PART I
CAUTIONARY STATEMENT
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,"
"expect," "believe," "estimate," "anticipate," "intend," "continue," "plan," "predict," "seek," "should," "would," "could," "potential," "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 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; 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; 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, including changes in coding and
reimbursement methods; 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 I of this report. 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 otherwise required by law. 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.
As
used in this report, "the Company," "we," "us" and "our" refer to CombiMatrix Corporation and its majority-owned subsidiary companies.
Item 1. BUSINESS
Overview
CombiMatrix Corporation was originally incorporated in October 1995 as a California corporation. In September 2000, we were
reincorporated as a Delaware corporation, and in December 2002, we merged with, and became a wholly owned subsidiary of, Acacia Research Corporation ("Acacia"). In August 2007,
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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.
We
provide valuable molecular diagnostic solutions and comprehensive clinical support to foster the highest quality in patient care. We specialize in miscarriage analysis, prenatal
testing and pediatric genetics, offering DNA-based testing for the detection of genetic abnormalities beyond what can be identified through traditional methodologies. We perform genetic testing
utilizing a variety of advanced cytogenomic techniques, including chromosomal microarray, standardized and customized fluorescence
in situ
hybridization
("FISH") and high-resolution karyotyping. We are dedicated to providing high-level clinical support for healthcare professionals in order to help them incorporate the results of complex genetic
testing into patient-centered medical decision making.
We
also own a one-third minority interest in Leuchemix, Inc., a private drug development company focused on developing a series of compounds to address a number of
oncology-related diseases.
Market Overview
We develop and market our molecular testing services in two distinct markets: prenatal/postnatal developmental disorders and
hematology/oncology genomics. We believe the molecular diagnostics market is one of the fastest-growing segments within the overall diagnostics market. Molecular diagnostics, within the context of
this discussion, refers to the use of an individual's genetic analysis to guide medical decision-making in the area of disease diagnosis and post-diagnostic management. Innovative approaches to
re-sequencing of the human genome and a growing clinical appreciation and acceptance of the utility of genomic information in guiding clinical care have enabled the rapid growth of this market. Many
experts believe that the use of molecular diagnostics will
continue to grow in the coming years and will have a significant impact on the way in which medicine is practiced.
The human body is composed of billions of cells, each containing DNA that encodes the basic instructions for cellular function. The
complete set of an individual's DNA is called the genome, and is organized into 23 pairs of chromosomes, which are further divided into smaller regions called genes. Each gene is comprised of a
specific sequence involving four nucleotides (also called "bases"): A, T, G and C. These bases are complementary to one another in that A binds only with T and G binds only with C. This interaction
forms "base pairs", and is responsible for the double helix structure of DNA.
The
human genome has approximately three billion nucleotides. The order of these nucleotides is known as the DNA sequence. When a gene is turned on, or expressed, the genetic information
encoded in the DNA is transcribed (copied) to an intermediate format, called messenger RNA ("mRNA"). The mRNA code is then read and translated into a specific protein product. Proteins direct numerous
cellular functions, some of which lead to the expression of individual traits, such as eye color or height. Some level of normal variability is seen throughout the genome, however, abnormal variations
in the sequence of a gene, such as deletions, duplications, or point mutations, can interfere with the normal physiology of the cells in which that gene is expressed. These abnormal variations may
lead to disease, predisposition to a disease, or an atypical response to certain types of drugs.
There are a number of methods of genetic analysis that are used in diagnostic genetic testing. They broadly fall into three main
categories: (i) re-sequencing of individual base pairs of DNA; (ii) assessing DNA copy number variation; and (iii) analyzing gene expression. In many diagnostic situations, it is
only necessary to analyze either a single gene or a small number of genes. This diagnostic testing can be accomplished by a number of different techniques, depending on the situation. However, when a
larger number of genetic factors need to be analyzed, one of the most efficient methods of analysis is to use a
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chromosomal
microarray (also referred to as "microarray" testing), which measures millions of DNA variations in a single experiment.
Microarray testing to assess DNA copy number variation is achieved by comparing a patient's genomic DNA to a reference genome to
evaluate for relative gains and losses of genomic information. Some gains and losses of genomic information are known to cause genetic disorders, or predispose a person to a genetic disorder. Other
gains and losses are considered benign because they occur in regions of the genome that are known to show variability and have not been associated with any disease or disease process. The reason we
believe that microarray testing is such a powerful tool is that it enables simultaneous analysis across the entire genome in a single reaction, providing a comprehensive analysis of all 46 chromosomes
in a single test. Unlike gene expression arrays, which evaluate mRNA levels to monitor the activity of specific genes, DNA-based microarray analysis identifies quantitative defects in the number of
copies of genomic DNA in order to test for conditions that are known to be associated with gains and losses of chromosomal information. Throughout this discussion, the terms "microarray" and "array"
are used interchangeably, and refer to DNA-based microarray testing.
Manufacturing
microarrays involves affixing 'probes' (specific sequences of genomic DNA) to a solid surface and then allowing labeled patient DNA to hybridize, or to bind with the
probes. We utilize oligonucleotide ("oligo") probes, which are typically 25-75 base pairs in length. The first platform has approximately 180,000 oligo probes, and only measures copy number variation.
This platform utilizes array comparative genomic hybridization ("aCGH"), in which both patient DNA and reference DNA sets are differentially labeled and allowed to competitively hybridize to the
probes. Differences in the intensity of the probe signals are used to assess patient DNA copy number changes. The second platform has approximately 850,000 oligo probes, which are designed not only to
measure copy number variation, but also to assess single nucleotide polymorphisms, or "SNPs." SNPs are single points along the genome that are highly variable with respect to which base pair is
present (A, T, G or C) in any given person. This platform compares labeled patient DNA to a computer-based reference sample, and it uses the differences in the intensity of the signal to assess
copy number changes, as well as information regarding the specific base at the SNP locations to assess for chromosomal disorders that involve abnormalities not related to a
quantitative
change in the
amount of DNA. We custom designed both platforms to optimize both the sensitivity and specificity of our microarray test.
Diagnostics Market Segmentation
In general, our diagnostic services and our test menu are focused around our highly specialized genomic microarray. While there are
risks associated with billing and reimbursement of these highly specialized tests, we believe that our market position and test portfolio provide significant leverage in the rapidly growing
personalized genomics/diagnostics space. Our test menu is further supplemented by what may be considered more routine tests, which allow us access to a broader, yet synergistic market. Our overall
clinical market can be divided into two primary markets: (i) prenatal and postnatal developmental disorders; and (ii) oncogenomic testing for hematologic malignancies and solid tumors.
Our market analysis indicates that our potential client base for both of these markets can be divided into three general customer segments, as detailed below. Our services are therefore tailored to
meet the specific needs of each of these customer segments.
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karyotyping
or FISH for miscarriage testing (also referred to as "Products of Conception" or "POC"), and this testing is typically sent out to a specialty laboratory. However, based on more recent,
highly compelling data demonstrating the superiority of microarray testing to karyotyping, we believe significant growth opportunities exist in this segment. Another distinguishing factor of this
segment involves the larger national and regional laboratories. These laboratories have sufficient professional competence and sophistication to partner with other service organizations to offer
microarray technology as part of their service offerings. This segment of the market is characterized by a
preponderance of clients that require us to bill the patients' insurers directly, as opposed to engaging in an institutional, direct-bill relationship.
-
•
-
Physician groups:
In the developmental genetics market,
physician groups collectively constitute a significant market opportunity. This segment of the market typically outsources all of their genetic testing services, meaning that they require a global
level of service that necessitates processing all aspects of patient billing. The physicians that make up this market include geneticists, reproductive endocrinologists, OB-GYNs and maternal fetal
medicine ("MFM") specialists.
Technologies
In order to achieve the promise of personalized medicine, our objective is to provide a suite of molecular diagnostic tests based on
the following array-based technologies.
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Our custom-designed oligo arrays allow us to analyze DNA on a highly refined scale. By incorporating smaller probes
(25 - 75 bases in length), and spacing these shorter probes closely together, we are able to provide a dense, high-resolution analysis of the whole genome. In addition, with the platform
we utilize, the oligos measure SNPs as part of the analysis. Working with an industry-aligned consortium, this customized array focuses on regions of known clinical significance (i.e. regions
known to cause well-described genetic syndromes when lost or gained) as well as regions that make up the remainder of the genome, sometimes referred to as the genomic backbone. Since the introduction
of high-density oligonucleotide arrays with SNP analysis into clinical medicine, many new genetic syndromes caused by genomic gains and losses have been, and still continue to be, identified.
Meta-analyses
and large prospective studies have demonstrated that microarray testing provides a significant increase in the detection rate of chromosomal abnormalities compared to
standard cytogenetic testing (i.e., karyotyping and evaluation of the tips of chromosomes, called subtelomeres, by
FISH). Although the percent increase varies based on the type of sample being tested (i.e. miscarriage tissue, pediatric sample, prenatal sample), the data has shown that standard chromosomal
analysis misses many disorders that are easily identifiable by microarray testing. The ability to identify a specific cause for a disorder or the cause of a pregnancy loss assists not only with
diagnostic management, but also with anticipatory care.
In
addition, microarrays have been shown to assist in the assessment of genetic instability in many types of cancer, such as breast, hematologic, brain, and the gastro-intestinal tract.
Previously, chromosomal evaluation of tumors through standard testing, such as karyotyping, proved exceedingly difficult, as karyotyping and FISH both require live, actively dividing cells. Unlike
karyotyping, however, microarray testing is DNA-based, meaning that it can be performed on non-living tissue, including tissue samples that have been fixed in formalin and embedded in paraffin
("FFPE").
In oncology and some cases of miscarriage analysis, the involved tissue has typically been processed by a pathology laboratory by using
formalin to fix the tissue and using a paraffin block to store the fixed sample. To be a comprehensive service provider, our microarray platform must be able to evaluate genomic alterations in FFPE
samples. Working with our array platform manufacturer, we have successfully adapted our oligonucleotide array for analysis of FFPE specimens. During the specialized FFPE process, the fragmented DNA is
'restored' to longer segments by ligating free DNA ends together prior to analysis. This restoration step makes the oligo array particularly useful in analyzing DNA samples that are of poorer quality,
such as older samples or tissue that have been strongly 'fixed' in formalin and placed in a paraffin block, because the process 'restores' large segments that increase the assay's robustness and
reduces "noise" in the data.
Our Services
We utilize the latest in microarray technologies to deliver molecular diagnostic services for the diagnosis of diseases and the
management of patient care in two primary
areas: (i) developmental disorders associated with intellectual disability, congenital anomalies, dysmorphic features, autism spectrum disorders and miscarriage/stillbirth; and
(ii) hematology/oncology.
The focus of our developmental disorder suite of array tests is on the prenatal and postnatal application of microarrays to assist in
diagnosing genomic syndromes associated with intellectual disability,
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developmental
delays, congenital anomalies, dysmorphic features and autism spectrum disorders. Although traditional karyotyping was regarded as the "gold standard" for this type of diagnosis for the
past two decades, recent meta-analyses and large prospective multicenter studies have definitively demonstrated a significant improvement in the detection rate of chromosomal abnormalities by
microarray analysis compared to standard karyotyping and/or FISH.
In
2010, the American College of Medical Genetics, which is the governing body for the utilization of genetic testing, recommended microarray testing
in lieu
of
standard karyotyping children with intellectual disabilities, developmental disorders, congenital abnormalities, dysmorphic features, and autism/autism spectrum disorders
based on the fact that microarray analysis
doubled
the detection rate of chromosomal abnormalities in these patients. In 2013, following the publication
of a large, prospective, multicenter trial designed to compare karyotyping to microarray analysis in the prenatal population (Wapner et al.), the American College of Obstetricians and Gynecologists,
which is the governing body for the practice of medicine in the area of obstetrics and gynecology, recommended that microarray analysis be performed
in lieu
of
standard karyotyping when fetal anomalies are present on ultrasound, or there is a fetal death or stillbirth. They also recommended that microarray analysis be offered as an
alternative to standard karyotyping for any other patient undergoing a prenatal diagnostic procedure, given the increased sensitivity of microarray analysis to detect chromosomal abnormalities, even
following a normal karyotype result.
Microarray
analysis provides critical information for families and their physicians. In prenatal care, it allows the physician and patient to make better pregnancy management and care
decisions, as well as allowing for the opportunity to provide anticipatory care with respect to abnormalities that may be associated with a specific disorder that may not yet be recognizable. Such
knowledge can inform decisions about where to deliver (such as at a tertiary care center for an infant with complex abnormalities) and how aggressive to be with neonatal support in very severe cases.
In pediatric care, the same is true. Once the cause of a child's development disorder and/or congenital anomalies has
been identified, parents, teachers and physicians can work toward ensuring that appropriate medical and educational care decisions are made based on the child's condition. And as with prenatal care,
microarray analysis can assist in providing appropriate anticipatory care, such as initiating screening tests at an earlier age when the child's disorder is associated with an increased risk of a
specific disorder or disease complication.
As with prenatal and pediatric genetics, karyotyping has been considered the standard of care for evaluating pregnancy losses for
chromosomal disorders. However, tissue from miscarriages, fetal deaths and stillbirths is difficult to culture (grow) in the laboratory, and this culturing process is required in order to perform a
karyotype. Microarray analysis is particularly useful in this arena, as it does not depend on the successful growth of a cell culture. Instead, it relies solely on the cells' DNA, which can be
directly extracted from nearly any fetal tissue sample. While karyotyping fails to provide a result in between 20-50% of these cases, microarray testing is able to provide a result greater than 95% of
the time. This is particularly beneficial in the analysis of first trimester pregnancy loss, as it is estimated that 50-60% of all first trimester losses are due to chromosomal abnormalities. Being
able to identify the cause of the miscarriage in one out of every two women means that physicians are better able to provide personalized reproductive counseling and plan future pregnancy management
for a much larger segment of their patient population.
In 2006, we introduced our first developmental disorders microarray, which detected over 50 different genetic disorders in one
multiplexed analysis. In October 2006, the U.S. Food and Drug Administration ("FDA") indicated that this test did not require approval under its guidance as it did not meet the definition of an
In Vitro
Diagnostics Multivariate Index Analysis ("IVDMIA"). Following this
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determination,
we launched our microarray test under the Clinical Laboratory Improvement Amendments of 1988 ("CLIA") guidelines for use in the clinical care of patients. Since then, we have launched
several upgrades of this test. Our current microarray offering is capable of identifying more than 500 different chromosomal and genetic disorders, ranging from common conditions, such as Down
syndrome (trisomy 21) and DiGeorge syndrome (deletion 22q11.2), to much more rare disorders.
We
continue to monitor primary, peer-reviewed journals for information that allows us to make either incremental improvements to the current array design, or much larger changes for a
new version of our array. As an example of our publication-driven approach, as early as 2009, we began to include specific coverage of regions shown to be strongly associated with autism spectrum
disorders ("ASDs") or predisposition to ASDs, long before the guidelines to testing children with autism/ASDs included microarray analysis. It is now recognized that approximately 7% of all children
with an ASD have a genomic abnormality that is identifiable by microarray. This contributes to the clinical recommendation that chromosomal microarray analysis be offered to all individuals with an
ASD as part of a first-tier diagnostic evaluation.
More
significantly, based upon an ongoing evaluation of current medical literature, we adopted an oligonucleotide microarray platform that analyzes SNPs throughout the genome. In
addition to assessing genomic copy number variations, analysis of SNPs enables detection of regions of loss of heterozygosity ("LOH"), which indicate the presences of a genetic imprinting disorder, or
an increased risk of an autosomal recessive disorder due to shared ancestry. In the miscarriage analysis space, SNPs readily detect triploidy, molar pregnancies, and maternal cell contamination,
thereby decreasing the number of additional ancillary testing often required for such samples.
Another area of focus for our diagnostic services is cancer. At any given time in the United States, there are several million
individuals who either have cancer or are cancer survivors and are at risk for recurrence. Patients who are newly diagnosed with cancer require significant medical care, which often includes physical
examinations, biopsies, diagnostic testing, chemotherapy, surgery, extended hospital stays and radiotherapy. We have developed, and continue to develop, a series of diagnostic microarray tests that,
through the genetic analysis of blood, tissue or biopsy samples, will provide additional genomic information to physicians for use in providing more personalized management of their patients.
We
offer microarray testing to address several of the common hematological malignancies, with a particular emphasis on Chronic Lymphocytic Leukemia ("CLL"). Our
array-based test is designed to evaluate the underlying genetic aberrations in the cancer cells to assist in providing additional information regarding the likely clinical course of the disease. Such
information can then be utilized by physicians, in combination with other tests, to make better-informed patient management and treatment decisions and recommendations.
In
breast cancer, HER2 status has been traditionally determined by immunohistochemistry ("IHC") to assess the amount of HER2 protein present, or by FISH analysis to evaluate for the
presence of HER2 gene amplification at the DNA level in cancer cells. However, both of these tests are relatively subjective, and studies have shown significant variability in interpretation between
different pathologists
on similar cases. To complicate matters further, some cases show equivocal results (i.e. not clearly positive or negative), and up to 20% of cases have discordant IHC and FISH results, in which
one is positive and the other is negative. Due to the incomplete assessment of chromosome 17 and the complex structural alterations associated with breast cancer, we believe FISH and IHC remain
imperfect diagnostic tests for HER2 status determination. In contrast, microarray analysis of chromosome 17 provides an objective result for the assessment of HER2 copy number and resolves both
equivocal and discordant HER2 results obtained by FISH and IHC.
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Our Strategy
Our strategic intent is to become the preeminent diagnostic services laboratory for prenatal microarray testing. To achieve this, we
have recently implemented a three-pronged approach to drive market adoption. The three components we are leveraging include: 1) expanding our direct sales efforts and emphasizing direct sales
in miscarriage analysis testing; 2) leveraging pathology partnerships; and 3) establishing strategic alliances with industry partners.
Our sales and marketing representatives aggressively market our miscarriage analysis microarray testing to the three primary physician
groups involved in miscarriage analysis: OB/GYNs, MFMs, and the historically underserved pathology community. It is the OB/GYN, and occasionally the MFM who perform the surgical procedure to remove
fetal and placental tissue from the uterus following a fetal death or a miscarriage. The pathologists are the custodians of this tissue and are often charged with determining which reference lab to
utilize for send-out testing on the specimen. Our strategic sales approach is to engage with, and sell to, the multiple decision-makers in the laboratory and the clinic, culminating with the
pathologist. We believe this pathology-centric approach to miscarriage analysis testing gives us a competitive edge against our competitors in that our competitors' primary sales call point is the
medical office clinician and their primary test offering focus is on other product or service lines in developmental testing.
Recent
studies by the National Institute of Health, which were published in the
New England Journal of Medicine
in December of 2012,
indicate that the clinical benefit of DNA microarray testing is greater than that of traditional karyotyping for both stillbirths (Reddy, et al.) and for invasive procedures
(Wapner, et al.). In addition, in December 2013, the American College of Obstetricians and Gynecologists ("ACOG") issued a Committee Opinion recommending microarray analysis
in
lieu of karyotyping
for cases of fetal death and for stillbirths. We are leveraging our direct sales channel and our strategic partners' channels to capitalize on the
opportunity created by the publishing of these landmark studies and the recommendation of ACOG, which we believe highlights the superiority of microarray testing compared to traditional testing, such
as karyotyping and FISH.
Since pathologists are a critical component in the referral to reference lab testing, we have established and will continue to pursue
multiple relationships to facilitate the expansion of our array services. We plan to pursue additional relationships and collaborations with pathology groups to gain access to sales, marketing and
distribution channels. These relationships include alliances with other complementary laboratory service providers, which helps us increase our market reach and frequency of visits to potential
customers.
Strategic alliances with established industry partners allow us to round-out our test menu to offer complete testing solutions to MFM
specialists and OB/GYNs, and enable us to capitalize on the demand for complementary techniques such as non-invasive prenatal testing ("NIPT"). We have established several key partnerships in the past
year, most notably with Sequenom, Inc., where we jointly announced in August 2013 that we entered into a collaboration agreement to market and promote microarray analysis to confirm abnormal
NIPT results and to offer a broader scope of detection of chromosomal abnormalities for patients undergoing diagnostic testing.
In
addition, we have focused our reimbursement efforts to maximize collections for all of the tests that we perform. We internalized our billing and collections process in 2012 and are
augmenting our billing and reimbursement department to secure future positive coverage decisions and optimize payer relations. We
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are
also focused on increasing our managed care relationships, and we recently announced payor contracts for cytogenomic testing for over 60 million covered lives in the United States.
Billing and Reimbursement
Revenues from our clinical laboratory tests are generated primarily from the provision of test results to the referring healthcare
provider, however reimbursement can come from several different sources. Depending on the billing arrangement and applicable law, parties that reimburse us for our services include direct-bill
customers, third-party payors and individual patients. Where there is a coverage policy, contract or agreement in place, we bill the third-party payor, the hospital or referring laboratory as well as
the patient (for deductibles and coinsurance or copayments, where applicable) in accordance with the policy or contractual terms. Where there is no coverage policy, contract or agreement in place, we
pursue reimbursement on behalf of each patient on a case-by-case basis and rely on applicable billing standards to guide our claims process.
Our
direct-bill payors include healthcare institutions such as hospitals and clinics, and in some circumstances, patients themselves. For the direct-bill and individual patient
categories, our diagnostic services are billed and revenues are recognized at established contractual rates, once the test results have been delivered to the ordering physician.
Third-party
payors include organizations such as commercial insurance companies, as well as government payors including Medicare and Medicaid. We bill our tests to these payors using
individual billing codes known as Common Procedural Terminology ("CPT") codes established for array-based laboratory diagnostic testing. For the non-governmental third-party payor category, our
diagnostic services are billed at our list prices for the tests performed, but they are recognized for accounting and financial reporting purposes as diagnostic service revenues based upon the amounts
expected to be collected. The difference between the amount billed to each payor and the amount expected to be collected is recorded as a contractual allowance. For governmental payors, we recognize
revenues based upon published fee schedules established by the Centers for Medicare and Medicaid Services ("CMS") or various state Medicaid fee schedules.
CPT codes are the main data code set used by physicians, hospitals, laboratories and other health care professionals to report
separately-payable clinical laboratory tests for reimbursement purposes. The CPT coding system is maintained and updated on an annual basis by the American Medical Association ("AMA"). In 2012, the
AMA added over one hundred new CPT codes for specific molecular tests such as ours. These new codes replaced the more general "stacking" codes that were previously used to bill for these services, and
they became effective January 2013. In the Final Physician Fee Schedule Rule, which was issued in November 2012, CMS stated that it had determined it would pay for the new codes as clinical laboratory
tests, which are payable on the Clinical Laboratory Fee Schedule ("CLFS"). Although the various Medicare Administrative Contractors ("MACs") established pricing based on a "gap filling" methodology,
not all of the codes were priced by CMS and were omitted from the 2014 Clinical Lab Fee Schedule. These include molecular codes used by CombiMatrix in billing for our molecular microarray tests.
The
omission by CMS of pricing for certain CPT codes used by us could have an adverse impact on our revenues and cash reimbursement going forward. We continue to work with billing
consultants and industry advisory groups to determine what information and action is required to ensure reimbursement. There is also a possibility that other third-party payors will not establish
positive or adequate coverage policies or reimbursement rates. Though pricing will vary from payor to payor, it is too early to assess the impact, if any, that the omission of pricing on certain
molecular CPT codes may have on our results of operations.
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For the years ending December 31, 2013 and 2012, approximately 31% and 38% of our diagnostic services revenues were derived from
direct bill customers, 67% and 55% from third-party commercial insurance carriers and 2% and 7% from government payors, including Medicare and several state Medicaid plans, respectively.
With
respect to the third-party payors that we bill, we are considered an "out-of-network" provider with the majority of the carriers, resulting in varying expected reimbursement
amounts, which we believe is not unusual for a company such as ours that offers highly specialized and/or unique testing. An "in-network" provider has a contracted arrangement with the insurance
company or benefits provider. This contract governs, among other things, service-level agreements and reimbursement rates. In certain instances, an insurance company may negotiate an "in-network" rate
for our testing rather
than pay the typical "out-of-network" rate. During our operating history, we have been able to receive reimbursement for most of our tests from major commercial third-party payors based on their
established policies. Our efforts in obtaining reimbursement based on individual claims, including pursuing appeals or reconsiderations of claims denials, require a substantial amount of time and
effort, and bills may not be paid for many months, if at all. Furthermore, if a third-party payor denies coverage after final appeal, payment may not be received. We implemented a revenue cycle
management system and have expanded our billing and collections department to address these issues. We have also executed managed care contracts to become "in-network" with certain third-party payors.
However, we cannot predict whether, or under what circumstances, payors will reimburse our microarray tests. Payment amounts can also vary across individual policies. Denial of coverage by payors, or
reimbursement at inadequate levels, will have a material adverse impact on market acceptance of our tests.
Governmental Regulation
Our business is subject to extensive laws and regulations as described below. It is impossible to predict what future changes will be
made to federal, state and local laws and regulations and the impact that such changes may have on us.
Comprehensive health care reform legislation passed in 2010 and titled The Patient Protection and Affordable Care Act ("ACA")
instituted permanent cuts to the CLFS, which are in addition to the automatic sequestration reductions mandated by the Budget Control Act of 2011. Most of the regulations implementing the ACA will not
be finalized until the end of 2014 and beyond, making it impossible to predict with certainty the ultimate effects that the ACA will have on us. Generally, the ACA and private payers continue to
experiment with various payment mechanisms designed to contain costs, for example, accountable care and managed care organizations. These reforms present challenges and unpredictability to
laboratories like ours.
As a clinical reference laboratory, we are required to hold certain federal, state and local licenses as well as certain certifications
and permits to conduct our business. Under CLIA, we are required to hold a certificate applicable to the type of work we perform and to comply with standards covering personnel, facilities
administration, quality systems and proficiency testing. We
have a certificate of accreditation under CLIA to perform testing and are accredited by the College of American Pathologists ("CAP"). To renew our CLIA certificate, we are subject to periodic
inspection standards applicable to the testing we perform. Should regulatory compliance requirements become substantially more complex, operational costs at our lab might increase in the future. If
our laboratory is out of compliance with CLIA requirements, we may be subject to certain sanctions including suspension or revocation of our CLIA
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certificate
and various civil and/or criminal penalties. We must maintain CLIA compliance and certification to be eligible to bill for services provided to Medicare beneficiaries. If we were to be
found out of compliance with CLIA program requirements and subjected to sanction, our business could be harmed. We are not able to guarantee that we will pass all future license and/or certification
inspections.
Regulations by the U.S. FDA regarding genetic testing are in a state of flux and changes to these regulations could dramatically affect
the molecular diagnostics industry in the near future. While the FDA has the authority to regulate laboratory developed tests ("LDTs"), it has generally exercised enforcement discretion in the area of
LDTs performed by CLIA-certified laboratories. However, with the advent of Direct-to-Consumer DNA testing (i.e., testing that is marketed directly to the public, does not require a physician's
order, and provides risk factor information rather than diagnostic or prognostic information), genomic testing using microarray technology (particularly single nucleotide polymorphism arrays) has come
under scrutiny. In July 2010, the FDA held a two-day public meeting to obtain input from key stakeholders, including physicians, laboratory directors, regulatory and accrediting body members and the
general public, regarding the structuring of a regulatory framework for LDTs. During this meeting, we believe that it became clear that the FDA's primary concern had less to do with CLIA-certified
laboratories (such as ours) performing
clinical
microarray testing (i.e., testing ordered by a physician for medically necessary reasons,
including disease diagnosis, monitoring and treatment decisions) and more to do with Direct-to-Consumer laboratories performing
non-clinical
testing
that relies on what the FDA has referred to as "black box" proprietary algorithms to interpret their microarray data. This meeting came on the heels of a U.S. Government Accountability Office report
entitled "Direct-to-Consumer Genetic Tests: Misleading Test Results are Further Complicated By Deceptive Marketing and Other Questionable Practices." While no specific guidelines or timelines were
stated, industry participants generally believe that changes to how the FDA regulates LDTs will be forthcoming. There can be no assurance, however, that such changes will not negatively impact our
business. Generally speaking, the FDA and the legislative branch frequently entertain proposals that would increase FDA oversight of laboratories like ours and the testing that we conduct. The outcome
and impact of such proposals on our business is impossible to predict. The FDA may impose a range of penalties for non-compliance
with any of its rules, including recalls, injunctions and sanctions, any of which would negatively impact our business.
Under the federal Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), the U.S. Department of Health and Human
Services issued regulations to protect the privacy of individuals' personal medical and health information through the implementation of security measures that govern how such data is stored and
maintained, and to limit the disclosure of this "protected health information" to only those who receive specific authorization from the individual. The federal Health Information Technology for
Economic and Clinical Health ("HITECH") Act, enacted in February, 2009 expanded the HIPAA rules significantly, in particular HIPAA enforcement. For example, HITECH authorizes state attorneys general
to bring civil actions on behalf of state residents and it requires HHS to conduct extensive auditing. Perhaps most importantly, HITECH renders HIPAA directly applicable to the "business associates"
of covered entities, which in some cases may mean us. The omnibus regulation implementing most of the HITECH provisions was published in January, 2013. In February, 2014, CMS issued final rules
amending HIPAA to provide individuals or their personal representatives with the right to receive copies of their test reports from laboratories covered by HIPAA and/or to request that such test
reports be transmitted to certain third parties. This rule preempts many state laws that prohibit laboratories like ours from directly providing individuals with their test reports. Violations of
HIPAA regulations include civil and criminal penalties, including up to ten years imprisonment. Consequently, our policies and procedures are designed to comply with such regulations. The requirements
under these regulations may change periodically and we will continue to monitor such changes.
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There
are also a number of state laws governing confidentiality of health information that are applicable to our operations, and new laws governing privacy may be adopted in the future.
Violation of such laws could affect our applicable state licensure and could also result in criminal and/or civil penalties.
In
addition, HIPAA and many state laws would require that we provide a written notification to affected individuals, certain federal and state agencies, and possibly the media if we
suffered a breach of personal medical or health information. While we believe that we comply with regulations currently, we can provide no assurance that we are or will remain in compliance with
diverse privacy requirements as they develop.
We
believe that we are in compliance with the current Transactions and Code Sets Rule. The ICD-10-CM compliance date is October 1, 2014. Failure to comply could adversely impact
our reimbursement and the ongoing efforts of other providers and payers to comply could have a negative effect on our receipts and net revenue. We also believe that we are in compliance with the
Operating Rules for electronic funds transfers and remittance advice transactions. We will continue to assess our computer systems to ensure compliance with such requirements.
Federal and State Insurance Regulations, Self-referral Prohibitions and Anti-kickback Laws
We are subject to federal and state laws, such as the Federal False Claims Act, state false claims acts, the illegal remuneration
provisions of the Social Security Act, the federal anti-kickback laws, state anti-kickback laws, and the federal "Stark" laws, that govern financial and other arrangements among healthcare providers,
their owners, vendors and referral sources, and that are intended to prevent healthcare fraud and abuse. Among other things, these laws prohibit kickbacks, bribes and rebates, as well as other direct
and indirect payments or fee splitting arrangements that are designed to induce the referral of patients to a particular provider for medical products or services payable by any federal healthcare
program, and prohibit presenting a false or misleading claim for payment under a federal or state program. They also prohibit some physician self-referrals. These laws are liberally interpreted and
aggressively enforced by multiple state and federal agencies and law enforcement (including individual "qui tam" plaintiffs) and such enforcement is increasing. For example, the ACA increased funding
for federal enforcement actions and many states have established their own Medicare/Medicaid Fraud Units and require providers to conspicuously post the applicable Unit's hotline number. Possible
sanctions for violation of any of these restrictions or prohibitions include loss of eligibility to participate in federal and state reimbursement programs and civil and criminal penalties. Changes in
these laws at all levels of government are frequent and could increase our cost of doing business. If we fail to comply, even inadvertently, with any of these requirements, we could be required to
alter our operations, refund payments to the government, lose our licensure or accreditation, enter into corporate integrity, deferred prosecution or similar agreements with state or federal
government agencies, and become subject to significant civil and criminal penalties.
In addition to federal certification requirements of laboratories under CLIA, licensure is required and maintained for our clinical
reference laboratory under California law. We currently maintain a license in good standing with the California Department of Health Services ("DHS"), but if our clinical reference laboratory is found
to be out of compliance with California standards, our license may be suspended or revoked by the California DHS, and we may be subject to fines and penalties.
We
must also satisfy various application and provisional requirements for other states in which we desire to conduct business, and we have obtained licenses for Florida, Maryland,
Pennsylvania and Rhode Island. We are also licensed by the New York State Department of Health specifically for cytogenetics and genomic microarrays relating to pediatric specimens and to products of
conception samples for miscarriage analysis. We may become aware from time to time of additional states that require out-of-state laboratories
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to
obtain licensure in order to accept patient specimens from those states, and it is possible that other states do have such requirements or will have such requirements in the future. If we identify
any other state with such requirements or if we are contacted by any other states advising us of such requirements, we intend to strictly adhere to the instructions and guidelines from the state
regulators as to how we should comply with such requirements. There can be no assurance, however, that our efforts to comply will be successful.
Commercial Operations
All services offered by us are performed in our CLIA certified, CAP accredited clinical laboratory in Irvine, California. Our
commercial operations infrastructure includes sales, marketing, clinical support services and billing/reimbursement. We continue to build a nationally focused commercialization strategy by interacting
directly with pathologists, medical geneticists, maternal fetal medicine specialists, reproductive endocrinologists, obstetrician/gynecologists, pediatric neurologists and genetic counselors. The
market-specific experience of our direct sales force, coupled with regional and local territory experience, is expected to increase physician awareness and demand for our services. Our marketing and
clinical support services teams work in tandem to increase awareness and appropriate utilization of our services by both physicians and patients. Our marketing initiatives include traditional
marketing tactics such as physician education, professional medical society and advocacy tradeshows as well as web based initiatives. Our billing and reimbursement team works to facilitate access to
our services by assisting ordering physicians and their patients with healthcare insurance billing, appeal processes, patient payment options, and securing managed care contracts with willing payers.
In addition to our direct sales approach, we actively market our services to other laboratories through pathology partnerships and through strategic alliances with complementary industry partners.
Seasonality
Our business is subject to the impact of seasonality, particularly during the mid-summer months when patients tend to be less likely to
visit their healthcare providers and pursue diagnostic testing and physicians are on vacation. In addition, during the winter months, disruptions in transportation due to inclement weather may affect
not only patients' ability to visit their healthcare providers, but it may also prompt provider concerns about potential disruption or delay in sample processing, both of which negatively impact our
business. Consequently, the demand for our services, in general, could be subject to declines in the summer and during periods of severe weather.
Patents, Trademarks and Licenses
As a part of our corporate restructuring that occurred in 2010, many of the patents listed below were licensed to a private company,
CustomArray, Inc., for which we receive minimum royalties of $100,000 per year. The intellectual property rights listed below are not currently used in our molecular diagnostics services
business.
In
the United States, we have been issued ten United States patents related to our former CustomArray tool business. Three of these patents (U.S. Patent Nos. 6,093,302 and
6,280,595, which expire on January 5, 2018 and 6,444,111, which expires October 13, 2019) are first generation technology relating to methods for electrochemical synthesis of arrays of
DNA and other biological materials as well as non-biological materials. The fourth United States Patent (U.S. Patent No. 6,456,942 which expires January 25, 2020) describes and claims a
network infrastructure for array synthesis and analysis.
The
fifth United States Patent (U.S. Patent No. 7,075,187 which expires November 9, 2021) describes and claims a porous coating material that covers electrodes and is used as a
three-dimensional support material for electrochemical synthesis on the individual electrodes of an array of electrodes. The sixth (U.S. Patent No. 7,323,320 which expires September 12,
2022) and seventh (U.S. Patent No. 7,563,600 which expires September 12, 2022) United States Patents have been assigned to another company. The eighth United
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States
Patent (U.S. Patent No. 7,507,837 which expires December 22, 2025) describes and claims a process for performing an isolated palladium (II)-mediated oxidation reaction on our
electrode for building libraries of organic compounds electrochemically and in parallel. The ninth United States Patent (U.S. Patent No. 7,541,314 which expires February 24, 2026)
describes and claims a microarray with a linker that is cleaved by a base for use in selective removal of oligonucleotides from the microarray. A tenth United States Patent (U.S. Patent
No. 7,718,579 which expires September 13, 2024) describes and claims method for electrochemical removal of acid-labile protecting groups on an electrode microarray using an organic
solution. Corresponding patents describing and claiming methods for electrochemical synthesis of arrays have been issued to us in the European Union, Australia, and Taiwan and are pending in the
remaining major industrialized markets. We have filed patent applications relating to new methods of, and materials for, electrochemical synthesis and for electrochemical detection, which eliminates
the need for optical readers.
We
seek to protect our corporate identity and services with trademarks and service marks. In addition, our trademark strategy includes protecting the identity and goodwill associated
with our technologies and services. Currently, our registered trademarks include COMBIMATRIX®.
We
attempt to obtain licenses to the patent rights of others when required to meet our business objectives. For example, we purchase chemical reagents from suppliers who are licensed
under appropriate patent rights. Further, our policy is to obtain licenses from patent holders for our services whenever such licenses are required. We evaluate if and when a license is needed or
required depending upon the individual circumstance.
Competition
We believe that competition within our market is increasing. Our business competitors in the United States include regional DNA
microarray clinical laboratories, both commercial and academic, as well as large national companies such as LabCorp (through its acquisition of Genzyme), Perkin-Elmer (through its acquisition of
Signature Genomics), and approximately ten others. Some of these competitors may possess greater financial, technical, human and other resources than we do. In addition, technological advances or
entirely different approaches developed by one or more of our competitors could render our services obsolete or uneconomical. The existing approaches of competitors or new approaches or technology
developed by competitors may be more effective than those developed by or currently utilized by us.
Our
market is rapidly changing, and we expect to face additional competition from new market entrants, new product and service developments and consolidation of our existing competitors.
As new
competitors emerge, the intensity of competition may increase in the future. An example of this is the emergence of NIPT companies in the past several years. These companies offer a screening test
that is complementary to diagnostic microarray testing, as clinical guidelines recommend that all positive NIPT results be confirmed with diagnostic testing performed using an invasive technique, such
as chorionic villus sampling or amniocentesis. We believe that by including NIPT as part of our testing repertoire, we have a more complete offering that helps mitigate competitive risk and optimizes
patient care.
Research and Development
Our research and development activities primarily relate to the development and validation of diagnostic tests in connection with our
specialized developmental disorder and oncology array-based diagnostic services.
Employees
As of December 31, 2013, we had 43 full-time-equivalent employees, one of whom is an M.D. and another who is a Ph.D. We believe
that we maintain good relationships with our employees and are not subject to collective bargaining arrangements.
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Environmental Matters
Our operations involve the use, transportation, storage and disposal of hazardous substances. As a result, we are subject to
environmental and health and safety laws and regulations. The cost of complying with these and any future environmental regulations could be substantial, though historically such costs have not been
significant. In addition, if we fail to comply with environmental laws and regulations, or release any hazardous substances into the environment, we could be exposed to substantial liability in the
form of fines, penalties, remediation costs and other damages and could even suffer a curtailment or shut down of our operations.
Available Information
We are subject to the informational requirements of the Securities Exchange Act of 1934. Therefore, we file periodic reports, proxy
statements and other information with the SEC. Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street N.E.,
Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other
information regarding issuers that file electronically.
Additional
financial and company-related information can be found in the Investor Relations section of our website at www.combimatrix.com. Our Annual Reports on Form 10-K, our
Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended, are made available free of charge on our website as soon as reasonably practicable after we electronically file them with or furnish them to the SEC. Information contained on
our web site is not part of this Annual Report on Form 10-K or our other filings with the SEC.
The
charters of our Audit Committee, our Compensation Committee and our Nominating and Governance Committee are available on the Investor Relations section of our website under
"Corporate Governance." Also available on that section of our website is our Code of Business Conduct and Ethics, which we expect every employee, officer and director to read, understand and abide by.
This information is also available by writing to us at the address on the cover of this report.
Item 1A. RISK FACTORS
An investment in our securities involves a high degree of risk. Before making a decision to purchase our securities, you should carefully consider all of the
risks described in this annual report. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem
immaterial may also affect our business and results of operations. If any of these risks actually occur, our business, financial condition or results of operations could be seriously harmed. In that
event, the market price for our common stock could decline and you may lose part or all of your investment.
Risks Related To Our Business
We have a history of losses and expect to incur additional losses in the future.
We have sustained substantial losses since our inception. We may never become profitable, or if we do, we may not be able to sustain
profitability. We expect to incur significant research and development, marketing, general and administrative expenses. As a result, we expect to incur losses for the foreseeable future.
To
date, we have relied primarily upon selling equity and convertible debt and equity securities, as well as payments from strategic partners, to generate the funds needed to finance the
implementation of our
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business
strategies. We cannot assure you that we will not encounter unforeseen difficulties, including the outside influences identified below that may deplete our capital resources more rapidly than
anticipated. Our subsidiary companies also may be required to obtain additional financing through bank borrowings, debt or equity financings or otherwise, which would require us to make additional
investments or face a dilution of our equity interests. We cannot be sure that additional funding will be available on favorable terms, if at all. If we fail to obtain additional funding when needed
for our subsidiary companies and ourselves, we may not be able to execute our business plans or continue operations, and our business may be materially adversely affected.
We
began commercialization of our molecular diagnostics services in 2006. Accordingly, we have a limited operating history of generating revenues from services. In addition, we are still
developing our technologies and service offerings and are subject to the risks, expenses and difficulties frequently encountered by companies with such limited operating histories. Since we have a
limited operating history, we cannot assure you that our operations will become profitable or that we will generate sufficient revenues to meet our expenditures and support our activities.
Because our business operations are subject to many uncontrollable outside influences, we may not succeed.
Our business operations are subject to numerous risks from outside influences, including the
following:
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•
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Technological advances may make our array-based technology obsolete or less competitive, and as a
result, our revenue and the value of our assets could materially decrease.
Our
services are dependent upon oligonucleotide and SNP array-based technologies. These technologies compete with conventional diagnostic technologies such as karyotyping, FISH and
polymerase chain reaction, or PCR-based tests. Our services are substantially dependent upon our ability to offer the latest in microarray technology in the chromosomal microarray analysis and
proteomic markets. We expect to face additional competition from new market entrants and consolidation of our existing competitors. Many of our competitors have existing strategic relationships with
major pharmaceutical and biotechnology companies, greater commercial experience and substantially greater financial and personnel resources than we do. We expect new competitors to emerge and the
intensity of competition to increase in the future. If these companies are able to offer technological advances, our services may become less valuable or even obsolete. We cannot provide any assurance
that existing or new competitors will not enter the market with the same or similar technological advances before we are able to do so.
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•
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New environmental regulation may materially increase the net losses of our
business.
Our
operations involve the use, transportation, storage and disposal of hazardous substances, and as a result, we are subject to environmental and health and safety laws and regulations.
If we were to be found in violation of these laws and regulations, we may face fines or other penalties. Also, any changes in these laws and regulations could increase our compliance costs, and as a
result, could materially increase our net losses.
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•
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Our technologies face uncertain market value.
Our
business includes many services, some of which were more recently introduced into the market. We cannot provide any assurance that the increase, if any, in market acceptance of these
technologies and services will meet or exceed our expectations.
Further,
we are developing services, some of which have not yet been introduced into the market. A lack of or limited market acceptance of these technologies and services will have a
material adverse effect upon our results of operations.
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•
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We obtain components and raw materials from a limited number of sources, and, in some cases, a
single source, and the loss or interruption of our supply sources may materially adversely impact our ability to provide testing services to meet our existing or future sales
targets.
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. Any supply interruption in a sole sourced component or raw material might result in up to a several month delay and materially harm our ability to
provide testing services until a new source of supply, if any, could be located and qualified. In addition, an uncorrected impurity or supplier's variation in a raw material, either unknown to us or
incompatible with our process, could have a material adverse effect on our ability to provide testing services. We may be unable to find a sufficient alternative supply channel in a reasonable time
period, or on commercially reasonable terms, if at all.
Any
one of the foregoing outside influences may require us to seek additional financing to meet the challenges presented or to mitigate a loss in revenue, and we may not be able to
obtain the needed financing in a timely manner on commercially reasonable terms or at all. Further, any one of the foregoing outside influences affecting our business could make it less likely that we
will be able to gain acceptance of our array technology by researchers in the pharmaceutical, biotechnology and academic communities.
Our revenues will be unpredictable, and this may materially adversely affect our financial condition.
The amount and timing of revenues that we may realize from our business will be unpredictable because whether our services are
commercialized and generate revenues depends, in part, on the efforts and timing of our potential customers. Also, our sales cycles may be lengthy. As a result, our revenues may vary significantly
from quarter to quarter, which could make our business difficult to manage and cause our quarterly results to be below market expectations. If this happens, the price of our common stock may decline
significantly.
The genetic diagnostic laboratory market is characterized by rapid technological change, frequent new product and services introductions, and evolving industry standards,
and we may encounter difficulties keeping pace with changes in this market.
The introduction of diagnostic tests embodying new technologies and the emergence of new industry standards can render existing tests
obsolete and unmarketable in short periods of time. We expect our competitors to introduce new products and services and enhancements to their existing products and services. We may not be able to
enhance our current tests, or to develop new tests, in a manner that keeps pace with emerging industry standards and achieves market acceptance. Our inability to accomplish any of these endeavors will
likely have a material adverse effect on our business, operating results, cash flows, and financial condition.
If we do not enter into successful partnerships and collaborations with other companies, we may not be able to fully develop our technologies or services, and our business
could be materially adversely affected.
Since we do not possess all of the resources necessary to develop and commercialize services that may result from our technologies on a
mass scale, we will need either to grow our sales, marketing and support group or make appropriate arrangements with strategic partners to market, sell and support our services. We believe that we
will have to enter into additional strategic partnerships to develop and commercialize future services. If we cannot identify adequate partners, if we do not enter into adequate agreements, or if our
existing arrangements or future agreements are not successful, our ability to develop and commercialize services will be impacted negatively, and our revenues will be materially adversely affected.
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We have limited commercial experience in marketing or selling any of our potential services, and unless we develop these capabilities, we may not be successful.
Even if we are able to develop our services for commercial release on a large scale, we have limited experience in performing our tests
in the volumes that will be necessary for us to achieve commercial sales and in marketing or selling our services to potential customers. We cannot assure you that we will be able to commercially
perform our tests on a timely basis, in sufficient quantities, or on commercially reasonable terms.
We face intense competition, and we cannot assure you that we will be successful competing in the market.
The diagnostics market is characterized by rapidly changing technology, evolving industry standards, changes in customer needs,
emerging competition and new product and services introductions. One or more of our competitors may offer technology superior to ours and render our technology obsolete or uneconomical. Many of our
competitors have greater financial and personnel resources and more experience in marketing, sales and research and development than we have. If we were not able to compete successfully, our business
and financial condition would be materially harmed.
If our technology is not widely adopted by physicians and laboratories in the diagnostics market, our business will be materially adversely affected.
In order to be successful, our test offerings must meet the commercial requirements of hospitals and physicians and be considered the
standard of care in order to be widely adopted. Market acceptance will depend on many factors, including:
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the benefits and cost-effectiveness of our services relative to others available in the market;
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•
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our ability to provide testing services in sufficient quantities with acceptable quality and reliability and at an
acceptable cost;
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our ability to develop and market additional tests and enhance existing tests that are responsive to the changing needs of
our customers; and
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the willingness and ability of customers to adopt new technologies or the reluctance of customers to change technologies
upon which they have previously relied.
The FDA may decide to regulate LDTs, which could prevent us from offering existing tests and/or delay the introduction of new testing services.
During 2010, the FDA publicly announced that it has decided to exercise regulatory authority over LDTs and that it plans to issue
guidance to the industry regarding its regulatory approach. The FDA has indicated that it will use a risk-based approach to regulation and will direct more resources to tests with wider distribution
and with the highest risk of injury, but that it will be sensitive to the need to not adversely impact patient care or innovation. The FDA has not announced a framework or timetable for implementing
its new regulatory approach. The regulatory approach adopted by the FDA may lead to an increased regulatory burden, including additional costs and delays in introducing new tests. While the ultimate
impact of the FDA's approach is unknown, it may be extensive and may result in significant change. Our failure to adapt to these changes could have a material adverse effect on our business.
U.S. healthcare reform legislation may result in significant changes and our business could be adversely impacted if we fail to adapt.
Government oversight of and attention to the healthcare industry in the United States is significant and increasing. In March 2010,
U.S. federal legislation was enacted to reform healthcare. The legislation provides for reductions in the Medicare clinical laboratory fee schedule beginning in 2011 and also
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includes
a productivity adjustment that reduces the CPI market basket update beginning in 2011. The legislation imposes an excise tax on the seller for the sale of certain medical devices in the
United States, including those purchased and used by laboratories, beginning in 2013. The legislation establishes the Independent Payment Advisory Board, which will be responsible, beginning in 2014,
annually to submit proposals aimed at reducing Medicare cost growth while preserving quality. These proposals automatically will be implemented unless Congress enacts alternative proposals that
achieve the same savings targets. Further, the legislation calls for the Center for Medicare and Medicaid Innovation to examine alternative payment methodologies and conduct demonstration programs.
The legislation provides for extensive health insurance reforms, including the elimination of pre-existing condition exclusions and other limitations on coverage, fixed percentages on medical loss
ratios, expansion in Medicaid and other programs, employer mandates, individual mandates, creation of state and regional health insurance exchanges, and tax subsidies for individuals to help cover the
cost of individual insurance coverage. The legislation also permits the establishment of accountable care organizations, a new healthcare delivery model. Additionally, in November, 2013, CMS finalized
a proposal to annually evaluate reimbursement rates for Clinical Laboratory Fee Schedule codes based
on technological changes, volume, growth, and so on. Payment adjustments are scheduled to begin on January 1, 2015 and CMS plans to have evaluated all 1,250 CLFS codes by December 31,
2019. The cuts described in this section are in addition to various automatic sequestration cuts mandated by the Budget Control Act of 2011 and the possibility that Congress will at some future date
fail to prevent reductions to the Physician Fee Schedule under the Sustainable Growth Rate formula. While the ultimate impact of the health reform and related legislation on the healthcare industry is
unknown, it is likely to be extensive and may result in significant change. Our failure to adapt to these changes could have a material adverse effect on our business.
A significant component of our revenue is dependent upon successful insurance claims. Our revenue will be diminished if payors do not adequately cover or reimburse us for
our services.
Physicians and patients may decide not to order our high-complexity genomic microarray tests unless third-party payors, such as managed
care organizations as well as government payors such as Medicare and Medicaid, pay a substantial portion of the test price. Reimbursement by a third-party payor may depend on a number of factors,
including a payors' determination that tests using our technologies are:
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not experimental or investigational;
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medically necessary;
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appropriate for the specific patient;
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cost-effective;
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supported by peer-reviewed publications; and
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included in clinical practice guidelines.
A
substantial portion of the testing for which we bill our hospital and laboratory clients is ultimately paid by third-party payors. However, there is uncertainty concerning third-party
payor reimbursement of any test, including our high-complexity genomic microarray tests. Several entities conduct technology assessments of medical tests and devices and provide the results of their
assessments for informational purposes to other parties. These assessments may be used by third-party payors and health care providers as grounds to deny coverage for a test or procedure. It is
possible that federal, state and third-party insurers may limit their coverage of our tests in the future.
Increasing
emphasis on managed care in the United States is likely to put pressure on the pricing of healthcare services. Uncertainty exists as to the coverage and reimbursement status
of new applications or services. Governmental payors and private payors are scrutinizing new medical products and services. Such third-parties may not cover, or may limit coverage and resulting
reimbursement for our services.
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Additionally,
third-party insurance coverage may not be available to patients for any of our existing tests or tests we may add in the future. Any pricing pressure exerted by these third-party payors
on our customers may, in turn, be exerted by our customers on us. If governmental payors, including their contracted administrators, and other third-party payors do not provide adequate coverage
and/or timely reimbursement for our services, our operating results, cash flows, or financial condition may materially decline.
Our business could be adversely impacted by the adoption of new coding for molecular genetic tests.
Certain CPT codes that we use to bill for our microarray tests were omitted by CMS from the Clinical Laboratory Fee Schedule in 2013.
The pricing omission will force state Medicaid plans and third party payors to determine their own price independent of CMS's recommendations (or lack thereof). There can be no guarantees that
Medicaid and other payors will establish favorable reimbursement rates or adequate coverage policies. If payors do not recognize the value of the molecular genetic tests we offer or do not provide
coverage for molecular tests such as ours, our revenues, earnings and cash flows could be adversely impacted.
Our cash flows and financial condition may materially decline if payors do not reimburse us for our services in a timely manner.
We depend on our payors to reimburse us for our services in timely manner. If our payors do not reimburse us in a timely manner, our
cash flows and financial condition may materially decline.
Third-party billing is extremely complicated and could result in us incurring significant additional costs.
Billing for molecular laboratory services is extremely complicated. The client is the party that orders the tests and the payor is the
party that pays for the tests, and the two are not typically the same. Depending on the billing arrangement and/or applicable law, we need to bill various payors, such as patients, health insurance
companies, Medicare, Medicaid, doctors and employer groups, all of which have different billing requirements. Health insurance companies and governmental payors also generally require complete and
correct billing information within certain filing deadlines. Additionally, our billing relationships require us to undertake internal audits to evaluate compliance with applicable laws and regulations
as well as internal compliance policies and procedures. Health insurance companies also impose routine external audits to evaluate payments made. Additional factors complicating billing
include:
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•
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pricing differences between our fee schedules and the reimbursement rates of the payors;
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disputes with payors as to which party is responsible for payment; and
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disparity in coverage and information requirements among various carriers.
We
incur significant additional costs as a result of our participation in the Medicare and Medicaid programs, as billing and reimbursement for laboratory testing are subject to
considerable and complex federal and state regulations. The additional costs we expect to incur as a result of our participation in the Medicare and Medicaid programs include costs related to, among
other factors: (1) complexity added to our billing processes; (2) training and education of our employees and customers; (3) implementing compliance procedures and oversight;
(4) collections and legal costs; (5) challenging coverage and payment denials; and (6) providing patients with information regarding claims processing and services, such as
advanced beneficiary notices. If these costs increase, our results of operations will be materially adversely affected.
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Loss of or adverse changes to our accreditations or licenses could materially and adversely affect our business, prospects and results of operations.
The clinical laboratory testing industry is highly regulated. We are subject to CLIA, a federal law that regulates clinical
laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. CLIA is intended to ensure the
quality and reliability of clinical laboratories in the United States by mandating specific standards in the areas of personnel qualifications, administration, and participation in proficiency
testing, patient test management, quality control, quality assurance and inspections. We have a current certificate of accreditation under CLIA to perform testing. To renew this certificate, we are
subject to survey and inspection every two years. Moreover, CLIA inspectors may make random inspections of our clinical reference laboratory. A failure to pass such inspections would result in
suspension of our certificate of accreditation, which would have a material adverse effect on our business and results of operations.
We
are also required to maintain a laboratory license to conduct testing in California. California laws establish standards for day-to-day operation of our clinical reference laboratory,
including the training and skills required of personnel and quality control. Moreover, several states require that we hold licenses to test specimens from patients in those states. Other states may
have similar requirements or may adopt similar requirements in the future. A failure to obtain and maintain these licenses would have a material adverse effect on our business and results of
operations.
Complying with numerous regulations pertaining to our business is an expensive and time-consuming process, and failure to comply could result in significant penalties and
suspension of one or more of our licenses.
Areas of the regulatory environment that may affect our ability to conduct business include, without
limitation:
-
•
-
Federal and state laws applicable to billing and claims payment and/or regulatory agencies enforcing those laws and
regulations;
-
•
-
Federal and state laboratory anti-mark-up laws;
-
•
-
Federal and state anti-kickback laws;
-
•
-
Federal and state false claims laws;
-
•
-
Federal and state self-referral and financial inducement laws, including the federal physician anti-self-referral law, or
the Stark Law;
-
•
-
Coverage and reimbursement levels by Medicare, Medicaid, other governmental payors and private insurers;
-
•
-
Restrictions on reimbursements for our services;
-
•
-
Federal and state laws governing laboratory testing, including CLIA;
-
•
-
Federal and state laws governing the development, use and distribution of diagnostic medical tests known as "home brews";
-
•
-
Health Insurance Portability and Accountability Act of 1996 ("HIPAA");
-
•
-
Federal and state regulation of privacy, security and electronic transactions;
-
•
-
State laws regarding prohibitions on the corporate practice of medicine;
-
•
-
State laws regarding prohibitions on fee-splitting;
22
Table of Contents
-
•
-
Federal, state and local laws governing the handling and disposal of medical and hazardous waste; and
-
•
-
Occupational Safety and Health Administration ("OSHA") rules and regulations.
The
above-noted laws and regulations are extremely complex and, in many instances, there are no significant regulatory or judicial interpretations of such laws and regulations. We also
may be subject to regulation in foreign jurisdictions as we seek to expand international distribution of our tests. Any determination that we have violated these laws, or the public announcement that
we are being investigated for possible violations of these laws, would materially adversely affect our business, prospects, results of operations and financial condition. Violations could also result
in extensive civil and/or criminal penalties, loss of licensure or accreditation (which could in turn affect our ability to operate or collect reimbursement), exclusion from government healthcare
programs or private payer networks, and other materially adverse effects. In addition, a significant change in any of these laws may require us to change our business model in order to maintain
compliance with these laws, which could reduce our revenue or increase our costs and materially adversely affect our business, prospects, results of operations, and financial condition.
We are subject to significant environmental, health and safety regulation.
We are subject to licensing and regulation under federal, state and local laws and regulations relating to the protection of the
environment and human health and safety, including laws and regulations relating to the handling, transportation and disposal of medical specimens, infectious and hazardous waste and radioactive
materials, as well as to the safety and health of laboratory employees. In addition, OSHA has established extensive requirements relating to workplace safety for health care employers, including
clinical laboratories, whose workers may be exposed to blood-borne pathogens such as HIV and the hepatitis B virus. These regulations, among other things, require work practice controls, protective
clothing and equipment, training, medical follow-up, vaccinations, and other measures designed to minimize exposure to, and transmission of, blood-borne pathogens. In addition, the federally enacted
Needlestick Safety and Prevention Act requires, among other things, that we include in our safety programs the evaluation and use of engineering controls such as safety needles if found to be
effective at reducing the risk of needlestick injuries in the workplace. If we are found in violation of any of these regulations, we could be subject to substantial penalties or discipline and our
business, prospects and results of operations could be materially and adversely affected.
We are subject to federal and state laws governing the financial relationship among healthcare providers, including Medicare and Medicaid laws, and our failure to comply
with these laws could result in significant penalties and other material adverse consequences.
We anticipate that a component of our future revenue will be dependent on reimbursement from Medicare and state Medicaid programs. The
Medicare program is administered by CMS which, like the states that administer their respective state Medicaid programs, imposes extensive and detailed requirements on diagnostic services providers,
including, but not limited to, rules that govern how we structure our relationships with physicians, how and when we submit reimbursement claims and how we provide our specialized diagnostic services.
Our failure to comply with applicable Medicare, Medicaid and other governmental payor rules could result in our inability to participate in a governmental payor program, our returning of funds already
paid to us, civil monetary penalties, criminal penalties and/or limitations on the operational function of our laboratory. Any of these outcomes would have a material adverse effect on our business
and results of operations.
23
Table of Contents
Our business is subject to stringent laws and regulations governing the privacy, security and transmission of medical information, and our failure to comply could subject us
to criminal penalties and civil sanctions.
Governmental laws and regulations protect the privacy, security and transmission of medical information. Such laws and regulations
restrict our ability to use or disclose patient identifiable laboratory data, without patient authorization, for purposes other than payment, treatment or healthcare operations (as defined by HIPAA),
except for disclosures for various public policy purposes and other permitted purposes outlined in the privacy regulations. The privacy and security regulations provide for significant fines and other
penalties for wrongful use or disclosure of PHI, including potential civil and criminal fines and penalties. Such regulations were expanded under the HITECH Act, including rules impacting the release
of protected health information, patients' right to access such information, the content and manner of providing notice of a breach, and information system security requirements. We also could incur
damages under state laws to private parties for the wrongful use or disclosure of confidential health information or other private personal information. In addition, the Secretary of the Department of
Health and Human Services has published HIPAA regulations to protect the privacy of health information when it is exchanged electronically during certain financial and administrative transactions.
These HIPAA transaction standards are complex and different payers interpret them differently. Complying with applicable transmission standards is costly and failure to do so could disrupt our
receipts or subject us to penalties. Generally, any security breach of our information systems, including the theft of our patients' financial information due to our failure to comply with applicable
security standards, would adversely impact our business and our reputation.
Failure to comply with the ICD-10-CM Code Set could adversely impact reimbursement.
We believe that we are in compliance with the current Transactions and Code Sets Rule. The ICD-10-CM compliance date is
October 1, 2014. Failure to comply could adversely impact our reimbursement and the ongoing efforts of other providers and payers to comply could have a negative effect on our receipts and net
revenue. We also believe that we are in compliance with the Operating Rules for electronic funds transfers and remittance advice transactions. We will continue to assess our computer systems to ensure
compliance with such requirements.
Our services development efforts may be hindered if we are unable to gain access to patients' tissue and blood samples.
The development of our diagnostic services requires access to tissue and blood samples from patients who have the diseases we are
addressing. Our clinical development relies on our ability to secure access to these samples, as well as information pertaining to their associated clinical outcomes. Access to samples can be
difficult since it may involve multiple levels of approval, complex usage rights and privacy rights, among other issues. Lack of or limited access to samples would harm our future services development
efforts, which would have a material adverse effect on our business and results of operations.
If our current laboratory facility becomes inoperable or loses certification, we will be unable to perform our tests and our business will be materially adversely affected.
Our diagnostic tests are operated out of our CLIA-certified laboratory in Irvine, California. Currently, we do not have a second
certified laboratory. Should our only CLIA-certified laboratory be unable to perform tests, for any reason, we may be unable to perform needed diagnostic tests in connection with our development of
technologies services and our business will be materially adversely affected.
24
Table of Contents
Our future success depends on the continued service from our scientific, technical and key management personnel and our ability to identify, hire and retain additional
scientific, technical and key management personnel in the future.
There is intense competition for qualified personnel in our industry, particularly for laboratory technicians, scientific and medical
experts and senior level management. Loss of the services of, or failure to recruit, these key personnel could be significantly detrimental to us and could materially adversely affect our business and
operating results. We may not be able to continue to attract and retain scientific and medical experts or other qualified personnel necessary for the development of our business or to replace key
personnel who may leave us in the future. If our business grows, it will place increased demands on our resources and likely will require the addition of new management personnel. An inability to
recruit and retain qualified management and employees on commercially reasonable terms would adversely and materially affect our business.
As our operations expand, our costs to comply with environmental laws and regulations will increase, and failure to comply with these laws and regulations could materially
harm our financial results.
Our operations involve the use, transportation, storage and disposal of hazardous substances and, as a result, we are subject to
environmental and health and safety laws and regulations. As we expand our operations, our use of hazardous substances will increase and lead to additional and more stringent requirements. The cost to
comply with these and any future environmental and health and safety regulations could be substantial. In addition, our failure to comply with laws and regulations, and any releases of hazardous
substances into the environment or at our disposal sites, could expose us to substantial liability in the form of fines, penalties, remediation costs and other damages, or could lead to a curtailment
or shut down of our operations. These types of events, if they occur, would materially adversely affect our financial results.
Any litigation to protect our intellectual property, or any third-party claims of infringement, could divert substantial time and money from our business and could shut down
some of our operations.
Our commercial success depends, in part, on our non-infringement of the patents or proprietary rights of third-parties. Many companies
developing technology for the biotechnology and pharmaceutical industries use litigation aggressively as a strategy to protect and expand the scope of their intellectual property rights. Accordingly,
third-parties may assert that we are employing their proprietary technology without authorization. In addition, third-parties may claim that use of our technologies infringes their current or future
patents. We could incur substantial costs defending against such allegations regardless of their merit, and the attention of our management and technical personnel could be diverted while defending
ourselves against any of these claims. We may incur the same liabilities in enforcing our patents against others. We have not made any provision in
our financial plans for potential intellectual property related litigation, and we may not be able to pursue litigation as aggressively as competitors with substantially greater financial resources.
If
parties making infringement claims against us are successful, they may be able to obtain injunctive or other relief, which effectively could block our ability to further develop,
commercialize, and sell services, and could result in the award of substantial damages against us. If we are unsuccessful in protecting and expanding the scope of our intellectual property rights, our
competitors may be able to develop, commercialize, and sell services that compete against us using similar technologies or obtain patents that could effectively block our ability to further develop,
commercialize, and sell our services. In the event of a successful claim of infringement against us, we may be required to pay substantial damages and either discontinue those aspects of our business
involving the technology upon which we infringed or obtain one or more licenses from third parties, which may not be available on commercially reasonable terms, or at all. While we may license
additional technology in the future, we may not be able to obtain these licenses at a reasonable cost, or at all. In that event, we could encounter delays in services introductions while we
25
Table of Contents
attempt
to develop alternative methods or services, and such attempts may not be successful. Defense of any lawsuit or failure to obtain any of these licenses could prevent us from commercializing
available services, which would have a material adverse effect on our business and results of operations.
We could face substantial liabilities if we are sued for product liability.
Product liability claims could be filed by someone alleging that our tests failed to perform as claimed. We may also be subject to
liability for errors in the performance of our tests. Such product liability and related claims could be substantial. Defense of such claims could be time consuming and expensive and could result in
damages that are not covered by our insurance.
Exposure to possible litigation and legal liability may adversely affect our business, financial condition and results of operations.
In the past, we have been exposed to a variety of litigation claims and there can be no assurance that we will not be subject to other
litigation in the future that may adversely affect our business, financial condition or results of operations. On February 14, 2011, Relator Michael Strathmann served us with a 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. On October 24, 2012, the California Court of Appeals reversed the Superior Court's dismissal, finding that the anti SLAPP statute was not applicable
and remanding the case to the Superior Court. Strathmann has filed an Amended Complaint, and we have filed an Answer to that pleading. A trial date has been set for June 9, 2014 in the Orange
County Superior Court and discovery has begun. Defense of this lawsuit could be time consuming and expensive, and there can be no assurance that we will be successful in our defense.
Failure to effectively manage our growth could place strains on our managerial, operational and financial resources and could materially adversely affect our business and
operating results.
Our growth has placed, and is expected to continue to place, a strain on our managerial, operational and financial resources. Any
further growth by us or an increase in the number of our strategic relationships will increase this strain on our managerial, operational and financial resources. This strain may inhibit our ability
to achieve the rapid execution necessary to successfully implement our business plan.
As a public company, we are subject to complex legal and accounting requirements that will require us to incur substantial expense and will expose us to risk of
non-compliance.
As a public company, we are subject to numerous legal and accounting requirements that do not apply to private companies. The cost of
compliance with many of these requirements is substantial, not only in absolute terms but, more importantly, in relation to the overall scope of the operations of a small company. Failure to comply
with these requirements can have numerous material adverse consequences including, but not limited to, our inability to file required periodic reports on a timely basis, which would result in the loss
of our eligibility to use Form S-3 for raising capital, loss of market confidence, delisting of our securities, governmental or private actions against us and/or liquidated damages payable to
the holders of our Series A Warrants and Series C Warrants. We cannot assure you that we will be able to comply with all
26
Table of Contents
of
these requirements or that the cost of such compliance will not prove to be a substantial competitive disadvantage compared to our privately held and larger public competitors.
Ethical, legal and social concerns surrounding the use of genetic information could reduce demand for our test offerings.
Genetic testing has raised ethical issues regarding privacy and the appropriate uses of the resulting information. For these reasons,
governmental authorities may call for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no
known cure. Similarly, such concerns may lead individuals to refuse to use genetics tests even if permissible. Any of these scenarios could reduce the potential markets for our molecular diagnostic
services, which reduction could have a material adverse effect on our business.
Risks Related To Investment In Our Securities
Small company stock prices are especially volatile, and this volatility may depress the price of our stock.
The stock market has experienced significant price and volume fluctuations, and the market prices of small companies have been highly
volatile. We believe that various factors may cause the market price of our stock to fluctuate, perhaps substantially, including, among others, announcements
of:
-
•
-
our or our competitors' technological innovations;
-
•
-
supply, manufacturing, or distribution disruptions or other similar problems;
-
•
-
proposed laws regulating participants in the laboratory services industry;
-
•
-
developments in relationships with collaborative partners or customers;
-
•
-
our failure to meet or exceed securities analysts' expectations of our financial results; or
-
•
-
a change in financial estimates or securities analysts' recommendations.
In
the past, companies that have experienced volatility in the market price of their stock have been the objects of securities class action litigation. If we become the object of
securities class action litigation, it could result in substantial costs and a diversion of management's attention and resources, all of which could materially adversely affect the business and
financial results of our business.
Future sales or the potential for future sales of our securities in the public markets may cause the trading price of our common stock to decline and could impair our
ability to raise capital through subsequent equity offerings.
Sales of a substantial number of shares of our common stock or other securities in the public markets, or the perception that these
sales may occur, could cause the market price of our common stock or other securities to decline and could materially impair our ability to raise capital through the sale of additional securities. The
shares of common stock issuable upon exercise of the warrants issued in our December 2013 public offering are freely tradable. We have obligations to the investors in our 2012 private placement
offering of Series A convertible preferred stock and warrants to purchase common stock to maintain the public registration of common stock underlying their issued and outstanding warrants. We
also have obligations to the investors in our April 2011 private placement that could require us to register shares of common stock held by them and shares issuable upon exercise of their warrants for
resale on a registration statement. If we raise additional capital in the future through the use of our existing shelf registration statement or if we register existing, or agree to register future,
privately placed shares for resale on a registration statement, such additional shares would be freely tradable, and, if significant in amount, such sales could further adversely affect the market
price of our common stock. The sale of a large number of shares of our common stock also might make it more difficult for us to sell equity or equity-related securities in the future at a time and at
the prices that we deem appropriate.
27
Table of Contents
Our stock price could decline because of the potentially dilutive effect of future financings, warrant anti-dilution provisions or exercises of warrants and common stock
options.
Assuming exercise in full of all options and warrants outstanding as of December 31, 2013 (not taking into account any price
based or anti-dilution adjustments), approximately 19.2 million shares of our common stock would be outstanding. Any additional equity or convertible debt financings in the future could result
in further dilution to our stockholders. Existing stockholders also will suffer dilution in ownership interests and voting rights and our stock price could decline as a result of potential future
application of anti-dilution features of our Series A Warrants.
We may fail to meet market expectations because of fluctuations in our quarterly operating results, all of which could cause our stock price to decline.
Our revenues and operating results have fluctuated in the past and may continue to fluctuate significantly from quarter to quarter in
the future. It is possible that, in future periods, our revenues could fall below the expectations of securities analysts or investors, all of which could cause the market price of our stock to
decline. The following are among the factors that could cause our operating results to fluctuate significantly from period to period:
-
•
-
our unpredictable revenue sources;
-
•
-
the nature, pricing and timing of our and our competitors' products and/or services;
-
•
-
changes in our and our competitors' research and development budgets;
-
•
-
expenses related to, and our ability to comply with, governmental regulations of our services and processes; and
-
•
-
expenses related to, and the results of, patent filings and other proceedings relating to intellectual property rights.
We
anticipate significant fixed expenses, due in part to our need to continue to invest in services development. We may be unable to adjust our expenditures if revenues in a particular
period fail to meet our expectations, all of which would materially adversely affect our operating results for that period. As a result of these fluctuations, we believe that period-to-period
comparisons of our financial results will not necessarily be meaningful, and that you should not rely on these comparisons as an indication of our future performance.
28
Table of Contents
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
We currently lease office and laboratory space of approximately 12,200 square feet in Irvine, California under a lease agreement that
expires in January 2015.
Item 3. 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. On October 24, 2012, the California Court of Appeals reversed the Superior Court's
dismissal, finding that the anti-SLAPP statute was not applicable and remanding the case to the Superior Court. Strathmann filed an Amended Complaint, and we have filed our Answer to that pleading. On
February 14, 2014, we filed a Motion for Summary Judgment, requesting that the Court enter judgment
in our favor without trial. That Motion is to be heard by the Court on April 30, 2014. In the event that the Motion is not successful, then trial has been set for June 9, 2014 in the
Orange County Superior Court. While discovery has commenced in the case, and we believe that there is no merit to Strathmann's claims and intend to vigorously defend against them, there can be no
assurance that we will ultimately be successful.
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.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
29
Table of Contents
COMBIMATRIX CORPORATION
CONSOLIDATED BALANCE SHEETS
As of December 31, 2013 and 2012
(In thousands, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,289
|
|
$
|
2,372
|
|
|
Short-term investments
|
|
|
1,747
|
|
|
—
|
|
|
Accounts receivable, net of allowance for doubtful accounts of $288 and $245
|
|
|
1,695
|
|
|
1,262
|
|
|
Supplies
|
|
|
171
|
|
|
465
|
|
|
Prepaid expenses and other assets
|
|
|
128
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
16,030
|
|
|
4,237
|
|
|
Property and equipment, net
|
|
|
581
|
|
|
666
|
|
|
Investments in unconsolidated subsidiaries and other
|
|
|
221
|
|
|
211
|
|
|
Patents and licenses, net
|
|
|
—
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
16,832
|
|
$
|
5,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other
|
|
$
|
1,367
|
|
$
|
1,222
|
|
|
Current portion, capital lease obligations
|
|
|
168
|
|
|
253
|
|
|
Warrants, net of $0 and $280 in issuance costs
|
|
|
568
|
|
|
4,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,103
|
|
|
5,679
|
|
|
Capital lease obligations, net of current portion
|
|
|
65
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,168
|
|
|
5,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
Convertible preferred stock; $0.001 par value; 5 million shares authorized;
|
|
|
|
|
|
|
|
|
Series A—4,000 shares authorized; none and 1,644.45186 issued and outstanding, net of $0 and $101 in issuance costs
|
|
|
—
|
|
|
394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity (deficit):
|
|
|
|
|
|
|
|
|
Convertible preferred stock; $0.001 par value; 5 million shares authorized;
|
|
|
|
|
|
|
|
|
Series B—2,000 shares authorized; none issued and outstanding
|
|
|
—
|
|
|
—
|
|
|
Series C—2,500 shares authorized; none issued and outstanding
|
|
|
—
|
|
|
—
|
|
|
Series D—12,000 shares authorized; 2,200.7 and none issued and outstanding
|
|
|
—
|
|
|
—
|
|
|
Common stock; $0.001 par value; 25 million shares authorized; 9,870,838 and 1,511,133 shares issued and outstanding
|
|
|
10
|
|
|
2
|
|
|
Additional paid-in capital
|
|
|
95,098
|
|
|
67,106
|
|
|
Accumulated other comprehensive loss
|
|
|
(4
|
)
|
|
—
|
|
|
Accumulated deficit
|
|
|
(80,440
|
)
|
|
(68,227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity (deficit)
|
|
|
14,664
|
|
|
(1,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity (deficit)
|
|
$
|
16,832
|
|
$
|
5,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
COMBIMATRIX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2013 and 2012
(In thousands, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
For the Years
Ended
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Diagnostic services
|
|
$
|
6,204
|
|
$
|
4,975
|
|
|
Clinical trial support services
|
|
|
—
|
|
|
195
|
|
|
Royalties
|
|
|
163
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
6,367
|
|
|
5,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
3,527
|
|
|
2,702
|
|
|
Research and development
|
|
|
1,011
|
|
|
1,400
|
|
|
Sales and marketing
|
|
|
2,764
|
|
|
2,596
|
|
|
General and administrative
|
|
|
5,206
|
|
|
5,378
|
|
|
Patent amortization and royalties
|
|
|
254
|
|
|
266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
12,762
|
|
|
12,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(6,395
|
)
|
|
(6,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
5
|
|
|
1
|
|
|
Interest expense
|
|
|
(356
|
)
|
|
(179
|
)
|
|
Warrant derivative gains (charges)
|
|
|
2,804
|
|
|
(2,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
2,453
|
|
|
(2,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,942
|
)
|
$
|
(9,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock dividends
|
|
$
|
(247
|
)
|
$
|
(123
|
)
|
|
Series C convertible preferred stock dividends
|
|
|
(27
|
)
|
|
—
|
|
|
Deemed dividends from issuing Series A convertible preferred stock
|
|
|
—
|
|
|
(617
|
)
|
|
Deemed dividends from issuing Series B convertible preferred stock
|
|
|
(417
|
)
|
|
—
|
|
|
Deemed dividends from issuing Series C convertible preferred stock
|
|
|
(1,213
|
)
|
|
—
|
|
|
Deemed dividends from issuing Series D convertible preferred stock
|
|
|
(6,367
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(12,213
|
)
|
$
|
(10,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(1.00
|
)
|
$
|
(8.75
|
)
|
|
Series A convertible preferred stock dividends
|
|
|
(0.06
|
)
|
|
(0.11
|
)
|
|
Series C convertible preferred stock dividends
|
|
|
(0.01
|
)
|
|
—
|
|
|
Deemed dividends from issuing Series A convertible preferred stock
|
|
|
—
|
|
|
(0.57
|
)
|
|
Deemed dividends from issuing Series B convertible preferred stock
|
|
|
(0.11
|
)
|
|
—
|
|
|
Deemed dividends from issuing Series C convertible preferred stock
|
|
|
(0.31
|
)
|
|
—
|
|
|
Deemed dividends from issuing Series D convertible preferred stock
|
|
|
(1.62
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share attributable to common stockholders
|
|
$
|
(3.11
|
)
|
$
|
(9.43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding
|
|
|
3,940,965
|
|
|
1,088,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
COMBIMATRIX CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Years Ended December 31, 2013 and 2012
(In thousands, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
For the
Years Ended
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
Net loss
|
|
$
|
(3,942
|
)
|
$
|
(9,527
|
)
|
|
Unrealized loss on available-for-sale securities
|
|
|
(4
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
$
|
(3,946
|
)
|
$
|
(9,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
COMBIMATRIX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 2013 and 2012
(In thousands, except share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
Convertible
Preferred Stock
|
|
|
|
Series B
Convertible
Preferred Stock
|
|
Series C
Convertible
Preferred Stock
|
|
Series D
Convertible
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
|
Total
Stockholders'
Equity
(Deficit)
|
|
|
|
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Deficit
|
|
|
|
Shares
|
|
Amount
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
Balances, December 31, 2011
|
|
|
—
|
|
$
|
—
|
|
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
1,070,412
|
|
$
|
2
|
|
$
|
66,108
|
|
$
|
—
|
|
$
|
(57,960
|
)
|
$
|
8,150
|
|
|
Reverse stock split adjustment
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(28
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Issuance of Series A convertible preferred stock, net of issuance costs
|
|
|
2,500.0
|
|
|
394
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Beneficial conversion feature on Series A convertible preferred stock
|
|
|
—
|
|
|
(495
|
)
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
495
|
|
|
—
|
|
|
—
|
|
|
495
|
|
|
Conversion of Series A convertible preferred stock to common stock
|
|
|
(855.54814
|
)
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
427,878
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Make-whole dividends paid in common stock
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,871
|
|
|
—
|
|
|
101
|
|
|
—
|
|
|
(101
|
)
|
|
—
|
|
|
Accrued dividends on Series A convertible preferred stock
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(22
|
)
|
|
(22
|
)
|
|
Deemed dividends from issuing Series A convertible preferred stock
|
|
|
—
|
|
|
495
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(617
|
)
|
|
(617
|
)
|
|
Non-cash stock compensation
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
402
|
|
|
—
|
|
|
—
|
|
|
402
|
|
|
Net loss
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,527
|
)
|
|
(9,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2012
|
|
|
1,644.45186
|
|
|
394
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,511,133
|
|
|
2
|
|
|
67,106
|
|
|
—
|
|
|
(68,227
|
)
|
|
(1,119
|
)
|
|
Conversion of Series A convertible preferred stock to common stock
|
|
|
(1,644.45186
|
)
|
|
(394
|
)
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
822,421
|
|
|
1
|
|
|
393
|
|
|
—
|
|
|
—
|
|
|
394
|
|
|
Make-whole dividends paid in common stock
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
50,307
|
|
|
—
|
|
|
247
|
|
|
—
|
|
|
(247
|
)
|
|
—
|
|
|
Issuance of Series B convertible preferred stock, net of issuance costs
|
|
|
—
|
|
|
—
|
|
|
|
|
1,610.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
130,000
|
|
|
—
|
|
|
1,769
|
|
|
—
|
|
|
—
|
|
|
1,769
|
|
|
Beneficial conversion feature on Series B convertible preferred stock
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
(417
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
417
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Deemed dividends from issuing Series B convertible preferred stock
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
417
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(417
|
)
|
|
—
|
|
|
Conversion of Series B convertible preferred stock to common stock
|
|
|
—
|
|
|
—
|
|
|
|
|
(1,610.4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
535,392
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Issuance of Series C convertible preferred stock, net of issuance costs
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
2,400.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,139
|
|
|
—
|
|
|
—
|
|
|
2,139
|
|
|
Beneficial conversion feature on Series C convertible preferred stock
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,213
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,213
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Deemed dividends from issuing Series C convertible preferred stock
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,213
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,213
|
)
|
|
—
|
|
|
Conversion of Series C convertible preferred stock to common stock
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
(2,400.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
839,864
|
|
|
1
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Issuance of Series D convertible preferred stock, net of issuance costs
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,000.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,720
|
|
|
—
|
|
|
—
|
|
|
10,720
|
|
|
Beneficial conversion feature on Series D convertible preferred stock
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,367
|
)
|
|
—
|
|
|
—
|
|
|
6,367
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Deemed dividends from issuing Series D convertible preferred stock
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,367
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,367
|
)
|
|
—
|
|
|
Conversion of Series D convertible preferred stock to common stock
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,799.3
|
)
|
|
—
|
|
|
4,756,946
|
|
|
5
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Preferred stock dividends paid in common stock
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,141
|
|
|
—
|
|
|
49
|
|
|
—
|
|
|
(27
|
)
|
|
22
|
|
|
Exercise of Series A common stock warrants
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,209,634
|
|
|
1
|
|
|
3,141
|
|
|
—
|
|
|
—
|
|
|
3,142
|
|
|
Reclassification of derivative warrant liability from warrant exercises
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,111
|
|
|
—
|
|
|
—
|
|
|
1,111
|
|
|
Non-cash stock compensation
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
432
|
|
|
—
|
|
|
—
|
|
|
432
|
|
|
Unrealized loss on available-for-sale securities
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
(4
|
)
|
|
Net loss
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,942
|
)
|
|
(3,942
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2013
|
|
|
—
|
|
$
|
—
|
|
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
2,200.7
|
|
$
|
—
|
|
|
9,870,838
|
|
$
|
10
|
|
$
|
95,098
|
|
$
|
(4
|
)
|
$
|
(80,440
|
)
|
$
|
14,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
COMBIMATRIX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2013 and 2012
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,942
|
)
|
$
|
(9,527
|
)
|
|
Adjustments to reconcile net loss to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
698
|
|
|
490
|
|
|
Stock compensation
|
|
|
432
|
|
|
402
|
|
|
Warrant derivative (gains) charges
|
|
|
(2,804
|
)
|
|
2,357
|
|
|
Provision for bad debts
|
|
|
290
|
|
|
276
|
|
|
Loss on disposal of fixed assets
|
|
|
49
|
|
|
—
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(723
|
)
|
|
(76
|
)
|
|
Supplies, prepaid expenses and other assets
|
|
|
294
|
|
|
48
|
|
|
Accounts payable, accrued expenses and other
|
|
|
101
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities
|
|
|
(5,605
|
)
|
|
(5,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(304
|
)
|
|
(31
|
)
|
|
Purchase of available-for-sale investments
|
|
|
(1,750
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from investing activities
|
|
|
(2,054
|
)
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of Series A convertible preferred stock
|
|
|
—
|
|
|
2,079
|
|
|
Issuance costs relating to Series A convertible preferred stock
|
|
|
(106
|
)
|
|
—
|
|
|
Net proceeds from issuance of Series B convertible preferred stock
|
|
|
1,769
|
|
|
—
|
|
|
Net proceeds from issuance of Series C convertible preferred stock
|
|
|
2,139
|
|
|
—
|
|
|
Net proceeds from issuance of Series D convertible preferred stock
|
|
|
10,892
|
|
|
—
|
|
|
Net proceeds from exercise of common stock warrants
|
|
|
3,142
|
|
|
—
|
|
|
Repayment of capital lease obligations
|
|
|
(259
|
)
|
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities
|
|
|
17,577
|
|
|
1,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
9,918
|
|
|
(4,013
|
)
|
|
Cash and cash equivalents, beginning
|
|
|
2,372
|
|
|
6,385
|
|
|
Unrealized loss on cash equivalents
|
|
|
(1
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, ending
|
|
$
|
12,289
|
|
$
|
2,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid in interest expense
|
|
$
|
54
|
|
$
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Property and equipment purchased on capital leases
|
|
$
|
13
|
|
$
|
306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Make-whole Series A convertible preferred stock paid in common stock
|
|
$
|
247
|
|
$
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividends from issuing convertible preferred stock
|
|
$
|
7,997
|
|
$
|
617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of derivative warrant liability from warrant exercises
|
|
$
|
1,111
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrants issued in Series A convertible preferred stock
offering
|
|
$
|
—
|
|
$
|
2,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
COMBIMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
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"), and 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 provide valuable molecular diagnostic solutions and comprehensive clinical support for the highest quality of care. We specialize in
miscarriage analysis, prenatal and pediatric healthcare, offering DNA-based testing for the detection of genetic abnormalities beyond what can be identified through traditional methodologies. We
perform genetic testing utilizing a variety of advanced cytogenomic techniques, including microarray, standardized and customized FISH and high resolution karyotyping. We emphasize support for
healthcare professionals, to ensure data understanding and communication of results to patients. We deliver high-technology driven answers, with a high degree of assistance for the ordering physician
and staff.
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.
Reverse Stock Split
On December 4, 2012, 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-ten (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 December 4, 2012 was automatically changed into one-tenth 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 ten as of December 4, 2012. 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 new and improve existing commercial diagnostic testing services and related technologies. At December 31, 2013, we had cash, cash equivalents and short-term investments of
$14.0 million and anticipate that our cash and cash equivalent balances will be sufficient to meet our cash requirements beyond 2014, thereby removing the substantial doubt that we can continue
as a going concern beyond 2014. Our financial statements for the year ended December 31, 2012 were prepared assuming we would continue as a going concern. Our history of incurring net losses
and net operating cash flow deficits led to the uncertainty regarding our ability to execute our business plans as of December 31, 2012, which also raised substantial doubt about our ability to
continue as a going concern at December 31, 2012.
F-8
Table of Contents
COMBIMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In
order for us to continue as a going concern beyond 2014 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 shareholders. 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 products 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;
-
•
-
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 technologies or 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
Accounting Principles and Fiscal Year End.
The consolidated financial statements and accompanying notes are prepared on the accrual
basis of
accounting in accordance with U.S. generally accepted accounting principles ("GAAP"). We have a December 31 year-end.
Use of Estimates.
The preparation of financial statements in conformity with U.S. GAAP 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.
Basis of Presentation and Principles of Consolidation.
The accompanying consolidated financial statements include the accounts of the
Company and our
wholly-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.
F-9
Table of Contents
COMBIMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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 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. 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 years ended December 31,
2013 and 2012, net positive revenue adjustments were $607,000 and $570,000, 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 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.
Clinical
trials support services revenue is recognized when the related support services have been delivered to and accepted by the customer. Royalty revenue is recognized in the period
when earned.
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 of greater than three 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 statement 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.
F-10
Table of Contents
COMBIMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, such as quoted prices for similar assets or liabilities; 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 and money market funds 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.
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.
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.
Accounts receivable are stated at principal amounts and are primarily
comprised of amounts
contractually due from customers for services performed. 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
F-11
Table of Contents
COMBIMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Supplies.
Supplies inventory, which consists primarily of raw materials to be used in the production of the arrays we use for our tests,
is stated at
the lower of cost or market using the first-in, first-out method.
Property and Equipment.
Property and equipment is recorded at cost. Additions and improvements that
increase the value or extend the life of an asset are capitalized. Maintenance and repairs are expensed as incurred. Disposals are removed at cost less accumulated depreciation or amortization and any
gain or loss from disposition is reflected in the consolidated statement of operations in the period of disposition. Depreciation is computed on a straight-line basis over the following estimated
useful lives of the assets:
|
|
|
|
|
Laboratory equipment
|
|
3 to 5 years
|
|
Furniture and fixtures
|
|
5 to 7 years
|
|
Computer hardware and software
|
|
3 years
|
|
Leasehold improvements
|
|
Lesser of lease term or useful life of improvement
|
Certain
leasehold improvements, furniture and equipment held under capital leases are classified as property and equipment and are amortized over their useful lives using the
straight-line method. Lease amortization is included in depreciation expense.
Stock-Based Compensation.
The compensation cost for stock-based awards to employees 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.
The
weighted average assumptions used to estimate the fair value of awards granted for the periods presented are noted in the table below. Expected volatility is based on the separate
historical volatility of the market prices of our common stock. The risk-free rate for the expected term, using the simplified method, of the option is based on the U.S. Treasury yield curve in effect
at the time of grant.
|
|
|
|
|
|
|
|
|
|
|
For the Years
Ended
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
Risk free interest rate
|
|
|
1.7%
|
|
|
1.3%
|
|
|
Volatility
|
|
|
106.0%
|
|
|
78.5%
|
|
|
Expected term
|
|
|
6.3 years
|
|
|
6.3 years
|
|
|
Expected dividends
|
|
|
0%
|
|
|
0%
|
|
F-12
Table of Contents
COMBIMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock-based
compensation expense for 2013 and 2012 attributable to our functional expense categories were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Years
Ended
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
Cost of products and services
|
|
$
|
7
|
|
$
|
5
|
|
|
Research and development
|
|
|
—
|
|
|
7
|
|
|
Sales and marketing
|
|
|
14
|
|
|
4
|
|
|
General and administrative
|
|
|
411
|
|
|
386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-cash stock compensation
|
|
$
|
432
|
|
$
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development Expenses.
Prior to launching a new test or modifying an existing test, extensive laboratory validations
consistent with the
various regulations that govern our industry must be performed. As a result, research and development expenses include labor, laboratory supplies, and other development costs required to maintain and
improve our existing suite of diagnostic test offerings as well as to investigate and develop new tests. Costs to acquire technologies which are utilized in research and development and which have no
alternative future use are expensed when incurred. Software developed for use in our services is expensed as incurred until both (i) technological feasibility for the software has been
established and (ii) all research and development activities for the other components of the system have been completed. We believe these criteria are met after we have received evaluations
from third-party test sites and completed any resulting modifications to the services. Expenditures to date have been classified as research and development expense.
Advertising.
Costs associated with marketing and advertising of our services are expensed as incurred. For the years ended
December 31, 2013
and 2012, we incurred marketing and advertising expenses of $249,000 and $312,000, respectively.
Income Taxes.
We recognize income taxes on an accrual basis based on tax positions taken or expected to be taken in our tax returns. A
tax position
is defined as a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets and
liabilities. Tax positions are recognized only when it is more likely than not (i.e., likelihood of greater than 50%), based on technical merits, that the position would be sustained upon
examination by taxing authorities. Tax positions that meet the more likely than not threshold are measured using a probability-weighted approach as the largest amount of tax benefit that is greater
than 50% likely of being realized upon settlement. Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in our financial statements or tax returns. A valuation allowance is established to reduce deferred tax assets if all, or some
portion, of such assets will more than likely not be realized. Should they occur, our policy is to classify interest and penalties related to tax positions as income tax expense. Since our inception,
no such interest or penalties have been incurred, however.
Other Comprehensive Loss.
Components of comprehensive loss include unrealized gains and losses on available-for-sale securities and are
included in
the consolidated statements of comprehensive loss.
Segments.
We have determined that we operate in one segment for financial reporting purposes.
F-13
Table of Contents
COMBIMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 CombiMatrix 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:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
Common stock options
|
|
|
639,019
|
|
|
161,933
|
|
|
Common stock warrants
|
|
|
7,623,677
|
|
|
1,219,479
|
|
|
Series A preferred stock convertible into common stock
|
|
|
—
|
|
|
822,431
|
|
|
Series D preferred stock convertible into common stock
|
|
|
1,068,297
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluded dilutive securities
|
|
|
9,330,993
|
|
|
2,203,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements.
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update
("ASU")
No. 2013-11, "Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" to eliminate
diversity in practice. Under this ASU, an unrecognized tax benefit, or a portion of an unrecognized tax benefit that exists at the reporting date, should be presented in the financial statements as a
reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if certain criteria are met. This guidance is effective for fiscal years and
interim periods within those years beginning after December 15, 2013 with early adoption permitted. We do not believe the adoption of this ASU will have a material impact on our consolidated
financial statements.
In
February 2013, the FASB amended its guidance to require an entity to present the effect of certain significant reclassifications out of accumulated other comprehensive income or loss
on the respective line items in net income or loss. The new accounting guidance does not change the items that must be reported in other comprehensive income or loss or when an item of other
comprehensive income or loss must be reclassified to net income or loss. The guidance is effective prospectively for fiscal years beginning after December 15, 2012 and we were required to adopt
these new provisions during the first quarter of 2013. As the guidance requires additional presentation only, there was no impact to our consolidated results of operations or financial position.
F-14
Table of Contents
COMBIMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. CASH AND SHORT-TERM INVESTMENTS
As of December 31, 2013, we held $12.3 million in cash and cash equivalents and $1.7 million of short-term investments, which are reported at
fair value. Cash, cash equivalents and short-term investments consisted of the following as of December 31, 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013
|
|
|
|
Cost
|
|
Unrealized
Gain
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
|
Cash and money market securities
|
|
$
|
11,290
|
|
$
|
—
|
|
$
|
—
|
|
$
|
11,290
|
|
|
Certificates of deposit
|
|
|
2,750
|
|
|
—
|
|
|
(4
|
)
|
|
2,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,040
|
|
$
|
—
|
|
$
|
(4
|
)
|
$
|
14,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cash and cash equivalents
|
|
$
|
12,290
|
|
$
|
—
|
|
$
|
(1
|
)
|
$
|
12,289
|
|
|
Included in short-term investments
|
|
|
1,750
|
|
|
—
|
|
|
(3
|
)
|
|
1,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,040
|
|
$
|
—
|
|
$
|
(4
|
)
|
$
|
14,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There
were no realized gains or losses for the year ended December 31, 2013.
4. FAIR VALUE MEASUREMENTS
The following table summarizes, for each major category of financial assets or liabilities measured on a recurring basis, the respective fair value at
December 31, 2013 and 2012, and the classification by level of input within the fair value hierarchy defined above (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurements
|
|
|
December 31, 2013
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
8,263
|
|
$
|
7,264
|
|
$
|
999
|
|
$
|
—
|
|
|
Short-term investments
|
|
|
1,747
|
|
|
—
|
|
|
1,747
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,010
|
|
$
|
7,264
|
|
$
|
2,746
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative warrant liability
|
|
$
|
568
|
|
$
|
—
|
|
$
|
—
|
|
$
|
568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurements
|
|
|
December 31, 2012
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
14
|
|
$
|
14
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative warrant liability
|
|
$
|
4,483
|
|
$
|
—
|
|
$
|
—
|
|
$
|
4,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
Table of Contents
COMBIMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
following table is a reconciliation of financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended
December 31, 2013 (in thousands):
|
|
|
|
|
|
|
|
Derivative
Warrant
Liability
|
|
|
Balance, December 31, 2012
|
|
$
|
4,483
|
|
|
Changes in fair value
|
|
|
(2,804
|
)
|
|
Reclassifications
|
|
|
(1,111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013
|
|
$
|
568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
fair value of the derivative warrant liability is based on Level 3 inputs. For this liability, we developed our own assumptions that do not have observable inputs or available
market data to support the fair value recorded. See Note 10 for further discussion of the derivative warrant liability.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
Laboratory equipment
|
|
|
1,737
|
|
$
|
1,745
|
|
|
Furniture and fixtures
|
|
|
225
|
|
|
103
|
|
|
Computer hardware and software
|
|
|
42
|
|
|
214
|
|
|
Leasehold improvements
|
|
|
279
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,283
|
|
|
2,351
|
|
|
Less—accumulated depreciation and amortization
|
|
|
(1,702
|
)
|
|
(1,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
581
|
|
$
|
666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense was $352,000 and $276,000 for the years ended December 31, 2013 and 2012, respectfully. The net book value of assets under capital lease
obligations was $246,000 and $523,000 as of December 31, 2013 and 2012, respectively.
6. BALANCE SHEET COMPONENTS
Accounts payable, accrued expenses and other accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
Accounts payable
|
|
$
|
636
|
|
$
|
610
|
|
|
Payroll and other employee benefits
|
|
|
353
|
|
|
324
|
|
|
Accrued vacation
|
|
|
144
|
|
|
143
|
|
|
Deferred rent
|
|
|
—
|
|
|
4
|
|
|
Royalties
|
|
|
211
|
|
|
106
|
|
|
Other accrued expenses
|
|
|
23
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,367
|
|
$
|
1,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
Table of Contents
COMBIMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. INCOME TAXES
The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred assets and liabilities consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred settlement costs
|
|
$
|
1,215
|
|
$
|
1,574
|
|
|
Stock-based compensation
|
|
|
423
|
|
|
428
|
|
|
Accrued liabilities and other
|
|
|
500
|
|
|
485
|
|
|
Net operating loss carryforwards and credits
|
|
|
61,756
|
|
|
59,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
63,894
|
|
|
61,660
|
|
|
Less: valuation allowance
|
|
|
(63,944
|
)
|
|
(61,620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net of valuation allowance
|
|
|
(50
|
)
|
|
40
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
50
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
reconciliation of the federal statutory income tax rate and the effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
Statutory federal tax rate
|
|
|
(34%
|
)
|
|
(34%
|
)
|
|
Impact on state tax rates
|
|
|
(7%
|
)
|
|
(5%
|
)
|
|
Warrant valuation
|
|
|
(22%
|
)
|
|
9%
|
|
|
Cancellation of vested non-qualified stock options
|
|
|
1%
|
|
|
9%
|
|
|
Valuation allowance
|
|
|
59%
|
|
|
20%
|
|
|
Other non deductible permanent items
|
|
|
3%
|
|
|
1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0%
|
|
|
0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2013 and 2012, we had net deferred tax assets totaling approximately $63.9 million and $61.7 million, respectively. These assets are offset by
valuation allowances due to our determination that the criteria for asset recognition have not been met, as well as by deferred tax liabilities. At December 31, 2013, we had federal net
operating loss carryforwards of approximately $160 million, which begin to expire in 2017 through 2032. In addition, we have tax credit carryforwards of approximately $5.2 million.
Utilization of net operating loss carryforwards and tax credit carryforwards are subject to the "change of ownership" provisions under Section 382 of the Internal Revenue Code. The amount of
such limitations has not been determined. Also, given that our net operating losses have yet to be utilized, all previous tax years remain open to examination by Federal authorities and other
jurisdictions in which we operate. We have no unrecognized tax benefits as of December 31, 2013 and 2012.
F-17
Table of Contents
COMBIMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. COMMITMENTS AND CONTINGENCIES
Leases
We have entered into a non-cancelable operating lease for approximately 12,200 square feet of office and laboratory facilities in
Irvine, California with a lease term through January 2015.
At
December 31, 2013, we had eleven capital leases for laboratory equipment with original purchase amounts totaling $435,000 and with useful lives of five years. As of
December 31, 2013, the remaining lease obligations (including interest charges) were $259,000 with minimum future lease payments shown below. The weighted average interest rate on the capital
lease obligations was 13.5%, based on remaining lease obligations as of December 31, 2013. The fair value of the capital lease obligations was not significantly different from their carrying
amounts for all periods presented.
Future
minimum lease payments for all of our facilities and leased equipment are as follows (in thousands):
Years
ending December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
Capital
Leases
|
|
Total
|
|
|
2014
|
|
$
|
161
|
|
$
|
188
|
|
$
|
349
|
|
|
2015
|
|
|
13
|
|
|
43
|
|
|
56
|
|
|
2016
|
|
|
—
|
|
|
25
|
|
|
25
|
|
|
2017
|
|
|
—
|
|
|
3
|
|
|
3
|
|
|
2018
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
174
|
|
|
259
|
|
$
|
433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less—imputed interest
|
|
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of capital lease obligations
|
|
|
|
|
|
233
|
|
|
|
|
|
Less—current portion
|
|
|
|
|
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations, net of current portion
|
|
|
|
|
$
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent
expense for the years ended December 31, 2013 and 2012 was $297,000 and $302,000, respectively.
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 (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; (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
F-18
Table of Contents
COMBIMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
On September 30, 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 $100,000 in each of the years ended December 31, 2013 and 2012, and are included in
patent amortization and royalties in the accompanying consolidated statements of operations.
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. On October 24, 2012, the California Court of Appeals reversed the Superior Court's dismissal, finding that the anti-SLAPP statute was not applicable and
remanding the case to the Superior Court. Strathmann filed an Amended Complaint, and we have filed our Answer to that pleading. On February 14, 2014, we filed a Motion for Summary Judgment,
requesting that the Court enter judgment in our favor without trial. That Motion is to be heard by the Court on April 30, 2014. In the event that the Motion is not successful, then trial has
been set for June 9, 2014, in the Orange County Superior Court. While discovery has commenced in the case, and we believe that there is no merit to Strathmann's claims and intend to vigorously
defend against them, there can be no assurance that we will ultimately be successful. No contingent liability has been recognized due to the lack of specificity relating to the damages being sought by
Strathmann and management's assessment that the likelihood of a materially unfavorable outcome is remote.
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.
9. RETIREMENT SAVINGS PLAN
We have an employee savings and retirement plan under section 401(k) of the Internal Revenue Code (the "Retirement Plan"). The Retirement Plan is a defined
contribution plan in which eligible employees may elect to have a percentage of their compensation contributed to the Retirement Plan, subject to certain guidelines issued by the Internal Revenue
Service. We may contribute to the Retirement Plan at the discretion of our board of directors. There were no contributions made by us during any of the years presented.
F-19
Table of Contents
COMBIMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. STOCKHOLDERS' EQUITY
Series A Convertible Preferred Stock Financing
On September 28, 2012 (the "Commitment Date"), we entered into a securities purchase agreement with certain accredited investors
(the "Series A Investors"), pursuant to which we sold and issued 1,050.70039 shares of newly created Series A 6% Convertible Preferred Stock (the "Series A Stock") to the
Series A Investors at a purchase price of $1,000 per share in an initial closing that occurred on October 1, 2012 (the "Series A First Closing"), and we sold and issued
1,449.29961 additional shares of Series A Stock on December 6, 2012 to the Series A Investors at a purchase price of $1,000 per share after stockholder approval was obtained on
November 29, 2012 (the "Series A Second Closing") (combined, the "Series A Financing"). After certain offering-related costs were incurred, the net proceeds received by us from
the Series A Financing were $2.0 million. As a result of the Series A Second Closing, the conversion price for the Series A Stock was set to $1.9995 per share, or the
equivalent of 1.25 million shares of common stock issuable upon conversion of all Series A Stock. We filed resale registration statements on Form S-3 related to the
Series A financing, which have been declared effective by the SEC. Until all Series A Investors no longer hold Series A warrants to purchase common stock: (i) we may not
sell any variable rate securities or dilutive securities except for certain exempt issuances; (ii) if we enter into a subsequent financing on more favorable terms than the Series A Stock
financing, then the agreements between us and the Series A Investors will be amended to include such more favorable terms; and (iii) we may not sell securities at an effective price per
share less than $4.91 except for certain exempt issuances, unless waivers from the Series A Investors are obtained.
Holders
of the Series A Stock were entitled to receive accruing dividends at the annual rate of 6%, payable semi-annually. Upon conversion of Series A Stock into common
stock, we paid to each holder
of Series A Stock converting to common stock, as a "make-whole" payment in common stock, an amount equal to $118 per $1,000 of stated value of Series A Stock so converted, less the
aggregate amount of dividends previously paid on such converting Series A Stock. During December 2012, the Series A Investors converted 855.54814 shares of Series A Stock into
427,878 shares of common stock. In addition, 12,871 shares of common stock were issued to the Series A Investors in payment of the make-whole dividends related to the Series A Stock
conversions. On January 4, 2013, accrued Series A dividends of $22,000 were paid by issuing 4,164 shares of common stock to the Series A Investors. During the first quarter of
2013, the Series A Investors converted all of the remaining 1,644.45186 shares of Series A Stock into 822,421 shares of common stock. In addition, 50,307 shares of common stock were
issued to the Series A Investors in payment of the make-whole and accrued dividends related to the Series A Stock conversions. The combination of make-whole and accrued dividends paid in
shares of common stock for the twelve months ended December 31, 2013 was $247,000.
In
addition to the issuance of the Series A Stock, at the Series A First Closing, we issued warrants to purchase 213,945 shares of common stock to the Series A
Investors. These warrants have a term of 5
1
/
2
years and initially were to become exercisable six months from the Series A First Closing, with an initial exercise price of $9.50
per share. At the Series A Second Closing, we issued warrants to purchase 724,825 shares of common stock to the Series A Investors. These warrants have a term of 5
1
/
2
years and initially were to become exercisable six months from the Series A Second Closing, with an initial exercise price of $2.364 per share (collectively, the "Series A Warrants").
The exercise price of the Series A Warrants and the number of shares of common stock underlying the Series A Warrants are subject to full-ratchet anti-dilution adjustments in the event
we issue securities, other than certain excepted issuances, at a price below the then current exercise price of the Series A Warrants. On February 26, 2013, we entered into an agreement
with the Series A Investors to modify the Series A Warrants such that they would become immediately exercisable as of February 22, 2013 (the "Modification Date"). Since the
Modification Date
F-20
Table of Contents
COMBIMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
through
December 31, 2013, 1,209,634 shares of common stock have been issued from exercises of the Series A Warrants, resulting in proceeds to the Company of $3.1 million. See
discussion below regarding further adjustments to the Series A Warrants as a result of the Series B, C and D financings executed during 2013.
We
account for stock purchase warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreements. Under applicable accounting
guidance, stock warrants must be accounted for as derivative financial instruments if the warrants contain full-ratchet anti-dilution provisions, which preclude the warrants from being considered
indexed to our own stock. The Series A Warrants issued to the Series A Investors contain such provisions, thus requiring us to treat them as derivative financial instruments, to be
recorded at fair value at issuance and subsequently adjusted to fair value at each reporting date, with the corresponding adjustment reflected as a non-operating credit / charge in the consolidated
statement of operations. During 2013, we valued the Series A Warrants using the Monte-Carlo simulation method using the following assumptions at each valuation date: (i) closing stock
price and Series A Warrant contractual exercise price; (ii) term to
expiration commensurate with the remaining Series A Warrant terms of 5.0 to 4.3 years; (iii) historical volatilities commensurate with the term of the remaining Series A
Warrants of between 114.5% to 126.5%; (iv) risk-free interest rates commensurate with the term of the remaining Series A Warrants of 0.8% to 1.4%; and (v) simulated anti-dilution
impact assuming various probabilities that we will raise additional capital by issuing equity securities at prices above or below the current contractual Series A Warrant exercise price during
the Series A Warrant terms. The result of these valuation simulations was to initially value the Warrants issued at a combined $2.1 million derivative liability, with the residual value
allocated to the Series A preferred stock. Subsequently, the fair value of the warrants increased to $4.5 million at December 31, 2012, resulting in $2.4 million of warrant
derivative charges recognized during the fourth quarter of 2012. During 2013, the warrant derivative liability decreased due primarily to lower stock prices as well as from Series A Warrant
exercises, resulting in a net gain of $2.8 million and a reclassification to additional paid-in capital of $1.1 million, respectively.
During
2012, we valued the Series A Warrants using the Monte-Carlo simulation method using the following assumptions at each valuation date: (i) closing stock price and
Series A Warrant contractual exercise price; (ii) term to expiration commensurate with the individual Series A Warrant terms ranging from 5.3 years to 5.5 years;
(iii) historical volatilities commensurate with the term of the Series A Warrants ranging from 65.6% to 103.9%; (iv) risk-free interest rates commensurate with the term of the
Series A Warrants ranging from 0.7% to 0.8%; and (v) simulated anti-dilution impact assuming various probabilities that the Company will raise additional capital by issuing equity
securities at prices above or below the current contractual Series A Warrant exercise prices during the Series A Warrant terms. The result of these valuation simulations was to initially
value the Series A Warrants issued at a combined $2.1 million derivative liability, with the residual value of $495,000 allocated to the Series A Stock. Because the value of the
Series A Warrants issued at the First Closing exceeded the consideration paid by Investors by $123,000, this amount was recorded as a deemed dividend charged to retained earnings at the First
Closing. Subsequently, the fair value of the warrants increased to $4.5 million, resulting in $2.4 million of non-operating, warrant derivative charges recognized for the period ended
December 31, 2012.
Offering-related
costs that were accrued or paid as of and for the period ending December 31, 2012 of $527,000 were allocated between the Series A Warrants and
Series A Stock on a pro-rata basis, resulting in $427,000 allocated to the Series A Warrants and $101,000 allocated to the Series A Stock. Offering-related costs allocated to the
Series A Warrants are being amortized over the Series A Warrant exercise restriction period of six months from issuance of the Series A Warrants, which resulted in $147,000 of
additional
F-21
Table of Contents
COMBIMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
interest
expense charges in the period ended December 31, 2012. The remaining $280,000 of unamortized costs were expensed during the first three months of 2013 and charged to interest expense.
Series B Convertible Preferred Stock Financing
On March 19, 2013, we entered into a securities purchase agreement (the "Series B Purchase Agreement") with an existing
institutional investor (the "Series B Investor") to purchase 130,000 shares of common stock at a price of $3.05 per share and approximately 1,610.4 units consisting of, in the aggregate,
Series B 6% convertible preferred stock (the "Series B Stock") and warrants to purchase up to 275,000 shares of common stock at an exercise price of $3.49 per share (the "Series B
Warrants") in a registered direct offering (the "Series B Financing") of securities sold off of our existing shelf registration statement on Form S-3 (File No. 333-176372). The
Series B Financing closed on March 20, 2013 (the "Series B Closing"). The Series B Stock and Series B Warrants were sold in multiples of fixed combinations, with
each fixed combination consisting of one share of Series B Stock and a Series B Warrant to purchase approximately 171 shares of common stock. Each fixed combination of Series B
Stock and Series B Warrants was sold at a price of $1,000. The Series B Stock was initially convertible into an aggregate of 528,000 shares of common stock at an initial conversion price
of $3.05 per share. The Series B Warrants were not exercisable for six months from the Series B Closing, and the Series B Stock accrued dividends at an annual rate of 6% beginning
six months after the Series B Closing, assuming the Series B Stock had not been converted by that time. Upon the Series B Closing, we received proceeds of $1.8 million, net
of placement agent fees and other related paid and accrued costs. Given that the effective conversion price of the Series B Stock was below the closing market price of our common stock at the
time of the Series B Closing, we recognized a beneficial conversion feature in the amount of $417,000. Since the Series B Stock was immediately convertible into common stock, the
beneficial conversion feature was treated as a deemed dividend charged to retained earnings.
The
Series B Warrants have a 5
1
/
2
year term as well as a cashless exercise provision in the event there is no effective registration statement covering the common
stock issuable upon exercise of the Series B Warrants, and are not exercisable for the first six months following issuance. The Series B Warrants are not subject to price anti-dilution
protection.
The
Series B Investor agreed to be subject to a blocker that (i) would prevent its common stock ownership at any given time from exceeding 4.99% (which may be increased,
but not above 9.99%) of our outstanding common stock; or (ii) would prevent us from issuing any shares of common stock to the Series B Investor upon the conversion by such
Series B Investor of Series B Stock if the issuance of such shares to the Series B Investor, when aggregated with all other shares of common stock sold to the Series B
Investor under the Series B Purchase Agreement together with all shares of common stock issued upon the conversion of Series B Stock, would result in the total issuance of common stock
to exceed 19.99% of our outstanding common stock, without first obtaining the approval of our stockholders. We obtained stockholder approval at our June 27, 2013 Annual Stockholders' Meeting
for the terms of the Series B Stock and the issuance and delivery in the aggregate of that number of shares of common stock exceeding 19.99% of the outstanding shares of common stock upon
conversion of the Series B Stock. Since the Series B Closing through December 31, 2013, the Series B Investor has converted all of the Series B stock into 535,392
shares of common stock. See discussion below regarding additional adjustments to the Series B Stock as a result of the Series C Financing. Also, as a result of the Series B
Financing, the exercise price of the Series A Warrants issued in the Series A First Closing automatically ratcheted down by their terms from their original exercise price of $9.50 per
share to an
adjusted exercise price of $3.05 per share, and the underlying shares exercisable as of the Series B Closing were automatically increased from 213,935 shares to 666,375 shares at that time.
F-22
Table of Contents
COMBIMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Series C Convertible Preferred Stock Financing
On May 3, 2013, we entered into a securities purchase agreement (the "Series C Purchase Agreement") with certain
accredited investors (the "Series C Investors"), pursuant to which we sold and issued 1,200 shares of our newly created Series C 6% convertible preferred stock (the "Series C
Stock") to the Series C Investors at a purchase price of $1,000 per share in an initial closing that occurred on May 6, 2013 (the "Series C First Closing"), and we sold and issued
1,200 additional shares of Series C Stock to the Series C Investors on June 28, 2013 at a purchase price of $1,000 per share after stockholder approval was obtained on
June 27, 2013 (the "Series C Second Closing") (combined, the "Series C Financing"). After certain offering-related costs, the net proceeds from the Series C Financing were
$2.14 million.
As
a result of the Series C Second Closing, the conversion price for the Series C Stock was set to $2.85759 per share, or the equivalent of 839,864 shares of common stock
issuable upon conversion of all Series C Stock. The conversion price of the Series C Stock was also subject to proportional adjustment for stock splits, stock dividends,
recapitalizations and the like. The Series C Stock earned 6% annual dividends.
Accrued
dividends are payable semi-annually, and also on the date of conversion of any Series C Stock, in cash or, subject to certain conditions and at our election, in shares of common stock.
If the dividends are paid in shares of common stock, the number of shares of common stock comprising the dividend on each share of Series C Stock will be valued at a 20% discount to the average
of the daily volume weighted average price for the five-day trading period immediately prior to the dividend payment date. Given that the effective conversion price of the Series C Stock was
below the closing market price of our common stock at the time of both of the Series C closings, we recognized beneficial conversion features in the amount of $1.2 million, which were
limited to and reduced the net proceeds allocated to the Series C Stock. Since the Series C Stock was immediately convertible into common stock, the beneficial conversion feature was
treated as a deemed dividend charged to retained earnings.
Also
as a result of the Series C Second Closing, the exercise price of the Series A Warrants issued in the Series A First Closing automatically ratcheted down by
their terms from their most recent exercise price of $3.05 per share to an adjusted exercise price of $2.86 per share, and the underlying shares exercisable as of the Series C Second Closing
were automatically increased from 441,566 shares to
470,907 shares. In addition, the conversion price of the Series B Stock automatically ratcheted down by their terms from $3.05 per share to an adjusted conversion price of $2.85759 per share,
and the underlying shares issuable from conversion of Series B Stock as of the Series C Second Closing were automatically increased from 109,837 shares to 117,231 shares.
In
addition to the issuance of the Series C Stock, we issued warrants at the Series C First Closing to purchase 491,803 shares of our common stock with an exercise price of
$3.77 per share, and. at the Series C Second Closing, we issued additional warrants to purchase 491,803 shares of our common stock with an exercise price of $3.55 per share (collectively, the
"Series C Warrants"). The exercise price of the Series C Warrants issued equaled 110% of the market value (as defined by Nasdaq rules) of one share of common stock on each closing date.
The Series C Warrants have a 5
1
/
2
year term, were not exercisable for the first six months following issuance and include a cashless exercise provision, which is only applicable
if the common stock underlying the Series C Warrants was not subject to an effective registration statement or otherwise cannot be sold without restriction pursuant to Rule 144.
The
common stock underlying the Series C Stock and Series C Warrants were initially unregistered under the Securities Act of 1933. In connection with the Series C
Financing, however, we entered into a registration rights agreement with the Series C Investors (the "Registration Rights Agreement"). The Registration Rights Agreement required us to file
registration statements with the SEC registering for resale: (i) the shares of common stock issuable upon conversion of the Series C Stock; (ii) the shares of
F-23
Table of Contents
COMBIMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
common
stock issuable as dividends on the Series C Stock; (iii) the shares of common stock issuable upon exercise of the Series C Warrants; and (iv) any additional shares
of common stock issuable in connection with any anti-dilution provisions associated with the Series C Stock. We filed registration statements relating to both of the Series C closings,
and both registration statements have been declared effective by the SEC. Under the terms of the Registration Rights Agreement, we are obligated to maintain the effectiveness of the resale
registration statements until all securities registered thereunder are sold or otherwise can be sold without restriction pursuant to Rule 144. The Registration Rights Agreement includes
liquidated damages provisions in the event we fail to file or maintain the effectiveness of the registration statements. We do not plan, nor are we obligated, to register the Series C Stock or
the Series C Warrants.
For
the year ended December 31, 2013, the Series C Investors have converted all of their shares of Series C stock into 839,864 shares of common stock.
Series D Convertible Preferred Stock Financing
On December 20, 2013 (the "Series D Closing"), we closed an underwritten public offering (the "Series D Offering")
and issued 12,000 units of securities to investors, with each unit consisting of: (i) one share of Series D preferred stock ("Series D Stock") convertible into shares of our
common stock equal to 1,000 divided by the conversion price of $2.06, which was 72.5% of the consolidated closing bid price of our common stock on the Nasdaq Capital Market on December 16,
2013, the date we executed the underwriting agreement ("UA date"); and (ii) one warrant exercisable for 485.4369 shares of our common stock, at an exercise price per share equal to $3.12
("Series D Warrants"), which was 110% of the consolidated closing bid price of our common stock on the Nasdaq Capital Market on the UA date. The shares of common stock underlying the
Series D Stock and Series D Warrants were registered on Form S-1 (File No. 333-191221), which was declared effective by the SEC on December 16, 2013. The
Series D Stock was immediately convertible and the Series D Warrants were immediately exercisable for shares of common stock and have a term of five years. In total, there were 5,825,243
shares of common stock issuable upon conversion of the Series D Stock and up to 5,825,243 shares of common stock issuable upon exercise of the Series D Warrants. The units were sold for
a purchase price equal to $1,000 per unit, resulting in gross proceeds of $12 million at the Series D Closing. After certain offering-related costs paid to the underwriters and others at
the closing and through February 2014, net proceeds received by us were $10.7 million. As of December 31, 2013, 9,799.3 shares of Series D Stock have converted into 4,756,946
shares of common stock. Subsequent to December 31, 2013 and through the date of this report, all of the remaining Series D Stock has converted into an additional 1,068,297 shares of
common stock. Also as a result of the Series D Offering, the exercise price of the then-outstanding Series A Warrants automatically ratcheted down by their terms from their original
exercise price of $2.86 per share to an adjusted exercise price of $2.06 per share, and the underlying shares exercisable was automatically increased by 81,910 shares. A registration statement on
Form S-3 has been filed in order to register these shares as per the terms of our original Series A offering documents.
F-24
Table of Contents
COMBIMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Warrants
Outstanding warrants to purchase our common stock are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of Common
Stock Issuable
from Warrants
Outstanding as of
December 31,
|
|
|
|
|
|
|
Exercise
Price
|
|
|
|
|
2013
|
|
2012
|
|
Expiration
|
|
Liability-classified warrants:
|
|
|
|
|
|
|
|
|
|
|
|
October 2012
|
|
|
292,817
|
|
|
213,945
|
|
$2.06(1)
|
|
April 2018
|
|
December 2012
|
|
|
—
|
|
|
724,825
|
|
$2.36
|
|
June 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
292,817
|
|
|
938,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity-classified warrants:
|
|
|
|
|
|
|
|
|
|
|
|
December 2013
|
|
|
5,825,243
|
|
|
—
|
|
$3.12
|
|
December 2018
|
|
June 2013
|
|
|
491,803
|
|
|
—
|
|
$3.55
|
|
December 2018
|
|
May 2013
|
|
|
491,803
|
|
|
—
|
|
$3.77
|
|
November 2018
|
|
March 2013
|
|
|
275,000
|
|
|
—
|
|
$3.49
|
|
September 2018
|
|
April 2011
|
|
|
131,047
|
|
|
131,047
|
|
$21.40
|
|
April 2016
|
|
October 2009
|
|
|
3,000
|
|
|
3,000
|
|
$77.80
|
|
October 2014
|
|
May 2009
|
|
|
2,967
|
|
|
2,967
|
|
$75.00 - $90.00
|
|
May 2014 - July 2014
|
|
May 2009
|
|
|
109,997
|
|
|
109,997
|
|
$90.00
|
|
May 2014
|
|
July 2008
|
|
|
—
|
|
|
33,698
|
|
$118.70 - $136.50
|
|
July 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,330,860
|
|
|
280,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total—all warrants
|
|
|
7,623,677
|
|
|
1,219,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Prior
to the anti-dilution adjustments which occurred on March 20, 2013, June 28, 2013 and December 20, 2013, these warrants had an
initial exercise price of $9.50 per share.
11. STOCK OPTIONS
Our employees participate in the CombiMatrix Corporation 2006 Stock Incentive Plan (the "CombiMatrix Plan"), which was approved by our board of directors in 2006.
In addition, during 2005, the board of directors of our wholly owned subsidiary, CombiMatrix Molecular Diagnostics, Inc., approved the CombiMatrix Molecular Diagnostics 2005 Stock Award Plan
(the "CMDX Plan"). Our board of directors believes that granting employees stock-based awards from the CombiMatrix Plan is in the best interest of our Company and our stockholders. No awards have been
granted to the CMDX Plan since 2010, and it is no longer being utilized.
CombiMatrix Corporation 2006 Stock Incentive Plan
The CombiMatrix Plan is administered by the Compensation Committee (the "Committee") of our Board of Directors. The Committee
determines which eligible individuals are to receive option grants or stock issuances under the CombiMatrix Plan, the time or times when the grants or issuances are to be made, the number of shares
subject to each grant or issuance, the status of any granted option as either an
F-25
Table of Contents
COMBIMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
incentive
stock option or a non-statutory stock option under the federal tax laws, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any
granted option is to remain outstanding.
The
CombiMatrix Plan is divided into three separate equity incentive programs: a discretionary option grant / stock appreciation right program, a stock issuance program, and an automatic
option grant program for outside directors. To date, the discretionary option grant program has been the primary program used in awarding stock-based compensation. Under the discretionary option grant
program, the Committee may grant non-statutory options to purchase shares of CombiMatrix stock to eligible individuals in our employ (including employees, non-employee board members and consultants)
at an exercise price not less than 100% of the fair market value of those shares on the grant date, and incentive stock options to purchase shares of CombiMatrix stock to eligible employees at an
exercise
price not less than 100% of the fair market value of those shares on the grant date. Options are generally exercisable over a three- or four-year vesting term following the date of grant and expire
ten years after the grant date. The authorized number of shares of common stock subject to the CombiMatrix Plan increases by 3% of the total number of CombiMatrix common stock outstanding at the end
of each calendar year. At December 31, 2013, there were approximately 856,000 authorized shares available under the CombiMatrix Plan, with approximately 203,000 shares available for grant.
The
following is a summary of the stock option activities under the CombiMatrix Plan for 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Price
|
|
Weighted
Contractual
Term
|
|
Aggregate
Intrinsic
Value
('000s)
|
|
|
Balance at December 31, 2011
|
|
|
223,243
|
|
$
|
48.69
|
|
7.8 years
|
|
$
|
6
|
|
|
Granted
|
|
|
60,000
|
|
$
|
10.00
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(52,933
|
)
|
$
|
22.47
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(66,377
|
)
|
$
|
67.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
163,933
|
|
$
|
35.21
|
|
7.3 years
|
|
$
|
23
|
|
|
Granted
|
|
|
502,586
|
|
$
|
3.29
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(13,750
|
)
|
$
|
9.68
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(13,750
|
)
|
$
|
28.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
|
639,019
|
|
$
|
10.79
|
|
8.7 years
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2012
|
|
|
86,335
|
|
$
|
53.44
|
|
5.7 years
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2013
|
|
|
98,259
|
|
$
|
47.75
|
|
6.0 years
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
Table of Contents
COMBIMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information
related to options granted under the CombiMatrix Plan for 2013 and 2012 is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
Weighted average fair values of options granted
|
|
$
|
2.39
|
|
$
|
6.23
|
|
|
Options granted with exercise prices:
|
|
|
|
|
|
|
|
|
Greater than market price on the grant date
|
|
|
—
|
|
|
—
|
|
|
Equal to market price on the grant date
|
|
|
502,586
|
|
|
60,000
|
|
|
Less than market price on the grant date
|
|
|
—
|
|
|
—
|
|
There
were no option exercises during 2013 or 2012. The aggregate fair value of options vested during the years ended December 31, 2013 and 2012 was $279,000 and $600,000,
respectively. As of December 31, 2013, the total unrecognized compensation expense related to non-vested stock option awards was $1.2 million, which is expected to be recognized over a
weighted average term of approximately 2.5 years.
CombiMatrix Molecular Diagnostics 2005 Stock Award Plan
Our wholly owned subsidiary, CMDX, executed the CMDX Plan, with plan provisions and terms similar to that of the CombiMatrix Plan as
described above. At December 31, 2013, there were 4.0 million authorized shares available under the CMDX Plan, with approximately
3.7 million shares available for grant. However, our Board of Directors has no intention of utilizing this plan in the future.
The
following is a summary of stock option activities for the CMDX Plan for 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Price
|
|
Weighted
Contractual
Term
|
|
Aggregate
Intrinsic
Value
('000s)
|
|
|
Balance at December 31, 2011
|
|
|
411,000
|
|
$
|
0.36
|
|
4.2 years
|
|
$
|
60
|
|
|
Granted
|
|
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(120,000
|
)
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
291,000
|
|
$
|
0.34
|
|
3.1 years
|
|
$
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
Cancelled
|
|
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
|
291,000
|
|
$
|
0.34
|
|
2.1 years
|
|
$
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2012
|
|
|
241,000
|
|
$
|
0.30
|
|
3.0 years
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2013
|
|
|
241,000
|
|
$
|
0.30
|
|
2.1 years
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There
were no option grants during 2013 or 2012 under the CMDX Plan. The fair value of options vested during the years ended December 31, 2013 and 2012 was not significant. As of
December 31, 2013, the total unrecognized compensation expense related to non-vested stock option awards was not significant.
F-27
Table of Contents
COMBIMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock Option Awards Granted to Non-Employees
Stock option expense reflected in the consolidated statements of operations related to stock options issued to our non-employee
scientific advisory board members and consultants are recognized at fair value using the Black-Scholes option-pricing model with weighted average assumptions as disclosed in Note 2 under
"Stock-Based Compensation." For the years ended December 31, 2013 and 2012, non-cash charges recognized from stock option awards granted to non-employees was not significant.
12. SUBSEQUENT EVENT
From January 1, 2014 through the date of this report, certain investors have exercised Series A Warrants to purchase 124,111 shares of our common
stock, resulting in net proceeds of $256,000 to us.
F-28
Table of Contents
EXHIBIT INDEX
|
|
|
|
Exhibit
Number
|
|
Description
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation(1)
|
3.2
|
|
Certificate of Amendment to Amended and Restated Certificate of Incorporation(2)
|
3.3
|
|
Certificate of Amendment to Amendment and Restated Certificate of Incorporation(3)
|
3.4
|
|
Second Amended and Restated Bylaws(4)
|
3.5
|
|
Certificate of Designation of Preferences, Rights and Limitations of Series A 6% Convertible Preferred Stock(5)
|
3.6
|
|
Certificate of Designation of Preferences, Rights and Limitations of Series B 6% Convertible Preferred Stock(27)
|
3.7
|
|
Certificate of Designation of Preferences, Rights and Limitations of Series C 6% Convertible Preferred Stock(33)
|
3.8
|
|
Certificate of Designation of Preferences, Rights and Limitations of Series D Convertible Preferred Stock(40)
|
10.2†
|
|
Restated Executive Change in Control Severance Plan(6)
|
10.4
|
|
Amendment No. 3 to Lease dated as of January 11, 2010(7)
|
10.5
|
|
Amendment No. 4 to the Lease effective as of October 21, 2012(8)
|
10.6†
|
|
2006 Stock Incentive Plan, as amended(9)
|
10.7†
|
|
Form of Stock Incentive Plan Agreement(10)
|
10.8†
|
|
Employment Agreement for Mark McDonough(11)
|
10.9
|
|
Form of Amended and Restated Indemnification Agreement(12)
|
10.13
|
|
Form of Securities Purchase Agreement dated as of April 1, 2011(13)
|
10.14
|
|
Form of Investors Rights Agreement dated as of April 1, 2011(14)
|
10.15
|
|
HLM Rights Agreement dated as of April 1, 2011(15)
|
10.16
|
|
Form of Warrant to Purchase Common Stock issued on April 7, 2011(16)
|
10.17
|
|
Form of Indemnity Agreement(17)
|
10.18
|
|
Form of Securities Purchase Agreement dated as of September 28, 2012(18)
|
10.19
|
|
Form of Warrant to Purchase Common Stock(19)
|
10.20
|
|
Form of Registration Rights Agreement dated as of September 28, 2012(20)
|
10.21
|
|
Form of Lock-Up Agreement dated as of September 28, 2012(21)
|
10.22
|
|
Form of Voting Agreement dated as of September 28, 2012(22)
|
10.23
|
|
Consent and Waiver executed on December 4, 2012(23)
|
10.24†
|
|
Employment Agreement for Richard Hockett, M.D.(24)
|
10.25†
|
|
Amendment to CombiMatrix 2006 Stock Incentive Plan(25)
|
10.26
|
|
Form of Amendment No. 1 to Common Stock Purchase Warrant dated February 26, 2013(26)
|
10.27
|
|
Form of Warrant to Purchase Common Stock(28)
|
10.28
|
|
Form of Securities Purchase Agreement dated as of March 19, 2013(29)
|
Table of Contents
|
|
|
|
Exhibit
Number
|
|
Description
|
|
10.29
|
|
Placement Agent Agreement, dated July 13, 2012, between the Company and C. K. Cooper & Company(30)
|
10.30
|
|
Addendum to Placement Agent Agreement, dated September 10, 2012, between the Company and C. K. Cooper & Company(31)
|
10.31
|
|
Addendum to Placement Agent Agreement, dated March 14, 2013, between the Company and C. K. Cooper & Company(32)
|
10.32†
|
|
Mark McDonough Compensation Arrangement(42)
|
10.33
|
|
Form of Waiver Regarding HLM Rights Agreement dated April 5, 2013(47)
|
10.34
|
|
Form of Securities Purchase Agreement dated as of May 3, 2013(34)
|
10.35
|
|
Form of Warrant to Purchase Common Stock(35)
|
10.36
|
|
Form of Registration Rights Agreement dated as of May 3, 2013(36)
|
10.37†
|
|
Form of Voting Agreement dated as of May 3, 2013(37)
|
10.38†
|
|
Form of Stock Incentive Plan Agreement for Performance-Based Options(43)
|
10.39†
|
|
Letter Agreement dated June 27, 2013 regarding Mark McDonough's bonus arrangement(38)
|
10.40
|
|
Amendment No. 5 to Lease effective as of July 16, 2013(39)
|
10.50
|
|
Form of Warrant to Purchase Common Stock(41)
|
10.51†
|
|
2014 Executive Performance Bonus Plan, as amended(44)
|
10.52†
|
|
Form of Restricted Stock Unit Award Agreement under the Company's 2006 Stock Incentive Plan(45)
|
10.53†
|
|
Employment Agreement for R. Weslie Tyson, M.D.(46)
|
21.1
|
|
Subsidiaries of the Registrant(*)
|
23.1
|
|
Consent of Haskell & White LLP(*)
|
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 Annual Report on Form 10-K for the year ended December 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated
Balance Sheets as of December 31, 2013 and 2012; (ii) Consolidated Statements of Operations for the years ended December 31, 2013 and 2012; (iii) Consolidated Statements of Comprehensive Loss for the years ended December 31,
2013 and 2012; (iv) Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2013 and 2012; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012; and
(vi) Notes to Consolidated Financial Statements.(*)
|
Table of Contents
-
†
-
Denotes
management contract or compensatory plan or arrangement.
-
(1)
-
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.
-
(2)
-
Incorporated
by reference to Exhibit 3.1A to the Company's Quarterly Report on Form 10-Q filed August 14, 2008.
-
(3)
-
Incorporated
by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
December 4, 2012.
-
(4)
-
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.
-
(5)
-
Incorporated
by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
October 1, 2012.
-
(6)
-
Incorporated
by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q (File No. 001-33523) filed with the SEC on
August 16, 2010.
-
(7)
-
Incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
January 15, 2010.
-
(8)
-
Incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
October 25, 2012.
-
(9)
-
Incorporated
by reference to Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q (File No. 001-33523) filed with the SEC on
August 9, 2013.
-
(10)
-
Incorporated
by reference to the Company's Registration Statement on Form S-1 (SEC File No. 333-139679), which became effective
June 8, 2007.
-
(11)
-
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
November 13, 2012.
-
(12)
-
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
August 12, 2011.
-
(13)
-
Incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
April 7, 2011.
-
(14)
-
Incorporated
by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
April 7, 2011.
-
(15)
-
Incorporated
by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
April 7, 2011.
-
(16)
-
Incorporated
by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
April 7, 2011.
-
(17)
-
Incorporated
by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
April 7, 2011.
-
(18)
-
Incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
October 1, 2012.
-
(19)
-
Incorporated
by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
October 1, 2012.
-
(20)
-
Incorporated
by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
October 1, 2012.
-
(21)
-
Incorporated
by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
October 1, 2012.
Table of Contents
-
(22)
-
Incorporated
by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
October 1, 2012.
-
(23)
-
Incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
December 7, 2012.
-
(24)
-
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.
-
(25)
-
Incorporated
by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q (File No. 001-33523) filed with the SEC on
November 13, 2012.
-
(26)
-
Incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
February 26, 2013.
-
(27)
-
Incorporated
by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
March 20, 2013.
-
(28)
-
Incorporated
by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
March 20, 2013.
-
(29)
-
Incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
March 20, 2013.
-
(30)
-
Incorporated
by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
March 20, 2013.
-
(31)
-
Incorporated
by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
March 20, 2013.
-
(32)
-
Incorporated
by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
March 20, 2013.
-
(33)
-
Incorporated
by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
May 6, 2013.
-
(34)
-
Incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
May 6, 2013.
-
(35)
-
Incorporated
by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
May 6, 2013.
-
(36)
-
Incorporated
by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
May 6, 2013.
-
(37)
-
Incorporated
by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
May 6, 2013.
-
(38)
-
Incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
July 1, 2013.
-
(39)
-
Incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
July 19, 2013.
-
(40)
-
Incorporated
by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
December 23, 2013.
-
(41)
-
Incorporated
by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-1/A (File No. 333-191211) filed with the
SEC on December 16, 2013.
-
(42)
-
Incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
April 3, 2013.
Table of Contents
-
(43)
-
Incorporated
by reference to Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q (File No. 001-33523) filed with the SEC on
May 13, 2013.
-
(44)
-
Incorporated
by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
March 10, 2014.
-
(45)
-
Incorporated
by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
February 24, 2014.
-
(46)
-
Incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
March 10, 2014.
-
(47)
-
Incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-33523) filed with the SEC on
April 8, 2013.
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