Investing in our common stock involves a very high degree of risk. You should carefully consider the risks described below and all of the other information in our filings under the Exchange Act before making any investment decisions regarding our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we do not know of or that we currently deem immaterial may also negatively affect our business, financial condition, operating results, and prospects. In that case, the market price of our common stock could decline, and you could lose all or part of your investment.
Risks Relating to Our Business Operations
Our sales of our PLAC ELISA products are characterized by a high degree of customer concentration. The loss of one or more of these customers or a decline in revenue from one or more of our key customers could have a material adverse effect on our business, financial condition, and results of operations.
Sales to a limited number of customers account for a significant portion of our revenue and accounts receivable. Our top five customers accounted for 84% and 73% of our accounts receivable as of March 31, 2016 and March 31, 2015, respectively, and 83% and 74% of our total revenues for the three months ended March 31, 2016 and 2015, respectively. Our dependence on, and the identity of, our key customers may vary from period to period as a result of competition among our customers, and changes in individual customers’ purchases of our products. Our former largest customer, Health Diagnostics Laboratory Inc. (“HDL”), filed for bankruptcy in June 2015, and as the HDL bankruptcy process continues we are unable to predict whether we can collect our outstanding accounts receivable for their prior purchases. Moreover, we are unable to predict whether post-bankruptcy orders will continue with the sale of the majority of HDL assets to True Health Diagnostics, LLC, and if continuing, the timing and purchase levels. Additionally, Atherotech, another of our top five customers in 2015 and 2014, declared Chapter 7 bankruptcy in March 2016. Atherotech’s filing of bankruptcy has no impact on our 2015 revenue or receivables. We are in the process of creating an additional distribution channel for our products through national laboratories, major hospital systems, regional reference laboratories, and physician office laboratories serviced through national distributors for PLAC Activity, but in the near term we expect to continue to have revenues concentrated with a number of large laboratory customers. The loss of, material reduction in sales volume to, or significant adverse change in our relationship with any of our key customers could have a material adverse effect on our revenue in any period and may result in significant annual and quarterly revenue variations.
We have engaged in limited sales and marketing activities for our PLAC Activity product.
PLAC Activity may never gain significant acceptance in the marketplace and therefore never generate substantial revenue or profits. As is the case with all novel biomarkers, we must penetrate the market and generate demand with physician education and awareness programs. Publication in peer review journals of results from outcome studies using our products will be an important consideration in the adoption by physicians. Our ability to successfully commercialize PLAC Activity and other diagnostic products and services will depend on many factors, including:
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driving adoption and revenue growth through clinical messaging; and
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executing on our commercial strategy of creating a broad and diversified distribution channel of new laboratory customers for this product, including national laboratories, major hospital systems, regional reference laboratories, and physician office laboratories.
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In addition, the timing and uptake from contracting to orders and revenue is highly unpredictable and we may be unable to successfully predict growth in revenues or profits, if any, from PLAC Activity and any new products. These and other factors may present obstacles to commercial acceptance of our products, and we may need to devote substantial time and money to surmount these obstacles, and the result might not be successful.
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We rely on two manuf
acturers to supply materials for our PLAC ELISA Test and a limited number of vendors and suppliers to obtain materials for our PLAC Activity Test in the manufacture of our products. If these manufacturers are unable to deliver our products or these vendors
and suppliers are unable to deliver our materials in a timely manner, or at all, we may be unable to meet demand, which would have a material adverse effect on our business.
We have qualified two third-party manufacturers for our PLAC ELISA Test, and we intend to order regularly from both of these manufacturers in the future. We rely on our third-party manufacturers to maintain their manufacturing facility in compliance with FDA and other federal, state and/or local regulations including health, safety and environmental standards. If they fail to maintain compliance with FDA or other critical regulations, they could be ordered to curtail operations, which would have a material adverse impact on our business. In addition, increases in the prices we pay our manufacturer, or lapses in quality, such as failure to meet our specifications or the requirements of the Quality System Regulations (“QSR”) and other regulatory requirements, could materially adversely affect our business. Any manufacturing defect or error discovered after our products have been produced and distributed could result in significant consequences, including costly recall procedures and damage to our reputation. Our ability to replace the existing manufacturers may be difficult, because the number of potential manufacturers is limited.
We also currently depend on certain key vendors and suppliers of materials that are essential for the manufacture of our products. Any interruption in the supply of materials, or the inability to obtain materials from alternate sources in a timely manner, could impair our ability to supply our products and to meet the demands of our customers, which would have a material adverse effect on our business.
We manufacture PLAC Activity Test on-site in South San Francisco, California and we could experience supplier, process, quality control and shipping problems.
We have been manufacturing PLAC Activity Test in-house since January 2012. We are dependent on the expertise of our personnel for ensuring the production and quality of the PLAC Activity Test. We could observe performance deviations that have not been apparent during development, including performance and stability of PLAC Activity. The discovery of such performance deviations or of any manufacturing problems may adversely affect our sales in the U.S. and other countries.
If third-party payers do not reimburse our customers for the use of our clinical diagnostic products or if they reduce reimbursement levels, our ability to sell our products could be harmed.
We sell our products primarily through distributors and to laboratory customers, substantially all of which receive reimbursement for the health care services they provide to their patients from third-party payers, such as Medicare, Medicaid and other government programs, private insurance plans and managed care programs. Both the PLAC ELISA and the PLAC Activity Tests are covered by Medicare. Third-party payers are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for medical products and services. Accordingly, third-party payers are increasingly challenging the prices charged for diagnostic tests. Most of these third-party payers may deny coverage and reimbursement if they determine that a product was not medically necessary or not used in accordance with cost-effective treatment methods, or was used for an unapproved indication.
In the U.S., third-party payers generally require billing codes on claims for reimbursement that describe the services provided. For laboratory services, the American Medical Association (“AMA”) establishes most of the billing codes using Current Procedural Terminology (“CPT”) codes. Each third-party payer generally develops payment amounts and coverage policies for their beneficiaries or members that ties to the CPT code established for the laboratory test and, therefore, coverage and reimbursement may differ by payer even if the same billing code is reported for claims filing purposes. Currently, the tests performed by our assays are described by a specific CPT code for Lp-PLA
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. If our customers are not reimbursed for our products, they may reduce or discontinue purchases of our products, which would cause our revenues to decline. Lower-than-expected, or decreases in, reimbursement amounts for tests performed may negatively impact our ability to price our products successfully.
On April 1, 2014 the Protecting Access to Medicare Act of 2014 (PAMA) was signed into law. It includes the most extensive reform of the Medicare Clinical Fee Schedule (CLFS) since it was established in 1984. Section 216 of PAMA creates a new Section 1834A of the Social Security Act which contains many of the CLFS reforms. Starting on January 1, 2017, most rates on the CLFS will be derived from private payer rates for laboratory services. It is not clear how these changes in rates will impact us, but reduced rates could materially impact our future revenues. On September 25, 2015, Centers for Medicare & Medicaid Services, or CMS, released a proposed rule for the Medicare Clinical Diagnostic Laboratory Tests Payment System, which lays out the regulations and processes for the implementation of the PAMA law. As expected, the CMS has proposed to begin the establishment of payment rates for clinical laboratory tests based on the currently available payment rates from commercial payers, effective January 1, 2017. Per the PAMA law and the proposed rule, regardless of the payment rates indicated by the commercial payer data provided to the CMS, the maximum amount an individual payment for a clinical laboratory diagnostic test can be reduced is 10% for payments effective January 2017. It is not clear how these changes in rates will impact us, but reduced rates could materially impact our future revenues.
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O
ur business, in particular the growth of our business, is dependent on our ability to successfully develop and commercialize novel diagnostic products and services based on biomarkers.
As an example, in March 2014, we entered into an exclusive licensing and supply agreement with BRAHMS to develop and commercialize three independent biomarkers to aid in risk prediction and prognosis for heart failure. These new biomarker product opportunities represent our future product pipeline. In the event we fail to meet certain diligence requirements under the license, our exclusive U.S. right for these products may be lost, which would have an adverse effect on our product pipeline and sales.
The requirements of being a public company have required and will continue to require significant resources, increase our costs and occupy our management, and we may be unable to comply with these requirements in a timely or cost-effective manner.
As a company with public reporting responsibilities, we have incurred and will continue to incur significant legal, accounting, and other expenses related to, among other things:
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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;
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maintaining and updating internal policies, such as those relating to insider trading and disclosure controls and procedures;
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involving and retaining to a greater degree outside counsel and accountants in the above activities; and
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establishing and maintaining an investor relations function, including the provision of certain information on our website.
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If we are successful in our efforts to uplist to a national securities exchange or if we cease to be a smaller reporting company under applicable SEC regulations, we will also be subject to additional reporting and compliance requirements. Compliance with these rules and regulations has and will cause us to incur significant legal and financial compliance costs. In addition, we are required to implement and maintain effective internal control over financial reporting and disclosure. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting. Our testing may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. We have incurred and expect to continue to incur significant expense and devote substantial management effort toward ensuring compliance with these requirements. Moreover, if we are not able to comply with these requirements in a timely manner, or if we identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our common stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would entail expenditure of additional financial and management resources.
Natural disasters, including earthquakes, may damage our facilities.
Our corporate, research and manufacturing facilities are located in the San Francisco Bay Area of California, in close proximity to known earthquake fault zones. As a result, these facilities and any clinical samples kept in these facilities are susceptible to damage from earthquakes and other natural disasters, such as fires, floods and similar events. Although we maintain general business insurance against fires and some general business interruptions, there can be no assurance that the scope or amount of coverage will be adequate in any particular case. Insurance specifically for earthquake risks is not available on commercially reasonable terms.
Failure in our information technology and storage systems could significantly disrupt the operation of our business.
Our ability to execute our business plan depends, in part, on the continued and uninterrupted performance of our information technology (“IT”) systems. IT systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our IT systems, sustained or repeated system failures that interrupt our ability to generate and maintain data could adversely affect our ability to operate our business.
Our future success depends on our ability to effectively recruit and retain our senior management and other key employees and attract, retain and motivate qualified personnel.
We depend on the efforts and abilities of our senior management, our research and development and sales and marketing staff and a number of other key management, support, technical and administrative services personnel. In particular, we rely on the experience of our senior management, who have specific knowledge of our business and industry that is difficult to replace. If we are unable to attract and retain highly-qualified senior management, our business may be adversely affected. Effective succession planning is also important to our long-term success. Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution.
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Competition for experienced, high-quality personnel exists, particularly in the San Francisco Bay Area, and we cannot assure you that we can continue to recruit and retain such
personnel. Our failure to hire, train and retain qualified personnel would impair our ability to manage our business effectively and develop new products.
Significant disruptions of information technology systems or breaches of data security could adversely affect our business.
Our business is increasingly dependent on critical, complex and interdependent information technology systems, including Internet‑based systems, to support business processes as well as internal and external communications. The size and complexity of our computer systems make them potentially vulnerable to breakdown, malicious intrusion and computer viruses that may result in the impairment of key business processes.
In addition, our systems are potentially vulnerable to data security breaches—whether by employees or others—that may expose sensitive data to unauthorized persons. Such data security breaches could lead to the loss of trade secrets or other intellectual property, or could lead to the public exposure of personally identifiable information (including sensitive personal information) of our employees, collaborators, and others. A data security breach or privacy violation that leads to disclosure or modification of or prevents access to patient information, including personally identifiable information or protected health information, could harm our reputation, compel us to comply with federal and/or state breach notification laws, subject us to mandatory corrective action, require us to verify the correctness of database contents and otherwise subject us to liability under laws and regulations that protect personal data, resulting in increased costs or loss of revenue. If we are unable to prevent such data security breaches or privacy violations or implement satisfactory remedial measures, our operations could be disrupted, and we may suffer loss of reputation, financial loss and other regulatory penalties because of lost or misappropriated information. In addition, these breaches and other inappropriate access can be difficult to detect, and any delay in identifying them may lead to increased harm of the type described above. Moreover, the prevalent use of mobile devices that access confidential information increases the risk of data security breaches, which could lead to the loss of confidential information, trade secrets or other intellectual property. While we have implemented security measures to protect our data security and information technology systems, such measures may not prevent such events.
Such disruptions and breaches of security could have a material adverse effect on our business, financial condition and results of operations.
Risks Relating to Government Regulations
We are subject to extensive regulation by the FDA and other regulatory agencies, and failure to comply with such regulation could have a material adverse effect on our business, financial condition, and results of operations.
Our business and our medical device products, including our PLAC Tests, are subject to extensive regulation by the FDA and other federal, state, and foreign regulatory agencies. These laws and regulations govern many aspects of our products and operations, and the products and operations of our suppliers and distributors, including premarket clearance and approval, design, development and manufacturing, labeling, packaging, safety and adverse event reporting, recalls, storage, advertising, promotion, sales and record keeping. Failure to comply with these laws and regulations could result in, among other things, warning letters, civil or criminal penalties, injunctions, delays in clearance or approval of our products, withdrawal of cleared products, recalls, and other operating restrictions, all of which could cause us to incur significant expenses.
Before we can market or sell a new product or a significant modification to an existing product in the U.S., we must obtain either clearance under Section 510(k) of the FDA, or approval of a pre-market approval application (“PMA”), from the FDA, unless an exemption applies. In the 510(k) clearance process, the applicant must demonstrate to the FDA’s satisfaction that a proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, with respect to intended use, technology and safety and effectiveness, in order to obtain clearance from the FDA to market the proposed device. Clinical data is sometimes required to support substantial equivalence. The PMA pathway requires an applicant to demonstrate the safety and effectiveness of the device based, in part, on extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing, and labeling data. The FDA can delay, limit, or deny clearance or approval of a device for many reasons, including:
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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;
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The data from our pre-clinical studies and clinical trials may be insufficient to support clearance or approval, where required;
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The manufacturing process or facilities we use may not meet applicable requirements; and
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Changes in FDA clearance or approval policies or the adoption of new regulations may require additional data.
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Further, any modification we make to a 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design, or manufacture, would require us to seek a new 510(k) clearance or, possibly,
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approval of a PMA. The FDA requires every manufacturer to make this determination in the first instance, but the FDA may review any manufacturer’s decision. The FDA may not agree with our decisions regarding whether new clearances
or approvals are necessary for changes to 510(k) cleared devices. If the FDA disagrees with our determination and requires us to submit new 510(k) notifications or PMAs for modifications to our previously cleared products for which we have concluded that n
ew clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties.
Even when a product reaches the market, the subsequent discovery of previously unknown problems, such as material deficiencies or defects in design, labeling, or manufacture, or a potential unacceptable risk to health, with a product may result in restrictions on the product, including recall or withdrawal of the product from the market, and/or a requirement to submit a new 510(k) submission or PMA for the product in order to support continued marketing.
We and our suppliers are subject to inspections by the FDA and other regulatory agencies, and deficiencies identified during these audits could have a material adverse effect on our results of operations.
Once regulatory clearance or approval has been granted, the product and its manufacturer are subject to continual review by the FDA and other regulatory authorities. For example, we are subject to routine inspection by the FDA and certain state agencies for compliance with the QSR, which establishes the good manufacturing practices for medical devices, and Medical Device Reporting regulations, which require us to report to the FDA any incident in which one of our products may have caused or contributed to a death or serious injury or malfunctioned in a way that could cause death or serious injury. Although we believe that we have adequate processes in place to ensure compliance with these and other post-market requirements, the FDA or other regulatory bodies could disagree and take enforcement action, including issuing warning letters, untitled letters, fines, injunctions, consent decrees or civil penalties, or imposing operating restrictions or partial suspension or total shutdown of manufacturing, selling or exporting our products, among other sanctions, if it concludes that we are out of compliance with applicable regulations or if it concludes that our products pose an unacceptable risk to health or are otherwise deficient in design, labeling or manufacture. Further, the ability of our suppliers to supply critical components or materials and of our distributors to sell our products could be adversely affected if their operations are determined to be out of compliance. The FDA and other regulatory bodies could also require us to recall products if we fail to comply with applicable regulations. Such actions by the FDA and other regulatory bodies would adversely affect our revenues and results of operations.
We are and will be subject to new regulations, which could have a material adverse effect on our results of operations.
Many national, regional, and local laws and regulations, including the healthcare reform legislation, have not been fully implemented by the regulatory authorities or adjudicated by the courts, and these provisions are open to a variety of interpretations. In the ordinary course of business, we must frequently make judgments with respect to compliance with applicable laws and regulations. If regulators subsequently disagree with the manner in which we have sought to comply with these regulations, we could be subjected to various sanctions, including substantial civil and criminal penalties, as well as product recall, seizure or injunction with respect to the sale of our products. Such sanctions could severely impair our reputation within the industry and any limitation on our ability to manufacture and market our products could have a material adverse effect on our business. In addition, in January 2011, the FDA announced twenty-five action items it intends to take in reforming the 510(k) premarket review program. The FDA issued its recommendations and proposed action items in response to concerns from both within and outside of the FDA about the 510(k) program. The FDA is in the process of issuing guidance on the specific modifications or clarifications that the FDA intends to make to its guidance, policies, and regulations pertaining to the review and regulation of devices such as ours which seek and receive marketing clearance through the 510(k) process. The FDA’s announced action items signal that additional regulatory requirements are likely. The FDA intends to issue a variety of draft guidance and regulations which, when fully implemented, could impose additional regulatory requirements upon us, which could delay our ability to obtain new clearances, increase the cost of compliance, or restrict our ability to maintain our current 510(k) clearances.
Healthcare reform and its restrictions on coverage and reimbursement may adversely affect our business.
Legislation both proposed and passed has had an impact on reimbursement levels for diagnostic services, including laboratory tests. For instance, in March 2010, President Barack Obama signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “PPACA”), which makes a number of substantial changes to the way health care is financed by both governmental and private insurers. Among other things, the PPACA mandates a reduction in payments for clinical laboratory services paid under the Medicare Clinical Laboratory Fee Schedule of 1.75% for the years 2011 through 2015. A productivity adjustment also is made to the fee schedule payment amount. In addition, on February 22, 2012, President Obama signed the Middle Class Tax Relief and Job Creation Act of 2012, which, among other things, mandated an additional change in Medicare reimbursement for clinical laboratory services. This legislation requires a rebasing of the Medicare clinical laboratory fee schedule to effect a 2% reduction in payment rates otherwise determined for 2013, which in turn will serve as a base for 2014 and subsequent years. Further, with respect to the PPACA changes, the legislation establishes an Independent Payment Advisory Board
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(“IPAB”) to reduce the per capita rate of growth in Medicare spending. The IPAB has broad discretion to propo
se policies, which may have a negative impact on payment rates for services, including clinical laboratory services, beginning in 2016, and for hospital services beginning in 2020. PPACA also provided for an excise tax on medical devices and required to di
sclose all transfers of values to physicians and physician teaching institutions under the sunshine provisions of the PPACA. On December 18, 2015, President Obama signed into law the "Protecting Americans from Tax Hikes Act of 2015." The Act imposes a two-
year moratorium on the medical device excise tax effective for sales made after December 31, 2015.
The full impact on our business of the PPACA and other government spending limitations resulting from broader cutbacks in government spending or reimbursement is uncertain. Levels of reimbursement may decrease in the future, and future legislation, regulation or reimbursement policies of third-party payers may adversely affect the demand for and price levels of our products.
PAMA included a substantial new payment system for clinical laboratory tests under the Clinical Laboratory Fee Schedule. Under PAMA, Medicare payment rates for tests will be equal to the volume-weighted median of the private payer payment rates for a test. The payment rates calculated under PAMA will be effective starting January 1, 2017, and will be reviewed every three years, based on private payer payment rates and volumes for their tests. On September 25, 2015, CMS released a proposed rule for the Medicare Clinical Diagnostic Laboratory Tests Payment System, which lays out the regulations and processes for the implementation of the PAMA law. As expected, CMS has proposed to begin the establishment of payment rates for clinical laboratory tests based on the currently available payment rates from commercial payers, effective January 1, 2017. Per the PAMA law and the proposed rule, regardless of the payment rates indicated by the commercial payer data provided to CMS, the maximum amount an individual payment for a clinical laboratory diagnostic test can be reduced is 10% for payments effective January 2017. We believe that, starting in 2017 and over time, our customers could see decreased reimbursement from Medicare for running our PLAC Tests which may impact the price at which we sell them our kits and negatively impact our revenue growth.
We are subject to healthcare laws, regulation and enforcement, and our failure to comply with those laws could have a material adverse effect on our results of operations and financial condition.
We are also subject to healthcare fraud and abuse regulation and enforcement by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:
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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;
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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;
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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;
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federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters; and
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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.
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If our operations are found to be in violation of any of the laws described above or any other governmental laws or regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, the exclusion from participation in federal and state healthcare programs, or imprisonment, any of which could adversely affect our ability to operate our business and our financial results.
Risks Relating to Liquidity and Additional Capital
Our current debt financing contains restrictions that limit our flexibility in operating our business, and our lender may accelerate repayment of amounts outstanding under certain circumstances.
In September 2014, we entered into a Loan and Security Agreement with Oxford (the “Loan and Security Agreement”). The Loan and Security Agreement contains a number of affirmative and restrictive covenants. These covenants limit our ability to, among other things:
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Merge, consolidate or acquire another entity;
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Incur additional indebtedness;
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Enter into transactions with affiliates; and
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Pay dividends or make other distributions or payments on our capital stock.
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If we breach any of these covenants, are unable to make a required payment of principal or interest, or experience a material adverse change to our business, it could result in an event of default under the Loan and Security Agreement. Upon the occurrence of an event of default under the Loan and Security Agreement, Oxford could elect to declare all amounts outstanding to be immediately due and payable and exercise remedies, including removing the existing cash balances from our bank accounts necessary to maintain liquidity. If we were unable to repay the amounts due under the Loan and Security Agreement, Oxford could proceed against the collateral granted to it to secure such indebtedness. We have pledged substantially all of our assets, other than our intellectual property, as collateral under the loan. Any event of default under the Loan and Security Agreement could significantly jeopardize our business and ability to continue as a going concern.
We will need to raise additional capital to support our operations in the future.
We will require additional funds to uplist our Common Stock from the OTC Bulletin Board to NASDAQ and to broadly commercialize our products and to develop new products. Our ability to fund our operations and to conduct the required development activities related to any new product candidates will be significantly limited if we are unable to obtain the necessary capital. We expect to seek to raise funds through equity or debt offerings, bank facilities, or other sources of capital. Additional funding may not be available when needed or on terms acceptable to us. The consent of Oxford will likely be required for additional debt or other financings. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. We cannot assure you that we will be able to raise any such additional funding, and any such failure may negatively impact our business and operations.
Our future capital needs are uncertain and our former independent registered public accounting firm has expressed in its report on our 2015 audited financial statements a substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital or obtain loans from financial institutions and our operations could be curtailed if we are unable to obtain the required additional funding when needed. We may not be able to do so when necessary, and/or the terms of any financings may not be advantageous to us.
Our financial statements for the three months ended March 31, 2016 included in Item 1 of this quarterly report on Form 10-Q have been prepared assuming we will continue to operate as a going concern. However, due to our ongoing operating losses, negative cash flows from operations, and our accumulated deficit, there is substantial doubt about our ability to continue as a going concern. Because we continue to experience net operating losses, our ability to continue as a going concern is subject to our ability to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities or obtaining loans from financial institutions. Our continued net operating losses increase the difficulty in completing such sales or securing alternative sources of funding, and there can be no assurances that we will be able to obtain such funding on favorable terms or at all. If we are unable to obtain sufficient financing from the sale of our securities or from alternative sources, we may be required to reduce, defer or discontinue certain of our research and development activities and operating activities or we may not be able to continue as a going concern. As a result, our former independent registered public accounting firm expressed a substantial doubt regarding our ability to continue as a going concern in its auditors’ report on the financial statements included in our Annual Report filed on March 29, 2016. Our financial statements do not include any adjustments that might result from the outcome of the uncertainty regarding our ability to continue as a going concern. If we cannot continue as a going concern, our stockholders may lose their entire investment in the common stock. Future reports from our independent registered public accounting firm may also contain statements expressing doubt about our ability to continue as a going concern.
We have a history of losses, we expect to incur losses for at least the next few years, and we may never achieve profitability.
We have incurred substantial net losses since our inception. Our accumulated deficit was $217.2 million at March 31, 2016. For the three months ended March 31, 2016 and 2015, we incurred net losses of $1.7 million and $1.0 million, respectively. We expect to continue to incur net losses for at least the next few years based on our current plans to engage in new development activities to broaden our product pipeline. If we are unable to achieve profitability, or if the time required to achieve profitability is longer than we anticipate, we may not be able to continue our business.
Moreover, we are solely dependent on our two PLAC Tests for revenues. We expect that the PLAC Tests will account for a substantial portion of our revenue for the foreseeable future. We do not know if both of our PLAC Tests will be accepted broadly by the market over the long-term and it is possible that the demand for the product may decline over time, and any quarter or other period of profitability may not be sustainable without continued growth in sales of both of our products. Even with our 510(k) FDA clearance, we may never be able to successfully commercialize PLAC Activity in the U.S. Any decline in demand or failure of our PLAC Tests
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to penetrate current or new markets significantly could have a material adverse effect on our business, financial cond
ition, and results of operations. Moreover, the sale of PLAC Tests may not continue to stabilize, and any reduction in demand from one or more of our major customers may have a significant impact on our ability to achieve and maintain profitability.
Risks Relating to Intellectual Property
If the combination of patents, trade secrets, trademarks, and contractual provisions that we rely on to protect our intellectual property proves inadequate, our ability to successfully commercialize our products will be harmed and we may never be able to operate our business profitably.
Our success depends, in large part, on our ability to protect proprietary discoveries, technology, brands, creative works, and diagnostic tests under the patent and other intellectual property laws of the U.S. and other countries, so that we can seek to prevent others from unlawfully using our proprietary inventions and information. We hold issued patents in the U.S. covering PLAC ELISA and PLAC Activity. Certain patents for PLAC ELISA and PLAC Activity will expire in 2016. We continue to review new patent applications but there can be no assurance that these patent applications will be used or any issued patents will maintain a competitive advantage for our PLAC ELISA and PLAC Activity products.
While there can be no assurance that other patents or our other intellectual property or regulatory barriers may further protect our PLAC ELISA and PLAC Activity products, we believe that there are manufacturing and regulatory barriers to competition that may limit the ability of potential competitors to achieve a clinical performance level comparable to our PLAC ELISA and PLAC Activity products.
We have also filed or have licensed rights to a number of patent applications that are in an early stage of prosecution, and we cannot make any assurances that any of the pending patent applications will become issued and enforceable patents. In addition, due to technological changes that may affect our proposed products or judicial interpretation of the scope of our patents, our proposed products might not, now or in the future, be adequately covered by our patents.
Furthermore, U.S. Supreme Court decisions in cases involving patents claiming genetic materials and information, and diagnostic products and methods based on genetic materials and information may impact our business. For example, on March 20, 2012, in
Mayo Collaborative Services, DBA Mayo Medical Laboratories, et al. v. Prometheus Laboratories, Inc
., the U.S. Supreme Court issued an opinion holding that the processes claimed by Prometheus’ patent were not patent eligible because these processes—determining the relationships between concentrations of certain metabolites in the blood and the likelihood that a thiopurine drug dosage will prove ineffective or cause harm—merely apply laws of nature and are not themselves patentable. On June 13, 2013 in
Association for Molecular Pathology et al.v. Myriad Genetics, Inc., et al.
the U.S. Supreme Court issued an opinion holding that a naturally occurring DNA segment is a product of nature and not patent eligible merely because it has been isolated, but cDNA is patent eligible because it is not naturally occurring. It is unknown what impact these decisions will have with respect to our patents.
We license key intellectual property from GlaxoSmithKline and ICOS, and our contractual relationships have certain limitations.
We have an exclusive license from GlaxoSmithKline (formerly SmithKlineBeecham plc) and a co-exclusive license from ICOS Corporation (“ICOS”), subsequently acquired by Eli Lilly and Company, to practice and commercialize technology covered by several issued and pending U.S. patents and their foreign counterparts. Some of these licensed patents covering composition of matter and cardiovascular diagnostic claims have different expiration dates from 2015 through 2016, which may limit our ability to generate future revenue from products claimed under those exclusive and co-exclusive licenses.
Several of our agreements with each of GlaxoSmithKline and ICOS provide licenses to use intellectual property that is important to our business, and we may enter into additional agreements in the future with GlaxoSmithKline or with other third parties that change licenses to valuable technology. Current licenses impose, and future licenses may impose, various commercialization, milestones and other obligations on us, including the obligation to terminate our use of patented subject matter under certain circumstances. If a licensor becomes entitled to, and exercises, termination rights under a license, we could lose valuable rights and our ability to develop our current and future products. Our business may suffer if any current or future licenses terminate, if the licensors fail to abide by the terms of the license or fail to prevent infringement by third parties, if the licensed patents or other rights are found to be invalid or if we are unable to enter into necessary licenses on acceptable terms.
Any inability to adequately protect our proprietary technologies and product candidates could harm our competitive position.
We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. We plan to continue to apply for patents covering our technologies and products as we deem appropriate. We cannot make assurances that our pending patent applications will issue as patents and, if they do, whether the scope of such claims will be sufficiently broad to prevent third parties from utilizing our technologies, commercializing our discoveries, or developing competing products. Any patents we currently hold, or obtain in the future, may be held invalid or unenforceable or may not be sufficiently broad to prevent others from utilizing our
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technologies, commercializing our discoveries, or developing competing technologies and products. Moreover, expiration or invalidation of our issued patents may impact our ab
ility 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 p
atents may fail to provide us with any competitive advantage.
We have rights to patents and patent applications owned by licensors that provide important protection on the composition of matter and utility of our products, product candidates and product pipeline. We do not, however, directly control the prosecution and maintenance of all of these patents. A licensor may not fulfill its obligations under a license and may allow these patents to go abandoned or may not pursue meaningful claims for our products. Also, while the U.S. Patent and Trademark Office has issued patents covering diagnostic utility or methods, we do not know whether or how courts will enforce these patents. If a court finds our patents for these types of inventions to be invalid, unenforceable or interprets them narrowly, the benefits of our patent strategy may not materialize. If any or all of these events occur, they could diminish the value of our intellectual property.
Risks Relating to Our Stock
Our stock price is likely to continue to be volatile.
Currently, our common stock is quoted on the OTC Bulletin Board. Stocks traded “over the counter” typically are subject to greater volatility than stocks traded on stock exchanges, such as the NASDAQ Stock Market, due to the fact that OTC trading volumes are generally significantly lower than those on stock exchanges. This lower volume may allow a relatively few number of stock trades to greatly affect the stock price, particularly where the trading price of the stock price is relatively low. In addition, the stock markets and the markets for medical diagnostics and biotechnology stocks in particular, have experienced volatility that has often been unrelated to the operating performance of particular companies. Moreover, our stockholders and Board approved a 15-for-1 reverse stock split that resulted in increased volatility due to our higher stock price as adjusted for the reverse stock split. For example, our stock price at March 31, 2016 declined by more than 70% since July 1, 2015, the first trading day following the effectiveness of the reverse stock split. The trading price of our common stock has been and is likely to continue to be extremely volatile. Some of the many factors that may cause the market price of our common stock to fluctuate include, in no particular order:
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Our ability to grow revenue and achieve profitability based on our two FDA-cleared PLAC products;
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Our ability to develop, launch and commercialize potential new products;
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Actions taken by regulatory authorities or reimbursement legislation with respect to our products;
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The progress and results of our product development efforts or those of our competitors;
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Significant changes to our executive team or other members of senior management;
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The outcome of legal actions to which we may become a party;
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Changes in our strategy and competitive positioning;
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Changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;
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Our ability to uplist to a national stock exchange; and
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Restatements of our financial results and/or material weaknesses in our internal controls.
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These broad market fluctuations may adversely affect the trading price of our common stock. Investors may not be able to sell when they desire due to insufficient buyer demand and may realize less than, or lose all of, their investment.
We are not currently listed on a national exchange and there can be no assurance we will ever be listed.
Currently, our common stock is quoted on the OTC Bulletin Board under the symbol DDXS. We do not know when, if ever, our common stock will be listed on a national stock exchange. In order to be eligible for relisting or listing, we must meet the initial listing criteria for The NASDAQ Stock Market or another national exchange, including a minimum per share price. We currently do not meet these requirements and cannot assure you that we will be able to satisfy these requirements, or if we satisfy them, that we will be able to maintain compliance with them.
Our business and operations could be negatively affected as a result of actions of activist stockholders.
Campaigns by stockholders to effect changes at publicly traded companies are sometimes led by investors through various corporate actions, including Board nominations and proxy contests. We may become subject to one or more campaigns by stockholders who desire to increase stockholder value in the short term. If we become engaged in a proxy contest with an activist stockholder in the future, our business and operations could be adversely affected as responding to such contests or other activist stockholder actions
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would be costly and time-consuming, and we would expect that such actions would disrupt our operations and divert the a
ttention of management and our employees from executing our strategies and plans. In addition, if individuals are elected to our Board with a specific agenda
or without relevant experience or expertise
, it may adversely affect the ability of the Board to f
unction effectively and the management team to implement effectively and in a timely manner our strategic plans, which are focused on building shareholder value. Any perceived uncertainties around our future direction from shareholder activism or changes t
o the Board may lead to the perception of a change in the direction of our business, or instability or lack of continuity for our products. These perceptions may cause concerns for our customers or be exploited by our competitors. As a result, we could ex
perience significant volatility and a decline of our stock price, the loss of potential business opportunities with current and potential new customers, and difficulties in attracting and retaining qualified personnel. For example, we entered into a settl
ement agreement with an activist stockholder pursuant to which we nominated, and the stockholders elected, John Sperzel III, a mutually acceptable candidate for election at our 2015 annual meeting of stockholders. We also recently received an activist stoc
kholder notice from Meson Capital LLP. There can be no assurance that we will not be subject to additional campaigns by other stockholders now or in the future.
Our charter documents and Delaware law may discourage an acquisition of our Company.
Provisions of our certificate of incorporation, bylaws, and Delaware law could make it more difficult for a third-party to acquire us, even if doing so would be beneficial to our stockholders. For example, we may issue shares of preferred stock in the future without stockholder approval and upon such terms as our Board of Directors may determine. Our issuance of this preferred stock could have the effect of making it more difficult for a third-party to acquire, or of discouraging a third-party from acquiring, a majority of our outstanding stock. Our bylaws also provide that special stockholder meetings may be called only by our Board of Directors, Chairperson of the Board of Directors, or by our Chief Executive Officer, with the result that any third-party takeover not supported by the Board of Directors could be subject to significant delays and difficulties.