XNAS:CBMX CombiMatrix Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For The Quarterly Period Ended June 30, 2012

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM            TO           .

 

Commission File Number 001-33523

 

COMBIMATRIX CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

47-0899439

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

310 Goddard, Suite 150,

 

 

Irvine, CA

 

92618

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (949) 753-0624

 

N/A

(Former name, former address and former fiscal year, if changed since last report.)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   o

 

Accelerated filer   o

 

Non-accelerated filer  o

 

Smaller reporting company  x

 

 

 

 

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes o No x

 

As of August 6, 2012, 10,704,121 shares of CombiMatrix Corporation common stock, $0.001 par value were issued and outstanding.

 

 

 



Table of Contents

 

COMBIMATRIX CORPORATION

Table of Contents

 

Part I. Financial Information

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011

3

 

 

 

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2012 and 2011

4

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011

5

 

 

 

 

Notes to Consolidated Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

13

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

18

 

 

 

Item 4.

Controls and Procedures

18

 

 

 

 

 

 

Part II. Other Information

 

 

 

 

 Item 1.

Legal Proceedings

18

 

 

 

 Item 1A.

Risk Factors

19

 

 

 

 Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

19

 

 

 

 Item 3.

Defaults Upon Senior Securities

19

 

 

 

 Item 4.

Mine Safety Disclosures

19

 

 

 

 Item 5.

Other Information

19

 

 

 

 Item 6.

Exhibits

19

 

 

 

 

 

 

 Signatures

 

20

 

 

 

 Exhibit Index

 

21

 

 

 

 

2



Table of Contents

 

COMBIMATRIX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

3,159

 

$

6,385

 

Accounts receivable, net of allowance for doubtful accounts of $464 and $333

 

985

 

1,462

 

Supplies

 

298

 

476

 

Prepaid expenses and other assets

 

145

 

259

 

Total current assets

 

4,587

 

8,582

 

 

 

 

 

 

 

Property and equipment, net

 

504

 

607

 

Investments in unconsolidated subsidiaries

 

127

 

127

 

Patents and licenses, net

 

99

 

132

 

Total assets

 

$

5,317

 

$

9,448

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable, accrued expenses and other

 

$

1,060

 

$

1,004

 

Current portion, capital lease obligations

 

114

 

115

 

Total current liabilities

 

1,174

 

1,119

 

 

 

 

 

 

 

Capital lease obligations, net of current portion

 

140

 

179

 

Total liabilities

 

1,314

 

1,298

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred stock; $0.001 par value; 5,000,000 shares authorized; none issued and outstanding

 

 

 

Common stock; $0.001 par value; 25,000,000 shares authorized; 10,704,121 shares issued and outstanding, respectively

 

11

 

11

 

Additional paid-in capital

 

66,353

 

66,099

 

Accumulated net losses

 

(62,361

)

(57,960

)

Total shareholders’ equity

 

4,003

 

8,150

 

Total liabilities and shareholders’ equity

 

$

5,317

 

$

9,448

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

COMBIMATRIX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share information)

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Services

 

$

1,252

 

$

1,209

 

$

2,496

 

$

2,122

 

Royalty

 

54

 

25

 

79

 

50

 

Total revenues

 

1,306

 

1,234

 

2,575

 

2,172

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of services

 

677

 

693

 

1,336

 

1,323

 

Research and development

 

342

 

321

 

792

 

660

 

Sales and marketing

 

679

 

671

 

1,552

 

1,228

 

General and administrative

 

1,569

 

1,369

 

3,143

 

2,695

 

Patent amortization and royalties

 

66

 

66

 

142

 

131

 

Total operating expenses

 

3,333

 

3,120

 

6,965

 

6,037

 

Operating loss

 

(2,027

)

(1,886

)

(4,390

)

(3,865

)

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

 

1

 

1

 

2

 

Interest expense

 

(6

)

(4

)

(12

)

(9

)

Total other expense

 

(6

)

(3

)

(11

)

(7

)

Net loss from continuing operations

 

(2,033

)

(1,889

)

(4,401

)

(3,872

)

Income from discontinued operations

 

 

205

 

 

236

 

Net loss

 

$

(2,033

)

$

(1,684

)

$

(4,401

)

$

(3,636

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share from continuing operations

 

$

(0.19

)

$

(0.18

)

$

(0.41

)

$

(0.43

)

Basic and diluted net income per share from discontinued operations

 

 

0.02

 

 

0.03

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

 

$

(0.19

)

$

(0.16

)

$

(0.41

)

$

(0.40

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average common shares outstanding

 

10,704,121

 

10,466,912

 

10,704,121

 

9,051,518

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

COMBIMATRIX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Net loss

 

$

(4,401

)

$

(3,636

)

Adjustments to reconcile net loss to net cash flows from operating activities:

 

 

 

 

 

Depreciation and amortization

 

175

 

160

 

Non-cash stock compensation

 

254

 

678

 

Provision for bad debts

 

278

 

117

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

199

 

(303

)

Supplies, prepaid expenses and other assets

 

292

 

(153

)

Accounts payable, accrued expenses and other

 

56

 

16

 

Net cash flows from operating activities

 

(3,147

)

(3,121

)

 Investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(20

)

(50

)

Net cash flows from investing activities

 

(20

)

(50

)

 Financing activities:

 

 

 

 

 

Net proceeds from issuance of common stock, net

 

 

6,638

 

Repayment of capital lease obligations

 

(59

)

(35

)

Net cash flows from financing activities

 

(59

)

6,603

 

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

(3,226

)

3,432

 

Cash and cash equivalents, beginning

 

6,385

 

6,556

 

Cash and cash equivalents, ending

 

$

3,159

 

$

9,988

 

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

Property and equipment purchased under capital lease

 

$

19

 

$

71

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5



Table of Contents

 

COMBIMATRIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.    OVERVIEW AND BACKGROUND

 

CombiMatrix Corporation (the “Company,” “we,” “us” and “our”) was originally incorporated in October 1995 as a California corporation and later reincorporated as a Delaware corporation in September 2000.  In December 2002, we merged with and became a wholly owned subsidiary of Acacia Research Corporation (“Acacia”).  In December 2006, we filed a registration statement with the U.S. Securities and Exchange Commission (“SEC”) in order to register our common stock as part of a plan to split-off from Acacia (the “Split-Off”).  On August 15, 2007 (the “Split-Off Date”), the Split-Off was effected and our common stock became publicly traded on the Nasdaq Stock Market (symbol: “CBMX”).  As of the Split-Off Date, we ceased to be a subsidiary of, or affiliated with, Acacia.

 

Description of the Company

 

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.

 

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 the Company’s diagnostic services business and transition senior management.  As part of the Restructuring Plan, we closed our Mukilteo, Washington facility, which had been focused primarily on research, development and commercialization of the Company’s oligonucleotide microarray technologies, also known as our “CustomArray” business.

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X.  Accordingly, certain information and footnotes required by generally accepted accounting principles in annual financial statements have been omitted or condensed.  These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2011, as reported by us in our Annual Report on Form 10-K filed with the SEC on March 16, 2012.  The year-end consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.  The consolidated financial statements include all adjustments of a normal recurring nature which, in the opinion of management, are necessary for a fair statement of our financial position as of June 30, 2012, and results of operations and cash flows for the interim periods presented.  The results of operations for the three months ended June 30, 2012 are not necessarily indicative of the results to be expected for the entire year.

 

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.  See Note 3 for additional information regarding discontinued operations.  Unless otherwise noted, amounts and disclosures throughout the notes to our consolidated financial statements relate to our continuing operations.

 

Liquidity and Risks

 

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 tests and products.

 

At June 30, 2012, we had cash and cash equivalents of $3.2 million and anticipate that our cash and cash equivalent balances will be sufficient to meet our cash requirements into the fourth quarter of 2012.  The uncertainty regarding our ability to execute our business plans beyond this point raises substantial doubt about our ability to continue as a going concern.

 

6



Table of Contents

 

COMBIMATRIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

In order for us to continue as a going concern beyond 2012 and ultimately to achieve profitability, we may 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 cause dilution to our shareholders.  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 personnel across all operational functions, which could jeopardize our future strategic initiatives and business plans.

 

Our business operations are also subject to certain risks and uncertainties, including:

 

·                  market acceptance of our products and services;

 

·                  technological advances that may make our products and services obsolete or less competitive;

 

·                  increases in operating costs, including costs for supplies, personnel and equipment;

 

·                  the availability and cost of capital; and

 

·                  government regulation that may restrict our business.

 

Our services are concentrated in a highly competitive market that is characterized by rapid technological advances, frequent changes in customer requirements and evolving regulatory requirements and industry standards.  Failure to anticipate or respond adequately to technological advances, changes in customer requirements, changes in regulatory requirements or industry standards, or any significant delays in the development or introduction of planned products or services, could have a material adverse effect on our business and operating results.  The accompanying consolidated financial statements have been prepared assuming that the Company continues as a going concern.  The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the matters discussed herein.

 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates.  The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

 

Principles of Consolidation.  The accompanying consolidated financial statements include the accounts of the Company and our wholly owned and majority-owned subsidiaries.  Investments for which we possess the power to direct or cause the direction of the management and policies, either through majority ownership or other means, are accounted for under the consolidation method.  Material intercompany transactions and balances have been eliminated in consolidation.  Investments in companies in which we maintain an ownership interest of 20% to 50% or exercise significant influence over operating and financial policies are accounted for under the equity method.  The cost method is used where we maintain ownership interests of less than 20% and do not exercise significant influence over the investee.

 

Revenue Recognition. We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been performed, (iii) amounts are fixed or determinable and (iv) collectability of amounts is reasonably assured.

 

7



Table of Contents

 

COMBIMATRIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

Service revenues from providing diagnostic tests are recognized when the testing process is complete and test results are reported to the ordering physician or clinic.  These diagnostic services are billed to various payors, including commercial insurance companies, healthcare institutions, government payors including Medicare and Medicaid and individuals.  We report revenues from contracted payors based on a contractual rate, or in the case of Medicare and Medicaid, published fee schedules for our tests.  We report revenues from non-contracted payors based on the amount expected to be collected.  The difference between the amount billed and the amount expected to be collected from non-contracted payors is recorded as a contractual allowance to arrive at net recognized revenues.  The expected revenues from non-contracted payors are based on the historical collection experience of each payor or payor group, as appropriate.  In each reporting period, we review our historical collection experience for non-contracted payors and adjust our expected revenues for current and subsequent periods accordingly.  We also recognize additional revenue from actual cash payments that exceed amounts initially recognized, in the period the payments are received.  For the three and six months ended June 30, 2012 and 2011, net positive revenue adjustments were $154,000, $375,000, $150,000 and $181,000, respectively.  Because a substantial portion of our revenues is from non-contracted third-party payors, it is likely that we will be required to make positive or negative adjustments to accounting estimates with respect to contractual allowances in the future, which may positively or adversely affect our results of operations.

 

Cash and Cash Equivalents.  We consider all highly liquid, short-term investments with original maturities of three months or less when purchased to be cash equivalents.

 

Fair Value Measurements.  We measure fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability.  We utilize a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

·                  Level 1:                   Observable market inputs such as quoted prices in active markets;

 

·                  Level 2:                   Observable market inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

 

·                    Level 3:                 Unobservable inputs where there is little or no market data, which require the reporting entity to develop its own assumptions.

 

Concentration of Credit Risks.  Cash equivalents are invested in deposits with certain financial institutions and may, at times, exceed federally insured limits.  We have not experienced any significant losses on our deposits of cash and cash equivalents.

 

Accounts Receivable and Allowance for Doubtful Accounts.  Accounts receivable are stated at principal amounts and are primarily comprised of amounts contractually due from customers for products and services.  An allowance for doubtful accounts is recorded for estimated uncollectible amounts due from various payor groups such as commercial insurance companies, healthcare institutions, government payors and individuals.  The process for estimating the allowance for doubtful accounts involves significant assumptions and judgments.  Specifically, the allowance for doubtful accounts is adjusted periodically and is principally based upon specific identification of past due or disputed accounts.  We also review the age of receivables by payor class to assess our allowance at each period end.  The payment realization cycle for certain governmental and commercial insurance payors can be lengthy, involving denial, appeal and adjudication processes, and is subject to periodic adjustments that may be significant.  Accounts receivable are periodically written off when identified as uncollectible and deducted from the allowance for doubtful accounts after appropriate collection efforts have been exhausted. Additions to the allowance for doubtful accounts are charged to bad debt expense as a component of general and administrative expenses in the consolidated statements of operations.  Collection of governmental, private health insurer, and client receivables are generally a function of providing complete and correct billing information to the insurers and clients within the filing deadlines required by each payor.  Collection of receivables due from patients and clients is generally subject to increased credit risk due to credit-worthiness or inability to pay.

 

8



Table of Contents

 

COMBIMATRIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

Stock-Based CompensationThe compensation cost for all stock-based awards is measured at the grant date, based on the fair value of the award, and is recognized as an expense, on a straight-line basis, over the employee’s requisite service period (generally the vesting period of the equity award) which is generally three years.  The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model.  Stock-based compensation expense is recognized only for those awards that are expected to vest using an estimated forfeiture rate.  We estimate pre-vesting option forfeitures at the time of grant and reflect the impact of estimated pre-vesting option forfeitures in compensation expense recognized.  Stock-based compensation expense for all periods presented attributable to our functional expense categories were as follows (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Cost of products and services

 

$

1

 

$

16

 

$

4

 

$

32

 

Research and development

 

2

 

18

 

6

 

37

 

Sales and marketing

 

(7

)

17

 

4

 

34

 

General and administrative

 

85

 

318

 

240

 

607

 

Discontinued operations

 

 

(5

)

 

(32

)

Total non-cash stock compensation

 

$

81

 

$

364

 

$

254

 

$

678

 

 

Net Loss Per Share.  Basic and diluted net loss per share has been computed by dividing the net loss by the weighted average number of common shares issued and outstanding during the periods presented.  Options and warrants to purchase common stock are anti-dilutive and therefore are not included in the determination of the diluted net loss per share.  The following table presents a reconciliation of basic and diluted loss per share from continuing operations for all periods presented (in thousands, except share and per-share data):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Numerator:

 

 

 

 

 

 

 

 

 

Loss from continuing operations applicable to common shareholders

 

$

(2,033

)

$

(1,889

)

$

(4,401

)

$

(3,872

)

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

10,704,121

 

10,466,912

 

10,704,121

 

9,051,518

 

Basic and diluted loss per share from continuing operations

 

$

(0.19

)

$

(0.18

)

$

(0.41

)

$

(0.43

)

 

 

 

 

 

 

 

 

 

 

Common stock options

 

2,019,536

 

2,336,018

 

2,019,536

 

2,336,018

 

Common stock warrants

 

2,807,244

 

4,894,570

 

2,807,244

 

4,894,570

 

Excluded potentially dilutive securities

 

4,826,780

 

7,230,588

 

4,826,780

 

7,230,588

 

 

Segments.  We have determined that we operate in one segment for financial reporting purposes.

 

Reclassifications.  Certain prior period amounts, including royalty revenues, have been reclassified to conform with the current period presentation.

 

Recent and Adopted Accounting Pronouncements.  In July 2011, the Financial Accounting Standards Board (“FASB”) issued an amendment to the accounting standards related to the revenue recognition practices of health care entities that recognize significant amounts of patient service revenues at the time services are rendered even though the entity does not assess the patient’s ability to pay for those services.  The amendment requires such entities to classify its provision for bad debts related to such revenues as a reduction from patient service revenues rather than as an operating expense as well as enhanced disclosures about an entity’s policy for recognizing revenue and bad debt expense for patient service transactions along with quantitative information about the effects of changes in the assessment of collectability of patient service revenue.  This amendment was effective for us beginning January 1, 2012.  Given that we do not recognize significant amounts of patient service revenues from individual payments but primarily from contracted and non-contracted third-party payors, we do not believe this standard is applicable to us and therefore its adoption did not result in a material impact on our consolidated financial position, results of operations or cash flows.

 

9



Table of Contents

 

COMBIMATRIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

In June 2011, the FASB issued an amendment to the accounting standards related to the presentation of comprehensive income.  This standard revises the manner in which entities present comprehensive income in their financial statements and removes the option to present items of other comprehensive income in the statement of changes in shareholders’ equity.  This standard requires an entity to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements of net income and other comprehensive income.  The adoption of this standard did not result in a material impact on our consolidated financial position, results of operations or cash flows.

 

3.              RESTRUCTURING

 

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.  Certain activities relating to completion of our former Department of Defense contracts continued into the first six months of 2011.  There have been no activities from discontinued operations subsequent to June 30, 2011.

 

4.              FAIR VALUE MEASUREMENTS

 

The following table summarizes, for each major category of financial assets measured on a recurring basis, the respective fair value at June 30, 2012 and December 31, 2011 and the classification by level of input within the fair value hierarchy defined above (in thousands):

 

 

 

 

 

Fair Value Measurements at

 

June 30, 2012

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

2,572

 

$

2,572

 

$

 

$

 

 

 

 

 

 

Fair Value Measurements at

 

December 31, 2011

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

5,771

 

$

5,771

 

$

 

$

 

 

5.              SHAREHOLDERS’ EQUITY

 

Equity Financings

 

There were no equity financing transactions in the periods ended June 30, 2012.

 

On April 7, 2011 (the “Closing Date”), we completed a private placement transaction (the “Private Placement”) with accredited investors in which we sold $6.76 million of newly-issued shares of our common stock and common stock purchase warrants.  Under the terms of the Private Placement, we sold 3.08 million units for $2.193125 per unit.  Each unit consisted of one share of CombiMatrix common stock and one warrant to purchase 0.425 shares of common stock at an exercise price of $2.14 per share.  The unit price reflects the market value of our common stock as determined by Nasdaq rules plus $0.053125 for the warrant component.  The warrants may be exercised beginning six months after the Closing Date and have a term of five years.  The proceeds of the transaction, net of legal costs, will be used to fund growth initiatives and for general working capital purposes. No investment banking or advisory fees were paid by the Company.  Attorney’s fees and related costs were approximately $122,000, bringing the net proceeds from the Private Placement to $6.64 million.

 

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COMBIMATRIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

Warrants

 

Outstanding warrants to purchase CombiMatrix stock are as follows:

 

 

 

Shares of Common Stock

 

 

 

 

 

 

 

Issuable from Warrants

 

 

 

 

 

 

 

Outstanding as of

 

 

 

 

 

 

 

June 30,

 

December 31,

 

Exercise

 

 

 

Date of Issue

 

2012

 

2011

 

Price

 

Expiration

 

 

 

 

 

 

 

 

 

 

 

April 2011

 

1,310,572

 

1,310,572

 

$2.14

 

April 2016

 

October 2009

 

30,000

 

30,000

 

$7.78

 

October 2014

 

May 2009

 

29,688

 

29,688

 

$7.50 - $9.00

 

May 2014 - June 2014

 

May 2009

 

1,100,000

 

1,100,000

 

$9.00

 

May 2014

 

July 2008

 

336,984

 

336,984

 

$11.87 - $13.65

 

July 2013

 

May 2007

 

 

959,390

 

$5.50

 

May 2012

 

Total

 

2,807,244

 

3,766,634

 

 

 

 

 

 

6.    COMMITMENTS AND CONTINGENCIES

 

Human Resources

 

We provide certain severance benefits such that if an executive officer of CombiMatrix Corporation is terminated for other than cause, death or disability, the executive will receive payments equal to three months’ base salary plus medical and dental benefits.  In addition, we have implemented a Restated Executive Change of Control Severance Plan (the “Severance Plan”) that affects certain members of our senior management-level employees who are classified as “Section 16 Officers” of CombiMatrix Corporation.  Pursuant to the Severance Plan, if a participating employee is involuntarily terminated (other than for death, disability or for cause) or resigns for “good reason” (as defined in the Severance Plan) during the two-year period following a “change of control” (as defined in the Severance Plan) of the Company, then, subject to execution of a release of claims against the Company, the employee will be entitled to receive: (i) one-half times annual base salary; (ii) immediate vesting of outstanding compensatory equity awards; and (iii) payment of COBRA premiums for the participating employee and eligible dependants for a pre-determined period of time.  Payment of benefits under the Severance Plan will be limited by provisions contained in Section 409A of the U.S. Internal Revenue Code.  The Severance Plan is administered by a plan administrator, which is the Compensation Committee of the Board of Directors.  In order to participate in the Severance Plan, an eligible employee must waive any prior retention or severance agreements.

 

Litigation

 

In 2002, we entered into a settlement agreement with Nanogen, Inc. (“Nanogen”) to settle all pending litigation between the parties.  Pursuant to the terms of the settlement agreement, we agreed to make quarterly payments to Nanogen equal to 12.5% of total sales of products developed by us and our affiliates based on the patents that had been in dispute in the litigation, up to an annual maximum amount of $1.5 million.  The minimum quarterly payments under the settlement agreement are $25,000 per quarter until the patents expire in 2018.  Royalty expenses recognized under the agreement were $25,000, $50,000, $25,000, and $50,000, for the three and six months ended June 30, 2012 and 2011, respectively, and are included in patent amortization and royalties in the accompanying consolidated statements of operations.

 

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COMBIMATRIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

On February 14, 2011, Relator Michael Strathmann (“Strathmann”) served us with a complaint (“the Complaint”) filed in the Superior Court of the State of California for the County of Orange.  The Complaint alleged that we submitted false and fraudulent insurance claims to National Union Fire Insurance Company of Pittsburgh, PA in connection with a prior lawsuit that was settled with Nanogen, Inc., thereby allegedly violating the California Insurance Fraud Prevention Act, and sought penalties and unspecified treble damages.  On May 4, 2011, the Superior Court dismissed the Complaint by ordering that it be stricken for violation of the California Anti-SLAPP statute, which prevents plaintiffs from filing abusive lawsuits against public policy.  On June 15, 2011, Strathmann filed a Notice of Appeal with the California Court of Appeals, appealing the granting of the Motion to Strike.  Subsequently, Strathmann filed a Notice of Appeal of the award of attorneys’ fees against him, which appeals have now been consolidated and are in the briefing stage.  Strathmann filed his Opening Brief on January 18, 2012, and we filed our Respondents’ Brief on May 3, 2012.  Oral arguments before the California Court of Appeals will take place on August 24, 2012.  We believe that this litigation is frivolous and intend to vigorously defend against the appeal, but there can be no assurance that we will ultimately be successful in defending against it.

 

From time to time, we are subject to other claims and legal actions that arise in the ordinary course of business.  We believe that the ultimate liability with respect to these other claims and legal actions, if any, will not have a material effect on our financial position, results of operations or cash flows.  Based on a distribution agreement executed between us and Acacia, it is expected that such claims and legal actions attributable to CombiMatrix Corporation prior to the Split-Off Date will remain with us subsequent to the Split-Off Date.  As of the date of this report and prior to such date, we are not aware of the existence of any such claims or legal actions.

 

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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 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 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.

 

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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 six months ended June 30, 2012, our operating activities included the recognition of $1.3 million and $2.5 million of total revenues, respectively, which increased by $72,000 and $403,000, respectively, from the comparable periods in 2011 due primarily to increased volumes of tests performed as well as an overall increase in our customer base as a result of increased sales and marketing efforts.  Our net loss from continuing operations also increased over the comparable periods due to increased operating expenses, partially from increased sales and marketing expenses from expansion of our sales force as well as from increased general and administrative expenses due primarily to increased headcount and from increased litigation costs.

 

For the six months ended June 30, 2012, our activities included adding Richard Ding, Chief Executive Officer of bioTheranostics Inc., and Joseph M. Limber, President and Chief Executive Officer of Prometheus Laboratories Inc., to our Board of Directors.  On April 11, 2012, we announced the hiring of Richard Hockett, MD as our Chief Medical Officer, who joined us on May 1, 2012.  Dr. Hockett was formerly the Chief Medical Officer of Affymetrix, Inc.  Also, on May 11, 2012, we announced the appointment of Dr. Ronald J. Wapner to our Scientific Advisory Board.  Dr. Wapner is the Vice Chair for Research in Obstetrics and Gynecology for Columbia University Medical Center and Director of Reproductive Genetics.  He pioneered the development of chorionic villus sampling (CVS) and multi-fetal reduction, and has authored more than 250 publications.  Dr. Wapner is also an active investigator in the area of Maternal-Fetal Medicine and the principal investigator for the recently completed National Institute of Child Health and Human Development (NICHD)-sponsored prospective, multi-center study comparing chromosomal microarray testing to karyotyping.

 

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.

 

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Comparison of the Results of Operations for the Three and Six Months Ended June 30, 2012 and 2011

 

Revenues and Cost of Revenues (dollars in thousands):

 

 

 

Three Months Ended

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

Change

 

June 30,

 

Change

 

 

 

2012

 

2011

 

$

 

%

 

2012

 

2011

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

1,252

 

$

1,209

 

$

43

 

4%

 

$

2,496

 

$

2,122

 

$

374

 

18%

 

Royalties

 

54

 

25

 

29

 

116%

 

79

 

50

 

29

 

58%

 

Cost of services

 

(677

)

(693

)

16

 

2%

 

(1,336

)

(1,323

)

(13

)

(1%)

 

 

Services.  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.  Services revenues increased primarily due to volume increases of our genomic tests.  Billable test volumes were 1,459 and 2,836 for the three and six months ended June 30, 2012, respectively, compared to 1,201 and 2,159 for the comparable respective periods in 2011.  For the six months ended June 30, 2012 and 2011, our average revenue per test was approximately $880 and $983, respectively.  This decrease was due primarily to the introduction of additional cytogenetic tests, primarily FISH and chromosome analysis, that are priced and reimbursed at lower rates than our array-based test offerings as well as from a change in mix of tests performed for customers with governmental third-party insurance coverage including various state Medicaid programs and Medicare, which tend to have lower reimbursement per test than do commercial insurance or direct-bill customers.  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 six months ended June 30, 2012 and 2011, net positive revenue adjustments were $154,000, $375,000, $150,000 and $181,000, respectively.

 

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 quarter ended June 30, 2012, CA’s gross revenues exceeded the minimum threshold stipulated in the agreement, resulting in higher royalties than previous periods, which up until the current quarter have never exceeded the minimum threshold.  It is uncertain whether CA’s revenues will continue at current levels or return to the minimum payments in future periods.

 

Cost of Services.  Cost of services includes direct materials such as array and laboratory costs, direct laboratory labor (wages and benefits), allocation of 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 is not proportional to the change in revenues during the same period. For the three and six months ended June 30, 2012 and 2011, cost of services included $1,000, $4,000 $16,000 and $32,000, respectively, of non-cash stock compensation expense.  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.

 

Operating Expenses (dollars in thousands):

 

 

 

Three Months Ended

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

Change

 

June 30,

 

Change

 

 

 

2012

 

2011

 

$

 

%

 

2012

 

2011

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

342

 

$

321

 

$

21

 

7%

 

$

792

 

$

660

 

$

132

 

20%

 

Sales and marketing

 

679

 

671

 

8

 

1%

 

1,552

 

1,228

 

324

 

26%

 

General and administrative

 

1,569

 

1,369

 

200

 

15%

 

3,143

 

2,695

 

448

 

17%

 

 

Research and Development.  These expenses include labor 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.  The increase in research and development expenses was due primarily to additional labor and materials costs from test validations of new cytogenetics tests that were launched during the first and second quarters of 2012.  In addition, for the three and six months ended June 30, 2012 and 2011, research and development expenses included $2,000, $6,000, $18,000 and $37,000, respectively, of non-cash stock compensation expense.  The decreases from prior periods were due primarily to prior stock option awards granted to our employees that were or became fully vested during the current 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.

 

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Table of Contents

 

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.  The increase in sales and marketing expenses was due to greater emphasis during the first half of 2012 on our sales and marketing efforts in order to expand and increase market awareness and penetration of our suite of molecular diagnostic tests.  In addition, for the three and six months ended June 30, 2012 and 2011, sales and marketing expenses (credits) included $(7,000), $4,000, $17,000 and $34,000, respectively, of non-cash stock compensation expense.  The decreases from prior periods were due primarily to prior stock option awards granted to our employees that were or became fully vested during the current 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.

 

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.  General and administrative expenses increased for the three and six months ended June 30, 2012 primarily due to increased headcount in Billing and Information Technology departments, 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 $85,000, $240,000, $318,000 and $607,000 for the three and six months ended June 30, 2012 and 2011, respectively.  The decreases from prior periods were due primarily to prior stock option awards granted to our employees that were or became fully vested during the current 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.

 

Discontinued Operations (dollars in thousands):

 

 

 

Three Months Ended

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

Change

 

June 30,

 

Change

 

 

 

2012

 

2011

 

$

 

%

 

2012

 

2011

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

$

 

$

205

 

$

(205

)

(100%)

 

$

 

$

236

 

$

(236

)

(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 half of 2011.

 

Inflation

 

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

 

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Liquidity and Capital Resources

 

At June 30, 2012, cash and cash equivalents totaled $3.2 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 June 30, 2012 was $3.4 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):

 

 

 

Six Months Ended

 

 

 

 

 

June 30,

 

 

 

 

 

2012

 

2011

 

Change

 

Net cash provided by (used in):

 

 

 

 

 

 

 

Operating activities

 

$

(3,147

)

$

(3,121

)

$

(26

)

Investing activities

 

(20

)

(50

)

30

 

Financing activities

 

(59

)

6,603

 

(6,662

)

Increase cash and cash equivalents

 

$

(3,226

)

$

3,432

 

$

(6,658

)

 

Operating Activities.  Higher cash reimbursement from increased sales, billing and collection efforts experienced during the first six months of 2012 were offset by increased operating expenses described above, resulting in an insignificant change from the comparable 2011 period.

 

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 $6.64 million of net proceeds received from closing a private placement offering in April of 2011 compared to no such activities during 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, anticipated cash flows from operations and anticipated operating cash savings from our Restructuring Plan will be sufficient to meet our cash requirements into the fourth quarter of 2012.  In May 2012, we announced and implemented cost reduction measures, including the restructuring of our sales force and headcount reductions as part of a program to decrease overall expenses and our cash burn.  We estimate that the reductions from the headcount and associated expenses alone will result in savings of nearly 300,000 per quarter going forward.

 

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 shareholders.  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

 

·                  other factors that may not be within our control.

 

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Off-Balance Sheet Arrangements

 

As of June 30, 2012, 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 entered into an operating lease for our laboratory space and corporate offices, totaling approximately 12,200 square feet.  We have no significant commitments for capital expenditures in 2012 or beyond.  We have executed nine capital leases totaling $477,000 for certain laboratory equipment.

 

Recent Accounting Pronouncements

 

Refer to Note 2 to our consolidated interim financial statements included in Part I, Item 1 of this report.

 

Item 3.                     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required for smaller reporting companies.

 

Item 4.                     CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Based on this evaluation, our principal executive officer and our principal financial officer concluded that as of June 30, 2012, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods prescribed by the SEC and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our last fiscal quarter (the quarter ended June 30, 2012) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II—OTHER INFORMATION

 

Item 1.  LEGAL PROCEEDINGS

 

On February 14, 2011, Relator Michael Strathmann (“Strathmann”) served us with a complaint (“the Complaint”) filed in the Superior Court of the State of California for the County of Orange.  The Complaint alleged that we submitted false and fraudulent insurance claims to National Union Fire Insurance Company of Pittsburgh, PA in connection with a prior lawsuit that was settled with Nanogen, Inc., thereby allegedly violating the California Insurance Fraud Prevention Act, and sought penalties and unspecified treble damages.  On May 4, 2011, the Superior Court dismissed the Complaint by ordering that it be stricken for violation of the California Anti-SLAPP statute, which prevents plaintiffs from filing abusive lawsuits against public policy.  On June 15, 2011, Strathmann filed a Notice of Appeal with the California Court of Appeals, appealing the granting of the Motion to Strike.  Subsequently, Strathmann filed a Notice of Appeal of the award of attorneys’ fees against him, which appeals have now been consolidated and are in the briefing stage.  Strathmann filed his Opening Brief on January 18, 2012, and we filed our Respondents’ Brief on May 3, 2012.  Oral arguments before the California Court of Appeals will take place on August 24, 2012.  We believe that this litigation is frivolous and intend to vigorously defend against the appeal, but there can be no assurance that we will ultimately be successful in defending against it.

 

From time to time, we are involved in other litigation arising in the normal course of business.  Management believes that resolution of these other matters will not result in any payment that, in the aggregate, would be material to our financial position or results of operations.

 

18



Table of Contents

 

Item 1A.  RISK FACTORS

 

The following risk factors include any and all material changes to, and should be read in conjunction with, the risk factors contained in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the SEC on March 16, 2012.

 

We will not be able to meet our cash requirements beyond 2012 without obtaining additional capital from external sources, and if we are unable to do so, we may not be able to continue as a going concern.

 

We anticipate that our cash and cash equivalents of $3.2 million as of June 30, 2012 will meet our cash requirements into the fourth quarter of 2012. However, in order for us to continue as a going concern beyond that point, we will be required to obtain capital from external sources. If external financing sources are not available in a timely manner or at all, or are inadequate to fund our operations, it could result in reduced revenues and cash flows from the sales of our diagnostic services and/or could jeopardize our ability to launch, market and sell additional products and services necessary to grow and sustain our operations, and 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.

 

Our Common Stock may be delisted by the Nasdaq Capital Market if we cannot maintain Nasdaq’s listing requirements.

 

We are not currently in compliance with Nasdaq’s minimum bid price requirements. Our common stock is currently listed on the Nasdaq Capital Market which requires that, to maintain this listing, our common stock must continue to trade above $1.00 per share. In May and June 2012, our common stock had failed to meet this criterion for over 30 consecutive trading days. As a result, we were notified by Nasdaq that we have 180 calendar days from June 26, 2012 to regain compliance with Nasdaq Listing Rule 5550(a)(2) by reestablishing a minimum bid price of $1.00 per share or greater for ten consecutive trading days. In the event we do not regain compliance with Rule 5550(a)(2) prior to the expiration of the 180 calendar day period, Nasdaq will provide us with written notification that our securities are subject to delisting from the Nasdaq Capital Market. We cannot assure you that the bid price of our common stock will regain compliance with, or continue to meet, Nasdaq’s minimum listing standard.  As a result, the market for your shares may be limited, and it may be difficult for you to sell your shares at an acceptable price, or at all. In addition, a delisting may make it more difficult or expensive for us to raise additional capital in the future.

 

If we are delisted from the Nasdaq Capital Market, your ability to sell your shares of our common stock would also be limited by the penny stock restrictions, which could further limit the marketability of your shares.

 

If our common stock is delisted, it would come within the definition of “penny stock” as defined in the Securities Exchange Act of 1934 and would be covered by Rule 15g-9 of the Securities Exchange Act of 1934. That Rule imposes additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors. For transactions covered by Rule 15g-9, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written agreement to the transaction prior to the sale. Consequently, Rule 15g-9, if it were to become applicable, would affect the ability or willingness of broker-dealers to sell our securities, and accordingly would affect the ability of stockholders to sell their securities in the public market. These additional procedures could also limit our ability to raise additional capital in the future.

 

Item 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

Item 3.  DEFAULTS UPON SENIOR SECURITIES

 

None.

 

Item 4.  MINE SAFETY DISCLOSURES

 

Not applicable.

 

Item 5.  OTHER INFORMATION

 

None.

 

Item 6.  EXHIBITS

 

An index of exhibits is found on page 21 of this report.

 

19



Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

COMBIMATRIX CORPORATION

 

 

 

 

 

By:

/s/ R. JUDD JESSUP

 

 

R. Judd Jessup

 

 

Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

 

By:

/s/ SCOTT R. BURELL

 

 

Scott R. Burell

 

 

Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

 

 

Date:  August 10, 2012

 

 

 

20



Table of Contents

 

EXHIBIT INDEX

 

Exhibit
Number

 

Description

 

 

 

3.1    

 

Amended and Restated Certificate of Incorporation. Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (SEC File No. 333-139679) filed with the SEC on December 26, 2006.

3.2    

 

Certificate of Amendment to Amended and Restated Certificate of Incorporation. Incorporated by reference to Exhibit 3.1A to the Company’s Quarterly Report on Form 10-Q (File No. 001-33523) filed with the SEC on August 14, 2008.

3.3    

 

Second Amended and Restated Bylaws. Incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K (File No. 001-33523) filed with the SEC on March 18, 2010.

10.1    

 

Employment Agreement for Richard Hockett, M.D. Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File No. 001-33523) filed with the SEC on May 11, 2012.

31.1    

 

Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (*)

31.2    

 

Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 (*)

32.1    

 

Certification of Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

32.2    

 

Certification of Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

101.0    

 

The following materials from CombiMatrix Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011; (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011; (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011; and (iv) Notes to Consolidated Financial Statements (**).

 


  (*)

 

Included herewith.

(**)

 

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101.0 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

21


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