Filing summary
Entity note: The supplied filing is for Transgenomic, Inc., not Precipio, Inc. It is a Form 10-Q for the quarter ended September 30, 2013; the financial statements are unaudited.
Business context and reporting period
Transgenomic describes itself as a biotechnology company focused on genetic testing and research services. Its two reportable segments are Laboratory Services and Diagnostic Tools, including genetic testing, research services, instruments and consumables. The company combined its clinical laboratory and pharmacogenomic services reporting into Laboratory Services in 2013; prior-year segment figures were reclassified.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $6.65 million | $7.89 million | $21.33 million | $24.19 million |
| Gross profit / margin | $2.85 million / 43% | $3.80 million / 48% | $9.94 million / 47% | $11.47 million / 47% |
| Operating loss | $5.41 million | $2.43 million | $12.15 million | $6.24 million |
| Net loss | $5.55 million | $2.75 million | $12.01 million | $6.01 million |
| Loss per common share | $0.06 | $0.04 | $0.14 | $0.09 |
At September 30, 2013, cash was $4.02 million, working capital was $5.18 million, total assets were $33.18 million and stockholders’ equity was $15.39 million. Debt totaled $6.56 million: $1.09 million current and $5.47 million long term. Nine-month operating cash outflow was $6.33 million; investing outflow was $1.60 million; financing inflow was $7.45 million. Cash declined $0.48 million from year-end 2012.
Material changes versus prior periods
- Q3 sales declined 16% year over year: Laboratory Services fell 13% and Diagnostic Tools fell 20%. For the first nine months, sales decreased 12%, with declines in both segments.
- Q3 gross margin fell to 43% from 48%, mainly reflecting lower Laboratory Services test volumes and Diagnostic Tools instrument mix. Nine-month consolidated gross margin remained 47%; Laboratory Services margin weakened while Diagnostic Tools margin improved.
- Operating loss and net loss widened substantially. Q3 selling, general and administrative expense rose to $7.63 million from $5.56 million, primarily due to an additional reserve for potentially uncollectible receivables. Nine-month SG&A also increased, reflecting sales-force expansion and higher bad-debt provisions.
- The company recorded a $5.21 million provision for doubtful accounts for the first nine months and wrote off approximately $3.1 million of prior-period receivables. Net accounts receivable was $4.41 million at quarter-end.
- Financing included a January 2013 equity offering of 16.6 million shares for gross proceeds of approximately $8.3 million, and March refinancing with a $4.0 million term loan and a revolving line with up to $4.0 million availability. The company reported 88.25 million common shares outstanding at September 30, versus 71.65 million at December 31, 2012.
Outlook, risks and unusual items
- Management stated that existing liquidity was expected to cover cash needs for at least 12 months, but cautioned that the company may not be able to grow sales, reduce expenses further or raise additional capital, and may not have resources to continue operations indefinitely.
- Management anticipated growth in both segments as new tests and technologies are commercialized, but provided no quantified revenue, earnings or cash-flow guidance.
- Risks highlighted include lower reimbursement rates from government and private payors, weak test volumes and instrument demand, competition, collection risk, reliance on external financing, foreign-exchange exposure and compliance with lender covenants.
- The debt is secured by the company’s assets and includes minimum liquidity and revenue covenants and other restrictions. The company said it was compliant with amended covenants at September 30. A November 14, 2013 amendment, effective October 31, reduced a future minimum revenue covenant. A covenant default could allow lenders to stop advances, accelerate repayment or enforce collateral rights.
- The company reported no material adverse effect expected from pending ordinary-course claims and no off-balance-sheet arrangements. Vendor commitments were $1.4 million; operating lease payments were also disclosed. The filing reported a $0.3 million prior-period understatement of warrant liability, corrected in 2013; warrant fair-value gains were non-cash.
- Commercial developments described after quarter-end included a U.S. CardioPredict collaboration with PDI and an oncology-test distribution agreement with PerkinElmer for territories outside the U.S., effective January 1, 2014. These are forward-looking commercial opportunities, not reported-period revenue results.
Investor facts to verify
- Confirm the filing’s issuer identity: this document names Transgenomic, Inc., not Precipio, Inc.
- Assess the size and collectability of receivables, including the large doubtful-account provision and prior-period write-offs.
- Review cash burn, borrowing availability under the receivables-based revolver, debt service requirements and compliance with amended lender covenants.
- Track whether new partnerships and product launches generate sales sufficient to offset declining segment revenue and operating losses.
- Verify share dilution and potential dilution from outstanding warrants and options; the filing reports 26.64 million common-stock warrants outstanding at September 30, 2013.