Aspira Women's Health Inc. - Quarter Report: 2017 September (Form 10-Q)



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON,  DC 20549

                                      

FORM 10-Q

                                      

(Mark One)



☑     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30,  2017



OR



☐     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from ______ to ______



Commission file number:  001-34810

                                            



                                            



(512) 519-0400

(Registrant’s Telephone Number, Including Area Code)

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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 ☑ 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 such shorter period that the registrant was required to submit and post such files).  Yes ☑ No ☐



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one):



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐



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



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 ☑ No ☐



As of October 31,  2017, the registrant had 59,998,748 shares of common stock, par value $0.001 per share, outstanding.





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VERMILLION, INC.



FORM 10-Q



Table of Contents







Vermillion, OVA1 and Overa are registered trademarks of Vermillion, Inc.



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PART I - FINANCIAL INFORMATION



ITEM 1.FINANCIAL STATEMENTS



Vermillion, Inc.

Condensed Consolidated Balance Sheets

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

(Unaudited)









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See accompanying notes to the unaudited condensed consolidated financial statements.

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Vermillion, Inc.

Condensed Consolidated Statements of Operations

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

(Unaudited)







See accompanying notes to the unaudited condensed consolidated financial statements.

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Vermillion, Inc.

Condensed Consolidated Statements of Cash Flows

(Amounts in Thousands)

(Unaudited)







See accompanying notes to the unaudited condensed consolidated financial statements.

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Vermillion, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)





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

Organization

Vermillion, Inc. (“Vermillion” Vermillion and its wholly-owned subsidiaries are collectively referred to as 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 $393,098,000 at September 30, 2017. The Company also expects to incur a net loss and negative cash flows from operations for the remainder of 2017 and the foreseeable future. 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 August 31, 2017, certain investors exercised outstanding warrants for common stock for net proceeds of approximately $3,577,000 after deducting offering expenses.

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. 



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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 ASU No. 2014-09 (defined below) included in Recent Accounting Pronouncements below.  

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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 fourth quarter of 2017.

The Company is also continuing its analysis of the effect ASU 2014-09 will have on its Product Revenue and also expects to complete this analysis in the fourth quarter 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 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

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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.





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.

 

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 into 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 

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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 September 30, 2017 and 2016 totaled $66,000 and $71,000, respectively. Building rent for the nine months ended September 30, 2017 and 2016 totaled $189,000 and $175,000, 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 $174,000 and $97,000 as of September 30,  2017 and 2016, respectively. The net book value of assets under capital lease obligations was $58,000 and $135,000 as of September 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 September 30, 2017 and 2016 totalled $30,000 and $24,000, respectively. Royalty expense for the nine months ended September 30, 2017 and 2016 totalled $94,000 and $66,000, respectively.

  

4.   STOCKHOLDERS’ EQUITY

2017 Warrant Repricing and Exercise      



In December 2014, the Company issued warrants to purchase up to an aggregate of 4,166,659 shares of Vermillion common stock at an exercise price of $2.00 per share in conjunction with a December 2014 private placement of Vermillion common stock.  The warrants expire by their original terms on December 23, 2017.



On August 31, 2017, certain holders exercised warrants to purchase 3,796,818 shares of Vermillion common stock in consideration for the Company agreeing to reduce the exercise price to $1.00 per share of Vermillion common stock.



 The Company issued 3,796,818 shares of Vermillion common stock and received $3,796,818 in aggregate gross proceeds (approximately $3,577,000 net of transaction costs). The incremental non-cash fair value of approximately $942,000 from the modification of the warrants was calculated using the Black-Scholes model and recorded as a deemed dividend to the warrant holders within 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 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.

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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 nine months ended September 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 25% on September 1, 2017, and the remaining 25% will vest on December 1, 2017. The Company also issued to certain consultants 27,878 shares of restricted stock under the 2010 Plan having a fair value of approximately $48,000.



During the three months ended September 30, 2017, the Company issued to certain consultants 5,037 shares of restricted stock under the 2010 Plan having a fair value of approximately $9,000. The Company did not make any awards of restricted stock to non-employee directors during the three months ended September 30, 2017. 



During the nine months ended September 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. In addition, 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 generally vest 25% on each of the four anniversaries of the grant date.  



During the nine months ended September 30, 2017, the Company also 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 September 30, 2017, the Company granted certain officers and employees options to purchase 22,500 shares of Vermillion common stock with an exercise price of $1.32 per share. These stock options vest 25% on each of the four anniversaries of the vesting commencement date for each such stock option. 



During the three months ended September 30, 2017, the Company granted certain consultants of the Company options to purchase 120,000 shares of Vermillion common stock with an exercise price of $1.32 per share. These stock options vest in 24 equal monthly installments beginning on the vesting commencement date for each such stock option.



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

 

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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 7,971,860 and  7,485,632 potential shares of Vermillion common stock as of September 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.





 



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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995.

These statements involve a number of risks and uncertainties. Words such as “may,” “expects,” “intends,” “anticipates,” “believes,” “estimates,” “plans,” “seeks,” “could,” “should,” “continue,” “will,” “potential,” “projects” and similar expressions are intended to identify such forward-looking statements. Readers are cautioned that these forward-looking statements speak only as of the date on which this Quarterly Report on Form 10-Q is filed with the Securities and Exchange Commission (“SEC”), and, except as required by law, Vermillion, Inc. (“Vermillion” and, together with its subsidiaries, the “Company,” “we,” “our,” or “us”) does not assume any obligation to update, amend or clarify them to reflect events, new information or circumstances occurring after such date.

Examples of forward-looking statements regarding our business include the following:

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Forward-looking statements are subject to significant risks and uncertainties, including those discussed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016 (our “2016 Annual Report”) and Part II, Item 1A. “Risk Factors” of our Quarterly Report on Form 10-Q for the three months ended March 31, 2017 (our “2017 First Quarterly Report”), that could cause actual results to differ materially from those projected in such forward-looking statements due to various factors, including our ability to increase the volume of OVA1 or Overa sales; our ability to market our test through sales channels other than Quest Diagnostics including ASPiRA LABS; failures by third-party payers to reimburse OVA1 or Overa or changes or variances in reimbursement rates; our ability to secure additional capital on acceptable terms to execute our business plan; our ability to commercialize OVA1 and/or Overa both within and outside the United States; in the event that we succeed in commercializing OVA1 and/or Overa outside the United States, the political, economic and other conditions affecting other countries (including foreign exchange rates); our ability to develop and commercialize additional diagnostic products and achieve market acceptance with respect to these products; our ability to compete successfully; our ability to obtain any regulatory approval required for our future diagnostic products; our or our

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suppliers’ ability to comply with United States Food and Drug Administration (“FDA”) requirements for production, marketing and post-market monitoring of our products; additional costs that may be required to make further improvements to our manufacturing operations; our ability to maintain sufficient or acceptable supplies of immunoassay kits from our suppliers; our ability to continue to develop, protect and promote our proprietary technologies; future litigation against us, including infringement of intellectual property and product liability exposure; our ability to retain key employees; business interruptions; legislative actions resulting in higher compliance costs; changes in healthcare policy; our ability to comply with environmental laws; our ability to generate sufficient demand for ASPiRA LABS’ services to cover its operating costs; our ability to comply with the additional laws and regulations that apply to us in connection with the operation of ASPiRA LABS; our ability to comply with FDA regulations that relate to our products and to obtain any FDA clearance or approval required to develop and perform LDTs; ASPiRA IVD’s lack of operating history; ASPiRA IVD’s ability to generate and maintain business; fluctuations over time with respect to ASPiRA IVD’s operating results; ASPiRA IVD’s ability to enter into profitable contracts; ASPiRA IVD’s ability to maintain effective information systems without significant interruption; ASPiRA IVD’s ability to perform its services in compliance with contractual requirements, regulatory standards and ethical considerations; and our ability to continue as a going concern.   



Overview

Our vision is to drive the advancement of women’s health by providing innovative methods to detect, monitor and manage the treatment of both benign and malignant gynecologic disease, with our primary focus being diseases of the female pelvic cavity.

We have expanded our corporate strategy with the goal of transforming Vermillion from a technology license company to a diagnostic service and bio-analytic solutions provider. Our plan is to broaden our commercial focus from ovarian cancer to differential diagnosis of women with a range of gynecological disorders. Our strategy is being deployed in three phases. The three phases are a rebuild phase, which was completed in the third quarter of 2015, a transformation phase, which is now virtually complete except for continuing expansion of payer coverage, and a market expansion and growth phase, which we began in 2017.  

During the first phase, we expanded our leadership team by hiring several new senior leaders including a chief executive officer.  In addition, we expanded our commercial strategy, reestablished medical and advisory support, rebuilt our patient advocacy strategy and established a billing system and a payer strategy outside of our relationship with Quest Diagnostics.  During the second phase, we completed the process of obtaining licensure of ASPiRA LABS in all of the states that require licenses, and are in the process of establishing our own payer coverage for OVA1, Multivariate Index Assay (MIA), and our second-generation OVA1 test, trademarked Overa, Multivariate Index Assay, 2nd Generation (MIA2G). Overa has been launched on a targeted basis.  In the third phase, we plan to fully commercialize OVA1 and Overa by utilizing the full national licensure of ASPiRA LABS, select laboratories for distribution, managed care coverage in select markets, our sales force and existing customer base.  Unlike OVA1, Overa uses a global testing platform, which will allow Overa to be deployed internationally.  We initiated the targeted launch of Overa in October 2016 with two key accounts converting from OVA1 to Overa. In October 2015, we announced registration of the CE mark for and clearance to market Overa in the European Union.  We also plan to develop an LDT product series, which we refer to internally as OvaX.  We anticipate that OvaX will include not only biomarkers, but also clinical risk factors, other diagnostics and patient history data in order to boost predictive value. 

We are dedicated to the discovery, development and commercialization of novel high-value diagnostic and bio-analytical solutions that help physicians diagnose, treat and improve outcomes for women. Our tests are intended to detect, characterize and stage disease, and to help guide decisions regarding patient treatment, which may include decisions to refer patients to specialists, to perform additional testing, or to assist in monitoring response to therapy. A distinctive feature of our approach is to combine multiple biomarkers, other modalities and diagnostics, clinical risk factors and patient data into a single, reportable index score that has higher diagnostic accuracy than its constituents. We concentrate on our development of novel diagnostic tests for gynecologic disease, with an 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.

Our initial product, OVA1, is an FDA cleared blood test designed to, in addition to a physician’s clinical assessment of a woman with a pelvic mass, identify women who are at high risk of having a malignant ovarian

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tumor prior to planned surgery. We have launched on a targeted basis a second-generation biomarker panel known as Overa, which is intended to maintain our product’s high sensitivity while improving specificity. We received FDA clearance for Overa in March 2016. Overa uses the Roche cobas 6000 platform.  

In June 2014, Vermillion launched ASPiRA LABS, a Clinical Laboratory Improvements Amendments of 1988 (“CLIA”) certified national laboratory based in Austin, Texas, which specializes in applying biomarker-based technologies to address critical needs in the management of gynecologic cancers and disease. ASPiRA LABS provides expert diagnostic services using a state-of-the-art biomarker-based diagnostic algorithm to aid in clinical decision making and advance personalized treatment plans. The lab currently processes our OVA1 and Overa tests, and we plan to develop and perform LDTs at ASPiRA LABS in the future. ASPiRA LABS holds a CLIA Certificate of Registration and a state laboratory license in California, Florida, Maryland, New York, Pennsylvania and Rhode Island. The Centers for Medicare & Medicaid Services issued a provider number to ASPiRA LABS in March 2015.

In 2016, we created a new service within the ASPiRA channel strategy, “an ASPiRA IVD Services Program”. In April 2016, we formed ASPiRA IVD to offer IVD trial services to third-party customers. ASPiRA IVD is a specialized laboratory provider dedicated to meeting the unique testing needs of IVD manufacturers seeking to commercialize high-complexity assays. ASPiRA IVD was built around a core of laboratory expertise and an FDA-compliant quality system,  and strives to deliver accurate and reliable results to its third-party customers suitable for FDA submission.  ASPiRA IVD received  a CLIA laboratory license in June 2016 and commenced operations in the second quarter of 2016.

In this program, we also plan to leverage our existing infrastructure and enhance our pipeline of future technologies by fostering relationships with IVD companies who are developing new diagnostics including companion diagnostics platforms. We believe this plan will allow us to continue to be innovative in evaluating potential diagnostics. Our goal with the addition of this line of business is to invest in our short-term and long-term enterprise value while leveraging our specimen bank, database, FDA experience, laboratory informatics and operating efficiency.



Strategy:

We are focused on the execution of five core strategic business drivers in ovarian cancer diagnostics and specialized laboratory services to build long-term value for our investors:



We believe that these business drivers will contribute significantly to addressing unmet medical needs for women faced with gynecologic disease and other conditions and the continued development of our business.

OVA1 addresses a clear clinical need, namely the pre-surgical identification of women who are at 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

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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 software cleared as part of the OVA1 510(k) to determine the likelihood of malignancy in women over age 18, with a pelvic mass for whom surgery is planned. OVA1 should not be used without an independent clinical/radiological evaluation and is not intended to be a screening test or to determine whether a patient should proceed to surgery. Incorrect use of OVA1 carries the risk of unnecessary testing, surgery and delayed diagnosis.  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.

Novitas Solutions, the Medicare contractor, covers and reimburses for OVA1.  This local coverage determination from Novitas Solutions essentially provides national coverage for patients enrolled in Medicare as well as Medicare Advantage health plans. However, ASPiRA LABS initially experienced difficulty in obtaining payment from Novitas Solutions for most claims submitted due to Novitas Solutions’ administrative requirements. In October 2016, Novitas Solutions updated its administrative requirements for OVA1 reimbursement which has improved our ability to obtain reimbursement for OVA1 from Novitas Solutions.

In October 2016, we launched our pelvic mass specimen and data repository and began the collection of Institutional Review Board patient consents for collection and cataloguing of serum samples for future research purposes.

In November 2016, The American College of Obstetricians and Gynecologists ("ACOG”) issued Practice Bulletin Number 174 which included OVA1 as a “Multivariate Index Assay”. This bulletin outlines ACOG's “new” clinical management guidelines for adnexal mass management. 

These new clinical management guidelines replace the July 2007 version, Practice Bulletin 83. Practice Bulletins summarize current information on techniques and clinical management issues for the practice of obstetrics and gynecology. Practice Bulletins are evidence-based documents, and recommendations are based on the evidence. This is also the only clinical management tool used for adnexal masses. Guidelines do not exist for adnexal masses, only Practice Bulletins. Guidelines do exist, however, for ovarian cancer management.  

The Practice Bulletin recommends that obstetricians and gynecologists evaluating women with adnexal masses who do not meet Level A criteria of a low risk transvaginal ultrasound should proceed with Level B clinical guidelines. Level B guidelines state that the physician may use risk assessment tools such as existing CA125 technology or OVA1 (“Multivariate Index Assay”) as listed in the bulletin.  Based on this, OVA1 has now achieved parity with CA125 as a Level B recommendation for the management of adnexal masses.

In December 2016, we received an FDA Clarification Letter regarding OVA1 and Overa. This letter was in reference to the September 7, 2016 FDA Safety Communication advising women and their physicians against the use of ovarian cancer screening tests for asymptomatic women.

In order to avoid any confusion, as well as to document the FDA position on OVA1 and Overa, Jeffrey Shuren, M.D., J.D., Director for the Center for Devices and Radiological Health at the FDA, sent a letter to Vermillion, dated December 21, 2016. In the letter, Dr. Shuren stated:

We agree that this safety communication does not apply to Vermillion’s FDA-cleared tests, OVA1 (MIA) and Overa (MIA2G), which are not screening tests for ovarian cancer.

FDA cleared OVA1 (MIA) and Overa (MIA2G) as aids to further assess the likelihood that malignancy is present when the physician’s independent clinical and radiological evaluation does not indicate malignancy. The intended uses of the two assays are the same—to help physicians more reliably identify which patients would benefit from consultation with or referral to a gynecologic oncologist. OVA1 (MIA) and Overa (MIA2G) are indicated for women who present with an adnexal mass.

In March 2015, we entered into a new commercial agreement with 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 10, 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

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terms of this agreement, we will not offer to existing or future Quest Diagnostics customers CA 125-II or other tests that Quest Diagnostics offers.

In 2016, we continued to make progress with increased payer positive medical polices and in network agreements for a total of over 80 million covered lives.

In the first half of 2017, ASPiRA IVD services landed two top pharmaceutical trial service agreements including one enrollment study.

In July 2017 ASPiRA LABS expanded its patient advocacy program nationally to assist patients with proactive benefit checks, with over 90% resulting in OVA1 utilization.

In September 2017, the preliminary Protecting Access to Medicare Act of 2014 (PAMA) price for OVA1 and Overa was published by the Center for Medicare and Medicaid Service (CMS). The preliminary OVA1 rate is based on the median of private payer payments submitted by Vermillion as part of the market-based payment reforms mandated through PAMA. The Overa price was benchmarked to the only proteomic test currently on the fee schedule, which uses biomarkers and an algorithm to produce a prognostic score. The new rates, once finalized, are scheduled to become effective January 1, 2018. 

In 2017, we continued to make progress with increased payer positive medical polices and in network agreements for a total of over 123 million covered lives, expected effective by February 2018.

  

Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates from those disclosed in Item 7 of our 2016 Annual Report.



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Results of Operations - Three Months Ended September 30, 2017 Compared to Three Months Ended September 30,  2016

The selected summary financial and operating data of the Company for the three months ended September 30, 2017 and 2016 were as follows:





Product Revenue.  Product revenue was $657,000 for the three months ended September 30, 2017 compared to $581,000 for the same period in 2016.  Revenue for ASPiRA LABS is being recognized when the OVA1 test is being performed or when amounts that will ultimately be realized can be estimated. All other ASPiRA LABS revenue is being recognized on a cash basis and thus recognition of revenue lags the performance of some OVA1 tests. The 13% product revenue growth is due to improvement in the average unit price received per test compared to the same quarter in the prior year. The increase in average unit price was driven by an increase in client bill contracts, expansion of positive medical policy and contracting with payers, and improved billing and collection practices.

The number of OVA1 tests performed decreased 13% to approximately 1,954 OVA1 tests during the three months ended September 30, 2017 compared to approximately 2,257 OVA1 tests for the same period in 2016. The volume decrease was primarily due to the previously announced loss of a client bill customer in July 2017,  which was concentrated in uncovered territories (territories not covered by an ASPiRA sales representative) and, to a lesser extent, the impact of hurricanes in two key areas (Texas and Florida).  Partially affecting the volume decrease was modest year-over-year growth in covered territories (territories covered by an ASPiRA sales representative). We expect the test volume to improve in the fourth quarter relative to volume in the third quarter of 2017. 

Service Revenue.  Service revenue was $42,000 for the three months ended September 30, 2017 compared to $42,000 for the same period in 2016.  Service revenue will vary from quarter to quarter based on the size of ongoing customer projects. Revenue for ASPiRA IVD is being recognized once certain revenue recognition criteria has been met (see Note 1 to the financial statements included in Part I, Item I of this Form 10-Q). We expect service revenue to increase in the fourth quarter of 2017 relative to service revenue in the third quarter of 2017 due to the performance of certain anticipated projects.

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Cost of Revenue - Product.  Cost of product revenue was $495,000 for the three months ended September 30, 2017 compared to $461,000 for the same period in 2016, representing an increase of 7% due primarily to some equipment maintenance costs and increased consultant fees incurred in the third quarter. We expect the cost of product revenue to decrease modestly in the fourth quarter of 2017 compared to the third quarter of 2017 as one-time costs incurred in the third quarter of 2017 are not expected to be repeated.

Cost of Revenue - Service.    Cost of service revenue was $284,000 for the three months ended September 30, 2017 compared to $356,000 for the same period in 2016. The 20% decrease related primarily to consulting costs related to the opening of the lab in the third quarter of 2016, which were not repeated in 2017. We expect the cost of service revenue to increase in the fourth quarter of 2017 compared to the third quarter of 2017 due to expected variable costs relating to performance of certain projects.     

Research and Development Expenses.  Research and development expenses represent costs incurred to develop our technology and carry out clinical studies, and include personnel-related expenses, regulatory costs, reagents and supplies used in research and development laboratory work, infrastructure expenses, contract services and other outside costs. Research and development expenses for the three months ended September 30, 2017 decreased $178,000, or 48%, compared to the same period in 2016.  This decrease was primarily due to a reduction in personnel and personnel related expenses. We expect research and development expenses to remain consistent with third quarter 2017 levels in the fourth quarter of 2017.

Sales and Marketing Expenses.  Our sales and marketing expenses consist primarily of personnel-related expenses, education and promotional expenses, and infrastructure expenses. These expenses include the costs of educating physicians, laboratory personnel and other healthcare professionals regarding OVA1 and Overa. Sales and marketing expenses also include the costs of sponsoring continuing medical education, medical meeting participation, and dissemination of scientific and health economic publications. Sales and marketing expenses for the three months ended September 30, 2017 decreased $556,000, or 35%, compared to the same period in 2016.  This decrease was primarily due to  a reduction in consulting and, marketing services and lower health economic study costs in the third quarter of 2017 compared to 2016. We expect sales and marketing expenses to increase modestly over the remainder of 2017 as we focus efforts on the commercialization of OVA1 and Overa.

General and Administrative Expenses.  General and administrative expenses consist primarily of personnel-related expenses, professional fees and other costs, including legal, finance and accounting expenses and other infrastructure expenses. General and administrative expenses for the three months ended September 30, 2017 decreased by $118,000, or 9%, compared to the same period in 2016.  The decrease was primarily due to a  reduction in consulting services. We expect general and administrative expenses to remain consistent with third quarter 2017 levels in the fourth quarter of 2017.



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Results of Operations – Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

The selected summary financial and operating data of the Company for the nine months ended September 30, 2017 and 2016 were as follows:







Product Revenue.  Product revenue was $2,195,000 for the nine months ended September 30, 2017 compared to $1,640,000 for the same period in 2016.  Revenue for ASPiRA LABS is being recognized when the OVA1 test is being performed or when amounts that will ultimately be realized can be estimated. All other ASPiRA LABS revenue is being recognized on a cash basis and thus recognition of revenue lags the performance of some OVA1 tests. The $555,000, or 34%, product revenue growth is due to improvement in the average unit price received per test compared to the same period in the prior year. The increase in average unit price was driven by an increase in client bill contracts, expansion of positive medical policy and contracting with payers, and improved billing and collection practices.

The number of OVA1 tests performed decreased 3% to approximately 6,665 OVA1 tests during the nine months ended September 30, 2017 compared to approximately 6,867 OVA1 tests for the same period in 2016.  The volume decrease was primarily due to the previously announced loss of a client bill customer in July 2017,  which was concentrated in uncovered territories (territories not covered by an ASPiRA sales representative) and, to a lesser extent, the impact of hurricanes in two key areas (Texas and Florida).

Service Revenue.  Service revenue was $128,000 for the nine months ended September 30, 2017 compared to $197,000 for the same period in 2016, a decrease of $69,000, or 35%.  Service revenue will vary from quarter to quarter based on the size of ongoing customer projects. Revenue for ASPiRA IVD is being recognized once certain revenue recognition criteria has been met (see Note 1 to the financial statements included in Part I, Item I of this Form 10-Q). 

Cost of Revenue - Product.  Cost of product revenue was $1,345,000 for the nine months ended September 30, 2017 compared to $1,516,000 for the same period in 2016, representing a decrease of $171,000, or 11%, due to operating efficiencies compared to the prior year. 

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Cost of Revenue - Service.  Cost of service revenue was $855,000 for the nine months ended September 30, 2017 compared to $416,000 for the same period in 2016.  ASPiRA IVD did not commence operations until June 2016 and thus included only four months of expense compared to three full quarters of expense in 2017.

Research and Development Expenses.  Research and development expenses represent costs incurred to develop our technology and carry out clinical studies, and include personnel-related expenses, regulatory costs, reagents and supplies used in research and development laboratory work, infrastructure expenses, contract services and other outside costs. Research and development expenses through March 2016 also included costs related to activities performed under contracts with our collaborators and strategic partners. Research and development expenses for the nine months ended September 30, 2017 decreased $1,183,000, or 63%, compared to the same period in 2016.  This decrease was primarily due to the expiration of our collaboration agreement with The Johns Hopkins University School of Medicine in March 2016 as well as lower personnel and personnel related expenses due to the clearance of Overa in March 2016.

Sales and Marketing Expenses.  Our sales and marketing expenses consist primarily of personnel-related expenses, education and promotional expenses, and infrastructure expenses. These expenses include the costs of educating physicians, laboratory personnel and other healthcare professionals regarding OVA1 and Overa. Sales and marketing expenses also include the costs of sponsoring continuing medical education, medical meeting participation, and dissemination of scientific and health economic publications. Sales and marketing expenses for the nine months ended September 30, 2017 decreased $2,400,000, or 44%, compared to the same period in 2016.  This decrease was primarily due to a reduction in personnel and personnel expenses and decreases in consulting and marketing services compared to the prior year period.

General and Administrative Expenses.  General and administrative expenses consist primarily of personnel-related expenses, professional fees and other costs, including legal, finance and accounting expenses and other infrastructure expenses. General and administrative expenses for the nine months ended September 30, 2017 decreased by $820,000, or 18%, compared to the same period in 2016. The decrease was primarily due to the reduction of consulting services and ASPiRA IVD start-up expenses in 2016 not being repeated in 2017. 



Liquidity and Capital Resources

We plan to continue to expend resources selling and marketing OVA1 and Overa, operating our IVD trial services business and developing additional diagnostic tests and service capabilities.  

We have incurred significant net losses and negative cash flows from operations since inception. At September 30, 2017, we had an accumulated deficit of $393,098,000 and stockholders’ equity of $5,921,000. As of September 30, 2017, we had $7,752,000 of cash and cash equivalents and $2,229,000 of current liabilities. Working capital was $6,074,000 and $3,547,000 at September 30, 2017 and December 31, 2016, respectively.

In December 2014, the Company issued warrants to purchase up to an aggregate of 4,166,659 shares of Vermillion common stock at an exercise price of $2.00 per share in conjunction with a December 2014 private placement of Vermillion common stock.  The warrants expire by their original terms on December 23, 2017.



On August 31, 2017, certain holders exercised warrants to purchase 3,796,818 shares of Vermillion common stock in consideration for the Company agreeing to reduce the exercise price to $1.00 per share of Vermillion common stock.



 The Company issued 3,796,818 shares of Vermillion common stock and received  $3,796,818 in aggregate gross proceeds (approximately $3,577,000 net of transaction costs).

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.

In March 2016, we entered into an agreement (the “Loan Agreement”) pursuant to which we may borrow up to $4,000,000 from the DECD. We received an initial disbursement of $2,000,000 in April 2016 under this

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agreement. The remaining $2,000,000 will be disbursed if and when we achieve certain future milestones. 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 (the “Measurement Date”). 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%. The Company is continuing to monitor progress towards achieving the employment milestone noted above. See also Note 3  to the financial statements included in Part I, Item I of this Form 10-Q for further information regarding the Loan Agreement.

We expect to incur a net loss and negative cash flows from operations in the remainder of 2017 and the foreseeable future.  Our management believes that successful achievement of our business objectives will require additional financing. Given these conditions, there is substantial doubt about our 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.

Net cash used in operating activities was $5,977,000 for the nine months ended September 30,  2017, resulting primarily from the net loss reported of $7,542,000 and changes in accounts payable, accrued and other liabilities of $401,000, partially offset by stock compensation expense of $997,000, depreciation and amortization of $599,000 and changes in prepaid expenses of $312,000.

Net cash used in operating activities was $11,199,000 for the nine months ended September 30, 2016 resulting primarily from the net loss reported of $12,122,000 and changes in accounts payable, accrued and other liabilities of $769,000, partially offset by stock compensation expense of $861,000, depreciation and amortization of $523,000 and changes in prepaid expenses of $354,000.

Net cash used in investing activities was $56,000 and $1,240,000 for the nine months ended September 30, 2017 and 2016, respectively. The higher costs in 2016 resulted from purchases of property and equipment for the ASPiRA IVD laboratory.

Net cash provided by financing activities was $8,543,000 for the nine months ended September 30, 2017, which consisted primarily of proceeds from the sale of Vermillion common stock in our February 2017 private placement, net of issuance costs, as well proceeds from the exercise of common stock warrants, net of issuance costs. 

Net cash provided by financing activities of $1,877,000 for the nine months ended September 30, 2016 consisted primarily of proceeds from the DECD loan.        

Our future liquidity and capital requirements will depend upon many factors, including, among others:   

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We have significant net operating loss (“NOL”) carryforwards as of September 30, 2017 for which a full valuation allowance has been provided due to our history of operating losses. Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions may restrict our ability to use our NOL credit carryforwards due to ownership change limitations occurring in the past or that could occur in the future. These ownership changes may also limit the amount of NOL credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively.

Off-Balance Sheet Arrangements

As of September 30, 2017, we had no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our condensed consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.





Per Item 305(e) of Regulation S-K, the information called for by this Item 3 is not required.



Evaluation of disclosure controls and procedures.

Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management, including our Chief Executive Officer and Chief Accounting Officer, performed an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30,  2017. Based on this evaluation, our Chief Executive Officer and Chief Accounting Officer have concluded that as of September 30,  2017, our disclosure controls and procedures were effective.



Changes in internal controls over financial reporting.

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







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PART II - OTHER INFORMATION





In the ordinary course of business, we may periodically become subject to legal proceedings and claims arising in connection with ongoing business activities. The results of litigation and claims cannot be predicted with certainty, and unfavorable resolutions are possible and could materially and adversely affect our results of operations, cash flows and financial position. In addition, regardless of the outcome, litigation could have an adverse impact on us because of defense costs, diversion of management resources and other factors. While the outcome of these proceedings and claims cannot be predicted with certainty, there are no matters, as of September 30,  2017, that, in the opinion of management, will have a material adverse effect on our financial position, results of operations or cash flows.

ITEM 1A. RISK FACTORS



There have been no material changes to our risk factors from those disclosed under “Risk Factors” in Part I, Item 1A of our 2016 Annual Report and Part II, Item 1A of our 2017 First Quarterly Report. The risks and uncertainties described in our 2016 Annual Report and 2017 First Quarterly Report are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also materially adversely affect our business, financial condition or results of operations.





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ITEM 6.   EXHIBITS

(a)   The following exhibits are filed or incorporated by reference with this report as indicated below:







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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





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