Precipio, Inc. - Quarter Report: 2009 June (Form 10-Q)

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the Quarterly Period Ended June 30, 2009

Or

For the transition period from              to             

Commission file number: 000-30975

TRANSGENOMIC, INC.

(Exact name of registrant as specified in its charter)

(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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). )    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

As of August 13, 2009, the number of shares of common stock outstanding was 49,189,672.

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TRANSGENOMIC, INC.

INDEX

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PART I. FINANCIAL INFORMATION

TRANSGENOMIC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except per share data)

See notes to unaudited condensed consolidated financial statements.

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TRANSGENOMIC, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share data)

See notes to unaudited condensed consolidated financial statements.

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TRANSGENOMIC, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Six Months Ended June 30, 2009

(Dollars in thousands except per share data)

See notes to unaudited condensed consolidated financial statements.

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TRANSGENOMIC, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

See notes to unaudited condensed consolidated financial statements.

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TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2009 and 2008

Business Description.

Transgenomic, Inc. provides innovative products for the 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 Instrument Related Business and Laboratory Services.

Instrument Related Business:

Laboratory Services:

Management believes existing sources of liquidity, including cash and cash equivalents of $4.8 million, are sufficient to meet expected cash needs during 2009. Our business consolidation efforts, recent reduction in force and cost containment management have helped control our operating costs, however, we have added sales and marketing costs over the last two years in an effort to drive increased sales. In addition we have increased our research expenditures to drive development of new products and to support business opportunities and collaborations. 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.

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.

Risks and Uncertainties.

Certain risks and uncertainties are inherent in our day-to-day operations and to the process of preparing our financial statements. The more significant of those risks are presented below and throughout the notes to the financial statements.

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TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2009 and 2008

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. In addition, estimates and assumptions associated with the determination of the fair value of certain assets and related impairments require considerable judgment by management. Actual results could differ from the estimates and assumptions used in preparing these financial statements.

No customer accounted for more than 10% of consolidated net sales during the three and six months ended June 30, 2009 and 2008. For the three and six months ended June 30, 2009 one customer made up more than 10% of the Laboratory Services net sales. This customer represented 20% of the Laboratory Services net sales for the six months ended June 30, 2009 and 23% for the six months ended June 30, 2008. This customer represented 22% of the Laboratory Services net sales for the three months ended June 30, 2009 and 21% for the three months ended June 30, 2008.

Concentrations of Cash.

From time to time, we may maintain a cash position with financial institutions in amounts that exceed federally insured limits. We have not experienced any losses on such accounts as of June 30, 2009.

Basis of Presentation.

The consolidated balance sheet as of December 31, 2008 was derived from our audited balance sheet as of that date. The accompanying consolidated financial statements as of and for the three and six months ended June 30, 2009 and 2008 are unaudited and reflect all 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, 2008 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 investments with original maturities at acquisition of three months or less. Such investments presently consist of only temporary overnight investments.

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 six months ended June 30, 2009 and 2008:

While payment terms are generally 30 days, we have also provided extended payment terms of up to 90 days in certain cases. We operate globally and some of the international payment terms may be greater than 90 days. Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a quarterly basis. We determine the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received.

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TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2009 and 2008

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:

Depreciation during the three months ended June 30, 2009 and 2008, respectively, included $0.2 million for each period related to depreciation of property and equipment. Depreciation during the six months ended June 30, 2009 and 2008, respectively, included $0.3 million for each period related to depreciation of property and equipment.

Other Assets.

Other assets include intellectual property, patents 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 legal costs, filing fees and other expenses associated with obtaining patents on new discoveries and amortize these costs using the straight-line method over the shorter of the legal life of the patent or its economic life beginning on the date the patent is issued.

Each of these assets is treated as long-lived assets for purposes of FAS No. 144, which provides that long-lived assets will be tested for impairment on an annual basis or when a significant event occurs which may impact impairment. We periodically review the carrying value of our long-lived assets to assess recoverability and impairment. We recorded no impairment in the three and six months ended June 30, 2009 and 2008.

Other Assets. Other assets include US security deposits and deferred tax assets.

Stock Based Compensation.

All stock options awarded to date have exercise prices equal to the market price of our common stock on the date of grant and have ten-year contractual terms. Unvested options as of June 30, 2009 had vesting periods of three years from date of grant. None of the stock options outstanding at June 30, 2009 are subject to performance or market-based vesting conditions.

We measure and recognize compensation expense for all stock-based awards made to employees and directors, including stock options. Compensation expense is based on the calculated fair value of the awards as measured at the grant date and is expensed ratably over the service period of the awards (generally the vesting period). During the six months ended June 30, 2009, we recorded compensation expense of $0.1 million within the selling, general and administrative expense as a result of the vesting of options exercisable for the purchase of 1,745,000 shares. During the six months ended June 30, 2008, we recorded compensation expenses of $0.1 million within selling, general and administrative expense as a result of the vesting of options exercisable for the purchase of 1,535,000 shares. As of June 30, 2009, there was $0.2 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of nearly three years.

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TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2009 and 2008

The fair value of the options granted during the quarters ended June 30, 2009 and 2008 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 2.12% to 3.99%, 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 106.08% and 80.03% based on the historical volatility of our stock over a time that is consistent with the expected life of the option. A small group of senior executives hold the majority of the stock options and are expected to hold the options until they are vested. Therefore, no forfeitures were assumed.

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.

Net Sales Recognition.

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 June 30, 2009 and June 30, 2008, deferred net sales, mainly associated with our service contracts, included in the balance sheet in other accrued expenses, were approximately $1.4 million and $1.9 million, respectively.

Net sales from our Molecular Clinical Reference Laboratory Services are recognized on an individual test basis and takes place when the test report is completed, reviewed and sent to the client less the reserve for insurance, Medicare and Medicaid expected payment. There are no deferred net sales associated with our Molecular Clinical Reference Laboratory. In our Pharmacogenomics Research Services Group, we recognize net sales based on a proportionate performance measurement for each project. At June 30, 2009 and 2008, deferred net sales associated with the pharmacogenomics research projects included in the balance sheet in other accrued expenses, was less than $0.1 million for each period.

Taxes collected from customers and remitted to government agencies for specific net sales producing transactions are recorded net with no effect on the income statement.

Research and Development.

Research and development and various collaboration 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 revaluation gains or losses resulting from changes in currency exchange rates are included in the determination of net income. Foreign currency revaluation adjustments increased operating expenses and net loss by $0.2 million for the three months ended June 30, 2009 and $0.4 million for the six months ended June 30, 2009, and decreased operating expenses and increased net income by $0.3 million during the three months ended June 30, 2008 and $0.5 million during the six months ended June 30, 2008.

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TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2009 and 2008

Comprehensive Income.

Accumulated other comprehensive income at June 30, 2009 and December 31, 2008 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 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, warrants or conversion rights that have exercise or conversion prices below the market value of our common stock. At June 30, 2009, there were outstanding options, warrants and conversion rights exercisable for 11,514,720 shares of our common stock all of which were excluded from the computation of diluted earnings per share because the effect would be anti-dilutive due to the net loss from continuing operations in that period. At June 30, 2008 there were outstanding options, warrants and conversion rights exercisable for 12,031,704 shares of our common stock of which options to acquire 111,338 shares were included in the calculation of diluted earnings per share.

Recently Issued Accounting Pronouncements.

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 as of January 1, 2008 for financial assets and financial liabilities within its scope. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2 “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”), which defers the effective date of FAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years for items within the scope of FSP FAS 157-2. We have implemented FAS 157 and FSP FAS 157-2 with no impact to our financial statements.

In April 2009 the FASB issued Staff Position No. 157-4 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”). FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with FASB Statement No. 157 “Fair Value Measurements” (FAS 157), when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009 and shall be applied prospectively. There are no financial impacts to the consolidated financial statements in implementing this pronouncement.

In December 2007 the FASB issued FAS No. 141(R) “Business Combinations” (“FAS 141(R)”). FAS 141(R) changes several underlying principles in applying the purchase method of accounting. Among the significant changes, FAS 141(R) requires a redefining of the measurement date of a business combination, expensing direct transaction costs as incurred, capitalizing in-process research and development costs as an intangible asset and recording a liability for contingent consideration at the measurement date with subsequent re-measurements recorded in the results of operations. FAS 141(R) also requires that costs for business restructuring and exit activities related to the acquired company will be included in the post-combination financial results of operations and also provides new guidance for the recognition and measurement of contingent assets and liabilities in a business combination. In addition, FAS 141(R) requires several new disclosures, including the reasons for the business combination, the factors that contribute to the recognition of goodwill, the amount of acquisition related third-party expenses incurred, the nature and amount of contingent consideration, and a discussion of pre-existing relationships between the parties. FAS 141(R) is effective as of January 1, 2009. We currently do not have any plans for a business combination, therefore FAS No.141 (R) has no impact on our consolidated financial statements.

In December 2007 the FASB issued FAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51”, (“FAS 160”). FAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. FAS 160 requires noncontrolling interests in subsidiaries initially to be measured at fair value and classified as a separate component of equity. FAS 160 also requires a new presentation on the face of the consolidated financial statements to separately report the amounts attributable to controlling and non-controlling interests. FAS 160 was effective as of January 1, 2009. We currently do not have a noncontrolling interest in a subsidiary nor have we deconsolidated a subsidiary, therefore, FAS 160 is not applicable at this time.

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TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2009 and 2008

In April 2008 the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. FAS 142-3”). FSP No. FAS 142-3 requires companies estimating the useful life of a recognized intangible asset to consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, to consider assumptions that market participants would use about renewal or extension as adjusted for FAS No. 142’s, Goodwill and Other Intangible Assets, entity-specific factors. FSP No. FAS 142-3 was adopted on January 1, 2009 and had no impact on our financial statements.

In May 2008 the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“FAS 162”). This Standard identified the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. FAS 162 directs the hierarchy to the entity, rather than the independent auditors, as the entity is responsible for selecting accounting principles for financial statements that are presented in conformity with generally accepted accounting principles. FAS 162 was effective November 15, 2008 and did not have an impact on our financial statements. In June 2009 the FASB issued Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles”, a replacement of FASB Statement No. 162. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Statement identified the sources of accounting principles and the framework for selecting the principles used in preparing the financial statements of nongovernmental entities that are presented in conformity with GAAP. The GAAP hierarchy will be modified to include only two levels of GAAP: authoritative and nonauthoritative. As a result, FAS 168 replaces FAS 162 to indicate this change to the GAAP hierarchy.

In June 2008 the FASB issued Abstract Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 clarifies the exceptions that are allowable under FAS 133, “Accounting for Derivative Instruments and Hedging Activities” in paragraph 11A. Under FAS 133 most derivatives are recorded as assets or liabilities with changes in their fair value being recorded through earnings. One of the exceptions outlined in paragraph 11A of FAS 133 states that if a derivative is indexed to the entity’s own stock and is classified in shareholder’s equity, the derivative accounting is avoided. EITF 07-5 clarifies whether or not a derivative is indexed to an entity’s own stock. EITF 07-5 was adopted on January 1, 2009. We have assessed our warrants and determined the fair value is $0 so there is no impact to our financial statements.

In May 2009 the FASB issued Statement No. 165, “Subsequent Events” (“FAS 165”). This Statement does not require significant changes in the subsequent events that an entity reports either through recognition or disclosure in its financial statements. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether the date represents the date the financial statements were issued or were available to be issued. FAS 165 is effective after June 15, 2009. We have implemented FAS 165.

Inventories consisted of the following:

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TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2009 and 2008

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

Amortization expense for intangible assets was less than $0.1 million during the three and six months ended June 30, 2009 and 2008, respectively. Amortization expense for intangible assets is expected to be approximately $0.1 million for each of the years 2009 through 2013.

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. Some of our leases have early termination clauses. The future minimum lease payments required under these leases are approximately $0.5 million for the remainder of 2009, $0.9 million in 2010, $0.6 million in 2011, $0.3 million in 2012, and $0.1 million thereafter. Rent expense for continuing operations relating to operating leases for the three months ended June 30, 2009 and 2008 was approximately $0.2 million for each period. Rent expense for continuing operations relating to operating leases for each of the six months ended June 30, 2009 and 2008 was $0.4 million, respectively.

At June 30, 2009, firm commitments to vendors to purchase components used in WAVE Systems and instruments manufactured by others totaled $0.1 million.

We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. We have statutes of limitation open for Federal income tax returns related to tax years 2005 and 2008. We have state income tax returns subject to examination primarily for tax years 2005 through 2008. 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 2008.

Income tax benefit for the six months ended June 30, 2009 was a benefit of less than $0.1 million. This is partially the result of the change in deferred tax assets and liabilities reported in financial statements of subsidiaries outside the U.S due primarily to foreign currency exchange losses. A refundable tax credit related to the 2008 Federal and State Income Tax returns was also recorded. This credit is anticipated to continue for 2009. This tax benefit is partially offset by tax expense related to state and franchise taxes as well as reserves for uncertain income taxes, recorded in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48’). We believe the tax benefit recorded will be partially offset in future periods by a tax expense, related to income reported in financial statements of subsidiaries outside the United States. Income tax expense for the six months ended June 30, 2008 was less than $0.1 million.

During the three and six months ended June 30, 2009, there were no material changes to the liability for uncertain tax positions.

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TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2009 and 2008

We maintain an employee 401(k) retirement savings plan that allows for voluntary contributions into designated investment funds by eligible employees. Prior to June 1, 2009 we matched the employee’s contributions at the rate of 50% on the first 6% of contributions. Effective June 1, 2009, Transgenomic discontinued matching employee 401(k) contributions. We may, at the discretion of our Board of Directors, make additional contributions on behalf of the Plan’s participants. Contributions to the 401(k) plan were less than $0.1 million for each of the three and six months ended June 30, 2009 and 2008.

Common Stock.

The Company’s Board of Directors is authorized to issue up to 100,000,000 shares of common stock, from time to time, as provided in a resolution or resolutions adopted by the Board of Directors.

Common Stock Warrants.

No common stock warrants were issued or exercised during the three and six months ended June 30, 2009 and 2008. At June 30, 2009, there were warrants outstanding which were exercisable to purchase 7,978,156 shares of common stock.

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.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2009 and 2008

The following table summarizes stock option activity during the six months ended June 30, 2009:

During the six months ended June 30, 2009, we granted options exercisable to purchase 70,000 shares of common stock at a weighted average exercise price of $0.42 under our 2006 Equity Incentive Plan. The weighted average fair value per share on grant date of options granted during the six months ended June 30, 2009 was $0.35.

Our company’s chief decision-maker as defined in FAS 131, Disclosures about Segments of an Enterprise and Related Information, is the Chief Executive Officer, who regularly evaluates our performance based on net sales and gross profit. The preparation of this segment analysis required management to make estimates and assumptions around expense below the gross profit level. While we believe the segment information to be directionally correct, actual results could differ from the estimates and assumptions used in preparing this information.

The accounting policies of the segments are the same as the policies discussed in Footnote B – Summary of Significant Accounting Policies.

We have two reportable operating segments.

Segment information for the three months ended June 30, 2009 and 2008 is as follows:

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2009 and 2008

Segment information for the six months ended June 30, 2009 and 2008 is as follows:

Net sales by product were as follows:

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2009 and 2008

Net cost of goods sold was as follows:

Net sales for the three and six months ended June 30, 2009 and 2008 by country were as follows:

No other country accounted for more than 5% of total net sales.

No customer accounted for more than 10% of consolidated net sales during the three and six months ended June 30, 2009 and 2008. For the three and six months ended June 30, 2009 and 2008 one customer made up more than 10% of the Laboratory Services net sales. This customer represented 20% of the Laboratory Services net sales for the six months ended June 30, 2009 and 23% for the six months ended June 30, 2008.

Approximately 80% of our long-lived assets are within the United States. Substantially all of the remaining long-lived assets are within Europe.

We have no material subsequent events to be disclosed as of August 13, 2009 which is the date our financial statements were issued.

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Overview

Transgenomic, Inc. provides innovative products for the 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 Instrument Related Business and Laboratory Services.

Instrument Related Business:

Laboratory Services:

Executive Summary

Net sales for the six months ended June 30, 2009 decreased by $2.0 million or 16% compared to the same period in 2008. Net sales in our Instrument Related Business were down 24% or $2.6 million for the six months ended June 30, 2009 compared to the same period in 2008. Net sales from bioinstruments were down 27% and net sales of consumables were down 21% for the comparable six month periods. During the six months ended June 30, 2009, net sales from Laboratory Services grew 27%, or $0.5 million, compared to the same six month period in 2008. The Clinical Reference Laboratory showed revenue growth of 62% and net sales from Pharmacogenomics Research Services decreased by 28%. Our gross profit margin decreased from 59% for the six months ended June 30, 2008 to 52% for the same period in 2009. Net loss was $1.7 million for the six months ended June 30, 2009 compared to net income of $0.2 million for the six months ended June 30, 2008. The global economic crisis has impacted our business. We have seen some positive signs in the last thirty to sixty days, but remain concerned as to the timing of a turn-around.

As of June 30, 2009, we had cash and cash equivalents of $4.8 million, unchanged from December 31, 2008.

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 sequential growth in net sales and continue to control manufacturing and other operating expenses.

Uncertainties

The uncertainty of the current general global economic conditions could negatively impact our business in the future.

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We have historically operated at a loss until recently and have not consistently generated sufficient cash from operating activities to cover our operating and other cash expenses. While we have been able to historically finance our operating losses through borrowings or from the issuance of additional equity, we may not be able to obtain such funding due to the tightened credit markets. At June 30, 2009 we had cash and cash equivalents of $4.8 million. We believe that existing sources of liquidity are sufficient to meet expected cash needs during 2009.

There are many factors that affect the market demand for our products and services that we cannot control. Demand for our Instrument Related Business is affected by the needs and budgetary resources of research institutions, universities and hospitals. The instrument purchase represents a significant expenditure by these types of customers and often requires a long sales cycle. These customers may not have the funding available to purchase our instruments.

Results of Continuing Operations

Three Months Ended June 30, 2009 and 2008

Net Sales. Net sales consisted of the following:

Bioinstrument sales consist of sales of our WAVE System and associated equipment that we manufacture or assemble, net sales from service contracts that we enter into with purchasers of our instruments, as well as sales of instruments we distribute for other manufacturers (“OEM equipment”). We also sell refurbished WAVE Systems in order to access customers that may not be able to afford new systems. Bioinstrument net sales are down $0.5 million, or 17%, during the three months ended June 30, 2009 as compared to the same period in 2008. The decrease in bioinstrument net sales was due to lower average sales price on both our WAVE and OEM instruments. There were three OEM instruments sold in the second quarter of both 2009 and 2008, however, the average sales price in the second quarter of 2009 was down by over 15% due primarily to the type of models sold. All three OEM sales in 2008 were the larger 64 sample instruments where all three sales in 2009 were the smaller 24 sample instruments. We sold only one more WAVE instrument in the second quarter 2009 as compared to 2008, but the average sales price was lower by over 35% due to the geographic make up of the sales. There was also a reduction in service contracts related to the WAVE instruments primarily in the European market. This reduction was due to both volume and foreign currency exchange impact.

Net sales of bioconsumables decreased during the three months ended June 30, 2009 compared to 2008. The decrease in consumables is primarily related to lower European sales volume on our WAVE consumables of $0.3 million and the impact of the foreign currency exchange rate of $0.3 million.

Net sales of Laboratory Services increased during the three months ended June 30, 2009 compared to 2008 by approximately $0.2 million. Laboratory Services sales includes both the Molecular Clinical Reference Laboratory Services and the Pharmacogenomics Research Services. The Molecular Clinical Reference Laboratory Services net sales of $1.0 million increased 43% over the three months ended June 30, 2008. The Molecular Clinical Reference Laboratory Services net sales growth is attributable to the increased sales focus. We increased the number of sales employees during 2008. The Pharmacogenomics Research Services net sales of $0.3 million during the three months ended June 30, 2009 decreased by $0.1 million, or 18%, from the three months ended June 30, 2008. One large customer in 2008 made up more than 50% of the net sales and has completed their project. The Pharmacogenomics Research Services net sales have peaks due to the nature of project related business.

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Costs of Goods Sold. Costs of goods sold include material costs for the products that we sell and substantially all other costs associated with our manufacturing facilities (primarily personnel costs, rent and depreciation). It also includes direct costs (primarily personnel costs, rent, supplies and depreciation) associated with our Laboratory Services operations. Cost of goods sold consisted of the following:

Gross profit was $2.7 million or 48% of total net sales during the second quarter of 2009, compared to $3.7 million or 60% during the same period of 2008. Cost of sales for the Instrument Related Business was flat for the second quarter of 2009 compared to the same period of 2008. The number of instruments and type sold in each period was comparable. The foreign currency impact on bioconsumables net sales also impacts gross margin negatively. This resulted in a lower gross margin as net sales were lower by $1.0 million. During the three months ended June 30, 2009, the gross margin for the Laboratory Services was 31% as compared to 45% in the same period of 2008. The Laboratory Services gross margin decrease is attributed to both lower average net sales per test and the cost mix of tests being sold. The lower average net sales per test is a result of increased Medicare and Medicaid test volume and lower reimbursements. In addition we have had an increase in our operating supplies costs. Our direct variable costs can be significantly different for some of the tests we offer. The Chromosomal Micro Array “CMA” test, our fastest growing test, has a significantly higher direct variable cost than many others. In addition, some of the Pharmacogenomic projects are smaller ones where costs are higher than the one larger project in 2008.

Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily consist of personnel costs, marketing, travel and entertainment costs, professional fees, and facility costs. In addition, foreign currency revaluation is included here. Excluding foreign currency revaluation gains or losses, which was a loss of $0.2 million in the three months ended June 30, 2009 and a gain of $0.3 million in the same period of 2008, our selling, general and administrative costs decreased from $3.4 million in 2008 to $2.5 million in 2009. The primary decrease is due to no bonus accrual, open positions not filled, lower travel and lower stock option expense.

Research and Development Expenses. Research and development expenses primarily include personnel costs, legal fees, outside services, collaboration expenses, supplies, and facility costs and are expensed in the period in which they are incurred. For the three months ended June 30, 2009 these costs totaled $0.7 million compared to $0.6 million for the three months ended June 30, 2008. The increase is primarily due to collaboration expense with Power3 for their NuroPro assay development related to the diagnosis of Alzheimer’s and Parkinson’s diseases.

Research and development expenses totaled 13% and 9% of net sales during the three months ended June 30, 2009 and 2008, respectively.

Other Income (Expense). Other income consists primarily of interest income from cash and cash equivalents invested in overnight instruments. Other income during the three months ended June 30, 2009 and June 30, 2008 was less than $0.1 million for each period.