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TBIO > SEC Filings for TBIO > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for TRANSGENOMIC INC


9-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

Forward-Looking Information
This report, including this Management's Discussion & Analysis, contains forward-looking statements. These statements are based on management's current views, assumptions or beliefs of future events and financial performance and are subject to uncertainty and changes in circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements. These factors include, among other things: our expected revenue, income (loss), receivables, operating expenses, supplier pricing, availability and prices of raw materials, Medicare/Medicaid/Insurance reimbursements, product pricing, foreign currency exchange rates, sources of funding operations and acquisitions, our ability to raise funds, sufficiency of available liquidity, future interest costs, future economic circumstances, industry conditions, our ability to execute our operating plans, the success of our cost savings initiatives, competitive environment and related market conditions, actions of governments and regulatory factors affecting our business and other risks as described in our reports filed with the Securities and Exchange Commission. In some cases these statements are identifiable through the use of words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "target," "can," "could," "may," "should," "will," "would" and similar expressions.
You are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Actual results may differ materially from those suggested by the forward-looking statements that we make for a number of reasons including those described in Part II, Item 1A, "Risk Factors," of this report and in Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, which we filed with the Securities and Exchange Commission on March 14, 2013.
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.
The following discussion should be read together with our financial statements and related notes contained in this report and with the financial statements, related notes and Management's Discussion & Analysis included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, which we filed with the Securities and Exchange Commission on March 14, 2013. Results for the three months ended March 31, 2013 are not necessarily indicative of results that may be attained in the future.

Overview
We are a global biotechnology company advancing personalized medicine in the
detection and treatment of cancer and inherited diseases through our proprietary
molecular technologies and clinical and research services. We have two
complementary business segments:
•        Laboratory Services. Our clinical laboratories specialize in genetic
         testing for cardiology, neurology, mitochondrial disorders and oncology.
         Our clinical laboratories located in New Haven, Connecticut and Omaha,
         Nebraska are certified under the Clinical Laboratory Improvement
         Amendment (CLIA) as high complexity labs and our Omaha facility is also
         accredited by the College of American Pathologists (CAP). Our laboratory
         located in Omaha, Nebraska also provides pharmacogenomics research
         services supporting Phase II and Phase III clinical trials conducted by
         pharmaceutical companies. Our laboratories employ a variety of genomic
         testing service technologies including ICE COLD-PCR technology. ICE
         COLD-PCR is a proprietary platform technology that can be run in any
         laboratory with standard PCR technology and that enables detection of
         mutations from virtually any sample type including tissue biopsies,
         blood and circulating tumor cells (CTCs) at levels greater than
         1,000-fold higher than standard DNA sequencing techniques.


•        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. 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. 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.

First Quarter 2013 Overview


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We are advancing personalized medicine in cardiology, oncology, and inherited diseases through our proprietary molecular technologies and world-class clinical research services. Today, we are a global leader in cardiac genetic testing with a family of innovative products, including the C-GAAP test (Clopidogrel Genetic Absorption Activation Panel). We are proud to report that Transgenomic was recently awarded the 2013 Governor's Bioscience Award in April 2013. The Bioscience Award recognizes companies that have made significant contributions to the bioscience industry in Nebraska.
In the first quarter of 2013, we consolidated our Clinical Laboratories and Pharmacogenomic Services business segments into a single segment and, going forward, it will be referred to as our Laboratory Services segment. We continue to anticipate growth in both our Laboratory Services and Diagnostic Tools segments, as we commercialize new technologies and tests we have developed internally, in-licensed, or acquired, and as we expand into other markets and regions worldwide.
In the Laboratory Services unit, ScoliScore™, our newest acquisition, is the first clinically validated, saliva-based multi-gene diagnostic test that identifies patients who will not progress to a severe curvature of the spine, thereby reducing those patients' need for repeated doctor visits, physical examinations and, most importantly, years of exposure to radiation from frequent X-Rays.
The market for ScoliScore is significant, with nearly 100,000 children and adolescents, usually between the ages of 8 and 15, entering the medical system annually with scoliosis. At any one time there are at least 400,000 patients being monitored for the disease until they reach spinal maturity. Only a small percentage, roughly 3%, of these children will progress to severe scoliosis, a severe curvature of the spine that would require surgical intervention, yet all of them will be followed clinically and screened with repeated x-rays throughout their childhood and adolescent development to monitor their condition. The elevated risk and incidence of cancer these children face as a result of these repeated x-rays is well documented. ScoliScore is the only test on the market that can determine whether these patients will not progress to a severe curvature of the spine requiring surgical correction. The ScoliScore test determines a risk profile for each patient based on their unique genetics and extent of curvature when first profiled. Since the vast majority of children will not develop severe scoliosis, the risk profile can then be used by the treating or monitoring physician to direct safer and more cost-effective monitoring, including fewer x-rays. This translates into tremendous cost savings in terms of individual lives and to our healthcare system.
In support of ScoliScore, we have expanded our sales team, are collaborating with key opinion leaders in the field to expand awareness, collate patient data for publications that demonstrate the clinical utility of the test, and are actively working with payers to expand coverage and reimbursement. We are also initiating marketing campaign efforts to reach patients and their families to educate them about the risks from repeated x-rays. We expect ScoliScore will contribute to revenue growth throughout 2013 and beyond.
We also continue to provide increased sales and marketing support behind our proprietary C-GAAP test. C-GAAP is a simple but comprehensive saliva test that more accurately predicts a patient's response to Plavix® (clopidogrel). This innovative test analyzes markers in two important genes to identify patients who are at a genetically increased risk of major adverse cardiovascular events due to diminished effectiveness of Plavix. Clopidogrel is the most widely prescribed antiplatelet drug used worldwide to reduce the risks of death, stroke and heart attack in heart disease patients. Patients with dysfunctional CYP2C19 and ABCB1 genes treated with clopidogrel exhibit a 50% increase in major adverse cardiovascular event rates than do patients with normal CYP2C19 and ABCB1 genetic function. Our C-GAAP is the only assay on the market that includes both genes in the test.
We continue to expand the commercial reach of our cardiology platform through the growth of our FAMILION franchise, which currently includes thirteen tests designed to detect for the vast number of genetic mutations that can cause cardiac disorders. The comprehensive nature of our FAMILION genetic tests demonstrates our commitment to setting the standard for cardiac genetic testing today.
We continue to progress our commercial collaboration with the Medical College of Wisconsin Laboratories, a world-renowned institution with a robust presence in genomics and genetic testing. MCW conducts our proprietary NuclearMitome Test which employs next-generation sequencing technology to identify mutations in 448 genes and, to date, represents the most comprehensive genetic test available for mitochondrial disorders. Mitochondrial disorders are notoriously difficult to diagnose because they affect multiple organ systems, including the liver, the brain and nervous system, kidneys, and cardiovascular system. This collaboration allows us to rapidly expand the commercial use of this innovative test and to commence building out our offerings in whole genome and exome testing. Other services that we offer in our Laboratory Services business include performing genetic testing involving cancer pathway gene mutation analysis and other associated genomics testing services for a number of pharmaceutical companies: both for pre-clinical drug discovery projects and Phase II and III clinical trials.
Also in the Laboratory Services unit, we continue to advance ICE COLD-PCR, our breakthrough mutation detection technology that enables unmatched sensitivity and complete DNA mutation detection using standard sequencing equipment. The extremely high sensitivity of ICE COLD-PCR enables detection of mutations from virtually any sample type including tissue


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biopsies, blood, and circulating tumor cells (CTCs). The broad use of this innovative technology has the potential to revolutionize cancer screening, diagnosis, monitoring, and therapy selection since it has the ability to perform safer, less invasive, and more frequent assessments of a cancer and its mutations, all through a simple blood sample.
The ICE COLD-PCR technology, exclusively licensed by us for DNA sequencing analysis, was developed in collaboration with the Dana-Farber Cancer Institute and is supported by multiple validation studies confirming reproducible mutation detection up to 1,000 to 10,000 times more sensitive than traditional sequencing and PCR techniques. In addition to our ongoing study with The University of Texas MD Anderson Cancer Center evaluating ICE COLD-PCR in several cancer types, in the second half of 2012 we initiated several new collaborations for clinical validation of this breakthrough platform technology. We expect that the results of the MD Anderson study will be announced later this year. We have also received an NIH STTR grant to study blood testing for pancreatic cancer with colleagues at the University of Nebraska Medical Center. We continue to pursue clinical trial projects from several top-tier pharmaceutical companies, and we believe these relationships and project successes will drive growth during 2013 as we begin to realize larger study contracts and opportunities to develop tests that support oncology drug treatment and patient selection. Over the long term, we believe our expertise with ICE COLD-PCR, combined with our expanding number of tests, will further contribute to our pharma partner and clinical trial projects and the advancement of "blood biopsies" for selecting or verifying treatment for cancer patients without the need for an expensive, invasive tissue biopsy.
In the Diagnostic Tools business, our instrument sales continue to translate into incremental revenue from consumables and service contract sales, providing compounded and repeating revenue. In 2012, we achieved CE IVD Mark registration in Europe for the diagnostic use of our proprietary WAVE MCE System and SURVEYOR® Scan KRAS Kit. This kit contains a simple, yet highly sensitive test to identify mutations in the KRAS gene, which are key determinants of the effectiveness of modern cancer drugs. Gaining the CE IVD Mark expands the market reach significantly by allowing product sales in the European Union. Uncertainties
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. We have been able to historically finance our operating losses through borrowings or from the issuance of additional equity. At March 31, 2013 we had cash and cash equivalents of $7.7 million. We believe that existing sources of liquidity are sufficient to meet expected cash needs for at least the next 12 months.
The uncertainty of the current general economic conditions could negatively impact our business in the future. There are many factors that affect the market demand for our products and services that we cannot control. Demand for our Diagnostic 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. Our Laboratory Services business is dependent upon reimbursement from government and private payers that continually look for ways to reduce costs, including by unilaterally reducing reimbursement for services such as those that we provide. There are no assurances that reimbursements from certain of these providers will remain at levels that will allow us to be profitable.
We have translation risk that occurs when transactions are consummated 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. In addition, results of operations and the balance sheet of our foreign subsidiary are translated from British Pound Sterling to our reporting currency, which is the U.S. Dollar. As a result, we are subject to exchange rate risk. Fluctuations in foreign exchange rates could impact our business and financial results.


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Results of Operations
Net sales for the three months ended March 31, 2013 increased by $0.2 million, or 2% compared to the same period in 2012. During the three months ended March 31, 2013, net sales from our Laboratory Services segment increased by $0.4 million compared to the same three month period in 2012. Net sales in our Diagnostic Tools segment decreased $0.3 million for the three months ended March 31, 2013 compared to the same period in 2012. Our gross profit margin increased to 50% for the three months ended March 31, 2013 from 43% for the three months ended March 31, 2012. Loss from operations was $3.8 million for the three months ended March 31, 2013 compared to $2.4 million for the three months ended March 31, 2012.

Three Months Ended March 31, 2013 and 2012 Net Sales. Net sales for the three months ended March 31, 2013 increased by $0.2 million, or 2% compared to the same period of 2012. Net sales performance in each of the segments was as follows:

Dollars in Thousands Three Months Ended March 31, Change 2013 2012 $ % Laboratory Services $ 4,427 $ 4,001 $ 426 11 % Diagnostic Tools 2,947 3,205 (258 ) (8 )% Total Net Sales $ 7,374 $ 7,206 $ 168 2 %

Laboratory Services net sales of $4.4 million increased $0.4 million, or 11% during the three months ended March 31, 2013 compared to the same period in 2012. Laboratory Services net sales increased compared to last year due to higher test volumes, largely reflecting higher sales of our Nuclear Mitome diagnostic test, sales of our recently launched ScoliScoreTM and C-GAAP tests and a modest shift towards higher priced tests.

Diagnostic Tools net sales of $2.9 million decreased $0.3 million, or 8%, during the three months ended March 31, 2013 compared to the same period in 2012, as we sold fewer instruments in the first quarter of 2013 than in the first quarter of 2012. The decline in instrument sales was partially offset by higher sales of consumables.
Cost of Goods Sold. Cost of goods sold includes 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.
Gross Profit. Gross profit and gross margins for each of our business segments were as follows:

                               Dollars in Thousands
                        Three Months Ended
                             March 31,              Margin %
                          2013           2012     2013    2012
Laboratory Services $    2,193         $ 1,648     50 %    41 %
Diagnostic Tools         1,488           1,456     50 %    45 %
Gross Profit        $    3,681         $ 3,104     50 %    43 %

Gross profit was $3.7 million, or 50% of total net sales during the first quarter of 2013, compared to $3.1 million, or 43% of total net sales during the same period of 2012. During the three months ended March 31, 2013, the gross margin for Laboratory Services was 50% as compared to 41% in the same period of 2012. In 2013, the higher margins reflect higher average sales prices, as well as improved margins on Nuclear Mitome tests. Diagnostic Tools gross margin increased to 50% for the three months ended March 31, 2013 from 45% in the same period of 2012 due to the mix of instruments sold. In 2012, there were more instruments sold to distributors, which carry lower margins.


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Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily consist of personnel costs, marketing, travel costs, professional fees, and facility costs. Our selling, general and administrative costs increased $1.7 million to $6.7 million from $5.0 million during the three month period ended March 31, 2013 compared to the same period in 2012. We had higher sales costs due to the increase in the size of our sales force to support C-GAAP and the launch of ScoliScoreTM. We also had higher bad debt expense during the three months ended March 31, 2013.
Research and Development Expenses. Research and development expenses primarily include personnel costs, intellectual property 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 March 31, 2013 and 2012, these costs totaled $0.8 million and $0.5 million, respectively. The increase in research and development costs is due in part to activities related to converting a number of our tests to a more efficient Next Generation Sequencing instrument platform. Research and development expenses totaled 10% and 8% of net sales during the three months ended March 31, 2013 and 2012, respectively.
Other Income (Expense). Other expense for the three months ended March 31, 2013 and 2012 includes interest expense of $0.2 million and $0.3 million, respectively. In addition, other income includes the revaluation of the common stock warrants, which is due to the change in fair value. The income associated with the change in fair value of the warrants is a non-cash item.
Income Tax Expense. Income tax expense for the three months ended March 31, 2013 and 2012 was $0.1 million, and less than $0.1 million, respectively, primarily related to income earned by our foreign subsidiary.

Liquidity and Capital Resources
Our working capital positions at March 31, 2013 and December 31, 2012 were as
follows:

                                                             Dollars in Thousands
                                                  March 31,      December 31,
                                                    2013             2012             Change
Current assets (including cash and cash
equivalents of $7,729 and $4,497, respectively) $    21,594     $       18,717     $    2,877
Current liabilities                                   9,494             16,528         (7,034 )
Working capital                                 $    12,100     $        2,189     $    9,911

Historically we have operated at a loss and have not consistently generated sufficient cash from operating activities to cover our operating and other cash expenses. We have been able to finance our operating losses through borrowings or from the issuance of additional equity. At March 31, 2013, we had cash and cash equivalents of $7.7 million. We believe that existing sources of liquidity are sufficient to meet expected cash needs for the next 12 months. On January 30, 2013, we issued 16,600,000 shares of common stock at a price per share of $0.50, as well as five year warrants to purchase up to an aggregate of 8,300,000 shares of common stock with an exercise price of $0.75 per share. On March 13, 2013, we entered into a loan and security agreement with affiliates of Third Security, LLC for a revolving line of credit with borrowing availability of up to $4.0 million, subject to reduction based on our eligible accounts receivable, and a term loan of $4 million. Proceeds were used to extinguish the debt with PGxHealth and for working capital purposes. However, we cannot be certain that we will be able to increase our net sales, further reduce our expenses or raise additional capital. Accordingly, we may not have sufficient sources of liquidity to continue our operations indefinitely.
Please see Note 5 "Debt" and Note 6 "Commitments and Contingencies" to our accompanying unaudited condensed consolidated financial statements for additional information regarding our outstanding debt and debt servicing obligations.

Analysis of Cash Flows
Three Months Ended March 31, 2013 and 2012 Net Change in Cash and Cash Equivalents. Cash and cash equivalents increased by $3.2 million during the three months ended March 31, 2013 compared to an increase of $14.3 million during the three months ended March 31, 2012. During the three months ended March 31, 2013 we used cash of $3.3 million in operating activities and $1.1 million in investing activities, which was offset by cash provided by financing activities of $7.7 million. In the three months ended March 31, 2012, net cash used in operating activities was $2.8 million, and net cash used in investing activities was $0.3 million, which was offset by cash provided by financing activities of $17.3 million.


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Cash Flows Used In Operating Activities. Cash flows used in operating activities totaled $3.3 million during the three months ended March 31, 2013 compared to cash flows used in operating activities of $2.8 million during the three months ended March 31, 2012. The cash flows used in operating activities in the first quarter of 2013 include the net loss, increase in accounts receivable of $1.5 million and decrease in accounts payable of $0.7 million, offset by non-cash items including the warrant revaluation of $0.4 million, provision for losses on doubtful accounts of $1.6 million, stock option expense of $0.2 million and depreciation and amortization of $0.7 million. The cash flows used in operating activities in the first quarter of 2012 include the net loss and decrease in accounts payable of $1.1 million, offset by the non-cash items, which include the provision for losses on doubtful accounts of $0.5 million, stock option expense of $0.3 million and depreciation and amortization of $0.5 million. Cash Flows Used In Investing Activities. Cash flows used in investing activities totaled $1.1 million during the three months ended March 31, 2013 compared to cash flows used in investing activities of $0.3 million during the same period of 2012. Cash flows used in investing activities in the first quarter of 2013 include payments made in connection with the acquisition of ScoliScoreTM assets of $0.8 million, purchases of property and equipment of $0.1 million and additions to our patents of $0.1 million. Cash flows used in investing activities in the first quarter of 2012 include purchases of property and equipment of $0.2 million and additions to our patents of $0.1 million. Cash Flows Provided by Financing Activities. Cash flows provided by financing activities were $7.7 million for the three months ended March 31, 2013. Cash provided by financing activities during the three months ended March 31, 2013 included the proceeds from the issuance of 16.6 million shares of our common stock. Cash flows used in financing activities were for payments on debt and capital lease obligations. Cash flows provided by financing activities were $17.3 million for the three months ended March 31, 2012. Cash provided by financing activities during the three months ended March 31, 2012 included the proceeds from the issuance of 19.0 million shares of our common stock. Cash flows used in financing activities were for payments on debt and capital lease obligations.

Off-Balance Sheet Arrangements
At each of March 31, 2013 and December 31, 2012, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations and Commitments
There have been no material changes to our contractual obligations outside the normal course of business as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31,2012. . . .

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