TMCnet News
VERMILLION, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) 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. We claim the protection of such safe harbor, and disclaim any intent or obligation to update any forward-looking statement. You can identify these statements by forward-looking words such as "may," "expect," "intend," "anticipate," "believe," "estimate," "plan," "could," "should" and "continue" or the negative of these or similar words. These forward-looking statements may also use different phrases. We have based these forward-looking statements on management's (for purposes of this Item 2, "we", "us" or "our") current expectations and projections about future events. Examples of language found in forward-looking statements include the following: • projections of our future revenue, results of operations and financial condition; • anticipated efficacy of our products, product development activities and product innovations; • our ability to consolidate the five OVA1 immunoassays on a single mainstream automated platform; • competition and consolidation in the markets in which we compete; • existing and future collaborations and partnerships; • the utility of biomarker discoveries; • our belief that particular biomarker discoveries may have diagnostic and/or therapeutic utility; • achieving milestones in product development, future regulatory or scientific submissions and presentations; • 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; • results of clinical trials, post-market studies required by FDA, and publications on OVA1; • forgiveness of the outstanding principal amounts of the secured line of credit by Quest Diagnostics; • commercialization of tests through and recognition of revenue under our agreement with Quest Diagnostics; • the amount of funding required to fund our planned operations; • the potential loss of expected funding in the event that the warrants issued by us on May 13, 2013 are not exercised; • the consolidation of holdings of our common stock in the hands of fewer investors; and • our ability to obtain and expected reimbursement for our products from third party payers such as private insurance companies and government insurance plans. Such 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 diagnostic products; our ability to manage our operating expenses and cash resources consistently 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 - 9 --------------------------------------------------------------------------------- Table of Contents commercialize our products; our ability to obtain any regulatory approval for our future diagnostic products; our ability to maintain sufficient or acceptable supplies of immunoassay kits from our suppliers; our success in achieving development milestones, achieving desired results in clinical trials or FDA-mandated studies; 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 our forward-looking statements. Overview Our vision is to become a recognized leader in the advancement of women's health by providing innovative methods that detect, monitor and manage the treatment of gynecologic cancers. We are dedicated to the discovery, development and commercialization of novel high-value diagnostic tests that help physicians diagnose, treat and improve outcomes for patients. Our tests are intended to detect, diagnose and stage disease, and to help guide decisions regarding prognosis and patient treatment. These may include decisions to refer patients to specialists, to perform additional testing, or to assist in the selection or monitoring of therapy and disease progression. A distinctive feature of our approach is to combine multiple biomarkers into a single, reportable index score that has higher diagnostic effectiveness than its constituents. We concentrate our development of novel diagnostic tests in the fields of gynecologic oncology 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 other issues in the fields of oncology and women's health through collaborations with leading academic and clinical research institutions. Our lead product, OVA1, an ovarian cancer blood test, was cleared by the United States Food and Drug Administration ("FDA") in September 2009. 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 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 in a clinical cohort of 516 patients, OVA1, in conjunction with clinical evaluation, was able to identify 95.7% (154/161) of the malignant ovarian tumors overall, and to rule out malignancy with a negative predictive value ("NPV") of 94.6% (123/130). At the 2010 International Gynecologic Cancer Society Meeting, data were presented demonstrating the high sensitivity of OVA1 for epithelial ovarian cancers; 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 2012, we completed a second pivotal clinical study of OVA1, called the "OVA500 study" and led by Dr. Robert E. Bristow, Director of Gynecologic Oncology Services with UC Irvine Healthcare. The study evaluated OVA1 performance in a population of 494 patients who underwent surgery for an adnexal mass after enrollment by a non-gynecologic oncologist, the intended use population for routine OVA1 testing. In the new study, of the 27 sites used in each study, only 10 were common to both. Collectively, the clinical trial and the OVA 500 study evaluated 1,110 eligible subjects at a total of 44 sites. Despite the difference in population between the two studies, and the large number of differing sites, the sensitivity of OVA1 added to clinical impression (also called OVA1 dual assessment) was identical, at 95.7% (88/92). In addition, overall NPV of OVA1 dual assessment was 98.1% (204/208), higher than the 94.6% NPV found in the earlier validation study. In premenopausal surgery patients, OVA1 dual assessment sensitivity was 93.5% (29/31), NPV was 98.6% (145/147) and specificity was 58.9% - 10 - -------------------------------------------------------------------------------- Table of Contents (145/246) when combined with clinical assessment. OVA1 also showed strong performance in detecting early stage malignancies. OVA1 correctly stratified 91.4% (32/35) of early stage cancers and 89.3% (25/28) of stage I cancers as high risk, respectively. In comparison, CA125-II sensitivity was 65.7% (23/35) for early stage and 64.3% (18/28) for stage I malignancies. Overall, the results strongly and independently confirmed the clinical performance of OVA1 in presurgical triage of adnexal mass patients, including premenopausal and early stage cancers. The OVA500 study was published in February 2013 in the peer-reviewed journal Gynecologic Oncology, which enjoys the highest impact factor rating of any journal worldwide focused on gynecologic oncology. The results have also been incorporated into an updated Medical Education presentation, as well as our Marketing and Reimbursement collateral. Since many professional medical societies stress the importance of multiple independent clinical trials as so-called "evidence levels", we also believe that OVA500 contributes to a higher evidence level relative to OVA1's utility in the medical management of adnexal masses. Dr. Bristow presented another study at the Society of Gynecological Oncology in March 2013 which has been submitted to a medical journal (not yet published). It was based on the medical records of 13,321 women with epithelial cancer, the most common type of ovarian cancer, diagnosed from 1999 to 2006 in California. Only 37 percent of these patients received treatment that adhered to guidelines set by the National Comprehensive Cancer Network, an alliance of 21 major cancer centers with expert panels that analyze, research and recommend treatments. The study found that surgeons who operated on 10 or more women a year for ovarian cancer, and hospitals that treated 20 or more a year, were more likely to stick to the guidelines and their patients lived longer. Among women with advanced disease - the stage at which ovarian cancer is usually first found - 35 percent survived at least five years if their care met the guidelines, compared with 25 percent of those whose care fell short. According to Dr. Bristow, principal investigator of the study, "If we could just make sure that women get to the people who are trained to take care of them, the impact would be much greater than that of any new chemotherapy drug or biological agent." (NY Times, March 11, 2013, Denise Grady) In addition to OVA1, we have development programs in other clinical aspects of ovarian cancer as well as in peripheral arterial disease. In the field of peripheral arterial disease, 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 peripheral arterial disease. We have completed an intended-use study, published in the December 2012 edition of Vascular Medicine, to develop and validate a multi-marker algorithm for the assessment of individuals at risk for peripheral arterial disease. This algorithm will be specifically directed at a primary care population in which the peripheral arterial disease blood test is expected to be used. With our recent decision to focus on gynecologic oncology and related diseases, we now plan to seek a Development/Commercial Partner for this program who will work with us to complete the product development, conduct the required clinical validation studies, and eventually commercialize this product on a global basis. In another program, we have initiated pilot experiments intended to identify markers with high clinical specificity that may complement OVA1. These experiments are early stage and may take different directions depending on the results. We have yet to select one or more intended uses, and establish a regulatory pathway for this potential next generation OVA product. 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 Office of Sponsored Programs; Stanford University; and the University of Kentucky. The Medicare contractor Highmark Medicare Services (now Novitas Solutions) has been covering OVA1 in its reimbursement program since March 2010. There are currently twenty-five independent BlueCross BlueShield plans, representing approximately 45.2 million lives, which provide coverage for OVA1. In total, including Medicare and other private payers, approximately 91.7 million patients have access and coverage for OVA1. The Company and Quest Diagnostics are pursuing coverage from additional payers. In January 2012, the Department of Defense added OVA1 to their Quest Diagnostics lab services contract, giving more than 45 military medical centers in the U.S. and numerous military medical clinics and facilities around the world access to OVA1 for the first time. Approximately 1.4 million uniformed service members now have access to OVA1 through the Quest Diagnostics lab services contract with the Department of Defense, bringing the covered lives total to over 93 million. On April 17, 2013, we announced the signing of a cooperative research and development agreement (CRADA) with the U.S. Army Medical Research and Materiel Command (USAMRMC). The agreement kicks off a project titled, "Cost Reduction Using OVA1 in a Treatment Algorithm for Adnexal Masses in Women," and follows the January 2012 decision by the U.S. Department of Defense to cover OVA1 testing. The two-phase study will investigate the cost-benefit profile of OVA1 testing as a presurgical standard of care in women with pelvic masses, and assess OVA1 clinical utility in a managed care setting. - 11 - -------------------------------------------------------------------------------- Table of Contents Phase 1 will retrospectively assess medical outcomes and total cost of care to establish historical benchmarks and estimate potential benefits of OVA1 utilization. Phase 2 will involve a multi-center prospective clinical study within the Western Regional Command to assess OVA1 as a standard of care across a large sector of the U.S. Armed Forces. The project will further support our Reimbursement efforts, by gathering data on the real-world impact of OVA1 on medical and health economic outcomes compared with accurate and holistic benchmarks. Under the terms of our Strategic Alliance Agreement with Quest Diagnostics, 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 reference laboratory marketplace 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 its exclusivity period for an additional year beyond September 11, 2014 on the same terms and conditions. In March 2012, the American Medical Association (AMA) Current Procedural Terminology (CPT ®) Panel voted to approve an application for a Category I CPT code for OVA1, which became effective January 1, 2013. The new CPT code is a positive step forward in advancing the commercialization of OVA1, as we believe it helps streamline claims processing and accelerate further coverage and adoption by private payers. On January 3, 2013, we received a letter (the "Delisting Notice") from the NASDAQ Stock Market LLC ("NASDAQ") notifying us that we were not in compliance with NASDAQ's Listing Rule 5620(a), which requires the Company to hold an annual meeting of shareholders no later than one year after the end of the Company's fiscal year-end, and Listing Rule 5620(b), which requires the Company to solicit proxies and provide proxy statements for such meeting and to provide copies of such proxy solicitation to NASDAQ. The annual meeting was delayed due to a lawsuit brought against the Company and its board of directors by dissident stockholders, Gyorgy B. Bessenyei and Robert S. Goggin, III, which prohibited the Company from holding a meeting until the matter was resolved. We held our annual meeting of shareholders on March 21, 2013 and are back in compliance with the NASDAQ listing rules. On March 18, 2013, we appointed Thomas H. McLain as President and Chief Executive Officer. Mr. McLain most recently served as Chief Executive Officer and Chief Financial Officer of Claro Scientific, LLC, an early-stage diagnostic company. Before Claro, from 1998 to 2007 he held various senior management positions at Nabi Biopharmaceuticals (now Biota Pharmaceuticals, Inc.), a biotechnology company addressing immune system conditions. Prior to Nabi, Mr. McLain held several senior management positions of increasing responsibility over 10 years at Bausch & Lomb Incorporated, a global eye care company. Mr. McLain also previously served Eastman Chemical Company as a member of its board of directors, the audit and finance committees, and as chairman of the health, safety, environment and security committee. Mr. McLain previously served as a member of the board of the biotechnology industry association (BIO), as well as several community and business development boards. Earlier in his career, Mr. McLain served as Audit Manager at Ernst & Young, LLP. He holds an MBA in Accounting and Information Systems from the University of Rochester, Simon Graduate School of Business and a BA in economics from the College of the Holy Cross. Effective March 18, 2013, the Company and Thomas H. McLain entered into an employment agreement (the "Employment Agreement"). Pursuant to the terms of the Employment Agreement, the Company will pay Mr. McLain an annual base salary of at least $350,000. In addition, Mr. McLain will be eligible for a bonus of up to fifty percent (50%) of his base salary (prorated for partial years) for achievement of reasonable Company and individual performance-related goals to be defined by the Company's Board of Directors. In addition, Mr. McLain is eligible to receive a one-time milestone incentive bonus of $50,000 that will be paid within thirty (30) days after the successful completion of a fund raising event of a minimum net to Vermillion of $4 million. In the event Mr. McLain is terminated "without cause" or "for good reason", as those terms are defined in the Employment Agreement, at any time following the date which is six (6) months following the Effective Date, he is entitled to receive continued payment of his base salary as then in effect, as well as continued health and dental benefits, for a period of twelve months following the date of termination. In addition, pursuant to the Employment Agreement, in the event Mr. McLain is terminated "without cause" or "for good reason" within twelve (12) months following a "change of control", as those terms are defined in the Employment Agreement, one-hundred percent (100%) of any then-unvested shares under Company stock options then held by Mr. McLain will vest upon the date of such termination. - 12 - -------------------------------------------------------------------------------- Table of Contents On March 18, 2013, Mr. McLain was granted an option to purchase 400,000 shares of the Company's common stock, subject to approval by the Company's stockholders of an increase in the number of shares authorized under the Company's 2010 Stock Incentive Plan. The options will vest in forty-eight (48) equal monthly installments, with the first installment vesting on April 1, 2013, and subject to acceleration upon a change in control, as defined in his Employment Agreement. Mr. McLain succeeded Bruce Huebner, the company's interim president and chief executive officer. Mr. Huebner was elected as Chairman of the Board of Directors, also on March 18, 2013. On March 21, 2013, Robert S. Goggin, III, a partner with Keller and Goggin, PC, was elected to our Board of Directors at our Annual Stockholder Meeting. On May 6, 2013, we received notification that one of the five immunoassay component kits that are used in OVA1 is to be discontinued effective December 2014. As part of our existing strategic product roadmap, we had planned on consolidating the five OVA1 immunoassays on a single mainstream automated platform, and as part of the consolidation we expect to substitute a new immunoassay component kit for the discontinuing kit. We are required to submit these changes pursuant to a 510k submission with the FDA. We consider consolidating the immunoassay components on a single platform to be a strategic step toward allowing OVA1 broader market access, including potential commercialization outside the United States. At present, we anticipate this project will be completed well before December 2014 and expect that no material business interruption will result. However, no assurances can be made that the FDA will clear our expected 510(k) submission. On May 13, 2013, we completed a private placement pursuant to which existing and new investors purchased 8,000,000 shares of our common stock at a price per share of $1.46. We also issued 12,500,000 warrants at a price per warrant of $0.125 in the private placement. The net proceeds of the private placement were approximately $11,800,000 after deducting expected offering expenses. The Warrants are exercisable for 12,500,000 shares of common stock at $1.46 per share. On May 10, 2013, the Board of Directors amended the Company's bylaws, effective immediately, to increase the number of directors of the Company from six to eight persons, creating two new director positions. Both new director positions will be Class III directors. The increase was required under the Shareholders Agreement between the Company and the investors named therein dated May 13, 2013 in conjunction with the recently announced private placement of common stock and warrants. 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, 2012, filed with the SEC on March 1, 2013. Recent Accounting Pronouncements In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") number 2013-02, Other Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income to improve the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 requires reporting the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income. It is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012. The adoption of this ASU does not affect our interim consolidated financial statements, but could require additional disclosure, if applicable, in future periods. - 13 - -------------------------------------------------------------------------------- Table of Contents Results of Operations - Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012 The selected summary financial and operating data of Vermillion for the three months ended March 31, 2013 and 2012 were as follows: Three Months Ended March 31, Increase (Decrease) (dollars in thousands) 2013 2012 Amount % Revenue: Product $ 214 $ 198 $ 16 8 License 114 114 - - Total revenue 328 312 16 5 Cost of revenue: Product 37 38 (1 ) (3 ) Total cost of revenue 37 38 (1 ) (3 ) Gross profit 291 274 17 6 Operating expenses: Research and development 484 452 32 7 Sales and marketing 1,072 1,518 (446 ) (29 ) General and administrative 1,337 468 869 186 Total operating expenses 2,893 2,438 455 19 Loss from operations (2,602 ) (2,164 ) (438 ) 20 Interest income 2 8 (6 ) (75 ) Interest expense - (65 ) 65 100 Gain on litigation settlement, net - 379 (379 ) (100 ) Reorganization items - 88 (88 ) (100 ) Other income (expense), net 29 (22 ) 51 (232 ) Loss before income taxes (2,571 ) (1,776 ) (795 ) 45 Income tax benefit (expense) - - - - Net loss $ (2,571 ) $ (1,776 ) $ (795 ) 45 Product Revenue. Product revenue was $214,000 for the three months ended March 31, 2013 compared to $198,000 for the same period in 2012. We recognized product revenue for the three months ended March 31, 2013 for the sale of OVA1 through Quest Diagnostics. Quest Diagnostics performed approximately 4,274 OVA1 tests during the three months ended March 31, 2013 compared to approximately 3,952 tests for the same period in 2012. Product revenue increased for the three months ended March 31, 2013 compared to the same period in 2012 due to the increased volume of tests. We commercially launched OVA1 in March 2010 and product revenue for the three months ended March 31, 2013 was substantially derived from domestic sales of OVA1. 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, 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 for the three months ended March 31, 2013 were consistent with the same period in 2012. However, we expect research and development expense to increase in future periods as we continue to invest in our product pipeline and progress our FDA-required post-marketing study to verify the performance characteristics of OVA1 in routine clinical use. Sales and Marketing Expenses. Our sales and marketing expenses consist primarily of personnel-related expenses, education and promotional expenses, and infrastructure expenses. 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 decreased $446,000, or 29%, - 14 - -------------------------------------------------------------------------------- Table of Contents for the three months ended March 31, 2013 compared to the same period in 2012. The decrease was primarily due to marketing and creative services consulting expense totaling $255,000 in the prior year that was not repeated in 2013. In addition, personnel and personnel-related costs decreased $172,000 compared to the same period in the prior year due to lower average headcount during the period due to our sales force restructuring in early 2012 . 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. General and administrative expenses increased by $869,000, or 186%, for the three months ended March 31, 2013 compared to the same period in 2012. The increase was due to $151,000 in Annual Shareholder Meeting and proxy solicitation costs (no similar costs in 2012) as well as an increase of $70,000 in legal fees, primarily related to our contested proxy. Personnel related costs increased $150,000 for the cost of our CEO transition compared to the same period in 2012. In addition, the prior year period included one-time reversals of $440,000 of amounts previously accrued for litigation which was settled in 2012. We expect our general and administrative expenses to decrease in future periods as the one-time costs of the Annual Shareholder Meeting and CEO transition during the three months ended March 31, 2013 are not expected to recur. Interest Expense. Interest expense decreased to $0 due to the payoff of the Quest Diagnostics loan in October 2012. Gain on Litigation Settlement, Net. In February 2012, we entered into a Settlement Agreement with Oppenheimer & Co., Inc. related to losses on our short and long-term investments in previous years. Under the terms of the Settlement Agreement, the total settlement was $1,000,000; $535,000 ($379,000 net after legal fees and costs) was paid in March 2012 and $465,000 ($331,000 net after legal fees and costs) was paid in September 2012. The gain on litigation settlement represents the net proceeds received from the March 2012 payment. Reorganization Items. There were no reorganization items for the three months ended March 31, 2013 compared to income of $88,000 for the same period in 2012. The prior year amount was due primarily to the one-time recognition of $103,000 in claims adjustments upon the formal closure of our Bankruptcy Filing in January 2012. Liquidity and Capital Resources In March 2010, we launched OVA1 commercially. We will continue to expend resources in the selling and marketing of OVA1 and developing additional diagnostic tests. We have incurred significant net losses and negative cash flows from operations since inception. At March 31, 2013, we had an accumulated deficit of $326,016,000 and stockholders' equity of $2,227,000. As of March 31, 2013, we had $5,834,000 of cash and cash equivalents and $3,573,000 of current liabilities. We expect revenue relating to OVA1 to be our only material, recurring source of cash in 2013. Our ability to continue to meet our business objectives in the future is dependent upon, among other things, raising additional capital or generating sufficient revenue in excess of costs. Given these conditions, there is substantial doubt about the Company's ability to continue as a going concern. The interim consolidated financial statements have been prepared on a going concern basis and do not include any adjustments that might result from these uncertainties. On May 13, 2013, we completed a private placement of 8,000,000 shares of our common stock for estimated net proceeds of approximately $11,800,000. We issued 12,500,000 warrants in connection with this private placement. If these warrants are exercised, we would realize an additional $18,250,000 of net proceeds. We may also seek to raise additional capital in the future through a variety of sources, which may include the public equity market, private equity financing, collaborative arrangements, licensing arrangements, and/or public or private debt. - 15 - -------------------------------------------------------------------------------- Table of Contents Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. If we obtain additional funds through arrangements with collaborators or strategic partners, we may be required to relinquish our rights to certain technologies or products that we might otherwise seek to retain. 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. 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 determination 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 insurance payer community's acceptance of and reimbursement for OVA1. Cash and cash equivalents as of March 31, 2013 and December 31, 2012, were $5,834,000 and $8,007,000, respectively. Working capital was $2,804,000 and $5,295,000 at March 31, 2013 and December 31, 2012, respectively. Net cash used in operating activities was $2,173,000 for the three months ended March 31, 2013, resulting primarily from $2,571,000 net loss incurred as adjusted for non-cash license revenues of $114,000, partially offset by $176,000 of stock-based compensation expense. Net cash used in operating activities also included $360,000 of cash provided by changes in operating assets and liabilities mainly driven by the $159,000 increase of accounts payable, accrued liabilities and other liabilities and the $217,000 increase in deferred revenue. Net cash used in operating activities was $2,621,000 for the three months ended March 31, 2012, resulting primarily from $1,776,000 net loss incurred as adjusted for non-cash license revenues of $114,000, partially offset by $138,000 of stock-based compensation expense. Net cash used in operating activities also included $894,000 of cash used from changes in operating assets and liabilities mainly driven by the $976,000 decrease of accounts payable, accrued liabilities and other liabilities. There was no net cash used in investing activities for the three months ended March 31, 2013. Net cash used in investing activities was $9,000 for the three months ended March 31, 2012 due to the purchase of property and equipment. There was no net cash provided by financing activities for the three months ended March 31, 2013. Net cash provided by financing activities was $6,000 for the three months ended March 31, 2012, which resulted from net proceeds from issuance of common stock from exercise of stock options. We have significant net operating loss ("NOL") credit carryforwards as of March 31, 2013 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. Off-Balance Sheet Arrangements As of March 31, 2013, we had no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources. |