Precipio, Inc. - FORM 10-Q - May 18, 2017

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EX-32.1 - EXHIBIT 32.1 - Precipio, Inc.tbio-ex321_20170331x10q.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 _______________________________
 FORM 10-Q
 _______________________________

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2017
OR 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____ to _____
Commission File Number: 000-36439
 _______________________________
TRANSGENOMIC, INC.
(Exact name of registrant as specified in its charter)
 _______________________________

Delaware
 
91-1789357
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
12325 Emmet Street, Omaha, Nebraska
 
68164
(Address of principal executive offices)
 
(Zip Code)
(402) 452-5400
(Registrant’s telephone number, including area code)
 _______________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes   x No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
o
Accelerated filer
 
o
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
Smaller reporting company
 
x
Emerging growth company
 
o
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   o    No   x
As of April 30, 2017, the number of shares of common stock outstanding was 26,863,062.


TRANSGENOMIC, INC.
INDEX
 
 
 
 
 
 
 
 
Page No.    
 
 
 
 
PART I.
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
Item 4.
 
 
 
 
 
PART II.
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 6.
 
 
 
 
 

2

PART I. FINANCIAL INFORMATION 
Item 1.
Financial Statements
TRANSGENOMIC, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
 
March 31,
 
 
 
2017
 
December 31,
 
(unaudited)
 
2016
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
59

 
$
110

Accounts receivable, net
279

 
225

Inventories
15

 
24

Other current assets
190

 
105

Assets held for sale
24

 
31

Total current assets
567

 
495

 
 
 
 
PROPERTY AND EQUIPMENT, NET
127

 
144

 
 
 
 
OTHER ASSETS:
 
 
 
Intangibles, net
531

 
562

Other assets
4

 
58

 
$
1,229

 
$
1,259

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
CURRENT LIABILITIES:
 
 
 
Current maturities of long-term debt
$
7,368

 
$
7,814

Accounts payable
8,509

 
6,541

Accrued compensation
192

 
224

Accrued expenses
3,398

 
3,546

Deferred revenue
133

 
170

Other current liabilities
1,529

 
1,529

Total current liabilities
21,129

 
19,824

LONG TERM LIABILITIES:
 
 
 
Common stock warrant liability
615

 
582

Other long-term liabilities
128

 
203

Total liabilities
21,872

 
20,609

STOCKHOLDERS’ DEFICIT:
 
 
 
Preferred stock, $0.01 par value, 15,000,000 shares authorized, 214,705 shares issued and outstanding
2

 
2

Common stock, $0.01 par value, 150,000,000 shares authorized, 26,863,062 shares at March 31, 2017 and 26,446,927 shares at December 31, 2016 issued and outstanding
268

 
264

Additional paid-in capital
206,342

 
205,877

Accumulated deficit
(227,255
)
 
(225,493
)
Total stockholders’ deficit
(20,643
)
 
(19,350
)
 
$
1,229

 
$
1,259


See notes to unaudited condensed consolidated financial statements.

3

TRANSGENOMIC, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
 
 
Three Months Ended
 
March 31,
 
2017
 
2016
NET SALES
$
658

 
$
236

COST OF GOODS SOLD
459

 
505

Gross profit (loss)
199

 
(269
)
OPERATING EXPENSES:
 
 
 
Selling, general and administrative
1,620

 
1,704

Research and development
134

 
270

 
1,754

 
1,974

OPERATING LOSS FROM CONTINUING OPERATIONS
(1,555
)
 
(2,243
)
OTHER INCOME (EXPENSE):
 
 
 
Interest expense, net
(247
)
 
(169
)
Warrant revaluation
(33
)
 
321

 
(280
)
 
152

LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(1,835
)
 
(2,091
)
INCOME TAX EXPENSE (BENEFIT)
—

 
—

LOSS FROM CONTINUING OPERATIONS
(1,835
)
 
(2,091
)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAXES
73

 
(1,173
)
NET LOSS
(1,762
)
 
(3,264
)
 
 
 
 
PREFERRED STOCK DIVIDENDS
—

 
(393
)
 
 
 
 
NET LOSS FROM CONTINUING OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS
(1,835
)
 
(2,484
)
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS
73

 
(1,173
)
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS
$
(1,762
)
 
$
(3,657
)
 
 
 
 
BASIC AND DILUTED LOSS PER COMMON SHARE FROM CONTINUING OPERATIONS
$
(0.07
)
 
$
(0.12
)
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE FROM DISCONTINUED OPERATIONS
$
—

 
$
(0.06
)
BASIC AND DILUTED LOSS PER COMMON SHARE
$
(0.07
)
 
$
(0.18
)
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING
26,779,835

 
20,323,333


See notes to unaudited condensed consolidated financial statements.

4

TRANSGENOMIC, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) 
 
Three Months Ended 
 March 31,
 
2017
 
2016
CASH FLOWS USED IN OPERATING ACTIVITIES:
 
 
 
Net loss
$
(1,762
)
 
$
(3,264
)
Less income (loss) from discontinued operations, net of tax
73

 
(1,173
)
Loss from continuing operations
(1,835
)
 
(2,091
)
 
 
 
 
Adjustments to reconcile net loss to net cash flows used in operating activities:
 
 
 
Depreciation and amortization
48

 
83

Stock-based compensation and change in liability of stock appreciation rights
(24
)
 
110

Provision for losses on doubtful accounts
1

 
21

Warrant revaluation
33

 
(321
)
Loss on settlement of lease termination
358

 
—

Deferred interest
—

 
17

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(55
)
 
73

Inventories
9

 
6

Other assets
(45
)
 
41

Accounts payable
1,967

 
1,230

Accrued expenses and other liabilities
(587
)
 
(481
)
Net cash used in operating activities, continuing operations
(130
)
 
(1,312
)
Net cash provided by (used in) operating activities, discontinued operations
80

 
(612
)
Net cash used in operating activities
(50
)
 
(1,924
)
CASH FLOWS USED IN INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
—

 
(19
)
Change in other assets
—

 
(7
)
Net cash used in investing activities
—

 
(26
)
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
 
 
 
Principal payments on capital lease obligations
(1
)
 
(1
)
Issuance of preferred stock and warrants, net of costs of $219
—

 
1,779

Proceeds from debt
—

 
500

Principal payments on debt
—

 
(550
)
Net cash flows (used in) provided by financing activities
(1
)
 
1,728

NET CHANGE IN CASH AND CASH EQUIVALENTS
(51
)
 
(222
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
110

 
444

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
59

 
$
222

SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
Cash paid during the period for interest
$
—

 
$
—

SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
 
 
 
Initial valuation of warrant issued in conjunction with Private Placement
$
—

 
$
1,827

Conversion of convertible promissory notes
499

 
—

Debt settled with issuance of preferred stock and warrants
—

 
199

See notes to unaudited condensed consolidated financial statements.

5


TRANSGENOMIC, INC. AND SUBSIDIARY
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

6
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

7
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.

8
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:
•
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

9
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:
 
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

10
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Three Months Ended March 31, 2017 and 2016


 
 
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.

(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.

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.

11
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”).


12
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

13
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.


14
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

15
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.

16
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.

17
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

18
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.

19
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:

20
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

    

21
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.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information
This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis, contains forward-looking statements. These statements are based on management’s current views, assumptions or beliefs of future events and financial performance and are subject to uncertainty and changes in circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements. These factors include, among other things: our expected revenue, income (loss), receivables, operating expenses, supplier pricing, availability and prices of raw materials, insurance reimbursements, product pricing, sources of funding operations and acquisitions, our ability to raise funds, sufficiency of available liquidity, future interest costs, future economic circumstances, business strategy, industry conditions, our ability to execute our operating plans, the success of our cost savings initiatives, competitive environment and related market conditions, expected financial and other benefits from our organizational restructuring activities, actions of governments and regulatory factors affecting our business, retaining key employees and other risks as described in our reports filed with the Securities and Exchange Commission. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or the negative versions of these terms and other similar expressions.
You are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks and other factors that could cause

22

actual results to differ materially from those suggested by these forward-looking statements. Actual results may differ materially from those suggested by the forward-looking statements that we make for a number of reasons, including those described in Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q and in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which we filed with the Securities and Exchange Commission on April 13, 2017.
We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
The following discussion should be read together with our financial statements and related notes contained in this Quarterly Report on Form 10-Q and with the financial statements, related notes and Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which we filed with the Securities and Exchange Commission on April 13, 2017. Results for the three months ended March 31, 2017 are not necessarily indicative of results that may be attained in the future.

Overview

Transgenomic, Inc. (“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 by 100 - 400 fold over existing technologies. 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. It is generally understood that most current technologies are unable to consistently identify mutations that occur in less than approximately 5% of a sample. However, many mutations found at much lower levels, even as low as 0.01%, are known to be clinically relevant and can have significant consequences to a patient: both in terms of how they will respond to a given drug or treatment and how a given tumor is likely to change over time. More importantly, in our view, is the ability to significantly improve the level of detection while using blood, saliva and even urine as a source for DNA, rather than depending on painful, expensive and potentially dangerous tumor biopsies. We believe that this is an important advancement in patient care with respect to cancer detection, treatment and monitoring and can result in significant cost savings for the healthcare system by replacing invasive procedures with the simple collection of blood or other bodily fluids. By broadening the types of samples that can be used for testing and allowing all sequencing platforms to provide improved identification of low level mutations, MX-ICP has the potential to make testing more readily available and more patient friendly, enable genetic monitoring of disease progression, effectively guide treatment protocols, and reduce the overall cost of diagnosis and monitoring while significantly improving patient outcomes.

Our laboratory in Omaha, Nebraska 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. ICE COLD-PCR is a proprietary ultra-high sensitivity platform technology with breakthrough potential to enable wide adoption of personalized, precision medicine in cancer and other diseases. It can be run in any laboratory that contains standard PCR systems. MX-ICP enables detection of multiple known and unknown mutations from virtually any sample type, including tissue biopsies, blood, urine, saliva, cell-free DNA (“cfDNA”) and circulating tumor cells (“CTCs”) at levels greater than 1,000-fold higher than standard DNA sequencing techniques. It is easy to implement and use within existing workflows. 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.

The following discussion should be read together with our financial statements and related notes contained in this Quarterly Report. Results for the three months ended March 31, 2017 are not necessarily indicative of results that may be attained in the future.

First Quarter 2017 Overview and Recent Highlights

Below is a summary of our most recent business activities:


23

•
Leading Clinical Laboratory Services Provider LifeLabs Selects ICE COLD-PCR (ICP) as Its Mutation Enrichment Platform - In January 2017, we announced a licensing agreement with leading Canadian laboratory services provider LifeLabs, which has selected our ICP technology as its mutation enrichment platform for cancer testing. LifeLabs intends to use ICP with tissue samples and is receiving a three-year non-exclusive license to the ICP technology in Canada. The three-year renewable agreement also allows LifeLabs to benefit from technology improvements and additional product launches during its term.
Uncertainties
We have historically operated at a loss and have not consistently generated sufficient cash from operating activities to cover our operating and other cash expenses. We have been able to historically finance our operating losses through borrowings or from the issuance of additional equity. At March 31, 2017, we had cash and cash equivalents of less than $0.1 million. Our ability to continue as a going concern is dependent upon a combination of completing our planned merger with 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 our obligations and pay our liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at this time and raises substantial doubt that we will be able to continue as a going concern.

Results of Continuing Operations for The Three Months Ended March 31, 2017 and 2016
Net Sales. Net sales were as follows:
 
Dollars in Thousands
 
Three Months Ended
 
 
 
March 31,
 
Change
 
2017
 
2016
 
$    
 
%
Total Net Sales
$
658

 
$
236

 
$
422

 
179
%
Net sales increased by $0.4 million, or 179%, during the three months ended March 31, 2017 as compared to the same period in 2016. The increase in total net sales for the current year period reflects higher sales of our contract laboratory services due to a new contract that did not exist in the prior year period.
Cost of Goods Sold. Cost of goods sold includes material costs for the products that we sell and other direct costs (primarily personnel costs, rent, supplies and depreciation) associated with the operations of our laboratories.
Gross Profit. Gross profit and gross margins were as follows:
 
Dollars in Thousands
 
Three Months Ended
 
 
 
March 31,
 
Margin %
 
2017
 
2016
 
2017
 
2016
Gross Profit (Loss)
$
199

 
$
(269
)
 
30
%
 
(114
)%
Gross profit was $0.2 million, or 30% of total net sales, during the first quarter of 2017, compared to negative $0.3 million, or (114)% of total net sales, during the same quarter of 2016. The increased gross profit during the three months ended March 31, 2017 as compared to the same period of 2016 is due to increased revenues, along with a slight decrease in cost of goods sold which resulted from lower personnel costs.
Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily consist of personnel costs, marketing, travel costs, professional fees, facility costs and bad debt provisions. Our selling, general and administrative costs decreased by $0.1 million to $1.6 million during the three month period ended March 31, 2017 as compared to the same period in 2016. This decrease was due to lower personnel costs, lower professional fees and lower stock compensation costs in the first quarter of 2017 as compared to the first quarter of 2016. These decreases were partially offset by increased costs related to our pending merger and an increase of approximately $0.4 million related to charges incurred as part of a settlement agreement for the early termination of our facility lease for our Omaha, Nebraska facility.
Research and Development Expenses. Research and development expenses primarily include personnel costs, intellectual property fees, patent costs, outside services, laboratory supplies and facility costs and are expensed in the period in which they are incurred. For the three months ended March 31, 2017, research and development expenses totaled $0.1 million as compared to $0.3 million for the three months ended March 31, 2016. The decrease was a result of lower personnel costs and lower laboratory

24

supply costs during the three months ended March 31, 2017 as compared to the same period in 2016. Research and development expenses totaled 20% and 114% of net sales during the three months ended March 31, 2017 and 2016, respectively.
Other Income (Expense). Other expense for the three months ended March 31, 2017 and 2016 includes interest expense of approximately $0.2 million for interest related to our debt. We also recorded expense of less than $0.1 million and income of $0.3 million for the three months ended March 31, 2017 and 2016, respectively, for the revaluation of common stock warrants, which was due to the change in fair value of the common stock warrant liability. The income and expense associated with the change in fair value of the warrants is a non-cash item.
Discontinued Operations for The Three Months Ended March 31 2017 and 2016
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.
Revenues and net loss of the discontinued operations consisted of the following:
 
Three months ended March 31,
(Dollars in thousands)
2016
 
2016
Net sales
$
68

 
$
1,103

Net income (loss) from discontinued operations, before tax
$
73

 
$
(1,173
)
Income tax expense
—

 
—

Income (loss) from discontinued operations, net of tax
$
73

 
$
(1,173
)


Liquidity and Capital Resources
Our working capital positions at March 31, 2017 and December 31, 2016 were as follows: 
 
Dollars in Thousands
 
March 31,
2017
 
December 31,
2016
 
Change
Current assets (including cash and cash equivalents of $59 and $110, respectively)
$
567

 
$
495

 
$
72

Current liabilities
21,129

 
19,824

 
1,305

Working capital
$
(20,562
)
 
$
(19,329
)
 
$
(1,233
)

At March 31, 2017, we had cash on hand of less than $0.1 million. Our ability to continue as a going concern is dependent upon a combination of completing our planned merger with 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 our obligations and pay our liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at this time and raises substantial doubt that we will be able to continue as a going concern. There is no assurance that we will complete the merger in a timely manner or at all. The merger agreement is subject to many closing conditions and termination rights. We also cannot be certain that additional financing, if needed, will be available on acceptable terms, or at all, and our failure to raise capital when needed could limit our ability to continue our operations.

Analysis of Cash Flows - Three Months Ended March 31, 2017 and 2016
Net Change in Cash and Cash Equivalents. Cash and cash equivalents decreased by less than $0.1 million during the three months ended March 31, 2017, compared to an decrease of $0.2 million during the three months ended March 31, 2016. These amounts include cash provided by discontinued operations of $0.1 million and cash used in discontinued operations of $0.6 million, for the three months ended March 31, 2017 and 2016, respectively.
Cash Flows From Continuing Operations

25

Cash Flows Used in Operating Activities. The cash flows used in operating activities of $0.1 million during the three months ended March 31, 2017 included a net loss of $1.8 million and a decrease in accrued expenses of $0.6 million. These were partially offset by an increase in accounts payable of $2.0 million and non-cash adjustments of $0.4 million. The cash flows used in operating activities in the first three months of 2016 included the net loss of $2.1 million and a decrease in accrued expenses and other liabilities of $0.5 million. These were partially offset by an increase in accounts receivable of $1.2 million.
Cash Flows Used in Investing Activities. Cash flows used in investing activities for continuing operations were zero and less than $0.1 million for the three months ended March 31, 2017 and 2016, respectively.
Cash Flows Provided by Financing Activities. There were no cash flows provided by financing activities for the three months ended March 31, 2017 other than capital lease payments of less than $0.1 million. Cash flows provided by financing activities during the three months ended March 31, 2016 totaled $1.7 million which included net proceeds of approximately $1.8 million from our Unit issuance and $0.5 million from borrowing on our debt. These proceeds were partially offset by payments on our debt of approximately $0.6 million

Off-Balance Sheet Arrangements
At each of March 31, 2017 and December 31, 2016, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations and Commitments
There have been no material changes to our contractual obligations outside the normal course of business as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on April 13, 2017 except for the following.
•Our debt decreased by $0.4 million resulting from the conversion of convertible promissory notes into shares of our common stock in January 2017. See Note 4 - Debt to our accompanying condensed consolidated financial statements.
•Our operating lease obligations decreased from approximately $1.3 million to approximately $0.6 million as the result of a settlement agreement we entered into on April 7, 2017 related to the early termination of our lease for our Omaha, Nebraska facility.

Critical Accounting Policies and Estimates
Accounting policies used in the preparation of our consolidated financial statements may involve the use of management judgments and estimates. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial statements and require significant or complex judgments on the part of management. Our judgments and estimates are based on experience and assumptions that we believe are reasonable under the circumstances. Further, we evaluate our judgments and estimates from time to time as circumstances change. Actual financial results based on judgments or estimates may vary under different assumptions or circumstances. Our critical accounting policies are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the Securities and Exchange Commission on April 13, 2017.

Recently Issued Accounting Pronouncements
Please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the Securities and Exchange Commission on April 13, 2017. There have been no changes to those accounting pronouncements listed except as noted in Note 2 - “Summary of Significant Accounting Policies-Recent Accounting Pronouncements” in the Notes to Unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.

Impact of Inflation
We do not believe that price inflation or deflation had a material adverse effect on our financial condition or results of operations during the periods presented.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk


26

We are a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide the information required under this item.

Item 4.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Management performed, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on the evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that, as of March 31, 2017, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
We have evaluated the changes in our internal control over financial reporting that occurred during the three months ended March 31, 2017 and concluded that there have not been any changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

27

PART II. OTHER INFORMATION
 
Item 1.
Legal Proceedings
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 Item 1, 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 Transgenomic’s 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 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

28

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 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 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.
The outcome of legal proceedings and claims brought against us are subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against us in the same reporting period for amounts in excess of management’s expectations, our financial statements for such reporting period could be materially adversely affected. In general, the resolution of a legal matter could prevent us from offering our services or products to others, could be material to our financial condition or cash flows, or both, or could otherwise adversely affect our operating results. 

Item 1A.
Risk Factors

As disclosed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, there are a number of risks and uncertainties that may have a material effect on the operating results of our business and our financial condition. There are no additional material updates or changes to our risk factors since the filing of our Annual Report on Form 10-K for the year ended December 31, 2016.


29

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 6.
Exhibits
(a)
Exhibits
2.1

 
First Amendment to Agreement and Plan of Merger, dated as of February 3, 2017, by and among the Registrant, New Haven Labs Inc. and Precipio Diagnostics, LLC (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on February 2, 2017).
 
 
 
10.1

 
Waiver Letter Agreement by and among the Registrant, Potomac Capital Partners, L.P., MAZ Partners LP, David Wambeke and Craig-Hallum Capital Group LLC, dated as of January 10, 2017 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on January 17, 2017).
 
 
 
10.2

 
First Amendment to Unsecured Convertible Promissory Note by and among the Registrant and MAZ Partners LP, dated as of January 17, 2017 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on January 20, 2017).
 
 
 
10.3

 
Termination and Tenth Amendment to Loan and Security Agreement, dated as of February 3, 2017, by and among Third Security Senior Staff 2008 LLC, as administrative agent and a lender, the other lenders party thereto and the Registrant (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 2, 2017).
 
 
 
10.4

 
Promissory Note, dated February 2, 2017, between the Registrant and Precipio Diagnostics, LLC (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 3, 2017).
 
 
 
10.5

 
Securities Purchase Agreement, dated as of April 13, 2017, by and between the Registrant and the investors set forth on Schedule A attached thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 17, 2017).
 
 
 
10.6

  
Form of Promissory Note, issued by the Registrant to certain investors, dated as of April 13, 2017 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on April 17, 2017).
 
 
 
10.7

 
Form of Warrant to Purchase Common Stock, issued by the Registrant to certain investors, dated as of April 13, 2017 (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on April 17, 2017).
 
 
 
10.8

 
Precipio Diagnostics, LLC Subordinated Promissory Note, issued by Precipio to the Registrant, dated as of April 13, 2017 (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on April 17, 2017).
 
 
 
10.9

 
Subordination Agreement, dated as of April 13, 2017, by and between the Registrant and Webster Bank, National Association (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed on April 17, 2017).
 
 
 
31.1

 
Certification of Paul Kinnon, President, Chief Executive Officer and Interim Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended.
 
 
 
32.1

  
Certification of Paul Kinnon, President, Chief Executive Officer and Interim Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended.
 
 
 
101.INS

 
XBRL Instance Document
 
 
 
101.SCH

 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL

 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF

 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB

 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE

 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 

30

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
TRANSGENOMIC, INC.
 
 
 
 
Date:
May 18, 2017
By:
/S/ PAUL KINNON



Paul Kinnon
President, Chief Executive Officer and Interim Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)
 
 
 
 

31

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