UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the Quarterly Period Ended March 31, 2016

OR

Commission File Number 0-26483

 

Diadexus, Inc.

(Exact name of Registrant as Specified in its Charter)

 

 

(650) 246-6400

(Registrant’s telephone number, including area code)

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the registrant’s common stock, $0.01 par value per share, was 4,100,060 as of April 28, 2016.

 

 

 

 

 

 

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DIADEXUS, INC.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2016

TABLE OF CONTENTS

 

 

 

 

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PART I – FINANCIAL INFORMATION

 

DIADEXUS, INC.

CONDENSED BALANCE SHEETS

(Unaudited)

 

See accompanying notes to condensed financial statements.

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DIADEXUS, INC.

CONDENSED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

See accompanying notes to condensed financial statements.

 

 

 

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DIADEXUS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

See accompanying notes to condensed financial statements.

 

 

 

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Diadexus, Inc.

Notes to Condensed Financial Statements

 

1. Business Overview

Formation of the Company

Diadexus is a diagnostics company developing and commercializing products that deliver healthcare providers with relevant information to assist in the management of their patients throughout the course of cardiac disease.  The Company’s capabilities include proprietary manufacturing, assay development, FDA regulatory clearances, and marketing and selling products.  Diadexus has evolved from a company that served a concentrated group of customers to one that is building a broad, diversified base of new laboratory customers through the launch of the PLAC^® Test for Lp-PLA₂ Activity (the “PLAC Activity Test”). Since its inception, the Company has incurred losses, and it has relied primarily on private placements of preferred stock and debt financing, as well as on revenue generated from the sale of products, to fund its operations. As of March 31, 2016, the Company had an accumulated deficit of $217.2 million, a working capital deficit of $7.4 million and stockholders’ deficit of $6.3 million.

In August 2014, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Oxford Finance LLC (“Oxford”) to borrow up to $15 million, the entire amount of which was borrowed at a fixed interest rate of 6.95% per annum. The Loan Agreement contains a number of customary representations and warranties and customary covenants, including covenants regarding delivery of financial statements, maintenance of inventory, payment of taxes, maintenance of insurance, dispositions of property, business combinations or acquisitions, incurrence of additional indebtedness and transactions with affiliates. If the Company breaches any of these covenants or it is unable to make a required payment of principal or interest, or it experiences a material adverse change to its business, it could result in a default under the Loan Agreement and the amount of the loan balance, plus accrued and unpaid interest, and final payment, and the prepayment fee, and other obligations due the lender would be come immediately payable.

The Company will require additional funds to uplist its Common Stock from the OTC Bulletin Board to NASDAQ and to broadly commercialize its products and develop new products. Its ability to fund operations and to conduct the required development activities related to any new product candidates will be significantly limited if the Company is unable to obtain the necessary capital. The Company expects to seek to raise funds through equity or debt offerings, bank facilities, or other sources of capital. Additional funding may not be available when needed or on terms acceptable to the Company and it may need to implement additional cost cutting actions. The consent of Oxford will likely be required for additional debt financings. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. The Company cannot assure you that it will be able to raise any such additional funding.  Failure to generate sufficient cash flows from operations, including failure to increase revenues, raise additional capital and reduce discretionary spending could have a material adverse effect on the Company’s ability to achieve its intended business objectives. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not contain any adjustments that might result from the outcome of this uncertainty.  Additionally, due to the substantial doubt about the Company’s ability to continue operating as a going concern and the material adverse change clause in the Oxford Loan Agreement, the entire amount of notes payable at March 31, 2016 and December 31, 2015, respectively, has been classified as current in these financial statements.

Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of management, the accompanying unaudited condensed financial statements have been prepared on a consistent basis with the December 31, 2015 audited financial statements and include all adjustments, consisting of normal recurring adjustments, that are necessary for a fair statement of the Company’s financial position as of March 31, 2016, results of operations for the three months ended March 31, 2016 and 2015 and cash flows for the three months ended March 31, 2016 and 2015.

Effective June 30, 2015, the Company consummated a 1-for-15 reverse split of all issued and outstanding shares of common stock and concurrently reduced the number of authorized common stock to 50,000,000 shares.  All share and per share amounts have been adjusted to reflect this reverse split.

All references in these notes to financial statements to the “Company,” “we,” “us” and “our” refer to Diadexus, Inc., a Delaware corporation, unless the context requires otherwise.

 

 

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2. Summary of Significant Accounting Policies

Except for the policy listed below, the Company’s significant accounting policies are disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission (“SEC”) on March 29, 2016, and have not changed as of March 31, 2016.

Foreign Currency Contracts

In March 2014, the Company entered into a License and Supply Agreement with B.R.A.H.M.S. GmbH (“BRAHMS”). Under the terms of the agreement, the Company paid 750,000 Euros in April 2014 and another 500,000 Euros in March 2015.  The Company paid an additional 500,000 Euros in development and regulatory milestones in June 2015 and may pay up to 1,000,000 Euros in post-launch commercialized milestones and royalties on future sales.  In order to reduce its foreign exchange risk, on January 30, 2015, the Company entered into two forward contracts to purchase an aggregate of 1,000,000 Euros in two tranches: 500,000 Euros in March 2015 and an additional 500,000 Euros in September 2015.  The forward contract for March 2015 offset the payment due to BRAHMS in March 2015. The latter contract was offset by a spot contract in June 2015 when the developmental milestone was reached. The forward contracts did not qualify as a cash flow hedge.  Realized and unrealized gains and losses on the forward contracts are a component of Other income (expense) in the accompanying condensed Statements of Comprehensive Loss. At March 31, 2016, there were no forward contracts outstanding.        

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). The amendment in this ASU provides guidance on the revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The core principle of this update provides guidance to identify the performance obligations under the contract(s) with a customer and how to allocate the transaction price to the performance obligations in the contract. It further provides guidance to recognize revenue when (or as) the entity satisfies a performance obligation. In August 2015, the FASB issued an update to defer the effective date of this update by one year.  The updated standard becomes effective for the Company in the first quarter of fiscal year 2018, but allows the Company to adopt the standard one year earlier if it so chooses.  The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on its Financial Statements and related disclosures, and is therefore unable to determine the impact on the Company’s financial statements.

In August 2014 the FASB issued Accounting Standards Update No 2014-15: Presentation of Financial Statement Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). The update sets forth a requirement for management to evaluate whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period, including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans. (5) require an express statement of other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date the financial statements are issued (or available to be issued). The new standard applies prospectively to annual periods ending after December 31, 2015, and to annual and interim periods thereafter. See Note 1 regarding our discussion on our ability to continue as a going concern.  

In April 2015, the FASB issued ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company has adopted these provisions, as of the beginning of the first quarter of 2016. As a result, the Company reclassified $95,000 and $114,000 of deferred financing costs as of March 31, 2016 and December 31, 2015, respectively, from other assets, which is currently presented as a direct deduction from notes payable.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330):  “Simplifying the Measurement of Inventory (“ASU 2015-11”), which permits companies to measure inventory at the lower of cost and net realizable value.  ASU 2015-11 applies to all business entities and is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2016.  Early adoption is permitted.  The Company is evaluating the impact of this ASU on its financial statements.  

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which amends existing guidance on income taxes to require the classification of all deferred tax assets and liabilities as non-current on the balance sheet. The

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Company is required to adopt this ASU no later than January 1, 2018, with early adoption permitted, and the guidance may be applied either prospectively or retrospectively. The Company does not expect this ASU to have a material impact on its financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The updated guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The amendment to the standard is effective for the Company beginning on June 1, 2018. The Company does not expect this ASU to have a material impact on its financial statements.

In February 2016, the FASB issued ASU 2016-02 - Leases (ASC 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors).  The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today.  ASC 842 supersedes the previous leases standard, ASC 840 Leases. The standard is effective on January 1, 2019, with early adoption permitted. The Company is in the process of evaluating the impact of this ASU on its financial statements.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The ASU does not change the core principle of the guidance in the aforementioned ASU 2014-09, instead, the amendments in this Update are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations and whether an entity reports revenue on a gross or net basis. ASU 2016-08 will have the same effective date and transition requirements as ASU 2014-09. The Company is in the process of evaluating the impact of this ASU on its financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income, EPS, and the statement of cash flows. For public companies, the amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company is in the process of evaluating the impact of this ASU on its financial statements.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments in this Update affect the guidance in the aforementioned ASU 2014-09 by clarifying two aspects: identifying performance obligations and the licensing implementation guidance. ASU 2016-10 will have the same effective date and transition requirements as the ASU 2014-09. The Company is in the process of evaluating the impact of this ASU on its financial statements.

 

 

3. Cash and Cash Equivalents

The Company maintains its cash in bank accounts, which at times may exceed federally insured limits. The Company has not experienced any losses on such accounts. The Company considers all highly liquid investments purchased with an original maturity of three months or less at the time of purchase to be cash equivalents.

The following is a summary of cash and cash equivalents at March 31, 2016 and December 31, 2015 (in thousands):

 

 

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4. Fair Value Measurements

In accordance with FASB’s Accounting Standard Codification (“ASC”) 820, the Company discloses and recognizes the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The guidance establishes three levels of the fair value hierarchy as follows:

Level 1: Observable inputs, such as quoted prices in active markets for identical assets or liabilities;

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities;

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table represents the Company’s fair value hierarchy for its financial assets (cash and cash equivalents) measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015 (in thousands):

 

 

 

The fair value of the notes payable is valued based on Level 2 inputs and approximates its book value. The fair value of the notes payable is based on the present value of expected future cash flows and assumptions about current interest rates and the credit worthiness of the Company. As of March 31, 2016, the notes payable is carried at face value of $15 million less any unamortized debt discount.

The carrying value of other financial instruments, including cash, accounts receivable, accounts payable and other payables, approximates fair value due to their short maturities.

 

 

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5. Inventory, net

Inventory consists of the following (in thousands):

 

 

 

6. Property, Plants and Equipment

 

The following is a summary of property and equipment at cost less accumulated depreciation as of March 31, 2016 and December 31, 2015 (in thousands):  

 

 

Depreciation and amortization expense for the quarter ended March 31, 2016 and 2015 was $60,000 and $82,000, respectively.

 

 

7. Total Accrued and Other Current Liabilities

Total accrued and other current liabilities include the following as of March 31, 2016 and December 31, 2015 (in thousands):

 

 

 

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8. Concentration of Credit Risk

Revenues from the following customers each represented at least 10% of total revenue for the three months ended March 31, 2016 and 2015, respectively. They also represented a significant portion of our accounts receivable as of March 31, 2016 and 2015, respectively.

 

 

 

9. Notes Payable

In August 2014, the Company entered into a Loan Agreement with Oxford to borrow up to $15 million, the entire amount of which was borrowed at a fixed interest rate of 6.95% per annum. The obligations under the Loan Agreement are payable in 48 monthly installments which began in October 2014, with interest-only payments to be made from October 2014 to September 2015, followed by 36 months of equal principal and interest payments.   

The Company paid an initial fee of $150,000 for access to this loan and will be required to pay an additional $1.5 million following the earlier of loan maturity or termination. The Company may prepay all, but not less than all, of the loan amount with 10 days advance notice to Oxford and payment of a prepayment premium. In connection with the Loan Agreement, the Company issued a warrant to Oxford to purchase 60,606 shares of the Company’s common stock (See Note 13, “Stock Warrants”).

The Company granted Oxford a security interest in substantially all of the Company’s personal property to secure the Company’s payment and other obligations under the Loan Agreement. The security interest does not extend to patents, trademarks and other intellectual property rights (except for the rights to payment related to the sale, licensing or disposition of such intellectual property rights) or certain other specified property.

The Loan Agreement contains a number of customary representations and warranties and customary covenants, including covenants regarding delivery of financial statements, maintenance of inventory, payment of taxes, maintenance of insurance, dispositions of property, business combinations or acquisitions, incurrence of additional indebtedness and transactions with affiliates. The Company is also restricted from paying dividends or making other distributions or payments of its capital stock except for repurchases of stock pursuant to employee stock purchase plans, employee restricted stock agreements, stockholder rights plans, director or consultant stock option plans, or similar plans, provided such repurchases do not exceed $250,000 in the aggregate per fiscal year. If the Company breaches any of these covenants or it is unable to make a required payment of principal or interest, or it experiences a material adverse change to its business, it could result in a default under the Loan and Security Agreement and the amount of the loan balance, plus accrued and unpaid interest, and final payment, and the prepayment fee, and other obligations due the lender would be come immediately payable.

The Company recorded a debt discount of $470,000 associated with the Loan Agreement and the amount will be amortized as interest expense over the term of the Loan Agreement using the effective interest method. Concurrent with the execution of the Loan Agreement, in August 2014, the Company used $8.4 million of the proceeds received from the loan to repay its existing loan with Comerica Bank. All Loan and Security Agreements previously entered with Comerica Bank were terminated upon receipt of this repayment. The Company was in compliance with all the covenants with Comerica Bank prior to the repayment.

The Company accounted for the repayment to Comerica Bank as a debt extinguishment since the issuance of the new loan is with another unrelated creditor. Accordingly, the Company accelerated and expensed the unamortized debt discount of $132,000, debt issuance costs of $82,000 and balloon payment of $117,000 to interest expense in August 2014.

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The Company recorded $81,000 of loss from the debt extinguishment as interest expense in August 2014. This amount represented a pre-payment premium pursuant to the Amended Loan and Security Agreement entered into with Comerica Bank.

Effective January 1, 2016, the Company adopted ASU 2015-03 and changed its method of presentation relating to debt issuance cost. Prior to 2016, the Company's policy was to present these costs in other assets on the balance sheet, net of accumulated amortization. Beginning in 2016, the Company has presented these fees as a direct deduction to the related debt. As a result, we reclassified $95,000 and $114,000 of deferred financing costs as of March 31, 2016 and December 31, 2015, respectively, from other assets, which are currently presented as a direct deduction from notes payable.

As of March 31, 2016, future minimum payments for the notes payable are as follows (in thousands):

 

 

The payments above include interest as well as $1.5 million of additional payment required to be made by the Company following the earlier of loan maturity or termination.

As noted in Note 1 to these financial statements, due to the substantial doubt about the Company’s ability to continue operating as a going concern and the material adverse change clause in the Oxford Loan Agreement, the entire amount of notes payable at March 31, 2016 has been classified as current in these financial statements.

 

 

10. Basic and Diluted Net Loss per Share

Basic net loss per common share is based on the weighted average number of common shares outstanding during the period. Diluted net loss per common share is based on the weighted average number of common shares and other dilutive securities outstanding during the period, provided that including these dilutive securities does not increase the net loss per share.

The effect of the options and warrants was anti-dilutive for the three months ended March 31, 2016 and 2015. The following table shows the total outstanding securities considered anti-dilutive and therefore, excluded from the computation of diluted net loss per share (in thousands):

 

 

 

11. License and Supply Agreement

 

On September 4, 2015, 2015, the Company entered into a License and Supply Agreement (the “License and Supply Agreement”) with OriGene Technologies, Inc., (“OriGene”) and Wuxi OriGene Biotechnology Co., Ltd., (“WOBC”) (OriGene and WOBC are referred to herein collectively as “Licensee”).

 

Under the License and Supply Agreement, the Company granted Licensee an exclusive license and supply agreement granting Licensee rights to develop and commercialize Lp-PLA₂ concentration assay products in certain Asian countries (the “Territory”) with a license term of ten years, and supply commitments dependent on certain conditions.  The Company will be responsible for supplying to Licensee certain raw materials and reagents needed for Licensee to develop, produce and sell PLAC^® ELISA in the Territory.  Licensee will seek marketing authorization for the test in the Territory.  Licensee has agreed to purchase the Lp-PLA₂ concentration assay products exclusively from the Company at a mark-up above the Company’s manufacturing cost.  Licensee has also committed to a minimum first bulk supply purchase totaling $50,000.

 

After commencement of commercial sales, the Company will be eligible to receive modest sales-based milestones as well as mid-single-digit royalties on net sales.

 

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In addition to the PLAC^® ELISA rights, the Company has also granted to Licensee a right of first offer for future rights to PLAC^® Activity in the Territory.

 

In connection with the License and Supply Agreement, the Company and OriGene entered into a separate securities purchase agreement (the “Stock Purchase Agreement”) on September 4, 2015. Pursuant to the Stock Purchase Agreement, on September 4, 2015, when the closing market price of the Company’s stock was $3.01, the Company issued 261,684 shares of its common stock, at a per share purchase price of approximately $3.82 for a total of $1.0 million.  The Company has accounted for the License and Supply Agreement and the Stock Purchase Agreement as one arrangement under the multiple element arrangement guidance as they were entered into simultaneously and reference each other in the agreements.  The difference in the fair value of the common stock and the purchase price, $0.2 million, is being recognized as license revenue ratably over the ten year period of the License and Supply Agreement. The revenue recognized in connection with the license fee in the three months ended March 31, 2016 was $5,300.  Deferred revenue of $0.2 million at March 31, 2016 is included in the accompanying balance sheet.

 

 

12. Stock Based Compensation

Stock Option Plans

The Company records stock-based compensation of stock options and awards granted to employees and directors by estimating the fair value of stock-based awards using the Black-Scholes option pricing model and amortizing the fair value of the stock-based awards granted over the applicable vesting period of the awards on a straight-line or ratable basis, as appropriate.

The following table summarizes stock compensation expense related to employee stock options and employee stock-based compensation for the three months ended March 31, 2016 and 2015, which was incurred as follows (in thousands):

 

 

Restricted Stock Units

On February 6, 2015, the Company awarded an aggregate of 14,545 fully vested RSUs as a bonus to the Chairman of the Board for her performance as Interim Executive Chair in 2014 with a grant-date fair value equal to approximately $92,000 in the aggregate, or $6.30 per share. Each RSU entitled the recipient to receive one share of the Company’s common stock upon vesting. The fair value of the RSU is based on the Company’s closing stock price on the date of grant. As of March 31, 2016, no RSUs remained outstanding.

Warrants

On June 30, 2015, the Board of the Company approved the issuance of a warrant to purchase 112,667 shares of the Company’s common stock with an exercise price of $6.00 per share to Lori Rafield, Ph.D., the Company’s Chief Executive Officer.  The warrant bears an exercise price above the fair market value of the common stock of the Company and was issued in order to satisfy the terms of Dr. Rafield’s employment agreement as the Chief Executive Officer in lieu of a stock option grant for the same number of shares of common stock of the Company that the Board previously approved in connection with her employment.  The warrant vests ratably in equal monthly installments over 48 months and expires on June 30, 2025.  The fair value of the warrant was calculated using the Black-Scholes option pricing model and the following assumptions: volatility of 74.05%, risk-free rate of 1.63%, exercise price of $6.00 and expected life of 5.02 years.  The fair value of the warrant was determined to be $331,000 and is amortized over the vesting period on a straight-line basis.

 

 

13. Commitments and Contingencies

Lease Commitments

The Company leases an office and laboratory facility (the “349 Facility”) under a long-term, non-cancelable operating lease agreement, which expires in December 2016.

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In 2010, the Company recorded a lease obligation associated with the 349 Facility, which contained a lease payment that exceeded current market rates. Accordingly, the Company recognized a $4.1 million unfavorable lease obligation, included in the accompanying balance sheet. The Company amortizes the unfavorable lease obligation using the effective interest rate method.

In connection with its leased facilities, the Company recognized a liability for asset retirement obligations representing the present value of estimated remediation costs to be incurred at the expiration of the 349 Facility lease. The following table describes changes to the Company’s asset retirement obligation liability for the three months ended March 31, 2016 and 2015 (in thousands):

 

 

Rent expense for the Company’s facilities was $0.4  million and $0.4 million for the three months ended March 31, 2016 and 2015, respectively.  The terms of the lease for the 349 Facility provides for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period. Deferred rent of $156,000 and $208,000 at March 31, 2016 and December 31, 2015, respectively, is included in the accompanying balance sheets.

As of March 31, 2016, future minimum lease payments under non-cancelable operating leases are as follows (in thousands):

 

 

Research and Development Commitments and Contingencies

In March 2014, the Company entered into a License and Supply Agreement (the “Agreement”) with BRAHMS. Under the terms of the Agreement, the Company paid 750,000 Euros in April 2014 and paid another 500,000 Euros in March 2015. The Company paid an additional 500,000 Euros in development and regulatory milestones in June 2015 and may pay up to 1,000,000 Euros in post-launch commercialized milestones and royalties on future sales.

 

 

 

 

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The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve a number of risks and uncertainties. Our actual results could differ materially from those indicated by forward-looking statements as a result of various factors, including but not limited to, the period for which we estimate our cash resources are sufficient, the availability of additional funds, as well as those set forth under “Risk Factors” and those that may be identified from time to time in our reports and registration statements filed with the Securities and Exchange Commission.

The following discussion and analysis is intended to provide an investor with a narrative of our financial results and an evaluation of our financial condition and results of operations. This discussion should be read in conjunction with the unaudited Condensed Financial Statements and related Notes included in Item 1 of this Quarterly Report and the Financial Statements and related Notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 29, 2016, or our 2015 Annual Report..

Overview

We are a diagnostics company focused on developing and commercializing proprietary cardiovascular diagnostic products addressing unmet needs in cardiovascular disease (“CVD”). We sell our diagnostic products to laboratories and hospitals. Physicians order tests for their patients from these laboratories and use the results to aid in assessing their patients’ risk for CVD.

Our company was initially incorporated in November 1995. In July 2010, we completed a reverse merger with former diaDexus, Inc., which was the successor to a company initially formed as a joint venture between SmithKlineBeecham Corporation (now GlaxoSmithKline LLC (“GlaxoSmithKline”)) and Incyte Pharmaceuticals, Inc. Upon formation in September 1997, SmithKlineBeecham Corporation granted former diaDexus, Inc. an exclusive license to certain diagnostic intellectual property, including exclusive rights to develop diagnostic assays for lipoprotein-associated phospholipase A2 (“Lp-PLA₂”). In November 2010, in connection with the reverse merger, we changed our name to diaDexus, Inc.

Our products, the PLAC ELISA Test and the PLAC Activity Test, (collectively “the PLAC Tests”), are designed to provide information, over and above traditional risk factors, such as cholesterol levels, to help identify individuals at increased risk of suffering a heart attack or stroke. Some of these events may be reduced with earlier detection of increased risk and more aggressive risk-reducing strategies, including treatment to lower LDL-cholesterol goals with statins. We have commercialized two PLAC Tests. One test measures the concentration of circulating Lp-PLA₂ in the blood using an enzyme-linked-immunosorbent serologic assay (“ELISA”), the PLAC ELISA Test. The PLAC ELISA Test is the only Lp-PLA₂ blood test cleared by the Food and Drug Administration (“FDA”) to aid in assessing risk for both coronary heart disease and ischemic stroke associated with atherosclerosis. The second test, the PLAC Activity Test, is an enzyme assay for the quantitative determination of Lp-PLA₂ activity levels in human plasma and serum on automated clinical chemistry analyzers, to be used in conjunction with clinical evaluation and patient risk assessment as an indicator of atherosclerotic cardiovascular disease.

We have incurred substantial losses since inception, and expect to continue to incur net losses for at least the next few years based on our current plans to engage in new development activities to broaden or enhance our product pipeline. To date, we have funded our operations primarily through private placements of equity and debt financing, as well as through revenue generated from the sale of products.

We entered into a Loan and Security Agreement with Comerica Bank in September 2011, which was amended in September 2012 and again in October 2013.This loan was terminated in August 2014 and a new Loan and Security Agreement was established with Oxford. The new Loan and Security Agreement contained certain financial and non-financial covenants. Our future liquidity requirements may increase beyond currently expected levels if we fail to maintain compliance with such covenants. In order to meet our future liquidity needs, we may become reliant on additional equity and/or debt financing. Additional funding may not be available when needed or on terms acceptable to us. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants and security interests in our assets. We cannot assure you that we will be able to raise any such additional funding in a timely manner if we require funds.

Effective June 30, 2015, we consummated a 1-for-15 reverse split of all issued and outstanding shares of common stock and concurrently reduced the authorized number of common stock to 50,000,000 shares.  All share and per share amounts have been adjusted to reflect this reverse split.

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License and Supply Agreement

On September 4, 2015, we entered into a License and Supply Agreement (the “License and Supply Agreement”) with OriGene Technologies, Inc., (“OriGene”) and Wuxi OriGene Biotechnology Co., Ltd., (“WOBC”) (OriGene and WOBC are referred to herein collectively as “Licensee”) and a Securities Purchase Agreement with OriGene.

 

Under the License and Supply Agreement, we granted Licensee an exclusive license and supply agreement granting Licensee rights to develop and commercialize Lp-PLA₂ concentration assay products in certain Asian countries (the “Territory”) with a license term of ten years, and supply commitments dependent on certain conditions.  We will be responsible for supplying to Licensee certain raw materials and reagents needed for Licensee to develop, produce and sell PLAC® ELISA in the Territory.  Licensee will seek marketing authorization for the test in the Territory.  Licensee has agreed to purchase the Lp-PLA₂ concentration assay products exclusively from us at a mark-up above our manufacturing cost.  Licensee has also committed to a minimum first bulk supply purchase totaling $50,000.

 

After commencement of commercial sales, we will be eligible to receive certain modest sales-based milestones as well as mid-single-digit royalties on net sales. As the milestones are not dependent upon any actions of the Company and therefore not considered substantive, the milestone payments, if and when received, will be treated as additional arrangement compensation.  The Company will recognize a prorated share of the milestone from inception of the agreement to the date the milestone was received, with the remaining recorded as deferred revenue and recognized over the remaining life of the agreement on a straight-line basis.

 

In addition to the PLAC^® ELISA rights, we have also granted to Licensee a right of first offer for future rights to PLAC^® Activity in the Territory.

 

In connection with the License and Supply Agreement, we and OriGene entered into a separate securities purchase agreement (the “Stock Purchase Agreement”) on September 4, 2015. Pursuant to the Stock Purchase Agreement, on September 4, 2015, when the closing market price of our stock was $3.01, we issued 264,681 shares of our common stock, at a per share purchase price of approximately $3.82 for a total of $1.0 million.  We have accounted for the License and Supply Agreement and the Stock Purchase Agreement as one arrangement under the multiple element arrangement guidance as they were entered into simultaneously and reference each other in the agreements.  The difference in the fair value of the common stock and the purchase price, $0.2 million, is being recognized as license revenue ratably over the ten year period of the License and Supply Agreement. The revenue recognized in connection with the license fee for the three months ended March 31, 2016 was $5,300.

Critical Accounting Policies and Estimates

The accompanying discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses, and related disclosures. On an ongoing basis, we evaluate these estimates. Estimates are based on historical experience, information received from third parties and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from those estimates under different assumptions or conditions.

Our significant accounting policies are described in the notes to the unaudited Condensed Financial Statements included elsewhere in this Quarterly Report on Form 10-Q, as well as in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.  While all significant accounting policies are important to our Condensed Financial Statements, certain of these policies may be viewed as being critical.  Such policies are those that are both most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective and complex estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, or the related disclosure of contingent assets and liabilities.  These estimates are based on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances.  Actual results may differ materially from these estimates.  

Forward currency contracts:

In March 2014, we entered into a License and Supply Agreement with BRAHMS. Under the terms of the agreement, we paid 750,000 Euros in April 2014 and another 500,000 Euros in March 2015.  We paid an additional 500,000 Euros in development and regulatory milestones in June 2015, may pay up to 1,000,000 Euros in post-launch commercialized milestones, and royalties on future sales.  In order to reduce its foreign exchange risk, on January 30, 2015, we entered into two forward contracts to purchase an aggregate of 1,000,000 Euros in two tranches: 500,000 Euros in March 2015 and an additional 500,000 Euros in September 2015.  The forward contract for March 2015 offset the payment due to B.R.A.H.M.S. GmbH in March 2015. The latter contract was offset by a spot contract in June 2015 when the developmental milestone was reached.  The forward contracts did not qualify as a cash flow hedge.  

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Realized and unrealized gains and losses on the forward contracts are a component of Other income (expense) in the accompanying condensed Statements of Comprehensive Loss. At March 31, 2016, there were no forward contracts outstanding.

Results of Operations

Results of Operations for the Three Months Ended March 31, 2016 and 2015.

Revenues

 

 

Revenues by geography are based on the billing address of the customer. The following table sets forth total revenues by geographic area (in thousands):

 

 

Revenues are generated from product sales and licensing fees.

Total revenues for the quarter ended March 31, 2016 were $3.5 million, a decrease of approximately $2.0 million, or 36%, compared to the same period in 2015. The decrease is due to decreased product sales as a result of the loss of two of our largest customers, Health Diagnostics Laboratory (“HDL”), filing for bankruptcy on June 7, 2015, and Atherotech, filing for bankruptcy on March 4, 2016.  These decreases were partially offset by an increase in PLAC^® ELISA Test volumes from other customers, and a significant growth in PLAC^® Activity Test volumes from new customers during the first quarter of 2016.

Our top four customers accounted for 79% of our total revenues for the three months ended March 31, 2016, compared to 62% of total revenue derived from top three customers for the three months ended March 31, 2015. Because of this customer concentration, the recent bankruptcy of HDL and Atherotech, and the timing of orders from these customers, our quarterly revenues may fluctuate materially.

Operating Costs and Expenses

Product Costs of Revenue

 

Product costs of revenue include our expenditures for cost of goods, manufacturing support, product supplies, quality control, personnel expenses and facility costs. Product costs decreased approximately $0.5 million, or 30%, for the three months ended March 31, 2016 as compared to the same period in 2015. This decrease was due to decreased sales as noted above and reduced headcount and continued cost containment efforts following the restructuring implemented in the fourth quarter of 2014.  

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Sales and Marketing Expenses

 

 

Sales and marketing expenses include our expenditures on customer support, medical and other consultant fees, marketing programs and materials, and personnel expenses. Sales and marketing expenses decreased approximately $0.4 million, or 28%, for the three months ended March 31, 2016 as compared to the same period in 2015. The decrease was primarily due to a decrease of approximately $0.3 million in professional services and other associated costs including travel and entertainment and office costs for the three months ended March 31, 2016 compared to the same period in 2015.

Research and Development Expenses

 

 

Research and development expenses include costs related to product development, regulatory support of our technology and other technical support costs, including salaries and consultant fees. Research and development expenses were slightly lower for the three months ended March 31, 2016 as compared to the same period in 2015 and reflect our continued cost containment efforts during 2016.

General and Administrative Expenses

 

 

General and administrative expenses include personnel costs for finance, administration, information systems and professional fees as well as facilities expenses. General and administrative expenses decreased $0.3 million for the three months ended March 31, 2016 as compared to the same period in 2015. This decrease was primarily related to a decrease of $0.6 million in professional services expenses from continued cost containment efforts during 2016, partially offset by an increase of $0.2 million in personal costs due to increased headcount in the first quarter 2016 compared to the same period in 2015.

Interest Income, Interest Expense and Other Income (Expense), net

 

 

Interest income is derived from cash balances and short-term and long-term investments. Interest expense is based on outstanding debt obligations. Total interest and other income (expense) decreased slightly for the three months ended March 31, 2016 as compared to the same period in 2015.

Contractual Obligations

Our contractual obligations and future minimum lease payments that are non-cancelable are summarized in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2015 Annual Report. There have been no significant changes to these contractual obligations during the three months ended March 31, 2016.

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Liquidity and Capital Resources

Since our inception, we have incurred losses, and we have relied primarily on private placements of preferred stock and debt financing, as well as on revenue generated from the sale of products, to fund our operations. As of March 31, 2016, we had an accumulated deficit of $217.2 million, working capital deficit of $7.4 million and stockholders’ deficit of $6.3 million. The recurring losses from operations and negative cash flows from operations raise substantial doubt regarding our ability to continue as a going concern, and our former independent registered public accounting firm expressed a “going concern” opinion in its auditors’ report on our 2015 Annual Report.

In August 2014, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Oxford to borrow up to $15 million, the entire amount of which was borrowed at a fixed interest rate of 6.95% per annum. The Loan Agreement contains a number of customary representations and warranties and customary covenants, including covenants regarding delivery of financial statements, maintenance of inventory, payment of taxes, maintenance of insurance, dispositions of property, business combinations or acquisitions, incurrence of additional indebtedness and transactions with affiliates. If the Company breaches any of these covenants or it is unable to make a required payment of principal or interest, or it experiences a material adverse change to its business, it could result in a default under the Loan and Security Agreement and the amount of the loan balance, plus accrued and unpaid interest, and final payment, and the prepayment fee, and other obligations due the lender would be come due immediately.

In September 2015, we entered into a Stock Purchase Agreement with OriGene in connection with the License and Supply Agreement.  Pursuant to the Stock Purchase Agreement, on September 4, 2015, when the closing market price of the Company’s stock was $3.01, the Company issued 264,681 shares of its common stock, at a per share purchase price of approximately $3.82 for a total of $1.0 million.  The difference in the fair value of the common stock and the purchase price, $0.2 million, is being recognized as license revenue ratably over the ten year period of the License and Supply Agreement. The revenue recognized in connection with the license fee for three months ended March 31, 2016 was $5,300.

We will require additional funds to uplist our Common Stock from OTC Bulletin Board to NASDAQ and to broadly commercialize our products and develop new products. Our ability to fund our operations and to conduct the required development activities related to any new product candidates will be significantly limited if we are unable to obtain the necessary capital. We expect to seek to raise funds through equity or debt offerings, bank facilities, or other sources of capital. Additional funding may not be available when needed or on terms acceptable to us and we may need to implement additional cost cutting actions. The consent of Oxford will likely be required for additional debt financings. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. We cannot assure you that we will be able to raise any such additional funding. We do not believe that our cash resources of $6.4 million as of March 31, 2016 provide us with sufficient funds to meet our expected working capital needs through the end of 2016.

Cash and Cash Equivalents

As of March 31, 2016, we had cash and cash equivalents of $6.4 million, compared to $9.1 million at December 31, 2015. The decrease of $2.7 million primarily reflects cash used in operating activities of $1.6 million and the principal repayment on Oxford debt of $1.2 million.

Cash Flows from Operating Activities

Net cash used in operating activities was $1.6 million for the three months ended March 31, 2016, and was primarily related to the net loss of $1.7 million. Significant non-cash items included $0.2 million in non-cash interest associated with notes payable, $0.1 million in stock-based compensation, $(0.2) million in unfavorable lease amortization, $0.3 million in accrued liabilities, $(0.3) million in accounts payable, and $(0.2) million in accounts receivable.  

Net cash used in operating activities was $1.6 million for the three months ended March 31, 2015, and was primarily related to the net loss of $1.0 million and $1.1 million in cash outflow related to changes in operating assets and liabilities. This was partially offset by non-cash items totaling $0.5 million. Significant non-cash items were $0.3 million in stock-based compensation, $0.1 million in depreciation and amortization, $0.2 million in non-cash interest associated with our term loan, $0.1 million in inventory write off and $(0.2) million in unfavorable lease amortization.

Cash Flows from Investing Activities

There was minimal net cash used in investing activities to purchase property and equipment in the three months ended March 31, 2016.

There was no net cash used in investing activities in the three months ended March 31, 2015.

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Cash Flows from Financing Activities

Net cash used by financing activities of $1.2 million for the three months ended March 31, 2016 was solely related to the principal repayment on the Oxford debt paid during the first quarter of 2016.  

Net cash provided by financing activities of $56,000 for the three months ended March 31, 2015 consisted entirely of proceeds from stock option exercises.

Other Information

Our future capital requirements will depend primarily upon our ability to maintain and grow our current product revenues, develop new cardiovascular biomarkers, and to manage our obligations under real estate leases.

We expect to require additional financing and will seek to raise funds through equity or debt offerings, bank facilities, or other sources of capital. Additional funding may not be available when needed or on terms acceptable to us. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. We cannot assure you that we will be able to raise any such additional funding or, if available, that such funding would be on favorable terms.

We have incurred substantial losses since inception, and expect to continue to incur net losses for at least the next few years based on our current plans to engage in new development activities to broaden or enhance our product pipeline. To date, we have funded our operations primarily through private placements of preferred stock and debt financing, as well as through revenue generated from the sale of products and provision of services.

In August 2014, we entered into a loan and security agreement with Oxford. (See Note10 of the Notes to Financial Statements included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2016.) This loan contains various covenants. If we breach any of these covenants or we are unable to make a required payment of principal or interest, or experience a material adverse change to our business, it could result in a default under the loan.  Upon the occurrence of an event of default under the loan, Oxford could elect to declare all amounts outstanding to be immediately due and payable. If we are unable to repay those amounts, Oxford could proceed against the collateral granted to them to secure such indebtedness. We have pledged substantially all of our assets, other than our intellectual property, as collateral under the loan.

Off-Balance Sheet Arrangements

As of March 31, 2016, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Recent Accounting Pronouncements

See Note 2 of our Notes to Condensed Financial Statements included in this report for recent accounting pronouncements, including the expected dates of adoption and estimated effects on our financial statements.

 

 

In the normal course of business, our financial position is routinely subject to a variety of risks, including market risk associated with interest rate movement. We regularly assess these risks and have established policies and business practices intended to protect against these and other exposures. As a result, we do not anticipate material potential losses in these areas.  

As of March 31, 2016, we had cash and cash equivalents of $6.4 million, which consisted of cash and highly liquid money market funds.

During the three months ended March 31, 2016, there were no material changes to our market risk disclosures as set forth under “Quantitative and Qualitative Disclosure About Market Risk” in our 2015 Annual Report.

As noted above in Item 2, we entered into two forward contracts to purchase an aggregate of 1,000,000 Euros in order to reduce our foreign currency risk associated with the License and Supply Agreement with BRAHMS.  Under the terms of the agreement, we paid 750,000 Euros in April 2014 and another 500,000 Euros in March 2015.  We paid an additional 500,000 Euros in development and regulatory milestones in June 2015 and may pay up to a total of 1,000,000 Euros in post-launch commercialized milestones and royalties on future sales.  The forward contracts are in two tranches: 500,000 Euros in March 2015 and an additional 500,000 Euros in September 2015.  The latter contract was offset by a spot contract in June 2015, when the developmental milestone was reached.  The forward contract for March 2015 offset the payment due to BRAHMS in March 2015. The forward contracts do not qualify as a cash flow hedge.  At March 31, 2016, there were no forward contracts outstanding.

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Evaluation of Disclosure Controls and Procedures

We have performed an evaluation under the supervision and with the participation of our management, including our principal executive and principal financial officers, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures were effective as of March 31, 2016 to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Controls

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our disclosure controls and procedures and internal control over financial reporting may not prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Projections of any evaluation of the effectiveness of a control system to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure system are met.

 

 

 

 

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PART II – OTHER INFORMATION

 

We are, from time to time, subject to various claims and legal actions during the ordinary course of business. We are not currently party to any material litigation or material legal proceedings.

 

Investing in our common stock involves a very high degree of risk. You should carefully consider the risks described below and all of the other information in our filings under the Exchange Act before making any investment decisions regarding our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we do not know of or that we currently deem immaterial may also negatively affect our business, financial condition, operating results, and prospects. In that case, the market price of our common stock could decline, and you could lose all or part of your investment.

Risks Relating to Our Business Operations

Our sales of our PLAC ELISA products are characterized by a high degree of customer concentration. The loss of one or more of these customers or a decline in revenue from one or more of our key customers could have a material adverse effect on our business, financial condition, and results of operations.

Sales to a limited number of customers account for a significant portion of our revenue and accounts receivable. Our top five customers accounted for 84% and 73% of our accounts receivable as of March 31, 2016 and March 31, 2015, respectively, and 83% and 74% of our total revenues for the three months ended March 31, 2016 and 2015, respectively. Our dependence on, and the identity of, our key customers may vary from period to period as a result of competition among our customers, and changes in individual customers’ purchases of our products. Our former largest customer, Health Diagnostics Laboratory Inc. (“HDL”), filed for bankruptcy in June 2015, and as the HDL bankruptcy process continues we are unable to predict whether we can collect our outstanding accounts receivable for their prior purchases.  Moreover, we are unable to predict whether post-bankruptcy orders will continue with the sale of the majority of HDL assets to True Health Diagnostics, LLC, and if continuing, the timing and purchase levels.  Additionally, Atherotech, another of our top five customers in 2015 and 2014, declared Chapter 7 bankruptcy in March 2016. Atherotech’s filing of bankruptcy has no impact on our 2015 revenue or receivables. We are in the process of creating an additional distribution channel for our products through national laboratories, major hospital systems, regional reference laboratories, and physician office laboratories serviced through national distributors for PLAC Activity, but in the near term we expect to continue to have revenues concentrated with a number of large laboratory customers.  The loss of, material reduction in sales volume to, or significant adverse change in our relationship with any of our key customers could have a material adverse effect on our revenue in any period and may result in significant annual and quarterly revenue variations.

We have engaged in limited sales and marketing activities for our PLAC Activity product.

PLAC Activity may never gain significant acceptance in the marketplace and therefore never generate substantial revenue or profits. As is the case with all novel biomarkers, we must penetrate the market and generate demand with physician education and awareness programs. Publication in peer review journals of results from outcome studies using our products will be an important consideration in the adoption by physicians. Our ability to successfully commercialize PLAC Activity and other diagnostic products and services will depend on many factors, including:

In addition, the timing and uptake from contracting to orders and revenue is highly unpredictable and we may be unable to successfully predict growth in revenues or profits, if any, from PLAC Activity and any new products.  These and other factors may present obstacles to commercial acceptance of our products, and we may need to devote substantial time and money to surmount these obstacles, and the result might not be successful.

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We rely on two manufacturers to supply materials for our PLAC ELISA Test and a limited number of vendors and suppliers to obtain materials for our PLAC Activity Test in the manufacture of our products. If these manufacturers are unable to deliver our products or these vendors and suppliers are unable to deliver our materials in a timely manner, or at all, we may be unable to meet demand, which would have a material adverse effect on our business.

We have qualified two third-party manufacturers for our PLAC ELISA Test, and we intend to order regularly from both of these manufacturers in the future. We rely on our third-party manufacturers to maintain their manufacturing facility in compliance with FDA and other federal, state and/or local regulations including health, safety and environmental standards. If they fail to maintain compliance with FDA or other critical regulations, they could be ordered to curtail operations, which would have a material adverse impact on our business. In addition, increases in the prices we pay our manufacturer, or lapses in quality, such as failure to meet our specifications or the requirements of the Quality System Regulations (“QSR”) and other regulatory requirements, could materially adversely affect our business. Any manufacturing defect or error discovered after our products have been produced and distributed could result in significant consequences, including costly recall procedures and damage to our reputation. Our ability to replace the existing manufacturers may be difficult, because the number of potential manufacturers is limited.

We also currently depend on certain key vendors and suppliers of materials that are essential for the manufacture of our products. Any interruption in the supply of materials, or the inability to obtain materials from alternate sources in a timely manner, could impair our ability to supply our products and to meet the demands of our customers, which would have a material adverse effect on our business.

We manufacture PLAC Activity Test on-site in South San Francisco, California and we could experience supplier, process, quality control and shipping problems.

We have been manufacturing PLAC Activity Test in-house since January 2012. We are dependent on the expertise of our personnel for ensuring the production and quality of the PLAC Activity Test. We could observe performance deviations that have not been apparent during development, including performance and stability of PLAC Activity. The discovery of such performance deviations or of any manufacturing problems may adversely affect our sales in the U.S. and other countries.

If third-party payers do not reimburse our customers for the use of our clinical diagnostic products or if they reduce reimbursement levels, our ability to sell our products could be harmed.

We sell our products primarily through distributors and to laboratory customers, substantially all of which receive reimbursement for the health care services they provide to their patients from third-party payers, such as Medicare, Medicaid and other government programs, private insurance plans and managed care programs. Both the PLAC ELISA and the PLAC Activity Tests are covered by Medicare. Third-party payers are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for medical products and services. Accordingly, third-party payers are increasingly challenging the prices charged for diagnostic tests. Most of these third-party payers may deny coverage and reimbursement if they determine that a product was not medically necessary or not used in accordance with cost-effective treatment methods, or was used for an unapproved indication.  

In the U.S., third-party payers generally require billing codes on claims for reimbursement that describe the services provided. For laboratory services, the American Medical Association (“AMA”) establishes most of the billing codes using Current Procedural Terminology (“CPT”) codes. Each third-party payer generally develops payment amounts and coverage policies for their beneficiaries or members that ties to the CPT code established for the laboratory test and, therefore, coverage and reimbursement may differ by payer even if the same billing code is reported for claims filing purposes. Currently, the tests performed by our assays are described by a specific CPT code for Lp-PLA₂. If our customers are not reimbursed for our products, they may reduce or discontinue purchases of our products, which would cause our revenues to decline. Lower-than-expected, or decreases in, reimbursement amounts for tests performed may negatively impact our ability to price our products successfully.  

On April 1, 2014 the Protecting Access to Medicare Act of 2014 (PAMA) was signed into law. It includes the most extensive reform of the Medicare Clinical Fee Schedule (CLFS) since it was established in 1984. Section 216 of PAMA creates a new Section 1834A of the Social Security Act which contains many of the CLFS reforms. Starting on January 1, 2017, most rates on the CLFS will be derived from private payer rates for laboratory services. It is not clear how these changes in rates will impact us, but reduced rates could materially impact our future revenues.  On September 25, 2015, Centers for Medicare & Medicaid Services, or CMS, released a proposed rule for the Medicare Clinical Diagnostic Laboratory Tests Payment System, which lays out the regulations and processes for the implementation of the PAMA law.  As expected, the CMS has proposed to begin the establishment of payment rates for clinical laboratory tests based on the currently available payment rates from commercial payers, effective January 1, 2017.  Per the PAMA law and the proposed rule, regardless of the payment rates indicated by the commercial payer data provided to the CMS, the maximum amount an individual payment for a clinical laboratory diagnostic test can be reduced is 10% for payments effective January 2017. It is not clear how these changes in rates will impact us, but reduced rates could materially impact our future revenues.

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Our business, in particular the growth of our business, is dependent on our ability to successfully develop and commercialize novel diagnostic products and services based on biomarkers.

As an example, in March 2014, we entered into an exclusive licensing and supply agreement with BRAHMS to develop and commercialize three independent biomarkers to aid in risk prediction and prognosis for heart failure. These new biomarker product opportunities represent our future product pipeline.  In the event we fail to meet certain diligence requirements under the license, our exclusive U.S. right for these products may be lost, which would have an adverse effect on our product pipeline and sales.  

The requirements of being a public company have required and will continue to require significant resources, increase our costs and occupy our management, and we may be unable to comply with these requirements in a timely or cost-effective manner.

As a company with public reporting responsibilities, we have incurred and will continue to incur significant legal, accounting, and other expenses related to, among other things:

If we are successful in our efforts to uplist to a national securities exchange or if we cease to be a smaller reporting company under applicable SEC regulations, we will also be subject to additional reporting and compliance requirements. Compliance with these rules and regulations has and will cause us to incur significant legal and financial compliance costs. In addition, we are required to implement and maintain effective internal control over financial reporting and disclosure. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting. Our testing may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. We have incurred and expect to continue to incur significant expense and devote substantial management effort toward ensuring compliance with these requirements. Moreover, if we are not able to comply with these requirements in a timely manner, or if we identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our common stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would entail expenditure of additional financial and management resources.

Natural disasters, including earthquakes, may damage our facilities.

Our corporate, research and manufacturing facilities are located in the San Francisco Bay Area of California, in close proximity to known earthquake fault zones. As a result, these facilities and any clinical samples kept in these facilities are susceptible to damage from earthquakes and other natural disasters, such as fires, floods and similar events. Although we maintain general business insurance against fires and some general business interruptions, there can be no assurance that the scope or amount of coverage will be adequate in any particular case. Insurance specifically for earthquake risks is not available on commercially reasonable terms.

Failure in our information technology and storage systems could significantly disrupt the operation of our business.

Our ability to execute our business plan depends, in part, on the continued and uninterrupted performance of our information technology (“IT”) systems. IT systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our IT systems, sustained or repeated system failures that interrupt our ability to generate and maintain data could adversely affect our ability to operate our business.

Our future success depends on our ability to effectively recruit and retain our senior management and other key employees and attract, retain and motivate qualified personnel.

We depend on the efforts and abilities of our senior management, our research and development and sales and marketing staff and a number of other key management, support, technical and administrative services personnel. In particular, we rely on the experience of our senior management, who have specific knowledge of our business and industry that is difficult to replace. If we are unable to attract and retain highly-qualified senior management, our business may be adversely affected. Effective succession planning is also important to our long-term success. Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution.

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Competition for experienced, high-quality personnel exists, particularly in the San Francisco Bay Area, and we cannot assure you that we can continue to recruit and retain such personnel. Our failure to hire, train and retain qualified personnel would impair our ability to manage our business effectively and develop new products.

Significant disruptions of information technology systems or breaches of data security could adversely affect our business.

Our business is increasingly dependent on critical, complex and interdependent information technology systems, including Internet‑based systems, to support business processes as well as internal and external communications. The size and complexity of our computer systems make them potentially vulnerable to breakdown, malicious intrusion and computer viruses that may result in the impairment of key business processes.

In addition, our systems are potentially vulnerable to data security breaches—whether by employees or others—that may expose sensitive data to unauthorized persons. Such data security breaches could lead to the loss of trade secrets or other intellectual property, or could lead to the public exposure of personally identifiable information (including sensitive personal information) of our employees, collaborators, and others. A data security breach or privacy violation that leads to disclosure or modification of or prevents access to patient information, including personally identifiable information or protected health information, could harm our reputation, compel us to comply with federal and/or state breach notification laws, subject us to mandatory corrective action, require us to verify the correctness of database contents and otherwise subject us to liability under laws and regulations that protect personal data, resulting in increased costs or loss of revenue. If we are unable to prevent such data security breaches or privacy violations or implement satisfactory remedial measures, our operations could be disrupted, and we may suffer loss of reputation, financial loss and other regulatory penalties because of lost or misappropriated information. In addition, these breaches and other inappropriate access can be difficult to detect, and any delay in identifying them may lead to increased harm of the type described above. Moreover, the prevalent use of mobile devices that access confidential information increases the risk of data security breaches, which could lead to the loss of confidential information, trade secrets or other intellectual property. While we have implemented security measures to protect our data security and information technology systems, such measures may not prevent such events.

Such disruptions and breaches of security could have a material adverse effect on our business, financial condition and results of operations.

Risks Relating to Government Regulations

We are subject to extensive regulation by the FDA and other regulatory agencies, and failure to comply with such regulation could have a material adverse effect on our business, financial condition, and results of operations.

Our business and our medical device products, including our PLAC Tests, are subject to extensive regulation by the FDA and other federal, state, and foreign regulatory agencies. These laws and regulations govern many aspects of our products and operations, and the products and operations of our suppliers and distributors, including premarket clearance and approval, design, development and manufacturing, labeling, packaging, safety and adverse event reporting, recalls, storage, advertising, promotion, sales and record keeping. Failure to comply with these laws and regulations could result in, among other things, warning letters, civil or criminal penalties, injunctions, delays in clearance or approval of our products, withdrawal of cleared products, recalls, and other operating restrictions, all of which could cause us to incur significant expenses.

Before we can market or sell a new product or a significant modification to an existing product in the U.S., we must obtain either clearance under Section 510(k) of the FDA, or approval of a pre-market approval application (“PMA”), from the FDA, unless an exemption applies. In the 510(k) clearance process, the applicant must demonstrate to the FDA’s satisfaction that a proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, with respect to intended use, technology and safety and effectiveness, in order to obtain clearance from the FDA to market the proposed device. Clinical data is sometimes required to support substantial equivalence. The PMA pathway requires an applicant to demonstrate the safety and effectiveness of the device based, in part, on extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing, and labeling data. The FDA can delay, limit, or deny clearance or approval of a device for many reasons, including:

Further, any modification we make to a 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design, or manufacture, would require us to seek a new 510(k) clearance or, possibly,

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approval of a PMA. The FDA requires every manufacturer to make this determination in the first instance, but the FDA may review any manufacturer’s decision. The FDA may not agree with our decisions regarding whether new clearances or approvals are necessary for changes to 510(k) cleared devices. If the FDA disagrees with our determination and requires us to submit new 510(k) notifications or PMAs for modifications to our previously cleared products for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties.

Even when a product reaches the market, the subsequent discovery of previously unknown problems, such as material deficiencies or defects in design, labeling, or manufacture, or a potential unacceptable risk to health, with a product may result in restrictions on the product, including recall or withdrawal of the product from the market, and/or a requirement to submit a new 510(k) submission or PMA for the product in order to support continued marketing.

We and our suppliers are subject to inspections by the FDA and other regulatory agencies, and deficiencies identified during these audits could have a material adverse effect on our results of operations.

Once regulatory clearance or approval has been granted, the product and its manufacturer are subject to continual review by the FDA and other regulatory authorities. For example, we are subject to routine inspection by the FDA and certain state agencies for compliance with the QSR, which establishes the good manufacturing practices for medical devices, and Medical Device Reporting regulations, which require us to report to the FDA any incident in which one of our products may have caused or contributed to a death or serious injury or malfunctioned in a way that could cause death or serious injury. Although we believe that we have adequate processes in place to ensure compliance with these and other post-market requirements, the FDA or other regulatory bodies could disagree and take enforcement action, including issuing warning letters, untitled letters, fines, injunctions, consent decrees or civil penalties, or imposing operating restrictions or partial suspension or total shutdown of manufacturing, selling or exporting our products, among other sanctions, if it concludes that we are out of compliance with applicable regulations or if it concludes that our products pose an unacceptable risk to health or are otherwise deficient in design, labeling or manufacture. Further, the ability of our suppliers to supply critical components or materials and of our distributors to sell our products could be adversely affected if their operations are determined to be out of compliance. The FDA and other regulatory bodies could also require us to recall products if we fail to comply with applicable regulations. Such actions by the FDA and other regulatory bodies would adversely affect our revenues and results of operations.

We are and will be subject to new regulations, which could have a material adverse effect on our results of operations.

Many national, regional, and local laws and regulations, including the healthcare reform legislation, have not been fully implemented by the regulatory authorities or adjudicated by the courts, and these provisions are open to a variety of interpretations. In the ordinary course of business, we must frequently make judgments with respect to compliance with applicable laws and regulations. If regulators subsequently disagree with the manner in which we have sought to comply with these regulations, we could be subjected to various sanctions, including substantial civil and criminal penalties, as well as product recall, seizure or injunction with respect to the sale of our products. Such sanctions could severely impair our reputation within the industry and any limitation on our ability to manufacture and market our products could have a material adverse effect on our business. In addition, in January 2011, the FDA announced twenty-five action items it intends to take in reforming the 510(k) premarket review program. The FDA issued its recommendations and proposed action items in response to concerns from both within and outside of the FDA about the 510(k) program. The FDA is in the process of issuing guidance on the specific modifications or clarifications that the FDA intends to make to its guidance, policies, and regulations pertaining to the review and regulation of devices such as ours which seek and receive marketing clearance through the 510(k) process. The FDA’s announced action items signal that additional regulatory requirements are likely. The FDA intends to issue a variety of draft guidance and regulations which, when fully implemented, could impose additional regulatory requirements upon us, which could delay our ability to obtain new clearances, increase the cost of compliance, or restrict our ability to maintain our current 510(k) clearances.

Healthcare reform and its restrictions on coverage and reimbursement may adversely affect our business.

Legislation both proposed and passed has had an impact on reimbursement levels for diagnostic services, including laboratory tests. For instance, in March 2010, President Barack Obama signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “PPACA”), which makes a number of substantial changes to the way health care is financed by both governmental and private insurers. Among other things, the PPACA mandates a reduction in payments for clinical laboratory services paid under the Medicare Clinical Laboratory Fee Schedule of 1.75% for the years 2011 through 2015. A productivity adjustment also is made to the fee schedule payment amount. In addition, on February 22, 2012, President Obama signed the Middle Class Tax Relief and Job Creation Act of 2012, which, among other things, mandated an additional change in Medicare reimbursement for clinical laboratory services. This legislation requires a rebasing of the Medicare clinical laboratory fee schedule to effect a 2% reduction in payment rates otherwise determined for 2013, which in turn will serve as a base for 2014 and subsequent years. Further, with respect to the PPACA changes, the legislation establishes an Independent Payment Advisory Board

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(“IPAB”) to reduce the per capita rate of growth in Medicare spending. The IPAB has broad discretion to propose policies, which may have a negative impact on payment rates for services, including clinical laboratory services, beginning in 2016, and for hospital services beginning in 2020. PPACA also provided for an excise tax on medical devices and required to disclose all transfers of values to physicians and physician teaching institutions under the sunshine provisions of the PPACA. On December 18, 2015, President Obama signed into law the "Protecting Americans from Tax Hikes Act of 2015." The Act imposes a two-year moratorium on the medical device excise tax effective for sales made after December 31, 2015.  

The full impact on our business of the PPACA and other government spending limitations resulting from broader cutbacks in government spending or reimbursement is uncertain. Levels of reimbursement may decrease in the future, and future legislation, regulation or reimbursement policies of third-party payers may adversely affect the demand for and price levels of our products.

PAMA included a substantial new payment system for clinical laboratory tests under the Clinical Laboratory Fee Schedule.  Under PAMA, Medicare payment rates for tests will be equal to the volume-weighted median of the private payer payment rates for a test. The payment rates calculated under PAMA will be effective starting January 1, 2017, and will be reviewed every three years, based on private payer payment rates and volumes for their tests.  On September 25, 2015, CMS released a proposed rule for the Medicare Clinical Diagnostic Laboratory Tests Payment System, which lays out the regulations and processes for the implementation of the PAMA law.  As expected, CMS has proposed to begin the establishment of payment rates for clinical laboratory tests based on the currently available payment rates from commercial payers, effective January 1, 2017.  Per the PAMA law and the proposed rule, regardless of the payment rates indicated by the commercial payer data provided to CMS, the maximum amount an individual payment for a clinical laboratory diagnostic test can be reduced is 10% for payments effective January 2017. We believe that, starting in 2017 and over time, our customers could see decreased reimbursement from Medicare for running our PLAC Tests which may impact the price at which we sell them our kits and negatively impact our revenue growth.

We are subject to healthcare laws, regulation and enforcement, and our failure to comply with those laws could have a material adverse effect on our results of operations and financial condition.

We are also subject to healthcare fraud and abuse regulation and enforcement by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

If our operations are found to be in violation of any of the laws described above or any other governmental laws or regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, the exclusion from participation in federal and state healthcare programs, or imprisonment, any of which could adversely affect our ability to operate our business and our financial results.

Risks Relating to Liquidity and Additional Capital

Our current debt financing contains restrictions that limit our flexibility in operating our business, and our lender may accelerate repayment of amounts outstanding under certain circumstances.

In September 2014, we entered into a Loan and Security Agreement with Oxford (the “Loan and Security Agreement”). The Loan and Security Agreement contains a number of affirmative and restrictive covenants. These covenants limit our ability to, among other things:

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If we breach any of these covenants, are unable to make a required payment of principal or interest, or experience a material adverse change to our business, it could result in an event of default under the Loan and Security Agreement. Upon the occurrence of an event of default under the Loan and Security Agreement, Oxford could elect to declare all amounts outstanding to be immediately due and payable and exercise remedies, including removing the existing cash balances from our bank accounts necessary to maintain liquidity. If we were unable to repay the amounts due under the Loan and Security Agreement, Oxford could proceed against the collateral granted to it to secure such indebtedness. We have pledged substantially all of our assets, other than our intellectual property, as collateral under the loan.  Any event of default under the Loan and Security Agreement could significantly jeopardize our business and ability to continue as a going concern.

We will need to raise additional capital to support our operations in the future.

We will require additional funds to uplist our Common Stock from the OTC Bulletin Board to NASDAQ and to broadly commercialize our products and to develop new products. Our ability to fund our operations and to conduct the required development activities related to any new product candidates will be significantly limited if we are unable to obtain the necessary capital. We expect to seek to raise funds through equity or debt offerings, bank facilities, or other sources of capital. Additional funding may not be available when needed or on terms acceptable to us. The consent of Oxford will likely be required for additional debt or other financings. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. We cannot assure you that we will be able to raise any such additional funding, and any such failure may negatively impact our business and operations.

Our future capital needs are uncertain and our former independent registered public accounting firm has expressed in its report on our 2015 audited financial statements a substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital or obtain loans from financial institutions and our operations could be curtailed if we are unable to obtain the required additional funding when needed.  We may not be able to do so when necessary, and/or the terms of any financings may not be advantageous to us.

Our financial statements for the three months ended March 31, 2016 included in Item 1 of this quarterly report on Form 10-Q have been prepared assuming we will continue to operate as a going concern.  However, due to our ongoing operating losses, negative cash flows from operations, and our accumulated deficit, there is substantial doubt about our ability to continue as a going concern.  Because we continue to experience net operating losses, our ability to continue as a going concern is subject to our ability to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities or obtaining loans from financial institutions.  Our continued net operating losses increase the difficulty in completing such sales or securing alternative sources of funding, and there can be no assurances that we will be able to obtain such funding on favorable terms or at all.  If we are unable to obtain sufficient financing from the sale of our securities or from alternative sources, we may be required to reduce, defer or discontinue certain of our research and development activities and operating activities or we may not be able to continue as a going concern.  As a result, our former independent registered public accounting firm expressed a substantial doubt regarding our ability to continue as a going concern in its auditors’ report on the financial statements included in our Annual Report filed on March 29, 2016.  Our financial statements do not include any adjustments that might result from the outcome of the uncertainty regarding our ability to continue as a going concern. If we cannot continue as a going concern, our stockholders may lose their entire investment in the common stock.  Future reports from our independent registered public accounting firm may also contain statements expressing doubt about our ability to continue as a going concern.

We have a history of losses, we expect to incur losses for at least the next few years, and we may never achieve profitability.

We have incurred substantial net losses since our inception. Our accumulated deficit was $217.2 million at March 31, 2016. For the three months ended March 31, 2016 and 2015, we incurred net losses of $1.7 million and $1.0 million, respectively. We expect to continue to incur net losses for at least the next few years based on our current plans to engage in new development activities to broaden our product pipeline. If we are unable to achieve profitability, or if the time required to achieve profitability is longer than we anticipate, we may not be able to continue our business.

Moreover, we are solely dependent on our two PLAC Tests for revenues. We expect that the PLAC Tests will account for a substantial portion of our revenue for the foreseeable future. We do not know if both of our PLAC Tests will be accepted broadly by the market over the long-term and it is possible that the demand for the product may decline over time, and any quarter or other period of profitability may not be sustainable without continued growth in sales of both of our products. Even with our 510(k) FDA clearance, we may never be able to successfully commercialize PLAC Activity in the U.S. Any decline in demand or failure of our PLAC Tests

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to penetrate current or new markets significantly could have a material adverse effect on our business, financial condition, and results of operations. Moreover, the sale of PLAC Tests may not continue to stabilize, and any reduction in demand from one or more of our major customers may have a significant impact on our ability to achieve and maintain profitability.

Risks Relating to Intellectual Property If the combination of patents, trade secrets, trademarks, and contractual provisions that we rely on to protect our intellectual property proves inadequate, our ability to successfully commercialize our products will be harmed and we may never be able to operate our business profitably.

Our success depends, in large part, on our ability to protect proprietary discoveries, technology, brands, creative works, and diagnostic tests under the patent and other intellectual property laws of the U.S. and other countries, so that we can seek to prevent others from unlawfully using our proprietary inventions and information. We hold issued patents in the U.S. covering PLAC ELISA and PLAC Activity. Certain patents for PLAC ELISA and PLAC Activity will expire in 2016.  We continue to review new patent applications but there can be no assurance that these patent applications will be used or any issued patents will maintain a competitive advantage for our PLAC ELISA and PLAC Activity products.

While there can be no assurance that other patents or our other intellectual property or regulatory barriers may further protect our PLAC ELISA and PLAC Activity products, we believe that there are manufacturing and regulatory barriers to competition that may limit the ability of potential competitors to achieve a clinical performance level comparable to our PLAC ELISA and PLAC Activity products.

We have also filed or have licensed rights to a number of patent applications that are in an early stage of prosecution, and we cannot make any assurances that any of the pending patent applications will become issued and enforceable patents. In addition, due to technological changes that may affect our proposed products or judicial interpretation of the scope of our patents, our proposed products might not, now or in the future, be adequately covered by our patents.

Furthermore, U.S. Supreme Court decisions in cases involving patents claiming genetic materials and information, and diagnostic products and methods based on genetic materials and information may impact our business. For example, on March 20, 2012, in Mayo Collaborative Services, DBA Mayo Medical Laboratories, et al. v. Prometheus Laboratories, Inc., the U.S. Supreme Court issued an opinion holding that the processes claimed by Prometheus’ patent were not patent eligible because these processes—determining the relationships between concentrations of certain metabolites in the blood and the likelihood that a thiopurine drug dosage will prove ineffective or cause harm—merely apply laws of nature and are not themselves patentable. On June 13, 2013 in Association for Molecular Pathology et al.v. Myriad Genetics, Inc., et al. the U.S. Supreme Court issued an opinion holding that a naturally occurring DNA segment is a product of nature and not patent eligible merely because it has been isolated, but cDNA is patent eligible because it is not naturally occurring. It is unknown what impact these decisions will have with respect to our patents.

We license key intellectual property from GlaxoSmithKline and ICOS, and our contractual relationships have certain limitations.

We have an exclusive license from GlaxoSmithKline (formerly SmithKlineBeecham plc) and a co-exclusive license from ICOS Corporation (“ICOS”), subsequently acquired by Eli Lilly and Company, to practice and commercialize technology covered by several issued and pending U.S. patents and their foreign counterparts. Some of these licensed patents covering composition of matter and cardiovascular diagnostic claims have different expiration dates from 2015 through 2016, which may limit our ability to generate future revenue from products claimed under those exclusive and co-exclusive licenses.

Several of our agreements with each of GlaxoSmithKline and ICOS provide licenses to use intellectual property that is important to our business, and we may enter into additional agreements in the future with GlaxoSmithKline or with other third parties that change licenses to valuable technology. Current licenses impose, and future licenses may impose, various commercialization, milestones and other obligations on us, including the obligation to terminate our use of patented subject matter under certain circumstances. If a licensor becomes entitled to, and exercises, termination rights under a license, we could lose valuable rights and our ability to develop our current and future products. Our business may suffer if any current or future licenses terminate, if the licensors fail to abide by the terms of the license or fail to prevent infringement by third parties, if the licensed patents or other rights are found to be invalid or if we are unable to enter into necessary licenses on acceptable terms.

Any inability to adequately protect our proprietary technologies and product candidates could harm our competitive position.

We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. We plan to continue to apply for patents covering our technologies and products as we deem appropriate. We cannot make assurances that our pending patent applications will issue as patents and, if they do, whether the scope of such claims will be sufficiently broad to prevent third parties from utilizing our technologies, commercializing our discoveries, or developing competing products. Any patents we currently hold, or obtain in the future, may be held invalid or unenforceable or may not be sufficiently broad to prevent others from utilizing our

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technologies, commercializing our discoveries, or developing competing technologies and products. Moreover, expiration or invalidation of our issued patents may impact our ability to maintain the competitive position of our products. Furthermore, third parties may independently develop similar or alternative technologies or design around our patented technologies. Third parties may challenge or invalidate our patents, or our patents may fail to provide us with any competitive advantage.

We have rights to patents and patent applications owned by licensors that provide important protection on the composition of matter and utility of our products, product candidates and product pipeline. We do not, however, directly control the prosecution and maintenance of all of these patents. A licensor may not fulfill its obligations under a license and may allow these patents to go abandoned or may not pursue meaningful claims for our products. Also, while the U.S. Patent and Trademark Office has issued patents covering diagnostic utility or methods, we do not know whether or how courts will enforce these patents. If a court finds our patents for these types of inventions to be invalid, unenforceable or interprets them narrowly, the benefits of our patent strategy may not materialize. If any or all of these events occur, they could diminish the value of our intellectual property.

Risks Relating to Our Stock

Our stock price is likely to continue to be volatile.

Currently, our common stock is quoted on the OTC Bulletin Board. Stocks traded “over the counter” typically are subject to greater volatility than stocks traded on stock exchanges, such as the NASDAQ Stock Market, due to the fact that OTC trading volumes are generally significantly lower than those on stock exchanges. This lower volume may allow a relatively few number of stock trades to greatly affect the stock price, particularly where the trading price of the stock price is relatively low. In addition, the stock markets and the markets for medical diagnostics and biotechnology stocks in particular, have experienced volatility that has often been unrelated to the operating performance of particular companies. Moreover, our stockholders and Board approved a 15-for-1 reverse stock split that resulted in increased volatility due to our higher stock price as adjusted for the reverse stock split.  For example, our stock price at March 31, 2016 declined by more than 70% since July 1, 2015, the first trading day following the effectiveness of the reverse stock split.  The trading price of our common stock has been and is likely to continue to be extremely volatile. Some of the many factors that may cause the market price of our common stock to fluctuate include, in no particular order:

These broad market fluctuations may adversely affect the trading price of our common stock. Investors may not be able to sell when they desire due to insufficient buyer demand and may realize less than, or lose all of, their investment.

We are not currently listed on a national exchange and there can be no assurance we will ever be listed.

Currently, our common stock is quoted on the OTC Bulletin Board under the symbol DDXS. We do not know when, if ever, our common stock will be listed on a national stock exchange. In order to be eligible for relisting or listing, we must meet the initial listing criteria for The NASDAQ Stock Market or another national exchange, including a minimum per share price. We currently do not meet these requirements and cannot assure you that we will be able to satisfy these requirements, or if we satisfy them, that we will be able to maintain compliance with them.

Our business and operations could be negatively affected as a result of actions of activist stockholders.  

Campaigns by stockholders to effect changes at publicly traded companies are sometimes led by investors through various corporate actions, including Board nominations and proxy contests. We may become subject to one or more campaigns by stockholders who desire to increase stockholder value in the short term. If we become engaged in a proxy contest with an activist stockholder in the future, our business and operations could be adversely affected as responding to such contests or other activist stockholder actions

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would be costly and time-consuming, and we would expect that such actions would disrupt our operations and divert the attention of management and our employees from executing our strategies and plans. In addition, if individuals are elected to our Board with a specific agenda or without relevant experience or expertise, it may adversely affect the ability of the Board to function effectively and the management team to implement effectively and in a timely manner our strategic plans, which are focused on building shareholder value. Any perceived uncertainties around our future direction from shareholder activism or changes to the Board may lead to the perception of a change in the direction of our business, or instability or lack of continuity for our products. These perceptions may cause concerns for our customers or be exploited by our competitors.  As a result, we could experience significant volatility and a decline of our stock price, the loss of potential business opportunities with current and potential new customers, and difficulties in attracting and retaining qualified personnel.  For example, we entered into a settlement agreement with an activist stockholder pursuant to which we nominated, and the stockholders elected, John Sperzel III, a mutually acceptable candidate for election at our 2015 annual meeting of stockholders. We also recently received an activist stockholder notice from Meson Capital LLP. There can be no assurance that we will not be subject to additional campaigns by other stockholders now or in the future.

Our charter documents and Delaware law may discourage an acquisition of our Company.

Provisions of our certificate of incorporation, bylaws, and Delaware law could make it more difficult for a third-party to acquire us, even if doing so would be beneficial to our stockholders. For example, we may issue shares of preferred stock in the future without stockholder approval and upon such terms as our Board of Directors may determine. Our issuance of this preferred stock could have the effect of making it more difficult for a third-party to acquire, or of discouraging a third-party from acquiring, a majority of our outstanding stock. Our bylaws also provide that special stockholder meetings may be called only by our Board of Directors, Chairperson of the Board of Directors, or by our Chief Executive Officer, with the result that any third-party takeover not supported by the Board of Directors could be subject to significant delays and difficulties.

 

None.

 

None

 

Not applicable

 

None

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

 

 

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EXHIBIT INDEX

 

 

 

 

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