| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the Quarterly Period Ended September 30, 2011 | |
For the Quarterly Period Ended September 30, 2010
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from _____ to _____ | |
For the transition period fromto
| Delaware | 911789357 | |
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| 12325 Emmet Street, Omaha, Nebraska | 68164 | |
| (Address of principal executive offices) | (Zip Code) | |
| Large accelerated filer | o | Accelerated filer | ||||
| o | ||||||
| Non-accelerated filer | o | Smaller Reporting Company | x | |||
49,379,822.
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| Item 6. | ||||
| Item 1. | Financial Statements |
CURRENT ASSETS: Cash and cash equivalents Accounts receivable (net of allowances for bad debts of $335 and $310, respectively) Inventories (net of allowances for obsolescence of $520 and $507, respectively) Prepaid expenses and other current assets Total current assets PROPERTY AND EQUIPMENT: Equipment Furniture, fixtures & leasehold improvements Less: accumulated depreciation OTHER ASSETS: Other assets (net of accumulated amortization of $524 and $525, respectively) CURRENT LIABILITIES: Accounts payable Other accrued expenses Accrued compensation Total current liabilities Other long-term liabilities Total liabilities STOCKHOLDERS’ EQUITY: Preferred stock, $.01 par value, 15,000,000 shares authorized, none outstanding Common stock, $.01 par value, 100,000,000 shares authorized, 49,289,672 and 49,189,672 shares outstanding, respectively Additional paid-in capital Accumulated other comprehensive income Accumulated deficit Total stockholders’ equity NET SALES COST OF GOODS SOLD Gross profit OPERATING EXPENSES: Selling, general and administrative Research and development Restructuring charges LOSS FROM OPERATIONS OTHER INCOME (EXPENSE): Interest, net Other, net LOSS BEFORE INCOME TAXES INCOME TAX EXPENSE (BENEFIT) NET LOSS BASIC AND DILUTED LOSS PER SHARE BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING (DEFICIT) Balance, January 1, 2010 Net loss Other comprehensive income (loss): Foreign currency translation adjustment, net of tax Comprehensive loss Non-cash stock-based compensation Issuance of shares for employee stock options Balance, September 30, 2010 CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net loss Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities: Depreciation, amortization and disposals Non-cash, stock based compensation Changes in operating assets and liabilities: Accounts receivable Inventories Prepaid expenses and other current assets Accounts payable Accrued expenses and accrued compensation Other long term liabilities Long term deferred income taxes Net cash flows provided by (used in) operating activities CASH FLOWS USED IN INVESTING ACTIVITIES: Purchase of property and equipment Change in other assets Net cash flows used in investing activities CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: Issuance of common stock Principal payments on capital lease obligations Net cash flows provided by financing activities EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH NET CHANGE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD CASH AND CASH EQUIVALENTS AT END OF PERIOD SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Interest Income taxes, net SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION Acquisition of equipment through capital leases The preferred stock conversion feature and warrant liability are recorded at fair value. See Footnote I. Three Months Ended September 30, 2010 Three Months Ended September 30, 2009 Nine Months Ended September 30, 2010 Nine Months Ended September 30, 2009 Three Months Ended September 30, 2010 Three Months Ended September 30, 2009 Nine Months Ended September 30, 2010 Nine Months Ended September 30, 2009 2010: Leasehold improvements Furniture and fixtures Production equipment Computer equipment Research and development equipment that would require an impairment analysis prior to our scheduled review. Classes of Property Equipment Less: Accumulated amortization Total following criteria are met: 2010 2011 2012 2013 Total minimum lease payments Less: Amount representing interest Present value of net minimum lease payments $0.1 million, respectively. Net sales of Diagnostic Tools products 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 record these instruments at fair value at each reporting date and changes will be recorded as an adjustment to earnings. The warrant liability and preferred stock conversion feature are considered level three financial instruments. See Footnote I. consolidated balance sheet as of adopted accounting pronouncements. our Form 10-Q for the three months ended March 31, 2011. Severance and related costs Facility closure costs Other Restructuring charges Severance and related costs Facility closure costs Other Total Finished goods Raw materials and work in process Demonstration inventory Less allowance for obsolescence Total Intellectual property Patents Other Total assets, net of applicable valuation allowances. million, respectively. 2010. related to income reported in financial statements of our subsidiary outside the U.S. Income tax expense for the Warrant Holder Various Institutional Holders (1) Laurus Master Fund, Ltd. (2) Laurus Master Fund, Ltd. (2) Laurus Master Fund, Ltd. (2) Laurus Master Fund, Ltd. (2) Laurus Master Fund, Ltd. (2) Total 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 Balance at January 1, 2010: Granted Exercised Forfeited Expired Balance at September 30, 2010: Exercisable at September 30, 2010: 2011 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. Net Sales Gross Profit Net Income (Loss) before Taxes Income Tax Expense (Benefit) Net Income (Loss) Depreciation/Amortization Restructuring Charges Interest Income, Net 2010 Net Sales Gross Profit Net Loss before Taxes Income Tax Expense (Benefit) Net Loss Depreciation/Amortization Restructuring Charges Interest Income Total Assets Instrument Related Business: Bioinstruments Bioconsumables Laboratory Services: Molecular Clinical Reference Laboratory Pharmacogenomics Research Services Total Net Sales 2010 United States Italy France Germany United Arab Emirates United Kingdom All Other Countries Total the FAMILION acquisition. Net sales from Pharmacogenomics Services increased by $ 2010. Our gross profit margin 2011 patients undergoing treatment for cancer. We have historically operated at a loss and have not consistently generated sufficient cash from operating activities to cover our operating 2012. business. Instrument Related Business: Bioinstruments Bioconsumables Laboratory Services: Molecular Clinical Reference Laboratory Pharmacogenomics Research Services Total Net sales Instrument Related Business: Bioinstruments Bioconsumables Laboratory Services: Molecular Clinical Reference Laboratory Pharmacogenomics Research Services Cost of goods sold lower bioconsumables sales which also have a relatively fixed-cost base. was $0.1 million compared to $0.2 million in revaluation gain for the three months ended September 30, 2010. Research and development expenses totaled development activities in Omaha, Nebraska. Instrument Related Business: Bioinstruments Bioconsumables Laboratory Services: Molecular Clinical Reference Laboratory Pharmacogenomics Research Services Total Net Sales Instrument Related Business: Bioinstruments Bioconsumables Laboratory Services: Molecular Clinical Reference Laboratory Pharmacogenomics Research Services Cost of goods sold which also have a relatively fixed-cost base. nine months ended September 30, 2011 was less than $0.1 million compared to $0.3 million in revaluation loss for the nine months ended September 30, 2010. Research and development expenses totaled development activities in Omaha, Nebraska, the benefit which is partially offset by legal costs to defend a patent. Current assets (including cash and cash equivalents of $4,589 and $5,642, respectively) Current liabilities Working capital payment obligations related to our notes payable and capital leases, and increased accrued liabilities. 2010. September 30, 2010
(unaudited) December 31,
2009 ASSETS $ 4,589 $ 5,642 3,536 4,522 3,658 3,552 646 738 12,429 14,454 10,371 9,972 3,836 3,834 14,207 13,806 (13,160 ) (12,839 ) 1,047 967 461 583 $ 13,937 $ 16,004 LIABILITIES AND STOCKHOLDERS’ EQUITY $ 889 $ 1,013 2,722 2,517 668 573 4,279 4,103 351 239 4,630 4,342 — — 498 497 139,715 139,703 1,644 1,645 (132,550 ) (130,183 ) 9,307 11,662 $ 13,937 $ 16,004 September 30, 2011 December 31, (unaudited) 2010 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,423 $ 3,454 Accounts receivable, net 7,591 7,601 Inventories, net 3,306 3,344 Other current assets 1,336 635 Total current assets 13,656 15,034 PROPERTY AND EQUIPMENT: Equipment 10,105 9,820 Furniture, fixtures & leasehold improvements 3,723 3,479 13,828 13,299 Less: accumulated depreciation (12,231 ) (11,697 ) 1,597 1,602 OTHER ASSETS: Goodwill 6,275 6,275 Intangibles (net of accumulated amortization of $1,142 and $519, respectively) 8,325 8,962 Other assets 121 154 $ 29,974 $ 32,027 LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable $ 1,721 $ 1,360 Accrued compensation 1,058 875 Short term debt 247 989 Current maturities of long term debt 1,234 — Accrued liabilities 3,834 3,231 Contractual obligation 1,363 1,628 Current portion of lease obligations 197 170 Accrued preferred stock dividend 450 — Total current liabilities 10,104 8,253 LONG TERM LIABILITIES: Long term debt less current maturities 7,405 8,640 Preferred stock conversion feature 8,000 1,983 Preferred stock warrant liability 3,200 2,351 Other long-term liabilities 974 843 Total liabilities 29,683 22,070 Redeemable Series A convertible preferred stock, $.01 par value, 3,879,307 shares authorized, 2,586,205 shares issued and outstanding 1,796 1,457 STOCKHOLDERS’ EQUITY(DEFICIT): 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, 49,379,822 and 49,289,672 shares issued and outstanding, respectively 499 498 Additional paid-in capital 140,486 139,730 Accumulated other comprehensive income 1,675 1,589 Accumulated deficit (144,165 ) (133,317 ) Total stockholders’ equity (deficit) (1,505 ) 8,500 $ 29,974 $ 32,027 Three Months Ended
September 30, Nine Months Ended
September 30, 2010 2009 2010 2009 $ 4,419 $ 5,046 $ 14,956 $ 15,508 2,402 2,293 7,568 7,291 2,017 2,753 7,388 8,217 2,159 2,215 7,623 7,922 613 938 1,952 2,468 72 — 72 — 2,844 3,153 9,647 10,390 (827 ) (400 ) (2,259 ) (2,173 ) — 1 1 14 — (1 ) — (4 ) — — 1 10 (827 ) (400 ) (2,258 ) (2,163 ) 71 (34 ) 109 (114 ) $ (898 ) $ (366 ) $ (2,367 ) $ (2,049 ) $ (0.02 ) $ (0.01 ) $ (0.05 ) $ (0.04 ) 49,289,672 49,189,672 49,228,561 49,189,672 Three Months Ended Nine Months Ended September 30, September 30, 2011 2010 2011 2010 NET SALES $ 8,253 $ 4,419 $ 23,400 $ 14,956 COST OF GOODS SOLD 3,808 2,402 10,248 7,568 Gross profit 4,445 2,017 13,152 7,388 OPERATING EXPENSES: Selling, general and administrative 4,364 2,159 14,272 7,623 Research and development 515 613 1,650 1,952 Restructuring charges 5 72 40 72 4,884 2,844 15,962 9,647 LOSS FROM OPERATIONS (439 ) (827 ) (2,810 ) (2,259 ) OTHER INCOME (EXPENSE): Interest income (expense), net (238 ) — (720 ) 1 Expense on preferred stock (600 ) — (6,866 ) — Other, net (2 ) — 231 — (840 ) — (7,355 ) 1 LOSS BEFORE INCOME TAXES (1,279 ) (827 ) (10,165 ) (2,258 ) INCOME TAX EXPENSE (BENEFIT) (9 ) 71 (120 ) 109 NET LOSS $ (1,270 ) $ (898 ) $ (10,045 ) $ (2,367 ) PREFERRED STOCK DIVIDENDS AND ACCRETION (275 ) — (803 ) — NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (1,545 ) $ (898 ) $ (10,848 ) $ (2,367 ) BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.03 ) $ (0.02 ) $ (0.22 ) $ (0.05 ) BASIC AND DILUTED WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING 49,327,527 49,289,672 49,306,861 49,228,561 20102011 Common Stock Outstanding
Shares Par
Value Additional
Paid-in
Capital Accumulated
Deficit Accumulated
Other
Comprehensive
Income (Loss) Total 49,189,672 $ 497 $ 139,703 $ (130,183 ) $ 1,645 $ 11,662 — — — (2,367 ) (2,367 ) (2,367 ) — — — — (1 ) (1 ) (2,368 ) — — (29 ) — — (29 ) 100,000 1 41 — — 42 49,289,672 $ 498 $ 139,715 $ (132,550 ) $ 1,644 $ 9,307 Common Stock Total Balance, January 1, 2011 49,289,672 $ 498 $ 139,730 $ (133,317 ) $ 1,589 $ 8,500 Net loss — — — (10,045 ) (10,045 ) (10,045 ) Other comprehensive income (loss): Foreign currency translation adjustment, net of tax — — — — 86 86 Comprehensive loss (9,959 ) Non-cash stock-based compensation — — 734 — — 734 Issuance of shares of stock 90,150 1 22 — — 23 Preferred stock accretion — — — (353 ) (353 ) Dividends on preferred stock — — — (450 ) — (450 ) Balance, September 30, 2011 49,379,822 499 140,486 (144,165 ) $ 1,675 $ (1,505 ) Nine Months Ended
September 30, 2010 2009 $ (2,367 ) $ (2,049 ) 523 615 (29 ) 151 969 1,461 (167 ) 709 90 20 (121 ) (142 ) 242 (557 ) (44 ) 29 20 — (884 ) 237 (141 ) (327 ) (25 ) (20 ) (166 ) (347 ) 42 — (57 ) — (15 ) — 12 — (1,053 ) (110 ) 5,642 4,771 $ 4,589 $ 4,661 $ — $ — 4 163 $ 286 — Nine Months Ended September 30, 2011 2010 CASH FLOWS USED IN OPERATING ACTIVITIES: Net loss $ (10,045 ) $ (2,367 ) Adjustments to reconcile net loss to net cash flows used in operating activities: Depreciation and amortization 1,506 523 Non-cash, stock based compensation 734 (29 ) Provision for losses on doubtful accounts 1,432 29 Provision for losses on inventory obsolescence 47 78 Preferred stock revaluation 6,866 — Changes in operating assets and liabilities: Accounts receivable (1,418 ) 940 Inventories (44 ) (245 ) Prepaid expenses and other current assets (269 ) 90 Accounts payable 137 (121 ) Accrued liabilities (131 ) 242 Other long term liabilities 268 (44 ) Long term deferred income taxes 18 20 Net cash flows used in operating activities (899 ) (884 ) CASH FLOWS USED IN INVESTING ACTIVITIES: Purchase of property and equipment (147 ) (141 ) Change in other assets (256 ) (25 ) Net cash flows used in investing activities (403 ) (166 ) CASH FLOWS USED IN FINANCING ACTIVITIES: Principal payments on capital lease obligations (165 ) (57 ) Issuance of common stock 23 42 Principal payment on note payable (659 ) — Net cash flows used in financing activities (801 ) (15 ) EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH 72 12 NET CHANGE IN CASH AND CASH EQUIVALENTS (2,031 ) (1,053 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,454 5,642 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,423 $ 4,589 SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Interest $ 495 $ — Income taxes, net 106 4 SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION Acquisition of equipment through capital leases $ 388 $ 286 Dividends accrued on preferred stock 450 — 20102011 and 20092010A. BUSINESS DESCRIPTIONA. BUSINESS DESCRIPTION provides innovative products for the purificationis a global biotechnology company advancing personalized medicine in cancer and analysis of nucleic acids used in the life sciences industry for research focused oninherited diseases through its proprietary molecular geneticstechnologies and diagnostics. We also provide genetic variation analytical services to the medical research,world-class clinical and research services. We have three complementary business segments.markets. Net sales are categorized as Instrument Related Business and Laboratory Services.Instrument Related Business:• Bioinstruments.Diagnostic Tools. Our flagshipproprietary 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 nearlyover 1,500 WAVE Systems as of September 30, 2010.2011. 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 third-party installedOEM 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 HPLC separationchromatography columns.Laboratory Services:Molecular Clinical Reference Laboratory. The molecular clinical reference laboratory specializes in mitochondrial and molecular diagnostic testing including genetic testing for oncology, hematology and inherited disorders. Located in Omaha, Nebraska, the molecular clinical reference laboratory operates in a Good Laboratory Practices compliant environment and is certified under the Clinical Laboratory Improvement Amendment (CLIA) as a high complexity lab and is accredited by CAP (College of American Pathologists).Pharmacogenomics Research Services. Pharmacogenomics research services are provided by our Contract Research Organization located in Omaha, Nebraska. It specializes in pharmocogenomic, biomarker and mutation discovery research serving the pharmaceutical and biomedical industries world-wide for disease research, drug and diagnostic development and clinical trial support.Although we have experienced recurring net losses (resulting in an accumulated deficit of $132.6 million at September 30, 2010) management believes existing sources of liquidity, including cash and cash equivalents of $4.6 million, are sufficient to meet expected cash needs through 2011. We will need to increase net sales in order to meet our liquidity needs on a long-term basis. If we cannot increase net sales, further reductions to operating expenses will be needed. In future periods, there is no assurance that we will be able to increase net sales or further reduce expenses and, accordingly, we may not have sufficient sources of liquidity to continue operations indefinitely.B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESB. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES wholly-ownedwholly owned subsidiary. All intercompany balances and transactions have been eliminated in consolidation. The more significant of those risks are presented below and throughout the notes to the financial statements.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Nine Months Ended September 30, 2010 and 20091.Use of Estimates.2.Concentration of Revenue Risk.No customer accounted for more than 10% of consolidated net sales during the three and nine months ended September 30, 2010 and 2009. For the three and nine months ended September 30, 2010 one customer accounted for more than 10% of the Laboratory Services net sales. This customer represented 16% of the Laboratory Services net sales for the three months ended September 30, 2010 and 15% of the Laboratory Services net sales for the nine months ended September 30, 2010. For the three and nine months ended September 30, 2009 one customer accounted for more than 10% of the Laboratory Services net sales. This customer represented 18% of the Laboratory Services net sales for the three months ended September 30, 2009 and 20% for the nine months ended September 30, 2009.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 September 30, 2010.20092010 was derived from our audited balance sheet as of that date. The accompanying consolidated financial statements as of and for the three and nine months ended September 30, 20102011 and 20092010 are unaudited and reflect all adjustments whichthat are, in the opinion of management, necessary for a fair presentation of the20092010 contained in our Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.20102011 and 2009: Dollars in Thousands Beginning
Balance Provision Write Offs Ending
Balance $ 295 $ 40 $ — $ 335 $ 358 $ (5 ) $ (8 ) $ 345 $ 310 $ 29 $ (4 ) $ 335 $ 388 $ 27 $ (70 ) $ 345 TRANSGENOMIC, INC. AND SUBSIDIARY2010:NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Nine Months Ended September 30, 2010 and 2009 Dollars in Thousands Provision Write Offs Three Months Ended September 30, 2011 $ 1,387 $ 205 $ (113 ) $ 1,479 Three Months Ended September 30, 2010 $ 295 $ 40 $ — $ 335 Nine Months Ended September 30, 2011 $ 334 $ 1,433 $ (288 ) $ 1,479 Nine Months Ended September 30, 2010 $ 310 $ 29 $ (4 ) $ 335 accounts.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. an 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.20102011 and 2009: Dollars in Thousands Beginning
Balance Provision Write Offs Ending
Balance $ 536 $ 12 $ (28 ) $ 520 $ 123 $ 257 $ (27 ) $ 353 $ 507 $ 78 $ (65 ) $ 520 $ 108 $ 298 $ (53 ) $ 353 Dollars in Thousands Provision Write Offs Three Months Ended September 30, 2011 $ 520 $ (2 ) $ (4 ) $ 514 Three Months Ended September 30, 2010 $ 536 $ 12 $ (28 ) $ 520 Nine Months Ended September 30, 2011 $ 518 $ 47 $ (51 ) $ 514 Nine Months Ended September 30, 2010 $ 507 $ 78 $ (65 ) $ 520 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 impactcost less accumulated depreciation.cost. Depreciation is computed by the straight-line method over the estimated useful lives of the related assets as follows:1 to 10 years 3 to 7 years 3 to 7 years 3 to 7 years 2 to 7 years Other Assets.Other assets include intellectual property, patents and other long-term assets.1.Intellectual Property.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 royaltiesDepreciation expense related to such licenses are expensed as incurred.2.Patents.We capitalize legal costs, filing feesproperty and other expenses associated with obtaining patents on new discoveriesequipment during the three months ended September 30, 2011 and amortize these costs using2010 was $0.2 million and $0.1 million, respectively. Included in depreciation for the straight-line method overthree months ended September 30, 2011 was less than $0.1 million related to equipment acquired under capital leases. Depreciation expense related to property and equipment during the shorternine months ended September 30, 2011 and 2010 was $0.5 million and $0.3 million, respectively. Included in depreciation for the nine months ended September 30, 2011 was $0.1 million related to equipment acquired under capital leases.legal lifepurchase price over fair value of the patent or its economic life beginning on the date the patentassets acquired and is issued.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Nine Months Ended September 30, 2010 and 2009Each of these assetsnot amortized. Goodwill is treated as long-lived assets. Long-lived assets will be tested for impairment on an annual basisannually. We perform this impairment analysis during the fourth quarter of each year or when a significant event occurs whichthat may impact impairment.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 three or 2010 or 2009.3.Other Long-Term Assets.2011Other long-term assets include U.S. security deposits and deferred tax assets, net of applicable valuation allowances.20102011 had vesting periods of one or three years from date of grant. None of the stock options outstanding at September 30, 20102011 are subject to performance or market-based vesting conditions.ninethree months ended September 30, 2010,2011, we recorded the recapture of compensation expense recovery of less than $0.1 million within the selling, general and administrative expense. The vesting of options exercisable for the purchase of 1.3 million shares was offset by the expense recovery for stock options which were forfeited due to the requisite service not being rendered. During the nine months ended September 30, 2009,2011, we recorded compensation expensesexpense of $0.2$0.7 million within selling, general and administrative expense as a result of the vesting of options exercisable for the purchase of 1.73.6 million shares. During the nine months ended September 30, 2010, we recorded compensation expense recovery 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. As of September 30, 2010,2011, there was less than $0.1$1.2 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.20102011 and 2009.2010. The fair value of the options granted during the nine months ended September 30, 2010 2011and 20092010 was estimated on theirthe respective grant dates using the Black-Scholes option pricing model. There were 75,000We granted 2.2 million stock options granted during the nine months ended September 30, 2010.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 1.98%1.87% based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected lifelives of fivefour years, based on expected exercise activity behavior; and volatility of 105% 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 hold the majority of the stock options and are expected to hold the options for five years. Forfeitures of 1.10% have been assumed.have beenwere assumed in the calculation.Capital LeasesThe followingan analysisrealized and earned when all of the leased property under capital leases. Dollars in Thousands Asset Balances at September 30 2010 2009 $ 286 $ — — — $ 286 $ — TRANSGENOMIC, INC. AND SUBSIDIARYIn our Pharmacogenomics Services, 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 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Nine Months Ended September 30, 2011 and 2010, and 2009The following is a schedule by years of future minimum lease payments under capital leases togetherdeferred net sales associated with pharmacogenomics research projects, included in the present value of the net minimum lease payments as of September 30, 2010.Year ending December 31: Dollars in Thousands $ 14 86 86 71 $ 257 (28 ) $ 229 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 likelyother accrued liabilities, was $0.1 million and less than not that they will not be realized.Net Sales Recognition.periods. Netperiods and net sales associated with these contracts are deferred and recognized ratably over the service period. At September 30, 20102011 and September 30, 2009,2010, deferred net sales, mainly associated with our service contracts, included in the balance sheet in other accrued expenses,liabilities, was approximately $1.5 million and $1.4 million respectively 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 expected reimbursement. 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 September 30, 2010 and 2009, deferred net sales associated with the pharmacogenomics research projects included in the balance sheet in other accrued expenses, was less than $0.1 million for each period.ResearchDevelopment.Researchissuing 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 developmentshould be reported outside of equity. Preferred stock is accreted to its redemption value. The warrants do not qualify to be treated as equity, and various collaboration costsaccordingly, are chargedrecorded as a liability. A preferred stock conversion feature is embedded within the Series A Preferred Stock that meets the definition of a derivative. The preferred stock, warrant liability and preferred stock conversion feature are all recorded separately and were initially recorded at fair value using the Black Scholes model. We are required to expense when incurred.they areit 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 lossesgain of less than $0.1approximately $0.1 million are is reported as accumulated other comprehensive income on the accompanyingTRANSGENOMIC, INC. AND SUBSIDIARYSeptember 30, 2011NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued). A cumulative translation loss of less than $0.1 million was reported as accumulated other comprehensive income for the Nine Months Ended nine months ended September 30, 2010 and 2009consolidated balance sheets for the nine months ended September 30, 2010.. Revenues and expenses are translated at the average exchange rates during the period. For transactions that are not denominated in the functional currency, we recognized less than $0.1 million aslosses ofloss for the nine months ending September 30, 2011 and $0.3 million as foreign currency transaction lossesloss in the determination of net incomeloss for each of the nine months ending September 30, 2010.2009.Comprehensive Income.Accumulated other comprehensivecash equivalents invested in overnight instruments. Other income at in the and December 31, 2009 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. was less than $0.1 million.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 10,598,15617,751,940 and 11,383,72010,598,156 shares of our common stock have been excluded from the computation of diluted earnings per share at September 30, 20102011 and 2009,2010, respectively. The options, warrants and conversion rights that were exercisable in 20102011 and 20092010 were not included because the effect would be anti-dilutive due to the net loss. As a result, none of our outstanding options, warrants or conversion rights affect the calculation of diluted earnings per share.Issued Accounting Pronouncements. This standard update will be effective for us on January 1, 2011. 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 in accounting for multiple-deliverable revenue arrangements that better reflects their economics as more arrangements will be separated into individual units of accounting. We are currently evaluating theOur adoption of ASU No. 2009-13 did not have a material impact of adopting ASU 2009-13.on our consolidated financial statements. This standard update will be effective for us on January 1, 2011. 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.are currently evaluatingadopted the impactnew disclosure provisions with the filing of adopting ASU 2009-14.C.RESTRUCTURING CHARGESthird quarterFASB issued guidance on the presentation of 2010 we made a decision to consolidate our research and development activities in Omaha, Nebraska. We expect to substantially completecomprehensive income. The new guidance eliminates the transition by December 31, 2010. We have recognized expenses for restructuring, including but not limited to, severance, facility costs and costs to move equipment from Gaithersburg, Maryland to Omaha, Nebraska. These restructuring charges are attributable to our lab services and instrument segments.20102011 and 2009Restructuring charges include: Dollars in Thousands Costs Incurred in the
Three Months Ended
September 30, 2010 Cumulative Costs
Incurred at
September 30, 2010 Total
Expected Costs $ 40 $ 40 $ 53 24 24 63 8 8 66 $ 72 $ 72 $ 182 Liabilities recorded2010consolidationFASB issued guidance on the presentation of our Gaithersburg, Maryland facility for the third quarter of 2010 consistnet patient service revenue. The new guidance requires a change in presentation of the following: Dollars in Thousands Balance at
June 30, 2010 Costs Incurred and
Charged to Expense Costs Paid or
Otherwise
Settled Changes in
Estimates Balance at
September 30, 2010 $ — $ 40 $ — $ — $ 40 — 24 (8 ) — 16 — 8 (8 ) — — $ — $ 72 $ (16 ) $ — $ 56 D.C. INVENTORIES allowancesallowance for obsolescence) consisted of the following: Dollars in Thousands September 30,
2010 December 31,
2009 $ 2,167 $ 2,322 1,590 1,588 421 149 4,178 4,059 (520 ) (507 ) $ 3,658 $ 3,552 TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Nine Months Ended September 30, 2010 and 2009 Dollars in Thousands Finished goods $ 2,063 $ 2,119 Raw materials and work in process 1,469 1,531 Demonstration inventory 288 212 $ 3,820 $ 3,862 Less allowance for obsolescence (514 ) (518 ) Total $ 3,306 $ 3,344 E.D. INTANGIBLES AND OTHER ASSETS Finite lived Dollars in Thousands September 30, 2010 December 31, 2009 Cost Accumulated
Amortization Net Book
Value Cost Accumulated
Amortization Net Book
Value $ 290 $ 273 $ 17 $ 310 $ 284 $ 26 531 251 280 598 241 357 164 — 164 200 — 200 $ 985 $ 524 $ 461 $ 1,108 $ 525 $ 583 Dollars in Thousands September 30, 2011 December 31, 2010 Cost Cost Intangibles—acquired technology $ 6,535 $ 683 $ 5,852 $ 6,535 $ — $ 6,535 Intangibles—assay royalties 1,434 154 1,280 1,434 — 1,434 Intangibles—third party payor relationships 367 — 367 367 — 367 Intangibles—tradenames and trademarks 344 37 307 344 — 344 Patents 767 263 504 511 245 266 Intellectual property 20 5 15 290 274 16 $ 9,467 $ 1,142 $ 8,325 $ 9,481 $ 519 $ 8,962 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 assets.Intangibles—acquired technology Income Approach - Multi-period Excess Earnings Method Intangibles—third party payor relationships Cost Approach - Replacement Cost Method Intangibles—assay royalties Income Approach - Multi-period Excess Earnings Method Intangibles—tradenames and trademarks Income Approach - Relief from Royalty Method and nine months ended September 30, 2011 and 2010, respectively. Amortization expense for intangible assets was $1.0 million and 2009,less than $0.1 million during the nine months ended September 30, 2011 and 2010, respectively. Amortization expense for intangible assets is expected to be less than $0.1$1.2 million forin each of the years 2010 and thereafter. During2011 through 2017.E. CAPITAL LEASES nine months ended property acquired under capital leases. Dollars in Thousands Asset Balances at Classes of Property Equipment $ 782 $ 394 Less: Accumulated amortization (119 ) (13 ) Total $ 663 $ 381 2010 we abandoned patents of $0.1 million.2011. Dollars in Thousands 2011 $ 75 2012 224 2013 209 2014 35 Total minimum lease payments $ 543 Less: Amount representing interest (79 ) Present value of net minimum lease payments $ 464 F.F. COMMITMENTS AND CONTINGENCIES 2010,2011, $1.1 million in 2012, $0.6 million in 2011,2013, $0.4 million in 2014 , $0.4 million in 2015 and $0.3 million in 2012, less than $0.12016. Rent expense for the three months ended September 30, 2011 and 2010 was $0.2 million in each of the years 2013 through 2016.and $0.2 million, respectively. Rent expense for each of the threenine months ended September 30, 2011 and 2010 was $0.7 million and 2009 was $0.2 million. Rent expense for each of the nine months ended September 30, 2010 and 2009 was $0.6 million.2011.2012. The employment agreement provides that Mr. Tuttle will be entitled to receive a severance paymentspayment from the Company if his employment is terminated involuntarily except if such termination is based on “just cause”, as that term is defined in thehis 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 provisionsprovision 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 addition2010,2011, firm commitments to vendors to purchase components used in WAVE Systems and instruments manufactured by others totaled $0.3$0.5 million.G.G. INCOME TAXES Federalfederal income tax returns related to tax years 2007 through 2009.2010. We have state income tax returns subject to examination primarily for tax years 20062007 through 2009.2010. 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 20062007 through 2009.expensebenefit for the nine months ended September 30, 20102011 was $0.1 million.$0.1 million. This is the result of the change in deferred tax assets and liabilities reported in financial statements of our subsidiary outside the U.S. ThisWe believe the tax benefit recorded will be offset in future periods by a tax expenseTRANSGENOMIC, INC. AND SUBSIDIARYnineNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) months ended Nine Months Ended September 30, 2010 and 2009includes state and franchise taxes as well as reserves for uncertain income taxes. Income tax benefit for the nine months ended September 30, 2009 was less than $0.1 million. The effective tax rate for the nine months ended September 30, 20102011 is (4.84)%1.14%, which is primarily the result of valuation allowances against the net operating losses for the U.S. partially adjusted by permanent differences related to intercompany foreign currency exchange of our subsidiary outsideU.S. The effective tax rate for thethree and nine months ended September 30, 2009 was 5.27%.During the three2011 nine months ended September 30, 2010, there were no material changes to the liability for uncertain tax positions.H.EMPLOYEE BENEFIT PLANH. STOCKHOLDERS’ EQUITY We maintain an employee 401(k) retirement savings plan that allows for voluntary contributions into designated investment funds by eligible employees. We currently 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 each of the three and nine months ended September 30, 2010 and 2009.I.STOCKHOLDERS’ EQUITYCommon Stock.The Company’s 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.Common Stock Warrants.No common stock warrants were issued or exercised during the three and nine months ended September 30, 2010 or 2009. At September 30, 2010, there were warrants outstanding which were exercisable to purchase 7,978,156 shares of common stock. Issue Year Expiration Underlying Shares Exercise Price 2005 Oct. 2010 6,903,156 $ 1.20 2003 Dec. 2010 200,000 $ 1.92 2003 Dec. 2010 200,000 $ 2.07 2003 Dec. 2010 150,000 $ 2.35 2004 Feb. 2011 125,000 $ 2.57 2004 Aug. 2011 400,000 $ 1.18 7,978,156 We are released from the liability when the stock warrants expire.(1)These warrants were issued in conjunction with a private placement of common stock in October 2005.(2)These warrants were 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 conjunction with the 2005 private placement, the exercise prices of these warrants were adjusted according to repricing provisions contained in the original warrant agreements. While the Laurus Loans have been terminated, the warrants remain outstanding. Due to the repricing provision, these warrants are considered liabilities for financial reporting purposes. We have assessed and determined the fair value is $0.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Nine Months Ended September 30, 2010 and 2009series ofadditional 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.Warrant Holder Issue Year Expiration Affiliates of Third Security, LLC (1) 2010 December 2015 5,172,408 $0.58 J.(1) This Warrant was issued in connection with the Financing. The number of shares shown reflects the post-conversion shares. I. FAIR VALUE Dollars in Thousands For the three months ended September 30, 2011 Preferred
Stock
Warrant
Liability Total Beginning balance at June 1, 2011 $ 7,600 $ 3,000 $ 10,600 Total gains or losses: Recognized in earnings 400 200 600 Balance at September 30, 2011 $ 8,000 $ 3,200 $ 11,200 Dollars in Thousands For the nine months ended September 30, 2011 Warrants Total Beginning balance at January 1, 2011 $ 1,983 $ 2,351 $ 4,334 Total gains or losses: Recognized in earnings 6,017 849 6,866 Balance at September 30, 2011 $ 8,000 $ 3,200 $ 11,200 J. STOCK OPTIONS 2010: Number of
Options Weighted Average
Exercise Price 3,331,731 $ 2.39 75,000 .58 (100,000 ) (.42 ) (553,500 ) (.75 ) (133,231 ) (12.50 ) 2,620,000 $ 2.24 2,363,334 $ 2.42 Balance at January 1, 2011 2,565,001 $ 2.11 Granted 2,335,500 1.17 Exercised (30,000 ) (0.76 ) Forfeited (334,501 ) (1.66 ) Cancelled (363,000 ) (6.79 ) Balance at September 30, 2011 4,173,000 $ 1.20 Exercisable at September 30, 2011 2,234,712 $ 1.26 2010,2011, we granted options exercisable to purchase 75,0002,335,500 shares of common stock at a weighted average exercise price of $0.58$1.17 under our 2006 Equity Incentive Plan. No options were granted in the third quarter of 2011.K.K. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION 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.twothree reportable operating segments, Clinical Laboratories, Pharmacogenomic Services and 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 company's chief operating decision-maker is now reviewing our business as having three segments.20102011 and 20092010 is as follows: Dollars in Thousands 2010 2009 Instrument
Business Lab
Services Total Instrument
Business Lab
Services Total $ 3,155 $ 1,264 $ 4,419 $ 3,852 $ 1,194 $ 5,046 1,849 168 2,017 2,229 524 2,753 (30 ) (797 ) (827 ) 70 (470 ) (400 ) 71 — 71 (34 ) — (34 ) $ (101 ) $ (797 ) $ (898 ) $ 104 $ (470 ) $ (366 ) 47 77 124 92 74 166 38 34 72 — — — — — — 1 — 1 Dollars in Thousands 2011 Clinical Laboratories Pharmacogenomic Services Diagnostic
Tools Total Net Sales $ 4,085 $ 552 $ 3,616 $ 8,253 Gross Profit 2,456 241 1,748 4,445 Net Income (Loss) before Taxes (1,472 ) 122 71 (1,279 ) Income Tax Expense (Benefit) (20 ) — 11 (9 ) Net Income (Loss) $ (1,452 ) $ 122 $ 60 $ (1,270 ) Depreciation/Amortization 350 75 56 481 Restructure 2 — 3 5 Interest Income (Expense) (238 ) — — (238 ) 20102011 and 2009 Dollars in Thousands 2010 Clinical Laboratories Pharmacogenomic Services Diagnostic
Tools Total Net Sales $ 918 $ 346 $ 3,155 $ 4,419 Gross Profit 248 (80 ) 1,849 2,017 Net Loss before Taxes (662 ) (135 ) (30 ) (827 ) Income Tax Expense (Benefit) — — 71 71 Net Loss $ (662 ) $ (135 ) $ (101 ) $ (898 ) Depreciation/Amortization 32 45 47 124 Restructure 34 — 38 72 Interest Income (Expense) — — — — 20102011 and 20092010 is as follows: Dollars in Thousands 2010 2009 Instrument
Business Lab
Services Total Instrument
Business Lab
Services Total $ 11,180 $ 3,776 $ 14,956 $ 11,794 $ 3,714 $ 15,508 6,320 1,068 7,388 6,692 1,525 8,217 (343 ) (1,915 ) (2,258 ) (451 ) (1,712 ) (2,163 ) 109 — 109 (114 ) — (114 ) $ (452 ) $ (1,915 ) $ (2,367 ) $ (337 ) $ (1,712 ) $ (2,049 ) 151 229 380 352 207 559 38 34 72 — — — 1 — 1 10 4 14 September 30, 2010 September 30, 2009 $ 7,072 $ 6,865 $ 13,937 $ 8,686 $ 6,669 $ 15,355 Net sales by product were as follows: Dollars in Thousands Dollars in Thousands Three Months Ended
September 30, Nine Months Ended
September 30, 2010 2009 2010 2009 $ 1,356 $ 1,999 $ 5,925 $ 6,215 1,799 1,853 5,255 5,579 3,155 3,852 11,180 11,794 918 923 2,790 2,886 346 271 986 828 1,264 1,194 3,776 3,714 $ 4,419 $ 5,046 $ 14,956 $ 15,508 Net cost Dollars in Thousands 2011 Diagnostic
Tools Total Net Sales $ 11,435 $ 1,824 $ 10,141 $ 23,400 Gross Profit 6,787 764 5,601 13,152 Net Income (Loss) before Taxes (11,331 ) 615 551 (10,165 ) Income Tax Expense (Benefit) — — (120 ) (120 ) Net Income (Loss) $ (11,331 ) $ 615 $ 671 $ (10,045 ) Depreciation/Amortization 1,113 184 151 1,448 Restructure 28 — 12 40 Interest Income (Expense) (720 ) — — (720 ) 9/30/2011 Total Assets $ 20,822 $ 953 $ 8,199 $ 29,974 Dollars in Thousands 2010 Clinical
Laboratories Pharmacogenomic
Services Diagnostic
Tools Total Net Sales $ 2,790 $ 986 $ 11,180 $ 14,956 Gross Profit 1,159 (91 ) 6,320 7,388 Net Loss before Taxes (1,471 ) (444 ) (343 ) (2,258 ) Income Tax Expense (Benefit) — — 109 109 Net Loss $ (1,471 ) $ (444 ) $ (452 ) $ (2,367 ) Depreciation/Amortization 98 131 151 380 Restructure 34 — 38 72 Interest Income (Expense) — — 1 1 9/30/2010 Total Assets $ 5,777 $ 1,088 $ 7,072 $ 13,937 20102011 and 200920102011 and 20092010 by country were as follows: Dollars in Thousands Dollars in Thousands Three Months Ended
September 30, Nine Months Ended
September 30, 2010 2009 2010 2009 $ 2,082 $ 1,920 $ 6,483 $ 6,254 813 913 2,300 2,676 209 386 812 1,175 194 441 1,099 973 4 — 778 — 224 �� 230 991 666 893 1,156 2,493 3,764 $ 4,419 $ 5,046 $ 14,956 $ 15,508 Dollars in Thousands Dollars in Thousands Three Months Ended Nine Months Ended September 30, September 30, 2011 2010 2011 2010 United States $ 6,034 $ 2,082 $ 16,738 $ 6,483 Italy 762 813 2,373 2,300 United Kingdom 193 224 451 991 France 166 209 579 812 Germany 187 194 581 1,099 United Arab Emirates — 4 — 778 All Other Countries 911 893 2,678 2,493 Total $ 8,253 $ 4,419 $ 23,400 $ 14,956 Approximately 80%L.L. SUBSEQUENT EVENTS On October 27, 2010 6,903,156warrants to various institutional holders expired unexercised.We have been awardedthe Investors having an aggregate market value of $0.3 million.federal grant underresult of the Qualifying Therapeutic Discovery Project Program related to 2009 projects. NetAmendment Agreement, the value of our consultant fees we expect to receive $0.6 million cash in the fourth quarterSeries A Preferred and Warrant, including the preferred stock conversion feature and preferred stock warrant liability, will be reclassified into shareholders equity as of 2010.the date of the Amendment Agreement. The following table sets forth a summary of the balance sheet as reported and pro-forma as if the Amendment Agreement had occurred on September 30, 2011. As reported Pro-Forma Dollars in Thousands September 30, 2011 September 30, 2011 Total Assets $29,974 $29,974 Total Liabilities 29,683 18,483 Redeemable Series A convertible preferred stock 1,796 — Total Stockholders' Equity (Deficit) (1,505 ) 11,491 $ 29,974 29,974 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations income(loss)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.2009.2010. Results for the quarter ended September 30, 20102011 are not necessarily indicative of results that may be attained in the future.provides innovative products for the purificationis a global biotechnology company advancing personalized medicine in cancer and analysis of nucleic acids used in the life sciences industry for research focused oninherited diseases through its proprietary molecular geneticstechnologies and diagnostics. We also provide genetic variation analytical services to the medical research,world-class clinical and research services. We have three complementary business segments.markets. Net sales are categorized as Instrument Related Business and Laboratory Services.Instrument Related Business:• Bioinstruments.Diagnostic Tools. Our flagshipproprietary 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 nearlyover 1,500 WAVE Systems as of September 30, 2010.2011. 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 third-party installedOEM 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 HPLC separationchromatography columns.Laboratory Services:Molecular Clinical Reference Laboratory. The molecular clinical reference laboratory specializes in mitochondrial and molecular diagnostic testing including genetic testingoncology, hematology and inherited disorders. Located in Omaha, Nebraska the molecular clinical reference laboratory operates in a Good Laboratory Practices compliant environment and is certified under the Clinical Laboratory Improvement Amendment (CLIA) as a high complexity lab and is accredited by CAP (College of American Pathologists).Pharmacogenomics Research Services. Pharmacogenomics research services are provided by our Contract Research Organization located in Omaha, Nebraska. It specializes in pharmocogenomic, biomarker and mutation discovery research serving the pharmaceutical and biomedical industries world-wide for disease research, drug and diagnostic development and clinical trial support.Although we have experienced recurring net losses (resulting in an accumulated deficit of $132.6 million at 2010) management believes existing sources2011 increased by $8.4 million or 56% compared to the same period inWe will need to increaseThese results include the FAMILION acquisition in our Clinical Laboratories segment. During the nine months ended September 30, 2011, net sales from Clinical Laboratories increased by $8.6 million compared to the same nine month period in order2010. The Clinical Laboratories increase is a result of the revenue of $8.4 million related to meet our liquidity needs on a long-term basis. If we cannot increase net sales, further reductions to operating expenses will be needed. In future periods, there is no assurance that we will be able to increase net sales or further reduce expenses and, accordingly, we may not have sufficient sources of liquidity to continue operations indefinitely.Executive Summary2010 were down 4%2011 compared to the same period in 2009.2010. Net sales in our Instrument Related BusinessDiagnostic Tools were down 5%9% or $0.6$1.0 million for the nine months ended September 30, 20102011 compared to the same period in 2009. Net sales from bioinstruments were down 5% and net sales of consumables were down 6% for the comparable nine month periods. During the nine months ended September 30, 2010, net sales from Laboratory Services were up 2% compared to the same nine month period in 2009. The Clinical Reference Laboratory decreased 3% and net sales from Pharmacogenomics Research Services increased by 19%.decreased by 4%increased from compared to the same period in 2009. The Instrument Related Business gross margin was flat at 57% for each of the nine months ended in 2010 and 2009. Laboratory Services gross margin decreased from 41% gross profit in the nine months ended September 30, 2009 to 28%56% for the same period in 2010. Net loss was $2.4 million2011. Clinical Laboratories gross margin increased from 42% in the nine months ended September 30, 2010 to 59% for the same period in 2011. Loss from operations was $2.8 million for the nine months ended September 30, 2011 compared to $2.3 million for the nine months ended September 30, 2010 compared to net loss.$2.0 million for the nine months ended September 30, 2009.OutlookWe continue to leverage our core instrument business for on-going instrument sales worldwide as well as employing our instruments, we had cash and related expertise in our two laboratory services businesses. cash equivalents of $1.4 million.ofour diagnostics and our laboratory services businesses andas we continue to seek outcommercialize new assay technologies and tests we have developed internally or in-licensed, and as we expand into other markets and regions worldwide.license or develop internally$2.9 million. 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 offeringskey cardiac tests, and we expect to introduce a new, competitively-positioned Plavix® response test in the near term.service businesses. And although challenges do exist fordrug and disease research.having some success with sellingexpanding our distribution network in Europe and introducing the systems into new geographic areas, including the Middle East and Asia, to continue the revenue from our instrument related businessDiagnostic Tools segment. In addition, we recently announced an agreement with A. Menarini Diagnostics, one of the leading diagnostics companies in Europe, for the distribution of our new WAVE® M.C.E System and SURVEYOR® mutation detection assay kits in the European Union, which will greatly increase our footprint in key European markets and, we believe, lead to significant sales from this product line.lookadvance our pipeline of cancer pathway gene mutation kits as well. We have completed development of our first ICE COLD-PCR assay kit and will commence market validation trials in the fourth quarter. Our first ICE COLD-PCR kit,emerging markets and novel applications to provide us with new opportunities for our WAVE System such as our newly launched K-RASresistance conferring mutations. Longer term, we anticipate that these ultra-sensitive mutation detection kit. During the third quarterkits can become effective and efficient products for use both in earlier cancer screening in blood and to monitor treatment and disease recurrence. completed the requirements for CE IVD labeling of our SURVEYOR® Scan K-RAS mutation detection kit and have significantly expanded distribution throughout most of the European Union as a result. We intend to continue to look for opportunities to diversify into new markets, including the personalized medicine market (particularlyparticularly in oncology),oncology, where the sensitivities of our technologies are essential. As discussed below, a recently licensed technology that could provide the highest sensitivity available in the marketplace is being refined for usesignificant clinical benefit. We have also embarked on our Wave Systems. In addition, we are also selling refurbished WAVE Systems in order to allow an opportunity for customers who may not be able to afford the full cost of a new system to purchase and utilize our WAVE technology. Additionally, we have developed credibility and momentum with third-party platforms that will allow us to leverage our direct sales force and distribution network.On the Laboratory Services front, we have completed cancer pathway gene mutation projects for a number of high visibility pharmaceutical companies which have continued to demonstrate the unique sensitivity of detecting DNA mutations in cancer genes which are central to effective therapy selection for current and future cancer therapeutics. To this end, we are now gaining clinical trial program contracts which we believe will more rapidly impact our revenue opportunities from this segment. To compliment our mutation detection expertise, we also have strengthened our capabilities in biomarker development and mutation detection in novel cancer pathway genes which will aid in the development of true personalized medicine for our pharmaceutical partners. We recently licensed and are developing a new technology for even greater DNA mutation enrichment and detection sensitivity which could prove to be the highest sensitivity technology in the market. In our Molecular Clinical Reference Laboratory we have continued to seek out or develop new testsseveral academic collaborations to further expandvalidate our menunewest technologies and growth opportunitiesbetter determine how they can and will be used in clinical settings for this business, including a test that would determine the likelihood of the sibling of an autistic child also developing autism.Uncertaintiesexpenses and other cash needs.expenses. While we have been able to historically finance our operating losses through borrowings or from the issuance of additional equity, there is the risk that we may not be able to obtain such funding indue to the future.tightened credit markets. At September 30, 20102011 we had cash and cash equivalents of $4.6 million.$1.4 million. We do believe that existing sources of liquidity are sufficient to meet expected cash needs into 2011.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.foreign currency revaluationtranslation risk whichthat occurs when a transaction occurstransactions are consummated in a currency other than British Pound Sterling, which is the entity’s “functional currency”. The majorityfunctional currency of our international salesforeign subsidiary These transactions, which are transactedmost often consummated in the euro, whichEuros, must be first convertedtranslated into British pound sterling,Pound Sterling. In addition, results of operations and then into U.S. dollars. At January 1, 2009 the Euro to Greatbalance sheet of our foreign subsidiary are translated from British Pound Sterling to our reporting currency, which is the U.S. Dollar. As a result we are subject to exchange rate was .9690 as compared to the September 30, 2010 rate of .8613. The Great British Pound to U.S. Dollar exchange rate was 1.4501 at January 1, 2009 compared to 1.5809 at September 30, 2010.risk. Fluctuations in the foreign exchange rates could impact our business results. Foreign currency revaluation adjustments decreased operating expenses and net loss by $0.2 million and $0.1 million for the three months ended September 30, 2010 and 2009, respectively and foreign currency revaluation adjustments increased operating expenses and net loss by $0.3 million during each of the nine months ended September 30, 2010 and 2009.Continuing Operations20102011 and 20092010 Dollars in Thousands Three Months Ended
September 30, Change 2010 2009 $ % $ 1,356 $ 1,999 $ (643 ) (32 )% 1,799 1,853 (54 ) (3 )% 3,155 3,852 (697 ) (18 )% 918 923 (5 ) (1 )% 346 271 75 28 % 1,264 1,194 70 6 % $ 4,419 $ 5,046 $ (627 ) (12 )% Bioinstrument sales consist of sales of our WAVE System and associated equipment that we manufacture or assemble, Dollars in Thousands Three Months Ended September 30, Change 2011 2010 $ % Clinical Laboratories $ 4,085 $ 918 $ 3,167 345 % Pharmacogenomics Services 552 346 206 60 % Diagnostic Tools 3,616 3,155 461 15 % Total Net sales $ 8,253 $ 4,419 $ 3,834 87 % 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 customers that may not be able to afford new systems. Bioinstrument net sales are down $0.6increased $3.2 million or 32%, during the three months ended September 30, 2010 as2011 compared to the same period in 2009. The decrease in bioinstrument net sales was2010. Of this increase, $3.0 million is due to changes inrevenue from the product mix sold during the quarter as well as fewer instruments sold. No OEM instruments were sold in 2010 compared to one OEM sale in the third quarterFAMILION family of 2009. We sold four WAVE instruments in the third quarter 2010 as compared to five WAVE instruments in the third quarter of 2009. The average sales price was higher in the third quarter of 2009 due to the geographic location of the sales. Service contract sales were flat during the three months ended September 30, 2010 as compared to the same period in 2009. Parts, freight and miscellaneous income was lowergenetic tests, which we acquired on December 29, 2010. In addition, our revenue increased by $0.1$0.2 million in the third quarterour neurology family of 2010 as compared to the same period in 2009.Net sales of bioconsumables were down less than $0.1 million, or 3%, during the three months ended September 30, 2010 compared to 2009. This decrease is related to lower sales volume in our European markets.Net sales of Laboratory Services increased 6% during the three months ended September 30, 2010 compared to 2009. 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 down 1% compared to the three months ended September 30, 2009. The Molecular Clinical Reference Laboratory average revenue per test has decreased by 4%tests due to the mix of tests performed and increased Medicare and Medicaid test volumes which generates lower reimbursement for these tests. The decrease inthe average revenue per test is offset by a 4% increase in sales volume. The test. Research Services net sales of $0.3$0.6 million during the three months ended September 30, 2010 was up 28%2011 increased by $0.2 million compared to 2009. The increase in Pharmacogenomics Research Services net sales is largelythe same period of 2010 due to an increasethe volume of genetic testing performed in the number of customers for the third quarter of 2010 compared to 2009. Theconnection with various clinical trials at various stages by our pharmaceutical company clients. Pharmacogenomics Research Services net sales have peaks due to the project related nature of patient enrollment patterns and the business. Eachtiming of clinical trials. While the revenue generated from genetic testing related to clinical trials is significant, it is usually earned over the duration of the trial. Therefore, each period for Pharmacogenomics Research Services should be considered on a stand alonestandalone basis and is not indicative of future net sales.LaboratoryClinical Laboratories and Pharmacogenomics Services operations. Costgoods sold consisted of the following:our business segments were as follows: Dollars in Thousands Three Months Ended
September 30, Change 2010 2009 $ % $ 532 $ 526 $ 6 1 % 774 1,097 (323 ) (29 )% 1,306 1,623 (317 ) (20 )% 670 479 191 40 % 426 191 235 123 % 1,096 670 426 64 % $ 2,402 $ 2,293 $ 109 5 % Dollars in Thousands Three Months Ended September 30, Margin % 2011 2010 2011 2010 Clinical Laboratories $ 2,456 $ 248 60 % 27 % Pharmacogenomics Services 241 (80 ) 44 % (23 )% Diagnostic Tools 1,748 1,849 48 % 59 % Gross Profit $ 4,445 $ 2,017 54 % 46 % $2.0$4.4 million or 46%54% of total net sales during the third quarter of 2010,2011, compared to $2.8$2.0 million or 55%46% during the same period of 2009. Margins on the instrument related business are up by 1% compared to the same period in 2009. The bioinstrument margin decreased from 74% in the three months ended September 30, 2009 to 61% in the same period of 2010. This decrease is driven by the composition of products sold and fewer instruments sold in the third quarter of 2010. Margins on bioconsumables increased from 41% for the three months ended September 30, 2009 to 57% in the same period of 2010. During the three months ended September 30, 2010,2011, the gross margin for the Laboratory ServicesClinical Laboratories was 13%60% as compared to 44%27% in the same period of 2009.2010. The three months ended September 30, 2011 include the gross profits from sales of the FAMILION family of genetic tests, which we acquired on December 29, 2010. Pharmacogenomics Services gross margin on the Clinical Reference Laboratory was 27% for the third quarter of 2010 compared to 48% for the third quarter of 2009. Pharmacogenomics gross margin decreasedincreased from 30%negative 23% for the three months ended September 30, 20092010 to a negative 23%44% for the three months ended September 30, 2010. These decreases are2011. Pharmacogenomics Services has a relatively fixed-cost base so any increase or decrease in revenue directly impacts gross margins. Diagnostic Tools gross margin decreased from 59% in the three months ended September 30, 2010 to 48% in the same period of 2011 due to staff added along with higher operating supplies cost.Excluding foreign currency revaluation gains or losses,Our selling, general and administrative costs increased $2.2 million from $2.2 million to $4.4 million during the three month period ended September 30, 2011 compared to the same period in 2010. The primary increase in our selling, general and administrative costs were down less than $0.1 million comparedis due to the same periodacquisition of 2009.the FAMILION family of genetic tests of $1.3 million. In addition, we had bad debt charges of $0.2 million and amortization of acquired intangible assets of $0.3 million. Foreign currency revaluation gains in the three months ended September 30, 2010 were $0.2 million compared to $0.1 million in revaluation gainsloss for the three months ended September 30, 2009.2011third quarter ofthree months ended September 30, 2011 and 2010, and 2009 these costs totaled $0.6$0.5 million and $0.9$0.6 million, respectively. The 2009 research and development costs included collaboration expenses with the Dana-Farber Cancer Institute related to the development of high sensitivity mutation detection technology called COLD-PCR (coamplification at lower denaturation temperature PCR).14%6% and 19%14% of net sales during the three months ended September 30, 2011 and 2010, respectively. The decrease as a percentage of net sales is due primarily to the consolidation of our research and 2009, respectively. income consists primarily of interest income from cash and cash equivalents invested in overnight instruments. Other expense during the three months ended September 30, 2010 and 2009 was less than $0.1 million for each period.Income Tax Expense (Benefit). Income tax expense for the three months ended September 30, 20102011 includes interest expense and the expense associated with the preferred stock and warrant, which is due to the change in fair value of the preferred stock conversion feature. The expense associated with the change in value of the preferred stock conversion feature is a non-cash item.than $0.1than$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.foreign subsidiary. This tax benefit is partially offset by tax expense includesrelated to state and franchise taxes as well as reserves for uncertain income taxes. We believe the recorded tax benefit will be offset in future periods by a tax expense, related to income reported in the financial statements of our foreign subsidiary. Income tax benefitexpense for the three months ended September 30, 2009 was less than $0.1 million.Results of Continuing OperationsNine Months Ended September 30, 2010 was $0.1 million.20092010 Dollars in Thousands Nine Months Ended
September 30, Change 2010 2009 $ % $ 5,925 $ 6,215 $ (290 ) (5 )% 5,255 5,579 (324 ) (6 )% 11,180 11,794 (614 ) (5 )% 2,790 2,886 (96 ) (3 )% 986 828 158 19 % 3,776 3,714 62 2 % $ 14,956 $ 15,508 $ (552 ) (4 )% Bioinstrument sales consist of sales of our WAVE System and associated equipment that we manufacture or assemble, Dollars in Thousands Nine Months Ended September 30, Change 2011 2010 $ % Clinical Laboratories $ 11,435 $ 2,790 $ 8,645 310 % Pharmacogenomic Services 1,824 986 838 85 % Diagnostic Tools 10,141 11,180 (1,039 ) (9 )% Total Net sales $ 23,400 $ 14,956 $ 8,444 56 % 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 customers that may not be able to afford new systems. Bioinstrument net sales are down $0.3increased $8.6 million or 5%, during the nine months ended September 30, 2010 as2011 compared to the same period in 2009. The decrease2010. Of this increase in bioinstrumentrevenue, $8.4 million is due to revenue from the FAMILION family of genetic tests, which we acquired on December 29, 2010.was due to lower average sales price inof $1.8 million during the nine months ended September 30, 2010. We sold five OEM instruments in each of the nine months ended September 30, 2010 and September 30, 2009. The average sales price was lower on our OEM instruments sold in 2010 as compared to 2009. We sold twenty-two WAVE Systems in the nine months ended September 30, 2010 as compared to eighteen in the nine months ended September 30, 2009, and the average sales price was lower due to the geographic location of the sales. Service contract sales were down $0.12011 increased $0.8 million for the nine months ended September 30, 2010 compared to the same period of 2009 due to lower volumes in both the European and U.S. markets. Parts, freight and miscellaneous income was lower by $0.3 million in the nine months ended September 30, 2010 as compared to the same period of 2009.Net sales of bioconsumables decreased during the nine months ended September 30, 2010 compared to 2009.2010. The primary decrease in consumablesincrease is due to lower volume in our European market offset by higher volume in our U.S. market.Net salesthe completion of Laboratory Services increased by 2% for the nine months ended September 30, 2010 compared to 2009. Sales of Laboratory Services include both the Molecular Clinical Reference Laboratory Services and thea significant project with a pharmaceutical company client. Pharmacogenomics Research Services. The Molecular Clinical Reference Laboratory Services net sales of $2.8 million represented a decrease of 3% over the nine months ended September 30, 2009. The Molecular Clinical Reference Laboratory average revenue per test has decreased by 6% due to the mix of tests performed and the increased Medicare and Medicaid test volumes which generates lower reimbursement for these tests. The decrease in average revenue per test is offset by a 3% increase in volume. The Pharmacogenomics Research Services net sales of $1.0 million during the nine months ended September 30, 2010 represented an increase of 19% from the nine months ended September 30, 2009. The increase in Pharmacogenomics Research Services is largely due to an increase in the number of clients for the nine months ended September 30, 2010 compared to the same period of 2009. The Pharmacogenomics Research Services net sales have peaks due to the project related nature of the business.project-related services performed on behalf of our clients. Each period for Pharmacogenomics Research Services should be considered on a stand alone basis and is not indicative of future net sales.LaboratoryClinical Laboratories and Pharmacogenomics Services operations. Costgoods sold consistedour business segments were as follows: Dollars in Thousands Nine Months Ended September 30, Margin % 2011 2010 2011 2010 Clinical Laboratories $ 6,787 $ 1,159 59 % 42 % Pharmacogenomic Services 764 (91 ) 42 % (9 )% Diagnostic Tools 5,601 6,320 55 % 57 % Gross Profit $ 13,152 $ 7,388 56 % 49 % the following:Contents Dollars in Thousands Nine Months Ended
September 30, Change 2010 2009 $ % $ 2,487 $ 2,167 $ 320 15 % 2,373 2,935 (562 ) (19 )% 4,860 5,102 (242 ) (5 )% 1,631 1,607 24 1 % 1,077 582 495 85 % 2,708 2,189 519 24 % $ 7,568 $ 7,291 $ 277 4 % $7.4$13.2 million or 49%56% of total net sales during the nine months ended September 30, 2010,2011, compared to $8.2$7.4 million or 53%49% during the same period of 2009. Margins on2010. During the Instrument Related Business were flat for the nine months ended September 30, 2010 compared to the same period in 2009. During the nine months ended September 30, 2010,2011, the gross margin for the Laboratory ServicesClinical Laboratories was 28%$6.8 million as compared to 41%$1.2 million in the same period of 2009.2010. The erosionnine months ended September 30, 2011 include gross profit from sales of the FAMILION family of genetic tests, which we acquired on December 29,2010. Pharmacogenomics Services gross margin increased from negative 9% for the nine months ended September 30, 2010 to 42% for the nine months ended September 30, 2011. Pharmacogenomics Services have a relatively fixed-cost base so any increase or decrease in revenue directly impacts gross margins. Diagnostic Tools gross margin decreased from 57% in the gross margin is driven bynine months ended September 30, 2010 to 55% in the same period of 2011due to lower average netbioconsumable sales, reimbursement per test due to increased Medicare and Medicaid test volume and higher operating costs.Excluding foreign currency revaluation losses, which was a loss of $0.3Our selling, general and administrative costs increased from $7.6 million in each of to $14.3 million during the nine months month period ended September 30, 2010,2011 compared to the same period in 2010. The primary increase in our selling, general and administrative costs decreased from $7.7 million to $7.3 million. The primary decrease is primarily due to lower salary and$3.7 million in expenses related to the FAMILION family of genetic tests, which we acquired on December 29, 2010. In addition, we had $0.8 million in expense related to the vesting of the employee stock option expense.grants, $0.9 million in amortization of the acquired intangibles and bad debt expense of $1.5 million. Foreign currency revaluation gain for the Research and development expenses were $2.0 million and $2.5 million forDuring the nine months ended September 30, 2011 and 2010 these costs totaled $1.7 millionand 2009,$2.0 million, respectively.13%7% and 16%13% of net sales during the nine months ended September 30, 2011 and 2010, respectively. The decrease is due primarily to the consolidation of our research and 2009, respectively.consists primarily of interest income from cash and cash equivalents invested in overnight instruments. Other income duringfor the nine months ended September 30, 20102011 includes an award of a federal grant under the Qualifying Therapeutic Discovery Project of $0.2 million, net of consulting fees. Other expense includes interest expense as well as the expense associated with the preferred stock and September 30, 2009 was less than $0.1 million for each period.warrant, which is due to the change in fair value of the preferred stock conversion feature. The expense associated with the change in value of the preferred stock conversion feature is a non-cash item.expensebenefit for the nine months ended September 30, 20102011 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 subsidiaries outside the U.S.our foreign subsidiary. This tax benefit is partially offset by tax expense includesrelated to state and franchise taxes as well as reserves for uncertain income taxes. We believe the recorded tax benefit will be offset in future periods by a tax expense, related to income reported in the financial statements of our foreign subsidiary. Income tax benefitexpense for the nine months ended September 30, 20092010 was $0.1 million.20102011 and December 31, 20092010 were as follows: Dollars in Thousands September 30,
2010 December 31,
2009 Change $ 12,429 $ 14,454 $ (2,025 ) 4,279 4,103 176 $ 8,150 $ 10,351 $ (2,201 ) The working Dollars in Thousands September 30,
2011 Change Current assets (including cash and cash equivalents of $1,423 and $3,454, respectively) $ 13,656 $ 15,034 $ (1,378 ) Current liabilities 10,104 8,253 1,851 Working capital $ 3,552 $ 6,781 $ (3,229 ) decrease at September 30, 2010 compareddecreased due primarily to December 31, 2009 is primarily a result of our net loss of $2.4 million for the nine months ended September 30, 2010.WhileHistorically we have been able to historically finance our operating losses through borrowings or from the issuance of additional equity, weequity. We currently have no borrowings and have no plans to issuesecure additional borrowings for this purpose, but instead are exploring alternative funding from certain existing holders of our equity securities for this purpose.as well as additional sources of liquidity. At September 30, 20102011, we had cash and cash equivalents of $4.6 million.$1.4 million. We believe that existing sources of liquidity are sufficient2011. We2012, but we will need to increase our net sales focus on receivables and inventory management or further reduce our operating expenses in order to be assured of meeting our liquidity needs on a long-term basis. It may also be necessary for us to secure additional funding in the near future. However, we cannot assure you 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.20102011 and 20092010$1.1$2.0 million during the nine months ended September 30, 2010 to $4.6 million2011 compared to a decrease of $0.1$1.1 million in cash balances during the nine months ended September 30, 2009.2010. During the nine months ended September 30, 2011 we used cash of $0.9 million in operating activities, $0.4 million in investing activities, $0.8 million in financing activities which was offset by $0.1 million by the effect of foreign currency exchange rate changes on cash. In 2010, net cash used in operating activities was $0.7$0.9 million and $0.5 , $0.2 million was used in investing activities which was offset byand less than $0.1 million provided bywas used in financing activities. The impact of foreign currency exchange revaluation was nominal. In 2009 net cash provided by operating activities was $0.2 million offset by $0.3 million of net cash flow used in investing activities with minimal impact of foreign currency exchange rates.inIn Operating Activities. Cash flows used in operating activities were $0.7totaled $0.9 million during both the nine months ended September 30, 2010, compared to cash flows provided by operating activities of $0.2 million during the same period of 2009.2011 and 2010. The cash flows used in operating activities in 2010 relate to2011 include the net loss of $2.4 million which isand increase in accounts receivable, offset by non-cash items including the timely collectionchange in fair value of the preferred stock conversion feature and warrant liability, the provision for losses on doubtful accounts receivable of $1.0 million and noncash items of $0.5 million. The cash flows provided by operating activities in 2009 primarily relate to the accounts receivable collections of $1.5 milliondepreciation and noncash items of $0.8 million offset by the loss of $2.0 million.amortization.$0.5$0.4 million during the nine months ended September 30, 20102011 compared to cash flows used in investing activities of $0.3$0.2 million during the same period of 2009.2010. Cash flows used in investing activities in 2011 include purchases of property and equipment of $0.1 million and additions to our patents of $0.3 million. Cash flows used in investing activities in 2010 and 2009 consisted primarily of purchases of property and equipment.Provided byUsed in Financing Activities. Cash flows providedused in financing activities were $0.8 million for the nine months ended September 30, 2011. Cash flows used in financing activities were for payments on debt and capital lease obligations and were partially offset by cash received from the issuance of common stock in connection with the exercise of stock options for 30,000 shares during the quarter. Cash flows used in financing activities were less than $0.1 million for the nine months ended September 30, 2010. This resulted2010. Cash flows used in financing activities were for principal payments on capital leases offset by the cash received from the issuance of common stock due toin connection with the exercise of stock options for 100,000 shares during the second quarter of 2010. There were no cash flows provided by or used in financing activities for the nine months ended September 30, 2009.20102011 and December 31, 2009,2010, 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 or other contractually narrow or limited purposes.2009.2009.2010. There have been no changes to those accounting pronouncements listed except as noted in note B to the financial statements contained in this report.Item 4T. Controls and ProceduresItem 4. Controls and Procedures underwith the directionparticipation of our Chief Executive Officer and Interim 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 Exchange Act. Our disclosure controls and procedures are designed to provide reasonable assurance 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’s forms, and that such information is accumulated and communicated to our management including our Chief Executive Officer and our Interim Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on the evaluation, the Company’s Chief Executive Officer and our Interim Chief Financial Officer concluded that, as of September 30, 20102011, Transgenomic’s disclosure controls and procedures were effective.Change in Internal Control Over Financial Reporting. ThereWe have been noevaluated the changes in our internal control over financial reporting that occurred during the quarterthree months ended September 30, 2011 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.Item 1. Legal Proceedings occasionala 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.Item 1A. Risk Factors 20092010 before deciding to invest in our common stock. If any of 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 decline and you may lose all or part of your investment.In addition to the risks described in Item 1A of our annual report on Form 10-K for the fiscal year Ended December 31, 2009 please consider the following risks before deciding to invest in our common stock:Providers of clinical testing services may be subject to lawsuits alleging negligence or other similar legal claims. Potential suits could involve claims for substantial damages. Litigation could also have an adverse impact on our client base and reputation. We maintain liability insurance coverage for certain claims that could result from providing or failing to provide clinical testing services, including inaccurate testing results and other exposures. Our insurance coverage limits our maximum recovery on individual claims and, therefore, there is no assurance that such coverage will be adequate.20092010 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.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.Item 6. Exhibits (a) Exhibits 3.1 3.1 Third Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to Registrant’s 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’s 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’s Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) 44.1 Form of Certificate of the Registrant’s Common Stock (incorporated by reference to Exhibit 4 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000) 4.2 Series A convertible Preferred Stock Purchase Agreement, dated December 29, 2010, by and among Transgenomic, Inc., Third Security Senior Staff 2008 LLC, Third Security Staff 2010 LLC, and Third Security Incentive 2010 LLC (incorporated by reference to Exhibit 4.1 to Registrant’s 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) 4.4 Registration Rights Agreement, dated December 29, 2010, by and among Transgenomic, Inc., 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’s Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) 4.5 Secured Promissory Note, issued December 29, 2010 by Transgenomic, Inc. in favor of PGxHealth, LLC (incorporated by reference to Exhibit 4.4 to Registrant’s Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) 4.6 Secured Promissory Note, issued December 29, 2010 by Transgenomic, Inc. in favor of PGxHealth, LLC (incorporated by reference to Exhibit 4.5 to Registrant’s Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) 10.1 Sublease Agreement, dated December 29, 2010, by and between Transgenomic, Inc. and Clinical Data, Inc. (incorporated by reference to Exhibit 10.1 to Registrant’s Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) 10.2 Noncompetition 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 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 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 * * XBRL information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Act of 1934, and is 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. TRANSGENOMIC, INC. Date: November 15, 201010, 2011 By: 28