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EX-31.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - Aspira Women's Health Inc.d236780dex311.htm
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EX-31.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - Aspira Women's Health Inc.d236780dex312.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended September 30, 2011.

OR

 

¨ Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from                      to                     .

Commission File Number: 001-34810

LOGO

 

 

Vermillion, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   33-0595156
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
12117 Bee Caves Road, Building Three, Suite 100, Austin, Texas   78738
(Address of principal executive offices)   (Zip Code)

(512) 519-0400

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (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  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 shorter period that the registrant was required to submit and post such files).    Yes  þ    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   þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  þ    No  ¨

As of October 31, 2011, the Registrant had 14,856,634 shares of common stock, par value $0.001 per share, outstanding.

 

 

 


VERMILLION, INC.

FORM 10-Q

Table of Contents

 

           Page  

PART I

   Financial Information   

Item 1

   Unaudited Financial Statements      1   
  

Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010

     1   
  

Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010

     2   
  

Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010

     3   
  

Notes to Consolidated Financial Statements

     4   

Item 2

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      13   

Item 3

   Quantitative and Qualitative Disclosures About Market Risk      22   

Item 4

   Controls and Procedures      22   

PART II

   Other Information   

Item 1

   Legal Proceedings      23   

Item 1A

   Risk Factors      24   

Item 2

   Unregistered Sales of Equity Securities and Use of Proceeds      35   

Item 3

   Defaults Upon Senior Securities      35   

Item 4

   Removed and Reserved      35   

Item 5

   Other Information      35   

Item 6

   Exhibits      36   

SIGNATURES

     37   

Vermillion, OVA1 and OvaCalc are registered trademarks of Vermillion, Inc. ProteinChip is a registered trademark of Bio-Rad Laboratories, Inc. BioSepra is a registered trademark of Pall Corporation.


PART I—FINANCIAL INFORMATION

ITEM 1. UNAUDITED FINANCIAL STATEMENTS

Vermillion, Inc.

Consolidated Balance Sheets

(Amounts in Thousands, Except Share and Par Value Amounts)

(Unaudited)

 

     September 30,     December 31,  
     2011     2010  
Assets     

Current assets:

    

Cash and cash equivalents

   $ 27,228      $ 22,914   

Accounts receivable

     114        136   

Prepaid expenses and other current assets

     455        779   
  

 

 

   

 

 

 

Total current assets

     27,797        23,829   

Property and equipment, net

     237        194   

Other assets

     12        12   
  

 

 

   

 

 

 

Total assets

   $ 28,046      $ 24,035   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable

   $ 2,162      $ 998   

Accrued liabilities

     3,223        3,056   

Convertible senior notes

     —          5,000   

Deferred revenue

     1,001        1,049   
  

 

 

   

 

 

 

Total current liabilities

     6,386        10,103   

Long-term debt owed to related party

     7,000        7,000   

Warrant liability

     —          378   

Deferred revenue

     1,381        1,679   

Other liabilities

     104        259   
  

 

 

   

 

 

 

Total liabilities

     14,871        19,419   

Commitments and contingencies (Note 5)

    

Stockholders’ equity:

    

Preferred stock, $0.001 par value, 5,000,000 shares authorized, none issued and outstanding at September 30, 2011 and December 31, 2010

     —          —     

Common stock, $0.001 par value, 150,000,000 shares authorized at September 30, 2011 and December 31, 2010; 14,848,301 and 10,657,564 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively

     15        11   

Additional paid-in capital

     326,476        303,270   

Accumulated deficit

     (313,164     (298,509

Accumulated other comprehensive loss

     (152     (156
  

 

 

   

 

 

 

Total stockholders’ equity

     13,175        4,616   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 28,046      $ 24,035   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

-1-


Vermillion, Inc.

Consolidated Statement of Operations

(Amounts in Thousands, Except Share and Per Share Amounts)

(Unaudited)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2011     2010     2011     2010  

Revenue:

        

Product revenue

   $ 206      $ 114      $ 714      $ 159   

License revenue

     114        299        341        671   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     320        413        1,055        830   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

        

Product

     26        13        105        25   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     26        13        105        25   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     294        400        950        805   

Operating expenses:

        

Research and development(1)

     1,370        1,111        4,219        2,797   

Sales and marketing(2)

     1,499        1,025        4,320        1,751   

General and administrative(3)

     1,952        1,864        6,982        6,604   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     4,821        4,000        15,521        11,152   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (4,527     (3,600     (14,571     (10,347

Interest income

     18        12        55        25   

Interest expense

     (100     (117     (330     (375

Change in fair value and gain from exercise of warrants, net

     32        980        374        4,427   

Debt conversion costs

     —          —          —          (141

Reorganization items

     (42     (44     (74     (1,641

Reorganization items—related party incentive plan

     —          —          —          (6,932

Other income (expense), net

     (32     33        (109     (36
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (4,651     (2,736     (14,655     (15,020

Income tax expense

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (4,651   $ (2,736   $ (14,655   $ (15,020
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share—basic and diluted

   $ (0.31   $ (0.26   $ (1.04   $ (1.45
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares used to compute basic and diluted net loss per common share

     14,820,694        10,495,324        14,041,549        10,345,995   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-cash stock-based compensation expense included in operating expenses:

        

(1) Research and development

   $ 181      $ 283      $ 590      $ 788   

(2) Sales and marketing

     40        26        122        51   

(3) General and administrative

     211        929        2,264        2,547   

See accompanying notes to the consolidated financial statements.

 

-2-


Vermillion, Inc.

Consolidated Statements of Cash Flows

(Amounts in Thousands)

(Unaudited)

 

     Nine Months Ended September 30,  
     2011     2010  

Cash flows from operating activities:

    

Net loss

   $ (14,655   $ (15,020

Adjustments to reconcile net loss to net cash used in operating activities:

    

Change in warrant value and gain from warrant exercise, net

     (374     (4,427

Accrued incentive plan with related parties

     —          4,141   

Non-cash license revenue

     (341     (671

Depreciation and amortization

     55        103   

Debt conversion costs

     —          141   

Loss on sale and disposal of property and equipment

     —          54   

Realized gain on sale of investments

     —          (58

Stock-based compensation expense

     2,976        1,177   

Changes in operating assets and liabilities:

    

Accounts receivable

     22        (261

Prepaid expenses and other assets

     324        (163

Accounts payable, accrued liabilities and other liabilities

     1,537        191   

Deferred revenue

     (5     148   

Reorganization items

     (365     (3,859
  

 

 

   

 

 

 

Net cash used in operating activities

     (10,826     (18,504
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of property and equipment

     (98     (170

Proceeds from sale of investments

     —          465   

Proceeds from sale of property and equipment

     —          5   
  

 

 

   

 

 

 

Net cash (used in) / provided by investing activities

     (98     300   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Principal repayment of debtor-in-possession loan financing with related party

     —          (400

Principal repayment of 7.00% convertible senior notes

     (5,000     —     

Principal repayment of 4.50% convertible senior notes

     —          (2,195

Proceeds from sale of common stock, net of issuance costs

     20,206        42,782   

Proceeds from issuance of common stock from exercise of stock options

     28        42   

Issuance costs related to stock warrant exercises

     —          (133

Issuance costs related to conversion of convertible senior notes

     —          (46
  

 

 

   

 

 

 

Net cash provided by financing activities

     15,234        40,050   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     4        6   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     4,314        21,852   

Cash and cash equivalents, beginning of period

     22,914        3,440   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 27,228      $ 25,292   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid during the period for:

    

Interest

   $ 397      $ 1,341   

Noncash investing and financing activities:

    

Principal reduction from conversion of senior convertible notes

   $ —        $ (170

Principal reduction from forgiveness of Quest Diagnostics secured line of credit

     —          (3,000

Issuance of common stock from warrant exercise

     —          1,059   

Issuance of common stock from conversion of principal and interest for senior convertible notes

     —          504   

See accompanying notes to the consolidated financial statements.

 

-3-


Vermillion, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

1.   ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

Organization

Vermillion, Inc. (“Vermillion”; Vermillion and its wholly-owned subsidiaries are collectively referred to as “we” or the “Company”) is incorporated in the state of Delaware and is engaged in the business of developing and commercializing diagnostics tests in the fields of oncology, cardiology and women’s health. On March 9, 2010, we commercially launched the OVA1® ovarian tumor triage test (“OVA1”) and on September 20, 2010, OVA1 was CE marked, a requirement for marketing the test in the European Union. On April 2, 2011, we entered into Amendment No. 5 to the Strategic Alliance Agreement (“Amendment No. 5”) with Quest Diagnostics Incorporated (“Quest Diagnostics”) and Quest Diagnostics India Private Limited (“Quest Diagnostics India”). Pursuant to Amendment No. 5, Quest Diagnostics India will have the exclusive right to commercialize OVA1 in India for a certain period of time, as specified in the Strategic Alliance Agreement, as amended.

On August 1, 2011, we entered into an Exclusive Distribution Agreement (the “Pronto Agreement”) with Pronto Diagnostics Ltd. (“Pronto Diagnostics”). Pursuant to the Pronto Agreement, Pronto Diagnostics will have the exclusive right to distribute OVA1 in Israel and areas under Palestinian control for a certain period of time as specified in the Pronto Agreement, provided that Pronto Diagnostics achieves certain minimum sales of OVA1 to maintain the exclusive distribution rights.

We have incurred significant net losses and negative cash flows from operations since inception. We currently generate revenue solely through sales and collaborations associated with OVA1. Our ability to achieve our business objectives is dependent upon, among other things, generating sufficient revenue in excess of costs or raising additional capital. We may seek to raise additional funding from various possible sources, including the public equity market, private financings, sales of assets, collaborative arrangements and debt. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Additional funding may not be available when needed or on terms acceptable to us. If we are unable to obtain additional capital, we may be required to delay, reduce the scope of or eliminate our sales and marketing and/or research and development activities or not be able to pay our existing debt.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments necessary for the fair statement of results for the periods presented, have been included. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year or any other interim period.

The unaudited consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim unaudited consolidated financial statements have read or have access to the audited consolidated financial statements for the preceding fiscal year. The consolidated balance sheet at December 31, 2010 has been derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by GAAP. Accordingly, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2010, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2011.

The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC” or “Codification”) 852 “Reorganizations” applied to the Company’s financial statements while we operated under the provisions of Chapter 11 of the United States Bankruptcy Code (“Chapter 11”). ASC 852 does not change the application of GAAP in the preparation of financial statements. However, for periods including and subsequent to the filing of the Chapter 11 petition, ASC 852 does require that the financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain expenses that were realized or incurred during the Chapter 11 proceedings have been classified as “reorganization items” on the accompanying consolidated statements of operations.

 

-4-


The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimated results.

Significant Accounting and Reporting Policies

We have made no significant changes in our critical accounting policies and significant estimates from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed with the SEC on February 28, 2011.

 

2.   CHAPTER 11 BANKRUPTCY

On March 30, 2009, we filed a voluntary petition for relief under Chapter 11 in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). We operated our business and managed our properties as debtors in possession while under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. On January 22, 2010, we emerged from bankruptcy.

Financial Statement Presentation

The accompanying consolidated financial statements have been prepared in accordance with ASC 852, and on a going-concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business.

Reorganization Items

Professional advisory fees and other costs directly associated with our reorganization are reported separately as reorganization items pursuant to ASC 852. Professional fees include legal fees undertaken as part of the reorganization process. The write-off of debt issuance costs and discounts related to debt generally represent one-time charges. Certain expenses incurred by non-debtors are paid by the Company and are reported as reorganization items. The reorganization items in the consolidated statement of operations for the three and nine months ended September 30, 2011 and 2010 consisted of the following items:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  

(in thousands)

   2011      2010      2011      2010  

Debtors reorganization items

           

Professional fees associated with bankruptcy proceedings

   $ 32       $ 35       $ 63       $ 892   

Related party incentive plan

     —           —           —           6,932   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debtors reorganization items

     32         35         63         7,824   

Non-Debtors reorganization items

           

Professional fees associated with bankruptcy proceedings

     10         9         11         749   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total reorganization items

   $ 42       $ 44       $ 74       $ 8,573   
  

 

 

    

 

 

    

 

 

    

 

 

 

Plan of Reorganization

On January 7, 2010, the Bankruptcy Court issued a confirmation order approving our Plan of Reorganization. The Plan of Reorganization contemplated the reorganization of the Company and the discharge of all outstanding claims against and interests in the Company. Pursuant to the Plan of Reorganization, as confirmed, each holder of an allowed priority claim received cash in an amount equal to such allowed claim. The secured claim arising from the Quest Diagnostics Credit Agreement and the Patent Security Agreement (the “secured line of credit”) was reinstated and unimpaired. Holders of the outstanding 4.50% Convertible Senior Notes (the”4.50% Notes”) received the payment of $2,195,000 of principal, the unpaid interest of $140,000 and 9,044 shares of common stock in exchange for their claims. $5,000,000 in principal of the outstanding 7.00% Convertible Senior Notes (the “7.00% Notes”) was reinstated. Holders of unpaid interest on previously converted 7.00% Notes received $362,000 in cash and 7,239 shares related to the unpaid interest of the 7.00% Notes. All holders of allowed general unsecured claims elected to receive cash and were entitled to be paid in full. The 7.00% Notes were due September 2011 and were paid in full upon maturity.

On January 22, 2010, the confirmation order issued by the Bankruptcy Court for approving our Plan of Reorganization became final and all conditions precedent to January 22, 2010 were satisfied or waived. Accordingly, we emerged from bankruptcy under Chapter 11 and reinstated our common stock, par value $0.001.

 

-5-


Although we have emerged from bankruptcy, the bankruptcy case will remain open until the following matters are resolved, which includes approval by the Bankruptcy Court:

 

   

Molecular Analytical Systems, Inc. Litigation (see Note 5);

 

   

Bio-Rad Laboratories, Inc. Matters (see Note 5);

 

   

$1,000,000 milestone under the Strategic Alliance Agreement with Quest Diagnostics (see Note 4); and

 

   

various pre-petition liability objections.

 

3.   RECENT ACCOUNTING PRONOUNCEMENTS

Fair Value Measurement – In April 2011, the FASB issued new guidance to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. This new guidance amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. The new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. We do not believe the adoption of the new guidance will have an impact on our consolidated financial position, results of operations or cash flows.

Comprehensive Income – In June 2011, the FASB issued new guidance on the presentation of comprehensive income. Specifically, the new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. We will adopt this pronouncement in the first quarter of 2012, and it will have no effect on our financial position or results of operations but it will impact the way we present comprehensive income.

 

4.   SECURED LINE OF CREDIT WITH QUEST DIAGNOSTICS INCORPORATED

On July 22, 2005, in connection with our Strategic Alliance Agreement with Quest Diagnostics, Quest Diagnostics provided us with a $10,000,000 secured line of credit, which was collateralized by certain of our intellectual property, used only for payment of certain costs and expenses directly related to developing and commercializing up to three diagnostic tests from our product pipeline (the “Strategic Alliance”). Under the terms of this secured line of credit, the interest rate is prime rate plus 0.5%, payable monthly. If, in the event of default on any principal or interest payment, the interest rate is increased to prime plus 2.0%. This secured line of credit also contains provisions for Quest Diagnostics to forgive portions of the amounts borrowed that correspond to our achievement of certain milestones related to development, regulatory approval and commercialization of certain diagnostic tests. The amounts to be forgiven and the corresponding milestones we must achieve are:

 

       (i) $1,000,000 for each application that allows a licensed laboratory test to be commercialized, with a maximum of three applications for $3,000,000;

 

       (ii) $3,000,000 for the earlier of the United States Food and Drug Administration (the “FDA”) clearance of the first diagnostic test kit or commercialization of the first diagnostic test kit; and

 

-6-


       (iii) $2,000,000 upon each FDA clearance of up to two subsequent diagnostic test kits but no later than the first commercialization of each such diagnostic test kit, with a maximum forgiveness of $4,000,000 for two diagnostic test kits.

If not otherwise forgiven, the principal amount outstanding and any unpaid interest of this secured line of credit will become due and payable on October 7, 2012.

We achieved the milestone for FDA clearance of the first diagnostic test kit when OVA1 was cleared by the FDA in September 2009. While we were under Chapter 11 bankruptcy protection, we had not paid accrued interest on the secured line of credit and were therefore in default. In January 2010, we emerged from bankruptcy and cured the default upon payment of accrued interest, and as a result of the cure, the principal on the secured line of credit was reduced by $3,000,000 to $7,000,000. The outstanding principal balance of this secured line of credit was $7,000,000 at September 30, 2011 and December 31, 2010. We are currently in discussions with Quest Diagnostics regarding the achievement of an additional $1,000,000 forgiveness milestone related to OVA1 under the terms of the Strategic Alliance Agreement.

 

5.   COMMITMENTS AND CONTINGENCIES

Under the terms of a research collaboration agreement with The Johns Hopkins University School of Medicine (“JHU”), we were required to pay JHU $600,000, $618,000 and $637,000 for the years ended December 31, 2008, 2009 and 2010, respectively. In June 2010, the research collaboration agreement was amended by extending the term and reducing the payments to $300,000 for 2010, $400,000 for 2011, $400,000 for 2012 and $100,000 for 2013. In conjunction with the amendment, JHU forgave the previously outstanding amounts owed of $623,000, which we recognize as a reduction to research and development expenses straight line over the term of the amended agreement. Collaboration expenses under the JHU collaboration were $67,000 and $176,000 for the three and nine months ended September 30, 2011, and $68,000 and $275,000 for the three and nine months ended September 30, 2010, respectively. Collaboration expenses under the JHU collaboration are included in research and development expenses. In addition, under the terms of the amended research collaboration agreement, we are required to pay the greater of 4% royalties on net sales of diagnostic tests using the assigned patents or annual minimum royalties of $52,500. The minimum royalty was increased from $50,000 per annum to $52,500 in July 2011 in a contract amendment that expanded our patent rights for ovarian cancer.

In June 2010, we entered into non-cancelable facility leases for facilities located in Austin, Texas through May 2012 and Mountain View, California through August 2012. The combined annual base rent for these facilities is $129,000 per year, prorated for partial years. In July 2010, we relocated our corporate headquarters from Fremont, California to Austin, Texas. The Fremont, California lease expired in August 2010.

Contingent Liabilities

Molecular Analytical Systems, Inc. Litigation

On July 9, 2007, Molecular Analytical Systems (“MAS”) filed a lawsuit in the Superior Court of California for the County of Santa Clara naming Vermillion and Bio-Rad as defendants (the “State Court lawsuit”). Under the State Court lawsuit, MAS sought an unspecified amount of damages and alleged, among other things, that we are in breach of a license agreement with MAS relating to the Surface Enhanced Laser Desorption/Ionization (“SELDI”) technology as a result of our entry into a sublicense agreement with Bio-Rad. We filed a petition to compel arbitration, which was denied in the trial court. We then filed our general denial and affirmative defenses on April 1, 2008. The Company and Bio-Rad thereafter appealed the denial of the motion to compel arbitration, which appeal had the effect of staying the State Court lawsuit, which stay was further extended in both the state trial and appellate courts when we filed a Voluntary Petition for Relief under Chapter 11 in the Bankruptcy Court on March 30, 2009. MAS filed a proof of claim on July 15, 2009, in connection with our Chapter 11 bankruptcy proceedings. The proof of claim mirrored the MAS lawsuit and asserted that we breached the Exclusive License Agreement by transferring certain technologies to Bio-Rad without obtaining MAS’s consent. MAS listed the value of its claim as in excess of $5,000,000. On December 28, 2009, we objected to MAS’s Proof of Claim in the Bankruptcy Court. On January 7, 2010, the Bankruptcy Court confirmed our Plan of Reorganization. Per the Court’s order confirming the Plan, our bankruptcy case will be closed when, along with other requirements, a final, non-appealable judgment is entered on MAS’s claims. After the Plan of Reorganization was confirmed, MAS filed a motion with the Bankruptcy Court asking it to abstain from hearing its proof of claim and asked the Bankruptcy Court to grant relief from the automatic stay so that MAS could proceed with the State Court lawsuit in California. Over our objection, the Bankruptcy Court granted that motion on March 15, 2010. Thereafter, the California Court of Appeal set oral argument on our appeal of the trial court order denying our motion to compel arbitration for June 17, 2010. The California Court of Appeals overturned the Superior Court’s decision in an opinion dated July 9, 2010, and ordered that the dispute be arbitrated before the Judicial Arbitration and Mediation Service (“JAMS”). MAS filed its demand for arbitration on September 15, 2010. The demand did not include any additional detail regarding MAS’s claims, and submitted the same complaint for unspecified damages that MAS filed in the Superior Court in 2007. The parties thereafter conducted discovery, and the arbitration hearing commenced on September 21, 2011. Both sides presented evidence over five hearing days, ending on October 4, 2011. The parties have agreed to complete post-hearing briefing by November 9, 2011 and will present closing arguments on November 11, 2011. We anticipate receiving a final ruling from the Arbitrator before the end of 2011. An unfavorable judgment against us could require us to pay monetary damages, including the possibility of punitive damages. Management does not believe an unfavorable outcome is probable, or even reasonably possible for which an amount or range of loss can be estimated such that would require an accrual or disclosure under ASC 450, contingencies; however, management cannot predict the ultimate outcome of this matter at this time.

 

-7-


Bio-Rad Laboratories, Inc. Matters

On November 13, 2006, we completed the Instrument Business Sale to Bio-Rad. The Instrument Business Sale included the SELDI technology, ProteinChip arrays and accompanying software. Pursuant to the terms of the sales agreement, the total sales price was $20,000,000, of which $16,000,000 was paid by Bio-Rad to us at the closing of the transaction on November 13, 2006. A total of $4,000,000 was held back from the sales proceeds contingent upon our meeting certain obligations, of which $2,000,000 was subsequently paid to us in fiscal 2007 upon the issuance by the United States Patent and Trademark Office of a reexamination certificate for United States Patent No. 6,734,022. From the amounts held back, the remaining $2,000,000, subject to certain adjustments, is being held in escrow to serve as security for us to fulfill certain obligations.

In connection with the Instrument Business Sale, we entered into a letter agreement with Bio-Rad pursuant to which we agreed to indemnify Bio-Rad and its subsidiaries with respect to certain payments made by Bio-Rad in connection with the termination of employees of its former subsidiary in the United Kingdom in the six-month period immediately following the Instrument Business Sale. On May 4, 2007, Bio-Rad delivered a claim for indemnification under the agreement for $307,000, which was paid out of the $2,000,000 held in escrow. In August 2009, Bio-Rad also filed a proof of claim in the bankruptcy case for indemnification of the MAS lawsuit. Management is disputing the MAS claim and cannot predict the ultimate outcome of this matter at this time.

In connection with the Instrument Business Sale, we also entered into a manufacture and supply agreement with Bio-Rad on November 13, 2006, whereby we agreed to purchase ProteinChip Systems and ProteinChip Arrays (collectively, the “Research Tools Products”) from Bio-Rad. Under the terms of the manufacture and supply agreement, we agreed to provide Bio-Rad quarterly, non-binding, twelve-month rolling forecasts setting forth our anticipated needs for Research Tools Products over the forecast period. We were permitted to provide revised forecasts as necessary to reflect changes in demand for the products, and Bio-Rad was required to use commercially reasonable efforts to supply amounts in excess of the applicable forecast. Either party was permitted to terminate the agreement for convenience upon 180 days’ prior written notice, or upon default if the other party failed to cure such default within 30 days after notice thereof. In a letter from us to Bio-Rad dated May 2, 2008, we exercised our right to terminate the November 13, 2006 manufacture and supply agreement for convenience upon 180 days’ written notice. Consequently, termination of the agreement became effective on October 29, 2008. In October 2009, Bio-Rad filed a proof of claim in our bankruptcy case based on certain contract claims for approximately $1,000,000. We are attempting to resolve the contract claims and have accrued for this contingency at September 30, 2011 and December 31, 2010. Management cannot predict the ultimate outcome of this matter at this time.

In addition, from time to time, the Company is involved in legal proceedings and regulatory proceedings arising out of our operations. We establish reserves for specific liabilities in connection with legal actions that we deem to be probable and estimable. Other than as disclosed above, we are not currently a party to any proceeding, the adverse outcome of which would have a material adverse effect on our financial position or results of operations.

 

6.   COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss as of September 30, 2011 and December 31, 2010 were as follows:

 

     September  30,
2011
    December  31,
2010
 

(in thousands)

    

Cumulative translation adjustment

   $ (152   $ (156
  

 

 

   

 

 

 
   $ (152   $ (156
  

 

 

   

 

 

 

 

-8-


Comprehensive loss for the three and nine months ended September 30, 2011 and 2010 was as follows:

 

     Three months ended September 30,     Nine months ended September 30,  

(in thousands)

   2011     2010     2011     2010  

Net loss

   $ (4,651   $ (2,736   $ (14,655   $ (15,020

Change in gain on long-term investments

     —          (58     —          (119

Foreign currency translation adjustment

     1        3        3        6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (4,650   $ (2,791   $ (14,652   $ (15,133
  

 

 

   

 

 

   

 

 

   

 

 

 

 

7.   EMPLOYEE BENEFITS PLANS

2010 Stock Option Plan

On February 8, 2010, our Board of Directors approved the Vermillion, Inc. 2010 Stock Incentive Plan (the “2010 Plan”). On December 3, 2010, the 2010 Plan was approved by our stockholders. The 2010 Plan is administered by the Compensation Committee of the Board. The Company’s employees, directors, and consultants are eligible to receive awards under the 2010 Plan. The 2010 Plan permits the granting of a variety of awards, including stock options, share appreciation rights, restricted shares, restricted share units, unrestricted shares, deferred share units, performance and cash-settled awards, and dividend equivalent rights. The 2010 Plan provides for issuance of up to 1,322,983 shares of common stock, par value $0.001 per share under the 2010 Plan, subject to adjustment as provided in the 2010 Plan.

Stock-Based Compensation

Employee Stock-based Compensation Expense

During the three months ended September 30, 2011, we did not grant any restricted share units to our executive officers. We granted 177,000 restricted share units to our executive officers during the nine months ended September 30, 2011 having a fair value of $724,000 and vesting on a quarterly basis over a three-year period beginning in March 2011. There was no restricted stock granted to our executive officers during the three and nine months ended September 30, 2010. We distributed 14,750 and 29,500 shares of common stock to our executive officers during the three and nine months ended September 30, 2011 per the terms of the restricted share unit grant.

On September 29, 2011, our Board of Directors approved the Company making income tax gross-up payments to our Chief Executive Officer in connection with the distribution of the 85,000 shares of restricted stock granted on March 18, 2011. A letter agreement to this effect was executed on October 3, 2011. We expensed approximately $19,000 related to this letter agreement during the three months ended September 30, 2011. A total of 14,166 of the 85,000 common shares have been distributed through September 30, 2011.

During the three and nine months ended September 30, 2011, we granted 9,495 and 97,295 restricted share units to our Board of Directors as compensation for their services during 2011. The March 2011 restricted stock grants of 87,800 shares have a fair value of $347,000 and vest 50% on June 1, 2011 and 25% each on September 1, 2011 and December 1, 2011. The September 2011 restricted stock grant of 9,495 shares has a fair value of $26,000 and vests on December 1, 2011. There was no restricted stock granted to our Board of Directors during the three and nine months ended September 30, 2010. We distributed 21,950 and 65,850 shares of common stock to our Board of Directors during the three and nine months ended September 30, 2011 per the terms of the restricted share unit grant.

There were no stock option grants during the three months ended September 30, 2011. We granted stock options to purchase 36,430 shares of common stock with an average exercise price of $4.30 during the nine months ended September 30, 2011. We granted stock options to purchase up to 49,500 and 195,500 shares of common stock with an average exercise price of $7.81 and $21.59 during the three and nine months ended September 30, 2010, respectively. The fair value of the stock options granted was valued on the date of grant using the Black-Scholes valuation model using the following average assumptions:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011      2010     2011     2010  

Dividend yield

     —           0     0     0

Volatility

     —           81     79     82

Risk-free interest rate

     —           1.97     2.01     2.37

Expected lives (years)

     —           5.7        5.7        5.6   

Weighted average fair value

     —         $ 5.34      $ 2.90      $ 14.95   

 

-9-


The allocation of employee stock-based compensation expense by functional area for the three and nine months ended September 30, 2011 and 2010, respectively, was as follows:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  

(in thousands)

   2011      2010      2011      2010  

Research and development

   $ 181       $ 283       $ 590       $ 750   

Sales and marketing

     40         26         122         46   

General and administrative

     211         929         2,264         2,447   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 432       $ 1,238       $ 2,976       $ 3,243   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-employee Stock-based Compensation Expense

We recognize stock-based compensation expense related to stock options granted to non-employees as the stock options are earned. As part of the bankruptcy case, certain former employees were converted into consultants whereby their existing stock options continued to vest, under the original terms of their stock option grants, as they provided consulting services to the Company. We amortize the values attributable to these options over the service period. The unvested portion of these options was re-measured at each vesting date. We believe that the fair value of the stock options is more reliably measurable than the fair value of the services received. There were no such options remaining outstanding at September 30, 2011. The fair value of the stock options granted were revalued using the Black-Scholes valuation model as prescribed by ASC 505, “Equity,” using the following average assumptions:

 

     Nine Months Ended
September 30, 2010
 

Dividend yield

     0

Volatility

     82

Risk-free interest rate

     3.19

Expected lives (years)

     7.81   

Weighted average fair value

   $ 14.44   

The stock-based compensation expense will fluctuate as the fair market value of the common stock fluctuates. There was no stock-based compensation expense for non-employees during the three and nine months ended September 30, 2011 or the three months ended September 30, 2010. In connection with stock options relating to non-employees, we recorded non-employee stock-based compensation allocated by functional area for the nine months ended September 30, 2010 as follows:

 

(in thousands)

   Nine Months Ended
September 30, 2010
 

Research and development

   $ 38   

Sales and marketing

     5   

General and administrative

     100   
  

 

 

 

Total

   $ 143   
  

 

 

 

 

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8.   COMMON STOCK

February 2011 Follow-on Public Offering

On February 18, 2011, we completed a sale of 4,000,000 shares of our common stock in an underwritten follow-on public offering at a price of $5.45 per share for $21,800,000 in gross proceeds. Net proceeds of the offering were approximately $20,200,000 after deducting underwriting discounts and expected offering expenses. Roth Capital Partners acted as the sole manager of the offering.

Common Stock Warrants

At September 30, 2011 and December 31, 2010, the Company had warrants outstanding to purchase 195,012 shares of common stock that are subject to fair value measurement on a recurring basis. These warrants expire in August 2012. The fair value of these common stock warrants for the three and nine months ended September 30, 2011 and 2010 was determined using a Black-Scholes valuation model with the following Level 3 inputs:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Dividend yield

     0     0     0     0

Volatility

     64     81     61     83

Risk-free interest rate

     0.12     0.40     0.29     0.80

Expected lives (years)

     0.92        1.92        1.17        2.17   

Weighted average fair value

   $ 0.02      $ 1.56      $ 0.19      $ 9.94   

For the three and nine months ended September 30, 2011, income relating to changes in fair value of the common stock warrant liabilities totaled $32,000 and $374,000, respectively. For the three and nine months ended September 30, 2010, income relating to changes in fair value of the common stock warrant liabilities totaled $980,000 and $4,204,000, respectively. No warrants were exercised during the three months and nine months ended September 30, 2011. As a result of warrant exercises, we recognized total gains of none and $223,000 for the three and nine months ended September 30, 2010, respectively. Warrant liabilities at September 30, 2011 are included in accrued liabilities. The following table is a reconciliation of the warrant liability measured at fair value using Level 3 inputs for the three and nine months ended September 30, 2011 and 2010:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(in thousands)

   2011     2010     2011     2010  

Balance at beginning of period

   $ 36      $ 1,284      $ 378      $ 5,659   

Change in fair value of common stock warrants

     (32     (980     (374     —     

Issuance of common stock from warrant exercise

     —          —          —          (4,204

Reclassification of warrant fair value to equity upon exercise and issuance of common stock

     —          —          —          (1,151
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 4      $ 304      $ 4      $ 304   
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth the Company’s financial liabilities, related to common stock warrants issued in the August 29, 2007 private placement, subject to fair value measurements as of September 30, 2011:

 

            Fair Value Measurements at Reporting Date Using  

(in thousands)

   Total  Fair
Value
     Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
           

Liabilities:

           

Common stock warrants

   $ 4       $ —         $ —         $ 4   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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9.   LOSS PER SHARE

We calculate basic loss per share using the weighted average number of common shares outstanding during the period. Because we are in a net loss position, diluted loss per share is calculated using the weighted average number of common shares outstanding and excludes the effects of 1,205,078 and 1,630,095 potential common shares as of September 30, 2011 and 2010, respectively, that are antidilutive. Potential common shares include common shares issuable upon conversion of all convertible senior notes, incremental shares of common stock issuable upon the exercise of outstanding stock options, common stock warrants and restricted stock awards.

 

10.   RELATED PARTY TRANSACTIONS

Consulting Agreements

On June 17, 2011, we entered into a consulting agreement with Bruce A. Huebner, a member of our Board of Directors. Pursuant to the terms of the consulting agreement, Mr. Huebner is retained as an independent contractor to perform certain consulting services relating to sales, marketing, business development and corporate strategy for us. For the three and nine months ended September 30, 2011, we incurred $6,000 and $8,000 in general and administrative expenses under the consultant arrangement, respectively.

On March 26, 2009, we entered into a consulting agreement with our former Chief Executive Officer and current Director. For the three and nine months ended September 30, 2010, we incurred none and $24,000 in general and administrative expenses under the consultant arrangement. On February 1, 2010, this consulting agreement was terminated when we re-hired our Chief Executive Officer.

On September 14, 2009, we entered into a consulting agreement with our former Vice President and Chief Science Officer. For the three and nine months ended September 30, 2010, we incurred none and $14,272 in research and development expenses under the consulting arrangement. On February 1, 2010, this consulting agreement was terminated when we re-hired our Senior Vice President and Chief Science Officer. Effective October 11, 2011, this individual was named our Senior Vice President and Chief Medical Officer.

On November 2, 2011, the Company entered into a consulting agreement with our Senior Vice President and Chief Medical Officer, effective on November 4, 2011. Pursuant to the terms of the consulting agreement, this individual will continue to serve as the Company’s Chief Medical Officer and a member of the Company’s Scientific Advisory Board.

Quest Diagnostics

Quest Diagnostics is a significant stockholder and the holder of our Secured Line of Credit (see Note 4). Accounts receivable from Quest Diagnostics under the Strategic Alliance Agreement totaled $110,000 and $121,000 at September 30, 2011 and December 31, 2010, respectively.

Debtor’s Incentive Plan

In connection with the Bankruptcy Filing, on April 21, 2009, the Company filed the Debtor’s Motion for Entry of an Order Approving the Debtor’s Incentive Plan (the “Incentive Plan”) and Authorizing Payments thereunder pursuant to §§ 363(b) and 503(b) of the Bankruptcy Code (the “Incentive Plan Motion”) which sought to provide proper incentives to the Directors (Gail Page, John Hamilton and James Burns, collectively, the “Directors”) to help achieve a successful restructuring of the Company. Under the final terms of the Incentive Plan, the Company was directed to distribute an aggregate of $5,000,000 in cash and 302,541 shares of restricted stock having a fair value of $6,626,000 in Incentive Plan Payments to the Directors. All such restricted stock was to be distributed, with 1/24th of it vesting on each monthly anniversary of the vesting commencement date, June 22, 2009. The liability was accounted for upon the occurrence of the qualified transaction on January 7, 2010 when the Bankruptcy Court issued a confirmation order approving the Company’s Reorganization Plan. Accordingly, the Company recorded a charge of none and $1,656,000 for the three and nine months ended September 30, 2011, respectively. The Company recorded a charge of $828,000 and $9,141,000 for the three and nine months ended September 30, 2010, respectively. The expense for the three and nine months ended September 30, 2011 was recorded in general and administrative expenses. For the nine months ended September 30, 2010, the Company incurred $9,141,000 under the terms of the Incentive Plan, of which $6,932,000 was recorded in Reorganization Items for the period prior to emerging out of bankruptcy and $2,209,000 was recorded in general and administrative expenses for the period subsequent to emerging out of bankruptcy. In April 2010, the Company distributed an aggregate of $5,000,000 in cash to the Directors. As of September 30, 2011, all 302,541 shares of common stock were distributed to the Directors under the Incentive Plan.

 

11.   SUBSEQUENT EVENTS

        On November 8, 2011, we entered into an asset purchase agreement with Correlogic Systems, Inc. (“Correlogic”), pursuant to which, subject to the satisfaction of certain conditions, we have agreed to pay to Correlogic $435,000 and purchase from Correlogic substantially all of its assets, including, without limitation, certain documents, diagnostic samples and intellectual property owned by and licensed to Correlogic in connection with Correlogic’s ovarian cancer diagnostics business, including a diagnostic test under the name “OvaCheck2” for the detection of ovarian cancer. The assets will be acquired under Sections 105 and 363 of the Chapter 11 of the U.S. Bankruptcy Code. The completion of the asset acquisition is subject to the satisfaction of customary closing conditions, as well as approval of the transaction and the asset purchase agreement by the United States Bankruptcy Court for the District of Maryland and the Court’s confirmation and clarification of the rights of Quest Diagnostics and Laboratory Corporation of America Holdings to certain of Correlogic’s assets pursuant to Section 365(n) of Chapter 11 of the U.S. Bankruptcy Code.

 

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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

The Company has made statements in this Quarterly Report on Form 10-Q that are deemed forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. The Company claims the protection of such safe harbor, and disclaims any intent or obligation to update any forward-looking statement. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “could,” “should” and “continue” or the negative of such terms or other similar words. These forward-looking statements may also use different phrases. The Company has based these forward-looking statements on management’s (“we”, “us” or “our”) current expectations and projections about future events. Examples of forward-looking statements include the following statements:

 

   

projections of our future revenue, results of operations and financial condition;

 

   

anticipated efficacy of our products, product development activities and product innovations;

 

   

competition and consolidation in the markets in which we compete;

 

   

existing and future collaborations and partnerships;

 

   

the utility of biomarker discoveries;

 

   

our belief that biomarker discoveries may have diagnostic and/or therapeutic utility;

 

   

the confirmation of our top-line data from our PAD intended use study as data analysis proceeds;

 

   

our plans to develop and commercialize diagnostic tests through our strategic alliance with Quest Diagnostics;

 

   

our ability to comply with applicable government regulations;

 

   

our ability to expand and protect our intellectual property portfolio;

 

   

anticipated future losses;

 

   

expected levels of expenditures;

 

   

expected market adoption of our diagnostic tests, including OVA1;

 

   

our ability to obtain reimbursement for our diagnostic tests, including OVA1;

 

   

forgiveness of the outstanding principal amounts of the secured line of credit by Quest Diagnostics;

 

   

accounting treatment of revenue from our agreement with Quest Diagnostics;

 

   

the period of time for which our existing financial resources, debt facilities and interest income will be sufficient to enable us to maintain current and planned operations; and

 

   

market risk of our investments.

These statements are subject to significant risks and uncertainties, including those identified in Part II Item 1A, “Risk Factors”, that could cause actual results to differ materially from those projected in such forward-looking statements due to various factors, including our ability to generate sales after completing development of new diagnostic products; our ability to manage the Company’s operating expenses and cash resources that is consistent with our plans; our ability to secure adequate funds on acceptable terms to execute our business plan; our ability to develop and commercialize diagnostic products using both our internal and external research and development resources; our ability to obtain market acceptance of OVA1 or future diagnostic products, including the risk that our products will not be competitive with products offered by other companies, or that users will not be entitled to receive adequate reimbursement for our products from third party payers such as private insurance companies and government insurance plans; our ability to successfully license or otherwise successfully partner with third parties to commercialize our products; our ability to obtain any regulatory approval for our future diagnostic products; and our ability to protect and promote our proprietary technologies. We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to accurately predict or that we do not fully control that could cause actual results to differ materially from those expressed or implied in the Company’s forward-looking statements.

 

-13-


Overview

We are dedicated to the development and commercialization of novel high-value diagnostic tests that help physicians diagnose, treat and improve outcomes for patients. Our tests are intended to help guide decisions regarding patient treatment, which may include decisions to refer patients to specialists, to perform additional testing, or to assist in the selection of therapy. A distinctive feature of our approach is to combine multiple markers into a single, reportable index score that has higher diagnostic accuracy than its constituents have.

Management (“we”, “us” or “our”) concentrates its development of novel diagnostic tests in the fields of oncology, cardiology and women’s health, with the initial focus on ovarian cancer. We also intend to address clinical questions related to early disease detection, treatment response, monitoring of disease progression, prognosis and others through collaborations with leading academic and research institutions and through our strategic alliance agreement with Quest Diagnostics.

On March 30, 2009, we filed for relief under the Chapter 11 of the Bankruptcy Code. We emerged from bankruptcy protection on January 22, 2010, pursuant to the terms of a January 5, 2010 order entered by the Bankruptcy court approving our Second Amended Plan of Reorganization under Chapter 11.

Our lead product, OVA1, was cleared by the FDA on September 11, 2009 and is currently being offered by Quest Diagnostics. OVA1 addresses a clear unmet clinical need, namely the pre-surgical identification of women who are at high risk of having a malignant ovarian tumor. Numerous studies have documented the benefit of referral of these women to gynecologic oncologists for their initial surgery. Prior to the clearance of OVA1, no blood test had been cleared by the FDA for physicians to use in the pre-surgical management of ovarian adnexal masses. OVA1 is a qualitative serum test that utilizes five well-established biomarkers and proprietary FDA-cleared software to determine the likelihood of malignancy in women over age 18 with a pelvic mass for whom surgery is planned.

OVA1 was developed through large pre-clinical studies in collaboration with numerous academic medical centers encompassing over 2,500 clinical samples. OVA1 was fully validated in a prospective multi-center clinical trial encompassing 27 sites reflective of the diverse nature of the clinical centers at which ovarian adnexal masses are evaluated. The results of the clinical trial demonstrated that among non-gynecologic oncologists, OVA1, in conjunction with clinical evaluation, was able to identify 91.7% of the malignant ovarian tumors and to rule out malignancy (negative predictive value, NPV) with 93.2% certainty. Data were presented at the 2010 International Gynecologic Cancer Society Meeting demonstrating the high sensitivity of OVA1 for epithelial ovarian cancers; overall OVA1 detected 95/96 epithelial ovarian cancer cases for a sensitivity of 99.0%, including 40/41 stage I and stage II epithelial ovarian cancers, for an overall sensitivity of 97.6% for early stage epithelial ovarian cancers, as compared to 65.9% for CA125 using the American College of Obstetricians and Gynecologists (“ACOG”) cutoffs. The improvement in sensitivity was even greater among premenopausal women; for OVA1, sensitivity for early stage epithelial ovarian cancer was 92.9% and for CA125, sensitivity was 35.7%. Overall, OVA1 detected 76% of malignancies missed by CA125, including all advanced stage malignancies. OVA1 is not indicated for use as a screening or stand-alone diagnostic assay. In June 2011, two peer review articles were published in Obstetrics & Gynecology, which is the official publication of the ACOG, showing OVA1’s value in evaluating women with an adnexal mass for the likelihood of ovarian cancer prior to surgery. The papers demonstrated that adding OVA1 to a physician’s preoperative assessment of a woman’s ovarian mass would identify more ovarian cancers than a physician’s preoperative assessment alone.

The Medicare contractor Highmark Medicare Services has been covering OVA1 in its reimbursement program since March 2010. Also, 22 independent BCBS plans, representing approximately 36.0 million lives, are currently covering OVA1. Including Medicare and other regional plans, we believe total coverage for OVA1 is approximately 82.5 million lives.

Under the terms of our Strategic Alliance Agreement with Quest Diagnostics, as amended, Quest Diagnostics is required to pay us a fixed payment of $50 per OVA1 performed, as well as 33% of its “gross margin” from revenue from performing OVA1 domestically, as that term is defined in the Strategic Alliance Agreement as amended. Quest Diagnostics is the exclusive clinical laboratory provider of OVA1 in its exclusive territory, which includes the US, Mexico, the United Kingdom and India through September 11, 2014. OVA1 was CE marked in September 2010, a requirement for marketing the test in the European Union. OVA1 was launched in India in May 2011. Quest Diagnostics has the right to extend the exclusivity period for an additional year beyond September 11, 2014 on the same terms and conditions.

 

-14-


On August 1, 2011, we entered into the Pronto Agreement with Pronto Diagnostics. Pursuant to the Pronto Agreement, Pronto Diagnostics will have the exclusive right to distribute OVA1 in Israel and areas under Palestinian control for a certain period of time as specified in the Pronto Agreement, provided that Pronto Diagnostics will sell certain minimum quantities of OVA1 to maintain the exclusive distribution rights. The Pronto Agreement also establishes the amounts that Pronto Diagnostics will pay to us with respect of OVA1. This supports our goal of expanding OVA1 into international markets.

In addition to OVA1, we have development programs in other clinical aspects of ovarian cancer as well as in peripheral arterial disease (“PAD”). In the field of PAD, we have identified candidate biomarkers that may help to identify individuals at high risk for a decreased ankle-brachial index score, which is indicative of the likely presence of PAD. We have initiated an intended-use study to establish and validate a multi-marker algorithm for the assessment of individuals at risk for PAD.

Current and former academic and research institutions that we have or have had collaborations with include the Johns Hopkins University School of Medicine; the University of Texas M.D. Anderson Cancer Center; University College London; the University of Texas Medical Branch; the Katholieke Universiteit Leuven; Clinic of Gynecology and Clinic of Oncology, Rigshospitalet, Copenhagen University Hospital; the Ohio State University Research Foundation; Stanford University; and the University of Kentucky.

On September 6, 2011, we announced that the United States Patent and Trademark Office (“USPTO”) has issued patent number 8,014,952 entitled “Serum Biomarkers in Lung Cancer” to the Company.

On September 14, 2011, we announced the presentation of data by Fred Ueland, M.D., Associate Professor of Gynecologic Oncology at the University of Kentucky’s Markey Cancer Center, and principal investigator of the multi-center OVA1 clinical trial, demonstrating the improvement in sensitivity when using imaging in conjunction with OVA1. The key finding from Dr. Ueland’s presentation at the 17th Annual European Society of Gynecologic Oncology meeting held in Milan from September 11th to 14th, 2011 is that OVA1, when combined with imaging, achieved 98.1% sensitivity for all types of ovarian cancers and obtained a negative predictive value of 96.3%. A higher OVA1 score also correlated with an increasing risk of ovarian malignancy.

On September 26, 2011, we announced the appointment of Donald Munroe, Ph.D. as Chief Scientific Officer and Vice President of Research and Development. In this role, Dr. Munroe will support OVA1 with clinical and technical collaborations as well as Quality and Regulatory responsibilities. In addition, Dr. Munroe will be responsible for furthering development of our two pipeline products, OVA2TM and VASCLIR®. Specifically, he will continue the preclinical studies and initiate appropriate clinical studies for registration of these products. As part of his role, he will identify and establish appropriate platform partnerships for the commercialization of these potential products. In conjunction with Dr. Munroe’s hiring, Eric T. Fung, MD, Ph.D. became Chief Medical Officer. Dr. Fung will focus on our OVA1 commercialization efforts, including providing ongoing medical support for Vermillion and Quest Diagnostics, assisting in obtaining reimbursement through payer meetings and post-marketing studies, and accelerating OVA1 international expansion. Additionally, Dr. Fung will provide medical support for the development of our two pipeline products. These changes were effective as of October 11, 2011.

On October 3, 2011, we announced positive top-line results from the intended use study of our PAD blood test, VASCLIR. The goals of the study were to validate the markers described in earlier publications (Circulation, 2007 and Vascular Medicine, 2008) and to develop and validate a biomarker panel applicable to the intended use population.

Key takeaways from the study include the following:

 

   

The individual biomarkers beta 2 microglobulin (b2m), cystatin C, and hsCRP (high sensitivity c-reactive protein), each has statistically significant different levels between PAD subjects and non-PAD subjects (p<.001).

 

   

As in the previous study, these biomarkers also showed correlation to the ankle-brachial index (ABI), each with p<.001.

 

   

Preliminary assessment of candidate biomarker panels derived in the intended use population demonstrated an odds-ratio of approximately seven.

 

-15-


The intended use study was a prospective, double-blinded multi-center study of approximately 1,000 subjects who met specific inclusion criteria for being at increased risk of having PAD, including smokers and diabetics age 50 or above and elderly age 70 or above. The study was conducted in conjunction with CPC Clinical Research, led by William R. Hiatt, MD, who is currently the Novartis Foundation endowed professor for cardiovascular research in the Department of Medicine, University of Colorado School of Medicine appointed in cardiology and a clinical focus in vascular medicine.

On September 29, 2011, our Board of Directors determined that it was appropriate for the Company to separate the role of Chairman of the Board from the role of Chief Executive Officer. To this end, Gail S. Page resigned her role as Chairman of the Board and the Board elected James S. Burns as Chairman of the Board. Mr. Burns has been a director of the Board since 2005. Ms. Page will continue in her role as President and Chief Executive Officer of the Company and as a member of the Board.

On September 29, 2011, the Board granted 9,495 restricted stock units (“RSU’s”) to Bruce Huebner for his service as a director of the Board starting on May 17, 2011. The RSUs granted to Mr. Huebner will vest on December 1, 2011. The Board also approved the Company making tax gross-up payments to Ms. Page in connection with the distribution of the 85,000 RSU’s granted to her on March 18, 2011. A letter agreement to this effect was executed on October 3, 2011.

On October 5, 2011, Sandra A. Gardiner announced her resignation as our Vice President and Chief Financial Officer, effective October 21, 2011. Ms. Gardiner accepted an employment opportunity in the San Francisco Bay Area and her resignation was not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. In conjunction with Ms. Gardiner’s resignation, Eric Schoen was appointed as our Chief Accounting Officer effective October 6, 2011.

On November 2, 2011, the Company entered into a consulting agreement with Eric T. Fung, M.D., Ph.D., effective on November 4, 2011. Pursuant to the terms of the consulting agreement, Dr. Fung will continue to serve as the Company’s Chief Medical Officer and a member of the Company’s Scientific Advisory Board. In lieu of Dr. Fung’s prior compensation, the Company will pay Dr. Fung on an hourly basis at the rate of $145. The Company will also pay Dr. Fung at the rate of $2,500 per quarter for services provided by him as a member of the Company’s Scientific Advisory Board.

Dr. Fung’s existing stock options and restricted stock units will continue to vest in accordance with the terms of the respective stock option and restricted stock unit agreements. The consulting agreement entered into between Dr. Fung and the Company is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.

On November 3, 2011, we announced the receipt of a notice of allowance from the USPTO for our fifth patent covering a combination of biomarkers that could be used in the diagnosis of PAD, a condition that raises the risk of heart attack and stroke. The patent, entitled “Beta-2 Microglobulin (B2m) and C Reactive Protein (CRP) as Biomarkers for Peripheral Artery Disease,” involves a unique combination of B2m and CRP, two proteins that have been demonstrated in numerous studies to be associated with PAD.

On November 8, 2011, we entered into an asset purchase agreement with Correlogic Systems, Inc. (“Correlogic”), pursuant to which, subject to the satisfaction of certain conditions, we have agreed to pay to Correlogic $435,000 and purchase from Correlogic substantially all of its assets, including, without limitation, certain documents, diagnostic samples and intellectual property owned by and licensed to Correlogic in connection with Correlogic’s ovarian cancer diagnostics business, including a diagnostic test under the name “OvaCheck2” for the detection of ovarian cancer. The assets will be acquired under Sections 105 and 363 of the Chapter 11 of the U.S. Bankruptcy Code. The completion of the asset acquisition is subject to the satisfaction of customary closing conditions, as well as approval of the transaction and the asset purchase agreement by the United States Bankruptcy Court for the District of Maryland and the Court’s confirmation and clarification of the rights of Quest Diagnostics and Laboratory Corporation of America Holdings to certain of Correlogic’s assets pursuant to Section 365(n) of Chapter 11 of the U.S. Bankruptcy Code.

Critical Accounting Policies and Significant Estimates

We have made no significant changes in our critical accounting policies and significant estimates from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed with the SEC on February 28, 2011.

Recent Accounting Pronouncements

Fair Value Measurement – In April 2011, the FASB issued new guidance to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. This new guidance amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. The new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. We do not believe the adoption of the new guidance will have an impact on our consolidated financial position, results of operations or cash flows.

 

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Comprehensive Income – In June 2011, the FASB issued new guidance on the presentation of comprehensive income. Specifically, the new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. We will adopt this pronouncement in the first quarter of 2012, and it will have no effect on our financial position or results of operations but it will impact the way we present comprehensive income.

Results of Operations—Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010

The selected summary financial and operating data of Vermillion for the three months ended September 30, 2011 and 2010 were as follows:

 

      Three Months Ended September 30,     Increase (Decrease)  

(dollars in thousands)

   2011     2010     Amount     %  

Revenue:

        

Product

   $ 206      $ 114      $ 92        81   

License

     114        299        (185     (62
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     320        413        (93     (23
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

        

Product

     26        13        13        100   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     26        13        13        100   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     294        400        (106     (27

Operating expenses:

        

Research and development

     1,370        1,111        259        23   

Sales and marketing

     1,499        1,025        474        46   

General and administrative

     1,952        1,864        88        5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     4,821        4,000        821        21   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (4,527     (3,600     (927     26   

Interest income

     18        12        6        50   

Interest expense

     (100     (117     17        (15

Change in fair value and gain from exercise of warrants, net

     32        980        (948     (97

Reorganization items

     (42     (44     2        (5

Other income (expense), net

     (32     33        (65     (197
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (4,651     (2,736     (1,915     70   

Income tax benefit (expense)

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (4,651   $ (2,736   $ (1,915     70   
  

 

 

   

 

 

   

 

 

   

 

 

 

Product Revenue. Product revenue was $206,000 for the three months ended September 30, 2011 compared to $114,000 for the same period in 2010. We recognized product revenue for the three months ended September 30, 2011 for the sale of OVA1 through Quest Diagnostics. Quest Diagnostics performed approximately 4,108 OVA1 tests during the three months ended September 30, 2011 compared to approximately 1,250 tests for the same period in 2010. We commercially launched OVA1 on March 9, 2010. Product revenue increased $92,000 for the three months ended September 30, 2011 compared to the same period in 2010 due to the increased volume of tests. The timing of revenue recognition for the payments associated with the increased number of tests was impacted by the November 10, 2010 Amendment No. 4 to the Strategic Alliance Agreement with Quest Diagnostics (“Quest Amendment No. 4”). Product revenue for the three months ended September 30, 2011 was derived solely from domestic sales of OVA1.

 

-17-


License Revenue. License revenue was $114,000 for the three months ended September 30, 2011 compared to $299,000 for the same period in 2010. Under the terms of our secured line of credit with Quest Diagnostics, $3,000,000 principal was forgiven upon the achievement of FDA clearance of OVA1. This amount is recognized as license revenue straight-lined over the period of sales exclusivity Quest Diagnostics received beginning on OVA1’s commercialization date of March 9, 2010. License revenue decreased $185,000, or 62%, for the three months ended September 30, 2011 compared to the same period in 2010 due to the extension of the term of exclusivity for up to three additional years in Quest Amendment No. 4. The balance of the $3,000,000 forgiven will be recognized over the revised period of exclusivity.

Product Cost of Revenue. Cost of product revenue includes royalties on net sales paid to JHU, as well as sample acquisition and lot qualification costs related to the testing of reagent lots for the assays included in OVA1 to ensure they meet the specifications required for inclusion. Product cost of revenue totaled $26,000 for the three months ended September 30, 2011 compared to $13,000 in the same period in 2010 due to increased sample acquisition and lot qualification costs related to increased OVA1 sales volume requiring more frequent lot qualification.

Research and Development Expenses. Research and development expenses represent costs incurred to develop our technology and carry out clinical studies, and include personnel-related expenses, regulatory costs, reagents and supplies used in research and development laboratory work, infrastructure expenses, including allocated facility occupancy and information technology costs, contract services and other outside costs. Research and development expenses also include costs related to activities performed under contracts with our collaborators and strategic partners. Research and development expenses increased by $259,000, or 23%, for the three months ended September 30, 2011 compared to the same period in 2010. This increase was due primarily to a $701,000 increase in clinical trial and collaboration costs for the ongoing development of our ovarian cancer program and our PAD blood test, VASCLIR, partially offset by a decrease in stock compensation costs of $102,000 and lower salary and bonus costs of $142,000 compared to the same period in 2010.

Sales and Marketing Expenses. Our sales and marketing expenses consist primarily of personnel-related expenses, education and promotional expenses, and infrastructure expenses, including allocated facility occupancy and information technology costs. These expenses include the costs of educating physicians, laboratory personnel and other healthcare professionals regarding OVA1. Sales and marketing expenses also include the costs of sponsoring continuing medical education, medical meeting participation and dissemination of scientific and health economic publications. Our personnel-related expenses include the cost of our Territory Development Managers, the subject matter experts responsible for market development and the coordination of interactions with the Quest Diagnostics’ sales team. Sales and marketing expenses increased by $474,000, or 46%, for the three months ended September 30, 2011 compared to the same period in 2010. The increase was primarily due to a $353,000 increase in personnel and personnel-related expenses, reflecting a full quarter of expense for five sales and marketing related personnel added during the three month period ended September 30, 2010 plus the addition of three such personnel subsequent to September 30, 2010 bringing the total to 18 at September 30, 2011.

General and Administrative Expenses. General and administrative expenses consist primarily of personnel-related expenses, professional fees and other costs, including legal, finance and accounting expenses and other infrastructure expenses, including allocated facility occupancy and information technology costs. General and administrative expenses increased by $88,000, or 5%, for the three months ended September 30, 2011 compared to the same period in 2010. General and administrative expenses for the three months ended September 30, 2011 included an $824,000 increase in legal fees due primarily to costs of the MAS arbitration. In addition, personnel and personnel-related expenses increased $100,000 due to additional headcount compared to the prior year. These increases were partially offset by a decrease in stock compensation expenses of $718,000 as all Incentive Plan costs were fully amortized in the prior quarter.

Change in fair value and gain from exercise of warrants, net. The change in fair value and gain from exercise of warrants was $32,000 for the three months ended September 30, 2011 compared to $980,000 for the three months ended September 30, 2010. The decrease of $948,000 for the three months ended September 30, 2011 compared to the same period in 2010 was primarily due to the relative decrease in the Company’s stock price during the respective three month periods.

 

-18-


Results of Operations—Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

The selected summary financial and operating data of Vermillion for the nine months ended September 30, 2011 and 2010 were as follows:

 

      Nine Months Ended September 30,     Increase (Decrease)  

(dollars in thousands)

   2011     2010     Amount     %  

Revenue:

        

Product

   $ 714      $ 159      $ 555        349   

License

     341        671        (330     (49
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     1,055        830        225        27   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

        

Product

     105        25        80        320   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     105        25        80        320   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     950        805        145        18   

Operating expenses:

        

Research and development

     4,219        2,797        1,422        51   

Sales and marketing

     4,320        1,751        2,569        147   

General and administrative

     6,982        6,604        378        6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     15,521        11,152        4,369        39   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (14,571     (10,347     (4,224     41   

Interest income

     55        25        30        120   

Interest expense

     (330     (375     45        (12

Change in fair value and gain from exercise of warrants, net

     374        4,427        (4,053     (92

Debt conversion costs

     —          (141     141        —     

Reorganization items

     (74     (1,641     1,567        (95

Reorganization items—related party incentive plan

     —          (6,932     6,932        —     

Other income (expense), net

     (109     (36     (73     203   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (14,655     (15,020     365        (2

Income tax benefit (expense)

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (14,655   $ (15,020   $ 365        (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Product Revenue. Product revenue was $714,000 for the nine months ended September 30, 2011 compared to $159,000 for the same period in 2010. The Company performed approximately 11,108 OVA1 tests during the nine months ended September 30, 2011 compared to approximately 1,592 for the same period in 2010. Product revenue increased $555,000 for the nine months ended September 30, 2011 compared to the same period in 2010 due to the increased volume of tests as well as the recognition of $160,000 of deferred revenue upon meeting the criteria for revenue recognition.

License Revenue. License revenue was $341,000 for the nine months ended September 30, 2011 compared to $671,000 for the same period in 2010. Under the terms of our secured line of credit with Quest, $3,000,000 principal was forgiven upon the achievement of FDA clearance of OVA1. This amount is recognized as license revenue straight-lined over the period of sales exclusivity Quest Diagnostics received beginning on OVA1’s commercialization date of March 9, 2010. License revenue decreased $330,000, or 49%, for the nine months ended September 30, 2011 compared to the same period in 2010 due to the extension of the term of exclusivity for up to three additional years in Quest Amendment No. 4. The balance of the $3,000,000 forgiven is being recognized over the revised period of exclusivity.

Product Cost of Revenue. Cost of product revenue includes royalties on net sales paid to JHU, as well as sample acquisition and lot qualification costs related to the testing of reagent lots for the assays included in OVA1 to ensure they meet the specifications required for inclusion. Product cost of revenue was $105,000 for the nine months ended September 30, 2011 compared to $25,000 for the same period in 2010 due to increased sample acquisition and lot qualification costs as a result of the increased testing volume.

 

-19-


Research and Development Expenses. Research and development expenses represent costs incurred to develop our technology and carry out clinical studies, and include personnel-related expenses, regulatory costs, reagents and supplies used in research and development laboratory work, infrastructure expenses, including allocated facility occupancy and information technology costs, contract services and other outside costs. Research and development expenses also include costs related to activities performed under contracts with our collaborators and strategic partners. Research and development expenses increased by $1,422,000 or 51%, for the nine months ended September 30, 2011 compared to the same period in 2010. This increase was due primarily to a $2,056,000 increase in clinical trial and collaboration costs for the ongoing development of our ovarian cancer program and our PAD blood test, VASCLIR, partially offset by decreases in stock-based compensation expense, depreciation expense, and losses on disposal of property and equipment compared to the same period in 2010.

Sales and Marketing Expenses. Our sales and marketing expenses consist primarily of personnel-related expenses, education and promotional expenses, and infrastructure expenses, including allocated facility occupancy and information technology costs. These expenses include the costs of educating physicians, laboratory personnel and other healthcare professionals regarding OVA1. Sales and marketing expenses also include the costs of sponsoring continuing medical education, medical meeting participation and dissemination of scientific and health economic publications. Our personnel-related expenses include the cost of our Territory Development Managers, the subject matter experts responsible for market development and the coordination of interactions with the Quest Diagnostics’ sales team. Sales and marketing expenses increased by $2,569,000, or 147%, for the nine months ended September 30, 2011 compared to the same period in 2010. The increase was primarily due to a $1,790,000 increase in personnel and personnel-related expenses, reflecting 18 sales and marketing related personnel at September 30, 2011 whereas we were building our Territory Development Manager team during the nine months ended September 30, 2010. Trade show, advertising and marketing expenses also increased $427,000 related to the continuing cost of OVA1 promotion and education.

General and Administrative Expenses. General and administrative expenses consist primarily of personnel-related expenses, professional fees and other costs, including legal, finance and accounting expenses and other infrastructure expenses, including allocated facility occupancy and information technology costs. General and administrative expenses increased by $378,000, or 6%, for the nine months ended September 30, 2011 compared to the same period in 2010. General and administrative expenses for the nine months ended September 30, 2011 included increases in legal fees due to the MAS litigation, personnel and personnel-related expenses due to additional headcount compared to the prior year, and annual meeting costs incurred in the current period versus the fourth quarter of 2010. The increases were offset by decreases in stock compensation expense as Incentive Plan costs were fully amortized in the prior quarter as well as decreases in audit and tax fees incurred compared to the same period 2010 due to the substantial effort to bring current all periodic reports required by the Securities and Exchange Act of 1934 following emergence from bankruptcy.

Change in fair value and gain from exercise of warrants. The change in fair value and gain from exercise of warrants was $374,000 for the nine months ended September 30, 2011 compared to $4,427,000 for the nine months ended September 30, 2010. The decrease of $4,053,000 for the nine months ended September 30, 2011 compared to the same period in 2010 was primarily due to the relative decrease in the Company’s stock price during the respective nine month periods.

Reorganization items. Reorganization items for the nine months ended September 30, 2011 totaled $74,000 compared to $1,641,000 for the same period in 2010. Reorganization items include professional advisory fees and other costs directly associated with our Chapter 11 bankruptcy activities. The activities were largely completed during 2010 resulting in lower expenses during the nine months ended September 30, 2011.

Reorganization items—related party incentive plan. All Incentive Plan expenses during 2011 were included in general and administrative expense. Reorganization items for the nine months ended September 30, 2010 amounted to $6,932,000 and were recorded as Reorganization items-related party incentive plan prior to our emergence from bankruptcy in 2010.

 

-20-


Liquidity and Capital Resources

We have experienced significant cumulative operating losses since inception and, as of September 30, 2011, we had an accumulated deficit of $313,164,000.

On March 9, 2010, we commercially launched OVA1. We will continue to expend substantial resources in the selling and marketing of OVA1, researching and developing additional diagnostic tests, obtaining FDA clearance, and commercializing those products. We will continue to be in an accumulated deficit position unless sufficient revenues can be generated to offset expenses. On February 18, 2011, we completed an underwritten follow-on public offering of our common stock for $21,800,000 in gross proceeds. Net proceeds of the offering were approximately $20,200,000 after deducting underwriting discounts and expected offering expenses. Our $5,000,000 of outstanding 7.00% Notes due in September 2011 were paid in full. We believe that our existing cash and cash equivalents will be sufficient to meet our cash requirements for at least the next twelve months.

The successful achievement of our business objectives may require additional financing and therefore, we may need to raise additional capital or incur indebtedness to continue to fund the Company’s future operations. We may seek to raise capital through a variety of sources, including:

 

   

the public equity market;

 

   

private equity financing;

 

   

collaborative arrangements;

 

   

licensing arrangements; and/or

 

   

public or private debt.

Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Additional funding may not be available when needed or on terms acceptable to us. If we are unable to obtain additional capital, we may be required to delay, reduce the scope of or eliminate our sales and marketing and/or research and development activities or not be able to pay our existing debt. Our future liquidity and capital requirements will depend upon many factors, including, among others:

 

   

resources devoted to establish sales, marketing and distribution capabilities;

 

   

the rate of product adoption by physicians and patients;

 

   

our decisions to acquire or invest in other products, technologies and businesses;

 

   

the market price of our common stock as it affects the exercise of stock options and the conversion terms of our convertible debt; and

 

   

the insurance payer community’s acceptance of and reimbursement for OVA1; and

 

   

the outcome of the MAS arbitration.

Cash and cash equivalents as of September 30, 2011 and December 31, 2010, were $27,228,000 and $22,914,000, respectively. Working capital was $21,411,000 and $13,726,000 at September 30, 2011 and December 31, 2010, respectively.

Net cash used in operating activities was $10,826,000 for the nine months ended September 30, 2011, resulting primarily from the $14,655,000 net loss incurred as adjusted for a change in fair value of warrants of $374,000 and non-cash license revenues of $341,000, partially offset by $2,976,000 of stock-based compensation expense. Net cash used in operating activities also included $1,513,000 of cash provided by changes in operating assets and liabilities mainly driven by an increase in accounts payable, accrued liabilities and other liabilities of $1,537,000 as well as the receipt of $489,000 under the Internal Revenue Service Qualifying Therapeutic Discovery Projects Grant Program for our OVA2 and PAD programs.

Net cash used in operating activities was $18,504,000 for the nine months ended September 30, 2010, resulting primarily from operating losses incurred as adjusted for a change in fair value of warrants and warrant exercises of $4,427,000 and non-cash license revenues of $671,000, partially offset by $141,000 of debt issuance costs, $103,000 of depreciation and amortization, $1,177,000 of stock-based compensation expense and $4,141,000 accrued incentive plan with related parties. Net cash used in operating activities also decreased by $3,944,000 of cash provided by changes in operating assets and liabilities mainly driven by the $3,859,000 of reorganization items.

 

-21-


Net cash used in investing activities was $98,000 for the nine months ended September 30, 2011 due to the purchase of property and equipment. Net cash provided by investing activities was $300,000 for the nine months ended September 30, 2010, primarily due to the proceeds from sale of investments of $465,000 partially offset by the purchase of property and equipment for $170,000.

Net cash provided by financing activities was $15,234,000 for the nine months ended September 30, 2011, which resulted primarily from net proceeds in connection with our February 2011 follow-on public equity offering partially offset by the $5,000,000 payment of our 7.00% Notes.

Net cash provided by financing activities was $40,050,000 for the nine months ended September 30, 2010, which resulted primarily from net proceeds of $42,782,000 in connection with our January 2010 private placement, offset by $2,195,000 in repayments of the 4.50% Notes and $400,000 of the debtor-in-possession financing with Quest Diagnostics.

We have significant net operating loss (NOL) credit carryforwards as of December 31, 2010 for which a full valuation allowance has been provided due to our history of operating losses. Our ability to use our net NOL credit carryforwards may be restricted due to ownership change limitations occurring in the past or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions. These ownership changes may also limit the amount of NOL credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively.

We believe that it is probable that an ownership change occurred as a result of our follow-on public offering in February 2011. Any limitation may result in the expiration of a portion of the NOL credit carryforwards before utilization and any NOL credit carryforwards that expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of our valuation allowance. Due to the existence of a valuation allowance, it is not expected that such limitations, if any, will have an impact on our results of operations or financial position.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Per Item 305(e) of Regulation S-K, information is not required.

 

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures.

Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15e and 15d-15e under the Exchange Act) designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management, including our Chief Executive Officer and Chief Accounting Officer, performed an evaluation of our disclosure controls and procedures as defined under the Exchange Act as of September 30, 2011. Based on this evaluation, our Chief Executive Officer and Chief Accounting Officer have concluded that as of September 30, 2011, our disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15(d)-15(e) under the Exchange Act, were effective.

Changes in internal controls over financial reporting.

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

On July 9, 2007, Molecular Analytical Systems (“MAS”) filed a lawsuit in the Superior Court of California for the County of Santa Clara naming Vermillion and Bio-Rad as defendants (the “State Court lawsuit”). Under the State Court lawsuit, MAS sought an unspecified amount of damages and alleged, among other things, that we are in breach of a license agreement with MAS relating to the SELDI technology as a result of our entry into a sublicense agreement with Bio-Rad. We filed a petition to compel arbitration, which was denied in the trial court. We then filed our general denial and affirmative defenses on April 1, 2008. The Company and Bio-Rad thereafter appealed the denial of the motion to compel arbitration, which appeal had the effect of staying the State Court lawsuit, which stay was further extended in both the state trial and appellate courts when we filed a Voluntary Petition for Relief under Chapter 11 in the Bankruptcy Court on March 30, 2009. MAS filed a proof of claim on July 15, 2009, in connection with our Chapter 11 bankruptcy proceedings. The proof of claim mirrored the MAS lawsuit and asserted that we breached the Exclusive License Agreement by transferring certain technologies to Bio-Rad without obtaining MAS’s consent. MAS listed the value of its claim as in excess of $5,000,000. On December 28, 2009, we objected to MAS’s Proof of Claim in the Bankruptcy Court. On January 7, 2010, the Bankruptcy Court confirmed our Plan of Reorganization. Per the Court’s order confirming the Plan, our bankruptcy case will be closed when, along with other requirements, a final, non-appealable judgment is entered on MAS’s claims. After the Plan of Reorganization was confirmed, MAS filed a motion with the Bankruptcy Court asking it to abstain from hearing its proof of claim and asked the Bankruptcy Court to grant relief from the automatic stay so that MAS could proceed with the State Court lawsuit in California. Over our objection, the Bankruptcy Court granted that motion on March 15, 2010. Thereafter, the California Court of Appeal set oral argument on our appeal of the trial court order denying our motion to compel arbitration for June 17, 2010. The California Court of Appeals overturned the Superior Court’s decision in an opinion dated July 9, 2010, and ordered that the dispute be arbitrated before JAMS. MAS filed its demand for arbitration on September 15, 2010. The demand did not include any additional detail regarding MAS’s claims, and submitted the same complaint for unspecified damages that MAS filed in the Superior Court in 2007. The parties thereafter conducted discovery, and the arbitration hearing commenced on September 21, 2011. Both sides presented evidence over five hearing days, ending on October 4, 2011. The parties have agreed to complete post-hearing briefing by November 9, 2011 and will present closing arguments on November 11, 2011. We anticipate receiving a final ruling from the Arbitrator before the end of 2011. An unfavorable judgment against us could require us to pay monetary damages, including the possibility of punitive damages. Management does not believe an unfavorable outcome is probable, or even reasonably possible for which an amount or range of loss can be estimated such that would require an accrual or disclosure under ASC 450, contingencies; however Management cannot predict the ultimate outcome of this matter at this time.

In addition, from time to time, we are involved in legal proceedings and regulatory proceedings arising out of our operations. We established reserves for specific liabilities in connection with legal actions that it deems to be probable and estimable. Other than as disclosed above, we are not currently a party to any proceeding, the adverse outcome of which would have a material adverse effect on our financial position or results of operations.

 

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Item 1A. Risk Factors

You should carefully consider the following risk factors and uncertainties together with all of the other information contained in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2010, including the audited consolidated financial statements and accompanying notes, and our other filings from time to time with the SEC. The risks and uncertainties management describes below are the only material ones we face as of the date this Quarterly Report on Form 10-Q is initially filed with the SEC. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely affect our business.

Risks Related to Our Business

We expect to incur a net loss for fiscal 2011. If we are unable to generate significant product and licensing revenue in the future, we may never achieve profitability.

We have experienced significant operating losses each year since our inception and we expect to incur a net loss for fiscal year 2011. Our losses have resulted principally from costs incurred in research and development, sales and marketing, litigation, and general and administrative costs associated with our operations and bankruptcy under Chapter 11.

Our ability to commercialize OVA1 and other potential diagnostic tests is heavily dependent on our strategic alliance with Quest Diagnostics.

Quest Diagnostics has an exclusive license to offer OVA1 in the reference laboratory market as a clinical laboratory test in the US, Mexico, the United Kingdom and India through September 11, 2014, which may be extended for an additional year beyond September 11, 2014. In addition, Quest Diagnostics is expected to have a similar exclusive license with respect to our VASCLIR test for a three year period following clearance by the FDA, as well as with respect to one additional test developed by us, if and to the extent, Quest Diagnostics exercises its development option with respect to any such test on or before October 7, 2012. Consequently, our ability to generate revenue from these tests in these regions is heavily dependent on Quest Diagnostics and its ability to market and offer these tests in its clinical laboratories.

We expect that for the foreseeable future nearly all of our revenue will be derived from Quest Diagnostics and will depend on the number of OVA1 tests performed by Quest Diagnostics and the reimbursement rate for performing those tests, which are outside of our control.

We expect that a significant amount of our revenues for the foreseeable future will be derived through our strategic partnership with Quest Diagnostics and will be based on the number of OVA1 tests performed by Quest Diagnostics and the reimbursement rate received by Quest Diagnostics for those tests. On November 10, 2010, we entered into an Amendment No. 4 to our Strategic Alliance Agreement with Quest Diagnostics (the “Amendment No. 4”). Under the terms of the Amendment No. 4, we are to be paid $50 for each OVA1 performed by Quest Diagnostics, as well as a 33% royalty of Quest Diagnostics’ gross margin from performing OVA1 domestically. Amendment No. 4 provides for a monthly payment by Quest Diagnostics to us based on Quest Diagnostics’ average reimbursement per OVA1 in the previous month. Under the terms of Amendment No. 4, the royalty portion of our revenue is subject to adjustment, either up or down, on an annual basis within 60 days of the end of each calendar year based on Quest Diagnostics’ actual reimbursement history for that calendar year. To the extent Quest Diagnostics is not reimbursed, is reimbursed at a lower than expected rate, or has reimbursement claims rejected, the royalty amounts owed to us would be reduced. Any amounts owed by us to Quest Diagnostics will be deducted against payments owed to us in future periods. The number of tests performed by Quest Diagnostics and the amount of reimbursement received by Quest Diagnostics in any given period will be largely outside of our control. If Quest Diagnostics were to perform fewer tests or receive less reimbursement per test than expected, it could have a material adverse effect on our revenue and results of operations.

How we will recognize future revenue under the Quest Diagnostics Strategic Alliance Agreement remains uncertain and is likely to change, which could affect our revenue in future periods.

As described in detail above, Amendment No. 4 changed the structure and calculation of the payment to be received by us from Quest Diagnostics relating to OVA1. Given our limited commercialization history with OVA1, our lack of experience with the new payment terms contained in Amendment No. 4 and our inability to know or control Quest Diagnostics’ reimbursement rates for OVA1, it may be difficult for us to estimate the amount of the future revenues and the size of any year-end adjustment. It is likely that we will be unable to recognize some or all of the revenue from the royalty payments to be received from Quest Diagnostics until we are better able to estimate the final royalty payment amounts and the magnitude and effect of the annual recalculation and adjustment mechanism. Accordingly, the amount of revenue we will be able to recognize in any quarter could vary significantly, and the method used to calculate that revenue could be subject to change.

 

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Failures to reimburse OVA1 or changes in reimbursement rates by third party payers and variances in reimbursement rates could materially and adversely affect our revenues and could result in significant fluctuations in our revenues.

A significant portion of our revenues is dependent on the amount Quest Diagnostics receives from third party payers for performing OVA1. Insurance coverage and reimbursement rates for diagnostic tests are uncertain, subject to change and particularly volatile during the early stages of a newly commercialized diagnostic test. OVA1 was commercially launched in March of 2010. There remain questions as to what extent third party payers, such as Medicare, Medicaid and private insurance companies will provide coverage for OVA1 and with what limitations. Quest Diagnostics will likely experience volatility in the coverage and reimbursement of OVA1 due to contract negotiations with third party payers and implementation requirements. Quest Diagnostics has advised us that the reimbursement amounts it has received from third party payers varies from payer to payer, and, in some cases, the variation is material. Third party payers, including private insurance companies as well as government payers such as Medicare and Medicaid, have increased their efforts to control the cost, utilization and delivery of healthcare services. These measures have resulted in reduced payment rates and decreased utilization for the diagnostic test industry. From time to time, Congress has considered and implemented changes to the Medicare fee schedules in conjunction with budgetary legislation, and pricing for tests covered by Medicare is subject to change at any time. Reductions in the reimbursement rate of payers may occur in the future. Reductions in the price at which OVA1 is reimbursed could have a material adverse effect on our revenues. If we and Quest Diagnostics working collaboratively are unable to establish and maintain broad coverage and reimbursement for OVA1 or if third party payers change their coverage or reimbursement policies with respect to OVA1, our revenues could be materially and adversely affected.

We may need to raise additional capital in the future beyond what we have raised in a follow-on public offering on February 18, 2011, and if we are unable to secure adequate funds on terms acceptable to us, we may be unable to execute our business plan.

On February 18, 2011, we completed a follow-on public offering of our common stock in which we issued an additional 4 million shares and raised approximately $20.2 million in net proceeds. We believe that our current cash resources will be sufficient to meet our anticipated needs for at least the next twelve months. However, we may need to raise additional capital beyond what we have raised in the follow-on public offering in order to develop new or enhanced products or services, increase our efforts to discover biomarkers and develop them into diagnostic products, or acquire complementary products, businesses or technologies. We may seek to raise additional capital beyond what we have raised in the follow-on offering through the issuance of equity or debt securities, or a combination thereof, in the public or private markets, or through a collaborative arrangement or sale of assets. Additional financing opportunities may not be available to us, or if available, may not be on favorable terms. The availability of financing opportunities will depend, in part, on market conditions, and the outlook for our business. Any future issuance of equity securities or securities convertible into equity could result in substantial dilution to our stockholders, and the securities issued in such a financing may have rights, preferences or privileges senior to those of our common stock. If we raise additional funds by issuing debt, we may be subject to limitations on our operations, through debt covenants or other restrictions. If we obtain additional funds through arrangements with collaborators or strategic partners, we may be required to relinquish rights to certain technologies or products that we might otherwise seek to retain. If adequate and acceptable financing is not available to us at the time that we seek to raise additional capital, our ability to execute our business plan successfully may be negatively impacted.

Leverage and debt service obligations may adversely affect our consolidated cash flows.

As of September 30, 2011, we had $7,000,000 outstanding under our secured line of credit with Quest Diagnostics.

 

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Quest Diagnostics provided us with a $10,000,000 secured line of credit, which was forgivable based upon the achievement of certain milestones related to the development, regulatory approval and commercialization of certain diagnostic tests. As of our emergence from bankruptcy under the Bankruptcy Code, certain milestones had been met and the principal balance of the secured line of credit was reduced to $7,000,000. We are in discussions with Quest Diagnostics regarding the achievement of an additional $1,000,000 forgiveness milestone related to OVA1 under the terms of the Amended Strategic Alliance Agreement. The $7,000,000 secured line of credit is secured by our assets. As a result of this indebtedness, we have principal and interest payment obligations to Quest Diagnostics. The degree to which we are leveraged could, among other things:

 

   

make it difficult for us to obtain financing for working capital, acquisitions or other purposes on favorable terms, if at all;

 

   

make us more vulnerable to industry downturns and competitive pressures; and

 

   

limit our flexibility in planning for or reacting to changes in our business.

Our ability to meet our debt service obligations will depend upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. If we cannot meet our debt service obligation, it would have a material adverse effect on our consolidated financial position.

We may not succeed in developing additional diagnostic products, and, even if we do succeed in developing additional diagnostic products, the diagnostic products may never achieve significant commercial market acceptance.

Our success depends on our ability to develop, optimize, validate and commercialize diagnostic products resulting from biomarker discovery. It is well understood that this entails considerable risk as candidate biomarkers may fail to yield a clinically and commercially viable algorithm design; may present challenges in immunoassay design or manufacturing; and may not succeed in analytical or clinical validation. For example, markers being evaluated for OVA2 may not be validated in downstream pre-clinical or clinical studies, once we undertake and perform such studies. Although our PAD blood test in development, VASCLIR, achieved positive top-line results from an intended use clinical study, it is possible that these biomarkers, upon further analysis and clinical study, may not meet acceptance criteria for regulatory clearance.

Clinical testing is expensive, takes many years to complete and can have an uncertain outcome. Clinical failure can occur at any stage of the testing. Clinical trials for our PAD, OVA2, and other future diagnostic tests may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and/or non-clinical testing on these tests. In addition, the results of our clinical trials may identify unexpected risks relative to safety or efficacy, which could complicate, delay or halt clinical trials, or result in the denial of regulatory approval by the FDA and other regulatory authorities.

If we do succeed in developing additional diagnostic tests with acceptable performance characteristics, we may not succeed in achieving significant commercial market acceptance for those tests. Our ability to successfully commercialize diagnostic products, including OVA1, will depend on several factors, including:

 

   

our ability to convince the medical community of the safety and clinical efficacy of our products and their advantages over existing or new diagnostic products;

 

   

our success in establishing new clinical practices or changing previous ones, such that utilization of the tests fail to meet established standards of care, medical guidelines and the like;

 

   

our ability to further establish business relationships with other diagnostic or laboratory companies that can assist in the commercialization of these products in the US and globally; and

 

   

the scope and extent of the agreement by Medicare and third-party payers to provide full or partial reimbursement coverage for our products, which will affect patients’ willingness to pay for our products and will likely heavily influence physicians’ decisions to recommend or use our products.

These factors present obstacles to significant commercial acceptance of our existing and potential diagnostic products, for which we will have to spend substantial time and financial resources to overcome, and there is no guarantee that we will be successful in doing so. Our inability to do so successfully would prevent us from generating revenue from future diagnostic products.

The diagnostics market is competitive and we may not be able to compete successfully, which would adversely impact our ability to generate revenue.

 

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Our principal competition currently comes from the many clinical options available to medical personnel involved in clinical decision-making. For example, rather than ordering an OVA1 for a woman with an adnexal mass, obstetricians, gynecologists, and gynecologic oncologists may choose a different clinical option or none at all. If we are not able to convince clinicians that OVA1 provides significant improvement over current clinical practices, our ability to commercialize OVA1 would be adversely affected. Additionally, Fujirebio Diagnostics, Inc. recently announced that they have received clearance from the FDA to commercialize its Risk of Malignancy Algorithm (“ROMA”) test, a diagnostic test that uses the biomarkers CA 125 and HE4 to identify masses with a high likelihood of malignancy. The ROMA test may be in direct competition with OVA1 and our revenues could be materially and adversely affected if and when the ROMA test is successfully commercialized. In addition, other potential competitors, such as Becton Dickinson, ArrayIt Corporation, Correlogic Systems, Inc., HealthLinx, and Abbott Labs have publicly disclosed that they have been or are currently working on ovarian cancer diagnostic assays. Academic institutions periodically report new findings in ovarian cancer diagnostics that may have commercial value. Our failure to compete with any competitive diagnostic assay if and when commercialized could adversely affect our business.

We have priced OVA1 at a point that recognizes the value-added by its increased sensitivity for ovarian malignancy. If others develop a test that is viewed to be similar to OVA1 in efficacy but is priced at a lower point, we and/or our strategic partners may have to lower the price of OVA1 in order to effectively compete, which would impact our margins and potential for profitability.

The commercialization of our diagnostic tests may be affected adversely by changing FDA regulations, and any delay by or failure of the FDA to approve our diagnostic tests submitted to the FDA may adversely affect our consolidated revenues, results of operations and financial condition.

The FDA cleared OVA1 on September 11, 2009. Our activities related to diagnostic products are, or have the potential to be, subject to regulatory oversight by the FDA under provisions of the Federal Food, Drug and Cosmetic Act and regulations thereunder, including regulations governing the development, marketing, labeling, promotion, manufacturing and export of our products. Failure to comply with applicable requirements can lead to sanctions, including withdrawal of products from the market, recalls, refusal to authorize government contracts, product seizures, civil money penalties, injunctions and criminal prosecution.

The Food, Drug and Cosmetic Act requires that medical devices introduced to the United States market, unless exempted by regulation, be the subject of either a pre-market notification clearance, known as a 510(k) clearance or 510(k) de novo clearance, or a PMA. Some of our potential future clinical products may require a 510(k) or 510(k) de novo clearance, while others may require a PMA. With respect to devices reviewed through the 510(k) process, we may not market a device until an order is issued by the FDA finding our product to be substantially equivalent to a legally marketed device known as a predicate device. A 510(k) submission may involve the presentation of a substantial volume of data, including clinical data. The FDA may agree that the product is substantially equivalent to a predicate device and allow the product to be marketed in the United States. On the other hand, the FDA may determine that the device is not substantially equivalent and require a PMA, or require further information, such as additional test data, including data from clinical studies, before it is able to make a determination regarding substantial equivalence. By requesting additional information, the FDA can delay market introduction of our products. Delays in receipt of or failure to receive any necessary 510(k) clearance or PMA approval, or the imposition of stringent restrictions on the labeling and sales of our products, could have a material adverse effect on us. If the FDA indicates that a PMA is required for any of our potential future clinical products, the application will require extensive clinical studies, manufacturing information and likely review by a panel of experts outside the FDA. Clinical studies to support either a 510(k) submission or a PMA application would need to be conducted in accordance with FDA requirements. Failure to comply with FDA requirements could result in the FDA’s refusal to accept the data or the imposition of regulatory sanctions. We cannot assure that any necessary 510(k) clearance or PMA approval will be granted on a timely basis, or at all. To the extent we seek FDA 510(k) clearance or FDA pre-market approval for other diagnostic tests, any delay by or failure of the FDA to clear or approve those diagnostic tests may adversely affect our consolidated revenues, results of operations and financial condition.

If we or our suppliers fail to comply with FDA requirements, we may not be able to market our products and services and may be subject to stringent penalties; further improvements to our or our suppliers’ manufacturing operations may be required that could entail additional costs.

 

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The commercialization of our products could be delayed, halted or prevented by applicable FDA regulations. If the FDA were to view any of our actions as non-compliant, it could initiate enforcement actions, such as a warning letter and possible imposition of penalties. In addition, analyte specific reagents (“ASRs”) that we may provide would be subject to a number of FDA requirements, including compliance with the FDA’s Quality System Regulations (“QSR”), which establish extensive requirements for quality assurance and control as well as manufacturing procedures. Failure to comply with these regulations could result in enforcement actions for us or our potential suppliers. Adverse FDA actions in any of these areas could significantly increase our expenses and limit our revenue and profitability. We will need to undertake steps to maintain our operations in line with the FDA’s QSR requirements. Some components of OVA1 are manufactured by other companies and we are required to maintain supply agreements with these companies. If these agreements are not satisfactory to the FDA, we will have to renegotiate these agreements. Any failure to do so would have an adverse effect on our ability to commercialize OVA1. Our suppliers’ manufacturing facilities will be subject to periodic regulatory inspections by the FDA and other federal and state regulatory agencies. If and when we begin commercializing and assembling our products by ourselves, our facilities will be subject to the same inspections. We or our suppliers may not satisfy such regulatory requirements, and any such failure to do so would have an adverse effect on our commercialization efforts.

A 510(k) clearance or PMA approval of our device may place substantial restrictions on how our device is marketed or to whom it may be sold. All devices cleared by the FDA are subject to continuing regulation by the FDA and certain state agencies. As a medical device manufacturer, we are also required to register and list our products with the FDA. We are required to set forth and adhere to a Quality Policy and other regulations. In addition, we are required to comply with the FDA’s QSRs, which require that our devices be manufactured and records be maintained in a prescribed manner with respect to manufacturing, testing and control activities. Additionally, we may be subject to inspection by federal and state regulatory agencies. Non-compliance with these standards can result in, among other things, fines, injunctions, civil penalties, recalls, total or partial suspension of production. Further, we are required to comply with FDA requirements for labeling and promotion. For example, the FDA prohibits cleared or approved devices from being promoted for uncleared or unapproved uses. Labeling and promotional activities are subject to scrutiny by the FDA, which prohibits the marketing of medical devices for unapproved uses. Additionally, the FDA has required us to perform certain post-marketing studies (“Post-market Surveillance”) to verify or validate the clinical performance of FDA-cleared tests. These studies will increase our research and development costs.

In addition, the medical device reporting regulation requires that we provide information to the FDA whenever evidence reasonably suggests that one of our devices may have caused or contributed to a death or serious injury, or where a malfunction has occurred that would be likely to cause or contribute to a death or serious injury if the malfunction were to recur.

If we fail to continue to develop our technologies, we may not be able to successfully foster adoption of our products and services or develop new product offerings.

Our technologies are new and complex, and are subject to change as new discoveries are made. New discoveries and advancements in the diagnostic field are essential if we are to foster the adoption of our product offerings. Development of these technologies remains a substantial risk to us due to various factors, including the scientific challenges involved, our ability to find and collaborate successfully with others working in the diagnostic field, and competing technologies, which may prove more successful than our technologies.

If we fail to maintain our rights to utilize intellectual property directed to diagnostic biomarkers, we may not be able to offer diagnostic tests using those biomarkers.

One aspect of our business plan is to develop diagnostic tests based on certain biomarkers, which we have the right to utilize through licenses with our academic collaborators, such as the Johns Hopkins University School of Medicine, Stanford University, and the University of Texas M.D. Anderson Cancer Center. In some cases, our collaborators own the entire right to the biomarkers. In other cases, we co-own the biomarkers with our collaborators. If, for some reason, we lose our license to biomarkers owned entirely by our collaborators, we may not be able to use those biomarkers in diagnostic tests. If we lose our exclusive license to biomarkers co-owned by us and our collaborators, our collaborators may license their share of the intellectual property to a third party that may compete with us in offering diagnostic tests, which would materially adversely affect our consolidated revenues, results of operations and financial condition.

We have $7,000,000 outstanding from the secured line of credit provided by Quest Diagnostics. If we fail to achieve the milestones for the forgiveness of the secured line of credit set forth in our amended credit agreement with Quest Diagnostics, we will be responsible for full repayment of the secured line of credit on October 7, 2012.

 

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As of September 30, 2011, we have $7,000,000 outstanding from the secured lined of credit in connection with the Strategic Alliance. Over a two-year period, we borrowed monthly increments of $417,000, totaling $10,000,000, and have paid all interest that was due. Funds from this secured line of credit were used for certain costs and expenses directly related to the Strategic Alliance, with forgiveness of the repayment obligations based upon our achievement of milestones related to the development, regulatory approval and commercialization of certain diagnostic tests. On October 7, 2009, the Strategic Alliance Agreement was amended to extend the term of the agreement to end on the earlier of (i) October 7, 2012 and (ii) the date on which Quest Diagnostics has commercially launched three licensed laboratory tests under the Strategic Alliance. On September 11, 2009, we announced our milestone achievement of clearing OVA1 with the FDA and, effective after the emergence from bankruptcy, reduced our principal obligations under the Amended Strategic Alliance Agreement to $7,000,000. We are in discussions with Quest Diagnostics regarding the achievement of an additional $1,000,000 forgiveness milestone related to OVA1 under the terms of the Amended Strategic Alliance Agreement. Should we fail to achieve the remaining milestones, we would be responsible for the repayment of the outstanding principal amount and any unpaid interest on the secured line of credit on October 7, 2012, which could materially adversely affect our consolidated results of operations and financial condition.

If a competitor infringes on our proprietary rights, we may lose any competitive advantage we may have as a result of diversion of our time, enforcement costs and the loss of the exclusivity of our proprietary rights.

Our success depends in part on our ability to maintain and enforce our proprietary rights. We rely on a combination of patents, trademarks, copyrights and trade secrets to protect our technology and brand. We have submitted a number of patent applications covering biomarkers that may have diagnostic or therapeutic utility. Our patent applications may or may not result in additional patents being issued.

If competitors engage in activities that infringe on our proprietary rights, our focus will be diverted and we may incur significant costs in asserting our rights. We may not be successful in asserting our proprietary rights, which could result in our patents being held invalid or a court holding that the competitor is not infringing, either of which would harm our competitive position. We cannot be sure that competitors will not design around our patented technology.

We also rely upon the skills, knowledge and experience of our technical personnel. To help protect our rights, we require all employees and consultants to enter into confidentiality agreements that prohibit the disclosure of confidential information. These agreements may not provide adequate protection for our trade secrets, knowledge or other proprietary information in the event of any unauthorized use or disclosure. If any trade secret, knowledge or other technology not protected by a patent were to be disclosed to or independently developed by a competitor, it could have a material adverse effect on our business, consolidated results of operations and financial condition.

If others successfully assert their proprietary rights against us, we may be precluded from making and selling our products or we may be required to obtain licenses to use their technology.

Our success depends on avoiding infringing on the proprietary technologies of others. If a third party were to assert claims that we are violating their patents, we might incur substantial costs defending ourselves in lawsuits against charges of patent infringement or other unlawful use of another’s proprietary technology. Any such lawsuit may not be decided in our favor, and if we are found liable, it may be subject to monetary damages or injunction against using the technology. We may also be required to obtain licenses under patents owned by third parties and such licenses may not be available to us on commercially reasonable terms, if at all.

Current and future litigation against us could be costly and time consuming to defend.

We are from time to time subject to legal proceedings and claims that arise in the ordinary course of business, such as claims brought by our clients in connection with commercial disputes, employment claims made by current or former employees, and claims brought by third parties alleging infringement on their intellectual property rights. In addition, we may bring claims against third parties for infringement on our intellectual property rights. Litigation may result in substantial costs and may divert our attention and resources, which may seriously harm our business, consolidated results of operations and financial condition.

An unfavorable judgment against us in any legal proceeding or claim could require us to pay monetary damages. In addition, an unfavorable judgment in which the counterparty is awarded equitable relief, such as an injunction, could have an adverse impact on our licensing and sublicensing activities, which could harm our business, consolidated results of operations and consolidated financial condition.

 

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On July 9, 2007, Molecular Analytical Systems (“MAS”) filed a lawsuit in the Superior Court of California for the County of Santa Clara naming Vermillion and Bio-Rad as defendants (the “State Court lawsuit”). Under the State Court lawsuit, MAS sought an unspecified amount of damages and alleged, among other things, that we are in breach of a license agreement with MAS relating to the SELDI technology as a result of our entry into a sublicense agreement with Bio-Rad. We filed a petition to compel arbitration, which was denied in the trial court. We then filed our general denial and affirmative defenses on April 1, 2008. The Company and Bio-Rad thereafter appealed the denial of the motion to compel arbitration, which appeal had the effect of staying the State Court lawsuit, which stay was further extended in both the state trial and appellate courts when we filed a Voluntary Petition for Relief under Chapter 11 in the Bankruptcy Court on March 30, 2009. MAS filed a proof of claim on July 15, 2009, in connection with our Chapter 11 bankruptcy proceedings. The proof of claim mirrored the MAS lawsuit and asserted that we breached the Exclusive License Agreement by transferring certain technologies to Bio-Rad without obtaining MAS’s consent. MAS listed the value of its claim as in excess of $5,000,000. On December 28, 2009, we objected to MAS’s Proof of Claim in the Bankruptcy Court. On January 7, 2010, the Bankruptcy Court confirmed our Plan of Reorganization. Per the Court’s order confirming the Plan, our bankruptcy case will be closed when, along with other requirements, a final, non-appealable judgment is entered on MAS’s claims. After the Plan of Reorganization was confirmed, MAS filed a motion with the Bankruptcy Court asking it to abstain from hearing its proof of claim and asked the Bankruptcy Court to grant relief from the automatic stay so that MAS could proceed with the State Court lawsuit in California. Over our objection, the Bankruptcy Court granted that motion on March 15, 2010. Thereafter, the California Court of Appeal set oral argument on our appeal of the trial court order denying our motion to compel arbitration for June 17, 2010. The California Court of Appeals overturned the Superior Court’s decision in an opinion dated July 9, 2010, and ordered that the dispute be arbitrated before JAMS. MAS filed its demand for arbitration on September 15, 2010. The demand did not include any additional detail regarding MAS’s claims, and submitted the same complaint for unspecified damages that MAS filed in the Superior Court in 2007. The parties thereafter conducted discovery, and the arbitration hearing commenced on September 21, 2011. Both sides presented evidence over five hearing days, ending on October 4, 2011. The parties have agreed to complete post-hearing briefing by November 9, 2011 and will present closing arguments on November 11, 2011. We anticipate receiving a final ruling from the Arbitrator before the end of 2011. An unfavorable judgment against us could require us to pay monetary damages, including the possibility of punitive damages. Management does not believe an unfavorable outcome is probable, or even reasonably possible for which an amount or range of loss can be estimated such that would require an accrual or disclosure under ASC 450, contingences, however management cannot predict the ultimate outcome of this matter at this time.

Our failure to meet our purchase commitments pursuant to a manufacture and supply agreement with Bio-Rad could adversely affect our consolidated results of operations and financial condition.

We are a party to a manufacture and supply agreement with Bio-Rad, dated November 13, 2006, whereby we agreed to purchase from Bio-Rad the ProteinChip Systems and ProteinChip Arrays necessary to support our diagnostics efforts. Under the terms of the agreement, we were required to purchase a specified number of ProteinChip Systems and ProteinChip Arrays in each of the three years following the date of the agreement. Pursuant to a letter from us to Bio-Rad dated May 2, 2008, we exercised our right to terminate the agreement for convenience upon 180 days’ written notice. Consequently, termination of the agreement became effective on October 29, 2008. In our bankruptcy proceeding, Bio-Rad filed a claim for approximately $1,000,000. If we are unable to resolve this claim, it would have an adverse effect on our consolidated cash flows.

Because our business is highly dependent on key executives and employees, our inability to recruit and retain these people could hinder our business plans.

We are highly dependent on our executive officers and certain key employees. Our executive officers and key employees are employed at will. Any inability to engage new executive officers or key employees could impact operations or delay or curtail our research, development and commercialization objectives. To continue our research and product development efforts, we need people skilled in areas such as clinical operations, regulatory affairs and clinical diagnostics. Competition for qualified employees is intense.

If we lose the services of any senior executive officers or key employees, our ability to achieve our business objectives could be harmed, which in turn could adversely affect our business and operating results.

 

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Our diagnostic efforts may cause us to have significant product liability exposure.

The testing, manufacturing and marketing of medical diagnostic tests entail an inherent risk of product liability claims. Potential product liability claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of the policy. Our existing insurance will have to be increased in the future if we are successful at introducing new diagnostic products and this will increase our costs. In the event that we are held liable for a claim or for damages exceeding the limits of our insurance coverage, we may be required to make substantial payments. This may have an adverse effect on our consolidated results of operations, financial condition and cash flows, and may increase the volatility of our common stock price.

Business interruptions could limit our ability to operate our business.

Our operations, as well as those of the collaborators on which we depend, are vulnerable to damage or interruption from fire; natural disasters, including earthquakes; computer viruses; human error; power shortages; telecommunication failures; international acts of terror; and similar events. Although we have certain business continuity plans in place, we have not established a formal comprehensive disaster recovery plan, and our back-up operations and business interruption insurance may not be adequate to compensate it for losses we may suffer. A significant business interruption could result in losses or damages incurred by us and require us to cease or curtail our operations.

If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could adversely affect our business, operating results, and financial condition.

We are required to comply with the management certification requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We are required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal controls that, or that are reasonably likely to, materially affect internal controls over financial reporting. A “material weakness” is a deficiency or combination of deficiencies that results in a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected. If we fail to continue to comply with the requirements of Section 404, we might be subject to sanctions or investigation by regulatory authorities such as the SEC. If we fail to remedy any material weakness, our consolidated financial statements may be inaccurate, which could adversely affect our business, operating results, and financial condition.

Legislative actions resulting in higher compliance costs are likely to adversely affect our future consolidated results of operations, financial position and cash flows.

Compliance with laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, and new regulations adopted by the SEC, are resulting in increased compliance costs. The SEC and other regulators have continued to adopt new rules and regulations and make additional changes to existing regulations that require our compliance. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas such as “say on pay” and proxy access. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations. Compliance with these new regulations and disclosure obligations will result in increased general and administrative expenses and may cause a diversion of our time and attention from revenue-generating activities to compliance activities.

Changes in healthcare policy could increase our costs and impact sales of and reimbursement for our tests.

In March 2010, President Barack Obama signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, the “PPACA”), which makes changes that are expected to significantly impact the pharmaceutical and medical device industries. Beginning in 2013, each medical device manufacturer will have to pay a sales tax in an amount equal to 2.3 percent of the price for which such manufacturer sells its medical devices. The PPACA also 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. This adjustment is in addition to a productivity adjustment to the Clinical Laboratory Fee Schedule. In addition to the PPACA, the impact of which cannot be predicted given its recent enactment and current lack of implementing regulations or interpretive guidance, a number of states are also contemplating significant reform of their healthcare policies. We cannot predict whether future healthcare initiatives will be implemented at the federal or state level, or the effect any future legislation or regulation will have on us. The taxes imposed by the new federal legislation may result in decreased profits to us, and lower reimbursements by payers for our tests, all of which may adversely affect our business.

 

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We are subject to environmental laws and potential exposure to environmental liabilities.

We are subject to various international, federal, state and local environmental laws and regulations that govern our operations, including the handling and disposal of non-hazardous and hazardous wastes, the recycling and treatment of electrical and electronic equipment, and emissions and discharges into the environment. Failure to comply with such laws and regulations could result in costs for corrective action, penalties or the imposition of other liabilities. We are also subject to laws and regulations that impose liability and clean-up responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, a current or previous owner or operator of property may be liable for the costs to remediate hazardous substances or petroleum products on or from its property, without regard to whether the owner or operator knew of, or caused, the contamination, as well as incur liability to third parties affected by such contamination. The presence of, or failure to remediate properly, such substances could adversely affect the value and the ability to transfer or encumber such property. Based on currently available information, although there can be no assurance, we believe that such costs and liabilities have not had and will not have a material adverse impact on our consolidated results of operations.

Risks Related to Owning our Stock

The liquidity and trading volume of our common stock may be low.

The liquidity and trading volume of our common stock has at times been low in the past and may again be low in the future. If the liquidity and trading volume were to fall, this could impact the trading price of our shares and adversely affect our ability to issue stock and for holders to obtain liquidity in their shares should they desire to sell.

Our stock price has been, and may continue to be, highly volatile, and an investment in our stock could suffer a decline in value.

The trading price of our common stock has been highly volatile and could continue to be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:

 

   

failure to significantly increase revenue;

 

   

actual or anticipated period-to-period fluctuations in financial results;

 

   

failure to achieve, or changes in, financial estimates by securities analysts;

 

   

announcements or introductions of new products or services or technological innovations by us or our competitors;

 

   

publicity regarding actual or potential discoveries of biomarkers by others;

 

   

comments or opinions by securities analysts or major stockholders;

 

   

conditions or trends in the pharmaceutical, biotechnology and life science industries;

 

   

announcements by us of significant acquisitions and divestitures, strategic partnerships, joint ventures or capital commitments;

 

   

developments regarding our patents or other intellectual property or that of our competitors;

 

   

litigation or threat of litigation;

 

   

additions or departures of key personnel;

 

   

limited daily trading volume; and

 

   

economic and other external factors, disasters or crises.

In addition, the stock market in general and the market for diagnostic technology companies, in particular, have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of our attention and our resources.

 

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If we fail to meet all applicable Nasdaq Global Market requirements and Nasdaq determines to delist our common stock, the market liquidity and market price of our common stock could decline, and our ability to access the capital markets could be negatively affected.

Our common stock is listed on the Nasdaq Global Market. In order to maintain that listing, we must satisfy minimum financial and other requirements, including requirements that we maintain a market value of listed securities of at least $50 million and a minimum bid price of $1 per share. If we fail to meet all applicable Nasdaq Global Market requirements and Nasdaq determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock and adversely affect our ability to obtain financing for the continuation of our operations. This delisting could also impair the value of our investors’ investment.

Anti-takeover provisions in our charter, bylaws and stockholder rights plan and under Delaware law could make a third party acquisition of the Company difficult.

Our certificate of incorporation, bylaws and stockholder rights plan contain provisions intended to give us more leverage to maximize the long term interests of our shareholders in the event of an attempted hostile takeover. While, on balance, the Board of Directors views the benefits to shareholders of these provisions to outweigh their risks, these provisions could delay or prevent a merger, acquisition or other change of control of the Company or limit the price that future investors might be willing to pay for shares of our common stock.

The rights issued pursuant to our stockholder rights plan will become exercisable the tenth day after a person or group announces acquisition of 15% or more of our common stock or announces commencement of a tender or exchange offer the consummation of which would result in ownership by the person or group of 15% or more of our common stock. If the rights become exercisable, the holders of the rights (other than the person acquiring 15% or more of our common stock) will be entitled to acquire, in exchange for the rights’ exercise price, shares of our common stock or shares of any company in which we are merged, with a value equal to twice the rights’ exercise price.

We are also subject to certain provisions of Delaware law that could delay, deter or prevent a change in control of the Company. Under these provisions, if anyone becomes an “interested stockholder,” we may not enter into a “business combination” with that person for three years without special approval, which could discourage a third party from making a takeover offer and could delay or prevent a change in control of us. An “interested stockholder” means, generally, someone owning 15% or more of our outstanding voting stock or an affiliate of ours that owned 15% or more of our outstanding voting stock during the past three years, subject to certain exceptions as described in the Delaware General Corporation Law.

We could face adverse consequences as a result of the actions of activist stockholders.

Certain of our stockholders may, from time to time, attempt to aggressively involve themselves in the governance and strategic direction of our Company above and apart from normal interactions between stockholders and management. Such activism, and any related negative publicity, could result in substantial costs that negatively impact our stock price and increase its volatility. In addition, such activism could cause a diversion of the attention of our management and Board of Directors and create perceived uncertainties with existing and potential strategic partners impacting our ability to consummate potential transactions, collaborations or opportunities in furtherance of our strategic plan. In addition, such activism could make it more difficult to attract and retain qualified personnel, customers and business partners, which could disrupt the growth of the market for OVA1, delay the development and commercialization of new tests and further adversely affect the trading price of our common stock and increase its volatility. In addition, the activists may have little or no experience in the diagnostics industry or may seek to elect members to our Board of Directors with little or no experience in the diagnostics industry who may have a specific agenda different and apart from the majority of our stockholders. To the extent any such stockholders constitute a “group,” as used relating to Section 13 of the Securities Exchange Act of 1934, by having any relationship, agreement, arrangement, affiliation or understanding among themselves, whether direct or indirect, oral or written, specific or informal, it could result in a “trigger event” under our stockholder rights plan, causing disruption and additional costs to the Company and its stockholders and increasing volatility in our stock price.

Because we do not intend to pay dividends, our stockholders will benefit from an investment in our common stock only if it appreciates in value.

We have never declared or paid any cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends in the foreseeable future. As a result, the success of an investment in our common stock will depend entirely upon any future appreciation. There is no guarantee that our common stock will appreciate in value or even maintain the price at which our investors purchased their shares.

 

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We may need to sell additional shares of our common stock or other securities in the future beyond what we have raised in a follow-on public offering on February 18, 2011 to meet our capital requirements which could cause significant dilution.

On February 18, 2011, we completed a follow-on public offering of our common stock in which we issued an additional 4 million shares and raised approximately $20.2 million in net proceeds. As of September 30, 2011, we had 14,848,301 shares of our common stock outstanding and 715,258 shares of our common stock reserved for future issuance to employees, directors and consultants pursuant to our employee stock plans, which excludes 830,736 shares of our common stock that were subject to outstanding options as well as unvested restricted stock awards. As of September 30, 2011, 178,945 shares of restricted stock awards to certain employees and Directors pursuant to the 2010 Plan remain unvested. These shares vest through March 2014. In addition, as of September 30, 2011, warrants to purchase 195,397 shares of our common stock were outstanding at exercise prices ranging from $9.25 to $12.60 per share, with a weighted average exercise price of $9.26 per share.

The exercise or conversion of all or a portion of our senior notes, outstanding options and warrants, and the vesting of our restricted stock, would dilute the ownership interests of our stockholders. Furthermore, future sales of substantial amounts of our common stock in the public market, or the perception that such sales are likely to occur, could affect prevailing trading prices of our common stock and the value of the notes.

 

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

None

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Removed and Reserved

 

Item 5. Other Information

The resignation of our Vice President and Chief Financial Officer, Sandra A. Gardiner, previously disclosed in a Current Report on Form 8-K dated October 11, 2011 was effective on October 21, 2011. In conjunction with Ms. Gardiner’s resignation, the Company appointed Eric Schoen as Chief Accounting Officer, effective October 6, 2011.

 

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Item 6. Exhibits

 

(a) The following exhibits are filed with this report as indicated below:

 

10.1    Consulting Agreement, dated November 2, 2011, by and between Eric T. Fung and Vermillion, Inc.*#
10.2    Exclusive Distribution Agreement, dated August 1, 2011, by and between Pronto Diagnostics Ltd., and Vermillion, Inc., incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q, filed by Vermillion, Inc. on August 9, 2011 ††
10.3    Offer Letter, dated September 20, 2011, by and between Donald G. Munroe and Vermillion, Inc., incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed by Vermillion, Inc. on September 26, 2011 #
31.1    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2    Certification of the Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.0    Certification of the Chief Executive Officer and Chief 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

Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, the interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is otherwise not subject to liability under these sections.

 

 

* Filed herewith.
# Indicates management contract or compensatory plan.
†† Certain portions of this exhibit have been omitted and filed separately with the SEC. Confidential treatment has been requested with respect to such omitted portions.

 

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SIGNATURES

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

 

     Vermillion, Inc.

Date: November 9, 2011

   /s/    Gail S. Page
  

 

  

Gail S. Page

President and Chief Executive Officer

(Principal Executive Officer)

Date: November 9, 2011

   /s/    Eric J. Schoen
  

 

  

Eric J. Schoen

Chief Accounting Officer

(Principal Financial Officer)

 

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