UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2013
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 0-26483
diaDexus, Inc.
(Exact name of Registrant as Specified in its Charter)
| | |
| Delaware | | 94-3236309 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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349 Oyster Point Boulevard South San Francisco, California | | 94080 |
| (Address of principal executive offices) | | (Zip Code) |
(650) 246-6400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Common Stock, $0.01 par value per share
(Title of Class)
Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the issuer 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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)
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| Large accelerated filer | | ¨ | | Accelerated filer | | ¨ |
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| Non-accelerated filer | | ¨ (Do not check if a smaller reporting company) | | Smaller Reporting Company | | x |
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 aggregate market value of the common stock held by non-affiliates of the Registrant on June 30, 2013, based upon the last trade price of the common stock reported on the OTCQB on June 28, 2013, was approximately $35.3 million.* As of March 6, 2014, 54,813,385 shares of the registrant’s common stock, par value $0.01, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the 2014 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K. Such Proxy Statement will be filed within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K.
| * | Excludes 8,950,020 shares of Common Stock held by directors, officers and stockholders whose beneficial ownership exceeds 5% of the Registrant’s Common Stock outstanding. The number of shares owned by stockholders whose beneficial ownership exceeds 5% was determined based upon Schedules 13D and 13G, if any, filed with the SEC. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, that such person is controlled by or under common control with the Registrant, or that such persons are affiliates for any other purpose. |
Special Note Regarding Forward-Looking Statements
This discussion and analysis should be read in conjunction with our audited financial statements and related notes thereto appearing in Item 8 of this Annual Report on Form 10-K and the risk factors described in Part I, Item 1A of this Annual Report on Form 10-K.
This Annual Report includes “forward-looking statements” that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain forward-looking statements can be identified by words such as “may,” “will,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “could” or “would” or the negative thereof or other comparable terminology. All statements other than statements of historical fact are “forward-looking statements” for purposes of these provisions, including any statements of the plans and objectives of management, any statements regarding future operations, any statements regarding future economic conditions or performance and any statement of assumptions underlying any of the foregoing.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. We caution you therefore against relying on any of these forward-looking statements.
Any forward-looking statements included in this Annual Report speak only as of the date hereof. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to update any such forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law.
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Table of Contents
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PART I
Company Overview and Organization
We are a life sciences company focused on developing and commercializing proprietary cardiovascular diagnostic products addressing unmet needs in cardiovascular disease (“CVD”). We sell our diagnostic products to laboratories. Physicians order testing 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.
The “Company,” “diaDexus,” “we,” “us,” and “our” refers to the business of diaDexus, Inc. (f/k/a VaxGen, Inc.) after the reverse merger between Vaxgen, Inc. and former diaDexus, Inc. on July 28, 2010.
Our Products and Product Candidates
The following table summarizes the indications and regulatory status of our major products:
| | | | |
Products | | Indications | | Regulatory Status |
| PLAC® Test ELISA Kit | | An aid in predicting risk for CHD and ischemic stroke associated with atherosclerosis | | Clearance from FDA first obtained for marketing in the US in July 2003 for CHD and in June 2005 for ischemic stroke. Commercialized in the US and Europe. |
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| PLAC® Test for Lp-PLA2 Activity | | An indicator of atherosclerotic cardiovascular disease | | CE mark received in January 2012. Commercial launch in Europe in March 2012. We are pursuing 510(k) clearance to allow commercialization in the US. |
Our products, the PLAC Test ELISA Kit and the PLAC Test for Lp-PLA2 Activity, (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 mass of circulating Lp-PLA2 in the blood using an enzyme-linked-immunosorbent serologic assay (“ELISA”), the PLAC Test ELISA Kit. The PLAC Test ELISA Kit 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 (“CHD”) and ischemic stroke associated with atherosclerosis. The second test, the PLAC Test for Lp-PLA2 Activity, 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.
Background on Lp-PLA2 Levels and Risk for Heart Attack and Stroke
CHD and stroke were the first and fourth most frequent causes of death, respectively, in the US in 2010, as reported by the Center for Disease Control in 2012. CHD and stroke were the first and second greatest causes of death for individuals over 65 years of age in the European Union (“EU”) in 2009, as reported by Eurostat in 2012.
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CHD is a narrowing of the arteries that supply blood and oxygen to the heart, most frequently as a result of atherosclerosis, which occurs when fatty material or other substances build up to form plaque on the walls of the arteries. A heart attack can result if the blood to a section of the heart becomes blocked or reduced as a result of the atherosclerosis. Similarly, ischemic stroke, the most common form of stroke, is often associated with atherosclerosis, when a blood clot forms at the buildup of fatty material or other substances in vessels in the brain or when a blood clot from another part of the body dislodges and then blocks a narrower vessel in the brain. In either case, if blood flow is not restored quickly, that portion of the heart or brain will become damaged from lack of oxygen and the cells begin to die.
Lp-PLA2 is an inflammatory enzyme implicated in the formation of rupture prone plaque that can lead to the formation of blood clots and trigger a heart attack or stroke. Lp-PLA2 is a cardiovascular risk marker, and potentially a risk factor, as substantiated in a number of prospective studies:
| | • | | A 2004 peer-reviewed article authored by Dr. Christie Ballantyne and colleagues analyzed samples from the Atherosclerosis Risk in Communities (“ARIC”) study, which followed 12,819 apparently healthy middle-aged men and women for six to eight years. Results from this study indicated that individuals with LDL-cholesterol (commonly referred to as “bad cholesterol”) levels less than 130 mg/dL and levels of Lp-PLA2 in the highest third of the population are twice as likely to have a coronary event than individuals with LDL-cholesterol levels less than 130 mg/dL and Lp-PLA2 levels in the lowest third of the population. |
| | • | | A 2008 peer-reviewed publication by Dr. Philip Gorelick and colleagues based on the analysis of samples from the ARIC study concluded that individuals with systolic blood pressure in the highest third of the population and levels of Lp-PLA2 above the mean were 6.8 times more likely to have a stroke than someone with a systolic blood pressure in the lowest third of the population and levels of Lp-PLA2 below the mean. |
| | • | | A meta-analysis by The Lp-PLA2 Collaboration published inThe Lancet in 2010, reviewed 32 prospective studies evaluating Lp-PLA2 and risk of coronary disease, stroke and mortality, and interpreted that Lp-PLA2 activity or mass levels show continuous associations with risk of CHD similar in magnitude to that with non-HDL cholesterol and systolic blood pressure. |
| | • | | In March 2012, a peer-reviewed article authored by Dr. Paul Ridker and colleagues based on the analysis of samples from the Justification for the Use of Statins in Primary Prevention: An Intervention Trial Evaluating Rosuvastatin (JUPITER) study concluded that among primary prevention patients allocated to the placebo, higher base levels of Lp-PLA2 activity were statistically significantly associated with increased cardiovascular risk. The same study showed that among patients allocated to rosuvastatin (Crestor®), Lp-PLA2levels were not independently associated with residual cardiovascular risk. Treated patients with Lp-PLA2activity in the higher second, third and fourth quartiles had a somewhat greater relative risk reduction than did those with levels in the first quartile, although this trend did not meet statistical significance. |
| | • | | In October 2013, Dr. Harvey D. White and colleagues published a first positive outcomes study based on the analysis of archived samples of the Long-term Intervention with Pravastatin in Ischaemic Disease (“LIPID”) study. This sub-study showed that reduction in Lp-PLA2activity is a significant predictor of reduction in CHD and changes in Lp-PLA2 activity may account for a substantial proportion of pravastatin (Pravachol®) effect in reducing CHD events over an average of 6.1 years of treatment. This analysis broke new ground by looking for the first time at the relationship between changes in Lp-PLA2levels and its correlation to reduced CHD events and elevated Lp-PLA2 to a potential risk-factor from predictive risk-marker. |
Lp-PLA2 as a therapeutic target
Two peer-reviewed publications, authored by Dr. Wolfgang Koenig and colleagues in 2003 and by Dr. Tomi Häkkinen and colleagues in 1999, indicate that Lp-PLA2 activity is up-regulated in atherosclerotic lesions and in rupture-prone fibrous caps. The rationale for Lp-PLA2 as a key inflammatory biomarker is attractive because this enzyme is produced in atherosclerotic plaques and is specifically linked to plaque inflammation and, presumably, ruptures, suggesting a possible causal pathway leading to clinical events. In preclinical studies published in 2008,
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Dr. Robert L. Wilensky and colleagues have shown that inhibition of Lp-PLA2 attenuates the inflammatory response and slows atherosclerotic plaque progression. However, clinical trials are necessary to support the proposition that blocking or reducing Lp-PLA2 activity levels will interrupt the sequence of events leading to atherosclerotic plaque formation and/or rupture. To that end, GlaxoSmithKline developed an Lp-PLA2 inhibitor, darapladib, and is evaluating its clinical efficacy in two randomized, double-blind, placebo-controlled Phase 3 studies.
The first Phase 3 study, named STABILITY, which top-line results were first publicly disclosed by GlaxoSmithKline in November 2013, did not meet its primary clinical endpoint, time to the first occurrence of any component of the composite of major adverse cardiovascular events (“MACE”). GlaxoSmithKline also disclosed that there were greater reductions (nominal p<=0.05) in some of the pre-defined secondary endpoints that require further analysis. GlaxoSmithKline indicated on www.clinicaltrials.gov that a second Phase 3 study, named SOLID-TIMI 52, has an estimated primary completion date of March 2014.
Utility of the PLAC Tests
Our PLAC Tests are blood tests that measure Lp-PLA2 mass or activity levels. We believe that our PLAC Tests thereby provide valuable and actionable information, over and above traditional risk factors such as smoking, blood pressure, cholesterol, family history and age, for treatment and prevention of heart disease and stroke. Individuals with high levels of Lp-PLA2, when considered in conjunction with traditional risk factors, may merit more aggressive risk-reducing strategies, including treatment towards lower LDL-cholesterol goals with statins.
PLAC Test ELISA Kit
We introduced our initial PLAC Test ELISA Kit (the “PLAC ELISA Test”) in 2004. Our PLAC ELISA Test uses microplate technologies to measure levels of Lp-PLA2. The infrastructure for performing microplate tests typically exists only at large and midsize clinical reference laboratories and large hospitals, which must be certified by the US Department of Health and Human Services (“DHHS”) for high-complexity diagnostics under the Clinical Laboratory Improvement Amendments (“CLIA”). Smaller hospitals and clinics can order the PLAC ELISA Test for their patients from those institutions that are able to perform microplate tests and offer the PLAC ELISA Test. Patients can have their blood drawn at a local laboratory and shipped to the more advanced institutions for analysis. The PLAC ELISA Test is the only product that we market in the US, Europe, Israel and Mexico.
PLAC Test for Lp-PLA2 Activity
We introduced our PLAC Test for Lp-PLA2 Activity (the “PLAC Activity Test”) in Europe in March 2012. Our PLAC Activity Test is an enzyme assay for the quantitative determination of Lp-PLA2 activity levels in human serum or plasma. Our PLAC Activity Test allows for the measurement of Lp-PLA2 using automated clinical chemistry analyzer technology. This clinical chemistry technology is more prevalent than the microplate technology used for the PLAC ELISA Test and a broader array of institutions can conduct the test. This group includes clinical laboratories and hospitals of all sizes. In addition, the sample handling requirements are much less stringent for the PLAC Activity Test compared to the PLAC ELISA Test, allowing greater ease of use for those facilities processing specimens. The PLAC Activity Test is available in Europe to be used in conjunction with clinical evaluation and patient risk assessment as an indicator of atherosclerotic cardiovascular disease. CE marking for this intended use was obtained by self-certification in January 2012. The PLAC Activity Test is only available on a commercial basis in Europe. We plan to pursue 510(k) clearance for this test from the FDA and eventually commercialize this assay format in the US if we obtain the FDA clearance.
In September 2013, we had a pre-submission meeting with the FDA, as a result of which we are advancing our clinical program to support the submission of the PLAC Activity Test to the FDA. We have gained access to a large longitudinal cardiovascular disease study to validate the PLAC Activity Test. We anticipate that the clinical study sample analysis will be initiated prior to the end of the first quarter of 2014.
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Both the STABILITY and SOLID-TIMI 52 studies led by GlaxoSmithKline used a Research-Use-Only version of our PLAC Activity Test to measure Lp-PLA2 activity in all patients entering the studies and certain patients over time. Revenue from the sale of this Research-Use-Only kit was less than 5% of total revenues for 2012 and 2013.
Marketing and Distribution
The Market Opportunity
In 2008, a consensus panel of investigators recommended how to use Lp-PLA2 along with guideline-endorsed CVD risk assessment to better stratify individuals who might be at greater CVD risk than suggested by traditional risk factors and who therefore might benefit from more aggressive management strategies. The consensus panel endorsed the use of Lp-PLA2 for the assessment of CHD events and stroke risk in intermediate- or moderate-risk populations, and specifically recommended testing in the following patients:
| | • | | any patient with two or more major CHD risk factors; |
| | • | | any patient 65 years of age or older with one additional risk factor, given that risk for CHD events and strokes increase with age; |
| | • | | individuals with an elevated fasting glucose; and |
| | • | | patients with diagnostic criteria for metabolic syndrome who are generally at moderate risk (it has been shown that elevated Lp-PLA2 further increases CVD risk in these patients). |
The panel also recommended Lp-PLA2 testing for patients with known CHD or a CHD risk equivalent, such as diabetes or ischemic stroke. Since the publication of these guidelines, Lp-PLA2 measurement has been recommended in the American Heart Association guidelines issued in 2010 and in the American Stroke Association guidelines issued in 2011.
In 2011, members of the National Lipid Association Biomarkers Expert Panel recommend that Lp-PLA2 testing may be considered in intermediate-risk patients, as well as certain greater-risk subgroups, such as those with CHD or a CHD risk equivalent, patients with family history of premature CHD, and patients with recent CHD events, to identify patients who might benefit from more intensive lipid therapy. In 2012, The American Association of Clinical Endocrinologists issued guidelines for the management of dyslipidemia and the prevention of atherosclerosis which included the following specific statements on Lp-PLA2:
| | • | | Lp-PLA2 has been identified as a strong and independent predictor of cardiovascular disease events and stroke in patients with and without clinically evident coronary artery disease. |
| | • | | Measurement of Lp-PLA2, in some studies, has demonstrated more specificity than high sensitivity C-Reactive Protein (“hs-CRP”) when it is necessary to further stratify a patient’s cardiovascular disease risk, especially with elevated hs-CRP in the presence of other causes of inflammation (hs-CRP is an indiscriminate marker of general inflammation). |
| | • | | Significantly elevated Lp-LPA2 in combination with significantly elevated hs-CRP constitutes very high cardiovascular disease risk in individuals with low or moderately elevated LDL cholesterol. |
We estimate that approximately 85 million adults in the US had two or more cardiovascular risk factors in 2012. We believe this represents the maximum population in the US to be the targets for our PLAC Tests indicated for aiding in predicting risk for CHD. Based on 2012 published statistics from the American Heart Association, we further estimate that approximately 15% of the US adult population that has high total cholesterol (equal or greater than 200 mg/dL), or approximately 36 million individuals, represents our total addressable market. In Europe, we estimate that a total addressable market similar to that of the US exists based on similar age demographics as well as similar life style.
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Distribution
In the US, we market and distribute our PLAC ELISA Test to approximately 30 national and regional clinical reference laboratories with a concentration on the cardiovascular specialty laboratories, which represent the bulk of the demand for the test. Cardiovascular specialty laboratories aim to deliver the consultative sale and performance of several cardiovascular tests, including the PLAC ELISA Test. Our PLAC ELISA Tests are ultimately ordered by physicians who obtain test results from clinical reference laboratories. We and our participating laboratory customers often conduct physician education and awareness programs about Lp-PLA2 and about our PLAC ELISA Test. Our sales force communicates directly with cardiovascular specialty laboratory sales staffs works with these sales staffs to organize educational roundtables for physicians. In 2013, we performed over 310 educational round tables for physicians with the sales staffs of the cardiovascular specialty laboratories. We also have field application specialists that support the start-up of new laboratory customers and respond to their technical questions. Additionally, we maintain a product-focused website, from which interested parties may obtain general information and specific documents relating to the use and clinical performance of our PLAC ELISA Test.
Our top four US laboratory customers for the fiscal year ended December 31, 2013 accounted for 74% of our revenue compared to 69% for the fiscal year ended December 31, 2012. Although our customer base trended towards a more diverse base as new cardiovascular specialty laboratories emerge and grow, we expect this high degree of customer concentration to continue.
In Europe, we market and distribute our PLAC Tests through distributors. We have selected distributors for the PLAC Tests in our target countries based on their knowledge, interest in promoting the PLAC Tests, their contacts and experience in the market, and their ability to reach a variety of customers. All of our European distributors have an exclusive right to distribute our product in their respective territories. Sales in ex-US territories represented approximately 2% of our total revenues for both 2012 and 2013.
Customers
In all territories we and our distributors’ sales and marketing efforts typically target physicians who are delivering primary care to their patients, such as primary care physicians, family physicians, endocrinologists and obstetricians/gynecologists, and have an interest in delivering preventive care. These physicians are generally aware that half of all heart attacks occur in individuals with normal levels of LDL-cholesterol and use diagnostic products, like the PLAC Tests, to help uncover the hidden risks of heart attacks and strokes.
Clinical Guidelines for Lp-PLA2 Testing
Because of the existing body of evidence on the usefulness of measuring Lp-PLA2 levels and expert opinions, testing for Lp-PLA2 is recommended in the following four guidelines:
| | • | | American College of Cardiology Foundation/America Heart Association guideline for assessment of cardiovascular risk in asymptomatic adults (2010); |
| | • | | These guidelines were updated in November 2013 and did not specifically discuss the use of Lp-PLA2 testing. These updated guidelines attempt to define practices that meet the needs of patients in most circumstances and are not a replacement for clinical judgment. |
| | • | | Guidelines for the primary prevention of stroke: A guideline for healthcare professionals from the American Heart Association/American Stroke Association (2011); |
| | • | | American Association of Clinical Endocrinologists’ guidelines for management of dyslipidemia and prevention of atherosclerosis (2012); and |
| | • | | European guidelines on cardiovascular disease prevention in clinical practice (2012). |
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Lp-PLA2 testing is recommended as a vascular-specific inflammation biomarker. The American Association of Clinical Endocrinologists’ guidelines recommend assessing markers of inflammation in patients where further stratification of risk is necessary. hs-CRP and Lp-PLA2 provide useful additional information in these instances and appear to be synergistic in predicting risk of CVD and stroke. Measurement of Lp-PLA2, which in some studies has demonstrated more specificity than hs-CRP, is recommended when it is necessary to further stratify a patient’s CVD risk, especially in the presence of systemic hs-CRP elevations.
Manufacturing and Sources of Supply
We currently depend on two third-party manufacturers to assemble the PLAC ELISA Test. We manufacture certain raw materials in-house that are used by these manufacturers in the production of the PLAC ELISA Test. We manufacture the PLAC Activity Test on our site in South San Francisco, California. We also depend on other key vendors and suppliers of materials, some of which are sole source or for whom an alternative could be difficult to find.
Intellectual Property and Licenses
We actively seek patent protection in the US and other jurisdictions to protect technology, inventions, and improvements to inventions with commercial importance or strategic value to our business. Our success depends to a significant degree upon our ability to obtain patent protection for our technologies. As of December 31, 2013, we own or have a license to 28 patents and 22 pending patent applications worldwide that relate to Lp-PLA2. These issued patents have expiration dates ranging from 2013 to 2016.
We have exclusive licenses from SmithKlineBeecham Corp. (now GlaxoSmithKline) and a co-exclusive license from ICOS Corporation (“ICOS”) (acquired by Eli Lilly and Company) to practice and commercialize technology covered by several issued and pending US patents and their foreign counterparts. The licenses from GlaxoSmithKline and ICOS include exclusive rights to develop diagnostic assays for Lp-PLA2. Some of these licensed patents covering composition of matter and cardiovascular diagnostic claims have expiration dates that range from 2013 to 2016. A family of issued patents and pending applications covering the measurement of Lp-PLA2 activity in the presence of an inhibitor, such as the drug candidate darapladib, will expire after 2024.
We intend to seek further intellectual property protection on Lp-PLA2 technologies, including both the PLAC ELISA Test and the PLAC Activity Test, to strengthen our competitive position.
Prior to the 2010 merger between VaxGen, Inc. (“Vaxgen”) and former diaDexus, VaxGen sold its anthrax vaccine program and licensed its Human Immunodeficiency Virus (“HIV”) vaccine program to third parties. We retain rights to milestone and royalty payments under these license and purchase agreements; however we do not anticipate that we will derive nor ultimately receive any significant revenue from these third parties that obtained rights to VaxGen’s anthrax and HIV programs.
Competition
Current Competition
We face competition from a number of life sciences companies in the discovery, development, and commercialization of novel diagnostic products for cardiovascular disease. Competing companies include, but are not limited to, large public companies with significantly greater resources, such as Roche, Abbott Laboratories, Siemens, Quest Diagnostics and Alere. Their products may compete indirectly with our current products by offering alternative tests for the same clinical need, and in the future they may compete directly against our product offerings.
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We are also aware that research may be underway at various government-financed entities worldwide, as well as at numerous academic institutions, to identify potential diagnostic markers and therapies for cardiovascular disease. Products developed from discoveries made by these entities and institutions may compete with our future product offerings.
Because of our current exclusive and co-exclusive licenses and patents, we believe it would be difficult for a competing company to commercialize an Lp-PLA2 test without our agreement. In the broader category of inflammation biomarkers, we are aware that hs-CRP tests are considered by some physicians to be competitive diagnostic blood tests and by other physicians to be complementary diagnostic blood tests to our PLAC Tests. There are over a dozen manufacturers of hs-CRP tests and such tests are widely available to the same laboratory customers who purchase our PLAC Tests.
Future Competition
It may be possible for existing customer laboratories to commercialize a diagnostic test service once our patents covering composition of matter and cardiovascular diagnostic claims of our PLAC Tests expire. Although these laboratories could develop a laboratory developed test and could show that they measure the same products as our PLAC Tests, or analytic validity, they would need to analyze human clinical samples from a study representative of US adult population with known cardiovascular outcomes to be able to claim clinical validity. We believe that there are few such archived studies available for providing clinical validity and running a long term prospective study would cost prohibitive to potential competitors. We also believe the FDA clearance for our PLAC ELISA Test and obtaining a similar clearance for the PLAC Activity Test could provide, along with being first-to-market, a distinct competitive advantage over future competitors for Lp-PLA2testing.
Research and Development
We incurred approximately $4.7 million and $4.2 million of research and development expenses during the years ended December 31, 2013 and 2012, respectively, each of which accounted for approximately 18% of our total operating expenses in these respective years. In 2012, we made technical improvements to both tests and analyzed archival samples from various clinical trials for Lp-PLA2 levels. In 2013, we continued to work on improving the PLAC ELISA Test, extended the shelf life of the PLAC Activity Test, and conducted preliminary activities in preparation of cohort testing with the PLAC Activity Test for submission to the FDA.
Pipeline
We are in the process of identifying new indications for our PLAC Tests to expand the clinical utility of our products. There are several published clinical studies that provide preliminary evidence that Lp-PLA2 levels may have clinical utility in diseases or indications other than those for which our PLAC Tests are currently cleared. We intend to focus on cardiovascular disease risks, such as risks of secondary cardiac events and risks of cardiac events in the context of other diseases.
We are also interested in acquiring biomarkers or rights to biomarkers that could be sold through our existing partnered sales channel, i.e., measured at cardiovascular specialty laboratories. We are specifically interested in assets that would have a development period of three years or less and would help uncover other heart disease risks. To that end, in the second half of 2012, we started a strategic business development process to identify new biomarker assays in the cardiovascular space, for development and sale through our existing channels. We anticipate being able to provide an update on this strategic development by the end of the first quarter of 2014.
Government Regulations and Regulatory Progress
Our PLAC Tests are subject to regulation by the FDA under its authority to regulate medical devices. In the US, medical devices are classified into one of three classes on the basis of the controls deemed by the FDA to be
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necessary to reasonably ensure their safety and effectiveness. Class I devices are subject to general controls, including labeling, premarket notification and adherence to the FDA’s Quality Systems Regulation (“QSR”), which covers device-specific good manufacturing practices. Class II devices are subject to general controls and special controls, including performance standards and post-market surveillance. Class III devices are subject to premarket approval and most of the previously identified requirements. Most in vitro diagnostic devices are regulated as Class I or Class II devices, although certain diagnostic tests are classified as Class III devices. Our PLAC Tests are classified as class II devices.
We are required to comply with the FDA’s good manufacturing practice requirements contained in its QSR. We are also subject to the FDA’s 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. Failure to comply with the applicable US medical device regulatory requirements could result in, among other things, warning letters, fines, injunctions, civil penalties, repairs, replacements, refunds, recalls or seizures of products, total or partial suspension of production, the FDA’s refusal to grant future premarket clearances or approvals, withdrawals or suspensions of current product applications, and criminal prosecution, any one or more of which could have a material adverse effect on diaDexus.
We are also subject to the laws that govern the manufacture and distribution of medical devices in the countries in which we manufacture or sell products. The member states of the EU have adopted the European Medical Device Directives, which regulate the manufacture and distribution of medical devices in all EU member countries. These regulations require us to obtain CE marking for diagnostic tests, including our PLAC Tests, prior to marketing them in any EU member state. In December 2009, we received authorization to apply the CE marking to our PLAC ELISA Test. In September 2011, we were awarded a Certificate of Registration of Quality System to I.A. EN ISO 13485:20003 (“ISO certification”) for “Design, manufacture and distribution of in vitro diagnostic reagents for the determination and evaluation of cardiovascular biomarkers” by the National Standards Authority of Ireland. In January 2012, the Technical File for the PLAC Activity Test was submitted for CE marking with a European authorized representative, mdi Europa. CE marking was obtained by self-certification in January 2012. Both ISO certification and CE marking are requirements for our PLAC Activity Test to be marketed and sold in Europe.
We are also subject to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices, transfers of value to physicians and teaching hospitals, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents used in connection with our research. Compliance with these laws and regulations relating to the protection of the environment has not had a material effect on our capital expenditures or competitive position. However, the extent of governmental regulation that might result from any legislative or administrative action cannot be accurately predicted.
In June 2011, we submitted a premarket notification to the FDA seeking clearance under section 510(k) of the Food, Drug and Cosmetic Act (“FDCA”) to market our PLAC Activity Test. In October 2011, we elected to withdraw the application following discussions with the FDA. We continued to have discussions with the FDA regarding a new application for the PLAC Activity Test with data from archival blood samples of a large clinical trial. In September 2013, we had a pre-submission meeting with the FDA, as a result of which we advanced our clinical program to support the submission of the PLAC Activity Test to the FDA. We have gained access to a large longitudinal cardiovascular disease study to validate the PLAC Activity Test. We anticipate that the clinical study sample analysis will be initiated prior to the end of the first quarter of 2014 and that we will subsequently submit a 510(k) to the FDA providing we interpret that the analysis supports clinical efficacy of the PLAC Activity Test. The FDA then would have up to 90 days to complete its review, but it may request additional data, which increases the time necessary to complete its review.
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Reimbursement
Our largest customers are cardiovascular specialty laboratories in the US. Payment for testing to these customers is largely based on third-party payor reimbursement, whereby the laboratory that performs the test will submit an invoice to the patient’s insurance provider or to the patient if he is not covered by an insurance program. Each diagnostic procedure (and in some instances, specific technologies) is assigned a current procedural terminology (“CPT”) code by the American Medical Association. Each CPT code is then assigned a reimbursement level by the Centers for Medicare and Medicaid Services (“CMS”), formerly the US Health Care Financing Administration. Third party insurance payors typically establish a specific fee to be paid for each code submitted. Third party payor reimbursement policies are generally determined with reference to the reimbursement for CPT codes for Medicare patients, which themselves are determined on a national basis by CMS. To the extent that third-party insurers cover our PLAC Test, our customers running our test are reimbursed provided that the clinician’s order contains covered diagnostic codes. Our PLAC ELISA Test has a CPT code and is reimbursed at $46.31 by CMS in 2014 and was reimbursed at $46.66 by CMS in 2013, before any sequester. We anticipate that there will be further decrease in the reimbursement price from CMS in future years. As a result of this decrease, we may experience pressure on our average selling price to our US customer laboratories that run our PLAC ELISA Test.
Our PLAC Tests has not received reimbursement coverage in any European country. We have on-going efforts to provide economic benefit analysis to certain European agencies that establish reimbursement for their respective territories.
Employees
As of December 31, 2013, we had a total of 67 full-time employees, including 12 full-time employees in sales. None of our employees are subject to a collective bargaining agreement and we believe that our relations with our employees are good.
Available Information
For more information about us, please visit our website at http://www.diadexus.com and our PLAC Tests website at http://www.plactest.com. You may also obtain a free copy of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports on the day the reports or amendments are filed with or furnished to the SEC by visiting the SEC’s website located at www.sec.gov, or our website at http://www.diadexus.com. In addition, any stockholder who wishes to obtain a printed copy of any of these documents should write to: Investor Relations, diaDexus, 349 Oyster Point Boulevard, South San Francisco, CA 94080. The information found on, or otherwise accessible through, our website or our PLAC Tests website is not incorporated information and does not form a part of this Annual Report on Form 10-K.
You may also read and copy any document we file at the SEC’s public reference room located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at (800) SEC-0330 for further information on the public reference room.
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.
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Risks Relating to Our Business Operations
We have withdrawn our 510(k) premarket notification for FDA clearance of our PLAC Activity Test, and we may not be able to submit a subsequent 510(k) premarket notification or to obtain clearance with respect to such application.
On June 17, 2011, we submitted a premarket notification to the FDA seeking clearance under Section 510(k) of the FDCA to market our PLAC Activity Test. This assay measures the activity levels of the Lp-PLA2 enzyme in the blood, while the PLAC Tests currently marketed in the US utilizes an ELISA method that measures the concentration of the enzyme. The PLAC Activity Test is capable of running on automated, high throughput clinical chemistry analyzers unlike the current PLAC ELISA Test. Future commercialization of an assay capable of running on automated, high throughput clinical chemistry analyzers may be important for the expansion of the PLAC Tests market and revenue growth. On October 24, 2011, we elected to withdraw this application following discussions with the FDA. We continued to have discussions with the FDA regarding a new application for the PLAC Activity Test, and in September 2013, we had a pre-submission meeting with the FDA. As a result of this meeting, we are advancing our clinical program to support the submission of the PLAC Activity Test. We have partnered with a large longitudinal cardiovascular disease study to validate the PLAC Activity Test. We are anticipating that the clinical study sample analysis will be initiated prior to the end of the first quarter of 2014.
There can be no guarantee that clinical trials we identify will be satisfactory to the FDA. We cannot assure you that the results of any such clinical trials will support the proposed clinical claims. There can be no guarantee that the FDA will clear any subsequent 510(k) submission on a timely basis, or at all. We are unable to predict the submission date or receipt of clearance for the PLAC Activity Test, which may result in a loss of potential customers and would have an adverse effect on our financial condition and our ability to maintain or expand our business.
Our future success depends on our ability to retain our Chief Executive Officer and other key employees and to attract, retain and motivate qualified personnel.
We depend on the efforts and abilities of our Chief Executive Officer, along with other senior management, our research and development staff and a number of other key management, sales, support, technical and administrative services personnel. 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 develop new products and manage our business effectively.
We are an early stage company and have engaged in only limited sales and marketing activities for our first products, the PLAC Tests.
Our products 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 establish a market for our PLAC Tests and build that market through 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 and in the coverage by insurers. Our ability to successfully commercialize the PLAC Tests and other diagnostic products will depend on many factors, including:
| | • | | whether healthcare providers believe our PLAC Tests and any other diagnostic tests that we successfully develop provide sufficient incremental clinical utility; |
| | • | | whether we are able to demonstrate that treatment of individuals based on their Lp-PLA2 levels improves clinical outcomes in prospective clinical studies; and |
| | • | | whether health insurers, government health programs and other third-party payors will cover and pay for our diagnostic tests and the amounts they will reimburse. |
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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.
Our business is 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 four customers accounted for 72% and 60% of our accounts receivable as of December 31, 2013 and 2012, respectively, and 74% and 69% of our revenue for the years ended December 31, 2013 and 2012, 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, developments related to our products, and changes in individual customers’ purchases of our products. We may experience greater or lesser customer concentration in the future, depending on future commercial agreements and whether we are able to grow our revenue from the PLAC Activity Test. However, it is likely that our revenue and profitability will continue to be dependent on a very limited number of customers, and we may experience an even higher degree of customer concentration in the future. 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 given period and may result in significant annual and quarterly revenue variations. Moreover, our largest customers exert greater influence over our product pricing, which led to a decline in average sales price in past quarters. Such downward pressure on our pricing may continue. In addition, we may be unable to collect related accounts receivables when due, which could have a material adverse effect on our business.
Our PLAC Activity Test sales could be affected by the outcome and the timing of the GlaxoSmithKline’s clinical studies of its Lp-PLA2 inhibitor, darapladib.
In November 2013, GlaxoSmithKline reported in a press release that their trial evaluating the Lp-PLA2 inhibitor, darapladib, did not meet its primary endpoint measure, which was time to first occurrence of any major adverse cardiovascular event (“MACE”). GlaxoSmithKline indicated on www.clinicaltrials.gov that a second Phase 3 study, named SOLID-TIMI 52, has an estimated primary completion date of March 2014. The outcomes of these trials may or may not increase or decrease the adoption and sales of our PLAC Test and we are unable to predict the timing and potential impact of those results.
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 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 manufacturers for our PLAC ELISA Test, and we intend to order regularly from both of these third-party 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 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, some of which are sole source or for whom an alternative could be difficult to replace in a timely manner, that are essential for the manufacture of our
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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 our PLAC Activity Test on-site in South San Francisco, California and we could experience process, quality control and shipping problems due to the early stage of manufacturing.
We have developed manufacturing of the PLAC Activity Test in house. We are dependent on the expertise of our personnel for this product. We could observe performance deviations that have not been apparent during development, including performance and stability of the PLAC Activity Test. The discovery of such performance deviations or of any manufacturing problems may adversely affect our sales in Europe.
If third-party payors 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 payors, such as Medicare, Medicaid and other government programs, private insurance plans and managed care programs. Third-party payors 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 payors are increasingly challenging the prices charged for diagnostic tests. Most of these third-party payors 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 US, third-party payors 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 CPT codes. Each third-party payor 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 payor even if the same billing code is reported for claims filing purposes. For laboratory tests without a specific billing code, payors often review claims on a claim-by-claim basis and there are increased uncertainties as to coverage and eligibility for reimbursement. Currently, the tests performed by our assays are described by existing CPT codes, but we cannot guarantee that the CPT codes will not be revised or new CPT codes will not be established for our future assays. 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 using our products may decrease amounts physicians and other practitioners are able to charge patients, which in turn may adversely affect the willingness of physicians and other practitioners to purchase our products at prices we target, or at all. If we are unable to sell our products at target prices, our revenue and gross margins will suffer and our business could be materially harmed.
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. If we fail to develop and commercialize or enter into collaborations for new diagnostic products, we may be unable to execute our business plan.
Our long-term ability to generate product revenue will depend in part on our ability to develop additional formats or versions of the PLAC Tests and other new diagnostic products. If internal efforts do not generate sufficient product candidates, we will need to identify third parties that wish to collaborate with us to develop new products and applications. Our ability to enter into third-party relationships will depend in part on our ability to negotiate acceptable license and related agreements. Even if we are successful in establishing collaborative arrangements, they may never result in the successful development or commercialization of any product candidate or the generation of any sales or royalty revenues. In addition, rapid technological developments and innovations
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characterize the markets for our products and services. Our success will depend in large part on our ability to correctly identify emerging trends, enhance capabilities, and develop and manufacture new products quickly, in a cost-effective manner, and at competitive prices. The development of new and enhanced products is a complex and costly process. We may need to make substantial capital expenditures and incur significant research and development costs to develop and introduce such new products and enhancements. If we fail to timely develop and introduce competitive new products or additional formats of our existing products, our business could be materially adversely affected.
International expansion of our business exposes us to significant risks associated with doing business outside of the United States.
Our business strategy incorporates international expansion, including establishing and maintaining direct sales and physician outreach and education capabilities outside of the US and expanding our relationship with distributors. We currently market both of our PLAC Tests in Europe. Doing business internationally involves a number of risks, including:
| | • | | multiple, conflicting and changing laws and regulations such as tax laws, export and import restrictions, employment laws, regulatory requirements and other governmental approvals, permits and licenses; |
| | • | | failure by us or our distributors to obtain and maintain regulatory approvals for the use of our tests in various countries; |
| | • | | difficulties in managing foreign operations; |
| | • | | complexities associated with managing multiple payor reimbursement regimes or patient self-pay systems; |
| | • | | logistics and regulations associated with shipping, including infrastructure conditions and transportation delays; |
| | • | | limits in our ability to penetrate international markets if we are not able to process tests locally; |
| | • | | financial risks, such as longer payment cycles, difficulty collecting accounts receivable and exposure to foreign currency exchange rate fluctuations; |
| | • | | natural disasters, political and economic instability, including wars, terrorism, and political unrest, outbreak of disease, boycotts, curtailment of trade and other business restrictions; and |
| | • | | regulatory and compliance risks that relate to maintaining accurate information and control over sales and distributors’ activities that may fall within the purview of the Foreign Corrupt Practice Act, its books and records provisions or its anti-bribery provisions. |
Any of these factors could significantly harm our future international expansion and operations and, consequently, our revenues and results of operations.
Our dependence on distributors for foreign sales of our PLAC Activity Test could limit or hinder us from selling our tests in Europe and from realizing long-term international revenue growth.
As of December 31, 2013, we had exclusive distribution agreements for our products in 23 countries, mostly in Europe, and we may enter into other similar arrangements in other countries in the future. Exclusive distribution arrangements limit our ability to directly, or indirectly through other distributors, address customers in those countries. Distributors may not commit the necessary resources to market and sell our PLAC Tests to the level of our expectations. We intend to grow our business internationally, and to do so we may need to attract additional distributors to expand the territories in which we sell our PLAC Activity Tests. If current or future distributors do not perform adequately, or we are unable to locate distributors in particular geographic areas, we may not realize long-term international revenue growth.
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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:
| | • | | preparing, filing and distributing periodic and current reports under the Exchange Act for a larger operating business and complying with other Exchange Act requirements applicable to public companies; |
| | • | | formalizing old and establishing new internal policies, such as those relating to insider trading and disclosure controls and procedures; |
| | • | | involving and retaining to a greater degree outside counsel and accountants in the above activities; and |
| | • | | establishing and maintaining an investor relations function, including the provision of certain information on our website. |
We will also be subject to additional reporting and compliance requirements if our securities are listed on a national securities exchange or if we cease to be a smaller reporting company under applicable SEC regulations. 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 Securities and Exchange Commission (“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, our corporate, research and manufacturing 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 systems, or 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.
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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 US, we must obtain either clearance under Section 510(k) of the FDCA, or approval of a pre-market approval application, or 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:
| | • | | we may not be able to demonstrate to the FDA’s satisfaction that our products are substantially equivalent to lawful predicate device or safe and effective for their intended uses; |
| | • | | the data from our pre-clinical studies and clinical trials may be insufficient to support clearance or approval, where required; |
| | • | | the manufacturing process or facilities we use may not meet applicable requirements; and |
| | • | | changes in FDA clearance or approval policies or the adoption of new regulations may require additional data. |
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, 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.
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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 recently enacted 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. Although the FDA has not detailed 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,
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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 (“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. In addition, the PPACA provides for an excise tax on medical devices that will potentially increase our costs if we are unable to pass the taxes on to our customers and requires us to disclose all transfers of values to physicians and physician teaching institutions under the sunshine provisions of the PPACA. A failure to properly disclose such transfers could cause Medicare to impose penalties, including substantial financial sanctions.
In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. For example, on August 2, 2011, President Obama signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend proposals in spending reductions to Congress. The Joint Select Committee did not achieve the targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, thereby triggering the legislation’s automatic reduction to several government programs. These automatic budget triggers have been commonly referred to as the sequestration process.
The full impact on our business of the PPACA and the potential impact of the sequestration process is uncertain. Levels of reimbursement may decrease in the future, and future legislation, regulation or reimbursement policies of third-party payors may adversely affect the demand for and price levels of our products.
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:
| | • | | the federal Health Insurance Portability and Accountability Act of 1996 as amended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information; |
| | • | | the federal healthcare programs’ Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs; |
| | • | | federal false claims laws that prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent; |
| | • | | federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters; and |
| | • | | state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers. |
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.
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Risks Relating to Liquidity
Our Comerica Bank loan contains restrictions that limit our flexibility in operating our business, and our lender may accelerate repayment of amounts outstanding under certain circumstances.
In September 2011, we entered into a Loan and Security Agreement with Comerica Bank, which was amended in September 2012 and again in October 2013 (the “Amended Loan and Security Agreement”). The Amended Loan and Security Agreement contains various covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things:
| | • | | Sell, transfer, lease or dispose of our assets; |
| | • | | Create, incur or assume additional indebtedness; |
| | • | | Encumber or permit liens on certain of our assets; |
| | • | | Pay dividends on, repurchase or make distributions with respect to our common stock; |
| | • | | Make specified investments; |
| | • | | Consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and |
| | • | | Enter into certain transactions with our affiliates. |
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 a default under the loan. Additionally, we are required to (i) maintain a liquidity ratio of not less than 1.25 to 1 and (ii) ensure our cumulative net loss beginning July 1, 2013 does not exceed $6,000,000 in accordance with GAAP, and our failure to do so could result in a default under the loan. Upon the occurrence of an event of default under the loan, Comerica could elect to declare all amounts outstanding to be immediately due and payable. If we were unable to repay those amounts, Comerica 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.
We will need to raise additional capital to support our operations in the future.
We will require additional funds to 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 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.
We are an early stage company with 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 $199.9 million at December 31, 2013. For the years ended December 31, 2013 and 2012, we incurred net losses of $2.2 million and $2.8 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 or enhance our product pipeline. If we are unable to execute our commercialization strategy 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 product line of PLAC Tests. We expect that the PLAC Tests will account for a substantial portion of our revenue for the foreseeable future. We do not know if our PLAC Tests will be successful over the long-term and it is possible that the demand for the product may decline over time,
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and any quarter or other period of profitability may not be sustainable without continued growth in sales of our PLAC Tests. We may never be able to commercialize the PLAC Activity Test in the US. Any decline in demand or failure of our PLAC Tests 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 grow at the historical rates that we have experienced in the past, and any reduction in demand from one or more of our major customers would have a significant impact on our ability to achieve and maintain profitability.
We have liabilities for real estate leases in excess of what is necessary for our current business. We will incur these additional expenses until we are able to sublease a portion of our larger leased facility.
We have a significant real estate lease for a facility of approximately 65,000 square feet with current monthly minimum required expenses of approximately $220,000. The term of the lease continues until December 31, 2016. Until such time that we are able to sublease a portion of the facility, we will incur liabilities for real estate leases significantly in excess of what is necessary for our current business. We may never be able to sublease a portion of the facility.
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, and diagnostic tests under the patent and other intellectual property laws of the US and other countries, so that we can seek to prevent others from unlawfully using our proprietary inventions and information.
Additionally, we have 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.
Moreover, the US Leahy-Smith America Invents Act, with central provisions effective as of March 2013, brings significant changes to the US patent system, which include a change to a “first to file” system from a “first to invent” system and changes to the procedures for challenging issued patents and disputing patent applications during the examination process, among other things. The effects of these changes on our patent portfolio and business have yet to be determined, as the US Patent and Trademark Office is implementing regulations relating to these changes and US courts have yet to address the new provisions. However, these changes could increase the costs and uncertainties surrounding the prosecution of our patent applications and the enforcement or defense of our patent rights.
Furthermore, recently issued US Supreme Court has 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 US 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 inAssociation for Molecular Pathology et al.v. Myriad Genetics, Inc., et al. the US 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 the impact of the decisions in these cases will bring with respect to our patents.
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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 US patents and their foreign counterparts. Some of these licensed patents covering composition of matter and cardiovascular diagnostic claims have expiration dates range from 2013 to 2016. A family of issued patents and pending applications covering measuring Lp-PLA2 activity in the presence of an inhibitor, such as the drug candidate darapladib, will expire after 2024.
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, milestone 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 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 GlaxoSmithKline and ICOS that provide important protection on the composition of matter and utility of our products and product candidates. We do not, however, directly control the prosecution and maintenance of all of these patents. GlaxoSmithKline and ICOS may not fulfill their obligations as licensors and may allow these patents to go abandoned or may not pursue meaningful claims for our products. Also, while the US 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 unpatentable 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.
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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. 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:
| | • | | Actions taken by regulatory authorities with respect to our products; |
| | • | | The progress and results of our product development efforts; |
| | • | | The outcome of legal actions to which we may become a party; |
| | • | | Our ability to commercialize the products, if any, that we are able to develop; |
| | • | | Changes in our capital structure, such as future issuances of securities or the incurrence of additional debt; and |
| | • | | Restatements of our financial results and/or material weaknesses in our internal controls. |
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. 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.
As a result of our failure to make timely filings of financial statements, we were delisted from The NASDAQ Stock Market in 2004. 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 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 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 or President, with the result that any third-party takeover not supported by the Board of Directors could be subject to significant delays and difficulties.
| Item 1B. | Unresolved Staff Comments |
None
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We maintain our principal administrative office, laboratory and production operations in a 65,000 square foot leased facility located at 349 Oyster Point Boulevard under a lease agreement that expires in December 2016. We believe this facility is more than adequate for our present needs.
We are from time to time subject to various claims and legal actions during the ordinary course of business. We believe that there are currently no claims or legal actions that would reasonably be expected to have a material adverse effect on its results of operations or financial condition.
| Item 4. | Mine Safety Disclosures |
Not applicable
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PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stock Holder Matters and Issuer Purchases of Equity Securities |
Our common stock is quoted on the OTC Bulletin Board (the “OTCQB”) under the symbol “DDXS”. The following table sets forth the high and low bid prices of our common stock for the periods indicated. The prices represent quotations by dealers without adjustments for retail markups or commission and may not represent material transactions.
| | | | | | | | | | | | | | | | |
| | | Common Stock | |
| | | 2013 | | | 2012 | |
| | | High | | | Low | | | High | | | Low | |
First Quarter | | $ | 0.69 | | | $ | 0.34 | | | $ | 0.42 | | | $ | 0.17 | |
Second Quarter | | | 0.88 | | | | 0.54 | | | | 0.46 | | | | 0.23 | |
Third Quarter | | | 1.95 | | | | 0.72 | | | | 0.46 | | | | 0.32 | |
Fourth Quarter | | | 2.23 | | | | 0.64 | | | | 0.43 | | | | 0.28 | |
On March 6, 2014, the last reported sales price of our common stock on the OTCQB was $0.98 per share.
Holders
There were approximately 298 holders of record of our common stock as of March 6, 2014.
Repurchases and Dividends
Issuer purchases of equity securities during the quarter ended December 31, 2013:
(in thousands, except shares and per share amounts)
| | | | | | | | | | | | | | | | |
| Fiscal Period | | Total Number
of Shares
Purchased | | | Average
Price
Paid Per
Share | | | Total Number of
Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs | | | Approximate
Dollar Value of
Shares That May
Yet Be Purchased
Under Plans or
Programs | |
| | | | |
April 1 – April 30, 2013 | | | 248,440 | | | $ | 0.26 | | | | — | | | | — | |
| | | | |
August 1 – August 31, 2013 | | | 386,784 | | | | 0.26 | | | | — | | | $ | — | |
| | | | | | | | | | | | | | | | |
| | | | |
| | | 635,224 | | | $ | 0.26 | | | | — | | | $ | — | |
| | | | | | | | | | | | | | | | |
In April 2013, we issued 248,440 shares of common stock pursuant to a cashless exercise of 438,421 options with an exercise price of $0.26. In August 2013, we issued 386,784 shares of common stock pursuant to a cashless exercise of 480,769 warrants with an exercise price of $0.26. There were no other repurchases of our equity securities during the year ended December 31, 2013. We have never declared or paid any cash dividends on our common stock and we do not currently intend to pay any cash dividends on our common stock for the foreseeable future. Under the terms of a loan agreement with a bank, we are restricted from declaring a dividend without the bank’s consent.
The information required by this item regarding equity compensation plans is incorporated by reference to the information in Item 11 of this Annual Report on Form 10-K.
| Item 6. | Selected Financial Data |
Not required
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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 Financial Statements and related Notes included in PART II, Item 8 of this Annual Report on Form 10-K for the year ended December 31, 2013.
Overview
We are a life sciences company focused on developing and commercializing proprietary cardiovascular diagnostic products addressing unmet needs in cardiovascular disease (“CVD”). We sell our diagnostic products to laboratories. Physicians order testing 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 mass 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 (“CHD”) 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. The amended Loan and Security Agreement contains 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
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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.
The “Company,” “diaDexus,” “we,” “us,” and “our” refers to the business of diaDexus, Inc. (f/k/a VaxGen, Inc.) after the reverse merger between Vaxgen, Inc. and former diaDexus, Inc. on July 28, 2010.
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 United States (“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.
Note 2 of the financial statements in Part II, Item 8 of this Annual Report on Form 10-K describes the significant accounting policies used in the preparation of the financial statements. We consider the following accounting policies to be critical accounting policies because they are significantly affected by critical accounting estimates, they are highly important to the portrayal of our financial condition and results and they require management judgments and assumptions about matters that are inherently uncertain.
Revenue Recognition
We generate revenues from product sales, royalties earned, license fees and contract arrangements, and recorded net of customer and distributor discounts. Revenue is recognized when the four basic criteria of revenue recognition are met: (i) a contractual agreement exists; (ii) delivery of product has occurred and risk of loss and title has transferred, transfer of technology (intellectual property) has been completed or services have been rendered; (iii) the fee is fixed or determinable; and (iv) collectability is reasonably assured.
License fee revenue including nonrefundable upfront fees, is deferred and recognized over the term of the underlying agreements. We recognize royalty revenue when reportable product sales are confirmed. Revenue from technology licenses or other payments under collaborative agreements where we have a continuing obligation to perform is recognized as revenue over the expected period of the continuing performance obligation. The term of these underlying agreements is ten years.
Our revenues are derived to a large extent from sales to a limited number of distributors and large laboratory customers which account for a significant portion of our revenue. The concentration of our key customers may vary from period to period for a variety of reasons, including competition, developments related to our products, and changes in individual customers’ purchases of our products. The concentration of revenue from our top four customers was 74% and 69% for the years ended December 31, 2013 and 2012, respectively.
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Revenues by geography are based on the billing address of the customer. The following table sets forth revenues by geographic area (in thousands):
| | | | | | | | |
| | | Years Ended December 31, | |
| | | 2013 | | | 2012 | |
United States | | $ | 24,316 | | | $ | 20,443 | |
Europe | | | 330 | | | | 245 | |
Rest of the world | | | 238 | | | | 88 | |
| | | | | | | | |
| | $ | 24,884 | | | $ | 20,776 | |
| | | | | | | | |
Stock-Based Compensation
We account for stock-based compensation using the fair value recognition provisions of Accounting Standard Codification (“ASC”) 718,Share-Based Payment. The fair value of stock options and warrants are calculated using the Black-Scholes pricing method on the date of grant. Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the input of various assumptions, including the expected life of the stock-based payment awards, our stock price volatility and the expected forfeiture rate of our options. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment.
Because employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in our management’s opinion, the existing model does not necessarily provide a reliable single measure of fair value of our employee stock options. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period. See Note 12 to the financial statements for more information regarding stock-based compensation.
Income Taxes
Effective January 1, 2009, we adopted ASC 740-10, Accounting for Income Taxes. ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The interpretation applies to all tax positions accounted for and requires a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in an income tax return. Subsequent recognition, de-recognition and measurement is based on management’s best judgment given the facts, circumstances and information available at the reporting date. See Note 15 to the financial statements for more information regarding our income tax policies.
Pre-Merger VaxGen filed tax returns with positions that may be challenged by the tax authorities. These positions relate to, among others, deductibility of certain expenses, expenses included in our research and development tax credit computations, as well as other matters. Although the outcome of any tax audit is uncertain, in management’s opinion, adequate provisions for income taxes have been made for potential liabilities resulting from such matters. We regularly assess the tax positions for such matters and include reserves for those differences in position. The reserves are utilized or reversed once the statute of limitations has expired and/or at the conclusion of the tax examination. We believe that the ultimate outcome of these matters will not have a material impact on our financial position, financial operations or liquidity.
We file income tax returns in the US federal jurisdiction and several state jurisdictions. To date, we have not been audited by the Internal Revenue Service or any state income tax jurisdictions. Our policy is to recognize
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interest and penalties related to the underpayment of income taxes as a component of income tax expense. As of December 31, 2013, there have been no interest or penalties charged to us in relation to the underpayment of income taxes.
We have generated net losses since inception and accordingly did not record a provision for income taxes. The deferred tax assets were primarily comprised of federal and state tax net operating loss (“NOL”) carryforwards. Due to uncertainties surrounding our ability to continue to generate future taxable income to realize these tax assets, a full valuation allowance has been established to offset our deferred tax assets. Additionally, the future utilization of our NOL carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have occurred previously or that could occur in the future. If necessary, the deferred tax assets will be reduced by any carryforwards that expire prior to utilization as a result of such limitations, with a corresponding reduction of the valuation allowance.
Under the provisions of Sections 382 and 383 of the Internal Revenue Code, a change of control, as defined in the Internal Revenue Code, may impose an annual limitation on the amount of the Company’s net operating loss and tax credit carryforwards, and other tax attributes, that can be used to reduce future tax liabilities. As a result of our reverse merger, certain of the Company’s tax attributes related to former diaDexus, Inc. prior to the reverse merger are subject to an annual limitation of $240,000 for federal and state purposes.
Results of Operations
Results of Operations for the Years Ended December 31, 2013 and 2012
Revenues
| | | | | | | | | | | | |
| | | Years Ended December 31, | | | % Increase (Decrease) | |
| | | 2013 | | | 2012 | | | 2012 to 2013 | |
| | | (in thousands) | | | | |
Revenues: | | | | | | | | | | | | |
Product sales | | $ | 24,561 | | | $ | 18,066 | | | | 36 | % |
Royalty revenue | | | 18 | | | | 2,405 | | | | (99 | )% |
License revenue | | | 305 | | | | 305 | | | | — | % |
| | | | | | | | | | | | |
Total net revenues | | $ | 24,884 | | | $ | 20,776 | | | | 20 | % |
| | | | | | | | | | | | |
Revenues are generated from licensing fees, royalties earned, product sales, and contract arrangements. The accounting classification of our product revenue as either royalties or product sales relates to the sales channels used, and as such, we believe that operating performance is most effectively evaluated by examining total net revenues.
Revenues for the year ended December 31, 2013 were $24.9 million, an increase of approximately $4.1 million, or 20% compared with the year ended December 31, 2012. This increase primarily reflects an increased volume demand for our PLAC ELISA Test.
Our top four customers accounted for 74% and 69% of our net revenues for the years ended December 31, 2013 and 2012, respectively. Because of this customer concentration and the timing of orders from these customers, our quarterly and annual revenues may fluctuate materially. We expect quarterly revenues to fluctuate more due to the high customer concentration. We also expect revenues to increase with volume demand for the PLAC Tests.
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Product Costs
| | | | | | | | | | | | |
| | | Years Ended December 31, | | | % Increase | |
| | | 2013 | | | 2012 | | | 2012 to 2013 | |
| | | (in thousands) | | | | |
Product costs | | $ | 7,222 | | | $ | 6,296 | | | | 15 | % |
Product costs include our expenditures for cost of goods, manufacturing support, product supplies, quality control, personnel expenses and facility costs. Product costs for the year ended December 31, 2013 were $7.2 million, an increase of $926,000, or 15% compared to the year ended December 31, 2012. This increase primarily reflects an increase in personnel and recruiting costs of approximately $460,000 due to expansion of quality control and manufacturing teams, an increase in excise tax of approximately $455,000 imposed under the Patient Protection and Affordable Care Act of 2010, and an increase in product-related materials and supplies costs of approximately $255,000 due to increased demand for our PLAC Tests. These cost increases were partially offset by a decrease of approximately $250,000 in royalty costs due to the expiration of a royalty obligation in August 2012.
We expect product costs to continue to increase due to increased demand for our PLAC Tests, partially offset by production economies of scale.
Sales and Marketing Expenses
| | | | | | | | | | | | |
| | | Years Ended December 31, | | | % Increase | |
| | | 2013 | | | 2012 | | | 2012 to 2013 | |
| | | (in thousands) | | | | |
Sales and marketing | | $ | 7,482 | | | $ | 5,465 | | | | 37 | % |
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 for the year ended December 31, 2013 were $7.5 million, an increase of $2.0 million, or 37% compared to the year ended December 31, 2012. This increase primarily reflects an increase in personnel costs of approximately $1.5 million due to an expansion of our sales and marketing team, an increase of approximately $321,000 related to increased marketing activities and development of marketing materials, and an increase in travel and entertainment of approximately $264,000 due to higher headcount. These cost increases were partially offset by a decrease in collaborative studies expenses of approximately $72,000 related to exploratory label claim expansion of our PLAC Tests.
We expect our sales and marketing expenses to continue to increase as we identify and hire additional personnel and as we develop and commercialize new products in the US, and maintain and expand our position in the market for diagnostics in cardiovascular disease.
Research and Development Expenses
| | | | | | | | | | | | |
| | | Years Ended December 31, | | | % Increase | |
| | | 2013 | | | 2012 | | | 2012 to 2013 | |
| | | (in thousands) | | | | |
Research and development | | $ | 4,709 | | | $ | 4,196 | | | | 12 | % |
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 for the year ended December 31, 2013 were $4.7 million, an increase of $513,000, or 12% compared to
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the year ended December 31, 2012. This increase primarily reflects an increase in personnel costs of $298,000 due to expansion of our research and development team and an increase in costs of approximately $211,000 related to development of a new diagnostics product pipeline.
We expect research and development costs will continue to increase as a result of staffing increases and new product development projects.
General and Administrative Expenses
| | | | | | | | | | | | |
| | | Years Ended December 31, | | | % Increase | |
| | | 2013 | | | 2012 | | | 2012 to 2013 | |
| | | (in thousands) | | | | |
General and administrative | | $ | 7,486 | | | $ | 7,217 | | | | 4 | % |
General and administrative expenses include personnel costs for finance, administration, information systems and professional fees as well as facilities expenses. General and administrative expenses for the year ended December 31, 2013 were $7.5 million, an increase of $269,000, or 4%, compared to the year ended December 31, 2012. This increase primarily reflects an increase in stock-based compensation expense of approximately $157,000 primarily attributable to a higher stock price, an increase in professional fees of approximately $81,000 primarily related to healthcare regulatory compliance, and an increase in accrued compensation of $66,000. These cost increases were partly offset by a one-time recruiting expense of approximately $91,000 related to the hiring of our chief financial officer in 2012.
We expect general and administrative expenses increase slightly on track with inflation.
Interest Income, Interest Expense and Other Income (Expense), Net
| | | | | | | | | | | | |
| | | Years Ended December 31, | | | % Increase (Decrease) | |
| | | 2013 | | | 2012 | | | 2012 to 2013 | |
| | | (in thousands) | | | | |
Interest income, interest expense and other income (expense), net | | | | | | | | | | | | |
Interest income | | $ | 4 | | | $ | 16 | | | | (75 | )% |
Interest expense | | | (488 | ) | | | (395 | ) | | | 24 | % |
Other income (expense), net | | | 340 | | | | (10 | ) | | | (3,500 | )% |
| | | | | | | | | | | | |
Total net interest and other income (expense) | | $ | (144 | ) | | $ | (389 | ) | | | (63 | )% |
| | | | | | | | | | | | |
Interest income is derived from cash balances, and short and long-term investments. Interest expense is based on outstanding debt obligations. Net interest and other expense for the year ended December 31, 2013 was $(144,000), an increase of $245,000, or 63% compared to the year ended December 31, 2012. This increase primarily reflects a gain of approximately $340,000 from sale of assets held-for-sale, offset by increase in interest expense of approximately $93,000 primarily due to an increase in our loan under our credit facility.
Income Taxes
| | | | | | | | | | | | |
| | | Years Ended December 31, | | | % Increase | |
| | | 2013 | | | 2012 | | | 2012 to 2013 | |
| | | (in thousands) | | | | |
Income tax benefit (provision) | | $ | (5 | ) | | $ | (2 | ) | | | 150 | % |
We generated a net loss for the year ended December 31, 2013 and had no federal income tax provision. Our effective tax rate for income tax was 0% for the years ended December 31, 2013 and 2012.
32
While we have substantial net operating loss carryforwards available to offset future taxable income for federal and state income tax purposes, our ability to utilize certain of our net operating losses are limited due to changes in our ownership as defined by Section 382 of the Internal Revenue Code. At December 31, 2013, we had unrecognized tax benefits totaling $1.6 million.
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 December 31, 2013, we had an accumulated deficit of $199.9 million, working capital of $14.6 million and stockholders’ equity of $7.5 million. Based on our current operating plan, we believe that our existing cash and cash equivalents will be sufficient to cover our cash needs for operating activities and commitments for at least twelve months.
Cash, Cash Equivalents and Investments
As of December 31, 2013, we had cash and cash equivalents of $16.8 million, compared to cash, cash equivalents and investments of $13.6 million at December 31, 2012. The increase of $3.2 million primarily reflects proceeds from notes payable of $5.0 million which was partially offset by cash used in operating activities of $2.1 million.
Cash Flows from Operating Activities
Net cash used in operating activities of $2.1 million for the year ended December 31, 2013 was principally due to the net loss of $2.2 million and a $0.3 million cash outflow related to changes in operating assets and liabilities, offset by the effect of non-cash items totaling $0.4 million. Significant non-cash items were stock-based compensation expense of $0.6 million, depreciation and amortization of $0.5 million, interest expense of $0.1 million, unfavorable lease amortization of $(0.6) million and gain in sale of assets of $(0.3) million.
Net cash used in operating activities of $3.4 million for the year ended December 31, 2012 was principally due to the net loss of $2.8 million and a $1.2 million cash outflow related to changes in operating assets and liabilities, offset by the effect of non-cash items totaling $0.6 million. Significant non-cash items were depreciation and amortization of $0.5 million, stock-based compensation of $0.4 million, interest expense of $0.1 million, and unfavorable lease amortization of $(0.5) million.
Cash Flows from Investing Activities
Net cash provided by investing activities in the year ended December 31, 2013 was $1.1 million, primarily due to net investment maturities of $0.7 million and proceeds from sale of assets of $0.6 million. This cash provided by investing activities was partially offset by purchases of property and equipment totaling $0.3 million.
Net cash provided by investing activities in the year ended December 31, 2012 was $5.8 million, primarily due to net investment maturities of $6.0 million and a restricted cash release of $0.4 million relating to the expiration of the 343 Oyster Point facility lease in January 2012. This cash provided by investing activities was partially offset by purchases of property and equipment totaling $0.6 million.
Cash Flows from Financing Activities
Net cash provided by financing activities in the year ended December 31, 2013 was $5.0 million, primarily due to amending and increasing a term loan in the amount of $5.0 million and proceeds from stock option exercises of $0.1 million. This was partially offset by a fee paid relating to the term loan of $0.1 million.
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Net cash provided by financing activities in the year ended December 31, 2012 was $39,000, reflecting proceeds from stock option exercises, partially offset by a fee paid relating to the amendment of a term loan agreement first entered into in September 2011.
Other Information
Our future capital requirements will depend primarily upon our ability to maintain and grow our current product revenues, to obtain regulatory approval for the PLAC Activity Test in the US, to develop and commercialize product line extensions for our PLAC Tests, to develop or acquire new cardiovascular biomarker tests, to manage our obligations under real estate leases, to realize the sale of our assets held for sale, and to improve our reimbursement prospects from third-party payors.
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.
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.
In September 2011, we entered into a loan and security agreement with Comerica Bank, which was amended in September 2012 and again in October 2013 (see Note 9 of the Notes to Financial Statements included in this Annual Report on Form 10-K). 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. Additionally, we are required to (i) maintain a liquidity ratio of not less than 1.25 to 1 and (ii) ensure our cumulative net loss does not exceed $6,000,000 beginning July 1, 2013 in accordance with GAAP, and failure to do so could result in a default under the loan. Upon the occurrence of an event of default under the loan, the bank could elect to declare all amounts outstanding to be immediately due and payable. If we are unable to repay those amounts, the bank 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.
Our future liquidity requirements may increase beyond currently expected levels if we fail to maintain compliance with the loan covenants. In order to meet the 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. 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.
Commitments and Contingencies
Our contractual obligations and future minimum lease payments that are non-cancelable at December 31, 2013 are disclosed in the following table(in thousands):
| | | | | | | | | | | | | | | | |
| | | Total | | | 2014 | | | 2015 | | | 2016 | |
Debt obligations | | $ | 11,379 | | | $ | 3,418 | | | $ | 3,233 | | | $ | 4,728 | |
Operating lease obligations | | | 7,977 | | | | 2,581 | | | | 2,658 | | | | 2,738 | |
| | | | | | | | | | | | | | | | |
Total contractual commitments | | $ | 19,356 | | | $ | 5,999 | | | $ | 5,891 | | | $ | 7,466 | |
| | | | | | | | | | | | | | | | |
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As part of the reverse merger completed in 2010, we recorded a lease obligation which contained a lease payment that exceeded current market rates. Accordingly, we recognized a $4.1 million unfavorable lease obligation. We amortize the unfavorable lease obligation using the effective interest rate method. The carrying amount of the unfavorable lease liability was $2.5 million as of December 31, 2013.
Off-Balance Sheet Arrangements
As of December 31, 2013, 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 Financial Statements for recent accounting pronouncements, including the expected dates of adoption and estimated effects on our financial statements.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
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 December 31, 2013, we had cash and cash equivalents of $16.8 million which consisted of cash and highly liquid money market funds.
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| Item 8. | Financial Statements and Supplementary Data |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of diaDexus, Inc.
In our opinion, the accompanying balance sheets and the related statements of comprehensive loss, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of diaDexus, Inc. at December 31, 2013 and December 31, 2012, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers, LLP
San Jose, California
March 11, 2014
36
DIADEXUS, INC.
BALANCE SHEETS
(in thousands, except share data)
| | | | | | | | |
| | | December 31, | |
| | | 2013 | | | 2012 | |
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 16,847 | | | $ | 12,851 | |
Short-term investment securities | | | — | | | | 747 | |
Accounts receivable, net of reserve of $5 and $0 at December 31, 2013 and 2012, respectively | | | 3,027 | | | | 2,789 | |
Inventories | | | 460 | | | | 134 | |
Assets held for sale | | | — | | | | 300 | |
Prepaid expenses and other current assets | | | 845 | | | | 871 | |
| | | | | | | | |
Total current assets | | | 21,179 | | | | 17,692 | |
Restricted cash | | | 1,400 | | | | 1,400 | |
Property and equipment, net | | | 968 | | | | 1,250 | |
Other long-term assets | | | 100 | | | | 142 | |
| | | | | | | | |
Total assets | | $ | 23,647 | | | $ | 20,484 | |
| | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 611 | | | $ | 469 | |
Notes payable, current portion | | | 2,763 | | | | 272 | |
Deferred revenues, current portion | | | 228 | | | | 317 | |
Deferred rent, current portion | | | 51 | | | | — | |
Unfavorable lease obligations | | | 697 | | | | 588 | |
Accrued and other current liabilities | | | 2,203 | | | | 1,953 | |
| | | | | | | | |
Total current liabilities | | | 6,553 | | | | 3,599 | |
Non-current portion of notes payable | | | 7,047 | | | | 4,621 | |
Non-current portion of deferred revenue | | | — | | | | 225 | |
Non-current portion of deferred rent | | | 336 | | | | 363 | |
Non-current portion of unfavorable lease obligation | | | 1,777 | | | | 2,475 | |
Other long term liabilities | | | 414 | | | | 346 | |
| | | | | | | | |
Total liabilities | | | 16,127 | | | | 11,629 | |
Commitments and contingencies (Note 14) | | | | | | | | |
Stockholders’ equity: | | | | | | | | |
Preferred Stock, $0.01 par value, 19,979,500 shares authorized; none issued or outstanding | | | — | | | | — | |
Common stock, $0.01 par value; 100,000,000 shares authorized; 54,751,685 and 53,890,314 shares issued and outstanding at December 31, 2013 and December 31, 2012, respectively | | | 548 | | | | 539 | |
Additional paid-in capital | | | 206,868 | | | | 206,048 | |
Accumulated deficit | | | (199,896 | ) | | | (197,732 | ) |
| | | | | | | | |
Total stockholders’ equity | | | 7,520 | | | | 8,855 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 23,647 | | | $ | 20,484 | |
| | | | | | | | |
See accompanying notes to financial statements.
37
DIADEXUS, INC.
STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, except share data)
| | | | | | | | |
| | | Years ended December 31, | |
| | | 2013 | | | 2012 | |
Revenues: | | | | | | | | |
Product sales | | $ | 24,561 | | | $ | 18,066 | |
Royalty revenue | | | 18 | | | | 2,405 | |
License revenue | | | 305 | | | | 305 | |
| | | | | | | | |
Total revenues | | | 24,884 | | | | 20,776 | |
| | | | | | | | |
Operating costs and expenses: | | | | | | | | |
Product costs | | | 7,222 | | | | 6,296 | |
Sales and marketing | | | 7,482 | | | | 5,465 | |
Research and development | | | 4,709 | | | | 4,196 | |
General and administrative | | | 7,486 | | | | 7,217 | |
| | | | | | | | |
Total operating costs and expenses | | | 26,899 | | | | 23,174 | |
| | | | | | | | |
Loss from operations | | | (2,015 | ) | | | (2,398 | ) |
Interest income, interest expense and other income (expense), net: | | | | | | | | |
Interest income | | | 4 | | | | 16 | |
Interest expense | | | (488 | ) | | | (395 | ) |
Other income (expense), net | | | 340 | | | | (10 | ) |
| | | | | | | | |
Loss before income tax | | | (2,159 | ) | | | (2,787 | ) |
Income tax provision | | | (5 | ) | | | (2 | ) |
| | | | | | | | |
Net loss | | $ | (2,164 | ) | | $ | (2,789 | ) |
| | | | | | | | |
Basic and diluted net loss per share: | | $ | (0.04 | ) | | $ | (0.05 | ) |
| | | | | | | | |
Weighted average shares used in computing basic and diluted net loss per share | | | 54,329,424 | | | | 53,198,336 | |
| | | | | | | | |
Comprehensive loss: | | | | | | | | |
Net loss | | $ | (2,164 | ) | | $ | (2,789 | ) |
Net change in unrealized gain/(loss) on available for sale securities | | | — | | | | 5 | |
| | | | | | | | |
Comprehensive loss | | $ | (2,164 | ) | | $ | (2,784 | ) |
| | | | | | | | |
See accompanying notes to financial statements.
38
DIADEXUS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | |
| | | Years Ended December 31, | |
| | | 2013 | | | 2012 | |
Operating activities: | | | | | | | | |
Net loss | | | (2,164 | ) | | $ | (2,789 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
Gain on disposal of assets | | | (340 | ) | | | 4 | |
Depreciation and amortization | | | 531 | | | | 503 | |
Stock-based compensation | | | 632 | | | | 362 | |
Provision for doubtful accounts and rebate reserve (reversal) | | | 5 | | | | (24 | ) |
Amortization on investments | | | — | | | | 26 | |
Noncash interest expense | | | 31 | | | | 29 | |
Noncash interest associated with notes payable | | | 140 | | | | 125 | |
Unfavorable lease | | | (589 | ) | | | (492 | ) |
Inventory written off | | | — | | | | 31 | |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | (243 | ) | | | (357 | ) |
Inventory | | | (326 | ) | | | (48 | ) |
Prepaid expenses, other current assets and other long-term assets | | | 3 | | | | 138 | |
Accounts payable | | | 174 | | | | (386 | ) |
Accrued liabilities and other long-term liabilities | | | 342 | | | | (343 | ) |
Deferred rent | | | 24 | | | | 97 | |
Deferred revenue | | | (314 | ) | | | (319 | ) |
| | | | | | | | |
Net cash used in operating activities | | $ | (2,094 | ) | | $ | (3,443 | ) |
| | | | | | | | |
Investing activities: | | | | | | | | |
Purchases of property and equipment | | | (302 | ) | | | (605 | ) |
Maturities of available-for-sale investments | | | 747 | | | | 7,219 | |
Purchases of available-for-sale investments | | | — | | | | (1,245 | ) |
Proceeds from sale of assets, net | | | 634 | | | | 2 | |
Release of restricted cash | | | — | | | | 400 | |
| | | | | | | | |
Net cash provided by investing activities | | $ | 1,079 | | | $ | 5,771 | |
| | | | | | | | |
Financing activities: | | | | | | | | |
Proceeds from notes payable | | | 5,000 | | | | — | |
Debt issuance costs | | | (50 | ) | | | (50 | ) |
Proceeds from stock option exercises | | | 61 | | | | 89 | |
| | | | | | | | |
Net cash provided by financing activities | | $ | 5,011 | | | $ | 39 | |
| | | | | | | | |
Net increase in cash and cash equivalents | | | 3,996 | | | | 2,367 | |
Cash and cash equivalents, beginning of year | | | 12,851 | | | | 10,484 | |
| | | | | | | | |
Cash and cash equivalents, end of year | | $ | 16,847 | | | $ | 12,851 | |
| | | | | | | | |
Supplemental disclosure: | | | | | | | | |
Cash paid for interest | | $ | 315 | | | $ | 267 | |
Non-cash investing and financing transactions | | | | | | | | |
Issuance of warrants for common stock in connection with debt | | $ | 136 | | | $ | 48 | |
Net change in accounts payable from acquisition of property and equipment | | $ | (32 | ) | | $ | 51 | |
Net change in accrued liabilities from acquisition of property and equipment | | $ | (16 | ) | | $ | 27 | |
See accompanying notes to financial statements.
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DIADEXUS, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | | Additional
Paid in
Capital | | | Accumulated
Other
Comprehensive
Income (Loss) | | | Accumulated
Deficit | | | Total
Stockholder’s
Equity | |
| | | Number
of
Shares | | | Amount | | | | | |
Balance at December 31, 2011 | | | 53,067,045 | | | | 531 | | | | 205,557 | | | | (5 | ) | | | (194,943 | ) | | | 11,140 | |
Stock-based compensation—employee under ASC 718 | | | — | | | | — | | | | 362 | | | | — | | | | — | | | | 362 | |
Issuance and sale of common stock under stock-based compensation plans | | | 823,269 | | | | 8 | | | | 81 | | | | — | | | | — | | | | 89 | |
Issuance of warrants | | | — | | | | — | | | | 48 | | | | — | | | | — | | | | 48 | |
Change in unrealized gain (loss) on available-for-sale securities | | | — | | | | — | | | | — | | | | 5 | | | | — | | | | 5 | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | (2,789 | ) | | | (2,789 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2012 | | | 53,890,314 | | | $ | 539 | | | $ | 206,048 | | | $ | — | | | $ | (197,732 | ) | | $ | 8,855 | |
Stock-based compensation—employee under ASC 718 | | | — | | | | — | | | | 632 | | | | — | | | | — | | | | 632 | |
Issuance and sale of common stock under stock-based compensation plans | | | 474,587 | | | | 5 | | | | 56 | | | | — | | | | — | | | | 61 | |
Issuance of warrants | | | — | | | | — | | | | 136 | | | | — | | | | — | | | | 136 | |
Issuance and sale of common stock under warrants | | | 386,784 | | | | 4 | | | | (4 | ) | | | — | | | | — | | | | — | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | (2,164 | ) | | | (2,164 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2013 | | | 54,751,685 | | | $ | 548 | | | $ | 206,868 | | | $ | — | | | $ | (199,896 | ) | | $ | 7,520 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to financial statements.
40
diaDexus, Inc.
Notes to Financial Statements
1. Business Overview
Formation of the Company
We are a life sciences company focused on developing and commercializing proprietary cardiovascular diagnostic products addressing unmet needs in cardiovascular disease (“CVD”). We sell our diagnostic products to laboratories. Physicians order testing for their patients from these laboratories and use the results to aid in assessing their patients risk for CVD.
The Company’s products, PLAC® Tests, are designed to provide information, over and above traditional risk factors, to help identify individuals at increased risk of suffering a heart attack or stroke. Some of these events may be reduced with earlier detection and more aggressive risk-reducing strategies, including treatment to lower LDL-cholesterol goals with statins. The Company has commercialized two PLAC Tests. One test measures the mass of circulating Lp-PLA2 in the blood, the PLAC ELISA Test .. The PLAC ELISA Test is the only Lp-PLA2 blood test cleared by the US Food and Drug Administration (the “FDA”) to aid in assessing risk for both coronary heart disease and ischemic stroke associated with atherosclerosis. The second test, the PLAC Test for Lp-PLA2 Activity, 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. The Company is currently commercializing the PLAC ELISA Test in the United States and Europe and the PLAC Activity Test in Europe.
The Company has incurred substantial losses since the inception, and expects to continue to incur net losses for at least the next few years. To date, the Company has funded its operations primarily through private placements of preferred stock and debt financing, as well as through revenue generated from the sale of products.
In September 2011, the Company entered into a Loan and Security Agreement with Comerica Bank, which was amended in September 2012 and again in October 2013 (see Note 9 of the Notes to Financial Statements included in this Annual Report on Form 10-K). The Loan and Security Agreement contains various covenants. If the Company breaches any of these covenants or is unable to make a required payment of principal or interest, or experiences a material adverse change to its business, it could result in a default under the loan. Additionally, the Company is required to (i) maintain a liquidity ratio of not less than 1.25 to 1 and (ii) ensure its cumulative net loss does not exceed $6,000,000 beginning July 1, 2013 in accordance with GAAP, and failure to do so could result in a default under the loan. Upon the occurrence of an event of default under the loan, the bank could elect to declare all amounts outstanding to be immediately due and payable. If the Company is unable to repay those amounts, the bank could proceed against the collateral granted to them to secure such indebtedness. The Company has pledged substantially all of its assets, other than its intellectual property, as collateral under the loan.
Our future liquidity requirements may increase beyond currently expected levels if we fail to maintain compliance with the loan covenants. In order to meet the 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 us. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. We cannot assure you that it will be able to raise any such additional funding or, if available, that such funding would be on favorable terms.
PLAC Test ELISA Kit
The Company introduced its initial PLAC Test ELISA Kit (the “PLAC ELISA Test”) in 2004 uses microplate technologies to measure levels of Lp-PLA2. The infrastructure for performing microplate tests typically exists only at large and midsize clinical reference laboratories and large hospitals, which must be certified by the US
41
Department of Health and Human Services (“DHHS”) for high-complexity diagnostics under the Clinical Laboratory Improvement Amendments (“CLIA”). Smaller hospitals and clinics can order the PLAC ELISA Test for their patients from those institutions that are able to perform microplate tests and offer the PLAC ELISA Test. Patients can have their blood drawn at a local laboratory and shipped to the more advanced institutions for analysis. The Company markets the PLAC ELISA Test in the United States, Europe, Israel and Mexico.
PLAC Test for Lp-PLA2 Activity
The Company introduced the PLAC Test for Lp-PLA2 Activity (the “PLAC Activity Test”) in Europe in March 2012. This PLAC Activity Test is an enzyme assay for the quantitative determination of Lp-PLA2 activity levels in human serum or plasma. The PLAC Activity Test allows for the measurement of Lp-PLA2 using automated clinical chemistry analyzer technology. This clinical chemistry technology is more prevalent than the microplate technology used for the PLAC ELISA Test, such that a broader array of institutions can conduct the test. This group includes clinical laboratories and hospitals of all sizes and physician operated laboratories (“POLs”). In addition, the sample handling requirements are much less stringent for the PLAC Activity Test compared to the PLAC ELISA Test, allowing greater ease of use for those facilities processing specimens. The PLAC Activity Test is currently available in Europe for use in conjunction with clinical evaluation and patient risk assessment as an indicator of atherosclerotic cardiovascular disease. The Company affixed the CE marking for this intended use by self-certification in January 2012. The PLAC Activity Test is available on a commercial basis only in Europe. The Company plans to pursue 510(k) clearance for this test from the FDA and eventually commercialize this assay format in the United States if the Company obtains FDA clearance.
In September 2013, the Company had a pre-submission meeting with the FDA, as a result of which the Company is advancing its clinical program to support the submission of the PLAC Activity Test to the FDA. The Company has partnered with a large longitudinal cardiovascular disease study to validate the PLAC Activity Test. The Company anticipates that the clinical study sample analysis will be initiated prior to the end of the first quarter of 2014.
All references in these notes to financial statements to the “Company,” “we,” “us” and “our” refer to diaDexus, Inc. (f/k/a VaxGen, Inc.), a Delaware corporation, unless the context requires otherwise.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with US generally accepted accounting principles (“GAAP”). Certain amounts previously reported in the financial statements have been reclassified to conform to the current year presentation. Such reclassifications did not affect net loss, stockholders’ equity or cash flow.
Starting in January 2013, the Company includes excise tax collected from customer product sales. The Company recognized $402,000 and $455,000 in charged excise tax within product revenue and product costs, respectively, for the year ended December 31, 2013. For the year ended December 31, 2012, there was no excise tax recognized within product revenue and product costs.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets, including assets held for sale, and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results may differ significantly from those estimates.
42
The Company considers the accounting policies related to revenue recognition, stock-based compensation, and income taxes to be the most critical accounting policies, because they require the Company to make estimates, assumptions and judgments about matters that are inherently uncertain.
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.
Restricted Cash
Restricted cash represents term deposits, which expire in December 2016, held at one 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. Management assesses each of these investments on an individual basis to determine if the decline in fair value was other than temporary. 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 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.
Inventory
Inventories are stated as the lower of cost or market. Cost is determined using the first in, first out 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.
Segments
The Company has one reportable segment and uses one measurement of profitability to manage its business. All long-lived assets are maintained in the United States of America.
Revenues by geography are based on the billing address of the customer. The following table sets forth revenues by geographic area (in thousands):
| | | | | | | | |
| | | Years Ended December 31, | |
| | | 2013 | | | 2012 | |
United States | | $ | 24,316 | | | $ | 20,443 | |
Europe | | | 330 | | | | 245 | |
Rest of the world | | | 238 | | | | 88 | |
| | | | | | | | |
| | $ | 24,884 | | | $ | 20,776 | |
| | | | | | | | |
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Revenue Recognition
Revenues are generated from product sales, royalties earned, license fees and contract arrangements, and recorded net of customer and distributor discounts. Revenue is recognized when the four basic criteria of revenue recognition are met: (i) a contractual agreement exists; (ii) delivery of product has occurred and risk of loss and title has transferred, transfer of technology (intellectual property) has been completed or services have been rendered; (iii) the fee is fixed or determinable; and (iv) collectability is reasonably assured.
License fee revenue including nonrefundable upfront fees, is deferred and recognized over the term of the underlying agreements. Royalty revenue is recognized when reportable product sales are confirmed. Revenue from technology licenses or other payments under collaborative agreements where the Company has a continuing obligation to perform is recognized as revenue over the expected period of the continuing performance obligation. The term of these underlying agreements ranges from two to ten years.
Accruals
In connection with the process of preparing financial statements, the Company estimates accrued expenses. This process involves communicating with our applicable personnel to identify services that have been performed on the Company’s behalf and estimating the level of service performed and the associated cost incurred for the service when the Company has not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. The Company makes estimates of accrued expenses as of each balance sheet date in the financial statements based on known facts and circumstances. The Company periodically confirms the accuracy of estimates with selected service providers and makes adjustments, if necessary.
Research and Development
Research and development expenses include internal and external costs. Internal costs include product development, regulatory support for technology, laboratory materials and supply costs and other technical support costs, including salaries and consultant fees. External expenses consist of sponsored research studies and investigator sponsored trials. Research and development costs are expensed as incurred.
Impairment of Long-Lived Assets
In accordance with Accounting Standards Codification (“ASC”) Subtopic ASC 360-10, impairment of long-lived assets is measured or assessed when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Stock-Based Compensation
The Company recognizes stock-based compensation expense for all stock-based payment awards in accordance with ASC 718, which requires the measurement and recognition of compensation expense for all stock-based payments made to employees and directors including employee stock option awards, based on estimated fair value. Stock-based compensation expense for expected-to-vest stock-based awards is valued under the single-option approach and amortized on a ratable basis, net of estimated forfeitures. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s statements of operations for all periods presented.
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The assumptions used in computing the fair value of stock-based awards reflect the Company’s best estimates, but involve uncertainties relating to market and other conditions, many of which are outside of the Company’s control. In addition, the Company’s estimate of future stock-based compensation expense will be affected by a number of items including the Company’s stock price, the number of stock options the Company’s board of directors may grant in future periods, as well as a number of complex and subjective valuation adjustments and the related tax effect.
The fair value of nonvested restricted stock units (“RSUs”) is based on the Company’s closing stock price on the date of grant.
The net loss for the years ended December 31, 2013 and 2012 include employee stock-based compensation expense of $632,000 and $362,000, respectively. As of December 31, 2013, the total unrecorded stock-based compensation expense for unvested stock options, net of expected forfeitures, was $1.0 million, which is expected to be amortized over a weighted-average period of 2.24 years.
Fair Value Measurements
In accordance with ASC Subtopic 820-10 the carrying amounts of certain financial instruments of the Company, including cash equivalents, marketable securities and liabilities, continue to be valued at fair value. ASC Subtopic 820-10 defines fair value and provides guidance for using fair value to measure assets and liabilities and is applicable whenever assets or liabilities are required or permitted to be measured at fair value.
The fair value estimates presented reflect the information available to the Company as of December 31, 2013. See Note 3, “Fair Value Measurements.”
Deferred Rent
Deferred rent consists of the difference between cash payments and the recognition of rent expense on a straight-line basis for the buildings the Company leases. The leases provide for fixed increases in minimum annual rental payments and the total amount of rental payments due over the lease terms are being charged to rent expense ratably over the life of the leases.
Comprehensive Income (Loss)
Comprehensive income (loss) 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 (loss) excluded from the Company’s net loss.
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.
On January 1, 2009, the Company adopted ASC 740-10-25. For the years ended December 31, 2013 and 2012, the Company did not have any additional 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 interest expense as incurred.
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Recent Accounting Pronouncements
In July 2013, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11, “Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force).” The amendments in this ASU provide guidance on the financial statements presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward with certain exceptions, in which case such an unrecognized tax benefit should be presented in the financial statements as a liability. The amendments in this ASU do not require new recurring disclosures and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are currently assessing the impact of this ASU on our financial statements.
3. Cash, Cash Equivalents and Investments
As part of its cash management program, the Company maintains a portfolio of marketable investment securities. The securities are investment grade and generally mature within one year and may include tax exempt securities and certificates of deposit. The fair value of substantially all securities is determined by quoted market prices. 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 90 days or less at the time of purchase to be cash equivalents.
The following is a summary of cash, cash equivalents, and available-for-sale securities as of December 31, 2013 and 2012(in thousands):
| | | | | | | | | | | | | | | | |
| | | December 31, 2013 | |
| | | Cost Basis | | | Unrealized Gains | | | Unrealized Losses | | | Estimated Fair Value | |
Cash and cash equivalents: | | | | | | | | | | | | | | | | |
Cash | | $ | 12,800 | | | $ | — | | | $ | — | | | $ | 12,800 | |
Money market funds | | | 4,047 | | | | — | | | | — | | | | 4,047 | |
| | | | | | | | | | | | | | | | |
Total cash and cash equivalents | | $ | 16,847 | | | $ | — | | | $ | — | | | $ | 16,847 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | December 31, 2012 | |
| | | Cost Basis | | | Unrealized Gains | | | Unrealized Losses | | | Estimated Fair Value | |
Cash and cash equivalents: | | | | | | | | | | | | | | | | |
Cash | | $ | 6,054 | | | $ | — | | | $ | — | | | $ | 6,054 | |
Money market funds | | | 6,797 | | | | — | | | | — | | | | 6,797 | |
| | | | | | | | | | | | | | | | |
Total cash and cash equivalents | | $ | 12,851 | | | $ | — | | | $ | — | | | $ | 12,851 | |
| | | | | | | | | | | | | | | | |
Available-for-sale marketable securities: | | | | | | | | | | | | | | | | |
Certificate of deposits | | | 747 | | | | — | | | | — | | | | 747 | |
| | | | | | | | | | | | | | | | |
Total available-for-sale marketable securities | | $ | 747 | | | $ | — | | | $ | — | | | $ | 747 | |
| | | | | | | | | | | | | | | | |
Fair Value Measurements
In accordance with 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;
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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 equivalents and investments) measured at fair value on a recurring basis as of December 31, 2013 and 2012(in thousands):
| | | | | | | | | | | | | | | | |
| | | | | | Fair Value Measurements | |
| | | Balance as of
December 31,
2013 | | | Quoted Prices
In Active
Markets for
Identical Assets
Level 1 | | | Significant
other
Observable
Inputs
Level 2 | | | Significant
Unobservable
Inputs
Level 3 | |
Assets: | | | | | | | | | | | | | | | | |
Cash | | $ | 12,800 | | | $ | 12,800 | | | $ | — | | | $ | — | |
Money market funds | | | 4,047 | | | | 4,047 | | | | — | | | | — | |
Restricted cash | | | 1,400 | | | | — | | | | 1,400 | | | | — | |
| | | | | | | | | | | | | | | | |
| | $ | 18,247 | | | $ | 16,847 | | | $ | 1,400 | | | $ | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | Fair Value Measurements | |
| | | Balance as of
December 31,
2012 | | | Quoted Prices
In Active
Markets for
Identical Assets
Level 1 | | | Significant
other
Observable
Inputs
Level 2 | | | Significant
Unobservable
Inputs
Level 3 | |
Assets: | | | | | | | | | | | | | | | | |
Cash | | $ | 6,054 | | | $ | 6,054 | | | $ | — | | | $ | — | |
Money market funds | | | 6,797 | | | | 6,797 | | | | — | | | | — | |
Certificates of deposit | | | 747 | | | | — | | | | 747 | | | | — | |
Restricted cash | | | 1,400 | | | | — | | | | 1,400 | | | | — | |
| | | | | | | | | | | | | | | | |
| | $ | 14,998 | | | $ | 12,851 | | | $ | 2,147 | | | $ | — | |
| | | | | | | | | | | | | | | | |
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 December 31, 2013, the notes payable is carried at face value of $10.0 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.
4. Inventory
Inventory consists of the following(in thousands):
| | | | | | | | |
| | | December 31,
2013 | | | December 31,
2012 | |
Finished goods | | $ | 361 | | | $ | 61 | |
Raw materials | | | 99 | | | | 73 | |
| | | | | | | | |
| | $ | 460 | | | $ | 134 | |
| | | | | | | | |
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5. Assets Held For Sale
Prior to the period reflected in this report, the Company had committed to a plan to sell the equipment related to its manufacturing facility and had determined that these assets met the criteria for, and had been classified as, “held for sale” in accordance with ASC Topic 360. The market approach was used in determining the fair market value of these assets.
Total assets held for sale are as follows(in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Fair Value Measurements Using | |
Description | | December 31,
2013 | | | Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1) | | | Significant
Other
Observable
Inputs
(Level 2) | | | Significant
Unobservable
Inputs
(Level 3) | | | Year Ended
December 31,
2013
Total
Gains (Losses) | |
Assets held for sale | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 340 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Fair Value Measurements Using | |
Description | | December 31,
2012 | | | Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1) | | | Significant
Other
Observable
Inputs
(Level 2) | | | Significant
Unobservable
Inputs
(Level 3) | | | Year Ended
December 31,
2012
Total
Gains (Losses) | |
Assets held for sale | | $ | 300 | | | $ | — | | | $ | — | | | $ | 300 | | | $ | — | |
The measurement of the assets held for sale at fair value incorporated significant unobservable inputs as a result of a lack of any available observable market information to determine the fair value. The calculation of the fair value of assets held for sale used a market valuation technique that relied on Level 3 inputs, including quoted prices for similar assets. In 2012, the Company signed an agreement to sell the assets for $695,000, net of disposal costs. All assets were transferred and sold to the purchaser as of December 31, 2013 and the Company recognized net gains of $340,000, which are included as other income (expenses), net in the statement of comprehensive loss for the year ended December 31, 2013.
6. Property, Plant and Equipment
Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized, and maintenance and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method. The estimated useful lives for significant property and equipment categories are as follows:
| | |
Office and laboratory equipment | | 3 years |
Computer equipment and software | | 3 years |
Leasehold improvements | | Term of lease agreement |
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The following is a summary of property and equipment at cost less accumulated depreciation as of December 31, 2013 and 2012 (in thousands):
| | | | | | | | |
| | | December 31,
2013 | | | December 31,
2012 | |
Laboratory equipment | | $ | 2,299 | | | $ | 3,149 | |
Leasehold improvements | | | 616 | | | | 602 | |
Computer and software | | | 299 | | | | 361 | |
Furniture and fixtures | | | 81 | | | | 180 | |
Construction in progress | | | 149 | | | | — | |
| | | | | | | | |
| | | 3,444 | | | | 4,292 | |
Less: Accumulated depreciation and amortization | | | (2,476 | ) | | | (3,042 | ) |
| | | | | | | | |
| | $ | 968 | | | $ | 1,250 | |
| | | | | | | | |
Depreciation and amortization expense for the years ended December 31, 2013 and 2012 was $0.5 million for each year.
7. Total Accrued and Other Current Liabilities
Other current liabilities include the following as of December 31, 2013 and 2012(in thousands):
| | | | | | | | |
| | | December 31,
2013 | | | December 31,
2012 | |
Accrued payroll and related expenses | | $ | 1,481 | | | $ | 1,220 | |
Accrued consulting expense | | | 207 | | | | 122 | |
Accrued legal and patent expense | | | 124 | | | | 87 | |
Accrued sales and excise tax | | | 71 | | | | 60 | |
Accrued royalty expense | | | 65 | | | | 118 | |
Accrued collaborative research obligations | | | 46 | | | | 22 | |
Accrued audit fees | | | — | | | | 73 | |
Accrued property and equipment | | | 11 | | | | 27 | |
Other current liabilities | | | 198 | | | | 224 | |
| | | | | | | | |
Total accrued and other current liabilities | | $ | 2,203 | | | $ | 1,953 | |
| | | | | | | | |
8. Concentration of Credit Risk
Revenues from the following distributor and large laboratory customers represented a significant portion of total revenue for the years ended December 31, 2013 and 2012 and accounts receivable as of December 31, 2013 and 2012.
| | | | | | | | | | | | | | | | |
| | | Revenue | | | Accounts Receivable | |
| | | December 31,
2013 | | | December 31,
2012 | | | December 31,
2013 | | | December 31,
2012 | |
Customer A | | | 44 | % | | | 44 | % | | | 36 | % | | | 34 | % |
Customer B | | | 14 | % | | | 13 | % | | | 11 | % | | | 14 | % |
Customer C | | | 10 | % | | | 6 | % | | | 10 | % | | | 2 | % |
Customer D | | | 6 | % | | | 6 | % | | | 15 | % | | | 10 | % |
Customer E | | | 5 | % | | | 6 | % | | | 9 | % | | | 10 | % |
| | | | | | | | | | | | | | | | |
Total | | | 79 | % | | | 75 | % | | | 81 | % | | | 70 | % |
| | | | | | | | | | | | | | | | |
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9. Notes Payable
In September 2011, the Company entered into a Loan and Security Agreement with Comerica Bank to borrow up to $5 million, the entire amount of which was borrowed at a rate of 5.25% per annum (“Original Term Loan”). The loan was payable in 36 monthly installments which were to begin in October 2012, with interest only payments being made from October 2011 to September 2012. The Company paid an initial fee of $25,000 for access to this loan and will be required to pay an additional fee of $100,000 following repayment of the loan. The Company may prepay all, but not less than all, of the loaned amount with 30 days advance notice to the bank. In connection with the loan, the Company issued a warrant to the bank to purchase 480,769 shares of the Company’s common stock (Note 13).
The term loan is secured by a first priority security interest on all of the Company’s assets excluding the Company’s intellectual property (except for rights to payment related to the sale, licensing or disposition of such intellectual property rights) and property not assignable without consent by a third party or with respect to which granting a security interest is contrary to law. In addition, the Company has agreed not to sell, assign, transfer, pledge or otherwise encumber its intellectual property to another entity without the bank’s approval or consent, subject to certain exceptions.
The Loan and Security Agreement contains customary representations and warranties, covenants, events of defaults and termination provisions. The affirmative covenants included, among other things, that the Company timely file taxes, maintain good standing and government compliance, maintain a liquidity ratio of not less than 1.25 to 1, ensure its cumulative net loss does not exceed $6 million beginning July 1, 2013 in accordance with GAAP, maintain primary depository and operating accounts with the bank, maintain liability and other insurance, and provide security interests to the bank in the collateral of any subsidiary formed or acquired by the Company in the future. The negative covenants provided and continue to provide, among other things, that without the prior consent of the bank, the Company may not dispose of certain assets, engage in certain business combinations or acquisitions, incur additional indebtedness or encumber any of the Company’s property (subject to certain exceptions), pay dividends on the Company’s capital stock or make prohibited investments. The loan and security agreement provides that an event of default will occur if, among other triggers, (1) the Company defaults in the payment of any amount payable under the agreement when due, (2) there occurs any circumstance or circumstances that could reasonably be expected to result in a material adverse effect on the Company’s business, operations or condition, or on the Company’s ability to perform its obligations under the agreement, (3) the Company becomes insolvent, (4) the Company undergoes a change in control or (5) the Company breaches any negative covenants or certain affirmative covenants in the agreement or, subject to a cure period, otherwise neglects to perform or observe any material item in the agreement. The repayment of the term loan may be accelerated, at the option of the bank, following the occurrence of an event of default, which would require the Company to pay to the bank an amount equal to the sum of: (i) all outstanding principal plus accrued interest, (ii) the final payment, plus (iii) all other sums, that shall have become due and payable but have not been paid, including interest at the default rate with respect to any past due amounts. As of December 31, 2013, the Company was in compliance with all the covenants.
On September 11, 2012, the Company and Comerica Bank entered into an Amended and Restated Loan and Security Agreement (the “First Amended Loan and Security Agreement”). The First Amended Loan and Security Agreement extended the interest-only payment period for an additional twelve months, through September 23, 2013, and extended the maturity date for an additional twelve months, to September 23, 2016. The First Amended Loan and Security Agreement also reduced the monthly principal payments by amortizing the loan over a 48 month basis, resulting in an increased balloon payment of principal on the maturity date. The Company paid a fee of $50,000 for access to the First Amended Loan and Security Agreement. Pursuant to the Amendment, the Company issued a warrant to Comerica to purchase 168,919 shares of its common stock. The warrant has an exercise price of $0.37 per share and will expire on September 11, 2019 (Note 13).
The Company accounted for this amendment as a debt modification since the terms of the original and the First Amended Loan and Security Agreements were not substantially different, and the present value of cash flows of
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the modified instrument was within 10% of the cash flows of the original debt instrument. Accordingly, debt discount of $48,000 associated with the First Amended Loan and Security Agreement, and unamortized debt discount of $72,000 from the Original Term Loan, is amortized as an adjustment of interest expense over the term of the First Amended Loan and Security Agreement using the effective interest method.
In October 2013, the Company and Comerica Bank entered into a Second Amended and Restated Loan and Security Agreement (the “Second Amended Loan and Security Agreement”). The Second Amended Loan and Security Agreement increased the aggregate principal amount of the loan by $5 million, the entire amount of which was borrowed on October 17, 2013, for a total outstanding principal amount of $10 million, with interest at a fixed per annum rate equal to 6.45%. The Second Amended Loan and Security Agreement also extends the interest-only payment period for an additional three months, through December 31, 2013, and extends the maturity date for an additional three months, to December 1, 2016. The Second Amended Loan and Security Agreement also reduces the monthly principal payments by amortizing the loan over a 42 month basis, resulting in an increased balloon payment of principal on the maturity date. Additionally, the Company is required to (i) maintain a liquidity ratio of not less than 1.25 to 1 and (ii) ensure its cumulative net loss does not exceed $6 million beginning July 1, 2013 in accordance with GAAP. The Company paid a fee of $50,000 for access to the Second Amended Loan and Security Agreement. Pursuant to the Second Amended Loan and Security Agreement, the Company issued a warrant to Comerica Bank to purchase 96,685 shares of its common stock. The warrant has an exercise price of $1.81 per share and will expire on October 17, 2020 (Note 13).
The Company accounted for this Second Amended Loan and Security Agreement as a debt modification since the terms of the original and the amended Loan and Security Agreements were not substantially different.
The Company recorded debt discount of $136,000 associated with the Second Amended Loan and Security Agreement, and unamortized debt discount of $77,000 from the Original Term Loan will be amortized as an adjustment of interest expense over the term of the Second Amended Loan and Security Agreement using the effective interest method.
Future minimum payments for the notes payable are as follows(in thousands):
| | | | |
2014 | | $ | 3,418 | |
2015 | | | 3,233 | |
2016 | | | 4,728 | |
| | | | |
Total minimum payments | | | 11,379 | |
Less: Amount representing interest | | | (1,379 | ) |
| | | | |
Present value of minimum payments | | | 10,000 | |
Less: Unamortized debt discount | | | (190 | ) |
| | | | |
Notes payable, net | | | 9,810 | |
| | | | |
Less: Notes payable, current portion | | | (2,763 | ) |
| | | | |
Non-current portion of notes payable | | $ | 7,047 | |
| | | | |
10. Common Stock
On July 15, 2011, the Company amended its certificate of incorporation to increase the number of authorized shares of its common stock, par value of $0.01 per share, to 100,000,000. The holders of common stock are entitled to receive dividends, as, when and if declared by the Company’s Board of Directors out of funds legally available for distribution, subject to the restriction on dividends contained in the Company’s Second Amended Loan and Security Agreement with Comerica bank (Note 9).
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11. Basic and Diluted 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 do not increase the net loss per share.
The effect of the options and warrants was anti-dilutive for the years ended December 31, 2013 and 2012. 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):
| | | | | | | | |
| | | As of
December 31, | |
| | | 2013 | | | 2012 | |
Options to purchase common stock | | | 9,705 | | | | 8,963 | |
Warrants to purchase common stock | | | 266 | | | | 650 | |
Restricted stock units | | | 42 | | | | — | |
| | | | | | | | |
Total | | | 10,013 | | | | 9,613 | |
| | | | | | | | |
12. Stock Based Compensation
Stock Option Plans
2012 Equity Incentive Award Plan
The Company’s stockholders approved the 2012 Equity Incentive Award Plan (the “2012 Plan”) at the 2012 Annual Meeting of Stockholders on May 17, 2012 and approved 3,000,000 shares of common stock authorized for issuance. Upon approval of the 2012 Plan, all shares of common stock that remained available for issuance under the 1996 Stock Option Plan (the “1996 Plan”) and the 1998 Director Stock Option Plan (the “Director Plan”) were added to the shares reserved under the 2012 Plan. In addition, pursuant to the 2012 Plan, any shares of common stock subject to awards previously granted under the 1996 Plan, the Director Plan and certain non-plan option agreements entered into with certain individuals as of March 31, 2012 that terminate, expire or lapse will become available for issuance under the 2012 Plan. The 2012 Plan provides for the granting of options, restricted stock awards, restricted stock unit award, performance awards, dividend equivalents awards, deferred stock awards, deferred stock unit awards, stock payment awards and stock appreciation rights to employees, non-employee directors and consultants. Options granted under the 2012 Plan may be designated as qualified or nonqualified at the discretion of the Compensation Committee of the Board of Directors. Generally, shares issuable upon exercise of options vest ratably over four years, beginning one year from the date of grant; however, options can vest upon grant. Option terms expire no later than 10 years from the date of grant, or 5 years from the date the option is granted to a greater than 10% stockholder. The stock options are exercisable at not less than the fair market value of the stock at the date of grant, or not less than 110% of the fair market value of the stock at the date of grant if granted to a greater than 10% stockholder. The Company has also granted restricted stock unit (“RSU”) awards under the 2012 Plan. RSU awards entitle the recipient to receive one share of the Company’s common stock for every RSU upon vesting. RSUs generally vest annually. As of December 31, 2013, options to purchase 3,030,612 shares of common stock were outstanding, 41,708 shares of common stock were issuable upon the settlement of outstanding RSUs and 2,345,617 shares were available for issuance under the 2012 Plan.
1996 Stock Option Plan
The 1996 Plan initially had 4,750,000 shares of common stock authorized for issuance and a provision that automatically increased this number by 3.5% of the issued and outstanding common stock on the last trading day of the December immediately preceding each fiscal year through January 2007. Options granted under the 1996
52
Plan were designated as qualified or nonqualified at the discretion of the Compensation Committee of the Board of Directors. Generally, shares issuable upon exercise of options vest ratably over four years, beginning one year from the date of grant; however, options could vest upon grant. All options expire no later than 10 years from the date of grant. Qualified stock options are exercisable at not less than the fair market value of the stock at the date of grant, and nonqualified stock options are exercisable at prices determined at the discretion of the Board of Directors, but not less than 85% of the fair market value of the stock at the date of grant. On May 17, 2012, the 1996 Plan was terminated in connection with the effectiveness of the 2012 Plan. All 1,555,492 shares that were available for issuance under the 1996 Plan were transferred to the 2012 Plan, and the 6,398,904 shares that were subject to awards outstanding under the 1996 Plan remained outstanding pursuant to the terms of the 1996 Plan. As of December 31, 2013, options to purchase 2,998,554 shares of common stock were outstanding pursuant to the terms of the 1996 Plan.
1998 Director Stock Option Plan
The Director Plan for non-employee directors had 300,000 shares of common stock authorized for issuance. On May 17, 2012, the Director Plan was terminated in connection with the effectiveness of the 2012 Plan. All 130,000 shares that were available for issuance under the Director Plan were transferred to the 2012 Plan, and the 170,000 shares that were subject to awards outstanding under the Director Plan remained outstanding pursuant to the terms of the Director Plan. As of December 31, 2013, options to purchase 40,000 shares of common stock were outstanding pursuant to the terms of the Director Plan.
Non-Plan Grants
In October 2004, the Company granted non-qualified stock options to purchase 30,000 shares of common stock outside of the Company’s stock option plans to its former director with an exercise price of $12.27 per share. These options were granted with terms that are substantially in accordance with the Company’s standard stock option terms. As of December 31, 2013, all of these options remained outstanding.
In September 2011, the Company granted non-qualified stock options to purchase 1,530,000 shares of common stock outside of the Company’s stock option plans to its current Chief Executive Officer with an exercise price of $0.25 per share. These options were granted with terms that are substantially in accordance with the Company’s standard stock option terms. As of December 31, 2013, all of these options remained outstanding.
In October 2011, the Company granted non-qualified stock options to purchase 1,130,000 shares of common stock outside of the Company’s stock option plans to its current Chief Business Officer with an exercise price of $0.26 per share. These options were granted with terms that are substantially in accordance with the Company’s standard stock option terms. As of December 31, 2013, 1,018,458 of these options remained outstanding.
On February 1, 2012, the Company granted non-qualified stock options to purchase 1,060,000 shares of common stock outside of the Company’s stock option plans to its current Chief Financial Officer with an exercise price of $0.28 per share. These options were granted with terms that are substantially in accordance with the Company’s standard stock option terms. As of December 31, 2013, 1,057,460 of these options remained outstanding.
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Restricted Stock Units
On August 6, 2013, the Company awarded an aggregate of 41,708 RSUs to its directors with a grant-date fair value equal to approximately $55,000 in the aggregate. Each RSU entitles the recipient to receive one share of the Company’s common stock upon vesting. RSUs awarded to directors generally vest annually. The fair value of nonvested RSUs is based on the Company’s closing stock price on the date of grant. As of December 31, 2013, all of these RSUs remained outstanding and none was vested. A summary for the year ended December 31, 2013 is as follows:
| | | | | | | | | | | | | | | | |
| | | Shares of
Underlying
RSUs | | | Average Grant
Date Fair Value
Price per Share | | | Weighted
Remaining Vesting
Period
(In years) | | | Aggregate
Intrinsic
Value | |
Nonvested as of December 31, 2012 | | | — | | | | — | | | | | | | | | |
Granted | | | 41,708 | | | | 1.33 | | | | | | | | | |
Vested and released | | | — | | | | — | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Nonvested as of December 31, 2013 | | | 41,708 | | | $ | 1.33 | | | | 0.50 | | | $ | 37,537 | |
| | | | | | | | | | | | | | | | |
Stock Based Compensation Expense
The following table summarizes stock compensation expense related to employee stock options and employee stock-based compensation expense for the years ended December 31, 2013 and 2012 which was incurred as follows(in thousands):
| | | | | | | | |
| | | Years Ended
December 31, | |
| | | 2013 | | | 2012 | |
Stock-based compensation expense: | | | | | | | | |
General and administrative | | $ | 361 | | | $ | 204 | |
Research and development | | | 135 | | | | 73 | |
Sales and marketing | | | 113 | | | | 73 | |
Product costs | | | 23 | | | | 12 | |
| | | | | | | | |
Total stock-based compensation expense | | $ | 632 | | | $ | 362 | |
| | | | | | | | |
Valuation Assumptions
The compensation expense related to stock options recognized was determined using the Black-Scholes option valuation model. Option valuation models require the input of subjective assumptions and these assumptions can vary over time. The weighted average assumptions used were as follows:
| | | | | | | | |
| | | Years ended
December 31, | |
| | | 2013 | | | 2012 | |
Dividend yield | | | 0.0 | % | | | 0.0 | % |
Risk-free interest rate | | | 0.93 | % | | | 0.54 | % |
Expected volatility | | | 84.66 | % | | | 95.97 | % |
Forfeiture rate | | | 13.90 | % | | | 13.24 | % |
Expected term (years) | | | 4.06 | | | | 4.12 | |
Fair value per share at grant date | | $ | 0.61 | | | $ | 0.21 | |
The expected stock price volatility assumption was determined by examining the historical volatilities for industry peers, and the trading history for the Company’s common stock. For the year ended December 31, 2012,
54
volatility assumption was determined by examining historical volatilities for industry peers only as the Company did not have sufficient trading history for the Company’s common stock for that period. The Company will continue to analyze its own historical stock price volatility as more historical data for the Company’s common stock becomes available. The risk-free interest rate assumption is based on the US Treasury instruments whose 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. The expected term of stock options represents the weighted-average period the stock options are expected to remain outstanding. The Company considers option vesting terms, contractual terms and historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior.
Employee Stock-Based Compensation
The table below presents information related to stock option activity, net of options previously exercised:
| | | | | | | | | | | | | | | | |
| | | Number of
Options
Outstanding | | | Weighted-
Average
Exercise
Price | | | Weighted-
Average
Remaining
Contractual
Term
(In years) | | | Aggregate
Intrinsic
Value | |
Outstanding as of December 31, 2011 | | | 9,187,589 | | | $ | 0.48 | | | | | | | | | |
Options granted | | | 2,669,190 | | | | 0.32 | | | | | | | | | |
Options exercised | | | (2,247,419 | ) | | | 0.26 | | | | | | | | | |
Options cancelled/forfeited/expired | | | (646,134 | ) | | | 0.72 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding as of December 31, 2012 | | | 8,963,226 | | | | 0.47 | | | | | | | | | |
Options granted | | | 1,563,910 | | | | 1.00 | | | | | | | | | |
Options exercised | | | (664,568 | ) | | | 0.26 | | | | | | | | | |
Options cancelled/forfeited/expired | | | (157,484 | ) | | | 4.53 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding as of December 31, 2013 | | | 9,705,084 | | | $ | 0.50 | | | | 7.92 | | | $ | 5,112,805 | |
| | | | | | | | | | | | | | | | |
Exercisable as of December 31, 2013 | | | 5,544,395 | | | $ | 0.49 | | | | 7.50 | | | $ | 3,251,337 | |
| | | | | | | | | | | | | | | | |
Vested and expected to vest as of December 31, 2013 | | | 9,097,437 | | | $ | 0.50 | | | | 7.88 | | | $ | 4,863,083 | |
| | | | | | | | | | | | | | | | |
The following table summarizes information relating to stock options outstanding as of December 31, 2013:
| | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | | Options Exercisable | |
Range of Exercise Price | | Number
Outstanding | | | Weighted
Average
Remaining
Contractual
Life (In Years) | | | Weighted
Average
Exercise
Price | | | Number
Exercisable | | | Weighted
Average
Exercise
Price | |
$0.14 | | | 51,000 | | | | 7.95 | | | $ | 0.14 | | | | 27,500 | | | $ | 0.14 | |
$0.25 | | | 1,542,000 | | | | 7.74 | | | | 0.25 | | | | 864,583 | | | | 0.25 | |
$0.26 | | | 2,463,115 | | | | 7.06 | | | | 0.26 | | | | 1,945,198 | | | | 0.26 | |
$0.28 | | | 1,131,710 | | | | 8.10 | | | | 0.28 | | | | 513,668 | | | | 0.28 | |
$0.29 – $0.33 | | | 1,092,647 | | | | 7.52 | | | | 0.30 | | | | 936,395 | | | | 0.30 | |
$0.34 | | | 330,000 | | | | 8.72 | | | | 0.34 | | | | 330,000 | | | | 0.34 | |
$0.36 | | | 1,160,920 | | | | 8.60 | | | | 0.36 | | | | 403,733 | | | | 0.36 | |
$0.39 – $0.77 | | | 978,692 | | | | 8.57 | | | | 0.57 | | | | 295,818 | | | | 0.44 | |
$1.19 – $12.27 | | | 915,000 | | | | 9.30 | | | | 1.63 | | | | 187,500 | | | | 3.06 | |
$15.71 | | | 40,000 | | | | 0.40 | | | | 15.71 | | | | 40,000 | | | | 15.71 | |
| | | | | | | | | | | | | | | | | | | | |
$0.14 – $15.71 | | | 9,705,084 | | | | 7.92 | | | $ | 0.50 | | | | 5,544,395 | | | $ | 0.49 | |
| | | | | | | | | | | | | | | | | | | | |
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The estimated fair value of grants of stock options to non-employees of the Company is charged to expense in the financial statements. These options vest in the same manner as the employee options granted under the option plan as described above.
Stock based compensation expense recognized during the years ended December 31, 2013 and 2012 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. As of December 31, 2013, the total remaining unrecognized cost of approximately $1.0 million is expected to be recognized over approximately two years.
Shares Reserved for Future Issuance
The Company had reserved shares of common stock for future issuance as of December 31, 2013 and 2012 as follows:
| | | | | | | | |
| | | As of December 31, | |
| | | 2013 | | | 2012 | |
Options to purchase common stock | | | 9,705,084 | | | | 8,963,226 | |
Warrants to purchase common stock | | | 265,604 | | | | 649,688 | |
Restricted stock units | | | 41,708 | | | | — | |
Shares available for option grants | | | 2,345,617 | | | | 3,793,751 | |
| | | | | | | | |
Total | | | 12,358,013 | | | | 13,406,665 | |
| | | | | | | | |
13. Stock Warrants
The Company issues warrants to investors as part of its overall financing strategy and to vendors in order to reduce costs. In connection with the loan and security agreement the Company entered into with Comerica bank (Note 9) in September 2011, the Company issued a warrant to purchase 480,769 shares of the Company’s common stock, at an exercise price of $0.26 per share. The warrant expires in September 2018. The initial fair value of the warrant was calculated using the Black-Scholes option pricing model and the following assumptions: volatility of 88.03%, risk-free interest rate of 1.36%, exercise price of $0.26 and an expected life of 7 years. The fair value of the warrant was determined to be $94,000 and was recorded as equity in additional paid-in-capital and a discount to the carrying value of the loan. Through August 2012, the discount was amortized to interest expense using the effective interest rate method over the 48-month term of the original loan. As of September 2012, and in connection with the First Amended and Restated Loan and Security Agreement between the Company and Comerica Bank (Note 9), the unamortized discount will be recognized over the remaining term of the amended loan, which matures in September 2016. Comerica exercised this warrant in August 2013.
In connection with the First Amended Loan and Security Agreement, the Company issued a warrant to purchase 168,919 shares of the Company’s common stock, at an exercise price of $0.37 per share. This warrant expires in September 2019. The initial fair value of the warrant was calculated using the Black-Scholes option pricing model and the following assumptions: volatility of 89.87%, risk-free interest rate of 1.03%, exercise price of $0.37 and an expected life of 7 years. The fair value of the warrant was determined to be $48,000 and was recorded as equity in additional paid-in-capital and a discount to the carrying value of the loan. The discount is being amortized to interest expense using the effective interest rate method over the remaining term of the amended loan which matures in September 2016.
In connection with the Second Amended Loan and Security Agreement the Company issued a warrant to purchase 96,685 shares of the Company’s common stock, at an exercise price of $1.81 per share. This warrant expires in October 2020. The initial fair value of the warrant was calculated using the Black-Scholes option pricing model and the following assumptions: volatility of 89.01%, risk-free interest rate of 2.05%, exercise price of $1.81 and an expected life of 7 years. The fair value of the warrant was determined to be $136,000 and was
56
recorded as equity in additional paid-in-capital and a discount to the carrying value of the loan. The discount is being amortized to interest expense using the effective interest rate method over the remaining term of the amended loan which matures in December 2016.
In August 2013, the Company issued 386,784 shares of common stock pursuant to a cashless exercise of Comerica’s warrant to purchase 480,769 shares at an exercise price of $0.26 per share. As of December 31, 2013, there were warrants outstanding to purchase 265,604 shares of the Company’s common stock, with a weighted-average exercise price of $0.89 per share and an aggregate exercise price of $0.2 million.
The following table summarizes information about all warrants outstanding as of December 31, 2013:
| | | | | | | | | | | | |
| | | Warrants Outstanding and Exercisable | |
Exercise Price | | Number
Outstanding | | | Weighted
Average
Remaining
Contractual
Life (In Years) | | | Weighted
Average
Exercise
Price | |
$0.37 | | | 168,919 | | | | 5.70 | | | $ | 0.37 | |
$1.81 | | | 96,685 | | | | 6.80 | | | $ | 1.81 | |
| | | | | | | | | | | | |
| | | 265,604 | | | | 6.10 | | | $ | 0.89 | |
| | | | | | | | | | | | |
14. Leases, Commitments and Contingencies
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. The Company also leased another office and laboratory facility (the “343 Facility”), and subleased a portion of that facility, until the Company’s underlying lease for that facility expired on January 1, 2012. Upon expiration of the 343 Facility lease, restricted cash of $400,000 previously pledged as security for this lease was released in 2012.
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 years ended December 31, 2013 and 2012 (in thousands):
| | | | | | | | |
| | | Years Ended December 31, | |
| | | 2013 | | | 2012 | |
Asset retirement obligation, beginning of year | | $ | 302 | | | $ | 273 | |
Accretion expense | | | 32 | | | | 29 | |
| | | | | | | | |
Asset retirement obligation, end of year | | $ | 334 | | | $ | 302 | |
| | | | | | | | |
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 in 2010. The Company amortizes the unfavorable lease obligation using the effective interest rate method. The carrying amount, net of accumulated amortization, of the unfavorable lease liability, was $2.5 million as of December 31, 2013.
Rent expense for the Company’s facilities was $1.9 million and $2.0 million for the years ended December 31, 2013 and 2012, 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 $387,000 and $363,000 as of December 31, 2013 and 2012, respectively, is included in the accompanying balance sheet.
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At December 31, 2013, future minimum lease payments under non-cancelable operating leases are as follows (in thousands):
| | | | |
| | | Operating
Leases | |
2014 | | | 2,581 | |
2015 | | | 2,658 | |
2016 | | | 2,738 | |
| | | | |
Total minimum lease payments | | $ | 7,977 | |
| | | | |
Legal Proceedings
The Company is from time to time subject to various claims and legal actions during the ordinary course of business. The Company believes that there are currently no claims or legal actions that would reasonably be expected to have a material adverse effect on its results of operations, future cash flows or financial condition.
15. Income Taxes
Provision for Income Tax
The Company files US Federal and California state tax returns and the tax provision is composed as follows(in thousands):
| | | | | | | | |
| | | December 31, | |
| | | 2013 | | | 2012 | |
Current Tax Expense: | | | | | | | | |
Federal | | $ | — | | | $ | — | |
State | | | 5 | | | | 2 | |
| | | | | | | | |
Total current tax expense | | | 5 | | | | 2 | |
Deferred Tax Expense: | | | | | | | | |
Federal | | | — | | | | — | |
State | | | — | | | | — | |
| | | | | | | | |
Total deferred tax expense | | | — | | | | — | |
| | | | | | | | |
Net tax provision (benefit) | | $ | 5 | | | $ | 2 | |
| | | | | | | | |
The differences between the US statutory tax rate and the Company’s effective tax rate are as follows:
| | | | | | | | |
| | | December 31, | |
| | | 2013 | | | 2012 | |
Statutory rate | | | 34.0 | % | | | 34.0 | % |
State taxes, net of Federal benefit | | | 11.5 | | | | 34.9 | |
Change in state rate | | | (22.9 | ) | | | (36.7 | ) |
R&D credit | | | (7.3 | ) | | | (33.4 | ) |
Permanent differences | | | (3.6 | ) | | | (3.4 | ) |
State minimum taxes | | | (0.3 | ) | | | (0.1 | ) |
Change in valuation allowance | | | (13.5 | ) | | | 2.9 | |
Other | | | 1.9 | | | | 1.7 | |
| | | | | | | | |
Effective tax rate | | | (0.2 | )% | | | (0.1 | )% |
| | | | | | | | |
58
As of December 31, 2013, the Company had approximately $232 million of federal, $163 million of California, and $17 million of other state net operating loss carryforwards available to offset future taxable income. These loss carryforwards begin to expire in 2019 for federal purposes, in 2016 for California purposes and in 2014 for other state purposes.
As of December 31, 2013, the Company had credit carryforwards of approximately $5.8 million and $5.9 million available to reduce future taxable income, if any, for federal and California state income tax purposes, respectively. The federal R&D credit carryforwards expire starting 2019 and California credits can be carried forward indefinitely.
The effects of changes in tax rates and laws are recognized in the period new legislation is enacted. Furthermore, the reinstatement of an expired provision in a later reporting period requires companies to wait until the date the law is enacted to reflect the effect of the tax law changes into the annual estimated effective tax rate starting on the first interim reporting period that includes the enactment date. The impact of this change, on both the annual effective tax rate and on deferred taxes are to be reported as a component of tax expense related to continuing operations. Although the Company incurred qualified research expenses in 2012 that would generate a federal R&D credit, the deferred tax benefit of these credits is not recorded because the federal provisions extending the R&D credit were not extended until January 2013. Therefore, the amount of federal R&D credits for 2012 was considered a discrete item during the first quarter of 2013 for financial reporting purposes.
Based on the weight of available evidence, including cumulative losses since inception and expected future losses, the Company has determined that it is more likely than not that the deferred tax asset amount will not be realized and therefore a full valuation allowance has been provided on net deferred tax assets.
As of December 31, 2013 and 2012, the Company had deferred tax assets of approximately $109.4 million and $109.2 million, respectively, which have been fully offset by a valuation allowance. The net valuation allowance increased by approximately $0.2 million in the year ended December 31, 2013 and decreased by approximately $2.8 million during the year ended December 31, 2012. Deferred tax assets primarily relate to net operating loss and research tax credit carryforwards.
The tax effects of temporary differences and carryforwards that give rise to deferred tax assets are as follows(in thousands):
| | | | | | | | |
| | | December 31, | |
| | | 2013 | | | 2012 | |
Deferred tax assets: | | | | | | | | |
Accruals and reserves | | $ | 1,694 | | | $ | 1,794 | |
Fixed assets | | | 2,338 | | | | 2,563 | |
Deferred research expense | | | 3,667 | | | | 5,592 | |
Stock options | | | 3,822 | | | | 3,798 | |
Net operating loss carryforwards | | | 89,306 | | | | 86,663 | |
Research tax credit carryforwards | | | 8,541 | | | | 8,796 | |
Other | | | 9 | | | | 7 | |
| | | | | | | | |
Total deferred tax assets | | | 109,377 | | | | 109,213 | |
Less: Valuation allowance | | | (109,377 | ) | | | (109,213 | ) |
| | | | | | | | |
Net deferred tax assets | | $ | — | | | $ | — | |
| | | | | | | | |
Under the provisions of Sections 382 and 383 of the Internal Revenue Code, a change of control, as defined, may impose an annual limitation on the amount of the Company’s net operating loss and tax credit carryforwards, and other tax attributes, that can be used to reduce future tax liabilities. As a result of the Reverse Merger, certain of the Company’s Old diaDexus tax attributes are subject to an annual limitation of $240,000 for federal and state purposes.
59
Uncertain Tax Positions
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. The Company performed a full analysis of uncertain tax positions at December 31, 2010. The Company has no new uncertain tax positions for 2013.
As of December 31, 2012, the Company had approximately $1.4 million of unrecognized tax benefits relating to the reserve on R&D credits. In 2013, this amount was increased by $0.2 million as the result of a reserve placed on California R&D credit carryforwards from tax years ended December 31, 2013. As the Company has not utilized any of these credits, no reserve is recorded on the financial statements.
The following table reflects the changes in the gross unrecognized tax benefits for the years ended December 31(in thousands):
| | | | | | | | |
| | | 2013 | | | 2012 | |
Balance at January 1 | | $ | 1,375 | | | $ | 1,366 | |
Increase related to gross up state positions | | | 251 | | | | — | |
Increase related to current year positions | | | 34 | | | | — | |
Increase related to prior year positions | | | 1 | | | | 9 | |
Decrease related to expiration of credits | | | (93 | ) | | | — | |
| | | | | | | | |
Balance at December 31 | | $ | 1,568 | | | $ | 1,375 | |
| | | | | | | | |
The Company is currently not subject to any income tax examinations. Due to the Company’s losses, generally all years remain open.
16. Subsequent Events
In March 2014, the Company and Thermo Fisher Scientific, Inc. (“Thermo Fisher Scientific”) entered into a License and Supply Agreement (the “Agreement”) to develop and commercialize three independent biomarkers in the United States. Upon execution of the Agreement, the Company is obligated to pay Thermo Fisher Scientific an upfront payment of €750,000 and another €500,000 is payable within twelve months of the effective date. In addition, the Company agreed to pay Thermo Fisher Scientific milestone payments, depending on the achievement of future milestone events, including development and regulatory milestone payments.
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| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None
| Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We have performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of December 31, 2013 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 CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Exchange Act Rules 13a-15(f) and 15d-15(f) as a process designed by, or under the supervision of, the Company’s principal executive and financial officers, or persons performing similar functions, and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that:
| | • | | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| | • | | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
| | • | | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness 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.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal Control-Integrated Framework (2013). Based on our assessment and those criteria, our management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2013.
61
Changes in Internal Controls
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarterly period ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
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. Also, projections of any evaluation of effectiveness of internal control 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 are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our principal executive officer and principal financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were effective at the reasonable assurance level to ensure the information required to be disclosed in this report is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
| Item 9B. | Other Information |
None
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PART III
| Item 10. | Directors, Executive Officers and Corporate Governance |
The information required by this Item will be set forth in the Company’s proxy statement under the headings, “Proposal 1—Election of Directors,” “Section 16(e) Beneficial Ownership Reporting Compliance” and “Meetings and Committees of the Board of Directors,” to be filed with the Securities and Exchange Commission within 120 days after the Company’s fiscal year end and is incorporated herein by reference.
| Item 11. | Executive Compensation |
The information required by this Item will be set forth in the Company’s proxy statement under the heading, “Compensation of Directors and Executive Officers,” to be filed with the Securities and Exchange Commission within 120 days after the Company’s fiscal year end and is incorporated herein by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this Item will be set forth in the Company’s proxy statement under the headings, “Security Ownership of Certain Beneficial Owners and Management” and “Compensation of Directors and Executive Officers—Equity Compensation Plan Information,” to be filed with the Securities and Exchange Commission within 120 days after the Company’s fiscal year end and is incorporated herein by reference.
| Item 13. | Certain Relationships and Related Transactions and Director Independence |
The information required by this Item will be set forth in the Company’s proxy statement under the headings, “Certain Relationships and Related Transactions” and “Proposal 1—Election of Directors,” to be filed with the Securities and Exchange Commission within 120 days after the Company’s fiscal year end and is incorporated herein by reference.
| Item 14. | Principal Accountant Fees and Services |
The information required by this Item will be set forth in the Company’s proxy statement under the heading, “Proposal 4—Ratification of Appointment of the Independent Registered Public Accounting Firm,” to be filed with the Securities and Exchange Commission within 120 days after the Company’s fiscal year end and is incorporated herein by reference.
63
PART IV
| Item 15. | Exhibits and Financial Statements Schedules |
(a) The following documents are included as part of this Annual Report on Form 10-K.
(1) Index to Financial Statements.
Included in Part II of this Report:
(2) Financial Statement Schedules.
All financial statement schedules are omitted because they are not applicable or not required or because the required information is included in the financial statements or notes thereto.
(3) Exhibits
| | |
| Exhibit | | Description |
| |
| 2.1* | | Agreement and Plan of Merger and Reorganization, dated May 28, 2010, by and among VaxGen, Inc., Violet Acquisition Corporation, Violet Acquisition LLC, diaDexus, Inc. and John E. Hamer, as the agent of diaDexus, Inc.’s stockholders (incorporated by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K (file no. 0-26483), filed on June 1, 2010) |
| |
| 2.2 | | Amendment No. 1 to Agreement and Plan of Merger and Reorganization, dated June 24, 2010, by and among VaxGen, Inc., Violet Acquisition Corporation, Violet Acquisition LLC, diaDexus, Inc., and John E. Hamer as the agent of diaDexus, Inc’s stockholders (incorporated by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K (file no. 0-26483), filed on June 28, 2010) |
| |
| 3.1 | | Restated Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.1 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2010, filed on November 15, 2010) |
| |
| 3.2 | | Certificate of Change of Registered Agent and Registered Office (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K (file no. 0-26483), filed on January 25, 2011) |
| |
| 3.3 | | Amendment to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K (file no. 0-26483), filed on July 18, 2011) |
| |
| 3.4 | | Amended and Restated Bylaws of the registrant (incorporated by reference to Exhibit 3.2 to the registrant’s Current Report on Form 8-K (file no. 0-26483), filed on November 5, 2010) |
| |
| 4.1 | | Specimen Stock Certificate for Common Stock of diaDexus, Inc. (incorporated by reference to Exhibit 4.1 to the registrant’s Registration Statement on Form S-8 (file no. 333-170924), filed on December 2, 2010) |
| |
| 4.2 | | Warrant to purchase shares of Common Stock, issued to Comerica Bank on September 23, 2011 (incorporated by reference to Exhibit 4.1 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2011, filed on November 9, 2011) |
64
| | |
| Exhibit | | Description |
| |
| 4.3 | | Warrant to purchase shares of Common Stock, issued to Comerica Bank on September 11, 2012 (incorporated by reference to Exhibit 4.1 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2012, filed on November 7, 2012) |
| |
| 4.4 | | First Amendment to Warrant to Purchase Stock, dated July 18, 2013, by and between diaDexus, Inc. and Comerica Ventures Incorporated (incorporated by reference to Exhibit 4.1 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2013, filed on November 5, 2013) |
| |
| 4.5 | | Warrant to purchase shares of Common Stock, issued to Comerica Bank on October 17, 2013 |
| |
| 10.1# | | Amended and Restated 1996 Stock Option Plan, as amended and restated effective July 29, 2010 (incorporated by reference to Exhibit 10.6 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2010, filed on November 15, 2010) |
| |
| 10.2# | | Form of Stock Option Agreement pursuant to the registrant’s Amended and Restated 1996 Stock Option Plan (incorporated by reference to Exhibit 10.7 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2010, filed on November 15, 2010) |
| |
| 10.3# | | Amended and Restated 1998 Director Stock Option Plan, as amended and restated effective as of May 29, 2002 (incorporated by reference to Appendix B to the registrant’s Definitive Proxy Statement (file no. 0-26483), filed on April 30, 2002) |
| |
| 10.4 | | Form of Indemnity Agreement by and between the registrant and the registrant’s directors and executive officers (incorporated by reference to Exhibit 10.9 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2010, filed on November 15, 2010) |
| |
| 10.5 | | SB/HGS Diagnostic License Agreement, effective as of July 24, 1997, by and among SmithKline Beecham Corp., SmithKline Beecham p.l.c. and Human Genome Sciences, Inc. (incorporated by reference to Exhibit 10.10 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2010, filed on November 15, 2010) |
| |
| 10.6** | | Collaboration and License Agreement, dated as of September 2, 1997 (the “Collaboration Agreement”), by and among diaDexus, LLC, SmithKline Beecham Corp., SmithKline Beecham p.l.c., and Incyte Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.17 to diaDexus, Inc.’s Registration Statement on Form S-1/A (file no. 333-50318), filed April 9, 2001) |
| |
| 10.7 | | Amendment No. 1 to the Collaboration Agreement, dated as of February 1, 1998, by and among diaDexus, LLC, SmithKline Beecham Corp., SmithKline Beecham p.l.c., and Incyte Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.18 to diaDexus, Inc.’s Registration Statement on Form S-1 (file no. 333-50318), filed November 20, 2000) |
| |
| 10.8** | | Amendment No. 2 to the Collaboration Agreement, dated as of July 2, 1998, by and among diaDexus, LLC, SmithKline Beecham Corp., SmithKline Beecham p.l.c., and Incyte Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.19 to diaDexus, Inc.’s Registration Statement on Form S-1/A (file no. 333-50318), filed April 9, 2001) |
| |
| 10.9 | | Amendment to the Collaboration Agreement, dated as of May 4, 1999, by and among diaDexus, LLC, SmithKline Beecham Corp., SmithKline Beecham p.l.c., and Incyte Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.20 to diaDexus, Inc.’s Registration Statement on Form S-1 (file no. 333-50318), filed November 20, 2000) |
| |
| 10.10** | | Amendment No. 3 to the Collaboration Agreement, dated as of July 28, 1999, by and among diaDexus, LLC, Quest Diagnostics Incorporated, SmithKline Beecham Corp., SmithKline Beecham p.l.c., and Incyte Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.21 to diaDexus, Inc.’s Registration Statement on Form S-1/A (file no. 333-50318), filed April 9, 2001) |
65
| | |
| Exhibit | | Description |
| |
| 10.11 | | Amendment No. 4 to the Collaboration Agreement, dated as of February 17, 2000, by and among diaDexus, LLC, SmithKline Beecham Corp., SmithKline Beecham p.l.c., and Incyte Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.22 to diaDexus, Inc.’s Registration Statement on Form S-1 (file no. 333-50318), filed November 20, 2000) |
| |
| 10.12 | | Amendment to Collaboration Agreement, dated as of March 30, 2000, by and among diaDexus, LLC, SmithKline Beecham Corp., SmithKline Beecham p.l.c., and Incyte Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.23 to diaDexus, Inc.’s Registration Statement onForm S-1 (file no. 333-50318), filed November 20, 2000) |
| |
| 10.13** | | Side Letter to License Agreement, dated February 28, 2005, by and between diaDexus, Inc. and SmithKline Beecham Corp. dba GlaxoSmithKline (incorporated by reference to Exhibit 10.18 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2010, filed on November 15, 2010) |
| |
| 10.14** | | Diagnostics License Agreement, dated December 9, 2004, by and between diaDexus, Inc. and ICOS Corp. (incorporated by reference to Exhibit 10.19 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2010, filed on November 15, 2010) |
| |
| 10.15** | | Agreement, dated as of August 1, 2006, by and between diaDexus, Inc. and Dako North America, Inc. (incorporated by reference to Exhibit 10.27 to Amendment No. 1 on Form 10-Q/A(file no. 0-26483), filed on August 15, 2011, to the registrant’s Quarterly Report for the fiscal quarter ended September 30, 2010) |
| |
| 10.16 | | Lease, dated October 26, 1998, by and between VaxGen, Inc. and Oyster Point Tech Center LLC (incorporated by reference to Exhibit 10.18 to the registrant’s Registration Statement on Form S-1 (file no. 333-78065), filed on May 7, 1999) |
| |
| 10.17 | | Fifth Amendment to Lease, dated April 14, 2005, by and between VaxGen, Inc. and Oyster Point Tech Center LLC (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K (file no. 0-26483), filed on April 21, 2005) |
| |
| 10.18 | | Sixth Amendment to Lease Agreement, dated October 11, 2007, by and between VaxGen, Inc. and Oyster Point Tech Center LLC (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K (file no. 0-26483), filed on October 17, 2007) |
| |
| 10.19# | | Employment Agreement, effective as of January 10, 2011, by and between diaDexus, Inc. and Emilia Zychlinsky Bulaevsky (incorporated by reference to Exhibit 10.55 to the registrant’s Annual Report on Form 10-K (file no. 0-26483) for the fiscal year ended December 31, 2010, filed on March 22, 2011) |
| |
| 10.20# | | Executive Employment Agreement, effective as of July 1, 2011, by and between diaDexus, Inc. and Brian E. Ward (incorporated by reference to Exhibit 10.3 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended June 30, 2011, filed on August 15, 2011) |
| |
| 10.21# | | Offer Letter, dated September 20, 2011, by and between diaDexus, Inc. and Brian E. Ward (incorporated by reference to Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2011, filed on November 9, 2011) |
| |
| 10.22# | | Stock Option Agreement, dated September 26, 2011, by and between diaDexus, Inc. and Brian E. Ward (incorporated by reference to Exhibit 10.3 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2011, filed on November 9, 2011) |
66
| | |
| Exhibit | | Description |
| |
| 10.23# | | Change in Control and Severance Agreement, dated September 26, 2011 by and between diaDexus, Inc. and Brian E. Ward (incorporated by reference to Exhibit 10.4 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2011, filed on November 9, 2011) |
| |
| 10.24# | | Offer Letter, dated September 20, 2011, by and between diaDexus, Inc. and R. Michael Richey (incorporated by reference to Exhibit 10.5 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2011, filed on November 9, 2011) |
| |
| 10.25# | | Stock Option Agreement, dated October 1, 2011, by and between diaDexus, Inc. and R. Michael Richey (incorporated by reference to Exhibit 10.6 to the registrant’s Quarterly Report onForm 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2011, filed on November 9, 2011) |
| |
| 10.26# | | Change in Control and Severance Agreement, dated September 20, 2011, by and between diaDexus, Inc. and R. Michael Richey (incorporated by reference to Exhibit 10.7 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2011, filed on November 9, 2011) |
| |
| 10.27** | | Loan and Security Agreement, dated September 23, 2011, by and between diaDexus, Inc. and Comerica Bank (incorporated by reference to Exhibit 10.12 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2011, filed on November 9, 2011) |
| |
| 10.28# | | Offer Letter, dated January 8, 2012, by and between diaDexus, Inc. and Jean-Frédéric Viret (incorporated by reference to Exhibit 10.61 to the registrant’s Annual Report on Form 10-K (file no. 0-26483), for the fiscal year ended December 31, 2011, filed on March 15, 2012) |
| |
| 10.29# | | Stock Option Agreement, dated February 1, 2012, by and between diaDexus, Inc. and Jean-Frédéric Viret (incorporated by reference to Exhibit 10.62 to the registrant’s Annual Report on Form 10-K (file no. 0-26483), for the fiscal year ended December 31, 2011, filed on March 15, 2012) |
| |
| 10.30# | | Change in Control and Severance Agreement, dated February 2, 2012, by and between diaDexus, Inc. and Jean-Frédéric Viret (incorporated by reference to Exhibit 10.63 to the registrant’s Annual Report on Form 10-K (file no. 0-26483), for the fiscal year ended December 31, 2011, filed on March 15, 2012) |
| |
| 10.31** | | Purchase Agreement, dated as of May 9, 2012 and effective as of April 24, 2012, by and between diaDexus, Inc. and Boston Heart Diagnostics (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended June 30, 2012, filed on August 7, 2012) |
| |
| 10.32# | | 2012 Equity Incentive Award Plan, effective as of May 17, 2012 (incorporated by reference to Appendix A to the registrant’s Definitive Proxy Statement (file no. 0-26483), filed on April 11, 2012) |
| |
| 10.33** | | Purchase Agreement with Atherotech Diagnostics Lab, dated August 23, 2012 and effective as of August 20, 2012 (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2012, filed on November 7, 2012) |
| |
| 10.34** | | Volume Discount Program Addendum with Atherotech Diagnostics Lab, dated August 23, 2012 and effective as of August 20, 2012 (incorporated by reference to Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2012, filed on November 7, 2012) |
67
| | |
| Exhibit | | Description |
| |
| 10.35** | | Amended and Restated Loan and Security Agreement by and between diaDexus, Inc. and Comerica Bank, dated September 11, 2012 (incorporated by reference to Exhibit 10.3 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2012, filed on November 7, 2012) |
| |
| 10.36** | | Second Amended and Restated Loan and Security Agreement, by and between the Company and Comerica, dated October 17, 2013. |
| |
| 10.37 | | diaDexus, Inc. Key Employee Severance Benefit Plan, adopted October 30, 2013 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K (file no. 0-26483), filed on November 5, 2013) |
| |
| 10.38** | | Purchase Agreement, dated as of October 16, 2013 and effective as of October 18, 2013, by and between diaDexus, Inc. and Health Diagnostics Laboratory (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2013, filed on November 5, 2013) |
| |
| 23.1 | | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm |
| |
| 24.1 | | Power of Attorney (see signature page to this Annual Report on Form 10-K) |
| |
| 31.1 | | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) |
| |
| 31.2 | | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) |
| |
| 32.1 | | Certification of Chief Executive Officer pursuant to 18 USC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
| 32.2 | | Certification of Chief Financial Officer pursuant to 18 USC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
| 101.INS | | XBRL Instance Document |
| |
| 101.SCH | | XBRL Taxonomy Extension Schema Document |
| |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| * | Certain schedules referenced in the Agreement and Plan of Merger and Reorganization have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule will be furnished supplementally to the Securities and Exchange Commission upon request. |
| # | Management contract or compensatory plan or arrangement. |
| ** | Confidential treatment has been granted with respect to certain portions of this agreement. |
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | |
| | | | | diaDexus, Inc. |
| | | |
| Date: March 11, 2014 | | | | By: | | /S/ BRIAN E. WARD |
| | | | | | Brian E. Ward |
| | | | | | President and Chief Executive Officer |
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and appoints Brian E. Ward, with full power of substitution and resubstitution, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this annual report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorney-in-fact and agents or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | |
Signature | | Title | | Date |
| | |
/S/ BRIAN E. WARD Brian E. Ward | | President and Chief Executive
Officer, Director
(Principal Executive Officer) | | March 11, 2014 |
| | |
/S/ JEAN-FRÉDÉRIC VIRET Jean-Frédéric Viret | | Chief Financial Officer
(Principal Financial and
Accounting Officer) | | March 11, 2014 |
| | |
/S/ LORI F. RAFIELD Lori F. Rafield | | Chairman of the Board of Directors | | March 11, 2014 |
| | |
/S/ KAREN DREXLER Karen Drexler | | Director | | March 11 , 2014 |
| | |
/S/ ANDREW GALLIGAN Andrew Galligan | | Director | | March 11, 2014 |
| | |
/S/ OYE OLUKOTUN Oye Olukotun | | Director | | March 11, 2014 |
| | |
/S/ JAMES P. PANEK James P. Panek | | Director | | March 11, 2014 |
| | |
/S/ CHARLES W. PATRICK Charles W. Patrick | | Director | | March 11, 2014 |
69
EXHIBIT INDEX
| | |
| Exhibit | | Description |
| |
| 2.1* | | Agreement and Plan of Merger and Reorganization, dated May 28, 2010, by and among VaxGen, Inc., Violet Acquisition Corporation, Violet Acquisition LLC, diaDexus, Inc. and John E. Hamer, as the agent of diaDexus, Inc.’s stockholders (incorporated by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K (file no. 0-26483), filed on June 1, 2010) |
| |
| 2.2 | | Amendment No. 1 to Agreement and Plan of Merger and Reorganization, dated June 24, 2010, by and among VaxGen, Inc., Violet Acquisition Corporation, Violet Acquisition LLC, diaDexus, Inc., and John E. Hamer as the agent of diaDexus, Inc’s stockholders (incorporated by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K (file no. 0-26483), filed on June 28, 2010) |
| |
| 3.1 | | Restated Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.1 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2010, filed on November 15, 2010) |
| |
| 3.2 | | Certificate of Change of Registered Agent and Registered Office (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K (file no. 0-26483), filed on January 25, 2011) |
| |
| 3.3 | | Amendment to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K (file no. 0-26483), filed on July 18, 2011) |
| |
| 3.4 | | Amended and Restated Bylaws of the registrant (incorporated by reference to Exhibit 3.2 to the registrant’s Current Report on Form 8-K (file no. 0-26483), filed on November 5, 2010) |
| |
| 4.1 | | Specimen Stock Certificate for Common Stock of diaDexus, Inc. (incorporated by reference to Exhibit 4.1 to the registrant’s Registration Statement on Form S-8 (file no. 333-170924), filed on December 2, 2010) |
| |
| 4.2 | | Warrant to purchase shares of Common Stock, issued to Comerica Bank on September 23, 2011 (incorporated by reference to Exhibit 4.1 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2011, filed on November 9, 2011) |
| |
| 4.3 | | Warrant to purchase shares of Common Stock, issued to Comerica Bank on September 11, 2012 (incorporated by reference to Exhibit 4.1 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2012, filed on November 7, 2012) |
| |
| 4.4 | | First Amendment to Warrant to Purchase Stock, dated July 18, 2013, by and between diaDexus, Inc. and Comerica Ventures Incorporated (incorporated by reference to Exhibit 4.1 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2013, filed on November 5, 2013) |
| |
| 4.5 | | Warrant to purchase shares of Common Stock, issued to Comerica Bank on October 17, 2013 |
| |
| 10.1# | | Amended and Restated 1996 Stock Option Plan, as amended and restated effective July 29, 2010 (incorporated by reference to Exhibit 10.6 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2010, filed on November 15, 2010) |
| |
| 10.2# | | Form of Stock Option Agreement pursuant to the registrant’s Amended and Restated 1996 Stock Option Plan (incorporated by reference to Exhibit 10.7 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2010, filed on November 15, 2010) |
| |
| 10.3# | | Amended and Restated 1998 Director Stock Option Plan, as amended and restated effective as of May 29, 2002 (incorporated by reference to Appendix B to the registrant’s Definitive Proxy Statement (file no. 0-26483), filed on April 30, 2002) |
70
| | |
| Exhibit | | Description |
| |
| 10.4 | | Form of Indemnity Agreement by and between the registrant and the registrant’s directors and executive officers (incorporated by reference to Exhibit 10.9 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2010, filed on November 15, 2010) |
| |
| 10.5 | | SB/HGS Diagnostic License Agreement, effective as of July 24, 1997, by and among SmithKline Beecham Corp., SmithKline Beecham p.l.c. and Human Genome Sciences, Inc. (incorporated by reference to Exhibit 10.10 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2010, filed on November 15, 2010) |
| |
| 10.6** | | Collaboration and License Agreement, dated as of September 2, 1997 (the “Collaboration Agreement”), by and among diaDexus, LLC, SmithKline Beecham Corp., SmithKline Beecham p.l.c., and Incyte Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.17 to diaDexus, Inc.’s Registration Statement on Form S-1/A (file no. 333-50318), filed April 9, 2001) |
| |
| 10.7 | | Amendment No. 1 to the Collaboration Agreement, dated as of February 1, 1998, by and among diaDexus, LLC, SmithKline Beecham Corp., SmithKline Beecham p.l.c., and Incyte Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.18 to diaDexus, Inc.’s Registration Statement on Form S-1 (file no. 333-50318), filed November 20, 2000) |
| |
| 10.8** | | Amendment No. 2 to the Collaboration Agreement, dated as of July 2, 1998, by and among diaDexus, LLC, SmithKline Beecham Corp., SmithKline Beecham p.l.c., and Incyte Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.19 to diaDexus, Inc.’s Registration Statement on Form S-1/A (file no. 333-50318), filed April 9, 2001) |
| |
| 10.9 | | Amendment to the Collaboration Agreement, dated as of May 4, 1999, by and among diaDexus, LLC, SmithKline Beecham Corp., SmithKline Beecham p.l.c., and Incyte Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.20 to diaDexus, Inc.’s Registration Statement on Form S-1 (file no. 333-50318), filed November 20, 2000) |
| |
| 10.10** | | Amendment No. 3 to the Collaboration Agreement, dated as of July 28, 1999, by and among diaDexus, LLC, Quest Diagnostics Incorporated, SmithKline Beecham Corp., SmithKline Beecham p.l.c., and Incyte Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.21 to diaDexus, Inc.’s Registration Statement on Form S-1/A (file no. 333-50318), filed April 9, 2001) |
| |
| 10.11 | | Amendment No. 4 to the Collaboration Agreement, dated as of February 17, 2000, by and among diaDexus, LLC, SmithKline Beecham Corp., SmithKline Beecham p.l.c., and Incyte Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.22 to diaDexus, Inc.’s Registration Statement on Form S-1 (file no. 333-50318), filed November 20, 2000) |
| |
| 10.12 | | Amendment to Collaboration Agreement, dated as of March 30, 2000, by and among diaDexus, LLC, SmithKline Beecham Corp., SmithKline Beecham p.l.c., and Incyte Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.23 to diaDexus, Inc.’s Registration Statement on Form S-1 (file no. 333-50318), filed November 20, 2000) |
| |
| 10.13** | | Side Letter to License Agreement, dated February 28, 2005, by and between diaDexus, Inc. and SmithKline Beecham Corp. dba GlaxoSmithKline (incorporated by reference to Exhibit 10.18 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2010, filed on November 15, 2010) |
| |
| 10.14** | | Diagnostics License Agreement, dated December 9, 2004, by and between diaDexus, Inc. and ICOS Corp. (incorporated by reference to Exhibit 10.19 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2010, filed on November 15, 2010) |
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| Exhibit | | Description |
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| 10.15** | | Agreement, dated as of August 1, 2006, by and between diaDexus, Inc. and Dako North America, Inc. (incorporated by reference to Exhibit 10.27 to Amendment No. 1 on Form 10-Q/A(file no. 0-26483), filed on August 15, 2011, to the registrant’s Quarterly Report for the fiscal quarter ended September 30, 2010) |
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| 10.16 | | Lease, dated October 26, 1998, by and between VaxGen, Inc. and Oyster Point Tech Center LLC (incorporated by reference to Exhibit 10.18 to the registrant’s Registration Statement on Form S-1 (file no. 333-78065), filed on May 7, 1999) |
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| 10.17 | | Fifth Amendment to Lease, dated April 14, 2005, by and between VaxGen, Inc. and Oyster Point Tech Center LLC (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K (file no. 0-26483), filed on April 21, 2005) |
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| 10.18 | | Sixth Amendment to Lease Agreement, dated October 11, 2007, by and between VaxGen, Inc. and Oyster Point Tech Center LLC (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K (file no. 0-26483), filed on October 17, 2007) |
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| 10.19# | | Employment Agreement, effective as of January 10, 2011, by and between diaDexus, Inc. and Emilia Zychlinsky Bulaevsky (incorporated by reference to Exhibit 10.55 to the registrant’s Annual Report on Form 10-K (file no. 0-26483) for the fiscal year ended December 31, 2010, filed on March 22, 2011) |
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| 10.20# | | Executive Employment Agreement, effective as of July 1, 2011, by and between diaDexus, Inc. and Brian E. Ward (incorporated by reference to Exhibit 10.3 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended June 30, 2011, filed on August 15, 2011) |
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| 10.21# | | Offer Letter, dated September 20, 2011, by and between diaDexus, Inc. and Brian E. Ward (incorporated by reference to Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2011, filed on November 9, 2011) |
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| 10.22# | | Stock Option Agreement, dated September 26, 2011, by and between diaDexus, Inc. and Brian E. Ward (incorporated by reference to Exhibit 10.3 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2011, filed on November 9, 2011) |
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| 10.23# | | Change in Control and Severance Agreement, dated September 26, 2011 by and between diaDexus, Inc. and Brian E. Ward (incorporated by reference to Exhibit 10.4 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2011, filed on November 9, 2011) |
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| 10.24# | | Offer Letter, dated September 20, 2011, by and between diaDexus, Inc. and R. Michael Richey (incorporated by reference to Exhibit 10.5 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2011, filed on November 9, 2011) |
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| 10.25# | | Stock Option Agreement, dated October 1, 2011, by and between diaDexus, Inc. and R. Michael Richey (incorporated by reference to Exhibit 10.6 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2011, filed on November 9, 2011) |
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| 10.26# | | Change in Control and Severance Agreement, dated September 20, 2011, by and between diaDexus, Inc. and R. Michael Richey (incorporated by reference to Exhibit 10.7 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2011, filed on November 9, 2011) |
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| 10.27** | | Loan and Security Agreement, dated September 23, 2011, by and between diaDexus, Inc. and Comerica Bank (incorporated by reference to Exhibit 10.12 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2011, filed on November 9, 2011) |
72
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| Exhibit | | Description |
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| 10.28# | | Offer Letter, dated January 8, 2012, by and between diaDexus, Inc. and Jean-Frédéric Viret (incorporated by reference to Exhibit 10.61 to the registrant’s Annual Report on Form 10-K (file no. 0-26483), for the fiscal year ended December 31, 2011, filed on March 15, 2012) |
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| 10.29# | | Stock Option Agreement, dated February 1, 2012, by and between diaDexus, Inc. and Jean-Frédéric Viret (incorporated by reference to Exhibit 10.62 to the registrant’s Annual Report on Form 10-K (file no. 0-26483), for the fiscal year ended December 31, 2011, filed on March 15, 2012) |
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| 10.30# | | Change in Control and Severance Agreement, dated February 2, 2012, by and between diaDexus, Inc. and Jean-Frédéric Viret (incorporated by reference to Exhibit 10.63 to the registrant’s Annual Report on Form 10-K (file no. 0-26483), for the fiscal year ended December 31, 2011, filed on March 15, 2012) |
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| 10.31** | | Purchase Agreement, dated as of May 9, 2012 and effective as of April 24, 2012, by and between diaDexus, Inc. and Boston Heart Diagnostics (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended June 30, 2012, filed on August 7, 2012) |
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| 10.32# | | 2012 Equity Incentive Award Plan, effective as of May 17, 2012 (incorporated by reference to Appendix A to the registrant’s Definitive Proxy Statement (file no. 0-26483), filed on April 11, 2012) |
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| 10.33** | | Purchase Agreement with Atherotech Diagnostics Lab, dated August 23, 2012 and effective as of August 20, 2012 (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2012, filed on November 7, 2012) |
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| 10.34** | | Volume Discount Program Addendum with Atherotech Diagnostics Lab, dated August 23, 2012 and effective as of August 20, 2012 (incorporated by reference to Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2012, filed on November 7, 2012) |
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| 10.35** | | Amended and Restated Loan and Security Agreement by and between diaDexus, Inc. and Comerica Bank, dated September 11, 2012 (incorporated by reference to Exhibit 10.3 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2012, filed on November 7, 2012) |
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| 10.36** | | Second Amended and Restated Loan and Security Agreement, by and between the Company and Comerica, dated October 17, 2013. |
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| 10.37 | | diaDexus, Inc. Key Employee Severance Benefit Plan, adopted October 30, 2013 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K (file no. 0-26483), filed on November 5, 2013) |
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| 10.38** | | Purchase Agreement, dated as of October 16, 2013 and effective as of October 18, 2013, by and between diaDexus, Inc. and Health Diagnostics Laboratory (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q (file no. 0-26483) for the fiscal quarter ended September 30, 2013, filed on November 5, 2013) |
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| 23.1 | | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm |
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| 24.1 | | Power of Attorney (see signature page to this Annual Report on Form 10-K) |
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| 31.1 | | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) |
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| 31.2 | | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) |
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| Exhibit | | Description |
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| 32.1 | | Certification of Chief Executive Officer pursuant to 18 USC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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| 32.2 | | Certification of Chief Financial Officer pursuant to 18 USC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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| 101.INS | | XBRL Instance Document |
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| 101.SCH | | XBRL Taxonomy Extension Schema Document |
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| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| * | Certain schedules referenced in the Agreement and Plan of Merger and Reorganization have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule will be furnished supplementally to the Securities and Exchange Commission upon request. |
| # | Management contract or compensatory plan or arrangement. |
| ** | Confidential treatment has been granted with respect to certain portions of this agreement. |
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