MX-ICP is a simple, proprietary chemistry that amplifies the ability to detect genetic mutations by 100 - 400 fold. This chemistry has been validated internally on all currently available sequencing platforms, including Sanger, Next Gen Sequencing and Digital PCR. By enhancing the level of detection of genetic mutations and suppressing the normal, “wild-type” DNA, several benefits are provided. It is generally understood that most current technologies are unable to consistently identify mutations that occur in less than approximately 5% of a sample. However, many mutations found at much lower levels, even down to 0.01% are known to be clinically relevant and can have significant consequences to a patient: both in terms of how they will respond to a given drug or treatment and how a given tumor is likely to change over time. More importantly, in our view, significantly improving the level of detection while using blood, saliva and even urine as a source for DNA, rather than depending on painful, expensive and potentially dangerous tumor biopsies, is an important advancement in patient care with respect to cancer detection, treatment and monitoring of the disease and can result in significant cost savings for the healthcare system by replacing invasive procedures with the simple collection of blood or other bodily fluid. By broadening the types of samples that can be used for testing and allowing all sequencing platforms to provide improved identification of low level mutations, MX-ICP has the potential to make testing much more patient friendly, enable genetic monitoring of disease progression and more effectively guide treatment protocols, and reduce the overall cost of diagnosis and monitoring while also improving patient outcomes.
In April 2014, we announced an agreement with Raptor Pharmaceutical Corp. to provide genetic testing services for Raptor’s clinical trial evaluating RP103 as a potential treatment for Leigh syndrome and other inherited mitochondrial disorders. This agreement is an example of how we are working with a number of
pharmaceutical companies
to developoffering contract DNA sequencing and
market complementary genetic tests designed to improveother genomic analysis services, including SeqWright and others. In addition, several clinical
diagnosesdiagnostics service providers, such as LabCorp, Quest Diagnostics, Foundation Medicine, GeneDx and
outcomes. Similarly,Baylor College of Medicine, also offer related laboratory services. Finally, additional competition arises from academic core laboratory facilities. Competition for our WAVE System arises primarily from DNA sequencing and genotyping technologies. Competitors in
Januarythese areas include, among others, Thermo Fisher, Qiagen N.V., F. Hoffman-La Roche, Ltd., Sequenom, Inc and Illumina, Inc. Competition for some of our non-WAVE consumable products comes from numerous well-diversified life sciences reagents providers, including, among others, Thermo Fisher, Qiagen N.V., Roche, Agilent Technologies, Inc. and Promega Corporation.Employees
As of December 31, 2014 we announced thatand 2013, we had enteredemployees focused in the following areas of operation:
| | December 31, | |
| | 2014 | | | 2013 | |
Manufacturing and Laboratory | | | 84 | | | | 76 | |
Sales, Marketing and Administration | | | 60 | | | | 86 | |
Research and Development | | | 8 | | | | 9 | |
| | | 152 | | | | 171 | |
Of our 152 total employees as of December 31, 2014, a total of 150 were full-time employees.
Our employees were employed in the following geographical locations:
| | December 31, | |
| | 2014 | | | 2013 | |
United States | | | 131 | | | | 151 | |
Europe (other than the United Kingdom) | | | 11 | | | | 10 | |
United Kingdom | | | 10 | | | | 10 | |
| | | 152 | | | | 171 | |
General Information
We were incorporated in Delaware on March 6, 1997. Our principal office is located at 12325 Emmet Street, Omaha, Nebraska 68164 (telephone: 402-452-5400). This facility houses certain administrative staff and laboratories. We maintain manufacturing facilities in Omaha, Nebraska and San Jose, California. We maintain research and development offices in Omaha, Nebraska. We maintain laboratories in Omaha, Nebraska and New Haven, Connecticut that have been certified under the CLIA. Our New Haven facility also houses certain administrative operations.
Our Internet website is located at http://www.transgenomic.com. The information on our website is not a part of this Annual Report. We make available free of charge on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our SEC reports can be accessed through the investor relations section of our Internet website.
The public may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The SEC’s Internet website is located at http://www.sec.gov.
Executive Officers of the Registrant
Paul Kinnon. Mr. Kinnon, age 51, has served as our President and Chief Executive Officer and a Director since September 2013 and as our Interim Chief Financial Officer since October 2014. Mr. Kinnon has more than 20 years of global leadership experience in innovative life science and diagnostics companies. From January through August 2013, he provided consulting services to the life science sector as a Partner at Arch Global Research. During a portion of this time, Mr. Kinnon provided consulting services to us. From January 2007 to December 2012, Mr. Kinnon was President, Chief Executive Officer and a Director of ZyGEM Corporation Limited, a biotechnology company, where he transformed the company from a regional enzyme provider into a collaborationleader in integrated microfluidic technologies for forensic and clinical diagnostic applications. From May 2006 to June 2007, Mr. Kinnon was Vice President & General Manager Environmental Diagnostics (later expanded to Applied Markets) at Invitrogen Corporation (now Life Technologies), a high growth life sciences and diagnostics firm, and from October 2004 until April 2006, he was Vice President, Global Strategic Alliances at Invitrogen. Previously, Mr. Kinnon also held business, sales and marketing roles of increasing responsibility at Guava Technologies, Inc., Cellomics, Inc. and other life science companies. Mr. Kinnon earned his Bachelor of Sciences degree in Applied Chemistry at Coventry University in the United Kingdom and holds a Diploma of Marketing. A petition in bankruptcy was filed against ZyGEM Corporation Limited in April 2013.
Leon F. Richards. Mr. Richards, age 58, was appointed our Chief Accounting Officer by our Board of Directors in October 2014. Mr. Richards is an experienced corporate finance executive and certified public accountant with Horizon Discovery Group plcmore than 30 years of experience building and leading financial organizations. Mr. Richards has served as our Controller since November 2012. He most recently served as Controller and Chief Accounting Officer of Baldwin Technology Company, Inc., a leading global supplier of process automation equipment for the printing and publishing industry, from May 2004 to develop improved genetic diagnostic tests incorporating stateSeptember 2012. Mr. Richards earned his Bachelor of Business Administration and Accounting from Iona College.”
The information under Part III, “Item 10. Directors, Executive Officers and Corporate Governance” of the art controls.Original Form10-K is hereby amended and restated in its entirety to read as follows:
“Board of Directors and Committees
Our Board consists of five directors. The collaboration was designedBoard is divided into three classes with directors in each class serving for a term of three years. The terms of office of the current Class I, Class II and Class III directors will expire in 2016, 2017 and 2015, respectively. The Preferred Stockholders are entitled, as a separate voting group, to enable uselect two of the five directors (the “Preferred Stock Directors”). The Common Stockholders are entitled, as a separate voting group, to transition fromelect the usethree remaining directors (the “Common Stock Directors”). There is one Common Stock Director in each class. There is one Preferred Stock Director in each of plasmid-derived controlsClass I and Class II, but not a Preferred Stock Director in Class III.
Robert M. Patzig is the current Preferred Stock Director in Class I, Paul Kinnon is the current Common Stock Director in Class I, Doit L. Koppler, II is the current Preferred Stock Director in Class II, John D. Thompson is the current Common Stock Director in Class II and Michael A. Luther, Ph.D. is the current Common Stock Director in Class III.
Certain biographical information regarding our director nominee and directors continuing in office after the Annual Meeting, including their ages as of April 21, 2015 and the dates that they were first elected to Horizon’s Quantitative Molecular Reference Standards. This collaborationour Board, is expected to provide strategic opportunitiesset forth below. In each individual’s biography we have highlighted specific experience, qualifications, and skills that have led the potentialBoard to significantly benefitconclude that such individual is a valued member of our biomarker identification business.Board. In addition to these specific attributes, all of our directors have significant expertise in one or more areas of importance to our business and have high-level managerial experience in relatively complex organizations or are accustomed to dealing with complex problems. We believe all of our directors are individuals of high character and integrity, are able to work well with others, and have sufficient time to devote to the affairs of our company.
To provide additional supportName | | Age | | Principal Occupation | | Director Since | | Term to Expire |
| | | | | | | | |
CLASS III DIRECTOR NOMINEE |
|
Michael A. Luther, Ph.D., Common Stock Director | | 58 | | Senior Vice President, Discovery and Development Services, Albany Molecular Research, Inc. | | 2014 | | 2015 |
| | | | | | | | |
CLASS I DIRECTORS CONTINUING IN OFFICE |
|
Robert M. Patzig, Preferred Stock Director | | 46 | | Chairperson of the Board, Transgenomic, Inc. | | 2010 | | 2016 |
| | | | | | | | |
Paul Kinnon, Common Stock Director | | 52 | | President, Chief Executive Officer and Interim Chief Financial Officer of Transgenomic, Inc. | | 2013 | | 2016 |
| | | | | | | | |
CLASS II DIRECTORS CONTINUING IN OFFICE |
|
Doit L. Koppler, II, Preferred Stock Director | | 51 | | Managing Director and Treasurer, Third Security, LLC | | 2010 | | 2017 |
| | | | | | | | |
John D. Thompson, Common Stock Director | | 66 | | Retired Senior Vice President, Strategy & Corporate Development, Invitrogen Corporation | | 2014 | | 2017 |
Michael A. Luther, Ph.D. Dr. Luther has served as Senior Vice President, Discovery and Development Services, at Albany Molecular Research, Inc. (NASDAQ: AMRI), a global contract research and manufacturing organization offering drug discovery, development and manufacturing services, since October 2013, where he is responsible for the expansionstrategic, operational and business development activities for Albany Molecular Research, Inc.’s global discovery and development divisions. From August 2012 to September 2013, Dr. Luther was Corporate Vice President of our core businesses, we recruited two newGlobal Discovery Research Services at Charles River Laboratories (NYSE: CRL), a global provider of products and services to pharmaceutical and biotechnology companies, government agencies and academic institutions, where he served as the general manager of the firm’s discovery business unit, including developing and implementing strategic and operating plans. Prior to his role at Charles River, from March 2009 to August 2012, he was President and a member of the Board of Directors of the David H. Murdock Research Institute, a non-profit contract research organization located in Kannapolis, North Carolina, where he led and directed all activities of the institute, including applied research and development activities. From November 2006 to March 2009, Dr. Luther held the position of Vice President and Site Head at Merck Frosst, a pharmaceutical company in Montreal, Canada, focused on the delivery of Phase I product candidates from target to clinic for novel therapeutics in respiratory and metabolic disorders. Prior to Merck Frosst, from 1991 to 2006, he held positions of increasing responsibilities at GlaxoSmithKline, a global healthcare company that researches and develops a broad range of innovative medicines and brands, culminating in his appointment as Vice President, High Throughput Biology. Dr. Luther holds a Bachelor of Science degree in Biology and Chemistry from North Carolina State University, a Master in Business Administration from Duke University, Fuqua School of Business, and a Ph.D. in Biophysical Chemistry from Saint Louis University School of Medicine. He has served as a member of the board of directors inof Islet Sciences, Inc., a biopharmaceutical company (OTC: ISLT), since March 2014. In May 2014, we announced John Thompson’s appointmentThe Board selected Dr. Luther to serve as a director because it believes he possesses valuable experience in the healthcare and pharmaceutical industries and extensive strategic, scientific and business experience in such industries, which brings a unique and valuable perspective to the Board.
Robert M. Patzig. On February 12, 2015, Mr. Patzig was appointed Chairperson of Transgenomic.the Board. He had been standing Chairperson since January 1, 2015 and has been a Board member since December 2010. Since June 2014, Mr. Patzig has also served as Board Chair of Ligmincha International, a non-profit organization focused on the preservation and dissemination of Tibetan Bon Buddhism. Until December 31, 2014, Mr. Patzig was Senior Managing Director and the Chief Investment Officer for Third Security, LLC, an investment firm with a concentration in life science. Mr. Patzig joined Third Security upon its inception in 1999. Mr. Patzig’s responsibilities included identifying and evaluating investment opportunities for Third Security and its funds as well as general portfolio oversight and portfolio management. Prior to the formation of Third Security, Mr. Patzig served as Director of Market Research and Analysis at GIV Holding, Inc. and Director of Research Services at General Injectables & Vaccines, Inc. He served as a member of the Board of Directors of Cyntellect, Inc. from February 2011 until June 2012 and previously as Chairman of the Board from July 2007 to September 2008. Mr. Patzig was a Director of the Virginia Biotechnology Association, a non-profit industry advocacy group from 2006 until 2011. Mr. Patzig served as a member of the Board of Directors of Intrexon Corporation from May 2005 to February 2008 and was Chairman from February 2007 to February 2008. He served as a member of the Board of Directors of Synchrony, Inc. from February 2006 to April 2008. Mr. Patzig also served as the head of the Investment Committee for Howe and Rusling, Inc. a registered investment advisor from 2001 until its sale in 2006. Mr. Patzig received a B.A. in Philosophy and an M.A. in English from Virginia Tech. The Board appointed Mr. Patzig as its Chairperson because of his substantial biotechnology industry experience as well has his securities and investment expertise.
Paul Kinnon. Mr. Kinnon has served as our President and Chief Executive Officer and a Director since September 2013. On October 31, 2014, Mr. Kinnon was appointed Interim Chief Financial Officer. Mr. Kinnon has more than 20 years of global leadership experience in innovative life science and diagnostics companies. From January through August 2013, he provided consulting services to the life science sector as a Partner at Arch Global Research. During a portion of this time, Mr. Kinnon provided consulting services to us. From January 2007 to December 2012, Mr. Kinnon was President, Chief Executive Officer and a Director of ZyGEM Corporation Limited, a biotechnology company, where he transformed the company from a regional enzyme provider into a leader in integrated microfluidic technologies for forensic and clinical diagnostic applications. From May 2006 to June 2007, Mr. Kinnon was Vice President & General Manager Environmental Diagnostics (later expanded to Applied Markets) at Invitrogen Corporation (now Life Technologies), a high growth life sciences and diagnostics firm, and from October 2004 until April 2006, he was Vice President, Global Strategic Alliances at Invitrogen. Previously, Mr. Kinnon also held business, sales and marketing roles of increasing responsibility at Guava Technologies, Inc., Cellomics, Inc. and other life science companies. Mr. Kinnon earned his Bachelor of Sciences degree in Applied Chemistry at Coventry University in the United Kingdom and holds a Diploma of Marketing. A petition in bankruptcy was filed against ZyGEM Corporation Limited in April 2013. The Board selected Mr. Kinnon to serve as a director because he is our Chief Executive Officer and because of his expansive knowledge and experience in the life science industry, as well as his past executive management roles at both life science and biotechnology companies.
Doit L. Koppler, II.Mr. Koppler joined Third Security as Managing Director and Treasurer in 2001 and manages the finance function of Third Security and is involved with several portfolio companies of Third Security’s managed investment funds. Mr. Koppler served as Vice President, Treasurer and a member of the Board of Directors of Vital Diagnostics Holding Corp., a global supplier of products and services for the clinical laboratory in the traditional in vitro diagnostics market with a focus on the physician’s office, hospital and small-to-medium sized laboratory segments from its inception in 2006 through 2012. Mr. Koppler served as Chairman and Chief Executive Officer of New River Funds, a family of no-load mutual funds, from its inception in 2003 through 2008 and as the Chief Investment Officer of New River Advisers, LLC, the investment adviser to New River Small Cap Fund, predecessor to Southern Sun Small Cap Fund. Mr. Koppler served as a member of the Board of Directors of IntelliMat, Inc. from November 2006 to July 2008. Prior to joining Third Security, Mr. Koppler served as Vice President and Controller of General Injectables & Vaccines, Inc., a $120 million distributor of injectable biologics and vaccines primarily to outpatient physician offices, from 1992 to 2000. From 1987 to 1992, he was a Manager in the audit practice of Ernst & Young LLP. Mr. Koppler is a Certified Public Accountant, Chartered Global Management Accountant and a Member of the American Institute of Certified Public Accountants. He has also held Series 7 and Series 66 securities registrations. Mr. Koppler received a B.S. in Accounting from Salem International University. The Board selected Mr. Koppler to serve as a director because of his valuable financial expertise, including his public accounting and financial reporting experience.
John D. Thompson.Mr. Thompson has served as a consultant and board member to a number of life sciences enterprises. He was Senior Vice President, Strategy and Corporate Development at Invitrogen Corporation, where he completed over 20 transactions with an aggregate value in excess of $2 billion, in-licensed more than 200 compounds, and charted the company’s ambitious growth plans. Previously Mr. Thompson was an influential strategistSenior Vice President, Strategic and deal makerBusiness Development at top tier life sciences firms such as InvitrogenDexter Corporation, where he led restructuring activities involving more than a dozen acquisitions and divestitures. Earlier he was Vice President, Financial Services and Treasurer, where he negotiated financings totaling $100 million, and refinanced multicurrency debt and credit agreements. Mr. Thompson also worked at Dexter subsidiary, Life Technologies. HeAs Senior Vice President and General Manager, Americas Research Products Division, he helped achieve annual double-digit sales and earnings growth while divesting less promising businesses. As Vice President Finance, Secretary and Treasurer, he helped focus the business on high technology products, oversaw the merger that resulted in the formation of Life Technologies and helped ensure the success of its IPO. Mr. Thompson began his career in public accounting at Ernst & Young. Mr. Thompson received a BBA degree from Cleveland State University. The Board selected Mr. Thompson to serve as a director because it believes he brings extensive experience in life sciences business development, corporate strategy and mergers and acquisitions to Transgenomic. In March 2014, we announced that Michael A. Luther, Ph.D. had been appointed as a director of Transgenomic. Dr. Luther has had a distinguished career as a researcher, manager and senior executive at leading life sciences organizations, including major pharmaceutical companies and top tier research services firms. His combination of scientific expertise, practical business experience and effective leadership is expected to contribute significantlyfirms to our ongoing strategic transformation. Other personnel changes were announcedBoard. He was selected the Chairperson of the Audit Committee in November 2014 when Mark Colonnese resigned asFebruary 2015.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act and the rules of the SEC require our Chief Financial Officerdirectors, certain officers and Executive Vice Presidentbeneficial owners of Transgenomic to pursue other interests. Paul Kinnon, our President and Chief Executive Officer, assumed the role of Interim Chief Financial Officer and Leon Richards, our Corporate Controller, took on the additional responsibilities of serving as Chief Accounting Officer.
During 2014, we also strengthened our financial structure, resources and positioning. In January 2014, we effected a 1-for-12 reverse splitmore than 10% of our issued and outstanding shares of common stock. In May 2014, we received approval for the listing of our common shares on The NASDAQ Capital Market. The uplisting, which became effective on May 9, 2014, was intended to provide greater visibility, access to capital, and increased share liquidity. Uplisting to the NASDAQ Capital Market represented an important symbolic, as well as practical, step for Transgenomic. During 2014, we augmented our capital resources via completion of a $7.0 million investment agreement, $3.1 million raised from a private placement and convertible note, and the sale of our SURVEYOR business for a minimum of $4.25 million in cash to Transgenomic.
With the foundation for commercialization of MX-ICP largely in place, our Patient Testing business showing new signs of strength and a global team focused on realizing the potential of our product portfolio, we are well positioned to execute our business strategy.
Results of Continuing Operations
Net Sales.
Net sales consisted of the following:
|
| | | | | | | | | | | | | | |
2014 vs. 2013 | Dollars in Thousands |
| | | |
| Year Ended December 31, | | Change |
| 2014 | | 2013 | | $ | | % |
Laboratory Services | $ | 16,520 |
| | $ | 15,391 |
| | $ | 1,129 |
| | 7 | % |
Genetic Assays and Platforms | 10,563 |
| | 12,153 |
| | (1,590 | ) | | (13 | )% |
Total net sales | $ | 27,083 |
| | $ | 27,544 |
| | $ | (461 | ) | | (2 | )% |
Laboratory Services net sales increased $1.1 million during the year ended December 31, 2014 as compared to the same period of 2013. This increase resulted from a 23% increase in patient testing sales due to a number of new products launched in late 2013 and an increase in our core Laboratory Services business. This increase was partially offset by lower sales of our contract laboratory services.
Genetic Assays and Platforms sales during the year ended December 31, 2014 decreased $1.6 million as compared to the same period of 2013 as a result of lower instrument sales and lower bioconsumables sales resulting from the sale of our Surveyor Kits product line during 2014.
|
| | | | | | | | | | | | | | |
2013 vs. 2012 | Dollars in Thousands |
| | | |
| Year Ended December 31, | | Change |
| 2013 | | 2012 | | $ | | % |
Laboratory Services | $ | 15,391 |
| | $ | 19,329 |
| | $ | (3,938 | ) | | (20 | )% |
Genetic Assays and Platforms | 12,153 |
| | 12,151 |
| | 2 |
| | — | % |
Total net sales | $ | 27,544 |
| | $ | 31,480 |
| | $ | (3,936 | ) | | (13 | )% |
Laboratory Services net sales decreased $3.9 million during the year ended December 31, 2013 as compared to the same period of 2012. Revenue decreased in 2013 compared to 2012 primarily due to overall lower test volumes, primarily in Neurology testing. The decline in revenue was partially offset by higher contract work associated with a collaboration agreement.
Genetic Assays and Platforms net sales during the year ended December 31, 2013 were even with the level achieved in 2012. The slight change in sales was the result of modestly lower instruments sales in 2013, offset by an increase in our sales of bioconsumables.
Costs of Goods Sold.
Costs of goods sold includes material costs for the products that we sell and substantially all other costs associated with our manufacturing facilities (primarily personnel costs, rent and depreciation) as well as the wholesale price we pay manufacturers of OEM Equipment that we distribute. It also includes direct costs (primarily personnel costs, rent, supplies and depreciation) associated with our Laboratory Services operations.
Gross Profit.
Gross profit and gross margins for each of our business segments were as follows:
|
| | | | | | | | | | | | | |
2014 vs. 2013 | Dollars in Thousands |
| | | |
| Year Ended December 31, | | Margin % |
| 2014 | | 2013 | | 2014 | | 2013 |
Laboratory Services | $ | 6,840 |
| | $ | 6,820 |
| | 41 | % | | 44 | % |
Genetic Assays and Platforms | 2,881 |
| | 3,934 |
| | 27 | % | | 32 | % |
Gross profit | $ | 9,721 |
| | $ | 10,754 |
| | 36 | % | | 39 | % |
Gross profit was $9.7 million, or 36% of total net sales, during the year ended December 31, 2014, compared to $10.8 million, or 39% of total net sales, during the same period of 2013. During the year ended December 31, 2014, the gross margin for Laboratory Services was $6.8 million, or 41%, as compared to $6.8 million, or 44%, in the same period of 2013. The gross profit increase for Laboratory Services in 2014 primarily reflects the increased test volumes noted above partially offset by lower profit from our contract laboratory services. Genetic Assays and Platforms gross margin decreased in the year ended December 31, 2014 compared to the same period of 2013 as a result of lower instrument sales and lower gross profit from bioconsumables resulting from the sale of our Surveyor Kits product line during 2014.
|
| | | | | | | | | | | | | |
2013 vs. 2012 | Dollars in Thousands |
| | | |
| Year Ended December 31, | | Margin % |
| 2013 | | 2012 | | 2013 | | 2012 |
Laboratory Services | $ | 6,820 |
| | $ | 9,316 |
| | 44 | % | | 48 | % |
Genetic Assays and Platforms | 3,934 |
| | 3,816 |
| | 32 | % | | 31 | % |
Gross profit | $ | 10,754 |
| | $ | 13,132 |
| | 39 | % | | 42 | % |
Gross profit was $10.8 million, or 39% of total net sales, during the year ended December 31, 2014, compared to $13.1 million, or 42% of total net sales, during the same period of 2012. During the year ended December 31, 2013, the gross margin for Laboratory Services was $6.8 million, or 44%, as compared to $9.3 million, or 48%, in the same period of 2012. The gross profit decline for Laboratory Services primarily reflects the lower test volumes noted above. Lower overall costs were more than offset by the sales decline. Genetic Assays and Platforms gross margin remained consistent in the year ended December 31, 2013 compared to the same period of 2012.
Operating expenses.
The following table summarizes operating expenses further described below for the years ended December 31, 2014, 2013 and 2012:
|
| | | | | | | | | | | |
| Dollars in Thousands |
| | | |
| Year Ended December 31, |
| 2014 | | 2013 | | 2012 |
Selling, general and administrative | $ | 24,146 |
| | $ | 23,301 |
| | $ | 20,145 |
|
Research and development | 2,897 |
| | 3,212 |
| | 2,491 |
|
Total | $ | 27,043 |
| | $ | 26,513 |
| | $ | 22,636 |
|
Selling, General and Administrative Expenses.
Selling, general and administrative expenses consist primarily of personnel costs, marketing, travel costs, professional fees, bad debt expense and facility costs. Our selling, general and administrative costs increased to $24.1 million during the year ended December 31, 2014 compared to $23.3 million for the same period in 2013. The increase in selling, general and administrative costs primarily relates to a higher bad debt provision in 2014 as compared to 2013 along with increased professional fees and stock compensation costs. These increases were partially offset by decreased employee salary and benefits costs and lower amortization costs.
Our selling, general and administrative costs increased to $23.3 million during the year ended December 31, 2013 compared to $20.1 million for the same period in 2012. The increase in selling, general and administrative costs primarily relates to a $3.0 million higher bad debt provision in 2013 as compared to 2012. In addition, the increased costs include severance costs in 2013 related to staffing reductions in the second quarter and an executive termination in the third quarter.
Research and Development Expenses.
Research and development expenses include primarily personnel costs, intellectual property legal fees, outside services, collaboration expenses, supplies and facility costs and are expensed in the period in which they are incurred. During the years ended December 31, 2014 and 2013 these costs totaled $2.9 million and $3.2 million, respectively. Research and development expenses totaled 11% and 12% of net sales during the years ended December 31, 2014 and 2013, respectively. The decrease in research and development expenses in 2014 as compared to 2013 includes a decrease in employee salary and benefits costs partially offset by an increase in operating supplies expenses.
During the years ended December 31, 2013 and 2012, research and development expenses totaled $3.2 million and $2.5 million, respectively. Research and development expenses totaled 12% and 8% of net sales during the years ended December 31, 2013 and 2012, respectively. The increase in 2013 as compared to 2012 is due in part to activities related to converting a number of our tests to a more efficient Next Generation Sequencing instrument platform, activities related to our programs validating the use of ICE COLD-PCR, and expanding our portfolio of tests and kits and the platforms on which they are performed.
Other Income (Expense).
The following table summarizes other income (expense) for the years ended December 31, 2014, 2013 and 2012:
|
| | | | | | | | | | | | |
| Dollars in Thousands |
| | | |
| Year Ended December 31, |
| 2014 | | 2013 | | 2012 | |
Interest expense | $ | (665 | ) | | $ | (642 | ) | | $ | (888 | ) | |
Income from change in fair value of warrants | 455 |
| | 300 |
| | 2,200 |
| |
Gain on sale of product line | 4,114 |
| | — |
| | — |
| |
Other, net | — |
| | 60 |
| | 11 |
| |
Total other income (expense), net | $ | 3,904 |
| | $ | (282 | ) | | $ | 1,323 |
| |
Other income, net for the year ended December 31, 2014 totaled $3.9 million. Other income, net included a $4.1 million gain on the sale of our Surveyor Kits product line during 2014 along with income associated with the change in fair value of the common stock warrants. The income associated with the common stock warrants is a non-cash item. These income items were partially offset by interest expense primarily relating to our debt.
Other expense, net for the year ended December 31, 2013 totaled $0.3 million. Other expense, net included interest expense partially offset by the income associated with the change in fair valuefile reports of the common stock warrants.
Other income, net for the year ended December 31, 2012 totaled $1.3 million. Other income, net included income associated with the change in fair value of the common stock warrants, partially offset by interest expense.
Income Tax Expense (Benefit).
Income tax expense (benefit) recorded during the years ended December 31, 2014, 2013their ownership and2012 related to income taxes in states, foreign countries and other local jurisdictions and totaled $0.5 million, $(0.1) million and $0.1 million, respectively. Net income tax expense for the year ended December 31, 2014 included approximately $0.6 million of deferred income tax expense for a deferred tax liability related to the tax deductibility of our goodwill, which is an indefinite-lived asset. We expect this deferred income tax expense to be approximately $0.2 million annually going forward. The effective tax rate for the year ended December 31, 2014 is 3.9%, which is primarily the result of valuation allowances against net operating losses for the United States, partially adjusted by permanent differences related to inter-company foreign currency exchange of our subsidiary outside the United States. The effective tax rates for the years ended December 31, 2013 and 2012 were negative 0.3% and 1.8%, respectively.
We continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent we begin to generate taxable income in future periods and determine that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time. Our net operating loss carry-forwards of $128.9 million will
expire at various dates from 2018 through 2034, if not utilized. We also had state income tax loss carry-forwards of $46.8 million at December 31, 2014. These carry-forwards will also expire at various dates from 2018 to 2034 if not utilized.
Liquidity and Capital Resources
Our working capital positions at December 31, 2014 and 2013 were as follows (in thousands):
|
| | | | | | | | | | | | |
| | December 31, | | |
| | 2014 | | 2013 | | Change |
Current assets (including cash and cash equivalents of $1,609 and $1,626 respectively) | | $ | 13,432 |
| | $ | 11,835 |
| | $ | 1,597 |
|
Current liabilities | | 11,115 |
| | 8,625 |
| | (2,490 | ) |
Working capital | | $ | 2,317 |
| | $ | 3,210 |
| | $ | (893 | ) |
We entered into an Unsecured Convertible Promissory Note Purchase Agreement (the “Purchase Agreement”), dated December 31, 2014, with an accredited investor (the “Initial Investor”) pursuant to which we issued and sold, on December 31, 2014 (the “Initial Closing”), to the Initial Investor in a private placement an unsecured convertible promissory note (the “Initial Note”) in the aggregate principal amount of $750,000.
Pursuant to the terms of the Purchase Agreement, we entered into the Purchase Agreement with seven additional accredited investors (the “Additional Investors”) on January 15, 2015 and issued and sold to the Additional Investors in a private placement (the “Additional Private Placement”) Additional Notes in an aggregate principal amount of $925,000. Each of the Additional Notes accrues interest at a rate of 6% per year and matures on December 31, 2016. The outstanding principal and unpaid interest accrued under each Additional Note is convertible into shares of common stock of the Company as follows: (i) commencing upon the date of issuance of the Additional Note (but no earlier than January 1, 2015), the Additional Investor holding such Additional Note is entitled to convert, on a one-time basis, up to 50% of the outstanding principal and unpaid interest accrued under the Additional Note, into shares of Common Stock at a conversion price equal to the lesser of (a) the average closing price of the common stock on the Market for the 20 consecutive trading days immediately preceding the date of conversion, and (b) $2.20 (subject to adjustment for stock splits, stock dividends, other distributions, recapitalizations and the like); and (ii) commencing February 15, 2015, the Additional Investor holding such Additional Note is entitled to convert, on a one-time basis, any or all of the remaining outstanding principal and unpaid interest accrued under the Additional Note, into shares of Common Stock at a conversion price equal to 85% of the average closing price of the Common Stock on the Market for the 15 consecutive trading days immediately preceding the date of conversion.
On February 27, 2015, we entered into a purchase agreement with Craig-Hallum Capital Group LLC (the “Underwriter”) pursuant to which we sold 3,573,899 shares of our common stock and corresponding warrants to purchase up to 714,780 shares of common stock. Each share of common stock was sold in combination with a warrant to purchase 0.20 of a share of Common Stock. The purchase price to the public for each share of Common Stock and accompanying warrant was $1.95.
The purchase price paid by the Underwriter to us for the common stock and accompanying warrants was $1.8135. The net proceeds, after deducting the Underwriter’s discount and other estimated expenses, were approximately $6.2 million.
Please see the section entitled "Contractual Obligations and Other Commitments" that follows shortly in this document and Footnote 6 "Debt" to our accompanying consolidated financial statements for additional information regarding our outstanding debt and debt servicing obligations.
At December 31, 2014, we had cash and cash equivalents of $1.6 million. As described above, in January 2015 we received approximately $0.9 million in gross proceeds in connection with the issuance and sale of unsecured convertible promissory notes and in February 2015 we received net proceeds of approximately $6.2 million from the issuance of common stock. Our current operating plan projects improved operating results, improvement in collection rates and monetization of underutilized assets. As with any operating plan, there are risks associated with our ability to execute it. Therefore, there can be no assurance that we will be able to satisfy our obligations, or achieve the operating improvements as contemplated by the current operating plan. If we are unable to execute this plan, we will need to find additional sources of cash not contemplated by the current operating plan and/or raise additional capital to sustain continuing operations as currently contemplated. We could raise additional funds through various potential sources such as through the sale of assets or sale of debt or equity securities. However, there can be no assurance that the additional funding sources will be available to us at reasonable terms or at all. If we are unable to achieve our operating plan or obtain additional financing, our business would be jeopardized and we may not be able to continue as a going concern.
Analysis of Cash Flows
The following table presents a summary of our cash flows: |
| | | | | | | | | | | |
| (amounts in thousands) |
| 2014 | | 2013 | | 2012 |
Net cash provided by (used in): | | | | | |
Operating activities | $ | (13,702 | ) | | $ | (8,473 | ) | | $ | (10,204 | ) |
Investing activities | 3,625 |
| | (1,766 | ) | | (4,878 | ) |
Financing activities | 10,070 |
| | 7,370 |
| | 14,604 |
|
Effect of exchange rates on cash | (10 | ) | | (2 | ) | | 29 |
|
Net decrease in cash and cash equivalents | $ | (17 | ) | | $ | (2,871 | ) | | $ | (449 | ) |
Net Decrease in Cash and Cash Equivalents. Cash and cash equivalents decreased by $0.0 million, $2.9 million and $0.4 million for the periods ended December 31, 2014, 2013 and 2012, respectively.
Cash Flows Used In Operating Activities. We used cash for operating activities of $13.7 million, $8.5 million and $10.2 million during 2014, 2013 and 2012, respectively. In 2014, cash flows used in operating activities of $13.7 million reflects the Company's net loss of $13.9 million and an increase in accounts receivable of $8.5 million as a result of higher fourth quarter sales in 2014 as compared to 2013 along higher levels of past due receivables in Laboratory Services. These were offset by an increase in accounts payable of $2.0 million and increases in non-cash items, including the provision for losses on doubtful accounts of $6.1 million, stock compensation expense of $0.9 million and depreciation and amortization of $2.2 million. During 2013, the cash flows used in operating activities of $8.5 million includes our cash loss from operations and an increase in accounts receivable of $2.8 million as a result of a slow-down in collections in Laboratory Services and high fourth quarter shipments in Genetic Assays and Platforms. A decrease in inventory of $1.1 million related to higher instrument sales and better inventory management partially offset the operating use. In 2012, the cash used in operating activities of $10.2 million includes an increase in accounts receivable of $2.9 million related to higher levels of past due receivables and an increase in inventories of $1.4 million to purchase additional OEM instruments in anticipation of future sales, coupled with the cash loss from operations.
Cash Flows Provided By (Used In) Investing Activities. Cash flows provided by investing activities totaled $3.6 million for the year ended December 31, 2014 and included proceeds from the sale of our Surveyor Kits product line of $3.8 million, partially offset by purchases of property and equipment of $0.1 million. During 2013, we utilized $1.8 million of cash for investing activities, primarily related to additions to property, plant and equipment and patents of $0.9 million and a final payment related to the 2012 acquisition of $0.9 million. During 2012, we acquired the intangible assets of ScoliScoreTM for $4.4 million, $3.6 million of which we paid in 2012. In 2012, we also recorded purchases of property and equipment totaling $0.9 million.
Cash Flows Provided By Financing Activities. Cash flows provided by financing activities for the year ended December 31, 2014 included proceeds from the issuance of Series B Convertible Preferred Stock of $6.9 million, net proceeds of $2.4 million from the October 2014 issuance of common stock and proceeds of $0.8 million from the issuance of an unsecured convertible promissory note in December 2014. These proceeds were partially offset by payments on our capital lease obligations. During 2013, we recorded net proceeds from a private placement with institutional and accredited investors of $7.6 million, received proceeds from borrowings of $6.6 million and recorded principal payments of $6.2 million to settle the PGxHealth note payable. During 2012, we recorded net proceeds from a private placement with institutional and accredited investors of $17.5 million and recorded principal payments on notes payable totaling $2.6 million.
Contractual Obligations and Other Commitments
At December 31, 2014, our contractual obligations and other commitments were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Amounts in thousands) |
| 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | After 2019 | | Total |
Long term debt(1) | $ | 462 |
| | $ | 7,375 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 7,837 |
|
Interest(1) | 506 |
| | 306 |
| | — |
| | — |
| | — |
| | — |
| | 812 |
|
Capital lease obligations(2) | 35 |
| | 3 |
| | 1 |
| | — |
| | — |
| | — |
| | 39 |
|
Operating lease obligations(3) | 1,032 |
| | 927 |
| | 763 |
| | 485 |
| | 235 |
| | 628 |
| | 4,070 |
|
Purchase obligations(4) | 675 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 675 |
|
| $ | 2,710 |
| | $ | 8,611 |
| | $ | 764 |
| | $ | 485 |
| | $ | 235 |
| | $ | 628 |
| | $ | 13,433 |
|
(1) See Footnote 6 - "Debt" to our accompanying consolidated financial statements.
(2) See Footnote 7 - "Capital Leases" to our accompanying consolidated financial statements.
(3) These amounts represent non-cancellable operating leases for equipment, vehicles and operating facilities
(4) These amounts represent purchase commitments, including all open purchase orders
At December 31, 2014, we had unrecognized tax benefits of $0.1 million. A reasonable estimate of the timing related to the $0.1 million is not possible.
Off Balance Sheet Arrangements
At December 31, 2014 and 2013, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
Accounting policies used in the preparation of the consolidated financial statements may involve the use of management judgments and estimates. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial statements and require significant or complex judgments on the part of management. 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 reported 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. 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. The following are certain critical accounting policies that may involve the use of judgments or estimates.
Allowance for Doubtful Accounts and Contractual Allowances.
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 can be greater than 90 days. Accounts receivable are carried at original invoice amount and shown net of allowance for doubtful accounts and contractual allowances. The estimate made for doubtful accounts is based on a review of all outstanding amounts on a quarterly basis. The estimate for contractual allowances is based on contractual terms or historical reimbursement rates and is recorded when revenue is recorded. We determine the allowance for doubtful accounts and contractual allowances by regularly evaluating individual payor receivables and considering a payor's financial condition, credit history, reimbursement rates and current economic conditions. Accounts receivable are written off when deemed uncollectible and after all collection efforts have been exhausted. Recoveries of accounts receivable previously written off are recorded as a reduction in bad debt expense when received.
Inventories.
Inventories are stated at the lower of cost or market net of allowance for obsolete and slow moving inventory. Cost is computed using standard costs for finished goods and average or latest actual cost for raw materials and work in process, which approximates the first-in, first-out (FIFO) method. We write down slow-moving and obsolete inventory by the difference between the value of the inventory and our estimate of the reduced value based on potential future uses, the likelihood that overstocked inventory will be sold and the expected selling prices of the inventory. If our ability to realize value on slow-moving or obsolete inventory is less favorable than assumed, additional write-downs of the inventory may be required.
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.
Goodwill.
Goodwill is tested for impairment annually utilizing a weighted combination of income and market approaches. The income approach applies a discounted cash flow methodology to the Company's future period projections and the more heavily weighted market approach uses market available information on the Company. We perform this impairment analysis during the fourth quarter of each year or when a significant event occurs that may impact goodwill. Impairment may occur when the carrying value of the reporting unit exceeds its fair value. If the carrying value of the reporting unit exceeds its fair value, the fair value of all identifiable
tangible and intangible assets and liabilities is determined as part of a hypothetical purchase price allocation to determine the amount of goodwill impairment. No impairment of goodwill has occurred to date.
Intangible Assets.
Intangible assets include intellectual property, patents and acquired products. At December 31, 2013, the Company revised its estimate of useful lives on certain intangible assets, which decreased amortization expense in 2014 by $0.4 million.
1. Intellectual Property. Initial costs paid to license intellectual property from independent third parties are capitalized and amortized using the straight-line method over the license period. Ongoing royalties related to such licenses are expensed as incurred.
2. Patents. We capitalize legal costs, filing fees and other expenses associated with obtaining patents on new discoveries and amortize these costs using the straight-line method over the shorter of the legal life of the patent or its economic life beginning on the date the patent is issued.
3. Acquired Products. As a part of the FAMILION acquisition and acquisition of certain intangible assets from Axial, we acquired technology, in process technology, trademarks/tradenames, customer relationships, covenants not to compete and third party relationships. These costs will be amortized pursuant to the straight-line method over their estimated economic life of seven to ten years. See Footnote 5 "Intangibles and Other Assets" to our accompanying consolidated financial statements.
We review our amortizable long lived assets for impairment whenever events indicate that the carrying amount of the asset (group) may not be recoverable. An impairment loss may be needed if the sum of the future undiscounted cash flows is less than the carrying amount of the asset (group). The amount of the loss would be determined by comparing the fair market value of the asset to the carrying amount of the asset (group). No loss has been recorded during the years ended December 31, 2014, 2013 or 2012.
Common Stock Warrants.
Our issued and outstanding 2012 warrants to purchase common stock do not qualify to be treated as equity, and accordingly, are recorded as a liability ("Common Stock Warrant Liability"). The Common Stock Warrant Liability was initially recorded at fair value using a Monte Carlo simulation model. We are required to present these instruments at fair value at each reporting date and any changes in fair values are recorded as an adjustment to earnings. The Common Stock Warrant Liability is considered a level three financial instrument. See Footnote 13 "Fair Value" to our accompanying consolidated financial statements.
Stock Based Compensation.
All stock-based awards 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 awards as of December 31, 2014 had vesting periods of one or three years from date of grant. None of the stock awards outstanding at December 31, 2014 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 for stock options and for Stock Appreciation Rights ("SAR") is based on the calculated mark-to-market value of the awards at quarter end, with both expensed over the service period of the awards. The values are determined using the Black-Scholes methodology.
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. Our liability for uncertain tax positions was $0.1 million and $0.3 million as of December 31, 2014 and 2013, respectively. We recorded less than $0.1 million of additional uncertain tax positions during each of the years ended 2014 and 2013. We recorded $0.2 million and zero for reductions in uncertain tax positions relating to statute of limitations lapse for the years ended 2014 and 2013, respectively. We had no material interest or penalties during fiscal 2014 or fiscal 2013, and we do not anticipate any such items during the next twelve months. Our policy is to record interest and penalties directly related to income taxes as income tax expense in the Consolidated Statements of Operations.
Net Sales Recognition.
Revenue is realized and earned when all of the following criteria are met:
Persuasive evidence of an arrangement exists;
Delivery has occurred or services have been rendered;
The seller’s price to the buyer is fixed or determinable; and
Collectability is reasonably assured.
In Laboratory Services, net sales from Patient Testing labs are recognized on an individual test basis and take place when the test report is completed, reviewed and sent to the client less the reserve for insurance, Medicare and Medicaid contractual adjustments. There are no deferred net sales associated with our Patient Testing services. Adjustments to the allowances, based on actual receipts from third party payers, are reflected in the estimated contractual allowance applied prospectively. In our Biomarker Identification labs, we perform services on a project by project basis. When we receive payment in advance, we recognize revenue when we deliver the service. These projects typically do not extend beyond one year.
Net sales of Genetic Assays and Platforms products are recognized in accordance with the terms of the sales arrangement. Such recognition is based on receipt of an unconditional customer order and transfer of title and risk of ownership to the customer, typically upon shipment of the product under a purchase order. Our sales terms do not provide for the right of return unless the product is damaged or defective. Net sales from certain services associated with the analytical instruments, to be performed subsequent to shipment of the products, is deferred and recognized when the services are provided. Such services, mainly limited to installation and training services that are not essential to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument. We also enter into various service contracts that cover installed instruments. These contracts cover specific time periods and net sales associated with these contracts are deferred and recognized ratably over the service 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.
Our foreign subsidiary uses the local currency of the country in which it is located as its functional currency. Its assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenues and expenses are translated at the average rates during the period.
Comprehensive Income.
Accumulated other comprehensive income at December 31, 2014, 2013 and 2012 consisted of foreign currency translation adjustments.
Loss 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.
Recent Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for reporting a discontinued operation. Under this standard, a disposal of part of an organization that has a major effect on its operations and financial results is a discontinued operation. This guidance is effective prospectively for us beginning January 1, 2015 with earlier application permitted, but only for disposals (or classifications as held for sale) that have not been reported previously. When adopted, we do not expect that this guidance will have a material impact on our financial condition, results of operations or cash flows.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to a customer. This ASU will replace most existing revenue recognition guidance in generally accepted accounting principles in the U.S. when it becomes effective on January 1, 2017. Early application is not permitted, but the standard permits the use of either the retrospective or cumulative effect transition method. We have not selected a transition method and are currently evaluating the impact this guidance will have on our financial condition, results of operations and cash flows.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40). The new guidance addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is permitted. We do not expect to early adopt
this guidance and do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.
Impact of Inflation
We do not believe that inflation has had a material effect on our current business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, for example, if the cost of our materials or the cost of shipping our products to customers were to incur substantial increases as a result of the rapid rise in the cost of oil, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
|
| |
Item 7A. | Quantitative and Qualitative Disclosure about Market Risk. |
We are a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide the information required under this item.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Transgenomic, Inc.
We have audited the accompanying consolidated balance sheets of Transgenomic, Inc. and Subsidiary (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Transgenomic, Inc. and Subsidiary at December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Hartford, Connecticut
April 15, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Transgenomic, Inc.
We have audited the accompanying consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows of Transgenomic, Inc. and Subsidiary for the year ended December 31, 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Transgenomic, Inc. and Subsidiary for the year ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.
/s/ McGladrey LLP
Omaha, Nebraska
March 14, 2013
TRANSGENOMIC, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2014 and 2013
(Dollars in thousands except per share data)
|
| | | | | | | |
| | | |
| 2014 | | 2013 |
ASSETS | | | |
CURRENT ASSETS: | | | |
Cash and cash equivalents | $ | 1,609 |
| | $ | 1,626 |
|
Accounts receivable (net of allowances for doubtful accounts of $7,947 and $3,838, respectively) | 7,627 |
| | 5,314 |
|
Inventories (net of allowances of $628 and $799, respectively) | 3,005 |
| | 3,957 |
|
Other current assets | 1,191 |
| | 938 |
|
Total current assets | 13,432 |
| | 11,835 |
|
PROPERTY AND EQUIPMENT: | | | |
Equipment | 11,369 |
| | 11,255 |
|
Furniture, fixtures & leasehold improvements | 3,877 |
| | 3,874 |
|
| 15,246 |
| | 15,129 |
|
Less: accumulated depreciation | (13,764 | ) | | (13,126 | ) |
| 1,482 |
| | 2,003 |
|
OTHER ASSETS: | | | |
Goodwill | 6,918 |
| | 6,918 |
|
Intangibles (net of accumulated amortization of $5,970 and $4,598, respectively) | 7,964 |
| | 9,195 |
|
Other assets | 210 |
| | 327 |
|
| $ | 30,006 |
| | $ | 30,278 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
CURRENT LIABILITIES: | | | |
Current maturities of long term debt | $ | 462 |
| | $ | 242 |
|
Accounts payable | 4,871 |
| | 2,860 |
|
Accrued compensation | 1,129 |
| | 1,330 |
|
Accrued expenses | 2,550 |
| | 2,037 |
|
Deferred revenue | 1,035 |
| | 1,088 |
|
Other current liabilities | 1,068 |
| | 1,068 |
|
Total current liabilities | 11,115 |
| | 8,625 |
|
LONG TERM LIABILITIES: | | | |
Long term debt less current maturities | 7,375 |
| | 6,318 |
|
Common stock warrant liability | 145 |
| | 600 |
|
Other long-term liabilities | 1,688 |
| | 1,303 |
|
Accrued preferred stock dividend | 3,130 |
| | 1,986 |
|
Total liabilities | 23,453 |
| | 18,832 |
|
STOCKHOLDERS’ EQUITY: | | | |
Preferred stock, $.01 par value, 15,000,000 shares authorized, 4,029,502 and 2,586,205 shares issued and outstanding, respectively | 40 |
| | 26 |
|
Common stock, $.01 par value, 150,000,000 shares authorized, 8,084,471 and 7,353,695 shares issued and outstanding, respectively (1) | 81 |
| | 73 |
|
Additional paid-in capital (1) | 189,680 |
| | 179,459 |
|
Accumulated other comprehensive income | 340 |
| | 390 |
|
Accumulated deficit | (183,588 | ) | | (168,502 | ) |
Total stockholders’ equity | 6,553 |
| | 11,446 |
|
| $ | 30,006 |
| | $ | 30,278 |
|
(1) The common stock shares and additional paid-in capital for all periods presented reflect the one-for-twelve reverse stock split which took effect on January 27, 2014.
See notes to consolidated financial statements.
TRANSGENOMIC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2014, 2013 and 2012
(Dollars in thousands except per share data)
|
| | | | | | | | | | | |
| | | | | |
| | | | | |
| 2014 | | 2013 | | 2012 |
NET SALES | $ | 27,083 |
| | $ | 27,544 |
| | $ | 31,480 |
|
COST OF GOODS SOLD | 17,362 |
| | 16,790 |
| | 18,348 |
|
Gross profit | 9,721 |
| | 10,754 |
| | 13,132 |
|
OPERATING EXPENSES: | | | | | |
Selling, general and administrative | 24,146 |
| | 23,301 |
| | 20,145 |
|
Research and development | 2,897 |
| | 3,212 |
| | 2,491 |
|
| 27,043 |
| | 26,513 |
| | 22,636 |
|
LOSS FROM OPERATIONS | (17,322 | ) | | (15,759 | ) | | (9,504 | ) |
OTHER INCOME (EXPENSE): | | | | | |
Interest expense, net | (665 | ) | | (642 | ) | | (888 | ) |
Warrant revaluation | 455 |
| | 300 |
| | 2,200 |
|
Gain on sale of product line | 4,114 |
| | — |
| | — |
|
Other, net | — |
| | 60 |
| | 11 |
|
| 3,904 |
| | (282 | ) | | 1,323 |
|
LOSS BEFORE INCOME TAXES | (13,418 | ) | | (16,041 | ) | | (8,181 | ) |
INCOME TAX EXPENSE (BENEFIT) | 524 |
| | (54 | ) | | 146 |
|
NET LOSS | $ | (13,942 | ) | | $ | (15,987 | ) | | $ | (8,327 | ) |
PREFERRED STOCK DIVIDENDS AND ACCRETION | (1,144 | ) | | (726 | ) | | (660 | ) |
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS | $ | (15,086 | ) | | $ | (16,713 | ) | | $ | (8,987 | ) |
BASIC AND DILUTED LOSS PER COMMON SHARE (1) | $ | (2.01 | ) | | $ | (2.30 | ) | | $ | (1.55 | ) |
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING (1) | 7,493,844 |
| | 7,266,642 |
| | 5,794,785 |
|
(1) Net loss per share and the number of shares used in the per share calculations for all periods presented reflect the one-for-twelve reverse stock split which took effect on January 27, 2014.
See notes to consolidated financial statements.
TRANSGENOMIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Years Ended December 31, 2014, 2013 and 2012
(Dollars in thousands)
|
| | | | | | | | | | | | |
| | 2014 | | 2013 | | 2012 |
Net Loss | | $ | (13,942 | ) | | $ | (15,987 | ) | | $ | (8,327 | ) |
Other Comprehensive Loss; foreign currency translation adjustment, net of tax | | (50 | ) | | (45 | ) | | 99 |
|
Comprehensive Loss | | $ | (13,992 | ) | | $ | (16,032 | ) | | $ | (8,228 | ) |
| | | | | | |
See notes to consolidated financial statements.
TRANSGENOMIC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2014, 2013 and 2012
(Dollars in thousands except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | | | | | | | |
| Outstanding Shares | | Par Value | | Outstanding Shares (1) | | Par Value (1) | | Additional Paid-in Capital (1) | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total |
Balance, December 31, 2011 | 2,586,205 |
| | $ | 26 |
| | 4,135,478 |
| | $ | 46 |
| | $ | 153,442 |
| | $ | (142,802 | ) | | $ | 336 |
| | $ | 11,048 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (8,327 | ) | | | | (8,327 | ) |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 99 |
| | 99 |
|
Non-cash stock-based compensation | — |
| | — |
| | — |
| | — |
| | 731 |
| | — |
| | — |
| | 731 |
|
Issuance of shares of common stock | — |
| | — |
| | 1,667 |
| | — |
| | 10 |
| | — |
| | — |
| | 10 |
|
Private placement, net | — |
| | — |
| | 1,833,333 |
| | 18 |
| | 17,355 |
| | — |
| | — |
| | 17,373 |
|
Dividends on preferred stock | — |
| | — |
| | — |
| | — |
| | — |
| | (660 | ) | | — |
| | (660 | ) |
Balance, December 31, 2012 | 2,586,205 |
| | $ | 26 |
| | 5,970,478 |
| | $ | 64 |
| | $ | 171,538 |
| | $ | (151,789 | ) | | $ | 435 |
| | $ | 20,274 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (15,987 | ) | | | | (15,987 | ) |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (45 | ) | | (45 | ) |
Non-cash stock-based compensation | — |
| | — |
| | — |
| | — |
| | 360 |
| | — |
| | — |
| | 360 |
|
Private Placement, net | — |
| | — |
| | 1,383,217 |
| | 14 |
| | 7,556 |
| | — |
| | — |
| | 7,570 |
|
Other | — |
| | — |
| | — |
| | (5 | ) | | 5 |
| | — |
| | — |
| | — |
|
Dividends on preferred stock | — |
| | — |
| | — |
| | — |
| | — |
| | (726 | ) | | — |
| | (726 | ) |
Balance, December 31, 2013 | 2,586,205 |
| | $ | 26 |
| | 7,353,695 |
| | $ | 73 |
| | $ | 179,459 |
| | $ | (168,502 | ) | | $ | 390 |
| | $ | 11,446 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (13,942 | ) | | | | (13,942 | ) |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (50 | ) | | (50 | ) |
Non-cash stock-based compensation | — |
| | — |
| | — |
| | — |
| | 977 |
| | — |
| | — |
| | 977 |
|
Private Placement, net | — |
| | | | 730,776 |
| | 8 |
| | 2,353 |
| | | | | | 2,361 |
|
Preferred stock agreement | 1,443,297 |
| | 14 |
| | — |
| | — |
| | 6,891 |
| | — |
| | — |
| | 6,905 |
|
Dividends on preferred stock | — |
| | — |
| | — |
| | — |
| | — |
| | (1,144 | ) | | — |
| | (1,144 | ) |
| | | | | | | | | | | | | | | |
Balance, December 31, 2014 | 4,029,502 |
| | $ | 40 |
| | 8,084,471 |
| | $ | 81 |
| | $ | 189,680 |
| | $ | (183,588 | ) | | $ | 340 |
| | $ | 6,553 |
|
(1) The common stock shares and additional paid-in capital for all periods presented reflect the one-for-twelve reverse stock split which took effect on January 27, 2014.
See notes to consolidated financial statements.
TRANSGENOMIC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2014, 2013 and 2012
(Dollars in thousands)
|
| | | | | | | | | | | |
| 2014 | | 2013 | | 2012 |
CASH FLOWS USED IN OPERATING ACTIVITIES: | | | | | |
Net loss | $ | (13,942 | ) | | $ | (15,987 | ) | | $ | (8,327 | ) |
Adjustments to reconcile net loss to net cash flows used in operating activities: | | | | | |
Depreciation and amortization | 2,248 |
| | 2,748 |
| | 2,278 |
|
Non-cash, stock based compensation | 939 |
| | 462 |
| | 731 |
|
Provision for losses on doubtful accounts | 6,119 |
| | 5,548 |
| | 2,468 |
|
Provision for losses on inventory obsolescence | 61 |
| | 217 |
| | 129 |
|
Warrant revaluation | (455 | ) | | (300 | ) | | (2,200 | ) |
Loss on disposal of fixed assets | — |
| | 9 |
| | 23 |
|
Deferred interest | 330 |
| | — |
| | — |
|
Deferred income taxes | 631 |
| | — |
| | — |
|
Gain on sale of product line | (4,114 | ) | | — |
| | — |
|
Other | — |
| | (62 | ) | | — |
|
Changes in operating assets and liabilities, net of acquisitions: | | | | | |
Accounts receivable | (8,488 | ) | | (2,757 | ) | | (2,913 | ) |
Inventories | 715 |
| | 908 |
| | (1,373 | ) |
Prepaid expenses and other current assets | (50 | ) | | 122 |
| | (209 | ) |
Accounts payable | 2,029 |
| | 801 |
| | (576 | ) |
Accrued expenses and other liabilities | 275 |
| | (182 | ) | | (235 | ) |
Net cash flows used in operating activities | (13,702 | ) | | (8,473 | ) | | (10,204 | ) |
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: | | | | | |
Acquisitions | — |
| | (849 | ) | | (3,551 | ) |
Purchase of property and equipment | (130 | ) | | (605 | ) | | (882 | ) |
Purchase of short term investments | — |
| | — |
| | (8,994 | ) |
Proceeds from the sale of short term investments | — |
| | — |
| | 8,994 |
|
Proceeds from sale of product line | 3,800 |
| | — |
| | — |
|
Change in other assets | (45 | ) | | (312 | ) | | (445 | ) |
Net cash flows provided by (used in) investing activities | 3,625 |
| | (1,766 | ) | | (4,878 | ) |
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: | | | | | |
Proceeds from note payable | 7,190 |
| | 6,560 |
| | — |
|
Principal payments on capital lease obligations | (144 | ) | | (348 | ) | | (328 | ) |
Payment of deferred financing costs | — |
| | (241 | ) | | — |
|
Issuance of preferred stock, net | 6,906 |
| | — |
| | — |
|
Issuance of common stock and related warrants, net | 2,360 |
| | 7,570 |
| | 17,483 |
|
Principal payments on note payable | (6,242 | ) | | (6,171 | ) | | (2,551 | ) |
Net cash flows provided by financing activities | 10,070 |
| | 7,370 |
| | 14,604 |
|
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH | (10 | ) | | (2 | ) | | 29 |
|
NET CHANGE IN CASH AND CASH EQUIVALENTS | (17 | ) | | (2,871 | ) | | (449 | ) |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 1,626 |
| | 4,497 |
| | 4,946 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 1,609 |
| | $ | 1,626 |
| | $ | 4,497 |
|
|
| | | | | | | | | | | |
SUPPLEMENTAL CASH FLOW INFORMATION | | | | | |
Cash paid during the period for: | | | | | |
Interest | $ | 229 |
| | $ | 724 |
| | $ | 964 |
|
Income taxes, net | — |
| | 9 |
| | 123 |
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION | | | | | |
Acquisition of equipment through capital leases | $ | — |
| | $ | — |
| | $ | 175 |
|
Dividends accrued on preferred stock | 1,144 |
| | 726 |
| | 660 |
|
Note payable converted to Equity | — |
| | — |
| | 3,000 |
|
Acquisition of intangibles | — |
| | — |
| | 849 |
|
See notes to consolidated financial statements.
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
Business Description.
Transgenomic, Inc. (“we”, “us”, “our”, the “Company” or “Transgenomic”) is a global biotechnology company advancing personalized medicine for the detection and treatment of cancer and inherited diseases through its proprietary molecular technologies and world-class clinical and research services. A key goal is to bring our Multiplexed ICE COLD-PCR (“MX-ICP”) product to the clinical market rapidly through strategic licensing agreements, enabling the use of blood and other bodily fluids for more effective and patient-friendly diagnosis, monitoring and treatment of cancer.
MX-ICP is a simple, proprietary chemistry that amplifies the ability to detect genetic mutations by 100 - 400 fold. This chemistry has been validated internally on all currently available sequencing platforms, including Sanger, Next Gen Sequencing and Digital PCR. By enhancing the level of detection of genetic mutations and suppressing the normal, “wild-type” DNA, several benefits are provided. It is generally understood that most current technologies are unable to consistently identify mutations that occur in less than approximately 5% of a sample. However, many mutations found at much lower levels, even down to 0.01% are known to be clinically relevant and can have significant consequences to a patient: both in terms of how they will respond to a given drug or treatment and how a given tumor is likely to change over time. More importantly, in our view, significantly improving the level of detection while using blood, saliva and even urine as a source for DNA, rather than depending on painful, expensive and potentially dangerous tumor biopsies, is an important advancement in patient care with respect to cancer detection, treatment and monitoring of the disease and can result in significant cost savings for the healthcare system by replacing invasive procedures with the simple collection of blood or other bodily fluid. By broadening the types of samples that can be used for testing and allowing all sequencing platforms to provide improved identification of low level mutations, MX-ICP has the potential to make testing much more patient friendly, enable genetic monitoring of disease progression and more effectively guide treatment protocols, and reduce the overall cost of diagnosis and monitoring while also improving patient outcomes.
Currently, our operations are organized and reviewed by management along its major product lines and presented in the following two business segments;
Laboratory Services. Our laboratories specialize in genetic testing for cardiology, neurology and mitochondrial disorders, and for oncology. Our Patient Testing laboratories located in New Haven, Connecticut and Omaha, Nebraska are certified under the Clinical Laboratory Improvement Amendment (“CLIA”) as high complexity laboratories and our Omaha facility is accredited by the College of American Pathologists. Our Biomarker Identification laboratory located in Omaha provides pharmacogenomics research services supporting Phase II and Phase III clinical trials conducted by pharmaceutical and biotechnology companies. Our laboratories employ a variety of genomic testing service technologies, including our new, high performance MX-ICP technology. ICE COLD-PCR is a proprietary ultra-high sensitivity platform technology with breakthrough potential to enable wide adoption of personalized, precision medicine in cancer and other diseases. It can be run in any laboratory that contains standard PCR systems. MX-ICP enables detection of multiple known and unknown mutations from virtually any sample type, including tissue biopsies, blood, urine, saliva, cell-free DNA (“cfDNA”) and circulating tumor cells (“CTCs”) at levels greater than 1,000-fold higher than standard DNA sequencing techniques. It is easy to implement and use within existing workflows.
Genetic Assays and Platforms. Our proprietary product in this business segment is the WAVE® System, which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. We also distribute bio-instruments produced by other manufacturers (“OEM Equipment”) through our sales and distribution network. Service contracts to maintain installed systems are sold and supported by our technical support personnel. The installed WAVE base and some OEM Equipment platforms generate a demand for consumables that are required for the continued operation of the bio-instruments. We develop, manufacture and sell these consumable products. In addition, we manufacture and sell consumable products that can be used on multiple, independent platforms. These products include a range of chromatography columns.
Going Concern
The consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern which assumes that the Company will realize its assets and discharge its liabilities in the ordinary course of business. The Company has incurred substantial operating losses and has used cash in its operating activities for the past few years. As of December 31, 2014, the Company had working capital of approximately $2.3 million. During the
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2014, 2013 and 2012
first quarter of 2015, the Company received net proceeds of approximately $7.1 million from the issuance and sale of unsecured convertible promissory notes and issuance of common stock. Including the recent financing, the Company’s ability to continue as a going concern is dependent upon a combination of generating additional revenue, improving cash collections, potentially selling underutilized assets and, if needed, raising necessary financing to meet its obligations and pay its liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at this time and raises substantial doubt that the Company will be able to continue as a going concern. These consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern. The Company cannot be certain that additional financing will be available on acceptable terms, or at all, and its failure to raise capital when needed could limit its ability to continue its operations.
| |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation.
The consolidated financial statements include the accounts of Transgenomic, Inc. and its wholly owned subsidiary. All inter-company balances and transactions have been eliminated in consolidation.
Risks and Uncertainties.
Certain risks and uncertainties are inherent in the Company’s 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.
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 require considerable judgment by management. The key estimates included in the consolidated financial statements include stock option valuations, goodwill and intangible valuations, accounts receivable and inventory valuations, warrant valuations and contractual allowances. Actual results could differ from the estimates and assumptions used in preparing these consolidated financial statements.
Basis of Presentation.
On January 15, 2014, the Board of Directors of the Company approved a reverse split of the Company’s common stock, par value $0.01, at a ratio of one-for twelve. This reverse stock split became effective on January 27, 2014 and, unless otherwise indicated, all share amounts, per share data, share prices, exercise prices and conversion rates set forth in these notes and the accompanying consolidated financial statements have, where applicable, been adjusted retroactively to reflect this reverse stock split.
Reclassifications.
Certain prior period amounts of selling, general and administrative expenses have been reclassified to cost of goods sold in order to conform to the current period presentation. These reclassifications had no effect on previously reported net earnings. The amounts reclassified were $1.7 million and $1.9 million for the years ended December 31, 2013 and 2012, respectively.
Fair Value.
Unless otherwise specified, book value approximates fair market value. The Company’s Level 1 financial instruments include cash and cash equivalents. The Company’s Level 3 financial instruments include the common stock warrant liability, preferred stock warrant liability and conversion feature, and debt. Due to its variable interest component, debt approximates fair value. The common stock warrant liability and Series A Convertible Preferred Stock (“Series A Preferred Stock”) warrant liability and conversion feature are recorded at fair value. See Footnote 13 “Fair Value”.
Cash and Cash Equivalents.
Cash and cash equivalents include cash and investments with original maturities at the date of acquisition of three months or less. Such investments presently consist of temporary overnight investments.
Concentrations of Cash.
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
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 December 31, 2014.
Accounts Receivable.
The following is a summary of activity for the allowance for doubtful accounts during the years ended December 31, 2014, 2013 and 2012:
|
| | | | | | | | | | | | | | | |
| Dollars in Thousands |
| Beginning Balance | | Provision | | Write Offs | | Ending Balance |
Twelve months ended December 31, 2014 | $ | 3,838 |
| | $ | 6,119 |
| | $ | (2,010 | ) | | $ | 7,947 |
|
Twelve months ended December 31, 2013 | $ | 2,171 |
| | $ | 5,548 |
| | $ | (3,881 | ) | | $ | 3,838 |
|
Twelve months ended December 31, 2012 | $ | 1,088 |
| | $ | 2,468 |
| | $ | (1,385 | ) | | $ | 2,171 |
|
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 can be greater than 90 days. Accounts receivable are carried at original invoice amount and shown net of allowance for doubtful accounts and contractual allowances. The estimate made for doubtful accounts is based on a review of all outstanding amounts on a quarterly basis. The estimate for contractual allowances is based on contractual terms or historical reimbursement rates and is recorded when revenue is recorded. We determine the allowance for doubtful accounts and contractual allowances by regularly evaluating individual payor receivables and considering a payor’s financial condition, credit history, reimbursement rates and current economic conditions. Accounts receivable are written off when deemed uncollectible and after all collection efforts have been exhausted. Recoveries of accounts receivable previously written off are recorded as a reduction in bad debt expense when received.
Inventories.
Inventories are stated at the lower of cost or market net of allowance for obsolete and slow moving inventory. Cost is computed using standard costs for finished goods and average or latest actual cost for raw materials and work in process, which approximates the first-in, first-out (FIFO) method. We write down slow-moving and obsolete inventory by the difference between the value of the inventory and our estimate of the reduced value based on potential future uses, the likelihood that overstocked inventory will be sold and the expected selling prices of the inventory. If our ability to realize value on slow-moving or obsolete inventory is less favorable than assumed, additional write-downs of the inventory may be required.
The following is a summary of activity for the allowance for obsolete inventory during the years ended December 31, 2014, 2013 and 2012:
|
| | | | | | | | | | | | | | | |
| Dollars in Thousands |
| Beginning Balance | | Provision | | Write Offs | | Ending Balance |
Twelve months ended December 31, 2014 | $ | 799 |
| | $ | 61 |
| | $ | (232 | ) | | $ | 628 |
|
Twelve months ended December 31, 2013 | $ | 616 |
| | $ | 217 |
| | $ | (34 | ) | | $ | 799 |
|
Twelve months ended December 31, 2012 | $ | 511 |
| | $ | 129 |
| | $ | (24 | ) | | $ | 616 |
|
We determine the allowance for obsolescence by evaluating inventory quarterly for items deemed to be slow moving or obsolete.
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:
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
|
| |
Leasehold improvements | 1 to 10 years |
Furniture and fixtures | 3 to 7 years |
Production equipment | 3 to 7 years |
Computer equipment | 3 to 7 years |
Research and development equipment | 2 to 7 years |
Depreciation expense related to property and equipment during the years ended December 31, 2014, 2013 and 2012 was $0.5 million, $0.6 million and $0.7 million, respectively. Included in depreciation for each of the years ended December 31, 2014, 2013 and 2012 was $0.3 million related to equipment acquired under capital leases.
Goodwill.
Goodwill is tested for impairment annually utilizing a combination of income and market approaches. The income approach applies a discounted cash flow methodology to the Company’s future period projections and the more heavily weighted market approach uses market available information on the Company. We perform this impairment analysis during the fourth quarter of each year or when a significant event occurs that may impact goodwill. Impairment may occur when the carrying value of the reporting unit exceeds its fair value. If the carrying value of the reporting unit exceeds its fair value, the fair value of all identifiable tangible and intangible assets and liabilities is determined as part of a hypothetical purchase price allocation to determine the amount of goodwill impairment. No impairment of goodwill has occurred to date.
Intangibles.
Intangible assets include intellectual property, patents and acquired products. At December 31, 2013, the Company revised its estimate of useful lives on certain intangible assets, which caused decreased amortization expense in 2014 by $0.4 million.
1. Intellectual Property. Initial costs paid to license intellectual property from independent third parties are capitalized and amortized using the straight-line method over the license period. Ongoing royalties related to such licenses are expensed as incurred.
2. Patents. We capitalize legal costs, filing fees and other expenses associated with obtaining patents on new discoveries and amortize these costs using the straight-line method over the shorter of the legal life of the patent or its economic life beginning on the date the patent is issued.
3. Acquired Products. As part of the FAMILION acquisition and acquisition of certain intangible assets from Axial, the Company acquired technology, in process technology, trademarks/tradenames, customer relationships, covenants not to compete and third party relationships. These costs will be amortized pursuant to the straight-line method over their estimated economic life of seven to ten years. See Footnote 5 “Intangible Assets and Other Assets”.
We review our amortizable long lived assets for impairment whenever events indicate that the carrying amount of the asset (group) may not be recoverable. An impairment loss may be needed if the sum of the future undiscounted cash flows is less than the carrying amount of the asset (group). The amount of the loss would be determined by comparing the fair market value of the asset to the carrying amount of the asset (group). No loss has been recorded during the years ended December 31, 2014, 2013 or 2012.
Common Stock Warrants.
Our issued and outstanding 2012 warrants to purchase common stock do not qualify to be treated as equity and accordingly, are recorded as a liability (“Common Stock Warrant Liability”). The Common Stock Warrant Liability was initially recorded at fair value using a Monte Carlo simulation model. We are required to present these instruments at fair value at each reporting date and any changes in fair values are recorded as an adjustment to earnings. The Common Stock Warrant Liability is considered a Level 3 financial instrument. See Footnote 13 - “Fair Value”.
Stock Based Compensation.
All stock-based awards 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 December 31, 2014 had vesting periods of one or three years from the date of grant. None of the stock options outstanding at December 31, 2014 are subject to performance or market-based vesting conditions.
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
We measure and recognize compensation expense for all stock-based awards made to employees and directors, including stock options. Compensation expense, net of estimated forfeitures, is based on the calculated fair value of the awards as measured at the grant date and is expensed over the service period of the awards.
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. Our policy is to record interest and penalties directly related to income taxes as income tax expense in the Consolidated Statements of Operations.
Net Sales Recognition.
Revenue is realized and earned when all of the following criteria are met:
Persuasive evidence of an arrangement exists;
Delivery has occurred or services have been rendered;
The seller’s price to the buyer is fixed or determinable; and
Collectability is reasonably assured.
In Laboratory Services, net sales from Patient Testing laboratories are recognized on an individual test basis and take place when the test report is completed, reviewed and sent to the client less the reserve for insurance, Medicare and Medicaid contractual adjustments. There are no deferred net sales associated with our Patient Testing services. Adjustments to the allowances, based on actual receipts from third party payers, are reflected in the estimated contractual allowance applied prospectively. In our Biomarker Identification laboratory, we perform services on a project by project basis. When we receive payment in advance, we recognize revenue when we deliver the service. These projects typically do not extend beyond one year. At December 31, 2014 and 2013, deferred net sales associated with pharmacogenomics research projects, included in the balance sheet in deferred revenue, was $0.3 million and $0.2 million, respectively.
Net sales of Genetic Assays and Platforms products are recognized in accordance with the terms of the sales arrangement. Such recognition is based on receipt of an unconditional customer order and transfer of title and risk of ownership to the customer, typically upon shipment of the product under a purchase order. Our sales terms do not provide for the right of return unless the product is damaged or defective. Net sales from certain services associated with the analytical instruments, to be performed subsequent to shipment of the products, is deferred and recognized when the services are provided. Such services, mainly limited to installation and training services that are not essential to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument. We also enter into various service contracts that cover installed instruments. These contracts cover specific time periods and net sales associated with these contracts are deferred and recognized ratably over the service period. At December 31, 2014 and 2013, deferred net sales, mainly associated with our service contracts, included in the balance sheet in deferred revenue was approximately $0.7 million and $0.9 million, respectively.
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.
Our foreign subsidiary uses the local currency of the country in which it is located as its functional currency. Its assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. A translation loss of $0.1 million is reported in other comprehensive income on the accompanying consolidated balance sheet as of both December 31, 2014 and 2013. Revenues and expenses are translated at the average rates during the period. For transactions that are not denominated in the functional currency, we recognized a foreign currency translation loss of less than $0.1 million for the year ended December 31, 2014, foreign currency translation income of less than $0.1 million for the year ended December 31, 2013 and a foreign currency translation loss of less than $0.1 million for the year ended December 31, 2012.
Earnings Per Share.
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
Basic earnings per share is calculated based on the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share includes 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, as long as the effect is not anti-dilutive. Options, warrants and conversion rights pertaining to 6,613,572, 3,785,709 and 2,471,670 shares of our common stock have been excluded from the computation of diluted earnings per share at December 31, 2014, 2013 and 2012, respectively. The options, warrants and conversion rights that were exercisable in 2014, 2013 and 2012 were not included because the effect would be anti-dilutive due to the net loss.
Recently Issued Accounting Pronouncements.
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for reporting a discontinued operation. Under this standard, a disposal of part of an organization that has a major effect on its operations and financial results is a discontinued operation. This guidance is effective prospectively for us beginning January 1, 2015 with earlier application permitted, but only for disposals (or classifications as held for sale) that have not been reported previously. When adopted, we do not expect that this guidance will have a material impact on our financial condition, results of operations or cash flows.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to a customer. This ASU will replace most existing revenue recognition guidance in generally accepted accounting principles in the U.S. when it becomes effective on January 1, 2017. Early application is not permitted, but the standard permits the use of either the retrospective or cumulative effect transition method. We have not selected a transition method and are currently evaluating the impact this guidance will have on our financial condition, results of operations and cash flows.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40). The new guidance addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is permitted. We do not expect to early adopt this guidance and do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.
3. SALE OF PRODUCT LINE
On July 1, 2014, we entered into a Surveyor Kit Patent, Technology, and Inventory Purchase Agreement (the “Purchase Agreement”) with Integrated DNA Technologies, Inc. (“IDT”). Pursuant to the Purchase Agreement, on July 1, 2014, we transferred and sold to IDT all of our right, title and interest in and to our Surveyor Kits product line and related technology, including, without limitation, all patents, patent applications, licenses, technology, know-how and trademarks relating to the Surveyor Kits product line technology and our inventory of Surveyor products (collectively, the “Surveyor Technology”).
In consideration for the purchase of the Surveyor Technology, IDT paid us an initial payment of $3.65 million. IDT will pay us an additional amount equal to an aggregate of $600,000 in four equal installments, the first of which was required to be made by, and was received on, October 1, 2014, and the last of which must be made by July 1, 2015. Additionally, if net sales of the Surveyor Kits by IDT exceed a certain threshold during the period beginning on October 1, 2014 and ending on September 30, 2015, IDT will be obligated to pay us an additional earn-out payment equal to a percentage of the net sales exceeding the threshold that is in the middle double digits.
Pursuant to the Purchase Agreement, IDT granted us a worldwide, irrevocable, exclusive, fully paid-up, royalty-free, transferable right and license to the Surveyor Technology for clinical uses, including, without limitation, the provision of diagnostic and pharmaceutical services and any other clinical uses in connection with our Laboratory Services segment.
For the twelve months ended December 31, 2014, we recorded a gain on the sale of the Surveyor Technology of approximately $4.1 million, based on the net proceeds in excess of the total divested net assets.
4. INVENTORIES
Inventories (net of allowance for slow moving and obsolescence) consisted of the following:
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
|
| | | | | | | |
| Dollars in Thousands |
| December 31, 2014 | | December 31, 2013 |
Finished goods | $ | 2,139 |
| | $ | 2,978 |
|
Raw materials and work in process | 1,302 |
| | 1,567 |
|
Demonstration inventory | 192 |
| | 211 |
|
| $ | 3,633 |
| | $ | 4,756 |
|
Less allowances | (628 | ) | | (799 | ) |
Total | $ | 3,005 |
| | $ | 3,957 |
|
5. INTANGIBLE ASSETS AND OTHER ASSETS
Long-lived intangible assets and other assets consisted of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Dollars in Thousands |
| December 31, 2014 | | December 31, 2013 |
| Cost | | Accumulated Amortization | | Net Book Value | | Cost | | Accumulated Amortization | | Net Book Value |
Acquired technology | $ | 9,009 |
| | $ | 3,995 |
| | $ | 5,014 |
| | $ | 9,009 |
| | $ | 3,175 |
| | $ | 5,834 |
|
Assay royalties | 1,434 |
| | 819 |
| | 615 |
| | 1,434 |
| | 614 |
| | 820 |
|
Third party payor relationships | 367 |
| | 98 |
| | 269 |
| | 367 |
| | 73 |
| | 294 |
|
Tradenames and trademarks | 824 |
| | 351 |
| | 473 |
| | 824 |
| | 233 |
| | 591 |
|
Customer relationships | 652 |
| | 98 |
| | 554 |
| | 652 |
| | 54 |
| | 598 |
|
Covenants not to compete | 184 |
| | 138 |
| | 46 |
| | 184 |
| | 77 |
| | 107 |
|
Patents | 1,198 |
| | 385 |
| | 813 |
| | 1,153 |
| | 336 |
| | 817 |
|
Intellectual property | 266 |
| | 86 |
| | 180 |
| | 170 |
| | 36 |
| | 134 |
|
| $ | 13,934 |
| | $ | 5,970 |
| | $ | 7,964 |
| | $ | 13,793 |
| | $ | 4,598 |
| | $ | 9,195 |
|
|
| |
| |
| Estimated Useful Life |
Acquired technology | 7 – 10 years |
Assay royalties | 7 years |
Third party payor relationships | 15 years |
Tradenames and trademarks | 7 years |
Customer relationships | 15 years |
Covenants not to compete | 3 years |
Patents | Life of the patent |
Intellectual property | 7 years |
Amortization expense for intangible assets was $1.4 million, $1.8 million and $1.4 million during the years ended December 31, 2014, 2013 and 2012. At December 31, 2013, the Company revised its estimate of useful lives on certain intangible assets which caused amortization expense in 2014 to decrease by $0.4 million. Amortization expense for intangible assets for each of the five succeeding fiscal years is expected to be $1.4 million, $1.3 million, $1.3 million, $1.0 million and $0.9 million for the years ended December 31, 2015, 2016, 2017, 2018 and 2019, respectively.
Other assets include U.S. security deposits and deferred tax assets, net of applicable valuation allowances.
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
6. DEBT
|
| | | | | | | | |
| | Dollars in Thousands |
| | Year Ended December 31, |
| | 2014 | | 2013 |
Revolving Line (1) | | $ | 3,000 |
| | $ | 2,560 |
|
Term Loan (2) | | 4,087 |
| | 4,000 |
|
Convertible Promissory Note (3) | | 750 |
| | — |
|
Total debt | | 7,837 |
| | 6,560 |
|
Current portion of long term debt | | (462 | ) | | (242 | ) |
Long term debt, net of current maturities | | $ | 7,375 |
| | $ | 6,318 |
|
Revolving Line and Term Loan.
On March 13, 2013 (the “Effective Date”), we entered into a Loan and Security Agreement with affiliates of Third Security, LLC (the “Lenders”) for (a) a revolving line of credit (the “Revolving Line”) with borrowing availability of up to $4.0 million, subject to reduction based on our eligible accounts receivable, and (b) a term loan (the “Term Loan”) of $4.0 million (the “Loan Agreement”). Proceeds were used to pay off the PGxHealth note payable and for general corporate and working capital purposes.
On August 2, 2013, we entered into an amendment to the Loan Agreement (the “Amendment”). The Amendment, which became effective as of June 30, 2013, reduces our future minimum revenue covenants under the Loan Agreement and modifies the interest rates applicable to the amounts advanced under the Revolving Line.
On November 14, 2013, we entered into a second amendment to the Loan Agreement (the “Second Amendment”). The Second Amendment, which is effective as of October 31, 2013, reduces our future minimum revenue covenant under the Loan Agreement.
On January 27, 2014, we entered into a third amendment to the Loan Agreement (the “Third Amendment”). Pursuant to the Third Amendment, the Lenders agreed to waive certain events of default under the Loan Agreement, and the parties amended certain provisions of the Loan Agreement, including the minimum liquidity ratio that we must maintain during the term of the Loan Agreement.
On March 3, 2014, we entered into a fourth amendment to the Loan Agreement (the “Fourth Amendment”). The Fourth Amendment provides that we will not be required to make any principal or interest payments under the Term Loan for the period from March 1, 2014 through March 31, 2015. Accordingly, pursuant to the Loan Agreement as amended by the Fourth Amendment, the next principal and interest payment under the Term Loan will be due on April 1, 2015. The interest on the debt that is being deferred, and not paid, is being capitalized as part of the Term Loan. As of December 31, 2014, the amount of interest that has been capitalized is $0.3 million.
On October 22, 2014, we entered into a fifth amendment to the Loan Agreement (the “Fifth Amendment”). Pursuant to the Fifth Amendment, among other things, reduced the minimum liquidity and revenue covenants under the Loan Agreement. The Fifth Amendment also reduced the aggregate amount that we may borrow under the Revolving Line from $4.0 million to $3.0 million.
On April 1, 2015, we entered into a sixth amendment to the Loan Agreement (the “Sixth Amendment”). The Sixth Amendment provides, among other things, that (i) the Lenders will waive specified events of default under the terms of the Loan Agreement, (ii) commencing as of April 1, 2015, we will make monthly interest payments to the Lenders, (iii) we will not be obligated to make monthly payments of principal to the Lenders until April 1, 2016, (iv) we will be required to make an initial prepayment of a portion of the loan balance in the amount of approximately $149,000 on April 1, 2015 and one or more additional prepayments to the Lenders under the Loan Agreement upon the occurrence of certain events, and (v) we will not be required to comply with the minimum liquidity ratio under the terms of the Loan Agreement until the earliest to occur of a specified event or March 31, 2016. The Sixth Amendment also extends the time period in which we must provide certain reports and statements to the Lenders and amends the circumstances pursuant to which we may engage in certain sales or transfers of its business or property without the consent of the Lenders.
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
Convertible Promissory Note.
On December 31, 2014, we entered into an Unsecured Convertible Promissory Note Purchase Agreement with an accredited investor (the “Investor”) pursuant to which we agreed to issue and sell to the Investor in a private placement an unsecured convertible promissory note (the “Note”). We issued the Note in the aggregate principal amount of $750,000 to the Investor on December 31, 2014. The Note accrues interest at a rate of 6% per year and matures on December 31, 2016. Under the Note, the outstanding principal and unpaid interest accrued under the Note is convertible into shares of common stock of the Company as follows: (i) commencing upon the date of issuance of the Note (but no earlier than January 1, 2015), the Investor is entitled to convert, on a one-time basis, up to 50% of the outstanding principal and unpaid interest accrued under the Note, into shares of common stock of the Company at a conversion price equal to the lesser of (a) the average closing price of the common stock on the principal securities exchange or securities market on which the Company’s common stock is then traded (the “Market”) for the 20 consecutive trading days immediately preceding the date of conversion, and (b) $2.20 (subject to adjustment for stock splits, stock dividends, other distributions, recapitalizations and the like); and (ii) commencing February 15, 2015, the Investor is entitled to convert, on a one-time basis, any or all of the remaining outstanding principal and unpaid interest accrued under the Note, into shares of common stock of the Company at a conversion price equal to 85% of the average closing price of the Common Stock on the Market for the 15 consecutive trading days immediately preceding the date of conversion.
| |
(1) | Revolving Line of Credit.Amounts advanced under the Revolving Line bear interest at an annual rate equal to the greater of (a) 4.25% or (b) the Wall Street Journal prime rate plus 1%. Interest is payable on a monthly basis, with the balance payable at the maturity of the Revolving Line. Under the Amendment, amounts advanced under the Revolving Line bear interest at an annual rate equal to the greater of (x) 6.25% or (y) the Wall Street Journal prime rate plus 3%. The current interest rate is 6.25%. Under the Loan Agreement, we paid the Lenders an upfront fee of $20,000, and will pay the Lenders an additional commitment fee of $20,000 on each one year anniversary of the Effective Date during the term of the Revolving Line. In addition, a fee of 0.5% per annum is payable quarterly on the unused portion of the Revolving Line. The Revolving Line matures on September 1, 2016.
|
| |
(2) | Term Loan. We received $4.0 million under the Term Loan on the Effective Date. Pursuant to the terms of the Loan Agreement, as amended by the Sixth Amendment, we are required to make monthly payments of interest to the Lenders commencing on April 1, 2015. The current interest rate is 9.1%.
|
We paid the Lenders an upfront fee of $40,000 for the Term Loan, and will pay the Lenders an additional final payment of $120,000 at maturity or prepayment of the Term Loan. In addition, if we repay the Term Loan prior to maturity, we will pay the Lenders a prepayment penalty of 2.5% of the total outstanding balance under the Term Loan if the prepayment occurs between one and two years after the Effective Date, and 1% of the total outstanding balance under the Term Loan if the prepayment occurs thereafter.
Additional Terms
The Loan Agreement contains affirmative and negative covenants. Under the Loan Agreement, we are required to maintain a minimum liquidity ratio and achieve a minimum amount of revenue, and we also agreed not to (i) pledge or otherwise encumber our assets other than to the Lenders, (ii) enter into additional borrowings or guarantees, (iii) repurchase our capital stock, or (iv) enter into certain mergers or acquisitions without the Lenders’ consent. Additionally, the Loan Agreement contains a subjective acceleration clause at the discretion of the Lenders. As of December 31, 2014, the Company was in compliance with all financial covenants of the Loan Agreement, as amended by the Fifth Amendment.
To secure the repayment of any amounts borrowed under the Revolving Line and the Term Loan, we granted the Lenders a security interest in all of our assets. The occurrence of an event of default under the Loan Agreement could result in the acceleration of our obligations under the Loan Agreement and would increase the applicable interest rate under the Revolving Line or Term Loan (or both) by 5%, and permit the Lenders to exercise remedies with respect to the collateral under the Loan Agreement.
| |
(3) | Convertible Promissory Note. The Note accrues interest at a rate of 6% per year and matures on December 31, 2016. On January 1, 2015, $375,000 of the December 31, 2014 balance was converted into 198,708 shares of Company common stock in accordance with the terms of the Note.
|
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
The aggregate minimum principal maturities of the debt for the following fiscal years are as follows (dollars in thousands):
|
| | | |
| |
2015 | $ | 462 |
|
2016 | 7,375 |
|
Total | $ | 7,837 |
|
7. CAPITAL LEASES
The following is an analysis of the property acquired under capital leases.
|
| | | | | | | |
| Dollars in Thousands |
| Asset Balances at |
Classes of Property | December 31, 2014 | | December 31, 2013 |
Equipment | $ | 1,514 |
| | $ | 1,514 |
|
Less: Accumulated amortization | (997 | ) | | (721 | ) |
Total | $ | 517 |
| | $ | 793 |
|
The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of December 31, 2014.
Year ending December 31:
|
| | | |
| Dollars in Thousands |
2015 | 35 |
|
2016 | 3 |
|
2017 | 1 |
|
Total minimum lease payments | $ | 39 |
|
Less: Amount representing interest | (2 | ) |
Present value of net minimum lease payments | $ | 37 |
|
The short term portion of our capital leases is included in accrued expenses and the long term portion is included in other long-term liabilities on the Balance Sheet. Included in depreciation for the years ended December 31, 2014, 2013 and 2012 was $0.3 million, $0.3 million and less than $0.3 million, respectively, related to equipment acquired under capital leases.
8. 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.
Rent expense under all operating leases was $1.0 million in each of 2014, 2013 and 2012. We lease certain equipment, vehicles and operating facilities under non-cancellable operating leases , some of which have escalation clauses that expire on various dates through 2022. Future minimum lease payments under non-cancellable operating leases are as follows (in thousands):
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
|
| | | |
2015 | $ | 1,032 |
|
2016 | 927 |
|
2017 | 763 |
|
2018 | 485 |
|
2019 | 235 |
|
thereafter | 628 |
|
Total | $ | 4,070 |
|
At December 31, 2014, firm commitments to vendors totaled $0.7 million.
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
9. INCOME TAXES
The Company’s provision for income taxes for the years ended December 31, 2014, 2013 and 2012 relates to income taxes in states, foreign countries and other local jurisdictions and differs from the amounts determined by applying the statutory Federal income tax rate to loss before income taxes for the following reasons:
|
| | | | | | | | | | | | |
| | Dollars in Thousands |
| | 2014 | | 2013 | | 2012 |
Benefit at federal rate | | $ | (4,562 | ) | | $ | (5,454 | ) | | $ | (2,781 | ) |
Increase (decrease) resulting from: | | | | | | |
State income taxes—net of federal benefit | | (360 | ) | | (518 | ) | | 2 |
|
Foreign subsidiary tax rate difference | | 114 |
| | (3 | ) | | (27 | ) |
Tax contingency | | (144 | ) | | 23 |
| | 22 |
|
Expiring net operating loss carryforwards | | — |
| | — |
| | 1,472 |
|
Earnings repatriation | | — |
| | — |
| | 582 |
|
Miscellaneous permanent differences | | 227 |
| | 155 |
| | 284 |
|
Liability warrants | | (154 | ) | | (102 | ) | | (748 | ) |
Tax credits | | — |
| | — |
| | 215 |
|
State, net operating loss expiration/true-up | | (327 | ) | | 1,179 |
| | — |
|
Other—net | | 44 |
| | (80 | ) | | 15 |
|
Valuation allowance | | 5,686 |
| | 4,746 |
| | 1,110 |
|
Total income tax (benefit) expense | | $ | 524 |
| | $ | (54 | ) | | $ | 146 |
|
|
| | | | | | | | | | | | |
| | Dollars in Thousands |
| | 2014 | | 2013 | | 2012 |
Federal: | | | | | | |
Current | | $ | — |
| | $ | — |
| | $ | — |
|
Deferred | | 608 |
| | — |
| | — |
|
Total Federal | | $ | 608 |
| | $ | — |
| | $ | — |
|
State: | | | | | | |
Current | | $ | — |
| | $ | — |
| | $ | 3 |
|
Deferred | | 23 |
| | — |
| | — |
|
Total State | | $ | 23 |
| | $ | — |
| | $ | 3 |
|
Foreign: | | | | | | |
Current | | $ | (156 | ) | | $ | 20 |
| | $ | 46 |
|
Deferred | | 49 |
| | (74 | ) | | 97 |
|
Total Foreign | | $ | (107 | ) | | $ | (54 | ) | | $ | 143 |
|
Total Tax Provision | | $ | 524 |
| | $ | (54 | ) | | $ | 146 |
|
The Company’s deferred income tax asset at December 31, 2014 and 2013 is comprised of the following temporary differences:
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
|
| | | | | | | | |
| | Dollars in Thousands |
| | 2014 | | 2013 |
Deferred Tax Asset: | | | | |
Net operating loss carryforward | | $ | 46,231 |
| | $ | 42,950 |
|
Research and development credit carryforwards | | 918 |
| | 951 |
|
Deferred revenue | | 207 |
| | 174 |
|
Inventory | | 200 |
| | 275 |
|
Allowance for bad debt | | 2,738 |
| | 1,279 |
|
Other | | 1,545 |
| | 718 |
|
| | 51,839 |
| | 46,347 |
|
Less valuation allowance | | (51,751 | ) | | (46,088 | ) |
Deferred Tax Asset | | $ | 88 |
| | $ | 259 |
|
Deferred Tax Liability: | | | | |
Goodwill | | $ | 631 |
| | $ | — |
|
Foreign earnings | | $ | — |
| | $ | 25 |
|
Property and equipment | | 88 |
| | 186 |
|
Deferred Tax Liability | | $ | 719 |
| | $ | 211 |
|
Net Deferred Asset (Liability) | | $ | (631 | ) | | $ | 48 |
|
At December 31, 2014, we had total unused federal tax net operating loss carryforwards of $128.9 million. The expiration dates are as follows (amounts in thousands):
|
| | | |
| |
2018 | $ | 1,838 |
|
2019 | 8,181 |
|
2020 | 9,662 |
|
2021 | 8,228 |
|
2022 | 16,862 |
|
2023 | 16,173 |
|
2024 | 17,390 |
|
2025 | 8,153 |
|
2026 | 6,792 |
|
2027 | 3,238 |
|
2028 | 1,272 |
|
2029 | 591 |
|
2031 | 2,784 |
|
2032 | 8,358 |
|
2033 | 11,748 |
|
2034 | 7,662 |
|
Total | $ | 128,932 |
|
Of these federal net operating loss carryforwards, $1.2 million were obtained in the acquisition of Annovis, Inc. and may be subject to certain restrictions. Remaining net operating loss carryforwards could be subject to limitations under section 382 of the Internal Revenue Code of 1986, as amended. At December 31, 2014, we had unused state tax net operating loss carryforwards of approximately $46.8 million that expire at various times beginning in 2015. At December 31, 2014, we had unused research and development credit carryforwards of $0.9 million that expire at various times between 2018 and 2028. At December 31, 2014, we had unused foreign net operating loss carryforwards relating to operations in the United Kingdom of approximately $0.9 million with an unlimited carryforward period. A valuation allowance has been provided for the remaining deferred tax assets, due to the cumulative losses in recent years and an inability to utilize any additional losses as carrybacks. We will continue to assess the
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
recoverability of deferred tax assets and the related valuation allowance. To the extent we begin to generate income in future years and it is determined that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time.
Our liability for uncertain tax positions, which was included in other long term liabilities, was $0.1 million and $0.3 million as of December 31, 2014 and 2013, respectively. We recorded less than $0.1 million of additional uncertain tax positions during each of the years ended 2014 and 2013. We recorded $0.2 million and zero for reductions in uncertain tax positions relating to statute of limitations lapse for the years ended 2014 and 2013, respectively. We had no material interest or penalties during fiscal 2014 or fiscal 2013, and we do not anticipate any such items during the next twelve months. Our policy is to record interest and penalties directly related to income taxes as income tax expense in the Consolidated Statements of Operations. 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 2011 through 2014. We have state income tax returns subject to examination primarily for tax years 2011 through 2014. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service, state or foreign tax authorities to the extent utilized in a future period. 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 2011 through 2014.
10. EMPLOYEE BENEFIT PLAN
We maintain an employee 401(k) retirement savings plan that allows for voluntary contributions into designated investment funds by eligible employees. Effective October 1, 2010, Transgenomic discontinued matching employee 401(k) contributions. Beginning January 1, 2012, we reinstated matching employee 401(k) contributions. We currently match the employee’s contributions at the rate of 100% on the first 3% of contributions and 50% on the next 2% 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 $0.4 million, $0.4 million and $0.3 million for the years ended December 31, 2014, 2013 and 2012, respectively.
11. STOCKHOLDERS’ EQUITY
Common Stock.
Pursuant to our Third Amended and Restated Certificate of Incorporation, as amended, we currently have 150,000,000 shares of common stock authorized for issuance.
On February 2, 2012, we entered into definitive agreements with institutional and other accredited investors and raised approximately $22.0 million in a private placement financing (the “Private Placement”), which includes an aggregate of $3.0 million in convertible notes (the “Convertible Notes”) issued in December 2011 to entities affiliated with Third Security, LLC (the “Third Security Investors”), a related party, that automatically convert into shares of our common stock and warrants to purchase such common stock on the same terms as all investors in the Private Placement. Pursuant to the applicable purchase agreement, we issued an aggregate of 1,583,333 shares of our common stock at a price per share of $12.00, as well as five-year warrants to purchase up to an aggregate of 823,333 shares of common stock with an exercise price of $15.00 per share. In connection with the conversion of the Convertible Notes, the Third Security Investors received an aggregate of 250,000 shares of common stock and 125,000 warrants on the same terms as all investors in the Private Placement. Craig-Hallum Capital Group LLC served as the sole placement agent for the offering. In consideration for services rendered as the placement agent in the offering, we agreed to (i) pay to the placement agent cash commissions equal to $1,330,000, or 7.0% of the gross proceeds received in the offering, (ii) issue to the placement agent a five-year warrant to purchase up to 31,666 shares of our common stock (representing 2% of the shares sold in the Private Placement) with an exercise price of $15.00 per share and other terms that are the same as the terms of the warrants issued in the Private Placement; and (iii) reimburse the placement agent for reasonable out-of-pocket expenses, including fees paid to the placement agent’s legal counsel, incurred in connection with the offering, which reimbursable expenses were not to exceed $125,000. The costs incurred to complete the Private Placement were recorded as a reduction in equity in the amount of $1.5 million. Net proceeds from this offering have been used for general corporate and working capital purposes, primarily to accelerate development of several of our key initiatives.
On January 24, 2013, we entered into a Securities Purchase Agreement with certain institutional and other accredited investors pursuant to which we: (i) sold to the investors an aggregate of 1,383,333 shares of our common stock at a price per share of $6.00 for aggregate gross proceeds of approximately $8.3 million; and (ii) issued to the investors warrants to purchase up to an aggregate of 691,656 shares of our common stock with
an exercise pricethe SEC. We believe all Section 16 reports were filed in a timely manner during 2014, except for one Form 4 to report the grant of
$9.00 per share (the “Offering”)a stock option made on March 13, 2014 that was inadvertently filed late by Dr. Luther.Code of Business Conduct and Ethics
Our Board has adopted a code of ethical conduct that applies to our principal executive officer, principal financial officer and senior financial management. This code of ethical conduct is embodied within our Code of Business Conduct and Ethics, which applies to all persons associated with our Company, including our directors, officers and employees (including our principal executive officer, principal financial officer, principal accounting officer and controller). The warrants
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013Code of Business Conduct and 2012
may be exercised, in whole or in part, at any time from January 30, 2013 until January 30, 2018 and contain both cash and “cashless exercise” features. The Third Security Investors purchased an aggregate of 500,000 shares of common stock and warrants to purchase an aggregate of 250,000 shares of common stockEthics is available in the Offering on the same terms as the other investors. We used the net proceeds from the Offering for general corporate and working capital purposes.
In connection with the Offering, we entered into a registration rights agreement with the investors (the “Registration Rights Agreement”). The Registration Rights Agreement required that we file with the Securities and Exchange Commission (the “SEC”) a registration statement to register for resale the shares of common stock sold and the shares of common stock issuable upon exercise of the warrants by March 16, 2013. The registration statement was filed with the SEC on March 15, 2013 and was declared effective by the SEC on March 29, 2013.
The January 2013 common stock transaction required the repricing and issuance of additional common stock warrants to the holders of warrants issued in the February 2012 common stock and warrant sale. The exercise price of the warrants decreased from $15.00 per share to $12.96 per share and the number of shares issuable upon exercise of the warrants increased from 948,333 to 1,097,600.
On October 22, 2014, we entered into a Securities Purchase Agreement with certain accredited investors (the “October 2014 Investors”), pursuant to which we, in a private placement, issued and sold to the October 2014 Investors (the “2014 Private Placement”) an aggregate of 730,776 sharesInvestor Relations section of our
common stockwebsite at
a price per sharewww.transgenomic.com. In order to satisfy our disclosure requirements under Item 5.05 of
$3.25 for an aggregate purchase priceForm 8-K, we will disclose amendments to, or waivers of,
approximately $2.375 million, and warrants to purchase up to an aggregate of 365,388 sharescertain provisions of our
common stock with an initial exercise priceCode of
$4.00 per share that are exercisable forBusiness Conduct and Ethics relating to our chief executive officer, chief financial officer, chief accounting officer, controller or persons performing similar functions on our website promptly following the
period from April 22, 2015 through April 22, 2020. In connection with the 2014 Private Placement, we also issued a warrant to purchase up to an aggregateadoption of
9,230 sharesany such amendment or waiver.Corporate Governance
Committees of our common stock to one advisor. The warrants issued in the 2014 Private Placement include both cash and “cashless exercise” features.
The 2014 Private Placement required the repricing and issuance of additional common stock warrants to the holders of warrants issued in the February 2012 common stock and warrant sale. The exercise price of the warrants decreased from $11.73 per share to $10.86 per share and the number of shares issuable upon exercise of the warrants increased from 1,212,665 to 1,309,785.
On December 31, 2014, Transgenomic entered into an Unsecured Convertible Promissory Note Purchase Agreement (the “Note Purchase Agreement”) with an accredited investor (the “Note Investor”) pursuant to which we agreed to issue and sell to the Note Investor in a private placement (the “Note Private Placement”) an unsecured convertible promissory note (the “Note”) in the aggregate principal amount of $750,000. The Note accrues interest at a rate of 6% per year and matures on December 31, 2016. Under the Note, the outstanding principal and unpaid interest accrued under the Note is convertible into shares of our common stock as follows: (i) commencing upon the date of issuance of the Note (but no earlier than January 1, 2015), the Note Investor is entitled to convert, on a one-time basis, up to 50% of the outstanding principal and unpaid interest accrued under the Note, into shares of our common stock at a conversion price equal to the lesser of (a) the average closing price of the our common stock on the principal securities exchange or securities market on which our common stock is then traded (the “Market”) for the 20 consecutive trading days immediately preceding the date of conversion, and (b) $2.20 (subject to adjustment for stock splits, stock dividends, other distributions, recapitalizations and the like); and (ii) commencing February 15, 2015, the Note Investor is entitled to convert, on a one-time basis, any or all of the remaining outstanding principal and unpaid interest accrued under the Note, into shares of our common stock at a conversion price equal to 85% of the average closing price of our common stock on the Market for the 15 consecutive trading days immediately preceding the date of conversion.
Pursuant to the terms of the Note Purchase Agreement, we are subject to certain registration obligations and we may be required to effect one or more other registrations to register for resale the shares of our common stock issued or issuable under the Note in connection with certain “piggy-back” registration rights granted to the Note Investor.
The Note Private Placement required the repricing and issuance of additional common stock warrants to the holders of warrants issued in the February 2012 common stock and warrant sale. The exercise price of the 2012 warrants decreased from $10.86 per share to $10.25 per share and the number of shares issuable upon exercise of the warrants increased from 1,309,785 to 1,387,685.
Common Stock Warrants.
There were 664,703 common stock warrants issued during the 12 months ended December 31, 2014 and none of the issued warrants were exercised. Included in the warrants issued in 2014 were 290,085 warrants issued due to re-pricing requirements of the Private Placement. Common stock warrants issued during the 12 months ended December 31, 2013 were 840,939 and none of the issued warrants were exercised. Warrants to purchase an aggregate of 2,884,986 shares of common stock were outstanding at December 31, 2014.
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
|
| | | | | | | | |
Warrant Holder | | Issue Year | | Expiration | | Underlying Shares | | Exercise Price |
Third Security Investors(1) | | 2010 | | December 2015 | | 431,027 | | $6.96 |
Various Institutional Holders(2) | | 2012 | | February 2017 | | 1,204,763 | | $10.25 |
Third Security Investors(2) | | 2012 | | February 2017 | | 182,922 | | $10.25 |
Various Institutional Holders(3) | | 2013 | | January 2018 | | 441,656 | | $9.00 |
Third Security Investors(3) | | 2013 | | January 2018 | | 250,000 | | $9.00 |
Various Institutional Holders(4) | | 2014 | | April 2020 | | 374,618 | | $4.00 |
| | | | | | 2,884,986 | | |
| |
(1) | This Warrant was issued in connection with the issuance of warrants to purchase shares of our Series A Preferred Stock to the Third Security Investors in December 2010. The number of underlying shares shown reflects the number of shares of common stock issuable upon conversion of the shares of Series A Preferred Stock for which this Warrant is currently exercisable. |
| |
(2) | These Warrants were issued in connection with the Private Placement completed in February 2012 and are classified as a liability in our financial statements. See Footnote 13 - “Fair Value”. These warrants also contain certain anti-dilution provisions that provide for an adjustment to the exercise price and number of shares issuable upon exercise of the warrant in the event that we engage in certain issuances of shares of our common stock at a price lower than the exercise price of the warrant. |
| |
(3) | These warrants were issued in connection with the Offering, which was completed in January 2013. |
| |
(4) | These warrants were issued in connection with the 2014 Private Placement, which was completed in October 2014. |
Preferred Stock Series A.
The Company’s Board of Directors is authorizedOur Board has established and delegated certain responsibilities to issue up to
15,000,000 shares of preferred stock in one or more series, from time to time, with such designations, powers, preferencesits standing Audit Committee, Compensation Committee and rightsNominating 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. Corporate Governance Committee.Audit Committee
We have no current plans to issue any additional preferred stock. Classes of stock such as the preferred stock may be used,a separately designated standing Audit Committee established in certain circumstances, to create voting impediments on extraordinary corporate transactions or to frustrate persons seeking to effect a merger or otherwise to gain control of the Company. For the foregoing reasons, any additional preferred stock issued by the Company could have an adverse effect on the rights of the holders of the common stock.
On December 29, 2010, we entered into a transactionaccordance with the Third Security Investors, pursuant to the terms of a Series A Convertible Preferred Stock Purchase Agreement (the “Series A Purchase Agreement”), in which we: (i) sold an aggregate of 2,586,205 shares of Series A Preferred Stock at a price of $2.32 per share; and (ii) issued Series A Warrants to purchase up to an aggregate of 1,293,102 shares of Series A Preferred Stock having an exercise price of $2.32 per share (the sale of Series A Preferred Stock and issuance of the Series A Warrants hereafter referred to together as the “Financing”). The Series A Warrants may be exercised at any time from December 29, 2010 until December 28, 2015 and contain a “cashless exercise” feature. The gross proceeds from the Series A financing were $6.0 million. The $0.2 million of costs incurred to complete the Series A financing were recorded as a reduction in the value of the Series A Preferred Stock. We used the net proceeds from the financing to acquire the FAMILION family of genetic tests from PGxHealth, a subsidiary of Clinical Data, Inc. Until the November 2011 modifications, the Series A Preferred Stock met the definition of mandatorily redeemable stock as it was preferred capital stock that was redeemable at the option of the holder through December 2015 and was reported outside of equity. The Series A Preferred Stock was to be accreted to its redemption value of $6.0 million. Until the November 2011 modifications, the Series A Warrants did not qualify to be treated as equity and, accordingly, were recorded as a liability. A preferred stock anti-dilution feature is embedded within the Series A Preferred Stock that met the definition of a derivative.
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
In connection with the Series A financing, we filed a Certificate of Designation of Series A Convertible Preferred Stock (the “Series A Certificate of Designation”) with the Secretary of State of the State of Delaware, designating 3,879,307 shares of our preferred stock as Series A Preferred Stock. As of December 31, 2013, the Series A Preferred Stock, including the Series A Preferred Stock issuable upon exercise of the Series A Warrants, was convertible into shares of our common stock at a rate of 4-for-1, which conversion rate is subject to further adjustment as set forth in the Series A Certificate of Designation. Giving effect to the reverse split of our stock in January 2014, the conversion rate was adjusted to 1-for-3. Certain rights of the holders of the Series A Preferred Stock are senior to the rights of the holders of our common stock. The Series A Preferred Stock has a liquidation preference equal to its original price per share, plus any accrued and unpaid dividends thereon. The holders of the Series A Preferred Stock are entitled to receive quarterly dividends, which accrue at the rate of 10% of the original price per share per annum, whether or not declared, and which shall compound annually and shall be cumulative. In any calendar quarter in which we have positive distributable cash flow as defined in the Series A Purchase Agreement, we are required to pay from funds legally available a cash dividend in the amount equal to the lesser of 50% of such distributable cash flow or the aggregate amount of dividends accrued on the Series A Preferred Stock.
Generally, the holders of the Series A Preferred Stock are entitled to vote together with the holders of common stock, as a single group, on an as-converted basis. However, the Series A Certificate of Designation provides that we shall not perform some activities, subject to certain exceptions, without the affirmative vote of a majority of the holders of the outstanding shares of Series A Preferred Stock. The holders of the Series A Preferred Stock, along with the holders of the Series B Preferred Stock, also are entitled to elect or appoint, as a single group, two directors of the Company.
In connection with the Series A financing, we also entered into a registration rights agreement with the Third Security Investors (the “Registration Rights Agreement”). Pursuant to the terms of the Registration Rights Agreement, the Company has granted certain demand, “piggyback” and S-3 registration rights covering the resale of the shares of common stock underlying the Series A Preferred Stock issued pursuant to the Series A Purchase Agreement and issuable upon exercise of the Series A Warrants and all shares of common stock issuable upon any dividend or other distribution with respect thereto.
In November 2011, we entered into a transaction with the Third Security Investors, pursuant to an Agreement Regarding Preferred Stock (the “Amendment Agreement”), in which the Third Security Investors agreed to (i) waive their rights to enforce the anti-dilution and redemption features of the Series A Preferred Stock and (ii) at the next annual stockholders’ meeting, vote to amend the Series A Certificate of Designation to remove the anti-dilution and redemption features of the Series A Preferred Stock. In exchange, the Company issued shares of common stock to the Third Security Investors having an aggregate market value of $0.3 million.
As a result of the Amendment Agreement, the values of the Series A Preferred Stock and Series A Warrants, including the Series A Preferred Stock conversion feature and Series A Warrant liability, were reclassified into stockholders’ equity as of the date of the Amendment Agreement.
Preferred Stock Series B.
On March 5, 2014, we entered into a Series B Convertible Preferred Stock Purchase Agreement (the “Series B Purchase Agreement”) with affiliates of Third Security, LLC (the “2014 Third Security Investors”), pursuant to which we, in a private placement, sold and issued an aggregate of 1,443,297 shares of our Series B Preferred Stock, par value $0.01 per share (the “Series B Preferred Stock”), at a price per share of $4.85 for an aggregate purchase price of approximately $7.0 million. Each share of Series B Preferred Stock issued pursuant to the Series B Purchase Agreement is initially convertible into shares of our common stock at a rate of 1-for-1, which conversion rate is subject to further adjustment as set forth in the Certificate of Designation of Series B Convertible Preferred Stock.
In connection with the Series B financing, we also entered into a Registration Rights Agreement, dated March 5, 2014, with the 2014 Third Security Investors, pursuant to which we granted certain demand, “piggy-back” and S-3 registrations rights covering the resale of the shares of common stock underlying the Series B Preferred Stock issued pursuant to the Series B Purchase Agreement and all shares of common stock issuable upon any dividend or other distribution with respect thereto.
The Series B financing required the repricing and issuance of additional common stock warrants to the holders of warrants issued in the Private Placement. The exercise price of the warrants decreased from $12.96 per share to $11.73 per share and the number of shares issuable upon exercise of the warrants increased from 1,097,600 to 1,212,665.
We recorded accrued dividends on the Series A Preferred Stock and the Series B Preferred Stock of $1.1 million, $0.7 million and $0.7 million during the years ended December 31, 2014, 2013 and 2012, respectively.
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
12. EQUITY INCENTIVE PLAN
The Company’s 2006 Equity Incentive Plan (the “Plan”) allows the Company to make awards of various types of equity-based compensation, including stock options, dividend equivalent rights (“DERs”), stock appreciation rights (“SARs”), restricted stock, restricted stock units, performance units, performance shares and other awards, to employees and directors of the Company. As of December 31, 2014, the Company was authorized to issue 1,666,666 shares under the Plan; provided, that no more than 1,250,000 of such shares may be used for grants of restricted stock, restricted stock units, performance units, performance shares and other awards.
The Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”), which has the authority to set the number, exercise price, term and vesting provisions of the awards granted under the Plan, subject to the terms thereof. Either incentive or non-qualified stock options may be granted to employees of the Company, but only non-qualified stock options may be granted to non-employee directors and advisors. However, in either case, the Plan requires that stock options must be granted at exercise prices not less than the fair market value of the common stock on the date of the grant. Options issued under the plan vest over periods as determined by the Committee and expire 10 years after the date the option was granted.
For the years ended December 31, 2014, 2013 and 2012, we recorded compensation expense of $0.9 million, $0.4 million and $0.7 million, respectively within selling, general and administrative expense. As of December 31, 2014, there was $0.7 million of unrecognized compensation expense related to unvested stock awards, which is expected to be recognized over a weighted average period of approximately 1.4 years.
The fair value of the options and SARs granted during 2014 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 1.50% to 1.74%, based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected lives of four to five years, based on historical exercise activity; and volatility of 82% to 105% for grants made during the year ended December 31, 2014 based on the historical volatility of our stock over a time that is consistent with the expected life of the option.
The fair value of the options granted during 2013 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 0.73% to 1.75%, based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected lives of four to five years, based on historical exercise activity; and volatility of 105% to 106% for grants made during the year ended December 31, 2013 based on the historical volatility of our stock over a time that is consistent with the expected life of the option.
The fair value of the options granted during 2012 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 0.62% to 1.03%, based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected lives of eight years, based on historical exercise activity; and volatility of 101% to 114% for grants made during the year ended December 31, 2012 based on the historical volatility of our stock over a time that is consistent with the expected life of the option.
The weighted average grant date fair value per share of options granted during the years ended December 31, 2014, 2013 and 2012 was $3.51, $3.72 and $9.72 respectively.
Stock Options.
The following table summarizes stock option activity under the Plan during the year ended December 31, 2014:
|
| | | | | | | |
| | Number of Options | | Weighted Average Exercise Price |
Balance at January 1, 2014 | | 565,028 |
| | $ | 7.19 |
|
Granted | | 264,529 |
| | 5.10 |
|
Forfeited | | (115,222 | ) | | 5.53 |
|
Expired | | (14,436 | ) | | 12.03 |
|
Balance at December 31, 2014 | | 699,899 |
| | $ | 6.58 |
|
Exercisable at December 31, 2014 | | 289,617 |
| | $ | 8.87 |
|
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
All stock options outstanding were issued to employees, officers or outside directors.
As of December 31, 2014, 650,952 outstanding options were vested or expected to vest. The weighted average exercise price of these options was $6.58 and the aggregate intrinsic value was zero with a remaining weighted average contractual life of 7.7 years.
As of December 31, 2014, 289,617 options were exercisable with a weighted average exercise price of $8.87 and an aggregate intrinsic value of zero. The weighted average contractual life of these options was 5.9 years.
No options were exercised in 2014 or 2013. During 2012, 1,667 shares were exercised with an intrinsic value of less than $10,000.
The total fair value of shares that vested during each of 2014, 2013 and 2012 was $0.6 million.
Stock Appreciation Rights (“SARs”).
The following table summarizes SARs activity under the Plan during the year ended December 31, 2014:
|
| | | | | | | |
| | Number of SARs | | Weighted Average Exercise Price |
Balance at January 1, 2014 | | 138,333 |
| | $ | 4.32 |
|
Granted | | 15,000 |
| | 3.15 |
|
Forfeited | | (34,788 | ) | | 4.32 |
|
Expired | | (20,212 | ) | | 4.32 |
|
Balance at December 31, 2014 | | 98,333 |
| | $ | 4.14 |
|
Exercisable at December 31, 2014 | | 35,208 |
| | $ | 4.32 |
|
All SARs outstanding were issued to officers.
As of December 31, 2014, 98,333 outstanding SARs shares were vested or expected to vest. The weighted average exercise price of these options was $4.14 and the aggregate intrinsic value was zero with a remaining weighted average contractual life of 8.9 years.
As of December 31, 2014, 35,208 SARs shares were exercisable and no SARs shares were exercised in 2014, 2013 and 2012. At December 31, 2014, a liability of $0.1 million was recorded in accrued expenses.
13. FAIR VALUE
FASB guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements for our financial assets and liabilities, as well as for other assets and liabilities that are carried at fair value on a recurring basis in our consolidated financial statements.
FASB guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The three levels of inputs used to measure fair value are as follows:
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2—Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets; and
Level 3—Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing the asset or liability.
Debt
Our long term debt is considered a Level 3 liability for which book value approximates fair market value due to the variable interest rate it bears.
Common Stock Warrant Liability
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
Certain of our issued and outstanding warrants to purchase common stock do not qualify to be treated as equity, and accordingly are recorded as a liability. The Common Stock Warrant Liability represents the fair value of the 1.4 million warrants issued in February 2012 (as adjusted pursuant to the terms of the 2012 warrants). We are required to record these instruments at fair value at each reporting date and changes are recorded as a non-cash adjustment to earnings. The gains or losses included in earnings are reported in other income (expense) in our Statement of Operations. Management does not believe that this liability will be settled by a use of cash.
The Common Stock Warrant Liability is considered a Level 3 financial instrument and is valued using a Monte Carlo simulation. This method is well suited to value options with non-standard features, such as anti-dilution protection. A Monte Carlo simulation model uses repeated random sampling to simulate significant uncertainty in inputs. Assumptions and inputs used in the valuation of the common stock warrants are broken down into four sections: Static Business Inputs; Static Technical Inputs; Simulated Business Inputs; and Simulated Technical Inputs.
Static Business Inputs include: Our equity value, which was estimated using our stock price of $2.01 as of December 31, 2014; the amount of the down-round financing, the timing of the down-round financing, the expected exercise period of 2.11 years from the valuation date and the fact that no other potential fundamental transactions are expected during the term of the common stock warrants.
Static Technical Inputs include: volatility of 70% based on implied and historical rates over the expected term and the risk-free interest rate of 0.67% based on the 2-year U.S. Treasury yield.
Simulated Business Inputs include: the probability of down-round financing, which was estimated to be 50% for simulated equity values below the down-round financing cut-off point.
Simulated Technical Inputs include: our equity value in periods 1-10 follows a geometric Brownian motion and is simulated over 10 independent six-month periods; a down-round financing event was randomly simulated in an iteration based on the 50% discrete probability of a down-round financing for those iterations where our simulated equity value at the expected timing of down-round financing was below the down-round financing cut-off point.
During the year ended December 31, 2014, the changes in the fair value of the liability measured using significant unobservable inputs (Level 3) was comprised of the following:
|
| | | | |
| | Dollars in Thousands |
| | For the Year Ended |
| | December 31, 2014 |
Balance at December 31, 2013 | | $ | 600 |
|
Total gains or losses: | | |
Recognized in earnings | | (455 | ) |
Balance at December 31, 2014 | | $ | 145 |
|
The change in unrealized gains or losses of Level 3 liabilities is included in earnings and is reported in other income (expense) in our Statement of Operations.
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
|
| | | | | | | | | | | | | | | |
| In thousands, except per share data |
| March 31 | | June 30 | | September 30 | | December 31 |
2014 | | | | | | | |
Net Sales | $ | 6,251 |
| | $ | 6,764 |
| | $ | 6,372 |
| | $ | 7,696 |
|
Gross Profit | 2,494 |
| | 2,393 |
| | 2,215 |
| | 2,619 |
|
Net Loss | (4,176 | ) | | (3,893 | ) | | (80 | ) | | (5,793 | ) |
Basic and diluted loss per common share | $ | (0.60 | ) | | $ | (0.57 | ) | | $ | (0.05 | ) | | $ | (0.77 | ) |
| | | | | | | |
2013 | | | | | | | |
Net Sales | $ | 7,374 |
| | $ | 7,306 |
| | $ | 6,646 |
| | $ | 6,218 |
|
Gross Profit | 3,255 |
| | 2,973 |
| | 2,450 |
| | 2,076 |
|
Net Income (Loss) | (3,586 | ) | | (2,867 | ) | | (5,552 | ) | | (3,982 | ) |
Basic and diluted loss per common share | $ | (0.54 | ) | | $ | (0.41 | ) | | $ | (0.78 | ) | | $ | (0.57 | ) |
15. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
Transgenomic’s chief operating decision-maker is the Chief Executive Officer, who regularly evaluates our performance based on net sales and gross profit. The preparation of this segment analysis requires management to make estimates and assumptions around expenses below the gross profit level. While we believe the segment information to be materially correct, actual results could differ from the estimates and assumptions used in preparing this information.
We have two reportable operating segments, Laboratory Services and Genetic Assays and Platforms. These lines of business are complementary with the Biomarker Identification labs driving innovation and leading to kit production in our Genetic Assays and Platforms segment and new tests in our Patient Testing labs.
The accounting policies of the segments are the same as the policies discussed in Footnote 2 – “Summary of Significant Accounting Policies”.
Segment information for the years ended December 31, 2014, 2013 and 2012 is as follows:
|
| | | | | | | | | | | |
| Dollars in Thousands |
| 2014 |
| Laboratory Services | | Genetic Assays and Platforms | | Total |
Net Sales | $ | 16,520 |
| | $ | 10,563 |
| | $ | 27,083 |
|
Gross Profit | 6,840 | | 2,881 |
| | 9,721 |
|
Net Loss before Taxes | (14,691 | ) | | 1,273 |
| | (13,418 | ) |
Income Tax Expense | 631 |
| | (107 | ) | | 524 |
|
Net Loss | $ | (15,322 | ) | | $ | 1,380 |
| | $ | (13,942 | ) |
Depreciation/Amortization | $ | 2,088 |
| | $ | 160 |
| | $ | 2,248 |
|
Interest Expense | 406 |
| | 259 |
| | 665 |
|
| December 31, 2014 |
Total Assets | $ | 23,116 |
| | $ | 6,890 |
| | $ | 30,006 |
|
Goodwill | 6,918 |
| | — |
| | 6,918 |
|
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
|
| | | | | | | | | | | |
| Dollars in Thousands |
| 2013 |
| Laboratory Services | | Genetic Assays and Platforms | | Total |
Net Sales | $ | 15,391 |
| | $ | 12,153 |
| | $ | 27,544 |
|
Gross Profit | 6,820 |
| | 3,934 |
| | 10,754 |
|
Net (Loss) before Taxes | (12,486 | ) | | (3,555 | ) | | (16,041 | ) |
Income Tax Expense | — |
| | (54 | ) | | (54 | ) |
Net (Loss) | $ | (12,486 | ) | | $ | (3,501 | ) | | $ | (15,987 | ) |
Depreciation/Amortization | $ | 2,467 |
| | $ | 281 |
| | $ | 2,748 |
|
Interest Expense | 398 |
| | 244 |
| | 642 |
|
| December 31, 2013 |
Total Assets | $ | 21,711 |
| | $ | 8,567 |
| | $ | 30,278 |
|
Goodwill | 6,918 |
| | — |
| | 6,918 |
|
|
| | | | | | | | | | | |
| Dollars in Thousands |
| 2012 |
| Laboratory Services | | Genetic Assays and Platforms | | Total |
Net Sales | $ | 19,329 |
| | $ | 12,151 |
| | $ | 31,480 |
|
Gross Profit | 9,316 |
| | 3,816 |
| | 13,132 |
|
Net Loss before Taxes | (6,874 | ) | | (1,307 | ) | | (8,181 | ) |
Income Tax Expense | — |
| | 146 |
| | 146 |
|
Net Loss | $ | (6,874 | ) | | $ | (1,453 | ) | | $ | (8,327 | ) |
Depreciation/Amortization | $ | 1,960 |
| | $ | 318 |
| | $ | 2,278 |
|
Interest Expense | 851 |
| | 37 |
| | 888 |
|
| December 31, 2012 |
Total Assets | $ | 29,196 |
| | $ | 9,595 |
| | $ | 38,791 |
|
Goodwill | 6,918 |
| | — |
| | 6,918 |
|
Net sales for the year ended December 31, 2014, 2013 and 2012 by country were as follows:
|
| | | | | | | | | | | | | |
| | | Dollars in Thousands |
| | | Years Ended December 31, |
| | | 2014 | | 2013 | | 2012 |
United States | | | $ | 21,052 |
| | $ | 20,119 |
| | $ | 22,727 |
|
Italy | | | 1,258 |
| | 1,530 |
| | 2,524 |
|
United Kingdom | | | 881 |
| | 748 |
| | 1,703 |
|
All Other Countries | | | 3,892 |
| | 5,147 |
| | 4,526 |
|
Total | | | $ | 27,083 |
| | $ | 27,544 |
| | $ | 31,480 |
|
Other than the countries specifically identified above, no country individually accounted for more than 5% of total net sales.
More than 99% of our long-lived assets are located within the United States. Substantially all of the remaining long-lived assets are located within Europe.
16. ACQUISITIONS
ScoliScoreTM
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
On September 21, 2012, we acquired certain intangible assets from Axial Biotech, Inc. (“Axial”) related to the ScoliScoreTM assay. In consideration for the purchase of the intangible assets, we made a cash payment of approximately $3.4 million to Axial and certain of its creditors. In addition, following the transfer of all of the assets related to the ScoliScoreTM assay and confirmation that the ScoliScoreTM assay operates, within our laboratories pursuant to protocol agreed upon by us and Axial, during the years ended December 31, 2012 and 2013 we paid an additional $0.2 million and $0.8 million, respectively, to Axial and certain of its creditors. The total consideration paid was$4.4 million. This acquisition provides us with the ScoliScoreTM assay technology and intellectual property, and an established revenue and customer base.
The following intangible assets were each valued separately using valuation approaches most appropriate for each specific asset.
|
| |
Acquired technology | Relief from Royalty Method |
Tradenames | Relief from Royalty Method |
Customer relationships | Multi-Period Excess Earnings Method |
Covenants not to compete | With and Without Method |
Patents | Relief from Royalty Method |
The Income Approach uses valuation techniques to convert future amounts, cash flows or earnings, to a single, discounted amount. The fair value measure is based on the value that is indicated by market expectations about the present value of those future amounts.
The Relief from Royalty Method assumes that, if the Company did not have proprietary ownership of the genetic testing processes on which its revenues depend, it might elect to lease the rights or licenses from another company. The fair value is measured as the estimated discounted cash flows of the royalty payments avoided by ownership.
The Multi Period Excess Earnings Method measures the fair value as the estimated discounted cash flows of the existing customer relationships over a period during which revenues from existing customer relationships are assumed to have been substantially replaced by revenues from future customers.
The With and Without Method measures the fair value of the non-competition agreements as the probability adjusted difference between the estimated discounted cash flows with and without the effect of competition. The model that includes competition includes lost revenues as well as increased expenses required to rebuild the lost revenues.
The acquired intangibles have the following useful lives; acquired technology - 10 years; third party payor relationships - 15 years; assay royalties - 7 years; tradenames and trademarks - 7 years.
The assets acquired were $3.9 million in identifiable intangible assets and $0.5 million in goodwill. No liabilities were assumed. The acquired assets are reported as a component of our laboratory services segment.
The goodwill arising from the acquisition has been assigned to our Laboratory Services segment and is expected to be deductible for tax purposes.
17. SUBSEQUENT EVENTS
Issuance of Convertible Promissory Notes
The Company entered into a purchase agreement with seven accredited investors (the “Investors”) on January 15, 2015 and issued and sold to the Investors in a private placement (the “Additional Private Placement”) Notes in an aggregate principal amount of $925,000 on January 20, 2015. Each of the Notes accrues interest at a rate of 6% per year and matures on December 31, 2016. The outstanding principal and unpaid interest accrued under each Note is convertible into shares of common stock of the Company as follows: (i) commencing upon the date of issuance of the Note (but no earlier than January 1, 2015), the Investor holding such Note is entitled to convert, on a one-time basis, up to 50% of the outstanding principal and unpaid interest accrued under the Note, into shares of our common stock at a conversion price equal to the lesser of (a) the average closing price of our common stock on the principal securities exchange or securities market on which our common stock is then traded (the “Market”) for the 20 consecutive trading days immediately preceding the date of conversion, and (b) $2.20 (subject to adjustment for stock splits, stock dividends, other distributions, recapitalizations and the like); and (ii) commencing February 15, 2015, the Investor holding such Note is entitled
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013 and 2012
to convert, on a one-time basis, any or all of the remaining outstanding principal and unpaid interest accrued under the Note, into shares of our common stock at a conversion price equal to 85% of the average closing price of our common stock on the Market for the 15 consecutive trading days immediately preceding the date of conversion.
The Additional Private Placement required the repricing and issuance of additional common stock warrants to the investors in the Company’s February 2012 common stock and warrant financing. The exercise price of these warrants decreased from $10.25 per share to $9.59 per share and the number of shares issuable upon exercise of the warrants increased from 1,387,685 to 1,483,161.
Issuance of Common Stock and Common Stock Warrants
On February 27, 2015, the Company entered into a purchase agreement with Craig-Hallum Capital Group LLC (the “Underwriter”) relating to the Company’s sale and issuance of 3,573,899 shares of the Company’s common stock and corresponding warrants to purchase up to 714,780 shares of the Company’s common stock (the “Offering”). Each share of common stock was sold in combination with a warrant to purchase 0.20 of a share of common stock. The purchase price to the public for each share of common stock and accompanying warrant was $1.95.
The purchase price paid by the Underwriter to the Company for the common stock and accompanying warrants was $1.8135. The net proceeds from the Offering, after deducting the Underwriter’s discount and other estimated Offering expenses, were approximately $6.2 million.
The accompanying warrants are exercisable immediately upon their initial issuance date at an exercise price of $2.24 per share and will expire five years from the date of issuance. The exercise price will also be subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting our common stock.
The Offering required the repricing and issuance of additional common stock warrants to the investors in the Company’s February 2012 common stock and warrant financing. The exercise price of these warrants decreased from $9.59 per share to $7.56 per share and the number of shares issuable upon exercise of the warrants increased from 1,483,161 to 1,881,396.
Amended Loan and Security Agreement
On April 1, 2015, the Company entered into a sixth amendment to the Loan Agreement. The sixth amendment provides, among other things, that (i) the Lenders will waive specified events of default under the terms of the Loan Agreement, (ii) commencing as of April 1, 2015, the Company will make monthly interest payments to the Lenders, (iii) the Company will not be obligated to make monthly payments of principal to the Lenders until April 1, 2016, (iv) the Company will be required to make an initial prepayment of a portion of the loan balance in the amount of approximately $149,000 on April 1, 2015 and one or more additional prepayments to the Lenders under the Loan Agreement upon the occurrence of certain events, and (v) the Company will not be required to comply with the minimum liquidity ratio under the terms of the Loan Agreement until the earliest to occur of a specified event or March 31, 2016. The sixth amendment also extends the time period in which the Company must provide certain reports and statements to the Lenders and amends the circumstances pursuant to which the Company may engage in certain sales or transfers of its business or property without the consent of the Lenders.
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. |
None.
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| |
Item 9A. | Controls and Procedures. |
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report, management performed, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e)Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
The Audit Committee’s primary duties and responsibilities include monitoring the integrity of our financial statements, monitoring the independence and performance of our external auditors, and monitoring our compliance with applicable legal and regulatory requirements. The functions of the Audit Committee also include reviewing periodically with our independent registered public accounting firm the performance of the services for which they are engaged, including reviewing the scope of the annual audit and its results, reviewing with management and the auditors the adequacy of our internal accounting controls, reviewing with management and the auditors the financial results prior to the filing of quarterly and annual reports, reviewing fees charged by our independent registered public accounting firm and reviewing any transactions between our Company and related parties. Our
disclosure controlsindependent registered public accounting firm reports directly and
procedures are designedis accountable solely to
provide reasonable assurance that informationthe Audit Committee. The Audit Committee has the sole authority to hire and fire the independent registered public accounting firm and is responsible for the oversight of the performance of their duties, including ensuring the independence of the independent registered public accounting firm. The Audit Committee also approves in advance the retention of, and all fees to be paid to, the independent registered public accounting firm. The rendering of any auditing services and all non-auditing services by the independent registered public accounting firm is subject to prior approval of the Audit Committee.The Audit Committee operates under a written charter which is available in the Investor Relations section of our website atwww.transgenomic.com. The Audit Committee is required to be disclosed in the reports we file or submitcomposed of directors who are independent under the Exchange Act is recorded, processed, summarized,rules of the SEC and reported within the time periods specified inlisting standards of The Nasdaq Stock Market LLC (“NASDAQ”).
The current members of the Audit Committee are directors Mr. Patzig, Dr. Luther and Mr. Thompson, the Chairperson of the Audit Committee, all of whom have been determined by the Board to be independent under the NASDAQ listing standards and rules adopted by the SEC applicable to audit committee members. The Board has determined that each of Mr. Patzig, Dr. Luther and Mr. Thompson qualifies as an “audit committee financial expert” under the rules adopted by the SEC and formsthe Sarbanes Oxley Act of 2002. The Audit Committee met eight times during 2014 and did not take any actions by written consent.
Executive Officers of the SecuritiesRegistrant
Paul Kinnon. Mr. Kinnon, age 51, has served as our President and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to management including our Chief Executive Officer and a Director since September 2013 and as our Interim Chief Financial Officer since October 2014. Mr. Kinnon has more than 20 years of global leadership experience in innovative life science and diagnostics companies. From January through August 2013, he provided consulting services to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and no evaluation of controls and procedures can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation, andlife science sector as a resultPartner at Arch Global Research. During a portion of the material weaknesses described below, thethis time, Mr. Kinnon provided consulting services to us. From January 2007 to December 2012, Mr. Kinnon was President, Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controlsa Director of ZyGEM Corporation Limited, a biotechnology company, where he transformed the company from a regional enzyme provider into a leader in integrated microfluidic technologies for forensic and procedures were not effective asclinical diagnostic applications. From May 2006 to June 2007, Mr. Kinnon was Vice President & General Manager Environmental Diagnostics (later expanded to Applied Markets) at Invitrogen Corporation (now Life Technologies), a high growth life sciences and diagnostics firm, and from October 2004 until April 2006, he was Vice President, Global Strategic Alliances at Invitrogen. Previously, Mr. Kinnon also held business, sales and marketing roles of December 31, 2014.
(b) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishingincreasing responsibility at Guava Technologies, Inc., Cellomics, Inc. and maintaining an adequate systemother life science companies. Mr. Kinnon earned his Bachelor of internal control over financial reporting. Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesSciences degree in accordance with accounting principles generally acceptedApplied Chemistry at Coventry University in the United StatesKingdom and holds a Diploma of America.
Our internal control over financial reporting includes those policies and procedures that:
pertain to the maintenance of records that,Marketing. A petition in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;
provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our financial statementsbankruptcy was filed against ZyGEM Corporation Limited in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time. Our system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.
Management has conducted, with the participation ofApril 2013.Leon F. Richards. Mr. Richards, age 58, was appointed our Chief ExecutiveAccounting Officer and our Interim Chief Financial Officer, an assessment, including testing of the effectiveness, of our internal control over financial reporting as defined in Rule 13(a)-15(f) under the Exchange Act as of December 31, 2014. Management’s assessment of internal control over financial reporting was conducted using the criteria in the 2013
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that assessment, management has identified material weaknesses in the Company’s internal control over financial reporting, as described below. Management has concluded that, as a result of these material weaknesses, the Company’s internal control over financial reporting was not effective as of December 31, 2014.
A material weakness is a control deficiency, or combination of control deficiencies, that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
This Annual Report does not include an attestation report of Transgenomic’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to Item 308(b) of Regulation S-K, which permits the Company to provide only management’s report in this Annual Report.
Material Weakness Identified in the Company’s Patient Testing business operations in New Haven.
Management identified the following two material weaknesses in the Company’s internal control over financial reporting as of December 31, 2014:
Design and Maintenance of Controls Surrounding Revenue Recognition. The Company did not design and maintain effective controls over proper timing and recognition of revenue. The Company’s procedures and controls were not adequately designed to ensure that revenues were timely identified and measured to ensure that revenue was recorded correctly within the appropriate period.
Design and Maintenance of Controls Surrounding Determination of Allowance for Doubtful Accounts. The Company did not design and maintain effective controls over the elements used in its analysis and evaluation of the allowance for doubtful accounts to ensure that the allowance for doubtful was reasonably stated.
The ineffectiveness of the control environment did not result in an adjustment to the current year financial statements or a restatement of prior year financial statements. Although the Company has already made progress in this area, additional steps need to be taken, as indicated above, and sufficient time needs to elapse before management can conclude that newly implemented controls are operating effectively and that the material weaknesses have been adequately remediated.
Remediation Efforts to Address Material Weaknesses
Our management has worked, and continues to work, to strengthen our internal control over financial reporting. We are committed to ensuring that such controls are designed and operating effectively.
Effective for the quarter ending March 31, 2015, an additional review and reconciliation step will be added to the revenue recognition process to ensure that all revenue is appropriately recognized in the proper period. The review and reconciliation will include, among other steps, a reconciliation of proof of delivery (fax confirmation) to invoice, to unbilled reports and to error processing queues.
In addition, effective for the quarter ending March 31, 2015, an additional review process will be added to the allowance for doubtful accounts analysis such that current and historical trends of payments are given more weight in the determination of the allowance amount.
(c) Changes in internal control over financial reporting
There have been no changes in internal control over financial reporting that occurred during the quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Item 9B. | Other Information. |
None.
Part III
|
| |
Item 10. | Directors, Executive Officers and Corporate Governance. |
The information required by this item is incorporated by reference to the information set forth in the sections titled “Board of Directors and Committees”, “Section 16(a) Beneficial Ownership Reporting Compliance”, “Code of Business Conduct and Ethics”, “Corporate Governance - Committees of our Board of
Directors”Directors in October 2014. Mr. Richards is an experienced corporate finance executive and certified public accountant with more than 30 years of experience building and leading financial organizations. Mr. Richards has served as our Controller since November 2012. He most recently served as Controller and Chief Accounting Officer of Baldwin Technology Company, Inc.,
“Corporate Governance - Audit Committee”a leading global supplier of process automation equipment for the printing and
“Corporate Governance - Compensation Committee” inpublishing industry, from May 2004 to September 2012. Mr. Richards earned his Bachelor of Business Administration and Accounting from Iona College.There are no family relationships between or among any of our definitive proxy statement to be filed with the Securities and Exchange
Commission (the “SEC”) in connection with the annual meeting of stockholders to be held in 2015 (the “2015 Proxy Statement”). The information required by this item related to the executive officers can be found in the section captioned “Executive Officers of the Registrant” under Part I, “Item 1. Our Business” of this Annual Report on Form 10-K, and is also incorporated herein by reference.
or directors.” |
| |
Item 11.14 | Executive Compensation. |
The information required by this item is incorporated by reference to the information set forth in the sections titled “2014 Executive Compensation” and “Director Compensation” in the 2015 Proxy Statement.
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information required by this item is incorporated by reference to the information set forth in the sections titled “Beneficial Ownership of Common Stock”, “Beneficial Ownership of Preferred Stock” and “Equity Compensation Plan Information” in the 2015 Proxy Statement.
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| |
Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
The information required by this item is incorporated by reference to the information set forth in the sections titled “Review and Approval of Related Person Transactions” and “Director Independence” in the 2015 Proxy Statement.
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Item 14. | Principal Accounting Fees and Services. |
The information required by this item is incorporated by reference to the information set forth in the section titled “Independent Registered Public Accounting Firm” in the 2015 Proxy Statement.
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Item 15. | Exhibits, Financial Statement Schedules. |
| |
(a) | The following documents are filed as part of this report:the Company’s Annual Report on Form 10-K for the year ended December 31, 2014: |
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| |
1 | Financial Statements. The following financial statements of the Registrant are included in response to Item 8 of this report: |
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets of the Registrant and Subsidiary as of December 31, 2014 and 2013.
Consolidated Statements of Operations of the Registrant and Subsidiary for the years ended December 31, 2014, 2013 and 2012.
Consolidated Statements of Comprehensive Loss of the Registrant and Subsidiary for the years ended December 31, 2014, 2013 and 2012.
Consolidated Statements of Stockholders’ Equity of the Registrant and Subsidiary for the years ended December 31, 2014, 2013 and 2012.
Consolidated Statements of Cash Flows of the Registrant and Subsidiary for the years ended December 31, 2014, 2013 and 2012.
Notes to Consolidated Financial Statements of the Registrant and Subsidiary.
the Company’s Annual Report on Form 10-K for the year ended December 31, 2014: |
| |
| Report of Independent Registered Public Accounting Firm. Consolidated Balance Sheets of the Registrant and Subsidiary as of December 31, 2014 and 2013. Consolidated Statements of Operations of the Registrant and Subsidiary for the years ended December 31, 2014, 2013 and 2012. Consolidated Statements of Comprehensive Loss of the Registrant and Subsidiary for the years ended December 31, 2014, 2013 and 2012. Consolidated Statements of Stockholders’ Equity of the Registrant and Subsidiary for the years ended December 31, 2014, 2013 and 2012. Consolidated Statements of Cash Flows of the Registrant and Subsidiary for the years ended December 31, 2014, 2013 and 2012. Notes to Consolidated Financial Statements of the Registrant and Subsidiary. |
2 | Financial Statement Schedules. |
All financial statement schedules are omitted because the information is inapplicable or presented in the notes to the financial statements.
| |
| All financial statement schedules are omitted because the information is inapplicable or presented in the notes to the financial statements. |
3 | Exhibits. The following exhibits are filed as required by Item 15(a)(3) of this report.the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Exhibit numbers refer to the paragraph numbers under Item 601 of Regulation S-K: |
|
| | | |
†2.1 |
| | Asset Purchase Agreement among the Registrant, Scoli Acquisition Sub, Inc. and Axial Biotech, Inc. dated August 27, 2012 (incorporated by reference to Exhibit 2.1 to the Registrant’sRegistrant's Quarterly Report on Form 10-Q filed on November 8, 2012). |
| | |
3.1 |
| | Third Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’sRegistrant's Quarterly Report on Form 10-Q filed on November 14, 2005). |
| | |
3.2 |
| | Certificate of Amendment of Third Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’sRegistrant's Current Report on Form 8-K filed on May 29, 2012).
|
| | |
3.3 |
| | Certificate of Amendment of Third Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on January 28, 2014). |
| | |
3.4 |
| | Certificate of Amendment of Certificate of Designation of Series A Convertible Preferred Stock of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on March 6, 2014). |
| | |
3.5 |
| | Certificate of Designation of Series B Convertible Preferred Stock of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on March 6, 2014). |
| | |
3.6 |
| | Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3(ii) to the Registrant’s Current Report on Form 8-K filed on May 25, 2007). |
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|
| | | |
4.1 |
| | Form of Certificate of the Registrant’s Common Stock (incorporated by reference to Exhibit 4 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000). |
4.2 |
| | Form of Series A Convertible Preferred Stock Warrant issued to Third Security Senior Staff 2008 LLC, Third Security Staff 2010 LLC and Third Security Incentive 2010 LLC (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on January 4, 2011). |
| | |
4.3 |
| | Registration Rights Agreement, dated December 29, 2010, by and among the Registrant, Third Security Senior Staff 2008 LLC, Third Security Staff 2010 LLC and Third Security Incentive 2010 LLC (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed on January 4, 2011). |
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4.4 |
| | First Amendment to Registration Rights Agreement dated November 8, 2011 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on November 14, 2011). |
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4.5 |
| | Form of Warrant issued by the Registrant to the Third Security Entities on February 7, 2012 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 7, 2012). |
| | |
4.6 |
| | Form of Warrant issued by the Registrant to the Investors on February 7, 2012 (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on February 7, 2012). |
| | |
4.7 |
| | Form of Registration Rights Agreement entered into by and among the Registrant, the Third Security Entities and the Investors dated February 2, 2012 (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on February 7, 2012). |
| | |
4.8 |
| | Registration Rights Agreement, entered into by and among the Registrant and the Investors, dated January 24, 2013 (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K/A filed on January 31, 2013). |
| | |
4.9 |
| | Form of Warrant issued by the Registrant to the Investors on January 30, 2013 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K/A filed on January 31, 2013). |
| | |
4.10 |
| | Registration Rights Agreement, dated as of March 5, 2014, by and among the Registrant, Third Security Senior Staff 2008 LLC, Third Security Staff 2014 LLC and Third Security Incentive 2010 LLC (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on March 6, 2014). |
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4.11 |
| | Form of Warrant issued by Transgenomic, Inc. to the Investors and the advisor on October 22, 2014 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on October 22, 2014). |
| | |
4.12 |
| | Form of Unsecured Convertible Promissory Note issued by Transgenomic, Inc. to the Investor pursuant to the Unsecured Convertible Promissory Note Purchase Agreement, dated as of December 31, 2014 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on January 7, 2015). |
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4.13 |
| | Form of Indenture, between the Registrant and one or more trustees to be named (incorporated by reference to Exhibit 4.15 to the Registrant’s Registration Statement on Form S-3 (Registration No. 333-201907) filed on February 6, 2015). |
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4.14 |
| | Form of Common Stock Warrant Agreement and Warrant Certificate (incorporated by reference to Exhibit 4.16 to the Registrant’s Registration Statement on Form S-3 (Registration No. 333-201907) filed on February 6, 2015). |
| | |
4.15 |
| | Form of Preferred Stock Warrant Agreement and Warrant Certificate (incorporated by reference to Exhibit 4.17 to the Registrant’s Registration Statement on Form S-3 (Registration No. 333-201907) filed on February 6, 2015). |
| | |
4.16 |
| | Form of Debt Securities Warrant Agreement and Warrant Certificate (incorporated by reference to Exhibit 4.18 to the Registrant’s Registration Statement on Form S-3 (Registration No. 333-201907) filed on February 6, 2015). |
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4.17 |
| | Form of Debt Securities (to be filed by amendment as Exhibit 4.19 to the Registrant’s Registration Statement on Form S-3 (File No. 333-201907) filed on February 6, 2015 or as an exhibit to a Current Report on Form 8-K). |
4.18 |
| | Specimen Preferred Stock Certificate and Form of Certificate of Designation of Preferred Stock (to be filed by amendment as Exhibit 4.20 to the Registrant’s Registration Statement on Form S-3 (File No. 333-201907) filed on February 6, 2015 or as an exhibit to a Current Report on Form 8-K). |
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|
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4.19 |
| | Form of Warrant to Purchase Common Stock (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on February 27, 2015). |
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*10.1 |
| | The Registrant’s 2006 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on January 28, 2014). |
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*10.2 |
| | 1999 UK Approved Stock Option Sub Plan of the Registrant (incorporated by reference to Exhibit 10.7 to the Registrant’sRegistrant's Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000). |
| | |
10.3 |
| | License Agreement, dated August 20, 1997, between the Registrant and Leland Stanford Junior University (incorporated by reference to Exhibit 10.15 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000). |
| | |
10.4 |
| | License Agreement, dated December 1, 1989, between Cruachem Holdings Limited (a wholly owned subsidiary of the Registrant) and Millipore Corporation (incorporated by reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K filed on March 25, 2002). |
| | |
10.5 |
| | Sublicense Agreement, dated October 1, 1991, between Cruachem Holdings Limited (a wholly owned subsidiary of the Registrant) and Applied Biosystems, Inc. (incorporated by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K filed on March 25, 2002). |
| | |
10.6 |
| | Missives, dated May 17, 2002, between Cruachem Limited (a wholly-owned subsidiary of the Registrant) and Robinson Nugent (Scotland) Limited (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on August 14, 2002). |
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10.7 |
| | License Amendment Agreement, dated June 2, 2003, by and between Geron Corporation and the Registrant (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 12, 2003). |
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10.8 |
| | Supply Agreement, dated January 1, 2000, between the Registrant and Hitachi Instruments (incorporated by reference to Exhibit 10.16 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000). |
10.9 |
| | | |
10.9 | | | License Agreement between the Registrant and the Dana-Farber Cancer Institute dated October 8, 2009 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on November 5, 2009). |
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*10.10 |
| | Employment Agreement between the Registrant and Mark P. Colonnese (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 17, 2012). |
| | |
10.11 |
| | Securities Purchase Agreement, entered into by and among the Registrant and the Investors, dated January 24, 2013 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K/A filed on January 31, 2013). |
| | |
10.12 |
| | Forbearance Agreement, dated February 7, 2013, by and between the Registrant and Dogwood Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 8, 2013). |
| | |
10.13 |
| | Loan and Security Agreement among the Registrant, Third Security Senior Staff 2008 LLC, as administrative agent and a lender, and the other lenders party thereto, dated March 13, 2013 (incorporated by reference to Exhibit 10.39 to the Registrant’s Annual Report on Form 10-K filed on March 14, 2013). |
| | |
10.14 |
| | First Amendment to Loan and Security Agreement among the Registrant, Third Security Senior Staff 2008 LLC, as administrative agent and a lender, and the other lenders party thereto, dated August 2, 2013 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 6, 2013). |
| | |
*10.15 |
| | Employment Agreement between the Registrant and Paul Kinnon, effective September 30, 2013 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 30, 2013). |
*10.16 |
| | Form of Incentive Stock Option Agreement between the Registrant and Paul Kinnon, effective September 30, 2013 (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2014). |
| | |
*10.17 |
| | Form of Stock Appreciation Rights Agreement between the Registrant and Paul Kinnon, effective September 30, 2013 (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2014). |
| | |
|
| | | |
*10.18 |
| | Form of Stock Appreciation Rights Agreement between the Registrant and Mark Colonnese, effective September 30, 2013 (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2014). |
| | |
*10.19 |
| | Form of Stock Appreciation Rights Agreement under the 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed on September 30, 2013). |
| | |
10.20 |
| | Second Amendment to Loan and Security Agreement among the Registrant, Third Security Senior Staff 2008 LLC, as administrative agent and a lender, and the other lenders party thereto, effective October 31, 2013 (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2014). |
| | |
10.21 |
| | Limited Waiver and Third Amendment to Loan and Security Agreement among Transgenomic, Inc., Third Security Senior Staff 2008 LLC, as administrative agent and a lender, and the other lenders party thereto, dated January 27, 2014 (incorporated by reference to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K filed on March 27, 2014).2014. |
| | |
10.22 |
| | Fourth Amendment to Loan and Security Agreement among Transgenomic, Inc., Third Security Senior Staff 2008 LLC, as administrative agent and a lender, and the other lenders party thereto, dated March 3, 2014 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 6, 2014). |
| | |
10.23 |
| | Series B Convertible Preferred Stock Purchase Agreement, dated as of March 5, 2014, by and among Transgenomic, Inc. and Third Security Senior Staff 2008 LLC, Third Security Staff 2014 LLC and Third Security Incentive 2010 LLC (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on March 6, 2014). |
| | |
+‡10.24
|
| | Collaboration Agreement, dated as of October 9, 2013, by and between the Registrant and PDI, Inc. (incorporated by reference to Exhibit 10.24 to the Registrant’s Annual Report on Form 10-K/A filed on September 5, 2014). |
| | |
+‡10.25
|
| | Surveyor Kit Patent, Technology, and Inventory Purchase Agreement, dated as of July 1, 2014, by and between the Registrant and Integrated DNA Technologies, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on November 12, 2014). |
| | |
10.26 |
| | Securities Purchase Agreement, dated as of October 22, 2014, by and among Transgenomic, Inc. and the Investors (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on October 22, 2014). |
| | |
10.27 |
| | Limited Waiver and Fifth Amendment to Loan and Security Agreement among Transgenomic, Inc., Third Security Senior Staff 2008 LLC, as administrative agent and a lender, and the other lenders party thereto, dated October 22, 2014 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 22, 2014). |
| | |
10.28 |
| | Unsecured Convertible Promissory Note Purchase Agreement, dated as of December 31, 2014, by and between Transgenomic, Inc. and the Investor (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on January 7, 2015). |
| | |
12.1 | #12.1 | | Statement Regarding the Computation of Ratio of Earnings to Fixed Charges and Preferred Share Dividends for the Years Ended December 31, 2010, 2011, 2012, 2013 and 2014.2014 |
| | |
21#21 |
| | Subsidiaries of the Registrant. |
�� | | |
23.1#23.1 |
| | Consent of Independent Registered Public Accounting Firm - Ernst & Young LLP |
| | |
23.2#23.2 |
| | Consent of Independent Registered Public Accounting Firm - McGladrey LLP |
| | |
24#24 |
| | Powers of Attorney (included on signature page hereto). |
| | |
31 | #31.1 | | Certifications | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
+31.2 | | | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
31.3 | | | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
#***32 | 32.1 | | CertificationsCertification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
101.INS | #101.INS | | XBRL Instance Document |
| | |
101.SCH | #101.SCH | | XBRL Taxonomy Extension Schema Document |
| | |
101.CAL | #101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
101.DEF | #101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| | |
|
| | | |
101.LAB | #101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| | |
101.PRE | #101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
† |
| | Pursuant to Item 601(b)(2) of Regulation S-K, the schedules to this agreement have been omitted. The Registrant agrees to furnish supplementally a copy of any omitted schedule to the SECSecurities and Exchange Commission upon request. |
| | |
* |
| | Denotes exhibit that constitutes a management contract, or compensatory plan or arrangement. |
| | |
** |
| | These certifications are not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Registrant specifically incorporates it by reference. |
| | |
+ | ‡ | | Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC. |
| | |
# | | Included with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on April 15, 2015, which is being amended hereby. |
| | |
+ | | Included with the Registrant’s Amendment No. 1 to Annual Report on Form 10-K/A for the year ended December 31, 2014, filed with the SEC on August 14, 2015. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 15 day of April 2015.
authorized. |
| | Transgenomic, Inc. |
| | |
TRANSGENOMIC, INC. |
Dated: August 21, 2015 | |
By: | | /s/ PAUL KINNONPaul Kinnon |
| | President, Chief Executive Officer and Interim Chief Financial Officer (Principal Executive Officer and Principal Financial Officer) |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints, jointly and severally, Paul Kinnon and Leon Richards, and each of them acting individually, as his attorney-in-fact, each with full power of substitution and resubstitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| | | |
Signature | | Title | | Date |
| | | |
/s/ PAUL KINNON
Paul Kinnon
| | Director, President, Chief Executive Officer and Interim Chief Financial Officer (Principal Executive Officer and Principal Financial Officer) | | April 15, 2015 |
| | | |
/s/ LEON RICHARDS
Leon Richards
| | Chief Accounting Officer (Principal Accounting Officer) | | April 15, 2015 |
| | | |
/s/ ROBERT M. PATZIG
Robert M. Patzig | | Director | | April 15, 2015 |
| | | |
/s/ DOIT L. KOPPLER II
Doit L. Koppler II | | Director | | April 15, 2015 |
| | | |
/s/ MICHAEL A. LUTHER
Michael A. Luther | | Director | | April 15, 2015 |
| | | |
/s/ JOHN D. THOMPSON
John D. Thompson
| | Director | | April 15, 2015 |
| | 20 | |