NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
OVERVIEW AND BACKGROUND
CombiMatrix
Corporation (the “Company,” “we,” “us” and “our”) was originally incorporated
in October 1995 as a California corporation and later reincorporated as a Delaware corporation in September 2000. In December
2002, we merged with, and became a wholly owned subsidiary of Acacia Research Corporation (“Acacia”). In 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 pre-implantation genetic diagnostics and screening, miscarriage analysis, prenatal and pediatric diagnostics, 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 analysis, standardized
and customized fluorescent in-situ hybridization (“FISH”) and high resolution karyotyping. We emphasize support for
healthcare professionals, to ensure data understanding and communication of results to patients. We deliver high technology driven
answers, with a high degree of assistance for the ordering physician and staff. Our laboratory facilities and corporate headquarters
are located in Irvine, California.
We
also own a one-third minority interest in Leuchemix, Inc. (“Leuchemix”), a private drug development company focused
on developing a series of compounds to address a number of oncology-related diseases.
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, certain
information and notes required by generally accepted accounting principles in annual financial statements have been omitted or
condensed. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements
and notes thereto for the year ended December 31, 2015, as reported by us in our Annual Report on Form 10-K filed with the SEC
on February 18, 2016. The year-end consolidated balance sheet data was derived from audited financial statements but does not
include all disclosures required by accounting principles generally accepted in the United States of America. The consolidated
financial statements include all adjustments of a normal recurring nature which, in the opinion of management, are necessary for
a fair statement of our financial position as of March 31, 2016, and results of operations and cash flows for the interim periods
presented. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results to
be expected for the entire year.
Reverse
Stock Split
On
January 29, 2016, we filed a Certificate of Amendment to our Certificate of Incorporation with the Secretary of State of the State
of Delaware to effect a reverse split of our common stock at a ratio of one-for-fifteen (the “Reverse Stock Split”),
which became effective at the close of business on that day. As a result, each share of CombiMatrix common stock outstanding as
of January 29, 2016 was automatically changed into one-fifteenth of a share of common stock. No fractional shares were issued
in connection with the Reverse Stock Split, and cash paid to stockholders for potential fractional shares was insignificant. The
number of shares of common stock subject to outstanding options, warrants and convertible securities were also reduced by a factor
of fifteen as of January 29, 2016. All historical share and per share amounts reflected throughout this document have been adjusted
to reflect the Reverse Stock Split. The authorized number of shares and the par value per share of our common stock were not affected
by the Reverse Stock Split.
Liquidity
and Risks
We
have a history of incurring net losses and net operating cash flow deficits. We are also deploying new technologies and continue
to develop new and improve existing commercial diagnostic testing services and related technologies. On March 31, 2016, we had
cash, cash equivalents and short-term investments of $6.6 million and anticipate that our cash and cash equivalent balances will
be sufficient to meet our cash requirements for at least the next twelve months. In order for us to achieve profitability, we
may be required to obtain capital from external sources, increase revenues and reduce operating costs. However, there can be no
assurance that our operations will become profitable or that external sources of financing, including the issuance of debt and/or
equity securities, will be available at times and at terms acceptable to us, or at all. The issuance of additional equity or convertible
debt securities will also cause dilution to our stockholders. If external financing sources are not available or are inadequate
to fund our operations, we will be required to reduce operating costs, including research projects and personnel, which could
jeopardize our future strategic initiatives and business plans.
COMBIMATRIX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Our
business operations are also subject to certain risks and uncertainties, including:
|
●
|
market
acceptance of our technologies and services;
|
|
|
|
|
●
|
technological
advances that may make our technologies and services obsolete or less competitive;
|
|
|
|
|
●
|
increases
in operating costs, including costs for supplies, personnel and equipment;
|
|
|
|
|
●
|
variability
in third-party reimbursement of our tests;
|
|
|
|
|
●
|
the
availability and cost of capital; and
|
|
|
|
|
●
|
governmental
regulation that may restrict our business.
|
Our
services are concentrated in a highly competitive market that is characterized by rapid technological advances, frequent changes
in customer requirements and evolving regulatory requirements and industry standards. Failure to anticipate or respond adequately
to technological advances, changes in customer requirements, changes in regulatory requirements or industry standards, or any
significant delays in the development or introduction of planned 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
Use
of Estimates.
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”)
in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Principles
of Consolidation
. The accompanying consolidated financial statements include the accounts of the Company and our wholly owned
and majority-owned subsidiaries. Investments for which we possess the power to direct or cause the direction of management and
policies, either through majority ownership or other means, are accounted for under the consolidation method. Material intercompany
transactions and balances have been eliminated in consolidation. Investments in companies in which we maintain an ownership interest
of 20% to 50% or exercise significant influence over operating and financial policies are accounted for under the equity method.
The cost method is used where we maintain ownership interests of less than 20% and do not exercise significant influence over
the investee.
Revenue
Recognition
. We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services
have been performed, (iii) amounts are fixed or determinable and (iv) collectability of amounts is reasonably assured.
Service
revenues from providing diagnostic tests are recognized when the testing process is complete and test results are reported to
the ordering physician or clinic. These diagnostic services are billed to various payors, including commercial insurance companies,
healthcare institutions, government payors including various state Medicaid programs, and individuals. We report revenues from
contracted payors based on a contractual rate, or in the case of state Medicaid contracts, published fee schedules for our tests.
We report revenues from non-contracted payors based on the amounts expected to be collected. The differences between the amounts
billed and the amounts expected to be collected from non-contracted payors are recorded as contractual allowances to arrive at
net recognized revenues. The expected revenues from non-contracted payors are based on the historical collection experience of
each payor or payor group, as appropriate, and also take into account recent collection trends. In each reporting period, we review
our historical collection experience for non-contracted payors and adjust our expected revenues for current and subsequent periods
accordingly. We also recognize additional revenue from actual cash payments that exceed amounts initially recognized, in the period
the payments are received. For the three months ended March 31, 2016 and 2015, net positive revenue adjustments were $400,000
and $127,000, 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. No single customer exceeded 10% of revenues for the quarter ended March
31, 2016. For the quarter ended March 31, 2015, 11% of our revenues were from one customer.
COMBIMATRIX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Cash
Equivalents and Short-Term Investments.
We consider all highly liquid investments purchased with original maturities of three
months or less when purchased to be cash equivalents. Short-term investments consist of fixed income investments with maturities
between three and 12 months and other highly liquid investments that can be readily purchased or sold using established markets.
These investments are classified as available-for-sale and are reported at fair value on the Company’s consolidated balance
sheet. Unrealized holding gains and losses are reported within comprehensive loss in the consolidated 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.
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 equivalents within the fair value hierarchy as Level 1 as these assets are valued using quoted prices in active
markets for identical assets at the measurement date. We classify short-term investments within the fair value hierarchy as Level
2, primarily utilizing broker quotes in a non-active market for valuation of these investments. Financial instruments that contain
valuation inputs that are not readily determinable from active markets or from similar securities trading in active markets, such
as derivative financial instruments, are classified within the fair value hierarchy as Level 3.
Impairment
of Long-Lived Assets
. Long-lived assets and intangible assets are reviewed for potential impairment when events or changes
in circumstances indicate the carrying amount of an asset may not be recoverable. In the event the sum of the expected undiscounted
future cash flows resulting from the use of the asset is less than the carrying amount of the asset, an impairment loss equal
to the excess of the asset’s carrying value over its fair value is recorded. If an asset is determined to be impaired, the
loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the
estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows.
Derivative
Financial Instruments.
We evaluate financial instruments for freestanding or embedded derivatives. Derivative instruments
that do not qualify for permanent equity classification are recorded as liabilities at fair value, with changes in value recognized
as other income (expense) in the consolidated statements of operations in the period of change. Derivative liabilities are categorized
as either short-term or long-term based upon management’s estimates as to when the derivative instrument may be realized
or based upon the holder’s ability to realize the instrument.
Concentration
of Credit Risks
. Cash and cash equivalents are invested in deposits with certain financial institutions and may, at times,
exceed federally insured limits. We have not experienced any significant losses on our deposits of cash and cash equivalents.
We do not believe that we are exposed to significant credit risk on cash and cash equivalents or on our short-term investments.
As of March 31, 2016, accounts receivable from one commercial insurance carrier of $398,000 exceeded 10% of our total accounts
receivable balance. As of December 31, 2015, accounts receivable from the same commercial insurance carrier of $316,000 exceeded
10% of our total accounts receivable balance.
COMBIMATRIX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Substantially
all of the components and raw materials used in providing our testing services, including array slides and reagents, are currently
provided to us from a limited number of sources or in some cases from a single source. Although we believe that alternative sources
for those components and raw materials are available, any supply interruption in a sole-sourced component or raw material might
result in up to a several-month production delay and materially harm our ability to provide testing services until a new source
of supply, if any, could be located and qualified.
Accounts
Receivable and Allowance for Doubtful Accounts.
For our contracted third-party payors, governmental payors or direct-bill
customers, accounts receivable are stated at principal amounts and are primarily comprised of amounts contractually due from customers
for services performed. For our non-contracted payors, accounts receivable are stated at amounts expected to be collected based
upon historical collection experience with the third-party payor. The payment realization cycle for certain governmental and commercial
insurance payors can be lengthy, involving denial, appeal and adjudication processes, and is subject to periodic adjustments that
may be significant. Accounts receivable are periodically written off when identified as uncollectible after appropriate collection
efforts have been exhausted. Such write-offs increase the contractual allowances (which reduce revenues) for those accounts in
the period of adjustment. Collection of governmental, private health insurer, and client receivables are generally a function
of providing complete and correct billing information to the insurers and clients within the filing deadlines required by each
payor.
Collection
of receivables due from patients and private-pay clients is generally subject to increased credit risk due to credit-worthiness
or inability to pay. For these customers, an allowance for doubtful accounts is recorded for estimated uncollectible amounts,
and involves significant assumptions and judgments. Specifically, the allowance for doubtful accounts is adjusted periodically
and is principally based upon specific identification of past due or disputed accounts. We also review the age of receivables
to assess our allowance at each period end. Additions to the allowance for doubtful accounts are charged to bad debt expense as
a component of general and administrative expenses in the consolidated statements of operations.
Stock-Based
Compensation
. The compensation cost for all employee stock-based awards is measured at the grant date, based on the fair value
of the award, and is recognized as an expense, on a straight-line basis, over the employee’s requisite service period (generally
the vesting period of the equity award) which is generally four years. The fair value of each stock option award is estimated
on the date of grant using a Black-Scholes option valuation model. The fair value of each restricted stock unit (“RSU”)
award is based on the number of shares granted and the closing price of our common stock on Nasdaq on the date of grant. Stock-based
compensation expense is recognized only for those awards that are expected to vest using an estimated forfeiture rate. We estimate
pre-vesting option forfeitures at the time of grant and reflect the impact of estimated pre-vesting option forfeitures in compensation
expense recognized.
Stock-based
compensation expense for all periods presented attributable to our functional expense categories from stock option and RSU awards
vesting during the periods presented were as follows (in thousands):
|
|
For
The Three Months
|
|
|
|
Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cost
of services
|
|
$
|
16
|
|
|
$
|
5
|
|
Research
and development
|
|
|
-
|
|
|
|
-
|
|
Sales
and marketing
|
|
|
27
|
|
|
|
26
|
|
General
and administrative
|
|
|
172
|
|
|
|
144
|
|
Total
non-cash stock compensation
|
|
$
|
215
|
|
|
$
|
175
|
|
Net
Loss Per Share
. Basic and diluted net loss per share has been computed by dividing the net loss by the weighted average number
of common shares issued and outstanding during the periods presented. Options and warrants to purchase common stock as well as
preferred stock convertible into shares of common stock are anti-dilutive and therefore are not included in the determination
of the diluted net loss per share. The following table reflects the excluded dilutive securities:
COMBIMATRIX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
|
|
For
the Three Months
Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Common
stock options
|
|
|
75,163
|
|
|
|
60,807
|
|
Restricted
stock units
|
|
|
27,848
|
|
|
|
41,584
|
|
Common
stock warrants
|
|
|
2,710,500
|
|
|
|
540,639
|
|
Series
E preferred stock convertible into common stock
|
|
|
-
|
|
|
|
83,871
|
|
Series
F preferred stock convertible into common stock
|
|
|
1,856,324
|
|
|
|
-
|
|
Excluded
dilutive securities
|
|
|
4,669,835
|
|
|
|
726,901
|
|
Segments.
We have determined that we operate in one segment for financial reporting purposes.
Recent
Accounting Pronouncements.
In March 2016, the Financial Accounting Standards Board (“FASB”) issued guidance regarding
employee share-based payment accounting. The guidance is intended to simplify several areas of accounting for share-based compensation
arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The standard is
effective for the Company on January 1, 2017. We are currently evaluating the impact that this guidance will have on our consolidated
financial statements.
In
February 2016, the FASB issued guidance regarding leases, which requires lessees to recognize on the balance sheet a right-of-use
asset, representing their right to use the underlying asset for the lease term, and a lease liability for all leases with terms
greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing
and uncertainty of cash flows arising from leases. The guidance requires the use of a modified retrospective transition approach,
which includes a number of optional practical expedients that entities may elect to apply. The guidance is effective for the Company
beginning January 1, 2019, and we are currently evaluating the impact that this guidance will have on our consolidated financial
statements.
In
January 2016, the FASB issued accounting guidance regarding recognition and measurement of financial assets and financial liabilities.
This guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition,
measurement, presentation and disclosure. The guidance is effective for annual reporting periods beginning after December 15,
2017, and interim periods within those annual periods. We do not expect the adoption of this guidance to have any impact on our
consolidated financial statements.
In
July 2015, the FASB issued accounting guidance regarding simplifying the measurement of inventory. The new guidance applies only
to inventory for which cost is determined by methods other than last-in, first-out and the retail inventory method, which includes
inventory that is measured using first-in, first-out or average cost. Inventory within the scope of this standard is required
to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary
course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard will be effective
for us on January 1, 2017. We do not expect the adoption of this guidance to have a material impact on our consolidated financial
statements.
In
April 2015, the FASB issued new accounting guidance that requires debt issuance costs related to a recognized debt liability to
be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being
presented as an asset. Debt disclosures will include the face amount of the debt liability and the effective interest rate. The
guidance requires retrospective application and represents a change in accounting principle. This guidance is effective for us
in the first quarter of 2016. Implementation of this guidance did not have a material impact on our consolidated financial statements.
Reclassifications
.
Certain prior period amounts have been reclassified to conform to the current period presentation.
COMBIMATRIX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3.
CASH AND SHORT-TERM INVESTMENTS
As
of March 31, 2016, we held $5.6 million in cash and cash equivalents and $1.0 million of short-term investments, which are reported
at fair value. Cash, cash equivalents and short-term investments consisted of the following as of March 31, 2016 and December
31, 2015 (in thousands):
|
|
March
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
|
Gain
|
|
|
|
Loss
|
|
|
Value
|
|
|
Cost
|
|
|
|
Gain
|
|
|
|
Loss
|
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and money market securities
|
|
$
|
5,608
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,608
|
|
|
$
|
653
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
653
|
|
Corporate
bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Certificates
of deposit
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
3,250
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
3,248
|
|
|
|
$
|
6,608
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,608
|
|
|
$
|
3,903
|
|
|
$
|
-
|
|
|
$
|
(2
|
)
|
|
$
|
3,901
|
|
There
were no realized gains or losses for the periods ended March 31, 2016 or 2015.
4.
FAIR VALUE MEASUREMENTS
The
following table summarizes, for each major category of financial assets measured on a recurring basis, the respective fair value
at March 31, 2016 and December 31, 2015 and the classification by level of input within the fair value hierarchy defined above
(in thousands):
|
|
|
|
|
Fair
Value Measurements
|
|
March
31, 2016
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
|
Level
3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents
|
|
$
|
3,022
|
|
|
$
|
3,022
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Short-term
investments
|
|
|
1,000
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
-
|
|
Total
|
|
$
|
4,022
|
|
|
$
|
3,022
|
|
|
$
|
1,000
|
|
|
$
|
-
|
|
|
|
|
|
|
Fair
Value Measurements
|
|
December
31, 2015
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
|
Level
3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents
|
|
$
|
99
|
|
|
$
|
99
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Short-term
investments
|
|
|
3,248
|
|
|
|
-
|
|
|
|
3,248
|
|
|
|
-
|
|
Total
|
|
$
|
3,347
|
|
|
$
|
99
|
|
|
$
|
3,248
|
|
|
$
|
-
|
|
The
carrying amounts of accounts receivable, accounts payable, accrued expenses, capital leases and the secured promissory note approximate
fair value due primarily to the short-term nature of these financial instruments.
COMBIMATRIX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
5.
SECURED PROMISSORY NOTE
On
May 20, 2014 (“Execution Date”), we executed a secured promissory note (the “Note”) with ACC Investment
Ltd. in the amount of $350,000, payable in equal amortized payments over a thirty-six month period (the “Term”) from
the Execution Date. The Note bears an annual interest rate of 10% and is secured by certain laboratory equipment used in our microarray
services business. Legal and other closing costs totaling $22,000 were capitalized with the Note and are being amortized over
the Term as interest expense. As of March 31, 2016 and December 31, 2015, components of the Note were as follows (in thousands):
|
|
March
31,
2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Carrying
value
|
|
$
|
138
|
|
|
$
|
168
|
|
Unamortized
legal and closing costs
|
|
|
(8
|
)
|
|
|
(10
|
)
|
|
|
|
130
|
|
|
|
158
|
|
Less-
current portion
|
|
|
(127
|
)
|
|
|
(124
|
)
|
Long-term
portion
|
|
$
|
3
|
|
|
$
|
34
|
|
6.
STOCKHOLDERS’ EQUITY
Series
A through E Convertible Preferred Stock and Warrants Financings
Between
2012 and 2015, we executed several financing transactions whereby we issued convertible preferred stock and warrants to purchase
common stock to investors. As of March 31, 2016, none of the Series A through E convertible preferred stock remained outstanding
(see further discussion of the Series E convertible preferred stock below). For as long as the Series A warrants remain unexercised
through their expiration date, except under certain permitted circumstances, we may not issue, or enter into any agreement to
issue, common stock or common stock equivalents at a price per share below the $73.65 exercise price of the Series A warrants,
unless waivers from the Series A investors are obtained. Until the time that less than 7.5% of the Series B, C and E warrants
remain unexercised through their expiration date, except under certain permitted circumstances, we may not issue, or enter into
any agreement to issue, common stock or common stock equivalents at prices per share below the $29.55, $29.55 and $32.51 exercise
prices of the Series B, C and E warrants, respectively, unless waivers from the Series B, C and E investors are obtained. In addition,
until there are no longer Series A, C and E warrants outstanding we may not sell any variable rate securities except for certain
exempt issuances.
Series
E Convertible Preferred Stock Financing
On
February 13, 2015, we and certain accredited institutional pre-existing investors (the “Series E Investors”) entered
into a securities purchase agreement (the “Series E Purchase Agreement”), pursuant to which we sold 102,800 shares
common stock at a price of $26.25 per share, 2,201.493 shares of Series E 6% Convertible Preferred Stock (the “Series E
Preferred Stock”) and warrants to purchase 46,676 shares of common stock initially at an exercise price of $29.55 per share,
which was the consolidated closing bid price of our common stock on Nasdaq immediately prior to entering into the Series E Purchase
Agreement (the “Series E Warrants”, and the transactions contemplated by the Series E Purchase Agreement, the “Series
E Financing”). The Series E Preferred Stock and Series E Warrants were sold in a fixed combination consisting of one share
of Series E Preferred Stock and a Series E Warrant to purchase approximately 21.1977 shares of common stock. Each fixed combination
of Series E Preferred Stock and Series E Warrants were sold at a price of $1,000. The Series E Preferred Stock sold was convertible
into 83,871 shares of common stock at an initial conversion price of $26.25 per share. The closing under the Series E Purchase
Agreement occurred on February 18, 2015 (the “Series E Closing Date”), where we received gross proceeds of $4.9 million
from the Series E Investors. After closing-related costs and expenses, net proceeds from the Series E Financing were approximately
$4.7 million. Given that the effective conversion price of the Series E Preferred Stock, inclusive of amounts allocated to common
stock and Series E Warrants, was below the closing market price of our common stock at the time of the Series E Closing Date,
we recognized a beneficial conversion feature in the amount of $890,000. Since the Series E Preferred Stock was immediately convertible
into common stock, the beneficial conversion feature was treated as a deemed dividend charged to retained earnings.
Each
share of Series E Preferred Stock had initially carried a 6% per annum dividend that would begin accruing six months after the
Series E Closing Date and would be payable only in cash, but these dividends had been waived for all time by the holders of Series
E Preferred Stock, as described below. Until the volume weighted average price of our common stock on Nasdaq exceeds 200% of the
conversion price of the Series E Preferred Stock for ten consecutive trading days, the Series E Preferred Stock was subject to
full ratchet price based anti-dilution protection, subject to certain limitations.
The
Series E Warrants issued have a 5 ½ year term and have a cashless exercise provision in the event there is no effective
registration statement covering the common stock issuable upon exercise of the Series E Warrants. The Series E Warrants are not
subject to price based anti-dilution protection.
COMBIMATRIX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The
Series E Financing was effected as a takedown off our shelf registration statement on Form S-3, which initially became effective
on October 2, 2014, pursuant to a prospectus supplement filed with the Securities and Exchange Commission on February 13, 2015.
See
below for modifications made to the Series E Preferred Stock and the Series E Warrants.
Private
Placement Warrant Financing
Substantially
concurrently with the closing of the Series E Financing, on February 13, 2015, we entered into a separate securities purchase
agreement (the “Warrant Purchase Agreement”) with selected accredited institutional pre-existing investors (the “Private
Placement Investors”), pursuant to which we agreed to sell to the Private Placement Investors warrants to purchase 102,678
shares of Common Stock (the “Private Placement Warrants”, and the transactions contemplated by the Warrant Purchase
Agreement, the “Warrant Financing”). In consideration of an aggregate of $1,000, we had agreed to sell the Private
Placement Warrants, which would not be issued unless and until our stockholders approved amending our Certificate of Incorporation
to increase our authorized common stock to permit the issuance of the common stock issuable upon exercise of the Private Placement
Warrants (the “Charter Amendment”). We estimated the fair value of the Private Placement Warrants using the Black-Scholes
valuation model to be $1.82 million, which was classified as a warrant subscription payable within additional paid-in capital
in our consolidated balance sheet using the following assumptions: (i) closing stock price and Private Placement Warrants contractual
exercise price; (ii) 5.5 year term; (iii) historical volatilities commensurate with the term of the Private Placement Warrants
of 113.2%; and (iv) risk-free interest rates commensurate with the term of the Private Placement Warrants of 1.5%. We allocated
the proceeds received from the Series E Financing to the Private Placement Warrants based on the relative fair value of the instruments
issued to the Series E Investors. As a result of the special stockholders meeting held on April 28 2015, we issued the Private
Placement Warrants to the Private Placement Investors and the warrant subscription payable was reclassified to additional paid-in
capital.
Each
Private Placement Warrant initially had an exercise price of $32.505 per share of common stock (subject to adjustment for stock
splits and the like), which was 110% of the consolidated closing bid price of our common stock on Nasdaq immediately prior to
entering into the Warrant Purchase Agreement, and is exercisable at any time after the six month anniversary of entering into
the Warrant Purchase Agreement and on or prior to the close of business on the five year anniversary of the initial exercise date,
subject to the beneficial ownership limitation described below. The Private Placement Warrants are not subject to price based
anti-dilution protection. If, at the time of exercise of a Private Placement Warrant, there is no effective registration statement
registering for resale the shares of common stock issuable upon exercise of the Private Placement Warrant, the holder may exercise
the Private Placement Warrant on a cashless basis. When exercised on a cashless basis, a portion of the Private Placement Warrant
is cancelled in payment of the purchase price payable in respect of the number of shares of common stock purchasable upon such
exercise.
Modification
of Certain Other Outstanding Warrants
In
connection with the purchase of the Private Placement Warrants, we modified previously issued and outstanding warrants held by
the Private Placement Investors that were issued in connection with the Series A, B and C financings described above, to (i) reduce
the exercise prices thereunder to $29.55, which represents the consolidated closing bid price of our common stock on Nasdaq immediately
prior to the date we entered into the Warrant Purchase Agreement; (ii) prohibit the exercise of such modified warrants for a period
of six months after the date of the modification; and (iii) extend the exercise period of such modified warrants for an additional
six months (such modifications, collectively, the “Warrant Price Modifications”). Separately, we also agreed to a
Warrant Price Modification with a holder of Series C Warrants solely in consideration for such holder’s waiver of certain
preemptive rights. We estimated the change in fair value of these warrants immediately prior to and immediately subsequent to
the Warrant Price Modification to be $336,000, and such amount was recorded as a non-cash equity offering cost.
Series
E Modifications
On
October 12, 2015, we entered into an Amendment No. 1 to Common Stock Purchase Warrants (the “Warrants Amendment”)
with each of the holders of the Series E Warrants and each of the holders of the Private Placement Warrants. Under the terms of
the Warrants Amendment, all of the Series E Warrants and 100,847 of the Private Placement Warrants had their exercise prices reduced
to $16.50 per share. Accordingly, with respect to the Private Placement Warrants, 100,847 of the Private Placement Warrants have
an exercise price of $16.50 per share and 1,831 of the Private Placement Warrants retain their original exercise price of $32.505
per share. In consideration for entering into the Warrants Amendment, each Series E Investor agreed to irrevocably waive
ab
initio
and for all time its right to receive cash dividends on its shares of our Series E Preferred Stock. As a result, no
dividends relating to the Series E Preferred Stock have been recognized in our consolidated financial statements. We estimated
the change in fair value of the Series E Warrants and the affected Private Placement Warrants prior to and immediately subsequent
to the Warrants Amendment to be $168,000, which was recognized as a deemed dividend and as an increase to additional paid-in capital
during the fourth quarter of 2015.
COMBIMATRIX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
On
February 4, 2016, we entered into a Series E 6% Convertible Preferred Stock Repurchase Agreement (the “Repurchase Agreement”)
with the Series E Investors. Pursuant to the terms of the Repurchase Agreement, we agreed to pay each Series E Investor $300 per
share of Series E Preferred Stock, or approximately $656,000, in consideration for the right to repurchase the Series E Investor’s
Series E Preferred Stock at a price per share of $1,000 (the “Repurchase Price”), which was the original price per
share paid by the Series E Investors for their Series E Preferred Stock in February 2015. We recognized the $656,000 payments
as a deemed dividend paid to the Series E investors.
Immediately
following the closing of our Series F public offering discussed below, we paid $2.2 million to the Series E Investors to repurchase
all of the outstanding Series E Preferred Stock, in accordance with the terms of the Repurchase Agreement. Since none of the Series
E Preferred Stock had converted by the time we repurchased the Series E Preferred Stock, the original $890,000 beneficial conversion
feature that we recognized as a deemed dividend in 2015 was reversed as a return of capital from the Series E Preferred stockholders
to the common stockholders.
Series
F Convertible Preferred Stock and Warrants Financing
On
March 24, 2016 (the “Series F Closing”), we closed an underwritten public offering (the “Series F Offering”)
and issued 8,000 immediately separable units of securities to investors, with each unit consisting of: (i) one share of Series
F convertible preferred stock (“Series F Preferred Stock”) convertible into shares of our common stock equal to 1,000
divided by the conversion price of $3.87, which was 75% of the consolidated closing bid price of our common stock on the Nasdaq
Capital Market on March 18, 2016, the date we executed the underwriting agreement (“UA date”); and (ii) 258.397875
warrants, each to purchase one share of our common stock at an exercise price per share equal to $5.17 (“Series F Warrants”),
which was 100% of the consolidated closing bid price of our common stock on the Nasdaq Capital Market on the UA date. The Series
F Preferred Stock, the Series F Warrants, and the shares of common stock underlying the Series F Preferred Stock and Series F
Warrants were registered on Form S-1, which was declared effective by the SEC on March 18, 2016. The Series F Preferred Stock
was immediately convertible and the Series F Warrants were immediately exercisable for shares of common stock and have a term
of five years. The Series F Warrants are exercisable for cash or, solely in the absence of an effective registration statement
or prospectus, by cashless exercise. In total, there were 2,067,183 shares of common stock issuable upon conversion of the Series
F Preferred Stock and up to 2,067,183 shares of common stock issuable upon exercise of the Series F Warrants. The units were sold
for a purchase price equal to $1,000 per unit, resulting in gross proceeds received by us of $8 million. Total offering-related
costs paid through March 31, 2016 were $720,000, resulting in net proceeds recognized of $7.3 million, with an additional $311,000
of closing-related costs to be paid during the second quarter of 2016. Given that the effective conversion price of the Series
F Preferred Stock was below the closing market price of our common stock at the time of the Series F Closing, we recognized a
beneficial conversion feature in the amount of $1.9 million. Since the Series F Preferred Stock was immediately convertible into
common stock, the beneficial conversion feature was treated as a deemed dividend charged to retained earnings at closing. Also,
from the time of the Series F Closing through the date of this filing, 1,845 shares of the Series F Preferred Stock have converted
into 476,754 shares of common stock.
The
Series F Preferred Stock is non-voting (except to the extent required by law and except for certain consent rights relating to
amending the certificate of incorporation or bylaws, and the like), but ranks senior to our common stock with respect to distributions
upon our dissolution, liquidation or winding-up. Until the volume weighted average price of our common stock on Nasdaq exceeds
200% of the conversion price of the Series F Preferred Stock for any 20 of 30 consecutive trading days, and the daily dollar trading
volume during such period exceeds $200,000 per trading day, the Series F Preferred Stock is subject to full ratchet price based
anti-dilution protection, subject to certain limitations. Also, the Company can force holders of Series F Preferred Stock to convert
into our common stock if the volume-weighted average price of our common stock exceeds 200% of the Series F Preferred Stock conversion
price for any 20 of 30 consecutive trading days, and the daily dollar trading volume during such period exceeds $200,000 per trading
day, subject to certain other conditions. The Series F investors have agreed to be subject to a blocker that would prevent each
of their respective common stock ownership at any given time from exceeding 4.99% of our outstanding common stock (which may be
increased on 61 days’ notice, but not above 9.99%).
The
Series F Warrants have a 5 year term and have a cashless exercise provision in the event there is no effective registration statement
covering the common stock issuable upon exercise of the Series F Warrants. The Series F Warrants are not subject to price based
anti-dilution protection. The Series F Warrants are listed on the Nasdaq Capital Market under the trading symbol “CBMXW.”
COMBIMATRIX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Warrants
Outstanding
warrants to purchase common stock are as follows:
|
|
Shares
of Common Stock
Issuable from Warrants
Outstanding as of
|
|
|
|
|
|
|
|
|
|
March
31,
2016
|
|
|
December
31,
2015
|
|
|
Exercise
Price
|
|
|
Expiration
|
|
Equity-classified
warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
2016
|
|
|
2,067,183
|
|
|
|
-
|
|
|
$
|
5.17
|
|
|
March
2021
|
|
April
2015
|
|
|
100,847
|
|
|
|
100,847
|
|
|
$
|
16.50
|
|
|
August
2020
|
|
April
2015
|
|
|
1,831
|
|
|
|
1,831
|
|
|
$
|
32.51
|
|
|
August
2020
|
|
February
2015
|
|
|
46,676
|
|
|
|
46,676
|
|
|
$
|
16.50
|
|
|
August
2020
|
|
June
2014
|
|
|
1,690
|
|
|
|
1,690
|
|
|
$
|
30.90
|
|
|
April
2018
|
|
December
2013
|
|
|
388,365
|
|
|
|
388,365
|
|
|
$
|
46.80
|
|
|
December
2018
|
|
June
2013
|
|
|
32,788
|
|
|
|
32,788
|
|
|
$
|
29.55
|
|
|
June
2019
|
|
May
2013
|
|
|
32,788
|
|
|
|
32,788
|
|
|
$
|
29.55
|
|
|
May
2019
|
|
March
2013
|
|
|
18,334
|
|
|
|
18,334
|
|
|
$
|
29.55
|
|
|
March
2019
|
|
October
2012
|
|
|
11,252
|
|
|
|
11,252
|
|
|
$
|
29.55
|
|
|
September
2018
|
|
April
2011
|
|
|
8,746
|
|
|
|
8,746
|
|
|
$
|
321.00
|
|
|
April
2016
|
|
Total
|
|
|
2,710,500
|
|
|
|
643,317
|
|
|
|
|
|
|
|
|
|
7.
COMMITMENTS AND CONTINGENCIES
Executive
Severance
We
provide certain severance benefits such that if an executive officer of CombiMatrix Corporation is terminated for other than cause,
death or disability, the executive will receive payments equal to three months’ base salary plus medical and dental benefits.
In addition, we have implemented a Restated Executive Change of Control Severance Plan (as amended, the “Severance Plan”)
that affects certain of our senior management-level employees who are classified as “Section 16 Officers” of the Company.
Pursuant to the Severance Plan, if a participating employee is involuntarily terminated (other than for death, disability or for
cause) or resigns for “good reason” (as defined in the Severance Plan) during the two-year period following a “change
of control” (as defined in the Severance Plan) of the Company, then, subject to execution of a release of claims against
the Company, the employee will be entitled to receive: (i) one-half times annual base salary (one times annual base salary for
the CEO); (ii) immediate vesting of outstanding compensatory equity awards; and (iii) payment of COBRA premiums for the participating
employee and eligible dependents for a pre-determined period of time. Payment of benefits under the Severance Plan will be limited
by provisions contained in Section 409A of the U.S. Internal Revenue Code. The Severance Plan is administered by a plan administrator,
which initially is the Compensation Committee of the Board of Directors. In order to participate in the Severance Plan, an eligible
employee must waive any prior retention or severance agreements. The Severance Plan automatically renews annually unless terminated
upon 12 months prior written notice.
On
December 2, 2015, our Board of Directors adopted a Transaction Bonus Plan (the “Transaction Bonus Plan”). The Transaction
Bonus Plan provides for certain bonus payments to be made, upon the consummation of a qualifying change of control transaction,
to certain employees of the Company as shall be determined from time to time by the Compensation Committee of our Board of Directors.
The aggregate value of the bonuses payable under the Transaction Bonus Plan shall not exceed the greater of (i) $1,000,000 or
(ii) ten percent of the net proceeds received in connection with a qualifying change of control transaction, and the percentage
of such bonus pool awarded to each eligible participant shall be determined from time to time by our Compensation Committee.
COMBIMATRIX
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Litigation
In
2002, we entered into a settlement agreement with Nanogen, Inc. (“Nanogen”) to settle all pending litigation between
the parties. Pursuant to the terms of the settlement agreement, we agreed to make quarterly payments to Nanogen equal to 12.5%
of total sales of products developed by us and our affiliates based on the patents that had been in dispute in the litigation,
up to an annual maximum amount of $1.5 million. The minimum quarterly payments under the settlement agreement are $25,000 per
quarter until the patents expire in 2018. Royalty expenses recognized under the agreement were $25,000 in each of the quarters
ended March 31, 2016 and 2015, and are included in patent amortization and royalties in the accompanying consolidated statements
of operations.
From
time to time, we are subject to other claims and legal actions that arise in the ordinary course of business. We believe that
the ultimate liability with respect to these claims and legal actions, if any, will not have a material effect on our financial
position, results of operations or cash flows. Any legal costs resulting from claims or legal actions are expensed as incurred.