UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A-210-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20042006
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-30975
TRANSGENOMIC, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 91-1789357 | |
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification Number) |
12325 Emmet Street Omaha, NE 68164 | 68164 | ||
(Address of Principal Executive Offices) | (Zip Code) |
(402) 452-5400
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange On Which Registered | |
None | N/A |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x X No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K xForm10-K X
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer (as definedor a non-accelerate filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Act). YesExchange Act.
Large Accelerated Filer ¨ NoAccelerated Filer ¨ Non-Accelerated Filer x
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes No X
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based on the last reported closing price per share of Common Stock as reported on The Nasdaq NationalGlobal Market on the last business day of the registrant’s most recently completed second fiscal quarter was approximately $38.37$22.63 million.
As of April 14, 2005,At March 30, 2007, the registrant had 34,234,92249,189,672 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant Proxy Statement relating to its 2007 Annual Meeting of Stockholders (the “Proxy Statement”) have been incorporated into Part III of this Report on Form 10-K.
Explanatory NoteTRANSGENOMIC, INC.
We are amending our annual report on Form 10-K for the fiscal year ended December 31, 2004 (“Form 10-K”) for certain adjustments that are required to appropriately report cash flows from operating and investing activities in the audited consolidated statements of cash flows included in Part II, Item 8 herein and related cash flow disclosures included in Part II, Item 7. These restatements are discussed in Note P to the consolidated financial statements and result only in a reclassification of certain items within the audited consolidated statement of cash flows. They have no effect on the net change in cash and cash equivalents for any period reported or any other line item in the audited consolidated financial statements. Except as indicated, we have made no other changes to our Form 10-K.
Index to Form 10-K/A-210-K for the Fiscal Year Ended December 31, 20042006
Item 1. | 2 | |||||
Item 1A. | 7 | |||||
Item 1B. | 11 | |||||
Item 2. | 12 | |||||
Item 3. | 12 | |||||
Item 4. | 12 | |||||
Item | ||||||
Item 6. | 15 | |||||
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
Item 7A. | 30 | |||||
Item 8. | ||||||
Consolidated Balance Sheets as of December 31, | ||||||
Item 9. | Changes in and Disagreement with Accountants on Accounting and Financial Disclosure | 56 | ||||
Item 9A. | ||||||
Item | 56 | |||||
Item 10. | 56 | |||||
Item 11. | 56 | |||||
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 57 | ||||
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 57 | ||||
Item 14. | 57 | |||||
Item 15. | ||||||
62 |
This annual reportAnnual Report on Form 10-K/A10-K references the following registered trademarks which are the property of Transgenomic: DNASEP® Columns, WAVE® System, WAVEMAKER® Software, TRANSFORMING THE WORLD® for Laboratory Equipment, TRANSGENOMIC® and the Globe Logo®; MutationDiscovery.com® Website, OLIGOSEP® for Systems and Reagents, OPTIMASE® Polymerase, RNASEP® Columns, SURVEYOR®WAVE OPTIMIZED® reagents, and WAVE® MD Systems. Additionally, this Annual reportReport on Form 10-K references the following trademarks which are the property of Transgenomic: MitoScreen™ Kits, ProtocolWriter™ Software, Navigator™ Software, THE POWER OF DISCOVERY™ for Lab Reagents and Educational Programs, and Surveyor™ Nuclease. All other trademarks or trade names referred to in this Annual Report on Form 10-K/A10-K are the property of their respective owners.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains or incorporates by reference certain forward-looking statements. Many of these forward-looking statements refer to our plans, objectives, expectations and intentions, as well as our future financial results and are subject to risk and uncertainty. You can identify these forward-looking statements by words such as “expects,” “anticipates,” “intends,” “plans,” “may,” “will,” “believes,” “seeks,” “estimates” and similar expressions. Because these forward-looking statements involve risks and uncertainties, there are many factors that could cause our actual results to differ materially from those expressed or implied by these forward-looking statements, including those discussed under “Risks Related to Our Business” and other factors identified by cautionary language used elsewhere in the Annual Report on Form 10-K.
Business |
We provideTransgenomic, Inc. (the “Company”) provides innovative products and services for the synthesis, purification and analysis of nucleic acids. Our operations fall into two principal business units, BioSystemsacids used in the life sciences industry for research focused on molecular genetics and Nucleic Acids. Our BioSystems products include our WAVE® automated instrument systems, WAVE associated consumable productsdiagnostics. We also provide genetic variation analytical services to the medical research, clinical and other related consumable products. Our Nucleicpharmaceutical markets. Net sales are categorized as bioinstruments, bioconsumables and discovery services.
· | Bioinstruments. Our flagship product is the WAVE System which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There is a world-wide installed base of over 1,350 WAVE Systems as of December 31, 2006. We also distribute bioinstruments produced by other manufacturers through our sales and distribution network. Service contracts to maintain installed systems are sold and supported by technical support personnel. |
· | Bioconsumables. The installed WAVE base and some third-party installed platforms generate a demand for consumables that are required for the system’s continued operation. We develop, manufacture and sell these products. In addition, we manufacture and sell consumable products that can be used on multiple, independent platforms. These products include SURVEYOR Nuclease and a range of HPLC separation columns. |
· | Discovery Services. We provide various genetic laboratory services through a contract research lab in Gaithersburg, Maryland and a second laboratory in Omaha, Nebraska that operates in a Good Laboratory Practices (“GLP”) compliant environment and is certified under the Clinical Laboratory Improvement Amendment. The services provided primarily include (1) genomic biomarker analysis services to pharmaceutical and biopharmaceutical companies to support preclinical and clinical development of targeted therapeutics; and (2) molecular-based testing for hematology, oncology and certain inherited diseases for physicians and third-party laboratories. |
Historically, we operated a segment (the “Nucleic Acids products consist principally ofoperating segment”) that developed, manufactured and marketed chemical building blocks for nucleic acid synthesis. Both business unitsIn the fourth quarter of 2005, we implemented a plan to exit the Nucleic Acids operating segment and have service offerings as well, including genetic variation discovery and analysis services and custom synthesis of specialty nucleic acids.
Our technologies center around three core competencies: separation chemistries, enzymology, and nucleic acid chemistries. We employ novel chemistries for separating nucleic acids, proteins, peptides, amino acids and carbohydrates. Our most significant separation technology is currently embodied in the WAVE System. The WAVE System is a versatile instrument that can be used for genetic variation detection, size-based double-strand DNA separation and analysis, single-strand DNA separation and analysis and DNA purification. The WAVE System requires the use of various consumable products that we manufacture and sell separately.
Our second core competency is expertise in developing novel enzymes. Enzymes are proteins that act as catalysts for biochemical reactions. Several of these reactions are useful in genomics. The ability to develop enzymes useful in the experimental manipulation of genes provides powerful tools for producing genetic material in the form needed for further analysis or incorporation into diagnostics and therapeutics. These products can also expandrecently completed the sale of consumable products to WAVE System users and may also be sold for other applications. Our SURVEYOR® product line of mutation detection kits allow for the cleaving of DNA at points where DNA sequence variations exists. The resulting DNA fragments can then be analyzed by our WAVE System, fluorescent capillary electrophoresis or standard gel electrophoresis. SURVEYOR Kits provide a simple and robust method of scanning relatively large DNA fragments for both known and novel sequence variations.
Our third core competency is nucleic acid chemistries. Our synthetic nucleic acid products consist of chemical building blocks of nucleic acids (known as phosphoramidites). We also manufacture related specialty chemicals such as fluorescent markers and molecular tags, dyes, quenchers, linkers, and solvents used to modify nucleic acids for subsequent detection or manipulation. These products are used by research organizations, diagnostic companies and pharmaceutical companies. These products are produced primarily in our Glasgow, Scotland facility. Prior to November 11, 2004, we had also manufactured synthesized segments of nucleic acids (known as oligonucleotides) in a facility in Boulder, Colorado. On November 11, 2004, we sold theremaining assets associated with this facility to a subsidiary of Eyetech Pharmaceuticals, Inc. (“Eyetech”). As a result of this sale, we no longer manufacturesegment. Accordingly, the assets and sell these specialized oligonucleotides.
Our operations are managed based upon the natureresults of the products and services provided. Accordingly, we operateNucleic Acids operating segment are reflected as discontinued operations for all periods presented in two reportable segments, BioSystems and Nucleic Acids. Operations for these segments are evaluated based upon specific identification of revenues and expenses associated with the business activities resulting in a segment operating income or loss. See Note K to the accompanying consolidated financial statements for detailed segment information.this filing.
Business Strategy
Since inception, our business strategy has been to provide products and services to biomedical researchers, medical institutions, diagnostic and pharmaceutical companies that are tied to advancements in the field of genetics. The movementgenomics. Advances in the field of genomics have fueled efforts to understand individual differences in disease susceptibility, disease progression, and related market opportunities, has shifted from gene discoveryresponse to the analysis of variations in gene sequences. Researchers are beginning to link variations in the gene sequences to disorders and diseases.therapy. Accordingly, a principal component of our strategy has been to establish our WAVE System as thean industry standard in the geneticbiomedical research market and to develop additional markets for the WAVE System such as clinical research and diagnostics. Through an expanding base of installed systems, we expect to increase the sales of consumable products used with the WAVE.WAVE System and create opportunities to market additional products to this customer base.
WeIn addition, through our Discovery Services offerings, we have also historically soughtgained exposure to position ourselves as a partner to biopharmaceuticalthe translational and pharmaceutical companiesclinical research markets, laying the foundation for increasing our participation in the early stagesfull value chain associated with activities ranging from basic biomedical research to development of their efforts to develop genomic-based diagnosticsdiagnostic and therapeutics, thereby allowingtherapeutic products. During the fourth quarter of 2005, our laboratory in Omaha, Nebraska was certified under the Clinical Laboratory Improvement Amendments and we received our first patient samples for molecular-based testing for hematology, oncology and certain inherited diseases for physicians and third-party laboratories. We believe there is a significant opportunity for us to participate in future successes of products derivedcapitalize on the increasing demand for molecular-based personalized medicine by leveraging on our technologies and experience gained from the expanding knowledge of genomics. While wegenomic biomarker analysis that our Discovery Services Group has and will continue to believe that the long-term prospects for this business segment are favorable, we concluded that near-term revenuesprovide to pharmaceutical and biopharmaceutical companies.
Significant Recent Events
There have been key changes to our senior management.
On April 3, 2006, Collin J. D’Silva resigned as our President and Chief Executive Officer. Mr. D’Silva served as our Chairman until January 19, 2007, when he also resigned from this segment would generate neither positive cash flows nor profits from operations. Consequently, in the second quarter of 2004, our Board of Directors directedand as our Chairman. The Board of Directors appointed Gregory Sloma, a current independent director, to serve as the interim Chairman of the Board.
Craig J. Tuttle joined the Company as the President and Chief Executive Officer on July 12, 2006, Mr. Tuttle, age 54, has over 25 years of general management, sales and marketing, and research and development experience in medical diagnostic and biotechnology companies. During 2004 and 2005, Mr. Tuttle was the President and Chief Operating Officer of Duke Scientific, a Northern California specialty chemistry manufacturer, and led the sale of Duke Scientific to exploreFisher Healthcare in 2005.
On September 20, 2006, Michael A. Summers, resigned as our Chief Financial Officer in order to pursue another professional opportunity. On December 4, 2006, Debra A. Schneider, age 48, joined the Company as Vice President and Chief Financial Officer. Ms. Schneider also serves as the Secretary and Treasurer of the Company. Ms. Schneider was most recently employed by First Data Corporation, a provider of processing and related services to institutions issuing credit and debit cards. Ms Schneider’s tenure at First Data Corporation covered seventeen years during which she served in a number of roles including finance planning, accounting and Chief Financial Officer for various business units. Most recently she served as Senior Vice President of Finance.
The Company has been engaged in a process of exploring strategic alternatives, forwhich it recently terminated.
The Company’s Board of Directors hired an independent financial advisor to assist the Board in its evaluation of potential strategic alternatives available to the Company that included but were not
limited to (i) the sale of all or a portion of the continuing business or related assets; (ii) the acquisition of complementary businesses or assets; (iii) a merger; and (iv) other complementary business partnerships and collaborations. Although the financial advisor contacted a substantial number of companies, both in and outside of the genomics industry, regarding a potential strategic transaction, and management entered into negotiations with a number of these companies, no agreements were reached with any company with respect to such a transaction. The Board of Directors has elected to terminate its contract with the independent financial advisor effective April 25, 2007.
We exited our former Nucleic Acids operating segment.
On December 22, 2005, the Company’s Directors voted to either sell or close and liquidate the Nucleic Acids operating segment, including the possible salewhich consisted primarily of one or both of the facilities in Glasgow, Scotland and Boulder, Colorado. On November 11, 2004, we sold the assets associated with our specialty oligonucleotidea manufacturing facility in Boulder, Colorado. We continue to operate our facility in Glasgow, Scotland which primarily produces chemical building blocks used in the synthesisScotland. This decision was made after an evaluation of, nucleic acids. However, we have taken steps to consolidate these operationsamong other things, short and to reduce costs in order to better align operating expenses with anticipated revenues.
Our business strategy going forward is to achieve revenue growth in our BioSystemslong-term sales projections for products sold by this operating segment, andincluding estimates of 2006 sales to better align our cost structure with anticipated revenues in both of ourthe operating segments. We have already taken stepssegment’s largest customer. While opportunities to implementsell this strategyoperating segment as more fully discussed under “Significant 2004 Developments,” below.
Significant 2004 Developments
We determined that oura going concern were evaluated, we did not receive any offers to purchase the Nucleic Acids operating segment was impairedsegment. Accordingly, we closed the Glasgow facility and sold our specialty oligonucleotides manufacturing facility.
Based upon information obtained throughbegan the process of evaluating strategic alternatives for our Nucleic Acids segment, we determined that it was more likely than not that the valueliquidation of the assets associated with the Nucleic Acids operating segment. All employees of this businessoperating segment were impaired. either dismissed or redeployed to our Bioinstruments operating segment. The Glasgow facility was sold on February 28, 2007 for approximately $2.7 million after associated selling costs. Proceeds will be used in the normal operations of the Company.
We engaged an external valuation firmhave continued to assist us in conducting an interim period impairment test that resulted in a non-cash charge of $11.97 million relatedwork to these assets during the three months ended June 30, 2004. The charge consisted of $9.87 million related to the impairment of goodwill and $2.10 million related to the impairment of property and equipment.
reduce operating costs
On November 11, 2004,February 20, 2007, we sold the assets associated with our specialty oligonucleotides manufacturing facility in Boulder, Colorado to Eyetech. The sale price was $3.00 million in cash plus the assumption of the lease on the Boulder facility and of certain equipment leases withannounced a gross value of $2.38 million. Substantially all of the 27 employees at the Boulder facility became Eyetech employees. Net proceeds from the sale (after transaction expenses and fees paid to our investment advisors) equaled approximately $2.70 million. In conjunction with this transaction, we recorded a gain on sale of $1.47 million in the fourth quarter of 2004.
We implemented a restructuring plan to better align costs with expected revenues.
On November 13, 2004, our Board of Directors approved a restructuringcost reduction plan designed to refocus the Company on its BioSystems operating segment and to better align our cost structure with anticipated revenues. The plan (which is incrementalexpected to the sale of our Boulder, Colorado facility) included a workforce reductionyield annualized savings of approximately 60 positions and$1.5 million once all components of the closureplan are fully implemented. The closing of two domestic research and development facilities associated with our Nucleic Acids operating segment and two European field offices. Additionally, we eliminated approximately 10 positionsthe Company’s Cramlington, England production facility is the principal component of this plan. We expect to incur aggregate charges estimated at our chemical building blocks manufacturing facility in Glasgow, Scotland. In conjunction with these changes, we incurred a charge of $3.57$1.2 to $1.4 million during the quarter ended December 31, 2004 relatedfirst and second quarters of 2007, relating primarily to severance, benefits and facility closures.
closure costs.
Together,Our stock has been delisted from the sale of our specialty oligonucleotide manufacturing facilityNasdaq Capital Market and the implementation of our restructuring plan are expected to result in $10.0 million to $12.00 million in annual cost savings.
We revised our credit facilities with Laurus Master Funds, Ltd.
We have entered into a $7.50 million convertible line of credit (the ”Credit Line”) and a separate $2.75 million convertible note (the ”Term Note”) with Laurus Master Fund, Ltd. (“Laurus”)(collectively, the “Laurus Loans”). In February 2004, Laurus waived the borrowing base limitationis now trading on the Credit Line, thereby makingOTC Bulletin Board (OTCBB)
On February 1, 2007, we received a staff determination letter from Nasdaq’s Listing Qualifications Department indicating that we no longer met the full $7.50 million facility available to the Company regardless of the available collateral. On August 31, 2004, Laurus agreed to extend the borrowing base waiverminimum bid price requirement for continued listing on the Credit Line through March 19, 2005. In addition, Laurus has deferred certain payments due underNasdaq Capital Market. As a result, the Term Note and reduced the interest rate on bothlisting of the Laurus Loans to 0% for any day the closing sale price of the Company’s common stock is at or above $1.75 per share. In return, we lowered the conversion price on each of the Laurus Loans to $1.00 per share and issued a warrant to Laurus covering an additional 400,000 common shares at an exercise price of $1.25 per share. The closing price of the Company’sour common stock on August 31, 2004the Nasdaq Capital Market was $1.20 per share.
Subsequent to December 31, 2004, we further amendedended on February 22, 2007. Trading information about our Credit Line. On March 18, 2005, Laurus agreed to extend the borrowing base waivercommon stock became available on the Credit Line through March 31, 2006. In addition, we agreed to allow Laurus to convert $1.87 million of the outstanding principal balance under the Credit Line into 3,600,000 shares of common stockOTC Bulletin Board beginning on March 18, 2005 and $0.65 million of the outstanding principal balance of the Term Note into 1,250,000 shares of common stock on March 24, 2005. As a result, we have increased the amount available under the Credit Line by $1.87 million and have eliminated substantially all remaining 2005 scheduled principal payments on the Term Loan.
February 26, 2007.
Sales and Marketing
We currently sellhave sold our products to customers in over 3050 countries. We use a direct sales and support staff for sales in the U.S., U.K. and most countries in Western Europe. For the rest of the world, we sell our products through dealers and distributors located in those local markets. We currently have over 2535 dealers and distributors. We also maintain regionally-based technical support staffs and applications scientists to support our sales and marketing activities throughout the U.S. and Europe. The nature of our instruments and bioconsumables business does not generally lend itself to tracking and reporting sales backlog.
Customers
Customers include numerous leading academic and medical institutions in the U.S. and abroad. In addition, our customers also include a number of large, established U.S. and foreign pharmaceutical, biotech and commercial companies.
During 2004, sales to Geron Corporation totaled $4.15 million and represented 12% of total consolidated net sales and 49% of total net sales within our Nucleic Acids operating segment. We do not have a long-term sales agreement with Geron Corporation and, accordingly, the amount of nucleic acid products we sell to it is subject to change. Revenues from our Nucl eic Acids business would be substantially reduced if Geron Corporation’s need for our products declined or if it decided to obtain these products from other suppliers.
No other customer currently accounts for more than 10% of total consolidated or operating segment net sales.
Research and Development
We maintain an active program of research and development and expect to continue to incur significant expense for these activities going forward. Our research and development activities includeprimarily directed toward the improvement of the DNA separation media used in our WAVE System, the refinement of the hardware and software components of the WAVE System, the creation of unique enzymes and WAVE-Optimized® enzymes, and the development of assays on the WAVE System. We have also focused on further refinements and process manufacturing improvements for our Surveyor DNA mismatch cutting enzyme. Most importantly, we completed a large cancer mutation scanning study where we employed our SURVEYOR and WAVE System technology to discover a lesser extent,significant number of cancer linked mutations which we believe may have commercial value in the improvement of chemicalfuture. We plan to prepare patent submissions on discovered mutations for up to 40 key cancer regulating and biochemical reaction techniques for synthetic nucleic acids.signaling genes.
Consistent with our business strategy discussed above, we have taken steps to reduce researchFor the years ended December 31, 2006, 2005 and development expenditures to levels that are more consistent with our current levels of revenue. For 2004,
our research and development expendituresexpenses were approximately $6.69 million. This represents a substantial reduction from our prior levels of expenditures that were $9.31$2.36 million, $12.20$2.20 million and $9.37$4.50 million, in 2003, 2002 and 2001, respectively. We expect that we will further curtail ourneed to continue to invest in research and development activities untilin order to remain competitive and to take advantage of new business opportunities as they arise. During 2007, we are ableexpect research and development expense to increasebe approximately equal to the 2006 levels.
In addition to the amounts reflected above, our revenues or otherwise improve our liquiditydiscontinued operations incurred no research and working capital positions.
development expenses during the years ended December 31, 2006 and 2005 and $2.18 million during the year ended December 31, 2004.
Manufacturing
We manufacture bioconsumable products including our separation columns, liquid reagents, enzymes and nucleic acid products.enzymes. The major components of our WAVE systemsSystems are manufactured for us by a third party. We integrate our own hardware and software with these third party manufactured components. Our manufacturing facilities for our WAVE® systems Systems and bioconsumables are located in Omaha, Nebraska, San Jose, California, and Cramlington, England. Our phosphoramidites and related synthetic nucleic acid products are manufacturedEngland (through December 31, 2006). As noted earlier, we plan to close the Cramlington, England facility in our Glasgow, Scotland facility.
2007.
Intellectual Property
To establish and protect our proprietary technologies and products, we rely on a combination of patent, copyright, trademark and trade-secret laws, as well as confidentiality provisions in our contracts. We presently own rights to more than 8070 issued patents and 5013 pending applications in both the U.S. and abroad. Our BioSystems operating segment products, comprising the WAVE® System and related consumables are protected by patents and in-licensed technologies with remaining lives of 9 to 18 years. Intellectual property related to our Synthetic Nucleic Acid business unit, other than production trade secrets, is almost entirely in-licensed. A number of these in-licensed patents have recently, or will soon, expire. As a result, we expect price competitionthat expire in the Nucleic Acids operating segment to intensifyvarious periods beginning in the next year.2013 through 2022. We will continue to file patent applications and seek new licenses as warranted to protect and develop new technologies of interest to our customer base in the coming years.
Competition
The markets in which our Biosystems operating segment operateswe operate are highly competitive and characterized by rapidly changing technological advances. A number of Transgenomic’sour competitors possess substantial resources and are able to develop and offer a much greater breadth of products and/or services, coupled with significant marketing and distribution capabilities. Transgenomic competesWe compete principally on the basis of uniquely enabling technical advantages in specific but significant market segments.
Competition for our WAVE Systems arises primarily from DNA sequencing and genotyping technologies. Competitors in these areas include Applied Biosystems, Beckman Coulter, Amersham (now part of GE Healthcare), Affymetrix, Agilent Technologies, Nanogen, Illumina, Sequenom, Pyrosequencing (now part of Biotage AB), Varian, and others. Competition for some of our non-WAVE consumable products comes from numerous well-diversified life sciences reagents providers, including, among others, Invitrogen, Qiagen, Roche, Stratagene, and Promega. Our Discovery Services unit facesdiscovery services face competition from a number of companies offering contract DNA sequencing and other genomic analysis services, including Genaissance Pharmaceuticals, GeneLogic, Agencourt, SeqWright, Gentris, and Perlagen. In addition, several clinical diagnostics service providers, such as Labcorp, Quest, and Specialty Laboratories, also offer related laboratory services in support of clinical trials. Finally, additional competition arises from academic core laboratory facilities.
Competition is also intense in the markets in which our Nucleic Acids operating segment functions, and increasingly driven by price. Transgenomic competes on the basis of its ability to develop and manufacture synthetic nucleic acid building blocks used to make DNA and RNA oligonucleotides. Competitors include Proligo Degussa, Pierce Nucleic Acid Technologies, and Applied Byosystems. In addition, competition is expected in the future from new overseas entrants focusing on low cost production.
Employees
As of December 31, 20042006, 2005 and 2003,2004, we had 178 and 244 employees respectively. Certain of those employees at December 31, 2004 were terminated during January and February 2005 in connection with the 2004 restructuring plan. As of February 28, 2005, we had 157 employees and expect our headcount to be relatively stable throughout the remainder of 2005. These employees are focused in the following areas of our operation:
February 28, 2005 | December 31, 2004 | December 31, 2003 | December 31, | |||||||||
BioSysytems Operating Segment | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Manufacturing | 50 | 52 | 54 | 47 | 56 | 52 | ||||||
Sales, Marketing and Administration | 68 | 75 | 90 | 65 | 73 | 75 | ||||||
Research and Development | 18 | 19 | 31 | 16 | 10 | 19 | ||||||
136 | 146 | 175 | 128 | 139 | 146 | |||||||
Nucleic Acids Operating Segment | ||||||||||||
Manufacturing | 16 | 20 | 45 | |||||||||
Sales, Marketing and Administration | 5 | 6 | 8 | |||||||||
Research and Development | 0 | 6 | 16 | |||||||||
Personnel associated with discontinued operations | — | 17 | 32 | |||||||||
21 | 32 | 69 | 128 | 156 | 178 | |||||||
157 | 178 | 244 | ||||||||||
Our employees were employed in the following geographical locations:
December 31, | ||||||
2006 | 2005 | 2004 | ||||
United States | 84 | 94 | 106 | |||
Europe (other than the United Kingdom) | 23 | 23 | 22 | |||
United Kingdom | 21 | 39 | 50 | |||
128 | 156 | 178 | ||||
We supplement our workforce through the use of independent contractors and consultants. As of February 28,At December 31, 2006, 2005 and December 31, 2004, we have engaged independent contractors or consultants who provide services to us approximately equivalent to fiveone, one and fourfive full-time employees, respectively.
Our employees were employed in the following geographical locations.
February 28, 2005 | December 31, 2004 | December 31, 2003 | ||||
United States | 93 | 106 | 166 | |||
Europe (other than the United Kingdom) | 20 | 22 | 20 | |||
United Kingdom | 44 | 50 | 58 | |||
157 | 178 | 244 | ||||
General Information
We were incorporated in Delaware on March 6, 1997. Our principal office is located at 12325 Emmet Street, Omaha, Nebraska 68164 (telephone: 402-452-5400). We maintain manufacturing facilities in Omaha, Nebraska, San Jose, California, Glasgow, Scotland and Cramlington, England. We maintain research and development offices in Gaithersburg, Maryland and Omaha, Nebraska.
As noted earlier, we plan to close the Cramlington, England facility in 2007.
Our Internet address iswww.transgenomic.com. We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reportsfiled by us with the SEC available free of charge throughon our website as soon as reasonably practicable after we file these documents with the Securities and Exchange Commission.reports are filed. The address of our website iswww.transgenomic.com. Information on our website, including any SEC report, is not part of this Annual Report on Form 10-K.
Risks Related to Our Business
Risk Factors |
We may not have adequate financial resources to execute our business plan and may be need to terminate some operations.plan.
We have experienced nethistorically operated at a loss and have not generated sufficient cash from operating activities to cover our operating and other cash expenses. While we have been able to historically finance our operating losses and had an accumulated deficitthrough borrowings or from the issuance of $107,101 atadditional equity, we currently have no plans to borrow additional funds or to issue additional equity securities for this purpose. At March 30, 2007 and December 31, 2004. As of March 31, 2005,2006, we had cash and cash equivalents of $1.37$7.91 million plus an additional $2.29and $5.87 million, available under our Credit Line. Based on our 2005 operating plan,respectively. While we believe that existing sources of liquidity will beare sufficient to meet expected cash needs during 2005. If necessary,through 2007, we believewill need to increase our revenues or further reduce our operating expenses in order to be assured of meeting our liquidity needs on a long-term basis. However, we can manage costs and expenses at reduced levels to conserve working capital. The need for any such cost and expense reductions during 2005 would likely delay implementation of our business plan. Additionally, we may pursue additional financing alternatives. Ultimately, we must achieve sufficient revenue levels to support its cost structure.
Not withstanding our beliefs, there is no assurancecannot assure you that we will be able to achieve all of these stepsincrease our revenues or that any of these steps will allow us to meetfurther reduce our cash needs. Accordingly, our existing cash balances, cash generated by operations,expenses and, available borrowings under the Credit Line may be insufficient to satisfy our liquidity requirements if our operating plan is not met. In addition, there is no assurance that we will be able to obtain additional debt or equity financing to meet future cash needs. If we are not able to meet our needs for working capital,accordingly, we may not be ablehave sufficient sources of liquidity to execute parts or allcontinue the operations of our business plan and may need to discontinue operations in one or both of our operating segments.
the Company indefinitely.
We have a history of operating losses and may incur losses in the future.
We have experienced annual losses from continuing operations since inception of our operations. Our operating losses from continuing operations for each of the last three fiscal years ended December 31, 2006, 2005 and 2004 were $29.06$2.96 million, $22.59$4.98 million, and $21.70$13.75 million, respectively. These losses have been due principally to the high levels of research and development expenses and sales and marketing expenses that we have incurred in order to develop and market our products, the fixed nature of our manufacturing costs, restructuring charges and impairment charges. In addition, markets for our products and services have developed more slowly than expected in many cases and may continue to do so. As a result, we may incur operating losses in the future, and we may never be profitable.
future.
We may issue a substantial amount of our stock in conversion of our debt and exercise of options and warrants and this could reduce the market price for our stock.
As of April 14, 2005, we had outstanding 34,234,922 million shares of common stock. We also had obligations to issue approximately 6.2 million shares of common stock under outstanding stock options and warrants. Additionally, we may issue shares of common stock upon conversion of all or part of the Laurus Loans. Currently, Laurus may acquire 2.8 million shares of our common stock upon conversion of this debt. The issuance of such additional shares of common stock may be dilutive to our current shareholders and could negatively impact the market price of our common stock.
Markets for our products and services may continue to develop slowly.
There are many factors that affect the market demand for our products and services that we cannot control. This is especially true in our Nucleic Acids operating segment where the demand for our products depends to a large degree on the success that our customers and potential customers have in developing useful pharmaceutical products based on genetic intervention. A central strategy for our Nucleic Acids operating segment is to sell synthetic nucleic acid products to biopharmaceutical and pharmaceutical companies that are seeking to develop commercially viable genomic-based diagnostic and therapeutic products. We have invested a significant amount of capital into acquiring and developing manufacturing facilities and other assets to allow us to pursue this market. However, this is a new field of commercial development, and many of these biopharmaceutical and pharmaceutical companies are in the early stages of their efforts to develop genomic-based diagnostics and therapeutics and have encountered difficulties in these efforts. As a result, the demand for our synthetic nucleic acid products is difficult to forecast and may develop slowly or sporadically. In addition, we cannot assure you that these companies will not internally develop the chemistries and manufacturing capabilities to produce the products they could buy from us. Demand for our WAVE System is similarly affected by the needs and budgetary resources of research institutions, universities, hospitals and others who use the WAVE System for genetic-variation research. The WAVE System represents a significant expenditure by these types of customers and often requires a long sales cycle. If revenues from the sales of our products and services continue at current levels, we may need to take steps to further reduce operating expenses or raise additional working capital. We cannot assure you that sales will increase or that we will be able to reduce operating expenses or raise additional working capital. Similarly, the sales cycle for the OEM products that we sell can also be a long sales cycle.
Sales of our Discovery Services have been variable.
A single customer accounts for a significant portionSales of consolidated net salesdiscovery services have varied significantly due in large part to the fact that approximately 82% and net90% of discovery services sales in our Nucleic Acids operating segment.
During 2004 salesand 2005, respectively, were realized from orders from a single large pharmaceutical company. Sales to Geron Corporation totaled $4.15 million and represented 12% of total consolidated net sales and 49% of total net sales within our Nucleic Acids operating segment. We do not havethis customer were governed by a long-term salesnon-binding master services agreement with Geron Corporation and, accordingly,dated August 22, 2002. Accordingly, the amount of nucleic acid products we sellsales to itthis customer is subject to change. Revenues from our Nucleic Acids operating segment business would be substantially reduced if Geron Corporation’s need for our products declined or if it decidedIn 2006, we did not sell any discovery services to obtain these products from other suppliers.
No other customer currently accounts for more than 10% of total consolidated or operating segment net sales.
this customer.
Customer clinical trials may be delayed or discontinued.
A significant percentage of our Nucleic Acids operating segment and Discovery Services revenues are generated by sales to customers involved in drug development. Our products and services are generally used by these customers in the manufacture of drug candidates in varying stages clinical trials. If these clinical trials are delayed or cancelled or are otherwise not successful, this could have a significant impact on revenues.
The sale of our products and business operations in international markets subjects us to additional risks.
During the last three fiscalpast several years, our international sales have been approximately 55-65%represented more than half of our total net sales. As a result, a major portion of our revenues and expenses are subject to risks associated with international sales and operations. These risks include:
• payment cycles in foreign markets are typically longer than in the U.S. and capital spending budgets for research agencies can vary over time with foreign governments;
• changes in foreign currency exchange rates can make our products more costly and operating expenses higher in local currencies since our foreign sales and operating expenses are typically paid for in U.S. Dollars, British Pounds or the Euro; and
• the potential for changes in U.S. and foreign laws or regulations that result in additional import or export restrictions, higher tariffs or other taxes, more burdensome licensing requirements or similar impediments to our ability to sell products and services profitably in these markets.
Ÿ | payment cycles in foreign markets are typically longer than in the U.S., and capital spending budgets for research agencies can vary over time with foreign governments; |
Ÿ | changes in foreign currency exchange rates can make our products more costly and operating expenses higher in local currencies since our foreign sales and operating expenses are typically paid for in U.S. Dollars, British Pounds or the Euro; and |
Ÿ | the potential for changes in U.S. and foreign laws or regulations that result in additional import or export restrictions, higher tariffs or other taxes, more burdensome licensing requirements or similar impediments to our ability to sell products and services profitably in these markets. |
Our WAVE System includes hardware components and instrumentation manufactured by a single supplier and if we are no longer able to obtain these components and instrumentation our ability to manufacture our products could be impaired.
We currently rely on a single supplier, Hitachi High Technologies America, to provide the basic instrument used in our WAVE Systems. While other suppliers of instrumentation and computer hardware are available, we believe that our arrangement with Hitachi offers strategic advantages. Hitachi is replacing its current instrument line with a new instrument line. While we presently plan to convert our technology and applications to this new instrument line, such conversion may not be successful and, therefore, we may incur additional costs for the custom manufacturing of the current instrument line. If we were required to seek alternative sources of supply, it could be time consuming or expensive or require significant and costly modification of our WAVE System. Also, if we were unable to obtain instruments from Hitachi in sufficient quantities or in a timely manner, our ability to manufacture our products could be impaired, which could limit our future revenues.
We may not have adequate personnel to execute our business plan.
In order to reduce our operating costs, we have significantly reduced the number of employees including reductions in our research and development staff and our sales and marketing personnel.all area of the business. In addition, we may lose other key management, scientific, technical, sales and manufacturing personnel from time to time. It may be very difficult to replace personnel if they are needed in the future, and the loss of key personnel could harm our business and operating results. We cannot assure you that our employee reductions will not impair our ability to continue to develop new products and refine existing products in order to remain competitive. In addition, these reductions could prevent us from successfully marketing our products and developing our customer base.
Our markets are very competitive.
As described above, we compete with many other companies in both our Biosystems and Nucleic Acids operating segments. Many of these competing companiesour competitors have greater resources than we do and/or may enjoy other competitive advantages. This may allow them to more effectively market their products to our customers or potential customers, to develop products that make our products obsolete or to produce and sell products less expensively than us. As a result of these competitive factors, demand for and pricing of our products and services could be negatively affected.
The price for our common stock is volatile and may drop further.
The trading price for our common stock has fluctuated significantly over recent years. The volatility in the price of our stock is attributable to a number of factors, not all of which relate to our operating results and financial position. Nevertheless, continued volatility in the market price for our stock should be expected and we cannot assure you that the price of our stock will increase in the future. Fluctuations or further declines in the price of our stock may affect our ability to sell shares of our stock and to raise capital through future equity financing.
If we are unable to maintain our Nasdaq listing, your ability to trade shares of our common stock could suffer.
In order for our common stock to remain listed on the Nasdaq National Market (“Nasdaq”), we must meet the minimum listing requirements for continued listing, including, among other requirements, minimum bid price and market value of public float requirements. On March 31, 2005, we were notified that the bid price for our common stock over a 30-day period was below the $1.00 minimum required for continued listing of our common stock on the Nasdaq. In order to remain listed, the minimum bid price for our common stock must be at least $1.00 per share over ten consecutive business days before September 27, 2005. If we are not able to regain compliance with this listing requirement, we may be delisted from the Nasdaq. If our common stock is delisted from the Nasdaq, transactions in our common stock would likely be conducted only in the over-the counter market, or potentially on regional exchanges, which could negatively impact the trading volume and price of our common stock, and investors may find it more difficult to purchase or dispose of, or to obtain accurate quotations as to the market value of, our common stock. In addition, if our common stock were not listed on the Nasdaq and the trading price of our common stock fell below $1.00 per share, trading in our common stock would also be subject to the requirements of certain rules which require additional disclosures by broker-dealers in connection with any trades involving a stock defined as a “penny stock.” In such event, the additional burdens imposed on broker-dealers to effect transactions in our common stock could further limit the market liquidity of our common stock and the ability of investors to trade our common stock.
Our patents may not protect us from others using our technology that could harm our business and competitive position.
Patent law relating to the scope of claims in the technology fields in which we operate is still evolving. The degree of future protection for our proprietary rights is uncertain. Furthermore, we cannot be certain that others will not independently develop similar or alternative products or technology, duplicate any of our products, or, if patents are issued to us, design around the patented products developed by us. Our patents or licenses could be challenged by litigation and, if the outcome of such litigation were
adverse to us, our competitors could be free to use our technology. We may not be able to obtain additional patents for our technology, or if we are able to do so, patents may not provide us with substantial protection or be commercially beneficial. In addition, we could incur substantial costs in litigation if we are required to defend ourselves in patent suits brought by third parties or if we initiate such suits.
We cannot be certain that other measures taken to protect our intellectual property will be effective.
We rely upon trade secret protection, copyright and trademark laws, non-disclosure agreements and other contractual provisions for some of our confidential and proprietary information that is not subject matter for which patent protection is being sought. Such measures, however, may not provide adequate protection for our trade secrets or other proprietary information. If theysuch measures do not protect our rights, third parties could use our technology and our ability to compete in the market would be reduced.
We are dependent upon our licensed technologies and may need to obtain additional licenses in the future to offer our products and remain competitive.
We have licensed key components of our technologies from third parties. If these agreements were to terminate prematurely due to our breach of the terms of these licenses or we otherwise fail to maintain our rights to such technology, we may lose the right to manufacture or sell a substantial portion of our products. In addition, we may need to obtain licenses to additional technologies in the future in order to keep our products competitive. If we fail to license or otherwise acquire necessary technologies, we may not be able to develop new products that we need to remain competitive.
The patent underlying our nonexclusive license to manufacture standard nucleic acid building blocks expired as of March 15, 2005. The expiration of this patent could result in additional manufacturers entering the market for these products. Some of these manufacturers may have lower cost structures or other competitive advantages which may reduce our market share and/or our operating margins related to these products.
The protection of intellectual property in foreign countries is uncertain.
A significant percentage of our sales are to customers located outside the U.S. The patent and other intellectual property laws of some foreign countries may not protect our intellectual property rights to the same extent as U.S. laws. We may need to bring proceedings to defend our patent rights or to determine the validity of our competitors’ foreign patents. These proceedings could result in substantial cost and diversion of our efforts. Finally, some of our patent protection in the U.S. is not available to us in foreign countries due to the laws of those countries.
Our products could infringe on the intellectual property rights of others.
There are a significant number of U.S. and foreign patents and patent applications submitted for technologies in, or related to, our area of business. As a result, any application or exploitation of our technology could infringe patents or proprietary rights of others and any licenses that we might need as a result of such infringement might not be available to us on commercially reasonable terms, if at all. This may lead others to assert patent infringement or other intellectual property claims against us.
Our failure to comply with any applicable government regulations or otherwise respond to claims relating to improper handling, storage or disposal of hazardous chemicals that we use may adversely affect our results of operations.
Our research and development and manufacturing activities involve the controlled use of hazardous materials and chemicals. We are subject to federal, state, local and international laws and regulations governing the use, storage, handling and disposal of hazardous materials and waste products. If we fail to comply with applicable laws or regulations, we could be required to pay penalties or be held liable for any damages that result and this liability could exceed our financial resources. We cannot assure you that accidental contamination or injury will not occur. Any such accident could damage our research and manufacturing facilities and operations, resulting in delays and increased costs.
The price for our common stock is volatile and may drop.
The trading price for our common stock has fluctuated significantly over recent years. The volatility in the price of our stock is attributable to a number of factors, not all of which relate to our operating results and financial position. The delisting of our stock from the NASDAQ may negatively affect the volume of shares traded and the price for our stock. Continued volatility in the market price for our stock should be expected and we cannot assure you that the price of our stock will not decrease in the future. Fluctuations or further declines in the price of our stock may affect our ability to sell shares of our stock and to raise capital through future equity financing.
Our common stock is deemed to be “penny stock”, which may make it more difficult for investors to sell their shares due to suitability requirements.
Our common stock is classified as a “penny stock” under the rules of the SEC. The Securities and Exchange Commission has adopted Rule 3a51-1 which establishes the definition of a “penny stock”, for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, Rule 15g-9 requires:
· | that a broker or dealer approve a person's account for transactions in penny stocks; and |
· | that the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. |
In order to approve a person's account for transactions in penny stocks, the broker or dealer must:
· | obtain financial information and investment experience objectives of the person; and |
· | make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. |
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form:
· | sets forth the basis on which the broker or dealer made the suitability determination; and |
· | that the broker or dealer received a signed, written agreement from the investor prior to the transaction. |
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
We may issue a substantial amount of our common stock to holders of options and warrants and this could reduce the market price for our stock.
At December 31, 2006, we had obligations to issue 13,530,241 shares of common stock including outstanding stock options representing 5,467,664 shares and warrants representing 8,062,577 shares. The issuance of these additional shares of common stock may be dilutive to our current shareholders and could negatively impact the market price of our common stock.
Our common stock is thinly traded and a large percentage of our shares are held by a small group of unrelated, institutional owners.
At March 30, 2007, we had 49,189,672 shares of common stock outstanding. Fewer than ten unrelated, institutional holders own more than 50% of these shares The sale of significant shares into the public market has potential to cause significant downward pressure on the price of our common stock. This is particularly the case if the shares being placed into the market exceed the market’s ability to absorb the stock. Such an event could place further downward pressure on the price of our common stock. This presents an opportunity for short sellers to contribute to the further decline of our stock price. If there are significant short sales of our stock, the price decline that would result from this activity will cause the share price to decline more so, which, in turn, may cause long holders of the stock to sell their shares thereby contributing to sales of stock in the market.
Unresolved Staff Comments |
None.
Properties |
We currently lease and occupy a total of seven facilities throughout the world under non-cancelable leases with various terms. The following table summarizes certain information regarding the leased facilities. Annual rent amounts presented in the table are reflected in thousands.
Location | Function | Square Footage | 2007 Scheduled Rent | Lease Term | ||||
Omaha, Nebraska | WAVE and Consumable Manufacturing | 25,000 | $130 | June 2009 | ||||
San Jose, California | Consumable Manufacturing | 14,360 | $158 | October 2010 | ||||
Cramlington, England | Consumable Manufacturing(2) | 8,500 | $73 | March 2008 | ||||
Glasgow, Scotland | Multi Functional(1) | 5,059 | $31 | March 2012 | ||||
Omaha, Nebraska | Multi Functional(1) | 18,265 | $201 | July 2012 | ||||
Paris, France | Multi Functional(1) | 4,753 | $962 | January 2014 | ||||
Gaithersburg, Maryland | Multi Functional(1) | 6,560 | $46 | May 2007 |
(1) | Multi Functional facilities include functions related to manufacturing, services, sales and marketing, research and development and/or administration. |
(2) | As noted earlier, we plan to close this facility in 2007. Notice has been given to landlord, we will exit facility in March 2008. |
The Company no longer occupies its former facilities in San Diego, California and Cambridge, Massachusetts and leases on these facilities expired in January 2007. The Company expects to be able to renew leases that expire in 2007 on terms substantially similar to the existing lease terms.
Legal Proceedings |
The Company is not a party to any pending legal proceedings which, if decided adversely to the Company, will have a material adverse effect on our financial position, results of operations or cash flows.
Submission of Matters to a Vote of Security Holders. |
We did not submit any matters to our stockholders for a vote or other approval during the fourth quarter of the fiscal year covered by this report.
Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information. Share price information for our common stock is available on the OTC Bulletin Board under the symbol TBIO.OB. Prior to February 22, 2007, our common stock was listed for trading on the Nasdaq Capital Market under the symbol TBIO. The following table sets forth the high and low closing prices for our common stock during each of the quarters of 2005 and 2006.
High | Low | |||||
Year Ended December 31, 2005 | ||||||
First Quarter | $ | 1.11 | $ | 0.53 | ||
Second Quarter | $ | 0.90 | $ | 0.45 | ||
Third Quarter | $ | 1.24 | $ | 0.70 | ||
Fourth Quarter | $ | 1.11 | $ | 0.80 | ||
Year Ended December 31, 2006 | ||||||
First Quarter | $ | 1.03 | $ | 0.62 | ||
Second Quarter | $ | 0.84 | $ | 0.39 | ||
Third Quarter | $ | 0.77 | $ | 0.31 | ||
Fourth Quarter | $ | 0.89 | $ | 0.40 |
Holders. At March 30, 2007, there are 49,189,672 shares of our common stock outstanding and approximately 3,310 holders of record.
Dividends. We have never declared or paid any cash dividends on our common stock and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. We expect to retain all earnings, if any, for investment in our business. Dividends on our common stock will be paid only if and when declared by our Board of Directors. The Board’s ability to declare a dividend is subject to limits imposed by Delaware corporate law. In determining whether to declare dividends, the Board may consider our financial condition, results of operations, working capital requirements, future prospects and other relevant factors.
Securities authorized for issuance under equity compensation plans.
The following equity compensation plan information summarizes plans and securities approved and not approved by security holders as of December 31, 2006.
(a) | (b) | (c) | ||||
PLAN CATEGORY | Number of | Weighted-average option, warrants | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) | |||
Equity compensation plans approved by security holders(1) | 5,467,664 | $4.08 | 3,778,567 | |||
Equity compensation plans not approved by security holders | — | — | — | |||
Total | 5,467,664 | $4.08 | 3,778,567 | |||
(1) | Consists of our 2006 Equity Compensation Plan |
Five Year Performance Comparison: The following graph provides an indicator of cumulative total shareholder returns for the Company as compared to a peer group index comprised of Argonaut Technologies, Caliper Life Sciences, Cepheid, Cipergen Biosystems, Inc,Harvard Bioscience IC, Illumina, Inc., Luminex Corporation, Nuvelo, Inc., Orchid Biosciences, Inc. and Sequenom, Inc and to the Nasdaq Market Index. The graph assumes that the value of the investment in the Company’s common stock, the Nasdaq Market Index and the Peer Group Index, was $100 on December 31, 2001, and that all dividends were reinvested.
Sale of Unregistered Securities. The Company made no sales of its common stock during the years ended December 31, 2006 and 2004 that were not registered under the Securities Act of 1933 (the “Securities Act”). Information regarding sales of equity securities by the Company during the years ended December 31, 2005 that were not registered under the Securities Act of 1933 have been previously reported by the Company on Form 8-Ks filed on March 18, 2005, March 30, 2005 and October 31, 2005.
Issuer Purchase of Equity Securities. The Company made no purchases of its common stock during the quarter ended December 31, 2006. Therefore, tabular disclosure is not presented.
Selected Consolidated Financial Data |
The selected consolidated balance sheet data as of December 31, 2006 and 2005 and the selected consolidated statements of operations data for each year ended December 31, 2006, 2005 and 2004 have been derived from our audited consolidated financial statements that are included elsewhere in this Annual Report on Form 10-K. The selected consolidated balance sheet data as of December 31, 2004, 2003 and 2002 and the selected consolidated statements of operations data for each year ended December 31, 2003 and 2002 have been derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. Dollar amounts, except per share data, are presented in thousands.
Year Ended December 31, | ||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||
Net sales | $ | 23,415 | $ | 25,828 | $ | 25,243 | $ | 26,044 | $ | 24,235 | ||||||||||
Cost of good sold | 12,046 | 13,497 | 11,997 | 11,374 | 9,935 | |||||||||||||||
Gross profit | 11,369 | 12,331 | 13,246 | 14,670 | 14,300 | |||||||||||||||
Selling, general and administrative | 12,138 | 12,218 | 15,961 | 16,586 | 20,539 | |||||||||||||||
Research and development | 2,362 | 2,199 | 4,501 | 6,834 | 11,173 | |||||||||||||||
Restructuring charges(1) | — | — | 1,267 | 516 | 3,282 | |||||||||||||||
Impairment charges(2) | — | 425 | — | — | — | |||||||||||||||
Operating expenses | 14,500 | 14,842 | 21,729 | 23,936 | 34,994 | |||||||||||||||
Other income (expense)(3) | 198 | (2,447 | ) | (5,263 | ) | (181 | ) | 512 | ||||||||||||
Loss before income taxes | (2,933 | ) | (4,958 | ) | (13,746 | ) | (9,447 | ) | (20,182 | ) | ||||||||||
Income tax expense | 30 | 26 | 4 | 65 | 105 | |||||||||||||||
Loss from continuing operations | (2,963 | ) | (4,984 | ) | (13,750 | ) | (9,512 | ) | (20,287 | ) | ||||||||||
(Loss) income from discontinued operations, net of tax(4) | (468 | ) | (10,009 | ) | (20,622 | ) | (13,446 | ) | (1,078 | ) | ||||||||||
Net loss | $ | (3,431 | ) | $ | (14,993 | ) | $ | (34,372 | ) | $ | (22,958 | ) | $ | (21,365 | ) | |||||
Basic and diluted (loss) income per share:(4) | ||||||||||||||||||||
From continuing operations | $ | (0.06 | ) | $ | (0.14 | ) | $ | (0.47 | ) | $ | (0.39 | ) | $ | (0.86 | ) | |||||
From discontinued operations(4) | (0.01 | ) | (0.28 | ) | (0.72 | ) | (0.55 | ) | (0.05 | ) | ||||||||||
$ | (0.07 | ) | $ | (0.42 | ) | $ | (1.19 | ) | $ | (0.94 | ) | $ | (0.91 | ) | ||||||
Basic and diluted weighted average shares outstanding | 49,188 | 35,688 | 29,006 | 24,484 | 23,583 | |||||||||||||||
As of December 31, | ||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Total assets | $ | 21,367 | $ | 25,340 | $ | 37,458 | $ | 57,306 | $ | 74,035 | ||||||||||
Borrowings under credit line | — | — | 6,514 | 2,142 | — | |||||||||||||||
Current portion of long-term debt | — | — | 825 | 1,693 | 63 | |||||||||||||||
Long-term debt, less current portion | — | — | 2,199 | — | 1,499 | |||||||||||||||
Total stockholders’ equity | 16,038 | 17,906 | 16,535 | 45,058 | 61,515 |
(1) | Restructuring plans were implemented in 2002 and 2004 to reduce and align our expenses with current business prospects. The plans included employee terminations, office closures, termination of collaborations and write-offs of abandoned intellectual property. As a result, restructuring charges were recorded and are included in operating expenses. Refer to Note M to the accompanying consolidated financial statements. |
(2) | Impairment charges in 2005 relate to the impairment of patent pursuits and write-down of inventory to net realizable value. Refer to Notes to the accompanying consolidated financial statements. |
(3) | Other income (expense) for all years presented primarily includes interest expense and interest income, loss on debt extinguishment of $0.5 million in 2005 related to the repayment of long-term debt and $2.9 million resulting from certain modifications to long-term borrowing agreements that were treated as extinguishments for financial reporting purposes. Refer to Note F to the accompanying consolidated financial statements. |
(4) | During 2005, we decided to exit our Nucleic Acids operating segment and, as a result, we recorded impairment and exit charges of $8.8 million consisting of valuation adjustments to reflect the carrying value of related net assets at estimated fair market value. We now reflect the results of this business as discontinued operations for all periods presented. Refer to Note C to the accompanying consolidated financial statements. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following The Company’s continuing operations consist of the manufacture and sale of its WAVE System and related consumable products and discovery services which make use of the Company’s WAVE System to perform genomic research on a contract basis and disease testing services. These functions are categorized as one reportable operating segment. Although revenue is analyzed by type, the Company’s net financial results are analyzed as a single segment due to the Executive Summary 2006 Results Sales of bioinstruments and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.analysis gives effectdiscussion should be read in conjunction with the Consolidated Financial Statements and applicable Notes to Consolidated Financial Statements and other information in this report, including Risk Factors set forth in Item 1A and Critical Accounting Policies at the end of this Item 7.restatementintegrated nature of the products and services that we sell. The Consolidated Financial Statements also reflect the assets and results of our statements of cash flows for the years ended December 31, 2004 and 2003, as discussed in Note P to the consolidated financial statements.OverviewSince 2000 (the year of our initial public offering), we have incurred net losses of $94.76 million generally related to ourformer Nucleic Acids operating segment, researchwhich are shown as discontinued operations in all periods as a result of the implementation of a plan to exit this operating segment in the fourth quarter of 2005.development and selling, general and administrative costs. Our liquidity and working capital positionsassociated consumables continued to deteriorate during 2004 predominatelydecline in 2006, due to operating losses that were fundeda number of factors including competition from sequencing and other evolving technologies. Sales from our discovery services group during the year primarily by borrowings underwere down substantially from 2005 as we completed a significant engagement for a large pharmaceutical company and were not able to replace these sales in 2006. Although we have taken significant steps to reduce our Credit Lineoperating expenses in response to declining revenues, we continued to operate at a loss and to generate a negative cash flow during the saleyear. However, our loss and use of our specialty oligonucleotides facility in Boulder, Colorado. At December 31, 2004, we had an accumulated deficitcash were reduced significantly over each of $107.10 million.the last three years.ToWe continue to work to respond to changes in the overall business climate for our products and our liquidity positionposition. On December 22, 2005, we decided to sell or close and our demand for capital, we instituted significant changes during 2004 designed to, among other things, align our cost structure with projected revenues, focus on opportunities in our BioSystems operating segment, and minimizeliquidate the adverse financial effect of our Nucleic Acids operating segment. While the primary goals of these changes were to provide the foundation for a self-sustaining, growth-oriented company with positive cash flows and earnings, there can be no assurances that we can achieve these goals.We determined that our Nucleic Acids operating segment, which consisted primarily of a manufacturing facility in Glasgow, Scotland. This decision was impairedmade after an evaluation of, among other things, short and long-term sales projections for products sold our specialty oligonucleotide facility.by this operating segment, including estimates of 2006 sales to the operating segment’s largest customer. While opportunities to sell the operating segment as a going concern were evaluated, we ultimately ended up closing the facility and terminating or redeploying all of the employees of this business segment. In February of 2007, we completed the sale of the facility in Glasgow, Scotland. We now reflect the results of this operating segment as discontinued operations for all periods presented.Based upon information obtained throughAs a result of the processactions undertaken since the fourth quarter of evaluating strategic alternatives for our2004, including the reclassification of the Nucleic Acids operating segment as a discontinued operation, our losses from
continuing operations have gone from $13.75 million and $4.98 million in 2004 and 2005, respectively, to $2.96 million in 2006. Net cash flows used by operating activities have gone from $12.75 million and $3.63 million in 2004 and 2005, respectively to $1.21 million in 2006.
2007 Outlook
Timing of the demand for our products, particularly our flagship WAVE Systems, has been difficult to predict due largely to ongoing changes in the marketplace and the funding arrangements of our customers. Because our net sales are largely dependent upon sales of a limited number of products, including WAVE Systems and OEM Instruments, and our cost structure is largely fixed, historical results have been somewhat sporadic. For these reasons, it is not our practice to provide prospective financial guidance related specifically to revenues, costs, net income (loss) or cash flows. However, our financial objectives are to generate income from continuing operations and positive cash flows from continuing operations. To accomplish these goals we determinedmust generate sequential growth in net sales, leverage manufacturing expenses and continue to better control operating expenses. We will continue to look for opportunities, through consolidation or otherwise, to reduce our operating expenses related to our core business.
Develop sequential growth in net sales.
We will work to continue to leverage on and strengthen our core instrument business. Challenges exist for WAVE System and consumable growth in traditional markets. We believe emerging markets and novel applications will provide for opportunities for our WAVE System. We intend to continue to diversify into new markets, including the personalized medicine market (particularly in oncology), where the sensitivities of our technologies are essential. In the short-term, we believe that the introduction of the newest generation of our flagship product, the WAVE System 4500 will provide upgrade opportunities to our current installed base. In addition, we are also selling refurbished WAVESystems in order to allow an opportunity for customers that may not be able to afford the cost of a new system. In the intermediate to longer-term, we believe that newly developed “targeted” consumable products will increase usability of our installed base and enhance net sales of consumables. Additionally, we have developed credibility and momentum with third-party platforms that will allow us to leverage on our direct sales force and distribution network.
On the discovery services front, we will seek to leverage past successes with pharmaceutical customers to diversify our customer base. While we have performed discovery services for a number of large pharmaceutical customers, these engagements do not materialize at a constant rate and the lead time to develop major contracts is often lengthy. To mitigate this risk, we believe there is a significant opportunity for us to capitalize on the increasing demand for molecular-based personalized medicine by leveraging our technologies and experience gained from the genomic biomarker analysis that discovery services provides to pharmaceutical and biopharmaceutical companies. During the fourth quarter of 2005, our laboratory in Omaha, Nebraska was certified under the Clinical Laboratory Improvement Amendments, and we received our first patient samples from physicians and third-party laboratories for molecular-based testing for hematology, oncology and certain inherited diseases. This capability also allows us to offer a vertically-integrated suite of services that can support activities ranging from discovery research to clinical trials to diagnostic testing. As the need for drug/diagnostic combination products increases, we believe this suite of service offerings will prove attractive to various customers. We have recently added some new customers in this area of the business.
Continue to control operating expenses.
Operating expenses include selling, general and administrative expenses and research and development expenses. We will need to continue to invest in research and development activities in order to remain competitive and to take advantage of new business opportunities as they arise. During 2007, we expect operating expenses, including research and development expense, to be approximately equal to 2006 levels.
Results of Continuing Operations
Years Ended December 31, 2006 and 2005
Net Sales. Net sales for the years ended December 31, 2006 and 2005 consisted of the following (dollars in thousands):
Change | ||||||||||||
2006 | 2005 | $ | % | |||||||||
Bioinstruments | $ | 13,604 | $ | 14,427 | $ | (823) | (6) | % | ||||
Bioconsumables | 8,719 | 8,981 | (262) | (3) | % | |||||||
Discovery Services | 1,092 | 2,420 | (1,328) | (55) | % | |||||||
Net sales | $ | 23,415 | $ | 25,828 | $ | (2,413) | (9) | % | ||||
Bioinstrument sales consist of sales of our WAVE System and associated equipment that we manufacture or assemble, revenues from service contracts that we enter into with purchasers of our instruments, as well as sales of instruments we distribute for other manufacturers (“OEM equipment”). We also sell refurbished WAVE Systems in order to access customers that may not be able to afford new systems. We sold 68 WAVE Systems during the year ended December 31, 2006 compared to 97 systems during the same period of 2005. This decrease resulted from lower demand in all major geographic markets and among both research and diagnostic users particularly in our largest markets throughout Western Europe. Demand for the WAVE has been affected by significant competitive challenges from traditional (i.e. sequencing) and evolving technologies. The decrease in WAVE System sales was largely offset by OEM instrument sales, increased net sales from product upgrades and service contracts.
Bioconsumable net sales decreased during year ended December 31, 2006 compared to 2005. Despite the increase in installed base of WAVE instruments from 1,290 units at December 31, 2005 to 1,358 units at December 31, 2006, we do not believe that all of these instruments are being fully utilized. In addition, consumable products are available from other manufacturers which can be used in place of many of our consumable products. Some of these competitive products sell at prices below the prices we charge for our products, which have caused us to have some price compression, principally in Europe.
The decrease in discovery services net sales was primarily attributable to the expiration of certain research contracts with a large pharmaceutical company in 2005, of $2,188 that was partially offset by increased net sales from research projects from other pharmaceutical companies and services provided by our CLIA lab, of $384.
Costs of Goods Sold Costs of goods sold include material costs for the products that we sell and substantially all other costs associated with our manufacturing facilities (primarily personnel costs, rent and depreciation) 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 discovery services operations. Cost of goods sold for the years ended December 31, 2006 and 2005 consisted of the following (dollars in thousands):
Change | ||||||||||||
2006 | 2005 | $ | % | |||||||||
Bioinstruments | $ | 5,745 | $ | 6,442 | $ | (697) | (11) | % | ||||
Bioconsumables | 4,530 | 4,762 | (232) | (5) | % | |||||||
Discovery Services | 1,771 | 2,293 | (522) | (23) | % | |||||||
Cost of goods sold | $ | 12,046 | $ | 13,497 | $ | (1,451) | (11) | % | ||||
Gross profit equaled $11.37 million or 49% of total net sales during the year ended December 31, 2006 compared to $12.33 million and 48% during the same period of 2005. The increase in gross profit as a percent of revenue is largely attributable to changes in the composition of products sold. Sales of our OEM instruments (third party platforms) provided for higher gross profit in 2006, while gross profit on WAVE sales is down, due to the lower number of instruments sold and the fixed base of costs associated with this area. Sales of specialty consumables (SURVEYOR Nuclease, HPLC separation columns, etc.) were up slightly in 2006 and these products generate higher gross profits than base buffers and enzymes. Gross profit from discovery services is significantly less in 2006 due to the decrease in net sales to a large pharmaceutical customer which produced net sales of $2,188 in 2005 and $8 in 2006, coupled with a much smaller decrease in the cost of goods sold due to the fixed base of cost associated with the discovery services group.
Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily include personnel costs, marketing, travel and entertainment costs, professional fees, and facility costs. These costs remained essentially flat in 2006 compared to 2005, but increased as a percentage of net sales from 47% to 52% as a result of reduced sales. Foreign currency transaction adjustments increased operating expenses by approximately $.08 million compared to the year ended December 31, 2005
Research and Development Expenses. Research and development expenses primarily include personnel costs, supplies, and facility costs. These costs totaled $2.36 million during the year ended December 31, 2006 compared to $2.20 million during the same period of 2005, an increase of $0.16 million or 7%. As a percentage of net sales, research and development expenses totaled 10% and 9% of net sales during the year ended December 31, 2006 and 2005 respectively. We expect to continue to invest up to 10% of our net sales in research and development activities. Research and development costs are expensed in the year in which they are incurred.
Impairment Charges. We did not incur any impairment charges during 2006, but incurred $0.43 million of impairment charges during 2005 consisting of a $0.25 million charge associated with certain international patent pursuits that were no longer consistent with our strategic plan and a charge of $0.18 million related to inventory associated with certain OEM instruments.
Other Income (Expense). Other income during the year ended December 31, 2006 of $0.20 million consisted of interest income of $0.22 million which was partially offset by interest expense of
$0.01 million, and other expense of $0.01 million. Other expense during the year ended December 31, 2005 consisted of interest expense of $1.98 million and a loss on debt extinguishment of $0.54 million which was partially offset by interest income of $0.03 and other income of $0.04 million. Interest expense consisted of the following for the years ended December 31, 2006 and 2005 (dollars in thousands):
2006 | 2005 | ||||||
Interest paid or accrued on outstanding debt | $ | — | $ | 553 | |||
Amortization of debt premiums | — | (857 | ) | ||||
Amortization of debt discounts – warrants | — | 28 | |||||
Amortization of debt discount – beneficial conversion feature | — | 725 | |||||
Fair value of incremental shares received by Laurus | — | 1,365 | |||||
Other | 11 | 164 | |||||
$ | 11 | $ | 1,978 | ||||
We had previously entered into a $7,500,000 line of credit (the “Credit Line”) and a $2,750,000 convertible note (the “Term Note,” and collectively with the Credit Line the “Laurus Loans”) from Laurus Master Fund, Ltd. (“Laurus”). On March 18, 2005, Laurus converted $1.87 million of the outstanding principal balance under the Credit Line into 3,600,000 shares of our common stock at $0.52 per share. In addition, on March 24, 2005, Laurus converted $0.65 million of the outstanding principal balance of the Term Note into 1,250,000 shares of our common stock at $0.52 per share. In conjunction with these conversions, we accelerated amortization of $0.41 million of related debt premiums and discounts and recorded a charge to interest expense of $1.37 million related to the fair value of incremental shares received by Laurus. Contemporaneously with the closing of a private offering of common stock in November 2005 (the “2005 Private Placement”), we repaid all outstanding principal and accrued interest on the Laurus Loans. In conjunction with this prepayment, we recorded a loss on debt extinguishment of $0.54 million. This loss consisted of prepayment penalties and fees paid to Laurus to facilitate the 2005 Private Placement of $0.84 million offset by the elimination of associated net debt premiums of $0.30 million.
Income Tax Expense. Income tax expense recorded during the years ended December 31, 2006 and 2005 related to income taxes in states, foreign countries and other local jurisdictions. Due to the our cumulative losses, expected losses in future years and inability to utilize any additional losses as carrybacks, we did not provide for an income tax benefit during the years ended December 31, 2006 or 2005 based on our determination that it was more likely than not that such benefits would not be realized. We will continue to assess the valuerecoverability 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 associated with this business were impaired. We engaged an external valuation firm to assist us in conducting an interim period impairment testwill be recognized at such time. While the Company has significant net operating loss carryforwards, it is likely that resulted in a non-cash charge of $11.97 million related to these assets during the three months ended June 30, 2004. The charge consisted of $9.87 million related to the impairment of goodwillSection 382 (Limitation on Net Operating Loss Carryforwards and $2.10 million related to the impairment of property and equipment.
On November 11, 2004, we sold the assets associated with our specialty oligonucleotides manufacturing facility in Boulder, Colorado to a subsidiary of Eyetech Pharmaceuticals, Inc. (“Eyetech”). The sale price was $3.00 million in cash plus the assumptionCertain Built-In Losses following Ownership Change) of the lease onInternal Revenue Code, and the Boulder facility and certain equipment leases with a gross valueregulations promulgated thereunder, will significantly limit the amount of $2.38 million. Substantially all of the 27 employees at the Boulder facility became Eyetech employees. Net proceeds from the sale (after transaction expenses and fees paid to our investment advisors) equaled approximately $2.70 million. In conjunction with this transaction, we recorded a gain on sale of $1.47 million in the fourth quarter of 2004.
We implemented a restructuring plan to better align costs with expected revenues.
On November 13, 2004, our Board of Directors approved a restructuring plan designed to refocusnet operating loss carryforward that the Company on its BioSystems business segmentcould utilize in any tax year. Our federal net operating loss carryforwards from continuing and to better align our cost structure with anticipated revenues. The plan (which is incremental to the salediscontinued operations of our Boulder, Colorado facility) included a workforce reduction$106.23 million will expire at various dates from 2008 through 2026, if not utilized. We also had state income tax loss carryforwards from continuing and discontinued operations of approximately 60 positions and the closure of two domestic research and development facilities associated with our nucleic acids operating segment and two European field offices. Additionally, we eliminated 11 positions$43.84 million at our chemical building blocks manufacturing facility in Glasgow, Scotland. In conjunction with these changes, we incurred a charge of $3.57 million during the quarter ending December 31, 2004 related primarily to severance, benefits and facility closures.2006. These carryforwards will also expire at various dates beginning in 2007 if not utilized.
We expect the 2004 restructuring plan and the sale of our specialty oligonucleotide manufacturing facility to have a significant impact on our ongoing costs. The pro forma effects on our 2004 loss from operations are as follows.
2004 As Reported | Sale of Oligonucleotide Facility | Restructuring Plan(1) | Impairment Charges(2) | 2004 Pro Forma | ||||||||||||||||
In thousands | ||||||||||||||||||||
Net sales | $ | 33,789 | $ | 2,051 | $ | — | $ | — | $ | 31,738 | ||||||||||
Cost of goods sold | 24,596 | 5,456 | 706 | — | 18,434 | |||||||||||||||
Gross profit (loss) | 9,193 | (3,405 | ) | (706 | ) | — | 13,304 | |||||||||||||
Selling, general and administrative | 17,499 | 33 | 1,304 | — | 16,162 | |||||||||||||||
Research and development | 6,685 | 4 | 3,068 | — | 3,613 | |||||||||||||||
Restructuring charges | 3,570 | — | 3,570 | — | — | |||||||||||||||
Impairment charges(2) | 11,965 | — | — | 11,965 | — | |||||||||||||||
Gain on sale of facility(3) | (1,466 | ) | (1,466 | ) | — | — | — | |||||||||||||
Operating expenses | 38,253 | (1,429 | ) | 7,942 | 11,965 | 19,775 | ||||||||||||||
Loss from operations | $ | (29,060 | ) | $ | (1,976 | ) | $ | (8,648 | ) | $ | (11,965 | ) | $ | (6,471 | ) | |||||
Results of Operations
Changes in Results of Operations
Amounts in Thousands | |||||||||||||||||||||||||
Dollar Change | Percent Change | ||||||||||||||||||||||||
2004 | 2003 | 2002 | 2003 to 2004 | 2002 to 2003 | 2003 to 2004 | 2002 to 2003 | |||||||||||||||||||
Net Sales | |||||||||||||||||||||||||
Bioinstruments | $ | 14,385 | $ | 17,916 | $ | 19,098 | $ | (3,581 | ) | $ | (1,182 | ) | (20 | )% | (6 | )% | |||||||||
Bioconsumables | 8,838 | 7,260 | 5,137 | 1,578 | 2,123 | 22 | % | 41 | % | ||||||||||||||||
Discovery Services | 2,020 | 868 | — | 1,152 | 868 | 133 | % | — | |||||||||||||||||
Total BioSystems operating segment | 25,243 | 26,044 | 24,235 | (801 | ) | 1,809 | (3 | )% | 7 | % | |||||||||||||||
Chemical Building Blocks | 6,488 | 6,631 | 13,319 | (143 | ) | (6,688 | ) | (2 | )% | (50 | )% | ||||||||||||||
Specialty Oligonucleotides | 2,058 | 1,191 | — | 867 | 1,191 | 73 | % | — | |||||||||||||||||
Total Nucleic Acids operating segment | 8,546 | 7,822 | 13,319 | 724 | (5,497 | ) | 9 | % | (41 | )% | |||||||||||||||
Total Net Sales | 33,789 | 33,866 | 37,554 | (77 | ) | (3,688 | ) | (1 | )% | (10 | )% | ||||||||||||||
Cost of Goods Sold | |||||||||||||||||||||||||
Bioinstruments | 6,382 | 7,343 | 7,650 | 85 | 250 | 1 | % | 3 | % | ||||||||||||||||
Bioconsumables | 4,012 | 3,475 | 2,284 | 537 | 1,191 | 15 | % | 52 | % | ||||||||||||||||
Discovery Services | 1,603 | 557 | — | 1,046 | 557 | 188 | % | — | |||||||||||||||||
Total BioSystems operating segment | 11,997 | 11,375 | 9,934 | 622 | 1,441 | 5 | % | 15 | % | ||||||||||||||||
Chemical Building Blocks | 7,165 | 6,937 | 9,635 | 228 | (2,698 | ) | 3 | % | (28 | )% | |||||||||||||||
Specialty Oligonucleotides | 5,434 | 6,003 | — | (569 | ) | 6,003 | (9 | )% | — | ||||||||||||||||
Total Nucleic Acids operating segment | 12,599 | 12,940 | 9,635 | (341 | ) | 3,305 | (3 | )% | 34 | % | |||||||||||||||
Total Cost of Goods Sold | 24,596 | 24,315 | 19,569 | (281 | ) | 4,746 | (1 | )% | 24 | % | |||||||||||||||
Selling, General and Administrative Expenses | 17,499 | 17,324 | 24,199 | 175 | (6,875 | ) | 1 | % | (28 | )% | |||||||||||||||
Research and Development Expenses | 6,685 | 9,305 | 12,201 | (2,620 | ) | (2,896 | ) | (28 | )% | (24 | )% | ||||||||||||||
Restructuring Charges | 3,570 | 738 | 3,282 | 2,832 | (2,544 | ) | 384 | % | (78 | )% | |||||||||||||||
Impairment Charges | 11,965 | 4,772 | — | 5,726 | 4,772 | 120 | % | — | |||||||||||||||||
Gain on sale of facility | 1,466 | — | — | 1,466 | — | — | — | ||||||||||||||||||
Other Income (Expense) | �� | (5,406 | ) | (305 | ) | 437 | 5,102 | 742 | 1673 | % | 170 | % |
Years Ended December 31, 20042005 and 20032004
Net Sales. Net sales duringfor the years ended December 31, 2005 and 2004 decreased $0.08 million or 1% from 2003 as a resultconsisted of a $0.80 million or 3% decreasethe following (dollars in sales in our BioSystems operating segment offset by a $0.72 million or 9% increase in sales in our Nucleic Acids operating segment.thousands):
Change | ||||||||||||
2005 | 2004 | $ | % | |||||||||
Bioinstruments | $ | 14,427 | $ | 14,385 | $ | 42 | 1 | % | ||||
Bioconsumables | 8,981 | 8,838 | 143 | 2 | % | |||||||
Discovery Services | 2,420 | 2,020 | 400 | 20 | % | |||||||
Net sales | $ | 25,828 | $ | 25,243 | $ | 585 | 2 | % | ||||
The decrease in sales in our BioSystems operating segment resulted from a decrease of $3.58 million or 20% from bioinstruments that was partially offset by increases in sales of bioconsumables of $1.58 million or 22% and Discovery Services of $1.15 million or 133%. The decrease of bioinstrument sales was primarily the result of a decline in the number of WAVE Systems sold from 122 in 2003totaled 97 during the year ended December 31, 2005 compared to 107 induring the same period of 2004. The selling prices of our instruments vary based on the specific model and optional accessories. We had an installed base of approximately 1,2001,290 units at December 31, 2005 compared to 1,193 units at December 31, 2004. The increase in the installed base of instruments
continues to drive increases in sales of bioconsumables used with these instruments. The increase in Discovery Services revenue during 2004 was primarily attributable to the discovery services agreements that we entered into with pharmaceutical companies to support their clinical development of oncology therapeutics. We plan to continue to seek opportunities to provide genetic variation discovery and analysis services to pharmaceutical and other customers and believe that these services provide us a significant opportunity to expand revenues in the future.
Nucleic Acids operating segment sales increased by $0.72 million or 9% in 2004 compared to 2003 as a result of a substantial increase in sales of specialty oligonucleotides produced by our facility in Boulder, Colorado as raw materials in DNA-based drug candidates. As a result of the sale of this facility in November 2004, we will no longer manufacture or sell oligonucleotides. Sales of our chemical building block products produced in our Glasgow, Scotland facility were essentially the same in 2004 as in 2003. During 2004, sales of chemical building blocks to Geron Corporation totaled $4.15 million and represented 12% of total consolidated net sales, 49% of total net sales within our Nucleic Acids operating segment and 61% of chemical building blocks revenue. We do not have long-term sales commitments from Geron Corporation and, accordingly, the amount we sell them is subject to change. Revenues from our Nucleic Acids operating segment would be substantially reduced if Geron’s need for our products declined or if it decided to obtain these products from other suppliers.
Costs of Goods Sold.Costs Cost of goods sold include material costs for the products that we sellyears ended December 31, 2005 and substantially all other costs2004 consisted of the following (dollars in thousands):
Change | ||||||||||||
2005 | 2004 | $ | % | |||||||||
Bioinstruments | $ | 6,442 | $ | 6,382 | $ | 60 | 1 | % | ||||
Bioconsumables | 4,762 | 4,012 | 750 | 19 | % | |||||||
Discovery Services | 2,293 | 1,603 | 690 | 43 | % | |||||||
Cost of goods sold | $ | 13,497 | $ | 11,997 | $ | 1,500 | 13 | % | ||||
Overall, our cost of goods sold increased despite an overall decline in net sales due to the fixed-cost burden associated with our manufacturing facilities (primarily personnel costs, rent and depreciation). It also includes direct costs (primarily personnel costs and supplies) associated with our Discovery Services product line. Depreciation expense included in costs of goods sold totaled $2.10 million and $1.74 million in 2004 and 2003, respectively.
Costs of goods sold during 2004 decreased $0.28 million or 1% from 2003 as a result of a $0.62 million or 5% increase in our BioSystems operating segment offset by a $0.34 million or 3% decrease in our Nucleic Acids operating segment. The overall decrease is consistent with the decrease in net sales.
facilities.
Gross profit was $9.19equaled $12.33 million or 27%48% of total net sales during 2004the year ended December 31, 2005 compared to $9.55$13.25 million and 28%52% during 2003. A summarythe same period of margins by operating segment follows (dollars2004. The decrease in thousands):
2004 | 2003 | |||||||||||||
Dollars | Percent | Dollar | Percent | |||||||||||
BioSystems operating segment | $ | 13,246 | 52 | % | $ | 14,669 | 56 | % | ||||||
Nucleic Acids operating segment | (4,053 | ) | (47 | )% | (5,118 | ) | (65 | )% | ||||||
$ | 9,193 | 27 | % | $ | 9,551 | 28 | % | |||||||
We expectgross profit as a percent of revenue is largely attributable to changes in the composition of products sold. Generally, sales of WAVE Systems and ancillary instrumentation generate higher gross profits than sales of third party platforms. Sales of specialty consumables (SURVEYOR Nuclease, HPLC separation columns, etc.) generate higher gross profits than base buffers and enzymes. Gross profits from our BioSystems operating segmentdiscovery services have been less than expected due to be within historic rangesthe continuing build out of 50% to 60%. As a resultcapacity and expansion of the sale of our Boulder, Colorado facility and the restructuring plan implemented in November 2004, we anticipate that our cost of goods sold will be significantly improved. However, our Nucleic Acids operating segment continues to have excess capacity in its Glasgow, Scotland manufacturing facility that will adversely impact costs of goods sold and margins until demand for our Nucleic Acids building block products increase.
product offerings.
Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily include personnel costs, marketing, travel and entertainment costs, professional fees, and facility costs. These costs totaled $17.50$12.22 million in 2005 compared to $15.96 million in 2004, compared to $17.32 million in 2003, an increasea decrease of $0.18$3.74 million or 1%23%. This increase related to a $1.26 million increase in selling expenses offset by a $1.09 million reduction in general and administrative expenses. As a percentage of revenue, selling, general and administrative expenses totaled just over 51%43% and 63% during the year ended December 31, 2005 and 2004, respectively. This decrease resulted primarily from termination of personnel and the elimination of facilities related costs in both conjunction with the
2004 and 2003. Depreciation expense include in selling, general and administrativeRestructuring Plan. Foreign currency transaction adjustments increased operating expenses totaled $1.02by approximately $0.33 million and $1.28 million induring the years ended December 31, 2005 compared to the same period of 2004 and 2003, respectively.
when foreign currency transaction adjustments reduced operating expenses by approximately $0.45 million.
Research and Development Expenses. Research and development expenses primarily include personnel costs, supplies, and facility costs. These costs totaled $6.69$2.20 million in 2004during the year ended December 31, 2005 compared to $9.31$4.50 million in 2003,during the same period of 2004, a decrease of $2.62$2.30 million or 28%51%. The decrease related primarily to the 2004 Restructuring Plan.
As a percentage of revenue, research and development expenses totaled 20%8% and 27%18% of revenue induring the year ended December 31, 2005 and 2004, and 2003, respectively. These decreases related to our focus on expense control, the sale of our Boulder, Colorado facility and the restructuring plan implemented in November 2004. Depreciation expense included in research and development expenses included $0.88 million and $0.89 million in 2004 and 2003, respectively. We expect to continue to invest a substantial portion of our revenues in research and development activities primarily associated with our BioSystems operating segment. Research and development costs are expensed in the year in which they are incurred.
Impairment Charges. Impairment charges totaled $0.43 million during the year ended December 31, 2005 and consisted of $0.25 million associated with certain international patent pursuits that were no longer consistent with our strategic plan and $0.18 million related to certain inventory associated with third party platforms.
Restructuring Charges. On November 13, 2004, our Board of Directors approved a restructuring plan designed to refocus on the BioSystems operating segment and to better align the Company’s cost structure with anticipated revenues. The plan (which is incremental to the sale of the specialty oligonucleotide manufacturing facility in Boulder, Colorado) included a workforce reduction of approximately 60 positions and the closure of two domestic researchvarious facilities and development facilitiesfield offices. In order to recognize the various costs associated with our Nucleic Acids
operating segmentworkforce reduction and two European field offices. Additionally, we eliminated approximately 10 positions at its chemical building blocks manufacturing facility in Glasgow, Scotland. In conjunction with these changes,facilities closings, we incurred a charge of $3.57$1.23 million during the quarter ending December 31, 2004 consisting of severance benefits of $1.41 million, future rents on closed facilities (net of projected sublease rents) of $1.24 million, the write-off of property and equipment specifically attributable to closed facilities of $0.74 million and other costs of $0.18 million. We had accrued expenses associated with this restructuring plan of $1.91 million at December 31, 2004 of which $1.49 million is expect to be paid in 2005.
Impairment Charges.During the second quarter of 2004, our Board of Directors directed us to explore strategic alternatives for the Nucleic Acids operating segment. The process included significant due diligence by us, our advisors and prospective independent buyers and other interested parties. Based upon information obtained through this process, we determined that it was more likely than not that the value of the assets associated with this business were impaired. We engaged an external valuation firm to assist us in conducting an interim period impairment test that resulted in us recording a non-cash charge of $11.97 million related to these assets during the three months ended June 30, 2004. The charge consisted of $9.87 million related to the impairment of goodwill and $2.10 million related to the impairment of property and equipment.
Gain on Sale of Facility. On November 11, 2004, we sold the assets associated with our specialty oligonucleotides manufacturing facility in Boulder, Colorado to a subsidiary of Eyetech Pharmaceuticals, Inc. (“Eyetech”). The sale price was $3.00 million in cash plus the assumption of the lease on the Boulder facility and of certain equipment leases with a gross value of $2.38 million. Net proceeds from the sale (after transaction expenses and fees paid to our investment advisors) equaled approximately $2.70 million. In conjunction with this transaction, we recorded a gain on sale of $1.47 million in the fourth quarter of 2004.
Other Income (Expense). Other expense during 2004the year ended December 31, 2005 of $5.41$2.45 million consisted of interest expense of $2.38$1.98 million and a loss on debt extinguishment of $0.54 million, which were partially offset by interest income of $0.03 and other net income of $0.04 million. Other expense during the year ended December 31, 2004 consisted of consisted of interest expense of $2.37 million, loss on debt extinguishment of $2.86 million and other net expense of $0.16 million which consisted primarily of net investment losses associated with available-for-sales securities (Geron stock). Other$0.38 million.
Interest expense during 2003 of $0.31 million consisted of interest incomethe following for the years ended December 31, 2005 and 2004 (dollars in thousands):
2005 | 2004 | ||||||
Interest paid or accrued on outstanding debt | $ | 553 | $ | 542 | |||
Amortization of debt premiums | (857 | ) | — | ||||
Amortization of debt discounts – warrants | 28 | — | |||||
Amortization of debt discount – beneficial conversion feature | 725 | 1,641 | |||||
Fair value of incremental shares received by Laurus | 1,365 | — | |||||
Other | 164 | 183 | |||||
$ | 1,978 | $ | 2,366 | ||||
We had previously entered into a $7,500,000 line of $0.20credit (the “Credit Line”) and a $2,750,000 convertible note (the “Term Note,” and collectively with the Credit Line the “Laurus Loans”) from Laurus Master Fund, Ltd. (“Laurus”). On March 18, 2005, Laurus converted $1.87 million of the outstanding principal balance under the Credit Line into 3,600,000 shares of our common stock at $0.52 per share. In addition, on March 24, 2005, Laurus converted $0.65 million of the outstanding principal balance of the Term Note into 1,250,000 shares of our common stock at $0.52 per share. In
conjunction with these conversions, we accelerated amortization of $0.41 million of related debt premiums and discounts and recorded a charge to interest expense of $0.31$1.37 million related to the fair value of incremental shares received by Laurus. Contemporaneously with the closing of a private offering of common stock in November 2005 (the “2005 Private Placement”), we repaid all outstanding principal and otheraccrued interest on the Laurus Loans. In conjunction with this prepayment, we recorded a loss on debt extinguishment of $0.54 million. This loss consisted of prepayment penalties and fees paid to Laurus to facilitate the 2005 Private Placement of $0.84 million offset by the elimination of associated net expensesdebt premiums of $0.20$0.30 million.
The increase in interest expense resulted from higher average debt balances and interest rates. Gross debt totaled $8.95 million at December 31, 2004 compared to $4.69 million at December 31, 2003. Our Credit Line and Term Note had average balances during 2004 of $5.69 million and $2.73 million, respectively, with weighted average interest rates of 6.39% and 6.48%, respectively. The high and low borrowings under our Credit Line during 2004 were $7.23 million and $2.63 million, respectively. Interest expense in 2004 and 2003 includes amortization of related premiums and discounts of $1.64 million and $0, respectively.
Loss on debt extinguishment totaled $2.86 million during 2004.the year ended December 31, 2004. As described in the Note EF to the accompanying consolidated financial statements, certain August 31, 2004 modifications to our Laurus Loans were treated as extinguishments for financial reporting purposes since the change in present value of expected cash flows between the original and modified agreements iswas greater than 10%. As such, we recorded a loss on extinguishment of debt of $2.86 million at August 31, 2004 reflecting the difference between (i) the recorded amount of debt, net of related discounts, of $7.43 million and (ii) the fair value of the new debt instrument of $10.29 million plus the fair value of the new warrants of $0.11 million. The difference between the fair value of the new debt of $10.29 million and the face value of the debt of $8.57 million representsrepresented a premium, which will bewas reflected as a reduction of interest expense over the life of the new debt.
Income Tax Expense.Income tax expense relates solelyrecorded during the years ended December 31, 2005 and 2004 related to our operationsincome taxes in certainstates, foreign countries and certain states. In addition to income tax expense in these jurisdictions, we do not record any income tax benefits dueother local jurisdictions. Due to our cumulative losses, in recent years, expected losses in future years and the uncertainty as to whether we will be ableinability to utilize any additional losses as carrybacks.carrybacks, we did not provide for an income tax benefit during the years ended December 31, 2005 or 2004 based on our determination that it was more likely than not that such benefits would not be realized. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. We expect to continue to incur losses and expect to continue to provide valuation allowances against deferred tax assets. To the extent we begin to generate taxable income in future yearsperiods and it is determineddetermine that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized. Our deferred tax assets as of December 31, 2004 were $38.29 million and were entirely offset by a valuation allowance. As of December 31, 2004, we had federal net operating loss carryforwards of approximately $91.47 million. Our net operating loss carryforwards will expirerecognized at various dates from 2008 through 2024, if not utilized. We also had state income tax loss carryforwards of $37.62 million at December 31, 2004. These carryforwards will also expire at various dates beginning in 2005 if not utilized.
Years Ended December 31, 2003 and 2002
Net Sales.Net sales decreased in 2003, as compared to 2002, due to a significant decline in demand for our Nucleic Acids products. Sales in our Nucleic Acids operating segment decreased due to a significant decline in demand for our chemical building block products. These products are used by our biopharmaceutical and pharmaceutical customers as raw materials in DNA based drug candidates. The decrease in demand is largely attributable to the timing of completion and/or failure of Phase III clinical trials by certain of our large customers. This decrease in demand for DNA building blocks in 2003 was partially offset by sales of oligonucleotides generated by our start-up manufacturing facility in Boulder, Colorado.such time.
Sales in our BioSystems operating segment increased in 2003. Revenues from salesResults of WAVE systems and related services were relatively flat with 2002. However, bioconsumable product sales strength resulted from increased WAVE related consumable usage asDiscontinued Operations
In the installed basefourth quarter of WAVE Systems has increased and as researchers begin2005, we implemented a plan to use them more extensively in place of other methods of DNA analysis. Also contributing to the increase were revenues generated by new product sales including our Optimase product line that was launched in 2002 and began to see increased usage in 2003. Sales of WAVE systems declined slightly from 2002 to 2003 offset by an increase in related services revenues. The slight decline in systems sales was mainly due to continued low sales volumes to our North American customer base. Increased services revenue was attributable to our focus on providing genetic variation discovery and analysis services to our pharmaceutical base of customers.
Cost of Goods Sold.Cost of goods sold increased in 2003 over 2002 despite the decline in our revenues. This increase was anticipated and was attributable mainly to excess manufacturing capacity inexit our Nucleic Acids operating segment. The BioSystemsIn conjunction with the decision to exit this operating segment, costthe Company recorded impairment charges of goods sold$0.43 million and $8.02 million in 2006 and 2005, respectively, consisting of valuation adjustments to reflect the carrying value of the related net assets at estimated fair market value. Accordingly, we now reflect the results of this segment as a percentagediscontinued operations for all periods presented. Expenses that are not directly identified to this operating segment or are considered corporate overhead have not been allocated to this segment in determining the results from discontinued operations. Summary results of sales declined year over year but remained within historical ranges at approximately 43%. The margins in ouroperations of the former Nucleic Acids operating segment were negatively impactedas follows (dollars in thousands):
Years Ended December 31, | |||||||||
2006 | 2005 | 2004 | |||||||
NET SALES | $ | 1,142 | $ | 3,881 | $ | 8,546 | |||
COST OF GOODS SOLD | 912 | 4,004 | 12,599 | ||||||
Gross profit (loss) | 230 | (123) | (4,053) | ||||||
OPERATING EXPENSES: | |||||||||
Selling, general and administrative | 264 | 1,054 | 1,538 | ||||||
Research and development | — | — | 2,184 | ||||||
Restructuring charges | — | — | 2,303 | ||||||
Exit and disposal charges | — | 866 | — | ||||||
Impairment charges | 436 | 8,022 | 11,965 | ||||||
Gain on sale of facility | — | — | (1,466) | ||||||
700 | 9,942 | 16,524 | |||||||
LOSS FROM OPERATIONS | (470) | (10,065) | (20,577) | ||||||
OTHER INCOME (EXPENSE) | 2 | 56 | (143) | ||||||
LOSS BEFORE INCOME TAXES | (468) | (10,009) | (20,720) | ||||||
INCOME TAX BENEFIT | — | — | (98) | ||||||
LOSS FROM DISCONTINUED OPERATIONS | $ | (468) | $ | (10,009) | $ | (20,622) | |||
On December 22, 2005, the Company’s Directors voted to either sell or close and liquidate the Nucleic Acids operating segment, which consists primarily of a manufacturing facility in Glasgow, Scotland. This decision was made after an evaluation of, among other things, short and long-term sales projections for products sold by higherthis operating segment, including estimates of 2006 sales to the operating segment’s largest customer. In addition, the Company expects to incur additional period costs attributable to closure of the facility that will be recorded in discontinued operations in 2007. In conjunction with the decision to exit this operating segment, the Company recorded an impairment charge of $8,022 in 2005 consisting of valuation adjustments to reflect the carrying value of the related net assets at estimated fair market value.
There was no goodwill associated with the former Nucleic Acids operating segment at December 31, 2005 and 2004. The former Nucleic Acids operating segment recorded charges of $9,865 during 2004, related to the impairment of goodwill. The 2004 charge resulted from an interim period impairment test performed during the second quarter of 2004.
The interim period impairment test became necessary after the Company’s Directors directed management during the second quarter of 2004 to explore strategic alternatives for the former Nucleic Acids operating segment. This process included significant due diligence by management, third-party advisors and prospective independent buyers and other interested parties. Information obtained through this process indicated that it was more likely than not that the assets associated with the Nucleic Acids operating segment were impaired.
The former Nucleic Acids operating segment also recorded a charge of $2,100 during 2004 related to the impairment of property and equipment associated with this operating segment.
On November 13, 2004, the former Nucleic Acids operating segment sold the assets associated with its specialty oligonucleotides manufacturing costsfacility in Boulder, Colorado to a subsidiary of Eyetech Pharmaceuticals, Inc. (“Eyetech”). The sale price was $3,000 in cash plus the assumption of the lease on the Boulder facility and excess capacity due largelyof certain equipment leases with a gross value of $2,377. Substantially all of the 27 employees at the Boulder facility became Eyetech employees. Net proceeds from the sale (after transaction expenses and fees paid to our plant expansion effortsinvestment advisors) equaled approximately $2,700. In conjunction with this transaction, the Nucleic Acids operating segment recorded a gain on sale of $1,466 in Glasgow, Scotland and Boulder, Colorado.
Selling, General and Administrative Expenses.Selling, general and administrative expenses decreased significantly from 2002 to 2003 as a result of our restructuring activities and focus on expense control. Nearly half of the total decrease was in personnel and personnel related expenses as we significantly reduced our employee headcount. Additionally, reductions in outside services, advertising, sales promotions, depreciation and travel expenses accounted for approximately 30% of the total decrease.
Research and Development Expenses.Research and development expenses decreased significantly as a result of our restructuring activities and focus on expense control. Over 60% of the total decrease was in personnel and personnel related expenses as we significantly reduced our employee headcount. Additionally, significant reductions in outside services, supplies, depreciation and travel expenses were realized. During 2003 there were no capitalized software costs, whereas in the prior year we capitalized approximately $1.13 million of development costs. Research and development expenses consist of salaries and related personnel costs of researchers and software developers, material costs for prototypes and test units, legal expenses relating to intellectual property research and application development activities, testing and enhancement of our products, and amortization of intellectual property. We expense our research and development costs in the year in which they are incurred with the exception of certain capitalized software development costs.
Restructuring Charges.During the fourth quarter of 2004.
The Company implemented restructuring plans in 2004 and 2002 management formulated and executed a significant portion of a restructuring plan. The plan was developeddesigned to reduce expenses thereby better aligning the Company’s expensealign its cost structure with current business prospects. The plan includedanticipated revenues. In conjunction with these plans, the former Nucleic Acids operating segment recorded restructuring charges in 2004 and 2003 of $2,303 and $222, respectively, related primarily to employee terminations,severance agreements, office closures, termination of collaborationsproperty and write-offs of abandonedequipment and intellectual property. We continued to execute the plan during the first halfThere were accrued expenses associated with these restructuring plans of 2003 resulting in the additional charges recorded in 2003. These charges consisted of mainly employee severance costs and the write-off of a note receivable related to the abandonment of a product development collaboration. The note receivable write-off was a non-cash charge of $0.35 million.
Goodwill Impairment Charge.Statement of Financial Accounting Standard (SFAS) No. 142,Goodwill and Other Intangible Assets, establishes guidelines for accounting for goodwill and other intangible assets and provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be evaluated for impairment annually. The Company engaged an external valuation firm to assist with the completion of its annual impairment test during the fourth quarter of 2003. As a result of this test we recorded a non-cash goodwill impairment charge of $4.77 million related to our nucleic acids segment.
Income Taxes.The Company’s tax expense relates to its operations in certain foreign countries and certain states. No tax benefits are being recorded due to our cumulative losses in recent years, expected losses in future years and the uncertainty as to whether we will be able to utilize any additional losses as carrybacks. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. We expect to continue to incur losses and expect to continue to provide valuation allowances against deferred tax assets. 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. Our deferred tax assets as of December 31, 2003 were $30.60 million and were entirely offset by a valuation allowance. As of December 31, 2003, we had federal net operating loss carryforwards of approximately $78.50 million. We also had state income tax loss carryforwards of $28.70 million$191 at December 31, 2003.2005.
The Company accepted common stock from a customer of the former Nucleic Acids operating segment, Geron Corporation (“Geron”) as payment for goods and services. These shares were classified as available-for-sale securities. Net realized gains on these securities during 2005 of $52 and realized losses on these securities of $128 during 2004 were reflected as other expense. Proceeds from the sales of these available for sale securities are reflected within net cash flows from investing activities. During 2005 and 2004, sales to Geron totaled $1,949 and $4,151, respectively, representing 50% and 49%, respectively, of net sales within this operating segment.
Liquidity and Capital Resources
Our working capital (deficiency) positions at December 31, 20042006 and 20032005 were as follows:follows (in thousands):
December 31, | |||||||||||
2004 | 2003 | Change | |||||||||
In Thousands | |||||||||||
Current assets(1) | $ | 17,908 | $ | 24,378 | $ | (6,470 | ) | ||||
Current liabilities | 18,724 | 12,248 | 6,476 | ||||||||
Working capital (deficiency) | $ | (816 | ) | $ | 12,130 | $ | (12,946 | ) | |||
December 31, | |||||||||
2006 | 2005 | Change | |||||||
Current assets (including cash and cash equivalents of $5,868 and $6,736, respectively) | $ | 15,605 | $ | 18,118 | $ | (2,513) | |||
Current liabilities | 5,329 | 7,434 | (2,105) | ||||||
Working capital | $ | 10,276 | $ | 10,684 | $ | (408) | |||
The deterioration ofWe have historically operated at a loss and have not generated sufficient cash from operating activities to cover our working capital position during 2004 was predominately dueoperating and other cash expenses. While we have been able to historically finance our operating losses that were funded primarily bythrough borrowings under our Credit Line,or from the saleissuance of our specialty oligonucleotides facility in Boulder, Coloradoadditional equity, we currently have no borrowings and the reclassification athave no plans to issue additional equity securities for this purpose. At March 30, 2007 and December 31, 2004 of a portion of our chemical building blocks inventory with a book value of $2.86 million as a long-term asset rather than as a current asset. The reclassification of these inventories was based on sales forecasts for these products. As of March 31, 2005,2006, we had cash and cash equivalents of $1.37$7.91 million plus an additional $2.29and $5.87 million, available under our Credit Line.
We have experienced recurring net losses and had an accumulated deficit of $107,101 at December 31, 2004. Based on our 2005 operating plan,respectively. While we believe that existing sources of liquidity will beare sufficient to meet expected cash needs through 2007, we will need to increase our revenues or further reduce our operating expenses in order to be assured of meeting our liquidity needs on a long-term basis. On February 20, 2007, we announced a cost reduction plan designed to align our cost structure with anticipated revenues. The plan is expected to yield annualized savings of approximately $1.5 million once all components of the plan are fully implemented. The closing of the Company’s Cramlington, England production facility is the principal component of this plan. We expect to incur aggregate charges estimated at $1.2 to $1.4 million during 2005. If necessary,the first and second quarters of 2007, relating primarily to severance, benefits and facility closure costs. However, we believecannot assure you that we can manage costswill be able to increase our revenues or further reduce our expenses and, expenses at reduced levels to conserve working capital. The need for any such cost and expense reductions during 2005 would likely delay implementation of our business plan. Additionally,accordingly, we may pursue additional financing alternatives. Ultimately, we must achievenot have sufficient revenue levelssources of liquidity to support our cost structure.
Laurus Loans. The Credit Line is a $7.50 million line of credit that we entered into with Laurus in December 2003. The termcontinue the operations of the Credit Line is three years carrying an interest rate of 2.0% over the prime rate or a minimum of 6.0%. Funds available under the Credit Line are determined by a borrowing base equal to 90% of eligible accounts receivable balances plus up to $1.00 million related to inventory balances. The Credit Line is secured by most of our assets. Prior to amendments to the Credit Line discussed below, payment of interest and principal could, under certain circumstances, be made with shares of our common stock at a fixed conversion price of $2.20 per share. Conversion of this debt to common stock may be made at the election of Laurus or the Company. We could elect to convert only if our shares trade at a price exceeding $2.42 per share for ten consecutive trading days, and such conversion is further subject to trading volume limitations and a limitation on the total beneficial ownership by Laurus of our common stock. Upon entering into the Credit Line, we issued warrants to Laurus to acquire 550,000 shares of the our common stock at an exercise price exceeding the average trading price of our common stock over the ten trading days prior to the date of the warrant.Company indefinitely.
In February 2004, we entered into the $2.75 million Term Note with Laurus. The Term Note carries an interest rate of 2.0% over the prime rate or a minimum of 6.0% and has a term of 3 years. Prior to amendments to the Term Note discussed below, the principal and interest on the Term Note could be converted into our common stock at a fixed conversion price of $2.61 per share. Upon entering the Term Note, we issued warrants to Laurus to acquire 125,000 shares of our common stock. Borrowings under the Term Note were primarily used to retire the mortgage debt on our Glasgow, Scotland facility. Remaining borrowings of approximately $0.75 million were used to complete the build-out of the Glasgow facility, complete the consolidation our Glasgow operations into the new facility and provide funds for operations.
In February 2004, Laurus waived the borrowing base limitation on the Credit Line, thereby making the full $7.50 million facility available to us regardless of the available collateral. On August 31, 2004, Laurus agreed to extend the borrowing base waiver on the Credit Line through March 19, 2005. In addition, Laurus deferred certain payments due under the Term Note and reduced the interest rate on both of the Laurus Loans to 0% for any day the closing sale price of our common stock is at or above $1.75 per share. In return, we lowered the conversion price on each of the Laurus Loans to $1.00 per share and issued a warrant to Laurus covering an additional 400,000 common shares at an exercise price of $1.25 per share. The closing price of our common stock on August 31, 2004 was $1.20 per share.
On March 18, 2005, Laurus agreed to further extend the borrowing base waiver on the Credit Line until March 31, 2006. In connection with this waiver, we agreed to allow Laurus to convert $1.88 million of the outstanding principal balance under the Credit Line into 3,600,000 shares of common stock. In addition, on March 24, 2005 we agreed to allow Laurus to convert $0.65 million of the outstanding principal balance of the Term Note into 1,250,000 shares of common stock. As a result, we have increased the amount available under the Credit Line by $1.88 million and have eliminated substantially all remaining 2005 scheduled principal payments on the Term Loan.
Analysis of Cash Flows
Years Ended December 31, 2006 and 2005
Net Change in Cash and Cash Equivalents. Cash and cash equivalents decreased $0.87 million during the year ended December 31, 2006 as a result of net cash of $1.21 million being used by operating activities and of $0.20 million being used in investing activities, which was partially offset by net cash provided by financing activities of $0.01 million and changes in foreign currency exchange of $0.54 million.
Cash Flows Used In Operating Activities.Cash flows used in operating activities totaled $12.75$1.21 million during 2004the year ended December 31, 2006 compared to $13.02$3.63 million during 2003.the same period of 2005. The use in 2004 related2006 resulted primarily to afrom our net loss of $34.37$3.43 million offset by non-cash charges of $21.80$2.55 million. Non-cash charges consisted primarily of depreciation and amortization, certain restructuring charges, impairment charges certain financing costs and loss on debt extinguishment.non-cash stock based compensation. Working capital and other adjustments decreased cash flows from operating activities by $0.18 million.
Cash flows from investing activities totaled $6.03$0.34 million during 2004 compared to cash2006.
Cash Flows Used In Investing Activities. Cash flows used in investing activities of $2.95totaled $0.20 million during 2003.the year ended December 31, 2006 compared to $1.65 million of cash flow provided by investing activities during the same period of 2005. The investingcash used in 2006 was for purchases, offset by
sales, of property and equipment. The principal source of cash flows generatedfrom investing activities in 2004 were from the sale2005 was sales of available for sale securities received from Geron for goods and services and the sale of our specialty oligoneucleotide manufacturing facility and reductions in other assets$2.15 million that were offset by purchases of $0.64 million of property and equipment.
Cash Flows from Financing Activities.Cash flows from financing activities totaled $6.00$0.01 million during 2004 compared to $7.30the year ended December 31, 2006 as a result of the sale of common stock, through the Employee Stock Purchase Plan. This compares with $7.92 million during 2003. Theof cash flow from financing activities during 2005 resulting from the receipt of approximately $13.8 million in 2004 relate primarily to net draws on our Credit Line and proceeds from the Term Note that were2005 Private Placement offset by paymentsrepayment of long-term debt.
approximately $5.9 million under the Laurus Loans.
Obligations and Commitments
Our ongoing capital commitments consist of debt service requirements and obligations under capital leases. The following table sets forth our contractualidentifies material obligations and commitments as of December 31, 2004 along with cash payments due in each period indicated:2006:
Payments Due by Period | |||||||||||||||
2005 | 2006 | 2007 | 2008 | 2009 and Thereafter | |||||||||||
In thousands | |||||||||||||||
Credit Line(1) | $ | 5,948 | $ | — | $ | — | $ | — | $ | — | |||||
Term Note (1) | 850 | 900 | 850 | — | — | ||||||||||
Operating lease payments(2) | 1,958 | 1,382 | 486 | 187 | 372 | ||||||||||
Total contractual obligations | $ | 8,756 | $ | 2,282 | $ | 1,336 | $ | 187 | $ | 372 | |||||
Payments Due by Period | |||||||||||||||||||||
Contractual Obligations | After | ||||||||||||||||||||
Millions of Dollars | Total | 2007 | 2008 | 2009 | 2010 | 2011 | 2011 | ||||||||||||||
Operating Leases(a) | $ | 3.71 | $ | 0.87 | $ | 0.77 | $ | 0.69 | $ | 0.57 | $ | 0.38 | $ | 0.43 | |||||||
Purchase Obligations(b) | 1.03 | 1.03 | — | — | — | — | — | ||||||||||||||
Total Contractual obligations | $ | 4.74 | $ | 1.90 | $ | 0.77 | $ | 0.69 | $ | 0.57 | $ | 0.38 | $ | 0.43 | |||||||
(a) | Operating leases include facility, automobile and |
At December 31, 2004, we had firm commitments totaling $0.80 million to Hitachi High Technologies America to purchase components used in our WAVE Systems. These commitments will be fulfilled during 2005.
(b) | Purchase obligations include purchase commitments for components used in WAVE Systems and OEM instruments. |
Off Balance Sheet Arrangements
At December 31, 20042006 and 2003,2005, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies
Accounting policies used in the preparation of the consolidated financial statements may involve the use of management judgments and estimates. Certain of the Company’sour accounting policies are considered critical as they are both important to the portrayal of the Company’sour financial statements and they require significant or complex judgments on the part of management. Our judgments and estimates are based on experience and assumptions that we believe are reasonable under the circumstances. Further, we evaluate our judgments and estimates from time to time as circumstances change. Actual financial results based on judgment or estimates may vary under different assumptions or circumstances. The following are certain critical accounting policies that may involve the use of judgment or estimates.
Allowance for Doubtful Account.Account. Accounts receivable are shown net of an allowance for doubtful accounts. In determining an allowance for doubtful accounts, we consider the following.
Ÿ | The age of the accounts receivable, |
Customer credit history,
Customer financial information,
Our knowledge of the customer.
If our customers’ financial condition were to deteriorate, resulting in a change in their ability to make payment, additional allowances may be required.
Inventories.Inventories. Inventories are stated at the lower of cost or market. Cost is computed using standard costs for finished goods and average or latest actual cost for raw materials and work in process. We write down slow-moving and obsolete inventory by the difference between the value of the inventory and our estimate of the reduced value based on potential future uses, the likelihood that overstocked inventory will be sold and the expected selling prices of the inventory. If our ability to realize value on slow-moving or obsolete inventory is less favorable than assumed, additional write-downs of the inventory may be required.
Depreciation and Amortization of Long-Lived Assets.AssetsThe Company’s. Our long-lived assets consist primarily of property, plant and equipment, goodwill, patents, intellectual property and capitalized software development costs. We believe the useful lives we assigned to these assets are reasonable. If our assumptions about these assets change as a result of events or circumstances and we believe the assets may have declined in value we may record impairment charges resulting in lower profits.an increase to operating expenses. Property and equipment are carried at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets ranging from 3 to 15 years. The Company capitalizes theWe capitalize external and in-house legal costs and filing fees associated with obtaining patents on itsour new discoveries and amortizesamortize these costs using the straight-line method over the shorter of the legal life of the patent or its economic life, generally 17 years, beginning on the date the patent is issued. Intellectual property, which is purchased technology, is recorded at cost and is amortized over its estimated useful life.
Impairment of Long-Lived Assets.AssetsThe Company evaluates. We evaluate goodwill for impairment on an annual basis. The Company assessesWe assess the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These computations utilize judgments and assumptions inherent in management’sour estimate of future undiscounted and discounted cash flows to determine recoverability of these assets. If management’sour assumptions about these assets were to change as a result of events or circumstances, the Companywe may be required to record an impairment loss.
Revenue Recognition.Recognition. Revenue on the sales of products is recognized in accordance with the terms of the sales arrangement. Such recognition is based on receipt of an unconditional customer order and transfer of title and risk of ownership to the customer, typically upon shipment of the product. Our sales terms do not provide for the right of return unless the product is damaged or defective. Revenues from certain services associated with our analytical instruments, to be performed subsequent to shipment of the products, is deferred and recognized when the services are provided. Such services, mainly limited to installation and training services that are not essential to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument.
Recently Issued Accounting Pronouncements
In July 2006, the FASB issued Interpretation (“FIN”) No. 48, “Uncertainty in Income Taxes.” FIN 48 applies to all tax positions within the scope of Statement 109 and clarifies when and how to recognize tax benefits in the financial statements with a two-step approach of recognition and measurement. FIN 48 will become effective in the first quarter of 2007. Management continues to evaluate the effect that adoption of FIN 48 will have on our consolidated results of operations and financial position.
On December 16, 2004,In September 2006, the SEC issued Staff Accounting Bulletin. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Accounting Standards Board (FASB)Statements (SAB 108). SAB 108 provides interpretive guidance on how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB 108 requires registrants to quantify misstatements using both an income statement and balance sheet approach and then evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial are now considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. If prior year’s financial statements are not restated, the cumulative effect adjustment is recorded in opening accumulated earnings (deficit) as of the beginning of the fiscal year of adoption. SAB 108 is effective for us at the end of 2006. There was no impact to our Consolidated Financial Statements as a result of adoption of this pronouncement.
In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment. SFAS No.123R addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the157,Fair Value Measurement (FAS 157). While this statement does not require new fair value measurements, it provides guidance on applying fair value and expands required disclosures. FAS 157 is effective for us beginning in the first quarter of the enterprise’s equity instruments or that may be settled by the issuace of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 and generally requires that such transactions be accounted for using a fair-value-based method. We expect to adopt this standard on January 1, 2006.2008. We are currently assessing the final impact of this standardFAS 157 may have on our financial position, results of operations or cash flows. This assessment includes evaluating option valuation methodologies and assumptions as well as potential changes to compensation strategies.Consolidated Financial Statements.
On November 24, 2004,In February 2007, the FASB issued SFASStatement No. 151, Inventory Costs – an amendment159,The Fair Value Option for Financial Assets and Financial Liabilities (FAS 159). This statement, which is expected to expand fair value measurement, permits entities to choose to measure many financial instruments and certain other items at fair value. FAS 159 is effective for us beginning in the first quarter of ARB No. 43. SFAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be excluded from the cost of inventory and expensed when incurred. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective at the beginning of 2006.2008. We are currently assessing the final impact of this standardFAS 159 may have on our Consolidated Financial Statements.
Use of Estimates
The preparation of consolidated financial position,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 and the determination of goodwill impairments require considerable judgment by management. Actual results of operations or cash flows
could differ from the estimates and assumptions used in preparing these financial statements.
Impact of Inflation
We do not believe that price inflation had a material adverse effect on our financial condition or results of operations during the periods presented.
Quantitative and Qualitative Disclosure about Market Risk |
Interest Rate Risk. Previously, our principal market risk was interest rate risk on our variable-rate borrowings under the Laurus Loans. During the fourth quarter of 2005, we repaid the entire principal balance of the Laurus Loans with the proceeds from the 2005 Private Placement and have terminated these loans. Accordingly, we no longer have any borrowings which subject us to material interest rate risk.
Foreign Currency Rate Fluctuations
Translation Risk.During the last three fiscal years, our international sales have represented approximately 50-65%more than 50% of our net sales. These sales of products in foreign countries are mainly completed in either British Pounds Sterling or the Euro. Additionally, we have two wholly owned subsidiaries, Transgenomic LTD.,Limited, and Cruachem LTD.,Limited, whose operating currency is British Pounds Sterling and the Euro. Results of operations for the Company’s foreign subsidiaries are translated using the average exchange rate during the period. Assets and liabilities are translated at the exchange rate in effect on the balance sheet dates. As a result we are subject to exchange rate risk. The operational expenses of our foreign subsidiaries help to reduce the currency exposure we have based on our sales denominated in foreign currencies by converting foreign currencies directly into goods and services. As such, management feelswe feel we do not have a material exposure to foreign currency rate fluctuations at this time.
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Transgenomic, Inc.
Omaha, Nebraska
We have audited the accompanying consolidated balance sheets of Transgenomic, Inc. and subsidiaries (the “Company”) as of December 31, 20042006 and 2003,2005, and the related consolidated statements of operations, stockholders’ equity, (deficit), and cash flows for each of the three years in the period ended December 31, 2004. Our audit also included the financial statement schedule listed in the Index at Item 15.2006. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on thethese financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our auditaudits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Transgenomic, Inc. and subsidiaries at December 31, 20042006 and 2003,2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004,2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note O, duringB to the first quarter of 2005,consolidated financial statements, in 2006 the Company obtained an extensionadopted Statement of the waiver of the borrowing base limit through March 31, 2006.
As discussed in Note P, the Company restated its consolidated statements of cash flows for the years ended December 31, 2004 and 2003.
Financial Accounting Standards No. 123(R),/s/ DELOITTE & TOUCHE LLPShare-Based Payment.
Omaha, Nebraska
April 14, 2005 (May 25, 2005, as to the effects of the restatement discussed in Note P)
/s/ Deloitte & Touche LLP |
Omaha, Nebraska |
March 30, 2007 |
TRANSGENOMIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 20042006 and 20032005
(Dollars in thousands except per share data)
2004 | 2003 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 1,002 | $ | 1,241 | ||||
Accounts receivable (net of allowances for bad debts of $1,051 and $549) | 10,197 | 10,877 | ||||||
Inventories | 5,366 | 10,584 | ||||||
Prepaid expenses and other current assets | 1,343 | 1,676 | ||||||
Total current assets | 17,908 | 24,378 | ||||||
PROPERTY AND EQUIPMENT: | ||||||||
Land and buildings | 2,427 | 2,239 | ||||||
Equipment | 19,263 | 20,362 | ||||||
Furniture and fixtures | 5,781 | 9,054 | ||||||
27,471 | 31,655 | |||||||
Less: accumulated depreciation | 13,946 | 12,951 | ||||||
13,525 | 18,704 | |||||||
GOODWILL | 638 | 10,503 | ||||||
OTHER ASSETS | 5,387 | 3,721 | ||||||
$ | 37,458 | $ | 57,306 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | 3,431 | $ | 3,580 | ||||
Other accrued expenses | 7,318 | 3,874 | ||||||
Accrued compensation | 636 | 959 | ||||||
Line of credit | 6,514 | 2,142 | ||||||
Current portion of long-term debt | 825 | 1,693 | ||||||
Total current liabilities | 18,724 | 12,248 | ||||||
Long-term debt | 2,199 | — | ||||||
Total liabilities | 20,923 | 12,248 | ||||||
COMMITMENTS AND CONTINGENCIES (Note F) | ||||||||
STOCKHOLDERS’ EQUITY: | ||||||||
Preferred stock, $.01 par value, 15,000,000 shares authorized, none outstanding | — | — | ||||||
Common stock, $.01 par value, 60,000,000 shares authorized, 29,330,874 and 28,119,122 shares outstanding in 2004 and 2003, respectively | 299 | 286 | ||||||
Additional paid-in capital | 120,798 | 115,904 | ||||||
Accumulated other comprehensive income | 2,539 | 1,597 | ||||||
Accumulated deficit | (107,101 | ) | (72,729 | ) | ||||
Total stockholders’ equity | 16,535 | 45,058 | ||||||
$ | 37,458 | $ | 57,306 | |||||
2006 | 2005 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 5,868 | $ | 6,736 | ||||
Accounts receivable (net of allowances for bad debts of $444 and $615, respectively) | 6,525 | 7,542 | ||||||
Inventories | 2,672 | 2,990 | ||||||
Prepaid expenses and other current assets | 540 | 653 | ||||||
Current assets of discontinued operations | — | 197 | ||||||
Total current assets | 15,605 | 18,118 | ||||||
PROPERTY AND EQUIPMENT: | ||||||||
Equipment | 10,345 | 10,108 | ||||||
Furniture and fixtures | 3,820 | 3,797 | ||||||
14,165 | 13,905 | |||||||
Less: accumulated depreciation | 12,667 | 11,328 | ||||||
1,498 | 2,577 | |||||||
OTHER ASSETS: | ||||||||
Goodwill | 638 | 638 | ||||||
Other assets | 853 | 1,074 | ||||||
Non-current assets of discontinued operations | 2,773 | 2,933 | ||||||
$ | 21,367 | $ | 25,340 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | 1,558 | $ | 1,796 | ||||
Other accrued expenses | 2,898 | 3,114 | ||||||
Accrued compensation | 689 | 602 | ||||||
Current liabilities of discontinued operations | 184 | 1,922 | ||||||
Total current liabilities | 5,329 | 7,434 | ||||||
COMMITMENTS AND CONTINGENCIES (Note G) | ||||||||
STOCKHOLDERS’ EQUITY: | ||||||||
Preferred stock, $.01 par value, 15,000,000 shares authorized, none outstanding | — | — | ||||||
Common stock, $.01 par value, 100,000,000 and 60,000,000 shares authorized, respectively, 49,189,672 and 49,182,121 shares outstanding, respectively | 497 | 497 | ||||||
Additional paid-in capital | 138,966 | 138,800 | ||||||
Accumulated other comprehensive income | 2,100 | 703 | ||||||
Accumulated deficit | (125,525 | ) | (122,094 | ) | ||||
Total stockholders’ equity | 16,038 | 17,906 | ||||||
$ | 21,367 | $ | 25,340 | |||||
See notes to consolidated financial statements.
TRANSGENOMIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2004, 20032006, 2005 and 20022004
(Dollars in thousands except per share data)
2004 | 2003 | 2002 | ||||||||||
NET SALES | $ | 33,789 | $ | 33,866 | $ | 37,554 | ||||||
COST OF GOODS SOLD | 24,596 | 24,315 | 19,569 | |||||||||
Gross profit | 9,193 | 9,551 | 17,985 | |||||||||
OPERATING EXPENSES: | ||||||||||||
Selling, general and administrative | 17,499 | 17,324 | 24,199 | |||||||||
Research and development | 6,685 | 9,305 | 12,201 | |||||||||
Restructuring charges (Note N) | 3,570 | 738 | 3,282 | |||||||||
Impairment charges (Note C) | 11,965 | 4,772 | — | |||||||||
Gain on sale of facility (Note M) | (1,466 | ) | — | — | ||||||||
38,253 | 32,139 | 39,682 | ||||||||||
LOSS FROM OPERATIONS | (29,060 | ) | (22,588 | ) | (21,697 | ) | ||||||
OTHER INCOME (EXPENSE): | ||||||||||||
Interest expense | (2,383 | ) | (315 | ) | (62 | ) | ||||||
Loss on debt extinguishment | (2,859 | ) | — | — | ||||||||
Other—net | (164 | ) | 10 | 499 | ||||||||
(5,406 | ) | (305 | ) | 437 | ||||||||
LOSS BEFORE INCOME TAXES | (34,466 | ) | (22,893 | ) | (21,260 | ) | ||||||
CURRENT INCOME TAX EXPENSE (BENEFIT) | (94 | ) | 65 | 105 | ||||||||
NET LOSS | $ | (34,372 | ) | $ | (22,958 | ) | $ | (21,365 | ) | |||
BASIC AND DILUTED LOSS PER SHARE | $ | (1.19 | ) | $ | (0.94 | ) | $ | (0.91 | ) | |||
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING | 29,006,241 | 24,483,861 | 23,582,687 |
2006 | 2005 | 2004 | ||||||||||
NET SALES | $ | 23,415 | $ | 25,828 | $ | 25,243 | ||||||
COST OF GOODS SOLD | 12,046 | 13,497 | 11,997 | |||||||||
Gross profit | 11,369 | 12,331 | 13,246 | |||||||||
OPERATING EXPENSES: | ||||||||||||
Selling, general and administrative | 12,138 | 12,218 | 15,961 | |||||||||
Research and development | 2,362 | 2,199 | 4,501 | |||||||||
Restructuring charges | — | — | 1,267 | |||||||||
Impairment charges | — | 425 | — | |||||||||
14,500 | 14,842 | 21,729 | ||||||||||
LOSS FROM OPERATIONS | (3,131 | ) | (2,511 | ) | (8,483 | ) | ||||||
OTHER INCOME (EXPENSE): | ||||||||||||
Interest expense | (11 | ) | (1,978 | ) | (2,366 | ) | ||||||
Interest income | 216 | 27 | — | |||||||||
Loss on debt extinguishment | — | (541 | ) | (2,859 | ) | |||||||
Other, net | (7 | ) | 45 | (38 | ) | |||||||
198 | (2,447 | ) | (5,263 | ) | ||||||||
LOSS BEFORE INCOME TAXES | (2,933 | ) | (4,958 | ) | (13,746 | ) | ||||||
INCOME TAX EXPENSE | 30 | 26 | 4 | |||||||||
LOSS FROM CONTINUING OPERATIONS | (2,963 | ) | (4,984 | ) | (13,750 | ) | ||||||
DISCONTINUED OPERATIONS: | ||||||||||||
Loss from discontinued operations before income tax | (468 | ) | (10,009 | ) | (20,720 | ) | ||||||
Income tax benefit of discontinued operations | — | — | (98 | ) | ||||||||
LOSS FROM DISCONTINUED OPERATIONS | (468 | ) | (10,009 | ) | (20,622 | ) | ||||||
NET LOSS | $ | (3,431 | ) | $ | (14,993 | ) | $ | (34,372 | ) | |||
BASIC AND DILUTED LOSS PER SHARE: | ||||||||||||
From continuing operations | $ | (0.06 | ) | $ | (0.14 | ) | $ | (0.47 | ) | |||
From discontinued operations | (0.01 | ) | (0.28 | ) | (0.72 | ) | ||||||
$ | (0.07 | ) | $ | (0.42 | ) | $ | (1.19 | ) | ||||
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING | 49,188,451 | 35,687,580 | 29,006,241 |
See notes to consolidated financial statements.
TRANSGENOMIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
Years Ended December 31, 2004, 20032006, 2005 and 20022004
(Dollars in thousands except per share data)
Common Stock | Additional Paid in Capital | Unearned | Accumulated Deficit | Accumulated Comprehensive Income (Loss) | Treasury Stock | Total | |||||||||||||||||||||||
Outstanding Shares | Par Value | ||||||||||||||||||||||||||||
Balance, January 1, 2002 | 23,606,003 | $ | 239 | $ | 113,260 | $ | (158 | ) | $ | (28,406 | ) | $ | (81 | ) | $ | (2,750 | ) | $ | 82,104 | ||||||||||
Net loss | — | — | — | — | (21,365 | ) | (21,365 | ) | — | (21,365 | ) | ||||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | 493 | — | 493 | |||||||||||||||||||||
Unrealized gain on available for sale securities | — | — | — | — | — | (34 | ) | — | (34 | ) | |||||||||||||||||||
Comprehensive loss | — | — | — | — | — | (20,906 | ) | — | |||||||||||||||||||||
Issuance and exercise of stock options or warrants | 81,900 | 1 | 460 | (51 | ) | — | 410 | ||||||||||||||||||||||
Issuance of shares for employee stock purchase plan | 56,842 | — | 214 | — | — | — | — | 214 | |||||||||||||||||||||
Deferred compensation | — | ��� | — | 131 | — | — | — | 131 | |||||||||||||||||||||
Purchase of treasury stock | (232,700 | ) | — | — | — | — | — | (438 | ) | (438 | ) | ||||||||||||||||||
Balance, December 31, 2002 | 23,512,045 | 240 | 113,934 | (78 | ) | (49,771 | ) | 378 | (3,188 | ) | 61,515 | ||||||||||||||||||
Net loss | — | — | — | (22,958 | ) | (22,958 | ) | — | (22,958 | ) | |||||||||||||||||||
Other comprehensive income (loss): | — | ||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | 1,219 | — | 1,219 | |||||||||||||||||||||
Comprehensive loss | — | — | — | — | — | (21,739 | ) | — | |||||||||||||||||||||
Issuance of stock options and warrants | — | — | 386 | — | — | — | — | 386 | |||||||||||||||||||||
Beneficial Conversion Premium | — | — | 480 | — | — | — | — | 480 | |||||||||||||||||||||
Issuance of shares | 4,500,000 | 45 | 969 | — | — | — | 3,188 | 4,202 | |||||||||||||||||||||
Issuance of shares for employee stock purchase plan | 107,077 | 1 | 135 | — | — | — | — | 136 | |||||||||||||||||||||
Amortization of unearned compensation | 78 | — | — | — | 78 | ||||||||||||||||||||||||
Balance, December 31, 2003 | 28,119,122 | 286 | 115,904 | — | (72,729 | ) | 1,597 | — | 45,058 | ||||||||||||||||||||
Net loss | — | — | — | — | (34,372 | ) | (34,372 | ) | (34,372 | ) | |||||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | �� | — | — | 942 | — | 942 | |||||||||||||||||||||
Comprehensive loss | — | — | — | — | — | (33,430 | ) | — | |||||||||||||||||||||
Issuance of stock options and warrants | — | — | 189 | — | — | — | — | 189 | |||||||||||||||||||||
Beneficial Conversion Premium | — | — | 2,420 | — | — | — | — | 2,420 | |||||||||||||||||||||
Issuance of shares | 1,134,850 | 12 | 2,198 | — | — | — | — | 2,210 | |||||||||||||||||||||
Issuance of shares for employee stock purchase plan | 76,902 | 1 | 87 | — | — | — | — | 88 | |||||||||||||||||||||
Balance, December 31, 2004 | 29,330,874 | $ | 299 | $ | 120,798 | $ | — | $ | (107,101 | ) | $ | 2,539 | $ | — | $ | 16,535 | |||||||||||||
Common Stock | Additional Paid in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||
Outstanding Shares | Par Value | |||||||||||||||||||
Balance, January 1, 2004 | 28,119,122 | $ | 286 | $ | 115,904 | $ (72,729 | ) | $ | 1,597 | $ | 45,058 | |||||||||
Net loss | — | — | — | (34,372 | ) | (34,372 | ) | (34,372 | ) | |||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | 942 | 942 | ||||||||||||||
Comprehensive loss | (33,430 | ) | ||||||||||||||||||
Issuance of stock options and warrants | — | — | 189 | — | — | 189 | ||||||||||||||
Beneficial conversion premium | — | — | 2,420 | — | — | 2,420 | ||||||||||||||
Conversion of Laurus Loans | 1,134,850 | 12 | 2,198 | — | — | 2,210 | ||||||||||||||
Issuance of shares for employee stock purchase plan | 76,902 | 1 | 87 | — | — | 88 | ||||||||||||||
Balance, December 31, 2004 | 29,330,874 | 299 | 120,798 | (107,101 | ) | 2,539 | 16,535 | |||||||||||||
Net loss | — | — | — | (14,993 | ) | (14,993 | ) | (14,993 | ) | |||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | (1,836 | ) | (1,836 | ) | ||||||||||||
Comprehensive loss | (16,829 | ) | ||||||||||||||||||
Beneficial conversion premium | — | — | 399 | — | — | 399 | ||||||||||||||
Conversion of Laurus Loans | 4,900,000 | 49 | 2,507 | — | — | 2,556 | ||||||||||||||
Fair value of incremental shares issued | — | — | 1,365 | — | — | 1,365 | ||||||||||||||
Issuance of shares in private placement, net of expenses of $1,213 | 14,925,743 | 149 | 13,713 | — | — | 13,862 | ||||||||||||||
Issuance of shares for employee stock purchase plan | 25,504 | — | 18 | — | — | 18 | ||||||||||||||
Balance, December 31, 2005 | 49,182,121 | 497 | 138,800 | (122,094 | ) | 703 | 17,906 | |||||||||||||
Net loss | — | — | — | (3,431 | ) | (3,431 | ) | (3,431 | ) | |||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | 1,397 | 1,397 | ||||||||||||||
Comprehensive loss | (2,034 | ) | ||||||||||||||||||
Non-cash stock based compensation | — | — | 161 | — | — | 161 | ||||||||||||||
Issuance of shares for employee stock purchase plan | 7,551 | — | 5 | — | — | 5 | ||||||||||||||
Balance, December 31, 2006 | 49,189,672 | $ | 497 | $ | 138,966 | $ | (125,525 | ) | $ | 2,100 | $ | 16,038 | ||||||||
See notes to consolidated financial statements.
TRANSGENOMIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004, 20032006, 2005 and 20022004
(Dollars in thousands except per share data)thousands)
2004 (as restated, see | 2003 (as restated, | 2002 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net loss | $ | (34,372 | ) | $ | (22,958 | ) | $ | (21,365 | ) | |||
Adjustments to reconcile net loss to net cash flows from operating activities: | ||||||||||||
Depreciation and amortization | 4,625 | 4,597 | 3,993 | |||||||||
Non-cash restructuring charges (Note N) | 2,027 | 364 | 1,698 | |||||||||
Impairment charges (Note C) | 11,965 | 4,772 | — | |||||||||
Gain on sale of facility (Note M) | (1,466 | ) | — | — | ||||||||
Non-cash financing costs | 1,642 | — | — | |||||||||
Loss on debt extinguishment | 2,859 | — | — | |||||||||
(Gain)/Loss on sale of securities | 128 | (64 | ) | — | ||||||||
Other | 18 | 93 | 131 | |||||||||
Changes in operating assets and liabilities, net of acquisitions: | ||||||||||||
Purchase of trading securities | — | (1,566 | ) | — | ||||||||
Proceeds from sale of trading securities | — | 1,519 | — | |||||||||
Accounts receivable | (3,334 | ) | 342 | 794 | ||||||||
Inventories | 2,611 | 2,887 | (5,767 | ) | ||||||||
Prepaid expenses and other current assets | (130 | ) | 334 | 527 | ||||||||
Accounts payable | (268 | ) | (1,509 | ) | 2,249 | |||||||
Accrued expenses | 941 | (1,828 | ) | (204 | ) | |||||||
Net cash flows from operating activities | (12,754 | ) | (13,017 | ) | (17,944 | ) | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Securities received in settlement of accounts receivable | (4,397 | ) | (277 | ) | — | |||||||
Purchases of available for sale securities | — | — | (19,088 | ) | ||||||||
Proceeds from the maturities and sale of available for sale securities | 4,269 | 4,000 | 39,355 | |||||||||
Purchase of property and equipment | (1,758 | ) | (6,413 | ) | (11,468 | ) | ||||||
Change in other assets | 522 | (543 | ) | (2,871 | ) | |||||||
Proceeds from sale of specialty oligonuceotide manufacturing facility (Note M) | 3,000 | — | — | |||||||||
Proceeds from asset sales | — | 9 | — | |||||||||
Net cash flows from investing activities | 6,033 | (2,947 | ) | 5,928 | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Net change in line of credit | 4,956 | 2,992 | — | |||||||||
Proceeds from long-term debt | 2,750 | — | 1,559 | |||||||||
Payments on long-term debt | (1,779 | ) | (35 | ) | — | |||||||
Issuance of common stock, net of expenses | 71 | 4,338 | 624 | |||||||||
Purchase of treasury stock | — | — | (438 | ) | ||||||||
Net cash flows from financing activities | 5,998 | 7,295 | 1,745 | |||||||||
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH | 484 | 175 | 393 | |||||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | (239 | ) | (8,494 | ) | (9,878 | ) | ||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 1,241 | 9,735 | 19,613 | |||||||||
CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 1,002 | $ | 1,241 | $ | 9,735 | ||||||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||||||
Cash paid during the year for: | ||||||||||||
Interest | $ | 560 | $ | 314 | $ | 30 | ||||||
Income taxes, net | (94 | ) | 70 | 120 | ||||||||
Non-cash transactions: | ||||||||||||
Available for sale securities acquired for goods and services | 4,397 | 277 | — | |||||||||
Conversions of debt to equity | 2,226 | — | — |
2006 | 2005 | 2004 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net loss | $ | (3,431 | ) | $ | (14,993 | ) | $ | (34,372 | ) | |||
Adjustments to reconcile net loss to net cash flows from operating activities: | ||||||||||||
Depreciation and amortization | 1,949 | 4,283 | 4,625 | |||||||||
Non-cash restructuring charges | — | — | 2,027 | |||||||||
Impairment charges | 437 | 8,447 | 11,965 | |||||||||
Gain on sale of facility | — | — | (1,466 | ) | ||||||||
Non-cash financing costs | — | 1,281 | 1,642 | |||||||||
Non-cash debt extinguishment charges | — | (303 | ) | 2,859 | ||||||||
Non-cash stock based compensation | 161 | — | — | |||||||||
(Gain)/loss on sale of securities | — | (50 | ) | 128 | ||||||||
Other | 18 | — | 18 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | 1,634 | 139 | (3,334 | ) | ||||||||
Inventories | 397 | 514 | 2,611 | |||||||||
Prepaid expenses and other current assets | 200 | 574 | (130 | ) | ||||||||
Accounts payable | (731 | ) | (1,129 | ) | (268 | ) | ||||||
Accrued expenses | (1,846 | ) | (2,390 | ) | 941 | |||||||
Net cash flows from operating activities | (1,212 | ) | (3,627 | ) | (12,754 | ) | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Proceeds from the maturities and sale of available for sale securities | — | 2,151 | 4,269 | |||||||||
Purchase of property and equipment | (250 | ) | (641 | ) | (1,758 | ) | ||||||
Change in other assets, including cash paid for patents | (64 | ) | (3 | ) | 522 | |||||||
Proceeds from sale of specialty oligonucleotide manufacturing facility | — | — | 3,000 | |||||||||
Proceeds from asset sales | 119 | 139 | — | |||||||||
Net cash flows from investing activities | (195 | ) | 1,646 | 6,033 | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Net change in line of credit | — | (4,069 | ) | 4,956 | ||||||||
Proceeds from long-term debt | — | — | 2,750 | |||||||||
Payments on long-term debt | — | (1,850 | ) | (1,779 | ) | |||||||
Issuance of common stock, net of expenses | 5 | 13,836 | 71 | |||||||||
Net cash flows from financing activities | 5 | 7,917 | 5,998 | |||||||||
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH | 534 | (202 | ) | 484 | ||||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | (868 | ) | 5,734 | (239 | ) | |||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 6,736 | 1,002 | 1,241 | |||||||||
CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 5,868 | $ | 6,736 | $ | 1,002 | ||||||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||||||
Cash paid during the year for: | ||||||||||||
Interest | $ | 11 | $ | 553 | $ | 560 | ||||||
Income taxes, net | 30 | 12 | (94 | ) | ||||||||
Non-cash transactions: | ||||||||||||
Available for sale securities acquired for goods and services | — | 2,099 | 4,397 | |||||||||
Conversions of debt to equity | — | 2,536 | 2,226 |
See notes to consolidated financial statements.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 20032006, 2005 and 20022004
(Dollars in thousands except per share data)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTIONBusiness Description..
Transgenomic, Inc., a Delaware corporation, and its subsidiaries (the “Company”) provide innovative products and services for the synthesis, purification and analysis of nucleic acids. The Company’s products and services include automated instrument systems, associated consumables, nucleic acid chemical building blocks, nucleic acid synthesis products, novel chemistry development for nucleic acids and genetic variation discovery services. The Company develops, assembles, manufactures and markets its products and services toused in the life sciences industry to be used infor research focused on molecular genetics of humans and other organisms. Such research could lead to development of new diagnostics and therapeutics.diagnostics. The Company’s business plan is to participate in the value chain associated with these activities by providing key technology, tools, consumables, biochemical reagents andCompany also provides genetic variation analytical services to those entities engaged in basic biomedicalthe medical research, clinical and the development of diagnosticspharmaceutical markets. Net sales are categorized as bioinstruments, bioconsumables and therapeutic agents.
The Company operates in two reportable segments, BioSystems and Nucleic Acids. The BioSystems operating segment generates revenue from the sale of automated instrument systems and associated consumable products and services. The Nucleic Acids operating segment generates revenue from the sale of nucleic acid-based products anddiscovery services.
· | Bioinstruments. The Company’s principal product is the WAVE System which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. Bioinstrument sales also include instruments distributed for other manufacturers and service contracts to maintain installed systems are sold by the Company. |
The Company markets and sells these products primarily
· | Bioconsumables. The Company develops, manufactures and sells consumable products used with the WAVE System and other instruments it sells. |
· | Discovery Services. The Company provides various genetic laboratory services through a contract research lab in Gaithersburg, Maryland and a second laboratory in Omaha, Nebraska. The services provided primarily include (1) genomic biomarker analysis services to pharmaceutical and biopharmaceutical companies to support preclinical and clinical development of targeted therapeutics; and (2) molecular-based testing for hematology, oncology and certain inherited diseases for physicians and third-party laboratories. |
These operations are reported in a direct sales and support group in North America and Europe and through a networksingle reportable segment due to the integrated nature of distributors in the Pacific Rim and other international markets. These sales efforts are directed fromproducts. Historically, the Company headquarters in Omaha, Nebraskaoperated a separate business segment (the “Nucleic Acids operating segment”) that developed, manufactured and through a series of salesmarketed chemical building blocks for nucleic acid synthesis to biotechnology, pharmaceutical and support offices strategically locatedoligonucleotide synthesis companies and research institutions throughout the United States, Europeworld. In the fourth quarter of 2005, the Company implemented a plan to exit this operating segment and Japan.
substantially completed this plan during 2006. Accordingly, results of this operating segment are reflected as discontinued operations for all periods presented.
The Company has experienced recurring net losses, including $3.4 million in 2006, $15.0 million in 2005 and $34.4 million in 2004, and had an accumulated deficit of $107,101$125.5 million at December 31, 2004.2006. Based on the Company’s 2005 operating plan and the receipt of $2.7 million from the sale of the Glasgow facility on February 28, 2007, management believes its existing sources of liquidity will be sufficient to meet its cash needs during 2005. If necessary, the Company’s management believes they can manage costs and expenses at reduced levels to conserve working capital. The need for any such costs and expense reductions during 2005 would likely delay implementation of the Company’s business plan. Additionally, management may pursue additional financing alternatives. Ultimately,2007. While the Company must achievehas been able to historically finance its operation losses through borrowings or from the issuance of additional equity, its management does not believe the Company can borrow additional funds or issue additional equity securities for this purpose. Accordingly, the Company will need to increase its revenues or further reduce its operating expenses in order to be assured of meeting its liquidity needs on a long-term basis. However, there can be no assurance that the Company will be able to increase revenues or further reduce expenses and, accordingly, it may not have sufficient revenue levelssources of liquidity to support its cost structure.continue operations indefinitely.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Years Ended December 31, 2006, 2005 and 2004
(Dollars in thousands except per share data)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation.
The consolidated financial statements include the accounts of Transgenomic, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates.
The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions associated with the determination of fair value of certain assets and related impairments, and the determination of goodwill impairments require considerable judgment by management. Actual results could differ from the estimates and assumptions used in preparing these financial statements.
Cash and Cash Equivalents.Equivalents
For purposes of reporting cash flows, cashCash and cash equivalents include cash and temporary investmentsmonies invested in overnight funds with original maturities at acquisition of three months or less.
Short Term Investments.
The Company classifies all of its short-term investments with maturities at acquisition of greater than three months as available for sale securities. Such short-term investments consist primarily of United States government and federal agency securities, corporate commercial paper and corporate debt that are stated at market value, with unrealized gains and losses on such securities reflected, net of tax, as other comprehensive income in stockholders’ equity. Realized gains and losses on short term investments are included in earnings and are derived using the specific identification method for determining the cost of securities. It is the Company’s intent to maintain a liquid portfolio to take advantage of investment opportunities; therefore, all securities are considered to be available for sale and are classified as current assets.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands except per share data)
During 2003 and 2004, the Company accepted common stock from one of its customers (Geron Corporation) as payment for goods and services. These shares were classified as available-for-sale securities. Net losses on these securities of $128 during 2004 and net gains of $111 during 2003 were reflected as other expense on the consolidated statement of operations. Proceeds from the sales of these available for sale securities were reflected within net cash flows from investing activities.
our bank.
Accounts Receivable.
Accounts receivable are shown net of allowance for doubtful accounts. The following is a summary of activity for the allowance for doubtful accounts during each of the three years ended December 31, 2004:2006:
Beginning Balance | Additional Charges to Income | Deductions from Reserve | Ending Balance | |||||||||
Year Ended December 31, 2004 | $ | 549 | $ | 534 | $ | 32 | $ | 1,051 | ||||
Year Ended December 31, 2003 | $ | 450 | $ | 174 | $ | 75 | $ | 549 | ||||
Year Ended December 31, 2002 | $ | 213 | $ | 418 | $ | 181 | $ | 450 |
Beginning Balance | Additional Charges to Income | Deductions from Reserve | Ending Balance | |||||||||
Year Ended December 31, 2006 | $ | 615 | $ | 92 | $ | 263 | $ | 444 | ||||
Year Ended December 31, 2005 | $ | 701 | $ | — | $ | 86 | $ | 615 | ||||
Year Ended December 31, 2004 | $ | 359 | $ | 374 | $ | 32 | $ | 701 |
While payment terms are generally 30 days, the Company has also provided extended payment terms of up to 90 days in certain cases.
Inventories.
Inventories are stated at the lower of cost or market. Cost is computed using standard costs for finished goods and average or latest actual cost for raw materials and work in process.process
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Years Ended December 31, 2006, 2005 and 2004
(Dollars in thousands except per share data)
PropertyEquipment, Furniture and Equipment.Fixtures.
PropertyAll equipment, furniture and equipmentfixtures are carried at cost.cost, less accumulated depreciation. Depreciation is computed by the straight-line method over the estimated useful lives of the related assets as follows:
| ||
Leasehold improvements | 3 to | |
Furniture and fixtures | 5 to 7 years | |
Production equipment | 5 to 7 years | |
Computer equipment | 3 to 5 years | |
Research and development equipment | 3 to 5 years | |
Demonstration equipment | 3 to 5 years |
Depreciation of property and equipment totaled $4,009, $3,983$1,344, $1,786 and $3,993$3,330 in 2006, 2005 and 2004, 2003 and 2002, respectively.
Goodwill and other Intangible Assets
The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142,Goodwill and Other Intangible Assets,beginning on January 1, 2002. SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives willis not be amortized, but willis to be tested for impairment annually. Impairment occurs when the carrying value is determined to not be recoverable thereby causing the fair value of the asset is less than itsgoodwill to exceed the carrying amount.value. If impaired, the asset’sassets carrying value is reduced to its fair value. Identifiable intangible assets with definite lives are amortized over their estimated useful lives and tested for impairment as events or changes in circumstances indicate the carrying amount of the asset may be impaired. Impairment occurs when the carrying value is not recoverable and the fair value of the asset is less than the carrying value.
The Company has not amortized goodwill for any period presented. Accordingly, there are no differences between reported net loss and loss per share related to goodwill amortization.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands except per share data)
Other Assets.
Other assets include long-term inventory,capitalized software development costs, intellectual property, patents, intellectual property,other intangible assets, deferred financing costs and other long-term assets.
Capitalized Software Development Costs. The Company capitalized software development costs.costs for products offered for sale in accordance with SFAS No. 86,Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. This Standard allows for the capitalization of certain development costs once a software product has reached technological feasibility. The Company capitalized no software development costs during the three years ended December 31, 2006.
Intellectual Property. Initial costs paid to license intellectual property from independent, third parties is capitalized and amortized using the straight line method over the license period. Ongoing royalties related to such licenses are expensed as incurred.
Patents. The Company capitalizes the external and in-house legal costs and filing fees associated with obtaining patents on its new discoveries and amortizes these costs using the straight-line method over the shorter of the legal life of the patent or its economic life, generally 17 years, beginning on the date the patent is issued. The Company capitalized software development costs
Other intangible assets with indefinite lives will not be amortized, but will be tested for products offered for saleimpairment annually. Impairment occurs when the carrying value is not recoverable and the fair value of the asset is less than the carrying value. If impaired, the asset’s carrying value is reduced to its fair
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Years Ended December 31, 2006, 2005 and 2004
(Dollars in accordance with SFAS No. 86,Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. This Standard allows for the capitalization of certain development costs once a software product has reached technological feasibility. Development costs capitalized totaled $0 in 2004 and 2003 and $1,127 in 2002.thousands except per share data)
value. Identifiable intangible assets with definite lives are amortized over their estimated useful lives and tested for impairment as events or changes in circumstances indicate the carrying amount of the asset may be impaired.
Deferred Financing Costs. Certain financing costs are capitalized and amortized to interest expense over the life of the related financing.
Other Long-Term Assets. Other long-term assets consist primarily of demonstration inventory that has been at customer or prospective customer sites for greater than one year and security deposits on leased facilities. Long-term demonstration inventory is stated at the lower of cost or market.
Stock Based Compensation.
All stock options awarded to date have exercise prices equal to the market price of our common stock on the date of grant and have ten-year contractual terms. Unvested options as of December 31, 2006 had vesting periods of three years from date of grant. None of the stock options outstanding at December 31, 2006 are subject to performance or market-based vesting conditions.
The Company accountsadopted Financial Accounting Standards Board (FASB) Statement No. 123(R),Share-Based Payment (FAS 123(R)), on January 1, 2006. FAS 123(R) requires the Company to measure and recognize compensation expense for its employeeall stock-based awards made to employees and directors, including stock options. Compensation expense is based on the calculated fair value of the awards as measured at the grant date and is expensed ratably over the service period of the awards (generally the vesting period).
During the year ended December 31, 2006, the Company recorded compensation expense of $12 within general and administrative expense related to 340,000 new option grants under(the “New Options”) and $149 within general and administrative expense related to the provisionsextension of the post-termination exercisable period for 450,000 options of two former employees from 90 days after termination to the remaining contractual term of the original option grants (the “Modified Options”). The fair value of the New Options and the Modified Options were estimated on the grant date or the modification dates, as the case may be, using the Black-Scholes option pricing model. With respect to the New Options, the Black-Scholes model was used with the following assumptions: risk-free interest rates of 4.87% to 4.99%; dividend yields of zero percent; expected lives of 2 to 9 years and volatility of 89.14%. With respect to the Modified Options, the Black Scholes model was used with the following assumptions: risk-free interest rates of 4.71% to 5.07%, based on the US treasury yield in effect at the time of grant; dividend yields of zero percent; expected lives of 2 to 9 years, based on historical exercise activity behavior, and volatility of 89.14%, based on the historical volatility of our stock over a time period that is consistent with the expected life of the option. As of December 31, 2006, there was $124 of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of nearly 3 years
Prior to the adoption of FAS 123(R), the Company applied the recognition and measurement principles of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to EmployeeEmployees,s, which utilizes the intrinsic value method. and related interpretations. Accordingly, no stock-based employee compensation cost forexpense related to stock option grants was reflected in net income in years prior to 2006, as all options is measured asgranted under those plans had a grant price equal to the excess, if any, of the fair market value of the Company’sour common stock aton the date of grant overgrant. The Company elected to use the modified prospective transition method to implement FAS 123(R) and,
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Years Ended December 31, 2006, 2005 and 2004
(Dollars in thousands except per share data)
accordingly, did not restate financial results for prior periods. The Company elected to follow the alternative method under FASB Staff Position FAS 123R-3,Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards, for purposes of determining the Company’s pool of excess tax benefits available to absorb tax deficiencies. The following table details the effect on net income and earnings per share had compensation expense for all stock-based awards, including stock option exercise price. Stock option grants to non-employees are accounted for usingoptions, been recorded in the twelve months ended December 31, 2005 and 2004 based on the fair value method of accounting in accordance with SFASunder FASB Statement No. 123,Accounting for Stock-Based Compensation,Compensation: using the Black-Scholes model.
The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock based employee compensation.
2004 | 2003 | 2002 | ||||||||||
Net Loss: | ||||||||||||
As reported | $ | (34,372 | ) | $ | (22,958 | ) | $ | (21,365 | ) | |||
Pro forma | $ | (35,432 | ) | $ | (24,794 | ) | (23,274 | ) | ||||
Basic and diluted loss per share: | ||||||||||||
As reported | (1.19 | ) | (0.94 | ) | (0.91 | ) | ||||||
Pro forma | (1.22 | ) | (1.01 | ) | (0.99 | ) |
2005 | 2004 | |||||||
Net Loss: | ||||||||
As reported | $ | (14,993 | ) | $ | (34,372 | ) | ||
Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax | 957 | 1,060 | ||||||
Pro forma | $ | (15,950 | ) | $ | (35,432 | ) | ||
Basic and diluted loss per share: | ||||||||
As reported | (0.42 | ) | (1.19 | ) | ||||
Pro forma | (0.45 | ) | (1.22 | ) |
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 unlikelymore likely than not that they will not be realized.
Revenue Recognition.
Revenue on the sales of products is recognized in accordance with the terms of the sales arrangement. Such recognition is based on receipt of an unconditional customer order and transfer of title and risk of ownership to the customer, typically upon shipment of the product. Our sales terms do not provide for the right of return unless the product is damaged or defective. Revenues from certain services associated with our analytical instruments, to be performed subsequent to shipment of the products, is deferred and recognized when the services are provided. Such services, mainly limited to installation and training services that are not essential to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument. The Company also enters into various service contracts that cover installed WAVE systems.instruments. These contracts cover specific time periods and revenue associated with these contracts is deferred and recognized over the service period. At December 31, 20042006 and 2003,2005, deferred revenue, mainly associated with the Company’s service contracts, included on the Company’s balance sheet in other accrued expenses was approximately $1,478$1,591 and $1,792$2,124, respectively.
Research and Development.
Research and development costs are charged to expense when incurred.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands except per share data)
Translation of Foreign Currency.
Financial statements of subsidiaries outside the U.S. are measured using the local currency as the functional currency. The adjustments to translate those amounts into U.S. dollars are accumulated in a
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Years Ended December 31, 2006, 2005 and 2004
(Dollars in thousands except per share data)
separate account in stockholders’ equity and are included in accumulated other comprehensive income. Foreign currency transaction gains or losses resulting from changes in currency exchange rates are included in the determination of net income. Foreign currency transaction adjustments increased net loss by $79 and $332 during the years ended December 31, 2006 and 2005, respectively, and decreased net loss approximately $328 in 2004 and $1,089 in 2003 and 2002.
by $445 during the year ended December 31, 2004.
Comprehensive Income.
Accumulated other comprehensive income at December 31, 20042006 and 20032005 consisted of foreign currency translation adjustments, net of applicable tax of $0.adjustments. For all previous periods presented, accumulated other comprehensive income consists of foreign currency translation adjustments and unrealized gains or losses on available for sale investments, net of applicable tax of $0.investments. The Company deems its foreign investments to be permanent in nature and does not provide for taxes on currency translation adjustments arising from converting its investments in a foreign currency to U.S. dollars. There were no reclassification adjustments to be reported in the periods presented.
Fair Value of Financial Instruments.
The carrying amount of the Company’s cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair value because of the short maturity of those instruments. The Company derives the fair value of its short-term investments based on quoted market prices. The carrying value of long-term debt and the line of credit approximates fair value based upon existing interest rates available to the Company for similar debt.
Earnings Per Share.
Basic earnings per share are calculated based on the weighted-average number of common shares outstanding during each period. Diluted earnings per share include shares issuable upon exercise of outstanding stock options, and warrants or conversion rights that have exercise or conversion prices below the market value of convertible notes, where dilutive. Potentially dilutive securities totalingour common stock. Options, warrants and conversion rights pertaining to 13,530,241, 13,625,675 and 13,484,072 7,671,771 and 5,158,672 in 2004, 2003 and 2002, respectively,shares of our common stock have been excluded from the computation of diluted earnings per share as they have an antidilutive effect due toat December 31, 2006, 2005 and 2004 because the Company’s net loss.
exercise or conversion price of these instruments exceeded the market price of our common stock on those dates.
Recently Issued Accounting Pronouncements
On December 16, 2004,In July 2006, the Financial Accounting Standards Board (FASB)FASB issued SFASInterpretation (“FIN”) No. 123R, Share-Based Payment. SFAS No.123R addresses48, “Uncertainty in Income Taxes.” FIN 48 applies to all tax positions within the accounting for share-based payment transactionsscope of Statement 109 and clarifies when and how to recognize tax benefits in which an enterprise receives employee servicesthe financial statements with a two-step approach of recognition and measurement. FIN 48 will become effective in exchange for (a) equity instrumentsthe first quarter of 2007. Management continues to evaluate the enterprise or (b) liabilitieseffect that are basedadoption of FIN 48 will have on the fair value of the enterprise’s equity instruments or that may be settled by the issuace of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 and generally requires that such transactions be accounted for using a fair-value-based method. The Company expects to adopt this standard on January 1, 2006. The Company is currently assessing the final impact of this standard on its financial position,our consolidated results of operations or cash flows. This assessment includes evaluating option valuation methodologies and assumptions as well as potential changesfinancial position.
In September 2006, the SEC issued Staff Accounting Bulletin. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides interpretive guidance on how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB 108 requires registrants to compensation strategies.
On November 24, 2004, the FASB issued SFAS No. 151, Inventory Costs –quantify misstatements using both an amendment of ARB No. 43. SFAS No. 151 requires idle facility expenses, freight, handling costs,income statement and wastedbalance sheet approach and then evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial are now considered material (spoilage) costs to be excluded from the cost of inventory and expensed when incurred. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective at the beginning of 2006. The Companyeither approach, no restatement is currently assessing the final impact of this standard onrequired so long as management properly applied its financial position, results of operations or cash flows.
Use of Estimates.previous approach and all relevant
The preparation of consolidatedfacts and circumstances were considered. If prior year’s financial statements in conformity with accounting principles generally accepted inare not restated, the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS - Continued
Years Ended December 31, 2004, 20032006, 2005 and 20022004
(Dollars in thousands except per share data)
B. INVENTORIES
Inventories consistedcumulative effect adjustment is recorded in opening accumulated earnings (deficit) as of the followingbeginning of the fiscal year of adoption. SAB 108 is effective for us at December 31:the end of 2006. There was no impact to our Consolidated Financial Statements as a result of adoption of this pronouncement.
Biosystems Operating Segment | Nucleic Acids Operating Segment | Total | ||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||
Finished goods | $ | 2,637 | $ | 2,875 | $ | 2,380 | $ | 2,247 | $ | 5,017 | $ | 5,122 | ||||||
Raw materials and work in process | 780 | 1,223 | 2,275 | 3,851 | 3,055 | 5,074 | ||||||||||||
Demonstration inventory | 153 | 388 | — | — | 153 | 388 | ||||||||||||
3,570 | 4,486 | 4,655 | 6,098 | 8,225 | 10,584 | |||||||||||||
Less inventory classified as a long-term asset | �� | — | — | 2,859 | — | 2,859 | — | |||||||||||
Net Inventory | $ | 3,570 | $ | 4,486 | $ | 1,796 | $ | 6,098 | $ | 5,366 | $ | 10,584 | ||||||
In September 2006, the FASB issued Statement No. 157, Fair Value Measurement (FAS 157). While this statement does not require new fair value measurements, it provides guidance on applying fair value and expands required disclosures. FAS 157 is effective for us beginning in the first quarter of 2008. We are currently assessing the impact FAS 157 may have on our Consolidated Financial Statements.
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (FAS 159). This statement, which is expected to expand fair value measurement, permits entities to choose to measure many financial instruments and certain other items at fair value. FAS 159 is effective for us beginning to the first quarter of 2008. We are currently assessing the impact FAS 159 may have on our Consolidated Financial Statements.
C. DISCONTINUED OPERATIONS AND DIVESTITURES
In the fourth quarter of 2005, the Company implemented a plan to exit the Nucleic Acids operating segment inventory at December 31, 2004 and 2003 consistedwhich was primarily engaged in the manufacture of phosphoramadites and the raw materials to produce phosphoramadites which are used to produce synthetic DNA. Accordingly, the Company now reflects the related assets and producedresults of operations from this segment as discontinued operations for all periods presented. Expenses that are not directly identified to the Nucleic Acids operating segment or are considered corporate overhead have not been allocated to this segment in arriving at results from discontinued operations. Summary results of operations of the former Nucleic Acids operating segment were as follows:
Years Ended December 31, | |||||||||
2006 | 2005 | 2004 | |||||||
NET SALES | $ | 1,142 | $ | 3,881 | $ | 8,546 | |||
COST OF GOODS SOLD | 912 | 4,004 | 12,599 | ||||||
Gross profit (loss) | 230 | (123) | (4,053) | ||||||
OPERATING EXPENSES: | |||||||||
Selling, general and administrative | 264 | 1,054 | 1,538 | ||||||
Research and development | — | — | 2,184 | ||||||
Restructuring charges | — | — | 2,303 | ||||||
Exit and disposal charges | — | 866 | — | ||||||
Impairment charges | 436 | 8,022 | 11,965 | ||||||
Gain on sale of facility | — | — | (1,466) | ||||||
700 | 9,942 | 16,524 | |||||||
LOSS FROM OPERATIONS | (470) | (10,065) | (20,577) | ||||||
OTHER INCOME (EXPENSE) | 2 | 56 | (143) | ||||||
LOSS BEFORE INCOME TAXES | (468) | (10,009) | (20,720) | ||||||
INCOME TAX BENEFIT | — | — | (98) | ||||||
LOSS FROM DISCONTINUED OPERATIONS | $ | (468) | $ | (10,009) | $ | (20,622) | |||
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Years Ended December 31, 2006, 2005 and 2004
(Dollars in thousands except per share data)
On December 22, 2005, the Company’s Directors voted to either sell or close and liquidate the Nucleic Acids operating segment, which consists primarily of a manufacturing facility in Glasgow, Scotland. AsThis decision was made after an evaluation of, among other things, short and long-term sales projections for products sold by this operating segment, including estimates of 2006 sales to the operating segment’s largest customer. In addition, the Company expects to incur additional period costs attributable to closure of the facility that will be recorded in discontinued operations in 2007. In conjunction with the decision to exit this operating segment, the Company recorded an impairment charge of $8,022 in 2005 consisting of valuation adjustments to reflect the carrying value of the related net assets at estimated fair market value.
There was no goodwill associated with the former Nucleic Acids operating segment at December 31, 2004, the Company has classified a portion of this inventory as a long-term other asset based on its existing sales forecasts for these products.
2005 and 2004. The Company periodically evaluates its inventory of chemical building blocks to determine whether they continue to meet quality and other specifications and over what time period such products are expected to be sold. Product that does not meet quality and other specifications can generally be re-worked to enhance purity. Costs to purify such product and related yield losses are expensed as incurred.
C. GOODWILL
At December 31, 2004 and 2003, goodwill byformer Nucleic Acids operating segment consist of the following:
Biosystems Operating Segment | Nucleic Acids Segment | Total | |||||||||
Net balance December 31, 2002 | $ | 638 | $ | 14,637 | $ | 15,275 | |||||
Goodwill impairment charge | — | (4,772 | ) | (4,772 | ) | ||||||
Net balance December 31, 2003 | 638 | 9,865 | 10,503 | ||||||||
Goodwill impairment charge | — | (9,865 | ) | (9,865 | ) | ||||||
Net Balance December 31, 2004 | $ | 638 | $ | 0 | $ | 638 | |||||
The Company recorded charges of $9,865 and $4,772 during 2004 and 2003, respectively, related to the impairment of goodwill associated with the Nucleic Acids operating segment. In each case, the amount of the impairment charge was based, in part, on independent valuations performed by the same unaffiliated valuation firm. The 2003 charge resulted from the Company’s annual impairment test that was performed in the fourth quarter of 2003.goodwill. The 2004 charge resulted from an interim period impairment test performed during the second quarter of 2004.
The interim period impairment test became necessary after the Company’s Board of Directors directed management during the second quarter of 2004 to explore strategic alternatives for the former Nucleic Acids operating segment. This process included significant due diligence by management, third-party advisors and prospective independent buyers and other interested parties. Information obtained through this process indicated that it was more likely than not that the assets associated with the Nucleic Acids operating segment were impaired.
The Companyformer Nucleic Acids operating segment also recorded a charge of $2,100 during the second quarter of 2004 related to the impairment of property and equipment associated with this operating segment.
On November 13, 2004, the former Nucleic Acids operating segment sold the assets associated with its specialty oligonucleotides manufacturing facility in Boulder, Colorado to a subsidiary of Eyetech Pharmaceuticals, Inc. (“Eyetech”). The sale price was $3,000 in cash plus the assumption of the lease on the Boulder facility and of certain equipment leases with a gross value of $2,377. Substantially all of the 27 employees at the Boulder facility became Eyetech employees. Net proceeds from the sale (after transaction expenses and fees paid to our investment advisors) equaled approximately $2,700. In conjunction with this transaction, the Nucleic Acids operating segment.segment recorded a gain on sale of $1,466 in the fourth quarter of 2004.
The Company implemented restructuring plans in 2004 and 2002 designed to better align its cost structure with anticipated revenues. In conjunction with these plans, the former Nucleic Acids operating segment recorded restructuring charges in 2004 of $2,303 related primarily to employee severance agreements, office closures, property and equipment and intellectual property. There were accrued expenses associated with these restructuring plans of $191 at December 31, 2005.
The Company accepted common stock from a customer of the former Nucleic Acids operating segment, Geron Corporation (“Geron”) as payment for goods and services. These shares were
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Years Ended December 31, 2006, 2005 and 2004
(Dollars in thousands except per share data)
classified as available-for-sale securities. Net realized gains on these securities during 2005 of $52 and realized losses on these securities of $128 during 2004 were reflected as other expense. Proceeds from the sales of these available for sale securities are reflected within net cash flows from investing activities. During 2005 and 2004, sales to Geron totaled $1,949 and $4,151, respectively, representing 50% and 49%, respectively, of net sales within this operating segment.
The assets and liabilities of the former Nucleic Acids operating segment were as follows:
December 31, | ||||||
2006 | 2005 | |||||
Accounts receivable (net of allowances for bad debts of $169 and $393, respectively) | $ | — | $ | 51 | ||
Inventories | — | 86 | ||||
Prepaid expenses and other current assets | — | 60 | ||||
Current assets of discontinued operations | $ | — | $ | 197 | ||
Property, plant and equipment, net | $ | 2,773 | $ | 2,933 | ||
Other assets | — | — | ||||
Non-current assets of discontinued operations | $ | 2,773 | $ | 2,933 | ||
Accounts payable | $ | 45 | $ | 434 | ||
Other accrued expenses | 139 | 863 | ||||
Accrued compensation | — | 625 | ||||
Current liabilities of discontinued operations | $ | 184 | $ | 1,922 | ||
D. INVENTORIES
Inventories consisted of the following:
December 31, | ||||||
2006 | 2005 | |||||
Finished goods | $ | 2,146 | $ | 2,062 | ||
Raw materials and work in process | 443 | 653 | ||||
Demonstration inventory | 83 | 275 | ||||
$ | 2,672 | $ | 2,990 | |||
The Company recorded a charge of $178 during the fourth quarter of 2005 related to the impairment of certain inventory associated with third party platforms. No charges were recorded for the year ended December 31, 2006.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS - Continued
Years Ended December 31, 2004, 20032006, 2005 and 20022004
(Dollars in thousands except per share data)
D.E. OTHER ASSETS
At December 31, 2004 and 2003, finiteFinite lived intangible assets and other assets consisted of the following:
2004 | 2003 | December 31, | ||||||||||||||||||||||||||||||||||
Cost | Accumulated Reserve | Net Book Value | Cost | Accumulated Reserve | Net Book Value | 2006 | 2005 | |||||||||||||||||||||||||||||
Capitalized software | $ | 2,132 | $ | 1,468 | $ | 664 | $ | 2,132 | $ | 758 | $ | 1,374 | ||||||||||||||||||||||||
Cost | Accumulated Reserve | Net Book Value | Cost | Accumulated Reserve | Net Book Value | |||||||||||||||||||||||||||||||
Intellectual property | 765 | 476 | 289 | 765 | 165 | 600 | $ | 765 | $ | 677 | $ | 88 | $ | 765 | $ | 534 | $ | 231 | ||||||||||||||||||
Patents | 1,071 | 194 | 877 | 1,035 | 170 | 865 | 676 | 155 | 521 | 636 | 135 | 501 | ||||||||||||||||||||||||
Deferred Financing Costs | 576 | 183 | 393 | 409 | — | 409 | ||||||||||||||||||||||||||||||
Long Term Inventory | 4,797 | 1,938 | 2,859 | — | — | — | ||||||||||||||||||||||||||||||
Other | 452 | 147 | 305 | 656 | 183 | 473 | 705 | 461 | 244 | 838 | 496 | 342 | ||||||||||||||||||||||||
Total | $ | 9,793 | $ | 4,406 | $ | 5,387 | $ | 4,997 | $ | 1,276 | $ | 3,721 | $ | 2,146 | $ | 1,293 | $ | 853 | $ | 2,239 | $ | 1,165 | $ | 1,074 | ||||||||||||
During the year ended December 31, 2005, management determined that certain international patent pursuits were no longer consistent with the Company’s strategic plan. Accordingly, the Company recorded an impairment charge of $247 in 2005 related to the abandonment of such pursuits. No such charges were recorded during 2006.
Amortization expense for intangible assets was $171, $1,159 and $1,197 $825during years ended December 31, 2006, 2005 and $150 during 2004, 2003 and 2002, respectively. Amortization expense for intangible assets is expected to be approximately $1,009 in 2005, $342 in 2006, $320 in$66 for 2007, $62 in$53 for 2008, $42 for 2009 and $130 in 2009.
2010, $38 for 2011 and $32 for 2012.
E.F. DEBT
Debt consisted of the followingThe Company had no debt at December 31:
2004 | 2003 | |||||||
Credit Line | ||||||||
Gross amount due (2% above prime, due December 2006) | $ | 5,948 | $ | 2,992 | ||||
Debt premium | 1,004 | — | ||||||
Debt discount - warrants | (85 | ) | (370 | ) | ||||
Debt discount - beneficial conversion premium | (353 | ) | (480 | ) | ||||
$ | 6,514 | $ | 2,142 | |||||
Long-Term Debt | ||||||||
Convertible debt (2% above prime, due February 2007) | $ | 2,550 | $ | — | ||||
Debt Premium | 474 | — | ||||||
Mortgage debt | — | 1,693 | ||||||
Less current portion | (825 | ) | (1,693 | ) | ||||
$ | 2,199 | $ | — | |||||
31, 2006 and 2005.
In December 2003, the Company entered into a $7,500 line of credit (the “Credit Line”) with Laurus Master Fund, Ltd. (“Laurus”). The term of the Credit Line iswas three years carrying an interest rate of 2.0% over the prime rate or a minimum of 6.0% (7.25% at December 31, 2004). Funds available under the Credit Line arewere determined by a borrowing base equal to 90% of eligible accounts receivable balances plus up to $1,000 related to inventory balances. The Credit Line iswas secured by most of the Company’s assets. Prior to amendments to the Credit Line discussed below, payment of interest and principal could, under certain circumstances, be made with shares of the Company’s common stock at a fixed conversion price of $2.20 per share. Conversion of this debt to common stock may becould have been made at the election of Laurus or the Company. The Company could elect to convert only if its shares tradetraded at a price exceeding $2.42 per share for ten consecutive trading days, and such conversion iswas further subject to trading volume limitations and a limitation on the total beneficial ownership by Laurus of the Company’s common stock. Upon entering into the Credit Line, the Company issued warrants to Laurus to acquire 550,000 shares of the Company’s common stock at an exercise price exceeding the average trading price of the Company’s common stock over the ten trading days prior to the date of the warrant. The amount available under the Credit Line at December 31, 2004 and 2003 was $1,552 and $4,508, respectively.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Years Ended December 31, 2006, 2005 and 2004
(Dollars in thousands except per share data)
In February 2004, the Company entered into a separate $2,750 convertible note with Laurus (the “Term Note”). The Term Note carriescarried an interest rate of 2.0% over the prime rate or a minimum of 6.0% (7.25% at December 31, 2004) and hashad a term of 3 years. Prior to amendments to the Term Note discussed below, the principal and interest on the Term Note could be converted into common stock of the Company at a fixed conversion price of $2.61 per share. Upon entering the Term Note, the Company issued warrants to Laurus to acquire 125,000 shares of its common stock. Borrowings under the Term Note were primarily used to retire the mortgage debt on the Company’s Glasgow facility. Remaining borrowings of approximately $750 were used to complete the build-out of the Glasgow facility, complete the consolidation the Company’s Glasgow operations into the new facility and provide funds for operations.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands except per share data)
Certain features of the Credit Line and Term Note (collectively, the “Laurus Loans”) requirerequired the Company to separately account for the value of certain amounts related to the warrants issued and the conversion feature of the Laurus Loans. Specifically, Emerging Issues Task Force (“EITF”) No. 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments, requires the Company to separately value the warrants issued and the “beneficial conversion premium” related to the Laurus Loans. Any borrowings under the Credit Line may result in additional beneficial conversion premiums. The values of the warrants and the beneficial conversion premium have beenwere recorded on the balance sheet as a debt discount and an increase to additional paid in capital. The debt discount recorded for these items will bewas amortized as expense to the income statement over the terms of the Laurus Loans or as the warrants are exercised or the debt iswas converted into common stock thereby increasing the effective interest rate on the Laurus Loans. In January and February 2004, Laurus exercised its conversion rights on the Credit Line and converted $2,000 of amounts outstanding on the Credit Line into approximately 910,000 shares of common stock of the Company. In connection with this conversion, the Company accelerated the amortization of approximately $480 of the beneficial conversion premium.
In February 2004, Laurus waived the borrowing base limitation on the Credit Line, thereby making the full $7,500 facility available to the Company regardless of the available collateral. On August 31, 2004, Laurus agreed to extend the borrowing base waiver on the Credit Line through March 19, 2005. In addition, Laurus deferred certain payments due under the Term Note and reduced the interest rate on both of the Laurus Loans to 0% for any day the closing sale price of the Company’s common stock iswas at or above $1.75 per share. In return, the Company lowered the conversion price on each of the Laurus Loans to $1.00 per share and issued a warrant to Laurus covering an additional 400,000 common shares at an exercise price of $1.25 per share. The closing price of the Company’s common stock on August 31, 2004 was $1.20 per share.
The August 31, 2004 Laurus modifications were treated as extinguishments for financial reporting purposes since the change in present value of expected cash flows between the original and modified agreements iswas greater than 10%. As such, the Company recorded a loss on extinguishment of debt of $2,859 at August 31, 2004 reflecting the difference between (i) the recorded amount of debt, net of related discounts, of $7,427 and (ii) the fair value of the new debt instrument of $10,287 plus the fair value of the new warrants of $111. The difference between the fair value of the new debt of $10,287 and the face value of the debt of $8,572 representsrepresented a premium, which will bewas reflected as a reduction of interest expense over the life of the new debt.
Prospectively, draws on the Credit Line may result in beneficial conversion charges to the extent the price of the Company’s common stock exceeds the conversion price on the day of the draw. Such beneficial charges will be amortized as expense to the income statement during the period the draw remains outstanding or up to the point the debt is converted into common stock thereby increasing the effective interest rate on the Credit Line.
Principal repayments under the Term Note are scheduled as follows: $850 in 2005, $900 in 2006, and $800 in 2007.
Amortization of debt premiums and discounts totaled $1,644 during 2004 and $0 in each 2003 and 2002 and is reflected as interest expense in the accompanying statement of operations.
During 2002, Cruachem Ltd., a wholly owned subsidiary of the Company, entered into a mortgage loan with The Royal Bank of Scotland. The original principal amount of the loan was £1.0 million. Principal and interest were payable in quarterly installments. The loan carried a 15-year term and a fixed annual interest rate of 6.77%. Security for this loan was the Company’s 45,000 square foot manufacturing facility located in Glasgow, Scotland. The loan carried certain financial and non-financial covenants that included a minimum net cash flow requirement. The net book value of the facility was approximately $2,000 at December 31, 2003. During February 2004, the Company repaid the principal balance of the mortgage loan and therefore, the Company included the entire outstanding principal balance of this loan at December 31, 2003 within current liabilities.
F. COMMITMENTS AND CONTINGENCIES
The Company has been named as a defendant in a lawsuit filed in Spain by a prospective distributor who claims that the Company breached a promise to grant the plaintiff a distributorship for certain of the Company’s products in a specific geographic area in Europe. The plaintiff is seeking monetary relief of approximately $500. The Company believes the lawsuit is without merit and intends to vigorously defend this matter.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS - Continued
Years Ended December 31, 2004, 20032006, 2005 and 20022004
(Dollars in thousands except per share data)
On March 18, 2005, Laurus agreed to further extend the borrowing base waiver on the Credit Line until March 31, 2006. In connection with this waiver, the Company agreed to allow Laurus to convert $1,872 of the outstanding principal balance under the Credit Line into 3,600,000 shares of its common stock. In addition, on March 24, 2005 the Company agreed to allow Laurus to convert $650 of the outstanding principal balance of the Term Note into 1,250,000 shares of common stock. As a result, the Company increased the amount available under the Credit Line by $1,872 and eliminated substantially all remaining 2005 scheduled principal payments on the Term Loan. The closing market price of the Company’s common stock the day before each of these conversions was $0.58 per share. No other provisions of the Credit Line or Term Note were modified, including the $1.00 conversion price for remaining debt. In conjunction with these conversions the Company accelerated amortization of $0.41 million of related debt premiums and discounts and recorded a charge to interest expense of $1.37 million related to the fair value of incremental shares received by Laurus.
Contemporaneously with the closing of a private placement of the Company’s common stock on October 31, 2005 (the “2005 Private Placement”), the Company repaid all outstanding principal and accrued interest on the Laurus Loans which have been cancelled and are no longer available to the Company. In conjunction with this prepayment, the Company recorded a loss on debt extinguishment of $541. This loss consisted of prepayment penalties and fees paid to Laurus to facilitate the 2005 Private Placement of $844 offset by the elimination of associated net debt premiums of $303.
Interest expense consisted of the following:
Years Ended December 31, | ||||||||||
2006 | 2005 | 2004 | ||||||||
Interest paid or accrued on outstanding debt | $ | — | $ | 553 | $ | 542 | ||||
Amortization of debt premiums | — | (857 | ) | — | ||||||
Amortization of debt discounts – warrants | — | 28 | — | |||||||
Amortization of debt discount – beneficial conversion feature | — | 725 | 1,641 | |||||||
Fair value of incremental shares received by Laurus | — | 1,365 | — | |||||||
Other | 11 | 164 | 183 | |||||||
$ | 11 | $ | 1,978 | $ | 2,366 | |||||
G. COMMITMENTS AND CONTINGENCIES
The Company is subjectnot a party to a number of other claims of various amounts,any pending legal proceedings which, arise out ofif decided adversely to the normal course of business. In the opinion of management, the disposition of all claims currently pendingCompany, will not have a material adverse effect on the Company’sour financial position, results of operations or cash flows, after considering amounts already reflected in the consolidated financial statements.
flows.
The Company leases certain equipment, vehicles and operating facilities. The Company’sfacilities under non-cancellable operating leases related to its operating facilities currentlythat expire on various dates through 2010. At December 31, 2004, the2014. The future minimum lease payments required under non-cancellable lease provisionsthese leases are approximately $1,958 in 2005, $1,382 in 2006, $486$875 in 2007, $187$769 in 2008, $191$692 in 2009, $574 in 2010, $378 in 2011, $226 in 2012, and $181 in 2010.$98 thereafter. Rent expense related to all operating leases for the
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Years Ended December 31, 2006, 2005 and 2004
(Dollars in thousands except per share data)
years ended December 31, 2004, 20032006, 2005 and 20022004 was approximately $1,038, $1,283 and $2,007, $2,487 and $2,266, respectively.
At December 31, 2004, the Company had2006, firm commitments totaling $798 to a vendorvendors to purchase components used in WAVE Systems.
Systems and OEM instruments totaled $1,028. The Company expects to pay the majority of these purchase commitments during 2007.
G.H. INCOME TAXES
Loss before income taxes consists of the following:
Years ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
United States | $ | (30,467 | ) | $ | (19,809 | ) | $ | (19,640 | ) | |||
International | (3,999 | ) | (3,084 | ) | (1,620 | ) | ||||||
$ | (34,466 | ) | $ | (22,893 | ) | $ | (21,260 | ) | ||||
The Company’s provision for income taxes for the years ended December 31, 2006, 2005 and 2004 2003relates to income taxes in states, foreign countries and 2002other local jurisdictions, is all current and differs from the amounts determined by applying the statutory Federal income tax rate to loss before income taxes for the following reasons:
2004 | 2003 | 2002 | ||||||||||
Benefit at Federal Rate | $ | (11,718 | ) | $ | (7,784 | ) | $ | (7,228 | ) | |||
Increase (decrease) resulting from: | ||||||||||||
State income taxes—net of federal benefit | (595 | ) | (485 | ) | (518 | ) | ||||||
Foreign subsidiary tax rate difference | 493 | 427 | 224 | |||||||||
Research and development tax credit | (141 | ) | (250 | ) | (188 | ) | ||||||
Impairment charges | 3,569 | — | — | |||||||||
Other—net | 78 | 82 | 137 | |||||||||
Valuation allowance | 8,220 | 8,075 | 7,678 | |||||||||
Total income tax expense (benefit) | $ | (94 | ) | $ | 65 | $ | 105 | |||||
2006 | 2005 | 2004 | |||||||
Benefit at federal rate | $ | (997) | $ | (1,687) | $ | (4,674) | |||
Increase (decrease) resulting from: | |||||||||
State income taxes—net of federal benefit | (210) | (192) | (428) | ||||||
Foreign subsidiary tax rate difference | (135) | (81) | (151) | ||||||
Research and development tax credit | — | — | (76) | ||||||
Other—net | 28 | 191 | 145 | ||||||
Valuation allowance | 1,344 | 1,795 | 5,188 | ||||||
Current income tax expense | $ | 30 | $ | 26 | $ | 4 | |||
The Company’s deferred income tax asset from continuing and discontinued operations at December 31, 20042006 and 20032005 is comprised of the following temporary differences:
2004 | 2003 | |||||||
Net operating loss carryforward | $ | 35,587 | $ | 29,292 | ||||
Research and development credit carryforwards | 1,328 | 1,188 | ||||||
Deferred revenue | 708 | 400 | ||||||
Accrued vacation | 81 | 134 | ||||||
Other | 583 | (422 | ) | |||||
38,287 | 30,592 | |||||||
Less valuation allowance | (38,287 | ) | (30,592 | ) | ||||
$ | — | $ | — | |||||
2006 | 2005 | |||||||
Net operating loss carryforward | $ | 40,377 | $ | 38,730 | ||||
Research and development credit carryforwards | 1,328 | 1,328 | ||||||
Deferred revenue | 249 | 341 | ||||||
Accrued vacation | 69 | 78 | ||||||
Fixed assets | 1,163 | 1,270 | ||||||
Reserves | 1,250 | 814 | ||||||
Other | (238 | ) | — | |||||
44,198 | 42,561 | |||||||
Less valuation allowance | (44,198 | ) | (42,561 | ) | ||||
$ | — | $ | — | |||||
At December 31, 2004,2006, the Company had total usedunused federal tax net operating loss carryforwards from continuing and discontinued operations of $91,474$106,233 of which $1,770 expire in 2008, $3,698 expire in 2009, $2,970 expire in 2010, $943 expire in 2011, $3,425 expire in 2012, $1,838 expire in 2018, $8,182 expire in 2019, $9,662 expire in 2020, $8,228 expire in 2021, $16,862 expire in 2022;2022, $16,173 expire in 2023, $17,390 expire in 2024, $8,153 expire in 2025, and $17,723$6,939 expire in 2026.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS - Continued
Years Ended December 31, 2004, 20032006, 2005 and 20022004
(Dollars in thousands except per share data)
expire in 2024. Of these federalWhile the Company has significant net operating loss carryforwards, $11,820 were obtainedit is likely that Section 382 (Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change) of the Internal Revenue Code, and the regulations promulgated there under, will significantly limit the amount of net operations loss carryforward that the Company could utilize in the acquisition of Annovis, Inc. and may be subject to certain restrictions.any tax year. At December 31, 2004,2006, the Company had unused state tax net operating loss carryforwards from continuing and discontinued operations of approximately $37,619$43,836 that expire at various times between 20052007 and 2024.2026. At December 31, 2004,2006, the Company had unused research and development credit carryforwards from continuing and discontinued operations of $1,328 that expire at various times between 2008 and 2024. A valuation allowance has been provided for the remaining deferred tax assets, due to the Company’s cumulative losses in recent years, expected losses in future years and an inability to utilize any additional losses as carrybacks. The Company will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent the Company begins to generate income in future years and it is determined that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time.
H.I. EMPLOYEE BENEFIT PLAN
The Company maintains an employee 401(k) retirement savings plan that allows for voluntary contributions into designated investment funds by eligible employees. The Company matches the employees’ contributions at the rate of 50% on the first 6% of contributions. The Company may, at the discretion of its Board of Directors, make additional contributions on behalf of the Plan’s participants. Company contributions were approximately $500 for each ofFor the three years ended December 31, 2004.
2006, 2005 and 2004, Company contributions to the 401(k) plan were $164, $172, and $279, respectively.
I.J. STOCKHOLDERS’ EQUITY
Common Stock.
On October 31, 2005, the Company completed the 2005 Private Placement. The securities issued consisted of: (i) 14,925,743 shares of the Company’s common stock, plus (ii) five-year, non-callable warrants to purchase another 5,970,297 shares of common stock with an exercise price of $1.20 per share. The aggregate purchase price for the securities sold in the 2005 Private Placement was $1.01 per share of common stock initially being sold (the “Purchase Price”) or $15,075. In conjunction with the 2005 Private Placement, the Company issued a warrant to Oppenheimer & Co., Inc. to purchase 932,859 shares at $1.20 per share as part of their placement fee.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Years Ended December 31, 2006, 2005 and 2004
(Dollars in thousands except per share data)
During 2005 and 2004, the Company issued 4,900,000 and 1,134,850 shares, respectively, of common stock in conjunction with conversions under the Laurus Loans as follows.
Date | Price | Shares Issued | Net Proceeds | Facility | Applied To | |||||||
January 2005 | $ | 1.00 | 50,000 | $ | 50 | Term Note | Principal | |||||
March 2005 | $ | 0.52 | 3,600000 | 1,835 | Credit Note | Principal | ||||||
March 2005 | $ | 0.52 | 1,250,000 | 650 | Term Note | Principal | ||||||
Total 2005 | 4,900,000 | $ | 2,535 | |||||||||
January 2004 | $ | 2.20 | 650,000 | $ | 1,422 | Credit Line | Principal | |||||
February 2004 | $ | 2.20 | 259,091 | 570 | Credit Line | Principal | ||||||
December 2004 | $ | 1.00 | 150,000 | 146 | Term Note | Principal | ||||||
December 2004 | $ | 1.00 | 75,759 | 72 | Term Note | Interest | ||||||
Total 2004 | 1,134,850 | $ | 2,210 | |||||||||
Each of the foregoing stock sales was exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) as a sale not involving a public offering. These shares have been registered for resale under the Securities Act.
In May 2001, Company shareholders approved the adoption of the Transgenomic, Inc. 2001 Employee Stock Purchase Plan that was subsequently implemented in November 2001 and terminated in December 2005. Substantially all of the Company’s U.S. employees were eligible to participate in
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Years Ended December 31, 2006, 2005 and 2004
(Dollars in thousands except per share data)
the Plan. Eligible employees authorize payroll deductions to be made for the purchase of shares. Such deductions were accumulated during a defined participation period at the end of which each participant was deemed to have been granted an option to purchase shares of stock from the Company at 85% of the fair market value of the Company stock as measured by the closing price of the stock on either the first or last business day of the participation period, whichever was lower. The number of shares purchased under the option was based upon the participant’s elected withholding amount. At the end of the participation period such option was automatically exercised. This plan was structured to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1986, as amended. The Company issued 7,551, 25,504, and 76,902 shares under this plan, during the years ended December 31, 2006, 2005 and 2004, respectively.
Common Stock Warrants.
No common stock warrants were issued during 2006. Warrants covering 6,903,156 shares of common stock were issued during 2005. At December 31, 2006, we had 8,062,577 common stock warrants outstanding.
Warrant Holder | Issue Year | Expiration Year | Underlying Shares | Exercise Price | |||||
Various Institution Holders(1) | 2005 | 2010 | 6,903,156 | $ | 1.20 | ||||
Laurus Master Fund, Ltd.(2) | 2003 | 2010 | 200,000 | $ | 1.92 | ||||
Laurus Master Fund, Ltd.(2) | 2003 | 2010 | 200,000 | $ | 2.07 | ||||
Laurus Master Fund, Ltd.(2) | 2003 | 2010 | 150,000 | $ | 2.35 | ||||
Laurus Master Fund, Ltd.(2) | 2004 | 2011 | 125,000 | $ | 2.57 | ||||
Laurus Master Fund, Ltd.(2) | 2004 | 2011 | 400,000 | $ | 1.18 | ||||
TN Capital Equities, Ltd.(2) | 2003 | 2008 | 45,918 | $ | 2.94 | ||||
TN Capital Equities, Ltd.(2) | 2004 | 2009 | 15,566 | $ | 3.18 | ||||
GE Capital(3) | 2002 | 2007 | 13,762 | $ | 3.27 | ||||
GE Capital(3) | 2003 | 2008 | 9,175 | $ | 3.27 | ||||
Total | 8,062,577 | ||||||||
(1) | These warrants were issued in conjunction with the 2005 Private Placement described earlier in this Note. |
(2) | These warrants were issued in conjunction with the Laurus Loans and subsequent modifications. In conjunction with the 2005 Private Placement, the exercise prices of these warrants were adjusted according to repricing provisions contained in the original warrant agreements. Refer to Note F of the consolidated financial statements. |
(3) | These warrants were issued in conjunction with operating leases with GE Capital. While the leases have since been terminated, the warrants are still outstanding. |
Preferred Stock.
The Company’s Board of Directors is authorized to issue up to 15,000,000 shares of preferred stock in one or more series, from time to time, with such designations, powers, preferences and rights and such qualifications, limitations and restrictions as may be provided in a resolution or resolutions
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Years Ended December 31, 2006, 2005 and 2004
(Dollars in thousands except per share data)
adopted by the Board of Directors. The authority of the Board of Directors includes, but is not limited to, the determination or fixing of the following with respect to shares of such class or any series thereof: (i) the number of shares; (ii) the dividend rate, whether dividends shall be cumulative and, if so, from which date; (iii) whether shares are to be redeemable and, if so, the terms and amount of any sinking fund providing for the purchase or redemption of such shares; (iv) whether shares shall be convertible and, if so, the terms and provisions thereof; (v) what restrictions are to apply, if any, on the issue or reissue of any additional preferred stock; and (vi) whether shares have voting rights. The preferred stock may be issued with a preference over the common stock as to the payment of dividends. The Company has no current plans to issue any series of preferred stock. Classes of stock such as the preferred stock may be used, in certain circumstances, to create voting impediments on extraordinary corporate transactions or to frustrate persons seeking to effect a merger or otherwise to gain control of the Company. For the foregoing reasons, any preferred stock issued by the Company could have an adverse effect on the rights of the holders of the common stock.
Common Stock.K. EQUITY INCENTIVE PLAN
During 2004,The Company’s 2006 Equity Incentive Plan (the “Plan”) allows the Company issued 1,134,850to 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. The Plan was adopted in 2006 as a modification of the Company’s 1997 Stock Option Plan (the “Prior Plan”). In addition to providing for additional types of equity-based awards, the Plan increases the total number of shares of common stock in conjunction with conversionsthat the Company may issue from 7,000,000 under the Laurus Loans.
Date | Price | Shares Issued | Net Proceeds | Facility | Applied To | |||||||
January 2004 | $ | 2.20 | 650,000 | $ | 1,422 | Credit Line | Principal | |||||
February 2004 | $ | 2.20 | 259,091 | 570 | Credit Line | Principal | ||||||
December 2004 | $ | 1.00 | 150,000 | 146 | Term Note | Principal | ||||||
December 2004 | $ | 1.00 | 75,759 | 72 | Term Note | Interest | ||||||
1,134,850 | $ | 2,210 | ||||||||||
In September 2003, the Company issued 1,780,000Prior Plan to 10,000,000 shares of its common stock and in November 2003, the Company issued 2,720,000 shares of its common stock in privately-negotiated sales. These shares were sold pursuant to the terms of a Securities Purchase Agreement, dated August 27, 2003. The sale of these shares was exempt from registration under the Securities ActPlan; provided, that no more than 5,000,000 of 1933, as amended (the “Securities Act”) as a sale not involving a public offering. Thesesuch shares have been registeredmay be used for resale under the Securities Act. The net proceeds to the Company, after paymentgrants of transaction feesrestricted stock, restricted stock units, performance units, performance shares and other expenses of the offering, were approximately $4,202.
In May 2001, Company shareholders approved the adoption of the Transgenomic, Inc. 2001 Employee Stock Purchase Plan that was subsequently implemented in November 2001. Substantially all of the Company’s U.S. employees are eligible to participate in the Plan. Eligible employees authorize payroll deductions to be made for the purchase of shares. Such deductions are accumulated duringawards.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS - Continued
Years Ended December 31, 2004, 20032006, 2005 and 20022004
(Dollars in thousands except per share data)
a defined participation period at the end of which each participant is deemed to have been granted an option to purchase shares of stock from the Company at 85% of the fair market value of the Company stock as measured by the closing price of the stock on either the first or last business day of the participation period, whichever is lower. The number of shares purchased under the option is based upon the participants elected withholding amount. At the end of the participation period such option is automatically exercised. This plan is structured to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1986, as amended. During 2004, 2003 and 2002 there were 76,902, 107,077 and 56,842 shares issued under this plan, respectively.
Common Stock Warrants.
The following is a summary of the 1,159,421 common stock warrants outstanding at December 31, 2004. No warrants expired or were exercised during 2004.
Warrant Holder | Issue Year | Expiration Year | Underlying Shares | Exercise Price | |||||
Laurus Master Fund, Ltd.(1) | 2003 | 2010 | 200,000 | $ | 2.25 | ||||
Laurus Master Fund, Ltd.(1) | 2003 | 2010 | 200,000 | $ | 2.44 | ||||
Laurus Master Fund, Ltd.(1) | 2003 | 2010 | 150,000 | $ | 2.32 | ||||
Laurus Master Fund, Ltd.(1) | 2004 | 2011 | 125,000 | $ | 3.11 | ||||
Laurus Master Fund, Ltd.(1) | 2004 | 2011 | 400,000 | $ | 1.25 | ||||
TN Capital Equities, Ltd.(1) | 2003 | 2008 | 45,918 | $ | 2.94 | ||||
TN Capital Equities, Ltd.(1) | 2004 | 2009 | 15,566 | $ | 3.18 | ||||
GE Capital(2) | 2002 | 2007 | 13,762 | $ | 3.27 | ||||
GE Capital(2) | 2003 | 2008 | 9,175 | $ | 3.27 |
J. STOCK OPTIONS
The Company’s 1997 Stock Option Plan, as amended (the “Stock Option Plan”), allows the Company to grant both incentive stock options and nonqualified stock options to acquire shares of the Company’s common stock to employees and directors of the Company and to nonemployee advisors. Either incentive or non-qualified stock options may be granted to employees of the Company, but only nonqualified stock options may be granted to nonemployee directors and advisors. The maximum number of shares for which options may be granted under the Stock Option Plan is 7,000,000. The Stock Option Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”) which has the authority to set the number, exercise price, term and vesting provisions of the optionsawards granted under the Stock Option Plan, subject to the terms thereof. TheEither incentive or non-qualified stock options may be granted to employees of the Company, but only nonqualified stock options may be granted to nonemployee directors and advisors. 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. Generally,Options issued under the stock optionsplan vest at a rate of either 20% per year over a five-year period or 33 1/3% per year over a three-year periodperiods as determined by the Compensation Committee and expire 10 years after the date the option was granted. The Company has elected to record expense on a straight-line basis. If the option holder ceases to be employed by the Company, the Company will have the right to terminate any outstanding but unexercised options.
To date, the only awards made under the Plan (and the Prior Plan) have been non-incentive stock options. The following table summarizes activity under the Stock Option Plan (and the Prior Plan) during the three years ended December 31, 2004:2006:
Number of Options | Weighted Average Exercise Price | |||||
Balance at January 1, 2002 | 5,133,831 | 6.90 | ||||
Granted | 632,000 | 5.09 | ||||
Exercised | (81,900 | ) | 5.01 | |||
Forfeited | (539,021 | ) | 7.69 | |||
Balance at December 31, 2002: | 5,144,910 | 6.62 | ||||
Granted | 1,282,000 | 1.64 | ||||
Exercised | — | — | ||||
Forfeited | (733,994 | ) | 7.25 | |||
Balance at December 31, 2003: | 5,692,916 | 6.62 | ||||
Granted | 360,000 | 1.70 | ||||
Exercised | — | — | ||||
Forfeited | (964,879 | ) | 5.24 | |||
Balance at December 31, 2004: | 5,088,037 | $ | 5.09 | |||
Exercisable at December 31, 2004 | 4,214,214 | $ | 5.55 | |||
Number of Options | Weighted Average Exercise Price | |||||
Balance at January 1, 2006: | 5,570,432 | 4.31 | ||||
Granted | 340,000 | .62 | ||||
Exercised | — | — | ||||
Forfeited or expired | (442,768 | ) | 4.45 | |||
Balance at December 31, 2006: | 5,467,664 | $ | 4.08 | |||
Vested and expected to vest at December 31, 2006 | 5,416,664 | $ | 4.08 | |||
Exercisable at December 31, 2006 | 5,127,664 | $ | 4.30 | |||
�� |
During the year ended December 31, 2006, the Company issued 225,000 options at exercise prices of $0.68, 15,000 options at exercise prices of $1.03 and 100,000 options at exercise prices of $0.42. The weighted average grant date fair value per share of options granted during the years ended December 31, 2006, 2005 and 2004 was $0.31, $0.63 and $0.40, respectively.
On December 28, 2005, the Company’s Directors approved a plan to accelerate the vesting of all outstanding stock options. Aside from the acceleration of the vesting date, the terms and the conditions of the stock option award agreements governing the underlying stock option grants remained unchanged. As a result of this plan, options to purchase approximately 1,081,845 shares became immediately exercisable. All such options were out-of-the money, and accordingly, the accelerated vesting resulted in no compensation expense since there was no intrinsic value associated with these fixed awards at the date of modification. Accelerating the vesting of these options allows the Company to avoid recognition of compensation expense associated with these options in future periods.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS - Continued
Years Ended December 31, 2004, 20032006, 2005 and 20022004
(Dollars in thousands except per share data)
The weighted average fair value per share of options granted in 2004, 2003 and 2002 was $0.40, $0.93 and $2.92, respectively.
The Company has elected to follow the measurement provisions of APB No. 25, under which no recognition of expense is required in accounting for stock options granted to employees for which the exercise price equals or exceeds the deemed fair market value of the stock at the grant date. In those cases where options have been granted with an exercise price below the deemed fair market value, the Company recognizes compensation expense using the straight-line method over the vesting periods of the individual stock options.
Stock-based compensation expense recorded by the Company represents amortization of unearned compensation related to options granted to employees with an exercise price less than the deemed fair market value at the date of grant and options granted to non-employees. During 2004, 2003 and 2002, the Company recorded compensation expense of $0, $93 and $131, respectively. The expense amounts were calculated using the Black-Scholes option pricing model with the following assumptions: no common stock dividends, risk-free interest rates ranging from 3.10% to 6.53%; volatility ranging from 35% to 85%; and an expected option life of 1 to 7.5 years.
The following table summarizes information about options outstanding as of December 31, 2004:2006:
Options Outstanding | Options Exercisable | |||||||||||
Range of Exercise Prices | Number Outstanding | Weighted-Average Remaining Contractual Life | Weighted-Average Exercise Price | Number Exercisable | Weighted-Average Exercise Price | |||||||
(in years) | ||||||||||||
$ 1.00—$ 1.30 | 408,335 | 6.8 | $ | 1.30 | 155,011 | $ | 1.30 | |||||
$ 1.31—$ 2.60 | 1,009,167 | 7.9 | $ | 1.89 | 551,850 | $ | 1.90 | |||||
$ 2.61—$ 3.90 | 50,002 | 5.5 | $ | 2.90 | 38,336 | $ | 2.90 | |||||
$ 3.91—$ 5.20 | 2,142,200 | 3.0 | $ | 5.00 | 2,142,200 | $ | 5.00 | |||||
$ 5.21—$ 6.50 | 768,182 | 6.1 | $ | 6.16 | 692,633 | $ | 6.15 | |||||
$ 6.51—$ 9.10 | 10,000 | 6.4 | $ | 9.00 | 10,000 | $ | 9.00 | |||||
$ 9.11—$10.40 | 396,420 | 5.6 | $ | 9.88 | 358,253 | $ | 9.88 | |||||
$10.41—$13.00 | 303,731 | 5.2 | $ | 12.80 | 265,931 | $ | 12.81 | |||||
5,088,037 | 5.1 | $ | 5.09 | 4,214,214 | $ | 5.55 | ||||||
Options Outstanding | Options Exercisable | |||||||||||
Range of Exercise Prices | Number Outstanding | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | Number Exercisable | Weighted- Average Exercise Price | |||||||
(in years) | ||||||||||||
$ 0.00—$ 1.30 | 1,665,500 | 7.9 | $ | 0.99 | 1,325,500 | $ | 1.08 | |||||
$ 1.31—$ 2.60 | 674,833 | 6.1 | $ | 1.92 | 674.833 | $ | 1.92 | |||||
$ 2.61—$ 3.90 | 10,000 | 5.8 | $ | 2.90 | 10,000 | $ | 2.90 | |||||
$ 3.91—$ 5.20 | 2,025,600 | 1.0 | $ | 5.00 | 2,025,600 | $ | 5.00 | |||||
$ 5.21—$ 6.50 | 591,500 | 3.9 | $ | 6.15 | 591,500 | $ | 6.15 | |||||
$ 6.51—$ 9.10 | 10,000 | 4.4 | $ | 9.00 | 10,000 | $ | 9.00 | |||||
$ 9.11—$10.40 | 280,500 | 3.5 | $ | 9.89 | 280,500 | $ | 9.89 | |||||
$10.41—$13.00 | 209,731 | 3.2 | $ | 12.75 | 209,731 | $ | 12.80 | |||||
5,467,664 | 4.3 | $ | 4.07 | 5,127,664 | $ | 4.30 | ||||||
K.L. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in twohas one reportable segments, BioSystems and Nucleic Acids. Operations for these segmentsoperating segment. Although revenue is analyzed by type, net financial results are evaluated based upon specific identification of revenues and expenses associated with the business activities resulting in aanalyzed as one segment operating income. Expenses that cannot be directly identified to an operating activity or are considered corporate overhead are not allocateddue to the segments in arriving at operating income forintegrated nature of the segment. Generally, decisions regarding asset allocation, financing, taxes or other items impacting the Company’s Balance Sheet are made at the corporate level and, accordingly, operating segment Balance Sheet information is not typically reviewedproducts. Net sales by operating decision makers.product were as follows:
Years Ended December 31, | |||||||||
2006 | 2005 | 2004 | |||||||
Bioinstruments | $ | 13,604 | $ | 14,427 | $ | 14,385 | |||
Bioconsumables | 8,719 | 8,981 | 8,838 | ||||||
Discovery Services | 1,092 | 2,420 | 2,020 | ||||||
$ | 23,415 | $ | 25,828 | $ | 25,243 | ||||
The BioSystems operating segment generates revenue from the sale of automated instrument systems and associated consumable products and services. This segments products are based upon two of the Company’s three core competencies, separations chemistries and enzymology. Specifically, this segment’s main products are the WAVE system, related bioconsumables and research services.Net sales by geographic region were as follows:
Years Ended December 31, | |||||||||
2006 | 2005 | 2004 | |||||||
United States | $ | 6,780 | $ | 7,069 | $ | 7,036 | |||
Europe | 14,262 | 14,979 | 13,959 | ||||||
Pacific Rim | 1,390 | 2,297 | 2,325 | ||||||
Other | 983 | 1,483 | 1,923 | ||||||
Total | $ | 23,415 | $ | 25,828 | $ | 25,243 | |||
The Nucleic Acids operating segment generates revenue fromNo customer accounted for more than 10% of consolidated net sales for any period presented. However, sales to a large pharmaceutical company totaled $8 and $2,188 and $1,658 during the saleyears ended December 31, 2006, 2005 and 2004, respectively, and represented 0%, 9% and 7% of products andconsolidated net sales. Sales to this customer were governed by a non-binding master services based upon all three of the Company’s core competencies, nucleic acid chemistries, separations chemistries and enzymology. Specifically, this segments main products are nucleic acid building blocks or “phosphoramidites”, fluorescent markers, dyes and associated reagents and novel chemistry and process development services.agreement dated August 22, 2002.
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS - Continued
Years Ended December 31, 2004, 20032006, 2005 and 20022004
(Dollars in thousands except per share data)
Substantially all long-lived assets are within the United States.
M. RESTRUCTURING PLANS
The following is information for net sales and operating income by segment.
2004 | 2003 | 2002 | ||||||||||
Net Sales | ||||||||||||
BioSystems | $ | 25,243 | $ | 26,044 | $ | 24,235 | ||||||
Nucleic Acids | 8,546 | 7,822 | 13,319 | |||||||||
Total | $ | 33,789 | $ | 33,866 | $ | 37,554 | ||||||
Loss from operations | ||||||||||||
BioSystems | $ | (2,294 | ) | $ | (2,786 | ) | $ | (9,417 | ) | |||
Nucleic Acids | (17,623 | ) | (12,440 | ) | (1,004 | ) | ||||||
Corporate | (9,143 | ) | (7,362 | ) | (11,276 | ) | ||||||
Total | $ | (29,060 | ) | $ | (22,588 | ) | $ | (21,697 | ) | |||
DuringCompany implemented restructuring plans in 2004 sales to Geron Corporation totaled $4,151 and represented 49% of net sales within our Nucleic Acids operating segment and 12% of total consolidated net sales. During 2003 and 2002 designed to better align the Company’s cost structure with anticipated revenues. In conjunction with these plans, the Company restructuring charges in 2004 of $1,267 related primarily to employee severance agreements, office closures, property and equipment and intellectual property. There were no single customer accounted for more than 10% of operating segment or consolidated net sales.
The following is information for fixed assets and fixed asset additions by segment. Fixed assets are tracked by location and department and thus can be identified to operating segments even though specific segment Balance Sheets are not produced.
2004 | 2003 | |||||
Fixed Assets | ||||||
BioSystems | $ | 2,695 | $ | 3,412 | ||
Nucleic Acids | 10,150 | 13,991 | ||||
Corporate | 680 | 1,301 | ||||
Total | $ | 13,525 | $ | 18,704 | ||
Fixed Asset Additions | ||||||
BioSystems | $ | 901 | $ | 1,000 | ||
Nucleic Acids | 848 | 5,393 | ||||
Corporate | 9 | 20 | ||||
Total | $ | 1,758 | $ | 6,413 | ||
The following is supplemental information for net sales by geographic area.
2004 | 2003 | 2002 | |||||||
Sales by Geographic Area: | |||||||||
United States | $ | 13,580 | $ | 12,251 | $ | 16,805 | |||
Europe | 15,392 | 15,955 | 16,011 | ||||||
Pacific Rim | 2,794 | 3,335 | 4,129 | ||||||
Other | 2,023 | 2,325 | 609 | ||||||
Total | $ | 33,789 | $ | 33,866 | $ | 37,554 | |||
Long-lived assets by geographic area as ofaccrued expenses associated with these restructuring plans at December 31, are as follows:
2004 | 2003 | |||||
United States | $ | 7,754 | $ | 20,935 | ||
Europe | 7,564 | 9,705 | ||||
Pacific Rim | 11 | 32 | ||||
Total | $ | 15,329 | $ | 30,672 | ||
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended2006 and 2005 and $516 at December 31, 2004, 2003 and 2002
2004.
(Dollars in thousands except per share data)
L.N. QUARTERLY RESULTS (UNAUDITED)
The following table contains selected unauditedUnaudited quarterly consolidated statements of operations data for each quarter for fiscal years 2004 and 2003.was as follows:
2004 | Year Ended December 31, 2006 | |||||||||||||||||||||||||||||||||||||||
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total | |||||||||||||||||||||||||||||||
Net Sales | $ | 8,629 | $ | 9,011 | $ | 8,194 | $ | 7,955 | $ | 33,789 | $ | 6,497 | $ | 6,189 | $ | 4,919 | $ | 5,810 | $ | 23,415 | ||||||||||||||||||||
Gross Profit | $ | 2,861 | $ | 3,153 | $ | 1,337 | $ | 1,842 | $ | 9,193 | $ | 2,982 | $ | 3,049 | $ | 2,312 | $ | 3,026 | $ | 11,369 | ||||||||||||||||||||
Loss from continuing operations | $ | (304 | ) | $ | (258 | ) | $ | (1,525 | ) | $ | (876 | ) | $ | (2,963 | ) | |||||||||||||||||||||||||
Loss from discontinued operations | (14 | ) | (125 | ) | (164 | ) | (165 | ) | (468 | ) | ||||||||||||||||||||||||||||||
Net loss | $ | (3,859 | ) | $ | (15,132 | ) | $ | (8,442 | ) | $ | (6,939 | ) | $ | (34,372 | ) | $ | (318 | ) | $ | (383 | ) | $ | (1,689 | ) | $ | (1,041 | ) | $ | (3,431 | ) | ||||||||||
Basic & Diluted Loss Per Share | $ | (0.13 | ) | $ | (0.52 | ) | $ | (0.29 | ) | $ | (0.24 | ) | $ | (1.19 | ) | |||||||||||||||||||||||||
Basic and Diluted Weighted Average Shares Outstanding | 28,728 | 29,053 | 29,078 | 29,338 | 29,006 | |||||||||||||||||||||||||||||||||||
Basic and diluted earnings (loss) per share: | ||||||||||||||||||||||||||||||||||||||||
From continuing operations | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.02 | ) | $ | (0.06 | ) | |||||||||||||||||||||||||
From discontinued operations | — | — | — | — | (0.01 | ) | ||||||||||||||||||||||||||||||||||
2003 | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.02 | ) | $ | (0.07 | ) | |||||||||||||||||||||||||
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total | ||||||||||||||||||||||||||||||||||||
Net Sales | $ | 9,505 | $ | 8,481 | $ | 7,537 | $ | 8,343 | $ | 33,866 | ||||||||||||||||||||||||||||||
Gross Profit | $ | 3,691 | $ | 2,556 | $ | 775 | $ | 2,529 | $ | 9,551 | ||||||||||||||||||||||||||||||
Net loss | $ | (3,596 | ) | $ | (4,670 | ) | $ | (6,097 | ) | $ | (8,595 | ) | $ | (22,958 | ) | |||||||||||||||||||||||||
Basic & Diluted Loss Per Share | $ | (0.15 | ) | $ | (0.20 | ) | $ | (0.25 | ) | $ | (0.32 | ) | $ | (0.94 | ) | |||||||||||||||||||||||||
Basic and Diluted Weighted Average Shares Outstanding | 23,519 | 23,540 | 24,177 | 26,723 | 24,484 | |||||||||||||||||||||||||||||||||||
Basic and Diluted Weighted Average Shares Outstanding (in thousands) | 49,185 | 49,190 | 49,190 | 49,190 | 49,188 |
Year Ended December 31, 2005 | ||||||||||||||||||||
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total | ||||||||||||||||
Net Sales | $ | 6,927 | $ | 6,889 | $ | 6,663 | $ | 5,349 | $ | 25,828 | ||||||||||
Gross Profit | $ | 3,399 | $ | 3,486 | $ | 3,115 | $ | 2,331 | $ | 12,331 | ||||||||||
Loss from continuing operations | $ | (2,162 | ) | $ | (473 | ) | $ | (526 | ) | $ | (1,823 | ) | $ | (4,984 | ) | |||||
Income(loss) from discontinued operations | (730 | ) | (525 | ) | 637 | (9,391 | ) | (10,009 | ) | |||||||||||
Net income(loss) | $ | (2,892 | ) | $ | (998 | ) | $ | 111 | $ | (11,214 | ) | $ | (14,993 | ) | ||||||
Basic and diluted loss per share: | ||||||||||||||||||||
From continuing operations | $ | (0.07 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.04 | ) | $ | (0.14 | ) | |||||
From discontinued operations | (0.03 | ) | (0.02 | ) | 0.02 | (0.21 | ) | (0.28 | ) | |||||||||||
$ | (0.10 | ) | $ | (0.03 | ) | $ | — | $ | (0.25 | ) | $ | (0.42 | ) | |||||||
Basic and Diluted Weighted Average Shares Outstanding (in thousands) | 29,984 | 34,237 | 34,243 | 44,366 | 35,688 |
Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly per share losses may not equal the annual loss per share.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
M. SALE OF SPECIALTY OLIGONUCLEOTIDE MANUFACTURING FACILITYNone.
On November 11, 2004, the Company sold the assets associated with its specialty oligonucleotides manufacturing facility in Boulder, Colorado to a subsidiary of Eyetech Pharmaceuticals, Inc. (“Eyetech”). The sale price was $3,000 in cash plus the assumption of the lease on the Boulder facility and of certain equipment leases with a gross value of $2,377. Substantially all of the 27 employees at the Boulder facility became Eyetech employees. Net proceeds from the sale (after transaction expenses and fees paid to our investment advisors) equaled approximately $2,700. In conjunction with this transaction, we recorded a gain on sale of $1,466 in the fourth quarter of 2004.
N. RESTRUCTURING PLANS
On November 13, 2004, the Company’s Board of Directors approved a restructuring plan designed to refocus on the BioSystems operating segment and to better align the Company’s cost structure with anticipated revenues. The plan (which is incremental to the sale of the specialty oligonucleotide manufacturing facility in Boulder, Colorado facility) included a workforce reduction of approximately 60 positions and the closure of two domestic research and development facilities associated with our Nucleic Acids operating segment and two European field offices. Additionally, the Company eliminated approximately 10 positions at its chemical building blocks manufacturing facility in Glasgow, Scotland. In conjunction with these changes, the Company incurred a charge of $3,570 during the quarter ending December 31, 2004 consisting of severance benefits of $1,406, future rents on closed facilities (net of projected sublease rents) of $1,241, the write-off property and equipment specifically attributable to closed facilities of $740 and other costs of $183. The Company had accrued expenses associated with this restructuring plan of $1,909 at December 31, 2004 of which $1,486 is expected to be paid 2005 and $423 in 2006.
During the fourth quarter of 2002 management formulated and executed a significant portion of a restructuring plan. The plan was developed to reduce expenses thereby better aligning the Company’s expense structure with current business prospects. The plan included employee terminations, office closures, termination of collaborations and write-offs of abandoned intellectual property. Specifically, in the fourth quarter of 2002 the Company notified approximately 60 employees of their termination, notified landlords of our intent to close four facilities and reduce our space commitment under lease at two other facilities, terminated certain consulting and collaboration agreements and abandoned certain patents. As a result of the plan $3,282 in restructuring charges were recorded and are included in operating expenses. These charges consisted of approximately $775 of employee severance costs, $1,200 in office
TRANSGENOMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands except per share data)
closure related costs, $400 of collaboration and other agreement termination charges and $900 in write-offs of abandoned intellectual property. Approximately 45% of the total charges were for non-cash items. Additional restructuring charges totaling $741 were incurred in the first half of 2003. The Company had accrued expenses associated with these restructuring activities of $0 at December 31, 2004 and $227 at December 31, 2003.
O. SUBSEQUENT EVENTS
On March 18, 2005, Laurus agreed to further extend the borrowing base waiver on the Credit Line until March 31, 2006. In connection with this waiver, the Company agreed to allow Laurus to convert $1,872 of the outstanding principal balance under the Credit Line into 3,600,000 shares of its common stock. In addition, on March 24, 2005 the Company agreed to allow Laurus to convert $650 of the outstanding principal balance of the Term Note into 1,250,000 shares of common stock. As a result, the Company increased the amount available under the Credit Line by $1,872 and eliminated substantially all remaining 2005 scheduled principal payments on the Term Loan.
P. RESTATEMENT OF STATEMENTS OF CONSOLIDATED CASH FLOWS
Subsequent to the issuance of the Company’s financial statements for the year ended December 31, 2004, the Company’s management determined that it had incorrectly included the amortization of software development costs within net cash flows from investing activities rather than within net cash flows from operating activities. The Company’s management also determined that restricted common stock accepted as payment for goods and services from one of the Company’s customers and subsequently sold was incorrectly classified within the consolidated statements of cash flows. It is the Company’s policy to account for restricted common stock received in settlement of a customer’s accounts receivable as available for sale securities. The sale of such securities should be reflected in the consolidated statements of cash flows as an investing activity. Available for sale securities acquired for goods and services should be reflected as supplemental non-cash transactions.
As a result, the Company’s consolidated statements of cash flows for the fiscal years ended December 31, 2004 and 2003 have been restated from the amounts previously reported to correct these errors. This restatement had no impact on the statements of consolidated cash flows for the fiscal year ended December 31, 2002. In addition, this restatement had no impact on the Company’s consolidated balance sheets or consolidated statements of operations. The impact of this restatement on the consolidated statements of cash flows is as follows (dollars in thousands):
2004 As Previously Reported | 2004 As Restated | 2003 As Previously Reported | 2003 As Restated | |||||||||
Depreciation and amortization | 4,009 | 4,625 | 3,981 | 4,597 | ||||||||
Trading securities acquired in settlement of accounts receivable | (4,397 | ) | — | (1,843 | ) | — | ||||||
Proceeds from sales of trading securities | 4,269 | — | 1,907 | 1,519 | ||||||||
Purchase of trading securities | — | — | — | (1,566 | ) | |||||||
Accounts receivable | 1,063 | (3,334 | ) | 619 | 342 | |||||||
Net cash flows from operating activities | (9,101 | ) | (12,754 | ) | (13,245 | ) | (13,017 | ) | ||||
Proceeds from the maturities and sale of available for sale securities | — | 4,269 | 3,612 | 4,000 | ||||||||
Change in other assets | 1,138 | 522 | 73 | (543 | ) | |||||||
Net cash flows from investing activities | 2,380 | 6,033 | (2,719 | ) | (2,947 | ) |
Controls and Procedures. |
(a) | Evaluation of Disclosure Controls and Procedures. A review and evaluation was performed by the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this annual report. Based on that review and evaluation, the CEO and CFO concluded that the Company’s current disclosure controls and procedures, as designed and implemented, were effective in providing reasonable assurance that information required to be disclosed is recorded, processed, summarized and reported in the reports the Company submits under the Securities Exchange Act of 1934. |
(b) | Change in Internal Control Over Financial Reporting. There have been no changes in the Company’s internal control over financial reporting during the last fiscal year that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. |
Other Information |
None.
Item 9A. Controls and ProceduresPart III
Directors, Executive Officers and Corporate Governance. |
A review and evaluation was performed by the Company’s management,Information relating to our Board of Directors, including the Company’sinformation regarding Craig Tuttle, our President and Chief Executive Officer (“CEO”who is also a director, required by this item is incorporated by reference to the Proxy Statement for the Company’s 2007 Annual Meeting of Stockholders (the “Proxy Statement”) under the caption “Board of Directors and Committees.” Information regarding our other executive officer who is not a director is set forth below.
Debra A Schneider. Ms. Schneider, age 48, joined the Company in December, 2006 and currently serves as Vice President and Chief Financial Officer (“CFO”),Officer. She also is the Secretary and Treasurer for the Company. Prior to joining the Company, Ms. Schneider spent seventeen years at First Data Corporation in a number of the effectivenessroles, including finance, planning, accounting and Chief Financial Office roles for various business units. Most recently, she served as Senior Vice President of the designFinance. Prior to her tenure at First Data Corporation, she worked as Controller at Creative Financing, Inc. and operation of the Company’s disclosure controls and procedures as of the end of the period coveredan accountant with KPMG.
Executive Compensation. |
Information required by this annual report. Based on that review and evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures, as designed and implemented, were effective. There have been no changes in the Company’s internal controls subsequentItem is incorporated by reference to the date of their evaluation.Proxy Statement under the caption “Executive Compensation.”
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Information required by this Item is incorporated by reference to the Proxy Statement under the caption “Voting Securities and Beneficial Ownership by Principal Stockholder and our Directors and Officers.”
Certain Relationships and Related Transactions, Director Independence |
This review and evaluation took into account the restatements described in Note PInformation required by this Item is incorporated by reference to the accompanying consolidated financial statementsProxy Statement under the captions “Certain Relationships and after considering the natureRelated Transactions” and “Board of Directors and the isolated effects of such restatements on the consolidated statements of cash flows and the controls underlying the accumulation of the related information, the Company’s management has concluded that the restatement was not the result of a material weakness in internal control over financial reporting.Committees”.
Principal Accounting Fees and Services |
Information required by this Item is incorporated by reference to the Proxy Statement under the caption “Accounting Fees and Services.”
Exhibits and Financial Statement Schedules. |
(a) | The following documents are filed as part of this report: |
1. | Financial Statements. The following financial statements of the Registrant are included in response to Item 8 of this report: |
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets of the Registrant and Subsidiaries as of December 31, 20042006 and 2003.
2005.
Consolidated Statements of Operations of the Registrant and Subsidiaries for the years ended December 31, 2004, 20032006, 2005 and 2002.
2004.
Consolidated Statements of Stockholders’ Equity (Deficit) of the Registrant and Subsidiaries for the years ended December 31, 2004, 20032006, 2005 and 2002.
2004.
Consolidated Statements of Cash Flows of the Registrant and Subsidiaries for the years ended December 31, 2004 (restated), 2003 (restated)2006, 2005 and 2002.
2004.
Notes to Consolidated Financial Statements of the Registrant and Subsidiaries.
2. | Financial Statement Schedules. |
Schedule II-Valuation and Qualifying AccountsNone
3. | Exhibits. The following exhibits were filed as required by Item 15(a)(3) of this report. Exhibit numbers refer to the paragraph numbers under Item 601 of Regulation S-K: |
2.1 Agreement and Plan of Merger, dated as of April 30, 2001, by and among Registrant, TBIO Nebraska, Inc., TBIO, Inc. and Annovis, Inc. (incorporated by reference to Exhibit 2.1 to Registrant’s Report on Form 8-K filed on May 31, 2001)
2.2 Addendum to Agreement and Plan of Merger, dated as of May 18, 2001, by and among Registrant, TBIO Nebraska, Inc., TBIO, Inc. and Annovis, Inc. (incorporated by reference to Exhibit 2.2 to Registrant’s Report on Form 8-K filed on May 31, 2001)
2.32 Asset Purchase Agreement, dated as of November 8, 2004, by and between Registrant and Eyetech Boulder Inc. (incorporated by reference to Exhibit 2.3 to Registrant’s Report on Form 10-K (Registration No. 000-30975) filed on April 15, 2005)
3.1 SecondThird Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 23.1 to Amendment No. 1 to Registration StatementRegistrant’s Report on Form S-110-Q (Registration No. 333-32174)000-30975) filed on May 17, 2000)
November 14, 2005.
3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)
4.14 Form of Certificate of the Registrant’s Common Stock (incorporated by reference to Exhibit 4 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)
10.1 Fourth Amended and Restated 1997 Stock Option2006 Equity Incentive Plan of the Registrant (incorporated by reference to Exhibit 10.14(b) to Registrant’s ReportRegistration on Form 10-KS-8 (Registration No. 000-30975)333-139999) filed on April 15, 2005)
January 16, 2007.
10.2 1999 UK Approved Stock Option Sub Plan of the Registrant (incorporated by reference to Exhibit 10.7 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)
10.3 Employee Stock Purchase Plan of the Registrant (incorporated by reference to Exhibit 4(b) to Registration Statement on Form S-8 (Registration No. 333-71866) filed on October 19, 2001)
10.4 Employment Agreement dated April 1, 2000, by and between the RegistrantCompany and CollinCraig J. D’SilvaTuttle, dated July 12, 2006 (incorporated by reference to Exhibit 10.810.1 to Registration StatementRegistrant’s Report on Form S-18-K (Registration No. 333-32174)000-30975) filed on March 10, 2000)
July 12, 2006.
10.5 Amendment No. 1 to the Employment Agreement effective March 1, 2000, bybetween the Company and between Transgenomic, Inc. and Collin D’Silva (incorporated by reference to Exhibit 10.9 of the Registrant’s Quarterly Report on Form 10-Q filed on May 17, 2004)
10.6 Employment Agreement,Craig J. Tuttle, effective July 31, 2004, by and between Transgenomic, Inc. and Michael A. Summers (incorporated by reference to Exhibit 10.11 to Registrant’s Quarterly Report on Form 10-Q filed on November 15, 2004).
10.7 Employment Agreement, dated January 22, 2002, between the Registrant and Keith A. Johnson12, 2006 (incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q (Registration No. 000-30975) filed on MayNovember 14, 2002)2006.
10.6 Employment Agreement between the Company and Debra A. Schneider, effective December 14, 2006, (incorporated by reference to Exhibit 10.1 to Registrant’s Report on Form 8-K (Registration No. 000-30975) filed on November 15, 2006.
10.810.7 License Agreement, dated September 1, 1994, between Registrant and Professor Dr. Gunther Bonn, et. al. and Amendment thereto, dated March 14, 1997 (incorporated by reference to Exhibit 10.14 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)
10.910.8 License Agreement, dated August 20, 1997, between the Registrant and Leland Stanford Junior University (incorporated by reference to Exhibit 10.15 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)
10.1010.9 License Agreement, dated December 1, 1989, between Cruachem Holdings Ltd.Limited (a wholly owned subsidiary of the Registrant) and Millipore Corporation (incorporated by reference to Exhibit 10.13 to Registrant’s Annual Report on Form 10-K filed on March 25, 2002)
10.11
10.10 Sublicense Agreement, dated October 1, 1991, between Cruachem Holdings Ltd.Limited (a wholly owned subsidiary of the Registrant) and Applied Biosystems, Inc. (incorporated by reference to Exhibit 10.14 to Registrant’s Annual Report on Form 10-K filed on March 25, 2002)
10.1210.11 Missives, dated May 17, 2002, between Cruachem Limited (a wholly-owned subsidiary of the Registrant) and Robinson Nugent (Scotland) Limited (incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed on August 14, 2002)
10.1310.12 License Amendment Agreement, dated June 2, 2003, by and between Geron Corporation and the Registrant. (incorporated by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q filed on August 12, 2003)
10.1410.13 Supply Agreement, dated January 1, 2000, between the Registrant and Hitachi Instruments (incorporated by reference to Exhibit 10.16 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)
10.15 Form of Securities Purchase Agreement by and between the Registrant and various counterparties, dated August 27, 2003 (incorporated by reference to Exhibit 10 to the Registrant’s Report on Form 8-K filed on August 29, 2003)
10.16 Securities Purchase Agreement by and between the Registrant and Geron Corporation, dated June 2, 2003 (incorporated by reference to Exhibit 10.0 to Amendment No. 3 to Registration Statement on Form S-3 (Registration No. 333-108319) as filed on October 14, 2003)
10.1710.14 Security Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003)
10.1810.15 Amendment to Security Agreement and Related Documents by and between the Registrant and Laurus Master Fund, Ltd., dated August 31, 2002 (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-3 (Registration No. 333-118970) as filed on September 14, 2004)
10.1910.16 Secured Revolving Note by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003)
10.2010.17 Secured Convertible Minimum Borrowing Note by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003)
10.2110.18 Secured Convertible Minimum Borrowing Note Series B by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003, as amended on April 15, 2004 (incorporated by reference to the Registration Statement of the Registrant (Registration No. 333-114661) filed on April 21, 2004)
10.2210.19 Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003)
10.23
10.20 Registration Rights Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003)
10.2410.21 Common Stock Purchase Warrant by and between the Registrant and TN Capital Equities, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003)
10.2510.22 Securities Purchase Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004, as amended on April 15, 2004 (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004)
10.2610.23 Amendment to Securities Purchase Agreement and Related Document by and between the Registrant and Laurus Master Fund, Ltd., dated August 31, 2004 (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-3 (Registration No. 333-118970) as filed on September 14, 2004)
10.2710.24 Secured Convertible Term Note by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004, as amended on April 15, 2004 (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004)
10.2810.25 Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004, as amended on April 15, 2004 (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004)
10.2910.26 Registration Rights Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004 (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004)
10.3010.27 Common Stock Purchase Warrants by and between the Registrant and TN Capital Equities, Ltd., dated March 1, 2004 (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004)
10.3110.28 Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated August 31, 2004 (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-3 (Registration No. 333-118970) as filed on September 14, 2004)
10.32 Engagement10.29 Form of Securities Purchase Agreement by and between the Registrant and Goldsmith, Agio, Helms Securities, Inc.,various counterparties dated March 19, 2004, as amended August 12, 2004September 22, 2005 (incorporated by reference to Exhibit 10.1010.1 to Registrant’sthe Registrants Quarterly Report on Form 10-Q filed on November 15, 2004)14, 2005)
10.30 Common Stock Purchase Warrant by and between the Registrant and Oppenheimer & Co., Inc. dated October 27, 2005
10.31 Letter Agreement by and between the Registrant and Laurus Master Fund, Ltd. dated September 22, 2005
10.32 Letter Agreement by and between the Registrant and Laurus Master Fund, Ltd. dated October 31, 2005
21 Subsidiaries of the Registrant
23 Consent of Independent Registered Public Accounting Firm
24 Powers of Attorney
31 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized on this 26th2nd day of May 2005.April 2007.
TRANSGENOMIC, INC. | ||
By: | /s/ | |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this amended report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this26th 2nd day of May 2005.April 2007.
Signature | Title | |||
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| Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |||
/ Gregory J. Duman | Director | |||
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| Director | |||
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| Director | |||
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| Director | |||
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*By | ||||
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Attorney-in-fact for the individuals as indicated. |
Schedule II – Valuation And Qualifying Accounts
(dollars in thousands)
Beginning Balance | Additional Charges to Income | Deductions from Reserve | Ending Balance | |||||||||
Allowance for Bad Debts: | ||||||||||||
Year Ended December 31, 2004 | $ | 549 | $ | 534 | $ | 32 | $ | 1,051 | ||||
Year Ended December 31, 2003 | $ | 450 | $ | 174 | $ | 75 | $ | 549 | ||||
Year Ended December 31, 2002 | $ | 213 | $ | 418 | $ | 181 | $ | 450 |
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