See accompanying notes to the unaudited condensed consolidated financial statements.

Vermillion, Inc.

Condensed Consolidated Statements of Operations

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

(Unaudited)







See accompanying notes to the unaudited condensed consolidated financial statements.

Vermillion, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

(Amounts in Thousands, Except Share Amounts)

(Unaudited)

See accompanying notes to the unaudited condensed consolidated financial statements.

Vermillion, Inc.

Condensed Consolidated Statements of Cash Flows

(Amounts in Thousands)

(Unaudited)







See accompanying notes to the unaudited condensed consolidated financial statements.

Vermillion, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)





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

Organization

Vermillion, Inc. (“Vermillion”; Vermillion and its wholly-owned subsidiaries are collectively referred to as the “Company,” “we”“we,” “our,” or “our”“us”) is incorporated in the state of Delaware, and is engaged in the business of developing and commercializing diagnostic tests for gynecologic disease. The Company sells OVA1™OVA1,Overa and Overa™OVA1PLUS risk of malignancy tests for ovarian cancer (“OVA1”OVA1,” “Overa,” and “Overa,“OVA1PLUS,” respectively) through Vermillion’s wholly-owned Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) certified clinical laboratory, ASPiRA LABS, Inc. (“ASPiRA LABS”). The Company also sells a product for genetic testing for specific women’s health diseases, called ASPiRA GenetiX, with a core focus on ovarian cancer.

The Company has historically also offersoffered in-vitro diagnostic (“IVD”) trial services to third-party customers through its wholly-owned subsidiary, ASPiRA IVD, Inc. (“ASPiRA IVD”), which commenced operations in June 2016. ASPiRA IVD iswas a specialized, CLIA certified, laboratory provider dedicated to meeting the unique testing needs of IVD manufacturers seeking to commercialize high-complexity assays. The Company has discontinued pursuing contracts for ASPiRA IVD and its contractual commitments were concluded in the fourth quarter of 2019.

Going ConcernLiquidity

The Company has incurred significant net losses and negative cash flows from operations since inception, and as a result has an accumulated deficit of approximately $393,098,000$425,867,000 and limited liquidity at September 30, 2017.March 31, 2020. The Company also expects to incur a net loss and negative cash flows from operations for the remainder of 2017 and the foreseeable future. The Company’s management believes that successful achievement of the Company’s business objectives will require additional financing. 2020.  Given these conditions, there is substantial doubt about the Company’s ability to continue as a going concern.concern for a period of one year from the date these consolidated financial statements are issued. The condensed consolidated financial statements have been prepared on a going concern basis and do not includecontain any adjustments that mightas a result fromof these uncertainties.

In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. The Company expectsnovel coronavirus has since spread to raise capital throughover 100 countries, including every state in the United States. In March 2020, the World Health Organization declared COVID-19, the disease caused by the novel coronavirus, a variety of sources, which may includepandemic, and the exercise of common stock warrants,  equity offerings, debt financing, collaborations, licensing arrangements, grants and government funding and strategic alliances. However, additional funding may not be available when needed or on terms acceptableUnited States declared a national emergency with respect to the Company. Ifcoronavirus outbreak. This outbreak has severely impacted global economic activity, and many countries and many states in the CompanyUnited States have reacted to the outbreak by instituting quarantines, mandating business and school closures and restricting travel. In addition, many conventions and industry conferences have been canceled.

As a result of the COVID-19 pandemic and actions taken to contain it, our test volume, and resulting revenue, has decreased significantly in late March and April 2020 as fewer patients are visiting their physicians and elective surgeries have been postponed as a result of closures. Although we have seen some increases in late April and early May 2020, it is uncertain what the duration of the decreased test volumes might be. In order to reduce the impact of limitations on visiting physician offices due to the current closures and quarantines, we have implemented other means of coverage such as virtual sales representative meetings and increased digital sales and marketing. Enrollment for future studies may also be delayed due to the impact of current closures. The full impact of the COVID-19 pandemic continues to evolve as of the date of this filing. As a result, we are unable to obtain additional capital, it may not be able to continue sales and marketing, research and development, or other operationsestimate the extent of the impact of the COVID-19 pandemic on the scope or scale of current activity and that could have a material adverse effect on the Company’s business, results of operations and financial condition.our liquidity.

As discussed in Note 4, on August 31, 2017, certain investors exercised outstanding warrants for common stock for net proceeds of approximately $3,577,000 after deducting offering expenses.

As discussed in Note 4, on February 17, 2017,June 28, 2019, the Company completed a private placementpublic offering (the “Offering”), pursuant to which certain investors purchased Vermillion common stock for net proceeds of approximately $13,521,000 after deducting underwriting discounts, commissions and warrantsother expenses related to the offering. On July 2, 2019, William Blair & Company, L.L.C., the sole underwriter of the Offering, exercised its option to

purchase additional shares of Vermillion common stock for net proceeds of approximately $5,127,000$2,092,000, after deducting offering expenses.underwriting discounts, commissions and other expenses related to the offering.

As discussed in Note 3, in March 2016, the Company entered into an agreement (the(as amended, the “Loan Agreement”), pursuant to which it may borrow up to $4,000,000 from the State of Connecticut Department of Economic and Community Development (the “DECD”). An initial disbursement of $2,000,000 was made to the Company inon April 15, 2016 under the Loan Agreement. The Loan Agreement provides that the remaining $2,000,000 will be disbursedadvanced if and when the Company achieves certain future milestones.



Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management of the Company, all adjustments, consisting of normal recurring adjustments necessary for the fair statement of results for the periods presented, have been included. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year or any other interim period.

The unaudited condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim unaudited condensed consolidated financial statements have read or have access to the audited consolidated financial statements for the preceding fiscal year. The condensed consolidated balance sheet at December 31, 20162019 included in this report has been derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by GAAP. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 20162019 included in Vermillion’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 31,  2017April 7, 2020 (the “2016“2019 Annual Report”).

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimated results.

In August 2018, the Financial Accounting Standards Board (the “FASB”) issued ASU 2018-15, Intangibles-Goodwill and Other-Internal Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company adopted ASU 2018-15 effective on January 1, 2020, using the prospective transition approach, which allows the Company to change the accounting method without restating prior periods or booking cumulative adjustments. The adoption of ASU 2018-15 did not have a material impact on the Company’s consolidated financial statements.



Significant Accounting and Reporting Policies

Revenue Recognition

Product Revenue

The Company has adopted ASC 954-605,Health Care Entities—Revenue Recognition, – OVA1, Overa and OVA1PLUS:  as revenue from laboratory services has become significant to the Company.The Company's product revenue is generated by performing diagnostic services using its OVA1 and Overa tests, and the service is completed upon the delivery of test results to the prescribing physician. The Company recognizes product revenue relatedin accordance with the provisions of ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). Product revenue is recognized upon completion of the OVA1, Overa or OVA1PLUS test and delivery of results to billings for Medicare and commercial payersthe

physician based on an accrual basis, netestimates of contractual and other adjustments, when amounts that will ultimately be realized canrealized. In determining the amount of revenue to be estimated. Untilrecognized for a contract has been negotiated with a commercial payer or governmental program, the OVA1 and Overa tests may or may not be covered by these entities' existing reimbursement policies. In addition, patients do not enter into direct agreements withdelivered test result, the Company that commit them to pay any portion ofconsiders factors such as payment history and amount, payer coverage, whether there is a reimbursement contract between the cost of the tests in the event that their insurance declines to reimburse the Company. In the absence of an agreement with the patient or other clearly enforceable legal right to demand payment from the patient, the related revenue is only recognized upon cash receipt.

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

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

Service Revenue

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

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

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

Recent Accounting Pronouncements

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

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

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

The Company is also continuing its analysis of the effect ASU 2014-09 will have on its Product Revenue and also expects to complete this analysis in the fourth quarter of 2017. Revenue that is recognized upon the ultimate receipt of cash under the Company’s existing revenue recognition policy will have to be reassessed under the new standard. The Company’s implementation process is to reviewreviews its patient account population to determine theand determines an appropriate distribution of patient accounts by payer  (i.e. (i.e., Medicare, patient pay, other third-party payer, etc.etc.) into portfolios with similar collection experienceexperience. The Company has elected this practical expedient that, when evaluated for collectability, will resultresults in a materially

consistent revenue amount for such portfolios as if each patient account were evaluated on an individual contract basis. During the quarter ended March 31, 2020, there were approximately $14,000 of downward adjustments to estimates to recognize revenue for services provided in a contract-by-contract basis.prior period. There were no impairment losses on accounts receivable recorded during the quarters ended March 31, 2020 and 2019.  

Product Revenue – ASPiRA GenetiX: Under ASC 606, the Company’s genetics revenue is recognized upon completion of the ASPiRA GenetiX test and delivery of results to the physician based on estimates of amounts that will ultimately be realized. In determining the amount of revenue to be recognized for a delivered test result, the Company considers factors such as payment history and amount, payer coverage, whether there is a reimbursement contract between the payer and the Company, and any current developments or changes that could impact reimbursement. These estimates require significant judgment by management as the Company has limited experience with such factors relating to ASPiRA GenetiX.  

Service Revenue: The Company’s service revenue was generated by performing IVD trial services for third-party customers. Measurement of progress on contracts with customers was generally based on the input measurement of cost incurred relative to the total expected costs to satisfy the performance obligation. We do not expect to have any significant service revenue going forward as we wound down the ASPiRA IVD subsidiary in the fourth quarter of 2019.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update changes the impairment model from the currently used incurred loss methodology to an expected loss methodology, which will result in the more timely recognition of losses. The ASU is scheduled to be effective in 2023 for smaller reporting companies. The Company has not yet determined if it plans to utilizeis currently assessing the full retrospective or modified retrospective methodimpact of adoption, but anticipates adopting the new standard in the first quarter of 2018.this ASU on its consolidated financial statements.





2.   AGREEMENTS WITH QUEST DIAGNOSTICS INCORPORATED



In March 2015, the Company entered into a commercial agreement with Quest Diagnostics, Incorporated (“Quest Diagnostics”). Pursuant to this agreement, all OVA1 U.S. testing services for Quest Diagnostics customers were transferred to Vermillion’s wholly-owned subsidiary, ASPiRA LABS, as of August 2015. Pursuant to this agreement, as amended as of April 10, 2015, March 11, 2017, March 1, 2018 and March 11, 2020, Quest Diagnostics has agreedcontinued to provide blood draw and logistics support by transporting specimens from its clients to ASPiRA LABS for testing through at least March 11, 2018 in exchange for a market value fee. Per the terms of this agreement, the Company will not offer to existing or future Quest Diagnostics customers tests that Quest Diagnostics offers.

3.   COMMITMENTS AND CONTINGENCIES



Coronavirus Aid, Relief, and Economic Security (CARES) Act and Paycheck Protection Program Loan

On March 27, 2020, the U.S federal government enacted the CARES Act. The CARES Act is an emergency economic stimulus package in response to the coronavirus outbreak. The Company continues to evaluate the impact of the CARES Act on its business, future financial condition and results of operations but, with the

exception of the PPP Loan described below, did not note a material impact of the CARES Act for the three months ended March 31, 2020.

On May 1, 2020, we obtained the PPP Loan from BBVA USA in the aggregate amount of $1,005,767, pursuant to the PPP, which was established under the CARES Act, as administered by the SBA. The application for these funds required the Company to, in good faith, certify that the described economic uncertainty at the time made the loan request necessary to support the ongoing operations of the Company. This certification further required the Company to take into account its current business activity and its ability to access other sources of liquidity sufficient to support ongoing operations in a manner that was not significantly detrimental to the business. Under the terms of the CARES Act and the PPP, all or a portion of the principal amount of the PPP Loan is subject to forgiveness so long as, over the eight-week period following our receipt of the proceeds of the PPP Loan, the Company uses those proceeds for payroll costs, rent, utility costs or the maintenance of employee and compensation levels. The PPP Loan, which was granted pursuant to a Promissory Note, matures on May 1, 2022. Any unforgiven portion of the PPP Loan bears interest at a rate of 1.000% per annum, payable monthly in equal installments commencing on December 1, 2020.

Development Loan

On March 22, 2016, the Company entered into the Loan Agreement with the DECD, pursuant to which the Company may borrow up to $4,000,000 from the DECD. Proceeds from the $2,000,000 April 2016 initial disbursement under the Loan Agreementloan were utilized primarily to fund the build-out, information technology infrastructure and other costs related to the Company’s Trumbull, Connecticut facility and operations. The loan bears interest at a fixed rate of 2.0% per annum and requires equal monthly payments of principal and interest until maturity, which occurs on April 15, 2026. As security for the loan, the Company has granted the DECD a blanket security interest in the Company’s personal and intellectual property. The DECD’s security interest in the Company’s intellectual property may be subordinated to a qualified institutional lender. 

An initial disbursement of $2,000,000 was made to the Company on April 15, 2016 under the Loan Agreement. The remaining $2,000,000 will be advanced if and when the Company achieves certain other future milestones. The loan may be prepaid at any time without premium or penalty. On each of March 7, 2018 and April 3, 2020, the Company amended the Loan Agreement to adjust the future milestones which would allow the Company to continue to be eligible to borrow the remaining $2,000,000. The April 2020 amendment changes the criteria for receiving the next $1,000,000 available under the Loan Agreement by reducing from 40 to 25 the number of full-time employees that the Company is required to hire, by changing the date on or before which the Company must meet this requirement from March 1, 2021 to December 31, 2020, and by increasing the required capital investment of the Company from $18,000,000 to $18,800,000. Although the criteria for receiving the final $1,000,000 available under the loan were not changed as part of the April 2020 amendment, such disbursement is also conditioned on the Company meeting the requirements described above. 

Under the terms of the Loan Agreement, as amended, the Company may be eligible for forgiveness of up to $2,000,000$1,500,000 of the principal amount of the loan if the Company achieves certain job creation and retention milestones by March 1, 2018.December 31, 2022. Conversely, if the Company is either unable to meet these job creation and retention milestones, namely, hiring 4025 full-time employees with a specified average annual salary within the allotted timeframe andon or before December 31, 2020 or retaining thosesuch employees for a consecutive two-year periodor does not maintain the Company’s Connecticut operations for a period of 10 years, the DECD may require early repayment of a portion or all of the loan depending on job attainment as compared to the required amount plus a penalty of 5%. of the total funded loan. 

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

Operating Leases

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

2021 with no automatic renewal or renewal option. 

In October 2015, the Company entered into a lease agreement for a facility in Trumbull, Connecticut. The lease required initial payments for the buildout of leasehold improvements to the office space, which were approximately $596,000. The termCompany has the right to renew the lease for up to two five-year terms at a rate equal to 90% of the then current fair market rate. The Company’s Trumbull, Connecticut lease is five years beginning after the initial date of occupancy in January expires on June 8, 2021.

2016 and a rent abatement periodThe Company is not reasonably certain to exercise the renewal option for its Trumbull, Connecticut lease due to the uncertain nature of five months. its pricing.

The lease includes an aggregate annual base rent of $32,000 and annual estimated common area charges, taxes and insurance of $95,000.  

Building rentexpense associated with these operating leases for the three months ended September 30, 2017March 31, 2020 and 2016 totaled $66,000 and $71,000, respectively. Building rent for2019 is shown in the nine months ended September 30, 2017 and 2016 totaled $189,000 and $175,000, respectively.table below (in thousands).



Capital Lease

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



The accumulated amortization of assets under capital lease obligations was $174,000 and $97,000 as of September 30,  2017 and 2016, respectively. The net book value of assets under capital lease obligations was $58,000 and $135,000Based on our leases as of September 30, 2017March 31, 2020, the table below sets forth the approximate future lease payments related to operating leases with initial terms of one year or more (inthousands).

Weighted-average lease term and 2016, respectively.  discount rate were as follows:



Non-cancelable Royalty Obligations

The Company is a party to an amended research collaboration agreement with The Johns Hopkins University School of Medicine under which the Company licenses certain of its intellectual property 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 disease. Under the terms of the amended research collaboration agreement, Vermillion is required to pay the greater of 4% royalties on net sales of diagnostic tests using the assigned patents or annual minimum royalties of $57,500. Royalty expense for the three months ended September 30, 2017March 31, 2020 and 20162019 totalled $30,000$46,000 and $24,000,$31,000, respectively. Royalty expense for the nine months ended September 30, 2017 and 2016 totalled $94,000 and $66,000, respectively.

4.   STOCKHOLDERS’ EQUITY

2017 Warrant Repricing and Exercise

2019 Offering

In December 2014,On June 26, 2019, the Company issued warrantsentered into an underwriting agreement (the “Underwriting Agreement”) with William Blair & Company, L.L.C., as the sole underwriter (the “Underwriter”), in connection with an underwritten public offering of 18,750,000 shares of the Company’s common stock, par value $0.001 per share.  

Pursuant to the Underwriting Agreement, the Company agreed to issue and sell an aggregate of 18,750,000 shares of Vermillion common stock offered by the Underwriter in a public offering at a price of $0.80 per share (the “Offering”). The Offering closed on June 28, 2019 and resulted in net proceeds to the Company, of approximately $13,521,000 after deducting expenses of approximately $1,500,000.  

Under the Underwriting Agreement, the Company granted the Underwriter an option to purchase up to an aggregate of 4,166,659additional 2,812,500 shares of Vermillion common stock at an exercisethe public offering price, of $2.00 per share in conjunction with a December 2014 private placement of Vermillion common stock.  The warrants expire by their original terms on December 23, 2017.

less underwriting discounts and commissions. On August 31, 2017, certain holdersJuly 2, 2019, the Underwriter exercised warrantsits option to purchase 3,796,818 shares of Vermillion common stock in consideration for the Company agreeing to reduce the exercise price to $1.00 per share of Vermillion common stock.

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

2017 Private Placement

On February 17, 2017, the Company completed a private placement pursuant to which certain investors purchased 3,747,1252,812,500 shares of Vermillion common stock at a price of $1.40$0.80 per share. Vermillion also issued warrantsshare and resulted in proceeds to purchase sharesthe Company of Vermillion common stock at a price of $0.125 per warrant share in the private placement. Net proceeds of the private placement were approximately $5,127,000$2,092,000, after deducting offering expenses. The warrants are exercisable forunderwriting discounts, commissions and 2,810,338 shares of Vermillion common stock at $1.80 per share. The warrants expire onother expenses related to the fifth anniversary of the date of issuance or, if earlier, five business days after Vermillion delivers notice that the closing price per share of its common stock exceeded the exercise price for 20 consecutive trading days during the exercise periodoffering.

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

2010 Stock Incentive Plan

The Company’s employees, directors, and consultants arewere eligible to receive awards under the Vermillion, Inc. Second Amended and Restated 2010 Stock Incentive Plan, (the “2010 Plan”). The 2010which was replaced by the 2019 Plan permits the granting(as defined below) with respect to future equity grants. As of March 31, 2020, a varietytotal of awards, including stock options, share appreciation rights, restricted shares, restricted share units, unrestricted shares, deferred share units, performance and cash-settled awards, and dividend equivalent rights. The 2010 Plan provides for issuance of up to 8,122,9835,860,377 shares of Vermillion common stock were reserved with respect to outstanding stock options and unvested restricted stock awards.

2019 Stock Incentive Plan

At the Company’s annual meeting of stockholders on June 18, 2019, the Company’s stockholders approved the Vermillion, Inc. 2019 Stock Incentive Plan (the “2019 Plan”). The purposes of the 2019 Plan are (i) to align the interests of the Company’s stockholders and recipients of awards under the 2019 Plan by increasing the proprietary interest of such recipients in the Company’s growth and success; (ii) to advance the interests of the Company by attracting and retaining non-employee directors, officers, other employees, consultants, independent contractors and agents; and (iii) to motivate such persons to act in the long-term best interests of the Company and its stockholders.  The 2019 Plan allows the Company to grant stock options, stock appreciation rights, restricted stock, restricted stock units and performance awards to participants.

Subject to the terms and conditions of the 2019 Plan, the initial number of shares authorized for grants under the 2019 Plan is 10,492,283. To the extent an equity award granted under the 2019 Plan expires or otherwise terminates without having been exercised or paid in full, or is settled in cash, the shares of common stock subject to adjustment as provided insuch award will become available for future grant under the 20102019 Plan. As of March 31, 2020, a total of 10,492,283 shares of common stock had been reserved for issuance under the 2019 Plan, of which 3,515,708 shares of common stock are subject to outstanding stock options.

Stock-Based Compensation

During the ninethree months ended September 30, 2017,March 31, 2020, the Company awarded to Vermillion’sthe Company’s non-employee directors 131,250an aggregate of 356,940 shares of restricted stock under the 20102019 Plan, having a grant date of March 19,  2020 and a grant date fair value of approximately $281,000 as payment for services to be rendered in 2017. These$243,000. The vesting of these shares of restricted stock vested 50%is as follows: 25% on April 1, 2020; 25% on June 1, 2017 and2020; 25% on September 1, 2017,2020; and the remaining 25% will vest on December 1, 2017. The Company also issued to certain consultants 27,878 shares of restricted stock under the 2010 Plan having a fair value of approximately $48,000.

2020.  During the three months ended September 30, 2017, the Company issued to certain consultants 5,037 shares of restricted stock under the 2010 Plan having a fair value of approximately $9,000. The Company did not make any awards of restricted stock to non-employee directors during the three months ended September 30, 2017. 

During the nine months ended September 30, 2017,March 31,  2020, the Company also granted certain consultantsthe Company’s non-employee directors options to purchase 70,000an aggregate of 498,768 shares of Vermillion common stock with an exercise price of $2.14$0.68 per share.

During the three months ended March 31, 2020, the Company granted certain consultants options to purchase 50,000 shares of Vermillion common stock under the 2019 Plan. with an exercise price of $0.82 per share.

These stock options have performance-based vesting conditions based on certain metrics through March 31, 2021.  The Company also granted certain officers and employeesconsultants options to purchase approximately 916,000an aggregate of 41,000 shares of Vermillion common stock with an exercise price of $2.14$0.68 per share. In addition,

During the three months ended March 31, 2020, the Company granted certain officers and employees options to purchase 14,500an aggregate of 850,000 shares of Vermillion common stock with an exercise price of $1.83$0.82 per share. These stock options generally vest 25%were granted under the 2019 Plan and have performance-based vesting conditions based on each of the four anniversaries of the grant date.  certain metrics through March 31, 2021.  

During the ninethree months ended September 30, 2017,March 31, 2020,  the Company also granted certain officers and employees options to purchase 250,000an aggregate of 24,000 shares of Vermillion common stock with an exercise price of approximately $2.14$0.77 per share with performance-based vesting based on certain metrics through December 31, 2017. These options vest 25% on each of the four anniversaries of the grant date if the performance-based metrics are met.

During the three months ended September 30, 2017, the Company granted certain officers and employees options to purchase 22,5001,500,000 shares of Vermillion common stock with an exercise price of $1.32$0.68 per share. These stock options were granted under the 2019 Plan and vest 25% on each of the four anniversaries of the vesting commencement date for each such stock option. 

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

The allocation of employee stock-based compensation expense by functional area for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 was as follows:





5.   LOSS PER SHARE

The Company calculates basic loss per share using the weighted average number of shares of Vermillion common stock outstanding during the period. Because the Company is in a net loss position, diluted loss per share is calculated using the weighted average number of shares of Vermillion common stock outstanding and excludes the effects of 7,971,86012,543,364 and 7,485,63210,144,433 potential shares of Vermillion common stock as of September 30, 2017March 31, 2020 and 2016,2019, respectively, that are anti-dilutive. Potential shares of Vermillion common stock include incremental shares of Vermillion common stock issuable upon the exercise of outstanding warrants, stock options and unvested restricted stock units.



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

Forward-Looking Statements

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

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

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

Forward-looking statements are subject to significant risks and uncertainties, including those discussed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 20162019 (our “2016“2019 Annual Report”) andas supplemented by the section entitled “Risk Factors” in Part II, Item 1A. “Risk Factors”1A of ourthis Quarterly Report on Form 10-Q for the three months ended March 31, 2017 (our “2017 First Quarterly Report”), that could cause actual results to differ materially from those projected in such forward-looking statements due to various factors, including our ability to continue as a going concern; our ability to increase the volume of OVA1 or Overaour product sales; our ability to market our test through sales channels other than Quest Diagnostics including ASPiRA LABS; failures by third-party payers to reimburse OVA1 or Overa or changes or variances in reimbursement rates; our ability to secure additional capital on acceptable terms to execute our business plan; our ability to commercialize OVA1 and/or Overa both within and outside the United States;comply with Nasdaq’s continued listing requirements to remain publicly traded; in the event that we succeed in commercializing OVA1, and/or Overa, OVA1PLUS and ASPiRA GenetiX outside the United States, the political, economic and other conditions affecting other countries (including foreign exchange rates);countries; our ability to continue developing existing technologies; our ability to develop and commercialize additional diagnostic products and achieve market

acceptance with respect to these products; our ability to compete successfully; our ability to obtain any regulatory approval required for our future diagnostic products; our or our

suppliers’ ability to comply with United States Food and Drug Administration (“FDA”) requirements for production, marketing and post-market monitoring of our products; additional costs that may be required to make further improvements to our manufacturing operations; our ability to maintain sufficient or acceptable supplies of immunoassay kits from our suppliers; our ability to continue to develop, protect and promote our proprietary technologies; our ability to use intellectual property directed to diagnose biomarkers; our ability to successfully defend our proprietary technology against third parties; future litigation against us, including infringement of intellectual property and product liability exposure; our ability to retain key employees; business interruptions; legislative actions resulting in higher compliance costs; changes in healthcare policy; our ability to comply with environmental laws; our ability to generate sufficient demand for ASPiRA LABS’ services to cover its operating costs; our ability to comply with the additional laws and regulations that apply to us in connection with the operation of ASPiRA LABS; our ability to comply with FDA regulations that relate to our products and to obtain any FDA clearance or approval required to develop and perform LDTs; ASPiRA IVD’s lack of operating history; ASPiRA IVD’s ability to generate and maintain business; fluctuations over time with respect to ASPiRA IVD’s operating results; ASPiRA IVD’s ability to enter into profitable contracts; ASPiRA IVD’s ability to maintain effective information systems without significant interruption; ASPiRA IVD’s ability to perform its services in compliance with contractual requirements, regulatory standards and ethical considerations; and our ability to continue as a going concern.integrate and achieve anticipated results from any acquisitions or strategic alliances; our ability to use our net operating loss carryforwards; the liquidity and trading volume of our common stock; the concentration of ownership of our common stock; and impacts resulting from or relating to the COVID-19 pandemic and actions taken to contain it.   



Overview

Our visioncore mission is to drivetransform the advancementstate of women’s health, by providing innovative methods to detect, monitor and manage the treatment of both benign and malignant gynecologic disease,globally, starting with our primary focus being diseases of the female pelvic cavity.

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

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

We are dedicated to the discovery, development and commercialization of novel high-value diagnostic and bio-analytical solutions that help physicians diagnose, treat and improve outcomes for women. Our tests are intended to detect, characterize and stage disease, and to help guide decisions regarding patient treatment, which may include decisions to refer patients to specialists, to perform additional testing, or to assist in monitoring response to therapy. A distinctive feature of our approach is to combine multiple biomarkers, other modalities and diagnostics, clinical risk factors and patient data into a single, reportable index score that has higher diagnostic accuracy than its constituents. We concentrate on our development of novel diagnostic tests for gynecologic disease, with an initial focus on ovarian cancer. We also intendaim to address clinical questions relatedensure that women of all ages, stages and ethnicities have the best solutions available to early disease detection, treatment response, monitoringassess their personalized risk of disease progression, prognosiscancer at the earliest stage when it matters most. Our end goal is to serve a large global pelvic mass population and others through collaborationsoverall women’s health sector with leading academica platform coupled with proprietary science and research institutions.data tools which will drive better health and wellbeing for each patient we serve.

Our initial product,We currently market and sell the following products and related services: (1) OVA1, is an FDA cleareda blood test designed to, in addition to a physician’s clinical assessment of a woman with a pelvic mass, identify women who are at high risk of having a malignant ovarian

tumor prior to planned surgery. surgery;We have launched on a targeted basis (2) Overa, a second-generation biomarker panel known as Overa, which is intended to maintain our product’s high sensitivity while improving specificity. Wespecificity; (3) OVA1PLUS, a service offering combining our OVA1 and Overa products, designed to improve accuracy and reduce false elevations in the intermediate risk area by nearly 40% by leveraging the strengths of OVA1’s (MIA) sensitivity and Overa’s (MIA2G) specificity; and (4) ASPiRA GenetiX, a genetic test for specific women’s health diseases, initially focused on detecting hereditary breast and ovarian cancer syndrome (“HBOC”) and carriers of the gene. OVA1 received FDA clearance forin September 2009, and Overa received FDA clearance in March 2016. OVA1 and Overa useseach use the Roche cobas 4000, 6000 and 8000 platform.  s. Through March 31,  2020,  our product and related services revenue has been limited to revenue generated by sales of OVA1, with ASPiRA GenetiX revenue beginning in the fourth quarter of 2019.

We are developing three additional products and related services, including two diagnostic algorithms as part of an LDT product series, OVANex and Endocheck and a high-risk screening algorithm, OVAinherit, for patients who are genetically predisposed to ovarian cancer.

We ultimately plan to commercialize each of our products on a global level.We currently hold CE marks for OVA1 and Overa. In June 2014, Vermillion launchedaddition, each of OVA1 and Overa are already offered on a global testing platform, which allows both tests to be deployed worldwide.

We also own and operate ASPiRA LABS, a Clinical Laboratory Improvements Amendments of 1988 (“CLIA”) certified national laboratory based in Austin, Texas, which specializes in applying biomarker-based

technologies to address critical needs in the management of gynecologic cancers and disease. ASPiRA LABS provides expert diagnostic services using a state-of-the-art biomarker-based diagnostic algorithm to aid in clinical decision making and advance personalized treatment plans. The lab currently processes our OVA1 and Overa tests, and we plan to expand the testing to other gynecologic conditions with high unmet need. We also plan to develop and perform LDTs at ASPiRA LABS in the future.LABS. ASPiRA LABS holds a CLIA Certificate of Registration and a state laboratory license in California, Florida, Maryland, New York, Pennsylvania and Rhode Island. This allows the lab to process OVA1 on a national basis. The Centers for Medicare &and Medicaid Services (“CMS”) issued a provider number to ASPiRA LABS in March 2015.

Recent Developments

In 2016,the first quarter of 2019, we createdbegan the development stage of our third-generation technology and first diagnostic algorithm LDT, internally known as OVANex, and formerly referred to as Diagnostic Algorithm #1 and Watch and Wait. The new test will have strong sensitivity and specificity as well as a negative predictive value of greater than 99%, which will allow physicians to serially monitor women with a mass to delay or avoid unnecessary surgery. Tackling serial monitoring, which involves testing each patient two to four times a year, presents a new and potentially large market opportunity for us. The test will be initially launched as a serial monitoring LDT only, but the 2020 prospective monitoring study will be designed to enable us to submit for FDA clearance if we choose to do so. The COVID-19 pandemic could have a  potential impact on the recruitment of patients for the 2020 prospective monitoring study, as well as for additional population-based studies we anticipate conducting in the future. If all goes well with the 2020 prospective monitoring study, we expect a 2021 product launch.

In the fourth quarter of 2019, we completed all outstanding service within the ASPiRA channel strategy, “anrevenue contracts relating to our ASPiRA IVD Services Program”. In April 2016, we formed ASPiRA IVD to offer IVD trial services to third-party customers.subsidiary. We are no longer pursuing in-vitro diagnosticcontracts and have fulfilled all contractual obligations under previous contracts. All ASPiRA IVD is a specialized laboratory provider dedicated to meeting the unique testing needs of IVD manufacturers seeking to commercialize high-complexity assays. ASPiRA IVD was built around a core of laboratory expertisedirect employees and an FDA-compliant quality system,  and strives to deliver accurate and reliable results to its third-party customers suitable for FDA submission.  ASPiRA IVD contract labor have been terminated.

In August 2019, we received a CLIA laboratory licensedeficiency letter from the Listing Qualifications Department of the Nasdaq Stock Market (“Nasdaq”) stating that, for the preceding 30 consecutive business days, the closing bid price for Vermillion common stock was below the minimum of $1.00 per share, as is required for continued listing on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2). In accordance with the Nasdaq rules, we were provided an initial period of 180 calendar days, or until January 29, 2020, to regain compliance with the minimum bid price requirement. On January 30, 2020, we were granted an additional 180-calendar day compliance period to regain compliance with the minimum bid price requirement. On April 27, 2020, we were notified by Nasdaq that we had regained compliance. There is no assurance that we will maintain compliance with this or any of the other Nasdaq continued listing requirements. 

On March 11, 2020, we entered into an Amendment No. 4 to Testing and Services Agreement (the “Amendment”) with Quest Diagnostics. The Amendment amends that certain Testing and Services Agreement, dated as of March 11, 2015 (as previously amended as of April 10, 2015, March 11, 2017 and March 1, 2018 (the “TSA”). The purpose of the Amendment was to extend the term of the TSA from March 11, 2019 to March 11, 2023 and for the Company to pay an annual fee of $75,000 for the services of a part-time Quest project manager.

On April 3, 2020, we entered into the Second Amendment to Assistance Agreement (the “Amendment”) with the State of Connecticut Department of Economic and Community Development (the “DECD”). The Amendment amends the loan agreement, dated as of March 22, 2016 (as amended on March 7, 2018 and April 3, 2020, the “Loan Agreement”), pursuant to which we may borrow up to $4,000,000 from the DECD. An initial disbursement of $2,000,000 was made to Vermillion on April 15, 2016 under the Loan Agreement. The primary purpose of the Amendment was to amend the conditions of the loan, including the criteria for receiving additional disbursements and the criteria for loan forgiveness. For additional information, see Note 3, “Commitments and Contingencies”, of the Notes to Condensed Consolidated Financial Statements in June 2016this Quarterly Report on Form 10-Q.

On April 14, 2020, we announced that we are now credentialed with Florida’s State Medicaid program for an estimated additional 3.6 million credentialed Medicaid lives.

COVID-19 Pandemic

In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. The novel coronavirus has since spread to over 100 countries, including every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19, the disease caused by the novel coronavirus, a pandemic, and commencedon March 13, 2020, the United States declared a national emergency with respect to the coronavirus outbreak. This outbreak has severely impacted global economic activity, and many countries and many states in the United States have reacted to the outbreak by instituting quarantines, mandating business and school closures and restricting travel. Patient enrollment for our planned research studies has been lower due to the impact of closures and restricted travel, which could lead to delays in the completion of such studies.  Our commercial efforts to enter into decentralized arrangements with large healthcare networks and supergroups continue to move forward. However, finalization of such deals may be slowed by the pandemic. In addition, many conventions and industry conferences have been canceled.

As a result of the COVID-19 pandemic and actions taken to contain it,  the majority of our employees are working remotely. Our lab operations require on-site essential employees. We have stratified the lab operations team into two separate groups so that if an infection were to occur, it would be localized and not impact the entire workforce.  We believe the lab could continue to operate in the event any isolated infection were to impact a portion of the workforce. In addition, as of the date of the filing of this Form 10-Q, we have at least three months of reagents, one of our key testing supplies, in stock, depending on volume of tests performed, and we are working with the manufacturer to ensure a consistent supply over the next 6 months. 

We are committed to following recommended physical and social distancing guidelines in order to reduce the risk of infection for our employees. We have also decreased our travel and convention-related expenses. We are taking several measures to reduce the impact of the current closures and quarantines. For example, because our salespeople are experiencing limitations on their ability to physically visit physician offices, we have implemented other means of coverage such as virtual sales representative meetings and increased digital sales and marketing.  Our sales team will recommence in-person calls to customers as determined on a state by state basis, in accordance with local guidelines. Some states, such as Texas, Tennessee and Georgia, have already allowed such in-person calls. We have developed protocols and training for our team where physical visits are allowed to help ensure employee, customer and patient safety.

Our test volume has decreased significantly as fewer patients are visiting their physicians and elective surgeries have been postponed as a result of closures,  and it is uncertain what the duration of the decreased activity might be. As a result, we are unable to estimate the potential impact of the COVID-19 pandemic on our operations or cash flows as of the date of this filing.

On March 27, 2020, the U.S federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act is an emergency economic stimulus package in response to the coronavirus outbreak which, among other things, provides loans, guarantees and subsidies to qualifying businesses and contains numerous income tax provisions. Some of these tax provisions are expected to be effective retroactively for years ending before the date of enactment. The Company continues to evaluate the implications of the CARES Act, and, aside from the below, its future impact on our business, financial condition and results of operations has not yet been determined. 

On April 10, 2020, we received a stimulus check of approximately $89,000 from the U.S. Department of Health and Human Services pursuant to the CARES Act.

On May 1, 2020, we were granted a loan (the “PPP Loan”) from BBVA USA in the aggregate amount of $1,005,767, pursuant to the Paycheck Protection Program (the “PPP”), which was established under the CARES Act as administered by the U.S. Small Business Administration (the “SBA”).  Under the terms of the CARES Act and the PPP, all or a portion of the principal amount of the PPP Loan is subject to forgiveness so long as, over the eight-week period following our receipt of the proceeds of the PPP Loan, the Company uses those proceeds for payroll costs, rent, utility costs or the maintenance of employee and compensation levels. We expect to use the proceeds of the PPP Loan in a manner that will qualify for complete forgiveness of the PPP Loan but caution that there can be no assurance that all or any portion of the PPP Loan will be forgiven. The PPP Loan, which was granted pursuant to a Promissory Note, matures on May 1, 2022. Any unforgiven portion of the PPP Loan bears interest at a rate of 1.000% per annum, payable monthly in equal installments commencing on December 1, 2020.

In the second quarter of 2016.

In this program,2020, we also plan to leverage our existing infrastructurebegin running COVID-19 antibody and enhance our pipeline of future technologies by fostering relationships with IVD companies whoantigen tests. We are developing new diagnostics including companion diagnostics platforms. We believeplanning two channels for this plan will allow us to continue to be innovative in evaluating potential diagnostics. Our goal with the addition of this line of business is to invest in our short-term and long-term enterprise value while leveraging our specimen bank, database, FDA experience, laboratory informatics and operating efficiency.offering.  



Strategy:Strategy

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



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

OVA1 addresses a clear clinical need, namely the pre-surgical identification of women who are at risk of having a malignant ovarian tumor. Numerous studiesWe have documented the benefit of referral of these women to gynecologic oncologistsactive international distribution agreements for their initial surgery. Prior to the clearance of OVA1, no blood test had been cleared by

the FDA for physicians to useOvera with Pro-Genetics LTD in Israel and MacroHealth, Inc. in the pre-surgical management of ovarian adnexal masses. OVA1 is a qualitative serum test that utilizes five well-established biomarkersPhilippines. The MacroHealth, Inc. agreement was our first agreement regarding decentralized technology transfer for Overa specimen testing.

In the United States, revenue for diagnostic tests comes from several sources, including third-party payers such as insurance companies, government healthcare programs, such as Medicare and proprietary software cleared as part of the OVA1 510(k) to determine the likelihood of malignancy in women over age 18, with a pelvic mass for whom surgery is planned. OVA1 should not be used without an independent clinical/radiological evaluationMedicaid, client bill accounts and is not intended to be a screening test or to determine whether a patient should proceed to surgery. Incorrect use of OVA1 carries the risk of unnecessary testing, surgery and delayed diagnosis.  OVA1 was developed through large pre-clinical studies in collaboration with numerous academic medical centers encompassing over 2,500 clinical samples. OVA1 was fully validated in a prospective multi-center clinical trial encompassing 27 sites reflective of the diverse nature of the clinical centers at which ovarian adnexal masses are evaluated.

patients. Novitas Solutions, thea Medicare contractor, covers and reimburses for OVA1.  ThisOVA1tests performed in certain states, including Texas. Due to OVA1 tests being performed exclusively at ASPiRA LABS in Texas, the local coverage determination from Novitas Solutions essentially provides national coverage for patients enrolled in Medicare as well as Medicare Advantage health plans. However, ASPiRA LABS initially experienced difficulty in obtaining payment from Novitas Solutionsalso bills third-party commercial and other government payers as well as client bill accounts and patients for most claims submitted due to Novitas Solutions’ administrative requirements. In October 2016, Novitas Solutions updated its administrative requirements for OVA1 reimbursement which has improved our ability to obtain reimbursement for OVA1 from Novitas Solutions.OVA1.

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

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

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

The Practice BulletinNumber 174 recommends that obstetricians and gynecologists evaluating women with adnexal masses who do not meet Level A criteria of a low risk transvaginal ultrasound should proceed with Level B clinical guidelines. Level B guidelines state that the physician may use risk assessment tools such as existing CA125

technology or OVA1 (“Multivariate Index Assay”) as listed in the bulletin. Based on this, OVA1 has now achieved parity with CA125 as a Level B clinical recommendation for the management of adnexal masses.

Practice Bulletins summarize current information on techniques and clinical management issues for the practice of obstetrics and gynecology. Practice Bulletins are evidence-based documents, and recommendations are based on the evidence. This is also the only clinical management tool used for adnexal masses. Although there are Practice Bulletins, guidelines do not exist for adnexal masses. ACOG guidelines do exist, however, for ovarian cancer management.  

In December 2016, we received an FDA Clarification Letter regardingOctober 2018, ASPiRA LABS launched OVA1PLUS, a clinical pathway which combines the strengths of OVA1 and Overa. This letteroffering helps drive earlier detection, which in turn lowers overall healthcare costs and reduces inefficiencies in the care pathway.

Recent Publications 

In parallel to building our OVA platform offering and our commercial deployment, we have been working on several key publications and product extensions.

In June and August 2019, we published two papers on the ethnic disparity in clinical performance between OVA1 and its competitors. “Multivariate Index Assay is Superior to CA125 and HE4 Testing in Detection of Ovarian Malignancy in African American Women” was published by Biomarkers in reference to the September 7, 2016 FDA Safety Communication advising womenCancer, an international peer-reviewed journal.  “Ethnic disparity in clinical performance between multivariate index assay and their physicians against the useCA125 in detection of ovarian cancer screening tests for asymptomaticmalignancy” was published in Future Oncology. Collectively, these studies indicated that in a comparison of Overa against Risk of Malignancy Algorithm (“ROMA”) (HE4 + CA125) and CA125, Overa, had the highest sensitivity in detecting malignancy in African American women.

The research was initiated after the publication of four independent articles showing that African American and non-Caucasian women demonstrated to have lower CA125 levels than Caucasian women. In order to avoid any confusion,African American women, CA125 detected 33.3%, ROMA detected 54.5%, and OVA1 detected 79.1% of ovarian cancers. OVA1 was superior in Caucasian women as well, as it detected 93.2% of ovarian cancers compared with the 82.9% detected by ROMA. These were the first peer reviewed papers on this topic. Our goal is to documentoffer an ethnicity specific pelvic mass risk assessment starting with African American women.

In July 2019, a study was published in the FDA position on OVA1 and Overa, Jeffrey Shuren, M.D.journal Advanced Therapeutics, J.D., Directortitled “Clinical Performance Comparison of Two In-Vitro Diagnostic Multivariate Index Assays (IVDMIAs) for Presurgical Assessment for Ovarian Cancer Risk”. A total of 993 patients were studied. The results of the Center for Devices and Radiological Health at the FDA, sent a letter to Vermillion, dated December 21, 2016. In the letter, Dr. Shuren stated:

We agreestudy show that this safety communication does not apply to Vermillion’s FDA-cleared tests, OVA1 (MIA) andsecond-generation multivariate index assay, Overa (MIA2G), which are not screening tests forhas superior sensitivity to the current standards of care, ROMA and CA125, in detecting ovarian cancer.cancer, and the lowest false-negative rate in correctly characterizing ovarian malignancy risk.

FDA cleared OVA1 (MIA) and Overa (MIA2G) as aids to further assessIn August 2019, a study was published in Journal of Surgical Oncology, titled “Combining A Second-Generation Multivariate Index Assay with Ovarian Imaging Improves the likelihood that malignancy is present when the physician’s independent clinical and radiological evaluation does not indicate malignancy.Preoperative Assessment of An Adnexal Mass”. The intended useskey conclusion of the two assaysstudy is that Overa® (MIA2G) and pelvic imaging are complementary tests and interpreting them together can provide important information about the same—to helpmalignant risk of an ovarian tumor. For physicians more reliably identify which patients would benefit from consultation with ormaking decisions about a referral to a gynecologic oncologist. OVA1 (MIA) and Overa (MIA2G) are indicated for women who presentspecialist, the combination of MIA2G with an adnexal mass.ultrasound has a significantly higher sensitivity when compared with imaging alone.  

In March 2015,2020, the results of an OVA1PLUS study were scheduled to be presented as a  poster at the Society of Gynecologic Oncology’s 2020 Annual Meeting on Women’s Cancer (the “SGO Meeting”).  The objective of the study was to determine whether using Overa to perform reflex testing on test results with a high OVA1 score can improve specificity in detection of malignancy in women with adnexal masses, a testing process we entered into a new commercial agreement with Quest Diagnostics.  Pursuantrefer to this agreement, all OVA1 U.S. testing services for Quest Diagnostics customers were transferredas our OVA1PLUS test.  These results indicate that the OVA1PLUS test did improve specificity in detection of ovarian cancers. Although the SGO Meeting was canceled due to Vermillion’s wholly-owned subsidiary, ASPiRA LABS, as of August 10, 2015.  Pursuant to this agreement, as amended as of March 11, 2017, Quest Diagnostics has agreed to provide blood draw and logistics support by transporting specimens from its clients to ASPiRA LABS for testing through at least March 11, 2018 in exchange for a market value fee.   Per the

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

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

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

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

In September 2017,COVID-19 pandemic, the preliminary Protecting Access to Medicare Act of 2014 (PAMA) price for OVA1 and Overaabstract was published by the Center for Medicare and Medicaid Service (CMS). The preliminary OVA1 rate is basedmade available on the median of private payer payments submitted by Vermillion as part of the market-based payment reforms mandated through PAMA. The Overa price was benchmarked to the only proteomic test currently on the fee schedule, which uses biomarkers and an algorithm to produce a prognostic score. The new rates, once finalized, are scheduled to become effective January 1, 2018.

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

Critical Accounting Policies and Estimates

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



Critical Accounting Policies and Estimates

Our product revenue is generated by performing diagnostic services using our OVA1, Overa, OVA1PLUS or ASPiRA GenetiX tests, and the service is completed upon the delivery of the test result to the prescribing physician. The entire transaction price is allocated to the single performance obligation contained in a contract with a patient.Under ASC Topic 606, Revenue from Contracts with Customers, all revenue is recognized upon completion of the test based on estimates of amounts that will ultimately be realized. In determining the amount to accrue for a delivered test result, we consider factors such as payment history and amount, payer coverage, whether there is a reimbursement contract between the payer and us, and any current developments or changes that could impact reimbursement. These estimates require significant judgment by management. We also review our patient account population and determine an appropriate distribution of patient accounts by payer (i.e., Medicare, patient pay, other third-party payer, etc.) into portfolios with similar collection experience. When evaluated for collectability, this results in a materially consistent revenue amount for such portfolios as if each patient account were evaluated on an individual contract basis.

Results of Operations - Three Months Ended September 30, 2017March 31, 2020 Compared to Three Months Ended September 30,  2016March 31, 2019

The selected summary financial and operating data of the Company for the three months ended SeptemberMarch 31,  2020 30, 2017 and 20162019 were as follows:





Product Revenue.  Product revenue was $657,000$1,210,000 for the three months ended September 30, 2017March 31, 2020 compared to $581,000$779,000 for the same period in 2016.2019. Revenue for ASPiRA LABS is being recognized when the OVA1, Overa, OVA1PLUS or ASPiRA Genetix test is being performed or when amounts that willcompleted based on estimates of what we expect to ultimately be realized can be estimated. All other ASPiRA LABS revenue is being recognized on a cash basis and thus recognition of revenue lags the performance of some OVA1 tests.realize. The 13%55% product revenue growthincrease is due to improvement in the average unit price received per test compared to the same quarter in the prior year. The increase in average unit price was driven by an increase in client bill contracts, expansionthe number of positive medical policyour tests performed. We expect revenue to decline in the second quarter due to the lower test volume as a result of the COVID-19 pandemic and contracting with payers,related closures. The duration of the pandemic and improved billing and collection practices.efforts to contain it is uncertain.

The number of OVA1 tests performed decreased 13%increased 58% to approximately 1,9543,654 OVA1 tests during the three months ended September 30, 2017March 31, 2020 compared to approximately 2,2572,313 OVA1 tests for the same period in 2016. The volume decrease was primarily due2019.  Notably, prior to the previously announced loss of a client bill customer in July 2017,  which was concentrated in uncovered territories (territories not covered by an ASPiRA sales representative) and, to a lesser extent, theMarch 2020 impact of hurricanesthe COVID-19 pandemic, there was an 80% increase in two key areas (Texasthe combined January and Florida).  Partially affectingFebruary 2020 test volume, when compared to the volume decrease was modest year-over-year growthsame period in covered territories (territories covered by an ASPiRA sales representative).2019. Although wWee expect the test volume to improvedecline in the fourthsecond quarter relativedue to the COVID-19 pandemic and related closures, we have begun to see an increase in daily test volume during late April and early May 2020, when compared with the daily test volume in late March 2020.  

The number of ASPiRA GenetiX tests performed increased to approximately 107 during the thirdthree months ended March 31, 2020 compared to none in the same period of 2019. We expect ASPiRA GenetiX test volumes to decline in the second quarter due to the COVID-19 pandemic and related closures.

For the first quarter of 2017. 2020, revenue per OVA1 test performed decreased to approximately $324 compared to $337 for the first quarter of 2019.This decrease was driven by an increase in our mix of patient pay revenue in certain sales territories.  Through new contracts and insourcing our billing function, we expect to increase the percentage of revenue we receive from third-party payers as compared with revenue we receive from patient payers, as well as improve collections from patient payers. We expect that the broader economic impacts of the COVID-19 pandemic will have an effect on our collections from patient payers, which may affect our revenue per OVA1 test in the second quarter.

Service Revenue.  Service revenue was $42,000$10,000 for the three months ended September 30, 2017March 31, 2020 compared to $42,000$24,000 for the same period in 2016.  Service revenue will vary from quarter2019.  All projects with ASPiRA IVD were completed during 2019 and the subsidiary’s operations were wound down. Some final project closure costs were recognized in 2020, as well as charges to quarter based on the size of ongoing customer projects.customers for billable project closure support. Revenue for ASPiRA IVD is beingwas recognized once certain revenue recognition criteria hashad been met (see Note 1met. We do not expect to the financial statements included in Part I, Item I of this Form 10-Q). We expect service revenue to increase in the fourth quarter of 2017 relative to have any significant service revenue in the third quarter of 2017 due to the performance of certain anticipated projects.2020.

Cost of Revenue - Product.  Cost of product revenue was $495,000$795,000 for the three months ended September 30, 2017March 31, 2020 compared to $461,000$516,000 for the same period in 2016,2019, representing an increase of 7%54% due primarily to some equipment maintenancethe addition of ASPiRA GenetiX, as well as increases in variable costs anddue to increased consultant fees incurred in the third quarter.volume. We expect the cost of product revenue to decrease modestlyalong with the decrease in volume of tests performed in the fourthsecond quarter of 2017 compared2020. We expect to experience lower gross margin percentages as the third quartervolume of 2017 as one-timetests performed decreases due to certain fixed costs incurred in the third quarter of 2017 are not expected to be repeated.that will continue.

Cost of Revenue - Service.  Cost of service revenue was $284,000$5,000 for the three months ended September 30, 2017March 31, 2020 compared to $356,000$178,000 for the same period in 2016.2019. The 20%97% decrease related primarily to consulting costs relatedwas due to the openingwind down of the labour ASPiRA IVD subsidiary in the third quarter of 2016, which were not repeated in 2017. We expect the cost of service revenue to increase in the fourth quarter of 2017 compared to the third quarter of 2017 due to expected variable costs relating to performance of certain projects.2019. 

Research and Development Expenses.  Research and development expenses represent costs incurred to develop our technology and carry out clinical studies, and include personnel-related expenses, regulatory costs, reagents and supplies used in research and development laboratory work, infrastructure expenses, contract services and other outside costs. Research and development expenses for the three months ended September 30, 2017 decreased $178,000,March 31, 2020 increased by $186,000, or 48%89%, compared to the same period in 2016.2019. This decreaseincrease was primarily due to a reductionclinical utility and product development costs related to OVANex in personnel and personnel related expenses.2020 as well as investments in bioinformatics. We expect research and development expenses to remain consistent with third quarter 2017 levelsdecline in the fourthsecond quarter of 2017.2020, as patient recruitment for studies will be delayed as a result of the COVID-19 pandemic.

Sales and Marketing Expenses.  Our sales and marketing expenses consist primarily of personnel-related expenses, education and promotional expenses, and infrastructure expenses. These expenses include the costs of educating physicians laboratory personnel and other healthcare professionals regarding OVA1, Overa, OVA1PLUS and Overa.ASPiRA GenetiX. Sales and marketing expenses also include the costs of sponsoring continuing medical education, medical meeting participation, and dissemination of scientific and health economic publications. Sales and marketing expenses for the three months ended September 30, 2017March 31, 2020 decreased $556,000,$249,000, or 35%11%, compared to the same period in 2016.2019. This decrease was primarily due to a reductiondecreased headcount and personnel-related expenses in the first quarter of 2020 compared to 2019, as well as reductions in consulting and marketing services and lower health economic study costs intravel due to the third quarter of 2017 compared to 2016.COVID-19 pandemic. We expect sales and marketing expenses to increasedecrease modestly overin the remaindersecond quarter of 2017 as we focus efforts on2020, due to the commercialization of OVA1 and Overa.continued travel restrictions resulting from the COVID-19 pandemic.

General and Administrative Expenses.  General and administrative expenses consist primarily of personnel-related expenses, professional fees and other costs, including legal, finance and accounting expenses and other infrastructure expenses. General and administrative expenses for the three months ended September 30, 2017 decreasedMarch 31, 2020 increased by $118,000,$455,000, or 9%36%, compared to the same period in 2016.  The decrease was2019. This increase is primarily due to a  reductionan increase in consulting services.headcount and personnel-related expenses as well as legal expenses when compared with those in the first quarter of 2019. We expect general and administrative expenses to remain consistent with thirdthe first quarter 2017 levels in the fourthsecond quarter of 2017.2020.

Other Income.  Other income in the first quarter of 2020 consists primarily of the stimulus check received from the U.S. Department of Health and Human Services of approximately $89,000.



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

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