VRML Vermillion Inc

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 Refo rm 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 th is Quarterly Report on Form 10-Q is filed with the Securities and Exchange Commission (“ SEC ”) , and, except as required by law, Vermillion, Inc. (“Vermillion” and together with its subsidiaries, the “Company , ” “we , ” “our , ” or “us”) does not assume any obligation to update, amend or clarify them to reflect events, new information or circumstances occurring after such date.

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

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, 2015 (our “2015 Annual Repo rt”) and our   Quarterly Report on Form 10- Q for the three months ended March 31, 2016 (our “2016 First Quarterly Report”) , that could cause actual results to differ materially from those projected in such forward-looking statements due to various factors, including our ability to increase the volume of OVA1 sales; our ability to market our test through sales channels other than Quest Diagnostics Incorporated (“Quest Diagnostics”) including ASPiRA LABS; failures by third-party payers to reimburse OVA1 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 O vera   both within and outside the United States; in the event that we succeed in commercializing O vera outside the United States, the political, economic and other conditions affecting other countries (including foreign exchange rates); our ability to develop and commercialize additional diagnostic products and achieve market acceptance with respect to these products; our ability to compete successfully; our ability to obtain any regulatory approval required for our future diagnostic products; our or our suppliers’ ability to comply with United States Food and Drug Administration (“FDA”) requirements for production, marketing and post-market monitoring of our products; additional costs that may be required to make further improvements to our manufacturing operations; our ability to maintain sufficient or acceptable supplies of immunoassay kits from our suppliers; our ability to continue to develop, protect and promote our proprietary technologies; future litigation against us, including infringement of intellectual property and product liability exposure; our ability to retain key employees; business interruptions; legislative actions resulting in higher compliance costs; changes in healthcare policy; our ability to comply with environmental laws; our ability to generate sufficient demand for ASPiRA LABS’ services to cover its operating costs; our ability to comply with the additional laws and regulations that apply to us in connection with the operation of ASPiRA LABS; our ability to comply with FDA regulations that relate to our products and to obtain any FDA clearance or approval required to develop and perform laboratory-developed tests (“ 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; and ASPiRA IVD’s ability to perform its services in compliance with contractual requirements, regulatory standards and ethical considerations.    



Overview

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

We have expanded our corporate strategy with the goal of transforming Vermillion from a technology license company to a diagnostic service and bio-analytic solutions provider. Our plan is to broaden our commercial focus from ovarian cancer to differential diagnosis of women with a range of gynecologic al 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 ongoing, and a market expansion and growth phase, which we expect to begin during 2016 .  

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, re-established 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 ,   are in the process of establishing our own payer coverage for

OVA1 and plan to launch a second-generation OVA1 test, trademarked Overa. In the third phase we plan to commercialize Overa by utilizing the full national licensure of ASPiRA LABS, 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. I n 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. On February 11, 2016, we adopted a plan to streamline our organization. We reduced headcount and other expenses targeting an approximately 20% reduction in go-forward operating expenses in 2016, as compared to operating expenses in 2015.

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

Our initial product, OVA1, is a 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. The FDA cleared OVA1 in September 2009 , and we commercially launched OVA1 in March 2010. We have completed a second-generation biomarker panel known as Overa, which is intended to maintain our product’s high sensitivity while improving specificity. We submitted our 510(k) clearance application for Overa to the FDA in March 2015, with the goal of commencing the marketing and sale of the panel on a targeted basis in 2016. We received FDA clearance for Overa on March 18, 2016. Overa uses the Roche cobas 6000 platform .  

In June 2014, Vermillion launched ASPiRA LABS, a Clinical Laboratory Improvements Amendments of 1988 (“CLIA”) certified national laboratory based in Austin, Texas, which specializes in applying biomarker-based technologies to address critical needs in the management of gynecologic cancers and disease. ASPiRA LABS provides expert diagnostic services using a state-of-the-art biomarker-based diagnostic algorithm to aid in clinical decision making and advance personalized treatment plans. The lab currently processes our OVA1 test, and we expect the lab to process the CA 125-II test (which is marketed and sold by a third   party) in the future in specific markets although we are prohibited from offering CA 125-II tests to existing or future Quest Diagnostics customers (see Note 2 to our second quarter 2016 unaudited financial statements above) . We plan to expand the testing provided by ASPiRA LABS to other gynecologic conditions with high unmet need. We also plan to develop and perform LDTs at ASPiRA 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 & Medicaid Services issued a provider number to ASPiRA LABS in March 2015.

In 2016, we creat ed a new service within the ASPiRA channel strategy, “an ASPiRA IVD Services Program”. In April 201 6 , we formed ASPiRA IVD to   offer IVD t rial services to thi rd - party customers. A SPiRA IVD is a specialized laboratory provider dedicated to meeting the unique testing needs of IVD manufacturers seeking to commercializ e  high-complexity assays. A SPiRA IVD was built around a core of laboratory expertise and a n FDA-compliant quality system ,   and strives to deliver accurate and reliable results to its third-party customers suitable for FDA submission .   ASPiRA IVD received  a CLIA laboratory license in June 2016 and commence d operations in the second quarter of 2016 .

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

Strategy:

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



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

OVA1 addresses a clear clinical need, namely the pre - surgical identification of women who are at high risk of having a malignant ovarian tumor. Numerous studies have documented the benefit of referral of these women to gynecologic oncologists for their initial surgery. Prior to the clearance of OVA1, no blood test had been cleared by the FDA for physicians to use in the pre - surgical management of ovarian adnexal masses. OVA1 is a qualitative serum test that utilizes five well-established biomarkers and proprietary software cleared as part of the OVA1 510(k) to determine the likelihood of malignancy in women over age 18, with a pelvic mass for whom surgery is planned. OVA1 should not be used without an independent clinical/radiological evaluation and is not intended to be a screening test or to determine whether a patient should proceed to surgery. Incorrect use of OVA1 carries the risk of unnecessary testing, surgery and delayed diagnosis.   OVA1 was developed through large pre-clinical studies in collaboration with numerous academic medical centers encompassing over 2,500 clinical samples. OVA1 was fully validated in a prospective multi-center clinical trial encompassing 27 sites reflective of the diverse nature of the clinical centers at which ovarian adnexal masses are evaluated.

In May 2015 we announced that the Company was approved for a product development grant from the Cancer Prevention and Research Institute of Texas (“CPRIT”) for $7,500,000, to help fund the Company's new multi-site pelvic mass registry of patients undergoing evaluation, diagnosis, treatment and follow up for pelvic masses that may lead to gynecological malignancy. Receipt of the grant award was subject to execution of a grant contract with CPRIT. However, the Company and CPRIT were unable to reach mutually agreeable terms on the grant contract and terminated negotiations on August 8 , 2016 . The Company now intends to fund its pelvic mass registry by utilizing its own resources and pursuing partnerships with third parties.

On April 20, 2016, we announced the publication of the first clinical utility data demonstrating that identification of high-risk patients using OVA1 prior to surgery resulted in referral of nearly all patients who had primary ovarian malignancies to gynecologic oncologists. The study, titled “The clinical utility of an elevated-risk multivariate index assay score in ovarian cancer patients ,” was published i n the June 2016 issue of the peer-reviewed journal Current Medical Research & Opinion .

The study surveyed physicians who frequent ly used OVA1, and identified 122 patients who underwent surgery for a pelvic mass after a high-risk OVA1 score was reported. Of these, 65 had a primary ovarian malignancy, while the remainder were benign or had a metastatic cancer of non-ovarian origin. Pre-surgical involvement of a gynecologic oncologist was documented, including referral, consultation or availability on stand-by; and the specialty of the surgeon who performed the adnexal surgery was also recorded. Of the 4 patients whose surgery was not performed by a gynecologic oncologist, 2 required re-operation for complete staging by a

gynecologic oncologist. In comparison, none of the 61 ovarian cancers that were operated on by a gynecologic oncologist required restaging. According to the National Academy of Medicine’s 2016 report titled ,   “ , ” re-operations are common after non-specialists operate on ovarian cancer, and may result in delayed treatment, higher costs and inferior outcomes compared with ‘first time right’ surgery by a gynecologic oncologist.

I n   May 2016 we entered into our first international distribution agreement for Overa. Pursuant to this agreement, Bio- Medical Science Co., Ltd. will market and distribute Overa on an exclusive basis in South Korea.   Subsequently, we executed exclusive international distribution agreements for Overa with Pro-Genetics LTD in Israel and MacroHealth, Inc. in the Philippines. MacroHealth is Vermillion’s first decentralized international agreement with Overa specimen testing to be performed in the Philippines.

In July 2016, as part of our campaign to pursue managed care coverage agreements throughout 2016,   we entered into   contracts for pay e r coverage of OVA1 with Priority Health Managed Benefits, a Michigan healthcare insurance company ,   and Independent Medical Systems, a preferred provider organization based in Dallas , T exas .   In August 2016 ,  w e   announced a contract for pay e r coverage of OVA1 with Sutter Valley Medical Foundation (d/b/a Gould Medical Foundation) , a California   network provider .

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 2015 Annual Report and Part I, Item 2 of our 2016 First Quarterly Report , except for those changes discussed in Note 1 to our second quarter 2016 unaudited condensed consolidated financial statements above . Such discussion is hereby incorporated herein by reference.



Product Revenue .  Product revenue was $ 5 54 ,000 for the three months ended June 30 ,   2016 compared to $ 535 ,000 for the same period in 2015 .   For the three months ended June 30, 2016 ,   product r evenue was recognized solely from OVA1 tests performed at ASPiRA LABS .   Product revenue for the three months ended June 30, 2015 consisted of $483,000 from tests performed by Quest Diagnostics and $52,000 from tests performed at ASPiRA LABS . Revenue for ASPiRA LABS’ contractual clients is being recognized when the OVA1 test is performed. All other ASPiRA LABS revenue is being recognized on the cash basis.  

The number of OVA1 tests performed decreased 43 % to approximately 2 , 345 OVA1 tests during the three months ended June 30 , 201 6 compared to approximately 4,103   OVA1 tests for the same period in 201 5 .   All tests for the three months ended June 30, 2016 were performed by ASPiRA LABS. Th e volume during the three months ended June 30 , 201 5 included 3, 829 OVA1 tests performed by Quest Diagnostics and 274 tests performed by ASPiRA LABS .   We attribute the decreased number of tests performed to volume lost after the transition of testing from Quest Diagnostics to ASPiRA LABS in August 2015.      

Service Revenue .  Service revenue was $155,000 for the three months ended June 30, 2016. There was no service revenue in 2015. Revenue for ASPiRA IVD is being recognized once certain revenue recognition criteria has been met (see Note 1 to our second quarter 2016 unaudited financial statements above) .   We expect service revenue to de crease in the third quarter of 2016 ,   because the initial   project being serviced by ASPiRA IVD is near complet ion, and we do not expect significant additional projects to be initiated until the fourth quarter of 2016 .

Cost of Revenue - Product .     Cost of product revenue was $ 527 ,000 for the three months ended June 30, 2016   compared to $5 74 ,000 for the same period in 2015 .   We expect the cost of product revenue to remain consistent with second quarter 2016 levels in the third quarter of 2016.

Cost of Revenue - Service .     Cost of service revenue was $ 60 ,000 for the three months ended June 30, 2016. There was no cost of service revenue in 2015 , as ASPiRA IVD did not commence operations until 2016 .   We expect the cost of service revenue to increase significantly in the third quarter of 2016 due to the ramp-up of ASPiRA   IVD ’s   laboratory operations.      

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 also include costs related to activities performed under contracts with our collaborators and strategic partners. Research and development expenses for the three months ended June 30 ,   2016 de creased $ 3 55 ,000, or 39 % , compared to the same period in 2015 .   This decrease was primar ily due to the expiration of our collaboration agreement with The Johns Hopkins University School of Medicine and lower personnel and personnel related expenses due to our February 2016 restructuring and other terminations . We expect research and development expense to remain consistent with second quarter 2016 levels in the third quarter of 2016 .

Sales and Marketing Expenses .  Our sales and marketing expenses consist primarily of personn el-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. 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 June 30, 2016 decreased $ 9 31 ,000, or 3 6 %, compared to the same period in 2015 .   Th is decrease was primarily due to a reduction in personnel and personnel expenses due to our February 2016 restructuring and decreases in customer seminars . We expect sales and marketing expenses to remain consistent   with second quarter 2016 levels in the third   quarter of 2016 .

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 expens es. General and administrative expenses for the three months ended June 30 ,   2016   increased by $ 3 60 ,000, or 27%, compared to the same period in 2015 .   The increase was primarily due to $329,000 of charges incurred in connection with opening the ASPiRA IVD laboratory and increased consulting costs   associated with international business development .   We expect general and administrative expenses to decrease significantly in the third quarter of 2016 , because ASPiRA IVD has commenced operations and the expenses incurred in connection with its laboratory operations will be included in “ cost of revenue – service ” .

Product Revenue .  Product revenue was $1,0 59 ,000 for the six months ended June 30, 2016 compared to $1,170,000 for the same period in 2015. Product revenue for the six months ended June 30, 2016 consisted of $ 280 ,000 from tests performed for ASPiRA LABS’   contractual clients and $ 779 ,000 of revenue recognized based on ASPiRA LABS’ cash collections. All product revenue in 2016 was recognized from OVA1 tests performed at ASPiRA LABS. Product revenue for the six months ended June 30, 2015 consisted of $1,092,000 from tests performed by Quest Diagnostics ,   including the one-time recognition of $163,000 in deferred product revenue upon the signing of our agreement with Quest Diagnostics i n March 2015 , and $78,000 of revenue recognized based on ASPiRA LABS’ cash collections..  

The number of OVA1 tests performed decreased 4 2 % to approximately 4 , 610 OVA1 tests during the six months ended June 30, 2016 compared to approximately 7,886 OVA1 tests for the same period in 2015. All tests for the six months ended June 30, 2016 were performed by ASPiRA LABS. Th e volume during the six months ended June 30, 2015 included 7 , 396 OVA1 tests performed by Quest Diagnostics and 490 tests performed by ASPiRA LABS .   We attribute the decreased number of tests performed to volume los t after   the transition of testing from Quest Diagnostics to ASPiRA LABS in August 2015.       

Service Revenue .  Service revenue was $155,000 for the six months ended June 30, 2016. There was no service revenue in 2015. Revenue for ASPiRA IVD is being recognized once certain revenue recognition criteria has been met (see Note 1 to our second quarter 2016 unaudited financial statements above) .

Cost of Revenue - Product .     Cost of product revenue was $ 1,055 ,000 for the six months ended June 30, 2016   compared to $ 1,065 ,000 for the same period in 2015 .   We expect the cost of product revenue to remain consistent in the third quarter of 2016 .

Cost of Revenue - Service .     Cost of service revenue was $60 ,000 for the six months ended June 30, 2016. There was no cost of service revenue in 2015 as ASPiRA IVD was not formed until 2016 .   We expect the cost of service revenue to increase significantly in the third quarter of 2016 due to the ramp-up of ASPiRA IVD’s laboratory operations .  

Resea rch 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 also include costs related to activities performed under contracts with our collaborators and strategic partners. Research and development expenses decreased by $ 5 26 ,000, or 26 %, for the six months ended June 30, 2016 compared to the same period in 201 5 .   This decrease was primarily due to a decrease in costs associated with our collaboration with The Johns Hopkins University School of Medicine as well as lower personnel and related costs due to lower headcount.  

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. 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 decreased by $ 868 ,000, or 1 8 %, for the six months ended June 30, 2016 compared to the same period in 2015. Th is decrease was primarily due to a reduction in personnel and personnel expenses due to our February 2016 restructuring and decreases in customer seminars and managed markets study costs .  

General and Administrative Expenses .  General and administrative expenses consist primarily of personnel-related expenses, profes sional fees and other costs, including legal, finance and accounting expenses and other infrastructure expenses. General and administrative expenses in creased by $ 61 9 ,000, or 2 3 %, for the six months ended June 30, 201 6 compared to the same period in 201 5 .   The in crease was primarily due to $ 4 69 ,000 of charges incurred in connection with opening the ASPiRA IVD laboratory and increased consulting costs associated with international business development .

Other Income (Expense), Net .  Other income was $1 6 ,000 for the six months ended June 30, 201 6   compared to $1 09 ,000 in the same period in 201 5 . Other income for the six months ended June 30, 2015 related to recognition of one-time items related to the March 2015 agreement with Quest Diagnostics.



Liquidity and Capital Resources

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

We have incurred significant net losses and negative cash flows from operations since inception. At June 30 ,   2016 , we had an accumulated deficit of $ 37 9 , 23 4 ,000 and stockholders’ equity of $ 9,505 ,000 . As of June 30 ,   2016 , we had $ 1 1 , 06 2 ,000 of cash and cash equivalents and $ 2 , 5 8 9 ,000 of current liabilities. Working capital was $ 9 , 20 3 ,000 and $16,015,000 at June 30 , 2016 and December 31, 2015 , respectively.

On March 22, 2016, we entered into an agreement pursuant to which we may borrow up to $4,000,000 from the DECD. We received an initial disbursement of $2,000,000 on April 15, 2016 under this agreement . The remaining $2,000,000 will be disbursed if and when we achieve certain future milestones.

We expect to incur a net loss and negative cash flows from operations in 2016 and the foreseeable future. Our management believes that successful achievement of our business objectives will require additional financing. Given these conditions, there is substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements have been prepared on a going concern basis and do not include any adjustments that might result from these uncertainties.  

We expect to raise capital through a variety of sources, which may include the public equity market, private equity financing, collaborative arrangements, licensing arrangements, and/o r public or private debt. However, additional funding may not be available when needed or on terms acceptable to us . If we are unable to obtain additional capital, we may not be able to continue sales and marketing, research and development, or other operations on the scope or scale of current activity and that could have a material adverse effect on our business, results of operations and financial condition.  

Net cash used in operating activities was $ 8, 45 5 ,000 for the six months ended June 30 , 201 6 resulting primarily from the net loss reported of $ 8 , 64 6 ,000   a nd changes in accounts payable, accrued and other liabilities of $ 8 35 ,000 partially offset by stock compensation expense of $ 600 ,000 and depreciation and amortization of $ 323 ,000 .

Net cash used in operating activities was $9,467,000 for the six months ended June 30, 2015 resulting primarily from the net loss reported of $8,986,000, cha nges in operating assets and liabilities of $563,000 and non-cash license revenue of $316,000, partially offset by stock compensation expense of $363,000.

Net cash used in investing activities was $ 1,068 ,000 and $140,000 for the six months ended June 30, 2016 and 2015, respectively. This increase resulted from purchases of property and equipment for the ASPiRA IVD lab oratory and also included a $125,000 down payment on the Roche c obas 6000 analyzer   use d at ASPiRA LABS .

Net cash provided by financing activities was $ 1 , 943 ,000 for the six months ended June 30, 201 6 compar ed to $ 2,480 ,000 of net cash used in financing activities during the same period in 201 5 .   Net cash provided by financing activities for the six months ended June 30, 2016 consisted primarily of proceeds from the DECD loan.

Net cash used in financing activities for the six months ended June 30, 2015 resulted primarily from the repurchase of common stock of $1,291,000, the repayment of short-term debt of $1,069,000 and $122,000 of offering expens es relating to our December 2014 private placement.       

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

We have significant net operating loss (“NOL”) carryforwards as of June 30 , 201 6 for which a full valuation allowance has been provided due to our history of operating losses. Our ability to use our net NOL credit carryforwards may be restricted due to ownership change limitations occurring in the past or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions. These ownership changes may also limit the amount of NOL credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively.

In connection with a private placement offering of common stock and warrants we completed in May 2013, we entered into a stockholders agreement which, among other things, gives two of the primary investors in that offering the right to participate in any future equity offerings by the Company on the same price and terms as other investors. In addition, the stockholders agreement prohibits us from taking certain material actions without the consent of at least one of the two primary investors in that offering . These material actions include:

The foregoing rights terminate for each stockholder when that stockholder ceases to beneficially own less than 50% of the shares and warrants (taking into account shares issued upon exercise of the warrants), in the aggregate, tha t were purchased at the closing of the 2013 private placement.



Off-Balance Sheet Arrangements

As of June 30 ,   2016 , we had no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our condensed consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.





Per Item 305(e) of Regulation S-K, information is not required.



Evaluation of disclosure controls and procedures.

Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management, including our Chief Executive Officer and Chief Accounting Officer, performed an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30 ,   2016 . Based on this evaluation, our Chief Executive Officer and Chief Accounting Officer have concluded that as of June 30 ,   2016 , our disclosure controls and procedures were effective.



Changes in internal controls over financial reporting.

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