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CBMX > SEC Filings for CBMX > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Quarterly Report


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, 2012, filed with the SEC on March 25, 2013.

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 services, the success and effectiveness of our technologies, our ability to retain and hire key personnel, the competitive nature of and anticipated growth in our markets, market position of our 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 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 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 new services; 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, 2012 filed with the SEC on March 25, 2013. 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.


We provide valuable molecular diagnostic solutions and comprehensive clinical support for the highest quality of care. We specialize in miscarriage analysis, prenatal and pediatric healthcare, offering DNA-based testing for the detection of genetic abnormalities beyond what can be identified through traditional methodologies. We perform genetic testing utilizing a variety of advanced cytogenomic techniques, including microarray, standardized and customized FISH, and high resolution karyotyping. We are located in Irvine, California.

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.

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For the three and six months ended June 30, 2013, our operating activities included the recognition of $1.5 million and $3.1 million of total revenues, respectively which increased by $194,000 and $536,000, respectively, from the comparable periods in 2012 due primarily to increased volumes of molecular diagnostic tests performed. Our net losses decreased over the comparable periods due partially to increased revenues and reduced operating expenses as a result of cost reduction efforts executed during the second quarter of 2012, but primarily due to non-cash warrant derivative gains of $1.4 million and $3.3 million that were recognized during the three and six months ended June 30, 2013, respectively.

During the second quarter, we executed an agreement to issue securities in a private placement transaction with certain accredited investors that resulted in gross proceeds to us totaling $2.4 million received in two tranches, with the first tranche having closed on May 6, 2013 and the second tranche having closed on June 28, 2013. This financing was through the sale of Series C convertible preferred stock (the "Series C Stock") with an adjusted conversion price of $2.85759 per share of common stock, subject to future adjustments, and warrants to purchase 491,803 shares of common stock with an exercise price of $3.77 per share and 491,803 shares of common stock with an exercise price of $3.55 per share (collectively, the "Series C Warrants"). The Series C Stock also accrues an annual dividend of 6%, increasing by 1% per year that the Series C Stock remains outstanding but not to exceed 10%. Upon closing of both tranches, we received proceeds of $2.2 million, net of paid and accrued offering-related costs.

During the first quarter, we executed a registered direct offering to an existing institutional investor of Series B convertible preferred stock, common stock and warrants to purchase common stock (the "Series B Financing"), resulting in net proceeds to us of $1.8 million.

For the six months ended June 30, 2013, the exercise of certain warrants from our Series A convertible preferred stock financing executed during the fourth quarter of 2012 (the "Series A Warrants") resulted in additional proceeds of $2.4 million through June 30, 2013.

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, 2012, filed with the SEC on March 25, 2013, 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.

Comparison of the Results of Operations for the Three and Six Months Ended June 30, 2013 and 2012

Revenues and Cost of Revenues (dollars in thousands):

                        Three Months Ended                       Six Months Ended
                             June 30,             Change             June 30,            Change
                         2013         2012       $       %        2013       2012       $       %

Diagnostic services   $    1,445    $  1,252   $ 193     15%   $    3,031   $ 2,496   $ 535     21%
Royalties                     55          54       1      2%           80        79       1      1%
Cost of services            (851 )      (677 )  (174 ) (26)%       (1,788 )  (1,336 )  (452 ) (34)%

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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. The key drivers and metrics relating to the change in diagnostic services revenues were as follows:

                         Three Months Ended                         Six Months Ended
                              June 30,              Change              June 30,              Change
                          2013         2012        #       %         2013        2012        #       %

Total billable
tests                       1,485       1,459       26      2%         3,203      2,836      367     13%
Microarray tests            1,106         888      218     25%         2,137      1,804      333     18%
Microarray %age of
total tests                 74.5%       60.9%                          66.7%      63.6%

Revenue per test -
total                  $      973    $    858    $ 115     13%    $      946    $   880    $  66      8%
Revenue per test -
microarrays            $    1,213    $  1,262    $ (49 )  (4)%    $    1,300    $ 1,284    $  16      1%

Although total billable testing volumes increased by 2% and 13% for the three and six months ended June 30, 2013 over the comparable periods in 2012, respectively, diagnostic services revenues increased by 15% and 21% over the same periods, respectively. The reason that diagnostic services revenues have increased by greater percentages than have total billable testing volumes is due to a shift in test mix during 2013 towards a higher concentration of microarray testing, particularly in the prenatal testing market. Because microarray tests are priced and reimbursed at significantly higher rates than our array-based tests, our overall average revenue per test has increased for all periods presented, thereby driving higher revenues in the first half of 2013 compared to the first half of 2012. In addition, decreases in oncology and pediatric testing volumes were offset by increases in prenatal testing, resulting in an overall increase in diagnostic services revenues quarter-over-quarter and year-over-year. The change in test mix has been driven by a change in sales and marketing efforts in mid-2012 towards the prenatal diagnostic testing market and less towards pediatric and oncology markets. Diagnostic services revenues also include 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 six months ended June 30, 2013 and 2012, net positive revenue adjustments were $67,000, $268,000, $154,000 and $375,000, respectively. Because approximately 70% of our revenues are billed to non-contracted third-party payors, it is likely that we will be required to make adjustments to accounting estimates with respect to contractual allowances in the future, which may positively or adversely affect our revenues and results of operations.

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. CA's sales activities were similar in 2013 compared to 2012, resulting in virtually no change for all periods presented. It is uncertain whether in future periods, CA's revenues will increase or continue at 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. Increases in cost of services were due to increased diagnostic testing volumes period-over-period.

Operating Expenses (dollars in thousands):

                      Three Months Ended                             Six Months Ended
                           June 30,                Change                June 30,                Change
                      2013         2012         $          %        2013         2012         $          %

Research and
development         $     177    $     342   $   (165 )   (48)%   $     360    $     792   $   (432 )   (55)%
Sales and
marketing                 695          679         16        2%       1,336        1,552       (216 )   (14)%
General and
administrative          1,251        1,569       (318 )   (20)%       2,624        3,143       (519 )   (17)%

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 and technology platforms, costs to maintain and improve our existing suite of diagnostic tests offered and process improvement projects. Prior to launching a new test or technology, 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 and six months ended June 30, 2013, research and development expenses decreased from the comparable 2012 periods due primarily to reduced headcount as well as from lower supply and materials costs incurred. For the three and six months ended June 30, 2013 and 2012, non-cash stock compensation expenses were not significant.

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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 June 30, 2013, sales and marketing expenses increased from the comparable 2012 period due primarily to increased headcount in marketing as well as increased marketing and promotional related activities. For the six months ended June 30, 2013, sales and marketing expenses decreased from the comparable 2012 period due primarily to reduced sales headcount and related 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 three and six months ended June 30, 2013 and 2012, non-cash stock compensation expenses were not significant.

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 and six months ended June 30, 2013, general and administrative expenses decreased from the comparable 2012 periods due primarily to reduced salaries and wages from executive retirements and prior year bonuses not repeated in the current periods, reduced third-party billing fees from bringing billing in-house in mid-2012 and lower bad debt expenses. Also included in general and administrative expenses are non-cash stock-based compensation expenses, which were $103,000, $171,000, $85,000 and $240,000 for the three and six months ended June 30, 2013 and 2012, respectively. Changes to stock-based compensation expenses are driven by timing of when option awards are granted compared to when older awards become fully vested or expire due to forfeitures, as well as by the valuations attributed to individual awards at the time they are granted. 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.

Other Non-Operating Items (dollars in thousands):

                   Three Months Ended                        Six Months Ended
                        June 30,              Change             June 30,              Change
                    2013         2012       $        %        2013       2012       $         %

expense                 (19 )        (6 )    (13 ) (217)%       (321 )      (12 )   (309 ) (2575)%

gains 1,437 - 1,437 - 3,274 - 3,274 -

Interest Expense. Prior to the fourth quarter of 2012, interest expense was entirely comprised of interest charges associated with certain capital leases for laboratory equipment, which were $19,000, $41,000, $6,000 and $12,000 for the three and six months ended June 30, 2013 and 2012, respectively. Increases are due to additional capital leases during late 2012 and early 2013. In addition, $280,000 of interest expense in 2013 is related to the amortization of offering-related costs incurred during the fourth quarter of 2012. These costs were being amortized over the Series A Warrant exercise restriction period of six months from issuance, but due to a modification on February 22, 2013 to the Series A Warrants resulting in immediate exercisability, all of the unamortized offering related costs as of December 31, 2012 were charged to interest expense during the first quarter of 2013.

Warrant Derivatives Gains. This represents the net gains recognized from mark-to-market adjustments of the remaining Series A Warrants to their estimated fair values as of March 31, 2013 and June 30, 2013. There were no such activities during the first two quarters of 2012. We valued the Series A Warrants using the Monte-Carlo simulation method using the following assumptions at June 30, 2013: (i) closing common stock price and Series A Warrant contractual exercise price; (ii) term to expiration commensurate with the remaining Series A Warrant terms of 4.7 years; (iii) historical volatilities commensurate with the term of the remaining Series A Warrants of 120.5%;
(iv) risk-free interest rates commensurate with the term of the remaining Series A Warrants of 1.3%; and (v) simulated anti-dilution impact assuming various probabilities that we will raise additional capital by issuing equity securities at prices above or below the current contractual Series A Warrant exercise price during the Series A Warrant terms. The result of these valuation simulations was to value the remaining Series A Warrants at $1.2 million, which was $1.4 million below their carrying value as of March 31, 2013. As a result, we recognized a $1.4 million non-operating, warrant derivative gain in our consolidated statement of operations for the three months ended June 30, 2013. As a result of a similar valuation analysis performed during the first quarter ended March 31, 2013, the combined warrant derivative gains recognized in our consolidated statement of operations for the six months ended June 30, 2013 was $3.3 million. The Series A Warrants were valued as Level 3 liabilities under our policies for assessing fair value measurements. If the inputs such as volatility and probability of subsequent financings were to change, the concluded values could change significantly.

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

Liquidity and Capital Resources

At June 30, 2013, cash and cash equivalents totaled $5.7 million, compared to $2.4 million at December 31, 2012. 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 June 30, 2013 was $5.0 million, compared to a working capital deficit of $(1.4 million) at December 31, 2012. 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):

                                                     Six Months Ended
                                                         June 30,
                                                     2013        2012     Change
Net cash provided by (used in):
Operating activities                               $  (2,816 ) $ (3,147 ) $   331
Investing activities                                     (80 )      (20 )     (60 )
Financing activities                                   6,248        (59 )   6,307
Increase (decrease) in cash and cash equivalents   $   3,352   $ (3,226 ) $ 6,578

Operating Activities. The decrease in net cash flows used in operating activities resulted primarily from higher cash reimbursement from customers coupled with decreased operating expenses described above.

Investing Activities. The increase in net cash flows used in investing activities was due to an increase in capital expenditures primarily related to our laboratory facilities.

Financing Activities. The increase in net cash flows from financing activities was due to the combination of Series B and C financings discussed above, as well as from Series A common stock warrant exercises. There were no such financing activities during the first six months ended June 30, 2012.

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 June 30, 2013 will allow us to meet our cash requirements into the third quarter of 2014. 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 will 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 research projects and personnel, 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 2013 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

other factors that may not be within our control.

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Off-Balance Sheet Arrangements

As of June 30, 2013, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC. However, we have recently entered into an amendment to our existing operating lease for laboratory space and corporate offices, totaling approximately 12,200 square feet, which now expires in January of 2015. We have no significant commitments for capital expenditures for the remainder of 2013 or beyond. Also as of June 30, 2013, we had eleven active capital leases totaling $657,000 for certain laboratory and IT-related equipment, with lease payments continuing through 2017.

Recent Accounting Pronouncements

None that are expected to have a material impact to the Company's consolidated financial statements.

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