Business context and reporting period
This is Transgenomic, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2011; the filing does not identify Precipio, Inc. as the registrant. Transgenomic reported three businesses: Clinical Laboratories, Pharmacogenomics Services, and Diagnostic Tools. Results include the FAMILION genetic-testing business acquired in December 2010.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $8.253 million | $4.419 million | $23.400 million | $14.956 million |
| Gross profit / margin | $4.445 million / 54% | $2.017 million / 46% | $13.152 million / 56% | $7.388 million / 49% |
| Operating loss | $0.439 million | $0.827 million | $2.810 million | $2.259 million |
| Net loss | $1.270 million | $0.898 million | $10.045 million | $2.367 million |
| Net loss available to common stockholders | $1.545 million | $0.898 million | $10.848 million | $2.367 million |
| Basic and diluted loss per share | $0.03 | $0.02 | $0.22 | $0.05 |
For the nine months, operating cash outflow was $0.899 million; investing outflow was $0.403 million; financing outflow was $0.801 million. Cash declined $2.031 million to $1.423 million. At September 30, current assets were $13.656 million, current liabilities $10.104 million, and working capital $3.552 million. Total reported debt, including short-term debt and current and long-term maturities, was approximately $8.886 million. Stockholders’ equity was a deficit of $1.505 million.
Material changes and unusual items
- Nine-month sales rose 56%, primarily reflecting $8.4 million of FAMILION revenue. Clinical Laboratories sales increased $8.645 million; Pharmacogenomics Services increased $0.838 million; Diagnostic Tools declined $1.039 million (9%).
- Gross margin improved to 56% from 49%, including a marked improvement in Clinical Laboratories and Pharmacogenomics Services. Operating loss nevertheless widened to $2.810 million from $2.259 million, with higher SG&A partly associated with FAMILION, stock compensation, acquired-intangible amortization, and bad-debt expense.
- The nine-month common-stockholder loss included $6.866 million of preferred-stock-related expense from fair-value remeasurement of preferred conversion and warrant liabilities; this was noncash. The filing also reports $0.5 million of accrued preferred dividends.
- After quarter-end, in November 2011, investors agreed to waive and seek removal of preferred-stock anti-dilution and redemption features. In exchange, the company issued common shares with an aggregate market value of $0.3 million. The filing’s pro forma presentation shows liabilities reduced from $29.683 million to $18.483 million and stockholders’ equity changing from a $1.505 million deficit to $11.491 million, assuming the agreement applied at September 30.
Outlook, risks, and contingencies
Management anticipated continued growth in diagnostics and laboratory services, citing FAMILION, new tests, and development of mutation-detection technologies. It described the WAVE instrument business as mature and facing competition, with traditional WAVE and consumables sales shrinking; Diagnostic Tools sales fell 9% over nine months. Pharmacogenomics revenue may fluctuate with project timing and clinical-trial enrollment. Management gave no quantified revenue or earnings guidance.
Management said existing liquidity was expected to meet cash needs into 2012, but also said the company needed higher sales and lower expenses for longer-term liquidity and might need additional funding in the near future. It could not assure that it would raise capital, grow sales, or reduce expenses sufficiently. Other cited risks include reimbursement and customer-budget constraints, competition, foreign-exchange exposure, and uncertainty in executing operating plans. The company said pending ordinary-course claims were not expected to have a material adverse effect. Disclosure controls were assessed as effective at September 30, 2011.
Important facts for investors to verify
- Confirm the registrant and reporting entity: this filing is for Transgenomic, Inc., not Precipio, Inc.
- Review cash runway, debt repayment terms, and the availability and terms of any additional financing.
- Assess the November preferred-stock amendment’s final implementation, share issuance, and effect on dilution and capital structure.
- Evaluate whether FAMILION revenue and improved laboratory margins can be sustained, and whether Diagnostic Tools declines continue.
- Examine collectability of receivables, including the substantial increase in the doubtful-account provision, and the assumptions used to value preferred-stock-related liabilities.