Item
1.
Financial Statements (Unaudited)
COMBIMATRIX
CORPORATION
CONSOLIDATED
BALANCE SHEETS
(In
thousands)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,345
|
|
|
$
|
653
|
|
Short-term investments
|
|
|
-
|
|
|
|
3,248
|
|
Accounts receivable, net of allowance for doubtful accounts of $244 and $235
|
|
|
3,235
|
|
|
|
2,682
|
|
Supplies
|
|
|
459
|
|
|
|
418
|
|
Prepaid expenses and other assets
|
|
|
169
|
|
|
|
200
|
|
Total current assets
|
|
|
8,208
|
|
|
|
7,201
|
|
Property and equipment, net
|
|
|
651
|
|
|
|
691
|
|
Other assets
|
|
|
30
|
|
|
|
30
|
|
Total assets
|
|
$
|
8,889
|
|
|
$
|
7,922
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other
|
|
$
|
1,623
|
|
|
$
|
1,591
|
|
Current portion, long-term debt
|
|
|
129
|
|
|
|
193
|
|
Total current liabilities
|
|
|
1,752
|
|
|
|
1,784
|
|
Capital lease obligations, net of current portion
|
|
|
49
|
|
|
|
71
|
|
Secured promissory note payable, net of current portion
|
|
|
-
|
|
|
|
34
|
|
Deferred rent
|
|
|
153
|
|
|
|
177
|
|
Total liabilities
|
|
|
1,954
|
|
|
|
2,066
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Convertible preferred stock; $0.001 par value; 5,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
Series F - 8,000 shares authorized; 1,690 and none issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Series E - 2,202 shares authorized; none and 2,201.493 issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock; $0.001 par value; 50,000,000 shares authorized; 2,487,450 and 845,374 shares issued and outstanding
|
|
|
14
|
|
|
|
13
|
|
Additional paid-in capital
|
|
|
108,952
|
|
|
|
102,651
|
|
Accumulated other comprehensive loss
|
|
|
-
|
|
|
|
(2
|
)
|
Accumulated deficit
|
|
|
(102,031
|
)
|
|
|
(96,806
|
)
|
Total stockholders’ equity
|
|
|
6,935
|
|
|
|
5,856
|
|
Total liabilities and stockholders’ equity
|
|
$
|
8,889
|
|
|
$
|
7,922
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
COMBIMATRIX
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except share and per share information)
(Unaudited)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diagnostic services
|
|
$
|
3,211
|
|
|
$
|
2,481
|
|
|
$
|
9,190
|
|
|
$
|
7,292
|
|
Royalties
|
|
|
37
|
|
|
|
45
|
|
|
|
137
|
|
|
|
112
|
|
Total revenues
|
|
|
3,248
|
|
|
|
2,526
|
|
|
|
9,327
|
|
|
|
7,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
1,476
|
|
|
|
1,400
|
|
|
|
4,327
|
|
|
|
4,028
|
|
Research and development
|
|
|
88
|
|
|
|
133
|
|
|
|
380
|
|
|
|
352
|
|
Sales and marketing
|
|
|
1,055
|
|
|
|
1,295
|
|
|
|
3,532
|
|
|
|
3,658
|
|
General and administrative
|
|
|
1,450
|
|
|
|
1,249
|
|
|
|
4,562
|
|
|
|
4,212
|
|
Patent amortization and royalties
|
|
|
25
|
|
|
|
25
|
|
|
|
75
|
|
|
|
75
|
|
Impairment of cost-basis investment
|
|
|
-
|
|
|
|
97
|
|
|
|
-
|
|
|
|
97
|
|
Total operating expenses
|
|
|
4,094
|
|
|
|
4,199
|
|
|
|
12,876
|
|
|
|
12,422
|
|
Operating loss
|
|
|
(846
|
)
|
|
|
(1,673
|
)
|
|
|
(3,549
|
)
|
|
|
(5,018
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
7
|
|
|
|
5
|
|
|
|
19
|
|
|
|
13
|
|
Interest expense
|
|
|
(17
|
)
|
|
|
(19
|
)
|
|
|
(52
|
)
|
|
|
(59
|
)
|
Total other income (expense)
|
|
|
(10
|
)
|
|
|
(14
|
)
|
|
|
(33
|
)
|
|
|
(46
|
)
|
Net loss
|
|
$
|
(856
|
)
|
|
$
|
(1,687
|
)
|
|
$
|
(3,582
|
)
|
|
$
|
(5,064
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend from issuing Series F convertible preferred stock and warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,877
|
)
|
|
$
|
-
|
|
Deemed dividend paid for right to repurchase Series E convertible preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(656
|
)
|
|
|
-
|
|
Deemed dividend from issuing Series E convertible preferred stock and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
890
|
|
|
|
(890
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(856
|
)
|
|
$
|
(1,687
|
)
|
|
$
|
(5,225
|
)
|
|
$
|
(5,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.38
|
)
|
|
$
|
(2.00
|
)
|
|
$
|
(2.38
|
)
|
|
$
|
(6.13
|
)
|
Deemed dividend paid for right to repurchase Series E convertible preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.44
|
)
|
|
|
-
|
|
Deemed dividend from issuing Series E convertible preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
0.59
|
|
|
|
(1.08
|
)
|
Deemed dividend from issuing Series F convertible preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(1.25
|
)
|
|
|
-
|
|
Basic and diluted net loss per share attributable to common stockholders
|
|
$
|
(0.38
|
)
|
|
$
|
(2.00
|
)
|
|
$
|
(3.48
|
)
|
|
$
|
(7.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding
|
|
|
2,253,834
|
|
|
|
845,395
|
|
|
|
1,502,680
|
|
|
|
825,956
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
COMBIMATRIX
CORPORATION
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
(In
thousands, except share and per share information)
(Unaudited)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(856
|
)
|
|
$
|
(1,687
|
)
|
|
$
|
(3,582
|
)
|
|
$
|
(5,064
|
)
|
Unrealized gain on available-for-sale investments
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
4
|
|
Total comprehensive loss
|
|
$
|
(856
|
)
|
|
$
|
(1,687
|
)
|
|
$
|
(3,580
|
)
|
|
$
|
(5,060
|
)
|
The
accompanying notes are an integral part of these consolidated financial statements.
COMBIMATRIX
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,582
|
)
|
|
$
|
(5,064
|
)
|
Adjustments to reconcile net loss to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
195
|
|
|
|
227
|
|
Non-cash stock compensation
|
|
|
591
|
|
|
|
519
|
|
Provision for bad debts
|
|
|
302
|
|
|
|
218
|
|
Impairment fo cost-basis investment
|
|
|
-
|
|
|
|
97
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(855
|
)
|
|
|
(455
|
)
|
Supplies, prepaid expenses and other assets
|
|
|
(35
|
)
|
|
|
(153
|
)
|
Accounts payable, accrued expenses and other
|
|
|
23
|
|
|
|
440
|
|
Net cash flows from operating activities
|
|
|
(3,361
|
)
|
|
|
(4,171
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(148
|
)
|
|
|
(66
|
)
|
Purchase of available-for-sale investments
|
|
|
(4,998
|
)
|
|
|
(4,000
|
)
|
Sale of available-for-sale investments
|
|
|
8,248
|
|
|
|
4,230
|
|
Net cash flows from investing activities
|
|
|
3,102
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of Series F convertible stock and common stock warrants
|
|
|
8,000
|
|
|
|
-
|
|
Costs from issuance of Series F convertible convertible stock and common stock warrants
|
|
|
(1,064
|
)
|
|
|
-
|
|
Repurchase of Series E convertible prefered stock and dividends
|
|
|
(2,842
|
)
|
|
|
-
|
|
Proceeds from issuance of Series E convertible stock, common stock and warrants
|
|
|
-
|
|
|
|
4,900
|
|
Costs from issuance of Series E convertible convertible stock, common stock and warrants
|
|
|
-
|
|
|
|
(220
|
)
|
Repayments of long-term debt
|
|
|
(143
|
)
|
|
|
(135
|
)
|
Net cash flows from financing activities
|
|
|
3,951
|
|
|
|
4,545
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
3,692
|
|
|
|
538
|
|
Cash and cash equivalents, beginning
|
|
|
653
|
|
|
|
1,010
|
|
Cash and cash equivalents, ending
|
|
$
|
4,345
|
|
|
$
|
1,548
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
Deemed dividends from issuing Series E convertible preferred stock
|
|
$
|
(890
|
)
|
|
$
|
890
|
|
|
|
|
|
|
|
|
|
|
Deemed dividends from issuing Series F convertible preferred stock
|
|
$
|
1,877
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Accrued property, plant and equipment
|
|
$
|
9
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Property and equipment purchased under capital lease
|
|
$
|
23
|
|
|
$
|
72
|
|
|
|
|
|
|
|
|
|
|
Warrant modifications recognized as non-cash Series E offering-related costs
|
|
$
|
-
|
|
|
$
|
336
|
|
|
|
|
|
|
|
|
|
|
Tenant improvements recognized as deferred rent
|
|
$
|
-
|
|
|
$
|
164
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
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 August 2007,
we split-off from Acacia and became publicly traded on The NASDAQ Stock Market. As a result of the split-off, we ceased to be
a subsidiary of, or affiliated with, Acacia.
Description
of the Company
We
are a family health-focused clinical molecular diagnostic laboratory specializing in pre-implantation genetic screening, prenatal
diagnosis, miscarriage analysis, and pediatric developmental disorders. We strive to provide best-in-class clinical laboratory
support to healthcare professionals, allowing them to maximize the clinical utility of their patients’ test results and
to optimize patient care. Our testing focuses on advanced technologies, including single nucleotide polymorphism chromosomal microarray
analysis, next generation sequencing, fluorescent in situ hybridization and high resolution karyotyping. Our approach to testing
is to offer sophisticated technology along with high-quality clinical support to our ordering physicians and their patients. Our
laboratory facilities and corporate headquarters 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.
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 notes 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, 2015, as reported by us in our Annual Report on Form 10-K filed with the SEC
on February 18, 2016. 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 September 30, 2016, and results of operations and cash flows for the interim
periods presented. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative
of the results to be expected for the entire year.
Reverse
Stock Split
On
January 29, 2016, we filed a Certificate of Amendment to our Certificate of Incorporation with the Secretary of State of the State
of Delaware to effect a reverse split of our common stock at a ratio of one-for-fifteen (the “Reverse Stock Split”),
which became effective at the close of business on that day. As a result, each share of CombiMatrix common stock outstanding as
of January 29, 2016 was automatically changed into one-fifteenth of a share of common stock. No fractional shares were issued
in connection with the Reverse Stock Split, and cash paid to stockholders for potential fractional shares was insignificant. The
number of shares of common stock subject to outstanding options, warrants and convertible securities were also reduced by a factor
of fifteen as of January 29, 2016. All historical share and per share amounts reflected throughout this document have been adjusted
to reflect the Reverse Stock Split. The authorized number of shares and the par value per share of our common stock were not affected
by the Reverse Stock Split.
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 and improve existing commercial diagnostic testing services and related technologies. As of September 30, 2016, we
had cash, cash equivalents and short-term investments of $4.3 million and anticipate that our cash, cash equivalents and short-term
investments will be sufficient to meet our cash requirements for at least the next twelve months. In order for us to ultimately
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 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.
Our
business operations are also subject to certain risks and uncertainties, including:
|
●
|
market
acceptance of our technologies and services;
|
|
|
|
|
●
|
technological
advances that may make our technologies and services obsolete or less competitive;
|
|
|
|
|
●
|
increases
in operating costs, including costs for supplies, personnel and equipment;
|
|
|
|
|
●
|
variability
in third-party reimbursement of our tests;
|
|
|
|
|
●
|
the
availability and cost of capital; and
|
|
|
|
|
●
|
governmental
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 services, could have a material adverse effect on our business
and operating results. The accompanying consolidated financial statements have been prepared assuming that we will continue 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.
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 various state Medicaid programs, and individuals. We report revenues from
contracted payors based on a contractual rate, or in the case of state Medicaid contracts, published fee schedules for our tests.
We report revenues from non-contracted payors based on the amounts expected to be collected. The differences between the amounts
billed and the amounts expected to be collected from non-contracted payors are recorded as contractual allowances 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, and also take into account recent collection trends. 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. Because a substantial portion of our revenues is from 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 results of operations. In all cases described above, we report revenues net of any applicable
statutory taxes collected from customers, as applicable. No single customer exceeded 10% of revenues for the three or nine months
ending September 30, 2016, nor for the three months ended September 30, 2015. For the nine months ended September 30, 2015, 10%
of our revenues were generated from one customer.
Cash
Equivalents and Short-Term Investments.
We consider all highly liquid investments purchased with original maturities of three
months or less when purchased to be cash equivalents. Short-term investments consist of fixed income investments with maturities
between three and 12 months and other highly liquid investments that can be readily purchased or sold using established markets.
These investments are classified as available-for-sale and are reported at fair value on the Company’s consolidated balance
sheet. Unrealized holding gains and losses are reported within comprehensive loss in the consolidated statements of comprehensive
loss. Fair value is based on available market information including quoted market prices, broker or dealer quotations or other
observable inputs. If a decline in the fair value of a short-term investment below our cost basis is determined to be other than
temporary, such investment is written down to its estimated fair value as a new cost basis and the amount of the write-down is
included in earnings as an impairment charge. To-date, no permanent impairment charges have been realized or recorded.
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.
|
We
classify our cash equivalents within the fair value hierarchy as Level 1 as these assets are valued using quoted prices in active
markets for identical assets at the measurement date. We classify short-term investments within the fair value hierarchy as Level
2, primarily utilizing broker quotes in a non-active market for valuation of these investments. Financial instruments that contain
valuation inputs that are not readily determinable from active markets or from similar securities trading in active markets, such
as derivative financial instruments, are classified within the fair value hierarchy as Level 3.
Impairment
of Long-Lived Assets
. Long-lived assets and intangible assets are reviewed for potential impairment when events or changes
in circumstances indicate the carrying amount of an asset may not be recoverable. In the event the sum of the expected undiscounted
future cash flows resulting from the use of the asset is less than the carrying amount of the asset, an impairment loss equal
to the excess of the asset’s carrying value over its fair value is recorded. If an asset is determined to be impaired, the
loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the
estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows.
During
the third quarter of 2015, management determined that the carrying value of a cost-basis investment in the stock of a privately
held company was impaired, resulting in a one-time, non-cash impairment charge of $97,000 for the three and nine months ended
September 30, 2015.
Derivative
Financial Instruments.
We evaluate financial instruments for freestanding or embedded derivatives. Derivative instruments
that do not qualify for permanent equity classification are recorded as liabilities at fair value, with changes in value recognized
as other income (expense) in the consolidated statements of operations in the period of change. Derivative liabilities are categorized
as either short-term or long-term based upon management’s estimates as to when the derivative instrument may be realized
or based upon the holder’s ability to realize the instrument.
Concentration
of Credit Risks
. Cash and 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.
We do not believe that we are exposed to significant credit risk on cash and cash equivalents or on our short-term investments.
As of September 30, 2016, accounts receivable from two commercial insurance carriers of $418,000 and $346,000 exceeded 10% of
our total accounts receivable balance. As of December 31, 2015, accounts receivable from one commercial insurance carrier of $316,000
exceeded 10% of our total accounts receivable balance.
Substantially
all of the components and raw materials used in providing our testing services, including array slides and reagents, are currently
provided to us from a limited number of sources or in some cases from a single source. Although we believe that alternative sources
for those components and raw materials are available, any supply interruption in a sole-sourced component or raw material might
result in up to a several-month production delay and materially harm our ability to provide testing services until a new source
of supply, if any, could be located and qualified.
Accounts
Receivable and Allowance for Doubtful Accounts.
For our contracted third-party payors, governmental payors or direct-bill
customers, accounts receivable are stated at principal amounts and are primarily comprised of amounts contractually due from customers
for services performed. For our non-contracted customers, accounts receivable are stated at amounts expected to be collected based
on historical collection experience with the third-party payor. 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 after appropriate collection
efforts have been exhausted. Such write-offs increase the contractual allowances (which reduce revenues) for those accounts in
the period of adjustment. 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 private-pay clients is generally subject to increased credit risk due to credit-worthiness
or inability to pay. For these customers, an allowance for doubtful accounts is recorded for estimated uncollectible amounts,
and 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
to assess our allowance at each period end. 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.
Stock-Based
Compensation
. The compensation cost for all employee 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 four years. The fair value of each stock option award is estimated
on the date of grant using a Black-Scholes option valuation model. The fair value of each restricted stock unit (“RSU”)
award is based on the number of shares granted and the closing price of our common stock as reported on NASDAQ on the date of
grant. 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 from stock option and RSU awards vesting during the periods presented were as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
$
|
14
|
|
|
$
|
11
|
|
|
$
|
34
|
|
|
$
|
21
|
|
Research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Sales and marketing
|
|
|
19
|
|
|
|
15
|
|
|
|
63
|
|
|
|
46
|
|
General and administrative
|
|
|
153
|
|
|
|
147
|
|
|
|
494
|
|
|
|
452
|
|
Total non-cash stock compensation
|
|
$
|
186
|
|
|
$
|
173
|
|
|
$
|
591
|
|
|
$
|
519
|
|
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 as well as
preferred stock convertible into shares of common stock are anti-dilutive and therefore are not included in the determination
of the diluted net loss per share. The following table reflects the excluded dilutive securities:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock options
|
|
|
66,687
|
|
|
|
70,028
|
|
|
|
66,687
|
|
|
|
70,028
|
|
Restricted stock units
|
|
|
59,000
|
|
|
|
38,800
|
|
|
|
59,000
|
|
|
|
38,800
|
|
Common stock warrants
|
|
|
2,701,754
|
|
|
|
643,260
|
|
|
|
2,701,754
|
|
|
|
643,260
|
|
Series E preferred stock convertible into common stock
|
|
|
-
|
|
|
|
83,866
|
|
|
|
-
|
|
|
|
83,866
|
|
Series F preferred stock convertible into common stock
|
|
|
436,662
|
|
|
|
-
|
|
|
|
436,662
|
|
|
|
-
|
|
Excluded potentially dilutive securities
|
|
|
3,264,103
|
|
|
|
835,954
|
|
|
|
3,264,103
|
|
|
|
835,954
|
|
Segments.
We have determined that we operate in one segment for financial reporting purposes.
Recent
Accounting Pronouncements.
In August 2016, the Financial Accounting Standards Board (“FASB”) issued new accounting
guidance aimed at reducing the existing diversity in GAAP regarding how certain cash receipts and cash payments are classified
in the statement of cash flows. The new guidance is effective for fiscal years beginning after December 15, 2017, and interim
periods within those fiscal years. Early adoption is also permitted. We do not expect the adoption of this guidance to have a
material impact on our consolidated statements of cash flows.
In
March 2016, the FASB issued guidance regarding employee share-based payment accounting. The guidance is intended to simplify several
areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement
of cash flows and provides the choice for companies to estimate forfeitures during the vesting period of an award (which is required
under current GAAP) or recognize forfeitures at the time an award is cancelled and forfeited. The standard is effective for us
on January 1, 2017. We do not expect the adoption of this guidance to have a significant impact on our consolidated financial
statements. However, we have elected to change our policy regarding forfeitures to recognize if and when an award is cancelled
and forfeited rather than estimating forfeitures up front. We will be required to implement this policy change using the modified
retrospective approach, during the first quarter of 2017. We estimate that the impact from implementing this policy change will
be to reduce retained earnings and increase additional paid-in capital by approximately $40,000, but we will not know the actual
amount until after the fourth quarter of 2016.
In
February 2016, the FASB issued guidance regarding leases, which requires lessees to recognize on the balance sheet a right-of-use
asset, representing their right to use the underlying asset for the lease term, and a lease liability for all leases with terms
greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing
and uncertainty of cash flows arising from leases. The guidance requires the use of a modified retrospective transition approach,
which includes a number of optional practical expedients that entities may elect to apply. The guidance is effective for us beginning
January 1, 2019, and we are currently evaluating the impact that this guidance will have on our consolidated financial statements.
In
January 2016, the FASB issued accounting guidance regarding recognition and measurement of financial assets and financial liabilities.
This guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition,
measurement, presentation and disclosure. The guidance is effective for annual reporting periods beginning after December 15,
2017, and interim periods within those annual periods. We do not expect the adoption of this guidance to have a significant impact
on our consolidated financial statements.
In
July 2015, the FASB issued accounting guidance regarding simplifying the measurement of inventory. The new guidance applies only
to inventory for which cost is determined by methods other than last-in, first-out and the retail inventory method, which includes
inventory that is measured using first-in, first-out or average cost. Inventory within the scope of this standard is required
to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary
course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard will be effective
for us on January 1, 2017. We do not expect the adoption of this guidance to have a material impact on our consolidated financial
statements.
In
August 2014, the FASB issued new guidance requiring management of all entities to evaluate whether there are conditions and events
that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial
statements are issued (or available to be issued when applicable). The guidance is effective for fiscal years ending after December
15, 2016 and for annual and interim periods thereafter. While we do not expect the adoption of this guidance to have a material
effect on our consolidated financial statements, adoption will increase disclosures in the notes to our consolidated financial
statements if management concludes that substantial doubt about our ability to continue as a going concern within twelve months
of the date that our consolidated financial statements are issued is present.
In
May 2014, the FASB issued new accounting guidance regarding revenue recognition from contracts with customers, which when effective
will supersede existing revenue recognition requirements and will eliminate most industry-specific guidance from GAAP. The core
principle of the new guidance is to require an entity to recognize as revenue the amount that reflects the consideration to which
it expects to be entitled in exchange for goods or services as it transfers control to its customers. The new guidance requires
additional qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows
arising from contracts with customers. An entity can apply the new guidance retrospectively to each prior reporting period presented
(i.e., the full retrospective method) or retrospectively with the cumulative effect of initially applying the standard recognized
at the date of initial application in retained earnings. As originally issued, the new revenue recognition standard would be effective
for us beginning January 1, 2017. However, in 2015, the FASB voted to defer the effective date of the new guidance for one year.
We are currently evaluating the appropriate transition method and any further impact of this guidance on our consolidated financial
statements and related disclosures.
Reclassifications
.
Certain prior period amounts have been reclassified to conform to the current period presentation.
3.
CASH AND SHORT-TERM INVESTMENTS
As
of September 30, 2016, we held $4.3 million in cash, cash equivalents and short-term investments, which are reported at fair value.
Cash, cash equivalents and short-term investments consisted of the following as of September 30, 2016 and December 31, 2015 (in
thousands):
|
|
As of September 30, 2016
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and money market securities
|
|
$
|
4,345
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,345
|
|
|
$
|
653
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
653
|
|
Commercial paper
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Certificates of deposit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,250
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
3,248
|
|
|
|
$
|
4,345
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,345
|
|
|
$
|
3,903
|
|
|
$
|
-
|
|
|
$
|
(2
|
)
|
|
$
|
3,901
|
|
There
were no realized gains or losses for the periods ended September 30, 2016 or 2015.
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 September 30, 2016 and December 31, 2015 and the classification by level of input within the fair value hierarchy defined above
(in thousands):
|
|
|
|
|
Fair Value Measurements
|
|
September 30, 2016
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
3,033
|
|
|
$
|
3,033
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Short-term investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cash equivalents
|
|
$
|
3,033
|
|
|
$
|
3,033
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
Fair Value Measurements
|
|
December 31, 2015
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
99
|
|
|
$
|
99
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Short-term investments
|
|
|
3,248
|
|
|
|
-
|
|
|
|
3,248
|
|
|
|
-
|
|
Cash equivalents
|
|
$
|
3,347
|
|
|
$
|
99
|
|
|
$
|
3,248
|
|
|
$
|
-
|
|
The
carrying amounts of accounts receivable, accounts payable, accrued expenses, capital leases and the secured promissory note approximate
fair value due primarily to the short-term nature of these financial instruments.
5.
SECURED PROMISSORY NOTE
On
May 20, 2014 (“Execution Date”), we executed a secured promissory note (the “Note”) with ACC Investment
Ltd. in the amount of $350,000, payable in equal amortized payments over a thirty-six month period (the “Term”) from
the Execution Date. The Note bears an annual interest rate of 10% and is secured by certain laboratory equipment used in our microarray
services business. Legal and other closing costs totaling $22,000 were capitalized with the Note and are being amortized over
the Term as interest expense. As of September 30, 2016 and December 31, 2015, components of the Note were as follows (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Carrying value
|
|
$
|
76
|
|
|
$
|
168
|
|
Unamortized legal and closing costs
|
|
|
(4
|
)
|
|
|
(10
|
)
|
|
|
|
72
|
|
|
|
158
|
|
Less- current portion
|
|
|
(72
|
)
|
|
|
(124
|
)
|
Long-term portion
|
|
$
|
-
|
|
|
$
|
34
|
|
6.
STOCKHOLDERS’ EQUITY
Series
A through E Convertible Preferred Stock and Warrants Financings
Between
2012 and 2015, we executed several financing transactions whereby we issued convertible preferred stock and warrants to purchase
common stock to investors. As of September 30, 2016, none of the Series A through E convertible preferred stock remained outstanding.
For as long as the Series A warrants remain unexercised through their expiration date, except under certain permitted circumstances,
we may not issue, or enter into any agreement to issue, common stock or common stock equivalents at a price per share below the
$73.65 exercise price of the Series A warrants, unless waivers from the Series A investors are obtained. Until the time that less
than 7.5% of the Series B, C and E warrants remain unexercised through their expiration date, except under certain permitted circumstances,
we may not issue, or enter into any agreement to issue, common stock or common stock equivalents at prices per share below the
$29.55, $29.55 and $32.51 exercise prices of the Series B, C and E warrants, respectively, unless waivers from the Series B, C
and E investors are obtained. In addition, until there are no longer Series A, C and E warrants outstanding we may not sell any
variable rate securities except for certain exempt issuances.
Series
E Convertible Preferred Stock Financing
On
February 13, 2015, we and certain accredited institutional pre-existing investors (the “Series E Investors”) entered
into a securities purchase agreement (the “Series E Purchase Agreement”), pursuant to which we sold 102,800 shares
common stock at a price of $26.25 per share, 2,201.493 shares of Series E 6% Convertible Preferred Stock (the “Series E
Preferred Stock”) and warrants to purchase 46,676 shares of common stock initially at an exercise price of $29.55 per share,
which was the consolidated closing bid price of our common stock on NASDAQ immediately prior to entering into the Series E Purchase
Agreement (the “Series E Warrants”, and the transactions contemplated by the Series E Purchase Agreement, the “Series
E Financing”). The Series E Preferred Stock and Series E Warrants were sold in a fixed combination consisting of one share
of Series E Preferred Stock and a Series E Warrant to purchase approximately 21.1977 shares of common stock. Each fixed combination
of Series E Preferred Stock and Series E Warrants were sold at a price of $1,000. The Series E Preferred Stock sold was convertible
into 83,871 shares of common stock at an initial conversion price of $26.25 per share. The closing under the Series E Purchase
Agreement occurred on February 18, 2015 (the “Series E Closing Date”), where we received gross proceeds of $4.9 million
from the Series E Investors. After closing-related costs and expenses, net proceeds from the Series E Financing were approximately
$4.7 million. Given that the effective conversion price of the Series E Preferred Stock, inclusive of amounts allocated to common
stock and Series E Warrants, was below the closing market price of our common stock at the time of the Series E Closing Date,
we recognized a beneficial conversion feature in the amount of $890,000. Since the Series E Preferred Stock was immediately convertible
into common stock, the beneficial conversion feature was treated as a deemed dividend charged to retained earnings.
The
Series E Warrants issued have a 5 ½ year term and have a cashless exercise provision in the event there is no effective
registration statement covering the common stock issuable upon exercise of the Series E Warrants. The Series E Warrants are not
subject to price based anti-dilution protection. See below for modifications made to the Series E Preferred Stock and the Series
E Warrants.
Private
Placement Warrant Financing
Substantially
concurrently with the closing of the Series E Financing, on February 13, 2015, we entered into a separate securities purchase
agreement (the “Warrant Purchase Agreement”) with selected accredited institutional pre-existing investors (the “Private
Placement Investors”), pursuant to which we agreed to sell to the Private Placement Investors warrants to purchase 102,678
shares of Common Stock (the “Private Placement Warrants”, and the transactions contemplated by the Warrant Purchase
Agreement, the “Warrant Financing”). In consideration of an aggregate of $1,000, we had agreed to sell the Private
Placement Warrants, which would not be issued unless and until our stockholders approved amending our Certificate of Incorporation
to increase our authorized common stock to permit the issuance of the common stock issuable upon exercise of the Private Placement
Warrants (the “Charter Amendment”). We estimated the fair value of the Private Placement Warrants using the Black-Scholes
valuation model to be $1.82 million, which was classified as a warrant subscription payable within additional paid-in capital
in our consolidated balance sheet using the following assumptions: (i) closing stock price and Private Placement Warrants contractual
exercise price; (ii) 5.5 year term; (iii) historical volatilities commensurate with the term of the Private Placement Warrants
of 113.2%; and (iv) risk-free interest rates commensurate with the term of the Private Placement Warrants of 1.5%. We allocated
the proceeds received from the Series E Financing to the Private Placement Warrants based on the relative fair value of the instruments
issued to the Series E Investors. As a result of the special stockholders meeting held on April 28 2015, we issued the Private
Placement Warrants to the Private Placement Investors and the warrant subscription payable was reclassified to additional paid-in
capital.
Each
Private Placement Warrant initially had an exercise price of $32.505 per share of common stock (subject to adjustment for stock
splits and the like), which was 110% of the consolidated closing bid price of our common stock on NASDAQ immediately prior to
entering into the Warrant Purchase Agreement, and is exercisable at any time after the six month anniversary of entering into
the Warrant Purchase Agreement and on or prior to the close of business on the five year anniversary of the initial exercise date,
subject to a beneficial ownership limitation. The Private Placement Warrants are not subject to price based anti-dilution protection.
If, at the time of exercise of a Private Placement Warrant, there is no effective registration statement registering for resale
the shares of common stock issuable upon exercise of the Private Placement Warrant, the holder may exercise the Private Placement
Warrant on a cashless basis. When exercised on a cashless basis, a portion of the Private Placement Warrant is cancelled in payment
of the purchase price payable in respect of the number of shares of common stock purchasable upon such exercise.
Modification
of Certain Other Outstanding Warrants
In
connection with the purchase of the Private Placement Warrants, we modified previously issued and outstanding warrants held by
the Private Placement Investors that were issued in connection with the Series A, B and C financings described above, to (i) reduce
the exercise prices thereunder to $29.55, which represents the consolidated closing bid price of our common stock on NASDAQ immediately
prior to the date we entered into the Warrant Purchase Agreement; (ii) prohibit the exercise of such modified warrants for a period
of six months after the date of the modification; and (iii) extend the exercise period of such modified warrants for an additional
six months (such modifications, collectively, the “Warrant Price Modifications”). Separately, we also agreed to a
Warrant Price Modification with a holder of Series C Warrants solely in consideration for such holder’s waiver of certain
preemptive rights. We estimated the change in fair value of these warrants immediately prior to and immediately subsequent to
the Warrant Price Modification to be $336,000, and such amount was recorded as a non-cash equity offering cost.
Series
E Modifications
On
October 12, 2015, we entered into an Amendment No. 1 to Common Stock Purchase Warrants (the “Warrants Amendment”)
with each of the holders of the Series E Warrants and each of the holders of the Private Placement Warrants. Under the terms of
the Warrants Amendment, all of the Series E Warrants and 100,847 of the Private Placement Warrants had their exercise prices reduced
to $16.50 per share. Accordingly, with respect to the Private Placement Warrants, 100,847 of the Private Placement Warrants have
an exercise price of $16.50 per share and 1,831 of the Private Placement Warrants retain their original exercise price of $32.505
per share. In consideration for entering into the Warrants Amendment, each Series E Investor agreed to irrevocably waive
ab
initio
and for all time its right to receive cash dividends on its shares of our Series E Preferred Stock. We estimated the
change in fair value of the Series E Warrants and the affected Private Placement Warrants prior to and immediately subsequent
to the Warrants Amendment to be $168,000, which was recognized as a deemed dividend and as an increase to additional paid-in capital
during the fourth quarter of 2015.
On
February 4, 2016, we entered into a Series E 6% Convertible Preferred Stock Repurchase Agreement (the “Repurchase Agreement”)
with the Series E Investors. Pursuant to the terms of the Repurchase Agreement, we agreed to pay each Series E Investor $300 per
share of Series E Preferred Stock, or approximately $656,000, in consideration for the right to repurchase the Series E Investor’s
Series E Preferred Stock at a price per share of $1,000 (the “Repurchase Price”), which was the original price per
share paid by the Series E Investors for their Series E Preferred Stock in February 2015. We recognized the $656,000 payments
as a deemed dividend paid to the Series E investors.
Immediately
following the closing of our Series F public offering discussed below, we paid $2.2 million to the Series E Investors to repurchase
all of the outstanding Series E Preferred Stock, in accordance with the terms of the Repurchase Agreement. Since none of the Series
E Preferred Stock had converted by the time we repurchased the Series E Preferred Stock, the original $890,000 beneficial conversion
feature that we recognized as a deemed dividend in 2015 was reversed as a return of capital from the Series E Preferred stockholders
to the common stockholders.
Series
F Convertible Preferred Stock and Warrants Financing
On
March 24, 2016 (the “Series F Closing”), we closed an underwritten public offering (the “Series F Offering”)
and issued 8,000 immediately separable units of securities to investors, with each unit consisting of: (i) one share of Series
F convertible preferred stock (“Series F Preferred Stock”) convertible into shares of our common stock equal to 1,000
divided by the conversion price of $3.87, which was 75% of the consolidated closing bid price of our common stock on the NASDAQ
Capital Market on March 18, 2016, the date we executed the underwriting agreement (“UA date”); and (ii) 258.397875
warrants, each to purchase one share of our common stock at an exercise price per share equal to $5.17 (“Series F Warrants”),
which was 100% of the consolidated closing bid price of our common stock on the NASDAQ Capital Market on the UA date. The Series
F Preferred Stock, the Series F Warrants, and the shares of common stock underlying the Series F Preferred Stock and Series F
Warrants were registered on Form S-1, which was declared effective by the SEC on March 18, 2016. The Series F Preferred Stock
was immediately convertible and the Series F Warrants were immediately exercisable for shares of common stock and have a term
of five years. The Series F Warrants are exercisable for cash or, solely in the absence of an effective registration statement
or prospectus, by cashless exercise. In total, there were 2,067,183 shares of common stock issuable upon conversion of the Series
F Preferred Stock and up to 2,067,183 shares of common stock issuable upon exercise of the Series F Warrants. The units were sold
for a purchase price equal to $1,000 per unit, resulting in gross proceeds received by us of $8 million. Total offering-related
costs paid through September 30, 2016 were $1.06 million, resulting in net proceeds recognized of $6.94 million. Given that the
effective conversion price of the Series F Preferred Stock was below the closing market price of our common stock at the time
of the Series F Closing, we recognized a beneficial conversion feature in the amount of $1.9 million. Since the Series F Preferred
Stock was immediately convertible into common stock, the beneficial conversion feature was treated as a deemed dividend charged
to retained earnings at closing. Also, from the time of the Series F Closing through September 30, 2016, 6,310 shares of the Series
F Preferred Stock have converted into 1,630,521 shares of common stock. Subsequent to September 30, 2016 and through the date
of this report, an additional 51 shares of Series F Preferred Stock were converted into 13,179 shares of common stock.
The
Series F Preferred Stock is non-voting (except to the extent required by law and except for certain consent rights relating to
amending the certificate of incorporation or bylaws, and the like), but ranks senior to our common stock with respect to distributions
upon our dissolution, liquidation or winding-up. Until the volume weighted average price of our common stock on NASDAQ exceeds
200% of the conversion price of the Series F Preferred Stock for any 20 of 30 consecutive trading days, and the daily dollar trading
volume during such period exceeds $200,000 per trading day, the Series F Preferred Stock is subject to full ratchet price based
anti-dilution protection, subject to certain limitations. Also, the Company can force holders of Series F Preferred Stock to convert
into our common stock if the volume-weighted average price of our common stock exceeds 200% of the Series F Preferred Stock conversion
price for any 20 of 30 consecutive trading days, and the daily dollar trading volume during such period exceeds $200,000 per trading
day, subject to certain other conditions. The Series F investors have agreed to be subject to a blocker that would prevent each
of their respective common stock ownership at any given time from exceeding 4.99% of our outstanding common stock (which may be
increased on 61 days’ notice, but not above 9.99%).
The
Series F Warrants have a 5-year term and have a cashless exercise provision in the event there is no effective registration statement
covering the common stock issuable upon exercise of the Series F Warrants. The Series F Warrants are not subject to price based
anti-dilution protection. The Series F Warrants are listed on the NASDAQ Capital Market under the trading symbol “CBMXW.”
Common
Stock Purchase Warrants Repurchase Agreement
On
July 11, 2016, we entered into a Common Stock Purchase Warrants Repurchase Agreement (the “Warrants Repurchase Agreement”)
with the holders (the “Holders”) of our outstanding common stock purchase warrants issued in October 2012, March 2013,
May 2013, June 2013, June 2014, February 2015 and April 2015 (collectively, the “Warrants”) in connection with our
Series A, Series B, Series C and Series E financings. Pursuant to the terms of the Warrants Repurchase Agreement, we have agreed
to repurchase such Warrants from each Holder upon execution of a “Fundamental Transaction” (as defined in such Warrants)
at various negotiated prices per Warrant share as set forth in the Warrants Repurchase Agreement. Under the terms of the Warrants
Repurchase Agreement, we will repurchase half of such Warrants upon the announcement of a Fundamental Transaction and the remaining
half of such Warrants upon the closing of a Fundamental Transaction. In addition, upon the closing of a Fundamental Transaction,
all Securities Purchase Agreements and Registration Rights Agreements associated with the original issuances of such Warrants
will be terminated and the various restrictions set forth therein will no longer be of any force or effect. In connection with
entering into the Warrants Repurchase Agreement, we were granted certain consents and waivers relating to a Fundamental Transaction.
In the event that a Fundamental Transaction is announced and consummated, we will be obligated to repurchase such Warrants for
approximately $459,000 of cash consideration paid to the Holders. One half of this amount will be due within three business days
of announcing the Fundamental Transaction, and the remaining half will be due within three business days of closing the Fundamental
Transaction. In the event that we announce a Fundamental Transaction but never close, for whatever reason, then one-half of such
Warrants will be repurchased and cancelled and one-half will remain issued and outstanding. In the event that a Fundamental Transaction
is never announced nor consummated, we will not be obligated to repurchase such Warrants, and the underlying terms and conditions
of such Warrants will remain in effect.
Warrants
Outstanding
warrants to purchase common stock are as follows:
|
|
Shares of Common Stock
Issuable from Warrants
|
|
|
|
|
|
|
|
|
Outstanding as of
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
Exercise
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Price
|
|
|
Expiration
|
Equity-classified warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2016
|
|
|
2,067,183
|
|
|
|
-
|
|
|
$
|
5.17
|
|
|
March 2021
|
April 2015
|
|
|
100,847
|
|
|
|
100,847
|
|
|
$
|
16.50
|
|
|
August 2020
|
April 2015
|
|
|
1,831
|
|
|
|
1,831
|
|
|
$
|
32.51
|
|
|
August 2020
|
February 2015
|
|
|
46,676
|
|
|
|
46,676
|
|
|
$
|
16.50
|
|
|
August 2020
|
June 2014
|
|
|
1,690
|
|
|
|
1,690
|
|
|
$
|
30.90
|
|
|
April 2018
|
December 2013
|
|
|
388,365
|
|
|
|
388,365
|
|
|
$
|
46.80
|
|
|
December 2018
|
June 2013
|
|
|
32,788
|
|
|
|
32,788
|
|
|
$
|
29.55
|
|
|
June 2019
|
May 2013
|
|
|
32,788
|
|
|
|
32,788
|
|
|
$
|
29.55
|
|
|
May 2019
|
March 2013
|
|
|
18,334
|
|
|
|
18,334
|
|
|
$
|
29.55
|
|
|
March 2019
|
October 2012
|
|
|
11,252
|
|
|
|
11,252
|
|
|
$
|
29.55
|
|
|
September 2018
|
April 2011
|
|
|
-
|
|
|
|
8,746
|
|
|
$
|
321.00
|
|
|
April 2016
|
Total
|
|
|
2,701,754
|
|
|
|
643,317
|
|
|
|
|
|
|
|
7.
COMMITMENTS AND CONTINGENCIES
Executive
Severance
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 (as amended, the “Severance Plan”)
that affects certain of our senior management-level employees who are classified as “Section 16 Officers” of the Company.
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 (one times annual base salary for
the CEO); (ii) immediate vesting of outstanding compensatory equity awards; and (iii) payment of COBRA premiums for the participating
employee and eligible dependents 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 initially 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. The Severance Plan automatically renews annually unless terminated
upon 12 months prior written notice.
Also,
our Board of Directors has adopted a Transaction Bonus Plan (the “Transaction Bonus Plan”), which provides for certain
bonus payments to be made, upon the consummation of a qualifying change of control transaction, to certain employees of the Company
as shall be determined by the Compensation Committee of our Board of Directors. The aggregate value of the bonuses payable under
the Transaction Bonus Plan shall be the greater of (i) $1,000,000 or (ii) ten percent of the net proceeds received in connection
with a qualifying change of control transaction, and the percentage of such bonus pool awarded to each eligible participant shall
be determined by our Compensation Committee. As there are no transactions deemed imminent or probable, no amounts have been recognized
in the consolidated financial statements relating to these plans.
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 and $75,000 for both of
the three and nine months ended September 30, 2016 and 2015, respectively, and are included in patent amortization and royalties
in the accompanying consolidated statements of operations.
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 claims and legal actions, if any, will not have a material effect on our financial
position, results of operations or cash flows. Any legal costs resulting from claims or legal actions are expensed as incurred.
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, 2015, filed with the
SEC on February 18, 2016.
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,” “more likely to,” “with
a view to,” “our future success depends,” “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, development of new
technologies and services, litigation, regulatory matters, market acceptance and performance of our services, the success and
effectiveness of our technologies and services, our ability to retain and hire key personnel, the competitive nature of and anticipated
growth in our markets, market size, 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 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; market acceptance
of chromosomal microarray analysis (“CMA”) as a preferred method over karyotyping; the rate of transition to CMA from
karyotyping; changes in consumer demand; third-party reimbursement of CMA; our ability to attract and retain a qualified sales
force and key technical personnel; our ability to successfully develop and introduce new technologies and services; rapid technological
change in our markets; supply availability; our ability to bill and obtain reimbursement for highly specialized tests; the rate
of growth of the in vitro fertilization (“IVF”) diagnostic testing market; our ability to comply with regulations
to which our business is subject, including changes in coding and reimbursement methods; legislative, regulatory and competitive
developments in markets in which we and our subsidiaries operate; our limited market capitalization; our ability to obtain additional
financing for working capital on acceptable terms and in a timely manner; 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, 2015 filed with the SEC on February 18, 2016. 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 family health-focused clinical molecular diagnostic laboratory specializing in pre-implantation genetic screening, prenatal
diagnosis, miscarriage analysis, and pediatric developmental disorders. We strive to provide best-in-class clinical laboratory
support to healthcare professionals, allowing them to maximize the clinical utility of their patients’ test results and
to optimize patient care. Our testing focuses on advanced technologies, including single nucleotide polymorphism chromosomal microarray
analysis, next generation sequencing, fluorescent in situ hybridization and high resolution karyotyping. Our approach to testing
is to offer sophisticated technology along with high quality clinical support to our ordering physicians and their patients. Our
laboratory facilities and corporate headquarters 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.
Overview
For
the three and nine months ended September 30, 2016, our operating activities included the recognition of $3.2 million and $9.3
million of total revenues, respectively, which increased by $722,000 and $1.9 million, respectively, from the comparable periods
in 2015, due primarily to increased volumes of molecular diagnostic tests performed and improved third-party reimbursement of
those tests, particularly in the reproductive health testing market. Our net losses for the three and nine months ended September
30, 2016 decreased over the comparable periods in 2015 due primarily to increased sales, improved gross margins and reduced sales
and marketing expenses, partially offset by increased general and administrative expenses for the comparable periods presented.
Also for the nine months ended September 30, 2016, our net loss attributable to common stockholders decreased by $729,000 from
the comparable period in 2015 due to improved net operating losses, partially offset by increases in deemed dividends recognized
from a premium paid to Series E investors as well as from issuing Series F convertible preferred stock with a conversion price
below the fair value of our common stock at closing.
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, 2015, filed with the SEC on February 18, 2016, 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, 2016 and 2015
Revenues
and Cost of Services (dollars in thousands):
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
|
September 30,
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diagnostic services revenues
|
|
$
|
3,211
|
|
|
$
|
2,481
|
|
|
$
|
730
|
|
|
|
29%
|
|
|
$
|
9,190
|
|
|
$
|
7,292
|
|
|
$
|
1,898
|
|
|
|
26%
|
|
Royalty revenues
|
|
|
37
|
|
|
|
45
|
|
|
|
(8
|
)
|
|
|
(18%)
|
|
|
|
137
|
|
|
|
112
|
|
|
|
25
|
|
|
|
22%
|
|
Cost of services
|
|
|
(1,476
|
)
|
|
|
(1,400
|
)
|
|
|
(76
|
)
|
|
|
(5%)
|
|
|
|
(4,327
|
)
|
|
|
(4,028
|
)
|
|
|
(299
|
)
|
|
|
(7%)
|
|
Diagnostic
Services Revenues.
Diagnostic services revenues are generated from providing DNA-based genomic testing services primarily
in the areas of pre-implantation genetic screening (or “PGS”), pre-implantation genetic diagnostics (or “PGD”),
miscarriage analysis, prenatal diagnostics (collectively referred to as “reproductive health” testing) and postnatal
development disorders in children. 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
|
|
|
|
2016
|
|
|
2015
|
|
|
#
|
|
|
%
|
|
|
2016
|
|
|
2015
|
|
|
#
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total billable tests
|
|
|
2,835
|
|
|
|
2,495
|
|
|
|
340
|
|
|
|
14%
|
|
|
|
8,263
|
|
|
|
7,439
|
|
|
|
824
|
|
|
|
11%
|
|
Total reproductive health tests(1)
|
|
|
1,483
|
|
|
|
1,265
|
|
|
|
218
|
|
|
|
17%
|
|
|
|
4,312
|
|
|
|
3,757
|
|
|
|
555
|
|
|
|
15%
|
|
Reproductive health percentage of total billable tests
|
|
|
52.3%
|
|
|
|
50.7%
|
|
|
|
|
|
|
|
|
|
|
|
52.2%
|
|
|
|
50.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per test - total billable tests
|
|
$
|
1,133
|
|
|
$
|
994
|
|
|
$
|
139
|
|
|
|
14%
|
|
|
$
|
1,112
|
|
|
$
|
980
|
|
|
$
|
132
|
|
|
|
13%
|
|
Revenue per test - total reproductive health tests(1)
|
|
$
|
1,562
|
|
|
$
|
1,314
|
|
|
$
|
248
|
|
|
|
19%
|
|
|
$
|
1,545
|
|
|
$
|
1,296
|
|
|
$
|
249
|
|
|
|
19%
|
|
(1)
includes PGS, PGD, prenatal and miscarriage analysis microarray tests.
For
the three months ended September 30, 2016, total billable tests and total diagnostic services revenues increased by 14% and 29%,
respectively, compared to the three months ended September 30, 2015. For the nine months ended September 30, 2016, total billable
tests and total diagnostic services revenues increased by 11% and 26%, respectively, compared to the nine months ended September
30, 2015. Driving the increase in total billable tests and diagnostic service revenues for all periods presented were the increases
in reproductive health testing volumes, which increased by 17% and 15% for the three and nine months ended September 30, 2016
compared to the 2015 periods, respectively. We believe this reflects the commercialization strategies and focus of our sales force,
which have emphasized reproductive health diagnostic testing over traditional testing. In addition, improved reimbursement from
third-party payors primarily for our miscarriage analysis microarray test drove higher revenues per test in our reproductive health
segment, thereby resulting in a higher percentage increase in total diagnostic services revenues compared to the increase in billable
testing volumes.
Diagnostic
services revenues are recognized based on: i) contractual rates billed to our customers and third party payors; and ii) amounts
that we expect to collect from non-contracted third-party payors, which include adjustments for changes in estimates of contractual
allowances as well as from receiving cash payments in excess of amounts previously recognized. Because approximately 71% of our
diagnostic revenues are billed to third-party payors, most of which are non-contracted, it is likely that we will be required
to make adjustments to these accounting estimates in the future, which may positively or adversely affect our revenues and results
of operations.
Royalties.
In 2010, we entered into an exclusive licensing agreement with CustomArray, Inc. (“CA”), a private company located
in Washington State, to license certain 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.
The changes in royalty revenues reported reflect changes in CA’s revenues. It is uncertain whether in future periods, CA’s
revenues will increase or continue at the minimum contractual amounts.
Cost
of Services
. Cost of services relating to our diagnostic tests performed include direct materials such as microarray slides,
reagents and related laboratory materials, direct laboratory labor (wages and benefits), allocation of administrative overhead
and stock-compensation expenses. Increases in cost of services for all periods presented were due primarily to increased diagnostic
testing volumes described above. For the three and nine months ended September 30, 2016 and 2015, non-cash stock compensation
expenses were not significant.
Operating
Expenses (dollars in thousands):
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
|
September 30,
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
88
|
|
|
$
|
133
|
|
|
$
|
(45
|
)
|
|
|
(34%)
|
|
|
$
|
380
|
|
|
$
|
352
|
|
|
$
|
28
|
|
|
|
8%
|
|
Sales and marketing
|
|
|
1,055
|
|
|
|
1,295
|
|
|
|
(240
|
)
|
|
|
(19%)
|
|
|
|
3,532
|
|
|
|
3,658
|
|
|
|
(126
|
)
|
|
|
(3%)
|
|
General and administrative
|
|
|
1,450
|
|
|
|
1,249
|
|
|
|
201
|
|
|
|
16%
|
|
|
|
4,562
|
|
|
|
4,212
|
|
|
|
350
|
|
|
|
8%
|
|
Impairment of cost-basis investment
|
|
|
-
|
|
|
|
97
|
|
|
|
(97
|
)
|
|
|
(100%)
|
|
|
|
-
|
|
|
|
97
|
|
|
|
(97
|
)
|
|
|
(100%)
|
|
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 months ended September 30, 2016, research and development expenses decreased from the comparable 2015 period due primarily
to increased efforts in launching a new microarray platform for our miscarriage analysis test during 2015 that did not repeat
during 2016. For the nine months ended September 30, 2016, research and development expenses increased from the comparable 2015
period due primarily to increased efforts during 2016 in launching a next generation sequencing platform for our PGS testing services.
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 and nine months ended September 30, 2016, sales and marketing expenses decreased from the comparable 2015 periods due primarily
to reduced headcount in sales representatives and reduced travel and entertainment costs from fewer sales headcount compared to
the 2015 period. For the three and nine months ended September 30, 2016 and 2015, non-cash stock compensation expenses were not
significant.
General
and Administrative.
These expenses include compensation and benefit costs of our administrative staff, client billing and
collections, information technology, executive management, human resources and accounting personnel, as well as facilities-related
costs, insurance, legal, audit and other professional services. For the three and nine months ended September 30, 2016, general
and administrative expenses increased from the comparable 2015 periods due primarily to increased salaries and bad debt expense,
investor relations and consulting expenses, partially offset by decreased legal fees as a result of litigation which concluded
in 2015. Also included in general and administrative expenses are non-cash stock-based compensation expenses, which were $153,000,
$494,000, $147,000 and $452,000 for the three and nine months ended September 30, 2016 and 2015, 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 from employee turnover, as well as by the changes to 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.
Impairment
of cost-basis investment.
During the third quarter of 2015, management determined that the carrying value of a cost-basis
investment in the stock of a privately held company was impaired, resulting in a one-time, non-cash impairment charge of $97,000
for the three and nine months ended September 30, 2015. There were no such charges in the 2016 comparable periods in 2016.
Inflation
Inflation
has not had a significant impact on our business, results of operations or financial condition.
Liquidity
and Capital Resources
At
September 30, 2016, cash, cash equivalents and short-term investments totaled $4.3 million, compared to $3.9 million at December
31, 2015. Cash is held primarily in general checking accounts as well as in money market mutual funds backed by U.S. government
securities. Short-term investments are comprised primarily of commercial paper issued by U.S. financial institutions. Working
capital was $6.5 million and $5.4 million at September 30, 2016 and December 31, 2015, respectively. The primary reason for the
increase in working capital was due to higher cash balances at September 30, 2016 compared to December 31, 2015, driven by operating,
investing and financing activities described 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,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(3,361
|
)
|
|
$
|
(4,171
|
)
|
|
$
|
810
|
|
Investing activities
|
|
|
3,102
|
|
|
|
164
|
|
|
|
2,938
|
|
Financing activities
|
|
|
3,951
|
|
|
|
4,545
|
|
|
|
(594
|
)
|
Increase (decrease) in cash and cash equivalents
|
|
$
|
3,692
|
|
|
$
|
538
|
|
|
$
|
3,154
|
|
Operating
Activities.
Improved cash reimbursement, partially offset by higher laboratory supply costs from increased testing volumes
during the nine months ended September 30, 2016 resulted in lower overall cash used in operating activities compared to the nine
months ended September 30, 2015.
Investing
Activities.
Cash flows from investing activities relate primarily to the sales of short-term investments to fund operations,
which increased in 2016 compared to 2015.
Financing
Activities.
The net decrease in net cash flows from financing activities was due primarily to the $6.9 million of net proceeds
received in March 2016 from the Series F Financing, partially offset by the combined $2.8 million of payments made to the Series
E investors, compared to $4.7 million in net proceeds from the Series E financing that closed in February of 2015.
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 technologies and services. However, we believe that our cash, cash equivalents and short-term
investment balances at September 30, 2016 will be sufficient to meet our expected cash requirements for the next twelve months.
In order for us to continue as a going concern beyond this point 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
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 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 2016 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;
|
|
|
|
|
●
|
variability
in third-party reimbursement for our diagnostic tests;
|
|
|
|
|
●
|
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, 2016, 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. We have entered into an operating lease for our laboratory space and corporate offices, totaling approximately
12,200 square feet, expiring in early 2020. We have no significant commitments for capital expenditures for the remainder of 2016
or beyond. We currently have ten active capital leases totaling $254,000 for certain laboratory and IT-related equipment,
with lease payments continuing through July of 2019.
Recent
Accounting Pronouncements
See
Note 2 to the consolidated interim financial statements located elsewhere in this report for a discussion on recent accounting
pronouncements.