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Cardiff Oncology, Inc. - Quarter Report: 2012 September (Form 10-Q)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

OR

 

o

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                   to                   

 

COMMISSION FILE NUMBER 000-54556

 

TROVAGENE, INC.

(Exact Name of small business issuer as specified in its charter)

 

Delaware

 

27-2004382

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

11055 Flintkote Avenue, Suite B, San Diego, California 92121

(Address of principal executive offices) (Zip Code)

 

Issuer’s telephone Number: (858) 952-7570

 

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

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

 

As of November 9, 2012 the issuer had 14,180,934 shares of Common Stock issued and outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I

 

 

 

 

Item 1.

Financial Statements

3

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

21

 

 

 

Item 4

Controls and Procedures

27

 

 

 

 

PART II

 

 

 

 

Item 1.

Legal Proceedings

27

 

 

 

Item 6.

Exhibits

28

 

2



Table of Contents

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS.

 

INDEX TO FINANCIAL STATEMENTS

 

 

 

Page

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011

 

4

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Net (Loss) Income for the Three and Nine Months Ended September 30, 2012 and 2011 (unaudited) and the period August 4, 1999 (Inception) to September 30, 2012 (period from January 1, 2012 to September 30, 2012 unaudited)

 

5

 

 

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the period August 4, 1999 (Inception) to September 30, 2012 (period from January 1, 2012 to September 30, 2012 unaudited)

 

6

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (unaudited) and the period August 4, 1999 (Inception) to September 30, 2012 (period from January 1, 2012 to September 30, 2012 unaudited)

 

13

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

15

 

3



Table of Contents

 

Trovagene, Inc. and Subsidiaries

 

(A development stage company)

 

CONSOLIDATED BALANCE SHEETS

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

7,815,128

 

$

700,374

 

Accounts receivable

 

128,188

 

99,140

 

Prepaid expenses

 

57,252

 

42,658

 

Total current assets

 

8,000,568

 

842,172

 

Property and equipment, net

 

208,393

 

22,504

 

Other assets

 

362,081

 

174,581

 

Total assets

 

$

8,571,042

 

$

1,039,257

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity (Deficiency)

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

140,034

 

$

928,364

 

Accrued expenses

 

617,509

 

501,517

 

Total current liabilities

 

757,543

 

1,429,881

 

Derivative financial instruments

 

2,838,107

 

3,840,644

 

Total liabilities

 

3,595,650

 

5,270,525

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

Stockholders’ equity (deficiency)

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 20,000,000 shares authorized, 95,600 shares outstanding at September 30, 2012 and December 31, 2011, designated as Series A Convertible Preferred Stock with liquidation preference of $956,000 at September 30, 2012 and December 31, 2011

 

96

 

96

 

 

 

 

 

 

 

Common stock, $0.0001 par value, 150,000,000 and 100,000,000 shares authorized at September 30, 2012 and December 31, 2011, respectively; 14,180,726 and 10,737,026 issued and outstanding at September 30, 2012 and December 31, 2011, respectively

 

1,418

 

1,073

 

 

 

 

 

 

 

Additional paid-in capital

 

53,840,264

 

39,365,994

 

Deficit accumulated during development stage

 

(48,866,386

)

(43,598,431

)

Total stockholders’ equity (deficiency)

 

4,975,392

 

(4,231,268

)

 

 

 

 

 

 

 

 

$

8,571,042

 

$

1,039,257

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

4



Table of Contents

 

Trovagene, Inc. and Subsidiaries
(A Development Stage Company)

Consolidated Statements of Operations and Comprehensive (Loss) Income

(unaudited)

 

 

 

 

 

 

 

August 4, 1999

 

 

 

 

 

 

 

(Inception) to

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

2012

 

Royalty income

 

$

41,500

 

$

45,000

 

$

117,153

 

$

193,946

 

$

762,223

 

Milestone fees

 

150,000

 

 

150,000

 

 

150,000

 

License fees

 

20,000

 

10,000

 

20,000

 

30,000

 

1,383,175

 

Total revenues

 

211,500

 

55,000

 

287,153

 

223,946

 

2,295,398

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

511,433

 

200,924

 

1,326,197

 

602,228

 

16,855,146

 

Purchased in process research and development

 

 

 

 

 

2,666,869

 

General and administrative

 

739,042

 

586,230

 

2,375,666

 

1,721,301

 

24,916,726

 

Total operating expenses

 

1,250,475

 

787,154

 

3,701,863

 

2,323,529

 

44,438,741

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(1,038,975

)

(732,154

)

(3,414,710

)

(2,099,583

)

(42,143,343

)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

173

 

266,883

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

(56,637

)

(1,325,372

)

Amortization of deferred debt costs and original issue discount

 

 

 

 

 

(2,346,330

)

Change in fair value of derivative instruments—warrants

 

388,750

 

118,040

 

(1,824,565

)

540,789

 

(598,557

)

Gain on extinguishment of debt

 

 

623,383

 

 

623,383

 

623,383

 

Liquidated damages and other forbearance agreement settlement costs

 

 

 

 

 

(1,758,111

)

Net (loss) income and comprehensive (loss) income

 

(650,225

)

9,269

 

(5,239,275

)

(991,875

)

(47,281,447

)

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividend

 

(9,560

)

(9,560

)

(28,680

)

(28,680

)

(336,598

)

Series A Convertible Preferred stock conversion rate change accreted as a dividend

 

 

 

 

 

(455,385

)

Cumulative effect of early adopting ASC Topic 815-40

 

 

 

 

 

(792,956

)

 

 

 

 

 

 

 

 

 

 

 

 

Net loss and comprehensive loss attributable to common stockholders

 

$

(659,785

)

$

(291

)

$

(5,267,955

)

$

(1,020,555

)

$

(48,866,386

)

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS PER COMMON SHARE-BASIC AND DILUTED:

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(0.05

)

$

(.00

)

$

(0.42

)

$

(.11

)

 

 

Weighted average shares outstanding:

 

14,178,733

 

10,017,095

 

12,506,789

 

9,401,161

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

5



Table of Contents

 

Trovagene, Inc. and Subsidiaries

(A Development Stage Company)

Consolidated Statements of Stockholders’ Equity (Deficiency)

 

 

 

Common Stock

 

Treasury Shares

 

Additional
Paid-In

 

Deferred
Stock
Based

 

Deficit
Accumulated
During
Development

 

Total
Stockholders’
Equity

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Compensation

 

Stage

 

(Deficiency)

 

Balance, August 4, 1999 (Inception)

 

 

$

 

 

$

 

$

 

$

 

$

 

$

 

Issuance of common stock to founders for cash at $0.0012 per share

 

37,000,000

 

3,700

 

 

 

38,300

 

 

 

42,000

 

Net loss

 

 

 

 

 

 

 

(14,760

)

(14,760

)

Balance, January 31, 2000

 

37,000,000

 

$

3,700

 

 

$

 

$

38,300

 

 

(14,760

)

27,240

 

Net loss

 

 

 

 

 

 

 

(267,599

)

(267,599

)

Balance, January 31, 2001

 

37,000,000

 

$

3,700

 

 

$

 

$

38,300

 

 

(282,359

)

(240,359

)

Capital contribution of cash

 

 

 

 

 

45,188

 

 

 

45,188

 

Net loss

 

 

 

 

 

 

 

(524,224

)

(524,224

)

Balance, January 31, 2002

 

37,000,000

 

$

3,700

 

 

$

 

$

83,488

 

 

(806,583

)

(719,395

)

Issuance of common stock for cash at $0.003 per share

 

1,258,000

 

126

 

 

 

3,274

 

 

 

3,400

 

Capital contribution of cash

 

 

 

 

 

2,500

 

 

 

2,500

 

Net loss

 

 

 

 

 

 

 

(481,609

)

(481,609

)

Balance, January 31, 2003

 

38,258,000

 

$

3,826

 

 

$

 

$

89,262

 

 

(1,288,192

)

(1,195,104

)

Net loss

 

 

 

 

 

 

 

(383,021

)

(383,021

)

Balance, January 31, 2004

 

38,258,000

 

$

3,826

 

 

$

 

$

89,262

 

 

(1,671,213

)

(1,578,125

)

Waiver of founders’ deferred compensation

 

 

 

 

 

1,655,031

 

 

 

1,655,031

 

Private placement of common stock

 

440,868

 

44

 

 

 

2,512,906

 

 

 

2,512,950

 

Redemption of shares held by Panetta Partners, Inc.

 

(36,477,079

)

(3,648

)

 

 

(496,352

)

 

 

(500,000

)

Costs associated with recapitalization

 

 

 

 

 

(301,499

)

 

 

(301,499

)

Share exchange with founders

 

376,334

 

38

 

 

 

(38

)

 

 

 

Issuance of treasury shares

 

 

 

58,333

 

6

 

(6

)

 

 

 

Issuance of treasury shares to escrow

 

58,333

 

6

 

(58,333

)

(6

)

 

 

 

 

Issuance of common stock and warrants for cash at $11.70 per share

 

228,026

 

23

 

 

 

2,667,877

 

 

 

2,667,900

 

Issuance of 20,610 warrants to selling agents

 

 

 

 

 

403,038

 

 

 

403,038

 

Finders warrants charged to cost of capital

 

 

 

 

 

(403,038

)

 

 

(403,038

)

Deferred stock-based compensation

 

 

 

 

 

1,937,500

 

(1,937,500

)

 

 

Amortization of deferred stock-based compensation

 

 

 

 

 

 

245,697

 

 

245,697

 

Options issued to consultants

 

 

 

 

 

1,229,568

 

 

 

1,229,568

 

Warrants issued to consultants

 

 

 

 

 

2,630,440

 

 

 

2,630,440

 

Net loss

 

 

 

 

 

 

 

(5,371,027

)

(5,371,027

)

Balance, January 31, 2005

 

2,884,482

 

$

289

 

 

$

 

$

11,924,689

 

$

(1,691,803

)

$

(7,042,240

)

$

3,190,935

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6



Table of Contents

 

Trovagene, Inc. and Subsidiaries

(A Development Stage Company)

Consolidated Statements of Stockholders’ Equity (Deficiency)

 

 

 

Preferred Stock

 

Common Stock

 

Treasury Shares

 

Additional
Paid-In

 

Deferred
Stock
Based

 

Deficit
Accumulated
During
Development

 

Total
Stockholders’
Equity

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Compensation

 

Stage

 

(Deficiency)

 

Balance, January 31, 2005

 

 

$

 

2,884,482

 

$

289

 

 

$

 

$

11,924,689

 

$

(1,691,803

)

$

(7,042,240

)

$

3,190,935

 

Private placement of common stock

 

 

 

17,094

 

2

 

 

$

 

$

199,998

 

 

 

200,000

 

Payment of selling agents fees and expenses in cash

 

 

 

 

 

 

 

(179,600

)

 

 

(179,600

)

Common stock issued to selling agents

 

 

 

4,077

 

 

 

 

 

 

 

 

Private placement of common stock

 

 

 

252,564

 

25

 

 

 

2,954,974

 

 

 

2,954,999

 

Payment of selling agents fees and expenses in cash

 

 

 

 

 

 

 

(298,000

)

 

 

(298,000

)

Issuance of 20,205 warrants issued to selling agents

 

 

 

 

 

 

 

222,188

 

 

 

222,188

 

Selling agents warrants charged to cost of capital

 

 

 

 

 

 

 

(222,188

)

 

 

(222,188

)

Private placement of preferred stock and warrants for cash at $10.00 per share (restated)

 

277,100

 

277

 

 

 

 

 

2,770,723

 

 

 

2,771,000

 

Accretion of preferred stock dividends (restated)

 

 

 

 

 

 

 

792,956

 

 

(792,956

)

 

Value of warrants reclassified to derivative financial instrument liability

 

 

 

 

 

 

 

(567,085

)

 

 

(567,085

)

Payment of selling agents fees and expenses in cash

 

 

 

 

 

 

 

(277,102

)

 

 

(277,102

)

Issuance of 17,572 warrants issued to selling agents

 

 

 

 

 

 

 

167,397

 

 

 

167,397

 

Selling agents warrants charged to cost of capital

 

 

 

 

 

 

 

(167,397

)

 

 

(167,397

)

Return of treasury shares from escrow

 

 

 

(58,333

)

(6

)

58,333

 

6

 

 

 

 

 

Retirement of treasury shares

 

 

 

 

 

(58,333

)

(6

)

6

 

 

 

 

Common stock issued for services

 

 

 

833

 

 

 

 

16,500

 

 

 

16,500

 

Stock-based compensation expense for non-employees

 

 

 

 

 

 

 

2,928,298

 

 

 

2,928,298

 

Amortization of deferred stock-based compensation

 

 

 

 

 

 

 

 

645,832

 

 

 

645,832

 

Preferred stock dividend

 

 

 

 

 

 

 

 

 

(60,741

)

(60,741

)

Net loss

 

 

 

 

 

 

 

 

 

(7,844,326

)

(7,844,326

)

Balance, January 31, 2006

 

277,100

 

$

277

 

3,100,717

 

$

310

 

 

$

 

$

20,266,357

 

$

(1,045,971

)

$

(15,740,263

)

$

3,480,710

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7



Table of Contents

 

Trovagene, Inc. and Subsidiaries

(A Development Stage Company)

Consolidated Statements of Stockholders’ Equity (Deficiency)

 

 

 

Preferred Stock

 

Common Stock

 

Additional
Paid-In

 

Deferred
Stock
Based

 

Deficit
Accumulated
During
Development

 

Total
Stockholders’
Equity

 

Temporary
Equity—
Unregistered
Common Stock

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Compensation

 

Stage

 

(Deficiency)

 

Shares

 

Amount

 

Balance, January 31, 2006

 

277,100

 

$

277

 

3,100,717

 

$

310

 

$

20,266,357

 

$

(1,045,971

)

$

(15,740,263

)

$

3,480,710

 

 

$

 

Conversion of Series A preferred stock and issuance of common stock

 

(174,000

)

(174

)

137,739

 

14

 

160

 

 

 

 

 

 

Implementation of ASC 718

 

 

 

 

 

(1,045,971

)

1,045,971

 

 

 

 

 

Private placement of common stock

 

 

 

125,787

 

13

 

943,388

 

 

 

943,401

 

 

 

Payment of selling agents fees and expenses in cash

 

 

 

 

 

(118,341

)

 

 

(118,341

)

 

 

Issuance of 15,779 warrants to selling agents

 

 

 

 

 

55,568

 

 

 

55,568

 

 

 

Selling agents warrants charged to cost of capital

 

 

 

 

 

(55,568

)

 

 

(55,568

)

 

 

Issuance of common stock and warrants for cash at $6.00 per share

 

 

 

 

 

 

 

 

 

166,667

 

1,000,000

 

Payment of finder’s fees and expenses in cash

 

 

 

 

 

 

 

 

 

 

(80,000

)

Value of warrants classified as derivative financial instrument liability

 

 

 

 

 

 

 

 

 

 

(15,000

)

Issuance of 27,425 units to finder

 

 

 

 

 

167,856

 

 

 

167,856

 

 

 

Common Stock issued for services

 

 

 

1,449

 

 

9,566

 

 

 

9,566

 

 

 

Value attributed to warrants issued with 6% convertible debentures

 

 

 

 

 

1,991,822

 

 

 

1,991,822

 

 

 

Reclassification of derivative financial instruments to stockholders’ equity upon adoption of ASC 815-40

 

 

 

 

 

567,085

 

 

(455,385

)

111,700

 

 

 

Warrants issued for services

 

 

 

 

 

101,131

 

 

 

101,131

 

 

 

Donated services

 

 

 

 

 

62,500

 

 

 

62,500

 

 

 

Stock based compensation

 

 

 

 

 

1,572,545

 

 

 

1,572,545

 

 

 

Preferred stock dividend

 

 

 

 

 

 

 

(59,164

)

(59,164

)

 

 

Net loss

 

 

 

 

 

 

 

(7,134,067

)

(7,134,067

)

 

 

Balance, January 31, 2007

 

103,100

 

$

103

 

3,365,692

 

$

337

 

$

24,518,098

 

$

 

$

(23,388,879

)

$

1,129,659

 

166,667

 

$

905,000

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

8



Table of Contents

 

Trovagene, Inc. and Subsidiaries

(A Development Stage Company)

Consolidated Statements of Stockholders’ Equity (Deficiency)

 

 

 

Preferred Stock

 

Common Stock

 

Additional
Paid-In

 

Deficit
Accumulated
During
Development

 

Total
Stockholders’
Equity

 

Temporary Equity—
Unregistered
Common Stock

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Stage

 

(Deficiency)

 

Shares

 

Amount

 

Balance, January 31, 2007

 

103,100

 

$

103

 

3,365,692

 

$

337

 

$

24,518,098

 

$

(23,388,879

)

1,129,659

 

166,667

 

$

905,000

 

Conversion of preferred stock to common stock

 

(7,500

)

(7

)

7,813

 

1

 

6

 

 

 

 

 

Private placement of common stock

 

 

 

283,333

 

28

 

849,972

 

 

850,000

 

 

 

Payment of selling agent fees and expenses

 

 

 

 

 

(51,733

)

 

(51,733

)

 

 

Issuance of warrants to selling agents

 

 

 

 

 

45,403

 

 

45,403

 

 

 

Selling agent warrants charged to cost of capital

 

 

 

 

 

(45,403

)

 

(45,403

)

 

 

Derivative liability—warrants at issuance

 

 

 

 

 

(45,371

)

 

(45,371

)

 

 

Donated services

 

 

 

 

 

275,000

 

 

275,000

 

 

 

Stock-based compensation expense

 

 

 

 

 

914,847

 

 

914,847

 

 

 

Preferred stock dividend

 

 

 

 

 

 

(35,054

)

(35,054

)

 

 

Net loss

 

 

 

 

 

 

(4,683,141

)

(4,683,141

)

 

 

Balance, December 31, 2007

 

95,600

 

$

96

 

3,656,838

 

$

366

 

$

26,460,819

 

$

(28,107,074

)

(1,645,793

)

166,667

 

$

905,000

 

Reclassification of common stock initially recorded as temporary equity

 

 

 

166,667

 

17

 

904,983

 

 

905,000

 

(166,667

)

(905,000

)

Private placement of common stock

 

 

 

330,682

 

33

 

1,144,967

 

 

1,145,000

 

 

 

Payment of selling agents fees and expenses

 

 

 

 

 

(74,500

)

 

(74,500

)

 

 

Conversion of debenture to common stock

 

 

 

31,214

 

3

 

93,638

 

 

93,641

 

 

 

Derivative liability—warrants at issuance

 

 

 

 

 

(201,122

)

 

(201,122

)

 

 

Donated services

 

 

 

 

 

390,750

 

 

390,750

 

 

 

Stock based compensation

 

 

 

 

 

543,697

 

 

543,697

 

 

 

Preferred stock dividend

 

 

 

 

 

 

(38,240

)

(38,240

)

 

 

Net loss

 

 

 

 

 

 

(5,166,240

)

(5,166,240

)

 

 

Balance, December 31, 2008

 

95,600

 

$

96

 

4,185,401

 

$

419

 

$

29,263,232

 

$

(33,311,554

)

$

(4,047,807

)

 

$

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

9



Table of Contents

 

Trovagene, Inc. and Subsidiaries

(A Development Stage Company)

Consolidated Statements of Stockholders’ Equity (Deficiency)

 

 

 

Preferred Stock

 

Common Stock

 

Additional
Paid-In

 

Deficit
Accumulated
During
Development

 

Total
Stockholders’
Equity

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Stage

 

(Deficiency)

 

Balance December, 31, 2008

 

95,600

 

$

96

 

4,185,401

 

$

419

 

$

29,263,232

 

$

(33,311,554

)

$

(4,047,807

)

Issuance of shares of common stock in connection with convertible debenture forbearance agreement

 

 

 

906,245

 

91

 

1,739,868

 

 

1,739,959

 

Issuance of shares of common stock in payment of convertible debenture interest

 

 

 

60,147

 

6

 

112,285

 

 

112,291

 

Private placements of common stock

 

 

 

488,333

 

49

 

1,464,951

 

 

1,465,000

 

Issuance of common stock pursuant to a non-exclusive selling agent’s agreement

 

 

 

68,897

 

7

 

306,730

 

 

306,737

 

Issuance of shares of common stock re settlement for consulting services rendered

 

 

 

159,630

 

16

 

478,874

 

 

478,890

 

Stock based compensation expense

 

 

 

 

 

177,836

 

 

177,836

 

Preferred stock dividend

 

 

 

 

 

 

(38,240

)

(38,240

)

Derivative liability—warrants and price protected units upon issuance

 

 

 

 

 

(1,497,568

)

 

(1,497,568

)

Net loss

 

 

 

 

 

 

(2,483,807

)

(2,483,807

)

Balance, December 31, 2009

 

95,600

 

$

96

 

5,868,653

 

$

588

 

$

32,046,208

 

$

(35,833,601

)

$

(3,786,709

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

10



Table of Contents

 

Trovagene, Inc. and Subsidiaries

(A Development Stage Company)

Consolidated Statements of Stockholders’ Equity (Deficiency)

 

 

 

Preferred Stock

 

Common Stock

 

Additional
Paid-In

 

Accumulated
Deficit
During
Development

 

Total
Stockholders’
Equity

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Stage

 

(Deficiency)

 

Balance, December 31, 2009

 

95,600

 

$

96

 

5,868,653

 

$

588

 

$

32,046,208

 

(35,833,601

)

$

(3,786,709

)

Issuance of shares of common stock in payment of convertible debenture interest

 

 

 

85,619

 

9

 

115,962

 

 

115,971

 

Issuance of common stock to selling agents

 

 

 

79,333

 

8

 

(8

)

 

 

Private placement of units

 

 

 

578,233

 

58

 

1,734,642

 

 

1,734,700

 

Derivative liabilitiy—price protected units upon issuance

 

 

 

 

 

(1,010,114

)

 

(1,010,114

)

Consulting services settled via issuance of stock

 

 

 

70,833

 

7

 

212,493

 

 

212,500

 

Shares issued in settlement of legal fees

 

 

 

29,240

 

3

 

99,997

 

 

100,000

 

Stock issued in payment of deferred salary to former CEO

 

 

 

12,745

 

1

 

28,345

 

 

28,346

 

Shares issued in connection with Agreement & Plan of Merger with Etherogen, Inc.

 

 

 

2,043,797

 

204

 

2,771,185

 

 

2,771,389

 

Stock Based Compensation expense

 

 

 

 

 

325,930

 

 

325,930

 

Preferred stock dividend

 

 

 

 

 

 

(38,240

)

(38,240

)

Net loss

 

 

 

 

 

 

(5,449,138

)

(5,449,138

)

Balance, December 31, 2010

 

95,600

 

$

96

 

8,768,453

 

$

878

 

$

36,324,640

 

$

(41,320,979

)

$

(4,995,365

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

11



Table of Contents

 

Trovagene, Inc. and Subsidiaries

(A Development Stage Company)

Consolidated Statements of Stockholders’ Equity (Deficiency)

 

 

 

Preferred
Stock
Shares

 

Preferred
Stock
Amount

 

Common
Stock
Shares

 

Common
Stock
Amount

 

Additional
Paid-In
Capital

 

Deficit
Accumulated
During
Development
Stage

 

Total
Stockholders’
Deficiency

 

Balance, December 31, 2010

 

95,600

 

$

96

 

8,768,453

 

$

878

 

$

36,324,640

 

$

(41,320,979

)

$

(4,995,365

)

Issuance of shares of common stock in payment of convertible debenture interest in accordance with Forbearance Agreement

 

 

 

64,214

 

6

 

85,269

 

 

85,275

 

Private placement of units

 

 

 

857,833

 

85

 

2,573,415

 

 

2,573,500

 

Derivative liability-fair value of warrants and price protected units issued

 

 

 

 

 

(1,298,618

)

 

(1,298,618

)

Shares issued in connection with Board Compensation

 

 

 

41,750

 

4

 

125,246

 

 

125,250

 

Issuance of common stock to shareholder as finder’s fees

 

 

 

90,258

 

9

 

(9

)

 

 

Issuance of common stock in connection with consulting services

 

 

 

58,333

 

6

 

174,994

 

 

175,000

 

Stock issued in connection with conversion of convertible debentures

 

 

 

856,185

 

85

 

1,130,079

 

 

1,130,164

 

Stock based compensation

 

 

 

 

 

250,978

 

 

250,978

 

Preferred stock dividend

 

 

 

 

 

 

(38,240

)

(38,240

)

Net loss

 

 

 

 

 

 

(2,239,212

)

(2,239,212

)

Balance, December 31, 2011

 

95,600

 

$

96

 

10,737,026

 

$

1,073

 

$

39,365,994

 

$

(43,598,431

)

$

(4,231,268

)

Units issued via registered direct public offering and private placement of units

 

 

 

3,278,334

 

328

 

12,479,672

 

 

12,480,000

 

Fees and expenses related to financing transactions — paid in cash

 

 

 

 

 

(1,533,885

)

 

(1,533,885

)

Derivative liability-fair value of warrants and price protected units issued

 

 

 

 

 

(765,329

)

 

(765,329

)

Correction of error in derivative liability—fair value of warrants price protected units issued

 

 

 

 

 

274,967

 

 

274,967

 

Warrants classified to Additional Paid in Capital

 

 

 

 

 

3,317,463

 

 

3,317,463

 

Issuance of common stock and warrant to shareholder as finder’s fees

 

 

 

30,450

 

3

 

(3

)

 

 

Issuance of common stock in connection with Asset Purchase Agreement with MultiGen Diagnostics, Inc.

 

 

 

125,000

 

13

 

187,487

 

 

187,500

 

Issuance of common stock in connection with consulting services

 

 

 

9,916

 

1

 

22,380

 

 

22,381

 

Issuance of warrant in connection with advisory services

 

 

 

 

 

142,508

 

 

142,508

 

Stock based compensation

 

 

 

 

 

349,010

 

 

349,010

 

Preferred stock dividend

 

 

 

 

 

 

(28,680

)

(28,680

)

Net loss

 

 

 

 

 

 

(5,239,275

)

(5,239,275

)

Balance, September 30, 2012 (unaudited)

 

95,600

 

$

96

 

14,180,726

 

$

1,418

 

$

53,840,264

 

$

(48,866,386

)

$

4,975,392

 

 

12



Table of Contents

 

Trovagene, Inc. and Subsidiaries

(A Development Stage Company)

Consolidated Statements of Cash Flows

(unaudited)

 

 

 

Nine Months Ended
September 30, 2012

 

Nine Months Ended
September 30, 2011

 

For the period
August 4, 1999
(Inception) to
September 30, 2012

 

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

 

Net loss

 

$

(5,239,275

)

$

(991,875

)

$

(47,281,447

)

 

 

 

 

 

 

 

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

26,331

 

7,708

 

248,130

 

Stock based compensation expense

 

349,010

 

203,675

 

11,829,335

 

 

 

 

 

 

 

 

 

Founders’, compensation contributed to equity

 

 

 

1,655,031

 

 

 

 

 

 

 

 

 

Donated services contributed to equity

 

 

 

829,381

 

 

 

 

 

 

 

 

 

Settlement of consulting services in stock

 

 

 

478,890

 

Amortization of deferred debt costs and original issue discount

 

 

 

2,346,330

 

Liquidated damages and other forbearance agreement settlement costs paid in stock

 

 

 

1,758,111

 

 

 

 

 

 

 

 

 

Interest expense on convertible debentures paid in stock

 

 

56,637

 

757,198

 

 

 

 

 

 

 

 

 

Change in fair value of financial instruments

 

1,824,565

 

(540,789

)

598,557

 

 

 

 

 

 

 

 

 

Gain on extinguishment of debt

 

 

(623,383

)

(623,383

)

 

 

 

 

 

 

 

 

Purchased in process research and development expense-related party

 

 

 

2,666,869

 

Stock issued in connection with payment of deferred salary

 

 

 

28,346

 

Stock issued in connection with settlement of legal fees

 

 

 

100,000

 

Stock and warrant issued in connection with consulting services

 

164,889

 

175,000

 

452,389

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Decrease (increase) in other assets

 

 

21,648

 

(69,881

)

Decrease (increase) in accounts receivable

 

(29,048

)

(16,508

)

(128,189

)

(Increase) decrease in prepaid expenses

 

(14,594

)

108,414

 

(57,252

)

(Decrease) increase in accounts payable, accrued expenses and other

 

(701,019

)

189,766

 

715,352

 

Net cash used in operating activities

 

(3,619,141

)

(1,409,707

)

(23,696,233

)

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

Assets acquired in Etherogen, Inc. merger

 

 

 

(104,700

)

Capital expenditures

 

(212,220

)

(1,529

)

(456,523

)

Net cash used in investing activities

 

(212,220

)

(1,529

)

(561,223

)

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Proceeds from sale of 6% convertible debenture

 

 

 

2,335,050

 

Debt issuance costs

 

 

 

(297,104

)

Proceeds from sale of common stock, net of expenses

 

10,946,115

 

1,510,000

 

28,378,120

 

Proceeds from a non-exclusive selling agent’s agreement

 

 

 

142,187

 

Note (repayment)

 

 

 

 

Costs associated with recapitalization

 

 

 

(362,849

)

Proceeds from sale of preferred stock

 

 

 

2,771,000

 

Payment of finders’ fee on preferred stock

 

 

 

(277,102

)

Redemption of common stock

 

 

 

(500,000

)

Payment of preferred stock dividends

 

 

 

(116,718

)

Net cash provided by financing activities

 

10,946,115

 

1,510,000

 

32,072,584

 

Net change in cash and equivalent

 

7,114,754

 

98,764

 

7,815,128

 

Cash and cash equivalents—Beginning of period

 

700,374

 

58,703

 

 

Cash and cash equivalents—End of period

 

$

7,815,128

 

$

157,467

 

$

7,815,128

 

 

13



Table of Contents

 

 

 

Nine months
ended September 30,
2012

 

Nine months
ended September 30,
2011

 

For the period
August 4, 1999
(Inception) to
September 30, 2012

 

Supplementary disclosure of cash flow activity:

 

 

 

 

 

 

 

Cash paid for taxes

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

Conversion of 174,000 shares of preferred stock into 137,739 shares of common stock:

 

 

 

 

 

 

 

Surrender of 174,000 shares of preferred stock

 

$

 

$

 

$

(1,740,000

)

Issuance of 137,739 shares of common stock

 

$

 

$

 

$

1,740,000

 

Issuance of 125,000 shares of common stock pursuant to Asset Purchase Agreement with Multigen Diagnostics, Inc.

 

$

187,500

 

$

 

$

187,500

 

Issuance of 2,043,797 shares of common stock pursuant to Agreement and Plan of Merger with Etherogen, Inc.

 

 

 

 

 

$

2,771,389

 

Reclassification of derivative financial instruments to additional paid in capital

 

$

(3,317,463

)

 

$

(3,317,463

)

Correction of error in derivative financial instruments

 

$

(274,967

)

 

$

(274,967

)

 

 

 

 

 

 

 

 

Issuance of 41,750 shares of common stock for Board of Directors’ fees in lieu of cash payment

 

$

 

$

125,250

 

$

125,250

 

Conversion of $2,335,050 of 6% debentures

 

$

 

$

1,130,164

 

$

1,130,164

 

Series A Preferred beneficial conversion feature accreted as a dividend

 

$

 

$

 

$

455,385

 

Preferred stock dividends accrued

 

$

28,680

 

$

28,680

 

$

162,520

 

Interest paid on common stock

 

$

 

$

56,637

 

$

1,325,372

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

14



Table of Contents

 

Trovagene, Inc. and Subsidiaries

(A Development Stage Company)

 

Notes to Condensed Consolidated Financial Statements

 

1. Condensed Consolidated Financial Statements

 

Business Overview

 

Trovagene, Inc. (“Trovagene” or the “Company”) is a development stage molecular diagnostic company that focuses on the development and marketing of urine-based nucleic acid tests for patient/disease screening and monitoring. The Company’s novel tests predominantly use transrenal DNA (Tr-DNA) and transrenal RNA (Tr-RNA). Trovagene’s primary focus is to leverage its urine-based (i.e. transrenal) testing platform to facilitate improvements in the management of cancer care and women’s healthcare. Tr-DNAs and Tr-RNAs are fragments of nucleic acids derived from dying cells inside the body. The intact DNA is fragmented in dying cells and released into the blood stream. These fragments have been shown to cross the kidney barrier and can be detected in urine. In addition, there is evidence that some species of RNA or their fragments are stable enough to cross the renal barrier. These RNA can also be isolated from urine, detected and analyzed. The Company believes its technology is applicable to all transrenal nucleic acids (Tr-NA). Trovagene’s patented technology uses safe, non-invasive, cost effective and simple urine collection which can be applied to a broad range of testing including: tumor detection and monitoring (e.g., KRAS mutations in pancreatic cancer), prenatal genetic testing, infectious diseases, tissue transplantation, forensic identification and for patient selection in clinical trials. Trovagene’s technology is ideally suited to be used in developing molecular diagnostic assays that will allow physicians to provide very simple, non-invasive and convenient screening and monitoring tests for their patients by identifying specific biomarkers involved in the disease process. If the Company is successful, its novel assays may facilitate improved testing compliance resulting in earlier diagnosis of disease, more targeted treatment which will be more cost effective, and improvements in the quality of life for the patient.

 

Underwritten Public Offering of Common Stock and Reverse Stock Split

 

On May 30, 2012, the Company completed a underwritten public offering in which an aggregate of 1,150,000 units, with each unit consisting of two shares of its common stock and one warrant to purchase one share of common stock were sold at a purchase price of $8.00 per unit. On June 13, 2012, the underwriters exercised their overallotment option in full for an additional 172,500 units.  The Company raised a total of $9.1 million in net proceeds after deducting underwriting discounts and commissions of $0.7 million and offering expenses of $0.7 million.  The units began trading on The NASDAQ Capital Market on May 30, 2012 under the symbol “TROVU”.  Upon the exercise in full of the underwriters’ overallotment, the units may be separated into common stock and warrants.  Each warrant has an exercise price of $5.32 per share, and expires five years from the closing of the offering.  The warrants trade on The NASDAQ Capital Market under the symbol “TROVW”. Warrants issued in connection with the underwritten public offering and sale of units in May 2012 are not considered derivatives based on our analysis of the criteria of ASC 815, as the Company is not required to make any cash payments or net cash settlement to the registered holder in lieu of issuance of warrant shares.

 

On March 15, 2012, the Board of Directors and on April 27, 2012 a majority of the stockholders approved a proposal to amend the Company’s Amended and Restated Certificate of Incorporation to effect a reverse stock split of the Company’s issued and outstanding common stock at a ratio of not less than one-for-two and not greater than one-for-six at any time prior to April 27, 2013 at the discretion of the Board of Directors. On May 24, 2012, the Board of Directors approved a 1-for-6 reverse stock split of the Company’s issued and outstanding common stock effective on May 29, 2012. All the relevant information relating to number of shares and per share information contained in these consolidated financial statements has been retrospectively adjusted to reflect the reverse stock split for all periods presented.

 

Private Placements

 

During the nine months ended September 30, 2012, the Company closed four private placement financings which raised gross proceeds of $1,900,000. The Company issued 633,334 shares of its common stock and warrants to purchase 633,334 shares of common stock. The purchase price paid by the investor was $3.00 for each unit, determined by the price paid by investors in recent private placements. The warrants expire on December 31, 2018 and are exercisable at $3.00 per share. The Company paid $96,500 in cash for a finder’s fee. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Trovagene has determined that the warrants issued in connection with these private placements should be recorded as derivative liabilities since they are all price protected (Note 6). The fair value is disclosed in Note 7.

 

During the nine months ended September 30, 2012, the Company issued 30,450 units to a selling agent, who is also a shareholder of the Company, consisting of 30,450 shares of common stock and warrants to purchase 30,450 shares of common stock. The warrants have an exercise price of $3.00 per share, are immediately exercisable and expire December 31, 2018. The units were issued as a finder’s fee in connection with certain private placements closed during the nine months ended September 30, 2012. The issuance of these units was treated as a non-compensatory cost of capital.

 

15



Table of Contents

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of Trovagene, which include its wholly owned subsidiary Xenomics, Inc., a California corporation (“Xenomics Sub”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated. Certain items in the comparable prior period’s financial statements have been reclassified to conform to the current period’s presentation. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements as of December 31, 2011 and December 31, 2010 and for each of the two years ended December 31, 2011 and from inception (August 4, 1999) to December 31, 2011 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2012.  The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at September 30, 2012, results of operations, and cash flows for the three and nine months ended September 30, 2012, and for all periods presented herein, have been made. The results of operations for the periods ended September 30, 2012 and 2011 are not necessarily indicative of the operating results for the full year.

 

Going Concern

 

Trovagene’s consolidated financial statements as of September 30, 2012 have been prepared under the assumption that Trovagene will continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to generate additional revenue. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company will be required to raise additional capital within the next year to complete the development and commercialization of current product candidates and to continue to fund operations at its current cash expenditure levels.

 

Cash used in operating activities was $3,619,141 and $1,409,707, for the nine months ended September 30, 2012 and 2011, respectively. During the nine months ended September 30, 2012 and 2011, the Company incurred net losses attributable to common stockholders of $5,267,955 and $1,020,555, respectively.

 

To date, Trovagene’s sources of cash have been primarily limited to the sale of debt and equity securities. Net cash provided by financing activities for the nine months ended September 30, 2012 and 2011 was $10,946,115 and $1,510,000, respectively. The Company cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that the Company can raise additional funds by issuing equity securities, the Company’s stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact the Company’s ability to conduct its business.

 

If the Company is unable to raise additional capital when required or on acceptable terms, it may have to significantly delay, scale back or discontinue the development and/or commercialization of one or more of its product candidates. The Company may also be required to:

 

·                  Seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; and

 

·                  Relinquish licenses or otherwise dispose of rights to technologies, product candidates or products that the Company would otherwise seek to develop or commercialize themselves, on unfavorable terms.

 

The Company has approximately $7,290,000 million of cash in the bank at November 9, 2012. Based on the Company’s projections of future ordinary expenses and expected receipts the Company has enough cash to pay expenses through November of 2013.

 

2. Net Loss Per Share

 

Basic and diluted net loss per share is presented in conformity with ASC Topic 260, Earnings per Share, for all periods presented. In accordance with this guidance, basic and diluted net income/loss per common share was determined by dividing net income/loss applicable to common stockholders by the weighted-average common shares outstanding during the period.  In a period where there is a net loss position, diluted weighted-average shares are the same as basic weighted-average shares.  Shares used in calculation basic and diluted net loss per common share exclude as antidilutive the following share equivalents:

 

 

 

As of September 30,

 

 

 

2012

 

2011

 

Options to purchase Common Stock

 

3,295,066

 

1,927,358

 

Warrants to purchase Common stock

 

5,729,754

 

3,241,141

 

Series A Convertible Preferred Stock

 

95,600

 

95,600

 

 

 

 

 

 

 

 

 

9,120,420

 

5,264,099

 

 

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3.              Accounting for Share-Based Payments

 

ASC Topic 718 “Compensation—Stock Compensation” requires companies to measure the cost of employee services received in exchange for the award of equity instruments based on the estimated fair value of the award at the date of grant. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award. Trovagene accounts for shares of common stock, stock options and warrants issued to non-employees based on the fair value of the stock, stock option or warrant, if that value is more reliably measurable than the fair value of the consideration or services received. The Company accounts for stock options issued and vesting to non-employees in accordance with ASC Topic 505-50 “ Equity-Based Payment to Non-Employees” whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Accordingly the fair value of these options is being “marked to market” quarterly until the measurement date is determined. The weighted-average fair value per share of all options granted during the nine months ended September 30, 2012 and 2011 estimated as of the grant date using the Black-Scholes option valuation model was $1.38 and $0.72, respectively.

 

Stock-based compensation expense related to Trovagene options has been recognized in operating results as follow:

 

 

 

Three Months
Ended September 30,

 

Nine Months
Ended September 30

 

 

 

2012

 

2011

 

2012

 

2011

 

Included in research and development expense

 

$

37,399

 

$

2,314

 

$

68,879

 

$

6,943

 

Included in general and administrative expense

 

92,960

 

80,656

 

280,131

 

196,732

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

130,359

 

$

82,970

 

$

349,010

 

$

203,675

 

 

The unrecognized compensation cost related to non-vested stock options outstanding at September 30, 2012 and 2011, net of expected forfeitures, was $1,457,061 and $187,521, respectively, to be recognized over a weighted-average remaining vesting period of approximately four years and five years, respectively.

 

The estimated fair value of stock option awards was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions during the following periods indicated.

 

 

 

Nine Months
Ended
September 30,
2012

 

Nine Months
Ended
September 30,
2011

 

Risk-free interest rate

 

.62-1.04

%

.85

%

Dividend yield

 

0

%

0

%

Expected volatility

 

90

%

90

%

Expected term (in years)

 

5 yrs.

 

5 yrs.

 

 

A summary of stock option activity and of changes in stock options outstanding under the Plan is presented below:

 

 

 

Number of
Options

 

Exercise Price
Per Share

 

Weighted Average
Exercise Price
Per Share

 

Intrinsic
Value

 

Balance outstanding, December 31, 2011

 

2,426,192

 

$

3.00 to $15.00

 

$

5.22

 

$

 

Granted

 

878,249

 

2.84 to 4.68

 

3.46

 

265,774

 

Forfeited

 

(9,375

)

3.00

 

3.00

 

 

Balance outstanding, September 30, 2012

 

3,295,066

 

$

2.84 to 15.00

 

$

4.74

 

$

265,774

 

Exercisable at September 30, 2012

 

1,652,704

 

$

2.84 to 15.00

 

$

6.23

 

$

333,955

 

 

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Warrants

 

The Company issued 2,128,284 warrants, whose weighted average exercise price was $4.61 per share, in the nine months ended September 30, 2012, of which, 663,784 were issued in connection with private placements of its common stock, 92,000 were issued to underwriters in connection with the underwritten public offering, 1,322,500 were issued in connection with the underwritten public offering of its common stock, and 50,000 were issued for services provided by a related party.

 

4.              Stockholders’ Equity (Deficiency)

 

During the nine months ended September 30, 2012, the Company closed four private placement financings which raised gross proceeds of $1,900,000. The Company issued 633,334 shares of its common stock and warrants to purchase 633,334 shares of common stock. The purchase price paid by the investor was $3.00 for each unit, determined by the price paid by investors in recent private placements.  The warrants expire after eight years and are exercisable at $3.00 per share. The Company paid $96,500 in cash for a finder’s fee. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Trovagene has determined that the warrants issued in connection with these private placements should be recorded as derivative liabilities at the time of issuance since they are all price protected (Note 6), however the completion of the underwritten public offering on May 30, 2012 removed the condition which required these warrants to be treated as derivative liabilities.  Accordingly, the fair value of these warrants were marked to market through May 30, 2012 and then reclassified from a liability to additional paid in capital.

 

During the nine months ended September 30, 2012, the Company issued 30,450 units to a selling agent, who is also a shareholder of the Company, consisting of 30,450 shares of common stock and warrants to purchase 30,450 shares of common stock. The warrants have an exercise price of $3.00 per share, are immediately exercisable and expire December 31, 2018.  The units were issued as a finder’s fee in connection with certain private placements closed during the nine months ended September 30, 2012. The issuance of these units was treated as a non-compensatory cost of capital.

 

During the nine months ended September 30, 2012, the Company issued 125,000 shares of common stock in connection with an asset purchase agreement with MultiGen Diagnostics, Inc.  See Note 5.

 

On May 30, 2012, the Company completed an underwritten public offering in which an aggregate of 1,150,000 units, with each unit consisting of two shares of its common stock and one warrant to purchase one share of common stock were sold at a purchase price of $8.00 per unit. On June 13, 2012 the underwriters exercised their overallotment option in full for an additional 172,500 units.  Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, “Derivatives and Hedging - Contracts in an Entity’s Own Equity”, Trovagene determined that the warrants issued in connection with this transaction were not derivative liabilities.  The Company raised a total of $9.1 million in net proceeds after deducting underwriting discounts and commissions of $0.7 million and offering expenses of $0.7 million.

 

5. Asset Purchase Agreement

 

On February 1, 2012 the Company entered into an asset purchase agreement with MultiGen Diagnostics, Inc.  The Company determined that the acquired asset does not meet the definition of a business, as defined in ASC 805, Business Combinations and will be accounted for under ASC 350, Intangibles- Goodwill and Other.  In connection with the acquisition, the Company issued 125,000 shares of restricted common stock to MultiGEN.  In addition, up to an additional $3.7 million may be paid in a combination of common stock and cash to MultiGEN upon the achievement of specific sales and earnings targets. In addition, in connection with the acquisition, the Company entered into a Reagent Supply Agreement dated as of February 1, 2012 pursuant to which MultiGEN will supply and deliver reagents to be used in connection with a Clinical Laboratory Improvement Amendment (CLIA) laboratory.  The total purchase consideration was determined to be $187,500 which was paid in the Company’s common stock.

 

Under ASC Topic 805, Business Combinations, the Company was required to assess the fair value of the assets acquired and the contingent consideration at the date of acquisition. Therefore, the Company assessed the fair value of the assets purchased and concluded that the purchase price would be allocated entirely to one intangible asset, a CLIA license.  The contingent consideration of the $3.7 million milestone was determined to have a fair value of $0 by applying a weighted average probability on the achievement of the milestones developed during the valuation process.  The Company will assess the fair value of the contingent consideration at each quarter and make adjustments as necessary until the milestone dates have expired.

 

6.  Derivative Financial Instruments

 

Effective January 1, 2009, the Company adopted provisions of ASC Topic 815-40, “Derivatives and Hedging: Contracts in Entity’s Own Equity” (“ASC Topic 815-40”). ASC Topic 815-40 clarifies the determination of whether an instrument issued by an entity (or an embedded feature in the instrument) is indexed to an entity’s own stock, which would qualify as a scope exception under ASC Topic 815-10.

 

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Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Trovagene has determined that the warrants issued in connection with certain of its private placements and with its debentures must be recorded as derivative liabilities. Accordingly the warrants are also being re-measured at each balance sheet date based on estimated fair value, and any resultant changes in fair value are being recorded in the Company’s statement of operations.

 

The Company estimates the fair value of the warrants issued in connection with certain of its private placements and with its debentures using the Black-Scholes model in order to determine the associated derivative instrument liability and change in fair value described above. The range of assumptions used to determine the fair value of the warrants at the end of each nine month period, September 30, 2012 and September 30, 2011 were as follows:

 

 

 

Nine Months Ended
September 30, 2012

 

Nine Months Ended
September 30, 2011

 

Estimated fair value of Trovagene common stock

 

$

1.20-3.07

 

$

1.32

 

Expected warrant term

 

1 month - 6 years

 

1 - 7 years

 

Risk-free interest rate

 

0.09-0.92

 

2.04

%

Expected volatility

 

90

%

90

%

Dividend yield

 

 

 

 

The following table sets forth the components of changes in the Company’s derivative financial instruments liability balance, valued using the Black-Scholes option pricing method, for the periods indicated:

 

Date

 

Description

 

Warrants

 

Derivative
Instrument
Liability

 

 

 

 

 

 

 

 

 

December 31, 2011

 

Balance of derivative financial instruments liability

 

1,103,727

 

$

994,627

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of warrants during the nine months ended September 30, recognized as a loss in the statement of operations

 

 

1,843,480

 

 

 

 

 

 

 

 

 

September 30, 2012

 

Balance of derivative financial instruments liability

 

1,103,727

 

$

2,838,107

 

 

The following table sets forth the components of changes in the Company’s derivative financial instruments liability balance, valued using the Binomial option pricing method, for the periods indicated:

 

 

 

 

 

 

 

Change In

 

 

 

 

 

 

 

 

 

Fair value

 

 

 

 

 

 

 

 

 

of Derivative

 

 

 

 

 

 

 

 

 

Liability

 

 

 

 

 

Number of

 

 

 

For Previously

 

Ending

 

 

 

Price Protected

 

 

 

Outstanding

 

Balance

 

 

 

Units at

 

Derivative Liability

 

Price Protected

 

Derivative

 

Quarter

 

Issuance

 

For Issued Units

 

Units

 

Liability

 

 

 

 

 

 

 

 

 

 

 

Total at December 31, 2011

 

2,321,451

 

$

2,967,283

 

$

(121,266

)

$

2,846,017

 

Correction of error

 

(224,087

)

(274,967

)

 

 

2,571,050

 

Fair value of new warrants issued during the period

 

633,334

 

765,329

 

 

 

3,336,379

 

Change in fair value of warrants during the period

 

 

 

 

 

(18,916

)

3,317,463

 

Reclassification of derivative liability to equity

 

 

 

(3,317,463

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2012

 

2,730,698

 

$

140,182

 

$

(140,182

)

$

 

 

The total derivative liability for the Company at September 30, 2012 was $2,838,107.

 

7. Fair Value Measurements

 

Fair value of financial instruments

 

The Company has adopted FASB ASC 820 Fair Value Measurements and Disclosures (“ASC 820”) for financial assets and liabilities that are required to be measured at fair value, and non-financial assets and liabilities that are not required to be measured at fair value on a recurring basis. Financial instruments consist of cash and cash equivalents, accounts receivable and accounts payable.

 

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These financial instruments are stated at their respective historical carrying amounts which approximate fair value due to their short term nature.

 

The following tables present the Company’s liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of December 31, 2011 and September 30, 2012:

 

Description

 

Quoted Prices
in
Active
Markets
for Identical
Assets and
Liabilities
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Balance as of
December 31, 2011

 

Derivative liabilities related to Warrants

 

$

 

$

 

$

3,840,644

 

$

3,840,644

 

 

Description

 

Quoted Prices
in
Active
Markets
for Identical
Assets and
Liabilities
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Balance as of
September 30,
2012

 

Derivative liabilities related to Warrants

 

$

 

$

 

$

2,838,107

 

$

2,838,107

 

 

The following table sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the nine months ended September 30, 2012:

 

Description

 

Balance at
December 31,
2011

 

Correction
of error

 

Fair Value of
Warrants
Reclassified to
Additional Paid in
Capital

 

Fair value of
New Warrants
Issued During
the Period

 

Unrealized
gains or
(losses)

 

Balance as of
September 30,
2012

 

Derivative liabilities related to Warrants

 

$

3,840,644

 

$

(274,967

)

$

(3,317,463

)

$

765,328

 

$

1,824,565

 

$

2,838,107

 

 

The unrealized gains or losses on the derivative liabilities are recorded as a change in fair value of derivative liabilities in the Company’s statement of operations. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, the Company reviews the assets and liabilities that are subject to ASC Topic 815-40. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.

 

8. Commitments and Contingencies

 

Research Agreement

 

On June 27, 2012, the Company entered into a research agreement with University of Texas MD Anderson Cancer Center (“MDACC”) to provide samples and evaluate methods used by the Company in identification of pancreatic cancer mutations.  Under this agreement, the Company has committed to pay $90,400 for the services performed by the University.  As of September 30, 2012, $45,240 has been paid to MDACC under this agreement.

 

Collaboration and License Agreements

 

On September 12, 2012, the Company entered into a non-exclusive license agreement with Quest Diagnostics related to the development and commercialization of laboratory tests related to screening nucleophosmin protein (“NPM1”) nucleic acid mutations. Under this agreement, the Company has granted a license to certain NPM1 patents in exchange for a one time license fee of $20,000 due upon execution of the agreement and royalty payments on net sales of Quest Diagnostics and its affiliates.  As of September 30, 2012, no royalty payments have been received.

 

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On September 13, 2012, the Company entered into a collaboration and license agreement with Strand Life Sciences related to the validation and commercial launch of a Urine and DNA test related to Human Papillomavirus (“HPV”).  Under this agreement, the Company has granted a license for use of its tests to Strand in exchange for royalty payments on net sales earned in the territory specified in the agreement.  As of September 30, 2012, no royalties have been received under this agreement.

 

In the three month period ending September 30, 2012, the Company received a $150,000 milestone payment related to an agreement with Ipsogen S.A. signed in 2007. This amount is reflected in revenues and was triggered by the issuance of a United States patent.

 

Employment Agreements

 

On February 1, 2012, the Company entered into an executive agreement with Stephen Zaniboni in which he agreed to serve as Trovagene’s Chief Financial Officer. The term of the agreement is effective as of February 1, 2012 and continues until February 1, 2013 and is automatically renewed for successive one year periods at the end to each term. Mr. Zaniboni’s compensation is $200,000 per year. Mr. Zaniboni is eligible to receive a cash bonus of up to 50% of his base salary per year based on meeting certain performance objectives and bonus criteria. Upon entering the agreement, Mr. Zaniboni was granted 166,667 non-qualified stock options which have an exercise price of $3.60 per share and vest annually in equal amounts over a period of four years.

 

If the executive agreement is terminated by us for cause or as a result of Mr. Zaniboni’s death or permanent disability or if Mr. Zaniboni terminates his agreement voluntarily, Mr. Zaniboni shall receive a lump sum equal to (i) any portion of unpaid base compensation then due for periods prior to termination, (ii) any bonus or realization bonus earned but not yet paid through the date of termination and (iii) all expenses reasonably incurred by Mr. Zaniboni prior to date of termination. If the executive agreement is terminated by us without cause Mr. Zaniboni shall receive a severance payment equal to base compensation for three months if termination occurs ten months after the effective date of the agreement and six months if termination occurs subsequent to ten months from the effective date. If the executive agreement is terminated as a result of a change of control, Mr. Zaniboni shall receive a severance payment equal to base compensation for twelve months and all unvested stock options shall immediately vest and become fully exercisable for a period of six months following the date of termination.

 

Consulting Agreements

 

On February 1, 2012 the Company entered into a consulting agreement whereby the Company retained the services of an independent contractor who will provide business development services for the Company. As compensation for the consultant’s services, the Company granted a stock option to purchase up to 166,667 shares of common stock at $3.00 per share.  The Stock option vests as follows: 33,333 shares vest ratably over a four year period and 133,334 Shares vest upon achievement of various milestones. See Note 3.

 

On February 1, 2012 the Company entered into a consulting agreement whereby the Company retained the services of an independent contractor who will provide public relations and publicity services for the Company. As compensation for the consultant’s services, the Company will pay a monthly fee and issue 1,417 shares of restricted common stock monthly.  See Note 3.

 

On April 26, 2012 the Company entered into a consulting agreement whereby the Company retained the services of an independent contractor who will provide scientific consulting services as a member of the Company’s Scientific Advisory Board (“SAB”). As compensation for the consultant’s services, the Company granted a stock option to purchase up to 100,000 shares of common stock at $3.66 per share.  Options to purchase the shares of common stock vest ratably over a three year period. See Note 3.

 

On July 3, 2012 the Company entered into a consulting agreement whereby the Company retained the services of an independent contractor who will provide scientific consulting services as a member of the Company’s Scientific Advisory Board. As compensation for the consultant’s services, the Company granted an initial stock option to purchase up to 5,000 shares of common stock at $2.84 per share.  Options to purchase the shares of common stock vest ratably over a three year period.  See Note 3.  In addition, the SAB member will be entitled to an annual option grant to purchase 1,000 shares and will be compensated for attendance of meetings and teleconferences.  See Note 3.

 

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

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report, including statements

 

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regarding the future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions.

 

In addition, our business and financial performance may be affected by the factors that are discussed under “Risk Factors” in the Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 30, 2012. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for us to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

You should not rely upon forward looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

 

The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

 

Overview

 

From August 4, 1999 (inception) through September 30, 2012 we have sustained a cumulative deficit of $48,866,386. From inception through September 30, 2012, we have generated minimal out-licensing revenue and expect to incur additional losses to perform further research and development activities and do not currently have any material revenues from commercial diagnostic or biopharmaceutical products.

 

Our product development efforts are thus in their early stages and we cannot make estimates of the costs or the time they will take to complete. The risk of completion of any program is high because of the many uncertainties involved in bringing new diagnostics or biopharmaceutical products to market potentially including the long duration of clinical testing, the specific performance of proposed products under stringent clinical trial protocols, the extended regulatory approval and review cycles, our ability to raise additional capital, the nature and timing of research and development expenses and competing technologies being developed by organizations with significantly greater resources.

 

Recent Developments

 

On March 15, 2012, the Board of Directors and on April 27, 2012 a majority of the stockholders approved a proposal to amend the Company’s Amended and Restated Certificate of Incorporation to effect a reverse stock split of the Company’s issued and outstanding common stock at a ratio of not less than one-for-two and not greater than one-for-six at any time prior to April 27, 2013 at the discretion of the Board of Directors. On May 24, 2012, the Board of Directors approved a 1-for-6 reverse stock split of the Company’s issued and outstanding common stock effective on May 29, 2012.

 

On May 30, 2012, we completed an underwritten public offering in which an aggregate of 1,150,000 units, with each unit consisting of two shares of its common stock and one warrant to purchase one share of common stock were sold at a purchase price of $8.00 per unit. On June 13, 2012, the underwriters exercised their overallotment option in full for an additional 172,500 units.  We raised a total of $9.1 million in net proceeds after deducting underwriting discounts and commissions of $0.7 million and offering expenses of $0.7 million.  The units began trading on The NASDAQ Capital Market on May 30, 2012 under the symbol “TROVU”. Upon the exercise in full of the underwriters’ overallotment, the units may be separated into common stock and warrants.  Each warrant has an exercise price of $5.32 per share, and will expire five years from the closing of the offering.  The warrants trade on The NASDAQ Capital Market under the symbol “TROVW”.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

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Inflation

 

It is our opinion that inflation has not had a material effect on our operations.

 

Critical Accounting Policies

 

Revenues

 

We license and sublicense our patent rights to healthcare companies, medical laboratories and biotechnology partners.  These agreements may involve multiple elements such as license fees, royalties and milestone payments. Revenue is recognized for each element when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable, and collection is reasonably assured.

 

·             Up-front nonrefundable license fees pursuant to agreements under which we have no continuing performance obligations are recognized as revenues on the effective date of the agreement and when collection is reasonably assured.

 

·             Minimum royalties are recognized as earned, and royalties in excess of minimum amounts are recognized upon receipt of payment when collection is assured.

 

·             Milestone payments are recognized when both the milestone is achieved and the related payment is received.  The Company has not received or recognized milestone payment revenues to date.

 

Derivative Financial Instruments-Warrants

 

Our derivative liabilities are related to warrants issued in connection with financing transactions and are therefore not designated as hedging instruments.  All derivatives are recorded on our balance sheet at fair value in accordance with current accounting guidelines for such complex financial instruments.

 

We have issued common stock warrants in connection with the execution of certain equity and debt financings.  Certain warrants are classified as derivative liabilities under the provisions of FASB ASC 815 Derivatives and Hedging (“ASC 815”), and are recorded at their fair market value as of each reporting period. Such warrants do not meet the exemption that a contract should not be considered a derivative instrument if it is (1) indexed to its own stock and (2) classified in stockholders’ equity. Changes in fair value of derivative liabilities are recorded in the consolidated statement of operations under the caption “Change in fair value of derivative instruments.”  Warrants issued in connection with the underwritten public offering and sale of units in May 2012 are not considered derivatives based on our analysis of the criteria of ASC 815, as we are not required to make any cash payments or net cash settlement to the registered holder in lieu of issuance of warrant shares.

 

Research and Development

 

Research and development costs, which include expenditures in connection with an in-house research and development laboratory, salaries and staff costs, application and filing for regulatory approval of proposed products, purchased in-process research and development, regulatory and scientific consulting fees, as well as contract research and insurance, are accounted for in accordance with ASC Topic 730-10-55-2, Research and Development. Also, as prescribed by this guidance, patent filing and maintenance expenses are considered legal in nature and therefore classified as general and administrative expense.  Costs are not allocated to projects as the majority of the costs relate to employees and facilities costs and we do not track employees’ hours by project or allocate facilities costs on a project basis.

 

Share-based Compensation

 

Share-based compensation expense for employees and directors is recognized in the statement of operations based on estimated amounts, including the grant date fair value and the expected service period. For stock options, we estimate the grant date fair value using a binomial valuation model, which requires the use of multiple subjective inputs including estimated future volatility, expected forfeitures and the expected term of the awards. Share-based compensation recorded in our statement of operations is based on awards expected to ultimately vest and has been reduced for estimated forfeitures.  We recognize the value of the awards on a straight-line basis over the awards’ requisite service periods. The requisite service period is generally the time over which our share-based awards vest.

 

We account for equity instruments granted to non-employees in accordance with ASC Topic 505-50 “Equity-Based Payment to Non-Employees” where the value of the share-based compensation is based upon the measurement date as determined at either a)

 

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the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete.  Accordingly the fair value of these options is being “marked to market” quarterly until the measurement date is determined.

 

Fair value of financial instruments

 

Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, debentures and derivative liabilities. We have adopted FASB ASC 820 Fair Value Measurements and Disclosures (“ASC 820”) for financial assets and liabilities that are required to be measured at fair value, and non-financial assets and liabilities that are not required to be measured at fair value on a recurring basis. These financial instruments are stated at their respective historical carrying amounts which approximate to fair value due to their short term nature.

 

ASC 820 provides that the measurement of fair value requires the use of techniques based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. The inputs create the following fair value hierarchy:

 

·   Level 1 — Quoted prices for identical instruments in active markets.

 

·   Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations where inputs are observable or where significant value drivers are observable.

 

·   Level 3 — Instruments where significant value drivers are unobservable to third parties.

 

RESULTS OF OPERATIONS

 

Three Months Ended September 30, 2012 and 2011

 

Revenues

 

Our total revenues were $211,500 and $55,000 for the three months ended September 30, 2012 and 2011, respectively.  The revenues were comprised of the following components:

 

 

 

For the three months ended September 30,

 

 

 

2012

 

2011

 

(Decrease)/Increase

 

Royalties

 

$

41,500

 

$

45,000

 

$

(3,500

)

Milestone payments

 

150,000

 

 

150,000

 

License fees

 

20,000

 

10,000

 

10,000

 

Total revenues

 

$

211,500

 

$

55,000

 

$

156,500

 

 

Royalty income decreased by $3,500 in the nine months ended September 30, 2012 due to a decrease in the minimum royalty payments with several parties.  The milestone payment of $150,000 earned in 2012 was received upon achievement of a milestone with Ipsogen SAS.  License fees in 2012 resulted from the signing of a new license agreement with Quest Diagnostics.  In 2011, the license fee was a result of an agreement with Fairview Health Services.

 

Research and Development Expenses

 

Research and development expenses consisted of the following:

 

 

 

For the three months ended September 30,

 

 

 

2012

 

2011

 

Increase/(Decrease)

 

Salaries and staff costs

 

$

211,822

 

$

106,245

 

$

105,577

 

Outside services, consultants and lab supplies

 

217,721

 

44,768

 

172,953

 

Facilities

 

83,667

 

44,728

 

38,939

 

Other

 

(1,777

)

5,183

 

(6,960

)

Total research and development

 

511,433

 

$

200,924

 

$

310,509

 

 

Research and development expenses increased by $310,509 to $511,433 for the three months ended September 30, 2012, from $200,924 for the same period in 2011. The $105,577 increase in salaries and staff costs was comprised of an approximately $23,000 increase related to the addition of personnel for our CLIA lab operations, $48,000 increase from new personnel added in 2012

 

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as well as bonuses paid to existing personnel, and an increase of approximately $35,000 in stock based compensation related to options granted to research and development personnel.  Of the $172,953 increase in outside services, consultants and lab supplies, approximately $67,000 results from our CLIA lab which started up in February 2012, and the remaining increase is due to an increase in lab supplies, samples and consultants used to support new research projects.  The increase in facilities expense is comprised of primarily the following items:  an increase of approximately $21,000 related to the addition of the CLIA lab, an increase of approximately $5,000 in depreciation expense, and an approximately $8,000 increase related to insurance for our CLIA lab operations.

 

General and Administrative Expenses

 

General and administrative expenses consisted of the following:

 

 

 

For the three months ended September 30,

 

 

 

2012

 

2011

 

Increase/(Decrease)

 

Salaries and staff costs

 

$

221,543

 

$

97,344

 

$

124,199

 

Outside services and Board of Directors’ fees

 

332,500

 

269,630

 

62,870

 

Legal and accounting fees

 

108,602

 

173,354

 

(64,752

)

Facilities

 

40,018

 

16,275

 

23,743

 

Insurance

 

16,893

 

23,517

 

(6,624

)

Other

 

19,486

 

6,110

 

13,376

 

 

 

$

739,042

 

$

586,230

 

$

152,812

 

 

General and administrative expenses increased by $152,812 to $739,042 for the three months ended September 30, 2012 from $586,230 for the same period in 2011.  Salaries and staff costs increased primarily due to the implementation of a bonus plan in 2012 resulting in an increase in accrued bonuses of approximately $60,000, the addition of new personnel resulting in an increase of approximately $53,000, and an increase in stock based compensation of approximately $12,000.  The increase in outside services and Board of Directors’ fees resulted primarily from the addition of our Chief Executive Officer and Chief Financial Officer, as well as share based compensation related to a warrant granted to a BOD member and an increase in costs associated with filing required documents with the Securities and Exchange Commission (SEC).  Legal and accounting fees decreased in the three month period ended September 30, 2012 as compared to the same period in 2011, as we incurred significant expenses related to audit and review of our Form 10 prepared during the first nine months of 2011 and initially filed in the fourth quarter of 2011.

 

Change in Fair Value of Derivative Instruments

 

We issued securities that were accounted for as derivative liabilities at issuance.  As of September 30, 2012, the derivative liabilities were revalued to $2,838,107, resulting in a net decrease in value of $388,750 from June 30, 2012, based primarily upon changes in the fair value as a result of changes in the closing stock price at September 30, 2012.

 

Gain on Extinguishment of Debt

 

There was no gain on extinguishment of debt in the three month period ended September 30, 2012, compared to $623,383 in the same period of 2011. The amount in 2011 resulted from the settlement with the holders of convertible debentures as a result of conversion of the amount owed into shares of Common Stock as consideration for their agreement to extinguish the debt.

 

Nine Months Ended September 30, 2012 and 2011

 

Revenues

 

Our total revenues were $287,153 and $223,946 for the nine months ended September 30, 2012 and 2011, respectively, and consisted of the following:

 

 

 

Nine months ended September 30,

 

 

 

2012

 

2011

 

(Decrease)/Increase

 

 

 

 

 

 

 

 

 

Royalty income

 

$

117,153

 

$

193,946

 

$

(76,793

)

Milestone

 

150,000

 

 

150,000

 

License fees

 

20,000

 

30,000

 

(10,000

)

Total revenues

 

$

287,153

 

$

223,946

 

$

63,207

 

 

Royalty income decreased by $76,793 in the nine months ended September 30, 2012, primarily due to the termination of the license agreement with Sequenom, Inc. in late 2011.  The milestone payment of $150,000 earned in 2012 was received upon achievement of a milestone with Ipsogen SAS. License fees decreased by $10,000 in the nine month period ended September 30, 2012 as there were fewer license agreements entered into during the nine month period ended September 30, 2012 as compared to the same period in 2011.

 

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Research and Development Expenses

 

Research and development expenses consisted of the following:

 

 

 

For the nine months ended September 30,

 

 

 

2012

 

2011

 

Increase/(Decrease)

 

Salaries and staff costs

 

$

637,485

 

395,289

 

$

242,196

 

Outside services, consultants and lab supplies

 

414,884

 

89,721

 

325,163

 

Facilities

 

260,972

 

98,313

 

162,659

 

Other

 

12,856

 

18,905

 

(6,049

)

Total research and development

 

$

1,326,197

 

$

602,228

 

$

723,969

 

 

Research and development expenses increased by $723,969 to $1,326,197 for the nine months ended September 30, 2012 from $602,228 for the same period in 2011.  The $242,196 increase in salaries and staff costs was comprised of an approximately $58,000 increase related to the addition of personnel for our CLIA lab operations, $125,000 increase from new personnel added in 2012 as well as bonuses paid to existing personnel and accrued for a new bonus plan in 2012, and an increase of approximately $60,000 in stock based compensation related to options granted to research and development personnel.  Of the $325,163 increase in outside services, consultants and lab supplies, approximately $107,000 resulted from the start-up of our CLIA lab in February 2012, an increase of $25,000 related to consultants primarily working on cancer projects, a $166,000 increase in lab supplies purchased to support new projects, and $32,000 related to an increase in research collaborations.  The increase in facilities expense is comprised of approximately $62,000 related to the addition of the CLIA lab and the remainder of the increase related to the expansion of our laboratory space at the end of 2011.

 

General and Administrative Expenses

 

General and administrative expenses consisted of the following:

 

 

 

For the nine months ended September 30,

 

 

 

2012

 

2011

 

Increase/(Decrease)

 

Salaries and staff costs

 

$

628,486

 

473,015

 

155,471

 

Outside services and Board of Director fees

 

1,052,607

 

459,099

 

593,508

 

Legal and accounting fees

 

464,491

 

667,591

 

(203,100

)

Facilities

 

97,001

 

52,932

 

44,070

 

Insurance

 

52,613

 

67,966

 

(15,354

)

Other

 

80,468

 

698

 

79,770

 

 

 

$

2,375,666

 

$

1,721,301

 

$

654,365

 

 

General and administrative expenses increased by $654,365 to $2,375,666 for the nine months ended September 30, 2012 from $1,721,301 for the same period in 2011. The increase in salaries and staff costs consisted of an increase in accrued bonuses of approximately $247,000 based on the 2012 bonus plan and an increase of approximately $85,000 in stock based compensation related to options, partially offset by a decrease of approximately $152,000 in severance and employment settlement claims and a decrease of approximately $21,000 in salaries related to personnel who ceased employment with us.  The increase in outside services resulted primarily from approximately $165,000 of stock based compensation related to warrant and stock issuances for advisory and public relations services, approximately $247,000 from the addition of our Chief Executive Officer and Chief Financial Officer, as well as services provided by outside business development and investor relations individuals, an increase of $97,000 related to public relations and an increase of $53,000 in EDGAR and XBRL expenses associated with SEC filings.  Legal and accounting fees decreased in the nine month period ended September 30, 2012 compared to the prior year, as services related to assisting us with SEC compliance decreased as a result of completing our Form 10 early in 2012.  Facilities expenses increased as a result of $14,000 increase in rent due to additional space, $9,000 increase in office supplies related to new employees, and a $5,000 increase in depreciation expense.  The increase in other expenses resulted primarily from additional travel costs of approximately $42,000 in the first nine months of 2012, and was offset by a decrease in debt forgiveness of approximately $29,000 that was included in other expenses in 2011

 

Interest Expense

 

There was no interest expense in the nine months ended September 30, 2012 compared to $56,637 in the nine months ended September 30, 2011.  The interest expense in the nine months ended September 30, 2011 related to convertible debentures that were extinguished in July 2011.

 

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Change in Fair Value of Derivative Instruments

 

We issued securities that were accounted for as derivative liabilities at issuance during the nine months ended September 30, 2012.  On May 30, 2012 we closed an underwritten public offering that removed the condition that required the securities issued during the nine months ended September 30, 2012, as well as certain securities issued in prior periods, to be treated as derivative liabilities.  Accordingly, the fair value of these securities of $3,317,463 was reclassified from a liability to additional paid in capital.  As of September 30, 2012, the remaining derivative liabilities were revalued to $2,838,107, resulting in a net increase in value of $1,843,481 from December 31, 2011, based primarily upon changes in the fair value as a result of the underwritten public offering.

 

Gain on Extinguishment of Debt

 

There was no gain on extinguishment of debt in the nine month period ended September 30, 2012, compared to $623,383 in the same period of 2011. The amount in 2011 resulted from the settlement with the holders of convertible debentures as a result of conversion of the amount owed into shares of Common Stock as consideration for their agreement to extinguish the debt.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of September 30, 2012, we had $7,815,128 in cash and cash equivalents.  As of September 30, 2012 we had working capital of $7,243,025, compared to a working capital deficit of $587,709 as of December 31, 2011.  As of November 9, 2012, our working capital was approximately $6,898,000.

 

Net cash used in operating activities for the nine months ended September 30, 2012 was $3,619,141, compared to $1,409,707 for the nine months ended September 30, 2011. Our use of cash was primarily a result of the net loss of $5,239,275 for the nine months ended September 30, 2012, adjusted for non-cash items related to stock-based compensation of $349,010, depreciation and amortization of $26,331 and the change in fair value of derivatives of $1,824,565.  The changes in our operating assets and liabilities consisted of lower accounts payable and accrued expenses and an increase in accounts receivable and prepaid expenses.  At our current and anticipated level of operating loss, we expect to continue to incur an operating cash outflow for the next several years.

 

Investing activities consisted of purchases for capital equipment that used $212,220 in cash during the nine months ended September 30, 2012, compared to $1,529 for the same period in 2011.

 

Net cash provided by financing activities was $10,946,115 during the nine months ended September 30, 2012, compared to $1,510,000 in 2011. Cash received from financing activities during the nine months ended September 30, 2012 and 2011 were from proceeds related to the sale of common stock.

 

ITEM 4.  CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

At the end of the period covered by this Quarterly Report on Form 10-Q, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures.  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 and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  Based on that evaluation, as of June 30, 2012, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are not effective, due to weaknesses in our financial closing process. We intend to implement remedial measures designed to address the ineffectiveness of our disclosure controls and procedures.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II

 

ITEM 1. LEGAL PROCEEDINGS.

 

We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.

 

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ITEM 6. EXHIBITS.

 

Exhibit
Number

 

Description of Exhibit

 

 

 

31.1

 

Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act.

 

 

 

31.2

 

Certification of Principal Financial Officer required under Rule 13a-14(a)/15d-14(a) under the Exchange Act.

 

 

 

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101

 

Financial statements from the quarterly report on Form 10-Q of the Company for the quarter ended September 30, 2012, filed on November 14, 2012, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows (iv) the Condensed Consolidated Statement of Stockholders Equity (Deficit) and (v) the Notes to Consolidated Financial Statements tagged as blocks of text.

 

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SIGNATURES

 

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

 

 

TROVAGENE, INC.

 

 

 

November 14, 2012

By:

/s/ Antonius Schuh

 

 

Antonius Schuh

 

 

Chief Executive Officer

 

 

 

TROVAGENE, INC.

 

 

 

November 14, 2012

By:

/s/ Stephen Zaniboni

 

 

Stephen Zaniboni

 

 

Chief Financial Officer

 

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