Diadexus (VXGN) 10-Q 2015 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2015

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.)
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)

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

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

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

Large accelerated filer	¨	Accelerated filer	¨
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 number of shares outstanding of the registrant’s common stock, $0.01 par value per share, was 57,536,305 as of May 11, 2015.

DIADEXUS, INC.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2015

TABLE OF CONTENTS

	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Balance Sheets	3
	Condensed Statements of Comprehensive Loss	4
	Condensed Statements of Cash Flows	5
	Notes to Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4	Controls and Procedures	18
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	30
Signatures		31

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

DIADEXUS, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share data)

	March 31,			December 31,
	2015			2014
	(unaudited)			(Note 1)
Assets
Current assets:
Cash and cash equivalents	$	13,389		$	14,946
Accounts receivable, net of reserve of $5 and $6 at March 31, 2015 and    December 31, 2014, respectively		3,994			4,101
Inventories		385			578
Prepaid expenses and other current assets		498			500
Total current assets		18,266			20,125
Restricted cash		1,400			1,400
Property and equipment, net		555			637
Other long-term assets		112			131
Total assets	$	20,333		$	22,293
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	662		$	1,023
Notes payable, current portion		2,116			957
Deferred revenues, current portion		120			120
Deferred rent, current portion		148			128
Unfavorable lease obligations		853			820
Accrued and other current liabilities		2,151			3,074
Total current liabilities		6,050			6,122
Non-current portion of notes payable		12,819			13,791
Non-current portion of deferred rent		156			208
Non-current portion of unfavorable lease obligation		727			957
Other long term liabilities		378			369
Total liabilities	$	20,130		$	21,447
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred Stock, $0.01 par value, 19,979,500 shares authorized; none    issued and outstanding		—			—
Common stock, $0.01 par value; 100,000,000 shares authorized; 57,536,305    and 54,751,685 shares issued and outstanding at March 31, 2015 and    December 31, 2014, respectively		575			567
Additional paid-in capital		208,961			208,642
Accumulated deficit		(209,333	)		(208,363	)
Total stockholders' equity		203			846
Total liabilities and stockholders' equity	$	20,333		$	22,293

See accompanying notes to condensed financial statements.

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DIADEXUS, INC.

CONDENSED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands, except share and per share data)

	Three Months Ended March 31,
	2015			2014
	(unaudited)
Revenues:
Product sales	$	5,527		$	5,011
Service revenue		—			349
License revenue		—			75
Total revenues		5,527			5,435
Operating costs and expenses:
Product costs of revenue		1,569			1,593
Service costs of revenue		—			45
Sales and marketing		1,312			2,481
Research and development		890			3,041
General and administrative		2,264			2,143
Total operating costs and expenses		6,035			9,303
Loss from operations		(508	)		(3,868	)
Interest income, interest expense and other income (expense), net:
Interest income		1			1
Interest expense		(468	)		(219	)
Other income (expense), net		16			(2	)
Loss before income tax		(959	)		(4,088	)
Income tax provision		(11	)		(12	)
Net loss	$	(970	)	$	(4,100	)
Net loss and Comprehensive loss	$	(970	)	$	(4,100	)
Basic and diluted net loss per share:	$	(0.02	)	$	(0.07	)
Weighted average shares used in computing basic and diluted net loss per share		56,883,669			54,771,788

See accompanying notes to condensed financial statements.

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DIADEXUS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

	Three Months Ended March 31,
	2015			2014
	(unaudited)
Operating activities:
Net loss	$	(970	)	$	(4,100	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on disposal of property and equipment and assets held for sale		—			4
Depreciation and amortization		82			139
Stock-based compensation		271			204
Provision for doubtful accounts and rebate reserve (reversal)		(1	)		(5	)
Noncash interest expense		9			8
Noncash interest associated with notes payable		207			66
Unfavorable lease		(197	)		(167	)
Inventory write off		109			—
Changes in operating assets and liabilities
Accounts receivable		108			119
Inventory		84			244
Prepaid expenses, other current assets and other long-term assets		—			(102	)
Accounts payable		(362	)		46
Accrued liabilities and other long term liabilities		(921	)		1,401
Deferred rent		(32	)		(13	)
Deferred revenue		—			(77	)
Net cash used in operating activities		(1,613	)		(2,233	)
Investing activities:
Purchases of property and equipment		—			(62	)
Proceeds from sale of assets		—			(5	)
Net cash provided by (used in) investing activities		—			(67	)
Financing activities:
Principal repayment of notes payable		—			(714	)
Proceeds from issuance of common stock		56			16
Net cash provided by (used in) financing activities		56			(698	)
Net decrease in cash and cash equivalents		(1,557	)		(2,998	)
Cash and cash equivalents, beginning of period		14,946			16,847
Cash and cash equivalents, end of period	$	13,389		$	13,849

See accompanying notes to condensed financial statements.

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Diadexus, Inc.

Notes to Condensed Financial Statements

1. Business Overview

Formation of the Company

Diadexus, Inc., a Delaware corporation, is a diagnostics company developing and commercializing products that deliver healthcare providers with relevant information to assist in the management of their patients throughout the course of cardiac disease.  Our capabilities include proprietary manufacturing, assay development, FDA regulatory clearances, and marketing and selling products.  These capabilities have enabled our evolution from a single-product business into a multi-product company with growth potential to develop additional products from our portfolio of advanced cardiac biomarkers. Since our inception, we have incurred losses, and we have relied primarily on private placements of preferred stock and debt financing, as well as on revenue generated from the sale of products, to fund our operations. As of March 31, 2015, we had an accumulated deficit of $209.3 million, working capital of $12.2 million and stockholders’ equity of $0.2 million.

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

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

Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, the accompanying unaudited condensed financial statements have been prepared on a consistent basis with the December 31, 2014 audited financial statements and include all adjustments, consisting of normal recurring adjustments, that are necessary to fairly state the Company’s financial position as of March 31, 2015, results of operations for the three months ended March 31, 2015 and 2014 and cash flows for the three months ended March 31, 2015 and 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

Except for the policy listed below, the Company’s significant accounting policies are disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission (“SEC”) on March 12, 2015, and have not changed as of March 31, 2015.

Forward currency contracts:

In March 2014, the Company had entered into a License and Supply Agreement with B.R.A.H.M.S GmbH.  Under the terms of the agreement, the Company paid 750,000 Euros in April 2014 and another 500,000 Euros in March 2015.  The Company may pay up to an additional 500,000 Euros in development and regulatory milestones and up to 1,000,000 Euros in post-launch commercialized milestones and royalties on future sales.  In order to reduce its foreign exchange risk, on January 30, 2015, the Company entered into two forward contracts to purchase an aggregate of 1,000,000 Euros in two tranches: 500,000 Euros in March 2015 and an additional 500,000 Euros in September 2015.  The forward contract for March 2015 offset the payment due to B.R.A.H.M.S GmbH in March

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2015. The forward contracts do not qualify as a cash flow hedge.  Realized and unrealized gains and losses on the forward contracts are a component of Other income (expense) in the accompanying condensed Statements of Comprehensive Loss. The net fair value of the remaining forward contract at March 31, 2015 of $27,000 is included in Accrued liabilities in the Balance Sheet with the related unrealized loss in Other income (expense) in the Statement of Comprehensive Loss.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). The amendment in this ASU provides guidance on the revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The core principle of this update provides guidance to identify the performance obligations under the contract(s) with a customer and how to allocate the transaction price to the performance obligations in the contract. It further provides guidance to recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 is effective for public entities for annual and interim periods beginning after December 15, 2016.  In April 2015, the FASB proposed to defer for one year the effective date of the new revenue standard, with an option that would permit companies to adopt the standard as early as the original effective date.  Early adoption prior to the original effective date is not permitted.  The Company is evaluating the impact of this standard.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern” ("ASU 2014-15"). The update sets forth a requirement for management to evaluate whether there are conditions and events that raise substantial doubt about an entity's ability to continue as a going concern, a responsibility that did not previously exist in GAAP. The amendments included in this update require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period, including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 will be effective for the Company in fiscal year 2016. The Company is currently assessing the future impact of this update to its financial statements.

In April 2015, the FASB issued ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (ASU 2015-03”).. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for annual and interim reporting periods of public entities beginning after December 15, 2015, and early adoption is permitted.  The Company is evaluating the impact of this standard.

3. Cash and Cash Equivalents

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

The following is a summary of cash and cash equivalents at March 31, 2015 and December 31, 2014 (in thousands):

	March 31, 2015
			Unrealized		Unrealized		Estimated
	Cost Basis		Gains		Losses		Fair Value
Cash and cash equivalents:
Cash	$	9,336	$	—	$	—	$	9,336
Money market funds		4,053		—		—		4,053
Total cash and cash equivalents	$	13,389	$	—	$	—	$	13,389

	December 31, 2014
			Unrealized		Unrealized		Estimated
	Cost Basis		Gains		Losses		Fair Value
Cash and cash equivalents:
Cash	$	10,894	$	—	$	—	$	10,894
Money market funds		4,052		—		—		4,052
Total cash and cash equivalents	$	14,946	$	—	$	—	$	14,946

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Fair Value Measurements

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

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

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

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

The following table represents the Company’s fair value hierarchy for its financial assets (cash and cash equivalents) measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014 (in thousands):

			Fair Value Measurements
			Quoted Prices		Significant
			In Active		other		Significant
	Balance at		Markets for		Observable		Unobservable
	March 31,		Identical Assets		Inputs		Inputs
	2015		Level 1		Level 2		Level 3
Assets:
Cash	$	9,336	$	9,336	$	—	$	—
Money market funds		4,053		4,053		—		—
Restricted cash		1,400		—		1,400		—
	$	14,789	$	13,389	$	1,400	$	—

			Fair Value Measurements
			Quoted Prices		Significant
			In Active		other		Significant
	Balance at		Markets for		Observable		Unobservable
	December 31,		Identical Assets		Inputs		Inputs
	2014		Level 1		Level 2		Level 3
Assets:
Cash	$	10,894	$	10,894	$	—	$	—
Money market funds		4,052		4,052		—		—
Restricted cash		1,400		—		1,400		—
	$	16,346	$	14,946	$	1,400	$	-

The fair value of the notes payable is valued based on Level 2 inputs and approximates its book value. The fair value of the notes payable is based on the present value of expected future cash flows and assumptions about current interest rates and the credit worthiness of the Company. As of March 31, 2015, the notes payable is carried at face value of $15 million less any unamortized debt discount.

The fair value of the forward currency contract is valued based on Level 2 inputs and approximates its book value.  The fair value of the forward contract is based on the future forward rate at period end.  As of March 31, 2015, the forward currency contract fair value of $27,000 was included in Accrued and other current liabilities.

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

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4. Inventory

Inventory consists of the following (in thousands):

	March 31,		December 31,
	2015		2014
Finished goods	$	186	$	234
Work in process		81		271
Raw materials		118		73
	$	385	$	578

5. Total Accrued and Other Current Liabilities

Total accrued and other current liabilities include the following as of March 31, 2015 and December 31, 2014 (in thousands):

	March 31,		December 31,
	2015		2014
Accrued payroll and related expense		999		1,084
Accrued collaborative research obligations		—		612
Accrued restructuring charges		476		736
Accrued Board of Director fees		204		248
Other current liabilities		472		394
Total accrued and other current liabilities	$	2,151	$	3,074

Accrued research obligations at December 31, 2014 represented approximately $0.6 million in payments payable to B.R.A.H.M.S. GmbH, for the license of three heart failure markers. This balance was settled in March 2015.

6. Concentration of Credit Risk

Revenues from the following customers represented a significant portion of total revenue for the three months ended March 31, 2015 and 2014 and accounts receivable as of March 31, 2015 and December 31, 2014:

	Revenue						Accounts Receivable
	Three Months Ended March 31,						March 31,			December 31,
	2015			2014			2015			2014
Customer A		31	%		30	%		41	%		7	%
Customer B		19	%		16	%		17	%		5	%
Customer C		12	%		15	%		3	%		3	%
Customer D		8	%		5	%		8	%		8	%
Customer E		4	%		5	%		4	%		2	%
Total		74	%		71	%		73	%		25	%

7. Notes Payable

As noted above, in August 2014, the Company entered into a Loan Agreement with Oxford to borrow up to $15 million, the entire amount of which was borrowed at a fixed interest rate of 6.95% per annum. The obligations under the Loan Agreement are payable in 48 monthly installments which began in October 2014, with interest only payments to be made from October 2014 to September 2015, followed by 36 months of equal principal and interest payments. If the Company’s trailing six month revenues equal or exceed $15 million at the end of the fiscal month ending July 31, 2015, the Company may continue to make interest only payments through September 2016 followed by 24 months of equal principal and interest payments. The Company paid an initial fee of $150,000 for access to this loan and will be required to pay an additional $1.5 million following the earlier of loan maturity or termination. The Company may prepay all, but not less than all, of the loan amount with 10 days advance notice to Oxford and payment of a prepayment premium. In connection with the Loan Agreement, the Company issued a warrant to Oxford to purchase 909,090 shares of the Company’s common stock.

The Company granted Oxford a security interest in substantially all of the Company’s personal property to secure the Company’s payment and other obligations under the Loan Agreement. The security interest does not extend to patents, trademarks and other

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intellectual property rights (except for the rights to payment related to the sale, licensing or disposition of such intellectual property rights) or certain other specified property.

The Loan Agreement contains a number of customary representations and warranties and customary covenants, including covenants regarding delivery of financial statements, maintenance of inventory, payment of taxes, maintenance of insurance, dispositions of property, business combinations or acquisitions, incurrence of additional indebtedness and transactions with affiliates. The Company is also restricted from paying dividends or making other distributions or payments of its capital stock except for repurchases of stock pursuant to employee stock purchase plans, employee restricted stock agreements, stockholder rights plans, director or consultant stock option plans, or similar plans, provided such repurchases do not exceed $250,000 in the aggregate per fiscal year. If the Company breaches any of these covenants or it is unable to make a required payment of principal or interest, or it experiences a material adverse change to its business, it could result in a default under the Loan and Security Agreement. As of March 31, 2015, the Company was in compliance with all the covenants.

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

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

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

As of March 31, 2015, future minimum payments for the notes payable are as follows (in thousands):

2015 (remainder of year)	$	1,910
2016		5,554
2017		5,554
2018		5,665
Total minimum payments		18,683
Less: Amount representing interest		(3,683	)
Present value of minimum payments		15,000
Less: Unamortized debt discount		(373	)
Notes payable, net		14,627
Less: Notes payable, current portion		(2,116	)
Add:  Long term interest payable		308
Non-current portion of notes payable	$	12,819

8. Basic and Diluted Net Loss per Share

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

The effect of the options and warrants was anti-dilutive for the three months ended March 31, 2015 and 2014. 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 March 31,
	2015		2014
Options to purchase common stock		9,485		9,824
Warrants to purchase common stock		1,175		266
Restricted stock units		-		42
Total		10,660		10,132

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9. Stock Based Compensation

Stock Option Plans

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

The Company issued 568,445 shares of common stock for the three months ended March 31, 2015 upon stock option exercises. Additionally, the Company issued 218,182 shares of common stock during the three months ended March 31, 2015 upon vesting of Restricted Stock Units granted as a bonus to the Chairman of the Board of Directors for her performance as Interim Executive Chair in 2014.

The following table summarizes stock compensation expense related to employee stock options and employee stock-based compensation for the three months ended March 31, 2015 and 2014, which was incurred as follows (in thousands):

	Three Months Ended
	March 31,
	2015		2014
Stock-based compensation expense:
General and administrative	$	162	$	124
Research and development		57		43
Sales and marketing		30		32
Product costs		22		5
Total stock-based compensation expense	$	271	$	204

Restricted Stock Units

On February 6, 2015, the Company awarded an aggregate of 218,182 fully vested RSUs as a bonus to the Chairman of the Board for her performance as Interim Executive Chair in 2014 with a grant-date fair value equal to approximately $92,000 in the aggregate, or $0.42 per share. Each RSU entitled the recipient to receive one share of the Company’s common stock upon vesting. The fair value of the RSU is based on the Company’s closing stock price on the date of grant. As of March 31, 2015, no RSUs remained outstanding.

10. Restructuring and Other Charges

During the twelve months ended December 31, 2014, the Company incurred $1,238,000 in employee severance costs and $60,000 in other restructuring costs. As of December 31, 2014, the entire balance of $736,000 in restructuring accrual was classified as short-term and recorded within accrued and other current liabilities in the Balance Sheet as the Company expects to pay out the remaining accrual by December 31, 2015.  

The following table summarizes changes in the restructuring accrual for the three months ended March 31, 2015 (in thousands):

	Three Months Ended
	March 31, 2015
	Employee Severance Costs			Other Costs			Total
Beginning balance	$	688		$	48		$	736
Charges		—			—			—
Payments		(246	)		(14	)		(260	)
Ending balance	$	442		$	34		$	476

11. Commitments and Contingencies

Lease Commitments

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

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

Rent expense for the Company’s facilities was $435,000 and $465,000 for the three months ended March 31, 2015 and 2014, 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 $304,000 and $336,000 at March 31, 2015 and December 31, 2014, respectively, is included in the accompanying balance sheets.

As of March 31, 2015, future minimum lease payments under non-cancelable operating leases are as follows (in thousands):

	Operating
	Leases
2015 (remainder of year)		1,994
2016		2,738
Total minimum lease payments	$	4,732

Research and Development Commitments and Contingencies

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

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Item 2. 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 unaudited Condensed Financial Statements and related Notes included in Item 1 of this Quarterly Report and the Financial Statements and related Notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2014.

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 the only two FDA-cleared tests to measure Lp-PLA₂ and 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 to aid in assessing risk for both coronary heart disease (“CHD”) and ischemic stroke associated with atherosclerosis. 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 aid in predicting risk of CHD in patients with no prior history of cardiovascular events.

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

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

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

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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.

Critical accounting estimates, as defined by the Securities and Exchange Commission (“SEC”), are those that are most important to the portrayal of our financial condition and results of operations and require our management’s most difficult and subjective judgments and estimates of matters that are inherently uncertain. The accounting policies and estimates that we consider to be critical, subjective, and requiring judgment in their application are summarized in “Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2014 filed with SEC on March 12, 2015. Except for the new policy below, there have been no significant changes to the accounting policies and estimates disclosed in our Form 10-K.

Forward currency contracts:

In March 2014, we entered into a License and Supply Agreement with B.R.A.H.M.S GmbH.  Under the terms of the agreement, we paid 750,000 Euros in April 2014 and another 500,000 Euros in March 2015.  We may pay up to 500,000 Euros in development and regulatory milestones, up to 1,000,000 Euros in post-launch commercialized milestones, and royalties on future sales.  In order to reduce its foreign exchange risk, on January 30, 2015, we entered into two forward contracts to purchase an aggregate of 1,000,000 Euros in two tranches: 500,000 Euros in March 2015 and an additional 500,000 Euros in September 2015.  The forward contract for March 2015 offset the payment due to B.R.A.H.M.S GmbH in March 2015. The forward contracts do not qualify as a cash flow hedge.  Realized and unrealized gains and losses on the forward contracts are a component of Other income (expense) in the accompanying condensed Statements of Comprehensive Loss. The net fair value of the remaining forward contract at March 31, 2015 of $27,000 is included in Accrued liabilities in the Balance Sheet with the related unrealized loss in Other income (expense) in the Statement of Comprehensive Loss.

Results of Operations

For the Three Months Ended March 31, 2015 and 2014.

Revenues

	Three Months Ended				% Increase
	March 31,				(Decrease)
	2015		2014		2014 to 2015
	(in thousands)
Revenues:
Product sales	$	5,527	$	5,011		10	%
Service revenue		—		349		(100	%)
License revenue		—		75		(100	%)
Total net revenues	$	5,527	$	5,435		2	%

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

	Three months ended
	March 31,
	2015		2014
United States	$	5,425	$	5,311
Europe		102		84
Rest of the world		—		40
	$	5,527	$	5,435

Revenues are generated from product sales, service revenue, and licensing fees.

The increase in total revenues of approximately $92,000 for the three months ended March 31, 2015 as compared to the same period in 2014 is primarily due to increased product sales of approximately $0.5 million due to increased volume demand for our PLAC

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ELISA Test, partially offset by the lack of both service revenues under an agreement with GlaxoSmithKline and license fees during the first three months of 2015.

Our top five customers accounted for 74% of our total revenues for the three months ended March 31, 2015 compared to 71% for the same periods in 2014. Because of this customer concentration and the timing of orders from these customers, our quarterly revenue may fluctuate materially.

Operating Costs and Expenses

Product Costs of revenue

	Three Months Ended				% Increase
	March 31,				(Decrease)
	2015		2014		2014 to 2015
	(in thousands)
Product costs of revenue	$	1,569	$	1,593		(2	%)

Product costs of revenue include our expenditures for cost of goods, manufacturing support, product supplies, quality control, personnel expenses and facility costs. Product costs decreased $24,000 for the three months ended March 31, 2015 as compared to the same period in 2014. This decrease was primarily due to reduced headcount from our reduction in force in the fourth quarter of 2014 partially offset by increased costs of production in line with the increase in sales.

Service costs of revenue

	Three Months Ended				% Increase
	March 31,				(Decrease)
	2015		2014		2014to 2015
	(in thousands)
Service costs of revenue	$	—	$	45		(100	%)

Service costs of revenue include our expenditures such as personnel and temporary support staff expenses, and lab supply costs are they relate to our service revenue. The 2014 amount reflects expenses incurred in conjunction with providing laboratory services to GlaxoSmithKline during the three months ended March 31, 2014.  There have been no similar services rendered to date in the three months ended March 31, 2015.

Sales and Marketing Expenses

	Three Months Ended				% Increase
	March 31,				(Decrease)
	2015		2014		2014 to 2015
	(in thousands)
Sales and Marketing Expenses	$	1,312	$	2,481		(47	%)

Sales and marketing expenses include our expenditures on customer support, medical and other consultant fees, marketing programs and materials, and personnel expenses. Sales and marketing expenses decreased $1.2 million for the three months ended March 31, 2015 as compared to the same period in 2014. This decrease primarily reflects a decrease in personnel expenses of approximately $1.0 million due to the reduction in force in the fourth quarter of 2014 and a commensurate reduction in other associated costs including travel and entertainment and office costs.

Research and Development Expenses

	Three Months Ended				% Increase
	March 31,				(Decrease)
	2015		2014		2014 to 2015
	(in thousands)
Research and Development Expenses	$	890	$	3,041		(71	%)

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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 decreased $2.2 million for the three months ended March 31, 2015 as compared to the same period in 2014. This decrease primarily reflects a decrease in expenses related to the development of our product pipeline. Research and development expenses in 2014 included $1.7 million for the initial commitment to obtain an exclusive license from B.R.A.H.M.S. GmbH related to certain heart failure biomarkers.  Additional decreases include a reduction of professional services of $0.2 million, reduction of personnel costs of $0.1 million due to our reduction in force in the fourth quarter of 2014, and reductions in other related expenses, such as lab and office costs.

General and Administrative Expenses

	Three Months Ended				% Increase
	March 31,				(Decrease)
	2015		2014		2014 to 2015
	(in thousands)
General and Administrative Expenses	$	2,264	$	2,143		6	%

General and administrative expenses include personnel costs for finance, administration, information systems and professional fees as well as facilities expenses. General and administrative expenses increased $0.1 million for the three months ended March 31, 2015 as compared to the same period in 2014. This increase was primarily related to an increase in professional services, partially offset by a decrease of $0.1 million in personnel costs due to our reduction in force in the fourth quarter of 2014.

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

	Three Months Ended						% Increase
	March 31,						(Decrease)
	2015			2014			2014 to 2015
	(in thousands)
Interest income, interest expense and other income (expense), net
Interest income	$	1		$	1			0	%
Interest expense		(468	)		(219	)		114	%
Other income (expense), net		16			(2	)		(900	%)
Total Interest and other income (expense)	$	(451	)	$	(220	)		105	%

Interest income is derived from cash balances and short-term and long-term investments. Interest expense is based on outstanding debt obligations. Total interest and other income (expense) increased $0.2 million for the three months ended March 31, 2015 as compared to the same period in 2014. This increase primarily reflects an increase in interest expense of approximately $0.2 million due to a larger outstanding balance and higher interest rate under the new credit facility with Oxford Finance LLC as compared to our previous credit facility with Comerica.

Contractual Obligations

Our contractual obligations and future minimum lease payments that are non-cancelable are summarized in “Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2014 filed with SEC on March 12, 2015. There have been no significant changes to these contractual obligations during the three months ended March 31, 2015.

Liquidity and Capital Resources

Since our inception, we have incurred losses, and we have relied primarily on private placements of preferred stock and debt financing, as well as on revenue generated from the sale of products, to fund our operations. As of March 31, 2015, we had an accumulated deficit of $209.3 million, working capital of $12.2 million and stockholders’ equity of $0.2 million.

In August 2014, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Oxford Finance LLC (“Oxford”) to borrow up to $15 million, the entire amount of which was borrowed at a fixed interest rate of 6.95% per annum. The Loan Agreement contains a number of customary representations and warranties and customary covenants, including covenants regarding delivery of financial statements, maintenance of inventory, payment of taxes, maintenance of insurance, dispositions of property, business combinations or acquisitions, incurrence of additional indebtedness and transactions with affiliates. If we breach any of these covenants or are unable to make a required payment of principal or interest, or we experience a material adverse change to our business, it could result in a default under the Loan and Security Agreement and the amount of the loan balance, plus accrued and

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unpaid interest, and final payment, the prepayment fee, and other obligations due to the lender would be come due immediately. We believe we currently have sufficient capital to fund our operations for at least 12 months.

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

Cash and Cash Equivalents

As of March 31, 2015, we had cash and cash equivalents of $13.4 million, compared to $14.9 million at December 31, 2014. The decrease of $1.5 million primarily reflects cash used in operating activities of $1.6 million.

Cash Flows from Operating Activities

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

Net cash used in operating activities was $2.2 million for the three months ended March 31, 2014, and was primarily related to the net loss of $4.1 million.  This was offset by $1.6 million cash inflow related to changes in operating assets and liabilities and non-cash items totaling $0.2 million. Significant non-cash items were $(0.2) million in unfavorable lease amortization, $0.1 million in depreciation and amortization, $0.2 million in stock-based compensation and $0.1 million in noncash interest.

Cash Flows from Investing Activities

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

Net cash used in investing activities in the three months ended March 31, 2014was $67,000, primarily due to purchases of property and equipment.

Cash Flows from Financing Activities

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

Net cash used in financing activities in the three months ended March 31, 2014 was $0.7 million and was primarily due to the payment of principal on the Comerica term loan.  The Comerica loan was fully repaid in August 2014 in conjunction with the Loan Agreement with Oxford discussed above.

Other Information

Our future capital requirements will depend primarily upon our ability to maintain and grow our current product revenues, 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, and to improve our reimbursement prospects from third-party payers.

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

We have incurred substantial losses since inception, and expect to continue to incur net losses for at least the next few years based on our current plans to engage in new development activities to broaden or enhance our product pipeline. To date, we have funded our

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operations primarily through private placements of preferred stock and debt financing, as well as through revenue generated from the sale of products.

In August 2014, we entered into a loan and security agreement with Oxford. (See Note10 of the Notes to Financial Statements included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2015.) This loan contains various covenants. If we breach any of these covenants or we are unable to make a required payment of principal or interest, or experience a material adverse change to our business, it could result in a default under the loan.  Upon the occurrence of an event of default under the loan, Oxford could elect to declare all amounts outstanding to be immediately due and payable. If we are unable to repay those amounts, Oxford could proceed against the collateral granted to them to secure such indebtedness. We have pledged substantially all of our assets, other than our intellectual property, as collateral under the loan.

Off-Balance Sheet Arrangements

As of March 31, 2015, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Recent Accounting Pronouncements

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

Item 3. Quantitative and Qualitative Disclosure 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 March 31, 2015, we had cash and cash equivalents of $13.4 million, which consisted of cash and highly liquid money market funds.

During the three months ended March 31, 2015, except for the foreign currency contract disclosed below, there were no material changes to our market risk disclosures as set forth in Part II Item 7A. “Quantitative and Qualitative Disclosure About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2014.

As noted above in Item 2, we entered into two forward contracts to purchase an aggregate of 1,000,000 Euros in order to reduce our foreign currency risk associated with the License and Supply Agreement with B.R.A.H.M.S GmbH.  Under the terms of the agreement, we paid 750,000 Euros in April 2014 and another 500,000 Euros in March 2015.  We may pay up to 500,000 Euros in development and regulatory milestones and post-launch commercialized milestones up to a total of 1,000,000 Euros and royalties on future sales.  The forward contracts are in two tranches: 500,000 Euros in March 2015 and an additional 500,000 Euros in September 2015.  The forward contract for March 2015 offset the payment due to B.R.A.H.M.S GmbH in March 2015. The forward contracts do not qualify as a cash flow hedge.  The net fair value of the remaining forward contract at March 31, 2015 of $27,000 is included in Accrued liabilities in the Balance Sheet.  We do not anticipate material potential losses from the remaining forward currency contract.

Item 4. 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 principal executive and principal financial officers, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, our principal executive and principal financial officers, concluded that our disclosure controls and procedures were effective as of March 31, 2015 to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Controls

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Inherent Limitations on Effectiveness of Controls

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

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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. We have marked with an asterisk (*) those risks described below that reflect substantive changes from, or additions to, the risks described under Part 1, Item 1A “Risk Factors” included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2015.

Risks Relating to Our Business Operations

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

We depend on the efforts and abilities of our senior management, our research and development staff and a number of other key management, sales, support, technical and administrative services personnel. In particular, we rely on the experience of our senior management, who have specific knowledge of our business and industry that is difficult to replace. If we are unable to attract and retain highly-qualified senior management our business may be adversely affected. Effective succession planning is also important to our long-term success. Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution. We have experienced significant turnover as we reconstitute our management team.  For example, as previously announced, our former Chief Executive Officer retired from Diadexus in December 2014 and our former Chief Financial Officer and Chief Business Officer both resigned from the Company in September 2014. In March 2015, we have appointed a new Chief Financial Officer, our Chairman of the Board has been appointed as the Chief Executive Officer in April 2015, and we are still actively recruiting for a Chief Commercial Officer. Any failure to effectively manage our business and operations through these transitions or retain new executives and other members of our senior management team could be disruptive to our business operations and have an adverse effect on the execution of our business and commercial strategies, as well as our potential to raise capital.

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

PLAC Activity may never gain significant acceptance in the marketplace and therefore never generate substantial revenue or profits. As is the case with all novel biomarkers, we must establish a market 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 PLAC Activity and other diagnostic products and services will depend on many factors, including:

● whether healthcare providers believe our PLAC Activity and any other diagnostic tests and services that we successfully develop provide sufficient incremental clinical utility;

● whether we are able to demonstrate that management of individuals based on their Lp-PLA₂ levels improves clinical outcomes in clinical studies; and

● whether health insurers, government health programs and other third-party payers will cover and pay for our diagnostic tests and the amounts they will reimburse.

These and other factors may present obstacles to commercial acceptance of our products, and we may need to devote substantial time and money to surmount these obstacles, and the result might not be successful.

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

Sales to a limited number of customers account for a significant portion of our revenue and accounts receivable. Our top five customers accounted for 73% and 25% of our accounts receivable as of March 31, 2015 and December 31, 2014 respectively, and 74% and 71% of our total revenues for the three months ended March 31, 2015 and 2014, 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 are attempting to expand our customer base but in the near term we expect to continue to have customer concentration in fewer than 10 larger customers, and in order to increase revenue will also need to increase the demand from our existing customers.  Even if our customer expansion efforts are successful, our revenues 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. In addition, many of our existing customers purchase our products without a long-term agreement in place and we expect that our revenues and profitability may be affected by the lack of long-term agreements with customers. The loss of, material reduction in sales volume to, or significant adverse change in our relationship with any of our key customers could have a material adverse effect on our revenue in any period and may result in significant annual and quarterly revenue variations. 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 June 2014, the Office of Inspector General (“OIG”) published a special fraud alert relating to compensation paid by laboratories to referring physicians and physician group practices for blood specimen collection, processing and packaging, and for submitting patient data to a registry or database. The publication is an industry notification posted on the OIG website. This type of compensation continues to be scrutinized by the OIG, including initiating recent enforcement actions, and further guidance from the OIG may have an adverse effect on sales to our customers as the alert could reduce the number of tests ordered by referring physicians and physician group practices.

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

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

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

We manufacture PLAC Activity on-site in South San Francisco, California and we could experience supplier, process, quality control and shipping problems due to the early stage of manufacturing.

We have been manufacturing PLAC Activity in-house since January 2012. We are dependent on the expertise of our personnel for ensuring the production and quality of this product. We could observe performance deviations that have not been apparent during development, including performance and stability of PLAC Activity. The discovery of such performance deviations or of any manufacturing problems may adversely affect our sales in Europe and the US. We are also dependent upon a limited number of suppliers.  In the event we are reliant upon a sole supplier, we attempt to identify qualified back up suppliers, but cannot be assured they will be available to us.

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

We sell our products primarily through distributors and to laboratory customers, substantially all of which receive reimbursement for the health care services they provide to their patients from third-party payers, such as Medicare, Medicaid and other government programs, private insurance plans and managed care programs. Third-party payers are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for medical products and services. Accordingly, third-party payers are increasingly challenging the prices charged for diagnostic tests. Most of these third-party payers may deny coverage and reimbursement if they determine that a product was not medically necessary or not used in accordance with cost-effective treatment methods, or was used for an unapproved indication. With respect to the clinical utility of our products, we have not conducted studies with validated clinical benefit information at a statistical level, which may negatively impact our ability to obtain reimbursement for our products.

In the US, third-party payers generally require billing codes on claims for reimbursement that describe the services provided. For laboratory services, the American Medical Association (“AMA”) establishes most of the billing codes using Current Procedural Terminology (“CPT”) codes. Each third-party payer generally develops payment amounts and coverage policies for their beneficiaries or members that ties to the CPT code established for the laboratory test and, therefore, coverage and reimbursement may differ by payer even if the same billing code is reported for claims filing purposes. For laboratory tests without a specific billing code, payers 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 that new CPT codes will not be established for these or 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 revenues and gross margins will suffer and our business could be materially harmed.

On April 1, 2014 the Protecting Access to Medicare Act of 2014 (PAMA) was signed into law. It includes the most extensive reform of the Medicare Clinical Fee Schedule (CLFS) since it was established in 1984. Section 216 of PAMA creates a new Section 1834A of the Social Security Act which contains many of the CLFS reforms. Starting on January 1, 2017, most rates on the CLFS will be derived from private payer rates for laboratory services. It is not clear how these changes in rates will impact us. However, reduced rates could materially impact our future revenues.

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.

As an example, in March 2014, we entered into an exclusive licensing and supply agreement with Brahms Thermo Fisher Scientific to develop and commercialize three independent biomarkers to aid in risk prediction and prognosis for heart failure. In the event we fail to meet certain diligence requirements under the license, our exclusive right for these products will be lost, which may have an adverse effect on our product pipeline and sales.

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

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

● 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;

● maintaining and updating 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

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internal control over financial reporting. Our testing may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. We have incurred and expect to continue to incur significant expense and devote substantial management effort toward ensuring compliance with these requirements. Moreover, if we are not able to comply with these requirements in a timely manner, or if we identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our common stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would entail expenditure of additional financial and management resources.

Natural disasters, including earthquakes, may damage our facilities.

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

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

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

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 (“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 devices 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

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unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties.

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

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

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

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

Many national, regional, and local laws and regulations, including the 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. The FDA is in the process of issuing guidance on the specific modifications or clarifications that the FDA intends to make to its guidance, policies, and regulations pertaining to the review and regulation of devices such as ours which seek and receive marketing clearance through the 510(k) process. The FDA’s announced action items signal that additional regulatory requirements are likely. The FDA intends to issue a variety of draft guidance and regulations which, when fully implemented, could impose additional regulatory requirements upon us, which could delay our ability to obtain new clearances, increase the cost of compliance, or restrict our ability to maintain our current 510(k) clearances. In July 2014, the FDA issued  the “Benefit-Risk Factors to Consider When Determining Substantial Equivalence in Premarket Notifications [510(k)] with Different Technology Characteristics”. This draft guidance is intended to improve predictability, consistency, and transparency of the 510(k) premarket review process.

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

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

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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.

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

In April 2014, the President signed the Protecting Access to Medicare Act of 2014 (“PAMA”), which included a substantial new payment system for clinical laboratory tests under the Clinical Laboratory Fee Schedule.  Under PAMA, Medicare payment rates for tests will be equal to the volume-weighted median of the private payer payment rates for a test. The payment rates calculated under PAMA will be effective starting January 1, 2017, and will be reviewed every three years, based on private payer payment rates and volumes for their tests.  We believe that, starting in 2017 and over time, our customers could see decreased reimbursement from Medicare for running our PLAC Tests which may impact the price at which we sell them our kits and negatively impact our revenue growth.

In June 2014, the Office of the Inspector General, (“OIG”) issued a Special Fraud Alert and issued additional clarifying guidelines and advisory opinions addressing the general subject of remuneration offered and paid by laboratories to referring physicians. This type of compensation continues to be scrutinized by the OIG, including initiating recent enforcement actions, and at the present time, we cannot predict the responses by our customers to the OIG’s focus on the practices identified in the anti-fraud alerts.

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 payers 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 payer, 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.

Risks Relating to Liquidity and Additional Capital

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

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

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

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

● Dispose of property;

● Merge, consolidate or acquire another entity;

● Incur additional indebtedness;

● Enter into transactions with affiliates;

● Pay dividends or make other distributions or payments on our capital stock.

If we breach any of these covenants, are unable to make a required payment of principal or interest, or experience a material adverse change to our business, it could result in an event of default under the Loan and Security Agreement. Upon the occurrence of an event of default under the Loan and Security Agreement, Oxford could elect to declare all amounts outstanding to be immediately due and payable. If we were unable to repay the amounts due under the Loan and Security Agreement, Oxford could proceed against the collateral granted to it to secure such indebtedness. We have pledged substantially all of our assets, other than our intellectual property, as collateral under the loan.

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

We have incurred substantial net losses since our inception. Our accumulated deficit was $209.3 million at March 31, 2015. For the three months ended March 31, 2015 and 2014, we incurred net losses of $1.0 million and $4.1 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 achieve profitability, or if the time required to achieve profitability is longer than we anticipate, we may not be able to continue our business.

Moreover, we are solely dependent on our two PLAC tests for revenues. We expect that the PLAC tests will account for a substantial portion of our revenue for the foreseeable future. We do not know if both of our PLAC Tests will be accepted broadly by the market over the long-term and it is possible that the demand for the product may decline over time, and any quarter or other period of profitability may not be sustainable without continued growth in sales of both of our products. Even with our 510(k) FDA clearance, we may never be able to successfully commercialize PLAC Activity in the 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 stabilize, 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, brands, creative works, 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. We hold issued patents in the US covering PLAC ELISA and PLAC Activity. Certain patents for PLAC ELISA and PLAC Activity expire in 2015.  We continue to review new patent applications but there can be no assurance that these patent applications will be used or any issued patents will maintain a competitive advantage for our PLAC ELISA and PLAC Activity products.

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

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

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 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 in Association 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 impact these decisions will have with respect to our patents.

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

We have an exclusive license from GlaxoSmithKline (formerly SmithKlineBeecham plc) and a co-exclusive license from ICOS Corporation (“ICOS”), subsequently acquired by Eli Lilly and Company, to practice and commercialize technology covered by several issued and pending US patents and their foreign counterparts. Some of these licensed patents covering composition of matter and cardiovascular diagnostic claims have different expiration dates from 2015 through 2016, which may limit our ability to generate future revenue from products claimed under those exclusive and co-exclusive licenses. While we have a family of issued patents and pending applications directed to the measurement of Lp-PLA₂ activity in the presence of an inhibitor of Lp-PLA₂ activity that have expiration dates ranging from 2025 to 2026. There can be no assurance that those patent applications will be issued or that any issued patents will maintain a competitive advantage for our Lp-PLA₂ products.

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

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

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

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We have rights to patents and patent applications owned by licensors that provide important protection on the composition of matter and utility of our products, product candidates and product pipeline. We do not, however, directly control the prosecution and maintenance of all of these patents. A licensor may not fulfill its obligations under a license and may allow these patents to go abandoned or may not pursue meaningful claims for our products. Also, while the 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 invalid, unenforceable or interprets them narrowly, the benefits of our patent strategy may not materialize. If any or all of these events occur, they could diminish the value of our intellectual property.

Risks Relating to Our Stock

Our stock price is likely to continue to be volatile.

Currently, our common stock is quoted on the OTC Bulletin Board. Stocks traded “over the counter” typically are subject to greater volatility than stocks traded on stock exchanges, such as the NASDAQ Stock Market, due to the fact that OTC trading volumes are generally significantly lower than those on stock exchanges. This lower volume may allow a relatively few number of stock trades to greatly affect the stock price, particularly where the trading price of the stock price is relatively low. 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:

● Our ability to grow our established business based on two FDA-cleared products;

● Our ability to launch and commercialize potential new products, that we might be able to develop;

● Actions taken by regulatory authorities with respect to our products;

● The progress and results of our product development efforts or those of our competitors;

● Significant changes to our executive team or other members of senior management;

● The outcome of legal actions to which we may become a party;

● Changes in our strategy and competitive positioning;

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

Campaigns by stockholders to effect changes at publicly traded companies are sometimes led by investors through various corporate actions, including Board nominations and proxy contests. We may become subject to one or more campaigns by stockholders who desire to increase stockholder value in the short term. If we become engaged in a proxy contest with an activist stockholder in the future, our business and operations could be adversely affected as responding to such contests or other activist stockholder actions would be costly and time-consuming, and we would expect that such actions would disrupt our operations and divert the attention of management and our employees from executing our strategic plans and product launch. In addition, if individuals are elected to our Board with a specific agendaor without relevant experience or expertise, it may adversely affect the ability of the Board to function effectively as well as our ability to effectively and timely implement our strategic plans, which are focused on long-term shareholder value. Any perceived uncertainties as to our future direction as a result of shareholder activism or changes to the composition of our Board may lead to the perception of a change in the direction of our business and instability or lack of continuity with respect to our products which may cause concerns for our customers or be exploited by our competitors.  As a result, we could experience significant volatility and a decline of our stock price, the loss of potential business opportunities and difficulties in attracting and retaining qualified personnel and customers.  For example, we recently entered into a settlement agreement with an activist stockholder

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pursuant to which we nominated a mutually acceptable candidate for election at our 2015 annual meeting of stockholders.  There can be no assurance that we will not be subject to additional campaigns by other stockholders now or in the future.

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

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None

Item 4. Mine Safety Disclosures.

Not applicable

Item 5. Other Information.

None

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Item 6. Exhibits

Exhibit No.	Description
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 of the Registrant (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)
10.1#	Offer letter, effective March 16, 2015 by and between diaDexus, Inc. and Leone D. Patterson
31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)
31.2	Certification of Principal Accounting Officer pursuant to Exchange Act Rule 13a-14(a)
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Accounting Officer pursuant to 18 U.S.C. 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

# Management contract or compensatory plan or arrangement

30

SIGNATURES

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

	diaDexus, Inc.
Date: May 14, 2015	By:	/s/ Lori F. Rafield
		Lori F. Rafield
		Chairman, Chief Executive Officer (Principal Executive Officer)
Date: May 14, 2015	By:	/s/ Leone D. Patterson
		Leone D. Patterson
		Chief Financial Officer (Principal Financial and Accounting Officer)

31

EXHIBIT INDEX

Exhibit No.	Description
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 of the Registrant (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)
10.1#	Offer letter, effective March 16, 2015 by and between diaDexus, Inc. and Leone D. Patterson
31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)
31.2	Certification of Principal Accounting Officer pursuant to Exchange Act Rule 13a-14(a)
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Accounting Officer pursuant to 18 U.S.C. 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

# Management contract or compensatory plan or arrangement

32