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CombiMatrix ‘Adequately Financed’ As It Awaits $36M Judgment, CEO Says

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CombiMatrix has enough cash on hand to get it through the third quarter of 2009 while it waits to collect a $36 million judgment it was awarded in May after winning a lawsuit against National Union Fire Insurance Company over a coverage dispute.
 
The company also announced its second-quarter results, posting total revenue growth of 55 percent, propelled by a 421-percent rise in diagnostic services revenue.
 
The Mulkiteo, Wash.-based company also recently filed an Aug. 12 S-3 shelf registration with the US Securities and Exchange Commission that will enable it to raise up to $100 million in stock offerings.
 
However, CEO Amit Kumar said that CombiMatrix is unlikely to raise capital in the next few months. Between the $3.8 million in cash and equivalents on hand at the end of the second quarter and $10 million in convertible notes sold in July to YA Global Investments, a Cayman Islands-based investment fund, Kumar said the company is well positioned to continue its plans to expand both its array-based diagnostics offering as well as its sales and marketing infrastructure.
 
“With this $10 million and the $3.8 million from our balance sheet at the end of Q2, we feel that we are adequately financed for the near future,” Kumar said last week during the firm’s Q2 earnings call.
 
“I want to clearly note that we have no intention of raising capital in the near future,” he said, regarding the S-3 filing. “We are adequately financed currently, [but] one of the concerns that customers, potential employees, corporate partners, and others have is with our limited capital.
 
“As we continue to build our business, we want to have the flexibility to take advantage of situations as they arise,” he continued. The potential to raise $100 million in stock offerings “reflects the size of our opportunity. Therefore this filing gives us an option among many as we go forward.”
 
CombiMatrix is still waiting to collect the $35.7 million final judgment it was awarded in May from National Union after the US District Court for the Central District of California ruled in its favor. 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 5/27/2008).
 
National Union appealed the judgment and plans to file its opening brief with an appeals court in November.
 
Kumar said during the Q2 call that the company has “cash enough to get us through several quarters and perhaps enough to get us to the collection of the $36 million judgment from National Union.” He said that as the appeals process proceeds, the judgment will accrue interest, although he declined to speculate when CombiMatrix might receive the cash.
 
Diagnostics and Sales
 
During the call, Kumar also addressed several of the firm’s strategic goals for the remainder of the year, which include the “continued expansion of our products and services, the expansion of our commercialization infrastructure, some potentially transformative deals, and consequent improvement in our revenues and cash flows.”
 

“I want to clearly note that we have no intention of raising capital in the near future.”

CombiMatrix has followed a strategy of product proliferation, and has had nine diagnostic product launches in five different application areas over the past two years. These product launches include tests for detecting constitutional genetic abnormalities, autism, chronic lymphocytic leukemia, breast cancer, and melanoma.
 
Kumar said that the company will soon launch a prostate cancer-detection test through its CombiMatrix Molecular Diagnostics subsidiary in Irvine, Calif. He did not provide more detail on the test and did not answer e-mails seeking additional comment.
 
However, he noted during the call that the addition of Colin Collins to CMDX’s scientific advisory board, announced last week, was part of the firm’s effort to prepare its prostate cancer diagnostic for market.
 
Collins is an associate professor of urology at the Cancer Research Institute and the department of molecular medicine at the University of California, San Francisco. According to Combi, his research has led to the identification of genetic markers that have been used to risk-stratify cancer patients.
 
In addition to prepping the prostate cancer test for launch, Kumar said that CombiMatrix hopes to double its four-person sales force by year-end. CombiMatrix currently employs 65 people, he said.
 
Q2 in Full
 
CombiMatrix’s total second-quarter revenues grew 55 percent atop a 421-percent jump in diagnostic services revenue.
 
CombiMatrix said that revenues for the quarter ended June 30 grew to $2.1 million from $1.3 million in the second quarter of 2007.
 
Revenues from government contracts grew 42 percent to $968,000 from $679,000 in the year-ago quarter; product revenue grew 30 percent to $597,000 from $458,000; and diagnostic services revenue more than tripled to $440,000 from $137,000 in the second quarter of 2007.
 
R&D spending fell 19 percent to $890,000 from $1.1 million in the prior-year period, while marketing, general, and administrative expenses rose slightly to $2.4 million from $2.3 million.
 
Total second-quarter operating expenses rose 10 percent to $5.4 million from $4.9 million in the comparable period of 2007.
 
CombiMatrix cut its second-quarter net loss by 8 percent to $3.3 million from $3.6 million in the year-ago period. The company said that the 2007 results included non-cash charges of $145,000 related to the adjustment of long-term warrant liability for changes in fair value. The firm said it had no such adjustments during the second quarter of 2008 because it now classifies outstanding warrants as a component of permanent equity.
 
Excluding the effects of the warrant liability adjustments in 2007, the company’s second-quarter net loss improved by $159,000, or 5 percent, compared to the second quarter of 2007.
 
CombiMatrix said it lowered its cash burn for the quarter by 7 percent to $2.5 million from $2.7 million in the second quarter of 2007.
 
As of June 30, the company’s cash, cash equivalents, and available-for-sale investments totaled $3.8 million. Of that amount, $1.7 million were held in auction rate securities. The company cautioned that the market for auction rate securities has “collapsed,” making its holdings in these securities “currently illiquid.”

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