| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the Quarterly Period Ended June 30, 2011 | |
For the Quarterly Period Ended September 30, 2010
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from _____ to _____ | |
For the transition period fromto
| Delaware | 911789357 | |
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| 12325 Emmet Street, Omaha, Nebraska | 68164 | |
| (Address of principal executive offices) | (Zip Code) | |
| Large accelerated filer | o | Accelerated filer | ||||
| o | ||||||
| Non-accelerated filer | o | Smaller Reporting Company | x | |||
49,319,672.
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| PART II. | ||||
| Item 1. | ||||
| Item 1A. | ||||
| Item 6. | ||||
| Item 1. | Financial Statements |
CURRENT ASSETS: Cash and cash equivalents Accounts receivable (net of allowances for bad debts of $335 and $310, respectively) Inventories (net of allowances for obsolescence of $520 and $507, respectively) Prepaid expenses and other current assets Total current assets PROPERTY AND EQUIPMENT: Equipment Furniture, fixtures & leasehold improvements Less: accumulated depreciation OTHER ASSETS: Other assets (net of accumulated amortization of $524 and $525, respectively) CURRENT LIABILITIES: Accounts payable Other accrued expenses Accrued compensation Total current liabilities Other long-term liabilities Total liabilities STOCKHOLDERS’ EQUITY: Preferred stock, $.01 par value, 15,000,000 shares authorized, none outstanding Common stock, $.01 par value, 100,000,000 shares authorized, 49,289,672 and 49,189,672 shares outstanding, respectively Additional paid-in capital Accumulated other comprehensive income Accumulated deficit Total stockholders’ equity NET SALES COST OF GOODS SOLD Gross profit OPERATING EXPENSES: Selling, general and administrative Research and development Restructuring charges LOSS FROM OPERATIONS OTHER INCOME (EXPENSE): Interest, net Other, net LOSS BEFORE INCOME TAXES INCOME TAX EXPENSE (BENEFIT) NET LOSS BASIC AND DILUTED LOSS PER SHARE BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING Balance, January 1, 2010 Net loss Other comprehensive income (loss): Foreign currency translation adjustment, net of tax Comprehensive loss Non-cash stock-based compensation Issuance of shares for employee stock options Balance, September 30, 2010 CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net loss Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities: Depreciation, amortization and disposals Non-cash, stock based compensation Changes in operating assets and liabilities: Accounts receivable Inventories Prepaid expenses and other current assets Accounts payable Accrued expenses and accrued compensation Other long term liabilities Long term deferred income taxes Net cash flows provided by (used in) operating activities CASH FLOWS USED IN INVESTING ACTIVITIES: Purchase of property and equipment Change in other assets Net cash flows used in investing activities CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: Issuance of common stock Principal payments on capital lease obligations Net cash flows provided by financing activities EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH NET CHANGE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD CASH AND CASH EQUIVALENTS AT END OF PERIOD SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Interest Income taxes, net SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION Acquisition of equipment through capital leases biomedical industries world-wide for disease research, drug and diagnostic development and clinical trial support. Principles of Consolidation. The preferred stock conversion feature and warrant liability are recorded at fair value. See Footnote L. Three Months Ended September 30, 2010 Three Months Ended September 30, 2009 Nine Months Ended September 30, 2010 Nine Months Ended September 30, 2009 Three Months Ended September 30, 2010 Three Months Ended September 30, 2009 Nine Months Ended September 30, 2010 Nine Months Ended September 30, 2009 2010: Leasehold improvements Furniture and fixtures Production equipment Computer equipment Research and development equipment December 31, 2010. Classes of Property Equipment Less: Accumulated amortization Total 2010 2011 2012 2013 Total minimum lease payments Less: Amount representing interest Present value of net minimum lease payments Our policy is to record interest and penalties directly related to income taxes as income tax expense in the Consolidated Statement of Operations. respectively. consolidated balance Severance and related costs Facility closure costs Other Restructuring charges Severance and related costs Facility closure costs Other Total Finished goods Raw materials and work in process Demonstration inventory Less allowance for obsolescence Total Intellectual property Patents Other Total assets, net of applicable valuation allowances. $0.4 million, respectively. 2010. Warrant Holder Various Institutional Holders (1) Laurus Master Fund, Ltd. (2) Laurus Master Fund, Ltd. (2) Laurus Master Fund, Ltd. (2) Laurus Master Fund, Ltd. (2) Laurus Master Fund, Ltd. (2) Total 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 Balance at January 1, 2010: Granted Exercised Forfeited Expired Balance at September 30, 2010: Exercisable at September 30, 2010: 2011 segments, Laboratory Services and Instrument Business. Net Sales Gross Profit Net Income (Loss) before Taxes Income Tax Expense (Benefit) Net Income (Loss) Depreciation/Amortization Restructuring Charges Interest Income, Net Net Sales Gross Profit Net Loss before Taxes Income Tax Expense (Benefit) Net Loss Depreciation/Amortization Restructuring Charges Interest Income Total Assets Instrument Related Business: Bioinstruments Bioconsumables Laboratory Services: Molecular Clinical Reference Laboratory Pharmacogenomics Research Services Total Net Sales Instrument Related Business: Bioinstruments Bioconsumables Laboratory Services: Molecular Clinical Reference Laboratory Pharmacogenomics Research Services Total Cost of Goods Sold Net sales for the three and United States Italy France Germany United Arab Emirates United Kingdom All Other Countries Total We have biomedical industries world-wide for disease research, drug and diagnostic development and clinical trial support. Executive Summary Our gross profit margin of 2011 to $6.3 million. While this non-cash expense appears significant this does not affect our cash flow. 1,000 times higher than routine DNA testing technology, we have recently discovered a technique to further improve mutation detection sensitivity of standard Sanger sequencing. We have termed this new discovery “BLOCker-Sequencing” and we are combining this new discovery with our Ice COLD-PCR program to bring what we believe to be the most accurate and sensitive mutation detection technology available in the market today. patients undergoing treatment for cancer. We have historically operated at a loss and have not consistently generated sufficient cash from operating activities to cover our operating to be impacted. Instrument Related Business: Bioinstruments Bioconsumables Laboratory Services: Molecular Clinical Reference Laboratory Pharmacogenomics Research Services Total Net sales 2010. 2010. Instrument Related Business: Bioinstruments Bioconsumables Laboratory Services: Molecular Clinical Reference Laboratory Pharmacogenomics Research Services Cost of goods sold . Research and development expenses totaled development activities in Omaha, Nebraska which is offset by legal costs to defend a patent. Instrument Related Business: Bioinstruments Bioconsumables Laboratory Services: Molecular Clinical Reference Laboratory Pharmacogenomics Research Services Total Net Sales evolving technologies. $0.3 million. Instrument Related Business: Bioinstruments Bioconsumables Laboratory Services: Molecular Clinical Reference Laboratory Pharmacogenomics Research Services Cost of goods sold from six months ended June 30, 2011 was $0.1 million compared to $0.5 million in revaluation loss for the six months ended June 30, 2010. Research and development activities in Omaha, Nebraska which is offset by legal costs to defend a patent. Current assets (including cash and cash equivalents of $4,589 and $5,642, respectively) Current liabilities Working capital payment obligations related to our notes payable and capital leases, lower accounts receivable and increased accrued liabilities. We continue to explore additional sources of liquidity. 2010. September 30, 2010
(unaudited) December 31,
2009 ASSETS $ 4,589 $ 5,642 3,536 4,522 3,658 3,552 646 738 12,429 14,454 10,371 9,972 3,836 3,834 14,207 13,806 (13,160 ) (12,839 ) 1,047 967 461 583 $ 13,937 $ 16,004 LIABILITIES AND STOCKHOLDERS’ EQUITY $ 889 $ 1,013 2,722 2,517 668 573 4,279 4,103 351 239 4,630 4,342 — — 498 497 139,715 139,703 1,644 1,645 (132,550 ) (130,183 ) 9,307 11,662 $ 13,937 $ 16,004 June 30, 2011 December 31, (unaudited) 2010 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,639 $ 3,454 Accounts receivable (net of allowances for bad debts of $1,387 and $334, respectively) 7,194 7,601 Inventories (net of allowances for obsolescence of $520 and $518, respectively) 3,309 3,344 Other current assets 860 635 Total current assets 14,002 15,034 PROPERTY AND EQUIPMENT: Equipment 10,118 9,820 Furniture, fixtures & leasehold improvements 3,723 3,479 13,841 13,299 Less: accumulated depreciation (12,070 ) (11,697 ) 1,771 1,602 OTHER ASSETS: Goodwill 6,275 6,275 Intangibles (net of accumulated amortization of $843 and $519, respectively) 8,522 8,962 Other assets 130 154 $ 30,700 $ 32,027 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 1,400 $ 1,360 Accrued compensation 1,006 875 Short term debt and current maturities of long term debt 1,728 989 Accrued liabilities 3,681 3,231 Contractual obligation 1,573 1,628 Current portion of lease obligations 217 170 Preferred stock dividend payable 300 — Total current liabilities 9,905 8,253 LONG TERM LIABILITIES: Long term debt less current maturities 7,406 8,640 Preferred stock conversion feature 7,600 1,983 Preferred stock warrant liability 3,000 2,351 Other long-term liabilities 1,008 843 Total liabilities 28,919 22,070 Redeemable Series A convertible preferred stock, $.01 par value, 3,879,307 shares authorized, 2,586,205 shares issued and outstanding 1,670 1,457 STOCKHOLDERS’ EQUITY: Preferred stock, $.01 par value, 15,000,000 shares authorized, 2,586,205 shares issued and outstanding — — Common stock, $.01 par value, 100,000,000 shares authorized, 49,299,672 and 49,289,672 shares issued and outstanding, respectively 498 498 Additional paid-in capital 140,502 139,730 Accumulated other comprehensive income 1,731 1,589 Accumulated deficit (142,620 ) (133,317 ) Total stockholders’ equity 111 8,500 $ 30,700 $ 32,027 Three Months Ended
September 30, Nine Months Ended
September 30, 2010 2009 2010 2009 $ 4,419 $ 5,046 $ 14,956 $ 15,508 2,402 2,293 7,568 7,291 2,017 2,753 7,388 8,217 2,159 2,215 7,623 7,922 613 938 1,952 2,468 72 — 72 — 2,844 3,153 9,647 10,390 (827 ) (400 ) (2,259 ) (2,173 ) — 1 1 14 — (1 ) — (4 ) — — 1 10 (827 ) (400 ) (2,258 ) (2,163 ) 71 (34 ) 109 (114 ) $ (898 ) $ (366 ) $ (2,367 ) $ (2,049 ) $ (0.02 ) $ (0.01 ) $ (0.05 ) $ (0.04 ) 49,289,672 49,189,672 49,228,561 49,189,672 Three Months Ended Six Months Ended June 30, June 30, 2011 2010 2011 2010 NET SALES $ 7,667 $ 5,095 $ 15,148 $ 10,537 COST OF GOODS SOLD 3,112 2,608 6,406 5,166 Gross profit 4,555 2,487 8,742 5,371 OPERATING EXPENSES: Selling, general and administrative 5,589 3,033 9,946 5,464 Research and development 579 512 1,135 1,339 Restructuring Charges 11 — 35 — 6,179 3,545 11,116 6,803 LOSS FROM OPERATIONS (1,624 ) (1,058 ) (2,374 ) (1,432 ) OTHER INCOME (EXPENSE): Interest income (expense), net (240 ) 1 (478 ) 1 Expense on preferred stock (4,239 ) — (6,266 ) — Other, net 1 — 232 — (4,478 ) 1 (6,512 ) 1 LOSS BEFORE INCOME TAXES (6,102 ) (1,057 ) (8,886 ) (1,431 ) INCOME TAX EXPENSE (BENEFIT) (104 ) 89 (110 ) 38 NET LOSS $ (5,998 ) $ (1,146 ) $ (8,776 ) $ (1,469 ) PREFERRED STOCK DIVIDENDS AND ACCRETION (267 ) — (527 ) — NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (6,265 ) $ (1,146 ) $ (9,303 ) $ (1,469 ) BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.13 ) $ (0.02 ) $ (0.19 ) $ (0.03 ) BASIC AND DILUTED WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING 49,299,672 49,206,339 49,296,339 49,198,005 NineSix Months Ended SeptemberJune 30, 20102011 Common Stock Outstanding
Shares Par
Value Additional
Paid-in
Capital Accumulated
Deficit Accumulated
Other
Comprehensive
Income (Loss) Total 49,189,672 $ 497 $ 139,703 $ (130,183 ) $ 1,645 $ 11,662 — — — (2,367 ) (2,367 ) (2,367 ) — — — — (1 ) (1 ) (2,368 ) — — (29 ) — — (29 ) 100,000 1 41 — — 42 49,289,672 $ 498 $ 139,715 $ (132,550 ) $ 1,644 $ 9,307 Common Stock Total Balance, January 1, 2011 49,289,672 $ 498 $ 139,730 $ (133,317 ) $ 1,589 $ 8,500 Net loss — — — (8,776 ) (8,776 ) (8,776 ) Other comprehensive income (loss): Foreign currency translation adjustment, net of tax — — — — 142 142 Comprehensive loss (8,634 ) Non-cash stock-based compensation — — 765 — — 765 Issuance of shares for employee stock options 10,000 — 7 — — 7 Preferred stock accretion — — — (227 ) (227 ) Dividends on preferred stock — — — (300 ) — (300 ) Balance, June 30, 2011 49,299,672 498 140,502 (142,620 ) $ 1,731 $ 111 Nine Months Ended
September 30, 2010 2009 $ (2,367 ) $ (2,049 ) 523 615 (29 ) 151 969 1,461 (167 ) 709 90 20 (121 ) (142 ) 242 (557 ) (44 ) 29 20 — (884 ) 237 (141 ) (327 ) (25 ) (20 ) (166 ) (347 ) 42 — (57 ) — (15 ) — 12 — (1,053 ) (110 ) 5,642 4,771 $ 4,589 $ 4,661 $ — $ — 4 163 $ 286 — Six Months Ended June 30, 2011 2010 CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net loss $ (8,776 ) $ (1,469 ) Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities: Depreciation and amortization 992 378 Non-cash, stock based compensation 765 (50 ) Provision for losses on doubtful accounts 1,227 2 Provision for losses on inventory obsolescence 48 67 Preferred stock revaluation 6,266 — Changes in operating assets and liabilities: Accounts receivable (769 ) 565 Inventories 2 62 Prepaid expenses and other current assets 215 147 Accounts payable (196 ) (99 ) Accrued liabilities 276 404 Other long term liabilities 24 (47 ) Long term deferred income taxes 13 13 Net cash flows provided by (used in) operating activities 87 (27 ) CASH FLOWS USED IN INVESTING ACTIVITIES: Purchase of property and equipment (216 ) (108 ) Change in other assets (139 ) (18 ) Net cash flows used in investing activities (355 ) (126 ) CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Principal payments on capital lease obligations (156 ) — Issuance of common stock 7 42 Principal payment on note payable (495 ) — Net cash flows provided by (used in) financing activities (644 ) 42 EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH 97 (115 ) NET CHANGE IN CASH AND CASH EQUIVALENTS (815 ) (226 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,454 5,642 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,639 $ 5,416 SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Interest $ 480 $ — Income taxes, net 13 2 SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION Acquisition of equipment through capital leases $ 390 $ — Dividends payable on preferred stock 300 — NineSix Months Ended SeptemberJune 30, 20102011 and 20092010A. BUSINESS DESCRIPTIONA. BUSINESS DESCRIPTION provides innovative products for the purification and analysis of nucleic acids usedis a global biotechnology company specializing in the life sciences industry for research focused on molecular genetics and diagnostics. We also providehigh sensitivity genetic variation analyticaland mutation analysis, providing products and services to the medicalin DNA mutation detection and discovery for clinical research, clinical molecular diagnostics and pharmacogenomics analyses.markets. Net sales are categorized as Instrument Related Business and Laboratory Services.• flagshipproprietary product is the WAVE® System which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There is a worldwide installed base of nearlyover 1,500 WAVE Systems as of SeptemberJune 30, 2010.2011. We also distribute bioinstruments produced by other manufacturers (“OEM Equipment”) through our sales and distribution network. Service contracts to maintain installed systems are sold and supported by technical support personnel.• third-party installedOEM platforms generate a demand for consumables that are required for the continued operation of the bioinstruments. We develop, manufacture and sell these consumable products. In addition, we manufacture and sell consumable products that can be used on multiple, independent platforms. These products include SURVEYOR® Nuclease and a range of HPLC separationchromatography columns.Laboratory Services:Molecular Clinical Reference Laboratory. The molecular clinical reference laboratory specializes in mitochondrial and molecular diagnostic testing including genetic testing for oncology, hematology and inherited disorders. Located in Omaha, Nebraska, the molecular clinical reference laboratory operates in a Good Laboratory Practices compliant environment and is certified under the Clinical Laboratory Improvement Amendment (CLIA) as a high complexity lab and is accredited by CAP (College of American Pathologists).B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Pharmacogenomics Research Services. Pharmacogenomics research services are provided by our Contract Research Organization located in Omaha, Nebraska. It specializes in pharmocogenomic, biomarker and mutation discovery research serving the pharmaceutical and biomedical industries world-wide for disease research, drug and diagnostic development and clinical trial support.Although we have experienced recurring net losses (resulting in an accumulated deficit of $132.6 million at September 30, 2010) management believes existing sources of liquidity, including cash and cash equivalents of $4.6 million, are sufficient to meet expected cash needs through 2011. We will need to increase net sales in order to meet our liquidity needs on a long-term basis. If we cannot increase net sales, further reductions to operating expenses will be needed. In future periods, there is no assurance that we will be able to increase net sales or further reduce expenses and, accordingly, we may not have sufficient sources of liquidity to continue operations indefinitely.B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The more significant of those risks are presented below and throughout the notes to the financial statements.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Nine Months Ended September 30, 2010 and 20091.Use of Estimates.2.Concentration of Revenue Risk.No customer accounted for more than 10% of consolidated net sales during the three and nine months ended September 30, 2010 and 2009. For the three and nine months ended September 30, 2010 one customer accounted for more than 10% of the Laboratory Services net sales. This customer represented 16% of the Laboratory Services net sales for the three months ended September 30, 2010 and 15% of the Laboratory Services net sales for the nine months ended September 30, 2010. For the three and nine months ended September 30, 2009 one customer accounted for more than 10% of the Laboratory Services net sales. This customer represented 18% of the Laboratory Services net sales for the three months ended September 30, 2009 and 20% for the nine months ended September 30, 2009.Concentrations of Cash.From time to time, we may maintain a cash position with financial institutions in amounts that exceed federally insured limits. We have not experienced any losses on such accounts as of September 30, 2010.20092010 was derived from our audited balance sheet as of that date. The accompanying consolidated financial statements as of and for the three and ninesix months ended SeptemberJune 30, 20102011 and 2009 201020092010 contained in our Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.ninesix months ended SeptemberJune 30, 20102011 and 2009: Dollars in Thousands Beginning
Balance Provision Write Offs Ending
Balance $ 295 $ 40 $ — $ 335 $ 358 $ (5 ) $ (8 ) $ 345 $ 310 $ 29 $ (4 ) $ 335 $ 388 $ 27 $ (70 ) $ 345 TRANSGENOMIC, INC. AND SUBSIDIARY2010:NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Nine Months Ended September 30, 2010 and 2009 Dollars in Thousands Provision Write Offs Three Months Ended June 30, 2011 $ 716 $ 779 $ (108 ) $ 1,387 Three Months Ended June 30, 2010 $ 279 $ 16 $ — $ 295 Six Months Ended June 30, 2011 $ 334 $ 1,228 $ (175 ) $ 1,387 Six Months Ended June 30, 2010 $ 310 $ (11 ) $ (4 ) $ 295 accounts.accounts and contractual allowances. The estimate made for doubtful accounts is based on a review of all outstanding amounts on a quarterly basis. We determine the allowance for doubtful accounts and contractual allowances by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. an allowance for obsolete inventory. Cost is computed using standard costs for finished goods and average or latest actual cost for raw materials and work in process, which approximates the first-in, first-out (FIFO) method.ninesix months ended SeptemberJune 30, 20102011 and 2009: Dollars in Thousands Beginning
Balance Provision Write Offs Ending
Balance $ 536 $ 12 $ (28 ) $ 520 $ 123 $ 257 $ (27 ) $ 353 $ 507 $ 78 $ (65 ) $ 520 $ 108 $ 298 $ (53 ) $ 353 Dollars in Thousands Provision Write Offs Three Months Ended June 30, 2011 $ 520 $ 41 $ (41 ) $ 520 Three Months Ended June 30, 2010 $ 478 $ 67 $ (9 ) $ 536 Six Months Ended June 30, 2011 $ 518 $ 49 $ (47 ) $ 520 Six Months Ended June 30, 2010 $ 507 $ 65 $ (36 ) $ 536 cost less accumulated depreciation.cost. Depreciation is computed by the straight-line method over the estimated useful lives of the related assets as follows:1 to 10 years 3 to 7 years 3 to 7 years 3 to 7 years 2 to 7 years Other Assets.Depreciation expense related to property and equipment during the Othersix months ended June 30, 2011 and 2010 was $0.4 million and $0.2 million, respectively. Included in depreciation for the six months ended June 30, 2011 was less than $0.1 million related to capital leases. We did not have any capital leases in the second quarter of 2010.other long-term assets.acquired products.1. 2. TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Nine Months Ended September 30, 20103. 2009Eachthird party relationships. These costs will be amortized straight line over their estimated economic life of theseseven to eight years. See Footnote E.isare treated as long-lived assets. Long-lived assets will be tested for impairment on an annual basis or when a significant event occurs, which may impact impairment. We review quarterly the carrying value of our long-lived assets to assess recoverability and impairment. We recorded no impairment in the threeimpairments as of June 30, 2011 or nine months ended September 30, 2010 or 2009.3.Other Long-Term Assets.long-termLong Term Assets.U.S.US security deposits and deferred tax assets, netassets.SeptemberJune 30, 20102011 had vesting periods of one or three years from date of grant. None of the stock options outstanding at SeptemberJune 30, 20102011 are subject to performance or market-based vesting conditions.ninethree months ended SeptemberJune 30, 2010,2011, we recorded compensation expense recovery of less than $0.1$0.8 million within the selling, general and administrative expense. TheDuring the six months ended June 30, 2011, we recorded compensation expense of $0.8 million within the selling, general and administrative expense as a result of the vesting of options exercisable for the purchase of 1.33.6 million shares was offset by the expense recovery for stock options which were forfeited due to the requisite service not being rendered.shares. During the ninesix months ended SeptemberJune 30, 2009,2010, we recorded compensation expenses of $0.2less than $0.1 million within selling, general and administrative expense as a result of the vesting of options exercisable for the purchase of 1.71.3 million shares. As of SeptemberJune 30, 2010,2011, there was less than $0.1$1.2 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of nearly three years.No stock options were granted during the quarters ended September 30, 2010 and 2009. nine monthsquarters ended SeptemberJune 30, 20102011 and 20092010 was estimated on their respective grant dates using the Black-Scholes option pricing model. We granted 2.2 million stock options during the second quarter of 2011. These stock options were granted to our entire employee base with the bulk being granted to our senior management team. The Black-Scholes model was used with the following assumptions: risk-free interest rates of 1.87% based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected lives of four years, based on expected exercise activity behavior; and volatility of 105% based on the historical volatility of our stock over a time that is consistent with the expected life of the option. A small group of senior executives hold the majority of the stock options and are expected to hold the options for five years. Forfeitures of 1.10% have been assumed.nine monthsquarter ended SeptemberJune 30, 2010. The Black-Scholes model was used with the following assumptions: risk-free interest rates of 1.98% based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected life of five years, based on historical exercise activity behavior; and volatility of 102.69% based on the historical volatility of our stock over a time that is consistent with the expected life of the option. A small group of senior executives holdheld the majority of the stock options and are expected to hold the options until they are vested. Forfeitures of 2.2% have beenwere assumed in the calculation.Capital LeasesThe following is an analysis of the leased property under capital leases. Dollars in Thousands Asset Balances at September 30 2010 2009 $ 286 $ — — — $ 286 $ — TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Nine Months Ended September 30, 2010 and 2009The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of September 30, 2010.Year ending December 31: Dollars in Thousands $ 14 86 86 71 $ 257 (28 ) $ 229 periods. Netperiods and net sales associated with these contracts are deferred and recognized ratably over the service period. At SeptemberJune 30, 20102011 andSeptember 30, 2009,2010other accrued expenses,liabilities, was approximately $1.5 million and $1.4 million respectively for each of the periods.expected reimbursement.contractual adjustments. There are no deferred net sales associated with our Molecular Clinical Reference Laboratory. Adjustments to the allowances, based on actual receipts from third party payers, are recorded upon settlement.SeptemberJune 30, 20102011 and 2009,2010, deferred net sales associated with the pharmacogenomics research projects included in the balance sheet in other accrued expenses,liabilities, was $0.1 million and less than $0.1 million, for each period.they areit is located as their functional currency. Its assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Cumulative translation lossesgain of less than $0.1approximately $0.1 million are is reported as accumulated other comprehensive income on the accompanyingTRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Nine Months Ended September 30, 2010 and 2009sheetssheet as of ninesix months ended SeptemberJune 30, 2010. Revenues and expenses are translated at the average exchange rates during the period. For transactions that are not denominated in the functional currency, we recognized net losses of $0.3$0.1 million as foreign currency transaction lossesloss in the determination of net loss for the six months ending June 30, 2011 and $0.5 million as foreign currency transaction loss in the determination of net loss for the six months ending June 30, 2010.each of the ninethree months ended June 30, 2011 was less than $0.1 million. Other income for the three and six months ending SeptemberJune 30, 2010 and 2009. was less than $0.1 million.SeptemberJune 30, 20102011 and December 31, 20092010 consisted of foreign currency translation adjustments, net of applicable tax of zero. We deem our foreign investments to be permanent in nature and do not provide for taxes on currency translation adjustments arising from converting investments in a foreign currency to U.S. dollars.10,598,15618,504,943 and 11,383,72010,763,324 shares of our common stock have been excluded from the computation of diluted earnings per share at SeptemberJune 30, 20102011 and 2009,2010, respectively. The options, warrants and conversion rights that were exercisable in 20102011 and 20092010 were not included because the effect would be anti-dilutive due to the net loss. As a result, none of our outstanding options, warrants or conversion rights affect the calculation of diluted earnings per share. This standard update will be effective for us on January 1, 2011. Vendors often provide multiple products and/or services to their customers as part of a single arrangement. These deliverables may be provided at different points in time or over different time periods. The existing guidance regarding how and whether to separate these deliverables and how to allocate the overall arrangement consideration to each was originally captured in EITF Issue No. 00-21,Revenue Arrangements with Multiple Deliverables, which is now codified at ASC 605-25,Revenue Recognition – Multiple-Element Arrangements. The issuance of ASU 2009-13 amends ASC 605-25 and represents a significant shift from the existing guidance that was considered abuse-preventative and heavily geared toward ensuring that revenue recognition was not accelerated. The application of this new guidance is expected to result in accounting for multiple-deliverable revenue arrangements that better reflects their economics as more arrangements will be separated into individual units of accounting. We are currently evaluating theOur adoption of ASU No. 2009-13 did not have a material impact of adopting ASU 2009-13.on our consolidated financial statements. This standard update will be effective for us on January 1, 2011. ASU 2009-14 modifies the existing scope guidance in ASC 985-605,Software Revenue Recognition, for revenue arrangements with tangible products that include software elements. This modification was made primarily due to the changes in ASC 605-25 noted previously, which further differentiated the separation and allocation guidance applicable to non-software arrangements as compared to software arrangements. Prior to the modification of ASC 605-25, the separation and allocation guidance for software and non-software arrangements was more similar. Under ASC 985-605, which was originally issued as AICPA Statement of position 97-2,Software Revenue Recognition, an arrangement to sell a tangible product along with software was considered to be in its scope if the software was more than incidental to the product as a whole. Our adoption of ASU No. 2009-14 did not have a material impact on our consolidated financial statements.are currently evaluatingadopted the impactnew disclosure provisions with the filing of adopting ASU 2009-14.C.RESTRUCTURING CHARGESIn the third quarter of 2010 we made a decision to consolidate our research and development activities in Omaha, Nebraska. We expect to substantially complete the transition by December 31, 2010. We have recognized expenses for restructuring, including but not limited to, severance, facility costs and costs to move equipment from Gaithersburg, Maryland to Omaha, Nebraska. These restructuring charges are attributable to our lab services and instrument segments.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Nine Months Ended September 30, 2010 and 2009Restructuring charges include: Dollars in Thousands Costs Incurred in the
Three Months Ended
September 30, 2010 Cumulative Costs
Incurred at
September 30, 2010 Total
Expected Costs $ 40 $ 40 $ 53 24 24 63 8 8 66 $ 72 $ 72 $ 182 Liabilities recordedForm 10-Q for the consolidation of our Gaithersburg, Maryland facility for the third quarter of 2010 consist of the following: Dollars in Thousands Balance at
June 30, 2010 Costs Incurred and
Charged to Expense Costs Paid or
Otherwise
Settled Changes in
Estimates Balance at
September 30, 2010 $ — $ 40 $ — $ — $ 40 — 24 (8 ) — 16 — 8 (8 ) — — $ — $ 72 $ (16 ) $ — $ 56 D.C. INVENTORIES Dollars in Thousands September 30,
2010 December 31,
2009 $ 2,167 $ 2,322 1,590 1,588 421 149 4,178 4,059 (520 ) (507 ) $ 3,658 $ 3,552 Dollars in Thousands Finished goods $ 1,940 $ 2,119 Raw materials and work in process 1,544 1,531 Demonstration inventory 345 212 $ 3,829 $ 3,862 Less allowance for obsolescence (520 ) (518 ) Total $ 3,309 $ 3,344 NineSeptemberJune 30, 20102011 and 20092010E.D. INTANGIBLES AND OTHER ASSETS Finite lived Dollars in Thousands September 30, 2010 December 31, 2009 Cost Accumulated
Amortization Net Book
Value Cost Accumulated
Amortization Net Book
Value $ 290 $ 273 $ 17 $ 310 $ 284 $ 26 531 251 280 598 241 357 164 — 164 200 — 200 $ 985 $ 524 $ 461 $ 1,108 $ 525 $ 583 Dollars in Thousands June 30, 2011 December 31, 2010 Cost Cost Intangibles—acquired technology $ 6,535 $ 455 $ 6,080 $ 6,535 $ — $ 6,535 Intangibles—assay royalties 1,434 103 1,331 1,434 — 1,434 Intangibles—third party payor relationships 367 — 367 367 — 367 Intangibles—tradenames and trademarks 344 25 319 344 — 344 Patents 665 256 409 511 245 266 Intellectual property 20 4 16 290 274 16 $ 9,365 $ 843 $ 8,522 $ 9,481 $ 519 $ 8,962 Estimated Useful Life Intellectual property 10 years Patents 7 years Intangibles—acquired technology 7 – 8 years Intangibles—third party payor relationships Indefinite Intangibles—assay royalties 7 years Intangibles—tradenames and trademarks 7 years U.S.US security deposits and deferred tax assets.and nine months ended SeptemberJune 30, 2011 and 2010, respectively. Amortization expense for intangible assets was $0.6 million and 2009,less than $0.1 million during the six months ended June 30, 2011 and 2010, respectively. Amortization expense for intangible assets is expected to be $1.2 million in each of the years 2011 through 2017.E. DEBT Dollars in Thousands June 30,
2011 December 31,
2010PGxHealth note payable (1) $ 8,640 $ 8,640 PGxHealth note payable (2) 494 989 $ 9,134 $ 9,629 (1) The First Note is a three year senior secured promissory note to PGxHealth, LLC entered into on December 29, 2010 in conjunction with our acquisition of the FAMILION family of genetic tests from PGxHealth. Interest is payable at 10% per year with quarterly interest payments through March 29, 2012. Thereafter, quarterly installments will include both principal and interest through December 30, 2013. (2) The Second Note is a one year senior secured promissory note to PGxHealth, LLC entered into on December 31, 2010 for facility improvements made to the CLIA certified laboratory in New Haven, Connecticut. Interest is payable at 6.5% per year with the principal and interest payable in twelve monthly installments with the final payment due on December 31, 2011. $0.1 million$6,000,000, then we shall, upon the consummation of such equity financing, pay to PGxHealth the lesser of: (i) 25% of the gross proceeds received from such financing; and (ii) the then-outstanding balance under the First Note. Under the terms of the Second Note, in the event of a sale of all or substantially all of the assets of the Company, we shall pay PGxHealth the lesser of: (i) 100% of the proceeds, less certain fees, received pursuant to such sale; and (ii) the then-outstanding balance under the Second Note.2010 and thereafter. During the nine months ended Septemberfollowing June 30, 2010 we abandoned patents of $0.1 million.2011 are as follows:2011 $ 1,728 2012 3,703 2013 3,703 $ 9,134 F.F. CAPITAL LEASES Dollars in Thousands Asset Balances at Classes of Property Equipment $ 784 $ 394 Less: Accumulated amortization (78 ) (13 ) Total $ 706 $ 381 Dollars in Thousands 2011 $ 145 2012 224 2013 209 2014 35 Total minimum lease payments $ 613 Less: Amount representing interest (94 ) Present value of net minimum lease payments $ 519 G. COMMITMENTS AND CONTINGENCIES $0.3 million in 2010, $0.6 million in 2011, $1.1 million in 2012, $0.6 million in 2013, $0.4 million in 2014 , $0.4million in 2015 and $0.3 million in 2012, less than $0.12016. Rent expense for the three months ended June 30, 2011 and 2010 was $0.3 million in each of the years 2013 through 2016.and $0.2 million, respectively. Rent expense for each of the three sixSeptemberJune 30, 2011 and 2010 was $0.5 million and 2009 was $0.2 million. Rent expense for each of the nine months ended September 30, 2010 and 2009 was $0.6 million.2011.2012. The employment agreement provides that Mr. Tuttle will be entitled to receive a severance paymentspayment from the Company if his employment is terminated involuntarily except if such termination is based on “just cause”, as that term is defined in thehis employment agreement. The severance payment payable in the event of involuntary termination without just cause is equal to his annual base salary at the time of termination and will be paid over a twelve-month period. The employment agreement provides that the severance payment provisionsprovision will be honored if the Company is acquired by, or merged into, another company and his position is eliminated as a result of such acquisition or merger. In addition we have one employee who is entitled to a severance payment of less than $0.1 million if the employee’s position is eliminated prior to July 2012.SeptemberJune 30, 2010,2011, firm commitments to vendors to purchase components used in WAVE Systems and instruments manufactured by others totaled $0.3$1.3 million.G.H. INCOME TAXES 2009.2010. We have state income tax returns subject to examination primarily for tax years 20062007 through 2009.2010. Open tax years related to foreign jurisdictions remain subject to examination. Our primary foreign jurisdiction is the United Kingdom which has open tax years for 20062007 through 2009.expensebenefit for the ninesix months ended SeptemberJune 30, 20102011 was $0.1 million.a benefit $0.1 million. This is the result of the change in deferred tax assets and liabilities reported in financial statements of our subsidiary outside the U.S. ThisWe believe the tax benefit recorded will be offset in future periods by a tax expenseTRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Nine Months Ended September 30, 2010 and 2009includes state and franchise taxes as well as reserves for uncertain related to income taxes.reported in financial statements of our subsidiary outside the U.S. Income tax benefitexpense for the nineSeptemberJune 30, 20092010 was less than $0.1 million. The effective tax rate for the ninesix months ended SeptemberJune 30, 20102011 is (4.84)%1.14% which is primarily the result of valuation allowances against the net operating lossesNet Operating Losses for the U.S. partially adjusted by permanent differences related to intercompany foreign currency exchange of our subsidiary outside.U.S. The effective tax rate for the ninethree and six months ended SeptemberJune 30, 2009 was 5.27%.During the three2011 nine months ended September 30, 2010, there were no material changes to the liability for uncertain tax positions.H.I. EMPLOYEE BENEFIT PLAN currently match the employee’s contributions at the rate of 50% on the first 6% of contributions. We may, at the discretion of our Board of Directors, make additional contributions on behalf of the Plan’s participants. Contributions to the 401(k) plan were less than $0.1 million for each of the three and ninesix months ended SeptemberJune 30, 2010. No contributions were made in the three and 2009.six months ended June 30, 2011 due to cost saving initiatives.I.J. STOCKHOLDERS’ EQUITY ninesix months ended SeptemberJune 30, 20102011 or 2009.2010. At SeptemberJune 30, 2010,2011, there were warrants outstanding which were exercisable to purchase 7,978,1565,572,408 shares of common stock. Issue Year Expiration Underlying Shares Exercise Price 2005 Oct. 2010 6,903,156 $ 1.20 2003 Dec. 2010 200,000 $ 1.92 2003 Dec. 2010 200,000 $ 2.07 2003 Dec. 2010 150,000 $ 2.35 2004 Feb. 2011 125,000 $ 2.57 2004 Aug. 2011 400,000 $ 1.18 7,978,156 We are released from the liability when the stock warrants expire.Warrant Holder Issue Year Expiration Laurus Master Fund, Ltd. (1) 2004 August 2011 400,000 $ 1.13 Affiliates of Third Security, LLC (2) 2010 December 2015 5,172,408 $ 0.58 Total 5,572,408 (1)These warrants were issued in conjunction with a private placement of common stock in October 2005.(2)(1)These warrants were issued in conjunction with two loans that had been made to us by Laurus Master Fund, Ltd. (the “Laurus Loans”), and subsequent modifications of these loans. In conjunction with the 2005 private placement, the exercise prices of these warrants were adjusted according to repricing provisions contained in the original warrant agreements. While the Laurus Loans have been terminated, the warrants remain outstanding. Due to(2) These warrants were issued in conjunction with the repricing provision, these warrants are considered liabilities for financial reporting purposes. We have assessed and determinedSeries A Convertible Preferred Stock financing (the “Financing”) with certain entities affiliated with Third Security, LLC (the “Investors”). The number of shares shown reflects the fair value is $0.post conversion shares.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Nine Months Ended September 30, 2010 and 2009series ofadditional 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 additional preferred stock issued by the Company could have an adverse effect on the rights of the holders of the common stock.J.K. FAIR VALUE Dollars in Thousands For the six months ended June 30, 2011 Preferred
Stock
Warrant
Liability Total Beginning balance at April 1, 2011 $ 5,078 $ 1,283 $ 6,361 Total gains or losses: Recognized in earnings 2,522 1,717 4,239 Balance at June 30, 2011 $ 7,600 $ 3,000 $ 10,600 Dollars in Thousands For the six months ended June 30, 2011 Warrants Total Beginning balance at January 1, 2011 $ 1,983 $ 2,351 $ 4,334 Total gains or losses: Recognized in earnings 5,617 649 6,266 Balance at June 30, 2011 $ 7,600 $ 3,000 $ 10,600 L. STOCK OPTIONS ninesix months ended SeptemberJune 30, 2010: Number of
Options Weighted Average
Exercise Price 3,331,731 $ 2.39 75,000 .58 (100,000 ) (.42 ) (553,500 ) (.75 ) (133,231 ) (12.50 ) 2,620,000 $ 2.24 2,363,334 $ 2.42 Balance at January 1, 2011 2,565,001 $ 2.11 Granted 2,335,500 1.17 Exercised (10,000 ) (0.70 ) Forfeited (227,001 ) (2.06 ) Cancelled (349,500 ) (6.67 ) Balance at June 30, 2011 4,314,000 $ 1.22 Exercisable at June 30, 2011 2,587,715 $ 1.30 ninesix months ended SeptemberJune 30, 2010,2011, we granted options exercisable to purchase 75,0002,335,500 shares of common stock at a weighted average exercise price of $0.58$1.17 under our 2006 Equity Incentive Plan.K.M. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION segments.SeptemberJune 30, 20102011 and 20092010 is as follows: Dollars in Thousands 2010 2009 Instrument
Business Lab
Services Total Instrument
Business Lab
Services Total $ 3,155 $ 1,264 $ 4,419 $ 3,852 $ 1,194 $ 5,046 1,849 168 2,017 2,229 524 2,753 (30 ) (797 ) (827 ) 70 (470 ) (400 ) 71 — 71 (34 ) — (34 ) $ (101 ) $ (797 ) $ (898 ) $ 104 $ (470 ) $ (366 ) 47 77 124 92 74 166 38 34 72 — — — — — — 1 — 1 Dollars in Thousands 2011 2010 Total Total Net Sales $ 4,866 $ 2,801 $ 7,667 $ 1,241 $ 3,854 $ 5,095 Gross Profit 3,064 1,491 4,555 418 2,069 2,487 Net Loss before Taxes (5,743 ) (359 ) (6,102 ) (506 ) (551 ) (1,057 ) Income Tax Expense (Benefit) — (104 ) (104 ) — 89 89 Net Loss $ (5,743 ) $ (255 ) $ (5,998 ) $ (506 ) $ (640 ) $ (1,146 ) Depreciation/Amortization 444 46 490 73 48 121 Restructure — 11 11 — — — Interest Income (Expense) (240 ) — (240 ) — 1 1 Dollars in Thousands 2011 2010 Total Total Net Sales $ 8,623 $ 6,525 $ 15,148 $ 2,512 $ 8,025 $ 10,537 Gross Profit 4,850 3,892 8,742 901 4,470 5,371 Net Loss before Taxes (9,278 ) 392 (8,886 ) (1,118 ) (313 ) (1,431 ) Income Tax Expense (Benefit) — (110 ) (110 ) — 38 38 Net Loss $ (9,278 ) $ 502 $ (8,776 ) $ (1,118 ) $ (351 ) $ (1,469 ) Depreciation/Amortization 872 95 967 152 104 256 Restructure — 35 35 — — — Interest Income (Expense) (473 ) (5 ) (478 ) — 1 1 6/30/2011 6/30/2010 Total Assets $ 22,621 $ 8,079 $ 30,700 $ 7,395 $ 7,051 $ 14,446 Dollars in Thousands Dollars in Thousands Three Months Ended Six Months Ended June 30, June 30, 2011 2010 2011 2010 Laboratory Services: Molecular Clinical Reference Laboratory $ 3,864 $ 931 $ 7,351 $ 1,873 Pharmacogenomics Research Services 1,002 310 1,272 639 4,866 1,241 8,623 2,512 Instrument Related Business: Bioinstruments 1,319 2,217 3,157 4,569 Bioconsumables 1,482 1,637 3,368 3,456 2,801 3,854 6,525 8,025 Total Net Sales $ 7,667 $ 5,095 $ 15,148 $ 10,537 NineSeptemberJune 30, 20102011 and 2009Segment information for the nine months ended September 30, 2010 and 2009 is as follows: Dollars in Thousands 2010 2009 Instrument
Business Lab
Services Total Instrument
Business Lab
Services Total $ 11,180 $ 3,776 $ 14,956 $ 11,794 $ 3,714 $ 15,508 6,320 1,068 7,388 6,692 1,525 8,217 (343 ) (1,915 ) (2,258 ) (451 ) (1,712 ) (2,163 ) 109 — 109 (114 ) — (114 ) $ (452 ) $ (1,915 ) $ (2,367 ) $ (337 ) $ (1,712 ) $ (2,049 ) 151 229 380 352 207 559 38 34 72 — — — 1 — 1 10 4 14 September 30, 2010 September 30, 2009 $ 7,072 $ 6,865 $ 13,937 $ 8,686 $ 6,669 $ 15,355 Net sales by product were as follows: Dollars in Thousands Dollars in Thousands Three Months Ended
September 30, Nine Months Ended
September 30, 2010 2009 2010 2009 $ 1,356 $ 1,999 $ 5,925 $ 6,215 1,799 1,853 5,255 5,579 3,155 3,852 11,180 11,794 918 923 2,790 2,886 346 271 986 828 1,264 1,194 3,776 3,714 $ 4,419 $ 5,046 $ 14,956 $ 15,508 Dollars in Thousands Dollars in Thousands Three Months Ended
September 30, Nine Months Ended
September 30, 2010 2009 2010 2009 $ 532 $ 526 $ 2,487 $ 2,167 774 1,097 2,373 2,935 1,306 1,623 4,860 5,102 670 479 1,631 1,607 426 191 1,077 582 1,096 670 2,708 2,189 $ 2,402 $ 2,293 $ 7,568 $ 7,291 Dollars in Thousands Dollars in Thousands Three Months Ended Six Months Ended June 30, June 30, 2011 2010 2011 2010 Laboratory Services: Molecular Clinical Reference Laboratory $ 1,435 $ 495 $ 3,023 $ 957 Pharmacogenomics Research Services 367 328 750 654 1,802 823 3,773 1,611 Instrument Related Business: Bioinstruments 585 1,024 1,107 1,956 Bioconsumables 725 761 1,526 1,599 1,310 1,785 2,633 3,555 Total Cost of Goods Sold $ 3,112 $ 2,608 $ 6,406 $ 5,166 TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Nine Months Ended September 30, 2010 and 2009ninesix months ended SeptemberJune 30, 20102011 and 20092010 by country were as follows: Dollars in Thousands Dollars in Thousands Three Months Ended
September 30, Nine Months Ended
September 30, 2010 2009 2010 2009 $ 2,082 $ 1,920 $ 6,483 $ 6,254 813 913 2,300 2,676 209 386 812 1,175 194 441 1,099 973 4 — 778 — 224 �� 230 991 666 893 1,156 2,493 3,764 $ 4,419 $ 5,046 $ 14,956 $ 15,508 Dollars in Thousands Dollars in Thousands Three Months Ended Six Months Ended June 30, June 30, 2011 2010 2011 2010 United States $ 5,669 $ 2,070 $ 10,705 $ 4,401 Italy 785 721 1,611 1,487 United Kingdom 233 200 491 767 France 225 359 413 604 Germany 182 345 394 905 United Arab Emirates — 774 — 774 All Other Countries 573 626 1,534 1,599 Total $ 7,667 $ 5,095 $ 15,148 $ 10,537 Approximately 80%L.N. SUBSEQUENT EVENTS On October 27, 2010 6,903,156 common stock warrants to various institutional holders expired unexercised.been awarded a federal grant under the Qualifying Therapeutic Discovery Project Program relatedno material subsequent events to 2009 projects. Netbe disclosed.Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations income(loss)income (loss), receivables, operating expenses, supplier pricing, availability and prices of raw materials, Medicare/Medicaid/Insurance reimbursements, product pricing, foreign currency exchange rates, sources of funding operations and acquisitions, our ability to raise funds, sufficiency of available liquidity, future interest costs, future economic circumstances, industry conditions, our ability to execute our operating plans, the success of our cost savings initiatives, competitive environment and related market conditions, actions of governments and regulatory factors affecting our business and other risks as described in our reports filed with the Securities and Exchange Commission. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions.2009.2010. Results for the quarter ended SeptemberJune 30, 20102011 are not necessarily indicative of results that may be attained in the future.provides innovative products for the purification and analysis of nucleic acids usedis a global biotechnology company specializing in the life sciences industry for research focused on molecular genetics and diagnostics. We also providehigh sensitivity genetic variation analyticaland mutation analysis, providing products and services to the medicalin DNA mutation detection and discovery for clinical research, clinical molecular diagnostics and pharmacogenomics analyses.markets. Net sales are categorized as Instrument Related Business and Laboratory Services.• flagshipproprietary product is the WAVE® System which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There is a worldwide installed base of nearlyover 1,500 WAVE Systems as of SeptemberJune 30, 2010.2011. We also distribute bioinstruments produced by other manufacturers (“OEM Equipment”) through our sales and distribution network. Service contracts to maintain installed systems are sold and supported by our technical support personnel.• third-party installedOEM platforms generate a demand for consumables that are required for the continued operation of the bioinstruments. We develop, manufacture and sell these consumable products. In addition, we manufacture and sell consumable products that can be used on multiple, independent platforms. These products include SURVEYOR® Nuclease and a range of HPLC separationchromatography columns.Laboratory Services:Molecular Clinical Reference Laboratory. The molecular clinical reference laboratory specializes in mitochondrial and molecular diagnostic testing including genetic testing for oncology, hematology and inherited disorders. Located in Omaha, Nebraska the molecular clinical reference laboratory operates in a Good Laboratory Practices compliant environment and is certified under the Clinical Laboratory Improvement Amendment (CLIA) as a high complexity lab and is accredited by CAP (CollegePharmacogenomics Research Services. Pharmacogenomics research services are provided by our Contract Research Organization located in Omaha, Nebraska. It specializes in pharmocogenomic, biomarker and mutation discovery research serving the pharmaceutical and biomedical industries world-wide for disease research, drug and diagnostic development and clinical trial support.Although we have experienced recurring net losses (resulting in an accumulated deficit of $132.6 million at September 30, 2010) management believes existing sources of liquidity, including cash and cash equivalents of $4.6 million, are sufficient to meet expected cash needs during 2010. We will need to increase net sales in order to meet our liquidity needs on a long-term basis. If we cannot increase net sales, further reductions to operating expenses will be needed. In future periods, there is no assurance that we will be able to increase net sales or further reduce expenses and, accordingly, we may not have sufficient sources of liquidity to continue operations indefinitely.ninesix months ended SeptemberJune 30, 2010 were down 4%2011 increased by $4.6 million or 44% compared to the same period in 2009.2010. These results include the FAMILION acquisition in our Laboratory Services segment. During the six months ended June 30, 2011, net sales from Laboratory Services increased by $6.1 million compared to the same six month period in 2010. The Clinical Reference Laboratory increase is a result of the revenue of $5.1 million related to the FAMILION acquisition. Net sales from Pharmacogenomics Research Services increased by $0.6 million. Net sales in our Instrument Related Business were down 5%19% or $0.6$1.5 million for the ninesix months ended SeptemberJune 30, 20102011 compared to the same period in 2009.2010. Net sales from bioinstruments were down 5%31% and net sales of consumables were down 6%3% for the comparable ninesix month periods. During the nine months ended September 30, 2010, net sales from Laboratory Services were up 2% compared to the same nine month period in 2009. The Clinical Reference Laboratory decreased 3% and net sales from Pharmacogenomics Research Services increased by 19%.decreased by 4%increased from ninesix months ended SeptemberJune 30, 2010 compared to the same period in 2009. The Instrument Related Business gross margin was flat at 57% for each of the nine months ended in 2010 and 2009. Laboratory Services gross margin decreased from 41% gross profit in the nine months ended September 30, 2009 to 28%58% for the same period in 2011. Laboratory Services gross margin increased from 36% in the six months ended June 30, 2010 to 56% for the same period in 2011. Loss from operations was $2.4 million for the six months ended June 30, 2011 compared to $1.4 million for the six months ended June 30, 2010.Net loss was $2.4Within this business our pharmacogenomics research services grew 223% to $1.0 million for the nine months ended September 30, 2010 compared to net losssecond quarter of $2.02011. Testing volume and revenues increased in both our Neurology lab business and in our FAMILION product group with sales of $1.2 million for Neurology and $2.6 million for FAMILION. The FAMILION tests are an important means of identifying cardiac channelopathies, potentially life threatening defects in the nineheart. Both doctors and patients recognize the benefit that these tests provide in at risk populations, and we expect to continue to expand this franchise.ended September 30, 2009.OutlookIn addition to Ice COLD-PCR, which offers sensitivity improvements as much as instrumentsinstrument technology and related expertise in our two laboratory services businesses. We anticipate continued growth in bothhaving some success withexpanding our opportunities by selling systems into new geographic areas, including the Middle East and Asia, to continue the revenue from our instrument related business segment. We also continue to looksell OEM instruments worldwide for emergingpre-analytical karyotyping automation and to select markets and novel applicationsin Europe for Image Analysis.provide us with new opportunities for our WAVE System such as our newly launched K-RAS mutation detection kit. During the third quarter we completed the requirements for CE IVD labelingadvance. Market validation trials of our SURVEYOR® ScanBRAF and PIK3CA kits were begun this quarter. Further, we made significant progress in applying these kits, along with our CE-IVD marked K-RAS mutation detection kit, and have significantly expanded distribution throughout most of the European Unionto a high-throughput OEM analyzer that will be marketed as a result. We intend tocomplete system.including the personalized medicine market (particularlyparticularly in oncology),oncology, where the sensitivities of our technologies are essential. As discussed below, a recently licensed technology that could provide the highest sensitivity available in the marketplace is being refined for usesignificant clinical benefit. We have also embarked on our Wave Systems. In addition, we are also selling refurbished WAVE Systems in order to allow an opportunity for customers who may not be able to afford the full cost of a new system to purchase and utilize our WAVE technology. Additionally, we have developed credibility and momentum with third-party platforms that will allow us to leverage our direct sales force and distribution network.On the Laboratory Services front, we have completed cancer pathway gene mutation projects for a number of high visibility pharmaceutical companies which have continued to demonstrate the unique sensitivity of detecting DNA mutations in cancer genes which are central to effective therapy selection for current and future cancer therapeutics. To this end, we are now gaining clinical trial program contracts which we believe will more rapidly impact our revenue opportunities from this segment. To compliment our mutation detection expertise, we also have strengthened our capabilities in biomarker development and mutation detection in novel cancer pathway genes which will aid in the development of true personalized medicine for our pharmaceutical partners. We recently licensed and are developing a new technology for even greater DNA mutation enrichment and detection sensitivity which could prove to be the highest sensitivity technology in the market. In our Molecular Clinical Reference Laboratory we have continued to seek out or develop new testsseveral academic collaborations to further expandvalidate our menunewest technologies and growth opportunitiesbetter determine how they can and will be used in clinical settings for this business, including a test that would determine the likelihood of the sibling of an autistic child also developing autism.Uncertaintiesexpenses and other cash needs.expenses. While we have been able to historically finance our operating losses through borrowings or from the issuance of additional equity, there is the risk that we may not be able to obtain such funding indue to the future.tightened credit markets. At SeptemberJune 30, 20102011 we had cash and cash equivalents of $4.6 million.$2.6 million. We do believe that existing sources of liquidity are sufficient to meet expected cash needs intoduring 2011. foreign currency revaluation risk which occurs when a transaction occurstransactions are done in a currency other than the entity’s “functional currency”.British Pound Sterling. These transactions must be revalued within the Transgenomic, Limited ledger, whose functional currency is the British Pound Sterling. The majority of our international salesthe transactions on this ledger are transacted in the euro, which must be first converted into British pound sterling, and then into U.S. dollars. At January 1, 2009 the EuroEuro. As a result we are subject to Great British Pound exchange rate was .9690 as compared to the September 30, 2010 rate of .8613. The Great British Pound to U.S. Dollar exchange rate was 1.4501 at January 1, 2009 compared to 1.5809 at September 30, 2010.risk. Fluctuations in the foreign exchange rates could impactcause our business results. Foreign currency revaluation adjustments decreased operating expenses and net loss by $0.2 million and $0.1 million for the three months ended September 30, 2010 and 2009, respectively and foreign currency revaluation adjustments increased operating expenses and net loss by $0.3 million during each of the nine months ended September 30, 2010 and 2009.Continuing OperationsSeptemberJune 30, 20102011 and 20092010 Dollars in Thousands Three Months Ended
September 30, Change 2010 2009 $ % $ 1,356 $ 1,999 $ (643 ) (32 )% 1,799 1,853 (54 ) (3 )% 3,155 3,852 (697 ) (18 )% 918 923 (5 ) (1 )% 346 271 75 28 % 1,264 1,194 70 6 % $ 4,419 $ 5,046 $ (627 ) (12 )% Dollars in Thousands Three Months Ended June 30, Change 2011 2010 $ % Laboratory Services: Molecular Clinical Reference Laboratory $ 3,864 $ 931 $ 2,933 315 % Pharmacogenomics Research Services 1,002 310 692 223 % 4,866 1,241 3,625 292 % Instrument Related Business: Bioinstruments 1,319 2,217 (898 ) (41 )% Bioconsumables 1,482 1,637 (155 ) (9 )% 2,801 3,854 (1,053 ) (27 )% Total Net sales $ 7,667 $ 5,095 $ 2,572 50 % customers that may not be able to afford new systems.additional customers. Bioinstrument net sales are down $0.6decreased $0.9 million, or 32%41%, during the three months ended SeptemberJune 30, 20102011 as compared to the same period in 2009.2010. The decrease in bioinstrument net sales was due to changesfewer instruments sold in the product mixsecond quarter of 2011. We sold duringone WAVE instrument in the secondquarter as well as fewer instruments sold. No OEM instruments were sold in 2010of 2011 compared to 14 in the second quarter of 2010. Demand for WAVE Systems has been affected by significant competitive challenges from traditional (i.e. sequencing) and evolving technologies. We sold one OEM saleinstrument in the thirdsecond quarter of 2009. We sold four WAVE instruments2011 compared to zero in the third quarter 2010 as compared to five WAVE instruments in the thirdsecond quarter of 2009. The average sales price was higher in the third quarter of 2009 due to the geographic location of the sales. Service contract sales were flat during the three months ended September 30, 2010 as compared to the same period in 2009. Parts, freight and miscellaneous income was lower by $0.1 million in the third quarter of 2010 as compared to the same period in 2009.less than $0.19% or $0.2 million or 3%, during the three months ended SeptemberJune 30, 20102011 compared to 2009. This decrease is related to2010. The United States and Europe had lower sales volumevolumes in our European markets.Net salesthe second quarter of Laboratory Services increased 6% during the three months ended September 30, 2010 compared to 2009. Laboratory Services sales includes both the Molecular Clinical Reference Laboratory Services and the Pharmacogenomics Research Services. The Molecular Clinical Reference Laboratory Services net sales were down 1%2011 compared to the three months ended September 30, 2009. The Molecular Clinical Reference Laboratory average revenue per test has decreased by 4% due to the mix of tests performed and increased Medicare and Medicaid test volumes which generates lower reimbursement for these tests. The decrease in average revenue per test is offset by a 4% increase in sales volume. The Pharmacogenomics Research Services net sales of $0.3 million during the three months ended September 30, 2010 was up 28% compared to 2009. The increase in Pharmacogenomics Research Services net sales is largely due to an increase in the number of customers for the thirdsecond quarter of 2010 compared to 2009. The Pharmacogenomics Research Services net sales have peaks due to the project related nature of the business. Each period for Pharmacogenomics Research Services should be considered on a stand alone basis and is not indicative of future net sales. Dollars in Thousands Three Months Ended
September 30, Change 2010 2009 $ % $ 532 $ 526 $ 6 1 % 774 1,097 (323 ) (29 )% 1,306 1,623 (317 ) (20 )% 670 479 191 40 % 426 191 235 123 % 1,096 670 426 64 % $ 2,402 $ 2,293 $ 109 5 % Dollars in Thousands Three Months Ended June 30, Change 2011 2010 $ % Laboratory Services: Molecular Clinical Reference Laboratory $ 1,435 $ 495 $ 940 190 % Pharmacogenomics Research Services 367 328 39 12 % 1,802 823 979 119 % Instrument Related Business: Bioinstruments 585 1,024 (439 ) (43 )% Bioconsumables 725 761 (36 ) (5 )% 1,310 1,785 (475 ) (27 )% Costs of Goods Sold $ 3,112 $ 2,608 $ 504 19 % $2.0$4.6 million million or 46%59% of total net sales during the thirdsecond quarter of 2010,2011, compared to $2.8$2.5 million or 55%49% during the same period of 2009. Margins on the instrument related business are up by 1% compared to the same period in 2009. The bioinstrument margin decreased from 74% in the three months ended September 30, 2009 to 61% in the same period of 2010. This decrease is driven by the composition of products sold and fewer instruments sold in the third quarter of 2010. Margins on bioconsumables increased from 41% for the three months ended September 30, 2009 to 57% in the same period of 2010. During the three months ended SeptemberJune 30, 2010,2011, the gross margin for the Laboratory Services was 13%63% as compared to 44%34% in the same period of 2009.2010. The gross margin on the Clinical Reference Laboratory was 27%63% for the thirdsecond quarter of 20102011 compared to 48%47% for the thirdsecond quarter of 2009.2010. The three months ended June 30, 2011 include the business acquired in the acquisition of the FAMILION family of genetic tests. Pharmacogenomics gross margin decreasedincreased from 30%negative 6% for the three months ended SeptemberJune 30, 20092010 to a negative 23%63% for the three months ended SeptemberJune 30, 2010. These decreases are due2011. Pharmacogenomics has a relatively fixed cost base so the increase in revenue directly impacts margins. The bioinstrument margin increased from 54%staff added along with higher operating supplies cost.56% in the same period of 2011. Margins on bioconsumables decreased from 54% to 51% in 2011.Excluding foreign currency revaluation gains or losses,Our selling, general and administrative costs increased $2.6 million from $3.0 million to $5.6 million during the three month period ended June 30, 2011 compared to the same period in 2010. The primary increase in our selling, general and administrative costs is due to the acquisition of the FAMILION family of genetic tests of $1.2 million. In addition, we had $0.8 million in expense related to the vesting of the employee stock option grants, bad debt charges of $0.7 million and amortization of acquired intangible assets of $0.3 million. Foreign currency revaluation loss for the three months ended June 30, 2011were down less than $0.1 million compared to the same period of 2009. Foreign currency revaluation gains in the three months ended September 30, 2010 were $0.2 million compared to $0.1$0.4 million in revaluation gainsloss for the three months ended SeptemberJune 30, 2009.2010thirdsecond quarter of 20102011 and 20092010 these costs totaled $0.6$0.6 million and $0.9$0.5 million, respectively. The 2009 research and development costs included collaboration expenses with the Dana-Farber Cancer Institute related to the development of high sensitivity mutation detection technology called COLD-PCR (coamplification at lower denaturation temperature PCR).14%8% and 19%10% of net sales during the three months ended SeptemberJune 30, 2011 and 2010, respectively. The decrease as a percentage of net sales is due primarily to the consolidation of our research and 2009, respectively. income consists primarily of interest income from cash and cash equivalents invested in overnight instruments. Other expense during the three months ended September 30, 2010 and 2009 was less than $0.1 million for each period.Income Tax Expense (Benefit). Income tax expense for the three months ended SeptemberJune 30, 20102011 includes the expense on preferred stock which is due to the increase in fair value of the Preferred Stock conversion feature and warrants. This is a non-cash item.less thana benefit of $0.1 million. This is the result of the change in deferred tax assets and liabilities reported in the financial statements of our subsidiary outside the U.S. This tax benefit is partially offset by tax expense includesrelated to state and franchise taxes as well as reserves for uncertain income taxes. We believe the tax benefit recorded will be offset in future periods by a tax expense, related to income reported in financial statements of our subsidiary outside the U.S. Income tax benefit for the three months ended SeptemberJune 30, 20092010 was less than $0.1 million.Continuing OperationsNineSix Months Ended SeptemberJune 30, 20102011 and 20092010 Dollars in Thousands Nine Months Ended
September 30, Change 2010 2009 $ % $ 5,925 $ 6,215 $ (290 ) (5 )% 5,255 5,579 (324 ) (6 )% 11,180 11,794 (614 ) (5 )% 2,790 2,886 (96 ) (3 )% 986 828 158 19 % 3,776 3,714 62 2 % $ 14,956 $ 15,508 $ (552 ) (4 )% Dollars in Thousands Six Months Ended June 30, Change 2011 2010 $ % Laboratory Services: Molecular Clinical Reference Laboratory $ 7,351 $ 1,873 $ 5,478 292 % Pharmacogenomics Research Services 1,272 639 633 99 % 8,623 2,512 6,111 243 % Instrument Related Business: Bioinstruments 3,157 4,569 (1,412 ) (31 )% Bioconsumables 3,368 3,456 (88 ) (3 )% 6,525 8,025 (1,500 ) (19 )% Total Net sales $ 15,148 $ 10,537 $ 4,611 44 % customers that may not be able to afford new systems.additional customers. Bioinstrument net sales are down $0.3decreased $1.4 million, or 5%31%, during the ninesix months ended SeptemberJune 30, 20102011 as compared to the same period in 2009.2010. The decrease in bioinstrument net sales was due to lower average sales pricefewer instruments sold in the ninesix months ended SeptemberJune 30, 2011. There were three OEM instruments sold in 2011 compared to five in 2010. We sold five OEMWAVE instruments in each of the nine months ended September 30, 2010 and September 30, 2009. The average sales price was lower on our OEM instruments sold2011 compared to18 in 2010 as compared to 2009. We sold twenty-two2010. Demand for WAVE Systems in the nine months ended September 30, 2010 as compared to eighteen in the nine months ended September 30, 2009,has been affected by significant competitive challenges from traditional (i.e. sequencing) and the average sales price was lower due to the geographic location of the sales. Service contract sales were down $0.1 million for the nine months ended September 30, 2010 compared to the same period of 2009 due to lower volumes in both the European and U.S. markets. Parts, freight and miscellaneous income was lower by $0.3 million in the nine months ended September 30, 2010 as compared to the same period of 2009.decreasedwere down 3% or $0.1 million during the ninesix months ended SeptemberJune 30, 20102011 compared to 2009.2010. The primary decreasevolume sold in consumables is due to lower volume in our European marketthe United States increased by $0.2 million which was offset by higher volumelower volumes in our U.S. market.Net salesEurope of Laboratory Services increased by 2% for the nine months ended September 30, 2010 compared to 2009. Sales of Laboratory Services include both the Molecular Clinical Reference Laboratory Services and the Pharmacogenomics Research Services. The Molecular Clinical Reference Laboratory Services net sales of $2.8 million represented a decrease of 3% over the nine months ended September 30, 2009. The Molecular Clinical Reference Laboratory average revenue per test has decreased by 6% due to the mix of tests performed and the increased Medicare and Medicaid test volumes which generates lower reimbursement for these tests. The decrease in average revenue per test is offset by a 3% increase in volume. The Pharmacogenomics Research Services net sales of $1.0 million during the nine months ended September 30, 2010 represented an increase of 19% from the nine months ended September 30, 2009. The increase in Pharmacogenomics Research Services is largely due to an increase in the number of clients for the nine months ended September 30, 2010 compared to the same period of 2009. The Pharmacogenomics Research Services net sales have peaks due to the project related nature of the business. Each period for Pharmacogenomics Research Services should be considered on a stand alone basis and is not indicative of future net sales. Dollars in Thousands Nine Months Ended
September 30, Change 2010 2009 $ % $ 2,487 $ 2,167 $ 320 15 % 2,373 2,935 (562 ) (19 )% 4,860 5,102 (242 ) (5 )% 1,631 1,607 24 1 % 1,077 582 495 85 % 2,708 2,189 519 24 % $ 7,568 $ 7,291 $ 277 4 % Dollars in Thousands Six Months Ended June 30, Change 2011 2010 $ % Laboratory Services: Molecular Clinical Reference Laboratory $ 3,023 $ 957 $ 2,066 216 % Pharmacogenomics Research Services 750 654 96 15 % 3,773 1,611 2,162 134 % Instrument Related Business: Bioinstruments 1,107 1,956 (849 ) (43 )% Bioconsumables 1,526 1,599 (73 ) (5 )% 2,633 3,555 (922 ) (26 )% Costs of Goods Sold $ 6,406 $ 5,166 $ 1,240 24 % $7.4$8.7 million or 49%58% of total net sales during the ninesix months ended SeptemberJune 30, 2010,2011, compared to $8.2$5.4 million or 53%51% during the same period of 2009. Margins on2010. During the Instrument Related Business were flat for the ninesix months ended SeptemberJune 30, 2010 compared to the same period in 2009. During the nine months ended September 30, 2010,2011, the gross margin for the Laboratory Services was 28%56% as compared to 41%36% in the same period of 2009.2010. The erosiongross margin on the Clinical Reference Laboratory was 59% for the six months ended June 30, 2011 compared to 49% for the same period of 2010. The six months ended June 30, 2011 include the business acquired in the acquisition of the FAMILION family of genetic tests. Pharmacogenomics gross margin is driven byincreased from negative 2% for the lower average net sales reimbursement per test duesix months ended June 30, 2010 to 41% for the six months ended June 30, 2011. Pharmacogenomics has a relatively fixed cost base so the increase in revenue directly impacts margins. The bioinstrument margin increased Medicare and Medicaid test volume and higher operating costs.Excluding foreign currency revaluation losses, which was a loss of $0.3Our selling, general and administrative costs increased from $5.5 million to $9.9 million during the six month period ended June 30, 2011 compared to the same period in each of the nine months ended September 30, 2010,2010. The primary increase in our selling, general and administrative costs decreased from $7.7 million to $7.3 million. The primary decrease is due to lower salary andthe acquisition of the FAMILION family of genetic tests. In addition, we had $0.8 million in expense related to the vesting of the employee stock option expense.grants. Foreign currency revaluation loss for the Research and development expenses were $2.0 million and $2.5 million forDuring the ninesix months ended SeptemberJune 30, 2011 and 2010 these costs totaled $1.1 millionand 2009,$1.3 million, respectively.13%7% and 16%13% of net sales during the ninesix months ended SeptemberJune 30, 2011 and 2010, respectively. The decrease is due primarily to the consolidation of our research and 2009, respectively.consists primarily of interest income from cash and cash equivalents invested in overnight instruments. Other income duringfor the ninesix months ended SeptemberJune 30, 20102011 includes an award of a federal grant under the Qualifying Therapeutic Discovery Project of $0.2 million, net of consulting fees. The expense on preferred stock is due to the increase in fair value of the Preferred Stock conversion feature and September 30, 2009 was less than $0.1 million for each period.warrants. This is a non-cash item.expensebenefit for the ninesix months ended SeptemberJune 30, 20102011 was a benefit of $0.1 million. This is the result of the change in deferred tax assets and liabilities reported in the financial statements of subsidiariesour subsidiary outside the U.S. This tax benefit is partially offset by tax expense includesrelated to state and franchise taxes as well as reserves for uncertain income taxes. We believe the tax benefit recorded will be offset in future periods by a tax expense, related to income reported in financial statements of our subsidiary outside the U.S. Income tax benefitexpense for the ninesix months ended SeptemberJune 30, 20092010 was less than $0.1 million.SeptemberJune 30, 20102011 and December 31, 20092010 were as follows: Dollars in Thousands September 30,
2010 December 31,
2009 Change $ 12,429 $ 14,454 $ (2,025 ) 4,279 4,103 176 $ 8,150 $ 10,351 $ (2,201 ) Dollars in Thousands June 30,
2011 Change Current assets (including cash and cash equivalents of $2,639 and $3,454, respectively) $ 14,002 $ 15,034 $ (1,032 ) Current liabilities 9,905 8,253 1,652 Working capital $ 4,097 $ 6,781 $ (2,684 ) decrease at September 30, 2010 compareddecreased due to December 31, 2009 is primarily a result of our net loss of $2.4 million for the nine months ended September 30, 2010.and have no plansor to issue additional equity securities for this purpose. At SeptemberJune 30, 20102011 we had cash and cash equivalents of $4.6 million.$2.6 million. We believe that existing sources of liquidity are sufficient to meet expected cash needs into 2011. Weduring 2011, we will need to increase our net sales, and focus on receivables and inventory management or furtherthe integration of the FAMILION acquisition to reduce our operating expenses in order to be assured of meeting our liquidity needs on a long-term basis. However, we cannot assure you that we will be able to increase our net sales or further reduce our expenses, or raise further capital or equity and, accordingly, we may not have sufficient sources of liquidity to continue our operations indefinitely.NineSix Months Ended SeptemberJune 30, 20102011 and 20092010$1.1$0.8 million during the ninesix months ended SeptemberJune 30, 2010 to $4.6 million2011 compared to a decrease of $0.1$0.2 million in cash balances during the ninesix months ended SeptemberJune 30, 2009.2010. During the six months ended June 30, 2011 we used cash in investing and financing activities which was offset by cash provided in operating activities and foreign currency exchange revaluation. In 2010, net cash used in operating activities was $0.7less than $0.1 million, and $0.5$0.1 million was used in investing activities and $0.1 million impact of foreign currency exchange rates, which was offset by less than $0.1 million provided by financing activities. The impact of foreign currency exchange revaluation was nominal. In 2009 net cashwas $0.2totaled $0.1 million offset by $0.3 million of netduring the six months ended June 30, 2011, compared to cash flow used in investing activities with minimal impact of foreign currency exchange rates.Cash Flows Used in Operating Activities. Cash flows used in operating activities were $0.7 million during the nine months ended September 30, 2010, compared to cash flows provided by operating activities of $0.2less than $0.1 million during the same period of 2009. The cash flows used in operating activities in 2010 relate to the net loss of $2.4 million which is offset by the timely collection of accounts receivable of $1.0 million and noncash items of $0.5 million.2010. The cash flows provided by operating activities in 2009 primarily relate to2011 include the net loss and decrease in accounts receivable, collections of $1.5 million and noncash items of $0.8 million offset by the lossnon-cash items which include revaluation of $2.0 million.the preferred stock conversion feature and warrant liability, provision for losses on doubtful accounts and depreciation and amortization.$0.5$0.4 million during the ninesix months ended SeptemberJune 30, 20102011 compared to cash flows used in investing activities of $0.3$0.1 million during the same period of 2009.2010. Cash flows used in investing activities in 2011 include purchases of property and equipment of $0.2 million and additions to our patentsand 2009 consisted primarily of purchases of property and equipment.ProvidedUsed in Financing Activities. Cash flows used in financing activities were $0.6 million for the six months ended June 30, 2011. Cash flows used in financing activities were for payments on debt and capital lease obligations offset by Financing Activities.the issuance of common stock due to the exercise of stock options for 10,000 shares during the first quarter of 2011. Cash flows provided by financing activities were less than $0.1 million for the ninesix months ended SeptemberJune 30, 2010.2010. This resulted from the issuance of common stock due to the exercise of stock options for 100,000 shares during the second quarter of 2010. There were no cash flows provided by or used in financing activities for the nine months ended September 30, 2009.SeptemberJune 30, 20102011 and December 31, 2009,2010, 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.2009.2009.2010. There have been no changes to those accounting pronouncements listed except as noted in note B to the financial statements contained in this report.Item 4T. Controls and ProceduresItem 4. Controls and Procedures underwith the directionparticipation of our Chief Executive Officer and Interim Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such information is accumulated and communicated to our management including our Chief Executive Officer and our Interim Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on the evaluation, the Company’s Chief Executive Officer and our Interim Chief Financial Officer concluded that, as of SeptemberJune 30, 20102011, Transgenomic’s disclosure controls and procedures were effective.Change in Internal Control Over Financial Reporting. ThereWe have been noevaluated the changes in our internal control over financial reporting that occurred during the quarterthree months ended June 30, 2011 and concluded that there have not been any changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Item 1. Legal Proceedings occasionala number of claims of various amounts which arise out of the normal course of our business. In our opinion, the disposition of pending claims will not have a material adverse effect on our financial position, results of operations or cash flows.Item 1A. Risk Factors 20092010 before deciding to invest in our common stock. If any of the risks actually occur, our business, financial condition or results of operations could be negatively affected, the market price of our common stock or other securities could decline and you may lose all or part of your investment.In addition to the risks described in Item 1A of our annual report on Form 10-K for the fiscal year Ended December 31, 2009 please consider the following risks before deciding to invest in our common stock:Providers of clinical testing services may be subject to lawsuits alleging negligence or other similar legal claims. Potential suits could involve claims for substantial damages. Litigation could also have an adverse impact on our client base and reputation. We maintain liability insurance coverage for certain claims that could result from providing or failing to provide clinical testing services, including inaccurate testing results and other exposures. Our insurance coverage limits our maximum recovery on individual claims and, therefore, there is no assurance that such coverage will be adequate.20092010 are all of the ones that we currently consider material. However, they are not the only ones facing our company. Additional risks not presently known to us, or which we currently consider immaterial, may also adversely affect us. There may be risks that a particular investor views differently from us, and our analysis might be wrong. If any of the risks that we face actually occur, our business, financial condition and operating results could be materially adversely affected and could differ materially from any possible results suggested by any forward-looking statements that we have made or might make. In such case, the trading price of our common stock could decline, and you could lose part or all of your investment.We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.Item 6. Exhibits (a) Exhibits 3.1 3.1 Third Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to Registrant’s Report on Form 10-Q (Registration No. 000-30975) filed on November 14, 2005) 3.2 Amended and Restated Bylaws of the Registrant (incorporated by reference to Registrant’s Report on Form 8-K (Registration No. 000-30975) filed on May 25, 2007) 3.3 Certificate of Designation of Series A Convertible Preferred Stock dated as of December 28, 2010 (incorporated by reference to Exhibit 3.1 to Registrant’s Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) 44.1 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) 4.2 Series A convertible Preferred Stock Purchase Agreement, dated December 29, 2010, by and among Transgenomic, Inc., Third Security Senior Staff 2008 LLC, Third Security Staff 2010 LLC, and Third Security Incentive 2010 LLC (incorporated by reference to Exhibit 4.1 to Registrant’s Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) 4.3 Form of Warrant (incorporated by reference to Exhibit 4.2 to Registrant’s Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) 4.4 Registration Rights Agreement, dated December 29, 2010, by and among Transgenomic, Inc., Third Security Senior Staff 2008 LLC, Third Security Staff 2010 LLC, and Third Security Incentive 2010 LLC (incorporated by reference to Exhibit 4.3 to Registrant’s Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) 4.5 Secured Promissory Note, issued December 29, 2010 by Transgenomic, Inc. in favor of PGxHealth, LLC (incorporated by reference to Exhibit 4.4 to Registrant’s Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) 4.6 Secured Promissory Note, issued December 29, 2010 by Transgenomic, Inc. in favor of PGxHealth, LLC (incorporated by reference to Exhibit 4.5 to Registrant’s Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) 10.1 Sublease Agreement, dated December 29, 2010, by and between Transgenomic, Inc. and Clinical Data, Inc. (incorporated by reference to Exhibit 10.1 to Registrant’s Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) 10.2 Noncompetition and Nonsolicitation Agreement, dated December 29, 2010 by and among PGxHealth, LLC, Clinical Data, Inc. and Transgenomic, Inc. (incorporated by reference to Exhibit 10.2 to Registrant’s Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) 10.3 Security Agreement, dated December 29, 2010, by and between PGxHealth, LLC and Transgenomic, Inc. (incorporated by reference to Exhibit 10.3 to Registrant’s Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) 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 101.INS XBRL Instance Document * 101.SCH XBRL Taxonomy Extension Schema Document * 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document * 101.DEF XBRL Taxonomy Extension Definition Linkbase Document * 101.LAB XBRL Taxonomy Extension Label Linkbase Document * 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document * * TRANSGENOMIC, INC. Date: November 15, 2010August 12, 2011 By: 28