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Precipio (PRPO)

Filed: 30 Mar 06, 7:00pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-K

 


(Mark One)

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission File Number 000-30975

 


TRANSGENOMIC, INC.

(Exact Name of Registrant as Specified in its Charter)

 


 

Delaware 91-1789357

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification Number)

12325 Emmet Street Omaha, NE 68164 68164
(Address of Principal Executive Offices) (Zip Code)

(402) 452-5400

(Registrant’s Telephone Number, Including Area Code)

 


Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange On Which Registered

None N/A

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share

(Title of Class)

 


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form10-K  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerate filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  ¨            Accelerated Filer  ¨            Non-Accelerated Filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based on the last reported closing price per share of Common Stock as reported on The Nasdaq National Market on the last business day of the registrant’s most recently completed second quarter was approximately $23.28 million.

At March 30, 2006, the registrant had 49,189,672 shares of Common Stock outstanding.

 


DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant Proxy Statement relating to its 2006 Annual Meeting of Stockholders (the “Proxy Statement”) have been incorporated into Parts II and II of this Report on Form 10-K.

 



TRANSGENOMIC, INC.

Index to Form 10-K for the Fiscal Year Ended December 31, 2005

 

PART I

     2
 

Item 1.

  

Business

  

2

 

Item 1A.

  

Risk Factors

  

6

 

Item 1B.

  

Unresolved Staff Comments

  

9

 

Item 2.

  

Properties

  

9

 

Item 3.

  

Legal Proceedings

  

10

 

Item 4.

  

Submission of Matters to a Vote of Security Holders

  

10

 

Item 4A.

  

Executive Officers

  

10

PART II

     
 

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  

11

 

Item 6.

  

Selected Consolidated Financial Data

  

12

 

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

13

 

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

  

24

 

Item 8.

  

Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm

  

25

   

Consolidated Balance Sheets as of December 31, 2005 and 2004

  

26

   

Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003

  

27

   

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2005, 2004 and 2003

  

28

   

Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003

  

29

   

Notes to the Consolidated Financial Statements for the Years Ended December 31, 2005, 2004 and 2003

  

30

 

Item 9.

  

Changes in and Disagreement with Accountants on Accounting and Financial Disclosure

  

46

 

Item 9A.

  

Controls and Procedures

  

46

 

Item 9B.

  

Other Information

  

46

PART III

     

46

 

Item 10.

  

Directors and Executive Officers of the Registrant

  

46

 

Item 11.

  

Executive Compensation

  

46

 

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  

46

 

Item 13.

  

Certain Relationships and Related Transactions

  

46

 

Item 14.

  

Principal Accountant Fees and Services

  

46

PART IV

     

46

 

Item 15.

  

Exhibits and Financial Statement Schedules

  

46

SIGNATURES

    

50

This Annual Report on Form 10-K references the following registered trademarks which are the property of Transgenomic: DNASEP® Columns, WAVE® System, WAVEMAKER® Software, TRANSFORMING THE WORLD® for Laboratory Equipment, TRANSGENOMIC® and the Globe Logo®; MutationDiscovery.com® Website, OLIGOSEP® for Systems and Reagents, OPTIMASE® Polymerase, RNASEP® Columns, WAVE OPTIMIZED® reagents, and WAVE® MD Systems. Additionally, this Annual report on Form 10-K references the following trademarks which are the property of Transgenomic: MitoScreen™ Kits, ProtocolWriter™ Software, Navigator™ Software, THE POWER OF DISCOVERY™ for Lab Reagents and Educational Programs, and Surveyor™ Nuclease. All other trademarks or trade names referred to in this Annual Report on Form 10-K are the property of their respective owners.

 

1


PART I

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains or incorporates by reference certain forward-looking statements. Many of these forward-looking statements refer to our plans, objectives, expectations and intentions, as well as our future financial results and are subject to risk and uncertainty. You can identify these forward-looking statements by words such as “expects,” “anticipates,” “intends,” “plans,” “may,” “will,” “believes,” “seeks,” “estimates” and similar expressions. Because these forward-looking statements involve risks and uncertainties, there are many factors that could cause our actual results to differ materially from those expressed or implied by these forward-looking statements, including those discussed under “Risks Related to Our Business” and other factors identified by cautionary language used elsewhere in the Annual Report on Form 10-K.

Item 1. Our Business

We develop, assemble, manufacture and market versatile products and provide analytical services to the medical research, clinical and pharmaceutical markets for use in genetic variation analysis. Products and services are sold through a direct sales force in the United States and throughout much of Western Europe. For the rest of the world, products and services are sold through more than 25 dealers and distributors located in those local markets. Net sales are categorized as bioinstruments, bioconsumables and discovery services.

 

  Bioinstruments. The flagship product is the WAVE® system which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There was a world-wide installed base of nearly 1,300 WAVE® systems as of December 31, 2005. We utilize our sales and distribution network to sell a number of independent, third party equipment platforms. Service contracts to maintain installed systems are sold and supported by technical support personnel.

 

  Bioconsumables. The installed WAVE® base generates a demand for consumables that are required for the system’s continued operation. We develop, manufacture and sell these 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 separation columns.

 

  Discovery Services. We provide various genetic laboratory services through a contract research lab in Gaithersburg, Maryland and a second laboratory in Omaha, Nebraska that operates in a Good Laboratory Practices (“GLP”) compliant environment and is certified under the Clinical Laboratory Improvement Amendment. The services provided primarily include (1) genomic biomarker analysis services to pharmaceutical and biopharmaceutical companies to support preclinical and clinical development of targeted therapeutics; and (2) molecular-based testing for hematology, oncology and certain inherited diseases for physicians and third-party laboratories.

Historically, we operated a segment (the “Nucleic Acids operating segment”) that developed, manufactured and marketed chemical building blocks for nucleic acid synthesis to biotechnology, pharmaceutical and oligonucleotide synthesis companies and research institutions throughout the world. In the fourth quarter of 2005, we implemented a plan to exit this operating segment. Accordingly, results of this business are reflected as discontinued operations for all periods presented.

Business Strategy

Since inception, our business strategy has been to provide products and services to biomedical researchers, medical institutions, diagnostic and pharmaceutical companies that are tied to advancements in the field of genomics. Advances in genomics have fueled efforts to understand individual differences in disease susceptibility, disease progression, and response to therapy. Accordingly, a principal component of our strategy has been to establish our WAVE® system as an industry standard in the biomedical research market and to develop additional markets for the WAVE® system such as clinical research and diagnostics. Through an expanding base of installed systems, we expect to increase the sales of consumable products used with the WAVE® system and create opportunities to market additional products to this customer base. In addition, through our Discovery Services offerings, we have gained exposure to the translational and clinical research markets, laying the foundation for increasing our participation in the full value chain associated with activities ranging from basic biomedical research to development of diagnostic and therapeutic products.

 

2


Significant 2005 Events

We decided to exit our former Nucleic Acids operating segment.

On December 22, 2005, the Company’s Directors voted to either sell or close and liquidate the Nucleic Acids operating segment, which consists primarily of a manufacturing facility in Glasgow, Scotland. This decision was made after an evaluation of, among other things, short and long-term sales projections for products sold by this operating segment, including estimates of 2006 sales to the operating segment’s largest customer. While opportunities to sell this operating segment as a going concern are being evaluated, we have commenced procedures, including notification of affected employees, which may lead to closure and liquidation of the facility in Glasgow, Scotland. During 2006, we expect to incur costs of approximately $0.72 million related to statutory payments to affected employees and other costs specifically attributable to closure of the facility which have been accrued at December 31, 2005. In addition, the Company expects to incur additional period costs of approximately $0.25 million in each of the first two quarters of 2006 attributable to closure of the facility that will be recorded in discontinued operations in 2006. In conjunction with the decision to exit this operating segment, the Company recorded an impairment charge of $8.02 million consisting of valuation adjustments to reflect the carrying value of the related net assets at estimated fair market value. We now reflect the results of this operating segment as discontinued operations for all periods presented.

We completed a private placement of our common stock in the fourth quarter.

On October 31, 2005, we issued securities to institutional investors in a private placement (the “2005 Private Placement”). The securities issued consisted of: (i) 14,925,743 shares of the Company’s common stock, plus (ii) five-year, non-callable warrants to purchase another 5,970,297 shares of common stock with an exercise price of $1.20 per share. The aggregate purchase price for the securities sold was $1.01 per share of common stock initially being sold or $15.08 million. In conjunction with this transaction, we issued a warrant to Oppenheimer & Co., Inc. to purchase 932,859 shares at $1.20 per share as part of their placement fee.

The net proceeds from the 2005 Private Placement were $13.90 million after transaction costs of $1.18 million. These proceeds were partially used to repay all outstanding principal and accrued interest on our loans to Laurus Master Funds, Ltd. (“Laurus”) including fees paid to Laurus to facilitate the 2005 Private Placement and prepayment penalties to Laurus in the sum of $0.82 million. The remaining proceeds of $5.35 million will be used for future working capital needs.

One of our laboratories was certified under the Clinical Laboratory Improvement Amendment, and we began to offer molecular-based testing to physicians and third-party laboratories.

During the fourth quarter of 2005, our laboratory in Omaha, Nebraska was certified under the Clinical Laboratory Improvement Amendments and we received our first patient samples for molecular-based testing for hematology, oncology and certain inherited diseases for physicians and third-party laboratories. We believe there is a significant opportunity for us to capitalize on the increasing demand for molecular-based personalized medicine by leveraging on our technologies and experience gained from the genomic biomarker analysis that our Discovery Services Group has and will continue to provide to pharmaceutical and biopharmaceutical companies.

We introduced the newest generation of our flagship product, the WAVE® system 4500.

During September 2005, we introduced the newest version of our WAVE® platform, the WAVE® system 4500. The WAVE® 4500 includes enhancements that are designed to optimize sensitivity and throughput for our customers while reducing our overall product and maintenance cost. In addition to new product sales, certain enhanced components of the WAVE® 4500, including the oven and software, will provide modular upgrade opportunities for our existing customers.

 

3


In the first quarter, Laurus converted $2.52 million of its loans into shares of our common stock.

On March 18, 2005, we allowed Laurus to convert $1.87 million of the outstanding principal balance under our convertible line of credit (the “Credit Line”) into 3,600,000 shares of our common stock. In addition, on March 24, 2005 we allowed Laurus to convert $0.65 million of the outstanding principal balance of our convertible term note (the “Term Note”) into 1,250,000 shares of our common stock. The Credit Line and Term Note (collectively, the “Laurus Loans”) were subsequently repaid in September 2005 and are no longer available to us.

Sales and Marketing

We have sold our products to customers in over 30 countries. We use a direct sales and support staff for sales in the U.S., U.K. and most countries in Western Europe. For the rest of the world, we sell our products through dealers and distributors located in those local markets. We have over 25 dealers and distributors. We also maintain regionally-based technical support staffs and applications scientists to support our sales and marketing activities throughout the U.S. and Europe.

Customers

Customers include numerous leading academic and medical institutions in the U.S. and abroad. In addition, our customers also include a number of large, established U.S. and foreign pharmaceutical, biotech and commercial companies. No customer accounts for more than 10% of consolidated net sales.

Research and Development

We maintain an active program of research and development primarily directed toward the improvement of the DNA separation media used in our WAVE® system, the refinement of the hardware and software components of the WAVE® system, the creation of unique enzymes and WAVE-Optimized® enzymes, and the development of assays on the WAVE® system.

For the years ended December 31, 2005, 2004 and 2003, our research and development expenses were $2.20 million, $4.50 million and $6.83 million, respectively. We will need to continue to invest in research and development activities in order to remain competitive and to take advantage of new business opportunities as they arise. During 2006, we expect research and development expense to be approximately equal to the 2005 levels.

In addition to the amounts reflected above, our discontinued operations incurred no research and development expenses during the year ended December 31, 2005 and $2.18 million and $2.47 million during the years ended December 31, 2004 and 2003, respectively.

Manufacturing

We manufacture bioconsumable products including our separation columns, liquid reagents, and enzymes. The major components of our WAVE® systems are manufactured for us by a third party. We integrate our own hardware and software with these third party manufactured components. Our manufacturing facilities for our WAVE® systems and bioconsumables are located in Omaha, Nebraska, San Jose, California, and Cramlington, England. The nature of our instruments and bioconsumables business does not generally lend itself to tracking and reporting sales backlog.

Intellectual Property

To establish and protect our proprietary technologies and products, we rely on a combination of patent, copyright, trademark and trade-secret laws, as well as confidentiality provisions in our contracts. We presently own rights to more than 40 issued patents and 20 pending applications in both the U.S. and abroad. Our WAVE® System and related

 

4


consumables, are protected by patents and in-licensed technologies that expire in various periods beginning in 2013 through 2022. We will continue to file patent applications and seek new licenses as warranted to protect and develop new technologies of interest to our customer base in the coming years.

Competition

The markets in which we operate are highly competitive and characterized by rapidly changing technological advances. A number of our competitors possess substantial resources and are able to develop and offer a much greater breadth of products and/or services, coupled with significant marketing and distribution capabilities. We compete principally on the basis of uniquely enabling technical advantages in specific but significant market segments.

Competition for our WAVE® systems arises primarily from DNA sequencing and genotyping technologies. Competitors in these areas include Applied Biosystems, Beckman Coulter, Amersham (now part of GE Healthcare), Affymetrix, Agilent Technologies, Nanogen, Illumina, Sequenom, Pyrosequencing (now part of Biotage AB), Varian, and others. Competition for some of our non-WAVE® consumable products comes from numerous well-diversified life sciences reagents providers, including, among others, Invitrogen, Qiagen, Roche, Stratagene, and Promega. Our discovery services product line faces competition from a number of companies offering contract DNA sequencing and other genomic analysis services, including Genaissance Pharmaceuticals, GeneLogic, Agencourt, SeqWright, Gentris, and Perlagen. In addition, several clinical diagnostics service providers, such as Labcorp, Quest, and Specialty Laboratories, also offer related laboratory services in support of clinical trials. Finally, additional competition arises from academic core laboratory facilities.

Employees

As of December 31, 2005, 2004 and 2003, we had employees focused in the following areas of our operation:

 

   December 31,
   2005  2004  2003

Manufacturing

  56  52  54

Sales, Marketing and Administration

  73  75  90

Research and Development

  10  19  31
         
  139  146  175

Personnel associated with discontinued operations

  17  32  69
         
  156  178  244
         

Our employees were employed in the following geographical locations.

 

   December 31,
   2005  2004  2003

United States

  94  106  166

Europe (other than the United Kingdom)

  23  22  20

United Kingdom

  39  50  58
         
  156  178  244
         

We supplement our workforce through the use of independent contractors and consultants. At December 31, 2005, 2004 and 2003, we have engaged independent contractors or consultants who provide services to us approximately equivalent to one, five and four full-time employees, respectively.

General Information

We were incorporated in Delaware on March 6, 1997. Our principal office is located at 12325 Emmet Street, Omaha, Nebraska 68164 (telephone: 402-452-5400). We maintain manufacturing facilities in Omaha, Nebraska, San Jose, California, and Cramlington, England. We maintain research and development offices in Gaithersburg, Maryland and Omaha, Nebraska. Additionally, our discontinued operation includes a manufacturing facility in Glasgow, Scotland.

 

5


We make reports filed by us with the SEC available free of charge on our website as soon as reasonably practicable after these reports are filed. The address of our website iswww.transgenomic.com. Information on our website, including any SEC report, is not part of this Annual Report on Form 10-K.

Item 1A. Risk Factors

We may not have adequate financial resources to execute our business plan.

At December 31, 2005, we had cash and cash equivalents of $6.74 million. While we believe that existing sources of liquidity are sufficient to meet expected cash needs through 2006, we have experienced recurring net losses and have an accumulated deficit totaling $122.09 million at December 31, 2005 and have historically relied upon cash flows from investing and financing activities to offset significant cash outflows from operating activities. To the extent necessary, we believe that we can manage costs and expenses at reduced levels to conserve working capital. The need for any such cost and expense reductions would likely delay implementation of our business plan. Ultimately, we must achieve sufficient revenues in order to generate positive net earnings and cash flows from operations. However, we cannot assure you that we will be able to increase our revenues.

We have a history of operating losses and may incur losses in the future.

We have experienced annual losses from continuing operations since inception of our operations. Our losses from continuing operations for the years ended December 31, 2005, 2004 and 2003 were $4.98 million, $13.75 million, and $9.51 million, respectively. These losses have been due principally to the high levels of research and development expenses and sales and marketing expenses that we have incurred in order to develop and market our products, restructuring charges and impairment charges. In addition, markets for our products have developed more slowly than expected in many cases and may continue to do so. As a result, we may incur operating losses in the future.

Markets for our products and services may develop slowly.

There are many factors that affect the market demand for our products and services that we cannot control. Demand for our WAVE® system is affected by the needs and budgetary resources of research institutions, universities, hospitals and others who use the WAVE® system for genetic-variation research. The WAVE® system represents a significant expenditure by these types of customers and often requires a long sales cycle. If revenues from the sales of our products and services continue at current levels, we may need to take steps to further reduce operating expenses or raise additional working capital. We cannot assure you that sales will increase or that we will be able to reduce operating expenses or raise additional working capital.

One customer accounted for a significant portion of sales.

No customer accounted for more than 10% of consolidated net sales for any period presented. However, sales to a large pharmaceutical company totaled $2.19 million, $1.66 million and $0.39 million during the years ended December 31, 2005, 2004 and 2003, respectively, and represented 9%, 7%, and 2% of consolidated net sales. Sales to this customer are governed by a non-binding master services agreement dated August 22, 2002. Accordingly, the amount of sales to this customer is subject to change.

The sale of our products and business operations in international markets subjects us to additional risks.

During the past several years, international sales have represented approximately 55-68% of our total net sales. As a result, a major portion of our revenues and expenses are subject to risks associated with international sales and operations. These risks include:

 

  payment cycles in foreign markets are typically longer than in the U.S., and capital spending budgets for research agencies can vary over time with foreign governments;

 

6


  changes in foreign currency exchange rates can make our products more costly and operating expenses higher in local currencies since our foreign sales and operating expenses are typically paid for in U.S. Dollars, British Pounds or the Euro; and

 

  the potential for changes in U.S. and foreign laws or regulations that result in additional import or export restrictions, higher tariffs or other taxes, more burdensome licensing requirements or similar impediments to our ability to sell products and services profitably in these markets.

Our WAVE® system includes hardware components and instrumentation manufactured by a single supplier and if we are no longer able to obtain these components and instrumentation our ability to manufacture our products could be impaired.

We rely on a single supplier, Hitachi High Technologies America, to provide the basic instrument used in our WAVE® systems. While other suppliers of instrumentation and computer hardware are available, we believe that our arrangement with Hitachi offers strategic advantages. Hitachi is replacing its current instrument line with a new instrument line. While we presently plan to convert our technology and applications to this new instrument line, such conversion may not be successful and, therefore, we may incur additional costs for the custom manufacturing of the current instrument line. If we were required to seek alternative sources of supply, it could be time consuming or expensive or require significant and costly modification of our WAVE® system. Also, if we were unable to obtain instruments from Hitachi in sufficient quantities or in a timely manner, our ability to manufacture our products could be impaired, which could limit our future revenues.

We may not have adequate personnel to execute our business plan.

In order to reduce our operating costs, we have significantly reduced the number of employees, including reductions in our research and development staff and our sales and marketing personnel. In addition, we may lose other key management, scientific, technical, sales and manufacturing personnel from time to time. It may be very difficult to replace personnel if they are needed in the future, and the loss of key personnel could harm our business and operating results. We cannot assure you that our employee reductions will not impair our ability to continue to develop new products and refine existing products in order to remain competitive. In addition, these reductions could prevent us from successfully marketing our products and developing our customer base.

Our markets are very competitive.

Many of our competitors have greater resources than we do and/or may enjoy other competitive advantages. This may allow them to more effectively market their products to our customers or potential customers, to develop products that make our products obsolete or to produce and sell products less expensively than us. As a result of these competitive factors, demand for and pricing of our products and services could be negatively affected.

Our patents may not protect us from others using our technology that could harm our business and competitive position.

Patent law relating to the scope of claims in the technology fields in which we operate is still evolving. The degree of future protection for our proprietary rights is uncertain. Furthermore, we cannot be certain that others will not independently develop similar or alternative products or technology, duplicate any of our products, or, if patents are issued to us, design around the patented products developed by us. Our patents or licenses could be challenged by litigation and, if the outcome of such litigation were adverse to us, our competitors could be free to use our technology. We may not be able to obtain additional patents for our technology, or if we are able to do so, patents may not provide us with substantial protection or be commercially beneficial. In addition, we could incur substantial costs in litigation if we are required to defend ourselves in patent suits brought by third parties or if we initiate such suits.

We cannot be certain that other measures taken to protect our intellectual property will be effective.

We rely upon trade secret protection, copyright and trademark laws, non-disclosure agreements and other contractual provisions for some of our confidential and proprietary information that is not subject matter for which patent protection is being sought. Such measures, however, may not provide adequate protection for our trade secrets or other proprietary information. If such measures do not protect our rights, third parties could use our technology and our ability to compete in the market would be reduced.

 

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We are dependent upon our licensed technologies and may need to obtain additional licenses in the future to offer our products and remain competitive.

We have licensed key components of our technologies from third parties. If these agreements were to terminate prematurely due to our breach of the terms of these licenses or we otherwise fail to maintain our rights to such technology, we may lose the right to manufacture or sell a substantial portion of our products. In addition, we may need to obtain licenses to additional technologies in the future in order to keep our products competitive. If we fail to license or otherwise acquire necessary technologies, we may not be able to develop new products that we need to remain competitive.

The protection of intellectual property in foreign countries is uncertain.

A significant percentage of our sales are to customers located outside the U.S. The patent and other intellectual property laws of some foreign countries may not protect our intellectual property rights to the same extent as U.S. laws. We may need to bring proceedings to defend our patent rights or to determine the validity of our competitors’ foreign patents. These proceedings could result in substantial cost and diversion of our efforts. Finally, some of our patent protection in the U.S. is not available to us in foreign countries due to the laws of those countries.

Our products could infringe on the intellectual property rights of others.

There are a significant number of U.S. and foreign patents and patent applications submitted for technologies in, or related to, our area of business. As a result, any application or exploitation of our technology could infringe patents or proprietary rights of others and any licenses that we might need as a result of such infringement might not be available to us on commercially reasonable terms, if at all. This may lead others to assert patent infringement or other intellectual property claims against us.

Our failure to comply with any applicable government regulations or otherwise respond to claims relating to improper handling, storage or disposal of hazardous chemicals that we use may adversely affect our results of operations.

Our research and development and manufacturing activities involve the controlled use of hazardous materials and chemicals. We are subject to federal, state, local and international laws and regulations governing the use, storage, handling and disposal of hazardous materials and waste products. If we fail to comply with applicable laws or regulations, we could be required to pay penalties or be held liable for any damages that result and this liability could exceed our financial resources. We cannot assure you that accidental contamination or injury will not occur. Any such accident could damage our research and manufacturing facilities and operations, resulting in delays and increased costs.

The price for our common stock is volatile and may drop.

The trading price for our common stock has fluctuated significantly over recent years. The volatility in the price of our stock is attributable to a number of factors, not all of which relate to our operating results and financial position. Nevertheless, continued volatility in the market price for our stock should be expected and we cannot assure you that the price of our stock will not decrease in the future. Fluctuations or further declines in the price of our stock may affect our ability to sell shares of our stock and to raise capital through future equity financing.

If we are unable to maintain our Nasdaq listing, your ability to trade shares of our common stock could suffer.

In order for our common stock to remain listed on the Nasdaq National Market (“Nasdaq”), we must meet the minimum listing requirements for continued listing, including, among other requirements, minimum bid price and market value of public float requirements. On February 15, 2006, we were notified that the bid price for our common stock over a 30-day period was below the $1.00 minimum required for continued listing of our common stock on the Nasdaq. In order to remain listed, the minimum bid price for our common stock must be at least $1.00 per share over ten consecutive business days before August 14, 2006. If we are not able to regain compliance with this listing requirement, we may be

 

8


delisted from the Nasdaq. If our common stock is delisted from the Nasdaq, transactions in our common stock would likely be conducted only in the over-the counter market, or potentially on regional exchanges, which could negatively impact the trading volume and price of our common stock, and investors may find it more difficult to purchase or dispose of, or to obtain accurate quotations as to the market value of, our common stock. In addition, if our common stock were not listed on the Nasdaq and the trading price of our common stock fell below $1.00 per share, trading in our common stock would also be subject to the requirements of certain rules which require additional disclosures by broker-dealers in connection with any trades involving a stock defined as a “penny stock.” In such event, the additional burdens imposed on broker-dealers to effect transactions in our common stock could further limit the market liquidity of our common stock and the ability of investors to trade our common stock.

We may issue a substantial amount of our common stock to holders of options and warrants and this could reduce the market price for our stock.

At December 31, 2005, we had obligations to issue 13,625,675 shares of common stock including outstanding stock options representing 5,563,098 shares and warrants representing 8,062,577 shares. The issuance of these additional shares of common stock may be dilutive to our current shareholders and could negatively impact the market price of our common stock.

Our common stock is thinly traded and a large percentage of our shares are held by a small group of unrelated, institutional owners.

At March 30, 2006, we had 49,189,672 shares of common stock outstanding. Fewer than ten unrelated, institutional holders own 50% to 70% of these shares. The sale of significant shares into the public market has potential to cause significant downward pressure on the price of our common stock. This is particularly the case if the shares being placed into the market exceed the market’s ability to absorb the stock. Such an event could place further downward pressure on the price of our common stock. This presents an opportunity for short sellers to contribute to the further decline of our stock price. If there are significant short sales of our stock, the price decline that would result from this activity will cause the share price to decline more so, which, in turn, may cause long holders of the stock to sell their shares thereby contributing to sales of stock in the market.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We own one facility in Glasgow, Scotland and lease 10 facilities throughout the world under non-cancelable leases with various terms. The following table summarizes occupied locations. Annual rent amounts presented in the table are reflected in thousands.

 

Location

  

Function

  Square
Footage
  2006
Scheduled
Rent
  Lease Term
Expires

Owned

        

Glasgow, Scotland

  Phosphoramidite Manufacturing(1)  44,212   N/A  N/A

Leased and Occupied

        

Omaha, Nebraska

  WAVE®and Consumable Manufacturing  25,000  $132  June 2007

San Jose, California

  Consumable Manufacturing  14,360  $148  October 2010

Cramlington, England

  Consumable Manufacturing  8,500  $14  March 2006

Omaha, Nebraska

  Multi Functional(2)  18,265  $191  July 2007

Paris, France

  Multi Functional(2)  4,753  $81  January 2014

Gaithersburg, Maryland

  Multi Functional(2)  6,560  $45  May 2006

Cambridge, Massachusetts

  Multi Functional(2)  2,500  $70  January 2007

Leased and Not Occupied(3)

  Multi Functional(2)  12,290  $340  2006 – 2007

(1)This facility is associated with the discontinued Nucleic Acids operating segment. We are currently assessing alternatives for this facility, including closure and sale.

 

9


(2)Multi Functional facilities include functions related to manufacturing, services, sales and marketing, research and development and/or administration.
(3)Leased and not occupied facilities consist of leases on facilities in San Diego, California that expire in January 2007 and a lease on a facility in Berlin, Germany that expires in May 2006. A number of these facilities are sublet to independent third parties. Annual rents from these subtenants are expected to total $0.17 million in 2006.

Item 3. Legal Proceedings

We are subject to a number of claims of various amounts, which arise out of the normal course of 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 4. Submission of Matters to a Vote of Security Holders.

We did not submit any matters to our stockholders for a vote or other approval during the fourth quarter of the fiscal year covered by this report.

Item 4A. Executive Officers

Our executive officers are appointed annually by the Board of Directors at the first meeting following the annual stockholders’ meeting. Other officers are appointed by the Board of Directors from time to time. Each officer holds office until a successor has been duly appointed and qualified or until the death, resignation or removal of such officer. Our executive officers and their ages are listed below followed by a brief biography.

 

Name

  Age  

Position

Collin J. D’Silva

  48  Chairman of the Board, Chief Executive Officer and Director

Michael A. Summers

  41  Chief Financial Officer

Mitchell L. Murphy

  49  Vice President, Secretary and Treasurer

Collin J. D’Silva.Mr. D’Silva has served as our Chairman of the Board and Chief Executive Officer since 1997 and is also a Director. Mr. D’Silva, a co-founder of Transgenomic, has worked for the Company and its predecessors since 1988. Mr. D’Silva was employed by AT&T from 1980 to 1988. At AT&T, he held various positions in engineering, materials management, sales support and business development. His last position at AT&T was Business Unit Manager and Engineering Manager for a network distribution products division. Mr. D’Silva holds a B.S. degree and a M.Eng. degree in industrial engineering from Iowa State University and an M.B.A. from Creighton University.

Michael A. Summers.Mr. Summers joined Transgenomic, Inc. in August 2004 and serves as Chief Financial Officer. Mr. Summers was employed with C&A Industries, Inc. from 2003 to 2004 where as General Manager he was responsible for the operations of various divisions that provided human capital management and consulting services. From 2001 to 2003, he was Executive Vice President and Chief Financial Officer for Nexterna, Inc., a wholly-owned technology subsidiary of Union Pacific Corporation. From 2000 to 2001, he was the Chief Accounting Officer for Able Telcom Holding Corp., a publicly-owned project management and construction company. Prior to 2000, Mr. Summers held various positions including eight years as an auditor for the Omaha, Nebraska office of Deloitte & Touche, LLP. Mr. Summers graduated from Creighton University in 1987 with a B.S. degree in business administration with an accounting major. He is a Certified Public Accountant.

 

10


Mitchell L. Murphy.Mr. Murphy joined us in 1992. His current duties include the overall corporate administration and shareholder relations. Prior to joining Transgenomic, he held accounting and financial management positions for 15 years with companies involved in manufacturing, steel distribution and rebar fabrication. He spent over two years as an auditor for the Omaha, Nebraska office of Deloitte, Haskins & Sells (now Deloitte & Touche LLP) working in a broad range of industries. Mr. Murphy graduated with honors from Creighton University in 1978 with a B.S. degree in business administration with an accounting major.

Item 5. Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Repurchases of Equity Securities

(a)Market Information. Our common stock is listed for trading on the Nasdaq under the symbol TBIO. The following table sets forth the high and low closing prices for our common stock during each of the quarters of 2004 and 2005.

 

   High  Low

Year Ended December 31, 2004

    

First Quarter

  $3.23  $1.96

Second Quarter

  $1.87  $1.24

Third Quarter

  $1.58  $1.07

Fourth Quarter

  $1.52  $1.06

Year Ended December 31, 2005

    

First Quarter

  $1.11  $0.53

Second Quarter

  $0.90  $0.45

Third Quarter

  $1.24  $0.70

Fourth Quarter

  $1.11  $0.80

(b)Holders. At March 30, 2006, there are 49,189,672 shares of our common stock outstanding and approximately 3,475 holders of record.

(c)Dividends. We have never declared or paid any cash dividends on our common stock and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. We expect to retain all earnings, if any, for investment in our business. Dividends on our common stock will be paid only if and when declared by our Board of Directors. The Board’s ability to declare a dividend is subject to limits imposed by Delaware corporate law. In determining whether to declare dividends, the Board may consider our financial condition, results of operations, working capital requirements, future prospects and other relevant factors.

(d)Securities authorized for issuance under equity compensation plans. The information required by this item is incorporated herein by reference to the section of the Proxy Statement relating to our 2006 Annual Meeting of Shareholders captioned “Equity Compensation Plan Information.”

Sale of Unregistered Securities

Information regarding sales of equity securities by the Company during the year ended December 31, 2005 that were not registered under the Securities Act of 1933 have been previously reported by the Company on Form 8-Ks filed on March 18, 2005, March 30, 2005 and October 31, 2005.

Issuer Purchase of Equity Securities

The Company made no purchases of its common stock during the quarter ended December 31, 2005. Therefore, tabular disclosure is not presented.

 

11


Item 6. Selected Consolidated Financial Data

The selected consolidated balance sheet data at December 31, 2005 and 2004 and the selected consolidated statements of operations data for each year ended December 31, 2005, 2004 and 2003 have been derived from our audited consolidated financial statements that are included elsewhere in this Annual Report on Form 10-K. The selected consolidated balance sheet data at December 31, 2003, 2002 and 2001 and the selected consolidated statements of operations data for each year ended December 31, 2002 and 2001 have been derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. Dollar amounts, except per share data, are presented in thousands.

 

   Year Ended December 31, 
   2005  2004  2003  2002  2001(1) 

Statement of Operations Data:

      

Net sales

  $25,828  $25,243  $26,044  $24,235  $28,040 

Cost of good sold

   13,497   11,997   11,374   9,935   11,831 
                     

Gross profit

   12,331   13,246   14,670   14,300   16,209 

Selling, general and administrative

   12,218   15,961   16,586   20,539   17,666 

Research and development

   2,199   4,501   6,834   11,173   9,372 

Restructuring charges(2)

   —     1,267   516   3,282   —   

Impairment charges(3)

   425   —     —     —     —   
                     

Operating expenses

   14,842   21,729   23,936   34,994   27,038 

Other income (expense)(4)

   (2,447)  (5,263)  (181)  512   2,401 
                     

Loss before income taxes

   (4,958)  (13,746)  (9,447)  (20,182)  (8,428)

Income tax expense

   26   4   65   105   24 
                     

Loss from continuing operations(5)

   (4,984)  (13,750)  (9,512)  (20,287)  (8,452)

(Loss) income from discontinued operations, net of tax

   (10,009)  (20,622)  (13,446)  (1,078)  1,051 
                     

Net loss

  $(14,993) $(34,372) $(22,958) $(21,365) $(7,401)
                     

Basic and diluted (loss) income per share:(5)

      

From continuing operations

  $(0.14) $(0.47) $(0.39) $(0.86) $(0.37)

From discontinued operations(5)

   (0.28)  (0.72)  (0.55)  (0.05)  0.04 
                     
  $(0.42) $(1.19) $(0.94) $(0.91) $(0.33)
                     

Basic and diluted weighted average shares outstanding

   35,688   29,006   24,484   23,583   22,560 
   As of December 31, 
   2005  2004  2003  2002  2001 

Balance Sheet Data:

      

Total assets

  $25,340  $37,458  $57,306  $74,035  $89,286 

Borrowings under credit line(6)

   —     6,514   2,142   —     —   

Current portion of long-term debt(6)

   —     825   1,693   63   —   

Long-term debt, less current portion(6)

   —     2,199   —     1,499   —   

Total stockholders’ equity

   17,906   16,535   45,058   61,515   82,104 

(1)In May 2001, we acquired Annovis, Inc., a specialty chemicals company that develops, manufactures and markets a wide variety of nucleic acid-based products and services for the life science industry, for a total purchase price of approximately $16,910. Annovis’ results of operations have been included in the accompanying financial statements beginning on May 1, 2001.
(2)Restructuring plans were implemented in 2002 and 2004 to reduce and align our expenses with current business prospects. The plans included employee terminations, office closures, termination of collaborations and write-offs of abandoned intellectual property. As a result, restructuring charges were recorded and are included in operating expenses. Refer to the Notes to the accompanying consolidated financial statements.
(3)Impairment charges in 2005 relate to the impairment of patent pursuits and inventory. Refer to the Notes to the accompanying consolidated financial statements.
(4)Other income (expense) for all years presented primarily includes interest expense, interest income, loss on debt extinguishment in 2005 related to the repayment of our Laurus Loans of $541, and loss on debt extinguishment of $2,859 in 2004 resulting from certain modifications to our Laurus Loans that were treated as extinguishments for financial reporting purposes. Refer to the Notes to the accompanying consolidated financial statements.
(5)During 2005, we decided to sell or close and liquidate the former Nucleic Acids operating segment, which now consists primarily of a manufacturing facility in Glasgow, Scotland. In conjunction with the decision to exit this operating segment, we recorded impairment and exit charges of $8,888 consisting of valuation adjustments to reflect the carrying value of related net assets at estimated fair market value. We now reflect the results of this business as discontinued operations for all periods presented. Refer to the Notes to the accompanying consolidated financial statements.

 

12


(6)The Laurus Loans were repaid during 2005 resulting in a loss on debt extinguishment of $541. Refer to the Notes to the accompanying consolidated financial statements.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the Consolidated Financial Statements and applicable Notes to Consolidated Financial Statements and other information in this report, including Risk Factors set forth in Item 1A and Critical Accounting Policies at the end of this Item 7.

The Company has one reportable operating segment. Although revenue is analyzed by type, net financial results are analyzed as one segment due to the integrated nature of the products. The Consolidated Financial Statements also include discontinued operations. In the fourth quarter of 2005, the Company implemented a plan to exit the former Nucleic Acids operating segment. Accordingly, results of this operating segment are reflected as discontinued operations for all periods presented.

Executive Summary

2005 Results

We have experienced recurring net losses and had an accumulated deficit at December 31, 2005 of $122.09 million. To respond to changes in the overall business climate for our products, our liquidity position and capital structure, we have instituted significant change that began in the fourth quarter of 2004 with the sale of our specialty oligonucleotide manufacturing facility and a wide-reaching restructuring plan. We continued implementing positive change during 2005 by executing on the following:

We decided to exit our former Nucleic Acids operating segment.

On December 22, 2005, we decided to sell or close and liquidate the Nucleic Acids operating segment, which consists primarily of a manufacturing facility in Glasgow, Scotland. This decision was made after an evaluation of, among other things, short and long-term sales projections for products sold by this operating segment, including estimates of 2006 sales to the operating segment’s largest customer. While opportunities to sell the operating segment as a going concern are being evaluated, procedures have commenced, including notification to affected employees, which is expected to lead to closure of the facility in Glasgow, Scotland. During 2006, we expect to incur costs of approximately $0.72 million related to statutory payments to affected employees and other costs specifically attributable to closure of the facility which have been accrued at December 31, 2005. In addition, the Company expects to incur additional period costs of approximately $0.25 million in each of the first two quarters of 2006 attributable to closure of the facility that will be recorded in discontinued operations in 2006. In conjunction with the decision to exit this operating segment, the Company recorded an impairment charge of $8.02 million consisting of valuation adjustments to reflect the carrying value of the related net assets at estimated fair market value. We now reflect the results of this operating segment as discontinued operations for all periods presented.

We completed a private placement of our common stock in the fourth quarter.

On October 31, 2005, we issued securities to institutional investors in a private placement (the “2005 Private Placement”). The securities issued consisted of: (i) 14,925,743 shares of the Company’s common stock, plus (ii) five-year, non-callable warrants to purchase another 5,970,297 shares of common stock with an exercise price of $1.20 per share. The aggregate purchase price for the securities sold was $1.01 per share of common stock initially being sold or $15.08 million. In conjunction with this transaction, we issued a warrant to Oppenheimer & Co., Inc. to purchase 932,859 shares at $1.20 per share as part of their placement fee.

The net proceeds from the 2005 Private Placement were $13.90 million after transaction costs of $1.18 million. These proceeds were partially used to repay all outstanding principal and accrued interest on our Laurus Loans including fees paid to Laurus to facilitate the 2005 Private Placement and prepayment penalties to Laurus in the sum of $0.82 million. The remaining proceeds of $5.35 million will be used for future working capital needs.

 

13


In the first quarter, Laurus converted $2.52 million of its loans into shares of our common stock.

On March 18, 2005, we allowed Laurus to convert $1.87 million of the outstanding principal balance under our Credit Line into 3,600,000 shares of our common stock. In addition, on March 24, 2005 we allowed Laurus to convert $0.65 million of the outstanding principal balance of our Term Note into 1,250,000 shares of our common stock. The Credit Line and Term Note (collectively, the “Laurus Loans”) were subsequently repaid in September 2005 and are no longer available to us.

In summary, the 2005 results reflected improvement, but we are not satisfied.

As a result of the actions undertaken since the fourth quarter of 2004, loss from continuing operations has gone from $9.51 million and $13.75 million in 2003 and 2004, respectively, to $4.98 million in 2005. Net cash flows used by operating activities have gone from $13.02 million and $12.75 million in 2004 to $3.63 million in 2005. Additionally, sales of Geron stock received as payment for goods and services and included in net cash flows from investing activities provided $2.15 million in positive cash flows. Because these shares are considered available-for-sale securities, related sales are recorded as investing activities.

2006 Outlook

Timing of the demand for our products, particularly our flagship WAVE® systems, has been difficult to predict due largely to ongoing changes in the market place and the funding arrangements of our customers. Because our net sales are largely dependent upon sales of a limited number of products, including WAVE® systems, and our cost structure is largely fixed, historical results have been somewhat sporadic. For these reasons, it is not our practice to provide prospective financial guidance related specifically to revenues, costs, net income (loss) or cash flows. However, our financial objectives are to generate income from continuing operations and positive cash flows from continuing operations. To accomplish these goals we must generate sequential growth in net sales, convert manufacturing expenses from fixed to variable costs and continue to better control operating expenses.

Develop sequential growth in net sales.

We will work to continue to leverage on and strengthen our core instrument business. Challenges exist for WAVE® system and consumable growth in traditional markets. However, we intend to continue to diversify into new markets, including the personalized medicine market (particularly in oncology), where the sensitivities of our technologies are essential. In the short-term, we believe that the introduction of the newest generation of our flagship product, the WAVE® system 4500 will provide upgrade opportunities to our current installed base. In the intermediate to longer-term, we believe that newly developed “targeted” consumable products will increase usability of our installed base and enhance net sales of consumables. Additionally, we have developed credibility and momentum with several third-party platforms that will allow us to leverage on our direct sales force and distribution network.

On the discovery services front, we will seek to leverage on past customer successes with pharmaceutical customers to diversify our customer base. Challenges also exist for these service offerings. While our large pharmaceutical customer representation has increased steadily with pilot or “proof of concept” projects, the lead time to major contracts has proven lengthy. To mitigate this risk, we believe there is a significant opportunity for us to capitalize on the increasing demand for molecular-based personalized medicine by leveraging on our technologies and experience gained from the genomic biomarker analysis that discovery services has and will continue to provide to pharmaceutical and biopharmaceutical companies. During the fourth quarter of 2005, our laboratory in Omaha, Nebraska was certified under the Clinical Laboratory Improvement Amendments, and we received our first patient samples from physicians and third-party laboratories for molecular-based testing for hematology, oncology and certain inherited diseases. This capability also allows us to offer a vertically-integrated suite of services that can support activities ranging from discovery research to clinical trials to diagnostic testing. As the need for drug/diagnostic combination products increases, we believe this suite of service offerings will prove attractive to various customers.

 

14


Convert manufacturing expenses from fixed to variable costs.

A significant portion of our manufacturing costs relate to fixed overhead associated with personnel and facilities. We continue to evaluate consolidation and outsourcing opportunities designed to convert these costs from fixed to variable costs.

Continue to control operating expenses.

Operating expenses include selling, general and administrative expenses and research and development expenses. We will need to continue to invest in research and development activities in order to remain competitive and to take advantage of new business opportunities as they arise. During 2006, we expect operating expenses, including research and development expense, to be approximately equal to 2005 levels.

Results of Continuing Operations

Years Ended December 31, 2005 and 2004

Net Sales. Net sales for the years ended December 31, 2005 and 2004 consisted of the following (dollars in thousands):

 

         Change 
   2005  2004  $  % 

Bioinstruments

  $14,427  $14,385  $42  1%

Bioconsumables

   8,981   8,838   143  2%

Discovery Services

   2,420   2,020   400  20%
              

Net sales

  $25,828  $25,243  $585  2%
              

WAVE® systems sold totaled 97 during the year ended December 31, 2005 compared to 107 during the same period of 2004. Although the number of WAVE® systems sold declined, overall bioinstrument net sales increased slightly due primarily to net sales increases from product upgrades and service contracts. The selling prices of our instruments vary based on the specific model and optional accessories. We had an installed base of 1,290 units at December 31, 2005 compared to 1,193 units at December 31, 2004. The increase in the installed base of instruments was primarily responsible for the 2% increase in sales of bioconsumables. The increase in discovery services revenue during 2005 was primarily attributable to the discovery services agreements that we entered into with a large pharmaceutical company to support their clinical development of oncology therapeutics. We plan to continue to seek opportunities to provide genetic variation discovery and analysis services to pharmaceutical and other customers and believe that these services provide us a significant opportunity to expand revenues in the future.

Costs of Goods Sold.Costs of goods sold include material costs for the products that we sell and substantially all other costs associated with our manufacturing facilities (primarily personnel costs, rent and depreciation). It also includes direct costs (primarily personnel costs and supplies) associated with our discovery services operations. Cost of goods sold for the years ended December 31, 2005 and 2004 consisted of the following (dollars in thousands):

 

         Change 
   2005  2004  $  % 

Bioinstruments

  $6,442  $6,382  $60  1%

Bioconsumables

   4,762   4,012   750  19%

Discovery Services

   2,293   1,603   690  43%
              

Cost of goods sold

  $13,497  $11,997  $1,500  13%
              

Gross profit was $12.33 million or 43% of total net sales during the year ended December 31, 2005 compared to $13.25 million and 52% during the same period of 2004. The decrease in gross profit as a percent of revenue is largely attributable to changes in the composition of products sold. Generally, sales of WAVE® systems and ancillary instrumentation generate higher gross profits than sales of third party platforms. Sales of specialty consumables (SURVEYOR Nuclease, HPLC separation columns, etc.) generate higher gross profits than base buffers and enzymes. Gross profits from discovery services have been less than expected due to the continuing build out of capacity and expansion of product offerings.

 

15


Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily include personnel costs, marketing, travel and entertainment costs, professional fees, and facility costs. These costs totaled $12.22 million during the year ended December 31, 2005 compared to $15.96 million during the same period of 2004, a decrease of $3.74 million or 23%. As a percentage of revenue, selling, general and administrative expenses totaled 43% and 63% during the year ended December 31, 2005 and 2004, respectively. This decrease resulted primarily from termination of personnel and the elimination of facilities related costs in conjunction with the 2004 Restructuring Plan. Foreign currency transaction adjustments increased operating expenses by approximately $0.33 million during the year ended December 31, 2005 compared to the same period of 2004 when foreign currency transaction adjustments reduced operating expenses by approximately $0.45 million.

Research and Development Expenses. Research and development expenses primarily include personnel costs, supplies, and facility costs. These costs totaled $2.20 million during the year ended December 31, 2005 compared to $4.50 million during the same period of 2004, a decrease of $2.30 million or 51%. The decrease related primarily to the 2004 Restructuring Plan.

As a percentage of revenue, research and development expenses totaled 8% and 18% of revenue during the year ended December 31, 2005 and 2004, respectively. We expect to continue to invest up to 10% of our revenues in research and development activities. Research and development costs are expensed in the year in which they are incurred.

Impairment Charges.Impairment charges totaled $0.43 million during the year ended December 31, 2005 and consisted of $0.25 million associated with certain international patent pursuits that were no longer consistent with our strategic plan and $0.18 million related to certain inventory associated with third party platforms.

Other Income (Expense). Other expense during the year ended December 31, 2005 of $2.45 million consisted of interest expense of $1.98 million, loss on debt extinguishment of $0.54 million net of other income of $0.07 million. Other expense during the year ended December 31, 2004 consisted of interest expense of $2.37 million, loss on debt extinguishment of $2.86 million and other expense of $0.38 million.

Interest expense consisted of the following for the years ended December 31, 2005 and 2004 (dollars in thousands):

 

   2005  2004

Interest paid or accrued on outstanding debt

  $553  $542

Amortization of debt premiums

   (857)  —  

Amortization of debt discounts – warrants

   28   —  

Amortization of debt discount – beneficial conversion feature

   725   1,641

Fair value of incremental shares received by Laurus

   1,365   —  

Other

   164   183
        
  $1,978  $2,366
        

On March 18, 2005, we allowed Laurus to convert $1.87 million of the outstanding principal balance under our Credit Line into 3,600,000 shares of our common stock at $0.52 per share. In addition, on March 24, 2005 we allowed Laurus to convert $0.65 million of the outstanding principal balance of our Term Note into 1,250,000 shares of our common stock at $0.52 per share. Laurus agreed to apply this Term Note conversion against substantially all remaining 2005 scheduled principal payments on such loan. The closing market price of our common stock the day before each of these conversions was $0.58 per share. No other provisions of our Credit Line or Term Note were modified, including the $1.00 conversion price for remaining debt. In conjunction with these conversions we accelerated amortization of $0.41 million of related debt premiums and discounts and recorded a charge to interest expense of $1.37 million related to the fair value of incremental shares received by Laurus.

 

16


Contemporaneously with the closing of the 2005 Private Placement our common stock on October 31, 2005, we repaid all outstanding principal and accrued interest on the Laurus Loans which have been cancelled and are no longer available to us. In conjunction with this prepayment, we recorded a loss on debt extinguishment of $0.54 million. This loss consisted of prepayment penalties and fees paid to Laurus to facilitate the 2005 Private Placement of $0.84 million offset by the elimination of associated net debt premiums of $0.30 million.

Loss on debt extinguishment totaled $2.86 million during the year ended December 31, 2004. As described in the Notes to the accompanying consolidated financial statements, certain August 31, 2004 modifications to our Laurus Loans were treated as extinguishments for financial reporting purposes since the change in present value of expected cash flows between the original and modified agreements was greater than 10%. As such, we recorded a loss on extinguishment of debt of $2.86 million at August 31, 2004 reflecting the difference between (i) the recorded amount of debt, net of related discounts, of $7.43 million and (ii) the fair value of the new debt instrument of $10.29 million plus the fair value of the new warrants of $0.11 million. The difference between the fair value of the new debt of $10.29 million and the face value of the debt of $8.57 million represents a premium, which will be reflected as a reduction of interest expense over the life of the new debt.

Income Tax Expense.Income tax expense recorded during the years ended December 31, 2005 and 2004 related to income taxes in states, foreign countries and other local jurisdictions. Due to the our cumulative losses, expected losses in future years and inability to utilize any additional losses as carrybacks, we did not provide for an income tax benefit during the years ended December 31, 2005 or 2004 based on our determination that it was more likely than not that such benefits would not be realized. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent we begin to generate taxable income in future periods and determine that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time. Our net operating loss carryforwards from continuing and discontinued operations of $99.64 million will expire at various dates from 2008 through 2025, if not utilized. We also had state income tax loss carryforwards from continuing and discontinued operations of $39.00 million at December 31, 2005. These carryforwards will also expire at various dates beginning in 2006 if not utilized.

Years Ended December 31, 2004 and 2003

Net Sales. Net sales for the years ended December 31, 2004 and 2003 consisted of the following (dollars in thousands):

 

         Change 
   2004  2003  $  % 

Bioinstruments

  $14,385  $17,916  $(3,531) (20)%

Bioconsumables

   8,838   7,260   1,578  22%

Discovery Services

   2,020   868   1,152  133%
              

Net sales

  $25,243  $26,044  $(801) (3)%
              

WAVE® systems sold totaled 107 during the year ended December 31, 2004 compared to 122 during the same period of 2003. The selling prices of our instruments vary based on the specific model and optional accessories. We had an installed base of 1,193 units at December 31, 2004 compared to 1,086 units at December 31, 2004. The increase in the installed base of instruments continues to drive increases in sales of bioconsumables used with these instruments. The increase in Discovery Services revenue during 2004 was primarily attributable to the discovery services agreements that we entered into with pharmaceutical companies to support their clinical development of oncology therapeutics.

Costs of Goods Sold.Cost of goods sold for the years ended December 31, 2004 and 2003 consisted of the following (dollars in thousands):

 

         Change 
   2004  2003  $  % 

Bioinstruments

  $6,382  $7,343  $(961) (13)%

Bioconsumables

   4,012   3,474   538  15%

Discovery Services

   1,603   557   1,046  188%
              

Cost of goods sold

  $11,997  $11,374  $623  5%
              

 

17


Overall, our cost of goods sold increased despite an overall decline in net sales due to the fixed-cost burden associated with our manufacturing facilities.

Gross profit was $13.25 million or 52% of total net sales during the year ended December 31, 2004 compared to $14.67 million and 56% during the same period of 2003. The decrease in gross profit as a percent of revenue is largely attributable to changes in the composition of products sold. Generally, sales of WAVE® systems and ancillary instrumentation generate higher gross profits than sales of third party platforms. Sales of specialty consumables (SURVEYOR Nuclease, HPLC separation columns, etc.) generate higher gross profits than base buffers and enzymes. Gross profits from discovery services have been less than expected due to the continuing build out of capacity and expansion of product offerings.

Selling, General and Administrative Expenses. Selling, general and administrative expenses totaled $15.96 million in 2004 compared to $16.59 million in 2003, a decrease of $0.63 million or 4%. As a percentage of revenue, selling, general and administrative expenses totaled just over 63% in both 2004 and 2003.

Research and Development Expenses. Research and development expenses totaled $4.50 million in 2004 compared to $6.83 million in 2003, a decrease of $2.33 million or 34%. As a percentage of revenue, research and development expenses totaled 18% and 26% of revenue in 2004 and 2003, respectively. These decreases related to our focus on expense control and the restructuring plan implemented in November 2004. Research and development costs are expensed in the year in which they are incurred.

Restructuring Charges. On November 13, 2004, our Board of Directors approved a restructuring plan designed to refocus and to better align the Company’s cost structure with anticipated revenues. The plan included a workforce reduction and the closure of various facilities and field offices. In conjunction with these changes, we incurred a charge of $1.23 million during the quarter ending December 31, 2004.

Other Income (Expense). Other expense during 2004 of $5.26 million consisted of interest expense of $2.37 million, loss on debt extinguishment of $2.86 million, and other net expense of $0.04 million. Other expense during 2003 of $0.18 million consisted of interest expense of $0.17 million and other net expense of $0.01 million.

Interest expense consisted of the following for the years ended December 31, 2004 and 2003 (dollars in thousands):

 

   2004  2003

Interest paid or accrued on outstanding debt

  $542  $89

Amortization of debt discount – beneficial conversion feature

   1,641   —  

Other

   183   85
        
  $2,366  $174
        

Loss on debt extinguishment totaled $2.86 million during 2004. As described in the Notes to the accompanying consolidated financial statements, certain August 31, 2004 modifications to our Laurus Loans were treated as extinguishments for financial reporting purposes since the change in present value of expected cash flows between the original and modified agreements was greater than 10%. As such, we recorded a loss on extinguishment of debt of $2.86 million at August 31, 2004 reflecting the difference between (i) the recorded amount of debt, net of related discounts, of $7.43 million and (ii) the fair value of the new debt instrument of $10.29 million plus the fair value of the new warrants of $0.11 million. The difference between the fair value of the new debt of $10.29 million and the face value of the debt of $8.57 million represented a premium, which was reflected as a reduction of interest expense over the life of the new debt.

 

18


Income Tax Expense. Income tax expense recorded during the years ended December 31, 2004 and 2003 related to income taxes in states, foreign countries and other local jurisdictions. Due to our cumulative losses, expected losses in future years and inability to utilize any additional losses as carrybacks, we did not provide for an income tax benefit during the years ended December 31, 2004 or 2003 based on our determination that it was more likely than not that such benefits would not be realized. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent we begin to generate taxable income in future periods and determine that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time.

Results of Discontinued Operations

In the fourth quarter of 2005, we implemented a plan to exit our Nucleic Acids operating segment. Accordingly, we now reflect the results of these businesses as discontinued operations for all periods presented. Expenses that are not directly identified to this operating segment or are considered corporate overhead have not been allocated in arriving at loss from discontinued operations. Summary results of operations of the former Nucleic Acids operating segment were as follows (dollars in thousands):

 

   Years Ended December 31, 
   2005  2004  2003 

NET SALES

  $3,881  $8,546  $7,821 

COST OF GOODS SOLD

   4,004   12,599   12,941 
             

Gross loss

   (123)  (4,053)  (5,120)

OPERATING EXPENSES:

    

Selling, general and administrative

   1,054   1,538   737 

Research and development

   —     2,184   2,471 

Restructuring charges

   —     2,303   222 

Exit and disposal charges

   866   —     —   

Impairment charges

   8,022   11,965   4,772 

Gain on sale of facility

   —     (1,466)  —   
             
   9,942   16,524   8,202 
             

LOSS FROM OPERATIONS

   (10,065)  (20,577)  (13,322)

OTHER INCOME (EXPENSE)

   56   (143)  (124)
             

LOSS BEFORE INCOME TAXES

   (10,009)  (20,720)  (13,446)

INCOME TAX BENEFIT

   —     (98)  —   
             

LOSS FROM DISCONTINUED OPERATIONS

  $(10,009) $(20,622) $(13,446)
             

On December 22, 2005, the Company’s Directors voted to either sell or close and liquidate the Nucleic Acids operating segment, which consists primarily of a manufacturing facility in Glasgow, Scotland. This decision was made after an evaluation of, among other things, short and long-term sales projections for products sold by this operating segment, including estimates of 2006 sales to the operating segment’s largest customer. While opportunities to sell the operating segment as a going concern are being evaluated, procedures have commenced, including notification to affected employees, which may lead to closure of the facility in Glasgow, Scotland. During 2006, we expect to incur costs of approximately $0.72 million related to statutory payments to affected employees and other costs specifically attributable to closure of the facility which have been accrued at December 31, 2005. In addition, the Company expects to incur additional period costs of approximately $0.25 million in each of the first two quarters of 2006 attributable to closure of the facility that will be recorded in discontinued operations in 2006. In conjunction with the decision to exit this operating segment, the Company recorded an impairment charge of $8.02 million consisting of valuation adjustments to reflect the carrying value of the related net assets at estimated fair market value.

The former Nucleic Acids operating segment accepted common stock from one of its customers, Geron Corporation (“Geron”) as payment for goods and services. These shares were classified as available-for-sale securities. Net realized gains on these securities during 2005 and 2003 of $0.05 million and $0.11 million, respectively, and realized losses on these securities of $0.13 million during 2004 were reflected as other expense on the consolidated statement of operations.

 

19


Proceeds from the sales of these available for sale securities are reflected within net cash flows from investing activities. During 2005 and 2004, sales to Geron totaled $1.95 million and $4.15 million, respectively, representing 50% and 49%, respectively, of net sales within this operating segment.

On November 11, 2004, the former Nucleic Acids operating segment sold the assets associated with its specialty oligonucleotides manufacturing facility in Boulder, Colorado to a subsidiary of Eyetech Pharmaceuticals, Inc. (“Eyetech”). The sale price was $3.00 million in cash plus the assumption of the lease on the Boulder facility and of certain equipment leases with a gross value of $2.38 million. Substantially all of the 27 employees at the Boulder facility became Eyetech employees. Net proceeds from the sale (after transaction expenses and fees paid to our investment advisors) equaled approximately $2.70 million. In conjunction with this transaction, the Nucleic Acids operating segment recorded a gain on sale of $1.47 million in the fourth quarter of 2004.

There was no goodwill associated with the former Nucleic Acids operating segment at December 31, 2005 and 2004. The former Nucleic Acids operating segment recorded charges of $9.87 million and $4.77 million during 2004 and 2003, respectively, related to the impairment of goodwill. The 2003 charge resulted from an annual impairment test that was performed in the fourth quarter of 2003. The 2004 charge resulted from an interim period impairment test performed during the second quarter of 2004.

The interim period impairment test became necessary after the Company’s Directors directed management during the second quarter of 2004 to explore strategic alternatives for the former Nucleic Acids operating segment. This process included significant due diligence by management, third-party advisors and prospective independent buyers and other interested parties. Information obtained through this process indicated that it was more likely than not that the assets associated with the Nucleic Acids operating segment were impaired.

The former Nucleic Acids operating segment also recorded a charge of $2.10 million during the second quarter of 2004 related to the impairment of property and equipment associated with this operating segment.

Liquidity and Capital Resources

Our working capital positions at December 31, 2005 and 2004 were as follows (in thousands):

 

   December 31,    
   2005  2004  Change 

Current assets (including cash and cash equivalents of $6,736 and $1,002, respectively)

  $18,118  $17,908  $210 

Current liabilities

   7,434   18,724   (11,290)
             

Working capital

  $10,684  $(816) $11,500 
             

The improvement in our working capital position was due principally to proceeds received from the 2005 Private Placement and conversions in March 2005 of Laurus Loans to equity.

While we believe that existing sources of liquidity are sufficient to meet expected cash needs through 2006, we have experienced recurring net losses and have historically relied upon cash flows from investing and financing activities to offset significant cash outflows from operating activities. To the extent necessary, we believe that we can manage costs and expenses at reduced levels to conserve working capital. The need for any such cost and expense reductions would likely delay implementation of our business plan. Ultimately, we must achieve sufficient revenues in order to generate positive net earnings and cash flows from operations.

Analysis of Cash Flows

Years Ended December 31, 2005 and 2004

Net Change in Cash and Cash Equivalents.Cash and cash equivalents increased $5.73 million during the year ended December 31, 2005 as a result of net cash from investing activities and financing activities of $1.65 million and $7.92 million, respectively, offset by net cash used in operating activities of $3.63 million, and changes in foreign currency exchange rates of $0.20 million.

 

20


Cash Flows from Operating Activities. Cash flows used in operating activities totaled $3.63 million during the year ended December 31, 2005 compared to $12.75 million during the same period of 2004. The use in 2005 related primarily to a net loss of $14.99 million offset by non-cash charges of $13.66 million. Non-cash charges consisted primarily of depreciation and amortization, impairment charges and certain financing costs. Working capital and other adjustments decreased cash flows from operating activities by $2.29 million.

Cash Flows from Investing Activities. Cash flows provided by investing activities totaled $1.65 million during the year ended December 31, 2005 compared to $6.03 million during the same period of 2004. The principal source of cash flows from investing activities in 2005 were sales of available for sale securities (Geron stock) of $2.15 million that were offset by purchases of $0.64 million of property and equipment. The principal source of cash flows from investing activities in 2004 were sales of available for sale securities (Geron Stock) of $4.27 million and the $3.00 million sale of our manufacturing facility in Boulder, Colorado offset by purchases of $1.76 million of property and equipment.

Cash Flows from Financing Activities. Cash flows from financing activities totaled $7.92 million during the year ended December 31, 2005 compared to $6.00 million during 2004. The principal source of cash flows from financing activities in 2005 was the 2005 Private Placement offset by repayment of the Laurus Loans.

Years Ended December 31, 2004 and 2003

Net Change in Cash and Cash Equivalents.Cash and cash equivalents decreased $0.24 million during the year ended December 31, 2004 as net cash used in operating activities of $12.75 million was offset by net cash from investing activities and financing activities of $6.03 million and $6.00 million, respectively and changes in foreign currency exchange rates of $0.48 million.

Cash Flows Used in Operating Activities. Cash flows used in operating activities totaled $12.75 million during 2004 compared to $13.02 million during 2003. The use in 2004 related primarily to a net loss of $34.37 million offset by non-cash charges of $21.80 million. Non-cash charges consisted of depreciation and amortization, certain restructuring charges, impairment charges, certain financing costs and loss on debt extinguishment. Working capital and other adjustments decreased cash flows from operating activities by $0.18 million.

Cash Flows from Investing Activities. Cash flows from investing activities totaled $6.03 million during 2004 compared to cash flows used in investing activities of $2.95 million during 2003. The investing cash flows generated in 2004 were from the sale of Geron stock received for goods and services and the sale of our specialty oligoneucleotide manufacturing facility and reductions in other assets that were offset by purchases of property and equipment.

Cash Flows from Financing Activities. Cash flows from financing activities totaled $6.00 million during 2004 compared to $7.30 million during 2003. The cash from financing activities in 2004 related primarily to net draws on our Credit Line and proceeds from the Term Note that were offset by payments of long-term debt.

 

21


Obligations and Commitments

We lease certain equipment, vehicles and operating facilities under non-cancellable operating leases that expire on various dates through 2010. The future minimum lease payments required under these leases are approximately $1.18 million in 2006, $0.54 million in 2007, $0.28 million in 2008, $0.28 million in 2009, and $0.25 million in 2010.

At December 31, 2005, firm commitments to vendors to purchase components used in WAVE® systems totaled $0.88 million. We expect to pay the majority of these purchase commitments during 2006.

Off Balance Sheet Arrangements

At December 31, 2005 and 2004, 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.

Critical Accounting Policies

Accounting policies used in the preparation of the consolidated financial statements may involve the use of management judgments and estimates. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial statements and they require significant or complex judgments on the part of management. Our judgments and estimates are based on experience and assumptions that we believe are reasonable under the circumstances. Further, we evaluate our judgments and estimates from time to time as circumstances change. Actual financial results based on judgment or estimates may vary under different assumptions or circumstances. The following are certain critical accounting policies that may involve the use of judgment or estimates.

Allowance for Doubtful Account. Accounts receivable are shown net of an allowance for doubtful accounts. In determining an allowance for doubtful accounts, we consider the following.

 

 The age of the accounts receivable,

 

 Customer credit history,

 

 Customer financial information,

 

 Reasons for non-payment, and

 

 Our knowledge of the customer.

If our customers’ financial condition were to deteriorate, resulting in a change in their ability to make payment, additional allowances may be required.

Inventories. Inventories are stated at the lower of cost or market. Cost is computed using standard costs for finished goods and average or latest actual cost for raw materials and work in process. We write down slow-moving and obsolete inventory by the difference between the value of the inventory and our estimate of the reduced value based on potential future uses, the likelihood that overstocked inventory will be sold and the expected selling prices of the inventory. If our ability to realize value on slow-moving or obsolete inventory is less favorable than assumed, additional write-downs of the inventory may be required.

Depreciation and Amortization of Long-Lived Assets. Our long-lived assets consist primarily of equipment, patents, intellectual property and capitalized software development costs. We believe the useful lives we assigned to these assets are reasonable. If our assumptions about these assets change as a result of events or circumstances and we believe the assets may have declined in value we may record impairment charges resulting in an increase to operating expenses.

 

22


Property and equipment are carried at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets ranging from 3 to 15 years. We capitalize external and in-house legal costs and filing fees associated with obtaining patents on our 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, generally 17 years, beginning on the date the patent is issued. Intellectual property, which is purchased technology, is recorded at cost and is amortized over its estimated useful life.

Impairment of Long-Lived Assets. We evaluate goodwill for impairment on an annual basis. We assess the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These computations utilize judgments and assumptions inherent in our estimate of future undiscounted and discounted cash flows to determine recoverability of these assets. If our assumptions about these assets were to change as a result of events or circumstances, we may be required to record an impairment loss.

Revenue Recognition. Revenue on the sales of products is recognized in accordance with the terms of the sales arrangement. Such recognition is based on receipt of an unconditional customer order and transfer of title and risk of ownership to the customer, typically upon shipment of the product. Our sales terms do not provide for the right of return unless the product is damaged or defective. Revenues from certain services associated with our analytical instruments, to be performed subsequent to shipment of the products, is deferred and recognized when the services are provided. Such services, mainly limited to installation and training services that are not essential to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument.

Recently Issued Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment.” SFAS No.123R addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 and generally requires that such transactions be accounted for using a fair-value-based method. We adopted this standard on January 1, 2006 using the modified prospective method. With regard to share-based payment transactions (primarily employee stock options) that existed at December 31, 2005, the Company does not expect the adoption of this standard will have a material impact on its financial position, results of operations or cash flows. With regard to future share-based payment transactions, the Company is evaluating option valuation methodologies and assumptions as well as potential changes to compensation strategies.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”. SFAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be excluded from the cost of inventory and expensed when incurred. It also requires that allocation of fixed production overhead to be based on the normal capacity of the production facilities. SFAS No. 151 is effective for us beginning January 1, 2006. We are assessing the final impact of this standard on our financial position, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets.” This statement addresses the prospective measurement for nonmonetary exchanges of nonmonetary assets. It specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS is 153 will be effective for us beginning January 1, 2007. We are assessing the final impact of this standard on our financial position, results of operations or cash flows.

In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections.” This statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. It carries forward without change the previous guidance for reporting the correction of an error and a change in accounting estimate. SFAS 154 is effective for us beginning January 1, 2006.

 

23


Impact of Inflation

We do not believe that price inflation had a material adverse effect on our financial condition or results of operations during the periods presented.

Foreign Currency Rate Fluctuations

During the last three fiscal years, our international sales have represented approximately 70% of our net sales. These sales of products in foreign countries are mainly completed in either British Pounds Sterling or the Euro. Additionally, we have two wholly owned subsidiaries, Transgenomic, LTD., and Cruachem, LTD., whose operating currency is British Pounds Sterling and the Euro. Results of operations for the Company’s foreign subsidiaries are translated using the average exchange rate during the period. Assets and liabilities are translated at the exchange rate in effect on the balance sheet dates. As a result we are subject to exchange rate risk. The operational expenses of our foreign subsidiaries help to reduce the currency exposure we have based on our sales denominated in foreign currencies by converting foreign currencies directly into goods and services. As such, we feel do not have a material exposure to foreign currency rate fluctuations at this time.

Item 7A. Quantitative and Qualitative Disclosure about Market Risk

Previously, our principal market risk was interest rate risk on our variable-rate borrowings under the Laurus Loans. During the fourth quarter of 2005, we repaid the entire principal balance of the Laurus Loans with the proceeds from the 2005 Private Placement and have terminated these loans. Accordingly, we no longer have any borrowings which subject us to material interest rate risk.

 

24


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Transgenomic, Inc.

Omaha, Nebraska

We have audited the accompanying consolidated balance sheets of Transgenomic, Inc. and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Transgenomic, Inc. and subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Deloitte & Touche LLP

Omaha, Nebraska

March 30, 2006

 

25


TRANSGENOMIC, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of December 31, 2005, and 2004

(Dollars in thousands except per share data)

 

   2005  2004 
ASSETS   

CURRENT ASSETS:

   

Cash and cash equivalents

  $6,736  $1,002 

Accounts receivable (net of allowances for bad debts of $615 and $701, respectively)

   7,542   9,867 

Inventories

   2,990   3,570 

Prepaid expenses and other current assets

   653   1,262 

Current assets of discontinued operations

   197   2,207 
         

Total current assets

   18,118   17,908 

PROPERTY AND EQUIPMENT:

   

Equipment

   10,108   10,943 

Furniture and fixtures

   3,797   3,867 
         
   13,905   14,810 

Less: accumulated depreciation

   11,328   10,481 
         
   2,577   4,329 

OTHER ASSETS:

   

Goodwill

   638   638 

Other assets

   1,074   2,528 

Non-current assets of discontinued operations

   2,933   12,055 
         
  $25,340  $37,458 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY   

CURRENT LIABILITIES:

   

Accounts payable

  $1,796  $2,464 

Other accrued expenses

   3,114   6,498 

Accrued compensation

   602   595 

Line of credit

   —     6,514 

Current portion of long-term debt

   —     825 

Current liabilities of discontinued operations

   1,922   1,828 
         

Total current liabilities

   7,434   18,724 

Long-term debt

   —     2,199 
         

Total liabilities

   7,434   20,923 

COMMITMENTS AND CONTINGENCIES (Note F)

   

STOCKHOLDERS’ EQUITY:

   

Preferred stock, $.01 par value, 15,000,000 shares authorized, none outstanding

   —     —   

Common stock, $.01 par value, 100,000,000 and 60,000,000 shares authorized, respectively, 49,182,121 and 29,330,874 shares outstanding, respectively

   497   299 

Additional paid-in capital

   138,800   120,798 

Accumulated other comprehensive income

   703   2,539 

Accumulated deficit

   (122,094)  (107,101)
         

Total stockholders’ equity

   17,906   16,535 
         
  $25,340  $37,458 
         

See notes to consolidated financial statements.

 

26


TRANSGENOMIC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

 

   2005  2004  2003 

NET SALES

  $25,828  $25,243  $26,044 

COST OF GOODS SOLD

   13,497   11,997   11,374 
             

Gross profit

   12,331   13,246   14,670 

OPERATING EXPENSES:

    

Selling, general and administrative

   12,218   15,961   16,586 

Research and development

   2,199   4,501   6,834 

Restructuring charges

   —     1,267   516 

Impairment charges

   425   —     —   
             
   14,842   21,729   23,936 
             

LOSS FROM OPERATIONS

   (2,511)  (8,483)  (9,266)

OTHER INCOME (EXPENSE):

    

Interest expense

   (1,978)  (2,366)  (174)

Loss on debt extinguishment

   (541)  (2,859)  —   

Other, net

   72   (38)  (7)
             
   (2,447)  (5,263)  (181)
             

LOSS BEFORE INCOME TAXES

   (4,958)  (13,746)  (9,447)

INCOME TAX EXPENSE

   26   4   65 
             

LOSS FROM CONTINUING OPERATIONS

   (4,984)  (13,750)  (9,512)

DISCONTINUED OPERATIONS:

    

Loss from discontinued operations before income tax

   (10,009)  (20,720)  (13,446)

Income tax benefit of discontinued operations

   —     (98)  —   
             

LOSS FROM DISCONTINUED OPERATIONS

   (10,009)  (20,622)  (13,446)
             

NET LOSS

  $(14,993) $(34,372) $(22,958)
             

BASIC AND DILUTED LOSS PER SHARE:

    

From continuing operations

  $(0.14) $(0.47) $(0.39)

From discontinued operations

   (0.28)  (0.72)  (0.55)
             
  $(0.42) $(1.19) $(0.94)
             

BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING

   35,687,580   29,006,241   24,483,861 

See notes to consolidated financial statements.

 

27


TRANSGENOMIC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

 

  Common Stock Additional
Paid in
Capital
 Unearned
Compensation
  Accumulated
Deficit
  Accumulated
Other
Comprehensive
Income (Loss)
  Treasury
Stock
  

Total

 
  Outstanding
Shares
 Par
Value
      

Balance, January 1, 2003

 23,512,045 $240 $113,934 $(78) $(49,771) $378  $(3,188) $61,515 

Net loss

 —    —    —     (22,958)  (22,958)  —     (22,958)

Other comprehensive income (loss):

        

Foreign currency translation adjustment

 —    —    —    —     —     1,219   —     1,219 
           

Comprehensive loss

 —    —    —    —     —     (21,739)  —     —   

Issuance of stock options and warrants

 —    —    386  —     —     —     —     386 

Beneficial conversion premium

 —    —    480  —     —     —     —     480 

Issuance of shares

 4,500,000  45  969  —     —     —     3,188   4,202 

Issuance of shares for employee stock purchase plan

 107,077  1  135  —     —     —     —     136 

Amortization of unearned compensation

 —    —    —    78   —     —     —     78 
                            

Balance, December 31, 2003

 28,119,122  286  115,904  —     (72,729)  1,597   —     45,058 

Net loss

 —    —    —    —     (34,372)  (34,372)   (34,372)

Other comprehensive income (loss):

        

Foreign currency translation adjustment

 —    —    —    —     —     942   —     942 
           

Comprehensive loss

 —    —    —    —     —     (33,430)  —     —   

Issuance of stock options and warrants

 —    —    189  —     —     —     —     189 

Beneficial conversion premium

 —    —    2,420  —     —     —     —     2,420 

Conversion of Laurus Loans

 1,134,850  12  2,198  —     —     —     —     2,210 

Issuance of shares for employee stock purchase plan

 76,902  1  87  —     —     —     —     88 
                            

Balance, December 31, 2004

 29,330,874  299  120,798  —     (107,101)  2,539   —     16,535 

Net loss

 —    —    —    —     (14,993)  (14,993)   (14,993)

Other comprehensive income (loss):

        

Foreign currency translation adjustment

 —    —    —    —     —     (1,836)  —     (1,836)
           

Comprehensive loss

 —    —    —    —     —     (16,829)  —     —   

Beneficial conversion premium

 —    —    399  —     —     —     —     399 

Conversion of Laurus Loans

 4,900,000  49  2,507  —     —     —     —     2,556 

Fair value of incremental shares issued

 —    —    1,365  —     —     —     —     1,365 

Issuance of shares in private placement, net of expenses of $1,213

 14,925,743  149  13,713  —     —     —     —     13,862 

Issuance of shares for employee stock purchase plan

 25,504  —    18  —     —     —     —     18 
                            

Balance, December 31, 2005

 49,182,121 $497 $138,800 $—    $(122,094) $703  $—    $17,906 
                            

See notes to consolidated financial statements.

 

28


TRANSGENOMIC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands)

 

   2005  2004  2003 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net loss

  $(14,993) $(34,372) $(22,958)

Adjustments to reconcile net loss to net cash flows from operating activities:

    

Depreciation and amortization

   4,283   4,625   4,597 

Non-cash restructuring charges

   —     2,027   364 

Impairment charges

   8,447   11,965   4,772 

Gain on sale of facility

   —     (1,466)  —   

Non-cash financing costs

   1,281   1,642   —   

Non-cash debt extinguishment charges

   (303)  2,859   —   

(Gain)/loss on sale of securities

   (50)  128   (64)

Other

   —     18   93 

Changes in operating assets and liabilities:

    

Purchase of trading securities

   —     —     (1,566)

Proceeds from sale of trading securities

   —     —     1,519 

Accounts receivable

   139   (3,334)  342 

Inventories

   514   2,611   2,887 

Prepaid expenses and other current assets

   574   (130)  334 

Accounts payable

   (1,129)  (268)  (1,509)

Accrued expenses

   (2,390)  941   (1,828)
             

Net cash flows from operating activities

   (3,627)  (12,754)  (13,017)

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from the maturities and sale of available for sale securities

   2,151   4,269   4,000 

Purchase of property and equipment

   (641)  (1,758)  (6,413)

Change in other assets

   (3)  522   (543)

Proceeds from sale of specialty oligonuceotide manufacturing facility

   —     3,000   —   

Proceeds from asset sales

   139   —     9 
             

Net cash flows from investing activities

   1,646   6,033   (2,947)

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net change in line of credit

   (4,069)  4,956   2,992 

Proceeds from long-term debt

   —     2,750   —   

Payments on long-term debt

   (1,850)  (1,779)  (35)

Issuance of common stock, net of expenses

   13,836   71   4,338 
             

Net cash flows from financing activities

   7,917   5,998   7,295 

EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH

   (202)  484   175 
             

NET CHANGE IN CASH AND CASH EQUIVALENTS

   5,734   (239)  (8,494)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

   1,002   1,241   9,735 
             

CASH AND CASH EQUIVALENTS AT END OF YEAR

  $6,736  $1,002  $1,241 
             

SUPPLEMENTAL CASH FLOW INFORMATION

    

Cash paid during the year for:

    

Interest

  $553  $560  $314 

Income taxes, net

   12   (94)  70 

Non-cash transactions:

    

Available for sale securities acquired for goods and services

   2,099   4,397   277 

Conversions of debt to equity

   2,536   2,226   —   

See notes to consolidated financial statements.

 

29


TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

 

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Description.

Transgenomic, Inc., a Delaware corporation, and its subsidiaries (the “Company”) provide innovative products and services for the synthesis, purification and analysis of nucleic acids. The Company’s products and services include automated instrument systems, associated consumables, and genetic variation discovery services. The Company develops, assembles, manufactures and markets its products and services to the life sciences industry to be used in research focused on molecular genetics of humans and other organisms. Such research could lead to development of new diagnostics and therapeutics. The Company’s business plan is to participate in the value chain associated with these activities by providing key technology, tools, consumables, biochemical reagents and services to those entities engaged in basic biomedical research and the development of diagnostics and therapeutic agents.

The Company develops, assembles, manufactures and markets versatile products and provides analytical services to the medical research, clinical and pharmaceutical markets for use in genetic variation analysis. Products and services are sold through a direct sales force in the United States and throughout much of Western Europe. For the rest of the world, products and services are sold through more than 25 dealers and distributors located in those local markets. Net sales are categorized as bioinstruments, bioconsumables and discovery services.

 

  Bioinstruments. The flagship product is the WAVE® system which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There was a world-wide installed base of nearly 1,300 WAVE® systems as of December 31, 2005. The Company utilizes its sales and distribution network to sell a number of independent, third party equipment platforms. Service contracts to maintain installed systems are sold and supported by technical support personnel.

 

  Bioconsumables. The installed WAVE® base generates a demand for consumables that are required for the system’s continued operation. The Company develops, manufactures and sells these products. In addition, the Company manufactures and sells consumable products that can be used on multiple, independent platforms. These products include SURVEYOR Nuclease and a range of HPLC separation columns.

 

  Discovery Services. The Company provides various genetic laboratory services through a contract research lab in Gaithersburg, Maryland and a second laboratory in Omaha, Nebraska that operates in a Good Laboratory Practices (“GLP”) compliant environment and is certified under the Clinical Laboratory Improvement Amendment. The services provided primarily include (1) genomic biomarker analysis services to pharmaceutical and biopharmaceutical companies to support preclinical and clinical development of targeted therapeutics; and (2) molecular-based testing for hematology, oncology and certain inherited diseases for physicians and third-party laboratories.

Historically, the Company operated a segment (the “Nucleic Acids operating segment”) that developed, manufactured and marketed chemical building blocks for nucleic acid synthesis to biotechnology, pharmaceutical and oligonucleotide synthesis companies and research institutions throughout the world. In the fourth quarter of 2005, the Company implemented a plan to exit this operating segment. Accordingly, results of this operating segment are reflected as discontinued operations for all periods presented.

The Company has experienced recurring net losses and had an accumulated deficit of $122,094 at December 31, 2005. Based on the Company’s operating plan, management believes its existing sources of liquidity will be sufficient to meet its cash needs during 2006. If necessary, the Company’s management believes they can manage costs and expenses at reduced levels to conserve working capital. The need for any such cost and expense reductions during 2006 would likely delay implementation of the Company’s business plan. Additionally, management may pursue additional financing alternatives. Ultimately, the Company must achieve sufficient revenue levels to support its cost structure.

 

30


TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

 

Principles of Consolidation.

The consolidated financial statements include the accounts of Transgenomic, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents.

For purposes of reporting cash flows, cash and cash equivalents include cash and temporary investments with original maturities at acquisition of three months or less.

Short Term Investments.

The Company classifies all of its short-term investments with maturities at acquisition of greater than three months as available for sale securities. Such short-term investments consist primarily of United States government and federal agency securities, corporate commercial paper and corporate debt that are stated at market value, with unrealized gains and losses on such securities reflected, net of tax, as other comprehensive income in stockholders’ equity. Realized gains and losses on short term investments are included in earnings and are derived using the specific identification method for determining the cost of securities. It is the Company’s intent to maintain a liquid portfolio to take advantage of investment opportunities; therefore, all securities are considered to be available for sale and are classified as current assets.

Accounts Receivable.

Accounts receivable are shown net of allowance for doubtful accounts. The following is a summary of activity for the allowance for doubtful accounts during each of the three years ended December 31, 2005:

 

   Beginning
Balance
  Additional
Charges
to Income
  Deductions
from
Reserve
  Ending
Balance

Year Ended December 31, 2005

  $701  $—    $86  $615

Year Ended December 31, 2004

  $359  $374  $32  $701

Year Ended December 31, 2003

  $351  $83  $75  $359

While payment terms are generally 30 days, the Company has also provided extended payment terms of up to 90 days in certain cases.

Inventories.

Inventories are stated at the lower of cost or market. Cost is computed using standard costs for finished goods and average or latest actual cost for raw materials and work in process.

Property and Equipment.

Property and equipment are carried at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the related assets as follows:

 

Buildings

  15 years

Leasehold improvements

  3 to 7 years

Furniture and fixtures

  5 to 7 years

Production equipment

  5 to 7 years

Computer equipment

  3 to 5 years

Research and development equipment

  3 to 5 years

Demonstration equipment

  3 to 5 years

 

31


TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

 

Depreciation of property and equipment totaled $1,786, $3,330 and $3,298 in 2005, 2004 and 2003, respectively.

Goodwill and other Intangible Assets

Statement of Financial Accounting Standards (“SFAS”) No. 142,Goodwill and Other Intangible Assets,provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for impairment annually. Impairment occurs when the carrying value is not recoverable and the fair value of the asset is less than the carrying value. If impaired, the asset’s carrying value is reduced to its fair value. Identifiable intangible assets with definite lives are amortized over their estimated useful lives and tested for impairment as events or changes in circumstances indicate the carrying amount of the asset may be impaired.

Other Assets.

Other assets include capitalized software, intellectual property, patents, deferred financing costs and other long-term assets.

Capitalized Software. The Company capitalized software development costs for products offered for sale in accordance with SFAS No. 86,Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. This Standard allows for the capitalization of certain development costs once a software product has reached technological feasibility. The Company capitalized no software development costs during the three years ended December 31, 2005.

Intellectual Property. Initial costs paid to license intellectual property from independent, third parties is capitalized and amortized using the straight line method over the license period. Ongoing royalties related to such licenses are expensed as incurred.

Patents. The Company capitalizes the external and in-house legal costs and filing fees associated with obtaining patents on its new discoveries and amortizes these costs using the straight-line method over the shorter of the legal life of the patent or its economic life, generally 17 years, beginning on the date the patent is issued.

Deferred Financing Costs. Certain financing costs are capitalized and amortized to interest expense over the life of the related financing.

Other Long-Term Assets. Other long-term assets consist primarily of demonstration inventory that has been at customer or prospective customer sites for greater than one year and security deposits on leased facilities. Long-term demonstration inventory is stated at the lower of cost or market.

Stock Based Compensation.

The Company accounts for its employee stock option grants under the provisions of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, which utilizes the intrinsic value method. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company’s common stock at the date of grant over the stock option exercise price.

The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), to stock-based employee compensation.

 

   2005  2004  2003 

Net Loss:

    

As reported

  $(14,993) $(34,372) $(22,958)

Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax

   957   1,060   1,836 
             

Pro forma

  $(15,950) $(35,432) $(24,794)
             

Basic and diluted loss per share:

    

As reported

   (0.42)  (1.19)  (0.94)

Pro forma

   (0.45)  (1.22)  (1.01)

 

32


TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

 

Income Taxes.

Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities at each balance sheet date using tax rates expected to be in effect in the year the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent that it is more likely than not that they will not be realized.

Revenue Recognition.

Revenue on the sales of products is recognized in accordance with the terms of the sales arrangement. Such recognition is based on receipt of an unconditional customer order and transfer of title and risk of ownership to the customer, typically upon shipment of the product. Our sales terms do not provide for the right of return unless the product is damaged or defective. Revenues from certain services associated with our analytical instruments, to be performed subsequent to shipment of the products, is deferred and recognized when the services are provided. Such services, mainly limited to installation and training services that are not essential to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument. The Company also enters into various service contracts that cover installed WAVE® systems. These contracts cover specific time periods and revenue associated with these contracts is deferred and recognized over the service period. At December 31, 2005 and 2004, deferred revenue, mainly associated with the Company’s service contracts, included on the Company’s balance sheet was approximately $2,124 and $1,478, respectively.

Research and Development.

Research and development costs are charged to expense when incurred.

Translation of Foreign Currency.

Financial statements of subsidiaries outside the U.S. are measured using the local currency as the functional currency. The adjustments to translate those amounts into U.S. dollars are accumulated in a separate account in stockholders’ equity and are included in accumulated other comprehensive income. Foreign currency transaction gains or losses resulting from changes in currency exchange rates are included in the determination of net income. Foreign currency transaction adjustments increased net loss by $332 during the year ended December 31, 2005 and decreased net loss by $445 and $674 during the years ended December 31, 2004 and 2003, respectively.

Comprehensive Income.

Accumulated other comprehensive income at December 31, 2005 and 2004 consisted of foreign currency translation adjustments, net of applicable tax of $0. For all previous periods presented, accumulated other comprehensive income consists of foreign currency translation adjustments and unrealized gains or losses on available for sale investments, net of applicable tax of $0. The Company deems its foreign investments to be permanent in nature and does not provide for taxes on currency translation adjustments arising from converting its investments in a foreign currency to U.S. dollars.

Fair Value of Financial Instruments.

The carrying amount of the Company’s cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair value because of the short maturity of those instruments. The Company derives the fair value of its short-term investments based on quoted market prices. The carrying value of long-term debt and the line of credit approximates fair value based upon existing interest rates available to the Company for similar debt.

 

33


TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

 

Earnings Per Share.

Basic earnings per share are calculated based on the weighted-average number of common shares outstanding during each period. Diluted earnings per share include shares issuable upon exercise of outstanding stock options and warrants or conversion of convertible notes, where dilutive. Potentially dilutive securities totaling 13,625,675 at December 31, 2005, 13,484,072 at December 31, 2004 and 7,671,771 at December 31, 2003 have been excluded from the computation of diluted earnings per share as they have an antidilutive effect.

Recently Issued Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuace of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 and generally requires that such transactions be accounted for using a fair-value-based method. The Company adopted this standard on January 1, 2006 using the modified prospective method. With regard to share-based payment transactions (primarily employee stock options) that existed at December 31, 2005, the Company does not expect the adoption of this standard will have a material impact on its financial position, results of operations or cash flows. With regard to future share-based payment transactions, the Company is evaluating option valuation methodologies and assumptions as well as potential changes to compensation strategies.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs – an amendment of ARB No. 43. SFAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be excluded from the cost of inventory and expensed when incurred. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective on January 1, 2006. The Company is currently assessing the final impact of this standard on its financial position, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets.” This statement addresses the prospective measurement for nonmonetary exchanges of nonmonetary assets. It specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS is 153 will be effective for the Company beginning January 1, 2007. We are assessing the final impact of this standard on our financial position, results of operations or cash flows.

In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections.” This statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. It carries forward without change the previous guidance for reporting the correction of an error and a change in accounting estimate. SFAS 154 is effective for the Company beginning January 1, 2006.

Use of Estimates.

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In particular, estimates of the valuation of long-term inventory are subject to considerable estimation error due to the inherent uncertainty in projecting sales of this product over a period of years. In addition, estimates and assumptions associated with the determination of fair value of certain assets and related impairments, and the determination of goodwill impairments require considerable judgment by management. Actual results could differ from the estimates and assumptions used in preparing these financial statements.

 

34


TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

 

B. DISCONTINUED OPERATIONS AND DIVESTITURES

In the fourth quarter of 2005, the Company implemented a plan to exit the Nucleic Acids operating segment. Accordingly, the Company now reflects the related results as discontinued operations for all periods presented. Expenses that are not directly identified to the Nucleic Acids operating segment or are considered corporate overhead have not been allocated in arriving at loss from discontinued operations. Summary results of operations of the former Nucleic Acids operating segment were as follows:

 

   Years Ended December 31, 
   2005  2004  2003 

NET SALES

  $3,881  $8,546  $7,821 

COST OF GOODS SOLD

   4,004   12,599   12,941 
             

Gross loss

   (123)  (4,053)  (5,120)

OPERATING EXPENSES:

    

Selling, general and administrative

   1,054   1,538   737 

Research and development

   —     2,184   2,471 

Restructuring charges

   —     2,303   222 

Exit and disposal charges

   866   —     —   

Impairment charges

   8,022   11,965   4,772 

Gain on sale of facility

   —     (1,466)  —   
             
   9,942   16,524   8,202 
             

LOSS FROM OPERATIONS

   (10,065)  (20,577)  (13,322)

OTHER INCOME (EXPENSE)

   56   (143)  (124)
             

LOSS BEFORE INCOME TAXES

   (10,009)  (20,720)  (13,446)

INCOME TAX BENEFIT

   —     (98)  —   
             

LOSS FROM DISCONTINUED OPERATIONS

  $(10,009) $(20,622) $(13,446)
             

On December 22, 2005, the Company’s Directors voted to either sell or close and liquidate the Nucleic Acids operating segment, which consists primarily of a manufacturing facility in Glasgow, Scotland. This decision was made after an evaluation of, among other things, short and long-term sales projections for products sold by this operating segment, including estimates of 2006 sales to the operating segment’s largest customer. While opportunities to sell the operating segment as a going concern are being evaluated, procedures have commenced, including notification to affected employees, which is expected to lead to closure of the facility in Glasgow, Scotland. During 2006, the Company expects to incur costs of approximately $715 related to statutory payments to affected employees and other costs specifically attributable to closure of the facility which have been accrued at December 31, 2005. In addition, the Company expects to incur additional period costs attributable to closure of the facility that will be recorded in discontinued operations in 2006. In conjunction with the decision to exit this operating segment, the Company recorded an impairment charge of $8,022 consisting of valuation adjustments to reflect the carrying value of the related net assets at estimated fair market value.

There was no goodwill associated with the former Nucleic Acids operating segment at December 31, 2005 and 2004. The former Nucleic Acids operating segment recorded charges of $9,865 and $4,772 during 2004 and 2003, respectively, related to the impairment of goodwill. The 2003 charge resulted from an annual impairment test that was performed in the fourth quarter of 2003. The 2004 charge resulted from an interim period impairment test performed during the second quarter of 2004.

The interim period impairment test became necessary after the Company’s Directors directed management during the second quarter of 2004 to explore strategic alternatives for the former Nucleic Acids operating segment. This process included significant due diligence by management, third-party advisors and prospective independent buyers and other interested parties. Information obtained through this process indicated that it was more likely than not that the assets associated with the Nucleic Acids operating segment were impaired.

 

35


TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

 

The former Nucleic Acids operating segment also recorded a charge of $2,100 during the second quarter of 2004 related to the impairment of property and equipment associated with this operating segment.

On November 13, 2004, the former Nucleic Acids operating segment sold the assets associated with its specialty oligonucleotides manufacturing facility in Boulder, Colorado to a subsidiary of Eyetech Pharmaceuticals, Inc. (“Eyetech”). The sale price was $3,000 in cash plus the assumption of the lease on the Boulder facility and of certain equipment leases with a gross value of $2,377. Substantially all of the 27 employees at the Boulder facility became Eyetech employees. Net proceeds from the sale (after transaction expenses and fees paid to our investment advisors) equaled approximately $2,700. In conjunction with this transaction, the Nucleic Acids operating segment recorded a gain on sale of $1,466 in the fourth quarter of 2004.

The Company implemented restructuring plans in 2004 and 2002 designed to better align its cost structure with anticipated revenues. In conjunction with these plans, the former Nucleic Acids operating segment recorded restructuring charges in 2004 and 2003 of $2,303 and $222, respectively, related primarily to employee severance agreements, office closures, property and equipment and intellectual property. There were accrued expenses associated with these restructuring plans of $191 and $1,393 at December 31, 2005 and 2004, respectively.

The Company accepted common stock from a customer of the former Nucleic Acids operating segment, Geron Corporation (“Geron”) as payment for goods and services. These shares were classified as available-for-sale securities. Net realized gains on these securities during 2005 and 2003 of $52 and $111, respectively, and realized losses on these securities of $128 during 2004 were reflected as other expense. Proceeds from the sales of these available for sale securities are reflected within net cash flows from investing activities. During 2005 and 2004, sales to Geron totaled $1,949 and $4,151, respectively, representing 50% and 49%, respectively, of net sales within this operating segment. Sales to Geron were not significant during 2003.

The assets and liabilities of the former Nucleic Acids operating segment were as follows:

 

   December 31,
   2005  2004

Accounts receivable (net of allowances for bad debts of $393 and $350, respectively)

  $51  $330

Inventories

   86   1,796

Prepaid expenses and other current assets

   60   81
        

Current assets of discontinued operations

  $197  $2,207
        

Property, plant and equipment, net

  $2,933  $9,196

Other assets

   —     2,859
        

Non-current assets of discontinued operations

  $2,933  $12,055
        

Accounts payable

  $434  $967

Other accrued expenses

   863   820

Accrued compensation

   625   41
        

Current liabilities of discontinued operations

  $1,922  $1,828
        

 

36


TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

 

The former Nucleic Acids operating segment inventory consisted primarily of phosphoramadites and the raw materials to produce phosphoramadites which are used and produced at the Company’s facility in Glasgow, Scotland. At December 31, 2004, the Company classified a portion of this inventory as a long-term other asset based on its existing sales forecasts for these products.

C. INVENTORIES

Inventories consisted of the following:

 

   2005  2004

Finished goods

  $2,062  $2,637

Raw materials and work in process

   653   780

Demonstration inventory

   275   153
        
  $2,990  $3,570
        

The Company recorded a charge of $178 during the fourth quarter of 2005 related to the impairment of certain inventory associated with third party platforms.

D. OTHER ASSETS

Finite lived intangible assets and other assets consisted of the following:

 

   December 31,
   2005  2004
   Cost  Accumulated
Reserve
  Net Book
Value
  Cost  Accumulated
Reserve
  Net Book
Value

Capitalized software

  $2,132  $2,132  $—    $2,132  $1,468  $664

Intellectual property

   765   534   231   765   476   289

Patents

   636   135   501   1,071   194   877

Deferred financing costs

   576   576   —     576   183   393

Other

   838   496   342   775   470   305
                        

Total

  $4,947  $3,873  $1,074  $5,319  $2,791  $2,528
                        

During the year ended December 31, 2005, management determined that certain international patent pursuits were no longer consistent with the Company’s strategic plan. Accordingly, the Company recorded an impairment charge of $247 related to the abandonment of such pursuits.

Amortization expense for intangible assets was $1,159, $1,197 and $825 during years ended December 31, 2005, 2004 and 2003, respectively. Amortization expense for intangible assets is expected to be approximately $58 in each of the next five years.

E. DEBT

The Company had no debt at December 31, 2005. Debt consisted of the following at December 31, 2004:

 

Credit Line

  

Gross amount due (2% above prime, contractually due December 2006)

  $5,948 

Debt premium

   1,004 

Debt discount - warrants

   (85)

Debt discount – beneficial conversion premium

   (353)
     
  $6,514 
     

Long-Term Debt

  

Convertible debt (2% above prime, contractually due February 2007)

  $2,550 

Debt Premium

   474 

Mortgage debt

   —   

Less current portion

   (825)
     
  $2,199 
     

 

37


TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

 

In December 2003, the Company entered into a $7,500 line of credit (the “Credit Line”) with Laurus Master Fund, Ltd. (“Laurus”). The term of the Credit Line was three years carrying an interest rate of 2.0% over the prime rate or a minimum of 6.0% (7.25% at December 31, 2004). Funds available under the Credit Line were determined by a borrowing base equal to 90% of eligible accounts receivable balances plus up to $1,000 related to inventory balances. The Credit Line was secured by most of the Company’s assets. Prior to amendments to the Credit Line discussed below, payment of interest and principal could, under certain circumstances, be made with shares of the Company’s common stock at a fixed conversion price of $2.20 per share. Conversion of this debt to common stock could have been made at the election of Laurus or the Company. The Company could elect to convert only if its shares traded at a price exceeding $2.42 per share for ten consecutive trading days, and such conversion was further subject to trading volume limitations and a limitation on the total beneficial ownership by Laurus of the Company’s common stock. Upon entering into the Credit Line, the Company issued warrants to Laurus to acquire 550,000 shares of the Company’s common stock at an exercise price exceeding the average trading price of the Company’s common stock over the ten trading days prior to the date of the warrant. The amount available under the Credit Line at December 31, 2004 and 2003 was $1,552 and $4,508, respectively.

In February 2004, the Company entered into a separate $2,750 convertible note with Laurus (the “Term Note”). The Term Note carried an interest rate of 2.0% over the prime rate or a minimum of 6.0% (7.25% at December 31, 2004) and had a term of 3 years. Prior to amendments to the Term Note discussed below, the principal and interest on the Term Note could be converted into common stock of the Company at a fixed conversion price of $2.61 per share. Upon entering the Term Note, the Company issued warrants to Laurus to acquire 125,000 shares of its common stock. Borrowings under the Term Note were primarily used to retire the mortgage debt on the Company’s Glasgow facility. Remaining borrowings of approximately $750 were used to complete the build-out of the Glasgow facility, complete the consolidation the Company’s Glasgow operations into the new facility and provide funds for operations.

Certain features of the Credit Line and Term Note (collectively, the “Laurus Loans”) required the Company to separately account for the value of certain amounts related to the warrants issued and the conversion feature of the Laurus Loans. Specifically, Emerging Issues Task Force (“EITF”) No. 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments, requires the Company to separately value the warrants issued and the “beneficial conversion premium” related to the Laurus Loans. The values of the warrants and the beneficial conversion premium were recorded on the balance sheet as a debt discount and an increase to additional paid in capital. The debt discount recorded for these items was amortized as expense to the income statement over the terms of the Laurus Loans or as the debt was converted into common stock thereby increasing the effective interest rate on the Laurus Loans. In January and February 2004, Laurus exercised its conversion rights on the Credit Line and converted $2,000 of amounts outstanding on the Credit Line into approximately 910,000 shares of common stock of the Company. In connection with this conversion, the Company accelerated the amortization of approximately $480 of the beneficial conversion premium.

In February 2004, Laurus waived the borrowing base limitation on the Credit Line, thereby making the full $7,500 facility available to the Company regardless of the available collateral. On August 31, 2004, Laurus agreed to extend the borrowing base waiver on the Credit Line through March 19, 2005. In addition, Laurus deferred certain payments due under the Term Note and reduced the interest rate on both of the Laurus Loans to 0% for any day the closing sale price of the Company’s common stock was at or above $1.75 per share. In return, the Company lowered the conversion price on each of the Laurus Loans to $1.00 per share and issued a warrant to Laurus covering an additional 400,000 common shares at an exercise price of $1.25 per share. The closing price of the Company’s common stock on August 31, 2004 was $1.20 per share.

The August 31, 2004 Laurus modifications were treated as extinguishments for financial reporting purposes since the change in present value of expected cash flows between the original and modified agreements was greater than 10%. As such, the Company recorded a loss on extinguishment of debt of $2,859 at August 31, 2004 reflecting the difference between (i) the recorded amount of debt, net of related discounts, of $7,427 and (ii) the fair value of

 

38


TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

 

the new debt instrument of $10,287 plus the fair value of the new warrants of $111. The difference between the fair value of the new debt of $10,287 and the face value of the debt of $8,572 represented a premium, which was reflected as a reduction of interest expense over the life of the new debt.

On March 18, 2005, Laurus agreed to further extend the borrowing base waiver on the Credit Line until March 31, 2006. In connection with this waiver, the Company agreed to allow Laurus to convert $1,872 of the outstanding principal balance under the Credit Line into 3,600,000 shares of its common stock. In addition, on March 24, 2005 the Company agreed to allow Laurus to convert $650 of the outstanding principal balance of the Term Note into 1,250,000 shares of common stock. As a result, the Company increased the amount available under the Credit Line by $1,872 and eliminated substantially all remaining 2005 scheduled principal payments on the Term Loan. The closing market price of the Company’s common stock the day before each of these conversions was $0.58 per share. No other provisions of the Credit Line or Term Note were modified, including the $1.00 conversion price for remaining debt. In conjunction with these conversions the Company’s accelerated amortization of $0.41 million of related debt premiums and discounts and recorded a charge to interest expense of $1.37 million related to the fair value of incremental shares received by Laurus.

Contemporaneously with the closing of a private placement of the Company’s common stock on October 31, 2005 (the “2005 Private Placement”), the Company repaid all outstanding principal and accrued interest on the Laurus Loans which have been cancelled and are no longer available to the Company. In conjunction with this prepayment, the Company recorded a loss on debt extinguishment of $541. This loss consisted of prepayment penalties and fees paid to Laurus to facilitate the 2005 Private Placement of $844 offset by the elimination of associated net debt premiums of $303.

During 2002, Cruachem Ltd., a wholly owned subsidiary of the Company, entered into a mortgage loan with The Royal Bank of Scotland. The original principal amount of the loan was £1.0 million. Principal and interest were payable in quarterly installments. The loan carried a 15-year term and a fixed annual interest rate of 6.77%. Security for this loan was the Company’s 45,000 square foot manufacturing facility located in Glasgow, Scotland. The loan carried certain financial and non-financial covenants that included a minimum net cash flow requirement. The net book value of the facility was approximately $2,000 at December 31, 2003. During February 2004, the Company repaid the principal balance of the mortgage loan.

Interest expense consisted of the following:

 

   Years Ended December 31,
   2005  2004  2003

Interest paid or accrued on outstanding debt

  $553  $542  $89

Amortization of debt premiums

   (857)  —     —  

Amortization of debt discounts – warrants

   28   —     —  

Amortization of debt discount – beneficial conversion feature

   725   1,641   —  

Fair value of incremental shares received by Laurus

   1,365   —     —  

Other

   164   183   85
            
  $1,978  $2,366  $174
            

F. COMMITMENTS AND CONTINGENCIES

The Company is subject to a number of claims of various amounts, which arise out of the normal course of business. In the opinion of management, the disposition of pending claims will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

The Company leases certain equipment, vehicles and operating facilities under non-cancellable operating leases that expire on various dates through 2010. The future minimum lease payments required under these leases are approximately $1,176 in 2006, $539 in 2007, $276 in 2008, $277 in 2009, and $250 in 2010. Rent expense related to all operating leases for the years ended December 31, 2005, 2004 and 2003 was approximately $1,283, $2,007 and $2,487, respectively.

At December 31, 2005, firm commitments to vendors to purchase components used in WAVE® systems totaled $879. The Company expects to pay the majority of these purchase commitments during 2006.

 

39


TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

 

G. INCOME TAXES

The Company’s provision for income taxes for the years ended December 31, 2005, 2004 and 2003 relates to income taxes in states, foreign countries and other local jurisdictions, is all current and differs from the amounts determined by applying the statutory Federal income tax rate to loss before income taxes for the following reasons:

 

   2005  2004  2003 

Benefit at Federal Rate

  $(1,687) $(4,674) $(3,212)

Increase (decrease) resulting from:

    

State income taxes—net of federal benefit

   (192)  (428)  (326)

Foreign subsidiary tax rate difference

   (81)  (151)  (576)

Research and development tax credit

   —     (76)  (155)

Other—net

   191   145   81 

Valuation allowance

   1,795   5,188   4,253 
             

Current income tax expense

  $26  $4  $65 
             

The Company’s deferred income tax asset from continuing and discontinued operations at December 31, 2005 and 2004 is comprised of the following temporary differences:

 

   2005  2004 

Net operating loss carryforward

  $38,730  $35,587 

Research and development credit carryforwards

   1,328   1,328 

Deferred revenue

   341   708 

Accrued vacation

   78   81 

Other

   2,084   583 
         
   42,561   38,287 

Less valuation allowance

   (42,561)  (38,287)
         
  $—    $—   
         

At December 31, 2005, the Company had total unused federal tax net operating loss carryforwards from continuing and discontinued operations of $99,641 of which $1,770 expire in 2008, $3,698 expire in 2009, $2,970 expire in 2010, $943 expire in 2011, $3,425 expire in 2012, $1,838 expire in 2018, $8,182 expire in 2019, $9,662 expire in 2020, $8,228 expire in 2021, $16,862 expire in 2022; $16,173 expire in 2023, $17,390 expire in 2024 and $8,500 expire in 2025. Of these federal net operating loss carryforwards, $11,820 were obtained in the acquisition of Annovis, Inc. and may be subject to certain restrictions. At December 31, 2005, the Company had unused state tax net operating loss carryforwards from continuing and discontinued operations of approximately $39,002 that expire at various times between 2006 and 2025. At December 31, 2005, the Company had unused research and development credit carryforwards from continuing and discontinued operations of $1,328 that expire at various times between 2008 and 2024. A valuation allowance has been provided for the remaining deferred tax assets, due to the Company’s cumulative losses in recent years, expected losses in future years and an inability to utilize any additional losses as carrybacks. The Company will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent the Company begins to generate income in future years and it is determined that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time.

 

40


TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

 

H. EMPLOYEE BENEFIT PLAN

The Company maintains an employee 401(k) retirement savings plan that allows for voluntary contributions into designated investment funds by eligible employees. The Company matches the employees’ contributions at the rate of 50% on the first 6% of contributions. The Company may, at the discretion of its Board of Directors, make additional contributions on behalf of the Plan’s participants. For the years ended December 31, 2005, 2004 and 2003, Company contributions to the 401(k) plan were $172, $279, and $343, respectively.

I. STOCKHOLDERS’ EQUITY

Preferred Stock.

The Company’s Board of Directors is authorized to issue up to 15,000,000 shares of preferred stock in one or more series, from time to time, with such designations, powers, preferences and rights and such qualifications, limitations and restrictions as may be provided in a resolution or resolutions adopted by the Board of Directors. The authority of the Board of Directors includes, but is not limited to, the determination or fixing of the following with respect to shares of such class or any series thereof: (i) the number of shares; (ii) the dividend rate, whether dividends shall be cumulative and, if so, from which date; (iii) whether shares are to be redeemable and, if so, the terms and amount of any sinking fund providing for the purchase or redemption of such shares; (iv) whether shares shall be convertible and, if so, the terms and provisions thereof; (v) what restrictions are to apply, if any, on the issue or reissue of any additional preferred stock; and (vi) whether shares have voting rights. The preferred stock may be issued with a preference over the common stock as to the payment of dividends. The Company has no current plans to issue any series of preferred stock. Classes of stock such as the preferred stock may be used, in certain circumstances, to create voting impediments on extraordinary corporate transactions or to frustrate persons seeking to effect a merger or otherwise to gain control of the Company. For the foregoing reasons, any preferred stock issued by the Company could have an adverse effect on the rights of the holders of the common stock.

Common Stock.

On October 31, 2005, the Company completed the 2005 Private Placement of securities to institutional investors. The securities issued consisted of: (i) 14,925,743 shares of the Company’s common stock, plus (ii) five-year, non-callable warrants to purchase another 5,970,297 shares of common stock with an exercise price of $1.20 per share (the “Offering”). The aggregate purchase price for the securities sold in the 2005 Private Placement was $1.01 per share of common stock initially being sold (the “Purchase Price”) or $15,075. In conjunction with the 2005 Private Placement, the Company issued a warrant to Oppenheimer & Co., Inc. to purchase 932,859 shares at $1.20 per share as part of their placement fee.

During 2005 and 2004, the Company issued 4,900,000 and 1,134,850 shares, respectively, of common stock in conjunction with conversions under the Laurus Loans as follows.

 

Date

  Price  Shares
Issued
  

Net

Proceeds

  

Facility

  

Applied
To

January 2005

  $1.00  50,000  $50  Term Note  Principal

March 2005

  $0.52  3,600000   1,835  Credit Note  Principal

March 2005

  $0.52  1,250,000   650  Term Note  Principal
             

Total 2005

    4,900,000  $2,535    
             

January 2004

  $2.20  650,000  $1,422  Credit Line  Principal

February 2004

  $2.20  259,091   570  Credit Line  Principal

December 2004

  $1.00  150,000   146  Term Note  Principal

December 2004

  $1.00  75,759   72  Term Note  Interest
             

Total 2004

    1,134,850  $2,210    
             

In September 2003, the Company issued 1,780,000 shares of its common stock and in November 2003, the Company issued 2,720,000 shares of its common stock in privately-negotiated sales. These shares were sold pursuant to the terms of a Securities Purchase Agreement, dated August 27, 2003. The net proceeds to the Company, after payment of transaction fees and other expenses of the offering, were approximately $4,202.

 

41


TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

 

Each of the foregoing stock sales was exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) as a sale not involving a public offering. These shares have been registered for resale under the Securities Act.

In May 2001, Company shareholders approved the adoption of the Transgenomic, Inc. 2001 Employee Stock Purchase Plan that was subsequently implemented in November 2001 and terminated in December 2005. Substantially all of the Company’s U.S. employees were eligible to participate in the Plan. Eligible employees authorize payroll deductions to be made for the purchase of shares. Such deductions were accumulated during a defined participation period at the end of which each participant was deemed to have been granted an option to purchase shares of stock from the Company at 85% of the fair market value of the Company stock as measured by the closing price of the stock on either the first or last business day of the participation period, whichever was lower. The number of shares purchased under the option was based upon the participant’s elected withholding amount. At the end of the participation period such option was automatically exercised. This plan was structured to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1986, as amended. The Company issued 25,504, 76,902, and 107,077 shares under this plan, during the years ended December 31, 2005, 2004 and 2003, respectively.

Common Stock Warrants.

Warrants covering 6,903,156 shares of common stock were issued during 2005. At December 31, 2005, we had 8,062,577 common stock warrants outstanding.

 

Warrant Holder

  Issue Year  Expiration Year  Underlying Shares  Exercise Price

Various Institution Holders(1)

  2005  2010  6,903,156  $1.20

Laurus Master Fund, Ltd.(2)

  2003  2010  200,000  $1.92

Laurus Master Fund, Ltd.(2)

  2003  2010  200,000  $2.07

Laurus Master Fund, Ltd.(2)

  2003  2010  150,000  $2.35

Laurus Master Fund, Ltd.(2)

  2004  2011  125,000  $2.57

Laurus Master Fund, Ltd.(2)

  2004  2011  400,000  $1.18

TN Capital Equities, Ltd.(2)

  2003  2008  45,918  $2.94

TN Capital Equities, Ltd.(2)

  2004  2009  15,566  $3.18

GE Capital(3)

  2002  2007  13,762  $3.27

GE Capital(3)

  2003  2008  9,175  $3.27

(1)These warrants were issued in conjunction with the 2005 Private Placement described earlier in this Note.
(2)These warrants were issued in conjunction with the Laurus Loans and subsequent modifications. 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. Refer to Note E.
(3)These warrants were issued in conjunction with operating leases with GE Capital. While the leases have since been terminated, the warrants are still outstanding.

J. STOCK OPTIONS

The Company’s 1997 Stock Option Plan, as amended (the “Stock Option Plan”), allows the Company to grant both incentive stock options and nonqualified stock options to acquire shares of the Company’s common stock to employees and directors of the Company and to nonemployee advisors. Either incentive or non-qualified stock options may be granted to employees of the Company, but only nonqualified stock options may be granted to nonemployee directors and advisors. The maximum number of shares for which options may be granted under the Stock Option Plan is 7,000,000. The Stock Option Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”) which has the authority to set the number, exercise price, term and vesting provisions of the options granted under the Stock Option Plan, subject to the terms thereof. The options must be granted at exercise prices not less than the fair market value of the common stock on the date of the grant. While

 

42


TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

 

vesting periods vary, stock options generally vest at a rate of either 20% per year over a five-year period or 33 1/3% per year over a three-year period and expire 10 years after the date the option was granted. If the option holder ceases to be employed by the Company, the Company will have the right to terminate any outstanding but unexercised options.

The following table summarizes activity under the Stock Option Plan during the three years ended December 31, 2005:

 

   Number of
Options
  Weighted Average
Exercise Price

Balance at January 1, 2003:

  5,144,910   6.62

Granted

  1,282,000   1.64

Exercised

  —     —  

Forfeited

  (733,994)  7.25
       

Balance at December 31, 2003:

  5,692,916   6.62

Granted

  360,000   1.70

Exercised

  —     —  

Forfeited

  (964,879)  5.24
       

Balance at December 31, 2004:

  5,088,037   5.09

Granted

  1,183,500   1.04

Exercised

  —     —  

Forfeited

  (708,439)  4.48
       

Balance at December 31, 2005:

  5,563,098  $4.31
       

Exercisable at December 31, 2005

  5,563,098  $4.31
       

The weighted average fair value per share of options granted during the years ended December 31, 2005, 2004 and 2003 was $0.63, $0.40 and $0.93, respectively.

The Company has elected to follow the measurement provisions of APB No. 25, under which no recognition of expense is required in accounting for stock options granted to employees for which the exercise price equals or exceeds the deemed fair market value of the stock at the grant date. Stock-based compensation expense recorded by the Company represents amortization of unearned compensation related to options granted to employees with an exercise price less than the deemed fair market value at the date of grant and options granted to non-employees. There was no such expense in 2005 and 2004 and $93 for the year ended December 31, 2003.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rates ranging from 3.10% to 6.53%, volatility ranging from 35% to 100%, an expected option life of 3 years and no common stock dividends.

On December 28, 2005, the Company’s Directors approved a plan to accelerate the vesting of all outstanding stock options. Aside from the acceleration of the vesting date, the terms and the conditions of the stock option award agreements governing the underlying stock option grants remained unchanged. As a result of this plan, options to purchase approximately 1,081,845 shares became immediately exercisable. All such options were out-of-the money, and accordingly, the accelerated vesting resulted in no compensation expense since there was no intrinsic value associated with these fixed awards at the date of modification. Accelerating the vesting of these options allows the Company to avoid recognition of compensation expense associated with these options in future periods.

 

43


TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

 

The following table summarizes information about options outstanding as of December 31, 2005:

 

   Options Outstanding  Options Exercisable

Range of Exercise Prices

  Number
Outstanding
  Weighted-
Average
Remaining
Contractual Life
  Weighted-
Average
Exercise Price
  Number
Exercisable
  Weighted-
Average
Exercise Price
      (in years)         

$ 1.00—$ 1.30

  1,412,834  9.0  $1.08  1,412,834  $1.08

$ 1.31—$ 2.60

  797,333  7.4  $1.91  797,333  $1.91

$ 2.61—$ 3.90

  35,000  6.8  $2.90  35,000  $2.90

$ 3.91—$ 5.20

  2,075,700  2.1  $5.00  2,075,700  $5.00

$ 5.21—$ 6.50

  680,000  5.5  $6.15  680,000  $6.15

$ 6.51—$ 9.10

  10,000  5.4  $9.00  10,000  $9.00

$ 9.11—$10.40

  290,000  5.2  $9.89  290,000  $9.89

$10.41—$13.00

  262,231  4.4  $12.80  262,231  $12.80
                 
  5,563,098  5.3  $4.31  5,563,098  $4.31
                 

K. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION

The Company has one reportable operating segment. Although revenue is analyzed by type, net financial results are analyzed as one segment due to the integrated nature of the products. Net sales by product were as follows:

 

   Years Ended December 31,
   2005  2004  2003

Bioinstruments

  $14,427  $14,385  $17,916

Bioconsumables

   8,981   8,838   7,260

Discovery Services

   2,420   2,020   868
            
  $25,828  $25,243  $26,044
            

Net sales by geographic region were as follows:

 

   Years Ended December 31,
   2005  2004  2003

United States

  $7,069  $7,036  $7,968

Europe

   14,979   13,959   13,380

Pacific Rim

   2,297   2,325   2,403

Other

   1,483   1,923   2,293
            

Total

  $25,828  $25,243  $26,044
            

No customer accounted for more than 10% of consolidated net sales for any period presented. However, sales to a large pharmaceutical company totaled $2,188 and $1,658 and $393 during the years ended December 31, 2005, 2004 and 2003, respectively, and represented 9%, 7% and 2% of consolidated net sales. Sales to this customer are governed by a non-binding master services agreement dated August 22, 2002. Accordingly, the amount of sales to this customer is subject to change.

Substantially all long-lived assets are within the United States.

L. RESTRUCTURING PLANS

The Company implemented restructuring plans in 2004 and 2002 designed to better align the Company’s cost structure with anticipated revenues. In conjunction with these plans, the Company recorded restructuring charges in 2004 and 2003 of $1,267 and $516, respectively, related primarily to employee severance agreements, office closures, property and equipment and intellectual property. There were no accrued expenses associated with these restructuring plans at December 31, 2005 and $516 at December 31, 2004.

 

44


TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

 

M. QUARTERLY RESULTS (UNAUDITED)

Unaudited quarterly consolidated statements of operations data was as follows:

 

   Year Ended December 31, 2005 
   1st Quarter  2nd Quarter  3rd Quarter  4th Quarter  Total 

Net Sales

  $6,927  $6,889  $6,663  $5,349  $25,828 

Gross Profit

  $3,399  $3,486  $3,115  $2,331  $12,331 

Loss from continuing operations

  $(2,162) $(473) $(526) $(1,823) $(4,984)

Income (loss) from discontinued operations

   (730)  (525)  637   (9,391)  (10,009)
                     

Net loss

  $(2,892) $(998) $111  $(11,214) $(14,993)
                     

Basic and diluted earnings (loss) per share:

      

From continuing operations

  $(0.07) $(0.01) $(0.02) $(0.04) $(0.14)

From discontinued operations

   (0.03)  (0.02)  0.02   (0.21)  (0.28)
                     
  $(0.10) $(0.03) $—    $(0.25) $(0.42)
                     

Basic and Diluted Weighted Average Shares Outstanding
(in thousands)

   29,984   34,237   34,243   44,366   35,688 
   Year Ended December 31, 2004 
   1st Quarter  2nd Quarter  3rd Quarter  4th Quarter  Total 

Net Sales

  $6,385  $6,563  $5,502  $6,793  $25,243 

Gross Profit

  $3,590  $3,599  $2,840  $3,217  $13,246 

Loss from continuing operations

  $(2,308) $(1,736) $(5,368) $(4,338) $(13,750)

Loss from discontinued operations

   (1,551)  (13,396)  (3,074)  (2,601)  (20,622)
                     

Net loss

  $(3,859) $(15,132) $(8,442) $(6,939) $(34,372)
                     

Basic and diluted loss per share:

      

From continuing operations

  $(0.08) $(0.06) $(0.18) $(0.15) $(0.47)

From discontinued operations

   (0.05)  (0.46)  (0.11)  (0.09)  (0.72)
                     
  $(0.13) $(0.52) $(0.29) $(0.24) $(1.19)
                     

Basic and Diluted Weighted Average Shares Outstanding
(in thousands)

   28,728   29,053   29,078   29,338   29,006 

Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly per share losses may not equal the annual loss per share.

 

45


Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

 

 (a)Evaluation of Disclosure Controls and Procedures. A review and evaluation was performed by the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this annual report. Based on that review and evaluation, the CEO and CFO concluded that the Company’s current disclosure controls and procedures, as designed and implemented, were effective in assuring that information required to be disclosed is recorded, processed, summarized and reported in the reports the Company submits under the Securities Exchange Act of 1934.

 

 (b)Change in Internal Control Over Financial Reporting. There have been no changes in the Company’s internal control over financial reporting during the year that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

None.

Part III

Item 10. Directors and Executive Officers of the Registrant.

Information required by this item is incorporated by reference to the Proxy Statement under the caption “Board of Directors and Committees.” Information regarding our executive officers is set forth in Item 4A of this report.

Item 11. Executive Compensation.

Information required by this Item is incorporated by reference to the Proxy Statement under the caption “Executive Compensation.”

Item 12. Security Ownership of Certain Beneficial Owners and Management.

Information required by this Item is incorporated by reference to the Proxy Statement under the caption “Voting Securities and Beneficial Ownership by Principal Stockholder and our Directors and Officers.”

Item 13. Certain Relationships and Related Transactions

None.

Item 14. Principal Accountant Fees and Services

Information required by this Item is incorporated by reference to the Proxy Statement under the caption “Accounting Fees and Services.”

Part IV

Item 15. Exhibits and Financial Statement Schedules.

(a) The following documents are filed as part of this report:

 

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 1.Financial Statements. The following financial statements of the Registrant are included in response to Item 8 of this report:

Report of Independent Registered Public Accounting Firm.

Consolidated Balance Sheets of the Registrant and Subsidiaries as of December 31, 2005 and 2004.

Consolidated Statements of Operations of the Registrant and Subsidiaries for the years ended December 31, 2005, 2004 and 2003.

Consolidated Statements of Stockholders’ Equity of the Registrant and Subsidiaries for the years ended December 31, 2005, 2004 and 2003.

Consolidated Statements of Cash Flows of the Registrant and Subsidiaries for the years ended December 31, 2005, 2004 and 2003.

Notes to Consolidated Financial Statements of the Registrant and Subsidiaries.

 

 2.Financial Statement Schedules.

None

 

 3.Exhibits. The following exhibits were filed as required by Item 15(a)(3) of this report. Exhibit numbers refer to the paragraph numbers under Item 601 of Regulation S-K:

2.1 Agreement and Plan of Merger, dated as of April 30, 2001, by and among Registrant, TBIO Nebraska, Inc., TBIO, Inc. and Annovis, Inc. (incorporated by reference to Exhibit 2.1 to Registrant’s Report on Form 8-K filed on May 31, 2001)

2.2 Addendum to Agreement and Plan of Merger, dated as of May 18, 2001, by and among Registrant, TBIO Nebraska, Inc., TBIO, Inc. and Annovis, Inc. (incorporated by reference to Exhibit 2.2 to Registrant’s Report on Form 8-K filed on May 31, 2001)

2.3 Asset Purchase Agreement, dated as of November 8, 2004, by and between Registrant and Eyetech Boulder Inc. (incorporated by reference to Exhibit 2.3 to Registrant’s Report on Form 10-K (Registration No. 000-30975) filed on April 15, 2005)

3.1 Second Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 2 to Amendment No. 1 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on May 17, 2000)

3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)

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)

10.1 Fourth Amended and Restated 1997 Stock Option Plan of the Registrant (incorporated by reference to Exhibit 10.1 to Registrant’s Report on Form 10-K (Registration No. 000-30975) filed on April 15, 2005)

10.2 1999 UK Approved Stock Option Sub Plan of the Registrant (incorporated by reference to Exhibit 10.7 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)

10.3 Employee Stock Purchase Plan of the Registrant (incorporated by reference to Exhibit 4(b) to Registration Statement on Form S-8 (Registration No. 333-71866) filed on October 19, 2001)

10.4 Employment Agreement, dated April 1, 2000, by and between the Registrant and Collin J. D’Silva (incorporated by reference to Exhibit 10.8 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)

10.5 Amendment No. 1 to the Employment Agreement, effective March 1, 2000, by and between Transgenomic, Inc. and Collin D’Silva (incorporated by reference to Exhibit 10.9 of the Registrant’s Quarterly Report on Form 10-Q filed on May 17, 2004)

10.6 Employment Agreement, effective July 31, 2004, by and between Transgenomic, Inc. and Michael A. Summers (incorporated by reference to Exhibit 10.11 to Registrant’s Quarterly Report on Form 10-Q filed on November 15, 2004).

10.7 Employment Agreement, dated January 22, 2002, between the Registrant and Keith A. Johnson (incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed on May 14, 2002)

 

47


10.8 License Agreement, dated September 1, 1994, between Registrant and Professor Dr. Gunther Bonn, et. al. and Amendment thereto, dated March 14, 1997 (incorporated by reference to Exhibit 10.14 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)

10.9 License Agreement, dated August 20, 1997, between the Registrant and Leland Stanford Junior University (incorporated by reference to Exhibit 10.15 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)

10.10 License Agreement, dated December 1, 1989, between Cruachem Holdings Ltd. (a wholly owned subsidiary of the Registrant) and Millipore Corporation (incorporated by reference to Exhibit 10.13 to Registrant’s Annual Report on Form 10-K filed on March 25, 2002)

10.11 Sublicense Agreement, dated October 1, 1991, between Cruachem Holdings Ltd. (a wholly owned subsidiary of the Registrant) and Applied Biosystems, Inc. (incorporated by reference to Exhibit 10.14 to Registrant’s Annual Report on Form 10-K filed on March 25, 2002)

10.12 Missives, dated May 17, 2002, between Cruachem Limited (a wholly-owned subsidiary of the Registrant) and Robinson Nugent (Scotland) Limited (incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed on August 14, 2002)

10.13 License Amendment Agreement, dated June 2, 2003, by and between Geron Corporation and the Registrant. (incorporated by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q filed on August 12, 2003)

10.14 Supply Agreement, dated January 1, 2000, between the Registrant and Hitachi Instruments (incorporated by reference to Exhibit 10.16 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)

10.15 Form of Securities Purchase Agreement by and between the Registrant and various counterparties, dated August 27, 2003 (incorporated by reference to Exhibit 10 to the Registrant’s Report on Form 8-K filed on August 29, 2003)

10.16 Securities Purchase Agreement by and between the Registrant and Geron Corporation, dated June 2, 2003 (incorporated by reference to Exhibit 10.0 to Amendment No. 3 to Registration Statement on Form S-3 (Registration No. 333-108319) as filed on October 14, 2003)

10.17 Security Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003)

10.18 Amendment to Security Agreement and Related Documents by and between the Registrant and Laurus Master Fund, Ltd., dated August 31, 2002 (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-3 (Registration No. 333-118970) as filed on September 14, 2004)

10.19 Secured Revolving Note by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003)

10.20 Secured Convertible Minimum Borrowing Note by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003)

10.21 Secured Convertible Minimum Borrowing Note Series B by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003, as amended on April 15, 2004 (incorporated by reference to the Registration Statement of the Registrant (Registration No. 333-114661) filed on April 21, 2004)

10.22 Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003)

10.23 Registration Rights Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003)

10.24 Common Stock Purchase Warrant by and between the Registrant and TN Capital Equities, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003)

 

48


10.25 Securities Purchase Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004, as amended on April 15, 2004 (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004)

10.26 Amendment to Securities Purchase Agreement and Related Document by and between the Registrant and Laurus Master Fund, Ltd., dated August 31, 2004 (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-3 (Registration No. 333-118970) as filed on September 14, 2004)

10.27 Secured Convertible Term Note by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004, as amended on April 15, 2004 (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004)

10.28 Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004, as amended on April 15, 2004 (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004)

10.29 Registration Rights Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004 (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004)

10.30 Common Stock Purchase Warrants by and between the Registrant and TN Capital Equities, Ltd., dated March 1, 2004 (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004)

10.31 Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated August 31, 2004 (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-3 (Registration No. 333-118970) as filed on September 14, 2004)

10.32 Engagement Agreement by and between the Registrant and Goldsmith, Agio, Helms Securities, Inc., dated March 19, 2004, as amended August 12, 2004 (incorporated by reference to Exhibit 10.10 to Registrant’s Quarterly Report on Form 10-Q filed on November 15, 2004)

10.33 Form of Securities Purchase Agreement by and between the Registrant and various counterparties dated September 22, 2005 (incorporated by reference to Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q filed on November 14, 2005)

10.34 Common Stock Purchase Warrant by and between the Registrant and Oppenheimer & Co., Inc. dated October 27, 2005

10.35 Letter Agreement by and between the Registrant and Laurus Master Fund, Ltd. dated September 22, 2005

10.36 Letter Agreement by and between the Registrant and Laurus Master Fund, Ltd. dated October 31, 2005

21     Subsidiaries of the Registrant

23     Consent of Independent Registered Public Accounting Firm

24     Powers of Attorney

31     Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32     Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

49


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 30th day of March 2006.

 

TRANSGENOMIC, INC.
By: 

/s/ COLLIN J. D’SILVA

 

Collin J. D’Silva,

Chairman and Chief Executive Officer

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this 30th day of March 2006.

 

Signature

  

Title

/s/ COLLIN J. D’SILVA

Collin J. D’Silva

  

Chairman of the Board, Director and Chief Executive Officer

(Principal Executive Officer)

/s/ MICHAEL A. SUMMERS

Michael A. Summers

  

Chief Financial Officer (Principal Financial Officer)

/s/ GREGORY J. DUMAN*

Gregory J. Duman

  

Director

/s/ JEFFREY SKLAR*

Jeffrey Sklar

  

Director

/s/ ROLAND J. SANTONI*

Roland J. Santoni

  

Director

/s/ PARAG SAXENA*

Parag Saxena

  

Director

/s/ GREGORY T. SLOMA*

Gregory T. Sloma

  

Director

*By Collin J. D’Silva, as attorney-in-fact  

/s/ COLLIN J. D’SILVA

Collin J. D’Silva

Attorney-in-fact for the individuals as indicated.

  

 

50