UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________
FORM 10-Q
_______________________________
(Mark One)
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| |
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the Quarterly Period Ended June 30, 2011quarterly period ended March 31, 2012 |
Or
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| |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from _____ to _____ |
file number:File Number: 000-30975 _______________________________
TRANSGENOMIC, INC.
(Exact name of registrant as specified in its charter)
_______________________________
|
| | |
| Delaware | | 911789357 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | |
| 12325 Emmet Street, Omaha, Nebraska | | 68164 |
| (Address of principal executive offices) | | (Zip Code) |
(402) 452-5400
(Registrant’s telephone number, including area code)
_______________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ) Yes ox No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | | | |
| Large accelerated filer | | o | Accelerated filer | | ox |
| Non-accelerated filer | | o (Do not check if a smaller reporting company) | Smaller Reporting Companyreporting company | | xo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of August 12, 2011,May 8, 2012, the number of shares of common stock outstanding was 49,319,672.71,645,725.
TRANSGENOMIC, INC.
INDEX
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| | | | Page No. |
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| PART I. | | | |
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| Item 1. | | | |
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| Item 2. | | | |
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| Item 3. | | Quantitative and Qualitative Disclosures About Market Risk | |
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| Item 4. | | | |
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| PART II. | | | |
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| Item 1. | | | |
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| Item 1A. | | | |
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| Item 6. | | | |
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PART I. FINANCIAL INFORMATION
| |
| Item 1. | Financial Statements |
TRANSGENOMIC, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data) |
| | | | | | | |
| | March 31, | | |
| | 2012 | | December 31, |
| | (unaudited) | | 2011 |
| ASSETS | | | |
| CURRENT ASSETS: | | | |
| Cash and cash equivalents | $ | 19,291 |
| | $ | 4,946 |
|
| Accounts receivable, net | 6,704 |
| | 7,573 |
|
| Inventories, net | 4,014 |
| | 3,859 |
|
| Other current assets | 1,028 |
| | 820 |
|
| Total current assets | 31,037 |
| | 17,198 |
|
| PROPERTY AND EQUIPMENT: | | | |
| Equipment | 10,277 |
| | 10,143 |
|
| Furniture, fixtures & leasehold improvements | 3,711 |
| | 3,682 |
|
| | 13,988 |
| | 13,825 |
|
| Less: accumulated depreciation | (12,112 | ) | | (11,969 | ) |
| | 1,876 |
| | 1,856 |
|
| OTHER ASSETS: | | | |
| Goodwill | 6,440 |
| | 6,440 |
|
| Intangibles, net | 7,691 |
| | 7,966 |
|
| Other assets | 140 |
| | 102 |
|
| | $ | 47,184 |
| | $ | 33,562 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| CURRENT LIABILITIES: | | | |
| Accounts payable | $ | 1,567 |
| | $ | 2,609 |
|
| Accrued compensation | 1,047 |
| | 1,133 |
|
| Short term debt | — |
| | 3,082 |
|
| Current maturities of long term debt | 7,294 |
| | 3,703 |
|
| Accrued expenses | 3,593 |
| | 3,839 |
|
| Other Liabilities | 1,042 |
| | 1,042 |
|
| Current portion of lease obligations | 316 |
| | 320 |
|
| Accrued preferred stock dividend | 765 |
| | 600 |
|
| Total current liabilities | 15,624 |
| | 16,328 |
|
| LONG TERM LIABILITIES: | | | |
| Long term debt less current maturities | 1,345 |
| | 4,937 |
|
| Common stock warrant liability | 3,100 |
| | — |
|
| Other long-term liabilities | 1,211 |
| | 1,249 |
|
| Total liabilities | 21,280 |
| | 22,514 |
|
| STOCKHOLDERS’ EQUITY: | | | |
| Series A preferred stock, $.01 par value, 15,000,000 shares authorized, 2,586,205 shares issued and outstanding | 26 |
| | 26 |
|
| Common stock, $.01 par value, 100,000,000 shares authorized, 71,645,725 and 49,625,725 shares issued and outstanding, respectively | 721 |
| | 501 |
|
| Additional paid-in capital | 170,423 |
| | 152,987 |
|
| Accumulated other comprehensive income | 397 |
| | 336 |
|
| Accumulated deficit | (145,663 | ) | | (142,802 | ) |
| Total stockholders’ equity | 25,904 |
| | 11,048 |
|
| | $ | 47,184 |
| | $ | 33,562 |
|
|
| | | | | | | |
| | June 30, | | |
| | 2011 | | December 31, |
| | (unaudited) | | 2010 |
| ASSETS | | | |
| CURRENT ASSETS: | | | |
| Cash and cash equivalents | $ | 2,639 |
| | $ | 3,454 |
|
| Accounts receivable (net of allowances for bad debts of $1,387 and $334, respectively) | 7,194 |
| | 7,601 |
|
| Inventories (net of allowances for obsolescence of $520 and $518, respectively) | 3,309 |
| | 3,344 |
|
| Other current assets | 860 |
| | 635 |
|
| Total current assets | 14,002 |
| | 15,034 |
|
| PROPERTY AND EQUIPMENT: | | | |
| Equipment | 10,118 |
| | 9,820 |
|
| Furniture, fixtures & leasehold improvements | 3,723 |
| | 3,479 |
|
| | 13,841 |
| | 13,299 |
|
| Less: accumulated depreciation | (12,070 | ) | | (11,697 | ) |
| | 1,771 |
| | 1,602 |
|
| OTHER ASSETS: | | | |
| Goodwill | 6,275 |
| | 6,275 |
|
| Intangibles (net of accumulated amortization of $843 and $519, respectively) | 8,522 |
| | 8,962 |
|
| Other assets | 130 |
| | 154 |
|
| | $ | 30,700 |
| | $ | 32,027 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| CURRENT LIABILITIES: | | | |
| Accounts payable | $ | 1,400 |
| | $ | 1,360 |
|
| Accrued compensation | 1,006 |
| | 875 |
|
| Short term debt and current maturities of long term debt | 1,728 |
| | 989 |
|
| Accrued liabilities | 3,681 |
| | 3,231 |
|
| Contractual obligation | 1,573 |
| | 1,628 |
|
| Current portion of lease obligations | 217 |
| | 170 |
|
| Preferred stock dividend payable | 300 |
| | — |
|
| Total current liabilities | 9,905 |
| | 8,253 |
|
| LONG TERM LIABILITIES: | | | |
| Long term debt less current maturities | 7,406 |
| | 8,640 |
|
| Preferred stock conversion feature | 7,600 |
| | 1,983 |
|
| Preferred stock warrant liability | 3,000 |
| | 2,351 |
|
| Other long-term liabilities | 1,008 |
| | 843 |
|
| Total liabilities | 28,919 |
| | 22,070 |
|
| Redeemable Series A convertible preferred stock, $.01 par value, 3,879,307 shares authorized, 2,586,205 shares issued and outstanding | 1,670 |
| | 1,457 |
|
| STOCKHOLDERS’ EQUITY: | | | |
| Preferred stock, $.01 par value, 15,000,000 shares authorized, 2,586,205 shares issued and outstanding | — |
| | — |
|
| Common stock, $.01 par value, 100,000,000 shares authorized, 49,299,672 and 49,289,672 shares issued and outstanding, respectively | 498 |
| | 498 |
|
| Additional paid-in capital | 140,502 |
| | 139,730 |
|
| Accumulated other comprehensive income | 1,731 |
| | 1,589 |
|
| Accumulated deficit | (142,620 | ) | | (133,317 | ) |
| Total stockholders’ equity | 111 |
| | 8,500 |
|
| | $ | 30,700 |
| | $ | 32,027 |
|
See notes to unaudited condensed consolidated financial statements.
TRANSGENOMIC, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
| | | | Three Months Ended | | Six Months Ended | Three Months Ended |
| | June 30, | | June 30, | March 31, |
| | 2011 | | 2010 | | 2011 | | 2010 | 2012 | | 2011 |
| NET SALES | $ | 7,667 |
| | $ | 5,095 |
| | $ | 15,148 |
| | $ | 10,537 |
| $ | 7,206 |
| | $ | 7,480 |
|
| COST OF GOODS SOLD | 3,112 |
| | 2,608 |
| | 6,406 |
| | 5,166 |
| 4,102 |
| | 3,326 |
|
| Gross profit | 4,555 |
| | 2,487 |
| | 8,742 |
| | 5,371 |
| 3,104 |
| | 4,154 |
|
| OPERATING EXPENSES: | | | | | | | | | | |
| Selling, general and administrative | 5,589 |
| | 3,033 |
| | 9,946 |
| | 5,464 |
| 4,994 |
| | 4,323 |
|
| Research and development | 579 |
| | 512 |
| | 1,135 |
| | 1,339 |
| 549 |
| | 557 |
|
| Restructuring Charges | 11 |
| | — |
| | 35 |
| | — |
| |
| Restructuring charges | | — |
| | 24 |
|
| | 6,179 |
| | 3,545 |
| | 11,116 |
| | 6,803 |
| 5,543 |
| | 4,904 |
|
| LOSS FROM OPERATIONS | (1,624 | ) | | (1,058 | ) | | (2,374 | ) | | (1,432 | ) | (2,439 | ) | | (750 | ) |
| OTHER INCOME (EXPENSE): | | | | | | | | | | |
| Interest income (expense), net | (240 | ) | | 1 |
| | (478 | ) | | 1 |
| (273 | ) | | (238 | ) |
| Expense on preferred stock | (4,239 | ) | | — |
| | (6,266 | ) | | — |
| — |
| | (2,027 | ) |
| Other, net | 1 |
| | — |
| | 232 |
| | — |
| 20 |
| | 231 |
|
| | (4,478 | ) | | 1 |
| | (6,512 | ) | | 1 |
| (253 | ) | | (2,034 | ) |
| LOSS BEFORE INCOME TAXES | (6,102 | ) | | (1,057 | ) | | (8,886 | ) | | (1,431 | ) | (2,692 | ) | | (2,784 | ) |
| INCOME TAX EXPENSE (BENEFIT) | (104 | ) | | 89 |
| | (110 | ) | | 38 |
| 4 |
| | (6 | ) |
| NET LOSS | $ | (5,998 | ) | | $ | (1,146 | ) | | $ | (8,776 | ) | | $ | (1,469 | ) | $ | (2,696 | ) | | $ | (2,778 | ) |
| PREFERRED STOCK DIVIDENDS AND ACCRETION | (267 | ) | | — |
| | (527 | ) | | — |
| (165 | ) | | (260 | ) |
| NET LOSS AVAILABLE TO COMMON STOCKHOLDERS | $ | (6,265 | ) | | $ | (1,146 | ) | | $ | (9,303 | ) | | $ | (1,469 | ) | $ | (2,861 | ) | | $ | (3,038 | ) |
| BASIC AND DILUTED LOSS PER COMMON SHARE | $ | (0.13 | ) | | $ | (0.02 | ) | | $ | (0.19 | ) | | $ | (0.03 | ) | $ | (0.05 | ) | | $ | (0.06 | ) |
| BASIC AND DILUTED WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING | 49,299,672 |
| | 49,206,339 |
| | 49,296,339 |
| | 49,198,005 |
| 62,683,527 |
| | 49,293,005 |
|
See notes to unaudited condensed consolidated financial statements.
TRANSGENOMIC, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Dollars in thousands)
|
| | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2012 | | 2011 |
| Net Loss | $ | (2,696 | ) | | $ | (2,778 | ) |
| Foreign currency translation adjustment, net of tax | 61 |
| | 107 |
|
| Other Comprehensive Income, net of tax | 61 |
| | 107 |
|
| Comprehensive Loss | $ | (2,635 | ) | | $ | (2,671 | ) |
| | | | |
See notes to unaudited condensed consolidated financial statements.
TRANSGENOMIC, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
SixThree Months Ended June 30, 2011March 31, 2012
(Dollars in thousands except per share data)
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | | | | | |
| | Outstanding Shares | | Par Value | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total |
| Balance, January 1, 2011 | 49,289,672 |
| | $ | 498 |
| | $ | 139,730 |
| | $ | (133,317 | ) | | $ | 1,589 |
| | $ | 8,500 |
|
| Net loss | — |
| | — |
| | — |
| | (8,776 | ) | | (8,776 | ) | | (8,776 | ) |
| Other comprehensive income (loss): | | | | | | | | | | | |
| Foreign currency translation adjustment, net of tax | — |
| | — |
| | — |
| | — |
| | 142 |
| | 142 |
|
| Comprehensive loss | | | | | | | | | (8,634 | ) | | |
| Non-cash stock-based compensation | — |
| | — |
| | 765 |
| | — |
| | — |
| | 765 |
|
| Issuance of shares for employee stock options | 10,000 |
| | — |
| | 7 |
| | — |
| | — |
| | 7 |
|
| Preferred stock accretion | — |
| | — |
| | — |
| | (227 | ) | | | | (227 | ) |
| Dividends on preferred stock | — |
| | — |
| | — |
| | (300 | ) | | — |
| | (300 | ) |
| Balance, June 30, 2011 | 49,299,672 |
| | 498 |
| | 140,502 |
| | (142,620 | ) | | $ | 1,731 |
| | $ | 111 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred Stock | | Common Stock | | | | | | | | |
| | Outstanding
Shares | | Par
Value | | Outstanding Shares | | Par Value | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | Total |
| Balance, January 1, 2012 | 2,586,205 |
| | 26 |
| | 49,625,725 |
| | $ | 501 |
| | $ | 152,987 |
| | $ | (142,802 | ) | | $ | 336 |
| | $ | 11,048 |
|
| Net loss | | | | | — |
| | — |
| | — |
| | (2,696 | ) | | — |
| | (2,696 | ) |
| Foreign currency translation adjustment, net of tax | | | | | — |
| | — |
| | — |
| | — |
| | 61 |
| | 61 |
|
| Non-cash stock-based compensation | | | | | — |
| | — |
| | 273 |
| | — |
| | — |
| | 273 |
|
| Private Placement, net | | | | | 22,000,000 |
| | 220 |
| | 17,153 |
| | | | | | 17,373 |
|
| Issuance of shares of stock | | | | | 20,000 |
| | — |
| | 10 |
| | — |
| | — |
| | 10 |
|
| Dividends on preferred stock | | | | | — |
| | — |
| | — |
| | (165 | ) | | — |
| | (165 | ) |
| Balance, March 31, 2012 | 2,586,205 |
| | 26 |
| | 71,645,725 |
| | 721 |
| | 170,423 |
| | (145,663 | ) | | $ | 397 |
| | $ | 25,904 |
|
See notes to unaudited condensed consolidated financial statements.
TRANSGENOMIC, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| | | | Six Months Ended | Three Months Ended |
| | June 30, | March 31, |
| | 2011 | | 2010 | 2012 | | 2011 |
| CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: | | | | | | |
| Net loss | $ | (8,776 | ) | | $ | (1,469 | ) | $ | (2,696 | ) | | $ | (2,778 | ) |
| Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities: | | | | | | |
| Depreciation and amortization | 992 |
| | 378 |
| 513 |
| | 494 |
|
| Non-cash, stock based compensation | 765 |
| | (50 | ) | 273 |
| | 9 |
|
| Provision for losses on doubtful accounts | 1,227 |
| | 2 |
| 474 |
| | 448 |
|
| Provision for losses on inventory obsolescence | 48 |
| | 67 |
| 1 |
| | 7 |
|
| Preferred stock revaluation | 6,266 |
| | — |
| — |
| | 2,027 |
|
| Changes in operating assets and liabilities: | | | | | | |
| Accounts receivable | (769 | ) | | 565 |
| 448 |
| | (350 | ) |
| Inventories | 2 |
| | 62 |
| (128 | ) | | 210 |
|
| Prepaid expenses and other current assets | 215 |
| | 147 |
| (204 | ) | | 316 |
|
| Accounts payable | (196 | ) | | (99 | ) | (1,057 | ) | | (780 | ) |
| Accrued liabilities | 276 |
| | 404 |
| (292 | ) | | 471 |
|
| Other long term liabilities | 24 |
| | (47 | ) | (97 | ) | | (29 | ) |
| Long term deferred income taxes | 13 |
| | 13 |
| 5 |
| | 6 |
|
| Net cash flows provided by (used in) operating activities | 87 |
| | (27 | ) | (2,760 | ) | | 51 |
|
| CASH FLOWS USED IN INVESTING ACTIVITIES: | | | | | | |
| Purchase of property and equipment | (216 | ) | | (108 | ) | |
| Purchases of property and equipment | | (198 | ) | | (86 | ) |
| Change in other assets | (139 | ) | | (18 | ) | (67 | ) | | (1 | ) |
| Net cash flows used in investing activities | (355 | ) | | (126 | ) | (265 | ) | | (87 | ) |
| CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: | | | | | | |
| Principal payments on capital lease obligations | (156 | ) | | — |
| (52 | ) | | (66 | ) |
| Issuance of common stock | 7 |
| | 42 |
| |
| Issuance of common stock and warrants, net | | 17,483 |
| | 7 |
|
| Principal payment on note payable | (495 | ) | | — |
| (82 | ) | | (248 | ) |
| Net cash flows provided by (used in) financing activities | (644 | ) | | 42 |
| 17,349 |
| | (307 | ) |
| EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH | 97 |
| | (115 | ) | 21 |
| | 59 |
|
| NET CHANGE IN CASH AND CASH EQUIVALENTS | (815 | ) | | (226 | ) | 14,345 |
| | (284 | ) |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 3,454 |
| | 5,642 |
| 4,946 |
| | 3,454 |
|
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 2,639 |
| | $ | 5,416 |
| $ | 19,291 |
| | $ | 3,170 |
|
| SUPPLEMENTAL CASH FLOW INFORMATION | | | | | | |
| Cash paid during the period for: | | | | | | |
| Interest | $ | 480 |
| | $ | — |
| $ | 495 |
| | $ | 238 |
|
| Income taxes, net | 13 |
| | 2 |
| 2 |
| | 13 |
|
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION | | | | | | |
| Acquisition of equipment through capital leases | $ | 390 |
| | $ | — |
| $ | 12 |
| | $ | 147 |
|
| Dividends payable on preferred stock | 300 |
| | — |
| |
| Dividends accrued on preferred stock | | 165 |
| | 150 |
|
| Note Payable converted to Equity | | 3,000 |
| | — |
|
See notes to unaudited condensed consolidated financial statements.
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSTATEMENTS—(Continued)
SixThree Months Ended June 30,March 31, 2012 and 2011 and 2010
Business Description.
Transgenomic, Inc. is a global biotechnology company specializingadvancing personalized medicine in high sensitivity genetic variation and mutation analysis, providing products and services in DNA mutationthe detection and discovery fortreatment of cancer and inherited diseases through its proprietary molecular technologies and world-class clinical and research services. We have three complementary business segments.
Clinical Laboratories. Our clinical molecular diagnostics and pharmacogenomics analyses.
Laboratory Services:
Molecular Clinical Reference Laboratory. The molecular clinical reference laboratory specializeslaboratories specialize in genetic testing for oncology, hematologycardiology, neurology, mitochondrial disorders, and inherited disorders.oncology. Located in New Haven, Connecticut and Omaha, Nebraska, the molecular clinical reference laboratories are certified under the Clinical Laboratory Improvement Amendment (CLIA) as high complexity labs and our Omaha facility is also accredited by CAP (Collegethe College of American Pathologists)Pathologists (CAP).
Pharmacogenomics Research Services. Pharmacogenomics research services are provided by ourOur Contract Research Organization located in Omaha, Nebraska.Nebraska provides pharmacogenomics research services supporting Phase II and Phase III clinical trials conducted by our pharmaceutical customers. This lab specializes in pharmacogenomic, biomarker and mutation discovery research serving the pharmaceutical and biomedical industries world-wide for disease research, drug and diagnostic development and clinical trial support.
Instrument Related Business:
| |
| • | Bioinstruments.Diagnostic Tools. Our proprietary product is the WAVE® System which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There is a worldwide installed base of over 1,5001,525 WAVE Systems as of June 30, 2011March 31, 2012. We also distribute bioinstruments produced by other manufacturers (“OEM Equipment”) through our sales and distribution network. Service contracts to maintain installed systems are sold and supported by our technical support personnel.
|
| |
• | Bioconsumables. The installed WAVE base and some OEM Equipment platforms generate a demand for consumables that are required for the continued operation of the bioinstruments. We develop, manufacture and sell these consumable products. In addition, we manufacture and sell consumable products that can be used on multiple, independent platforms. These products include SURVEYOR® Nuclease and a range of chromatography columns.
|
| |
| B. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation.
The consolidated financial statements include the accounts of Transgenomic, Inc. and its wholly-ownedwholly owned subsidiary. All intercompanyinter-company balances and transactions have been eliminated in consolidation.
Risks and Uncertainties.
Certain risks and uncertainties are inherent in our day-to-day operations and to the process of preparing our financial statements. The more significant of those risks are presented below and throughout the notes to the consolidated financial statements.
Use of Estimates.
The preparation of consolidated financial statements 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 net sales and expenses during the reporting period. In addition, estimates and assumptions associated with the determination of the fair value of certain assets and related impairments require considerable judgment by management. Actual results could differ from the estimates and assumptions used in preparing these consolidated financial statements.
Reclassifications.
Certain prior year amounts have been reclassified in order to conform to the current year presentation regarding segment reporting.
Fair Value.
Unless otherwise specified, book value approximates fair market value. The preferredcommon stock conversion feature and warrant liability areis recorded at fair value. See Footnote L.H - Fair Value.
Basis of Presentation.
The condensed consolidated balance sheet as of December 31, 20102011 was derived from our audited balance sheet as of that date. The accompanying consolidated financial statements as of and for the three and sixthree months ended June 30, 2011March 31, 2012 and 2010
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Six Months Ended June 30, 2011 and 2010
are unaudited and reflect all adjustments whichthat are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. These unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 20102011 contained in our Annual Report on Form 10-K.10-K filed with the Securities and Exchange Commission on March 14, 2012. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.
Cash and Cash Equivalents.
Cash and cash equivalents include cash and investments with original maturities at the date of acquisition of three months or less. Such investments presently consist of temporary overnight investments.
Concentrations of Cash.
From time to time, we may maintain a cash position with financial institutions in amounts that exceed federally insured limits. We have not experienced any losses on such accounts as of June 30, 2011March 31, 2012.
Accounts Receivable.
The following is a summary of activity for the allowance for doubtful accounts during the three and six months ended June 30, 2011March 31, 2012 and 2010:2011:
|
| | | | | | | | | | | | | | | |
| | Dollars in Thousands |
| | Beginning Balance | | Provision | | Write Offs | | Ending Balance |
| Three Months Ended June 30, 2011 | $ | 716 |
| | $ | 779 |
| | $ | (108 | ) | | $ | 1,387 |
|
| Three Months Ended June 30, 2010 | $ | 279 |
| | $ | 16 |
| | $ | — |
| | $ | 295 |
|
| Six Months Ended June 30, 2011 | $ | 334 |
| | $ | 1,228 |
| | $ | (175 | ) | | $ | 1,387 |
|
| Six Months Ended June 30, 2010 | $ | 310 |
| | $ | (11 | ) | | $ | (4 | ) | | $ | 295 |
|
|
| | | | | | | | | | | | | | | |
| | Dollars in Thousands |
| | Beginning Balance | | Provision | | Write Offs | | Ending Balance |
| Three Months Ended March 31, 2012 | $ | 1,088 |
| | $ | 474 |
| | $ | (483 | ) | | $ | 1,079 |
|
| Three Months Ended March 31, 2011 | $ | 334 |
| | $ | 448 |
| | $ | (66 | ) | | $ | 716 |
|
While payment terms are generally 30 days, we have also provided extended payment terms of up to 90 days in certain cases. We operate globally and some of the international payment terms may be greater than 90 days. Accounts receivable are carried at original invoice amount and shown net of allowance for doubtful accounts and contractual allowances. The estimate made for doubtful accounts is based on a review of all outstanding amounts on a quarterly basis. We determine the allowance for doubtful accounts and contractual allowances by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received.
Inventories.
Inventories are stated at the lower of cost or market net of allowance for obsolete inventory. Cost is computed using standard costs for finished goods and average or latest actual cost for raw materials and work in process, which approximates the first-in, first-out (FIFO) method.
The following is a summary of activity for the allowance for obsolete inventory during the three and six months ended June 30, 2011March 31, 2012 and 2010:2011:
|
| | | | | | | | | | | | | | | |
| | Dollars in Thousands |
| | Beginning Balance | | Provision | | Write Offs | | Ending Balance |
| Three Months Ended June 30, 2011 | $ | 520 |
| | $ | 41 |
| | $ | (41 | ) | | $ | 520 |
|
| Three Months Ended June 30, 2010 | $ | 478 |
| | $ | 67 |
| | $ | (9 | ) | | $ | 536 |
|
| Six Months Ended June 30, 2011 | $ | 518 |
| | $ | 49 |
| | $ | (47 | ) | | $ | 520 |
|
| Six Months Ended June 30, 2010 | $ | 507 |
| | $ | 65 |
| | $ | (36 | ) | | $ | 536 |
|
|
| | | | | | | | | | | | | | | |
| | Dollars in Thousands |
| | Beginning Balance | | Provision | | Write Offs | | Ending Balance |
| Three Months Ended March 31, 2012 | $ | 511 |
| | $ | 1 |
| | $ | (3 | ) | | $ | 509 |
|
| Three Months Ended March 31, 2011 | $ | 518 |
| | $ | 7 |
| | $ | (5 | ) | | $ | 520 |
|
We determine the allowance for obsolete inventoryobsolescence by evaluating inventory quarterly the inventory for items deemed to be slow moving or obsolete. Included in our provision is the foreign currency impact of the consolidation of our subsidiary.
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Six Months Ended June 30, 2011 and 2010
Property and Equipment.
Property and equipment are carried at cost.cost less accumulated depreciation. Depreciation is computed by the straight-line method over the estimated useful lives of the related assets as follows:
|
| |
| Leasehold improvements | 1 to 10 years |
| |
| Furniture and fixtures | 3 to 7 years |
| |
| Production equipment | 3 to 7 years |
| |
| Computer equipment | 3 to 7 years |
| |
| Research and development equipment | 2 to 7 years |
Depreciation expense related to property and equipment was $0.2 million during each of the sixthree months ended June 30, 2011March 31, 2012 and 2010 was $0.4 million and $0.2 million, respectively.2011. Included in depreciation for the six months ended June 30, 2011each period was less than $0.1 million related to equipment acquired under capital leases. We did not have any capital leases in the second quarter of 2010.
Goodwill.
Goodwill is the excess of the purchase price over fair value of assets acquired and is not amortized. Goodwill is tested for impairment annually. We perform this impairment analysis during the fourth quarter of each year or when a significant event occurs whichthat may impact goodwill. Impairment occurs when the carrying value is determined to be not recoverable thereby causing the carrying value of the goodwill to exceed its fair value. If impaired, the asset’s carrying value is reduced to its fair value. We recorded no impairment charges related to goodwill as of December 31, 2010. No events have transpired in the sixthree months ended June 30, 2011March 31, 2012 that would require reevaluation of this conclusion.
Intangibles.
Intangibles include intellectual property, patents and acquired products.
| |
1. | Intellectual Property.an impairment analysis prior to our scheduled review.
|
Initial costs paid to license intellectual property from independent third parties are capitalized and amortized using the straight-line method over the license period. Ongoing royalties related to such licenses are expensed as incurred.
We capitalize legal costs, filing fees and other expenses associated with obtaining patents on new discoveries and amortize these costs using the straight-line method over the shorter of the legal life of the patent or its economic life beginning on the date the patent is issued.
As a part of the FAMILION acquisition we acquired technology, in process technology, trademarks/tradenames and third party relationships. These costs will be amortized straight line over their estimated economic life of seven to eight years. See Footnote E.
These assets are treated as long-lived assets. Long-lived assets will be tested for impairment on an annual basis or when a significant event occurs, which may impact impairment. We review quarterly the carrying value of our long-lived assets to assess recoverability and impairment. We recorded no impairments as of June 30, 2011 or December 31, 2010.
Other Long Term Assets.
Other long term assets include US security deposits and deferred tax assets.
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Six Months Ended June 30, 2011 and 2010
Stock Based Compensation.
All stock options awarded to date have exercise prices equal to the market price of our common stock on the date of grant and have ten-year contractual terms. Unvested options as of June 30, 2011March 31, 2012 had vesting periods of one or three years from date of grant. None of the stock options outstanding at June 30, 2011March 31, 2012 are subject to performance or market-based vesting conditions.
We measure and recognize compensation expense for all stock-based awards made to employees and directors, including stock options. Compensation expense is based on the calculated fair value of the awards as measured at the grant date and is expensed ratably over the service period of the awards (generally the vesting period).
During the three months ended June 30, 2011March 31, 2012, we recorded compensation expense of $0.8$0.3 million within the selling, general and administrative expense. During the sixthree months ended June 30,March 31, 2011, we recorded compensation expense of $0.8 million within the selling, general and administrative expense as a result of the vesting of options exercisable for the purchase of 3.6 million shares. During the six months ended June 30, 2010, we recorded compensation expenses of less than $0.1 million within selling, general and administrative expense as a result of the vesting of options exercisable for the purchase of 1.3 million shares.expense. As of June 30, 2011March 31, 2012, there was $1.2$0.8 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted averageweighted-average period of nearly three years.
We granted 100,000 stock options during the quarter ended March 31, 2012. The fair value of the options granted during the quartersthree months ended June 30, 2011 and 2010March 31, 2012 was estimated on theirthe respective grant dates using the Black-Scholes option pricing model. We granted 2.2 million stock options during the second quarter of 2011. These stock options were granted to our entire employee base with the bulk being granted to our senior management team. The Black-Scholes model was used with the following assumptions: risk-free interest rates of 1.87%0.81% based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected lives of foureight years, based on expected exercise activity behavior; and volatility of 105%109% based on the historical volatility of our stock over a time that is consistent with the expected life of the option. A small group of senior executives holdholds the majority of the stock options and such senior executives are expected to hold the options for five years. Forfeitures of 1.10%1.64 % have been assumed.
There were 75,000130,000 stock options granted during the quarter ended June 30, 2010.March 31, 2011. The Black-Scholes model was used with the following assumptions: risk-free interest rates of 1.98%2.16% based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected life of fivesix years, based on historical exercise activity behavior; and volatility of 102.69%107% based on the historical volatility of our stock over a time that is consistent with the expected life of the option.past five years. A small group of senior executives held the majority of the stock options and such senior executives are expected to hold the options until they are vested. Forfeitures of 2.2%3.6% were assumed in the calculation.
Income Taxes.
Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis 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 more likely than not that they will not be realized. Our policy is to record interest and penalties directly related to income taxes as income tax expense in the Consolidated Statement of Operations.
Net Sales Recognition.
Revenue is realized and earned when all of the following criteria are met:
Persuasive evidence of an arrangement exists
Delivery has occurred or services have been rendered
The seller’s price to the buyer is fixed or determinable, and
Collectability is reasonably assured.
Net sales from our Clinical Laboratories segment are recognized on an individual test basis and takes place when the test report is completed, reviewed and sent to the client less the reserve for insurance, Medicare and Medicaid contractual adjustments. There are no deferred net sales associated with our Clinical Laboratories segment. Adjustments to the allowances, based on actual receipts from third party payers, are recorded upon settlement.
In our Pharmacogenomics Services segment, we perform services on a project by project basis. When we receive payment in advance, we recognize revenue when we deliver the service. These projects typically do not extend beyond one year. At March 31, 2012 and 2011, deferred net sales associated with pharmacogenomics research projects, included in the balance sheet in other accrued liabilities, was $0.1 million in each period.
Net sales of products in our Diagnostic Tools segment are 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 under a purchase order. Our sales terms do not provide for the right of return unless the product is damaged or defective. Net sales from certain services associated with the 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. We also enter into various service contracts that cover installed instruments. These contracts cover specific time periods and net sales associated with these contracts are deferred and recognized ratably over the service period. At June 30, 2011March 31, 2012 and
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Six Months Ended June 30, 2011 and 2010
2010,, deferred net sales, mainly associated with our service contracts, included in the balance sheet in accrued liabilities,expenses, was approximately $1.4 million for each of the periods.
Net sales from our Molecular Clinical Reference Laboratory Services are recognized on an individual test basis and takes place when the test report is completed, reviewed and sent to the client less the reserve for insurance, Medicare and Medicaid contractual adjustments. There are no deferred net sales associated with our Molecular Clinical Reference Laboratory. Adjustments to the allowances, based on actual receipts from third party payers, are recorded upon settlement.
In our Pharmacogenomics Research Services Group, we perform services on a project by project basis. When we get payment in advance we recognize revenue when we deliver the service. These projects typically do not extend beyond one year. At June 30, 2011 and 2010, deferred net sales associated with the pharmacogenomics research projects included in the balance sheet in other accrued liabilities, was $0.1$1.3 million and less than $0.1$1.5 million, respectively.
Taxes collected from customers and remitted to government agencies for specific net sales producing transactions are recorded net with no effect on the income statement.
Research and Development.Common Stock Warrants.
Research and development and various collaboration costs are charged to expense when incurred.
Preferred Stock.
We entered into a Series A Convertible Preferred The Common Stock Purchase Agreement on December 29, 2010, as discussed in Note L, selling shares of preferred stock and issuing warrants to purchase a certain number of shares of Series A Preferred Stock. The Series A Preferred Stock meets the definition of mandatorily redeemable stock as it is preferred capital stock which is redeemable at the option of the holder and should be reported outside of equity. Preferred stock is accreted to its redemption value. The warrantsWarrants do not qualify to be treated as equity, and accordingly, are recorded as a liability. A preferred stock conversion feature is embedded within the Series A PreferredThe Common Stock that meets the definition of a derivative. The preferred stock, warrantWarrant liability and preferred stock conversion feature are all recorded separately and werewas initially recorded at fair value using the Black Scholesa Monte Carlo simulation model. We arewere required to record these instrumentsthis instrument at fair value at each reporting date and changes will beare recorded as an adjustment to earnings. The warrantCommon Stock Warrant liability and preferred stock conversion feature areis considered a level three financial instruments. See Footnote L.instrument.
Translation of Foreign Currency.
Our foreign subsidiary uses the local currency of the country in which it is located as theirits functional currency. Its assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. CumulativeA cumulative translation gain of approximately $0.1 million is reported as accumulated other comprehensive income on the accompanying consolidated balance sheet as of June 30, 2011March 31, 2012. CumulativeA cumulative translation lossesgain of $0.2$0.1 million were was reported as accumulated other comprehensive income for the six months ended June 30, 2010.as of March 31, 2011. Revenues and expenses are translated at the average rates during the period. For transactions that are not denominated in the functional currency, we recognized less than $0.1 million as foreign currency transaction loss in the determination of net loss for the sixthree months ending June 30, 2011March 31, 2012 and $0.5$0.1 million as foreign currency transaction lossgain in the determination of net loss for the six months ending June 30, 2010.
Other Income.
Other income consists primarily of interest income from cash and cash equivalents invested in overnight instruments. Other income in the six months ended June 30, 2011 includes an award of a federal grant under the Qualifying Therapeutic Discovery Project related to COLD-PCR, Surveyor Scan kit development for key cancer pathway gene mutations and mtDNA damage assays. Other income related to this federal grant was $0.2 million, net of consulting fees. Other income for the three months ended June 30, 2011 was less than $0.1 million. Other income for the three and six months ending June 30, 2010March 31, 2011 was less than $0.1 million..
Comprehensive Income.
Accumulated other comprehensive income at June 30, 2011 and December 31, 2010 consisted of foreign currency translation adjustments, net of applicable tax of zero. We deem our foreign investments to be permanent in nature and do not provide for taxes on currency translation adjustments arising from converting investments in a foreign currency to U.S. dollars.
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Six Months Ended June 30, 2011 and 2010
EarningsEarnings(Loss) Per Share.
Basic earningsearnings(loss) per share is calculated based on the weighted averageweighted-average number of common shares outstanding during each period. Diluted earnings per share include shares issuable upon exercise of outstanding stock options, warrants or conversion rights that have exercise or conversion prices below the market value of our common stock. Options, warrants and conversion rights pertaining to 18,504,94328,741,938 and 10,763,32418,095,894 shares of our common stock have been excluded from the computation of diluted earnings per share at June 30, 2011March 31, 2012 and 2010,2011, respectively. The options, warrants and conversion rights that were exercisable in 2011 and 2010 were not included because the effect would be anti-dilutive due to the net loss.
Recently Issued Accounting Pronouncements.
In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (ASC 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force); effective for years beginning after June 15, 2010. Vendors often provide multiple products and/or services to their customers as part of a single arrangement. These deliverables may be provided at different points in time or over different time periods. The existing guidance regarding how and whether to separate these deliverables and how to allocate the overall arrangement consideration to each was originally captured in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, which is now codified at ASC 605-25, Revenue Recognition – Multiple-Element Arrangements. The issuance of ASU 2009-13 amends ASC 605-25 and represents a significant shift from the existing guidance that was considered abuse-preventative and heavily geared toward ensuring that revenue recognition was not accelerated. The application of this new guidance is expected to result inadopted accounting for multiple-deliverable revenue arrangements that better reflects their economics as more arrangements will be separated into individual units of accounting. Our adoption of ASU No. 2009-13 did not have a material impact on our consolidated financial statements.
In October 2009, the FASB issued ASU No. 2009-14, Software (ASC 985): Certain Revenue Arrangements That Include Software Elements (a consensus of the FASB Emerging Issues Task Force); effective for years beginning after June 15, 2010. ASU 2009-14 modifies the existing scope guidance in ASC 985-605, Software Revenue Recognition, for revenue arrangements with tangible products that include software elements. This modification was made primarily due to the changes in ASC 605-25 noted previously, which further differentiated the separation and allocation guidance applicable to non-software arrangements as compared to software arrangements. Prior to the modification of ASC 605-25, the separation and allocation guidance for software and non-software arrangements was more similar. Under ASC 985-605, which was originally issued as AICPA Statement of position 97-2, Software Revenue Recognition, an arrangement to sell a tangible product along with software was considered to be in its scope if the software was more than incidental to the product as a whole. Our adoption of ASU No. 2009-14 did not have a material impact on our consolidated financial statements.pronouncements.
In January 2010, the FASB issued guidance to amend the disclosure requirements related to fair value measurements, effective for years beginning after December 15, 2010. The guidance requires the disclosure of roll forward activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level Three fair value measurements). We adopted the new disclosure provisions with the filing of our Form 10-Q for the three months ended March 31, 2011.
In June 2011, the FASB issued guidance on the presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. The new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011. The Company elected to report other comprehensive income and its components in a separate statement of comprehensive income for the three months ended March 31, 2012 and 2011.
In July 2011, the FASB issued guidance on the presentation of net patient service revenue. The new guidance requires a change in presentation of the statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, enhanced disclosure about policies for recognizing revenue and assessing bad debts are required. Disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts will be required. The new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011. Our adoption of this guidance did not have a material impact on our consolidated financial statements.
In September 2011, the FASB issued guidance on Intangibles including goodwill and other intangibles. The new guidance will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The new guidance is effective for fiscal years beginning after December 15, 2011. We will follow this guidance in our fourth quarter 2012 testing of goodwill and other intangibles.
In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurement” (“ASU 2011-04”). ASU 2011-04 amends ASC 820 to achieve common fair value measurement and disclosure requirements in U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). The amended guidance requires information disclosure regarding transfers between Level 1 and Level 2 of the fair value hierarchy, information disclosure regarding sensitivity of a fair value measurement categorized within Level 3 of the fair value hierarchy to changes in unobservable inputs and any interrelationships between those unobservable inputs, and the categorization by level of the fair value hierarchy for items that are not measured at fair value. The amended guidance was effective for financial periods beginning after December 15, 2011. ASU 2011-04 did not have a material effect on the Company's consolidated financial position or results of operations.
Inventories (net of allowancesallowance for obsolescence) consisted of the following:
| | | | Dollars in Thousands | Dollars in Thousands |
| | June 30, 2011 |
| | December 31, 2010 |
| March 31, 2012 |
| | December 31, 2011 |
|
| Finished goods | $ | 1,940 |
| | $ | 2,119 |
| $ | 2,911 |
| | $ | 2,608 |
|
| Raw materials and work in process | 1,544 |
| | 1,531 |
| 1,481 |
| | 1,485 |
|
| Demonstration inventory | 345 |
| | 212 |
| 131 |
| | 277 |
|
| | $ | 3,829 |
| | $ | 3,862 |
| $ | 4,523 |
| | $ | 4,370 |
|
| Less allowance for obsolescence | (520 | ) | | (518 | ) | (509 | ) | | (511 | ) |
| Total | $ | 3,309 |
| | $ | 3,344 |
| $ | 4,014 |
| | $ | 3,859 |
|
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Six Months Ended June 30, 2011 and 2010
| |
| D. | INTANGIBLES AND OTHER ASSETS |
Long LivedLong-lived intangible assets and other assets consisted of the following:
| | | | Dollars in Thousands | Dollars in Thousands |
| | June 30, 2011 | | December 31, 2010 | March 31, 2012 | | December 31, 2011 |
| | Cost | | Accumulated Amortization | | Net Book Value | | Cost | | Accumulated Amortization | | Net Book Value | Cost | | Accumulated Amortization | | Net Book Value | | Cost | | Accumulated Amortization | | Net Book Value |
| Intangibles—acquired technology | $ | 6,535 |
| | $ | 455 |
| | $ | 6,080 |
| | $ | 6,535 |
| | $ | — |
| | $ | 6,535 |
| $ | 6,535 |
| | $ | 1,138 |
| | $ | 5,397 |
| | $ | 6,535 |
| | $ | 911 |
| | $ | 5,624 |
|
| Intangibles—assay royalties | 1,434 |
| | 103 |
| | 1,331 |
| | 1,434 |
| | — |
| | 1,434 |
| 1,434 |
| | 256 |
| | 1,178 |
| | 1,434 |
| | 205 |
| | 1,229 |
|
| Intangibles—third party payor relationships | 367 |
| | — |
| | 367 |
| | 367 |
| | — |
| | 367 |
| 367 |
| | — |
| | 367 |
| | 367 |
| | — |
| | 367 |
|
| Intangibles—tradenames and trademarks | 344 |
| | 25 |
| | 319 |
| | 344 |
| | — |
| | 344 |
| 344 |
| | 61 |
| | 283 |
| | 344 |
| | 49 |
| | 295 |
|
| Patents | 665 |
| | 256 |
| | 409 |
| | 511 |
| | 245 |
| | 266 |
| 726 |
| | 274 |
| | 452 |
| | 703 |
| | 267 |
| | 436 |
|
| Intellectual property | 20 |
| | 4 |
| | 16 |
| | 290 |
| | 274 |
| | 16 |
| 20 |
| | 6 |
| | 14 |
| | 20 |
| | 5 |
| | 15 |
|
| | $ | 9,365 |
| | $ | 843 |
| | $ | 8,522 |
| | $ | 9,481 |
| | $ | 519 |
| | $ | 8,962 |
| $ | 9,426 |
| | $ | 1,735 |
| | $ | 7,691 |
| | $ | 9,403 |
| | $ | 1,437 |
| | $ | 7,966 |
|
|
| |
| | |
| | Estimated Useful Life |
| Intellectual property | 10 years |
| Patents | 7 years |
| Intangibles—acquired technology | 7 – 8 years |
| Intangibles—third party payor relationships | Indefinite |
| Intangibles—assay royalties | 7 years |
| Intangibles—tradenames and trademarks | 7 years |
Other assets include USU.S. security deposits and deferred tax assets, net of applicable valuation allowances.
Amortization expense for intangible assets was $0.3 million and less than $0.1 million during each of the three months ended June 30, 2011March 31, 2012 and 2010, respectively. Amortization expense for intangible assets was $0.6 million and less than $0.1 million during the six months ended June 30, 2011 and 2010, respectively.. Amortization expense for intangible assets is expected to be $1.2 million in each of the years 20112012 through 2017.
|
| | | | | | | |
| | Dollars in Thousands |
| | June 30,
2011 | | December 31,
2010 |
| PGxHealth note payable (1) | $ | 8,640 |
| | $ | 8,640 |
|
| PGxHealth note payable (2) | 494 |
| | 989 |
|
| | $ | 9,134 |
| | $ | 9,629 |
|
| |
(1) | The First Note is a three year senior secured promissory note to PGxHealth, LLC entered into on December 29, 2010 in conjunction with our acquisition of the FAMILION family of genetic tests from PGxHealth. Interest is payable at 10% per year with quarterly interest payments through March 29, 2012. Thereafter, quarterly installments will include both principal and interest through December 30, 2013. |
| |
(2) | The Second Note is a one year senior secured promissory note to PGxHealth, LLC entered into on December 31, 2010 for facility improvements made to the CLIA certified laboratory in New Haven, Connecticut. Interest is payable at 6.5% per year with the principal and interest payable in twelve monthly installments with the final payment due on December 31, 2011. |
The entire unpaid balance of the Notes will become immediately due and payable if: (i) we fail to make timely payments
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Six Months Ended June 30, 2011 and 2010
under the Notes; (ii) we make an assignment for the benefit of creditors; (iii) we file for bankruptcy; or (iv) upon any event of default under the Security Agreement. Additionally, under the terms of the First Note, if we consummate an equity financing that involves the receipt by us of net proceeds of not less than $6,000,000, then we shall, upon the consummation of such equity financing, pay to PGxHealth the lesser of: (i) 25% of the gross proceeds received from such financing; and (ii) the then-outstanding balance under the First Note. Under the terms of the Second Note, in the event of a sale of all or substantially all of the assets of the Company, we shall pay PGxHealth the lesser of: (i) 100% of the proceeds, less certain fees, received pursuant to such sale; and (ii) the then-outstanding balance under the Second Note.
The Notes are secured by the assets of Transgenomic.
The aggregate minimum principal maturities of the debt for each of the three fiscal years following June 30, 2011 are as follows:
|
| | | |
| 2011 | $ | 1,728 |
|
| 2012 | 3,703 |
|
| 2013 | 3,703 |
|
| | $ | 9,134 |
|
The following is an analysis of the leased property under capital leases.
|
| | | | | | | |
| | Dollars in Thousands |
| | Asset Balances at |
| Classes of Property | June 30, 2011 |
| | December 31, 2010 |
|
| Equipment | $ | 784 |
| | $ | 394 |
|
| Less: Accumulated amortization | (78 | ) | | (13 | ) |
| Total | $ | 706 |
| | $ | 381 |
|
The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of June 30, 2011.
Year ending December 31:
|
| | | |
| | Dollars in Thousands |
| 2011 | $ | 145 |
|
| 2012 | 224 |
|
| 2013 | 209 |
|
| 2014 | 35 |
|
| Total minimum lease payments | $ | 613 |
|
| Less: Amount representing interest | (94 | ) |
| Present value of net minimum lease payments | $ | 519 |
|
| |
G. | COMMITMENTS AND CONTINGENCIES |
We are subject to a number of claims of various amounts, which arise out of the normal course of business. In the opinion of management, the disposition of pending claims will not have a material adverse effect on our financial position, results of operations or cash flows.
We lease certain equipment, vehicles and operating facilities under non-cancellable operating leases that expire on various dates through 2016.2022. The future minimum lease payments required under these leases are approximately $0.8 million in 2012, $1.1 million in 2013, $1.0 million in 2014, $0.9 million in 2015. $0.9 million in 2016 and $0.6 million in 2011, $1.1 million in 2012, $0.6 million in 2013, $0.4 million in 2014 , $0.4million in 2015 and $0.3 million in 2016. Rent expense for the three months ended June 30, 2011 and 2010 was $0.3 million and $0.2 million, respectively.2017. Rent expense for each of the sixthree
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Six Months Ended June 30, 2011 and 2010
months ended June 30, 2011March 31, 2012 and 20102011 was $0.5$0.2 million and $0.4$0.3 million, respectively.
We have entered into an employment agreement with Craig J. Tuttle, our President and Chief Executive Officer. The current term of Mr. Tuttle’s employment agreement ends on July 12, 2012. The employment agreement provides that Mr. Tuttle will be entitled to receive a severance payment from the Company if his employment is terminated involuntarily except if such termination is based on “just cause”, as that term is defined in his employment agreement. The severance payment payable in the event of involuntary termination without just cause is equal to his annual base salary at the time of termination and will be paid over a twelve-month period. The employment agreement provides that the severance payment provision will be honored if the Company is acquired by, or merged into, another company and his position is eliminated as a result of such acquisition or merger. In addition we have one employee who is entitled to a severance payment of less than $0.1 million if the employee’s position is eliminated prior to July 2012.
At June 30, 2011March 31, 2012, firm commitments to vendors to purchase components used in WAVE Systems and instruments manufactured by others totaled $1.3$2.3 million.
We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. We have statutes of limitation open for Federalfederal income tax returns related to tax years 20072008 through 2010.2011. We have state income tax returns subject to examination primarily for tax years 20072008 through 2010.2011. Open tax years related to foreign jurisdictions, primarily the United Kingdom, remain subject to examination. Our primary foreign jurisdiction isexamination for the United Kingdom which has open tax years for 20072008 through 2010.2011.
Income tax benefitexpense for the sixthree months ended June 30, 2011March 31, 2012 was a benefit $0.1 million.nominal. This is the result of the change in deferred tax assets and liabilities reported in financial statements of our subsidiary outside the U.S. We believe the tax benefitexpense recorded will be offset in future periods by a tax expense related to income reported in financial statements of our subsidiary outside the U.S. Income tax expense for the sixthree months ended June 30, 2010March 31, 2011 was less than $0.1 million. The effective tax rate for the sixthree months ended June 30, 2011March 31, 2012 is 1.14%0.14%, which is primarily the result of valuation allowances against the Net Operating Lossesnet operating losses for the U.S. .
During the three and six months ended June 30, 2011March 31, 2012 and 2010,2011, there were no material changes to the liability for uncertain tax positions.
We maintain an employee 401(k) retirement savings plan that allows for voluntary contributions into designated investment funds by eligible employees. We match the employee’s contributions at the rate of 50% on the first 6% of contributions. We may, at the discretion of our Board of Directors, make additional contributions on behalf of the Plan’s participants. Contributions to the 401(k) plan were less than $0.1 million for the three and six months ended June 30, 2010. No contributions were made in the three and six months ended June 30, 2011 due to cost saving initiatives.
Common Stock.
The Company’sOur Board of Directors is authorized to issue up to 100,000,000 shares of common stock, from time to time, as provided in a resolution or resolutions adopted by the Board of Directors.
On February 7, 2012 we entered into definitive agreements with institutional and other accredited investors and raised approximately $22.0 million in a private placement financing ("Private Placement"), which includes an aggregate of $3.0 million in convertible notes issued in December 2011 to entities associated with Third Security, LLC, a related party, that automatically convert into shares of our common stock and warrants to purchase such common stock on the same terms as all investors in the Private Placement. Pursuant to the purchase agreement, we issued an aggregate of 19,000,000 shares of our common stock at a price per share of $1.00, as well as five-year warrants to purchase up to an aggregate of 9,500,000 shares of common stock with an exercise price of $1.25 per share. In connection with the conversion of the convertible notes issued by us to the entities associated with Third Security, LLC, the entities received an aggregate of 3,000,000 shares of common stock and 1,500,000 warrants on the same terms as all investors in the Private Placement. The costs incurred to complete the Private Placement were recorded as a reduction in equity in the amount of $1.5 million. Net proceeds from this offering will be used for general corporate and working capital purposes, primarily to accelerate development of several of our key initiatives.
Pursuant to the Company's equity financing completed on February 2, 2012, the Company is obligated to pay PGxHealth, LLC (“PGx”) an aggregate of $5.5 million as a prepayment under the senior secured promissory note (the “Note”). The Company has accounted for the full prepayment amount as a current liability as of March 31, 2012. The Company has contacted PGx on numerous occasions to make arrangements for having the Company make the prepayment to PGx in accordance with the terms of the Note, as well as to coordinate the timing of the prepayment. However, PGx has not responded to any of the Company's outreach efforts. The Company intends to continue to comply with the original terms of the Note.
Common Stock Warrants.
11,000,000 common stock warrants were issued during the three months ended March 31, 2012. No common stock warrants were issued or exercised during the three and six months ended June 30,March 31, 2011 or 2010. At June 30, 2011, there were warrants outstanding which were exercisable. Warrants to purchase an aggregate of 5,572,40816,172,408 shares of common stock.stock were outstanding at March 31, 2012.
|
| | | | | | | | | | | |
| Warrant Holder | | Issue Year | | Expiration | | Underlying Shares | | Exercise Price |
| Laurus Master Fund, Ltd. (1) | | 2004 | | August 2011 | | 400,000 |
| | $ | 1.13 |
|
| Affiliates of Third Security, LLC (2) | | 2010 | | December 2015 | | 5,172,408 |
| | $ | 0.58 |
|
| Total | | | | | | 5,572,408 |
| | |
|
| | | | | | | | |
| Warrant Holder | | Issue Year | | Expiration | | Underlying Shares | | Exercise Price |
Affiliates of Third Security, LLC(1) | | 2010 | | December 2015 | | 5,172,408 | | $0.58 |
Various Institutional Holders(2) | | 2012 | | February 2017 | | 9,500,000 | | $1.25 |
Affiliates of Third Security, LLC(2) | | 2012 | | February 2017 | | 1,500,000 | | $1.25 |
| | | | | | | 16,172,408 | | |
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Six Months Ended June 30, 2011 and 2010
| |
| (1) | These warrants wereThis Warrant was issued in conjunction with two loans that had been made to us by Laurus Master Fund, Ltd. (the “Laurus Loans”), and subsequent modifications of these loans. In conjunctionconnection with the 2005 private placement,Financing. The number of underlying shares shown reflects the exercise pricesnumber of these warrants were adjusted according to repricing provisions contained inshares of common stock issuable upon conversion of the original warrant agreements. While the Laurus Loans have been terminated, the warrants remain outstanding.shares of Series A Preferred Stock for which this Warrant is currently exercisable. |
| |
| (2) | These warrantsWarrants were issued in conjunctionconnection with the Series A Convertible Preferred Stock financing (the “Financing”) with certain entities affiliated with Third Security, LLC (the “Investors”). The number of shares shown reflects the post conversion shares.Private Placement in February 2012. |
Preferred Stock.
The Company’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 additional 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 additional preferred stock issued by the Company could have an adverse effect on the rights of the holders of the common stock.
On December 29, 2010, we entered into a Series A Convertible Preferred Stock Purchase Agreement (“Series A Purchase Agreement”) with the Investors pursuant to which we: (i) sold an aggregate of 2,586,205 shares of Series A Convertible Preferred Stock; and (ii) issued warrants to purchase up to an aggregate of 1,293,102 shares of Series A Convertible Preferred Stock with an exercise price of $2.32 per share. The Warrants may be exercised at any time from December 29, 2010 until December 28, 2015 and contain a “cashless exercise” feature. The shares of Series A Convertible Preferred Stock issuable pursuant to the Series A Purchase Agreement and upon exercise of the Warrants are initially convertible into shares of our common stock at a rate of 4-for-1, which conversion rate is subject to further adjustment as set forth in the Certificate of Designation. The aggregate gross proceeds from the issuance were $6.0 million.
The Series A Convertible Preferred Stock meets the definition of mandatorily redeemable stock as it is preferred capital stock that is redeemable at the option of the holder and should be reported outside of equity. Preferred stock is accreted to its redemption value. The warrants do not qualify to be treated as equity, and accordingly, are recorded as a liability. A preferred stock conversion feature is embedded within the Series A Convertible Preferred Stock that meets the definition of a derivative.
The costs to secure the preferred stock were taken against the preferred stock. For the year ended December 31, 2010 these costs were $0.2 million.
We used the net proceeds from the financing to acquire the FAMILION family of genetic tests from PGxHealth, a subsidiary of Clinical Data.
In connection with the Financing, we filed a Certificate of Designation of Series A Convertible Preferred Stock with the Secretary of State of the State of Delaware, designating 3,879,307 shares of our Preferred Stock as Series A Convertible Preferred Stock. Certain rights of the holders of the Series A Convertible Preferred Stock are senior to the rights of the holders of Common Stock. The Series A Convertible Preferred Stock has a liquidation preference equal to its original price per share, plus any accrued and unpaid dividends thereon. The Series A Convertible Preferred Stock accrues cumulative dividends at the rate of 10.0% of the original price per share per annum.
Generally, the holders of the Series A Preferred Stock are entitled to vote together with the holders of Common Stock, as a single group, on an as-converted basis. However, the Certificate of Designation provides that we shall not perform some activities, subject to certain exceptions, without the affirmative vote of a majority of the holders of the outstanding shares of Series A Convertible Preferred Stock. The holders of the Series A Convertible Preferred Stock also are entitled to elect or appoint, as a single group, two (2) of the five (5) directors of the Company.
In connection with the Financing, we also entered into a registration rights agreement with the Investors (the “Registration
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Six Months Ended June 30, 2011 and 2010
Rights Agreement”). Pursuant to the terms of the Registration Rights Agreement, the Company has granted the Investors certain demand, “piggyback” and S-3 registration rights covering the resale of the shares of Common Stock underlying the Series A Convertible Preferred Stock issued pursuant to the Series A Purchase Agreement and issuable upon exercise of the Warrants and all shares of Common Stock issuable upon any dividend or other distribution with respect thereto. The holders of the Series A Convertible Preferred Stock are entitled to receive quarterly dividends which will accrue whether or not declared, shall compound annually and shall be cumulative. In any calendar quarter we shall be required to pay from funds legally available a cash dividend in the amount of 50% of the distributable cash flow or aggregate amount of dividends accrued on the Series A Convertible Preferred Stock. During the six months ended June 30, 2011 we recorded $0.3 million in dividends payable which were not distributed.
Financial Accounting Standards Board (“FASB”) guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements for our financial assets and liabilities, as well as for other assets and liabilities that are carried at fair value on a recurring basis in our consolidated financial statements.
FASB guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The three levels of inputs used to measure fair value are as follows:
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities,
Level 2—Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets, and
Level 3—Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing the asset or liability.
The preferredcommon stock warrant liability and preferred stock conversion feature are recorded separately and areis recorded at fair value. We are required to record these instrumentsthis instrument at fair value at each reporting date and changes are recorded as an adjustment to earnings. The preferredgains or losses included in earnings are reported in other income (expense) in our Statement of Operations.
The common stock warrant liability and preferred stock conversion feature areis considered a Level 3 financial instruments which areinstrument and is valued using a Monte Carlo simulation. This method is well suited to value options with non-standard features, such as anti-dilution protection. A Monte Carlo simulation model uses repeated random sampling to simulate significant uncertainty in inputs. Assumptions and inputs used in the Black Scholes call option pricing formula.valuation of the commons stock warrants are broken down into four sections: Static Business Inputs; Static Technical Inputs; Simulated Business Inputs: and Simulated Technical Inputs.
Static Business Inputs include: Our equity value which is was estimated using our stock price at the Valuation Date of $1.20; the amount of down-round financing, the timing of the down-round financing, the expected exercise period was 4.86 years from the valuation date and no other potential fundamental transactions are expected during the term of the common stock warrants.
Static Technical Inputs include: volatility of 55% and the risk-free interest rate of 1.04% based on the 5-year U.S. Treasury bond.
Simulated Business Inputs include the probability of down-round financing which was estimated to be 10% for simulated equity values below the down-round financing cut-off point.
Simulated Technical Inputs include: Our equity value in periods 1 -10 follows a geometric Brownian motion and is simulated over 10 independent six-month periods; a down-round financing event was randomly simulated in an iteration based on the 10% discrete probability of a down-round financing for those iterations where our simulated equity value at the expected timing of down-round financing was below the down-round financing cut-off point.
During the three months ended June 30, 2011March 31, 2012, the changes in the fair value of the liabilitiesliability measured using significant unobservable inputs (Level 3) werewas comprised of the following:
|
| | | | | | | | | | | |
| | Dollars in Thousands |
| | For the six months ended |
| | June 30, 2011 |
| | Preferred Stock Conversion Feature | | Preferred
Stock
Warrant
Liability | | Total |
| Beginning balance at April 1, 2011 | $ | 5,078 |
| | $ | 1,283 |
| | $ | 6,361 |
|
| Total gains or losses: | | | | | |
| Recognized in earnings | 2,522 |
| | 1,717 |
| | 4,239 |
|
| Balance at June 30, 2011 | $ | 7,600 |
| | $ | 3,000 |
| | $ | 10,600 |
|
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Six Months Ended June 30, 2011 and 2010 |
| | | | |
| | | Dollars in Thousands |
| | | For the Three Months Ended |
| | | March 31, 2012 |
| Balance at March 31, 2012 | | $ | 3,100 |
|
During the six months ended June 30, 2011, the changes in the fair value of the liabilities measured using significant unobservable inputs (Level 3) were comprised of the following:
|
| | | | | | | | | | | |
| | Dollars in Thousands |
| | For the six months ended |
| | June 30, 2011 |
| | Preferred Stock Conversion Feature | | Warrants | | Total |
| Beginning balance at January 1, 2011 | $ | 1,983 |
| | $ | 2,351 |
| | $ | 4,334 |
|
| Total gains or losses: | | | | | |
| Recognized in earnings | 5,617 |
| | 649 |
| | 6,266 |
|
| Balance at June 30, 2011 | $ | 7,600 |
| | $ | 3,000 |
| | $ | 10,600 |
|
We had no Level 3 liabilities at June 30, 2010December 31, 2011. There were no purchases, sales, issuances or settlementsThe change in the three or six months ended June 30, 2011 and 2010. Theunrealized gains or losses of Level 3 liabilities are included in earnings are reported in other income (expense) in our Statement of Operations.
The following table summarizes stock option activity during the sixthree months ended June 30, 2011March 31, 2012:
| | | | Number of Options | | Weighted Average Exercise Price | Number of Options | | Weighted Average Exercise Price |
| Balance at January 1, 2011 | 2,565,001 |
| | $ | 2.11 |
| |
| Balance at January 1, 2012 | | 4,172,000 |
| | $ | 1.10 |
|
| Granted | 2,335,500 |
| | 1.17 |
| 100,000 |
| | 1.45 |
|
| Exercised | (10,000 | ) | | (0.70 | ) | (20,000 | ) | | (0.50 | ) |
| Forfeited | (227,001 | ) | | (2.06 | ) | (39,998 | ) | | 2.80 |
|
| Cancelled | (349,500 | ) | | (6.67 | ) | (18,001 | ) | | (4.89 | ) |
| Balance at June 30, 2011 | 4,314,000 |
| | $ | 1.22 |
| |
| Exercisable at June 30, 2011 | 2,587,715 |
| | $ | 1.30 |
| |
| Balance at March 31, 2012 | | 4,194,001 |
| | $ | 1.09 |
|
| Exercisable at March 31, 2012 | | 2,224,710 |
| | $ | 1.01 |
|
During the sixthree months ended June 30, 2011,March 31, 2012, we granted options exercisable to purchase 2,335,500100,000 shares of common stock at a weighted average exercise price of $1.171.45 per share under our 2006 Equity Incentive Plan. Options to purchase an aggregate of 130,000 shares of common stock were granted during the three months ended March 31, 2011.
| |
M.J. | OPERATING SEGMENT AND GEOGRAPHIC INFORMATION |
Our company’s chief operating decision-maker is theour Chief Executive Officer, who regularly evaluates our performance based on net sales and gross profit. The preparation of this segment analysis requires management to make estimates and assumptions around expenseexpenses below the gross profit level. While we believe the segment information to be directionally correct, actual results could differ from the estimates and assumptions used in preparing this information.
The accounting policies of the segments are the same as the policies discussed in Footnote B – Summary of Significant Accounting Policies.
We have twothree reportable operating segments, LaboratoryClinical Laboratories, Pharmacogenomic Services and Instrument Business.Diagnostic Tools. During the third quarter of 2011, we changed the manner in which we report segment results internally. Accordingly, segment results of the prior period have been reclassified to reflect these changes. Beginning with the third quarter of 2011, our chief operating decision-maker reviews our business as having three segments. The change in segments was driven by our corporate strategy to advance personalized medicine through proprietary molecular technologies and world-class clinical and research services. These lines of business are complementary with the Pharmacogenomics Services driving innovation and leading to kit production in our Diagnostic Tools segment and new tests in our Clinical Laboratories.
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Six Months Ended June 30, 2011 and 2010
Segment information for the three months ended June 30, 2011March 31, 2012 and 20102011 is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Dollars in Thousands |
| | 2011 | | 2010 |
| | Laboratory Services | | Instrument Business | | Total | | Laboratory Services | | Instrument Business | | Total |
| Net Sales | $ | 4,866 |
| | $ | 2,801 |
| | $ | 7,667 |
| | $ | 1,241 |
| | $ | 3,854 |
| | $ | 5,095 |
|
| Gross Profit | 3,064 |
| | 1,491 |
| | 4,555 |
| | 418 |
| | 2,069 |
| | 2,487 |
|
| Net Loss before Taxes | (5,743 | ) | | (359 | ) | | (6,102 | ) | | (506 | ) | | (551 | ) | | (1,057 | ) |
| Income Tax Expense (Benefit) | — |
| | (104 | ) | | (104 | ) | | — |
| | 89 |
| | 89 |
|
| Net Loss | $ | (5,743 | ) | | $ | (255 | ) | | $ | (5,998 | ) | | $ | (506 | ) | | $ | (640 | ) | | $ | (1,146 | ) |
| Depreciation/Amortization | 444 |
| | 46 |
| | 490 |
| | 73 |
| | 48 |
| | 121 |
|
| Restructure | — |
| | 11 |
| | 11 |
| | — |
| | — |
| | — |
|
| Interest Income (Expense) | (240 | ) | | — |
| | (240 | ) | | — |
| | 1 |
| | 1 |
|
Segment information for the six months ended June 30, 2011 and 2010 is as follows: |
| | | | | | | | | | | | | | | |
| | Dollars in Thousands |
| | 2012 |
| | Clinical Laboratories | | Pharmacogenomic Services | | Diagnostic
Tools | | Total |
| Net Sales | $ | 3,371 |
| | $ | 630 |
| | $ | 3,205 |
| | $ | 7,206 |
|
| Gross Profit | 1,274 |
| | 374 |
| | 1,456 |
| | 3,104 |
|
| Net Income (Loss) before Taxes | (2,168 | ) | | 81 |
| | (605 | ) | | (2,692 | ) |
| Income Tax Expense (Benefit) | — |
| | — |
| | 4 |
| | 4 |
|
| Net Income (Loss) | $ | (2,168 | ) | | $ | 81 |
| | $ | (609 | ) | | $ | (2,696 | ) |
| Depreciation/Amortization | 416 |
| | 32 |
| | 47 |
| | 495 |
|
| Interest Income (Expense) | (247 | ) | | (5 | ) | | (21 | ) | | (273 | ) |
| | | | | | | | |
| | March 31, 2012 |
| Total Assets | 27,118 |
| | 3,477 |
| | 16,589 |
| | 47,184 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Dollars in Thousands |
| | 2011 | | 2010 |
| | Laboratory Services | | Instrument Business | | Total | | Laboratory Services | | Instrument Business | | Total |
| Net Sales | $ | 8,623 |
| | $ | 6,525 |
| | $ | 15,148 |
| | $ | 2,512 |
| | $ | 8,025 |
| | $ | 10,537 |
|
| Gross Profit | 4,850 |
| | 3,892 |
| | 8,742 |
| | 901 |
| | 4,470 |
| | 5,371 |
|
| Net Loss before Taxes | (9,278 | ) | | 392 |
| | (8,886 | ) | | (1,118 | ) | | (313 | ) | | (1,431 | ) |
| Income Tax Expense (Benefit) | — |
| | (110 | ) | | (110 | ) | | — |
| | 38 |
| | 38 |
|
| Net Loss | $ | (9,278 | ) | | $ | 502 |
| | $ | (8,776 | ) | | $ | (1,118 | ) | | $ | (351 | ) | | $ | (1,469 | ) |
| Depreciation/Amortization | 872 |
| | 95 |
| | 967 |
| | 152 |
| | 104 |
| | 256 |
|
| Restructure | — |
| | 35 |
| | 35 |
| | — |
| | — |
| | — |
|
| Interest Income (Expense) | (473 | ) | | (5 | ) | | (478 | ) | | — |
| | 1 |
| | 1 |
|
| | 6/30/2011 | | 6/30/2010 |
| Total Assets | $ | 22,621 |
| | $ | 8,079 |
| | $ | 30,700 |
| | $ | 7,395 |
| | $ | 7,051 |
| | $ | 14,446 |
|
Net sales by product were as follows:
|
| | | | | | | | | | | | | | | |
| | Dollars in Thousands | | Dollars in Thousands |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2011 | | 2010 | | 2011 | | 2010 |
| Laboratory Services: | | | | | | | |
| Molecular Clinical Reference Laboratory | $ | 3,864 |
| | $ | 931 |
| | $ | 7,351 |
| | $ | 1,873 |
|
| Pharmacogenomics Research Services | 1,002 |
| | 310 |
| | 1,272 |
| | 639 |
|
| | 4,866 |
| | 1,241 |
| | 8,623 |
| | 2,512 |
|
| Instrument Related Business: | | | | | | | |
| Bioinstruments | 1,319 |
| | 2,217 |
| | 3,157 |
| | 4,569 |
|
| Bioconsumables | 1,482 |
| | 1,637 |
| | 3,368 |
| | 3,456 |
|
| | 2,801 |
| | 3,854 |
| | 6,525 |
| | 8,025 |
|
| Total Net Sales | $ | 7,667 |
| | $ | 5,095 |
| | $ | 15,148 |
| | $ | 10,537 |
|
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Six Months Ended June 30, 2011 and 2010 |
| | | | | | | | | | | | | | | |
| | | | | | | | |
| | Dollars in Thousands |
| | 2011 |
| | Clinical Laboratories | | Pharmacogenomic Services | | Diagnostic
Tools | | Total |
| Net Sales | $ | 3,487 |
| | $ | 270 |
| | $ | 3,723 |
| | $ | 7,480 |
|
| Gross Profit | 1,900 |
| | (113 | ) | | 2,367 |
| | 4,154 |
|
| Net Loss before Taxes | (3,289 | ) | | (247 | ) | | 752 |
| | (2,784 | ) |
| Income Tax Expense (Benefit) | — |
| | — |
| | (6 | ) | | (6 | ) |
| Net Loss | $ | (3,289 | ) | | $ | (247 | ) | | $ | 758 |
| | $ | (2,778 | ) |
| Depreciation/Amortization | 394 |
| | 34 |
| | 49 |
| | 477 |
|
| Restructure | — |
| | — |
| | 24 |
| | 24 |
|
| Interest Income (Expense) | (233 | ) | | — |
| | (5 | ) | | (238 | ) |
| | | | | | | | |
| | March 31, 2011 |
| Total Assets | 19,853 |
| | 1,964 |
| | 9,581 |
| | 31,398 |
|
Net cost of goods sold was as follows:
|
| | | | | | | | | | | | | | | |
| | Dollars in Thousands | | Dollars in Thousands |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2011 | | 2010 | | 2011 | | 2010 |
| Laboratory Services: | | | | | | | |
| Molecular Clinical Reference Laboratory | $ | 1,435 |
| | $ | 495 |
| | $ | 3,023 |
| | $ | 957 |
|
| Pharmacogenomics Research Services | 367 |
| | 328 |
| | 750 |
| | 654 |
|
| | 1,802 |
| | 823 |
| | 3,773 |
| | 1,611 |
|
| Instrument Related Business: | | | | | | | |
| Bioinstruments | 585 |
| | 1,024 |
| | 1,107 |
| | 1,956 |
|
| Bioconsumables | 725 |
| | 761 |
| | 1,526 |
| | 1,599 |
|
| | 1,310 |
| | 1,785 |
| | 2,633 |
| | 3,555 |
|
| Total Cost of Goods Sold | $ | 3,112 |
| | $ | 2,608 |
| | $ | 6,406 |
| | $ | 5,166 |
|
Net sales for the three and six months ended June 30, 2011March 31, 2012 and 20102011 by country were as follows:
| | | | Dollars in Thousands | | Dollars in Thousands | Dollars in Thousands |
| | Three Months Ended | | Six Months Ended | Three Months Ended |
| | June 30, | | June 30, | March 31, |
| | 2011 | | 2010 | | 2011 | | 2010 | 2012 | | 2011 |
| United States | $ | 5,669 |
| | $ | 2,070 |
| | $ | 10,705 |
| | $ | 4,401 |
| $ | 4,724 |
| | $ | 5,036 |
|
| Italy | 785 |
| | 721 |
| | 1,611 |
| | 1,487 |
| 799 |
| | 826 |
|
| United Kingdom | 233 |
| | 200 |
| | 491 |
| | 767 |
| 336 |
| | 258 |
|
| France | 225 |
| | 359 |
| | 413 |
| | 604 |
| |
| Germany | 182 |
| | 345 |
| | 394 |
| | 905 |
| |
| United Arab Emirates | — |
| | 774 |
| | — |
| | 774 |
| |
| All Other Countries | 573 |
| | 626 |
| | 1,534 |
| | 1,599 |
| 1,347 |
| | 1,360 |
|
| Total | $ | 7,667 |
| | $ | 5,095 |
| | $ | 15,148 |
| | $ | 10,537 |
| $ | 7,206 |
| | $ | 7,480 |
|
No other country individually accounted for more than 5% of total net sales.
More than 95% of our long-lived assets are located within the United States. Substantially all of the remaining long-lived assets are located within Europe.
Events or transactions that occur after the balance sheet date, but before the financial statements are complete, are reviewed to determine if they should be recognized. We have no material subsequent events to be disclosed.disclose.
| |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Information
This report, including Management’s Discussion & Analysis, contains forward-looking statements. These statements are based on management’s current views, assumptions or beliefs of future events and financial performance and are subject to uncertainty and changes in circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements. These factors include, among other things: our expected revenue, income (loss), receivables, operating expenses, supplier pricing, availability and prices of raw materials, Medicare/Medicaid/Insurance reimbursements, product pricing, foreign currency exchange rates, sources of funding operations and acquisitions, our ability to raise funds, sufficiency of available liquidity, future interest costs, future economic circumstances, industry conditions, our ability to execute our operating plans, the success of our cost savings initiatives, competitive environment and related market conditions, actions of governments and regulatory factors affecting our business and other risks as described in our reports filed with the Securities and Exchange Commission. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions.
You are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Actual results may differ materially from those suggested by the forward-looking statements that we make for a number of reasons including those described in Part II, Item 1A, “Risk Factors,” of this report.report and in Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 31,2011, which we filed with the Securities and Exchange Commission on March 14, 2012.
We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
The following discussion should be read together with our financial statements and related notes contained in this report and with the financial statements, related notes, and Management’s Discussion & Analysis included in our annual reportAnnual Report on Form 10-K for the fiscal year ended December 31, 2010.2011, which we filed with the Securities and Exchange Commission on March 14, 2012. Results for the quarter ended June 30, 2011March 31, 2012 are not necessarily indicative of results that may be attained in the future.
Overview
Transgenomic, Inc. is a global biotechnology company specializingadvancing personalized medicine in high sensitivity genetic variation and mutation analysis, providing products and services in DNA mutationthe detection and discovery fortreatment of cancer and inherited diseases through its proprietary molecular technologies and world-class clinical and research services. We have three complementary business segments.
Clinical Laboratories. Our clinical molecular diagnostics and pharmacogenomics analyses.
Laboratory Services:
Molecular Clinical Reference Laboratory. The molecular clinical reference laboratory specializeslaboratories specialize in genetic testing for oncology, hematologycardiology, neurology, mitochondrial disorders, and inherited disorders.oncology. Located in New Haven, Connecticut and Omaha, Nebraska the molecular clinical reference laboratories are certified under the Clinical Laboratory Improvement Amendment (CLIA) as high complexity labs and our Omaha facility is also accredited by CAP (Collegethe College of American Pathologists)Pathologists (CAP).
Pharmacogenomics Research Services. Pharmacogenomics research services are provided by ourOur Contract Research Organization located in Omaha, Nebraska.Nebraska provides pharmacogenomics research services supporting Phase II and Phase III clinical trials conducted by our pharmaceutical customers. This lab specializes in pharmacogenomic, biomarker and mutation discovery research serving the pharmaceutical and biomedical industries world-wide for disease research, drug and diagnostic development and clinical trial support.
Instrument Related Business:
| |
| • | Bioinstruments.Diagnostic Tools. Our proprietary product is the WAVE® System which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There is a worldwide installed base of over 1,5001,525 WAVE Systems as of June 30, 2011March 31, 2012. We also distribute bioinstruments produced by other manufacturers (“OEM Equipment”) through our sales and distribution network. Service contracts to maintain installed systems are sold and supported by our technical support personnel.
|
| |
• | Bioconsumables. The installed WAVE base and some OEM Equipment platforms generate a demand for consumables that are required for the continued operation of the bioinstruments. We develop, manufacture and sell these consumable products. In addition, we manufacture and sell consumable products that can be used on multiple, independent platforms. These products include SURVEYOR® Nuclease and a range of chromatography columns.
|
Executive Summary
Net sales for the sixthree months ended June 30, 2011March 31, 2012 increaseddecreased by $4.6$0.3 million or 44%4% compared to the same period in 2010. These results include the FAMILION acquisition in our Laboratory Services segment.2011. During the sixthree months ended June 30, 2011March 31, 2012, net sales from Laboratory Services increasedour Clinical Laboratories segment decreased by $6.1$0.1 million compared to the same sixthree month period in 2010. The Clinical Reference Laboratory increase is2011. Our laboratory information management system (LIMS) installed at our New Haven, Connecticut laboratory testing facility experienced a resultsoftware failure that resulted in reduced sample processing capacity which impacted revenue for the first quarter of the revenue of $5.1 million related to the FAMILION acquisition.2012. Net sales from our Pharmacogenomics Research Services segment increased by $0.6 million. Net sales in our Instrument Related Business were down 19% or $1.50.4 million for the sixthree months ended June 30, 2011March 31, 2012 compared to the same period in 2010.2011. Net sales from bioinstrumentsin our Diagnostic Tools segment were down 31%$0.5 million and net sales of consumables were downor 3%14% for the comparable sixthree month periods.months ended March 31, 2012 compared to the same period in 2011. Our gross profit margin increaseddecreased from 51%56% for the sixthree months ended June 30, 2010March 31, 2011 to 58%43% for the same period in 2011. Laboratory Services gross margin increased from 36%2011 in the six months ended June 30, 2010 to 56% for the same period in 2011.. Loss from operations was $$2.4 million for the sixthree months ended June 30, 2011March 31, 2012 compared to $1.4$0.8 million for the sixthree months ended June 30, 2010March 31, 2011.
As of June 30, 2011March 31, 2012, we had cash and cash equivalents of $2.619.3 million.
Outlook
Our laboratory services revenues grew 292% over the same quarterWe anticipate continued growth in 2010. Within this business our pharmacogenomics research services grew 223% to $1.0 million for the second quarter of 2011. Testing volume and revenues increased2012 in both our Neurology lab business and in our FAMILION product group with sales of $1.2 million for Neurology and $2.6 million for FAMILION. The FAMILION tests are an important means of identifying cardiac channelopathies, potentially life threatening defects in the heart. Both doctors and patients recognize the benefit that these tests provide in at risk populations, and we expect to continue to expand this franchise.
As we experienced in the first quarter, and again this quarter, our significant stock price increase has resulted in non-cash charges due to the revaluationall three of our preferred stock conversion featurebusiness units, Clinical Labs, Pharmacogenomic Services and warrant liability. In the first quarter, this resulted in an expense of $2 million and, with further strengthening of our share price in second quarter; the expense reached an additional $4.2 million bringing the total expense for the first six months of 2011 to $6.3 million. While this non-cash expense appears significant this does not affect our cash flow.
Transgenomic anticipates growth in both our diagnostics and our laboratory services businessesDiagnostic Tools, as we commercialize new assay technologies and tests we have developed internally or in-licensed, expandingand as we expand into other markets and regions worldwide.
Our FAMILION franchise, which we acquired in December 2010, includes eleven tests for inherited cardiac disorders. We continue to believe that there is significant opportunity to expand this business based on increased use of existing tests and the launch of new products into the marketplace. In May, the Heart Rhythm Society issued new diagnostic guidelines supporting the use of some of our menu.key cardiac tests. In November 2011, we launched two new genetic tests at the annual American Heart Association meeting. These include our PGxPredict:CLOPIDOGREL Panel, a uniquely comprehensive test to predict a patient's response to clopidogrel (Plavix®), the most widely prescribed antiplatelet drug used to reduce the risks of death, stroke and heart attack, and a test for familial atrial fibrillation.
The clopidogrel response test, in particular, we have substantially increased our footprintis a significant opportunity for Transgenomic, as it is the only test which analyzes the genes CYP2C19 and ABCB1 to help predict a patient's ability to absorb and metabolize clopidogrel. Clopidogrel is taken in an inactive form, known as a prodrug, and must be absorbed through the intestine and then metabolized by the liver to form the active drug in a process controlled by these genes. Patients with dysfunctional or lower functioning ABCB1 or CYP2C19 are at heightened risk for cardiovascular events than patients with normal protein function due to poorer availability of the active drug. The risk associated with dysfunctional or lower functioning CYP2C19 prompted the FDA in 2010 to add a black box warning to the clopidogrel label.
In March of 2012, Transgenomic announced the publication of a new study by researchers at Vanderbilt University in the molecular diagnostics laboratory market throughjournal “Clinical Pharmacology and Therapeutics.” This large, independent study, the third such study examining CYP2C19 and ABCB1, demonstrated the importance of both genes in determining which patients would benefit from treatment with clopidogrel and which should pursue alternative treatment. ABCB1 is proprietary to Transgenomic, protected by an issued patent in Europe and pending patent in the US. There are approximately 6 million new patients prescribed Plavix each year, of which about 47% will not fully benefit from their therapy because of genetic variations in either CYP2C19 or ABCB1. This highlights a need for broad-based testing, and represents a potential multi-billion dollar opportunity for Transgenomic's Clinical Laboratories division.
In June 2011, we launched our acquisitionNuclear Mitome Test, which employs next-generation sequencing technology to identify mutations in 448 genes, and represents the most comprehensive genetic test available for mitochondrial disorders to date. We recently presented clinical findings from 78 patients tested for nuclear mitochondrial disorders using this test 2012 Annual Meeting of the FAMILION laboratory testing business. This acquisition brings us historic annual revenuesAmerican College of approximately $13.0 million and a much larger presenceMedical Genetics. The findings, presented by Dr. Jeana DaRe, Assistant CLIA Laboratory Director at Transgenomic, included details of both with insurers and patients. This acquisition also provides us access to higher throughput technologies and an expert staff to aid us as we continue growing our reference laboratory businessthe technical performance of the Nuclear Mitome Test as well as consolidation opportunities alreadythe wide variety of clinically revealing results discovered through its use. In addition, Dr. DaRe highlighted two case studies. In both cases, patients achieved a definitive diagnosis through the identification of genetic mutations far outside the normal spectrum of genetic testing. These results concluded the patients' diagnostic odysseys, which had encompassed wide-ranging genetic and non-genetic tests as well as consultation with various medical specialties, all of which had failed to pinpoint the underlying disease. These results are a typical occurrence in laboratory operations, billing and customer service functions.
patients sent for NuclearMitome testing.
In our PharmacogenomicPharmacogenomics Services Lab,Unit, we continue to perform cancer pathway gene mutation analysis and other associated genomics service testing for a number of pharmaceutical companies: both for pre-clinical drug discovery projects and phase II and III clinical trials. Although we may experience variability in quarter-to-quarter revenues based on the timing of projects or when specimens may arrive, we continue to experience growth in this area of the business. We can now analyze a patient's blood serum
rather than a tumor to detect DNA mutations, using our recently licensed ultra-sensitive DNA mutation detection technology, termed “COLD-PCR”, and a significant improvement to COLD-PCR termed “Ice“ICE COLD-PCR”. This is a significant achievement, and we believe it should lead to faster growth of our pharmacogenomics research services as pharmaceutical companies adopt this novel approach for both drug and disease research.
In additionFebruary, we announced our collaboration with MD Anderson in a study to Iceevaluate the use of our high sensitivity ICE COLD-PCR which offers sensitivity improvements as much as 1,000 times higher than routinemutation detection technology in analysis of DNA testingisolated from circulating tumor cells (CTCs) in blood samples from patients with advanced cancer. CTC's are very rare in blood and difficult to analyze using traditional genomic methods. Our ICE COLD PCR is a simple assay technology that has the ability to enrich very low levels of mutant DNA, allowing for the detection of tumor biomarkers using standard DNA sequencing techniques. With this technology, we have recently discoveredthe potential to determine the best therapeutic options for patients. CTC analysis may also be feasible when there is no solid tumor to biopsy. Since the analysis is done in blood, the procedure is also much easier and safer than a technique to further improve mutation detection sensitivity of standard Sanger sequencing. We have termed this new discovery “BLOCker-Sequencing”tumor biopsy.
For our instruments and consumables business, we are combining this new discovery with our Ice COLD-PCR program to bring what we believe to be the most accurate and sensitive mutation detection technology availableexperienced an increase in the market today.
We believe that this combinationnumber of technologies offers usunits sold as compared to a year ago, although the abilitymix of instruments sold resulted in a lower average sales prices. As a reminder, our instrument sales translate into incremental revenue from consumables and service contract sales, providing compounded and repeating revenue growth. During the first quarter, we began delivering instruments to develop tests for cancer detection or to measure cancer recurrence at earlier stagesour European distribution partner, A. Menarini Diagnostics, one of the leading diagnostic distribution companies in Europe. Our agreement with Menarini, which was signed last November, covers the disease process, aiding in drug selection or drug resistance determinations for these patients. By giving physicians the tools to select or change therapy earlier in the disease process, we can help improve outcomes for cancer patientssale and their families.
We continue to leveragemarketing of our core instrument business for on-going instrumentnewly-licensed WAVE® MCE instruments and consumable supplies sales worldwideconsumables, as well as employing our instrument technology and related expertise in our two laboratory services businesses.SURVERYOR® Scan mutation detection kits for the European Union. We believe this partnership has significant revenue potential over the next several years.
Although the WAVE System is a fully matured technology, and both it and its corresponding consumable sales growth in our traditional markets are shrinking, we are expanding our opportunities by selling systems into new geographic areas, including the Middle East and Asia, to continue the revenue from our instrument related business segment. We also continue to sell OEM instruments worldwide for pre-analytical karyotyping automation and to select markets in Europe for Image Analysis.
Our menu of cancer pathway gene mutation kits continues to advance. Market validation trialsIt terms of our BRAFLaboratory Services Unit, our New Haven, Connecticut laboratory testing facility experienced a software failure in the first quarter that resulted in reduced sample processing capacity. The Company has reviewed and PIK3CA kits were begun this quarter. Further, we made significant progress in applying these kits, along with our CE-IVD marked K-RAS kit,improved its internal procedures to a high-throughput OEM analyzersecure proper function of the laboratory information management system (LIMS). The Company believes that will be marketed as afull sample processing capacity has been restored and expects to complete system.
Finally, we continue to look for opportunities to diversify into new markets, particularly in oncology, where the sensitivities of our technologies provide significant clinical benefit. We have also embarked on several academic collaborations to further validate our newest technologies and better determine how they can and will be used in clinical settings for patients undergoing treatment for cancer.
sample backlog caused by the LIMS failure by June 2012.
Uncertainties
We have historically operated at a loss and have not consistently generated sufficient cash from operating activities to cover our operating and other cash expenses. While weWe have been able to historically finance our operating losses through borrowings or from the issuance of additional equity, we may not be able to obtain such funding due to the tightened credit markets.equity. At June 30, 2011March 31, 2012 we had cash and cash equivalents of $2.619.3 million. We believe that existing sources of liquidity are sufficient to meet expected cash needs during 2011.2012 and beyond.
The uncertainty of the current general economic conditions could negatively impact our business in the future. There are many factors that affect the market demand for our products and services that we cannot control. Demand for our Instrument Related BusinessDiagnostic Tools business is affected by the needs and budgetary resources of research institutions, universities and hospitals. The instrument purchase represents a significant expenditure by these types of customers and often requires a long sales cycle. These customers may not have the funding available to purchase our instruments. Competition and new instruments in the marketplace also may impact our sales.
We have revaluationtranslation risk whichthat occurs when transactions are doneconsummated in a currency other than British Pound Sterling, which is the functional currency of our foreign subsidiary. These transactions, which are most often consummated in Euros, must be translated into British Pound Sterling. These transactions must be revalued withinIn addition, results of operations and the Transgenomic, Limited ledger, whose functionalbalance sheet of our foreign subsidiary are translated from British Pound Sterling to our reporting currency, which is the British Pound Sterling. The majority of the transactions on this ledger are in Euro.U.S. Dollar. As a result we are subject to exchange rate risk. Fluctuations in the foreign exchange rates could causeimpact our business to be impacted.and financial results.
Results of Operations
Three Months Ended June 30, 2011March 31, 2012 and 20102011
Net Sales. Net sales consisted of the following:
|
| | | | | | | | | | | | | | |
| | Dollars in Thousands |
| | Three Months Ended | | |
| | June 30, | | Change |
| | 2011 | | 2010 | | $ | | % |
| Laboratory Services: | | | | | | | |
| Molecular Clinical Reference Laboratory | $ | 3,864 |
| | $ | 931 |
| | $ | 2,933 |
| | 315 | % |
| Pharmacogenomics Research Services | 1,002 |
| | 310 |
| | 692 |
| | 223 | % |
| | 4,866 |
| | 1,241 |
| | 3,625 |
| | 292 | % |
| Instrument Related Business: | | | | | | | |
| Bioinstruments | 1,319 |
| | 2,217 |
| | (898 | ) | | (41 | )% |
| Bioconsumables | 1,482 |
| | 1,637 |
| | (155 | ) | | (9 | )% |
| | 2,801 |
| | 3,854 |
| | (1,053 | ) | | (27 | )% |
| Total Net sales | $ | 7,667 |
| | $ | 5,095 |
| | $ | 2,572 |
| | 50 | % |
|
| | | | | | | | | | | | | | |
| | Dollars in Thousands |
| | Three Months Ended | | |
| | March 31, | | Change |
| | 2012 | | 2011 | | $ | | % |
| Clinical Laboratories | $ | 3,371 |
| | $ | 3,487 |
| | $ | (116 | ) | | (3 | )% |
| Pharmacogenomics Services | 630 |
| | 270 |
| | 360 |
| | 133 | % |
| Diagnostic Tools | 3,205 |
| | 3,723 |
| | (518 | ) | | (14 | )% |
| Total Net sales | $ | 7,206 |
| | $ | 7,480 |
| | $ | (274 | ) | | (4 | )% |
NetClinical Laboratories net sales of Laboratory Services increaseddecreased $3.60.1 million during the three months ended June 30, 2011March 31, 2012 compared to the same period in 2010. Laboratory Services sales includes both the Molecular Clinical Reference Laboratory Services and the
Pharmacogenomics Research Services. The Molecular Clinical Reference Laboratory Services net sales were up $2.9 million compared to the three months ended June 30, 20102011. Of this increaseOur laboratory information management system (LIMS) installed at our New Haven, Connecticut laboratory testing facility experienced a software failure that temporarily resulted in reduced sample processing capacity which impacted revenue for the Molecular Clinical Reference Laboratory revenue, $2.7 million is due to our acquisitionfirst quarter of the FAMILION family of genetic tests on December 29, 2010. In addition, our revenue increased for our cardiology family of tests due to the mix of tests performed and the average revenue per test by $0.2 million .2012.
The Pharmacogenomics Research Services net sales of $1.00.6 million during the three months ended June 30, 2011March 31, 2012 increased by $0.70.4 million compared to the same period of second2011 quarterdue to the volume of 2010. The increasegenetic testing performed in revenue is a direct result of Transgenomic being selectedconnection with various clinical trials at various stages by a majorour pharmaceutical company to perform highly sensitive mutational analyses on a large number of clinical trial samples in an expedited fashion. Due to impending deadlines set by the relevant agencies, the assays had to be performed both within a limited time frame and using methods considered to be the gold standard for mutation detection. Previous high-quality work performed for this client was a critical factor in choosing Transgenomic to run the assays. In addition, the Surveyor Scan/DNA sequencing methodologies used at Transgenomic met the requirements of sensitivity and specificity needed by the regulatory agencies. The successful completion of this project has led to additional signed contracts with this customer. Theclients. Pharmacogenomics Research Services net sales have peaks due to the nature of patient enrollment patterns inand the timing of clinical trials. While the overall revenue generated from genetic testing withinrelated to clinical trials is significant, it is usually spreadearned over the lengthduration of the trial. Therefore, each period for Pharmacogenomics Research Services should be considered on a standalone basis and is not indicative of future net sales.
Bioinstrument sales consist ofDiagnostic Tools net sales of our WAVE System and associated equipment that we manufacture or assemble, net sales from service contracts that we enter into with purchasers of our instruments, as well as sales of instruments we distribute for other manufacturers (“OEM equipment”). We also sell refurbished WAVE Systems in order to access additional customers. Bioinstrument net sales$3.2 million decreased $0.90.5 million, or 41%14%, during the three months ended June 30, 2011March 31, 2012 as compared to the same period in 2010. The decrease in bioinstrument net sales was due to fewer2011. We sold more instruments sold in the secondfirst quarter of 2011.2012 but they had a lower average sales price due to the mix of instruments sold. We sold onetwo OEM Equipment instruments in each of the first quarters of 2012 and 2011. We sold nine WAVE instrumentinstruments in the secondfirst quarter of 20112012 compared to 14 in the second quarter of 2010. Demand for WAVE Systems has been affected by significant competitive challenges from traditional (i.e. sequencing) and evolving technologies. We sold one OEM instrument in the second quarter of 2011 compared to zerofour in the secondfirst quarter of 2010.
2011. In the first quarter of 2012, we began delivering instruments for our exclusive distribution agreement with A. Menarini Diagnostics for our SURVEYOR® Scan and WAVE MCE (Micro-Capillary Electrophoresis) Mutation Detection system which accounted for the increase in WAVE system sales. Net sales of bioconsumables were down 9% or $0.2$0.5 million during the three months ended June 30, 2011March 31, 2012 compared to 2010. Thethe same period in 2011. Bioconsumable sales volumes in both the United States and Europe hadwere lower volumes in the secondfirst quarter of 20112012 compared to the secondfirst quarter of 2010.2011.
CostsCost of Goods Sold. Costs of goods sold include material costs for the products that we sell and substantially all other costs associated with our manufacturing facilities (primarily personnel costs, rent and depreciation). It also includes direct costs (primarily personnel costs, rent, supplies and depreciation) associated with our LaboratoryClinical Laboratories and Pharmacogenomics Services operations. Cost
Gross Profit. Gross profit and gross margins for each of goods sold consisted of the following:our business segments were as follows:
|
| | | | | | | | | | | | | | |
| | Dollars in Thousands |
| | Three Months Ended | | |
| | June 30, | | Change |
| | 2011 | | 2010 | | $ | | % |
| Laboratory Services: | | | | | | | |
| Molecular Clinical Reference Laboratory | $ | 1,435 |
| | $ | 495 |
| | $ | 940 |
| | 190 | % |
| Pharmacogenomics Research Services | 367 |
| | 328 |
| | 39 |
| | 12 | % |
| | 1,802 |
| | 823 |
| | 979 |
| | 119 | % |
| Instrument Related Business: | | | | | | | |
| Bioinstruments | 585 |
| | 1,024 |
| | (439 | ) | | (43 | )% |
| Bioconsumables | 725 |
| | 761 |
| | (36 | ) | | (5 | )% |
| | 1,310 |
| | 1,785 |
| | (475 | ) | | (27 | )% |
| Costs of Goods Sold | $ | 3,112 |
| | $ | 2,608 |
| | $ | 504 |
| | 19 | % |
|
| | | | | | | | | | | | | |
| | Dollars in Thousands |
| | Three Months Ended | | |
| | March 31, | | Margin % |
| | 2012 | | 2011 | | 2012 | | 2011 |
| Clinical Laboratories | $ | 1,274 |
| | $ | 1,900 |
| | 38 | % | | 54 | % |
| Pharmacogenomics Services | 374 |
| | (113 | ) | | 59 | % | | (42 | )% |
| Diagnostic Tools | 1,456 |
| | 2,367 |
| | 45 | % | | 64 | % |
| Gross Profit | $ | 3,104 |
| | $ | 4,154 |
| | 43 | % | | 56 | % |
Gross profit was $4.63.1 million million or 59%43% of total net sales during the secondfirst quarter of 2011,2012, compared to $2.54.2 million, or 49%56% of total net sales during the same period of 2010.2011. During the three months ended June 30, 2011March 31, 2012, the gross margin for the Laboratory Services was 63% as compared to 34% in the same period of 2010. The gross margin on the Clinical Reference Laboratory was 63% for the second quarter of 2011 compared to 47% for the second quarter of 2010. The three months ended June 30, 2011 include the business acquired in the acquisition of the FAMILION family of genetic tests. Pharmacogenomics gross margin increased from negative 6% for the three months ended June 30, 2010 to 63% for the three months ended June 30, 2011. Pharmacogenomics has a relatively fixed cost base so the increase in revenue directly impacts margins. The bioinstrument margin increased from 54%
in the three months endedLaboratories was June 30, 201038% as compared to 56%54% in the same period of 2011. Margins on bioconsumables2011. Our laboratory information management system (LIMS) installed at our New Haven, Connecticut laboratory testing facility experienced a software failure that resulted in reduced sample processing capacity which impacted revenue and gross profit for the first quarter of 2012. Clinical Laboratories has a relatively fixed-cost base so any decrease in revenue directly impacts gross margins. Pharmacogenomics Services gross margin increased from negative 42% for the three months ended March 31, 2011 to 59% for the three months ended March 31, 2012. Pharmacogenomics Services has a relatively fixed-cost base and any increase or decrease in revenue directly impacts gross margins. Diagnostic Tools gross margin decreased from 54%64% in the three months ended March 31, 2011 to 51%45% in 2011.the same period of 2011 due to the mix of instruments sold and lower bioconsumables sales which also have a relatively fixed-cost base.
Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily consist of personnel costs, marketing, travel and entertainment costs, professional fees, and facility costs. In addition, the effects of foreign currency revaluation isare included here.in selling, general and administrative expenses. Our selling, general and administrative costs increased $2.60.7 million from $3.04.3 million to $5.65.0 million during the three month period ended June 30, 2011March 31, 2012 compared to the same period in 2010. The primary increase in our selling, general and administrative costs is due to the acquisition of the FAMILION family of genetic tests of $1.2 million.2011. In addition, we had $0.8 million in expense related to the vesting of the employee stock option grants, bad debt charges of $0.7$0.5 million, and amortization of acquired intangible assetsstock option expense of $0.3 million.million during the three months ended March 31, 2012. Foreign currency revaluation loss for the three months ended June 30, 2011March 31, 2012 were less than $0.1 millionwas nominal compared to $0.4$0.1 million in revaluation lossgain for the three months ended June 30, 2010March 31, 2011.
Research and Development Expenses. Research and development expenses primarily include personnel costs, legal fees, outside services, collaboration expenses, supplies, and facility costs and are expensed in the period in which they are incurred. For the three months ended secondMarch 31, 2012 quarter of 2011 and 20102011, these costs totaled $0.60.5 million and $0.50.6 million, respectively. Research and development expenses totaled 8% and 10%7% of net sales during the three months ended June 30, 2011March 31, 2012 and 2010,2011, respectively. The decrease as a percentage of net sales is due primarily to the consolidation of our research and development activities in Omaha, Nebraska which is offset by legal costs to defend a patent.
Other Income (Expense). Other expense for the three months ended June 30, March 31, 2012 and 2011 includes the expense on preferred stock which is due to the increase in fair value of the Preferred Stock conversion feature and warrants. This is a non-cash item.interest expense.
Income Tax Expense (Benefit). Income tax benefitexpense for the three months ended June 30, 2011March 31, 2012 was a benefit of $0.1 million.nominal. This is the result of the change in deferred tax assets and liabilities reported in the financial statements of our subsidiary outside the U.S.foreign subsidiary. This tax benefitexpense is partially offset bydue to tax expense related to state and franchise taxes as well as reserves for uncertain income taxes. We believe the tax benefit recorded will be offset in future periods by a tax expense, related to income reported in financial statements of our subsidiary outside the U.S. Income tax benefitexpense for the three months ended June 30, 2010 was less than $0.1 million.
Results of Operations
Six Months Ended June 30, 2011 and 2010
Net Sales. Net sales consisted of the following:
|
| | | | | | | | | | | | | | |
| | Dollars in Thousands |
| | Six Months Ended | | |
| | June 30, | | Change |
| | 2011 | | 2010 | | $ | | % |
| Laboratory Services: | | | | | | | |
| Molecular Clinical Reference Laboratory | $ | 7,351 |
| | $ | 1,873 |
| | $ | 5,478 |
| | 292 | % |
| Pharmacogenomics Research Services | 1,272 |
| | 639 |
| | 633 |
| | 99 | % |
| | 8,623 |
| | 2,512 |
| | 6,111 |
| | 243 | % |
| Instrument Related Business: | | | | | | | |
| Bioinstruments | 3,157 |
| | 4,569 |
| | (1,412 | ) | | (31 | )% |
| Bioconsumables | 3,368 |
| | 3,456 |
| | (88 | ) | | (3 | )% |
| | 6,525 |
| | 8,025 |
| | (1,500 | ) | | (19 | )% |
| Total Net sales | $ | 15,148 |
| | $ | 10,537 |
| | $ | 4,611 |
| | 44 | % |
Net sales of Laboratory Services increased $6.1 million during the six months ended June 30, 2011 compared to the same period in 2010. Laboratory Services sales includes both the Molecular Clinical Reference Laboratory Services and the Pharmacogenomics Research Services. The Molecular Clinical Reference Laboratory Services net sales were up $5.5 million compared to the six months ended June 30, 2010. Of this increase in the Molecular Clinical Reference Laboratory revenue, $5.4 million is due to our acquisition of the FAMILION family of genetic tests on December 29, 2010.
The Pharmacogenomics Research Services net sales of $1.3 million during the six months ended June 30, 2011 increased $0.6 million compared to the second quarter of 2010. As previously discussed in the three months ended June 30, 2011, the
increase is due to the completion of a project with a major pharmaceutical company. The Pharmacogenomics Research Services net sales have peaks due to the nature of project related business. Each period for Pharmacogenomics Research Services should be considered on a stand alone basis and is not indicative of future net sales.
Bioinstrument sales consist of sales of our WAVE System and associated equipment that we manufacture or assemble, net sales from service contracts that we enter into with purchasers of our instruments, as well as sales of instruments we distribute for other manufacturers (“OEM equipment”). We also sell refurbished WAVE Systems in order to access additional customers. Bioinstrument net sales decreased $1.4 million, or 31%, during the six months ended June 30, 2011 as compared to the same period in 2010. The decrease in bioinstrument net sales was due to fewer instruments sold in the six months ended June 30, 2011. There were three OEM instruments sold in 2011 compared to five in 2010. We sold five WAVE instruments in 2011 compared to18 in 2010. Demand for WAVE Systems has been affected by significant competitive challenges from traditional (i.e. sequencing) and evolving technologies.
Net sales of bioconsumables were down 3% or $0.1 million during the six months ended June 30, 2011 compared to 2010. The volume sold in the United States increased by $0.2 million which was offset by lower volumes in Europe of $0.3 million.
Costs of Goods Sold. Costs of goods sold include material costs for the products that we sell and substantially all other costs associated with our manufacturing facilities (primarily personnel costs, rent and depreciation). It also includes direct costs (primarily personnel costs, rent, supplies and depreciation) associated with our Laboratory Services operations. Cost of goods sold consisted of the following:
|
| | | | | | | | | | | | | | |
| | Dollars in Thousands |
| | Six Months Ended | | |
| | June 30, | | Change |
| | 2011 | | 2010 | | $ | | % |
| Laboratory Services: | | | | | | | |
| Molecular Clinical Reference Laboratory | $ | 3,023 |
| | $ | 957 |
| | $ | 2,066 |
| | 216 | % |
| Pharmacogenomics Research Services | 750 |
| | 654 |
| | 96 |
| | 15 | % |
| | 3,773 |
| | 1,611 |
| | 2,162 |
| | 134 | % |
| Instrument Related Business: | | | | | | | |
| Bioinstruments | 1,107 |
| | 1,956 |
| | (849 | ) | | (43 | )% |
| Bioconsumables | 1,526 |
| | 1,599 |
| | (73 | ) | | (5 | )% |
| | 2,633 |
| | 3,555 |
| | (922 | ) | | (26 | )% |
| Costs of Goods Sold | $ | 6,406 |
| | $ | 5,166 |
| | $ | 1,240 |
| | 24 | % |
Gross profit was $8.7 million or 58% of total net sales during the six months ended June 30, 2011, compared to $5.4 million or 51% during the same period of 2010. During the six months ended June 30, 2011, the gross margin for the Laboratory Services was 56% as compared to 36% in the same period of 2010. The gross margin on the Clinical Reference Laboratory was 59% for the six months ended June 30, 2011 compared to 49% for the same period of 2010. The six months ended June 30, 2011 include the business acquired in the acquisition of the FAMILION family of genetic tests. Pharmacogenomics gross margin increased from negative 2% for the six months ended June 30, 2010 to 41% for the six months ended June 30, 2011. Pharmacogenomics has a relatively fixed cost base so the increase in revenue directly impacts margins. The bioinstrument margin increased from 57% in the six months ended June 30, 2010 to 65% in the same period of 2011. Margins on bioconsumables increased from 54% to 55% in 2011.
Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily consist of personnel costs, marketing, travel and entertainment costs, professional fees, and facility costs. In addition, foreign currency revaluation is included here. Our selling, general and administrative costs increased from $5.5 million to $9.9 million during the six month period ended June 30, 2011 compared to the same period in 2010. The primary increase in our selling, general and administrative costs is due to the acquisition of the FAMILION family of genetic tests. In addition, we had $0.8 million in expense related to the vesting of the employee stock option grants. Foreign currency revaluation loss for the six months ended June 30,March 31, 2011 was $0.1 million compared to $0.5 million in revaluation loss for the six months ended June 30, 2010.
Research and Development Expenses. Research and development expenses primarily include personnel costs, legal fees, outside services, collaboration expenses, supplies, and facility costs and are expensed in the period in which they are incurred. During the six months ended June 30, 2011 and 2010 these costs totaled $1.1 million and $1.3 million, respectively. Research and
development expenses totaled 7% and 13% of net sales during the six months ended June 30, 2011 and 2010, respectively. The decrease is due primarily to the consolidation of our research and development activities in Omaha, Nebraska which is offset by legal costs to defend a patent.
Other Income (Expense). Other income for the six months ended June 30, 2011 includes an award of a federal grant under the Qualifying Therapeutic Discovery Project of $0.2 million, net of consulting fees. The expense on preferred stock is due to the increase in fair value of the Preferred Stock conversion feature and warrants. This is a non-cash item.
Income Tax Expense (Benefit). Income tax benefit for the six months ended June 30, 2011 was a benefit of $0.1 million. This is the result of the change in deferred tax assets and liabilities reported in the financial statements of our subsidiary outside the U.S. This tax benefit is partially offset by tax expense related to state and franchise taxes as well as reserves for uncertain income taxes. We believe the tax benefit recorded will be offset in future periods by a tax expense, related to income reported in financial statements of our subsidiary outside the U.S. Income tax expense for the six months ended June 30, 2010 was less than $0.1 million.
Liquidity and Capital Resources
Our working capital positions at June 30, 2011March 31, 2012 and December 31, 20102011 were as follows:
| | | | Dollars in Thousands | Dollars in Thousands |
| | June 30,
2011 | | December 31, 2010 |
| | Change | March 31,
2012 | | December 31, 2011 |
| | Change |
| Current assets (including cash and cash equivalents of $2,639 and $3,454, respectively) | $ | 14,002 |
| | $ | 15,034 |
| | $ | (1,032 | ) | |
| Current assets (including cash and cash equivalents of $19,291 and $4,946, respectively) | | $ | 31,037 |
| | $ | 17,198 |
| | $ | 13,839 |
|
| Current liabilities | 9,905 |
| | 8,253 |
| | 1,652 |
| 15,624 |
| | 16,328 |
| | (704 | ) |
| Working capital | $ | 4,097 |
| | $ | 6,781 |
| | $ | (2,684 | ) | $ | 15,413 |
| | $ | 870 |
| | $ | 14,543 |
|
In February 2012, we entered into a definitive agreement with institutional and other accredited investors and raised approximately $22.0 million in a Private Placement financing which included $3.0 million in convertible notes issued in December 2011 that were converted into shares of our common stock as part of the Private Placement financing. Net proceeds of the Private Placement were $17.4 million.
Pursuant to the Company's equity financing completed on February 2, 2012, the Company is obligated to pay PGxHealth, LLC (“PGx”) an aggregate of $5.5 million as a prepayment under the senior secured promissory note (the “Note”). The working capital decreased dueCompany has accounted for the full prepayment amount as a current liability as of March 31, 2012. The Company has contacted PGx on numerous occasions to our payment obligations relatedmake arrangements for having the Company make the prepayment to our notes payable and capital leases, lower accounts receivable and increased accrued liabilities.PGx in accordance with the terms of the Note, as well as to coordinate the timing of the prepayment. However, PGx has not responded to any of the Company's outreach efforts. The Company intends to continue to comply with the original terms of the Note.
We have historically operated at a loss and have not consistently generated sufficient cash from operating activities to cover our operating and other cash expenses. WhileHistorically we have been able to historically finance our operating losses through borrowings or from the issuance of additional equity, we currently have no plans to secure additional borrowings or to issue additional equity securities for this purpose.equity. At June 30, 2011March 31, 2012, we had cash and cash equivalents of $2.619.3 million. We believe that existing sources of liquidity are sufficient to meet expected cash needs during 2011, we will need to increase our net sales,in 2012 and focus on the integration of the FAMILION acquisition to reduce our operating expenses in order to be assured of meeting our liquidity needs on a long-term basis.beyond. However, we cannot assure yoube certain that we will be able to increase our net sales, or further reduce our expenses or raise further capital or equity and, accordingly,additional capital. Accordingly, we may not have sufficient sources of liquidity to continue our operations indefinitely. We continue to explore additional sources
Analysis of Cash Flows
SixThree Months Ended June 30, 2011March 31, 2012 and 20102011
Net Change in Cash and Cash Equivalents. Cash and cash equivalents decreasedincreased by $0.814.3 million during the sixthree months ended June 30, 2011March 31, 2012 compared to a decrease of $0.20.3 million during the sixthree months ended June 30, 2010March 31, 2011. During the sixthree months ended June 30, 2011March 31, 2012 we used cash of $2.8 million in operating activities, $0.3 millionin investing and financing activities, which was offset by cash provided in operatingby financing activities and foreign currency exchange revaluation.of $17.3 million . In 2010,the three months ended March 31,2011, net cash used inprovided by operating activities was less than $0.1$0.1 million $0.1, $0.1 million was used in investing activities and $0.1$0.3 million impact of foreign currency exchange rates, which was offset by less than $0.1 million provided byused in financing activities.
Cash Flows Provided byBy or Used In Operating Activities. Cash flows provided byused in operating activities totaled $0.1$2.8 million during the sixthree months ended June 30, March 31, 2012 and compared to cash flows provided by operating activities of $0.1 million during the three months ended 2011, compared to. The cash flows used in operating activities of less than $0.1 million duringin 2012 include the same period of 2010.net loss and decrease in accounts payable, offset by non-cash items including the provision for losses on doubtful accounts, stock option expense and depreciation and amortization. The cash flows provided by operating activities in 2011 include the net loss and decrease in accounts receivable,payable, offset by the non-cash items which include revaluation of the preferred stock conversion feature and warrant liability, provision for losses on doubtful accounts and depreciation and amortization.
Cash Flows Used In Investing Activities. Cash flows used in investing activities totaled $0.40.3 million during the sixthree months ended June 30, 2011March 31, 2012 compared to cash flows used in investing activities of $0.1$0.1 million during the same period of 2010.2011. Cash flows used in investing activities in 20112012 include purchases of property and equipment of $0.2 million and additions to our patents
of $0.2$0.1 million. Cash flows used in investing activities in 20102011 consisted primarily of purchases of property and equipment.
Cash Flows Provided by or Used in Financing Activities. Cash flows used inprovided by financing activities were $0.617.3 million for the sixthree months ended June 30, 2011March 31, 2012. Cash provided by financing activities during the first quarter of 2012 included the proceeds from the issuance of 19,000,000 million shares of our common stock and from the issuance of common stock in connection with the exercise of stock options for 20,000 shares. Cash flows used in financing activities were for payments on debt and capital lease obligations. Cash flows used in financing activities were $0.3 million for the three months ended March 31, 2011. Cash flows used in financing activities were for principal payments on debt and capital lease obligations offset by the cash received from issuance of common stock due toin connection with the exercise of stock options for 10,000 shares during the first quarter of 2011. Cash flows provided by financing activities were less than $0.1 million for the six months ended June 30, 20102011. This resulted from the issuance of common stock due to the exercise of stock options for 100,000 shares during the second quarter of 2010.
Off-Balance Sheet Arrangements
At June 30, 2011March 31, 2012 and December 31, 2010,2011, we 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 that have or other contractually narroware reasonably likely to have a current or limited purposes.future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
Accounting policies used in the preparation of the consolidated financial statements may involve the use of management judgments and estimates. Certain of our accounting policies are considered critical as they are both important to the portrayal of our 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 judgments or estimates may vary under different assumptions or circumstances. Our critical accounting policies are discussed in our annual reportAnnual Report on Form 10-K for the fiscal year ended December 31, 2010.2011 filed with the Securities and Exchange Commission on March 14, 2012.
Recently Issued Accounting Pronouncements
Please refer to our annual reportAnnual Report on Form 10-K for the fiscal year ended December 31, 2010.2011 filed with the Securities and Exchange Commission on March 14, 2012. There have been no changes to those accounting pronouncements listed except as noted in noteFootnote B - Summary of Significant Accounting Policies to the notes to unaudited condensed consolidated financial statements contained in this report.
Impact of Inflation
We do not believe that price inflation or deflation had a material adverse effect on our financial condition or results of operations during the periods presented.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Translation Risk
Sales of products in foreign countries are mainly completed in either British Pounds Sterling or the Euro. Additionally, the British Pound Sterling is the functional currency of our wholly owned subsidiary, Transgenomic Limited. Results of operations and the Balance Sheet are translated from the functional currency of the subsidiary to our reporting currency of the U.S. Dollar. Results of operations for our foreign subsidiary are translated using the average exchange rate during the period. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. In addition, we have revaluation risk which occurs when the transaction is consummated in a currency other than the Bristish Pound Sterling. This transaction must be revalued within the Transgenomic Limited ledger, whose functional currency is the British Pound Sterling. The majority of the transactions on this ledger are in Euro. As a result we are subject to exchange rate risk and we do not currently engage in foreign currency hedging activities. A hypothetical 10% change in foreign currency exchange rates could have a meterial effect on our future operating results.
| |
| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures. Management performed, with the participation of our Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act.Act of 1934, as amended (the "Exchange Act"). Our disclosure controls and procedures are designed to provide reasonable assuranceensure that information required to be disclosed in the reports we file or submit under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’sSecurities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on the evaluation, the Company’sour Chief Executive Officer and our Chief Financial Officer concluded that, as of June 30, 2011March 31, 2012, Transgenomic’sour disclosure controls and procedures were effective.
We have evaluated the changes in our internal control over financial reporting that occurred during the three months ended June 30, 2011March 31, 2012 and concluded that there have not been any changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
We are subject to a number of claims of various amounts which arise out of the normal course of our business. In our opinion, the disposition of pending claims will not have a material adverse effect on our financial position, results of operations or cash flows.
An investmentWe may experience temporary disruptions and delays in processing tissue samples at our facilities.
We may experience delays in processing tissue samples caused by software and other errors. Recently, our laboratory information management system (LIMS) installed in our common stock involvesNew Haven, Connecticut laboratory testing facility experienced a number of risks. You should carefully consider eachsoftware failure that resulted in reduced sample processing capacity. Although we have reviewed and improved our internal procedures to secure proper function of the risks describedLIMS and we believe that the full sample processing capacity has been restored, there are no assurances that we will not experience future temporary delays or disruptions in processing samples at our New Haven, Connecticut facility or at our other facilities. Any delay in processing samples could have an adverse effect on our business, financial condition and results of operation.
Except as set forth above, there have been no material changes in our risk factors from those previously disclosed in Part 1, Item 1A of our annual reportAnnual Report on Form 10-K for the fiscal year ended December 31, 2010 before deciding to invest in our common stock. If any of2011 that was filed with the risks actually occur, our business, financial condition or results of operations could be negatively affected, the market price of our common stock or other securities could declineSecurities and you may lose all or part of your investment.
Note Regarding Risk Factors
The risk factors presented above and in Item 1A of our annual reportExchange Commission on Form 10-K for the fiscal year ended December 31, 2010 are all of the ones that we currently consider material. However, they are not the only ones facing our company. Additional risks not presently known to us, or which we currently consider immaterial, may also adversely affect us. There may be risks that a particular investor views differently from us, and our analysis might be wrong. If any of the risks that we face actually occur, our business, financial condition and operating results could be materially adversely affected and could differ materially from any possible results suggested by any forward-looking statements that we have made or might make. In such case, the trading price of our common stock could decline, and you could lose part or all of your investment. March 14, 2012.We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
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| | | |
| 3.1 |
| | Third Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to Registrant’sthe Registrant's Quarterly Report on Form 10-Q (Registration No. 000-30975) filed on November 14, 2005) |
| | | |
| 3.2 |
| | Amended and Restated Bylaws of the Registrant (incorporated by reference to Registrant’sExhibit 3(ii) to the Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on May 25, 2007) |
| | | |
| 3.3 |
| | Certificate of Designation of Series A Convertible Preferred Stock dated as of December 28, 2010 (incorporated by reference to Exhibit 3.1 to Registrant’sthe Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) |
| | | |
| 4.1 |
| | Form of Certificate of the Registrant’sRegistrant's Common Stock (incorporated by reference to Exhibit 4 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000) |
| | | |
| 4.2 |
| | Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-3 (Registration No. 333-111442) filed on December 22, 2003) |
| | |
| 4.3 |
| | Registration Rights Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-3 (Registration No. 333-111442) filed on December 22, 2003) |
| | |
| 4.4 |
| | Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004, as amended on April 15, 2004 (incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-3 (Registration No. 333-114661) filed on April 21, 2004) |
| | |
| 4.5 |
| | Registration Rights Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004 (incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-3 (Registration No. 333-114661) filed on April 21, 2004) |
| | |
| 4.6 |
| | Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated August 31, 2004 (incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-3 (Registration No. 333-118970) filed on September 14, 2004) |
| | |
| 4.7 |
| | Common Stock Purchase Warrant by and between the Registrant and Oppenheimer & Co., Inc. dated October 27, 2005 (incorporated by reference to Exhibit 10.34 to the Registrant's Annual Report on Form 10-K filed on March 31, 2006) |
| | |
| 4.8 |
| | Form of Series A convertibleConvertible Preferred Stock Purchase Agreement, dated December 29, 2010, by and among Transgenomic, Inc.,Warrant issued to Third Security Senior Staff 2008 LLC, Third Security Staff 2010 LLC, and Third Security Incentive 2010 LLC (incorporated by reference to Exhibit 4.14.2 to Registrant’sthe Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) |
| | | |
4.3 |
| | Form of Warrant (incorporated by reference to Exhibit 4.2 to Registrant’s Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) |
| | |
4.44.9 |
| | Registration Rights Agreement, dated December 29, 2010, by and among Transgenomic, Inc.,the Registrant, Third Security Senior Staff 2008 LLC, Third Security Staff 2010 LLC, and Third Security Incentive 2010 LLC (incorporated by reference to Exhibit 4.3 to Registrant’sthe Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) |
| | | |
4.54.10 |
| | First Amendment to Registration Rights Agreement dated November 8, 2011 (incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K filed on November 14, 2011) |
| | |
| 4.11 |
| | Secured Promissory Note, issued December 29, 2010 by Transgenomic, Inc.the Registrant in favor of PGxHealth, LLC (incorporated by reference to Exhibit 4.4 to Registrant’sthe Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) |
| | | |
4.64.12 |
| | Secured Promissory Note, issued December 29, 2010 by Transgenomic, Inc.the Registrant in favor of PGxHealth, LLC (incorporated by reference to Exhibit 4.5 to Registrant’sthe Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) |
| | | |
| 4.13 |
| | Convertible Promissory Note by and between the Registrant and Third Security Senior Staff 2008 LLC dated December 30, 2011 (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on January 6, 2012) |
| | |
| 4.14 |
| | Convertible Promissory Note by and between the Registrant and Third Security Staff 2010 LLC dated December 30, 2011 (incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed on January 6, 2012) |
| | |
| 4.15 |
| | Convertible Promissory Note by and between the Registrant and Third Security Incentive 2010 LLC dated December 30, 2011(incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on January 6, 2012) |
| | |
|
| | | |
| 4.16 |
| | Form of Warrant issued by the Registrant to the Third Security Entities on February 7, 2012 (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on February 7, 2012) |
| | |
| 4.17 |
| | Form of Warrant issued by the Registrant to the Investors on February 7, 2012 (incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed on February 7, 2012) |
| | |
| 4.18 |
| | Form of Registration Rights Agreement entered into by and among the Registrant, the Third Security Entities and the Investors dated February 2, 2012 (incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K filed on February 7, 2012) |
| | |
| 10.1 |
| | SubleaseSecurities Purchase Agreement dated December 29, 2010,entered into by and between Transgenomic, Inc.among the Registrant and Clinical Data, Inc.the Investors dated February 2, 2012 (incorporated by reference to Exhibit 10.1 to Registrant’sthe Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011)February 7, 2012) |
| | | |
10.231.1 |
| | NoncompetitionCertification of Craig J. Tuttle, President and Nonsolicitation Agreement, dated December 29, 2010 by and among PGxHealth, LLC, Clinical Data, Inc. and Transgenomic, Inc. (incorporated by reference to Exhibit 10.2 to Registrant’s Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) |
| | |
10.3 |
| | Security Agreement, dated December 29, 2010, by and between PGxHealth, LLC and Transgenomic, Inc. (incorporated by reference to Exhibit 10.3 to Registrant’s Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) |
| | |
31 |
| | CertificationsChief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended |
| | | |
3231.2 |
| | CertificationsCertification of Brett L. Frevert, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended |
| 32.1 |
| | Certification of Craig J. Tuttle, President and Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended |
| | |
| 32.2 |
| | Certification of Brett L. Frevert, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended |
| | | |
| 101.INS |
| | XBRL Instance Document * |
| | | |
| 101.SCH |
| | XBRL Taxonomy Extension Schema Document * |
| | | |
| 101.CAL |
| | XBRL Taxonomy Extension Calculation Linkbase Document * |
| | | |
| 101.DEF |
| | XBRL Taxonomy Extension Definition Linkbase Document * |
| | | |
| 101.LAB |
| | XBRL Taxonomy Extension Label Linkbase Document * |
| | | |
| 101.PRE |
| | XBRL Taxonomy Extension Presentation Linkbase Document * |
| | | |
| * |
| | Attached as Exhibit 101 to this report are documents formatted in XBRL information(Extensible Business Reporting Language). Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, the interactive data file is furnished anddeemed not filed or part of a registration statement or prospectus for purposes of Sections 11 andor 12 of the Securities Act of 1933, andas amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is otherwise not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document. these sections. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | |
| | | | |
| | | TRANSGENOMIC, INC. |
| | | | |
| Date: | August 12, 2011May 9, 2012 | By: | /S/ CRAIG J. TUTTLE |
| | | | Craig J. Tuttle President and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | |
| | By: | /S/ BRETT L. FREVERT |
| | | Brett L. Frevert Chief Financial Officer |
| | | (Principal Financial Officer and Principal Accounting Officer) |