Precipio, Inc. - Quarter Report: 2007 September (Form 10-Q)
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the Quarterly Period Ended September 30, 2007
|
|
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
|
911789357
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
12325
Emmet Street, Omaha, Nebraska
|
68164
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(402)
452-5400
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Securities Exchange
Act of 1934.
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act of
1934) Yes o No x
As
of
September 30, 2007, the number of shares of common stock outstanding was
49,189,672.
TRANSGENOMIC,
INC.
INDEX
|
|
Page No.
|
PART I.
|
FINANCIAL
INFORMATION
|
3
|
Item 1.
|
Financial
Statements
|
3
|
|
Unaudited
Condensed Consolidated Balance Sheets as of September 30, 2007 and
December 31, 2006
|
3
|
|
Unaudited
Condensed Consolidated Statements of Operations for the Three and
Nine
Months Ended September 30, 2007 and 2006
|
4
|
|
||
|
Unaudited
Condensed Consolidated Statements of Stockholders’ Equity for the Nine
Months Ended September 30, 2007
|
5
|
|
||
|
Unaudited
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended
September 30, 2007 and 2006
|
6
|
|
||
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
7
|
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
17
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
23
|
Item 4.
|
Controls
and Procedures
|
23
|
PART II.
|
OTHER
INFORMATION
|
24
|
|
||
Item 1.
|
Legal
Proceedings
|
24
|
Item 1A.
|
Risk
Factors
|
24
|
Item 6.
|
Exhibits
|
24
|
Signatures
|
25
|
2
PART
I. FINANCIAL INFORMATION
Item 1. Financial
Statements
TRANSGENOMIC,
INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars
in thousands except per share data)
|
September 30,
2007
(unaudited)
|
December 31,
2006
|
|||||
ASSETS
|
|
|
|||||
CURRENT
ASSETS:
|
|
|
|||||
Cash
and cash equivalents
|
$
|
6,543
|
$
|
5,868
|
|||
Accounts
receivable (net of allowances for bad debts of $585 and $613,
respectively)
|
5,646
|
6,525
|
|||||
Inventories
|
4,492
|
2,672
|
|||||
Prepaid
expenses and other current assets
|
905
|
540
|
|||||
Total
current assets
|
17,586
|
15,605
|
|||||
PROPERTY
AND EQUIPMENT:
|
|||||||
Equipment
|
10,759
|
10,345
|
|||||
Furniture
and fixtures
|
4,058
|
3,820
|
|||||
|
14,817
|
14,165
|
|||||
Less:
accumulated depreciation
|
13,251
|
12,667
|
|||||
|
1,566
|
1,498
|
|||||
OTHER
ASSETS:
|
|||||||
Goodwill
|
638
|
638
|
|||||
Other
assets
|
725
|
853
|
|||||
Non-current
assets of discontinued operations
|
—
|
2,773
|
|||||
|
$
|
20,515
|
$
|
21,367
|
|||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
CURRENT
LIABILITIES:
|
|||||||
Accounts
payable
|
$
|
1,964
|
$
|
1,558
|
|||
Other
accrued expenses
|
3,882
|
2,898
|
|||||
Accrued
compensation
|
575
|
689
|
|||||
Current
liabilities of discontinued operations
|
—
|
184
|
|||||
Total
current liabilities
|
6,421
|
5,329
|
|||||
Other
long-term liabilities
|
129
|
—
|
|||||
Total
liabilities
|
6,550
|
5,329
|
|||||
COMMITMENTS
AND CONTINGENCIES 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, 49,189,672 and 49,189,672 shares outstanding,
respectively
|
497
|
497
|
|||||
Additional
paid-in capital
|
139,054
|
138,966
|
|||||
Accumulated
other comprehensive income
|
2,387
|
2,100
|
|||||
Accumulated
deficit
|
(127,973
|
)
|
(125,525
|
)
|
|||
Total
stockholders’ equity
|
13,965
|
16,038
|
|||||
|
$
|
20,515
|
$
|
21,367
|
See
notes
to condensed consolidated financial statements.
3
TRANSGENOMIC,
INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars
in thousands except per share data)
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||
NET
SALES
|
$
|
5,151
|
$
|
4,919
|
$
|
16,645
|
$
|
17,605
|
|||||
COST
OF GOODS SOLD
|
2,500
|
2,607
|
7,872
|
9,261
|
|||||||||
Gross
profit
|
2,651
|
2,312
|
8,773
|
8,344
|
|||||||||
OPERATING
EXPENSES:
|
|||||||||||||
Selling,
general and administrative
|
2,672
|
3,305
|
8,719
|
8,834
|
|||||||||
Research
and development
|
720
|
586
|
2,270
|
1,721
|
|||||||||
Restructuring
Charge
|
681
|
—
|
1,305
|
—
|
|||||||||
|
4,073
|
3,891
|
12,294
|
10,555
|
|||||||||
|
|||||||||||||
LOSS
FROM OPERATIONS
|
(1,422
|
)
|
(1,579
|
)
|
(3,521
|
)
|
(2,211
|
)
|
|||||
OTHER
INCOME (EXPENSE):
|
|||||||||||||
Interest
income (expense)
|
75
|
(7
|
)
|
215
|
149
|
||||||||
Gain
on sale of investment
|
—
|
—
|
938
|
—
|
|||||||||
Other,
net
|
4
|
68
|
8
|
—
|
|||||||||
|
79
|
61
|
1,161
|
149
|
|||||||||
LOSS
BEFORE INCOME TAXES
|
(1,343
|
)
|
(1,518
|
)
|
(2,360
|
)
|
(2,062
|
)
|
|||||
INCOME
TAX EXPENSE
|
6
|
7
|
25
|
24
|
|||||||||
LOSS
FROM CONTINUING OPERATIONS
|
(1,349
|
)
|
(1,525
|
)
|
(2,385
|
)
|
(2,086
|
)
|
|||||
INCOME(LOSS)
FROM DISCONTINUED OPERATIONS, NET OF TAX
|
—
|
(164
|
)
|
66
|
(304
|
)
|
|||||||
NET
LOSS
|
$
|
(1,349
|
)
|
$
|
(1,689
|
)
|
$
|
(2,319
|
)
|
$
|
(2,390
|
)
|
|
COMPREHENSIVE
LOSS
|
$
|
(1,217
|
)
|
$
|
(1,350
|
)
|
$
|
(2,032
|
)
|
$
|
(1,552
|
)
|
|
BASIC
AND DILUTED LOSS PER SHARE:
|
|||||||||||||
From
continuing operations
|
$
|
(0.03
|
)
|
$
|
(0.03
|
)
|
$
|
(0.05
|
)
|
$
|
(0.04
|
)
|
|
From
discontinued operations
|
(0.00
|
)
|
0.00
|
(0.00
|
)
|
(0.01
|
)
|
||||||
|
$
|
(0.03
|
)
|
$
|
(0.03
|
)
|
$
|
(0.05
|
)
|
$
|
(0.05
|
)
|
|
BASIC
WEIGHTED AVERAGE SHARES OUTSTANDING
|
49,189,672
|
49,189,672
|
49,189,672
|
49,188,040
|
|||||||||
DILUTED
WEIGHTED AVERAGE SHARES OUTSTANDING
|
49,189,672
|
49,189,672
|
49,189,672
|
49,188,040
|
See
notes
to condensed consolidated financial statements.
4
TRANSGENOMIC,
INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Nine
Months Ended September 30, 2007
(Dollars
in thousands except per share data)
|
Common Stock
|
|
|
|
|
||||||||||||||
|
Outstanding
Shares
|
Par
Value
|
Additional
Paid-in
Capital
|
Accumulated
Deficit
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Total
|
|||||||||||||
Balance,
December 31, 2006
|
49,189,672
|
$
|
497
|
$
|
138,966
|
$
|
(125,525
|
)
|
$
|
2,100
|
$
|
16,038
|
|||||||
Cumulative
effect of adoption of FIN 48 (Note H)
|
—
|
—
|
—
|
(129
|
)
|
—
|
(129
|
)
|
|||||||||||
Balance,
January 1, 2007
|
49,189,672
|
$
|
497
|
$
|
138,966
|
$
|
(125,654
|
)
|
$
|
2,100
|
$
|
15,909
|
|||||||
Net
loss
|
—
|
—
|
—
|
(2,319
|
)
|
(2,319
|
)
|
(2,319
|
)
|
||||||||||
Other
comprehensive loss:
|
|
|
|
|
|
|
|||||||||||||
Foreign
currency translation adjustment
|
—
|
—
|
—
|
—
|
287
|
287
|
|||||||||||||
Comprehensive
loss
|
—
|
—
|
—
|
—
|
(2,032
|
)
|
—
|
||||||||||||
Stock-based
compensation
|
—
|
—
|
87
|
—
|
—
|
87
|
|||||||||||||
Balance,
September 30, 2007
|
49,189,672
|
$
|
497
|
$
|
139,054
|
$
|
(127,973
|
)
|
$
|
2,387
|
$
|
13,965
|
See
notes
to condensed consolidated financial statements.
5
TRANSGENOMIC,
INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars
in thousands)
|
Nine Months Ended
September 30,
|
||||||
|
2007
|
2006
|
|||||
CASH
FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
|
|
|
|||||
Net
loss
|
$
|
(2,319
|
)
|
$
|
(2,390
|
)
|
|
Adjustments
to reconcile net loss to net cash flows provided by (used in) operating
activities:
|
|||||||
Depreciation
and amortization
|
978
|
1,361
|
|||||
Impairment
charge
|
—
|
437
|
|||||
Non-cash,
stock based compensation
|
87
|
152
|
|||||
(Gain)
Loss on sale of investment and assets
|
(1,034
|
)
|
15
|
||||
Changes
in operating assets and liabilities:
|
|||||||
Accounts
receivable
|
1,041
|
2,585
|
|||||
Inventories
|
(1,800
|
)
|
805
|
||||
Prepaid
expenses and other current assets
|
(344
|
)
|
26
|
||||
Accounts
payable
|
124
|
(820
|
)
|
||||
Accrued
expenses
|
615
|
(1,691
|
)
|
||||
Net
cash flows provided by (used in) operating activities
|
(2,652
|
)
|
480
|
||||
CASH
FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
|
|||||||
Purchase
of property and equipment
|
(523
|
)
|
(228
|
)
|
|||
Change
in other assets
|
(133
|
)
|
(54
|
)
|
|||
Proceeds
from asset sales
|
3,935
|
95
|
|||||
Net
cash flows provided by (used in) investing activities
|
3,279
|
(187
|
)
|
||||
CASH
FLOWS PROVIDED BY FINANCING ACTIVITIES:
|
|||||||
Issuance
of common stock
|
—
|
5
|
|||||
Net
cash flows from financing activities
|
—
|
5
|
|||||
EFFECT
OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH
|
48
|
271
|
|||||
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
675
|
569
|
|||||
CASH
AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
5,868
|
6,736
|
|||||
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$
|
6,543
|
$
|
7,305
|
|||
SUPPLEMENTAL
CASH FLOW INFORMATION
|
|||||||
Cash
paid during the period for:
|
|||||||
Interest
|
$
|
5
|
$
|
—
|
|||
Income
taxes, net
|
25
|
24
|
See
notes
to condensed consolidated financial statements.
6
TRANSGENOMIC,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine
Months Ended September 30, 2007 and 2006
(Dollars
in thousands except per share data and as noted)
A. BUSINESS
DESCRIPTION
Business
Description.
Transgenomic,
Inc. provides innovative products for the synthesis, purification and analysis
of nucleic acids used in the life sciences industry for research focused on
molecular genetics and diagnostics. We also provide genetic variation analytical
services to the medical research, clinical and pharmaceutical 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
is a
worldwide installed base of over 1,400 WAVE Systems as of
September 30, 2007. We also distribute bioinstruments produced by
other manufacturers through our sales and distribution network.
Service
contracts to maintain installed systems are sold and supported
by
technical support personnel.
|
•
|
Bioconsumables.
The installed WAVE base and some third-party installed platforms
generate
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. The lab in Omaha operates in a Good Laboratory
Practices
(“GLP”) compliant environment and is certified under the Clinical
Laboratory Improvement Amendment. The services provided by the
laboratories 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.
In the fourth quarter of 2005, we implemented a plan to exit the Nucleic Acids
operating segment and during the three months ended March 31, 2007, we
completed the sale of the remaining assets associated with this segment.
Accordingly, the assets and results of the Nucleic Acids operating segment
are
reflected as discontinued operations for all periods presented in this filing.
Although
we have experienced declining sales and recurring net losses (resulting in
an
accumulated deficit of $128 million at September 30, 2007), management
believes existing sources of liquidity, including cash and cash equivalents
of
$6.5 million, are sufficient to meet expected cash needs into 2008. Although
our
business consolidation efforts have helped control our operating costs, we
will
need to increase net sales and/or further reduce operating expenses in order
to
meet our liquidity needs on a long-term basis. In future periods, there is
no
assurance that we will be able to increase net sales or further reduce expenses
and, accordingly, we may not have sufficient sources of liquidity to continue
operations indefinitely. In addition, such cost and expense reductions could
have an adverse impact on the new product pipeline and ultimately net sales.
We
could also pursue additional financing, but ultimately, we must achieve
sufficient net sales to consistently generate net income and cash flows from
operations.
B. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
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.
Use
of Estimates.
The
preparation of consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial
statements and the reported amounts of net sales and expenses during the
reporting period. In addition, estimates and assumptions associated with the
determination of the fair value of certain assets and related impairments 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.
7
TRANSGENOMIC,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine
Months Ended September 30, 2007 and 2006
(Dollars
in thousands except per share data and as noted)
Basis
of Presentation.
The
consolidated balance sheet as of December 31, 2006 was derived from our audited
balance sheet as of that date. The accompanying consolidated financial
statements as of and for the three and nine months ended September 30, 2007
and
2006 are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for
a
fair presentation of the financial position and operating results for the
interim periods. These unaudited consolidated financial statements and notes
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the year ended December 31, 2006 contained in our Annual
Report on Form 10-K. The results of operations for the interim periods presented
are not necessarily indicative of the results for the entire year.
Cash
and Cash Equivalents.
Cash
and
cash equivalents include cash and temporary overnight investments with original
maturities at acquisition of three months or less.
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 the three
and
nine months ended September 30, 2007 and 2006:
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||
Beginning
balance
|
$
|
649
|
$
|
493
|
$
|
613
|
$
|
1,008
|
|||||
Charges
to income
|
(64
|
)
|
30
|
(27
|
)
|
7
|
|||||||
Deductions
from reserves
|
—
|
26
|
(1
|
)
|
(466
|
)
|
|||||||
Ending
balance
|
$
|
585
|
$
|
549
|
$
|
585
|
$
|
549
|
While
payment terms are generally 30 days, we have also provided extended payment
terms of up to 90 days in certain cases. We review accounts receivable on a
quarterly basis and adjust our bad debt reserve accordingly.
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.
Equipment,
Furniture and Fixtures.
Equipment,
furniture and fixtures are carried at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the related assets
as
follows:
Leasehold
improvements
|
2 to 10 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
|
Depreciation
and amortization during the three months ended September 30, 2007 and 2006,
respectively, included $236 and $405, respectively, related to depreciation
of
property and equipment. Depreciation and amortization during the nine months
ended September 30, 2007 and 2006, respectively, included $978 and $1,361
respectively.
8
TRANSGENOMIC,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine
Months Ended September 30, 2007 and 2006
(Dollars
in thousands except per share data and as noted)
Goodwill.
Statement
of Financial Accounting Standards (“SFAS”) No. 142, Goodwill
and Other Intangible Assets, provides
that goodwill will not be amortized, but will be tested for impairment annually.
We perform this impairment analysis during the fourth quarter of each year.
Impairment occurs when the carrying value is determined to be not recoverable
thereby causing the fair value of the goodwill to exceed the carrying value.
If
impaired, the asset’s carrying value is reduced to its fair value.
Other
Assets.
Long-Lived
Assets.
In
August
2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting
for the Impairment or Disposal of Long-Lived Assets,
(SFAS
No. 144) which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes SFAS No. 121,
and the accounting and reporting provisions of Accounting Principles Board
(APB)
Opinion No. 30, Reporting
the Results of Operations,
for a
disposal of a segment of a business. We periodically review the carrying value
of our long-lived assets to assess recoverability and impairment. We
recorded no impairments during the three and nine months ended
September 30, 2007 or 2006.
Other
assets include intellectual property, patents, other intangible assets, and
other long-term assets.
Intellectual
Property. Initial costs paid to license intellectual property from independent
third parties are capitalized and amortized using the straight-line method
over
the license period. Ongoing royalties related to such licenses are expensed
as
incurred.
Patents.
We capitalize external and in-house legal costs, filing fees and other expenses
associated with obtaining patents on new discoveries and amortize these costs
using the straight-line method over the shorter of the legal life of the patent
or its economic life, generally 17 years, beginning on the date the patent
is
issued.
Other
Intangible Assets. 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
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.
All
stock
options awarded to date have exercise prices equal to the market price of our
common stock on the date of grant and have ten-year contractual terms. Unvested
options as of September 30, 2007 had vesting periods of three years from
date of grant. None of the stock options outstanding at September 30, 2007
are subject to performance or market-based vesting conditions.
We
adopted Financial Accounting Standards Board (FASB) Statement No. 123(R),
Share-Based
Payment
(“FAS
123(R)”), on January 1, 2006. FAS 123(R) requires us to measure and
recognize compensation expense for all stock-based awards made to employees
and
directors, including stock options. Compensation expense is based on the
calculated fair value of the awards as measured at the grant date and is
expensed ratably over the service period of the awards (generally the vesting
period).
On
December 28, 2005, our 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 allowed us to avoid recognition of
compensation expense associated with these options in future periods.
During
the nine months ended September 30, 2007, we recorded compensation expense
of $87 within the general administrative expense related to the vesting of
870,000 options. During the nine months ended September 30, 2006, we recorded
compensation expenses of $3 related to 240,000 new option grants and $149
related to an extension of the post-termination exercise period for 450,000
options from 90 days after termination to the remaining contractual term of
the
original option grants. The fair value of the options was estimated on their
respective grant dates using the Black-Scholes option pricing model. The
Black-Scholes model was used with the following assumptions: risk-free interest
rates of 4.97% to 5.08%, based on the U.S. Treasury
yield in effect at the time of grant; dividend yields of zero percent; expected
lives of 2 to 10 years, based on historical exercise activity behavior; and
volatility of 89.14% and 67.58% for grants issued for the nine months ended
September 30, 2007 based on the historical volatility of our stock over a
time that is consistent with the expected life of the option. As of
September 30, 2007, there was $435 of unrecognized compensation expense
related to unvested stock options, which is expected to be recognized over
a
weighted average period of nearly three years.
9
TRANSGENOMIC,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine
Months Ended September 30, 2007 and 2006
(Dollars
in thousands except per share data and as noted)
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
(referred to as “net sales”) 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 under a
purchase order. Our sales terms do not provide for the right of return unless
the product is damaged or defective. Net sales from certain services associated
with the analytical instruments, to be performed subsequent to shipment of
the
products, is deferred and recognized when the services are provided. Such
services, mainly limited to installation and training services that are not
essential to the functionality of the instruments, typically are performed
in a
timely manner subsequent to shipment of the instrument. We also enter into
various service contracts that cover installed instruments. These contracts
cover specific time periods and net sales associated with these contracts are
deferred and recognized over the service period. At September 30, 2007 and
December 31, 2006, deferred revenue mainly associated with our service
contracts, included in the balance sheet in other accrued expenses, was
approximately $1,898 and $1,591, 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 from continuing operations decreased net loss by $77 and $181 during
the three and nine months ended September 30, 2007, respectively. For the
three and nine months ended September 30, 2006, foreign currency transactions
adjustments from continuing operations increased net loss by $98 and decreased
net loss by $98, respectively.
Comprehensive
Income.
Accumulated
other comprehensive income at September 30, 2007 and December 31, 2006
consisted of foreign currency translation adjustments, net of applicable tax
of
zero. We deem our foreign investments to be permanent in nature and do not
provide for taxes on currency translation adjustments arising from converting
investments in a foreign currency to U.S. dollars.
Earnings
Per Share.
Basic
earnings per share is 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, warrants or conversion
rights that have exercise or conversion prices below the market value of our
common stock. Options, warrants and conversion rights pertaining to 12,201,141
and 13,778,841 shares of our common stock have been excluded from the
computation of diluted earnings per share at September 30, 2007 and 2006,
respectively, because the effect would be anti-dilutive due to the net loss
from
continuing operations in those periods. As a result, none of our outstanding
options, warrants or conversion rights affect the calculation of diluted
earnings per share.
10
TRANSGENOMIC,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine
Months Ended September 30, 2007 and 2006
(Dollars
in thousands except per share data and as noted)
Recently
Issued Accounting Pronouncements.
In
July
2006, the FASB issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (“FIN
48”). FIN 48 applies to all tax positions within the scope of Statement 109 and
clarifies when and how to recognize tax benefits in the financial statements
with a two-step approach of recognition and measurement. We adopted FIN 48
on
January 1, 2007. Under FIN 48, tax benefits are recognized only for tax
positions that are more likely than not to be sustained upon examination by
tax
authorities. The amount recognized is measured as the largest amount of benefit
that is more likely than not to be realized upon ultimate settlement.
Unrecognized tax benefits are tax benefits claimed in our tax returns that
do
not meet these recognition and measurement standards.
In
September 2006, the FASB issued Statement No. 157, Fair
Value Measurement
(“FAS
157”). While this Statement does not require new fair value measurements, it
provides guidance on applying fair value and expands required disclosures.
FAS
157 is effective beginning in the first quarter of 2008. We are currently
assessing the impact FAS 157 may have on our Consolidated Financial Statements.
In
February 2007, the FASB issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities
(“FAS
159”). This Statement, which is expected to expand fair value measurement,
permits entities to choose to measure many financial instruments and certain
other items at fair value. FAS 159 will become effective for us beginning with
the first quarter of 2008. We are currently assessing the impact FAS 159 may
have on our Consolidated Financial Statements.
C. DISCONTINUED
OPERATIONS
In
the
fourth quarter of 2005, we implemented a plan to exit the Nucleic Acids
operating segment. Accordingly, we now reflect the results related to this
operating segment as discontinued operations for all periods presented. Expenses
that are not directly identified to the Nucleic Acids operating segment or
that
are considered corporate overhead have not been allocated in arriving at the
loss from discontinued operations. Summary results of operations of the former
Nucleic Acids operating segment were as follows:
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||
NET
SALES
|
$
|
—
|
$
|
7
|
$
|
—
|
$
|
1,142
|
|||||
COST
OF GOODS SOLD
|
—
|
—
|
—
|
843
|
|||||||||
Gross
profit
|
—
|
7
|
—
|
299
|
|||||||||
OPERATING
EXPENSES
|
—
|
172
|
(66
|
)
|
605
|
||||||||
INCOME
(LOSS) FROM OPERATIONS
|
—
|
(165
|
)
|
66
|
(306
|
)
|
|||||||
OTHER
INCOME
|
—
|
1
|
—
|
2
|
|||||||||
INCOME
(LOSS) BEFORE INCOME TAXES
|
—
|
(164
|
)
|
66
|
(304
|
)
|
|||||||
INCOME
TAX
|
—
|
—
|
—
|
—
|
|||||||||
INCOME
(LOSS) FROM DISCONTINUED OPERATIONS
|
$
|
—
|
$
|
(164
|
)
|
$
|
66
|
$
|
(304
|
)
|
Assets
associated with the Nucleic Acids segment consisted principally of our facility
in Glasgow, Scotland. During the quarter ended March 31, 2007, we completed
the sale of the Glasgow facility and the associated equipment for $2.9 million,
net of selling expenses, which resulted in a gain of $0.1 million.
11
TRANSGENOMIC,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine
Months Ended September 30, 2007 and 2006
(Dollars
in thousands except per share data and as noted)
The
assets and liabilities of the former Nucleic Acids operating segment were as
follows:
|
September 30,
2007
|
December 31,
2006
|
|||||
Accounts
receivable (net of allowances for doubtful accounts of $177 and $173,
respectively)
|
$
|
—
|
$
|
—
|
|||
Prepaid
expenses and other current assets
|
—
|
—
|
|||||
Current
assets of discontinued operations
|
$
|
—
|
$
|
—
|
|||
Property
and equipment, net
|
$
|
—
|
$
|
2,773
|
|||
Non-current
assets of discontinued operations
|
$
|
—
|
$
|
2,773
|
|||
Accounts
payable
|
$
|
—
|
$
|
45
|
|||
Other
accrued expenses
|
—
|
139
|
|||||
Current
liabilities of discontinued operations
|
$
|
—
|
$
|
184
|
Liabilities
are related to expenses to be paid during 2007 for final closing costs of the
Glasgow facility.
D. RESTRUCTURING
CHARGES
We
recorded restructuring charges totaling $681 and $1.3 million for the three
and
nine months ended September 30, 2007. The restructuring charges were
comprised of severance totaling $892, facility closure costs totaling $272
and
other costs totaling $155. Restructuring charges related to three events: A
restructuring plan completed in the second quarter of 2007, which resulted
from
the termination of four employees in Omaha, Nebraska; facility closure
activities to close the Cramlington, England production facility and consolidate
production in the Omaha, Nebraska facility; and facility closure activities
to
close an administrative office outside Paris, France, and combine those
operations with those functions performed elsewhere in the organization.
E. INVENTORIES
Inventories
consisted of the following:
|
September 30,
2007
|
December 31,
2006
|
|||||
Finished
goods
|
$
|
3,193
|
$
|
2,146
|
|||
Raw
materials and work in process
|
1,286
|
443
|
|||||
Demonstration
inventory
|
13
|
83
|
|||||
|
$
|
4,492
|
$
|
2,672
|
F. OTHER
ASSETS
Finite
lived intangible assets and other assets consisted of the following:
|
September 30, 2007
|
December 31, 2006
|
|||||||||||||||||
|
Cost
|
Accumulated
Amortization
|
Net Book
Value
|
Cost
|
Accumulated
Amortization
|
Net Book
Value
|
|||||||||||||
Intellectual
property
|
$
|
865
|
$
|
704
|
$
|
161
|
$
|
765
|
$
|
677
|
$
|
88
|
|||||||
Patents
|
659
|
185
|
474
|
676
|
155
|
521
|
|||||||||||||
Other
|
303
|
213
|
90
|
705
|
461
|
244
|
|||||||||||||
Total
|
$
|
1,827
|
$
|
1,102
|
$
|
725
|
$
|
2,146
|
$
|
1,293
|
$
|
853
|
12
TRANSGENOMIC,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine
Months Ended September 30, 2007 and 2006
(Dollars
in thousands except per share data and as noted)
Amortization
expense for intangible assets was $24 and $10 during the three months ended
September 30, 2007 and 2006, respectively, and $69 and $160 during the nine
months ended September 30, 2007 and 2006, respectively. Amortization
expense for intangible assets is expected to be approximately $22 for the
remainder of 2007, $87 in 2008, $75 in 2009, $50 in 2010, $39 in 2011, and
$32
in 2012 and 2013.
G. COMMITMENTS
AND CONTINGENCIES
We
are
subject to a number of claims of various amounts, which arise out of the normal
course of business. In the opinion of management, the disposition of pending
claims will not have a material adverse effect on our financial position,
results of operations or cash flows.
We
lease
certain equipment, vehicles and operating facilities under non-cancellable
operating leases that expire on various dates through 2014. The future minimum
lease payments required under these leases are approximately $259 for the
remainder of 2007, $862 in 2008, $768 in 2009, $655 in 2010, $498 in 2011,
$293
in 2012, and $98 thereafter. Rent expense for continuing operations related
all
to operating leases for the three months ended September 30, 2007 and 2006
was approximately $298 and $260, respectively, and for the nine months ended
September 30, 2007 and 2006 was approximately $825 and $774, respectively.
At
September 30, 2007, firm commitments to vendors to purchase components used
in WAVE Systems and instruments manufactured by others totaled $349. We expect
to satisfy these purchase commitments during 2007.
H. INCOME
TAXES
In
July
2006, the FASB issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (“FIN
48”). FIN 48 applies to all tax positions within the scope of Statement 109 and
clarifies when and how to recognize tax benefits in the financial statements
with a two-step approach of recognition and measurement. We adopted FIN 48
on
January 1, 2007. Under FIN 48, tax benefits are recognized only for tax
positions that are more likely than not to be sustained upon examination by
tax
authorities. The amount recognized is measured as the largest amount of benefit
that is more than likely not to be realized upon ultimate settlement.
Unrecognized tax benefits are tax benefits claimed in the tax returns that
do
not meet these recognition and measurement standards.
Upon
adoption of FIN 48 on January 1, 2007, we recognized a $129 increase in the
liability for unrecognized tax benefits. This increase in the liability was
offset by an increase to the January 1, 2007 balance in the accumulated
deficit. The gross amount of unrecognized tax benefits as of the date of
adoption was $129, all of which would affect the effective tax rate if
recognized. Included in this amount is an aggregate of $72 of interest and
penalties. Our policy is to recognize interest and penalties directly related
to
income taxes as part of income tax expense.
We
file
income tax returns in the U.S. federal jurisdiction, various U.S. state
jurisdictions and various foreign jurisdictions. We have statutes of limitation
open for Federal income tax returns related to tax years 2004 through 2006.
We
have state income tax returns subject to examination primarily for tax years
2003 through 2006. Open tax years related to foreign jurisdictions remain
subject to examination. Our primary foreign jurisdiction is the United Kingdom
which has open tax years for 2005 through 2006. We are not currently under
examination in any jurisdiction.
During
the three and nine months ended September 30, 2007, there were no material
changes to the liability for uncertain tax positions.
I. EMPLOYEE
BENEFIT PLAN
We
maintain an employee 401(k) retirement savings plan that allows for voluntary
contributions into designated investment funds by eligible employees. We match
the employees’ contributions at the rate of 50% on the first 6% of
contributions. We may, at the discretion of our Board of Directors, make
additional contributions on behalf of the Plan’s participants. Contributions to
the 401(k) plan were $37 and $40 for the three months ended September 30,
2007 and 2006, respectively, and $118 and $122 for the nine months ended
September 30, 2007 and 2006, respectively.
13
TRANSGENOMIC,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine
Months Ended September 30, 2007 and 2006
(Dollars
in thousands except per share data and as noted)
J. STOCKHOLDERS’
EQUITY
Common
Stock Warrants.
No
common
stock warrants were issued during the three and nine months ended
September 30, 2007 or 2006. At September 30, 2007, there are 8,062,577
common stock warrants outstanding.
Warrant
Holder
|
Issue Year
|
Expiration Year
|
Underlying Shares
|
Exercise Price
|
|||||||||
Various
Institutional 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
|
||||||||
Total
|
8,062,577
|
(1)
|
These
warrants were issued in conjunction with a private placement of
common
stock in October 2005 (the “2005 Private Placement”).
|
(2)
|
These
warrants were issued in conjunction with two loans that had been
made to
us by Laurus Master Fund, Ltd. (the “Laurus Loans”), and subsequent
modifications of these loans. In conjunction with the 2005 Private
Placement, the exercise prices of these warrants were adjusted
according
to repricing provisions contained in the original warrant agreements.
While the Laurus Loans have been terminated, the warrants remain
outstanding.
|
(3)
|
These
warrants were issued in conjunction with operating leases with
GE Capital.
While the leases have since been terminated, the warrants remain
outstanding.
|
K. STOCK
OPTIONS
The
following table summarizes stock option activity during the nine months ended
September 30, 2007:
|
Number of
Options
|
Weighted Average
Exercise Price
|
|||||
Balance
at January 1, 2007:
|
5,467,664
|
$
|
4.07
|
||||
Granted
|
570,000
|
.70
|
|||||
Exercised
|
—
|
—
|
|||||
Forfeited
|
(1,883,100
|
)
|
4.18
|
||||
Balance
at September 30, 2007:
|
4,166,064
|
$
|
3.56
|
||||
Exercisable
at September 30, 2007:
|
3,271,064
|
$
|
4.35
|
During
the nine months ended September 30, 2007, we granted 570,000 stock options
at a weighted average exercise price of $0.70 under our 2006 Equity Incentive
Plan (formerly, the 1997 Stock Option Plan). The weighted average grant date
fair value per share of options granted during the nine months ended
September 30, 2007 was $0.70.
During
the nine months ended September 30, 2007, we recorded compensation expense
of $87 within the general administrative expense related to the vesting of
options. During the nine months ended September 30, 2006, we recorded
compensation expenses of $3 related to 240,000 new option grants and $149
related to an extension of the post-termination exercise period for 450,000
options from 90 days after termination to the remaining contractual term of
the
original option grants. The fair value of the options was estimated on their
respective grant dates using the Black-Scholes option pricing model. The
Black-Scholes model was used with the following assumptions: risk-free interest
rates of 4.97% to 5.08%, based on the U.S. Treasury
yield in effect at the time of grant; dividend yields of zero percent; expected
lives of 2 to 10 years, based on historical exercise activity behavior; and
volatility of 89.14% and 67.58% for grants issued for the nine months ended
September 30, 2007 based on the historical volatility of our stock over a
time that is consistent with the expected life of the option. As of
September 30, 2007, there was $435 of unrecognized compensation expense
related to unvested stock options, which is expected to be recognized over
a
weighted average period of nearly three years.
14
TRANSGENOMIC,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine
Months Ended September 30, 2007 and 2006
(Dollars
in thousands except per share data and as noted)
L. OPERATING
SEGMENT AND GEOGRAPHIC INFORMATION
We
have
one reportable operating segment. Although net sales are 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:
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||
Bioinstruments
|
$
|
2,371
|
$
|
2,510
|
$
|
8,377
|
$
|
10,294
|
|||||
Bioconsumables
|
2,113
|
2,100
|
6,561
|
6,640
|
|||||||||
Discovery
Services
|
667
|
309
|
1,707
|
671
|
|||||||||
|
$
|
5,151
|
$
|
4,919
|
$
|
16,645
|
$
|
17,605
|
Net
cost
of goods sold was as follows:
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||
Bioinstruments
|
$
|
783
|
$
|
1,046
|
$
|
3,142
|
$
|
4,297
|
|||||
Bioconsumables
|
1,119
|
1,135
|
3,197
|
3,630
|
|||||||||
Discovery
Services
|
598
|
426
|
1,533
|
1,334
|
|||||||||
|
$
|
2,500
|
$
|
2,607
|
$
|
7,872
|
$
|
9,261
|
Net
sales
by geographic region were as follows:
|
Three Months Ended
September 30,
|
Nine
Months Ended
September 30,
|
|||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||
United
States
|
$
|
2,005
|
$
|
1,712
|
$
|
5,663
|
$
|
4,996
|
|||||
Europe
|
2,216
|
2,870
|
8,865
|
10,652
|
|||||||||
Pacific
Rim
|
381
|
165
|
1,022
|
1,075
|
|||||||||
Other
|
549
|
172
|
1,095
|
882
|
|||||||||
|
$
|
5,151
|
$
|
4,919
|
$
|
16,645
|
$
|
17,605
|
No
customer accounted for more than 10% of consolidated net sales during the three
and nine months ended September 30, 2007 and 2006.
Substantially,
all of the long-lived assets are within the United States.
15
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
Overview
We
develop, assemble, manufacture and market versatile products for the synthesis,
purification and analysis of nucleic acids used in life sciences industry for
research focused on molecular genetics and diagnostics. We also 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
35
dealers and distributors located in those local markets. Net sales are
categorized as bioinstruments, bioconsumables and discovery services.
•
|
Bioinstruments.
Our flagship product is the WAVE System which has broad applicability
to
genetic variation detection in both molecular genetic research
and
molecular diagnostics. There is a worldwide installed base of over
1,400
WAVE Systems as of September 30, 2007. We also sell a number of
complementary equipment platforms manufactured by others (“OEM
Instruments”). Service contracts to maintain installed systems are sold
and supported by technical support personnel.
|
•
|
Bioconsumables.
The installed WAVE base and some third-party installed platforms
generate
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
a number
of equipment platforms manufactured by others. 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. The lab in Omaha operates in a Good Laboratory
Practices
(“GLP”) compliant environment and is certified under the Clinical
Laboratory Improvement Amendment (“CLIA”). The services provided by our
labs 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 medical testing services 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
operating segment are reflected as discontinued operations for all periods
presented in this filing. In the first quarter of 2007, we completed the sale
of
the remaining assets associated with the segment.
Executive
Summary
Net
sales
for the three months ended September 30, 2007 increased by 5%, compared to
the same period in 2006. The increase is primarily attributable to our Discovery
Services products. Net sales from bioinstruments were down 6%. Net sales from
bioconsumables were flat. Net sales from Discovery Services grew more than
115%,
or $358, compared to the same quarter in 2006. The entire increase was related
to the CLIA laboratory services. Gross margins improved year over year. Our
gross profit margins improved from 47% in the third quarter of 2006 to 51%
in
the current quarter ended September 30, 2007. The largest contributor to
this increase is our Discovery Services product line which went from a negative
gross profit in the third quarter of 2006 to a positive gross profit margin
of
10% in the quarter ended September 30, 2007. Overall operating expenses
included a non recurring expense of $681 for restructuring charges, primarily
related to closings in France and the United Kingdom. Net loss was $1.3 million
for the third quarter ended September 30, 2007. This is an improvement of
$340 or 20% over the same quarter in 2006. As of the end of the third quarter
ended September 30, 2007, we had cash and cash equivalents of $6.5 million.
Outlook
We
continue to work toward our objective of generating income from continuing
operations and positive cash flows from continuing operations. To accomplish
these goals, we must generate growth in net sales and continue to control
manufacturing and other operating expenses. Sales of bioinstruments, including
both our WAVE System and OEM instruments, we continue to be affected by
competition from other technologies. In addition, ongoing changes in the
marketplace and the funding arrangements of our customers have led to sporadic
sales in some markets. We continue to work to develop new applications for
our
WAVE System in an attempt to expand its market and sales. Sales of our OEM
instruments continue to be a priority. We are also focusing increased efforts
to
expand our Discovery Services sales. In particular, the growth in our CLIA
laboratory services has been promising and we believe we will continue to see
ongoing growth from this business. In addition, we completed work on seven
pharmaceutical company projects and completed negotiations to begin a phase
two
clinical trial for an important cancer drug for a major bio-pharmaceutical
partner. We continue to work on our cost reduction initiatives, including the
closing of facilities in Europe. We expect to complete these initiatives by
the
end of the year. The effects of these efforts will have a more noticeable impact
in 2008.
16
Results
of Continuing Operations
Three
Months Ended September 30, 2007 and 2006
Net
Sales.
Net
sales consisted of the following (dollars in thousands):
|
Three Months Ended
September 30,
|
Change
|
|||||||||||
|
2007
|
2006
|
$
|
%
|
|||||||||
Bioinstruments
|
$
|
2,371
|
$
|
2,510
|
$
|
(139
|
)
|
(6
|
)%
|
||||
Bioconsumables
|
2,113
|
2,100
|
13
|
1
|
%
|
||||||||
Discovery
Services
|
667
|
309
|
358
|
116
|
%
|
||||||||
Net
sales
|
$
|
5,151
|
$
|
4,919
|
$
|
232
|
5
|
%
|
The
bioinstrument net sales decrease of 6% was due to fewer OEM Systems being sold.
There were no OEM instrument sales in the third quarter of 2007. Fourteen WAVE
Systems were sold during the three months ended September 30, 2007,
compared to nine during the same period of 2006. The increased sales were in
the
United States and Asia markets. WAVE sales in each period include sales of
refurbished WAVEs. There are significant competitive challenges from traditional
(i.e. sequencing) and evolving technologies. Net sales of consumables related
to
our WAVE Systems and other third-party instruments were flat year over year.
The
largest growth was in our discovery services net sales. The 116% increase was
all attributable to CLIA laboratory services.
Costs
of Goods Sold. Costs
of
goods sold include material costs for the products that we sell and
substantially all other costs associated with our manufacturing facilities
(primarily personnel costs, rent and depreciation). It also includes direct
costs (primarily personnel costs, rent, supplies and depreciation) associated
with our discovery services operations. Cost of goods sold consisted of the
following (dollars in thousands):
|
Three Months Ended
September 30,
|
Change
|
|||||||||||
|
2007
|
2006
|
$
|
%
|
|||||||||
Bioinstruments
|
$
|
783
|
$
|
1,046
|
$
|
(263
|
)
|
(25
|
)%
|
||||
Bioconsumables
|
1,119
|
1,135
|
(16
|
)
|
(1
|
)%
|
|||||||
Discovery
Services
|
598
|
426
|
172
|
40
|
%
|
||||||||
Cost
of goods sold
|
$
|
2,500
|
$
|
2,607
|
$
|
(107
|
)
|
(4
|
)%
|
Gross
profit was $2.7 million or 51% of total net sales during the three months ended
September 30, 2007, compared to $2.3 million or 47% during the same period
of 2006. Gross profits as percentage of net sales increased due to product
mix
in our instrument sales and also due to the leverage of the discovery services
costs. We continue to have a large fixed expense base outside of direct material
costs. Discovery Services costs have a large fixed component, so increases
in
net sales drive gross profit improvement. The Discovery Services revenue
increase quarter over quarter was 116% while the increase in cost of goods
sold
was only 40%.
Selling,
General and Administrative Expenses.
Selling,
general and administrative expenses primarily consist of personnel costs,
marketing, travel and entertainment costs, professional fees, and facility
costs. These costs totaled $2.7 million during the three months ended
September 30, 2007, compared to $3.3 million during the same period of
2006, a decrease of $0.6 million or 19%. This decrease was primarily due to
the
consolidation and cost containment initiatives.
17
Research
and Development Expenses. Research
and development expenses primarily include personnel costs, outside services,
supplies, and facility costs and are expensed in the period in which they are
incurred. These costs remained flat and totaled $0.7 million during the three
months ended September 30, 2007, compared to $0.6 million during the same
period of 2006.
Research
and development expenses totaled 14% and 12% of net sales during the three
months ended September 30, 2007 and 2006, respectively.
Restructuring
Charges.
Restructuring charges consist of costs related to a reduction in force at our
Omaha, Nebraska facility, ongoing activities to close a production facility
in
Cramlington, England, and ongoing activities to close an administrative office
outside of Paris, France.
Other
Income (Expense). Other
income consists primarily of interest income from cash and cash equivalents
invested in overnight instruments. Other income totaled $0.1 million during
both
the three months ended September 30, 2007, and the same period of 2006.
Income
Tax Expense. In
July
2006, the FASB issued Interpretation (“FIN”) No. 48, Accounting
for Uncertainty in Income Taxes.
FIN 48
applies to all tax positions within the scope of Statement 109 and clarifies
when and how to recognize tax benefits in the financial statements with a
two-step approach of recognition and measurement. We adopted FIN 48 on
January 1, 2007. Under FIN 48, tax benefits are recognized only for tax
positions that are more likely than not to be sustained upon examination by
tax
authorities. The amount recognized is measured as the largest amount of benefit
that is more likely than not to be realized upon ultimate settlement.
Unrecognized tax benefits are tax benefits claimed in our tax returns that
do
not meet these recognition and measurement standards.
Nine
Months Ended September 30, 2007 and 2006
Net
Sales.
Net
sales consisted of the following (dollars in thousands):
|
Nine Months Ended
September 30,
|
Change
|
|||||||||||
|
2007
|
2006
|
$
|
%
|
|||||||||
Bioinstruments
|
$
|
8,377
|
$
|
10,294
|
$
|
(1,917
|
)
|
(19
|
)%
|
||||
Bioconsumables
|
6,561
|
6,640
|
(79
|
)
|
(1
|
)%
|
|||||||
Discovery
Services
|
1,707
|
671
|
1,036
|
154
|
%
|
||||||||
Net
sales
|
$
|
16,645
|
$
|
17,605
|
$
|
(960
|
)
|
(5
|
)%
|
The
bioinstrument net sales decrease of 19% was due to fewer WAVE Systems and OEM
instruments being sold. Forty four WAVE Systems were sold during the nine months
ended September 30, 2007, compared to 56 during the same period of 2006.
There were 3 OEM instruments sold during the nine months ended
September 30, 2007 compared to 14 during the same period in 2006. WAVE
sales in each period include sales of refurbished WAVEs. This decrease resulted
from lower demand in all major geographic markets and among both research and
diagnostic users, particularly in our largest markets throughout Western Europe.
There are significant competitive challenges from traditional (i.e. sequencing)
and evolving technologies. Net sales of consumables related to our WAVE Systems
and other third-party instruments were relatively flat year over year. The
largest growth, an increase of 154%, was in discovery services, and all
attributable to our CLIA laboratory services.
Costs
of Goods Sold. Costs
of
goods sold include material costs for the products that we sell and
substantially all other costs associated with our manufacturing facilities
(primarily personnel costs, rent and depreciation). It also includes direct
costs (primarily personnel costs, rent, supplies and depreciation) associated
with our discovery services operations. Cost of goods sold consisted of the
following (dollars in thousands):
|
Nine Months Ended
September 30,
|
Change
|
|||||||||||
|
2007
|
2006
|
$
|
%
|
|||||||||
Bioinstruments
|
$
|
3,142
|
$
|
4,297
|
$
|
(1,155
|
)
|
(27
|
)%
|
||||
Bioconsumables
|
3,197
|
3,630
|
(433
|
)
|
(12
|
)%
|
|||||||
Discovery
Services
|
1,533
|
1,334
|
199
|
15
|
%
|
||||||||
Cost
of goods sold
|
$
|
7,872
|
$
|
9,261
|
$
|
(1,389
|
)
|
(15
|
)%
|
Gross
profit was $8.8 million or 53% of total net sales during the nine months ended
September 30, 2007 compared to $8.3 million or 47% during the same period
of 2006. Gross profits as percentage of net sales increased due to the mix
of
instruments sold, lower consumable material and manufacturing costs and the
leverage related to the discovery services net sales. Some of the decrease
in
manufacturing costs was due to a shifting of personnel to research and
development efforts. We continue to have a large fixed expense base outside
of
direct material costs. Discovery Services costs have a large fixed component,
so
increases in net sales drive gross profit improvement.
18
Selling,
General and Administrative Expenses.
Selling,
general and administrative expenses primarily consist of personnel costs,
marketing, travel and entertainment costs, professional fees, and facility
costs. These costs totaled $8.7 million during the nine months ended
September 30, 2007, compared to $8.8 million during the same period of
2006.
Research
and Development Expenses.
Research
and development expenses primarily include personnel costs, outside services,
supplies, and facility costs and are expensed in the period in which they are
incurred. These costs totaled $2.3 million during the nine months ended
September 30, 2007, compared to $1.7 million during the same period of
2006, an increase of $0.6 million, primarily from collaboration expense,
increased compensation costs associated with personnel reassigned from Nucleic
Acid production and patent costs for discovery services.
Research
and development expenses totaled 14% and 10% of net sales during the nine months
ended September 30, 2007 and 2006, respectively.
Restructuring
Charges.
Restructuring charges consist of costs related to a reduction in force at our
Omaha, Nebraska facility, ongoing activities to close a production facility
in
Cramlington, England, and ongoing activities to close an administrative office
outside of Paris, France.
Other
Income (Expense).
Other
income during the nine months ended September 30, 2007 and 2006 was $1.1
million and $0.1 million, respectively. The increase was attributable to the
sale of an investment in equity securities. On May 10, 2007, we sold
250,000 shares of stock in Pinnacle Pharmaceuticals, Inc. at a price of $3.75
per share. Gross proceeds realized from the sale were $937,500 which resulted
in
a gain of $937,500 and is reflected in other income during the period. The
investment was in an unlisted company and was carried at a cost of $0. The
investment resulted from a prior business combination and the fair value at
the
acquisition date was determined to be $0. The investment was subject to certain
restrictions relating to sale, transfer or other disposition. Remaining other
income consisted primarily of interest income from cash and cash equivalents
invested in overnight instruments.
Income
Tax Expense. In
July
2006, the FASB issued Interpretation (“FIN”) No. 48, Accounting
for Uncertainty in Income Taxes.
FIN 48
applies to all tax positions within the scope of Statement 109 and clarifies
when and how to recognize tax benefits in the financial statements with a
two-step approach of recognition and measurement. We adopted FIN 48 on
January 1, 2007. Under FIN 48, tax benefits are recognized only for tax
positions that are more likely than not to be sustained upon examination by
tax
authorities. The amount recognized is measured as the largest amount of benefit
that is more likely than not to be realized upon ultimate settlement.
Unrecognized tax benefits are tax benefits claimed in our tax returns that
do
not meet these recognition and measurement standards.
Results
of Discontinued Operations
In
the
fourth quarter of 2005, we implemented a plan to exit the Nucleic Acids
operating segment. Accordingly, we now reflect the related results as
discontinued operations for all periods presented. Expenses that are not
directly identified to the Nucleic Acids operating segment or that are
considered corporate overhead have not been allocated in arriving at the loss
from discontinued operations. Summary results of operations of the former
Nucleic Acids operating segment were as follows (in thousands):
Three
Months Ended September 30, 2007 and 2006
|
Three Months Ended
September 30,
|
||||||
|
2007
|
2006
|
|||||
NET
SALES
|
$
|
—
|
$
|
7
|
|||
COST
OF GOODS SOLD
|
—
|
—
|
|||||
Gross
profit
|
—
|
7
|
|||||
OPERATING
EXPENSES
|
—
|
172
|
|||||
LOSS
FROM OPERATIONS
|
—
|
(165
|
)
|
||||
OTHER
INCOME
|
—
|
1
|
|||||
LOSS
BEFORE INCOME TAXES
|
—
|
(164
|
)
|
||||
INCOME
TAX
|
—
|
—
|
|||||
LOSS
FROM DISCONTINUED OPERATIONS
|
$
|
—
|
$
|
(164
|
)
|
19
Nine
Months Ended September 30, 2007 and 2006
|
Nine Months Ended
September 30,
|
||||||
|
2007
|
2006
|
|||||
NET
SALES
|
$
|
—
|
$
|
1,142
|
|||
COST
OF GOODS SOLD
|
—
|
843
|
|||||
Gross
profit
|
—
|
299
|
|||||
OPERATING
EXPENSES:
|
(66
|
)
|
605
|
||||
INCOME
(LOSS) FROM OPERATIONS
|
66
|
(306
|
)
|
||||
OTHER
INCOME
|
—
|
2
|
|||||
INCOME
(LOSS) BEFORE INCOME TAXES
|
66
|
(304
|
)
|
||||
INCOME
TAX
|
—
|
—
|
|||||
INCOME
(LOSS) FROM DISCONTINUED OPERATIONS
|
$
|
66
|
$
|
(304
|
)
|
Assets
associated with the Nucleic Acids segment consisted principally of our facility
in Glasgow, Scotland. During the nine months ended September 30, 2007, we
completed the sale of the Glasgow facility and the associated equipment for
$2.9
million, net of selling expenses, which resulted in a gain of $0.1 million.
The
gain is reflected in the operating expenses of discontinued operations during
the period.
Liquidity
and Capital Resources
Our
working capital positions at September 30, 2007 and December 31, 2006
were as follows (in thousands):
|
September 30,
2007
|
December 31,
2006
|
Change
|
|||||||
Current
assets (including cash and cash equivalents of $6,543 and $5,868,
respectively)
|
$
|
17,586
|
$
|
15,605
|
$
|
1,981
|
||||
Current
liabilities
|
6,421
|
5,329
|
1,092
|
|||||||
Working
capital
|
$
|
11,165
|
$
|
10,276
|
$
|
889
|
The
increase in working capital was largely driven by the proceeds from the sale
of
the Glasgow facility and related equipment for $2.9 million and the sale of
an
investment in equity securities of $0.9 million, offset by the significant
increase in inventory of OEM instruments and the net loss for the nine months
ended September 30, 2007.
Although
we have experienced declining sales and recurring net losses (resulting in
an
accumulated deficit of $128 million at September 30, 2007), management
believes existing sources of liquidity, including cash and cash equivalents
of
$6.5 million, are sufficient to meet expected cash needs into 2008. We will
need
to increase our net sales and further reduce operating expenses in order to
meet
our liquidity needs on a long-term basis. We cannot assure you that we will
be
able to increase net sales or further reduce our expenses and, accordingly,
we
may not have sufficient sources of liquidity to continue operations
indefinitely. If necessary, management believes they can further reduce costs
and expenses to conserve working capital. However, such cost and expense
reductions could have an adverse impact on our new product pipeline and
ultimately net sales. We could also pursue additional financing, but ultimately,
we must achieve sufficient net sales to consistently generate net income and
cash flows.
Analysis
of Cash Flows
Nine
Months Ended September 30, 2007 and 2006
Net
Change in Cash and Cash Equivalents. Cash
and
cash equivalents increased $0.7 million during the nine months ended
September 30, 2007 compared to an increase of $0.6 million during the nine
months ended September 30, 2006. The 2007 increase was the result of net
cash provided by investing activities of $3.3 million, offset by net cash used
by operating activities of $2.6 million. These were minimally offset from
foreign currency exchange rates. The 2006 increase was the result of net cash
used in investing activities of $0.2 million offset by net cash from operating
activities of $0.5 million, net cash from financing activities of $0.01 and
changes in foreign currency exchange rates of $0.3 million.
Cash
Flows used in Operating Activities.
Cash
flows used in operating activities totaled $2.6 million during the nine months
ended September 30, 2007, compared to cash flows generated from operating
activities of $0.5 million during the same period of 2006. The use of cash
flows
in 2007 related primarily to the net loss of $2.3 million and the higher
inventory levels of $1.8 million related primarily to the OEM instruments.
This
is offset by accounts receivable collections of $1.0 and decreased accrued
expenses of $0.6.
20
Cash
flows generated from operating activities of $0.5 million in 2006 related
primarily to $2.6 million of decreased accounts receivable, $0.8 million of
decreased inventory and depreciation/amortization non-cash changes of $1.4
million offset by a net loss of $2.4 million. Non-cash charges consisted of
depreciation and amortization. Working capital and other adjustments increased
cash flows from operating activities by $0.5 million.
Cash
Flows from Investing Activities.
Cash
flows provided by investing activities totaled $3.3 million during the nine
months ended September 30, 2007 compared to cash flows used in investing
activities of $0.2 million during the same period of 2006. Cash flows provided
by investing activities in 2007 consisted primarily of sales proceeds from
our
Glasgow facility and equipment of $2.9 million and sales proceeds of an
investment in equity securities of $0.9 million. This is offset by the use
of
cash for the purchase of property and equipment of $0.5 million. Cash flows
used
by investing activities in 2006 consisted of purchases of property and equipment
of $0.2 million and changes in other assets of $0.1 million offset by proceeds
from asset sales of $0.1 million.
Cash
Flows from Financing Activities.
Cash
flows from financing activities were minimal during the nine months ended
September 30, 2007 and September 30, 2006.
Obligations
and Commitments
The
following identifies material obligations and commitments as of
September 30, 2007:
|
Payments Due by Period
|
|||||||||||||||||||||
Contractual
Obligations
|
|
|
|
|
|
|
||||||||||||||||
Millions
of dollars
|
Total
|
2007
|
2008
|
2009
|
2010
|
2011
|
2012
|
|||||||||||||||
Operating
leases (a)
|
$
|
3.50
|
$
|
0.3
|
$
|
0.9
|
$
|
0.8
|
$
|
0.7
|
$
|
0.5
|
$
|
0.3
|
||||||||
Purchase
obligations (b)
|
0.4
|
0.4
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
Total
contractual obligations
|
$
|
3.90
|
$
|
0.7
|
$
|
0.9
|
$
|
0.8
|
$
|
0.7
|
$
|
0.5
|
$
|
0.3
|
(a)
Operating
leases include facility, automobile and other equipment leases.
(b)
Purchase
obligations include purchase commitments for components used in WAVE Systems
and
OEM instruments.
Off-Balance
Sheet Arrangements
At
September 30, 2007 and December 31, 2006, 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 and Estimates
Accounting
policies used in the preparation of the consolidated financial statements may
involve the use of management judgments and estimates. Certain of our accounting
policies are considered critical as they are both important to the portrayal
of
our financial statements and they require significant or complex judgments
on
the part of management. Our judgments and estimates are based on experience
and
assumptions that we believe are reasonable under the circumstances. Further,
we
evaluate our judgments and estimates from time to time as circumstances change.
Actual financial results based on judgments or estimates may vary under
different assumptions or circumstances. Our critical accounting policies are
discussed in our annual report on Form 10-K for the fiscal year ended
December 31, 2006. There have been no significant changes with respect to
these estimates during the nine months ended September 30, 2007, except for
the treatment of the contingency accruals.
Effective
January 1, 2007, we began to measure and record tax contingency accruals in
accordance with Financial Accounting Standards Board (“FASB”) Interpretation
No. 48, Accounting
for Uncertainty in Income Taxes,
an
Interpretation of FASB Statement No. 109
(“FIN
48”). Under FIN 48, tax benefits are recognized only for tax positions that are
more likely than not to be sustained upon examination by tax authorities. The
amount recognized is measured as the largest amount of benefit that is more
than
likely not to be realized upon ultimate settlement. Unrecognized tax benefits
are tax benefits claimed in our tax returns that do not meet these recognition
and measurement standards. For additional information on the adoption of FIN
48,
see Note H of this report.
21
Recently
Issued Accounting Pronouncements
Please
refer to our annual report on Form 10-K for the fiscal year ended
December 31, 2006. There have been no chnages to those listed except as
noted in note B.
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.
Item 3. Quantitative
and Qualitative Disclosures about Market Risk
Foreign
Currency Translation Risk. During
the nine months ended September 30, 2007 and 2006, our international sales
represented more than 67% 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 Limited,
and
Cruachem Limited, whose operating currencies are British Pounds Sterling and
the
Euro. Results of operations for our 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 we do not have a material
exposure to foreign currency rate fluctuations at this time.
Item 4. Controls
and Procedures
(a) |
Evaluation
of Disclosure Controls and Procedures. A review and evaluation was
performed by our President, Chief Executive Officer (“CEO”) and Chief
Financial Officer (“CFO”) of the effectiveness of the design and operation
of our disclosure controls and procedures as of the end of the period
covered by this quarterly report. Based on that review and evaluation,
the
CEO and CFO concluded that the Corporation’s 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 we submit under the Securities Exchange
Act of
1934.
|
(b) |
Change
in Internal Control Over Financial Reporting. There have been no
changes
in our internal control over financial reporting during the quarter
that
have materially affected, or are reasonably likely to materially
affect,
our internal control over financial reporting.
|
22
PART
II. OTHER INFORMATION
Item 1. 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 1A. Risk
Factors
There
have been no material changes in our risk factors from those described in
Item 1A of our annual report on Form 10-K for the fiscal year ended
December 31, 2006.
Item 6. Exhibits
(a)
Exhibits
3.1
|
Third
Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to Registrant’s Report on Form
10-Q (Registration No. 000-30975) filed on November 14,
2005
|
3.2
|
Amended
and Restated Bylaws of the Registrant filed on May 25,
2007
|
4
|
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
|
|
|
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
|
23
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
TRANSGENOMIC,
INC.
|
||
Date:
November 14, 2007
|
By:
|
/s/
CRAIG J. TUTTLE
|
|
|
|
Craig
J. Tuttle
President
and Chief Executive Officer
|
24