Cardiff Oncology, Inc. - Quarter Report: 2014 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, 2014

 

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)

 

 

11055 Flintkote Avenue, Suite A, 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):

 

 

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 October 31, 2014 the issuer had 18,902,783 shares of Common Stock issued and outstanding.

 

 

Table of Contents

 

TROVAGENE, INC.

 

Table of Contents

 

		Page
PART I	FINANCIAL INFORMATION
Item 1:	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013	3
	Condensed Consolidated Statements of Operations (unaudited) for the three months and nine months ended September 30, 2014 and 2013	4
	Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2014 and 2013	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4:	Controls and Procedures	20
PART II	OTHER INFORMATION
Item 6:	Exhibits	22
SIGNATURES

 

2

Table of Contents

 

TROVAGENE, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		September 30,			December 31,
		2014			2013
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	31,163,559		$	25,836,937
Accounts receivable		62,370			78,994
Prepaid expenses and other assets		348,018			152,789
Total current assets		31,573,947			26,068,720
Property and equipment, net		841,434			750,565
Other assets		346,902			336,450
Total assets		$	32,762,283		$	27,155,735
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	461,769		$	286,608
Accrued expenses		1,907,930			1,524,092
Current portion of long-term debt		752,734			198,166
Total current liabilities		3,122,433			2,008,866
Long-term debt, less current portion		13,978,818			322,998
Other long-term liability		96,060			—
Derivative financial instruments		3,211,216			4,431,871
Total liabilities		20,408,527			6,763,735
Commitments and contingencies (Note 9)
Stockholders’ equity
Preferred stock, $0.001 par value, 20,000,000 shares authorized; 60,600 shares outstanding at September 30, 2014 and December 31, 2013; designated as Series A Convertible Preferred Stock with liquidation preference of $606,000 at September 30, 2014 and December 31, 2013		60			60
Common stock, $0.0001 par value, 150,000,000 shares authorized; 18,902,783 shares issued and outstanding at September 30, 2014 and December 31, 2013		1,890			1,890
Additional paid-in capital		89,054,276			87,433,460
Accumulated deficit		(76,702,470		)	(67,043,410		)
Total stockholders’ equity		12,353,756			20,392,000
Total liabilities and stockholders’ equity		$	32,762,283		$	27,155,735

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

3

Table of Contents

 

TROVAGENE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2014			2013			2014			2013
Royalty income		$	57,199		$	43,756		$	213,780		$	211,879
License fees		—			—			10,000			—
Total revenues		57,199			43,756			223,780			211,879
Costs and expenses:
Research and development		1,990,251			915,457			4,829,945			2,661,550
Selling and marketing		540,584			330,525			1,699,988			1,156,157
General and administrative		1,466,592			1,875,427			4,135,310			4,235,776
Total operating expenses		3,997,427			3,121,409			10,665,243			8,053,483
Loss from operations		(3,940,228		)	(3,077,653		)	(10,441,463		)	(7,841,604		)
Interest income		3,470			44			7,940			44
Interest expense		(389,871		)	(6,263		)	(454,082		)	(6,931		)
Other (expense) income, net		(19,255		)	—			24,845			—
Change in fair value of derivative instruments—warrants		(1,029,333		)	(1,317,360		)	1,220,655			(2,933,527		)
Net loss		(5,375,217		)	(4,401,232		)	(9,642,105		)	(10,782,018		)
Preferred stock dividend		(6,060		)	(5,360		)	(16,955		)	(20,630		)
Net loss attributable to common stockholders		$	(5,381,277	)	$	(4,406,592	)	$	(9,659,060	)	$	(10,802,648	)
Net loss per common share-basic and diluted		$	(0.28	)	$	(0.25	)	$	(0.51	)	$	(0.66	)
Weighted average shares outstanding- basic and diluted		18,902,783			17,870,703			18,902,783			16,330,313

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

4

Table of Contents

 

TROVAGENE, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine Months Ended September 30,
		2014			2013
Operating activities
Net loss		$	(9,642,105	)	$	(10,782,018	)
Adjustments to reconcile net loss to net cash used in operating activities:
Net gain on disposal of fixed assets		(24,845		)	—
Depreciation and amortization		169,599			85,532
Accretion of discount on debt		28,686			—
Non-cash interest expense		—			2,085
Stock based compensation expense		1,384,959			1,856,684
Change in fair value of financial instruments		(1,220,655		)	2,933,527
Changes in operating assets and liabilities:
Increase in other assets		(10,452		)	(49,831		)
Decrease in accounts receivable		16,624			98,815
Increase in prepaid expenses		(195,229		)	(69,352		)
Increase in accounts payable,accrued expenses and other long-term liabilities		632,904			462,078
Net cash used in operating activities		(8,860,514		)	(5,462,480		)
Investing activities:
Capital expenditures, net		(235,623		)	(571,097		)
Net cash used in investing activities		(235,623		)	(571,097		)
Financing activities:
Proceeds from exercise of warrants		—			3,599,831
Proceeds of sale of common stock, net of expenses		—			18,897,388
Borrowings under debt agreement, net of expenses		14,938,723			—
Net (repayments) borrowings from equipment line of credit		(515,964		)	515,964
Net cash provided by financing activities		14,422,759			23,013,183
Net change in cash and equivalents		5,326,622			16,979,606
Cash and cash equivalents—Beginning of period		25,836,937			10,819,781
Cash and cash equivalents—End of period		$	31,163,559		$	27,799,387
Supplementary disclosure of cash flow activity:
Cash paid for taxes		$	2,400		$	7,650
Cash paid for interest		$	248,506		$	3,339
Supplemental disclosure of non-cash investing and financing activities:
Reclassification of derivative financial instruments to additional paid in capital		$	—		$	(5,417,871	)
Preferred stock dividends accrued		$	16,955		$	20,630
Warrants issued in connection with Loan and Security Agreement		$	235,857		$	—

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

5

Table of Contents

 

TROVAGENE, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Business Overview, Basis of Presentation and Liquidity

 

Business Overview

 

Trovagene, Inc. (“Trovagene” or the “Company”) is focused on developing and commercializing its precision cancer monitoring technology, which can inform oncologists and guide treatment decisions by determining a tumor’s mutational status and enabling oncologists to track therapeutic response and resistance over time.

 

The Company is in the process of expanding the body of clinical evidence supporting its urine-based cell-free DNA mutation tracking platform through collaborations with major cancer treatment centers and integrated healthcare networks.  This year, Trovagene expects that the benefits of its precision cancer monitoring technology will become more apparent in terms of its clinical utility and impact on patient outcomes.  The Company’s intellectual property estate protecting its technology includes methods of extracting, purifying, preparing, and detecting cell-free DNA and RNA mutations in both blood and urine.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of Trovagene, which include its wholly owned subsidiaries Xenomics, Inc., a California corporation, Xenomics Europa Ltd, (an inactive subsidiary formed in the United Kingdom and liquidated) and Etherogen, Inc., a Delaware corporation, 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, 2013 and 2012 and for each of the three years ended December 31, 2013 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 17, 2014.  The accompanying condensed consolidated 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, results of operations, and cash flows at September 30, 2014, and for all periods presented herein, have been made.  The results of operations for the periods ended September 30, 2014 and 2013 are not necessarily indicative of the operating results for the full year.

 

In June 2014, the Financial Accounting Standards Board (the FASB) issued an accounting standards update that removes the financial reporting distinction between development stage entities and other reporting entities from U.S. GAAP.  In addition, the amendments eliminate the requirements for development stage entities to: (1) present inception-to-date information in the statements of income, cash flows, and shareholder equity, (2) label the financial statements as those of a development stage entity, (3) disclose a description of the development stage activities in which the entity is engaged, and disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage.  The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014, with an option for early adoption. The Company elected early adoption, and does not believe the adoption of the standard had a material impact on our financial position, results of operations or related financial statement disclosures.

 

Liquidity

 

Trovagene’s condensed consolidated financial statements as of September 30, 2014 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.  Based on current plans the Company will be required to raise additional capital during 2016 to complete the development and commercialization of current product candidates and to continue to fund operations at its current projected cash expenditure levels.

 

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

 

6

Table of Contents

 

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 $30.0 million of cash and cash equivalents at October 31, 2014.

 

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 loss per common share was determined by dividing net 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 calculating basic and diluted net loss per common share for the nine months ended September 30 exclude as antidilutive the following share equivalents:

 

		September 30,
		2014		2013
Options to purchase Common Stock		4,233,749		3,894,044
Warrants to purchase Common stock		6,302,286		6,306,582
Series A Convertible Preferred Stock		63,125		63,125
		10,599,160		10,263,751

 

3.        Accounting for Share-Based Payments

 

Stock Options

 

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.

 

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

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2014			2013			2014			2013
Included in research and development expense		$	171,150		$	124,447		$	526,803		$	426,656
Included in selling and marketing expense		49,887			14,836			102,556			60,637
Included in general and administrative expense		184,663			829,793			755,600			1,369,391
Total stock-based compensation expense		$	405,700		$	969,076		$	1,384,959		$	1,856,684

 

The unrecognized compensation cost related to non-vested stock options outstanding at September 30, 2014 and 2013, net of expected forfeitures, was $ 3,805,661 and $3,170,227, respectively, both to be recognized over a weighted-average remaining vesting period of approximately three years.  The weighted average remaining contractual term of outstanding options as of September 30, 2014 was approximately seven years.

 

7

Table of Contents

 

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 assumptions during the following periods indicated:

 

		Nine Months Ended  September 30,
		2014		2013
Risk-free interest rate		1.5-2.1%		0.74 – 1.48%
Dividend yield		0%		0%
Expected volatility		81-83%		95-100%
Expected term (in years)		4-6 yrs		5 yrs

 

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

 

		Total Options		Weighted Average Exercise Price Per Share			Intrinsic Value
Balance outstanding, December 31, 2013		4,287,545		$	5.18
Granted		626,870
Forfeited		(690,666	)
Balance outstanding, September 30, 2014		4,233,749		$	4.71		$	3,592,365
Exercisable at September 30, 2014		2,107,069		$	4.76		$	2,211,482

 

The Trovagene Stock Option Plan expired on June 24, 2014.  The Trovagene Inc. 2014 Equity Incentive Plan, authorizing up to 2,500,000 shares of common stock for issuance under the Plan, was approved by the Board of Directors in June 2014 and approved by the Shareholders at the September 17, 2014 Annual Shareholders’ Meeting.

 

Warrants

 

A summary of warrant activity and changes in warrants outstanding, including both liability and equity classifications is presented below:

 

		Total Warrants		Weighted Average Exercise Price Per Share			Weighted Average Remaining Contractual Term
Balance outstanding, December 31, 2013		6,233,483		$	3.87		4.5 years
Granted		85,470		$	3.51
Forfeited		(16,667	)	$	10.80
Balance outstanding, September 30, 2014		6,302,286		$	3.84		3.8 years

 

4.     Stockholders’ Equity

 

Common Stock

 

On January 25, 2013, the Company filed a Form S-3 Registration Statement to offer and sell in one or more offerings, any combination of common stock, preferred stock, warrants, or units having an aggregate initial offering price not exceeding $150,000,000.  The preferred stock, warrants, and units may be convertible or exercisable or exchangeable for common stock or preferred stock or other Trovagene securities.  This form was declared effective on February 4, 2013.  In addition, in connection with the Form S-3, the Company entered into an agreement with Cantor Fitzgerald & Co. (“Agent”) on January 25, 2013 to issue and sell up to $30,000,000 of shares of common stock through them.  As payment for its services, the Agent is entitled to a 3% commission on gross proceeds.  There were no sales of common stock during the nine months ended September 30, 2014.

 

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 did not meet the definition of a business, as defined in ASC 805, Business Combinations and was

 

8

Table of Contents

 

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 and allocated to an indefinite lived intangible asset related to the CLIA license.

 

6.  Derivative Financial Instruments - Warrants

 

The Company follows the provisions of ASC Topic 815-40, “Derivatives and Hedging: Contracts in Entity’s Own Equity” for its derivative instruments.   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.

 

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 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 is being recorded in the Company’s condensed consolidated statement of operations.

 

The Company estimates the fair value of the warrants issued in connection with certain of its debentures using the Black-Scholes model in order to determine the associated derivative instrument liability and change in fair value described above.  The following range of assumptions was used to determine the fair value of the warrants during the periods indicated:

 

		Nine Months Ended  September 30,
		2014			2013
Estimated fair value of Trovagene common stock		$	3.50-5.73		$	6.26 – 7.18
Expected warrant term		4.3-4.8 yrs			1 – 5.8 yrs
Risk-free interest rate		1.6-1.8%			0.03 – 1.41%
Expected volatility		74-83%			95-100%
Dividend yield		0%			0%

 

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, 2013		Balance of derivative financial instruments liability		1,013,961		$	4,431,871
		Change in fair value of warrants during the period recognized as a gain in the condensed consolidated statement of operations		—		(1,220,655		)
September 30, 2014		Balance of derivative financial instruments liability		1,013,961		$	3,211,216

 

9

Table of Contents

 

7. Fair Value Measurements

 

Fair value of financial instruments

 

The following table presents the Company’s assets and 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 September 30, 2014 and December 31, 2013:

 

		Fair Value Measurements at
		September 30, 2014
		Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total
Assets:
Money market fund (1)		$	30,989,822		$	—		$	—		$	30,989,822
Total Assets		$	30,989,822		$	—		$	—		$	30,989,822
Liabilities:
Derivative liabilities related to warrants		$	—		$	—		$	3,211,216		$	3,211,216
Total Liabilities		$	—		$	—		$	3,211,216		$	3,211,216

 

		Fair Value Measurements at  December 31, 2013
		Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total
Assets:
Money market fund (1)		$	25,703,330		$	—		$	—		$	25,703,330
Total Assets		$	25,703,330		$	—		$	—		$	25,703,330
Liabilities:
Derivative liabilities related to warrants		—			$	—		$	4,431,871		$	4,431,871
Total Liabilities		$	—		$	—		$	4,431,871		$	4,431,871

 

(1) Included as a component of cash and cash equivalents on the accompanying condensed consolidated balance sheets.

 

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, 2014:

 

Description		Balance at December 31, 2013			Unrealized Gain			Balance at September 30, 2014
Derivative liabilities related to Warrants		$	4,431,871		$	(1,220,655	)	$	3,211,216

 

The unrealized gain on the derivative liabilities is recorded as a change in fair value of derivative liabilities in the Company’s condensed consolidated 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.

 

10

Table of Contents

 

8. Debt

 

Equipment Line of Credit

 

In June 2013, the Company entered into a Loan and Security Agreement (“Equipment Line of Credit”) with Silicon Valley Bank that provided for cash borrowings for equipment of up to $1.0 million, secured by the equipment financed.  Under the terms of the agreement, interest was the greater of 5% or 4.6% above the U.S. Treasury Note as of the date of each borrowing.  Interest only payments were due on borrowings through December 31, 2013, with both interest and principal payments commencing in January 2014.  Any equipment advances after December 31, 2013 were subject to principal and interest payments immediately over a 30 month period following the advance.  In June 2014, the equipment loan was paid in full, the Company had no further obligations thereunder, and the bank released its security interest in such assets.

 

The Company recorded approximately $61,000 in interest expense related to the Equipment Line of Credit from January 1, 2014, until the loan was paid in full in June 2014.

 

Loan and Security Agreement

 

In June 2014, the Company entered into a $15,000,000 loan and security agreement with two banks pursuant to which the lenders provided the Company a term loan, which was funded at closing. A portion of the proceeds were used to repay the existing equipment loan. The repayment with the same lender was accounted for as a debt extinguishment under ASC Topic 470-50, Debt. The interest rate on the new loan is 7.07% per annum.  The Company will make interest only payments on the outstanding amount of the loan on a monthly basis through July 2015, after which equal monthly payments of principal and interest are due until the loan maturity date of July 1, 2018.  The loan is secured by a security interest in all of the Company’s assets except intellectual property, which is subject to a negative pledge. In connection with the loan, the lenders received a warrant to purchase an aggregate 85,470 shares of the Company’s common stock at an exercise price of $3.51 per share exercisable for ten years from the date of issuance.  The original value of the warrants, totaling $235,857, was recorded as debt discount and additional paid-in capital.

 

At the Company’s option, it may prepay all of the outstanding principal balance, subject to certain pre-payment fees ranging from 1% to 3% of the prepayment amount.  In the event of a final payment of the loans under the loan agreement, either in the event of repayment of the loan at maturity or upon any prepayment, the Company is obligated to pay the amortized portion of the final fee of $1,050,000.

 

The Company is also subject to certain affirmative and negative covenants under the loan agreement, including limitations on its ability to: undergo certain change of control events; convey, sell, lease, license, transfer or otherwise dispose of any equipment financed by loans under the loan agreement; create, incur, assume, guarantee or be liable with respect to indebtedness, subject to certain exceptions; grant liens on any equipment financed under the loan agreement; and make or permit any payment on specified subordinated debt.  In addition, under the loan agreement, subject to certain exceptions, the Company is required to maintain with the lender its primary operating, other deposit and securities accounts.

 

Long-term debt and unamortized discount balances are as follows:

 

Balance at December 31, 2013		$	—
Face value of term loan		15,000,000
Debt discount		(297,134		)
Accretion of debt discount		28,686
Balance at September 30, 2014		$	14,731,552

 

Future minimum principal payments under the loan and security agreement are as follows:

 

Year Ending December 31,
2014		$	—
2015		1,898,549
2016		4,790,628
2017		5,140,519
2018		3,170,304
Total future minimum payments		15,000,000
Debt discount, net of accretion		(268,448		)
Total minimum principal payments		14,731,552

 

11

Table of Contents

 

The Company recorded approximately $392,817 in interest expense related to the Loan and Security Agreement during the nine months ended September 30, 2014.

 

9. Commitments and Contingencies

 

Executive and Consulting Agreements

 

The Company has contracted with various consultants and third parties, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”).  The executive agreements with the CEO and CFO provide for severance payments.

 

Lease Agreement

 

The Company leases approximately 8,300 square feet of office space at a monthly rental rate of approximately $18,300 to $20,000 during the remaining term of the lease, through December 2017. Effective May 14, 2014, the Company entered into the fifth amendment of its lease (the “Agreement”), which increased the leased space by 4,751 square feet and increased the monthly rent by approximately $10,500 per month, commencing in October 2014.

 

Research and Development Agreements

 

During 2012, the Company entered into research agreements 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, as well as to measure the degree of concordance between results of cell-free DNA mutations analysis from urine samples and tumor tissue.  During 2013, the agreements were amended to increase the scope of the agreements. Under these agreements, the Company has committed to pay approximately $266,000 for the services performed by MDACC. As of September 30, 2014, the Company has incurred and recorded approximately $244,000 of research and development expenses related to these agreements.

 

In April 2013, the Company entered into a research and development agreement with PerkinElmer Health Sciences, Inc. (“PerkinElmer”) pursuant to which the Company will design an assay, based on the Company’s urine-based cell-free molecular diagnostic technology, to determine the risk for developing hepatocellular carcinoma.  A notice of termination was received in March 2014 terminating the agreement.  No further commitments exist from either party. The Company had recognized milestone payments received from PerkinElmer as a reduction in research and development costs as the services were performed.  Amounts received in advance of services performed were recorded as accrued liabilities until the services for which the payment had been received were performed. Through the date of termination of the agreement, the Company had received milestone payments of approximately $90,000 and incurred and recorded approximately $90,000 of research and development costs.

 

In June 2013, the Company entered into a research agreement with Illumina, Inc. (“Illumina”) pursuant to which the parties will work together to evaluate the potential for integrating the Company’s transrenal technology for isolating, extracting and genetic analysis of nucleic acids from urine with Illumina’s genetic analysis sequencing technology (the “Research Plan”).  The parties have agreed that all results and reagents from the Research Plan will be shared between the parties.  The agreement will terminate upon the earlier of 30 days after completion of the research plan or the one year anniversary of the agreement unless extended by mutual written agreement. In October 2014, the agreement was extended for an additional year to June 2015.

 

In August 2013, the Company entered into a clinical trial agreement with the University of Southern California (“USC”), pursuant to which USC will provide the principal investigator and conduct the clinical trial related to the genetic characterization of metastatic colorectal cancers.  Under the agreement, the Company may pay USC approximately $232,000 for services provided. Through September 30, 2014 the Company has incurred and recorded approximately $6,400 of research and development expense related to this agreement.

 

In December 2013, the Company entered into a clinical trial agreement with US Oncology Research LLC (“USOR”), pursuant to which USOR will provide the principal investigator and conduct the clinical trial related to the examining the utility of transrenal quantitative KRAS testing in disease monitoring in patients with metastatic pancreatic cancer.  Under the agreement, the Company may pay USOR approximately $270,000 for services provided.  As of September 30, 2014 the Company has incurred and recorded approximately $38,400 of research and development expense related to this agreement.

 

On May 8, 2014, the Company entered into a Patent Assignment and License Agreement, effective as of April 23, 2014, with GenSignia IP Ltd., a United Kingdom company, pursuant to which the Company assigned all of its miRNA patents, including methods of using miRNA for detection of in vivo cell death and detecting cell-free miRNA in urine and blood.  Concurrent with the assignment, GenSignia granted to the Company an exclusive, world-wide, royalty-free, fully paid, perpetual license under the transferred patents in the urine field.  Pursuant to the agreement, GenSignia will pay the Company a low single digit royalty on net sales and will pay an aggregate $6.5 million in milestone payments upon the achievement of up to $150 million in net sales.  GenSignia shall be responsible for the preparation, filing and maintenance of all patents under the agreement.  Antonius Schuh, the Company’s CEO and a director, is a director of GenSignia.  Dr. Schuh did not participate in any negotiations with respect to the agreement and recused himself from any director vote in connection with the agreement.  As of September 30, 2014, the Company had recorded $10,000 in license fee revenue related to the agreement.  No costs or expenses have been incurred through September 30, 2014.

 

12

Table of Contents

 

On September 8, 2014, the Company entered into a Sponsored Research Agreement to conduct a validation study to evaluate use of the Company’s precision cancer monitoring technology in the management of lung cancer patients. Under the agreement, the Company may pay its collaborator in the study approximately $151,000 for services provided.  As of September 30, 2014 the Company has incurred approximately $30,000 related to this agreement.

 

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 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, 2013, filed on March 17, 2014.  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 is qualified in its entirety by, and should be read in conjunction with, the more detailed information set forth in the financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. 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

 

We are focused on developing and commercializing our precision cancer monitoring technology, which can inform oncologists; and guide treatment decisions by determining a tumor’s mutational status and enabling physicians to track therapeutic response and resistance over time.

 

We are expanding the body of clinical evidence supporting our urine-based cell-free DNA mutation tracking platform through collaborations with major cancer treatment centers and integrated healthcare networks.  We expect that the benefits of our precision cancer monitoring technology will become more apparent in terms of its clinical utility and impact on patient outcomes.  Our intellectual property estate protecting our technology includes methods of extracting, purifying, preparing, and detecting cell-free DNA and RNA mutations in urine.

 

Our accumulated deficit through September 30, 2014 is $76,702,470. To date, we have generated minimal revenues and expect to incur additional losses to perform further research and development activities and commercial expansion. During 2014, we have advanced our business with the following activities:

 

·                  On October 27, 2014, we announced the publication of clinical study results in the peer-reviewed medical journal, Cancer Discovery, featuring our precision cancer monitoring technology and its ability to non-invasively determine oncogene mutation status and monitor response to BRAF inhibitor therapy in patients with histiocytic disease, a malignancy often associated with BRAF mutations. These data were subsequently presented at the 30th Annual Histiocyte Society Meeting on October 28, in Toronto, Canada.

 

·                  We entered into a sponsored research agreement to evaluate our precision cancer monitoring technology in the management of lung cancer patients.

 

·                  We secured $15.0 million in debt financing with Silicon Valley Bank and Oxford Finance to aid in funding our clinical programs,

 

13

Table of Contents

 

commercialization efforts, and continued expansion of our oncogene mutation portfolio for cancer monitoring research.

 

·                  We entered into a strategic partnership with the Robert H. Lurie Comprehensive Cancer Center of Northwestern University (Lurie Cancer Center) and the Northwestern Medicine Developmental Therapeutics Institute (NMDTI) to conduct a translational research program designed to assess the utility of our urine-based cell-free oncogene mutation monitoring technology in clinical practice.

 

·                  We entered into a clinical collaboration with Dana-Farber Cancer Institute to investigate the utility of quantitative urine-based mutation detection and the ability to monitor tumor mutation burden and treatment response over time in metastatic melanoma patients.

 

·                  We introduced our non-invasive cancer monitoring platform with the release of our first multiplexed oncogene mutation assay using next generation sequencing. This allows us to leverage the scalability of our proprietary platform and next generation sequencing to introduce a full line of multiplexed urine-based oncogene mutation assays.

 

·                  We entered into a strategic partnership with Catholic Health Initiatives Center for Translational Research to clinically evaluate non-invasive genomic diagnostics to improve cancer care. The partnership seeks to establish clinical and health economic benefits for potential adoption in cancer management strategies.

 

·                  Our clinical study results were presented at the American Association for Cancer Research (AACR) Annual Meeting to demonstrate the ability of our molecular diagnostic platform to detect and monitor BRAF V600E mutations in cancer patients. The results were presented by Filip Janku, M.D., Ph.D., of The University of Texas MD Anderson Cancer Center on April 8, 2014.

 

·                      We also announced clinical study results in a publication and poster presentation at the 2014 American Society of Clinical Oncology (ASCO) Annual Meeting on June 2, 2014. An abstract published by Filip Janku, M.D., Ph.D. of The University of Texas MD Anderson Cancer Center demonstrated the ability to longitudinally monitor BRAF V600E mutations in urinary cell-free DNA in metastatic cancer patients with our molecular diagnostic technology. Additionally, a poster was presented by Eli Diamond, M.D. of Memorial Sloane Cancer Center demonstrating that our precision cancer monitoring platform was able to determine mutational status and monitor treatment response in patients with histiocytic disease.

 

Our product development and commercialization efforts are in their early stages, and we cannot make estimates of the costs or the time our development efforts will take to complete, or the timing and amount of revenues related to the sale of our tests and revenues related to our license agreements. The risk of completion of any program is high because of the many uncertainties involved in bringing new diagnostic products to market including the long duration of clinical testing, the specific performance of proposed products under stringent clinical trial protocols and/or CLIA requirements, 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.

 

Off-Balance Sheet Arrangements

 

We had no off-balance sheet arrangements as of September 30, 2014.

 

Critical Accounting Policies

 

Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Our accounting policies are described in ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS of our Annual Report on Form 10-K as of and for the year ended December 31, 2013, filed with the SEC on March 17, 2014.  There have been no changes to our critical accounting policies since December 31, 2013.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). The guidance contains changes to the summary and amendments that create revenue from contracts with customers and other assets, conforms amendments to other topics and subtopics in the codification and status tables, and provides background information and basis for these conclusions. The amendments in the update are effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018.  The Company is considering the impact of adoption of the standard on the condensed consolidated financial statements and have not yet determined the method by which they will adopt the standard in 2017. 

 

In June 2014, the FASB issued ASU No. 2014-12, “Compensation — Stock Compensation (Topic 718)” (“ASU 2014-12”). The guidance contains changes to the accounting for share-based payments with the terms of an award provide that a performance target could be achieved after the requisition period. The amendments in the update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The amendments should be applied prospectively to all share-based payment awards

 

14

Table of Contents

 

that are granted or modified on or after the effective date and retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. Adoption of the standard is not expected to have a material impact on the condensed consolidated financial statements.

 

RESULTS OF OPERATIONS

 

Three Months Ended September 30, 2014 and 2013

 

Revenues

 

Our total revenues were $57,199 and $43,756 for the three months ended September 30, 2014 and 2013, respectively. During the three months ended September 30, 2014 and 2013, revenues consisted of royalty income. The increase during the three months ended September 30, 2014 related to royalties received in excess of contractual minimum royalty amounts.

 

We expect our royalty income to fluctuate as the royalties are based on the minimum royalty payments as well as the timing of when payments are received for royalties in excess of minimum royalties. Milestone and license fee revenue is difficult to predict and can vary significantly from period to period.  In addition, we expect to have revenues from our diagnostics tests in future periods, but as the revenue recognition will be based on cash receipts, the timing of these revenues is also uncertain.

 

Research and Development Expenses

 

Research and development expenses consisted of the following:

 

		Three Months Ended September 30,
		2014			2013			Increase (Decrease)
Salaries and staff costs		$	819,212		$	370,196		449,016
Stock-based compensation		171,150			124,447			46,703
Outside services, consultants and lab supplies		782,309			264,628			517,681
Facilities		177,975			123,178			54,797
Travel and scientific conferences		26,823			18,034			8,789
Other		12,782			14,974			(2,192		)
Total research and development		$	1,990,251		$	915,457		$	1,074,794

 

Research and development expenses increased by $1,074,794 to $1,990,251 for the three months ended September 30, 2014 from $915,457 for the same period in 2013. Substantially all of the increase resulted from the expansion of our research and development efforts to support the clinical collaborations that will validate our tests to detect certain types of cancer in urine samples and monitor responsiveness to therapy and the status of disease. As a result of the increase in the number of collaborations from five to fifteen, we increased the average number of our internal research and development personnel to eighteen for the three months ended September 30, 2014 from eight during the same period of the prior year. In addition, we purchased additional laboratory equipment, lab supplies and clinical samples as a result in the number of collaborations. We expect research and development expenses to further increase as we enter into additional collaborations.

 

Selling and Marketing Expenses

 

Selling and marketing expenses consisted of the following:

 

		Three Months Ended September 30,
		2014			2013			Increase/(Decrease)
Salaries and staff costs		$	216,056		$	167,103		48,953
Stock-based compensation		49,887			14,836			35,051
Outside services and consultants		153,290			84,462			68,828
Facilities		31,062			23,806			7,256
Trade shows, conferences and marketing		50,347			35,022			15,325
Travel		31,909			7,678			24,231
Other		8,033			(2,382		)	10,415
Total sales and marketing		$	540,584		$	330,525		$	210,059

 

Selling and marketing expenses increased by $210,059 to $540,854 for the three months ended September 30, 2014 from $330,525 for the same period in 2013.  We have increased our average sales and marketing headcount to five in the three months ended September 30, 2014 from three in the same period of 2013, as we expand our efforts to inform the major cancer centers in the United States of our current and future product offerings. We expect these costs to increase as we continue to market and sell our tests.

 

15

Table of Contents

 

General and Administrative Expenses

 

General and administrative expenses consisted of the following:

 

		Three Months Ended September 30,
		2014			2013			Increase/(Decrease)
Salaries and staff costs		$	204,238		$	168,525		35,713
Board of Directors’ fees		94,354			46,075			48,279
Stock-based compensation		184,663			829,793			(645,130	)
Outside services and consultants		408,513			432,633			(24,120	)
Legal and accounting fees		428,120			258,270			169,850
Facilities and insurance		74,564			51,646			22,918
Travel		13,834			47,483			(33,649	)
Fees, licenses, taxes and other		58,306			41,003			17,303
Total general and administrative		$	1,466,592		$	1,875,428		(408,836	)

 

General and administrative expenses decreased by $408,836 to $1,466,592 for the three months ended September 30, 2014, from $1,875,428 for the same period in 2013.  The overall decrease resulted primarily from a decrease in stock-based compensation, offset in part by an increase in legal and accounting fees.  The three month period ended September 30, 2013 included the stock-based compensation of approximately $500,000 associated with an option grant to one of our Directors for services provided outside of routine Board of Directors’ activities, while there was no comparable compensation in the three month period ended September 30, 2014.  Continued patent filing and maintenance as well as the costs associated with being a publicly traded company, such as additional costs for insurance, NASDAQ fees and Sarbanes-Oxley compliance have added to our general and administrative expenses, in comparison to the same period of the prior year. Stock-based compensation, a non-cash expense, will fluctuate based on the timing and amount of share based awards granted, as well as the fair value of the awards at the time of grant or remeasurement. We expect our general and administrative costs to increase as a result of our accelerated filer status and as we raise more capital.

 

Interest Expense

 

Interest expense increased to $389,871 for the three months ended September 30, 2014, from $6,263 for the same period in 2013.  The increase resulted from an increase in our average debt outstanding during the three months ended September 30, 2014 compared to the same period of the prior year, as a result of borrowings under Loan and Security Agreement we entered into in June 2014.

 

Change in Fair Value of Derivative Instruments - Warrants

 

We have issued securities that are accounted for as derivative liabilities. As of September 30, 2014, the derivative liabilities related to securities issued were revalued to $3,211,216, resulting in a net increase in value of $1,029,333 from June 30, 2014, based primarily upon the increase in our stock price from $3.50 at June 30, 2014 to $4.58 at September 30, 2014 and the changes in the expected term and risk free interest rates for the expected term. The increase in value was recorded as non-operating loss for the three months ended September 30, 2014.

 

Net Loss

 

Net loss and per share amounts were as follows:

 

		Three Months Ended September 30,
		2014			2013			Increase (Decrease)
Net loss attributable to common shareholders		$	(5,381,277	)	$	(4,406,592	)	$	974,685
Net loss per common share: basic and diluted		$	(0.28	)	$	(0.25	)	$	(0.03	)
Weighted average shares: basic and diluted		18,902,783			17,870,703			1,032,080

 

The $974,685 increase in net loss attributable to common shareholders and $0.03 increase in net loss per share in 2014 compared to 2013 reflected a slight increase in revenues, an increase in operating expenses, and a decrease in the loss from the change in fair value in derivative liabilities, compared to the same period in the prior year. Net loss per share in 2014 was also impacted by the increase in weighted average shares outstanding resulting from the sale and issuance of approximately 3.4 million shares of common stock resulting from the sales of stock during the third quarter of 2013, as well as the exercise of stock options and warrants from August 1, 2013

 

16

Table of Contents

 

through December 31, 2013.

 

Nine Months Ended September 30, 2014 and 2013

 

Revenues

 

Our total revenues were $223,780 and $211,879 for the nine months ended September 30, 2014 and 2013, respectively. During the nine months ended September 30, 2014, revenues consisted of $10,000 of license fees and $213,780 of royalty income, while revenue in the same period of the prior year was comprised of all royalty income. The $10,000 license fee revenue in the nine months ended September 30, 2014 related to cash received for a license agreement signed in the second quarter of 2014.  There was no license fee revenue in the nine months ended September 30, 2013 and no diagnostic revenue in the nine months ended September 30, 2014 and 2013.

 

We expect our royalty income to fluctuate as the royalties are based on the portion of our partners’ revenues as well as the timing of when payments are received. Milestone and license fee revenue is difficult to predict and can vary significantly from period to period.  In addition, we expect to have revenues from our diagnostics tests in future periods, but as the revenue recognition will be based on cash receipts, the timing of these revenues is also uncertain.

 

Research and Development Expenses

 

Research and development expenses consisted of the following:

 

		Nine Months Ended September 30,
		2014			2013			Increase
Salaries and staff costs		$	2,000,125		$	979,244		$	1,020,881
Stock-based compensation		526,803			426,656			100,147
Outside services, consultants and lab supplies		1,743,485			848,204			895,281
Facilities		454,591			322,478			132,113
Travel and scientific conferences		71,169			51,952			19,217
Other		33,772			33,017			755
Total research and development		$	4,829,945		$	2,661,551		$	2,168,394

 

Research and development expenses increased by $2,168,394 to $4,829,945 for the nine months ended September 30, 2014 from $2,661,551 for the same period in 2013. Substantially all of the increase resulted from the expansion of clinical programs to support the collaborations we have entered into that support validation of our tests for detection of certain types of cancer in urine and monitoring the status of cancer after therapeutic intervention.  As a result of these collaborations, we increased the average number of our internal research and development personnel from eight to sixteen, and purchased additional laboratory equipment, lab supplies and clinical samples.  We expect research and development expenses to increase as we enter into additional collaborations.

 

Selling and Marketing Expenses

 

Selling and marketing expenses consisted of the following:

 

		Nine Months Ended September 30,
		2014			2013			Increase/(Decrease)
Salaries and staff costs		$	818,797		$	571,560		$	247,237
Stock-based compensation		102,556			60,637			41,919
Outside services and consultants		369,638			219,791			149,847
Facilities		85,616			69,655			15,961
Trade shows, conferences and marketing		204,263			136,939			67,324
Travel		109,972			63,284			46,688
Other		9,146			34,291			(25,145		)
Total sales and marketing		$	1,699,988		1,156,157			$	543,831

 

Selling and marketing expenses increased by $543,831 to $1,699,988 for the nine months ended September 30, 2014 from $1,156,157 for the same period in 2013.  We have increased our average sales and marketing headcount to five during the nine months ended September 30, 2014, from three in the same period of the prior year, and also increased costs as we expand our efforts to inform the major cancer centers in the United States of our current and future product offerings.  We expect these costs to increase as we continue to market and sell our tests.

 

17

Table of Contents

 

General and Administrative Expenses

 

General and administrative expenses consisted of the following:

 

		Nine Months Ended September 30,
		2014			2013			Increase/(Decrease)
Salaries and staff costs		$	599,874		$	414,342		$	185,532
Board of Directors’ fees		242,477			170,930			71,547
Stock-based compensation		755,599			1,369,391			(613,792		)
Outside services and consultants		1,055,697			1,016,032			39,665
Legal and accounting fees		954,089			791,795			162,294
Facilities and insurance		195,401			189,340			6,061
Travel		138,026			170,262			(32,236		)
Fees, licenses, taxes and other		194,147			113,684			80,463
Total general and administrative		$	4,135,310		$	4,235,776		$	(100,466	)

 

General and administrative expenses decreased by $100,466 to $4,135,310 for the nine months ended September 30, 2014, from $4,235,776 for the same period in 2013. The overall decrease resulted primarily from a decrease in stock-based compensation, offset in part by an increase salaries and staff costs, fees paid to the Board of Directors, and legal and accounting fees.  The nine month period ended September 30, 2013 included the stock-based compensation of approximately $500,000 associated with an option grant to one of our Directors for services provided outside of routine Board of Directors’ activities, while there was no comparable compensation in the same period ended September 30, 2014.  Our average headcount has increased from two in the nine months ended September 30, 2013 to four in the nine months ended September 30, 2014, in support of the growth of our sales and marketing and research and development functions. Sarbanes-Oxley compliance has also added to our general and administrative expenses in comparison to the same period of the prior year. We expect our general and administrative costs to increase as our overall headcount increases.

 

Interest Expense

 

Interest expense increased to $454,082 for the nine months ended September 30, 2014, from $6,931 for the same period in 2013.  The increase resulted from an increase in our average debt outstanding during the nine months ended September 30, 2014 compared to the same period of the prior year, primarily as a result of borrowings under the equipment line of credit we established in June 2013 and the Loan and Security Agreement we entered into in June 2014. We expect our interest expense to increase due to an increase in our average debt outstanding.

 

Change in Fair Value of Derivative Instruments - Warrants

 

We have issued securities that are accounted for as derivative liabilities.  As of September 30, 2014, the derivative liabilities related to securities issued were revalued to $3,211,216 resulting in a net decrease in value of $1,220,655 from December 31, 2013, based primarily upon the change in our stock price from $5.74 at December 31, 2013 to $4.58 at September 30, 2014 and the changes in the expected term, risk free interest rates and volatility for the expected term.  The decrease in value was recorded as non-operating gain for the nine months ended September 30, 2014.

 

Net Loss

 

Net loss and per share amounts were as follows:

 

		Nine Months Ended September 30,
		2014			2013			Increase (Decrease)
Net loss attributable to common shareholders		$	(9,659,060	)	$	(10,802,648	)	$	(1,143,588	)
Net loss per common share: basic and diluted		$	(0.51	)	$	(0.66	)	$	(0.15	)
Weighted average shares: basic and diluted		18,902,783			16,330,313			2,572,470

 

The $1,143,588 decrease in net loss attributable to common shareholders and $0.15 decrease in net loss per share in 2014 compared to 2013 reflected a slight increase in revenues, an increase in operating expenses, offset by the gain on the change in fair value

 

18

Table of Contents

 

in derivative liabilities. Net loss per share in 2014 was also impacted by the increase in weighted average shares outstanding resulting from the sale and issuance of approximately 3.4 million shares of common stock resulting from the sales of stock during the third quarter of 2013, and the exercise of stock options and warrants from April 1, 2013 through December 31, 2013.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of September 30, 2014, we had $31,163,559 in cash and cash equivalents.  Net cash used in operating activities for the nine months ended September 30, 2014 was $8,860,516, compared to $5,462,480 for the nine months ended September 30, 2013.  Our use of cash was primarily a result of the net loss of $9,642,105 for the nine months ended September 30, 2014, adjusted for non-cash items related to stock-based compensation of $1,384,959, depreciation and amortization of $169,599 and the gain from the change in fair value of derivatives of $1,220,655. The changes in our operating assets and liabilities consisted of higher accounts payable and accrued expenses, prepaid expenses and other assets, and a decrease in accounts receivable.  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 net purchases for capital equipment that used $235,623 in cash during the nine months ended September 30, 2014, compared to $571,097 for the same period in 2013.

 

Net cash provided by financing activities was $14,422,759 during the nine months ended September 30, 2014, compared to net cash provided by financing activities of $23,013,183 in 2013. Financing activities during the nine months ended September 30, 2014 related primarily to net borrowings under a Loan and Security Agreement we entered into in June 2014, less the pay-off of an equipment line of credit. Financing activities during the same period of the prior year consisted of $18,897,388 of proceeds received from the sale of common stock, $3,599,831 of proceeds received upon the exercise of warrants, as well as $515,964 of borrowings under an equipment line of credit.

 

As of September 30, 2014, and December 31, 2013, we had working capital of $28,451,514 and $24,059,854, respectively. As of October 31, 2014, our working capital was $27,298,510.

 

Our working capital requirements will depend upon numerous factors including but not limited to the nature, cost and timing of our research and development programs and ramp up of our sales and marketing function.  We will be required to raise additional capital during 2016 to complete the development and commercialization of current product candidates, to fund the existing working capital deficit and to continue to fund operations at our current cash expenditure levels.  To date, our sources of cash have been primarily limited to the sale of equity securities and debentures.  We cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact our ability to conduct business.  If we are unable to raise additional capital when required or on acceptable terms, we may have to (i) significantly delay, scale back or discontinue the development and/or commercialization of one or more of product candidates; (ii) 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; or (iii) relinquish or otherwise dispose of rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves on unfavorable terms.

 

Public Offering and Controlled Equity Offering

 

On January 25, 2013 we filed a Form S-3 Registration Statement to offer and sell in one or more offerings, any combination of common stock, preferred stock, warrants, or units having an aggregate initial offering price not exceeding $150,000,000. The preferred stock, warrants, and units may be convertible or exercisable or exchangeable for common stock or preferred stock or other securities.  This form was declared effective on February 4, 2013.  In addition, in connection with the Form S-3, we entered into an agreement with Cantor Fitzgerald & Co. (“Agent”) on January 25, 2013 to issue and sell up to $30,000,000 of shares of common stock through them.  As payment for their services, the Agent is entitled to a 3% commission on gross proceeds.

 

CONTRACTUAL OBLIGATIONS

 

As of September 30, 2014, the material change outside the ordinary course of our business to the contractual obligations we reported in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations and Commitments” in our annual report on Form 10-K for the year ended December 31, 2013, is disclosed in Note 8. Debt, and relates to the $15.0 million Loan and Security Agreement signed in June 2014.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risk

 

Our cash and cash equivalent primary consists of deposits, and money market deposits managed by commercial banks.  The goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk.

 

19