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CombiMatrix Corporation (NASDAQ:CBMX)

Q1 2014 Earnings Conference Call

May 7, 2014 11:00 ET

Executives

Rene Caron - Investor Relations, Allen & Caron

Mark McDonough - President and Chief Executive Officer

Scott Burell - Chief Financial Officer

Analysts

Kevin DeGeeter - Ladenburg

Bryan Brokmeier - Maxim Group

John Dunamon - Private Investor

Alan Shea - Private Investor

Operator

Greetings, and welcome to the CombiMatrix Corporation 2014 First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A 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. Rene Caron with Allen & Caron. Thank you, Mr. Caron. You may begin.

Rene Caron - Investor Relations, Allen & Caron

Thank you, Doug, and good morning, everyone. And I too would like to welcome you to the CombiMatrix 2014 first quarter results conference call. With us this morning are CombiMatrix 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 first quarter ended March 31, 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 949-474-4300 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 question-and-answer 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 see the Safe Harbor statement in today’s new release and the 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 that is accurate only as of this call today, May 7, 2014. Copies of CombiMatrix SEC filings are available online from the SEC or by clicking on Investor Relations on the company’s website.

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

Mark McDonough - President and Chief Executive Officer

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. Our core prenatal microarray test volumes grew 60% over the first quarter of 2013, while our prenatal microarray revenue was up 34%. We set new all-time records for revenue, chromosomal microarray testing volumes, and total customers. And we see no reason why this growth can’t continue. We believe these new growth milestones validate our strategy. We implemented a year and a half ago to be the premier independent laboratory focused on delivering microarray technologies in the prenatal and pediatrics segments.

This at time we have made significant strides. We have strengthened our balance sheet last December when we raised $12 million to fund our strategy to capitalize on our new opportunities. And today, we are in expansion mode. We are bolstering our sales team. We now have 12 sales executives in the field, we added five in the last three months and we are expanding our geographic by reach. We have also initiated the research and development efforts required for two new product offerings that will complement our current suite of molecular testing services. And to drive reimbursement coverage, we have added two professionals to strengthen our billing and reimbursement staff. 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.

In early April this year, we also increased the strength of our very strong medical team with the addition of two key medical professionals who bring outstanding expertise in developmental disorders as well as prenatal pathology, Dr. Wes Tyson, our Chief Medical Officer and Dr. Trilochan Sahoo, our Director of Cytogenetics. Trilochan reports directly to Wes. 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.

It is our plan to continue to execute our growth strategy as a high test for key service provider and capitalize on this outstanding opportunity to go forward. In addition to growing our business through an expanded sales team, we continue to bring in new channel partners. In January, we announced the partnership with ProPath, a provider of pathology services to clinicians, hospitals, reference laboratories and medical facilities across the nation. The partnership calls for us to perform CMA testing for miscarriage analysis for their customers.

In March, we announced we would be providing CMA testing for miscarriage analysis for American Pathology Partners, a nationwide network of anatomic pathology laboratories. Before that, late last summer, we joined forces with Sequenom and we are working closely with them to collaborate on education and marketing and to expand our product offerings in the growing prenatal genetic testing marketplace. While these are all important milestones for us, it is important to point out that they take time to grow and mature truly collaborative and beneficial partnerships. We believe that by the end of this year, these partnerships will begin to bear fruit and add meaningfully to our overall growth in expansion.

While we are building our enterprise, we also believe that the overall molecular diagnostic market is moving towards us. As most of you know in late 2012, a pair of large National Institute of Health studies was published in the New England Journal of Medicine that demonstrates the superiority of microarrays over traditional tests. Then last November of 2013, ACOG, the American College of Obstetrics and Gynecologists announced that it would recommend that CMA be the first line genetic testing in pregnancy showing fetal abnormalities on ultrasound as well as pregnancy is lost after 20 weeks of gestation. We believe we are in excellent position with added sales reps in additional capital to penetrate this growing market going forward.

Before I turn the call over to Scott Burell, our CFO to go over operating results in more detail, I’d like to summarize by emphasizing the excitement our company has about the momentum we see building on around us. We believe it’s important to build the new CombiMatrix strategically and methodically and that’s exactly what we are doing. So, please stay tuned.

With that, I’d like to turn the call over to Scott. Scott?

Scott Burell - Chief Financial Officer

Well, 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 March 31, 2014 were $1.82 million comprised of $1.8 million in diagnostics services revenues and $32,000 of royalty revenues. This compares to $1.6 million in total revenues for the first quarter of 2013 comprised of $1.59 million in diagnostics service revenues and $25,000 of royalty revenues representing an overall increase in total revenues of 13% year-over-year and new record in diagnostic revenues for CombiMatrix in the current quarter.

We ran a total of 1,673 billable diagnostic tests in the first quarter compared to 1,718 tests in the first quarter of 2013 and we billed 150 different customers in the first quarter of 2014 for the tests performed, a new record for CombiMatrix, compared to 119 customers in the first quarter of 2013 and 136 for the fourth quarter of 2013, which was our previous record. Although total billable diagnostic tests decreased year-over-year, the percentage of total billable tests representing the microarray tests increased significantly from representing only 60% of total tests performed during the first quarter of 2013 to 82% during the first quarter of 2014. 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 eliminates a significant amount of non-array testing that we are performing a year ago 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 tests during the first quarter versus prior periods. So as a result, the rest of my discussion on revenues would be focused primarily on our microarray testing metrics. We build 1,369 microarray tests during Q1 2014 representing another record quarter for CombiMatrix. The total billable microarray tests increased by nearly 33% from 1,030 microarray tests billed during the first quarter of 2013 and increased sequentially by almost 9% from 1,259 microarray tests billed during Q4 of 2013.

As reported today, we had another record quarter in the prenatal testing side of the business which the clarity includes both miscarriage analysis microarray testing as well as prenatal microarray testing for amnios and CVS samples. First quarter prenatal microarray volumes grew by 60% to 737 billable rests reported as compared to 461 tests reported in Q1 of 2013. This strong volume growth drove prenatal microarray revenues to a new record of $1.12 million, up 34% from $836,000 recognized in the first quarter of 2013. Pediatric and oncology microarray revenues combined were flat year-over-year bringing total microarray revenues to $1.7 million during Q1 of 2014, up nearly 20% from $1.4 million of microarray revenues during Q1 of 2013.

We are also extremely pleased to have achieved sequential prenatal microarray volume and revenue growth, which both grew by 9% from the fourth quarter of 2013, our previous record quarter for prenatal microarray volumes and revenues. As the trend towards greater concentration, microarray testing continues particularly in the prenatal market space, we expect our overall average revenue per test will also increase resulting in higher average revenue per test build and improved operating margins in future periods. So far in 2014, our average revenue per prenatal microarray test was $1,522 per test. Total microarray testing which includes pediatric and oncology tests was $1,252 per a microarray test and total average revenue for all billable tests performed was $1,070 per test, up from $923 per test in the first quarter of 2013.

Operating expenses for the three months ended March 31, 2014 increased by $613,000 from $3.2 million in Q1 of 2013 to $3.8 million in Q1 of 2014. This increase was driven partially from higher sales and marketing expenses from expansion of our sales team and marketing efforts as well as higher G&A costs due to increased legal expenses from ongoing litigation. Also our provision for bad debts were 6% of revenues for the first quarter ended 2014 compared to 4% in the comparable 2013 quarter.

Our net loss from operations increased to $2 million for the first quarter of 2014 compared to $1.6 million for the comparable 2013 first quarter, primarily due to increased sales and marketing and legal expenses, partially offset by increased revenues. As you saw in this morning’s news release, our net loss in this year’s first quarter was $2 million or $0.18 per basic and diluted share, net loss in the last year’s first quarter was $686,000 or $0.30 per basic and diluted share, which was significantly impacted by the impact of the warrant derivative gain of $1.2 million in the prior year. There was no such gain in the first quarter of 2014.

Turning now to our balance sheet and cash flows, we ended March 31, 2014 with $12.5 million in cash, cash equivalents and short-term investments compared to $14 million as of December 31. Our net cash flows used in operations were $1.57 million in the first quarter of 2014 compared to $1.6 million during the first quarter of 2013. Despite higher operating expenses discussed previously increased cash reimbursement during the first quarter of 2014, which was $1.5 million compared to $1.3 million in the first quarter of 2013 aided our net operating cash burn incurred during the first quarter of 2014.

Our ending cash balances were also aided by continued common stock warrant exercises which occurred during the first quarter contributing an additional $256,000 of cash to us from these exercises. And with the risk of repeating myself from our fourth quarter conference call the December $12 million public offering coupled with recent warrant exercises has significantly strengthened the company’s balance sheet and as a result we are better positioned than anytime in recent history to execute our business strategies. Finally, we ended March 31, 2014 with $16 million in total assets, $2.5 million of current and long-term liabilities combined and positive stockholders equity of $13 million.

With that Doug I will turn the call over to you for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Kevin DeGeeter from Ladenburg. Please proceed with your question.

Kevin DeGeeter - Ladenburg

Good morning guys. Congratulations on what looks like a really, really nice quarter here. A few question for me, first off you alluded both in the press release and your prepared comments about two pipeline programs that are moving through R&D can you provide maybe a little more granularity with regard to potential areas of future focus and our timeline is to when you will be comfortable talking a little bit more detail about product launch and commercial trajectory of those products?

Mark McDonough

Okay, thanks Kevin. Yes, so these – we will let the all those that know is that these are going to be complimentary tests for us. One of which will be expanded content to the second one which we are going to send to a new market. The timeline we are looking at right now is end of Q3, early Q4 timeframe. I think we will be prepared to make formal announcements in quarter three is most likely the best timing of that. And then from a revenue aspect I would expect 2015 that this will contribute to our top line.

Kevin DeGeeter - Ladenburg

Okay, great. And then just can you just maybe and I know we talked a bit about this in the past, but how do we think about the efficiency and productivity of the new sales reps and when should we begin to think about them having a more meaningful contribution to revenue growth, is that really is it a Q2 kind of event or is that really Q3 in the second half of the year?

Mark McDonough

It’s the second half of the year and the reason for that is that we continue to be very focused on miscarriage analysis market as well as the invasive testing opportunity. And in the invasive – in the miscarriage analysis market we are having very good success closing hospital systems, but those systems take a while to get through protocol. The other thing is as we train people even if they have been in women’s health space and the pathology space which is where we are looking for our candidates, there is a learning curve to understanding this. So we have been about a six month ramp to get the productivity and then it’s our goal for our best reps to be at $1 million within 15 to 18 months that’s kind of our metrics is.

Kevin DeGeeter - Ladenburg

Okay, great, really helpful. And can you just comment on the payer and reimbursement landscape, I guess I am interested in any progress you may have had with regard to getting additional lives under contract, but I am probably more interested in appreciating changes of – in turnaround and billing and billing rates when you are billing on an out of network basis?

Scott Burell

Right. Hey, Kevin.

Kevin DeGeeter - Ladenburg

Hi, Scott.

Scott Burell

Yes, recently, we don’t have any additions to cover lives to report, although I think as we have talked about in the past and on these calls, part of our corporate strategy is not only investing in sales and marketing, but also in billing and collections and reimbursement. We are actively in recruiting ahead of managed care to drive that effort. And currently what we are seeing is very similar to what I think other diagnostic companies have been discussing over the past 6 to 12 months, which is with the new codes that have been implemented, there have been a few payers that have denied the codes. We have experienced that, but the majority of what we see is primarily longer adjudication, where when the claim is submitted, there is a request from the payer for additional information and we are seeing more of that than we had seen in the past under prior coding that we are using.

That’s – as we did report today, we actually had a pretty strong quarter. Cash collection lines, up from prior quarters both sequentially as well as year-over-year, but our DSO has increased about 5 to 7 days from the mid 80s to I would say around the low 90s right now and that is reflective of just the longer time it’s taking to get through the process, because of the additional records and whatnot that are being requested. So, we think – obviously last year was somewhat chaotic, I would say, in the diagnostic space. I think a lot of that has settled down. And so we are looking 2014 to get back to little more stability though in the short-term, it probably could continue to be fluid and dynamic reimbursement environment.

Kevin DeGeeter - Ladenburg

Okay. And then just maybe lastly from me, then I will get back into queue. Can you just comment on the competitive dynamics within the prenatal microarray market, there has been (indiscernible) the meaningful player that’s looking to exit the market? I think there are also few of the other national players that if anything are focusing a little bit more of their sales and marketing effort on the market. So, what are you seeing in terms of stronger players entering versus certain parties that have chosen to leave the market?

Mark McDonough

Yes, great question. We see an opportunity. We see a real opportunity to be a boutique laboratory with access to genetic counselors by cell phone and not we had as you mentioned some larger competitors who are very good companies, but they are – we provide access advantages. We do think our partnerships are really going to help us in that arena. And it’s been – there has been a lot of activity that has been going on over the past weeks in addition to what happened in Q1 with our partners on capitalizing on the invasive opportunity. And I think the non-invasive testing market has presented opportunities for us as well, because at I think there will be continued reflex demand off of the growing in NIPT market. So, from a competitive landscape to get very granular on a day-to-day basis, we still are competing with carrier typing, we still are competing with integrated genetics, which is LabCorp. And we still in some instances are competing with educating in a sense and will be that non-invasive prenatal testing, while as the advantage of being non-invasive is still very targeted. And if you want the whole landscape in the genomic picture, microarray is the best picture. And I think our volume increase is reflective of that, but we think there is also tremendous upside, particularly with our partner. I mean and we are at the tip of the iceberg of what we could achieve down the road over the next 18 to 24 months.

Kevin DeGeeter - Ladenburg

Great, I appreciate the added color. Thanks so much.

Scott Burell

Thanks, Kevin.

Operator

Our next question comes from the line of Bryan Brokmeier from Maxim Group. Please proceed with your question.

Bryan Brokmeier - Maxim Group

Hi, guys. Thanks for taking the question. Just sort of following up on Kevin’s question regarding the invasive microarray market, could you comment on sort of what your outlook for that is in the long-term and sort of what your expectations are in terms of that being a growth driver over the next three to five years or if your expectations are that it’s really going to be your other products and that you are not depending on that supporting your growth and just sort of maybe more of a near-term opportunity for the company?

Mark McDonough

Hey, Bryan. Good to talk to you. So, I would say to the latter part of your question, we see the miscarriage analysis market as being a huge market for us, but we also see this prenatal invasive testing market being a huge one and the complementary markets, where our miscarriage analysis will lead us into and we have talked about previously that we see opportunities in the reproductive endocrinology idea community. So, those three markets we think are all complementary. That said we are very excited about the invasive testing market, because whether you look at three other companies, that’s one where they talk about invasive procedures being still 200,000 to 400,000 a year or if you want to be more skeptical and say non-invasive has really shrunk back to a number of 100,000. We are at a market share position of 1% of that today while we are growing our business. And so we see there is a real opportunity for a boutique service provider in the invasive testing space. That said, we also are excited, Bryan about the opportunities in miscarriage and in other markets as well. And that’s why as we talked about the new CombiMatrix, there is a – in the market opportunities in front of us, there is real upside (indiscernible) and invasive are – and I want to elaborate on the first part of your question, again.

Bryan Brokmeier - Maxim Group

Yes, that’s great.

Mark McDonough

Okay.

Bryan Brokmeier - Maxim Group

Thanks a lot.

Mark McDonough

Bryan, thank you.

Scott Burell

Thanks, Bryan.

Operator

(Operator Instructions) Our next question comes from the line of John Dunamon from a Private Investor. Please proceed with your question.

John Dunamon - Private Investor

Hi, gentlemen. Congratulations on the quarter. Is it possible that one of these upcoming quarters we can see some unexpected bottom line explosive growth? Thank you.

Scott Burell

Bottom line explosive growth, do I interpret that question to mean reduction and net loss and potentially net income, is that your question?

John Dunamon - Private Investor

Yes, sir.

Scott Burell

Yes. So, we have – as we stated in prior calls, we do see significant leverage in our business right now. Obviously, our G&A fixed costs we can leverage for the growth that we are expecting. We are making investments in sales and marketing. Our lab that obviously is the key driver of our volumes and whatnot in terms of servicing customers has capacity and also has operating leverage built in. And so from our point of view, it’s really all about the top line, we want to be smart with how we spend money and we want to be judicious about how we invest our capital. But to turn the bottom line into a class of the member isn’t about flashing and burning costs, it’s about growing our top line and leveraging the business to improve operating margins, which will fall right to the bottom line. So, as we continue to see hopefully double-digit growth going forward, we definitely expect that bottom line to turnaround.

John Dunamon - Private Investor

Great, thank you gentlemen.

Scott Burell

You bet.

Operator

Our next question comes from the line of Alan Shea, a Private Investor. Please proceed with your question.

Alan Shea - Private Investor

I think you already answered this question, my question is when do you guys see the company is not profitable so? Thank you.

Mark McDonough

So what we have stated probably in the past is we see the company’s breakeven point at approximately $4 million to $4.5 million in top line revenue per quarter. And the question is when do we get to that point and clearly with the market size, with the adoption of microarray what we have been talking about the fact that guidelines are positive. We have wind on our back in terms of microarray as a superior test over existing modalities. We are pretty excited about that occurring quickly, but that’s kind of anyone’s guess at this point. I mean the longer that it takes for the medical community to adopt our testing then that extent to runway a little bit, but there is definitely wind at our back in terms of pushing microarrays for types of testing that we provide. So, in terms of a number we – I have stated that the question is when we get to that number and obviously we all hope sooner rather than later.

Operator

There are no further questions in the queue. I would like to hand the call back to the management for closing comments.

Mark McDonough - President and Chief Executive Officer

Great. Thank you, Doug. Thank you all for joining this morning’s call. It’s an exciting time at CombiMatrix and we are working hard to ensure we continue our pace of progress to build us into a dominant position in microarray testing services for the prenatal and pediatric markets. Before we signoff today, I want to thank all our stockholders and other interested parties who joined us this morning 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 second quarter progress this summer. Thank you so much.

Operator

Ladies and gentlemen, this does conclude today’s call. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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