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DDXS > SEC Filings for DDXS > Form 10-Q on 5-Nov-2013All Recent SEC Filings

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Form 10-Q for DIADEXUS, INC.


5-Nov-2013

Quarterly Report


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, 2012.

Overview

We are a life sciences company developing and commercializing proprietary cardiovascular diagnostic products addressing unmet needs in cardiovascular disease. We are the successor to a company initially formed as a joint venture between SmithKlineBeecham Corporation (now GlaxoSmithKline LLC ("GlaxoSmithKline")) and Incyte Pharmaceuticals, Inc. Upon formation, SmithKlineBeecham Corporation granted us an exclusive license to certain diagnostic intellectual property, including exclusive rights to develop diagnostic assays for Lp-PLA2, an inflammatory marker of cardiovascular risk.

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

In September 2013, we had a pre-submission meeting with the FDA, as a result of which we are advancing our clinical program to support the submission of the PLAC Test for Lp-PLA2 Activity to the FDA. We have partnered with a large longitudinal cardiovascular disease study to validate the PLAC Test for Lp-PLA2 Activity. We are anticipating that the clinical study sample analysis will be initiated prior to the end of the first quarter of 2014.

In the second half of 2012, we started a strategic business development process to identify new biomarker assays in the cardiovascular space, for development and sale through our existing channels. We continue to anticipate being able to provide an update on this strategic development effort by the end of first quarter 2014.

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

We entered into a Loan and Security Agreement with Comerica Bank in September 2011, which was amended in September 2012 and again in October 2013. The amended Loan and Security Agreement contains certain financial and non-financial covenants. Our future liquidity requirements may increase beyond currently expected levels if we fail to maintain compliance with such covenants. In order to meet our future liquidity needs, we may become reliant on additional equity and/or debt financing. Additional funding may not be available when needed 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.

All references in this Quarterly Report on Form 10-Q to the "Company," "we," "us" and "our" refer to diaDexus, Inc. (f/k/a VaxGen, Inc.), a Delaware corporation, unless the context requires otherwise.

Critical Accounting Policies and Estimates

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

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, 2012 filed with SEC on March 11, 2013. There have been no significant changes to the accounting policies and estimates disclosed in our Form 10-K.


Table of Contents

Results of Operations

For the Three and Nine Months Ended September 30, 2013 and 2012.

Revenues



                                   Three Months Ended          % Increase           Nine Months Ended         % Increase
                                      September 30,            (Decrease)             September 30,           (Decrease)
                                    2013          2012        2012 to 2013          2013          2012       2012 to 2013
                                     (in thousands)                                   (in thousands)
Revenues:
Product sales                    $    6,314      $ 4,943                 28 %     $  17,915     $ 12,775                40 %
Royalty revenue                          -           279               (100 )%           18        2,353               (99 )%
License revenue                          76           76                 -  %           229          229                -  %

Total revenues                   $    6,390      $ 5,298                 21 %     $  18,162       15,357                18 %

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

                                  Three months ended          Nine months ended
                                     September 30,              September 30,
                                   2013          2012         2013          2012
            United States       $    6,291      $ 5,195     $  17,756     $ 15,123
            Europe                      72           79           234          173
            Rest of the world           27           24           172           61

                                $    6,390      $ 5,298     $  18,162     $ 15,357

Revenues are generated from licensing fees, royalties earned, product sales, and contract arrangements. The accounting classification of product revenue as either royalties or product sales relates to the sales channels used by the Company, and as such, we believe that operating performance is most effectively evaluated by examining total revenues.

The increase in revenues of approximately $1.1 million for the three months ended September 30, 2013 and $2.8 million for the nine months ended September 30, 2013 as compared to the same periods in 2012 reflects an increased volume demand for our PLAC Test ELISA Kit, offset by a decline in average sales price for our product. Starting in January 2013, we include excise tax collected from customers in product sales. For the three and nine months ended September 30, 2013, we recognized $89,000 and $303,000, respectively, in charged excise tax as product revenue, and $0 for the same periods in 2012.

Our top six customers accounted for 85% and 82% of our revenues for the three and nine months ended September 30, 2013, respectively, compared to 78% and 76%, respectively, for the same periods in 2012. Because of this customer concentration and the timing of orders from these customers, our quarterly revenue through the end of 2013 may fluctuate materially. Our largest customers are able to exert influence over our product pricing. We currently do not expect downward price pressure to continue as our contract term generally has duration of twelve months with pre-determined pricing.

Operating Costs and Expenses

Product Costs

Three Months Ended % Increase Nine Months Ended % Increase
September 30, (Decrease) September 30, (Decrease)
2013 2012 2012 to 2013 2013 2012 2012 to 2013
(in thousands) (in thousands)

Product costs $ 1,753 $ 1,558 13 % $ 5,468 $ 4,875 12 %

Product costs include our expenditures for cost of goods, manufacturing support, product supplies, quality control, personnel expenses and facility costs. Product costs increased $195,000 for the three months ended September 30, 2013 as compared to the same period in 2012. This increase primarily reflects an increase in excise tax expense of approximately $98,000, an increase in personnel expense of approximately $86,000 due to expansion of quality control and manufacturing teams, and an increase in product-related materials, supplies and equipment costs of approximately $48,000 due to increased demand for our PLAC Tests. These cost increases were partially offset by a decrease of approximately $38,000 in royalty cost due to expiration of a royalty obligation in August 2012.

Product costs increased $593,000 for the nine months ended September 30, 2013 as compared to the same period in 2012. This increase primarily reflects an increase in personnel and recruiting costs of approximately $350,000 due to expansion of quality control and manufacturing teams, an increase in excise tax of approximately $351,000 and an increase in product-related materials and supplies costs of approximately $171,000 due to increased demand for our PLAC Tests. These cost increases were partially offset by a decrease of approximately $281,000 in royalty cost due to expiration of royalty obligation in August 2012.

We expect product costs to continue to increase due to volume demand growth for our PLAC Tests, partially offset by production economies of scale.


Table of Contents

Sales and Marketing Expenses

Three Months Ended % Increase Nine Months Ended % Increase
September 30, (Decrease) September 30, (Decrease)
2013 2012 2012 to 2013 2013 2012 2012 to 2013
(in thousands) (in thousands)

Sales and marketing expenses $ 1,749 $ 1,297 35 % $ 5,671 $ 3,929 44 %

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 increased $452,000 for the three months ended September 30, 2013 as compared to the same period in 2012. This increase primarily reflects higher personnel expenses of approximately $330,000 due to expansion of our sales and marketing team, an increase of approximately $73,000 related to increased marketing activities and development of marketing materials, and an increase in travel and entertainment expenses of approximately $45,000 due to higher headcount.

Sales and marketing expenses increased $1.7 million for the nine months ended September 30, 2013 as compared to the same period in 2012. The increase primarily reflects an increase in personnel costs of approximately $1.4 million due to an expansion of our sales and marketing team, an increase of approximately $305,000 related to increased marketing activities and development of marketing materials, and an increase in travel and entertainment expenses of approximately $150,000 due to higher headcount. These cost increases were partially offset by a decrease in collaborative studies expense of approximately $77,000 related to exploratory label claim expansion of our PLAC Tests.

We expect our sales and marketing expenses to increase as we identify and hire additional personnel and as we develop and commercialize a pipeline of new diagnostics products to maintain and expand our position in the market for diagnostics in cardiovascular disease.

Research and Development Expenses

Three Months Ended % Increase Nine Months Ended % Increase
September 30, (Decrease) September 30, (Decrease)
2013 2012 2012 to 2013 2013 2012 2012 to 2013
(in thousands) (in thousands)

Research and development expenses $ 1,252 $ 912 37 % $ 3,515 $ 3,297 7 %

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 increased $340,000 for the three months ended September 30, 2013 as compared to the same period in 2012. This increase primarily reflects higher personnel costs of approximately $182,000 due expansion of our research and development team, an increase of approximately $132,000 related to development of a diagnostic product pipeline, and an increase of approximately $16,000 related to training and development of our research and development team.

Research and development expenses increased $218,000 for the nine months ended September 30, 2013 as compared to the same period in 2012. This increase primarily reflects higher costs related the development of a new diagnostics product pipeline of approximately $238,000 and an increase in personnel costs of approximately $98,000 due to expansion of our research and development team. These cost increases were partially offset by a reduction in expenses related to development of a second contract manufacturer in 2012 for the PLAC Test ELISA kit of approximately $125,000.

We expect research and development costs will increase in the future reflecting staffing increases and development study increases as we develop new pipeline product development projects.

General and Administrative Expenses

Three Months Ended % Increase Nine Months Ended % Increase
September 30, (Decrease) September 30, (Decrease)
2013 2012 2012 to 2013 2013 2012 2012 to 2013
(in thousands) (in thousands)

General and administrative expenses $ 1,891 $ 1,674 13 % $ 5,538 $ 5,354 3 %

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 $217,000 for the three months ended September 30, 2013 as compared to the same period in 2012. This increase primarily reflects an increase in professional fees such as financial audit expense of approximately $90,000, an increase in costs related to stock-based compensation of approximately $67,000 primarily attributable to a higher stock price, an increase in accrued compensation of approximately $35,000, and an increase in travel and entertainment expenses of approximately $25,000.

General and administrative expenses increased $184,000 for the nine months ended September 30, 2013 as compared to the same period in 2012. This increase primarily reflects an increase in professional fees of approximately $117,000 primarily related to healthcare regulatory compliance, an increase of approximately $94,000 primarily due to upgrading our facility and information technology infrastructure, and an increase in stock-based compensation of approximately $84,000 primarily attributable to a higher stock price. These cost increases were partly offset by a one-time recruiting expense of approximately $91,000 related to the hiring of our Chief Financial Officer in 2012, and costs associated with our move to 349 Oyster Point of approximately $25,000.

We expect general and administrative expenses to stay relatively unchanged in the near future.


Table of Contents

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



                                     Three Months Ended           % Increase             Nine Months Ended            % Increase
                                        September 30,             (Decrease)               September 30,              (Decrease)
                                     2013            2012        2012 to 2013           2013            2012         2012 to 2013
                                       (in thousands)                                     (in thousands)
Interest income, interest
expense and other income
(expense), net
Interest income                    $      1         $    3                 (67 )%     $       3        $   14                  (79 )%
Interest expense                        (93 )          (99 )                (6 )%          (278 )        (302 )                 (8 )%
Other income (expense), net              (7 )           (1 )               600 %            340            (4 )                  *

Total interest and other income
(expense)                          $    (99 )       $  (97 )                 2 %      $      65        $ (292 )               (122 )%

* Result not meaningful

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 $2,000 for the three months ended September 30, 2013 as compared to the same period in 2012.

Total interest and other income (expense) increased $357,000 for the nine months ended September 30, 2013 as compared to the same period in 2012. This increase primarily reflects a gain of approximately $340,000 from the sale of assets held-for-sale.

Interest expense will continue as long as our loan with Comerica is outstanding and will trend down as the loan is repaid.

Income Taxes



                                      Three Months Ended           % Increase             Nine Months Ended           % Increase
                                        September 30,              (Decrease)               September 30,             (Decrease)
                                   2013               2012        2012 to 2013          2013            2012         2012 to 2013
                                        (in thousands)                                     (in thousands)

Income tax provision $ - $ 1 (100 )% $ (5 ) $ (2 ) 150 %

We generated net losses for the three and nine months ended September 30, 2013 and had no federal income tax provision. Our effective tax rate was 0% for income tax for each of the three and nine months ended September 30, 2013 and we expect that our effective tax rate for the full year 2013 will be 0%. In addition, we have substantial net operating loss carry forwards available to offset future taxable income for federal and state income tax purposes. As of September 30, 2013, we had unrecognized tax benefits totaling $1.6 million. Our ability to utilize our net operating losses may be limited due to changes in our ownership as defined by Section 382 of the Code.

Under the provisions of Sections 382 and 383 of the Internal Revenue Code (the "Code"), a change of control, as defined in the Code, may impose an annual limitation on the amount of the Company's net operating loss and tax credit carryforwards, and other tax attributes that can be used to reduce future tax liabilities. As a result of a merger transaction involving us in 2010, certain of the Company's tax attributes prior to the merger transaction are subject to an annual limitation of $240,000 for federal and state purposes.

Liquidity and Capital Resources

Since our inception, we have incurred losses, and we have relied primarily on private placements of equity and debt financing, as well as on revenue generated from the sale of our products, to fund our operations. As of September 30, 2013, we had an accumulated deficit of $199.7 million, working capital of $11.3 million and stockholders' equity of $7.4 million. Based on our current operating plan, we believe that our existing cash, cash equivalents, and investment securities will be sufficient to cover our cash needs for operating activities and commitments for at least twelve months.

Cash, Cash Equivalents and Investments

As of September 30, 2013, we had cash, cash equivalents and short-term investments of $12.2 million, compared to $13.6 million as of December 31, 2012. The decrease of $1.4 million primarily reflects cash used in operating activities of $1.9 million, offset by the sale of $0.6 million in assets held for sale.

Cash Flows from Operating Activities

Net cash used in operating activities was $1.9 million for the nine months ended September 30, 2013, and was primarily related to the net loss of $2.0 million, adjusted for non-cash items of $(340,000) of gain in sale of equipment and assets held for sale, $(436,000) in unfavorable lease amortization, $432,000 in stock-based compensation expense, $401,000 in depreciation and amortization, and $(85,000) cash outflow related to changes in operating assets and liabilities.

Net cash used in operating activities was $3.1 million for the nine months ended September 30, 2012, and was primarily related to the net loss of $2.4 million, adjusted for non-cash items of $0.4 million in depreciation and amortization, $(0.4) million in unfavorable lease amortization, $0.3 million in stock-based compensation expense and $(1.1) million cash outflow related to changes in operating assets and liabilities.

Cash Flows from Investing Activities

Net cash provided by investing activities in the nine months ended September 30, 2013 was $1.2 million, primarily due to net investment maturities of $0.8 million and proceeds from sale of assets of $0.6 million. This cash provided by investing activities was partially offset by $0.2 million in purchases of property and equipment.

Net cash provided by investing activities in the nine months ended September 30, 2012 was $5.6 million, primarily due to net investment maturities of $5.7 million and restricted cash release of $0.4 million. This was partially offset by $0.6 million in purchases of property and equipment.


Table of Contents

Cash Flows from Financing Activities

Net cash provided by financing activities in the nine months ended September 30, 2013 was $45,000, reflecting proceeds from stock option exercises.

Net cash provided by financing activities in the nine months ended September 30, 2012 was $18,000, reflecting proceeds from stock option exercises, partially offset by a fee paid relating to the amendment of a loan and security agreement first entered into in September 2011.

Credit Facility

In September 2011, we entered into a Loan and Security Agreement with Comerica Bank, which was amended in September of 2012 (see Note 9, Notes Payable, of the Notes to Condensed Financial Statements included in this Quarterly Report on Form 10-Q) and again in October 2013 (see Note 16, Subsequent Events, of the Notes to Condensed Financial Statements included in this Quarterly Report on Form 10-Q). This agreement contains various covenants.

If we breach any of these covenants or are unable to make a required payment of principal or interest, or experience a material adverse change to our business, it could result in a default under the loan. Additionally, we are required to
(i) maintain a liquidity ratio of 1.25 to 1 and (ii) ensure our cumulative net loss measured from July 1, 2013 does not exceed $6,000,000, and failure to do so could result in a default under the loan. Upon the occurrence of an event of default under the loan, Comerica could elect to declare all amounts outstanding to be immediately due and payable, which would increase our liquidity requirements beyond the currently expected levels. If we are unable to repay those amounts, Comerica could proceed against the collateral granted to them to secure such indebtedness. We have pledged substantially all of our assets, other than our intellectual property, as collateral under the loan. We are in compliance with all the debt covenants as of September 30, 2013.

Other Information

We have incurred substantial losses since inception, and expect to continue to incur net losses for at least the next few years if we 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 expect to require additional financing and will seek to raise funds through equity or debt offerings, bank facilities, or other sources of capital. . . .

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