Aspira Women's Health Inc. - Quarter Report: 2011 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2011.

OR

For the transition period from                      to                     .

Commission File Number: 001-34810

Vermillion, Inc.

(Exact name of registrant as specified in its charter)

(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):

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

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)

See accompanying notes to the consolidated financial statements.

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Vermillion, Inc.

Consolidated Statement of Operations

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

(Unaudited)

See accompanying notes to the consolidated financial statements.

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Vermillion, Inc.

Consolidated Statements of Cash Flows

(Amounts in Thousands)

(Unaudited)

See accompanying notes to the consolidated financial statements.

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Vermillion, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

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.

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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.

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:

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.

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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:

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.

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:

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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.

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.

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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.

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

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

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:

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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:

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:

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:

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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:

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:

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:

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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.

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.

        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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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:

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.

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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.

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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 14^th, 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, OVA2^TM 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:

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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:

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.

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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.

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