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TBIO > SEC Filings for TBIO > Form 10-Q on 8-Aug-2013All Recent SEC Filings

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Form 10-Q for TRANSGENOMIC INC


8-Aug-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" or the negative versions of these terms and other 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 and six months ended June 30, 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.


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Second Quarter 2013 Overview
We are advancing personalized medicine in cardiology, oncology, neurology and inherited diseases through our proprietary molecular technologies and world-class clinical research services. Today, we are a global leader in molecular diagnostic testing with a family of innovative products

In 2013, we consolidated our Clinical Laboratories and Pharmacogenomic Services business segments into a single segment, which we now refer 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, we recently announced our entry into a collaboration with Amgen, Inc. for the development and launch of a CE-IVD test to screen patients with metastatic colorectal cancer (mCRC) for KRAS and NRAS mutations (collectively referred to as "RAS mutations"). In June 2013, Amgen presented results of a predefined-retrospective subset analysis of a global, multicenter, randomized Phase 3 study at the American Society of Clinical Oncology (ASCO) 2013 Annual Meeting. These RAS mutations outlined in the study, identified using our CE-IVD CRC RAScan™ kits in conjunction with our Surveyor®-Wave® technology, provide physicians with important information regarding tumor mutation status to inform clinical treatment decisions for their mCRC patients. The CRC RAScan™ kit provides superior sensitivity versus any other kit or sequencing method currently available. Our CLIA-certified laboratory in the U.S. is validated to receive patient samples for testing. In Europe, CE-IVD registered test kits are now available for purchase. CLIA testing revenue is recorded in our Laboratory Services segment, while kit sales revenue is recognized in our Diagnostic Tools segment.

CRC RAScanTM utilizes the DNA mismatch-cutting enzyme SURVEYOR Nuclease assay, developed exclusively by us. The SURVEYOR Nuclease assay can detect mutations at higher levels of sensitivity than stand-alone Sanger sequencing. CRC RAScanTM results can also be used to inform marginal or difficult to resolve sequencing results. Additionally, in gene regions where mutations exist at low frequencies, prescreening with CRC RAScanTM affords a cost and time-efficient workflow, as only CRC RAScanTM positive samples are advanced to the more complex and expensive Sanger sequencing analysis.

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 ScoliScoreTM is significant, with nearly 100,000 children and adolescents, usually between the ages of 8 and 15, entering the medical system annually with scoliosis. 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. ScoliScoreTM 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 ScoliScoreTM 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 ScoliScoreTM, we have expanded our sales team, are collaborating with key opinion leaders in the field to expand awareness, are testing patient data in support of 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 ScoliScoreTM will contribute to revenue growth throughout 2013 and beyond.

Our proprietary C-GAAP (Clopidogrel Genetic Absorption Activation Panel) test 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 progress our commercial collaboration with the Medical College of Wisconsin, a world-renowned institution with a robust presence in genomics and genetic testing. This collaboration allows us to rapidly expand the commercial use of our


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Nuclear Mitome test and to launch a number of new offerings, including whole exome testing,later in the third quarter using a next generation sequencing platform.

We continue to advance our ICE-COLD PCR technology to broaden its commercial applications. 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 June 2013, in a joint announcement with ApoCell, Inc., we announced the results of a research collaboration with the University of Texas MD Anderson Cancer Center that coupled ApoCell's ApoStream™ platform for isolating circulating tumor cells (CTCs) with our ICE COLD-PCR technology to detect signature mutations in CTCs isolated from the blood of lung cancer patients. This small pilot study demonstrated that ICE COLD-PCR technology was able to detect a number of the mutations in CTCs that were found in matched tumors from the same patient. The results were presented at the ASCO 2013 Annual Meeting. 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 draw. We are also completing a review of future diagnostic applications and utility of the ICE COLD-PCR technology and products for commercial applications.

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 June 30, 2013 we had cash and cash equivalents of $6.4 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. The government issued new reimbursement codes in 2013, which were set at pricing levels that were generally lower than the levels for identical tests in 2012. Certain private payers also used the issuance of the new codes as an opportunity to unilaterally lower their reimbursement rates. 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 June 30, 2013 decreased by $1.8 million, or 20% compared to the same period in 2012. During the three months ended June 30, 2013, net sales from our Laboratory Services segment decreased by $1.8 million compared to the same three month period in 2012. Net sales in our Diagnostic Tools segment were slightly higher for the three months ended June 30, 2013 compared to the same period in 2012. Our gross profit margin decreased to 47% for the three months ended June 30, 2013 from 50% for the three months ended June 30, 2012. Loss from operations was $2.9 million for the three months ended June 30, 2013 compared to $1.4 million for the three months ended June 30, 2012.

Three Months Ended June 30, 2013 and 2012 Net Sales. Net sales for the three months ended June 30, 2013 decreased by $1.8 million, or 20% compared to the same period in 2012. Net sales performance in each of the segments was as follows:

                                  Dollars in Thousands
                        Three Months Ended
                             June 30,                   Change
                          2013           2012        $           %
Laboratory Services $    4,012         $ 5,808    $ (1,796 )   (31 )%
Diagnostic Tools         3,294           3,285           9       -  %
Total Net Sales     $    7,306         $ 9,093    $ (1,787 )   (20 )%

Laboratory Services net sales of $4.0 million decreased $1.8 million, or 31% during the three months ended June 30, 2013 compared to the same period in 2012. Laboratory Services net sales decreased compared to last year due to lower test volumes and a shift towards lower-priced tests. We experienced higher than normal revenue in the second quarter of 2012 due to a failure in our laboratory information management system (LIMS) that occurred during the first quarter of 2012, which resulted in additional test volume being processed in the second quarter of 2012 instead of the first quarter of 2012.

Diagnostic Tools net sales of $3.3 million were slightly higher, during the three months ended June 30, 2013 compared to the same period in 2012. 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
                             June 30,               Margin %
                          2013           2012     2013    2012
Laboratory Services $    1,853         $ 3,117     46 %    54 %
Diagnostic Tools         1,557           1,445     47 %    44 %
Gross Profit        $    3,410         $ 4,562     47 %    50 %

Gross profit was $3.4 million, or 47% of total net sales during the second quarter of 2013, compared to $4.6 million, or 50% of total net sales during the same period of 2012. During the three months ended June 30, 2013, the gross margin for Laboratory Services was 46% as compared to 54% in the same period of 2012. In 2013, the lower margins largely reflect lower test volumes. Diagnostic Tools gross margin increased to 47% for the three months ended June 30, 2013 from 44% 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. Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily consist of personnel costs, marketing, travel costs, professional fees, facility costs and bad debt provisions. Our selling, general and administrative


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costs increased $0.1 million to $5.4 million from $5.3 million during the three month period ended June 30, 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.
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 June 30, 2013 and 2012, these costs totaled $0.9 million and $0.7 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 12% and 7% of net sales during the three months ended June 30, 2013 and 2012, respectively.
Other Income (Expense). Other expense for the three months ended June 30, 2013 and 2012 includes interest expense of $0.2 million and $0.2 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 benefit for the three months ended June 30, 2013 and 2012 was less than $0.1 million, and less than $0.1 million, respectively. Six Months Ended June 30, 2013 and 2012
Net Sales. Net sales for the six months ended June 30, 2013 decreased by $1.6 million, or 10% compared to the same period in 2012. Net sales performance in each of the segments was as follows:

Dollars in Thousands
Six Months Ended
                           June 30,                Change
                       2013        2012         $           %
Laboratory Services $   8,439    $  9,809    $ (1,370 )   (14 )%
Diagnostic Tools        6,241       6,490        (249 )    (4 )%
Total Net Sales     $  14,680    $ 16,299    $ (1,619 )   (10 )%

Laboratory Services net sales of $8.4 million decreased $1.4 million, or 14% during the six months ended June 30, 2013 compared to the same period in 2012. Laboratory Services net sales decreased compared to last year due to lower test volumes, and lower average sales prices per test.
Diagnostic Tools net sales of $6.2 million decreased $0.2 million, or 4%, during the three months ended June 30, 2013 compared to the same period in 2012, as we sold fewer instruments in the second quarter of 2013 than in the second quarter of 2012.
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
Six Months Ended
                           June 30,            Margin %
                       2013         2012     2013    2012
Laboratory Services $    4,046    $ 4,764     48 %    49 %
Diagnostic Tools         3,045      2,902     49 %    45 %
Gross Profit        $    7,091    $ 7,666     48 %    47 %

Gross profit was $7.1 million, or 48% of total net sales during the second quarter of 2013, compared to $7.7 million, or 47% of total net sales during the same period of 2012. During the six months ended June 30, 2013, the gross margin for Laboratory Services was 48% as compared to 49% in the same period of 2012. In 2013, the lower margins reflect lower average sales prices, as well as lower test volumes. Diagnostic Tools gross margin increased to 49% for the six months ended June 30, 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, facility costs and bad debt provisions. Our selling, general and administrative costs increased $1.9 million to $12.2 million from $10.3 million during the six month period ended June 30, 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 recorded a higher bad debt provision during the six months ended June 30, 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 six months ended June 30, 2013 and 2012, these costs totaled $1.7 million and $1.2 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 11% and 7% of net sales during the six months ended June 30, 2013 and 2012, respectively.
Other Income (Expense). Other expense for the six months ended June 30, 2013 and 2012 includes interest expense of $0.3 million and $0.5 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 six months ended June 30, 2013 was less than $0.1 million, compared to less than $0.1 million income tax benefit for the six months ended June 30, 2012.

Liquidity and Capital Resources
Our working capital positions at June 30, 2013 and December 31, 2012 were as
follows:

                                                             Dollars in Thousands
                                                  June 30,       December 31,
                                                    2013             2012             Change
Current assets (including cash and cash
equivalents of $6,388 and $4,497, respectively) $    19,917     $       18,717     $    1,200
Current liabilities                                   7,187              9,097         (1,910 )
Working capital                                 $    12,730     $        9,620     $    3,110

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 June 30, 2013, we had cash and cash equivalents of $6.4 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 the . . .

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