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CombiMatrix Corp (NASDAQ:CBMX)

Q4 2013 Earnings Conference Call

February 19, 2014 11:00 a.m. ET

Executives

Rene Caron – Partner Allen & Caron

Mark McDonough – President and CEO

Scott Burell – Chief Financial Officer

Analysts

Kevin DeGeeter – Ladenburg

Operator

Good day, and welcome to the CombiMatrix Corporation 2013 Fourth Quarter and Year End Financial Results Conference Call. As a reminder, today's conference is being recorded. [Operator Instructions]

I would now like to turn the conference over to Mr. Rene Caron. Sir, you may begin.

Rene Caron

Thank you, [Markita], and good morning, everyone. Welcome to CombiMatrix Corporation’s 2013 fourth quarter and year end results conference call. With us this morning are CombiMatrix's 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 fourth quarter and year ended December 31, 2013. 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 (949) 474-4300 and we'll send you a copy or add you to the distribution list.

I've been asked to remind you that today’s conference call presentation and answers to questions in the Q&A portion of this 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 conference call contains some time-sensitive information that is accurate only as the date of this call, February 19, 2014. Copies of CombiMatrix SEC filings are available online from the Securities Exchange Commission, by clicking on Investor Relations portion of the company’s website.

With that, it's now my pleasure to turn the call over to CombiMatrix President and CEO, Mark McDonough. Good morning, Mark.

Mark McDonough

Good morning, Rene and thank you. And thank you all for joining us today. I am pleased to report that we had another strong quarter and a very much improved year in 2013.

Our revenue growth from our core prenatal microarray testing market was substantial: 57% in the fourth quarter compared to 2012 and a 112% year to year. And our prenatal microarray testing volumes are also growing substantially by 22% sequentially and 126% over last year. Granted these are big percentages based on a still modest base, we believe there is no reason why we can’t keep this kind of growth going into 2014 and beyond.

If you have been watching us, you know that we have been building a network of providers and payers, a broad geographic network. In October, we announced a partnership with Three Rivers Provider Network that expands our lab services to 15 million network members throughout the U.S. In November, we announced partnership with Blue of Kansas City expanding our services to another 800,000 members in the Kansas City area, and America’s Choice Provider Network extending our services to another 14 million members nationwide.

In December, we announced another contract with FedMed, a national provider network that includes more than 550,000 physicians, 4000 hospitals and 60,000 ancillary care providers nationwide. More than 40 million people have access to FedMed’s preferred provider network. These are all important new extensions of our network and we are already experiencing the benefit and there are more to come.

The bottom line is that we are a vastly different company than we were a year ago. We have extended our reach to millions more patients are covered for CMA testing and numerous physician groups and testing labs are now on-board, spreading the word about the value of the prenatal testing. We intend to build a dominant position in the prenatal microarray testing market. We feel that we're off to a very good start to achieve this goal. This prenatal microarray testing market is a huge and rapidly expanding market and we are the only publicly traded company specializing it.

Some great news about the potential in the marketplace came in late November. ACOG, American College of Obstetricians and Gynecologists, announced that it was recommending the chromosomal microarray analysis to be the first line genetic test in pregnancies showing foetal abnormalities on an ultrasound screen. That’s a significant indicator that the demand for CMA is going to grow and we are in excellent position to penetrate that growing market.

As I mentioned in the past, we have a three pronged strategy to drive that growth. We will work with industry partners; we will work with pathology partners, and we will continue to build on the success of our direct sales team. We have already expanded our sales force. We doubled the team from 6 to 12 reps since the beginning of Q3, hiring three of these folks in the last week. We plan to grow to as many as 15 in the near future.

Our pathology partnerships continue to be accretive. Our most recent one with ProPath which we announced last month augments our sales force in key markets and is already having an impact that we can see in this quarter.

Our first industry partnership was with Sequenom. This partnership which we announced late last year is off to a good start as we're laying the foundation for future growth through training and collaboration. We foresee a lot of upside here and revenue a strong revenue contribution in the second half of this year.

Before I turn the call over to Scott Burell, our CFO, to discuss the financial and test metrics in more detail, I’d like to summarize by touching on the financing we did in December.

We raised gross proceeds of 12 million, which gives us plenty of runway to build the enterprise we need to be successful. We are using this capital to feed our strategy, put more sales people in place to capitalize on emerging market opportunity, to expand our network, to extend our reach, to build up our reimbursement team and to create new product offerings in the marketplace.

The traction we’ve already gained gives us confidence we are on the right track to deliver upon the right strategy in a market that we believe that is in excess of $350 million. We're very excited about what is to come for us.

Now I'd like to turn the call over to Scott.

Scott 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 three months ended December 31, 2013 were $1.75 million, comprised of $1.7 million in diagnostics services revenues and $48,000 of royalty revenues. This compares to $1.48 million in total revenues for the fourth quarter of 2012, comprised of $1.43 million in diagnostics service revenues and $54,000 in royalty revenues, representing an overall increase in total revenues of 18% quarter over quarter.

We ran a total of 1509 billable diagnostic tests in the fourth quarter compared to 1590 tests in the fourth quarter of 2012 and we billed 136 different customers in the fourth quarter of 2013 for the tests performed, a new record for CombiMatrix, compared to 108 customers in the fourth quarter of 2012 and 131 for the third quarter of 2013, this was our previous record.

As stated on prior earnings calls, continued adoption of microarray test in the prenatal market space, which for purposes of today's discussion include both prenatal testing as well as miscarriage analysis testing, is driving our overall testing mix toward a significantly higher concentration of microarray tests during the fourth quarter than in prior periods. As a result, the rest of my discussion will focus primarily on our microarray testing metrics.

We billed 1259 microarray tests during Q4 2013, representing a record quarter for CombiMatrix. Total microarray tests billed increased by nearly 31% from 963 microarray tests billed during the fourth quarter of 2012 and increased sequentially by 10% from 1145 microarray tests billed during Q3 2013.

As reported today, we had another record quarter in the prenatal testing side of the business. Fourth quarter prenatal microarray revenues grew by 57% as compared to Q4 of 2012 and year-to-date by 112% over the prior year. Strong volume growth drove the overall revenue increase in this market whereas declining volumes from oncology sales as well as lower volumes from non-array testing resulted in overall diagnostic revenue growth rate of 20% in Q4 2013 versus 2012 and year-to-date by 25% over the prior year.

We were also extremely pleased to have achieved sequential prenatal microarray revenue growth which grew by nearly 22% from the third quarter of 2013. Prenatal microarray revenues were $1 million during the fourth quarter of 2013 representing a new record for CombiMatrix and were $3.6 million for the year ended 20 13.

Our billing and reimbursement team has been working diligently on securing additional payer contracts that have been previously announced, allowing us to reap the benefits in terms of recognized revenue from the 24% increase in prenatal microarray volumes that we experienced from the third quarter to the fourth quarter of 2013.

Year-to-date 2013 total microarray volumes increased by 25% from 3,624 billable microarray tests performed in 2012 to 4,540 billable microarray tests performed in 2013. And we are pleased to report that corresponding microarray revenues had increased by 28% to $5.8 million in 2013 from $4.5 million in 2012 due primarily to a market shift to prenatal array testing while deemphasizing oncology and other non-array testing, which are reimbursed at significantly lower rates than our prenatal microarray business.

As the trend towards greater concentration of prenatal microarray testing continues, we expect our overall average revenue per test will also increase, resulting in higher average revenue per test billed and improved operating margins in future periods.

For 2013, our average prenatal -- our average revenue per prenatal microarray test was $1600 per test. And total microarray testing, which includes paediatric and oncology tests, was $1278 per microarray test, up from $1253 in 2012.

Our operating expenses for the three months ended December 31 2013 increased by $815,000 from $2.8 million in Q4 of 2012 to $3.6 million in Q4 of 2013. The increase was driven primarily by increased cost of services due to higher microarray testing volumes, higher sales and marketing expenses from expansion of our sales team and marketing efforts as well as higher G&A costs due to one-time management relocation costs as well as higher bad debt costs due to higher revenues.

For the year ended 2013 our provision for bad debt was 5% of revenues in 2013 compared 6% in 2012. Year to date operating expenses increased by $420,000 from $12.3 million in 2012 to $12.7 million in 2013 driven primarily by higher cost of services associated with record volumes and higher sales and marketing expenses from expanding our direct sales force, partially offset by lower R&D and G&A costs year over year.

Our net loss from operations increased to $1.8 million from the fourth quarter of 2013 compared to $1.3 million for the comparable 2012 fourth quarter, primarily due to increased cost of services, sales and marketing and G&A costs previously discussed, partially offset by the increased contribution from revenues.

Year-to-date our operating net loss decreased from $7 million in 2012 to $6.4 million in 2013 due primarily to increased revenues partially offset by increased cost of services from providing record test volumes in 2013 compared to 2012.

Turning now to our balance sheet and cash flows. We ended December 31, 2013 with $14 million in cash, cash equivalents and short-term investments compared to $2.4 million as of December 31, 2012. As Mark mentioned, we executed the public offering for the sale of $12 million of Series B convertible preferred stock and warrants to purchase common stock during the fourth quarter which significantly impacted our available cash resources as of the year end.

Our net cash flows used in operations were $1.5 million and $5.6 million for the 3 and 12 months ending December 31, 2013 compared to $1.4 million and $5.9 million in the comparable 2012 period. This cannot restated how the recent financing activities have strengthened our balance sheet and allow Mark and I as well as the rest of our management team to focus on execution of our business strategy rather than focusing on attaining necessary capital to operate the company.

Our increased cash position has removed the risk of our continuing as a going concern in the near term and has also more than taken care of the minimum equity listing issue with NASDAQ that we were dealing with a year ago.

To summarize, the combination of the convertible preferred stock financings coupled with common stock warrant exercises have provided nearly $20 million of additional capital to CombiMatrix over the past 14 months. As a result, we are well-positioned than at any time in recent history to execute of our business strategy.

Finally, we ended December 31, 2013 with $16.8 million in total assets, $2.1 million of current and long-term liabilities and positive stockholders’ equity of $14.7 million.

With that, I would now like to turn the call back over to the operator for some questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Kevin DeGeeter with Ladenburg.

Kevin DeGeeter – Ladenburg

A couple of things here. Can you just maybe talk a bit about how the ACOG guidelines, or the VISTECH [ph] guidelines has perhaps changed your sales and marketing approach or message and have you seen a change in ordering patterns or receptivity following the publication back in November?

Mark McDonough

With the guideline it puts us today a much better position for our invasive testing on amnio CVS. We are seeing a nice uptick in the ordering patterns. What -- it's just another arrow in the quiver for the maternal foetal medicine specialist to encourage microarray, with now this committee opinion coupled with the paper back in December 2012. So we are seeing the receptivity continuing to change in the MSM community. We do think we’re base off what our key opinion leaders are telling us, [Justin Bulber, Ron Wagner] that we are basically month or quarter four, or probably a 12 quarter conversion process to microarray from previous technologies. So we have good timing with our strategy.

To your direct question on what we are doing to shift that, now that we have the $12 million in capital, we are going to be hiring a team dedicated for the few – a handful of individuals dedicated to the prenatal amnio CVS space. As Scott has alluded to, our miscarriage analysis market is really growing very well, Kevin, right now. So we want to be non-distracting because that’s our highest AUP, we are averaging about $1700 on the process [ph] conception with miscarriages. But we also want to capitalize on the invasive testing space. So we are going to be building out a separate team to go out after that over the course of the next 3 months here.

Kevin DeGeeter – Ladenburg

I think you answered a part of my question which is just the additional sales reps and how they are being configured? So, a handful will focus on the prenatal market and are you also focusing on geographic expansion or how do we think about – kind of going from 6 to 15 here in a pretty short span?

Mark McDonough

So the last three individuals we brought just literally in the past week, they are in our home office for training today. One is in the Boston area, one’s in Atlanta, and one’s in San Francisco, which are key metroplex markets for us. The ProPath partnership we’re excited about too because it fills the Dallas void for us. They are based there and with a very strong presence as well as in Pennsylvania. As we go to 15 – and 15 is the number right now and it may – we think we have an opportunity to grow our business. So it may be a little bit more in that. We’re looking at prenatal specials as well as other key markets we need to fill the North-Central or looking to hire right now in Chicago.

But other than that our geographical coverage for a relatively lean team is fairly good with the major metropolitan areas. And so Chicago and LA are our two markets we are also looking at although they are covered by partners currently for us.

Kevin DeGeeter – Ladenburg

And just lastly and I will get back in the queue is – with regard to – I guess I think we got some revenue coming on from ProPath, eventually some of your corporate partners and other partnerships as well. Just from a P&L standpoint, how should we think about the changing revenue mix and how that may hit or impact this reported gross margin?

Scott Burell

Well, going forward we do see gross margin improving primarily because of the changing tax mix, de-empathizing non-array testing which is reimbursed lot lower than from the microarray testing. Our overall average revenue per test increased from the high 900s to the low 1100s quarter and quarter, and our overall test mix moved from approximately 61% to microarray to non-array testing in the quarter 2012 to over 83% in Q4 ‘13 microarray to non-array testing. So as that shift continues, microarray – significantly higher gross margins than non-array testing. We look to improve gross margin in the future.

Operator

(Operator Instructions) It appears we have no further questions at this time. I would like to turn the call back over to Mr. Mark McDonough for any additional or closing remarks.

Mark McDonough

Thanks, [Markita]. Once again I want to thank you for joining us for this morning’s call, your continued interest in CombiMatrix and your support of the company is greatly appreciated. I also would like to thank our management team and our employees for the tremendous job they are doing to help build CombiMatrix to a dominant player in the prenatal microarray testing market. We look forward to you joining us again on our next conference call when we report the company’s results for the first quarter 2014. This concludes this morning’s call. Thanks.

Operator

That does conclude today’s conference. We appreciate your participation. You may now disconnect.

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