| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended March 31, 2012 | |
For the Quarterly Period Ended March 31, 2011
| 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 | |
|
| |
| 12325 Emmet Street, Omaha, Nebraska | 68164 | |
| (Address of principal executive offices) | (Zip Code) | |
| Large accelerated filer | o | Accelerated filer | |||||
| x | |||||||
| Non-accelerated filer | o | Smaller reporting company | |||||
71,645,725.
CURRENT ASSETS: Cash and cash equivalents Accounts receivable (net of allowances for bad debts of $716 and $334, respectively) Inventories (net of allowances for obsolescence of $520 and $518, respectively) Other current assets Total current assets PROPERTY AND EQUIPMENT: Equipment Furniture, fixtures & leasehold improvements Less: accumulated depreciation OTHER ASSETS: Goodwill Intangibles (net of accumulated amortization of $817 and $519, respectively) Other assets CURRENT LIABILITIES: Accounts payable Accrued compensation Short term debt Accrued liabilities Contractual obligation Current portion of lease obligations Total current liabilities Long term debt less current maturities Redeemable Series A convertible preferred stock, $0.1 par value, 3,879,307 shares authorized, 2,586,205 shares issued and outstanding Preferred stock conversion feature Warrant liability Other long-term liabilities Total liabilities 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 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 expense Expense on preferred stock Other, net LOSS BEFORE INCOME TAXES INCOME TAX BENEFIT NET LOSS PREFERRED STOCK DIVIDENDS AND ACCRETION NET LOSS AVAILABLE TO COMMON STOCKHOLDERS BASIC AND DILUTED LOSS PER COMMON SHARE BASIC AND DILUTED WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING COMPREHENSIVE LOSS Balance, January 1, 2011 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 Dividends on preferred stock Balance, March 31, 2011 thousands) March 31, 2012 CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net loss Adjustments to reconcile net loss to net cash flows provided (used in) by operating activities: Depreciation and amortization Non-cash, stock based compensation Loss on sale assets Provision for losses on doubtful accounts Provision for losses on inventory obsolescence Preferred stock revaluation Changes in operating assets and liabilities: Accounts receivable Inventories Prepaid expenses and other current assets Accounts payable Accrued liabilities 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 USED IN FINANCING ACTIVITIES: Principal payments on capital lease obligations Issuance of common stock Principal payment on note payable Net cash flows used in 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 Dividends payable on preferred stock thousands except per share data) STATEMENTS—(Continued) 2011 Pharmacogenomics current year presentation regarding segment reporting. H - Fair Value. 2012 Three Months Ended March 31, 2011 Three Months Ended March 31, 2010 The following is a summary of activity for the allowance for obsolete inventory during the three months ended March 31, Three Months Ended March 31, 2011 Three Months Ended March 31, 2010 2011: Leasehold improvements Furniture and fixtures Production equipment Computer equipment Research and development equipment Goodwill is the excess of the purchase price over fair value of assets acquired and is not amortized. Goodwill is tested for impairment annually. We perform this impairment analysis during the fourth quarter of each year or when a significant event occurs calculation. Persuasive evidence of an arrangement exists Delivery has occurred or services have been rendered The seller’s price to the buyer is fixed or determinable, and Collectability is reasonably assured. instrument. pronouncements. Severance and related costs Facility closure costs Other Restructuring charges Finished goods Raw materials and work in process Demonstration inventory Less allowance for obsolescence Total Intangibles—acquired technology Intangibles—assay royalties Intangibles—third party payor relationships Intangibles—tradenames and trademarks Patents Intellectual property Intellectual property Patents Intangibles—acquired technology Intangibles—third party payor relationships Intangibles—assay royalties Intangibles—tradenames and trademarks PGxHealth note payable (1) PGxHealth note payable (2) 2011 2012 2013 Classes of Property Equipment Less: Accumulated amortization Total 2011 2012 2013 2014 Total minimum lease payments Less: Amount representing interest Present value of net minimum lease payments 2011. three months ended March 31, 2012. No common stock warrants were issued or exercised during the three months ended March 31, 2011 Warrant Holder Laurus Master Fund, Ltd. (1) Affiliates of Third Security, LLC (2) Total Beginning balance at January 1 Total gains or losses: Recognized in earnings Balance at March 31 Balance at January 1, 2011 Granted Exercised Forfeited Balance at March 31, 2011 Exercisable at March 31, 2011 world-class clinical and research services. These lines of business are complementary with the Pharmacogenomics Services driving innovation and leading to kit production in our Diagnostic Tools segment and new tests in our Clinical Laboratories. Net Sales Gross Profit Net Income/(Loss) before Taxes Income Tax Expense (Benefit) Net Income/(Loss) Depreciation/Amortization Restructure Interest Income (Expense) Total Assets Laboratory Services: Molecular Clinical Reference Laboratory Pharmacogenomics Research Services Instrument Related Business: Bioinstruments Bioconsumables Total Net Sales Laboratory Services: Molecular Clinical Reference Laboratory Pharmacogenomics Research Services Instrument Related Business: Bioinstruments Bioconsumables Total Cost of Goods Sold Net sales for the three months ended March 31, United States Italy United Kingdom Germany All Other Countries Total disclose. report and in Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 31,2011, which we filed with the Securities and Exchange Commission on March 14, 2012. Pharmacogenomics NuclearMitome testing. expects to complete the sample backlog caused by the LIMS failure by June 2012. We have historically operated at a loss and have not consistently generated sufficient cash from operating activities to cover our operating and other cash expenses. 2012 and beyond. and financial results. 2011 Laboratory Services: Molecular Clinical Reference Laboratory Pharmacogenomics Research Services Instrument Related Business: Bioinstruments Bioconsumables Total Net sales system sales. Net sales of bioconsumables were Laboratory Services: Molecular Clinical Reference Laboratory Pharmacogenomics Research Services Instrument Related Business: Bioinstruments Bioconsumables Cost of goods sold sales which also have a relatively fixed-cost base. was nominal compared to $0.1 million in revaluation gain for the three months ended March 31, 2011. Current assets (including cash and cash equivalents of $3,170 and $3,454, respectively) Current liabilities Working capital make arrangements for having the Company make the prepayment to PGx in accordance with the terms of the Note, as well as to coordinate the timing of the prepayment. However, PGx has not responded to any of the Company's outreach efforts. The Company intends to continue to comply with the original terms of the Note. 2011 was used in financing activities. 2011. future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. 2011 Evaluation of Disclosure Controls and Procedures. Management performed, with the participation of our Chief Executive Officer and 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 Securities Exchange Contents Page No. PART I. FINANCIAL INFORMATIONPage No. 3Item 1. Item 1. 3 3 4 5 6 7Item 2. 22Item 4.3. Quantitative and Qualitative Disclosures About Market Risk Item 4. 27PART II. 28Item 1. 28Item 1A. 28Item 6. 2930Item 1. Financial Statements March 31, 2011
(unaudited) December 31,
2010 ASSETS $ 3,170 $ 3,454 7,551 7,601 3,163 3,344 762 635 14,646 15,034 9,839 9,820 3,707 3,479 13,546 13,299 (11,885 ) (11,697 ) 1,661 1,602 6,275 6,275 8,664 8,962 152 154 $ 31,398 $ 32,027 LIABILITIES AND STOCKHOLDERS’ EQUITY $ 813 $ 1,360 1,015 875 741 989 4,017 3,231 1,572 1,628 182 170 8,340 8,253 8,640 8,640 1,553 1,457 5,078 1,983 1,283 2,351 918 843 25,812 23,527 — — 498 498 139,746 139,730 1,697 1,589 (136,355 ) (133,317 ) 5,586 8,500 $ 31,398 $ 32,027 March 31, 2012 December 31, (unaudited) 2011 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 19,291 $ 4,946 Accounts receivable, net 6,704 7,573 Inventories, net 4,014 3,859 Other current assets 1,028 820 Total current assets 31,037 17,198 PROPERTY AND EQUIPMENT: Equipment 10,277 10,143 Furniture, fixtures & leasehold improvements 3,711 3,682 13,988 13,825 Less: accumulated depreciation (12,112 ) (11,969 ) 1,876 1,856 OTHER ASSETS: Goodwill 6,440 6,440 Intangibles, net 7,691 7,966 Other assets 140 102 $ 47,184 $ 33,562 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 1,567 $ 2,609 Accrued compensation 1,047 1,133 Short term debt — 3,082 Current maturities of long term debt 7,294 3,703 Accrued expenses 3,593 3,839 Other Liabilities 1,042 1,042 Current portion of lease obligations 316 320 Accrued preferred stock dividend 765 600 Total current liabilities 15,624 16,328 LONG TERM LIABILITIES: Long term debt less current maturities 1,345 4,937 Common stock warrant liability 3,100 — Other long-term liabilities 1,211 1,249 Total liabilities 21,280 22,514 STOCKHOLDERS’ EQUITY: Series A preferred stock, $.01 par value, 15,000,000 shares authorized, 2,586,205 shares issued and outstanding 26 26 Common stock, $.01 par value, 100,000,000 shares authorized, 71,645,725 and 49,625,725 shares issued and outstanding, respectively 721 501 Additional paid-in capital 170,423 152,987 Accumulated other comprehensive income 397 336 Accumulated deficit (145,663 ) (142,802 ) Total stockholders’ equity 25,904 11,048 $ 47,184 $ 33,562 Three Months Ended
March 31, 2011 2010 $ 7,480 $ 5,442 3,326 2,558 4,154 2,884 4,323 2,432 557 827 24 — 4,904 3,259 (750 ) (375 ) (238 ) — (2,027 ) — 231 — (2,034 ) — (2,784 ) (375 ) (6 ) (51 ) $ (2,778 ) $ (324 ) (260 ) — $ (3,038 ) $ (324 ) $ (0.06 ) $ (0.01 ) 49,293,005 49,189,672 Three Months Ended March 31, 2012 2011 NET SALES $ 7,206 $ 7,480 COST OF GOODS SOLD 4,102 3,326 Gross profit 3,104 4,154 OPERATING EXPENSES: Selling, general and administrative 4,994 4,323 Research and development 549 557 Restructuring charges — 24 5,543 4,904 LOSS FROM OPERATIONS (2,439 ) (750 ) OTHER INCOME (EXPENSE): Interest income (expense), net (273 ) (238 ) Expense on preferred stock — (2,027 ) Other, net 20 231 (253 ) (2,034 ) LOSS BEFORE INCOME TAXES (2,692 ) (2,784 ) INCOME TAX EXPENSE (BENEFIT) 4 (6 ) NET LOSS $ (2,696 ) $ (2,778 ) PREFERRED STOCK DIVIDENDS AND ACCRETION (165 ) (260 ) NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (2,861 ) $ (3,038 ) BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.05 ) $ (0.06 ) BASIC AND DILUTED WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING 62,683,527 49,293,005 STOCKHOLDERS’ EQUITYThree Months Ended March 31, 2011thousands except per share data) Common Stock Outstanding
Shares Par
Value Additional
Paid-in
Capital Accumulated
Deficit Accumulated
Other
Comprehensive
Income (Loss) Total 49,289,672 $ 498 $ 139,730 $ (133,317 ) $ 1,589 $ 8,500 — — — (2,888 ) (2,888 ) (2,888 ) — — — — 107 107 (2,781 ) — — 9 — — 9 10,000 — 7 — — 7 — — — (150 ) — (150 ) 49,299,672 $ 498 $ 139,746 $ (136,355 ) $ 1,697 $ 5,586 Three Months Ended March 31, 2012 2011 Net Loss $ (2,696 ) $ (2,778 ) Foreign currency translation adjustment, net of tax 61 107 Other Comprehensive Income, net of tax 61 107 Comprehensive Loss $ (2,635 ) $ (2,671 ) CASH FLOWSSTOCKHOLDERS’ EQUITYthousands) Three Months Ended
March 31, 2011 2010 $ (2,778 ) $ (324 ) 494 165 9 1 — 1 448 (27 ) 7 (1 ) 2,027 — (350 ) (56 ) 210 (18 ) 316 (220 ) (780 ) 247 471 684 (29 ) (67 ) 6 7 51 392 (86 ) (47 ) (1 ) — (87 ) (47 ) (66 ) — 7 — (248 ) — (307 ) — 59 (89 ) (284 ) 256 3,454 5,642 $ 3,170 $ 5,898 $ 238 $ — 13 1 $ 147 $ — 150 — Preferred Stock Common Stock Outstanding
Shares Par
Value Total Balance, January 1, 2012 2,586,205 26 49,625,725 $ 501 $ 152,987 $ (142,802 ) $ 336 $ 11,048 Net loss — — — (2,696 ) — (2,696 ) Foreign currency translation adjustment, net of tax — — — — 61 61 Non-cash stock-based compensation — — 273 — — 273 Private Placement, net 22,000,000 220 17,153 17,373 Issuance of shares of stock 20,000 — 10 — — 10 Dividends on preferred stock — — — (165 ) — (165 ) Balance, March 31, 2012 2,586,205 26 71,645,725 721 170,423 (145,663 ) $ 397 $ 25,904 Three Months Ended March 31, 2012 2011 CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net loss $ (2,696 ) $ (2,778 ) Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities: Depreciation and amortization 513 494 Non-cash, stock based compensation 273 9 Provision for losses on doubtful accounts 474 448 Provision for losses on inventory obsolescence 1 7 Preferred stock revaluation — 2,027 Changes in operating assets and liabilities: Accounts receivable 448 (350 ) Inventories (128 ) 210 Prepaid expenses and other current assets (204 ) 316 Accounts payable (1,057 ) (780 ) Accrued liabilities (292 ) 471 Other long term liabilities (97 ) (29 ) Long term deferred income taxes 5 6 Net cash flows provided by (used in) operating activities (2,760 ) 51 CASH FLOWS USED IN INVESTING ACTIVITIES: Purchases of property and equipment (198 ) (86 ) Change in other assets (67 ) (1 ) Net cash flows used in investing activities (265 ) (87 ) CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Principal payments on capital lease obligations (52 ) (66 ) Issuance of common stock and warrants, net 17,483 7 Principal payment on note payable (82 ) (248 ) Net cash flows provided by (used in) financing activities 17,349 (307 ) EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH 21 59 NET CHANGE IN CASH AND CASH EQUIVALENTS 14,345 (284 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,946 3,454 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,291 $ 3,170 SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Interest $ 495 $ 238 Income taxes, net 2 13 SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION Acquisition of equipment through capital leases $ 12 $ 147 Dividends accrued on preferred stock 165 150 Note Payable converted to Equity 3,000 — STATEMENTS20112012 and 2010A. BUSINESS DESCRIPTIONA. BUSINESS DESCRIPTION specializingadvancing personalized medicine in high sensitivity genetic variation and mutation analysis, providing products and services in DNA mutationthe detection and discovery fortreatment of cancer and inherited diseases through its proprietary molecular technologies and world-class clinical and research services. We have three complementary business segments.molecular diagnostics and pharmacogenomics analyses.Laboratory Services:Molecular Clinical Reference Laboratory. The molecular clinical reference laboratory specializeslaboratories specialize in genetic testing for oncology, hematologycardiology, neurology, mitochondrial disorders, and inherited disorders.oncology. Located in New Haven, Connecticut and Omaha, Nebraska, the molecular clinical reference laboratories are certified under the Clinical Laboratory Improvement Amendment (CLIA) as high complexity labs and our Omaha facility is also accredited by CAP (Collegethe College of American Pathologists)Pathologists (CAP).Research Services. Pharmacogenomics research services are provided by ourOur Contract Research Organization located in Omaha, Nebraska.Nebraska provides pharmacogenomics research services supporting Phase II and Phase III clinical trials conducted by our pharmaceutical customers. This lab specializes in pharmacogenomic, biomarker and mutation discovery research serving the pharmaceutical and biomedical industries world-wide for disease research, drug and diagnostic development and clinical trial support.Instrument Related Business:• Bioinstruments.Diagnostic Tools. Our proprietary 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 over 1,5001,525 WAVE Systems as of March 31, 2011.2012. 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.•Bioconsumables. The installed WAVE base and some OEM Equipment 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 chromatography columns.B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESB. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES wholly-ownedwholly owned subsidiary. All intercompanyinter-company balances and transactions have been eliminated in consolidation.1.Use of Estimates.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31, 2011 and 20102.Concentration of Revenue Risk.No customer accounted for more than 10% of consolidated net sales duringthree months ended March 31, 2011 and 2010. For the three months ended March 31, 2011 no customers made up more than 10% of the Laboratory Services revenue. For the three months ended March 31, 2010 one customer made up more than 10% of the Laboratory Services net sales. This customer represented 16% of the Laboratory Services net sales for the three months ended March 31, 2010.preferredcommon stock conversion feature and warrant liability areis recorded at fair value. See Footnote L20102011 was derived from our audited balance sheet as of that date. The accompanying consolidated financial statements as of and for the three months ended March 31, 20112012 and 20102011 are unaudited and reflect all adjustments whichthat are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. These unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 20102011 contained in our Annual Report on Form 10-K.10-K filed with the Securities and Exchange Commission on March 14, 2012. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.2011.20112012 and 2010: Dollars in Thousands Beginning
Balance Provision Write Offs Ending
Balance $ 334 $ 448 $ (66 ) $ 716 $ 310 $ (27 ) $ (4 ) $ 279 Dollars in Thousands Provision Write Offs Three Months Ended March 31, 2012 $ 1,088 $ 474 $ (483 ) $ 1,079 Three Months Ended March 31, 2011 $ 334 $ 448 $ (66 ) $ 716 TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31, 2011 and 201020112012 and 2010: Dollars in Thousands Beginning
Balance Provision Write Offs Ending
Balance $ 518 $ 7 $ (5 ) $ 520 $ 507 $ (1 ) $ (28 ) $ 478 Dollars in Thousands Provision Write Offs Three Months Ended March 31, 2012 $ 511 $ 1 $ (3 ) $ 509 Three Months Ended March 31, 2011 $ 518 $ 7 $ (5 ) $ 520 obsolete inventoryobsolescence by evaluating inventory quarterly the inventory for items deemed to be slow moving or obsolete. Included in our provision is the foreign currency impact of the consolidation of our subsidiary.cost.cost less accumulated depreciation. 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 20112012 and 2010 was $0.2 million and $0.1 million, respectively.2011. Included in depreciation for the three months ended March 31, 2011each period was less than $0.1 million related to equipment acquired under capital leases. We did not have any capital leases in the first quarter of 2010.Goodwill.whichthat may impact goodwill. Impairment occurs when the carrying value is determined to be not recoverable thereby causing the carrying value of the goodwill to exceed its fair value. If impaired, the asset’s carrying value is reduced to its fair value. We recorded no impairment charges related to goodwill as of December 31, 2010. No events have transpired in the three months ended March 31, 20112012 that would require revaluation of this conclusion.Intangibles.Intangibles include intellectual property, patents and acquired products.1.Intellectual Property.Initial costs paidan impairment analysis prior to license intellectual property from independent third parties are capitalized and amortized using the straight-line method over the license period. Ongoing royalties related to such licenses are expensed as incurred.2.Patents.We capitalize legal costs, filing fees and other expenses associated with obtaining patents on new discoveries and amortize these costs using the straight-line method over the shorter of the legal life of the patent or its economic life beginning on the date the patent is issued.3.Acquired Products.As a part of the FAMILION acquisition we acquired technology, in process technology, trademarks/tradenames and third party relationships. These costs will be amortized straight line over their estimated economic life of seven to eight years. See Footnote E.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31, 2011 and 2010These assets are 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 quarterly review the carrying value of our long-lived assets to assess recoverability and impairment. We recorded no impairments as of December 31, 2010. No events have transpired in the three months ended March 31, 2011 that would require a revaluation of this conclusion.Other Long Term Assets.scheduled review.Other long term assets include US security deposits and deferred tax assets.20112012 had vesting periods of one or three years from date of grant. None of the stock options outstanding at March 31, 20112012 are subject to performance or market-based vesting conditions.the selling, general and administrative expense as a resultexpense. As of the vesting of options exercisable for the purchase of 1.4 million shares. During the three months ended March 31, 2010, we recorded compensation expenses of less than $0.1 million within selling, general and administrative expense as a result of the vesting of options exercisable for the purchase of 1.7 million shares. As of March 31, 2011,2012, there was $0.1$0.8 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted averageweighted-average period of nearly three years.quarterthree months ended March 31, 20112012 was estimated on theirthe respective grant dates using the Black-Scholes option pricing model. The Black-Scholes model was used with the following assumptions: risk-free interest rates of 0.81% based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected lives of eight years, based on expected exercise activity behavior; and volatility of 109% 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 holds the majority of the stock options and such senior executives are expected to hold the options for five years. Forfeitures of 1.64 % have been assumed.liveslife of six years, based on historical exercise activity behavior; and volatility of 107% based on the historical volatility of our stock over a time that is consistent with the expected life of the option.past five years. A small group of senior executives holdheld the majority of the stock options and such senior executives are expected to hold the options until they are vested. Forfeitures of 3.6% have been assumed.There were no stock options granted during the quarter ended March 31, 2010.Income Taxes.Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities at each balance sheet date using tax rates expected to be in effectassumed in the year the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent that it is more likely than not that they will not be realized.20112012 and March 31, 2010,2011, deferred net sales, mainly associated with our service contracts, included in the balance sheet in other accrued expenses, was approximately$1.3 million and $1.5 million, and $1.4 million, respectively.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31, 2011 and 2010Net sales from our Molecular Clinical Reference Laboratory Services are recognized on an individual test basis and takes place when the test report is completed, reviewed and sent to the client less the reserve for insurance, Medicare and Medicaid 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.In our Pharmacogenomics Research Services Group, we perform services on a project by project basis. When we get payment in advance we recognize revenue when we deliver the service. These projects typically do not extend beyond one year. At March 31, 2011 and 2010, deferred net sales associated with the pharmacogenomics research projects included in the balance sheet in other accrued liabilities, was $0.1 million and less than $0.1 million, respectively.Research and Development.Research and development and various collaboration costs are charged to expense when incurred.Preferred Stock.We entered into a Series A Convertible PreferredPurchase Agreement on December 29, 2010, as discussed in Note L, selling shares of preferred stock and issuing warrants to purchase a certain number of shares of Series A Preferred Stock.Warrants.Series A PreferredCommon Stock meets the definition of mandatorily redeemable stock as it is preferred capital stock which is redeemable at the option of the holder and should be reported outside of equity. Preferred stock is accreted to its redemption value. The warrantsWarrants do not qualify to be treated as equity, and accordingly, are recorded as a liability. A preferred stock conversion feature is embedded within the Series A PreferredThe Common Stock that meets the definition of a derivative. The preferred stock, warrantWarrant liability and preferred stock conversion feature are all recorded separately and werewas initially recorded at fair value using the Black Scholesa Monte Carlo simulation model. We arewere required to record these instrumentsthis instrument at fair value at each reporting date and changes will beare recorded as an adjustment to earnings. The warrantCommon Stock Warrant liability and preferred stock conversion feature areis considered a level three financial instruments. See Footnote L.theirits functional currency. Its assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. CumulativeA cumulative translation gain of approximately $0.1$0.1 million is reported as accumulated other comprehensive gainincome on the accompanying consolidated balance sheet as of March 31, 2011. Cumulative2012. A cumulative translation gainsgain of $0.2$0.1 million were was reported as accumulated other comprehensive income for the three months ended as of March 31, 2010.2011. Revenues and expenses are translated at the average rates during the period. For transactions that are not denominated in the functional currency, we recognized aless than $0.1 million as foreign currency transaction loss in the determination of net gain ofloss for the three months ending March 31, 2012 and $0.1 million as foreign currency transaction gain in the determination of net loss for the three months ending March 31, 2011 and a net loss of $0.1 million as foreign currency transaction loss in the determination of net loss for the three months ending March 31, 2010.Other Income..Other income consists primarily of interest income from cash and cash equivalents invested in overnight instruments. Other income in the three months ended March 31, 2011 includes an award of a federal grant under the Qualifying Therapeutic Discovery Project related to COLD-PCR, Surveyor Scan kit development for key cancer pathway gene mutations and mtDNA damage assays. Other income related to this federal grant was $0.2 million, net of consulting fees. Other income for the three months ending March 31, 2010 was less than $0.1 million.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31, 2011 and 2010Comprehensive Income.Accumulated other comprehensive income at March 31, 2011 and December 31, 2010 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.Earningsearningsearnings(loss) per share is calculated based on the weighted averageweighted-average number of common shares outstanding during each period. Diluted earnings per share include shares issuable upon exercise of outstanding stock options, warrants or conversion rights that have exercise or conversion prices below the market value of our common stock. Options, warrants and conversion rights pertaining to 18,095,89428,741,938 and 10,611,26318,095,894 shares of our common stock have been excluded from the computation of diluted earnings per share at March 31, 20112012 and 2010,2011, respectively. The options, warrants and conversion rights that were exercisable in 2011 and 2010 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.Issued Accounting Pronouncements.In October 2009, the FASB issued ASU No. 2009-13,Revenue Recognition (ASC 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force); effective for years beginning after June 15, 2010. 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 inadopted accounting for multiple-deliverable revenue arrangements that better reflects their economics as more arrangements will be separated into individual units of accounting. Our adoption of ASU No. 2009-13 did not have a material impact on our consolidated financial statements.In October 2009, the FASB issued ASU No. 2009-14,Software (ASC 985): Certain Revenue Arrangements That Include Software Elements (a consensus of the FASB Emerging Issues Task Force); effective for years beginning after June 15, 2010. 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.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended2010discounts). Additionally, enhanced disclosure about policies for recognizing revenue and assessing bad debts are required. Disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts will be required. The new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011. Our adoption of this guidance did not have a material impact on our consolidated financial statements.C.RESTRUCTURING CHARGESC. INVENTORIES In the third quarter of 2010 we made a decision to consolidate our research and development activities in Omaha, Nebraska. 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. The facility has been closed at March 31, 2011. These restructuring charges are attributable to our Lab Services and Instrument Related Business.Restructuring charges include: Dollars in Thousands Costs Incurred in the
Three Months
Ended
March 31, 2011 Cumulative Costs
Incurred at
March 31, 2011 Total
Expected Costs $ — $ 53 $ 53 14 59 59 10 50 54 $ 24 $ 162 $ 166 D.INVENTORIESallowancesallowance for obsolescence) consisted of the following: Dollars in Thousands March 31,
2011 December 31,
2010 $ 1,933 $ 2,119 1,549 1,531 201 212 $ 3,683 $ 3,862 (520 ) (518 ) $ 3,163 $ 3,344 TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31, 2011 and 2010 Dollars in Thousands Finished goods $ 2,911 $ 2,608 Raw materials and work in process 1,481 1,485 Demonstration inventory 131 277 $ 4,523 $ 4,370 Less allowance for obsolescence (509 ) (511 ) Total $ 4,014 $ 3,859 E.D. INTANGIBLES AND OTHER ASSETS Long Lived Dollars in Thousands March 31, 2011 December 31, 2010 Cost Accumulated
Amortization Net Book
Value Cost Accumulated
Amortization Net Book
Value $ 6,535 $ 228 $ 6,307 $ 6,535 $ — $ 6,535 1,434 51 1,383 1,434 — 1,434 367 — 367 367 — 367 344 12 332 344 — 344 511 252 259 511 245 266 290 274 16 290 274 16 $ 9,481 $ 817 $ 8,664 $ 9,481 $ 519 $ 8,962 Dollars in Thousands March 31, 2012 December 31, 2011 Cost Cost Intangibles—acquired technology $ 6,535 $ 1,138 $ 5,397 $ 6,535 $ 911 $ 5,624 Intangibles—assay royalties 1,434 256 1,178 1,434 205 1,229 Intangibles—third party payor relationships 367 — 367 367 — 367 Intangibles—tradenames and trademarks 344 61 283 344 49 295 Patents 726 274 452 703 267 436 Intellectual property 20 6 14 20 5 15 $ 9,426 $ 1,735 $ 7,691 $ 9,403 $ 1,437 $ 7,966 Estimated Useful Life 10 years 7 years 7 – 8 years Indefinite 7 years 7 years USU.S. security deposits and deferred tax assets, net of applicable valuation allowances.and $0.1 million during each of the three months ended March 31, 20112012 and 2010, respectively.2011. Amortization expense for intangible assets is expected to be $1.2 million in each of the years 20112012 through 2017.F.DEBT Dollars in Thousands March 31,
2011 December 31,
2010 $ 8,640 $ 8,640 741 989 $ 9,381 $ 9,629 (1)E.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.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31, 2011 and 2010(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.The entire unpaid balance of the Notes will become immediately due and payable if: (i) we fail to make timely payments under the Notes; (ii) we make an assignment for the benefit of creditors; (iii) we file for bankruptcy; or (iv) upon any event of default under the Security Agreement. Additionally, under the terms of the First Note, if we consummate an equity financing that involves the receipt by us of net proceeds of not less than $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.The Notes are secured by the assets of Transgenomic.The aggregate minimum principal maturities of the debt for each of the three fiscal years following December 31, 2010 are as follows: $ 741 3,703 4,937 $9,381 G.CAPITAL LEASESThe following is an analysis of the leased property under capital leases. Dollars in Thousands Asset Balances at March 31,
2011 December 31,
2010 $ 541 $ 394 (39 ) (13 ) $ 502 $ 381 The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of March 31, 2011.Year ending December 31: Dollars in Thousands $ 177 140 124 8 $ 449 (48 ) $ 401 TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31, 2011 and 2010H.COMMITMENTS AND CONTINGENCIES 2016.2022. The future minimum lease payments required under these leases are approximately $0.8 million in 2012, $1.1 million in 2013, $1.0 million in 2014, $0.9 million in 2011, $1.02015. $0.9 million in 2012, $0.42016 and $0.6 million in 2013, $0.2 million in 2014 and $0.2 million in 2015.2017. Rent expense for each of the three months ended March 31, 20112012 and 20102011 was $0.2 million and $0.3 million, and $0.2 million, respectively.We have entered into an employment agreement with Craig J. Tuttle, our President and Chief Executive Officer. The current term of Mr. Tuttle’s employment agreement ends on July 12, 2011. The employment agreement provides that Mr. Tuttle will be entitled to receive a severance payment from the Company if his employment is terminated involuntarily except if such termination is based on “just cause”, as that term is defined in his 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 provision 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 2012.2011,2012, firm commitments to vendors to purchase components used in WAVE Systems and instruments manufactured by others totaled $0.1$2.3 million.I.F. INCOME TAXES Federalfederal income tax returns related to tax years 20072008 through 2010.2011. We have state income tax returns subject to examination primarily for tax years 20072008 through 2010.2011. Open tax years related to foreign jurisdictions, primarily the United Kingdom, remain subject to examination. Our primary foreign jurisdiction isexamination for the United Kingdom which has open tax years for 20072008 through 2010.benefitexpense for the three months ended March 31, 20112012 was a benefit of less than $0.1 million.nominal. This is the result of the change in deferred tax assets and liabilities reported in financial statements of our subsidiary outside the U.S. We believe the tax benefitexpense 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 three months ended March 31, 20102011 was less than $0.1 million. The effective tax rate for the three months ended March 31, 20112012 is 1.0%0.14%, which is primarily the result of valuation allowances against the Net Operating Lossesnet operating losses for the U.S. partially offset by permanent differences related to intercompany foreign currency exchange of our subsidiary outside the U.S.20112012 and 2010,2011, there were no material changes to the liability for uncertain tax positions.J.EMPLOYEE BENEFIT PLANG. STOCKHOLDERS’ EQUITY We maintain an employee 401(k) retirement savings plan that allows for voluntary contributions into designated investment funds by eligible employees. We 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 the three months ended March 31, 2010. No contributions were made in the three months ended March 31, 2011 due to cost saving initiatives.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31, 2011 and 2010K.STOCKHOLDERS’ EQUITYThe Company’s or 2010. At March 31, 2011, there were warrants outstanding which were exercisable. Warrants to purchase 5,572,408an aggregate of 16,172,408 shares of common stock. Issue Year Expiration
Year Underlying
Shares Exercise
Price 2004 2011 400,000 $ 1.13 2010 2015 5,172,408 $ .58 5,572,408 Warrant Holder Issue Year Expiration 2010 December 2015 5,172,408 $0.58 2012 February 2017 9,500,000 $1.25 2012 February 2017 1,500,000 $1.25 16,172,408 (1) These warrants wereThis Warrant was 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 conjunctionconnection 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 the repricing provision, these warrants are considered liabilities for financial reporting purposes.(2)These warrants were issued in conjunction with the Series A Convertible Preferred Stock financing (the “Financing”) with certain entities affiliated with Third Security, LLC (the “Investors”).Financing. The number of underlying shares shown reflects the postnumber of shares of common stock issuable upon conversion shares.of the shares of Series A Preferred Stock for which this Warrant is currently exercisable.Preferred Stock.The Company’s Board of Directors is authorized to issue up to 15,000,000 shares of preferred stock in one or more series, from time to time, with such designations, powers, preferences and rights and such qualifications, limitations and restrictions as may be provided in a resolution or resolutions adopted by the Board of Directors. The authority of the Board of Directors includes, but is not limited to, the determination or fixing of the following with respect to shares of such class or any series thereof: (i) the number of shares; (ii) the dividend rate, whether dividends shall be cumulative and, if so, from which date; (iii) whether shares are to be redeemable and, if so, the terms and amount of any sinking fund providing for the purchase or redemption of such shares; (iv) whether shares shall be convertible and, if so, the terms and provisions thereof; (v) what restrictions are to apply, if any, on the issue or reissue of any additional preferred stock; and (vi) whether shares have voting rights. The preferred stock may be issued with a preference over the common stock as to the payment of dividends. The Company has no current plans to issue any series of preferred stock. Classes of stock such as the preferred stock may be used, in certain circumstances, to create voting impediments on extraordinary corporate transactions or to frustrate persons seeking to effect a merger or otherwise to gain control of the Company. For the foregoing reasons, any preferred stock issued by the Company could have an adverse effect on the rights of the holders of the common stock.On December 29, 2010, we entered into a Series A Convertible Preferred Stock Purchase Agreement (“Series A Purchase Agreement”) with Third Security, LLC pursuant to which we: (i) sold an aggregate of 2,586,205 shares of Series A Convertible Preferred Stock; and (ii) issued warrants to purchase up to an aggregate of 1,293,102 shares of Series A Convertible Preferred Stock with an exercise price of $2.32 per share. The Warrants may be exercised at any time from December 29, 2010 until December 28, 2015 and contain a “cashless exercise” feature. The shares of Series A Convertible Preferred Stock issuable pursuant to the Series A Purchase Agreement and upon exercise of the Warrants are initially convertible into shares of our common stock at a rate of 4-for-1, which conversion rate is subject to further adjustment as set forth in the Certificate of Designation. The aggregate gross proceeds from the issuance were $6.0 million.The Series A Convertible Preferred Stock meets the definition of mandatorily redeemable stock as it is preferred capital stock which is redeemable at the option of the holder and should be reported outside of equity. Preferred stock is accreted to its redemption value. The warrants do not qualify to be treated as equity, and accordingly, are recorded as a liability. A preferred stock conversion feature is embedded within the Series A Convertible Preferred Stock that meets the definition of a derivative.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31, 2011 and 2010The costs to secure the preferred stock were taken against the preferred stock. For the year ended December 31, 2010 these costs were $0.2 million.We used the net proceeds from the financing to acquire the FAMILION family of genetic tests from PGxHealth, a subsidiary of Clinical Data.In connection with the Financing, we filed a Certificate of Designation of Series A Convertible Preferred Stock with the Secretary of State of the State of Delaware, designating 3,879,307 shares of our Preferred Stock as Series A Convertible Preferred Stock. Certain rights of the holders of the Series A Convertible Preferred Stock are senior to the rights of the holders of Common Stock. The Series A Convertible Preferred Stock has a liquidation preference equal to its original price per share, plus any accrued and unpaid dividends thereon. The Series A Convertible Preferred Stock accrues cumulative dividends at the rate of 10.0% of the original price per share per annum.Generally, the holders of the Series A Preferred Stock are entitled to vote together with the holders of Common Stock, as a single group, on an as-converted basis. However, the Certificate of Designation provides that we shall not perform some activities, subject to certain exceptions, without the affirmative vote of a majority of the holders of the outstanding shares of Series A Convertible Preferred Stock. The holders of the Series A Convertible Preferred Stock also are entitled to elect or appoint, as a single group, two (2) of the five (5) directors of the Company.In connection with the Financing, we also entered into a registration rights agreement with the Investors (the “Registration Rights Agreement”). Pursuant to the terms of the Registration Rights Agreement, the Company has granted the Investors certain demand, “piggyback” and S-3 registration rights covering the resale of the shares of Common Stock underlying the Series A Convertible Preferred Stock issued pursuant to the Series A Purchase Agreement and issuable upon exercise of the Warrants and all shares of Common Stock issuable upon any dividend or other distribution with respect thereto. The holders of the Series A Convertible Preferred Stock are entitled to receive quarterly dividends which will accrue whether or not declared, shall compound annually and shall be cumulative. In any calendar quarter we shall be required to pay from funds legally available a cash dividend in the amount of 50% of the distributable cash flow or aggregate amount of dividends accrued on the Series A Convertible Preferred Stock. During the first quarter of 2011 we recorded $0.2 million in dividends payable which were not distributed.L.(2) These Warrants were issued in connection with the Private Placement in February 2012. H. FAIR VALUE preferredcommon stock warrant liability and preferred stock conversion feature are all recorded separately and areis recorded at fair value. We are required to record these instrumentsthis instrument at fair value at each reporting date and changes are recorded as an adjustment to earnings. The warrant liability and preferred stock conversion feature are considered Level 3 financial instruments which are valued using the Black Scholes call option pricing formula.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31, 2011 and 2010During the three months ended March 31, 2011, the changes in the fair value of the liabilities measured using significant unobservable inputs (Level 3) were comprised of the following: Dollars in Thousands For the three months ended
March 31, 2011 Preferred
Stock
Conversion
Feature Warrants Total $ 1,983 $ 2,351 $ 4,334 3,095 (1,068 ) 2,027 $ 5,078 $ 1,283 $ 6,361 We had no Level 3 liabilities at March 31, 2010. There were no purchases, sales, issuances or settlements in the three months ended March 31, 2011 and 2010. The gains or losses included in earnings are reported in other income (expense) in our Statement of Operations. Dollars in Thousands For the Three Months Ended March 31, 2012 Balance at March 31, 2012 $ 3,100 M.I. STOCK OPTIONS 2011: Number of
Options Weighted Average
Exercise Price 2,565,001 $ 2.08 130,000 .74 (10,000 ) (.70 ) (219,668 ) (2.48 ) 2,465,333 $ 2.02 2,178,666 $ 2.20 Balance at January 1, 2012 4,172,000 $ 1.10 Granted 100,000 1.45 Exercised (20,000 ) (0.50 ) Forfeited (39,998 ) 2.80 Cancelled (18,001 ) (4.89 ) Balance at March 31, 2012 4,194,001 $ 1.09 Exercisable at March 31, 2012 2,224,710 $ 1.01 N.J. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION company’s chief operating decision-maker is theour Chief Executive Officer, who regularly evaluates our performance based on net sales and gross profit. The preparation of this segment analysis requires management to make estimates and assumptions around expenseexpenses below the gross profit level. While we believe the segment information to be directionally correct, actual results could differ from the estimates and assumptions used in preparing this information.twothree reportable operating segments, LabClinical Laboratories, Pharmacogenomic Services and Instrument Business.TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31,Diagnostic Tools. During the third quarter of 2011, we changed the manner in which we report segment results internally. Accordingly, segment results of the prior period have been reclassified to reflect these changes. Beginning with the third quarter of 2011, our chief operating decision-maker reviews our business as having three segments. The change in segments was driven by our corporate strategy to advance personalized medicine through proprietary molecular technologies and 201020112012 and 20102011 is as follows: Dollars in Thousands 2011 2010 Lab
Services Instrument
Business Total Lab
Services Instrument
Business Total $ 3,757 $ 3,723 $ 7,480 $ 1,271 $ 4,171 $ 5,442 1,787 2,367 4,154 483 2,401 2,884 (3,536 ) 752 (2,784 ) (613 ) 238 (375 ) — (6 ) (6 ) — (51 ) (51 ) $ (3,536 ) $ 758 $ (2,778 ) $ (613 ) $ 289 $ (324 ) 428 49 477 79 56 135 — 24 24 — — — (233 ) (5 ) (238 ) — 1 1 3/31/2011 12/31/10 $ 21,817 $ 9,581 $ 31,398 $ 24,631 $ 7,396 $ 32,027 Net sales by product were as follows: Dollars in Thousands Three Months Ended
March 31, 2011 2010 $ 3,487 $ 942 270 329 3,757 1,271 1,837 2,352 1,886 1,819 3,723 4,171 $ 7,480 $ 5,442 Net cost of goods sold was as follows: Dollars in Thousands Three Months Ended
March 31, 2011 2010 $ 1,587 $ 462 383 326 1,970 788 522 932 834 838 1,356 1,770 $ 3,326 $ 2,558 Dollars in Thousands 2012 Clinical Laboratories Pharmacogenomic Services Diagnostic
Tools Total Net Sales $ 3,371 $ 630 $ 3,205 $ 7,206 Gross Profit 1,274 374 1,456 3,104 Net Income (Loss) before Taxes (2,168 ) 81 (605 ) (2,692 ) Income Tax Expense (Benefit) — — 4 4 Net Income (Loss) $ (2,168 ) $ 81 $ (609 ) $ (2,696 ) Depreciation/Amortization 416 32 47 495 Interest Income (Expense) (247 ) (5 ) (21 ) (273 ) March 31, 2012 Total Assets 27,118 3,477 16,589 47,184 Dollars in Thousands 2011 Clinical Laboratories Pharmacogenomic Services Diagnostic
Tools Total Net Sales $ 3,487 $ 270 $ 3,723 $ 7,480 Gross Profit 1,900 (113 ) 2,367 4,154 Net Loss before Taxes (3,289 ) (247 ) 752 (2,784 ) Income Tax Expense (Benefit) — — (6 ) (6 ) Net Loss $ (3,289 ) $ (247 ) $ 758 $ (2,778 ) Depreciation/Amortization 394 34 49 477 Restructure — — 24 24 Interest Income (Expense) (233 ) — (5 ) (238 ) March 31, 2011 Total Assets 19,853 1,964 9,581 31,398 TRANSGENOMIC, INC. AND SUBSIDIARYNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Three Months Ended March 31, 2011 and 201020112012 and 20102011 by country were as follows: Dollars in Thousands Three Months Ended
March 31, 2011 2010 $ 5,036 $ 2,330 826 766 258 568 211 560 1,149 1,218 $ 7,480 $ 5,442 Dollars in Thousands Three Months Ended March 31, 2012 2011 United States $ 4,724 $ 5,036 Italy 799 826 United Kingdom 336 258 All Other Countries 1,347 1,360 Total $ 7,206 $ 7,480 No customer accounted for more than 10% of consolidated net sales during the three months ended March 31, 2011 and 2010. For the three months ended March 31, 2011 no customers made up more than 10% of Laboratory Services net sales. For the three months ended March 31, 2010 one customer made up more than 10% of the Laboratory Services net sales. This customer represented 16% of the Laboratory Services net sales for the three months ended March 31, 2010.O.K. SUBSEQUENT EVENTS be disclosed.Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations report.annual reportAnnual Report on Form 10-K for the fiscal year ended December 31, 2010.2011, which we filed with the Securities and Exchange Commission on March 14, 2012. Results for the quarter ended March 31, 20112012 are not necessarily indicative of results that may be attained in the future.specializingadvancing personalized medicine in high sensitivity genetic variation and mutation analysis, providing products and services in DNA mutationthe detection and discovery fortreatment of cancer and inherited diseases through its proprietary molecular technologies and world-class clinical and research services. We have three complementary business segments.molecular diagnostics and pharmacogenomics analyses.Laboratory Services:Molecular Clinical Reference Laboratory. The molecular clinical reference laboratory specializeslaboratories specialize in genetic testing for oncology, hematologycardiology, neurology, mitochondrial disorders, and inherited disorders.oncology. Located in New Haven, Connecticut and Omaha, Nebraska the molecular clinical reference laboratories are certified under the Clinical Laboratory Improvement Amendment (CLIA) as high complexity labs and our Omaha facility is also accredited by CAP (Collegethe College of American Pathologists)Pathologists (CAP).Research Services. Pharmacogenomics research services are provided by ourOur Contract Research Organization located in Omaha, Nebraska.Nebraska provides pharmacogenomics research services supporting Phase II and Phase III clinical trials conducted by our pharmaceutical customers. This lab specializes in pharmacogenomic, biomarker and mutation discovery research serving the pharmaceutical and biomedical industries world-wide for disease research, drug and diagnostic development and clinical trial support.Instrument Related Business:• Bioinstruments.Diagnostic Tools. Our proprietary 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 over 1,5001,525 WAVE Systems as of DecemberMarch 31, 2010.2012. 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.•Bioconsumables. The installed WAVE base and some OEM Equipment 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 chromatography columns.2011 increased2012 decreased by $2.0$0.3 million or 37%4% compared to the same period in 2010. The first quarter of 2011 included the results of the FAMILION acquisition in our Laboratory Services segment.. During the three months ended March 31, 2011,2012, net sales from Laboratory Services increasedour Clinical Laboratories segment decreased by $2.5$0.1 million compared to the same three month period in 2010. The Clinical Reference Laboratory increase is2011. Our laboratory information management system (LIMS) installed at our New Haven, Connecticut laboratory testing facility experienced a resultsoftware failure that resulted in reduced sample processing capacity which impacted revenue for the first quarter of the revenue of $2.7 million related to the FAMILION acquisition.2012. Net sales from our Pharmacogenomics Research Services decreasedsegment increased by less than $0.1 million. Net sales in our Instrument Related Business were up 11% or $0.4$0.4 million for the three months ended March 31, 20112012 compared to the same period in 2010.2011. Net sales from bioinstrumentsin our Diagnostic Tools segment were down 22% and net sales of consumables were up 4%$0.5 million or 14% for the comparable three month periods. months ended March 31, 2012 compared to the same period in 2011. Our gross profit margin increaseddecreased from 53%56% for the three months ended March 31, 20102011 to 56%43% for the same period in 2011. Laboratory Services gross margin increased from 38% in the three months ended March 31, 2010 to 48% for the same period in 2011.2011. Loss from operations was $0.8$2.4 million for the three months ended March 31, 2012 compared to $0.8 million for the three months ended March 31, 2011 compared to $0.4 million for the three months ended .2010.As of March 31, 2011,2012$3.2 million.$19.3 million.We continue to leverage our core instrument business for on-going instrument sales worldwide as well as employing our instrument technology and related expertise in our two laboratory services businesses. strengtheningcontinued growth in both2012 in all three of our laboratory services businessesbusiness units, Clinical Labs, Pharmacogenomic Services and Diagnostic Tools, as we continue to seek outcommercialize new assay technologies and tests we have developed internally or in-licensed, and as we expand into other markets and regions worldwide.license or develop internallybelieve that there is significant opportunity to expand this business based on increased use of existing tests and the launch of new products into the marketplace. In May, the Heart Rhythm Society issued new diagnostic guidelines supporting the use of some of our menu offeringskey cardiac tests. In November 2011, we launched two new genetic tests at the annual American Heart Association meeting. These include our PGxPredict:CLOPIDOGREL Panel, a uniquely comprehensive test to predict a patient's response to clopidogrel (Plavix®), the most widely prescribed antiplatelet drug used to reduce the risks of death, stroke and heart attack, and a test for bothfamilial atrial fibrillation.these service businesses. the active drug. The risk associated with dysfunctional or lower functioning CYP2C19 prompted the FDA in 2010 to add a black box warning to the clopidogrel label.particular, we have substantially increased our footprintMarch of 2012, Transgenomic announced the publication of a new study by researchers at Vanderbilt University in the molecular diagnostics laboratory market throughjournal “Clinical Pharmacology and Therapeutics.” This large, independent study, the third such study examining CYP2C19 and ABCB1, demonstrated the importance of both genes in determining which patients would benefit from treatment with clopidogrel and which should pursue alternative treatment. ABCB1 is proprietary to Transgenomic, protected by an issued patent in Europe and pending patent in the US. There are approximately 6 million new patients prescribed Plavix each year, of which about 47% will not fully benefit from their therapy because of genetic variations in either CYP2C19 or ABCB1. This highlights a need for broad-based testing, and represents a potential multi-billion dollar opportunity for Transgenomic's Clinical Laboratories division.recent acquisitionNuclear Mitome Test, which employs next-generation sequencing technology to identify mutations in 448 genes, and represents the most comprehensive genetic test available for mitochondrial disorders to date. We recently presented clinical findings from 78 patients tested for nuclear mitochondrial disorders using this test 2012 Annual Meeting of the Clinical Data FAMILION laboratory testing business. This acquisition brings us approximately $13.0 million in new annual revenues and a much larger presenceAmerican College of Medical Genetics. The findings, presented by Dr. Jeana DaRe, Assistant CLIA Laboratory Director at Transgenomic, included details of both with insurers and patients. This acquisition also provides us access to higher throughput technologies and an expert staff to aid us in growing our reference laboratory businessthe technical performance of the Nuclear Mitome Test as well as consolidation opportunitiesthe wide variety of clinically revealing results discovered through its use. In addition, Dr. DaRe highlighted two case studies. In both cases, patients achieved a definitive diagnosis through the identification of genetic mutations far outside the normal spectrum of genetic testing. These results concluded the patients' diagnostic odysseys, which had encompassed wide-ranging genetic and non-genetic tests as well as consultation with various medical specialties, all of which had failed to pinpoint the underlying disease. These results are a typical occurrence in patients sent for laboratory operations, billing and sales and marketing.Lab,Services Unit, we continue to perform cancer pathway gene mutation projectsanalysis and other associated genomics service testing for a number of high visibility pharmaceutical companiescompanies: both for pre-clinical drug discovery projects and drugphase II and III clinical trials. EmployingAlthough we may experience variability in quarter-to-quarter revenues based on the timing of projects or when specimens may arrive, we continue to experience growth in this area of the business. We can now analyze a patient's blood serumrecently licensed ultra sensitiveultra-sensitive DNA mutation detection technology, termed Cold-PCR, and a significant improvement to COLD-PCR termed Ice COLD-PCR, we have added the significant addition of utilizing blood as a mutation detection sample source rather than just testing patients’ tumors.“ICE COLD-PCR”. This is a significant achievement, and should, we believe it should lead to much faster expansiongrowth of our service testing forpharmacogenomics research services as pharmaceutical partners as theycompanies adopt this novel approach for both drug and disease research.additionFebruary, we announced our collaboration with MD Anderson in a study to Ice Cold-PCR, which offersevaluate the use of our high sensitivity improvements as much as 10,000 times higher than routineICE COLD-PCR mutation detection technology in analysis of DNA testingisolated from circulating tumor cells (CTCs) in blood samples from patients with advanced cancer. CTC's are very rare in blood and difficult to analyze using traditional genomic methods. Our ICE COLD PCR is a simple assay technology that has the ability to enrich very low levels of mutant DNA, allowing for the detection of tumor biomarkers using standard DNA sequencing techniques. With this technology, we have recently discoveredthe potential to determine the best therapeutic options for patients. CTC analysis may also be feasible when there is no solid tumor to biopsy. Since the analysis is done in blood, the procedure is also much easier and safer than a technique to further improve mutation detection sensitivity of standard Sanger sequencing. We have termed this new discovery BLOCker-Sequencingtumor biopsy.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 availableexperienced an increase in the market today. We believe that this combinationnumber of technologies will offer usunits sold as compared to a year ago, although the abilitymix of instruments sold resulted in a lower average sales prices. As a reminder, our instrument sales translate into incremental revenue from consumables and service contract sales, providing compounded and repeating revenue growth. During the first quarter, we began delivering instruments to develop tests for earlier cancer detection using blood or even saliva, to measure recurrence for a very early warning to better manage patients suffering from cancerour European distribution partner, A. Menarini Diagnostics, one of the leading diagnostic distribution companies in Europe. Our agreement with Menarini, which was signed last November, covers the sale and marketing of our newly-licensed WAVE® MCE instruments and consumables, as well as support earlier drug selection or drug resistance determinations for these patients.Although the WAVE System is a fully matured technology, and both it and its corresponding consumable sales growth in our traditional markets are shrinking, we are expanding 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 sell OEM instruments worldwide for pre-analytical karyotyping automation. We have launched our CE IVD labeled K-RASSURVERYOR® Scan mutation detection kit into Europe and the U.S. and have released two follow on kits for detecting mutations in key cancer pathway genes BRAF and PIK3CA. These are key cancer pathway mutation assessment tools and, through our proprietary technologies, bring noteworthy improvements in sensitivity and cost efficiency to the market compared to competing technologies.European Union. We intend to continue to look for opportunities to diversify into new markets, includingbelieve this partnership has significant revenue potential over the personalized medicine market, particularly in oncology, where the sensitivitiesnext several years.technologies are essential. We have also embarked on several academic collaborationsLaboratory Services Unit, our New Haven, Connecticut laboratory testing facility experienced a software failure in the first quarter that resulted in reduced sample processing capacity. The Company has reviewed and improved its internal procedures to further validate our newest technologiessecure proper function of the laboratory information management system (LIMS). The Company believes that full sample processing capacity has been restored and better determine how they can and will be used in clinical settings for patients undergoing treatment for cancer.UncertaintiesWhile weWe have been able to historically finance our operating losses through borrowings or from the issuance of additional equity, we may not be able to obtain such funding due to the tightened credit markets.equity. At March 31, 20112012 we had cash and cash equivalents of $3.2 million.$19.3 million. We believe that existing sources of liquidity are sufficient to meet expected cash needs during 2011.Instrument Related BusinessDiagnostic Tools business is affected by the needs and budgetary resources of research institutions, universities and hospitals. The instrument purchase represents a significant expenditure by these types of customers and often requires a long sales cycle. These customers may not have the funding available to purchase our instruments. Competition and new instruments in the marketplace also may impact our sales.revaluationtranslation risk whichthat occurs when transactions are doneconsummated in a currency other than British Pound Sterling, which is the functional currency of our foreign subsidiary. These transactions, which are most often consummated in Euros, must be translated into British Pound Sterling. These transactions must be revalued withinIn addition, results of operations and the Transgenomic, Limited ledger, whose functionalbalance sheet of our foreign subsidiary are translated from British Pound Sterling to our reporting currency, which is the British Pound Sterling. The majority of the transactions on this ledger are in Euro.U.S. Dollar. As a result we are subject to exchange rate risk. Fluctuations in the foreign exchange rates could causeimpact our business to be impacted.Continuing Operations20112012 and 2010 Dollars in Thousands Three Months Ended
March 31, Change 2011 2010 $ % $ 3,487 $ 942 $ 2,545 270 % 270 329 (59 ) (18 )% 3,757 1,271 2,486 196 % 1,837 2,352 (515 ) (22 )% 1,886 1,819 67 4 % 3,723 4,171 (448 ) (11 )% $ 7,480 $ 5,442 $ 2,038 37 % Net Dollars in Thousands Three Months Ended March 31, Change 2012 2011 $ % Clinical Laboratories $ 3,371 $ 3,487 $ (116 ) (3 )% Pharmacogenomics Services 630 270 360 133 % Diagnostic Tools 3,205 3,723 (518 ) (14 )% Total Net sales $ 7,206 $ 7,480 $ (274 ) (4 )% of Laboratory Services increased $2.5decreased $0.1 million during the three months ended March 31, 20112012 compared to the same period in 2010. Laboratory Services sales includes both2011. Our laboratory information management system (LIMS) installed at our New Haven, Connecticut laboratory testing facility experienced a software failure that temporarily resulted in reduced sample processing capacity which impacted revenue for the Molecular Clinical Reference Laboratory Services and the Pharmacogenomics Research Services. The Molecular Clinical Reference Laboratory Services net sales were up $2.5 million compared to the three months ended March 31, 2010. The increase in Molecular Clinical Reference Laboratory revenue is due to our acquisitionfirst quarter of the FAMILION family of genetic tests on December 29, 2010.The 2012. Research Services net sales of $0.3$0.6 million during the three months ended March 31, 2011 decreased $0.12012 increased by $0.4 million compared to the first quartersame period of 2010. We had three more customers2011 due to the volume of genetic testing performed in 2011 which was offsetconnection with various clinical trials at various stages by lower average revenue per customer. Theour pharmaceutical company clients. Pharmacogenomics Research Services net sales have peaks due to the nature of projectpatient enrollment patterns and the timing of clinical trials. While the revenue generated from genetic testing related business. Eachto clinical trials is significant, it is usually earned over the duration of the trial. Therefore, each period for Pharmacogenomics Research Services should be considered on a stand alonestandalone basis and is not indicative of future net sales.Bioinstrument sales consist ofour WAVE System and associated equipment that we manufacture$3.2 million decreased $0.5 million, or assemble, net sales from service contracts that we enter into with purchasers of our instruments, as well as sales of instruments we distribute for other manufacturers (“OEM equipment”). We also sell refurbished WAVE Systems in order to access additional customers. Bioinstrument net sales decreased $0.5 million, or 22%14%, during the three months ended March 31, 20112012 as compared to the same period in 2010. The decrease2011. We sold more instruments in bioinstrument netthe first quarter of 2012 but they had a lower average sales wasprice due to fewerthe mix of instruments sold. We sold two OEM Equipment instruments in each of the first quarters of 2012 and 2011. We sold nine WAVE instruments in the first quarter of 2012 compared to four in the first quarter of 2011. In the first quarter of 2011. There were two OEM2012, we began delivering instruments soldfor our exclusive distribution agreement with A. Menarini Diagnostics for our SURVEYOR® Scan and WAVE MCE (Micro-Capillary Electrophoresis) Mutation Detection system which accounted for the increase in 2011 compared to five in the first quarter of 2010 each of which was offset by a higher average sales price in the first quarter of 2011. We sold four WAVE instruments in the first quarter of 2011 and 2010. The average sales price was higher in 2011. Demand for WAVE Systems has been affected by significant competitive challenges from traditional (i.e. sequencing) and evolving technologies.up 4% or $0.1down $0.5 million during the three months ended 20112012 compared to 2010. The volume soldthe same period in2011. Bioconsumable sales volumes in both the United States increased by $0.3 million which was offset byand Europe were lower volumes in Europethe first quarter of $0.2 million.Costs2012 compared to the first quarter of 2011.LaboratoryClinical Laboratories and Pharmacogenomics Services operations. Costgoods sold consisted of the following:our business segments were as follows: Dollars in Thousands Three Months Ended
March 31, Change 2011 2010 $ % $ 1,587 $ 462 $ 1,125 244 % 383 326 57 (17 )% 1,970 788 1,182 150 % 522 932 (410 ) (44 )% 834 838 (4 ) 0 % 1,356 1,770 (414 ) (23 )% $ 3,326 $ 2,558 $ 768 30 % Dollars in Thousands Three Months Ended March 31, Margin % 2012 2011 2012 2011 Clinical Laboratories $ 1,274 $ 1,900 38 % 54 % Pharmacogenomics Services 374 (113 ) 59 % (42 )% Diagnostic Tools 1,456 2,367 45 % 64 % Gross Profit $ 3,104 $ 4,154 43 % 56 % $4.2$3.1 million or 56%43% of total net sales during the first quarter of 2011,2012, compared to $2.9$4.2 million, or 53%56% of total net sales during the same period of 2010.2011. During the three months ended March 31, 2011,2012, the gross margin for the Laboratory ServicesClinical48%38% as compared to 38%54% in the same period of 2010. The2011. Our laboratory information management system (LIMS) installed at our New Haven, Connecticut laboratory testing facility experienced a software failure that resulted in reduced sample processing capacity which impacted revenue and gross margin on the Clinical Reference Laboratory was 54%profit for the first quarter of 2011 compared to 51% for the first quarter of 2010. The three months ended March 31, 2011 include the business acquired2012. Clinical Laboratories has a relatively fixed-cost base so any decrease in the acquisition of the FAMILION family of genetic tests.revenue directly impacts gross margins. Pharmacogenomics Services gross margin decreasedincreased from 1%negative 42% for the three months ended March 31, 20102011 to negative 42%59% for the three months ended March 31, 2011. This2012. Pharmacogenomics Services has a relatively fixed-cost base and any increase or decrease is due to staff added along with higher operating supplies cost. The bioinstrumentin revenue directly impacts gross margins. Diagnostic Tools gross margin increaseddecreased from 60%64% in the three months ended March 31, 20102011 to 72%45% in the same period of 2011. This increase is primarily driven by2011 due to the compositionmix of products sold. Margins oninstruments sold and lower bioconsumables increased from 54% to 56% in 2011.isare included here.in selling, general and administrative expenses. Our selling, general and administrative costs increased $1.9$0.7 million from $2.4$4.3 million to $4.3$5.0 million during the three month period ended March 31, 20112012 compared to the same period in 2010. The primary increase in our selling, general2011. In addition, we had bad debt charges of $0.5 million, and administrative costs is due to the acquisitionstock option expense of the FAMILION family of genetic tests. Foreign currency revaluation gains for$0.3 million during the three months ended March 31, 2011 were $0.1 million compared to $0.1 million in2012. Foreign currency revaluation loss for the three months ended March 31, 2010.2012first quarter of 2011three months ended March 31, 2012 and 20102011, these costs totaled $0.6$0.5 million and $0.8$0.6 million, respectively. Research and development expenses totaled 7%8% and 15%7% of net sales during the three months ended March 31, 20112012 and 2010,2011, respectively. Decrease is due primarily to the consolidation of our research and development activities in Omaha, Nebraska.incomeexpense for the three months ended March 31, 2012 and 2011 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 warrants. This is a non-cash item.interest expense.benefitexpense for the three months ended March 31, 20112012 was a benefit of less than $0.1 million.nominal. 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.foreign subsidiary. This tax benefitexpense is partially offset bydue to tax expense related 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 three months ended March 31, 20102011 was less than $0.1 million.20112012 and December 31, 20102011 were as follows: Dollars in Thousands March 31,
2011 December 31,
2010 Change $ 14,646 $ 15,034 $ (388 ) 8,340 8,253 (87 ) $ 6,306 $ 6,781 $ (475 ) Dollars in Thousands March 31,
2012 Change Current assets (including cash and cash equivalents of $19,291 and $4,946, respectively) $ 31,037 $ 17,198 $ 13,839 Current liabilities 15,624 16,328 (704 ) Working capital $ 15,413 $ 870 $ 14,543 working capital decrease is primarilyCompany has accounted for the full prepayment amount as a resultcurrent liability as of increased accrued expenses and compensation at March 31, 2011 compared2012. The Company has contacted PGx on numerous occasions to December 31, 2010.WhileHistorically we have been able to historically finance our operating losses through borrowings or from the issuance of additional equity, we currently have no borrowings and have no plans to issue additional equity securities for this purpose.equity. At March 31, 20112012, we had cash and cash equivalents of $3.2 million.$19.3 million. We believe that existing sources of liquidity are sufficient to meet expected cash needs during 2011, we will need to increase our net sales,in 2012 and focus on the 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.beyond. However, we cannot assure yoube certain that we will be able to increase our net sales, or further reduce our expenses or raise further capital or equity and, accordingly,additional capital. Accordingly, we may not have sufficient sources of liquidity to continue our operations indefinitely. We continue to explore additional sources20112012 and 2010decreasedincreased by $0.3$14.3 million during the three months ended March 31, 2012 compared to a decrease of $0.3 million during the three months ended March 31, 2011. During the three months ended March 31, 2012 we used cash of $2.8 million in operating activities, $0.3 million in investing activities, which was offset by cash provided by financing activities of $17.3 million . In the three months ended March 31,2011 compared to an increase of $0.3 million during the three months ended March 31, 2010. During the three months ended March 31, 2011 we used cash in operating, investing and financing activities which was offset by foreign currency exchange revaluation. In 2010, net cash provided by operating activities was $0.4$0.1 million offset by less than $0.1, $0.1 million of net cash flow was used in investing activities and $0.1$0.3 million impact of foreign currency exchange rates.byBy or Used In Operating Activities. Cash flows provided byused in operating activities totaled $0.1$2.8 million during the three months ended March 31, 2011,2012 and compared to cash flows provided by operating activities of $0.4$0.1 million during the same period of 2010.three months ended 2011. The cash flows used in operating activities in 2012 include the net loss and decrease in accounts payable, offset by non-cash items including the provision for losses on doubtful accounts, stock option expense and depreciation and amortization. The cash flows provided by operating activities in 2011 include the net loss and decrease in accounts payable, offset by the non-cash items which include revaluation of the preferred stock conversion feature and warrant liability, depreciation and amortization. The cash flows provided by operating activities in 2010 relate to the increase in accounts payable and accrued expenses of $0.9 million offset by the decrease in prepaid expenses of $0.2 million and the net loss of $0.3 million.$0.1$0.3 million during the three months ended March 31, 20112012 compared to cash flows used in investing activities of less than $0.1$0.1 million during the same period of 2010.2011. Cash flows used in investing activities in 20112012 include purchases of property and 2010equipment of $0.2 million and additions to our patents of $0.1 million. Cash flows used in investing activities in 2011 consisted primarily of purchases of property and equipment.used inprovided by financing activities were $0.3$17.3 million for the three months ended March 31, 2011.2012. Cash provided by financing activities during the first quarter of 2012 included the proceeds from the issuance of 19,000,000 million shares of our common stock and from the issuance of common stock in connection with the exercise of stock options for 20,000 shares. Cash flows used in financing activities were for payments on debt and capital lease obligations. Cash flows used in financing activities were $0.3 million for the three months ended March 31, 2011. Cash flows used in financing activities were for principal payments on debt and capital lease obligations offset by the cash received from issuance of common stock due toin connection with the exercise of stock options for 10,000 shares during the first quarter of 2011. There were no cash flows provided by or used in financing activities for the three months ended March 31, 2010.20112012 and December 31, 2010,2011, 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 that have or other contractually narroware reasonably likely to have a current or limited purposes.annual reportAnnual Report on Form 10-K for the fiscal year ended December 31, 2010.annual reportAnnual Report on Form 10-K for the fiscal year ended December 31, 2010.2011 filed with the Securities and Exchange Commission on March 14, 2012. There have been no changes to those accounting pronouncements listed except as noted in noteFootnote B - Summary of Significant Accounting Policies to the notes to unaudited condensed consolidated financial statements contained in this report.Item 4. Controls and Procedures Item 4. Controls and ProceduresAct.Act of 1934, as amended (the "Exchange Act"). Our disclosure controls and procedures are designed to provide reasonable assuranceensure 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’sSecurities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on the evaluation, the Company’sour Chief Executive Officer and our Chief Financial Officer concluded that, as of March 31, 2011, Transgenomic’s2012, our disclosure controls and procedures were effective.20112012 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 Item 1A. Risk Factors An investmentcommon stock involvesNew Haven, Connecticut laboratory testing facility experienced a number of risks. You should carefully consider eachsoftware failure that resulted in reduced sample processing capacity. Although we have reviewed and improved our internal procedures to secure proper function of the risks describedLIMS and we believe that the full sample processing capacity has been restored, there are no assurances that we will not experience future temporary delays or disruptions in processing samples at our New Haven, Connecticut facility or at our other facilities. Any delay in processing samples could have an adverse effect on our business, financial condition and results of operation.annual reportAnnual Report on Form 10-K for the fiscal year ended December 31, 2010 before deciding to invest in our common stock. If any2011 that was filed with the Securities and Exchange Commission on March 14, 2012.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.Note Regarding Risk FactorsThe risk factors presented above and in Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, 2009 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’sthe Registrant's Quarterly 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’sExhibit 3(ii) to the Registrant's Current 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’sthe Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011)4.1 Form of Certificate of the Registrant’sRegistrant's Common Stock (incorporated by reference to Exhibit 4 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)4.2 Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-3 (Registration No. 333-111442) filed on December 22, 2003) 4.2 4.3 Registration Rights Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-3 (Registration No. 333-111442) filed on December 22, 2003) 4.4 Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004, as amended on April 15, 2004 (incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-3 (Registration No. 333-114661) filed on April 21, 2004) 4.5 Registration Rights Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004 (incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-3 (Registration No. 333-114661) filed on April 21, 2004) 4.6 Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated August 31, 2004 (incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-3 (Registration No. 333-118970) filed on September 14, 2004) 4.7 Common Stock Purchase Warrant by and between the Registrant and Oppenheimer & Co., Inc. dated October 27, 2005 (incorporated by reference to Exhibit 10.34 to the Registrant's Annual Report on Form 10-K filed on March 31, 2006) 4.8 Form of Series A convertibleConvertible Preferred Stock Purchase Agreement, dated December 29, 2010, by and among Transgenomic, Inc.,Warrant issued to Third Security Senior Staff 2008 LLC, Third Security Staff 2010 LLC, and Third Security Incentive 2010 LLC (incorporated by reference to Exhibit 4.14.2 to Registrant’sthe Registrant's Current 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)4.9 4.4 Registration Rights Agreement, dated December 29, 2010, by and among Transgenomic, Inc.,the Registrant, Third Security Senior Staff 2008 LLC, Third Security Staff 2010 LLC, and Third Security Incentive 2010 LLC (incorporated by reference to Exhibit 4.3 to Registrant’sthe Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011)4.10 First Amendment to Registration Rights Agreement dated November 8, 2011 (incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K filed on November 14, 2011) 4.54.11 Secured Promissory Note, issued December 29, 2010 by Transgenomic, Inc.the Registrant in favor of PGxHealth, LLC (incorporated by reference to Exhibit 4.4 to Registrant’sthe Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011) 4.64.12 Secured Promissory Note, issued December 29, 2010 by Transgenomic, Inc.the Registrant in favor of PGxHealth, LLC (incorporated by reference to Exhibit 4.5 to Registrant’sthe Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011)4.13 Convertible Promissory Note by and between the Registrant and Third Security Senior Staff 2008 LLC dated December 30, 2011 (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on January 6, 2012) 4.14 Convertible Promissory Note by and between the Registrant and Third Security Staff 2010 LLC dated December 30, 2011 (incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed on January 6, 2012) 4.15 Convertible Promissory Note by and between the Registrant and Third Security Incentive 2010 LLC dated December 30, 2011(incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on January 6, 2012) 4.16 Form of Warrant issued by the Registrant to the Third Security Entities on February 7, 2012 (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on February 7, 2012) 4.17 Form of Warrant issued by the Registrant to the Investors on February 7, 2012 (incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed on February 7, 2012) 4.18 Form of Registration Rights Agreement entered into by and among the Registrant, the Third Security Entities and the Investors dated February 2, 2012 (incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K filed on February 7, 2012) 10.1 SubleaseSecurities Purchase Agreement dated December 29, 2010,entered into by and between Transgenomic, Inc.among the Registrant and Clinical Data, Inc.the Investors dated February 2, 2012 (incorporated by reference to Exhibit 10.1 to Registrant’sthe Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011)February 7, 2012)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)31.1 10.3 Security Agreement, dated December 29, 2010, byCertification of Craig J. Tuttle, President 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)31CertificationsChief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended32 Certifications31.2 Certification of Brett L. Frevert, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended 32.1 Certification of Craig J. Tuttle, President and Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended 32.2 Certification of Brett L. Frevert, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended 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 * * Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, the interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is otherwise not subject to liability under these sections. TRANSGENOMIC, INC. Date: May 13, 20119, 2012 By: (Principal Executive Officer) By: (Principal Financial Officer and Principal Accounting Officer) 30