| 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 March 31, 2011
| 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 | |
|
| |
| 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.
CURRENT ASSETS: Cash and cash equivalents Accounts receivable (net of allowances for bad debts of $716 and $334, respectively) Inventories (net of allowances for obsolescence of $520 and $518, respectively) Other current assets Total current assets PROPERTY AND EQUIPMENT: Equipment Furniture, fixtures & leasehold improvements Less: accumulated depreciation OTHER ASSETS: Goodwill Intangibles (net of accumulated amortization of $817 and $519, respectively) Other assets CURRENT LIABILITIES: Accounts payable Accrued compensation Short term debt Accrued liabilities Contractual obligation Current portion of lease obligations Total current liabilities Long term debt less current maturities Redeemable Series A convertible preferred stock, $0.1 par value, 3,879,307 shares authorized, 2,586,205 shares issued and outstanding Preferred stock conversion feature Warrant liability Other long-term liabilities Total liabilities STOCKHOLDERS’ EQUITY: Preferred stock, $.01 par value, 15,000,000 shares authorized, 2,586,205 shares issued and outstanding Common stock, $.01 par value, 100,000,000 shares authorized, 49,299,672 and 49,289,672 shares issued and outstanding, respectively 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 expense Expense on preferred stock Other, net LOSS BEFORE INCOME TAXES INCOME TAX BENEFIT NET LOSS PREFERRED STOCK DIVIDENDS AND ACCRETION NET LOSS AVAILABLE TO COMMON STOCKHOLDERS BASIC AND DILUTED LOSS PER COMMON SHARE BASIC AND DILUTED WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING (DEFICIT) Balance, January 1, 2011 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 Dividends on preferred stock Balance, March 31, 2011 CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net loss Adjustments to reconcile net loss to net cash flows provided (used in) by operating activities: Depreciation and amortization Non-cash, stock based compensation Loss on sale assets Provision for losses on doubtful accounts Provision for losses on inventory obsolescence Preferred stock revaluation Changes in operating assets and liabilities: Accounts receivable Inventories Prepaid expenses and other current assets Accounts payable Accrued liabilities 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 USED IN FINANCING ACTIVITIES: Principal payments on capital lease obligations Issuance of common stock Principal payment on note payable Net cash flows used in 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 Dividends payable on preferred stock Pharmacogenomics I. Three Months Ended March 31, 2011 Three Months Ended March 31, 2010 The following is a summary of activity for the allowance for obsolete inventory during the three and nine months ended Three Months Ended March 31, 2011 Three Months Ended March 31, 2010 Leasehold improvements Furniture and fixtures Production equipment Computer equipment Research and development equipment leases. Goodwill is the excess of the purchase price over fair value of assets acquired and is not amortized. Goodwill is tested for impairment annually. We perform this impairment analysis during the fourth quarter of each year or when a significant event occurs calculation. Persuasive evidence of an arrangement exists Delivery has occurred or services have been rendered The seller’s price to the buyer is fixed or determinable, and Collectability is reasonably assured. for each period. I. Other income for the adopted accounting pronouncements. Severance and related costs Facility closure costs Other Restructuring charges Finished goods Raw materials and work in process Demonstration inventory Less allowance for obsolescence Total Intangibles—acquired technology Intangibles—assay royalties Intangibles—third party payor relationships Intangibles—tradenames and trademarks Patents Intellectual property Intellectual property Patents Intangibles—acquired technology Intangibles—third party payor relationships Intangibles—assay royalties Intangibles—tradenames and trademarks PGxHealth note payable (1) PGxHealth note payable (2) 2011 2012 2013 Classes of Property Equipment Less: Accumulated amortization Total 2011 2012 2013 2014 Total minimum lease payments Less: Amount representing interest Present value of net minimum lease payments Warrant Holder Laurus Master Fund, Ltd. (1) Affiliates of Third Security, LLC (2) Total annum, whether or not declared, shall compound annually and shall be cumulative. In any calendar quarter, we are required to pay from funds legally available a cash dividend in the amount of 50% of the distributable cash flow as defined in the Series A Purchase Agreement or the aggregate amount of dividends accrued on the Series A Preferred. During the nine months ended September 30, 2011, we recorded $0.5 million in accrued dividends. liquidity, an exercise price of $0.39, expected term of 4.25 years, risk-free interest rate of 0.96% based on a 5 year U.S. Treasury and volatility of 103%. Beginning balance at January 1 Total gains or losses: Recognized in earnings Balance at March 31 Balance at January 1, 2011 Granted Exercised Forfeited Balance at March 31, 2011 Exercisable at March 31, 2011 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. 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 Restructure Interest Income (Expense) Total Assets Laboratory Services: Molecular Clinical Reference Laboratory Pharmacogenomics Research Services Instrument Related Business: Bioinstruments Bioconsumables Total Net Sales United States Italy United Kingdom Germany All Other Countries Total reclassified into shareholders equity as of 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. Pharmacogenomics discern set of disorders. We have historically operated at a loss and have not consistently generated sufficient cash from operating activities to cover our operating and other cash expenses. While we have been able to historically finance our operating losses through borrowings or from the issuance of additional equity, we may not be able to obtain such funding due to the tightened credit markets. At into 2012. business. Laboratory Services: Molecular Clinical Reference Laboratory Pharmacogenomics Research Services Instrument Related Business: Bioinstruments Bioconsumables Total Net sales Net sales of bioconsumables were 2010. Laboratory Services: Molecular Clinical Reference Laboratory Pharmacogenomics Research Services Instrument Related Business: Bioinstruments Bioconsumables Cost of goods sold revenue directly impacts gross margins. Diagnostic Tools gross margin decreased from September 30, 2010. Current assets (including cash and cash equivalents of $3,170 and $3,454, respectively) Current liabilities Working capital liabilities. Evaluation of Disclosure Controls and Procedures. Management performed, with the participation of our Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the 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 Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on the evaluation, the Company’s Chief Executive Officer and our Chief Financial Officer concluded that, as of Page No. PART I. FINANCIAL INFORMATIONPage No. 3Item 1. Item 1. 3 3 4 5 6 7Item 2. 22Item 4. 27PART II. 28Item 1. 28Item 1A. 28Item 6. 2930Item 1. Financial Statements March 31, 2011
(unaudited) December 31,
2010 ASSETS $ 3,170 $ 3,454 7,551 7,601 3,163 3,344 762 635 14,646 15,034 9,839 9,820 3,707 3,479 13,546 13,299 (11,885 ) (11,697 ) 1,661 1,602 6,275 6,275 8,664 8,962 152 154 $ 31,398 $ 32,027 LIABILITIES AND STOCKHOLDERS’ EQUITY $ 813 $ 1,360 1,015 875 741 989 4,017 3,231 1,572 1,628 182 170 8,340 8,253 8,640 8,640 1,553 1,457 5,078 1,983 1,283 2,351 918 843 25,812 23,527 — — 498 498 139,746 139,730 1,697 1,589 (136,355 ) (133,317 ) 5,586 8,500 $ 31,398 $ 32,027 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
March 31, 2011 2010 $ 7,480 $ 5,442 3,326 2,558 4,154 2,884 4,323 2,432 557 827 24 — 4,904 3,259 (750 ) (375 ) (238 ) — (2,027 ) — 231 — (2,034 ) — (2,784 ) (375 ) (6 ) (51 ) $ (2,778 ) $ (324 ) (260 ) — $ (3,038 ) $ (324 ) $ (0.06 ) $ (0.01 ) 49,293,005 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 ThreeNine Months Ended March 31,September 30, 2011 Common Stock Outstanding
Shares Par
Value Additional
Paid-in
Capital Accumulated
Deficit Accumulated
Other
Comprehensive
Income (Loss) Total 49,289,672 $ 498 $ 139,730 $ (133,317 ) $ 1,589 $ 8,500 — — — (2,888 ) (2,888 ) (2,888 ) — — — — 107 107 (2,781 ) — — 9 — — 9 10,000 — 7 — — 7 — — — (150 ) — (150 ) 49,299,672 $ 498 $ 139,746 $ (136,355 ) $ 1,697 $ 5,586 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 ) Three Months Ended
March 31, 2011 2010 $ (2,778 ) $ (324 ) 494 165 9 1 — 1 448 (27 ) 7 (1 ) 2,027 — (350 ) (56 ) 210 (18 ) 316 (220 ) (780 ) 247 471 684 (29 ) (67 ) 6 7 51 392 (86 ) (47 ) (1 ) — (87 ) (47 ) (66 ) — 7 — (248 ) — (307 ) — 59 (89 ) (284 ) 256 3,454 5,642 $ 3,170 $ 5,898 $ 238 $ — 13 1 $ 147 $ — 150 — 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 — March 31,September 30, 2011 and 2010A. BUSINESS DESCRIPTIONA. BUSINESS DESCRIPTION specializingadvancing personalized medicine in high sensitivity genetic variationcancer and mutation analysis, providing productsinherited diseases through its proprietary molecular technologies and services in DNA mutation detectionworld-class clinical and discovery forresearch services. We have three complementary business segments.research, clinical molecular diagnostics and pharmacogenomics analyses.Laboratory Services:Molecular Clinical Reference Laboratory. The molecular clinical reference laboratory specializeslaboratories specialize in genetic testing for oncology, hematologycardiology, neurology, mitochondrial disorders, and inherited disorders.oncology. Located in New Haven, Connecticut and Omaha, Nebraska the molecular clinical reference laboratories are certified under the Clinical Laboratory Improvement Amendment (CLIA) as high complexity labs and our Omaha facility is accredited by CAP (College of American Pathologists). Research Services. Pharmacogenomics research services are provided by our Contract Research Organization located in Omaha, Nebraska. This lab specializes in pharmacogenomic, biomarker and mutation discovery research serving the pharmaceutical and biomedical industries world-wide for disease research, drug and diagnostic development and clinical trial support.Instrument Related Business:• Bioinstruments.Diagnostic Tools. Our proprietary product is the WAVE® System which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There is a worldwide installed base of over 1,500 WAVE Systems as of March 31, 2011.September 30, 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 OEM Equipment platforms generate a demand for consumables that are required for the continued operation of the bioinstruments. We develop, manufacture and sell these consumable products. In addition, we manufacture and sell consumable products that can be used on multiple, independent platforms. These products include SURVEYOR® Nuclease and a range of chromatography columns.B. SUMMARY OF SIGNIFICANT ACCOUNTING 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.1.Use of Estimates.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31, 2011 and 20102.Concentration of Revenue Risk.No customer accounted for more than 10% of consolidated net sales during the three months ended March 31, 2011 and 2010. For the three months ended March 31, 2011 no customers made up more than 10% of the Laboratory Services revenue. For the three months ended March 31, 2010 one customer made up more than 10% of the Laboratory Services net sales. This customer represented 16% of the Laboratory Services net sales for the three months ended March 31, 2010.LMarch 31,September 30, 2011 and 2010 are unaudited and reflect all adjustments whichthat are, in the opinion of management, necessary for a fair presentation of theConcentrations 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 March 31, 2011.March 31,September 30, 2011 and 2010: Dollars in Thousands Beginning
Balance Provision Write Offs Ending
Balance $ 334 $ 448 $ (66 ) $ 716 $ 310 $ (27 ) $ (4 ) $ 279 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 TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31, 2011 and 2010March 31,September 30, 2011 and 2010: Dollars in Thousands Beginning
Balance Provision Write Offs Ending
Balance $ 518 $ 7 $ (5 ) $ 520 $ 507 $ (1 ) $ (28 ) $ 478 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 impact1 to 10 years 3 to 7 years 3 to 7 years 3 to 7 years 2 to 7 years March 31,September 30, 2011 and 2010 was $0.2 million and $0.1 million, respectively. Included in depreciation for the three months ended March 31,September 30, 2011 was less than $0.1 million related to equipment acquired under capital leases. We did not have anyDepreciation expense related to property and equipment during the nine 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 in the first quarter of 2010.Goodwill.whichthat may impact goodwill. Impairment occurs when the carrying value is determined to be not recoverable thereby causing the carrying value of the goodwill to exceed its fair value. If impaired, the asset’s carrying value is reduced to its fair value. We recorded no impairment charges related to goodwill as of December 31, 2010. No events have transpired in the threenine months ended March 31,September 30, 2011 that would require revaluation of this conclusion.Intangibles.Intangibles include intellectual property, patents and acquired products.1.Intellectual Property.Initial costs paidan impairment analysis prior to license intellectual property from independent third parties are capitalized and amortized using the straight-line method over the license period. Ongoing royalties related to such licenses are expensed as incurred.2.Patents.We capitalize legal costs, filing fees and other expenses associated with obtaining patents on new discoveries and amortize these costs using the straight-line method over the shorter of the legal life of the patent or its economic life beginning on the date the patent is issued.3.Acquired Products.As a part of the FAMILION acquisition we acquired technology, in process technology, trademarks/tradenames and third party relationships. These costs will be amortized straight line over their estimated economic life of seven to eight years. See Footnote E.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31, 2011 and 2010These assets are treated as long-lived assets. Long-lived assets will be tested for impairment on an annual basis or when a significant event occurs, which may impact impairment. We quarterly review the carrying value of our long-lived assets to assess recoverability and impairment. We recorded no impairments as of December 31, 2010. No events have transpired in the three months ended March 31, 2011 that would require a revaluation of this conclusion.Other Long Term Assets.scheduled review.Other long term assets include US security deposits and deferred tax assets.March 31,September 30, 2011 had vesting periods of one or three years from date of grant. None of the stock options outstanding at March 31,September 30, 2011 are subject to performance or market-based vesting conditions.March 31,September 30, 2011, we recorded the recapture of compensation expense of less than $0.1 million within selling, general and administrative expense. During thenine months ended September 30, 2011, we recorded compensation expense of $0.7 million within selling, general and administrative expense as a result of the vesting of options exercisable for the purchase of 1.43.6 million shares. During the threenine months ended March 31,September 30, 2010, we recorded compensation expensesexpense 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 1.71.3 million shares. As of March 31,September 30, 2011, there was $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.quarternine months ended March 31,September 30, 2011and 2010 was estimated on theirthe respective grant dates using the Black-Scholes option pricing model. We granted 2.2 million stock options during the second quarter of 2011. These stock options were granted to our entire employee base with the bulk being granted to our senior management team. The Black-Scholes model was used with the following assumptions: risk-free interest rates of 2.16%1.87% based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected lives of sixfour years, based on historicalexpected exercise activity behavior; and volatility of 107%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 until they are vested.for five years. Forfeitures of 3.6%1.10% have been assumed.no75,000 stock options granted during the quarter ended March 31,June 30, 2010.Income Taxes.Deferred tax assets The Black-Scholes model was used withliabilities are determinedNine Months Ended September 30, 2011 and 2010differences between the financial reporting and tax basis of assets and liabilities at each balance sheet date using tax rates expected to beU.S. Treasury yield in effect inat the yeartime of grant; dividend yields of zero percent; expected life of five years, based on historical exercise activity behavior; and volatility of 102.69% based on the differenceshistorical volatility of our stock over a time that is consistent with the expected life of the option. A small group of senior executives held the majority of the stock options and are expected to reverse. Deferred tax assetshold the options until they are reduced by a valuation allowance tovested. Forfeitures of 2.2% were assumed in the extent that it is more likely than not that they will not be realized.March 31,September 30, 2011 and March 31, 2010, deferred net sales, mainly associated with our service contracts, included in the balance sheet in other accrued expenses, was approximately $1.5 million and $1.4 million, respectively.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31, 2011 and 2010Net sales from our Molecular Clinical Reference Laboratory Services are recognized on an individual test basis and takes place when the test report is completed, reviewed and sent to the client less the reserve for insurance, Medicare and Medicaid contractual adjustments. There are no deferred net sales associated with our Molecular Clinical Reference Laboratory. Adjustments to the allowances, based on actual receipts from third party payers, are recorded upon settlement.In our Pharmacogenomics Research Services Group, we perform services on a project by project basis. When we get payment in advance we recognize revenue when we deliver the service. These projects typically do not extend beyond one year. At March 31, 2011 and 2010, deferred net sales associated with the pharmacogenomics research projects included in the balance sheet in other accrued liabilities, was $0.1approximately $1.4 million and less than $0.1 million, respectively.Research and Development.Research and development and various collaboration costs are charged to expense when incurred.L,I, selling shares of preferred stock and issuing warrants to purchase a certain number of shares of Series A Preferred Stock. The Series A Preferred Stock meets the definition of mandatorily redeemable stock as it is preferred capital stock which is redeemable at the option of the holder and should be reported outside of equity. Preferred stock is accreted to its redemption value. The warrants do not qualify to be treated as equity, and accordingly, are recorded as a liability. A preferred stock conversion feature is embedded within the Series A 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 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 L.theirits functional currency. Its assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. CumulativeA cumulative translation gain of approximately $0.1$0.1 million is reported as accumulated other comprehensive gainincome on the accompanying consolidated balance sheet as of March 31, 2011. CumulativeSeptember 30, 2011. A cumulative translation gainsloss of $0.2less than $0.1 million werewas reported as accumulated other comprehensive income for the threenine months ended March 31, 2010.September 30, 2010. Revenues and expenses are translated at the average rates during the period. For transactions that are not denominated in the functional currency, we recognized a net gain ofless than $0.1 million asthreenine months ending March 31,September 30, 2011 and a net loss of $0.1$0.3 million as foreign currency transaction loss in the determination of net loss for the threenine months ending March 31, 2010.September 30, 2010.threenine months ended March 31,September 30, 2011 includes an award of a federal grant under the Qualifying Therapeutic Discovery Project related to COLD-PCR, Surveyor Scan kit development for detecting key cancer pathway gene mutations and mtDNA damage assays. Other incomeIncome related to this federal grant was $0.2 million, net of consulting fees. Other income for the three months ending March 31, 2010ended September 30, 2011 was less than $0.1 million.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31, 2011three and nine months ending September 30, 2010Comprehensive Income. was less than $0.1 million.Accumulated other comprehensive income at March 31, 2011 and December 31, 2010 consisted of foreign currency translation adjustments, net of applicable tax of zero. We deem our foreign investments to be permanent in nature and do not provide for taxes on currency translation adjustments arising from converting investments in a foreign currency to U.S. dollars.weighted averageweighted-average number of common shares outstanding during each period. Diluted earnings per share include shares issuable upon exercise of outstanding stock options, warrants or conversion rights that have exercise or conversion prices below the market value of our common stock. Options, warrants and conversion rights pertaining to 18,095,89417,751,940 and 10,611,26310,598,156 shares of our common stock have been excluded from the computation of diluted earnings per share at March 31,September 30, 2011 and 2010, respectively. The options, warrants and conversion rights that were exercisable in 2011 and 2010 were not included because the effect would be anti-dilutive due to the net loss. As a result, none of our outstanding options, warrants or conversion rights affect the calculation of diluted earnings per share.Issued Accounting Pronouncements.March 31,September 30, 2011 and 2010C.RESTRUCTURING CHARGESC. INVENTORIES In the third quarter of 2010 we made a decision to consolidate our research and development activities in Omaha, Nebraska. 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. The facility has been closed at March 31, 2011. These restructuring charges are attributable to our Lab Services and Instrument Related Business.Restructuring charges include: Dollars in Thousands Costs Incurred in the
Three Months
Ended
March 31, 2011 Cumulative Costs
Incurred at
March 31, 2011 Total
Expected Costs $ — $ 53 $ 53 14 59 59 10 50 54 $ 24 $ 162 $ 166 D.INVENTORIESallowancesallowance for obsolescence) consisted of the following: Dollars in Thousands March 31,
2011 December 31,
2010 $ 1,933 $ 2,119 1,549 1,531 201 212 $ 3,683 $ 3,862 (520 ) (518 ) $ 3,163 $ 3,344 TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31, 2011 and 2010 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 Long Lived Dollars in Thousands March 31, 2011 December 31, 2010 Cost Accumulated
Amortization Net Book
Value Cost Accumulated
Amortization Net Book
Value $ 6,535 $ 228 $ 6,307 $ 6,535 $ — $ 6,535 1,434 51 1,383 1,434 — 1,434 367 — 367 367 — 367 344 12 332 344 — 344 511 252 259 511 245 266 290 274 16 290 274 16 $ 9,481 $ 817 $ 8,664 $ 9,481 $ 519 $ 8,962 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 10 years 7 years 7 – 8 years Indefinite 7 years 7 years USU.S. security deposits and deferred tax assets, net of applicable valuation allowances.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 March 31,September 30, 2011 and 2010, respectively. Amortization expense for intangible assets was $1.0 million and 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 $1.2 million in each of the years 2011 through 2017.F.DEBTE. CAPITAL LEASES Dollars in Thousands March 31,
2011 December 31,
2010 $ 8,640 $ 8,640 741 989 $ 9,381 $ 9,629 (1)The First Note is a three year senior secured promissory note to PGxHealth, LLC entered into on December 29, 2010 in conjunction with our acquisition of the FAMILION family of genetic tests from PGxHealth. Interest is payable at 10% per year with quarterly interest payments through March 29, 2012. Thereafter, quarterly installments will include both principal and interest through December 30, 2013.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31, 2011 and 2010(2)The Second Note is a one year senior secured promissory note to PGxHealth, LLC entered into on December 31, 2010 for facility improvements made to the CLIA certified laboratory in New Haven, Connecticut. Interest is payable at 6.5% per year with the principal and interest payable in twelve monthly installments with the final payment due on December 31, 2011.The entire unpaid balance of the Notes will become immediately due and payable if: (i) we fail to make timely payments under the Notes; (ii) we make an assignment for the benefit of creditors; (iii) we file for bankruptcy; or (iv) upon any event of default under the Security Agreement. Additionally, under the terms of the First Note, if we consummate an equity financing that involves the receipt by us of net proceeds of not less than $6,000,000, then we shall, upon the consummation of such equity financing, pay to PGxHealth the lesser of: (i) 25% of the gross proceeds received from such financing; and (ii) the then-outstanding balance under the First Note. Under the terms of the Second Note, in the event of a sale of all or substantially all of the assets of the Company, we shall pay PGxHealth the lesser of: (i) 100% of the proceeds, less certain fees, received pursuant to such sale; and (ii) the then-outstanding balance under the Second Note.The Notes are secured by the assets of Transgenomic.The aggregate minimum principal maturities of the debt for each of the three fiscal years following December 31, 2010 are as follows: $ 741 3,703 4,937 $9,381 G.CAPITAL LEASESleased property acquired under capital leases. Dollars in Thousands Asset Balances at March 31,
2011 December 31,
2010 $ 541 $ 394 (39 ) (13 ) $ 502 $ 381 Dollars in Thousands Asset Balances at Classes of Property Equipment $ 782 $ 394 Less: Accumulated amortization (119 ) (13 ) Total $ 663 $ 381 March 31, 2011.September 30, 2011. Dollars in Thousands $ 177 140 124 8 $ 449 (48 ) $ 401 TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31, 2011 and 2010 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 H.F. COMMITMENTS AND CONTINGENCIES $0.9$0.3 million in 2011, $1.0$1.1 million in 2012, $0.6 million in 2013, $0.4 million in 2013,2014 , $0.4 million in 2015 and $0.3 million in 2016. Rent expense for the three months ended September 30, 2011 and 2010 was $0.2 million in 2014 and $0.2 million, in 2015.respectively. Rent expense for each of the threenine months ended March 31,September 30, 2011 and 2010 was $0.3$0.7 million and $0.2$0.6 million, respectively.2011.2012. The employment agreement provides that Mr. Tuttle will be entitled to receive a severance payment from the Company if his employment is terminated involuntarily except if such termination is based on “just cause”, as that term is defined in his employment agreement. The severance payment payable in the event of involuntary termination without just cause is equal to his annual base salary at the time of termination and will be paid over a twelve-month period. The employment agreement provides that the severance payment provision will be honored if the Company is acquired by, or merged into, another company and his position is eliminated as a result of such acquisition or merger. In additionMarch 31,September 30, 2011, firm commitments to vendors to purchase components used in WAVE Systems and instruments manufactured by others totaled $0.1$0.5 million.I.G. INCOME TAXES Federalfederal income tax returns related to tax years 2007 through 2010. We have state income tax returns subject to examination primarily for tax years 2007 through 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 2007 through 2010.threenine months ended March 31,September 30, 2011 was a benefit of less than $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. We believe the tax benefit recorded will be offset in future periods by a tax expense related to income reported in financial statements of our subsidiary outside the U.S. Income tax benefitexpense for the threenine months ended March 31,September 30, 2010 was less than $0.1 million. The effective tax rate for the threenine months ended March 31,September 30, 2011 is 1.0%1.14%, which is primarily the result of valuation allowances against the Net Operating Lossesnet operating losses for the U.S. partially offset by permanent differences related to intercompany foreign currency exchange of our subsidiary outside the U.S.March 31,September 30, 2011 and 2010, there were no material changes to the liability for uncertain tax positions.J.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 match the employee’s contributions at the rate of 50% on the first 6% of contributions. We may, at the discretion of our Board of Directors, make additional contributions on behalf of the Plan’s participants. Contributions to the 401(k) plan were less than $0.1 million for the three months ended March 31, 2010. No contributions were made in the three months ended March 31, 2011 due to cost saving initiatives.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31, 2011 and 2010K.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 months ended March 31, 2011 or 2010. At March 31, 2011, there were warrants outstanding which were exercisable to purchase 5,572,408 shares of common stock. Issue Year Expiration
Year Underlying
Shares Exercise
Price 2004 2011 400,000 $ 1.13 2010 2015 5,172,408 $ .58 5,572,408 (1)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.(2)These warrants were issued in conjunction with the Series A Convertible Preferred Stock financing (the “Financing”) with certain entities affiliated with Third Security, LLC (the “Investors”). The number of shares shown reflects the post conversion shares.series 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. with Third Security, LLC pursuant to, in which we: (i) sold an aggregate of 2,586,205 shares of Series A Convertible Preferred Stock;Stock (the “Series A Preferred”) at a price of $2.32 per share; and (ii) issued warrantsa warrant to purchase up to an aggregate of 1,293,102 shares of Series A Convertible Preferred Stock with(the “Warrant”) having an exercise price of $2.32 per share.share (the sale of Series A Preferred and issuance of the Warrant hereafter referred to as the “Financing”). The WarrantsWarrant may be exercised at any time from December 29, 2010 until December 28, 2015 and containcontains a “cashless exercise” feature. The sharesgross proceeds from the Financing were $6.0 million. The $0.2 million of costs incurred to complete the Financing were recorded as a reduction in the value of the Series A Preferred. We used the net proceeds from the financing to acquire the FAMILION family of genetic tests from PGxHealth, a subsidiary of Clinical Data, Inc.The Series A Preferred meets the definition of mandatorily redeemable stock as it is preferred capital stock that is redeemable at the option of the holder through December 2015 and should be reported outside of equity. The Series A Preferred is accreted to its redemption value of $6.0 million. The Warrant does not qualify to be treated as equity and, accordingly, is recorded as a liability. A preferred stock anti-dilution feature is embedded within the Series A Preferred that meets the definition of a derivative.issuable pursuant to(the “Certificate of Designation”) with the Secretary of State of the State of Delaware, designating 3,879,307 shares of our preferred stock as Series A Convertible Preferred Stock. The Series A Preferred, including the Series A Purchase Agreement andPreferred issuable upon exercise of the Warrants are initially Warrant, isThe aggregate gross proceeds from the issuance were $6.0 million.The Series A Convertible Preferred Stock meets the definition of mandatorily redeemable stock as it is preferred capital stock which is redeemable at the option of the holder and should be reported outside of equity. Preferred stock is accreted to its redemption value. The warrants do not qualify to be treated as equity, and accordingly, are recorded as a liability. A preferred stock conversion feature is embedded within the Series A Convertible Preferred Stock that meets the definition of a derivative.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31, 2011 and 2010The costs to secure the preferred stock were taken against the preferred stock. For the year ended December 31, 2010 these costs were $0.2 million.We used the net proceeds from the financing to acquire the FAMILION family of genetic tests from PGxHealth, a subsidiary of Clinical Data.In connection with the Financing, we filed a Certificate of Designation of Series A Convertible Preferred Stock with the Secretary of State of the State of Delaware, designating 3,879,307 shares of our Preferred Stock as Series A Convertible Preferred Stock. Certain rights of the holders of the Series A Convertible Preferred Stock are senior to the rights of the holders of Common Stock.common stock. The Series A Convertible Preferred Stock has a liquidation preference equal to its original price per share, plus any accrued and unpaid dividends thereon. The holders of the Series A Convertible Preferred Stock accrues cumulativeare entitled to receive quarterly dividends, which accrue at the rate of 10.0% of the original price per share per annum. Stock are entitled to vote together with the holders of Common Stock,common stock, as a single group, on an as-converted basis. However, the Certificate of Designation provides that we shall not perform some activities, subject to certain exceptions, without the affirmative vote of a majority of the holders of the outstanding shares of Series A Convertible Preferred Stock.Preferred. The holders of the Series A Convertible Preferred Stock also are entitled to elect or appoint, as a single group, two (2) of the five (5) directors of the Company.Common Stockcommon stock underlying the Series A Convertible Preferred Stock issued pursuant to the Series A Purchase Agreement and issuable upon exercise of the Warrants and all shares of Common Stockcommon stock issuable upon any dividend or other distribution with respect thereto.holdersCompany’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 Series A Convertible PreferredBoard of Directors.are entitled to receive quarterly dividends which will accrue whether or not declared, shall compound annuallyWarrants.shall be cumulative. In any calendar quarter we shall be required to pay from funds legally available a cash dividend innine months ended September 30, 2011. Laurus Master Fund, Ltd. exercised its warrants during the amount of 50% of the distributable cash flow or aggregate amount of dividends accrued on the Series A Convertible Preferred Stock. During the firstthird quarter of 2011 we recorded $0.2 million in dividends payable whicha cashless exercise for 60,150 shares of stock. No common stock warrants were not distributed.issued or exercised during the three and nine months ended September 30, 2010. A warrant to purchase 5,172,408 shares of common stock was outstanding at September 30, 2011.Warrant Holder Issue Year Expiration Affiliates of Third Security, LLC (1) 2010 December 2015 5,172,408 $0.58 L.(1) This Warrant was issued in connection with the Financing. The number of shares shown reflects the post-conversion shares. I. FAIR VALUE all recorded separately and are recorded at fair value. We arewhichand are valued using the Black Scholes call option pricing formula.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31,formula, which approximates a binomial model for the preferred stock conversion feature. This method is among the most common and widely used valuation approaches for call options. The model relates an option's value to five variables: the current price of the underlying asset, the strike price of the option, the time to expiration or exercise of the option, a risk free interest rate, and the volatility of the underlying asset.2010March 31,September 30, 2011, the changes in the fair value of the liabilities measured using significant unobservable inputs (Level 3) were comprised of the following: Dollars in Thousands For the three months ended
March 31, 2011 Preferred
Stock
Conversion
Feature Warrants Total $ 1,983 $ 2,351 $ 4,334 3,095 (1,068 ) 2,027 $ 5,078 $ 1,283 $ 6,361 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 March 31, 2010.September 30, 2010. There were no purchases, sales, issuances or settlements of Level 3 liabilities in the three or ninemonths ended March 31,September 30, 2011 and 2010. The unrealized gains or losses of Level 3 liabilities are included in earnings are reported in other income (expense) in our Statement of Operations.M.J. STOCK OPTIONS threenine months ended March 31, 2011: Number of
Options Weighted Average
Exercise Price 2,565,001 $ 2.08 130,000 .74 (10,000 ) (.70 ) (219,668 ) (2.48 ) 2,465,333 $ 2.02 2,178,666 $ 2.20 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 N.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, LabClinical Laboratories, Pharmacogenomic Services and Instrument Business. 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 ) March 31,September 30, 2011 and 2010 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) — — — — threenine months ended March 31,September 30, 2011 and 2010 is as follows: Dollars in Thousands 2011 2010 Lab
Services Instrument
Business Total Lab
Services Instrument
Business Total $ 3,757 $ 3,723 $ 7,480 $ 1,271 $ 4,171 $ 5,442 1,787 2,367 4,154 483 2,401 2,884 (3,536 ) 752 (2,784 ) (613 ) 238 (375 ) — (6 ) (6 ) — (51 ) (51 ) $ (3,536 ) $ 758 $ (2,778 ) $ (613 ) $ 289 $ (324 ) 428 49 477 79 56 135 — 24 24 — — — (233 ) (5 ) (238 ) — 1 1 3/31/2011 12/31/10 $ 21,817 $ 9,581 $ 31,398 $ 24,631 $ 7,396 $ 32,027 Net sales by product were as follows: Dollars in Thousands Three Months Ended
March 31, 2011 2010 $ 3,487 $ 942 270 329 3,757 1,271 1,837 2,352 1,886 1,819 3,723 4,171 $ 7,480 $ 5,442 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 March 31,September 30, 2011 and 2010March 31,September 30, 2011 and 2010 by country were as follows: Dollars in Thousands Three Months Ended
March 31, 2011 2010 $ 5,036 $ 2,330 826 766 258 568 211 560 1,149 1,218 $ 7,480 $ 5,442 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 No customer accounted for more than 10% of consolidated net sales during the three months ended March 31, 2011 and 2010. For the three months ended March 31, 2011 no customers made up more than 10% of Laboratory Services net sales. For the three months ended March 31, 2010 one customer made up more than 10% of the Laboratory Services net sales. This customer represented 16% of the Laboratory Services net sales for the three months ended March 31, 2010.O.L. SUBSEQUENT EVENTS We have no material subsequent eventsdisclosed. 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 March 31,September 30, 2011 are not necessarily indicative of results that may be attained in the future.specializingadvancing personalized medicine in high sensitivity genetic variationcancer and mutation analysis, providing productsinherited diseases through its proprietary molecular technologies and services in DNA mutation detectionworld-class clinical and discovery forresearch services. We have three complementary business segments.research, clinical molecular diagnostics and pharmacogenomics analyses.Laboratory Services:Molecular Clinical Reference Laboratory. The molecular clinical reference laboratory specializeslaboratories specialize in genetic testing for oncology, hematologycardiology, neurology, mitochondrial disorders, and inherited disorders.oncology. Located in New Haven, Connecticut and Omaha, Nebraska the molecular clinical reference laboratories are certified under the Clinical Laboratory Improvement Amendment (CLIA) as high complexity labs and our Omaha facility is accredited by CAP (College of American Pathologists). Research Services. Pharmacogenomics research services are provided by our Contract Research Organization located in Omaha, Nebraska. This lab specializes in pharmacogenomic, biomarker and mutation discovery research serving the pharmaceutical and biomedical industries world-wide for disease research, drug and diagnostic development and clinical trial support.Instrument Related Business:• Bioinstruments.Diagnostic Tools. Our proprietary product is the WAVE® System which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There is a worldwide installed base of over 1,500 WAVE Systems as of December 31, 2010.September 30, 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 OEM Equipment platforms generate a demand for consumables that are required for the continued operation of the bioinstruments. We develop, manufacture and sell these consumable products. In addition, we manufacture and sell consumable products that can be used on multiple, independent platforms. These products include SURVEYOR® Nuclease and a range of chromatography columns.threenine months ended March 31,September 30, 2011 increased by $2.0$8.4 million or 37%56% compared to the same period inThe first quarter of 2011 included theThese results ofinclude the FAMILION acquisition in our Laboratory ServicesClinical Laboratories segment. During the threenine months ended March 31,September 30, 2011, net sales from Laboratory ServicesClinical Laboratories increased by $2.5$8.6 million compared to the same threenine month period in 2010. The Clinical Reference LaboratoryLaboratories increase is a result of the revenue of $2.7$8.4 million related to the FAMILION acquisition. Net sales from Pharmacogenomics Research Services decreasedincreased by less than $0.1 million. Net sales in our Instrument Related Business were up 11% or $0.4$0.8 million for the threenine months ended March 31,September 30, 2011 compared to the same period in 2010. Net sales from bioinstrumentsin Diagnostic Tools were down 22% and net sales of consumables were up 4%9% or $1.0 million for the comparable three month periods.nine months ended September 30, 2011 compared to the same period in 2010. Our gross profit margin increased from 53%49% for the threenine months ended March 31,September 30, 2010 to 56% for the same period in 2011. Laboratory ServicesClinical Laboratories gross margin increased from 38%42% in the threenine months ended March 31,September 30, 2010 to 48%59% for the same period in 2011. Loss from operations was $0.8$2.8 million for the threenine months ended March 31,September 30, 2011 compared to $0.4$2.3 million for the threenine months ended March 31, 2010.September 30, 2010.March 31,September 30, 2011, we had cash and cash equivalents of $3.2 million.$1.4 million.We continue to leverage our core instrument business for on-going instrument sales worldwide as well as employing our instrument technology and related expertise in our two laboratory services businesses. strengtheningcontinued growth in both 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 offerings for both of these service businesses. In particular,key cardiac tests, and we have substantially increased our footprintexpect to introduce a new, competitively-positioned Plavix® response test in the molecular diagnostics laboratory market throughnear term.recent acquisitionNuclear Mitome Test, a 400-gene screen of the Clinical Data FAMILION laboratory testing business.nuclear genes linked to mitochondrial function that provides useful clinical information in understanding the underlying genetic causes of this spectrum of diseases. This acquisition brings us approximately $13.0 million in new annual revenuestest has been well-received by mitochondrial experts and a much larger presence both with insurersphysicians already and patients. This acquisition also provides us accessis assisting them to higher throughput technologiesbetter diagnose this serious and an expert staffdifficult to aid us in growing our reference laboratory business as well as consolidation opportunities for laboratory operations, billing and sales and marketing.Lab,Services Unit, we continue to perform cancer pathway gene mutation projectsanalysis and other associated genomics service testing for a number of high visibility pharmaceutical companiescompanies: both for pre-clinical drug discovery projects and drugphase II and III clinical trials. EmployingAlthough we may experience variability in quarter-to-quarter revenues based on the timing of projects or when specimens may arrive, we continue to experience growth in this area of the business. We can now analyze a patient's blood serum rather than a tumor to detect DNA mutations, using our recently licensed ultra sensitiveultra-sensitive DNA mutation detection technology, termed Cold-PCR,“COLD-PCR”, and a significant improvement to COLD-PCR termed Ice COLD-PCR, we have added the significant addition of utilizing blood as a mutation detection sample source rather than just testing patients’ tumors.“ICE COLD-PCR”. This is a significant achievement, and should, we believe it should lead to much faster expansiongrowth of our service testing forpharmacogenomics research services as pharmaceutical partners as theycompanies adopt this novel approach for both drug and disease research.Ice Cold-PCR,ICE COLD-PCR, which offers sensitivity improvements as much as 10,0001,000 times higher than routine DNA testing technology, we have recently discovered a technique to further improve mutation detection sensitivity of standard Sanger sequencing. We have termed this new discovery BLOCker-Sequencing“BLOCker-Sequencing” and we are combining this new discovery with our Ice Cold-PCRICE COLD-PCR program to bring what we believe to be the most accurate and sensitive mutation detection technology available in the market today. We believe that this combination of technologies will offer us the ability to develop tests for earlier cancer detection using blood or even saliva, to measure recurrence for a very early warning to better manage patients suffering from cancer as well as support earlier drug selection or drug resistance determinations for these patients.opportunities by sellingdistribution 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.sell OEM instruments worldwide for pre-analytical karyotyping automation.advance our pipeline of cancer pathway gene mutation kits as well. We have launchedcompleted development of our CE IVD labeledfirst ICE COLD-PCR assay kit and will commence market validation trials in the fourth quarter. Our first ICE COLD-PCR kit,kit into Europekits can become effective and the U.S.efficient products for use both in earlier cancer screening in blood and have released two follow on kits for detecting mutations in key cancer pathway genes BRAFto monitor treatment and PIK3CA. These are key cancer pathway mutation assessment tools and, through our proprietary technologies, bring noteworthy improvements in sensitivity and cost efficiency to the market compared to competing technologies. We intend todisease recurrence.including the personalized medicine market, particularly in oncology, where the sensitivities of our technologies are essential.provide significant clinical benefit. We have also embarked on several academic collaborations to further validate our newest technologies and better determine how they can and will be used in clinical settings for patients undergoing treatment for cancer.UncertaintiesMarch 31,September 30, 2011 we had cash and cash equivalents of $3.2 million.$1.4 million. We believe that existing sources of liquidity are sufficient to meet expected cash needs during 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.revaluationtranslation risk whichthat occurs when transactions are doneconsummated in a currency other than British Pound Sterling, which is the functional currency of our foreign subsidiary These transactions, which are most often consummated in Euros, must be translated into British Pound Sterling. These transactions must be revalued withinIn addition, results of operations and the Transgenomic, Limited ledger, whose functionalbalance sheet of our foreign subsidiary are translated from British Pound Sterling to our reporting currency, which is the British Pound Sterling. The majority of the transactions on this ledger are in Euro.U.S. Dollar. As a result we are subject to exchange rate risk. Fluctuations in the foreign exchange rates could causeimpact our business to be impacted.Continuing OperationsMarch 31,September 30, 2011 and 2010 Dollars in Thousands Three Months Ended
March 31, Change 2011 2010 $ % $ 3,487 $ 942 $ 2,545 270 % 270 329 (59 ) (18 )% 3,757 1,271 2,486 196 % 1,837 2,352 (515 ) (22 )% 1,886 1,819 67 4 % 3,723 4,171 (448 ) (11 )% $ 7,480 $ 5,442 $ 2,038 37 % Net 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 % of Laboratory Services increased $2.5$3.2 million during the three months ended March 31,September 30, 2011 compared to the same period in 2010. Laboratory Services sales includes both the Molecular Clinical Reference Laboratory Services and the Pharmacogenomics Research Services. The Molecular Clinical Reference Laboratory Services net sales were up $2.5Of this increase, $3.0 million compared to the three months ended March 31, 2010. The increase in Molecular Clinical Reference Laboratory revenue is due to our acquisition ofrevenue from the FAMILION family of genetic tests, which we acquired on December 29, 2010.The In addition, our revenue increased by $0.2 million in our neurology family of tests due to the mix of tests performed and the average revenue per test. Research Services net sales of $0.3$0.6 million during the three months ended March 31,September 30, 2011 decreased $0.1 increased by $0.2 million compared to the first quartersame period of 2010. We had three more customers2010 due to the volume of genetic testing performed in 2011 which was offsetconnection with various clinical trials at various stages by lower average revenue per customer. Theour pharmaceutical company clients. Pharmacogenomics Research Services net sales have peaks due to the nature of projectpatient enrollment patterns and the timing of clinical trials. While the revenue generated from genetic testing related business. Eachto 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.Bioinstrument sales consistour WAVE System and associated equipment that we manufacture$3.6 million increased $0.5 million, or assemble, net sales from service contracts that we enter into with purchasers of our instruments, as well as sales of instruments we distribute for other manufacturers (“OEM equipment”). We also sell refurbished WAVE Systems in order to access additional customers. Bioinstrument net sales decreased $0.5 million, or 22%15%, during the three months ended March 31,September 30, 2011 as compared to the same period in 2010. The decrease in bioinstrument net sales was2010 due to fewer OEMselling more instruments sold in the first quarter of 2011. There were two OEM instruments sold in 2011 compared to five in the first quarter of 2010 each of which was offset by a higher average sales price in the firstthird quarter of 2011. We sold five OEM Equipment instruments in the third quarter of 2011 compared to zero in the third quarter of 2010 and we sold four WAVE instruments in both the firstthird quarter of 2011 and 2010. The average sales price was higher in 2011. Demand for WAVE Systems has been affected by significant competitive challenges from traditional (i.e. sequencing) and evolving technologies.up 4% or $0.1down $0.5 million during the three months ended March 31,2010. The volume sold in the United States increased by $0.3 million which was offset by lower volumes in Europethird quarter of $0.2 million.CostsCost of Goods Sold.Costs of goods sold include material costs for the products that we sell and substantially all other costs associated with our manufacturing facilities (primarily personnel costs, rent and depreciation). It also includes direct costs (primarily personnel costs, rent, supplies and depreciation) associated with our LaboratoryClinical Laboratories and Pharmacogenomics Services operations. Costgoods sold consisted of the following:our business segments were as follows: Dollars in Thousands Three Months Ended
March 31, Change 2011 2010 $ % $ 1,587 $ 462 $ 1,125 244 % 383 326 57 (17 )% 1,970 788 1,182 150 % 522 932 (410 ) (44 )% 834 838 (4 ) 0 % 1,356 1,770 (414 ) (23 )% $ 3,326 $ 2,558 $ 768 30 % 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 % $4.2$4.4 million or 56%54% of total net sales during the firstthird quarter of 2011, compared to $2.9$2.0 million or 53%46% during the same period of 2010. During the three months ended March 31,September 30, 2011, the gross margin for the Laboratory ServicesClinical Laboratories was 48%60% as compared to 38%27% in the same period of 2010. The gross margin on the Clinical Reference Laboratory was 54% for the first quarter of 2011 compared to 51% for the first quarter of 2010. The three months ended March 31,September 30, 2011 include the businessgross profits from sales of the FAMILION family of genetic tests, which we acquired on December 29, 2010. Pharmacogenomics Services gross margin increased from negative 23% for the three months ended September 30, 2010 to 44% for the three months ended September 30, 2011. 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 lower bioconsumables sales which also have a relatively fixed-cost base.tests. Pharmacogenomics gross margin decreased from 1%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 loss for the three months ended March 31, 2010September 30, 2011 was $0.1 million compared to negative 42%$0.2 million in revaluation gain for the three months ended March 31, 2011. This decrease is due to staff added along with higher operatingSeptember 30, 2010.cost. The bioinstrument margin increased from 60%and facility costs and are expensed in the period in which they are incurred. For the three months ended March 31,September 30, 2011 and 2010, these costs totaled $0.5 million and $0.6 million, respectively. Research and development expenses totaled 6% and 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 72%the consolidation of our research and development activities in Omaha, Nebraska. 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 % 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 % 2011. This increase is primarily driven by2010. The nine months ended September 30, 2011 include gross profit from sales of the compositionFAMILION family of products sold. Marginsgenetic tests, which we acquired on bioconsumablesDecember 29,2010. Pharmacogenomics Services gross margin increased from 54%negative 9% for the nine months ended September 30, 2010 to 56%42% for the nine months ended September 30, 2011. Pharmacogenomics Services have a relatively fixed-cost base so any increase or decrease in 2011.$1.9from $7.6 million from $2.4 to $14.3 million to $4.3 million during the threenine month period ended March 31,September 30, 2011 compared to the same period in 2010. The primary increase in our selling, general and administrative costs is primarily due to the acquisition of$3.7 million in expenses related to the FAMILION family of genetic tests.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 grants, $0.9 million in amortization of the acquired intangibles and bad debt expense of $1.5 million. Foreign currency revaluation gainsgain for the threenine months ended March 31,September 30, 2011 were was less than $0.1 million compared to $0.1$0.3 million in revaluation loss for the threenine months ended March 31, 2010.ForDuring the first quarter ofnine months ended September 30, 2011 and 2010 these costs totaled $0.6$1.7 million and $0.8$2.0 million, respectively.Research and development expenses totaled 7% and 15%13% of net sales during the threenine months ended March 31,September 30, 2011 and 2010, respectively. DecreaseThe decrease is due primarily to the consolidation of our research and development activities in Omaha, Nebraska.Nebraska, the benefit which is partially offset by legal costs to defend a patent.threenine months ended March 31,September 30, 2011 includes an award of a federal grant under the Qualifying Therapeutic Discovery Project of $0.2 million, net of consulting fees. TheOther expense onincludes interest expense as well as the expense associated with the preferred stock and warrant, which is due to the increasechange in fair value of the Preferred Stockpreferred stock conversion feature. The expense associated with the change in value of the preferred stock conversion feature and warrants. This is a non-cash item.threenine months ended March 31,September 30, 2011 was a benefit of less than $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 related to state and franchise taxes as well as reserves for uncertain income taxes. We believe the recorded tax benefit recorded will be offset in future periods by a tax expense, related to income reported in the financial statements of our subsidiary outside the U.S.foreign subsidiary. Income tax benefitexpense for the threenine months ended March 31,September 30, 2010 was less than $0.1 million.March 31,September 30, 2011 and December 31, 2010 were as follows: Dollars in Thousands March 31,
2011 December 31,
2010 Change $ 14,646 $ 15,034 $ (388 ) 8,340 8,253 (87 ) $ 6,306 $ 6,781 $ (475 ) 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 isdecreased due primarily a result ofto our payment obligations related to our notes payable and capital leases, and increased accrued expenses and compensation at March 31, 2011 compared to December 31, 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 March 31,September 30, 2011, we had cash and cash equivalents of $3.2 million.$1.4 million. We believe that existing sources of liquidity are sufficientduring 2011,into 2012, but we will need to increase our net sales and focus on the integration of the FAMILION acquisition to reduce our operating expenses in order to be assured of meeting our liquidity needs on a long-term basis. 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. We continue to explore additional sources of liquidity.ThreeNine Months Ended March 31,September 30, 2011 and 2010$0.3$2.0 million during the threenine months ended March 31,September 30, 2011 compared to an increasea decrease of $0.3$1.1 million during the threenine months ended March 31, 2010.September 30, 2010. During the threenine months ended March 31,September 30, 2011 we used cash of $0.9 millionin operating activities, $0.4 million in investing andactivities, $0.8 million in financing activities which was offset by $0.1 million by the effect of foreign currency exchange revaluation.rate changes on cash. In 2010, net cash provided byused in operating activities was $0.4$0.9 million offset by less than $0.1 , $0.2 million of net cash flow was used in investing activities and less than $0.1 million impact of foreign currency exchange rates.was used in financing activities.Provided byUsed In Operating Activities. Cash flows provided byused in operating activities totaled $0.1$0.9 million during both the threenine months ended March 31,September 30, 2011 compared to cash flows provided by operating activities of $0.4 million during the same period of and 2010. The cash flows provided byused in operating activities in 2011 include the net loss and decreaseincrease in accounts payable,receivable, offset by the non-cash items which include revaluationincluding the change in fair value of the preferred stock conversion feature and warrant liability, the provision for losses on doubtful accounts and depreciation and amortization. The cash flows provided by operating activities in 2010 relate to the increase in accounts payable and accrued expenses of $0.9 million offset by the decrease in prepaid expenses of $0.2 million and the net loss of $0.3 million.$0.1$0.4 million during the threenine months ended March 31,September 30, 2011 compared to cash flows used in investing activities of less than $0.1$0.2 million during the same period of 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 consisted primarily of purchases of property and equipment.$0.3$0.8 million for the threenine months ended March 31, 2011.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 due toin connection with the exercise of stock options for 10,00030,000 shares during the first quarter of 2011. There were no cashquarter. Cash flows provided by or used in financing activities were less than $0.1 million for the threenine months ended March 31,September 30, 2010. Cash flows used in financing activities were for principal payments on capital leases offset by the cash received from issuance of common stock in connection with the exercise of stock options for 100,000 shares during the second quarter of 2010.March 31,September 30, 2011 and December 31, 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.Item 4. Controls and Procedures Item 4. Controls and ProceduresMarch 31,September 30, 2011, Transgenomic’s disclosure controls and procedures were effective.March 31,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 Item 1A. Risk Factors 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) 4.1 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: May 13,November 10, 2011By: 30