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 12-Nov-2013All Recent SEC Filings

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

Form 10-Q for COMBIMATRIX CORP


12-Nov-2013

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, 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, services 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 continued 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.

General

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 fluorescent in-situ hybridization (or "FISH") and high resolution karyotyping. We emphasize support for healthcare professionals, to ensure data understanding and communication of results to patients. We deliver high-technology driven answers, with a high degree of assistance for the ordering physician and staff. Our clinical lab and corporate offices 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.


Table of Contents

Overview

For the three and nine months ended September 30, 2013, our operating activities included the recognition of $1.5 million and $4.6 million of total revenues, respectively which increased by $208,000 and $744,000, respectively, from the comparable periods in 2012 due primarily to increased volumes of molecular diagnostic tests performed. Our net loss decreased over the comparable periods in 2012 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 $3.4 million that were recognized during the nine months ended September 30, 2013.

During the second quarter of 2013, 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") 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"). Upon closing of both tranches, we received proceeds of $2.15 million, net of offering-related costs.

During the first quarter of 2013, 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.

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 September 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 Nine Months Ended
September 30, 2013 and 2012



Revenues and Cost of Revenues (dollars in thousands):



                   Three Months Ended                             Nine Months Ended
                      September 30,              Change             September 30,              Change
                    2013         2012         $          %         2013         2012        $          %

Diagnostic
services         $    1,468    $   1,053   $    415       39%   $    4,499    $  3,549   $    950       27%
Clinical trial
support
services                  -          195       (195 )  (100)%            -         195       (195 )  (100)%
Royalties                35           47        (12 )   (26)%          115         126        (11 )    (9)%
Cost of
services               (845 )       (647 )     (198 )   (31)%       (2,633 )    (1,983 )     (650 )   (33)%


Table of Contents

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                        Nine Months Ended
                          September 30,            Change           September 30,           Change
                         2013         2012       #        %        2013        2012       #        %

Total billable
tests                      1,438       1,356       82      6%        4,641      4,192      449     11%
Total microarray
tests                      1,145         857      288     34%        3,282      2,661      621     23%
Microarray
percentage of total
tests                        80%         63%                           71%        63%
Total prenatal
microarray tests             541         225      316    140%        1,548        596      952    160%
Prenatal percentage
of total microarray
tests                        47%         26%                           47%        22%

Revenue per test -
total                 $    1,021    $    776   $  245     32%   $      969    $   847   $  122     14%
Revenue per test -
all microarrays       $    1,206    $  1,109   $   97      9%   $    1,267    $ 1,229   $   38      3%
Revenue per test -
prenatal
microarrays           $    1,566    $  1,644   $  (78 )  (5)%   $    1,627    $ 1,703   $  (76 )  (4)%

Although total billable testing volumes increased by 6% and 11% for the three and nine months ended September 30, 2013 over the comparable periods in 2012, respectively, diagnostic services revenues increased by 39% and 27% 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 non-array tests, our overall average revenue per test has also increased for all periods presented, thereby driving higher revenues in 2013 compared to 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 nine months ended September 30, 2013 and 2012, net positive revenue adjustments were $169,000, $437,000, $41,000 and $416,000, respectively. Because approximately 68% 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. In addition, recent changes by Medicare to the molecular codes used by laboratories such as ours for microarray testing could positively or negatively impact reimbursement from certain non-contracted payors for our microarray tests, which would have a commensurate impact on revenues recognized from those payors.

Clinical Trial Support Services. In June 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 of 2012. 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 were no such programs or activities during 2013.

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 lower in 2013 compared to 2012, resulting in lower royalties for all periods presented in 2013 as compared to 2012. It is uncertain whether in future periods, CA's revenues will increase, continue at current levels or decrease 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. Increases in cost of services were due primarily to increased diagnostic testing volumes period-over-period, as well as increased materials costs associated with converting microarray testing platforms in the first and second quarters of 2013.


Table of Contents

Operating Expenses (dollars in thousands):



                     Three Months Ended                             Nine Months Ended
                       September 30,              Change              September 30,               Change
                     2013         2012         $          %        2013          2012          $          %

Research and
development        $     247    $     311   $    (64 )   (21)%   $     607    $     1,103   $   (496 )   (45)%
Sales and
marketing                657          470        187       40%       1,993          2,022        (29 )    (1)%
General and
administrative         1,149        1,131         18        2%       3,773          4,274       (501 )   (12)%

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 nine months ended September 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 nine months ended September 30, 2013 and 2012, non-cash stock compensation expenses were not significant.

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, 2013, sales and marketing expenses increased from the comparable 2012 period due primarily to increased headcount in sales and marketing as well as increased marketing and promotional-related activities. For the nine months ended September 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 nine months ended September 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. Changes for the three month periods ended September 30, 2013 were not significant. For the nine months ended September 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, reduced tenant improvement amortization costs which became fully amortized at the end of 2012 and lower bad debt expenses. Also included in general and administrative expenses are non-cash stock-based compensation expenses, which were $117,000, $288,000, $77,000 and $317,000 for the three and nine months ended September 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                       Nine Months Ended
                     September 30,           Change           September 30,            Change
                    2013        2012       $        %        2013        2012       $         %

Interest
expense                (18 )        (7 )    (11 ) (157)%        (339 )      (19 )   (320 ) (1,684)%
Warrant
derivative

gains 119 - 119 - 3,393 - 3,393 -

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 $18,000, $59,000, $7,000 and $19,000 for the three and nine months ended September 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.


Table of Contents

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 each balance sheet date. There were no such activities during the first three quarters of 2012. We valued the Series A Warrants using the Monte-Carlo simulation method using the following assumptions at September 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 4.5 years; (iii) historical volatilities commensurate with the term of the remaining Series A Warrants of 121.3%; (iv) risk-free interest rates commensurate with the term of the remaining Series A Warrants of 1.2%; 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 $1.1 million, which was $119,000 below their carrying value as of June 30, 2013. As a result, we recognized a $119,000 non-operating, warrant derivative gain in our consolidated statement of operations for the three months ended September 30, 2013. As a result of a similar valuation analysis performed during the first and second quarters in 2013, the combined warrant derivative gains recognized in our consolidated statement of operations for the nine months ended September 30, 2013 was $3.4 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.

Inflation

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

Liquidity and Capital Resources

At September 30, 2013, cash and cash equivalents totaled $4.0 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 September 30, 2013 was $3.6 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):

                                                     Nine Months Ended
                                                       September 30,
                                                      2013        2012     Change
Net cash provided by (used in):
Operating activities                               $   (4,099 ) $ (4,567 ) $   468
Investing activities                                     (288 )      (20 )    (268 )
Financing activities                                    6,022        (89 )   6,111
Increase (decrease) in cash and cash equivalents   $    1,635   $ (4,676 ) $ 6,311

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 nine months ended September 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 September 30, 2013 will allow us to meet our cash requirements into the second 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.


Table of Contents

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.

Off-Balance Sheet Arrangements

As of September 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 . . .

  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.