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Cash Poor, CombiMatrix Will Seek New Funds And Trim Operating Costs to Remain Solvent

Despite back-to-back quarters of revenue growth, CombiMatrix last week said it is working with a depleted balance sheet. In an effort to remain solvent beyond September, the company will likely seek external funding and look to leverage $35.7 million awarded in a recent court settlement.
The Mukilteo, Wash.-based array firm last week said that it had $5.5 million in cash, cash equivalents, and available-for-sale investments at the close of the quarter ended March 31. It said in a statement that, in order for it to continue operating as a going concern beyond September, “we will be required to obtain capital from external sources, increase revenues and reduce operating costs.”
It added that it is “evaluating a number of opportunities to increase our cash reserves.”
CEO Amit Kumar acknowledged the company’s dilemma during an earnings call with investors. “We are in the process of evaluating a number of options to strengthen our balance sheet, including some approaches to leverage our recent court judgment against National Union Fire Insurance Company,” Kumar said.
In March, the US District Court for the District of Central California awarded CombiMatrix $32.1 million in a suit against National Union. CombiMatrix sued National Union after it was denied coverage for legal expenses related to its litigation with Nanogen, which was settled in 2002 (see BAN 3/11/2008). The court increased the award to $35.7 million last month after it agreed that National Union owed CombiMatrix an additional $3.6 million for attorney’s fees and litigation costs.
Kumar said he is confident that the company will eventually receive the settlement. However, a final judgment has yet to be entered in the case and it is still possible that National Union could appeal.
Kumar declined to discuss details of the case during the call due to its ongoing status. He did not respond to an e-mail from BioArray News seeking comment in time for this publication.
CombiMatrix, a former subsidiary of Acacia Research, was founded in 1999 and fully separated from its parent last August. It trades on the NASDAQ exchange under the ticker CBMX. Since its split, the value of its stock has risen 70 percent from $6 per share to $10.18 per share as of midday trading on Tuesday.
Kumar said that the rise in the company’s stock price might help to woo additional investors who could provide the company with the funding it needs.

“We are in the process of evaluating a number of options to strengthen our balance sheet.”

“I do believe that the appreciation of our stock over the last few months, during a very difficult time in the general market, reflects this increased recognition, and also the anticipation of great things for the company moving forward,” Kumar said. He added that CombiMatrix plans to “increase the exposure of the company to investors” by “engaging in a number of investor relations activities” in coming months.
“Because we are a small company that has been independent only since August of 2007, just a handful of institutions are aware of us,” said Kumar. “Despite this, I believe that with each passing month more investors become aware of us, our technology, and our product.”
If CombiMatrix manages to secure additional funding, it won’t be the first time the company has relied on a cash infusion from the capital markets as it continues its transition from an array tools company to a molecular diagnostics service provider. For example, the company raised $10 million through a stock placement in December 2006 (see BAN 12/12/2006).
Diagnostics Strategy
Reiterating statements he made during the firm’s fourth-quarter earnings call in March, Kumar said during last week’s call that during the remainder of 2008 CombiMatrix plans to expand its sales and marketing force to reach customers outside the early adopters with whom it has so far managed to forge relationships.
“A major focus for 2008 will be to increase adoption of our tests from early adopters to physicians and, consequentially, increase our revenues,” Kumar said. “To this end we will continue to expand and strengthen our sales team, establish partnerships with laboratories, and execute other activities that will expand the reach of our tests.”
Kumar said that CombiMatrix currently has a “relatively small” sales force of four people to sell its diagnostic services. The company relies on external distributors to market and sell its research-oriented products. Despite this, the company has posted sequential quarterly growth in its molecular diagnostics segment, which has been the focal point of its overall business since 2006.
For example, while revenues for the first quarter of 2008 were $2.0 million compared to $1.1 million in the first quarter of 2007, CombiMatrix posted $273,000 in diagnostics revenue in Q1 ‘08, compared to $29,000 in revenue in the same period one year ago. The remainder of CombiMatrix’s Q1 sales included $1.1 million in government contract revenues and $647,000 in sales of its CustomArray research-related product, equipment, and service revenues.
“By the end of 2007, we were running roughly 100 [reimbursed] patients per month through our laboratory in Irvine, Calif.,” Kumar said. “By the end of Q1 2008 our monthly run rate of paid patients had grown to 150, and it continues to increase.”
As part of its marketing outreach, CombiMatrix will look to build more strategic alliances, such as the one it has developed with Aliso Viejo, Calif.-based Clarient, an oncology-testing and drug-development firm. CombiMatrix said in January that Clarient will offer its HemeScan test for the management of chronic lymphocytic leukemia.
Kumar said last week that Clarient has now finished validating the leukemia test and has begun marketing it to its customer base. “Clarient has a sales force of 30 that can call on customers and we are starting to see orders come in from that channel,” he said.
“These alliances are win-win situations for both companies,” said Kumar. “They allow us to expand our commercial reach by leveraging the infrastructure and physician relationships of the partner, and our partner can market and generate new revenue with a proprietary new product that has been developed by us.”
Q1 in Full
CombiMatrix last week reported that its first-quarter revenues increased around 80 percent and its net loss climbed nearly 62 percent year over year.
The array firm brought in revenues of $2 million for the three-month period ended March 31, compared to revenues of $1.1 million in the first quarter of 2007.
CombiMatrix’s net loss shot up to $3.4 million, or $.56 per share, from $2.1 million a year ago. There is no per-share comparison because CombiMatrix was part of Acacia Research before it was spun off in August.
CombiMatrix’s R&D expenses declined 27.8 percent to $1.3 million from $1.8 million, while SG&A costs fell 16 percent to $2.1 million from $2.5 million.
The firm had $5.5 million in cash, cash equivalents, and available-for-sale investments as of the end of the quarter.

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