UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20002003
OR
| 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 000-30975
TRANSGENOMIC, INC.
(Exact Name of Registrant as Specified in its Charter)
| Delaware | 91-1789357 | |
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification Number) | |
12325 Emmet Street Omaha, NE 68164 | 68164 | |
| (Address of Principal Executive Offices) | (Zip Code) | |
(402) 452-5400
(Registrant'sRegistrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange On Which Registered | |||
| None | N/A |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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/x No / /¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K / /x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes¨ Nox
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of February 16, 2001 (basedbased on the last reported closing price per share of Common Stock as reported on The Nasdaq National Market on such date)the last business day of the registrant’s most recently completed second fiscal quarter was approximately $62,854,300.$41,900,000.
As of FebruaryMarch 16, 2001,2004, the registrant had 21,230,16629,044,514 shares of Common Stock outstanding that consist of 21,492,070 shares issued less 261,904 shares of treasury stock.outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2001 Proxy Statement relating to the RegistrantsRegistrant’s May 23, 2001,19, 2004 Annual Stockholders Meeting are incorporated by reference into Part III.
TRANSGENOMIC, INC.
Index to Form 10-K for the Fiscal Year Ended December 31, 2000
2003
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This Form 10-K references the following trademarks which are the property of Transgenomic: DNASEP®, GUARD-DISC®, WAVE®, WAVEMAKER®, TRANSFORMING THE WORLD®, TRANSGENOMIC®, TRANSGENOMIC and DESIGN® and TRANSGENOMIC GLOBE LOGO®; OLIGOSEPTM, OPTIMASETM, RNASEPTM, WAVE OPTIMIZEDTM, WAVE-MDTM, WAVE NAVIGATORTM, THE POWER OF DISCOVERYTM, SURVEYORTM, and MutuationDiscovery.comTM. All other trademarks or trade names referred to in this Form 10-K are the property of their respective owners.
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this annual report on Form 10-K that are subject to risks and uncertainties. Many of these forward-looking statements refer to our plans, objectives, expectations and intentions, as well as our future financial results. You can identify these forward-looking statements by forward-looking words such as "expects," "anticipates," "intends," "plans," "may," "will," "believes," "seeks," "estimates"“expects,” “anticipates,” “intends,” “plans,” “may,” “will,” “believes,” “seeks,” “estimates” and similar expressions. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors discussed under "Risks“Risks Related to Our Business"Business” and other factors identified by cautionary language used elsewhere in this annual report on Form 10-K.
Overview
We provide innovative toolsproducts and services for the separationsynthesis, purification and analysis of nucleic acidsacids. Our operations fall into two principal business units, BioSystems and Nucleic Acids. Our BioSystems products include our WAVE® automated instrument systems, WAVE associated consumable products and other related consumable products. Our Nucleic Acids products include chemical building blocks for nucleic acid synthesis and synthesized nucleic acids. Both business units have service offerings as well, including genetic variation discovery and analysis services, novel chemistry development services and custom synthesis of nucleic acids. Our business strategy is to align our products and services with the advancements in the field of genetics and to become a major supplier of products and services to researchers, seeking to discovermedical institutions, diagnostic and understand variationspharmaceutical companies. Specifically, our strategy is to:
Our technologies center around three core competencies: separation chemistries, enzymology, and nucleic acid chemistries. We employ novel chemistries for separating nucleic acids, proteins, peptides, amino acids and carbohydrates. One of our tools aresignificant separation technologies is currently embodied in the WAVE System. The WAVE System is a versatile andinstrument that can be used for variation detection, size-based double-strand DNA separation and analysis, single-strand DNA separation and analysis and DNA purification. PriorThe WAVE System requires the use of various consumable products that we manufacture and sell separately.
Our second core competency is expertise in developing novel enzymes. Enzymes are proteins that act as catalysts for biochemical reactions. Several of these reactions are useful in genomics. The ability to develop enzymes useful in the experimental manipulation of genes provides powerful tools for producing genetic material in the form needed for further analysis or incorporation into diagnostics and therapeutics. These products can also expand the sale of consumable products to WAVE System users and may also be sold for other applications. In September 2003 we introduced our SURVEYOR™ product line of mutation detection kits. The key component of SURVEYOR Mutation Detection Kits is an enzyme that cleaves DNA at points where any type of DNA sequence variation exists, a significant improvement compared to related enzymes in its class. The resulting DNA fragments can then be analyzed by the Transgenomic WAVE System, fluorescent capillary electrophoresis or standard gel electrophoresis. SURVEYOR Kits provide a simple and robust method of scanning relatively large DNA fragments for both known and novel sequence variations. We have recently begun commercial sales of SURVEYOR.
Our third core competency is nucleic acid chemistries. Our synthetic nucleic acid products consist of chemical building blocks of nucleic acids (known as “phosphoramidites”), fluorescent markers and dyes, associated reagents, and synthesized segments of nucleic acids (known as “oligonucleotides” and “oligomimetics”). These products are used by research organizations, diagnostic companies and pharmaceutical companies. We produce these products in our Glasgow, Scotland facility. In 2003 we began production at a cGMP compliant facility in Boulder, Colorado. This facility is able to further process phosphoramidite products into synthesized oligonucleotides in larger quantities. This facility will also provide process development, enhancement and unique chemistry development services. Finally, our nucleic acid chemistry capabilities also include the ability to produce related specialty chemicals, such as molecular tags, dyes, quenchers, linkers, and solvents used to modify nucleic acids for subsequent detection or manipulation.
The Company’s operations are managed based upon the nature of the products and services provided. Accordingly, the Company operates in two reportable segments, BioSystems and Nucleic Acids. Operations for these segments are evaluated based upon specific identification of revenues and expenses associated with the business activities resulting in a segment operating income. Segment revenues and loss/income from operations are included in Note L to the formationCompany’s consolidated financial statements contained in Item 8 of Transgenomic, Inc., we conducted our business operations through an Iowa corporation known as CETAC Holding Company, Inc. and its various subsidiaries. CETAC Holding Company, Inc. designed, manufactured and sold several different types of non-life sciences instruments that prepare samples of material so that they may be more easily analyzed by, and efficiently introduced into testing apparatus. We also manufactured and sold chromatography products that are used in a variety of testing applications, such as food analysis and environmental testing. On July 1, 1997, we consolidated these companies into a new Delaware corporation known as Transgenomic, Inc., that was formed to develop, manufacture and market our new DNA separation and analysis products in addition to continuing the non-life sciences business of CETAC Holding Company, Inc. and its subsidiaries. In 1999, we acquired, through our subsidiary in the United Kingdom, substantially all of the assets of Kramel Biotech International, Limited, a manufacturer of laboratory consumables used in the field of molecular biology.this report.
Our business plan is to focus on the genomics segment of the life sciences industry and the development, marketing and support of our proprietary technology for the automated separation and analysis of nucleic acids. Therefore, effective April 1, 2000 we sold the assets related to our non-life sciences instrument product line for a total adjusted purchase price of $5.65 million plus reimbursement by the buyer of approximately $0.4 million of expenses paid by us since March 31, 2000 in connection with this product line.
DNA and Genomics-Based Research
Genomics-Based Research, Diagnostics and Therapeutics
The human body is composed of billions of cells each containing deoxyribonucleic acid, or DNA, which encodes the basic instructions for cellular function. The complete set of DNA is called the genome, or genetic code. The human genome is composed of 23 pairs of chromosomes that are further divided into approximately 30,000, or more, smaller regions called genes. Genes are used in the cell as the template for the production of proteins, and it is these proteins that direct cell function that are ultimately reflected in the individual traits of the person. Researchers theorize that the human genome may provide cells instructions on how to make up to 300,000 different proteins. Each gene is made up of four different chemicals known as nucleotide bases which are commonly designated by the first letter of their chemical names, or G, C, A
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and T. The entire human genome contains approximately 3 billion of these nucleotides arranged in order along the two complimentary strands of the DNA molecule. The order of the nucleotides along these strands is known as the DNA sequence, and it is this sequence that determines the function of the genes. Therefore, anyAny variation in the DNA sequence of a particular gene may result in a change in the cell function controlled by that gene. These changes, known as genetic variations, or polymorphisms, are often the cause of disease or make an individual more susceptible to disease.
Genomics is the systematic and comprehensive analysis of the sequence, structure and function of the genes that comprise the genome. Thegenome, the objective of which is identifying and understanding the role of genes in human physiology and disease. During the last ten years, an intense effort has been underway to determine the sequence of genes in the entire human genome. This basic research yielded a rough draft of the genome in the year 2000. Both the U.S.-government sponsored Human Genome Project and private researchers have been involved in this effort that has provided an immense amount of sequencing information for human DNA. While these efforts will provide a basic blueprint of the human genome, they have necessarily been centered on determining the DNA sequence of a limited number of individuals. Therefore, this fundamental sequencing data will not, by itself, provide much information about the function of genes and their relationship to disease. This information will only be developed through the intense study of genetic variation. Accordingly, genomics researchers are now attempting to understand variations in this DNA sequence information and how it correlates to disease in order to develop new drugs, treatmentstherapeutics and diagnostic methods.tools.
Importance of the Discovery of Genetic VariationSynthetic Nucleic Acids
There
Synthetic nucleic acid molecules—commonly referred to as oligonucleotides—are necessary consumable reagents for numerous DNA-based analytical methods, diagnostic methods, and therapeutic products.
Genomics-based Diagnostics
Once a varietyrelationship is established between a particular genetic variation(s) and a disease it becomes possible to look for the specific genetic variation(s) or other biomarkers as a way of variationsdiagnosing a person’s susceptibility to the disease or the actual presence of the disease.
Nucleic Acid-based Therapeutics
Most drugs developed to date have been small molecules that act by inhibiting the action of protein targets, typically enzymes or receptors that are known to occurbe involved in disease. Drug discovery involves the isolation and/or synthesis of large numbers of candidate chemical compounds, followed by high-throughput screening of these candidates for the ability to inhibit the protein target of interest. Drug candidates that pass initial screening
are then subjected to additional rounds of screening, preclinical testing in animal models, and Phase I – Phase III clinical trials. Experimental drugs that have demonstrated safety and efficacy at the end of this path are then candidates for potential marketing approval by regulatory agencies. Since the advent of recombinant DNA sequences.technology, proteins themselves have been increasingly exploited as therapeutic agents. More recently still, it has been demonstrated that nucleic acids—DNA and/or RNA—can also be utilized in a therapeutic context. The most common formmechanisms by which they act are novel, setting the stage for new paradigms in drug discovery/development.
Business Strategy
Our business strategy is to align our product and service offerings with the evolution of genetic variation involves a change in a single nucleotideadvancements and is called a single nucleotide polymorphism, or SNP. Other types of genetic variation include the insertion or deletion of several nucleotides and translocation or repetition of nucleotides. The identification and understanding of these variations, including SNPs, are important because they may indicate predisposition to a variety of diseases. Since even a single variation of a nucleotide can havebecome a major role in human disease, effortssupplier of products and services to understandresearchers, medical institutions, diagnostic and analyze genetic variationspharmaceutical companies. Genetic advancements have recently intensified.
After SNPs or other variations are discovered, their potential relevancedeveloped and continue to disease must be validated by determining the frequency of variation in different segments of the population. Some diseases, such as muscular dystrophy, are caused by DNA variations in a single gene. Many common diseases, such as diabetes, cancer and obesity, are caused by variations in more than one gene. Since a single variation or multiple variations may be required for a particular disease or trait to manifest itself, it is necessary to measure a sizable population of these variations in order to be able to predict with confidence the association of a variation with a particular disease or trait.
Therefore, the need to discover new genetic variations will be ongoing as the variety of human diseases are studied and their correlation with different populations or groups of individuals is analyzed. In order to do this on the scale that likely will be required, researchers will need technologies that provide faster sample analysis, greater accuracy and reliability and lower costs than technologies that they have historically used. It will be especially important that the technology used by these researchers be able to detect all types of variations, including SNPs, insertions and deletions, translocations and repetitions, and whether the existence of the variation is known or unknown. It is this need that we believe creates a market opportunity for our WAVE® System and its ability to detect genetic variations quickly, accurately and inexpensively.
Importance of Purification
A number of companies produce short single-strand DNA fragments, known as oligonucleotides, with a known sequence and sell them to genetic researchers who use them in research and other applications.
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When synthesizing oligonucleotides, it is important that the single-stranded DNA fragments do not contain fragments with unwanted DNA sequences. In commercial scale production of oligonucleotides, it is difficult to remove unwanted DNA sequences in a cost effective manner. As the usage of oligonucleotides in research and other applications continues to expand so to will the need to produce high quality, very pure oligonucleotides in an automated, scalable and cost-effective means. It is this need, we believe, that creates a market opportunity for the WAVE system.develop over time. The ability of the WAVE to purify these fragments quickly and inexpensively provides an effect solution for commercial scale production.
Our WAVE System is a versatile system that can be used for variation detection, size-based double-strand DNA separation and analysis, single-strand DNA separation and analysis and DNA purification. Because of this versatility, the WAVE System can essentially replace the use of traditional gel electrophoresismovement in the molecular biology laboratory. Our patented technology uses a process known as high performance liquid chromatographyfield of genomics, and related market opportunities, has shifted from gene discovery to separate DNA material so that genetic variation may be identified and analyzed. In this process, DNA is injected into a special tube or column containing microscopic polymer beads. These micro-beads have special surface chemistries that cause the DNA molecules to attach to the surface of the beads. A chemical reagent is then pumped through the column under carefully controlled pressure and temperature conditions causing the DNA molecules to be selectively released from the beads so that they can be separated and measured. Our proprietary software controls the entire process and produces the results of the operation in an easy-to-read chart format. Once the DNA sample is loaded into the instrument and necessary data is entered into the software, the process requires virtually no additional input from the researcher. By using our patented DNASep®, OLIGOSep® and RNASep™ columns and specifically formulated reagents that we have developed for various applications, the researcher is able to achieve a consistent high-quality result. Our WAVE System includes the following components.
The basic operation of WAVE System is described below:
DNA Sample Preparation. A sample of the DNA fragment of interest is first extracted from a biological sample such as tissue or blood. Extraneous proteins are removed from the DNA sample and the sample is placed into a multi-well plate along with chemicals or reagents. A targeted DNA sequence is then copied by repeated cycles of heating and cooling in order to produce enough of the targeted sequence so that it can be detected. This replication process is known as polymerase chain reaction, or PCR, amplification.
After the sample has been amplified, the sample DNA fragment may be mixed with "normal" DNA fragments that have a known sequence of nucleotides. The sample is then heated to cause the two strands of the DNA molecules in both the sample DNA and the normal DNA to separate from each other. The mixture is then cooled so that the strands reattach to each other. Because they are mixed together, the single-strand DNA from the sample DNA and the normal DNA will, in some cases, recombine with each
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other. If the sample DNA has a sequence of nucleotides that differs from the normal DNA, some of the recombined strands will not completely match and, therefore, will not bind completely. As a result, both the mismatched, or heteroduplex, DNA fragments and the correctly matched, or homoduplex, DNA fragments will be present. On the other hand, if the sample DNA has the same sequence of nucleotides as the normal DNA, all of the recombined strands will match and bind completely and only homoduplex DNA fragments will be present.
WAVE System Sample Introduction and Separation Process. A sample plate containing DNA is inserted directly into the WAVE System's autosampler. The autosampler takes a small volume of the sample and injects it into the column containing the micro-beads. Due to the chemical affinity of the DNA to the surface chemistry on the micro-beads in the column, the DNA attaches itself to the micro-beads. After the sample is injected into the instrument, a mixture of reagent fluids is pumped into the column at specified reagent concentrations and temperature conditions.
As the reagents are pumped through the column, DNA fragments are released and separated from each other. The DNA fragments flow from the column and through an ultraviolet or a fluorescence detector, which then measures and reports the passage of the DNA fragments of interest. Depending on the mode of operation, DNA fragments can be identified and measured to determine whether they are mutant or normal, or a specific DNA size or type. The separation and detection process continues until the entire DNA sample mixture is separated into individual fragments. Any fragment of interest can be collected for further study.
Modes of Operation. DNA can be separated using three different modes by controlling the oven temperature. These modes include the following:
Detection. The standard WAVE System uses ultraviolet, or UV, detection. UV detection is highly sensitive and can be used for all applications with standard PCR amplification. By adding fluorescence
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detection to our system, we can further decrease the amount of DNA needed for analysis. In this process, special fluorescent molecules, or tags, are attached to specific points in the DNA being analyzed. This makes it possible to detect fluorescently labeled DNA fragments from extremely low sample concentrations or from samples with low PCR amplification.
Fragment Collection. Purified DNA fragments can be collected for PCR amplification, sequencing or for cloning. Cloning is a process where bacteria are used to grow a large amount of specified DNA fragments. It is important that the DNA material used for cloning is very pure so that only the specified DNA material is found in the bacteria colonies. Amplification and sequencing also benefit from highly purified DNA fragments.
WAVEMaker Software. Our WAVEMaker Software integrates the instrumentation control and data acquisition functions of the WAVE System. The software performs several functions including the formatting and presentation of data. Our WAVEMaker Software provides logical input and output of instrument data that is easily understood by researchers familiar with conventional gel-based technology. WAVEMaker Software enables the user to choose a specific application. The clear display allows the user to set up the procedure in a matter of minutes. Customized protocols can easily be created and saved to facilitate future analyses. Point variation detection can be performed by importing the sequence or size of the DNA fragment of interest into WAVEMaker Software.
Pricing. This integrated WAVE System is priced from $60,000 to $100,000 depending on features and accessories. The price is dependent upon user selected options, which include fragment collection, various detector configurations and software versions.
WAVE Optimized Molecular Biology Consumables. The WAVE System requires the use of various consumable products that we manufacture and sell separately. As more WAVE Systems are sold, we expect thatgene sequences. From these consumable products will become an increasingly significant source of revenue for us.
The principal consumable products used with the WAVE System are the DNASep, OLIGOSep and RNASep columns and the chemical reagents that are used to carry the DNA samples through the WAVE System. Other consumables include filters and other replacement parts of the WAVE System.
The DNASep, OLIGOSep and RNASep columns are essentially small metal tubes that are packed with microscopic polymer beads, each of which is approximately two microns in diameter. A micron is one millionth of a meter. The surface of these micro-beads has a special chemical makeup that causes DNA molecules to adhere to them. The columns come in two sizes that are used depending on the amount of DNA being analyzed or purified. The smaller standard column sells for approximately $1,200 and the larger column sells for approximately $2,200. The WAVE System comes with one standard DNASep column which has a warranted life of 4,000 test cycles when used for variation detection. Our experience to date indicates that the average customer uses between two and six columns per instrument per year.
We also sell the chemical reagents used with the WAVE System. In general, these reagents are special fluids that are pumped through the columns in order to cause DNA molecules to release their chemical bonds to the micro-beads under the correct conditions. Although most of these reagents are similar to those that can be obtained from various suppliers, we have developed formulas for these reagents that have been specially optimized for use in the WAVE System. By using these WAVE Optimized reagents, we believe thatvariations researchers are more likelybeginning to achieve consistent high quality results with their WAVE Systems.
Some consumables are contained and packaged in convenient kits to increase easelink the impacts of use and minimize possibility of user error. These kits may be used in sample preparation or automated instrument operations for particular applications. By adding different application kits, the WAVE System can perform various applications.
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We intend to be the leading provider of technology platforms that enable life science researchers to discover and understand variations in the human genetic code, or genome, in ordergene sequences to acceleratedisorders and improve drug development and diagnostics. Additionally, our WAVE System may be used for purposes other than genetic variation discovery research. These additional applications represent new market opportunities. During 2000 we begandiseases. It is hoped that this knowledge will lead to adapt the WAVE System specificallycreation of diagnostic tests for these new market opportunities. Key elements of our strategy are as follows:
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ability of the WAVE System to screen genetic variations quickly, accurately and economically can make it a useful tool for this market. It will allow researchers to use the validated technology used for the original variation discovery work to screen for variations in a larger population. Additional market opportunities exist in the fields of bacterial, viral and plant genetics. During 2000 we began the process of designing specific software and hardware improvements to adapt the WAVE System for new market opportunities. We continue to develop new applications for the WAVE and expect further improvements to be available in the future.
During fiscal years 2000, 1999 and 1998, we spent $7.7 million, $6.3 million and $3.2 million, respectively, on research and development activities.
We continue to maintain an active program of research and development and expect to increase our spending over 2000 by approximately 15%continue to 20%spend significant amounts in 2001.2004. Our research and development activities include the improvement of the DNA separation media used in our columns andWAVE System, the refinement of the hardware and software components of the WAVE System.System, the creation of unique enzymes and WAVE-optimized enzymes, and the improvement of chemical and biochemical reaction techniques for synthetic nucleic acids. Our research and development work is focused on developing additional functionalityexpenses were $9.3 million, $12.2 million and $9.4 million in the WAVE System that will allow us to sell additional applications other than those addressing genetic variation discovery.2003, 2002 and 2001, respectively.
We are also developing improved methods and procedures to enable researchers to use the WAVE System to screen DNA samples for variations known to be related to genetic disease. We believe the WAVE System will be an attractive tool for this group of users because it will allow them to use the same validated methodology used to discover a variation and its link to disease to screen for that variation in a large population. We are working to make the screening process faster and more automated through the development of new software and improved separation media and instrumentation.
We consult with several leading scientists from around the world, as part of our ongoing research and development efforts. These advisors assist us in formulating our research, development, and commercialization strategies. Some of these advisors include:
We do not pay cash remuneration to our scientific advisors, but may reimburse them for reasonable expenses they incur on our behalf. We may also award stock options to them under our stock option plan.
We currently sell our WAVE Systems and related consumablesproducts in major geographical markets. We targetmarkets, including the U.S., the U.K. and most countries in Western Europe, with a direct sales and support staff. For the rest of the world, we sell our products through dealers and distributors located in those local markets. As of December 31, 2003, we had over 25 dealers and distributors. We also maintain regionally-based technical support staffs and applications scientists to support our sales and marketing activities throughout the U.S., Europe and Japan. See Note O, "Sales and Product Information," to our consolidated financial statements for a summary of our net sales by geographic area and product group.Europe.
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Our marketing efforts utilize a variety of promotional channels including print advertisements, scientific conferences, trade shows, and Internet browser ads. The primary targets of
We have sold our marketing efforts are life sciences researchers and medical geneticists in academic and commercial research institutions.
We had sold WAVE Systemsproducts to several hundred customers in over 2030 countries. Customers that have purchased at least one WAVE System include numerous core laboratory facilities and a number of other leading academic and medical institutions in the U.S. and abroad, including Harvard University, Stanford University, Baylor College of Medicine, University of Chicago, Fred Hutchison Cancer Research Facility, Mayo Clinic, National Cancer Institute, National Institutes of Health, Institut Curie, University of Cambridge, Welcome Trust-Oxford University and Institut Gustave Roussy. Customersabroad. In addition, our customers also include a number of large, established U.S. and foreign pharmaceutical, biotech and biotech companies including SmithKline Beecham, Bristol-Meyers Squibb, Millennium Pharmaceuticals, Merck & Company, Novartiscommercial companies. During 2003, two customers within our Nucleic Acids business unit, Geron Corporation and Eli Lilly and Company. No single customerInvitrogen Corporation, each accounted for more than 10%over 10 percent of our sales in 2000, 1999 or 1998.total revenues from that business unit.
We manufacture consumablebioconsumable products including our proprietary DNASep, OLIGOSep and RNASep separation columns, liquid reagents, enzymes and liquid reagents.nucleic acid products. The major components of our WAVE systems are manufactured for us by a third party. We also incorporateintegrate our own modifications into the basic liquid chromatography instrument that we use in our WAVE System.hardware and software with these third party manufactured components. Our manufacturing facilities for our WAVE systems and bioconsumables are located in Omaha, Nebraska, San Jose, California, Omaha, Nebraska, and Cramlington, England. Our Synthetic Nucleic Acid products are manufactured in Glasgow, Scotland and Boulder, Colorado.
We obtain the basic liquid chromatography instrument for our WAVE System from Hitachi Instruments, Inc. This relationship allows us to use Hitachi's significant manufacturing capability to meet potential future increases in demand for the WAVE System without investing in expanding our own manufacturing capacity.
Our relationship with Hitachi has existed since 1997. Under our agreement, we have the exclusive right to market any co-developed products for DNA analysis and purification using our DNASep technologies. In addition, the agreement provides for fixed pricing of the liquid chromatography instruments for our WAVE System. Our agreement with Hitachi has no fixed term and we have retained the right to work with other vendors for liquid chromatography instruments. Under the agreement, there will be no transfer of intellectual property rights without a specific agreement to do so.
We manufacture our consumable products and assemble our system units based upon forecasts of near-term demand and receipts of firm orders from customers. Systems are configured to customer specifications and are
generally shipped shortly after receipt of the order. Customers may reschedule orders with little or no penalty. For these reasons, our systems backlog at any given time is not particularly meaningful because it is not necessarily indicative of future sales levels. We had order backlogs at December 31, 2003, totaling approximately $2.6 million. In addition to our order backlog, we have deferred revenue recorded on our balance sheet totaling approximately $1.8 million. This amount is made up mainly of deferred revenue associated with service contracts on our WAVE instruments that cover a certain period of time. Such deferred revenue is generally recognized over the term of the service contract.
To establish and protect our proprietary technologies and products, we rely on a combination of patent, copyright, trademark and trade-secret laws, as well as confidentiality provisions in our contracts.
We have implemented an aggressive patent strategy designedsuccessfully prosecuted or licensed in numerous patents protecting our core technologies, and as a result we presently own rights to provide us with freedom to operate and facilitate commercialization of our current and future products. As of December 31, 2000 we own 24 issued patents in the United States and have 32 pending applications, of which we have received notices of allowances for four. We also own 18 foreignmore than 60 issued patents and over 60 pending applications in both the US and abroad. Our DNA separation technologies and methods embodied in our BioSystems business unit products are protected by patents and licensed technologies. These patents, including licensed technologies, have 55 foreign patent applications pending.
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Generally, U.S. patents have a termremaining lives of either 17 years from the date of issue or 20 years from the application filing date or earlier claimed priority date while patents between 9 to 18 years. Intellectual property related to our Nucleic Acid business unit is mainly licensed—in most other countries have a term of 20 years from the date of filing the patent application. Our issued United States patentstechnology. We will expire between 2009 and 2017. Our success depends to a significant degree upon our ability to develop proprietary products and technologies. We intend to continue to file patent applications and seek new licenses as we develop new products and technologies.
Patents provide some degree of protections
Competition
Competitors for our intellectual property. However, the assertion of patent protection involves complex legalBiosystems segment include several companies including Varian, Waters, Agilent, Applied Biosystems, Beckman Coulter, Amersham Biosciences and factual determinationsInvitrogen. These companies provide various products and is therefore uncertain. We also rely in part on trade-secret protection ofservices that compete either directly with our intellectual property. We attempt to protectsystems, bioconsumables and services, or indirectly through alternative technologies and/or methods. Competitors for our trade secrets by entering into confidentiality agreements with third parties, employees and consultants. Our employees and consultants also sign agreements requiring that they assign to us their interests in patents and copyrights arising from their work for us. All employees sign an agreement not to compete unfairly with us during their employment and after termination of their employment, through the misuse of confidential information, soliciting employees, soliciting customers and the like. However, it is possible that these agreements may be breached or invalidated and if so, there may not be an adequate corrective remedy available. Despite the measures we have taken to protect our intellectual property, we cannot assure you that third parties will not independently discover or invent competing technologies, or reverse engineer our trade secrets or other technologies. Therefore the measures we are taking to protect our proprietary rights may not be adequate.
We do not believe that our products infringenucleic acid segment vary depending on the intellectual property rights of any third party. However, third parties may file claims asserting thatproduct. In the standard chemical building blocks market, we compete with Applied Biosystems, Proligo Degussa and Pierce Nucleic Acid Technologies. The competitors for our technologies orpharmaceutical grade oligonucleotide synthesis products infringe on their intellectual property. We cannot predict whether third parties will assert claims against us or against the licensors of technology licensed to us, or whether those claims will be found to have merit. If we are forced to defend against such claims, whether they are with or without any merit, whether they are resolved in favor of or against us or our licensors, we may face costly litigation and diversion of management's attentionservices include primarily Proligo Degussa, Dow Chemical and resources. As a result of such disputes, we have to develop costly non-infringing technology or enter into licensing agreements. These agreements, if necessary, may be unavailable on terms acceptable to us, or at all, which could seriously harm our business or financial condition.Avecia.
The market for our products is highly competitive. Our principal competitors include those entities that provide alternative technologies and products for the separation and analysis of DNA in the areas of sample amplification, analysis process, sample separation and variation detection and correlation. They include Affymetrix, Inc., Agilent Technologies, Amersham Pharmacia Biotech AB, Applera Corporation, Bio-Rad Laboratories, Inc., Caliper Technologies Corp., GeneTrace Systems, Inc., Invitrogen Corporation, Sequenom, Inc. and Varian Associates Inc. Moreover, competitors have greater name recognition than we do and provide more conventional technologies and products with which some of our customers and potential customers may have more familiarity or experience. In many cases, in order to compete against existing and alternative technologies, we will need to demonstrate the superior performance, speed and capabilities of our WAVE System, including our proprietary DNASep column and micro-bead technology. We cannot assure you that we will be able to make the necessary enhancements to our technology or products to compete successfully with newly emerging technologies.
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As of December 31, 2000,2003, we had 188244 full-time employees. The following sets forth the number of persons employed in the principal areas of our operation:
Manufacturing | ||
Sales, Marketing and | ||
Research and Development | ||
Our future success depends on our continuing ability to attract, train and retain highly qualified technical, sales and managerial personnel. Competition for these personnel is intense. Due to the limited number of people available with the necessary technical skills, we can give no assurance that we can retain or attract key personnel in the future. None of our employees is represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good.
We supplement our workforce through the use of independent contractors and consultants. As of December 31, 2000,2003, we have engaged independent contractors or consultants who provide services to us approximately equivalent to 54 full time employees.
We were incorporated in Delaware on March 6, 1997. Our principal office is located at 12325 Emmet Street, Omaha, Nebraska 68164 (telephone: 402-452-5400). Our internet address iswww.transgenomic.com. We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports available free of charge through our website as soon as reasonably practicable after we file these documents with the Securities and Exchange Commission. The information contained in our website is not part of this Report on Form 10-K.
Risks Related to Our Business
Our limited operating history as a company focused on life sciences technologies and applications subjects us to risks inherent in the development of a new business enterprise and to the risk that weWe may not achieve profitability.have adequate financial resources to execute our business plan.
We have historically experienced operating losses and negative cash flows. As of December 31, 2003, we had approximately $1.2 million in cash and cash equivalents and an accumulated deficit of $72.7 million. To date, we have financed our operations and capital expenditures primarily from the proceeds of public and private placements of common stock. Additionally, in December 2003 and February 2004, we entered into loan agreements with Laurus Master Fund, Ltd. for a limited$7.5 million secured line of credit and a $2.75 million convertible note, respectively. In February 2004, Laurus issued us a letter which waived the borrowing base limitation on our line of credit, thereby making the full $7.5 million facility available to us regardless of collateral. Laurus has committed to keeping the waiver open through the end of 2004. We expect to continue to need substantial amounts of cash to fund our operations and capital expenditures in the future. Based upon our current projections, we expect to meet our future cash needs from existing cash, additional cash generated from our working capital, funds available to us under our $7.5 million credit facility and the net proceeds of the convertible note. These projections may or may not be realized based upon actual operating history as a company focused on life sciences technologiesresults and applicationscapital project requirements. Thus, our existing cash balances, cash generated by our working capital, available borrowings under our secured line of credit and are at a relatively early stagenet proceeds of development in this business. Our future financial performance will depend on the growth in demand for automated DNA separation and analysis enabling technologies. The genomics market is new and emerging, is rapidly evolving, is characterized by an increasing number of market entrants, andconvertible note may be insufficient to satisfy our liquidity requirements. Accordingly, we may need to raise additional capital. However, we cannot assure you that additional financing will be available to us when we need it or on acceptable terms. If we raise additional capital by issuing common stock or other equity securities, the issuance of these securities would result in dilution to our existing stockholders. If we borrow additional money, we will incur additional interest costs and may become subject to frequentcovenants that restrict our operations and continuing changes in standards, customers' preferencescapital expenditures. If we are not able to obtain additional capital as needed, we may need to take further steps to reduce our operating costs, and technology. As a result,may not be able to execute parts or all of our business is subject to all of the risks inherent in the development of a new business enterprise, such as the need:plan.
Our future operating results will depend on a number of factors, including the market acceptance of our products, the introduction of new products by our competitors, our ability to adapt our technology to the commercial needs of our customers and to developments in the genomics industry, and the timing and extent of our research and development efforts. Our limited operating history in the life sciences industry makes accurate prediction of future operations difficult.
We have a history of operating losses and expect to incur losses in the future.
We have experienced losses from operations since inception of $8.7our operations. Our operating losses for each of the last three fiscal years were $22.6 million, during the year ended December 31, 2000, $6.9$21.7 million and $9.7 million, in fiscal 19992003, 2002 and $2.0 million in fiscal 1998.2001, respectively. These losses were mostlyhave been due principally to the high levels of research and development expenses and sales and marketing expenses related to the development and marketing of our WAVE System. Inthat we have incurred in order to develop and market our products, restructuring charges and goodwill impairment charges. In addition, markets for our products have developed more slowly than expected in some cases and may continue to enhance our WAVE System and related products, develop new products, increase the pace of installations and expand our marketing, sales and customer support service staffs,do so. As a result, we expect to incur increasesoperating losses in our expenses over the next several years. As a result, we could continue to incur losses for the foreseeable future and we may never be profitable.
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Our technologyMarkets for our products and services may develop slowly.
There are many factors that affect the market demand for our products and services that we cannot control. This is especially true in our Nucleic Acid segment where the demand for our products depends to a large degree on the success that our customers and potential customers have in developing useful pharmaceutical products based on genetic intervention. A central strategy for our Nucleic Acid segment is to sell synthetic nucleic acid products to biopharmaceutical and pharmaceutical companies that are relativelyseeking to develop commercially viable genomic-based diagnostic and therapeutic products. We have invested a significant amount of capital into acquiring and developing manufacturing facilities and other assets to allow us to pursue this market. However, this is a new field of commercial development, and many of these biopharmaceutical and pharmaceutical companies are in the early stages of their efforts to develop genomic-based diagnostics and therapeutics and have encountered difficulties in these efforts. As a result, the demand for our synthetic nucleic acid products is difficult to forecast and may develop slowly or sporadically. In addition, we cannot assure you that these companies will not gain market acceptance among genomics researchers.
Ourdevelop internally the chemistries and manufacturing capabilities to produce the products they could buy from us. Demand for our WAVE System is similarly affected by the needs and other automated DNA separationbudgetary resources of research institutions, universities, hospitals and analysis products are relatively new products. Market acceptanceothers who use the WAVE System for genetic-variation research. The WAVE System represents a significant expenditure by these types of customers and often requires a long sales cycle. If revenues from the sales of our products is dependent upon factors, some of which are not in our control, such as continued growth in the genomics industry, the availability and price of competing products and technologies, the success of our sales efforts, and the acceptance of our product by the academic and research community, such as biologists, geneticists and biochemists, who are more familiar with the existing, traditional methods of DNA separation and analysis. Our products must compete against well-established techniques, such as gel and capillary electrophoresis and sequencing-based technologies. We cannot be certain that our products will replace or compete successfully against existing products or that our products will achieve market acceptance. If our products do not achieve market acceptance,services continue at current levels, we may not achieve profitability.
may need to We willrefine our WAVE Systemraise additional working capital or take steps to allow it to meet the requirements of commercial users.
Our WAVE System is relatively new and has been developed primarily for basic genomics research applications. The WAVE System will require significant enhancements to its capacity and software in order for it to be adapted to commercial applications such as diagnostic research and drug development. The adaptation of the current WAVE System for these commercial applications will require additional research and development work that may be expensive and time-consuming.further reduce operating expenses. We cannot assure you that sales will increase or that we will be able to make the necessary improvements to the WAVE System for use in commercial applications. If we are unable to complete the further development of the WAVE System we may not be able to successfully market it for commercial applications and this will limit our future revenues.raise additional working capital or reduce operating expenses.
If ethical and other concerns surrounding the use of genetic information become widespread, weCustomer clinical trials may have less demand for our products.be delayed or discontinued.
Genetic testing has raised ethical issues regarding confidentiality and
A significant percentage of our Nucleic Acid business unit revenues are generated by sales to customers involved in drug development. Our products are generally used by these customers in the appropriate usesmanufacture of the resulting information. Fordrugs candidates in varying stages clinical trials. If these reasons, governmental authorities may call for limits onclinical trials are delayed or regulation of the use of genetic testing or prohibit testing for genetic predisposition to disease, particularly for those that have no known cure. Any of these scenarioscancelled this could reduce the potential markets for our products, which could limit our future revenues.
We have a limited sales force and limited experience with direct marketing ofsignificant impact on our products that could limit our ability to effectively penetrate new markets.revenues generated by the Nucleic Acid business unit.
Our direct sales force may not be sufficiently large or knowledgeable to successfully penetrate the market. We may not be able to expand our direct sales force to meet our commercial objectives. In addition, our sales force may not be able to address complex scientific and technical issues raised by our customers. Our customer support personnel may also lack the broad range of technical expertise required to adequately service and support our products in the field.
The sale of our products involvesand business operations in international markets subjects us to additional risks.
During the last three fiscal years, our international sales have represented approximately 50-65% of our net sales. As a lengthy sales cycle that makesresult, a major portion of our revenues difficultand expenses are subject to forecast.risks associated with international sales and operations. These risks include:
Our ability to obtain customers for our WAVE System and related accessories depends
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and key management. We may expend substantial funds and sales effort with no assurance that a sale will result. Due to the lengthy sales cycle required, our revenues could be difficult to forecast.
We may need to raise additional funding which may not be available.
To date, we have financed our operations primarily from the proceeds of a $77,280,000 public offering of common stock, a $10,000,000 private offering of common stock, a $12,000,000 issuance of convertible notes and borrowings under our former $5 million bank line of credit. We will continue to need substantial amounts of cash for research and development and to expand our sales and marketing infrastructure. We expect our capitalmore costly and operating expenses higher in local currencies since our foreign sales and operating expenses are typically paid for in U.S. Dollars, British Pounds or the Euro; and
We may need to raise the additional capital in the future through bank financing or strategic investments. Additional financing may not be available to us when we need it, or, if available, we cannot assure that we will be able to obtain such financing on terms favorable to our stockholders or us. If we raise additional capital by issuing equity securities, the issuance of such securities would result in ownership dilution to our stockholders.
Our WAVE System includes hardware components and instrumentsinstrumentation manufactured by a single supplier and if we wereare no longer able to obtain these components and instrumentsinstrumentation our ability to manufacture our products could be impaired.
We currently rely on a single supplier, Hitachi Instruments, Inc.,High Technologies America, to provide the basic instrument used in our WAVE System.Systems. While other suppliers of instrumentation and computer hardware are available, we believe that our arrangement with Hitachi offers strategic advantages. Hitachi is replacing their current instrument line with a new instrument line. We may not be able to convert our technology and application to this new instrument line and, therefore, we may incur additional costs for the custom manufacturing of the current instrument line. If we were required to seek alternative sources of supply, it could be time consuming or expensive or require significant and costly modification of our WAVE System. Also, if we were unable to obtain instruments from Hitachi in sufficient quantities or in a timely manner, our ability to manufacture our products could be impaired, which could limit our future revenues.
Our chromatographic columns, a core component of the WAVE System, are manufactured at a single facility that is located in an earthquake-prone area.We may not have adequate personnel to execute our business plan.
All
During the fourth quarter of 2002 and the first half of 2003, we took steps to reduce our proprietary DNASep, OLIGOSepoperating costs that resulted in a significant reduction in our number of employees, including our research and RNASep columns are manufactured atdevelopment staff and our manufacturing facility in San Jose, California, which is located in an earthquake-prone area. In the event our manufacturing facility or equipment was affected by man-made or natural disasters, we would be unable to manufacture our products for sale or meet customer demand or sales projections. If our manufacturing operations were curtailed or ceased for any significant period of time, it could limit our future revenues.
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We face, and will continue to face, intense competition, both in the U.S. and abroad, from companies that are engaged in the development of products that analyze DNA and provide genetic information.
The nucleic acid analysis and separations markets are highly competitive. Our principal competitors include other biotechnology companies that provide alternative technologies and products for the separation and analysis of DNA. Many of our competitors have greater financial, operational, sales and marketing resourcespersonnel. In addition, we may lose other key management, scientific, technical, sales and more experiencemanufacturing personnel from time to time. It may be very difficult to replace personnel if they are needed in researchthe future, and developmentthe loss of key personnel could harm our business and commercialization thanoperating results. We cannot assure you that our employee reductions will not impair our ability to continue to develop new products and refine existing products in order to remain competitive. In addition, these reductions could prevent us from successfully marketing our products and developing our customer base.
Our markets are very competitive.
We compete with many other companies in both our Biosystems segment and Nucleic Acids segment. Competitors for our Biosystems segment include several companies, such as Varian, Waters, Agilent, Applied
Biosystems, Beckman Coulter, Amersham Biosciences and Invitrogen. These companies provide various products and services that compete either directly with our WAVE system, bioconsumables and services, or indirectly through alternative technologies and/or methods. Competitors for our Nucleic Acid segment vary depending on the product. In the standard chemical building blocks market, we have. Moreover, somecompete with Applied Biosystems, Proligo Degussa and Pierce Nucleic Acid Technologies. The competitors for our pharmaceutical-grade oligonucleotide synthesis products and services include primarily Proligo Degussa, Dow Chemical and Avecia. Many of our competitorsthese competing companies have greater name recognitionresources than we do or may enjoy other competitive advantages. This may allow them to more effectively market their products to our customers or potential customers, to develop products that make our products obsolete or to produce and provide more conventional technologiessell products less expensively than us. As a result of these competitive factors, demand for and products with which somepricing of our customersproducts and potential customersservices could be negatively affected.
The price for our common stock is volatile and may have more familiarity or experience. In orderdrop further.
Over the past two years our stock has traded at prices as high as $10.77 per share in the first quarter of 2002 to effectively compete against alternative technologies we will need to demonstrateas low as $0.93 per share in the superior performance, speed, capabilities and cost effectivenesssecond quarter of 2003. This volatility in the price of our WAVE System.
Extensive research effortsstock is attributable to a number of factors, not all of which relate to our operating results and rapid technological progress characterizefinancial position. Nevertheless, continued volatility in the genomics industry. To remain competitive,market price for our stock should be expected and we will be required to continue to expand and enhancecannot assure you that the functionalityprice of our DNA separation and analysis equipment and to offer comprehensive DNA analysis, and complimentary applications and solutions, with greater ease of use. Thisstock will includeincrease in the need to increase the WAVE System's capacity and to develop new instrumentation, software and application kits to allow the system to provide a broader range of DNA and RNA separation and analysis applications. New products may require additional development work, enhancement, testing,future. Fluctuations or further refinement before they can be made commercially available and, therefore, we could experience significant delaysdeclines in the development and manufactureprice of our products. Even after new products are made commercially available, unforeseen technical difficulties could arise, requiring additional expenditures by usstock may affect your ability to correct such difficultiessell shares of our stock and possibly resulting in further delays. We cannot be certain that new products will be successfully developed at all.our ability to raise capital through future equity financing.
Our patents may not protect us from others using our technology whichthat could harm our business and competitive position.
Our business and competitive position are dependent upon our ability to protect our proprietary technology. While we currently hold a number of domestic and foreign patents and licenses, the issuance of a patent is not conclusive as to its validity or enforceability, nor does it provide the patent holder with freedom to operate without infringing the patent rights of others. Our patents or licenses could be challenged by litigation and, if the outcome of such litigation were adverse to us, our competitors could be free to use our technology. As a result, the invalidation of key patents owned by or licensed to us or non-approval of pending patent applications could increase competition for our products. We may not be able to obtain additional patents for our technology, or if we are able to do so, patents may not provide us with substantial protection or be commercially beneficial. Our patent applications may not protect our products because of the following reasons:
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Patent law relating to the scope of claims in the technology fields in which we operate is still evolving. The degree of future protection for our proprietary rights is uncertain. Furthermore, we cannot be certain that others will not independently develop similar or alternative products or technology, duplicate any of our products, or, if patents are issued to us, design around the patented products developed by us. Our patents or licenses could be challenged by litigation and, if the outcome of such litigation were adverse to us, our competitors could be free to use our technology. We may not be able to obtain additional patents for our technology, or if we are able to do so, patents may not provide us with substantial protection or be commercially beneficial. In addition, we could incur substantial costs in litigation if we are required to defend ourselves in patent suits brought by third parties or if we initiate such suits.
We cannot be certain that other measures taken to protect our intellectual property will be effective.
We rely upon trade secret protection, copyright and trademark laws, non-disclosure agreements and other contractual provisions for some of our confidential and proprietary information that is not subject matter for which patent protection is being sought. Such measures, however, may not provide adequate protection for our trade secrets or other proprietary information. If they do not protect our rights, third parties could use our technology and our ability to compete in the market would be reduced. While we require employees, academic collaborators and consultants to enter into confidentiality and/or intellectual property assignments where appropriate, any of the following could still occur:
We are dependent upon our licensed technologies and may need to obtain additional licenses in the future to offer our products and remain competitive.
We have acquired or licensed key components of our technologies from third parties. If these agreements were to terminate prematurely or if wedue to our breach of the terms of anythese licenses or we otherwise fail to maintain our rights to such technology, we may lose the right to manufacture or sell a substantial portion of our products. In addition, we may need to obtain licenses to additional technologies in the future in order to keep our products competitive. If we fail to license or otherwise acquire necessary technologies, we may not be able to develop new products that we need to remain competitive.
The patent underlying our nonexclusive license to manufacture standard nucleic acid building blocks will expire in the first quarter of 2005. The expiration of this patent could result in additional manufacturers entering
the market for these products. Some of these manufacturers may have lower cost structures or other competitive advantages which may reduce our market share and/or our operating margins related to these products.
The protection of intellectual property in foreign countries is uncertain.
We have sold approximately 50%
A significant percentage of our WAVE Systemssales are to customers located outside the U.S. The patent and other intellectual property laws of some foreign countries may not protect our intellectual property rights to the same extent as U.S. laws. We may need to bring proceedings to defend our patent rights or to determine the validity of our competitors'competitors’ foreign patents. These proceedings could result in substantial cost and diversion of our efforts. Finally, some of our patent protection in the U.S. is not available to us in foreign countries due to the laws of those countries.
Our products could infringe on the intellectual property rights of others which could require us to pay substantial royalties.others.
There are a significant number of U.S. and foreign patents and patent applications submitted for technologies in, or related to, our area of business. As a result, any application or exploitation of our technology could infringe patents or proprietary rights of others and any licenses that we might need as a result of such infringement might not be available to us on commercially reasonable terms, if at all. This may lead others to assert patent infringement or other intellectual property claims against us. We may have to pay substantial damages, including treble damages, for past infringement if it is ultimately determined that our products infringe on another party's intellectual property rights. We could also be prohibited from selling our products before we obtain a license, which, if available at all, may require us to pay substantial
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royalties. Even if a claim is without merit, defending a lawsuit takes significant time, may be expensive and may divert management attention from other business concerns.
We depend on attracting and retaining key employees.
We are highly dependent on the principal members of our management staff and research and development group, including Collin J. D'Silva, our Chief Executive Officer. We have entered into employment agreements with Mr. D'Silva and some, but not all, of our other key employees. The loss of services of any of these individuals could seriously harm our product development and commercialization efforts for our new life sciences products. Our future success will also depend on our ability to attract, hire and retain additional personnel, including sales and marketing personnel, technical support and customer service staff and application scientists. There is intense competition for qualified personnel in our industry, especially for experienced personnel in the areas of chemistry and molecular biology, software and electric engineering, manufacturing and marketing, and there can be no assurance that we will be able to continue to attract and retain such personnel. Failure to attract and retain key personnel could reduce our ability to continue development of our DNA separation and analysis technology and to successfully market our products.
We will need to effectively manage our growth if we are to successfully implement our strategy.
The number of employees and scope of our business operations are expected to grow as we continue the commercialization of our WAVE System. This growth may place a strain on our management and operations. Our ability to manage our growth will depend on the ability of our officers and key employees to continue to implement and improve our operational, management information and financial control systems and to expand, train and manage our work force both in the U.S. and abroad. We may be required to open non-U.S. offices in addition to our current U.K., Japan and satellite European offices, which could result in additional burdens on our systems and resources. Our inability to manage our growth effectively could affect our ability to pursue business opportunities and expand our business.
Our failure to comply with any applicable government regulations or otherwise respond to claims relating to improper handling, storage or disposal of hazardous chemicals whichthat we use may adversely affect our results of operations.
Our research and development and manufacturing activities involve the controlled use of hazardous materials and chemicals, including acetonitrile.chemicals. We are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of hazardous materials and waste products. If we fail to comply with applicable laws or regulations, we could be required to pay penalties or be held liable for any damages that result and this liability could exceed our financial resources. We cannot assure you that accidental contamination or injury will not occur. Any such accident could damage our research and manufacturing facilities and operations, resulting in delays and increased costs.
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If our outstanding options and warrants are exercised, or our outstanding debt is converted into common stock, it will result in dilution.
As of December 31, 2003, we had outstanding approximately 28.1 million shares of common stock. We also had obligations to issue approximately 6.3 million shares of common stock under outstanding stock options and warrants. Additionally, we may issue shares of common stock upon conversion of all or part of our new line of credit and new convertible note. The issuance of such additional shares of common stock may be dilutive to our current shareholders and could negatively impact the market price of our common stock.
Our four principal manufacturing facilities are located in Omaha, Nebraska, San Jose, California, Boulder, Colorado and Glasgow, Scotland. Additionally, corporate administration offices are located in Omaha, Nebraska and research and development offices are located in Boulder, Colorado. The following table summarizes information related to property occupied in these locations.
Location | Square Footage | Annual Rent | Lease Term Expires | ||||
Omaha, Nebraska | 52,743 | $ | 508,598 | 2005-2007 | |||
San Jose, California | 14,360 | $ | 294,615 | 2005 | |||
Boulder, Colorado | 46,355 | $ | 489,851 | 2006-2007 | |||
Glasgow, Scotland | 14,500 | £ | 95,000 | 2007 | |||
Glasgow, Scotland | 45,000 | N/A | Owned Property | ||||
We do not own any real property. We currently lease officeadditional facilities for manufacturing, sales, customer support and manufacturing spaceresearch and development in the following locations:Crewe, England, Cramlington, England, Paris, France, Berlin, Germany, Cambridge, Massachusetts, Gaithersburg, Maryland and Denver, Colorado.
| Location | Square Footage | Annual Rent | Lease Term Expires | ||||
|---|---|---|---|---|---|---|---|
| Omaha, Nebraska | 16,734 | $ | 172,000 | 2007 | |||
| San Jose, California | 27,860 | $ | 468,000 | 2005 | |||
| Crewe, England | 10,250 | £ | 97,500 | 2006 | |||
| Cramlington, England | 8,200 | £ | 26,000 | 2001 | |||
| Tokyo, Japan | 1,000 | ¥7,293,000 | 2001 | ||||
| Cambridge, Massachusetts | 2,500 | $ | 54,000 | 2002 | |||
| Gaithersburg, Maryland | 2,294 | $ | 35,000 | 2004 | |||
| Houston, Texas | 2,760 | $ | 24,000 | 2003 | |||
| San Diego, California | 4,995 | $ | 135,000 | 2003 | |||
We are not a party, nor are any of our assets or properties subject, to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
We did not submit any matters to our stockholders for a vote or other approval during the fourth quarter of the fiscal year covered by this report.
Item 4a.4A. Executive Officers.
Our executive officers are electedappointed annually by the Board of Directors at the first meeting following the annual stockholder'sstockholder’s meeting. Other officers are electedappointed by the Board of Directors from time to time. Each officer holds office until a successor has been duly elected or appointed and qualified or until the death, resignation or removal of such officer.
Our current officers and their ages as of December 31, 20002003 are listed below followed by a brief biography.
Name | Position | ||||||||
Collin J. D’Silva | 46 | Chairman of the Board, Chief Executive Officer and Director | |||||||
Michael J. Draper(1) | Chief Financial Officer | ||||||||
John L. Allbery | |||||||||
| Executive Vice President | |||||||||
Keith A. Johnson | Vice President, | ||||||||
Mitchell L. Murphy | Vice President, Secretary and Treasurer |
| (1) | Mr. Draper is resigning as Chief Financial Officer effective March 31, 2004, but will remain with the Company for a transition period. Effective April 1, 2004, Mitchell L. Murphy will assume the additional duties of the Chief Financial Officer position on an interim basis. |
Collin J. D'Silva.D’Silva. Mr. D'SilvaD’Silva has served as our Chairman of the Board and Chief Executive Officer since 1997 and is also a Director. Mr. D'Silva,D’Silva, a co-founder of Transgenomic, has worked for Transgenomic and its predecessors since 1988. Prior to that time, Mr. D'SilvaD’Silva was employed by AT&T from 1980. At AT&T, he held various positions in engineering, materials management, sales support and business development. His last position at AT&T was Business Unit Manager and Engineering Manager for a network distribution products division. Mr. D'SilvaD’Silva holds a B.S. degree and a M.Eng. degree in industrial engineering from Iowa State University and an M.B.A.MBA from Creighton University.
William P. Rasmussen.Michael J. Draper. Mr. RasmussenDraper joined us on October 1, 1998Transgenomic, Inc. in April 2000 and currently serves as our Chief Financial Officer.Officer and was previously the Controller. Prior to joining Transgenomic, Mr. Draper was a business consultant from 1999 to 2000 providing accounting, business and systems consulting to corporations. From 1997 to 1999, he was Vice President of Accounting and Finance at Midland Systems, Inc. (MSI Systems Integrators). MSI provided computer hardware and networking solutions and services to customers throughout the Midwestern United States. Mr. Draper also spent 8 years in public accounting with the firm of Deloitte & Touche LLP from 1989 to 1997. Mr. Draper holds a B.S. degree in Accounting and Business Administration from the University of Nebraska.
John L. Allbery. Mr. Allbery joined us in June 2001, and currently serves as an Executive Vice President. Prior to joining us, Mr. Rasmussen was Chief Financial Officer at I-Mark Systems
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from 1996 until it was purchased in 1997. I-Mark Systems designed integrated computer voting solutions andAllbery was a successor corporation of ADD Consulting Inc., which provided computer staffing professionalsprivate business consultant based in Budapest, Hungary from 2000 to numerous industries.2001. From 1999 to 2000 Mr. RasmussenAllbery served as the Chief Financial Officer of ADD Consulting Inc.The Virtus Group, a private
business venture in Budapest, Hungary. Mr. Allbery also spent approximately 20 years in public accounting. Prior to leaving public accounting, Mr. Allbery was a Partner with Deloitte & Touche LLP. Mr. Allbery holds a B.A. degree in Accounting from 1994 untilDoane College and a MBA in Taxation from Golden Gate University.
Keith A. Johnson. Mr. Johnson joined us in 2002 as Vice President, General Counsel. Mr. Johnson has a B.A. in Biochemistry from Kalamazoo College, an M.B.A. in International Business and Marketing from Michigan State, and a law degree from the University of San Diego. Before joining I-Mark SystemsTransgenomic Mr. Johnson was Director of Intellectual Property, Technology Development and Licensing at Integra LifeSciences in 1996.Plainsboro, NJ, from 1999 to 2001. Mr. Rasmussen owned a travel management company from 1986 until 1998, and he provided consulting services to numerous software and telecommunication companies from 1984 through 1994. Mr. Rasmussen'sJohnson’s previous experience also includes serving as ControllerSenior Licensing Manager, Rutgers University, from 1998 to 1999 and Principle AccountingTechnology Licensing Officer, for Applied Communications, Inc. from 1979 until 1984. Applied Communications, Inc., now known as Transaction Systems Architects, Inc., is a software provider for transaction processing systems.
Douglas T. Gjerde, Ph.D. Dr. Gjerde joined us in 1996 as Chief Scientific Officer. Dr. Gjerde has held positions as senior scientist for Exxon Research and Engineering, Director of Research for Wescan Instruments, and President and Director of Research & Development for Sarasep, Inc. Sarasep, which Dr. Gjerde co-founded, was acquired by us in 1996. Dr. Gjerde has authored 12 patents and has more than 40 journal publications, primarily focused on separation technology. Dr. Gjerde received his B.S. in chemistry in 1976 from MinnesotaWashington State University, Mankato, Minnesota, and his Ph.D. in analytical chemistry in 1980 from Iowa State University, Ames, Iowa.
John E. Doyle.1995 to 1998. Mr. Doyle has been with our company since September 1997, initially focusing on operations and process improvement. In 1999, Mr. Doyle assumed responsibility for sales, again focusing on process as well as improvements in staffing. Prior to joining Transgenomic, he was with Supelco Inc. for 20 years, serving as Chief Executive Officer when it was a Sigma-Aldrich company; Business Unit Vice President when it was a subsidiary of Rohm and Haas Corporation; and International Vice President when it was privately held. Mr. Doyle received his engineering degree from Pennsylvania State University.
William Walker. Mr. Walker joined us in 1998 as Vice President of Intellectual Property. Mr. Walker is a corporate attorney with an emphasis in intellectual property law. Mr. Walker served as Director of Patents and Licensing for Syntex Corporation (1970 - 1981) and subsequently provided intellectual property counseling to new and emerging companies. Mr. Walker has a law degree from Georgetown University Law Center, a B.S. degree in chemical engineering from the University of Tennessee and a MFCC degree in psychology from Santa Clara University. HeJohnson is a member of the state bars of California, BarWashington, New Jersey and Nebraska and is active in numerous professional organizations.admitted to practice before the USPTO.
Mitchell L. Murphy. Mr. Murphy joined us in 1992. His current duties include the overall corporate administration and shareholder relations. Prior to joining Transgenomic, he held accounting and financial management positions for companies involved in manufacturing, steel distribution and rebar fabrication for 15 years. He spent over two years as an auditor for the Omaha, Nebraska office of Deloitte, Haskins & Sells (now Deloitte & Touche LLP) working in a broad range of industries. Mr. Murphy graduated with honors from Creighton University in 1978 with a B.S. degree in business administration with an accounting major.
Item 5. Market for Registrant'sRegistrant’s Common Equity and Related Stockholder Matters.
Our common stock is listed for trading on the NASDAQ National Market under the symbol TBIO. The following table sets forth the high and low prices for our common stock during each of the third and fourth quarters of 2000 beginning on July 17, 2000, the date of our initial public offering of common stock.
| Year Ended December 31, 2000 | High | Low | ||||
|---|---|---|---|---|---|---|
| Third Quarter (July 17 - September 30, 2000) | $ | 30.016 | $ | 15.75 | ||
| Fourth Quarter | $ | 23.00 | $ | 5.75 | ||
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Prior to July 17, 2000 there was no public market for our common stock.
Year Ended December 31, 2002 | High | Low | ||||
First Quarter | $ | 10.77 | $ | 7.00 | ||
Second Quarter | $ | 9.00 | $ | 2.10 | ||
Third Quarter | $ | 4.52 | $ | 2.39 | ||
Fourth Quarter | $ | 3.80 | $ | 2.15 | ||
Year Ended December 31, 2003 | ||||||
First Quarter | $ | 4.22 | $ | 1.40 | ||
Second Quarter | $ | 2.43 | $ | 0.93 | ||
Third Quarter | $ | 2.14 | $ | 1.03 | ||
Fourth Quarter | $ | 2.98 | $ | 1.45 | ||
At FebruaryMarch 16, 2001,2004, there were 21,230,16629,044,514 shares of our common stock outstanding and approximately 2,2003,500 holders of record. The outstanding shares consist of 21,492,070 shares issued less 261,904 shares of treasury stock.
We have never declared or paid any cash dividends on our capital stock and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently expect to retain all earnings, if any, for investment in our business. Dividends on our common stock will be paid only if and when declared by our board of directors. The board'sboard’s ability to declare a dividend is subject to limits imposed by Delaware corporate law. In determining whether to declare dividends, the board may consider our financial condition, results of operations, working capital requirements, future prospects and other relevant factors.
Item 6. Selected Financial Data.
The statement of operations data for the years ended December 31, 2000, 19992003, 2002 and 19982001 and the balance sheet data as of December 31, 20002003 and 19992002 are derived from our historical consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K, which have been audited by Deloitte & Touche LLP, our independent auditors. The statement of operations data for the years ended December 31, 19972000 and 19961999 and the balance sheet data as of December 31, 1998, 19972001, 2000 and 19961999 are derived from our audited historical consolidated financial statements that are not included in this Annual Report on Form 10-K. Our historical consolidatedIn May 2001, we acquired Annovis, Inc., a specialty chemicals company that develops, manufactures and markets a wide variety of nucleic acid-based products and services for the life science industry, for a total purchase price of approximately $16.9 million. Annovis’s results of operations have been included in the accompanying financial statements beginning on May 1, 2001. Additionally, our financial statements include the results from our non-life sciences product line which was sold effective April 1, 2000. Financial information prior to July 1, 1997 is that of our predecessor corporation, CETAC Holding Company, Inc. and its subsidiaries or predecessors.
The following selected financial data should be read in conjunction with our consolidated financial statements and the related notes thereto and the information under "Management“Management Discussion and Analysis of Financial Condition and Results of Operations"Operations” included elsewhere in this Annual Report on Form 10-K.
| | Year Ended December 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2000 | 1999 | 1998 | 1997 | 1996 | |||||||||||
| | In thousands, expect per share data | |||||||||||||||
| Statement of Operations Data: | ||||||||||||||||
| Net sales | $ | 25,883 | $ | 23,035 | $ | 18,935 | $ | 11,577 | $ | 12,535 | ||||||
| Cost of good sold | 12,800 | 12,090 | 9,590 | 6,336 | 6,760 | |||||||||||
| Gross profit | 13,083 | 10,945 | 9,345 | 5,241 | 5,775 | |||||||||||
| Selling, general and administrative | 14,047 | 11,532 | 8,160 | 6,412 | 4,751 | |||||||||||
| Research and development | 7,652 | 6,297 | 3,159 | 2,047 | 1,385 | |||||||||||
| Stock based compensation expense | 861 | — | — | — | — | |||||||||||
| Gain on sale of product line | (784 | ) | — | — | — | — | ||||||||||
| Operating expenses | 21,776 | 17,829 | 11,319 | 8,459 | 6,136 | |||||||||||
| Loss before income taxes | (8,481 | ) | (8,082 | ) | (2,506 | ) | (3,646 | ) | (644 | ) | ||||||
| Net loss | (8,661 | ) | $ | (9,827 | ) | $ | (1,576 | ) | $ | (2,410 | ) | $ | (415 | ) | ||
| Basic and diluted net loss per share | $ | (0.52 | ) | $ | (0.76 | ) | $ | (0.13 | ) | $ | (0.22 | ) | $ | (0.04 | ) | |
| Basic and diluted weighted average shares outstanding | 16,630 | 13,000 | 12,279 | 11,145 | 11,000 | |||||||||||
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| Year Ended December 31, | ||||||||||||||||||||
| 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||
| In thousands, except per share data | ||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||
Net sales | $ | 33,866 | $ | 37,554 | $ | 38,467 | $ | 25,883 | $ | 23,035 | ||||||||||
Cost of good sold | 24,315 | 19,569 | 17,198 | 12,800 | 12,090 | |||||||||||||||
Gross profit | 9,551 | 17,985 | 21,269 | 13,083 | 10,945 | |||||||||||||||
Selling, general and administrative | 17,324 | 24,199 | 21,636 | 14,908 | �� | 11,532 | ||||||||||||||
Research and development | 9,305 | 12,201 | 9,372 | 7,652 | 6,297 | |||||||||||||||
Restructuring charges(1) | 738 | 3,282 | — | — | — | |||||||||||||||
Goodwill impairment charge(2) | 4,772 | — | — | — | — | |||||||||||||||
Gain on sale of product line | — | — | — | (784 | ) | — | ||||||||||||||
Operating expenses | 32,139 | 39,682 | 31,008 | 21,776 | 17,829 | |||||||||||||||
Loss before income taxes | (22,893 | ) | (21,260 | ) | (7,377 | ) | (8,481 | ) | (8,082 | ) | ||||||||||
Net loss | $ | (22,958 | ) | $ | (21,365 | ) | $ | (7,401 | ) | $ | (8,661 | ) | $ | (9,827 | ) | |||||
Basic and diluted net loss per share | $ | (0.94 | ) | $ | (0.91 | ) | $ | (0.33 | ) | $ | (0.52 | ) | $ | (0.76 | ) | |||||
Basic and diluted weighted average shares outstanding | 24,484 | 23,583 | 22,560 | 16,630 | 13,000 | |||||||||||||||
| As of December 31, | ||||||||||||||||||||
| 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||
| In thousands | ||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Total assets | $ | 57,306 | $ | 74,035 | $ | 89,286 | $ | 77,863 | $ | 19,964 | ||||||||||
Line of credit | 2,142 | — | — | — | 4,340 | |||||||||||||||
Current portion of long-term debt | 1,693 | 63 | — | — | 580 | |||||||||||||||
Long-term debt, less current portion | — | 1,499 | — | — | 12,538 | |||||||||||||||
Total stockholders’ equity (deficit) | $ | 45,058 | $ | 61,515 | $ | 82,104 | $ | 73,966 | $ | (2,099 | ) | |||||||||
| | As of December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2000 | 1999 | 1998 | 1997 | 1996 | ||||||||||
| | In thousands | ||||||||||||||
| Balance Sheet Data: | |||||||||||||||
| Total assets | $ | 77,863 | $ | 19,964 | $ | 14,736 | $ | 10,010 | $ | 9,527 | |||||
| Long-term debt, less current portion | — | 12,538 | 695 | 1,128 | 1,597 | ||||||||||
| Total stockholders' equity (deficit) | 73,966 | (2,099 | ) | 6,649 | 991 | 2,114 | |||||||||
| (1) | In 2002 a plan was developed to reduce expenses thereby better aligning the Company’s expense structure with current business prospects. The plan included employee terminations, office closures, termination of collaborations and write-offs of abandoned intellectual property. As a result of the plan, restructuring charges were recorded and are included in operating expenses in 2002 and 2003, respectively. See Note Q to the consolidated financial statements. |
| (2) | The Company completed its annual goodwill impairment test during the fourth quarter 2003. As a result of this testing, the Company recorded a non-cash goodwill impairment charge related to its nucleic acids segment. See Note E to the consolidated financial statements. |
Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We provide innovative toolsproducts and services for nucleic acids separation and analysis. Our WAVE® System is a versatile system that can be used for variation detection, size-based double-strand DNA separationthe synthesis, purification and analysis single-strand DNAof nucleic acids. The Company’s operations are managed based upon the nature of the products and services provided. Accordingly, the Company has determined that it operates in two segments, BioSystems and Nucleic Acids. Operations for these segments are evaluated based upon specific identification of revenues and expenses associated with the business activities resulting in a segment operating income. Expenses that cannot be directly identified to an operating activity or are considered corporate overhead are not allocated to the segments in arriving at operating income for the segment.
The BioSystems operating segment generates revenue from the sale of automated instrument systems and associated consumable products and services. This segment’s products are based upon separations chemistries and enzymology. Specifically, this segment’s main products are the WAVE System, related bioconsumables and research services. Since the WAVE System product introduction in 1997, we have sold over 1,000 instruments to customers in over 30 countries.
The Nucleic Acids operating segment generates revenue from the sale of products and services based upon nucleic acid chemistries, separations chemistries and enzymology. Specifically, this segment’s main products are nucleic acid building blocks or phosphoramidites, oligonucleotides, fluorescent markers, dyes and associated reagents and novel chemistry and process development services.
Our technologies center around three core competencies: separation chemistries, enzymology, and analysisnucleic acid chemistries. We develop, assemble, manufacture and DNA purification. Our business plan ismarket our products and services to focus on the genomics segment of the life sciences industry to be used in research focused on molecular genetics of humans and other organisms. Such research could lead to development of new diagnostics and therapeutics. Our products can be used to analyze DNA or RNA at the development, marketingmolecular level, amplify, separate, and supportisolate nucleic acid fragments of our proprietary technology for the automated separationparticular interest and analysis of DNA. Our initial focus has been on marketingsynthesize conventional or chemically-modified nucleic acid molecules. These capabilities are central to researchersresearch seeking to discover and understand variations in the human genetic code, and the relationship of these variations to disease.
Revenues for our life sciences products are generated from the sale of our principal product, the WAVE® System,disease and, associated consumable productsultimately, to develop diagnostics and reagents. During the fiscal year ended December 31, 2000, we sold 245 WAVE® Systemstherapeutics based on this understanding. Our business plan is to major academic and government research centers and commercial and biopharmaceutical companies in over 20 countries. Revenues from the sale of consumable products during the same period have represented approximately 21% of our net sales derived from our life sciences business. We expect that over the next five years, sales from consumable products will increase as a percentage of our net sales.
Before July 1, 1997, we manufactured and sold instruments and other products usedparticipate in the non-life sciences instrumentation industry through our predecessor company, CETAC Holding Company, Inc.value chain associated with these activities by providing key technology, tools, consumables, biochemical reagents and its subsidiaries. On July 1, 1997, we merged these companies into Transgenomic, Inc., a new Delaware corporation, forservices to those entities engaged in basic biomedical research and the purposedevelopment of developing, manufacturingdiagnostics and selling our new life sciences product line in addition to continuing to manufacture and market our existing non-life sciences products. In 1999, we decided to focus our resources on our life sciences product line. Accordingly, during the second quarter of 2000 we sold the assets related to our non-life sciences instrument products. These assets consisted of inventory, property, plant and equipment, patents, other intellectual property rights and a lease deposit, with an aggregate book value, net of $125,000 of accrued liabilities, of approximately $4.9 million. Financial information for periods ending before the effective date of the sale, April 1, 2000, includes the results of our non-life sciences instrument product line. On July 21, 2000, we completed our initial public offering, selling 5,152,000 shares of common stock at $15.00 per share for net proceeds of approximately $69.9 million.therapeutic agents.
We have incurred significant losses resulting principally from costs incurred in research and development and selling, general and administrative costs associated with our operations. At December 31, 2000,2003, we had an accumulated deficit of $21.0$72.7 million. Although weWe expect to continue to incur substantial research and development and selling, general and administrative costscosts.
Executive Summary
The following is a summary of significant items or events that have had an effect on the Company’s financial position, results of operations, and liquidity:
Changes in Results of Operations
| Amounts in thousands | |||||||||||||||||||||||
| Dollar Change | Percent Change | ||||||||||||||||||||||
| 2003 | 2002 | 2001 | 2002 to 2003 | 2001 to 2002 | 2002 to 2003 | 2001 to 2002 | |||||||||||||||||
Net Sales | |||||||||||||||||||||||
Bioinstruments and Services | $ | 18,784 | $ | 19,098 | $ | 23,125 | $ | (314 | ) | $ | (4,027 | ) | (2 | )% | (17 | )% | |||||||
Bioconsumables | 7,260 | 5,137 | 4,915 | 2,123 | 222 | 41 | % | 5 | % | ||||||||||||||
Total Biosystems Business Unit | 26,044 | 24,235 | 28,040 | 1,809 | (3,805 | ) | 7 | % | (14 | )% | |||||||||||||
Chemical Building Blocks | 6,631 | 13,319 | 10,427 | (6,688 | ) | 2,892 | (50 | )% | 28 | % | |||||||||||||
Specialty Oligonucleotides and Services | 1,191 | — | — | 1,191 | — | — | — | ||||||||||||||||
Total Synthetic Nucleic Acids Business Unit | 7,822 | 13,319 | 10,427 | (5,497 | ) | 2,892 | (41 | )% | 28 | % | |||||||||||||
Total Net Sales | 33,866 | 37,554 | 38,467 | (3,688 | ) | (913 | ) | (10 | )% | (2 | )% | ||||||||||||
Cost of Goods Sold | |||||||||||||||||||||||
Bioinstruments and Services | 7,900 | 7,650 | 9,697 | 250 | (2,047 | ) | 3 | % | (13 | )% | |||||||||||||
Bioconsumables | 3,475 | 2,284 | 2,491 | 1,191 | (207 | ) | 52 | % | (33 | )% | |||||||||||||
Total Biosystems Business Unit | 11,375 | 9,934 | 12,188 | 1,441 | (2,254 | ) | 15 | % | (18 | )% | |||||||||||||
Chemical Building Blocks | 6,937 | 9,635 | 5,010 | (2,698 | ) | 4,625 | (28 | )% | 92 | % | |||||||||||||
Specialty Oligonucleotides and Services | 6,003 | — | — | 6,003 | — | — | — | ||||||||||||||||
Total Synthetic Nucleic Acids Business Unit | 12,940 | 9,635 | 5,010 | 3,305 | 4,625 | 34 | % | 92 | % | ||||||||||||||
Total Cost of Goods Sold | 24,315 | 19,569 | 17,198 | 4,746 | 2,371 | 24 | % | 14 | % | ||||||||||||||
Selling, General and Administrative Expenses | 17,324 | 24,199 | 21,636 | (6,875 | ) | 2,563 | (28 | )% | 12 | % | |||||||||||||
Research and Development Expenses | 9,305 | 12,201 | 9,372 | (2,896 | ) | 2,829 | (24 | )% | 30 | % | |||||||||||||
Restructuring and Restructuring Related Charges | 738 | 3,282 | — | (2,544 | ) | 3,282 | (78 | )% | — | ||||||||||||||
Goodwill Impairment Charge | 4,772 | — | — | 4,772 | — | — | — | ||||||||||||||||
Years Ended December 31, 20002003 and 1999
2002
Net Sales. Net sales increased 12%, from $23.0 milliondecreased in 19992003 due to $25.9 milliona significant decline in 2000.demand for our Nucleic Acids products. Sales in our Nucleic Acid operating segment decreased due to a significant decline in demand for our chemical building block products. These products are used by our biopharmaceutical and pharmaceutical customers as raw materials in DNA based drug candidates. The decrease in demand is largely attributable to the timing of completion and/or failure of Phase III clinical trials by certain of our life scienceslarge customers. We look for demand for these products to rebound slightly in 2004 as other customer products move through the clinical trial phases and as the anticipated FDA approval of certain DNA based drug candidates increases the potential for commercial production of these drugs. This decrease in demand for DNA building blocks in 2003 was partially offset by sales of oligonucleotides generated by our start-up manufacturing facility in Boulder, Colorado. Part of our business strategy has been to position ourselves as a unique partner to biopharmaceutical and pharmaceutical companies in the early stages of their efforts to develop genomic-based diagnostics and therapeutics. As part of this strategy we are focusing our sales efforts on large consumers of our Synthetic Nucleic Acid products who are willing to commit to long-term supply agreements. While we expect to see increased 67%, from $14.2 millionsales of these products based upon this strategy, we also may see varying demand depending on the success of the biopharmaceutical and pharmaceutical companies diagnostic and therapeutic products on which we are targeting our sales efforts. As a result we may see large variations in 1999 to $23.7 millionrevenue flows for these products.
Sales in 2000. Total revenues
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our BioSystems operating segment increased in 2003. Revenues from sales of WAVE® SystemsWAVE systems and related services were relatively flat with 2002. However, bioconsumable product sales strength resulted from increased 68%, from $11.2 million in 1999 to $18.8 million in 2000. Life sciences consumable sales increased 61%, from $3.0 million in 1999 to $4.9 million in 2000. Most of the increase in consumable sales came from our WAVE related consumables that increased 130% from $0.9 million in 1999 to $2.1 million. Sales of consumable products increasedusage as the installed base of WAVE®WAVE Systems has increased and as researchers begin to use them more extensively in place of other methods of DNA analysis. Also contributing to the increase were revenues generated by new product sales including our Optimase product line that was launched in 2002 and began to see increased usage in 2003. Sales of our non-life sciences instrument products decreased 75%,WAVE systems declined slightly from $8.8 million2002 to 2003 offset by an increase in 1999 to $2.2related services revenues. The slight decline in 2000systems sales is mainly due to continued low sales volumes to our North American customer base. Increased services revenue is attributable to our focus on providing genetic variation discovery and analysis services to our pharmaceutical base of customers. We believe that our genetic variation discovery and analysis services provide us a significant opportunity to expand revenues in the fact thatfuture. In December 2003, we soldannounced a discovery services agreement with Novartis Pharmaceuticals Corp. supporting the clinical development of oncology therapeutics and believe this product line effective April 1, 2000, therefore, no salesprovides a good model of these products were recorded after March 31, 2000.the opportunity for our services offering.
Cost of Goods Sold. Cost of goods sold increased 6% from $12.1 milliondespite the decline in 1999our revenues. This increase was anticipated and is attributable mainly to $12.8 millionexcess manufacturing capacity in 2000, representing 52% of net sales in 1999 and 49% of net sales in 2000. Costour Nucleic Acids business unit. The BioSystems business unit cost of goods sold as a percentpercentage of sales improveddeclined year over year but remained within historical ranges at approximately 43%. We expect that our Biosystems margins will fluctuate within historical ranges based upon the sales mix of systems, consumables and services. Currently our Nucleic Acid products are sold at lower margins compared to our Biosystems products. The margins in our Nucleic Acids business unit have been negatively impacted by higher manufacturing costs and excess capacity due largely to our plant expansion efforts in Glasgow, Scotland and Boulder, Colorado. In 2004 we anticipate that our cost of goods sold for our Nucleic Acid products will remain under pressure due to continued excess capacity. Overall we anticipate that our cost of goods sold as a percentage of sales will be consistent with 2003 or slightly lower combined material and manufacturing costsas we are hopeful that demand for our life science instruments as compared toNucleic Acid products will rebound slightly. Margin improvement will depend largely on the non-life sciences instruments. We anticipate that this percentage will improve in the future as we refinereturn of product demand thereby more fully utilizing our systems configurations potentially reducing materialmanufacturing capacity and spreading fixed costs and as consumables becomeacross a greater percentage of our revenues.larger revenue base.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 22%, from $11.5 million in 1999 to $14.0 million in 2000. This increase is thedecreased significantly as a result of additionalour restructuring activities and focus on expense control. Nearly half of the total decrease was in personnel and personnel-relatedpersonnel related expenses and depreciation. The average selling, general and administrative personnel counts increased 10% from 90as we have significantly reduced our employee headcount. Additionally, reductions in 1999 to 99 in 2000. The average count for 1999 included approximately 32 employees whose positions were associated with the non-life sciences product line which we sold effective April 1, 2000. Direct personnel expenses and increased traveloutside services, advertising, sales promotions, depreciation and travel related expenses associated with the activities of our expanded staff accounted for approximately 77%30% of the total increase. Increased depreciation expense associated with investmentsdecrease. While we believe that further reductions in offices and equipment supporting our expanded staff accounted for approximately 10% of the total increase. We anticipate selling, general and administrative expenses are possible in 2004, we do not expect to increase oversee the next several yearssame level of decreases experienced from 2002 to support our growing marketing, sales and business activities and costs associated with operating as a public company.2003.
Research and Development Expenses. Research and development expenses increased 22%,decreased significantly as a result of our restructuring activities and focus on expense control. Over 60% of the total decrease was in personnel and personnel related expenses as we have significantly reduced our employee headcount. Additionally, significant reductions in outside services, supplies, depreciation and travel expenses were realized. During 2003 there were no capitalized software costs, whereas in the prior year we capitalized approximately $1.2 million of development costs. While we believe that further reductions in research and development expenses are possible in 2004, we do not expect to see the same level of decreases experience from $6.3 million in 19992002 to $7.7 million in 2000. These expenses represented 27% of net sales in 1999 versus 30% of net sales in 2000.2003. Research and development expenses consist of salaries and related personnel costs of researchers and software developers, material costs for prototypes and test units, legal expenses relating to intellectual property research and application development activities, testing and enhancement of our products, and amortization of intellectual property. We expense our research and development costs in the year in which they are incurred. The increase in these expenses is attributable to increased personnel and personnel related expenses, the costs associatedincurred with the expanded activitiesexception of certain capitalized software development costs.
Restructuring Charges. During the stafffourth quarter of 2002 management formulated and depreciation.executed a significant portion of a restructuring plan. The average researchplan was developed to reduce expenses thereby better aligning the Company’s expense structure with current business prospects. The plan included employee terminations, office
closures, termination of collaborations and write-offs of abandoned intellectual property. We continued to execute the plan during the first half of 2003 resulting in the additional charges recorded in 2003. These charges consisted of mainly employee severance costs and the write-off of a note receivable related to the abandonment of a product development personnel count increased 4% from 55collaboration. The note receivable write-off was a non-cash charge of $350,000. Management does not expect to incur further restructuring charges in 19992004.
Goodwill Impairment Charge. Statement of Financial Accounting Standard (SFAS) No. 142,Goodwill and Other Intangible Assets, establishes guidelines for accounting for goodwill and other intangible assets and provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be evaluated for impairment annually. The Company engaged an external valuation firm to 57 in 2000. The average count for 1999 included approximately 7 employees whose positions were associatedassist with the non-life sciences product line which we sold effective April 1, 2000. Salaries, payroll taxes and benefits accounted for approximately 46%completion of its annual impairment test during the total increase. This percentage increase is greater than the percentage increase in average personnel counts due to the timingfourth quarter of personnel hiring in 1999. The majority of personnel additions in 1999 occurred in the second half of the year while personnel counts in 2000 were consistent. We supplement the expanded activities of our staff through the engagement of external consultants. Increased professional services fees accounted for approximately 18% of the total increase in research and development expenses. The increase in depreciation is the2003. As a result of investments in equipment during the year. The increase in depreciation accounted for approximately 20%this test we recorded a non-cash goodwill impairment charge of the total increase. We expect research and development spending to increase over the next several years as we expand our development efforts.
Stock Based Compensation. Stock based compensation expense was $0.9$4.8 million in 2000. In connection with the sale of our non-life sciences instrument product line, we accelerated the vesting of 71,700 options, which would have otherwise been forfeited. Former employees who were associated with our
22
non-life sciences product line held these options. The acceleration resulted in the recording of $0.6 million of stock based compensation expense in the first quarter of 2000. The remaining expense is due to amortization of deferred compensation related to stock options issued.
Gain on Sale of Product Line. Effective April 1, 2000 we sold the assets related to our non-life sciences instrument product line to enable us to focus our business plan on the genomics segment of the life sciences industry. The assets were sold for a total adjusted purchase price of $5.65 million plus reimbursement by the buyer of approximately $0.4 million of expenses paid by us since March 31, 2000 in connection with this product line. At the date of the transaction the gain to be recognized on the sale of the assets was deferred until we received all proceeds from the buyer. All such proceeds were received on December 29, 2000 and a gain on the sale of $0.8 million, before taxes, was recognized.nucleic acids segment.
Other Income (Expense). Other income and expense, which consists mainly of net interest income and expense, improved from an expense of $1.2 million in 1999 to income of $0.2 million in 2000. Interest expense for the year was $1.8 million as compared to $1.3 million in 1999. The increase in interest expense was the result of interest expense on our $12 million convertible notes that were issued in March 1999, additional interest expense on our working capital lending facility and accelerated interest charges on our convertible notes. On the effective date of our initial public offering interest payable on the notes was accelerated through the maturity date of the notes at an annual interest rate of 3.6%. As a result, the Company recorded additional interest expense of approximately $0.8 million in the third quarter of 2000. Interest income for the year was $2.0 million as compared to $0.1 million in 1999. The increase in interest income is a result of the investment of the net proceeds from our initial public offering.
Income Taxes. Income The Company’s tax expense in 1999 was $1.7 million while in 2000 income tax expense was $0.2 million. The expense recorded in 1999 relates to the establishment of a valuation allowance against previously recorded deferredits operations in certain foreign countries and certain states. No tax assets. The expense recorded in 2000 relates to the recognized gain on the sale of the assets related to our non-life sciences product line. No further tax benefit isbenefits are being recorded due to our cumulative losses in recent years, expected losses in future years and the uncertainty as to whether we will be able to utilize any additional losses as carrybacks. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. We expect to continue to incur losses and expect to continue to provide valuation allowances against deferred tax assets. To the extent we begin to generate income in future years and it is determined that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized. Our deferred tax assets as of December 31, 2003 were $30.6 million and were offset by a valuation allowance of $30.6 million. Our deferred tax assets as of December 31, 2002 were $23.2 million and were offset by a valuation allowance of $23.2 million. As of December 31, 2000,2003, we had federal net operating loss carryforwards of approximately $19.9$78.5 million. We also had federal research and development tax credit carryforwards of approximately $0.2 million. TheOur net operating loss and credit carryforwards will expire at various dates from 20122008 through 2020,2023, if not utilized. We also had state income tax loss carryforwards of $4.2 million.$28.7 million at December 31, 2003. These carryforwards will also expire at various dates beginning in 2008 if not utilized.
As of December 31, 1999, we had deferred tax assets of approximately $0.2 million. The deferred tax asset at December 31, 1999 has been offset by a valuation allowance of $4.5 million due to our cumulative losses in recent years, expected losses in future years and an inability to utilize any additional losses as carrybacks. The deferred tax assets as of December 31, 2000 were $7.6 million and were offset by a valuation allowance of $7.6 million. Deferred tax assets relate primarily to net operating loss carryforwards.
Years Ended December 31, 19992002 and 1998
2001
Net Sales. Net sales increased 22%, from $18.9 milliondecreased in 2002 due to weakness in demand for the year ended 1998 to $23.0 million for the year ended 1999.our Biosystems business unit products. Sales fromin our life sciences products increased 91%, from $7.4 millionBioSystems business unit decreased as a decline in 1998 to $14.2 in 1999. Total revenues from sales of WAVE Systems increased 107%, from $5.4 million in 1998 to $11.2 million in 1999. Life science consumables sales increased 50%, from $2.0 million in 1998 to $3.0 million in 1999. In 1999, we acquired another manufacturer of life science consumables and began including sales of these products in our revenues. These sales, along withwas offset by an increase of $0.7 million in
23
sales of our WAVE Systems consumables, account for the increase in total life science consumablesBioconsumable product sales. Sales of WAVE systems declined mainly due to lower sales volumes to our non-life sciences instruments decreased 24%, from $11.5 millioncommercial and industrial customer base and our North American customer base. Systems sold to our commercial and industrial customers accounted for approximately 6% of unit sales in 19982002 as compared to $8.8 millionapproximately 34% in 1999. This decrease was a result2001. Systems sold in North America accounted for approximately 25% of reduced demand for theseunit sales in 2002 as compared to approximately 40% in 2001. Sales of WAVE related consumable products relatedincreased as the installed base of WAVE Systems has increased and as researchers begin to an industry-wide consolidation among customers for these products anduse them more extensively in place of other methods of DNA analysis. Sales in our Nucleic Acid operating segment increased in 2002 due to the negative effect of a reorganizationtiming of our dealer and distributor network.acquisition of Annovis, Inc. in May 2001.
Cost of Goods Sold. Cost of goods sold increased from $9.6 million in 19982002 due mainly to $12.1 million in 1999the mix of products sold. BioSystems sales margins improved year over year mainly due to higher average selling prices per system resulting from greater sales of our higher margin high throughput WAVE system. The average sales price per instrument increased sales. Cost of goods asapproximately 10% in 2002. The higher margins on our BioSystems products were offset by lower margins in our nucleic acid operating segment. Currently our nucleic acid products, which have become a larger percentage of our total revenues, are sold at lower margins compared to our BioSystems products. The margins in our Nucleic Acids operating segment are lower due to bulk sales remained relatively constant from 1998of nucleic acid building block products and higher manufacturing costs due largely to 1999, increasing from 51%our plant expansion efforts in 1998 to 52% in 1999.Glasgow, Scotland and Boulder, Colorado.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 41%, from $8.2 million in 1998 to $11.5 million in 1999. This increase is theas a result of additional personnel and personnel-related expenses, bad debt expense and consulting fees. Average selling, generalthe write-off of a portion of notes receivable. These increases were offset by a reduction in goodwill amortization and administrative personnel counts increased 30% from 69 in 1998 to 90 in 1999. This increase is mainly the result of continuing to build our direct sales and marketing staff in the United States for our entry into the life sciences market. We also opened an office in Japan and expanded our life sciences sales efforts in Europe. Direct personnel expenses and increased travel and travel related expenses associated with the activities of our expanded staffforeign currency
exchange rate gains. Combined these items accounted for approximately 47%over 90% of the total increase. Increased consulting fees areDirect personnel expenses increased due to our expanded employee base during 2002. Bad debt expense increased as we felt it was appropriate to increase the allowance for bad debt given our increased levels of accounts receivable. The decrease in goodwill amortization is the result of a one-time advisory services feeour adoption of $550,000, or 17%Statement of the total increase, in 1999 in connection with consultingFinancial Accounting Standards (SFAS) No. 142,Goodwill and financial advisory services associated with the development of our strategic business plan and related intermediate and long-term financial strategies.Other Intangible Assets.
Research and Development Expenses. Research and development expenses increased 99%,in 2002 due to increased personnel and personnel related expenses resulting from $3.2an expanded employee base during 2002, depreciation, amortization and supplies offset by increased amounts of capitalized software expenses related to the WAVE system operating software. During 2002 we capitalized approximately $1.2 million of software development costs as compared to approximately $700,000 in 1998 to $6.3 million in 1999. These expenses represented 17% of net sales in 1998, versus 27% of net sales in 1999.the prior year. Research and development expenses consist of salaries and related personnel costs of researchers and software developers, material costs for prototypes and test units, legal expenses relating to intellectual property research and application development activities, testing and enhancement of our products, and amortization of intellectual property. We expense our research and development costs in the year in which they are incurred.incurred with the exception of certain capitalized software development costs.
Restructuring Charges. During the fourth quarter of 2002 management formulated and executed a significant portion of a restructuring plan. The increase in theseplan was developed to reduce expenses was attributable to a 77% increasethereby better aligning the Company’s expense structure with current business prospects. The plan included employee terminations, office closures, termination of collaborations and write-offs of abandoned intellectual property. Specifically, in the average researchfourth quarter of 2002 the Company notified approximately 60 employees of their termination, notified landlords of our intent to close four facilities and development personnel count, from 31reduce our space commitment under lease at two other facilities, terminated certain consulting and collaboration agreements and abandoned certain patents. As a result of the plan $3.3 million in 1998 to 55restructuring charges were recorded and are included in 1999. Compensation, benefits, hiring expensesoperating expenses. These charges consisted of approximately $800,000 of employee severance costs, $1.2 million in office closure related costs, $400,000 of collaboration and other direct personnel costs accounted for 62%agreement termination charges and $900,000 in write-offs of abandoned intellectual property. Approximately 45% of the total increase. The remaining increase is attributable to the costs associated with the expanded activities of the research and development staff.charges were for non-cash items.
Other Expenses.Income (Expense). Other expenses,income and expense, which consistedconsists mainly of net interest income and expense, increased 125%,decreased to income of $437,000 in 2002 from $0.5income of $2.4 million in 19982001. Interest income for the year was $626,000 as compared to $1.2$2.5 million in 1999. This increase2001. Interest expense for the year was related$62,000 as compared to $58,000 in 2001. The decrease in interest expenseincome is a result of declining interest rates on investments and reductions in our placement of $12.0 million of convertible notes in March 1999.
Income Taxes. The income tax benefit in 1998 was $0.9 million, while in 1999 income tax expense was $1.7 million. A valuation reserve of $4.5 million was recorded in 1999 due to our cumulative losses in recent years, expected losses in future years and an inability to utilize any additional losses as carrybacks. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. We expect to continue to incur losses and expect to continue to provide a valuation reserve against deferred tax assets. To the extent we begin to generate income in future years and determine that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized. As of December 31, 1999, we had federal net operating loss carryforwards of approximately $11.6 million. We also had federal research and development tax credit carryforwards of approximately $131,000. The net operating loss and credit carryforwards will expire at various dates from 2012 through 2019, if not utilized. We also had state income tax loss carryforwards of $3.0 million. These carryforwards will also expire at various dates if not utilized.short-term investment balances.
As of December 31, 1998 and 1999, we had deferred tax assets of approximately $2.0 million and $4.7 million, respectively. The deferred tax asset at December 31, 1999 has been offset by a valuation allowance of $4.5 million due to our cumulative losses in recent years, expected losses in future years and
24
an inability to utilize any additional losses as carrybacks. The deferred tax assets were $2.0 million and $180,000 as of December 31, 1998 and 1999, respectively. Deferred tax assets relate primarily to net operating loss carryforwards.
Liquidity and Capital Resources
Overview
We have historically experienced net losses and negative cash flows from operations during the past three years.flows. As a result, we had an accumulated deficit of $21.0$72.7 million as of December 31, 2000. On July 21, 2000, we issued 5,152,000 shares of common stock in our initial public offering at $15.00 per share. After payment of the underwriters' discounts and commissions and other expenses, we received net proceeds of approximately $69.9 million from this offering. In addition, holders of warrants and options to purchase shares of common stock exercised at various times since our initial public offering thus providing us with an additional $2.7 million in cash.2003. As of December 31, 19992003 and 2000,2002, we had approximately $0.2$1.2 million and $38.2$9.7 million, respectively, in cash and cash equivalents. In addition, as of December 31, 2000,2003 and 2002, we had $23.7no short-term investments and $3.6 million in short-term investments, respectively, for total cash and short-term investments of $61.9 million.approximately $1.2 million and $13.3 million, respectively.
On May 19, 2000, we sold the assets related to
The following table summarizes our non-life sciences instrument product line to a company controlled by Stephen F. Dwyer, a directorshort-term liquidity and a principal stockholdersources and uses of ours, for a total adjusted purchase pricecash, as of $5.65 million plus reimbursement by the buyer of approximately $0.4 million of expenses paid by us since March 31, 2000 in connection with this product line. Approximately $3.65 million was paid in cash at the closing of the sale and $2.0 million was paid with an interest-bearing promissory note due on December 30, 2000.
The purchaser financed the cash portion of the purchase price for these assets plus initial working capital needs with borrowings of approximately $4.6 million obtained from a bank. We acquired the notes evidencing these loans from the bank upon closing of our initial public offering by paying to the bank an amount equal to the entire principal balance of the notes plus accrued and unpaid interest. These acquired notes were consolidated with the original $2.0 million note. All of the principal and accrued interest on this consolidated note was repaid prior to maturity. On December 29, 2000, we repurchased 261,904 shares of our common stock from Mr. Dwyer for $10.50 per share, which was the closing price for our common stock on that day, for an aggregate purchase price of $2.7 million. Mr. Dwyer used these proceeds and additional resources to pay the principal and interest on the consolidated note.
Our $12 million convertible notes, due 2002, contained features that were impacted by our initial public offering. On the effective date of our initial public offering interest payable on the notes was accelerated through the maturity date of the notes at an annual interest rate of 3.6%. As a result, we recorded additional interest expense of approximately $0.8 million. These notes contained a conversion feature that allowed us, upon satisfaction of certain conditions, to cause conversion of the principal plus accrued interest into shares of our common stock at a conversion price of $5.00 per share. On August 14, 2000, our Board of Directors authorized us to convert the notes into common stock upon meeting the required conditions. On August 15, 2000, such conditions were met and the notes were converted into 2,750,906 shares of common stock. All principal and accrued interest at the conversion date of approximately $13.9 million was recorded to stockholders equity.
Our operating activities resulted in net outflows of $3.4 million in 1998 and $8.7 million in 1999 as compared to $4.7 million in 2000. The operating cash outflows for these periods resulted from significant investments in research and development, and sales and marketing, which resulted in operating losses. The operating cash outflows for 2000 are significantly lower than those in the prior year. This improvement in operating cash flows was attained in large part through increased accounts receivable collection. During 1999 the average days to collect accounts receivable was over 90 days. This decreased to approximately 60 days for 2000.
Net cash used in investing activities was $1.5 million in 1998 and $3.5 million for 1999 compared to $22.2 million in 2000. The change in investing cash flow in 2000 is the result of our investment of a portion
25
of the net proceeds from our initial public offering in short term investments. Such investments resulted in investing cash outflows of $23.7 million. This outflow was offset by the net cash inflow from the sale proceeds related to the sale of our non-life sciences product line assets net of investments in property and equipment.
Net cash provided by financing activities was $4.6 million in 1998 and $12.2 million for 1999 compared to $64.9 million in 2000. The financing cash inflows in 2000 are the result of our initial public offering offset by the repayment of bank debt and our purchase of treasury stock. Our IPO and subsequent sales of common stock for the exercise of warrantsyears ended December 31, 2003, 2002 and options resulted in cash inflow, net of expenses, of approximately $72.7 million. The repayment of debt resulted in cash outflow of approximately $5.2 million and the purchase of treasury stock resulted in cash outflow of approximately $2.7 million. The funds used came from the proceeds of the sale of our non-life sciences instrument product line and our initial public offering. The financing cash inflows in 1999 were due to the issuance of convertible notes that provided net proceeds of $11.4 million in March 1999, and net other borrowings.2001:
Our capital expenditures budget for 2001 is approximately $5.0 million. Capital expenditures for the current year are expected to relate to facility and equipment improvements. Research and development expenses are budgeted at approximately $8.9 million for 2001.
| Amounts in Thousands | As of and for the Year Ended December 31, | |||||||||||
| 2003 | 2002 | 2001 | ||||||||||
Short-term liquidity: | ||||||||||||
Current assets | $ | 24,378 | $ | 39,127 | $ | 62,876 | ||||||
Current liabilities | (12,248 | ) | (11,021 | ) | (7,182 | ) | ||||||
Net working capital | 12,130 | 28,106 | 55,694 | |||||||||
Cash and cash equivalents | $ | 1,241 | $ | 9,735 | $ | 19,613 | ||||||
Short-term investments | — | 3,612 | 23,913 | |||||||||
Available borrowings on line of credit | $ | 1,673 | $ | — | $ | — | ||||||
Net cash flows: | ||||||||||||
Operating activities | $ | (13,245 | ) | $ | (17,944 | ) | $ | (11,117 | ) | |||
Investing activities | (2,719 | ) | 5,928 | (9,394 | ) | |||||||
Financing activities | 7,295 | 1,745 | 1,943 | |||||||||
Effect of foreign currency exchange rates on cash | 175 | 393 | (12 | ) | ||||||||
Net change in cash and cash equivalents | $ | (8,494 | ) | $ | (9,878 | ) | $ | (18,580 | ) | |||
We expect to devote substantial capital resources to continue our research and development efforts, to expandsupport our marketing and sales and customer support activities, and for other general corporate activities. Our capital requirements for operations depend on a number of factors, including sales levels, the level of our research and development activities, market acceptance of our products and services, the resources we devote to developing and supporting our products and other factors.services and normal capital expenditures. The restructuring plan developed in 2002 has reduced our operating expenses and thereby reduced the cash needed to fund our operations. Additionally, our capital budget includes expenditures for the completion of our facility expansion projects in Glasgow, Scotland, and Boulder, Colorado, and for general facility and equipment improvements. Additional expansion projects for the Glasgow and Boulder production facilities may be incurred over the next 2 to 3 years as business demand dictates. During 2003, our major capital projects were substantially completed and we expect our capital expenditures to decrease significantly in 2004. Our original capital expenditures budget for 2003 was approximately $8.4 million while our actual cash utilized on capital expenditures for the year was $6.4 million. Currently, we project capital expenditures for 2004 to be in the range of $1.7 million to $2.5 million, depending largely upon demand for our nucleic acid products.
During the second half of 2003, we began to pursue a sale/leaseback opportunity for our manufacturing facility in Glasgow, Scotland. As negotiations continued, it became apparent to us that the terms offered by the purchasing entity were unacceptable, which caused management to seek alternative financing vehicles with better terms. As a result, in February 2004, we entered into a $2.75 million convertible note with Laurus Master Trust, Ltd. (“Laurus”), our line of credit provider. Management determined that the terms of the convertible note with Laurus were more favorable to the Company as compared to the proposed sale/leaseback transaction. The note carries an interest rate of prime plus 2% over the prime rate or a minimum of 6.0% and has a term of 3 years. The principal and interest on the note may be converted into common stock of the Company at a fixed conversion price of $2.61 per share. Proceeds from this transaction will be used to retire the current mortgage debt on the Glasgow facility, complete the build-out of the Glasgow facility, complete the consolidation our operations into the new facility and provide funds for operations. Proceeds, net of transaction costs and amounts used to repay our existing mortgage debt on the Glasgow facility, were approximately $750,000.
In December 2003, we entered into a new line of credit facility with Laurus. Under the terms of the agreement, we can borrow up to $7.5 million based on eligible accounts receivable and inventory balances. The
term of the agreement is three years carrying an interest rate of 2.0% over the prime rate or a minimum of 6.0%. Funds available under the line are determined by a borrowing base equal to 90% of eligible accounts receivable balances plus up to $1.0 million related to inventory balances. This line of credit is secured by most of our assets. Payment of interest and principal can, under certain circumstances, be made with shares of our common stock at a fixed conversion price of $2.20 per share. In January and February 2004, Laurus exercised its conversion rights on the line of credit and converted $2.0 million of amounts outstanding on the line into approximately 910,000 shares of common stock of the Company. As of December 31, 2003, we had approximately $3.0 million outstanding on this line of credit. In February 2004, Laurus waived the borrowing base limitation on our line, thereby making the full $7.5 million facility available to us regardless of the available collateral. This waiver will expire on December 19, 2004. This waiver, and the resulting access to the full amount of our line of credit, is a positive development in terms of access to liquidity for the Company.
As a result of our cost control measures and reduced capital expenditures, we expect our cash usage to decrease during 2004. Based upon our current projections, we expect to meet our cash needs for 2004 from existing cash, additional cash generated from our working capital, additional funds available to us under our $7.5 million credit facility and the proceeds of the $2.75 million convertible note entered into in February 2004, net of debt repayment costs. These projections assume continued revenue strength from our Biosystems business unit. We believe growth will result from increased consumable product offerings and continued strength in demand for our instruments. These projections also assume that revenues from our Nucleic Acid business unit have reached a base level in the third quarter of 2003 and will begin to increase in the future. Much of the anticipated increase in the Nucleic Acid business unit revenues will come from new customers and additional business from existing customers of our Boulder, Colorado facility that began production in 2003. More specifically, our current financial and cash balancesflow projections indicate that we expect to use approximately $2.5 million in cash to fund further operating losses and an additional $1.7 million to $2.5 million for capital expenditures. The majority of the capital expenditures will be associated with our Nucleic Acids business unit. These projections indicate a cash need of $4.2 million to $5.0 million for the year. Our cash balance at December 31, 2003 of $1.2 million, plus the net proceeds from our new convertible note of approximately $750,000 received in February 2004, additional advances available on our line of credit and the conversion by Laurus of $2.0 million of amounts outstanding on the line into approximately 910,000 shares of common stock of the Company are sufficient to fund operations throughmeet this projected cash need. As of December 31, 2003, additional advances available on our line of credit were $1.7 million based upon eligible collateral as of that date. Based upon the waiver received in February 2004, an additional $4.5 million was available when calculated as the total line of credit available of $7.5 million less $3.0 million outstanding at least fiscal yearDecember 31, 2003. DuringThese projections may or may not be realized based upon actual operating results and capital project requirements. Thus, during or after this period, if our existing cash balances, cash generated by operations isour working capital, and available borrowings under credit agreements are insufficient to satisfy our liquidity requirement,requirements, we may need to sell additional equity or debt securities, or obtain additional credit arrangements. We are monitoring our liquidity position and are prepared to take appropriate measures, as needed, to address liquidity. Such measures may include, but are not limited to, further expense reductions, an expansion of our line of credit, asset sales and the placement of equity or debt. We cannot assure you that any financing arrangement will be available in amounts or on terms acceptable to us. Our failure to raise additional capital, if needed, would harm our financial condition, results of operations and our business.
During 2003 our major cash expenditures were the funding of our operations and capital projects. Cash and investments decreased by a total of approximately $12.1 million in 2003 as compared to approximately $30.2 million in 2002. In 2003 approximately $13.2 million was used to fund our operations and $6.4 million used for capital projects offset by $3.0 million provided by advances on our line of credit and $4.3 million provided by the sale of common stock. Major capital projects included facility build-out, expansion and improvement at our two nucleic acid production facilities in Boulder, Colorado and Glasgow, Scotland. The Boulder facility project is designed to be a cGMP (Good Manufacturing Practices) facility for the synthesis of oligonucleotides. This facility began non-GMP production operations during the first quarter of 2003 and cGMP production in the
second quarter of 2003. The Glasgow facility project, which produces nucleic acid building blocks, included the upgrading of equipment and processes at the current production facility and the build-out of a new facility that provides significant capacity expansion along with further equipment and process improvements.
Our operating activities resulted in net outflows of $13.2 million in 2003 and $17.9 million in 2002. The operating cash outflows for these periods resulted mainly from our operating losses. Significant investments in manufacturing operations, research and development and sales and marketing contributed to the operating losses. Notwithstanding the higher operating losses, operating cash outflows for 2003 are lower than those in the prior year due in large part to more effective management of working capital, specifically, improved accounts receivable management and decreased inventory levels.
Net cash used by investing activities was $2.7 million in 2003 compared to net cash provided by investing activities of $5.9 million for 2002. The investing cash out flow in 2003 is due primarily to the investment in property, plant and equipment offset by the maturity of short-term investment funds. Cash provided in investing activities in 2002 was due primarily to the net maturity of funds in short-term investments offset by investments in property, plant and equipment.
Net cash provided by financing activities was $7.3 million in 2003 and $1.7 million for 2002. The financing cash inflows in 2003 were the result of proceeds from the sale of common stock and advances on our line of credit. Financing cash inflows in 2002 were the result of the sale of common stock and proceeds from long-term debt offset by the purchase of treasury stock.
Obligations and Commitments
Our ongoing capital commitments consist of debt service requirements and obligations under capital leases. The following table sets forth our contractual obligations along with cash payments due in each period indicated:
| Amounts in Thousands | Payments Due by Period | ||||||||||||||
| 2004 | 2005 | 2006 | 2007 | 2008 and Thereafter | |||||||||||
Line of credit(1) | $ | 2,992 | $ | — | $ | — | $ | — | $ | — | |||||
Long-term debt principal payments(2) | 1,693 | — | — | — | — | ||||||||||
Operating lease payments | 3,365 | 3,068 | 2,115 | 654 | — | ||||||||||
Total contractual obligations | $ | 8,050 | $ | 3,068 | $ | 2,115 | $ | 654 | $ | — | |||||
| (1) | See Note F to the consolidated financial statements. |
| (2) | The entire balance of amounts owed on a long-term note as of December 31, 2003, are classified as a current liability as the debt was repaid in the first quarter of 2004. See Note F to the consolidated financial statements. |
Off Balance Sheet Arrangements
At December 31, 2003 and 2002, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies
Accounting policies used in the preparation of the consolidated financial statements may involve the use of management judgments and estimates. Certain of the Company’s accounting policies are considered critical as they are both important to the portrayal of the Company’s financial statements and they require significant or
complex judgments on the part of management. Our judgments and estimates are based on experience and assumptions that we believe are reasonable under the circumstances. Further, we evaluate our judgments and estimates from time to time as circumstances change. Actual financial results based on judgment or estimates may vary under different assumptions or circumstances. The following are certain critical accounting policies that may involve the use of judgment or estimates.
Allowance for Doubtful Accounts Accounts receivable are shown net of an allowance for doubtful accounts. In determining an allowance for doubtful accounts, we consider the following.
If our customers’ financial condition were to deteriorate, resulting in a change in their ability to make payment, additional allowances may be required.
Inventories. Inventories are stated at the lower of cost or market. Cost is computed using standard costs for finished goods and average or latest actual cost for raw materials and work in process.
Depreciation and Amortization of Long-Lived Assets. The Company’s long-lived assets consist primarily of property, plant and equipment, goodwill, patents, intellectual property and capitalized software development costs. We believe the useful lives we assigned to these assets are reasonable. If our assumptions about these assets change as a result of events or circumstances and we believe the assets may have declined in value we may record impairment charges resulting in lower profits. Property and equipment are carried at cost. Depreciation and amortization are computed using straight-line and accelerated methods over the estimated useful lives of the related assets ranging from 3 to 15 years. The Company capitalizes the external and in-house legal costs and filing fees associated with obtaining patents on its new discoveries and amortizes these costs using the straight-line method over the shorter of the legal life of the patent or its economic life, generally 17 years, beginning on the date the patent is issued. Intellectual property, which is purchased technology, is recorded at cost and is amortized over its estimated useful life.
Impairment of Long-Lived Assets. The Company evaluates goodwill for impairment on an annual basis. The Company assesses the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These computations utilize judgments and assumptions inherent in management’s estimate of future undiscounted and discounted cash flows to determine recoverability of these assets. If management’s assumptions about these assets were to change as a result of events or circumstances, the Company may be required to record an impairment loss.
Revenue Recognition. Revenue on the sales of products is recognized in accordance with the terms of the sales arrangement. Such recognition is based on receipt of an unconditional customer order and transfer of title and risk of ownership to the customer, typically upon shipment of the product. Our sales terms do not provide for the right of return unless the product is damaged or defective. Revenues from certain services associated with our analytical instruments, to be performed subsequent to shipment of the products, is deferred and recognized when the services are provided. Such services, mainly limited to installation and training services that are not essential to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument.
Impact of Inflation
We do not believe that price inflation had a material adverse effect on our financial condition or results of operations during the periods presented.
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, is effective for all fiscal years beginning after June 15, 2000. SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company will adopt SFAS 133 effective January 1, 2001. Management does not expect the adoption of SFAS 133 to have a significant impact on the financial position, results of operations, or cash flows of the Company.
Foreign Currency Rate Fluctuations
Approximately 50%
During the last three fiscal years, our international sales have represented approximately 50-65% of our net sales. These sales have been to customers in the United States. While we do sellof products in many foreign countries most of these sales are mainly completed by ourin either British Pounds Sterling or the Euro. Additionally, we have two wholly-owned subsidiary,subsidiaries, Transgenomic, LTD., and are made in itsor Cruachem, LTD., whose operating currency is British pounds sterling orand the Euro. Results of operations for the Company'sCompany’s foreign subsidiary are translated using the average exchange rate during the period. Assets and liabilities are translated at the exchange rate in effect on the balance sheet dates. Too further limit our exposure to exchange rate risk all sales quotes issued by Transgenomic, Ltd., starting in 2001, will be based upon the United States dollar pricing converted at prevailing exchange rates at the time of the quote. Additionally, such quotes will have short expiration dates. As a result although we are
26
subject to exchange rate risk,risk. The operational expenses of our foreign subsidiaries help to reduce the currency exposure we have based on our sales denominated in foreign currencies by converting foreign currencies directly into goods and services. As such management feels we do not have a material exposure to foreign currency rate fluctuations at this time.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The primary objective
In 2003, we obtained a secured line of our investment activities iscredit that carries a variable interest rate. This line of credit exposes us to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the market value of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate atrisk. If the then-prevailingprime lending rate and the prevailing interest rate later rises, the market value of our investment will probably decline. To minimize this risk in the future,United States were to increase we intend to maintainwould experience higher interest costs. Based upon our portfoliototal available credit of cash equivalents and$7.5 million, a 1% increase in the prime rate would increase our annual interest expense by approximately $75,000. We no longer have short-term investments in a variety ofdebt securities including commercial paper, money market funds, government and non-government debt securities. The average duration of all of our investments in 2000 was less than one year. Duethat subject us to the short term nature of these investments, we believe we have no material exposure to interest rate risk arising frommarket risks described in our investments. Therefore, no quantitative tabular disclosure is presented.2002 Annual Report on Form 10-K.
27
Item 8. Financial Statements and Supplementary Data.
INDEPENDENT AUDITORS’ REPORT
Board of Directors
Transgenomic, Inc.
Omaha, Nebraska
We have audited the accompanying consolidated balance sheets of Transgenomic, Inc. and subsidiaries (the Company) as of December 31, 20002003 and 19992002 and the related consolidated statements of operations, stockholders'stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2000.2003. These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Transgenomic, Inc. and subsidiaries as of December 31, 20002003 and 1999,2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20002003 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note R, during the first quarter of 2004, the Company obtained a waiver of the borrowing base limit on its existing line of credit and entered into a convertible note agreement. As discussed in Note A, in 2002 the Company changed its method of accounting for goodwill and other intangible assets in connection with the adoption of Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets.
/s/ DELOITTE & TOUCHE LLP
Omaha, NebraskaJanuary 31, 2001
28March 26, 2004
TRANSGENOMIC, INC. AND SUBSIDIARIES
As of December 31, 20002003 and 19992002
(inIn thousands except share and per share data)
| | 2000 | 1999 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| ASSETS | |||||||||
| CURRENT ASSETS: | |||||||||
| Cash and cash equivalents | $ | 38,193 | $ | 153 | |||||
| Short term investments | 23,728 | — | |||||||
| Accounts receivable, net | 4,733 | 6,199 | |||||||
| Inventories | 2,567 | 3,919 | |||||||
| Prepaid expenses and other current assets | 948 | 623 | |||||||
| Total current assets | 70,169 | 10,894 | |||||||
| PROPERTY AND EQUIPMENT: | |||||||||
| Equipment | 6,359 | 5,200 | |||||||
| Furniture and fixtures | 1,068 | 1,567 | |||||||
| 7,427 | 6,767 | ||||||||
| Less—accumulated depreciation | 2,836 | 3,909 | |||||||
| 4,591 | 2,858 | ||||||||
| DEMONSTRATION INVENTORY | 196 | 2,124 | |||||||
| OTHER ASSETS | 2,907 | 4,087 | |||||||
| $ | 77,863 | $ | 19,963 | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | |||||||||
| CURRENT LIABILITIES: | |||||||||
| Note payable—bank | $ | — | $ | 4,340 | |||||
| Current portion of notes payable—other | — | 580 | |||||||
| Accounts payable | 1,961 | 2,827 | |||||||
| Accrued compensation | 569 | 666 | |||||||
| Other accrued expenses | 1,367 | 1,112 | |||||||
| Total current liabilities | 3,897 | 9,525 | |||||||
| NOTES PAYABLE—other, less current maturities | — | 116 | |||||||
| CONVERTIBLE NOTES PAYABLE | — | 12,421 | |||||||
| COMMITMENTS AND CONTINGENCIES (Notes H, J, L and N) | |||||||||
| STOCKHOLDERS' EQUITY (DEFICIT): | |||||||||
| Preferred stock, $.01 par value, 15,000,000 shares authorized, none outstanding | — | — | |||||||
| Common stock, $.01 par value, 60,000,000 shares authorized, 21,472,816 and 13,000,000 shares issued in 2000 and 1999, respectively | 215 | 130 | |||||||
| Additional paid-in capital | 97,965 | 10,232 | |||||||
| Unearned compensation | (463 | ) | (113 | ) | |||||
| Accumulated deficit | (21,005 | ) | (12,344 | ) | |||||
| Accumulated other comprehensive income (loss) | 4 | (4 | ) | ||||||
| 76,716 | (2,099 | ) | |||||||
| Less: Treasury Stock, at cost, 261,904 shares | (2,750 | ) | — | ||||||
| Total stockholders' equity (deficit) | 73,966 | (2,099 | ) | ||||||
| $ | 77,863 | $ | 19,963 | ||||||
| 2003 | 2002 | |||||||
| ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 1,241 | $ | 9,735 | ||||
Short term investments | — | 3,612 | ||||||
Accounts receivable, net | 10,877 | 11,058 | ||||||
Inventories | 10,584 | 12,448 | ||||||
Prepaid expenses and other current assets | 1,676 | 2,274 | ||||||
Total current assets | 24,378 | 39,127 | ||||||
PROPERTY AND EQUIPMENT: | ||||||||
Land and Buildings | 2,239 | 2,020 | ||||||
Equipment | 20,362 | 16,852 | ||||||
Furniture and fixtures | 9,054 | 5,849 | ||||||
| 31,655 | 24,721 | |||||||
Less: accumulated depreciation | 12,951 | 9,069 | ||||||
| 18,704 | 15,652 | |||||||
GOODWILL | 10,503 | 15,275 | ||||||
OTHER ASSETS | 3,721 | 3,981 | ||||||
| $ | 57,306 | $ | 74,035 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | 3,580 | $ | 4,917 | ||||
Other accrued expenses | 3,874 | 4,928 | ||||||
Accrued compensation | 959 | 1,113 | ||||||
Line of credit | 2,142 | — | ||||||
Current portion of long-term debt | 1,693 | 63 | ||||||
Total current liabilities | 12,248 | 11,021 | ||||||
Long-term debt | — | 1,499 | ||||||
Total liabilities | 12,248 | 12,520 | ||||||
COMMITMENTS AND CONTINGENCIES (Note G) | ||||||||
STOCKHOLDERS’ EQUITY: | ||||||||
Preferred stock, $.01 par value, 15,000,000 shares authorized, none outstanding | — | — | ||||||
Common stock, $.01 par value, 60,000,000 shares authorized, 28,119,122 and 24,006,649 shares issued in 2003 and 2001, respectively | 286 | 240 | ||||||
Additional paid-in capital | 115,904 | 113,934 | ||||||
Unearned compensation | — | (78 | ) | |||||
Accumulated other comprehensive income | 1,597 | 378 | ||||||
Accumulated deficit | (72,729 | ) | (49,771 | ) | ||||
| 45,058 | 64,703 | |||||||
Less: Treasury Stock, at cost, None and 494,604 shares in 2003 and 2002, respectively | — | (3,188 | ) | |||||
Total stockholders’ equity | 45,058 | 61,515 | ||||||
| $ | 57,306 | $ | 74,035 | |||||
See notes to consolidated financial statements.
29
TRANSGENOMIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2000, 19992003, 2002 and 19982001
(inIn thousands except share and per share data)
| | 2000 | 1999 | 1998 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| NET SALES | $ | 25,883 | $ | 23,035 | $ | 18,935 | |||||
| COST OF GOODS SOLD | 12,800 | 12,090 | 9,591 | ||||||||
| Gross profit | 13,083 | 10,945 | 9,344 | ||||||||
| OPERATING EXPENSES: | |||||||||||
| Selling, General and administrative | 14,047 | 11,532 | 8,160 | ||||||||
| Research and development | 7,652 | 6,297 | 3,159 | ||||||||
| Stock based compensation expense | 861 | — | — | ||||||||
| Gain on sale of product line | (784 | ) | — | — | |||||||
| 21,776 | 17,829 | 11,319 | |||||||||
| LOSS FROM OPERATIONS | (8,693 | ) | (6,884 | ) | (1,975 | ) | |||||
| OTHER INCOME (EXPENSE): | |||||||||||
| Interest income | 2,005 | 126 | 59 | ||||||||
| Interest expense | (1,779 | ) | (1,324 | ) | (575 | ) | |||||
| Other—net | (14 | ) | — | (15 | ) | ||||||
| 212 | (1,198 | ) | (531 | ) | |||||||
| LOSS BEFORE INCOME TAXES | (8,481 | ) | (8,082 | ) | (2,506 | ) | |||||
| INCOME TAX EXPENSE (BENEFIT): | |||||||||||
| Current | — | (28 | ) | 20 | |||||||
| Deferred | 180 | 1,773 | (950 | ) | |||||||
| 180 | 1,745 | (930 | ) | ||||||||
| NET LOSS | $ | (8,661 | ) | $ | (9,827 | ) | $ | (1,576 | ) | ||
| BASIC AND DILUTED LOSS PER SHARE | $ | (0.52 | ) | $ | (0.76 | ) | $ | (0.13 | ) | ||
| BASIC AND DILUTED WEIGHTED AVERAGE SHARES | |||||||||||
| OUTSTANDING | 16,629,555 | 13,000,000 | 12,279,042 | ||||||||
| 2003 | 2002 | 2001 | ||||||||||
NET SALES | $ | 33,866 | $ | 37,554 | $ | 38,467 | ||||||
COST OF GOODS SOLD | 24,315 | 19,569 | 17,198 | |||||||||
Gross profit | 9,551 | 17,985 | 21,269 | |||||||||
OPERATING EXPENSES: | ||||||||||||
Selling, General and administrative | 17,324 | 24,199 | 21,636 | |||||||||
Research and development | 9,305 | 12,201 | 9,372 | |||||||||
Restructuring charges (Note Q) | 738 | 3,282 | — | |||||||||
Goodwill impairment charge (Note E) | 4,772 | — | — | |||||||||
| 32,139 | 39,682 | 31,008 | ||||||||||
LOSS FROM OPERATIONS | (22,588 | ) | (21,697 | ) | (9,739 | ) | ||||||
OTHER INCOME (EXPENSE): | ||||||||||||
Interest income | 160 | 626 | 2,450 | |||||||||
Interest expense | (315 | ) | (62 | ) | (58 | ) | ||||||
Other—net | (150 | ) | (127 | ) | (30 | ) | ||||||
| (305 | ) | 437 | 2,362 | |||||||||
LOSS BEFORE INCOME TAXES | (22,893 | ) | (21,260 | ) | (7,377 | ) | ||||||
CURRENT INCOME TAX EXPENSE | 65 | 105 | 24 | |||||||||
NET LOSS | $ | (22,958 | ) | $ | (21,365 | ) | $ | (7,401 | ) | |||
BASIC AND DILUTED LOSS PER SHARE | $ | (0.94 | ) | $ | (0.91 | ) | $ | (0.33 | ) | |||
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING | 24,483,861 | 23,582,687 | 22,560,057 | |||||||||
See notes to consolidated financial statements.
30
TRANSGENOMIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
Years Ended December 31, 2000, 19992003, 2002 and 19982001
(inIn thousands except share data)
| | Common Stock | | | | | | | | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Outstanding Shares | Par Value | Additional Paid in Capital | Notes Receivable | Unearned Compensation | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total | ||||||||||||||||||||
| Balance, January 1, 1998 | 11,351,500 | $ | 114 | $ | 2,835 | $ | (1,020 | ) | $ | — | $ | (941 | ) | $ | 2 | $ | — | $ | 990 | ||||||||||
| Net loss | (1,576 | ) | (1,576 | ) | (1,576 | ) | |||||||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||
| Foreign currency translation adjustment | 1 | 1 | |||||||||||||||||||||||||||
| Comprehensive income (loss) | (1,575 | ) | |||||||||||||||||||||||||||
| Net receivable from related party | (66 | ) | (66 | ) | |||||||||||||||||||||||||
| Sale of common shares | 1,648,500 | 16 | 7,284 | 7,300 | |||||||||||||||||||||||||
| Balance, December 31, 1998 | 13,000,000 | 130 | 10,119 | (1,086 | ) | — | (2,517 | ) | 3 | — | 6,649 | ||||||||||||||||||
| Net loss | (9,827 | ) | (9,827 | ) | (9,827 | ) | |||||||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||
| Foreign currency translation adjustment | (7 | ) | (7 | ) | |||||||||||||||||||||||||
| Comprehensive income (loss) | (9,834 | ) | |||||||||||||||||||||||||||
| Net receivable from related party | 1,086 | 1,086 | |||||||||||||||||||||||||||
| Issuance of stock options | 113 | (113 | ) | — | |||||||||||||||||||||||||
| Balance, December 31, 1999 | 13,000,000 | 130 | 10,232 | — | (113 | ) | (12,344 | ) | (4 | ) | — | (2,099 | ) | ||||||||||||||||
| Net loss | (8,661 | ) | (8,661 | ) | (8,661 | ) | |||||||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||
| Foreign currency translation adjustment | (5 | ) | (5 | ) | |||||||||||||||||||||||||
| Unrealized gain on available for sale securities | 13 | 13 | |||||||||||||||||||||||||||
| Comprehensive income (loss) | (8,653 | ) | |||||||||||||||||||||||||||
| Sale of common shares | 25,000 | 250 | 250 | ||||||||||||||||||||||||||
| Initial public offering (net of expenses) | 5,152,000 | 52 | 69,644 | 69,696 | |||||||||||||||||||||||||
| Conversion of Notes Payable and accrued interest | 2,750,906 | 28 | 13,909 | 13,937 | |||||||||||||||||||||||||
| Issuance and exercise of stock options or warrants | 544,910 | 5 | 3,930 | (508 | ) | 3,427 | |||||||||||||||||||||||
| Amortization of unearned compensation | 158 | 158 | |||||||||||||||||||||||||||
| Purchase of treasury stock | (261,904 | ) | (2,750 | ) | (2,750 | ) | |||||||||||||||||||||||
| Balance, December 31, 2000 | 21,210,912 | $ | 215 | $ | 97,965 | $ | — | $ | (463 | ) | $ | (21,005 | ) | $ | 4 | $ | (2,750 | ) | $ | 73,966 | |||||||||
31
| Common Stock | Additional Paid in Capital | Unearned Compensation | Accumulated Deficit | Accumulated Comprehensive Income (Loss) | Treasury Stock | Total | |||||||||||||||||||||||||
Outstanding Shares | Par Value | ||||||||||||||||||||||||||||||
Balance, January 1, 2001 | $ | 21,210,912 | $ | 215 | $ | 97,965 | $ | (463 | ) | $ | (21,005 | ) | $ | 4 | $ | (2,750 | ) | $ | 73,966 | ||||||||||||
Net loss | (7,401 | ) | (7,401 | ) | (7,401 | ) | |||||||||||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||||||||||
Foreign currency translation adjustment | (107 | ) | (107 | ) | |||||||||||||||||||||||||||
Unrealized gain on available for sale securities | 22 | 22 | |||||||||||||||||||||||||||||
Comprehensive loss | (7,486 | ) | |||||||||||||||||||||||||||||
Issuance of shares for acquisition | 1,889,523 | 19 | 13,065 | 13,084 | |||||||||||||||||||||||||||
Issuance and exercise of stock options or warrants | 505,568 | 5 | 2,396 | 2,401 | |||||||||||||||||||||||||||
Deferred compensation | (166 | ) | 204 | 38 | |||||||||||||||||||||||||||
Amortization of unearned compensation | 101 | 101 | |||||||||||||||||||||||||||||
Balance, December 31, 2001 | 23,606,003 | 239 | 113,260 | (158 | ) | (28,406 | ) | (81 | ) | (2,750 | ) | 82,104 | |||||||||||||||||||
Net loss | (21,365 | ) | (21,365 | ) | (21,365 | ) | |||||||||||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||||||||||
Foreign currency translation adjustment | 493 | 493 | |||||||||||||||||||||||||||||
Unrealized gain on available for sale securities | (34 | ) | (34 | ) | |||||||||||||||||||||||||||
Comprehensive loss | (20,906 | ) | |||||||||||||||||||||||||||||
Issuance and exercise of stock options or warrants | 81,900 | 1 | 460 | (51 | ) | 410 | |||||||||||||||||||||||||
Issuance of shares for employee stock purchase plan | 56,842 | 214 | 214 | ||||||||||||||||||||||||||||
Amortization of unearned compensation | 131 | 131 | |||||||||||||||||||||||||||||
Purchase of treasury stock | (232,700 | ) | (438 | ) | (438 | ) | |||||||||||||||||||||||||
Balance, December 31, 2002 | 23,512,045 | 240 | 113,934 | (78 | ) | (49,771 | ) | 378 | (3,188 | ) | 61,515 | ||||||||||||||||||||
Net loss | (22,958 | ) | (22,958 | ) | (22,958 | ) | |||||||||||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||||||||||
Foreign currency translation adjustment | 1,219 | 1,219 | |||||||||||||||||||||||||||||
Comprehensive loss | (21,739 | ) | |||||||||||||||||||||||||||||
Issuance of stock options and warrants | 386 | 386 | |||||||||||||||||||||||||||||
Beneficial Conversion Premium | 480 | 480 | |||||||||||||||||||||||||||||
Issuance of shares | 4,500,000 | 45 | 969 | 3,188 | 4,202 | ||||||||||||||||||||||||||
Issuance of shares for employee stock purchase plan | 107,077 | 1 | 135 | 136 | |||||||||||||||||||||||||||
Amortization of unearned compensation | 78 | 78 | |||||||||||||||||||||||||||||
Balance, December 31, 2003 | $ | 28,119,122 | $ | 286 | $ | 115,904 | $ | — | $ | (72,729 | ) | $ | 1,597 | $ | — | $ | 45,058 | ||||||||||||||
TRANSGENOMIC INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998
(in thousands)
| | 2000 | 1999 | 1998 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net loss | $ | (8,661 | ) | $ | (9,827 | ) | $ | (1,576 | ) | |||
| Adjustments to reconcile net loss to net cash flows from operating activities: | ||||||||||||
| Depreciation and amortization | 1,807 | 1,364 | 798 | |||||||||
| Deferred income taxes | 180 | 1,773 | (950 | ) | ||||||||
| Loss (gain) on sale of assets | 4 | (16 | ) | (8 | ) | |||||||
| Gain on sale of product line | (784 | ) | — | — | ||||||||
| Accrued interest and redemption premium | 1,415 | 859 | — | |||||||||
| Amortization of deferred financing costs | 101 | 150 | — | |||||||||
| Stock based compensation expense | 861 | — | — | |||||||||
| Changes in operating assets and liabilities, net of acquisitions: | ||||||||||||
| Accounts receivable | 1,444 | (1,635 | ) | (2,029 | ) | |||||||
| Inventories | (223 | ) | (1,775 | ) | (1,718 | ) | ||||||
| Prepaid expenses and other current assets | (357 | ) | (296 | ) | 307 | |||||||
| Accounts payable | (796 | ) | 481 | 1,392 | ||||||||
| Accrued expenses | 261 | 179 | 340 | |||||||||
| Net cash flows from operating activities | (4,748 | ) | (8,743 | ) | (3,444 | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Purchase of property and equipment | (3,109 | ) | (1,828 | ) | (683 | ) | ||||||
| Proceeds from asset sales | 5,657 | 21 | 10 | |||||||||
| Increase in other assets | (980 | ) | (1,461 | ) | (790 | ) | ||||||
| Purchase of short term investments | (23,728 | ) | — | — | ||||||||
| Purchase of business, net of cash acquired | — | (187 | ) | — | ||||||||
| Net cash flows from investing activities | (22,160 | ) | (3,455 | ) | (1,463 | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Issuance of common stock, net of expenses | 72,670 | — | 7,300 | |||||||||
| Net change in note payable—bank | (4,340 | ) | 1,190 | (800 | ) | |||||||
| Proceeds from notes payable—other | 204 | — | 100 | |||||||||
| Payments on notes payable—other | (901 | ) | (430 | ) | (1,965 | ) | ||||||
| Purchase of treasury stock | (2,750 | ) | — | — | ||||||||
| Proceeds from convertible notes payable | — | 12,000 | — | |||||||||
| Deferred financing costs | — | (588 | ) | — | ||||||||
| Increase in related party receivables | — | — | (66 | ) | ||||||||
| Net cash flows from financing activities | 64,883 | 12,172 | 4,569 | |||||||||
| EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH | 65 | (8 | ) | 1 | ||||||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | 38,040 | (34 | ) | (337 | ) | |||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 153 | 187 | 524 | |||||||||
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 38,193 | $ | 153 | $ | 187 | ||||||
See notes to consolidated financial statements.
32
TRANSGENOMIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 19992003, 2002 and 19982001
(In thousands)
| 2003 | 2002 | 2001 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net loss | $ | (22,958 | ) | $ | (21,365 | ) | $ | (7,401 | ) | |||
Adjustments to reconcile net loss to net cash flows from operating activities: | ||||||||||||
Depreciation and amortization | 3,981 | 3,993 | 3,680 | |||||||||
Goodwill impairment charge | 4,772 | — | — | |||||||||
Non-cash restructuring charges | 364 | 1,698 | — | |||||||||
(Gain)/Loss on sale of trading securities | (64 | ) | — | — | ||||||||
Other | 93 | 131 | 130 | |||||||||
Changes in operating assets and liabilities, net of acquisitions: | ||||||||||||
Purchase of trading securities | (1,843 | ) | — | — | ||||||||
Proceeds from sale of trading securities | 1,907 | — | — | |||||||||
Accounts receivable | 619 | 794 | (4,677 | ) | ||||||||
Inventories | 2,887 | (5,767 | ) | (1,910 | ) | |||||||
Prepaid expenses and other current assets | 334 | 527 | (1,169 | ) | ||||||||
Accounts payable | (1,509 | ) | 2,249 | (378 | ) | |||||||
Accrued expenses | (1,828 | ) | (204 | ) | 608 | |||||||
Net cash flows from operating activities | (13,245 | ) | (17,944 | ) | (11,117 | ) | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Purchase of property and equipment | (6,413 | ) | (11,468 | ) | (5,706 | ) | ||||||
Proceeds from asset sales | 9 | — | 15 | |||||||||
(Increase)/Decrease in other assets | 73 | (2,871 | ) | (1,351 | ) | |||||||
Proceeds from the maturities and sale of available for sale securities | 3,612 | 39,355 | 52,739 | |||||||||
Purchases of available for sale securities | — | (19,088 | ) | (52,902 | ) | |||||||
Purchase of business, net of cash acquired | — | — | (2,189 | ) | ||||||||
Net cash flows from investing activities | (2,719 | ) | 5,928 | (9,394 | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Issuance of common stock, net of expenses | 4,338 | 624 | 2,401 | |||||||||
Purchase of treasury stock | — | (438 | ) | — | ||||||||
Proceeds from long-term debt | — | 1,559 | — | |||||||||
Net change in line of credit | 2,992 | — | — | |||||||||
Payments on long-term debt | (35 | ) | — | — | ||||||||
Repayment of acquired business debt | — | — | (458 | ) | ||||||||
Net cash flows from financing activities | 7,295 | 1,745 | 1,943 | |||||||||
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH | 175 | 393 | (12 | ) | ||||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | (8,494 | ) | (9,878 | ) | (18,580 | ) | ||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 9,735 | 19,613 | 38,193 | |||||||||
CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 1,241 | $ | 9,735 | $ | 19,613 | ||||||
See notes to consolidated financial statements.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002 and 2001
(Tabular amounts in thousands except share and per share data)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description.
Transgenomic, Inc., a Delaware corporation, and its subsidiaries (the "Company"“Company”) provide innovative research toolsproducts and services for the synthesis, purification and analysis of nucleic acids. The Company’s products and services include automated instrument systems, associated consumables, nucleic acid chemical building blocks, nucleic acid synthesis products, novel chemistry development for nucleic acids, process development services and genetic variation discovery services. The Company develops, assembles, manufactures and markets it’s products and services to the life sciences industry. These tools enable researchersindustry to discoverbe used in research focused on molecular genetics of humans and understand variationother organisms. Such research could lead to development of new diagnostics and therapeutics. The Company’s business plan is to participate in the human genetic code, or genome,value chain associated with these activities by providing key technology, tools, consumables, biochemical reagents and services to those entities engaged in orderbasic biomedical research and the development of diagnostics and therapeutic agents.
Prior to accelerate2002 the Company was managed and improve drug developmentoperated on a fully integrated basis in one operating segment. During 2002, management determined it was appropriate to evaluate the Company’s operations based upon the nature of the products and diagnostics. services provided. Accordingly, the Company has determined that it operates in two reportable segments, BioSystems and Nucleic Acids. The BioSystems operating segment generates revenue from the sale of automated instrument systems and associated consumable products and services. The Nucleic Acids operating segment generates revenue from the sale of nucleic acid-based products and services.
The Company markets and sells these platformsproducts primarily throughoutthrough a direct sales and support group in North America and Europe and through a network of distributors in the Pacific Rim. Through March 31, 2000,Rim and other international markets. These sales efforts are directed from the Company also manufacturedheadquarters in Omaha, Nebraska and designed sample preparationthrough a series of sales and monitoring instruments, which were primarily used with various types of opticalsupport offices strategically located throughout the United States, Europe and mass spectrometers to analyze the chemical makeup of samples. The assets related to this non-life sciences product line were sold effective April 1, 2000.Japan.
Principles of Consolidation.
The consolidated financial statements include the accounts of Transgenomic, Inc. and its wholly-owned subsidiaries Transgenomic, Ltd., which provides sales and customer support in Europe, Transgenomic Japan, Inc., which sponsors a sales and support branch office in Japan and Transgenomic St. Thomas, Inc., which is organized as a foreign sales corporation.subsidiaries. All intercompany balances and transactions have been eliminated.
Sales and Distribution Strategy.eliminated in consolidation.
The Company sells its products in two major ways:
The Company has sales offices in the United States, United Kingdom and Japan. These offices function mainly as service and support centers and also as sales resources for OEM and distributor customers in Europe and Japan.
Cash and Cash Equivalents.
For purposes of reporting cash flows, cash and cash equivalents include cash and temporary investments with original maturities at acquisition of three months or less.
Short Term Investments.
The Company classifies all of its short termshort-term investments with maturities at acquisition of greater than three months as available for sale securities. Such short term investments consist primarily of United States government and federal agency securities, corporate commercial paper and mutual fundscorporate debt which are stated at market value, with unrealized gains and losses on such securities reflected, net of tax, as other
33
comprehensive income in shareholders'stockholders’ equity. Realized gains and losses on short term investments are included in earnings and are derived using the specific identification method for determining the cost of securities. It is the Company'sCompany’s intent to maintain a liquid portfolio to take advantage of investment opportunities; therefore, all securities are considered to be available for sale and are classified as current assets. The Company may from time to time accept common stock from its customers as payment. These shares may be classified as trading securities with changes in fair value being recognized in current income or loss.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2003, 2002 and 2001
(Tabular amounts in thousands except share and per share data)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounts Receivable.
Accounts receivable are shown net of allowance for doubtful accounts of $180$549,000 and $161$450,000 in 20002003 and 1999,2002, respectively. Payment terms generally are 30 or 60 days. The Company has also provided extended payment terms of up to 90 days to some of its customers. Accounts receivable balances subject to extended terms were approximately $105 as of December 31, 2000 and $216 as of December 31, 1999. Balances due more than one year from the balance sheet date were approximately $0 and $77, respectively.
Inventories.
Inventories are stated at the lower of cost (first-in, first-out method) or market. The Company has certainCost is computed using standard costs for finished goods inventory it provides as demonstration units to potential customersand average or latest actual cost for evaluation, as well as to certain universitiesraw materials and original equipment manufacturers for testing and demonstration. All demonstration units are held for resale and includedwork in inventory at the lower of cost or market. Demonstration inventory that is greater than one year old and remains held for resale is reclassified from current assets to long-term assets and carried at the lower of cost or market. If the customer or institution does not purchase the instrument, it is retrieved, and, if necessary, reconditioned for sale. Demonstration inventory is evaluated for impairment based on its physical condition and technological status. No impairment loss has been recognized to date. At the time these instruments no longer are held for resale and will be used for in-house testing and analysis, they are transferred from inventory to property at the lower of cost or market and depreciated. Demonstration equipment included in property and equipment is used for research and development and training.process.
Property and Equipment.
Property and equipment are carried at cost. Depreciation and amortization are computed by the straight-line and accelerated methods over the estimated useful lives of the related assets as follows:
Buildings | 15 years | |
Leasehold improvements | 3 to 7 years | |
Furniture and fixtures | 5 to 7 years | |
Production equipment | 5 to 7 years | |
Computer equipment | ||
| 3 to 5 years | ||
Research and development equipment | 3 to 5 years | |
Demonstration equipment | 3 to 5 years |
Goodwill.Goodwill and other Intangible Assets
The Company adopted Statement of Financial Accounting Standard (SFAS) No. 142,Goodwill arising from the excess of cost overand Other Intangible Assets,beginning on January 1, 2002. SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for impairment annually. Impairment occurs when the fair value of net assets at dates of acquisitionthe asset is being amortized usingless than its carrying amount. If impaired, the straight-line method over 15 years.
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Impairment of Long-Lived Assets.
asset’s carrying value is reduced to its fair value. The Company assessescompletes its annual impairment test during the recoverability of long-lived assets held for use, including certainfourth quarter. Identifiable intangible assets with definite lives are amortized over their estimated useful lives and goodwill, whenevertested for impairment as events or changes in circumstances indicate that the carrying amount of anthe asset may not be recoverable. In such cases, ifimpaired. Impairment occurs when the sum of the expected cash flows (undiscounted and without interest) resulting from the usefair value of the asset is less than the carrying amount, an impairment loss is recognized based on the difference between the carrying amount and the fair value of the assets. No impairment loss has been recognized to date.value.
Other Assets.
Other assets include patents, intellectual property, deferred financing costs and intellectual property.capitalized software development costs. The Company capitalizes the external and in-house legal costs and filing fees associated with obtaining patents on its new discoveries and amortizes these costs using the straight-line method over the shorter of the legal life of the patent or its economic life, generally 17 years, beginning on the date the patent is issued. Intellectual property, which is purchased technology, is recorded at cost and is amortized over its estimated useful lifeThe Company capitalized software development costs for products offered for sale in accordance with Statement of between 5 and 10 years.Financial Accounting Standard No. 86,Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. This Standard allows for the capitalization of certain development costs once a software product has reached technological feasibility.
Deferred Financing Costs.TRANSGENOMIC, INC. AND SUBSIDIARIES
Deferred financing costs are amortized over the term of the related financing using the effective interest method.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2003, 2002 and 2001
(Tabular amounts in thousands except share and per share data)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Based Compensation.
The Company accounts for its employee stock option grants under the provisions of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, which utilizes the intrinsic value method. Accordingly, compensation cost for stock options is measured as the excess, if any, of the deemed fair market value of the Company'sCompany’s common stock at the date of grant over the stock option exercise price. Stock option grants to nonemployees are accounted for using the fair value method of accounting in accordance with Statement of Financial Accounting Standards (SFAS) No. 123,Accounting for Stock-Based Compensation using the Black-Scholes model.
The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123,Unearned Compensation.Accounting for Stock-Based Compensation, to stock based employee compensation.
Unearned compensation represents the unamortized difference between the option exercise price and the deemed fair market value of the Company's common stock at the option grant date, for options issued under the Company's Stock Option Plan (Note L). The unearned compensation is charged to operations over the vesting period of the respective options.
| 2003 | 2002 | 2001 | ||||||||||
Net Loss: | ||||||||||||
As reported | $ | (22,958 | ) | $ | (21,365 | ) | $ | (7,401 | ) | |||
Pro forma | $ | (24,794 | ) | (23,274 | ) | (10,110 | ) | |||||
Basic and diluted loss per share: | ||||||||||||
As reported | (0.94 | ) | (0.91 | ) | (0.33 | ) | ||||||
Pro forma | (1.01 | ) | (0.99 | ) | (0.45 | ) | ||||||
Income Taxes.
Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basesbasis of assets and liabilities at each balance sheet date using tax rates expected to be in effect in the year the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent that it is unlikely they will be realized.
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Revenue Recognition.
Sales
Revenue on the sales of products are recordedis recognized in accordance with the terms of the sales arrangement. Such recognition is based on receipt of an unconditional customer order and transfer of title and risk of ownership to the customer, typically upon shipment of the product. The Company'sOur sales terms do not provide for the right of return unless the product is damaged or defective. Installation and training revenues areRevenues from certain services associated with our analytical instruments, to be performed subsequent to shipment of the products, is deferred and recognized when earned.the services are provided. Such services, mainly limited to installation and training services that are not essential to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument. The Company also enters into various service contracts that cover installed WAVE systems. These contracts cover specific time periods and revenue associated with these contracts is deferred and recognized over the service period. At December 31, 2003 and 2002 deferred revenue, mainly associated with our service contracts, included on the Company’s balance sheet was approximately $1.8 million and $1.2 million respectively.
Research and Development.
Research and development costs are charged to expense when incurred.incurred with the exception of certain software development costs that are capitalized.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2003, 2002 and 2001
(Tabular amounts in thousands except share and per share data)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Translation of Foreign Currency.
Financial statements of subsidiaries outside the U.S. are measured using the local currency as the functional currency. The adjustments to translate those amounts into U.S. dollars are accumulated in a separate account in stockholders'stockholders’ equity and are included in other comprehensive income. Foreign currency transaction gains or losses resulting from changes in currency exchange rates are included in the determination of net income. For the periods presented, foreignForeign currency transaction adjustments decreased net loss approximately $1.0 million in 2003 and 2002. Foreign currency transaction adjustments in 2001 were not significant.
Comprehensive Income.
Comprehensive income for all periods presented consists of net income, foreign currency translation adjustments and unrealized gains or losses on available for sale investments. The Company deems its foreign investments to be permanent in nature and does not provide for taxes on currency translation adjustments arising from converting its investments in a foreign currency to U.S. dollars. There were no reclassification adjustments to be reported in the periods presented.
Fair Value of Financial Instruments.
The carrying amount of the Company'sCompany’s cash and cash equivalents, receivables, accounts payable and accrued expenses approximatesapproximate fair value because of the short maturity of those instruments. The Company derives the fair value of its short termshort-term investments based on quoted market prices. The carrying value of long-term debt and the line of credit approximates fair value based upon existing interest rates available to the Company for similar debt.
Earnings Per Share.
Basic earnings per share are calculated based on the weighted-average number of common shares outstanding during each period. Diluted earnings per share include shares issuable upon exercise of outstanding stock options and warrants or conversion of convertible notes, where dilutive. Potentially dilutive securities have been excluded from the computation of diluted earnings per share as they have an antidilutive effect due to the Company'sCompany’s net loss.
Accounting Pronouncements.
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, is effective for all fiscal years beginning after June 15, 2000. SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain
36
derivative instruments embedded in other contracts and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company will adopt SFAS 133 effective January 1, 2001. Management does not expect the adoption of SFAS 133 to have a significant impact on the financial position, results of operations, or cash flows of the Company.
Use of Estimates.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications.
Certain reclassifications may have been made to the 19982002 and 19992001 financial statements to conform to the 2000current presentation.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2003, 2002 and 2001
(Tabular amounts in thousands except share and per share data)
B. SHORT TERM INVESTMENTS
As of December 31, 2003, the Company had no available-for-sale securities. The amortizationamortized cost of available-for-sale securities and their approximate fair values, atas of December 31, 20002002, were as follows:
| | Amortized | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Commercial Paper | $ | 14,697 | $ | — | $ | — | $ | 14,697 | ||||
| U.S. Government Agencies | 2,949 | 1 | 2,948 | |||||||||
| Corporate Debt | 6,069 | 14 | 6,083 | |||||||||
| Total securities available-for-sale | $ | 23,715 | $ | 14 | $ | 1 | $ | 23,728 | ||||
Amortized Cost | Gross Gains | Gross Losses | Fair Value | |||||||||
December 31, 2002 | ||||||||||||
Corporate Debt | $ | 3,611 | $ | 1 | $ | - | $ | 3,612 | ||||
Maturities of short termshort-term investments are due within one year.
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In September 2003, the Company entered into an addendum to an existing supply agreement with Geron Corporation. The addendum allows Geron to pay for products being manufactured under the addendum with Geron common stock. As a result, Geron issued 31,080 shares of common stock to the Company as a prepayment for products. These shares are being accounted for as available for sale securities.
In June 2003, the Company entered into a license agreement with Geron Corporation. As part of the agreement, the Company was required to purchase 310,000 shares of Geron common stock for $5.05 per share on June 3, 2003. On June 4, 2003, the Company sold the Geron shares. The purchase and sale of these shares was accounted for as a purchase and sale of trading securities. The purchase price was $1,565,500 and the sale proceeds were $1,519,000 resulting in a trading loss of $46,500. This loss is reflected in current earnings and cash flows from operations.
C. INVENTORIES
At December 31, 20002003 and 1999,2002, inventories consist of the following:
| | 2000 | 1999 | |||||
|---|---|---|---|---|---|---|---|
| Finished goods | $ | 703 | $ | 157 | |||
| Raw materials and work in process | 1,557 | 2,787 | |||||
| Demonstration inventory | 503 | 3,099 | |||||
| 2,763 | 6,043 | ||||||
| Less long-term demonstration inventory | (196 | ) | (2,124 | ) | |||
| $ | 2,567 | $ | 3,919 | ||||
During 2000 and 1999, the Company reclassified demonstration inventory of approximately $1.0 million and $41, respectively, to property and equipment.
| 2003 | 2002 | |||||
Finished goods | $ | 5,319 | $ | 6,400 | ||
Raw materials and work in process | 5,074 | 5,904 | ||||
Demonstration inventory | 191 | 144 | ||||
| 10,584 | 12,448 | |||||
D. OTHER ASSETS
At December 31, 20002003 and 1999,2002, finite lived intangible assets and other assets consist of the following:
| | 2000 | 1999 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Cost | Accumulated Reserve | Net Book Value | Cost | Accumulated Reserve | Net Book Value | ||||||||||||
| Deferred income taxes | $ | — | $ | — | $ | — | $ | 180 | $ | — | $ | 180 | ||||||
| Goodwill | 903 | 382 | 521 | 909 | 306 | 603 | ||||||||||||
| Intellectual property | 535 | 267 | 268 | 2,535 | 447 | 2,088 | ||||||||||||
| Patents | 1,368 | 36 | 1,332 | 1,076 | 21 | 1,055 | ||||||||||||
| Other | 786 | — | 786 | 161 | — | 161 | ||||||||||||
| Total | $ | 3,592 | $ | 685 | $ | 2,907 | $ | 4,861 | $ | 774 | $ | 4,087 | ||||||
| 2003 | 2002 | |||||||||||||||||
| Cost | Accumulated Reserve | Net Book Value | Cost | Accumulated Reserve | Net Book Value | |||||||||||||
Capitalized software | $ | 2,132 | $ | 758 | $ | 1,374 | $ | 2,132 | $ | 24 | $ | 2,108 | ||||||
Intellectual property | 765 | 165 | 600 | 545 | 90 | 455 | ||||||||||||
Patents | $ | 1,035 | 170 | 865 | 883 | 150 | 733 | |||||||||||
Deferred Financing Costs | 409 | — | 409 | — | — | — | ||||||||||||
Other | $ | 656 | 183 | 473 | 685 | — | 685 | |||||||||||
Total | $ | 4,997 | $ | 1,276 | $ | 3,721 | $ | 4,245 | $ | 264 | $ | 3,981 | ||||||
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2003, 2002 and 2001
(Tabular amounts in thousands except share and per share data)
D. OTHER ASSETS (Continued)
Amortization expense for intangible assets was $825,000, $150,000 and $70,000 during 2003, 2002 and 2001, respectively. The Company expects amortization expense for intangible assets to be approximately $922,000 in fiscal 2004, $872,000 in fiscal 2005, $216,000 in fiscal 2006, $253,000 in fiscal 2006, and $77,000 in 2007.
E. NOTE PAYABLE—BANKGOODWILL
At December 31, 1999, note payable—bank2003 and 2002, goodwill by operating segment consisted of borrowingsthe following:
Biosystems operating segment | Nucleic Acids operating segment | Total | |||||||||
Net balance December 31, 2001 | $ | 638 | $ | 13,636 | $ | 14,274 | |||||
Finalization of purchase price allocations | — | 1,001 | 1,001 | ||||||||
Net balance December 31, 2002 | $ | 638 | $ | 14,637 | $ | 15,275 | |||||
Goodwill impairment charge | — | (4,772 | ) | (4,772 | ) | ||||||
Net Balance December 31, 2003 | $ | 638 | $ | 9,865 | $ | 10,503 | |||||
The Company also completed its annual impairment test during the fourth quarter 2003. The Company engaged an external valuation firm to assist with the completion of its annual impairment test during the fourth quarter of 2003. As a result of this test the Company recorded a non-cash goodwill impairment charge of $4.8 million related to its nucleic acids segment. There was no impairment related to the Biosystems operating segment.
A reconciliation of previously reported net loss and loss per share to the amounts adjusted for the exclusion of goodwill amortization follows:
| Fiscal Years Ended December 31, | ||||||||||||
| 2003 | 2002 | 2001 | ||||||||||
Reported Net Loss | $ | (22,958 | ) | $ | (21,365 | ) | $ | (7,401 | ) | |||
ADD: Goodwill Amortization | — | — | 889 | |||||||||
Adjusted Net Loss | $ | (22,958 | ) | $ | (21,365 | ) | $ | (6,512 | ) | |||
Loss Per Share: | ||||||||||||
As Reported | $ | (0.94 | ) | $ | (0.91 | ) | $ | (0.33 | ) | |||
Adjusted | $ | (0.94 | ) | $ | (0.91 | ) | $ | (0.29 | ) | |||
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2003, 2002 and 2001
(Tabular amounts in thousands except share and per share data)
F. LINE OF CREDIT AND LONG-TERM DEBT
In June 2003, the amount of $4.3 million againstCompany entered into a revolvingloan agreement with a financial institution for a secured line of credit up to a maximum of $5.0 million. In December 2003, the Company terminated the existing line of credit and entered into a new, $7.5 million line of credit facility with Laurus Master Fund, Ltd. (“Laurus”), of which the Company borrowed $4.0 million during 2003. The line matured on July 31, 2000 and was not renewed. The note carriedterm of the agreement is three years carrying an interest rate of 2.0% over the prime rate or a minimum of 6.0%. Funds available under the line are equal to the national prime. The interest was payable monthly. The interest rate at December 31, 1999, was 8.50%.
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F. NOTES PAYABLE—OTHER
Notes payable—other at December 31, 2000 and 1999 consists90% of eligible accounts receivable balances plus up to $1.0 million related to inventory balances. This line of credit is secured by most of the following:
| | 2000 | 1999 | ||||
|---|---|---|---|---|---|---|
| Installment note payable to a bank, repaid in 2000 | $ | — | $ | 180 | ||
| Installment note payable to a bank, repaid in 2000 | — | 280 | ||||
| Note payable—other, repaid in 2000 | — | 236 | ||||
| Total notes payable—other | — | 696 | ||||
| Less current portion | — | 580 | ||||
| Notes payable—other excluding current portion | $ | — | $ | 116 | ||
G. CONVERTIBLE NOTES PAYABLE
On March 23, 1999, the Company received approximately $11.4 millionCompany’s assets. Payment of net proceeds from the placement of $12 million aggregateinterest and principal amount 6% convertible notes due March 25, 2002. Interest on the notes compounded at 6% per annum until the completioncan, under certain circumstances, be made with shares of the Company's initial public offering. The Company's initial public offering impacted the notes as follows:
Certain features of the line of credit facility require the Company to convertseparately account for the notesvalue of certain amounts related to the warrants issued and the conversion feature of the facility. Specifically, Emerging Issues Task Force (“EITF”) No. 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments, requires the Company to value the warrants issued and the “beneficial conversion premium” related to this convertible facility. The beneficial conversion premium was initially based upon the Company’s borrowings during 2003 of $4.0 million. Any additional borrowings under the line of credit facility in the future will result in additional beneficial conversion premiums. The value of the warrants and the beneficial conversion premium are recorded on the balance sheet as a debt discount and an increase to additional paid in capital. The debt discount recorded for these items will be amortized as expense to the income statement over the term of the facility or as the warrants are exercised or the debt converted into common stock upon meetingthereby increasing the required conditions. On August 15, 2000, such conditions were met, and the notes were converted into 2,750,906 shares of common stock. All principal and accrued interest at the conversion date of approximately $13.9 million was converted to stockholders equity.
The effective interest rate includingon the facility. In connection with the conversion of $2.0 million of debt incurred under the line of credit facility in January and February 2004, the Company will accelerate the amortization of approximately $240,000 of the beneficial conversion premium.
During 2002, Cruachem Ltd., a redemption premium,wholly owned subsidiary of the Company, entered into a mortgage loan with The Royal Bank of Scotland. The original principal amount of the loan was 9.3%£1.0 million. Principal and interest are payable in quarterly installments. The loan carries a 15 year term and a fixed annual interest rate of 6.77%. Security for this loan is the Company’s 45,000 square foot manufacturing facility located in Glasgow, Scotland. The loan carries certain financial and non-financial covenants that must be met by Cruachem Ltd. that include a minimum net cash flow requirement. The net book value of the facility was approximately $2.0 million at December 31, 1999. At December 1999,2003. During February 2004, the convertible notes payableCompany repaid the principal balance was comprised of the following:mortgage loan and therefore, the Company has included the entire outstanding principal balance at December 31, 2003 within current liabilities.
| Principal | $ | 12,000 | ||
| Accrued interest and redemption premium | 859 | |||
| 12,859 | ||||
| Deferred financing costs (net of accumulated amortization of $150) | (438 | ) | ||
| $ | 12,421 | |||
39
H. LEASE COMMITMENTSTRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2003, 2002 and 2001
(Tabular amounts in thousands except share and per share data)
F. LINE OF CREDIT AND LONG-TERM DEBT (Continued)
The following table details the components of the Company’s line of credit and long-term debt as of December 31, 2003 and 2002:
| December 31, | ||||||||
| 2003 | 2002 | |||||||
Line of Credit | $ | 2,992 | $ | — | ||||
Less: | ||||||||
Debt discount—Warrants | 370 | — | ||||||
Debt discount—Beneficial conversion premium | 480 | — | ||||||
| $ | 2,142 | $ | — | |||||
Long-term debt | ||||||||
Mortgage debt | $ | 1,693 | $ | 1,562 | ||||
Less: current portion | (1,693 | ) | (63 | ) | ||||
| $ | — | $ | 1,499 | |||||
G. COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment, vehicles and operating facilities. The Company'sCompany’s leases related to its operating facilities currently expire on various dates ranging from 2000 through 2007. However, one lease allows for cancellation at either 36 or 48 months upon 60 days advanced written notice. At December 31, 2000,2003, the future minimum lease payments required under noncancellablenon-cancellable lease provisions are approximately $901 in 2001; $948 in 2002; $945 in 2003; $730$3.4 million in 2004; $598$3.1 million in 2005; $2.1 million in 2006; $700,000 in 2007; and a total of approximately $335 inno rental payments for the years 2006 through 2007.year 2008. Rent expense related to all operating leases for the years ended December 31, 2000, 19992003, 2002 and 19982001 was approximately $966, $984$2.5 million, $2.3 million and $655,$1.7 million, respectively.
The Company is not a party to any material legal proceedings.
I.H. INCOME TAXES
Loss before income taxes consists of the following:
| | Years ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2000 | 1999 | 1998 | |||||||
| United States | $ | (8,231 | ) | $ | (7,671 | ) | $ | (2,617 | ) | |
| International | (250 | ) | (411 | ) | 111 | |||||
| $ | (8,481 | ) | $ | (8,082 | ) | $ | (2,506 | ) | ||
| Years ended December 31, | ||||||||||||
| 2003 | 2002 | 2001 | ||||||||||
United States | $ | (19,809 | ) | $ | (19,640 | ) | $ | (7,448 | ) | |||
International | (3,084 | ) | (1,620 | ) | 71 | |||||||
| $ | (22,893 | ) | $ | (21,260 | ) | $ | (7,377 | ) | ||||
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2003, 2002 and 2001
(Tabular amounts in thousands except share and per share data)
H. INCOME TAXES (Continued)
The income tax provision consists of the following:
| | Years ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2000 | 1999 | 1998 | ||||||||
| CURRENT TAX EXPENSE (BENEFIT) | |||||||||||
| United States Federal | $ | — | $ | (28 | ) | $ | 20 | ||||
| DEFERRED TAX EXPENSE (BENEFIT) | |||||||||||
| United States Federal | 180 | 1,773 | (950 | ) | |||||||
| Total Income Tax Provision | $ | 180 | $ | 1,745 | $ | (930 | ) | ||||
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The Company'sCompany’s provision for income taxes for the years ended December 31, 2000, 19992003, 2002 and 19982001 differs from the amounts determined by applying the statutory Federal income tax rate to incomeloss before income taxes for the following reasons:
| | 2000 | 1999 | 1998 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Benefit at Federal Rate | $ | (2,884 | ) | $ | (2,748 | ) | $ | (852 | ) | |
| Increase (decrease) resulting from: | ||||||||||
| State income taxes—net of federal benefit | (119 | ) | (63 | ) | (86 | ) | ||||
| Intangible amortization | 39 | 43 | 39 | |||||||
| Research and development tax credit | (69 | ) | (54 | ) | (24 | ) | ||||
| Meals and entertainment | 43 | 39 | 27 | |||||||
| Other—net | 33 | 37 | (34 | ) | ||||||
| Valuation allowance | 3,137 | 4,491 | — | |||||||
| Total income tax expense (benefit) | $ | 180 | $ | 1,745 | $ | (930 | ) | |||
| 2003 | 2002 | 2001 | ||||||||||
Benefit at Federal Rate | $ | (7,784 | ) | $ | (7,228 | ) | $ | (2,508 | ) | |||
Increase (decrease) resulting from: | ||||||||||||
State income taxes—net of federal benefit | (485 | ) | (518 | ) | (154 | ) | ||||||
Foreign subsidiary tax rate difference | 427 | 224 | (17 | ) | ||||||||
Research and development tax credit | (250 | ) | (188 | ) | (98 | ) | ||||||
Other—net | 82 | 137 | 345 | |||||||||
Valuation allowance | 8,075 | 7,678 | 2,456 | |||||||||
Total income tax expense | $ | 65 | $ | 105 | $ | 24 | ||||||
The Company'sCompany’s deferred income tax asset at December 31, 20002003 and 19992002 is comprised of the following temporary differences:
| | 2000 | 1999 | |||||
|---|---|---|---|---|---|---|---|
| Net operating loss carryforward | $ | 7,359 | $ | 4,289 | |||
| Allowance for doubtful accounts | 61 | 60 | |||||
| Fixed asset depreciation | 48 | 124 | |||||
| Accrued vacation | 97 | 137 | |||||
| Other | (2 | ) | 61 | ||||
| 7,563 | 4,671 | ||||||
| Less valuation allowance | (7,563 | ) | (4,491 | ) | |||
| $ | — | $ | 180 | ||||
| 2003 | 2002 | |||||||
Net operating loss carryforward | $ | 30,480 | $ | 23,099 | ||||
Deferred revenue | 400 | 218 | ||||||
Accrued vacation | 134 | 116 | ||||||
Other | (422 | ) | (250 | ) | ||||
| 30,592 | 23,183 | |||||||
Less valuation allowance | (30,592 | ) | (23,183 | ) | ||||
| $ | — | $ | — | |||||
At December 31, 2000,2003, the Company has unused federal tax net operating loss carryforwards of approximately $2.1$1.8 million which expire in 2008, $3.7 million which expire in 2009, $3.0 million which expire in 2010, $0.9 million which expire in 2011, $3.4 million which expire in 2012, $1.8 million which expire in 2018, $7.7$8.2 million which expire in 2019, $9.7 million which expire in 2020, $8.2 million which expire in 2021, $16.8 million which will expire in 20192022 and $8.3$21.0 million which will expire in 2020.2023. Approximately $11.8 million of the Company’s total federal net operating loss carryforwards were obtained in the acquisition of Annovis, Inc. and may be subject to certain restrictions. Additionally, at December 31, 2000,2003, the Company has unused general business credits earned primarily through increased research expendituresstate tax net operating loss carryforwards of approximately $0.2$28.7 million. These credits expire at various times between 20102008 and 2020. The deferred tax asset of $180 as of December 31, 1999 was realized through the sale of the product line assets discussed in Note M.2023. A valuation allowance has been provided in 20002003 and 2002 for the remaining deferred tax assets, due to the Company'sCompany’s cumulative losses in recent years, expected losses in future years and an inability to utilize any additional losses as carrybacks. The Company will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent the Company begins to generate income in future years and it is determined that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time.
41
J.TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2003, 2002 and 2001
(Tabular amounts in thousands except share and per share data)
I. EMPLOYEE BENEFIT PLAN
The Company maintains an employee 401(k) retirement savings plan whichthat allows for voluntary contributions into designated investment funds by eligible employees. The Company matches the employees'employees’ contributions at the rate of 50% on the first 6% of contributions. The Company may at the discretion of its Board of Directors, make additional contributions on behalf of the Plan'sPlan’s participants. Company contributions were $220, $175$523,000, $507,000 and $118$357,000 for the years ended December 31, 2000, 19992003, 2002 and 1998,2001, respectively.
K. STOCKHOLDERS'J. STOCKHOLDERS’ EQUITY
Common Stock Warrants.
During 2002 the Company entered into an operating lease agreement with GE Capital. The Company issued 2,000,000 sharesagreement included the issuance of the Company's common stock, mainly through Placement Agents, in a private placement during 1997 and 1998. The Company also issued13,762 warrants to the Placement Agents with an exercise price of $5.00$3.27 per share (subject to certain cashless exercise rights) that have termsand a term of five years expiring in 2003. Total shares eligible2007. In 2003 an additional 9,175 warrants with an exercise price of $3.27 per share and term of 5 years expiring in 2008 were issued to be purchased through theseGE Capital in connection with the operating lease. During 2003 the Company entered into a line of credit agreement with Laurus. The agreement included issuance of 550,000 warrants were 106,754to Laurus with an exercise price of $2.25 to $2.82 per share and 152,450term of 7 years expiring in 2010 and 45,918 warrants to TN Capital Equities, Ltd. with an exercise prices of $2.94 per share and term of 5 years expiring in 2008. All warrants issued to GE Capital, Laurus and TN Capital Equities remain outstanding at December 31, 2000, and 1999, respectively.2003.
Preferred Stock.
The Company'sCompany’s Board of Directors is authorized to issue up to 15,000,000 shares of preferred stock in one or more series, from time to time, with such designations, powers, preferences and rights and such qualifications, limitations and restrictions as may be provided in a resolution or resolutions adopted by the Board of Directors. The authority of the Board of Directors includes, but is not limited to, the determination or fixing of the following with respect to shares of such class or any series thereof: (i) the number of shares; (ii) the dividend rate, whether dividends shall be cumulative and, if so, from which date; (iii) whether shares are to be redeemable and, if so, the terms and amount of any sinking fund providing for the purchase or redemption of such shares; (iv) whether shares shall be convertible and, if so, the terms and provisions thereof; (v) what restrictions are to apply, if any, on the issue or reissue of any additional preferred stock; and (vi) whether shares have voting rights. The preferred stock may be issued with a preference over the common stock as to the payment of dividends. The Company has no current plans to issue any series of preferred stock. Classes of stock such as the preferred stock may be used, in certain circumstances, to create voting impediments on extraordinary corporate transactions or to frustrate persons seeking to effect a merger or otherwise to gain control of the Company. For the foregoing reasons, any preferred stock issued by the Company could have an adverse effect on the rights of the holders of the common stock.
Common Stock.
In March 2000, the Company's Board of Directors approved an increase in the number of authorized common shares to 60,000,000, subject to the approval of the Company's stockholders.
In March 2000,September 2003, the Company issued 25,0001,780,000 shares of our common shares at $10.00 per share to an individual who was subsequently elected to the Company's Board of Directors.
On July 21, 2000,stock and in November 2003, the Company issued 5,152,0002,720,000 shares of our common stock in privately-negotiated sales. These shares were sold pursuant to the terms of a Securities Purchase Agreement, dated August 27, 2003. The sale of these shares was exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) as a sale not involving a public offering. These shares have been registered for resale pursuant to a Registration Statement declared effective on November 14, 2003. The net proceeds to the Company, after payment of transaction fees and other expenses of the offering, were approximately $4.3 million.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2003, 2002 and 2001
(Tabular amounts in thousands except share and per share data)
J. STOCKHOLDERS’ EQUITY (Continued)
In May 2001, the Company issued 1,889,523 shares of common stock in its initial public offering at $15.00 per share. After paymentconnection with the acquisition of Annovis, Inc. See Footnote O for further discussion of this acquisition.
In May 2001, Company shareholders approved the adoption of the underwriters' discounts and commissions and other expenses, the
42
Company received net proceeds of approximately $69.9 million from this offering. In addition, since the dateTransgenomic, Inc. 2001 Employee Stock Purchase Plan that was subsequently implemented in November 2001. Substantially all of the initial public offering, holdersCompany’s U.S. employees are eligible to participate in the Plan. Eligible employees authorize payroll deductions to be made for the purchase of warrants and optionsshares. Such deductions are accumulated during a defined participation period at the end of which each participant is deemed to have been granted an option to purchase shares of common stock have exercisedfrom the Company at various times.85% of the fair market value of the Company stock as measured by the closing price of the stock on either the first or last business day of the participation period, whichever is lower. The Company has receivednumber of shares purchased under the option is based upon the participants elected withholding amount. At the end of the participation period such option is automatically exercised. This plan is structured to qualify as an additional $2.7 million in net proceeds from these exercises.“employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1986, as amended. During 2003 and 2002 there were 107,077 and 56,842 shares issued under this plan, respectively. During 2001 there were no shares issued under this plan.
L.K. STOCK OPTIONS
The Company'sCompany’s 1997 Stock Option Plan, as amended (the "Stock“Stock Option Plan"Plan”), allows the Company to grant both incentive stock options and nonqualified stock options to acquire shares of the Company'sCompany’s common stock to employees and directors of the Company and to nonemployee advisors. Either incentive or non-qualified stock options may be granted to employees of the Company, but only nonqualified stock options may be granted to nonemployee directors and advisors. The maximum number of shares for which options may be granted under the Stock Option Plan is 6,000,000.7,000,000. The Stock Option Plan is administered by the Compensation Committee of the Board of Directors (the "Committee"“Committee”) which has the authority to set the number, exercise price, term and vesting provisions of the options granted under the Stock Option Plan, subject to the terms thereof. The options must be granted at exercise prices not less than the fair market value of the common stock on the date of the grant. Generally, the stock options vest at a rate of either 20% per year over a fivefive-year period or 33 1/3% per year over a three-year period and expire 10 years after the date the option was granted. If the option holder ceases to be employed by the Company, the Company will have the right to terminate any outstanding but unexercised options.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2003, 2002 and 2001
(Tabular amounts in thousands except share and per share data)
K. STOCK OPTIONS (Continued)
The following table summarizes activity under the Stock Option Plan during the three years ended December 31, 2000:2003:
| | Number of Options | Weighted Average Exercise Price | |||
|---|---|---|---|---|---|
| Balance at January 1, 1998: | 1,515,000 | 5.00 | |||
| Granted | 1,690,250 | 5.00 | |||
| Exercised | — | — | |||
| Canceled | — | — | |||
| Balance at December 31, 1998: | 3,205,250 | 5.00 | |||
| Granted | 590,250 | 5.00 | |||
| Exercised | — | — | |||
| Canceled | (257,750 | ) | 5.00 | ||
| Balance at December 31, 1999 | 3,537,750 | 5.00 | |||
| Granted | 1,137,000 | 10.57 | |||
| Exercised | (200,969 | ) | 5.28 | ||
| Canceled | (438,900 | ) | 6.45 | ||
| Balance at December 31, 2000 | 4,034,881 | 6.43 | |||
| Exercisable at December 31, 2000 | 2,321,471 | 5.33 | |||
43
Number of Options | Weighted Average Exercise Price | |||||
Balance at December 31, 2000 | 4,034,881 | $ | 6.43 | |||
Granted | 1,865,950 | 7.88 | ||||
Exercised | (470,900 | ) | 5.00 | |||
Canceled | (296,100 | ) | 9.75 | |||
Balance at December 31, 2001: | 5,133,831 | 6.90 | ||||
Granted | 632,000 | 5.09 | ||||
Exercised | (81,900 | ) | 5.01 | |||
Canceled | (539,021 | ) | 7.69 | |||
Balance at December 31, 2002: | 5,144,910 | 6.62 | ||||
Granted | 1,282,000 | 1.64 | ||||
Exercised | — | — | ||||
Canceled | (733,994 | ) | 7.25 | |||
Balance at December 31, 2003: | 5,692,916 | $ | 5.37 | |||
Exercisable at December 31, 2003 | 3,745,509 | $ | 6.11 | |||
The weighted average fair value per share of options granted in 2000, 19992003, 2002 and 19982001 was $5.43, $1.00$0.93, $2.92 and $1.02,$2.32, respectively.
The Company has elected to follow the measurement provisions of Accounting Principles Board OpinionAPB No. 25, under which no recognition of expense is required in accounting for stock options granted to employees for which the exercise price equals or exceeds the deemed fair market value of the stock at the grant date. In those cases where options have been granted with an exercise price below the deemed fair market value, the Company recognizes compensation expense using the straight-line method over the vesting periods of the individual stock options. During December 1999,
Stock-based compensation expense recorded by the Company recordedrepresents amortization of unearned compensation of $113 forrelated to options granted to employees with an exercise pricesprice less than the deemed fair market value at the date of grant. In the first quarter of 2000, the Company recorded unearned compensation of $298 for options granted with exercise prices less than the deemed fair market value at the date of grant. These amounts are being amortized by charges to operations over the vesting periods of the individual stock options using the straight-line method. Such amortization expense amounted to approximately $73 in 2000.
During 2000, the Company recorded unearned compensation of $271grant and compensation expense of $133 for options granted to non-employees. The unearnedDuring 2003, 2002 and 2001, the Company recorded compensation associated with these grants is being amortized by charges to operations over the vesting periodsexpense of the individual stock options using the straight-line method. Such amortization expense amounted to approximately $81 in 2000.$92,000, $131,000 and $139,000, respectively. The expense amounts were calculated using the Black-Scholes option pricing model with the following assumptions: no common stock dividends, risk-free interest rates ranging from 5.11%3.10% to 6.57%6.53%; volatility ofranging from 35% to 85%; and an expected option life of 1 to 57.5 years.
In connection with the sale of the Company's non-life sciences instrument product line, the Company accelerated the vesting of 71,700 options, which would have otherwise been forfeited. Compensation expense of approximately $574 was recorded for these options during the first quarter of 2000, representing the difference between the exercise price of the options and the deemed fair value of the common stock at the date the vesting was accelerated. In addition, 218,700 options were forfeited as a result of the sale.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2003, 2002 and 2001
(Tabular amounts in thousands except share and per share data)
K. STOCK OPTIONS (Continued)
The following table summarizes information about options outstanding as of December 31, 2000:2003:
| | Options Outstanding | Options Exercisable | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Range of Exercise Prices | Number Outstanding | Weighted-Average Remaining Contractual Life | Weighted-Average Exercise Price | Number Exercisable | Weighted-Average Exercise Price | |||||||
| | | (in years) | | | | |||||||
| $2.51—$5.00 | 3,040,650 | 7.1 | $ | 5.00 | 2,196,740 | $ | 5.00 | |||||
| $5.01—$7.50 | 250,000 | 10.0 | $ | 6.37 | 27,500 | $ | 6.37 | |||||
| $7.51—$10.00 | 130,500 | 8.9 | $ | 10.00 | 18,000 | $ | 10.00 | |||||
| $10.01—$12.50 | 116,000 | 9.8 | $ | 11.93 | 5,000 | $ | 11.93 | |||||
| $12.51—$15.00 | 497,731 | 9.2 | $ | 13.00 | 74,231 | $ | 13.00 | |||||
| 4,034,881 | 7.7 | $ | 6.43 | 2,321,471 | $ | 5.33 | ||||||
44
| Options Outstanding | Options Exercisable | |||||||||||
Range of Exercise Prices | Number Outstanding | Weighted-Average Remaining Contractual Life | Weighted-Average Exercise Price | Number Exercisable | Weighted-Average Exercise Price | |||||||
| (in years) | ||||||||||||
$ 1.00—$ 3.00 | 1,577,167 | 9.0 | $ | 1.84 | 251,851 | $ | 2.17 | |||||
$ 3.01—$ 5.00 | 2,184,700 | 4.1 | $ | 5.00 | 2,163,800 | $ | 5.00 | |||||
$ 5.01—$ 7.50 | 938,817 | 7.1 | $ | 6.17 | 655,975 | $ | 6.15 | |||||
$ 7.51—$10.00 | 601,001 | 6.6 | $ | 9.88 | 390,852 | $ | 9.89 | |||||
$10.01—$15.00 | 391,231 | 6.2 | $ | 12.77 | 283,031 | $ | 12.80 | |||||
| 5,692,916 | 6.3 | $ | 5.37 | 3,745,509 | $ | 6.11 | ||||||
Pro forma information regarding net income and income per share is required by Statement of Financial Accounting Standard No. 123,L. OPERATING SEGMENT AND GEOGRAPHIC INFORMATIONAccounting for Stock-based Compensation, (SFAS No. 123) assuming
Prior to 2002 the Company accountedwas managed and operated on a fully integrated basis in one operating segment. During 2002, management determined it was appropriate to evaluate the Company’s operations based upon the nature of the products and services provided. Accordingly, the Company has determined that it operates in two reportable segments, BioSystems and Nucleic Acids. Operations for its employee stock options usingthese segments are evaluated based upon specific identification of revenues and expenses associated with the fair value method. The fair value of each stock option granted is estimatedbusiness activities resulting in a segment operating income. Expenses that cannot be directly identified to an operating activity or are considered corporate overhead are not allocated to the segments in arriving at operating income for the segment. Generally, decisions regarding asset allocation, financing, taxes or other items impacting the Company’s Balance Sheet are made at the datecorporate level and, accordingly, operating segment Balance Sheet information is not typically reviewed by operating decision makers.
The BioSystems operating segment generates revenue from the sale of grant using the Black-Scholes option pricing model with the following weighted average assumptions for options granted in 2000, 1999automated instrument systems and 1998, respectively: no common stock dividends, risk-free interest rates ranging from 5.11% to 6.53%associated consumable products and 5.51% to 6.13% and 5.74% to 6.33%; 35% volatility and no volatility (prior to becoming a public company); and an expected option life of 1 to 10 years. Pro forma net income and income per share assuming compensation expense for the Stock Option Plan had been determined under SFAS No. 123,services. This segments products are as follows:
| | 2000 | 1999 | 1998 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Net Loss: | |||||||||||
| As reported | $ | (8,661 | ) | $ | (9,827 | ) | $ | (1,576 | ) | ||
| Pro forma | (10,205 | ) | (9,974 | ) | (1,663 | ) | |||||
| Basic and diluted loss per share: | |||||||||||
| As reported | (0.52 | ) | (0.76 | ) | (0.13 | ) | |||||
| Pro forma | (0.61 | ) | (0.77 | ) | (0.14 | ) | |||||
M. RELATED PARTY TRANSACTIONS
Sale of Product Line.
On May 19, 2000, the Company sold the assets related to its non-life sciences instrument product line to a company controlled by Stephen F. Dwyer, a director and principal stockholderbased upon two of the Company, for a total adjusted purchase priceCompany’s three core competencies, separations chemistries and enzymology. Specifically, this segment’s main products are the WAVE system, related bioconsumables and research services.
The Nucleic Acids operating segment generates revenue from the sale of $5.65 million plus reimbursement by the purchaser of approximately $400 of expenses paid by the Company in connection with this product line since March 31, 2000. The effective dateproducts and services based upon all three of the transaction was April 1, 2000. Approximately $3.65 million of the purchase price was paid in cashCompany’s core competencies, nucleic acid chemistries, separations chemistries and $2.0 million was paid with an 8.75% interest-bearing promissory note due on December 30, 2000. The purchaser financed the cash portion of the purchase price for these assets plus initial working capital needs with borrowings of approximately $4.6 million obtained from a bank. The Company acquired the notes evidencing these loans from the bank upon closing of its initial public offering on July 21, 2000 by paying to the bank an amount equal to the entire principal balance of the notes plus accruedenzymology. Specifically, this segments main products are nucleic acid building blocks or “phosphoramidites”, oligonucleotides, fluorescent markers, dyes and unpaid interest. The acquired notes were due on December 30, 2000,associated reagents and had an interest rate of 8.75% per annum. These acquired notes were consolidated with the original $2.0 million note. All of the principalnovel chemistry and accrued interest on this consolidated note was repaid prior to maturity. On December 29, 2000, we repurchased 261,904 shares of our common stock from Mr. Dwyer for $10.50 per share, which was the closing price for our common stock on that day, for an aggregate purchase price of $2.7 million. Mr. Dwyer used these proceeds and additional resources to pay the principal and interest on the consolidated note.process development services.
45
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STATEMENTS—(Continued)
Years Ended December 31, 2000, 19992003, 2002 and 19982001
(Tabular amounts in thousands except share and per share data)
The net assets sold and their book values were as follows:
| Inventories | $ | 2,485 | ||
| Property, net | 705 | |||
| Other assets | 1,775 | |||
| Accrued liabilities | (98 | ) | ||
| Net assets sold | $ | 4,867 | ||
The Company realized a gain on the sale of these assets of approximately $784 before taxes.
CT Partners.L. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION (Continued)
The Companyfollowing is information for net sales and CT Partners were related parties through common ownership. The Company provided research and development services for CT Partners at cost. In June 1999, the Company and CT Partners entered into an Asset Purchase Agreement whereby the Company purchased all intellectual property previously developed for CT Partners for $2 million in cash, less an outstanding note receivable of $1.1 million and certain related expenses. The intellectual property purchased was subsequently sold in connection with the sale of the assets of our non-life sciences product line.
N. COMMITMENTS AND CONTINGENCIESoperating income by segment.
| 2003 | 2002 | 2001 | ||||||||||
Sales | ||||||||||||
BioSystems | $ | 26,044 | $ | 24,235 | $ | 28,040 | ||||||
Nucleic Acids | 7,822 | 13,319 | 10,427 | |||||||||
Total | $ | 33,866 | $ | 37,554 | $ | 38,467 | ||||||
Loss/Income from operations | ||||||||||||
BioSystems | $ | (2,786 | ) | $ | (9,417 | ) | $ | (4,595 | ) | |||
Nucleic Acids | (12,440 | ) | (1,004 | ) | 1,090 | |||||||
Corporate | (7,362 | ) | (11,276 | ) | (6,234 | ) | ||||||
Total | $ | (22,588 | ) | $ | (21,697 | ) | $ | (9,739 | ) | |||
The Companyfollowing is information for fixed assets and fixed asset additions by segment. Fixed assets are tracked by location and department and thus can be identified to operating segments even though specific segment Balance Sheets are not a party to any material legal proceedings.
O. SALES AND PRODUCT INFORMATIONproduced.
The Company believes it is advantageous to operate on a fully integrated basis in one operating segment. Accordingly, management of the Company evaluates performance and determines the allocation of resources on an entity-wide basis.
| 2003 | 2002 | |||||
Fixed Assets | ||||||
BioSystems | $ | 3,412 | $ | 4,895 | ||
Nucleic Acids | 13,991 | 8,892 | ||||
Corporate | 1,301 | 1,865 | ||||
Total | $ | 18,704 | $ | 15,652 | ||
Fixed Asset Additions | ||||||
BioSystems | $ | 1,000 | $ | 2,533 | ||
Nucleic Acids | 5,393 | 8,563 | ||||
Corporate | 20 | 372 | ||||
Total | $ | 6,413 | $ | 11,468 | ||
The following is supplemental information for net sales by geographic areaarea.
| 2003 | 2002 | 2001 | |||||||
Sales by Geographic Area: | |||||||||
United States | $ | 12,251 | $ | 16,805 | $ | 18,063 | |||
Europe | 15,955 | 16,011 | 15,918 | ||||||
Pacific Rim | 3,335 | 4,129 | 2,901 | ||||||
Other | 2,325 | 609 | 1,585 | ||||||
Total | $ | 33,866 | $ | 37,554 | $ | 38,467 | |||
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2003, 2002 and product group:2001
| | 2000 | 1999 | 1998 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Sales by Geographic Area: | |||||||||||
| United States | $ | 11,586 | $ | 10,002 | $ | 10,215 | |||||
| Europe | 10,237 | 9,286 | 6,249 | ||||||||
| Pacific Rim | 3,313 | 2,992 | 1,704 | ||||||||
| Other | 747 | 755 | 767 | ||||||||
| Total | $ | 25,883 | $ | 23,035 | $ | 18,935 | |||||
| Sales by Product Group: | |||||||||||
| Bio-Systems | $ | 18,842 | $ | 11,219 | $ | 5,460 | |||||
| Wave-Consumables | 2,083 | 905 | 210 | ||||||||
| Other Bio-Consumables | 2,787 | 2,117 | 1,769 | ||||||||
| Sub-total—life science products | $ | 23,712 | $ | 14,241 | $ | 7,439 | |||||
| Non-life sciences products | 2,171 | 8,794 | 11,496 | ||||||||
| Total | $ | 25,883 | $ | 23,035 | $ | 18,935 | |||||
46
(Tabular amounts in thousands except share and per share data)
L. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION (Continued)
Long-lived assets by geographic area as of December 31 2000 are as follows:
| United States | $ | 3,505 | |
| Europe | 1,072 | ||
| Pacific Rim | 14 | ||
| Total | $ | 4,591 | |
Prior to fiscal year 2000, long-lived assets held outside
| 2003 | 2002 | |||||
United States | $ | 20,935 | $ | 23,882 | ||
Europe | $ | 9,705 | 8,203 | |||
Pacific Rim | $ | 32 | 30 | |||
Total | $ | 30,672 | $ | 32,115 | ||
During 2003 and 2002 no single customer accounted for more than 10% of the United States were not material.total sales. During 2001, one customer accounted for approximately 14% of our total sales.
P.M. SUPPLEMENTAL CASH FLOW INFORMATION
| | 2000 | 1999 | 1998 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Cash paid for interest | $ | 233 | $ | 319 | $ | 473 | |||
| Cash paid for taxes | $ | 4 | $ | 38 | $ | 30 | |||
| Noncash investing and financing activities: | |||||||||
| Exchange of note receivable for intellectual property | $ | — | $ | 1,086 | $ | — | |||
| Liabilities assumed in connection with business acquisitions | $ | — | $ | 135 | $ | — | |||
| Conversion of Notes Payable and Accrued Interest into Common Stock | $ | 13,909 | $ | — | $ | — | |||
| Reclassification of demonstration inventory to property | $ | 975 | $ | 41 | $ | 9 | |||
| 2003 | 2002 | 2001 | |||||||
Cash paid for interest | $ | 314 | $ | 30 | $ | 10 | |||
Cash paid for income taxes | $ | 70 | $ | 120 | $ | 3 | |||
Noncash investing and financing activities: | |||||||||
Liabilities assumed in connection with business acquisitions | $ | — | $ | — | $ | 3,388 | |||
Issuance of common stock as acquisition consideration | $ | — | $ | — | $ | 13,084 | |||
Q.N. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following is a summary of activity for the allowance for doubtful accounts during each of the three years ended December 31, 2000:2003:
| | Beginning Balance | Additional Charges to Income | Deductions from Reserve | Ending Balance | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year Ended December 31, 2000 | $ | 161 | $ | 19 | $ | — | $ | 180 | ||||
| Year Ended December 31, 1999 | 562 | 122 | (523 | ) | 161 | |||||||
| Year Ended December 31, 1998 | 100 | 463 | (1 | ) | 562 | |||||||
During 1999
Beginning Balance | Additional Charges to Income | Deductions from Reserve | Ending Balance | |||||||||
Year Ended December 31, 2003 | $ | 450 | $ | 174 | $ | 75 | $ | 549 | ||||
Year Ended December 31, 2002 | $ | 213 | $ | 418 | $ | 181 | $ | 450 | ||||
Year Ended December 31, 2001 | $ | 180 | $ | 65 | $ | 32 | $ | 213 | ||||
O. ACQUISITION
Effective May 1, 2001, the Company wrote-off one uncollectible accountacquired Annovis, Inc, a privately held company, for approximately $16.9 million through the issuance of approximately 1.9 million shares of Transgenomic, Inc. common stock, the payment of approximately $563,000 in cash in lieu of common stock to certain Annovis stockholders and the payment of approximately $3.2 million of direct acquisition related expenses. The acquisition was structured as a former European distributormerger of non-lifeAnnovis with a subsidiary of the Company and resulted in Annovis becoming a wholly-owned subsidiary of the Company. Annovis is a specialty chemicals company that develops, manufactures and markets a wide variety of nucleic acid based products and service for the life sciences products.industry. Annovis’s results of operations have been included in the accompanying financial statements beginning on May 1, 2001.
47
R. PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2003, 2002 and 2001
(Tabular amounts in thousands except share and per share data)
O. ACQUISITION (Continued)
The Company'sCompany accounted for this transaction as a purchase. The Company obtained an appraisal of the fair value of the tangible and intangible assets acquired from an independent appraiser. All identifiable tangible and intangible assets acquired and liabilities assumed have been allocated a portion of the cost equal to their estimated fair values as follows:
Net tangible assets and liabilities | $ | 1,390 | |
Intangible assets | $ | 60 | |
Goodwill | $ | 15,463 | |
Total Purchase Price (including direct expenses) | $ | 16,913 | |
The costs assigned to intangible assets have been amortized through December 31, 2002 on a straight-line basis over a period averaging 5 years.
The Company’s unaudited pro forma results of operations for the year ended December 31, 2000 and 1999,2001, assuming the saleacquisition of the non-life sciences instrument product lineAnnovis, Inc. occurred as of the beginning of the periodsperiod presented areis as follows:
| | Twelve Months Ended December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2000 | 1999 | |||||
| Net Sales | $ | 23,713 | $ | 14,241 | |||
| Net Loss | $ | (8,596 | ) | $ | (10,120 | ) | |
| Basic and diluted loss per share | $ | (0.52 | ) | $ | (0.78 | ) | |
The pro forma results for 2000 do not include the realized gain on the sale of the non-life sciences product line of $784 before taxes.
| Twelve Months Ended December 31, 2001 | ||||
Net Sales | $ | 42,581 | ||
Net Loss | $ | (7,672 | ) | |
Basic and diluted loss per share | $ | (0.33 | ) | |
S.P. QUARTERLY RESULTS (UNAUDITED)
The following table contains selected unaudited consolidated statements of operations data for each quarter for fiscal years 20002003 and 1999.2002.
| | 2000 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total | |||||||||||
| Net Sales | $ | 6,944 | $ | 5,593 | $ | 6,249 | $ | 7,097 | $ | 25,883 | ||||||
| Gross Margin | 3,113 | 2,912 | 3,294 | 3,764 | 13,083 | |||||||||||
| Operating Loss | (3,029 | ) | (2,270 | ) | (2,120 | ) | (1,274 | ) | (8,693 | ) | ||||||
| Loss before taxes | (3,498 | ) | (2,713 | ) | (2,077 | ) | (193 | ) | (8,481 | ) | ||||||
| Net loss | $ | (3,498 | ) | $ | (2,713 | ) | $ | (2,077 | ) | $ | (373 | ) | $ | (8,661 | ) | |
| Basic & Diluted Loss Per Share | $ | (0.27 | ) | $ | (0.21 | ) | $ | (0.11 | ) | $ | (0.02 | ) | $ | (0.52 | ) | |
| Basic and Diluted Weighted Average Shares Outstanding | 13,007,692 | 13,025,000 | 19,030,546 | 21,448,220 | 16,629,555 | |||||||||||
| | 1999 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total | |||||||||||
| Net Sales | $ | 5,227 | $ | 6,080 | $ | 5,595 | $ | 6,133 | $ | 23,035 | ||||||
| Gross Margin | 2,524 | 2,901 | 2,438 | 3,082 | 10,945 | |||||||||||
| Operating Loss | (1,520 | ) | (1,212 | ) | (2,061 | ) | (2,091 | ) | (6,884 | ) | ||||||
| Loss before taxes | (1,613 | ) | (1,517 | ) | (2,437 | ) | (2,515 | ) | (8,082 | ) | ||||||
| Net loss | $ | (978 | ) | $ | (4,013 | ) | $ | (2,437 | ) | $ | (2,399 | ) | $ | (9,827 | ) | |
| Basic & Diluted Loss Per Share | $ | (0.08 | ) | $ | (0.31 | ) | $ | (0.19 | ) | $ | (0.18 | ) | $ | (0.76 | ) | |
| Basic and Diluted Weighted Average Shares Outstanding | 13,000,000 | 13,000,000 | 13,000,000 | 13,000,000 | 13,000,000 | |||||||||||
| 2003 | ||||||||||||||||||||
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total | ||||||||||||||||
Net Sales | $ | 9,505 | $ | 8,481 | $ | 7,537 | $ | 8,343 | $ | 33,866 | ||||||||||
Gross Profit | 3,691 | 2,556 | 775 | 2,529 | 9,551 | |||||||||||||||
Net loss | $ | (3,596 | ) | $ | (4,670 | ) | $ | (6,097 | ) | $ | (8,595 | ) | $ | (22,958 | ) | |||||
Basic & Diluted Loss Per Share | $ | (0.15 | ) | $ | (0.20 | ) | $ | (0.25 | ) | $ | (0.32 | ) | $ | (0.94 | ) | |||||
Basic and Diluted Weighted Average Shares Outstanding | 23,519 | 23,540 | 24,177 | 26,723 | 24,484 | |||||||||||||||
| 2002 | ||||||||||||||||||||
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total | ||||||||||||||||
Net Sales | $ | 9,831 | $ | 9,424 | $ | 9,087 | $ | 9,212 | $ | 37,554 | ||||||||||
Gross Profit | 5,108 | 4,862 | 4,249 | 3,766 | 17,985 | |||||||||||||||
Net loss | $ | (3,359 | ) | $ | (3,981 | ) | $ | (4,727 | ) | $ | (9,298 | ) | $ | (21,365 | ) | |||||
Basic & Diluted Loss Per Share | $ | (0.14 | ) | $ | (0.17 | ) | $ | (0.20 | ) | $ | (0.40 | ) | $ | (0.91 | ) | |||||
Basic and Diluted Weighted Average Shares Outstanding | 23,653,544 | 23,699,047 | 23,483,315 | 23,498,935 | 23,582,687 | |||||||||||||||
Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly per share losses may not equal the annual loss per share.
48
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2003, 2002 and 2001
(Tabular amounts in thousands except share and per share data)
Q. CORPORATE RESTRUCTURING
The Company has experienced net losses and negative cash flows from operations. As a result, during the fourth quarter of 2002 management formulated and executed a significant portion of a restructuring plan. The plan was developed to reduce expenses thereby better aligning the Company’s expense structure with current business prospects. The plan included employee terminations, office closures, termination of collaborations and write-offs of abandoned intellectual property. Specifically, in the fourth quarter of 2002 the Company notified approximately 60 employees of their termination, notified landlords of our intent to close four facilities and reduce our space commitment under lease at two other facilities, terminated certain consulting and collaboration agreements and abandoned certain patents. As a result of the plan $3.3 million in restructuring charges were recorded and are included in operating expenses. These charges consisted of approximately $800,000 of employee severance costs, $1.2 million in office closure related costs, $400,000 of collaboration and other agreement termination charges and $900,000 in write-offs of abandoned intellectual property. Approximately 45% of the total charges were for non-cash items. Additional restructuring charges totaling $738,000 were incurred in the first half of 2003. The Company had accrued expenses associated with the restructuring activities of approximately 227,000 at December 31, 2003, and $1.5 million at December 31, 2002. The accrued expenses at December 31, 2003, were related to office closures. The accrued expenses at December 31, 2002, were primarily related to office closures and employee severance.
R. CORPORATE FINANCING SUBSEQUENT EVENTS
In February 2004, the Company entered into a $2.75 million convertible note with Laurus, our line of credit provider. The note carries an interest rate of 2.0% over the prime rate or a minimum of 6.0% and has a term of 3 years. The principal and interest on the note may be converted into common stock of the Company at a fixed conversion price of $2.61 per share. A portion of the proceeds from this transaction were used to retire the current mortgage debt on the Glasgow facility. The remaining proceeds of approximately $750,000 will be used to complete the build-out of the Glasgow facility, complete the consolidation our operations into the new facility and provide funds for operations.
In February 2004, Laurus waived the borrowing base limitation on the Company’s line of credit, thereby making the full $7.5 million facility available to the Company regardless of the available collateral. The waiver will expire on December 19, 2004. As of December 31, 2003, the Company had approximately $3.0 million outstanding on this line of credit facility based upon its current eligible accounts receivable and inventory balances. The waiver, and the resulting access to the full amount of the line of credit, provides additional access to liquidity for the Company. Additionally, in January and February 2004, Laurus exercised its conversion rights on the line of credit and converted $2.0 million of amounts outstanding on the line into approximately 910,000 shares of common stock of the Company.
Item 9. Changes in and Disagreement With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures
| (a) | Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information we are required to disclose in our reports under the Securities Exchange Act of 1934. |
| (b) | There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the previously mentioned evaluation. |
Part III
Item 10. Directors and Executive Officers of the Registrant.
We will file a definitive Proxy Statement relating to our 2004 Annual Meeting of Stockholders with the Securities Exchange Commission not later than April 30, 2001.29, 2004. Information about our directors required by Item 401 of Regulation S-Kthis item is incorporated by reference to theour definitive Proxy Statement. Information about our Executive Officers is shown in Part I of this filing.
Section 16(a) Beneficial Ownership Reporting Compliance. Item 405 of Regulation S-K requires disclosure of any known late filing or failure by an insider to file a report required by Section 16 of the Securities Exchange Act of 1934. Other than Form 3's for each Executive Officer and Director, we believe all Section 16 reports were filed in a timely manner during 2000.
Item 11. Executive Compensation.
Information required by this Item is incorporated by reference to our definitive Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information required by this Item is incorporated by reference to our definitive Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Information required by this Item is incorporated by reference to our definitive Proxy Statement.
Item 14. Principal Accountant Fees and Services
Information required by this Item is incorporated by reference to our definitive Proxy Statement.
Part IV
Item 14.15. Exhibits, Financial Statement Schedules and Reports of Form 8-K.
| (a) | The following documents are filed as part of this report: |
| 1. | Financial Statements |
The financial statements listed in the Index to Form 10-K for the Fiscal Year Ended December 31, 2000, on page 3 are filed as part of this report.
| 2. | Financial Statement Schedules—None. |
| 3. | Exhibits. The Exhibits required by Item 601 of Regulation S-K of the Securities and Exchange Act of 1934, as amended, filed as part of this report are listed in the Exhibit Index under paragraph (c) of this Item 15. |
| (b) | Reports on Form 8-K. |
The Company did not file any reportsRegistrant furnished a Report on Form 8-K duringon November 11, 2003, reporting the announcement of its results of operations for the quarter ended September 30, 2003, pursuant to Items 7 and 12 of Form 8-K.
The Registrant filed a Report on Form 8-K on November 18, 2003, announcing signature of a contract with an Austrian vaccine developer, pursuant to Items 5 and 7 of Form 8-K.
The Registrant filed a Report on Form 8-K on November 20, 2003, announcing signature of a contract with Fisher Scientific to distribute a product of the Registrant, pursuant to Items 5 and 7 of Form 8-K.
The Registrant filed a Report on Form 8-K on December 31, 2000.
The Registrant filed a Report on Form 8-K on December 4, 2003, announcing that its WAVE system would be cited in several presentations at the American Society of Hematology annual meeting, pursuant to Items 5 and 7 of Form 8-K.
The Registrant filed a Report on Form 8-K on December 9, 2003, announcing that it had terminated its existing line of credit agreement and entered into a new line of credit agreement, pursuant to Item 5 of Form 8-K.
| Exhibits. |
| 2.1 | ||||
| 2.2 | Addendum to Agreement and Plan of Merger, dated as of May 18, 2001 among Transgenomic, Inc., TBIO Nebraska, Inc., TBIO, Inc. and Annovis, Inc.(3) | |||
| 3.1 | Second Amended and Restated Certificate of Incorporation of the Registrant(2) | |||
| 3.2 | Bylaws of the Registrant(1) | |||
| 4 | Form of Certificate of the | |||
10.1 | Amended and Restated 1997 Stock Option Plan of the | |||
49
10.2 | 1999 UK Approved Stock Option Sub Plan of the Registrant(1) | |||
| 10.3 | Employment Agreement, dated April 1, 2000, between the Registrant and | |||
| 10.4 | Employee Stock Purchase Plan of the Registrant(5) | |||
| 10.5 | Employment Agreement, dated | |||
10.6 | ||||
License Agreement, dated September 1, 1994, between Registrant and Professor Dr. Gunther Bonn, et. al. and Amendment thereto, dated March 14, 1997(1) | ||||
| 10.7 | License Agreement, dated August 20, 1997, between the Registrant and Leland Stanford Junior University(1) | |||
| 10.8 | Supply Agreement, dated January 1, 2000, between the Registrant and Hitachi Instruments(1) | |||
| 10.9 | ||||
| 10.10 | Sublicense Agreement, dated October 1, 1991, between Cruachem Holdings Ltd. (a wholly owned subsidiary of the Registrant) and Applied Biosystems, Inc.(6) | |||
| 10.11 | Employment Agreement, dated January 22, 2002, between the Registrant and | |||
| 10.12 | Missives, dated May 17, 2002, between Cruachem Limited (a wholly-owned subsidiary of the Registrant) and Robinson Nugent (Scotland) Limited(8) | |||
| 10.13 | Agreement between The Royal Bank of Scotland plc and Cruachem Limited (a wholly-owned subsidiary of the Registrant), dated August 18, 2002(9) | |||
| 10.14 | Standard Security by Cruachem Limited (a wholly-owned subsidiary of the Registrant) in Favour of The Royal Bank of Scotland plc, dated August 13, 2002(9) | |||
| 10.15 | Lease Agreement by and between Yew Tree Investments LTD., LLLP and the Registrant, dated August 23, 2002(9) | |||
| 10.16 | Master Lease Agreement between General Electric Capital Corporation and the Registrant, dated December 12, 2002 (10) | |||
| 10.17 | Employment Agreement, dated May | |||
| 10.18 | ||||
| 10.19 | Accounts Receivable Financing Agreement, date June 17, 2003, between Silicon Valley Bank and the Registrant. (11) | |||
| 10.20 | Form of Securities Purchase Agreement by and between the Registrant and | |||
| 10.21 | ||||
| 10.22 | Security Agreement by | |||
| 10.23 | Secured Revolving Note by and between the Registrant and Laurus Master Fund, Ltd. dated December 3, 2003(14) | |||
| 10.24 | Secured Convertible Minimum Borrowing Note by and between the Registrant and Laurus Master Fund, Ltd. dated December 3, 2003 (14) | |||
| 10.25 | Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd. dated December 3, 2003 (14) | |||
| 10.26 | Registration Rights Agreement by and between the Registrant and Laurus Master Fund, Ltd. dated December 3, 2003 (14) | |||
| 10.27 | Common Stock Purchase Warrant by and between the Registrant and TN Capital Equities, Ltd. dated December 3, 2003 (14) | |||
| 21 | Subsidiaries of the Registrant | |||
23 | Consent of Deloitte & Touche LLP | |||
| 24 | Powers of Attorney | |||
| 31 | Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
| 32 | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) | |||
| (1) | This Exhibit is incorporated by reference to the Registration Statement of the Registrant (Registration No. 333-32174), which was filed on March 10, 2000. |
| (2) | This Exhibit is incorporated by reference to the Registration Statement of the Registrant (Registration No. 333-32174), as amended by Amendment 1, which amendment was filed on May 17, 2000. |
| (3) | This Exhibit is incorporated by reference to the Registration Statement of the Registrant (Registration No. 000-30975), which was filed on May 31, 2001. |
| (4) | This Exhibit is incorporated by reference to the Registrant’s Report on Form 10-Q, which was filed on August 14, 2001. |
| (5) | This Exhibit is incorporated by reference to the Registration Statement of the Registrant (Registration No. 333-71866), which was filed on October 19, 2001. |
| (6) | This Exhibit is incorporated by reference to the Registrant’s Annual Report on Form 10-K, which was filed on March 25, 2002. |
| (7) | This Exhibit is incorporated by reference to the Registrant’s Report on Form 10-Q, which was filed on May 14, 2002. |
| (8) | This Exhibit is incorporated by reference to the Registrant’s Report on Form 10-Q, which was filed on August 14, 2002. |
| (9) | This Exhibit is incorporated by reference to the Registrant’s Report on Form 10-Q, which was filed on November 12, 2002. |
| (10) | This Exhibit is incorporated by reference to the Registrant’s Annual Report on Form 10-K, which was filed on March 31, 2003. |
| (11) | This Exhibit is incorporated by reference to the Registrant’s Report on Form 10-Q, which was filed on August 12, 2003. |
| (12) | This Exhibit is incorporated by reference to the Registrant’s Report on Form 8-K which was filed on August 29, 2003. |
| (13) | This Exhibit is incorporated by reference the Registrant’s Amendment No. 3 to Registration Statement on Form S-3 (Registration No. 333-108319) as filed on October 14, 2003. |
| (14) | This Exhibit is incorporated by reference the Registrant’s Registration Statement on Form S-3 (Registration No. 333-111442) as filed on December 22, 2003. |
50
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 16th30th day of March 2001.2004.
| TRANSGENOMIC, INC. | ||||
| By: | /s/ COLLIN J. D’SILVA | |||
Collin J. Chairman and Chief Executive Officer | ||||
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this 16th30th day of March 2001.2004.
| Title | ||||
/s/ Collin J. | Chairman of the Board, Director and Chief Executive Officer (Principal Executive Officer) | ||||
Michael J. Draper | Chief Financial Officer (Principal Financial Officer) | ||||
/s/ GREGORY J. DUMAN* Gregory J. Duman | Director | ||||
/s/ JEFFREY SKLAR* Jeffrey Sklar | Director | ||||
/s/ ROLAND J. SANTONI* Roland J. | Director | ||||
/s/ PARAG SAXENA* Parag | Director | ||||
Gregory T. Sloma | Director | ||||
| *By Collin J. | |||||
Collin J. Attorney-in-fact for the individuals as indicated. | |||||
49