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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 9 Months Ended
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Sep. 30, 2014
Accounting Policies [Abstract] |
Summary of Significant Accounting Policies | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation. The condensed consolidated balance sheet as of December 31, 2013 was derived from our audited balance sheet as of that date. The accompanying condensed consolidated financial statements as of and for the three and nine months ended September 30, 2014 and 2013 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, 2013 contained in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 27, 2014. The results of operations for the interim periods presented are not necessarily indicative of the results for fiscal year 2014. Following approval of our stockholders, on January 15, 2014, our Board of Directors approved a reverse split of our common stock, par value $0.01, at a ratio of one-for-twelve. This reverse stock split became effective on January 27, 2014 and, unless otherwise indicated, all share amounts, per share data, share prices, exercise prices and conversion rates set forth in these notes and the accompanying condensed consolidated financial statements have, where applicable, been adjusted retroactively to reflect this reverse stock split. 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. Use of Estimates. The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. In addition, estimates and assumptions associated with the determination of the fair value of certain assets and related impairments require considerable judgment by management. Actual results could differ from the estimates and assumptions used in preparing these condensed consolidated financial statements. Reclassifications. Certain prior period amounts of selling, general and administrative expenses have been reclassified to cost of goods sold in order to conform to the current period presentation. These reclassifications had no effect on previously reported net earnings. Fair Value. Unless otherwise specified, book value approximates fair market value. The common stock warrant liability is recorded at fair value. See Note 10 - “Fair Value” for additional information. Cash and Cash Equivalents. Cash and cash equivalents include cash and investments with original maturities at the date of acquisition of three months or less. 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 September 30, 2014. Accounts Receivable. The following is a summary of activity for the allowance for doubtful accounts during the three and nine months ended September 30, 2014 and 2013:
| Dollars in Thousands
| Beginning Balance |  | Additions |  | Deductions |  | Ending Balance
Three Months Ended September 30, 2014 | $ | 4,041 |  |  | $ | 1,129 |  |  | $ | (400 | ) |  | $ | 4,770 |
Three Months Ended September 30, 2013 | $ | 2,362 |  |  | $ | 2,769 |  |  | $ | (1,086 | ) |  | $ | 4,045 |
Nine Months Ended September 30, 2014 | $ | 3,838 |  |  | $ | 2,652 |  |  | $ | (1,720 | ) |  | $ | 4,770 |
Nine Months Ended September 30, 2013 | $ | 2,171 |  |  | $ | 4,966 |  |  | $ | (3,092 | ) |  | $ | 4,045 |
While payment terms are generally 30 days, we have also provided extended payment terms in certain cases. In addition, we operate globally and the payment terms for some of our international customers may be greater than 90 days. Accounts receivable are carried at original invoice amount and shown net of allowance for doubtful accounts and contractual allowances. The estimate made for doubtful accounts is based on a review of all outstanding amounts on a quarterly basis. We determine the allowance for doubtful accounts by assigning a consistent reserve percentage to each accounts receivable aging category and contractual allowances by regularly evaluating individual customer payment history. Accounts receivable are written off when deemed uncollectible and all collection efforts have been exhausted. During the nine months ended September 30, 2014, in accordance with our stated policy, we wrote-off approximately $1.7 million of accounts receivable related to services rendered in prior year periods, determined to be uncollectible. Inventories. Inventories are stated at the lower of cost or market net of allowance for obsolete inventory. Cost is computed using standard costs for finished goods and average or latest actual cost for raw materials and work in process, which approximates the first-in, first-out (FIFO) method. The following is a summary of activity for the allowance for obsolete inventory during the three and nine months ended September 30, 2014 and 2013:
| Dollars in Thousands
| Beginning Balance |  | Additions |  | Deductions |  | Ending Balance
Three Months Ended September 30, 2014 | $ | 843 |  |  | $ | 6 |  |  | $ | (211 | ) |  | $ | 638 |
Three Months Ended September 30, 2013 | $ | 593 |  |  | $ | 19 |  |  | $ | (3 | ) |  | $ | 609 |
Nine Months Ended September 30, 2014 | $ | 799 |  |  | $ | 61 |  |  | $ | (222 | ) |  | $ | 638 |
Nine Months Ended September 30, 2013 | $ | 616 |  |  | $ | 19 |  |  | $ | (26 | ) |  | $ | 609 |
The three and nine month periods ended September 30, 2014 each include a deduction of $0.2 million related to inventory that was sold as part of the sale of our Surveyor Kits product line on July 1, 2014 (See Note 3 - “Sale of Product Line” for additional information). We determine the allowance for obsolescence by evaluating inventory quarterly for items deemed to be slow moving or obsolete. Property and Equipment. Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets as follows:
Leasehold improvements | 1 to 10 years
Furniture and fixtures | 3 to 7 years
Production equipment | 3 to 7 years
Computer equipment | 3 to 7 years
Research and development equipment | 2 to 7 years
Depreciation expense related to property and equipment was $0.1 million and $0.2 million for the three months ended September 30, 2014 and 2013, respectively. Included in depreciation expense for each of the three months ended September 30, 2014 and 2013 was $0.1 million related to equipment acquired under capital leases. Depreciation expense related to property and equipment was $0.4 million and $0.5 million for the nine months ended September 30, 2014 and 2013, respectively. Included in depreciation expense for each of the nine months ended September 30, 2014 and 2013 was $0.2 million related to equipment acquired under capital leases. Goodwill. Goodwill is tested for impairment annually. We perform this impairment analysis during the fourth quarter of each year or when a significant event occurs that may impact goodwill. Impairment occurs when the carrying value is determined to be not recoverable, thereby causing the carrying value of the goodwill to exceed its fair value. If impaired, the asset’s carrying value is reduced to its fair value. No events have transpired in the nine months ended September 30, 2014 that would require an impairment analysis prior to our scheduled review. 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 10-year contractual terms. Unvested options as of September 30, 2014 had vesting periods of one or three years from the date of grant. None of the stock options outstanding at September 30, 2014 are subject to performance or market-based vesting conditions. We measure and recognize compensation expense for all stock-based awards made to employees and directors. Compensation expense is based on the calculated fair value of the awards as measured at the grant date and is expensed over the service period of the awards. During the nine months ended September 30, 2014 and 2013, we recorded compensation expense of $1.0 million and $0.2 million, respectively, within selling, general and administrative expense. As of September 30, 2014, the unrecognized compensation expense related to unvested stock awards, net of estimated forfeitures, was $1.0 million, which is expected to be recognized over a weighted-average period of 1.4 years. We granted 23,250 stock options during the quarter ended September 30, 2014. The fair value of the options granted was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: risk-free interest rates of 1.66% based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected lives of 4.42 years, based on expected exercise activity behavior; and volatility of 82% based on the historical volatility of our common stock over a time that is consistent with the expected life of the option. Included in the stock awards outstanding as of September 30, 2014 were stock appreciation rights with respect to 83,333 and 55,000 shares of common stock granted to our Chief Executive Officer and former Chief Financial Officer, respectively. These rights will vest over three years from the date of grant and have an exercise price of $4.32 per share, which is equal to the fair value of one share of our common stock on the date of grant, which was September 30, 2013. Net Sales Recognition. 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.
For our Laboratory Services segment, net sales from Patient Testing laboratories are recognized on an individual test basis and take place when the test report is completed, reviewed and sent to the client, less the reserve for insurance, Medicare and Medicaid contractual adjustments. There are no deferred net sales associated with our Patient Testing services. Adjustments to the allowances, based on actual receipts from third party payors, are reflected in the estimated contractual allowance applied prospectively. In our Biomarker Identification laboratory, we perform pharmacogenomics research services on a project-by project-basis. When we receive payment in advance, we recognize revenue when we deliver the service. These projects typically do not extend beyond one year. At each of September 30, 2014 and December 31, 2013, deferred net sales associated with pharmacogenomics research projects included in the balance sheet in deferred revenue was $0.2 million. Net sales of products in our Genetic Assays and Platforms segment are recognized in accordance with the terms of the sales arrangement. Such recognition is based on receipt of an unconditional customer order and transfer of title and risk of ownership to the customer, typically upon shipment of the product under a purchase order. Our sales terms do not provide for the right of return unless the product is damaged or defective. Net sales from certain services associated with the analytical instruments, to be performed subsequent to shipment of the products, is deferred and recognized when the services are provided. Such services, mainly limited to installation and training services that are not essential to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument. We also enter into various service contracts that cover installed instruments. These contracts cover specific time periods, and net sales associated with these contracts are deferred and recognized ratably over the service period. At September 30, 2014 and December 31, 2013, deferred net revenue associated with our service contracts was $0.7 million and $0.9 million, respectively, and was included in the balance sheet in deferred revenue. Common Stock Warrants. Certain of our issued and outstanding warrants to purchase common stock do not qualify to be treated as equity and, accordingly, are recorded as a liability (“Common Stock Warrant Liability”). The Common Stock Warrant Liability was initially recorded at fair value using a Monte Carlo simulation model. We are required to present these instruments at fair value at each reporting date and any changes in fair values are recorded as an adjustment to earnings. The Common Stock Warrant Liability is considered a Level Three financial instrument for purposes of fair value measurement. See Note 10 - “Fair Value” for additional information. Translation of Foreign Currency. Our foreign subsidiary uses the British Pound Sterling, which is the local currency of the country in which it is located, as its functional currency. Its assets and liabilities are translated into U.S. Dollars at the exchange rates in effect at the balance sheet date. A cumulative translation loss of $0.01 million was reported as other comprehensive loss on the accompanying unaudited condensed consolidated statement of comprehensive loss for the nine months ended September 30, 2014. A cumulative translation loss of $0.1 million was reported as accumulated other comprehensive income for the nine months ended September 30, 2013. Revenues and expenses are translated at the average rates during the period. For transactions that are not denominated in the functional currency, we recognized less than $0.1 million as foreign currency transaction expense in the determination of net loss for the nine months ended September 30, 2014 and less than $0.1 million as foreign currency transaction income in the determination of net loss for the nine months ended September 30, 2013. 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 5,524,030 and 3,727,541 shares of our common stock have been excluded from the computation of diluted loss per share at September 30, 2014 and 2013, respectively. The options, warrants and conversion rights that were exercisable during the three and nine months ended September 30, 2014 and 2013 were not included in the computation of diluted loss per share because the effect would be anti-dilutive due to the net loss. Recent Accounting Pronouncements. In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for reporting a discontinued operation. Under this standard, a disposal of part of an organization that has a major effect on its operations and financial results is a discontinued operation. This guidance is effective prospectively for us beginning January 1, 2015 with earlier application permitted, but only for disposals (or classifications as held for sale) that have not been reported previously. When adopted, we do not expect that this guidance will have a material impact on our financial condition, results of operations or cash flows. In May 2014, the FASB issued 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. This ASU will replace most existing revenue recognition guidance in generally accepted accounting principles in the U.S. when it becomes effective on January 1, 2017. Early application is not permitted, but the standard permits the use of either the retrospective or cumulative effect transition method. We have not selected a transition method and are currently evaluating the impact this guidance will have on our financial condition, results of operations and cash flows. In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40). The new guidance addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is permitted. We do not expect to early adopt this guidance and do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

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