Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
CBMX > SEC Filings for CBMX > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for COMBIMATRIX CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for COMBIMATRIX CORP


13-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Cautionary Statement

You should read the following discussion and analysis in conjunction with the consolidated financial statements and related notes thereto contained in Part I, Item 1 of this report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our businesses or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the U.S. Securities and Exchange Commission, or "SEC," including our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 16, 2012.

This report contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact included in this report, are forward-looking statements. Reference is made in particular to the description of our plans and objectives for future operations, assumptions underlying such plans and objectives, and other forward-looking statements included in this report. Such statements may be identified by the use of forward-looking terminology such as "may," "will," "should," "would," "could," "expect," "believe," "estimate," "anticipate," "intend," "plan," "predict," "seek," "potential," "continue," "focus," "ongoing," or similar terms, variations of such terms or the negative of such terms, and include, but are not limited to, statements regarding projected results of operations, capital expenditures, earnings, management's future strategic plans, product development, litigation, regulatory matters, market acceptance and performance of our products and services, the success and effectiveness of our technologies, planned clinical trials by our minority-owned subsidiary, our ability to retain and hire key personnel, the competitive nature of and anticipated growth in our markets, market position of our products and services, marketing efforts and partnerships, liquidity and capital resources, our accounting estimates, and our assumptions and judgments. Such statements are based on management's current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by us, all of which are subject to change. These forward looking statements are not guarantees of future results and are subject to a number of risks, uncertainties and assumptions that are difficult to predict and that could cause actual results to differ materially and adversely from those described in the forward-looking statements. The risks and uncertainties referred to above include, but are not limited to, our ability to consummate the Second Closing; our stockholders' approval of the First Closing and Second Closing, including approval of an increase to our authorized shares of common stock; our ability to obtain additional financing for working capital on acceptable terms and in a timely manner; our ability to successfully increase the volume of our existing tests, expand the number of tests offered by our laboratory, increase the number of customers and partners and improve reimbursement for our testing; our ability to regain and maintain compliance with Nasdaq's listing requirements; our ability to continue as a going concern; changes in consumer demand; our ability to attract and retain a qualified sales force and key technical personnel; our ability to successfully develop products; our ability to successfully introduce new technologies and services; rapid technological change in our markets; supply availability; the outcome of existing litigation; our ability to bill and obtain reimbursement for highly specialized tests; our ability to comply with regulations to which our business is subject; legislative, regulatory and competitive developments in markets in which we and our subsidiaries operate; our limited market capitalization; future economic conditions; other circumstances affecting anticipated revenues and costs; and other factors as more fully disclosed in our discussion of risk factors in Item 1A of Part II of this report and in the "Risk Factors" described in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 16, 2012. Additional factors that could cause such results to differ materially from those described in the forward-looking statements are set forth in connection with the forward-looking statements. These forward-looking statements speak only as of the date of this report and we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based, except as required by law.

General

We are a molecular diagnostics company that operates primarily in the field of genetic analysis and molecular diagnostics through our wholly owned subsidiary, CombiMatrix Molecular Diagnostics, Inc. ("CMDX"), located in Irvine, California. CMDX operates as a diagnostics reference laboratory providing DNA-based clinical diagnostic testing services to physicians, hospitals, clinics and other laboratories in two primary areas: (i) prenatal and postnatal developmental disorders; and (ii) hematology/oncology genomics. CMDX provides its services primarily through the use of array-comparative genomic hybridization ("aCGH"), which enables the analysis of genetic anomalies, as well as through other test offerings including fluorescent in-situ hybridization ("FISH") and G-Band Chromosome analysis. Our mission is to empower physicians to positively impact patient care through the delivery of innovative molecular diagnostics services.


Table of Contents

Prior to 2010, we were primarily focused on developing proprietary DNA array-based tools and instruments for the genetic research community, under the brand formerly known as "CustomArray," as well as providing molecular diagnostics services through CMDX. On April 19, 2010, we announced a strategic and operational restructuring plan (the "Restructuring Plan") intended to significantly reduce operating costs, increase the focus on our diagnostic services business and transition senior management. As part of the Restructuring Plan, we closed our CustomArray business and facilities located in Mukilteo, Washington and relocated our corporate headquarters to Irvine, California. Since the restructuring, our primary focus has been on our diagnostics services business. Our goals include increasing utilization of our existing tests, expanding our diagnostic test menu, increasing and diversifying our client base, and improving reimbursement for our testing services.

As a result of executing the Restructuring Plan, the financial results of our CustomArray business have been classified as discontinued operations in the consolidated statements of operations for all periods presented. Unless otherwise noted, amounts and disclosures throughout this report relate to our continuing operations.

We also own a one-third minority interest in Leuchemix, Inc. ("Leuchemix"), a private drug development company focused on developing a series of compounds to address a number of oncology-related diseases.

Overview

For the three and nine months ended September 30, 2012, our operating activities included the recognition of $1.3 million and $3.9 million of total revenues, respectively, which increased by $58,000 and $461,000, respectively, from the comparable periods in 2011 due primarily to increased volumes of molecular diagnostic tests performed, increases in royalty revenues and from recognition of one-time revenues from providing clinical trials support services to one customer during the third quarter of 2012. Our net loss from continuing operations has decreased over the comparable periods due to increased revenues and also from reduced operating expenses as a result of cost reduction efforts executed during the second quarter of 2012.

For the nine months ended September 30, 2012, our activities included the hiring of Richard Hockett, MD as our Chief Medical Officer, who joined us on May 1, 2012 and Mark McDonough as Chief Commercial Officer, who joined us on August 23, 2012. During the first quarter of 2012 we named Richard Ding and Joseph Limber to our Board of Directors and during the second quarter appointed Dr. Ronald J. Wapner to our Scientific Advisory Board. On October 9, 2012, Mr. Limber resigned from our Board for personal reasons. In May 2012, we executed cost reduction measures which included the elimination of certain staff positions across all functional areas of the Company. We also executed a materials supply agreement to perform clinical trial support services to Affymetrix, Inc. for total consideration to us of $195,000, for which we completed our obligations under this agreement and recognized the consideration as revenue during the third quarter of 2012.

On October 1, 2012, we announced the execution of an agreement to issue securities in a private placement transaction to certain accredited investors that will result in gross proceeds to us totaling $2.5 million, to be received in two tranches, with the first tranche having closed on October 1, 2012 and the second tranche expected to close in early December 2012, subject to approval by our stockholders at a special meeting to be held on November 29, 2012. The financing is through the sale of convertible preferred stock with the first tranche having an initial conversion price of $0.49112 per share of common stock, subject to future adjustments, and 100% warrant coverage at an initial exercise price of $0.95 per share, subject to adjustments. The preferred stock also accrues an annual dividend of 6%. Upon closing of the first tranche, we received gross proceeds of $1.05 million from the investors and, pending stockholder approval, expect to receive the remaining $1.45 million within five business days after the November 29, 2012 stockholders' meeting.

Critical Accounting Estimates

Our unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 16, 2012, in the Notes to the Consolidated Financial Statements and the Critical Accounting Estimates sections. In addition, refer to Note 2 to the consolidated interim financial statements included in Part I, Item 1 of this report.


Table of Contents

Comparison of the Results of Operations for the Three and Nine months Ended September 30, 2012 and 2011

Revenues and Cost of Revenues (dollars in thousands):



                             Three Months Ended                          Nine Months Ended
                               September 30,             Change            September 30,            Change
                              2012         2011        $        %         2012        2011        $        %

Diagnostic services        $    1,053    $  1,212   $  (159 )   (13% ) $    3,549    $ 3,334   $   215       6%
Clinical trial support
services                          195           -       195        -          195          -       195        -
Royalties                          47          25        22      88%          126         75        51      68%
Cost of services                 (647 )      (642 )      (5 )    (1% )     (1,983 )   (1,965 )     (18 )    (1% )

Diagnostic Services. Diagnostic services revenues are generated from providing DNA-based genomic testing services primarily in the areas of prenatal and postnatal development disorders in children and, to a lesser extent, in oncology. Total billable test volumes were 1,356 and 4,192 for the three and nine months ended September 30, 2012, compared to 1,157 and 3,316 for the comparable periods in 2011, respectively. Although testing volumes have increased for all periods presented, diagnostic services revenues decreased for the three months ended September 30, 2012 compared to the comparable 2011 period primarily due to a change in mix of diagnostic services performed, where increases in prenatal testing volumes were offset by decreases in pediatric and oncology testing. Cytogenetic tests in the prenatal market, including FISH and chromosome analysis, are priced and reimbursed at lower rates than our array-based tests. As a result, our average revenue per test decreased from $1,047 and $1,005 for the three and nine months ended September 30, 2011, to $776 and $847 for the comparable 2012 periods, respectively. For the nine month periods ended September 30, 2012 and 2011, decreases in oncology and pediatric volumes were offset by increases in prenatal testing, resulting in an overall increase in diagnostic services revenues year-over-year. Diagnostic services revenues also includes adjustments relating to our revenue recognition policy of periodically adjusting our estimate for contractual allowances for revenues from non-contracted payors as well as from receiving cash payments in excess of amounts previously recognized for services revenues. For the three and nine months ended September 30, 2012 and 2011, net positive revenue adjustments were $41,000, $416,000, $169,000 and $350,000, respectively.

Clinical Trial Support Services. In June of 2012, we entered into a materials transfer agreement with Affymetrix, Inc. in support of their clinical trial program. Under the terms of the agreement, we delivered over 300 anonymous patient samples during the third quarter. As a result, we fully satisfied our obligations to Affymetrix, which resulted in recognition of $195,000 of clinical trial support services revenues for the three and nine months ended September 30, 2012. There are no future performance obligations by either party and we do not expect to recognize additional revenues from this agreement in the future.

Royalties. In 2010, we entered into an exclusive licensing agreement with CustomArray, Inc. ("CA"), a private company located in Washington State, for certain of our patents and intellectual property developed as part of our prior microarray manufacturing business. This agreement requires CA to pay us royalties as a percentage of their gross revenues, not less than $25,000 per quarter. During the second and third quarters of 2012, CA's gross revenues exceeded the minimum thresholds stipulated in the licensing agreement, resulting in royalties of $47,000 and $126,000 for the three and nine months ended September 30, 2012, compared to $25,000 and $75,000 for the comparable 2011 periods, respectively. It is uncertain whether in future periods, CA's revenues will increase, continue at current levels or return to the minimum contractual amounts.

Cost of Services. Cost of services relating to our diagnostic tests performed include direct materials such as array and laboratory costs, direct laboratory labor (wages and benefits), allocation of administrative overhead and stock-compensation expenses. Due primarily to favorable pricing obtained on certain of our direct materials used in providing our services, the percentage changes from 2011 to 2012 are not proportional to the change in revenues during the same periods. For the three and nine months ended September 30, 2012 and 2011, non-cash stock compensation expenses were not significant. See Note 2 to our consolidated interim financial statements included elsewhere in this report for a detailed description of the amounts of non-cash stock compensation expense recognized for the periods presented.


Table of Contents

Operating Expenses (dollars in thousands):



                               Three Months Ended                          Nine Months Ended
                                 September 30,             Change            September 30,            Change
                               2012         2011         $        %         2012        2011        $        %

Research and development     $     311    $     345   $   (34 )   (10% ) $    1,103    $ 1,005   $    98      10%
Sales and marketing                470          733      (263 )   (36% )      2,022      1,961        61       3%
General and administrative       1,131        1,481      (350 )   (24% )      4,274      4,176        98       2%

Research and Development. These expenses include labor (wages and benefits), non-cash stock compensation expenses and laboratory supply costs associated with investigating and validating new tests, costs to maintain and improve our existing suite of diagnostic tests offered and process improvement projects. Prior to launching a new test or modifying an existing test, appropriate clinical trials and extensive laboratory validations, consistent with the various regulations that govern our industry, must be performed. These costs are classified as research and development for all periods presented. For the three months ended September 30, 2012, research and development expenses decreased from the comparable 2011 period due primarily to reduced headcount as well as from lower supply and materials costs incurred. For the nine months ended September 30, 2012, research and development expenses increased from the comparable 2011 period due primarily to increased headcount earlier in 2012 compared to 2011 and from higher supply costs incurred during the first quarter of 2012 due primarily to the validation and launch of additional cytogenetic tests during that period. For the three and nine months ended September 30, 2012 and 2011, non-cash stock compensation expenses were not significant. See Note 2 to our consolidated interim financial statements included elsewhere in this report for a detailed description of the amounts of non-cash stock compensation expense recognized for the periods presented.

Sales and Marketing. These expenses include salaries and wages associated with our sales force and marketing resources, sales commissions and other expenses associated with promotional and advertising efforts as well as non-cash stock compensation expenses. For the three months ended September 30, 2012, sales and marketing expenses decreased from the comparable 2011 period due primarily to reduced headcount, travel and marketing expenses primarily as a result of our cost reduction efforts executed near the end of the second quarter of 2012. For the nine months ended September 30, 2012, sales and marketing expenses increased over the comparable 2011 period due to higher headcount, travel and marketing expenses incurred earlier in 2012 as compared to 2011, prior to our cost reduction efforts executed late in the second quarter of 2012. For the three and nine months ended September 30, 2012 and 2011, non-cash stock compensation expenses were not significant. See Note 2 to our consolidated interim financial statements included elsewhere in this report for a detailed description of the amounts of non-cash stock compensation expense recognized for the periods presented.

General and Administrative. These expenses include compensation and benefit costs of our administrative staff, client billing and collections, information technology, executive management, human resources and accounting personnel, as well as facilities-related costs, insurance, legal, audit and other professional services. For the three months ended September 30, 2012, general and administrative expenses decreased from the comparable 2011 period due primarily to reduced third-party billing fees and lower bad debt expenses, partially offset by increased salaries and benefits resulting from the hiring of our Chief Medical Officer during the second quarter of 2012. For the nine months ended September 30, 2012, general and administrative expenses increased over the comparable period in 2011 due primarily to higher salaries and benefits costs associated with our Chief Medical Officer and from increased staff in our Billing department, increased recruitment expenses associated with new board members and executive management and from increased litigation defense costs as compared to 2011. Also included in general and administrative expenses are non-cash stock-based compensation expenses, which were $77,000, $317,000, $188,000 and $795,000 for the three and nine months ended September 30, 2012 and 2011, respectively. The decreases were due primarily to prior stock option awards that were or became fully vested during recent periods, resulting in fewer option awards subject to vesting and related expenses during the current periods as compared to prior periods. See Note 2 to our consolidated interim financial statements included elsewhere in this report for a detailed description of the amounts of non-cash stock compensation expense recognized for the periods presented.


Table of Contents

Discontinued Operations (dollars in thousands):



                                     Three Months Ended                           Nine Months Ended
                                        September 30,            Change             September 30,             Change
                                     2012          2011        $        %       2012           2011         $        %

Income (loss) from discontinued
operations                         $      -     $       82   $  (82 ) (100% ) $      -     $        318   $ (318 ) (100% )

On April 19, 2010, we announced a Restructuring Plan intended to focus our Company on our diagnostic services business while shutting down our CustomArray business. The operations of our former CustomArray business are classified as discontinued operations for all periods presented. Income from final billings on former Department of Defense contracts occurred and was recognized during the first and second quarters of 2011. There were no activities relating to discontinued operations since the second quarter of 2011.

Inflation

Inflation has not had a significant impact on our business, results of operations or financial condition.

Liquidity and Capital Resources

At September 30, 2012, cash and cash equivalents totaled $1.7 million, compared to $6.4 million at December 31, 2011. Cash is held primarily in general checking accounts as well as in money market mutual funds backed by U.S. government securities. Working capital at September 30, 2012 was $2.2 million, compared to $7.5 million at December 31, 2011. The change in working capital was due primarily to the impact of net cash flow activities as discussed below. The net change in cash and cash equivalents for the periods presented was comprised of the following (in thousands):

                                                  Nine Months Ended
                                                    September 30,
                                                   2012        2011      Change
Net cash provided by (used in):
Operating activities                            $   (4,567 ) $ (5,141 ) $    574
Investing activities                                   (20 )     (107 )       87
Financing activities                                   (89 )    6,550     (6,639 )
(Decrease) increase cash and cash equivalents   $   (4,676 ) $  1,302   $ (5,978 )

Operating Activities. The decrease in net cash flows used in operating activities resulted primarily from higher cash reimbursement from increased sales, billing and collection efforts experienced during the first nine months of 2012, which were partially offset by increased operating expenses described above.

Investing Activities. The decrease in net cash flows used in investing activities was due to a decrease in capital expenditures.

Financing Activities. The decrease in net cash flows from financing activities was due primarily to the $6.6 million of net proceeds received from closing a private placement offering in April of 2011 compared to no such activities during the first nine months of 2012, as well as from higher principal payments from additional capital lease obligations incurred since 2011.

Future Liquidity. We have a history of incurring net losses and net operating cash flow deficits. We are also deploying new technologies and continue to develop commercial services. We believe that our cash and cash equivalent balances at September 30, 2012, together with the $1.05 million of gross proceeds received on October 1, 2012, and the $1.45 million of gross proceeds to be received, from the recent private placement transaction discussed above, and expense reductions from the cost reduction measures executed during the second quarter of 2012, will allow us to meet our cash requirements into the second quarter of 2013, assuming our stockholders approve the second tranche of the financing at our upcoming special stockholders meeting on November 29, 2012. In the event the Second Closing of the financing is not approved and the Second Closing does not occur, we believe we can meet our cash requirements into the first quarter of 2013.


Table of Contents

In order for us to continue as a going concern beyond this point and ultimately to achieve profitability, we will be required to obtain capital from external sources, increase revenues and reduce operating costs. However, there can be no assurance that our operations will become profitable or that external sources of financing, including the issuance of debt and/or equity securities, will be available at times and at terms acceptable to us, or at all. The issuance of additional equity or convertible debt securities would also cause dilution to our stockholders. If external financing sources are not available or are inadequate to fund our operations, we will be required to reduce operating costs, including but not limited to reducing personnel across all operational functions, which could jeopardize our future strategic initiatives and business plans. See Note 1 to the consolidated interim financial statements included elsewhere in this report for additional discussion of these matters.

Capital Requirements. We may also encounter unforeseen difficulties that may deplete our capital resources more rapidly than anticipated. As a result, we may be required to seek additional funding through equity, debt or other external financing, and there can be no assurance that additional funding will be available on favorable terms, in a timely fashion or at all. At this time, we have no significant commitments for capital expenditures in 2012 or beyond. However, our long-term capital requirements could be substantial and the adequacy of available funds will depend upon many factors, including:

the costs of commercialization activities, including sales and marketing costs and capital equipment;

competing technological developments;

the creation and formation of strategic partnerships;

the costs associated with leasing and improving our Irvine, California facility; and

. . .

  Add CBMX to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for CBMX - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.