CombiMatrix Corporation. (NASDAQ:CBMX)
Q2 2014 Earnings Conference Call
August 06, 2014, 04:30 p.m. ET
Robert Flamm – Investor Relations, Russo Partners
Mark McDonough – President and Chief Executive Officer
Scott Burell – Chief Financial Officer
Brian Marks – Zacks Investment Research
Kevin DeGeeter – Ladenburg
Greetings, and welcome to the CombiMatrix Corporation Second Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Mr. Robert Flamm, with Russo Partners. Please go ahead.
Thank you, Stacy, and good afternoon, everyone. Welcome to the CombiMatrix Corporation second quarter 2014 financial results conference call. With us today are CombiMatrix’s President and Chief Executive Officer, Mark McDonough; and the Company’s Chief Financial Officer, Scott Burell.
This afternoon, CombiMatrix distributed a news release that summarized its financial results for the second quarter ended June 30, 2014. If you have not received a copy of the news release or you want to be added to the company’s distribution list, please contact our office at 212-845-4226 and we will send you a copy or add you to the list.
I have been asked to remind you that today’s presentation and answers to questions in the Q&A portion of the call will include forward-looking statements within the meaning of the 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 CombiMatrix 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 conference call contains some time-sensitive information and is accurate only as of this call today, August 6, 2014. Copies of CombiMatrix SEC filings are available online from the SEC or by clicking on the Investor Relations tab on the company’s website.
With that now, it’s my pleasure to turn the call over to the President and CEO of CombiMatrix, Mark McDonough. Good afternoon, Mark.
Good afternoon, Robert and thank you and thank you all for joining us today. I am pleased to report that we had another strong quarter. Before we discuss the details of the quarter, I would like to take a step back and briefly discuss the significant potential of the prenatal and postnatal testing market and our plan to be a major player in this market.
As we have mentioned on previous calls, we are very excited about the size of the market we serve. Today, we believe the opportunity for microarray testing services in our principal areas of emphasis in prenatal and postnatal testing is rapidly approaching $500 million. We believe that this is a high touch service oriented market and that there is a significant unmet need for a specialized service provider who can deliver the additional advisory services to our physician and pathologist customer base.
We also believe that timely and accurate results that reduce patient anxiety and help both physicians and their patients make educated family planning decisions are incredibly valuable to our customers, and we are confident that we excel at delivering this information. It is our objective to continue to execute and capitalize on this outstanding opportunity before us. It is our goal and our plan to be the premier independent laboratory focused on delivering microarray technologies in the prenatal and pediatrics segments.
To that end, we continue to execute upon our three pronged approach to driving revenue, through our direct commercial team, our pathology partners and our industry partners. We have invested in our sales and marketing organization this past quarter and now have 14 sales professionals in the field, and two in-house marketing executives championing the benefits of CombiSNP microanalysis offering.
We have added another pathology partner this quarter in Long Island Pathology and we continue to develop the existing partnerships, both Pathology and Industry that we had started over the previous 15 months. As you may remember last summer we joined forces with Sequenom and are working closely with them to collaborate on education and marketing and to expand our product offerings in the growing prenatal genetic testing market place.
This collaboration is proceeding very well. In addition, our research and development efforts are progressing on plan so that we expect to deliver two new products that will complement our current suite of molecular testing services in the coming months. We will provide more information about these future services offering at the time of their launches.
Our lease activity is translating into financial performance. Scott Burell our CFO will cover this material in more detail, but I want to highlight a few points that demonstrate our ability to execute on our plan. First, we set all time record for revenues chromosomal microarray analysis testing volumes, new customers and total customers in Q2, 2014.
In addition, our mix of business continues to migrate towards our core focus area of higher value prenatal microarray testing. This is not only validating our marketing efforts but it’s evident in our average revenue per microarray which is up year-over-year and a continued gross margin improvement. Second, we also continue to invest in our reimbursement and billing team and focus the organization intently on this key initiative. As a result, we had a record quarter for cash collections of $1.8 million in Q2, 2014.
Increasing reimbursement coverage and securing new contracts are key objectives for us. And as such, we will continue to invest in the payer relations team going forward. Third, our strong revenue growth is significantly faster than growth in our corporate infrastructure enabling us to leverage our sales across a relatively stable corporate base. Although this metric is hidden behind litigation cost which Scott will go into detail – will discuss in more detail in a few minutes, we believe that it’s important for you to know that managing our cost structure while continuing to invest in the business is an important part of our strategy.
Before I turn the call over to Scott to go over operating results in more detail, I would like to reiterate the excitement our company has about the momentum we see building all around us. We believe it’s important to build the new CombiMatrix by executing on our focus strategic plan. Our results year-to-date show that we are doing just that. And with that, I’d like to turn the call over to Scott. Scott.
Thanks Mark and good afternoon everyone. I’d like to begin my comments today with an overview of our operating statement first, followed by a discussion of our balance sheet and cash flows before turning the call back over to Stacy for questions.
As Mark said, we continue to execute on our business plan as demonstrated by our recent financial results. Starting with the topline, our total revenues for the three months ended June 30, 2014 were $1.94 million comprised of $1.9 million in diagnostic services revenues, a new record for the company, and $35,000 royalty revenues. This compares to $1.5 million in total revenues for the second quarter of 2013, which comprised of $1.44 million in diagnostics service revenues and $55,000 royalty revenues representing an overall increase in total revenues of nearly 30% year-over-year.
We ran a total of 1,840 billable diagnostic tests in the second quarter compared to 1,485 tests in the second quarter of 2013. The increase in these figures related by an increase in a number of billed customers which totaled 177 in the second quarter of 2014, also a new record for CombiMatrix, compared to 125 customers in the second quarter of 2013 and 150 for the fourth quarter in 2014, which was our previous record.
The concentration of microarray test performed as a percentage of total tests continues to increase as microarray test now represented 78% of total diagnostic tests performed compared to 74% of total test performed during the second quarter of 2013.
This change in test mix is due to our change in sales focus and strategy towards microarray testing, but is also due to the change in microarray platform implemented in the spring of 2013, which eliminated a significant amount of non-array testing that we were require to perform on our prior microarray platform.
I have stated on prior earnings calls continued adoption of microarray test in the prenatal market space is driving our overall testing mix towards a significantly higher concentration of microarray test during the second quarter of 2014 than in prior periods.
As prenatal microarray testing is our primary growth driver for the business, the rest of my discussion regarding revenues will be focus primarily on the microarray testing metrics. We billed 1,431 total microarray tests during the second quarter of 2014 representing another record for CombiMatrix.
Total billable microarray test increased by nearly 33% from 1,106 tests billed during the second quarter of 2013, an increased sequentially by almost 5% from 1,369 microarray tests billed during the first quarter of 2014.
As reported today, we had another record quarter in the prenatal testing side of the business, which for clarity includes both miscarriage analysis microarray testing as well as prenatal microarray testing for amnios and CVS samples.
Second quarter prenatal microarray volumes grew by 60% to 872 billable tests reported as compared to 546 tests reported in Q2 of 2013. This strong volume growth drove prenatal microarray revenues to a new record of $1.2 million, up 46% from $836,000 recognized in the second quarter of 2013.
Pediatric and oncology microarray revenues combined increased by approximately $63,000 year-over-year bringing total microarray revenues to $1.79 million during this Q2 of 2014, representing a new record for total microarray revenues in a quarter for the company, an increased nearly 33% from $1.3 million of microarray revenues during the second quarter of 2013.
So far in 2014, our average revenue for prenatal microarray test was $1,456 per test. Total microarray testing which includes pediatric and oncology tests was $1,251 per microarray test and total average revenue for all billable test performed was $1,036 per test, up slightly from $973 per test for the comparable period in 2013.
Year-to-date, total revenues grew 21% to $3.8 million compared to $3.1 million in the prior six-month period in 2013. This is also a new record for a given six-month period for our company.
Prenatal microarray volumes and revenues were $1,609 and $2.3 million respectively, representing increases of almost 60% and 40% respectively over the comparable 2013 period.
Gross margins continue to improve, up 370 basis points in the quarter and up 350 basis points for the first six months of the year, driven by a number of positive trends. Switching to the [alumina-based] microarray platform in the spring of 2013, coupled with the overall improvement in our average revenue per diagnostic test performed were the primary factors that contributed to improved margins in 2014.
Total operating expenses for the three months ended June 30, 2014 increased by $1.5 million from $3 million in Q2 of 2013 to $4.6 million in Q2 of 2014. The increase was driven partially from higher cost of good sold due to increased volumes as just described and increased sales and marketing expenses from expansion of our sales team and marketing efforts.
But the primary driver is higher G&A cost almost exclusively from increased legal expenses from ongoing litigation. Total litigation expenses were $860,000 in the second quarter of 2014 compared to only $66,000 in the second quarter of 2013.
While it is our policy to not discuss ongoing litigation for obvious reasons, the significance these costs wants further discussion and I am prepared to repeat that we have publicly furnished in prior SEC filings regarding the case.
In summary, our former CombiMatrix employee name Michael Strathmann served us with a complaint filed at February of 2011, which was also filed with the Superior Court in the State of California in Orange City.
The Complaint alleged that we submitted false and fraudulent insurance claims to National Union Fire Insurance Company of Pittsburgh, Pennsylvania in connection with a prior lawsuit that was settled back in 2002 with the company called Nanogen and thereby allegedly violating the California Insurance Fraud Prevention Act, and sought penalties and unspecified treble damages.
In 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.
In June 15, 2011, Mr. Strathmann filed a Notice of Appeal with the California Court of Appeals, appealing the granting of the Motion to Strike. Subsequently, Mr. Strathmann filed a Notice of Appeal of the award of attorneys’ fees which originally were granted against him.
In October of 2012, the California Court of Appeals reversed the Superior Court’s dismissal, finding that the anti-SLAPP statute is not applicable and remanding the case to the Superior Court. Strathmann has filed an Amended Complaint, and we have filed our responses.
Since that time, our motion for summary judgment was denied and the trial began in June in the Orange County Superior Court. The trial is currently ongoing at this time and we continue to vigorously defend ourselves in this case.
However, now that the trial is in process, our defense costs have dramatically increased in 2014 compared to prior periods. We expect the defense costs to diminish upon conclusion of the trial that will amount on future litigation costs remained uncertain. I understand listeners on today’s call may have further questions regarding this matter, however this is all that either Mark or I are able to discuss at this time.
Our net loss from operations increased to $2.7 million for the second quarter of 2014 compared to $1.5 million for the comparable 2013 second quarter, primarily due to increased sales and marketing and legal expenses, partially offset by increased revenues discussed previously.
On a year-to-date basis both operating expenses and net loss from operations increased as compared to 2013, due to the same reasons discussed on our quarterly variances, that is increases in sales and marketing costs from expansion of our sales force coupled with significantly higher litigation cost, which totaled $1.3 million during the six-month ended June 30, 2014 resulted in higher operating expenses year-over-year, as well as higher net loss year-over-year, despite achieving record revenues discussed previously.
Our second quarter of 2014, net loss was $2.6 million or $0.23 per basic and diluted share, net loss for last year’s second quarter was $513,000 or $0.14 per basic and diluted share, which was significantly reduced by the impact of a non-cash warrant derivative gain of $1 million as compared to only $152,000 of warrant derivative gain recognized in the second quarter of 2014.
And the decrease in gains recognized was due primarily to a reduction in the amount of the warrant derivatives outstanding in 2014 compared to 2013, due to a number of warrant exercises which occurred late in 2013 and earlier this year.
Regarding our derivative warrant liabilities, we entered into a modification agreement with the existing Series A warrant holders in June of 2014 to remove the anti-dilution and cash buyback features of those warrants thereby eliminating the derivative accounting requirements of those warrants. As such, we do not expect to recognize warrant derivative gains or losses in future periods.
Now turning to our balance sheet and cash flows, we ended June 30, 2014 with $10.1 million in cash, cash equivalents and short-term investments compared to $14 million as of December 31, 2013. Our net cash flows used in operations were $2.5 million and $4 million for the three and six-month periods end of June 30, 2014 respectively, compared to $1.3 million and $2.9 million during the comparable 2013 periods respectively.
The quarterly and year to-date increases of approximately $1.3 million was due primarily to significantly higher litigation costs previously discussed, which resulted in higher cash outflows of $656,000 and $871,000 for the three and six-month periods ended June 30, 2014 respectively compared to 2013.
Also contributing to higher cash flows, used in operations was due to approximately 12 more full-time equivalent employees as of June 30, 2014 versus June 30, 2013, and these employees were primarily -- have primarily been deployed in our sales and marketing departments, as well as expansion in medical and in our billing departments, coupled with higher marketing costs and R&D expenses related to new test development.
Partially offsetting the increase in cash outflows was improved cash reimbursement on our test performed which for the six months ended June 30, 2014 was $3.4 million, a new semi-annual record for cash reimbursement compared to $2.9 million in the 2013 year to-date period.
Finally, we ended June 30, 2014 with $13.4 million in total assets, $2.4 million of current and long-term debt and positive stockholders equity of $11 million.
And with that, I’ll now turn the call back over to Stacy for questions.
Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from Brian Marks with Zacks Investment Research. Please proceed.
Brian Marks - Zacks Investment Research
Hi, guys. Congratulations on the quarter.
Brian Marks - Zacks Investment Research
So its look a great quarter, pretty much on all fronts in terms of sort of fundamental metrics, revenue, testing volume, growth in customer count, gross margins, expenses everything and I had a question on the litigation expense, but I understand that you guy can’t talk about this. So – but nonetheless congratulations on the quarter. It looks like it was fundamentally it was a great quarter.
So, I’ll move on, there was recent FDA guidance on additional regulation LDTs. Can you talk about what that may mean relative to potential additional regulation of your test -- kind of what your interpretation as I guess of that?
Yes. Hey, Brian, it’s Mark McDonough. So, it just that it’s our interpretation. As of now, we’ve look at this. It appears that over the next 60 days, more information is going to be promulgated on what exactly that would mean. And then, there’s going to be a 60-day comment period which pushes us in to November timeframe and really we are – it would be purely speculation on this. What we can say is that we’re very confident in the way we run our shop here.
We had a CAP inspection in the College of American Pathologists earlier this year. We had zeroed efficiencies. We just recently have been given approval on is – I think you’ve seen pediatric as well as our Product of Conception from the New York State Department of Health, which has a reputation nationally with good reason for being a very scrutinist, I don’t know if it’s a governing body, but a certifying body.
So we will – when the guidance comes out we will digest and comply with it, but at this point, we haven’t heard anything definitive. But we are – we want to reiterate just to one the cost, we’re very comfortable and confident in the way we run things here and we’ll always be kind of at the front of the compliance.
Brian Marks - Zacks Investment Research
Okay. I’m kind of curious as to the influence of the ACOG opinion. The NIH studies might have an uptick of microarray in place of carrier typing and miscarriage and prenatal testing. So, do you guys have any feedback you in management or from the sales team have get any feedback from providers, healthcare providers or insurance companies or others related to kind of what these studies have meant in terms of adoption of microarray in place of carrier typing?
Yes. I think, we’re very excited because number one, we’re seeing the increase as we speak and as we reported. But secondly we think the upside has tremendous educational opportunities, meaning the guideline gives the clinicians great comfort in their education of the patients. And then we continue to educate the genetic counselors who support these physicians to understand all the capabilities of microarray better and better.
And so, we really believe this is going to be 150,000 to 200,000 patients market just on the expected [mothers] and kind of elaborating on that, the non-invasive market has taken off dramatically, but we’re finding ourselves becoming more and more of a better compliment to non-invasive testing.
As data comes out, that shows that there are some things beyond with -- targeted nature of non-invasive testing and the sensitivity of that. So, we feel there’s going to be an effect to really piggyback on the huge explosion of the non-invasive testing with microarray as people want more comprehensive answers as well.
And then, its kind of just further elaboration though, we haven’t even received guideline yet on our miscarriage business which is going crazy. I mean, it’s doing very, very well. And so that’s another opportunity for us in the future we believe to grow and when the committee gets behind in miscarriage testing.
Brian Marks - Zacks Investment Research
Mark, clearly you guys are – your business is growing, there’s no question, can you kind of connect a direct line in terms of the feedback though that you’re hearing from this ACOG opinion or the NIH studies. Is it – do you feel that it sort of a direct result of that? Is it more than that or is it more of a curiosity question than anything.
I think the direct answer is, yes, we’re seeing uptick, but we still have a great opportunity to grow. The feedback we’re getting when we’re lending customers is that, that opinion gives the physicians a lot more comfort in recommending this over carrier typing which has been standard of care previous to this.
They now can tell the patient why they want this microarray test and then the other benefit of just the testing in general its showing such a clinical value that the uptick. We still feeling what I’m getting at is still feel we just at kind of that – I don’t want to quashes, but we’re still on the early stage at what could be a significant wave.
Brian Marks - Zacks Investment Research
And the physicians are aware of this, right. They are aware of the opinion and the studies?
The physicians are very much aware. The genetic counselors are the next level of people that we are working very hard to educate and to that end we’re bringing on third genetic counselor to help us with that education in the next three weeks. So, this already signed on to be on our team. So we’ll continue the education and the testing will follow, and then the account, I can also just share with this, just to close on this topic.
The other thing that the counselor choosing us is we’re also letting a counselor have been microarray, but they just like our high touch and our get turnaround time candidly, so we’re having success there too.
Brian Marks - Zacks Investment Research
Okay. Relative to the marketing sales effort, can you talk about your expectations relative to the size of sales force, how big you expect it to be – and say in the next 12 months? What is sort of that growth expectation as far as the sales force [skills]?
What we want to do is we want to get to where we are profitable as soon as possible by growing the top line. So we have this kind of magic number, but it’s really 18 reps in our budget by the end of next year. But its really – that’s not the number I want the investors to focus on. What we care most about is the productivity. And we feel if we have anywhere from 15 to 20 reps in the field over the next year we’ll be able to manage the cost and then its our goal to get everyone’s output to about a $1 million a year, and we feel we’re doing that. We’re well on our way to breakeven it beyond.
Brian Marks - Zacks Investment Research
Okay. All right. Thanks, Mark. That’s all I had. Thanks a lot and congratulations.
(Operator Instructions) Our next question comes from Kevin DeGeeter with Ladenburg. Please proceed. Kevin, your line is live.
Kevin, your phone maybe on mute? Okay. There are no further questions at this time. I’d like to turn the floor back over to Mark McDonough for closing comment.
Great. Thanks you Stacy. Thank you all for joining us for this afternoon’s call. As we mentioned, it’s an exciting time at CombiMatrix and we are all working very hard to ensure we continue our pace of progress to build CombiMatrix into a dominant position in microarray testing services for the prenatal and pediatric markets.
We will continue to grow our business in burgeoning market, walk, controlling our operating. Before we signoff today, I want to thank all our stockholders and other interested parties who joined us this afternoon and those we have met over the last few months for your interest and support. Scott and I look forward to updating you again when we report our third quarter progress this fall. Thank you.
This does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation.
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