Business context and reporting period
This is Transgenomic, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2012; the filing is not for Precipio, Inc. Transgenomic operated clinical laboratories, pharmacogenomics services, and diagnostic tools businesses.
Financial performance and condition
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $7.9 | $8.3 | $24.2 | $23.4 |
| Gross profit / margin | $3.8 / 48% | $4.4 / 54% | $11.5 / 47% | $13.2 / 56% |
| Operating loss | $(2.4) | $(0.4) | $(6.2) | $(2.8) |
| Net loss | $(2.8) | $(1.3) | $(6.0) | $(10.0) |
| Net loss available to common stockholders | $(2.9) | $(1.5) | $(6.5) | $(10.8) |
| Basic and diluted loss per share | $(0.04) | $(0.03) | $(0.09) | $(0.22) |
- Nine-month revenue rose 3%; clinical laboratory sales increased 17% to $13.3 million, while pharmacogenomics services fell 34% to $1.2 million and diagnostic tools declined 5% to $9.7 million.
- Gross margin contracted across all segments over nine months. Clinical laboratory margin was pressured by test mix, higher operating costs, and work to repair and improve the New Haven laboratory information system; diagnostic tools margin declined with lower-priced instrument sales.
- Nine-month operating cash outflow was $7.8 million, versus $0.9 million in 2011. Investing used $8.4 million, including short-term investment purchases and the ScoliScore acquisition; financing provided $15.9 million, primarily from the equity financing. Cash and cash equivalents ended at $4.7 million, with short-term investments of $4.0 million.
- Working capital was $5.9 million, up from $0.9 million at December 31, 2011. Total debt was approximately $7.4 million: $7.0 million current and $0.4 million long-term, compared with approximately $11.7 million at year-end 2011.
- Shares outstanding increased to 71.6 million from 49.6 million at year-end 2011. The February private placement raised approximately $22.0 million gross and $17.4 million net, issuing 19.0 million shares and warrants for 11.0 million shares.
Material changes, outlook, risks and unusual items
- The nine-month net loss improved year over year, but this comparison includes a $6.9 million noncash preferred-stock revaluation expense in 2011. Operating loss worsened from $2.8 million to $6.2 million in 2012.
- Transgenomic acquired ScoliScore assay assets from Axial Biotech in September for approximately $3.4 million upfront, with a further $1.0 million payable subject to transfer and operational confirmation. The acquired assets included $4.2 million of identifiable intangibles and $0.2 million of goodwill; allocation was preliminary.
- The company reported an obligation to prepay PGxHealth $5.5 million under a senior secured note and classified the full amount as a current liability. It had paid $1.2 million in June and said PGxHealth had not responded to its attempts to coordinate payment.
- Management said existing cash and short-term investments should cover expected cash needs for at least 12 months, but cautioned that continued operations may require increased sales, cost reductions, or additional capital. The company had historically incurred losses and had not consistently generated enough operating cash to cover expenses.
- Key operating risks include variable clinical-trial testing demand, instrument sales cycles and pricing, reimbursement and collection risks, and foreign-exchange exposure; the company did not hedge currency risk. A New Haven laboratory information system failure in early 2012 reduced processing capacity; management said capacity had been restored but warned of possible future disruptions.
- Management reported no material pending legal claims, no material subsequent events, and no off-balance-sheet arrangements. It stated that disclosure controls were effective as of September 30, 2012.
- No specific financial guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Confirm the filing identity: the registrant is Transgenomic, Inc., notwithstanding the request metadata naming Precipio, Inc.
- Track operating cash burn, receivables and bad-debt provisions, and whether management’s stated 12-month liquidity expectation remains supportable.
- Verify the timing and funding of the $5.5 million PGxHealth prepayment obligation, along with remaining ScoliScore consideration and integration performance.
- Assess whether clinical laboratory growth and new tests can offset weaker pharmacogenomics and diagnostic tools sales and the deterioration in gross margins.
- Monitor dilution and potential share issuance from the 16.2 million outstanding common-stock warrants, 4.3 million options, and the expanded common-share authorization.