sv1za
As Filed with the Securities and Exchange Commission on
December 6, 2007
Registration
No. 333-146354
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 2
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
Vermillion, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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3826
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33-0595156
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(State or Other Jurisdiction
of Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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6611 Dumbarton Circle
Fremont, California 94555
(510) 505-2100
(Address, Including Zip Code,
and Telephone Number,
Including Area Code, of
Registrants Principal Executive Offices)
Copies to:
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Gail S. Page
President and Chief Executive Officer
6611 Dumbarton Circle
Fremont, California 94555
(510) 505-2100
(Name, Address, Including
Zip Code, and Telephone
Number, Including Area Code, of Agent For Service)
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Robert Claassen, Esq.
Paul, Hastings, Janofsky & Walker LLP
Five Palo Alto Square, Sixth Floor
Palo Alto, CA 94306
(650) 320-1800
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Approximate date of commencement of proposed sale to the
public: From time to time after the effective
date of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. þ
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date, as the
Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this prospectus is not complete and may be
changed. The Selling Stockholders named herein may not sell
these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any jurisdiction
where the offer or sale is not permitted.
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SUBJECT TO COMPLETION, DATED
DECEMBER 6, 2007
PROSPECTUS
43,935,269 Shares of
Common Stock
We are registering our common stock, par value $0.001 per share,
for resale by the selling stockholders identified in this
prospectus.
The selling stockholders or their permitted transferees or other
successors in interest may, but are not required to, sell their
common stock in a number of different ways and at varying
prices. See Plan of Distribution on page 85 for
a description of how the selling stockholders may dispose of the
shares covered by this prospectus. We do not know when or in
what amount the selling stockholders may offer the shares for
sale.
We will not receive any of the proceeds from sales of common
stock made by the selling stockholders pursuant to this
prospectus. We have agreed to pay certain expenses related to
the registration of the shares of common stock.
Our common stock trades in the Nasdaq Capital Market under the
symbol VRML. On December 5, 2007, the last
reported sale price of our common stock on the Nasdaq Capital
Market was $0.83 per share.
Investing in our common stock
involves risks. See Risk Factors beginning on
page 6.
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved of these securities
or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
You should rely only on the information contained in this
prospectus. We have not authorized anyone else to provide you
with different information. If anyone provides you with
different or inconsistent information, you should not rely on
it. You should assume that the information appearing in this
prospectus is accurate only as of its date.
The date of this prospectus
is ,
2007.
TABLE OF
CONTENTS
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Page
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1
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6
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15
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15
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16
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16
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17
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19
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43
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60
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76
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79
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85
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87
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94
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98
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98
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98
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F-1
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EXHIBIT 23.1 |
This summary highlights selected information from this
prospectus. The following summary information is qualified in
its entirety by the information contained elsewhere in this
prospectus. This summary is not complete and may not contain all
of the information that you should consider prior to making an
investment decision. You should read the entire prospectus
carefully, including the Risk Factors section
beginning on page 6 of this prospectus and the audited
consolidated financial statements and notes thereto contained in
this prospectus before making an investment decision. Unless the
context otherwise requires, references to
Vermillion, we, us, or
the Company refer to Vermillion, Inc. and its wholly
owned subsidiaries.
Company
Information
We were originally incorporated in California on
December 9, 1993, under the name Abiotic Systems. In March
1995, we changed our corporate name to Ciphergen Biosystems,
Inc. and in May 2000, we reincorporated in Delaware. We had our
initial public offering on September 28, 2000. On
November 13, 2006, we sold assets and liabilities of our
protein research tools and collaborative services business,
referred to herein as the Instrument Business, to Bio-Rad
Laboratories, Inc., referred to herein as Bio-Rad, in order to
concentrate our resources on developing clinical protein
biomarker diagnostic products and services. On August 21,
2007, we changed our corporate name to Vermillion, Inc.
Prior to the November 13, 2006, sale of assets and
liabilities of our Instrument Business to Bio-Rad, we developed,
manufactured and sold ProteinChip Systems for life science
research. This patented technology is recognized as Surface
Enhanced Laser Desorption/Ionization, or SELDI. The systems
consist of
ProteinChip®
Readers, ProteinChip Software and related accessories, which
were used in conjunction with consumable ProteinChip Arrays.
These products were sold primarily to pharmaceutical companies,
biotechnology companies, academic research laboratories and
government research laboratories. We also provided research
services through our Biomarker Discovery Center laboratories,
and offered consulting services, customer support services and
training classes to our customers and collaborators.
Since the sale of assets and liabilities of our Instrument
Business to Bio-Rad, we have dedicated ourselves to the
discovery, development and commercialization of specialty
diagnostic tests that provide physicians with information with
which to manage their patients care and to improve patient
outcomes. We do this using translational proteomics, which is
the process of answering clinical questions by utilizing
advanced protein separation methods to identify and resolve
variants of specific biomarkers, developing assays, and
commercializing tests.
Through collaborations with leading academic and research
institutions, including The Johns Hopkins 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, The Ohio State University
Research Foundation, and Stanford University, we plan to develop
diagnostic tests in the fields of hematology/oncology,
cardiovascular disease and womens health. The clinical
questions we are addressing include early disease detection,
treatment response, monitoring of disease progression, prognosis
and others. In July 2005, we entered into a strategic alliance
agreement with Quest Diagnostics Incorporated, referred to
herein as Quest Diagnostics, pursuant to which the parties have
agreed to develop and commercialize up to three diagnostic
tests. The term of the agreement ends on the later of
(i) the three-year anniversary of the agreement and
(ii) the date on which Quest Diagnostics commercializes the
three diagnostic tests.
Our most established programs are in the field of ovarian
cancer. Commonly known as the silent killer, ovarian
cancer leads to approximately 15,000 deaths each year in the
United States. Approximately 20,000 new cases are diagnosed each
year, with the majority in patients with late stage disease,
where the cancer has spread beyond the ovary. Unfortunately, the
prognosis is poor in these patients, leading to the high
mortality rate from this disease. We believe that one unmet
clinical need is a diagnostic test that can provide adequate
predictive value to stratify patients with a pelvic mass into
those with a high risk of invasive ovarian cancer versus those
with a low risk. We believe that there are at least
5 million testing opportunities each year addressing this
need. We have developed a panel of biomarkers we believe
provides risk stratification
1
information for ovarian cancer based on a series of studies
involving over 2,500 clinical samples from more than five sites.
In a cohort study we were able to show, in 525 consecutively
sampled women, a significant increase in the positive predictive
value using our marker panel over the baseline level. This
translates into the potential to enrich the concentration of
ovarian cancer cases referred to the gynecologic oncologist by
more than two-fold. We are undertaking a prospective clinical
trial to support submission to the United States Food and Drug
Administration, referred to herein as the FDA, for approval as
an in vitro diagnostic, or IVD, test kit.
A second major program is a test intended to aid in the
detection of peripheral arterial disease, or PAD. This test,
which is based on research done in collaboration with Stanford
University, fills the unmet clinical need for a blood test that
can be used as an adjunct to detect PAD, which affects
10 million Americans, but is under diagnosed. Accurate
diagnosis of PAD permits aggressive lifestyle modification and
therapeutic intervention that can decrease the risk of major
adverse cardiovascular events. We reported in August 2007 the
publication of a discovery of two blood markers for PAD in the
peer-reviewed journal Circulation, which is published by
the American Heart Association. We are currently performing
clinical validation of this test, which will be commercialized
with Quest Diagnostics under the terms of the strategic alliance
agreement.
Recent
Developments
Effective November 1, 2007, Debra A. Young resigned from
her position as Vice President and Chief Financial Officer of
the Company for personal reasons. Immediately upon
Ms. Youngs resignation from the Company, Qun Zhou,
the Companys Corporate Controller, was appointed to serve
as Chief Financial Officer on an interim basis.
On September 17, 2007, we were served with a complaint
filed in the Superior Court of California for the County of
Santa Clara naming us and Bio-Rad as defendants and
Molecular Analytical Systems, referred to herein as MAS, as
plaintiff. The complaint alleges, among other things, that we
are in breach of our license agreement with MAS relating to
SELDI technology as a result of our entry into a sublicense
agreement with Bio-Rad. In connection with the sale of assets
and liabilities of our Instrument Business to Bio-Rad, we
sublicensed to Bio-Rad certain rights to the SELDI technology
that we obtained under the MAS license for use outside of the
clinical diagnostics field. We retained exclusive rights to the
technology for use in the field of clinical diagnostics for a
five-year period, after which we will retain nonexclusive rights
in that field. On November 14, 2007, we filed a petition to
compel MAS to arbitrate its claims with the Court. Given the
early stage of this action, we cannot predict the ultimate
outcome of this matter at this time.
On August 15, 2007, we were notified by the staff of the
Nasdaq Capital Market that we were not in compliance with
Marketplace Rule 4310(c)(3) and, as required by Marketplace
Rule 4310(c)(8)(C), we had 30 days to regain
compliance. Marketplace Rule 4310(c)(3) requires us to
(i) have minimum stockholders equity of $2,500,000,
(ii) have a minimum common stock market value of
$35,000,000 or (iii) have net income from continuing
operations of $500,000 in the most recently completed fiscal
year or in two of the last three most recently completed fiscal
years. Subsequently, on September 14, 2007, the staff of
the Nasdaq Capital Market notified us that we had regained
compliance with Marketplace Rule 4310(c)(3) because the
market value of our common stock exceeded $35,000,000 for ten
consecutive business days.
Additionally, on September 6, 2007, we were notified by the
staff of the Nasdaq Capital Market that our common stock bid
price closed below the minimum $1.00 per share for more than
30 consecutive business days, in violation of Marketplace
Rule 4310(c)(4) and, as required by Marketplace
Rule 4310(c)(8)(D), we had 180 days, or until
March 4, 2008, to regain compliance.
On August 29, 2007, we completed a private placement sale
of 24,513,092 shares of our common stock and warrants to
purchase up to an additional 19,610,470 shares of our
common stock with an exercise price of $0.925 per share and an
expiration date of August 29, 2012, to a group of new and
existing investors for $20,591,000 in gross proceeds. The net
proceeds of the transaction will be used for general working
capital needs. In connection with this transaction, we amended a
warrant originally issued to Quest Diagnostics on July 22,
2005. Pursuant to the terms of the amendment, the exercise price
for such warrant was reduced from $3.50 per share to $2.50 per
share and the expiration date of such warrant was extended from
July 22, 2010 to July 22, 2011. For services as
placement agent, we paid Oppenheimer & Co. Inc.
$1,200,000 and issued a
2
warrant to purchase up to 921,000 shares of our common
stock with an exercise price of $0.925 per share and expiration
date of August 29, 2012.
In August 2007, we announced the discovery of biomarkers that
could assist in the diagnosis of PAD. These findings, which were
made in collaboration with Stanford University, form the basis
of a novel blood test for PAD. The biomarkers are currently
undergoing validation. The results were published in the journal
Circulation, which is published by the American Heart
Association. Quest Diagnostics has accepted the PAD test for
further development under the strategic alliance agreement.
On June 26, 2006, Health Discovery Corporation filed a
lawsuit against us in the United States District Court for the
Eastern District of Texas, Marshall Division, referred to herein
as the Court, claiming that software used in certain of our
ProteinChip Systems infringes on three of its United States
patents. Health Discovery Corporation sought injunctive relief
as well as unspecified compensatory and enhanced damages,
reasonable attorneys fees, prejudgment interest and other
costs. On August 1, 2006, we filed an unopposed motion with
the Court to extend the deadline for us to answer or otherwise
respond until September 2, 2006. We filed our answer and
counterclaim to the complaint with the Court on
September 1, 2006. Concurrent with our answer and
counterclaims, we filed a motion to transfer the case to the
Northern District of California. On January 10, 2007, the
Court granted our motion to transfer the case to the Northern
District of California. The parties met for a scheduled
mediation on May 7, 2007. On July 10, 2007, we entered
into a license and settlement agreement with Health Discovery
Corporation, referred to herein as the HDC Agreement, pursuant
to which we licensed more than 25 patents covering Health
Discovery Corporations support vector machine technology
for use with SELDI technology. Under the terms of the HDC
Agreement, we receive a worldwide, royalty-free, non-exclusive
license for life sciences and diagnostic applications of the
technology and have access to any future patents resulting from
the underlying intellectual property in conjunction with use of
SELDI systems. Pursuant to the HDC Agreement, we paid $200,000
to Health Discovery Corporation upon entry into the agreement in
July 2007. The remaining $400,000 payable under the HDC
Agreement is payable as follows: $100,000 three months following
the date of the agreement, $150,000 twelve months following the
date of the agreement and $150,000 twenty-four months following
the date of the agreement. The HDC Agreement settles all
disputes between us and Health Discovery Corporation.
At our annual stockholders meeting on June 29, 2007,
stockholders approved amendments to our Certificate of
Incorporation to increase the number of authorized shares of
common stock from 80,000,000 to 150,000,000 and to change the
name of the company from Ciphergen Biosystems, Inc. to
Vermillion, Inc. On July 13, 2007, we amended and restated
our certificate of incorporation with the State of Delaware for
the increased authorized shares. We amended our certificate of
incorporation to reflect our name change on August 21, 2007.
In connection with the sale of assets and liabilities of our
Instrument Business on November 13, 2006, Bio-Rad withheld
$2,000,000 from the sales proceeds until the issuance of a
reexamination certificate confirming United States Patent
No. 6,734,022, referred to herein as the 022 Patent.
If the United States Patent and Trademark Office, or USPTO, does
not issue a reexamination certificate confirming the
patentability of all of the claims as originally issued in the
022 Patent, or claims of equivalent scope, we will not be
entitled to receive the $2,000,000 withheld by Bio-Rad. The
022 Patent is directed to a fundamental process of SELDI
that involves capturing an analyte from a sample on the surface
of a mass spectrometry probe derivatized with an affinity
reagent, applying matrix and detecting the captured analyte by
laser desorption mass spectrometry. In March 2007, the USPTO
issued a final office action in the reexamination, rejecting all
of the claims of the 022 Patent. Although the office
action was designated final, we, under the USPTO
rules, advocated the outstanding rejections and the
patentability of the claimed invention with the patent examiners
on March 30, 2007 and April 11, 2007. In addition, on
April 18, 2007, we filed a response to the final office
action with the USPTO. On October 23, 2007, the USPTO
issued us a reexamination certificate of the 022 Patent.
On November 9, 2007, we received $2,000,000 from Bio-Rad
that was withheld from the proceeds of the sale of our
Instrument Business.
In May 2007, the European Patent Office issued an EU Patent,
Biomarkers of Transitional Cell Carcinoma of the
Bladder, for aiding in bladder cancer diagnosis when used
in conjunction with the current
3
standard of care, cystoscopy (a diagnostic procedure that uses a
scope to view the bladder). The patent describes using mass
spectrometry to detect certain protein biomarkers that are
present in patients with bladder cancer versus patients who do
not have bladder cancer. These discoveries were made under our
collaborative agreement with Eastern Virginia Medical School. We
retain exclusive rights to these discoveries for diagnostic
development.
The
Offering
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Common stock offered by selling stockholders.
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43,935,269 shares |
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Use of Proceeds |
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We will not receive any proceeds from the shares of common stock
offered by this prospectus; however, we will receive proceeds
from the exercise of warrants to purchase the shares included in
the shares that are being offered by the selling stockholders
hereunder. Any proceeds we receive from such exercises of
warrants will be used for working capital purposes. See
Use of Proceeds on page 15. |
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Risk Factors |
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See Risk Factors beginning on page 6 and
other information included in this prospectus for a discussion
of factors you should carefully consider before deciding to
invest in the shares. |
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Nasdaq Capital Market Trading Symbol
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VRML |
4
Summary
Consolidated Financial and Operating Data
The following table shows our historical financial and operating
data as of and for each of the periods indicated, and should be
read in conjunction with Selected Consolidated Financial
Data and Managements Discussion and Analysis
of Financial Condition and Results of Operations included
elsewhere in this prospectus. The following tables set forth our
consolidated balance sheet data as of September 30, 2007,
and December 31, 2006, 2005, 2004, 2003 and 2002 and our
consolidated statements of operations data for the nine months
ended September 30, 2007 and 2006, and the years ended
December 31, 2006, 2005, 2004, 2003 and 2002. We derived
the selected consolidated financial data for the years ended
December 31, 2006, 2005 and 2004 from our audited
consolidated financial statements included elsewhere in this
prospectus. The consolidated statements of operations data for
the years ended December 31, 2003 and 2002, and the
consolidated balance sheet data as of December 31, 2004,
2003 and 2002, were derived from our audited consolidated
financial statements that are excluded from this prospectus. The
summary consolidated financial data as of September 30,
2007, and for the nine months ended September 30, 2007 and
2006 are derived from our unaudited consolidated financial
statements included elsewhere in this prospectus.
Our historical results are not necessarily indicative of the
results that may be expected for any future period. The results
of operations data for the nine-month periods presented below
are not necessarily indicative of the operating results for the
entire year or any other future interim period.
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Nine Months Ended
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September 30,
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Year Ended December 31,
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2007
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2006
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2006
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2005
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2004
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2003
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2002
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(in thousands, except per share amounts)
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(unaudited)
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Consolidated Statements of Operations Data:
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Total revenue
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$
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21
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$
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16,999
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$
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18,215
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$
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27,246
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$
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40,181
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$
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43,638
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$
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29,208
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Loss from operations
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(16,739
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(18,814
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(18,897
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(34,509
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(34,317
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(38,654
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(32,139
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)
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Loss from continuing operations
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(17,990
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(20,215
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(22,066
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)
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(36,387
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(36,571
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(38,818
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(30,660
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Income from discontinued operations
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954
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16,730
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2,071
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1,588
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Net loss
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$
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(17,990
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$
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(20,215
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$
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(22,066
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$
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(35,433
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$
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(19,841
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$
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(36,747
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$
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(29,072
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)
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Basic and diluted income (loss) per share:
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Loss from continuing operations
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$
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(0.43
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$
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(0.56
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$
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(0.61
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$
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(1.13
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$
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(1.25
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$
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(1.38
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$
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(1.14
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Income from discontinued operations
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0.03
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0.57
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0.07
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0.06
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Net loss
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$
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(0.43
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$
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(0.56
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$
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(0.61
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$
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(1.10
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$
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(0.68
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$
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(1.31
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$
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(1.08
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Shares used to compute basic and diluted loss per common share
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42,214
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36,042
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36,465
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32,321
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29,244
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28,154
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26,965
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September 30,
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December 31,
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|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(in thousands)
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
19,498
|
|
|
$
|
17,711
|
|
|
$
|
25,738
|
|
|
$
|
35,392
|
|
|
$
|
32,853
|
|
|
$
|
25,145
|
|
Investment in securities
|
|
|
4,000
|
|
|
|
|
|
|
|
2,240
|
|
|
|
2,175
|
|
|
|
14,463
|
|
|
|
17,396
|
|
Working capital
|
|
|
16,068
|
|
|
|
12,994
|
|
|
|
27,130
|
|
|
|
39,932
|
|
|
|
51,970
|
|
|
|
47,667
|
|
Total assets
|
|
|
26,867
|
|
|
|
23,016
|
|
|
|
52,811
|
|
|
|
74,377
|
|
|
|
102,026
|
|
|
|
87,615
|
|
Long-term debt and capital lease obligations, including current
portion
|
|
|
28,610
|
|
|
|
25,511
|
|
|
|
31,512
|
|
|
|
29,397
|
|
|
|
31,865
|
|
|
|
2,816
|
|
Total stockholders equity (deficit)
|
|
|
(8,092
|
)
|
|
|
(9,901
|
)
|
|
|
6,523
|
|
|
|
26,715
|
|
|
|
47,892
|
|
|
|
68,354
|
|
5
An investment in our common stock involves a high degree of
risk. You should carefully consider the following risk factors
together with all of the other information contained in this
prospectus, including our audited consolidated financial
statements and the notes thereto, before deciding whether to
invest in shares of our common stock. Each of these risks could
harm our business, operating results, financial condition
and/or
growth prospects. As a result, the trading price of our common
stock could decline and you might lose all or part of your
investment. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair
our operations.
Risks
Related to Our Business
We
expect to continue to incur net losses in 2007 and 2008. If we
are unable to significantly increase our revenues, we may never
achieve profitability.
From our inception through September 30, 2007, we have
generated cumulative revenue from the sale of products and
services to customers of $229.3 million and have incurred
net losses of $235.9 million. We have experienced
significant operating losses each year since our inception and
expect these losses to continue for at least the next several
quarters, resulting in an expected net loss for 2007 and 2008.
For example, we experienced net losses of $22.1 million in
2006 and $18.0 million for the nine months ended
September 30, 2007. Our losses have resulted principally
from costs incurred in research and development, sales and
marketing, litigation, and general and administrative costs
associated with our operations. These costs have exceeded our
gross profit which, to date, has been generated principally from
product sales derived from our Instrument Business which we sold
to Bio-Rad
on November 13, 2006. We expect to incur additional
operating losses that may be substantial. We may never achieve
profitability. Even if we do achieve profitability, we may not
be able to sustain or increase profitability on a quarterly or
annual basis.
We
will need to raise additional capital in the future, and if we
are unable to secure adequate funds on terms acceptable to us,
we may be unable to execute our business plan.
We believe that our current cash balances may not be sufficient
to fund planned expenditures beyond 12 months. Additional
financing opportunities may not be available, or if available,
may not be on favorable terms. The availability of financing
opportunities will depend, in part, on market conditions, and
the outlook for our company. Any future equity financing would
result in substantial dilution to our stockholders. If we raise
additional funds by issuing debt, we may be subject to
limitations on our operations, through debt covenants or other
restrictions. If adequate and acceptable financing is not
available, we may have to delay development or commercialization
of certain of our products or license to third parties the
rights to commercialize certain of our products or technologies
that we would otherwise seek to commercialize. We may also
reduce our marketing or other resources devoted to our products.
Any of these options could reduce our ability to successfully
execute our business plan.
Substantial
leverage and debt service obligations may adversely affect our
cash flows.
As of September 30, 2007, we had $19.0 million
aggregate principal amount of convertible senior notes
outstanding and $10.0 million outstanding under our secured
line of credit with Quest Diagnostics. As a result of this
indebtedness, we have high principal and interest payment
obligations. The degree to which we are leveraged could, among
other things:
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make it difficult for us to make payments on the notes;
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|
make it difficult for us to obtain financing for working
capital, acquisitions or other purposes on favorable terms, if
at all;
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|
make us more vulnerable to industry downturns and competitive
pressures; and
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|
limit our flexibility in planning for, or reacting to changes
in, our business.
|
6
Our ability to meet our debt service obligations will depend
upon our future performance, which will be subject to financial,
business and other factors affecting our operations, many of
which are beyond our control.
We may
not succeed in developing diagnostic products and even if we do
succeed in developing diagnostic products, they may never
achieve significant commercial market acceptance.
Our success depends on our ability to develop and commercialize
diagnostic products. There is considerable risk in developing
diagnostic products based on our biomarker discovery efforts as
potential tests may fail to validate results in larger clinical
studies and may not achieve acceptable levels of clinical
sensitivity and specificity. If we do succeed in developing
diagnostic tests with acceptable performance characteristics, we
may not succeed in achieving significant commercial market
acceptance for those tests. Our ability to successfully
commercialize diagnostic products that we may develop, such as
tests, kits and devices, will depend on several factors,
including:
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|
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our ability to convince the medical community of the safety and
clinical efficacy of our products and their advantages over
existing diagnostic products;
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|
our ability to further establish business relationships with
other diagnostic companies that can assist in the
commercialization of these products; and
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the agreement by Medicare and third-party payers to provide full
or partial reimbursement coverage for our products, the scope
and extent of which will affect patients willingness to
pay for our products and will likely heavily influence
physicians decisions to recommend our products.
|
These factors present obstacles to significant commercial
acceptance of our potential diagnostic products, which we will
have to spend substantial time and financial resources to
overcome, if we can do so at all. Our inability to successfully
do so would prevent us from generating additional revenue from
diagnostic products and from developing a profitable business.
Our
ability to commercialize our potential diagnostic tests is
heavily dependent on our strategic alliance with Quest
Diagnostics.
On July 22, 2005, Vermillion and Quest Diagnostics entered
into a strategic alliance, which focuses on commercializing up
to three assays chosen from our pipeline. The term of the
agreement ends on the later of (i) the three-year
anniversary of the agreement and (ii) the date on which
Quest Diagnostics commercializes the three diagnostic tests
covered by such agreement. If this strategic alliance does not
continue for its full term or if Quest Diagnostics fails to
diligently perform its obligations as a part of the strategic
alliance, such as independently developing, validating, and
commercializing potential diagnostic tests, our ability to
commercialize our potential diagnostic tests would be seriously
harmed. Due to the current uncertainty with regard to FDA
regulation of analyte specific reagents, referred to herein as
ASRs, or for other reasons, Quest Diagnostics may elect to forgo
development of ASR home brew laboratory tests and
instead elect to wait for the development of IVD test kits,
which would adversely affect our revenues. If we elect to
increase our expenditures to fund in-house diagnostic
development programs or research programs, we will need to
obtain additional capital, which may not be available on
acceptable terms, or at all. If we fail to develop diagnostic
tests, it would jeopardize our ability to continue as a business.
The
commercialization of our potential diagnostic tests may be
adversely affected by changing
FDA regulations.
The current regulatory environment with regard to ASRs and
in vitro diagnostic multivariate index assays, or IVDMIAs,
such as our potential ovarian cancer diagnostic test, is
unclear. To the extent the FDA requires that our potential
diagnostic tests receive FDA 510(k) clearance or FDA pre-market
approval, our ability to develop and commercialize our potential
diagnostic tests may be prevented or significantly delayed,
which would adversely affect our revenues.
7
If we
fail to continue to develop our technologies, we may not be able
to successfully foster adoption of our products and services or
develop new product offerings.
Our technologies are new and complex, and are subject to change
as new discoveries are made. New discoveries and advancements in
the diagnostic field are essential if we are to foster the
adoption of our product offerings. Development of these
technologies remains a substantial risk to us due to various
factors, including the scientific challenges involved, our
ability to find and collaborate with others working in the
diagnostic field, and competing technologies, which may prove
more successful than our technologies. In addition, we have
reduced our research and development headcount and expenditures,
which may adversely affect our ability to further develop our
technologies.
If we
fail to maintain our rights to utilize intellectual property
directed to diagnostic biomarkers, we may not be able to offer
diagnostic tests using those biomarkers.
One aspect of our business plan is to develop diagnostic tests
based on certain biomarkers, which we have the right to utilize
through licenses with our academic collaborators, such as The
Johns Hopkins University School of Medicine and The University
of Texas M.D. Anderson Cancer Center. In some cases, our
collaborators own the entire right to the biomarkers. In other
cases we co-own the biomarkers with our collaborators. If, for
some reason, we lose our license to biomarkers owned entirely by
our collaborators, we may not be able to use those biomarkers in
diagnostic tests. If we lose our exclusive license to biomarkers
co-owned by us and our collaborators, our collaborators may
license their share of the intellectual property to a third
party that may compete with us in offering diagnostic tests.
We
have drawn $10.0 million from the secured line of credit
provided by Quest Diagnostics. If we fail to achieve the
milestones for the forgiveness of the secured line of credit set
forth therein, we will be responsible for full repayment of the
secured line of credit.
As of September 30, 2007, we have drawn $10.0 million
from the secured lined of credit in connection with our
strategic alliance with Quest Diagnostics. We borrowed in
monthly increments of $417,000 over a two-year period and made
monthly interest payments. Funds from this secured line of
credit may only be used to pay certain costs and expenses
directly related to the strategic alliance, with forgiveness of
the repayment obligations based upon our achievement of
milestones related to the development, regulatory approval and
commercialization of certain diagnostic tests. Should we fail to
achieve these milestones, we would be responsible for the
repayment of the outstanding principal amount and any unpaid
interest on the secured line of credit on or before
July 22, 2010.
If a
competitor infringes our proprietary rights, we may lose any
competitive advantage we may have as a result of diversion of
management time, enforcement costs and the loss of the
exclusivity of our proprietary rights.
Our success depends in part on our ability to maintain and
enforce our proprietary rights. We rely on a combination of
patents, trademarks, copyrights and trade secrets to protect our
technology and brand. In addition to our licensed SELDI
technology, we also have submitted patent applications directed
to subsequent technological improvements and utilization of the
SELDI technology, including patent applications covering
biomarkers that may have diagnostic or therapeutic utility. Our
patent applications may not result in additional patents being
issued.
If competitors engage in activities that infringe our
proprietary rights, our managements focus will be diverted
and we may incur significant costs in asserting our rights. We
may not be successful in asserting our proprietary rights, which
could result in our patents being held invalid or a court
holding that the competitor is not infringing, either of which
would harm our competitive position. We cannot be sure that
competitors will not design around our patented technology.
We also rely upon the skills, knowledge and experience of our
technical personnel. To help protect our rights, we require all
employees and consultants to enter into confidentiality
agreements that prohibit the
8
disclosure of confidential information. These agreements may not
provide adequate protection for our trade secrets, knowledge or
other proprietary information in the event of any unauthorized
use or disclosure.
If
others successfully assert their proprietary rights against us,
we may be precluded from making and selling our products or we
may be required to obtain licenses to use their
technology.
Our success depends on avoiding infringing on the proprietary
technologies of others. If a third party were to assert claims
that we are violating their patents, we might incur substantial
costs defending ourselves in lawsuits against charges of patent
infringement or other unlawful use of anothers proprietary
technology. Any such lawsuit may not be decided in our favor,
and if we are found liable, we may be subject to monetary
damages or injunction against using the technology. We may also
be required to obtain licenses under patents owned by third
parties and such licenses may not be available to us on
commercially reasonable terms, or at all.
Current
and future litigation against us could be costly and time
consuming to defend.
We are from time to time subject to legal proceedings and claims
that arise in the ordinary course of business, such as claims
brought by our clients in connection with commercial disputes,
employment claims made by our current or former employees, and
claims brought by third parties alleging infringement on their
intellectual property rights. In addition, we may bring claims
against third parties for infringement on our intellectual
property rights. Litigation may result in substantial costs and
may divert managements attention and resources, which may
seriously harm our business, financial condition and results of
operations.
An unfavorable judgment against us in any legal proceeding or
claim could require us to pay monetary damages. In addition, an
unfavorable judgment in which the counterparty is awarded
equitable relief such as an injunction could have an adverse
impact on our licensing and sublicensing activities which could
harm our business, financial condition and results of operations.
On September 17, 2007, we were served with a complaint
naming us and Bio-Rad as defendants and MAS as the plaintiff. In
the complaint, MAS alleges that we are in breach of our license
agreement with MAS relating to SELDI technology as a result of
our entry into a sublicense agreement with Bio-Rad. On
November 14, 2007, we filed a petition to compel MAS to
arbitrate its claims with the Court. Given the early stage of
this action, we cannot predict the ultimate outcome of this
matter at this time.
We
depend on a single supplier to manufacture and supply our
products and any interruption in this supplier relationship
could materially and adversely affect our operating
results.
In connection with the sale of assets and liabilities of our
Instrument Business, we entered into a manufacture and supply
agreement with Bio-Rad pursuant to which Bio-Rad manufactures
and supplies our SELDI instruments and consumables. The initial
term of the agreement expires on November 12, 2011 and is
renewable for two additional two-year terms. If the manufacture
and supply agreement is terminated or is not renewed or if
Bio-Rad ceases manufacturing these products for another reason,
we would have to find another third party supplier or begin
manufacturing and supplying such products ourselves. We or
another third-party supplier may not be able to produce those
products at a cost, quantity or quality that are available from
Bio-Rad. In addition, any such interruption could delay or
diminish our ability to satisfy our customers orders which
could reduce our revenues, adversely affect our relationships
with our customers, and materially and adversely affect our
operating results.
If we
or our suppliers fail to comply with FDA requirements, we may
not be able to market our products and services and may be
subject to stringent penalties; further improvements to our or
our suppliers manufacturing operations may be required
that would entail additional costs.
The commercialization of our products could be affected by being
delayed, halted or prevented by applicable FDA regulations. If
the FDA were to view any of our actions as non-compliant, it
could initiate enforcement actions such as a warning letter and
possible imposition of penalties. In addition, ASRs that we may
provide will be subject to a number of FDA requirements,
including compliance with the FDAs Quality System
Regulations, referred to herein as QSRs, which establish
extensive requirements for quality assurance
9
and control as well as manufacturing procedures. Failure to
comply with these regulations could result in enforcement
actions for us or our potential suppliers. Adverse FDA actions
in any of these areas could significantly increase our expenses
and limit our revenue and profitability. Although we are ISO
9001:2000 certified with respect to the manufacturing processes
used for our previous ProteinChip products, we will need to
undertake additional steps to maintain our operations in line
with the FDAs QSRs. Our suppliers manufacturing
facilities are subject to periodic regulatory inspections by the
FDA and other federal and state regulatory agencies. If and when
we begin commercializing and assembling our products ourselves,
our facilities will be subject to the same inspections. We or
our suppliers may not satisfy such regulatory requirements, and
any such failure to do so would have an adverse effect on our
diagnostics efforts.
Because
our business is highly dependent on key executives and
employees, our inability to recruit and retain these people
could hinder our business plans.
We are highly dependent on our executive officers and certain
key employees. Effective November 1, 2007, the Chief
Financial Officer resigned from the Company for personal
reasons. Upon the Chief Financial Officers resignation,
our Corporate Controller was appointed to serve as Chief
Financial Officer on an interim basis while we search for a new
Chief Financial Officer. The resignation of the Chief Financial
Officer and loss of service of any other executive officers or
certain key employees could delay or curtail our research,
development and commercialization objectives. To continue our
research and product development efforts, we need people skilled
in areas such as bioinformatics, biochemistry and information
services. Competition for qualified employees is intense.
Our
diagnostics efforts may cause us to have significant product
liability exposure.
The testing, manufacturing and marketing of medical diagnostic
tests entail an inherent risk of product liability claims.
Potential product liability claims may exceed the amount of our
insurance coverage or may be excluded from coverage under the
terms of the policy. Our existing insurance will have to be
increased in the future if we are successful at introducing
diagnostic products and this will increase our costs. In the
event that we are held liable for a claim against which we are
not indemnified or for damages exceeding the limits of our
insurance coverage, may require us to make substantial payments.
This could adversely affect our cash position and results of
operations and could increase the volatility of our common stock
price.
Business
interruptions could limit our ability to operate our
business.
Our operations as well as those of the collaborators on which we
depend are vulnerable to damage or interruption from fire,
natural disasters, computer viruses, human error, power
shortages, telecommunication failures, international acts of
terror and similar events. Our primary facility is located in
Fremont, California, where we also have laboratories. Although
we have certain business continuity plans in place, we have not
established a formal comprehensive disaster recovery plan, and
our back-up
operations and business interruption insurance may not be
adequate to compensate us for losses we may suffer. A
significant business interruption could result in losses or
damages incurred by us and require us to cease or curtail our
operations.
Legislative
actions resulting in higher compliance costs are likely to
adversely affect our future financial position, cash flows and
results of operations.
Compliance with laws, regulations and standards relating to
corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002, new Securities and Exchange
Commission, or SEC, regulations and Nasdaq listing requirements,
are resulting in increased compliance costs. We, like all other
public companies, are incurring expenses and diverting our
employees time in an effort to comply with
Section 404 of the Sarbanes-Oxley Act of 2002. We are a
non-accelerated filer. We have completed the process of
documenting our systems of internal control and are currently
evaluating our systems of internal control. We are required to
assess our compliance with Section 404 of the
Sarbanes-Oxley Act of 2002 for the year ending December 31,
2007. We expect to devote the necessary resources, including
additional internal and supplemental external resources, to
support our assessment. If, in the future, we identify one or
more material weaknesses, or our external auditors are unable to
attest that our managements report is fairly stated or to
express an opinion on the effectiveness of
10
our internal controls, this could result in a loss of investor
confidence in our financial reports, have an adverse effect on
our stock price
and/or
subject us to sanctions or investigation by regulatory
authorities. Compliance with these evolving standards will
result in increased general and administrative expenses and may
cause a diversion of management time and attention from
revenue-generating activities to compliance activities.
Limitations
on our use of net operating loss carryforwards and research and
development deferred tax assets to offset future state and
federal income taxes may have an impact on our future results of
operations.
We are evaluating our net operating loss carryforwards and
research and development deferred tax assets to determine
whether our use of such deferred tax assets in the future may be
limited due to prior year ownership changes. We expect to
complete the studies by the end of 2007. If our ability to use
any of these deferred tax assets is limited, it may have an
adverse impact on our results of operations.
We are
subject to environmental laws and potential exposure to
environmental liabilities.
We are subject to various international, federal, state and
local environmental laws and regulations that govern our
operations, including the handling and disposal of nonhazardous
and hazardous wastes, the recycling and treatment of electrical
and electronic equipment, and emissions and discharges into the
environment. Failure to comply with such laws and regulations
could result in costs for corrective action, penalties or the
imposition of other liabilities. We also are subject to laws and
regulations that impose liability and
clean-up
responsibility for releases of hazardous substances into the
environment. Under certain of these laws and regulations, a
current or previous owner or operator of property may be liable
for the costs of remediating hazardous substances or petroleum
products on or from its property, without regard to whether the
owner or operator knew of, or caused, the contamination, as well
as incur liability to third parties affected by such
contamination. The presence of, or failure to remediate
properly, such substances could adversely affect the value and
the ability to transfer or encumber such property. Based on
currently available information, although there can be no
assurance, we believe that such costs and liabilities have not
had and will not have a material adverse impact on our financial
results.
Risks
Related to Owning Our Stock
Our
principal stockholders own a significant percentage of our
outstanding common stock and are, and will continue to be, able
to exercise significant influence over our
affairs.
As of November 30, 2007, Quest Diagnostics possessed voting
power over 8,605,952 shares, or 13.49%, and Phronesis
Partners, L.P., referred to herein as Phronesis, possessed
voting power over 6,665,678 shares, or 10.45%, of our
outstanding common stock. As a result, Quest Diagnostics and
Phronesis are able to determine a significant part of the
composition of our Board of Directors, hold significant voting
power with respect to matters requiring stockholder approval and
to exercise significant influence over our operations. The
interests of Quest Diagnostics and Phronesis may be different
than the interests of other stockholders on these and other
matters. This concentration of ownership also could have the
effect of delaying or preventing a change in our control or
otherwise discouraging a potential acquirer from attempting to
obtain control of us, which could reduce the price of our common
stock.
Although
we currently meet the standards for continued listing on the
Nasdaq Capital Market, there is no guarantee that we will
continue to meet these standards in the future and if we are
delisted the value of your investment in Vermillion may
substantially decrease.
To remain listed on the Nasdaq Capital Market, the bid price for
our common stock may not be below $1.00 per share for more than
30 consecutive business days. We received a delisting notice on
September 6, 2007, following a period of 30 business days
during which the bid price for our common stock was below $1.00.
We have until March 4, 2008 to regain compliance otherwise
Nasdaq may provide written notification that the Companys
securities will be delisted, at which time, we may appeal
Nasdaqs decision.
11
There is no guarantee that we will continue to meet the
standards for listing in the future. Upon delisting from the
Nasdaq Capital Market, our stock would be traded
over-the-counter, more commonly known as OTC. OTC transactions
involve risks in addition to those associated with transactions
in securities traded on the Nasdaq Capital Market. Many OTC
stocks trade less frequently and in smaller volumes than
Nasdaq-listed stocks. Accordingly, delisting from the Nasdaq
Capital Market would adversely affect the trading price of our
common stock, significantly limit the liquidity of our common
stock and impair our ability to raise additional funds.
Anti-takeover
provisions in our charter, bylaws and stockholder rights plan
and under Delaware law could make a third party acquisition of
us difficult.
Our certificate of incorporation, bylaws and stockholder rights
plan contain provisions that could make it more difficult for a
third party to acquire us, even if doing so might be deemed
beneficial by our stockholders. These provisions could limit the
price that investors might be willing to pay in the future for
shares of our common stock. We are also subject to certain
provisions of Delaware law that could delay, deter or prevent a
change in control of us. The rights issued pursuant to our
stockholder rights plan will become exercisable the tenth day
after a person or group announces acquisition of 15% or more of
our common stock or announces commencement of a tender or
exchange offer the consummation of which would result in
ownership by the person or group of 15% or more of our common
stock. If the rights become exercisable, the holders of the
rights (other than the person acquiring 15% or more of our
common stock) will be entitled to acquire, in exchange for the
rights exercise price, shares of our common stock or
shares of any company in which we are merged, with a value equal
to twice the rights exercise price.
Because
we do not intend to pay dividends, our stockholders will benefit
from an investment in our common stock only if it appreciates in
value.
We have never declared or paid any cash dividends on our common
stock. We currently intend to retain our future earnings, if
any, to finance the expansion of our business and do not expect
to pay any cash dividends in the foreseeable future. As a
result, the success of an investment in our common stock will
depend entirely upon any future appreciation. There is no
guarantee that our common stock will appreciate in value or even
maintain the price at which our investors purchased their shares.
Our
stock price has been highly volatile, and an investment in our
stock could suffer a decline in value.
The trading price of our common stock has been highly volatile
and could continue to be subject to wide fluctuations in price
in response to various factors, many of which are beyond our
control, including:
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failure to commercialize diagnostic tests and significantly
increase revenue;
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actual or anticipated period-to-period fluctuations in financial
results;
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failure to achieve, or changes in, financial estimates by
securities analysts;
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announcements or introductions of new products or services or
technological innovations by us or our competitors;
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publicity regarding actual or potential discoveries of
biomarkers by others;
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comments or opinions by securities analysts or major
stockholders;
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conditions or trends in the pharmaceutical, biotechnology and
life science industries;
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announcements by us of significant acquisitions and
divestitures, strategic partnerships, joint ventures or capital
commitments;
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developments regarding our patents or other intellectual
property or that of our competitors;
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litigation or threat of litigation;
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additions or departures of key personnel;
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sales of our common stock;
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limited daily trading volume;
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12
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delisting from the Nasdaq Capital Market; and
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economic and other external factors, disasters or crises.
|
In addition, the stock market in general and, in particular, the
Nasdaq Capital Market and the market for technology companies,
have experienced significant price and volume fluctuations that
have often been unrelated or disproportionate to the operating
performance of those companies. Further, there has been
significant volatility in the market prices of securities of
life science companies. These broad market and industry factors
may seriously harm the market price of our common stock,
regardless of our operating performance. In the past, following
periods of volatility in the market price of a companys
securities, securities class action litigation has often been
instituted. A securities class action suit against us could
result in substantial costs, potential liabilities and the
diversion of managements attention and our resources.
We may
need to sell additional shares of our common stock or other
securities to meet our capital requirements. If we need to sell
additional shares of our common stock or other securities to
meet our capital requirements, or upon conversion of our
convertible notes and exercises of currently outstanding options
and warrants, the ownership interests of our current
stockholders could be substantially diluted. The possibility of
dilution posed by shares available for future sale could reduce
the market price of our common stock and could make it more
difficult for us to raise funds through equity offerings in the
future.
As of November 30, 2007, we had 63,801,971 shares of
common stock outstanding. In addition, as of November 30,
2007, there were 7,653,758 shares of common stock reserved
for future issuance to employees, directors and consultants
pursuant to our employee stock plans, of which
5,669,958 shares of common stock were subject to
outstanding options. In addition, as of November 30, 2007,
warrants to purchase 22,931,470 shares of common stock were
outstanding at exercise prices ranging from $0.925 to $2.50 per
share, with a weighted exercise price of $1.079 per share. In
addition, there are 272,082 shares of common stock reserved
for issuance upon conversion of our outstanding
4.5% Convertible Senior Notes due 2008, referred to herein
as the 4.5% Notes, and 8,250,000 shares of common
stock reserved for issuance upon conversion of our
7.0% Convertible Senior Notes due 2011, referred to herein
as the 7.0% Notes. The exercise or conversion of all or a
portion of these securities would dilute the ownership interests
of our stockholders. Furthermore, future sales of substantial
amounts of our common stock in the public market, or the
perception that such sales are likely to occur, could affect
prevailing trading prices of our common stock and the value of
the notes.
13
Cautionary
Note Regarding Forward-Looking Statements
Some statements in this prospectus are deemed forward-looking
statements for purposes of the safe harbor provisions under the
Private Securities Litigation Reform Act of 1995. We claim the
protection of such safe harbor, and disclaim any intent or
obligation to update any forward-looking statement. You can
identify these statements by forward-looking words such as
may, will, expect,
intend, anticipate, believe,
estimate, plan, could,
should and continue or similar words.
These forward-looking statements may also use different phrases.
We have based these forward-looking statements on our current
expectations and projections about future events. Examples of
forward-looking statements include the following statements:
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|
|
|
|
projections of our future revenue, results of operations and
financial condition;
|
|
|
|
anticipated deployment, capabilities and uses of our products
and our product development activities and product innovations;
|
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|
|
the importance of proteomics as a major focus of biology
research;
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|
competition and consolidation in the markets in which we compete;
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|
existing and future collaborations and partnerships;
|
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the utility of biomarker discoveries;
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|
our belief that biomarker discoveries may have diagnostic and/or
therapeutic utility;
|
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|
our plans to develop and commercialize diagnostic tests through
our strategic alliance with Quest Diagnostics;
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our ability to comply with applicable government regulations;
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our ability to expand and protect our intellectual property
portfolio;
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our ability to decrease general and administrative costs;
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|
our ability to decrease sales and marketing costs;
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our ability to decrease research and development costs;
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|
anticipated future losses;
|
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expected levels of capital expenditures;
|
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|
|
forgiveness of the outstanding principal amounts of the secured
line of credit by Quest Diagnostics;
|
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|
the period of time for which our existing financial resources,
debt facilities and interest income will be sufficient to enable
us to maintain current and planned operations; and
|
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|
the market risk of our investments.
|
These statements are subject to significant risks and
uncertainties, including those identified in the section of this
prospectus entitled 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; managing our operating expenses and cash
resources that are consistent with our plans; our evaluation of
the net operating loss carryforwards and research and
development deferred tax credits to determine whether there is a
limit due to prior year ownership changes; our ability to
conduct new diagnostic product development using both our
internal research and development resources, and collaboration
partners within the budgets and time frames we have established;
the ability of the ProteinChip technology to discover protein
biomarkers that have diagnostic, theranostic
and/or drug
development utility; the continued emergence of proteomics as a
major focus of biological research and drug discovery; and our
ability to protect and promote our proprietary technologies. We
believe it is important to communicate our expectations to our
investors. However, there may be events in the future that we
are not able to accurately predict or that we do not fully
control that could cause actual results to differ materially
from those expressed or implied in our forward-looking
statements.
14
We will receive no proceeds from the sale of the shares by the
selling stockholders. However, this prospectus covers the offer
of shares of common stock issuable in the future upon the
exercise of (i) warrants to purchase up to an aggregate of
18,626,709 shares of common stock at an exercise price of
$0.925 per share, subject to certain adjustments, which are
exercisable until August 29, 2012, (ii) warrants to
purchase up to an aggregate of 45,000 shares of common
stock at an exercise price of $1.26 per share, subject to
certain adjustments, which are exercisable until August 2,
2011 and (iii) warrants to purchase up to an aggregate of
45,000 shares of common stock at an exercise price of $1.26
per share, subject to certain adjustments, which are exercisable
until November 14, 2011. If all of these warrants are
exercised in full for cash, we would receive aggregate gross
proceeds of approximately $17,343,000. There can be no assurance
any of these warrants will be exercised by the selling
stockholders or, if exercised, that we will receive any cash
proceeds upon such exercises. We expect to use proceeds, if any,
from exercise of these warrants for general working capital
purposes. We cannot assure that any selling stockholder will
sell any or all of the shares of common stock registered
pursuant to the registration statement of which this prospectus
is a part.
We will pay certain expenses related to the registration of the
shares of common stock.
DETERMINATION
OF OFFERING PRICE
The selling stockholders will determine at what price they may
sell the offered shares, and such sales may be made at
prevailing market prices, or at privately negotiated prices.
15
Our common stock is traded on the Nasdaq Capital Market under
the symbol VRML.
The following sets forth the quarterly high and low trading
prices as reported by the Nasdaq Capital Market for the periods
indicated.
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|
|
|
|
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Vermillion, Inc.
|
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|
|
Common Stock
|
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|
|
High
|
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|
Low
|
|
|
Fiscal Year 2005
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
4.34
|
|
|
$
|
2.62
|
|
Second Quarter
|
|
$
|
2.81
|
|
|
$
|
1.39
|
|
Third Quarter
|
|
$
|
2.65
|
|
|
$
|
1.67
|
|
Fourth Quarter
|
|
$
|
1.99
|
|
|
$
|
0.64
|
|
Fiscal Year 2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
2.25
|
|
|
$
|
1.00
|
|
Second Quarter
|
|
$
|
1.86
|
|
|
$
|
1.00
|
|
Third Quarter
|
|
$
|
1.55
|
|
|
$
|
0.85
|
|
Fourth Quarter
|
|
$
|
1.39
|
|
|
$
|
0.82
|
|
Fiscal Year 2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
1.99
|
|
|
$
|
0.92
|
|
Second Quarter
|
|
$
|
1.53
|
|
|
$
|
0.85
|
|
Third Quarter
|
|
$
|
1.15
|
|
|
$
|
0.55
|
|
Fourth Quarter (through December 5, 2007)
|
|
$
|
1.09
|
|
|
$
|
0.58
|
|
The closing price for our common stock on December 5, 2007
was $0.83. As of November 20, 2007, there were approximately
142 holders of record of our common stock, excluding shares
held in book-entry form through The Depository
Trust Company, and we estimate that the number of
beneficial owners of shares of our common stock was
approximately 3,982 as of such date.
We have never paid or declared any dividend on our common stock
and we do not anticipate paying cash dividends on our common
stock in the foreseeable future. If we pay a cash dividend on
our common stock, we also may be required to pay the same
dividend on an as-converted basis on any outstanding preferred
stock, warrants, convertible notes or other securities.
Moreover, any preferred stock or other senior debt or equity
securities to be issued and any future credit facilities might
contain restrictions on our ability to declare and pay dividends
on our common stock. We intend to retain all available funds and
any future earnings to fund the development and expansion of our
business.
16
SELECTED
CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial
data in conjunction with our audited consolidated financial
statements and the notes thereto, and Managements
Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this prospectus. The
following tables set forth our consolidated balance sheet data
as of September 30, 2007, and December 31, 2006, 2005,
2004, 2003 and 2002 and our consolidated statements of
operations data for the nine months ended September 30,
2007 and 2006, and the years ended December 31, 2006, 2005,
2004, 2003 and 2002. We derived the selected consolidated
financial data for the years ended December 31, 2006, 2005
and 2004 from our audited consolidated financial statements
included elsewhere in this prospectus. The consolidated
statements of operations data for the years ended
December 31, 2003 and 2002, and the consolidated balance
sheet data as of December 31, 2004, 2003 and 2002, were
derived from our audited consolidated financial statements that
are excluded from this prospectus. The summary consolidated
financial data as of September 30, 2007, and for the nine
months ended September 30, 2007 and 2006 are derived from
our unaudited consolidated financial statements included
elsewhere in this prospectus.
Our historical results are not necessarily indicative of the
results that may be expected for any future period. The results
of operations data for the nine-month periods presented below
are not necessarily indicative of the operating results for the
entire year or any other future interim period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(in thousands, except per share amounts)
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
|
|
|
$
|
10,702
|
|
|
$
|
11,292
|
|
|
$
|
18,350
|
|
|
$
|
31,378
|
|
|
$
|
35,872
|
|
|
$
|
23,572
|
|
Products from related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
827
|
|
Services
|
|
|
21
|
|
|
|
6,297
|
|
|
|
6,923
|
|
|
|
8,896
|
|
|
|
8,803
|
|
|
|
7,766
|
|
|
|
4,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
21
|
|
|
|
16,999
|
|
|
|
18,215
|
|
|
|
27,246
|
|
|
|
40,181
|
|
|
|
43,638
|
|
|
|
29,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
|
|
|
|
5,714
|
|
|
|
5,818
|
|
|
|
9,372
|
|
|
|
11,199
|
|
|
|
11,911
|
|
|
|
6,761
|
|
Products from related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
334
|
|
Services
|
|
|
15
|
|
|
|
3,118
|
|
|
|
3,520
|
|
|
|
4,321
|
|
|
|
3,876
|
|
|
|
3,426
|
|
|
|
2,277
|
|
Litigation settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
15
|
|
|
|
8,832
|
|
|
|
9,338
|
|
|
|
13,693
|
|
|
|
15,075
|
|
|
|
22,594
|
|
|
|
9,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
6
|
|
|
|
8,167
|
|
|
|
8,877
|
|
|
|
13,553
|
|
|
|
25,106
|
|
|
|
21,044
|
|
|
|
19,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,297
|
|
|
|
8,780
|
|
|
|
11,474
|
|
|
|
13,196
|
|
|
|
19,268
|
|
|
|
23,628
|
|
|
|
19,593
|
|
Sales and marketing
|
|
|
1,440
|
|
|
|
10,652
|
|
|
|
12,568
|
|
|
|
18,009
|
|
|
|
26,019
|
|
|
|
21,255
|
|
|
|
17,960
|
|
General and administrative
|
|
|
8,626
|
|
|
|
7,549
|
|
|
|
10,661
|
|
|
|
14,404
|
|
|
|
14,136
|
|
|
|
14,815
|
|
|
|
14,422
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
16,363
|
|
|
|
26,981
|
|
|
|
34,703
|
|
|
|
48,062
|
|
|
|
59,423
|
|
|
|
59,698
|
|
|
|
51,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(in thousands, except per share amounts)
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on sale of instrument business
|
|
|
(382
|
)
|
|
|
|
|
|
|
6,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(16,739
|
)
|
|
|
(18,814
|
)
|
|
|
(18,897
|
)
|
|
|
(34,509
|
)
|
|
|
(34,317
|
)
|
|
|
(38,654
|
)
|
|
|
(32,139
|
)
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(1,481
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
458
|
|
|
|
654
|
|
|
|
843
|
|
|
|
839
|
|
|
|
505
|
|
|
|
702
|
|
|
|
1,543
|
|
Interest expense
|
|
|
(1,727
|
)
|
|
|
(1,691
|
)
|
|
|
(2,254
|
)
|
|
|
(1,993
|
)
|
|
|
(2,001
|
)
|
|
|
(763
|
)
|
|
|
(43
|
)
|
Other income (expense) net
|
|
|
17
|
|
|
|
(174
|
)
|
|
|
(125
|
)
|
|
|
(717
|
)
|
|
|
(649
|
)
|
|
|
(150
|
)
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(17,991
|
)
|
|
|
(20,025
|
)
|
|
|
(21,914
|
)
|
|
|
(36,380
|
)
|
|
|
(36,462
|
)
|
|
|
(38,865
|
)
|
|
|
(30,704
|
)
|
Income tax benefit (expense) from continuing operations
|
|
|
1
|
|
|
|
(190
|
)
|
|
|
(152
|
)
|
|
|
(7
|
)
|
|
|
(109
|
)
|
|
|
47
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(17,990
|
)
|
|
|
(20,215
|
)
|
|
|
(22,066
|
)
|
|
|
(36,387
|
)
|
|
|
(36,571
|
)
|
|
|
(38,818
|
)
|
|
|
(30,660
|
)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,797
|
)
|
|
|
2,071
|
|
|
|
1,588
|
|
Gain from sale of operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
954
|
|
|
|
18,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
954
|
|
|
|
16,730
|
|
|
|
2,071
|
|
|
|
1,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,990
|
)
|
|
$
|
(20,215
|
)
|
|
$
|
(22,066
|
)
|
|
$
|
(35,433
|
)
|
|
$
|
(19,841
|
)
|
|
$
|
(36,747
|
)
|
|
$
|
(29,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.43
|
)
|
|
$
|
(0.56
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(1.25
|
)
|
|
$
|
(1.38
|
)
|
|
$
|
(1.14
|
)
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.03
|
|
|
|
0.57
|
|
|
|
0.07
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
$
|
(0.43
|
)
|
|
$
|
(0.56
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
(1.10
|
)
|
|
$
|
(0.68
|
)
|
|
$
|
(1.31
|
)
|
|
$
|
(1.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute basic and diluted loss per common share
|
|
|
42,214
|
|
|
|
36,042
|
|
|
|
36,465
|
|
|
|
32,321
|
|
|
|
29,244
|
|
|
|
28,154
|
|
|
|
26,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(in thousands)
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
19,498
|
|
|
$
|
17,711
|
|
|
$
|
25,738
|
|
|
$
|
35,392
|
|
|
$
|
32,853
|
|
|
$
|
25,145
|
|
Investment in securities
|
|
|
4,000
|
|
|
|
|
|
|
|
2,240
|
|
|
|
2,175
|
|
|
|
14,463
|
|
|
|
17,396
|
|
Working capital
|
|
|
16,068
|
|
|
|
12,994
|
|
|
|
27,130
|
|
|
|
39,932
|
|
|
|
51,970
|
|
|
|
47,667
|
|
Total assets
|
|
|
26,867
|
|
|
|
23,016
|
|
|
|
52,811
|
|
|
|
74,377
|
|
|
|
102,026
|
|
|
|
87,615
|
|
Long-term debt and capital lease obligations, including current
portion
|
|
|
28,610
|
|
|
|
25,511
|
|
|
|
31,512
|
|
|
|
29,397
|
|
|
|
31,865
|
|
|
|
2,816
|
|
Total stockholders equity (deficit)
|
|
|
(8,092
|
)
|
|
|
(9,901
|
)
|
|
|
6,523
|
|
|
|
26,715
|
|
|
|
47,892
|
|
|
|
68,354
|
|
18
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion in conjunction with
our consolidated financial statements and the notes thereto
included elsewhere in this prospectus. The following discussion
includes certain forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially
from those referred to in the forward-looking statements as a
result of various factors, including those discussed in
Risk Factors and elsewhere in this prospectus.
Overview
We were originally incorporated in California on
December 9, 1993, under the name Abiotic Systems. In March
1995, we changed our corporate name to Ciphergen Biosystems,
Inc. and in May 2000, we reincorporated in Delaware. We had our
initial public offering on September 28, 2000. On
November 13, 2006, we sold assets and liabilities of our
Instrument Business to Bio-Rad in order to concentrate our
resources on developing clinical protein biomarker diagnostic
products and services. On August 21, 2007, we changed our
corporate name to Vermillion, Inc. In conjunction with the name
change, we changed our common stock ticker symbol on the Nasdaq
Capital Market from CIPH to VRML.
Prior to the November 13, 2006, sale of assets and
liabilities of our Instrument Business to Bio-Rad, we developed,
manufactured and sold ProteinChip Systems for life science
research. This patented technology is recognized as SELDI. The
systems consist of ProteinChip Readers, ProteinChip Software and
related accessories, which were used in conjunction with
consumable ProteinChip Arrays. These products were sold
primarily to pharmaceutical companies, biotechnology companies,
academic research laboratories and government research
laboratories. We also provided research services through our
Biomarker Discovery Center laboratories, and offered consulting
services, customer support services and training classes to our
customers and collaborators. Our sales were driven by the need
for new and better tools to perform protein discovery,
characterization, purification, identification and assay
development. Many of the ProteinChip Systems sold to our
customers also generated revenue from the sale of consumables
and maintenance contracts. In addition, some of our customers
would enhance their ProteinChip Systems by adding automation
accessories and advanced software. Additionally, our expenses
consisted primarily of materials, contracted manufacturing
services, labor and overhead costs to manufacture our
ProteinChip Systems and ProteinChip Arrays and to support
customer services, marketing and sales activities, research and
development programs, litigation and general and administrative
costs associated with our operations.
Since the sale of assets and liabilities of our Instrument
Business to Bio-Rad, we have dedicated ourselves to the
discovery, development and commercialization of specialty
diagnostic tests that provide physicians with information with
which to manage their patients care and to improve patient
outcomes. We intend to do this using translational proteomics,
which is the process of answering clinical questions by
utilizing advanced protein separation methods to identify and
resolve variants of specific biomarkers, developing assays, and
commercializing tests. As a result of the transition from our
historical roots as a proteomics research products business to a
specialty diagnostic testing business, we have substantially
reduced the size of our staff. Currently, our expenses consist
primarily of research and development costs related to our
diagnostics efforts and general and administrative costs,
including litigation expenses and accounting and auditing
expenses.
Through collaborations with leading academic and research
institutions, including The Johns Hopkins 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, The Ohio State University
Research Foundation, and Stanford University, we plan to develop
diagnostic tests in the fields of hematology/oncology,
cardiovascular disease and womens health. The clinical
questions we are addressing include early disease detection,
treatment response, monitoring of disease progression, prognosis
and others. These research collaborations have provided us with
the clinical data and intellectual property portfolio that form
the basis of our product pipeline. We are now engaged in product
development and commercialization of discoveries made under
these collaborations.
19
In July 2005, we entered into a strategic alliance agreement
with Quest Diagnostics pursuant to which the parties have agreed
to develop and commercialize up to three diagnostic tests. The
term of the agreement ends on the later of (i) the
three-year anniversary of the agreement and (ii) the date
on which Quest Diagnostics commercializes the three diagnostic
tests. Thus, our major initiatives are currently aimed at
commercializing these tests, both within the context of our
strategic alliance agreement with Quest Diagnostics as well as
with other customers, to the extent permitted under the
agreement. In May 2007, we hired Steve Lundy as our Senior Vice
President of Sales and Marketing. We anticipate adding
additional members to our sales and marketing team to expedite
these activities.
Our most established programs are in the field of ovarian
cancer. Commonly known as the silent killer, ovarian
cancer leads to approximately 15,000 deaths each year in the
United States. Approximately 20,000 new cases are diagnosed each
year, with the majority in patients with late stage disease,
where the cancer has spread beyond the ovary. Unfortunately, the
prognosis is poor in these patients, leading to the high
mortality from this disease. We believe that one unmet clinical
need is a diagnostic test that can provide adequate predictive
value to stratify patients with a pelvic mass into those with a
high risk of invasive ovarian cancer versus those with a low
risk. We believe that there are at least 5 million testing
opportunities each year addressing this need. We have developed
a panel of biomarkers we believe provides risk stratification
information for ovarian cancer based on a series of studies
involving over 2,500 clinical samples from more than five sites.
In a cohort study we were able to show, in 525 consecutively
sampled women, a significant increase in the positive predictive
value using our marker panel over the baseline level. This
translates into the potential to enrich the concentration of
ovarian cancer cases referred to a gynecologic oncologist by
more than two-fold. We are undertaking a prospective clinical
trial to support submission to the FDA for approval as an IVD
test kit.
A second major program is a test intended to aid in the
detection of PAD. This test, which is based on research done in
collaboration with Stanford University, fills the unmet clinical
need for a blood test that can be used as an adjunct to detect
PAD, which affects 10 million Americans but is
underdiagnosed. Accurate diagnosis of PAD permits aggressive
lifestyle modification and therapeutic intervention that can
decrease the risk of major adverse cardiovascular events. We
reported in August the publication of a discovery of two blood
markers for PAD in the peer-reviewed journal Circulation,
which is published by the American Heart Association. We are
currently performing clinical validation of this test, which
will be commercialized with Quest Diagnostics under the terms of
the strategic alliance agreement.
We expect to incur losses for at least the next year. Due
to the sale of assets and liabilities of our Instrument Business
to Bio-Rad, we will have limited revenues until our diagnostic
tests are developed and successfully commercialized. To become
profitable, we will need to complete development of key
diagnostic tests, obtain FDA approval and successfully
commercialize our products. We have a limited history of
operations in developing diagnostic tests, and we anticipate
that our quarterly results of operations will fluctuate for the
foreseeable future due to several factors, including market
acceptance of current and new products, the timing and results
of our research and development efforts, the introduction of new
products by our competitors and possible patent or license
issues. Our limited operating history as a diagnostics business
makes accurate prediction of future results of operations
difficult.
Recent
Developments
Effective November 1, 2007, Debra A. Young resigned from
her position as Vice President and Chief Financial Officer of
the Company for personal reasons. In connection with her
resignation, the Company and Ms. Young entered into a
Separation Agreement and Release. Under the terms of this
agreement, Ms. Young agreed to resign from her position and
release any claims she may have against us. As consideration for
entering into this agreement, the Company agreed to pay
Ms. Young the equivalent of her base salary for a period of
six months for an aggregate amount of $113,000 and to continue
Ms. Youngs health and dental coverage through April
2008. Immediately upon Ms. Youngs resignation from
the Company, Qun Zhou, our Corporate Controller, was appointed
to serve as Chief Financial Officer on an interim basis.
Ms. Zhou currently receives an annual base salary of
$160,000.
20
On September 17, 2007, we were served with a complaint
filed in the Superior Court of California for the County of
Santa Clara naming us and Bio-Rad as defendants and MAS as
plaintiff. The complaint alleges, among other things, that we
are in breach of our license agreement with MAS relating to
SELDI technology as a result of our entry into a sublicense
agreement with Bio-Rad. In connection with the sale of assets
and liabilities of our Instrument Business to Bio-Rad, we
sublicensed to Bio-Rad certain rights to the SELDI technology
that we obtained under the MAS license for use outside of the
clinical diagnostics field. We retained exclusive rights to the
technology for use in the field of clinical diagnostics for a
five-year period, after which we will retain nonexclusive rights
in that field. On November 14, 2007, we filed a petition to
compel MAS to arbitrate its claims with the Court. Given the
early stage of this action, we cannot predict the ultimate
outcome of this matter at this time.
On August 15, 2007, we were notified by the staff of the
Nasdaq Capital Market that we were not in compliance with
Marketplace Rule 4310(c)(3) and, as required by Marketplace
Rule 4310(c)(8)(C), we had 30 days to regain
compliance. Marketplace Rule 4310(c)(3) requires us to
(i) have minimum stockholders equity of $2,500,000,
(ii) have a minimum common stock market value of
$35,000,000 or (iii) have net income from continuing
operations of $500,000 in the most recently completed fiscal
year or in two of the last three most recently completed fiscal
years. Subsequently, on September 14, 2007, the staff of
the Nasdaq Capital Market notified us that we had regained
compliance with Marketplace Rule 4310(c)(3) because the
market value of our common stock exceeded $35,000,000 for ten
consecutive business days.
Additionally, on September 6, 2007, we were notified by the
staff of the Nasdaq Capital Market that our common stock bid
price closed below the minimum $1.00 per share for more than
30 consecutive business days, in violation of Marketplace
Rule 4310(c)(4) and, as required by Marketplace
Rule 4310(c)(8)(D), we had 180 days, or until
March 4, 2008, to regain compliance.
On August 29, 2007, we completed a private placement sale
of 24,513,092 shares of our common stock and warrants to
purchase up to an additional 19,610,470 shares of our
common stock with an exercise price of $0.925 per share and an
expiration date of August 29, 2012, to a group of new and
existing investors for $20,591,000 in gross proceeds. The net
proceeds of the transaction will be used for general working
capital needs. In connection with this transaction, we amended a
warrant originally issued to Quest Diagnostics on July 22,
2005. Pursuant to the terms of the amendment, the exercise price
for such warrant was reduced from $3.50 per share to $2.50 per
share and the expiration date of such warrant was extended from
July 22, 2010 to July 22, 2011. For services as
placement agent, we paid Oppenheimer & Co. Inc.
$1,200,000 and issued a warrant to purchase up to
921,000 shares of our common stock with an exercise price
of $0.925 per share and expiration date of August 29, 2012.
In August 2007, we announced the discovery of biomarkers that
could assist in the diagnosis of PAD. These findings, which were
made in collaboration with Stanford University, form the basis
of a novel blood test for PAD. The biomarkers are currently
undergoing validation. The results were published in the journal
Circulation, which is published by the American Heart
Association. Quest Diagnostics has accepted the PAD test for
further development under the strategic alliance agreement.
On June 26, 2006, Health Discovery Corporation filed a
lawsuit against us in the United States District Court for the
Eastern District of Texas, Marshall Division, claiming that
software used in certain of our ProteinChip Systems infringes on
three of its United States patents. Health Discovery Corporation
sought injunctive relief as well as unspecified compensatory and
enhanced damages, reasonable attorneys fees, prejudgment
interest and other costs. On August 1, 2006, we filed an
unopposed motion with the Court to extend the deadline for us to
answer or otherwise respond until September 2, 2006. We
filed our answer and counterclaim to the complaint with the
Court on September 1, 2006. Concurrent with our answer and
counterclaims, we filed a motion to transfer the case to the
Northern District of California. On January 10, 2007, the
Court granted our motion to transfer the case to the Northern
District of California. The parties met for a scheduled
mediation on May 7, 2007. On July 10, 2007, we entered
into a license and settlement agreement with Health Discovery
Corporation, pursuant to which we licensed more than 25 patents
covering Health Discovery Corporations support vector
machine technology for use with SELDI technology. Under the
terms of the HDC Agreement, we receive a worldwide,
royalty-free, non-exclusive license for life sciences and
21
diagnostic applications of the technology and have access to any
future patents resulting from the underlying intellectual
property in conjunction with use of SELDI systems. Pursuant to
the HDC Agreement, we paid $200,000 to Health Discovery
Corporation upon entry into the agreement in July 2007. The
remaining $400,000 payable under the HDC Agreement is payable as
follows: $100,000 three months following the date of the
agreement, $150,000 twelve months following the date of the
agreement and $150,000 twenty-four months following the date of
the agreement. The HDC Agreement settles all disputes between us
and Health Discovery Corporation.
At our annual stockholders meeting on June 29, 2007,
stockholders approved amendments to our Certificate of
Incorporation to increase the number of authorized shares of
common stock from 80,000,000 to 150,000,000 and to change the
name of the company from Ciphergen Biosystems, Inc. to
Vermillion, Inc. On July 13, 2007, we amended and restated
our certificate of incorporation with the State of Delaware for
the increased authorized shares. We amended our certificate of
incorporation to reflect our name change on August 21, 2007.
In connection with the sale of assets and liabilities of our
Instrument Business on November 13, 2006, Bio-Rad withheld
$2,000,000 from the sales proceeds until the issuance of a
reexamination certificate confirming the 022 Patent. If
the USPTO does not issue a reexamination certificate confirming
the patentability of all of the claims as originally issued in
the 022 Patent, or claims of equivalent scope, we will not
be entitled to receive the $2,000,000 withheld by Bio-Rad. The
022 Patent is directed to a fundamental process of SELDI
that involves capturing an analyte from a sample on the surface
of a mass spectrometry probe derivatized with an affinity
reagent, applying matrix and detecting the captured analyte by
laser desorption mass spectrometry. In March 2007, the USPTO
issued a final office action in the reexamination, rejecting all
of the claims of the 022 Patent. Although the office
action was designated final, we, under the USPTO
rules, advocated the outstanding rejections and the
patentability of the claimed invention with the patent examiners
on March 30, 2007, and April 11, 2007. In addition, on
April 18, 2007, we filed a response to the final office
action with the USPTO. On October 23, 2007, the USPTO
issued a reexamination certificate of the 022 Patent. On
November 9, 2007, we received $2,000,000 from Bio-Rad that
was withheld from the proceeds of the sale of our Instrument
Business.
In May 2007, the European Patent Office issued an EU Patent,
Biomarkers of Transitional Cell Carcinoma of the
Bladder, for aiding in bladder cancer diagnosis when used
in conjunction with the current standard of care, cystoscopy (a
diagnostic procedure that uses a scope to view the bladder). The
patent describes using mass spectrometry to detect certain
protein biomarkers that are present in patients with bladder
cancer versus patients who do not have bladder cancer. These
discoveries were made under our collaborative agreement with
Eastern Virginia Medical School. We retain exclusive rights to
these discoveries for diagnostic development.
22
Results
of Operations
Nine
Months Ended September 30, 2007 Compared to Nine Months
Ended September 30, 2006
The following table sets forth selected summary financial and
operating data of Vermillion for the nine months ended
September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Increase (Decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
|
|
(unaudited, in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
|
|
|
$
|
10,702
|
|
|
$
|
(10,702
|
)
|
|
|
(100.00
|
)
|
Services
|
|
|
21
|
|
|
|
6,297
|
|
|
|
(6,276
|
)
|
|
|
(99.67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
21
|
|
|
|
16,999
|
|
|
|
(16,978
|
)
|
|
|
(99.88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
|
|
|
|
5,714
|
|
|
|
(5,714
|
)
|
|
|
(100.00
|
)
|
Services
|
|
|
15
|
|
|
|
3,118
|
|
|
|
(3,103
|
)
|
|
|
(99.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
15
|
|
|
|
8,832
|
|
|
|
(8,817
|
)
|
|
|
(99.83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
6
|
|
|
|
8,167
|
|
|
|
(8,161
|
)
|
|
|
(99.93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,297
|
|
|
|
8,780
|
|
|
|
(2,483
|
)
|
|
|
(28.28
|
)
|
Sales and marketing
|
|
|
1,440
|
|
|
|
10,652
|
|
|
|
(9,212
|
)
|
|
|
(86.48
|
)
|
General and administrative
|
|
|
8,626
|
|
|
|
7,549
|
|
|
|
1,077
|
|
|
|
14.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
16,363
|
|
|
|
26,981
|
|
|
|
(10,618
|
)
|
|
|
(39.35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sale of Instrument Business
|
|
|
(382
|
)
|
|
|
|
|
|
|
(382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(16,739
|
)
|
|
|
(18,814
|
)
|
|
|
(2,075
|
)
|
|
|
(11.03
|
)
|
Interest income
|
|
|
458
|
|
|
|
654
|
|
|
|
(196
|
)
|
|
|
(29.97
|
)
|
Interest expense
|
|
|
(1,727
|
)
|
|
|
(1,691
|
)
|
|
|
36
|
|
|
|
2.13
|
|
Other income (expense), net
|
|
|
17
|
|
|
|
(174
|
)
|
|
|
(191
|
)
|
|
|
(109.77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(17,991
|
)
|
|
|
(20,025
|
)
|
|
|
(2,034
|
)
|
|
|
(10.16
|
)
|
Income tax benefit (expense)
|
|
|
1
|
|
|
|
(190
|
)
|
|
|
(191
|
)
|
|
|
(100.53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,990
|
)
|
|
$
|
(20,215
|
)
|
|
$
|
(2,225
|
)
|
|
|
(11.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products Revenue. There was no products
revenue for the nine months ended September 30, 2007,
compared to $10,702,000 for the same period in 2006. The
decrease was the result of the sale of assets and liabilities of
our Instrument Business to Bio-Rad.
Services Revenue. Services revenue decreased
to $21,000 for the nine months ended September 30, 2007
from $6,297,000 for the same period in 2006. Services revenue
for the nine months ended September 30, 2007, was from
ongoing support services provided to a customer. This decrease
was the result of the sale of assets and liabilities of our
Instrument Business to Bio-Rad.
Cost of Products Revenue. There was no cost of
products revenue for the nine months ended September 30,
2007, compared to $5,714,000 for the same period in 2006. This
decrease was the result of the sale of assets and liabilities of
our Instrument Business to Bio-Rad
Cost of Services Revenue. Cost of services
revenue decreased to $15,000 for the nine months ended
September 30, 2007, from $3,118,000 for the same period in
2006. Cost of services revenue for the nine months ended
September 30, 2007, was from ongoing support services
provided to a customer. This decrease was the result of the sale
of assets and liabilities of our Instrument Business to Bio-Rad.
23
Research and Development Expenses. Research
and development expenses decreased by $2,483,000, or 28.3%, to
$6,297,000 for the nine months ended September 30, 2007,
from $8,780,000 for the same period in 2006. This decrease is
primarily due to our transition from our historical roots as a
proteomics research products business to a specialty diagnostic
testing business following the sale of assets and liabilities of
our Instrument Business to Bio-Rad. This transition resulted in
reductions in employee headcount to twelve at September 30,
2007, from twenty-seven at September 30, 2006, and,
correspondingly, salaries, payroll taxes, employee benefits and
stock-based compensation decreased by $1,736,000; materials and
supplies used in the development of new products decreased by
$721,000; equipment related expenses decreased by $400,000;
occupancy costs decreased by $168,000; outside services
decreased by $125,000; and other operating costs decreased by
$258,000. These decreases were offset by the increased
collaboration cost of $1,021,000. Stock-based compensation
expense included in research and development expenses was
$129,000 and $273,000 for the nine months ended
September 30, 2007 and 2006, respectively.
Sales and Marketing Expenses. Sales and
marketing expenses decreased to $1,440,000 for the nine months
ended September 30, 2007 from $10,652,000 for the same
period in 2006. The decrease was largely due to the sale of
assets and liabilities of our Instrument Business to Bio-Rad.
Correspondingly, employee headcount decreased to five at
September 30, 2007, from sixty-two at September 30,
2006, which resulted in a decline in salaries, payroll taxes,
employee benefits and stock-based compensation of $5,699,000.
This also resulted in reductions in travel by $1,122,000;
internal consumption of ProteinChip Arrays and other consumables
for customer demonstrations and support by $670,000; outside
services by $432,000; and equipment related expenses by
$1,169,000. Stock-based compensation expense included in sales
and marketing expenses was $66,000 and $252,000 for the nine
months ended September 30, 2007 and 2006, respectively.
General and Administrative Expenses. General
and administrative expenses increased to $8,626,000 for the nine
months ended September 30, 2007 from $7,549,000 for the
same period in 2006, an increase of $1,077,000, or 14.3%. The
increase was primarily due to the settlement of the Health
Discovery Corporation lawsuit of $600,000; increased
professional services of $201,000 primarily from our name change
and printing costs associated with the annual proxy and annual
financial report; increased legal fees of $266,000 primarily due
to filings of new patent applications, costs incurred from the
Health Discovery Corporation lawsuit and costs incurred from the
022 Patent reexamination; and increased accounting and
audit fees of $414,000 due to the timing of domestic and
international services performed. These increases were offset by
a decrease in equipment related expense of $109,000 and other
operating expenses of $312,000, primarily from the reduction in
postage and shipping costs attributable to reduced activity
resulting from the sale of assets and liabilities of our
Instrument Business to Bio-Rad. Employee headcount declined to
thirteen at September 30, 2007, from sixteen at
September 30, 2006. Stock-based compensation expense
included in general and administrative expenses was $488,000 and
$673,000 for the nine months ended September 30, 2007 and
2006, respectively.
Loss on Sale of Instrument Business. Loss on
sale of the Instrument Business of $382,000 for the nine months
ended September 30, 2007 resulted from a post-closing
adjustment related to the sale of assets and liabilities of our
Instrument Business to Bio-Rad.
Interest and Other Expense, Net. Interest
income was $458,000 for the nine months ended September 30,
2007, compared to $654,000 for the same period in 2006. Interest
income decreased primarily due to the liquidation of short-term
investments during 2006 to fund operations.
Interest expense was $1,727,000 for the nine months ended
September 30, 2007, compared to $1,691,000 for the same
period in 2006. Interest expense in both periods consisted
largely of interest related to our convertible senior notes and
borrowings from Quest Diagnostics. Interest expense included the
amortization of the beneficial conversion feature associated
with the convertible senior notes amounting to $182,000 and
$400,000 for the nine months ended September 30, 2007 and
2006, respectively.
Net other income was $17,000 for the nine months ended
September 30, 2007, compared to net other expense of
$174,000 for the same period in 2006. Net other income for the
nine months ended September 30, 2006, included $160,000
received in settlement of a claim against a service provider.
The increase to net other income also includes the reduction of
offering costs amortization related to the convertible notes
amounting to $54,000 for the nine months ended
September 30, 2007, from $280,000 for the same period in
2006.
24
Additionally, realized foreign currency exchange resulted in a
gain of $83,000 for the nine months ended September 30,
2007, as compared to a loss of $46,000 for the same period in
2006. The change in realized foreign currency exchange is due to
our foreign operations and foreign subsidiary balances, and
increase in foreign currency exchange rates.
Income Tax Expense. Income tax benefit for the
nine months ended September 30, 2007, was $1,000 compared
to $190,000 for the same period in 2006. The decrease in expense
was primarily due to reduction of net income in our foreign
operations as a result of the sale of assets and liabilities of
our Instrument Business to Bio-Rad.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
The following table sets forth selected summary financial and
operating data of Vermillion for the years ended
December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase (Decrease)
|
|
|
|
2006
|
|
|
2005
|
|
|
Amount
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
11,292
|
|
|
$
|
18,350
|
|
|
$
|
(7,058
|
)
|
|
|
(38.46
|
)
|
Services
|
|
|
6,923
|
|
|
|
8,896
|
|
|
|
(1,973
|
)
|
|
|
(22.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
18,215
|
|
|
|
27,246
|
|
|
|
(9,031
|
)
|
|
|
(33.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
5,818
|
|
|
|
9,372
|
|
|
|
(3,554
|
)
|
|
|
(37.92
|
)
|
Services
|
|
|
3,520
|
|
|
|
4,321
|
|
|
|
(801
|
)
|
|
|
(18.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
9,338
|
|
|
|
13,693
|
|
|
|
(4,355
|
)
|
|
|
(31.80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
8,877
|
|
|
|
13,553
|
|
|
|
(4,676
|
)
|
|
|
(34.50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
11,474
|
|
|
|
13,196
|
|
|
|
(1,722
|
)
|
|
|
(13.05
|
)
|
Sales and marketing
|
|
|
12,568
|
|
|
|
18,009
|
|
|
|
(5,441
|
)
|
|
|
(30.21
|
)
|
General and administrative
|
|
|
10,661
|
|
|
|
14,404
|
|
|
|
(3,743
|
)
|
|
|
(25.99
|
)
|
Goodwill impairment
|
|
|
|
|
|
|
2,453
|
|
|
|
(2,453
|
)
|
|
|
(100.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
34,703
|
|
|
|
48,062
|
|
|
|
(13,359
|
)
|
|
|
(27.80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of Instrument Business
|
|
|
6,929
|
|
|
|
|
|
|
|
6,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(18,897
|
)
|
|
|
(34,509
|
)
|
|
|
(15,612
|
)
|
|
|
(45.24
|
)
|
Interest income
|
|
|
843
|
|
|
|
839
|
|
|
|
4
|
|
|
|
0.48
|
|
Interest expense
|
|
|
(2,254
|
)
|
|
|
(1,993
|
)
|
|
|
261
|
|
|
|
13.10
|
|
Loss on extinguishment of debt
|
|
|
(1,481
|
)
|
|
|
|
|
|
|
1,481
|
|
|
|
|
|
Other expense, net
|
|
|
(125
|
)
|
|
|
(717
|
)
|
|
|
(592
|
)
|
|
|
(82.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(21,914
|
)
|
|
|
(36,380
|
)
|
|
|
(14,466
|
)
|
|
|
(39.76
|
)
|
Income tax expense
|
|
|
152
|
|
|
|
7
|
|
|
|
145
|
|
|
|
2,071.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(22,066
|
)
|
|
|
(36,387
|
)
|
|
|
(14,321
|
)
|
|
|
(39.36
|
)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from sale of discontinued operations, net of tax
|
|
|
|
|
|
|
954
|
|
|
|
(954
|
)
|
|
|
(100.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations
|
|
|
|
|
|
|
954
|
|
|
|
(954
|
)
|
|
|
(100.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(22,066
|
)
|
|
$
|
(35,433
|
)
|
|
$
|
(13,367
|
)
|
|
|
(37.72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
Products Revenue. Products revenue was
$11.3 million in 2006 and $18.4 million in 2005. The
$7.1 million or 39% decrease in products revenue from 2005
to 2006 was largely the result of a 38% decrease in revenue from
sales of our ProteinChip Systems, accessories and software, as
well as a 39% decrease in revenue from our arrays and
consumables. The decrease in systems and related revenue was due
to a 55% decrease in unit sales of ProteinChip Systems from 76
systems in 2005 to 34 systems in 2006 in part due to the asset
sale of our Instrument Business to Bio-Rad. During the first
half of 2006, products revenues trended down by about 10% from
the prior year and dropped significantly following the
announcement of the proposed transaction with Bio-Rad. The
decrease in array and consumable sales was largely driven by
lower unit sales due in part to significantly reduced new
instrument placements, as new instrument placements typically
included a significant initial purchase of consumables.
In the third quarter of 2005, we sold nine ProteinChip Systems
to one customer for $601,000. We also entered into a product
development agreement with this same customer, whereby the
customer would develop for us a specific new product and we
could pay the customer up to $500,000 based on the
customers attainment of specified development milestones.
Under this agreement, we paid this customer $300,000 of
development fees during 2005. This was recorded, following
EITF 01-9,
Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendors
Products), as a reduction to revenue, resulting in net
revenue from this customer of approximately $301,000 in 2005.
This constituted approximately 2% of products revenue and 1% of
total revenue for 2005. No additional payment was made in 2006.
With the divestiture of the Instrument Business to Bio-Rad, this
product development agreement was transferred to Bio-Rad.
Services Revenue. Services revenue was
$6.9 million in 2006 and $8.9 million in 2005. The
$2.0 million or 22% decrease in services revenue from 2005
to 2006 was primarily due to fewer new instrument placements,
which typically include an initial registration for one or more
training classes, and the closing of the asset sale to Bio-Rad
in the fourth quarter of 2006.
We expect that future revenues for our business will be affected
by, among other things, our ability to develop and commercialize
diagnostic tests, new product and application introductions,
customer budgets, competitive conditions and government funding
for research in our field. We expect limited revenues in 2007
until the new diagnostic tests are developed and launched.
Cost of Products Revenue. Cost of products
revenue was $5.8 million in 2006 and $9.4 million in
2005. The $3.6 million or 38% decrease in cost of products
revenue from 2005 to 2006 resulted from a decrease in unit sales
of our ProteinChip Systems, accessories, software, arrays and
other consumables. The decrease in gross margin of
$3.5 million for products revenue was largely due to the
aforementioned drop in unit sales. Gross margin as a percentage
of sales for products revenue was relatively flat at 48.9% of
sales in 2005 and 48.5% of sales in 2006.
Stock-based compensation expense related to employee stock
options under SFAS No. 123 (revised),
Share-Based
Payment, or SFAS 123(R), in cost of products revenue
was $144,000 in 2006. There was no deferred stock-based
compensation expense in cost of products revenue for 2005.
Cost of Services Revenue. Cost of services
revenue was $3.5 million in 2006 and $4.3 million in
2005. From 2006 to 2005, cost of services revenue decreased
$0.8 million or 19% primarily due to the 22% decrease in
services revenue. The gross margin for services revenue
decreased from 51% in 2005 to 49% in 2006 due to the drop in
services revenue.
We believe that gross profits for 2007 will be minimal until the
new diagnostic tests are developed and successfully
commercialized.
Research and Development Expenses. Research
and development expenses were $11.5 million in 2006 and
$13.2 million in 2005. From 2005 to 2006, research and
development expenses decreased $1.7 million or 13%
primarily due to a decrease of $2.4 million in salaries,
payroll taxes and employee benefits due to transition to
diagnostic testing and away from tools development following the
asset sale to Bio-Rad. Materials and supplies used in the
development of new products also decreased by $0.6 million,
depreciation decreased by $0.1 million, travel expenses
decreased by $0.1 million and consulting fees decreased by
$0.1 million,
26
consistent with the scaling back of research programs related to
our instrument platform. These decreases were partially offset
by a $1.4 million increase in clinical collaboration
expenses and a $0.3 million increase in stock-based
compensation expense related to employee stock options under
SFAS 123(R). Spending on diagnostics research under the
strategic alliance with Quest Diagnostics was approximately
$5.4 million in 2006 and $2.2 million in 2005.
Stock-based compensation expense related to employee stock
options under SFAS 123(R) in research and development
expenses was $337,000 in 2006. There was no deferred stock-based
compensation expense in research and development expenses for
2005.
We expect research and development expenses to decline in 2007
relative to 2006 due to having fewer research and development
employees in 2006 needed to support our research and development
activities associated with developing and commercializing
diagnostic tests as part of our strategic alliance with Quest
Diagnostics, and discovering biomarkers that could potentially
be developed into additional diagnostic products.
Sales and Marketing Expenses. Sales and
marketing expenses were $12.6 million in 2006 and
$18.0 million in 2005. From 2005 to 2006, sales and
marketing expenses decreased $5.4 million or 30%, largely
due to lower payroll-related costs as a result of a reduction in
sales and marketing headcount from 72 people in 2005 to
6 people at the end of 2006 due to the asset sale of our
Instrument Business to Bio-Rad. The primary components of the
decrease in expense from 2005 were payroll and related costs of
approximately $2.8 million, $0.9 million decrease in
travel expenses and a $0.6 million decrease in field
materials and supplies expense.
Stock-based compensation expense related to employee stock
options under SFAS 123(R) in sales and marketing expenses
was $321,000 in 2006. There was no deferred stock-based
compensation expense in sales and marketing expenses for 2005.
We expect sales and marketing expenses to decrease in 2007
relative to 2006 as a result of a smaller sales force and
reduced associated selling expenses until the launch of new
diagnostic tests.
General and Administrative Expenses. General
and administrative expenses were $10.7 million in 2006 and
$14.4 million in 2005. From 2005 to 2006, general and
administrative expenses decreased $3.7 million or 26%,
largely driven by a $2.1 million reduction in payroll and
related costs resulting from a reduction in headcount related
expenses due to the asset sale to Bio-Rad. Outside legal fees
decreased approximately $0.4 million due to decreased
patent registration activity which were partially offset by
legal fees related to defense of a SELDI patent. Other audit and
accounting fees decreased $1.3 million as 2005 audit costs
were much higher due to the restatement of earnings in 2005.
Stock-based compensation expense related to employee stock
options under SFAS 123(R) in general and administrative
expenses were $813,000 in 2006. There were no deferred
stock-based compensation expenses in general and administrative
expenses for 2005.
We expect general and administrative expenses to drop slightly
in 2007 relative to 2006 due to lower headcount in the
administration function which will be partially offset by the
costs of performing a management assessment of compliance with
Section 404 of the Sarbanes-Oxley Act of 2002.
Goodwill Impairment. We recorded goodwill
principally as a result of our acquisition of BioSepra in 2001,
the increases in our ownership of Ciphergen Biosystems KK in
2002 and 2004, and the acquisitions of Ciphergen Technologies,
Inc. and IllumeSys Pacific, Inc. in 1997 and 1998. We performed
annual impairment tests from 2002 through 2004 and determined
that no impairment had occurred. The goodwill related to
BioSepra was written off against the sale of the BioSepra
business in 2004. Due to Ciphergen Biosystems KKs lower
than expected operating results and cash flows throughout 2005
and based on revised forecasted results, a goodwill impairment
loss of $2.5 million was recognized in the fourth quarter
of 2005. The fair value of Ciphergen Biosystems KK was estimated
using expected discounted cash flows (see Notes 5 and 8 to
our audited consolidated financial statements included elsewhere
in this prospectus).
27
Gain From Sale of Instrument Business, Net of
Tax. The $6.9 million gain recognized in
2006 on the November 13, 2006, asset sale of our Instrument
Business to Bio-Rad is summarized as follows (in thousands):
|
|
|
|
|
Net Proceeds
|
|
|
|
|
Cash proceeds received
|
|
$
|
19,000
|
|
Less: Transaction costs
|
|
|
(782
|
)
|
|
|
|
|
|
|
|
|
18,218
|
|
|
|
|
|
|
Cost basis:
|
|
|
|
|
Accounts receivable, net, and other current assets
|
|
|
2,661
|
|
Inventories
|
|
|
4,536
|
|
Property, plant and equipment, net
|
|
|
3,231
|
|
Other intangible assets
|
|
|
1,856
|
|
Goodwill
|
|
|
76
|
|
Other long-term assets
|
|
|
152
|
|
Accounts payable and accrued liabilities
|
|
|
(1,400
|
)
|
Deferred Revenues
|
|
|
(3,420
|
)
|
Capital lease obligations
|
|
|
(14
|
)
|
Common stocks issued
|
|
|
3,611
|
|
|
|
|
|
|
|
|
|
11,289
|
|
|
|
|
|
|
Gain on sale of Instrument Business to Bio-Rad
|
|
$
|
6,929
|
|
|
|
|
|
|
We entered into a stock purchase agreement with Bio-Rad for the
private sale of shares of our common stock to Bio-Rad for an
aggregate purchase price of $3,000,000. The purchase price of
$0.972 per share was based on the average closing price for the
five days preceding the stock purchase agreement on
August 14, 2006. For accounting purposes, the
3,086,420 shares purchased were valued at $1.17 per share,
the closing price on November 13, 2006, the day the
transaction closed. The resulting value of $3.611 million
was allocated between common stock (3.086 million shares at
$0.001 par value) and additional paid-in capital of
$3.608 million. An additional $4.0 million of
contingent cash consideration included $2.0 million,
subject to certain adjustments, to be held in escrow as security
for certain of our obligations for three years following the
closing, and $2.0 million as a holdback amount to be held
by Bio-Rad until the issuance of a reexamination certificate
confirming a SELDI patent (see Notes 6 and 22 to our
audited consolidated financial statements included elsewhere in
this prospectus).
Loss on Extinguishment of Debt. The loss from
extinguishment of debt represents the expensing of $868,000 of
unamortized debt discount and $613,000 of unamortized prepaid
offering costs related to the exchange of $27.5 million of
our 4.5% Notes for $16.5 million of our
7.0% Notes and $11 million in cash (see Note 11
to our audited consolidated financial statements included
elsewhere in this prospectus).
Interest and Other Income (Expense),
Net. Interest income was $843,000 in 2006 and
$839,000 in 2005. Interest income from money market and accounts
remained flat between 2005 and 2006. Although money market
account balances decreased from $28.0 million in 2005 to
$17.7 million in 2006 this was offset by interest yield,
which steadily increased from 2.9% in June 2005 to 5.9% in
December 2006. Interest expense was $2.3 million in 2006
and $2.0 million in 2005. Interest expense increased
$0.3 million from 2005 to 2006 primarily due to the
increase in interest paid to Quest Diagnostics due to our
outstanding loan balance from Quest Diagnostics increasing from
$2.5 million to $7.1 million from December 31,
2005, to December 31, 2006.
Other expense was $125,000 in 2006 and $717,000 in 2005. In 2006
other expense consisted primarily of $332,000 of amortization of
issuance costs for the convertible senior notes partially offset
by $81,000 for the return of a lease deposit. In 2005, other
expense consisted primarily of $373,000 of expense for the
28
amortization of issuance costs for the convertible senior notes
and foreign exchange losses of approximately $232,000, largely
due to the impact on the transaction losses from the decline of
the U.S. dollar against the British pound and the Japanese
yen.
Income Tax Expenses. Our provision for income
taxes was due to current foreign income taxes, which were
$152,000 and $7,000 for the years ended December 31, 2006
and 2005, respectively, including discontinued operations.
Excluding discontinued operations, current foreign income taxes
were an expense of $152,000 and $7,000 for the years ended
December 31, 2006 and 2005, respectively.
We have incurred net losses since inception and consequently are
not subject to corporate income taxes in the U.S. to the
extent of our tax loss carryforwards. At December 31, 2006
we had net operating loss carryforwards of approximately
$125.0 million for federal and $58.8 million for state
tax purposes. If not utilized, these carryforwards will begin to
expire beginning in 2009 for federal purposes and 2007 for state
purposes. As of December 31, 2006, we had $2.9 million
of net operation carryforwards from our Japan operations. If not
utilized, this carryforward will begin to expire in 2012. We
also have research credit carryforwards of approximately
$4.4 million and $4.7 million for federal and state
tax purposes, respectively. If not utilized, the federal
research credit carryforwards will expire in various amounts
beginning in 2011. The California research credit can be carried
forward indefinitely. The utilization of net operating loss
carryforwards to reduce future income taxes will depend on our
ability to generate sufficient taxable income prior to the
expiration of the net operating loss carryforwards. In addition,
the maximum annual use of the net operating loss carryforwards
may be limited in situations where changes occur in our stock
ownership.
We have incurred income tax liabilities primarily in France and
Japan, as well as in most of the other countries outside the
U.S. in which we operate. We have used net operating loss
carryforwards to reduce our income tax liabilities in Japan and
the United Kingdom. The 2005 and 2006 net loss can be
carried forward for seven years.
Gain From Sale of BioSepra Business, Net of
Tax. We received $1.0 million that was
placed in an interest-bearing escrow account for one year and
$21,000 of accrued interest related to the BioSepra business and
treated the amount as an additional gain of $1,021,000 on the
sale in 2005. This was partly offset by a $67,000 reduction of
the gain on the sale of the BioSepra business for a post-closing
adjustment in 2005, in accordance with the related asset
purchase agreement, resulting in a net gain of $954,000 in 2005.
29
Year
Ended December 31, 2005 Compared to Year Ended
December 31, 2004
The following table sets forth selected summary financial and
operating data of Vermillion for the years ended
December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase (Decrease)
|
|
|
|
2005
|
|
|
2004
|
|
|
Amount
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
18,350
|
|
|
$
|
31,378
|
|
|
$
|
(13,028
|
)
|
|
|
(41.52
|
)
|
Services
|
|
|
8,896
|
|
|
|
8,803
|
|
|
|
93
|
|
|
|
1.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
27,246
|
|
|
|
40,181
|
|
|
|
(12,935
|
)
|
|
|
(32.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
9,372
|
|
|
|
11,199
|
|
|
|
(1,827
|
)
|
|
|
(16.31
|
)
|
Services
|
|
|
4,321
|
|
|
|
3,876
|
|
|
|
445
|
|
|
|
11.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
13,693
|
|
|
|
15,075
|
|
|
|
(1,382
|
)
|
|
|
(9.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
13,553
|
|
|
|
25,106
|
|
|
|
(11,553
|
)
|
|
|
(46.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
13,196
|
|
|
|
19,268
|
|
|
|
(6,072
|
)
|
|
|
(31.51
|
)
|
Sales and marketing
|
|
|
18,009
|
|
|
|
26,019
|
|
|
|
(8,010
|
)
|
|
|
(30.79
|
)
|
General and administrative
|
|
|
14,404
|
|
|
|
14,136
|
|
|
|
268
|
|
|
|
1.90
|
|
Goodwill impairment
|
|
|
2,453
|
|
|
|
|
|
|
|
2,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
48,062
|
|
|
|
59,423
|
|
|
|
(11,361
|
)
|
|
|
(19.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(34,509
|
)
|
|
|
(34,317
|
)
|
|
|
192
|
|
|
|
0.56
|
|
Interest income
|
|
|
839
|
|
|
|
505
|
|
|
|
334
|
|
|
|
66.14
|
|
Interest expense
|
|
|
(1,993
|
)
|
|
|
(2,001
|
)
|
|
|
(8
|
)
|
|
|
(0.40
|
)
|
Other expense, net
|
|
|
(717
|
)
|
|
|
(649
|
)
|
|
|
68
|
|
|
|
10.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(36,380
|
)
|
|
|
(36,462
|
)
|
|
|
(82
|
)
|
|
|
(0.22
|
)
|
Income tax expense
|
|
|
7
|
|
|
|
109
|
|
|
|
(102
|
)
|
|
|
(93.58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(36,387
|
)
|
|
|
(36,571
|
)
|
|
|
(184
|
)
|
|
|
(0.50
|
)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
|
|
|
|
|
|
(1,797
|
)
|
|
|
(1,797
|
)
|
|
|
(100.00
|
)
|
Gain from sale of discontinued operations, net of tax
|
|
|
954
|
|
|
|
18,527
|
|
|
|
(17,573
|
)
|
|
|
(94.85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations
|
|
|
954
|
|
|
|
16,730
|
|
|
|
(15,776
|
)
|
|
|
(94.30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(35,433
|
)
|
|
$
|
(19,841
|
)
|
|
$
|
(15,592
|
)
|
|
|
78.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products Revenue. Products revenue was
$18.4 million in 2005 and $31.4 million in 2004. The
$13.0 million or 42% decrease in products revenue from 2004
to 2005 was largely the result of a 54% decrease in revenue from
sales of our ProteinChip Systems, accessories and software, as
well as a 14% decrease in revenue from our arrays and
consumables. The decrease in systems and related revenue was due
to a 41% decrease in unit sales of ProteinChip Systems and a 22%
decrease in average revenue per system sold due to increased
discounting and incentives we offered to expedite orders,
discounts offered to customers on
trade-ins of
their older model ProteinChip Systems for a new
Series 4000, and the competitive environment. The decrease
in array and consumable sales was largely driven by lower unit
sales due in part to fewer new instrument placements, which
typically include a significant initial purchase of consumables.
In Japan, the strengthening of the U.S. dollar against the
Japanese yen resulted in a decrease in products revenue of
approximately $370,000.
30
In the third quarter of 2005, we sold nine ProteinChip Systems
to one customer for $601,000. We also entered into a product
development agreement with this same customer, whereby the
customer will develop a specific new product for us and we may
pay the customer up to $500,000 based on the customers
attainment of specified development milestones. Under this
agreement, we paid this customer $300,000 of development fees
during 2005. This was recorded, following
EITF 01-9,
Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendors
Products), as a reduction to revenue, resulting in net
revenue from this customer of approximately $301,000 in 2005.
This constituted approximately 2% of products revenue and 1% of
total revenue for 2005.
Services Revenue. Services revenue was
$8.9 million in 2005 and $8.8 million in 2004. The
$93,000 or 1% increase in services revenue from 2004 to 2005 was
primarily due to a $313,000 increase in revenue from
collaboration services handled through our Biomarker Discovery
Center laboratories due to the completion of several large
contracts in 2005, and from a $97,000 increase in revenue from
maintenance contracts, driven by growth in our installed base.
However, revenue from training and consulting services decreased
$317,000 primarily due to fewer new instrument placements, which
typically include an initial registration for one or more
training classes.
Cost of Products Revenue. Cost of products
revenue was $9.4 million in 2005 and $11.2 million in
2004. The $1.8 million or 16% decrease in cost of products
revenue from 2004 to 2005 resulted from a decrease in unit sales
of ProteinChip Systems, accessories, software, arrays and other
consumables, as well as a $1.1 million decrease in the
provision for excess and obsolete inventories in 2005 compared
to 2004. We introduced our Series 4000 platform in 2004 and
concurrently increased inventory reserves for older products.
These decreases were partially offset by higher costs of
materials recorded in 2005, compared to 2004 when a portion of
sales included instruments with components previously charged to
research and development. The gross margin for products revenue
decreased from 64% in 2004 to 49% in 2005. The decrease in gross
margin for products revenue was largely due to lower gross
margins for arrays and consumables resulting from lower
production volumes in 2005 compared to 2004, thus spreading our
fixed manufacturing overhead costs over fewer units produced and
eroding gross margin on products revenue by approximately 12% of
products revenue. The decrease in gross margin from 2004 to 2005
was also due to lower gross margins for ProteinChip Systems as a
result of increased discounting.
Deferred stock-based compensation expense in cost of products
revenue was $0 in 2005 and $45,000 in 2004.
Cost of Services Revenue. Cost of services
revenue was $4.3 million in 2005 and $3.9 million in
2004. From 2004 to 2005, cost of services revenue increased
$445,000 or 11% primarily due to increased costs associated with
paid projects performed by our Biomarker Discovery Center
laboratories and customer training. The gross margin for
services revenue decreased from 56% in 2004 to 51% in 2005
mainly due to lower gross margins realized on Biomarker
Discovery Center contracts, which have costs that typically vary
based on the complexity and difficulty of the work being
undertaken, and lower gross margins on our training services.
Research and Development Expenses. Research
and development expenses were $13.2 million in 2005 and
$19.3 million in 2004. From 2004 to 2005, research and
development expenses decreased $6.1 million or 32%
primarily due to a decrease of $2.2 million in salaries,
payroll taxes and employee benefits due to a 39% decline in
research and development staff. Materials and supplies used in
the development of new products also decreased by
$1.9 million and consulting fees decreased by
$1.0 million, consistent with the scaling back of research
programs related to our instrument platform.
Deferred stock-based compensation expense in research and
development expenses was $0 in 2005 and $37,000 in 2004.
Sales and Marketing Expenses. Sales and
marketing expenses were $18.0 million in 2005 and
$26.0 million in 2004. From 2004 to 2005, sales and
marketing expenses decreased $8.0 million or 31%, largely
due to lower payroll-related costs as a result of a 40% decrease
in the sales and marketing staff thereby decreasing payroll and
related costs approximately $4.1 million. The reduction in
our sales force also resulted in a $1.6 million decrease
31
in travel expenses and a $0.6 million decrease in
ProteinChip Arrays and lab supplies used for customer
demonstrations. The cost of advertising, trade shows and other
promotional activities declined by approximately
$1.2 million as 2004 expenses were unusually high in 2004
due to the launch of the Series 4000 ProteinChip System.
Deferred stock-based compensation expense in sales and marketing
expenses was $0 in 2005 and $93,000 in 2004.
General and Administrative Expenses. General
and administrative expenses were $14.4 million in 2005 and
$14.1 million in 2004. From 2004 to 2005, general and
administrative expenses increased $268,000 or 2%, largely driven
by $679,000 in severance costs for two former executives, partly
offset by a $142,000 reduction in payroll and related costs
resulting from a 32% reduction in administrative staff, which
occurred in the second half of 2005. Outside professional fees
increased approximately $429,000 as a result of work done to
assist us with our restatement of our second quarter 2005
financial statements. Other audit and accounting fees increased
$321,000, largely the result of efforts to comply with
Section 404 of the Sarbanes-Oxley Act of 2002. These
increases were partially offset by decreases of $427,000 in
stock-based compensation expense, $249,000 in costs of temporary
help, $165,000 in travel expenses and $124,000 in the provision
for bad debts.
Deferred stock-based compensation expense in general and
administrative expenses was $0 in 2005 and $427,000 in 2004.
Goodwill Impairment. We recorded goodwill
principally as a result of our acquisition of BioSepra in 2001,
the increases in our ownership of Ciphergen Biosystems KK in
2002 and 2004, and the acquisitions of Ciphergen Technologies,
Inc. and IllumeSys Pacific, Inc. in 1997 and 1998. We performed
annual impairment tests from 2002 through 2004 and determined
that no impairment had occurred. The goodwill related to
BioSepra was written off against the sale of the BioSepra
business in 2004. Due to Ciphergen Biosystems KKs lower
than expected operating results and cash flows throughout 2005
and based on revised forecasted results, a goodwill impairment
loss of $2.5 million was recognized in the fourth quarter
of 2005. The fair value of Ciphergen Biosystems KK was estimated
using expected discounted cash flows (see Notes 5 and 8 to
our audited consolidated financial statements included elsewhere
in this prospectus).
Interest and Other Income (Expense),
Net. Interest income was $839,000 in 2005 and
$505,000 in 2004. The increase of $334,000 from 2004 to 2005 was
largely due to higher interest rates. Interest expense was
$2.0 million in both 2005 and 2004.
Other expense was $717,000 in 2005 and $649,000 in 2004. In
2005, other expense consisted primarily of $373,000 of expense
for the amortization of issuance costs for the convertible
senior notes and foreign exchange losses of approximately
$232,000, largely due to the impact on the transaction of losses
from the decline of the U.S. dollar against the British
pound and the Japanese yen. In 2004, other expense consisted
mainly of $373,000 in expense associated with the amortization
of issuance costs for the convertible senior notes. Subsequent
to our acquisition of majority control of Ciphergen Biosystems
KK on August 31, 2002 and prior to our acquisition of 100%
control of Ciphergen Biosystems KK at the end of the first
quarter of 2004, we attributed a share of this joint
ventures income or losses to SC BioSciences (a
subsidiary of Sumitomo Corporation) minority interest. For 2004,
we attributed $0 of loss to minority interest, as cumulative
losses attributable to the minority shareholder exceeded
previous income.
Income Tax Expenses. Our provision for income
taxes was due to current foreign income taxes, which were $7,000
and $172,000 for the years ended December 31, 2005 and
2004, respectively, including discontinued operations. Excluding
discontinued operations, current foreign income taxes were an
expense of $7,000, and $109,000, for the years ended
December 31, 2005 and 2004, respectively.
Income (Loss) From Discontinued Operations, Net of
Tax. Discontinued operations includes all
revenue, cost of revenue, operating expenses, interest expense,
other income (expense) and tax provisions related to our
BioSepra business, which was sold to Pall Corporation on
November 30, 2004. Loss from discontinued operations was $0
in 2005 and $1.8 million in 2004.
32
The operating results of the BioSepra business for the eleven
months ended November 30, 2004, are presented in the
following table (in thousands):
|
|
|
|
|
Revenue
|
|
$
|
8,395
|
|
Gross profit
|
|
|
4,921
|
|
Operating expenses
|
|
|
6,638
|
|
Operating income
|
|
|
(1,717
|
)
|
Income (loss) before income taxes
|
|
|
(1,734
|
)
|
Income tax provision
|
|
|
63
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
(1,797
|
)
|
BioSepras business was characterized by a relatively low
number of orders for large quantities of customer-specific
products, often $250,000 to $1.5 million or more per order
that were utilized and consumed by pharmaceutical customers to
manufacture biological therapeutics. Filling these large orders
entailed a lengthy and highly controlled manufacturing process
at BioSepra, and customers typically ordered several years of
supply to be manufactured at one time and provided to them in a
few large deliveries for storage in environmentally-controlled
facilities to minimize batch variability. BioSepra generally
priced its products in Euros.
Gain From Sale of BioSepra Business, Net of
Tax. The $18.5 million gain we recognized in
2004 on the sale of our BioSepra business is summarized as
follows (in thousands):
|
|
|
|
|
Net proceeds:
|
|
|
|
|
Cash proceeds received
|
|
$
|
28,376
|
|
Less: Post-closing adjustment owed to buyer
|
|
|
(1,044
|
)
|
Less: Transaction costs
|
|
|
(321
|
)
|
|
|
|
|
|
|
|
|
27,011
|
|
|
|
|
|
|
Cost basis:
|
|
|
|
|
Accounts receivable, net, and other current assets
|
|
|
2,795
|
|
Inventories
|
|
|
5,294
|
|
Property, plant and equipment, net
|
|
|
6,081
|
|
Other tangible assets
|
|
|
210
|
|
Patents
|
|
|
210
|
|
Developed product technology
|
|
|
2,828
|
|
Goodwill
|
|
|
1,380
|
|
Accounts payable and accrued liabilities
|
|
|
(1,976
|
)
|
Capital lease obligations
|
|
|
(2,978
|
)
|
Other long-term liabilities
|
|
|
(629
|
)
|
Cumulative translation adjustment
|
|
|
(4,731
|
)
|
|
|
|
|
|
|
|
|
8,484
|
|
|
|
|
|
|
Gain on sale of BioSepra business
|
|
$
|
18,527
|
|
|
|
|
|
|
Liquidity
and Capital Resources
From our inception through September 30, 2007, we have
financed our operations principally with $229.3 million
from the sales of products and services to customers and
$183.0 million of net proceeds from debt and equity
financings. This includes net proceeds of $92.4 million
from our initial public offering on September 28, 2000; net
proceeds of $26.9 million from our Series E Preferred
Stock financing in March 2000; net proceeds of
$15.0 million from the sale of 6,225,000 shares of our
common stock and a warrant for 2,200,000 shares of our
common stock to Quest Diagnostics on July 22, 2005; net
proceeds of $18.2 million
33
in connection with our sale of assets and liabilities of the
Instrument Business and 3,086,420 shares of common stock to
Bio-Rad on November 13, 2006; and net proceeds of
$19.1 million from our private placement of
24,513,092 shares of our common stock and warrants to
purchase an additional 19,610,470 shares of our common
stock on August 29, 2007. In connection with the strategic
alliance agreement dated July 22, 2005, Quest Diagnostics
agreed to provide the Company with a $10.0 million secured
line of credit (see Note 2 to our audited consolidated
financial statements included elsewhere in this prospectus). As
of September 30, 2007, we have drawn $10.0 million
from this secured line of credit with Quest Diagnostics solely
to fund certain development activities related to our strategic
alliance. Under the terms of this secured line of credit, the
interest rate is at the prime rate plus 0.5% and is payable
monthly. We also received net proceeds of $27.0 million
from the sale of our
BioSepra®
business on November 24, 2004, and an additional
$1.0 million held in an interest-bearing escrow account for
one year after the sale and $21,000 of related interest on
December 1, 2005. Subsequent to September 30, 2007, we
received $2.0 million of sales proceeds that were withheld
by Bio-Rad in connection with the sale of our Instrument
Business which Bio-Rad paid to us on November 9, 2007 as a
result of the USPTOs issuance to us of a reexamination
certificate confirming the 022 Patent.
Cash and cash equivalents at September 30, 2007 were
$19.5 million. Working capital (defined as current assets
less current liabilities) at September 30, 2007 was
$16.1 million. The increase in working capital for the nine
months ended September 30, 2007 was principally due to the
net proceeds of $19.1 million from our August 2007
private placement and proceeds from our secured line of credit
with Quest Diagnostics, offset by funds used to finance
operating losses of $18.0 million. Cash, cash equivalents
and short-term investments at December 31, 2006 were
$17.7 million, compared to $28.0 million at
December 31, 2005. Working capital at December 31,
2006 was $13.0 million, compared to $27.1 million at
December 31, 2005. The decrease in working capital was
principally due to a net $10.3 million decrease in cash and
investments to fund our operating losses of $22.1 million
and $11.0 million of repayments on our 4.5% Notes,
partially offset by cash receipts of $16.0 million for the
sale of our Instrument Business to Bio-Rad, $4.6 million in
loan proceeds from Quest Diagnostics, and $3.0 million in
proceeds for the sale of common stock to Bio-Rad. In addition,
there was a $3.2 million decrease in accounts receivable
net of accounts receivable transferred to Bio-Rad, reflecting
the decline in revenue from continuing operations in 2006
compared to 2005, and a $136,000 decrease in inventory net of
inventory sold to Bio-Rad which resulted from our reducing
purchases of raw materials as we generally no longer need
inventory for sale until we obtain FDA approvals for the
diagnostic tests currently under development. These decreases in
working capital were partially offset by a $1.1 million
decrease in accounts payable and accrued liabilities due to our
cost-cutting measures and reduced inventory purchases, and a
$1.2 million decrease in current deferred revenue
consistent with our lower revenues. Cash, cash equivalents and
short-term investments at December 31, 2005 were
$28.0 million, compared to $37.6 million at
December 31, 2004. Working capital at December 31,
2005 was $27.1 million, compared to $39.9 million at
December 31, 2004. The decrease in working capital was
principally due to a net $27.1 million decrease in cash and
investments to fund our operating losses, partly offset by a
$17.5 million cash increase resulting from the sale of our
common stock to, and loans from, Quest Diagnostics. In addition,
there was a $5.0 million decrease in accounts receivable,
reflecting the decline in revenue from continuing operations in
2005 compared to 2004, and a $1.3 million decrease in
inventory which resulted from our reducing and delaying raw
materials purchases. These decreases were partially offset by a
$1.2 million decrease in accrued liabilities due to our
cost-cutting measures and reduced inventory purchases, and a
$1.4 million decrease in current deferred revenue
consistent with our lower revenues.
Net cash used in operating activities was $16.0 million for
the nine months ended September 30, 2007, primarily as a
result of the $18.0 million net loss reduced by
$2.2 million of noncash expenses including the loss on the
sale of assets and liabilities of our Instrument Business to
Bio-Rad, depreciation and amortization, stock-based compensation
and amortization of debt issuance costs and increased by
$204,000 of cash usage from changes in operating assets and
liabilities. Net cash used in operating activities was
$20.4 million in 2006 compared to $22.9 million in
2005. Less cash was collected from customers in 2006 as compared
to 2005 due primarily to a $9.0 million drop in sales in
2006 resulting in a $3.2 million net drop in accounts
receivables and $136,000 in inventory after considering the
transfer of accounts receivable and inventory to Bio-Rad as part
of the asset sale, partially offset by a combined decrease in
accounts payable and deferred
34
revenue of $2.2 million. Net cash used in operating
activities was $22.9 million in 2005 compared to
$32.5 million in 2004. Less cash was collected from
customers in 2005 as compared to 2004 due to $13.0 million
in lower sales in 2005. Cash used in operating activities was
mainly to fund payroll, inventory purchases and operating
expenses. The decrease in cash collected was offset by an
increase in interest income received in 2005 as compared to 2004
as a result of higher interest rates.
Net cash used in investing activities was $4.2 million for
the nine months ended September 30, 2007, which resulted
from purchases of short term investments and the acquisition of
robotics machinery and other equipment for laboratory use and
service of collaboration partner instruments. Net cash provided
by investing activities was $16.5 million in 2006 compared
to net cash used in investing activities of $3.5 million in
2005. Net cash provided by investing activities in 2006
primarily resulted from $16.0 million in proceeds from the
asset sale of our Instrument Business to Bio-Rad and
$2.2 million in maturities of short term investments
partially offset by purchases of fixed assets of $589,000, asset
sale transaction costs of $782,000, and $346,000 for a
technology license related to our litigation which was settled
in 2003. Net cash used in investing activities was
$3.5 million in 2005 compared to net cash provided by
investing activities of $34.0 million in 2004. Net cash
used in investing activities in 2005 included property and
equipment purchases of $2.8 million and payments of
$587,000 for a technology license related to our litigation
which was settled in 2003. We also paid $1.1 million to
Pall Corporation for post-closing adjustments related to the
sale of our BioSepra business, and we received $1.0 million
plus $21,000 of accrued interest from an escrow account related
to the sale of our BioSepra business. We anticipate spending
approximately $750,000 in total capital expenditures in 2007 to
support our clinical trials.
Net cash provided by financing activities was $22.1 million
for the nine months ended September 30, 2007, which
primarily resulted from the receipt of net proceeds of
$19.1 million from the sale of 24,513,092 shares of our
common stock and warrants to purchase 19,610,470 shares of our
common stock to a group of investors and the receipt of
$2.9 million in proceeds from the secured line of credit
with Quest Diagnostics. Total long-term debt at
September 30, 2007 was $28.6 million including the
current portion, compared to $25.5 million at
December 31, 2006. Net cash used in financing activities
was $4.2 million in 2006 compared with net cash provided by
financing activities in 2005 of $17.2 million in 2005. The
decrease resulted primarily from $11.0 million for
repayments of senior convertible debt partially offset by the
receipt of $4.6 million in loans from Quest Diagnostics and
the sale of $3.0 million of capital stock to Bio-Rad. Total
long-term debt at December 31, 2006 was $25.5 million,
compared to total long-term debt and capital lease obligations
at December 31, 2005, of $31.5 million. Net cash
provided by financing activities was $17.2 million in 2005
compared to $792,000 in 2004. The increase resulted primarily
from $15.0 million in net proceeds from the sale of our
common stock to Quest Diagnostics and the receipt of
$2.5 million in loans from Quest Diagnostics. There was
also a repayment of one stockholder loan in the aggregate
principal amount of $349,000, and the issuance of common stock
under our stock option and employee stock purchase plans of
$350,000, offset by repayments of an equipment financing loan of
$925,000 and the repayment of capital lease obligations of
$24,000. Long-term debt and capital lease balances at
December 31, 2005, totaled $31.5 million, compared to
$29.4 million at December 31, 2004. At
December 31, 2006, the Company had an accumulated deficit
of $217.9 million.
We have incurred significant net losses and negative cash flows
from operations since inception. At September 30, 2007, we
had an accumulated deficit of $235.9 million. After
completing the private placement on August 29, 2007,
management believes that our current available resources will be
sufficient to maintain current and planned operations through
the next twelve months. We will, however, be required to raise
additional capital at some point in the future. At such time as
we require additional funding, we may seek to raise such
additional funding from various sources, including the public
equity market, private financings, sales of assets,
collaborative arrangements and debt. If additional capital is
raised through the issuance of securities convertible into
equity, stockholders will experience dilution, and such
securities may have rights, preferences or privileges senior to
those of the holders of common stock or convertible senior
notes. If we obtain additional funds through arrangements with
collaborators or strategic partners, we may be required to
relinquish our rights to certain technologies or products that
we might otherwise seek to retain. There can be no assurance
that we will be able to obtain such financing, or obtain it on
acceptable terms. If we are unable to obtain financing on
acceptable terms, we may be unable to execute our business plan,
we could be required
35
to delay or reduce the scope of our operations, and we may not
be able to pay off the 4.5% Notes
and/or
7.0% Notes if and when they come due.
Our inability to operate profitably and to consistently generate
cash flows from operations, and our reliance on external funding
either from loans or equity, raise substantial doubt about our
ability to continue as a going concern.
The following summarizes our contractual obligations at
September 30, 2007, and the effect such obligations are
expected to have on our liquidity and cash flow in future
periods (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2008 to
|
|
|
2011 to
|
|
|
|
|
|
|
Total
|
|
|
2007
|
|
|
2010
|
|
|
2013
|
|
|
Thereafter
|
|
|
Loan from Quest Diagnostics(1)
|
|
$
|
10,000
|
|
|
$
|
|
|
|
$
|
10,000
|
|
|
$
|
|
|
|
$
|
|
|
Interest payable on loan from Quest Diagnostics(2)
|
|
|
2,251
|
|
|
|
206
|
|
|
|
2,045
|
|
|
|
|
|
|
|
|
|
Convertible senior notes(3)
|
|
|
19,000
|
|
|
|
|
|
|
|
2,500
|
|
|
|
16,500
|
|
|
|
|
|
Interest payable on convertible senior notes(2)
|
|
|
4,627
|
|
|
|
317
|
|
|
|
3,540
|
|
|
|
770
|
|
|
|
|
|
Noncancelable collaboration obligations(4)
|
|
|
753
|
|
|
|
723
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
Noncancelable operating lease obligations
|
|
|
3,656
|
|
|
|
951
|
|
|
|
2,705
|
|
|
|
|
|
|
|
|
|
Purchase obligations(5)
|
|
|
6,398
|
|
|
|
1,688
|
|
|
|
4,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
46,685
|
|
|
$
|
3,885
|
|
|
$
|
25,530
|
|
|
$
|
17,270
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Principal amounts, not including interest. |
|
(2) |
|
Based on outstanding principal balance and interest rate as of
September 30, 2007. |
|
(3) |
|
Excludes the beneficial conversion feature amounting to $79,000,
less related amortization of $39,000. |
|
(4) |
|
The following are non-cancelable collaboration obligations: |
|
|
|
|
|
On October 13, 2006, we entered into a two-year research
and collaboration agreement with The Ohio State University
Research Foundation directed at discovery, purification,
identification
and/or
validation of biomarkers related to thrombotic thrombocytopenic
purpura and production of associated technology. Under the terms
of the agreement, we will have exclusive rights to license
discoveries made during the course of this collaboration. We
will pay the noncancelable financial contribution in
consideration for costs incurred by The Ohio State University
Research Foundation specifically used in furtherance of this
research program of $149,500 in total during the first
15 months of the agreement. As of September 30, 2007,
we had a remaining noncancelable obligation of $60,000.
|
|
|
|
We extended our research collaboration agreement with The Johns
Hopkins University School of Medicine directed to the discovery
and validation of biomarkers in human subjects, including but
not limited to, clinical application of biomarkers in the
understanding, diagnosis and management of human diseases
through December 31, 2007. Under the extended research
collaboration agreement, we have a noncancelable obligation to
pay $150,000 through December 31, 2007. Additionally, under
a separate patent license agreement with The Johns Hopkins
University School of Medicine, we had a remaining noncancelable
obligation of $55,000 for license fees as of September 30,
2007.
|
|
|
|
On December 11, 2006, we entered into a consulting
agreement with PrecisionMed International, referred to herein as
PrecisionMed, which was subsequently amended on April 5,
2007. Under the terms of the amended agreement, PrecisionMed
will collect whole blood specimens from up to 1,000 research
subjects for the purposes of our whole blood collection protocol
for our OvaRI Assay clinical trial. The amended agreement
provides for a maximum payment of $1,335,000 for 500 research
subjects and a maximum payment of $1,788,000 for 1,000 research
subjects. As of September 30, 2007, we had a minimum
noncancelable obligation of $488,000.
|
|
|
|
|
|
Noncancelable collaboration obligations exclude amounts under an
agreement with University College London and
UCL BioMedica Plc, which is cancelable upon written
notice. |
36
|
|
|
(5) |
|
On November 13, 2006, in conjunction with the asset sale of
our Instrument Business to Bio-Rad, we also entered into a
manufacture and supply agreement with Bio-Rad. Under the terms
of the agreement, we will purchase a specified number of
instruments and arrays during each of the first three years of
the term of the agreement. As of September 30, 2007, we had
an estimated noncancelable obligation of $6,398,000. These
purchase obligations exclude $30,000 of license fees with
National Cardiovascular Center, which are contingent upon the
achievement of certain events. |
Off
Balance Sheet Arrangements
As of September 30, 2007, we had no off-balance sheet
arrangements that are reasonably likely to have a current or
future material effect on our consolidated financial condition,
results of operations, liquidity, capital expenditures or
capital resources.
Critical
Accounting Policies and Estimates
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. We base
our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation
of our consolidated financial statements. (see Note 1 to
our audited consolidated financial statements included elsewhere
in this prospectus.)
Revenue
Recognition
Through November 13, 2006 we had derived our revenue from
primarily two sources: (i) products revenue, which included
systems, accessories, software licenses and consumables, and
(ii) services and support revenue, which included Biomarker
Discovery Center services, maintenance, training and consulting
revenue. As a result of the asset sale to Bio-Rad, future
revenues will be based on the sales of diagnostic tests once the
first of these tests is approved by the FDA and commercialized.
As described below, significant management judgments and
estimates must be made and used in connection with the revenue
recognized in any accounting period.
Through November 13, 2006 we had recognized revenue from
the sales of systems, accessories, separately priced software
products and consumables when realized or realizable and earned,
which is when the following criteria are met:
|
|
|
|
|
persuasive evidence of an agreement exists;
|
|
|
|
the price is fixed or determinable;
|
|
|
|
the product has been delivered;
|
|
|
|
no significant obligations remain; and
|
|
|
|
collection of the receivable is reasonably assured.
|
For all sales prior to November 13, 2006, except for small
amounts of consumables, we used a binding purchase order,
contract or signed sales quotation as evidence of an
arrangement. Sales through our distributors were evidenced by a
master agreement governing the relationship together with
binding purchase orders on a
transaction-by-transaction
basis.
37
At the time of the transaction, we assessed whether the price
was fixed and determinable and whether or not collection was
reasonably assured. We assessed whether the price was fixed and
determinable based on the payment terms associated with the
transaction. If a significant portion of the payment was due
after our normal payment terms, which are 30 to 90 days
from invoice date in most countries, we generally treated the
price as not being fixed and determinable. In these cases, we
recognized revenue for the extended portions of the payment as
they became due. We assessed collectibility based on a number of
factors, including past transaction history with the customer
and the creditworthiness of the customer. We did not request
collateral from our customers. If we determined that collection
of a payment was not reasonably assured, we deferred the revenue
until the time collection became reasonably assured, which was
generally upon receipt of cash. The majority of deferred revenue
was sold to Bio-Rad as part of the asset sale of our Instrument
Business. Delivery generally occurred when the product was
delivered to a common carrier or when the customer received the
product, depending on the nature of the arrangement. Revenue
from shipping and handling was generally recognized upon product
shipment, based on the amount billed to customers for shipping
and handling. The related cost of shipping and handling was
included in cost of revenue upon product shipment.
We generally included a standard
12-month
warranty on our instruments and certain accessories in the form
of a maintenance contract upon initial sale. We also sold
separately priced maintenance (extended warranty) contracts,
which were generally for 12 or 24 months following
expiration of the initial warranty. We made no distinction
between a standard warranty and a maintenance (extended
warranty) contract, as coverage under both the standard and an
extended maintenance contract is identical. Because we did not
offer traditional warranties but enhanced them such that they
were identical to our separately priced maintenance contracts,
we believe it was appropriate to account for them the same way.
Revenue for both the standard and extended maintenance contracts
was deferred and recognized ratably over the maintenance
contract term. Related costs were expensed as incurred. All
warranty obligations were transferred to Bio-Rad on
November 13, 2006 with the sale of our Instrument Business.
For revenue from Biomarker Discovery Center contracts and other
consulting contracts, if elements were specifically tied to a
separate earnings process, then revenue related to an element
was recognized when the specific performance obligation
associated with that element was completed. When revenues for an
element were not specifically tied to a separate earnings
process, they were recognized ratably over the term of the
agreement. Revenue from Biomarker Discovery Center services and
other consulting contracts was recognized at the completion of
key stages in the performance of the service as described in our
agreement with the customer. Often, there was only a single
element, namely delivery of a scientific report upon completion
of our analysis of customer samples, in which case we recognized
all the revenue upon the conclusion of the project when all
deliverables had been provided to the customer. Revenue was
deferred for fees received before earned. Our training was
billed based on published course fees and we generally
recognized revenue as the training was provided to the customer.
On November 13, 2006, the Biomarker Discovery Centers and
their related contracts were transferred to Bio-Rad as part of
the asset sale. There has been no further revenue from the
Biomarker Discovery Centers after the asset sale.
For revenue arrangements with multiple elements that were
delivered at different points in time (for example, where we
have delivered the hardware and software but were also obligated
to provide services, maintenance
and/or
training), we evaluated whether the delivered elements had
standalone value to the customer, whether the fair value of the
undelivered elements was reliably determinable, and whether the
delivery of the remaining elements was probable and within our
control. When all these conditions were met, we recognized
revenue on the delivered elements. If any one of these
conditions was not met, we deferred the recognition of revenue
until all these conditions were met or all elements had been
delivered. Fair value for ongoing maintenance was based upon
separate sales of renewals to other customers. Fair value for
services, such as training or consulting, was based upon
separate sales by us of those services to other customers.
Allowance
for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make
required payments. These reserves are determined by analyzing
specific customer accounts that have known or potential
collection issues, and reviewing the length of time receivables
are outstanding and applying historical loss rates to the aging
of the accounts receivable balances. If the financial conditions
38
of our customers were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances would
be required.
Inventory
Reserves
As of September 30, 2007, we had no inventory available for
sale as a result of the asset sale to Bio-Rad. We will have
limited inventories until we complete the development and
commercialization of our diagnostic tests. Prior to the sale of
the Instrument Business to Bio-Rad, we wrote down our inventory
for estimated excess and obsolete inventory equal to the
difference between the cost of inventory and the estimated
market value based upon assumptions about future demand, market
conditions and the release of new products that will supersede
older ones. Such estimates were difficult to make under volatile
economic conditions. Reviews for excess inventory were done on a
quarterly basis and required reserve levels were calculated with
reference to our projected ultimate usage of that inventory. In
order to determine the ultimate usage, we took into account
recent sales forecasts, historical experience, projected
obsolescence and our current inventory levels.
Depreciation
and Amortization
Property, plant and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and
amortization are computed for financial reporting purposes
principally using the straight-line method over the following
estimated useful lives: machinery and equipment, 3-5 years;
demonstration equipment, two years; computer equipment,
development systems used for collaborations and software, three
years; furniture and fixtures, five years; buildings and
leasehold improvements, the lesser of their economic life or the
term of the underlying lease. The cost of repairs and
maintenance is charged to operations as incurred. Gains and
losses resulting from disposals of assets are reflected in the
year of disposition.
Valuation
of Long-Lived Assets Including Acquired Intangible
Assets
We review long-lived assets, which include property, plant and
equipment and acquired identifiable intangibles, for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Impairment
evaluations involve management estimates of the useful lives of
the assets and the future cash flows they are expected to
generate. An impairment loss is recognized when estimated
undiscounted future cash flows expected to result from the use
of the asset plus net proceeds expected from disposition of the
asset (if any) are less than the carrying value of the asset.
This approach also uses our estimates of future market growth,
forecasted revenue and costs and appropriate discount rates.
Actual useful lives, cash flows and other factors could be
different from those estimated by management and this could have
a material effect on our operating results and financial
position. When impairment is identified, the carrying amount of
the asset is reduced to its estimated fair value. Deterioration
of our business for a significant product or in a particular
geographic region in the future could also lead to impairment
adjustments as such issues are identified. In connection with
the November 13, 2006 sale of the Instrument Business,
there are no longer any intangible assets recorded on our
balance sheet as these intangible assets were associated with
our Instrument Business sold to Bio-Rad.
Goodwill
Impairment
We recorded goodwill principally as a result of our acquisitions
of IllumeSys Pacific, Inc. in 1997, Ciphergen Technologies, Inc.
in 1998 and BioSepra S.A. in 2001, and the increases in our
ownership of Ciphergen Biosystems KK in 2002 and 2004. The
goodwill related to BioSepra was written off against the gain on
the sale of the BioSepra business in 2004. We perform goodwill
impairment tests on an annual basis and more frequently when
events and circumstances occur that indicate a possible
impairment of goodwill. In determining whether there is an
impairment of goodwill, we calculate the estimated fair value of
the reporting unit in which the goodwill is recorded using a
discounted future cash flow method. We then compare the
resulting fair value to the net book value of the reporting
unit, including goodwill. If the net book value of a reporting
unit exceeds its fair value, we measure the amount of the
impairment loss by comparing the implied fair value of the
reporting units goodwill with the carrying amount of that
goodwill. To the extent that the carrying amount of a reporting
units goodwill exceeds its implied fair value, we
recognize a goodwill
39
impairment loss. We performed annual impairment tests through
2004 and determined that no impairment had occurred. We
performed an annual impairment test in 2005 and determined that
goodwill of $2.5 million associated with our Japanese
subsidiary had been impaired. (see Notes 5 and 8 to our
audited consolidated financial statements included elsewhere in
this prospectus.) The discounted future cash flow method used in
the first step of our impairment test involves significant
estimates including future cash inflows from estimated revenues,
future cash outflows from estimated project costs and general
and administrative costs, timing of collection and payment of
various items, working capital levels, future growth rates and
profit margins, as well as discount rate and terminal value
assumptions. Although we believe the estimates and assumptions
that we used in testing for impairment are reasonable, changes
in any one of these assumptions could produce a significantly
different result. In connection with the November 13, 2006
sale of the Instrument Business, there is no longer any goodwill
recorded on our balance sheet as goodwill was associated with
our Instrument Business and accordingly was written off.
Stock-Based
Compensation
We have various stock option, stock purchase and incentive plans
to reward employees and key executive officers of our company.
Effective January 1, 2006, we adopted SFAS 123(R)
using the modified prospective transition method. Under this new
standard, our estimate of compensation expense requires a number
of complex and subjective assumptions, including the price
volatility of our common stock, employee exercise patterns
(expected life of the options), future forfeitures and related
tax effects. Prior to the adoption of SFAS 123(R), we
accounted for stock option grants using the intrinsic value
method, in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees, or APB 25,
and accordingly, recognized no compensation expense for stock
option grants.
Under the modified prospective approach, SFAS 123(R)
applies to new awards and to awards that were outstanding on
January 1, 2006 that are subsequently modified, repurchased
or cancelled. Under the modified prospective approach,
compensation cost recognized in 2006 includes compensation cost
for all stock-based payments granted prior to, but not yet
vested as of, January 1, 2006, based on the grant-date fair
value estimated in accordance with the original provisions of
SFAS 123, and compensation cost for all stock-based
payments granted subsequent to January 1, 2006, based on
the grant-date fair value estimated in accordance with the
provisions of SFAS 123(R). Prior periods were not restated
to reflect the impact of adopting the new standard. As a result
of adopting SFAS 123(R) on January 1, 2006, our net
loss and basic and diluted net loss per share for the year ended
December 31, 2006 was $1.6 million and $0.04,
respectively, higher than if we had continued to account for
stock-based compensation under APB 25 for our stock option
grants. We have a 100% valuation allowance recorded against our
deferred tax assets. Therefore SFAS 123(R) had no effect on
the income tax provision in the consolidated statement of
operations or the consolidated statement of cash flows. There
was no stock based compensation expense during fiscal year 2005.
For fiscal year 2004, stock-based compensation expense of
$602,000 was related to amortization of our deferred stock
compensation expense from our initial public offering.
Contingencies
We have been, and may in the future become, subject to legal
proceedings related to intellectual property licensing matters.
Based on the information available at the balance sheet dates
and through consultation with our legal counsel, we assess the
likelihood of any adverse judgments or outcomes for these
matters, as well as potential ranges of probable loss. If losses
are probable and reasonably estimable, we will record a reserve
in accordance with Statement of Financial Accounting Standards
No. 5, Accounting for Contingencies. Currently
we have no such reserves recorded. Any reserves recorded in the
future may change due to new developments in each matter.
Income
Taxes
On January 1, 2007, we adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement
No. 109, or FIN 48, which clarifies the
accounting for income tax uncertainties that have been
recognized in an enterprises financial statements in
accordance with
40
SFAS No. 109, Accounting for Income Taxes.
The cumulative effect of adopting FIN 48 on January 1,
2007, resulted in no liability under FIN 48 on the balance
sheet. There are open statutes of limitation for taxing
authorities to audit us for federal and state jurisdictions from
the year 2003 through the current period. Since we had a full
valuation on all the deferred tax assets, FIN 48 had no
impact on our effective tax rate. We are evaluating the net
operating loss carryforwards and research and development
deferred tax assets to determine whether there is a limit due to
prior year ownership changes. It is possible that a portion of
these deferred tax assets may be limited in their use. We expect
to complete the studies by the end of 2007.
We account for income taxes using the liability method. Under
this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and the
tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to
affect taxable income. A valuation allowance is established when
necessary to reduce deferred tax assets to the amounts expected
to be realized. Interest and penalties related to income taxes
are recorded to interest and other expense of the consolidated
statement of operations.
Recent
Accounting Pronouncements
Fair
Value Option for Financial Assets and Financial
Liabilities
In February 2007, the FASB issued Statement of Financial
Accounting Standards, or SFAS, No. 159, The Fair
Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115. SFAS No. 159 provides entities
with an option to report selected financial assets and
liabilities at fair value. Unrealized gains and losses on items
for which the fair value option has been elected are reported in
earnings. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. Our adoption of
SFAS No. 159 is not expected to have a material impact
on our consolidated financial statements.
Fair
Value Measurements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157
defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements.
SFAS No. 157 clarifies the principle that fair value
should be based on the assumptions market participants would use
when pricing an asset or liability and establishes a fair value
hierarchy that prioritizes the information used to develop those
assumptions. Under the standard, fair value measurements would
be separately disclosed by level within the fair value
hierarchy. The provisions of SFAS No. 157 are
effective for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years, with early
adoption permitted. Our adoption of SFAS No. 157 is
not expected to have a material impact on our consolidated
financial statements.
Interest
Rate Risk
Our exposure to market risk for changes in interest rates
relates primarily to the increase or decrease in the amount of
interest income we can earn on our money market accounts and
investment portfolio, and to the increase or decrease in the
amount of interest expense we must pay with respect to our
secured line of credit with Quest Diagnostics. The primary
objective of our investment activities is to preserve principal,
maintain proper liquidity to meet operating needs and maximize
yields. Our investment policy, which has been approved by the
Board of Directors, specifies credit quality standards for our
investments and limits the amount of credit exposure to any
single issue, issuer or type of investment. We do not use or
plan to use derivative financial instruments in our investment
portfolio.
As of September 30, 2007, we had cash equivalents of
$18.5 million held in money market accounts and short-term
investments available for sale of $4.0 million invested in
auction rate preferred securities with maturities of less than
90 days. Management believes that, in the near term, we
will maintain our available funds in money market accounts or in
short-term investments with original maturities at the date of
purchase of less than 90 days. If market interest rates
were to increase by 100 basis points, or 1.00%, over the
interest rates at September 30, 2007, our annual interest
income for the money market accounts would increase by $185,000
and the investment portfolio value would decrease by $37,000.
41
As of September 30, 2007, we had an outstanding balance of
$10.0 million on a secured line of credit with Quest
Diagnostics. The secured line of credit with Quest Diagnostics
is subject to a floating interest rate. The 4.5% Notes and the
7.0% Notes have a fixed interest rate and, therefore, are not
subject to interest rate risk. If interest rates were to
increase by 100 basis points, or 1.00%, our annual interest
expense related to the secured line of credit with Quest
Diagnostics would increase by $100,000.
Foreign
Currency Exchange Risk
As a result of the sale of assets and liabilities of our protein
research tools and collaborative services business to Bio-Rad,
there is currently no foreign currency exchange risk related to
our revenues. However, we have a foreign subsidiary, Ciphergen
Biosystems KK, of which the functional currency is the Japanese
yen. Accordingly, the accounts of this operation are translated
from the Japanese yen to the United States dollar using the
current exchange rate in effect at the balance sheet date for
the balance sheet accounts, and using the average exchange rate
during the period for revenue and expense accounts. The effects
of translation are recorded to accumulated other comprehensive
loss of stockholders deficit.
The accounts of all other foreign operations are remeasured to
the United States dollar, which is the functional currency.
Accordingly, all monetary assets and liabilities of these
foreign operations are translated into United States dollars at
current period-end exchange rates, and non-monetary assets and
related elements of expense are translated using historical
rates of exchange. Income and expense elements are translated to
United States dollars using average exchange rates in effect
during the period. Gains and losses from the foreign currency
transactions of these subsidiaries are recorded to interest and
other expense, net in the consolidated statement of operations.
The net tangible assets of our
non-United
States operations, excluding intercompany debt, were $1.2
million at September 30, 2007.
We did not enter into any forward contracts during the nine
months ended September 30, 2007. Although we will continue
to monitor our exposure to currency fluctuations, we cannot
provide assurance that exchange rate fluctuations will not harm
our business in the future.
42
We were originally incorporated in California on
December 9, 1993, under the name Abiotic Systems. In March
1995, we changed our corporate name to Ciphergen Biosystems,
Inc. and in May 2000, we reincorporated in Delaware. We had our
initial public offering on September 28, 2000. On
November 13, 2006, we sold assets and liabilities of our
Instrument Business to Bio-Rad in an asset sale transaction in
order to concentrate our resources on developing clinical
protein biomarker diagnostic products and services. On
August 21, 2007, we changed our corporate name to
Vermillion, Inc. In conjunction with the name change, we changed
our common stock ticker symbol on the Nasdaq Capital Market from
CIPH to VRML.
Since the sale of assets and liabilities of our Instrument
Business to Bio-Rad, we have dedicated ourselves to the
discovery, development and commercialization of specialty
diagnostic tests that provide physicians with information with
which to manage their patients care and that improve
patient outcomes. We use translational proteomics, which is the
process of answering clinical questions by utilizing advanced
protein separation tools to identify and resolve variants of
specific biomarkers, developing assays, and commercializing
tests.
Through collaborations with leading academic and research
institutions, including The Johns Hopkins 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, The Ohio State University
Research Foundation, and Stanford University, we plan to develop
diagnostic tests in the fields of hematology/oncology,
cardiovascular disease, and womens health. The clinical
questions we are addressing include early disease detection,
treatment response, monitoring of disease progression, prognosis
and others. In July 2005, we entered into a strategic alliance
agreement with Quest Diagnostics covering a three-year period
during which the parties have agreed to develop and
commercialize up to three diagnostic tests.
Our most established programs are in the field of ovarian
cancer. Commonly known as the silent killer, ovarian
cancer leads to approximately 15,000 deaths each year in the
United States. Approximately 20,000 new cases are diagnosed each
year, with the majority in patients with late stage disease,
where the cancer has spread beyond the ovary. Unfortunately, the
prognosis is poor in these patients, leading to the high
mortality from this disease. We believe that one unmet clinical
need is a diagnostic test that can provide adequate predictive
value to stratify patients with a pelvic mass into those with a
high risk of invasive ovarian cancer versus those with a low
risk. We believe that there are at least 5 million testing
opportunities each year addressing this need. We have developed
a panel of biomarkers we believe provides risk stratification
information for ovarian cancer based on a series of studies
involving over 2,500 clinical samples from more than five sites.
In a cohort study we were able to show, in 525 consecutively
sampled women, a significant increase in the positive predictive
value using our marker panel over the baseline level. This
translates into the potential to enrich the concentration of
ovarian cancer cases referred to the gynecologic oncologist by
more than two-fold. We are undertaking a prospective clinical
trial to support submission to the FDA for approval as an
in vitro diagnostic test kit.
A second major program is a test intended to aid in the
detection of PAD. This test, which is based on research done in
collaboration with Stanford University, fills the unmet clinical
need for a blood test that can be used as an adjunct to detect
PAD, which affects 10 million Americans, but is under diagnosed.
Accurate diagnosis of PAD permits aggressive lifestyle
modification and therapeutic intervention that can decrease the
risk of major adverse cardiovascular events. We reported in
August the publication of a discovery of two blood markers for
PAD in the peer-reviewed journal Circulation, which is
published by the American Heart Association. We are currently
performing clinical validation of this test, which will be
commercialized with Quest Diagnostics under the terms of the
strategic alliance agreement.
The
Diagnostics Market Opportunity
The economics of health care demand improved allocation of
resources. Improved allocation of resources can be derived
through disease prevention, early detection of disease leading
to early intervention, and from diagnostic tools that can triage
patients to more appropriate therapy and intervention. According
to the Jain PharmaBiotech report, the worldwide market for
in vitro diagnostics in 2006 was approximately
$28.9 billion.
43
We have chosen to focus primarily in the areas of
hematology/oncology, cardiovascular disease, and womens
health. Demographic trends suggest that, as the population ages,
the burden from these diseases will increase, and the demand for
quality diagnostic, prognostic, and predictive tests will
increase. In addition, these areas generally lack quality
diagnostic tests and, therefore, we believe patient outcomes can
be significantly improved by the development of novel diagnostic
and risk stratification tests.
Our focus on proteomics enables us to address the market for
diagnostic tests that simultaneously measure multiple protein
biomarkers. A protein biomarker is a protein or protein variant
that is present in a greater or lesser amount in a disease state
versus a normal condition. Conventional proteomic tests measure
a single protein biomarker whereas most diseases are complex. We
believe that efforts to diagnose cancer and other complex
diseases have failed in large part because the disease is
heterogeneous at the causative level (i.e., most diseases can be
traced to multiple potential etiologies) and at the human
response level (i.e., each individual afflicted with a given
disease can respond to that ailment in a specific manner).
Consequently, measuring a single protein biomarker when multiple
protein biomarkers may be altered in a complex disease is
unlikely to provide meaningful information about the disease
state. We believe that our approach, using mass spectrometry,
will allow us to create diagnostic tests with sufficient
sensitivity and specificity to aid the physician considering
treatment options for patients with complex diseases.
Scientific
Background
Genes are the hereditary coding system of living organisms.
Genes encode proteins that are responsible for cellular
functions. The study of genes and their functions has led to the
discovery of new targets for drug development. Industry sources
estimate that within the human genome there are approximately
30,000 genes. The initial structure of a protein is determined
by a single gene. The final structure of a protein is frequently
altered by interactions with additional genes or proteins. These
subsequent modifications result in hundreds of thousands of
different proteins. In addition, proteins may interact with one
another to form complex structures that are ultimately
responsible for cellular functions.
Genomics allows researchers to establish the relationship
between gene activity and disease. However, many diseases are
manifested not at the genetic level, but at the protein level.
The complete structure of modified proteins cannot be determined
by reference to the encoding gene alone. Thus, while genomics
provides some information about diseases, it does not provide a
full understanding of disease processes. We are focused on
converting recent advances in proteomics into clinically useful
translational proteomic diagnostic tests.
The
Relationship Between Proteins and Diseases
The entire genetic content of any organism, known as its genome,
is encoded in strands of deoxyribonucleic acid, or DNA. Cells
perform their normal biological functions through the genetic
instructions encoded in their DNA, which results in the
production of proteins. The process of producing proteins from
DNA is known as gene expression or protein expression.
Differences in living organisms result from variability in their
genomes, which can affect the types of genes expressed and the
levels of gene expression. Each cell of an organism expresses
only approximately 10% to 20% of the genome. The type of cell
determines which genes are expressed and the amount of a
particular protein produced. For example, liver cells produce
different proteins from those produced by cells found in the
heart, lungs, skin, etc. Proteins play a crucial role in
virtually all biological processes, including transportation and
storage of energy, immune protection, generation and
transmission of nerve impulses and control of growth. Diseases
may be caused by a mutation of a gene that alters a protein
directly or indirectly, or alters the level of protein
expression. These alterations interrupt the normal balance of
proteins and create disease symptoms. A protein biomarker is a
protein or protein variant that is present in a greater or
lesser amount in a disease state versus a normal condition. By
studying changes in protein biomarkers, researchers may identify
diseases prior to the appearance of physical symptoms.
Historically, researchers discovered protein biomarkers as a
byproduct of basic biological disease research. This has
resulted in the validation by researchers of approximately 200
protein biomarkers that are being used in commercially available
clinical diagnostic products.
44
Limitations
of Existing Diagnostic Approaches and Our Solution
The in vitro diagnostics industry manufactures and
distributes products that are used to detect thousands of
individual components present in human derived specimens.
However, the vast majority of these assays are used specifically
to identify single protein biomarkers. The development of new
diagnostic products has been limited by the complexity of
disease states, which may be caused or characterized by several
or many proteins or post-translationally modified protein
variants. Diagnostic assays that are limited to the detection of
a single protein often have limitations in clinical specificity
(true negatives) and sensitivity (true positives) due to the
complex nature of many diseases and the inherent biological
diversity among populations of people. Diagnostic products that
are limited to the detection of a single protein may lack the
ability to detect more complex diseases, and thus produce
results that are unacceptable for practical use.
The heterogeneity of disease and of the human response to
disease often underlies the shortcoming of single markers to
diagnose and predict many diseases accurately. Our studies,
particularly in ovarian cancer, have given us a better
understanding of both the disease pathophysiology and the host
response. By using multiple markers, we are better able to
encompass the disease and host response heterogeneity. In
addition, by examining specific analytes with greater
resolution, for example, post-translational modifications, we
believe we can improve the specificity of our diagnostic markers
because these modifications reflect both the pathophysiology and
host response This is accomplished using an advanced protein
separation system (integrated equipment, reagents and software)
to identify combinations of specific biomarkers leading to
commercialization of disease specific assays.
We are applying translational proteomics research and
development tools and methods to analyze biological information
in an attempt to discover associations between proteins, protein
variants, protein-protein interaction and diseases. We intend to
develop new diagnostic tests based on known and newly-identified
protein markers to help physicians predict an individuals
predisposition for a disease in order to better characterize,
monitor progression of, and select appropriate therapy for such
disease. Our goals are to:
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Develop high-value diagnostic tests that address unmet medical
needs, particularly in stratifying patients according to the
risk of developing a disease, having a disease, or failing a
specific therapy for a disease;
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Facilitate more efficient clinical trials of new therapeutics by
providing biomarkers that stratify patients according to
likelihood of response; and
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Identify biomarkers that can form the basis of molecular imaging
targets.
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Our
Solution
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Problem
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Our Solution
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Heterogeneity of disease
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Emphasis on multi-marker panels
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Poorly validated markers
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Expertise in study design incorporating
internal and external validation
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Large multi-site studies
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Protein post-translational modifications
that reduce specificity of assays
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Assay development using mass
spectrometry to quantitate disease-specific forms
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Addressing
the heterogeneity of disease
Our strategy is to create a paradigm of diagnostics that is
based on risk stratification, multiple-marker testing, and
information integration. This strategy is based on the belief
that any specific disease is heterogeneous and, therefore,
relying on a single disease marker to provide a simple
yes-no answer is likely to fail. We believe that
efforts to diagnose cancer and other complex diseases have
failed in large part because the disease is heterogeneous at the
causative level, meaning that most diseases can be traced to
multiple potential etiologies, and at the human response level,
meaning that each individual afflicted with a given disease can
respond to that ailment in a specific manner. A better
understanding of heterogeneity of disease and human response is
necessary for improved diagnosis and treatment of many diseases.
45
Validation
of markers through proper study design
Analysis of peer-reviewed publications reveals almost daily
reports of novel biomarkers or biomarker combinations associated
with specific diseases. Few of these are used clinically. As
with drug discovery, preliminary research results fail to
canvass sufficient variation in study populations or laboratory
practices and, therefore, the vast majority of candidate
biomarkers fail to be substantiated in subsequent studies.
Recognizing that validation is the point at which most
biomarkers fail, our strategy is to reduce the attrition rate
between discovery and clinical implementation by building
validation into the discovery process. Biomarkers fail to
validate for a number of reasons, which can be broadly
classified into pre-analytical and analytical factors.
Pre-analytical factors include study design that does not mimic
actual clinical practice, inclusion of the wrong types of
control individuals, and demographic bias (usually seen in
studies in which samples are collected from a single
institution). Analytical factors include poor control over
laboratory protocols, inadequate randomization of study samples,
and instrumentation biases (for example, higher signal early in
the experimental run compared to later in the experimental run).
Finally, the manner in which the data are analyzed can have a
profound impact on the reliability of the statistical
conclusions. When designing clinical studies, we begin with the
clinical question, since this drives the downstream clinical
utility of the biomarkers. With this as a starting point, we are
able to design a study that includes the appropriate cases and
control groups. We further incorporate an initial validation
component even within the discovery component. We place an
emphasis on multi-institutional studies, inclusion of clinically
relevant controls, using qualified and trained operators to run
assays and collect data. For example, in the 2004 Cancer
Research paper describing the first three markers in the ovarian
cancer panel, more than 600 specimen samples taken from five
hospitals were analyzed. The samples were divided into sets for
training and validation purposes. Each site was shipped the same
sample set for operator training and proficiency development
followed by shipments of the same sample set for validation. The
validation sample sets were received and tested in separate test
rounds. The first round of validation samples is followed by a
second round of independent validation samples. Subsequently, we
have analyzed more than 2,000 samples from five additional
medical centers. We have examined over 300 samples in our breast
cancer program and over 400 samples in our prostate cancer
program. In analyzing the complex proteomics data, we take an
agnostic view of statistical methodologies, choosing to use a
variety of approaches and looking for concordance between
approaches, taking the view that markers deemed significant by
multiple statistical algorithms are more likely to reflect
biological conditions rather than mathematical artifacts.
Exploiting
the power of mass spectrometry to improve assay
specificity
An important characteristic of proteins is that their functional
activity is often modulated by changes in their structure.
Conventional approaches to assay proteins have variable ability
to detect these changes, and may depend on the specificity of
the antibody to the original or altered forms of the proteins.
Additionally, a conventional assay may inadvertently measure
only one form of a protein while many exist. We have developed
programs for biomarkers in which mass spectrometry provides an
advantage over traditional assays in characterizing and
quantitating disease markers. Mass spectrometrys
advantages over traditional assay approaches in these instances
is a result of its ability to distinguish two or more highly
related protein species based on molecular mass, or in
combination with chromatographic separation tools, such as with
ProteinChip®
arrays, based on biochemical properties. Because most
traditional assay approaches rely strictly on using antibodies
to capture the intended analyte, protein forms with a common
epitope are not readily distinguished. A few exemplar proteins
that are candidates for assay development using a mass
spectromic approach include von Willebrands factor, human
chorionic gonadotropin, albumin, c-reactive protein, and serum
amyloid A. One disease that we are specifically addressing is
TTP, a hematologic disease that affects mostly women and is a
result of a deficiency in the enzyme ADAMTS13. Current assays
rely on unwieldy Western Blots, which are both low throughput
and poorly quantitative. Our assay measures directly the product
of the enzymatic reaction for ADAMTS13, and provides the level
of quantitation necessary to distinguish TTP from other
thrombocytopenic diseases, evaluate patient responses to therapy
and monitor patients during clinical remission to prevent
recurrences of the disease.
46
Creating
and maintaining a multi-disease product pipeline
We plan to develop potential tests based on biomarkers
discovered in our sponsored programs with academic
collaborators, and also have the opportunity to in-license tests
from an installed base of hundreds of academic SELDI customers.
Our past strategy of selling our SELDI proteomics platform to
researchers in academia, pharmaceutical companies, and
biotechnology companies has provided us with access to
biomarkers that may potentially lead to additional diagnostic
tests. Going forward, we and Bio-Rad have agreed to continue to
identify SELDI users who may provide additional biomarker
discoveries for our diagnostics pipeline. In addition, we have
the opportunity to identify additional markers discovered on
other platforms that complement our existing product pipeline.
We have entered into collaboration, research, and material
transfer agreements with more than 16 companies and
academic institutions to support our large-scale clinical
studies, including ongoing studies as well as studies we plan to
conduct in the future. Some of our major collaborations in the
areas of cancer and womens health are described in greater
detail here.
The Johns Hopkins University School of
Medicine: Led by Dr. Daniel Chan, Director
of the clinical laboratories, this collaboration focuses on
oncology (in particular, breast, prostate, and ovarian cancer).
Under our collaboration agreement with Johns Hopkins, we provide
research funding, ProteinChip Systems and ProteinChip Arrays.
Johns Hopkins provides laboratory space and equipment, clinical
samples and scientists to perform the research. Johns Hopkins
has granted us an option to take a royalty-bearing, exclusive,
worldwide license to commercialize any inventions resulting from
the research. Our royalty obligations include minimum annual
royalties, as well as running royalties on sales of products and
services. The collaboration agreement with John Hopkins is
effective through December 31, 2007.
The University of Texas M. D. Anderson Cancer
Center: Led by Dr. Robert C. Bast, Jr.,
who discovered the tumor marker for CA125, this collaboration
focuses on ovarian cancer. CA125 found in women is most often
associated with cancers of the reproductive tract including the
uterus, fallopian tubes and ovaries. Under our Research and
License Agreement with M. D. Anderson, we provide research
funding, ProteinChip Arrays and other consumables. M. D.
Anderson provides clinical samples for research purposes. Both
we and M. D. Anderson perform designated portions of the
research. M. D. Anderson has granted us an option to negotiate
and acquire a royalty-bearing, exclusive, worldwide license to
commercialize any inventions resulting from the research. We are
currently in the process of negotiating license terms with M. D.
Anderson with respect to certain patent applications covering
biomarkers discovered under the collaboration.
Stanford University: Led by Dr. John
Cooke, this collaboration is directed at discovery, validation,
and characterization of novel biomarkers related to
cardiovascular diseases, most notably PAD. Both we and Stanford
perform designated portions of the research.
University College London: Led by Professor
Ian Jacobs, this collaboration provides us with access to the
largest ovarian cancer screening trial in the world (UKCTOCS).
This collaboration is aimed at ovarian and breast cancer.
Pursuant to our collaborative research agreement with UCL, we
provide research funding, ProteinChip Arrays and associated
consumables, bioinformatics, software and data analysis and
other research support. UCL provides clinical samples. Both
parties perform designated portions of the research. UCL has
granted us an option to acquire a royalty-bearing, exclusive,
worldwide license to commercialize inventions resulting from the
research in the field of diagnostics and therapeutics for cancer.
The University of Texas Medical Branch: Led by
Dr. John Petersen, this collaboration is focused on the
discovery and development of new products for personalized, or
targeted medicine, particularly in the field of liver disease.
Under our research and license agreement with UTMB, UTMB
provides clinical samples for research purposes. Both we and
UTMB perform designated portions of the research. UTMB has
granted us an option to negotiate and acquire a royalty-bearing,
exclusive, worldwide license to commercialize any inventions
resulting from the research subject to the terms of a license
agreement to be negotiated by the parties.
The Katholieke Universiteit Leuven,
Belgium: Led by Dr. Ignace Vergote, this
collaboration is directed at discovery, validation, and
characterization of novel biomarkers related to gynecological
diseases. Under the
47
terms of the research and license agreement, we will have
exclusive rights to license discoveries made during the course
of this collaboration. We will provide funding for sample
collection from patients undergoing evaluation of a persistent
mass and who will undergo surgical intervention. Each party will
fund designated portions of the research.
The Ohio State University Research
Foundation: Led by Dr. Haifeng Wu, this
collaboration is directed at discovery, validation, and
characterization of novel biomarkers related to thrombotic
thrombocytopenic purpura, or TTP, and production of associated
technology. TTP is a blood disorder characterized by low
platelets, low red blood cell count (caused by premature
breakdown of the cells), abnormalities in kidney function, and
nervous system abnormalities. It is usually caused by a decrease
in the function of an enzyme called ADAMTS13. Under the terms of
the research and collaboration agreement, we will have exclusive
rights to license discoveries made during the course of this
collaboration. We will fund a portion of the costs incurred by
the University.
Together with our collaborators, we are currently conducting
large-scale protein biomarker studies in the following areas:
hematology/oncology, cardiovascular disease and womens
health. Most of these studies involve the analysis of large
numbers of samples from healthy and diseased individuals, or
comparing patients with the disease of interest to those with
related diseases for which clinical distinction is necessary.
The goal of most of these studies is to identify sets of
proteins that serve as biomarkers for a specific disease.
|
|
|
|
|
|
|
|
|
|
|
2005 Estimated
|
|
|
|
|
|
|
|
Treatment Decisions
|
|
|
|
|
|
Disease Field
|
|
in the United States
|
|
|
Specific Clinical Question
|
|
Product Stage
|
|
Ovarian cancer
|
|
|
5,000,000
|
|
|
Screening and risk stratification of
women with a suspicious pelvic mass
|
|
Final clinical evaluation(1)
|
|
|
|
65,000
|
|
|
Prediction of recurrence/response to
chemotherapy
|
|
Initial clinical evaluation(2)
|
|
|
|
10,000,000
|
|
|
Surveillance of high-risk women
|
|
Initial discovery(3)
|
Breast cancer
|
|
|
54,000,000(4
|
)
|
|
Triage to imaging modality
|
|
Initial clinical evaluation
|
|
|
|
100,000
|
|
|
Enhanced response to chemotherapy
|
|
Initial discovery
|
Prostate cancer
|
|
|
30,000,000(5
|
)
|
|
Screening and detection in conjunction
with PSA
|
|
Initial clinical evaluation
|
|
|
|
230,000
|
|
|
Risk of recurrence
|
|
Initial clinical evaluation
|
Peripheral arterial disease
|
|
|
>12,000,000
|
|
|
Determination of risk of PAD
|
|
Final clinical evaluation
|
|
|
|
|
|
|
Distinguishing between PAD and CAD
(coronary artery disease)
|
|
Initial discovery
|
Thrombotic
thrombocytopenic Purpura
|
|
|
100,000
|
|
|
Diagnosis
|
|
Assay development(6)
|
Assisted reproductive
technology
|
|
|
90,000
|
|
|
Prediction of likelihood of successful
implantation
|
|
Initial clinical evaluation
|
|
|
|
(1) |
|
Final clinical evaluation means that a
specific marker set has undergone a multi-site evaluation and
assay development, and is undergoing final clinical evaluation
tests prior to product launch. |
|
(2) |
|
Initial clinical evaluation means that a
specific marker set is being evaluated in independent sample
sets, generally from multiple medical centers. In some
instances, candidate markers have been discovered |
48
|
|
|
|
|
and are undergoing clinical evaluation experiments while
additional markers are being sought to improve the clinical
performance. |
|
(3) |
|
Initial discovery means that studies,
generally retrospective case control, are being conducted to
discover and identify biomarkers. These studies are usually
relatively small (<200) and examine samples from 1-2
medical centers, and a specific set of markers for
commercialization has not yet been determined. |
|
(4) |
|
Number of women aged
40-70,
according to US Census estimates. |
|
(5) |
|
Number of men aged
50-75,
according to US Census estimates. |
|
(6) |
|
Assay development means the process of
creating reproducible and quantitative assays, as well as
ascertaining pre-analytical variables that affect
reproducibility such that the test can be run in a clinical
laboratory. |
Further details regarding important developments in several of
our large-scale studies are set forth below.
Ovarian cancer. Commonly known as the
silent killer, ovarian cancer leads to approximately
15,000 deaths each year in the United States. Approximately
20,000 new cases are diagnosed each year, with the majority in
patients with late stage disease, i.e., when the cancer has
spread beyond the ovary. Unfortunately, the prognosis is poor in
these patients, leading to the high mortality from this disease.
While the diagnosis of ovarian cancer in its earliest stages has
a profound positive impact on the likelihood of survival of the
disease, another factor that predicts survival from ovarian
cancer is the specialty training of the surgeon who operates on
the patient with ovarian cancer, with patients being treated by
the gynecologic oncologist having better outcomes than those
treated by the general surgeon. Accordingly, an unmet clinical
need is a diagnostic test that can provide adequate predictive
value to stratify patients with a pelvic mass into high risk of
invasive ovarian cancer versus those with a low risk. No blood
test currently exists to address properly this clinical
question, although CA125 is commonly used. CA125, which is
cleared by the FDA only for monitoring for recurrence of ovarian
cancer, is absent in up to 50% of early stage ovarian cancer
cases, and can be elevated in diseases other than ovarian
cancer, including benign ovarian tumors and endometriosis. These
shortcomings limit CA125s utility in distinguishing benign
from malignant ovarian tumors or for use in detection of early
stage ovarian cancer. Transvaginal ultrasound is another
diagnostic modality used with patients with ovarian tumors.
Attempts at defining specific morphological criteria that can
aid in a benign versus malignant diagnosis have led to the
morphology index and the risk of malignancy index, with reports
of 40-70%
predictive value. However, ultrasound interpretation can be
variable and dependent on the experience of the operator. In
August 2004, we, along with collaborators at Johns Hopkins,
University College London, and M. D. Anderson Cancer Center,
reported the discovery of three markers that, when combined,
provided higher diagnostic accuracy for early stage ovarian
cancer than other markers, for example, CA125. The three markers
that we reported in 2004 form the basis of an expanded panel of
biomarkers that together have been demonstrated to provide risk
stratification information in a series of studies involving over
2,500 clinical samples from five sites. Data presented at the
annual meeting of the American Society of Clinical Oncology in
June 2006 demonstrated the portability of this marker panel
among different clinical groups, indicating its potential
validity across various testing populations. The most recent
data presented at the annual meeting of the Society of
Gynecologic Oncology in March 2007 described results from a
cohort study. We were able to show, in 525 consecutively sampled
women, a significant increase in the positive predictive value
using our marker panel over the baseline level. We are
undertaking a prospective clinical trial to support submission
to the FDA for approval as an in vitro diagnostic test. In
addition, we are continuing to investigate the role of these
markers, as well as discovering additional biomarkers, that may
be used to identify early stage ovarian cancer and to predict
recurrence and prognosis.
Peripheral arterial disease. This disease
affects 12 million Americans and is under diagnosed and
under treated. With the rising incidence of diabetes, the
incidence of PAD, is expected to increase concomitantly. The
absence of a good blood test contributes to the under diagnosis
of PAD. In collaboration with Stanford University, we have
performed both an initial discovery study and a first validation
study that has resulted in the identification of a novel
biomarker for PAD. The results of these studies were published
on-line in the journal Circulation in August 2007.
Ongoing efforts are aimed at further validating this marker in
combination
49
with additional cardiovascular biomarkers. Quest Diagnostics has
accepted the PAD test as a development program under our
strategic alliance agreement.
Thrombotic thrombocytopenic purpura. This
disease affects approximately 1,000 Americans annually and is
life threatening in the absence of appropriate treatment, which
is usually plasmaphoresis. Under treatment can lead to increased
mortality from the disease while over treatment wastes precious
resources. In addition, patients with TTP need to be monitored
for clinical response to therapy. TTP is a result of absent or
reduced levels, also known as a defect in the activity, of the
enzyme ADAMTS13, Mass spectrometry was used as a logical
approach to develop an accurate and quantitative assay to
measure this enzymatic activity. Final assay development is
under way.
Prostate cancer. Approximately 250,000 men are
expected to be diagnosed with prostate cancer in the United
States each year, approximately 195,000 of whom will need to
make critical decisions on whether or not to undergo local
therapy, such as surgery or radiation, and on whether or not to
have additional treatment after local therapy. There is also a
need for a reliable test to determine the likelihood of
progression and the likelihood of recurrence after local
treatment. In May 2006, we and Johns Hopkins reported the
discovery of two biomarkers that, when combined with PSA, were
highly predictive of likelihood of recurrence of prostate
cancer. These findings resulted from two studies, one examining
over 400 men with prostate cancer, and the other examining 50
pairs of men followed for 5 years with prostate cancer
matched for age, cancer stage, and other clinical parameters.
These results suggest the potential of a test to aid in the
stratification of risk of highly aggressive prostate cancer,
independent of other clinical variables, reduce over treatment
of prostate cancer cases not likely to be lethal, and shift
treatment to those cases that are particularly likely to be
lethal.
Breast cancer. Detection of early stage breast
cancer holds the potential to improve outcomes for women with
this disease. No blood markers currently exist that can
accurately detect ductal carcinoma in situ, or DCIS, which is
one of the earliest stages of breast cancer, and it is likely
that imaging modalities such as mammography, ultrasound, and
magnetic resonance imaging will improve detection accuracy when
combined with blood markers or molecular imaging targets. In
collaboration with Johns Hopkins, we have performed two
independent studies to identify blood markers for DCIS and stage
I breast cancer. The first study examined 169 women with varying
stages of breast cancer, benign disease, and healthy women, and
the second study examined 176 women from a different medical
center as independent validation. We are currently performing a
350 woman multi-center validation study to confirm the two
markers identified in the previous studies.
Assisted reproductive technology. There has
been increased use of assisted reproductive technology, or ART,
to facilitate pregnancies, either in women who are infertile or
who have waited to have babies. Currently, it is difficult to
predict which embryos will lead to viable fetuses and successful
live births. Therefore, women may go through multiple cycles of
induction and implantation
and/or may
have multiple embryos implanted. Implantation cycles are
expensive, and multiple implantations often result in multiple
gestations. Therefore a test that can improve the probability
that an implanted embryo will result in a live birth will reduce
overall costs associated with ART and may reduce the number of
multiple gestations. SELDI-TOF-MS profiling of conditioned media
derived from cultured embryos has revealed a series of proteins
that may improve in discriminating between embryos that are more
likely to successfully implant versus those that are not. These
results are currently undergoing validation.
Commercialization
If we are successful at discovering biomarkers and panels of
biomarkers that have diagnostic utility, our commercialization
strategy includes partnering with other parties to assist in the
development and commercialization of our initial tests. In July,
2005, we entered into a strategic alliance agreement with Quest
Diagnostics covering a three-year period during which the
parties have agreed to develop and commercialize up to three
diagnostic tests. In connection with this strategic alliance in
exchange for common stock and warrants to purchase additional
common stock, Quest Diagnostics invested $15.0 million in
the Company and received a warrant to invest an additional
$7.7 million. In addition, Quest Diagnostics agreed to loan
us up to $10.0 million to pay certain costs and expenses
related to the strategic alliance. This loan is forgivable based
50
upon the achievement of certain milestones related to the
development of diagnostic tests. If we fail to achieve these
milestones, the outstanding loans will become due and payable in
July 2010. In addition, Quest Diagnostics invested an additional
$2.0 million in the Company and received an additional
2,380,952 shares of our common stock and warrants to
purchase 1,904,761 shares of our common stock through a
private placement on August 29, 2007.
We expect to commercialize and sell diagnostic tests in one or
both of two phases. The first phase, referred to as the ASR
phase, will involve the sale of ASRs to certain customers
coupled with the grant to such customer of a sublicense to
perform the laboratory test using the methodology covered by the
relevant license obtained from our collaborator(s), e.g., a test
for ovarian cancer covered by licenses from Johns Hopkins and
the M. D. Anderson Cancer Center. ASRs are the raw materials
which we will resell or make ourselves and which are utilized by
clinical laboratories to develop and perform home
brew laboratory tests in CLIA-regulated laboratories
(i.e., laboratories regulated under the federal Clinical
Laboratory Improvement Amendments of 1988, or CLIA). During the
second phase, or IVD phase, we plan to assemble and sell IVD
test kits, which have been cleared by the FDA, to customers
together with SELDI instruments which we expect to purchase from
Bio-Rad.
Under our strategic alliance agreement, Quest Diagnostics has
the exclusive right to perform up to three ASR laboratory tests.
Once we begin manufacturing a test kit for each of such tests,
we expect that Quest Diagnostics will purchase FDA-cleared IVD
test kits from us. Quest Diagnostics will have the exclusive
right to perform such tests and market test kits purchased from
us in the United States, Mexico, the United Kingdom and other
countries, such as Brazil, where Quest Diagnostics operates a
clinical laboratory, for up to five years following
commercialization of each respective test, referred to herein as
the exclusive period, with non-exclusive rights to commercialize
these tests in the rest of the world, subject to a royalty
payable to us. Upon expiration of the exclusive period, Quest
Diagnostics exclusive rights will become non-exclusive.
During the ASR phase for a given test, and as long as the
exclusive period continues, we will sell ASRs and grant rights
to perform such tests to Quest Diagnostics and to other
reference laboratories, hospitals and medical clinics in
countries where Quest Diagnostics does not operate a clinical
laboratory. Once the IVD phase begins for a given test, and as
long as the exclusive period continues for that particular test,
we will sell test kits and instruments to Quest Diagnostics. At
the end of the exclusive period with respect to any test kit,
Quest Diagnostics exclusive right to perform tests using
such test kit will become non-exclusive. In addition to
continuing to sell test kits to Quest Diagnostics, we will then
also sell test kits to commercial clinical laboratories in the
United States, Mexico, the United Kingdom and other countries
which were exclusive to Quest Diagnostics during the exclusive
period. In addition to working through Quest Diagnostics, we
intend to seek partnerships for commercialization purposes with
traditional in vitro diagnostics companies
and/or with
clinical reference labs in territories where Quest Diagnostics
does not have exclusive rights.
Customers
We expect that Quest Diagnostics and future commercialization
partners, reference laboratories, hospitals and medical clinics
that perform diagnostic testing will be the primary users of
future diagnostic products which we may develop. Pursuant to the
manufacture and supply agreement with Bio-Rad, Bio-Rad has
agreed to supply us with SELDI instruments and ProteinChip
Arrays previously manufactured by us. If Bio-Rad develops new
products using SELDI technology, Bio-Rad has agreed to supply
those products to us to sell to our customers. We can also
request that Bio-Rad develop and manufacture new products to
written specifications and the parties will negotiate in good
faith the terms of purchasing such products.
Except for Japan which accounted for 23%, 21% and 25% of our
sales for the years ended December 31, 2006, 2005 and 2004,
respectively, no single country represented more than 10% of our
revenues for such periods.
51
Competition
The diagnostics industry in which we operate is competitive and
evolving. There is intense competition among healthcare,
biotechnology, and diagnostics companies attempting to discover
candidates for potential new diagnostic products. These
companies may:
|
|
|
|
|
develop new diagnostic products in advance of us or our
collaborators;
|
|
|
|
develop diagnostic products which are more effective or more
cost-effective than those developed by us or our collaborators;
|
|
|
|
obtain regulatory clearance or approval of their diagnostic
products more rapidly than us or our collaborators; or
|
|
|
|
obtain patent protection or other intellectual property rights
that would limit our or our collaborators ability to
develop and commercialize, or our customers ability to
use, our or our collaborators diagnostic products.
|
We compete with companies in the U.S. and abroad that are
engaged in the development and commercialization of novel
biomarkers that may form the basis of novel diagnostic tests.
These companies may develop products that are competitive with
the products offered by us or our collaborators, such as analyte
specific reagents or diagnostic test kits, that perform the same
or similar purposes as our or our collaborators products.
Also, clinical laboratories may offer testing services that are
competitive with the products sold by us or our collaborators.
For example, a clinical laboratory can use either reagents
purchased from manufacturers other than us, or use its own
internally developed reagents, to make diagnostic tests. If
clinical laboratories make tests in this manner for a particular
disease, they could offer testing services for that disease as
an alternative to products sold by us used to test for the same
disease. The testing services offered by clinical laboratories
may be easier to develop and market than test kits developed by
us or our collaborators because the testing services are not
subject to the same clinical validation requirements that are
applicable to FDA-cleared or approved diagnostic test kits. We
believe a substantial portion of all sales of diagnostic
products are made to a small number of clinical reference
laboratories such as Quest Diagnostics and Laboratory
Corporation of America. Therefore, we expect to rely on clinical
reference laboratories for a substantial portion of our sales.
Our inability to establish or maintain one or more of these
laboratories as a customer could adversely affect our business,
financial condition, and operating results.
Research
and Development
Our research and development efforts towards developing novel
high-value diagnostic tests focus on two synergistic activities.
First, we are dedicated to developing new approaches to
investigate the human proteome. Second, we utilize these new
technologies to discover biomarkers that can address unmet
clinical needs. A major area of our research and development
activities centers around efforts to discover and validate
biomarkers and patterns of biomarkers that can be developed into
diagnostic assays. We do this both through in-house programs and
through collaborations we have established with The Johns
Hopkins School of Medicine, The University of Texas M. D.
Anderson Cancer Center and University College London, among
others.
In applied research, we are developing new applications and
reagents for quantitative differential protein expression
analysis, protein interaction assays and protein
characterization. Our efforts are particularly focused on
discovery and quantitative analysis of low-abundance proteins
present in complex samples such as plasma, serum and urine. We
have demonstrated that the surface chemistries immobilized on
ProteinChip Arrays have similar protein selectivity to those
chemistries immobilized on higher capacity bead formats,
facilitating the transition from discovery on arrays to small
scale purification on beads as well as orthogonal purification.
Using these approaches, we seek to improve the speed and
efficiency of designing protein separation strategies at any
scale based on the predictive information obtained using
ProteinChip Systems. We believe these methods will accelerate
the identification of discovered biomarkers.
52
Our activities in research and development will maintain a
strong focus in protein separation technologies, but will be
intently focused on development (i.e., taking research tools and
developing them into practical, usable tools for biomarker
discovery and assay). Research will initially focus on three
major tasks:
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|
|
|
|
Provide methodologies for making bead technologies based on
combinatorial ligand libraries for low-abundance protein
enrichment practical for biomarker discovery;
|
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|
Provide methodologies for making othorgonal chromatographic
separation of proteomes in a simplified serial workflow
practical for biomarker discovery; and
|
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|
|
Clinical assay development using novel proteomics technologies.
|
These objectives will maintain our competitive edge in biomarker
discovery abilities, and will be critical in our ability to
improve on our current diagnostic tests under development as
well as to develop and foster a pipeline of diagnostic tests.
The new proteomic analysis tools that we have developed are
intended to provide us with an important advantage in the race
to discover novel biomarkers. The complexity of the human
proteome has hindered efforts to develop a comprehensive
database of expressed proteins and their post-translational
modifications. Consequently, entities that are able to leverage
novel protein separation tools will have an advantage in
analyzing clinical samples to identify biomarkers for disease.
We have focused on developing solutions to the problem of
separating proteins to increase the number of proteins that can
be detected and characterized while maintaining a level of
throughput that permits running enough numbers of clinical
samples to achieve statistical significance. These novel
solutions are embodied in tools such as Equalizer Beads and
multi-select and mini-select technologies. These tools have been
applied to clinical samples that may be used to address
diagnostic questions in hematology/oncology, womens
health, and cardiovascular disease, as described above.
Properties
Our principal facility is located in Fremont, California. The
following chart indicates, as of November 30, 2007, the
facilities that we lease, the location and size of each facility
and its designated use.
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Lease
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|
|
Approximate
|
|
|
|
Expiration
|
Location
|
|
Square Feet
|
|
Primary Functions
|
|
Date
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|
Fremont, California
|
|
61,000 sq. ft(1)
|
|
Research and development laboratories, marketing, sales and
administrative offices
|
|
2008
|
Galveston, Texas
|
|
500 sq. ft.
|
|
Diagnostic test development laboratory
|
|
2009
|
|
|
|
(1) |
|
Approximately 29,000 square feet of this space has been
subleased to Bio-Rad for the remaining lease term. |
We are actively reviewing all of our space needs with a view to
reducing our overall facilities expenses. Actions we may take
include not renewing certain leases upon their expiration as
well as seeking to sublease space to others.
Intellectual
Property
Our intellectual property includes a portfolio of owned,
co-owned or licensed patents and patent applications. As of
November 30, 2007, our patent portfolio included 52 issued
U.S. patents, 87 pending U.S. patent applications and
numerous pending patent applications and issued patents outside
the U.S. These patents and patent applications are directed
to several areas of technology important to our business,
including the core SELDI technology, diagnostic applications,
protein biochips, instrumentation, software and biomarkers. The
issued patents covering the SELDI and mass spectrometry
technologies expire at various times from 2013 to 2019. Pursuant
to the asset purchase agreement relating to the sale of our
Instrument
53
Business, Bio-Rad acquired certain proprietary rights used in
the Instrument Business. At the close of the asset sale to
Bio-Rad, we entered into a cross license agreement with Bio-Rad
pursuant to which we retained the right to commercially exploit
those proprietary rights, including SELDI technology, in the
clinical diagnostics market. The clinical diagnostics market
includes laboratories engaged in the research and development
and/or
manufacture of diagnostic tests using biomarkers, commercial
clinical laboratories, hospitals and medical clinics that
perform diagnostic tests. We have been granted exclusive rights
to commercialize the proprietary rights in the clinical
diagnostics market during a five-year exclusivity period. After
the end of the five-year period, we and Bio-Rad will share
exclusive rights. We and Bio-Rad each have the right to engage
in negotiations with the other party for a license to any
improvements in the proprietary rights created by the other
party.
We own, license or hold options to license biomarkers developed
using SELDI technology and related intellectual property. As of
November 30, 2007, 39 of our patent applications are
directed to biomarker inventions and five are dedicated to other
diagnostic applications. These include applications in the areas
of cancer, cardiovascular disease, infectious disease,
neurodegenerative disease and womens health. We are
currently negotiating an extension of the term of our
collaboration agreement with The Johns Hopkins School of
Medicine to patent applications directed to biomarkers for
ovarian cancer that we intend to commercialize as an ovarian
cancer diagnostic test. Other institutions and companies from
which we hold options to license intellectual property related
to biomarkers include University College London (England), The
University of Texas M. D. Anderson Cancer Center, University of
Kentucky, The Ohio State University Research Foundation, McGill
University (Canada), Eastern Virginia Medical School, Aaron
Diamond AIDS Research Center, The University of Texas Medical
Branch, Goteborg University (Sweden), University of Kuopio
(Finland) and The Katholieke Universiteit Leuven (Belgium).
The rights to the core SELDI technology are derived through
royalty-bearing sublicenses from MAS. MAS holds an exclusive
license to patents directed to the SELDI technology from the
owner, Baylor College of Medicine. MAS granted certain rights
under these patents to our wholly owned subsidiaries, IllumeSys
Pacific, Inc. and Ciphergen Technologies, Inc. in 1997. We
obtained further rights under the patents in 2003 through
sublicenses and assignments executed as part of the settlement
of a lawsuit between Ciphergen, MAS, LumiCyte and T. William
Hutchens. Together, the sublicenses and assignments provide all
rights to develop, make and have made, use, sell, import, market
and otherwise exploit products and services covered by the
patents throughout the world in all fields and applications,
both commercial and non-commercial. The sub-licenses carry the
obligation to pay MAS a royalty equal to 2% of revenues
recognized between February 21, 2003 and the earlier of
(i) February 21, 2013, or (ii) the date on which
the cumulative payments to MAS have reached $10.0 million.
Through December 31, 2006, we had paid or accrued a total
of approximately $2.6 million in such royalties. In
connection with the asset sale of our Instrument Business to
Bio-Rad, we sublicensed to Bio-Rad certain rights to the license
rights for use outside of the clinical diagnostics field. We
retained exclusive rights to the license rights for use in the
field of clinical diagnostics for a five-year period, after
which we will retain non-exclusive rights in that field. Bio-Rad
agreed to pay the royalties due to MAS under the license rights,
either directly to us (to be paid to MAS) or directly to MAS, at
Bio-Rads option.
On July 10, 2007, we entered into a license and settlement
agreement with Health Discovery Corporation pursuant to which we
licensed more than 25 patents covering Health Discovery
Corporations support vector machine technology for use
with SELDI technology. Under the terms of the HDC Agreement, we
receive a worldwide, royalty-free, non-exclusive license for
life sciences and diagnostic applications of the technology and
have access to any future patents resulting from the underlying
intellectual property in conjunction with use of SELDI systems.
Pursuant to the HDC Agreement, we paid $200,000 to HDC upon
entry into the agreement in July 2007. The remaining $400,000
payable under the HDC Agreement is payable as follows: $100,000
three months following the date of the agreement, $150,000
twelve months following the date of the agreement and $150,000
twenty-four months following the date of the agreement. The HDC
Agreement settles all disputes between us and Health Discovery
Corporation.
54
Manufacturing
Since the completion of the asset sale to Bio-Rad, Bio-Rad has
taken over our manufacturing operations and pursuant to the
manufacture and supply agreement with Bio-Rad, Bio-Rad has
agreed to manufacture and we have agreed to purchase from
Bio-Rad the ProteinChip Systems and ProteinChip Arrays
(collectively referred to herein as the Research Tools Products)
required to support our diagnostics efforts. We have an annual
obligation to purchase a specified number of these Research
Tools Products for three years under our manufacture and supply
agreement with Bio-Rad. We currently estimate our aggregate
purchase obligation under this agreement to be $6,610,000. If
Bio-Rad fails to supply any Research Tools Products to us,
including any new Research Tools Products developed by Bio-Rad
for sale to its customers or any new Research Tools Products we
have requested Bio-Rad to make and sell to us, under certain
conditions we have the right to manufacture or have such
Research Tools Products manufactured by a third party for our
own use and sale to our customers and collaborators in the
clinical diagnostics market, subject to payment of a reasonable
royalty to Bio-Rad on sales of such Research Tools Products. In
the event that Bio-Rad is unable to provide the ProteinChip
instruments, arrays and supplies as required, there is no
guarantee that we will be able to find such a third party
supplier, or that the cost of purchasing these items will be
commercially reasonable. If we are not able to obtain the
necessary ProteinChip instruments, arrays, and supplies, our
ability to develop diagnostic products will be adversely
affected.
We will be responsible for assuring, through our incoming
quality control process, that the Research Tools Products we
purchase from Bio-Rad will comply with applicable government
regulations. During 2005, our quality control systems were
enhanced in order to comply with FDA regulations. We believe we
are prepared to fulfill our obligation to assure that such
Research Tools Products are in compliance with the FDAs
QSRs in 2007.
Environmental
Matters
Medical
Waste
We are subject to licensing and regulation under federal, state
and local laws relating to the handling and disposal of medical
specimens and hazardous waste as well as to the safety and
health of laboratory employees. Our laboratory facility in
Fremont, California is operated in material compliance with
applicable federal and state laws and regulations relating to
disposal of all laboratory specimens. We utilize outside vendors
for disposal of specimens. We cannot eliminate the risk of
accidental contamination or discharge and any resultant injury
from these materials. Federal, state and local laws and
regulations govern the use, manufacture, storage, handling and
disposal of these materials. We could be subject to damages in
the event of an improper or unauthorized release of, or exposure
of individuals to, hazardous materials. In addition, claimants
may sue us for injury or contamination that results from our
use, or the use by third parties, of these materials, and our
liability may exceed our total assets. Compliance with
environmental laws and regulations is expensive, and current or
future environmental regulations may impair our research,
development or production efforts.
Occupational
Safety
In addition to its comprehensive regulation of safety in the
workplace, the Federal Occupational Safety and Health
Administration has established extensive requirements relating
to workplace safety for healthcare employers, including clinical
laboratories, whose workers may be exposed to blood-borne
pathogens such as HIV and the hepatitis virus. These
regulations, among other things, require work practice controls,
protective clothing and equipment, training, medical
follow-up,
vaccinations and other measures designed to minimize exposure to
chemicals and transmission of the blood-borne and airborne
pathogens. Although we believe that we are currently in
compliance in all material respects with such federal, state and
local laws, failure to comply could subject us to denial of the
right to conduct business, fines, criminal penalties and other
enforcement actions.
55
Specimen
Transportation
Regulations of the Department of Transportation, the
International Air Transportation Agency, the Public Health
Service and the Postal Service apply to the surface and air
transportation of clinical laboratory specimens.
Legal
Proceedings
On June 26, 2006, Health Discovery Corporation filed a
lawsuit against us in the United States District Court for the
Eastern District of Texas, Marshall Division, claiming that
software used in certain of our ProteinChip Systems infringes on
three of its United States patents. Health Discovery Corporation
sought injunctive relief as well as unspecified compensatory and
enhanced damages, reasonable attorneys fees, prejudgment
interest and other costs. On August 1, 2006, we filed an
unopposed motion with the Court to extend the deadline for us to
answer or otherwise respond until September 2, 2006. We
filed our answer and counterclaim to the complaint with the
Court on September 1, 2006. Concurrent with our answer and
counterclaims, we filed a motion to transfer the case to the
Northern District of California. On January 10, 2007, the
Court granted our motion to transfer the case to the Northern
District of California. The parties met for a scheduled
mediation on May 7, 2007. On July 10, 2007, we entered
into a license and settlement agreement with Health Discovery
Corporation, pursuant to which we licensed more than 25 patents
covering Health Discovery Corporations support vector
machine technology for use with SELDI technology. Under the
terms of the HDC Agreement, we receive a worldwide,
royalty-free, non-exclusive license for life sciences and
diagnostic applications of the technology and have access to any
future patents resulting from the underlying intellectual
property in conjunction with use of SELDI systems. Pursuant to
the HDC Agreement, we paid $200,000 to HDC upon entry into the
agreement in July 2007. The remaining $400,000 payable under the
HDC Agreement is payable as follows: $100,000 three months
following the date of the agreement, $150,000 twelve months
following the date of the agreement and $150,000 twenty-four
months following the date of the agreement. The HDC Agreement
settles all disputes between us and Health Discovery Corporation.
On September 17, 2007, we were served with a complaint
filed in the Superior Court of California for the County of
Santa Clara naming us and Bio-Rad as defendants and MAS as
plaintiff. The complaint alleges, among other things, that we
are in breach of our license agreement with MAS relating to
SELDI technology as a result of our entry into a sublicense
agreement with Bio-Rad. In connection with the sale of assets
and liabilities of our Instrument Business to Bio-Rad, we
sublicensed to Bio-Rad certain rights to the SELDI technology
that we obtained under the MAS license for use outside of the
clinical diagnostics field. We retained exclusive rights to the
technology for use in the field of clinical diagnostics for a
five-year period, after which we will retain nonexclusive rights
in that field. On November 14, 2007, we filed a petition to
compel MAS to arbitrate its claims with the Court. Given the
early stage of this action, we cannot predict the ultimate
outcome of this matter at this time.
In addition, from time to time, we are involved in legal
proceedings and regulatory proceedings arising out of our
operations. 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 the Companys financial
position or results of operations.
Government
Regulation
General
Our activities related to diagnostic products are, or have the
potential to be, subject to regulatory oversight by the FDA
under provisions of the Federal Food, Drug and Cosmetic Act and
regulations there-under, including regulations governing the
development, marketing, labeling, promotion, manufacturing and
export of our products. Failure to comply with applicable
requirements can lead to sanctions, including withdrawal of
products from the market, recalls, refusal to authorize
government contracts, product seizures, civil money penalties,
injunctions and criminal prosecution.
56
Generally, certain categories of medical devices, a category
that may be deemed to include potential future products based
upon the ProteinChip platform, may require FDA 510(k), or 510(k)
de novo clearance or pre-market approval. Although the FDA
believes it has jurisdiction to regulate in-house laboratory
tests, or home brews, that have been developed and
validated by the laboratory providing the tests, the FDA has
not, to date, actively regulated those tests. Active
ingredients (known as ASRs) that are sold to laboratories
for use in tests developed in house by clinical laboratories
generally do not require FDA approval or clearance. ASRs
generally do not require FDA clearance or pre-market approval if
they are (1) sold to clinical laboratories certified by the
government to perform high complexity testing,
(2) manufactured in compliance with the FDAs QSRs,
and (3) labeled in accordance with FDA requirements,
including a statement that their analytical and performance
characteristics have not been established. A similar statement
would also be required on all advertising and promotional
materials relating to ASRs, such as those used in certain of our
proposed future tests. However, the regulatory environment
surrounding IVDMIAs is changing. IVDMIA devices, such as our
ovarian cancer test, employ not only the data generated by
ordinary ASRs but also an algorithm used to generate a result
that is used in the prevention or treatment of disease. The FDA
issued draft guidance in September 2006 which states that it
will regulate IVDMIAs as class II or III devices,
depending on the risk they present. Class II devices are
subject to 510(k) notification and class III devices
require clinical testing and a PMA. However, FDA draft guidance
is not the law and does not operate to bind either the FDA or
the public. Guidances reflect the FDAs current thinking
about a subject and the position it will take when dealing with
that subject. Accordingly, the current state of the law with
regard to regulation of ASRs, and IVDMIAs in particular, is very
unclear. It is possible that the FDAs current policy or
future revisions to FDA policies may have the effect of
increasing the regulatory burden on manufacturers of these
devices. The commercialization of our products and services
could be affected by being delayed, halted or prevented. We
cannot be sure that tests based upon the ProteinChip platform,
or a combination of reagents, will not require FDA 510(k),
510(k) de novo clearance or FDA pre-market approval.
Regardless of whether a medical device requires FDA approval or
clearance, a number of other FDA requirements apply to the
manufacturer of such a device and to those who distribute it.
Device manufacturers must be registered and their products
listed with the FDA, and certain adverse events, corrections and
removals must be reported to the FDA. The FDA also regulates the
product labeling, promotion and, in some cases, advertising of
medical devices. Manufacturers must comply with the FDAs
QSRs, which establish extensive requirements for design, quality
control, validation and manufacturing. Thus, manufacturers and
distributors must continue to spend time, money and effort to
maintain compliance, and failure to comply can lead to
enforcement action. The FDA periodically inspects facilities to
ascertain compliance with these and other requirements.
Diagnostic
Kits
The Food, Drug and Cosmetic Act requires that medical devices
introduced to the U.S. market, unless exempted by
regulation, be the subject of either a premarket notification
clearance, known as a 510(k) or 510(k) de novo, or a FDA
pre-market approval, known as a PMA. Some of our potential
future clinical products may require a 510(k) or 510(k) de novo,
others may require a PMA. With respect to devices reviewed
through the 510(k) process, we may not market a device until an
order is issued by the FDA finding our product to be
substantially equivalent to a legally marketed device known as a
predicate device. A 510(k) submission may involve the
presentation of a substantial volume of data, including clinical
data. The FDA may agree that the product is substantially
equivalent to a predicate device and allow the product to be
marketed in the U.S. On the other hand, the FDA may
determine that the device is not substantially equivalent and
require a PMA, or require further information, such as
additional test data, including data from clinical studies,
before it is able to make a determination regarding substantial
equivalence. By requesting additional information, the FDA can
further delay market introduction of our products.
If the FDA indicates that a PMA is required for any of our
potential future clinical products, the application will require
extensive clinical studies, manufacturing information and likely
review by a panel of experts outside the FDA. Clinical studies
to support either a 510(k) submission or a PMA application would
need to be conducted in accordance with FDA requirements.
Failure to comply with FDA requirements could
57
result in the FDAs refusal to accept the data or the
imposition of regulatory sanctions. There can be no assurance
that we will be able to meet the FDAs requirements or
receive any necessary approval or clearance.
Once granted, a 510(k) clearance or PMA approval may place
substantial restrictions on how our device is marketed or to
whom it may be sold. Even in the case of devices like ASRs,
which may be exempt from 510(k) clearance or PMA approval
requirements, the FDA may impose restrictions on marketing. Our
potential future ASR products may be sold only to clinical
laboratories certified under CLIA to perform high complexity
testing. In addition to requiring approval or clearance for new
products, the FDA may require approval or clearance prior to
marketing products that are modifications of existing products
or the intended uses of these products. We cannot assure that
any necessary 510(k) clearance or PMA approval will be granted
on a timely basis, or at all. Delays in receipt of or failure to
receive any necessary 510(k) clearance or PMA approval, or the
imposition of stringent restrictions on the labeling and sales
of our products, could have a material adverse effect on us. As
a medical device manufacturer, we are also required to register
and list our products with the FDA. In addition, we are required
to comply with the FDAs QSRs, which require that our
devices be manufactured and records be maintained in a
prescribed manner with respect to manufacturing, testing and
control activities. Further, we are required to comply with FDA
requirements for labeling and promotion. For example, the FDA
prohibits cleared or approved devices from being promoted for
uncleared or unapproved uses. In addition, the medical device
reporting regulation requires that we provide information to the
FDA whenever evidence reasonably suggests that one of our
devices may have caused or contributed to a death or serious
injury, or where a malfunction has occurred that would be likely
to cause or contribute to a death or serious injury if the
malfunction were to recur.
Our suppliers manufacturing facilities are, and, if and
when we begin commercializing and manufacturing our products
ourselves, our manufacturing facilities will be, subject to
periodic and unannounced inspections by the FDA and state
agencies for compliance with QSRs. Additionally, the FDA will
generally conduct a preapproval inspection for PMA devices.
Although we believe our suppliers and we will be able to operate
in compliance with the FDAs QSRs for ASRs, neither we nor
our suppliers have ever been subject to a FDA inspection and
cannot assure that we will be able to maintain compliance in the
future. If the FDA believes that our suppliers or we are not in
compliance with applicable laws or regulations, it can issue a
warning letter, detain or seize our products, issue a recall
notice, enjoin future violations and assess civil and criminal
penalties against us. In addition, approvals or clearances could
be withdrawn under certain circumstances. Failure to comply with
regulatory requirements or any adverse regulatory action could
have a material adverse effect on us.
Any customers using our products for clinical use in the
U.S. may be regulated under CLIA. CLIA is intended to
ensure the quality and reliability of clinical laboratories in
the U.S. by mandating specific standards in the areas of
personnel qualifications, administration, participation in
proficiency testing, patient test management, quality control,
quality assurance and inspections. The regulations promulgated
under CLIA establish three levels of diagnostic
tests namely, waived, moderately complex and highly
complex and the standards applicable to a clinical
laboratory depend on the level of the tests it performs. We
cannot assure you that the CLIA regulations and future
administrative interpretations of CLIA will not have a material
adverse impact on us by limiting the potential market for our
potential future products. Medical device laws and regulations
are also in effect in many of the countries in which we may do
business outside the U.S. These range from comprehensive
device approval requirements for some or all of our potential
future medical device products, to requests for product data or
certifications. The number and scope of these requirements are
increasing. Medical device laws and regulations are also in
effect in some states in which we do business. There can be no
assurance that we will obtain regulatory approvals in such
countries or that we will not incur significant costs in
obtaining or maintaining foreign regulatory approvals. In
addition, certain of our products which have not yet been
cleared or approved for domestic commercial distribution may be
subject to FDA export restrictions.
Employees
As of September 30, 2007, we had 30 full-time
employees worldwide, including 5 in sales and marketing, 12 in
research and development and 13 in general and administrative
departments. We also had an additional 12 individuals engaged as
independent contractors. None of our employees are covered by a
collective
58
bargaining agreement. We believe that our relations with our
employees are good. Our success will depend in large part on our
ability to attract and retain skilled and experienced employees.
Code of
Ethics for Executive Officers
We have adopted a Code of Ethics for Executive Officers. We
publicize the Code of Ethics for Executive Officers by posting
the policy on our website, www.vermillion.com. We will disclose
on our website any waivers of, or amendments to, our Code of
Ethics.
Information
About Vermillion
We file annual, quarterly and special reports, proxy statements
and other information with the Securities and Exchange
Commission. You may read and copy any document we file at the
SECs Public Reference Rooms in Washington, D.C., New
York, New York and Chicago, Illinois. The Public Reference Room
in Washington, D.C. is located at 450 Fifth Street,
N.W. Please call the SEC at
1-800-SEC-0330
for further information on the public conference rooms. Our SEC
filings are also available to the public from the SECs web
site at www.sec.gov.
In addition, the reports we file with the SEC are available at
the company website, www.vermillion.com, under Investor
Relations. The information contained on our website is not
incorporated by reference in this prospectus and should not be
considered a part of this prospectus.
59
Directors
and Executive Officers
Our Board of Directors currently consists of eight members.
Except for our Chief Executive Officer, none of our executive
officers are employed pursuant to employment agreements and
thus, serve at the discretion of our Board of Directors.
The following table sets forth the names and positions of the
current directors and executive officers of the Company and
their ages:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Gail S. Page
|
|
|
52
|
|
|
Director, President and Chief Executive Officer
|
Eric T. Fung, M.D., Ph.D.
|
|
|
37
|
|
|
Vice President of Medical and Clinical Affairs and Chief
Scientific Officer
|
Qun Zhou
|
|
|
39
|
|
|
Corporate Controller and Interim Chief Financial Officer
|
Stephen T. Lundy
|
|
|
46
|
|
|
Senior Vice President of Sales and Marketing
|
James L. Rathmann
|
|
|
56
|
|
|
Executive Chairman of the Board of Directors
|
James S. Burns
|
|
|
60
|
|
|
Director
|
Rajen K. Dalal
|
|
|
54
|
|
|
Director
|
John A. Young
|
|
|
75
|
|
|
Director
|
Judy Bruner
|
|
|
49
|
|
|
Director
|
Michael J. Callaghan
|
|
|
54
|
|
|
Director
|
Kenneth J. Conway
|
|
|
59
|
|
|
Director
|
Set forth below is a brief description of the business
experience of the directors and executive officers of the
Company.
Gail S. Page has been President and Chief Executive
Officer and a Director since December 2005. She joined us in
January 2004 as President of Vermillions Diagnostics
Division and an Executive Vice President of Vermillion, Inc.,
and was promoted to President and Chief Operating Officer of
Vermillion, Inc. in August 2005. From October 2000 to
January 2003, she was Executive Vice President and Chief
Operating Officer of Luminex Corporation. From 1988 to 2000, she
held various senior level management positions with Laboratory
Corporation of America, referred to herein as LabCorp. In 1993,
she was named Senior Vice President, Office of Science and
Technology at LabCorp, responsible for the management of
scientific affairs in addition to the diagnostics business
segment. Additionally, from 1995 to 1997, she headed the
Cytology and Pathology Services business unit for LabCorp. From
1988 to 2000, she was a member of the Scientific Advisory Board
and chaired the committee from 1993 to 1997. Prior to her years
at LabCorp and its predecessor, Roche Biomedical, she worked in
various functions in the academic and diagnostics industry. She
received her Medical Technology degree in 1976 from the
University of Florida in combination with an A.S. in
cardiopulmonary technology.
Eric T. Fung, M.D., Ph.D. joined us in
May, 2000 as a lead scientist in the newly formed Biomarker
Discovery Centers. He was promoted to Vice President of Medical
and Clinical Affairs and Chief Scientific Officer in June 2006.
Prior to joining Vermillion, Dr. Fung was a Howard Hughes
sponsored researcher at Stanford University. Dr. Fung has
anatomic pathology training from Stanford Medical School and
obtained his M.D. and Ph.D. degrees from the Johns Hopkins
University School of Medicine. He graduated with a B.S. with
honors from the California Institute of Technology.
Dr. Fung also currently holds an Adjunct Assistant
Professor position in the Department of Pathology at The Johns
Hopkins University School of Medicine.
Qun Zhou has served as Corporate Controller for the
Company since February 2007 and was appointed as Interim Chief
Financial Officer in November 2007. Prior to joining the
Company, Ms. Zhou served as Controller for ViOptix, Inc., a
developer and manufacturer of oxygen measuring devices in the
biotechnology industry, from May 2005 through February 2007.
From April 2000 through May 2005, Ms. Zhou served in
60
several capacities, including Business Unit Controller, with
Philips Medical Systems, a global leader in the medical device
and diagnostics industry. Ms. Zhou has over eleven years of
accounting and corporate finance experience and earned her
Masters of Business Administration from Boston College.
Stephen T. Lundy joined the Company in May 2007 and
serves as Senior Vice President of Sales and Marketing.
Mr. Lundy joined Vermillion from GeneOhm, a division of
Becton, Dickinson and Company Diagnostics, where he served as
Vice President of Sales and Marketing since 2003. At GeneOhm,
Mr. Lundy successfully led the commercial launch of several
novel molecular diagnostic assays including the first molecular
test for Methicillin Resistant Staphylococcus Aureus. From 2002
to 2003, Mr. Lundy served as Vice President of Marketing
for Esoterix, Inc., which was acquired by Laboratory Corporation
of America, and led the commercial integration and re-branding
of the numerous reference labs acquired by Esoterix. Prior to
Esoterix, he served as Marketing Director for Molecular
Diagnostics and Critical Care Testing at Bayer Diagnostics
Corporation.
James L. Rathmann has been President of Falcon Technology
Management Corporation and a general partner of Falcon
Technology Partners, L.P. since its founding in 1993.
Mr. Rathmann has been one of our directors since our
inception and became our Executive Chairman in December 2005. He
serves as a director of several private companies. Prior to
joining Falcon Technology in 1993, he was Senior Vice President
of Operations at Soft-Switch, Inc. from 1984 to 1993. He
received a B.A. in Mathematics from the University of Colorado
and an M.S. in Computer Science from the University of Wisconsin.
James S. Burns has been President and Chief Executive
Officer of EntreMed, Inc. since June 2004 and a director since
September 2004. He became one of our directors in 2005. From
2001 to 2003, Mr. Burns was a co-founder and served as
President and as Executive Vice President of MedPointe, Inc., a
specialty pharmaceutical company that develops, markets and
sells branded prescription pharmaceuticals. From 2000 to 2001,
he served as a founder and Managing Director of MedPointe
Capital Partners, a private equity firm that led a leveraged
buyout to form MedPointe Pharmaceuticals. Previously,
Mr. Burns was a founder, Chairman, President and Chief
Executive Officer of Osiris Therapeutics, Inc., a biotech
company developing therapeutic stem cell products for the
regeneration of damaged or diseased tissue. He has also been
Vice Chairman of HealthCare Investment Corporation and a
founding General Partner of Healthcare Ventures L.P., a venture
capital partnership specializing in forming companies build
around new pharmaceutical and biotechnology products; Group
President at Becton Dickinson and Company, a multidivisional
biomedical products company; and Vice President and Partner at
Booz Allen & Hamilton, Inc., a multinational
consulting firm. Mr. Burns is Chairman of the Executive
Committee of the American Type Culture Collection (ATCC) and
serves as a director of Symmetry Medical, Inc. He earned his
B.S. and M.S. degrees in biological sciences from the University
of Illinois and an M.B.A. from DePaul University.
Rajen K. Dalal is an industry consultant and became
one of our directors in 2003. From October 2006, he has served
as Chief Executive Officer of Aviir, Inc., a molecular
diagnostics company. From 2002 to 2005, he was the President and
Chief Executive Officer of Guava Technologies, Inc., a
biotechnology company based on mammalian cell profiling and
analysis. Prior to joining Guava, Mr. Dalal was at Chiron
Corporation where he was most recently President of its Blood
Testing Division. Prior to joining Chiron in 1991,
Mr. Dalal was a leader of McKinsey &
Companys pharmaceuticals and technology management groups.
Mr. Dalal received a bachelors degree in chemistry
from St. Xaviers College, the University of Bombay; a
masters degree in biochemical engineering from the
Massachusetts Institute of Technology; and an M.B.A. from the
University of Chicago.
John A. Young has been one of our directors since our
inception, was our Chairman from 1995 to December 2005 and
became our Lead Outside Director in December 2005.
Mr. Young was President and Chief Executive Officer of
Hewlett-Packard Company from 1978 until his retirement in 1992.
He serves as a director of another public life science company,
Affymetrix, Inc., and also serves as a director of several
private companies. He received a B.S.E.E. from Oregon State
University and an M.B.A. from the Stanford Graduate School of
Business.
Judy Bruner is Executive Vice President, Administration
and Chief Financial Officer of SanDisk Corporation. She became
one of our directors in 2003 and is also chairman of our Audit
Committee. She
61
joined SanDisk in June 2004 after serving on their board of
directors for two years. Ms. Bruner served as Senior Vice
President and Chief Financial Officer of palmOne, Inc. from
September 1999 through June 2004. Previously, Ms. Bruner
held a succession of financial management positions at 3Com
Corporation from 1988 to 1999. Ms. Bruner was Controller
and Chief Financial Officer at Ridge Computers, Inc. from 1984
to 1988, and she held a variety of financial positions at
Hewlett-Packard Company from 1980 to 1984. Ms. Bruner holds
a B.A. in economics from the University of California, Los
Angeles and an M.B.A. from Santa Clara University.
Michael J. Callaghan was an employee of MDS Capital Corp.
from 1991 through 2006 and most recently served as a Managing
Director. Mr. Callaghan became one of our directors in
1998. Prior to joining MDS Capital Corp. in 1992, he was active
in several general management positions. Mr. Callaghan
began his career with Ernst & Young, where he became a
Chartered Accountant. Mr. Callaghan is on the board of
directors of SXC Health Solutions, Corp. and serves on the audit
and compensation committees thereof. Mr. Callaghan received
a B. Comm. from McGill University and a M.B.A. from York
University.
Kenneth J. Conway has been President of Starfire
Ventures, a private biotech venture capital firm, since 2003. He
became one of our directors in April 2006. He also serves as a
director of several private companies. From 2000 to 2003, he
served as Chief Executive Officer at Vitivity, Inc., a
wholly-owned subsidiary of Millennium Pharmaceuticals focused on
predictive medicine. Prior to founding Vitivity, he was
President and Founder of Millennium Predictive Medicine, Inc.
from 1997 to 2000. He spent more than 26 years with Chiron
Diagnostics Corporation (formerly Ciba Corning), most recently
serving as President of U.S. Group and member of the Office
of the President. Mr. Conway has also been the Senior Vice
President and General Manager of Immuno Diagnostics, where he
led the development and commercialization of the ACS.180, a
world-leading system in automated immunodiagnostic testing, and
Vice President of several business units at Chiron (Ciba
Corning), as well as being Vice President of manufacturing at
Corning Medical Division. He received a B.S. in ceramic
engineering from Rutgers University and attended the Dartmouth
Institute Executive Program at Dartmouth Colleges Tuck
School of Business Administration.
Board of
Directors
Classes
The Board of Directors has eight members and is divided into
three classes serving staggered terms until 2010.
|
|
|
|
|
Class I directors serving until the annual meeting in 2010
are James L. Rathmann, Michael J. Callaghan and Kenneth J.
Conway.
|
|
|
|
Class II directors serving until the annual meeting in 2009
are Judy Bruner and Gail S. Page.
|
|
|
|
Class III directors serving until the annual meeting in
2008 are James S. Burns, Rajen K. Dalal and John A. Young.
|
Committees
The Board has the following three committees:
|
|
|
|
|
audit;
|
|
|
|
executive compensation; and
|
|
|
|
corporate governance and nominating.
|
The Board of Directors has adopted a written charter for each of
these committees which are available in the Corporate Governance
section on the Companys website, www.vermillion.com.
Audit Committee. The Audit Committee is
chaired by Judy Bruner and also includes James S. Burns and
Michael J. Callaghan each of whom is an independent
director as that term is defined under
Rule 10A-3(b)(1)
of the Exchange Act and in accordance with the current Nasdaq
Stock Markets director
62
independence and listing standards. The Board of Directors has
determined that Ms. Bruner qualifies as an audit
committee financial expert as defined under
Item 401(h) of
Regulation S-K.
The Committee is responsible for assuring the integrity of our
financial controls, audit and reporting functions. It reviews
with our management and our independent registered public
accounting firm the effectiveness of our financial controls,
accounting and reporting practices and procedures. In addition,
the Audit Committee reviews the qualifications of our
independent registered public accounting firm, makes
recommendations to the Board of Directors regarding the
selection of our independent registered public accounting firm,
and reviews the scope, fees and results of activities related to
audit and non-audit services. The Audit Committee held 7
meetings during fiscal 2006, including six meetings with
representatives of the independent registered public accounting
firm in attendance.
Compensation Committee. The Compensation
Committee is chaired by Kenneth J. Conway and also includes
Michael J. Callaghan and John A. Young, each of whom is an
independent director as defined under
Rule 10A-3(b)(1)
of the Exchange Act and in accordance with the current Nasdaq
Stock Markets director independence and listing standards.
Its principal responsibility is to administer our stock plans
and to set the salaries and incentive compensation, including
stock option grants, for the Companys President and Chief
Executive Officer and senior executive officers. The
Compensation Committee held three meetings during fiscal 2006.
Nominating and Governance Committee. The
Nominating and Governance Committee is chaired by Rajen K. Dalal
and also includes John A. Young and James L. Rathmann, each of
whom is an independent director as defined under
Rule 10A-3(b)(1)
of the Exchange Act and in accordance with the current Nasdaq
Stock Markets director independence and listing standards.
The responsibilities of the Nominating and Governance Committee
include developing a Board of Directors capable of advising the
Companys management in fields related to current or future
business directions of the Company, and regularly reviewing
issues and developments relating to corporate governance issues
and formulating and recommending corporate governance standards
to the Board of Directors. The Nominating and Governance
Committee held three meetings during fiscal 2006.
The Nominating and Governance Committee approves all nominees
for membership on the Board of Director, including the slate of
director nominees to be proposed by the Board of Directors to
our stockholders for election or any director nominees to be
elected or appointed by the Board of Directors to fill interim
director vacancies on the Board of Directors.
In addition, the Nominating and Governance Committee appoints
directors to committees of the Board of Directors and suggests
rotation for chairpersons of committees of the Board of
Directors as it deems desirable from time to time; and it
evaluates and recommends to the Board of Directors the
termination of membership of individual directors in accordance
with the Board of Directors corporate governance
principles, for cause or other appropriate reasons (including,
without limitation, as a result of changes in directors
employment or employment status). We have in the past used, and
the Nominating and Governance Committee intends in the future to
use, an executive recruiting firm to assist in the
identification and evaluation of qualified candidates to join
the Board of Directors; for these services, the executive
recruiting firm is paid a fee. Director nominees are expected to
have considerable management experience that would be relevant
to our current and expected future business directions, a track
record of accomplishment and a commitment to ethical business
practices.
The Nominating and Governance Committee assists the Board of
Directors in identifying qualified persons to serve as directors
of the Company. The Nominating and Governance Committee
evaluates all proposed director nominees, evaluates incumbent
directors before recommending re-nomination, and recommends all
approved candidates to the Board of Directors for appointment or
nomination to Company stockholders. The Nominating and
Governance Committee selects as candidates to the Board of
Directors for appointment or nomination individuals of high
personal and professional integrity and ability who can
contribute to the Board of Directors effectiveness in
serving the interests of our stockholders.
63
Board
Meetings
The Board of Directors held a total of 9 meetings during the
fiscal year ended December 31, 2006. Throughout fiscal year
2006, all directors attended greater than 75% of the aggregate
of all meetings of the Board of Directors and the committees of
the Board of Directors upon which such directors served.
Stockholders
Communications
Stockholders of the Company may communicate directly with the
Board of Directors in writing, addressed to:
Board of Directors
c/o Corporate
Secretary
Vermillion, Inc.
6611 Dumbarton Circle
Fremont, California 94555 U.S.A.
The Corporate Secretary will review each stockholder
communication. The Corporate Secretary will forward to the
entire Board (or to members of a Board committee, if the
communication relates to a subject matter clearly within that
committees area of responsibility) each communication that
(a) relates to the Companys business or governance,
(b) is not offensive and is legible in form and reasonably
understandable in content, and (c) does not merely relate
to a personal grievance against the Company or a team member or
to further a personal interest not shared by the other
stockholders generally.
The Nominating and Governance Committee has not established a
procedure for considering nominees for director nominated by the
Companys stockholders. The Board of Directors believes
that our independent committee can identify appropriate
candidates to our Board of Directors. Stockholders may nominate
candidates for director in accordance with the advance notice
and other procedures contained in our Bylaws.
We encourage each of our directors to attend each annual meeting
of the Companys stockholders whenever attendance does not
unreasonably conflict with the directors other business
and personal commitments. Four directors attended the 2007
annual meeting of stockholders.
Compensation
Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the board
of directors or compensation committee of any entity that has
one or more of its executive officers serving as a member of our
Board of Directors or Compensation Committee.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as
amended requires our executive officers and directors, and
persons who own more than ten percent (10%) of a registered
class of our equity securities, to file reports of ownership and
changes in ownership with the SEC and the National Association
of Securities Dealers, Inc. Executive officers, directors and
greater than ten percent stockholders are required by SEC
regulation to furnish us with copies of all Section 16(a)
forms they file. We believe all of our executive officers and
directors complied with all applicable filing requirements
during the fiscal year ended December 31, 2006.
Executive
Compensation
This section describes the compensation program for our named
executive officers, referred to herein as NEOs. In particular,
this section focuses on our 2006 compensation program and
related decisions.
Executive
Officers During 2006
Except for Stephen T. Lundy, who joined the Company in May 2007
and Qun Zhou, who was appointed as Interim Chief Financial
Officer in November 2007, all of the executive officers named in
the management
64
table above served in such capacities during 2006. In addition,
James P. Merryweather, Ph.D., served as Executive Vice
President, Sales and Marketing until his resignation in January
2007, William C. Sullivan served as Vice President, Corporate
Operations until his resignation in November 2007 and Debra A.
Young served as Vice President of Finance and Chief Financial
Officer until her resignation in November 2007. Set forth below
are brief descriptions of Dr. Merryweathers, Mr.
Sullivans and Ms. Youngs respective business
experience.
James P. Merryweather, Ph.D., age 57, joined the Company in
March 2005 as Executive Vice President, Pharmaceutical Corporate
Development and from December 2005 to January 2007, served as
Executive Vice President, Sales and Marketing. Prior to joining
the Company, Dr. Merryweather spent five years at Incyte
Corporation, most recently as Executive Vice President of
Business Development and Commercial Operations. Prior to joining
Incyte, he was at Millennium Pharmaceuticals as Vice President,
Program Management. Prior to joining Millennium, he spent
15 years at Chiron Corporation in a variety of roles
ranging from Senior Scientist to Director of Project Management.
Dr. Merryweather has spent over 20 years in the
biotechnology industry in senior positions in research and
development, program management and business development.
Dr. Merryweather graduated with a B.S. in chemistry from
Northern Illinois University and a Ph.D. in biochemistry from
Washington State University. On January 11, 2007,
Dr. Merryweather resigned from the Company.
William C. Sullivan, age 60, joined the Company in February
2004, as Vice President, Diagnostics Operations and from
January 2006 until November 2007, he served as Vice
President, Corporate Operations. Mr. Sullivan has spent
over 25 years in the diagnostics industry, covering all
aspects of clinical laboratory operations and diagnostic
manufacturing, including quality systems, product development,
technical transfer, customer support and operations management.
From 2001 until he joined us, Mr. Sullivan was a medical
device consultant since 2001. From 1999 to 2001, he was Vice
President, Diagnostic Manufacturing at Visible Genetics, Inc.
and from 1998 to 1999 he was Vice President, Operations at
Nichols Institute Diagnostics (a subsidiary of Quest
Diagnostics). Prior to joining Nichols, he was Vice President,
Operations at Dianet Med from 1997 to 1998. From 1989 to 1997,
Mr. Sullivan served at Laboratory Corporation of America
(or its predecessor Roche Biomedical) in a succession of
positions covering manufacturing operations. Mr. Sullivan
received a B.A. degree from the College of the Holy Cross and
subsequently attended graduate school at the University of
Pennsylvania. He is certified as a Specialist in Immunology by
the American Society for Clinical Pathology. On November 2,
2007, Mr. Sullivan resigned from the Company.
Debra A. Young, age 41, joined the Company as its Vice President
of Finance and Chief Financial Officer in November 2006 from
ViOptix, Inc., where she served as Chief Financial Officer since
2004. Prior to her service at ViOptix, Ms. Young was Chief
Financial Officer of the Nuclear Medicine Division of Philips
Electronics, a $500 million business. Before her promotion
to Chief Financial Officer, she served as Vice President
Controller for the Nuclear Medicine Division of Philips,
formerly ADAC Laboratories, Inc. Ms. Young has also held
positions at Somnus Medical Technologies, Inc. and
Ernst & Young LLP. On November 1, 2007, Ms. Young
resigned from the Company.
Compensation
Philosophy and Objectives
The goal of the Companys named executive officer
compensation program is the same for the overall
Company to foster compensation policies and
practices that attract, engage, and motivate high caliber talent
by offering a competitive pay and benefits program. The Company
is committed to a total compensation philosophy and structure
that provides flexibility in responding to market factors, that
rewards and recognizes superior performance, that attracts
highly skilled, experienced and capable employees, and that is
fair and fiscally responsible.
Elements
of Executive Compensation Program
The essential elements of the companys compensation
program include the following:
|
|
|
|
|
Overall average base salaries targeted at the
50th percentile of the companies with whom we compete for
labor talent.
|
65
|
|
|
|
|
Overall average base compensation at a higher target for
superior performers.
|
|
|
|
A benefits package that meets personal needs and is equal to or
better than those with whom we compete for talent.
|
|
|
|
Monetary and non-monetary incentive plans that motivate
employees toward achieving and exceeding our business goals.
|
The specific elements of compensation for our NEOs are salary,
annual bonus and equity incentive compensation.
Performance
to be Rewarded
The Compensation Committee has designed and implemented
compensation programs for named executives to reward them for
sustaining our financial and operating performance and
leadership excellence, to align their interests with those of
our shareowners and to encourage them to remain with the company
for long and productive careers. Most of our compensation
elements simultaneously fulfill one or more performance,
alignment
and/or
retention objectives.
Base salary and annual bonus are designed to reward annual
achievements and be commensurate with the executives scope
of responsibilities, demonstrated leadership abilities, and
management experience and effectiveness. Our other elements of
compensation focus on motivating and challenging the executive
to achieve superior, longer-term, sustained results.
Method
for Determining Amounts
In deciding on the type and amount of compensation for each
executive, the Compensation Committee seeks to align the
interests of the NEOs with those of our shareholders. In making
compensation decisions, the Compensation Committee reviews the
performance of the company and carefully evaluates an
executives performance during the year against established
goals, leadership qualities, operational performance, business
responsibilities, career with the company, current compensation
arrangements and long-term potential to enhance shareowner
value. The types and relative importance of specific financial
and other business objectives vary among the companys NEOs
depending on their positions and the particular operations or
functions for which they are responsible. The Compensation
Committee does not adhere to rigid formulas when determining the
amount and mix of compensation elements. Compensation elements
for each executive are reviewed in a manner that optimizes the
executives contribution to the company, and that takes
into account an evaluation of the compensation paid by our
competitors. The executive compensation program is designed to
be flexible in order to respond to an evolving business
environment. The Compensation Committee formal and informal
compensation surveys of companies of similar size and market
segment with which we compete to benchmark compensation of NEOs.
The Compensation Committee reviews both current pay and the
opportunity for future compensation to achieve an appropriate
mix between equity incentive awards and cash payments in order
to meet our objectives. However, prior stock compensation gains
are not considered in setting future compensation levels. The
mix of compensation elements is designed to reward recent
results and motivate long-term performance through a combination
of cash and equity incentive awards. During 2006, the
Compensation Committee received general information about
executive compensation from a contract human resources
consultant (Doug Testorff, referred to herein as the Human
Resources Consultant).
The Compensation Committee has primary responsibility for
assisting the Board of Directors in developing and evaluating
potential candidates for executive positions, including the
Chief Executive Officer, or CEO. As part of this responsibility,
the Committee oversees the design, development and
implementation of the compensation program for the CEO and the
other named executives. The Compensation Committee evaluates the
performance of the CEO and determines CEO compensation in light
of the goals and objectives of the compensation program. The CEO
(with the assistance of the Human Resources Consultant) and the
Compensation Committee assess the performance of the other named
executives and determine their compensation, based on initial
recommendations from the CEO. Other than the general Human
Resources Consultant,
66
neither the company nor the Compensation Committee has any
contractual arrangement with any compensation consultant who has
a role in determining or recommending the amount or form of
senior executive or director compensation.
The Compensation Committee annually reviews and approves stock
option grants for the CEO and other NEOs. Grants are based on
individual contribution and performance in achieving our
business objectives, as well as our overall performance.
Individual grants also take into account the positions and
particular operations or functions for which the NEO is
responsible. Stock option grants for NEOs adhere to the same
procedural policies as stock option grants for all employees of
the Company, as established by the Board of Directors. The
exercise price is the current price of our common stock on the
day the grant is approved by the Board of Directors. Stock
option grants vest over a four-year period and the options
expire 10 years from the date the Board of Directors grants
the options. The CEO and other NEOs receive stock option grants
at time of hire, and annually thereafter, as recommended by the
Compensation Committee to the Board of Directors. Amounts are
determined by comparing the level of equity-based compensation
is awarded to executives of competing companies, along with
consideration for attracting, retaining and motivating the
executive officers. We do not maintain specific stock ownership
guidelines, and do not currently have a policy for recovering
awards or payments if we are required to restate corporate
financials.
Impact
of Tax and Accounting
Section 162(m) of the Internal Revenue Code generally
prohibits any publicly held company from taking a federal income
tax deduction for compensation paid in excess of $1 million
in any taxable year to the chief executive officer and the next
four highest compensated officers. Exceptions are made for
qualified performance-based compensation. It is the Compensation
Committees policy to maximize the effectiveness of our
executive compensation in this regard.
Employment
Agreements
The CEO has a current employment agreement which also contains
severance and change of control provisions. No other NEO has an
employment, severance or change of control agreement. Our NEOs
serve at the will of the Board of Directors, which allows the
Board of Directors to exercise discretion regarding their
service of employment.
The Compensation Committee has primary responsibility for
assisting the Board of Directors in developing and evaluating
potential candidates for executive positions, including the CEO.
As part of this responsibility, the Compensation Committee
oversees the design, development and implementation of the
compensation program for the CEO and the other NEOs. The
Compensation Committee evaluates the performance of the CEO and
determines CEO compensation in light of the goals and objectives
of the compensation program. The CEO (with the assistance of the
Human Resources Consultant) and the Compensation Committee
assess the performance of the other NEOs and determine their
compensation, based on initial recommendations from the CEO.
Other than the Human Resources Consultant, neither the company
nor the Compensation Committee has any contractual arrangement
with any compensation consultant who has a role in determining
or recommending the amount or form of senior executive or
director compensation.
Compensation
for the Named Executives in 2006
The specific compensation decisions made for each of the NEOs
for 2006 reflect the performance of the Company against key
financial, strategic and operational goals for the year.
Gail S. Page was appointed President and CEO, effective
December 31, 2005, with an annual base salary of $350,000.
No increase in Ms. Pages base salary was implemented
in 2006. James P. Merryweather, Ph.D., was hired as Senior
Vice President of Sales and Marketing on January 15, 2005.
No increase in Dr. Merryweathers base salary was
implemented in 2006. William C. Sullivan, Vice President of
Corporate Operations received an annual salary increase of
$20,400, effective March 1, 2006. Debra A. Young was hired
as Vice President of Finance and Chief Financial Officer on
November 2, 2006. No salary increase was implemented for
Ms. Young during 2006. Eric T. Fung, M.D., Ph.D.,
Vice President of Clinical and Medical
67
Affairs and Chief Scientific Officer, received an annual salary
increase of $14,500 effective March 1, 2006. On
April 27, 2007 the Compensation Committee met and increased
base salaries as noted below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2006
|
|
|
12/31/2007 Expected
|
|
Named Executive Officer
|
|
Title
|
|
Base Salary
|
|
|
Base Salary
|
|
|
Gail S. Page
|
|
President & CEO
|
|
$
|
350,000
|
|
|
$
|
364,000
|
|
James P. Merryweather, Ph.D.
|
|
Sr. VP, Sales & Marketing
|
|
$
|
245,000
|
|
|
|
(1
|
)
|
William C. Sullivan
|
|
VP, Corporate Operations
|
|
$
|
218,000
|
|
|
|
(2
|
)
|
Debra A. Young
|
|
VP, Finance & CFO
|
|
$
|
220,000
|
|
|
|
(3
|
)
|
Eric T. Fung, M.D., Ph.D.
|
|
VP, Medical and Clinical Affairs and Chief Scientific Officer
|
|
$
|
200,000
|
|
|
$
|
220,000
|
|
|
|
|
(1) |
|
Dr. Merryweather resigned from the Company in January 2007. |
(2) |
|
Mr. Sullivan resigned from the Company in November 2007. |
(3) |
|
Ms. Young resigned from the Company in November 2007. |
The Compensation Committee recommended and the Board of
Directors approved the following 2006 management incentive
bonuses which were paid in 2007:
|
|
|
|
|
|
|
|
|
|
|
2006 Management
|
|
Named Executive Officer
|
|
Title
|
|
Incentive Bonus
|
|
|
Gail S. Page
|
|
President & CEO
|
|
$
|
140,000
|
|
James P. Merryweather, Ph.D.
|
|
Sr. VP, Sales & Marketing
|
|
$
|
58,800
|
|
William C. Sullivan
|
|
VP, Corporate Operations
|
|
$
|
34,900
|
|
Debra A. Young
|
|
VP, Finance & CFO
|
|
$
|
7,300
|
|
Eric T. Fung, M.D., Ph.D.
|
|
VP, Medical and Clinical Affairs and Chief Scientific Officer
|
|
$
|
32,000
|
|
Due to certain business circumstances occurring in 2006, the
Compensation Committee also recommended and the Board of
Directors approved a one time $50,000 bonus to be awarded to the
CEO and retention bonuses be awarded to the other NEOs. The
retention bonus agreements were implemented to enhance the
financial incentive and encouragement for select executives to
remain with the Company through June 7, 2007. The bonus
amounts were distributed to the participants upon execution of
the agreements in 2006.
|
|
|
|
|
|
|
|
|
|
|
2006 Retention
|
|
Named Executive Officer
|
|
Title
|
|
Bonus
|
|
|
James P. Merryweather, Ph.D.
|
|
Sr. VP, Sales & Marketing
|
|
$
|
50,000
|
|
William C. Sullivan
|
|
VP, Corporate Operations
|
|
$
|
50,000
|
|
Eric T. Fung, M.D., Ph.D.
|
|
VP, Medical and Clinical Affairs and Chief Scientific Officer
|
|
$
|
50,000
|
|
In 2006, the Compensation Committee recommended and the Board of
Directors approved three classes of stock option grants:
(1) on-going incentive stock option grants (Page,
Merryweather and Sullivan); (2) new-hire stock option
grants (Young); and, (3) retention based stock option
grants (Page, Merryweather and Sullivan).
The 2006 on-going incentive stock option grants to NEOs were
based on individual contribution and performance in achieving
our business objectives, as well as our overall performance. The
on-going incentive stock option grant program for NEOs was the
same as for employees of the Company. On-going incentive stock
option grants had a grant date of June 7, 2006, (the date
the grant was approved by the Board of Directors), at an option
price of $1.20 (which represented the fair value of our shares
on that date). The options vest over a four-year period, with
1/48
of the total number of options granted vesting each full month
of
68
employment of the NEO. On April 27, 2007 the Compensation
Committee met and approved stock options grants to NEOs as noted
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Incentive
|
|
|
|
|
|
|
|
|
Stock Option Grants
|
|
|
2007 Incentive
|
|
Named Executive Officer
|
|
Title
|
|
(NEOs)
|
|
|
Stock Option Grants
|
|
|
Gail S. Page
|
|
President & CEO
|
|
|
125,000
|
|
|
|
360,000
|
|
James P. Merryweather, Ph.D.(1)
|
|
Sr. VP, Sales & Marketing
|
|
|
25,000
|
|
|
|
|
|
William C. Sullivan(2)
|
|
VP, Corporate Operations
|
|
|
25,000
|
|
|
|
70,000
|
|
Debra A. Young(3)
|
|
VP, Finance and CFO
|
|
|
|
|
|
|
100,000
|
|
Eric T. Fung, M.D., Ph.D.
|
|
VP, Medical and Clinical Affairs and Chief Scientific Officer
|
|
|
75,000
|
|
|
|
240,000
|
|
|
|
|
(1) |
|
Dr. Merryweather resigned from the Company in January 2007,
at which time his options stopped vesting. |
(2) |
|
Mr. Sullivan resigned from the Company in November 2007, at
which time his options stopped vesting. |
(3) |
|
Ms. Young resigned from the Company in November 2007, at
which time her options stopped vesting. |
Debra A. Young was hired on November 2, 2006, to become
Vice President of Finance and Chief Financial Officer. In 2006,
the Compensation Committee recommended and the Board of
Directors approved a new hire stock option grant in the amount
of 125,000 options for Ms. Young. The options vest over a
four-year period: 25% on the one-year anniversary of employment
start date, and 1/36th of the remainder for each full month
of employment thereafter. Ms. Young resigned from the
Company in November 2007, at which time her options stopped
vesting.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 New Hire Stock
|
|
Named Executive Officer
|
|
Title
|
|
|
Option Grants (NEOs)
|
|
|
Debra A. Young
|
|
|
VP, Finance & CFO
|
|
|
|
125,000
|
|
Due to certain business circumstances occurring in 2006, the
Compensation Committee also recommended and the Board of
Directors approved retention stock option incentives be awarded
to the CEO and other NEOs. The retention stock options had a
grant date of June 7, 2006, (the date the grant was
approved by the Board of Directors), at an option price of
$1.20. The options vest over a four-year period, with
1/48
of the total number of options granted vesting each full month
of employment of the NEO. Dr. Merryweather resigned from
the Company in January 2007 and Mr. Sullivan resigned from
the Company in November 2007.
|
|
|
|
|
|
|
|
|
|
|
2006 Retention
|
|
|
|
|
|
Stock Option Grants
|
|
Named Executive Officer
|
|
Title
|
|
(NEOs)
|
|
|
Gail S. Page
|
|
President & CEO
|
|
|
125,000
|
|
James P. Merryweather, Ph.D.
|
|
Sr. VP, Sales & Marketing
|
|
|
75,000
|
|
William C. Sullivan
|
|
VP, Corporate Operations
|
|
|
50,000
|
|
69
Summary
Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
All Other
|
|
|
|
|
|
|
Salary
|
|
Bonus
|
|
Awards(1)
|
|
Compensation
|
|
Total
|
Name and Principal Position
|
|
Year
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Gail S. Page(2)
|
|
|
2006
|
|
|
$
|
350,000
|
|
|
$
|
190,000
|
|
|
$
|
311,724
|
|
|
$
|
27,113
|
(4)
|
|
$
|
878,837
|
|
President, Chief Executive
Officer and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debra A. Young(2)(3)
|
|
|
2006
|
|
|
$
|
35,833
|
|
|
$
|
7,333
|
|
|
$
|
5,843
|
|
|
$
|
|
|
|
$
|
49,009
|
|
Chief Financial Officer and
Vice President of Finance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Highest Paid Executives (other than CEO and CFO) by
Total Comp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James P. Merryweather, Ph.D.(2)
|
|
|
2006
|
|
|
$
|
245,000
|
|
|
$
|
108,800
|
|
|
$
|
125,183
|
|
|
$
|
|
|
|
$
|
478,983
|
|
Former Executive Vice
President, Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William C. Sullivan(2)
|
|
|
2006
|
|
|
$
|
214,600
|
|
|
$
|
84,900
|
|
|
$
|
21,622
|
|
|
$
|
|
|
|
$
|
321,122
|
|
Vice President, Corporate Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eric T. Fung, M.D., Ph.D.(2)
|
|
|
2006
|
|
|
$
|
197,583
|
|
|
$
|
82,000
|
|
|
$
|
49,990
|
|
|
$
|
|
|
|
$
|
329,573
|
|
Vice President, Medical and Clinical Affairs and
Chief Scientific Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executives who left in 2006 whose Total Comp was more than
any of above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William E. Rich
|
|
|
2006
|
|
|
$
|
378,340
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
378,340
|
|
Former President, Chief Executive
Officer and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Martin L. Verhoef
|
|
|
2006
|
|
|
$
|
271,743
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
271,743
|
|
Former Executive Vice President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew J. Hogan
|
|
|
2006
|
|
|
$
|
210,547
|
|
|
$
|
|
|
|
$
|
33,664
|
|
|
$
|
|
|
|
$
|
244,211
|
|
Former Sr. Vice President and
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel M. Caserza
|
|
|
2006
|
|
|
$
|
96,283
|
|
|
$
|
|
|
|
$
|
21,739
|
|
|
$
|
|
|
|
$
|
118,022
|
|
Former Vice President and
Corporate Controller
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amounts under Option Awards reflect the dollar amount
recognized for financial statement reporting purposes for the
fiscal year ended December 31, 2006, in accordance with
FAS 123(R) of awards and may include amounts from awards
granted in and prior to 2006. The assumptions and method for
valuing stock options are set forth in the notes to our audited
consolidated financial statements included elsewhere in this
prospectus. |
|
(2) |
|
NEOs |
|
(3) |
|
Debra A. Young was hired on November 2, 2006. |
|
(4) |
|
Other compensation represents automobile lease and automobile
expenses. |
Employment
and Severance Agreements
We entered into an employment agreement, dated August 24,
2000, with William E. Rich, Ph.D., our former President and
CEO. The agreement provided that if his employment terminated
other than voluntarily or for Cause or there was a
Constructive Termination, Dr. Rich would
continue to receive his salary and normal employee benefits for
a period of 12 months. Additionally, his stock options
would continue to vest for 24 months. The agreement also
provided that immediately prior to any Change in
Control in the Company, the vesting schedule for his held
options would be accelerated by one year. Likewise, the
agreement provided that if the Company was acquired within
12 months after Dr. Richs employment was
terminated or constructively terminated without cause,
Dr. Rich would receive severance pay and normal employee
benefits for a period of 12 months and all of the options
granted to him would immediately vest.
On December 31, 2005, we entered into a retirement
agreement with William E. Rich, Ph.D., our former CEO,
whereby Dr. Rich would continue to provide consulting
services to us for one year following his
70
retirement. This retirement agreement superseded
Dr. Richs employment agreement dated August 24,
2000. In consideration for consulting services, Dr. Rich
would receive $30,000 per month during the term of the
consulting period, as well as health benefits, use of a company
car and reimbursement for costs of a cell phone. Additionally,
the vesting of stock options granted to Dr. Rich while he
was an employee was accelerated by two years, and all remaining
unvested options were canceled. Dr. Richs consulting
period terminated on December 31, 2006.
Dr. Richs vested options may be exercised up to one
year following the end of his consultancy period.
We entered into an employment agreement, dated January 15,
2005, with James P. Merryweather, Ph.D., our former
Executive President of Sales and Marketing. The agreement
provided that if his employment terminated other than
voluntarily or for Cause or there is a
Constructive Termination, Dr. Merryweather
would continue to receive his salary and medical benefits for a
period of 12 months. The agreement also provided that if
the Company is acquired and within 12 months afterwards
Dr. Merryweathers employment is terminated or
constructively terminated without cause, he would receive
severance pay and medical benefits for a period of
12 months and all of the options granted to him would
immediately vest. Dr. Merryweathers employment
terminated on January 5, 2007, on which date his stock
options stopped vesting.
On January 5, 2007, we entered into a consulting agreement,
dated January 5, 2007 with James P.
Merryweather, Ph.D., our former Executive President of
Sales and Marketing whereby Dr. Merryweather continued to
provide consulting services to us two days per week for up to
six months following his resignation. Dr. Merryweather also
agreed not to compete with the Company or solicit the services
of our employees for six months following his resignation and
executed a general release of claims in favor of the Company.
This consulting agreement superseded
Dr. Merryweathers employment agreement dated
January 15, 2005. In consideration for consulting services,
Dr. Merryweather received $20,417 per month and medical
benefits during the term of his consulting period which ended on
June 30, 2007.
On February 2, 2006, we entered into a severance and
release agreement with Martin L. Verhoef, our former Executive
Vice President, whereby Mr. Verhoef would continue to
receive $21,667 per month plus health benefits for
12 months following the termination of his employment,
effective December 30, 2005. The period during which
Mr. Verhoefs vested stock options as of his
termination date could be exercised was extended to
June 30, 2006. Mr. Verhoefs employment agreement
dated January 8, 2004 was also terminated effective as of
December 30, 2005, after which his options vested pursuant
to the terms of the agreement.
We entered into a consulting agreement, dated March 22,
2006, with Matthew J. Hogan, our former Senior Vice President
and Chief Financial Officer, whereby Mr. Hogan would
continue to provide consulting services to the Company three
days per week for up to six months following his resignation.
Mr. Hogan also agreed not to compete with the Company or
solicit the services of our employees and executed a general
release of claims in favor of the Company. In consideration,
Mr. Hogan continued to receive compensation at his
then-current base rate of pay ($20,417 per month) during the
term of the consulting period. Stock options granted to
Mr. Hogan while he was an employee continued to vest while
he served as a consultant. Mr. Hogans consulting
period terminated on September 10, 2006.
We entered into an employment agreement, dated December 31,
2005, with Gail S. Page, President and Chief Executive Officer.
The agreement provides that if her employment terminates other
than voluntarily or for Cause or there was a
Constructive Termination, Ms. Page will
continue to receive her salary and medical benefits for a period
of 12 months. The agreement also provides that if the
Company was acquired and within 12 months afterwards
Ms. Pages employment is terminated or constructively
terminated without cause, she will receive severance pay of her
current salary ($364,000 in 2007) and medical benefits for
a period of 12 months and all of the options granted to her
will immediately vest.
We entered into an employment agreement, dated November 6,
2006, with Debra A. Young, Vice President of Finance and Chief
Financial Officer. The agreement provided that if her employment
terminated other than voluntarily or for Cause or
there is a Constructive Termination, Ms. Young
would continue to receive her salary and medical benefits for a
period of six months. The agreement also provided that if
the Company was acquired and within 12 months afterwards
Ms. Youngs employment was terminated or
constructively terminated without cause or resignation for good
reason within 12 months of a change of
71
control transaction, she would receive severance pay and medical
benefits for a period of six months and all of the options
granted to her will immediately vest. Ms. Youngs
employment terminated on November 1, 2007, on which date
her stock options stopped vesting. Ms. Young entered into a
Separation Agreement and Release with the Company pursuant to
which she received an amount equal to six months of her base
salary and the Company agreed to continue her health and dental
coverage through April 2008.
Summary Table. The following table sets forth,
for each of our equity-based compensation plans, the number of
shares of our common stock subject to outstanding options and
rights, the weighted-average exercise price of outstanding
options, and the number of shares available for future award
grants as of December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
|
|
|
Grant
|
|
|
Repriced
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
Awards:
|
|
|
Exercise
|
|
|
Date
|
|
|
or
|
|
|
|
|
|
|
Estimated Future Payouts
|
|
|
Estimated Future Payouts
|
|
|
Number of
|
|
|
Number of
|
|
|
or Base
|
|
|
Fair
|
|
|
Materially
|
|
|
|
|
|
|
Under Non-Equity
|
|
|
Under Equity
|
|
|
Shares of
|
|
|
Securities
|
|
|
Price of
|
|
|
Value of
|
|
|
Modified
|
|
|
|
|
|
|
Incentive Plan Awards
|
|
|
Incentive Plan Awards
|
|
|
Stock or
|
|
|
Underlying
|
|
|
Option
|
|
|
Option
|
|
|
Options
|
|
|
|
Grant
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
Units
|
|
|
Options
|
|
|
Awards
|
|
|
Awards
|
|
|
and SARs
|
|
Name
|
|
Date
|
|
|
($)(1)
|
|
|
($)
|
|
|
($)(1)
|
|
|
(#)(2)
|
|
|
(#)(2)
|
|
|
(#)(2)
|
|
|
(#)
|
|
|
(#)
|
|
|
($/Sh)
|
|
|
($/Sh)(3)
|
|
|
($/Sh)
|
|
|
Gail S. Page(1)
|
|
|
2006
|
|
|
|
|
|
|
$
|
175,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,000
|
|
|
|
|
|
|
$
|
1.20
|
|
|
$
|
225,750
|
|
|
|
|
|
President, Chief
Executive Officer and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debra A. Young(2)
|
|
|
2006
|
|
|
|
|
|
|
$
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
|
|
|
|
|
$
|
1.01
|
|
|
$
|
95,000
|
|
|
|
|
|
Chief Financial Officer and Vice
President of Finance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Highest Paid Executives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James P. Merryweather, Ph.D.
|
|
|
2006
|
|
|
|
|
|
|
$
|
73,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
$
|
1.20
|
|
|
$
|
90,300
|
|
|
|
|
|
Former Executive Vice
President, Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William C. Sullivan
|
|
|
2006
|
|
|
|
|
|
|
$
|
43,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
|
|
|
|
|
$
|
1.20
|
|
|
$
|
67,725
|
|
|
|
|
|
Vice President,
Corporate Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eric T. Fung, M.D., Ph.D.
|
|
|
2006
|
|
|
|
|
|
|
$
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
|
|
|
|
|
$
|
1.20
|
|
|
$
|
67,725
|
|
|
|
|
|
Vice President, Medical and Clinical Affairs and Chief
Scientific Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Target Bonus is based on a percentage of annual base salary
and was reviewed by the Compensation Committee prior to payout
in 2007 and prorated based on Company performance and time of
service. |
|
(2) |
|
The Company has no equity based incentive award program. |
|
(3) |
|
The grant date fair value is the amount the Company would
expense in its financial statements over the awards service
period in accordance with FAS 123(R) from awards granted in
2006. |
Equity
Compensation Plan Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares of
|
|
|
|
|
|
|
|
|
|
Common Stock Remaining
|
|
|
|
Number of Shares
|
|
|
|
|
|
Available for Future
|
|
|
|
of Common Stock to
|
|
|
Weighted-Average
|
|
|
Issuance Under Equity
|
|
|
|
be Issued Upon
|
|
|
Exercise Price of
|
|
|
Compensation Plans
|
|
|
|
Exercise of Outstanding
|
|
|
Outstanding Options
|
|
|
(Excluding Shares Reflected
|
|
Plan Category
|
|
Options and Rights
|
|
|
and Rights
|
|
|
in the First Column)
|
|
|
Equity compensation plans approved by security holders
|
|
|
4,794,739
|
(1)
|
|
$
|
3.59
|
(2)
|
|
|
2,900,176
|
(3)
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,794,739
|
|
|
|
3.59
|
|
|
|
2,900,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes outstanding stock options for 421,820 shares under
the 1993 Plan and 4,343,995 shares under the 2000 Plan.
Also includes 28,924 shares after giving effect to
estimated purchases under the Employee |
72
|
|
|
|
|
Stock Purchase Plan, or ESPP, for the purchase period that will
end on May 1, 2007 based on participant contributions
through December 31, 2006. |
|
(2) |
|
December 31, 2006 Weighted Average Exercise Price for
shares outstanding is $3.61. Including the 28,924 estimated ESPP
shares for the purchase period that will end on May 1, 2007
based on participant contributions through December 31,
2006, with an estimated per share price of $0.89 (based upon
November 1, 2006 close price of $1.05 multiplied by 85%),
the adjusted weighted average becomes $3.59. |
|
(3) |
|
Includes 2,730,176 shares for the 2000 Plan. On January 1
of each year during the term of the 2000 Plan, the total number
of shares available for award purposes under the 2000 Plan will
increase by the lesser of (i) 2,150,000 shares,
(ii) 5% of the outstanding shares of common stock on the
last day of the immediately preceding fiscal year, or
(iii) an amount determined by the Board of Directors. The
aggregate number of shares available for issuance under the 2000
Plan increased by 1,300,000 shares on January 1, 2006.
Also includes 170,000 shares made available for sale under
the ESPP. On January 1 of each year during the term of the ESPP,
the total number of shares available for sale under the ESPP
will increase by the lesser of (i) 430,000 shares,
(ii) 1% of the outstanding shares of common stock on the
last day of the immediately preceding fiscal year, or
(iii) an amount determined by the Board of Directors. |
73
The following table provides information with respect to the
outstanding stock options for the NEOs as of December 31,
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Options
|
|
|
|
|
|
|
Options
|
|
|
Options
|
|
|
Exercise
|
|
|
Option
|
|
|
|
(#)
|
|
|
(#)
|
|
|
Price
|
|
|
Expiration
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
($)
|
|
|
Date
|
|
|
Gail S. Page
|
|
|
21,574
|
|
|
|
|
|
|
$
|
9.27
|
|
|
|
1/5/2014
|
|
|
|
|
83,333
|
|
|
|
41,667
|
|
|
$
|
2.19
|
|
|
|
8/3/2015
|
|
|
|
|
36,528
|
|
|
|
|
|
|
$
|
9.27
|
|
|
|
1/5/2014
|
|
|
|
|
15,625
|
|
|
|
109,375
|
|
|
$
|
1.20
|
|
|
|
6/4/2016
|
|
|
|
|
15,625
|
|
|
|
109,375
|
|
|
$
|
1.20
|
|
|
|
6/4/2016
|
|
|
|
|
191,898
|
|
|
|
|
|
|
$
|
9.27
|
|
|
|
1/5/2014
|
|
|
|
|
91,666
|
|
|
|
8,334
|
|
|
$
|
2.96
|
|
|
|
2/7/2015
|
|
|
|
|
99,999
|
|
|
|
300,001
|
|
|
$
|
0.90
|
|
|
|
12/18/2015
|
|
Debra A. Young
|
|
|
|
|
|
|
125,000
|
|
|
$
|
1.01
|
|
|
|
10/30/2016
|
|
William C. Sullivan
|
|
|
250
|
|
|
|
750
|
|
|
$
|
3.70
|
|
|
|
9/14/2014
|
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
$
|
3.70
|
|
|
|
9/14/2014
|
|
|
|
|
23,337
|
|
|
|
|
|
|
$
|
8.53
|
|
|
|
2/16/2014
|
|
|
|
|
6,666
|
|
|
|
13,334
|
|
|
$
|
1.80
|
|
|
|
4/4/2015
|
|
|
|
|
6,666
|
|
|
|
3,334
|
|
|
$
|
2.19
|
|
|
|
8/3/2015
|
|
|
|
|
38,169
|
|
|
|
|
|
|
$
|
8.53
|
|
|
|
2/16/2014
|
|
|
|
|
3,125
|
|
|
|
21,875
|
|
|
$
|
1.20
|
|
|
|
6/4/2016
|
|
|
|
|
6,250
|
|
|
|
43,750
|
|
|
$
|
1.20
|
|
|
|
6/4/2016
|
|
|
|
|
28,494
|
|
|
|
|
|
|
$
|
8.53
|
|
|
|
2/16/2014
|
|
|
|
|
3,750
|
|
|
|
3,750
|
|
|
$
|
0.90
|
|
|
|
12/18/2015
|
|
James P. Merryweather, Ph.D.
|
|
|
61,333
|
|
|
|
98,667
|
|
|
$
|
2.85
|
|
|
|
3/9/2015
|
|
|
|
|
3,125
|
|
|
|
19,208
|
|
|
$
|
1.20
|
|
|
|
6/6/2016
|
|
|
|
|
458
|
|
|
|
11,541
|
|
|
$
|
1.20
|
|
|
|
6/6/2016
|
|
|
|
|
8,917
|
|
|
|
54,084
|
|
|
$
|
1.20
|
|
|
|
6/6/2016
|
|
|
|
|
|
|
|
|
2,667
|
|
|
$
|
1.20
|
|
|
|
6/6/2016
|
|
|
|
|
5,000
|
|
|
|
5,000
|
|
|
$
|
0.90
|
|
|
|
12/19/2015
|
|
Eric T. Fung, M.D., Ph.D.
|
|
|
4,300
|
|
|
|
|
|
|
$
|
3.4880
|
|
|
|
5/3/2010
|
|
|
|
|
599
|
|
|
|
|
|
|
$
|
6.3800
|
|
|
|
6/7/2011
|
|
|
|
|
5,401
|
|
|
|
|
|
|
$
|
6.3800
|
|
|
|
6/7/2011
|
|
|
|
|
917
|
|
|
|
|
|
|
$
|
5.6000
|
|
|
|
11/8/2011
|
|
|
|
|
4,083
|
|
|
|
|
|
|
$
|
5.6000
|
|
|
|
11/8/2011
|
|
|
|
|
3,500
|
|
|
|
|
|
|
$
|
4.5300
|
|
|
|
6/5/2012
|
|
|
|
|
1,500
|
|
|
|
|
|
|
$
|
4.5300
|
|
|
|
6/6/2012
|
|
|
|
|
8,500
|
|
|
|
|
|
|
$
|
4.3500
|
|
|
|
2/12/2013
|
|
|
|
|
6,500
|
|
|
|
|
|
|
$
|
4.3500
|
|
|
|
2/13/2013
|
|
|
|
|
5,000
|
|
|
|
|
|
|
$
|
9.6000
|
|
|
|
6/4/2013
|
|
|
|
|
5,000
|
|
|
|
|
|
|
$
|
9.6000
|
|
|
|
6/5/2013
|
|
|
|
|
6,667
|
|
|
|
|
|
|
$
|
8.6400
|
|
|
|
4/1/2014
|
|
|
|
|
13,333
|
|
|
|
|
|
|
$
|
8.6400
|
|
|
|
4/1/2014
|
|
|
|
|
4,560
|
|
|
|
|
|
|
$
|
7.4700
|
|
|
|
6/2/2014
|
|
|
|
|
14,277
|
|
|
|
|
|
|
$
|
7.4700
|
|
|
|
6/3/2014
|
|
|
|
|
6,163
|
|
|
|
|
|
|
$
|
7.4700
|
|
|
|
6/2/2014
|
|
|
|
|
501
|
|
|
|
3,501
|
|
|
$
|
3.7000
|
|
|
|
9/15/2014
|
|
|
|
|
3,999
|
|
|
|
1,999
|
|
|
$
|
3.7000
|
|
|
|
9/15/2014
|
|
|
|
|
10,000
|
|
|
|
20,000
|
|
|
$
|
1.8000
|
|
|
|
4/5/2015
|
|
|
|
|
13,333
|
|
|
|
6,667
|
|
|
$
|
2.1900
|
|
|
|
8/4/2015
|
|
|
|
|
|
|
|
|
1
|
|
|
$
|
0.9000
|
|
|
|
12/19/2015
|
|
|
|
|
4,999
|
|
|
|
5,000
|
|
|
$
|
0.9000
|
|
|
|
12/19/2015
|
|
|
|
|
3,125
|
|
|
|
21,875
|
|
|
$
|
1.2000
|
|
|
|
6/6/2016
|
|
|
|
|
6,250
|
|
|
|
43,750
|
|
|
$
|
1.2000
|
|
|
|
6/6/2016
|
|
Totals
|
|
|
886,295
|
|
|
|
1,076,505
|
|
|
|
|
|
|
|
|
|
74
Stock
Option Exercises
There were no stock option exercises by NEOs in 2006.
Director
Compensation
During 2002, the Board of Directors approved a compensation
system for outside directors and in 2003 this compensation
system was revised. Pursuant to this system, each new outside
director shall be granted, on the date of the first meeting of
the Board of Directors which he or she attends, an option to
purchase 25,000 shares of common stock, vesting monthly
over a
24-month
period. Each continuing outside director shall be granted an
annual option, on the date of each annual meeting of
stockholders, to purchase 12,500 shares of our common
stock, vesting monthly over a
12-month
period. In addition, each outside director also receives, at the
outside directors choice, either: (i) payment in the
amount of $5,000 paid quarterly as long as such person continues
to act as a director, or (ii) an additional option to
purchase a number of additional whole shares of common stock,
which are determined by the Company to have a Black-Scholes
valuation on the date of grant approximately equal to $20,000.
Also, on the date of each annual meeting of stockholders, the
Chairman of the Board of Directors will receive an annual grant
of an option to purchase 10,000 shares of our common stock,
vesting monthly over a
12-month
period. During fiscal 2005, the Board of Directors also created
a new director position entitled Executive Chairman
in order to assist in the transition of our management team.
James L. Rathmann was appointed to serve in this position and
received a one-time stock option grant for 150,000 shares,
which vests monthly over 24 months. The Chairman of the
Audit Committee receives an additional option to purchase
5,000 shares of our common stock, vesting monthly over a
12-month
period and the Chairmen of the Compensation Committee and the
Nominating and Governance Committee, if different from the
Chairman of the Board of Directors, each receive an additional
option to purchase 2,500 shares of our common stock,
vesting monthly over a
12-month
period. The Company reimburses its directors who are not
officers or employees for expenses incurred in attending any
Board of Directors or committee meeting. Directors who are also
the Companys officers or employees are not compensated for
attending Board of Directors or committee meetings.
Employee directors who meet the eligibility requirements may
participate in our 2000 Employee Stock Purchase Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value and
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
|
|
|
|
|
|
|
Non-equity
|
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
|
or Paid
|
|
|
|
|
|
|
|
|
Incentive Plan
|
|
|
Deferred
|
|
|
All Other
|
|
|
|
|
|
|
in Cash
|
|
|
Stock
|
|
|
Option
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Total
|
|
Name
|
|
($)
|
|
|
Awards
|
|
|
Awards(1)
|
|
|
($)
|
|
|
Earnings
|
|
|
($)
|
|
|
($)
|
|
|
Judy Bruner
|
|
$
|
20,000
|
|
|
|
|
|
|
$
|
28,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,880
|
|
John A, Young
|
|
$
|
20,000
|
|
|
|
|
|
|
$
|
13,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33,976
|
|
Michael J. Callaghan
|
|
$
|
20,000
|
|
|
|
|
|
|
$
|
8,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,692
|
|
Rajen K. Dalal
|
|
$
|
20,000
|
|
|
|
|
|
|
$
|
10,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,269
|
|
James S. Burns
|
|
$
|
20,000
|
|
|
|
|
|
|
$
|
17,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,961
|
|
James L. Rathmann
|
|
$
|
20,000
|
|
|
|
|
|
|
$
|
75,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
95,562
|
|
Kenneth J. Conway
|
|
$
|
20,000
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,000
|
|
Wendell Wierenga
|
|
|
|
|
|
|
|
|
|
$
|
8,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,440
|
|
|
|
|
(1) |
|
The amounts under Option Awards reflect the dollar amount
recognized for financial statement reporting purposes for the
fiscal year ended December 31, 2006, in accordance with
FAS 123(R) of awards and include amounts from awards
granted in and prior to 2006. The assumptions and method for
valuing stock options are set forth in the notes to our audited
consolidated financial statements included elsewhere in this
prospectus. |
75
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the
Company regarding beneficial ownership of the common stock as of
November 30, 2007, by (i) each person known by the
Company to be the beneficial owner of five percent or more of
the outstanding shares of the common stock, (ii) each
current Director of the Company, (iii) each Named Executive
Officer and (iv) the Named Executive Officers and Directors
of the Company as a group. All shares are subject to the named
persons sole voting and investment power except where
otherwise indicated.
Beneficial ownership is determined in accordance with the rules
of the SEC. Shares of common stock, which are issued and
outstanding, are deemed to be beneficially owned by any person
who has or shares voting or investment power with respect to
such shares. Shares of common stock which are issuable upon
exercise of options or warrants are deemed to be issued and
outstanding and beneficially owned by any person who has or
shares voting or investment power over such shares only if the
options or warrants in question are exercisable within
60 days of November 30, 2007, and, in any event,
solely for purposes of calculating that persons percentage
ownership of the Companys common stock (and not for
purposes of calculating the percentage ownership of any other
person).
The number of shares of common stock deemed outstanding and used
in the denominator for determining percentage ownership for each
person equals (i) 63,801,971 shares of common stock
outstanding as of November 30, 2007, plus (ii) such
number of shares of common stock as are issuable pursuant to
options, warrants or convertible securities held by that person
(and excluding options held by other persons) which may be
exercised within 60 days of November 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Percentage
|
|
|
|
Common
|
|
|
of
|
|
|
|
Stock
|
|
|
Outstanding
|
|
|
|
Shares
|
|
|
Shares
|
|
|
|
Beneficially
|
|
|
Beneficially
|
|
Name and Address of Beneficial Owner
|
|
Owned
|
|
|
Owned
|
|
|
Beneficial Owners 5% or more:
|
|
|
|
|
|
|
|
|
Falcon Technology Partners, L.P.(1)(2)
|
|
|
4,021,145
|
|
|
|
6.30
|
%
|
102 Atlee Circle
Berwyn, PA 19312
|
|
|
|
|
|
|
|
|
Highbridge International LLC(1)(3)
|
|
|
5,476,190
|
|
|
|
8.58
|
%
|
c/o Highbridge
Capital Management LLC
9 West
57th Street,
27th
Floor
New York, NY 10019
|
|
|
|
|
|
|
|
|
Ironwood Investment Management(1)
|
|
|
3,960,134
|
|
|
|
6.21
|
%
|
21 Custom House Street, Suite 240
Boston, MA 02110
|
|
|
|
|
|
|
|
|
OppenheimerFunds, Inc.(1)(4)
|
|
|
4,761,904
|
|
|
|
7.46
|
%
|
6803 South Tucson Way
Centennial, CO 80112
|
|
|
|
|
|
|
|
|
Phronesis Partners, L.P.(1)(5)
|
|
|
10,561,106
|
|
|
|
15.60
|
%
|
180 E. Broad Street #1704
Columbus, OH 43215
|
|
|
|
|
|
|
|
|
Quest Diagnostics Incorporated(1)(6)
|
|
|
12,710,713
|
|
|
|
18.72
|
%
|
1290 Wall Street West
Lyndhurst, NJ 07071
|
|
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Percentage
|
|
|
|
Common
|
|
|
of
|
|
|
|
Stock
|
|
|
Outstanding
|
|
|
|
Shares
|
|
|
Shares
|
|
|
|
Beneficially
|
|
|
Beneficially
|
|
Name and Address of Beneficial Owner
|
|
Owned
|
|
|
Owned
|
|
|
Directors and Named Executive Officers:
|
|
|
|
|
|
|
|
|
Judy Bruner(7)
|
|
|
143,250
|
|
|
|
*
|
|
SanDisk Corporation
601 McCarthy Boulevard
Milpitas, CA 95035
|
|
|
|
|
|
|
|
|
James S. Burns(8)
|
|
|
83,750
|
|
|
|
*
|
|
Entremed, Inc.
9640 Medical Center
Drive Rockville, MD 20850
|
|
|
|
|
|
|
|
|
Michael J. Callaghan(9)
|
|
|
166,450
|
|
|
|
*
|
|
1770 Green Street, Apt. 502
San Francisco, CA 94123
|
|
|
|
|
|
|
|
|
Kenneth J. Conway(10)
|
|
|
70,875
|
|
|
|
*
|
|
Starfire Venture
15 Eagles Nest
Scituate, MA 02066
|
|
|
|
|
|
|
|
|
Rajen K. Dalal(11)
|
|
|
130,500
|
|
|
|
*
|
|
Avir, Inc.
2463 Faber Place
Palo Alto, CA 94303
|
|
|
|
|
|
|
|
|
James L. Rathmann(1)(12)
|
|
|
4,739,927
|
|
|
|
7.39
|
%
|
Falcon Technology Partners
102 Atlee Circle
Berwyn, PA 19312
|
|
|
|
|
|
|
|
|
John A. Young(13)
|
|
|
423,790
|
|
|
|
*
|
|
Page Mill Investors
167 S. San Antonio Road, Suite 7
Los Altos, CA
94022-3055
|
|
|
|
|
|
|
|
|
Eric T. Fung, M.D., Ph.D.(14)
|
|
|
235,754
|
|
|
|
*
|
|
Stephen T. Lundy
|
|
|
|
|
|
|
*
|
|
Gail S. Page(15)
|
|
|
878,609
|
|
|
|
1.36
|
%
|
Qun Zhou(16)
|
|
|
3,962
|
|
|
|
*
|
|
All Directors and Named Executive Officers as a Group
|
|
|
7,043,317
|
|
|
|
10.63
|
%
|
|
|
|
* |
|
Less than 1%. |
|
(1) |
|
Based on filings by such owner with the SEC and/or a selling
stockholder questionnaire delivered to us by such owner on or
about August 29, 2007. |
|
|
|
(2) |
|
Excludes 1,428,571 shares issuable upon the exercise of
warrants which are not exercisable within 60 days of
November 30, 2007 because conversion is not permitted if
the holder and its affiliates would beneficially own in
aggregate more than 4.99% of our outstanding common stock
following such conversion. James L. Rathmann, the Executive
Chairman of our Board of Directors, is the general partner of
Falcon Technology Partners, L.P. and has sole voting and
investment power over the shares and warrants held by Falcon
Technology Partners, L.P. |
|
|
|
(3) |
|
Excludes 4,380,952 shares issuable upon the exercise of
warrants and 5,550,000 shares issuable upon conversion of
7.0% Notes which are not exercisable within 60 days of
November 30, 2007 because, in each case, conversion is not
permitted if the holder and its affiliates would beneficially
own in aggregate more than 4.99% of our outstanding common stock
following such conversion. Highbridge Capital Management, LLC is
the trading manager of Highbridge International LLC and has
voting control and investment discretion over the securities
held by Highbridge International LLC. Glenn Dubin and Henry
Swieca control Highbridge Capital Management, LLC and have
voting control and investment discretion over the securities
held by |
77
|
|
|
|
|
Highbridge International LLC. Each of Highbridge Capital
Management, LLC, Glenn Dubin and Henry Swieca disclaims
beneficial ownership of the securities held by Highbridge
International LLC. |
|
|
|
(4) |
|
Includes (i) 7,900 shares owned by Baring Global
Opportunities Fund, (ii) 31,300 shares owned by OFI
Institutional Global Opportunities Fund,
(iii) 4,343,500 shares owned by Oppenheimer Global
Opportunities Fund, (iv) 25,100 shares owned by
Russell Alpha Global Opportunities Fund and
(v) 354,104 shares owned by Russell Global
Opportunities Fund. Excludes (i) 6,320 shares issuable
upon the exercise of warrants owned by Baring Global Opportunity
Fund, (ii) 25,040 shares issuable upon the exercise of
warrants owned by OFI Institutional Global Opportunities Fund,
(iii) 3,474,800 shares issuable upon the exercise of
warrants owned by Oppenheimer Global Opportunities Fund,
(iv) 20,080 shares issuable upon the exercise of
warrants owned by Russell Alpha Global Opportunities Fund and
(v) 283,283 shares issuable upon the exercise of
warrants owned by Russell Global Opportunities Fund, in each
case, which are not exercisable within 60 days of
November 30, 2007 because conversion is not permitted if
the holder and its affiliates would beneficially own in
aggregate more than 4.99% of our outstanding common stock
following such conversion. OppenheimerFunds, Inc. is the
investment advisor to Baring Global Opportunities Fund, OFI
Institutional Global Opportunities Fund and Oppenheimer Global
Opportunities Fund and sub-advisor to Russell Alpha Global
Opportunities Fund and Russell Global Opportunities Fund (these
five funds collectively referred to herein as the Oppenheimer
Funds). Frank Jennings, Senior Vice President of Investments of
OppenheimerFunds, Inc., exercises voting and investment
authority over the shares and warrants owned by the Oppenheimer
Funds. Mr. Jennings disclaims beneficial ownership of such
shares and warrants. |
|
|
|
(5) |
|
Includes 3,895,428 shares issuable upon the exercise of
warrants which are exercisable within 60 days of
November 30, 2007. James E. Wiggins is the general partner
of Phronesis Partners, L.P. and exercises sole voting and
investment control over the shares and warrants owned by
Phronesis Partners, L.P. |
|
|
|
(6) |
|
Includes 4,104,761 shares issuable pursuant to warrants
exercisable within 60 days of November 30, 2007. Quest
Diagnostics is a publicly-held company. Quest Diagnostics
executive officers are responsible for running the business of
the company and thus, exercise voting and investment control
over the shares and warrants owned by Quest Diagnostics. |
|
|
|
(7) |
|
Includes 143,250 shares issuable upon exercise of options
exercisable within 60 days of November 30, 2007. |
|
|
|
(8) |
|
Includes 83,750 shares issuable upon exercise of options
exercisable within 60 days of November 30, 2007. |
|
|
|
(9) |
|
Includes 149,450 shares issuable upon exercise of options
exercisable within 60 days of November 30, 2007. Until
January 2007, Mr. Callaghan was a Managing Director of MDS
Capital Corp. Mr. Callaghan is party to a Declaration of
Trust Agreement with MDS Capital Corp. pursuant to which he
agreed that he has no rights or entitlements with respect to any
shares of our common stock or options exercisable for shares of
our common stock which were granted to him while he was employed
by MDS Capital Corp. or during a period of notice following
termination of his employment. Such period of notice has not yet
been determined. Mr. Callaghan disclaims beneficial
ownership of all shares and options. |
|
|
|
(10) |
|
Includes 68,875 shares issuable upon exercise of options
exercisable within 60 days of November 30, 2007. |
|
|
|
(11) |
|
Includes 130,500 shares issuable upon exercise of options
exercisable within 60 days of November 30, 2007. |
|
|
|
(12) |
|
Includes (i) 348,050 shares issuable upon exercise of
options exercisable within 60 days of November 30,
2007 and (ii) 4,021,145 shares owned by Falcon
Technology Partners, L.P. Excludes 1,428,571 shares owned
by Falcon Technology Partners issuable upon the exercise of
warrants which are not exercisable within 60 days of
November 30, 2007 because conversion is not permitted if
the holder and its affiliates would beneficially own in
aggregate more than 4.99% of our outstanding common stock
following such conversion. James L. Rathmann is the general
partner of Falcon Technology Partners, L.P. and has sole voting
and investment power over the shares and warrants. |
|
|
|
(13) |
|
Includes 139,440 shares held in family trusts and
284,350 shares issuable upon exercise of options
exercisable within 60 days of November 30, 2007.
Mr. Young and his spouse are joint trustees of the family
trusts and share voting and investment control over the shares
held in such trusts. |
|
|
|
(14) |
|
Includes 218,150 shares issuable upon exercise of options
exercisable within 60 days of November 30, 2007. |
|
|
|
(15) |
|
Includes 849,789 shares issuable upon exercise of options
exercisable within 60 days of November 30, 2007. |
|
|
|
(16) |
|
Includes 1,462 shares issuable upon exercise of options
exercisable within 60 days of November 30, 2007. |
78
We are registering for resale certain shares of our common
stock. The term selling stockholder includes the
stockholders listed below and their transferees, pledgees,
donees or other successors. Information concerning the selling
stockholders may change after the date of this prospectus and
changed information will be presented in a supplement to this
prospectus if and when required.
The table below shows the number of shares owned by the selling
stockholders based upon information they have provided to us on
or about August 29, 2007. Beneficial ownership is
determined in accordance with the rules of the SEC. Shares of
common stock, which are issued and outstanding, are deemed to be
beneficially owned by any person who has or shares voting or
investment power with respect to such shares. Shares of common
stock which are issuable upon exercise of options or warrants
are deemed to be issued and outstanding and beneficially owned
by any person who has or shares voting or investment power over
such shares only if the options or warrants in question are
exercisable within 60 days of November 30, 2007, and,
in any event, solely for purposes of calculating that
persons percentage ownership of the Companys common
stock (and not for purposes of calculating the percentage
ownership of any other person).
We cannot estimate the number of shares the selling stockholders
will hold after completion of this offering because they may
sell all or a portion of the shares and there are currently no
agreements, arrangements or understandings with respect to the
number of shares to be sold by them. We have assumed for
purposes of this table that none of the shares offered by this
prospectus will be held by the selling stockholders after the
completion of this offering. This information is based solely on
information provided by or on behalf of the selling stockholders
set forth below, and we have not independently verified the
information. We may amend or supplement this prospectus from
time to time to update the disclosure set forth in it.
Except as disclosed below and under Certain Relationships
and Related Transactions included elsewhere in this
prospectus, to our knowledge, none of the selling stockholders
has held any position or office or had any other material
relationship with us or any of our predecessors or affiliates
within the past three years other than as a result of the
ownership of our securities.
Certain of the selling stockholders listed in the table below
acquired the shares of our common stock and the warrants to
which this prospectus relates in a private placement which
closed on August 29, 2007. In the private placement, we
issued 24,513,092 shares of our common stock and warrants
to purchase an additional 19,610,470 shares of our common
stock. We also issued 921,000 warrants to purchase shares of our
common stock to Oppenheimer & Co. Inc. as partial
payment for its services in the private placement pursuant to a
placement agent agreement dated March 28, 2007. Pursuant to
such agreement, Oppenheimer & Co. Inc. also received a fee
of $1,200,000 for its services as placement agent. In connection
with our issuance of the 7.0% Notes, Oppenheimer & Co. Inc.
received $340,000 in financial advisory fees and two warrants to
purchase 100,000 shares of our common stock each (one warrant
was issued in April 2006 and one warrant was issued in November
2006) pursuant to a letter agreement with the Company dated
August 3, 2006. In addition, pursuant to an engagement
letter dated August 3, 2006, Oppenheimer & Co. Inc.
rendered a fairness opinion in connection with the sale of our
Instrument Business to Bio-Rad in November 2006 and received
$250,000 as compensation for such services. Frank Kee Colen, one
of the selling stockholders, is a managing director of
Oppenheimer & Co. Inc. James L. Rathmann, the
Executive Chairman of the Board of Directors, is the general
partner of Falcon Technology Partners, L.P., a selling
stockholder.
As part of the private placement, we entered into a securities
purchase agreement with the purchasers pursuant to which we
granted the purchasers registration rights with respect to the
shares of common stock issued in the private placement and the
shares of our common stock underlying the warrants issued in the
private placement. Pursuant to such registration rights, the
shares of common stock issued in the private placement and the
shares of our common stock underlying the warrants issued in the
private placement are being registered hereunder except for
2,380,952 shares and 1,904,761 shares underlying the
warrants issued to Quest Diagnostics in such private placement.
We are also registering up to 3,176,420 shares of our
common stock, including 90,000 shares of our common stock
issuable upon the exercise of warrants, all of which are being
offered for resale for the accounts
79
of the selling stockholders. Some of these shares are being
registered pursuant to piggy back registration
rights that we granted to certain of the selling stockholders.
The shares being registered, which were acquired from us in
various transactions, are comprised of the following:
|
|
|
|
|
Warrants to purchase 90,000 shares of our common stock
issued to Oppenheimer & Co. Inc. as partial payment
for their services in connection with our issuance of the
7.0% Notes in November 2006.
|
|
|
|
3,086,420 shares of common stock issued to Bio-Rad in
connection with the sale of our Instrument Business to Bio-Rad
in November 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offered
|
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Excluding
|
|
|
Offered
|
|
|
Total
|
|
|
|
|
|
|
Total Shares
|
|
|
|
|
|
Shares
|
|
|
that are
|
|
|
Number of
|
|
|
Percentage
|
|
|
|
Beneficially
|
|
|
Percentage
|
|
|
Issuable
|
|
|
Issuable
|
|
|
Shares
|
|
|
Beneficially
|
|
|
|
Owned
|
|
|
Beneficially
|
|
|
Upon
|
|
|
Upon
|
|
|
Beneficially
|
|
|
Owned
|
|
|
|
Before
|
|
|
Owned
|
|
|
Exercise of
|
|
|
Exercise of
|
|
|
Owned After
|
|
|
After
|
|
Name and Address of Beneficial Owner
|
|
Offering
|
|
|
Before Offering(1)
|
|
|
Warrants)
|
|
|
Warrants(2)
|
|
|
Offering(3)
|
|
|
Offering(1)(3)
|
|
|
Baring Global Opportunities Fund(4)
|
|
|
7,900
|
|
|
|
*
|
|
|
|
7,900
|
|
|
|
6,320
|
|
|
|
|
|
|
|
|
|
6803 South Tucson Way
Centennial, CO 80112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bio-Rad Laboratories, Inc.(5)
|
|
|
3,086,420
|
|
|
|
4.84
|
%
|
|
|
3,086,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1000 Alfred Nobel Drive
Hercules, CA 94547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank Kee Colen(6)
|
|
|
243,000
|
|
|
|
*
|
|
|
|
120,000
|
|
|
|
96,000
|
|
|
|
27,000
|
|
|
|
*
|
|
50 Riverside Drive
New York, NY 10024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Falcon Technology Partners, L.P.(7)
|
|
|
4,021,145
|
|
|
|
6.30
|
%
|
|
|
1,785,714
|
|
|
|
1,428,571
|
|
|
|
2,235,431
|
|
|
|
3.43
|
%
|
102 Atlee Circle
Berwyn, PA 19312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fort Mason Master, L.P.(8)
|
|
|
2,963,565
|
|
|
|
4.59
|
%
|
|
|
2,235,953
|
|
|
|
1,788,762
|
|
|
|
|
|
|
|
|
|
580 California Street, Suite 1925 San Francisco, CA
94104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fort Mason Partners, L.P.(9)
|
|
|
261,000
|
|
|
|
*
|
|
|
|
145,000
|
|
|
|
116,000
|
|
|
|
|
|
|
|
|
|
580 California Street, Suite 1925 San Francisco, CA
94104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Highbridge International LLC(10)
|
|
|
5,476,190
|
|
|
|
8.58
|
%
|
|
|
5,476,190
|
|
|
|
4,380,952
|
|
|
|
3,579,706
|
|
|
|
4.99
|
%
|
c/o Highbridge
Capital
Management LLC
9 West 57th Street
27th Floor
New York, NY 10019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iroquois Master Fund Ltd.(11)
|
|
|
2,142,856
|
|
|
|
3.31
|
%
|
|
|
1,190,476
|
|
|
|
952,380
|
|
|
|
|
|
|
|
|
|
641 Lexington Avenue
New York, NY 10022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFI Institutional Global Opportunities Fund(12)
|
|
|
31,300
|
|
|
|
*
|
|
|
|
31,300
|
|
|
|
25,040
|
|
|
|
|
|
|
|
|
|
6803 South Tucson Way
Centennial, CO 80112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oppenheimer Global Opportunities Fund(13)
|
|
|
4,343,500
|
|
|
|
6.81
|
%
|
|
|
4,343,500
|
|
|
|
3,474,800
|
|
|
|
|
|
|
|
|
|
6803 South Tucson Way
Centennial, CO 80112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offered
|
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Excluding
|
|
|
Offered
|
|
|
Total
|
|
|
|
|
|
|
Total Shares
|
|
|
|
|
|
Shares
|
|
|
that are
|
|
|
Number of
|
|
|
Percentage
|
|
|
|
Beneficially
|
|
|
Percentage
|
|
|
Issuable
|
|
|
Issuable
|
|
|
Shares
|
|
|
Beneficially
|
|
|
|
Owned
|
|
|
Beneficially
|
|
|
Upon
|
|
|
Upon
|
|
|
Beneficially
|
|
|
Owned
|
|
|
|
Before
|
|
|
Owned
|
|
|
Exercise of
|
|
|
Exercise of
|
|
|
Owned After
|
|
|
After
|
|
Name and Address of Beneficial Owner
|
|
Offering
|
|
|
Before Offering(1)
|
|
|
Warrants)
|
|
|
Warrants(2)
|
|
|
Offering(3)
|
|
|
Offering(1)(3)
|
|
|
Oppenheimer & Co. Inc.(14)
|
|
|
1,011,900
|
|
|
|
1.56
|
%
|
|
|
|
|
|
|
1,011,000
|
|
|
|
900
|
|
|
|
*
|
|
125 Broad Street
New York, NY 10004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phronesis Partners, L.P.(15)
|
|
|
10,561,106
|
|
|
|
15.60
|
%
|
|
|
4,869,285
|
|
|
|
3,895,428
|
|
|
|
1,796,393
|
|
|
|
2.74
|
%
|
180 E. Broad Street #1704
Columbus, OH 43215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rockmore Investment Master Fund Ltd.(16)
|
|
|
2,142,856
|
|
|
|
3.31
|
%
|
|
|
1,190,476
|
|
|
|
952,380
|
|
|
|
|
|
|
|
|
|
c/o Rockmore
Capital, LLC
150 E. 58th Street
New York, NY 10155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell Alpha Global Opportunities Fund(17)
|
|
|
25,100
|
|
|
|
*
|
|
|
|
25,100
|
|
|
|
20,080
|
|
|
|
|
|
|
|
|
|
6803 South Tucson Way
Centennial, CO 80112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell Global Opportunities Fund(18)
|
|
|
354,104
|
|
|
|
*
|
|
|
|
354,104
|
|
|
|
283,283
|
|
|
|
|
|
|
|
|
|
6803 South Tucson Way
Centennial, CO 80112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David I. J. Wang(19)
|
|
|
1,342,855
|
|
|
|
2.10
|
%
|
|
|
357,142
|
|
|
|
285,713
|
|
|
|
700,000
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1.09
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%
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7575 Pelican Bay Blvd.
Suite 1902 Naples, FL 34108
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* |
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Represents beneficial ownership of less than 1%. |
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(1) |
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Based on 63,801,971 shares of our common stock outstanding
as of November 30, 2007. |
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(2) |
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Assumes conversion of all outstanding warrants. Because
conversion of certain of the warrants is not permitted if the
holder and its affiliates would beneficially own in aggregate
more than 4.99% of our outstanding common stock following such
conversion, a holder must, prior to the conversion of such
warrants, sell such number of shares that, after the conversion
of such warrants and such sale of shares, the holder and its
affiliates would not beneficially own in aggregate more than
4.99% of our outstanding common stock. |
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(3) |
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Assumes all shares of common stock and shares of common stock
issuable upon exercise of warrants that are offered by the
selling stockholders are sold in this offering. See
footnote (2) for information regarding restrictions on the
conversion of certain of the warrants. |
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(4) |
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Total shares beneficially owned before offering excludes
6,320 shares issuable upon the exercise of warrants which
are not exercisable within 60 days of November 30,
2007 because conversion is not permitted if the holder and its
affiliates would beneficially own in aggregate more than 4.99%
of our outstanding common stock following such conversion.
OppenheimerFunds, Inc. is the investment advisor to Baring
Global Opportunities Fund. Frank Jennings, Senior Vice President
of Investments of OppenheimerFunds, Inc., exercises voting
authority over the shares and warrants owned by Baring Global
Opportunities Fund. Mr. Jennings disclaims beneficial
ownership over the shares and warrants held by Baring Global
Opportunities Fund. Baring Global Opportunities Fund is an
affiliate of OppenheimerFunds Distributor, Inc. which is a
limited purpose registered broker dealer. Baring Global
Opportunities Fund acquired its shares and warrants in the
ordinary course of business and did not, at the time it acquired
such shares and warrants, have any agreement or understanding,
directly or indirectly, with any person to distribute such
shares or warrants. |
81
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(5) |
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Bio-Rad is a publicly-held company. Bio-Rads executive
officers are responsible for running the business of the company
and thus, exercise voting and investment control over the shares
owned by Bio-Rad. |
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(6) |
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Total shares beneficially owned before offering includes
123,000 shares issuable upon the exercise of warrants
exercisable within 60 days of November 30, 2007. Total
shares beneficially owned after offering includes
27,000 shares issuable upon conversion of warrants which
are exercisable within 60 days of November 30, 2007.
Frank Kee Colen is a managing director of
Oppenheimer & Co. Inc. which is a broker dealer. Frank
Kee Colen acquired the shares and warrants in the ordinary
course of business and did not, at the time he acquired such
shares and warrants, have any agreement or understanding,
directly or indirectly, with any person to distribute such
shares or warrants. |
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(7) |
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Total shares beneficially owned before offering excludes
1,428,571 shares issuable upon the exercise of warrants
which are not exercisable within 60 days of
November 30, 2007 because conversion is not permitted if
the holder and its affiliates would beneficially own in
aggregate more than 4.99% of our outstanding common stock
following such conversion. James L. Rathmann, the Executive
Chairman of our Board of Directors, is the general partner of
Falcon Technology Partners, L.P. and has sole voting and
investment power over the shares and warrants held by Falcon
Technology Partners, L.P. |
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(8) |
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Total shares beneficially owned before offering includes
727,612 shares issuable upon the exercise of warrants which
are exercisable within 60 days of November 30, 2007
and excludes 1,061,150 shares issuable upon the exercise of
warrants which are not exercisable within 60 days of
November 30, 2007 because conversion is not permitted if
the holder and its affiliates would beneficially own in
aggregate more than 4.99% of our outstanding common stock
following such conversion. Fort Mason Capital LLC, serves
as the general partner of Fort Mason Master, L.P. and, in
such capacity, exercises sole voting and investment authority
over such shares and warrants. Mr. Daniel German serves as
the sole managing member of Fort Mason Capital, LLC.
Fort Mason Capital, LLC and Mr. German each disclaim
beneficial ownership of such shares and warrants, except to the
extent of its or his pecuniary interest therein. |
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(9) |
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Total shares beneficially owned before offering includes
116,000 shares issuable upon the exercise of warrants which
are exercisable within 60 days of November 30, 2007.
Fort Mason Capital LLC, serves as the general partner of
Fort Mason Partners, L.P. and, in such capacity, exercises
sole voting and investment authority over such shares and
warrants. Mr. Daniel German serves as the sole managing
member of Fort Mason Capital, LLC. Fort Mason Capital,
LLC and Mr. German each disclaim beneficial ownership of
such shares and warrants, except to the extent of its or his
pecuniary interest therein. |
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(10) |
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Total shares beneficially owned before offering excludes
4,380,952 shares issuable upon the exercise of warrants and
5,550,000 shares issuable upon conversion of
7.0% Notes which are not exercisable within 60 days of
November 30, 2007 because, in each case, conversion is not
permitted if the holder and its affiliates would beneficially
own in aggregate more than 4.99% of our outstanding common stock
following such conversion. Total shares beneficially owned after
offering includes 3,579,706 shares issuable upon conversion
of 7.0% Notes which are exercisable within 60 days of
November 30, 2007. Total shares beneficially owned after
offering excludes 1,970,294 shares issuable upon conversion
of 7.0% Notes which are not exercisable within 60 days
of November 30, 2007 because conversion is not permitted if
the holder and its affiliates would beneficially own in
aggregate more than 4.99% of our outstanding common stock
following such conversion. Highbridge Capital Management, LLC is
the trading manager of Highbridge International LLC and has
voting control and investment discretion over the securities
held by Highbridge International LLC. Glenn Dubin and Henry
Swieca control Highbridge Capital Management, LLC and have
voting control and investment discretion over the securities
held by Highbridge International LLC. Each of Highbridge Capital
Management, LLC, Glenn Dubin and Henry Swieca disclaims
beneficial ownership of the securities held by Highbridge
International LLC. |
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(11) |
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Total shares beneficially owned before offering includes
952,380 shares issuable upon exercise of warrants
exercisable within 60 days of November 30, 2007.
Joshua Silverman has sole voting and investment control over the
shares and warrants owned by Iroquois Master Fund Ltd.
Mr. Silverman disclaims beneficial ownership of these
shares and warrants. |
82
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(12) |
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Total shares beneficially owned before offering excludes
25,040 shares issuable upon the exercise of warrants which
are not exercisable within 60 days of November 30,
2007 because conversion is not permitted if the holder and its
affiliates would beneficially own in aggregate more than 4.99%
of our outstanding common stock following such conversion.
OppenheimerFunds, Inc. is the investment advisor to OFI
Institutional Global Opportunities Fund. Frank Jennings, Senior
Vice President of Investments of OppenheimerFunds, Inc.,
exercises voting authority over the shares and warrants owned by
OFI Institutional Global Opportunities Fund. Mr. Jennings
disclaims beneficial ownership over the shares and warrants held
by OFI Institutional Global Opportunities Fund. OFI
Institutional Global Opportunities Fund is an affiliate of
OppenheimerFunds Distributor, Inc. which is a limited purpose
registered broker dealer. OFI Institutional Global Opportunities
Fund acquired its shares and warrants in the ordinary course of
business and did not, at the time it acquired such shares and
warrants, have any agreement or understanding, directly or
indirectly, with any person to distribute such shares or
warrants. |
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(13) |
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Total shares beneficially owned before offering excludes
3,474,800 shares issuable upon the exercise of warrants
which are not exercisable within 60 days of
November 30, 2007 because conversion is not permitted if
the holder and its affiliates would beneficially own in
aggregate more than 4.99% of our outstanding common stock
following such conversion. OppenheimerFunds, Inc. is the
investment advisor to Oppenheimer Global Opportunities Fund.
Frank Jennings, Senior Vice President of Investments of
OppenheimerFunds, Inc., exercises voting authority over the
shares and warrants owned by Oppenheimer Global Opportunities
Fund. Mr. Jennings disclaims beneficial ownership over the
shares and warrants held by Oppenheimer Global Opportunities
Fund. Oppenheimer Global Opportunities Fund is an affiliate of
OppenheimerFunds Distributor, Inc. which is a limited purpose
registered broker dealer. Oppenheimer Global Opportunities Fund
acquired its shares and warrants in the ordinary course of
business and did not, at the time it acquired such shares and
warrants, have any agreement or understanding, directly or
indirectly, with any person to distribute such shares or
warrants. |
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(14) |
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Total shares beneficially owned before offering includes
1,011,900 shares issuable upon the exercise of warrants
exercisable within 60 days of November 30, 2007, 900
of which are held by Oppenheimer & Co. Inc. Pool.
Total shares beneficially owned after offering includes
900 shares issuable upon the exercise of warrants held by
Oppenheimer & Co. Inc. Pool which are exercisable
within 60 days of November 30, 2007. Albert G.
Lowenthal and Dennis McNamara exercise shared voting and
investment power over the warrants held by
Oppenheimer & Co. Inc. and the Oppenheimer &
Co. Inc. Pool Oppenheimer & Co. Inc. received warrants
to purchase 921,000 shares of our common stock as partial
payment for its services as placement agent in connection with
our private placement which closed on August 29, 2007.
Oppenheimer & Co. Inc. is a broker dealer.
Oppenheimer & Co. Inc. acquired the warrants in the
ordinary course of business and did not, at the time it acquired
such warrants, have any agreement or understanding, directly or
indirectly, with any person to distribute such warrants. |
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(15) |
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Total shares beneficially owned before offering includes
3,895,428 shares issuable upon the exercise of warrants
exercisable within 60 days of November 30, 2007. James
E. Wiggins is the general partner of Phronesis Partners, L.P.
and exercises sole voting and investment control over the shares
and warrants owned by Phronesis Partners, L.P. |
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(16) |
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Total shares beneficially owned before offering includes
952,350 shares issuable upon the exercise of warrants
exercisable within 60 days of November 30, 2007.
Rockmore Capital, LLC, referred to herein as Rockmore Capital,
and Rockmore Partners, LLC, referred to herein as Rockmore
Partners, each a limited liability company formed under the laws
of the State of Delaware, serve as the investment manager and
general partner, respectively, to Rockmore Investments (US) LP,
a Delaware limited partnership, which invests all of its assets
through Rockmore Investment Master Fund Ltd., an exempted
company formed under the laws of Bermuda, referred to herein as
Rockmore Master Fund. By reason of such relationships, Rockmore
Capital and Rockmore Partners may be deemed to share dispositive
power over the shares and warrants owned by Rockmore Master
Fund. Rockmore Capital and Rockmore Partners disclaim beneficial
ownership of such shares and warrants. Rockmore Partners has
delegated authority to Rockmore Capital regarding the portfolio
management decisions with respect to the shares and warrants
owned by Rockmore Master Fund and, as of November 30, 2007,
Mr. Bruce T. Bernstein and Mr. Brian Daly, as
officers of Rockmore Capital, are responsible for the portfolio
management decisions |
83
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of the shares and warrants owned by Rockmore Master Fund. By
reason of such authority, Messrs. Bernstein and Daly may be
deemed to share dispositive power over the shares and warrants
owned by Rockmore Master Fund. Messrs. Bernstein and Daly
disclaim beneficial ownership of such shares and warrants and
neither of such persons has any legal right to maintain such
authority. No other person has sole or shared voting or
dispositive power with respect to the shares and warrants as
those terms are used for purposes under
Regulation 13D-G
of the Exchange Act. No person or group (as that
term is used in Section 13(d) of the Exchange Act or the
Regulation 13D-G)
controls Rockmore Master Fund. |
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(17) |
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Total shares beneficially owned before offering excludes
20,080 shares issuable upon the exercise of warrants which
are not exercisable within 60 days of November 30,
2007 because conversion is not permitted if the holder and its
affiliates would beneficially own in aggregate more than 4.99%
of our outstanding common stock following such conversion.
OppenheimerFunds, Inc. is the sub-advisor to Russell Alpha
Global Opportunities Fund. Frank Jennings, Senior Vice President
of Investments of OppenheimerFunds, Inc., exercises voting
authority over the shares and warrants owned by Russell Alpha
Global Opportunities Fund. Mr. Jennings disclaims
beneficial ownership over the shares and warrants held by
Russell Alpha Global Opportunities Fund. |
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(18) |
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Total shares beneficially owned before offering excludes
283,283 shares issuable upon the exercise of warrants which
are not exercisable within 60 days of November 30,
2007 because conversion is not permitted if the holder and its
affiliates would beneficially own in aggregate more than 4.99%
of our outstanding common stock following such conversion.
OppenheimerFunds, Inc. is the sub-advisor to Russell Global
Opportunities Fund. Frank Jennings, Senior Vice President of
Investments of OppenheimerFunds, Inc., exercises voting
authority over the shares and warrants owned by Russell Global
Opportunities Fund. Mr. Jennings disclaims beneficial
ownership over the shares and warrants held by Russell Global
Opportunities Fund. |
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(19) |
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Total shares beneficially owned before offering includes
285,713 shares issuable upon the exercise of warrants
exercisable within 60 days of November 30, 2007. |
84
We are registering the shares offered by this prospectus on
behalf of the selling stockholders. The selling stockholders,
which as used herein includes donees, pledgees, transferees or
other
successors-in-interest
selling shares of common stock or interests in shares of common
stock received after the date of this prospectus from a selling
stockholder as a gift, pledge, partnership distribution or other
transfer, may, from time to time, sell, transfer or otherwise
dispose of any or all of their shares of common stock or
interests in shares of common stock on any stock exchange,
market or trading facility on which the shares are traded or in
private transactions. These dispositions may be at fixed prices,
at prevailing market prices at the time of sale, at prices
related to the prevailing market price, at varying prices
determined at the time of sale, or at negotiated prices. To the
extent any of the selling stockholders gift, pledge or otherwise
transfer the shares offered hereby, such transferees may offer
and sell the shares from time to time under this prospectus,
provided that this prospectus has been amended under
Rule 424(b)(3) or other applicable provision of the
Securities Act of 1933, as amended, referred to herein as the
Securities Act, to include the name of such transferee in the
list of selling stockholders under this prospectus.
The selling stockholders may use any one or more of the
following methods when disposing of shares or interests therein:
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ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
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block trades in which the broker-dealer will attempt to sell the
shares as agent, but may position and resell a portion of the
block as principal to facilitate the transaction;
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purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
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an exchange distribution in accordance with the rules of the
applicable exchange;
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privately negotiated transactions;
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short and long sales;
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through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise;
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broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
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a combination of any such methods of sale; and
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any other method permitted pursuant to applicable law.
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The selling stockholders may, from time to time, pledge or grant
a security interest in some or all of the shares of common stock
owned by them and, if they default in the performance of their
secured obligations, the pledgees or secured parties may offer
and sell the shares of common stock, from time to time, under
this prospectus, or under an amendment to this prospectus under
Rule 424(b)(3) or other applicable provision of the
Securities Act amending the list of selling stockholders to
include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
In connection with the sale of our common stock or interests
therein, the selling stockholders may enter into hedging
transactions with broker-dealers or other financial
institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume.
The selling stockholders may also sell shares of our common
stock short and deliver these securities to close out their
short positions, or loan or pledge the common stock to
broker-dealers that in turn may sell these securities. The
selling stockholders may also enter into option or other
transactions with broker-dealers or other financial institutions
or the creation of one or more derivative securities which
require the delivery to such broker-dealer or other financial
institution of shares offered by this prospectus, which shares
such broker-dealer or other financial institution may resell
pursuant to this prospectus (as supplemented or amended to
reflect such transaction).
85
The aggregate proceeds to the selling stockholders from the sale
of the common stock offered by them will be the purchase price
of the common stock less discounts or commissions, if any. Each
of the selling stockholders reserves the right to accept and,
together with their agents from time to time, to reject, in
whole or in part, any proposed purchase of common stock to be
made directly or through agents. We will not receive any of the
proceeds from this offering. Upon any exercise of the warrants
by payment of cash, however, we will receive the exercise price
of the warrants.
The selling stockholders also may resell all or a portion of the
shares in open market transactions in reliance upon
Rule 144 under the Securities Act, provided that they meet
the criteria and conform to the requirements of that rule.
The selling shareholders might be, and any broker-dealers that
act in connection with the sale of securities will be, deemed to
be underwriters within the meaning of
Section 2(11) of the Securities Act, and any commissions
received by such broker-dealers and any profit on the resale of
the securities sold by them while acting as principals will be
deemed to be underwriting discounts or commissions under the
Securities Act. Any broker-dealer and any selling stockholders
that may be deemed to be an underwriter within the
meaning of Section 2(11) of the Securities Act will be
subject to the prospectus delivery requirements of the
Securities Act. We will make copies of this prospectus available
to the selling stockholders and have informed them of their
obligation to deliver copies of this prospectus to purchasers at
or before the time of any sale of shares covered by this
prospectus. Such requirement may be satisfied by delivery
through the facilities of the Nasdaq Stock Market pursuant to
Rule 153 under the Securities Act.
To the extent required, the shares of our common stock to be
sold, the names of the selling stockholders, the respective
purchase prices and public offering prices, the names of any
agents, dealer or underwriter, any applicable commissions or
discounts with respect to a particular offer will be set forth
in an accompanying prospectus supplement or, if appropriate, a
post-effective amendment to the registration statement that
includes this prospectus.
86
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
During the previous part of this year and the years ended
December 31, 2006, 2005 and 2004, we did not engage in, nor
do we currently propose to engage in, any transaction or series
of similar transactions to which the Company was, or is to be, a
party in which the amount involved exceeds $120,000 and in which
any director, executive officer, holder of more than 5% of our
common stock or any member of the immediate family of any of the
foregoing persons had or will have a direct or indirect material
interest other than (1) compensation agreements and other
arrangements, which are described where required in
Management Executive Compensation
Compensation Discussion and Analysis Employment and
Severance Agreements and (2) the transactions
described below. The material agreements relating to the
transactions summarized below have been filed as exhibits to the
registration statement of which this prospectus forms a part and
the following summaries are qualified in their entirety by
reference to the full text of such agreements.
Relationship
with Bio-Rad
Asset
Purchase Agreement
Bio-Rad is a significant stockholder of the Company. On
November 13, 2006, we completed the sale to Bio-Rad of our
Instrument Business, which includes our SELDI technology,
ProteinChip arrays and accompanying software. Pursuant to the
terms of the asset purchase agreement entered into with Bio-Rad
on August 14, 2006, Bio-Rad paid us approximately
$16.0 million in cash at the closing of the transaction. An
additional $4.0 million of contingent cash consideration
included $2.0 million, subject to certain adjustments, to
be held in escrow as security for certain obligations of the
Company for three years following the closing, and
$2.0 million as a holdback amount to be held by Bio-Rad
until the issuance of a reexamination certificate confirming a
SELDI patent. The USPTO issued the reexamination certificate and
on November 9, 2007, we received the $2.0 million
withheld by Bio-Rad. We also entered into a number of ancillary
agreements, as set forth in greater detail below.
Subsequent to the sale of our Instrument Business to Bio-Rad,
both the Company and Bio-Rad recognized business activities on
behalf of each other. During the year ended December 31,
2006, we recorded a payable to Bio-Rad of $1.5 million for
accounts receivable we collected on behalf of Bio-Rad and $8,000
for invoices processed by Bio-Rad on our behalf. During the year
ended December 31, 2006, we recorded receivables from
Bio-Rad of $174,000 for invoices we processed on behalf of
Bio-Rad, $200,000 for sales taxes on the sale of assets and
$154,000 for unbilled receivables from Bio-Rad. As of
September 30, 2007, we owed Bio-Rad $20,000 for accounts
receivable we collected on behalf of Bio-Rad and Bio-Rad owed us
$83,000 of invoices processed and paid by us on behalf of
Bio-Rad. Subsequent to September 30, 2007, we made no
payments related to the accounts receivable owed to Bio-Rad, and
made no collections related to the $83,000 owed by Bio-Rad.
Additionally, for the nine months ended September 30, 2007,
we recorded a charge of $382,000 related to a post closing
adjustment resulting from the sale of our Instrument Business to
Bio-Rad.
Sublicense
Agreement
In connection with the sale of our Instrument Business to
Bio-Rad, we sublicensed to Bio-Rad certain rights to the core
SELDI technology for use outside of the clinical diagnostics
field. We retained exclusive rights to the license rights for
use in the field of clinical diagnostics for a five-year period,
after which the license will be co-exclusive in this field. The
rights to the core SELDI technology are derived through
royalty-bearing sublicenses from MAS. MAS holds an exclusive
license to patents directed to the SELDI technology from the
owner, Baylor College of Medicine. In 1997, MAS granted certain
rights under these patents to our wholly owned subsidiaries,
IllumeSys Pacific, Inc. and Ciphergen Technologies, Inc. We
obtained further rights under the patents in 2003 through
sublicenses and assignments executed as part of the settlement
of a lawsuit between Ciphergen, MAS, LumiCyte and T. William
Hutchens. Together, the sublicenses and assignments provide all
rights to develop, make and have made, use, sell, import, market
and otherwise exploit products and services covered by the
patents throughout the world in all fields and applications,
both commercial and non-commercial. The sublicenses carry the
obligation to pay MAS a royalty equal to 2% of revenues
recognized between February 21, 2003 and the earlier of
(i) February 21, 2013, or (ii) the date on
87
which the cumulative payments to MAS have reached
$10.0 million. Through December 31, 2006, we had paid
or accrued a total of approximately $2.6 million in such
royalties. Under our sublicense agreement with Bio-Rad, Bio-Rad
agreed to pay the royalties due to MAS under the license rights,
either directly to Vermillion (to be paid to MAS) or directly to
MAS, at Bio-Rads option.
Cross-License
Agreement
In connection with the sale of our Instrument Business to
Bio-Rad, we also entered into a Cross-License Agreement with
Bio-Rad whereby we retained the royalty-free, exclusive right to
commercially exploit existing technology, including SELDI
technology, in the clinical diagnostics market, which market is
comprised of clinical diagnostics developers, commercial
clinical laboratories, our collaborators, home users of clinical
diagnostic assays, and physicians office users of clinical
diagnostic assays, for a period of five years after the
effective date of the agreement, referred to herein as the
exclusivity period, after which the rights become co-exclusive
with Bio-Rad. Bio-Rad has the royalty-free, non-exclusive right
under our retained intellectual property in existence as of the
effective date of the agreement to commercially exploit the
products, processes and services of the Instrument Business
outside of the clinical diagnostics market. We and Bio-Rad have
also granted each other the first right to negotiate in good
faith to obtain a non-exclusive, worldwide license on
commercially reasonable terms for any improvements created or
developed and owned by such party during the exclusivity period
for commercialization in the clinical diagnostics market, in the
case of the Company, and outside the clinical diagnostics
market, in the case of Bio-Rad. Bio-Rad also agreed
(1) during the exclusivity period, not to sell products or
services in the clinical diagnostics market that utilize the
SELDI technology or enter into any agreement with any third
party to sell any such products or services and (2) not to
sell products or services in the clinical diagnostics market
that utilize any mass spectrometry technology, or to enter into
any agreement with any third party to sell any such products or
services for a specified period after the effective date of the
agreement.
Manufacture
and Supply Agreement
Since the sale of our Instrument Business to Bio-Rad, Bio-Rad
has taken over our manufacturing operations. In connection with
the asset sale, we entered into a Manufacture and Supply
Agreement with Bio-Rad on November 13, 2006 whereby we
agreed to purchase from Bio-Rad the Research Tools Products
necessary to support our diagnostics efforts.
Under this agreement, we must provide Bio-Rad quarterly,
non-binding, twelve-month rolling forecasts setting forth our
anticipated needs for Research Tools Products over the forecast
period. We may provide revised forecasts as necessary to reflect
changes in demand for the products, and Bio-Rad is required to
use commercially reasonable efforts to supply amounts in excess
of the applicable forecast. During each of the first three years
of the agreement, Bio-Rad has an obligation to manufacture and
deliver, and we have an obligation to purchase, minimum
quantities of Research Tools Products. We estimate that our
aggregate obligation under this agreement to be $6,610,000. If
Bio-Rad fails to supply any Research Tools Products to us,
including any new Research Tools Products developed by Bio-Rad
for sale to its customers or any new Research Tools Products we
have requested Bio-Rad to make and sell to us, under certain
conditions we have the right to manufacture or have such
Research Tools Products manufactured by a third party for our
own use and sale to our customers and collaborators in the
clinical diagnostics market, subject to payment of a reasonable
royalty to Bio-Rad on sales of such Research Tools Products. We
will be responsible for assuring through our incoming quality
control process that the Research Tools Products we purchase
from Bio-Rad will comply with applicable government regulations.
The term of this agreement expires on November 12, 2011,
but may be renewed for two successive two-year periods at our
option. Either party may terminate the agreement for convenience
upon 180 days prior written notice, or upon default
if the other party fails to cure such default within
30 days after notice thereof. We did not make any purchases
under this agreement for the year ended December 31, 2006
and made purchases totaling an aggregate of $212,000 under this
agreement during the nine months ended September 30, 2007.
As of September 30, 2007, we had a remaining purchase
obligation for the twelve months ending November 12, 2007
of approximately $1,688,000.
88
Transition
Services Agreement
In order to allocate support services between Bio-Rad and our
remaining business following the asset sale, we entered into a
transition services agreement with Bio-Rad. Under this
agreement, Bio-Rad and the Company agreed to provide each other
with certain administrative and operational support and related
services and share the use of certain equipment. The term of the
agreement was generally six months from the closing of the asset
sale but could be extended or shortened with respect to certain
items upon mutual agreement by the parties. The agreement was
amended in May and June 2007 to extend the term during which the
parties would provide certain consulting services to each other
until December 31, 2007. Either party may terminate one,
some or all of the remaining services of which it is the
recipient at any time upon 60 days advance notice.
The parties pay each other a fee for the provision of the
consulting services based on an hourly rate tied to the salary
of the employee or consultant who is providing such services.
For the year ended December 31, 2006, and for the nine
months ended September 30, 2007, the amount of services
provided by each party pursuant to the transition services
agreement were:
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|
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|
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|
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Year Ended
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|
|
Nine Months
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December 31,
|
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|
Ended September 30,
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Services Provided by Vermillion to Bio-Rad
|
|
$
|
66
|
|
|
$
|
107
|
|
|
|
|
|
Services Provided by Bio-Rad to Vermillion
|
|
$
|
52
|
|
|
$
|
65
|
|
|
|
|
|
Sublease
In connection with the Bio-Rad asset sale, we entered into a
sublease agreement with Bio-Rad, pursuant to which we sublease
approximately 29,000 square feet of our Fremont, California
facility. Bio-Rad may use the sublet premises only for general
office, laboratory, research and development, and other uses
necessary to conduct their business, and may not sublet the
premises without our consent. The sublease expires on
July 31, 2008 unless terminated earlier in accordance with
the terms of the sublease or master lease. Bio-Rad may terminate
the sublease at any time upon six months written notice.
Rent under the sublease is payable monthly and consists of base
rent plus a proportionate share of certain other expenses
including property taxes, management fees, insurance,
maintenance and utilities. Rent and certain other facility
related expenses are paid directly to us.
We recognized $204,000 and $1.2 million in base rent and
$25,000 and $315,000 in other rental expenses under the sublease
with Bio-Rad during the year ended December 31, 2006 and
the nine months ended September 30, 2007, respectively. In
accordance with the terms of the master lease, all payments
received by us from Bio-Rad under the sublease are paid to the
landlord under the master lease.
Stock
Purchase Agreement
In connection with the sale of the Instrument Business to
Bio-Rad, we also entered into a stock purchase agreement with
Bio-Rad pursuant to which we issued and sold
3,086,420 shares of our common stock to Bio-Rad for an
aggregate purchase price of $3.0 million. The purchase
price of $0.972 per share was based on the average closing price
for the five days preceding the stock purchase agreement on
August 14, 2006. For accounting purposes, the
3,086,420 shares purchased were valued at $1.17 per share,
the closing price on November 13, 2006, the day the
transaction closed. The stock purchase agreement with Bio-Rad
also provided for certain registration rights whereby if we file
a registration statement under the Securities Act, Bio-Rad may
elect to include their shares in that registration, subject to
various conditions. Bio-Rad has exercised these rights in
connection with the filing of the registration statement of
which this prospectus is a part.
Indemnification
Agreement with Respect to U.K. Employees
In connection with the sale of our Instrument Business to
Bio-Rad, 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 our former
subsidiary in the
89
United Kingdom in the six-month period immediately following the
sale. On May 4, 2007, Bio-Rad delivered a claim for
indemnification under the agreement for $307,455, which was paid
out of the escrow fund established pursuant to the asset
purchase agreement and related escrow agreement.
Relationship
with Quest Diagnostics
Strategic
Alliance Agreement
Quest Diagnostics is a significant stockholder of the Company.
On July 22, 2005, we entered into a strategic alliance
agreement with Quest Diagnostics covering a period ending on the
later of (i) the three-year anniversary of the agreement or
(ii) the date on which Quest Diagnostics has commercialized
three diagnostic tests based on our proprietary SELDI
ProteinChip technology. Pursuant to the agreement, Quest
Diagnostics will have the non-exclusive right to commercialize
each test on a worldwide basis, with exclusive commercialization
rights in territories where Quest Diagnostics has a significant
presence for up to five years following commercialization of
such test. As part of the strategic alliance, there is a royalty
arrangement under which Quest Diagnostics will pay royalties to
us based on fees earned by Quest Diagnostics for applicable
diagnostic services, and we will pay royalties to Quest
Diagnostics based on our revenue from applicable diagnostic
products. To date, no such royalties have been earned by either
party. Quest Diagnostics and the Company have also agreed to
enter into a supply agreement under which we will sell
instruments and consumable supplies to Quest Diagnostics (to be
used for performing diagnostic services) which we will purchase
from Bio-Rad under our manufacture and supply agreement.
Under our strategic alliance agreement, Quest Diagnostics has
the exclusive right to perform up to three ASR laboratory tests.
Once we begin manufacturing a test kit for each of such tests,
we expect that Quest Diagnostics will purchase FDA-cleared IVD
test kits from us. Quest Diagnostics will have the exclusive
right to perform such tests and market test kits purchased from
us in the United States, Mexico, the United Kingdom and other
countries, such as Brazil, where Quest Diagnostics operates a
clinical laboratory, for up to five years following
commercialization of each respective test, referred to herein as
the exclusive period, with non-exclusive rights to commercialize
these tests in the rest of the world, subject to a royalty
payable to us. Upon expiration of the exclusive period, Quest
Diagnostics exclusive rights will become non-exclusive.
During the ASR phase for a given test, and as long as the
exclusive period continues, we will sell ASRs and grant rights
to perform such tests to Quest Diagnostics and to other
reference laboratories, hospitals and medical clinics in
countries where Quest Diagnostics does not operate a clinical
laboratory. Once the IVD phase begins for a given test, and as
long as the exclusive period continues for that particular test,
we will sell test kits and instruments to Quest Diagnostics. At
the end of the exclusive period with respect to any test kit,
Quest Diagnostics exclusive right to perform tests using
such test kit will become non-exclusive. In addition to
continuing to sell test kits to Quest Diagnostics, we will then
also sell test kits to commercial clinical laboratories in the
United States, Mexico, the United Kingdom and other countries
which were exclusive to Quest Diagnostics during the exclusive
period. In addition to working through Quest Diagnostics, we
intend to seek partnerships for commercialization purposes with
traditional IVD companies
and/or with
clinical reference labs in territories where Quest Diagnostics
does not have exclusive rights.
Credit
Agreement
Pursuant to a credit agreement dated July 22, 2005, Quest
Diagnostics has also agreed to loan us up to $10.0 million
with interest accrued at the prime rate plus 0.5% and paid
monthly, solely to fund certain development activities related
to the strategic alliance. We may make borrowings in monthly
increments of up to approximately $417,000 on the last day of
each month during the first two years of the strategic alliance.
At September 30, 2007, such borrowings amounted to
$10.0 million plus accrued interest of $70,000. This loan,
collateralized by certain intellectual property of the Company,
will be forgiven based on our achievement of certain milestones
related to development, regulatory approval and
commercialization of certain diagnostic tests. Should we fail to
achieve these milestones, the outstanding principal amount of
any such loans will become due and payable on July 22,
2010. From the inception of the strategic alliance through
September 30,
90
2007, we had spent $10.0 million of the loan proceeds on
in-house research and development, as well as collaborations
with others, directed towards achieving the milestones.
2005
Stock Purchase Agreement
In addition, pursuant to a stock purchase agreement, dated
July 22, 2005, for an aggregate purchase price of
approximately $15.0 million, Quest Diagnostics purchased
6,225,000 shares of our common stock and a warrant having a
term of five years to purchase up to an additional
2,200,000 shares for $3.50 per share. The warrant was
valued at approximately $2.2 million based on the fair
value as determined by a Black-Scholes model using the following
assumptions: risk-free interest rate, 4.04%; expected life,
five years; expected volatility, 69%. The stock purchase
agreement also provided certain registration rights whereby
Quest Diagnostics may demand that we register their shares under
the Securities Act, or, if we file another registration
statement under the Securities Act, Quest Diagnostics may elect
to include their shares in that registration, subject to various
conditions. On January 12, 2006, the warrant with Quest
Diagnostics was amended to clarify that the total number of
shares of common stock purchased pursuant to the stock purchase
agreement and issuable upon exercise of the warrant will at no
time exceed 20% of the total number of outstanding shares of our
common stock, provided that Quest Diagnostics may, prior to or
concurrently with the exercise of the warrant, sell such number
of shares of our common stock that, after the exercise of the
warrant and such sale of shares, Quest Diagnostics would not own
more than 19.9% of our common stock. In connection with the
closing of our private placement on August 29, 2007, the
warrant was further amended to reduce the exercise price to
$2.50 per share and extend the expiration date from
July 22, 2010 to July 22, 2011.
Amendment
to Shareholder Rights Plan
In connection with the stock purchase agreement with Quest
Diagnostics, we also amended our shareholder rights agreement
dated March 20, 2002, between us and Wells Fargo Bank,
N.A., as Rights Agent. As more fully described in the
shareholder rights agreement, the holders of our common stock
are given rights to acquire additional shares of our preferred
stock upon the occurrence of specified events. The amendment
removes the applicability of such purchase rights with respect
to the purchase, sale and issuance of the shares of common stock
and the warrant held by Quest Diagnostics.
2007
Securities Purchase Agreement
On August 29, 2007, Quest Diagnostics purchased an
additional 2,380,952 shares of our common stock and
additional warrants to purchase 1,904,761 shares of our
common stock in a private placement. The aggregate purchase
price for the securities was $2.0 million. The related
purchase agreement provided for certain registration rights
whereby the investors, including Quest Diagnostics, may demand
that we register their shares under the Securities Act, or, if
we file another registration statement under the Securities Act,
the investors may elect to include their shares in that
registration, subject to various conditions. On August 29,
2007, we entered into a letter agreement with Quest Diagnostics
whereby (i) we agreed that the shares of common stock,
including the shares of common stock issuable upon the exercise
of warrants, issued in the private placement to Quest
Diagnostics would be deemed registrable securities
under the registration rights provisions of the 2005 stock
purchase agreement with Quest Diagnostics, and (ii) Quest
Diagnostics waived their registration rights with respect to
such shares under the 2007 securities purchase agreement.
Loans
Made Prior to Initial Public Offering Relating to Stock
Options
Prior to the Companys initial public offering in 2000, the
Company made loans evidenced by promissory notes to certain of
its former officers and directors in connection with the early
exercise of options. These full recourse notes had five-year
terms, were collateralized by the underlying stock and other
personal assets, and
91
became due immediately upon termination of employment of the
borrower. The following table sets forth certain information
with respect to each of the promissory notes:
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Interest
|
|
Principal
|
|
Accrued
|
|
|
Name
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|
Position
|
|
Date of Loan
|
|
Rate
|
|
Amount
|
|
Interest
|
|
Total
|
|
Daniel M. Caserza
|
|
Former Vice
|
|
September 8, 2000
|
|
|
6.22
|
%
|
|
$
|
30,000
|
|
|
$
|
9,000
|
|
|
$
|
39,000
|
|
|
|
President and
Corporate Controller
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David A. DeNola
|
|
Former Vice President Biosystems Division Operations
|
|
September 27, 2000
|
|
|
6.22
|
%
|
|
$
|
150,000
|
|
|
$
|
43,000
|
|
|
$
|
193,000
|
|
Robert M. Maurer
|
|
Former Vice President, Business Development
|
|
September 18, 2000
|
|
|
6.22
|
%
|
|
$
|
300,000
|
|
|
$
|
78,000
|
|
|
$
|
378,000
|
|
William E. Rich, Ph.D.
|
|
Former President
and Chief Executive Officer
|
|
September 1, 1999
|
|
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6.00
|
%
|
|
$
|
48,000
|
|
|
$
|
15,000
|
|
|
$
|
63,000
|
|
|
|
|
|
September 15, 1999
|
|
|
5.82
|
%
|
|
$
|
78,000
|
|
|
$
|
24,000
|
|
|
$
|
102,000
|
|
|
|
|
|
March 8, 2000
|
|
|
6.80
|
%
|
|
$
|
300,000
|
|
|
$
|
117,000
|
|
|
$
|
417,000
|
|
John Storella
|
|
Former Vice President, Intellectual Property Affairs
|
|
September 27, 2000
|
|
|
6.22
|
%
|
|
$
|
112,000
|
|
|
$
|
33,000
|
|
|
$
|
145,000
|
|
In December 2004, Daniel M. Caserza, Vice President and
Corporate Controller, repaid his note related to the early
exercise of a stock option, totaling $39,000, including
interest. In September and December 2004, David A. DeNola, our
former Vice President, Biosystems Division Operations,
repaid his note related to the early exercise of a stock option,
totaling $193,000, including interest. In March and September
2004, Robert M. Maurer, our former Vice President, Business
Development, repaid his note related to the early exercise of a
stock option, totaling $378,000, including interest. In June
2004 and March 2005, William E. Rich, Ph.D., our former
President and CEO, repaid his remaining three notes related to
the early exercise of stock options, totaling $582,000,
including interest. At various times prior to the maturity date
of September 27, 2005, John R. Storella, our former
Vice President, Intellectual Property Affairs, made
payments against his note related to the early exercise of stock
options, totaling $145,000, including interest, which repaid the
note in full. All of the aforementioned note repayments were
made at or prior to the maturity dates.
Other
Relationships
On August 29, 2007, Falcon Technology Partners, L.P.
purchased 1,785,714 shares of our common stock and warrants
to purchase 1,428,571 shares of our common stock in a
private placement. The aggregate purchase price for the
securities was $1.5 million. James L. Rathmann, Executive
Chairman of the Board of Directors, is a general partner of
Falcon Technology Partners, L.P. The related purchase agreement
provided for certain registration rights whereby Falcon
Technology Partners, L.P. may demand that we register their
shares under the Securities Act, or, if we file another
registration statement under the Securities Act, Falcon
Technology Partners, L.P. may elect to include their shares in
that registration, subject to various conditions. Falcon
Technology Partners, L.P. has exercised this right to have its
shares registered on the registration of which this prospectus
forms a part.
In connection with our private placement in August 2007, we
amended our shareholder rights agreement to remove the
applicability of the purchase rights provided thereunder with
respect to the purchase, sale and issuance of the shares of
common stock and the warrant held by Phronesis Partners, L.P.,
or Phronesis, one of our significant stockholders. On
October 12, 2007, at the request of Phronesis, we amended
the warrant issued to Phronesis in our private placement in
August 2007 to remove the provision limiting Phronesis
ability to exercise its warrant if it would beneficially own
more than 4.99% of our outstanding common stock following such
exercise.
We have entered into indemnification agreements with each of our
directors and officers which require us to indemnify our
directors and officers to the fullest extent permitted by
Delaware law.
92
Review
and Approval of Transactions with Related Persons
Our written corporate governance guidelines require all members
of the Board of Directors to inform the Audit Committee of all
types of transactions between themselves (directly or
indirectly) and the Company, prior to their conclusion, even if
such transactions are in the ordinary course of business. The
Audit Committee reviews and approves all related party
transactions for which Audit Committee approval is required by
applicable law or the rules of the Nasdaq Stock Market. The
guidelines also provide that the Board of Directors should
ensure that there is no abuse of corporate assets or unlawful
related party transactions.
Our corporate governance guidelines are posted on our website,
www.vermillion.com, under the heading Investor
Relations. Information contained in our website is not
incorporated by reference into and does not form any part of
this prospectus.
93
DESCRIPTION
OF CAPITAL STOCK
As of November 30, 2007, we were authorized to issue up to
150,000,000 shares of common stock and
5,000,000 shares of preferred stock under our Second
Amended and Restated Certificate of Incorporation.
Common
Stock
As of November 30, 2007, there were 63,801,971 shares
of common stock outstanding, 5,669,958 shares of common
stock issuable upon the exercise of outstanding stock options,
22,931,470 shares of common stock issuable upon the
exercise of warrants to purchase common stock,
272,082 shares of common stock issuable upon the conversion
of the 4.5% Notes and 8,250,000 shares of common stock
issuable upon the conversion of the 7.0% Notes.
Each holder of common stock is entitled to one vote for each
share on all matters to be voted upon by the stockholders and
there are no cumulative voting rights. Subject to preferences to
which holders of preferred stock may be entitled, holders of
common stock are entitled to receive ratably such dividends, if
any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. In the event
of a liquidation, dissolution or winding up of the Company,
holders of common stock would be entitled to share in our assets
remaining after the payment of liabilities and the satisfaction
of any liquidation preference granted the holders of any
outstanding shares of preferred stock. Holders of common stock
have no preemptive or conversion rights or other subscription
rights and there are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common
stock are, and the shares of common stock offered by us in this
offering, when issued and paid for will be, fully paid and
nonassesable. The rights, preferences and privileges of the
holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series
of preferred stock which we may designate in the future.
Stockholder
Rights Plan
We adopted a stockholder rights plan, the purpose of which is,
among other things, to enhance the ability of the Board of
Directors to protect stockholder interests and to ensure that
stockholders receive fair treatment in the event any coercive
takeover attempt of the Company is made in the future. The
stockholder rights plan could make it more difficult for a third
party to acquire, or could discourage a third party from
acquiring, the Company or a large block of the Companys
common stock.
The rights issued pursuant to our stockholder rights plan will
become exercisable the tenth day after a person or group
announces acquisition of 15% or more of our common stock or
announces commencement of a tender or exchange offer the
consummation of which would result in ownership by the person or
group of 15% or more of our common stock. If the rights become
exercisable, the holders of the rights (other than the person
acquiring 15% or more of our common stock) will be entitled to
acquire, in exchange for the rights exercise price, shares
of our common stock or shares of any company in which the
Company is merged, with a value equal to twice the rights
exercise price.
Preferred
Stock
As of November 30, 2007, there were no shares of our
preferred stock outstanding.
Our Board of Directors is authorized, subject to any limitations
prescribed by law, without stockholder approval, to issue from
time to time up to an aggregate of 5,000,000 shares of
preferred stock, in one or more series, each of such series to
have such rights and preferences, including voting rights,
dividend rights, conversion rights, redemption privileges and
liquidation preferences as shall be determined by the Board of
Directors. The rights for the holders of common stock will be
subject to, and may be adversely affected by, the rights of
holders of any preferred stock that may be issued in the future.
Issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more
difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, a majority of the
outstanding voting stock of us. We have no present plans to
issue any shares of preferred stock.
94
Warrants
As of November 15, 2007, warrants to purchase
22,931,470 shares of common stock at exercise prices
ranging from $0.925 to $2.50 were outstanding, with a weighted
exercise price of $1.079 per share. All outstanding warrants
contain provisions for the adjustment of the exercise price in
the event of stock dividends, stock splits, reorganizations,
reclassifications or mergers. In addition, certain of the
warrants contain anti-dilution provisions and a cashless
exercise feature that allows the holders thereof to
exercise the warrants without a cash payment to us under certain
circumstances. The rights of the shares of common stock issuable
upon exercise of all of our outstanding warrants shall be the
same as those described under Common Stock above.
Convertible
Notes
As of November 15, 2007 we had outstanding $16,500,000
principal amount of the 7.0% Notes and $2,500,000 principal
amount of the 4.5% Notes. The 7.0% Notes are
convertible into shares of our common stock at a conversion rate
of 500 shares per $1,000 aggregate principal amount of
notes, which is equal to a conversion price of $2.00 per share.
Notwithstanding the foregoing, any holder of 7.0% Notes who
(together with such holders affiliates) owns more than
$10.0 million aggregate principal amount of 7.0% Notes
is not permitted to convert its notes to the extent that, after
giving effect to such conversion, such holder (together with
such holders affiliates) would beneficially own in excess
of 4.99% of the total number of shares of our common stock
outstanding immediately after giving effect to such conversion.
The 4.5% Notes are convertible, at the option of the
holder, at any time on or prior to maturity of such notes into
shares of the Companys common stock initially at a
conversion rate of 108.8329 shares per $1,000 principal
amount of 4.5% Notes, which is equal to a conversion price
of $9.19 per share. The conversion prices of the 7.0% Notes
and the 4.5% Notes, and hence the respective conversion
rates, is subject to adjustment upon the occurrence of certain
events, such as stock splits, stock dividends and other
distributions or recapitalizations.
Registration
Rights
The registration statement of which this prospectus is a part
covers the resale of (i) 22,132,140 shares of our
common stock and 18,626,709 shares of our common stock
issuable upon the exercise of warrants issued in a private
placement that closed on August 29, 2007,
(ii) 3,086,420 shares of our common stock issued to
Bio-Rad in connection with the sale of our Instrument Business
to Bio-Rad in November 2006 and (iii) 90,000 shares of
our common stock issuable upon the exercise of warrants that
were issued to Oppenheimer & Co. Inc. in connection
with our sale of the 7.0% Notes in November 2006.
We are obligated to file this registration statement and we have
undertaken to use best efforts to keep it effective, generally
through the date that these shares are freely tradable under
Rule 144(k) under the Securities Act.
In addition, pursuant to our stock purchase agreement with Quest
Diagnostics dated as of July 22, 2005, we granted Quest
Diagnostics demand registration rights and piggy
back registration rights with respect to the shares of our
common stock underlying warrants held by Quest Diagnostics.
In connection with the sale of our Instrument Business to
Bio-Rad, we granted to Bio-Rad piggyback registration rights
exercisable until November 13, 2008 any time the Company
proposes to file with the SEC a registration statement relating
to an offering of any of its securities for its own account or
the account of security holders exercising their demand
registration rights (other than on
Form S-4
or
Form S-8
or their then equivalents relating to securities to be issued
solely in connection with an acquisition of any entity or
business or equity securities issuable in connection with stock
option or other employee benefit plans). Bio-Rad is exercising
its registration rights with respect to all of its shares of
common stock in connection with the filing of the registration
statements of which this prospectus is a part.
95
Section 203
of the Delaware Corporation Law
Section 203 of the General Corporation Law of the State of
Delaware, or DGCL, prevents an interested
stockholder (defined in Section 203 of the DGCL,
generally, as a person owning 15% or more of a
corporations outstanding voting stock), from engaging in a
business combination (as defined in Section 203
of the DGCL) with a publicly-held Delaware corporation for three
years following the date such person became an interested
stockholder, unless:
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before such person became an interested stockholder, the board
of directors of the corporation approved the transaction in
which the interested stockholder became an interested
stockholder or approved the business combination;
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upon consummation of the transaction that resulted in the
interested stockholders becoming an interested
stockholder, the interested stockholder owns at least 85% of the
voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by directors who are
also officers of the corporation and by employee stock plans
that do not provide employees with the rights to determine
confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer); or
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following the transaction in which such person became an
interested stockholder, the business combination is approved by
the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders
of two-thirds of the outstanding voting stock of the corporation
not owned by the interested stockholder.
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The provisions of Section 203 of the DGCL could make a
takeover of our company difficult.
Effect of
Certain Provisions of our Certificate of Incorporation and
Bylaws
Certain provisions of our Second Amended and Restated
Certificate of Incorporation and Bylaws may have the effect of
making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control
of us. Such provisions could limit the price that certain
investors might be willing to pay in the future for shares of
our common stock. Our Bylaws eliminate the right of stockholders
to call special meetings of stockholders or to act by written
consent without a meeting and require advance notice for
stockholder proposals and director nominations, which may
preclude stockholders from bringing matters before an annual
meeting of stockholders or from making nominations for directors
at an annual meeting of stockholders. The authorization of
undesignated preferred stock makes it possible for the Board of
Directors to issue preferred stock with voting or other rights
or preferences that could impede the success of any attempt to
change control of us. These and other provisions may have the
effect of deferring hostile takeovers or delaying changes in
control or management of us. The amendment of any of these
provisions would require approval by holders of at least
662/3%
of our outstanding common stock.
Limitation
of Liability
Section 145 of the DGCL provides a detailed statutory
framework covering indemnification of officers and directors
against liabilities and expenses arising out of legal
proceedings brought against them by reason of their being or
having been directors or officers. Section 145 generally
provides that a director or officer of a corporation:
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(i)
|
shall be indemnified by the corporation for all expenses of such
legal proceedings when he is successful on the merits;
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|
(ii)
|
may be indemnified by the corporation for the expenses,
judgments, fines and amounts paid in settlement of such
proceedings (other than a derivative suit), even if he is not
successful on the merits, if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful; and
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96
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|
|
|
(iii)
|
may be indemnified by the corporation for the expenses of a
derivative suit (a suit by a stockholder alleging a breach by a
director or officer of a duty owed to the corporation), even if
he is not successful on the merits, if he acted in good faith
and in a manner he reasonably believed to be in or not opposed
to the best interests of the corporation.
|
The indemnification discussed in clauses (ii) and (iii) above
may be made only upon a determination that indemnification is
proper because the applicable standard of conduct has been met.
Such a determination may be made by a majority of a quorum of
disinterested directors, independent legal counsel, the
stockholders or a court of competent jurisdiction. The
indemnification discussed in clause (iii) above may not
apply, however, if the director or officer is adjudged liable
for negligence or misconduct in the performance of his duties to
the corporation, unless the corporation determines that despite
such adjudication, but in view of all the circumstances, he is
entitled to indemnification.
Article VII of our Second Amended and Restated Certificate
of Incorporation and Article VI of our Bylaws provide in
substance that, to the fullest extent permitted by the DGCL,
each director and officer shall be indemnified against
reasonable costs and expenses, including attorneys fees,
and any liabilities which he may incur in connection with any
action to which he may be made a party by reason of his being or
having been a director or officer of our company, a predecessor
of our company, or serves or served as a director, officer or
employee of another enterprise at the request of our company or
any predecessor of our company. The indemnification provided by
our certificate of incorporation is not deemed exclusive of or
intended in any way to limit any other rights to which any
person seeking indemnification may be entitled.
Section 102(b)(7) of the DGCL permits a corporation to
provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability
|
|
|
|
|
for any breach of the directors duty of loyalty to the
corporation or its stockholders,
|
|
|
|
for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law,
|
|
|
|
under Section 174 of the DGCL, or
|
|
|
|
for any transaction from which the director derived an improper
personal benefit.
|
Article VII of our Second Amended and Restated Certificate
of Incorporation provides for the elimination of personal
liability of a director for monetary damages for breach of
fiduciary duty, as permitted by Section 102(b)(7) of the
DGCL. We maintain liability insurance on our officers and
directors against liabilities that they may incur in such
capacities. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers
or persons controlling our company pursuant to the foregoing
provisions, we have been informed that in the opinion of the SEC
such indemnification is against public policy as expressed in
the Act and is therefore unenforceable.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is Wells
Fargo Shareowner Services.
Listing
Currently, our shares are traded on the Nasdaq Capital Market,
under the symbol VRML.
97
Paul, Hastings, Janofsky & Walker LLP, Palo Alto,
California, will pass upon the validity of the shares of common
stock being registered by the registration statement of which
this prospectus is a part.
The financial statements as of December 31, 2006 and
December 31, 2005 and for each of the three years in the
period ended December 31, 2006 included in this prospectus
have been so included in reliance on the report (which contains
an explanatory paragraph relating to the Companys ability
to continue as a going concern as described in Note 1 to
our audited consolidated financial statements) of
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, given on the authority of said firm as experts
in auditing and accounting.
WHERE
YOU CAN FIND MORE INFORMATION ABOUT US
We file annual, quarterly and special reports, proxy statements
and other information with the Securities and Exchange
Commission. You may read and copy any document we file at the
SECs Public Reference Rooms in Washington, D.C., New
York, New York and Chicago, Illinois. The Public Reference Room
in Washington, D.C. is located at 450 Fifth Street,
N.W. Please call the SEC at
1-800-SEC-0330
for further information on the public conference rooms. Our SEC
filings are also available to the public from the SECs web
site at www.sec.gov.
You may request a copy of any or all of the information that has
been incorporated in this prospectus but that has not been
delivered, at no cost, by writing or telephoning us at the
following address or phone number:
Vermillion, Inc.
6611 Dumbarton Circle
Fremont, California 94555
(510) 505-2100
You should rely only on the information incorporated by
reference or provided in this prospectus or the prospectus
supplement. We have authorized no one to provide you with
different information. We are not making an offer of these
securities in any state where the offer is not permitted. You
should not assume that the information in this prospectus or the
prospectus supplement is accurate as of any date other than the
date on the front of the document.
No person has been authorized to give any information or to make
any representations other than those contained in this
prospectus in connection with our recent convertible debt
offering made hereby, and if given or made, such information or
representations must not be relied upon as having been
authorized by us, any selling stockholder or by any other
person. Neither the delivery of this prospectus nor any sale
made hereunder shall, under any circumstances, create any
implication that information herein is correct as of any time
subsequent to the date hereof. This prospectus does not
constitute an offer to sell or a solicitation of an offer to buy
any security other than the securities covered by this
prospectus, nor does it constitute an offer to or solicitation
of any person in any jurisdiction in which such offer or
solicitation may not lawfully be made.
98
INDEX
TO FINANCIAL STATEMENTS
|
|
|
|
|
Page
|
Vermillion, Inc. and Subsidiaries
|
|
|
|
|
F-2
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-6
|
Vermillion, Inc. and Subsidiaries
|
|
|
|
|
F-19
|
|
|
F-20
|
|
|
F-21
|
|
|
F-22
|
|
|
F-23
|
|
|
F-24
|
F-1
Vermillion,
Inc. and Subsidiaries
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands, except share and par value amounts)
|
|
|
|
(Unaudited)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
19,498
|
|
|
$
|
17,711
|
|
Short-term investments, at fair value
|
|
|
4,000
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts of
$- and $2, respectively
|
|
|
|
|
|
|
29
|
|
Prepaid expenses and other current assets
|
|
|
1,101
|
|
|
|
2,300
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
24,599
|
|
|
|
20,040
|
|
Property, plant and equipment, net
|
|
|
1,613
|
|
|
|
2,260
|
|
Other assets
|
|
|
655
|
|
|
|
716
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
26,867
|
|
|
$
|
23,016
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,177
|
|
|
$
|
2,401
|
|
Accrued liabilities
|
|
|
3,863
|
|
|
|
4,600
|
|
Deferred revenue
|
|
|
31
|
|
|
|
45
|
|
Current portion of convertible senior notes, net of discounts
|
|
|
2,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
8,531
|
|
|
|
7,046
|
|
Long-term debt owed to related party
|
|
|
10,000
|
|
|
|
7,083
|
|
Convertible senior notes, net of discount
|
|
|
16,150
|
|
|
|
18,428
|
|
Other liabilities
|
|
|
278
|
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
34,959
|
|
|
|
32,917
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
Stockholders deficit:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 5,000,000 shares
authorized, none issued and outstanding at September 30,
2007, and December 31, 2006
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 150,000,000 and
80,000,000 shares authorized at September 30, 2007,
and December 31, 2006, respectively; 63,776,934 and
39,220,437 shares issued and outstanding at
September 30, 2007, and December 31, 2006, respectively
|
|
|
64
|
|
|
|
39
|
|
Additional paid-in capital
|
|
|
227,796
|
|
|
|
207,991
|
|
Accumulated deficit
|
|
|
(235,850
|
)
|
|
|
(217,860
|
)
|
Accumulated other comprehensive loss
|
|
|
(102
|
)
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(8,092
|
)
|
|
|
(9,901
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
26,867
|
|
|
$
|
23,016
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-2
Vermillion,
Inc. and Subsidiaries
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands, except share and per share amounts)
|
|
|
|
(Unaudited)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
|
|
|
$
|
2,697
|
|
|
$
|
|
|
|
$
|
10,702
|
|
Services
|
|
|
|
|
|
|
1,965
|
|
|
|
21
|
|
|
|
6,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
|
|
|
|
4,662
|
|
|
|
21
|
|
|
|
16,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
|
|
|
|
1,571
|
|
|
|
|
|
|
|
5,714
|
|
Services
|
|
|
|
|
|
|
910
|
|
|
|
15
|
|
|
|
3,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
|
|
|
|
2,481
|
|
|
|
15
|
|
|
|
8,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
2,181
|
|
|
|
6
|
|
|
|
8,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,182
|
|
|
|
2,914
|
|
|
|
6,297
|
|
|
|
8,780
|
|
Sales and marketing
|
|
|
516
|
|
|
|
3,204
|
|
|
|
1,440
|
|
|
|
10,652
|
|
General and administrative
|
|
|
2,090
|
|
|
|
2,541
|
|
|
|
8,626
|
|
|
|
7,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,788
|
|
|
|
8,659
|
|
|
|
16,363
|
|
|
|
26,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sale of instrument business
|
|
|
|
|
|
|
|
|
|
|
(382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,788
|
)
|
|
|
(6,478
|
)
|
|
|
(16,739
|
)
|
|
|
(18,814
|
)
|
Interest income
|
|
|
169
|
|
|
|
190
|
|
|
|
458
|
|
|
|
654
|
|
Interest expense
|
|
|
(596
|
)
|
|
|
(592
|
)
|
|
|
(1,727
|
)
|
|
|
(1,691
|
)
|
Other income (expense), net
|
|
|
95
|
|
|
|
(116
|
)
|
|
|
17
|
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(5,120
|
)
|
|
|
(6,996
|
)
|
|
|
(17,991
|
)
|
|
|
(20,025
|
)
|
Income tax benefit (expense)
|
|
|
3
|
|
|
|
(20
|
)
|
|
|
1
|
|
|
|
(190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,117
|
)
|
|
$
|
(7,016
|
)
|
|
$
|
(17,990
|
)
|
|
$
|
(20,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share basic and diluted
|
|
$
|
(0.11
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(0.56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute basic and diluted loss per common share
|
|
|
48,056,582
|
|
|
|
36,075,163
|
|
|
|
42,214,245
|
|
|
|
36,041,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
Vermillion,
Inc. and Subsidiaries
Consolidated Statements of Changes in
Stockholders Equity (Deficit) and Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss(1)
|
|
|
Equity (Deficit)
|
|
|
Loss
|
|
|
|
(Dollars in thousands, except share and per share amounts)
|
|
|
|
(Unaudited)
|
|
|
Balance at December 31, 2005
|
|
|
35,998,881
|
|
|
$
|
36
|
|
|
$
|
202,485
|
|
|
$
|
(195,794
|
)
|
|
$
|
(204
|
)
|
|
$
|
6,523
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,215
|
)
|
|
|
|
|
|
|
(20,215
|
)
|
|
$
|
(20,215
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128
|
|
|
|
128
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(20,087
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock shares issued in connection with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
1,670
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
Employee stock purchase plan
|
|
|
75,886
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
Stock compensation charge
|
|
|
|
|
|
|
|
|
|
|
1,338
|
|
|
|
|
|
|
|
|
|
|
|
1,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
|
36,076,437
|
|
|
$
|
36
|
|
|
$
|
203,925
|
|
|
$
|
(216,009
|
)
|
|
$
|
(76
|
)
|
|
$
|
(12,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
39,220,437
|
|
|
$
|
39
|
|
|
$
|
207,991
|
|
|
$
|
(217,860
|
)
|
|
$
|
(71
|
)
|
|
$
|
(9,901
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,990
|
)
|
|
|
|
|
|
|
(17,990
|
)
|
|
$
|
(17,990
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
(31
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(18,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock shares issued in connection with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
20,312
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
Employee stock purchase plan
|
|
|
23,093
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
Private offering, net of issuance costs and registration fees
|
|
|
24,513,092
|
|
|
|
25
|
|
|
|
19,076
|
|
|
|
|
|
|
|
|
|
|
|
19,101
|
|
|
|
|
|
Stock compensation charge
|
|
|
|
|
|
|
|
|
|
|
684
|
|
|
|
|
|
|
|
|
|
|
|
684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
63,776,934
|
|
|
$
|
64
|
|
|
$
|
227,796
|
|
|
$
|
(235,850
|
)
|
|
$
|
(102
|
)
|
|
$
|
(8,092
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Accumulated Other Comprehensive Loss arises solely from foreign
currency cumulative translation adjustment. |
See accompanying notes to consolidated financial statements.
F-4
Vermillion,
Inc. and Subsidiaries
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
|
(Unaudited)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,990
|
)
|
|
$
|
(20,215
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Loss on sale of instrument business
|
|
|
382
|
|
|
|
|
|
Depreciation and amortization
|
|
|
882
|
|
|
|
3,551
|
|
Stock-based compensation expense
|
|
|
684
|
|
|
|
1,338
|
|
Amortization of debt discount associated with beneficial
conversion feature of convertible senior notes
|
|
|
182
|
|
|
|
399
|
|
Amortization of debt issuance costs
|
|
|
54
|
|
|
|
279
|
|
Accrued investment income
|
|
|
|
|
|
|
(5
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease in accounts receivable
|
|
|
29
|
|
|
|
1,898
|
|
Decrease (increase) in prepaid expenses and other current assets
|
|
|
848
|
|
|
|
(779
|
)
|
Decrease in inventories
|
|
|
|
|
|
|
1,445
|
|
Decrease in other assets
|
|
|
19
|
|
|
|
95
|
|
Decrease in accounts payable and accrued liabilities
|
|
|
(1,004
|
)
|
|
|
(2,317
|
)
|
Decrease in deferred revenue
|
|
|
(14
|
)
|
|
|
(760
|
)
|
Decrease in other liabilities
|
|
|
(82
|
)
|
|
|
(187
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(16,010
|
)
|
|
|
(15,258
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(235
|
)
|
|
|
(881
|
)
|
Maturities of short-term investment
|
|
|
|
|
|
|
2,245
|
|
Purchases of short-term investment
|
|
|
(4,000
|
)
|
|
|
|
|
Payment for license related to litigation settlement
|
|
|
|
|
|
|
(346
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(4,235
|
)
|
|
|
1,018
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercises of stock options
|
|
|
24
|
|
|
|
|
|
Proceeds from purchase of common stock by employee stock
purchase plan
|
|
|
21
|
|
|
|
100
|
|
Proceeds from private offering of common stock and common stock
warrants, net of issuance costs and registration fees
|
|
|
19,101
|
|
|
|
|
|
Proceeds from secured line of credit with Quest Diagnostics
Incorporated
|
|
|
2,917
|
|
|
|
3,749
|
|
Principal payments on capital lease obligations
|
|
|
|
|
|
|
(13
|
)
|
Repayments of long-term debt
|
|
|
|
|
|
|
(376
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
22,063
|
|
|
|
3,460
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(31
|
)
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
1,787
|
|
|
|
(10,714
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
17,711
|
|
|
|
25,738
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
19,498
|
|
|
$
|
15,024
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,603
|
|
|
$
|
1,595
|
|
Income taxes
|
|
|
197
|
|
|
|
7
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
Transfer of fixed assets to inventory
|
|
$
|
|
|
|
$
|
100
|
|
Acquisition of property and equipment under capital leases
|
|
|
|
|
|
|
1
|
|
See accompanying notes to consolidated financial statements.
F-5
Vermillion,
Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
|
|
1.
|
Organization,
Basis of Presentation and Summary of Significant Accounting and
Reporting Policies
|
The
Company
At the annual stockholders meeting on June 29, 2007,
the stockholders approved an amendment to the Certificate of
Incorporation to change the name of the company from Ciphergen
Biosystems, Inc. to Vermillion, Inc. (Vermillion;
Vermillion and its wholly-owned subsidiaries are collectively
referred to as the Company). The name change
represented the transition of the Company from its historical
roots as a proteomics research products business to a specialty
diagnostic testing business. On August 21, 2007, the
Company amended its Certificate of Incorporation to reflect the
name change.
Prior to the November 13, 2006, sale of assets and
liabilities of the Companys protein research products and
collaborative services business (the Instrument
Business) to Bio-Rad Laboratories, Inc.
(Bio-Rad), the Company developed, manufactured and
sold ProteinChip Systems for life science research. This
patented technology is recognized as Surface Enhanced Laser
Desorption/Ionization (SELDI). The systems consist
of ProteinChip Readers, ProteinChip Software and related
accessories, which were used in conjunction with consumable
ProteinChip Arrays. These products were sold primarily to
pharmaceutical companies, biotechnology companies, academic
research laboratories and government research laboratories. The
Company also provided research services through its Biomarker
Discovery Center laboratories, and offered consulting services,
customer support services and training classes to its customers
and collaborators. As a result of the sale of assets and
liabilities of the Companys Instrument Business to Bio-Rad
on November 13, 2006, the Company does not expect to
generate substantial revenues until certain diagnostic tests are
cleared by the United States Food and Drug Administration (the
FDA) and commercialized.
Since the sale of assets and liabilities of the Companys
Instrument Business to Bio-Rad, the Company has dedicated itself
to the discovery, development and commercialization of specialty
diagnostic tests that provide physicians with information with
which to manage their patients care and to improve patient
outcomes. The Company uses translational proteomics, which is
the process of answering clinical questions by utilizing
advanced protein separation methods, to identify and resolve
variants of specific biomarkers, develop assays and
commercialize diagnostic tests.
The Company has incurred significant net losses and negative
cash flows from operations since inception. At
September 30, 2007, the Company had an accumulated deficit
of $235,850,000. After completing the private placement sale of
securities on August 29, 2007, management (we,
us or our) believes the Companys
current available resources will be sufficient to maintain
current and planned operations through the next twelve months.
The Company will, however, be required to raise additional
capital at some point in the future. At such time the Company
requires additional funding, the Company may seek to raise such
additional funding from various sources, including the public
equity market, private financings, sales of assets,
collaborative arrangements and debt. If additional capital is
raised through the issuance of equity securities or securities
convertible into equity, stockholders will experience dilution,
and such securities may have rights, preferences or privileges
senior to those of the holders of common stock or convertible
senior notes. If the Company obtains additional funds through
arrangements with collaborators or strategic partners, the
Company may be required to relinquish its rights to certain
technologies or products that it might otherwise seek to retain.
There can be no assurance that the Company will be able to
obtain such financing, or obtain it on acceptable terms. If the
Company is unable to obtain financing on acceptable terms, we
may be unable to execute our business plan, the Company could be
required to delay or reduce the scope of its operations, and the
Company may not be able to pay off the convertible senior notes
if and when they come due.
F-6
Vermillion,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Basis
of Presentation
The unaudited consolidated financial statements of the Company
have been prepared in accordance with accounting principles
generally accepted in the United States of America
(GAAP) for interim financial statements and the
instructions to
Form 10-Q
pursuant to
Rule 10-01,
Interim Financial Statements, of
Regulation S-X
promulgated by the Securities and Exchange Commission (the
SEC). Accordingly, the unaudited consolidated
financial statements do not include all of the disclosures
required by GAAP for complete financial statements. The
December 31, 2006, consolidated balance sheet was derived
from audited consolidated financial statements, but does not
include all disclosures required by GAAP. The unaudited
consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and
accompanying notes contained in the Companys Annual Report
on
Form 10-K
for the fiscal year ended December 31, 2006, filed with the
SEC on April 2, 2007.
In the opinion of management, the unaudited consolidated
financial statements contain all adjustments consisting only of
a normal and recurring nature, which are considered necessary
for a fair presentation of the financial condition and results
of operations for such periods. The accompanying unaudited
consolidated financial statements include the accounts of the
Company. All intercompany transactions have been eliminated in
consolidation. The results of operations for the interim periods
shown herein are not necessarily indicative of operating results
for the entire year or any other future interim period.
Use of
Estimates in Preparation of Financial Statements
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 financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimated results.
Income
Taxes
On January 1, 2007, the Company adopted Financial
Accounting Standards Board (the FASB) Interpretation
No. (FIN) 48, Accounting for Uncertainty in
Income Taxes an Interpretation of FASB Statement No.
109, which clarifies the accounting for income tax
uncertainties that have been recognized in an enterprises
financial statements in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. The cumulative effect of
adopting FIN 48 on January 1, 2007, resulted in no
liability under FIN 48 on the balance sheet. There are open
statutes of limitations for taxing authorities to audit the
Company for federal and state jurisdictions from the year 2003
through the current period. Since the Company had a full
valuation on all the deferred tax assets, FIN 48 had no
impact on the Companys effective tax rate. The Company is
evaluating the net operating loss carryforwards, and research
and development deferred tax assets to determine whether there
is a limit due to prior year ownership changes. It is possible
that a portion of these deferred tax assets may be limited in
their use. The Company expects to complete the studies by the
end of 2007.
The Company accounts for income taxes using the liability
method. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial
statement and the tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. A valuation
allowance is established when necessary to reduce deferred tax
assets to the amounts expected to be realized. Interest and
penalties related to income taxes are recorded to interest and
other expense of the consolidated statement of operations.
F-7
Vermillion,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
2.
|
Recent
Accounting Pronouncements
|
Fair
Value Option for Financial Assets and Financial
Liabilities
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
Including an Amendment of FASB Statement
No. 115. SFAS No. 159 provides entities with
an option to report selected financial assets and liabilities at
fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings.
SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. The Companys adoption of
SFAS No. 159 is not expected to have a material impact
on its consolidated financial statements.
Fair
Value Measurements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements.
SFAS No. 157 clarifies the principle that fair value
should be based on the assumptions market participants would use
when pricing an asset or liability and establishes a fair value
hierarchy that prioritizes the information used to develop those
assumptions. Under the standard, fair value measurements would
be separately disclosed by level within the fair value
hierarchy. The provisions of SFAS No. 157 are
effective for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years, with early
adoption permitted. The Companys adoption of
SFAS No. 157 is not expected to have a material impact
on its consolidated financial statements.
|
|
3.
|
Strategic
Alliance with Quest Diagnostics Incorporated
|
On July 22, 2005, Vermillion and Quest Diagnostics
Incorporated (Quest) entered into a strategic
alliance agreement, which focuses on commercializing up to three
assays chosen from Vermillions pipeline. The term of the
agreement ends on the later of (i) the three-year
anniversary of the agreement and (ii) the date on which
Quest commercializes the three diagnostic tests covered by such
agreement. Pursuant to the agreement, Quest will have the
non-exclusive right to commercialize these tests on a worldwide
basis, with exclusive commercialization rights in territories
where Quest has a significant presence for up to five years
following commercialization. As part of the strategic alliance,
there is a royalty arrangement under which Quest will pay
royalties to Vermillion based on fees earned by Quest for
applicable diagnostics services, and Vermillion will pay
royalties to Quest based on Vermillions revenue from
applicable diagnostics products. To date, no such royalties have
been earned by either party.
Quest also agreed to provide Vermillion with a $10,000,000
secured line of credit, which is collateralized by certain
intellectual property of Vermillion, that may only be used for
certain costs and expenses directly related to the strategic
alliance. Under the terms of this secured line of credit, the
interest rate is at the prime rate plus 0.5% and is payable
monthly. Additionally, this secured line of credit contain
provisions for Quest to forgive portions of the amounts borrowed
that corresponds to Vermillions achievement of certain
milestones related to development, regulatory approval and
commercialization of certain diagnostic tests. The amounts to be
forgiven and the corresponding milestones that Vermillion must
achieve are (i) $1,000,000 for each application that allows
a licensed laboratory test to be commercialized with a maximum
of $3,000,000 for three applications that allows a licensed
laboratory test to be commercialized; (ii) $3,000,000 for
the commercialization of the first diagnostic test kit; and
(iii) $2,000,000 for each subsequent commercialization of
diagnostic test kits with a maximum of $4,000,000 for two
subsequent commercialization of diagnostic test kits. Should
Vermillion fail to achieve these milestones, it would be
responsible for the repayment of the outstanding principal
amount and any unpaid interest on the secured line of credit on
or before July 22, 2010. Vermillion has drawn on this
secured line of credit in monthly increments of $417,000 on the
last day of each month during the first two years of the
strategic alliance. As of September 30, 2007, and
December 31, 2006,
F-8
Vermillion,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Vermillion has drawn $10,000,000 and $7,083,000, respectively,
from this secured line of credit. From the inception of the
strategic alliance through September 30, 2007, the Company
had spent $10,000,000 of the amounts drawn on in-house research
and development, as well as collaborations with others, directed
towards achieving the milestones.
|
|
4.
|
Short-Term
Investments
|
Short-term investments available-for-sale are carried at fair
value based on quoted market prices. The Company has no
unrealized holding gains or losses based on the market value of
the auction rate preferred securities at September 30,
2007. Short-term investments available-for-sale consist of the
following at September 30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
Auction rate preferred securities
|
|
$
|
4,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The scheduled maturity dates for short-term investments
available for sale at September 30, 2007, are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 Year
|
|
|
After 5 Year
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
Through
|
|
|
Through
|
|
|
After
|
|
|
|
|
|
|
1 Year
|
|
|
5 Years
|
|
|
10 Years
|
|
|
10 Years
|
|
|
Total
|
|
|
Auction rate preferred securities
|
|
$
|
4,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Receivables
from and Payables to Bio-Rad
|
In connection with the sale of assets and liabilities of the
Companys Instrument Business on November 13, 2006,
Bio-Rad withheld $2,000,000 from the sales proceeds until the
issuance of a reexamination certificate confirming United States
Patent No. 6,734,022 (the 022 Patent). If the
United States Patent and Trademark Office (the
USPTO) does not issue a reexamination certificate
confirming the patentability of all of the claims as originally
issued in the 022 Patent, or claims of equivalent scope, the
Company will not be entitled to receive the $2,000,000 withheld
by Bio-Rad. The 022 Patent is directed to a fundamental process
of SELDI that involves capturing an analyte from a sample on the
surface of a mass spectrometry probe derivatized with an
affinity reagent, applying matrix and detecting the captured
analyte by laser desorption mass spectrometry. In March 2007,
the USPTO issued a final office action in the reexamination,
rejecting all of the claims of the 022 Patent. Although the
office action was designated final, Vermillion,
under the USPTO rules, advocated the outstanding rejections and
the patentability of the claimed invention with the patent
examiners on March 30, 2007, and April 11, 2007. In
addition, on April 18, 2007, Vermillion filed a response to
the final office action with the USPTO. On June 28, 2007,
the USPTO sent to Vermillion a notice of intent to issue a
reexamination certificate of the 022 Patent (see further
discussion in Note 13 Subsequent Event).
Subsequent to the sale of assets and liabilities of the
Companys Instrument Business to Bio-Rad on
November 13, 2006, both the Company and Bio-Rad recognized
business activities on behalf of each other. As of
September 30, 2007, the Company owed Bio-Rad $20,000 for
accounts receivable the Company collected on behalf of Bio-Rad.
Similarly, Bio-Rad owed the Company $128,000, which consisted of
$83,000 of invoices processed and paid by the Company on behalf
of Bio-Rad and $45,000 for Bio-Rads portion of expenses
related to facilities shared by the Company. Subsequent to
September 30, 2007, the Company made no payments towards
the $20,000 owed to Bio-Rad, and collected $45,000 related to
the $128,000 owed by Bio-Rad. As of December 31, 2006, the
Company owed Bio-Rad $1,571,000, which consisted of $1,511,000
for accounts receivable the Company collected on behalf of
Bio-Rad, $8,000 for invoices processed by Bio-Rad on behalf of
the Company and $52,000 for services Bio-Rad provided to the
Company. Similarly, Bio-Rad owed the Company
F-9
Vermillion,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
$619,000, which consisted of $174,000 for invoices processed by
the Company on behalf of Bio-Rad, $200,000 for sales taxes on
the sale of assets and $245,000 for unbilled receivables from
Bio-Rad. Subsequent to December 31, 2006, the Company paid
the $1,571,000 owed to Bio-Rad, and collected the $619,000 owed
by Bio-Rad. Additionally, for the nine months ended
September 30, 2007, the Company recorded a charge of
$382,000 related to a post-closing adjustment resulting from the
sale of assets and liabilities of the Companys Instrument
Business to Bio-Rad.
Additionally, as of September 30, 2007, the Company owed
Bio-Rad $192,000 for laboratory supplies. Subsequent to
September 30, 2007, the Company paid $160,000 related to
the $192,000 owed to Bio-Rad.
|
|
6.
|
Warranties
and Maintenance Contracts
|
Prior to the sale of assets and liabilities of the
Companys Instrument Business to Bio-Rad on
November 13, 2006, the Company had product warranty
activities and obligations to provide services for its products.
The Company generally included a standard
12-month
warranty on its ProteinChip Systems and certain accessories upon
initial sale, after which maintenance and support was available
under a separately priced contract or on an individual call
basis. The Company also sold separately priced maintenance
(extended warranty) contracts, which were generally for 12 or
24 months, upon expiration of the initial
12-month
warranty. Coverage under both the standard and extended
maintenance contracts was identical. Revenue for both the
standard and extended maintenance contracts was deferred and
recognized on a straight-line basis over the period of the
applicable maintenance contract. Related costs were recognized
as incurred.
For the three and nine months ended September 30, 2007, the
Company had no product warranty obligations or activity, as all
warranty obligations were assumed by Bio-Rad as of
November 13, 2006. Changes in product warranty obligations,
including separately priced maintenance obligations, for the
three and nine months ended September 30, 2006, were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2006
|
|
|
Balance at beginning of period
|
|
$
|
2,748
|
|
|
$
|
2,831
|
|
Add: Costs incurred for maintenance contracts
|
|
|
509
|
|
|
|
1,687
|
|
Revenue deferred for maintenance contracts
|
|
|
851
|
|
|
|
3,067
|
|
Less: Settlements made under maintenance contracts
|
|
|
(509
|
)
|
|
|
(1,687
|
)
|
Revenue recognized for maintenance contracts
|
|
|
(1,138
|
)
|
|
|
(3,437
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
2,461
|
|
|
$
|
2,461
|
|
|
|
|
|
|
|
|
|
|
7.00% Convertible
Senior Notes Due 2011
On November 15, 2006, the Company closed the sale of
$16,500,000 of convertible senior notes due September 1,
2011 (the New Notes). Offering costs were $104,000
and fees of $514,500, which were paid on behalf of the debt
holders, were recorded as debt discount on the New Notes. Fees
paid on behalf of debt holders included the fair value of two
warrants issued to underwriters to purchase a total of
200,000 shares of common stock at $1.26 per share. The
warrant was valued at approximately $140,000 based on the fair
value as determined by a Black-Scholes model using the following
assumptions: a risk free interest rate of 4.75%, 5 year
contractual life, and 88% volatility rate. Interest on the New
Notes is 7.00% per annum on the principal amount, payable
semiannually on March 1 and September 1 of each year, beginning
March 1, 2007. The New Notes were sold pursuant to separate
exchange and redemption agreements between the Company and each
of Highbridge International LLC, Deerfield International
Limited, Deerfield Partners, L.P., Bruce Funds, Inc. and
F-10
Vermillion,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Professional Life & Casualty, each holders of the
Companys existing 4.50% convertible senior notes due
September 1, 2008 (the Old Notes), pursuant to
which holders of an aggregate of $27,500,000 of the Old Notes
agreed to exchange and redeem their Old Notes for an aggregate
of $16,500,000 in aggregate principal amount of the New Notes
and $11,000,000 in cash, plus accrued and unpaid interest on the
Old Notes of $254,000 through and including the day prior to the
Closing. The transaction was treated as a debt extinguishment
and accordingly, $613,000 of unamortized prepaid offering costs
and $868,000 of unamortized debt discount related to the Old
Notes were charged to expense as loss on extinguishment of debt.
Offering costs and debt discount related to the New Notes will
be amortized to interest expense using the effective interest
method. Amortization expense in 2006 for the New Notes was
$15,000.
The Company issued the New Notes pursuant to an indenture, dated
November 15, 2006, between the Company and U.S. Bank
National Association, as Trustee. Following the Closing,
$2,500,000 in aggregate principal amount of the Old Notes remain
outstanding.
The New Notes are unsecured senior indebtedness of the Company
and bear interest at the rate of 7.00% per annum, which may be
reduced to 4.00% per annum if the Company receives approval or
clearance for commercial sale of any of its ovarian cancer tests
by the FDA. Interest is payable on March 1 and September 1 of
each year, commencing March 1, 2007. The effective interest
rate is 7.13% per annum.
The New Notes are convertible at the option of each Holder, at
any time on or prior to the close of business on the business
day immediately preceding September 1, 2011, into shares of
the Companys common stock at a conversion price of $2.00
per share, equivalent to a conversion rate equal to
500 shares of common stock per $1,000 principal of the New
Notes, subject to adjustment for standard anti-dilution
provisions including distributions to common stockholders and
stock splits as well as occurrence of a change in control, in
which case the conversion rate is adjusted for a make-whole
premium.
The make-whole premium shall be equal to the principal amount of
New Notes to be converted divided by $1,000 and multiplied by
the applicable number of shares of common stock based upon the
Companys share prices as of the change of control date.
Specifically, as the New Notes approach their redemption date of
September 2009, as discussed below, the make-whole payment
decreases. The Company is not required to make a make-whole
payment if the Companys stock price is less than $1.20 or
greater than $8.00 as of the date of the change in control. The
make-whole premium associated with the New Note sets a maximum
additional 15,000,001 shares that may be issued on
conversion (909.091 shares per $1,000 principal amount of
New Notes).
If a holder converts all or any portion of their New Notes prior
to October 31, 2008, upon such conversion, in addition to
the common stock such holder would receive, the holder will be
entitled to receive with respect to each New Note so converted
an amount in cash equal to the difference of (i) the amount
of all interest that the Company would be required to pay on
such New Note from the date of the indenture through
October 31, 2008, and (ii) the amount of interest
actually paid on such New Note by the Company prior to the time
of conversion.
Holders of the New Notes have the option to require the Company
to repurchase the New Notes under certain circumstances,
including at any time after September 1, 2009, if the
Company has not received approval or clearance for commercial
sale of any of its ovarian cancer test by the FDA. The Company
may redeem the New Notes at its option, in whole or in part, at
any time on or after September 1, 2009, at specified
redemption prices plus accrued and unpaid interest; provided
that the New Notes will be redeemable only if the closing price
of the stock equals or exceeds 200.0% of the conversion price
then in effect for at least 20 trading days within a period of
30 consecutive trading days ending on the trading day before the
date of the notice of the optional redemption. The
8,250,000 shares that could be issued if all New Notes were
converted into common stock have not been included in the
calculation of loss per share, as these potential common shares
are antidilutive. Upon a change of control, each holder of the
New Notes may require the
F-11
Vermillion,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Company to repurchase some or all of the New Notes at specified
redemption prices, plus accrued and unpaid interest. The
debenture contains a put option that entitles the holder to
require the Company to redeem the New Note at a price equal to
105.0% of the principal balance upon a change in control of the
Company.
The Company identified the guaranteed interest payment for any
conversion of any New Note by a holder prior to October 31,
2008, and the written put option permitting the holder to put
the debt at 105.0% of principal plus accrued and unpaid interest
upon a change of control as a compound embedded derivative,
which needs to be separated and measured at its fair value. The
factors impacting the fair value of the guaranteed interest
payment for any conversion of any New Note by a holder prior to
October 31, 2008, is based upon certain factors including
the Companys stock price, the time value of money and the
likelihood holders would convert within the next two years.
However, due to the Companys current stock price at the
date of New Note issuance and through December 31, 2006,
resulting in the conversion feature being substantially out of
the money, the likelihood of conversion was deemed to be remote.
The factors impacting the fair value of the written put option
permitting the holder to put the New Note at 105.0% of principal
plus accrued and unpaid interest upon a change of control, is
contingent upon a change of control. However, due to significant
related party holdings of the Companys common stock shares
and the presence of certain anti-takeover provisions in the
bylaws of the Company, a change of control is deemed to be
remote. When the fair values of these two features are combined,
the fair value of the compound embedded derivative had de
minimis fair value on the date of inception and on
December 31, 2006.
The Company and the investors entered into a registration rights
agreement in which the Company agrees to make reasonable
best efforts to file a shelf registration and keep it
effective permitting the New Note holders to sell the New Notes
or the underlying common stock shares. In the circumstance of a
failed registration, the Company agrees to pay interest as
partial relief for the damages (Liquidated Damages)
until the earlier of (1) the day on which the Registration
Default has been cured and (2) the date the Shelf
Registration Statement is no longer required to be kept
effective, in an amount in cash equal to 1.5% of the aggregate
outstanding principal amount of the New Notes until such
Registration Default is cured; provided that in no event shall
Liquidated Damages exceed 10.0% of the holders initial
investment in the New Notes in the aggregate.
The Company evaluated the Liquidated Damages according to
guidance under FASB Staff Position No. Emerging Issues Task
Force (FSP EITF)
00-19-2,
Accounting for Registration Payment Arrangements, which
specifies that the contingent obligation to make future payments
or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included
as a provision of a financial instrument or other agreement,
shall be recognized and measured separately in accordance with
SFAS No. 5, Accounting for Contingencies, and
FIN 14, Reasonable Estimation of the Amount of a
Loss. FSP
EITF 00-19-2
further states that an entity should recognize and measure a
registration payment arrangement as a separate unit of account
from the financial instrument subject to that arrangement.
Accordingly, the Company concluded that the transfer of
consideration under a registration payment arrangement is not
probable at the time of inception or December 31, 2006.
Therefore a contingent liability under the registration payment
arrangement was not recognized.
The New Notes and common stock issuable upon conversion of the
New Notes were registered with the SEC on
Form S-3
on December 15, 2006, and at December 31, 2006, all
New Notes remained issued and outstanding
F-12
Vermillion,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
8.
|
Commitments
and Contingent Liabilities
|
Commitments
On November 17, 2000, the Company originally entered into a
five-year research collaboration agreement with The Johns
Hopkins University School of Medicine (JHU), which
expired on November 30, 2005. The research collaboration
agreement was directed at the discovery and validation of
biomarkers in human subjects, including but not limited to
clinical application of biomarkers in the understanding,
diagnosis and management of human diseases. Since the expiration
on November 30, 2005, the Company had extended the research
collaboration agreement with JHU on a quarterly basis. Most
recently, on September 26, 2007, the Company extended the
research collaboration agreement with JHU through
December 31, 2007, while continuing to negotiate a renewal
collaboration agreement. Under the renewal collaboration
agreement, it is anticipated that Vermillion will have an
obligation to provide additional noncancelable collaboration
funding of $600,000 for 2007 in addition to $73,000 owed for
2006. Under an extended research collaboration agreement with an
expiration date of December 31, 2006, Vermillion had an
outstanding obligation to pay $305,000. Subsequently, under an
extended research collaboration agreement with an expiration
date of March 31, 2007, the outstanding 2006 obligation of
$305,000 was reduced to $73,000 during the three months ended
March 31, 2007. For the nine months ended
September 30, 2007, Vermillion paid $373,000 of
collaboration expenses and as of September 30, 2007,
Vermillion accrued $150,000 for collaboration expenses to JHU.
Collaboration costs related to this agreement were $150,000 and
$218,000 for the three and nine months ended September 30,
2007, respectively, which reflects the $232,000 reduction in
collaboration costs resulting from the extended collaboration
agreement through September 30, 2007. Collaboration costs
related to this agreement were $241,000 and $723,000 for the
three and nine months ended September 30, 2006,
respectively.
On September 22, 2005, the Company entered into a two year
collaborative research agreement with University College London
and UCL Biomedica Plc (together, UCL), which expired
on September 30, 2007. The collaborative research agreement
was directed at the utilization of Vermillions suite of
proteomic solutions (Deep Proteome, Pattern Track Process and
ProteinChip System) to further both parties ongoing
research in ovarian cancer and breast cancer. Under the terms of
the agreement, Vermillion had exclusive rights to license
intellectual property resulting from discoveries made during the
course of this collaboration for use in developing,
manufacturing and commercializing products and services
utilizing the intellectual property. Additionally, Vermillion
had an obligation to contribute $2,131,000 in cash and $652,000
in the form of Vermillion equipment, software, arrays and
consumable supplies as mutually agreed, valued at
Vermillions list selling price, to cover part of the costs
incurred by UCL specifically for this research program.
$1,065,000 of the cash obligation was to be paid in the first
year of the agreement and is noncancelable. The remaining
$1,066,000 was to be paid in the second year of the agreement
and was cancelable with three months advance notice. As of
September 30, 2007, the Company had made cash contributions
of $1,603,000 and accrued $567,000 related to this agreement.
Additionally, the Company provided at its cost $112,000, or
$546,000 valued at Vermillions list selling price, of
equipment, software, arrays and consumable supplies.
Collaboration costs, which are included in research and
development expenses, related to this agreement were $285,000
and $832,000 for the three and nine months ended
September 30, 2007, respectively, and $272,000 and $798,000
for the three and nine months ended September 30, 2006,
respectively.
On October 4, 2006, the Company entered into a one-year
research and development agreement, which has automatic renewals
for two additional one-year terms, with Katholieke Universiteit
Leuven, Belgium, directed at discovery, validation and
characterization of novel biomarkers related to gynecologic
disease. Under the terms of the agreement, Vermillion will have
exclusive rights to license discoveries made during the course
of this collaboration. Vermillion will
contribute 45,000 or $61,000 per year to fund sample
collection at the Katholieke Universiteit Leuven from patients
undergoing evaluation of a persistent pelvic mass who will
undergo surgical intervention. The first year contribution
of 45,000 or $61,000 is noncancelable. As of
September 30, 2007, the Company has paid $61,000 related to
this agreement. Collaboration costs related to
F-13
Vermillion,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
this agreement were $15,000 and $61,000 for the three and nine
months ended September 30, 2007, respectively.
On October 13, 2006, the Company entered into a two-year
research and collaboration agreement, which has automatic
renewals of additional one-year terms, with The Ohio State
University Research Foundation (OSURF) directed at
discovery, purification, identification
and/or
validation of biomarkers related to thrombotic thrombocytopenic
purpura (TTP) and production of associated
technology. Under the terms of the agreement, Vermillion has an
option to take an exclusive license to discoveries made during
the course of this collaboration. During the first fifteen
months of the agreement, Vermillion will pay a total of $150,000
in noncancelable financial contributions to OSURF in
consideration for costs incurred specifically for this research
program. There is no financial contribution obligation for the
remaining initial term of the agreement. As of
September 30, 2007, the Company has paid $94,000 and
accrued $34,000 related to this agreement. Collaboration costs
related to this agreement were $90,000 for the nine months ended
September 30, 2007. The Company did not incur collaboration
costs related to this agreement during the three months ended
September 30, 2007.
On December 11, 2006, Vermillion entered into a consulting
agreement with PrecisionMed International
(PrecisionMed), which was subsequently amended on
April 5, 2007. Under the terms of the amended agreement,
PrecisionMed will collect whole blood specimens from up to 1,000
research subjects for the purposes of Vermillions whole
blood collection protocol for its OvaRI Assay clinical trial.
The amended agreement provides for a maximum payment of
$1,335,000 for 500 research subjects and a maximum payment of
$1,788,000 for 1,000 research subjects. As of September 30,
2007, Vermillion has paid a total of $1,103,000, including
travel expenses of $50,000, and accrued $329,000 related to this
amended agreement. These costs, which are included in research
and development expenses, related to this agreement were
$488,000 and $1,288,000 for the three and nine months ended
September 30, 2007, respectively.
On June 1, 2007, Vermillion entered into a nonexclusive
license agreement with the National Cardiovascular Center
(NCVC), an entity organized and existing under the
laws of Japan. Under this agreement, Vermillion obtained a
ten-year worldwide nonexclusive license with the right to extend
the term for the life of the licensed patent, which includes a
United States Patent Application, a Japan Patent and a Patent
Cooperation Treaty (PCT) Application, for technology
used in our TTP diagnostic test kit that is under development.
Under this agreement, Vermillion will pay NCVC a non-refundable
license fee of $50,000. The payment terms are $20,000 upon
execution of this agreement, $10,000 upon submission of an
in vitro diagnostic test to the FDA for clearance, $10,000
upon the first commercial sale of such in vitro diagnostic
test kit and $10,000 upon achievement of $500,000 in net sales
of such in vitro diagnostic test kits. Additionally,
Vermillion will pay royalties to NCVC for net sales to customers
located in the United Sates, Japan, Europe and China. As of
September 30, 2007, Vermillion has paid $20,000 related to
the execution of this agreement.
In conjunction with the sale of assets and liabilities of the
Companys Instrument Business on November 13, 2006,
Vermillion also entered into a manufacture and supply agreement
with Bio-Rad. Under the terms of the manufacture and supply
agreement, Vermillion has a commitment to purchase 10 systems
and 30,000 arrays in the first year, 13 systems and 30,000
arrays in the second year and 20 systems and 30,000 arrays for
the third year in order to support its collaboration agreements
with Quest, which may be used as inventory for resale, fixed
assets for collaboration purposes or supplies for research and
development. The Company has estimated cost to be $63,000 per
system and $20 per array. As of September 30, 2007, the
Company had purchased and expensed $212,000 of arrays.
F-14
Vermillion,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Contingent
Liabilities
On September 17, 2007, Vermillion was served with a
complaint filed in the Superior Court of California for the
County of Santa Clara naming Vermillion and Bio-Rad as
defendants and Molecular Analytical Systems (MAS) as
plaintiff. The complaint alleges, among other things, that
Vermillion is in breach of its license agreement with MAS
relating to SELDI technology as a result of Vermillions
entry into a sublicense agreement with Bio-Rad. In connection
with the sale of assets and liabilities of the Companys
Instrument Business to Bio-Rad, Vermillion sublicensed to
Bio-Rad certain rights to the SELDI technology that Vermillion
obtained under the MAS license for use outside of the clinical
diagnostics field. Vermillion retained exclusive rights to the
technology for use in the field of clinical diagnostics for a
five-year period, after which it will retain nonexclusive rights
in that field. Given the early stage of this action, we cannot
predict the ultimate outcome of this matter at this time.
On June 26, 2006, Health Discovery Corporation filed a
lawsuit against Vermillion in the United States District Court
for the Eastern District of Texas, Marshall Division (the
Court), claiming that software used in certain of
Vermillions ProteinChip Systems infringes on three of its
United States patents. Health Discovery Corporation sought
injunctive relief as well as unspecified compensatory and
enhanced damages, reasonable attorneys fees, prejudgment
interest and other costs. On August 1, 2006, Vermillion
filed an unopposed motion with the Court to extend the deadline
for Vermillion to answer or otherwise respond until
September 2, 2006. Vermillion filed its answer and
counterclaim to the complaint with the Court on
September 1, 2006. Concurrent with its answer and
counterclaims, Vermillion filed a motion to transfer the case to
the Northern District of California. On January 10, 2007,
the court granted Vermillions motion to transfer the case
to the Northern District of California. The parties met for a
scheduled mediation on May 7, 2007. On July 10, 2007,
Vermillion entered into a license and settlement agreement with
Health Discovery Corporation (the HDC Agreement)
pursuant to which it licensed more than 25 patents covering
Health Discovery Corporations support vector machine
technology for use with SELDI technology. Under the terms of the
HDC Agreement, Vermillion receives a worldwide, royalty-free,
non-exclusive license for life sciences and diagnostic
applications of the technology and has access to any future
patents resulting from the underlying intellectual property in
conjunction with use of SELDI systems. Pursuant to the HDC
Agreement, Vermillion paid $200,000 to Health Discovery
Corporation upon entry into the agreement on July 10, 2007.
The remaining $400,000 under the HDC agreement is payable as
follows: $100,000 three months following the date of the
agreement, $150,000 twelve months following the date of the
agreement and $150,000 twenty-four months following the date of
the agreement. The total settlement of $600,000 was expensed for
nine months ended September 30, 2007. The HDC Agreement
settles all disputes between Vermillion and Health Discovery
Corporation.
Authorized
Shares
At the annual stockholders meeting on June 29, 2007,
the stockholders approved an amendment to the Certificate of
Incorporation to increase the number of authorized shares of
common stock from 80,000,000 to 150,000,000. On July 13,
2007, the Company amended and restated its Certificate of
Incorporation with the State of Delaware for the increased
authorized shares.
Private
Placement Sale
On August 29, 2007 (the Closing Date),
Vermillion completed a private placement sale of
24,513,092 shares of its common stock and warrants to
purchase up to an additional 19,610,470 shares of its
common stock with an exercise price of $0.925 per share and
expiration date of August 29, 2012, to a group of new and
existing investors for $20,591,000 in gross proceeds. The net
proceeds of the transaction will be used for general working
capital needs. Existing investors included affiliates of the
Company, who purchased 9,642,856 shares of common stock and
warrants to purchase up to an additional 7,714,284 shares
of common
F-15
Vermillion,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
stock for $8,100,000. In connection with Quests
participation in this transaction, Vermillion amended a warrant
originally issued to Quest on July 22, 2005. Pursuant to
the terms of the amendment, the exercise price for the purchase
of Vermillions common stock was reduced from $3.50 per
share to $2.50 per share and the expiration date of such warrant
was extended from July 22, 2010, to July 22, 2011. For
services as placement agent, Vermillion paid
Oppenheimer & Co. Inc. (Oppenheimer)
$1,200,000 and issued a warrant to purchase up to
921,000 shares of Vermillions common stock with an
exercise price of $0.925 per share and expiration date of
August 29, 2012. The warrants issued to the investors and
Oppenheimer were valued at $7,194,000 and $581,000,
respectively, based on the fair value as determined by the
Black-Scholes model. The amended value of the warrant issued to
Quest on July 22, 2005, increased by $356,000, which is
reflected in additional paid-in capital. Assumptions used to
value the warrants issued to the investors and Oppenheimer, and
the amended value of the warrant issued to Quest were as follows:
|
|
|
|
|
|
|
|
|
|
|
Private
|
|
|
Amendment to
|
|
|
|
Investors and
|
|
|
Quest
|
|
|
|
Oppenheimer
|
|
|
Diagnostics
|
|
|
|
& Co. Inc.
|
|
|
Incorporated
|
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Volatility
|
|
|
80.14
|
%
|
|
|
82.92
|
%
|
Risk-free interest rate
|
|
|
4.31
|
%
|
|
|
4.24
|
%
|
Expected lives (years)
|
|
|
5.00
|
|
|
|
3.90
|
|
Under the terms of the securities purchase agreement, the
Company is required to prepare and file with the SEC a Shelf
Registration Statement and have the Registration Statement be
declared effective by the SEC. The Company shall pay each
investor liquidated damages of 1/13 of 1.5% of the aggregate
purchase price with respect to any shares not previously sold or
transferred for the following events:
|
|
|
|
|
Each day in excess of 30 days from the Closing Date until
the Shelf Registration Statement is filed with the SEC.
|
|
|
|
Each day in excess of 90 days from the Closing Date until
the Registration Statement is declared effective by the SEC if
no SEC review of the Shelf Registration Statement, or each day
in excess of 120 days from the Closing Date until the
Registration Statement is declared effective by the SEC in the
event of an SEC review of the Registration Statement.
|
|
|
|
Each day for a period in excess of 20 consecutive days or 45
total days in any
12-month
period that the SEC issues a stop order to suspend the
effectiveness of the Registration Statement.
|
The maximum cumulative liquidated damages are 10.0% of the
aggregate purchase price. Payment of liquidated damages is due
30 days after coming into compliance with above events.
Interest is 1.5% every 30 days for delinquent payments.
The Company evaluated the liquidated damages provision according
to guidance under FSP
EITF 00-19-2,
which specifies that the contingent obligation to make future
payments or otherwise transfer consideration under a
registration payment arrangement, whether issued as a separate
agreement or included as a provision of a financial instrument
or other agreement, shall be recognized and measured separately
in accordance with SFAS No. 5 and FIN 14. FSP
EITF 00-19-2
further states that an entity should recognize and measure a
registration payment arrangement as a separate unit of account
from the financial instrument subject to that arrangement. The
Company filed a
Form S-1,
Shelf Registration Statement, with the SEC on September 27,
2007, and is currently under review by the SEC. The Company
considers the likelihood of the Registration Statement not being
declared effective within the prescribed timeframe and the SEC
suspension of the effectiveness of the Registration Statement
for a period of 20 consecutive days or not more than
45 days in any
12-month
period to be remote. As a result, to date no contingent
liability was recorded related to this registration
F-16
Vermillion,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
payment arrangement. As of September 30, 2007, the Company
has incurred costs of $290,000 in connection with the
registration of these securities, which is reflected as a
reduction to additional paid-in capital.
NASDAQ
Listing Requirements Compliance Notification
On August 15, 2007, Vermillion was notified by NASDAQ
Listing Qualifications that it did not comply with Marketplace
Rule 4310(c)(3) for continue inclusion, and as required by
Marketplace Rule 4310(c)(8)(C), Vermillion had
30 days, or until September 14, 2007, to regain
compliance. Marketplace Rule 4310(c)(3) requires Vermillion
to (A) have minimum stockholders equity of
$2,500,000, (B) have a minimum common stock market value of
$35,000,000 or (C) have net income from continuing
operations of $500,000 in the most recently completed fiscal
year or in two of the last three most recently completed fiscal
years. Subsequently, on September 14, 2007, NASDAQ Listing
Qualifications notified Vermillion it had regained compliance
with Marketplace Rule 4310(c)(3) with the market value of
Vermillion common stock exceeding $35,000,000 for 10 consecutive
business days
Additionally, on September 6, 2007, Vermillion was notified
by NASDAQ Listing Qualifications that Vermillions common
stock bid price closed below the minimum $1.00 per share
requirement for continued inclusion by Marketplace
Rule 4310(c)(4), and as required by Marketplace
Rule 4310(c)(8)(D), Vermillion had 180 days, or until
March 4, 2008, to regain compliance. To regain compliance,
the bid price of Vermillions common stock must close at
$1.00 per share or more for a minimum of 10 consecutive business
days.
|
|
10.
|
Stock-Based
Compensation
|
Options for 233,500 shares were granted with an exercise
price of $1.02, and options for 1,667,700 shares were
granted with an average exercise price of $1.26 during the three
and nine months ended September 30, 2007, respectively. The
allocation of stock-based compensation expense by functional
area for the three and nine months ended September 30, 2007
and 2006, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Cost of products revenue
|
|
$
|
|
|
|
$
|
46
|
|
|
$
|
1
|
|
|
$
|
140
|
|
Research and development
|
|
|
52
|
|
|
|
79
|
|
|
|
129
|
|
|
|
273
|
|
Sales and marketing
|
|
|
20
|
|
|
|
66
|
|
|
|
66
|
|
|
|
252
|
|
General and administrative
|
|
|
166
|
|
|
|
223
|
|
|
|
488
|
|
|
|
673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
238
|
|
|
$
|
414
|
|
|
$
|
684
|
|
|
$
|
1,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share is calculated using the weighted average
number of common shares 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 common shares
outstanding and excludes the effects of 37,440,001 and
12,173,606 potential common shares as of September 30, 2007
and 2006, respectively, that are antidilutive. Potential common
shares include common shares issuable upon conversion of all
convertible senior notes, common stock issuable under the
Companys 2000 Employee Stock Purchase Plan, and
incremental shares of common stock issuable upon the exercise of
outstanding stock options and warrants.
F-17
Vermillion,
Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
12.
|
Segment
Information and Geographic Data
|
As a result of the sale of assets and liabilities of the
Companys Instrument Business to Bio-Rad on
November 13, 2006, management has determined that the
Company operates one reportable segment, specialty diagnostic
tests. Prior to November 13, 2006, the Company operated one
reportable segment, which was the protein research products and
collaborative services business.
Prior to November 13, 2006, the Company sold most of its
products and services directly to customers in North America,
Western Europe and Japan, and through distributors in other
parts of Europe, Asia and in Australia. Revenue for geographic
regions reported below is based upon the customers
locations. The following is a summary of the geographic
information related to revenue for the three and nine months
ended September 30, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
United States
|
|
$
|
|
|
|
$
|
1,393
|
|
|
$
|
21
|
|
|
$
|
4,706
|
|
Canada
|
|
|
|
|
|
|
300
|
|
|
|
|
|
|
|
926
|
|
Europe
|
|
|
|
|
|
|
1,652
|
|
|
|
|
|
|
|
6,651
|
|
Asia-Pacific
|
|
|
|
|
|
|
1,317
|
|
|
|
|
|
|
|
4,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
4,662
|
|
|
$
|
21
|
|
|
$
|
16,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to customers in Japan represented 25.1% and 24.0% of
revenue for the three and nine months ended September 30,
2006. Additionally, sales to customers in the United Kingdom
represented 7.7% and 10.3% of revenue for the three and nine
months ended September 30, 2006. No other country outside
the United States accounted for 10% or more of total revenue
during these periods.
Long-lived assets, primarily machinery and equipment, are
reported based on the location of the assets. Long-lived asset
information by geographic area as of September 30, 2007,
and December 31, 2006, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
United States
|
|
$
|
1,607
|
|
|
$
|
2,244
|
|
Europe
|
|
|
6
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,613
|
|
|
$
|
2,260
|
|
|
|
|
|
|
|
|
|
|
On October 23, 2007, the USPTO issued a reexamination
certificate of the 022 Patent to Vermillion. Accordingly, the
Company has submitted the 022 Patent reexamination certificate
to Bio-Rad in order to claim the $2,000,000 withheld from the
sales proceeds. On November 9, 2007, the Company received
from Bio-Rad the $2,000,000 withheld from the sales proceeds.
F-18
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Vermillion, Inc.
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of Vermillion,
Inc. (formerly known as Ciphergen Biosystems, Inc.) and its
subsidiaries at December 31, 2006 and 2005, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2006 in conformity
with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under
Item 15(a)(2) presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial
statements, the Company changed the manner in which it accounts
for stock-based compensation in 2006.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial
statements, the Company has suffered recurring losses and
negative cash flows from operations and has a net capital
deficiency that raise substantial doubt about its ability to
continue as a going concern. Managements plans in regard
to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
San Jose, CA
April 2, 2007
F-19
VERMILLION,
INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share and per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,711
|
|
|
$
|
25,738
|
|
Short-term investment
|
|
|
|
|
|
|
2,240
|
|
Accounts receivable, net of allowance for doubtful accounts of
$2 and $238 respectively
|
|
|
29
|
|
|
|
5,828
|
|
Prepaid expenses and other current assets
|
|
|
2,300
|
|
|
|
1,746
|
|
Inventories
|
|
|
|
|
|
|
5,594
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
20,040
|
|
|
|
41,146
|
|
Property, plant and equipment, net
|
|
|
2,260
|
|
|
|
7,320
|
|
Goodwill
|
|
|
|
|
|
|
76
|
|
Other intangible assets, net
|
|
|
|
|
|
|
2,417
|
|
Other long-term assets
|
|
|
716
|
|
|
|
1,852
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
23,016
|
|
|
$
|
52,811
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,401
|
|
|
$
|
3,188
|
|
Accrued liabilities
|
|
|
4,600
|
|
|
|
6,298
|
|
Deferred revenue
|
|
|
45
|
|
|
|
4,132
|
|
Current portion of capital lease obligations
|
|
|
|
|
|
|
21
|
|
Current portion of equipment financing loan
|
|
|
|
|
|
|
377
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
7,046
|
|
|
|
14,016
|
|
Deferred revenue
|
|
|
|
|
|
|
508
|
|
Capital lease obligations, net of current portion
|
|
|
|
|
|
|
28
|
|
Long-term debt owed to a related party
|
|
|
7,083
|
|
|
|
2,500
|
|
Convertible senior notes, net of discount
|
|
|
18,428
|
|
|
|
28,586
|
|
Other long term liabilities
|
|
|
360
|
|
|
|
650
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
32,916
|
|
|
|
46,288
|
|
|
|
|
|
|
|
|
|
|
Stockholders (deficit) equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value Authorized:
80,000,000 shares at December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
Issued and outstanding: 39,220,437 shares and
35,998,881 shares at December 31, 2006 and 2005
respectively
|
|
|
39
|
|
|
|
36
|
|
Additional paid-in capital
|
|
|
207,991
|
|
|
|
202,485
|
|
Accumulated other comprehensive loss
|
|
|
(71
|
)
|
|
|
(204
|
)
|
Accumulated deficit
|
|
|
(217,860
|
)
|
|
|
(195,794
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders (deficit) equity
|
|
|
(9,901
|
)
|
|
|
6,523
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders (deficit) equity
|
|
$
|
23,016
|
|
|
$
|
52,811
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-20
VERMILLION,
INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
11,292
|
|
|
$
|
18,350
|
|
|
$
|
31,378
|
|
Services
|
|
|
6,923
|
|
|
|
8,896
|
|
|
|
8,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
18,215
|
|
|
|
27,246
|
|
|
|
40,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
5,818
|
|
|
|
9,372
|
|
|
|
11,199
|
|
Services
|
|
|
3,520
|
|
|
|
4,321
|
|
|
|
3,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
9,338
|
|
|
|
13,693
|
|
|
|
15,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
8,877
|
|
|
|
13,553
|
|
|
|
25,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
11,474
|
|
|
|
13,196
|
|
|
|
19,268
|
|
Sales and marketing
|
|
|
12,568
|
|
|
|
18,009
|
|
|
|
26,019
|
|
General and administrative
|
|
|
10,661
|
|
|
|
14,404
|
|
|
|
14,136
|
|
Goodwill Impairment
|
|
|
|
|
|
|
2,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
34,703
|
|
|
|
48,062
|
|
|
|
59,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of instrument business
|
|
|
(6,929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(18,897
|
)
|
|
|
(34,509
|
)
|
|
|
(34,317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
843
|
|
|
|
839
|
|
|
|
505
|
|
Interest expense
|
|
|
(2,254
|
)
|
|
|
(1,993
|
)
|
|
|
(2,001
|
)
|
Loss on extinguishment of debt
|
|
|
(1,481
|
)
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
(125
|
)
|
|
|
(717
|
)
|
|
|
(649
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(21,914
|
)
|
|
|
(36,380
|
)
|
|
|
(36,462
|
)
|
Income tax provision from continuing operations
|
|
|
152
|
|
|
|
7
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(22,066
|
)
|
|
|
(36,387
|
)
|
|
|
(36,571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
(1,797
|
)
|
Gain from sale of discontinued operations, net of tax
|
|
|
|
|
|
|
954
|
|
|
|
18,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations
|
|
|
|
|
|
|
954
|
|
|
|
16,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(22,066
|
)
|
|
$
|
(35,433
|
)
|
|
|
(19,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share from continuing operations
|
|
$
|
(0.61
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(1.25
|
)
|
Net income per share from discontinued operations
|
|
|
|
|
|
|
0.03
|
|
|
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.61
|
)
|
|
$
|
(1.10
|
)
|
|
$
|
(0.68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net income (loss) per share
|
|
|
36,465
|
|
|
|
32,321
|
|
|
|
29,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-21
VERMILLION,
INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS
(DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Receivable
|
|
|
Deferred
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-In
|
|
|
Rom
|
|
|
Stock-Based
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stockholders
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balances, January 1, 2004
|
|
|
29,080
|
|
|
$
|
29
|
|
|
$
|
186,043
|
|
|
$
|
(1,093
|
)
|
|
$
|
(725
|
)
|
|
$
|
4,158
|
|
|
$
|
(140,520
|
)
|
|
$
|
47,892
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,841
|
)
|
|
|
(19,841
|
)
|
Change in unrealized loss on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
7
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
829
|
|
|
|
|
|
|
|
829
|
|
Foreign currency translation gain realized upon sale of BioSepra
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,731
|
)
|
|
|
|
|
|
|
(4,731
|
)
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,736
|
)
|
Stock options exercised
|
|
|
88
|
|
|
|
|
|
|
|
329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
329
|
|
Sale of common stock under employee stock purchase plan
|
|
|
306
|
|
|
|
|
|
|
|
887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
887
|
|
Repurchase of common stock
|
|
|
(1
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
Deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(123
|
)
|
|
|
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
602
|
|
|
|
|
|
|
|
|
|
|
|
602
|
|
Repayment of notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2004
|
|
|
29,473
|
|
|
|
29
|
|
|
|
187,133
|
|
|
|
(349
|
)
|
|
|
|
|
|
|
263
|
|
|
|
(160,361
|
)
|
|
|
26,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,433
|
)
|
|
|
(35,433
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(467
|
)
|
|
|
|
|
|
|
(467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,900
|
)
|
Stock options exercised
|
|
|
12
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Sale of common stock under employee stock purchase plan
|
|
|
264
|
|
|
|
1
|
|
|
|
335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
336
|
|
Sale of stock and warrant to Quest Diagnostics
|
|
|
6,225
|
|
|
|
6
|
|
|
|
14,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,954
|
|
Issuance of common stock to Company officer
|
|
|
25
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
Repayment of notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2005
|
|
|
35,999
|
|
|
|
36
|
|
|
|
202,485
|
|
|
|
|
|
|
|
|
|
|
|
(204
|
)
|
|
|
(195,794
|
)
|
|
|
6,523
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,066
|
)
|
|
|
(22,066
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133
|
|
|
|
|
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,933
|
)
|
Stock options exercised
|
|
|
25
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
Sale of common stock under employee stock purchase plan
|
|
|
110
|
|
|
|
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131
|
|
Warrants issued to Oppenheimer
|
|
|
|
|
|
|
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140
|
|
Sale of common stock to Bio-Rad
|
|
|
3,086
|
|
|
|
3
|
|
|
|
3,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,611
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
1,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2006
|
|
|
39,220
|
|
|
$
|
39
|
|
|
$
|
207,991
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(71
|
)
|
|
$
|
(217,860
|
)
|
|
$
|
(9,901
|
)
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-22
VERMILLION,
INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(22,066
|
)
|
|
$
|
(35,433
|
)
|
|
$
|
(19,841
|
)
|
Adjustments to reconcile net loss to cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,082
|
|
|
|
5,463
|
|
|
|
6,960
|
|
Goodwill impairment
|
|
|
|
|
|
|
2,453
|
|
|
|
|
|
Stock-based compensation expense related to employee stock
options and ESPP
|
|
|
1,615
|
|
|
|
|
|
|
|
|
|
Deferred stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
602
|
|
Common stock issued to Company officer as compensation
|
|
|
|
|
|
|
55
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
1,481
|
|
|
|
|
|
|
|
|
|
Amortization of debt discount associated with beneficial
conversion feature of convertible senior notes
|
|
|
488
|
|
|
|
535
|
|
|
|
536
|
|
Amortization of debt issuance costs
|
|
|
332
|
|
|
|
373
|
|
|
|
373
|
|
Accrued investment income
|
|
|
(5
|
)
|
|
|
(65
|
)
|
|
|
(64
|
)
|
Interest accrued on notes receivable from related parties
|
|
|
|
|
|
|
(6
|
)
|
|
|
(66
|
)
|
Loss on retirement of fixed assets
|
|
|
35
|
|
|
|
242
|
|
|
|
208
|
|
Provision for bad debts
|
|
|
66
|
|
|
|
25
|
|
|
|
214
|
|
Losses on write-down of inventory
|
|
|
130
|
|
|
|
594
|
|
|
|
1,843
|
|
Gain from sale of instrument business to Bio-Rad
|
|
|
(6,929
|
)
|
|
|
|
|
|
|
|
|
Gain from sale of BioSepra business
|
|
|
|
|
|
|
(954
|
)
|
|
|
(18,527
|
)
|
Changes in operating assets and liabilities, net of assets sold
and liabilities relieved:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
3,207
|
|
|
|
4,729
|
|
|
|
2,267
|
|
Prepaid expenses and other current assets
|
|
|
(647
|
)
|
|
|
193
|
|
|
|
572
|
|
Inventories
|
|
|
136
|
|
|
|
900
|
|
|
|
(4,949
|
)
|
Other long-term assets
|
|
|
145
|
|
|
|
(43
|
)
|
|
|
(10
|
)
|
Accounts payable and accrued liabilities
|
|
|
(1,075
|
)
|
|
|
(257
|
)
|
|
|
(2,827
|
)
|
Deferred revenue
|
|
|
(1,174
|
)
|
|
|
(1,702
|
)
|
|
|
4
|
|
Other long-term liabilities
|
|
|
(260
|
)
|
|
|
1
|
|
|
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(20,439
|
)
|
|
|
(22,897
|
)
|
|
|
(32,458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(589
|
)
|
|
|
(2,837
|
)
|
|
|
(4,568
|
)
|
Proceeds from capital lease financing to reimburse previous cash
outlays to purchase facility improvements
|
|
|
|
|
|
|
|
|
|
|
601
|
|
Maturities of short-term investments
|
|
|
2,245
|
|
|
|
|
|
|
|
11,261
|
|
Short-term investments sold prior to maturity
|
|
|
|
|
|
|
|
|
|
|
850
|
|
Payment for license related to litigation settlement
|
|
|
(346
|
)
|
|
|
(587
|
)
|
|
|
(1,038
|
)
|
Payment to Pall Corporation for post-closing adjustments related
to sale of BioSepra business
|
|
|
|
|
|
|
(1,111
|
)
|
|
|
|
|
Increase in goodwill from BioSepra acquisition due to income tax
settlement
|
|
|
|
|
|
|
|
|
|
|
(203
|
)
|
Purchase of Ciphergen Biosystems KK common stock
|
|
|
|
|
|
|
|
|
|
|
(1,000
|
)
|
Proceeds from the sale of instrument business to Bio-Rad, net of
transaction costs
|
|
|
15,218
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of BioSepra business, net of transaction costs
|
|
|
|
|
|
|
1,021
|
|
|
|
28,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
16,528
|
|
|
|
(3,514
|
)
|
|
|
33,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of common stock to Bio-Rad
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to Quest Diagnostics
|
|
|
|
|
|
|
14,954
|
|
|
|
|
|
Proceeds from loan from Quest Diagnostics
|
|
|
4,583
|
|
|
|
2,500
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
Proceeds from exercises of stock options
|
|
|
12
|
|
|
|
14
|
|
|
|
329
|
|
Proceeds from issuance of common stock under employee stock
purchase plan
|
|
|
130
|
|
|
|
336
|
|
|
|
887
|
|
Repayment of notes receivables from stockholder
|
|
|
|
|
|
|
349
|
|
|
|
744
|
|
Principal payments on capital lease obligations
|
|
|
(37
|
)
|
|
|
(24
|
)
|
|
|
(376
|
)
|
Debt discount and issuance costs of convertible senior notes
|
|
|
(479
|
)
|
|
|
|
|
|
|
|
|
Repayments of convertible senior notes
|
|
|
(11,000
|
)
|
|
|
|
|
|
|
|
|
Repayments of long-term debt
|
|
|
(377
|
)
|
|
|
(925
|
)
|
|
|
(789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(4,168
|
)
|
|
|
17,204
|
|
|
|
792
|
|
Effect of exchange rate changes
|
|
|
52
|
|
|
|
(447
|
)
|
|
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(8,027
|
)
|
|
|
(9,654
|
)
|
|
|
2,539
|
|
Cash and cash equivalents, beginning of year
|
|
|
25,738
|
|
|
|
35,392
|
|
|
|
32,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
17,711
|
|
|
$
|
25,738
|
|
|
|
35,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,732
|
|
|
$
|
783
|
|
|
|
1,593
|
|
Cash paid for income taxes
|
|
|
227
|
|
|
|
44
|
|
|
|
2,135
|
|
Supplemental schedule of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment under capital leases
|
|
|
|
|
|
|
40
|
|
|
|
21
|
|
Transfer of fixed assets to (from) inventory
|
|
|
(793
|
)
|
|
|
283
|
|
|
|
446
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-23
VERMILLION,
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Organization
and Summary of Significant Accounting Policies
|
The
Company
Vermillion, Inc. (formerly known as Ciphergen Biosystems, Inc.)
and subsidiaries (the Company or
Vermillion) is dedicated to the discovery,
development and commercialization of specialty diagnostic tests
that provide physicians with information with which to manage
their patients care and that improve patient outcomes. We intend
to use translational proteomics, which is the process of
answering clinical questions by utilizing advanced protein
separation tools to identify and resolve variants of specific
biomarkers, developing assays, and commercializing tests.
Prior to the November 13, 2006 sale of our protein research
tools and collaborative services business (instrument
business) to Bio-Rad, Vermillion developed, manufactured
and sold
ProteinChip®
Systems for life science research. This core technology, which
was patented, is Surface Enhanced Laser Desorption/Ionization
(SELDI). The systems consist of ProteinChip Readers,
ProteinChip Software and related accessories, which were used in
conjunction with consumable ProteinChip Arrays. These products
were sold primarily to biologists at pharmaceutical and
biotechnology companies, and academic and government research
laboratories. The Company also provided research services
through its Biomarker Discovery
Center®
laboratories, and offered consulting services, customer support
services and training classes to its customers and
collaborators. As a result of the sale of the instruments
business to Bio-Rad, Vermillion did not record any sales
subsequent to November 13, 2006 and will not generate
substantial revenues until certain diagnostic tests are approved
by the FDA and commercialized.
The accompanying consolidated financial statements of the
Company were prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has
incurred significant net losses and negative cash flows from
operations since inception. At December 31, 2006, the
Company had an accumulated deficit of $217.9 million.
Management believes that currently available resources together
with existing debt facilities will not be sufficient to fund the
Companys obligations. The Companys ability to
continue to meet its obligations and to achieve its business
objectives is dependent upon, among other things, raising
additional capital or generating sufficient revenue in excess of
costs. At such time as the Company requires additional funding,
the Company may seek to raise such additional funding from
various sources, including the public equity market, private
financings, sales of assets, collaborative arrangements and
debt. If additional capital is raised through the issuance of
securities convertible into equity, stockholders will experience
dilution, and such securities may have rights, preferences or
privileges senior to those of the holders of common stock or
convertible senior notes. If the Company obtains additional
funds through arrangements with collaborators or strategic
partners, it may be required to relinquish its rights to certain
technologies or products that it might otherwise seek to retain.
There can be no assurance that the Company will be able to
obtain such financing, or obtain it on acceptable terms. If
Vermillion is unable to obtain financing on acceptable terms, it
may be unable to execute its business plan, it could be required
to delay or reduce the scope of its operations, and it may not
be able to pay off the convertible senior notes if and when they
come due.
The Companys inability to operate profitably and to
consistently generate cash flows from operations, its reliance
on external funding either from loans or equity, raise
substantial doubt about the Companys ability to continue
as a going concern.
Basis
of Presentation
The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally
accepted in the United States of America and include the
accounts of the Company and its subsidiaries. All intercompany
transactions have been eliminated in consolidation. BioSepra
S.A. was a wholly-owned subsidiary and was consolidated through
November 30, 2004, at which time the Company sold
F-24
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
BioSepra S.A., along with other assets related to its process
chromatography business. The BioSepra business is reflected as a
discontinued operation in the statement of operations.
Use of
Estimates
The preparation of consolidated financial statements in
accordance with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Certain
Risks and Uncertainties
The success of the Company depends on managements ability
to anticipate and to respond quickly and adequately to
technological developments in its industry, changes in customer
requirements and changes in industry standards. Any significant
delays in the development or introduction of new products or
services could have a material adverse effect on the
Companys business and operating results.
The Company licenses certain technologies that will be used in
products that are under development. An inability to retain such
technology licenses could result in a material adverse effect to
the Company. Additionally, some of the raw materials and
components used in its products are from single-source
suppliers. If the Company is unable to obtain such raw materials
and components, its financial condition and operating results
could be significantly impacted.
Cash
and Cash Equivalents
The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents.
Investments
Management determines the appropriate classification of the
Companys investments in marketable debt securities at the
time of purchase, and re-evaluates this designation at each
balance sheet date. At December 31, 2005, the Company
classified all marketable securities as
available-for-sale and carried them at fair value
with unrealized gains or losses related to these securities
included as a component of other comprehensive income (loss)
until realized. At December 31, 2006, the Company did not
have any investments in marketable debt securities. The
amortized cost of debt securities is adjusted for amortization
of premiums and accretion of discounts to maturity, which is
included in interest income. Realized gains and losses are
determined using the specific identification method. The cost of
securities sold is based on the specific identification method.
The Companys short-term investment at December 31,
2005 consisted of an investment in a fixed rate annuity. The
annuity is not within the scope of SFAS 115,
Accounting for Certain Investments in Debt and Equity
Securities. However, fair value approximates its carrying
value due to its short maturity. In February 2006, the Company
liquidated this investment.
The Companys investment objectives include the
preservation of invested funds and liquidity of investments that
is sufficient to meet cash flow requirements. Cash, cash
equivalents and investments in debt securities are with high
credit-quality financial institutions, commercial companies and
government agencies in order to limit the amount of credit
exposure.
F-25
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair
Value of Financial Instruments
The estimated fair value of financial instruments has been
determined using available market information or other
appropriate valuation methodologies. However, considerable
judgment is required in interpreting market data to develop
estimates of fair value; therefore, the estimates are not
necessarily indicative of the amounts that could be realized or
would be paid in a current market exchange. The effect of using
different market assumptions and/orestimation methodologies may
be material to the estimated fair value amounts. The carrying
amounts of certain of the Companys financial instruments
including cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximated fair value
due to their short maturities. The carrying value of the capital
leases approximated their fair value based on the borrowing
rates currently available to the Company for loans with similar
terms. The carrying value of the equipment financing loan and
the long-term debt from the credit facility provided by Quest
Diagnostics approximated their fair values based on discounting
the future cash flows using applicable spreads to approximate
current interest rates available to the Company. Convertible
senior notes have an estimated fair value based on quoted market
prices. The fair value of the convertible senior notes as
compared to their book value was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Book Value
|
|
|
Fair Value
|
|
|
Book Value
|
|
|
Fair Value
|
|
|
4.5% Convertible senior notes due 9/1/08
|
|
$
|
2,427
|
|
|
$
|
1,456
|
|
|
$
|
28,586
|
|
|
$
|
21,600
|
|
7.0% Convertible senior notes due 9/1/11
|
|
$
|
16,001
|
|
|
$
|
13,201
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,428
|
|
|
$
|
14,657
|
|
|
$
|
28,586
|
|
|
$
|
21,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentration
of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash
equivalents, investments in marketable debt securities and
accounts receivable. Most of the Companys cash and cash
equivalents as of December 31, 2006 were deposited with
financial institutions in the U.S. and exceeded federally
insured amounts. The Company also maintains cash deposits with
banks in Western Europe, Canada, China and Japan. The Company
has not experienced any losses on its deposits of cash and cash
equivalents. At December 31, 2006, the Company did not have
any investments in marketable debt securities. At
December 31, 2005, the Company had $2.2 million of
investments in marketable debt securities.
The Companys accounts receivable are derived from sales
made to customers located in North America, Europe and Asia. The
Company performs ongoing credit evaluations of its
customers financial condition and generally does not
require collateral. The Company maintains an allowance for
doubtful accounts based upon the expected collectibility of
accounts receivable. No customer accounted for 10% or more of
revenue in 2004, 2005 or 2006.
Inventories
Inventories are stated at the lower of standard cost, which
approximates cost on a
first-in,
first-out basis, or market value. Cost includes direct
materials, direct labor, contracted manufacturing services and
manufacturing overhead. Reserves for potentially excess and
obsolete inventory are recorded based on managements
analysis of inventory levels, planned changes in product
offerings, sales forecasts and other factors.
Property,
Plant and Equipment
Property, plant and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and
amortization are computed for financial reporting purposes
principally using the straight-line
F-26
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
method over the following estimated useful lives: machinery and
equipment, 3-5 years; demonstration equipment,
2 years; computer equipment, development systems used for
collaborations and software, 3 years; furniture and
fixtures, 5 years; buildings and leasehold improvements,
the lesser of their economic life or the term of the underlying
lease. The cost of repairs and maintenance is charged to
operations as incurred. Gains and losses resulting from
disposals of assets are reflected in the year of disposition.
Goodwill
and Other Intangible Assets
Goodwill represented the excess of the purchase price over the
estimated fair value of the tangible and intangible net assets
acquired in the Companys acquisitions of IllumeSys
Pacific, Inc. in 1997, Ciphergen Technologies, Inc. in 1998 and
Ciphergen Biosystems KK in 2002 and 2004. Goodwill is reviewed
for impairment at least annually and in the interim whenever
events or changes in circumstances indicate that the carrying
amount of goodwill may be impaired. In determining whether there
is an impairment of goodwill, the estimated fair value of the
reporting unit in which the goodwill is recorded is calculated
using a discounted future cash flow method. The resulting fair
value is then compared to the net book value of the reporting
unit, including goodwill. If the net book value of a reporting
unit exceeds its fair value, the amount of the impairment loss
is measured by comparing the implied fair value of the reporting
units goodwill with the carrying amount of that goodwill.
To the extent that the carrying amount of a reporting
units goodwill exceeds its implied fair value, a goodwill
impairment loss is recognized. In connection with the
November 13, 2006 sale of the instrument business to
Bio-Rad, the remaining carrying amount of goodwill of $76,000
was written off.
Other intangible assets represented a technology license
acquired in connection with the settlement of litigation in 2003
which is stated at cost and was being amortized on a
straight-line basis over its estimated useful life of
17 years. Other intangible assets were reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may no longer be
recoverable. In connection with the November 13, 2006 sale
of the instrument business, there are no longer any intangible
assets recorded on our balance sheet as the intangible assets
were associated with the instrument business sold to Bio-Rad.
Long-lived
Assets
Long-lived assets, such as property, plant and equipment and
purchased intangible assets, are reviewed for impairment when
events or changes in circumstances indicate the carrying amount
of an asset may not be recoverable. Recoverability is measured
by comparison of an asset groups carrying amount to future
net undiscounted cash flows the asset group is expected to
generate. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the projected
discounted future net cash flows arising from the assets. As of
December 31, 2006, the Company believes no such impairment
existed. Other long-term assets consist primarily of the
offering costs of the convertible senior notes and security
deposits for the Companys leased facilities.
Revenue
Recognition
Revenue from product sales, including systems, accessories and
consumables is recognized upon product shipment, provided no
significant obligations remain and collection of the receivables
was reasonably assured. Revenue from shipping and handling is
generally recognized upon product shipment, based on the amount
billed to customers for shipping and handling. The related cost
of shipping and handling is included in cost of revenue upon
product shipment.
Revenue from sales of separately priced software products is
recognized when realized or realizable and earned, which is when
the following criteria are met:
|
|
|
|
|
persuasive evidence of an agreement exists,
|
F-27
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
the price is fixed or determinable,
|
|
|
|
the product has been delivered,
|
|
|
|
no significant obligations remain, and
|
|
|
|
collection of the receivable is deemed probable.
|
The Company generally includes a standard
12-month
warranty on its instruments and accessories in the form of a
maintenance contract upon initial sale. The Company also sold
separately priced maintenance (extended warranty) contracts,
which were generally for 12 or 24 months, upon expiration
of the initial maintenance contract. Coverage under both the
standard and extended maintenance contracts is identical.
Revenue for both the standard and extended maintenance contracts
was deferred and recognized ratably over the maintenance
contract term. Related costs were expensed as incurred. Factors
that affected the Companys warranty costs included the
number of installed units, historical and anticipated rates of
warranty claims, and cost per claim. In connection with the
November 13, 2006 sale of the instrument business, Bio-Rad
assumed the rights and obligations under the warranty obligation
and maintenance contracts.
For revenue from Biomarker Discovery Center contracts and other
consulting contracts, if elements were specifically tied to a
separate earnings process, then revenue related to an element
was recognized when the specific performance obligation
associated with that element was completed. When revenues for an
element were not specifically tied to a separate earnings
process, they were recognized ratably over the term of the
agreement. Revenue from Biomarker Discovery Center services and
other consulting contracts were recognized at the completion of
key stages in the performance of the service as described in
Vermillions agreement with the customer. Often there was
only a single element, namely delivery of a scientific report
upon completion of Vermillions analysis of customer
samples, in which case the Company recognized all the revenue
upon the conclusion of the project when all deliverables have
been provided to the customer. Revenue was deferred for fees
received before earned. Vermillions training was billed
based on published course fees and the Company generally
recognizes revenue as the training is provided to the customer.
BioMarker Discovery contracts and other consulting contracts
were transferred to Bio-Rad as part of the sale of the
instrument business.
For revenue arrangements with multiple elements that are
delivered at different points in time (for example, where
Vermillion has delivered the hardware and software but is also
obligated to provide services, maintenance
and/or
training), the Company evaluated whether the delivered elements
have standalone value to the customer, whether the fair value of
the undelivered elements was reliably determinable, and whether
the delivery of the remaining elements was probable and within
the Companys control. When all these conditions were met,
the Company recognizes revenue on the delivered elements. If any
one of these conditions is not met, the Company deferred the
recognition of revenue until all these conditions were met or
all elements had been delivered. Fair values for ongoing
maintenance were based upon separate sales of renewals to other
customers. Fair values for services, such as training or
consulting, were based upon separate sales by the Company of
those services to other customers.
Research
and Development Costs
Research and development expenditures are charged to operations
as incurred. Research and development costs consist primarily of
payroll and related costs, materials and supplies used in the
development of new products, and fees paid to consultants and
outside service providers. Software development costs incurred
in the research and development of new products are expensed as
incurred until technological feasibility is established. To
date, products and upgrades have generally reached technological
feasibility and have been released for sale at substantially the
same time.
F-28
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Advertising
Costs
The Company expenses advertising costs as incurred. Advertising
costs were $87,000 in 2006, $285,000 in 2005, and $665,000 in
2004.
Stock-based
Compensation
Effective January 1, 2006, the Company adopted
SFAS No. 123 (revised), Share-Based
Payment (SFAS 123(R)), using the modified
prospective transition method. Under this new standard, the
Companys estimate of compensation expense requires a
number of complex and subjective assumptions, including the
price volatility of Vermillions common stock, employee
exercise patterns (expected life of the options), future
forfeitures and related tax effects. Prior to the adoption of
SFAS 123(R), the Company accounted for stock option grants
using the intrinsic value method, in accordance with APB Opinion
No. 25, Accounting for Stock Issued to
Employees (APB 25), and accordingly,
recognized no compensation expense for stock option grants.
Under the modified prospective approach, SFAS 123(R)
applies to new awards and to awards that were outstanding on
January 1, 2006 that are subsequently modified, repurchased
or cancelled. Under the modified prospective approach,
compensation cost recognized in 2006 includes compensation cost
for all stock-based payments granted prior to, but not yet
vested as of, January 1, 2006, based on the grant-date fair
value estimated in accordance with the original provisions of
SFAS 123, and compensation cost for all stock-based
payments granted subsequent to January 1, 2006, based on
the grant-date fair value estimated in accordance with the
provisions of SFAS 123(R). Prior periods were not restated
to reflect the impact of adopting the new standard.
The value of each option grant was estimated on the date of
grant using the Black-Scholes option pricing model in 2006, 2005
and 2004 with the following weighted assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Plan
|
|
|
Employee Stock Purchase Plan
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
4.8
|
%
|
|
|
4.1
|
%
|
|
|
3.2
|
%
|
|
|
5.0
|
%
|
|
|
3.5
|
%
|
|
|
1.9
|
%
|
Expected life
|
|
|
6.1 years
|
|
|
|
5 years
|
|
|
|
5 years
|
|
|
|
0.5 year
|
|
|
|
0.5 year
|
|
|
|
0.5 year
|
|
Expected volatility
|
|
|
86
|
%
|
|
|
90
|
%
|
|
|
93
|
%
|
|
|
85
|
%
|
|
|
90
|
%
|
|
|
93
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise price less than market price
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.63
|
|
|
$
|
0.71
|
|
|
$
|
1.43
|
|
Exercise price equal to market price
|
|
$
|
0.90
|
|
|
$
|
1.21
|
|
|
$
|
5.56
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Exercise price greater than market price
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
The expected term of stock options represents the
weighted-average period the stock options are expected to remain
outstanding and is based on the observed and expected time to
post-vesting exercise and post-vesting cancellations of options
by employees. Upon the adoption of SFAS 123(R), the Company
used a combination of historical and peer group volatility for a
blended volatility in deriving its expected volatility
assumption as allowed under SFAS 123(R) and
SAB No. 107. Prior to January 1, 2006, the
Company used the historical volatility. The selection of the
blended volatility approach was based upon the Companys
assessment that blended volatility is more representative of
future stock price trends than just using historical or peer
group volatility. The risk-free interest rate assumption is
based upon observed interest rates appropriate for the term
F-29
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of the Companys stock options. The expected dividend
assumption is based on the Companys history and
expectation of dividend payouts.
The stock-based compensation expense recognized in the
consolidated statements of operations for the year ended
December 31, 2006 is based on awards ultimately expected to
vest and has been reduced for estimated forfeitures.
SFAS 123(R) requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Forfeitures
were estimated based on historical experience. In the
Companys pro forma information required under
SFAS 123(R)for the periods prior to January 1, 2006,
the Company accounted for forfeitures as they occurred.
As a result of adopting SFAS 123(R), the Companys net
loss, and basic and diluted loss per share for the year ended
December 31, 2006 would have been $1.6 million and
$0.04 per share higher, respectively, than if it had continued
to account for stock-based compensation under APB Opinion
No. 25. The Company has a 100% valuation allowance recorded
against its deferred tax assets. Therefore SFAS 123(R) had
no effect on the income tax provision in the consolidated
statement of operations or the consolidated statement of cash
flows. Stock-based compensation expense by type of award for the
years ended December 31, 2006, 2005 and 2004 are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Stock-based compensation expense by type of award:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options & employee stock purchases
|
|
$
|
1,615
|
|
|
$
|
|
|
|
$
|
|
|
Amortization of deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
1,615
|
|
|
$
|
|
|
|
$
|
602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to 2006, the Company accounted for its stock-based
employee compensation arrangements using the intrinsic value
method of accounting. Unearned compensation expense was based on
the difference, if any, on the date of the grant between the
fair value of the Companys stock and the exercise price.
Unearned compensation was amortized and expensed using an
accelerated method. The Company accounted for stock issued to
non-employees using the fair value method of accounting. The
following table illustrates the effect on the Companys net
loss and net loss per share had compensation expense for
stock-based compensation been determined in accordance with
SFAS 123 for these prior periods as follows (in thousands,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Net loss as reported
|
|
$
|
(35,433
|
)
|
|
$
|
(19,841
|
)
|
Add: Employee stock-based compensation expense in reported net
income, net of tax
|
|
|
|
|
|
|
621
|
|
Less: Employee stock-based compensation expense determined under
the fair value method, net of tax
|
|
|
(5,725
|
)
|
|
|
(6,369
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(41,158
|
)
|
|
$
|
(25,589
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(1.10
|
)
|
|
$
|
(0.68
|
)
|
Pro forma
|
|
$
|
(1.27
|
)
|
|
$
|
(0.88
|
)
|
Income
Taxes
The Company accounts for income taxes using the liability
method. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial
statement and the tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the
differences are expected to
F-30
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
affect taxable income. A valuation allowance is established when
necessary to reduce deferred tax assets to the amounts expected
to be realized.
Foreign
Currency Translation
The functional currency of Ciphergen Biosystems KK is the
Japanese yen. Accordingly, all balance sheet accounts of this
operation are translated into U.S. dollars using the
current exchange rate in effect at the balance sheet date. The
revenues and expenses of Ciphergen Biosystems KK are translated
using the average exchange rates in effect during the period,
and the gains and losses from foreign currency translation are
recorded directly into a separate component of
stockholders equity under the caption Accumulated
other comprehensive loss.
The functional currency of BioSepra S.A. was the Euro. Upon the
completion of the sale of BioSepra on November 30, 2004,
the cumulative translation adjustment relating to BioSepra was
included in the determination of the gain on the sale.
The functional currency of all other
non-U.S. operations
is the U.S. dollar. Accordingly, all monetary assets and
liabilities of these foreign operations are translated into
U.S. dollars at current period-end exchange rates and
non-monetary assets and related elements of expense are
translated using historical rates of exchange. Income and
expense elements are translated to U.S. dollars using
average exchange rates in effect during the period. Gains and
losses from the foreign currency transactions of these
subsidiaries are recorded as other income or loss in the
statement of operations, and were not material for all years
presented.
Recent
Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109
(FIN 48), which clarifies the accounting for uncertainty in
tax positions. This Interpretation requires that we recognize in
our financial statements the impact of a tax position if that
position is more likely than not of being sustained on audit,
based on the technical merits of the position. The provisions of
FIN 48 are effective as of the beginning of The
Companys 2007 fiscal year, with the cumulative effect, if
any, of the change in accounting principle recorded as an
adjustment to opening retained earnings. The Company is
currently evaluating the impact of adopting FIN 48 on its
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted
accounting principles and expands disclosures about fair value
measurements. The provisions of SFAS 157 are effective for
fiscal years beginning after November 15, 2007. The Company
is currently evaluating the impact, if any, of the adoption of
SFAS 157 will have on its consolidated financial statements.
In September 2006, the SEC issued Staff Accounting
Bulletin No. 108 (SAB 108) in order to
eliminate the diversity of practice surrounding how public
companies quantify financial statement misstatements.
Traditionally, there have been two widely-recognized methods for
quantifying the effects of financial statement misstatements:
the roll-over method and the iron
curtain method. The roll-over method focuses
primarily on the impact of a misstatement on the income
statement, including the reversing effect of prior period
misstatements; but its use can lead to the accumulation of
misstatements in the balance sheet. The iron-curtain
method, on the other hand, focuses primarily on the effect of
correcting the period-end balance sheet with less emphasis on
the reversing effects of prior period errors on the income
statement. The Company currently uses the
iron-curtain method for quantifying identified
financial statement misstatements. In SAB 108, the SEC
staff established an approach that requires quantification of
financial statement misstatements based on the effects of the
misstatements on each of our financial statements and the
related financial statement disclosures. This model is commonly
referred to as a dual approach because it requires
F-31
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
quantification of errors under both the iron curtain
and the roll-over methods. SAB 108 permits
existing public companies to initially apply its provisions
either by (i) restating prior financial statements as if
the dual approach had always been used or
(ii) recording the cumulative effect of initially applying
the dual approach as adjustments to the carrying
values of assets and liabilities as of the beginning of the
current fiscal year with an offsetting adjustment to the opening
balance of retained earnings in the year of adoption. Use of the
cumulative effect transition method requires
detailed disclosure of the nature and amount of each individual
error being corrected through the cumulative adjustment and how
and when it arose. The provisions of SAB 108 must be
applied to annual financial statements no later than the first
fiscal year ending after November 15, 2006. Upon adoption,
there was no impact on the Companys consolidated financial
statements or related disclosures.
|
|
2.
|
Strategic
Alliance with Quest Diagnostics
|
On July 22, 2005, the Company entered into a strategic
alliance agreement with Quest Diagnostics covering a three year
period during which the parties will strive to develop and
commercialize up to three diagnostic tests. Pursuant to the
agreement, Quest Diagnostics will have the non-exclusive right
to commercialize these tests on a worldwide basis, with
exclusive commercialization rights in territories where
Quest Diagnostics has a significant presence for up to five
years following commercialization. As part of the strategic
alliance, there is a royalty arrangement under which Quest
Diagnostics will pay royalties to Vermillion based on fees
earned by Quest Diagnostics for applicable diagnostics services,
and Vermillion will pay royalties to Quest Diagnostics based on
Vermillions revenue from applicable diagnostics products.
To date, no such royalties have been earned by either party.
Quest Diagnostics and Vermillion have also entered into a supply
agreement under which Vermillion will sell instruments and
consumable supplies to Quest Diagnostics to be used for
performing diagnostics services which Vermillion will purchase
from Bio-Rad under its manufacturing and supply agreement (see
Note 12, Commitments and Contingencies). In
addition, for an aggregate purchase price of $15 million,
Quest Diagnostics purchased 6,225,000 shares of
Vermillions common stock, or approximately 17.4% of shares
outstanding after the transaction, and a warrant having a term
of five years to purchase up to an additional
2,200,000 shares for $3.50 per share. The warrant was
valued at approximately $2.2 million based on the fair
value as determined by a Black-Scholes model using the following
assumptions: risk-free interest rate, 4.04%; expected life,
5 years; expected volatility 69%. Quest Diagnostics also
agreed to loan Vermillion up to $10 million with interest
accrued at the prime rate plus 0.5% and paid monthly, solely to
fund certain development activities related to the strategic
alliance. Borrowings may be made by Vermillion in monthly
increments of up to approximately $417,000 on the last day of
each month during the first two years of the strategic alliance,
and at December 31, 2006, such borrowings amounted to
$7.1 million. This loan, collateralized by certain
intellectual property of Vermillion, will be forgiven based on
Vermillions achievement of certain milestones related to
development, regulatory approval and commercialization of
certain diagnostic tests. Should the Company fail to achieve
these milestones, the outstanding principal amount of any such
loans will become due and payable on July 22, 2010. From
the inception of the strategic alliance through
December 31, 2006, the Company had spent approximately
$7.1 million of the loan proceeds on in-house research and
development, as well as collaborations with others, directed
towards achieving the milestones.
F-32
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
3. Inventories,
Net (in thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Raw materials
|
|
$
|
|
|
|
$
|
1,775
|
|
Work in progress
|
|
|
|
|
|
|
1,241
|
|
Finished goods
|
|
|
|
|
|
|
2,578
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
5,594
|
|
|
|
|
|
|
|
|
|
|
As a result of the sale of the instrument business to Bio-Rad,
the company has no inventory as of December 31, 2006.
|
|
4.
|
Property,
Plant and Equipment, Net (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Machinery and equipment
|
|
$
|
3,853
|
|
|
$
|
11,760
|
|
Demonstration equipment
|
|
|
649
|
|
|
|
3,505
|
|
Leasehold improvements
|
|
|
2,753
|
|
|
|
3,669
|
|
Computers and equipment
|
|
|
720
|
|
|
|
1,778
|
|
Furniture and fixtures
|
|
|
197
|
|
|
|
827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,172
|
|
|
|
21,539
|
|
Less: Accumulated depreciation and amortization
|
|
|
(5,912
|
)
|
|
|
(14,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,260
|
|
|
$
|
7,320
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment included $0 and $183 of machinery
and equipment under capital leases at December 31, 2006 and
2005, respectively. Accumulated amortization of assets under
capital leases totaled $0 and $136 at December 31, 2006 and
2005, respectively.
The Company had no construction in progress at December 31,
2006 and 2005.
Depreciation expense for property, plant and equipment was
$3,175 in 2006, $4,253 in 2005, and $4,741 in 2004.
|
|
5.
|
Purchase
of Additional Ownership Interest in Ciphergen Biosystems
KK
|
In January 1999, the Company formed Ciphergen Biosystems KK as a
joint venture with Sumitomo Corporation to distribute the
Companys products in Japan. On March 23, 2004, the
Company acquired Sumitomos remaining interest in Ciphergen
Biosystems KK, bringing its total ownership to 100%. The Company
paid $1.0 million in cash. Acquisition costs were
immaterial. The acquisition was accounted for using the purchase
method of accounting.
F-33
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The total purchase price was allocated to the estimated fair
value of assets acquired and liabilities assumed as follows (in
thousands):
|
|
|
|
|
Tangible net assets acquired:
|
|
|
|
|
Accounts receivable, net, and other current assets
|
|
$
|
1,804
|
|
Inventories
|
|
|
218
|
|
Property and equipment
|
|
|
281
|
|
Other tangible assets
|
|
|
101
|
|
Accounts payable and accrued liabilities, including working
capital loans
|
|
|
(2,221
|
)
|
Capital lease obligations
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
165
|
|
Excess of purchase price over net assets acquired
|
|
|
835
|
|
|
|
|
|
|
|
|
$
|
1,000
|
|
|
|
|
|
|
The amount of the purchase price in excess of the net assets
acquired was recorded as goodwill. We performed annual
impairment tests through 2004 and determined that no impairment
had occurred. Due to Ciphergen Biosystems KKs lower than
expected operating results and cash flows throughout 2005 and
based on revised forecasted results, a goodwill impairment loss
of $2.5 million was recorded in the fourth quarter of 2005.
The fair value of Ciphergen Biosystems KK was estimated using
expected discounted cash flows.
|
|
6.
|
Gain on
Sale of Instrument Business
|
On November 13, 2006, Vermillion completed the sale to
Bio-Rad Laboratories, Inc. (Bio-Rad) of the
Companys protein research tools and collaborative services
business (the instrument business), which includes
the Companys SELDI technology, ProteinChip (R) arrays and
accompanying software through an asset sale transaction (the
Asset Sale). Pursuant to the terms of the Asset Sale
entered into with Bio-Rad on August 14, 2006, Bio-Rad paid
the Company approximately $16 million in cash at the
closing of the transaction. An additional $4.0 million of
contingent cash consideration includes $2.0 million,
subject to certain adjustments, to be held in escrow as security
for certain obligations of the Company for three years following
the closing, and $2.0 million as a holdback amount to be
held by Bio-Rad until the issuance of a re-examination
certificate confirming a SELDI patent. (See Note 22
Subsequent Events, of the Notes to Consolidated
Financial Statements).
F-34
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The $6.9 million gain recognized in 2006 on sale of the
instrument business to Bio-Rad is summarized as follows (in
thousands):
|
|
|
|
|
Net Proceeds
|
|
|
|
|
Cash proceeds received
|
|
$
|
19,000
|
|
Less: Transaction costs
|
|
|
(782
|
)
|
|
|
|
|
|
|
|
|
18,218
|
|
|
|
|
|
|
Cost basis:
|
|
|
|
|
Accounts receivable, net, and other current assets
|
|
|
2,661
|
|
Inventories
|
|
|
4,536
|
|
Property, plant and equipment, net
|
|
|
3,231
|
|
Other intangible assets
|
|
|
1,856
|
|
Goodwill
|
|
|
76
|
|
Other long-term assets
|
|
|
152
|
|
Accounts payable and accrued liabilities
|
|
|
(1,400
|
)
|
Deferred Revenues
|
|
|
(3,420
|
)
|
Capital lease obligations
|
|
|
(14
|
)
|
Common stock issued
|
|
|
3,611
|
|
|
|
|
|
|
|
|
|
11,289
|
|
|
|
|
|
|
Gain on sale of Instrument Business
|
|
$
|
6,929
|
|
|
|
|
|
|
On November 13, 2006, Bio-Rad and Vermillion entered into a
Stock Purchase Agreement (the Purchase Agreement)
for the private sale of shares of the Companys common
stock to Bio-Rad for an aggregate purchase price of $3,000,000.
The Purchase Agreement also provides for certain registration
rights such that if the Company files a registration statement
under the Securities Act of 1933, as amended, Bio-Rad may elect
to include its shares in that registration, subject to various
conditions. The purchase price of $0.972 per share was based on
the average closing price for the 5 days preceding the
Agreement on August 14, 2006. For accounting purposes, the
3,086,420 shares purchased are valued at $1.17 per share,
the closing price on November 13, 2006, the day the
transaction closed. The resulting value of $3.611 million
is allocated between common stock (3.1 million shares at
$0.001 par value) and additional paid-in capital of
$3.6 million.
Subsequent to the November 13, 2006 completion of the Asset
Sale, both Vermillion and Bio-Rad recognized business activities
on behalf of each party. As of December 31, 2006,
Vermillion owed to Bio-Rad a total of $1,571,000, which
consisted of $1,511,000 of accounts receivable Vermillion
collected which belonged to Bio-Rad, $8,000 of operating expense
invoices processed by Bio-Rad and reimbursable by Vermillion to
Bio-Rad, and $52,000 of other unbilled receivables from Bio-Rad.
Similarly, Bio-Rad owed to Vermillion a total of $619,000, which
consisted of $174,000 of operating expense invoices processed by
Vermillion and reimbursable by Bio-Rad to Vermillion, $200,000
of sales taxes on the sale of assets, and $245,000 of unbilled
receivables from Bio-Rad.
|
|
7.
|
Discontinued
Operation-Sale of BioSepra Business
|
On November 30, 2004, Vermillion completed the sale to Pall
Corporation of its wholly-owned French subsidiary, BioSepra
S.A., along with selected other assets (together the
BioSepra business). The sale of the BioSepra business
generated net proceeds of approximately $27.0 million. An
additional $1.0 million was placed in an interest-bearing
escrow account for one year, after which that amount plus
$21,000 of accrued interest was paid to Vermillion and treated
as an additional gain of $1,021,000 in 2005. This was partly
offset
F-35
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
by a $67,000 reduction of the gain on the sale of the BioSepra
business for a post-closing adjustment in 2005, in accordance
with the Asset Purchase Agreement, resulting in a net gain of
$954,000 in 2005. The Company recognized an $18.5 million
gain of $1,021,000 on this sale in 2004, summarized as follows
(in thousands):
|
|
|
|
|
Net proceeds:
|
|
|
|
|
Cash proceeds received
|
|
$
|
28,376
|
|
Less: Post-closing adjustment owed to buyer, paid in 2005
|
|
|
(1,044
|
)
|
Less: Transaction costs
|
|
|
(321
|
)
|
|
|
|
|
|
|
|
|
27,011
|
|
|
|
|
|
|
Cost basis:
|
|
|
|
|
Accounts receivable, net, and other current assets
|
|
|
2,795
|
|
Inventories
|
|
|
5,294
|
|
Property, plant and equipment, net
|
|
|
6,081
|
|
Other tangible assets
|
|
|
210
|
|
Patents
|
|
|
210
|
|
Developed product technology
|
|
|
2,828
|
|
Goodwill
|
|
|
1,380
|
|
Accounts payable and accrued liabilities
|
|
|
(1,976
|
)
|
Capital lease obligations
|
|
|
(2,978
|
)
|
Other long-term liabilities
|
|
|
(629
|
)
|
Cumulative translation adjustment
|
|
|
(4,731
|
)
|
|
|
|
|
|
|
|
|
8,484
|
|
|
|
|
|
|
Gain on sale of BioSepra business
|
|
$
|
18,527
|
|
|
|
|
|
|
As a result, Vermillion reported the BioSepra business as a
discontinued operation beginning in the fourth quarter of 2004.
The operating results of the BioSepra business are presented in
the following table (in thousands):
|
|
|
|
|
|
|
Eleven Months
|
|
|
|
Ended
|
|
|
|
November 30,
|
|
|
|
2004
|
|
|
Revenue
|
|
$
|
8,395
|
|
Gross profit
|
|
|
4,921
|
|
Operating expenses
|
|
|
6,638
|
|
Operating loss
|
|
|
(1,717
|
)
|
Loss before income taxes
|
|
|
(1,734
|
)
|
Income tax provision
|
|
|
63
|
|
Loss from discontinued operations, net of tax
|
|
|
(1,797
|
)
|
|
|
8.
|
Goodwill
and Other Intangible Assets
|
The Company adopted SFAS 142 on January 1, 2002 for
all goodwill and other intangible assets. As a result, goodwill
is no longer amortized but rather tested for impairment at least
annually and in the interim whenever circumstances indicate that
goodwill may be impaired.
F-36
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company performed a transitional goodwill impairment
assessment and noted no such impairment of goodwill. The Company
also performed annual impairment tests from 2002 through 2006.
In 2005, approximately $2.5 million of goodwill related to
the Companys Japanese subsidiary was written off. In 2006,
the remaining $76,000 of goodwill related to its instrument
business was written off due to the sale of its instrument
business to Bio-Rad. Goodwill and other intangible assets
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Total
|
|
|
Amount
|
|
|
Amortization
|
|
|
Total
|
|
|
Non-amortizing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
76
|
|
|
$
|
|
|
|
$
|
76
|
|
Amortizing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired license related to litigation settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,743
|
|
|
|
3,326
|
|
|
|
2,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,819
|
|
|
$
|
3,326
|
|
|
$
|
2,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to goodwill and other intangible assets consisted of
approximately $346,000 paid in license fees related to a
litigation settlement. Amortization expense for these intangible
assets was (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Acquired completed technology
|
|
$
|
|
|
|
$
|
|
|
|
$
|
707
|
|
Patents
|
|
|
|
|
|
|
|
|
|
|
53
|
|
Acquired license related to litigation settlement
|
|
|
907
|
|
|
|
1,210
|
|
|
|
1,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
907
|
|
|
$
|
1,210
|
|
|
$
|
1,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There are no longer any intangible assets recorded on our
balance sheet. In connection with the asset sale of
Vermillions instrument business to Bio-Rad, Vermillion
sublicensed to Bio-Rad certain rights to the license rights for
use outside of the clinical diagnostics field. Vermillion
retained exclusive rights to the license rights for use in the
field of clinical diagnostics for a five year period, after
which it will retain non-exclusive rights in that field. Bio-Rad
agreed to pay the royalties due to MAS under the license rights,
either directly to Vermillion (to be paid to MAS) or directly to
MAS, at its option.
The sublicensed license relates to the May 28, 2003
litigation settlement between Vermillion and Molecular
Analytical Systems, Inc. (MAS), LumiCyte, Inc.
(LumiCyte), and T. William Hutchens whereby the
Company acquired the undisputed exclusive rights granted to MAS
under patents licensed from Baylor College of Medicine and the
parties released all claims against each other. These patent
rights refer to technology known as SELDI-TOF-MS, and provide
the Company with an exclusive worldwide license and right to
sublicense the technology and to commercialize any and all
products, information and services derived from the technology
without limitation.
Furthermore, LumiCyte assigned all rights granted to it from MAS
and related to the Baylor College of Medicine patents to the
Company without restriction. As part of the settlement:
(a) Vermillion paid LumiCyte $3.0 million in cash;
(b) Vermillion issued to LumiCyte 1,250,000 shares of
Vermillion common stock which were valued at
$7.8 million; and
(c) Vermillion agreed to pay license fees to MAS based on
the revenues Vermillion and its affiliates derive from the SELDI
technology and recognize between February 21, 2003 and
May 28, 2014, provided
F-37
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
that such license fees will not exceed $1.0 million during
calendar year 2003 or $10.0 million in the aggregate.
Through December 31, 2006, the Company had paid or accrued
a total of $2.6 million in such license fees.
The license rights were treated as an intangible asset that the
Company purchased, and were amortized over its
17-year
useful life, from April 1997 to May 2014, using the straight
line method. The cost was prorated between cost of products
revenue and cost of services revenue based on the ratio of
SELDI-based products revenue to SELDI-based services revenue.
|
|
9.
|
Accrued
Liabilities (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Payroll and related expenses
|
|
$
|
785
|
|
|
$
|
1,795
|
|
Compensated absences
|
|
|
320
|
|
|
|
998
|
|
Collaboration and research agreements expenses
|
|
|
1,697
|
|
|
|
390
|
|
Legal and accounting fees
|
|
|
437
|
|
|
|
1,526
|
|
Tax-related liabilities
|
|
|
637
|
|
|
|
225
|
|
Accrued interest on convertible senior notes
|
|
|
185
|
|
|
|
450
|
|
Other accrued liabilities
|
|
|
539
|
|
|
|
914
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,600
|
|
|
$
|
6,298
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Warranties
and Maintenance Contracts
|
Until the sale of its instrument business to Bio-Rad, on
November 13, 2006, Vermillion had a direct field service
organization that provides service for its products. The Company
generally included a standard 12 month warranty on its
ProteinChip Systems, ProteinChip Tandem MS Interfaces and
accessories in the form of a maintenance contract upon initial
sale, after which maintenance and support may be provided under
a separately priced contract or on an individual call basis. The
Company substituted a maintenance contract in place of a
standard
12-month
warranty on its instruments and accessories upon initial sale.
Vermillion also sold separately priced maintenance (extended
warranty) contracts, which are generally for 12 or
24 months, upon expiration of the initial maintenance
contract. Coverage under both the standard and extended
maintenance contracts is identical. Revenue for both the
standard and extended maintenance contracts is deferred and
recognized on a straight line basis over the period of the
applicable maintenance contract. Related costs are recognized as
incurred.
Changes in product warranty obligations, including separately
priced maintenance obligations, during the years ended
December 31, 2006 and 2005 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Balance at beginning of period
|
|
$
|
2,831
|
|
|
$
|
3,778
|
|
Add: Costs incurred for maintenance contracts
|
|
|
1,928
|
|
|
|
2,688
|
|
Revenue deferred for separately priced maintenance contracts
|
|
|
3,271
|
|
|
|
4,287
|
|
Less: Deferred Revenue sold to Bio-Rad
|
|
|
(2,206
|
)
|
|
|
|
|
Settlements made under maintenance contracts
|
|
|
(1,928
|
)
|
|
|
(2,688
|
)
|
Revenue recognized for separately priced maintenance contracts
|
|
|
(3,896
|
)
|
|
|
(5,234
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
|
|
|
$
|
2,831
|
|
|
|
|
|
|
|
|
|
|
F-38
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11.
|
Long-term
Debt and Capital Leases
|
7.0% Convertible
Senior Notes Due 2011
On November 15, 2006, the Company closed the sale of
$16,500,000 of Convertible Senior Notes due September 1,
2011(the New Notes). Offering costs were $104,000
and fees of $514,500, which were paid on behalf of the debt
holders, were recorded as debt discount on the New Notes. Fees
paid on behalf of debt holders included the fair value of two
warrants issued to underwriters to purchase a total of
200,000 shares of common stock at $1.26 per share. The
warrant was valued at approximately $140,000 based on the fair
value as determined by a Black-Scholes model using the following
assumptions: a risk free interest rate of 4.75%, 5 year
contractual life, and 88% volatility rate. Interest on the notes
is 7.0% per annum on the principal amount, payable semiannually
on March 1 and September 1 of each year, beginning March 1,
2007. The New Notes were sold pursuant to separate exchange and
redemption agreements between the Company and each of Highbridge
International LLC, Deerfield International Limited, Deerfield
Partners, L.P., Bruce Funds, Inc. and Professional
Life & Casualty, each holders of the Companys
existing 4.50% Convertible Senior Notes due
September 1, 2008 (the Old Notes), pursuant to
which holders of an aggregate of $27.5 million of the Old
Notes agreed to exchange and redeem their Old Notes for an
aggregate of $16.5 million in aggregate principal amount of
the New Notes and $11.0 million in cash, plus accrued and
unpaid interest on the Old Notes of $0.3 million through
and including the day prior to the Closing. The transaction was
treated as a debt extinguishment and accordingly, $613,000 of
unamortized prepaid offering costs and $868,000 of unamortized
debt discount related to the Old Notes were charged to expense
as loss on extinguishment of debt. Offering costs and debt
discount related to the New Notes will be amortized to interest
expense using the effective interest method. Amortization
expense in 2006 for the New Notes was $15,000.
The Company issued the New Notes pursuant to an indenture, dated
November 15, 2006, between the Company and U.S. Bank
National Association, as Trustee. Following the Closing,
$2.5 million in aggregate principal amount of the Old Notes
remain outstanding.
The New Notes are unsecured senior indebtedness of the Company
and bear interest at the rate of 7.00% per annum, which may be
reduced to 4.00% per annum if the Company receives approval or
clearance for commercial sale of any of its ovarian cancer tests
by the U.S. Food and Drug Administration. Interest is
payable on March 1 and September 1 of each year, commencing
March 1, 2007. The effective interest rate is 7.13% per
annum.
The New Notes are convertible at the option of each Holder, at
any time on or prior to the close of business on the business
day immediately preceding September 1, 2011, into shares of
the Companys common stock at a conversion price of $2.00
per share, equivalent to a conversion rate equal to
500 shares of common stock per $1,000 principal of the New
Notes, subject to adjustment in certain circumstances. If a
Holder converts all or any portion of its Notes prior to
October 31, 2008, upon such conversion, in addition to the
Common Stock such Holder would receive, the Holder will be
entitled to receive with respect to each Note so converted an
amount in cash equal to the difference of (i) the amount of
all interest that the Company would be required to pay on such
Note from the date of the indenture through October 31,
2008 and (ii) the amount of interest actually paid on such
Note by the Company prior to the time of conversion.
Holders of the New Notes have the option to require the Company
to repurchase the New Notes under certain circumstances,
including at any time after September 1, 2009, if the
Company has not received approval or clearance for commercial
sale of any of its ovarian cancer test by the FDA. The Company
may redeem the notes at its option, in whole or in part, at any
time on or after September 1, 2009 at specified redemption
prices plus accrued and unpaid interest; provided that the notes
will be redeemable only if the closing price of the stock equals
or exceeds equals or exceeds 200% of the conversion price then
in effect for at least 20 trading days within a period of 30
consecutive trading days ending on the trading day before the
date of the notice of the optional redemption. The
8,250,000 shares that could be issued if all convertible
F-39
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
senior notes were converted into common stock have not been
included in the calculation of loss per share, as these
potential common shares are antidilutive. Upon a change of
control, each holder of the notes may require the Company to
repurchase some or all of the notes at specified redemption
prices, plus accrued and unpaid interest. The debenture contains
a put option that entitles the holder to require the Company to
redeem the debenture at a price equal to 105.0% of the principal
balance upon a change in control of the Company.
The notes and common stock issuable upon conversion of the notes
were registered with the U.S. Securities and Exchange
Commission on
Form S-3
on December 15, 2006, and at December 31, 2006 all
notes remained issued and outstanding
4.5% Convertible
Senior Notes Due 2008
On August 22, 2003, the Company closed the sale of
$30.0 million of convertible senior notes due
September 1, 2008. Offering costs were approximately
$1.9 million. Interest on the notes is 4.5% per annum on
the principal amount, payable semiannually on March 1 and
September 1, beginning March 1, 2004. The effective
interest rate is 5.85% per annum. The notes are convertible, at
the option of the holder, at any time on or prior to maturity of
the notes into shares of the Companys common stock
initially at a conversion rate of 108.8329 shares per
$1,000 principal amount of the notes, which is equal to a
conversion price of approximately $9.19 per share. The
conversion price, and hence the conversion rate, is subject to
adjustment upon the occurrence of certain events, such as stock
splits, stock dividends and other distributions or
recapitalizations. Because the market value of the stock rose
above the conversion price between the day the notes were priced
and the closing date, the Company recorded a discount of
$2,677,000 related to the intrinsic value of the beneficial
conversion feature resulting from this price change and the fact
that the initial purchaser of the notes was not required to
purchase the notes until the closing date. Immediately after the
closing, Vermillion common stock had a market price of $10.01
per share, or $0.82 per share higher than the conversion price.
The value of the beneficial conversion feature was determined by
multiplying this difference in the per share price of
Vermillions common stock by the 3,264,987 underlying
shares. This amount will be amortized to interest expense using
the effective interest method over the five-year term of the
notes, or shorter period in the event of conversion of the
notes. Amortization in 2006, 2005 and 2004 amounted to $473,000,
$535,000 and $536,000, respectively.
The notes are the Companys senior unsecured obligations
and rank on parity in right of payment with all of the
Companys existing and future senior unsecured debt and
rank senior to the Companys existing and future debt that
expressly provides that it is subordinated to the notes. The
notes are also effectively subordinated in right of payment to
the Companys existing and future secured debt, to the
extent of such security, and to its subsidiaries
liabilities. The indenture does not limit the incurrence by the
Company or its subsidiaries of other indebtedness.
The Company may redeem the notes at its option, in whole or in
part, at any time on or after September 1, 2006 at
specified redemption prices plus accrued and unpaid interest;
provided that the notes will be redeemable only if the closing
price of the stock equals or exceeds 150% of the conversion
price then in effect for at least 20 trading days within a
period of 30 consecutive trading days ending on the trading day
before the date of the notice of the redemption. The shares that
could be issued if all convertible senior notes were converted
into common stock have not been included in the calculation of
loss per share as these potential common shares are
antidilutive. Upon a change of control, each holder of the notes
may require the Company to repurchase some or all of the notes
at specified redemption prices, plus accrued and unpaid
interest. The debenture contains a put option that entitles the
holder to require the Company to redeem the debenture at a price
equal to 105.0% of the principal balance upon a change in
control of the Company. The Company does not anticipate that the
put option will have significant value because no change of
control is currently contemplated.
F-40
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The notes and common stock issuable upon conversion of the notes
were registered with the U.S. Securities and Exchange
Commission on
Form S-3
on October 8, 2003, and at December 31, 2006.
Following the closing of the November 15, 2006 sale of
$16,500,000 of Convertible Senior Notes due September 1,
2011, holders of an aggregate of $27.5 million of the Old
Notes agreed to exchange and redeem their Old Notes for an
aggregate of $16.5 million in aggregate principal amount of
the New Notes and $11.0 million in cash. Therefore, the
remaining $2.5 million in aggregate principal amount of the
Old Notes remain outstanding.
Loan
from Quest Diagnostics
On July 22, 2005, Quest Diagnostics agreed to loan the
Company up to $10 million. (see Note 2,
Strategic Alliance with Quest Diagnostics.)
Equipment
Financing Loan
In June 2003, the Company entered into a loan and security
agreement with General Electric Capital Corporation to obtain
financing for up to $5.0 million of capital equipment
purchases. The Company financed $2.1 million of capital
equipment purchases through this facility at an annual interest
rate of 7.48%, repayable in monthly installments over
36 months from the date of each drawdown under the
agreement. The loan is collateralized by the equipment being
financed as well as certain other assets of the Company. As of
December 31, 2006, there was no balance outstanding on the
loan as the outstanding loan balance of $377,000 was paid off in
July 2006. Total payments made for this facility including
principal and interest were $450,000, $771,000, and $707,000 in
the years ended December 31, 2006, 2005 and 2004
respectively.
Capital
Leases
As of December 31, 2006, The Company no longer held any
capital lease agreements. Any agreements, pertaining to certain
machinery and equipment in Japan under capital lease agreements
with Sumitomo Corporation and other independent finance
companies, in place during the year were transferred to Bio-Rad
as part of the asset sale transaction between Vermillion and
Bio-Rad, completed on November 13, 2006.
|
|
12.
|
Commitments
and Contingencies
|
Operating
Leases
The Company leases various equipment and facilities to support
its worldwide manufacturing, research and development, Biomarker
Discovery Center, and sales and marketing activities. Total rent
expense under all leases was $3,421,000, $3,825,000 and
$3,685,000 in the years ended December 31, 2006, 2005 and
2004, respectively. The Company leases its Fremont facility
under a non- cancelable operating lease that expires on
July 31, 2008. The lease provides for escalations of lease
payments of approximately 4% per year and is recognized as rent
expense on a straight line basis.
As of December 31, 2006, future minimum payments under
non-cancelable operating leases were as follows (in thousands):
|
|
|
|
|
2007
|
|
$
|
3,745
|
|
2008
|
|
|
2,616
|
|
2009
|
|
|
87
|
|
2010
|
|
|
|
|
2011 and after
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,448
|
|
|
|
|
|
|
F-41
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
These future minimum payments will be partially offset by the
sub-lease payments for a portion of Vermillions location
in Fremont California for $1.6 million and
$1.0 million in 2007 and 2008, respectively.
Inventory
Purchase Obligations
Vermillion has an annual obligation for three years to purchase
approximately $1,230,000 per year of systems and arrays under
its manufacturing and supply agreement with Bio-Rad to support
its collaboration agreements with Quest, which may be used as
inventory for resale or fixed assets for collaboration purposes.
Product
Development Agreement with a Customer
In the third quarter of 2005, the Company sold nine ProteinChip
Systems to one customer for $601,000. The Company also entered
into a product development agreement with this same customer,
whereby the customer will develop for Vermillion a specific new
product and Vermillion may pay the customer up to $500,000 based
on the customers attainment of specified development
milestones. Under this agreement, Vermillion paid this customer
$300,000 of development fees during 2005. This was recorded,
following
EITF 01-9,
Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendors
Products), as a reduction to revenue, resulting in net
revenue from this customer of approximately $301,000 in 2005.
This constituted approximately 2% of products revenue and 1% of
total revenue for 2005. No additional payment was made in 2006.
With the sale of the instrument business to Bio-Rad, the product
development agreement was also transferred to Bio-Rad.
Non-Cancelable
Collaboration Obligations
On October 3, 2005, the Company entered into a two year
research and license agreement with University College London
and UCL BioMedica Plc. (together, UCL) to utilize
Vermillions suite of proteomic solutions (Deep
Proteometm,
Pattern
Tracktm
Process and
ProteinChip®
System) to further UCLs ongoing research in ovarian cancer
and breast cancer. Under the terms of the agreement, Vermillion
has exclusive rights to license intellectual property resulting
from discoveries made during the course of this collaboration
for use in developing, manufacturing and selling products and
services utilizing the intellectual property. Additionally,
Vermillion will contribute approximately $2.1 million in
cash and $652,000 in the form of Vermillion equipment, software,
arrays and consumable supplies as requested by UCL, valued at
Vermillions list selling price, to cover part of the costs
incurred by UCL specifically for this research program.
$1.1 million of the cash obligation is to be paid in the
first year of the agreement and is non-cancelable. The remainder
is to be paid in the second year of the agreement and is
cancelable with three months advance notice. As of
December 31, 2006, the Company had expensed $1,389,000, of
which $57,000 represented the Companys cost for the arrays
and consumables it had provided.
On October 13, 2006, the company entered into a two year
research and collaboration agreement with The Ohio State
University Research Foundation directed at discovery,
purification, identification
and/or
validation of Biomarkers related to thrombotic thrombocytopenic
purpura and production of associated technology. Under the terms
of the agreement, Vermillion will have exclusive rights to
license discoveries made during the course of this
collaboration. Vermillion will pay the financial contribution to
the University in consideration for costs incurred by the
University specifically used in furtherance of this research
program for $149,500 in total during the first 15 months of
the agreement. The contribution of $149,500 is non-cancelable.
There is no financial contribution obligation for the remaining
9 months of the agreement.
On December 21, 2006, the company extended its research
collaboration agreement through December 31, 2009 with The
Johns Hopkins University School of Medicine directed to the
discovery and validation of biomarkers in human subjects,
including but not limited to clinical application of biomarkers
in the understanding, diagnosis, and management of human
diseases. Under the original agreement, which expired
December 31, 2006, Vermillion has an outstanding obligation
to pay $305,000, which had been accrued and
F-42
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
charged to research and development expense. Vermillion paid
$685,000 of collaboration expenses to John Hopkins in 2006
and expensed them to research and development. Under the
extended agreement, which is effective January 1, 2007,
Vermillion has an obligation to provide additional collaboration
funding of $600,000 for 2007. The first year contribution of
$600,000 is non-cancelable.
On October 4, 2006, the company entered into a one year
research and development agreement with Katholieke Universiteit
Leuven, Belgium directed at discovery, validation, and
characterization of novel Biomarkers related to gynecologic
disease. Under the terms of the agreement, Vermillion will have
exclusive rights to license discoveries made during the course
of this collaboration. Vermillion will contribute 45,000 Euros
or $59,300 per year to fund sample collection at the University
from patients undergoing evaluation of a persistent mass who
undergo surgical intervention. The first year contribution of
45,000 Euros or $59,300 is non-cancelable.
Litigation
On June 26, 2006, Health Discovery Corporation filed a
lawsuit against us in the U.S. District Court for the
Eastern District of Texas (Marshall Division), claiming that
software used in certain of Vermillions
ProteinChip®
Systems infringes on three of its United States patents. Health
Discovery Corporation is seeking injunctive relief as well as
unspecified compensatory and enhanced damages, reasonable
attorneys fees, prejudgment interest and other costs. On
August 1, 2006 Vermillion filed an unopposed motion with
the Court to extend the deadline for Vermillion to answer or
otherwise respond until September 2, 2006. Vermillion filed
its Answer and Counterclaim to the Complaint with the Court on
September 1, 2006. On January 10, 2007, the court
granted Vermillions motion to transfer the case to the
Northern District of California. The case is scheduled for a
case management conference on April 27, 2007 in the
Northern District of California. Given the early stage of this
action, the Company cannot predict the ultimate outcome of this
matter at this time.
At December 31, 2006 and 2005, 5,000,000 shares of
preferred stock were authorized, but no shares were issued or
outstanding.
The Company has adopted a Stockholder Rights Plan, the purpose
of which is, among other things, to enhance the Boards
ability to protect stockholder interests and to ensure that
stockholders receive fair treatment in the event any coercive
takeover attempt of the Company is made in the future. The
Stockholder Rights Plan could make it more difficult for a third
party to acquire, or could discourage a third party from
acquiring, the Company or a large block of the Companys
common stock. The following summary description of the
Stockholder Rights Plan does not purport to be complete and is
qualified in its entirety by reference to the Companys
Stockholder Rights Plan, which has been previously filed with
the Securities and Exchange Commission as an exhibit to a
Registration Statement on
Form 8-A.
The rights issued pursuant to Vermillions Stockholder
Rights Plan will become exercisable the tenth day after a person
or group announces acquisition of 15% or more of
Vermillions common stock or announces commencement of a
tender or exchange offer the consummation of which would result
in ownership by the person or group of 15% or more of the
Companys common stock. If the rights become exercisable,
the holders of the rights (other than the person acquiring 15%
or more of Vermillions common stock) will be entitled to
acquire, in exchange for the rights exercise price, shares
of Vermillions common stock or shares of any company in
which the Company is merged, with a value equal to twice the
rights exercise price.
F-43
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
Stock
Options, Warrants and Employee Stock Purchase Plan
|
1993
Stock Option Plan
The Company has no shares of common stock reserved for sale to
employees, directors or consultants under its 1993 Stock Option
Plan (the 1993 Plan). Under the 1993 Plan, options
were granted at prices not lower than 85% and 100% of the fair
market value of the common stock for nonstatutory and statutory
stock options, respectively. All outstanding options under the
1993 Plan are now fully vested, and unexercised options
generally expire ten years from the date of grant. At
December 31, 2006, no shares of common stock were subject
to repurchase by the Company. Since the Companys initial
public offering, no options have been granted under the 1993
Plan. During 2004, 2005 and 2006, options for 30,923, 12,040 and
18,250 shares were exercised, respectively. Options for
47,672, 87,113, and 371,979 shares were canceled during
2004, 2005 and 2006, respectively, and the shares reserved under
the 1993 Plan were reduced by the same amount.
2000
Stock Plan
In April 2000, the stockholders approved the 2000 Stock Plan
(the 2000 Plan). At December 31, 2006, the
Company had 2,730,178 shares of common stock reserved for
future stock option grants to employees, directors and
consultants under this stock option plan. Under the 2000 Plan,
options may be granted at prices not lower than 85% and 100% of
the fair market value of the common stock for nonstatutory and
statutory stock options, respectively. Options generally vest
monthly over a period of five years and unexercised options
generally expire ten years from the date of grant.
During 2004, options for 1,742,625 shares were granted,
options for 53,900 shares were exercised, and options for
640,199 shares were canceled. During 2005, options for
2,727,000 shares were granted, options for 216 shares
were exercised, and options for 1,319,471 shares were
canceled. During 2006, options for 1,569,450 shares were
granted, options for 6,595 shares were exercised, and
options for 2,740,329 shares were canceled.
During 2005, two executives terminated their employment with the
Company. The vesting of a portion of ones stock options
was accelerated, and the exercise periods for both were
extended, allowing the executives to potentially purchase option
shares that would otherwise have expired. The expense resulting
from these changes was not material to the consolidated
financial statements.
On January 1, 2004, 2005 and 2006 an additional 1,400,000,
900,000 and 1,300,000 shares were reserved for issuance
under the 2000 Plan, respectively.
F-44
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Activity under these two stock option plans was as follows (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
Options Outstanding
|
|
|
Average
|
|
|
|
Available
|
|
|
Number of
|
|
|
Price per
|
|
|
Aggregate
|
|
|
Exercise
|
|
|
|
for Grant
|
|
|
Shares
|
|
|
Share
|
|
|
Price
|
|
|
Price
|
|
|
Balances, January 1, 2004
|
|
|
494
|
|
|
|
4,054
|
|
|
$
|
0.23-$11.96
|
|
|
$
|
21,408
|
|
|
$
|
5.28
|
|
Shares reserved for the 2000 Plan
|
|
|
1,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in shares reserved
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,743
|
)
|
|
|
1,743
|
|
|
|
3.29-9.99
|
|
|
|
13,376
|
|
|
|
7.68
|
|
Options canceled/shares repurchased
|
|
|
688
|
|
|
|
(687
|
)
|
|
|
1.16-11.96
|
|
|
|
(4,088
|
)
|
|
|
5.95
|
|
Options exercised
|
|
|
|
|
|
|
(85
|
)
|
|
|
0.35-8.50
|
|
|
|
(329
|
)
|
|
|
3.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2004
|
|
|
792
|
|
|
|
5,025
|
|
|
|
0.23-11.96
|
|
|
|
30,367
|
|
|
|
6.04
|
|
Shares reserved for the 2000 Plan
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in shares reserved
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares granted to an officer
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(2,727
|
)
|
|
|
2,727
|
|
|
|
0.90-3.90
|
|
|
|
5,293
|
|
|
|
1.94
|
|
Options canceled
|
|
|
1,406
|
|
|
|
(1,406
|
)
|
|
|
1.16-11.96
|
|
|
|
(7,390
|
)
|
|
|
5.25
|
|
Options exercised
|
|
|
|
|
|
|
(12
|
)
|
|
|
1.16-1.80
|
|
|
|
(14
|
)
|
|
|
1.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2005
|
|
|
259
|
|
|
|
6,334
|
|
|
|
0.23-11.96
|
|
|
|
28,256
|
|
|
|
4.46
|
|
Shares Reserved for the 2000 Plan
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in shares reserved
|
|
|
(372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,569
|
)
|
|
|
1,569
|
|
|
|
1.01-1.73
|
|
|
|
1,890
|
|
|
|
1.20
|
|
Options canceled
|
|
|
3,112
|
|
|
|
(3,112
|
)
|
|
|
0.90-11.96
|
|
|
|
(12,958
|
)
|
|
|
4.16
|
|
Options exercised
|
|
|
|
|
|
|
(25
|
)
|
|
|
0.23-1.20
|
|
|
|
(12
|
)
|
|
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2006
|
|
|
2,730
|
|
|
|
4,766
|
|
|
$
|
0.90-$9.60
|
|
|
$
|
17,186
|
|
|
$
|
3.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The options outstanding and currently exercisable by weighted
average exercise price at December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Number
|
|
|
Life
|
|
|
Price
|
|
|
Number
|
|
|
Price
|
|
|
|
(In thousands)
|
|
|
(Years)
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
$0.90 1.01
|
|
|
795
|
|
|
|
9.1
|
|
|
$
|
0.92
|
|
|
|
228
|
|
|
$
|
0.90
|
|
$1.16 2.06
|
|
|
1,383
|
|
|
|
9.1
|
|
|
|
1.40
|
|
|
|
477
|
|
|
|
1.60
|
|
$2.19 2.85
|
|
|
394
|
|
|
|
8.4
|
|
|
|
2.46
|
|
|
|
219
|
|
|
|
2.37
|
|
$2.96 3.43
|
|
|
162
|
|
|
|
7.9
|
|
|
|
2.98
|
|
|
|
152
|
|
|
|
2.98
|
|
$3.49 4.43
|
|
|
694
|
|
|
|
4.7
|
|
|
|
3.76
|
|
|
|
632
|
|
|
|
3.77
|
|
$4.53 6.08
|
|
|
379
|
|
|
|
5.2
|
|
|
|
5.16
|
|
|
|
379
|
|
|
|
5.17
|
|
$6.38 8.53
|
|
|
371
|
|
|
|
7.1
|
|
|
|
8.04
|
|
|
|
371
|
|
|
|
8.04
|
|
$8.64 9.60
|
|
|
589
|
|
|
|
6.8
|
|
|
|
9.36
|
|
|
|
589
|
|
|
|
9.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.90 9.60
|
|
|
4,766
|
|
|
|
7.6
|
|
|
|
3.61
|
|
|
|
3.047
|
|
|
|
4.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-45
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock-Based
Compensation
During the years ended December 31, 2004, 2005 and 2006,
the exercise prices of all options granted were equal to fair
market value on the dates of grant. During the year ended
December 31, 2006, the Company recorded $1.6 million
of stock-based compensation related to stock options granted to
employees.
The allocation of stock-based compensation expense by functional
area was as follows (in thousands):
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Cost of revenue
|
|
$
|
144
|
|
Research and development
|
|
|
337
|
|
Sales and marketing
|
|
|
321
|
|
General and administrative
|
|
|
813
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
1,615
|
|
|
|
|
|
|
During the period from April 1997 through December 31,
2004, the Company recorded $20.9 million of deferred
stock-based compensation related to stock options granted to
consultants and employees. For options granted to consultants,
the Company determined the fair value of the options using the
Black-Scholes option pricing model with the following
assumptions: contractual lives of ten years; weighted average
risk-free rate calculated using rates between 4.5% and 6.2%;
expected dividend yield of zero percent; volatility of 75% and
deemed values of common stock between $0.35 and $14.67 per
share. No options have been granted to consultants since the
Companys initial public offering in 2000. Deferred
stock-based compensation expense was recognized in accordance
with an accelerated amortization method, over the vesting
periods of the related options, which are generally five years.
The allocation of deferred stock-based compensation expense by
functional area was as follows (in thousands):
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
Cost of revenue
|
|
$
|
45
|
|
Research and development
|
|
|
37
|
|
Sales and marketing
|
|
|
93
|
|
General and administrative
|
|
|
427
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
602
|
|
|
|
|
|
|
On December 20, 2005, Vermillions Board of Directors
approved the accelerated vesting of all unvested and
out-of-the-money stock options held by employees
with an exercise price per share of $4.00 or higher. The
accelerated vesting caused options previously awarded for the
purchase of approximately 1,035,000 shares of
Vermillions common stock, representing approximately 16%
of total options outstanding, to vest and become exercisable
immediately, subject to continued restrictions on sale. Of the
224 option grants subject to accelerated vesting, 27 are held by
executive officers. Under APB No. 25 and FASB
Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation , the
acceleration of the vesting of these options did not result in a
compensation charge because the exercise prices of the affected
options was greater than the closing price of our common stock
on December 20, 2005.
F-46
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Warrants
At December 31, 2004 no warrants remained
outstanding. During 2005, a warrant to purchase
2.2 million shares of Vermillion common stock at $3.50 per
share was issued to Quest Diagnostics as part of the
Companys strategic alliance with Quest Diagnostics (See
note 2, Strategic Alliance with Quest
Diagnostics). During 2006, two warrants to purchase
100,000 shares each of Vermillion common stock for a total
of 200,000 shares, were issued to Oppenheimer &
Co., Inc. for $1.26 per share. Fees paid on behalf of the debt
holders were recorded as a discount on the New Notes. Fees paid
on behalf of debt holders included the fair value of two
warrants issued to underwriters to purchase a total of
200,000 shares of common stock at $1.26 per share. Fair
value was determined by the Black Scholes method of valuation
using a risk free interest rate of 4.75%, 5 year
contractual life, and 88% volatility rate. These warrants were
valued at approximately $140,000. (See Note 11
Long-term Debt and Capital Leases). At
December 31, 2006, all of the aforementioned warrants
remained outstanding.
Employee
Stock Purchase Plan
In April 2000, the stockholders approved the 2000 Employee Stock
Purchase Plan, under which eligible employees may purchase
common stock of the Company through payroll deductions.
Purchases are made semi-annually at a price equal to the lower
of 85% of the closing price on the applicable offering
commencement date or 85% of the closing price at the end of the
purchase period. At December 31, 2006, the Company had
226,207 shares of common stock reserved for purchase by
employees under this Plan. During 2004, 2005 and 2006, purchases
of 306,209, 263,542, and 110,291 shares, respectively, were
made under this Plan.
On January 1, 2004, 2005 and 2006 an additional 290,795,
180,000 and 170,000 shares, respectively, were reserved for
purchase under the 2000 Employee Stock Purchase Plan. On
June 3, 2004, the stockholders approved an additional
250,000 shares to be reserved for this Plan.
The Company accounts for income taxes using the liability
method. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial
statement and tax bases of assets and liabilities using the
current tax laws and rates. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts
expected to be realized.
In 2006, 2005, and 2004, the Company has incurred income tax
liabilities primarily in France and Japan, as well as in most of
the other countries outside the U.S. in which it operates.
The Companys provision for income taxes was due to current
foreign income taxes, which were $152,000, $7,000, and $172,000
for the years ended December 31, 2006, 2005 and 2004,
respectively, including discontinued operations. Excluding
discontinued operations, current foreign income taxes were an
expense of $152,000, $7,000, and $109,000 for the years ended
December 31, 2006, 2005 and 2004, respectively.
Based on the available objective evidence, management believes
it is more likely than not that the net deferred tax assets
related to the Companys operations will not be fully
realizable. Accordingly, the Company has provided a full
valuation allowance against its net deferred tax assets at
December 31, 2006.
F-47
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net deferred tax assets (liabilities) consisted of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Depreciation and amortization
|
|
$
|
21,515
|
|
|
$
|
8,947
|
|
Other
|
|
|
4,093
|
|
|
|
6,814
|
|
Research and development and other credits
|
|
|
9,145
|
|
|
|
9,515
|
|
Net operating losses
|
|
|
46,999
|
|
|
|
48,767
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
81,752
|
|
|
|
74,043
|
|
Less: Valuation allowance
|
|
|
(81,752
|
)
|
|
|
(74,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of the statutory federal income tax rate to the
Companys effective tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Tax at federal statutory rate
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
State tax, net of federal benefit
|
|
|
0
|
|
|
|
(6
|
)
|
|
|
(6
|
)
|
Research and development and credits
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
|
(4
|
)
|
Foreign tax credits
|
|
|
2
|
|
|
|
(4
|
)
|
|
|
0
|
|
Change in valuation allowance
|
|
|
0
|
|
|
|
48
|
|
|
|
35
|
|
Stock-based compensation
|
|
|
35
|
|
|
|
0
|
|
|
|
1
|
|
Foreign tax rate difference and other
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
3
|
|
Gain on sale of BioSepra
|
|
|
1
|
|
|
|
0
|
|
|
|
6
|
|
Provision for income taxes
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
1
|
%
|
As of December 31, 2006, the Company has a net operating
loss carryforwards of approximately $125 million for
federal and $58.8 million for state tax purposes. If not
utilized, these carryforwards will begin to expire beginning in
2009 for federal purposes and 2007 for state purposes.
As of December 31, 2006, the Company has $2.9 million
of net operation carryforwards from its Japan operations. If not
utilized, this carry forward will begin to expire beginning in
2012.
The Company has research credit carryforwards of approximately
$4.4 million and $4.7 million for federal and state
income tax purposes, respectively. If not utilized, the federal
carryforwards will expire in various amounts beginning in 2011.
The California credit can be carried forward indefinitely.
The Internal Revenue Code limits the use of net operating loss
and tax credit carryforwards in certain situations where changes
occur in the stock ownership of a company. In the event the
Company has had a change in ownership, utilization of the
carryforwards could be restricted.
The Company has foreign tax credit carryforwards of
approximately $1.35 million for federal income tax
purposes. If not utilized, the federal carryforwards will expire
beginning 2015.
|
|
16.
|
Accumulated
Other Comprehensive Loss
|
Comprehensive loss generally represents all changes in
stockholders (deficit) equity except those resulting from
investments or contributions by stockholders. The only component
of comprehensive loss that is excluded from the net loss is the
Companys cumulative translation adjustments.
F-48
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Basic net loss per share is computed by dividing net loss for
the period by the weighted average number of common shares
outstanding during the period. Diluted net loss per share is
computed by dividing the net loss for the period by the weighted
average number of common and potential common shares outstanding
during the period, if their effect is dilutive. Potential common
shares include shares that could be issued if all convertible
senior notes were converted into common stock, common stock
subject to repurchase, common stock issuable under the
Companys 1993 and 2000 Employee Stock Purchase Plans, and
incremental shares of common stock issuable upon the exercise of
outstanding stock options and warrants.
The following table sets forth the computation of basic and
diluted net loss per share for the periods indicated (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(22,066
|
)
|
|
$
|
(36,387
|
)
|
|
$
|
(36,571
|
)
|
Net income from discontinued operations
|
|
|
|
|
|
|
954
|
|
|
|
16,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(22,066
|
)
|
|
$
|
(35,433
|
)
|
|
$
|
(19,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
36,465
|
|
|
|
32,321
|
|
|
|
29,273
|
|
Weighted average unvested common shares subject to repurchase
|
|
|
|
|
|
|
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted calculations
|
|
|
36,465
|
|
|
|
32,321
|
|
|
|
29,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from continuing operations
|
|
$
|
(0.61
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(1.25
|
)
|
Income per share from discontinued operations
|
|
|
|
|
|
|
0.03
|
|
|
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.61
|
)
|
|
$
|
(1.10
|
)
|
|
$
|
(0.68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the potential shares of common
stock that are not included in the diluted net loss per share
calculation above because to do so would be anti-dilutive for
the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Common stock subject to repurchase
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Stock options outstanding
|
|
|
4,766
|
|
|
|
6,334
|
|
|
|
5,025
|
|
Common stock issuable under employee stock purchase plan
|
|
|
29
|
|
|
|
41
|
|
|
|
65
|
|
Common stock warrants outstanding
|
|
|
2,400
|
|
|
|
2,200
|
|
|
|
|
|
Shares that could be issued if all convertible senior notes were
converted into common stock
|
|
|
8,522
|
|
|
|
3,265
|
|
|
|
3,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,717
|
|
|
|
11,840
|
|
|
|
8,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.
|
Employee
Benefit Plans
|
The Company maintains the Vermillion, Inc. 401(k) Savings Plan
for its U.S. employees. The Plan allows eligible employees
to defer up to 90%, subject to the Internal Revenue Service
annual contribution limit, of
F-49
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
their pretax compensation at the discretion of the employee.
Under the Plan, the Company is not required to make Plan
contributions. The Company had not made any contributions to the
Plan as of December 31, 2006.
On July 22, 2005, Quest Diagnostics purchased approximately
17.4% of the Company. (See Note 2, Strategic Alliance
with Quest Diagnostics.)
On November 13, 2006, Bio-Rad purchased approximately 7.9%
of the Company. (See Note 6, Gain on the Sale of the
Instrument Business.)
|
|
20.
|
Segment
Information and Geographic Data
|
Vermillions revenue is derived from the sales of related
products and services on a worldwide basis. The chief operating
decision maker evaluates resource allocation not on a product or
geographic basis, but rather on an enterprise-wide basis.
Therefore, management has determined that Vermillion operates in
only one reportable segment, which is the protein research tools
and collaborative services business.
The following table reflects the results of the Companys
sales to external customers by similar products and services for
the years ended December 31, 2006, 2005 and 2004 (in
thousands). Revenue from discontinued operations has been
excluded.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
ProteinChip Systems and related products
|
|
$
|
11,292
|
|
|
$
|
18,350
|
|
|
$
|
31,378
|
|
Services
|
|
|
6,923
|
|
|
|
8,896
|
|
|
|
8,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,215
|
|
|
$
|
27,246
|
|
|
$
|
40,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company sells its products and services directly to
customers in North America, Western Europe and Japan, and
through distributors in other parts of Europe and Asia and in
Australia. Revenue for geographic regions reported below is
based upon the customers locations and excludes revenue
from discontinued operations. Long-lived assets, predominantly
machinery and equipment, are reported based on the location of
the assets.
Following is a summary of the geographic information related to
revenue from continuing operations and long-lived assets for the
years ended December 31, 2006, 2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
5,155
|
|
|
$
|
12,123
|
|
|
$
|
17,636
|
|
Canada
|
|
|
973
|
|
|
|
923
|
|
|
|
950
|
|
Europe
|
|
|
6,984
|
|
|
|
7,636
|
|
|
|
9,387
|
|
Asia
|
|
|
5,103
|
|
|
|
6,564
|
|
|
|
12,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,215
|
|
|
$
|
27,246
|
|
|
$
|
40,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
2,244
|
|
|
$
|
6,256
|
|
|
$
|
7,308
|
|
Canada
|
|
|
0
|
|
|
|
20
|
|
|
|
111
|
|
Europe
|
|
|
16
|
|
|
|
561
|
|
|
|
958
|
|
Asia
|
|
|
0
|
|
|
|
483
|
|
|
|
938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,260
|
|
|
$
|
7,320
|
|
|
$
|
9,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-50
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In 2006, 2005 and 2004, sales to customers in Japan were 23%,
21%, and 25%, respectively, of total revenue from continuing
operations.
|
|
21.
|
Quarterly
Consolidated Financial Data (Unaudited)
|
The following table presents certain unaudited consolidated
quarterly financial information for the eight quarters ended
December 31, 2006. Revenue and gross profit for
discontinued operations have been excluded in all periods shown
as a result of the sale of our BioSepra business. In
managements opinion, this information has been prepared on
the same basis as the audited consolidated financial statements
and includes all adjustments (consisting only of normal
recurring adjustments, except for the non-recurring expense
resulting from the litigation settlement) necessary to state
fairly the unaudited quarterly results of operations set forth
herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Fiscal
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
|
|
(In thousands, except per share data)
|
|
|
Total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
7,064
|
|
|
$
|
5,273
|
|
|
$
|
4,662
|
|
|
$
|
1,216
|
|
|
$
|
18,215
|
|
2005
|
|
|
6,648
|
|
|
|
6,941
|
|
|
|
7,056
|
|
|
|
6,601
|
|
|
|
27,246
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
3,660
|
|
|
|
2,325
|
|
|
|
2,182
|
|
|
|
710
|
|
|
|
8,877
|
|
2005
|
|
|
3,513
|
|
|
|
3,358
|
|
|
|
3,707
|
|
|
|
2,975
|
|
|
|
13,553
|
|
Net loss from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
(5,464
|
)
|
|
|
(7,735
|
)
|
|
|
(7,016
|
)
|
|
|
(1,851
|
)
|
|
|
(22,066
|
)
|
2005
|
|
|
(9,332
|
)
|
|
|
(9,328
|
)
|
|
|
(7,476
|
)
|
|
|
(10,251
|
)
|
|
|
(36,387
|
)
|
Net income (loss) from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
(67
|
)
|
|
|
|
|
|
|
1,021
|
|
|
|
954
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
(5,464
|
)
|
|
|
(7,735
|
)
|
|
|
(7,016
|
)
|
|
|
(1,851
|
)
|
|
|
(22,066
|
)
|
2005
|
|
|
(9,332
|
)
|
|
|
(9,395
|
)
|
|
|
(7,476
|
)
|
|
|
(9,230
|
)
|
|
|
(35,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Fiscal
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
|
|
(In thousands, except per share data)
|
|
|
Basic and diluted net loss per share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
(0.15
|
)
|
|
|
(0.21
|
)
|
|
|
(0.19
|
)
|
|
|
(0.05
|
)
|
|
|
(0.61
|
)
|
2005
|
|
|
(0.32
|
)
|
|
|
(0.32
|
)
|
|
|
(0.23
|
)
|
|
|
(0.29
|
)
|
|
|
(1.13
|
)
|
Basic and diluted net income (loss) per share from discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
2005
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.03
|
|
|
|
0.03
|
|
Basic and diluted net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
(0.15
|
)
|
|
|
(0.21
|
)
|
|
|
(0.19
|
)
|
|
|
(0.05
|
)
|
|
|
(0.61
|
)
|
2005
|
|
|
(0.32
|
)
|
|
|
(0.32
|
)
|
|
|
(0.23
|
)
|
|
|
(0.26
|
)
|
|
|
(1.10
|
)
|
F-51
VERMILLION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Quarterly and annual earnings per share are calculated
independently, based on the weighted average number of shares
outstanding during the periods.
The Companys United States Patent 6,734,022 (the 022
patent) is currently under re-examination in the United States
Patent and Trademark Office. The 022 patent is directed to
a fundamental process of SELDI that involves capturing an
analyte from a sample on the surface of a mass spectrometry
probe derivatized with an affinity reagent, applying matrix and
detecting the captured analyte by laser desorption mass
spectrometry. In March 2007, the USPTO issued a final office
action in the re-examination, rejecting all of the claims of the
022 patent. The Company believes that the claims of the
022 patent are valid. While the office action is
designated final the Company has, under the USPTO
rules, as much as 6 months to advocate for the
patentability of the claimed invention with the patent
examiners, after which the Company has recourse to appeal. The
Company plans to respond to the final office action and if
necessary to appeal the decision. If the USPTO does not issue a
re-examination certificate confirming the patentability of all
of the claims as originally issued in the 022 patent, or
claims of equivalent scope, the Company will not be entitled to
receive the $2,000,000 holdback amount from Bio-Rad pursuant to
the Asset Purchase Agreement between Vermillion and Bio-Rad.
Furthermore, if these claims are canceled or significantly
narrowed in scope, the Company may be unable to block
competitors from utilizing SELDI to develop diagnostic tests
that involve detecting a single diagnostic biomarker, and the
Companys revenues may therefore be adversely affected.
F-52
SCHEDULE II
VERMILLION,
INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Additions
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
Beginning of
|
|
|
Charged
|
|
|
|
|
|
Other
|
|
|
at End
|
|
|
|
Year
|
|
|
to Earnings
|
|
|
Deductions
|
|
|
Changes
|
|
|
of Year
|
|
|
|
(In thousands)
|
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 Dec 2006
|
|
$
|
238
|
|
|
$
|
66
|
|
|
$
|
22
|
|
|
$
|
(280
|
)
|
|
$
|
2
|
|
31 Dec 2005
|
|
|
247
|
|
|
|
25
|
|
|
|
34
|
|
|
|
|
|
|
|
238
|
|
31 Dec 2004
|
|
|
553
|
|
|
|
214
|
|
|
|
295
|
|
|
|
(225
|
)
|
|
|
247
|
|
Inventory reserve:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 Dec 2006
|
|
|
2,110
|
|
|
|
130
|
|
|
|
522
|
|
|
|
(1,718
|
)
|
|
|
|
|
31 Dec 2005
|
|
|
1,997
|
|
|
|
594
|
|
|
|
481
|
|
|
|
|
|
|
|
2,110
|
|
31 Dec 2004
|
|
|
1,338
|
|
|
|
1,843
|
|
|
|
219
|
|
|
|
(965
|
)
|
|
|
1,997
|
|
Deferred tax valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 Dec 2006
|
|
|
74,043
|
|
|
|
7,709
|
|
|
|
|
|
|
|
|
|
|
|
81,752
|
|
31 Dec 2005
|
|
|
57,196
|
|
|
|
16,847
|
|
|
|
|
|
|
|
|
|
|
|
74,043
|
|
31 Dec 2004
|
|
|
50,250
|
|
|
|
6,946
|
|
|
|
|
|
|
|
|
|
|
|
57,196
|
|
43,935,269 Shares
Vermillion, Inc.
Common Stock
PROSPECTUS
We have not authorized any dealer, salesperson or other person
to give any information or to make any representations not
contained in this prospectus or any prospectus supplement. You
must not rely on any unauthorized information. This prospectus
is not an offer to sell these securities in any jurisdiction
where an offer or sale is not permitted. The information in this
prospectus is current as of the date of this prospectus. You
should not assume that this prospectus is accurate as of any
other date.
,
2007
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution
|
The estimated expenses to be borne by us in connection with the
offering are as follows:
|
|
|
|
|
SEC registration fee
|
|
$
|
1,335
|
|
Placement Agent fees
|
|
|
1,315,000
|
|
Legal fees and expenses
|
|
|
300,000
|
|
Accounting fees and expenses
|
|
|
100,000
|
|
Miscellaneous fees and expenses
|
|
|
200,000
|
|
Total
|
|
|
1,916,335
|
|
The Company will bear all of the expenses shown above.
|
|
Item 14.
|
Indemnification
of Directors and Officers
|
Section 145 of the Delaware General Corporation Law allows
for the indemnification of officers, directors and any corporate
agents in terms sufficiently broad to indemnify such persons
under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended, or the Securities Act. Our
Second Amended and Restated Certificate of Incorporation and our
Bylaws provide for indemnification of our directors, officers,
employees and other agents to the extent and under the
circumstances permitted by the Delaware General Corporation Law.
We have also entered into agreements with our directors and
executive officers that require us, among other things, to
indemnify them against certain liabilities that may arise by
reason of their status or service as directors and executive
officers to the fullest extent permitted by Delaware law. We
have also purchased directors and officers liability insurance,
which provides coverage against certain liabilities including
liabilities under the Securities Act.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities
|
The following sets forth information regarding all securities
sold by us since August 31, 2004 which were not registered
under the Securities Act.
1. On August 29, 2007, the Company closed a private
placement with a group of existing and new investors pursuant to
which it received approximately $20.6 million in gross
proceeds from the sale of approximately 24.5 million shares
of its common stock and the issuance of warrants for the
purchase of approximately 19.6 million additional shares of
the Companys common stock with an exercise price of $0.925
per share. In connection with the closing of the transaction,
the Company and Quest Diagnostics Incorporated, or Quest
Diagnostics, one of the investors in the private placement,
entered into an amendment to the warrant issued by the Company
to Quest Diagnostics on July 22, 2005. Pursuant to the
terms of the amendment, the exercise price for the purchase of
the Companys common stock under such warrant was reduced
from $3.50 per share to $2.50 per share and the expiration date
of the warrant was extended from July 22, 2010 to
July 22, 2011. The sale, offer and issuance of the
securities was exempt from registration under Section 4(2)
and/or
Rule 506 of Regulation D of the Securities Act, as a
transaction not involving a public offering, because among other
things, the investors were accredited investors at the time of
the transaction and appropriate legends were affixed to the
instruments representing such securities issued in such
transaction.
2. In connection with the August 2007 private placement,
the Company issued warrants to purchase 921,000 shares of
common stock at an exercise price of $0.925 per share, subject
to certain adjustments, to Oppenheimer & Co. Inc., or
Oppenheimer, in partial consideration of its services as
Placement Agent in the private placement. The Board of Directors
of the Company determined the value of such warrants to be equal
to the price paid for the warrants by the investors in the
offering, or $0.125 per warrant share, for an aggregate value of
approximately $115,000. The sale, offer and issuance of the
securities was exempt from registration
II-1
under Section 4(2)
and/or
Rule 506 of Regulation D of the Securities Act, as a
transaction not involving a public offering, because among other
things, Oppenheimer was an accredited investor at the time of
the transaction and appropriate legends were affixed to the
instruments representing such securities issued in such
transaction.
3. On November 15, 2006, the Company sold an aggregate
of $16,500,000 in principal amount of the Companys
7.0% Convertible Senior Notes due September 1, 2006,
referred to herein as the 7.0% Notes. The 7.0% Notes
were sold pursuant to separate exchange and redemption
agreements between the Company and each of Highbridge
International LLC, Deerfield International Limited, Deerfield
Partners, L.P., Bruce Funds, Inc. and Professional
Life & Casualty, collectively referred to herein as
the Holders, each holders of the Companys existing
4.5% Convertible Senior Notes due September 1, 2008,
referred to herein as the 4.5% Notes, pursuant to which
holders of an aggregate of $27.5 million of the
4.5% Notes agreed to exchange and redeem their
4.5% Notes for an aggregate of $16.5 million in
aggregate principal amount of the 7.0% Notes and
$11.0 million in cash, plus accrued and unpaid interest on
the 4.5% Notes through and including the day prior to the
closing. Immediately following the transaction,
$2.5 million in aggregate principal amount of the
4.5% Notes remained outstanding. The sale, offer and
issuance of the securities was exempt from registration under
Section 4(2)
and/or
Rule 506 of Regulation D of the Securities Act, as a
transaction not involving a public offering, because among other
things, the investors were accredited investors at the time of
the transaction and appropriate legends were affixed to the
instruments representing such securities issued in such
transaction.
4. In August 2006 and November 2006, the Company issued
warrants to purchase an aggregate of 200,000 shares of the
Companys common stock at an exercise price of $1.26 per
share, subject to certain adjustments, to Oppenheimer in partial
consideration for its services as the placement agent for the
offering of the 7.0% Notes. Fees paid on behalf of the debt
holders were recorded as a discount on the 7.0% Notes. Fees
paid on behalf of debt holders included the fair value of two
warrants issued to Oppenheimer. Fair value was determined by the
Black Scholes method of valuation using a risk free interest
rate of 4.75%, five year contractual life, and 88% volatility
rate. The sale, offer and issuance of the securities was exempt
from registration under Section 4(2)
and/or
Rule 506 of Regulation D of the Securities Act, as a
transaction not involving a public offering, because among other
things, Oppenheimer was an accredited investor at the time of
the transaction and appropriate legends were affixed to the
instruments representing such securities issued in such
transaction.
5. In connection with the sale of its instrument business
to Bio-Rad Laboratories, Incorporated, or Bio-Rad, the Company
sold Bio-Rad 3,086,420 shares of its common stock for an
aggregate purchase price of $3.0 million. The sale, offer
and issuance of the securities was exempt from registration
under Section 4(2)
and/or
Rule 506 of Regulation D of the Securities Act, as a
transaction not involving a public offering, because among other
things, Bio-Rad was an accredited investor at the time of the
transaction and appropriate legends were affixed to the
instruments representing such securities issued in such
transaction.
6. On July 22, 2005, the Company sold to Quest
Diagnostics 6,225,000 shares of its common stock for an
aggregate purchase price of $15.0 million and issued Quest
Diagnostics a warrant to purchase up to 2,200,000 shares of
the Companys common stock at an exercise price of $3.50
per share, subject to certain adjustments. The sale, offer and
issuance of the securities was exempt from registration under
Section 4(2)
and/or
Rule 506 of Regulation D of the Securities Act, as a
transaction not involving a public offering, because among other
things, Quest was an accredited investor at the time of the
transaction and appropriate legends were affixed to the
instruments representing such securities issued in such
transaction.
|
|
Item 16.
|
Exhibits
and Financial Statements Schedules
|
The exhibits filed as part of this Registration Statement are
listed in the exhibit index immediately preceding such exhibits,
which index in incorporated herein by reference.
II-2
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Securities and Exchange Commission, or
SEC, pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the
Calculation of Registration Fee table in the
effective registration statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under
the Securities Act to any purchaser, each prospectus filed
pursuant to Rule 424(b) as part of a registration statement
relating to an offering, other than registration statements
relying on Rule 430B or other than prospectuses filed in
reliance on Rule 430A, shall be deemed to be part of and
included in the registration statement as of the date it is
first used after effectiveness. Provided, however, that
no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify
any statement that was made in the registration statement or
prospectus that was part of the registration statement or made
in any such document immediately prior to such date of first use.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that
in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act, and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
following Registrant has duly caused this Amendment No. 2
to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fremont,
State of California, on the
6th day
of December, 2007.
VERMILLION, INC.
Gail S. Page
Director, President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to Registration Statement has been signed
by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
|
|
|
|
|
|
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Gail
S. Page
Gail
S. Page
|
|
Director, President and Chief Executive Officer (Principal
Executive Officer)
|
|
December 6, 2007
|
|
|
|
|
|
/s/ Qun
Zhou
Qun
Zhou
|
|
Corporate Controller and Interim Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
|
|
December 6, 2007
|
|
|
|
|
|
*
James
L. Rathmann
|
|
Executive Chairman of the Board of Directors
|
|
December 6, 2007
|
|
|
|
|
|
*
Judy
Bruner
|
|
Director
|
|
December 6, 2007
|
|
|
|
|
|
*
James
S. Burns
|
|
Director
|
|
December 6, 2007
|
|
|
|
|
|
*
Michael
J. Callaghan
|
|
Director
|
|
December 6, 2007
|
|
|
|
|
|
*
Kenneth
J. Conway
|
|
Director
|
|
December 6, 2007
|
|
|
|
|
|
*
Rajen
K. Dalal
|
|
Director
|
|
December 6, 2007
|
|
|
|
|
|
*
John
A. Young
|
|
Director
|
|
December 6, 2007
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Gail
S. Page
as
attorney-in-fact
|
|
|
|
|
II-4
EXHIBIT
INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Incorporated by Reference
|
|
Filed
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Filing Date
|
|
Herewith
|
|
Previously
|
|
|
2
|
.1
|
|
Share Purchase Agreement between Vermillion, Inc. (formerly
Ciphergen Biosystems, Inc.) and LumiCyte, Inc. dated
May 28, 2003
|
|
8-K
|
|
000-31617
|
|
2.1
|
|
June 11, 2003
|
|
|
|
|
|
2
|
.2
|
|
Asset Purchase Agreement between Vermillion, Inc. (formerly
Ciphergen Biosystems, Inc.) and Pall Corporation dated
October 27, 2004
|
|
8-K
|
|
000-31617
|
|
2.1
|
|
December 6, 2004
|
|
|
|
|
|
3
|
.1
|
|
Second Amended and Restated Certificate of Incorporation of
Vermillion, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
|
3
|
.2
|
|
Amended and Restated Bylaws of Vermillion, Inc. (formerly
Ciphergen Biosystems, Inc.)
|
|
S-1
|
|
333-32812
|
|
3.4
|
|
August 24, 2000
|
|
|
|
|
|
3
|
.3
|
|
Certificate of Designation of Rights, Preferences and Privileges
of Series A Participating Preferred Stock of Vermillion,
Inc. (formerly Ciphergen Biosystems, Inc.)
|
|
8-A
|
|
000-31617
|
|
3.5
|
|
March 21, 2002
|
|
|
|
|
|
4
|
.1
|
|
Form of Vermillion, Inc.s (formerly Ciphergen Biosystems,
Inc.) Common Stock Certificate
|
|
S-1
|
|
333-32812
|
|
4.1
|
|
August 24, 2000
|
|
|
|
|
|
4
|
.2
|
|
Indenture between Vermillion, Inc. (formerly Ciphergen
Biosystems, Inc.) and U.S. Bank National Association dated
August 22, 2003
|
|
S-3
|
|
333-109556
|
|
4.1
|
|
October 8, 2003
|
|
|
|
|
|
4
|
.3
|
|
Indenture between Vermillion, Inc. (formerly Ciphergen
Biosystems, Inc.) and U.S. Bank National Association dated
November 15, 2006
|
|
8-K
|
|
000-31617
|
|
4.1
|
|
November 21, 2006
|
|
|
|
|
|
4
|
.4
|
|
Preferred Shares Rights Agreement between Vermillion, Inc.
(formerly Ciphergen Biosystems, Inc.) and Continental Stock
Transfer & Trust Company dated March 20, 2002
|
|
8-A
|
|
000-31617
|
|
4.2
|
|
March 21, 2002
|
|
|
|
|
|
4
|
.5
|
|
Amendment to Rights Agreement between Vermillion, Inc. (formerly
Ciphergen Biosystems, Inc.) and Wells Fargo Bank, N.A. dated
July 22, 2005
|
|
8-K
|
|
000-31617
|
|
4.4
|
|
July 28, 2005
|
|
|
|
|
|
4
|
.6
|
|
Second Amendment to Rights Agreement between Vermillion, Inc.
(formerly Ciphergen Biosystems, Inc.) and Wells Fargo Bank, N.A.
dated September 30, 2005
|
|
8-K
|
|
000-31617
|
|
4.5
|
|
October 4, 2005
|
|
|
|
|
II-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Incorporated by Reference
|
|
Filed
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Filing Date
|
|
Herewith
|
|
Previously
|
|
|
4
|
.7
|
|
Third Amendment to Rights Agreement between Vermillion, Inc. and
Wells Fargo Bank, N.A., dated September 11, 2007
|
|
8-K
|
|
000-31617
|
|
10.1
|
|
September 12, 2007
|
|
|
|
|
|
5
|
|
|
Opinion of Paul, Hastings, Janofsky & Walker LLP
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
|
10
|
.1
|
|
Form of Preferred Stock Purchase Agreement
|
|
S-1
|
|
333-32812
|
|
10.1
|
|
March 20, 2000
|
|
|
|
|
|
10
|
.2
|
|
Fourth Amended and Restated Investors Rights Agreement dated
March 3, 2000
|
|
S-1
|
|
333-32812
|
|
10.2
|
|
March 20, 2000
|
|
|
|
|
|
10
|
.3
|
|
1993 Stock Option Plan
|
|
S-1
|
|
333-32812
|
|
10.3
|
|
March 20, 2000
|
|
|
|
|
|
10
|
.4
|
|
Form of Stock Option Agreement
|
|
S-1
|
|
333-32812
|
|
10.4
|
|
August 24, 2000
|
|
|
|
|
|
10
|
.5
|
|
2000 Stock Plan and related form of Stock Option Agreement
|
|
S-1
|
|
333-32812
|
|
10.5
|
|
August 24, 2000
|
|
|
|
|
|
10
|
.6
|
|
Amended and Restated 2000 Employee Stock Purchase Plan
|
|
10-Q
|
|
000-31617
|
|
10.6
|
|
November 14, 2007
|
|
|
|
|
|
10
|
.7
|
|
401(k) Plan
|
|
10-K
|
|
000-31617
|
|
10.7
|
|
March 22, 2005
|
|
|
|
|
|
10
|
.8
|
|
Form of Warrant
|
|
S-1
|
|
333-32812
|
|
10.8
|
|
March 20, 2000
|
|
|
|
|
|
10
|
.9
|
|
Form of Proprietary Information Agreement between Vermillion,
Inc. (formerly Ciphergen Biosystems, Inc.) and certain of its
employees
|
|
S-1
|
|
333-32812
|
|
10.9
|
|
August 24, 2000
|
|
|
|
|
|
10
|
.10
|
|
Lease Agreement between Vermillion, Inc. (formerly Ciphergen
Biosystems, Inc.) and John Arrillaga, Trustee of the John
Arrillaga Survivors Trust and Richard T. Peery, Trustee of
the Richard T. Peery Separate Property Trust, dated
January 28, 2000, and Amendment No. 1 dated
August 8, 2000
|
|
S-1
|
|
333-32812
|
|
10.12
|
|
September 27, 2000
|
|
|
|
|
|
10
|
.11
|
|
MAS License Agreement with IllumeSys Pacific, Inc. dated
April 7, 1997
|
|
S-1
|
|
333-32812
|
|
10.23
|
|
August 24, 2000
|
|
|
|
|
|
10
|
.12
|
|
MAS License Agreement with Ciphergen Technologies, Inc.
(formerly ISP Acquisition Corporation) dated April 7, 1997
|
|
S-1
|
|
333-32812
|
|
10.24
|
|
August 24, 2000
|
|
|
|
|
|
10
|
.13
|
|
Sublicense Agreement between Vermillion, Inc. (formerly
Ciphergen Biosystems, Inc.) and Bio-Rad Laboratories, Inc. dated
November 13, 2006
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
|
10
|
.14
|
|
Joint Venture Agreement between Vermillion, Inc. (formerly
Ciphergen Biosystems, Inc.) and Sumitomo Corporation
|
|
S-1
|
|
333-32812
|
|
10.25
|
|
March 20, 2000
|
|
|
|
|
II-6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Incorporated by Reference
|
|
Filed
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Filing Date
|
|
Herewith
|
|
Previously
|
|
|
10
|
.15
|
|
First Amendment to the Joint Venture Agreement between
Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.), Sumitomo
Corporation, SC Biosciences Corporation (a subsidiary of
Sumitomo Corporation) and Ciphergen Biosystems KK dated
March 15, 2002
|
|
10-K
|
|
000-31617
|
|
10.33
|
|
March 31, 2003
|
|
|
|
|
|
10
|
.16
|
|
Second Amendment to Joint Venture Agreement between Vermillion,
Inc. (formerly Ciphergen Biosystems, Inc.), Sumitomo
Corporation, SC Biosciences Corporation (a subsidiary of
Sumitomo Corporation) and Ciphergen Biosystems KK dated
November 15, 2002
|
|
10-K
|
|
000-31617
|
|
10.34
|
|
March 31, 2003
|
|
|
|
|
|
10
|
.17
|
|
Third Amendment to Joint Venture Agreement between Vermillion,
Inc. (formerly Ciphergen Biosystems, Inc.), Sumitomo
Corporation, SC Biosciences Corporation (a subsidiary of
Sumitomo Corporation) and Ciphergen Biosystems KK dated
November 15, 2002
|
|
10-K
|
|
000-31617
|
|
10.35
|
|
March 31, 2003
|
|
|
|
|
|
10
|
.18
|
|
Distribution and Marketing Agreement between Vermillion, Inc.
(formerly Ciphergen Biosystems, Inc.) and Ciphergen Biosystems
KK dated March 24, 1999
|
|
S-1
|
|
333-32812
|
|
10.26
|
|
September 22, 2000
|
|
|
|
|
|
10
|
.19
|
|
Joint Development Agreement between Vermillion, Inc. (formerly
Ciphergen Biosystems, Inc.) and Stanford Research Systems, Inc.
dated February 2, 1995 and amendment thereto
|
|
S-1
|
|
333-32812
|
|
10.27
|
|
March 20, 2000
|
|
|
|
|
|
10
|
.20
|
|
Asset Purchase Agreement by and between Invitrogen Corporation
and Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) dated
June 25, 2001
|
|
10-Q
|
|
000-31617
|
|
10.28
|
|
August 14, 2001
|
|
|
|
|
|
10
|
.21
|
|
Stock Purchase Agreement between Vermillion, Inc. (formerly
Ciphergen Biosystems, Inc.) and SC Biosciences Corporation dated
August 30, 2002
|
|
10-K
|
|
000-31617
|
|
10.32
|
|
March 31, 2003
|
|
|
|
|
II-7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Incorporated by Reference
|
|
Filed
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Filing Date
|
|
Herewith
|
|
Previously
|
|
|
10
|
.22
|
|
Lease Agreement between Symbion and Ciphergen Biosystems A/S
dated February 24, 2003
|
|
10-K
|
|
000-31617
|
|
10.37
|
|
March 31, 2003
|
|
|
|
|
|
10
|
.23
|
|
Employment Agreement between Gail Page and Vermillion, Inc.
(formerly Ciphergen Biosystems, Inc.) dated December 31,
2005
|
|
10-K
|
|
000-31617
|
|
10.39
|
|
March 17, 2006
|
|
|
|
|
|
10
|
.24
|
|
Separation Agreement and Release between Debra A. Young and
Vermillion, Inc. dated November 1, 2007
|
|
8-K
|
|
000-31617
|
|
10.1
|
|
November 5, 2007
|
|
|
|
|
|
10
|
.25
|
|
Registration Rights Agreement dated August 22, 2003
|
|
S-3
|
|
333-109556
|
|
10.1
|
|
October 8, 2003
|
|
|
|
|
|
10
|
.26
|
|
Extension of Term of Service and Support Agreement between
Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and
Applied Biosystems/MDS Sciex dated March 10, 2004
|
|
10-K
|
|
000-31617
|
|
10.43
|
|
March 15, 2004
|
|
|
|
|
|
10
|
.27
|
|
Settlement Agreement and Mutual General Release by and among
Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.),
IllumeSys Pacific, Inc., Ciphergen Technologies, Inc., Molecular
Analytical Systems, Inc., LumiCyte, Inc. and T. William Hutchens
dated May 28, 2003
|
|
8-K
|
|
000-31617
|
|
99.2
|
|
June 11, 2003
|
|
|
|
|
|
10
|
.28
|
|
Assignment Agreement by and among Vermillion, Inc. (formerly
Ciphergen Biosystems, Inc.), IllumeSys Pacific, Inc., Ciphergen
Technologies, Inc., Molecular Analytical Systems, Inc.,
LumiCyte, Inc. and T. William Hutchens dated May 28,
2003
|
|
8-K
|
|
000-31617
|
|
99.3
|
|
June 11, 2003
|
|
|
|
|
|
10
|
.29
|
|
License Agreement between Vermillion, Inc. (formerly Ciphergen
Biosystems, Inc.) and Molecular Analytical Systems, Inc. dated
May 28, 2003
|
|
8-K
|
|
000-31617
|
|
99.4
|
|
June 11, 2003
|
|
|
|
|
|
10
|
.30
|
|
Strategic Alliance Agreement between Vermillion, Inc. (formerly
Ciphergen Biosystems, Inc.) and Quest Diagnostics Incorporated
dated July 22, 2005
|
|
8-K
|
|
000-31617
|
|
10.44
|
|
July 28, 2005
|
|
|
|
|
|
10
|
.31
|
|
Stock Purchase Agreement between Vermillion, Inc. (formerly
Ciphergen Biosystems, Inc.) and Quest Diagnostics Incorporated
dated July 22, 2005
|
|
8-K
|
|
000-31617
|
|
10.45
|
|
July 28, 2005
|
|
|
|
|
II-8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Incorporated by Reference
|
|
Filed
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Filing Date
|
|
Herewith
|
|
Previously
|
|
|
10
|
.32
|
|
Letter Agreement dated August 29, 2007 between Vermillion,
Inc. and Quest Diagnostics Incorporated
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
|
10
|
.33
|
|
Warrant between Vermillion, Inc. (formerly Ciphergen Biosystems,
Inc.) and Quest Diagnostics Incorporated dated July 22, 2005
|
|
8-K
|
|
000-31617
|
|
10.46
|
|
July 22, 2005
|
|
|
|
|
|
10
|
.34
|
|
Memorialization Agreement between Vermillion, Inc. (formerly
Ciphergen Biosystems, Inc.) and Quest Diagnostics Incorporated
dated January 12, 2006
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
|
10
|
.35
|
|
Amendment to Warrant between Vermillion, Inc. (formerly
Ciphergen Biosystems, Inc.) and Quest Diagnostics Incorporated
dated August 29, 2007
|
|
8-K
|
|
000-31617
|
|
10.2
|
|
August 29, 2007
|
|
|
|
|
|
10
|
.36
|
|
Credit Agreement between Vermillion, Inc. (formerly Ciphergen
Biosystems, Inc.) and Quest Diagnostics Incorporated dated
July 22, 2005
|
|
8-K
|
|
000-31617
|
|
10.47
|
|
July 28, 2005
|
|
|
|
|
|
10
|
.37
|
|
Patent Security Agreement between Vermillion, Inc. (formerly
Ciphergen Biosystems, Inc.) and Quest Diagnostics Incorporated
dated July 22, 2005
|
|
8-K
|
|
000-31617
|
|
10.48
|
|
July 28, 2005
|
|
|
|
|
|
10
|
.38
|
|
Collaborative Research Agreement between University College
London, UCL Biomedica plc and Vermillion, Inc. (formerly
Ciphergen Biosystems, Inc.) dated September 22, 2005
|
|
10-K
|
|
000-31617
|
|
10.54
|
|
March 17, 2006
|
|
|
|
|
|
10
|
.39
|
|
Form of Exchange and Redemption Agreement, dated as of
November 3, 2006 between Vermillion, Inc. (formerly
Ciphergen Biosystems, Inc.) and certain holders of its
4.50% Convertible Senior Notes due September 1, 2008
|
|
8-K
|
|
000-31617
|
|
10.55
|
|
November 6, 2006
|
|
|
|
|
|
10
|
.40
|
|
Letter Agreement between Vermillion, Inc. (formerly Ciphergen
Biosystems, Inc.) and Oppenheimer & Co. Inc. dated
August 3, 2006
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
|
10
|
.41
|
|
Warrant dated August 3, 2006 with Oppenheimer &
Co. Inc.
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
|
10
|
.42
|
|
Warrant dated November 15, 2006 with
Oppenheimer & Co. Inc.
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
II-9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Incorporated by Reference
|
|
Filed
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Filing Date
|
|
Herewith
|
|
Previously
|
|
|
10
|
.43
|
|
Engagement Letter between Vermillion, Inc. (formerly Ciphergen
Biosystems, Inc.) and Oppenheimer & Co. Inc. dated
August 3, 2006
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
|
10
|
.44
|
|
Asset Purchase Agreement between Vermillion, Inc. (formerly
Ciphergen Biosystems, Inc.) and Bio-Rad Laboratories, Inc. dated
August 14, 2006
|
|
14a
|
|
000-31617
|
|
Annex A
|
|
September 12, 2006
|
|
|
|
|
|
10
|
.45
|
|
Amendment to Asset Purchase Agreement between Vermillion, Inc.
(formerly Ciphergen Biosystems, Inc.) and Bio-Rad Laboratories,
Inc. dated November 13, 2006
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
|
10
|
.46
|
|
Stock Purchase Agreement between Vermillion, Inc. (formerly
Ciphergen Biosystems, Inc.) and Bio-Rad Laboratories, Inc. dated
November 13, 2006
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
|
10
|
.47
|
|
Transition Services Agreement between Vermillion, Inc. (formerly
Ciphergen Biosystems, Inc.) and Bio-Rad Laboratories, Inc. dated
November 13, 2006
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
|
10
|
.48
|
|
Amendment No. 1 to Transition Services Agreement between
Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and
Bio-Rad Laboratories, Inc. dated May 11, 2007
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
|
10
|
.49
|
|
Amendment No. 2 to Transition Services Agreement between
Vermillion, Inc. (formerly Ciphergen Biosystems, Inc.) and
Bio-Rad Laboratories, Inc. dated June 15, 2007
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
|
10
|
.50
|
|
Manufacture and Supply Agreement between Vermillion, Inc.
(formerly Ciphergen Biosystems, Inc.) and Bio-Rad Laboratories,
Inc. dated November 13, 2006
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
|
10
|
.51
|
|
Amendment No. 1 to Manufacture and Supply Agreement between
Vermillion, Inc. and Bio-Rad Laboratories, Inc. dated
August 27, 2007
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
II-10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Incorporated by Reference
|
|
Filed
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Filing Date
|
|
Herewith
|
|
Previously
|
|
|
10
|
.52
|
|
Cross License Agreement between Vermillion, Inc. (formerly
Ciphergen Biosystems, Inc.) and Bio-Rad Laboratories, Inc. dated
November 13, 2006
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
|
10
|
.53
|
|
Letter Agreement between Vermillion, Inc. (formerly Ciphergen
Biosystems, Inc.) and Bio-Rad Laboratories, Inc. dated
November 13, 2006
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
|
10
|
.54
|
|
Sublease Agreement between Vermillion, Inc. (formerly Ciphergen
Biosystems, Inc.) and Bio-Rad Laboratories, Inc. dated
November 13, 2006
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
|
10
|
.55
|
|
Placement Agent Agreement between Vermillion, Inc. (formerly
Ciphergen Biosystems, Inc.) and Oppenheimer & Co. Inc.
dated March 28, 2007
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
|
10
|
.56
|
|
Securities Purchase Agreement by and among Vermillion, Inc. and
the purchasers party thereto dated as of August 23, 2007
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
|
10
|
.57
|
|
Form of Warrant
|
|
10-Q
|
|
000-31617
|
|
10.51
|
|
November 14, 2007
|
|
|
|
|
|
21
|
|
|
Subsidiaries of Registrant
|
|
10-K
|
|
000-31617
|
|
21.1
|
|
March 22, 2005
|
|
|
|
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers LLP, Independent Registered
Public Accounting Firm
|
|
|
|
|
|
|
|
|
|
ü
|
|
|
|
23
|
.2
|
|
Consent of Paul, Hastings, Janofsky & Walker LLP
(included in Exhibit 5)
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
|
24
|
|
|
Power of Attorney (included in Part II of the Registration
Statement)
|
|
|
|
|
|
|
|
|
|
|
|
ü
|
|
|
|
|
|
Certain portions of this exhibit have been omitted and filed
separately with the Securities and Exchange Commission.
Confidential treatment has been requested with respect to such
omitted portions. |
II-11