Exhibit 99.2
diaDexus, Inc. Balance Sheets
As of December 31, 2009 and 2008
| (in thousands of dollars, except share and per share data) | 2009 | 2008 | ||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 2,539 | $ | 11,580 | ||||
| Available-for-sale investments | 2,262 | 3,005 | ||||||
| Accounts receivable (net of allowance for doubtful accounts of $0 and rebate reserve of $46, respectively, and $8 and $66 at December 31, 2009 and 2008, respectively) | 1,637 | 1,836 | ||||||
| Accounts receivable from related party | 295 | 40 | ||||||
| Inventory | 221 | 137 | ||||||
| Prepaid expenses and other current assets | 618 | 733 | ||||||
| Total current assets | 7,572 | 17,331 | ||||||
| Property and equipment, net | 1,366 | 2,086 | ||||||
| Restricted cash | 400 | 400 | ||||||
| Other assets | 130 | 130 | ||||||
| Total assets | $ | 9,468 | $ | 19,947 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 273 | $ | 502 | ||||
| Accrued liabilities | 1,922 | 2,436 | ||||||
| Deferred revenue, current portion | 318 | 328 | ||||||
| Deferred rent, current portion | 194 | 142 | ||||||
| Notes payable, current portion | 3,498 | 3,840 | ||||||
| Total current liabilities | 6,205 | 7,248 | ||||||
| Deferred revenue, net of current | 1,140 | 1,446 | ||||||
| Deferred rent, net of current | 103 | 296 | ||||||
| Notes payable, net of current | - | 3,498 | ||||||
| Warrant liability | 36 | 328 | ||||||
| Total liabilities | 7,484 | 12,816 | ||||||
| Commitments and contingencies (Note 8) | ||||||||
| Stockholders' equity | ||||||||
| Preferred stock, $0.01 par value - 82,326,283 shares authorized, 80,277,609 shares issued and outstanding at December 31, 2009 and 2008 (Liquidation value $176,752 at December 31, 2009 and 2008) | 803 | 803 | ||||||
| Common stock, $0.01 par value - 170,000,000 shares authorized, 1,814,494 and 1,760,092 shares issued and outstanding at December 31, 2009 and 2008, respectively | 18 | 18 | ||||||
| Additional paid-in capital | 180,178 | 180,028 | ||||||
| Accumulated other comprehensive income | - | 15 | ||||||
| Accumulated deficit | (179,015 | ) | (173,733 | ) | ||||
| Total stockholders' equity | 1,984 | 7,131 | ||||||
| Total liabilities and stockholders' equity | $ | 9,468 | $ | 19,947 | ||||
The accompanying notes are an integral part of these financial statements.
2
diaDexus, Inc.
Statement of Operations
Years Ended December 31, 2009 and 2008
| (in thousands of dollars) | 2009 | 2008 | ||||||
| Revenues | ||||||||
| License revenue | $ | 429 | $ | 315 | ||||
| Royalty revenue | 4,208 | 4,058 | ||||||
| Product sales | 5,826 | 5,099 | ||||||
| Product sales to related party | 1,469 | 160 | ||||||
| Total net revenues | 11,932 | 9,632 | ||||||
| Costs and operating expenses | ||||||||
| Product costs | 3,452 | 2,377 | ||||||
| Research and development | 3,705 | 4,599 | ||||||
| Sales and marketing | 6,650 | 8,400 | ||||||
| General and administrative | 2,803 | 3,230 | ||||||
| Total operating expenses | 16,610 | 18,606 | ||||||
| Loss from operations | (4,678 | ) | (8,974 | ) | ||||
| Interest and other income | 394 | 401 | ||||||
| Interest and other expense | (998 | ) | (984 | ) | ||||
| Net loss | $ | (5,282 | ) | $ | (9,557 | ) | ||
The accompanying notes are an integral part of these financial statements.
3
diaDexus, Inc.
Statements of Stockholders' Equity
Years Ended December 31, 2009 and 2008
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Total Stockholders' | |||||||||||||||||||||||||||
| (in thousands of dollars, except share and per share data) | Shares | Amount | Shares | Amount | Capital | Income (Loss) | Deficit | Equity | ||||||||||||||||||||||||
| Balance at January 1, 2008 | 69,437,915 | $ | 694 | 1,581,444 | $ | 16 | $ | 170,952 | $ | 39 | $ | (164,176 | ) | $ | 7,525 | |||||||||||||||||
| Exercise of common stock options | - | - | 178,648 | 2 | 26 | - | - | 28 | ||||||||||||||||||||||||
| Stock-based compensation - employee under ASC 718 | - | - | - | - | 147 | - | - | 147 | ||||||||||||||||||||||||
| Issuance of Series F Convertible Preferred Stock at $0.8399 per share, net of issuance costs of $93 | 10,839,694 | 109 | - | - | 8,903 | - | - | 9,012 | ||||||||||||||||||||||||
| Comprehensive loss | ||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (9,557 | ) | (9,557 | ) | ||||||||||||||||||||||
| Change in unrealized gain on available-for-sale securities | - | - | - | - | - | (24 | ) | - | (24 | ) | ||||||||||||||||||||||
| Comprehensive loss | - | - | - | - | - | - | - | (9,581 | ) | |||||||||||||||||||||||
| Balance at December 31, 2008 | 80,277,609 | 803 | 1,760,092 | 18 | 180,028 | 15 | (173,733 | ) | 7,131 | |||||||||||||||||||||||
| Exercise of common stock options | - | - | 38,312 | - | 4 | - | - | 4 | ||||||||||||||||||||||||
| Exercise of common stock warrants | - | - | 16,090 | - | - | - | - | - | ||||||||||||||||||||||||
| Issuance costs of Series F Convertible Referred Stock | - | - | - | - | (15 | ) | - | - | (15 | ) | ||||||||||||||||||||||
| Stock-based compensation - employee under ASC 718 | - | - | - | - | 161 | - | - | 161 | ||||||||||||||||||||||||
| Comprehensive loss | - | |||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (5,282 | ) | (5,282 | ) | ||||||||||||||||||||||
| Change in unrealized gain on available-for-sale securities | - | - | - | - | - | (15 | ) | - | (15 | ) | ||||||||||||||||||||||
| Comprehensive loss | - | - | - | - | - | - | - | (5,297 | ) | |||||||||||||||||||||||
| Balance at December 31, 2009 | 80,277,609 | $ | 803 | 1,814,494 | $ | 18 | $ | 180,178 | $ | $ | (179,015 | ) | $ | 1,984 | ||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
4
diaDexus, Inc.
Statements of Cash Flows
Years Ended December 31, 2009 and 2008
| (in thousands of dollars) | 2009 | 2008 | ||||||
| Cash flows used in operating activities | ||||||||
| Net loss | $ | (5,282 | ) | $ | (9,557 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Gain on disposal of property and equipment | (14 | ) | - | |||||
| Depreciation and amortization | 918 | 886 | ||||||
| Amortization (accretion) on investments | (7 | ) | (215 | ) | ||||
| Stock-based compensation expense | 161 | 147 | ||||||
| Provision for doubtful accounts | - | 8 | ||||||
| Provision for rebate reserve | 19 | 66 | ||||||
| Noncash other income related to warrants | (292 | ) | (40 | ) | ||||
Noncash interest associated with amortization of discount on notes payable | 121 | 119 | ||||||
| Amortization of deferred rent | (141 | ) | (12 | ) | ||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | 180 | (257 | ) | |||||
| Accounts receivable from related party | (255 | ) | 104 | |||||
| Inventory | (84 | ) | 247 | |||||
| Prepaid expenses and other current assets | 115 | 124 | ||||||
| Accounts payable | (229 | ) | (337 | ) | ||||
| Accrued liabilities | (514 | ) | 507 | |||||
| Deferred revenue | (316 | ) | (299 | ) | ||||
| Net cash used in operating activities | (5,620 | ) | (8,509 | ) | ||||
| Cash flows from investing activities | ||||||||
| Purchases of property and equipment | (205 | ) | (109 | ) | ||||
| Maturities of available-for-sale investments | 10,750 | 18,897 | ||||||
| Purchases of available-for-sale investments | (10,015 | ) | (8,161 | ) | ||||
| Proceeds from sale of property and equipment | 21 | - | ||||||
| Net cash provided by investing activities | 551 | 10,627 | ||||||
| Cash flows used in financing activities | ||||||||
| Proceeds from issuance of common stock | 4 | 28 | ||||||
| Proceeds from issuance of convertible preferred stock, net | (15 | ) | 9,012 | |||||
| Principal repayment of the loan | (3,961 | ) | (2,440 | ) | ||||
| Net cash provided by (used in) financing activities | (3,972 | ) | 6,600 | |||||
| Net change in cash and cash equivalents | (9,041 | ) | 8,718 | |||||
| Cash and cash equivalents at beginning of year | 11,580 | 2,862 | ||||||
| Cash and cash equivalents at end of year | $ | 2,539 | $ | 11,580 | ||||
| Supplemental disclosure | ||||||||
| Interest paid | $ | 548 | $ | 863 | ||||
The accompanying notes are an integral part of these financial statements.
5
diaDexus, Inc.
Notes to the Financial Statements
December 31, 2009 and 2008
| 1. | The Company |
diaDexus, Inc. (the "Company"), was founded as a Delaware limited liability company in August 1997 by GlaxoSmithKline Corporation ("GlaxoSmithKline", formerly SmithKline Beecham Corporation) and Incyte Genomics, Inc. ("Incyte"). In April 2000, the Company was converted to a Delaware corporation.
The Company is a privately held diagnostics company focusing on the development and commercialization of patent - protected in vitro diagnostic products addressing unmet needs in cardiovascular disease.
These financial statements are prepared on a going concern basis that contemplates the realization of assets and discharge of liabilities in their normal course of business. The Company has incurred net operating losses and negative cash flows from operations during every year since inception. At December 31, 2009, the Company has an accumulated deficit of $179,015,266 and currently does not have financing sufficient for continued operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. In order to continue its operations, the Company must achieve profitable operations and/or obtain additional financing. There can be no assurance, however, that the Company can achieve profitability or that such a financing will be successfully completed or completed in term acceptable to the Company. M anagement is currently pursuing financing alternatives. As discussed in Note 14, the Company has entered into a definitive agreement with VaxGen, Inc. under which Vaxgen will acquire diaDexus in a stock-for-stock merger. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| 2. | Summary of Significant Accounting Policies |
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("US GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of 90 days or less to be cash equivalents. Cash equivalents consist primarily of money market accounts and treasury securities.
Related Party
The Company discloses any transactions with GlaxoSmithKline under "related party."
Restricted Cash
Restricted cash represents term deposits, which expire in June 2011, held at a financial institution as collateral for the lease of the Company's facilities in South San Francisco.
Available-for-Sale Investments
The Company classifies its investments as available-for-sale. Available-for-sale investments are recorded at fair value based on quoted market prices, with the unrealized gains or losses included in accumulated other comprehensive income (loss) within stockholders' equity, except that any unrealized losses which are deemed to be other than temporary are reflected in the statement of operations. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization or accretion is included in interest and other income. Realized gains or losses on sales of available-for-sale securities are reported in other income or expenses as incurred. The cost of securities sold is based on the specific identification method. Interest and dividends on available-for-sale securities are recorded in interest and other income.
6
diaDexus, Inc.
Notes to the Financial Statements
December 31, 2009 and 2008
Inventory
Inventories are stated as the lower of cost or market. Cost is determined using the first in, first out ("FIFO") method. Market value is determined as the lower of replacement cost or net realizable value.
Property and Equipment
Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. Laboratory equipment, computers, software, and office furniture are depreciated over three years. Leasehold improvements are recorded at cost and amortized over the term of the lease or their useful life, whichever is shorter. Maintenance and repairs are expensed as incurred.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or circumstances suggest that the carrying amount of those assets may be impaired and the expected future undiscounted cash flows that are expected to be generated by the asset are less than its carrying amount. Through December 31, 2009, the Company has not experienced impairment losses on its long-lived assets.
Revenue Recognition
The Company recognizes revenue from the sale of its products, royalties earned and contract arrangements. Product sales are recognized in accordance with ASC 605, Revenue Recognition. Revenue is recognized upon delivery, provided that persuasive evidence of an arrangement exists, the price is fixed or determinable and collection of the resulting receivable is reasonably assured. Revenue is recorded net of customer and distributor discounts. License fee revenue including nonrefundable upfront fees, are deferred and recognized over the term of the underlying agreements. The term of these underlying agreements ranges from two to ten years. Collaborative research revenue is recognized as the research is performed and the related research costs are incurred. Revenue from royalties based on licensees' sales of our products or technologies is recognized as earned in accordance with the contract terms when royalties from licensees can be reasonably estimated and collectibility is reasonably assured.
Research and Development
Research and development costs are expensed as incurred.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
7
diaDexus, Inc.
Notes to the Financial Statements
December 31, 2009 and 2008
On January 1, 2009, the Company adopted ASC 740-10-25, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No.109." The Company did not have any unrecognized tax benefits and there was no effect on its financial condition or results of operations as a result of adopting ASC 740-10-25. The Company's practice is to recognize interest and/or penalties related to income tax matters in income tax expense as incurred. No such expenses were incurred in 2009 nor in 2008.
Comprehensive Income
Comprehensive income represents all changes in stockholders' equity except those resulting from investments or contributions by stockholders. The Company's unrealized gains on available-for-sale securities represent the component of comprehensive income excluded from the Company's net loss.
Freestanding Preferred Stock Warrants
The Company has accounted for its freestanding warrants to purchase shares of the Company's convertible preferred stock as liabilities at fair value upon issuance. The warrants are subject to remeasurement at each balance sheet date and any change in fair value is recognized as a component of other income (expense), net.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted the fair value provisions of statement of ASC 718, Stock-based Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards, including stock options using a fair-value based method. ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model.
Equity instruments issued to nonemployees are recorded at their fair value on the measurement date and are subject to periodic adjustment as the underlying equity instruments vest. The Company granted no options to nonemployees for the years ended December 31, 2009 and 2008.
Recent Accounting Pronouncements
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (ASC 820): Improving Disclosures about Fair Value Measurements. This update will require
(1) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and
(2) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This guidance clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The new disclosures and clarifications of existing disclosure are effective for fiscal years beginning after December 15, 2009, except for the disclosure requirements for related to the purchases, sales, issuances and settlements in the rollforward activity of Level 3 fair value measurements. Those disclosure requirements are effective for fiscal years ending after December 31, 2010. The Company is assessing the impact of this guidance and does not believe the adoption of this guidance will have a material impact to the Company's financial statements.
In June 2009, the FASB issued ASC 105, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. ASC 105 establishes the FASB
8
diaDexus, Inc.
Notes to the Financial Statements
December 31, 2009 and 2008
Accounting Standards Codification ("ASC"), as the single source of authoritative accounting and reporting standards in the United States for all non-government entities, with the exception of the Securities and Exchange Commission and its staff. It does not include any new guidance or interpretations of US GAAP, but merely eliminates the existing hierarchy and codifies the previously issued standards and pronouncements into specific topic areas. The Codification was adopted for the Company's financial statements for the year ended December 31, 2009.
In May 2009, the FASB issued ASC 855, Subsequent Events. ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855, which includes a new required disclosure of the date through which an entity has evaluated subsequent events, was effective for interim or annual periods ending after June 15, 2009. The Company adopted this standard; however, the adoption of ASC 855 had no impact to the Company's financial statements.
In April 2009, the FASB issued an update to ASC 820, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which provides guidance on determining fair value when there is no active market or where the price inputs being used represent distressed sales. This update to ASC 820 was effective for interim and annual periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on the Company's financial statements.
In June 2006, the FASB issued ASC 740, Accounting for Uncertainty in Income Taxes, which is a change in accounting for income taxes. ASC 740 specifies how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax matters specifies how reserves for uncertain tax positions should be classified on the balance sheet and provides transition and interim-period guidance, among other provisions. The Company adopted ASC 740 as of January 1, 2009 -see Note 12 Income Taxes to Financial Statements.
9
diaDexus, Inc.
Notes to the Financial Statements
December 31, 2009 and 2008
Concentration of Credit Risk and Other Risks and Uncertainties
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and available-for-sale investments. The Company's cash and cash equivalents and available-for-sale securities are invested in deposits and securities held with three major financial institutions in the United States of America that management believes are trustworthy. Deposits and securities held in these financial institutions may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on its cash and cash equivalents and available-for-sale securities.
Revenues from the following four customers represented a significant portion of total revenue or accounts receivable for the year ended December 31, 2009 and 2008.
| Revenue | Accounts Receivable | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Customer A | 30 | % | 39 | % | 30 | % | 41 | % | ||||||||
| Customer B | 13 | % | 14 | % | 6 | % | 11 | % | ||||||||
| Customer C | 12 | % | 2 | % | 16 | % | 2 | % | ||||||||
| Customer D | 10 | % | 6 | % | 12 | % | 18 | % | ||||||||
To achieve profitable operations, the Company must successfully develop, manufacture, and market its current and future products. There can be no assurance that any such products can be developed or manufactured at an acceptable cost and with appropriate performance characteristics, or that such products will be successfully marketed. These factors could have a material adverse effect upon the Company's financial results, financial position and future cash flows.
The Company's future products may require approval from the U.S. Food and Drug Administration ("FDA") or certain international regulatory agencies prior to commencing commercial sales. There can be no assurance that the Company's future products will receive any of these required approvals. If the Company was denied such approvals or such approvals were delayed, it would have a material adverse impact on the Company's results of operations.
The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, uncertainty of market acceptance of products, product liability and the need to obtain additional financing.
| 3. | Fair Value Measurement |
Effective January 1, 2008, the Company adopted ASC 820, Fair Value Measurements, for its financial assets and liabilities. In accordance with the 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 hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows:
10
diaDexus, Inc.
Notes to the Financial Statements
December 31, 2009 and 2008
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.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.
As of December 31, 2009, the Company had cash and cash equivalents of $2,539,346, restricted cash of $400,000, and short-term investments of $2,262,273. Short-term investments consisted solely of US government and its agencies securities maturing between January and April 2010. The following table presents the fair value of these certain financial assets and liabilities determined using the inputs defined at December 31, 2009 and 2008, respectively.
Fair Value Measurements at December 31, 2009 (in thousands of dollars) | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets | ||||||||||||||||
| Cash | $ | 1,031 | $ | - | $ | - | $ | 1,031 | ||||||||
| Money market funds | 1,007 | - | - | 1,007 | ||||||||||||
| Restricted cash | - | 400 | - | 400 | ||||||||||||
US government and its agencies securities | - | 2,763 | - | 2,763 | ||||||||||||
| $ | 2,038 | $ | 3,163 | $ | - | $ | 5,201 | |||||||||
| Liabilities | ||||||||||||||||
| Preferred stock warrant liabilities | $ | - | $ | - | $ | 36 | $ | 36 | ||||||||
The change in fair value of the warrant liability is summarized below (in thousands of dollars): | ||||
| Fair value at December 31, 2008 | $ | 328 | ||
| Change in fair value recorded as other income | (292 | ) | ||
| Fair value at December 31, 2009 | $ | 36 | ||
11
diaDexus, Inc.
Notes to the Financial Statements
December 31, 2009 and 2008
Fair Value Measurements at December 31, 2008 (in thousands of dollars) | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets | ||||||||||||||||
| Cash | $ | 907 | $ | - | $ | - | $ | 907 | ||||||||
| Money market funds | 10,422 | - | - | 10,422 | ||||||||||||
| Treasury securities | - | 251 | - | 251 | ||||||||||||
| Restricted cash | - | 400 | - | 400 | ||||||||||||
| U.S. government and its agencies securities | - | 3,005 | - | 3,005 | ||||||||||||
| Liabilities | $ | 11,329 | $ | 3,656 | $ | - | $ | 14,985 | ||||||||
| Preferred stock warrant liabilities | $ | - | $ | - | $ | 328 | $ | 328 | ||||||||
The change in fair value of the warrant liability is summarized below (in thousands of dollars): | ||||
| Fair value at December 31, 2007 | $ | 368 | ||
| Change in fair value recorded as other income | (40 | ) | ||
| Fair value at December 31, 2008 | $ | 328 | ||
The valuation of the warrant liability is discussed in Note 9.
The carrying amount reported in the balance sheet as of December 31, 2009 for our note payable is $3,498,431. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of the note payable approximates fair value.
| 4. | Inventory |
Inventory consists of the following (in thousands of dollars):
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| Finished goods | $ | 79 | $ | 137 | ||||
| Work-in-process | 142 | - | ||||||
| $ | 221 | $ | 137 | |||||
12
diaDexus, Inc.
Notes to the Financial Statements
December 31, 2009 and 2008
| 5. | Property and Equipment |
Property and equipment consist of the following (in thousands of dollars):
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| Laboratory equipment | $ | 4,456 | $ | 4,430 | ||||
| Leasehold improvements | 7,686 | 7,686 | ||||||
| Computer and software | 1,843 | 1,783 | ||||||
| Furniture and fixtures | 804 | 800 | ||||||
| 14,789 | 14,699 | |||||||
| Less: Accumulated depreciation and amortization | (13,423 | ) | (12,613 | ) | ||||
| $ | 1,366 | $ | 2,086 | |||||
Depreciation and amortization expense for the years ended December 31, 2009 and 2008 was $918,000 and $886,000, respectively.
| 6. | Accrued Liabilities |
Accrued liabilities consist of the following (in thousands of dollars):
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| Payroll and related expenses | $ | 914 | $ | 1,295 | ||||
| Legal and patent expenses | 40 | 242 | ||||||
| Customer rebates | - | 212 | ||||||
| Inventory | - | 120 | ||||||
| Sales tax | 71 | 97 | ||||||
| Royalty expenses | 135 | 97 | ||||||
| Marketing expenses | 21 | 67 | ||||||
| Interest payable | 407 | 60 | ||||||
| Collaborative research obligations | - | 23 | ||||||
| Sublease payment | 115 | - | ||||||
| Other | 219 | 223 | ||||||
| $ | 1,922 | $ | 2,436 | |||||
13
diaDexus, Inc.
Notes to the Financial Statements
December 31, 2009 and 2008
| 7. | Investment in CFD Therapeutics, Inc. |
In January 2006, the Company spun-off its therapeutic business to CFD Therapeutics, Inc. ("CFD") and transferred the intellectual property, other assets and employee workforce associated with this business to develop novel cancer therapeutics stemming from discoveries previously made by the Company. The Company will continue to own and operate the diagnostic business. In conjunction with the spin-off, the Company entered into cross-licensing and service agreements providing extensive expertise in protein and monoclonal antibody pre-clinical activities. In addition certain equity related transactions with CFD have provided the Company with 39% ownership in CFD.
The Company had zero basis in the intellectual property, other assets and employee workforce at the time of transfer and accordingly the basis in the investment is zero dollars. All future activity is accounted for under the equity method of accounting. CFD substantially ceased operations during the year ended December 31, 2007.
In connection with this transaction, an agreement was entered into whereby the Company agreed to commit personnel time equivalent to five full-time employees for the performance of research and development services on behalf of CFD. In exchange, the Company received $250,000 per full-time employee equivalent, per year. The agreement began on January 15, 2006 and was terminated on July 27, 2007 as a result of CFD ceasing operations during the year ended December 31, 2007.
In September 2008, CFD Therapeutics, Inc. entered into a license agreement with another company to license its patent rights. As part of the arrangement, CFD had also entered into a new letter agreement with the Company to cease support to CFD in administrative services as well as corporate function. CFD paid the company $400,000 in order to fulfill all outstanding amount owed by CFD to the Company related to the Service Agreement and outstanding intellectual property invoices through July 31, 2008. The Company recorded this payment against research and development expenses as well as intellectual property expenses.
In October 2009, the company received $116,816 from CFD related to a one-time license renewal fee per the License Agreement CFD entered with another company in September 2008. The amount the Company received represents 20% of the agreed percentage as part of the New Letter Agreement the Company had entered with CFD in September 2008. The company has recorded the payment as license revenue for the year ended December 31, 2009.
14
diaDexus, Inc.
Notes to the Financial Statements
December 31, 2009 and 2008
| 8. | Commitments and Contingencies |
Lease Commitments
In June 2002, the Company entered into a facility sublease agreement for a laboratory and office facility in South San Francisco expiring in June 2011. In connection with the lease assignment agreement, the Company subleased out a portion of its leased office facility in South San Francisco through December 31, 2007 which was subsequently extended through May 2011. Minimum future lease payments as of December 31, 2009 are as follows:
| Future | ||||||||||||
| Minimum | ||||||||||||
| Lease | Sublease | Lease | ||||||||||
| (in thousands of dollars) | Commitment | Income | Commitment | |||||||||
| 2010 | $ | 1,772 | $ | (985 | ) | $ | 787 | |||||
| 2011 | 848 | (393 | ) | 455 | ||||||||
| $ | 2,620 | $ | (1,378 | ) | $ | 1,242 | ||||||
Rent expense was $1,578,167 and $1,657,490 for the years ended December 31, 2009 and 2008. The terms of the facility lease provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period. Deferred rent of $297,205 and $437,962 at December 31, 2009 and 2008, respectively, is included in the accompanying balance sheet.
Rental income from the sublease for the years ended December 31, 2009 and 2008 was $1,381,944 and $1,398,403 respectively. This has been included as a reduction to operating expenses in the statement of operations.
Notes Payable
In July 2007, the Company entered into a loan agreement with a bank and two finance companies to borrow up to $10,000,000, the entire amount of which was borrowed at an annual interest rate of 9.49%. The loan is payable in 30 equal installments which begin in May 2008, with interest only payments being made from August 2007 to April 2008. In connection with the loan, the Company issued warrants to purchase convertible preferred stock (Note 9).
Future minimum payments on the notes payable are as follows (in thousands of dollars):
| Year Ending December 31, 2010 | $ | 3,757 | ||
| Total minimum payments | 3,757 | |||
| Less: Amount representing interest | (158 | ) | ||
| Present value of minimum payments | 3,599 | |||
| Less: Unamortized discount from warrants and issuance cost | (101 | ) | ||
| Notes payable, current portion | $ | 3,498 |
Legal Proceedings
From time to time, the Company becomes involved in legal proceedings arising from the ordinary course of business. Management is not currently aware of any matters that will have a material adverse effect on the financial position, results of operations or cash flows of the Company.
15
diaDexus, Inc.
Notes to the Financial Statements
December 31, 2009 and 2008
| 9. | Convertible Preferred Stock |
Under the Company's Certificate of Incorporation, the Company's preferred stock is issuable in series and the Company's Board of Directors is authorized to determine the rights, preferences and terms of each series. At December 31, 2009 and 2008, the amounts, terms and liquidation values of each series are as follows (in thousands of dollars, except share and per share data):
| Shares | Liquidation Value | Liquidation | ||||||||||||||
| Series | Authorized | Outstanding | Per Share | Value | ||||||||||||
| A | 4,400,000 | 4,400,000 | $ | 1.70 | $ | 7,480 | ||||||||||
| B | 4,400,000 | 4,400,000 | 0.45 | 1,980 | ||||||||||||
| C | 13,225,807 | 13,225,807 | 1.55 | 20,500 | ||||||||||||
| D | 20,833 | 20,833 | 2.40 | 50 | ||||||||||||
| E | 48,135,340 | 47,391,275 | 2.52 | 119,426 | ||||||||||||
| F | 12,144,303 | 10,839,694 | 2.52 | 27,316 | ||||||||||||
| 82,326,283 | 80,277,609 | $ | 176,752 | |||||||||||||
Dividends
The holders of the outstanding shares of Series E and Series F Convertible Preferred Stock are entitled to receive, when and if declared by the Board of Directors, a noncumulative dividend at the annual rate of 8% of the original issuance price of $0.8399 for the Series E and Series F Convertible Preferred Stock. Such dividends are payable in preference to any dividend for all other outstanding stock (the "Junior Stock") of the Company declared by the Board of Directors. No other series of preferred stock issued by the Company is entitled to dividends. Through December 31, 2009, no dividends had been declared.
In the event dividends are paid on any share of Junior Stock, an additional dividend must be paid with respect to all outstanding shares of Series E and Series F Convertible Preferred Stock in an amount per share (on an as-if-converted basis) equal to the amount paid or set aside for each share of Junior Stock, whenever funds are legally available. Such dividends are payable when, and if declared by the Board of Directors. No dividends accrue unless declared by the Board of Directors. Through December 31, 2009, no dividends had been declared.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, holders of the Series F Preferred Stock shall be entitled to receive, prior to and in preference to any distribution of any of the assets to the holders of the Junior Stock of the Company, an amount per share equal to three times the original Series F issue price of $0.8399, for each outstanding share of Series F Preferred Stock, plus any declared but unpaid dividends on such shares of Series F Preferred Stock (the "Series F Liquidation Preference"). If upon the occurrence of such an event, the assets and funds distributed among the holders of the Series F Preferred Stock are insufficient to permit the payment in full to such holders of the Series F Preferred Stock of the Series F Liquidation Preference, then the entire assets and funds of the Company legally available for distribution shall be distributed notably among the holders of the Series F Preferred Stock based on the number of shares of Series F Preferred Stock held by each stockholder.
16
diaDexus, Inc.
Notes to the Financial Statements
December 31, 2009 and 2008
After the payment in full of the Series F Liquidation Preference, holders of the Series E Preferred Stock shall be entitled to receive, prior to and in preference to any distribution of any of the assets to the holders of the Junior Stock of the Company, an amount per share equal to three times the original Series E issue price of $0.8399, for each outstanding share of Series E Preferred Stock, plus any declared but unpaid dividends on such share of Series E Preferred Stock (the "Series E Liquidation Preference" and together with the Series F Liquidation Preference, the "Senior Liquidation Preference"). After payment of the Series F Liquidation Preference, if upon the occurrence of such an event, the assets and funds distributed among the holders of the Series E Preferred Stock are insufficient to permit the payment in full to such holde rs of Series E Preferred Stock of the Series E Liquidation Preference, the entire assets and funds of the Company legally available for distribution shall be distributed among the holders of the Series E Preferred Stock based on the amount on the number of shares of Series E Preferred Stock held by each stockholder.
After the payment in full of the Senior Liquidation Preference, holders of the Series A, Series B, Series C and Series D Preferred Stock shall be entitled to receive, prior to and in preference to any distribution of any of the assets to the holders of the Common Stock, an amount per share equal to $7,500,000 divided by the total number of outstanding shares of Series A Preferred Stock for each outstanding share of Series A Preferred Stock and 20% of the original issuance price of $2.27, $7.75 and $12.00 for each outstanding share of Series B, Series C and Series D Preferred Stock, respectively, plus any declared but unpaid dividends on such shares of Series A, Series B, Series C or Series D Preferred Stock. After payment of the Senior Liquidation Preference, if upon the occurrence of such an event, the assets and funds distributed among the holders of the preferred stock are insufficient to permit the payment to such holders of the full preferential amounts, then the entire assets and funds of the Company legally available for distribution shall be distributed ratably among the holders of the Series A, Series B, Series C and Series D Preferred Stock in proportion to the aggregate liquidation preference of such stock owned by each holder.
Upon completion of the distributions described above, all of the remaining assets of the Company available for distribution to stockholders shall be distributed among the holders of Common Stock pro rata based on the number of shares of Common Stock held by each stockholder.
Voting Rights
Holders of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock are entitled to one vote for each share of Common Stock into which such shares can be converted. The holders of the outstanding shares of Series A and Series C Preferred Stock, voting as separate classes, are each entitled to elect one member to the Company's Board of Directors and the holders of the outstanding shares of Series E and Series F Preferred Stock, voting separately as a single class, are entitled to elect four members to the Company's Board of Directors. The holders of the outstanding common stock, voting separately as a single class, are entitled to elect one member to the Company's Board of Directors.
Conversion Rights
Each share of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock is convertible, at the option of the holder, at any time after the date of issuance of such share for such preferred stock. Each share of preferred stock shall be convertible into the number of shares of Common Stock determined by dividing the original issuance price by the conversion price. The initial conversion price for each share of preferred stock is the original issuance price. The conversion price is subject to adjustment.
17
diaDexus, Inc.
Notes to the Financial Statements
December 31, 2009 and 2008
Each share of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock will automatically convert into shares of Common Stock at the then effective conversion price for each such share immediately upon the earlier of (i) the Company's sale of its common stock in a firm commitment of an underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended, the aggregate proceeds equal or exceed $40,000,000 (after deduction of underwriting discounts and commissions), and an offering price of no less than $1.68 per share, or (ii) upon the written consent of the holders of a majority of the then outstanding shares of Series F Preferred Stock voting as a single class on an as-if-converted basis.
Warrants
In connection with the sale of Series E Preferred Stock, the Company issued warrants in November 2005 to purchase 18,890,644 shares of Common Stock at $0.01 per share to the investors. The warrants expire in November 2010. The fair value of the warrants of $7,406,191 upon original issuance was included in the carrying value of the Series E Preferred Stock. The fair value of the warrants was determined using the Black-Scholes option pricing model and the following assumptions: volatility of 70%, risk free rate of 4.25%, exercise price of $0.01, fair value of $0.40 and an expected life of five years. Warrants to purchase 7,912 shares of common stock were exercised in 2009. At December 31, 2009, warrants to purchase 18,882,732 shares of Common Stock remained outstanding.
In connection with the sale of Series E Preferred Stock, the Company issued a warrant in November 2005 to purchase 148,827 shares of Series E Preferred Stock at $0.84 per share to the placement agent. The Series E Preferred Stock warrant converts automatically to a Common Stock warrant upon completion of an initial public offering by the Company that results in net proceeds of at least $40,000,000 and an offering price of at least $1.68 per share. The warrant expires in November 2010. The fair value of the warrant of $76,436 was originally included in the carrying value of the Series E Preferred Stock. The fair value of the warrant was determined using the Black-Scholes option pricing model and the following assumptions: volatility of 70%, risk free rate of 4.25%, exercise price of $0.84, and an expected life of five years. The warrants were measured at fair value and classified as warrant liability under the authoritative guidance for freestanding warrants and other similar instruments. The fair value of the warrant was remeasured at December 31, 2009, using Black-Scholes option pricing model and the following assumptions: volatility of 50%, risk-free interest rate of 0.41%, exercise price of $0.84, fair value of $0.23 and an expected life of 0.88 years. The change in fair value of $33,838 was recorded as other income for the years ended December 31, 2009. The warrant remains outstanding at December 31, 2009.
Additionally, the Company issued warrants, in connection with the January and December 2006 sales of Series E Preferred Stock to purchase 5,102,649 and 23,716,897 shares, respectively, of Common Stock at $0.01 per share to the investors. The warrants expire in January 2011 and December 2011, respectively. The original fair value of the warrants of $3,244,522 was included in the carrying value of the Series E Preferred Stock. The fair value of the warrants was determined using the Black-Scholes option pricing model and the following assumptions: volatility of 70%, risk free rate of 4.24%, exercise price of $0.01, fair value of $0.11 and an expected life of five years. During the year ended December 31, 2009, warrants to purchase 4,545 shares of common stock were exercised. Warrants to purchase 28,811,045 shares of common stock remain outs tanding at December 31, 2009.
18
diaDexus, Inc.
Notes to the Financial Statements
December 31, 2009 and 2008
In connection with the loan agreement entered in July 2007 (Note 8), the Company issued warrants to purchase 595,238 shares of Series E Preferred Stock at $0.84 per share that expire in July 2017. The fair value of the warrants of $338,897 is being amortized to interest expense over the life of the loan. The fair value of the warrant was determined using the Black-Scholes option pricing model and the following assumptions: volatility of 50%, risk free rate of 5.23%, exercise price of $0.84, and an expected life of ten years. The warrants were measured at fair value and classified as warrant liability under the authoritative guidance for freestanding warrants and other similar instruments. The fair values of the warrants were remeasured at December 31, 2009, using Black-Scholes option pricing model and the following assumptions: volatilit y of 50%, risk-free interest rate of 3.59%, exercise price of $0.84, fair value of $0.23 and an expected life of 7.5 years. The change in fair value of $257,755 was recorded as other income. The warrant remains outstanding at December 31, 2009.
In connection with the sale of Series F Preferred Stock, the Company issued warrants in December 2008 to purchase 10,839,694 shares of Common Stock of $0.01 per share to the investors. The warrants expire in December 2013. The fair value of the warrants of $238,457 was included in the carrying value of the Series F Preferred Stock. The original fair value of the warrants was determined using the Black-Scholes option pricing model and the following assumptions: volatility of 50%, risk-free interest rate of 1.49%, exercise price of $0.01, fair value of $0.03 and an expected life of five years. During the year ended December 31, 2009, warrants to purchase 3,633 shares of common stock were exercised. At December 31, 2009, warrants to purchase 10,836,061 shares of common stock remain outstanding.
| 10. | Common Stock |
The Company's amended articles of incorporation authorize the Company to issue 170,000,000 shares of $0.01 par value common stock. The holders of common stock are also entitled to receive dividends whenever funds are legally available, as, when, and if declared by the Board of Directors.
| 11. | Stock Option Plans |
The Company's Board of Directors adopted the 2000 Equity Incentive Plan (the "2000 Plan") and has reserved a total of 25,709,911 shares of the Company's Common Stock, under which 2,200,000 of these shares were converted from the 1997 Plan. These shares of the Company's Common Stock were reserved for issuance to employees and consultants of the Company. The Board of Directors has the authority to determine to whom options will be granted, the number of shares, the term and exercise price (which cannot be less than the estimated fair value at date of grant for incentive stock options or 85% of the estimated fair value for nonstatutory stock options). If an employee owns stock representing more than 10% of the outstanding shares, the price of each share shall be at least 110% of estimated fair value. Options generally vest 25% after one yea r and 1/48 of all of the shares vest on each monthly anniversary of the vesting commencement date thereafter.
19
diaDexus, Inc.
Notes to the Financial Statements
December 31, 2009 and 2008
Stock option activity under the Company's plans is as follows:
| Options Outstanding | ||||||||||||
| Shares Available for Grant | Number of Options | Weighted Average Exercise Price per Share | ||||||||||
| Balances, December 31, 2007 | 5,395,333 | 14,734,953 | $ | 0.29 | ||||||||
| Additional shares authorized | 3,250,000 | - | - | |||||||||
| Options granted | (2,711,632 | ) | 2,711,632 | 0.12 | ||||||||
| Options exercised | - | (178,648 | ) | 0.15 | ||||||||
| Options cancelled | 4,206,405 | (4,206,405 | ) | 0.21 | ||||||||
| Balances, December 31, 2008 | 10,140,106 | 13,061,532 | $ | 0.10 | ||||||||
| Options granted | (3,362,520 | ) | 3,362,520 | 0.08 | ||||||||
| Options exercised | - | (38,312 | ) | 0.12 | ||||||||
| Options cancelled | 830,034 | (830,034 | ) | 0.12 | ||||||||
| Balances, December 31, 2009 | 7,607,620 | 15,555,706 | $ | 0.10 | ||||||||
The following summarizes information about stock options outstanding at December 31, 2009:
Options Outstanding December 31, 2009 | Options Vested and Exercisable December 31, 2009 | |||||||||||||||
| Exercise Price | Number Outstanding | Weighted Average Remaining Contractual Life (Years) | Number Outstanding | Weighted Average Exercise Price | ||||||||||||
| $ 5.00 | 30,000 | 1.30 | 30,000 | $ | 5.00 | |||||||||||
| 4.00 | 10,000 | 2.93 | 10,000 | 4.00 | ||||||||||||
| 1.80 | 215,523 | 2.62 | 215,523 | 1.80 | ||||||||||||
| 1.30 | 38,500 | 0.63 | 38,500 | 1.30 | ||||||||||||
| 1.20 | 2,000 | 0.07 | 2,000 | 1.20 | ||||||||||||
| 0.40 | 1,005,649 | 5.17 | 1,005,649 | 0.04 | ||||||||||||
| 0.12 | 11,121,914 | 7.11 | 9,196,993 | 0.12 | ||||||||||||
| 0.08 | 3,132,120 | 9.25 | 71,875 | 0.08 | ||||||||||||
| 15,555,706 | 7.32 | 10,570,540 | $ | # 0.20 | ||||||||||||
20
diaDexus, Inc.
Notes to the Financial Statements
December 31, 2009 and 2008
At December 31, 2008, options to purchase 6,813,105 shares were exercisable and vested at a weighted average price of $0.25 per share.
Stock-Based Compensation Associated with Awards to Employees
During the years ended December 31, 2009 and 2008, the Company granted stock options to employees to purchase 3,362,520 and 2,711,632 shares of common stock with a weighted-average grant date fair value of $0.01 and $0.04 per share, respectively. Stock-based compensation expense recognized during the years ended December 31, 2009 and 2008 includes compensation expense for stock-based awards granted to employees based on the grant date fair value estimated in accordance with the provisions of ASC 718 of $160,694 and $147,281, respectively. As of December 31, 2009, there were total unrecognized compensation costs of $143,015 related to these stock options. These costs are expected to be recognized over a period of approximately 1.10 years.
The aggregate intrinsic value of options exercisable as of December 31, 2009 was $1,930,629. The aggregate intrinsic value of options exercised during the years ended December 31, 2009 and 2008 was $3,831 and $22,102, respectively.
The Company estimated the fair value of stock options using the Black-Scholes option valuation model. The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period of the awards. The fair value of employee stock options was estimated using the following weighted-average assumptions:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| Expected term (years) | 4 | 4 | ||||||
| Expected volatility | 55% | 50% | ||||||
| Risk-free interest rate | 1.74% | 2.33% | ||||||
| Dividend yield | - | - | ||||||
The expected term of stock options represents the weighted-average period the stock options are expected to remain outstanding and is based on the options vesting term, contractual terms and industry peers as the Company did not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior. The expected stock price volatility assumption was determined by examining the historical volatilities for industry peers, as the Company did not have any trading history for the Company's common stock. The Company will continue to analyze the historical stock price volatility and expected term assumption as more historical data for the Company's common stock becomes available. The risk-free interest rate assumption is based on the U.S. Treasury instruments who se term was consistent with the expected term of the Company's stock options. The expected dividend assumption is based on the Company's history and expectation of dividend payouts. Different estimates of volatility and expected term could materially change the value of an option and the resulting expense.
In addition, ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on management's expectation through industry knowledge as well as historical information.
21
diaDexus, Inc.
Notes to the Financial Statements
December 31, 2009 and 2008
The total fair value of employee shares vested during the year ended December 31, 2009 and 2008 was $99,079 and $147,000, respectively.
Stock-Based Compensation Associated with Awards to Nonemployees
During the years ended December 31, 2009 and 2008, the Company did not grant options to purchase shares of common stock to nonemployees.
| 12. | Income Taxes |
Temporary differences and carryforwards that gave rise to significant portions of deferred taxes are as follows (in thousands of dollars):
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| Net operating loss carryforwards | $ | 41,018 | $ | 38,255 | ||||
| Deferred research expense | 11,431 | 11,838 | ||||||
| Research tax credit carryforwards | 4,884 | 4,294 | ||||||
| Depreciation and amortization | 1,605 | 1,316 | ||||||
| Accruals and reserves | 932 | 1,188 | ||||||
| Other | 409 | 410 | ||||||
| Total deferred tax assets | 60,279 | 57,301 | ||||||
| Less: Valuation allowance | (60,279 | ) | (57,301 | ) | ||||
| Net deferred tax assets | $ | - | $ | - | ||||
Due to the uncertainties surrounding the realization of deferred assets through future taxable income, the Company has provided a full valuation allowance and, therefore, no benefit has been recognized for the net operating loss and other deferred tax assets.
Effective January 1, 2009, the Company adopted ASC 740-10 (formerly known as FIN 48), Accounting for Income Taxes, guidance that addresses the recognition, measurement, and disclosure of uncertain tax positions. As a result of the implementation of ASC 740-10 uncertain tax positions, the Company did not recognize any adjustment to the liability for uncertain tax positions. As of the date of adoption, the Company recorded a $518,248 reduction to deferred tax assets, all of which was offset by a full valuation allowance and therefore did not record any adjustment to the beginning balance of retained earnings. Total unrecognized income tax benefits as of December 31, 2009 was $518,248. The Company does not anticipate the total amounts of unrecognized tax benefits will significantly increase or decrease in the next 12 months.
The Company's policy is to include interest and penalties related to unrecognized tax benefits within the provision for taxes. Management determined that no accrual for interest and penalties was required as of December 31, 2009.
As of December 31, 2009, the Company had approximately $106 million of federal and $84 million of state net operating loss carryforwards available to offset future taxable income which expire in varying amounts beginning in 2020 and 2010, respectively. The Tax Reform Act of 1986 limits the use of net operating loss and tax credit carryforwards in certain situations where equity transactions result in a change of ownership as defined by Internal Revenue Code Section 382. In the event the Company should experience an ownership change, as defined, utilization of its U.S. net operating loss carryforwards and tax credits could be limited.
22
diaDexus, Inc.
Notes to the Financial Statements
December 31, 2009 and 2008
Based on a preliminary analysis of the limitation, the Company does not expect a material limitation on utilization of net operating loss and the credit carryforwards. Should a more comprehensive analysis be prepared, these amounts could change.
As of December 31, 2009, the Company had credit carryforwards of approximately $3,088,695 and $2,721,373 available to reduce future taxable income, if any, for both federal and California state income tax purposes, respectively. The federal R&D credit carryforwards expire beginning 2021 and California credits can be carried forward indefinitely.
The Company's primary tax jurisdiction is the United States. All of the Company's tax years are open to examination by the US federal and state tax authorities.
| 13. | Employee Benefit Plan |
In January 1998, the Company established a qualified savings plan for employees under Section 401(k) (the "401(k) Plan") of the Internal Revenue Service Code, in which employees may defer their pretax annual salary up to the statutory limits. The 401(k) Plan permits discretionary matching and profit sharing contributions to be made by the Company. Through December 31, 2009 the Company has not made any contributions to the 401(k) Plan.
| 14. | Subsequent Events |
On January 14, 2010, the Board of Directors approved the 2010 Equity Incentive Plan effective January 14, 2010. Under the terms of the new plan an additional 7,728,137 were added to the remaining 15,435,189 authorized and unissued shares under the prior plan to bring the aggregate number of shares that may be issued upon exercise to 23,163,326
On May 28, 2010, VaxGen, Inc. (VXGN), a biopharmaceutical company, and diaDexus entered into a definitive agreement under which VaxGen will acquire diaDexus in a stock-for-stock merger. Upon the closing of the transaction, diaDexus will become a wholly-owned subsidiary of VaxGen, diaDexus stockholders will become stockholders of VaxGen, the officers of the combined company will be the current officers of diaDexus, and the combined company will be re-named diaDexus. In addition, VaxGen has agreed to provide a loan to diaDexus in an amount not to exceed $6 million and certain significant stockholders of diaDexus agreed to provide a loan in an amount of $1.5 million. The merger is subject to customary closing conditions, including approval of the merger by diaDexus' stockholders.
23