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TROV > SEC Filings for TROV > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for TROVAGENE INC.

Form 10-Q for TROVAGENE INC.


14-Nov-2012

Quarterly Report


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

Forward-Looking Statements

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


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

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

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

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

Overview

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

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

Recent Developments

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

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

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.


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Inflation

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

Critical Accounting Policies

Revenues

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

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

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

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

Derivative Financial Instruments-Warrants

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

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

Research and Development

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

Share-based Compensation

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

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


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

Fair value of financial instruments

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

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

Level 1 - Quoted prices for identical instruments in active markets.

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

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

RESULTS OF OPERATIONS



Three Months Ended September 30, 2012 and 2011



Revenues



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



                             For the three months ended September 30,
                          2012              2011          (Decrease)/Increase
Royalties            $        41,500    $      45,000    $              (3,500 )
Milestone payments           150,000                -                  150,000
License fees                  20,000           10,000                   10,000
Total revenues       $       211,500    $      55,000    $             156,500

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

Research and Development Expenses



Research and development expenses consisted of the following:



                                                  For the three months ended September 30,
                                               2012              2011          Increase/(Decrease)
Salaries and staff costs                  $      211,822    $      106,245    $             105,577
Outside services, consultants and lab
supplies                                         217,721            44,768                  172,953
Facilities                                        83,667            44,728                   38,939
Other                                             (1,777 )           5,183                   (6,960 )
Total research and development                   511,433    $      200,924    $             310,509

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


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

General and Administrative Expenses



General and administrative expenses consisted of the following:



                                              For the three months ended September 30,
                                           2012              2011          Increase/(Decrease)
Salaries and staff costs              $      221,543    $       97,344    $             124,199
Outside services and Board of
Directors' fees                              332,500           269,630                   62,870
Legal and accounting fees                    108,602           173,354                  (64,752 )
Facilities                                    40,018            16,275                   23,743
Insurance                                     16,893            23,517                   (6,624 )
Other                                         19,486             6,110                   13,376
                                      $      739,042    $      586,230    $             152,812

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

Change in Fair Value of Derivative Instruments

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

Gain on Extinguishment of Debt

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

Nine Months Ended September 30, 2012 and 2011



Revenues



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



                          Nine months ended September 30,
                     2012           2011       (Decrease)/Increase

Royalty income   $    117,153    $  193,946   $             (76,793 )
Milestone             150,000             -                 150,000
License fees           20,000        30,000                 (10,000 )
Total revenues   $    287,153    $  223,946   $              63,207

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


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Research and Development Expenses



Research and development expenses consisted of the following:



                                                For the nine months ended September 30,
                                             2012              2011          Increase/(Decrease)
Salaries and staff costs               $        637,485          395,289    $             242,196
Outside services, consultants and
lab supplies                                    414,884           89,721                  325,163
Facilities                                      260,972           98,313                  162,659
Other                                            12,856           18,905                   (6,049 )
Total research and development         $      1,326,197    $     602,228    $             723,969

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

General and Administrative Expenses



General and administrative expenses consisted of the following:



                                                         For the nine months ended September 30,
                                                    2012               2011           Increase/(Decrease)
Salaries and staff costs                       $       628,486            473,015                  155,471
Outside services and Board of Director fees          1,052,607            459,099                  593,508
Legal and accounting fees                              464,491            667,591                 (203,100 )
Facilities                                              97,001             52,932                   44,070
Insurance                                               52,613             67,966                  (15,354 )
Other                                                   80,468                698                   79,770
                                               $     2,375,666    $     1,721,301    $             654,365

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

Interest Expense

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


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Change in Fair Value of Derivative Instruments

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

Gain on Extinguishment of Debt

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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