Q1 2013 Earnings Call
May 08, 2013 11:00 am ET
Rene Caron - President and Chief Operating Officer
Mark McDonough - Chief Executive Officer, President, Chief Commercial Officer and Director
Scott R. Burell - Chief Financial Officer, Principal Accounting Officer, Secretary and Treasurer
Good day, ladies and gentlemen, and welcome to the CombiMatrix Corporation 2013 First Quarter Financial Results Conference Call. As a reminder, today's call is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Rene Caron of Allen & Caron. Sir, you may begin.
Thank you, Andrea, and good morning, everyone. Welcome to the CombiMatrix Corporation 2013 first quarter results conference call. With us this morning are CombiMatrix President and CEO, Mark McDonough; and the company's Chief Financial Officer, Scott Burell.
Earlier this morning, CombiMatrix distributed a news release that summarized its financial results for the first quarter ended March 31, 2013. If you have not received a copy of the news release or want to be added to the company's distribution list, please contact our office at (949) 474-4300 and we will send you a copy and take care of your request.
I've been asked to remind you that today’s presentation and answers to questions in the question-and-answer portion of the call will include forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to be materially different from those anticipated.
For a list and description of those risks and uncertainties, please see the CombiMatrix’s filings with the Securities and Exchange Commission.
CombiMatrix does not assume any obligation to update or revise any financial projections or forward-looking statements made today.
Furthermore, this call contains some time-sensitive information and is accurate only as of this call today, May 8, 2013. Copies of CombiMatrix SEC filings are available online from the SEC or by clicking on Investor Relations on the CombiMatrix website.
With that, it's now my pleasure to turn the call over to CombiMatrix President and CEO, Mark McDonough. Good morning, Mark.
Good morning, Rene, and thank you and good morning, everyone. I'm pleased to start my first results conference call as CEO by saying we had a very solid first quarter. We had record prenatal testing volumes, which we previously announced. Total revenues increased by 28% over the first quarter of 2012, and most importantly, revenues in our core prenatal testing services grew by 158% over Q1 2012.
At the same time, we're continuing to cut costs, which means we have to work smarter. Our CFO, Scott Burell, will get into our financial details later in the call. But our goal is to make CombiMatrix leaner but more focused and more effective. We have implemented a strategy to reduce cash burn while concurrently keeping the necessary resources in place to take advantage of what we see as a huge opportunity, that is a rapidly expanding prenatal microarray testing market and our unique place in it.
There is no question the overall prenatal molecular diagnostic market is growing. The market is estimated to be about $600 million annually, but it's in transition and undergoing some fundamental changes.
New clinical data, including 2 large NIH-sponsored studies published late last year in the New England Journal of Medicine, showed that chromosomal microarray analysis, or CMA which we specialize in, does a better job of identifying significant genetic abnormalities than traditional karyotyping for both genetic prenatal diagnosis and genetic evaluation of stillbirths.
As more and more women realize the value of CMA, we believe the standard of care for prenatal testing will change and our share of the market will continue to grow rapidly. Additionally, we believe the advent of noninvasive prenatal testing, another market growing very rapidly, will only increase our market share. These noninvasive tests can be complementary to what we do and we believe will serve to grow our overall market.
The noninvasive tests screen for genetic conditions like Down syndrome, while our tests are more definitive and confirm the wide range of genetic abnormalities that can impact the pregnancy or the child once it's born. We are finding already that many parents who receive a positive NIPT result of a screen want to move to microarray analysis to confirm the screening results and generally to learn more. Interestingly enough, we're also getting cases where negative screens are reflects, as well to the array when the clinical picture is still unclear despite the negative screen.
As every day goes by, it is more apparent that our decision last year to go from a laboratory that was trying to do a variety of testing diverse markets to one focused on prenatal and pediatric testing, particularly CMA, was the right move. We are encountering significant headwinds in the oncology market at the time, which we have now deemphasized. And now we are seeing tailwinds in the prenatal and pediatric testing markets where we are focused. Today, we are the only publicly-traded company in the world that specializes in CMA.
As most of you know, I come from the sales and marketing side of the business. So an important part of what I brought to this role was a first-hand knowledge of our sales force and our sales strategy. I knew how we are deploying our efforts. As a result, we made the strategic decision to adopt a 3-tiered approach to our sales and marketing.
First, we have focused our direct sales team in major markets such as D.C., Baltimore, Phoenix, Houston, Southern California and St. Louis. Next, we've identified specific regions of the country where we saw opportunities and needed to build a stronger presence. We've identified the state of Florida, state of Pennsylvania and the North Central market, which includes both Chicago and Minneapolis. We saw these markets as opportunities which were relatively untapped and where we thought we could win market share. So far, the direct sales efforts are paying off.
The second tier is that we are partnering with regional pathology groups, where they are, in turn, marketing and distributing our microarray test, thus allowing us to leverage their entire sales force, and then they benefit concurrently by running complementary testing that they can perform, interpret and build for as well. This partnership model continues to drive increasing volume on a month-over-month basis for us, while not increasing our cost of sales.
Meanwhile, it helps our partners complete their women's health offering.
Third, we're establishing strategic corporate relationships where technology can be leveraged as complementary to ours. We believe that not only will we grow organically given our unique place in the market, but we'll grow through our relationships with many of the larger national partners with whom we are working. With limited resources and the desire to remain lean, these partnerships will give us commercial leverage as we gain share without large direct investment.
Finally, before Scott talks about the financials, I'd like to note that we are growing rapidly while concurrently reducing spending in every facet of our business, including sales and marketing, R&D and G&A. We're doing a lot more with less, which I think is an important achievement for a company like ours and shows that we are mindful of our investors and of maximizing our return.
With that, I'll turn the call over to Scott Burell. Scott?
Scott R. Burell
Thanks, Mark, and good morning, everyone. I'd like to begin my comments today with an overview of our operating statement, followed by a discussion of our balance sheet and cash flows, before turning the call back over to the operator for questions.
Starting with our operating results, total revenues for the 3 months ended March 31, 2013, where $1.61 million comprised of $1.5 million in diagnostic services revenues and $25,000 of royalty revenues. This compares to $1.27 million in total revenues for the first quarter of 2012, comprised of $1.24 million in diagnostic service revenues and $25,000 of royalty revenues, representing an overall increase in total revenues of 27% quarter-over-quarter.
We ran a total of 1,718 billable diagnostic tests in the first quarter compared to 1,377 tests in the first quarter of 2012, representing a 25% increase in diagnostic test volumes quarter-over-quarter. We build 119 different customers in the first quarter of 2013 for the test performed compared to 105 customers in the first quarter of 2012.
As reported in today's release, we had a strong quarter in the prenatal side of the business, which, during the first quarter, prenatal revenues grew by 158% as compared to the first quarter in 2012. Sequentially, prenatal revenues grew by 21% from the fourth quarter of 2012 to the first quarter of 2013. Strong volume growth, coupled with improved product mix in prenatal microarray testing, has contributed to the overall revenue growth in this market, whereas declining volumes from oncology, as well as lower volumes in certain pediatric markets, resulted in an overall diagnostic revenue growth rate of 28% in Q1 '13 [indiscernible] '12.
As stated on previous conference calls, the declines in oncology and pediatric revenues were expected as we have deemphasized our direct oncology sales efforts in recent periods and in turn, have focused our sales and business development efforts primarily in the prenatal diagnostics market. We anticipate that as the organization is more aligned towards the growing prenatal market, overall revenue growth in this space will continue, whereas oncology and pediatric revenues should stabilize.
During the first quarter, we were pleased to see our test mix moving back towards a higher concentration of microarray testing versus traditional FISH and chromosome analysis. A year ago, microarray testing represented 39% of our total prenatal testing volumes, whereas for the first quarter of 2013, microarray testing represented 51% of all prenatal tests performed. Due to higher pricing and reimbursement from our microarray test versus traditional testing, this change in test mix is the primary factor for why the growth in prenatal and total diagnostic testing revenues have increased by a higher percentage than our testing volumes.
Historically, our test menu expansion to include non-array tests was strategically important in driving our prenatal market growth and we believe will be important to drive a higher microarray volume in the future, as the prenatal market evolves from traditional testing to microarrays. We expect that our test mix will continue to be more highly concentrated in microarrays, particularly in the prenatal markets, resulting in higher average revenue per test performed and improved operating margins for future periods.
Our operating expenses for the 3 months ended March 31, 2013, were $3.2 million versus $3.6 million for the comparable 2012 period, representing a decrease of 12%. The decrease was driven primarily by cost reductions executed in May and June of 2012 where we reduced headcount across all functional areas of the company, as well as related operational costs and expenses.
Net loss decreased to $48,000 for the 3 months ended March 31, 2013, versus $2.4 million in the comparable 2012 period. The decrease was partially driven by higher revenues and lower operating expenses during the quarter, but was primarily due to the non-cash gain incurred as a result of mark-to-market derivative accounting for the warrants issued in our fourth quarter Series A Preferred Stock financing. Under GAAP, the warrants issued to the investor of this -- to the investors of this financing were recorded as derivative liabilities at fair value, with changes in fair value reported as nonoperating gains or charges in our consolidated income statements each reporting period.
Due primarily to certain warrant exercises during the first quarter of 2013, the value of the derivative warrant liabilities decreased by $1.8 million during the quarter, resulting in a corresponding gain to the 2013 statement of operations. It is likely that we could recognize substantial non-cash gains or charges in future periods, depending on changes in fair value, whether antidilution adjustments occur or whether the warrants are ultimately exercised for common stock and thereby eliminating the derivative liabilities altogether.
As previously reported in March of 2013, we executed a registered direct offering with an institutional investor for growth proceeds to the company of $2 million from the sale of common stock, Series B Convertible Preferred Stock and warrants to purchase common stock. Also related to the Series B Preferred Stock financing were non-cash deemed and accrued dividends totaling $417,000 in the first quarter, combined with $246,000 of dividends from conversions of our Series A Preferred Stock, resulting in overall net loss to common stockholders of $711,000 for the 3 months ended March 31, 2013, versus $2.4 million in the comparable 2012 period.
Turning now to our balance sheet and cash flows. We ended March 31, 2013 with $3.4 million in cash compared to $2.4 million as of December 31, 2012. Our net cash flows used in operations were $1.60 million for the 3 months ended March 31, 2013, compared to $1.63 million in the comparable 2012 period. Adding to our cash balances during the first quarter was the execution of a $2 million Series B financing, as well as $993,000 from the exercise of certain Series A warrants during the first quarter.
So far in the second quarter, I'm pleased to report that during April and through yesterday, an additional $520,000 of cash proceeds have been received from continued Series A warrant exercises. And more recently, we executed a Series C Convertible Preferred Stock financing in 2 tranches, with the first tranche of $1.2 million already received and the second $1.2 million tranche to be received within a few days of our Annual Stockholders Meeting in late June, pending stockholder approval for the transaction.
We now project that assuming stockholder approval is obtained and the second tranche is closed, the combination of our existing cash balances, combined with the capital from recent financing activities and warrant exercises, will conservatively provide operating funds into the second quarter of 2014.
Finally, we ended the first quarter of 2012 with $6.4 million in total assets, $1.7 million of current and long-term liabilities, excluding the warrant derivative liability of $2.6 million, and positive stockholders' equity of $2.1 million.
With that, I will now turn the call back to the operator for questions.
[Operator Instructions] Our first question will come from Victor Sparber [ph] with -- private investor.
My first question is on capacity utilization. Being unfamiliar with your analytic procedures, based on the number of tests you performed, what is the capacity available for additional testing?
This is Mark McDonough. We feel that we're operating about 45% of our capacity here in the lab. And so we have plenty of opportunity to double within the confines of just where we are at this point.
All right. And when you reach -- when you get closer to 100%, how does it relate in additional cost for additional analytical equipment?
Scott R. Burell
Yes, this is Scott. There's some additional capital investment we would need to make beyond doubling revenues that Mark mentioned. That capital is not significant. We currently operate just over 6,000 square feet in our lab here in Irvine, California. Before having to obtain additional space, we could add shifts and things like that to better maximize the utilization of that space. So the future capital expansion, with respect to a doubling or more of the business, is actually not that significant.
Okay. And lastly, using your third party here outside sales force, how does that reflect on your gross profit?
It's favorable in the sense that we have worked out just a small distribution fee for those entities because again, one of the advantages to the third parties that you mentioned is that they're also complementary -- they're complementing, excuse me, their own testing. So they're running certain testing off of these specimens as well and are able to bill for them, so we then have a small distribution fee and they have a couple of different reasons to want to participate in these agreements that allows them to grow their volume as well. So instead of having to pay fully [ph] burden sales and marketing person or sales rep, we just pay them a distribution fee. So it's a favorable jump to the margin.
[Operator Instructions] Ladies and gentlemen, that does conclude today's question-and-answer session. I would now like to turn the call back over to Mark McDonough for any final and closing remarks.
Thanks, Andrea. I'd just like to conclude by saying that everyone here at CombiMatrix is very excited about where we are headed. We have an incredible opportunity to make inroads in a growing and changing marketplace. We are already growing rapidly and we're just getting started.
Thank you very much for your interest in the company.
And once again, ladies and gentlemen, that does conclude today's call. Thank you for your participation and have a great day.
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