U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended June 30, 2004
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 000-50862
LUMERA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 91-2011728 | |
| (State or Other Jurisdiction of Incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 19910 North Creek Parkway, Bothell, Washington | 98011-3008 | |
| (Address of Principal Executive Offices) | (Zip Code) | |
(425) 415-6900
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
As of August 1, 2004, 16,484,730 shares of the Company’s common stock, $0.001 par value, were outstanding.
| Page | ||||
| PART I FINANCIAL INFORMATION |
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| Item 1 - |
Financial Statements (unaudited) |
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| Condensed Balance Sheets as of June 30, 2004 and December 31, 2003 |
3 | |||
| Condensed Statements of Operations for the three and six months ended June 30, 2004 and 2003 |
4 | |||
| Condensed Statements of Cash Flows for the six months ended June 30, 2004 and 2003 |
5 | |||
| 6 | ||||
| Item 2 - |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
12 | ||
| Item 3 - |
34 | |||
| Item 4 - |
35 | |||
| PART II OTHER INFORMATION | ||||
| Item 2 - |
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities |
36 | ||
| Item 4 - |
36 | |||
| Item 6 - |
37 | |||
2
LUMERA CORPORATION
(Unaudited)
| June 30, 2004 |
December 31, 2003 |
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| ASSETS |
||||||||
| CURRENT ASSETS |
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| Cash and cash equivalents |
$ | 657,000 | $ | 560,000 | ||||
| Accounts receivable |
— | 151,000 | ||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts |
117,000 | 166,000 | ||||||
| Prepaid stock-based research costs |
— | 159,000 | ||||||
| Other current assets |
1,077,000 | 55,000 | ||||||
| Total current assets |
1,851,000 | 1,091,000 | ||||||
| Property and equipment, net |
2,369,000 | 2,867,000 | ||||||
| Other assets |
33,000 | 100,000 | ||||||
| TOTAL ASSETS |
$ | 4,253,000 | $ | 4,058,000 | ||||
| LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ DEFICIT |
||||||||
| CURRENT LIABILITIES |
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| Accounts payable |
$ | 434,000 | $ | 159,000 | ||||
| Payable to Microvision |
37,000 | 42,000 | ||||||
| Current portion of research liability |
78,000 | — | ||||||
| Accrued liabilities |
1,315,000 | 576,000 | ||||||
| Notes payable - current |
2,085,000 | — | ||||||
| Total current liabilities |
3,949,000 | 777,000 | ||||||
| Research liability |
— | 1,948,000 | ||||||
| Other long-term liabilities |
244,000 | 16,000 | ||||||
| Total liabilities |
4,193,000 | 2,741,000 | ||||||
| COMMITMENTS AND CONTINGENCIES (Note 7) |
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| MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK |
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| Mandatorily redeemable convertible preferred stock, no par value, 5,500,000 shares authorized; 3,985,025 and 3,735,025 issued and outstanding at June 30, 2004 and December 31, 2003, respectively |
27,706,000 | 27,206,000 | ||||||
| SHAREHOLDERS’ DEFICIT |
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| Class A Common stock, no par value, 20,000,000 shares authorized; 802,414 shares issued and outstanding at June 30, 2004 and December 31, 2003 |
5,358,000 | 3,361,000 | ||||||
| Class B Common stock, no par value, 10,000,000 shares authorized; 5,370,000 issued and outstanding at June 30, 2004 and December 31, 2003 |
105,000 | 105,000 | ||||||
| Deferred stock-based compensation |
(961,000 | ) | (31,000 | ) | ||||
| Accumulated deficit |
(32,148,000 | ) | (29,324,000 | ) | ||||
| Total shareholders’ deficit |
(27,646,000 | ) | (25,889,000 | ) | ||||
| TOTAL LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ DEFICIT |
$ | 4,253,000 | $ | 4,058,000 | ||||
The accompanying notes are an integral part of these condensed financial statements.
3
LUMERA CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
| Three months ended June 30, |
Six months ended June 30, |
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| 2004 |
2003 |
2004 |
2003 |
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| Revenue |
$ | 288,000 | $ | 396,000 | $ | 604,000 | $ | 765,000 | ||||||||
| Cost of revenue |
188,000 | 185,000 | 382,000 | 383,000 | ||||||||||||
| GROSS PROFIT |
100,000 | 211,000 | 222,000 | 382,000 | ||||||||||||
| Research and development (benefit) expense |
(724,000 | ) | 2,034,000 | 1,070,000 | 4,039,000 | |||||||||||
| Marketing, general and administrative expense |
971,000 | 282,000 | 1,891,000 | 622,000 | ||||||||||||
| Total operating expenses |
247,000 | 2,316,000 | 2,961,000 | 4,661,000 | ||||||||||||
| Loss from operations |
(147,000 | ) | (2,105,000 | ) | (2,739,000 | ) | (4,279,000 | ) | ||||||||
| Interest income |
1,000 | 11,000 | 1,000 | 34,000 | ||||||||||||
| Interest expense |
(86,000 | ) | — | (86,000 | ) | — | ||||||||||
| Realized gain on sale of investment securities |
— | 12,000 | — | 39,000 | ||||||||||||
| NET LOSS |
$ | (232,000 | ) | $ | (2,082,000 | ) | $ | (2,824,000 | ) | $ | (4,206,000 | ) | ||||
| Deemed dividend upon issuance of mandatorily redeemable convertible preferred stock |
— | — | (500,000 | ) | — | |||||||||||
| NET LOSS AVAILABLE TO COMMON SHAREHOLDERS |
$ | (232,000 | ) | $ | (2,082,000 | ) | $ | (3,324,000 | ) | $ | (4,206,000 | ) | ||||
| NET LOSS PER SHARE-BASIC AND DILUTED |
$ | (0.04 | ) | $ | (0.34 | ) | $ | (0.54 | ) | $ | (0.68 | ) | ||||
| WEIGHTED-AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED |
6,172,400 | 6,172,400 | 6,172,400 | 6,172,400 | ||||||||||||
The accompanying notes are an integral part of these condensed financial statements.
4
LUMERA CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| Six months ended June 30, |
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| 2004 |
2003 |
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| Cash flows from operating activities: |
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| Net loss |
$ | (2,824,000 | ) | $ | (4,206,000 | ) | ||
| Adjustments to reconcile net loss to net cash used in operations: |
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| Depreciation |
595,000 | 594,000 | ||||||
| Noncash expenses related to issuance of stock, options and amortization of deferred compensation |
1,266,000 | 504,000 | ||||||
| Realized gain on sale of investment securities |
— | (39,000 | ) | |||||
| Interest on notes payable |
86,000 | — | ||||||
| Change in: |
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| Accounts receivable |
151,000 | (94,000 | ) | |||||
| Costs and estimated earnings in excess of billings on uncompleted contracts |
49,000 | (10,000 | ) | |||||
| Other current assets |
(345,000 | ) | 85,000 | |||||
| Other assets |
67,000 | 33,000 | ||||||
| Accounts payable |
259,000 | 39,000 | ||||||
| Payable to Microvision |
(5,000 | ) | 231,000 | |||||
| Accrued liabilities |
(35,000 | ) | 187,000 | |||||
| Research liability |
(1,870,000 | ) | 977,000 | |||||
| Net cash used in operating activities |
(2,606,000 | ) | (1,699,000 | ) | ||||
| Cash flows from investing activities: |
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| Sales of investment securities |
— | 2,009,000 | ||||||
| Purchases of property and equipment |
(97,000 | ) | (352,000 | ) | ||||
| Net cash (used in) provided by investing activities |
(97,000 | ) | 1,657,000 | |||||
| Cash flows from financing activities: |
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| Proceeds from note payable |
2,300,000 | — | ||||||
| Net proceeds from issuance of mandatorily redeemable convertible preferred stock |
500,000 | — | ||||||
| Net cash provided by financing activities |
2,800,000 | — | ||||||
| Net increase (decrease) in cash and cash equivalents |
97,000 | (42,000 | ) | |||||
| Cash and cash equivalents at beginning of period |
560,000 | 687,000 | ||||||
| Cash and cash equivalents at end of period |
$ | 657,000 | $ | 645,000 | ||||
| Value assigned to warrants issued in connection with convertible note |
$ | 301,000 | $ | — | ||||
| Prepaid offering costs included in accounts payable and accrued liabilities |
$ | 677,000 | $ | — | ||||
The accompanying notes are an integral part of these condensed financial statements.
5
Notes to Condensed Financial Statements
1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION
Lumera Corporation (“Company”) was incorporated on January 7, 2000 (“Inception”) under the laws of the state of Washington and reincorporated in 2004 under the laws of the state of Delaware. The Company is a majority owned subsidiary of Microvision, Inc. (“Microvision”). The Company was established to develop, manufacture and market devices using proprietary polymer materials. Until December 31, 2003, the Company was considered to be in the development stage. In 2004, the Company commercialized the devices for potential wireless networking and optical networking applications and had largely completed financial planning, establishing sources of supply, acquiring plant and equipment and recruiting personnel. Therefore, Lumera was considered to have exited the development stage.
The Company prepared the condensed financial statements included herein, without audit, pursuant to the rules and regulations of the United States of America Securities and Exchange Commission (SEC). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted as permitted by such rules and regulations. These condensed statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2003 previously filed with the Company’s Registration Statement on Form S-1, initially filed on May 19, 2004 and as amended through July 22, 2004.
In our opinion these unaudited condensed financial statements contain all of the adjustments (normal and recurring in nature) necessary to present fairly our financial position as of June 30, 2004, the results of operations for the three and six month periods ended June 30, 2004 and 2003, and the cash flows for the six month periods ended June 30, 2004 and 2003. The results of operations for the periods presented may not be indicative of those you may expect for the full year.
Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. 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 liabilities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates – The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s management has identified revenue recognition and accounting for research payments under the University of Washington agreements as areas where significant estimates and assumptions have been made in preparing the financial statements. The Company also evaluates the requirement for allowances for uncollectible receivables, and valuation allowances for deferred income tax assets.
Revenue Recognition – Revenue has primarily been generated from research and development cost reimbursement contracts for the United States government. Revenue on such contracts is recorded using the percentage-of-completion method measured on a cost-incurred basis. Changes in contract performance, contract conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and revenues and are recognized in the period in which the revisions are determined. Profit incentives are included in revenue when realization is assured.
Losses, if any, are recognized in full as soon as identified. Losses occur when the estimated direct and indirect costs to complete the contract exceed the unrecognized revenue on the contract. The Company evaluates the reserve for contract losses on a contract-by-contract basis. No losses have been incurred on any contracts to date.
All of the Company’s current and prior contracts with the government, which accounted for substantially all of the Company’s revenues since 2001, have been or are cost plus fixed fee type contracts. Under the terms of a cost plus fixed fee contract, the United States government reimburses the Company for actual direct and indirect costs incurred in performing the contracted services. The Company is under no obligation to spend more than the contract value to complete the contracted services. In addition, completion of the contracted services is generally on a best efforts basis. If the services are not completed, the government has the option to negotiate a follow-on contract to complete the services or to not pursue the services further with the Company. Contract deliveries consist of monthly financial reports, periodic technical reports and any devices if they have been successfully fabricated. There are no contractual provisions for repayments of any amounts disbursed to date under these contracts.
Cost and estimated earnings in excess of billings on uncompleted contracts comprises amounts of revenue recognized on contracts that the Company has not yet billed to a customer because the amounts were not contractually billable at the balance sheet date.
6
Research and Development – Research and development costs are expensed as incurred. As described in Note 7, the Company issued shares of common stock in connection with a research agreement. The value of these shares is amortized over the period of the research agreement.
Stock-Based Compensation – The Company has a stock-based employee compensation plan, which is described further in Note 5. The Company accounts for stock-based employee compensation arrangements on the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees and related amendments and interpretations. The Company complies with the disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, which requires fair value recognition for employee stock-based compensation. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (“EITF”) Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.
For employee stock options granted prior to the Company’s initial public offering (“IPO”) in July 2004, the fair value for these options were estimated at the date of grant using the minimum value method. The following table illustrates the effect on net loss and net loss per share as if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation (in thousands, except per share data):
| For the three months ended June 30, |
For the six months ended | |||||||||||||||