VERMILLION, INC., 10-Q filed on 11 Aug 17
Document and Entity Information
6 Months Ended
Jun. 30, 2017
Jul. 31, 2017
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Jun. 30, 2017 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q2 
 
Entity Registrant Name
VERMILLION, INC. 
 
Entity Central Index Key
0000926617 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Smaller Reporting Company 
 
Entity Common Stock, Shares Outstanding
 
56,164,082 
Condensed Consolidated Balance Sheets (USD $)
Jun. 30, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 6,028,000 
$ 5,242,000 
Accounts receivable
214,000 
275,000 
Prepaid expenses and other current assets
269,000 
498,000 
Inventories
102,000 
93,000 
Total current assets
6,613,000 
6,108,000 
Property and equipment, net
1,549,000 
1,911,000 
Other assets
11,000 
 
Total assets
8,173,000 
8,019,000 
Current liabilities:
 
 
Accounts payable
300,000 
881,000 
Accrued liabilities
1,541,000 
1,464,000 
Short-term debt
188,000 
182,000 
Other current liabilities
32,000 
34,000 
Total current liabilities
2,061,000 
2,561,000 
Non-current liabilities:
 
 
Long-term debt
1,538,000 
1,667,000 
Other non-current liabilities
47,000 
29,000 
Total liabilities
3,646,000 
4,257,000 
Commitments and contingencies (Note 3)
   
   
Stockholders' equity:
 
 
Common stock, par value $0.001 per share, 150,000,000 shares authorized at June 30, 2017 and December 31, 2016; 56,164,082 and 52,328,492 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively
56,000 
52,000 
Additional paid-in capital
395,060,000 
389,266,000 
Accumulated deficit
(390,589,000)
(385,556,000)
Total stockholders' equity
4,527,000 
3,762,000 
Total liabilities and stockholders' equity
$ 8,173,000 
$ 8,019,000 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Jun. 30, 2017
Dec. 31, 2016
Condensed Consolidated Balance Sheets [Abstract]
 
 
Common stock, par value
$ 0.001 
$ 0.001 
Common stock, shares authorized
150,000,000 
150,000,000 
Common stock, shares issued
56,164,082 
52,328,492 
Common stock, shares outstanding
56,164,082 
52,328,492 
Condensed Consolidated Statements Of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Jun. 30, 2017
Jun. 30, 2016
Revenue:
 
 
 
 
Product
$ 860 
$ 554 
$ 1,538 
$ 1,059 
Service
38 
155 
86 
155 
Total revenue
898 
709 
1,624 
1,214 
Cost of revenue:
 
 
 
 
Product
428 1
527 1
850 1
1,055 1
Service
266 1
60 1
571 1
60 1
Total cost of revenue
694 1
587 1
1,421 1
1,115 1
Gross profit
204 
122 
203 
99 
Operating expenses:
 
 
 
 
Research and development
268 2
564 2
493 2
1,498 2
Sales and marketing
1,041 3
1,628 3
2,064 3
3,908 3
General and administrative
1,241 4
1,691 4
2,648 4
3,350 4
Total operating expenses
2,550 
3,883 
5,205 
8,756 
Loss from operations
(2,346)
(3,761)
(5,002)
(8,657)
Interest income (expense), net
(10)
(8)
(22)
(5)
Other income (expense), net
(4)
20 
(9)
16 
Net loss
$ (2,360)
$ (3,749)
$ (5,033)
$ (8,646)
Net loss per share - basic and diluted
$ (0.04)
$ (0.07)
$ (0.09)
$ (0.17)
Weighted average common shares used to compute basic and diluted net loss per common share
56,113,917 
52,151,440 
55,123,977 
52,132,288 
Condensed Consolidated Statements Of Operations (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Jun. 30, 2017
Jun. 30, 2016
Cost Of Revenue [Member]
 
 
 
 
Stock-based compensation expense
$ 40 
$ 22 
$ 79 
$ 46 
Research And Development [Member]
 
 
 
 
Stock-based compensation expense
22 
53 
Sales And Marketing [Member]
 
 
 
 
Stock-based compensation expense
40 
14 
77 
56 
General And Administrative [Member]
 
 
 
 
Stock-based compensation expense
$ 295 
$ 319 
$ 510 
$ 445 
Condensed Consolidated Statements Of Cash Flows (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Cash flows from operating activities:
 
 
Net loss
$ (5,033)
$ (8,646)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation and amortization
401 
323 
Stock-based compensation expense
671 
600 
Loss on sale and disposal of property and equipment
Changes in operating assets and liabilities:
 
 
Accounts receivable
61 
(156)
Prepaid expenses and other assets
218 
233 
Inventories
(9)
Accounts payable, accrued liabilities and other liabilities
(504)
(835)
Deferred revenue
 
16 
Net cash used in operating activities
(4,191)
(8,455)
Cash flows from investing activities:
 
 
Purchase of property and equipment
(43)
(1,054)
Net cash used in investing activities
(43)
(1,054)
Cash flows from financing activities:
 
 
Proceeds from private placement offering of common stock, net of issuance costs
5,127 
 
Proceeds from issuance of DECD loan, net of issuance costs
 
1,966 
Principal repayment of DECD loan
(92)
(28)
Repayment of capital lease obligations
(15)
(14)
Proceeds from issuance of common stock from exercise of stock options
 
Net cash provided by financing activities
5,020 
1,929 
Net increase (decrease) in cash and cash equivalents
786 
(7,580)
Cash and cash equivalents, beginning of year
5,242 
18,642 
Cash and cash equivalents, end of year
6,028 
11,062 
Supplemental disclosure of cash flow information:
 
 
Cash paid during the period for interest
$ 24 
$ 10 
Organization, Basis Of Presentation And Significant Accounting And Reporting Policies
Organization, Basis Of Presentation And Significant Accounting And Reporting Policies

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 the “Company,” “we” or “our) is incorporated in the state of Delaware, and is engaged in the business of developing and commercializing diagnostic tests for gynecologic disease. The Company sells OVA1™ and Overa™ risk of malignancy tests for ovarian cancer (“OVA1” and “Overa, respectively) through Vermillion’s wholly-owned Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) certified clinical laboratory, ASPiRA LABS, Inc. (“ASPiRA LABS”). The Company also offers in-vitro diagnostic (“IVD”) trial services to third-party customers through its wholly-owned subsidiary, ASPiRA IVD, Inc. (“ASPiRA IVD”), which commenced operations in June 2016. ASPiRA IVD is a specialized, CLIA certified, laboratory provider dedicated to meeting the unique testing needs of IVD manufacturers seeking to commercialize high-complexity assays.

Going Concern

The Company has incurred significant net losses and negative cash flows from operations since inception, and as a result has an accumulated deficit of approximately $390,589,000  at  June 30, 2017. The Company also expects to incur a net loss and negative cash flows from operations for the remainder of 2017. The Company’s management believes that successful achievement of the Company’s business objectives will require additional financing. Given these conditions, there is substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements have been prepared on a going concern basis and do not include any adjustments that might result from these uncertainties.

The Company expects to raise capital through a variety of sources, which may include the exercise of common stock warrants, equity offerings, debt financing, collaborations, licensing arrangements, grants and government funding and strategic alliances. However, additional funding may not be available when needed or on terms acceptable to the Company. If the Company is unable to obtain additional capital, it may not be able to continue sales and marketing, research and development, or other operations on the scope or scale of current activity and that could have a material adverse effect on the Company’s business, results of operations and financial condition.

As discussed in Note 4, on February 17, 2017, the Company completed a private placement pursuant to which certain investors purchased Vermillion common stock and warrants to purchase shares of Vermillion common stock for net proceeds of approximately $5,127,000 after deducting offering expenses.

As discussed in Note 3, in March 2016, the Company entered into an agreement (the “Loan Agreement”) pursuant to which it may borrow up to $4,000,000 from the State of Connecticut Department of Economic and Community Development (the “DECD”). An initial disbursement of $2,000,000 was made to the Company in April 2016 under the Loan Agreement. The Loan Agreement provides that the remaining $2,000,000 will be disbursed if and when the Company achieves certain future milestones. 



Basis of Presentation

The accompanying unaudited condensed 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 Article 8-03 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 of the Company, 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 condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim unaudited condensed consolidated financial statements have read or have access to the audited consolidated financial statements for the preceding fiscal year. The condensed consolidated balance sheet at December 31, 2016 included in this report 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 condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2016, included in Vermillion’s Annual Report on Form 10-K which was filed with the Securities and Exchange Commission on March 31, 2017 (the “2016 Annual Report”).

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 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



Revenue Recognition



Product Revenue



        The Company has adopted ASC 954-605, Health Care Entities—Revenue Recognition, as revenue from laboratory services has become significant to the Company. The Company's product revenue is generated by performing diagnostic services using its OVA1 and Overa tests, and the service is completed upon the delivery of test results to the prescribing physician. The Company recognizes revenue related to billings for Medicare and commercial payers on an accrual basis, net of contractual and other adjustments, when amounts that will ultimately be realized can be estimated. Until a contract has been negotiated with a commercial payer or governmental program, the OVA1 and Overa tests may or may not be covered by these entities' existing reimbursement policies. In addition, patients do not enter into direct agreements with the Company that commit them to pay any portion of the cost of the tests in the event that their insurance declines to reimburse the Company. In the absence of an agreement with the patient or other clearly enforceable legal right to demand payment from the patient, the related revenue is only recognized upon cash receipt.



Estimates of amounts that the Company will ultimately realize require significant judgment by management. Some patients have out-of-pocket costs for amounts not covered by their insurance carrier, and the Company may bill the patient directly for these amounts in the form of co-payments and co-insurance in accordance with the patient’s health plan. Some payers may not cover the OVA1 and Overa tests as ordered by the prescribing physician under their reimbursement policies. The Company pursues reimbursement from such patients on a case-by-case basis. In the absence of contracted reimbursement coverage or the ability to estimate the amount that will ultimately be realized for the Company's services, revenue is recognized when cash is received.



 See discussion of FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”) included in Recent Accounting Pronouncements below.  





Service Revenue



The Company’s service revenue is generated by performing IVD trial services for third-party customers. In accordance with SAB Topic 13, service revenue is recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. 

See discussion of ASU No. 2014-09 included in Recent Accounting Pronouncements below.

The Company has made no other significant changes in its critical accounting policies and estimates from those disclosed in the 2016 Annual Report. 

Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), Compensation - Stock Compensation (“ASU 2016-09”). The new guidance simplifies several aspects of the accounting for share-based payments, including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the employees' maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash flows for the excess tax benefit and employee taxes paid when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016 and interim periods within that reporting period. The adoption of this standard is not expected to have a material effect on our financial statements.



In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets, provides more useful information to users of financial statements through improved disclosure requirements and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. This guidance requires that an entity depict the consideration by applying a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. On April 1, 2015, the FASB voted for a one-year deferral of the effective date of the new revenue recognition standard, ASU No. 2014-09. On July 15, 2015, the FASB affirmed these changes, which requires public entities to apply the amendments in ASU 2014-09 for annual reporting beginning after December 15, 2017. Early adoption is permitted beginning after December 31, 2016, the original effective date in ASU 2014-09.

The Company is in the early stages of its analysis of the effect ASU 2014-09 will have on its Service Revenue, but expects to complete its analysis during the second half of 2017.

The Company is also in the early stages of its analysis of the effect ASU 2014-09 will have on its Product Revenue and also expects to complete this analysis in the second half of 2017. Revenue that is recognized upon the ultimate receipt of cash under the Company’s existing revenue recognition policy will have to be reassessed under the new standard. The next step in the Company’s implementation process is to review its patient account population to determine the appropriate distribution of patient accounts by payer  (i.e., Medicare, patient pay, other third-party payer, etc.) into portfolios with similar collection experience that, when evaluated for collectability, will result in a materially consistent revenue amount for such portfolios as if each patient account were evaluated on a contract-by-contract basis.

The Company has not yet determined if it plans to utilize the full retrospective or modified retrospective method of adoption, but anticipates adopting the new standard in the first quarter of 2018.



Agreements With Quest Diagnostics Incorporated
Agreements With Quest Diagnostics Incorporated



2.   AGREEMENTS WITH QUEST DIAGNOSTICS INCORPORATED



In March 2015, the Company entered into a commercial agreement with Quest Diagnostics, Incorporated (“Quest Diagnostics”). Pursuant to this agreement,  all OVA1 U.S. testing services for Quest Diagnostics customers were transferred to Vermillion’s wholly-owned subsidiary, ASPiRA LABS, as of August 2015. Pursuant to this agreement, as amended as of March 11, 2017, Quest Diagnostics has agreed to provide blood draw and logistics support by transporting specimens from its clients to ASPiRA LABS for testing through at least March 11, 2018 in exchange for a market value fee. Per the terms of this agreement, the Company will not offer to existing or future Quest Diagnostics customers tests that Quest Diagnostics offers.

Commitments And Contingencies
Commitments And Contingencies

3.   COMMITMENTS AND CONTINGENCIES



Development Loan

On March 22, 2016, the Company entered into the Loan Agreement, pursuant to which the Company may borrow up to $4,000,000 from the DECD. Proceeds from the $2,000,000 April 2016 initial disbursement under the Loan Agreement were utilized primarily to fund the build-out, information technology infrastructure and other costs related to the Company’s Trumbull, Connecticut facility and operations. The loan bears interest at a fixed rate of 2.0% per annum and requires equal monthly payments of principal and interest until maturity, which occurs on April 15, 2026. As security for the loan, the Company has granted the DECD a blanket security interest in the Company’s personal and intellectual property. The DECD’s security interest in the Company’s intellectual property may be subordinated to a qualified institutional lender. Under the terms of the Loan Agreement, the Company may be eligible for forgiveness of up to $2,000,000 of the principal amount of the loan if the Company achieves certain job creation and retention milestones by March 1, 2018. Conversely, if the Company is unable to meet these job creation milestones, namely, hiring 40 full time employees with a specified average annual salary within the allotted timeframe and retaining those employees for a two-year period or does not maintain the Company’s Connecticut operations for a period of 10 years, the DECD may require early repayment of a portion or all of the loan plus a penalty of 5%. 

   

As discussed above, an initial disbursement of $2,000,000 was made to the Company on April 15, 2016 under the Loan Agreement. The Loan Agreement provides that the remaining $2,000,000 will be disbursed if and when the Company achieves certain future milestones. The loan may be prepaid at any time without premium or penalty.



Operating Leases

The Company leases facilities to support its business of discovering, developing and commercializing diagnostic tests in the fields of gynecologic disease. The Company’s principal facility, including the CLIA laboratory used by ASPiRA LABS, is located in Austin, Texas, and the CLIA laboratory used by ASPiRA IVD is located in Trumbull, Connecticut. The Austin, Texas lease includes an aggregate annual base rent of $85,000 and annual estimated common area charges, taxes and insurance of $46,000 and expires on January 31, 2019.    

In October 2015, the Company entered a lease agreement for a facility in Trumbull, Connecticut. The lease required initial payments for the buildout of leasehold improvements to the office space, which were approximately $596,000. The term of the lease is five years beginning after the initial date of occupancy in January 2016 and a rent abatement period of five months. The lease includes an aggregate annual base rent of $32,000 and annual estimated common area charges, taxes and insurance of $95,000.  

Building rent for the three months ended June 30, 2017 and 2016 totaled $62,000 and $53,000, respectively. Building rent for the six months ended June 30, 2017 and 2016 totaled $123,000 and $104,000, respectively.



Capital Lease

In April 2015, the Company leased a laboratory instrument for a total initial payment of $125,000 and ongoing payments of approximately $3,500 per month for 36 months after delivery. The agreement also requires minimum annual purchases of reagents from the manufacturer of the equipment. The laboratory instrument was placed into service on July 1, 2015.

The accumulated amortization of assets under capital lease obligations was $155,000 and $77,000 as of June 30, 2017 and 2016, respectively. The net book value of assets under capital lease obligations was $77,000 and $155,000 as of June 30, 2017 and 2016, respectively.  



Non-cancelable Royalty Obligations

The Company is a party to an amended research collaboration agreement with The Johns Hopkins University School of Medicine under which the Company licenses certain of its intellectual property. Under the terms of the amended research collaboration agreement, Vermillion is required to pay the greater of 4% royalties on net sales of diagnostic tests using the assigned patents or annual minimum royalties of $57,500. Royalty expense for the three months ended June 30, 2017 and 2016 totalled $34,000 and $22,000, respectively. Royalty expense for the six months ended June 30, 2017 and 2016 totalled $63,000 and $42,000, respectively.

  

Stockholders' Equity
Stockholders' Equity

4.   STOCKHOLDERS’ EQUITY

2017 Private Placement       

On February 17, 2017, the Company completed a private placement pursuant to which certain investors purchased 3,747,125 shares of Vermillion common stock at a price of $1.40 per share. Vermillion also issued warrants to purchase shares of Vermillion common stock at a price of $0.125 per warrant share in the private placement. Net proceeds of the private placement were approximately $5,127,000 after deducting offering expenses. The warrants are exercisable for 2,810,338 shares of Vermillion common stock at $1.80 per share. The warrants may be exercised from time to time beginning August 17, 2017 and expire on the fifth anniversary of the date of issuance or, if earlier, five business days after Vermillion delivers notice that the closing price per share of its common stock exceeded the exercise price for 20 consecutive trading days during the exercise period.

The sale of common stock and issuance of warrants qualified for equity treatment under GAAP. The respective values of the warrants and common stock were calculated using their relative fair values and classified under common stock and additional paid-in capital. The value ascribed to the warrants is $804,000 and to the common stock is approximately $4,296,000.



2010 Stock Incentive Plan

The Company’s employees, directors, and consultants are eligible to receive awards under the Vermillion, Inc. Second Amended and Restated 2010 Stock Incentive Plan (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 8,122,983 shares of Vermillion common stock, subject to adjustment as provided in the 2010 Plan.

Stock-Based Compensation

During the six months ended June 30, 2017, the Company awarded to Vermillion’s non-employee directors 131,250 shares of restricted stock under the 2010 Plan having a fair value of approximately $281,000 as payment for services to be rendered in 2017. These shares of restricted stock vested 50% on June 1, 2017, and will vest 25% on each of September 1, 2017 and December 1, 2017. The Company also issued to certain consultants 22,841 shares of restricted stock under the 2010 Plan having a fair value of approximately $39,000.



During the three months ended June 30, 2017, the Company issued to certain consultants 9,213 shares of restricted stock under the 2010 Plan having a fair value of approximately $19,000. The Company did not make any awards of restricted stock to non-employee directors during the three months ended June 30, 2017



During the six months ended June 30, 2017, the Company also granted certain consultants options to purchase 70,000 shares of Vermillion common stock with an exercise price of $2.14 per share.  The Company also granted certain officers and employees options to purchase approximately 916,000 shares of Vermillion common stock with an exercise price of $2.14 per share. These stock options generally vest 25% on each of the four anniversaries of the grant date.  In addition, the Company granted certain officers and employees options to purchase 250,000 shares of Vermillion common stock with an exercise price of approximately $2.14 per share with performance-based vesting based on certain metrics through December 31, 2017. These options vest 25% on each of the four anniversaries of the grant date if the performance-based metrics are met.



During the three months ended June 30, 2017, the Company granted certain officers and employees options to purchase 14,500 shares of Vermillion common stock with an exercise price of $1.83 per share. These stock options vest 25% on each of the four anniversaries of the vesting commencement date for each such stock option. 



The allocation of employee stock-based compensation expense by functional area for the three and six months ended June 30, 2017 and 2016 was as follows:

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,

(in thousands)

 

2017

 

2016

 

2017

 

2016

Cost of revenue

 

$

20 

 

$

22 

 

$

40 

 

$

46 

Research and development

 

 

 

 

22 

 

 

 

 

53 

Sales and marketing

 

 

38 

 

 

14 

 

 

70 

 

 

56 

General and administrative

 

 

283 

 

 

320 

 

 

414 

 

 

425 

Total

 

$

343 

 

$

378 

 

$

529 

 

$

580 



 

 

 

 

 

 

 

 

 

 

 

 





Loss Per Share
Loss Per Share

5.   LOSS PER SHARE

The Company calculates basic loss per share using the weighted average number of shares of Vermillion common stock outstanding during the period. Because the Company is in a net loss position, diluted loss per share is calculated using the weighted average number of shares of Vermillion common stock outstanding and excludes the effects of 11,662,280 and  7,808,044 potential shares of Vermillion common stock as of June 30, 2017 and 2016, respectively, that are anti-dilutive. Potential shares of Vermillion common stock include incremental shares of Vermillion common stock issuable upon the exercise of outstanding warrants, stock options and unvested restricted stock units.

Organization, Basis Of Presentation And Significant Accounting And Reporting Policies (Policy)

Organization

Vermillion, Inc. (“Vermillion”; Vermillion and its wholly-owned subsidiaries are collectively referred to as the “Company,” “we” or “our) is incorporated in the state of Delaware, and is engaged in the business of developing and commercializing diagnostic tests for gynecologic disease. The Company sells OVA1™ and Overa™ risk of malignancy tests for ovarian cancer (“OVA1” and “Overa, respectively) through Vermillion’s wholly-owned Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) certified clinical laboratory, ASPiRA LABS, Inc. (“ASPiRA LABS”). The Company also offers in-vitro diagnostic (“IVD”) trial services to third-party customers through its wholly-owned subsidiary, ASPiRA IVD, Inc. (“ASPiRA IVD”), which commenced operations in June 2016. ASPiRA IVD is a specialized, CLIA certified, laboratory provider dedicated to meeting the unique testing needs of IVD manufacturers seeking to commercialize high-complexity assays.

Going Concern

The Company has incurred significant net losses and negative cash flows from operations since inception, and as a result has an accumulated deficit of approximately $390,589,000  at  June 30, 2017. The Company also expects to incur a net loss and negative cash flows from operations for the remainder of 2017. The Company’s management believes that successful achievement of the Company’s business objectives will require additional financing. Given these conditions, there is substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements have been prepared on a going concern basis and do not include any adjustments that might result from these uncertainties.

The Company expects to raise capital through a variety of sources, which may include the exercise of common stock warrants, equity offerings, debt financing, collaborations, licensing arrangements, grants and government funding and strategic alliances. However, additional funding may not be available when needed or on terms acceptable to the Company. If the Company is unable to obtain additional capital, it may not be able to continue sales and marketing, research and development, or other operations on the scope or scale of current activity and that could have a material adverse effect on the Company’s business, results of operations and financial condition.

As discussed in Note 4, on February 17, 2017, the Company completed a private placement pursuant to which certain investors purchased Vermillion common stock and warrants to purchase shares of Vermillion common stock for net proceeds of approximately $5,127,000 after deducting offering expenses.

As discussed in Note 3, in March 2016, the Company entered into an agreement (the “Loan Agreement”) pursuant to which it may borrow up to $4,000,000 from the State of Connecticut Department of Economic and Community Development (the “DECD”). An initial disbursement of $2,000,000 was made to the Company in April 2016 under the Loan Agreement. The Loan Agreement provides that the remaining $2,000,000 will be disbursed if and when the Company achieves certain future milestones. 



Basis of Presentation

The accompanying unaudited condensed 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 Article 8-03 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 of the Company, 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 condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim unaudited condensed consolidated financial statements have read or have access to the audited consolidated financial statements for the preceding fiscal year. The condensed consolidated balance sheet at December 31, 2016 included in this report 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 condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2016, included in Vermillion’s Annual Report on Form 10-K which was filed with the Securities and Exchange Commission on March 31, 2017 (the “2016 Annual Report”).

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 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

Revenue Recognition



Product Revenue



        The Company has adopted ASC 954-605, Health Care Entities—Revenue Recognition, as revenue from laboratory services has become significant to the Company. The Company's product revenue is generated by performing diagnostic services using its OVA1 and Overa tests, and the service is completed upon the delivery of test results to the prescribing physician. The Company recognizes revenue related to billings for Medicare and commercial payers on an accrual basis, net of contractual and other adjustments, when amounts that will ultimately be realized can be estimated. Until a contract has been negotiated with a commercial payer or governmental program, the OVA1 and Overa tests may or may not be covered by these entities' existing reimbursement policies. In addition, patients do not enter into direct agreements with the Company that commit them to pay any portion of the cost of the tests in the event that their insurance declines to reimburse the Company. In the absence of an agreement with the patient or other clearly enforceable legal right to demand payment from the patient, the related revenue is only recognized upon cash receipt.



Estimates of amounts that the Company will ultimately realize require significant judgment by management. Some patients have out-of-pocket costs for amounts not covered by their insurance carrier, and the Company may bill the patient directly for these amounts in the form of co-payments and co-insurance in accordance with the patient’s health plan. Some payers may not cover the OVA1 and Overa tests as ordered by the prescribing physician under their reimbursement policies. The Company pursues reimbursement from such patients on a case-by-case basis. In the absence of contracted reimbursement coverage or the ability to estimate the amount that will ultimately be realized for the Company's services, revenue is recognized when cash is received.



 See discussion of FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”) included in Recent Accounting Pronouncements below.  





Service Revenue



The Company’s service revenue is generated by performing IVD trial services for third-party customers. In accordance with SAB Topic 13, service revenue is recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. 

See discussion of ASU No. 2014-09 included in Recent Accounting Pronouncements below.

The Company has made no other significant changes in its critical accounting policies and estimates from those disclosed in the 2016 Annual Report.

Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), Compensation - Stock Compensation (“ASU 2016-09”). The new guidance simplifies several aspects of the accounting for share-based payments, including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the employees' maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash flows for the excess tax benefit and employee taxes paid when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016 and interim periods within that reporting period. The adoption of this standard is not expected to have a material effect on our financial statements.



In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets, provides more useful information to users of financial statements through improved disclosure requirements and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. This guidance requires that an entity depict the consideration by applying a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. On April 1, 2015, the FASB voted for a one-year deferral of the effective date of the new revenue recognition standard, ASU No. 2014-09. On July 15, 2015, the FASB affirmed these changes, which requires public entities to apply the amendments in ASU 2014-09 for annual reporting beginning after December 15, 2017. Early adoption is permitted beginning after December 31, 2016, the original effective date in ASU 2014-09.

The Company is in the early stages of its analysis of the effect ASU 2014-09 will have on its Service Revenue, but expects to complete its analysis during the second half of 2017.

The Company is also in the early stages of its analysis of the effect ASU 2014-09 will have on its Product Revenue and also expects to complete this analysis in the second half of 2017. Revenue that is recognized upon the ultimate receipt of cash under the Company’s existing revenue recognition policy will have to be reassessed under the new standard. The next step in the Company’s implementation process is to review its patient account population to determine the appropriate distribution of patient accounts by payer  (i.e., Medicare, patient pay, other third-party payer, etc.) into portfolios with similar collection experience that, when evaluated for collectability, will result in a materially consistent revenue amount for such portfolios as if each patient account were evaluated on a contract-by-contract basis.

The Company has not yet determined if it plans to utilize the full retrospective or modified retrospective method of adoption, but anticipates adopting the new standard in the first quarter of 2018.



Stockholders' Equity (Tables)
Allocation of Stock-Based Compensation Expense by Functional Area



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,

(in thousands)

 

2017

 

2016

 

2017

 

2016

Cost of revenue

 

$

20 

 

$

22 

 

$

40 

 

$

46 

Research and development

 

 

 

 

22 

 

 

 

 

53 

Sales and marketing

 

 

38 

 

 

14 

 

 

70 

 

 

56 

General and administrative

 

 

283 

 

 

320 

 

 

414 

 

 

425 

Total

 

$

343 

 

$

378 

 

$

529 

 

$

580 



 

 

 

 

 

 

 

 

 

 

 

 



Organization, Basis Of Presentation And Significant Accounting And Reporting Policies (Details) (USD $)
6 Months Ended 0 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Dec. 31, 2016
Apr. 15, 2016
DECD [Member]
Mar. 22, 2016
DECD [Member]
Organization Consolidation And Summary Of Significant Accounting Policies [Line Items]
 
 
 
 
 
Accumulated deficit
$ (390,589,000)
 
$ (385,556,000)
 
 
Proceeds from issuance of private placement
5,127,000 
 
 
 
 
Total borrowing amount
 
 
 
 
4,000,000 
Initial proceeds from loan
 
1,966,000 
 
2,000,000 
 
Remaining loan amount
 
 
 
 
$ 2,000,000 
Commitments And Contingencies (Details) (USD $)
3 Months Ended 6 Months Ended 6 Months Ended 1 Months Ended 6 Months Ended 0 Months Ended 6 Months Ended 1 Months Ended 6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Jun. 30, 2017
Jun. 30, 2016
Dec. 31, 2016
Jun. 30, 2017
Austin, Texas facility [Member]
Oct. 31, 2015
Trumbull, Connecticut Facility [Member]
Jun. 30, 2017
Trumbull, Connecticut Facility [Member]
Apr. 15, 2016
DECD [Member]
Jun. 30, 2017
DECD [Member]
employee
Mar. 22, 2016
DECD [Member]
Apr. 30, 2015
Assets Under Capital Leases [Member]
item
Jun. 30, 2017
Assets Under Capital Leases [Member]
Jun. 30, 2016
Assets Under Capital Leases [Member]
Commitments And Contingencies [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total borrowing amount
 
 
 
 
 
 
 
 
 
 
$ 4,000,000 
 
 
 
Fixed rate per annum
 
 
 
 
 
 
 
 
 
 
2.00% 
 
 
 
Maturity date
 
 
 
 
 
 
 
 
 
Apr. 15, 2026 
 
 
 
 
Amount eligible for forgiveness
 
 
 
 
 
 
 
 
 
 
2,000,000 
 
 
 
Job creation, number of employees
 
 
 
 
 
 
 
 
 
40 
 
 
 
 
Job creation, term
 
 
 
 
 
 
 
 
 
2 years 
 
 
 
 
Debt, maturity term
 
 
 
 
 
 
 
 
 
10 years 
 
 
 
 
Debt penalty
 
 
 
 
 
 
 
 
 
5.00% 
 
 
 
 
Initial proceeds from loan
 
 
 
1,966,000 
 
 
 
 
2,000,000 
 
 
 
 
 
Remaining loan amount
 
 
 
 
 
 
 
 
 
 
2,000,000 
 
 
 
Annual base rent
 
 
 
 
 
85,000 
32,000 
 
 
 
 
 
 
 
Annual estimated common area charges, taxes and insurance
 
 
 
 
 
46,000 
95,000 
 
 
 
 
 
 
 
Lease expiration date
 
 
 
 
 
Jan. 31, 2019 
 
 
 
 
 
 
 
 
Leasehold improvements
 
 
 
 
 
 
596,000 
 
 
 
 
 
 
 
Lease term
 
 
 
 
 
 
 
5 years 
 
 
 
 
 
 
Rent abatement period
 
 
 
 
 
 
 
5 months 
 
 
 
 
 
 
Operating leases rental expense
62,000 
53,000 
123,000 
104,000 
 
 
 
 
 
 
 
 
 
 
Number of purchased laboratory instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
Initial payment of laboratory equipment
 
 
 
 
 
 
 
 
 
 
 
125,000 
 
 
Monthly payment for acquisition for equipment
 
 
 
 
 
 
 
 
 
 
 
3,500 
 
 
Number of payments for purchase production of assets
 
 
 
 
 
 
 
 
 
 
 
 
36 months 
 
Accumulated amortization
 
 
 
 
 
 
 
 
 
 
 
 
155,000 
77,000 
Net book value
1,549,000 
 
1,549,000 
 
1,911,000 
 
 
 
 
 
 
 
77,000 
155,000 
Percent of royalty paid
 
 
4.00% 
 
 
 
 
 
 
 
 
 
 
 
Minimum royalty payment
 
 
57,500 
 
 
 
 
 
 
 
 
 
 
 
Royalty expense
$ 34,000 
$ 22,000 
$ 63,000 
$ 42,000 
 
 
 
 
 
 
 
 
 
 
Stockholders' Equity (Narrative) (Details) (USD $)
6 Months Ended 3 Months Ended 6 Months Ended 3 Months Ended 6 Months Ended 3 Months Ended
Jun. 30, 2017
Feb. 17, 2017
Dec. 31, 2016
Jun. 30, 2017
2010 Stock Incentive Plan [Member]
Jun. 30, 2017
2010 Stock Incentive Plan [Member]
Non-Employee Directors [Member]
Restricted Stock [Member]
Jun. 30, 2017
2010 Stock Incentive Plan [Member]
Non-Employee Directors [Member]
Restricted Stock [Member]
Jun. 30, 2017
2010 Stock Incentive Plan [Member]
Non-Employee Directors [Member]
Restricted Stock [Member]
June 1, 2016 [Member]
Jun. 30, 2017
2010 Stock Incentive Plan [Member]
Non-Employee Directors [Member]
Restricted Stock [Member]
September 1, 2016 [Member]
Jun. 30, 2017
2010 Stock Incentive Plan [Member]
Non-Employee Directors [Member]
Restricted Stock [Member]
December 1, 2017 [Member]
Jun. 30, 2017
2010 Stock Incentive Plan [Member]
Certain Consultants [Member]
Restricted Stock [Member]
Jun. 30, 2017
2010 Stock Incentive Plan [Member]
Certain Consultants [Member]
Restricted Stock [Member]
Jun. 30, 2017
2010 Stock Incentive Plan [Member]
Certain Consultants [Member]
$2.14 [Member]
Stock Option [Member]
Jun. 30, 2017
2010 Stock Incentive Plan [Member]
Certain Officers And Employees [Member]
$2.14 [Member]
Stock Option [Member]
Jun. 30, 2017
2010 Stock Incentive Plan [Member]
Certain Officers And Employees [Member]
$2.14 [Member]
Stock Option [Member]
Share-based Compensation Award, Tranche One [Member]
Jun. 30, 2017
2010 Stock Incentive Plan [Member]
Certain Officers And Employees [Member]
$2.14 [Member]
Stock Option [Member]
Share-based Compensation Award, Tranche One [Member]
Jun. 30, 2017
2010 Stock Incentive Plan [Member]
Certain Officers And Employees [Member]
$2.14 [Member]
Performance Shares [Member]
Jun. 30, 2017
2010 Stock Incentive Plan [Member]
Certain Officers And Employees [Member]
$1.83 [Member]
Stock Option [Member]
Jun. 30, 2017
2010 Stock Incentive Plan [Member]
Certain Officers And Employees [Member]
$1.83 [Member]
Stock Option [Member]
Share-based Compensation Award, Tranche One [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock, shares issued
56,164,082 
3,747,125 
52,328,492 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Price per share
$ 0.001 
$ 1.40 
$ 0.001 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued a warrant to purchase common stock with a cost
 
$ 0.125 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from issuance of private placement
$ 5,127,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Warrants outstanding to purchase shares
 
2,810,338 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise price of warrants
 
$ 1.80 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value of warrants issued
 
804,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock value
56,000 
4,296,000 
52,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares available for grant
 
 
 
8,122,983 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted shares awarded
 
 
 
 
131,250 
 
 
 
9,213 
 
 
 
 
 
 
 
 
Fair value of restricted shares awarded
 
 
 
 
 
281,000 
 
 
 
19,000 
 
 
 
 
 
 
 
 
Stock options granted
 
 
 
 
 
 
 
 
 
 
 
70,000 
916,000 
 
 
250,000 
14,500 
 
Stock options granted, average exercise price
 
 
 
 
 
 
 
 
 
 
 
$ 2.14 
$ 2.14 
 
 
$ 2.14 
$ 1.83 
 
Restricted share units granted
 
 
 
 
 
 
 
 
 
 
22,841 
 
 
 
 
 
 
 
Fair value of restricted share units
 
 
 
 
 
 
 
 
 
 
$ 39,000 
 
 
 
 
 
 
 
Vesting percentage
 
 
 
 
 
 
50.00% 
25.00% 
25.00% 
 
 
 
 
25.00% 
25.00% 
 
 
25.00% 
Stockholders' Equity (Allocation of Employee Stock-Based Compensation Expense By Functional Area) (Details) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Jun. 30, 2017
Jun. 30, 2016
Cost Of Revenue [Member]
 
 
 
 
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
 
 
 
 
Stock-based compensation expense
$ 40 
$ 22 
$ 79 
$ 46 
Research And Development [Member]
 
 
 
 
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
 
 
 
 
Stock-based compensation expense
22 
53 
Sales And Marketing [Member]
 
 
 
 
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
 
 
 
 
Stock-based compensation expense
40 
14 
77 
56 
General And Administrative [Member]
 
 
 
 
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
 
 
 
 
Stock-based compensation expense
295 
319 
510 
445 
Employee Stock-Based Compensation [Member]
 
 
 
 
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
 
 
 
 
Stock-based compensation expense
343 
378 
529 
580 
Employee Stock-Based Compensation [Member] |
Cost Of Revenue [Member]
 
 
 
 
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
 
 
 
 
Stock-based compensation expense
20 
22 
40 
46 
Employee Stock-Based Compensation [Member] |
Research And Development [Member]
 
 
 
 
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
 
 
 
 
Stock-based compensation expense
22 
53 
Employee Stock-Based Compensation [Member] |
Sales And Marketing [Member]
 
 
 
 
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
 
 
 
 
Stock-based compensation expense
38 
14 
70 
56 
Employee Stock-Based Compensation [Member] |
General And Administrative [Member]
 
 
 
 
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
 
 
 
 
Stock-based compensation expense
$ 283 
$ 320 
$ 414 
$ 425 
Loss Per Share (Details)
6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Loss Per Share [Abstract]
 
 
Antidilutive securities excluded from computation of earnings per share
11,662,280 
7,808,044 

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