of this report and other risk factors described in our Annual Report on
Form 10-K, which are incorporated herein by reference. The description below provides a material
change to the previously disclosed risk factors affecting our business.
Failure to effectively integrate LMD, achieve anticipated synergies and utilize the broader Luminex
distribution relationships may result in prolonged operating losses in the Assay Segment which
would adversely affect the Companys business, consolidated statements of operations and financial condition.
The historic operations of LMD, when operated separately as Tm Bioscience, incurred
significant operating losses and had accrued an accumulated deficit of $74.4 million since
inception. These historic operating losses and the accumulated deficit were considered in
connection with the acquisition purchase price; however, LMD, on a go
forward basis, will need to
achieve synergies as a result of the merger, with, among other matters, a reduction in head count,
elimination of stand alone public company costs and certain other selling, general and
administrative expenses, and the elimination of significant interest expense as a result of the debt
reduction of $13.2 million at closing. LMD anticipates it will be able to leverage its
distribution opportunities and launch additional products resulting in increased revenues through
the Luminex strategic partner relationships; however, no assurances that the synergies or revenue
opportunities can be achieved and, if the consolidated Company fails to achieve such improvements,
the LMD operations will adversely affect the Companys business, consolidated statements of operations and
financial condition.
20
ITEM 2. UNREGISTRED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The stock repurchase activity for the first quarter of 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ISSUER PURCHASES OF EQUITY SECURITIES |
|
|
|
|
|
|
|
|
|
|
Total Number of Shares |
|
Appromixate Dollar Value of |
|
|
Total Number of |
|
Average Price |
|
Purchased as Part of |
|
Shares that May Yet Be |
|
|
Shares |
|
Paid per Share |
|
Publicly Announced |
|
Purchased Under the Plans or |
Period |
|
Purchased |
|
(1)($) |
|
Plans of Programs |
|
Programs |
|
01/1/07 - 01/31/07 |
|
|
89 |
|
|
|
12.75 |
|
|
|
|
|
|
|
|
|
02/1/07 - 02/28/07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
03/1/07 - 03/31/07 |
|
|
17,406 |
|
|
|
14.17 |
|
|
|
|
|
|
|
|
|
|
Total First Quarter |
|
|
17,495 |
|
|
$ |
14.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Shares purchased are attributable to the withholding of shares by Luminex to satisfy the
payment of tax obligations related to the vesting of restricted shares. |
21
ITEM 6. EXHIBITS
The following exhibits are filed herewith:
|
|
|
Exhibit |
|
|
Number |
|
Description of Documents |
|
10.1
|
|
Amendment to Restricted Stock Agreement, dated as of March 25, 2007, by and between Luminex
Corporation and Patrick J. Balthrop, Sr. |
|
|
|
31.1
|
|
Certification by CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification by CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
LUMINEX CORPORATION |
|
Date: May 10, 2007 |
|
|
|
By: |
/s/ HARRISS T. CURRIE
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Harriss T. Currie |
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Vice President, Finance and Chief Financial
Officer (Principal Financial Officer) |
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By: |
/s/ PATRICK J. BALTHROP
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Patrick J. Balthrop |
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President and Chief Executive Officer (Principal
Executive Officer) |
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