Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

| **x**                                             | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|---------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
|                                              |       |                                                                                                     |
| **FOR  THE QUARTERLY PERIOD ENDED JUNE 30, 2009** |
|                                              |
| **OR**                                            |
|                                              |       |                                                                                                     |
| **o**                                             | ** ** | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

** **

**FOR THE TRANSITION PERIOD FROM            TO           **

 

**Commission File Number****001-33523**

 

**COMBIMATRIX CORPORATION**

(Exact Name of Registrant as Specified inIts Charter)

 

| **Delaware**                                                  | ** ** | **47-0899439**      |
|---------------------------------------------------------------|------------|---------------------|
| (State or Other Jurisdiction of                               |       | (I.R.S. Employer    |
| Incorporation or Organization)                                |       | Identification No.) |
|                                                          |       |                |
| **6500 Harbour Heights Pkwy., Suite 303,  Mukilteo, WA** | ** ** | **98275**           |
| (Address of  Principal Executive Offices)                     |       | (Zip Code)          |

 

Registrant’s telephone number, includingarea code: ** (425) 493-2000**

 

 

(Former name, formeraddress and former fiscal year, if changed since last report.)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to filing requirements for thepast 90 days. Yes x   No o

 

Indicate by check mark whether the registranthas submitted electronically and posted on its corporate Website, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files).   Yes o  No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

| Large accelerated filer o                                              |   | Accelerated filer o         |
|-----------------------------------------------------------------------------|--------|----------------------------------|
|                                                                        |   |                             |
| Non-accelerated filer o

(Do not check if a smaller reporting company) |   | Smaller reporting company x |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).   Yes o  No x

 

As of August 7, 2009, 7,510,073 shares of CombiMatrixCorporation common stock were issued and outstanding.

 

 

 

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**Table of Contents**

** **

**COMBIMATRIX**CORPORATION

**Table of Contents**

 
| **Part I.   Financial Information** | ** **                                                                                                         |
|----------------------------------------------------|--------------------------------------------------------------------------------------------------------------------|
|                                               |                                                                                                               |   |
| Item  1.                                           | Financial  Statements                                                                                              |   |
|                                               |                                                                                                               |   |
|                                               | Consolidated  Balance Sheets as of June 30, 2009 (Unaudited) and December 31, 2008                       | 3 |
|                                               |                                                                                                               |   |
|                                               | Consolidated Statements of Operations for the Three  and Six Months Ended June 30,  2009 and 2008 (Unaudited) | 4 |
|                                               |                                                                                                               |   |
|                                               | Consolidated Statements of Cash Flows for the Six  Months Ended June 30, 2009 and 2008 (Unaudited)            | 5 |
|                                               |                                                                                                               |   |
|                                               | Notes to Consolidated Financial Statements (Unaudited)                                                             | 6 |
|                                               |                                                                                                               |   |
| Item 2.                                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        | 17 |
|                                               |                                                                                                               |   |
| Item 3.                                            | Quantitative  and Qualitative Disclosures about Market Risk                                                        | 23 |
|                                               |                                                                                                               |   |
| Item 4T.                                           | Controls and  Procedures                                                                                           | 23 |
|                                               |                                                                                                               |   |
| **Part II.   Other Information**    | ** **                                                                                                         |
|                                               |                                                                                                               |   |
| Item 1.                                            | Legal Proceedings                                                                                                  | 24 |
|                                               |                                                                                                               |   |
| Item 2.                                            | Unregistered  Sales of Equity Securities and Use of Proceeds                                                       | 24 |
|                                               |                                                                                                               |   |
| Item 4.                                            | Submission of  Matters to a Vote of Security Holders                                                               | 24 |
|                                               |                                                                                                               |   |
| Item 6.                                            | Exhibits                                                                                                           | 25 |
|                                               |                                                                                                               |   |
| **Signatures**                                     | 26                                                                                                                 |
|                                               |                                                                                                               |
| **Exhibit Index**                             | 27                                                                                                                 |

 

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**COMBIMATRIXCORPORATION**

**CONSOLIDATED BALANCE SHEETS**

**(Inthousands)**

** **
| ** **                                                                                                            | ** ** | **June 30,** | ** **   | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-------------------|--------------|-----------------------|------------|
| ** **                                                                                                            | ** ** | **2009**          | ** **   | **2008**              | ** ** |
| ** **                                                                                                            | ** ** | **(unaudited)**   | ** **   | ** **            | ** ** |
| **ASSETS**                                                                                                            |       |              |         |                  |       |
|                                                                                                                  |       |              |         |                  |       |
| Current  assets:                                                                                                      |       |              |         |                  |       |
| Cash  and cash equivalents                                                                                            |       | $                 |  10,985 |                  | $          |  7,579 |   |
| Available-for-sale  investments                                                                                       |       | —            |         | 1,526                 |       |
| Accounts  receivable, net of allowance for doubtful accounts of $644 and $378                                         |       | 835               |         | 916                   |       |
| Inventory                                                                                                             |       | 868               |         | 725                   |       |
| Prepaid  expenses and other assets                                                                                    |       | 203               |         | 219                   |       |
| Total  current assets                                                                                                 |       | 12,891            |         | 10,965                |       |
|                                                                                                                  |       |              |         |                  |       |
| Property  and equipment, net                                                                                          |       | 564               |         | 743                   |       |
| Investments  in unconsolidated subsidiaries                                                                           |       | 417               |         | 938                   |       |
| Patents  and licenses, net                                                                                            |       | 4,389             |         | 4,970                 |       |
| Goodwill                                                                                                              |       | 16,918            |         | 16,918                |       |
| Total  assets                                                                                                         |       | $                 |  35,179 |                  | $          |  34,534 |   |
|                                                                                                                  |       |              |         |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                        |       |              |         |                  |       |
| ** **                                                                                                            | ** ** | ** **        | ** **   | ** **            | ** ** |
| Current  liabilities:                                                                                                 |       |              |         |                  |       |
| Accounts  payable, accrued expenses and other                                                                         |       | $                 |  2,717  |                  | $          |  2,130 |   |
| Credit  line borrowings                                                                                               |       | —            |         | 820                   |       |
| Current  portion of deferred revenues                                                                                 |       | 381               |         | 418                   |       |
| Total  current liabilities                                                                                            |       | 3,098             |         | 3,368                 |       |
|                                                                                                                  |       |              |         |                  |       |
| Deferred  revenues, net of current portion                                                                            |       | 25                |         | 125                   |       |
| Capital  lease obligation, net of current portion                                                                     |       | 37                |         | 43                    |       |
| Secured  convertible debenture                                                                                        |       | 6,959             |         | 6,483                 |       |
| Other  liabilities                                                                                                    |       | 1,825             |         | 469                   |       |
| Total  liabilities                                                                                                    |       | 11,944            |         | 10,488                |       |
|                                                                                                                  |       |              |         |                  |       |
| Commitments  and contingencies (Note 8)                                                                               |       |              |         |                  |       |
|                                                                                                                  |       |              |         |                  |       |
| Shareholders’  equity:                                                                                           |       |              |         |                  |       |
| Preferred  stock; $0.001 par value; 5,000,000 shares authorized; none issued and  outstanding                         |       | —            |         | —                |       |
| Common  stock; $0.001 par value; 25,000,000 shares authorized; 7,479,466 and  6,288,033 shares issued and outstanding |       | 7                 |         | 6                     |       |
| Additional  paid-in capital                                                                                           |       | 53,601            |         | 43,650                |       |
| Accumulated  net losses                                                                                               |       | (30,373           | )            | (19,610               | )          |
| Total  shareholders’ equity                                                                                      |       | 23,235            |         | 24,046                |       |
| Total  liabilities and shareholders’ equity                                                                      |       | $                 |  35,179 |                  | $          |  34,534 |   |

** **

***The accompanyingnotes are an integral part of these consolidated financial statements.***

 

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**COMBIMATRIXCORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Inthousands, except share and per share information)**

**(Unaudited)**

*** ***
| ** **                                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                    | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                    | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                          |       |                   |       |                 |       |   |   |   |   |
| Revenues:                                                     |       |                   |       |                 |       |   |   |   |   |
| Government contracts                                          |       | $                      | 291        |                 | $          | 968 |   | $ | 816 |   | $ | 2,037 |   |
| Products                                                      |       | 300                    |       | 623                  |       | 557 |   | 1,198 |   |
| Services                                                      |       | 582                    |       | 414                  |       | 1,278 |   | 697 |   |
| Collaboration  agreements                                     |       | 63                     |       | 62                   |       | 125 |   | 124 |   |
| Total revenues                                                |       | 1,236                  |       | 2,067                |       | 2,776 |   | 4,056 |   |
|                                                          |       |                   |       |                 |       |   |   |   |   |
| Operating expenses:                                           |       |                   |       |                 |       |   |   |   |   |
| Cost of government  contract revenues                         |       | 242                    |       | 955                  |       | 737 |   | 1,969 |   |
| Cost of products and  services                                |       | 521                    |       | 484                  |       | 1,178 |   | 888 |   |
| Research and  development expenses                            |       | 1,282                  |       | 913                  |       | 2,413 |   | 2,259 |   |
| Marketing, general and  administrative expenses               |       | 2,861                  |       | 2,397                |       | 5,630 |   | 4,480 |   |
| Patent amortization and  royalties                            |       | 333                    |       | 361                  |       | 679 |   | 722 |   |
| Equity in loss of  investee                                   |       | 261                    |       | 241                  |       | 511 |   | 490 |   |
| Total operating  expenses                                     |       | 5,500                  |       | 5,351                |       | 11,148 |   | 10,808 |   |
| Operating loss                                                |       | (4,264                 | )          | (3,284               | )          | (8,372 | ) | (6,752 | ) |
|                                                          |       |                   |       |                 |       |   |   |   |   |
| Other income (expense):                                       |       |                   |       |                 |       |   |   |   |   |
| Interest income                                               |       | 5                      |       | 25                   |       | 15 |   | 125 |   |
| Interest expense                                              |       | (509                   | )          | (4                   | )          | (1,022 | ) | (5 | ) |
| Derivatives credits  (charges)                                |       | 137                    |       | —               |       | (1,384 | ) | — |   |
| Total other income  (expense)                                 |       | (367                   | )          | 21                   |       | (2,391 | ) | 120 |   |
|                                                          |       |                   |       |                 |       |   |   |   |   |
| Net loss                                                      |       | $                      | (4,631     | )                    | $          | (3,263 | ) | $ | (10,763 | ) | $ | (6,632 | ) |
|                                                          |       |                   |       |                 |       |   |   |   |   |
| Basic and diluted net  loss per share                         |       | $                      | (0.65      | )                    | $          | (0.54 | ) | $ | (1.60 | ) | $ | (1.10 | ) |
|                                                          |       |                   |       |                 |       |   |   |   |   |
| Basic and diluted  weighted average common shares outstanding |       | 7,103,330              |       | 6,025,844            |       | 6,714,149 |   | 6,011,465 |   |

** **

***The accompanyingnotes are an integral part of these consolidated financial statements.***

 

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** **

**COMBIMATRIXCORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Inthousands)**

**(Unaudited)**

** **
| ** **                                                                      | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                      | ** ** | **June 30,**    | ** ** |
| ** **                                                                      | ** ** | **2009**             | ** ** | **2008** | ** ** |
|                                                                            |       |                 |       |   |   |
| Operating activities:                                                           |       |                 |       |   |   |
| Net loss                                                                        |       | $                    | (10,763    | ) | $ | (6,632 | ) |
| Adjustments to  reconcile net loss to net cash flows from operating activities: |       |                 |       |   |   |
| Depreciation and  amortization                                                  |       | 775                  |       | 908 |   |
| Non-cash stock compensation                                                     |       | 1,646                |       | 769 |   |
| Derivatives charges                                                             |       | 1,384                |       | — |   |
| Equity in loss of  investees                                                    |       | 511                  |       | 490 |   |
| Warrants issued to  consultants                                                 |       | 190                  |       | — |   |
| Allowance for bad debt                                                          |       | 287                  |       | 84 |   |
| Amortization of debt  discount and issuance costs                               |       | 571                  |       | — |   |
| Changes in assets and liabilities:                                              |       |                 |       |   |   |
| Accounts receivable                                                             |       | (206                 | )          | (898 | ) |
| Inventory, prepaid  expenses and other assets                                   |       | (131                 | )          | (162 | ) |
| Accounts payable,  accrued expenses and other                                   |       | 839                  |       | 405 |   |
| Deferred revenues                                                               |       | (137                 | )          | (155 | ) |
| Net cash flows from  operating activities                                       |       | (5,034               | )          | (5,191 | ) |
| Investing activities:                                                           |       |                 |       |   |   |
| Purchase of property  and equipment                                             |       | (15                  | )          | (42 | ) |
| Sale of  available-for-sale investments                                         |       | 1,526                |       | 4,030 |   |
| Net cash flows from  investing activities                                       |       | 1,511                |       | 3,988 |   |
| Financing activities:                                                           |       |                 |       |   |   |
| Net proceeds from  issuance of common stock, net                                |       | 7,761                |       | 111 |   |
| (Repayment) draw on  credit line                                                |       | (820                 | )          | 808 |   |
| Repayment of capital  lease obligations                                         |       | (12                  | )          | (14 | ) |
| Net cash flows from  financing activities                                       |       | 6,929                |       | 905 |   |
|                                                                            |       |                 |       |   |   |
| Increase (decrease) in  cash and cash equivalents                               |       | 3,406                |       | (298 | ) |
| Cash and cash  equivalents, beginning                                           |       | 7,579                |       | 2,314 |   |
| Cash and cash  equivalents, ending                                              |       | $                    | 10,985     |   | $ | 2,016 |   |
|                                                                            |       |                 |       |   |   |
| Non-cash financing  activities:                                                 |       |                 |       |   |   |
| Accrued interest paid  in common stock                                          |       | $                    | 451        |   | $ | — |   |
| Conversion of secured  convertible debenture to common stock                    |       | $                    | 100        |   | $ | — |   |
| Accrued financing costs                                                         |       | $                    | 205        |   | $ | — |   |

 

***The accompanyingnotes are an integral part of these consolidated financial statements.***

 

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**COMBIMATRIXCORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

****1.    OVERVIEW AND BACKGROUND****

 

CombiMatrixCorporation (the “Company” “we” “us” and “our”) was originally incorporated in October 1995as a California corporation and later reincorporated as a Delaware corporationin September 2000.  On December 13,2002 (the “Merger Date”), we merged with and became a wholly owned subsidiaryof Acacia Research Corporation (“Acacia”). Also on the Merger Date, Acacia entered into a recapitalizationtransaction whereby Acacia created two classes of registered common stockcalled Acacia Research-CombiMatrix common stock (“AR-CombiMatrix stock”) andAcacia Research-Acacia Technologies common stock (“AR-Acacia Technologies stock”)and divided its existing Acacia common stock into shares of the two new classesof common stock.  On August 15,2007, we split-off from Acacia (the “Redemption Date”), and all currentlyissued and outstanding shares of AR-CombiMatrix stock were redeemed andexchanged for shares of CombiMatrix common stock at a redemption ratio of tenshares of AR-CombiMatrix stock for one share of CombiMatrix common stock (the “RedemptionRatio”), which is currently traded on the Nasdaq Global Market.  Also, warrants to purchase AR-CombiMatrixstock became exercisable to purchase CombiMatrix common stock, adjusted for theRedemption Ratio.  As of the RedemptionDate, we ceased to be a subsidiary of, or affiliated with, Acacia.

 

*****Description of the Company*****

 

****Weare a diversified biotechnology business that develops proprietarytechnologies, including products and services in the areas of drug development,genetic analysis, molecular diagnostics, nanotechnology and defense andhomeland security markets, as well as in other potential markets where ourproducts and services could be utilized. The technologies we have developedinclude a platform technology to rapidly produce user-defined, in-situsynthesized, oligonucleotide arrays for use in identifying and determining theroles of genes, gene mutations and proteins. This technology has a wide rangeof potential applications in the areas of genomics, proteomics, biosensors,drug discovery, drug development, diagnostics, combinatorial chemistry,material sciences and nanotechnology. Other technologies include proprietarymolecular synthesis and screening methods for the discovery of potential newdrugs****.  Wecurrently recognize revenues from selling these products and services andproviding research and development services for organizations including theU.S. Department of Defense (“DoD”) and other strategic partners.

 

CombiMatrixMolecular Diagnostics, Inc. (“CMDX”), our wholly owned subsidiary locatedin Irvine, California, has developed capabilities of producing arrays thatutilize bacterial artificial chromosomes, or “BACs,” which also enable geneticanalysis.  CMDX functions primarily as adiagnostics reference laboratory.

 

LeuchemixInc. (“Leuchemix”), a minority owned subsidiary, is developing a series ofcompounds to address a number of oncology-related diseases.

 

*****Basis of Presentation*****

 

The accompanyingconsolidated financial statements have been prepared in accordance withgenerally accepted accounting principles for interim financial information andwith the instructions to Form 10-Q and Rule 10-01 of RegulationS-X.  Accordingly, certain informationand footnotes required by generally accepted accounting principles in annualfinancial statements have been omitted or condensed in accordance withquarterly reporting requirements of the SEC. These interim consolidated financial statements should be read inconjunction with the consolidated financial statements and notes thereto forthe year ended December 31, 2008, as reported by us in our Annual Reporton Form 10-K filed on March 27, 2009. The year-end consolidated balance sheet data was derived from auditedfinancial statements but does not include all disclosures required byaccounting principles generally accepted in the United States of America.  The consolidated financial statements includeall adjustments of a normal recurring nature which, in the opinion ofmanagement, are necessary for a fair statement of our financial position as of June 30,2009, and results of operations and cash flows for the interim periodspresented.  The results of operations forthe three and six months ended June 30, 2009 are not necessarilyindicative of the results to be expected for the entire year.

 

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**COMBIMATRIXCORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(Unaudited)**

 

*****Liquidity and Risks*****

 

Wehave a history of incurring net losses and net operating cash flowdeficits.  We are also deploying new andunproven technologies and continue to develop commercial products. We haveseveral ongoing long-term development projects that involve experimentaltechnology and may require several years and substantial expenditures tocomplete.  Based on our cash andinvestment balances as of December 31, 2008, we believed that our cash andcash equivalent balances, anticipated cash flows from operations and otherexternal sources of available credit would be sufficient to meet our cashrequirements to September 2009, which raised substantial doubt about ourability to continue as a going concern beyond this point.  On May 1, 2009, we closed a registereddirect offering of our common stock and warrants which, after placement agentfees and other costs, netted approximately $7.6 million to us (see Note 7),which management believes extends our going concern through June 2010.

 

Inorder for us to continue operating as a going concern beyond June 2010, wewill be required to increase revenues, reduce operating costs and possibly toobtain capital from external sources. However, there can be no assurances that additional sources offinancing, including the issuance of debt and/or equity securities will beavailable at times and at terms acceptable to us.  The issuance of equity securities, shouldthat occur, will cause dilution to our shareholders.  If external sources of financing are notavailable or are inadequate to fund our operations, we will be required toreduce operating costs including research projects and personnel, which couldjeopardize the future strategic initiatives and business plans of theCompany.  For example, reductions in researchand development activities and/or personnel at our Mukilteo, Washingtonfacility could result in the inability to invest the resources necessary tocontinue to develop next-generation products and improve existing product linesin order to remain competitive in the marketplace, resulting in reducedrevenues and cash flows from the sales of our CustomArrayTM products and services.  Also, reduction in operating costs at CMDX,should they occur, could jeopardize its ability to launch, market and selladditional products and services necessary in order to grow and sustain itsoperations and eventually achieve profitability.

 

Ourbusiness operations are also subject to certain risks and uncertainties,including:

 

·                  market acceptance of products and services;

 

·                  technological advances that may make our products and services obsoleteor less competitive;

 

·                  increases in operating costs, including costs for supplies, personneland equipment;

 

·                  the availability and cost of capital;

 

·                  the financial crisis affecting the global banking system and financialmarkets; and

 

·                  governmental regulation that may restrict our business.

 

Oursuccess also depends on our ability to protect our intellectual property, theloss thereof or our failure to secure the issuance of additional patentscovering elements of our business processes could materially harm our businessand financial condition.  The patentscovering our core technology begin to expire in 2018.

 

Ourproducts and services are concentrated in a highly competitive market that ischaracterized by rapid technological advances, frequent changes in customerrequirements and evolving regulatory requirements and industry standards.  Failure to anticipate or respond adequatelyto technological advances, changes in customer requirements, changes inregulatory requirements or industry standards, or any significant delays in thedevelopment or introduction of planned products or services, could have amaterial adverse effect on our business and operating results.  The accompanying consolidated financialstatements have been prepared assuming that the Company continues as a goingconcern.  The financial statements do notinclude any adjustments to reflect the possible future effects on therecoverability and classification of assets or the amounts and classification ofliabilities that may result from the matters discussed herein.

 

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**COMBIMATRIXCORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(Unaudited)**

 

****2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES****

 

*Use of Estimates. *The preparation of financial statements in conformity withgenerally accepted accounting principles in the United States of Americarequires management to make estimates and assumptions that affect the reportedamount of assets and liabilities and disclosure of contingent assets andliabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period. Actualresults could differ from these estimates.

 

**RevenueRecognition**. We recognize revenue in accordancewith Staff Accounting Bulletin No. 104, “Revenue Recognition” and relatedauthoritative pronouncements.  Revenuesfrom multiple-element arrangements are accounted for in accordance withEmerging Issues Task Force (“EITF”) Issue 00-21, “Revenue Arrangements withMultiple Deliverables.”  Revenue isrecognized when (i) persuasive evidence of an arrangement exists, (ii) deliveryhas occurred or services have been performed, (iii) amounts are fixed ordeterminable and (iv) collectibility of amounts is reasonably assured.

 

Revenuefrom the sale of products and services, including shipping and handling feesbut excluding statutory taxes collected from customers, as applicable, arerecognized when delivery has occurred or services have been rendered.  We sell our products and services directly tocustomers and also through distributors, and our right to collection is notdependent upon installation or a subsequent sale of our products toend-users.  Our standard agreements donot provide for credits, returns or exchanges with our customers ordistributors.  Our distributionagreements include fixed pricing arrangements for our products and aftercustomer acceptance, there is no written or implied right to return or exchangethe products.

 

Revenuesfrom government grants and contracts are recognized in accordance withAccounting Research Bulletin No. 43, “Government Contracts,” and relatedpronouncements, such as Statement of Position 81-1, “Accounting for Performanceof Construction-Type and Certain Production-Type Contracts.”  Accordingly, revenues are recognized underthe percentage-of-completion method of accounting, using the cost-to-costapproach to measure completeness at each reporting period.  Under the percentage-of-completion method ofaccounting, contract revenues and costs are recognized in the period that workis performed based on the percentage of actual incurred costs to total contractcosts.  Actual contract costs includedirect charges for labor and materials and indirect charges for labor, overheadand certain general and administrative charges. Contract change orders and claims are included when they can be reliablyestimated and are considered probable. For contracts that extend over a one-year period, revisions in contractcost estimates, if they occur, have the effect of adjusting current periodearnings applicable to performance in prior periods.  Should current contract estimates indicate anoverall future loss to be incurred, a provision is made for the totalanticipated loss in the current period. Historically, contract revenue recognized approximates the amounts invoiced,resulting in no estimated costs and earnings in excess of billings or billingsin excess of estimated costs and earnings.

 

Revenuesfrom multiple-element arrangements involving license fees, up-front payments,milestone payments, products and/or services, which are received and/orbillable by us in connection with other rights and services that representcontinuing obligations of ours, are deferred until all of the elements havebeen delivered or until we have established objective and verifiable evidenceof the fair value of the undelivered elements.

 

Deferredrevenues arise from payments received in advance of the culmination of theearnings process.  Deferred revenuesexpected to be recognized within the next twelve months are classified withincurrent liabilities.  Deferred revenueswill be recognized as revenue in future periods when the applicable revenuerecognition criteria as described above are met.

 

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**COMBIMATRIXCORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(Unaudited)**

 

**Stock-BasedCompensation**.  The compensation cost for allstock-based awards is measured at the grant date, based on the fair value ofthe award, and is recognized as an expense, on a straight-line basis, over theemployee’s requisite service period (generally the vesting period of the equityaward) which is generally three years. The fair value of each option award is estimated on the date of grantusing a Black-Scholes option valuation model. Statement of Financial Accounting Standards (“SFAS”) No. 123(revised 2004), “Share-Based Payment” (“SFAS 123R”) requires stock-basedcompensation expense to be recorded only for those awards expected to vestusing an estimated forfeiture rate.  Weestimate pre-vesting option forfeitures at the time of grant and reflect theimpact of estimated pre-vesting option forfeitures in compensation expenserecognized.  Stock-based compensationexpense for all periods presented attributable to our functional expensecategories were as follows (in thousands; unaudited):

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                             | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                             | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                   | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of products and  services         |       | $                      | 23         |                 | $          | 6 |   | $ | 48 |   | $ | 11 |   |
| Research and  development              |       | 152                    |       | 71                   |       | 289 |   | 140 |   |
| Marketing, general and  administrative |       | 655                    |       | 331                  |       | 1,309 |   | 618 |   |
| Total non-cash stock  compensation     |       | $                      | 830        |                 | $          | 408 |   | $ | 1,646 |   | $ | 769 |   |

 

**NetLoss Per Share**. Basic and diluted net loss per share has been computed by dividing thenet loss by the weighted average number of common shares issued and outstandingduring the periods presented.  Optionsand warrants to purchase CombiMatrix stock are anti-dilutive and therefore arenot included in the determination of the diluted net loss per share.  The following table presents a reconciliationof basic and diluted loss per share for all periods presented (in thousands,except share and per-share data; unaudited):

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                  | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Numerator:                                  |       |                   |       |                 |       |   |   |   |   |
| Loss applicable to  common shareholders     |       | $                      | (4,631     | )                    | $          | (3,263 | ) | $ | (10,763 | ) | $ | (6,632 | ) |
| Denominator:                                |       |                   |       |                 |       |   |   |   |   |
| Weighted-average common  shares outstanding |       | 7,103,330              |       | 6,025,844            |       | 6,714,149 |   | 6,011,465 |   |
| Basic and diluted loss  per share           |       | $                      | (0.65      | )                    | $          | (0.54 | ) | $ | (1.60 | ) | $ | (1.10 | ) |
|                                        |       |                   |       |                 |       |   |   |   |   |
| Common stock options                        |       | 2,059,502              |       | 1,010,229            |       | 2,059,502 |   | 1,010,229 |   |
| Common stock warrants                       |       | 3,813,646              |       | 2,305,274            |       | 3,813,646 |   | 2,305,274 |   |
| Convertible debenture                       |       | 1,120,000              |       | —               |       | 1,120,000 |   | — |   |
| Excluded potentially  dilutive securities   |       | 6,993,148              |       | 3,315,503            |       | 6,993,148 |   | 3,315,503 |   |

 

**Available-For-SaleInvestments**. Investments in marketable securities are accounted for and classified inaccordance with the provisions of SFAS No. 115, “Accounting for CertainInvestments in Debt and Equity Securities” (“SFAS 115”).  Investments in securities with originalmaturities of less than three months are included in cash and cash equivalents,and investments with original maturities of greater than three months and lessthan one year are classified as short-term. Investments in marketable securities are typically classified asavailable-for-sale, which are reported at fair value with related unrealizedgains and losses in the value of such securities recorded as a component ofaccumulated other comprehensive income until realized.  The fair value of available-for-saleinvestments is determined in accordance with SFAS No. 157 (see “Fair ValueMeasurements” below and Note 3).  Weaccount for investments with fair values less than historical cost inaccordance with Financial Accounting Standards Board (“FASB”) Staff Position115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application toCertain Investments” (“FSP 115-1”), as amended. Under FSP 115-1, an impairment is deemed other than temporary based on avariety of factors including:  (a) theduration and severity of the impairment; (b) the ability and intent tohold an investment for a period of time sufficient for recovery of its carryingamount; and (c) the financial condition of the issuer.  All available evidence, both positive andnegative, is considered to determine whether the carrying amount of theinvestment is recoverable within a reasonable period of time.  In general, management does not consider aninvestment impairment to be other-than-temporary if the duration and amount ofthe impairment is less than twelve months and five percent of the historicalcost of the investment, respectively.

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(Unaudited)**

 

*****Fair Value Measurements. *****Weadopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), whichapplies to certain accounting standards that require or permit fair valuemeasurements, on January 1, 2008. SFAS 157 defines fair value, establishes a consistent framework formeasuring fair value and expands disclosures for each major asset and liabilitycategory measured at fair value on either a recurring or nonrecurringbasis.  SFAS 157 clarifies that fairvalue is an exit price, representing the amount that would be received to sellan asset or paid to transfer a liability in an orderly transaction betweenmarket participants.  As such, fair valueis a market-based measurement that should be determined based on assumptionsthat market participants would use in pricing an asset or liability.  As a basis for considering such assumptions,SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes theinputs used in measuring fair value as follows:

 
| · | Level 1: | Observable  market inputs such as quoted prices in active markets;                                                                 |
|--------|----------|------------------------------------------------------------------------------------------------------------------------------------|
|   |     |                                                                                                                               |
| · | Level 2: | Observable  market inputs, other than the quoted prices in active markets, that are  observable either directly or indirectly; and |
|   |     |                                                                                                                               |
| · | Level 3: | Unobservable  inputs where there is little or no market data, which require the reporting  entity to develop its own assumptions.  |

 

Weadopted SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities,” which provides entities the option to measure manyfinancial instruments and certain other items at fair value.  We have currently chosen not to elect thefair value option for any items that are not already required to be measured atfair value in accordance with generally accepted accounting principles.

 

*Derivatives Embedded in Certain Debt Securities. *We evaluate financial instruments forfreestanding or embedded derivatives in accordance with SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities” (“SFAS 133”), and relatedguidance.  Derivative instruments thathave been separated from the host contract and do not qualify for hedge accountingare recorded at fair value with changes in value recognized in as other income(expense) in the consolidated statements of operations in the period of change.

 

*****Recent Accounting Pronouncements.********* ****In June 2009, the FASB issuedSFAS No. 168, “The FASB Accounting Standards Codificationandthe Hierarchy of Generally Accepted Accounting Principles, a replacement ofFASB Statement No. 162” (the “Codification”).  The Codification, which was launched on July 1,2009, became the single source of authoritative nongovernmental U.S. GAAP,superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”),EITF and related literature. The Codification eliminates the GAAP hierarchycontained in SFAS No. 162 and establishes one level of authoritativeGAAP.  All other literature is considerednon-authoritative.  The Codification iseffective for financial statements issued for interim and annual periods endingafter September 15, 2009.  We willadopt the Codification for our quarter ending September 30, 2009.  We do not expect there to be any changes toour consolidated financial statements due to the implementation of theCodification.

 

In June 2009,the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”(“SFAS 167”), and SFAS No. 166, “Accounting for Transfers of FinancialAssets—an amendment of FASB Statement No. 140” (“SFAS 166”). SFAS 167amends FASB Interpretation No. 46(R) to eliminate the quantitativeapproach previously required for determining the primary beneficiary of avariable interest entity and requires ongoing qualitative reassessments ofwhether an enterprise is the primary beneficiary of a variable interestentity.  SFAS 166 amends SFAS No. 140by removing the exemption from consolidation for Qualifying Special PurposeEntities and also limits the circumstances in which a financial asset, orportion of a financial asset, should be derecognized when the transferor hasnot transferred the entire original financial asset to an entity that is notconsolidated with the transferor in the financial statements being presentedand/or when the transferor has continuing involvement with the transferredfinancial asset.  We will adopt SFAS 167and 166 for interim and annual reporting periods beginning on January 1,2010.  We do not expect the adoption ofthese statements to have any material impact on our consolidated financialstatements.

 

In May 2009, theFASB issued SFAS No. 165, “SubsequentEvents,” (“SFAS 165”), which provides guidance on events that occurafter the balance sheet date but prior to the issuance of the financialstatements.  SFAS 165 distinguishesevents requiring recognition in the financial statements and those that mayrequire disclosure in the financial statements. Furthermore, SFAS 165 requires disclosure of the date through whichsubsequent events were evaluated.  SFAS165 is effective for interim and annual periods after June 15, 2009.  We have adopted SFAS 165 for the quarterended June 30, 2009, and have evaluated subsequent events through August 14,2009.

 

In April 2009,the FASB issued three Staff Positions (“FSPs”) that are intended to provideadditional application guidance and enhance disclosures about fair valuemeasurements and impairments of securities. FSP FAS 157-4 clarifies theobjective and method of fair value measurement even when there has been asignificant decrease in market activity for the asset being measured. FSP FAS115-2 and FAS 124-2 establish a new model for measuring other-than-temporaryimpairments for debt securities, including establishing criteria for when torecognize a write-down through earnings versus other comprehensive income. FSPFAS 107-1 and APB 28-1 expands the fair value disclosures required for allfinancial instruments within the scope of SFAS No. 107, “Disclosures aboutFair Value of Financial Instruments,” to interim periods.  All of these FSPs became effective for usbeginning April 1, 2009, and did not have a significant impact on ourconsolidated financial statements.

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(Unaudited)**

 

In June 2008, the FASB ratified EITF Issue No. 07-5,“Determining Whether an Instrument (or an Embedded Feature) is Indexed to anEntity’s Own Stock” (“EITF 07-5”).  EITF07-5 provides that an entity should use a two-step approach to evaluate whetheran equity-linked financial instrument (or embedded feature) is indexed to itsown stock, including evaluating the instrument’s contingent exercise andsettlement provisions.  EITF 07-5 iseffective for fiscal years beginning after December 15, 2008, althoughearly adoption is allowed.  We chose toearly-adopt EITF 07-5 in 2008.  See Note6 below for discussion of the impact on EITF 07-5 to our consolidated financialstatements.

 

# **3.     FAIR VALUEMEASUREMENTS**

# ** **

The following table summarizes, for each majorcategory of financial assets or liabilities measured on a recurring basis, therespective fair value at June 30, 2009 and the classification by level ofinput within the fair value hierarchy defined by SFAS 157 (in thousands;unaudited):

 
| ** **                          | ** ** | **June 30,** | ** ** | **Fair Value Measurements at** | ** ** |
|-------------------------------------|------------|-------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **2009**          | ** ** | **Level 1**                    | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets:                             |       |              |       |                           |       |   |   |   |   |
| Cash equivalents                    |       | $                 | 10,342     |                           | $          | 10,342 |   | $ | — |   | $ | — |   |
| Available-for-sale  investments (1) |       | —            |       | —                         |       | — |   | — |   |
| Total                               |       | $                 | 10,342     |                           | $          | 10,342 |   | $ | — |   | $ | — |   |
|                                |       |              |       |                           |       |   |   |   |   |
| Liabilities:                        |       |              |       |                           |       |   |   |   |   |
| Embedded derivatives  (2)           |       | $                 | (1,825     | )                              | $          | — |   | $ | — |   | $ | (1,825 | ) |

 

----

(1)          Allavailable-for-sale investments previously categorized as Level 3 assets wereredeemed in January 2009.

 

(2)          Includedin “other liabilities” in the accompanying June 30, 2009 consolidatedbalance sheet.  See Note 6 below fordiscussion of fair value measurements relating to embedded derivatives.

 

Beginning January 1, 2009, SFAS 157 also requiresthat assets and liabilities measured on a nonrecurring basis to be reflected atfair value when an other-than-temporary impairment has been deemed tooccur.  We did not have any suchimpairments as of or for the six months ended June 30, 2009.

 

The following table is a reconciliation of financialassets and liabilities measured at fair value on a recurring basis usingsignificant unobservable inputs (Level 3) during the six months ended June 30,2009 (in thousands; unaudited):

 
| ** **                        | ** ** | **Available-**  | ** ** | ** **      | ** ** |   |   |   |   |
|-----------------------------------|------------|-----------------|------------|-----------------|------------|--------|--------|--------|--------|
| ** **                        | ** ** | **For-Sale**    | ** ** | **Embedded**    | ** ** |   |   |   |   |
| ** **                        | ** ** | **Investments** | ** ** | **Derivatives** | ** ** |   |   |   |   |
|                              |       |            |       |            |       |   |   |   |   |
| Balances,  December 31, 2008 |       | $               | 1,526      |            | $          | (469   | )      |   |   |   |   |
| Redemption of ARS                 |       | (1,526          | )          | —          |       |   |   |   |   |
| Conversions                       |       | —          |       | 28              |       |   |   |   |   |
| Realized losses                   |       | —          |       | (1,384          | )          |   |   |   |   |
| Balances, June 30,  2009     |       | $               | —     |            | $          | (1,825 | )      |   |   |   |   |

 

At December 31, 2008,our available-for-sale investments included $1.5 million of auction ratesecurities (“ARS”) at par value. Historically, the carrying value of ourARS approximated fair value due to active, liquid markets for these securitiesas well as the frequent resetting of the interest rates at auction, whichtypically occurred every 7 to 30 days. However, in mid-February 2008, the market for ARS collapsed and asa result, our ARS experienced multiple failed auctions during 2008.  During the fourth quarter of 2008, one of theissuers of our holdings in ARS redeemed $350,000 at par value, bringing thetotal amount of ARS held by us as of December 31, 2008 to $1.5million.  On January 2, 2009, all ofour remaining ARS were liquidated at par value.

 

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From mid-February 2008 through the third quarterof 2008, the fair values of our holdings in ARS were estimated using discountedcash flow models.  These models consider,among other things, the timing of expected future successful auctions,estimated future cash flows, collateralization and credit worthiness ofunderlying security investments and discount rates applied to the estimatedfuture cash flows.  Since these inputswere not observable, they were classified as Level 3 inputs under SFAS157.  As a result of the lack ofliquidity in the ARS market and not as a result of the quality of theunderlying collateral, we recorded unrealized losses on our ARS of $66,000 and$135,000 for the three and six months ended June 30, 2008,respectively.  However, due toliquidations of our ARS at par value prior to and subsequent to December 31,2008, we reversed our previously recognized unrealized losses and classifiedour ARS as current assets at par value in our December 31, 2008consolidated balance sheet.

 

# **4.     COMPREHENSIVE LOSS**

 

The following table shows ourcomprehensive net loss in accordance with SFAS No. 130, “ReportingComprehensive Income,” for all periods presented (in thousands; unaudited):

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                             | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                             | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net unrealized loss on  available-for-sale investments |       | $                      | —     |                 | $          | (66 | ) | $ | — |   | $ | (135 | ) |
| Net loss                                               |       | (4,631                 | )          | (3,263               | )          | (10,763 | ) | (6,632 | ) |
| Comprehensive loss                                     |       | $                      | (4,631     | )                    | $          | (3,329 | ) | $ | (10,763 | ) | $ | (6,767 | ) |

 

# **5.  CREDIT LINE BORROWINGS**

 

On May 9, 2008 and pursuant to a LoanManagement Account agreement (the “LMA”) with a financial institution (the “Lender”),we borrowed $808,000 from the Lender, secured by investments held in aninvestment account with the Lender.  TheLMA is similar to a revolving line of credit borrowing facility.  The LMA provided that we accrue monthlyinterest charges at an annual, variable rate of 1% plus the 30-day LIBORrate.  The total amount available underthe LMA ranged from 50% to 92% of investments pledged as collateral, based uponthe amount and security type in our investment portfolio, up to a maximumamount of $2.8 million.  The LMA had nostated maturity for the principal and interest amounts borrowed by us.  However, because the Lender has the abilityunder the terms of the LMA to call in the principal amount of the borrowings atany time, we classified the liability as a component of current liabilities inthe accompanying December 31, 2008 consolidated balance sheet.  The LMA balance of $820,000 as of December 31,2008 was repaid by us during the first quarter of 2009, however the LMA remainsavailable for future borrowings at similar terms if so chosen by management.

 

**6.  SECURED CONVERTIBLE DEBENTURE**

 

On July 10, 2008 (the “Closing Date”), weissued to YA Global Investments, L.P. (“YA”): (i) a secured convertibledebenture (the “Debenture”) with an aggregate principal amount of $10 million,which was convertible into shares of our common stock at a fixedconversion price of $11.87 per share (and was recently reduced to $7.50 pershare - see Note 7); and (ii) warrants (the “YA Warrants”) topurchase up to 336,984 shares of our common stock.  The Debenture is due on theearlier of July 10, 2010 (the “Term”) or within four months after receiptof payment of judgment or settlement proceeds from National Union Fire Ins. Co.of Pittsburgh, PA (“National Union”) in accordance with the $35.7million judgment (the “Judgment”) issued by the U.S. District Court for theCentral District of California (the “Court”).  The Debenture bears interest at an annualrate of 10%, with interest payments due quarterly in either cash or our commonstock, beginning October 2008.  Wehave the right to force conversion of the Debenture into our common stock ifthe volume-weighted average price (“VWAP”) of our stock exceeds between 125%and 135% of the fixed conversion price for a period of thirty consecutivetrading days, among other conditions and restrictions.  We also have a cash redemption option wherebywe have the right to pre-pay the Debenture during the Term, but only if ourcommon stock is trading below the fixed conversion price, among otherconditions.  Prepayment penalties rangebetween 0% and 10% of the principal amount due, depending upon when the cashredemption occurs during the Term.  The number ofshares issuable to YA upon conversion of the Debenture may increase due tocertain anti-dilution adjustments, including if we issue common stock at aprice lower than the $7.50 fixed conversion price while the outstandingprincipal amount of the Debenture is at least $5 million.  As the result of our registered directoffering that closed on May 1, 2009, the fixed conversion price of theDebenture was reduced from $11.87 per share to $7.50 per share pursuant to ananti-dilution adjustment (see Note 7).  The Debenture issecured by the Judgment as well as our intellectual property.  The YA Warrants have a five-year term andallow YA to purchase: (i) 168,492 shares of common stock at an exerciseprice of $11.87; and (ii) 168,492 shares of common stock at an exerciseprice of $13.65.  We have the right tocall the YA Warrants, but only if the VWAP of our common stock is at or greaterthan 130% of the YA Warrants’ exercise price for at least twenty consecutivetrading days, among other conditions.  Wehave registered the shares of our common stock that are issuable to YA uponconversion of the Debenture and exercise of the YA Warrants on Form S-3,which was declared effective by the SEC during the third quarter of 2008.

 

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*Recognition on the Closing Date*

 

On the Closing Date, we recognized the Debenture andYA Warrants based on their relative fair values of $8.2 million and $1.8million, respectively, in accordance with APB Opinion No. 14,“Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.”  The fair value of the Debenture wasdetermined using the convertible bond model, assuming a 15% yield.  The relative fair value of the YA Warrantswas classified as a component of additional paid-in capital in accordance with SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity” (“SFAS 150”) and EITF Issue No. 00-19, “Accountingfor Derivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock” (“EITF 00-19”), with the corresponding amount reflected asa contra-liability to the Debenture.  The fair value of the warrants was determinedusing the Black-Scholes model, assuming a term of five years, volatility of75%, no dividends, and a risk-free interest rate of 3.1%.

 

In accordance with SFAS 133, DerivativeImplementation Group Statement 133 Implementation Issue No. B16, “EmbeddedDerivatives: Calls and Puts in Debt Instruments” and related guidance as wellas the early adoption of EITF 07-5, the conversion feature, cash redemptionoption, potential acceleration of maturity of the Debenture upon payment of theJudgment proceeds and potential adjustments to the fixed conversion price allrepresent embedded derivatives that, as of the Closing Date, were valued inaggregate at $927,000 and recorded separately from the Debenture as otherliabilities, with a corresponding amount reflected as an additionalcontra-liability to the Debenture.  Thefair value of the embedded derivatives was determined using the convertiblebond model, discounted cash flows and binomial lattice models.

 

As a result of separating the YA Warrants andembedded derivatives from the Debenture, the aggregate contra-liability totaling$2.9 million was recognized as of the Closing Date and was netted against theDebenture, which will accrete to the face amount due YA over the Term using theeffective interest method, with the corresponding charges recorded as interestexpense.

 

*Recognition Subsequent to theClosing Date*

 

Since the Closing Date through June 30, 2009, YAhas converted $1.6 million of the Debenture into common stock, $1.5 million ofwhich was converted in 2008 and $100,000 of which was converted during thethree months ended June 30, 2009. As of June 30, 2009 and December 31, 2008, the remainingamount of the Debenture, net of the aggregate contra-liability, was $7.0million and $6.5 million, respectively. The embedded derivative liabilities were marked to fair value of $1.8million as of June 30, 2009, resulting in net non-operating derivativecredits (charges) of $137,000 and $(1.4 million) for the three and six monthsended June 30, 2009, respectively, inclusive of the impact from reducingthe fixed conversion price of the Debenture as described in Note 7 below.  As of June 30, 2009, the remainingprincipal amount of the Debenture was $8.4 million, with an estimated fairvalue of $8.1 million (excluding the imbedded derivative features).

 

Since the issuance of the Debenture through June 30,2009, accrued interest to YA in the amount of $637,000 has been paid by issuing73,072 shares of our common stock. Subsequent to June 30, 2009 but prior to the issuance of thisreport, accrued interest to YA as of June 30, 2009 in the amount of$211,000 was paid by issuing 30,607 shares of our common stock.

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

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# **7.  SHAREHOLDERS’ EQUITY**

# ** **

*Common Stock*

 

**On May 1, 2009, we closed a registereddirect offering (the “Offering”) of our common stock and warrants for grossproceeds of $8.25 million.  Under theterms of the Offering, we sold 1.1 million units for $7.50 per unit to certaininvestors.  Each unit consisted of oneshare of our common stock and one warrant, each warrant to purchase one shareof our common stock at an exercise price of $9.00 per share.  The warrants may not be exercised until sixmonths after the Offering and have a term of five years.  The warrants are also callable if our commonstock trades at or above $22.50 per share during any 20 trading days during aperiod of 30 consecutive trading days, with a minimum daily trading volume of50,000 shares each day during that 30 trading day period.  Subsequent to the date of the Offering butprior to June 30, 2009, we listed the warrants on the Nasdaq Global Marketunder the symbol “CBMXW”.  Net proceedsfrom the Offering, net of placement agent fees and expenses, were approximately$7.6 million.  As a result of executingthe Offering, the fixed conversion price of the Debenture has been reduced to$7.50 per share, effective May 1, 2009.**

** **

*Warrants*

 

Prior to theRedemption Date, Acacia had issued warrants to purchase approximately 23.8million shares of AR-CombiMatrix stock in connection with various financingtransactions.  As of the Redemption Date,all previously outstanding AR-CombiMatrix common stock warrants becameexercisable for CombiMatrix common stock, adjusted for the Redemption Ratiodiscussed above.

 

Outstandingwarrants to purchase CombiMatrix common stock are as follows (unaudited):

 
| ** **          | ** ** | **Shares of Common Stock** | ** ** | ** **            | ** ** | ** **      | ** ** |
|---------------------|------------|----------------------------|------------|-----------------------|------------|-----------------|------------|
| ** **          | ** ** | **Issuable from Warrants** | ** ** | ** **            | ** ** | ** **      | ** ** |
| ** **          | ** ** | **June 30,**          | ** ** | **December 31,** | ** ** | **Exercise**    | ** ** | ** ** | ** ** |
| **Date of Issue**   | ** ** | **2009**                   | ** ** | **2008**              | ** ** | **Price**       | ** ** | **Expiration** | ** ** |
|                |       |                       |       |                  |       |            |       |   |   |
| June 2009      |       | 129,688                    |       | —                |       | $7.50 - $9.00   |       | May 2014 -  June 2014 |   |
| May 2009       |       | 1,100,000                  |       | —                |       | $9.00           |       | May 2014 |   |
| July 2008      |       | 336,984                    |       | 336,984               |       | $11.87 - $13.65 |       | July 2013 |   |
| May 2007       |       | 959,390                    |       | 959,390               |       | $5.50           |       | May 2012 |   |
| December 2006  |       | 1,127,936                  |       | 1,127,936             |       | $8.70 - $10.88  |       | December 2011 |   |
| September 2005 |       | 159,648                    |       | 159,648               |       | $24.00          |       | September 2010 |   |
| Total               |       | 3,813,646                  |       | 2,583,958             |       |            |       |   |   |

 

On May 19,2009 (the “Grant Date”), we issued three warrants (the “Consultant Warrants”)to a consultant to purchase a total of 125,000 shares of our common stock withan exercise price of $9.00 per share and a term of five years.  The first warrant is for 25,000 shares andbecomes fully vested six months after the Grant Date.  The second and third warrants (the “ContingentWarrants”) are for 50,000 shares each of common stock, and become fully vestedonly if our underlying stock price achieves or exceeds $12.00 and $14.00 pershare, respectively, for five consecutive trading days as quoted on Nasdaq,over a period of twenty-four months from the Grant Date.  If these terms are not achieved during thistwenty-four month period, the Contingent Warrants will expire on May 19,2011.  Otherwise, if the vestingconditions are achieved within twenty-four months from the Grant Date, the ContingentWarrants will become fully exercisable for the remainder of the five-year term.

 

The fair value of theConsultant Warrants of $171,000 was classified as a component of additionalpaid-in capital in accordance with SFAS 150, EITF 07-5 and EITF 00-19, withthe corresponding amount reflected as a component of marketing, general andadministrative expenses in our consolidated statements of operations as of andfor the three months ended June 30, 2009.  The fair value of the Consultant Warrants wasdetermined using the Black-Scholes model, assuming a remaining term of 4.9years, volatility of 70%, no dividends, and a risk-free interest rate of2.5%.  In addition, the fair value of theContingent Warrants was determined using a Monte Carlo binomial stock simulationmodel to determine the probability that the vesting conditions will beachieved.  We will continue to recognizemark-to-model adjustments to the Consultant Warrants during their respectivevesting periods.

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(Unaudited)**

 

**8.    COMMITMENTS AND CONTINGENCIES**

** **

**Collaboration and Research Agreements**

 

On March 10, 2009, we executed a four-year,$858,000 contract with the NASA Ames Research Center (“NASA”)for further development of our microarray technologies.  The primary objective of the contract is todesign and test a microfluidics system that incorporates our semiconductor-basedmicroarray platform as part of an integrated genetic analysis system that canbe deployed in space.  Under the terms ofthis contract, we will perform research and development activities during thefirst year (“Phase I”) for a fixed fee of $214,000.  If NASA chooses to continue development foreach of the subsequent years two through four of the contract, we will continuedevelopment at similar funding levels to the first year, not to exceed amaximum fee of $858,000 for the entire contract period.  As of June 30, 2009, we had incurred$23,000 in actual costs for Phase I of this contract, which was approximately15% complete.

 

On July 31, 2008, we executed a $250,000contract with the DoD for the development of label-free detection techniques usingour microarray technology.  Thesedetection techniques involve the synthesis of molecules known as “aptamers,”which are molecules with unique biological properties.  We substantially completedthis contract during the first quarter of 2009 and do not expect to incuradditional costs or revenues from this contract beyond 2009.

 

On July 11, 2008, we executed a fifteen-month,$923,000 contract with the DoD to further development of our microarraytechnologies for a multipathogen detection system.  The primary objectives of the contract are tocontinue development of an automated biothreat agent detection system basedupon our complementary metal oxide semiconductor microarray and electrochemicaldetection techniques, to continue the integration of serological and genomicassays for orthogonal testing and to explore new methods of detection thatexpand target identification, reduce reagent burden, and improve assaytime.  Under the terms of this contract,we will perform research and development activities, as described under thecontract, and will be reimbursed on a periodic basis for actual costs incurredto perform these obligations, plus a fixed fee, of up to $923,000.  As of June 30, 2009, we hadsubstantially completed this contract and do not expect to incur additionalcosts or revenues from this contract beyond 2009.

 

On July 26,2007, we executed a one-year, $2.2 million contract with the DoD to furtherdevelopment of our microarray technologies. The primary objectives of the contract were to continue development of amultipathogen and chemical detection system. Under the terms of this contract, we performed research and development activities, as described under thecontract, and were reimbursed on a periodic basis for actual costs incurred toperform these obligations, plus a fixed fee, of up to $2.2 million.  We substantially completedthis contract during the third quarter of 2008 and do not expect to incuradditional costs or revenues from this contract beyond 2008.

 

On March 13,2007, we executed a one-year, $869,000 contract with the DoD, focusing on thedevelopment of a field-deployable influenza genotyping system based on ourelectrochemical detection technology to be used for military and homelandsecurity applications.  Under the termsof this contract, we performed research and development activities, asdescribed under the contract, and were reimbursed on a periodic basis foractual costs incurred to perform our obligations, plus a fixed fee, of up to$869,000.  We substantially completed thiscontract during the second quarter of 2008 and do not expect to incursignificant costs or revenues from this contract beyond 2008.

 

On August 9,2006, we executed a two-year, $1.9 million contract with the DoD, focusing onthe integration of our electrochemical detection technology currently underdevelopment with our microfluidics “lab-on-a-chip” technology to be used formilitary and homeland security applications. Under the terms of this contract,we performed research and development activities, as described under thecontract, and were reimbursed on a periodic basis for actual costs incurred toperform our obligations, plus a fixed fee, of up to $1.9 million.  We substantially completed this contractduring the fourth quarter of 2008 and do not expect to incur significant costsor revenues from this contract beyond 2008.

 

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**COMBIMATRIXCORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(Unaudited)**

 

**Human Resources**

 

Weprovide certain severance benefits such that if an executive of CombiMatrix whois a vice president or higher is terminated for other than cause, death ordisability, the executive will receive payments equal to three months’ basesalary plus medical and dental benefits. If termination occurs as a result of a change in control transaction,these benefits will be extended by three months.  Also, if our chief executive officer is terminatedfor other than cause, or for death or disability, he will receive paymentsequal to one year’s base salary plus medical and dental benefits.

 

**Litigation**

 

On September 30,2002, we entered into a settlement agreement with Nanogen, Inc. (“Nanogen”)to settle all pending litigation between the parties.  Pursuant to the terms of the settlementagreement, we agreed to make quarterly payments to Nanogen equal to 12.5% oftotal sales of products developed by us and our affiliates based on the patentsthat had been in dispute in the litigation, up to an annual maximum amount of$1.5 million.  The minimum quarterlypayments under the settlement agreement are $25,000 per quarter until thepatents expire in 2018.  Royalty expensesrecognized under the agreement for the three and six months ended June 30,2009 and 2008 were $25,000, $50,000, 48,000 and $91,000, respectively, and areincluded in patent amortization and royalties in the accompanying consolidatedstatements of operations.

 

In April 2005,Acacia and CombiMatrix filed a complaint against our insurance carrier,National Union, seeking reimbursement of litigation and settlement costs for alawsuit, pursuant to our directors’ and officers’ insurance policy withNational Union.  A trial was held andconcluded during the fourth quarter of 2007. In March 2008, the Court issued its Judgment in favor of Acacia andus, and awarded approximately $32.1 million in monetary damages to be paid byNational Union.  In accordance with thedistribution agreement entered into between Acacia and us prior to ourseparation, all proceeds from the lawsuit will be paid to us.  In May 2008, the Court awarded us anadditional $3.6 million in attorneys’ fees and litigation costs, therebyincreasing the overall award to $35.7 million. This award was entered as a final Judgment in May 2008 and willcontinue to earn interest until paid. National Union has appealed the Judgment to the U.S. Ninth CircuitCourt of Appeals, and we intend to vigorously defend against the appeal.  In September 2008, the Court requiredNational Union to post an appellate bond in the amount of $39.2 million tocover the Judgment as well as accrued interest charges.  The appellate bond will remain in place untilthe appeal process is concluded.  As of June 30,2009, all appellate briefs by us and National Union had been filed.

 

We aresubject to other claims and legal actions that arise in the ordinary course ofbusiness.  We believe that the ultimateliability with respect to these claims and legal actions, if any, will not havea material effect on our financial position, results of operations or cashflows.  Based on a distribution agreementexecuted between us and Acacia, it is expected that such claims, legal actions,etc. attributable to CombiMatrix Corporation prior to the Redemption Date willremain with the Company subsequent to the Redemption Date.  As of the date of this report and for allperiods presented, we are not aware of the existence of any such claims orlegal actions, however.

 

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**Item 2.   MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **

**Cautionary Statement**

 

You shouldread the following discussion and analysis in conjunction with the consolidatedfinancial statements and related notes thereto contained in Part I, Item 1of this report.  The informationcontained in this Quarterly Report on Form 10-Q is not a completedescription of our businesses or the risks associated with an investment in ourcommon stock.  We urge you to carefullyreview and consider the various disclosures made by us in this report and inour other reports filed with the U.S. Securities and Exchange Commission, or “SEC,”including our Annual Report on Form 10-K, filed on March 27, 2009.

 

This reportcontains forward-looking statements within the meaning of the “safe harbor”provisions of the Private Securities Litigation Reform Act of 1995. Referenceis made in particular to the description of our plans and objectives for futureoperations, assumptions underlying such plans and objectives, and otherforward-looking statements included in this report. Such statements may beidentified by the use of forward-looking terminology such as “may,” “will,” “expect,”“believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms,variations of such terms or the negative of such terms.  Such statements are based on management’scurrent expectations and are subject to a number of factors and uncertainties,which could cause actual results to differ materially from those described inthe forward-looking statements.  Suchstatements address future events and conditions concerning product development,capital expenditures, earnings, litigation, regulatory matters, markets forproducts and services, liquidity and capital resources and accountingmatters.  Actual results in each casecould differ materially from those anticipated in such statements by reason offactors such as future economic conditions, changes in consumer demand,legislative, regulatory and competitive developments in markets in which we andour subsidiaries operate, results of litigation and other circumstancesaffecting anticipated revenues and costs. We expressly disclaim any obligation or undertaking to release publiclyany updates or revisions to any forward-looking statements contained herein toreflect any change in our expectations with regard thereto or any change inevents, conditions or circumstances on which any such statement is based.  Additional factors that could cause suchresults to differ materially from those described in the forward-lookingstatements are set forth in connection with the forward-looking statements andin the “Risk Factors” described in our Annual Report on Form 10-K filed onMarch 27, 2009.

 

## **General**

## ** **

****Weare a diversified biotechnology business that develops proprietarytechnologies, including products and services in the areas of drug development,genetic analysis, molecular diagnostics, nanotechnology and defense andhomeland security markets, as well as in other potential markets where ourproducts and services could be utilized. The technologies we have developedinclude a platform technology to rapidly produce user-defined, in-situsynthesized, oligonucleotide arrays for use in identifying and determining theroles of genes, gene mutations and proteins. This technology has a wide rangeof potential applications in the areas of genomics, proteomics, biosensors,drug discovery, drug development, diagnostics, combinatorial chemistry,material sciences and nanotechnology. Other technologies include proprietarymolecular synthesis and screening methods for the discovery of potential newdrugs.****  We currentlyrecognize revenues from selling these products and services and providingresearch and development services for organizations including the U.S.Department of Defense, or “DoD” and other strategic partners.

 

CombiMatrixMolecular Diagnostics, Inc., or “**CMDX,**”our wholly owned subsidiary located in Irvine, California, has developedcapabilities of producing arrays that utilize bacterial artificial chromosomes,or “BACs,” which also enable genetic analysis. CMDX functions primarily as a diagnostics reference laboratory.

 

LeuchemixInc. (“Leuchemix”), a minority owned subsidiary, is developing a series ofcompounds to address a number of oncology-related diseases.

 

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## **RelationshipWith Acacia Research Corporation**

## ** **

Wewere originally incorporated in October 1995 as a California corporationand later reincorporated as a Delaware corporation in September 2000. On December 13,2002, we merged with and became a wholly owned subsidiary of Acacia ResearchCorporation, or “**Acacia**.”On the same date, Acacia entered into a recapitalization transaction wherebyAcacia created two classes of registered common stock called AcaciaResearch-CombiMatrix common stock (“**AR-CombiMatrix stock**”) andAcacia Research-Acacia Technologies common stock (“**AR-Acacia Technologies stock**”)and divided its existing Acacia common stock into shares of the two new classesof common stock.  On August 15, 2007(the “Redemption Date”), we split-off from Acacia and all issued andoutstanding shares of AR-CombiMatrix stock were redeemed and exchanged forshares of CombiMatrix common stock at a redemption ratio of ten shares ofAR-CombiMatrix stock for one share of CombiMatrix common stock (the “RedemptionRatio”), which is publicly traded on the Nasdaq Global Market (symbol: “CBMX”).  Also, warrants to purchase AR-CombiMatrixstock became exercisable to purchase CombiMatrix common stock, adjusted for theRedemption Ratio.  As of the RedemptionDate, we ceased to be a subsidiary of, or affiliated with, Acacia.

 

## **Liquidity**

## ** **

At December 31,2008, we had cash, cash equivalents and available-for-sale investments of $9.1million, which we believed would be sufficient to meet our cash requirements toSeptember 2009.  On May 1,2009, we closed a registered direct offering of our common stock and warrantswhich, after placement agent fees and other costs, netted approximately $7.6million to us, and thereby extending our ability to continue operating as agoing concern into 2010 (see Liquidity and Capital Resources below as well asNote 7 to the consolidated interim financial statements included elsewhereherein for further discussion).

 

Inorder for our company to continue as a going concern beyond 2010 and ultimatelyto achieve profitability, we will be required to increase revenues, reduceoperating costs and possibly to obtain capital from external sources.  However, there can be no assurance that suchcapital will be available at times and at terms acceptable to us, or thathigher levels of product and service revenues will be achieved.  The issuance of additional equity securities,should that occur, will cause dilution to our shareholders.  If external financing sources are notavailable or are inadequate to fund our operations, we will be required toreduce operating costs including research projects and personnel, which couldjeopardize our future strategic initiatives and business plans.  See Note 1 to the consolidated financialstatements included elsewhere in this report for additional discussion of thesematters.

 

## **BasisOf Presentation Of Financial Statements**

## ** **

Theconsolidated financial statements included in this Form 10-Q areconsistent with our historical financial statements included in our Form 10-Kfor our fiscal year ended December 31, 2008.

 

## **OverviewOf Recent Business Activities**

## ** **

Forthe three and six months ended June 30, 2009, our operating activitiesincluded the recognition of $1.2 million and $2.8 million in revenues,respectively, including $291,000 and $816,000 in government contract revenues,respectively, $339,000 and $627,000 in CustomArray product and servicerevenues, respectively, and $606,000 and $1.3 million in diagnostic labrevenues, respectively.  Research anddevelopment expenses, excluding government contract costs and non-cash stockbased compensation, increased in the three and six months ended June 30,2009 due primarily to the increased activities on our comprehensive cancerarray test currently under development. Marketing, general and administrative expenses, excluding non-cash stockcompensation, also increased over the same periods due primarily to increasedsales and marketing efforts at CMDX and also due to increased investor andpublic relations costs.

 

Significantbusiness developments that occurred during and subsequent to the second quarterended June 30, 2009 were:

 

·                  In April 2009, Dr. Karine Hovanesjoined CMDX, as its Laboratory Director. Dr. Hovanes is a Diplomat of the American Board of Medical Geneticsin Clinical Molecular Genetics and Clinical Cytogenetics and is also licensedin New York and California in both cytogenetics and molecular genetics. Dr. Hovanesjoins CMDX from the Laboratory Corporation of America, otherwise known asLabCorp.

 

·                  Also in April 2009, we announced anupdate to our Influenza-Detection Microarray to include sequence information ofthe latest strain of Swine Flu. The previous version of the Influenza-DetectionMicroarray already detected several strains of Swine Flu as well as thepathogenic Bird Flu.  Within one day ofreceiving sequence information of the new strain, we were able to update thearray to definitively identify the Swine Flu strain.

 

·                  In May 2009, we closed a registereddirect offering of our common stock and warrants for gross proceeds of $8.25million.

 

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·                In June 2009, we announced that thevalidation study performed by CMDX, in collaboration with the Department ofPathology at the University of Texas Health Science Center in San Antonio, TXof our HerScanTM breast cancer test, was available as anadvance online publication in the official journal of the United States andCanadian Academy of Pathology, Modern Pathology.

 

·                  Also in June 2009, we announced thatall of the appellate briefs associated with our ongoing litigation againstNational Union Fire Insurance Co. of Pittsburg, PA had been filed with the U.S.Ninth Circuit Court of Appeals (the “Appeals Court”), and that the next step inthe appellate process is for the Appeals Court to schedule oral hearings.

 

## **CriticalAccounting Estimates**

 

Our unaudited interim financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America. Preparation of these statements requires management to make judgmentsand estimates.  Some accounting policieshave a significant impact on amounts reported in these financialstatements.  A summary of significantaccounting policies and a description of accounting policies that areconsidered critical may be found in our Annual Report on Form 10-K, filedon March 27, 2009, in the Notes to the Consolidated Financial Statementsand the Critical Accounting Estimates section. In addition, refer to Note 2 to the consolidated interim financialstatements included inPart I, Item 1 of this report.

 

**Comparison of the Results of Operations for the Threeand Six months Ended June 30, 2009 and 2008**

** **

Revenues and Cost of Revenues (Inthousands)

** **
| ** **                            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|------------------------|------------|------------|------------|-------------------|------------|----------------------|------------|------------|------------|------------|------------|
| ** **                            | ** ** | **June 30,**      | ** ** | **Change** | ** ** | **June 30,** | ** ** | **Change**           | ** ** |
| ** **                            | ** ** | **2009**               | ** ** | **2008**   | ** ** | **$**             | ** ** | **%**                | ** ** | **2009**   | ** ** | **2008**   | ** ** | **$** | ** ** | **%** | ** ** |
|                                  |       |                   |       |       |       |              |       |                 |       |       |       |       |       |   |   |   |   |
| Government contracts                  |       | $                      | 291        |       | $          | 968               |       | $                    | (677       | )          | (70        | )%         |       | $ | 816 |   | $ | 2,037 |   | $ | (1,221 | ) | (60 | )% |   |
| Cost of government contract  revenues |       | (242                   | )          | (955       | )          | 713               |       | (75                  | )%         |       | (737       | )          | (1,969     | ) | 1,232 |   | (63 | )% |   |
| Products                              |       | 300                    |       | 623        |       | (323              | )          | (52                  | )%         |       | 557        |       | 1,198      |   | (641 | ) | (54 | )% |   |
| Services                              |       | 582                    |       | 414        |       | 168               |       | 41                   | %          |       | 1,278      |       | 697        |   | 581 |   | 83 | % |   |
| Cost of products and  services        |       | (521                   | )          | (484       | )          | (37               | )          | 8                    | %          |       | (1,178     | )          | (888       | ) | (290 | ) | 33 | % |   |
| Collaboration  agreements             |       | 63                     |       | 62         |       | 1                 |       | 2                    | %          |       | 125        |       | 124        |   | 1 |   | 1 | % |   |
|                                       |            |                        |            |            |            |                   |            |                      |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**GovernmentContracts and Cost of Government Contracts. **Under the terms of our contracts with the DoD, weare reimbursed on a periodic basis for actual costs incurred to perform ourobligations, plus a fixed fee.  Under theterms of our contract with NASA, we are reimbursed on a periodic basis based onscheduled, contractual fixed amounts. Revenues are recognized under the percentage-of-completion method ofaccounting, using the cost-to-cost approach to measure completeness at the endof the each reporting period.  Cost ofgovernment contracts reflect research and development expenses incurred inconnection with our commitments under our current contracts with the DoD.

 

Thedecrease in government contract revenues for the three and six months ended June 30,2009 versus the comparable periods in 2008 was due primarily to fewer activecontracts during 2009 versus 2008.  Therecent completion of our multipathogen and electrochemical detection contractsresulted in a decrease in government contract activity and thus lowergovernment contract revenues recognized during the three and six months ended June 30,2009 versus the comparable periods in 2008. See Note 8 to our consolidated interim financial statements includedelsewhere in this report for a detailed description of the amounts, completionrates and estimated costs to complete of our government contracts that areongoing as well as prior contracts that were completed during the periodspresented.  As these contracts nearcompletion, future contract revenues could be volatile in the short-term anddecrease in the longer term if new government contracts are not awarded orexecuted.

 

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**Productsand Cost of Products**. Product revenues and costs of products relate to domestic andinternational sales of our array products, which include DNA synthesizerinstruments, CustomArray 12K, 4X2K, 2X40K and 90K DNA expression arrays,ElectraSense® microarray readers and related hardware.  Product revenues decreased in the three andsix months ended June 30, 2009 versus the comparable periods in 2008 dueprimarily to lower instrument sales in 2009 than 2008.  As we expand our business focus fromexclusively selling array-based research and development products to providingarray-based diagnostic services, we have reduced internal sales staff, marketingand production efforts regarding sales of CustomArray products and instead haveexecuted product distribution and manufacturing agreements with variousthird-party distributors for the sales of our suite of CustomArray productsinto the research and development markets. Also, declining global economic conditions have negatively impacted thesales of our instruments.  As a result,CustomArray product revenues will likely be volatile and could decrease infuture periods, depending largely on the sales efforts of our distributors.

 

*Services.* Services revenues are comprised primarily of diagnostic lab servicesprovided by CMDX as well as the amortization of one-year equipment maintenanceand service contracts executed with certain customers of our DNA synthesizers.  Diagnostic services revenue from CMDX was$565,000 and $1.3 million for the three and six months ended June 30,2009, versus $369,000 and $622,000 in the comparable periods in 2008.  These revenues have increased due to anincreased number of diagnostic test offerings as well as increased customerdemand for our suite of diagnostic lab services provided by CMDX, which is dueprimarily to increased sales and marketing efforts.  Including BAC array product sales, totaldiagnostic lab revenues at CMDX were $606,000 and $1.3 million for the threeand six months ended June 30, 2009 versus $395,000 and $668,000 in thecomparable periods in 2008.

 

Operating Expenses (In thousands)

 

 
| ** **                              | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------------------|------------|------------|------------|-------------------|------------|----------------------|------------|------------|------------|------------|------------|
| ** **                              | ** ** | **June 30,**      | ** ** | **Change** | ** ** | **June 30,** | ** ** | **Change**           | ** ** |
| ** **                              | ** ** | **2009**               | ** ** | **2008**   | ** ** | **$**             | ** ** | **%**                | ** ** | **2009**   | ** ** | **2008**   | ** ** | **$** | ** ** | **%** | ** ** |
|                                    |       |                   |       |       |       |              |       |                 |       |       |       |       |       |   |   |   |   |
| Research and  development expenses      |       | $                      | 1,282      |       | $          | 913               |       | $                    | 369        |       | 40         | %          |       | $ | 2,413 |   | $ | 2,259 |   | $ | 154 |   | 7 | % |   |
| Marketing, general and  admin. expenses |       | 2,861                  |       | 2,397      |       | 464               |       | 19                   | %          |       | 5,630      |       | 4,480      |   | 1,150 |   | 26 | % |   |
| Patent amortization and  royalties      |       | 333                    |       | 361        |       | (28               | )          | (8                   | )%         |       | 679        |       | 722        |   | (43 | ) | (6 | )% |   |
| Equity in loss of of  investees         |       | 261                    |       | 241        |       | 20                |       | 8                    | %          |       | 511        |       | 490        |   | 21 |   | 4 | % |   |
|                                         |            |                        |            |            |            |                   |            |                      |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Research and Development Expenses*.  The increases in internal research anddevelopment expenses for the periods presented were due primarily to theincreased development efforts underway on our comprehensive cancer arraytest.  In addition, for the three and sixmonths ended June 30, 2009 and 2008, research and development expensesincluded $152,000, $289,000, $71,000 and $140,000, respectively, of non-cashstock compensation expense recognized under SFAS No. 123R.  These increases were due primarily toincreases in the overall number of stock option awards granted to our employeesduring the past twelve months.  See Note2 to our consolidated interim financial statements included elsewhere in thisreport for a detailed description of the amounts recognized for the periodspresented.

 

Futureresearch and development expenses will continue to be incurred in connectionwith our ongoing internal research and development efforts in the areas ofgenomics, diagnostics, drug discovery and product development.   We expect our research and developmentexpenses to continue to fluctuate and such expenses could increase in futureperiods as additional internal research and development agreements areundertaken and/or as new research and development collaborations are executedwith strategic partners.

 

**Marketing,General and Administrative Expenses.**  The increases in marketing, general andadministrative expenses for the periods presented were due primarily toincreases in sales and marketing expenses at CMDX, as well as increasedinvestor and public relations expenses. In addition, for the three and six months ended June 30, 2009 and2008, marketing, general and administrative expenses included $655,000, $1.3million, $331,000 and $618,000, respectively, of non-cash stock compensationexpense recognized under SFAS No. 123R. These increases were due primarily to increases in the overall number ofstock option awards granted to our employees during the past twelvemonths.  See Note 2 to our consolidatedinterim financial statements included elsewhere in this report for a detailed descriptionof the amounts recognized for the periods presented.

 

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### *****OtherNon-Operating Items*****

 
| ** **                    | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------|------------|------------------------|------------|------------|------------|-------------------|------------|----------------------|------------|------------|------------|------------|------------|
| ** **                    | ** ** | **June 30,**      | ** ** | **Change** | ** ** | **June 30,** | ** ** | **Change**           | ** ** |
| ** **                    | ** ** | **2009**               | ** ** | **2008**   | ** ** | **$**             | ** ** | **%**                | ** ** | **2009**   | ** ** | **2008**   | ** ** | **$** | ** ** | **%** | ** ** |
|                          |       |                   |       |       |       |              |       |                 |       |       |       |       |       |   |   |   |   |
| Interest expense              |       | $                      | (509       | )          | $          | (4                | )          | $                    | (505       | )          | 12625      | %          |       | $ | (1,022 | ) | $ | (5 | ) | $ | (1,017 | ) | 20340 | % |   |
| Derivative credits  (charges) |       | 137                    |       | —     |       | 137               |       | —               |       |       | (1,384     | )          | —     |   | (1,384 | ) | — |   |   |
|                               |            |                        |            |            |            |                   |            |                      |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**InterestExpense.****  Since July 2008,interest expense is recognized from the issuance of a secured convertibledebenture (the “Debenture”), which accrues interest at an annual rate of 10%and with a current principal amount of $8.4 million as of June 30, 2009.  Interest expense also includes amortization ofthe $2.9 million of debt discount recognized from issuance of the Debenture andwarrants using the effective interest method for the three and six months endedJune 30, 2009.**

 

**DerivativeCredits (Charges).****  These amountsrepresent the net credits or charges recognized during the periods frommark-to-model adjustments to the embedded derivatives associated with theDebenture that were outstanding as of June 30, 2009.  There were no such debenture or embedded derivativesoutstanding during the periods ended June 30, 2008. **In accordance with SFAS 133, DerivativeImplementation Group Statement 133 Implementation Issue No. B16, “EmbeddedDerivatives: Calls and Puts in Debt Instruments” and related guidance as well as the early adoption of EITF 07-5, theconversion feature, cash redemption option, potential acceleration of maturityof the Debenture and potential adjustments to the fixed conversion price allrepresent embedded derivatives of the Debenture that are recorded separately atfair value as other liabilities, with the corresponding fair value adjustmentsreflected as non-operating charges or credits, depending upon the results ofmark-to-model valuation adjustments.  Thefair value of the embedded derivatives was determined using the convertiblebond model, discounted cash flows and binomial lattice models.

 

**Inflation**

 

Inflationhas not had a significant impact on our Company.

 

**Liquidity and CapitalResources**

 

At June 30,2009, cash, cash equivalents and available-for-sale investments totaled $11.0million versus to $9.1 million at December 31, 2008.  Working capital at June 30, 2009 was 9.8million, compared to $7.6 million at December 31, 2008.  The change in working capital was dueprimarily to the impact of our registered direct offering executed May 1,2009 as well as our net cash flow activities as discussed below.  The net change in cash and cash equivalentsfor the periods presented was comprised of the following (in thousands):

** **
| ** **                                        | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------|------------|
| ** **                                        | ** ** | **June 30,**    | ** ** |
| ** **                                        | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Net cash provided by  (used in) operations:       |       |                 |       |   |   |
| Operating activities                              |       | $                    | (5,034     | ) | $ | (5,191 | ) |
| Investing activities                              |       | 1,511                |       | 3,988 |   |
| Financing activities                              |       | 6,929                |       | 905 |   |
| Increase (decrease) in  cash and cash equivalents |       | $                    | 3,406      |   | $ | (298 | ) |

 

*Operating Activities.*  The overall net decrease in cash used inoperating activities for the six months ended June 30, 2009 versus thecomparable period in 2008 was due primarily to a decrease in operating cashoutflows, which totaled $7.5 million for the six months ended June 30,2009 versus $8.2 million in the comparable period in 2008.  This decrease was due primarily from reducedlitigation expenses in 2009 versus 2008 as well as variances in timing ofvendor payments.  The improvement in netcash used in operating activities from this activity was partially offset by adecrease in cash inflows from customers, which were $2.5 million for the sixmonths ended June 30, 2009 versus $3.0 million in the comparable period in2008.  Cash inflows from customersdecreased for the periods presented primarily due to a decrease in billable DoDactivity and reduced product sales as discussed above.

 

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*Investing Activities.*  The change in net cash flows from investingactivities was due primarily to net sales of available-for-sale investments inconnection with ongoing cash management activities during the periodspresented.  Also, for the six monthsended June 30, 2009 and 2008, we incurred $15,000 and $42,000,respectively, of capital expenditures.

 

*Financing Activities.*  The overall net increase in financing activitieswas due to the execution of a registered direct offering (the “Offering”) ofour common stock and warrants for gross proceeds of $8.25 million, which weclosed on May 1, 2009.  Under theterms of the Offering, we sold 1.1 million units for $7.50 per unit to certaininvestors.  Each unit consisted of oneshare of our common stock and one warrant, each warrant to purchase one shareof our common stock at an exercise price of $9.00 per share.  The warrants may not be exercised until sixmonths after the Offering and have a term of five years.  Net proceeds from the Offering, net ofplacement agent fees and expenses, were approximately $7.6 million.  This increase in net cash flows fromfinancing activities was partially offset by the repayment of credit lineborrowings totaling $820,000 during the period ended June 30, 2009 versusour draw on the same credit line of $808,000 in the comparable period in2008.  Also, proceeds from the exerciseof common stock options and warrants were $89,000 during the period ended June 30,2009 versus $111,000 in the comparable period in 2008.

 

*Future Liquidity.*  We believe that the additional capital fromthe Offering will allow us to meet our operating cash requirements through June of2010.  In order for us to continue tomeet our cash requirements beyond this point, we will be required to increaserevenues, reduce operating costs and possibly to obtain capital from externalsources.  However, there can be noassurances that we will be able to secure additional sources of financing attimes and at terms acceptable to management. The issuance of additional equity securities, should that occur, willcause dilution to our shareholders.  Ifexternal financing sources are not available or are inadequate to fund ouroperations, management will be required to reduce our operating costs includingresearch projects and personnel, which could jeopardize our future strategicinitiatives and business plans.  Forexample, reductions in research and development activities and/or personnel atour Mukilteo, Washington facility could result in the inability to invest theresources necessary to continue to develop next-generation products and improveexisting product lines in order to remain competitive in the marketplace,resulting in reduced revenues and cash flows from the sales of our CustomArrayproducts and services.  Also, reductionsin operating costs at CMDX, should they occur, could jeopardize our ability tolaunch, market and sell additional products and services necessary to grow andsustain our operations and eventually achieve profitability.

 

*Capital Requirements.*  We may also encounter unforeseen difficultiesthat may deplete our capital resources more rapidly than anticipated.  Any efforts to seek additional funding couldbe made through equity, debt or other external financing, and there can be noassurance that additional funding will be available on favorable terms, if atall.  Our long-term capital requirementswill be substantial and the adequacy of available funds will depend upon manyfactors, including:

 

·                  the costs of commercialization activities, including sales andmarketing, manufacturing and capital equipment;

 

·                  our continued progress in research and development programs;

 

·                  the costs involved in filing, prosecuting, enforcing and defending anypatents claims, should they arise;

 

·                  the costs involved in defending our Judgment against the appeal broughtby National Union;

 

·                  our ability to license technology;

 

·                  competing technological developments;

 

·                  the creation and formation of strategic partnerships; and

 

·                  the costs associated with leasing and improving our Irvine, Californiafacility.

 

Pursuantto the tax allocation agreement executed between us and Acacia, we have agreednot to take certain actions for two years following the split off, unless weobtain an IRS ruling or an opinion of counsel to the effect that these actionswill not affect the tax-free nature of the split off.  These actions include certain issuances ofour stock, a liquidation or merger of our company, and dispositions of assetsoutside the ordinary course of our business. If any of these transactions were to occur, the split off could bedeemed to be a taxable distribution to Acacia. In particular, we have agreed to indemnify Acacia for any tax resultingfrom an acquisition by one or more persons of a 50% or greater interest in ourcompany.

 

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#### **Off-BalanceSheet Arrangements**

#### ** **

Wehave not entered into off-balance sheet financing arrangements, other thanoperating leases for our office and laboratory premises.  We have no significant commitments forcapital expenditures in 2009 or beyond. We have executed two capital leases totaling $109,000 for certainlaboratory equipment.  The followingtable lists our material known future cash commitments as of June 30,2009:

 
| ** **                         | ** ** | **Payments Due by Period (in thousands)** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|
| ** **                         | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2013 and** | ** ** |
| ** **                         | ** ** | **2009**                                  | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** |
| ** **                         | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating leases                   |       | $                                         | 273        |   | $ | 367 |   | $ | — |   | $ | — |   | $ | — |   |
| Capital leases                     |       | 6                                         |       | 13 |   | 14 |   | 15 |   | 1 |   |
| Minimum royalty  payments          |       | 50                                        |       | 100 |   | 100 |   | 100 |   | 575 |   |
| Secured convertible  debenture (1) |       | —                                    |       | 8,400 |   | — |   | — |   | — |   |
| Total contractual  obligations     |       | $                                         | 329        |   | $ | 8,880 |   | $ | 114 |   | $ | 115 |   | $ | 576 |   |

 

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(1)          Theprincipal amount of the Debenture as of June 30, 2009, which is due theearlier of July 10, 2010 or four months after receiving the settlementpayment from National Union, is reflected as being due in July, 2010 (thematurity date of the Debenture), assuming no additional conversions or earlyprepayments occur.

 

**Recent AccountingPronouncements**

 

Refer to Note 2 to our consolidated interimfinancial statements included in Part I, Item 1 of this report.

 

**Item 3.****                      ****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Not required for smallerreporting companies.

 

**Item 4T.****              ****CONTROLS AND PROCEDURES**

 

*Evaluation of DisclosureControls and Procedures*

 

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in our reports filed or submitted underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”) isrecorded, processed, summarized and reported within the time periods specifiedin SEC rules and forms.  Ourdisclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed in ourreports filed under the Exchange Act is accumulated and communicated tomanagement as appropriate to allow timely decisions regarding requireddisclosures.  There are inherentlimitations to the effectiveness of any system of disclosure controls andprocedures, including the possibility of human error and the circumvention oroverriding of the controls and procedures. Accordingly, even effectivedisclosure controls and procedures can only provide reasonable assurance ofachieving their control objectives, and management necessarily is required touse its judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures.  Our management,with the participation of our Chief Executive Officer and Chief FinancialOfficer, conducted an evaluation required by Rules 13a-15 and 15d-15 underthe Exchange Act of the effectiveness of our disclosure controls and proceduresas defined in Rules 13a-15 and 15d-15 under the Exchange Act as of June 30,2009.  Based on this evaluation, ourChief Executive Officer and Chief Financial Officer concluded that as of June 30,2009, the design and operation of our disclosure controls and procedures wereeffective.

 

*Changes in InternalControls*

 

There wereno changes in our internal control over financial reporting that occurredduring our last fiscal quarter (the quarter ended June 30, 2009) that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II—OTHER INFORMATION**

** **

**Item 1.  LEGAL PROCEEDINGS**

 

In April of 2005, Acacia and we filed a complaintin U.S. District Court for the Central District of California (the “Court”) against our insurancecarrier, National Union Fire Ins. Co. of Pittsburgh, PA (“National Union”),seeking reimbursement of litigation and settlement costs for a lawsuit,pursuant to our directors’ and officers’ insurance policy with NationalUnion.  A trial was held and concludedduring the fourth quarter of 2007.  In March 2008,the Court issued the Judgment in favor of Acacia and us, and awardedapproximately $32.1 million in monetary damages to be paid by NationalUnion.  In accordance with thedistribution agreement entered into between Acacia and us prior to our separation,all proceeds from the lawsuit will be paid to us.  In May 2008, the Court awarded us anadditional $3.6 million in attorneys’ fees and litigation costs, therebyincreasing the overall award to $35.7 million. This award was entered as a final Judgment in May 2008 and willcontinue to earn interest until paid.  National Union has appealed theJudgment to the U.S. Ninth Circuit Court of Appeals, and we intend tovigorously defend against the appeal. The Court has required, and National Union has posted, an appellate bondin the amount of $39.2 million to cover the Judgment as well as accruedinterest charges.  The appellate bondwill remain in place until the appeal process is concluded.  As of June 30, 2009, all appellatebriefs by us and National Union had been filed.

 

**Item2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

During the first and second quarters of2009, we issued 31,053 and 27,614 shares of our common stock, respectively, toYA in consideration of our quarterly interest charges accrued during the fourthquarter of 2008 under the terms of the Debenture.  The issuance of common stock to YA was madepursuant to an exemption under Rule 506 of Regulation D and/or Section 4(2) ofthe Securities Act of 1933.

 

On May 19,2009 (the “Grant Date”), we issued three warrants (the “Consultant Warrants”)to a consultant to purchase a total of 125,000 unregistered shares of ourcommon stock with an exercise price of $9.00 per share and a term of fiveyears.  The first warrant is for 25,000shares and becomes fully vested six months after the Grant Date.  The second and third warrants (the “ContingentWarrants”) are for 50,000 shares each of common stock, and become fully vestedonly if our underlying stock price achieves or exceeds $12.00 and $14.00 pershare, respectively, for five consecutive trading days as quoted on Nasdaq,over a period of twenty-four months from the Grant Date.  If these terms are not achieved during thistwenty-four month period, the Contingent Warrants will expire on May 19,2011.  Otherwise, if the vestingconditions are achieved within twenty-four months from the Grant Date, the ContingentWarrants will become fully exercisable for the remainder of the five-year term.  The warrants were issued pursuant to anexemption under Rule 506 and/or Section 4(2) of the SecuritiesAct of 1933.

 

**Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

At an annual meeting ofthe Company’s shareholders on June 11, 2009, the shareholders re-electedJohn H. Abeles, M.D., Thomas B. Akin, Brooke P. Anderson, Ph.D., F. RigdonCurrie, and Amit Kumar, Ph.D. and elected Scott Gottlieb, M.D., to serve untilthe 2010 Annual Meeting of Shareholders and until their successors have beenelected and qualified.  Approximately 69% of outstanding votableshares were represented in person or by proxy at the meeting.  The votingresults for each matter were as follows:

 

ProposalNo. 1:  Election of Directors

 
| **Director**               | ** ** | **For**   | ** ** | **Withheld** | ** ** |
|----------------------------|------------|-----------|------------|--------------|------------|
| John  H. Abeles. M.D.      |       | 4,132,510 |       | 244,030      |       |
| Thomas B. Akin             |       | 3,444,222 |       | 932,318      |       |
| Brooke  P. Anderson, Ph.D. |       | 4,234,603 |       | 141,937      |       |
| F.  Rigdon Currie          |       | 3,848,791 |       | 527,749      |       |
| Amit  Kumar, Ph.D.         |       | 4,235,113 |       | 141,427      |       |
| Scott  Gottlieb, M.D.      |       | 4,237,006 |       | 139,534      |       |

 

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**Item 6.  EXHIBITS**

** **

| **Exhibit  Number** | ** ** | **Description**                                                                                      |
|---------------------|------------|------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                 |
| 3.1                 |       | Amended and  Restated Certificate of Incorporation (1)                                               |
| 3.1a                |       | Certificate of  Amendment to Amended and Restated Certificate of Incorporation (2)                   |
| 3.2                 |       | Amended and  Restated Bylaws (3)                                                                     |
| 31.1                |       | Certification of  Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of  2002 |
| 31.2                |       | Certification of Chief Financial Officer pursuant to section 302 of  the Sarbanes-Oxley Act of 2002  |
| 32.1                |       | Certification of Chief Executive Officer pursuant to section 906 of  the Sarbanes-Oxley Act of 2002  |
| 32.2                |       | Certification of Chief Financial Officer pursuant to section 906 of  the Sarbanes-Oxley Act of 2002  |

 

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| (1) | Incorporated by reference to Exhibit 3.1 to CombiMatrix Corporation’s  Registration Statement on Form S-1 (SEC File No. 333-139679), which  became effective June 8, 2007.       |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Incorporated by  reference to Exhibit 3.1A to CombiMatrix Corporation’s Quarterly Report  on Form 10-Q filed August 14, 2008.                                                    |
| (3) | Incorporated by  reference to Exhibit 3.2 to CombiMatrix Corporation’s Registration  Statement on Form S-1 (SEC File No. 333-139679), which became  effective June 8, 2007. |

 

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** **

**SIGNATURES**

** **

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

 
|   | COMBIMATRIX CORPORATION |
|--------|-------------------------|
|   |                    |
|   |                    |   |
|   | By:                     | /s/ AMIT KUMAR, PH.D. |
|   |                    | Amit Kumar, Ph.D. |
|   |                    | Chief Executive Officer |
|   |                    | *(Authorized Signatory  and Principal Executive Officer)* |
|   |                    | * * |
|   |                    |   |
|   | By:                     | /s/ SCOTT R. BURELL |
|   |                    | Scott R. Burell |
|   |                    | Chief Financial Officer |
|   |                    | *(Principal Financial  and Accounting Officer)* |

 

Date:  August 14,2009

 

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**EXHIBITINDEX**

 

| **Exhibit  Number** | ** ** | **Description**                                                                                      |
|---------------------|------------|------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                 |
| 3.1                 |       | Amended and  Restated Certificate of Incorporation (1)                                               |
| 3.1a                |       | Certificate of  Amendment to Amended and Restated Certificate of Incorporation (2)                   |
| 3.2                 |       | Amended and  Restated Bylaws (3)                                                                     |
| 31.1                |       | Certification of  Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of  2002 |
| 31.2                |       | Certification of Chief Financial Officer pursuant to section 302 of  the Sarbanes-Oxley Act of 2002  |
| 32.1                |       | Certification of Chief Executive Officer pursuant to section 906 of  the Sarbanes-Oxley Act of 2002  |
| 32.2                |       | Certification of Chief Financial Officer pursuant to section 906 of  the Sarbanes-Oxley Act of 2002  |

 

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| (1) | Incorporated by reference to Exhibit 3.1 to CombiMatrix Corporation’s  Registration Statement on Form S-1 (SEC File No. 333-139679), which  became effective June 8, 2007.       |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Incorporated by  reference to Exhibit 3.1A to CombiMatrix Corporation’s Quarterly Report  on Form 10-Q filed August 14, 2008.                                                    |
| (3) | Incorporated by  reference to Exhibit 3.2 to CombiMatrix Corporation’s Registration  Statement on Form S-1 (SEC File No. 333-139679), which became  effective June 8, 2007. |

 

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