CombiMatrix first-quarter diagnostic lab revenues up 29% sequentially

CombiMatrix Corporation (Nasdaq:CBMX) today reported financial results for the three months ended March 31, 2010.  Key highlights for the first quarter and through the date of this release include:

• 29% quarterly sequential increase in diagnostic lab revenues from Q4-2009 to Q1-2010
• 13% quarter-over-quarter increase in diagnostic lab revenues from Q1-2009 to Q1-2010
• Highest quarterly revenue to date for our diagnostics business
• $25 million settlement reached with National Union in February 2010
• Retired all convertible debt
• Restructuring plan announced to improve operating cash burn
• Strengthened our Board of Directors with the appointment of Mark McGowan

"During the first quarter of 2010, our diagnostics business produced its best quarter ever and demonstrated strong growth relative to the previous quarter and the previous year's first quarter. This strong performance was driven by a number of factors including continued progress on reimbursement for our testing services," stated Dr. Amit Kumar, President and CEO of CombiMatrix Corporation.  "We expect to continue this progress in the coming quarters, and hope to build momentum that will drive revenue in a manner that will enable us to achieve cash flow positive operations."

Dr. Kumar continued, "We have also announced a dramatic restructuring and reinvention of our Company.  The goals of this restructuring are to reduce cash burn and accelerate the timeline to sustainable profitability.  Whenever such cost-cutting measures are enacted, one sacrifices some future opportunities.  Therefore, our Board and management have identified what segments of our business provide the greatest near-term opportunities to increase revenue and achieve profitability.  All other projects that require capital have either been eliminated or have been postponed until operating cash flows can fund them.  Also, as part of this restructuring, I will be stepping down from my position as President and CEO of CombiMatrix.  We are evaluating and interviewing candidates and hope to have my replacement in place by the end of the second quarter of 2010, at which point I will leave my operating role," concluded Dr. Kumar.

Operating Results - Three Months Ended March 31, 2010 and 2009

Revenues for the first quarter of 2010 were $1.3 million versus $1.2 million for the fourth quarter of 2009 and $1.5 million in the first quarter of 2009. First quarter 2010 revenues were comprised of $200,000 in government contract revenues, $235,000 in CustomArray^TM product, equipment and service revenues, and $820,000 in diagnostic lab revenues. First quarter 2009 revenues were comprised of $525,000 in government contract revenues, $288,000 in CustomArray product, equipment and service revenues and $727,000 in diagnostic lab revenues.  Government contract revenues have decreased due to fewer active contracts with the U.S. Department of Defense ("DoD") in the current reporting period than in the comparable 2009 period.  CustomArray product revenues decreased due to lower microarray sales in the current reporting period than in the comparable 2009 period.  Diagnostic laboratory revenues increased due primarily to expanded sales and marketing efforts as well as improved third-party reimbursement in the current reporting period than in the comparable 2009 period.   

Operating expenses for the first quarter of 2010 were $5.0 million versus $5.6 million in the comparable 2009 period.  Operating expenses included research and development and marketing, general and administrative expenses of $1.5 million and $2.7 million, respectively, versus $1.1 million and $2.8 million, respectively, in the comparable 2009 period.  Included in these amounts were non-cash stock compensation charges totaling $826,000 in the first quarter of 2010 versus $791,000 in the comparable 2009 period.

Net income for the first quarter of 2010 was $15.3 million versus a net loss of $(6.1 million) in the comparable 2009 period.  As a result of entering into a settlement agreement with National Union Fire Insurance Company of Pittsburgh, PA ("National Union") during the first quarter of 2010, the Company reported a one-time litigation settlement gain, net of contingent attorney costs, of $19.4 million.  In addition, as a result of retiring the Company's $8.4 million secured convertible debenture (the "Debenture") prior to maturity, the Company incurred a one-time, non-cash loss from early extinguishment of debt of $572,000 during the first quarter of 2010.  The 2010 first quarter results included $348,000 of interest and amortization charges, versus $513,000 in interest charges in the comparable 2009 period associated with the Debenture.  Also, non-cash derivative mark-to-model gains associated with retiring the Debenture were $605,000 for the first quarter of 2010 versus derivative charges of $(1.5 million) in the comparable 2009 period.

Financial Position and Cash Flows

Total assets were $37.3 million as of March 31, 2010 compared to $29.1 million as of December 31, 2009.  Cash and cash equivalents totaled $13.5 million as of March 31, 2010 compared to $5.4 million as of December 31, 2009.  Excluding the net proceeds from one-time litigation settlement gains, operating cash burn for the three months ended March 31, 2010 was $2.8 million versus $2.4 million for the comparable 2009 period.

First quarter Business Highlights and Recent Developments

On January 27, 2010, we reached a settlement in our ongoing litigation with National Union and received settlement proceeds, net of attorneys' costs and fees, of $19.4 million on February 3, 2010.  On March 2, 2010, we retired the Debenture, which had a remaining principal balance of $8.4 million as of that date.  As a result of retiring the Debenture, the potentially dilutive reserve of approximately 1.1 million shares of common stock that could have been issued from conversion of the Debenture was also retired.

In January 2010, the Company announced that Mark McGowan had joined the Board of Directors of CombiMatrix.  Mr. McGowan is the managing member of SAF Capital Management LLC, a value-oriented investment firm which he founded in November, 2006.  Prior to forming SAF Capital Management LLC, Mr. McGowan was Co-founder and Managing Partner of MPG Capital Management LLC, an equity market research firm which derived and licensed statistically validated algorithmic trading models and investment strategies for wealthy individuals and institutional investors.  Mr. McGowan previously worked within the Consumer and Market Knowledge function of Procter & Gamble, where he was instrumental in shaping marketing strategies for multiple brands, as well as leading Market Mix Modeling and the development of macroeconomic forecasting capabilities within Procter & Gamble's Homecare division.  Mr. McGowan performed two cooperative assignments with Johnson & Johnson; working within global operations for Johnson & Johnson subsidiary Ethicon Endo Surgery and in domestic operations for Johnson & Johnson's Consumer Products headquarters.  Mr. McGowan received his Bachelor of Science in Microbiology, with a focus in Genomics and Molecular Genetics, from Michigan State University.

On April 19, 2010, we announced a strategic and operational restructuring plan to significantly reduce operating costs, increase the focus on the Company's diagnostic services business and transition senior management.  After the restructuring, CombiMatrix will be focused primarily on its diagnostics services business, including increasing utilization of its existing tests, expanding the test menu, increasing the number of customers and partners, and improving reimbursement for its testing services.  As a component of this plan, the Company has initiated a search for a new President and Chief Executive Officer, which the Company intends to complete by the end of the second quarter of 2010, at which time Dr. Kumar will step down.  The restructuring plan is expected to yield annualized cost savings of approximately $4.0 million to $5.0 million per year after its completion.