UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934.
|
For
the
quarterly period ended September 30, 2008
¨
|
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 – Suite 100, Bothell, Washington
|
98011
|
(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. Yes
x
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
¨
|
Accelerated
filer
|
x
|
Non-accelerated
filer
|
¨
(Do not check if smaller reporting company)
|
Smaller reporting
company
|
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act): Yes
¨
No
x
.
As
of
October 31, 2008, 24,088,352 shares of the Company’s common stock, $0.001 par
value, were outstanding.
PART
I
FINANCIAL
INFORMATION
|
|
Page
|
Item
1 - Financial Statements (unaudited)
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2008 and December
31,
2007
|
|
3
|
|
|
|
Condensed
Consolidated Statements of Operations for the three and nine months
ended
|
|
|
September
30, 2008 and 2007
|
|
4
|
|
|
|
Condensed
Consolidated Statements of Comprehensive Loss for the three and nine
months ended
|
|
|
September
30, 2008 and 2007
|
|
5
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the nine months
ended
|
|
|
September
30, 2008 and 2007
|
|
6
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
7
|
|
|
|
Item
2 - Management’s Discussion and Analysis of Financial Condition and
Results of Operations
|
|
14
|
|
|
|
Item
3 -Quantitative and Qualitative Disclosures About Market
Risk
|
|
23
|
|
|
|
Item
4 - Controls and Procedures
|
|
23
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
|
|
|
Item
1 - Legal Proceedings
|
|
24
|
|
|
|
Item
1A - Risk Factors
|
|
24
|
|
|
|
Item
6 – Exhibits
|
|
28
|
PART
I
FINANCIAL
INFORMATION
ITEM
1.
FINANCIAL
STATEMENTS
LUMERA
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
7,045,000
|
|
$
|
7,132,000
|
|
Investment
securities, available-for-sale
|
|
|
-
|
|
|
7,494,000
|
|
Accounts
receivable
|
|
|
3,000
|
|
|
57,000
|
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
559,000
|
|
|
101,000
|
|
Other
current assets
|
|
|
334,000
|
|
|
350,000
|
|
Total
current assets
|
|
|
7,941,000
|
|
|
15,134,000
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
1,988,000
|
|
|
2,319,000
|
|
Assets
held for sale
|
|
|
34,000
|
|
|
314,000
|
|
Restricted
investments
|
|
|
700,000
|
|
|
700,000
|
|
Other
assets
|
|
|
46,000
|
|
|
46,000
|
|
TOTAL
ASSETS
|
|
$
|
10,709,000
|
|
$
|
18,513,000
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
675,000
|
|
$
|
923,000
|
|
Deferred
rent, current portion
|
|
|
117,000
|
|
|
105,000
|
|
Accrued
liabilities
|
|
|
988,000
|
|
|
1,055,000
|
|
Current
liabilities of disposal group held for sale
|
|
|
-
|
|
|
879,000
|
|
Total
current liabilities
|
|
|
1,780,000
|
|
|
2,962,000
|
|
|
|
|
|
|
|
|
|
Deferred
rent, net of current portion
|
|
|
211,000
|
|
|
303,000
|
|
Total
liabilities
|
|
|
1,991,000
|
|
|
3,265,000
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value, 120,000,000 shares authorized; 24,088,352
shares
issued and outstanding at September 30, 2008, and 20,055,852 shares
issued
and outstanding at December 31, 2007
|
|
|
24,000
|
|
|
20,000
|
|
Additional
Paid-in Capital
|
|
|
94,717,000
|
|
|
91,998,000
|
|
Accumulated
other comprehensive income
|
|
|
-
|
|
|
4,000
|
|
Accumulated
deficit
|
|
|
(86,023,000
|
)
|
|
(76,774,000
|
)
|
Total
shareholders' equity
|
|
|
8,718,000
|
|
|
15,248,000
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$
|
10,709,000
|
|
$
|
18,513,000
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
LUMERA
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,565,000
|
|
$
|
624,000
|
|
$
|
3,548,000
|
|
$
|
2,418,000
|
|
Cost
of revenue
|
|
|
785,000
|
|
|
344,000
|
|
|
1,674,000
|
|
|
1,271,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
780,000
|
|
|
280,000
|
|
|
1,874,000
|
|
|
1,147,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expense
|
|
|
437,000
|
|
|
938,000
|
|
|
2,009,000
|
|
|
2,148,000
|
|
Marketing,
general and administrative expense
|
|
|
1,913,000
|
|
|
2,822,000
|
|
|
6,847,000
|
|
|
7,010,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
2,350,000
|
|
|
3,760,000
|
|
|
8,856,000
|
|
|
9,158,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(1,570,000
|
)
|
|
(3,480,000
|
)
|
|
(6,982,000
|
)
|
|
(8,011,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
44,000
|
|
|
266,000
|
|
|
230,000
|
|
|
888,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(1,526,000
|
)
|
|
(3,214,000
|
)
|
|
(6,752,000
|
)
|
|
(7,123,000
|
)
|
Income/(Loss)
from discontinued operations
|
|
|
4,000
|
|
|
(1,617,000
|
)
|
|
(2,497,000
|
)
|
|
(3,747,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,522,000
|
)
|
$
|
(4,831,000
|
)
|
$
|
(9,249,000
|
)
|
$
|
(10,870,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME/(LOSS) PER SHARE-BASIC AND DILUTED -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
(0.06
|
)
|
$
|
(0.16
|
)
|
$
|
(0.32
|
)
|
$
|
(0.35
|
)
|
Discontinued
Operations
|
|
$
|
0.00
|
|
$
|
(0.08
|
)
|
$
|
(0.12
|
)
|
$
|
(0.19
|
)
|
Total
|
|
$
|
(0.06
|
)
|
$
|
(0.24
|
)
|
$
|
(0.44
|
)
|
$
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED-AVERAGE
SHARES OUTSTANDING - BASIC AND
DILUTED
|
|
|
23,407,193
|
|
|
20,055,352
|
|
|
21,200,773
|
|
|
20,055,352
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
LUMERA
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,522,000
|
)
|
$
|
(4,831,000
|
)
|
$
|
(9,249,000
|
)
|
$
|
(10,870,000
|
)
|
Other
comprehensive income (loss) - Unrealized holding gain (loss) arising
during period
|
|
|
-
|
|
|
10,000
|
|
|
(4,000
|
)
|
|
8,000
|
|
Comprehensive
loss
|
|
$
|
(1,522,000
|
)
|
$
|
(4,821,000
|
)
|
$
|
(9,253,000
|
)
|
$
|
(10,862,000
|
)
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements
.
LUMERA
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(9,249,000
|
)
|
$
|
(10,870,000
|
)
|
Adjustments
to reconcile net loss to net cash used in operations
|
|
|
|
|
|
|
|
Depreciation
|
|
|
559,000
|
|
|
668,000
|
|
Reserve
for collectibility of long-term note receivable
|
|
|
500,000
|
|
|
-
|
|
Noncash
expenses related to issuance of stock, options and amortization
of
deferred compensation
|
|
|
(56,000
|
)
|
|
1,814,000
|
|
Impairment
expense
|
|
|
243,000
|
|
|
-
|
|
Amortization
on investments
|
|
|
(60,000
|
)
|
|
(315,000
|
)
|
Noncash
deferred rent, net
|
|
|
(80,000
|
)
|
|
(65,000
|
)
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
54,000
|
|
|
290,000
|
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
(458,000
|
)
|
|
177,000
|
|
Other
current assets
|
|
|
16,000
|
|
|
(1,000
|
)
|
Accounts
payable (including current liabilities of disposal group held for
sale)
|
|
|
(702,000
|
)
|
|
(177,000
|
)
|
Accrued
liabilities (including current liabilities of disposal group held
for
sale)
|
|
|
(492,000
|
)
|
|
670,000
|
|
Net
cash used in operating activities
|
|
|
(9,725,000
|
)
|
|
(7,809,000
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Maturities
of investment securities
|
|
|
7,550,000
|
|
|
29,800,000
|
|
Purchases
of investment securities
|
|
|
-
|
|
|
(23,040,000
|
)
|
Issuance
of long term note receivable
|
|
|
(500,000
|
)
|
|
-
|
|
Purchases
of property and equipment
|
|
|
(191,000
|
)
|
|
(524,000
|
)
|
Net
cash provided by investing activities
|
|
|
6,859,000
|
|
|
6,236,000
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
proceeds from issuance of stock
|
|
|
2,739,000
|
|
|
|
|
Net
proceeds from the exercise of stock options
|
|
|
40,000
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
2,779,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(87,000
|
)
|
|
(1,573,000
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
7,132,000
|
|
|
10,521,000
|
|
Cash
and cash equivalents at end of period
|
|
$
|
7,045,000
|
|
$
|
8,948,000
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Notes
to Condensed Consolidated Financial Statements
1.
Basis
of Presentation
The
accompanying condensed consolidated financial statements of Lumera Corporation
(“Lumera” or the “Company”) have been prepared, 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. The year end
condensed consolidated balance sheet data was derived from audited financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America. These financial
statements should be read in conjunction with the audited financial statements
and footnotes included in the Company’s 2007 annual report on Form 10-K as filed
with the SEC and updated disclosures related to discontinued operations on
the
Company’s Form 8-K filed September 5, 2008.
These
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America, contain all
of
the adjustments (normal and recurring in nature) necessary, in our opinion,
to
state fairly our financial position as of September 30, 2008 and the results
of
operations, statement of comprehensive loss and cash flows for the periods
presented. The results of operations for the periods presented may not be
indicative of those which might be expected for the full year or any future
period.
Through
the first quarter of 2008, we managed our business in two reportable segments:
Electro-optics and Bioscience. In 2007, we contributed substantially all of
the
assets of our Bioscience segment to a newly formed wholly-owned subsidiary
company. Plexera Bioscience LLC (“Plexera”) was formed to further clarify the
purpose, business and funding requirements and market opportunities for both
Lumera and Plexera. In March 2008, the Company elected to exit its Bioscience
business, ceasing further investment in Plexera. In May 2008, the Company
determined that it would sell its interests in Plexera or otherwise dispose
of
Plexera’s assets and intellectual property. Based on the commitment to halt the
business and approval to sell the business without any continuing involvement
in
the business after the sale, the Company determined the accounting requirements
of SFAS No. 144 (“SFAS No. 144”)
Accounting
for the Impairment or Disposal of Long-Lived Assets
for
classifying the Plexera assets as held for sale and current liabilities of
disposal group held for sale and reporting their results of operations as
discontinued operations had been met (See Note 7 - Discontinued Operations).
The
condensed consolidated statements of operations for prior periods have been
adjusted to conform to this presentation.
We
account for long-lived assets in accordance with SFAS No. 144. This statement
requires that long-lived assets to be held and used by an entity be reviewed
for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Also, long-lived assets
to
be disposed of should be reported at the lower of the carrying amount or fair
value less cost to sell. The Company considers historical performance and future
estimated results in its evaluation of potential impairment and then compares
the carrying amount of the asset to the estimated future cash flows expected
to
result from the use of the asset. If the carrying amount of the asset exceeds
the estimated expected undiscounted future cash flows, the Company measures
the
amount of the impairment by comparing the carrying amount of the asset to its
fair value. The estimation of fair value is measured by discounting expected
future cash flows using the Company’s incremental borrowing rate.
Any
liabilities associated with exit or disposal activities are recorded in
accordance with Statement of Financial Accounting Standards No. 146 (“SFAS
No. 146”),
Accounting
for Obligations Associated with Disposal Activities
.
SFAS
No. 146 requires that liabilities be recognized for exit and disposal costs
only
when the liabilities are incurred, rather than upon the commitment to an exit
or
disposal plan.
We
account for our investment in Asyrmatos, Inc. under the equity method of
accounting in accordance with the provisions of Accounting Principles Board
Opinion No. 18 (“APB No. 18”) and FASB Interpretation No. 46( R),
Consolidation
of Variable Interest Entities
(as
amended) (“FIN 46”). (See Note 12 – Investment in Equity of Asyrmatos, Inc.).
2.
New Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157,
Fair
Value Measurements
(“SFAS
No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements.
SFAS
No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007; however, on February 12, 2008, the FASB issued FASB
Staff Position (“FSP”) No. FAS 157-2,
Effective
Date of FASB Statement No. 15,
(“FSP
No.
157-2”), which delays the effective date of SFAS No. 157 for nonfinancial assets
and nonfinancial liabilities except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least
annually). The Company is currently assessing the impact of SFAS No. 157
for nonfinancial assets and nonfinancial liabilities on its financial position
and results of operations. FSP No. 157-2 defers the effective date of SFAS
No.
157 to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within scope of FSP No. 157-2. We adopted
the provisions of SFAS No. 157 on January 1, 2008 for our financial assets
and
financial liabilities. Details related to the adoption of SFAS No.
157 and the impact on our financial position, results of operations or cash
flows is more fully discussed in Note 10 - Fair Value.
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
No. 159”). SFAS No. 159 permits entities to choose to measure certain financial
assets and liabilities at fair value. Unrealized gains and losses, arising
subsequent to adoption, are reported in earnings. SFAS No. 159 is effective
for
fiscal years beginning after November 15, 2007. The Company has adopted SFAS
No.
159 as of January 1, 2008 and has not elected the fair value option for any
items permitted under SFAS No. 159.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007),
Business
Combinations
(“SFAS
141(R)") which replaces SFAS No.141,
Business
Combinations
.
SFAS
141(R) retains the underlying concepts of SFAS 141 in that all business
combinations are still required to be accounted for at fair value under the
acquisition method of accounting but SFAS 141(R) changed the method of applying
the acquisition method in a number of significant aspects. SFAS 141(R) is
effective on a prospective basis for all business combinations for which the
acquisition date is on or after the beginning of the first annual period
subsequent to December 15, 2008, with the exception of the accounting for
valuation allowances on deferred taxes and acquired tax contingencies.
SFAS 141(R) amends SFAS 109 such that adjustments made to valuation
allowances on deferred taxes and acquired tax contingencies associated with
acquisitions that closed prior to the effective date of SFAS 141(R) would also
apply the provisions of SFAS 141(R). Early adoption is not allowed. We are
currently evaluating the effects, if any, that SFAS 141(R) may have on our
financial position, results of operations or cash flows.
3.
Net Loss per Share
Basic
net
loss per share is calculated on the basis of the weighted-average number of
common shares outstanding during the periods. Net loss per share assuming
dilution is calculated on the basis of the weighted-average number of common
shares outstanding and the dilutive effect of all potentially dilutive
securities, including common stock equivalents and convertible securities.
Basic
and
diluted net loss per share is the same because all potentially dilutive
securities outstanding are anti-dilutive. Potentially dilutive securities not
included in the calculation of diluted earnings per share include options and
warrants to purchase common stock. As of September 30, 2008 and 2007, we had
outstanding common stock options and warrants to purchase an aggregate of
5,977,188 and 4,615,152, respectively, which were excluded from the calculation
of diluted earnings per share.
As
a
result of the decision to cease Plexera operations, earnings or losses allocated
to the Plexera business are presented as discontinued operations in the
accompanying condensed consolidated financial statements.
4.
Property and equipment
Property
and equipment are stated at cost. We classify the net carrying values of
property and equipment as held for sale when the assets are actively marketed,
their sale is considered probable within one year and various other criteria
relating to their disposition are met. We discontinue depreciation of the
property and equipment at that time. In accordance with SFAS No. 144, we report
expense of assets classified as held for sale in discontinued operations for
all
periods presented if we will sell the assets on terms where we have no
continuing involvement after the sale. If active marketing ceases or the assets
no longer meet the criteria to be classified as held for sale, we reclassify
the
assets as held for use and resume depreciation. Depreciation is computed over
the estimated useful lives of the assets (two to five years) using the
straight-line method. Leasehold improvements are depreciated over the shorter
of
estimated useful lives or the initial lease term.
A
summary
of property and equipment at September 30, 2008 and December 31, 2007
follows:
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Computer
Equipment
|
|
$
|
905,000
|
|
$
|
856,000
|
|
Furniture
and Office Equipment
|
|
|
215,000
|
|
|
201,000
|
|
Lab
equipment
|
|
|
4,935,000
|
|
|
4,754,000
|
|
Leasehold
improvements
|
|
|
3,938,000
|
|
|
3,938,000
|
|
|
|
$
|
9,993,000
|
|
$
|
9,749,000
|
|
Less:
Accumulated depreciation
|
|
|
(8,005,000
|
)
|
|
(7,430,000
|
)
|
|
|
$
|
1,988,000
|
|
$
|
2,319,000
|
|
Long-lived
assets are reviewed by management for impairment of fair value whenever events
or changes in circumstances indicate that the carrying value of such assets
may
not be recoverable. Included in accumulated depreciation is an impairment loss
of $243,000 for certain of the Plexera assets. Plexera assets and accumulated
depreciation, including impairment charge are shown in Discontinued Operations
–
Note 7.
5.
Stock-Based Compensation
We
account for stock-based compensation costs under the provisions of SFAS No.
123(R), Share-Based Payment, (“FAS 123R”) and Staff Accounting Bulletin No. 107
(“SAB 107”) issued by the SEC in March 2005 and SAB 110 issued by the SEC
in December 2007.
Share
based compensation expense
The
following table shows the share-based compensation expense (benefit) related
to
employee grants recorded in the three and nine months ended September 30, 2008
and 2007:
|
|
For the three months ended
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Share-based
payment expense in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expense
|
|
$
|
50,000
|
|
$
|
83,000
|
|
$
|
98,000
|
|
$
|
207,000
|
|
Marketing,
general and administrative expense
|
|
|
41,000
|
|
|
341,000
|
|
|
170,000
|
|
|
1,245,000
|
|
|
|
$
|
91,000
|
|
$
|
424,000
|
|
$
|
268,000
|
|
$
|
1,452,000
|
|
The
table
above excludes $330,000 in net benefit recorded to stock-based compensation
due
to forfeitures related to discontinued operations for the nine-months ended
September 30, 2008. The table above excludes $6,000 of non-employee option
expense for the nine months ended September 30, 2008, accounted for in
accordance with EITF 96-18,
Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or
in Conjunction with Selling, Goods or Services
.
We
reduced share-based compensation expense by $74,000 and $688,000, for the three
and nine months ended September 30, 2008, respectively, mostly due to workforce
related forfeitures of unvested options during the three and nine months ended
September 30, 2008. There were no stock option exercises for the three months
ended September 30, 2008. Cash received from the exercise of options totaled
$40,000 for the nine months ended September 30, 2008. There were no stock option
exercises for the three and nine months ended September 30, 2007.
No
tax
benefit was recognized related to share-based compensation expense since we
have
never reported taxable income and have established a full valuation allowance
to
offset all of the potential tax benefits associated with our deferred tax
assets. Additionally, no share-based compensation expenses were capitalized
during the periods presented.
Valuation
assumptions
We
use
the Black-Scholes option pricing model in determining the fair value of stock
options, employing the following key assumptions during each respective period:
|
|
For the Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
Risk
Free Interest Rate
|
|
|
2.53%
- 3.87%
|
|
|
4.32%
- 5.06%
|
|
Expected
Life (in years)
|
|
|
6.25
|
|
|
6.25
|
|
Dividend
Yield
|
|
|
0.0%
|
|
|
0.0%
|
|
Volatility
|
|
|
75.0%
|
|
|
70.0%
|
|
The
risk-free rate is based on the U.S. Treasury yield curve in effect at the time
of grant. We do not anticipate declaring dividends in the foreseeable future.
The expected term of the option is based on the vesting terms of the respective
option and a contractual life of ten years using the simplified method
calculation as defined by SAB 110. Expected volatility is determined by blending
the annualized daily historical volatility of our stock price commensurate
with
the expected life of the option with volatility measures used by comparable
peer
companies. Our estimated forfeiture rate as of September 30, 2008 was 9%,
compared to 4% as of September 30, 2007. In conjunction with our restructuring
activities in March 2008, we reviewed our inception-to-date forfeitures,
including forfeitures attributable to the reduction in work force. As a result
of our review, we changed our estimated forfeiture rate to 9% effective
beginning in the first quarter of 2008, applicable to previously granted but
unvested option grants and to option grants during the current quarterly period.
Our stock price volatility and option lives involve management’s best estimates
at that time, both of which impact the fair value of the option calculated
under
the Black-Scholes methodology and, ultimately, the expense that will be
recognized over the life of the option.
Share-based
Payment Award Activity
The
following table summarizes the activity for employees under our Option Plans
for
the nine months ended September 30, 2008:
Share-based
Payment Award Activity
|
|
Shares
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining Contractual
Term (years)
|
|
Weighted
Average Grant
Date Fair
Value
|
|
Aggregate Intrinsic
Value
|
|
Shares Outstanding
as of December 31, 2007
|
|
|
3,070,376
|
|
$
|
4.96
|
|
|
7.32
|
|
|
|
|
|
-
|
|
Granted
|
|
|
393,150
|
|
|
2.23
|
|
|
|
|
$
|
1.52
|
|
|
-
|
|
Forfeited/expired/cancelled:
|
|
|
(1,428,963
|
)
|
|
5.26
|
|
|
|
|
|
|
|
|
-
|
|
Exercised
|
|
|
(20,000
|
)
|
|
2.00
|
|
|
|
|
|
|
|
$
|
13,000
|
|
Outstanding
at September 30, 2008
|
|
|
2,014,563
|
|
$
|
4.25
|
|
|
7.44
|
|
|
|
|
$
|
-
|
|
Options
exercisable at September 30, 2008
|
|
|
1,296,562
|
|
$
|
4.76
|
|
|
6.77
|
|
|
|
|
$
|
-
|
|
The
aggregate intrinsic value is calculated as the difference between the exercise
price of the underlying awards and the quoted price of the Company’s common
stock for all options that were in-the-money at September 30, 2008.
There
were no options granted during the three months ended September 30, 2008. The
weighted average grant date fair value of options granted was $2.47 during
the
three months ended September 30, 2007. There were no options exercised for
the
three months ended September 30, 2008 or 2007. The aggregate fair value of
stock
options vested during the three months ended September 30, 2008 and 2007 was
$90,000 and $216,000, respectively.
The
weighted average grant date fair value of options granted was $1.52 and $2.92
during the nine months ended September 30, 2008, and 2007, respectively. The
aggregate intrinsic value of stock options exercised during the nine months
ended September 30, 2008, was $13,000, determined as of the date of option
exercise. There were no options exercised for the nine months ended September
30, 2007. The aggregate fair value of stock options vested during the nine
months ended September 30, 2008 and 2007 was $1,077,000 and $1,466,000,
respectively.
As
of
September 30, 2008, there was approximately $670,000, net of estimated
forfeitures, of total unrecognized compensation cost, the majority of which
will
be recognized over a remaining requisite service period of 2 years.
6.
Segment Information
We
managed our business through two reportable segments: Electro-Optics and
Bioscience (“Plexera”). In May 2008, we committed to a plan to sell or otherwise
dispose of the assets and intellectual property of Plexera (See Note 7 -
Discontinued Operations). Revenue and operating loss amounts in this section
are
presented on a basis consistent with accounting principles generally accepted
in
the United States of America and include certain allocations attributable to
each segment. Segment information in the financial statements is presented
on a
basis consistent with our internal management reporting. Plexera’s results of
operations are now reported as discontinued operations, in accordance with
SFAS
No. 144. Certain corporate level expenses have been excluded from our segment
operating results and are analyzed separately.
Identifiable
assets by segment are not used in the Chief Operating Decision Makers’ analysis
and have been excluded. Depreciation is allocated to each segment based on
management’s estimate of property and equipment. The revenues and operating loss
by reportable segment are as follows:
|
|
For the three months ended
|
|
|
|
For the nine months ended
|
|
|
|
|
|
September 30,
|
|
Percentage
|
|
September 30,
|
|
Percentage
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electro-optics
|
|
$
|
1,565,000
|
|
$
|
624,000
|
|
|
151
|
%
|
$
|
3,548,000
|
|
$
|
2,418,000
|
|
|
47
|
%
|
Total
|
|
$
|
1,565,000
|
|
$
|
624,000
|
|
|
151
|
%
|
$
|
3,548,000
|
|
$
|
2,418,000
|
|
|
47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electro-optics
|
|
$
|
(54,000
|
)
|
$
|
(1,057,000
|
)
|
|
-95
|
%
|
$
|
(1,662,000
|
)
|
$
|
(1,997,000
|
)
|
|
-17
|
%
|
Corporate
expenses
|
|
|
(1,516,000
|
)
|
|
(2,423,000
|
)
|
|
-37
|
%
|
|
(5,320,000
|
)
|
|
(6,014,000
|
)
|
|
-12
|
%
|
Total
loss from continuing operations
|
|
$
|
(1,570,000
|
)
|
$
|
(3,480,000
|
)
|
|
-55
|
%
|
$
|
(6,982,000
|
)
|
$
|
(8,011,000
|
)
|
|
-13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(Loss)
from Discontinued Operations
|
|
$
|
4,000
|
|
$
|
(1,617,000
|
)
|
|
-100
|
%
|
$
|
(2,497,000
|
)
|
$
|
(3,747,000
|
)
|
|
-33
|
%
|
7.
Discontinued Operations
In
May
2008, the Company committed to a plan to sell or otherwise dispose of the assets
and intellectual property of its Plexera business. Substantially all the assets
of Plexera will be included in the sale and will consist primarily of
intellectual property and certain property and equipment.
In
accordance with SFAS No. 144, the disposal of assets constitute a component
of
the entity and have been accounted for as discontinued operations and
accordingly, the assets and liabilities have been segregated in the accompanying
condensed consolidated balance sheet and classified as assets held for sale
and
current liabilities of disposal group held for sale. The operating results
relating to these assets held for sale have been reclassified from continuing
operations and reported as discontinued operations in the accompanying 2008
and
2007 condensed consolidated statement of operations.
We
accounted for the impairment of assets in accordance with SFAS No. 144.
Following its decision to exit Plexera, management reviewed
Plexera’s property and equipment to determine recoverability. The
Plexera property and equipment is comprised of assets capitalized and deployed
in Plexera’s business including computer equipment, furniture and office
equipment, lab equipment and leasehold improvements. Plexera assets that are
useful to Lumera’s ongoing business have been redeployed. Included in loss from
discontinued operations for the nine months ended September 30, 2008 is an
impairment loss of $243,000 for certain of the Plexera assets.
In
conjunction with exiting Plexera in March 2008, we recorded severance costs
under the provision of SFAS No. 146, recording a reserve for severance costs
of
$387,000. Through September 30, 2008 we made cash severance payments totaling
$387,000, leaving a zero reserve balance.
In
conjunction with exiting Plexera, we cancelled certain contractual commitments
or otherwise provided for future contract costs under the provisions of SFAS
No.
146, recording contract costs of $157,000 during the three months ended March
31, 2008. Through September 30, 2008, we made cumulative cash contract payments
totaling $157,000, leaving a zero reserve balance.
|
|
Severance Costs
|
|
Contract Costs
|
|
Total
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
$
|
387,000
|
|
$
|
157,000
|
|
$
|
544,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Payments
|
|
|
-
|
|
|
(75,000
|
)
|
|
(75,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Balance at March 31, 2008
|
|
|
387,000
|
|
|
82,000
|
|
|
469,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Payments
|
|
|
(336,000
|
)
|
|
(45,000
|
)
|
|
(381,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Balance at June 30, 2008
|
|
|
51,000
|
|
|
37,000
|
|
|
88,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Payments
|
|
|
(51,000
|
)
|
|
(37,000
|
)
|
|
(88,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Balance at September 30, 2008
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
8.
Business Restructuring
In
March
2008, the Company elected to exit its Bioscience business, ceasing further
investment in Plexera (See Note 7 –
Discontinued
Operations
),
and to
take other corporate cost savings measures. The Company took certain immediate
actions to reduce cash expenditures including reducing its overall workforce
and
cancelling or postponing certain contractual commitments outside of exiting
Plexera. Accordingly, the Company recorded restructuring costs to marketing,
general and administrative expense totaling $147,000 during the three months
ended March 31, 2008.
Costs
associated with our restructuring activities are accounted for in accordance
with the provisions of SFAS No. 146. All of these costs have been paid as
of September 30, 2008 and no reserve for restructuring activities remains.
As a
part of our restructuring, we eliminated 5 positions in Corporate as well as
the
position of Vice President of Sales and Marketing which was held by Daniel
C.
Lykken, an Executive Officer of the Company and part of the Electro-Optics
segment. The sales and marketing functions will be performed by other staff
members pending our proposed merger with GigOptix, LLC (see Note 11 – Proposed
Merger).
9
.
Agreement with Kingsbridge Capital
On
February 21, 2008, we entered into a three-year $25 million Committed Equity
Financing Facility (the “CEFF”) with Kingsbridge Capital (“Kingsbridge”). Under
the CEFF, subject to certain conditions and limitations, we may require
Kingsbridge to purchase up to 10 million shares or $25 million of our common
stock, whichever is less, at a predetermined discount allowing us to raise
capital in amounts and intervals that we deem suitable. We are not obligated
to
sell any of the $25 million of common stock available under the CEFF, and there
are no minimum commitments or minimum use penalties. The terms of the CEFF
require a minimum bid price of $1.25 per share prior to each draw down. The
CEFF
does not contain any restrictions on our operating activities. We filed a
registration statement in March 2008, with respect to the resale of 4 million
shares issuable pursuant to the CEFF and underlying the warrant, and were
required to use commercially reasonable efforts to have such registration
statement effective by the within 180 days of our entry into the CEFF. The
Securities and Exchange Commission declared our registration statement effective
on May 28, 2008.
In
connection with the CEFF, we issued Kingsbridge a warrant (the “Warrant”) to
purchase 180,000 shares of our common stock at an exercise price of $3.00 per
share. The Warrant is exercisable beginning six months after the date of grant
and for a period of five years after it becomes exercisable. The warrants were
valued at $258,000 using the Black-Scholes pricing model and the following
assumptions: a contract term of 5.5 years, risk-free interest rate of 3.02%,
volatility of 75% and the fair value of our stock on February 21, 2008, of
$2.36
per share. The warrant was recorded as an issuance cost in additional paid-in
capital at the commitment date.
Should
we
sell shares to Kingsbridge under the CEFF, or issue shares in lieu of a blackout
payment, it will have a dilutive effect on the holdings of our current
stockholders, and may result in downward pressure on the price of our common
stock. If we draw down under the CEFF, we will issue shares to Kingsbridge
at a
discount of up to 12 percent from the volume weighted average price of our
common stock. If we draw down amounts under the CEFF when our share price is
decreasing, we will need to issue more shares to raise the same amount than
if
our stock price was higher. Issuances in the face of a declining share price
will have an even greater dilutive effect than if our share price were stable
or
increasing, and may further decrease our share price.
10.
Fair Value Measurements
Effective
January 1, 2008, we adopted SFAS No. 157 for our financial assets and financial
liabilities. As defined in SFAS No. 157, fair value is the price that would
be received for asset when sold or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (exit price).We
utilize market data or assumptions that we believe market participants would
use
in pricing the asset or liability, including assumptions about risk and the
risks inherent in the inputs to the valuation technique. These inputs can be
readily observable, market corroborated or generally unobservable. We primarily
apply the market approach for recurring fair value measurements, maximizing
the
use of observable inputs and minimizing the use of unobservable inputs to the
extent possible. We also consider the securities stated interest rate, the
security issuers’ credit risk and the impact of market rate fluctuations in our
assessment of fair value.
We
classify the determined fair value based on the observability of those inputs.
SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs
used to measure fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurement) and the lowest priority to unobservable inputs (Level
3
measurement). The three levels of the fair value hierarchy defined by SFAS
No. 157 are as follows:
§
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted)
for
identical assets or liabilities in active markets as of the reporting
date. Active markets are those in which transactions for the asset
or
liability occur in sufficient frequency and volume to provide the
most
reliable pricing information and evidence of fair value on an ongoing
basis.
|
§
|
Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial instrument. Level 2
inputs
also include quoted prices for identical or similar assets or liabilities
in markets that are not active, that is, markets in which there are
few
transactions for the asset or liability, the prices are not current,
or
price quotations vary substantially either over time or among market
makers and inputs other than quoted prices that are observable for
the
asset or liability (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities, prepayment
speeds,
loss severities, credit risks, and default
rates).
|
§
|
Level
3 inputs to the valuation methodology are generally less observable
from
objective sources, using estimates and assumptions developed by
management, which reflect those that a market participant would
use.
|
The
following table sets forth by level within the fair value hierarchy the
Company's financial assets and liabilities that were accounted for at fair
value
on a recurring basis in accordance with SFAS No.157 at September 30, 2008.
As
required by SFAS 157, financial assets and liabilities are classified in their
entirety based on the lowest level of input that is significant to the fair
value measurement. Our assessment of the significance of a particular input
to
the fair value measurement requires judgment and may affect the valuation of
fair value assets and liabilities and their placement within the fair value
hierarchy levels.
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Description
|
|
September 30, 2008
|
|
Qoted Prices in Active
Markets for Identical
Assets (Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Cash
equivalents - money market funds
|
|
$
|
7,045,000
|
|
$
|
-
|
|
$
|
7,045,000
|
|
$
|
-
|
|
Total
|
|
$
|
7,045,000
|
|
$
|
-
|
|
$
|
7,045,000
|
|
$
|
-
|
|
We
chose
not to elect the fair value option as prescribed by SFAS No. 159 for our
financial assets and liabilities that had not been previously carried at fair
value. Therefore, financial assets and liabilities not carried at fair value,
such as our accounts receivable and accounts payable, are still reported at
their carrying values.
As
of September 30, 2008, we applied Level 2 measurements to our holdings of cash
equivalents which were invested in money market funds.
11
.
Proposed
Merger
On
March
27, 2008, we announced that we had signed a definitive agreement (the “Merger
Agreement”) to merge with GigOptix, LLC (“GigOptix”). The Merger Agreement has
been unanimously approved by the board of directors of Lumera, with one director
recusing herself due to a conflict and the management board of GigOptix, with
one member recusing herself due to a conflict. Upon completion of the merger,
which is subject to the terms and conditions of the Merger Agreement and which
shall be treated as a tax free reorganization, existing securities holders
of
each company will own approximately 50% of the outstanding securities of
GigOptix, Inc., including options and warrants. The common shares of GigOptix,
Inc. are expected to trade on the NASDAQ Global Market under the ticker symbol
“GIGX”.
Consummation
of the merger requires the approval of a majority of our stockholders. The
Company established October 10, 2008 as the stockholder date of record and
December 4, 2008 as the date of its Annual Meeting of Stockholders. GigOptix,
Inc.’s Form S-4 registering the common stock to be issued to stockholders
following the completion of the Lumera Merger (as defined in the Merger
Agreement) has been declared effective by the Securities Exchange Commission
on
October 27, 2008. The Merger Agreement requires, among other things, the
cessation of Plexera’s business and the listing of GigOptix, Inc.’s stock on
either the NASDAQ’s Global or Capital markets. Plexera’s business operations
ceased in March 2008 and were formally discontinued in May 2008. GigOptix Inc.
has applied for listing on NASDAQ’s Capital Market system and is currently
awaiting approval.
The
Merger Agreement contains customary representations, warranties and covenants,
including, among others, covenants (i) to conduct each respective business
in
the ordinary course during the interim period between the execution of the
Merger Agreement and consummation of the Merger and (ii) not to engage in
certain kinds of transactions during such period. As a condition of closing,
we
must meet net working capital requirements of at least $6 million as of
June 30, 2008 subject to a reduction of $10,000 per day after June 30, 2008.
Subsequent to the sale of 4 million of our common shares which we completed
on
July 16, 2008, we believe that we will meet the minimum working capital
requirement of the Merger Agreement without the need to raise additional capital
(See Note 13 – Equity Financing).
Under
the
provisions of SFAS No. 141 (“SFAS No. 141”),
Business
Combinations,
GigOptix
will be deemed the acquiring entity for purposes of applying the purchase method
of accounting. Accordingly, we must expense our legal, financial advisory,
printing and other expenses associated with the proposed transaction. During
the
three and nine months ended September 30, 2008, we expensed $383,000 and $1.6
million, respectively, related to financial advisory fees associated with the
proposed merger, and expect to incur additional legal fees and other merger
related expenses during the last quarter of 2008. These expenses were recorded
in marketing, general and administrative expenses. We have an additional
financial advisory fee commitment totaling $750,000 due only upon completion
of
the merger.
12.
Investment in Equity of Asyrmatos Inc.
On
February 20, 2008, we entered into an agreement with Asyrmatos, Inc, a privately
held Boston-based company, pursuant to which we transferred our intellectual
property and other assets related to millimeter wave communication technologies.
In consideration for the transfer, we acquired shares of Class L Preferred
Stock
(the “Class L Preferred”) which represents 25% of the current outstanding
preferred and common shares of Asyrmatos and we received an option to acquire
all of the outstanding stock of Asyrmatos, Inc. in 2012. Asyrmatos intends
to
continue the development and commercialization of wireless millimeter wave
communication systems based in part on technology developed at Lumera. The
Class
L Preferred, which possesses certain voting rights and liquidation preferences,
are convertible into Series A Preferred Stock (the “Series A Preferred”) upon
the completion of a financing round representing a minimum of $5.5 million
in
equity capital in the aggregate. The Class L Preferred shall be convertible
into
the number of shares of Series A Preferred Stock that represents 25% of the
total number of shares of the then total outstanding capital stock of the
Company (including outstanding options and warrants) on a fully diluted basis.
In addition, in exchange for $500,000 in cash, we were issued a $500,000 Note
Receivable due February 19, 2010. The Note Receivable, which bears annual
interest at 7%, is convertible into equity securities of Asyrmatos at our option
and under certain conditions.
We
account for our investment in Asyrmatos under the equity method of accounting
in
accordance with the provisions of Accounting Principles Board Opinion No. 18
(“APB No. 18”) and FASB Interpretation No. 46( R),
Consolidation
of Variable Interest Entities
(as
amended) (“FIN 46”). Due to Asyrmatos’ continued losses, net liability position
and outlook, the recorded basis in our investment is zero. From its inception
on
February 20, 2008 through September 30, 2008 Asyrmatos reported a net operating
loss of $800,000. At September 30, 2008, Asyrmatos reported total assets of
$1,000 and total liabilities of $693,000.
Due
to
the uncertainty about the collectability of the Note Receivable, we have a
full
reserve of $500,000. Should Asyrmatos default on the repayment provisions of
our
convertible note, we have certain continuing rights to the underlying assets
and
intellectual property of Asyrmatos.
13.
Equity Financing
On
July
16,
2008,
we
sold 4
million shares of our common stock and warrants to purchase an additional 2
million shares through a registered direct offering, for net proceeds of
approximately $2.7 million, after deducting offering fees and expenses. The
shares and warrants were offered pursuant to the Company's effective shelf
registration statement that was previously filed on Form S-3 with the Securities
and Exchange Commission. We intend to use the net proceeds from this offering
for general corporate purposes and to meet minimum working capital requirements
under the conditions of the previously announced proposed merger with GigOptix.
For each share of common stock purchased in the offering, the investor was
also
issued warrants to purchase 0.50 shares of common stock for a combined issue
price of $0.76 per unit, before deducting offering fees and expenses. The shares
of common stock and warrants are immediately separable and were issued
separately. The warrants were valued at $734,160, using the Black-Scholes
pricing model and the following assumptions: a risk-free interest rate of 3.20%,
volatility of 75%, an exercise price of $0.76 per share, subject to adjustment,
a five-year term, and are not exercisable prior to six months after issuance.
14
.
NASDAQ
notification
In
a
letter from the NASDAQ Stock Market (NASDAQ) received May 16, 2008, the Company
was informed that it was out of compliance with the $10 million minimum
stockholders’ equity requirement for continued listing on the NASDAQ Global
Market set forth in Marketplace Rule 4450(a)(3). The letter asked for the
Company’s specific plan to achieve and sustain compliance with the
aforementioned listing standard.
On
July
16, 2008 the Company sold common stock and warrants pursuant to the Company's
effective shelf registration statement, with net proceeds of approximately
$2.7
million, after deducting offering fees and expenses (See Note 13 – Equity
Financing). We sold these shares primarily to provide the necessary capital
to
meet the minimum net working capital provision of our Merger Agreement and
to
regain pro-forma compliance with the minimum stockholders’ equity listing
requirement. A letter from NASDAQ dated July 25, 2008, acknowledged our plan
to
achieve compliance and offered alternatives to evidence that compliance, which
we satisfied with our filing of our June 30, 2008 Form 10-Q. A NASDAQ letter
dated September 4, 2008, acknowledged our compliance with Marketplace Rule
4450(a)(3) and indicated that we must demonstrate compliance in our next
quarterly report. Our stockholders’ equity balance at September 30, 2008 falls
below the minimum threshold; therefore, we anticipate that NASDAQ will issue
a
delisting notice which we will appeal to the NASDAQ’s Listing Qualifications
Panel pending our proposed merger with GigOptix. We may also apply for continued
listing on the NASDAQ Capital market.
On
August
14, 2008, the Company received a letter from NASDAQ indicating that for the
prior 30 consecutive business days the bid price of its common stock has closed
below the minimum $1.00 per share requirement for continued inclusion under
Marketplace Rule 4450(a)(5). This notification has no immediate effect on the
listing of or the ability to trade the Company’s common stock on The NASDAQ
Global Market. In accordance with Marketplace Rule 4450(e)(2), the Company
was
given 180 calendar days, or until February 10, 2009, to regain compliance.
On
October 16, 2008 NASDAQ suspended the enforcement of the rules requiring a
minimum $1 closing bid price until January 19, 2009. Based upon this suspension,
we will achieve compliance if the bid price of our common stock closes at $1.00
per share or more for a minimum of ten consecutive business days before May
18,
2009.
ITEM 2
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations, which should be read in conjunction with our financial
statements and notes thereto contained in the Company’s Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 17, 2008 and
updated disclosures related to discontinued operations on the Company’s Form 8-K
filed September 5, 2008 includes “forward-looking statements” within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), and is subject to the safe harbor created by that section. Such
statements may include, but are not limited to, projections of revenues, income
or loss, capital expenditures, plans for product development and cooperative
arrangements, future operations, financing needs or plans of Lumera, as well
as
assumptions relating to the foregoing. The words “believe,” “expect,” “will,”
“anticipate,” “estimate,” “project,” “plan,” and similar expressions identify
forward-looking statements, which speak only as of the date the statement was
made. Factors that could cause results to differ materially from those projected
or implied in the forward-looking statements are set forth under the caption
“Risk Factors” in our most recently filed Annual Report on Form
10-K.
Overview
We
were
established in 2000 to develop proprietary polymer materials and products based
on these materials. Lumera had previously developed products for two primary
markets: bioscience and electro-optics. Lumera is currently developing products
for the electro-optics applications only. Lumera designs and synthesizes polymer
materials at the molecular level. Lumera’s goal is to optimize the electrical,
optical and surface properties of these materials. Lumera uses these materials
to improve the design, performance and functionality of products for use in
optical communications devices and systems. Lumera believes it has developed
a
proprietary intellectual property position based on a combination of patents,
licenses and trade secrets relating to the design and characterization of
polymer materials, methods of polymer synthesis and production of polymers
in
commercial quantities, as well as device design, characterization, fabrication,
testing and packaging technology.
From
our
inception through December 31, 2003, we were considered to be in the
development stage concentrating primarily on the development of our technology
and potential products. Products for wireless networking and biochip
applications became available for customer evaluation in early 2004; therefore,
we were considered to have exited the development stage in 2004. To date,
substantially all of our revenues have come from contracts to develop
custom-made electro-optic materials and devices for government agencies. As
we
transition to a product-based company, we expect to record both revenue and
expense from product sales, and to incur increased costs for sales and marketing
and to increase general and administrative expense. Accordingly, the financial
condition and results of operations reflected in our historical financial
statements are not expected to be indicative of our future financial condition
and results of operations.
In
2004,
we also began the development of our label-free, high throughput detection
system and related biochip products aimed primarily at the growing proteomics
marketplace. We also continued the development of our polymer modulators, and
pending demand for higher bandwidth and speeds from optical communications
equipment suppliers, we have been developing other applications for our
modulators such as millimeter wave detection and communication systems. We
currently have products being evaluated by customers and potential customers
in
each of our product areas of our continuing electro-optics
business.
Effective
July 1, 2007, we contributed substantially all of the assets of our Bioscience
segment to a newly formed wholly-owned subsidiary, Plexera Bioscience LLC
(“Plexera”). Plexera was formed to further clarify the purpose, business
and funding requirements and market opportunities for both Lumera and Plexera.
In the first quarter of 2008, we elected to exit our bioscience (“Plexera”)
business due primarily to its continued losses and inability to raise additional
capital to fund such business. In the first quarter of 2008, Lumera incurred
costs of approximately $544,000, as a result of the shutdown of Plexera and
the
termination of its workforce. Additionally, during the nine months ended
September 30, 2008, Lumera incurred an impairment loss of $243,000 for certain
of the Plexera assets. In addition to halting the business activity of Plexera,
we reduced our corporate workforce by 6 employees including our Vice President
of Sales and Marketing as those functions will be performed by other staff
pending our proposed merger with GigOptix.
Discontinued
Operations of Plexera Bioscience LLC
.
In the
first quarter of 2008, we elected to exit our bioscience (“Plexera”) business
due primarily to its continued losses and inability to raise additional capital
to fund such business. In the first quarter of 2008, Lumera incurred costs
of
approximately $544,000, as a result of the shutdown of Plexera and the
termination of its workforce. Additionally, during the nine months ended
September 30, 2008, Lumera incurred an impairment loss of $243,000 for certain
of the Plexera assets. In addition to halting the business activity of Plexera,
we reduced our corporate workforce by 5 employees and our Vice President of
Sales and Marketing as those functions will be performed by other staff pending
our proposed merger with GigOptix. As discussed below under “Discontinued
Operations” Lumera elected to exit the Plexera LLC (“Plexera”) business, which
was previously presented as a separate reportable segment, during the first
quarter of 2008. In May 2008, the Board of Directors approved a plan to sell
or
otherwise liquidate the Plexera assets and intellectual property. As such,
the
results of operations for all historical periods for Plexera in the accompanying
condensed consolidated financial statements are presented as discontinued
operations in accordance with Statement of Financial Accounting Standards No.
144 (“SFAS No. 144”),
Accounting
for the Impairment or Disposal of Long-Lived Assets.
As
of
September 30, 2008, Lumera is developing products solely for the electro-optics
market. Lumera believes that it has developed a proprietary intellectual
property position based on a combination of patents, licenses and trade secrets
relating to the design and characterization of polymer materials, methods of
polymer synthesis and production of polymers in commercial quantities, as well
as device design, characterization, fabrication, testing and packaging
technology. Lumera currently has products being evaluated by customers and
potential customers of electro-optics products.
Merger
with GigOptix, LLC.
On
March
27, 2008, we announced that we had signed a definitive agreement (the “Merger
Agreement”) to merge with GigOptix, LLC (“GigOptix”). The Merger Agreement has
been unanimously approved by the board of directors of Lumera, with one recusal
due to a conflict and the management board of GigOptix, with one recusal due
to
a conflict. Upon completion of the merger, which is subject to the terms and
conditions of the Merger Agreement and which shall be treated as a tax free
reorganization, existing securities holders of each company will own
approximately 50% of the outstanding securities, including options and warrants,
of GigOptix, Inc..
Consummation
of the merger requires the approval of a majority of our stockholders. The
Company established October 10, 2008 as the stockholder date of record and
December 4, 2008 as the date of its Annual Meeting of Stockholders. GigOptix,
Inc.’s Form S-4 registering the common stock to be issued to stockholders
following the completion of the Lumera Merger (as defined in the Merger
Agreement) has been declared effective by the Securities Exchange Commission
on
October 27, 2008. The Merger Agreement requires, among other things, the
cessation of Plexera’s business and the listing of GigOptix, Inc.’s stock on
either the NASDAQ’s Global or Capital markets. Plexera’s business operations
ceased in March 2008 and were formally discontinued in May 2008. GigOptix Inc.
has applied for listing on NASDAQ’s Capital Market system and is currently
awaiting approval.
The
Merger Agreement contains customary representations, warranties and covenants,
including, among others, covenants (i) to conduct each respective business
in
the ordinary course during the interim period between the execution of the
Merger Agreement and consummation of the Merger and (ii) not to engage in
certain kinds of transactions during such period. As a condition of closing,
we
must meet net working capital requirements of at least $6 million as of
June 30, 2008 subject to a reduction of $10,000 per day after June 30, 2008.
Subsequent to the sale of 4 million of our common shares which we completed
on
July 16, 2008, we believe that we will meet the minimum working capital
requirement of the Merger Agreement without the need to raise additional capital
(See Note 13 – Equity Financing). We have an additional financial advisory fee
commitment totaling $750,000 due only upon completion of the
merger.
Electro-Optics
Segment
We
are
developing a new generation of electro-optic modulators and other devices for
optical networks and systems based on our proprietary polymer materials. The
applications for these advanced materials include electro-optic components
such
as modulators and ring oscillators, polymer electronics such as high performance
diodes and transistors, and optical interconnects for high speed (greater than
20 billion cycles per second) on chip and chip-to-chip communication. Our
polymer-based modulators can operate at speeds higher than existing inorganic
crystal-based electro-optic modulators and are smaller, lighter and more energy
efficient than electro-optic modulators using inorganic crystals. We have
designed and manufactured polymer-based electro-optic modulators that operate
at
data rates up to 100Gbps.
Our
current 40Gbps and 100Gbps parts address NR, RZ and duo-binary modulation
formats. However, since the bandwidth required at 40Gbps and 100Gbps is very
high for NRZ and RZ formats, signal impairments due to chromatic and
polarization mode dispersion increase dramatically. Hence, complex modulation
formats such as DQPSK are increasingly seen as necessary, since the bandwidth
required is half of that required for NRZ and RZ. Therefore, we will provide
components which enable DQPSK modulation format, in order to be competitive
in
higher data rate applications.
In
the
commercial markets, we have to create awareness of the advantages of evolving
to
using EO polymer-based devices instead of crystalline-based devices and of
our
40Gbps optical modulator within the industry. We will work to create customer
interest and open doors for relationships, leading to product evaluation and
design wins.
Further,
it may be advantageous to offer products which are higher in the value chain,
such as optical subassemblies. Our 40Gbps modulator has a smaller footprint
and
lower power consumption than that of any modulator based on crystalline
technology, thus transmission subassemblies containing this modulator and other
components, with standard electrical interfaces, would be of interest to both
module and system vendors. In order to offer such subassemblies, we need to
partner with one or more suppliers of electronic devices such as modulator
drivers, lasers and multiplexers. These subassemblies will enable greater ease
of design, lower power consumption and reduced footprint for the module,
transponder and line card designers.
We
have
also successfully completed in house Telcordia standard reliability testing
of
our packaged polymer-based electro-optic modulators. Lumera’s testing program
was based on industry standard tests including high temperature operation at
85
o
C
for
2,000 hours, with 50mW laser power at 1550 nm, temperature cycling ranging
between -40
o
C
and
85
o
C
for 500
cycles, high temperature storage at 85
o
C
for
2,000 hours, low temperature storage at -40
o
C
for 72
hours and thermal and mechanical shock. While further statistical testing is
necessary, this marks the first time that our polymer modulators have
successfully passed reliability tests as specified in the GR468 standard.
Results
of Operations
Revenue.
Substantially
all of our revenue since inception has been generated from cost plus fixed
fee
development contracts with several U.S. government agencies or with government
contractors. Our projects have primarily been to develop specialized
electro-optic polymer materials and devices.
Prospectively,
we intend to also generate revenue through sales of electro-optics products
to
original equipment manufacturers, or OEMs, and industry partners and through
development contracts. We expect that future revenue from U.S. government
contracts will decrease as a percentage of revenue and that product revenue
from
the sale of commercial products will increase both on a dollar basis and as
a
percentage of revenue in future years.
Cost
of Revenue.
Historically,
cost of revenue has consisted primarily of the direct and allocated indirect
costs of performing on development contracts. Direct costs include labor,
materials and other costs incurred directly in performing specific projects.
Indirect costs include labor and other costs associated with our research and
product development efforts and building our technical capabilities and
capacity. The cost of revenue can fluctuate substantially from period to period
depending on the level of both the direct costs incurred in the performance
of
projects and the level of indirect costs incurred. The cost of revenue as a
percentage of revenue can fluctuate significantly from period to period
depending on the contract mix, the cost of future planned products and the
level
of direct and indirect cost incurred.
Cost
of
product revenue includes direct labor and material costs and allocated indirect
costs. We currently utilize our research and development facilities to
manufacture our products until demand for these products justify separate
manufacturing facilities. Indirect cost is allocated to the cost of product
revenues based upon direct labor required during the manufacturing process,
but
only to the extent of product revenue. We record product costs in excess of
revenues as research and development costs.
We
expect
that cost of revenue on a dollar basis will increase in the future as a result
of anticipated sales of products, additional development contract work that
we
expect to perform, and commensurate growth in our personnel and technical
capacity required to perform on these contracts.
Research
and Development Expense.
Research
and development expense consists primarily of:
|
¨
|
compensation
for employees and contractors engaged in internal research and product
development activities;
|
|
¨
|
research
fees paid to the University of Washington (“UW”) and other educational
institutions for contract research;
|
|
¨
|
laboratory
operations, outsourced development and processing
work;
|
|
¨
|
costs
incurred in acquiring and maintaining licenses;
and
|
|
¨
|
related
operating expenses.
|
We
have
ongoing minimum royalty obligations required by a technology licensing agreement
with the UW totaling $75,000 annually, until we elect to cancel the license.
We
are currently funding researchers at the UW and other institutions to conduct
ongoing research activities on a project basis.
We
expect
to continue to incur substantial research and development expense to develop
commercial products using polymer materials technology. These expenses could
increase as a result of continued development and commercialization of our
polymer materials technology, including subcontracting work to potential
development partners, expanding and equipping in-house laboratories, acquiring
rights to additional technologies, hiring additional technical and support
personnel and pursuing other potential business opportunities.
Marketing,
General and Administrative Expense.
Marketing,
general and administrative expense consists primarily of compensation and
support costs for management and administrative staff, and for other general
and
administrative costs, including accounting and legal fees, consulting fees
and
other operating expenses. It also consists of costs associated with corporate
awareness campaigns such as web site development and participation at trade
shows, corporate communications initiatives and efforts with potential customers
and joint venture partners to identify and evaluate product applications in
which our technology could be integrated or otherwise used.
We
have
reduced embedded marketing, general and administrative expenses in 2008 in
preparation for our proposed merger. We have also incurred additional merger
related expenses. If the merger is not completed as planned, we expect
marketing, general and administrative expenses to increase in 2009 and beyond
as
we increase our product development and sales and marketing staff to qualify,
develop and define market products that we commercialize and to increase the
level of corporate and administrative activity.
Interest
Income.
Interest
income consists of earnings from investment securities. Dividend and interest
income are recognized when earned. Realized gains and losses are included in
other income.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations
is
based on our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. 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. On an ongoing basis, we evaluate
our estimates, including those related to revenue recognition, contract losses,
bad debts, investments and contingencies and litigation. We base our estimates
on historical experience, terms of existing contracts, information provided
by
our current and prospective customers and strategic partners, information
available from other outside sources, and on various other assumptions
management believes 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. Actual results
may differ from these estimates under different assumptions or
conditions.
We
believe the following accounting policies require our more significant judgments
and estimates used in the preparation of our financial statements. These
critical accounting estimates are consistent with those disclosed in our Annual
Report on Form 10-K, except as noted.
Revenue
Recognition.
We
recognize revenue as work progresses on long-term, cost plus fixed fee and
fixed
price contracts in accordance with Statement of Position 81-1,
Accounting
for Performance of Construction Type and Certain Product Type
Contracts
,
using
the percentage-of-completion method, which relies on estimates of total expected
contract revenue and costs. We use this revenue recognition methodology because
we can make reasonably dependable estimates of the revenue and costs. Recognized
revenues are subject to revisions as the contracts progress to completion and
actual revenue and cost become certain. Revisions in revenue estimates are
reflected in the period in which the facts that give rise to the revisions
become known.
Revenue
from product shipments is recognized in accordance with Staff Accounting
Bulletin No. 104
Revenue
Recognition
.
Revenue
is recognized when there is sufficient evidence of an arrangement, the selling
price is fixed or determinable and collection is reasonably assured. Revenue
for
product shipments is recognized upon acceptance of the product by the customer
or expiration of the contractual acceptance period, after which there are no
rights of return. Provisions are made for warranties at the time revenue is
recorded. Warranty expense and the associated liability recorded was not
material for any periods presented
.
Contract
Estimates.
We
estimate contract costs based on the experience of our professional researchers,
the experience we have obtained in our internal research efforts, and our
performance on previous contracts. We believe this allows us to reasonably
estimate the tasks required and the contract costs; however, there are
uncertainties in estimating these costs, such as the ability to identify
precisely the underlying technical issues hindering development of the
technology; the ability to predict all the technical factors that may affect
successful completion of the proposed tasks; and the ability to retain
researchers having enough experience to complete the proposed tasks in a timely
manner. Should actual costs differ materially from our estimates, we may have
to
adjust the timing and amount of revenue we recognize. To date, we have mitigated
the risk of failing to perform under these contracts by negotiating best efforts
provisions, which do not obligate us to complete contract
deliverables.
Stock-based
Compensation.
We
account for stock-based compensation under the provisions of the of Financial
Accounting Standards Board (“FASB”) Statement No. 123(R),
Share-Based
Payment
,
(“FAS
123R”) and Staff Accounting Bulletin No. 107 (“SAB 107”), and SAB 110, issued by
the SEC in December 2007. We use the accelerated method of expense recognition
pursuant to FASB Interpretation No. 28,
Accounting
for Stock Appreciation Rights and Other Variable Stock Option or Award Plans
(“FIN
28”). We use the Black-Scholes option pricing model in determining the fair
value of stock options..
We
issue
incentive awards to our employees through stock-based compensation consisting
of
stock options and restricted stock units (“RSUs”). The value of RSUs is
determined using the fair value method. We continue to use the Black-Scholes
option pricing model in determining the fair value of stock options, employing
the following key assumptions. The risk-free rate is based on the U.S. Treasury
yield curve in effect at the time of grant. We do not anticipate declaring
dividends in the foreseeable future. The expected option term is based on the
vesting terms of the respective options and a contractual life of ten years
using the simplified method calculation as defined by SAB 107 and permitted
by
SAB 110. Expected volatility is determined by blending the annualized daily
historical volatility of our stock price commensurate with the expected life
of
the option with volatility measures used by comparable peer companies. Our
stock
price volatility and option lives involve management’s best estimates at that
time, both of which impact the fair value of the option calculated under the
Black-Scholes methodology and, ultimately, the expense that will be recognized
over the life of the option.
FAS
123R
also requires that we recognize compensation expense for only the portion of
options or stock units that are expected to vest; therefore, we apply estimated
forfeiture rates that are derived from historical employee termination behavior.
If the actual number of forfeitures differs from those we estimated, additional
adjustments to compensation expense may be required in future periods. We may
modify the method in which we issue incentive awards to our employees through
stock-based compensation in future periods.
Impairment
of Long-Lived Assets.
In
accordance with Statement of Financial Accounting Standards No. 144,
Accounting
for the Impairment or Disposal of Long-Lived Assets
,
the
Company’s long-lived assets, such as property and equipment, with definite lives
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of these assets may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount
of an asset to estimated undiscounted future cash flows expected to be generated
by the asset. If the carrying amount of an asset exceeds its estimated
undiscounted future cash flows, an impairment charge is recognized in the amount
by which the carrying amount of the asset exceeds the fair value of the asset.
Disposal
Activities
.
Any
liabilities associated with exit or disposal activities are recorded in
accordance with Statement of Financial Accounting Standards No. 146 (“SFAS
No. 146”),
Accounting
for Obligations Associated with Disposal Activities
.
SFAS
No. 146 requires that liabilities be recognized for exit and disposal costs
only
when the liabilities are incurred, rather than upon the commitment to an exit
or
disposal plan. Restructuring charges are included in marketing, general and
administrative expense.
Equity
Investments.
We
account for our investment in Asyrmatos under the equity method of accounting
in
accordance with the provisions of Accounting Principles Board Opinion No. 18
(“APB No. 18”) and FASB Interpretation No. 46( R),
Consolidation
of Variable Interest Entities
(as
amended) (“FIN 46”).
The
following discussion should also be read in conjunction with our 2007 Form
10-K
filed with the Securities and Exchange Commission on March 17, 2008,
and
updated disclosures related to discontinued operations on the Company’s Form 8-K
filed September 5, 2008.
Results
of Operations
Comparison
of Three and Nine Months Ended September 30, 2008 and 2007
Summary
|
|
Three Months ended September 30,
|
|
Percentage
|
|
Nine Months ended September 30,
|
|
Percentage
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
Revenue
|
|
$
|
1,565,000
|
|
$
|
624,000
|
|
|
151
|
%
|
$
|
3,548,000
|
|
$
|
2,418,000
|
|
|
47
|
%
|
Cost
of revenue
|
|
|
(785,000
|
)
|
|
(344,000
|
)
|
|
128
|
%
|
|
(1,674,000
|
)
|
|
(1,271,000
|
)
|
|
32
|
%
|
Research
and development expense
|
|
|
(437,000
|
)
|
|
(938,000
|
)
|
|
-53
|
%
|
|
(2,009,000
|
)
|
|
(2,148,000
|
)
|
|
-6
|
%
|
Marketing,
general and administrative expense
|
|
|
(1,913,000
|
)
|
|
(2,822,000
|
)
|
|
-32
|
%
|
|
(6,847,000
|
)
|
|
(7,010,000
|
)
|
|
-2
|
%
|
Interest
Income
|
|
|
44,000
|
|
|
266,000
|
|
|
-83
|
%
|
|
230,000
|
|
|
888,000
|
|
|
-74
|
%
|
Income/(Loss)
from Discontinued Operations
|
|
|
4,000
|
|
|
(1,617,000
|
)
|
|
-100
|
%
|
|
(2,497,000
|
)
|
|
(3,747,000
|
)
|
|
-33
|
%
|
The
Board
committed to a plan to sell our wholly-owned subsidiary, Plexera in May 2008.
Accordingly, Plexera is reported as a discontinued operation for the three
and
nine months ended September 30, 2008 and 2007, respectively.
Revenue.
Revenue
increased by $941,000 and $1,130,000 for the three and nine months ended
September 30, 2008, respectively, over the three and nine months ended September
30, 2007, primarily due to increased levels of government contract activity.
Aggregate revenue on governmental contracts totaled $1,556,000 and $3,405,000
for the three and nine months ended September 30, 2008, respectively, an
increase of $932,000 and $1,078,000, respectively, compared to the three and
nine months ended months ended September 30, 2007, primarily due to government
contracts awarded in the first quarter of 2008. Backlog on our governmental
contracts totaled $2,313,000 at September 30, 2008. Product revenues totaled
$10,000 and $143,000 for the three and nine months ended September 30, 2008,
respectively, consisting of electro-optics devices and materials.
Cost
of Revenue.
Cost
of
revenue increased by $441,000 and $403,000 for the three and nine months ended
September 30, 2008, respectively, compared to the three and nine months ended
September 30, 2007, primarily due to increased government contract activity.
Contract costs were 50% and 48% of contract revenue for the three and nine
months ended September 30, 2008, respectively, compared to 55% and 53% for
the
three and nine months ended September 30, 2007, respectively, due to lower
overhead allocation rates applied to contract labor in the current periods.
Research
and Development Expense.
Research
and development expense decreased $501,000 and $139,000 to $437,000 and
$2,009,000 for the three and nine months ended September 30, 2008, respectively,
from $938,000 and $2,148,000 for the three and nine months ended September
30,
2007, respectively. Labor related costs allocated to the cost of revenue
increased by $208,000 and $115,000, due to the increase in government contract
revenue for the three and nine months ended September 30, 2008, compared to
the
prior year comparative periods. Compensation expense, including incentive pay,
decreased $217,000 and $98,000 during the three and nine months ended September
30, 2008, respectively, compared to the three and nine months ended September
30, 2007, due primarily to decreased incentive pay combined with a reduction
in
headcount during 2008. Professional fees decreased by $88,000 and $93,000,
respectively, for the three and nine months ended September 30, 2008 compared
to
the three and nine months ended September 30, 2007, due primarily to a decrease
in contract research fees and subcontracting expense. Materials and supplies
costs decreased by $41,000 for the three months ended September 30, 2008
compared to the three months ended September 30, 2007, due primarily to lower
product development costs during the current quarter. Materials and supplies
expense was $141,000 higher for the nine months ended September 30, 2008,
compared to the nine months ended September 30, 2007, respectively, due
primarily to device packaging expenditures during the first part of the year.
Stock-based compensation expense decreased $33,000 and $109,000 for the three
and nine months ended September 30, 2008, respectively, compared to the three
and nine months ended September 30, 2007, due primarily to forfeitures related
to the reduction in workforce associated with the Company’s business
restructuring combined with a decline in the fair market value of options
granted. License and royalty fees decreased by $11,000 and $44,000 for the
three
and nine months ended September 30, 2008, respectively, compared to the three
and nine months ended September 30, 2007. Depreciation expense decreased by
$32,000 for the nine months ended September 30, 2008 compared to the nine months
ended September 30, 2007 due to our asset base becoming more fully depreciated.
General and administrative expenses, including facilities expense increased
by
$92,000 and $209,000 for the three and nine months ended September 30, 2008,
respectively, compared to the three and nine months ended September 30, 2007
due
primarily to increased allocation resulting from the discontinued operations
during the year.
Marketing,
General and Administrative Expense.
Marketing,
general and administrative expense decreased $909,000 and $163,000 to $1,913,000
and $6,847,000 for the three and nine months ended September 30, 2008,
respectively, from $2,822,000 and $7,010,000 for the three and nine months
ended
September 30, 2007, respectively. Compensation expense, including incentive
pay,
decreased by $610,000 and $493,000 for the three and nine months ended September
30, 2008, respectively, over the prior year comparative period due primarily
to
reduction in administrative and executive workforce combined with and to
contractual severance expenses incurred in the prior year quarterly period.
Stock-based compensation expense decreased $300,000 and $1,069,000 during the
three and nine months ended September 30, 2008, respectively, compared to the
three and nine months ended September 30, 2007, due primarily to forfeitures
of
options associated with a reduction in executive and administrative workforce
combined with a decline in the fair market value of options granted. General
administrative expenses, including travel and facilities expense decreased
$43,000 and $200,000 during the three and nine months ended September 30, 2008,
respectively, compared to the three and nine months ended September 30, 2007.
Depreciation expense decreased by $17,000 and $53,000 during the three and
nine
months ended September 30, 2008, respectively, compared to the three and nine
months ended September 30, 2007 due to our asset base becoming more fully
depreciated. Professional services increased $60,000 and $1,153,000 during
the
three and nine months ended September 30, 2008, respectively, compared to the
three and nine months ended September 30, 2007, primarily due to legal fees
associated with our proposed merger combined with an increase in IP legal
expenses and other merger-related expenses. Included in professional fees during
the three and nine months ended September 30, 2008, are $383,000 and $1,565,000,
respectively, in professional fees related to preparations for our proposed
merger. During the first nine months of 2008, we also recorded a reserve for
collectability of our $500,000 note receivable associated with our first quarter
2008 investment in Asyrmatos.
Interest
Income.
Interest
income decreased $222,000 and $658,000 to $44,000 and $230,000 for the three
and
nine months ended September 30, 2008, respectively, from $266,000 and $888,000
for the three and nine months ended September 30, 2007, due primarily to
decreased levels of investments.
Discontinued
Operations
In
accordance with SFAS No. 144, the disposal of assets constitute a component
of
the entity and have been accounted for as discontinued operations and
accordingly, the assets and liabilities have been segregated in the accompanying
condensed consolidated balance sheet and classified as assets held for sale
and
current liabilities of disposal group held for sale. The operating results
relating to these assets held for sale are segregated and reported as
discontinued operations in the accompanying 2008 and 2007 condensed consolidated
statements of operations.
We
accounted for the impairment of assets in accordance with SFAS No. 144.
Following its decision to exit Plexera, management reviewed
Plexera’s property and equipment to determine recoverability. The
Plexera property and equipment is comprised of assets capitalized and deployed
in Plexera’s business including computer equipment, furniture and office
equipment, lab equipment and leasehold improvements. Plexera assets that are
useful to Lumera’s ongoing business have been redeployed. Included in loss from
discontinued operations for the nine months ended September 30, 2008 is an
impairment loss of $243,000 for certain of the Plexera assets.
In
conjunction with exiting Plexera in March 2008, we recorded severance costs
under the provision of SFAS No. 146, recording a reserve for severance costs
of
$387,000. Through September 30, 2008 we made cash severance payments totaling
$387,000, leaving a zero reserve balance.
In
conjunction with exiting Plexera, we cancelled certain contractual commitments
or otherwise provided for future contract costs under the provisions of SFAS
No.
146, recording contract costs of $157,000 during the three months ended March
31, 2008. Through September 30, 2008, we made cumulative cash contract payments
totaling $157,000, leaving a zero reserve balance.
|
|
Severance Costs
|
|
Contract Costs
|
|
Total
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
$
|
387,000
|
|
$
|
157,000
|
|
$
|
544,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Payments
|
|
|
-
|
|
|
(75,000
|
)
|
|
(75,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Balance at March 31, 2008
|
|
|
387,000
|
|
|
82,000
|
|
|
469,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Payments
|
|
|
(336,000
|
)
|
|
(45,000
|
)
|
|
(381,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Balance at June 30, 2008
|
|
|
51,000
|
|
|
37,000
|
|
|
88,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Payments
|
|
|
(51,000
|
)
|
|
(37,000
|
)
|
|
(88,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Balance at September 30, 2008
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Until
March 2008, when we elected to cease operations of Plexera, we reported the
results of operations of Plexera as a business segment included in continuing
operations. At the end of the first quarter 2008, we ceased all operations
of
Plexera. In May 2008, we committed to a plan to sell the Plexera business.
Substantially, all the assets and liabilities of Plexera will be included in
the
sale and will consist primarily of certain property and equipment, accounts
payable and accrued expenses. The results of operations directly attributed
to
Plexera’s operations that have been reclassified from continuing operations to
discontinued operations for all periods presented are as follows:
|
|
Three Months ended September 30,
|
|
Percentage
|
|
Nine Months ended September 30,
|
|
Percentage
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
Research and
development expense
|
|
$
|
(17,000
|
)
|
$
|
1,117,000
|
|
|
-102
|
%
|
$
|
1,329,000
|
|
$
|
2,558,000
|
|
|
-48
|
%
|
Marketing,
general and administrative expenses
|
|
|
13,000
|
|
|
500,000
|
|
|
-97
|
%
|
|
1,168,000
|
|
|
1,189,000
|
|
|
-2
|
%
|
Income/(Loss)
from Discontinued Operations
|
|
$
|
(4,000
|
)
|
$
|
1,617,000
|
|
|
-100
|
%
|
$
|
2,497,000
|
|
$
|
3,747,000
|
|
|
-33
|
%
|
Research
and development expense decreased by $1,134,000 and marketing, general and
administrative expense decreased by $487,000 for the three months ended
September 30, 2008, compared to the three months ended September 30, 2007,
due
entirely due to the shutdown of Plexera and the termination of its
workforce.
Research
and development expense decreased by $1,229,000 for the nine months ended
September 30, 2008, compared to the nine months ended September 30, 2007. We
exited the Plexera business late in the first quarter of 2008 and ceased
incurring additional research and development expenses at that time. Marketing,
general and administrative expense decreased by $21,000 during the nine months
ended September 30, 2008, compared to the nine months ended September 30, 2007,
as we stopped incurring additional expenses and completed our severance payout
associated with our decision to exit Plexera.
Business
Restructuring
In
March
2008, the Company elected to exit its Bioscience business (Plexera) and to
take
other corporate cost savings measures. In May 2008, the Board of Directors
approved a plan to sell the assets of Plexera. The Company recorded
restructuring costs during the nine months ended September 30, 2008 for the
following categories:
Severance Costs
|
|
Electro-Optics
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
$
|
122,000
|
|
$
|
25,000
|
|
$
|
147,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Payments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Balance at March 31, 2008
|
|
|
122,000
|
|
|
25,000
|
|
|
147,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Payments
|
|
|
(66,000
|
)
|
|
(25,000
|
)
|
|
(91,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Balance at June 30, 2008
|
|
|
56,000
|
|
|
-
|
|
|
56,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Payments
|
|
|
(56,000
|
)
|
|
-
|
|
|
(56,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Balance at September 30, 2008
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Costs
associated with our restructuring activities are accounted for in accordance
with the provisions of SFAS No. 146. Severance costs, which totaled
$147,000, represent amounts paid to former employees of Lumera. Severance
payments in the amount of $56,000 were made to former employees during the
three
months ended September 30, 2008. As a part of our restructuring, we eliminated
5
positions in Corporate as well as the position of Vice President of Sales and
Marketing which was held by Daniel C. Lykken, an Executive Officer of the
Company and part of Electro-Optics segment. The sales and marketing functions
will be performed by other staff members pending our proposed merger with
GigOptix, LLC (see Note 11 - Proposed Merger).
Segment
Revenues and Operating Loss
Revenue
and operating loss amounts in this section are presented on a basis consistent
with accounting principles generally accepted in the U.S. and include certain
allocations attributable to each segment. Segment information presented is
presented on a basis consistent with our internal management reporting, in
accordance with Statement of Financial Accounting Standards No. 131,
Disclosures
about Segments of an Enterprise and Related Information
(“SFAS
No. 131”). Certain corporate level expenses have been excluded from our segment
operating results and are analyzed separately. Plexera’s results of operations
are now reported as discontinued operations, in accordance with SFAS No.
144
.
|
|
For the three months ended
|
|
|
|
For the nine months ended
|
|
|
|
|
|
September 30,
|
|
Percentage
|
|
September 30,
|
|
Percentage
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electro-optics
|
|
$
|
1,565,000
|
|
$
|
624,000
|
|
|
151
|
%
|
$
|
3,548,000
|
|
$
|
2,418,000
|
|
|
47
|
%
|
Total
|
|
$
|
1,565,000
|
|
$
|
624,000
|
|
|
151
|
%
|
$
|
3,548,000
|
|
$
|
2,418,000
|
|
|
47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electro-optics
|
|
$
|
(54,000
|
)
|
$
|
(1,057,000
|
)
|
|
-95
|
%
|
$
|
(1,662,000
|
)
|
$
|
(1,997,000
|
)
|
|
-17
|
%
|
Corporate
expenses
|
|
|
(1,516,000
|
)
|
|
(2,423,000
|
)
|
|
-37
|
%
|
|
(5,320,000
|
)
|
|
(6,014,000
|
)
|
|
-12
|
%
|
Total
loss from continuing operations
|
|
$
|
(1,570,000
|
)
|
$
|
(3,480,000
|
)
|
|
-55
|
%
|
$
|
(6,982,000
|
)
|
$
|
(8,011,000
|
)
|
|
-13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(Loss)
from Discontinued Operations
|
|
$
|
4,000
|
|
$
|
(1,617,000
|
)
|
|
-100
|
%
|
$
|
(2,497,000
|
)
|
$
|
(3,747,000
|
)
|
|
-33
|
%
|
Electro-optics
Revenue.
Revenue
increased by $941,000 and $1,130,000 for the three and nine months ended
September 30, 2008, compared to the three and nine months ended September 30,
2007, respectively, primarily due to increased levels of government contract
activity. Aggregate revenue on governmental contracts totaled $1,556,000 and
$3,405,000 for the three and nine months ended September 30, 2008, respectively,
an increase of $932,000 and $1,078,000, respectively, over the three and nine
months ended September 30, 2007. Backlog on our governmental contracts totaled
$2,313,000 at September 30, 2008. Electro-optic product revenues totaled $10,000
during the three months ended September 30, 2008 and $143,000 for the nine
months ended September 30, 2008.
Operating
Loss.
Our
Electro-optics segment operating loss decreased by $1,003,000 and $335,000,
respectively, for the three and nine months ended September 30, 2008, compared
to the three and nine months ended September 30, 2007. Gross profit, primarily
related to higher governmental contract revenue, increased by $500,000 and
$727,000 for the three and nine months ended September 30, 2008 compared to
the
three and nine months ended September 30, 2007, respectively, while operating
costs decreased by $502,000 for the three months ended September 30, 2008
compared to the three months ended September 30, 2007 and increased by $392,000
during the nine months ended September 30, 2008, compared to the nine months
ended September 30, 2007. Compensation costs, including incentive pay, decreased
by $348,000 and $31,000 for the three and nine months ended September 30, 2008,
respectively, compared to the three and nine months ended September 30, 2007,
due primarily to a decrease in incentive pay combined with a reduction in
headcount and associated salary expense during the current periods. Increased
government contract activities, during the three and nine months ended September
30, 2008, resulted in additional labor and related overhead costs to be
allocated to cost of revenue reducing research and development expense by
$208,000 and $115,000, respectively, compared to the three and nine months
ended
September 30, 2007. Stock-based compensation costs decreased by $33,000 and
$102,000, respectively, for the three and nine months ended September 30, 2008
compared to the three and nine months ended September 30, 2007, due primarily
to
a decline in the fair market value of options granted. Depreciation expense
decreased by $32,000 for the nine months ended September 30, 2008, compared
to
the nine months ended September 30, 2007, respectively, due to our asset base
becoming more fully depreciated. License and royalty fees decreased by $11,000
and $44,000, respectively, for the three and nine months ended September 30,
2008 compared to the three and nine months ended September 30, 2007, due
primarily to a decrease in fees associated with our various agreements. General
and administrative activities, including facilities, associated with product
commercialization efforts increased by $64,000 and $251,000, respectively,
for
the three and nine months ended September 30, 2008, compared to the three and
nine months ended September 30, 2007 due primarily to increased allocation
resulting from the discontinued operations early in the year. Materials and
supplies costs decreased by $41,000 for the three months ended September 30,
2008 compared to the three months ended September 30, 2007, due primarily to
lower product development costs during the current quarter. Materials and
supplies expense was $141,000 higher for the nine months ended September 30,
2008, compared to the nine months ended September 30, 2007, respectively, due
primarily to device packaging expenditures during the first part of the year.
Professional fees mostly associated with consulting and subcontracting expense
increased by $69,000 and $324,000, respectively, for the three and nine months
ended September 30, 2008 compared to the three and nine months ended September
30, 2007.
Corporate
Expenses
Corporate
expenses.
Certain
corporate expenses primarily consist of executive management and human
resources, investor relations, legal, finance, information technology,
purchasing and other general corporate activities.
Total
corporate expenses decreased by $907,000 and $694,000, respectively, during
the
three and nine months ended September 30, 2008 compared to the three and nine
months ended September 30, 2007. Compensation costs, including incentive pay,
decreased by $478,000 and $559,000 for the three and nine months ended September
30, 2008, respectively, compared to the three and nine months ended September
30, 2007, mostly associated with a reduction in workforce. Stock-based
compensation decreased by $301,000 and $1,076,000, respectively, for the three
and nine months ended September 30, 2008, compared to the three and nine months
ended September 30, 2007 due primarily to reduction in executive and
administrative workforce and forfeitures of associated options combined with
a
decline in the fair market value of options granted. Professional fees decreased
by $96,000 for the three months ended September 30, 2008, compared to the three
months ended September 30, 2007 mostly due to a decrease in consulting expense
combined with in increase in costs associated with financial advisory services
and legal fees primarily associated with the proposed merger with GigOptix
LLC
during the current quarter. General and administrative costs, including
facilities and travel, decreased by $16,000 and $240,000 for the three and
nine
months ended September 30, 2008, respectively, compared to the three and nine
months ended September 30, 2007 due primarily to less expense associated with
our business restructuring. Depreciation expense decreased by $17,000 and
$53,000 for the three and nine months ended September 30, 2008, respectively,
compared to the three and nine months ended September 30, 2007, due to our
asset
base becoming more fully depreciated. Professional fees mostly associated with
financial advisory services and legal fees primarily associated with the
proposed merger with GigOptix LLC, offset by a decrease in consulting fees,
increased $736,000 for the nine months ended September 30, 2008, compared to
the
nine months ended September 30, 2007; included in professional fees are $383,000
and $1,565,000 in merger related expenses for the three and nine months ended
September 30, 2008, respectively. During the nine months ended September 30,
2008, we incurred a loss of $500,000 on a long-term receivable we have deemed
uncollectible.
Discontinued
Operations
Discontinued
Operations.
In
accordance with SFAS No. 144, the disposal of assets constitute a component
of
the entity and have been accounted for as discontinued operations. The operating
results relating to these assets held for sale are segregated and reported
as
discontinued operations in the accompanying 2008 and 2007 condensed consolidated
statements of operations.
The
loss
related to Plexera, classified as discontinued operations decreased by
approximately $1,621,000 and $1,250,000 for the three and nine months ended
September 30, 2008, respectively, compared to the three and nine months ended
September 30, 2007. The decrease is due to the decision of the Company in late
March of 2008 to exit the Plexera business.
Liquidity
and Capital Resources
We
have
funded our operations to date primarily through the sale of common and
convertible preferred stock, convertible notes and, to a lesser extent, through
revenues from development contracts and sales of services. We had an accumulated
deficit of $86.0 million as of September 30, 2008. We had approximately $7.0
million in cash and cash equivalents at September 30, 2008.
On
July
16,
2008,
we
sold 4
million shares of our common stock and warrants to purchase an additional 2
million shares through a registered direct offering, for net proceeds of
approximately $2.7 million, after deducting offering fees and expenses. The
shares and warrants were offered pursuant to the Company's effective shelf
registration statement that was previously filed on Form S-3 with the Securities
and Exchange Commission. We intend to use the net proceeds from this offering
for general corporate purposes and to meet minimum working capital requirements
under the conditions of the previously announced proposed merger with GigOptix.
For each share of common stock purchased in the offering, the investor was
also
issued warrants to purchase 0.50 shares of common stock for a combined issue
price of $0.76 per unit, before deducting offering fees and expenses. The shares
of common stock and warrants are immediately separable and were issued
separately. The warrants have an exercise price of $0.76 per share, subject
to
adjustment, have a five-year term, and are not exercisable prior to six months
after issuance.
Net
cash
used in operating activities increased by $1.9 million to $9.7 million for
the
nine months ended September 30, 2008, from $7.8 million for the nine months
ended September 30, 2007. We used $1.2 million in cash to fund our
Electro-optics activities during the nine months ended September 30, 2008,
a
decrease of $200,000 over the nine months ended September 30, 2007, primarily
due to increased levels of government contract activity combined with a decrease
in compensation expense mostly associated with a reduction in headcount and
related salary expense combined with a decrease in incentive pay during the
current period. We used $5.9 million in cash to fund corporate expenses during
the nine months ended September 30, 2008, an increase of $2.8 million over
the
nine months ended September 30, 2007 due primarily to incurred costs associated
with merger activities and costs associated with the business restructuring.
Discontinued operations used cash of $2.5 million for the nine months ended
September 30, 2008 compared to $3.3 million for the nine months ended September
30, 2007, a decrease of $800,000 due primarily to halting business activities
of
Plexera.
Net
cash
provided by investing activities totaled $6.9 million for the nine months ended
September 30, 2008, compared to $6.2 million for the nine months ended September
30, 2007. Capital expenditures totaled $191,000 for the nine months ended
September 30, 2008, compared with $524,000 for the nine months ended September
30, 2007. These costs resulted primarily from laboratory equipment purchases.
Maturities of investment securities totaled $7,550,000 for the nine months
ended
September 30, 2008. Maturities of investment securities, net of reinvestment,
totaled $6,760,000 for the nine months ended September 30, 2007. We loaned
$500,000 to Asyrmatos, Inc., in exchange for a long-term note receivable during
the first quarter of 2008.
Net
cash
of $2.8 million was provided by financing activities for the nine months ended
September 30, 2008, due primarily to the issuance of stock during the current
quarter combined with the exercise of stock options. No net cash was provided
by
financing activities for the nine months ended September 30, 2007.
Our
future capital requirements will depend on numerous factors, including: the
successful culmination of our proposed merger with GigOptix; the progress of
our
research and development efforts; the rate at which we can, directly or through
arrangements with original equipment manufacturers, introduce and sell products
incorporating our polymer materials technology; the costs of filing,
prosecuting, defending and enforcing any patent claims and other intellectual
property rights; market acceptance of our products and competing technological
developments; and our ability to establish cooperative development, joint
venture and licensing arrangements.
We
expect
that our cash used in operations will increase in the last quarter of 2008
as we
incur additional merger related expenses. If the merger is not completed as
planned, we our expect marketing, general and administrative expenses to
increase in 2009 and beyond as we increase our product development and sales
and
marketing staff to qualify, develop and define market products that we
commercialize and to increase the level of corporate and administrative
activity, including increases associated with our operation as a public
company.
Our
business does not presently generate the cash needed to finance our current
and
anticipated operations. We expect that the $7.0 million in cash and cash
equivalents and revenues from our existing contractual relationships, will
be
sufficient to fund our continuing operations through at least 2009.
On
March
27, 2008, Lumera Corporation and GigOptix, LLC (“GigOptix”) announced that they
have signed a definitive agreement to merge the two companies. The Merger
Agreement has been unanimously approved by the boards of directors of Lumera
and
GigOptix. Upon completion of the merger, which is subject to the terms and
conditions of the Merger Agreement and which shall be treated as a tax free
reorganization, existing securities holders of Lumera and GigOptix will each
own
approximately 50% of the outstanding securities, including options and warrants,
of GigOptix, Inc.; common shares will trade on the NASDAQ Global Market under
the ticker symbol “GIGX”.
Consummation
of the merger requires the approval of a majority of our stockholders. The
Company established October 10, 2008 as the stockholder date of record and
December 4, 2008 as the date of its Annual Meeting of Stockholders. GigOptix,
Inc.’s Form S-4 registering the common stock to be issued to stockholders
following the completion of the Lumera Merger (as defined in the Merger
Agreement) has been declared effective by the Securities Exchange Commission
on
October 27, 2008. The Merger Agreement contains customary representations,
warranties and covenants of Lumera and GigOptix, including, among others,
covenants (i) to conduct their respective businesses in the ordinary course
during the interim period between the execution of the Merger Agreement and
consummation of the Merger and (ii) not to engage in certain kinds of
transactions during such period. As a condition of closing, Lumera must have
net
working capital of at least $6 million, subject to diminution of $10,000 per
day
that the closing occurs after June 30, 2008. Subsequent to the sale of 4 million
of our common shares which we completed on July 16, 2008, we believe that we
will meet the minimum working capital requirement of the Merger Agreement
without the need to raise additional capital (See Note 13 – Equity Financing).
We have an additional financial advisory fee commitment totaling $750,000 due
only upon completion of the merger
New
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157,
Fair
Value Measurements
(“SFAS
No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements.
SFAS
No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007; however, on February 12, 2008, the FASB issued FASB
Staff Position (“FSP”) No. FAS 157-2,
Effective
Date of FASB Statement No. 15,
(“FSP
No.
157-2”), which delays the effective date of SFAS No. 157 for nonfinancial assets
and nonfinancial liabilities except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least
annually). The Company is currently assessing the impact of SFAS No. 157
for nonfinancial assets and nonfinancial liabilities on its financial position
and results of operations. FSP No. 157-2 defers the effective date of SFAS
No.
157 to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within scope of FSP No. 157-2. We adopted
the provisions of SFAS No. 157 on January 1, 2008 for our financial assets
and
financial liabilities. Details related to the adoption of SFAS No.
157 and the impact on our financial position, results of operations or cash
flows is more fully discussed in the Financial Statements at Note 10 - Fair
Value.
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
No. 159”). SFAS No. 159 permits entities to choose to measure certain financial
assets and liabilities at fair value. Unrealized gains and losses, arising
subsequent to adoption, are reported in earnings. SFAS No. 159 is effective
for
fiscal years beginning after November 15, 2007. The Company has adopted SFAS
No.
159 as of January 1, 2008 and has not elected the fair value option for any
items permitted under SFAS No. 159.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007),
Business
Combinations
(“SFAS
141(R)") which replaces SFAS No.141,
Business
Combinations
.
SFAS
141(R) retains the underlying concepts of SFAS 141 in that all business
combinations are still required to be accounted for at fair value under the
acquisition method of accounting but SFAS 141(R) changed the method of applying
the acquisition method in a number of significant aspects. SFAS 141(R) is
effective on a prospective basis for all business combinations for which the
acquisition date is on or after the beginning of the first annual period
subsequent to December 15, 2008, with the exception of the accounting for
valuation allowances on deferred taxes and acquired tax contingencies.
SFAS 141(R) amends SFAS 109 such that adjustments made to valuation
allowances on deferred taxes and acquired tax contingencies associated with
acquisitions that closed prior to the effective date of SFAS 141(R) would also
apply the provisions of SFAS 141(R). Early adoption is not allowed. We are
currently evaluating the effects, if any, that SFAS 141(R) may have on our
financial position, results of operations or cash flows.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Substantially
all of our cash equivalents are at fixed interest rates, and as such, the fair
value of these instruments is affected by changes in market interest rates.
Due
to the generally short-term maturities of these securities, however, we believe
that the market risk arising from our holdings of these financial instruments
is
not material.
Our
investment policy restricts investments to ensure principal preservation and
liquidity. We invest cash that we expect to use within approximately sixty
days
in Money Market Funds and U.S. treasury-backed instruments. We invest cash
in
excess of sixty days of our requirements in high-quality investment securities.
Any
continuation or worsening of the current global economic and financial
conditions could materially adversely affect our ability to raise, or the
cost
of, needed capital and could materially adversely affect out ability to
commercialize products.
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of disclosure controls and procedures
- Based
on an evaluation under the supervision and with the participation of the
Company’s management, the Company’s principal executive officer and principal
financial officer have concluded that the Company’s disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “
Exchange
Act”
))
were
effective as of September 30, 2008 to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms and that
information required to be disclosed by the Company in the reports that it
files
or submits under the Exchange Act is accumulated and communicated to the
company's management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required
disclosure.
Changes
in Internal Control
- There
was no change in our internal control over financial reporting (as defined
in
Rules 13a-15(F) and 15d-15(f) under the Exchange Act) that occurred during
the
period covered by this Quarterly Report on Form 10-Q that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART
II
OTHER
INFORMATION
ITEM
1.
LEGAL PROCEEDINGS
We
are
subject to various claims and pending or threatened lawsuits in the normal
course of business. We are not currently party to any legal proceedings that
management believes the adverse outcome of which would have a material adverse
effect on our financial position, results of operations or cash flows.
ITEM
1A. RISK FACTORS
Risk
factors may affect our future business and results. The matters discussed
below could cause our future results to materially differ from past results
or
those described in forward-looking statements and could have a material adverse
effect on our business, financial condition, results of operations and stock
price. Bear in mind that new risks emerge and management may not be able to
anticipate all of them or be able to predict how they impact our business and
financial performance.
Our
planned merger with GigOptix involves risk that could be harmful to our
business.
Under
the
terms of the merger agreement with GigOptix, we and GigOptix will become
wholly-owned subsidiaries of a newly formed company, GigOptix, Inc.
(“Holdings”). The planned merger involves certain risks including, but not
limited to:
|
·
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difficulties
assimilating the merged operations and personnel;
|
|
·
|
potential
disruptions of our ongoing business;
|
|
·
|
the
diversion of resources and management time;
|
|
·
|
the
possibility that uniform standards, controls, procedures and policies
may
not be maintained;
|
|
·
|
risks
associated with entering new markets in which we have little or no
experience;
|
|
·
|
the
potential impairment of relationships with employees or customers
as a
result of changes in management;
|
|
·
|
difficulties
in evaluating the future financial performance of the merged
businesses;
|
|
·
|
difficulties
integrating network equipment and operating support
systems;
|
|
·
|
brand
awareness issues related to the combined companies;
and
|
|
·
|
risks
associated with attainment of targeted synergy and savings goals
including
reductions in personnel, reductions or changes in current and proposed
spending, and changes to current business
plans.
|
The
impact of these risks on us could be exacerbated if the merger does not close
as
anticipated, or if closing is delayed.
The
value of the shares of Holdings’ common stock may be less than the value of
shares of our common stock as of the date of the merger agreement or on the
date
of the annual meeting.
The
value
of our common stock as of the merger agreement date, or on the date of our
annual meeting, may not be indicative of the price of Holdings’ common stock
after the merger is completed. The value of shares of our common stock may
vary
significantly between the date of the merger agreement, the date of the annual
meeting and the date of the completion of the merger. These variations may
result from, among other factors, changes in the businesses, operations, results
and prospects of the companies, market expectations of the likelihood that
the
merger will be completed and the timing of completion, the prospects of
post-merger operations, the effect of any conditions or restrictions imposed
on
or proposed with respect to the combined company by regulatory agencies and
authorities, general market and economic conditions and other factors. The
Lumera exchange ratio for the merger is fixed and, except as required to
facilitate the listing of Holdings’ common stock on the NASDAQ Global Market or
in connection with the issuance of additional shares of stock before the closing
date of the merger, will not be adjusted based on any change in our stock price
or the value of the GigOptix membership units before the merger.
The
surviving company may fail to realize the anticipated benefits of the merger.
Holdings’
future success will depend in significant part on its ability to realize the
cost savings, operating efficiencies and new revenue opportunities that we
expect to result from the integration of our and GigOptix businesses. Holdings’
operating results and financial condition will be adversely affected if it
is
unable to integrate successfully our operations and the operations of GigOptix,
fails to achieve or achieve on a timely basis such cost savings, operating
efficiencies and new revenue opportunities, or incurs unforeseen costs and
expenses or experiences unexpected operating difficulties that offset
anticipated cost savings. In particular, the integration of GigOptix and us
may
involve, among other matters, integration of sales, marketing, billing,
accounting, quality control, management, personnel, payroll, regulatory
compliance, network infrastructure and other systems and operating hardware
and
software, some of which may be incompatible and therefore may need to be
replaced.
Our
stockhoders will have reduced ownership and voting interests in Holdings and
will be able to exercise less influence over management following the
merger.
Our
stockholders will have reduced ownership and voting interests in the combined
company and will be able to exercise less influence over management following
the merger. Immediately after the merger, based on the exchange ratios contained
in the merger agreement, pre-merger Lumera stockholders will collectively own
a
smaller percentage of Holdings common stock than they did of our common stock
prior to the merger. Consequently, our stockholders will be able to exercise
less influence over the management and policies of Holdings than they currently
exercise over us.
We
will be subject to business uncertainties and contractual restrictions while
the
merger is pending that could adversely affect our business.
Uncertainty
about the effect of the merger on employees and customers may have an adverse
effect on us and, consequently, on the combined company. Although we intend
to
take actions to reduce any adverse effects, these uncertainties may impair
our
ability to attract, retain and motivate key personnel until the merger is
completed and for a period of time thereafter, and could cause customers,
suppliers and others that deal with us to seek to change existing business
relationships with the two companies. Employee retention may be particularly
challenging during the pendency of the merger, as employees may experience
uncertainty about their future roles with the combined company. If, despite
our
retention efforts, key employees depart because of issues relating to the
uncertainty and difficulty of integration or a desire not to remain with the
combined company, the combined company’s business could be seriously harmed.
The
merger agreement restricts us from making acquisitions and taking other
specified actions until the merger occurs or the merger agreement terminates.
These restrictions may prevent us from pursuing otherwise attractive business
opportunities and making other changes to our business that may arise before
completion of the merger or, if the merger is abandoned, termination of the
merger agreement.
Failure
to complete the merger could negatively affect us.
If
the
merger is not completed for any reason, we may be subject to a number of
material risks, including the following:
|
·
|
we
will not realize the benefits expected from becoming part of a combined
company, including a potentially enhanced competitive and financial
position;
|
|
·
|
the
trading price of our common stock may decline to the extent that
the
current market price of the common stock reflects a market assumption
that
the merger will be completed;
|
|
·
|
current
and prospective employees may experience uncertainty about their
future
roles with us, which may adversely affect our ability to attract
and
retain key management, marketing and technical personnel; and
|
|
·
|
some
costs related to the merger, such as legal, accounting and some financial
advisory fees, must be paid even if the merger is not completed.
|
We
may need to raise additional capital to meet our conditions to completion of
the
merger.
It
is a
condition to the completion of the merger that we have net working capital,
as
defined in the merger agreement, of at least $6,000,000 at the effective time
of
the merger, subject to reduction of $10,000 per day after June 30, 2008. In
order to meet this closing condition, we have raised additional capital, and
do
not anticipate raising more capital. There are several sources through which
we
might raise any capital needed to meet the net working capital closing
condition, including using the committed equity financing facility we entered
into with Kingsbridge Capital Limited and the sale of the Plexera business
division. If these sources are insufficient or unavailable to satisfy the net
working capital closing condition, we will need to raise capital through other
sources, such as an equity or debt financing. If we are unable to raise the
funds necessary to meet the net working capital closing condition at or prior
to
the closing, GigOptix may elect not to close the merger.
If
the proposed merger closes, the listing of Holdings’ common stock on the NASDAQ
Global Market may require us to reduce the number of shares of Holdings’ common
stock our shareholders receive in the merger.
Our
common stock is currently listed for trading on the NASDAQ Global Market.
On May
16, 2008, we received a Staff Deficiency Letter from The NASDAQ Stock Market
which stated that our stockholders’ equity at March 31, 2008 was less than the
$10 million minimum in stockholders’ equity required for continued listing on
The NASDAQ Global Market under Marketplace Rule 4450(a)(3). With the completion
of our July 2008 stock offering, we believe that we satisfy the minimum
stockholders’ equity requirements as of August 1, 2008. NASDAQ will continue to
monitor our ongoing compliance with the minimum stockholders’ equity
requirement.
On
August
14, 2008, we received a letter from The NASDAQ Stock Market indicating that
for
30 consecutive business days the bid price of our common stock had closed below
the minimum $1.00 per share requirement for continued inclusion on The NASDAQ
Stock Market under Marketplace Rule 4450(a)(5). In accordance with Marketplace
Rule 4450(e)(2), we have been provided 180 calendar days, or until February
10,
2009, to regain compliance. We will achieve compliance if the bid price of
the
Company’s common stock closes at $1.00 per share or more for a minimum of ten
consecutive business days before February 10, 2009.
As
a
condition to completion of the merger, Holdings must meet the initial listing
requirements to initiate the listing and trading of its shares on the NASDAQ
Global Market or qualify for an alternative listing on the NASDAQ Capital
Market. These initial listing requirements are more difficult to achieve than
the continued listing requirements under which we are now trading. In order
for
Holdings’ common stock to be listed on the NASDAQ Global Market, it must satisfy
a $5.00 minimum bid price initial listing requirement and $10 million of
stockholder equity. In accordance with the merger agreement, we and GigOptix
will review together the trading prices of our common stock with a view to
assessing the ability of Holdings’ common stock to satisfy the NASDAQ Global
Market’s $5.00 minimum bid price initial listing requirement. If, based on such
trading prices, it appears reasonably likely that the trading prices of
Holdings’ common stock would appear to fail to meet this requirement, we and
GigOptix are required to reduce proportionately the Lumera exchange ratio and
the GigOptix exchange ratio. Such a reduction to the exchange ratios will
decrease the total number of shares of Holdings’ common stock to be issued in
the merger and thereby increase the expected trading prices for Holdings common
stock to a level we and GigOptix consider reasonably sufficient to meet the
minimum bid price requirement. The NASDAQ Capital Market requires a $4.00
minimum initial bid price.
The
merger may not close because we or GigOptix may not satisfy conditions to
closing.
Our
obligations and the obligations of GigOptix to complete the merger are subject
to the satisfaction of the following conditions:
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·
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the
adoption of the merger agreement and approval of the transactions
contemplated thereby by our stockholders;
|
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·
|
the
approval of the charter amendment proposal by our
stockholders;
|
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·
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the
absence of any judgment or other legal prohibition of any court or
other
governmental entity that prohibits the completion of the merger;
|
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·
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the
declaration by the SEC of the effectiveness of the registration statement
relating to the merger;
|
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·
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the
authorization for listing of Holdings’ common stock issuable pursuant to
the merger on the NASDAQ Global Market or, if such listing is not
reasonably practicable, the NASDAQ Capital Market;
|
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·
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the
disposition or winding down of our Plexera business division;
|
|
·
|
the
truth and accuracy of the representations and warranties of the other
party, subject to the material adverse effect standard provided in
the
merger agreement;
|
|
·
|
the
performance in all material respects of the other party’s obligations
under the merger agreement;
|
|
·
|
the
absence of any change, event, violation, inaccuracy, circumstance
or
effect that, individually or in the aggregate, has had or is reasonably
expected to have a material adverse effect on the other party and
its
subsidiaries, taken as a whole;
|
|
·
|
the
receipt by each party of the required closing certificate from the
other
party;
|
|
·
|
the
receipt by us of executed lock-up agreements relating to our common
stock
from certain holders of GigOptix membership units;
|
|
·
|
the
predecessor company of GigOptix not having repaid any of its indebtedness,
except for ordinary course distributions; and
|
|
·
|
our
net working capital (as defined in the merger agreement) being at
least
$6,000,000 at the closing date, subject to reduction of $10,000 per
day if
the closing date occurs after June 30, 2008.
|
We
or
GigOptix may not be able to satisfy in a timely manner one or more of the
conditions required to be satisfied prior to the closing of the merger. With
some exceptions, both we and GigOptix each generally may waive conditions that
apply to its closing obligations under the Merger Agreement.
If
the proposed merger closes, Holdings’ dependence on third-party manufacturing
and supply relationships increases the risk that Holdings will not have an
adequate supply of products to meet demand or that the cost of materials will
be
higher than expected.
GigOptix
has historically depended upon third parties to manufacture, assemble or package
its products. We expect that this practice will continue following the merger.
As a result, Holdings will be subject to risks associated with these third
parties, including:
|
·
|
reduced
control over delivery schedules and quality;
|
|
·
|
inadequate
manufacturing yields and excessive costs;
|
|
·
|
difficulties
selecting and integrating new subcontractors;
|
|
·
|
potential
lack of adequate capacity during periods of excess demand;
|
|
·
|
limited
warranties on products supplied to Holdings;
|
|
·
|
potential
increases in prices;
|
|
·
|
potential
instability in countries where third-party manufacturers are located;
and
|
|
·
|
potential
misappropriation of its intellectual property.
|
Outside
foundries generally manufacture products on a purchase order basis, and GigOptix
has very few long-term supply arrangements with these suppliers. GigOptix has
less control over delivery schedules, manufacturing yields and costs than
competitors with their own fabrication facilities. A manufacturing disruption
experienced by one or more of the outside foundries or a disruption of Holdings’
relationship with an outside foundry, including discontinuance of its products
by that foundry, would negatively impact the production of certain of Holdings’
products for a substantial period of time.
If
the proposed merger closes, integrating GigOptix’s and our businesses may divert
management’s attention away from operations.
Successful
integration of the operations, products and personnel of GigOptix and us may
place a significant burden on management and internal resources. The diversion
of management’s attention and any difficulties encountered in the transition and
integration process could otherwise harm Holdings’ business, financial condition
and operating results. The integration will require efforts from each company,
including the coordination of their general and administrative functions. For
example, integration of administrative functions includes coordinating employee
benefits, payroll, financial reporting, purchasing and disclosure functions.
Delays in successfully integrating and managing employee benefits could lead
to
dissatisfaction and employee turnover. Problems in integrating purchasing and
financial reporting could result in control issues, including unplanned costs.
In addition, the combination of GigOptix’s and our organizations may result in
greater competition for resources and elimination of product development
programs that might otherwise be successfully completed.
If
our internal controls over financial reporting are not considered effective,
our
business and stock price could be adversely affected.
Section
404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness
of our internal controls over financial reporting as of the end of each fiscal
year, and to include a management report assessing the effectiveness of our
internal controls over financial reporting in our annual report on Form 10-K
for
that fiscal year. Section 404 also requires an independent registered public
accounting firm to attest to, and report on, management’s assessment of internal
controls over financial reporting.
Management,
including the chief executive officer and chief financial officer, do not expect
that the internal controls over financial reporting will prevent all errors
and
all fraud. A control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the control system’s
objectives will be met. Further, the design of a control system must reflect
the
fact that there are resource constraints, and the benefits of controls must
be
considered relative to their costs. Because of the inherent limitations in
all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud involving a company have been, or
will
be, detected. The design of any system of controls is based in part on certain
assumptions about the likelihood of future events, and there is no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, controls may become inadequate because of changes
in conditions or deterioration in the degree of compliance with policies or
procedures. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
It
is
possible that we or our independent registered public accounting firm will
identify a material weakness in our internal controls in the future. If our
internal controls over financial reporting are not considered effective, we
may
experience a restatement and/or a loss of public confidence, which could have
an
adverse effect on our business and on the market price of our common
stock.
The
complexity of our products may lead to errors, defects and bugs, which could
result in the necessity to redesign products and could negatively impact our
reputation with customers.
Products
as complex as our products may contain errors, defects and bugs when first
introduced or as new versions are released. Delivery of products with production
defects or reliability, quality or compatibility problems could significantly
delay or hinder market acceptance of the products or result in a costly recall
and could damage our reputation and adversely affect our ability to retain
existing customers and to attract new customers. In particular, certain of
our
products are customized or designed for integration into specific network
systems. If, after we have incurred significant expenses in designing such
products, the products experience defects or bugs, we may need to undertake
a
redesign of the product, a process which may result in significant additional
expenses.
We
may
also be required to make significant expenditures of capital and resources
to
resolve such problems. There is no assurance that problems will not be found
in
new products after commencement of commercial production, despite testing by
us,
our suppliers or our customers.
ITEM
6.
|
EXHIBITS
|
|
|
(a)
|
Exhibits
|
|
|
31.1
|
Chief
Executive Officer Certification Pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
31.2
|
Chief
Financial Officer Certification Pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 Of the
Sarbanes-Oxley Act of 2002
|
|
|
32.1
|
Chief
Executive Officer Certification pursuant to Section 1350, Chapter
63 of
Title 18, United States Code, as adopted pursuant to Section 906
of the
Sarbanes-Oxley Act of 2002
|
|
|
32.2
|
Chief
Financial Officer Certification pursuant to Section 1350, Chapter
63 of
Title 18, United States Code, as adopted pursuant to Section 906
of the
Sarbanes-Oxley Act of 2002
|
SIGNATURES
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
|
LUMERA
CORPORATION
|
|
|
Date:
November 7, 2008
|
/s/
JOSEPH J. VALLNER
|
|
Joseph
J. Vallner
|
|
President,
Interim Chief Executive Officer and Director
|
|
(Principal
Executive Officer)
|
|
|
Date:
November 7, 2008
|
/s/ PETER
J. BIERE
|
|
Sr.
Vice President, Chief Financial Officer and Treasurer (Principal
Financial
Officer
and Principal Accounting
Officer)
|
EXHIBIT
INDEX
The
following documents are filed.
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
31.1
|
|
Chief
Executive Officer Certification Pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
31.2
|
|
Chief
Financial Officer Certification Pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
32.1
|
|
Chief
Executive Officer Certification pursuant to Section 1350, Chapter
63 of
Title 18, United States Code, as adopted pursuant to Section 906
of the
Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Chief
Financial Officer Certification pursuant to Section 1350, Chapter
63 of
Title 18, United States Code, as adopted pursuant to Section 906
of the
Sarbanes-Oxley Act of 2002
|