SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 20032004
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-30975
TRANSGENOMIC, INC.
(Exact name of registrant as specified in its charter)
Delaware | 911789357 | |
(State or other jurisdiction of incorporation or organization) |
Identification No.) | |
12325 Emmet Street, Omaha, Nebraska | 68164 | |
(Address of principal executive offices) | (Zip Code) |
(402) 452-5400
(Registrant'sRegistrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.days Yes ýx No o¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act).Act of 1934, Yes o¨ No ýx
As of April 30, 2003,May 7, 2004, the number of shares of common stock outstanding was 23,532,049 consisting of 24,026,653 shares issued less 494,604 shares of Treasury Stock.29,044,514.
INDEX
PART I.I FINANCIAL INFORMATION
Transgenomic, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(In thousands except share and per share data)
| March 31, 2003 | December 31, 2002 | |||||||
---|---|---|---|---|---|---|---|---|---|
ASSETS | |||||||||
Current Assets | |||||||||
Cash and cash equivalents | $ | 6,445 | $ | 9,735 | |||||
Short term investments | — | 3,612 | |||||||
Accounts receivable—net | 12,272 | 11,058 | |||||||
Inventories | 12,511 | 12,448 | |||||||
Prepaid expenses and other current assets | 2,638 | 2,274 | |||||||
Total current assets | 33,866 | 39,127 | |||||||
Property and Equipment | |||||||||
Buildings and Equipment | 21,834 | 18,872 | |||||||
Furniture and fixtures | 5,902 | 5,849 | |||||||
Total property and equipment | 27,736 | 24,721 | |||||||
Less: accumulated depreciation | 9,491 | 9,069 | |||||||
Net property and equipment | 18,245 | 15,652 | |||||||
Goodwill | 15,275 | 15,275 | |||||||
Intangible and other assets | 3,709 | 3,981 | |||||||
Total assets | $ | 71,095 | $ | 74,035 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||
Current Liabilities | |||||||||
Accounts payable | $ | 5,328 | $ | 4,917 | |||||
Accrued expenses and other liabilities | 5,684 | 4,928 | |||||||
Accrued compensation | 1,128 | 1,113 | |||||||
Current portion of long-term debt | 61 | 63 | |||||||
Total current liabilities | 12,201 | 11,021 | |||||||
Long-term Liabilities | |||||||||
Long-term debt | 1,485 | 1,499 | |||||||
Total liabilities | 13,686 | 12,520 | |||||||
Stockholders' Equity | |||||||||
Preferred stock $.01 par value, 15,000,000 shares authorized, none outstanding | — | — | |||||||
Common stock $.01 par value, 60,000,000 shares authorized, 24,026,653 and 23,933,725 issued in 2003 and 2002 | 241 | 240 | |||||||
Additional paid-in capital | 113,966 | 113,934 | |||||||
Unearned compensation | (43 | ) | (78 | ) | |||||
Accumulated other comprehensive income (loss) | (200 | ) | 378 | ||||||
Accumulated deficit | (53,367 | ) | (49,771 | ) | |||||
60,597 | 64,703 | ||||||||
Less: Treasury stock, at cost, 494,604 shares | (3,188 | ) | (3,188 | ) | |||||
Total stockholders' equity | 57,409 | 61,515 | |||||||
Total liabilities and stockholders' equity | $ | 71,095 | $ | 74,035 | |||||
March 31, 2004 | December 31, 2003 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 2,229 | $ | 1,241 | ||||
Short-term investments | 316 | — | ||||||
Accounts receivable—net | 10,625 | 10,877 | ||||||
Inventories | 11,137 | 10,584 | ||||||
Prepaid expenses and other current assets | 2,055 | 1,676 | ||||||
Total current assets | 26,362 | 24,378 | ||||||
Property and Equipment | ||||||||
Land and Buildings | 2,299 | 2,239 | ||||||
Equipment | 21,059 | 20,362 | ||||||
Furniture and fixtures | 9,123 | 9,054 | ||||||
Total property and equipment | 32,481 | 31,655 | ||||||
Less: accumulated depreciation | 14,098 | 12,951 | ||||||
Net property and equipment | 18,383 | 18,704 | ||||||
Goodwill | 10,503 | 10,503 | ||||||
Intangible and other assets | 3,605 | 3,721 | ||||||
Total assets | $ | 58,853 | $ | 57,306 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 3,522 | $ | 3,580 | ||||
Other accrued expenses | 3,822 | 3,874 | ||||||
Accrued compensation | 1,142 | 959 | ||||||
Line of credit | 3,180 | 2,142 | ||||||
Current Portion of long-term debt | 525 | 1,693 | ||||||
Total current liabilities | 12,191 | 12,248 | ||||||
Long Term Liabilities | ||||||||
Long-term debt | 2,074 | — | ||||||
Total liabilities | 14,265 | 12,248 | ||||||
Stockholders’ Equity | ||||||||
Preferred stock $.01 par value, 15,000,000 shares authorized, none outstanding | — | — | ||||||
Common stock $.01 par value, 60,000,000 shares authorized, 29,044,514 and 28,119,122 issued in 2004 and 2003, respectively | 296 | 286 | ||||||
Additional paid-in capital | 118,910 | 115,904 | ||||||
Accumulated other comprehensive income (loss) | 1,970 | 1,597 | ||||||
Accumulated deficit | (76,588 | ) | (72,729 | ) | ||||
Total stockholders’ equity | 44,588 | 45,058 | ||||||
Total liabilities and stockholders’ equity | $ | 58,853 | $ | 57,306 | ||||
The accompanying notes are an integral part of these financial statements.
1
Transgenomic, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(In thousands except share and per share data)
| Three Months Ended March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | ||||||
Net sales | $ | 9,505 | $ | 9,831 | ||||
Cost of goods sold | 5,814 | 4,723 | ||||||
Gross profit | 3,691 | 5,108 | ||||||
Operating expenses: | ||||||||
Selling, general and administrative | 4,608 | 5,886 | ||||||
Research and development | 2,325 | 2,772 | ||||||
Restructuring charges | 264 | — | ||||||
Stock based compensation expense | 35 | 25 | ||||||
7,232 | 8,683 | |||||||
Loss from operations | (3,541 | ) | (3,575 | ) | ||||
Other income (expense) | ||||||||
Interest income | 34 | 251 | ||||||
Interest expense | (42 | ) | — | |||||
Other expense, net | (33 | ) | (14 | ) | ||||
(41 | ) | 237 | ||||||
Loss before income taxes | (3,582 | ) | (3,338 | ) | ||||
Income tax expense | 14 | 21 | ||||||
Net loss | $ | (3,596 | ) | $ | (3,359 | ) | ||
Basic and diluted weighted average shares outstanding | 23,518,713 | 23,653,544 | ||||||
Net loss per common share—basic and diluted | $ | (0.15 | ) | $ | (0.14 | ) |
Three Months Ended March 31, | ||||||||
2004 | 2003 | |||||||
Net sales | $ | 8,629 | $ | 9,505 | ||||
Cost of goods sold | 5,768 | 5,814 | ||||||
Gross profit | 2,861 | 3,691 | ||||||
Operating expenses: | ||||||||
Selling, general and administrative | 4,245 | 4,643 | ||||||
Research and development | 1,929 | 2,325 | ||||||
Restructuring charges (Note J) | — | 264 | ||||||
6,174 | 7,232 | |||||||
Loss from operations | (3,313 | ) | (3,541 | ) | ||||
Other income (expense): | ||||||||
Interest income | — | 34 | ||||||
Interest expense | (589 | ) | (42 | ) | ||||
Other income (expense), net | (54 | ) | (33 | ) | ||||
(643 | ) | (41 | ) | |||||
Loss before income taxes | (3,956 | ) | (3,582 | ) | ||||
Current income tax expense (benefit) | (97 | ) | 14 | |||||
Net loss | $ | (3,859 | ) | $ | (3,596 | ) | ||
Basic and diluted weighted average shares outstanding | 28,728,230 | 23,518,713 | ||||||
Net loss per common share—basic and diluted | $ | (0.13 | ) | $ | (0.15 | ) |
The accompanying notes are an integral part of these financial statements.
2
Transgenomic, Inc. and Subsidiaries
Consolidated Statement of Cash Flows (Unaudited)
(In thousands)
| Three Months Ended March 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | |||||||
Cash Flows from Operating Activities | |||||||||
Net loss | $ | (3,596 | ) | $ | (3,359 | ) | |||
Adjustments to reconcile net loss to net cash flows from operating activities: | |||||||||
Depreciation and amortization | 835 | 869 | |||||||
Non-cash compensation expense | 35 | 25 | |||||||
Changes in operating assets and liabilities: | |||||||||
Accounts receivable | (1,330 | ) | 28 | ||||||
Inventories | (183 | ) | (3,246 | ) | |||||
Prepaid expenses and other current assets | (375 | ) | (383 | ) | |||||
Accounts payable | 420 | 2,621 | |||||||
Accrued expenses | 1,053 | (1,213 | ) | ||||||
Net cash flows from operating activities | (3,141 | ) | (4,658 | ) | |||||
Cash Flows from Investing Activities | |||||||||
Purchase of property and equipment | (3,667 | ) | (1,440 | ) | |||||
Proceeds from the maturities and sale of available for sale securities | 3,612 | 12,450 | |||||||
Purchases of available for sale securities | — | (15,880 | ) | ||||||
(Increase)/decrease in other assets | 212 | (2,911 | ) | ||||||
Net cash flows from investing activities | 157 | (7,781 | ) | ||||||
Cash Flows from Financing Activities | |||||||||
Issuance of common stock and common stock warrants | 33 | 388 | |||||||
Net cash flows from financing activities | 33 | 388 | |||||||
Effect of foreign currency exchange rates on cash | (339 | ) | (45 | ) | |||||
Net change in cash and cash equivalents | (3,290 | ) | (12,096 | ) | |||||
Cash and cash equivalents at beginning of period | 9,735 | 19,613 | |||||||
Cash and cash equivalents at end of period | $ | 6,445 | $ | 7,517 | |||||
Three Months Ended March 31, | ||||||||
2004 | 2003 | |||||||
Cash Flows from Operating Activities | ||||||||
Net loss | $ | (3,859 | ) | $ | (3,596 | ) | ||
Adjustments to reconcile net loss to net cash flows from operating activities: | ||||||||
Depreciation and amortization | 1,048 | 835 | ||||||
Non-cash financing charges | 460 | — | ||||||
Non-cash compensation expense | — | 35 | ||||||
Loss on sale of available for sale securities | 27 | — | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 423 | (1,330 | ) | |||||
Inventories | (344 | ) | (183 | ) | ||||
Prepaid expenses and other current assets | (416 | ) | (375 | ) | ||||
Accounts payable | (100 | ) | 420 | |||||
Accrued expenses and other current liabilities | (1,242 | ) | 1,053 | |||||
Net cash flows from operating activities | (4,003 | ) | (3,141 | ) | ||||
Cash Flows from Investing Activities | ||||||||
Purchase of property and equipment | (435 | ) | (3,667 | ) | ||||
Proceeds from the maturities and sale of available for sale securities | 933 | 3,612 | ||||||
Change in other assets | 86 | 212 | ||||||
Net cash flows from investing activities | 584 | 157 | ||||||
Cash Flows from Financing Activities | ||||||||
Issuance of common stock and common stock warrants | 17 | 33 | ||||||
Proceeds from long-term debt | 2,750 | — | ||||||
Payment of long-term debt | (1,744 | ) | ||||||
Line of credit | 3,423 | — | ||||||
Net cash flows from financing activities | 4,446 | 33 | ||||||
Effect of foreign currency exchange rates on cash | (39 | ) | (339 | ) | ||||
Net change in cash and cash equivalents | 988 | (3,290 | ) | |||||
Cash and cash equivalents at beginning of period | 1,241 | 9,735 | ||||||
Cash and cash equivalents at end of period | $ | 2,229 | $ | 6,445 | ||||
The accompanying notes are an integral part of these financial statements.
3
Transgenomic, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited)
(InColumar Amounts thousands except share and per share data)
A. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of Transgenomic, Inc. and Subsidiaries (the "Company"“Company”) have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. In the opinion of management of the Company, all adjustments (consisting of only normal and recurring accruals) have been made to present fairly the financial positions, the results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2004 and 2003 are not necessarily indicative of the results to be expected for the full year. Although the Company believes that the disclosures are adequate to make the information presented not misleading, these financial statements should be read in conjunction with the consolidated financial statements for the period ended December 31, 2002,2003, that are included in the Company'sCompany’s Annual Report on Form 10-K.
Revenue Recognition.
Revenue on the sales of products is recognized in accordance with the terms of the sales arrangement. Such recognition is based on receipt of an unconditional customer order and transfer of title and risk of ownership to the customer, typically upon shipment of the product. Our sales terms do not provide for the right of return unless the product is damaged or defective. Revenues from certain services associated with our analytical instruments, to be performed subsequent to shipment of the products, is deferred and recognized when the services are provided. Such services, mainly limited to installation and training services that are not essential to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument. The Company also enters into various service contracts that cover installed WAVE systems. These contracts cover specific time periods and revenue associated with these contracts is deferred and recognized over the service period.
During the first quarter of fiscal 2004, the Company recognized approximately $196,000 of product sales under bill-and-hold arrangements. Under these arrangements, the customer had accepted title and risk of ownership to the product, but had requested that the Company store the product on behalf of the customer until the second quarter of fiscal 2004.
Stock Based Compensation.
The Company accounts for its employee stock option grants under the provisions of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, which utilizes the intrinsic value method. Accordingly, compensation cost for stock options is measured as the excess, if any, of the deemed fair market value of the Company'sCompany’s common stock at the date of grant over the stock option exercise price. Stock option grants to nonemployees are accounted for using the fair value method of accounting in accordance with Statement of Financial Accounting Standards (SFAS) No. 123,Accounting for Stock-Based 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,Accounting for Stock-Based Compensation, to stock based employee compensation.
| Three Months Ended | |||||||
---|---|---|---|---|---|---|---|---|
| March 31, 2003 | March 31, 2002 | ||||||
Net Loss: | ||||||||
As reported | $ | (3,596 | ) | $ | (3,359 | ) | ||
Pro forma | (3,974 | ) | (3,863 | ) | ||||
Basic and diluted loss per share: | ||||||||
As reported | (0.15 | ) | (0.14 | ) | ||||
Pro forma | (0.17 | ) | (0.16 | ) |
Three Months Ended | ||||||||
March 31, 2004 | March 31, 2003 | |||||||
Net Loss: | ||||||||
As reported | $ | (3,859 | ) | $ | (3,596 | ) | ||
Pro forma | $ | (4,123 | ) | $ | (3,974 | ) | ||
Basic and diluted loss per share: | ||||||||
As reported | $ | (0.13 | ) | $ | (0.15 | ) | ||
Pro forma | $ | (0.14 | ) | $ | (0.17 | ) |
B. SHORT TERM INVESTMENTS
The
As of December 31, 2003, the Company had no short-term investments atavailable-for-sale securities. The amortized cost of available-for-sale securities and their approximate fair values as of March 31, 2003. At December 31, 2002, short-term investments consisted2004, were as follows:
March 31, 2004 | Amortized | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||
Corporate common stock | $ | 289 | $ | 27 | $ | — | $ | 316 | ||||
Total securities available-for-sale | $ | 289 | $ | 27 | $ | — | $ | 316 | ||||
In January and March 2004, the Company entered into addendums to an existing supply agreement with Geron Corporation. The addendums allowed Geron to pay for products being manufactured by the Company under the addendum with Geron common stock. These shares are being accounted for as available for sale securities. As a result in January 2004, Geron issued 85,885 shares of common stock, valued at $959,000, to the following:Company as a prepayment for products. On February 12, 2004 the company sold these shares for $932,000 resulting in a loss of $27,000, which is reflected in the current earnings and cash flow from operations. In March, 2004, Geron issued 33,662 shares of common stock, valued at $289,000, to the Company as a prepayment for products.
December 31, 2002 | Amortized | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Corporate debt | 3,611 | 1 | — | 3,612 | ||||||||
Total securities available-for-sale | $ | 3,611 | $ | 1 | $ | — | $ | 3,612 | ||||
Transgenomic, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited)
(In thousands except share and per share data) (Continued)
Maturities of short-term investments are due within one year.
4
C. INVENTORIES
At March 31, 20032004, and December 31, 2002,2003, inventories consisted of the following:
| 2003 | 2002 | |||||
---|---|---|---|---|---|---|---|
Finished goods | $ | 7,041 | $ | 6,400 | |||
Raw materials and work in progress | 5,410 | 5,904 | |||||
Demonstration inventory | 241 | 325 | |||||
12,692 | 12,629 | ||||||
Less long-term demonstration inventory | (181 | ) | (181 | ) | |||
$ | 12,511 | $ | 12,448 | ||||
March 31, 2004 | December 31, 2003 | |||||
Finished goods | $ | 5,681 | $ | 5,319 | ||
Raw materials and work in progress | 5,083 | 5,074 | ||||
Demonstration inventory | 373 | 191 | ||||
11,137 | 10,584 | |||||
D. OTHER ASSETS
At March 31, 20032004, and December 31, 2002,2003, finite lived intangible assets and other assets consistconsisted of the following:
| March 31, 2003 | December 31, 2002 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cost | Accumulated Reserve | Net Book Value | Cost | Accumulated Reserve | Net Book Value | ||||||||||||
Capitalized software | $ | 2,132 | $ | 225 | $ | 1,907 | $ | 2,132 | $ | 24 | $ | 2,108 | ||||||
Intellectual property | 555 | 106 | 449 | 545 | 90 | 455 | ||||||||||||
Patents | 829 | 156 | 673 | 883 | 150 | 733 | ||||||||||||
Other | 803 | 123 | 680 | 799 | 114 | 685 | ||||||||||||
Total | $ | 4,319 | $ | 610 | $ | 3,709 | $ | 4,359 | $ | 378 | $ | 3,981 | ||||||
March 31, 2004 | December 31, 2003 | |||||||||||||||||
Cost | Accumulated Amortization | Net Book Value | Cost | Accumulated Amortization | Net Book Value | |||||||||||||
Capitalized software | $ | 2,132 | $ | 935 | $ | 1,197 | $ | 2,132 | $ | 758 | $ | 1,374 | ||||||
Intellectual property | 765 | 186 | 579 | 765 | 165 | 600 | ||||||||||||
Patents | 1,047 | 175 | 872 | 1,035 | 170 | 865 | ||||||||||||
Deferred Financing Costs | 576 | 39 | 537 | 409 | — | 409 | ||||||||||||
Other | 621 | 201 | 420 | 656 | 183 | 473 | ||||||||||||
Total | $ | 5,141 | $ | 1,536 | $ | 3,605 | $ | 4,997 | $ | 1,276 | $ | 3,721 | ||||||
Amortization expense for intangible assets was $243,000 and $218,000 during the quarterthree months ended March 31, 2003.2004, and 2003, respectively. The Company expects amortization expense for intangible assets to be approximately $564,000$830,000 for the balanceremainder of 2003, $900,000 in fiscal 2004, $900,000$1,022,000 in fiscal 2005, $200,000$367,000 in fiscal 2006, $233,000$377,000 in fiscal 2007, and $57,000$77,000 in fiscal 2008.2008 and $104,000 in fiscal 2009 and $104,000 in fiscal 2010.
E. GOODWILL
At March 31, 20032004, and December 31, 2002,2003, goodwill by operating segment consisted of the following:
| Biosystems operating segment | Nucleic Acids operating segment | Total | ||||||
---|---|---|---|---|---|---|---|---|---|
Net balance December 31, 2002 | $ | 638 | $ | 14,637 | $ | 15,275 | |||
Adjustments | — | — | — | ||||||
Net balance March 31, 2003 | $ | 638 | $ | 14,637 | $ | 15,275 | |||
5
Biosystems operating segment | Nucleic Acids operating segment | Total | |||||||
Net balance December 31, 2003 | $ | 638 | $ | 9,865 | $ | 10,503 | |||
Adjustments | — | — | |||||||
Net balance March 31, 2004 | $ | 638 | $ | 9,865 | $ | 10,503 | |||
Transgenomic, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited)
(In thousands except share and per share data) (Continued)
F. STOCKHOLDERS'STOCKHOLDERS’ EQUITY AND STOCK OPTIONS
Other Comprehensive Income.Results of operations for the Company'sCompany’s foreign subsidiariessubsidiary are translated using the average exchange rates during the period. Assets and liabilities are translated at the exchange rate in effect on the balance sheet dates. These translation adjustments, along with unrealized gains and losses on available-for-sale securities, are the Company'sCompany’s only components of other comprehensive income.
| Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
| 2003 | 2002 | |||||
Net loss | $ | (3,596 | ) | $ | (3,359 | ) | |
Unrealized loss on available for sale securities | — | (43 | ) | ||||
Currency translation adjustments | (578 | ) | (92 | ) | |||
Total comprehensive loss | $ | (4,174 | ) | $ | (3,494 | ) | |
Three Months Ended March 31, | ||||||||
2004 | 2003 | |||||||
Net loss | $ | (3,859 | ) | $ | (3,596 | ) | ||
Unrealized gain on available for sale securities | 27 | — | ||||||
Currency translation adjustments | 346 | (578 | ) | |||||
Total comprehensive loss | $ | (3,486 | ) | $ | (4,174 | ) | ||
Stock Options.During the first quarter of fiscal 2003,three months ended March 31, 2004, the Company granted 1,500120,000 options with an exercise price of $1.98$2.57 per share. The following table summarizes activity under the 1997 Stock Option Plan during the three months ended March 31, 2003.2004.
| Number of Options | Weighted Average Exercise Price | ||||
---|---|---|---|---|---|---|
Balance at December 31, 2002 | 5,144,910 | $ | 6.62 | |||
Granted | 1,500 | $ | 1.98 | |||
Exercised | — | — | ||||
Canceled | 138,095 | $ | 8.03 | |||
Balance at March 31, 2003 | 5,008,315 | $ | 6.58 | |||
Exercisable at March 31, 2003 | 3,504,048 | $ | 6.44 |
Number of Options | Weighted Average Exercise Price | |||||
Balance at December 31, 2003 | 5,692,916 | $ | 5.37 | |||
Granted | 120,000 | $ | 2.57 | |||
Exercised | — | — | ||||
Canceled | (95,398 | ) | $ | 6.63 | ||
Balance at March 31, 2004 | 5,717,518 | $ | 5.29 | |||
Exercisable at March 31, 2004 | 3,804,371 | $ | 6.12 |
The weighted average fair value of options granted was $1.12 forduring the first three months of fiscal 2003. At March 31, 2003, the weighted average remaining contractual life of options outstanding2004 was 6 years.$1.34 per share. The fair value of each stock option granted is estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for options granted in the first three months of fiscal 2003:2004: no common stock dividends; risk-free interest raterates of 3.9%3.84% to 4.37%; 85% volatility; and an expected option life of 3 years. At March 31, 2004, the weighted average remaining contractual life of options outstanding was 6.2 years.
G. INCOME TAXES
Due to the Company'sCompany’s cumulative losses, in recent years, expected losses in future years and inability to utilize any additional losses as carrybacks, the Company has not provided for an income tax benefit during the three months ended March 31, 2003,2004, based on management'smanagement’s determination that it was more likely than not that such benefits would not be realized. 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 taxable income in future periods and it determines that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time. During the three months ended March 31, 2003, the Company recorded current tax expense related to its Japan branch operations.
6
As of March 31, 20032004, and December 31, 2002,2003, the Company'sCompany’s deferred tax assets were offset by a valuation allowance of approximately $24.6$32.1 million and $23.2$30.6 million, respectively, duerespectively.
Transgenomic, Inc. and Subsidiaries
Notes to the Company's cumulative losses in recent years, expected losses in future yearsConsolidated Financial Statements (Unaudited)
(In thousands except share and inability to utilize any additional losses as carrybacks.per share data) (Continued)
H. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
The Company'sCompany’s operations are managed based upon the nature of the products and services provided. Accordingly, the Company has determined that it operates in two 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.income (loss). Expenses that cannot be directly identified to an operating activity or are considered corporate overhead are not allocated to the segments in arriving at operating income (loss) for the segment. Generally, decisions regarding asset allocation, financing, taxes or other items impacting the Company'sCompany’s balance sheet are made at the corporate level and, accordingly, operating segment balance sheet information is not typically reviewed by operating segment.
The BioSystems operating segment generates revenue from the sale of automated instrument systems and associated consumable products and services. This segment'ssegment’s products are based upon separations chemistries and enzymology. Specifically, this segment'ssegment’s main products are the WAVE system,System, related bioconsumables and research services.
The Nucleic Acids operating segment generates revenue from the sale of products and services based upon nucleic acid chemistries, separations chemistries and enzymology. Specifically, this segment'ssegment’s main products are nucleic acid building blocks or phosphoramidites, oligonucleotides, fluorescent markers, dyes and associated reagents and novel chemistry and process development services.
The following is information for net sales and operating income (loss) by segment.
| Three Months Ended March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | ||||||
Sales | ||||||||
BioSystems | $ | 6,939 | $ | 6,124 | ||||
Nucleic Acids | 2,566 | 3,707 | ||||||
Total | $ | 9,505 | $ | 9,831 | ||||
Income/(loss) from operations | ||||||||
BioSystems | $ | (663 | ) | $ | (2,114 | ) | ||
Nucleic Acids | (886 | ) | 206 | |||||
Corporate | (1,992 | ) | (1,667 | ) | ||||
Total | $ | (3,541 | ) | $ | (3,575 | ) | ||
Fixed asset additions during
Three Months Ended March 31, | ||||||||
2004 | 2003 | |||||||
Sales | ||||||||
BioSystems | $ | 6,385 | $ | 6,939 | ||||
Nucleic Acids | 2,244 | 2,566 | ||||||
Total | $ | 8,629 | $ | 9,505 | ||||
(Loss) from operations | ||||||||
BioSystems | $ | (517 | ) | $ | (663 | ) | ||
Nucleic Acids | (1,382 | ) | (886 | ) | ||||
Corporate | (1,414 | ) | (1,992 | ) | ||||
Total | $ | (3,313 | ) | $ | (3,541 | ) | ||
I. LINE OF CREDIT AND LONG-TERM DEBT
In December 2003, the quarterCompany entered into a new, $7.5 million line of credit facility with Laurus Master Fund, Ltd. (“Laurus”) The term of the agreement is three years carrying an interest rate of 2.0% over the prime rate or a minimum of 6.0%. Funds available under the line are are determined by a borrowing base equal to 90% of eligible accounts receivable balances plus up to $1.0 million related to inventory balances. This line of credit is secured by most of the Company’s assets. Payment of interest and principal can, 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 be made at the election of Laurus or the Company. The Company may elect to convert only if its 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 the Company’s common stock. In connection with the line of credit facility, the Company issued warrants to Laurus to acquire 550,000 shares of its common stock at exercise prices that exceed the average trading price of the Company’s common stock over the ten trading days prior to execution of the new line of credit.
In February 2004, the Company entered into a separate $2.75 million convertible note with Laurus,. The 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. The principal and interest on the note may be converted into common stock of the Company at a fixed conversion price of $2.61 per share. In connection with this agreement, the Company issued 125,000 warrants to Laurus to acquire 125,000 shares of its common stock. A portion of the proceeds from this transaction were mainlyused to retire the mortgage debt on the Company’s Glasgow facility. The remaining proceeds of approximately $750,000 will be used to complete the build-out of the Glasgow facility, complete the consolidation our operations into the new facility and provide funds for operations.
Certain features of the line of credit facility and convertable note require the Company to separately account for the value of certain amounts related to the warrants issued and the conversion feature of the facility. 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 these agreements. Any borrowings under the line of credit facility may result in additional beneficial conversion premiums. The value of the Nucleic Acid operating segment. Fixed assetswarrants and the beneficial conversion premium have been recorded on the balance sheet as a debt discount and an increase to additional paid in this segment were $12.3capital. The debt discount recorded for these items will be amortized as expense to the income statement over the term of the facility or as the warrants are exercised or the debt is converted into common stock thereby increasing the effective interest rate on these agreements.
In February 2004, Laurus waived the borrowing base limitation on the Company’s line of credit, thereby making the full $7.5 million atfacility available to the Company regardless of the available collateral. The waiver will expire on December 19, 2004. As of March 31, 20032004, the Company had approximately $4.4 million outstanding on this line of credit facility. In January and $8.9February 2004, Laurus exercised its conversion rights on the line of credit and converted $2.0 million atof amounts outstanding on the line into approximately 910,000 shares of common stock of the Company. In connection with the conversion of $2.0 million of debt incurred under the line of credit facility in January and February 2004, the Company has accelerated the amortization of approximately $460,000 of the beneficial conversion premium.
The following table details the components of the Company’s line of credit and long-term debt as of March 31, 2004 and December 31, 2002.2003.
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March 31, 2004 | December 31, 2003 | |||||
Line of Credit | $ | 4,415 | $ | 2,992 | ||
Less: | ||||||
Debt discount - warrants | 329 | 370 | ||||
Debt discount - Beneficial conversion premium | 906 | 480 | ||||
3,180 | 2,142 | |||||
Long-term debt | ||||||
Convertable debt | 2,750 | |||||
Mortgage Debt | 1,693 | |||||
Less: | ||||||
Debt discount - warrants | 76 | |||||
Debt discount - beneficial conversion premium | 75 | |||||
Current portion | 525 | 1,693 | ||||
$ | 2,074 | $ | — | |||
I.J. CORPORATE RESTRUCTURING AND ADDITIONAL FINANCING
The Company has historically experienced net losses and negative cash flows from operations. As a result, during the fourth quarter of fiscal 2002, management formulated a restructuring plan designed to reduce expenses thereby better aligning the Company'sCompany’s expense structure with current business prospects. The plan includesincluded employee terminations, office closures, and termination of collaborations and write-offs of abandoned intellectual property. A significant portion of the plan was executed in the fourth quarter of 2002 resulting in the recording of $3.3 million in restructuring charges. Restructuring activities continued in the current quarter resulting in additional restructuring charges of $264,000. Additional restructuring charges totaling between $235,000 and $435,000 are expected in the second quarter of 2003. The Company had accrued expenses and other liabilities associated with the restructuring activities of $730,000approximately $136,000 and $227,000 at March 31, 20032004, and $1.4 million at December 31, 2002.2003, respectively. The accrued expenses at March 31, 20032004, were primarily related to lease payments associated with office closures. The accrued expense at December 31, 2002 were primarily related to office closures and employee severance.
In March 2003 the Company entered into a loan commitment agreement with a financial institution for a secured line of credit up to a maximum commitment of $5.0 million. Collateral for the line of credit consists of all assets of Transgenomic, Inc. Funds available under the line are equal to 80% of eligible accounts receivable balances. Management expects to finalize the line of credit agreement in the second quarter of 2003. The proposed term of the agreement is 1 year carrying an interest rate of 2.25% over prime. Management believes, as a result of the restructuring activities, current cash balances and funds available from the secured line of credit will be sufficient to fund operations through at least fiscal year 2003.
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Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Operations.
The following discussion should be read in conjunction with our consolidated financial statements and notes included elsewhere in this filing.
Overview
We provide innovative products and services for the synthesis, purification and analysis of nucleic acids. Our products and services include automated instrument systems, associated consumables, nucleic acid chemical building blocks, nucleic acid synthesis products, novel chemistry development for nucleic acids, process development services and genetic variation discovery services. Our technologies center around three core competencies: separation chemistries, enzymology, and nucleic acid chemistries. We develop, assemble, manufacture and market our products and services to the life sciences industry to be used in research focused on molecular genetics of humans and other organisms. Such research could lead to development of new diagnostics and therapeutics. Our products can be used to analyze DNA or RNA at the molecular level, amplify, separate, and isolate nucleic acid fragments of particular interest and synthesize conventional or chemically-modified nucleic acid molecules. These capabilities are central to research seeking to discover and understand variations in the genetic code, the relationship of these variations to disease and, ultimately, to develop diagnostics and therapeutics based on this understanding. Our business plan is to participate in the value chain associated with these activities by providing key technology, tools, consumables, and biochemical reagents and services to those entities engaged in basic biomedical research and the development of diagnostics and therapeutic agents.
The Company'sCompany’s operations are managed based upon the nature of the products and services provided. Accordingly, the Company has determined that it operates in two 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. Expenses that cannot be directly identified to an operating activity or are considered corporate overhead are not allocated to the segments in arriving at operating income for the segment.
The BioSystems operating segment generates revenue from the sale of automated instrument systems and associated consumable products and services. This segment'ssegment’s products are based upon separations chemistries and enzymology. Specifically, this segment'ssegment’s main products are the WAVE system,System, related bioconsumables and research services. Since the WAVE System product introduction in 1997, we have sold nearlyover 1,000 instruments to customers in over 30 countries.
The Nucleic Acids operating segment generates revenue from the sale of products and services based upon nucleic acid chemistries, separations chemistries and enzymology. Specifically, this segment'ssegment’s main products are nucleic acid building blocks or phosphoramidites, oligonucleotides, fluorescent markers, dyes and associated reagents and novel chemistry and process development services.
We have incurred significant losses resulting principally from costs incurred in research and development and selling, general and administrative costs associated with our operations. At March 31, 2003,2004, we had an accumulated deficit of $53.4$76.6 million. We expect to continue to incur substantial research and development and selling, general and administrative costs.
Critical Accounting PoliciesExecutive Summary
Accounting policies
The following is a summary of significant items or events that have had an effect on the Company’s financial position, results of operations, and liquidity during the quarter:
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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 Company considers its critical accounting policies to be:
For additional discussion of these critical accounting policies, see the "Management Discussion and Analysis" section of the Company's 2002 Annual Report on Form 10-K.
Results of Operations Three Months Ending March 31, 2004 and 2003
Amounts in thousands | 2004 | 2003 | Change | % Change | ||||||||
Net Sales | ||||||||||||
Bioinstruments and Discovery Services | $ | 4,216 | $ | 5,331 | (1,115 | ) | (21 | )% | ||||
Bioconsumables | 2,169 | 1,608 | 561 | 35 | % | |||||||
Total Biosystems Business Unit | 6,385 | 6,939 | (554 | ) | (8 | )% | ||||||
Chemical Building Blocks | 1,565 | 2,492 | (927 | ) | (37 | )% | ||||||
Specialty Oligonucleotides and Services | 679 | 74 | 605 | 818 | % | |||||||
Total Synthetic Nucleic Acids Business Unit | 2,244 | 2,566 | (322 | ) | (13 | )% | ||||||
Total Net Sales | 8,629 | 9,505 | (876 | ) | (9 | )% | ||||||
Cost of Goods Sold | ||||||||||||
Bioinstruments and Services | 1,875 | 2,146 | (271 | ) | (13 | )% | ||||||
Bioconsumables | 921 | 755 | 166 | 22 | % | |||||||
Total Biosystems Business Unit | 2,796 | 2,901 | (105 | ) | (4 | )% | ||||||
Chemical Building Blocks | 1,458 | 1,716 | (258 | ) | (15 | )% | ||||||
Specialty Oligonucleotides and Services | 1,514 | 1,197 | 317 | 26 | % | |||||||
Total Synthetic Nucleic Acids Business Unit | 2,972 | 2,913 | 59 | 2 | % | |||||||
Total Cost of Goods Sold | 5,768 | 5,814 | (46 | ) | (.8 | )% | ||||||
Selling, General and Administrative Expenses | 4,245 | 4,608 | (363 | ) | (8 | )% | ||||||
Research and Development Expenses | 1,929 | 2,325 | (396 | ) | (17 | )% | ||||||
Restructuring and Restructuring Related Charges | — | 264 | (264 | ) | (100 | )% |
Three Months Ended March 31, 20032004 and 20022003
Net Sales. Net sales decreased 3% to $9.5 million in 2003 from $9.8 million in 2002. Sales in our BioSystems operating segment decreased in the first quarter of 2004 compared to the first quarter 2003. Bioinstruments revenues were significantly lower than 2003 partially offset by increased 13% to $6.9 million in 2003 from $6.1 million in 2002. Total revenues from sales of WAVE Systems increased 9% to $5.3 million in 2003 from $4.9 million in 2002. Bioconsumable product sales included in this operating segment increased 29% to $1.6 million in 2003 from $1.2 million in 2002. Sales in our Nucleic Acid operating segment decreased 31% to $2.6 millionDiscovery Services. The decline in 2003 from $3.7 million in 2002. Sales of WAVE systems increasedsales is mainly due to strong sales in Europe and the Far East offset by lowercontinued low sales volumes to commercial and industrial customers and our North American customer base. Increased services revenue is attributable to our focus on providing genetic variation discovery and analysis services to our pharmaceutical base of customers. We believe that our genetic variation discovery and analysis services provide us a significant opportunity to expand revenues in the future. In the first quarter ofDecember 2003, we sold no systems to commercialannounced a discovery services agreement with Novartis Pharmaceuticals Corp. supporting the clinical development of oncology therapeutics and industrial customers compared to approximately 8%believe this provides a good model of unitthe opportunity for our services offering. Bioconsumable product sales in 2002. Systems sold in North America accounted for approximately 24% of unit sales in 2003 as compared to approximately 39% in 2002. Sales ofstrengthened from increased WAVE related consumable products increasedusage as the installed base of WAVE Systems has increased resulting in increased consumable usage.
Sales in our Nucleic Acid operating segment continued to decreased in the first quarter of 2004 due to a decline in demand for our chemical building block products. These products are used by our biopharmaceutical and pharmaceutical customers as researchers begin to use them more extensivelyraw materials in place of other methods of DNA analysis.based drug candidates. The decrease in nucleic acid product salesdemand is largely attributable largely to declinesthe timing of completion and/or failure of Phase III clinical trials by certain of our large customers. We look for demand for these products to rebound slightly during the balance of 2004 as other customer products move through the clinical trial phases. This decrease in demand for standard chemicalDNA building blocks. Demand forblocks in the development and productionfirst quarter of novel chemistries has remained constant.2004 was partially offset by sales of oligonucleotides generated by our start-up manufacturing facility in Boulder, Colorado. Part of our business strategy ishas been to position ourselves as a unique partner to biopharmaceutical and pharmaceutical companies in the early stages of their efforts to develop genomic-based diagnostics and therapeutics. As part of this strategy we are focusing our sales efforts on large consumers of our Synthetic Nucleic Acid products who are willing to commit to long-term supply agreements. While we expect to see increased sales of these products based upon this strategy, we also may see varying demand depending on the success of the biopharmaceutical and pharmaceutical companies on which we are targeting our sales efforts. Therefore,diagnostic and therapeutic products. As a result we may see large variations in quarterly revenue flows for these products.
Cost of Goods Sold. Cost of goods sold increased 23%remained relatively flat year to $5.8 millionyear despite the decline in 2003 from $4.7 millionour revenues. Fixed costs associated with excess manufacturing capacity in 2002, representing 61%our Nucleic Acids business unit and a lower number of net sales in 2003 and 48% of net sales in 2002. BioSystems sales margins and average selling prices were consistent year over year. During the remainder of 2003 we anticipate thathigh margin Wave systems sold kept our cost of goods sold for ourcomparable to the first quarter of 2003. The BioSystems products will remainbusiness unit cost of goods sold as a percentage of sales increased year over year but remained within historical averages or improve slightly.ranges at approximately 44%. We expect that our Biosystems margins will fluctuate within historical ranges based upon the sales mix of systems, consumables and services. Currently our Nucleic Acid products are sold at lower margins compared to our Biosystems products. The margins in our Nucleic Acids operating segment are lower due to bulk sales of nucleic acid building block products andbusiness unit have been negatively impacted by higher manufacturing costs and excess capacity due largely to our plant expansion efforts in Glasgow, Scotland and Boulder, Colorado. Both totalWe anticipate that our cost of goods sold andfor our Nucleic Acid products will remain under pressure due to continued excess capacity during 2004. Overall we anticipate that our cost of goods sold as a percentpercentage of sales increased year over year due to the mix of products sold and additional manufacturing costs related to our new production facility in Boulder, Colorado. Overall we
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anticipate that our total cost of goods sold will be consistent with 20022003 or slightly higher. This is the result of the underutilization of our new oligonucleotide production facility in Boulder, Colorado. After 2003, we anticipate that the overall cost of goods sold percentage will improvelower as we refine our systems configurations potentially reducing material costs, improve upon production methods inare hopeful that demand for our Nucleic Acid operating segment which currently result in higher overallproducts will rebound slightly. Margin improvement will depend largely on the return of product demand thereby more fully utilizing our manufacturing capacity and spreading fixed costs and as product revenues increase thereby spreading our fixed production costs overacross a larger revenue base.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 22% to $4.6 million in 2003 from $5.9 million in 2002. This decrease is primarily theas a result of our restructuring activities that have reducedfocus on expense control. Reductions in personnel and personnel-relatedpersonnel related expenses outside services, rent and travel related costs. Additionally, we recordedcosts attributed to the decrease, offset by foreign currency transaction exchange rate gainsincreases. We will remain focused on controlling and reducing expenses during the quarter. Combined these items accounted for over 90% of the total decrease. Total selling, general2004.
Research and administrativeDevelopment Expenses. Research and development expenses represented 48% of net sales in 2003 versus 60% of net sales in 2002. It is expected that,decreased as a result of our restructuring activities described below,and focus on expense control. Approximately 60% of the total decrease was in personnel and personnel related expenses as we have reduced our selling, generalemployee headcount. Additionally, reductions in outside services and administrativesupplies were realized. We will remain focused on controlling and reducing expenses will decrease from 2002 levels.
Research and Development Expenses. Research and development expenses decreased 16% to $2.3 million in 2003 from $2.8 million in 2002. 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.during 2004. We expense our research and development costs in the year in which they are incurred with the exception of certain capitalized software development costs. The decrease is the result of our restructuring activities that have reduced personnel and personnel-related expenses, outside services, supplies and travel related costs. These decreased expenses were offset by a decline in the amount of capitalized software development costs. Combined these items accounted for approximately 85% of the total decrease. Total research and development expenses represented 24% of net sales in 2003 versus 28% of net sales in 2002. It is expected that, as a result of our restructuring activities discussed below, our research and development expenses will decrease from 2002 levels.incurred.
Stock Based Compensation. Stock based compensation expense was $35,000 in 2003 as compared to $25,000 in 2002. This expense represents the amortization of deferred compensation related to stock options issued.
Restructuring Charges. 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'sCompany’s expense structure with current business prospects. The plan included employee terminations, office closures, termination of collaborations and write-offs of abandoned intellectual property. We continued to execute upon the plan during the first quarter of 2003. As a result, $264,0002003 resulting in restructuringthe additional charges were recorded and are included in operating expenses.2003. These charges consisted of mainly of employee severance costs.costs and office closings. We expect that, as a result of thedid not incur further restructuring our total operating expenses for 2003 will be 20% to 25% below 2002 levels. Further restructuring activities are expectedcharges in the secondfirst quarter of 2003. As such, additional restructuring charges totaling between $235,000 and $435,000 are expected.2004.
Other Income (Expense). Other income and expense, which consists mainly of net interest income and expense, decreased to an expense of $41,000 in 2003 from income of $237,000 in 2002. Interest income for the quarter was $34,000 as compared to $251,000 in 2002. Interest expense for the quarter was $42,000 as compared to none in 2002. The decrease in interest income is a result of declining interest rates on investments and reductions in our short-term investment balances. Interest expense will increase in 2003 due to the long-term debt obtained by the Company during 2002 and the recently committed line of credit.
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Income Taxes. Income The Company’s tax expense during the quarter was $14,000 while in 2002 income tax expense was $21,000. During the quarter the Company recorded current tax expense related(benefit) relates to its Japan branch operations in certain foreign countries and certain state taxes. Our deferredstates. The tax assets asbenefit recorded in the first quarter of March 31, 2003 were $24.6 million and were offset by a valuation allowance of $24.6 million. Our deferred tax assets as of December 31, 2002 were $23.2 million and were offset by a valuation allowance of $23.2 million.2004 relates to refunds received in the United Kingdom. No further 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 taxable 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 March 31, 2004 were $32.1 million and were offset by a valuation allowance of $32.1 million.
Liquidity and Capital Resources
Overview
The Company’s liquidity position continued to be difficult during the first quarter of 2004 due primarily to continued losses and increases in working capital components. We have historically experienced net lossesbeen and negative cash flows. As a result, we had an accumulated deficit of $53.4 million as of March 31, 2003.will continue to be focused on improving accounts receivables collections and reducing inventory levels. As of March 31, 2003,2004 and December 31, 2002,2003 we had approximately $6.4$2.2 million and $9.7$1.2 million, respectively, in cash and cash equivalents. In addition, as of DecemberMarch 31, 2002,2004, we had approximately $3.6 million$316,000 in short-term investments and no short-term investments as of December 31, 2003, for total cash and short-term investments of approximately $13.3 million.$2.5 million and $1.2 million, respectively.
During the first quarter of 2003
The following table summarizes our major cash expenditures were the funding of our operationsshort-term liquidity and capital projects. A total of approximately $6.9 millionsources and uses of cash, as of March 31, 2004 and investments was used with approximately $3.1 million used to fund our operationsDecember 31, 2003 and $3.7 million for capital projects. Operating activities and capital projects were funded through existing cash and investments. Major capital projects during the quarter included facility build-out, expansion and improvement at our two nucleic acid production facilities in Boulder, Colorado and Glasgow, Scotland. The Boulder facility project is designed to be a cGMP (Good Manufacturing Practices) facility for the synthesis of oligonucleotides. This facility began non-GMP production operations during the first quarter of 2003periods ended March 31, 2004 and is expected to begin cGMP production in the second quarter of 2003. The Glasgow facility project, which produces nucleic acid building blocks, included the upgrading of equipment and processes at the current production facility and the build-out of a new facility that will include significant capacity expansion along with further equipment and process improvements. The current production facility improvements were completed during 2002 and the first production line, or pilot line, in the new facility is expected to be completed in 2003.2003:
Our operating activities resulted in net outflows of $3.1 million in 2003 and $4.7 million in 2002. The operating cash outflows for these periods resulted mainly from our operating losses. Significant investments in research and development and sales and marketing contributed to the operating losses. The operating cash outflows for 2003 are lower than those in the prior year due in large part to increases in accounts payables and accrued liabilities offset by operating losses and increased accounts receivable balances. Accounts receivable balances increased due largely to the concentration of sales during the fourth quarter of 2002 and first quarter of 2003 in European countries where payment terms of 90 days or more are customary.
Amounts in Thousands | March 31, 2004 | December 31, 2003 | ||||||
Short-term liquidity: | ||||||||
Current assets | $ | 26,362 | $ | 24,378 | ||||
Current liabilities | (12,191 | ) | (12,248 | ) | ||||
Net working capital | 14,171 | 12,130 | ||||||
Cash and cash equivalents | 2,229 | 1,241 | ||||||
Short-term investments | 316 | — | ||||||
Available borrowings on line of credit | 3,085 | 1,673 | ||||||
For the period ended March 31, 2004 | For the period ended March 31, 2003 | |||||||
Net cash flows: | ||||||||
Operating activities | $ | (4,003 | ) | $ | (3,141 | ) | ||
Investing activities | 584 | ) | 157 | |||||
Financing activities | 4,446 | 33 | ||||||
Effect of foreign currency exchange rates on cash | (39 | ) | (339 | ) | ||||
Net change in cash and cash equivalents | $ | 988 | $ | (3,290 | ) | |||
Net cash provided by investing activities was $157,000 in 2003 as compared to cash used of $7.8 million for 2002. The investing cash flow in 2003 is due primarily to the maturity of short-term investment funds offset by investment in property, plant and equipment. Cash used in investing activities in 2002 was due primarily to net reinvestment of funds in short-term investments and investments in property, plant and equipment.
Net cash provided by financing activities was $33,000 in 2003 and $388,000 for 2002. The financing cash inflows were the result of proceeds from the sale of common stock.
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We are party to a number of lease agreements mainly for office, research and development and production facilities. Such lease agreements expire at various dates through 2007, with future minimum annual lease payments of approximately $2.8 million in 2003 declining to less than $1.0 million in 2007.
We expect to devote substantial capital resources to continue our research and development efforts, to expandsupport our marketing and sales and customer support activities, and for other general corporate activities. Our capital requirements for operations depend on a number of factors, including sales levels, the level of our research and development activities, market acceptance of our products and services, the resources we devote to developing and supporting our products and services normaland general capital expenditures and other factors.expenditures. The restructuring plan developed in 2002 is expected to reducehas reduced our operating expenses and thereby reducereduced the cash needed to fund our operations until such time as we become cash flow positive.operations. Additionally, our capital budget includes expenditures for the completion of our facility expansion projects in Glasgow, Scotland, and Boulder, Colorado, and for general facility and equipment improvements. Additional expansion projects for the Glasgow and Boulder production facilities may be incurred over the next 2 to 3 years as business demand dictates. During the second quarter 2003 we expect to continue to make significant investments in property, plant and equipment, however, in the second half of 2003 weWe expect our capital expenditures to dropdecrease significantly as our production expansion projects come to an end. Our original capital expenditures budget for 2003 was approximately $8.4 million. We have re-evaluated the budget and have revised it downward. We nowin 2004. Currently, we expect capital expenditures for the full year2004 to be in the range of $6.7$1.7 million to $7.4 million.$2.5 million, depending largely upon demand for our nucleic acid products.
In December 2003, we entered into a three year line of credit facility with Laurus. Under the terms of the agreement, we can borrow up to $7.5 million based on eligible accounts receivable and inventory balances. The agreement carries an interest rate of 2.0% over the prime rate or a minimum of 6.0%. Funds available under the line are determined by a borrowing base equal to 90% of eligible accounts receivable balances plus up to $1.0 million related to inventory balances. This line of credit is secured by most of our assets. Payment of interest and principal can, under certain circumstances, be made with shares of our common stock at a fixed conversion price of $2.20 per share. In January and February 2004, Laurus exercised its conversion rights on the line of credit and converted $2.0 million of amounts outstanding on the line into approximately 910,000 shares of common stock of the Company. As of March 31, 2004, we had approximately $4.4 million outstanding on this line of credit. In February 2004, Laurus waived the borrowing base limitation on our line through December 12, 2004, thereby making the full $7.5 million facility available to us regardless of the available collateral.
We
In February 2004, we entered into a $2.75 million convertible note with Laurus, our line of credit provider. Management determined that the terms of the convertible note with Laurus were more favorable to the Company as compared to the previously announced proposed sale/leaseback transaction on our Glasgow, Scotland facility. The note carries an interest rate of prime plus 2% over the prime rate or a minimum of 6.0% and has a term of 3 years. The principal and interest on the note may be converted into common stock of the Company at a fixed conversion price of $2.61 per share. Proceeds from this transaction was used to retire the mortgage debt on the Glasgow facility, complete the build-out and consolidation of the Glasgow facility and provide funds for operations. Proceeds, net of transaction costs and amounts used to repay our existing mortgage debt on the Glasgow facility, were approximately $750,000.
As a result of our cost control measures and reduced capital expenditures, we expect our cash usage to decrease during 2004. Based upon our current projections, we expect to meet totalour cash needs for the remainder of 20032004 from existing cash, as of March 31, 2003 of $6.4 million, additional cash generated from operations during 2003our working capital, and funds available to us under a new $5.0our $7.5 million credit facility. In March 2003, we entered into a loan commitment agreement with a financial institutionThese projections assume revenue strength from our Biosystems business unit. We believe growth will result from increased consumable product offerings and an increase in demand for up to a $5.0 million secured line of credit. Collateral for the line consists of all assets held by Transgenomic, Inc. Funds available under the line are equal to 80% of eligible accounts receivable balances. Management expects to finalize the line of credit agreementour instruments. These projections also assume that revenues from our Nucleic Acid business unit increase in the second quarter of 2003. The proposed termfuture. Much of the agreement is 1 year carrying a variable interest rateanticipated increase in the Nucleic Acid business unit revenues will come from new customers and additional business from existing customers of 2.25% over prime. Additionally, we continue to pursue financing of up to an additional $5.0 million beyond the committed line of credit. We feelour Boulder, Colorado facility that such additional financing will be securedbegan production in 2003. CurrentMore specifically, our current financial and cash flow projections indicate that we expect to use approximately $1.5 million in cash to fund further operating losses and an additional $1.3 million to $2.1 million for capital expenditures. The majority of the capital expenditures will be associated with our Nucleic Acids business unit.
These projections indicate a cash flows are expectedneed of $2.6 million to turn positive during$3.4 million for the fourth quarterremainder of 2003.2004. Based upon the waiver received in February 2004, an additional $3.1 million is available when calculated as the total line of credit available of $7.5 million less $4.4 million outstanding at March 31, 2004. These projections may or may not be realized based upon actual operating results and capital project requirements. Thus, during or after this period, if our existing cash and short-term investments,balances, cash generated by operationsour working capital, and available borrowings under credit agreements isare insufficient to satisfy our liquidity requirements, we may need to sell additional equity or debt securities, or obtain additional credit arrangements. We are monitoring our liquidity position and are prepared to take appropriate measures, as needed, to address liquidity. Such measures may include, but are not limited to, further expense reductions, an expansion of our line of credit, asset sales and the placement of equity or debt. We cannot assure you that any financing arrangement will be available in amounts or on terms acceptable to us. Our failure to raise additional capital, if needed, would harm our financial condition, results of operations and our business.
Analysis of Cash Flows
During the first quarter of 2004, our major cash expenditures were the funding of our operations and capital projects. Cash and investments increased by a total of approximately $1.0 million in 2004 as compared to a decrease of approximately $3.3 million in 2003. In 2004 approximately $4.0 million was used to fund our operations and $600,000 used in investing activities offset by $3.4 million provided by advances on our line of credit and $1.0 million of additional long-term debt.
Our operating activities resulted in net outflows of approximately $4.0 million and $3.1 million in 2004 and 2003, respectively. The operating cash outflows for these periods resulted mainly from our operating losses. Significant manufacturing operations overcapacity, and significant investment in research and development and sales and marketing contributed to the operating losses.
Net cash utilized for investing activities was approximately $600,000 in 2004 compared to net cash provided by investing activities of $200,000 for 2003. The cash out flow for investing activities in 2004 is due primarily to the investment in property, plant and equipment.
Net cash provided by financing activities was approximately $4.4 million in 2004 and zero for 2003. The financing cash inflows in 2004 were the result of advances on our line of credit and additional long-term debt increase.
Obligations and Commitments
Our ongoing capital commitments consist of debt service requirements and obligations under capital leases. The following table sets forth our contractual obligations along with cash payments due in each period indicated:
Payments Due by Period | |||||||||||||||
Amounts in Thousands
| 2004 | 2005 | 2006 | 2007 | 2008 and Thereafter | ||||||||||
Line of credit1 | $ | 4,415 | $ | — | $ | — | $ | — | $ | — | |||||
Long-term debt principal payments | 350 | 850 | 900 | 650 | — | ||||||||||
Operating lease payments | 3,624 | 3,304 | 2,203 | 662 | — | ||||||||||
Total contractual obligations | $ | 8,389 | $ | 4,154 | $ | 3,103 | $ | 1,312 | $ | — | |||||
1. | See Note I to the consolidated financial statements. |
Off Balance Sheet Arrangements
At March 31, 2004 and 2003, the Company 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’s accounting policies are considered critical as they are both important to the portrayal of the Company’s financial statements and they require significant or complex judgments on the part of management. Our judgments and estimates are based on experience and assumptions that we believe are reasonable under the circumstances. Further, we evaluate our judgments and estimates from time to time as circumstances change. Actual financial results based on judgments or estimates may vary under different assumptions or circumstances.
The Company considers its critical accounting policies to be:
For additional discussion of these critical accounting policies, see the “Management Discussion and Analysis” section of the Company’s 2003 Annual Report on Form 10-K.
Impact of Inflation
We do not believe that price inflation had a material adverse effect on our financial condition or results of operations during the periods presented.
Foreign Currency Rate Fluctuations
Historically
During the last three fiscal years, our international sales have represented approximately 50%50-65% of our net sales. These sales have been to customers outside the United States. Most of these salesproducts in foreign countries are mainly completed by our wholly owned subsidiaries, Transgenomic, Ltd. and Cruachem, Ltd., and are made in their operating currency, theeither British Pounds Sterling or the Euro. Additionally, we have two wholly-owned subsidiaries, Transgenomic, LTD., and Cruachem, LTD., whose operating currency is British Pounds Sterling and the Euro. Results of operations for the Company'sCompany’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. To further limit our exposure to exchange rate risk all sales quotes issued by
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Transgenomic, Ltd. are based upon the United States dollar pricing converted at prevailing exchange rates at the time of the quote. Additionally, such quotes have short expiration dates. As a result although we are subject to exchange rate riskrisk. The operational expenses of our foreign subsidiaries help to reduce the currency exposure we have based largely upon the levels of outstanding accounts receivables,on our sales denominated in foreign currencies by converting foreign currencies directly into goods and services. As such management feels we do not have a material exposure to foreign currency rate fluctuations at this time.
Forward-looking Information
This report contains a number of "forward-looking statements"“forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. Many of these forward-looking statements refer to our plans, objective, expectations and intentions, as well as our future financial results. You can identify these forward-looking statements by forward-looking words such as "expects," anticipates," "intends," "plans," "may," "will," "believes," "feels", "seeks," "estimates,"“expects,” “anticipates,” “intends,” “plans,” “may,” “will,” “believes,” “feels,” “seeks,” “estimates,” and similar expressions. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those expressed or implied by these forward-looking statements. Such factors would include the growth of the markets for DNA analysis technology and consumable products, the acceptance of our technology, our ability to continue to improve our products, the development of competing technologies, and our ability to protect our intellectual property rights.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Risk.
We recently committed to
In December 2003, we obtained a secured line of credit that carries a variable interest rate. This line of credit will exposeexposes us to interest rate riskrisk. If the prime lending rate in 2003. We no longer have short-term investmentsthe United States were to increase we would experience higher interest costs. Based upon our total available credit of $7.5 million, a 1% increase in the prime rate would increase our annual interest expense by approximately $75,000.
In February, we obtained a secured long-term convertible note that subjectcarries a variable interest rate. This note exposes us to interest rate risk. If the market risks describedprime lending rate in the United States were to increase we would experience higher interest costs. Based upon our most recent Annual Report on Form 10-K.principal balance of $2.75 million, a 1% increase in the prime rate would increase our annual interest expense by approximately $27,500.
Item 4. Controls and Procedures
A review and evaluation was performed by the Company'sCompany’s management, including the Company'sCompany’s Chief Executive Officer ("CEO"(“CEO”) and Chief Financial Officer ("CFO"(“CFO”), of the effectiveness of the design and operation of the Company'sCompany’s disclosure controls and procedures as of a date within 90 days prior to the filingend of the period covered by this quarterly report. Based on that review and evaluation, the CEO and CFO concluded that the Company'sCompany’s current disclosure controls and procedures, as designed and implemented, were effective. There have been no significant changes in the Company'sCompany’s internal controls subsequent to the date of their evaluation. There were no significant material weaknesses identified in the course of such review and evaluation and, therefore, no corrective measures were taken by the Company.
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We are not a party to, and none of our assets or properties are subject to, any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
None
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits |
(3.1) | Second Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 2 to Amendment No. 1 to Registration Statement on Form S-1 (Registration No. 333-32174) as filed on May 17, 2000) | |
(3.2) | Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1 (Registration No. 333-32174) as filed on March 10, 2000) | |
(4) |
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Form of Certificate of the | ||
(10.1) | Form of Securities Purchase Agreement by and between the Registrant and various counterparties dated August 27, 2003 (incorporated by reference to the Registrant’s Report on Form 8-K which was filed on August 29, 2003) | |
(10.2) | 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) | |
(10.3) | Securities Purchase Agreement by and between the Registrant and Laurus Master Fund, Ltd. dated February 19, 2004, as amended on April 15, 2004 (1) | |
(10.4) | Secured Convertible Term Note by and between the Registrant and Laurus Master Fund, Ltd. dated February 19, 2004, as amended on April 15, 2004 (1) | |
(10.5) | Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd. dated February 19, 2004, as amended on April 15, 2004 (1) | |
(10.6) | Registration Rights Agreement by and between the Registrant and Laurus Master Fund, Ltd. dated February 19, 2004 (1) | |
(10.7) | Common Stock Purchase Warrant by and between the Registrant and TN Capital Equities, Ltd. dated March 1, 2004 (1) | |
(10.8) | 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 (1) | |
(10.9) | Amendment No. 1 to the Employment Agreement effective March 1, 2000 by and between Transgenomic, Inc. and Collin D’Silva | |
(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 (18 U.S.C. Section 1350) |
(1) | This exhibit is incorporated by reference to the Registration Statement of the Registrant (Registration No. 333-114661), which was filed on April 21, 2004. |
(b) | Reports on Form 8-K |
The Registrant did not filefiled a Report on Form 8-K duringon January 16, 2004, reporting the announcement of an agreement with Nanogen Inc. to distribute one of its instruments in select Western European countries, pursuant to Items 5 and 7 of Form 8-K.
The Registrant filed a Report on Form 8-K on January 21, 2004, reporting the announcement of an agreement with SpectruMedix LLC to distribute one of its instruments in Europe, pursuant to Items 5 and 7 of Form 8-K.
The Registrant filed a Report on Form 8-K on March 1, 2004, announcing an agreement with Laurus Master Fund, Ltd., to issue a $2.75 million convertible note, and the appointment of Gregory T. Sloma to its Board of Directors, pursuant to Items 7 and 5 of Form 8-K, respectively, and furnishing an announcement of its results of operations for the quarter ended December 31, 2003 pursuant to Item 12 of Form 8-K.
The Registrant filed a Report on Form 8-K on March 22, 2004, reporting the announcement of an agreement with Regado Bioscience to manufacture two components of a therapeutic, and provide a range of related services, pursuant to Items 5 and 7 of Form 8-K.
The Registrant filed a Report on Form 8-K on March 29, 2004, reporting the announcement of the presentation by several of its customers at the American Association of Cancer Research annual meeting results in which the Company’s WAVE System has played an important role, pursuant to Items 5 and 7 of Form 8-K.
The Registrant filed a Report on Form 8-K on March 31, 2003.2004, reporting the announcement of the resignation of Michael J. Draper as Chief Financial Officer effective March 31, 2004, and the assumption of the additional duties of the Chief Financial Officer position on an interim basis by Mitchell L. Murphy effective April 1, 2004, pursuant to Item 5 of Form 8-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TRANSGENOMIC, INC. | ||||
Date: May | By: | /s/ | ||
Interim Chief Financial Officer (authorized officer and principal financial officer) |
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CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Collin J. D'Silva, certify that:
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CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, William P. Rasmussen, certify that: