Cardiff Oncology, Inc. - Quarter Report: 2015 June (Form 10-Q)

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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 June 30, 2015

 

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 001-35558

 

TROVAGENE, INC.

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

 

 

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):

 

 

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 July 31, 2015 the issuer had 29,622,602 shares of Common Stock issued and outstanding.

 

 

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TROVAGENE, INC.

 

Table of Contents

 

		Page
PART I	FINANCIAL INFORMATION
Item 1:	Financial Statements
	Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2015 and December 31, 2014	3
	Condensed Consolidated Statements of Operations (unaudited) for the three months and six months ended June 30, 2015 and 2014	4
	Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2015 and 2014	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	21
Item 4:	Controls and Procedures	21
PART II	OTHER INFORMATION
Item 6:	Exhibits	27
SIGNATURES

 

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TROVAGENE, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		June 30,			December 31,
		2015			2014
Assets
Current assets:
Cash and cash equivalents		$	41,293,784		$	27,293,798
Accounts receivable		99,717			56,694
Prepaid expenses and other assets		508,408			369,259
Total current assets		41,901,909			27,719,751
Property and equipment, net		1,378,941			840,387
Other assets		362,946			336,708
Total Assets		$	43,643,796		$	28,896,846
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	1,110,749		$	747,799
Accrued expenses		1,519,212			1,841,808
Current portion of long-term debt		2,320,084			1,898,548
Total current liabilities		4,950,045			4,488,155
Long-term debt, less current portion		12,881,673			13,053,117
Derivative financial instruments		7,693,138			3,006,021
Total Liabilities		25,524,856			20,547,293
Commitments and contingencies (Note 8)
Stockholders’ equity
Preferred stock, $0.001 par value, 20,000,000 shares authorized; 60,600 shares outstanding at June 30, 2015 and December 31, 2014; designated as Series A Convertible Preferred Stock with liquidation preference of $606,000 at June 30, 2015 and December 31, 2014		60			60
Common stock, $0.0001 par value, 150,000,000 shares authorized; 24,872,602, and 18,915,794 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively		2,487			1,891
Additional paid-in capital		116,874,837			89,739,511
Accumulated deficit		(98,758,444		)	(81,391,909		)
Total stockholders’ equity		18,118,940			8,349,553
Total liabilities and stockholders’ equity		$	43,643,796		$	28,896,846

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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TROVAGENE, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
Royalty income		$	46,826		$	45,628		$	171,630		$	156,581
License fees		—			10,000			—			10,000
Diagnostic service revenue		2,520			—			4,686			—
Total revenues		49,346			55,628			176,316			166,581
Costs and expenses:
Cost of revenue		80,030			—			256,455			—
Research and development		2,684,157			1,397,173			4,881,816			2,839,694
Selling and marketing		1,915,850			589,814			2,710,503			1,159,404
General and administrative		2,001,516			1,310,239			3,807,501			2,668,719
Total operating expenses		6,681,553			3,297,226			11,656,275			6,667,817
Loss from operations		(6,632,207		)	(3,241,598		)	(11,479,959		)	(6,501,236		)
Interest income		9,251			2,079			15,620			4,470
Interest expense		(390,503		)	(54,714		)	(780,341		)	(64,210		)
(Loss) gain from change in fair value of derivative instruments — warrants		(3,175,754		)	2,217,142			(5,122,482		)	2,249,988
Other income, net		9,179			—			12,747			44,101
Net loss and comprehensive loss		(10,180,034		)	(1,077,091		)	(17,354,415		)	(4,266,887		)
Preferred stock dividend		(6,060		)	(1,685		)	(12,120		)	(10,895		)
Net loss and comprehensive loss attributable to common stockholders		$	(10,186,094	)	$	(1,078,776	)	$	(17,366,535	)	$	(4,277,782	)
Net loss per common share — basic		$	(0.41	)	$	(0.06	)	$	(0.75	)	$	(0.23	)
Net loss per common share — diluted		$	(0.41	)	$	(0.17	)	$	(0.75	)	$	(0.34	)
Weighted average shares outstanding — basic		24,592,883			18,902,782			23,212,963			18,902,782
Weighted average shares outstanding —diluted		24,592,883			19,232,759			23,212,963			19,067,770

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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TROVAGENE, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended June 30,
		2015			2014
Operating activities
Net loss		$	(17,354,415	)	$	(4,266,887	)
Adjustments to reconcile net loss to net cash used in operating activities:
Net gain on disposal of fixed assets		(3,568		)	(44,101		)
Depreciation and amortization		152,979			111,300
Stock based compensation expense		1,835,187			979,260
Amortization of debt costs		193,066			—
Accretion of discount on debt		57,026			—
Loss (gain) from the change in fair value of derivative instruments - warrants		5,122,482			(2,249,988		)
Changes in operating assets and liabilities:
Increase in other assets		(26,238		)	(10,452		)
(Increase) decrease in accounts receivable		(43,023		)	19,084
Increase in prepaid expenses		(139,149		)	(142,966		)
Increase in accounts payable and accrued expenses		28,234			152,605
Net cash used in operating activities		(10,177,419		)	(5,452,145		)
Investing activities:
Capital expenditures, net		(687,965		)	(133,658		)
Net cash used in investing activities		(687,965		)	(133,658		)
Financing activities:
Proceeds from sales of common stock, net of expenses		23,816,292			—
Proceeds from exercise of options		564,051			—
Proceeds from exercise of warrants		485,027			—
Net borrowings under debt agreements		—			14,422,759
Net cash provided by financing activities		24,865,370			14,422,759
Net change in cash and equivalents		13,999,986			8,836,956
Cash and cash equivalents—Beginning of period		27,293,798			25,836,937
Cash and cash equivalents—End of period		$	41,293,784		$	34,673,893
Supplementary disclosure of cash flow activity:
Cash paid for taxes		$	800		$	2,400
Cash paid for interest		$	530,250		$	71,756
Supplemental disclosure of non-cash investing and financing activities:
Preferred stock dividends accrued		$	12,120		$	10,895
Warrants issued in connection with Loan and Security Agreement		$	—		$	235,857
Reclassification of derivative financial instruments to additional paid in capital		$	435,365		$	—

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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TROVAGENE, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Organization and Basis of Presentation

 

Business Organization and Overview

 

On April 26, 2002, the Company was incorporated in the State of Florida. On July 2, 2004, the Company acquired Xenomics, a California corporation, which was in business to develop and commercialize urine-based molecular diagnostics technology. In 2007, the Company changed its fiscal year end from January 31 to December 31. In January 2010, the Company re-domesticated its state of incorporation from Florida to Delaware and changed its name to Trovagene, Inc. In June 2012, the Company’s common stock was listed on The NASDAQ Capital Market under the ticker symbol TROV.

 

Trovagene, Inc. (“Trovagene” or the “Company”) is a molecular diagnostic company that focuses on the development and commercialization of a proprietary urine-based cell-free molecular diagnostic technology for use in disease detection and monitoring across a variety of medical disciplines. Trovagene’s primary internal focus is to leverage its novel urine-based molecular diagnostic platform to facilitate improvements in the field of oncology, while the Company’s external focus includes entering into collaborations to develop the Company’s technology in areas such as infectious disease, transplant medicine, and prenatal genetics. The Company’s goal is to improve treatment outcomes for cancer patients using its proprietary technology to detect and quantitatively monitor cell-free DNA in urine. Circulating tumor DNA (“ctDNA”) is a subtype of cell-free DNA, and represents the mutant cell-free DNA that we use to detect and monitor cancer.

 

Basis of Presentation

 

The accompanying consolidated financial statements of Trovagene, which include its wholly owned subsidiaries Xenomics, Inc., a California corporation 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.

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP and the rules and regulations of the Securities and Exchange Commission (“SEC”) related to a quarterly report on Form 10-Q. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations. The unaudited interim condensed consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the periods presented. All such adjustments are of a normal and recurring nature. The operating results presented in these unaudited interim condensed consolidated financial statements are not necessarily indicative of the results that may be expected for any future periods. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2014 included in the Company’s annual report on Form 10-K filed with the SEC on March 12, 2015.

 

2. Summary of Significant Accounting Policies

 

Use of Estimates

 

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

 

Revenue Recognition

 

Revenue is recognized when persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable, and collection is reasonably assured.

 

Milestone, Royalty and License Revenues

 

The Company licenses and sublicenses its 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 when the criteria described above have been met as well as the following:

 

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

 

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·            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.

 

Diagnostic Service Revenues

 

Revenue for clinical laboratory tests may come from several sources, including commercial third-party payors, such as insurance companies and health maintenance organizations, government payors, such as Medicare and Medicaid in the United States, patient self-pay and, in some cases, from hospitals or referring laboratories who, in turn, might bill third-party payors for testing. The Company is recognizing diagnostic service revenue on the cash collection basis until such time as it is able to properly estimate collections on third party reimbursements.

 

Derivative Financial Instruments—Warrants

 

The Company has issued common stock warrants in connection with the execution of certain equity financings. Such 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.”

 

The fair value of warrants is determined using the Black-Scholes option-pricing model using assumptions regarding volatility of Trovagene’s common share price, remaining life of the warrant, and risk-free interest rates at each period end. The Company thus uses model-derived valuations where inputs are observable in active markets to determine the fair value and accordingly classifies such warrants in Level 3 per ASC 820, Fair Value Measurements. At June 30, 2015, and December 31, 2014, the fair value of these warrants was $7,693,138 and $3,006,021, respectively, and were included in the derivative financial instruments liability on the balance sheet.

 

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 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. Preferred dividends are included in income available to common stockholders in the computation of basic and diluted earnings per share. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common share equivalents outstanding for the period. Common share equivalents are only included when their effect is dilutive.

 

The following table sets forth the computation of basic and diluted earnings per share:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
Numerator: Net loss attributable to common shareholders		$	(10,186,094	)	$	(1,078,776	)	$	(17,366,535	)	$	(4,277,782	)
Adjustment for change in fair value of derivative instruments - warrants		—			(2,217,142		)	—			(2,217,142		)
Net loss used for diluted loss per share		$	(10,186,094	)	$	(3,295,918	)	$	(17,366,535	)	$	(6,494,924	)
Denominator for basic and diluted net loss per share:
Weighted average shares used to compute basic loss per share		24,592,883			18,902,782			23,212,963			18,902,782
Adjustments to reflect assumed exercise of warrants		—			329,977			—			164,988
Weighted average shares used to compute diluted net loss per share		24,592,883			19,232,759			23,212,963			19,067,770
Net loss per share attributable to common stockholders:
Basic		$	(0.41	)	$	(0.06	)	$	(0.75	)	$	(0.23	)
Diluted		$	(0.41	)	$	(0.17	)	$	(0.75	)	$	(0.34	)

 

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The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because their effect was anti-dilutive:

 

		June 30,
		2015		2014
Options to purchase Common Stock		5,898,597		3,897,249
Warrants to purchase Common Stock		5,703,242		5,288,325
Series A Convertible Preferred Stock		63,125		63,125
		11,664,964		9,248,699

 

Recent Accounting Pronouncements

 

In April 2015, a new accounting standard was issued that amends the presentation for debt issuance costs. Upon adoption, such costs shall be presented on our consolidated balance sheets as a direct deduction from the carrying amount of the related debt liability and not as a deferred charge presented in other assets on our consolidated balance sheets. This new standard will be effective for interim and annual periods beginning on January 1, 2016, and is required to be retrospectively adopted. Adoption of this new standard is not expected to have a material impact on our consolidated balance sheets or related disclosures.

 

In August 2014, the FASB issued an amendment to the accounting guidance related to the evaluation of an entity to continue as a going concern. The amendment establishes management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern in connection with preparing financial statements for each annual and interim reporting period. The amendment also gives guidance to determine whether to disclose information about relevant conditions and events when there is substantial doubt about an entity’s ability to continue as a going concern. The amended guidance is effective prospectively for fiscal years beginning after December 15, 2016. The new guidance will not have an impact on the Company’s financial position, results of operations or cash flows.

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The standard provides companies with a single model for accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.

 

3. Fair Value Measurements

 

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 June 30, 2015 and December 31, 2014:

 

		Fair Value Measurements at
		June 30, 2015
		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)		$	41,057,557		$	—		$	—		$	41,057,557
Total Assets		$	41,057,557		$	—		$	—		$	41,057,557
Liabilities:
Derivative liabilities related to warrants		$	—		$	—		$	7,693,138		$	7,693,138
Total Liabilities		$	—		$	—		$	7,693,138		$	7,693,138

 

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		Fair Value Measurements at December 31, 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)		$	27,123,587		$	—		$	—		$	27,123,587
Total Assets		$	27,123,587		$	—		$	—		$	27,123,587
Liabilities:
Derivative liabilities related to warrants		—			$	—		$	3,006,021		$	3,006,021
Total Liabilities		$	—		$	—		$	3,006,021		$	3,006,021

 

(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 six months ended June 30, 2015:

 

Description		Balance at December 31, 2014			Fair Value of Warrants Reclassified to Additional Paid in Capital			Unrealized Loss			Balance at June 30, 2015
Derivative liabilities related to Warrants		$	3,006,021		$	(435,365	)	$	5,122,482		$	7,693,138

 

The unrealized loss 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.

 

4. Property and Equipment

 

Property and equipment consist of the following:

 

		As of June 30,			As of December 31,
		2015			2014
Furniture and office equipment		$	455,169		$	365,955
Leasehold Improvements		39,401			39,401
Laboratory equipment		1,528,515			968,901
		2,023,085			1,374,257
Less—accumulated depreciation and amortization		(644,144		)	(533,870		)
Property and equipment, net		$	1,378,941		$	840,387

 

5. 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 during the six months ended June 30, 2014.

 

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Loan and Security Agreement

 

In June 2014, the Company entered into a $15,000,000 loan and security agreement (“Agreement”) under which the lenders provided the Company a term loan, which was funded at closing. The interest rate is 7.07% per annum. Under the Agreement, the Company makes 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. Included in the Agreement was a provision to extend the interest only payment to February 1, 2016 upon the Company’s receipt of unrestricted net cash proceeds from the sale of equity securities of not less than $30 million by June 30, 2015. In June 2015, the Company entered into an amendment to the Agreement (“Amendment”), which reduced the amount of unrestricted net cash proceeds to not less than $21 million from the sale of equity securities to qualify for an interest extension. The Company met the conditions in the Amendment related to the interest extension, as a result, the interest only payments that were to expire on August 1, 2015 have been extended for six months to February 1, 2016, when both interest and principal payments will commence. 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 as the warrants were equity classified. As of June 30, 2015, a warrant to purchase 42,735 shares of common stock remains outstanding.

 

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 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 Agreement, subject to certain exceptions, the Company is required to maintain with the lender its primary operating, other deposit and securities accounts. Furthermore, under the amendment to the Agreement, the Company is required to be in compliance with healthcare laws and regulations and terms and conditions of healthcare permits. The Company was in compliance with all covenants as of June 30, 2015.

 

As of June 30, 2015, amounts due under the Agreement include $2,320,084 in current liabilities and $12,881,673 in long-term liabilities. The Company recorded $780,341 in interest expense related to the Agreement during the six months ended June 30, 2015.

 

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

 

June 30,
2015		$	—
2016		5,195,650
2017		6,064,315
2018		3,740,035
Total long-term obligations		$	15,000,000

 

6. Derivative Financial Instruments — Warrants

 

Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Contracts in Entity’s Own Equity, Trovagene determined that certain warrants issued in connection with the execution of certain equity financings must be recorded as derivative liabilities. In accordance with ASC Topic 815-40, the warrants are also being re-measured at each balance sheet date based on estimated fair value, and any resultant change in fair value is being recorded in the Company’s statement of operations. The Company estimates the fair value of these warrants using the Black-Scholes option pricing model.

 

The range of assumptions used to determine the fair value of the warrants valued using the Black-Scholes option pricing model during the periods indicated was:

 

		Six Months Ended June 30,
		2015			2014
Estimated fair value of Trovagene common stock		$	6.81-10.15		$	3.50-5.73
Expected warrant term		3.5-3.8 years			4.5-4.8 years
Risk-free interest rate		0.89-1.01		%	1.62-1.73		%
Expected volatility		75-77		%	74-83		%
Dividend yield		0		%	0		%

 

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Expected volatility is based on the volatility of a peer group of companies with attributes similar to Trovagene. The warrants have a transferability provision and based on guidance provided in SAB 107 for instruments issued with such a provision, Trovagene used the full contractual term as the expected term of the warrants. The risk free rate is based on the U.S. Treasury security rates consistent with the expected remaining term of the warrants at each balance sheet date.

 

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, 2014		Balance of derivative financial instruments liability		1,013,961		$	3,006,021
		Exercised warrants		(46,666	)	(435,365		)
		Change in fair value of warrants during the period recognized as a loss in the condensed consolidated statement of operations		—		5,122,482
June 30, 2015		Balance of derivative financial instruments liability		967,295		$	7,693,138

 

7. 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 the Agent. As payment for its services, the Agent is entitled to a 3% commission on gross proceeds.

 

During the six month period ended June 30, 2015, the Company issued a total of 5,956,808 shares of Common Stock. The Company received gross proceeds of approximately $23.0 million from the sale of 5,111,110 shares of its common stock through an underwritten public offering in February 2015. The Company also received gross proceeds of approximately $2.8 million from the sale of 285,421 shares of its common stock at a weighted average price of $9.66 under the agreement with the Agent. In addition, 170,166 shares were issued upon exercise of options for a weighted average price of $3.31, 112,975 shares were issued upon exercise of warrants for a weighted average price of $4.29, and 277,136 shares were issued upon net exercise of 449,403 warrants at a weighted average exercise price of $3.05.

 

Stock Options

 

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

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
Included in research and development expense		$	409,304		$	166,019		$	712,321		$	355,653
Included in cost of revenue		4,641			—			14,950			—
Included in selling and marketing expense		171,049			29,989			254,114			52,670
Included in general and administrative expense		538,452			223,479			853,802			570,937
Total stock-based compensation expense		$	1,123,446		$	419,487		$	1,835,187		$	979,260

 

The unrecognized compensation cost related to non-vested stock options outstanding at June 30, 2015 and 2014, net of expected forfeitures, was $8,918,735 and $3,364,401, 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 June 30, 2015 was approximately eight years.

 

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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:

 

		Six Months Ended June 30,
		2015		2014
Risk-free interest rate		1.60-2.15	%	1.46-1.69	%
Dividend yield		0	%	0	%
Expected volatility		75-77	%	74-84	%
Expected term		6.2 years		5.0 years

 

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, 2014		4,913,472		$	4.66		$	2,808,083
Granted		1,396,500		7.64
Exercised		(170,166	)	3.31
Cancelled / Forfeited		(130,875	)	5.03
Expired		(110,334	)	14.43
Balance outstanding, June 30, 2015		5,898,597		5.21			29,847,486
Exercisable at June 30, 2015		2,441,739		4.39			14,183,710

 

The Trovagene Inc. 2014 Equity Incentive Plan (the “2014 EIP”) 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. An additional 2,500,000 shares of common stock for issuance was authorized by the Board of Directors in June 2015 and approved by the Shareholders at June 10, 2015 Annual Shareholders’ Meeting. As of June 30, 2015 there were 2,563,332 shares available for issuance under the 2014 EIP.

 

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, 2014		6,265,620		$	3.85		3.57
Exercised		(562,378	)	3.30
Balance outstanding, June 30, 2015		5,703,242		3.90			3.01

 

8. Commitments and Contingencies

 

Executive and Consulting Agreements

 

The Company has longer-term contractual commitments with various consultants and employees, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). The executive agreements with the CEO, CFO and Chief Commercial Officer (“CCO”) provide for severance payments. The executive agreement with the CEO also provides for a bonus payment in cash or stock upon the earlier of meeting certain trading volumes and market price of Trovagene’s common stock for a minimum period of ninety days or in the event of a change in control where the Company’s per share enterprise value equal or exceeds $7.50.  If the market price and volume target is realized, the bonus is approximately $3.5 million.  If a change of control occurs at the targeted enterprise values, the bonus is equal to 4% of the enterprise value.

 

Lease Agreement

 

The Company currently leases approximately 13,000 square feet of office space at a monthly rental rate of approximately $30,000. On June 11, 2015, the Company entered into an amendment to the lease agreement which will expand the square footage of its office space to approximately 22,600 square feet at a monthly rental rate of approximately $60,000. The new lease will expire on December 31, 2021.

 

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The new monthly rental rate will not be effective until the Company commences business operations in the expanded premises.

 

Research and Development Agreements

 

The Company has entered into a variety of collaboration and specimen transfer agreements relating to its development efforts. Included in research and development expense, the Company has recorded approximately $423,000 for the six months ended June 30, 2015 relating to services provided by the collaborators in connection with these agreements.

 

The Company is a party to various agreements under which it licenses technology on an exclusive basis in the field of human diagnostics. License fees are generally calculated as a percentage of product revenues, with rates that vary by agreement. To date, payments have not been material.

 

9. Subsequent Events

 

Public Offering

 

On July 22, 2015, the Company closed an underwritten public offering of 4,600,000 shares of its common stock, which includes 600,000 shares that were issued upon the full exercise by the underwriters of their overallotment option. The offering price was $8.75 per share and net proceeds to the Company were approximately $37.4 million.

 

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, 2014, filed on March 12, 2015. 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 a molecular diagnostic company that focuses on the development and commercialization of a proprietary urine-based cell-free molecular diagnostic technology for use in disease detection and monitoring across a variety of medical disciplines. Our primary internal focus is to leverage our novel urine-based molecular diagnostic platform to facilitate improvements in the field of oncology, while our external focus includes entering into collaborations to develop the Company’s technology in areas such as infectious disease, transplant medicine, and prenatal genetics. Our goal is to improve treatment outcomes for cancer patients using our proprietary technology to detect and quantitatively monitor cell-free DNA in urine.

 

We are leveraging our proprietary molecular diagnostic technology for the detection of cell-free DNA originating from diseased cell death and that can be isolated and detected from urine, blood, and tissue samples to improve disease management. 

 

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These genetic materials are also collectively referred to as “cell-free nucleic acids”, which result when cells in the body die and release their DNA contents into the bloodstream. The circulating fragments of genetic material are eventually filtered through the kidneys and therefore, can be detected and measured in urine. Cell-free nucleic acids can be used as genetic markers of disease. As such, the contents of urine or blood samples represent systemic liquid biopsies that can allow for simple, non-invasive or minimally-invasive sample collection methods. Circulating tumor DNA (“ctDNA”) is a subtype of cell-free DNA, and represents the mutant cell-free DNA that we use to detect and monitor cancer.

 

Our fundamental ctDNA diagnostic platform, also known as our Precision Cancer MonitoringSM, (“PCM”) platform is protected by a strong intellectual property portfolio. We have developed significant intellectual property around cell-free nucleic acids in urine, the extraction of cell-free nucleic acids from urine, as well as novel assay designs, particularly our proprietary non-naturally occurring primers. Through this proprietary technology, we believe that we are at the forefront of a shift in the way diagnostic medicine is practiced, using simple, non-invasive or minimally invasive sampling and analysis of nucleic acids, which we believe will ultimately lead to more effective treatment monitoring, better management of serious illnesses such as cancer, and the ability to detect the recurrence of cancer earlier. As of June 30, 2015, our intellectual property portfolio consists of over 60 issued patents worldwide and over 55 pending patent applications globally. Our patent estate includes intellectual property for the detection of cell-free nucleic acids that pass through the kidney into the urine, as well as their application in specific disease areas, including oncology, infectious disease, transplantation, and prenatal genetics.

 

We believe that our proprietary PCM platform is uniquely positioned to address a high unmet clinical need in field of oncology. Our PCM platform is designed to offer improved cancer monitoring by tracking and analyzing levels of cell-free DNA from either urine or blood samples, and is intended to provide important clinical information beyond the current standard of care. Using urine as a sample, our cancer monitoring technology enables more frequent, non-invasive monitoring of oncogene mutation status, disease progression and disease recurrence. Our research and development efforts were made commercially feasible following improved next-generation sequencing (“NGS”) technologies which are now available at a significantly lower cost. This combined with our extensive patent portfolio around cell-free DNA in urine gives us a competitive advantage to leverage an emerging trend toward monitoring cancer using ctDNA as a marker of disease status. Our proprietary sample preparation process forms the basis of our PCM platform. It includes novel technology for the extraction and isolation of ctDNA from either a urine or blood sample, proprietary non-naturally occurring primers to enrich the sample for mutant alleles, and the ability to detect nucleic acids of interest using one of several leading gene sequencing technologies such as NGS or droplet digital Polymerase Chain Reaction. We believe that our quantitative ctDNA detection and monitoring platform offers industry leading sensitivity, featuring single nucleic acid molecule detection.

 

Our PCM platform is poised to overcome a significant clinical dilemma in the area of cancer treatment. Recent scientific evidence supports the molecular basis of cancer, and has resulted in a paradigm shift in the way cancer is treated. Researchers and clinicians are now focused on specific oncogene mutations that are believed to be the molecular drivers of cancer, and, as a result, there is a trend in the pharmaceutical research community toward developing targeted therapies. As such, there is a need for oncologists to have an ability to track the mutational status of their patients, including a given patient’s response to treatments that are designed to target driver oncogene mutations. Current monitoring tools such as imaging procedures, tissue biopsy, and circulating tumor cells are insufficient to meet the challenge of monitoring oncogene mutations. Cancer imaging provides a rough indication of tumor size, but provides no information to oncologists regarding mutational status which is important for the use of molecular targeted therapies. Tissue biopsy usually involves a major surgical procedure and, in many cases, is not repeatable as there are limitations related to tissue access for serial biopsies. In some cases, biopsies may not be feasible, significantly increasing the need to determine mutational status using an alternative method. In addition, tumor heterogeneity is important, as the surgeon may not obtain the proper tissue from the tumor sample. With circulating tumor cells, which are typically measured using blood tests, sensitivity is low, and such tests are technically difficult and can be expensive.

 

While an improvement over chemotherapy in many cases, targeted drug therapies are not without issues, such as their high cost and potential side effects. In order to measure effectiveness of these therapies, repeated monitoring is needed and imaging and serial biopsies have their challenges or may not be optimal. If resistance develops to a targeted cancer therapy, fast and accurate detection of emerging or changing oncogene mutation status has potential to provide critical information early. Our PCM platform provides a novel solution for early detection of cancer progression using urine, a non-invasive, plentiful sample source. We continue to generate positive data supporting the clinical utility of our technology to monitor cancer using ctDNA.

 

Our accumulated deficit through June 30, 2015 is $98,758,444. To date, we have generated minimal revenues and expect to incur additional losses to perform further research and development activities and expand commercial operations. During 2015, we have advanced our business with the following activities:

 

·            We entered into a clinical collaboration with Memorial Sloan Kettering Cancer Center to monitor response to immunotherapy in melanoma patients using our PCM platform.

 

·            We launched “Yellow Is The New Red” marketing campaign for our PCM service at the 2015 American Society of Clinical Oncology Annual Meeting. The campaign is centered on our Clinical Experience Program, in which qualified oncologists can gain hands on clinical experience with the Company’s proprietary urinary liquid biopsy tests.

 

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·            We completed an underwritten public offering of 5,111,110 shares of common stock with net proceeds of approximately $21.3 million in February 2015.

 

·            We recruited Matthew Posard to our Executive Management Team as Chief Commercial Officer to lead our commercial operations.

 

·            We entered into a clinical collaboration with University of California, San Diego Moores Cancer Center to determine the utility of detecting and monitoring EGFR mutations in lung cancer patients using our PCM platform.

 

·            We entered into a clinical collaboration with City of Hope to conduct studies to determine the clinical utility of detecting and monitoring EGFR mutations in lung cancer patients using our PCM platform.

 

·            Two sets of clinical study results were presented at the 2015 Gastrointestinal Cancer Symposium supporting the potential utility of our PCM platform in colorectal and pancreatic cancer patients. Results demonstrated the ability of our PCM platform to detect and quantitate KRAS mutations at diagnosis and longitudinally in ctDNA obtained from colorectal and pancreatic cancer patients. We also showed data demonstrating that our proprietary KRAS assay may allow physicians to determine mutational status, monitor treatment response, and use genomics to aid in predicting patient prognosis.

 

·            Clinical study results were presented by Hatim Husain, M.D., from the University of California, San Diego Moores Cancer Center at the 2015 European Lung Cancer Conference. In that study, our urinary ctDNA assay identified 100% of tissue biopsy confirmed EGFR T790M mutations (n=10) in metastatic lung cancer patients. Our assay also detected T790M mutations in three subjects that Dr. Husain speculated may have been tissue biopsy false negatives. In addition, data from the study suggest that our assay may be capable of detecting cancer progression earlier than standard imaging and may be useful in determining patient response to novel EGFR T790M inhibitors.

 

·            Two sets of clinical study results and one set of analytical data were presented at the 2015 American Association for Cancer Research (“AACR”) Annual Meeting that demonstrated potential clinical utilities and advantages of our PCM platform. Our liquid biopsy technology features single molecule sensitivity and the ability to obtain significantly more ctDNA from urine samples vs. plasma.

 

·            Clinical results from the PREDICTORS 4 trial were presented by Jack Cuzick, Ph.D., Director, Wolfson Institute of Preventive Medicine and Head, Centre for Cancer Prevention at Queen Mary University of London at the European Research Organization on Genital Infection and Neoplasia (“EUROGIN”) 2015 Congress. Based on our analysis of more than 500 samples, the results showed high sensitivity (>90%) for our non-invasive, urine-based HPV assay for the detection of high-risk human papillomavirus (“HPV”) types and cervical intraepithelial neoplasia (“CIN”) Grade 2 or higher lesions.

 

·            Clinical data from four studies utilizing its Precision Cancer Monitoring℠ platform were presented at the 2015 American Society of Clinical Oncology Annual Meeting in Chicago, IL. Results demonstrated that our PCM technology offers advantages over tissue biopsy and demonstrates ability to monitor tumor dynamics in lung, pancreatic, and colon cancers.

 

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 or our diagnostic services 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, 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 June 30, 2015.

 

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, 2014, filed with the SEC on March 12, 2015. There have been no changes to our critical accounting policies since December 31, 2014.

 

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RESULTS OF OPERATIONS

 

Three Months Ended June 30, 2015 and 2014

 

Revenues

 

Our total revenues were $49,346 and $55,628 for the three months ended June 30, 2015 and 2014, respectively. The components of our revenues were as follows:

 

		Three Months Ended June 30,
		2015			2014			Increase (Decrease)
Royalty income		$	46,826		$	45,628		$	1,198
License fees		—			10,000			(10,000		)
Diagnostic service revenue		2,520			—			2,520
Total revenues		$	49,346		$	55,628		$	(6,282	)

 

The $1,198 increase in royalty income related primarily to receipts of payments in excess of minimum royalties. Diagnostic service revenue is recognized when payment is received for the test results. There was no diagnostic service revenue for the three months ended June 30, 2014 as no payments were received.

 

The $10,000 license fee earned during three months ended June 30, 2014 was related to a licensing agreement signed in the second quarter of 2014. There were no license fees earned during the three months ended June 30, 2015

 

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 our diagnostic service revenue to increase in future periods, but as the revenue recognition is based on cash receipts, the timing of these revenues is also uncertain.

 

Cost of Revenues

 

Our total cost of revenues was $80,030 for the three months ended June 30, 2015, compared to no cost of revenues in the same period of 2014. Cost of revenues relates to the costs of our diagnostic service revenues. The costs are recognized at the completion of testing. Due to revenue being recognized when cash is received, costs incurred in one period may relate to revenue recognized in a later period. Gross margins are negative as we begin to build test volume to cover costs associated with running our diagnostic tests as well as inefficiencies in realizing capacity related issues. No tests were completed during the three months ended June 30, 2014.

 

Research and Development Expenses

 

Research and development expenses consisted of the following:

 

		Three Months Ended June 30,
		2015			2014			Increase (Decrease)
Salaries and staff costs		$	852,178		$	637,122		$	215,056
Stock-based compensation		409,304			166,019			243,285
Outside services, consultants and lab supplies		1,136,879			409,926			726,953
Facilities		209,981			145,874			64,107
Travel and scientific conferences		59,993			25,482			34,511
Other		15,822			12,750			3,072
Total research and development		$	2,684,157		$	1,397,173		$	1,286,984

 

Research and development expenses increased by $1,286,984 to $2,684,157 for the three months ended June 30, 2015 from $1,397,173 for the same period in 2014. Our costs have increased as a result of the number of samples processed and validated in connection with our clinical collaborations. We utilize our clinical collaborations to provide data that summarizes the accuracy of our tests to detect certain types of cancer in urine samples. We also enter into clinical studies to provide data that supports our technology for the monitoring of responsiveness to therapy and the status of diseases. For the three months ended June 30, 2015 we were a party to over twenty-five active collaborations or studies, while in the same period of June 30, 2014 we were a party to seventeen collaborations or studies. As a result of these collaborations, we increased the average number of our internal research and development personnel from sixteen to twenty, and purchased additional laboratory equipment, lab supplies and clinical samples. We expect research and development expenses to increase as we enter into additional collaborations.

 

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Selling and Marketing Expenses

 

Selling and marketing expenses consisted of the following:

 

		Three Months Ended June 30,
		2015			2014			Increase/(Decrease)
Salaries and staff costs		$	777,238		$	284,223		$	493,015
Stock-based compensation		171,049			29,989			141,060
Outside services and consultants		285,250			110,340			174,910
Facilities		80,507			26,486			54,021
Trade shows, conferences and marketing		443,801			88,717			355,084
Travel		139,381			49,186			90,195
Other		18,624			873			17,751
Total sales and marketing		$	1,915,850		$	589,814		$	1,326,036

 

Selling and marketing expenses increased by $1,326,036 to $1,915,850 for the three months ended June 30, 2015 from $589,814 for the same period in 2014. During the three months ended June 30, 2015 we increased costs primarily as a result of our targeted marketing efforts which included advertising, articles published in electronic newsletters and interviews with key opinion leaders in our field. In addition, our clinical experience program, where we offer new clinicians a series of tests for no charge, are included in marketing expenses. We expect our selling and marketing expenses to increase as a result of the new headcount additions made to our commercial team in the three months ended June 30, 2015, and the initiation of new marketing campaigns.

 

General and Administrative Expenses

 

General and administrative expenses consisted of the following:

 

		Three Months Ended June 30,
		2015			2014			Increase/(Decrease)
Salaries and staff costs		$	334,810		$	219,909		$	114,901
Board of Directors’ fees		115,204			82,751			32,453
Stock-based compensation		538,452			223,479			314,973
Outside services and consultants		531,353			293,261			238,092
Legal and accounting fees		262,226			322,671			(60,445		)
Facilities and insurance		99,154			61,603			37,551
Travel		24,183			64,927			(40,744		)
Fees, licenses, taxes and other		96,134			41,638			54,496
Total general and administrative		$	2,001,516		$	1,310,239		$	691,277

 

General and administrative expenses increased by $691,277 to $2,001,516 for the three months ended June 30, 2015, from $1,310,239 for the same period in 2014. The significant components of the increase were primarily due to the increase of salaries and staff costs, stock-based compensation, and outside services and consultants. We increased our overall headcount from four to six to support the growth in our research, development and sales and marketing organizations. Stock-based compensation, a non-cash expense, will fluctuate based on the timing and amount of options granted, as well as the fair value of the options at the time of grant or remeasurement. The increase of outside services and consultants is primarily a result of an increase in investor relations activities as our investor base grows, as well as increased services related to information technology and human resources to support our overall headcount growth. We expect our general and administrative costs to increase to support the growth of our sales and marketing organization and from the additional costs we will incur in the billing and collection of revenues from the sales of our diagnostic tests.

 

Change in Fair Value of Derivative Instruments - Warrants

 

We have issued securities that are accounted for as derivative liabilities. As of June 30, 2015, the derivative liabilities related to securities issued were revalued to $7,693,138, resulting in an increase in value of $2,740,389 from March 31, 2015, based primarily upon the increase in our stock price from $6.81 at March 31, 2015 to $10.15 at June 30, 2015 as well as the changes in the expected term and risk free interest rates for the expected term, offset by fair value of warrants reclassified from the liability to additional paid in capital upon exercise of warrants. The increase in value was recorded as a loss from the change in fair value of derivative liabilities in the condensed consolidated statement of operations.

 

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Net Loss

 

Net loss and per share amounts were as follows:

 

		Three Months Ended June 30,
		2015			2014			Increase (Decrease)
Net loss attributable to common shareholders		$	(10,186,094	)	$	(1,078,776	)	$	9,107,318
Net loss per common share — basic		$	(0.41	)	$	(0.06	)	$	0.35
Net loss per common share — diluted		$	(0.41	)	$	(0.17	)	$	0.24
Weighted average shares outstanding — basic		24,592,883			18,902,782			5,690,101
Weighted average shares outstanding — diluted		24,592,883			19,232,759			5,360,124

 

The $9,107,318 increase in net loss attributable to common shareholders and $0.35 increase in basic net loss per share in 2015 compared to 2014 reflected a slight decrease in revenues, as well as increases in operating expenses, interest expense, and the loss from the change in fair value in derivative liabilities, compared to the same period in the prior year. Basic net loss per share in 2015 was also impacted by the increase in basic weighted average shares outstanding resulting from the sale and issuance of approximately 5.4 million shares of common stock resulting from the sales of stock, as well as the issuance of approximately 573,000 shares of common stock from the exercise of stock options and warrants.

 

Six Months Ended June 30, 2015 and 2014

 

Revenues

 

Our total revenues were $176,316 and $166,581 for the six months ended June 30, 2015 and 2014, respectively. The components of our revenues were as follows:

 

		Six Months Ended June 30,
		2015			2014			Increase (Decrease)
Royalty income		$	171,630		$	156,581		$	15,049
License fees		—			10,000			(10,000		)
Diagnostic service revenue		4,686			—			4,686
Total revenues		$	176,316		$	166,581		$	9,735

 

The $15,049 increase in royalty income related primarily to receipts of payments in excess of minimum royalties. Diagnostic service revenue is recognized when payment is received for the test results. There was no diagnostic service revenue for the six months ended June 30, 2014 as no payments were received.

 

The $10,000 license fee earned during six months ended June 30, 2014 was related to a licensing agreement signed in the second quarter of 2014. There were no license fees earned during the six months ended June 30, 2015.

 

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 our diagnostic service revenue to increase in future periods, but as the revenue recognition is based on cash receipts, the timing of these revenues is also uncertain.

 

Cost of Revenues

 

Our total cost of revenues was $256,455 for the six months ended June 30, 2015, compared to no cost of revenues in the same period of 2014. Cost of revenues relates to the costs of our diagnostic service revenues. The costs are recognized at the completion of testing. Due to revenue being recognized when cash is received, costs incurred in one period may relate to revenue recognized in a later period. Gross margins are negative as we begin to build test volume to cover costs associated with running our diagnostic tests as well as inefficiencies in realizing capacity related issues. No tests were completed during the six months ended June 30, 2014.

 

Research and Development Expenses

 

Research and development expenses consisted of the following:

 

		Six Months Ended June 30,
		2015			2014			Increase (Decrease)
Salaries and staff costs		$	1,642,120		$	1,180,913		$	461,207
Stock-based compensation		712,321			355,653			356,668
Outside services, consultants and lab supplies		2,045,076			961,176			1,083,900
Facilities		358,333			276,616			81,717
Travel and scientific conferences		96,082			44,346			51,736
Other		18,884			20,990			(2,106		)
Total research and development		$	4,881,816		$	2,839,694		$	2,042,122

 

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