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| TBIO.OB > SEC Filings for TBIO.OB > Form 10-Q on 13-Aug-2009 | All Recent SEC Filings |
13-Aug-2009
Quarterly Report
Overview
Transgenomic, Inc. provides innovative products for the purification and analysis of nucleic acids used in the life sciences industry for research focused on molecular genetics and diagnostics. We also provide genetic variation analytical services to the medical research, clinical and pharmaceutical markets. Net sales are categorized as Instrument Related Business and Laboratory Services.
Instrument Related Business:
• Bioinstruments. Our flagship product is the WAVE® System which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There is a worldwide installed base of over 1,450 WAVE Systems as of June 30, 2009. We also distribute bioinstruments produced by other manufacturers ("OEM Equipment") through our sales and distribution network. Service contracts to maintain installed systems are sold and supported by technical support personnel.
• Bioconsumables. The installed WAVE base and some third-party installed platforms generate a demand for consumables that are required for the continued operation of the bioinstruments. We develop, manufacture and sell these consumable products. In addition, we manufacture and sell consumable products that can be used on multiple, independent platforms. These products include SURVEYOR ® Nuclease and a range of HPLC separation columns.
Laboratory Services:
• Molecular Clinical Reference Laboratory. The molecular clinical reference laboratory specializes in mitochondrial and molecular diagnostic testing including genetic testing for oncology, hematology and inherited disorders. Located in Omaha, Nebraska the molecular clinical reference laboratory operates in a Good Laboratory Practices compliant environment and is certified under the Clinical Laboratory Improvement Amendment.
• Pharmacogenomics Research Services. Pharmacogenomics research services are provided by our Contract Research Organization located in Omaha, Nebraska. It specializes in pharmocogenomic, biomarker and mutation discovery research serving the pharmaceutical and biomedical industries world-wide for disease research, drug and diagnostic development and clinical trial support.
Executive Summary
Net sales for the six months ended June 30, 2009 decreased by $2.0 million or 16% compared to the same period in 2008. Net sales in our Instrument Related Business were down 24% or $2.6 million for the six months ended June 30, 2009 compared to the same period in 2008. Net sales from bioinstruments were down 27% and net sales of consumables were down 21% for the comparable six month periods. During the six months ended June 30, 2009, net sales from Laboratory Services grew 27%, or $0.5 million, compared to the same six month period in 2008. The Clinical Reference Laboratory showed revenue growth of 62% and net sales from Pharmacogenomics Research Services decreased by 28%. Our gross profit margin decreased from 59% for the six months ended June 30, 2008 to 52% for the same period in 2009. Net loss was $1.7 million for the six months ended June 30, 2009 compared to net income of $0.2 million for the six months ended June 30, 2008. The global economic crisis has impacted our business. We have seen some positive signs in the last thirty to sixty days, but remain concerned as to the timing of a turn-around.
As of June 30, 2009, we had cash and cash equivalents of $4.8 million, unchanged from December 31, 2008.
Outlook
We continue to work toward our objective of generating income from continuing operations and positive cash flows from continuing operations. To accomplish these goals, we must generate sequential growth in net sales and continue to control manufacturing and other operating expenses.
Uncertainties
The uncertainty of the current general global economic conditions could negatively impact our business in the future.
We have historically operated at a loss until recently and have not consistently generated sufficient cash from operating activities to cover our operating and other cash expenses. While we have been able to historically finance our operating losses through borrowings or from the issuance of additional equity, we may not be able to obtain such funding due to the tightened credit markets. At June 30, 2009 we had cash and cash equivalents of $4.8 million. We believe that existing sources of liquidity are sufficient to meet expected cash needs during 2009.
There are many factors that affect the market demand for our products and services that we cannot control. Demand for our Instrument Related 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.
Results of Continuing Operations
Three Months Ended June 30, 2009 and 2008
Net Sales. Net sales consisted of the following:
Dollars in Thousands
Three Months Ended
June 30, Change
2009 2008 $ %
Instrument Related Business:
Bioinstruments $ 2,305 $ 2,762 $ (457 ) (17 )%
Bioconsumables 1,904 2,467 (563 ) (23 )%
4,209 5,229 (1,020 ) (20 )%
Laboratory Services:
Molecular Clinical Reference Laboratory 1,011 708 303 43 %
Pharmacogenomics Research Services 253 309 (56 ) (18 )%
1,264 1,017 247 24 %
Total Net sales $ 5,473 $ 6,246 $ (773 ) (12 )%
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Bioinstrument sales consist of sales of our WAVE System and associated equipment that we manufacture 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 customers that may not be able to afford new systems. Bioinstrument net sales are down $0.5 million, or 17%, during the three months ended June 30, 2009 as compared to the same period in 2008. The decrease in bioinstrument net sales was due to lower average sales price on both our WAVE and OEM instruments. There were three OEM instruments sold in the second quarter of both 2009 and 2008, however, the average sales price in the second quarter of 2009 was down by over 15% due primarily to the type of models sold. All three OEM sales in 2008 were the larger 64 sample instruments where all three sales in 2009 were the smaller 24 sample instruments. We sold only one more WAVE instrument in the second quarter 2009 as compared to 2008, but the average sales price was lower by over 35% due to the geographic make up of the sales. There was also a reduction in service contracts related to the WAVE instruments primarily in the European market. This reduction was due to both volume and foreign currency exchange impact.
Net sales of bioconsumables decreased during the three months ended June 30, 2009 compared to 2008. The decrease in consumables is primarily related to lower European sales volume on our WAVE consumables of $0.3 million and the impact of the foreign currency exchange rate of $0.3 million.
Net sales of Laboratory Services increased during the three months ended June 30, 2009 compared to 2008 by approximately $0.2 million. Laboratory Services sales includes both the Molecular Clinical Reference Laboratory Services and the Pharmacogenomics Research Services. The Molecular Clinical Reference Laboratory Services net sales of $1.0 million increased 43% over the three months ended June 30, 2008. The Molecular Clinical Reference Laboratory Services net sales growth is attributable to the increased sales focus. We increased the number of sales employees during 2008. The Pharmacogenomics Research Services net sales of $0.3 million during the three months ended June 30, 2009 decreased by $0.1 million, or 18%, from the three months ended June 30, 2008. One large customer in 2008 made up more than 50% of the net sales and has completed their project. The Pharmacogenomics Research Services net sales have peaks due to the nature of project related business.
Costs of Goods Sold. Costs of goods sold include material costs for the products that we sell and substantially all other costs associated with our manufacturing facilities (primarily personnel costs, rent and depreciation). It also includes direct costs (primarily personnel costs, rent, supplies and depreciation) associated with our Laboratory Services operations. Cost of goods sold consisted of the following:
Dollars in Thousands
Three Months Ended
June 30, Change
2009 2008 $ %
Instrument Related Business:
Bioinstruments $ 982 $ 914 $ 68 7 %
Bioconsumables 965 1,034 (69 ) (7 )%
1,947 1,948 (1 ) 0 %
Laboratory Services:
Molecular Clinical Reference Laboratory 642 381 261 69 %
Pharmacogenomics Research Services 233 178 55 31 %
875 559 316 57 %
Cost of goods sold $ 2,822 $ 2,507 $ 315 13 %
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Gross profit was $2.7 million or 48% of total net sales during the second quarter of 2009, compared to $3.7 million or 60% during the same period of 2008. Cost of sales for the Instrument Related Business was flat for the second quarter of 2009 compared to the same period of 2008. The number of instruments and type sold in each period was comparable. The foreign currency impact on bioconsumables net sales also impacts gross margin negatively. This resulted in a lower gross margin as net sales were lower by $1.0 million. During the three months ended June 30, 2009, the gross margin for the Laboratory Services was 31% as compared to 45% in the same period of 2008. The Laboratory Services gross margin decrease is attributed to both lower average net sales per test and the cost mix of tests being sold. The lower average net sales per test is a result of increased Medicare and Medicaid test volume and lower reimbursements. In addition we have had an increase in our operating supplies costs. Our direct variable costs can be significantly different for some of the tests we offer. The Chromosomal Micro Array "CMA" test, our fastest growing test, has a significantly higher direct variable cost than many others. In addition, some of the Pharmacogenomic projects are smaller ones where costs are higher than the one larger project in 2008.
Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily consist of personnel costs, marketing, travel and entertainment costs, professional fees, and facility costs. In addition, foreign currency revaluation is included here. Excluding foreign currency revaluation gains or losses, which was a loss of $0.2 million in the three months ended June 30, 2009 and a gain of $0.3 million in the same period of 2008, our selling, general and administrative costs decreased from $3.4 million in 2008 to $2.5 million in 2009. The primary decrease is due to no bonus accrual, open positions not filled, lower travel and lower stock option expense.
Research and Development Expenses. Research and development expenses primarily include personnel costs, legal fees, outside services, collaboration expenses, supplies, and facility costs and are expensed in the period in which they are incurred. For the three months ended June 30, 2009 these costs totaled $0.7 million compared to $0.6 million for the three months ended June 30, 2008. The increase is primarily due to collaboration expense with Power3 for their NuroPro assay development related to the diagnosis of Alzheimer's and Parkinson's diseases.
Research and development expenses totaled 13% and 9% of net sales during the three months ended June 30, 2009 and 2008, respectively.
Other Income (Expense). Other income consists primarily of interest income from cash and cash equivalents invested in overnight instruments. Other income during the three months ended June 30, 2009 and June 30, 2008 was less than $0.1 million for each period.
Income Tax Expense (Benefit). Income tax benefit for the three months ended June 30, 2009 was a benefit of less than $0.1 million. This is primarily the result of a refundable tax credit related to the 2008 Federal and State Income Tax returns recorded this period. This credit is anticipated to continue for 2009. This tax benefit is partially offset by tax expense related to subsidiaries outside the United States, state and franchise taxes as well as reserves for uncertain income taxes, recorded in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48'). We believe the tax benefit recorded will be partially offset in future periods by a tax expense, related to income reported in financial statements of subsidiaries outside the United States. Income tax expense for the three months ended June 30, 2008 was less than $0.1 million.
Results of Continuing Operations
Six Months Ended June 30, 2009 and 2008
Net Sales. Net sales consisted of the following:
Dollars in Thousands
Six Months Ended
June 30, Change
2009 2008 $ %
Instrument Related Business:
Bioinstruments $ 4,217 $ 5,791 $ (1,574 ) (27 )%
Bioconsumables 3,726 4,720 (994 ) (21 )%
7,943 $ 10,511 (2,568 ) (24 )%
Laboratory Services:
Molecular Clinical Reference Laboratory 1,964 1,215 749 62 %
Pharmacogenomics Research Services 556 775 (219 ) (28 )%
2,520 1,990 530 27 %
Total Net Sales 10,463 $ 12,501 (2,038 ) (16 )%
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Bioinstrument sales consist of sales of our WAVE System and associated equipment that we manufacture 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 customers that may not be able to afford new systems. Bioinstrument net sales are down $1.6 million, or 27%, during the six months ended June 30, 2009 as compared to the same period in 2008. The decrease in bioinstrument net sales was due to fewer instruments sold in the six months ended June 30, 2009. In addition the instruments sold were at a lower average sales price than in 2008. This accounted for the majority of the decrease. We sold seven OEM instruments in the six months ended June 30, 2008 compared to four in the six months ended June 30, 2009. The average sales price was lower on our OEM instruments in 2009 as compared to 2008 due to more of the larger 64 sample instruments sold in 2008 and some pricing pressure with our larger domestic accounts. We sold one less WAVE System in the six months ended June 30, 2009 as compared to 2008, and the average sales price was lower due to the geographic make up of the sales. The foreign currency conversion rate difference between 2009 and 2008 impacted the average net sales price on our European sales. This decrease in bioinstrument sales resulted from lower demand in all major geographic markets and among both research and diagnostic users, particularly in our largest markets. Demand for WAVE Systems has been affected by significant competitive challenges from traditional (i.e. sequencing) and evolving technologies.
Net sales of bioconsumables decreased during the six months ended June 30, 2009 compared to 2008. The primary decrease in consumables is due to the negative impact of the foreign currency exchange rates, primarily the Great British Pound to the US Dollar. There is also some negative volume impact in our European market.
Net sales of Laboratory Services increased during the six months ended June 30, 2009 compared to 2008 by approximately $0.5 million. Laboratory Services sales includes both the Molecular Clinical Reference Laboratory Services and the Pharmacogenomics Research Services. The Molecular Clinical Reference Laboratory Services net sales of $2.0 million increased 62% over the six months ended June 30, 2008. The Molecular Clinical Reference Laboratory Services net sales growth is attributable to the increased sales focus. We increased the number of sales representatives during 2008. The Pharmacogenomics Research Services net sales of $0.6 million during the six months ended June 30, 2009 decreased 28% from the six months ended June 30, 2008. The decrease in Pharmacogenomics Research Services is due to one large customer in the first half of 2008 which has completed its project. The Pharmacogenomics Research Services net sales have peaks due to the nature of project related business.
Costs of Goods Sold. Costs of goods sold include material costs for the products that we sell and substantially all other costs associated with our manufacturing facilities (primarily personnel costs, rent and depreciation). It also includes direct costs (primarily personnel costs, rent, supplies and depreciation) associated with our Laboratory Services operations. Cost of goods sold consisted of the following:
Dollars in Thousands
Six Months Ended
June 30, Change
2009 2008 $ %
Instrument Related Business:
Bioinstruments $ 1,640 $ 1,943 $ (303 ) (16 )%
Bioconsumables 1,838 2,036 (198 ) (10 )%
3,478 3,979 (501 ) (13 )%
Laboratory Services:
Molecular Clinical Reference Laboratory 1,129 728 401 55 %
Pharmacogenomics Research Services 392 415 (23 ) (6 )%
1,521 1,143 378 33 %
Cost of goods sold $ 4,999 $ 5,122 $ (123 ) (2 )%
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Gross profit was $5.5 million or 52% of total net sales during the six months ended June 30, 2009, compared to $7.4 million or 59% during the same period of 2008. Cost of sales for the Instrument Related Business decreased by only 13% for the six months ended June 30, 2009 compared to the same period of 2008 on a net sales decrease of 24%. This is due to fewer instruments sold in the six month period, the mix of OEM and WAVE sales, a lower average instrument sales price and lower service sales, primarily in the European market. Service was affected by both volume and foreign exchange impact. The Laboratory Services revenue increased 27% for the six months ended June 30, 2009 over the same period of 2008, while cost of goods sold increased 33%. During the six months ended June 30, 2009, the gross margin for the Laboratory Services was 40% as compared to 43% in the same period of 2008. The erosion in the gross margin is driven by the lower average net sales reimbursement per test due to increased Medicare and Medicaid test volume. In addition we have had an increase in our operating supplies cost. Our direct variable costs per test can be significantly different for some of the tests we offer. The "CMA" test, our fastest growing test, has a significantly higher direct variable cost than many other of our tests.
Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily consist of personnel costs, marketing, travel and entertainment costs, professional fees, and facility costs. In addition, foreign currency revaluation is included here. Excluding foreign currency revaluation gains or losses, which was a loss of $0.4 million in the six months ended June 30, 2009 and a gain of $0.5 million in the same period of 2008, our selling, general and administrative costs decreased from $6.5 million to $5.3 million. The primary decrease is due to no employee bonus accrual, open positions not filled, lower travel expenses and lower stock option expense.
Research and Development Expenses. Research and development expenses primarily include personnel costs, legal fees, outside services, collaboration expenses, supplies, and facility costs and are expensed in the period in which they are incurred. For the six months ended June 30, 2009 these costs totaled $1.5 million compared to $1.1 million for the six months ended June 30, 2008. The increase is primarily due to collaboration expenses with Power3 for their NuroPro assay development related to the diagnosis of Alzheimer's and Parkinson's diseases.
Research and development expenses totaled 15% and 9% of net sales during the six months ended June 30, 2009 and 2008, respectively.
Other Income (Expense). Other income consists primarily of interest income from cash and cash equivalents invested in overnight instruments. Other income during the six months ended June 30, 2009 and June 30, 2008 was less than $0.1 million for each period.
Income Tax Expense (Benefit). Income tax benefit for the six months ended June 30, 2009 was a benefit of less than $0.1 million. This is partially the result of the change in deferred tax assets and liabilities reported in financial statements of subsidiaries outside the U.S due primarily to foreign currency exchange losses. A refundable tax credit related to the 2008 Federal and State Income Tax returns was also recorded. This credit is anticipated to continue for 2009. This tax benefit is partially offset by tax expense related to state and franchise taxes as well as reserves for uncertain income taxes, recorded in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48'). We believe the tax benefit recorded will be partially offset in future periods by a tax expense, related to income reported in financial statements of subsidiaries outside the United States. Income tax expense for the six months ended June 30, 2008 was less than $0.1 million.
Liquidity and Capital Resources
Our working capital positions at June 30, 2009 and December 31, 2008 were as
follows:
Dollars in Thousands
June 30, December 31,
2009 2008 Change
Current assets (including cash and cash
equivalents of $4,776 and $4,771, respectively) $ 14,238 $ 15,585 $ (1,347 )
Current liabilities 4,042 4,235 (193 )
Working capital $ 10,196 $ 11,350 $ (1,154 )
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The working capital decrease is primarily a result of lower accounts receivable of $1.1 million at June 30, 2009 compared to December 31, 2008.
Management believes existing sources of liquidity, including cash and cash equivalents of $4.8 million, are sufficient to meet expected cash needs during 2009. We have added experienced sales staff in our business in an effort to drive improved sales in 2009. We have also increased our research costs to drive new products and collaborations which should drive future growth. As a result of the current economic outlook in 2009 we cannot assure you that we will be able to maintain our net sales or further reduce our expenses and, accordingly, we may not have sufficient sources of liquidity to continue operations indefinitely. If necessary, management believes they can further reduce costs and expenses to conserve working capital. However, such cost and expense reductions could have an adverse impact on our new product pipeline and ultimately net sales. We could also pursue additional financing, but optimally, our goal is to achieve sufficient net sales to consistently generate net income and positive cash flow.
Analysis of Cash Flows
Six Months Ended June 30, 2009 and 2008
Net Change in Cash and Cash Equivalents. Cash and cash equivalents were flat during both of the six months ended June 30, 2009 and June 30, 2008. In 2009 net cash provided by operating activities was $0.2 million offset by $0.2 million of net cash flow used in investing activities with minimal impact of foreign currency exchange rates. In 2008 net cash provided by operating activities was $0.2 million which was offset by the net cash flow used in investing activities with a minimal impact of foreign currency exchange rates.
Cash Flows Provided by Operating Activities. Cash flows provided by operating activities totaled $0.2 million during both the six months ended June 30, 2009 and the six months ended June 30, 2008. The cash flows provided by operating activities in 2009 primarily relate to the accounts receivable collections of $1.4 million and noncash items of $0.5 million offset by the loss of $1.7 million. The cash flows provided in 2008 related to the net income of $0.2 million and noncash items of $0.5 million offset by an increase in accounts receivable of $0.4 million.
Cash Flows Used In Investing Activities. Cash flows used in investing activities totaled $0.2 million during the six months ended June 30, 2009 compared to cash flows used in investing activities of $0.1 million during the same period of 2008. Cash flows used in investing activities in 2009 and 2008 consisted primarily of purchases of property and equipment.
Off-Balance Sheet Arrangements
At June 30, 2009 and December 31, 2008, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
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