NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2017 and 2016
1. BUSINESS DESCRIPTION
Business Description
Transgenomic, Inc., and Subsidiary, (“we”, “us”, “our”, the “Company” or “Transgenomic”) is a biotechnology company advancing personalized medicine for the detection and treatment of cancer and integrated diseases through our proprietary molecular technologies and clinical and research services. A key goal is to bring our Multiplexed ICE COLD-PCR (“MX-ICP”) product to the clinical market through strategic partnerships and licensing agreements, enabling the use of blood and other bodily fluids for more effective and patient-friendly diagnosis, monitoring and treatment of cancer.
MX-ICP is technology proprietary to Transgenomic. It is a reagent that improves the ability to detect genetic mutations. This technology has been validated internally on all currently available sequencing platforms, including Sanger, Next Gen Sequencing and Digital PCR. By enhancing the level of detection of genetic mutations and suppressing the normal or wild-type DNA, several benefits are provided.
Historically, our operations were organized and reviewed by management along our major product lines and presented in
two
business segments: Laboratory Services and Genetic Assays and Platforms. Beginning with the quarter ended September 30, 2015, our operations are now organized as
one
business segment, our Laboratory Services segment, and during the fourth quarter of 2015, we began including a portion of our Laboratory Services segment as discontinued operations, this has continued through March 31, 2017.
Our current Laboratory Services business consists of our laboratory in Omaha, Nebraska, which is focused on providing genetic analytical services related to Oncology and pharmacogenomics research services supporting Phase II and Phase III clinical trials conducted by pharmaceutical and biotechnology companies. Our laboratory employs a variety of genomic testing service technologies, including our proprietary MX-ICP technology. Our laboratory in Omaha is certified under the Clinical Laboratory Improvement Amendments (“CLIA”) as a high complexity laboratory and is accredited by the College of American Pathologists.
Our condensed consolidated balance sheets, statements of operations and statements of cash flows for all periods presented reflect our former Genetic Assays and Platforms activities and Patient Testing business as discontinued operations (See Note 3 - “Discontinued Operations”).
Going Concern
The condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern, which assume that we will realize our assets and discharge our liabilities in the ordinary course of business. We have incurred substantial operating losses and have used cash in our operating activities for the past few years. As of March 31, 2017, we had negative working capital of
$20.6 million
and we were also not in compliance with our loan agreement due to the fact that events of default existed, including our failure to make certain required monthly interest payments to the lenders. The Company’s ability to continue as a going concern is dependent upon a combination of completing its planned merger with Precipio Diagnostics, LLC (“Precipio”), generating additional revenue, improving cash collections, potentially selling underutilized assets and/or product lines related to discontinued operations and, if needed, raising necessary financing to meet its obligations and pay its liabilities arising from normal business operations when they come due. Following the planned merger, Transgenomic will change its name to Precipio, Inc. (“New Precipio”). On February 17, 2017, Transgenomic received written notification from the staff of Nasdaq that, as a result of Transgenomic’s inability to maintain certain Nasdaq continued listing requirements, Nasdaq had determined to delist Transgenomic’s shares from Nasdaq. Accordingly, trading in Transgenomic’s shares was suspended, and on February 22, 2017, Transgenomic’s shares began trading on the OTCQB exchange under the ticker “TBIO”. As discussed below upon completion of the merger, the New Precipio common stock will be required to meet the Nasdaq listing standards. As a result of the merger, New Precipio is expected to meet Nasdaq's initial listing requirements. In addition, at the time of the merger the Company intends to execute a reverse stock split. The outcome of these matters cannot be predicted with any certainty at this time and raises substantial doubt that the Company will be able to continue as a going concern for the next twelve months from the date of issuance of these condensed financial statements. These condensed consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern. There is no assurance that the Company will complete the merger in a timely manner or at all. The merger agreement is subject to many closing conditions and termination rights. The Company
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three Months Ended March 31, 2017 and 2016
also cannot be certain that additional financing, if needed, will be available on acceptable terms, or at all, and its failure to raise capital when needed could limit its ability to continue its operations.
Merger Agreement
On October 12, 2016, Transgenomic, New Haven Labs Inc., a wholly owned subsidiary of Transgenomic (“Merger Sub” and, together with Transgenomic, the “Transgenomic Parties”), and Precipio entered into an Agreement and Plan of Merger (as amended by the Merger Agreement Amendment (as defined below) the “Merger Agreement”) pursuant to which Precipio will become a wholly owned subsidiary of Transgenomic (the “Merger”), on the terms and subject to the conditions set forth in the Merger Agreement. On February 2, 2017, Transgenomic, Merger Sub and Precipio entered into a First Amendment to Agreement and Plan of Merger (the “Merger Agreement Amendment”), which provided for, among other things, the revision of the exchange ratio set forth in the Merger Agreement, the waiver and removal of certain closing conditions and the authorization of certain actions taken by each of Transgenomic and Precipio since the date the Merger Agreement. The parties expect the Merger to close in the second quarter of 2017.
Upon the effectiveness of the Merger (the “Effective Time”), (i) the outstanding common units of Precipio will be converted into the right to receive approximately
160.6 million
shares of common stock of New Precipio (“New Precipio common stock”), together with cash in lieu of fractional units, which will result in Precipio common unit holders owning approximately
52%
of the issued and outstanding shares of New Precipio common stock on a fully diluted basis, taking into account the issuance of shares of convertible preferred stock of New Precipio (“New Precipio preferred stock”) in the Merger and the private placement as discussed below (the “fully diluted New Precipio common stock”) and (ii) the outstanding preferred units of Precipio will be converted into the right to receive approximately
24.1 million
shares of New Precipio preferred stock with an aggregate face amount equal to
$3.0 million
(based upon the purchase price of the new preferred stock of New Precipio in the new preferred stock financing), which will result in the Precipio preferred unit holders owning approximately
8%
of the fully diluted New Precipio common stock.
Upon completion of the merger, New Precipio will be required to meet the initial listing requirements to qualify its shares for listing and begin trading of its shares on Nasdaq. These initial listing requirements are more difficult to achieve than the continued listing requirements. Pursuant to the Merger Agreement, Transgenomic agreed to use its commercially reasonable efforts to cause the shares of Transgenomic common stock being issued in the merger to be approved for listing on Nasdaq at or prior to the effective time of the merger. Based on information currently available to Transgenomic, Transgenomic anticipates that its stock will be unable to meet the
$4.00
(or, to the extent applicable,
$3.00
) minimum bid price initial listing requirement at the closing of the merger unless it effects a reverse stock split. On October 31, 2016, the stockholders of Transgenomic authorized the Transgenomic Board to effect a reverse stock split of the shares of Transgenomic common stock at a ratio of between one-for-ten to one-for-thirty, such ratio to be determined by our Board of Directors (the “Reverse Split Proposal”). The Reverse Split Proposal was described in detail in our definitive proxy statement filed with the Securities and Exchange Commission on September 22, 2016, as supplemented on October 13, 2016. In addition, often times a reverse stock split will not result in a trading price for the affected common stock that is proportional to the ratio of the split.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation.
The accompanying condensed consolidated financial statements are presented in conformity with GAAP. Supplemental cash flows from discontinued operations are presented in Note 3 - “Discontinued Operations”. We have evaluated events occurring subsequent to March 31, 2017 for potential recognition or disclosure in the condensed consolidated financial statements and concluded there were no subsequent events that required recognition or disclosure.
The condensed consolidated balance sheet as of
December 31, 2016
was derived from our audited balance sheet as of that date. There has been no change in the balance sheet from December 31, 2016. The accompanying condensed consolidated financial statements as of and for the
three
months ended
March 31, 2017
and
2016
are unaudited and reflect all adjustments (consisting of only normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended
December 31, 2016
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three Months Ended March 31, 2017 and 2016
contained in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on April 13, 2017. The results of operations for the interim periods presented are not necessarily indicative of the results for fiscal year 2017.
Principles of Consolidation.
The condensed consolidated financial statements include the accounts of Transgenomic, Inc. and our wholly owned subsidiary. All inter-company balances and transactions have been eliminated in consolidation.
Risks and Uncertainties.
Certain risks and uncertainties are inherent in our day-to-day operations and in the process of preparing our financial statements. The more significant of those risks are presented below and throughout the notes to the unaudited condensed consolidated financial statements.
Fair Value.
Unless otherwise specified, book value approximates fair value. The common stock warrant liability is recorded at fair value. See Note 8 - “Fair Value” for additional information.
Cash and Cash Equivalents and Other Current Assets.
Cash and cash equivalents include cash and investments with original maturities at the date of acquisition of three months or less. Other current assets as of March 31, 2017 of
$0.2 million
include prepaid assets of
$0.1 million
and other receivables of
$0.1 million
.
Concentrations of Cash.
From time to time, we may maintain a cash position with financial institutions in amounts that exceed federally insured limits. We have not experienced any losses on such accounts as of
March 31, 2017
.
Property and Equipment.
Depreciation expense in continuing operations related to property and equipment was less than
$0.1 million
for each of the three month periods ended
March 31, 2017
and
2016
. Depreciation expense during each period includes depreciation related to equipment acquired under capital leases.
Intangible Assets.
Amortization expense for intangible assets was less than
$0.1 million
during the three month periods ended
March 31, 2017
and
2016
. Amortization expense for intangible assets is expected to be
$0.1 million
for each of the years ending December 31, 2017, 2018 and less than
$0.1 million
for each of the years ending December 31, 2019, 2020 and 2021.
Stock-Based Compensation.
All stock-based awards to date have exercise prices equal to the market price of our common stock on the date of grant and have
ten
-year contractual terms. Unvested awards as of
March 31, 2017
had vesting periods of up to
three
years from the date of grant. None of the awards outstanding at
March 31, 2017
are subject to performance or market-based vesting conditions.
During the
three
months ended
March 31, 2017
and 2016, we recorded compensation expense for all stock awards of
zero
and
$0.1 million
, respectively, within selling, general and administrative expense. As of
March 31, 2017
, the unrecognized compensation expense related to unvested stock awards was less than
$0.1 million
, which is expected to be recognized over a weighted-average period of
one
year.
Included in our stock awards outstanding as of March 31, 2017 were fully vested stock appreciation rights (“SARs”)
to purchase
83,333
shares of our common stock. The SARs were issued solely to our executive officers and vested over
three
years from the date of grant.
Net Sales Recognition.
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three Months Ended March 31, 2017 and 2016
Revenue is realized and earned when all of the following criteria are met:
|
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•
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Persuasive evidence of an arrangement exists;
|
|
|
•
|
Delivery has occurred or services have been rendered;
|
|
|
•
|
The seller’s price to the buyer is fixed or determinable; and
|
|
|
•
|
Collectability is reasonably assured.
|
In our Omaha, Nebraska laboratory, we perform services on a project by project basis. When we receive payment in advance, we initially defer the revenue and recognize it when we deliver the service. These projects typically do not extend beyond one year. At each of
March 31, 2017
and December 31,
2016
, deferred net sales associated with pharmacogenomics research projects included in the balance sheet in deferred revenue were
$0.1 million
and
$0.2 million
, respectively.
Net sales from Patient Testing laboratories are reported as part of discontinued operations (See Note 3 - “Discontinued Operations”) and are recognized on an individual test basis and, since collectability is not reasonably assured, are recognized when cash is received. There are no deferred net sales associated with our Patient Testing services.
Taxes collected from customers and remitted to government agencies for specific net sales producing transactions are recorded net with no effect on the income statement.
Loss Per Share.
Basic loss per share is calculated based on the weighted-average number of common shares outstanding during each period. Diluted loss per share includes shares issuable upon exercise of outstanding stock options, warrants or conversion rights that have exercise or conversion prices below the market value of our common stock. Options, warrants and conversion rights pertaining to
4,425,218
and
12,970,881
shares of our common stock have been excluded from the computation of diluted loss per share at
March 31, 2017
and
2016
, respectively, because the effect is anti-dilutive due to the net loss.
Recent Accounting Pronouncements.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. This guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to a customer. ASU No. 2014-09 will replace most existing revenue recognition guidance in generally accepted accounting principles in the U.S. when it becomes effective. In July 2015, the FASB decided to defer the effective date of this new accounting guidance by one year. As a result, ASU No. 2014-09 will be effective for us for all annual and interim reporting periods beginning after December 15, 2017 and early adoption would be permitted as of the original effective date. The new standard permits the use of either the retrospective or cumulative effect transition method. We do not expect to early adopt this guidance and we have not selected a transition method. We are currently evaluating the impact this guidance will have on our financial condition, results of operations and cash flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard amends the recognition of lease assets and lease liabilities by lessees for those leases currently classified as operating leases and amends disclosure requirements associated with leasing arrangements. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We are currently assessing the impact that the adoption of this ASU will have on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The new standard simplifies several aspects related to the accounting for share-based payment transactions, including the accounting for income taxes, statutory tax withholding requirements, forfeitures and classification on the statement of cash flows. This guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016. The Company adopted ASU No. 2016-09 as of January 1, 2017. The adoption of this guidance does not have a material effect on the Company’s financial position and results of operations.
In August 2016, FASB issued ASU No. 2016-15
,
Classification of Certain Cash Receipts and Cash Payments.
ASU No. 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows by adding or clarifying guidance on eight specific cash flow issues. ASU No. 2016-15 is effective for fiscal years
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three Months Ended March 31, 2017 and 2016
beginning after December 15, 2017, and for interim periods within that fiscal year. We do not believe ASU No. 2016-15 will have a material effect on our financial position and results of operations.
In January 2017, FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU No. 2017-01adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not believe ASU No. 2017-01 will have a material effect on its financial position and results of operations.
3. DISCONTINUED OPERATIONS
In March 2016, we halted testing services in our Patient Testing laboratory in New Haven, Connecticut. As a result of this action, as of December 31, 2015, our Patient Testing business met the criteria to be reported as discontinued operations. The related assets, liabilities, results of operations and cash flows for the Patient Testing business are classified as assets held for sale, liabilities held for sale and discontinued operations for all periods presented.
Results of the discontinued operations consisted of the following:
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Three months ended March 31,
|
(Dollars in thousands)
|
2017
|
|
2016
|
Net sales
|
$
|
68
|
|
|
$
|
1,103
|
|
Cost of goods sold
|
15
|
|
|
1,183
|
|
Gross profit (loss)
|
53
|
|
|
(80
|
)
|
Selling, general and administrative expense
|
(65
|
)
|
|
1,025
|
|
Research and development expense
|
—
|
|
|
68
|
|
Operating income (loss) from discontinued operations
|
118
|
|
|
(1,173
|
)
|
Loss on settlement of liability
|
(45
|
)
|
|
—
|
|
Income (loss) from discontinued operations before income taxes
|
73
|
|
|
(1,173
|
)
|
Income tax expense
|
—
|
|
|
—
|
|
Income (loss) from discontinued operations, net of taxes
|
$
|
73
|
|
|
$
|
(1,173
|
)
|
At March 31, 2017 and December 31, 2016, the Company had assets of the discontinued operations of less than
$0.1 million
which were classified as assets held for sale in the condensed consolidated balance sheets.
4. DEBT
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three Months Ended March 31, 2017 and 2016
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|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Revolving Line of Credit
(1)
|
|
$
|
3,243
|
|
|
$
|
3,243
|
|
Term Loan
(2)
|
|
4,000
|
|
|
4,000
|
|
Convertible Promissory Notes
(3)
|
|
125
|
|
|
571
|
|
Total debt
|
|
7,368
|
|
|
7,814
|
|
Current portion of long-term debt
|
|
(7,368
|
)
|
|
(7,814
|
)
|
Long-term debt, net of current maturities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
(1)
|
Revolving Line of Credit.
Amounts advanced under the Revolving Line accrue interest at an annual rate equal to the greater of (a)
6.25%
or (b) the
Wall Street Journal
prime rate plus
3%
. The current interest rate is
6.75%
. As discussed below under
Additional Terms
, the interest rate is subject to increase if there is a default under the Loan Agreement. Interest is payable on a monthly basis, with the balance payable at the maturity of the Revolving Line. Under the Loan Agreement, we pay the Lenders a commitment fee of
$20,000
on each one-year anniversary of March 13, 2013, the Effective Date, during the term of the Revolving Line. In addition, a fee of
0.5%
per annum is payable quarterly on the unused portion of the Revolving Line. The Revolving Line matures on November 1, 2017.
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|
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(2)
|
Term Loan.
We received
$4.0 million
under the Term Loan on the Effective Date. Pursuant to the terms of the Loan Agreement, as amended, the maturity date of the Loan Agreement was extended until November 1, 2017 and no principal payments on the Term Loan are due until such date. The current interest rate is
9.1%
. As discussed below, the interest rate is subject to increase if there is a default under the Loan Agreement.
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We will pay the Lenders an additional final payment of
$120,000
, at maturity or prepayment of the Term Loan, which has been recorded and is reflected in accrued expenses at March 31, 2017 and December 31, 2016. In addition, if we repay the Term Loan prior to maturity, we will pay the Lenders a prepayment penalty of
1%
of the total outstanding balance under the Term Loan.
Additional Terms.
The Loan Agreement contains affirmative and negative covenants. Under the Loan Agreement, we agreed not to (i) pledge or otherwise encumber our assets other than to the Lenders, (ii) enter into additional borrowings or guarantees, (iii) repurchase our capital stock, or (iv) enter into certain mergers or acquisitions without the Lenders’ consent. Additionally, the Loan Agreement contains a subjective acceleration clause at the discretion of the Lenders. As of March 31, 2017, we were not in compliance with the Loan Agreement, as amended, due to the fact that events of default existed, including our failure to make certain required monthly interest payments.
To secure the repayment of any amounts borrowed under the Revolving Line and the Term Loan, we granted the Lenders a security interest in all of our assets. The occurrence of an event of default under the Loan Agreement could result in the acceleration of our obligations under the Loan Agreement, would increase the applicable interest rate under the Revolving Line or Term Loan (or both) by
5%
and would permit the Lenders to exercise remedies with respect to the collateral under the Loan Agreement. At March 31, 2017, our applicable interest rates have been increased by
5%
.
(3)
Convertible Promissory Notes.
The Notes accrue interest at a rate of
6%
per year and matured on December 31, 2016.
Revolving Line and Term Loan.
On March 13, 2013 (the “Effective Date”), we entered into a Loan and Security Agreement with affiliates of Third Security, LLC, a related party, (the “Lenders”) for (a) a revolving line of credit (the “Revolving Line”) with borrowing availability of up to
$4.0 million
, subject to reduction based on our eligible accounts receivable, and (b) a term loan (the “Term Loan” and, together with the Revolving Line, the “Loan Agreement”) of
$4.0 million
. From the Effective Date through 2015, there were a number of amendments to the Loan Agreement.
On January 6, 2016, we entered into an eighth amendment to the Loan Agreement (the “Eighth Amendment”). The Eighth Amendment, among other things, (a) provided that the Lenders waived specified events of default under the terms of the Loan Agreement, (b) reduced our future minimum revenue covenants under the Loan Agreement, (c) extended the maturity date of the Loan Agreement until November 1, 2017, and (d) provided for the repayment of an overadvance of
$750,000
previously provided by the Lenders to us pursuant to the Loan Agreement.
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three Months Ended March 31, 2017 and 2016
During the first quarter of 2016, the overadvance that existed at December 31, 2015 was repaid to the Lenders and
$0.2 million
was received from certain of the Lenders and another lender affiliate in connection with the equity offering made on January 6, 2016.
On June 6, 2016, we entered into a ninth amendment to the Loan Agreement (the “Ninth Amendment”). The Ninth Amendment, among other things, (a) provided that the Lenders waived specified events of default under the terms of the Loan Agreement, (b) amended the prepayment terms of the Loan Agreement, (c) provided for the reduction of amounts available under the Revolving Line upon the prepayment or repayment of certain amounts by us, (d) removed the minimum liquidity ratio and minimum net revenue financial covenants applicable to us under the Loan Agreement, (e) amended the circumstances pursuant to which we may engage in certain sales or transfers of our business or property without the consent of the Lenders, and (f) capitalized certain amounts owed by us to the Lenders and added such overdue amounts to the outstanding principal amount of the Revolving Line.
On February 2, 2017, we entered into a termination and tenth amendment to the Loan Agreement (the “Tenth Amendment”). The Tenth Amendment, among other things, (i) provides that the Lenders will waive specified events of default under the terms of the Loan Agreement until the effective time of the Merger (or the termination of the Merger Agreement in accordance with its terms), (ii) provides for the conversion of all outstanding indebtedness owed to the Lenders under the Loan Agreement (the “Outstanding Indebtedness”) into shares of Transgenomic common stock and preferred stock (collectively, the “Conversion Shares”) effective as of the closing date of the Merger and (iii) the termination of the Loan Documents (as defined in the Loan Agreement) and the termination and release of all security interests and liens of the Lenders in the Collateral (as defined in the Loan Agreement) in each case immediately following the conversion of the Outstanding Indebtedness into Conversion Shares.
The effectiveness of certain provisions in the Tenth Amendment, including provisions relating to conversion of the Conversion Shares and termination of the Loan Documents, is conditioned on, among other things, the consummation of the Merger, and, in the event that the Merger is not consummated, these provisions in the Loan Agreement Amendment will terminate.
In connection with the Tenth Amendment, the Lenders have agreed to convert the outstanding principal and accrued interest under the Loan Agreement into (i) approximately
10.4 million
shares of New Precipio common stock immediately prior to the effectiveness of the Merger at a price equal to
$0.50
per share and (ii)
24.1 million
shares of New Precipio preferred stock. As of March 31, 2017, the outstanding amount owed under the Loan Agreement was approximately
$7.2 million
of principal and
$0.8 million
of accrued interest. The issuance of the Conversion Shares is subject to the approval of the Transgenomic stockholders in accordance with NASDAQ Capital Market listing rules.
Convertible Promissory Notes.
On December 31, 2014, we entered into an Unsecured Convertible Promissory Note Purchase Agreement (the “Note Purchase Agreement”) with an accredited investor (the “Investor”), pursuant to which we agreed to issue and sell to the Investor in a private placement an unsecured convertible promissory note (the “Initial Note”). We issued the Initial Note in the aggregate principal amount of
$750,000
to the Investor on December 31, 2014. Pursuant to the terms of the Initial Note, interest accrued at a rate of
6%
per year and the Initial Note was set to mature on December 31, 2016. The Initial Note has been converted in full into
502,786
shares of our common stock, in accordance with the terms of the Initial Note.
On January 15, 2015, we entered into the Note Purchase Agreement with
seven
accredited investors (the “Additional Investors”) and, on January 20, 2015, issued and sold to the Additional Investors, in a private placement, notes (the “Additional Notes”) in an aggregate principal amount of
$925,000
. We also issued, to our placement agent for the Notes, a convertible promissory note in an aggregate principal amount equal to
5%
of the proceeds received by us, or
$46,250
(the “Agent Note”). The Additional Notes and Agent Note have the same terms and conditions as the Initial Note. As of December 31, 2016,
$400,000
of the aggregate principal amount of the Additional Notes and Agent Note, and accrued interest thereon, had been converted into an aggregate of
281,023
shares of our common stock.
On the Maturity Date, the then outstanding aggregate amount owed on the Additional Notes and Agent Note of approximately
$0.6 million
, including accrued interest, became due. Pursuant to the terms of the Initial Note, our failure to pay any principal or interest within
10
days of the date such payment is due will constitute an event of default (the “Prospective Event of Default”).
On January 10, 2017, the Additional Investors and our placement agent executed a waiver of the Prospective Event of Default, pursuant to which, they agreed to waive the Prospective Event of Default on the condition that the Company and the Additional Investors enter into definitive documentation evidencing the terms for an extended maturity date of the Additional Notes and the Agent Note on or before January 16, 2017 (the “Waiver Deadline”).
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three Months Ended March 31, 2017 and 2016
On January 13, 2017, all but one Additional Investor exercised their conversion rights relating to their respective Additional Notes, including the Agent Note, and converted an aggregate principal amount of
$0.4
million, and accrued interest of less than
$0.1 million
, into
416,135
shares of our common stock. The Waiver Deadline was extended with respect to the remaining Additional Investor who did not exercise conversion rights (the “Non-Converting Investor”) so that the parties could continue to discuss a resolution of the Prospective Event of Default relating to such Non-Converting Investor’s Additional Note with an outstanding principal amount due of
$0.1
million.
On January 17, 2017, the Non-Converting Investor agreed to extend the Maturity Date of its Additional Note pursuant to an amendment to the Additional Note (the “Amendment”). The Amendment provides that two-thirds of the outstanding principal amount of the Additional Note must be paid upon the earlier to occur of the close of the Company’s merger with Precipio Diagnostics, LLC or June 16, 2017 (such applicable date, the “Deferred Maturity Date”). The remaining one-third of the principal amount outstanding on the Additional Note must be paid on the six month anniversary of the Deferred Maturity Date (the “Extended Maturity Date”).
5. CONTINGENCIES
We are subject to a number of claims of various amounts that arise out of the normal course of our business. In addition to the claims described in this Note, we are delinquent on the payment of outstanding accounts payable amounting to approximately
$0.6 million
with certain of our vendors and suppliers who have taken or have threatened to take legal action to collect such outstanding amounts.
On February 25, 2016, the Board of Regents of the University of Nebraska (“UNMC”) filed a lawsuit against us in the District Court of Douglas County, Nebraska, for breach of contract and seeking recovery of
$0.7 million
owed by us to UNMC. A
$0.4 million
liability has been recorded and is reflected in accrued expenses at March 31, 2017 and December 31, 2016. We and UNMC entered into a settlement agreement dated February 6, 2017, which included, among other things, a mutual general release of claims, and our agreement to pay
$0.4 million
to UNMC in installments over a period of time. As of March 15, 2017, the initial payment due to UNMC under the settlement agreement is delinquent. We and UNMC are currently in discussions to extend the date of the initial payment due to UNMC.
In addition, on April 13, 2016, Fox Chase Cancer Center (“Fox Chase”) filed a lawsuit against us in the Court of Common Pleas of Philadelphia County, First Judicial District of Pennsylvania Civil Trial Division (the “Court of Common Pleas”), alleging, among other things, breach of contract, tortious interference with present and prospective contractual relations, unjust enrichment, fraudulent conversion and conspiracy and seeking punitive damages in addition to damages and other relief. This lawsuit relates to a license agreement we entered into with Fox Chase in August 2000, as amended (the “License Agreement”), as well as the assignment of certain of our rights under the License Agreement to Integrated DNA Technologies, Inc. (“IDT”) pursuant to the Surveyor Kit Patent, Technology and Inventory Purchase Agreement we entered into with IDT effective as of July 1, 2014 (the “IDT Agreement”). Pursuant to the terms of the IDT Agreement, we agreed to indemnify IDT with respect to certain of the claims asserted in the Fox Chase proceeding. On July 8, 2016, the Court of Common Pleas sustained our preliminary objections to several of Fox Chase’s claims and dismissed the claims for tortious interference, fraudulent conversion, conspiracy, punitive damages and attorney’s fees. Accordingly, the case has been narrowed so that only certain contract claims and an unjust enrichment claim remain pending against us. We believe that we have good and substantial defenses to the claims asserted by Fox Chase. We are unable to determine whether any loss will occur or to estimate the range of such potential loss; therefore, no amount of loss has been accrued by us as of the date of filing of this Quarterly Report on Form 10-Q. Furthermore, there is no guarantee that we will prevail in this suit or receive any damages or other relief if we do prevail.
On June 23, 2016, the Icahn School of Medicine at Mount Sinai (“Mount Sinai”) filed a lawsuit against us in the Supreme Court of the State of New York, County of New York, alleging, among other things, breach of contract and, alternatively, unjust enrichment and quantum merit, and seeking recovery of
$0.7 million
owed by us to Mount Sinai for services rendered. We and Mount Sinai entered into a settlement agreement dated October 27, 2016, which included, among other things, a mutual general release of claims, and our agreement to pay approximately
$0.7 million
to Mount Sinai in installments over a period of time. A
$0.7 million
liability has been recorded and is reflected in accrued expenses at March 31, 2017 and December 31, 2016. Effective as of February 1, 2017, we and Mount Sinai agreed to amend the terms of our settlement agreement to extend the date of the initial payment due to Mount Sinai.
On December 19, 2016, Todd Smith (“Smith”) filed a lawsuit against us in the District Court of Douglas County Nebraska, alleging breach of contract and seeking recovery of
$2.2 million
owed by us to Smith for costs and damages arising from a breach of our obligations pursuant to a lease agreement between the parties. On April 7, 2017, we entered into a settlement agreement with Smith related to the early termination of our lease for our Omaha, Nebraska facility. The agreement included, among other things, a mutual general release of claims, and our agreement to pay approximately
$0.6 million
to Smith in installments over a period of time. A
$0.6 million
liability has been recorded and is reflected in accrued expenses at March 31, 2017. The accrued
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three Months Ended March 31, 2017 and 2016
liability includes
$0.4 million
recorded as a net loss on the settlement and is included in other expense in our condensed consolidated statements of operations for the three months ended March 31, 2017.
On February 21, 2017, XIFIN, Inc. (“XIFIN”) filed a lawsuit against us in the District Court for the Southern District of California alleging breach of written contract and seeking recovery of approximately
$0.27 million
owed by us to XIFIN for damages arising from a breach of our obligations pursuant to a Systems Services Agreement between us and XIFIN, dated as of February 22, 2013, as amended and restated on September 1, 2014. On April 5, 2017, the court clerk entered default against us. On May 5, 2017, XIFIN filed an application for entry of default judgment against us. A
$0.3 million
and
$0.2 million
liability has been recorded and is reflected in accrued expenses at March 31, 2017 and December 31, 2016, respectively.
We and Science Park Development Corporation (“SPDC”) entered into that certain Lease dated as of December 31, 2011, as modified by the First Amendment to Lease dated as of June 18, 2013, as further modified by a letter agreement dated as of February 2, 2015, as modified by the Second Amendment to Lease dated as of June 26, 2015 (the “ SPDC Lease”). In November 2016, SPDC alleged that we defaulted on our obligations under the SPDC Lease. Specifically, SPDC alleges that we failed to pay approximately
$0.4 million
in rental payments due under the SPDC Lease and that we vacated a portion of the leased premises in violation of the terms of the SPDC Lease. We and SPDC entered into a settlement agreement dated March 6, 2017, which included, among other things, a mutual general release of claims, and our agreement to pay approximately
$0.4 million
to SPDC in installments over a period of time. This liability has been recorded and is reflected in accrued expenses at March 31, 2017 and December 31, 2016.
CPA Global provides us with certain patent management services. On February 6, 2017, CPA Global claimed that we owe approximately
$0.2 million
for certain patent maintenance services rendered. CPA Global has not filed claims against us in connection with this allegation. A liability of approximately
$0.2 million
has been recorded and is reflected in accrued expenses at March 31, 2017 and December 31, 2016.
On March 9, 2016, counsel for Edge BioSystems, Inc. (“EdgeBio”) sent a demand letter on behalf of EdgeBio to us in connection with the terms of that certain Asset Purchase Agreement dated September 8, 2015 (the “EdgeBio Agreement”). EdgeBio alleges, among other things, that certain customers of EdgeBio erroneously remitted payments to us, that such payments should have been paid to EdgeBio and that we failed to remit these funds to EdgeBio in violation of the terms of the EdgeBio Agreement. On September 13, 2016, we received a demand for payment letter from EdgeBio’s counsel alleging that the balance due to EdgeBio is approximately
$0.1 million
. A liability of approximately
$0.1 million
has been recorded and is reflected in accrued expenses at March 31, 2017 and December 31, 2016.
On February 17, 2017, Jesse Campbell (“Campbell”) filed a lawsuit individually and on behalf of others similarly situated against us in the District Court for the District of Nebraska alleging we have a materially incomplete and misleading proxy relating to a potential merger and that the merger agreement’s deal protection provisions deter superior offers. As a result, he alleges that we have violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereafter. Although we intend to defend the lawsuit, there can be no assurance regarding the ultimate outcome of this case. Given the uncertainty of litigation, the legal standards that must be met for, among other things, class certification and success on the merits, we are unable to estimate the amount of loss, or range of possible loss, at this time that may result from this action. In the event that a settlement is reached related to these matters, the amount of such settlement may be material to our results of operations and financial condition and may have a material adverse impact on our liquidity.
6. INCOME TAXES
Annually, we file U.S. Federal, state and foreign income tax returns. All U.S. Federal and most state loss carryforwards remain subject to adjustment in the event of an income tax examination.
Income tax expense from continuing operations was
zero
for both the
three
months ended
March 31, 2017
and 2016. We maintain a full valuation allowance on our net deferred tax assets, having concluded that we are not more likely than not going to realize the benefit of our deferred tax assets, including our net operating loss carryforwards.
7. STOCKHOLDERS’ DEFICIT
Common Stock.
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three Months Ended March 31, 2017 and 2016
Pursuant to our Third Amended and Restated Certificate of Incorporation, as amended, we currently have
150,000,000
shares of common stock authorized for issuance.
On January 6, 2016, we entered into a Securities Purchase Agreement (the “SPA”) with certain accredited investors (the “2016 Investors”), pursuant to which, on January 8, 2016, we sold to the 2016 Investors, and the 2016 Investors purchased from us (the “January 2016 Offering”), an aggregate of approximately
$2.2 million
of units (the “Units”) consisting of (a) an aggregate of
2,365,243
shares (the “A-1 Preferred Shares”) of our Series A-1 Convertible Preferred Stock (the “A-1 Preferred”), and (b) warrants (the “2016 Warrants”) to purchase up to an aggregate of
1,773,929
shares of our common stock, with an initial value of
$1.8 million
. The gross amount of
$2.2 million
included
$2.0 million
of cash proceeds and
$0.2 million
of debt settled with the issuance of preferred stock and warrants. Each Unit was sold to the 2016 Investors at a purchase price of
$0.93
per Unit. The A-1 Preferred Shares are convertible into shares of our common stock at an initial rate of 1-for-1, which conversion rate is subject to further adjustment as set forth in our Certificate of Designation of Series A-1 Convertible Preferred Stock, which was filed with the Secretary of State of the State of Delaware on January 8, 2016 (the “Series A-1 Certificate of Designation”). We determined there was a beneficial conversion feature (“BCF”) in connection with this issuance and valued the BCF at
$0.4 million
. The holders of the A-1 Preferred were able to convert at any time following the issuance. Accordingly, we recorded a dividend totaling
$0.4 million
during 2016 related to this beneficial conversion, which was recorded against additional paid in capital. Pursuant to the terms of the Series A-1 Certificate of Designation, the holders of the A-1 Preferred Shares will generally be entitled to that number of votes as is equal to the product obtained by multiplying: (i) the number of whole shares of our common stock into which the A-1 Preferred may be converted as of the record date of such vote or consent, by (ii)
0.93
, rounded down to the nearest whole number. Therefore, every
1.075269
shares of A-1 Preferred will generally initially be entitled to one vote. In May 2016,
2,150,538
of the A-1 Preferred Shares were converted into
2,150,538
shares of our common stock. At March 31, 2017, there were
214,705
A-1 Preferred Shares outstanding.
The 2016 Warrants were immediately exercisable upon issuance, have a term of
five
years and have an exercise price of
$1.21
per share of our common stock. Each 2016 Warrant includes both cash and “cashless exercise” features and an exchange feature whereby the holder of the 2016 Warrant may exchange (the “Exchange Right”) all or any portion of the 2016 Warrant for a number of shares of our common stock equal to the quotient obtained by dividing the “Exchange Amount” by the closing bid price of our common stock on the second trading day prior to the date the 2016 Warrant is exchanged (the “Exchange Price”). Under the 2016 Warrants, the “Exchange Amount” is based upon a Black Scholes option pricing model, and the aggregate Exchange Amount under all of the 2016 Warrants will be
$1.4
million, subject to adjustment to the extent that the risk-free U.S. Treasury rate fluctuates between the date of issuance of the 2016 Warrants and the date the 2016 Warrants are exchanged. Each 2016 Warrant provides that the number of shares that may be issued upon exercise of the Exchange Right is limited to the number of shares that may be purchased pursuant to the terms of the 2016 Warrant, unless we have previously obtained stockholder approval or approval from The Nasdaq Stock Market LLC to issue any additional shares of our common stock (the “Additional Shares”) pursuant to the Exchange Right (the “Required Approvals”). For any Exchange Right exercised more than
90
days following the issuance of the 2016 Warrants, if we have not obtained either of the Required Approvals, we will be required to pay the 2016 Warrant holder an amount in cash for any Additional Shares that we cannot issue without the Required Approvals based on the Exchange Amount.
The 2016 Warrants further provide that, to the extent the closing bid price of our common stock on the second trading day prior to the date the 2016 Warrant is exchanged is less than
$0.50
, the Exchange Price will be deemed to be equal to
$0.50
, and, in addition to issuing shares of our common stock based on this Exchange Price, we will be required to pay to the 2016 Warrant holder an amount in cash equal to the product obtained by multiplying (a)
$0.50
minus the closing bid price of our common stock on the second trading day prior to the date the 2016 Warrant is exchanged, by (b) the aggregate number of shares of our common stock issued to the 2016 Warrant holder by the Company in such exchange at an Exchange Price equal to
$0.50
. Therefore, if the Required Approvals are obtained, based on the Exchange Amount of
$1,436,882
(which, as noted above, is subject to adjustment to the extent that the risk-free U.S. Treasury rate fluctuates between the date of the issuance of the 2016 Warrants and the date the 2016 Warrants are exchanged), the maximum number of shares of our common stock issuable pursuant to the Exchange Right in the 2016 Warrants will be
2,873,765
. In addition, if, for example, assuming an Exchange Amount of
$1,436,882
, the closing bid price of our common stock on the second trading day prior to the date the 2016 Warrants are exchanged is
$0.25
, we would be required to pay to the 2016 Warrant holders cash in an aggregate amount of
$718,441
in addition to issuing the 2016 Warrant holders
2,873,765
shares. During the year ended December 31, 2016,
1,006,419
of the 2016 Warrants were exchanged for
1,613,353
shares of our common stock and cash due of
$0.5 million
. As of March 31, 2017 and December 31, 2016, the
$0.5 million
due to a 2016 Investor is included in other current liabilities on our condensed consolidated balance sheet.
In accordance with the terms of the SPA, we amended that certain Series A Warrant to purchase up to an aggregate of
1,161,972
shares of our common stock previously issued by us to an affiliate of one of the 2016 Investors on July 7, 2015 (the “Original Warrant”), as previously reported by us on our Amendment No. 1 to Current Report on Form 8-K/A, filed with the SEC on July
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three Months Ended March 31, 2017 and 2016
7, 2015 (as so amended, the “Amended Warrant”). The Amended Warrant amends the Original Warrant to provide that the Amended Warrant is subject to the same terms and conditions as the 2016 Warrants and, therefore, includes both cash and “cashless exercise” features and an Exchange Right whereby the number of shares issuable pursuant to the Exchange Right is equal to the “Amended Warrant Exchange Amount”, which is based on a Black Scholes option pricing model, and will be
$941,197
, subject to adjustment to the extent that the risk-free U.S. treasury rate fluctuates between the date of issuance of the Amended Warrant and the date the Amended Warrant is exchanged. The Amended Warrant is exercisable for up to
1,161,972
shares of our common stock in the event we have obtained either of the Required Approvals with respect to the Amended Warrant. In the event the Amended Warrant holder exercises the Amended Warrant more than
90
days following the issuance of the Amended Warrant, if we have not obtained either of the Required Approvals, we will be required to pay the Amended Warrant holder an amount in cash for the shares of our common stock that we cannot issue under the Amended Warrant pursuant to such exercise without the Required Approvals based on the Amended Warrant Exchange Amount.
The Amended Warrant also provides that, to the extent the closing bid price of our common stock on the second trading day prior to the date the Amended Warrant is exchanged is less than
$0.50
, the Exchange Price will be deemed to be equal to
$0.50
, and, in addition to issuing shares of our common stock based on this Exchange Price (assuming receipt of the Required Approvals), we will be required to pay to the Amended Warrant holder an amount in cash equal to the product obtained by multiplying (a)
$0.50
minus the closing bid price of our common stock on the second trading day prior to the date the Amended Warrant is exchanged, by (b) the aggregate number of shares of our common stock issued to the Amended Warrant holder by us in such exchange at an Exchange Price equal to
$0.50
. Therefore, if the Required Approvals are obtained, based on the Amended Warrant Exchange Amount of
$941,197
(which, as noted above, is subject to adjustment to the extent that the risk-free U.S. Treasury rate fluctuates between the issuance of the Amended Warrant and the date the Amended Warrant is exchanged), the maximum number of shares of our common stock issuable pursuant to the Exchange Right in the Amended Warrant will be
1,882,395
. In addition, if, for example, assuming an Amended Warrant Exchange Amount of
$941,197
, the closing bid price of our common stock on the second trading day prior to the date the Amended Warrant is exchanged is
$0.25
, we would be required to pay to the Amended Warrant holder cash in an aggregate amount of
$470,599
in addition to issuing the Amended Warrant holder
1,882,395
shares.
In connection with entering into the SPA, we also entered into a Registration Rights Agreement, dated January 8, 2016, with the 2016 Investors. Pursuant to the terms of the Registration Rights Agreement, we were required to file with the SEC a registration statement to register for resale the shares of our common stock issuable upon conversion of the A-1 Preferred Shares and the shares of our common stock issuable upon exercise of the 2016 Warrants and the Amended Warrant by January 25, 2016. We filed the required registration statement with the SEC on January 25, 2016.
Craig-Hallum (the “Placement Agent”) served as the sole placement agent for the January 2016 Offering. In consideration for services rendered as the Placement Agent in the January 2016 Offering, we (1) paid to the Placement Agent cash commissions equal to approximately
$140,000
, or
7.0%
of the gross proceeds received in the January 2016 Offering, excluding any proceeds received from Third Security, LLC or any of its affiliates; (2) issued to the Placement Agent, for a price of
$50
, a
five
-year warrant to purchase up to
107,527
shares of our common stock at an exercise price of
$1.21
per share (the “Agent Warrant”), which is subject to the same terms as the 2016 Warrants except that the Agent Warrant was not exercisable until July 8, 2016 and does not contain the Exchange Right; and (3) reimbursed the Placement Agent for reasonable out-of-pocket expenses, including fees paid to the Placement Agent’s legal counsel, incurred in connection with the January 2016 Offering, which reimbursable expenses did not exceed
$50,000
.
The January 2016 Offering and the payment of all accrued and unpaid dividends on the Series A Preferred Stock and Series B Preferred Stock in the form of shares of our common stock at a rate of
$1.00
per share of our common stock discussed under “-Conversion of Preferred Stock” below required the repricing and issuance of additional common stock warrants to the holders of warrants issued in the February 2012 common stock and warrant sale (the “2012 Private Placement”). The exercise price of these warrants decreased to
$4.39
per share and the number of shares issuable upon exercise of the warrants increased from
2,188,177
to
3,239,827
.
On May 31, 2016, we issued to a vendor an aggregate of
78,000
shares of our common stock and, on June 14, 2016, we issued to a second vendor an aggregate of
64,153
shares of our common stock. Such shares of common stock were issued to the vendors in lieu of an aggregate cash amount of approximately
$89,000
owed by us to such vendors for services previously performed by such vendors. We issued the shares to the vendors in transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder and in reliance on similar exemptions under applicable state laws. The offering of the shares to the vendors did not involve a public offering, and no general solicitation or advertisement was made in connection with the offering of the shares to the vendors.
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three Months Ended March 31, 2017 and 2016
On June 7, 2016, we entered into an At the Market Offering Agreement (the “ATM Agreement”) with Craig-Hallum, as sales agent, pursuant to which we may offer and sell, from time to time, through Craig-Hallum, up to
$3,500,000
of shares (the “Shares”) of our common stock. Any Shares offered and sold in the offering will be issued pursuant to our effective shelf registration statement on Form S-3 (File No. 333-201907) and the related prospectus previously declared effective by the SEC on February 13, 2015, as supplemented by a prospectus supplement, dated June 7, 2016, that we filed with the SEC pursuant to Rule 424(b)(5) under the Securities Act of 1933, as amended (the “Securities Act”). The number of shares eligible for sale under the ATM Agreement will be subject to the limitations of General Instruction I.B.6 of Form S-3.
Under the terms of the ATM Agreement, we will pay Craig-Hallum a placement fee of
3.25%
of the gross sales price of the Shares, unless Craig-Hallum acts as principal, in which case we may sell Shares to Craig-Hallum as principal at a price to be agreed upon by us and Craig-Hallum. We will also reimburse Craig-Hallum for certain expenses incurred in connection with the ATM Agreement, and agreed to provide indemnification and contribution to Craig-Hallum with respect to certain liabilities, including liabilities under the Securities Act and the Securities Exchange Act of 1934, as amended.
The ATM Agreement was terminated during the fourth quarter of 2016 and at the time of termination we had sold
1,177,849
shares. The average sales price per common share was
$0.42
and the aggregate net proceeds from the sales totaled
$0.5 million
. We did not sell any shares under the ATM Agreement during the three month periods ended March 31, 2017 and 2016.
The sale of shares under the ATM Agreement required the repricing and issuance of additional common stock warrants to the holders of warrants issued in the 2012 Private Placement. The exercise price of these warrants decreased to
$4.23
per share and the number of shares issuable upon exercise of the warrants increased from
3,262,088
to
3,362,276
. The
3,362,276
warrants issued in the 2012 Private Placement expired in February 2017.
Common Stock Warrants.
During the
three
months ended
March 31, 2017
, we did not issue any warrants, no warrants were exercised and
3,362,276
warrants expired. During the three months ended March 31, 2016, we issued warrants to purchase
2,933,106
shares of common stock and no warrants were exercised. The warrants issued in the three months ended March 31, 2016 included
1,051,650
warrants issued due to repricing requirements of the Private Placement and
1,881,456
warrants issued in connection with the January 2016 Offering. Warrants to purchase an aggregate of
3,334,011
shares of common stock were outstanding at
March 31, 2017
.
|
|
|
|
|
|
|
|
|
|
Warrant Holder
|
|
Issue Year
|
|
Expiration
|
|
Underlying
Shares
|
|
Exercise
Price
|
Various Institutional Holders
(1)
|
|
2013
|
|
January 2018
|
|
441,655
|
|
$9.00
|
Affiliates of Third Security, LLC
(1)
|
|
2013
|
|
January 2018
|
|
250,000
|
|
$9.00
|
Various Institutional Holders
(2)
|
|
2014
|
|
April 2020
|
|
374,618
|
|
$4.00
|
Various Institutional Holders
(3)
|
|
2015
|
|
February 2020
|
|
714,780
|
|
$2.24
|
Various Institutional Holders
(4)
|
|
2015
|
|
December 2020
|
|
122,433
|
|
$1.66
|
Various Institutional Holders
(5)
|
|
2015
|
|
January 2021
|
|
1,161,972
|
|
$1.21
|
Affiliates of Third Security, LLC
(6)
|
|
2016
|
|
January 2021
|
|
161,026
|
|
$1.21
|
Various Institutional Holders
(6)
|
|
2016
|
|
January 2021
|
|
107,527
|
|
$1.21
|
|
|
|
|
|
|
3,334,011
|
|
|
|
|
(1)
|
These warrants were issued in connection with an offering which was completed in January 2013.
|
|
|
(2)
|
These warrants were issued in connection with a private placement which was completed in October 2014.
|
|
|
(3)
|
These warrants were issued in connection with an offering which was completed in February 2015.
|
|
|
(4)
|
These warrants were issued in connection with an offering which was completed in July 2015.
|
|
|
(5)
|
These warrants were originally issued in connection with the offering in July 2015, and were amended in connection with the January 2016 Offering, which was completed in January 2016.
|
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three Months Ended March 31, 2017 and 2016
|
|
(6)
|
These warrants were issued in connection with the January 2016 Offering, which was completed in January 2016.
|
Preferred Stock Series A.
The Company’s Board of Directors is authorized to issue up to
15,000,000
shares of preferred stock in one or more series, from time to time, with such designations, powers, preferences and rights and such qualifications, limitations and restrictions as may be provided in a resolution or resolutions adopted by the Board of Directors. The authority of the Board of Directors includes, but is not limited to, the determination or fixing of the following with respect to shares of such class or any series thereof: (i) the number of shares; (ii) the dividend rate, whether dividends shall be cumulative and, if so, from which date; (iii) whether shares are to be redeemable and, if so, the terms and amount of any sinking fund providing for the purchase or redemption of such shares; (iv) whether shares shall be convertible and, if so, the terms and provisions thereof; (v) what restrictions are to apply, if any, on the issue or reissue of any additional preferred stock; and (vi) whether shares have voting rights. The preferred stock may be issued with a preference over the common stock as to the payment of dividends. We have no current plans to issue any additional preferred stock. Classes of stock such as the preferred stock may be used, in certain circumstances, to create voting impediments on extraordinary corporate transactions or to frustrate persons seeking to effect a merger or otherwise to gain control of the Company. For the foregoing reasons, any additional preferred stock issued by the Company could have an adverse effect on the rights of the holders of the common stock.
On December 29, 2010, we entered into a transaction with the Third Security Investors, pursuant to the terms of a Series A Convertible Preferred Stock Purchase Agreement (the “Series A Purchase Agreement”), in which we: (i) sold an aggregate of
2,586,205
shares of Series A Preferred Stock at a price of
$2.32
per share; and (ii) issued Series A Warrants to purchase up to an aggregate of
1,293,102
shares of Series A Preferred Stock having an exercise price of
$2.32
per share (the sale of Series A Preferred Stock and issuance of the Series A Warrants hereafter referred to together as the “Financing”). The Series A Warrants may be exercised at any time from December 29, 2010 until December 28, 2015 and contain a “cashless exercise” feature. The gross proceeds from the Series A financing were
$6.0 million
. The
$0.2 million
of costs incurred to complete the Series A financing were recorded as a reduction in the value of the Series A Preferred Stock. We used the net proceeds from the financing to acquire the FAMILION family of genetic tests from PGxHealth, a subsidiary of Clinical Data, Inc. Until the November 2011 modifications, the Series A Preferred Stock met the definition of mandatorily redeemable stock as it was preferred capital stock that was redeemable at the option of the holder through December 2015 and was reported outside of equity. The Series A Preferred Stock was to be accreted to its redemption value of
$6.0 million
. Until the November 2011 modifications, the Series A Warrants did not qualify to be treated as equity and, accordingly, were recorded as a liability. A preferred stock anti-dilution feature is embedded within the Series A Preferred Stock that met the definition of a derivative.
In connection with the Series A financing, we filed a Certificate of Designation of Series A Convertible Preferred Stock (the “Series A Certificate of Designation”) with the Secretary of State of the State of Delaware, designating
3,879,307
shares of our preferred stock as Series A Preferred Stock. As of December 31, 2013, the Series A Preferred Stock, including the Series A Preferred Stock issuable upon exercise of the Series A Warrants, was convertible into shares of our common stock at a rate of 4-for-1, which conversion rate is subject to further adjustment as set forth in the Series A Certificate of Designation. Giving effect to the reverse split of our stock in January 2014, the conversion rate was adjusted to 1-for-3. Certain rights of the holders of the Series A Preferred Stock are senior to the rights of the holders of our common stock. The Series A Preferred Stock has a liquidation preference equal to its original price per share, plus any accrued and unpaid dividends thereon. The holders of the Series A Preferred Stock are entitled to receive quarterly dividends, which accrue at the rate of
10%
of the original price per share per annum, whether or not declared, and which shall compound annually and shall be cumulative. In any calendar quarter in which we have positive distributable cash flow as defined in the Series A Purchase Agreement, we are required to pay from funds legally available a cash dividend in the amount equal to the lesser of
50%
of such distributable cash flow or the aggregate amount of dividends accrued on the Series A Preferred Stock.
Generally, the holders of the Series A Preferred Stock are entitled to vote together with the holders of common stock, as a single group, on an as-converted basis. However, the Series A Certificate of Designation provides that we shall not perform some activities, subject to certain exceptions, without the affirmative vote of a majority of the holders of the outstanding shares of Series A Preferred Stock. The holders of the Series A Preferred Stock, along with the holders of the Series B Preferred Stock, also are entitled to elect or appoint, as a single group,
two
directors of the Company.
In connection with the Series A financing, we also entered into a registration rights agreement with the Third Security Investors (the “Registration Rights Agreement”). Pursuant to the terms of the Registration Rights Agreement, the Company has granted certain demand, “piggyback” and S-3 registration rights covering the resale of the shares of common stock underlying the
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three Months Ended March 31, 2017 and 2016
Series A Preferred Stock issued pursuant to the Series A Purchase Agreement and issuable upon exercise of the Series A Warrants and all shares of common stock issuable upon any dividend or other distribution with respect thereto.
In November 2011, we entered into a transaction with the Third Security Investors, pursuant to an Agreement Regarding Preferred Stock (the “Amendment Agreement”), in which the Third Security Investors agreed to (i) waive their rights to enforce the anti-dilution and redemption features of the Series A Preferred Stock and (ii) at the next annual stockholders’ meeting, vote to amend the Series A Certificate of Designation to remove the anti-dilution and redemption features of the Series A Preferred Stock. In exchange, the Company issued shares of common stock to the Third Security Investors having an aggregate market value of
$0.3 million
.
As a result of the Amendment Agreement, the values of the Series A Preferred Stock and Series A Warrants, including the Series A Preferred Stock conversion feature and Series A Warrant liability, were reclassified into stockholders’ equity as of the date of the Amendment Agreement.
Preferred Stock Series B.
On March 5, 2014, we entered into a Series B Convertible Preferred Stock Purchase Agreement (the “Series B Purchase Agreement”) with affiliates of Third Security, LLC (the “2014 Third Security Investors”), pursuant to which we, in a private placement, sold and issued an aggregate of
1,443,297
shares of our Series B Preferred Stock, par value
$0.01
per share (the “Series B Preferred Stock”), at a price per share of
$4.85
for an aggregate purchase price of approximately
$7.0 million
. Each share of Series B Preferred Stock issued pursuant to the Series B Purchase Agreement was initially convertible into shares of our common stock at a rate of
1
-for-1, which conversion rate was subject to further adjustment as set forth in the Certificate of Designation of Series B Convertible Preferred Stock.
In connection with the Series B financing, we also entered into a Registration Rights Agreement, dated March 5, 2014, with the 2014 Third Security Investors, pursuant to which we granted certain demand, “piggy-back” and S-3 registrations rights covering the resale of the shares of common stock underlying the Series B Preferred Stock issued pursuant to the Series B Purchase Agreement and all shares of common stock issuable upon any dividend or other distribution with respect thereto.
The Series B financing required the repricing and issuance of additional common stock warrants to the holders of warrants issued in the Private Placement. The exercise price of the warrants decreased from
$12.96
per share to
$11.73
per share and the number of shares issuable upon exercise of the warrants increased from
1,097,600
to
1,212,665
.
Conversion of Preferred Stock - Series A and Series B.
On January 6, 2016, the Company entered into a Conversion Agreement (the “Conversion Agreement”) with the holders (the “Preferred Holders”) of all of the Company’s outstanding shares of Series A Convertible Preferred Stock, par value
$0.01
per share (the “Series A Preferred Stock”), and Series B Preferred Stock, pursuant to which, among other things, the Preferred Holders: (a) elected to convert all of the outstanding shares of Series A Preferred Stock and Series B Preferred Stock into shares of our common stock, in each case in accordance with the terms thereof, and (b) agreed that all accrued and unpaid dividends on the Series A Preferred Stock and Series B Preferred Stock would be paid by the Company in shares of our common stock at a rate of
$1.00
per share of our common stock (collectively, the “Conversion”).
The outstanding shares of Series A Preferred Stock were convertible into shares of our common stock at a rate of
1
-for-3, and the outstanding shares of Series B Preferred Stock were convertible into shares of our common stock at a rate of 1-for-1. Prior to the entry into the Conversion Agreement, there were
2,586,205
shares of Series A Preferred Stock outstanding, which were converted into
862,057
shares of our common stock, and
1,443,297
shares of Series B Preferred Stock outstanding, which were converted into
1,443,297
shares of our common stock, for an aggregate of
2,305,354
shares of our common stock issued upon conversion of the Series A Preferred Stock and Series B Preferred Stock (the “Conversion Shares”). At the time of the entry into the Conversion Agreement, there were
$3.7
million in accrued and unpaid dividends on the outstanding shares of Series A Preferred Stock, which were converted, in accordance with the Conversion Agreement, into
3,681,590
shares of our common stock, and
$0.8
million in accrued and unpaid dividends on the outstanding shares of Series B Preferred Stock, which were converted, in accordance with the terms of the Conversion Agreement, into
793,235
shares of our common stock, for an aggregate of
4,474,825
shares of our common stock issued pursuant to the accrued and unpaid dividends on the Series A Preferred Stock and Series B Preferred Stock. Therefore, in connection with the full conversion of the Series A Preferred Stock and Series B Preferred Stock, plus the conversion of all accrued and unpaid dividends thereon, we issued an aggregate of
6,780,179
shares of our common stock to the Preferred Holders on January 6, 2016.
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three Months Ended March 31, 2017 and 2016
Following the conversion of the shares of Series A Preferred Stock and Series B Preferred Stock into common stock,
no
shares of Series A Preferred Stock or Series B Preferred Stock remain outstanding.
Preferred Stock Dividends.
We had
no
undeclared dividends for the three months ended March 31, 2017. For the three months ended March 31, 2016, we had undeclared dividends. In accordance with the FASB’s Accounting Standards Codification Topic 260-10-45-11, “
Earnings per Share
”, these dividends were added to the net loss per share calculation.
8. FAIR VALUE
FASB guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements for our financial assets and liabilities, as well as for other assets and liabilities that are carried at fair value on a recurring basis in our condensed consolidated financial statements.
FASB guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The three levels of inputs used to measure fair value are as follows:
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2—Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets; and
Level 3—Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing the asset or liability.
Debt.
Our long term debt book value approximates fair market value due to the variable interest rate it bears.
Common Stock Warrant Liabilities.
Certain of our issued and outstanding warrants to purchase shares of common stock do not qualify to be treated as equity and, accordingly, are recorded as a liability.
2012 Warrant Liability
The 2012 Warrant Liability represents the fair value of the
3.4 million
warrants issued in February 2012 (as adjusted pursuant to the terms of the 2012 Warrants). We are required to record these instruments at fair value at each reporting date and changes are recorded as a non-cash adjustment to earnings. The gains or losses included in earnings are reported in other income (expense) in our condensed consolidated Statement of Operations. Management does not believe that this liability will be settled by a use of cash. The 2012 Warrants expired in February 2017 and, as such, the 2012 Warrant Liability no longer exists at March 31, 2017.
The 2012 Warrant Liability is considered a Level 3 financial instrument and is valued using a Monte Carlo simulation model. This method is well suited to valuing options with non-standard features, such as anti-dilution protection. A Monte Carlo simulation model uses repeated random sampling to simulate significant uncertainty in inputs. Assumptions and inputs used in the valuation of the common stock warrants are broken down into four sections: Static Business Inputs; Static Technical Inputs; Simulated Business Inputs; and Simulated Technical Inputs.
During the three months ended
March 31, 2017
and 2016, the changes in the fair value of the liability measured using significant unobservable inputs (Level 3) were comprised of the following:
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three Months Ended March 31, 2017 and 2016
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
|
For the Three Months Ended
|
|
|
March 31, 2017
|
|
March 31, 2016
|
Beginning balance at January 1
|
|
$
|
—
|
|
|
$
|
350
|
|
Total (gains) or losses:
|
|
|
|
|
Recognized in earnings
|
|
—
|
|
|
(330
|
)
|
Balance at March 31
|
|
$
|
—
|
|
|
$
|
20
|
|
2016 Warrant Liability
The 2016 Warrant Liability represents the fair value of the
1.8 million
warrants issued in January 2016, of which,
0.8 million
warrants remain outstanding as of March 31, 2017. We are required to record these instruments at fair value at each reporting date and changes are recorded as a non-cash adjustment to earnings. The gains or losses included in earnings are reported in other income (expense) in our condensed consolidated Statement of Operations.
The 2016 Warrant Liability is considered a Level 3 financial instrument and is valued using a binomial lattice simulation model. This method is well suited to valuing options with non-standard features. Assumptions and inputs used in the valuation of the common stock warrants include; our equity value, which was estimated using our stock price of
$0.56
as of March 31, 2017; volatility of
115%
; and a risk-free interest rate of
1.66%
.
During the three months ended March 31, 2017 and 2016, the changes in the fair value of the liability measured using significant unobservable inputs (Level 3) were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31, 2017
|
|
March 31, 2016
|
|
Beginning balance at January 1
|
|
$
|
582
|
|
|
$
|
—
|
|
|
Additions
|
|
—
|
|
|
1,437
|
|
|
Total (gains) or losses:
|
|
|
|
|
|
Recognized in earnings
|
|
33
|
|
|
9
|
|
|
Balance at March 31
|
|
$
|
615
|
|
|
$
|
1,446
|
|
|
9. STOCK OPTIONS
Stock Options.
The following table summarizes stock option activity under our 2006 Equity Incentive Plan (the "Plan") during the
three
months ended
March 31, 2017
:
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted-Average
Exercise Price
|
Outstanding at January 1, 2017
|
738,026
|
|
|
$
|
3.59
|
|
Granted
|
—
|
|
|
—
|
|
Forfeited
|
(62,739
|
)
|
|
2.12
|
|
Outstanding at March 31, 2017
|
675,287
|
|
|
$
|
3.73
|
|
Exercisable at March 31, 2017
|
547,957
|
|
|
$
|
4.25
|
|
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three Months Ended March 31, 2017 and 2016
During the
three
months ended
March 31, 2017
, we did not grant any options to purchase shares of our common stock. Options to purchase an aggregate of
14,000
shares of our common stock were granted during the
three
months ended
March 31, 2016
.
As of
March 31, 2017
, there were
661,914
options that were vested or expected to vest with an aggregate intrinsic value of
zero
with a remaining weighted average contractual life of
7.2
years.
Stock Appreciation Rights (
“
SARs
”
)
As of
March 31, 2017
,
83,333
outstanding and exercisable SARs shares were vested or expected to vest. All outstanding SARs were issued solely to our chief executive officer. The weighted-average exercise price of these SARs was
$4.32
per share and the aggregate intrinsic value was
zero
with a remaining weighted average contractual life of
6.5
years.
10. SUBSEQUENT EVENTS
On April 13, 2017, Transgenomic completed the sale of an aggregate of
$1.15 million
of promissory notes (the “Bridge Notes”) in a bridge financing pursuant to a securities purchase agreement (the “Purchase Agreement”). Transgenomic may receive additional investments of up to
$100,000
in connection with the bridge financing. The financing is intended to help facilitate the completion of Transgenomic’s merger with Precipio, which is expected to close during the second quarter of 2017. Transgenomic received net proceeds of
$1,031,000
from the sale of the Bridge Notes.
The Bridge Notes have an annual interest rate of
4%
and a
90
-day maturity. Transgenomic may repay the Bridge Notes at any time in cash upon payment of a
20%
premium. In connection with the issuance of the Bridge Notes, Transgenomic issued warrants (the “Bridge Warrants”) to acquire
1.15 million
shares of Transgenomic common stock at an exercise price of
$0.50
per share, subject to anti-dilution protection. The Purchase Agreement provides certain piggyback registration rights for the holders of the Bridge Warrants for a period of six months after the closing of the bridge financing.
As part of the bridge financing, Transgenomic agreed to loan
50%
of the net proceeds from the sale of the Bridge Notes to Precipio pursuant to a promissory note (the “Precipio Note”) with an original principal amount of up to
$561,500
upon substantially the same terms and conditions as the Bridge Notes. The payment of the Precipio Note is subordinated to the payment by Precipio of its secured
$500,000
bank debt pursuant to a subordination agreement.
Aegis Capital Corp. acted as placement agent for the bridge financing and received a placement agent fee of
$84,000
and warrants (the “Aegis Warrants”) to acquire
168,000
shares of Transgenomic common stock at an exercise price of
$0.50
per share. The Aegis Warrants are identical to the Bridge Warrants except that the Aegis Warrants do not have anti-dilution protection.