Exhibit 4.1
As filed on November 23, 2011
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or 12(g) of the Securities Exchange Act Of 1934
TROVAGENE, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of other jurisdiction of incorporation)
27-2004382
I.R.S. Employer Identification Number
11055 Flintkote Avenue, Suite B
San Diego, CA 92121
(Address of Principal Executive Office) (Zip Code)
858-217-4838
(Registrant’s Telephone Number)
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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):
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Background
TrovaGene, Inc. (“Trovagene” or “the Company”) is a development stage molecular diagnostic company that focuses on the development and marketing of urine-based nucleic acid tests for patient/disease screening and monitoring. Our novel tests predominantly use transrenal DNA, or Tr-DNA, and transrenal RNA, or Tr-RNA. Our primary focus is to leverage our urine-based testing platform to facilitate improvements in Women’s Healthcare. Tr-DNAs and Tr-RNAs are fragments of nucleic acids derived from dying cells inside the body. The intact DNA is fragmented in dying cells and released in the blood stream. These fragments have been shown to cross the kidney barrier (i.e. transrenal) and can be detected in urine. In addition, there is evidence that some species of RNA or their fragments are stable enough to cross the renal barrier. These RNA can also be isolated from urine, detected and analyzed. Our technology is applicable to all transrenal nucleic acids, or Tr-NA.
Our patented technology uses safe, non-invasive, cost effective and simple urine collection and can be applied to a broad range of testing including: prenatal genetic testing, infectious diseases, tumor detection and monitoring, tissue transplantation, forensic identification and for patient selection in clinical trials. We believe that our technology is ideally suited to be used in developing molecular diagnostic assays that will allow physicians to provide very simple, non-invasive and convenient screening and monitoring tests for their patients by identifying specific biomarkers involved in the disease process. Our novel assays will facilitate much improved testing compliance resulting in earlier diagnosis of disease, more targeted treatment which will be more cost effective, and improvements in the quality of life for the patient.
As relates to our urine-based testing platform and focus on improving Women’s Healthcare, one of our key corporate priorities is to pursue and receive a European Conformity, or CE mark, and thus marketing approval, for our human papillomavirus, or HPV urine-based test to identify women at increased risk for cervical cancer. We plan to pursue this strategy in all countries that recognize and accept CE marks for regulatory marketing approval. During 2012 we intend to commence a pilot clinical study of our HPV urine-based test. We anticipate that this study will be led by very well respected key opinion leaders in Obstetrics and Gynecology, or OB/Gyn pathology. The anticipation is that positive results from this study would be used for publication purposes and to file for marketing approval in all countries that recognize CE Marks. Our HPV test would be the first urine-based HPV test approved for marketing, providing key advantages versus the current tests which are all based on cervical samples, such as patient convenience and privacy, non-invasive sample collection, etc.
Another key priority within our Women’s Healthcare testing pipeline falls within the fetal medicine arena. We plan to develop a urine-based prenatal screening test to detect pregnancies at increased risk for various chromosomal disorders, with an initial emphasis on Down Syndrome. Such a test would address a huge unmet need for an accurate, reliable and non-invasive screening modality.
In August 2010, we acquired a highly sensitive complementary metal-oxide-semiconductor, or CMOS, detection technology for DNA, RNA as well as proteins through our merger with Etherogen, Inc. A key advantage of this technology is that it is extremely sensitive and doesn’t require amplification of nucleic acids. Therefore, it reduces the complexity and cost of molecular diagnostics as it will not require significant equipment purchases or amplification training. Our CMOS detection technology may also open up new markets for molecular diagnostics such as hospitals and independent labs that currently do not perform high complexity assays such as those requiring use of a polymerase chain reaction, or PCR. We believe that this detection technology is highly complementary and synergistic with our transrenal technology, and can also be positioned in certain situations as a standalone molecular diagnostic device. In this regard, we plan to leverage this novel CMOS technology toward the development of Women’s Healthcare diagnostics. We have finalized the system architecture, operating procedure and software specifications for our CMOS technology.
During 2006 we in-licensed a new DNA-based biomarker, NPM1, specific for a subtype of acute myeloid leukemia, or AML. This NPM1 marker provides valuable information and insights as to disease prognosis and monitoring for minimal residual disease. Testing for NPM1 mutations has been added to AML practice guidelines by the National Comprehensive Cancer Network. Since 2006 we have executed out-licenses incorporating this biomarker with Sequenom, Inc. which was terminated in March of 2011, and with Ipsogen S.A. (Europe) and Asuragen Inc. (U.S.), who have developed and are manufacturing test kits for sale to labs from which we earn a royalty. We have also signed non-exclusive royalty bearing licenses with various labs including LabCorp (U.S.), Invivoscribe Technologies, Inc. (U.S.), Skyline Diagnostics B.V. (Europe), MLL Munich Leukemia Laboratory GmbH (Europe) and Warnex Inc. (Canada), who will be providing lab testing services for this marker. We are actively seeking to sign additional royalty bearing non-exclusive license agreements with labs that wish to provide this testing service.
In order to facilitate earlier availability and use of our products and technology, we plan to either acquire, sign additional partnerships, or start our own CLIA laboratory, which are clinical reference laboratories that can perform high complexity assays (i.e. those requiring PCR for amplification). Some of these laboratories are able to offer lab developed tests, or LDTs, by following
CLIA guidelines prior to receiving FDA clearance or approval. This will make our tests and technology available to physicians to order for their patient management, and in-turn generate revenue earlier than by going through the formal FDA regulatory process. Concurrently we plan to continue our clinical trials and submit our assays for either FDA approval or clearance. This approval or clearance will allow us to sell our assays to all CLIA laboratories and thus further expand our revenue potential. We plan to market and sell our products in the U.S. with our own direct commercial sales. In order to provide our products globally, we plan to establish business partnerships with diagnostic or pharmaceutical companies in Europe and Asia and other international markets. Our objective is to establish a worldwide network in order to provide the greatest potential return for our shareholders.
History
We were incorporated in the State of Florida on April 26, 2002 as Used Kar Parts, Inc. and planned to develop an on-line marketplace for used car parts. In an effort to develop that business, we entered into a contract with a web hosting service on a month to month basis to provide storage for website development and transaction processing. Our temporary website arrangement was suspended to preserve cash and pending new management’s evaluation of the business. On February 24, 2004, Jeannine Karklins, our former President, Treasurer, Secretary, principal shareholder and control person entered into a Capital Stock Purchase Agreement with Panetta Partners Ltd., a limited partnership affiliated with our former Co-Chairman and current director, Gabriele M. Cerrone, pursuant to which Panetta purchased an aggregate 2,000,000 restricted shares of our common stock from Ms. Karklins for $386,400 which represented approximately 97% of our outstanding shares of common stock at the time. Pursuant to the agreement, Ms. Karklins resigned as an officer and director of our company.
On July 2, 2004, we acquired Xenomics, a California corporation, which was developing and commercializing our Tr-DNA technology. As part of the acquisition, we changed our corporate name to Xenomics, Inc. (“Xenomics”).
In 2007, we changed our fiscal year end from January 31 to December 31. In January 2010, we redomesticated our state of incorporation from Florida to Delaware and changed our name to TrovaGene, Inc.
Our Technologies
We believe that our scientists were the first to report the discovery that a portion of cell-free DNA or RNA found in the bloodstream can cross the kidney barrier and be detected in the urine. This genetic material is referred to as Tr-DNA or Tr-RNA, or in aggregate Tr-nucleic acid. Analysis of Tr-DNA or Tr-RNA provides a simple, non-invasive and cost-effective method for molecular diagnostics and a platform for a broad range of diagnostic tests. In comparison with conventional tissue, sputum or plasma-based tests, this methodology has significant advantages with respect to patient convenience, privacy and compliance, ease of testing by elimination of difficult extraction steps in sample preparation, speed in performing the assay, and cost effectiveness.
We have a dominant patent position as it relates to transrenal molecular testing. We own issued U.S. and European patents that cover any and all testing for molecular targets that pass through the kidney (i.e. transrenal). In addition to these core patents,we have numerous patent applications pending in the areas of cancer, infectious diseases, transplantation, prenatal and genetic testing. We believe this patent position compares favorably to the Roche PCR and Gen-Probe ribosomal RNA patents in the molecular diagnostic field.
We have generated very positive clinical study results with our HPV urine-based test to identify women at risk for developing cervical cancer. The study, conducted in India, enrolled 320 patients. In this study, 31 out of 38 cervical swab samples that were initially classified as “negative” were subsequently determined to be positive by PCR followed by DNA sequencing of the urine using our urine-based platform. Additionally, 24 out of 34 cervical swab samples initially classified as “positive” were determined to be negative based on DNA sequencing of the urine. Our urine-based test only had 10 false negatives and 7 false positives, an impressive 93% sensitivity and 96% specificity. As a result we believe that the sensitivity and specificity of our urine-based test is at least similar to and potentially better than the currently used cervical-cell-based tests. As noted earlier, our test is non-invasive, much more convenient and private for the patient, simpler, less technically demanding in terms of cytology proficiency and cost effective. Our unique primer pair focused on the E1 region of the HPV genome should provide freedom to operate within the HPV patent landscape (i.e. we are confident that our HPV patent will issue in the major geographic areas and be enforceable).
Presently, we are working towards finalizing a clinical study protocol and recruiting study sites in conjunction with widely regarded and world renowned Ob/Gyn pathologists. We intend to use the results of this study, anticipated in 2012, toward the pursuit of a CE Mark in Europe and all other countries that recognize CE Marks for marketing approval.
In addition, we are actively involved in the development and subsequent commercialization of our fetal medicine assay, initially to screen for Down Syndrome, one of many genetic disorders caused by chromosomal abnormalities. There is a huge unmet market need for a simple, convenient and completely non-invasive screening approach in the maternal arena. Initial studies of our transrenal assays with maternal urine clearly showed that we can detect Y chromosomal sequences which in turn clearly demonstrates the ability to detect transrenal fetal nucleic acids in this maternal urine. Additionally, our novel assays show and incorporate a complete representation of the maternal and most likely fetal genome in maternal urine. The combination of our unique transrenal nucleic acid platform in combination with next generation sequencing should allow for the development and commercialization of the first truly non-invasive prenatal screening test for these chromosomal-related diseases.
Our recent acquisition of a highly sensitive molecular detection platform utilizing proprietary probe chemistry and on chip CMOS signal detection expands our reach within the molecular diagnostic arena. This analytical platform is synergistic and complementary to our transrenal nucleic acid technology and will be leveraged in our Women’s Healthcare and other development endeavors by providing unsurpassed analytical and detection capabilities. Patents for this detection platform are pending in the U.S., Europe and Japan. The technology platform consists of several novel inventions: (i) direct attachment of a probe to a CMOS sensor chip, (ii) a proprietary conjugate capture and (iii) a conjugate reporter probe. In combination they enable ultra-sensitive detection of nucleic acids or proteins, without the need for a separate amplification step such as with PCR. As such, no expensive equipment is required to be purchased by labs or hospitals, all of which constantly look for ways to reduce their expenses wherever possible. The chips may be processed using off-the-shelf available liquid handling systems and the results are read with a simple USB to an existing computer running our proprietary software. The demonstrated sensitivity using an engineering prototype is 300 molecules, or about 3 to 4 orders of magnitude more sensitive than other amplification based technologies on the market, at a small fraction of the expense.
Highly complementary to our Tr-DNA and Tr-RNA platform and projects, we have the exclusive worldwide rights to the use of the nucleophosmin protein gene (NPM1) for use in human in-vitro diagnostic testing, monitoring, prognostic evaluation and drug therapy selection for patients with AML. These rights and subsequent sublicenses have been crucial in terms of generating a steady incoming cash flow stream. We actively seek sublicense agreements with diagnostic laboratories planning to offer lab testing services to the clinical market based on a LDT for this marker. Two of our early sublicensees, LabCorp and Invivoscribe Technologies, have already announced commercial availability of a validated LDT molecular test for the NPM1 gene either as a standalone test or as part of an AML profile assay. In addition, two companies, Asuragen and Ipsogen, have sublicensed the rights to make and sell tests kits for the NPM1 mutations and are now offering these products as Research Use Only kits to the market. Lastly, we will be seeking drug development partnerships with pharmaceutical companies with active AML drug development initiatives as NPM1 is a valuable biomarker to guide patient selection in clinical trials.
The Market
Estimates of the size of the global molecular diagnostics market vary, however conservatively speaking the market is projected to approach $7.0 billion in 2011. The market is poised to deliver strong double-digit annual growth during the next 5 years, with some sources quoting a compound annual growth rate (CAGR) of 15-20%. The molecular diagnostics market has emerged as the fastest growing segment of the in-vitro diagnostics, or IVD market. Geographically, the United States and Europe are the most advanced in terms of adoption of molecular diagnostics and make up the majority of the existing global market (greater than 75% share). It is noteworthy that the Indian molecular diagnostics market is showing impressive growth, expected to reach 1.0 billion INR ($220 million) by 2011. By 2012, the United States and Europe markets are projected to surpass $4.0 billion and $1.0 billion respectively. Key drivers for this impressive growth include the exceptional ability to accurately and quickly detect the primary cause of disease and provide a strong tool for quick therapy decisions, need for automated and easier techniques, and the increased availability of tests for monitoring the efficacy of expensive drugs.
Transrenal molecular diagnostics will provide relevant diagnostic information that will lead to improvements in personalized patient management. Infectious diseases, cancer diagnosis and monitoring are where most of the use and progress in personalized molecular diagnostic medicine has occurred to-date. In addition, new products that facilitate personalized care are emerging in the areas of CNS, autism, diabetes, and depression, and most major pharmaceutical companies have active pharmacogenomic programs in their clinical studies in anticipation of the need to utilize diagnostic testing to stratify patients for efficacy.
We believe that we are very well positioned, with our very broad IP portfolio, to develop and market transrenal molecular diagnostic products, all of which we expect would address the huge unmet market needs of simplicity, patient convenience and privacy, accuracy, and cost effectiveness, and play key roles in their applications to improve testing compliance and as such reduce morbidity and mortality. The use of urine as a sample should provide a paradigm shift in screening and monitoring practices as it provides an easier sample to acquire in a non-invasive fashion, with more target present in the sample leading to greater sensitivity. These modified screening practices will most likely meet with wide physician and patient acceptance in Women’s Healthcare and beyond.
Women’s Healthcare - Human Papilloma Virus (HPV) - HPV Screening and Monitoring is one of our key priority areas. This specifically relates to our development-stage urine-based HPV test. The rationale for screening HPV is that high-risk subtypes cause virtually all cases of cervical cancer. Deaths due to cervical cancer are still a huge global problem, especially in the developing world where screening practices are far from ideal. As a case in point, there are roughly 85,000 and 74,000 annual deaths from cervical cancer in Southern Asia and India, respectively, two geographies with poor screening practices. Conversely, in countries such as the United States where there is much better patient compliance with testing guidelines, there are approximately 5,000 annual deaths. The major drivers for poor screening in these developing regions are cultural, limited resources/economics and poor cytology proficiency. Further exacerbating the compliance hurdles is the fact that the primary screening mechanism involves an invasive cervical scraping (e.g. Pap smear). This is a travesty since early detection of cervical
cancer typically leads to a 90-100% cure rate. The bottom line is that there is a tremendous unmet need for a new non-invasive, simple, private and cost effective test to simplify the screening process for patients, and in turn improve compliance. We believe our urine-based test will address these market needs.
Women’s Healthcare - Fetal Medicine — i.e. Down Syndrome — This is a second core area within our Women’s Healthcare screening pipeline. There are roughly 4.2 million annual pregnancies in the U.S., of which almost 1 in 5 are at risk to deliver a baby with Down Syndrome (750,000 at risk pregnancies). The key risk driver is age of the mother (i.e. pregnant women < age 23 have a 1 in 2,000 risk compared to 1 in 8 for women > age 50). However, it is noteworthy that a huge proportion of babies with Down Syndrome are born to mothers < 35 years of age because this is the predominant maternal age. As such, it is paramount that these younger expectant women be screened. Our urine-based test would represent an ideal screening option as it will be totally non-invasive (unlike amniocentesis) and likely be more robust (improved specificity, sensitivity and positive predictive value) compared to the Triple Marker Screen or Quad Marker Screen blood tests. The annual U.S. market opportunity for such a convenient non-invasive urine-based screening test, assuming all pregnant women are tested, totals upwards of $2.1-$3.15 billion (4.2MM annual pregnancies at $500 to $750 per test)
Infectious Diseases - Most infectious diseases are caused by viruses, bacteria, fungi, and parasites. Tr-DNA and Tr-RNA assays that detect molecular targets in such organisms provide a quick, accurate, simple and cost effective method for screening and monitoring. Specific areas of interest for us, in addition to the aforementioned HPV infection, include testing for molecular targets from organisms that cause Lyme disease, JC Virus, valley fever, and various fungal infections. These organisms all tend to be difficult to identify with current technology, making differential diagnosis especially challenging, thus delaying the start of potentially curative anti-infective treatment. Aspergillus is a genus of a few hundred mold species found worldwide throughout much of nature. Aspergillus infections can cause a considerable problem in immune compromised patients such as patients with HIV, patients who are undergoing cancer treatments, etc. This fungal species is difficult to grow and identify via culture techniques resulting in a poor prognosis for these patients. A test for these fungal infections by targeting (Tr-DNA specific to Aspergillus species in a urine sample will provide a much easier and faster way to diagnose and treat these patients. With these patients, getting fast test results is paramount and can mean the difference between survival and death. Our urine-based test addresses this need for speed, as well as simplicity, patient convenience and accuracy.
An area with a high unmet market need involves opportunistic infections in patients treated with immunosuppressive drugs such as tumor necrosis factor, or TNF, inhibitors. TNF inhibitors are used for the treatment of such conditions as rheumatoid arthritis, juvenile idiopathic arthritis, psoriatic arthritis, plaque psoriasis, ankylosing spondylitis, and Crohn’s disease. This class of drugs has a known risk of causing serious infections mediated by induced immunosuppression. Currently, about 800,000 patients are treated with this drug class within the U.S., and the number is steadily growing. The ease of urine collection and urine-based testing and monitoring allows for very quick diagnosis, heightened turnaround time allowing for quick treatment decisions, and enhanced patient convenience (i.e. at-home test). The goal of such a test will be to detect active infection prior to the onset of symptoms, to allow for proactive intervention (i.e. drug holiday).
One problematic organism of particular interest to us is Borrelia, the cause of Lyme disease. Lyme disease is the most common tick-borne disease in the Northern Hemisphere caused by at least three species of Borrelia. The number of reported annual cases in the U.S. is 15,000 to 20,000, although total annual incidence is believed to number upwards of 100,000. Borrelia is transmitted to humans by the bite of infected ticks belonging to a few species of the genus Ixodes (“hard ticks”). Early symptoms may include fever, headache, fatigue, depression, and a characteristic circular skin rash called erythema migrans. Left untreated, later symptoms may involve the joints, heart, and central nervous system. In most cases, the infection and its symptoms are eliminated by antibiotics, especially if the illness is treated early. Late, delayed, or inadequate treatment can lead to the more serious symptoms, which can be disabling and difficult to treat. The challenge with Lyme disease is that the early symptoms are often vague and subtle, making differential diagnoses difficult. Occasionally, symptoms such as arthritis persist after the infection has been eliminated by antibiotics, prompting suggestions that Borrelia causes autoimmunity. A Tr-DNA assay for Borrelia would provide a much needed mechanism for early and quick detection of Lyme disease.
JC Virus is a virus that commonly causes infections of no consequence in individuals with normal immune systems. However, in immunosuppressed individuals, JC Virus is responsible for a life-threatening infection of the brain and spinal cord called progressive multifocal leukoencephalopathy, or PML. JC Virus is also the primary cause of nephropathy (kidney disease) in people who have received a kidney transplant and are on immunosuppressive therapy. Patients with multiple sclerosis (MS) who are being treated with the drug, Tysabri, are at risk for developing PML. This prompted the FDA to require a “black box” warning on Tysabri labeling. By monitoring these patients with a test for JC Virus, a physician would be able to routinely check patients to determine if and when the early signs of PML are present and to discontinue Tysabri therapy prior to the onset of full-blown PML. Multiple sclerosis currently affects about 2.5 million patients worldwide with 400,000 in the U.S. Tysabri is widely thought of as the most effective treatment for MS, although its use is somewhat restricted due to the “black box” warning. Another commonly used drug (for RA and numerous hematologic cancers) associated with a high risk of JCV/PML is Genentech’s immunomodulator Rituxan. Our very quick and simple urine-based test to monitor for PML would allow many more patients to receive these two highly effective treatments with much less concern about PML.
Cancer Testing - It is anticipated that Tr-DNA and Tr-RNA analysis may be useful for detecting and monitoring various primary cancers. Such testing could serve to help the physician choose a treatment regimen offering the highest likelihood of a successful outcome and monitor response to these treatments and check for disease recurrence. By testing Tr-DNA for the appropriate genetic markers, it may also be possible to carry out pre-cancerous screening. As a case in point, Tr-DNA technology was evaluated in a cancer clinical study at Thomas Jefferson University, funded jointly by the National Institute of Health (NIH) and the National Cancer Institute (NCI). The study demonstrated that DNA fragments carrying a specific mutation (K-ras) and released from pre-cancerous colon polyps can be detected in the urine of patients. Studies have shown that cancer patients who have K-ras mutations do not respond successfully to treatment with anti-EGFR drugs such as Erbitux, Iressa, Tarceva, Tykerb and Vectibix. These EGFR agents are a mainstay in treatment for colorectal cancer. As high as 40% of patients with solid tumors have these mutations, and as such will not respond to EGFR drugs. By first testing for these K-ras mutations, the physician will be able to better manage their patients and avoid costly treatments that are not likely to have a positive clinical response. Screening and monitoring for K-ras and other key biomarker mutations (i.e. BRAF, PIK3CA, EGFR, etc.) using urine-based tests would provide a simple, non-invasive, quick, cost effective and convenient (i.e. at home test) testing alternative for physicians and patients. The number of patients that could potentially benefit from such a simple urine-based testing approach is enormous, as there are roughly 146,000 and 42,000 new cases of colorectal and pancreatic cancer in the United States per year, respectively, all of whom are at risk for K-ras mutations. Tr-DNA testing could also be applicable in lung cancer (220,000 new cases per year) and breast cancer (192,000 new cases per year) where the screening and monitoring for mutations is also crucial. Simple urine-based assays would likely lead to much improved personalized medicine for patients, resulting in the right drug being prescribed for the right disease at the right time leading to an improved quality of life for the patients.
In 2006, we in-licensed a new DNA-based biomarker (the nucleophosmin gene known as NPM1) for a subtype of AML. AML remains a complex cancer with poor outcomes in elderly patients. The National Cancer Institute estimates that nearly 13,000 new cases of AML were diagnosed, and approximately 9,000 deaths from AML occurred, in the U.S. in 2009. Additionally, it is estimated that prevalence of AML is approximately 25,000 in the U.S. AML is generally a disease of older adults, and the median age of a patient diagnosed with AML is about 67 years. AML patients with relapsed or refractory disease, and newly diagnosed AML patients over 60 years of age with poor prognostic risk factors, typically die within one year. There is a definite need for new treatment options for these patients. Overall, AML has the lowest 5 year survival rate (24%) of any of the 4 main types of leukemia. There are significant efforts in the pharmaceutical industry for the development of new drugs targeting AML. Of the patients with AML, 40-50% lacks any cytogenetic abnormalities and the monitoring of those patients for minimal residual disease and tumor relapse is based on substandard techniques. Currently, there is a growing body of evidence released from clinical and academic studies showing that mutations of the nucleophosmin gene (NPM1) correlate with the prognosis of AML and can be used for monitoring of minimal residual disease. We have sublicensed to two companies co-exclusive rights to develop and manufacture test kits for this mutation and have sublicensed non-exclusive rights to several laboratories that wish to develop their own LDTs and provide this NPM1 testing service to the market. We plan to continue to license the rights to this cancer marker to interested companies, including antibody applications.
Transplantation - According to government statistics, there are approximately 50,000 organ transplants performed in the U.S. annually. Post-transplant monitoring for organ rejection episodes requires a highly invasive tissue biopsy. Approximately 10 such biopsies are taken over a period of one year per patient. Because organ rejection is marked by early death of the cells, we believe that an early indication of rejection can be identified by measuring a unique series of genetic markers characteristic of the organ donor that can be easily detected in random urine specimens from the transplant recipient. Providing early evidence of tissue rejection is a key to administration and monitoring of the immunosuppressive therapies used to fend off tissue rejection. Given the annual number of transplants performed in the U.S. and the annual number of corresponding biopsies performed per patient, this would equate to a market opportunity in the U.S. of roughly 500,000 urine-based tests/year. Transplantation offers opportunities for partnering with companies developing drugs for controlling tissue rejection, developing cell transplantation, or developing novel transplantation technologies. This illustrates the breadth of commercial potential of our transrenal molecular testing platform technology and we intend to leverage such potential to maximize shareholder value.
Drug Development and Monitoring of Therapeutic Outcomes - The Tr-DNA and Tr-RNA technology has significant potential as a very simple, quick, home-based and non-invasive way of monitoring clinical responses to new drugs in clinical development and evaluating patient-specific responses to already approved and marketed therapies. Specific target applications include but are not limited to the monitoring of transplantation patients on immunosuppressive drugs, detection of metastasis following tumor surgery, monitoring of response and tumor progression during chemotherapy, and the development of optimal hormonal and chemotherapeutic treatment protocols.
In cancer treatment today, there is no reliable way to determine if a particular patient is responding to their current chemotherapy regimen. Generally, patients are reexamined after a sixty day interval to determine if the tumor has grown in size, reduced in size
(i.e. partial response), disappeared (i.e. no sign of disease — complete response) or remained the same. If the tumor has grown in size, or remained the same, the chemotherapy may be adjusted. By measuring and monitoring tumor specific genetic markers in the patient’s urine pre, peri and post chemotherapy, it may be possible to determine whether a patient is responding to chemotherapy within 48 hours after administration, instead of the current sixty day cycle. Our Tr-DNA or Tr-RNA technology may permit much quicker therapeutic decisions on a patient-specific basis (i.e. personalized medicine). About 1.25 million new cancer cases are diagnosed annually and there are several hundred companies developing chemotherapeutic agents in the United States alone. This defines the tremendous potential for applications of Tr-DNA and Tr-RNA technology in both drug development and monitoring therapeutic outcomes.
One of the largest costs associated with development of a new drug is the size of human clinical trials required to identify the cohort of responders to the drug, and the resulting statistical power required. By measuring specific genetic markers, it may be possible to pre-identify and subsequently screen for the most likely responders to the drug, and restrict patient recruitment to this subset. This would significantly reduce the cost to develop the drug and improve timelines. Having our urine-based nucleic acid tests incorporated into these clinical trial protocols, and ultimately the post-approval patient identification protocols, represents significant commercial potential for our platform.
Ultra-sensitive Analytical and Detection System - As it relates to detection platforms which are required for the final assay analysis, we will be developing a new instrument that provides features that will be synergistic and complementary to our transrenal technology and Women’s Healthcare assays. In this regard, we recently acquired Etherogen, Inc. which owns the CMOS Sensor Detection Platform, and we will be designing a “next generation” version of this screening and detection device. The major differentiating features of this platform are simplicity, unsurpassed ultra-sensitive detection of nucleic acids and proteins without the need for target amplification or the resulting investments in amplification-related infrastructure or capital equipment, significantly heightened speed and the ability to perform multi-analyte assays. Such a platform would undoubtedly expand the user base for molecular diagnostics. As a case in point, only a small proportion of the 7,000 U.S. hospitals are licensed to perform molecular diagnostics. Additionally, only a small percentage of independent medical laboratories are licensed to perform high-complexity testing (i.e. molecular diagnostics). This low hospital/lab acceptance is partly due to the extensive capital equipment and infrastructure requirements (i.e. amplification technology, highly trained personnel, special facilities, etc.). Our platform will address these adoption hurdles and we anticipate that most of these facilities will embrace our simple, ultra-sensitive, cost effective platform. We are finalizing the system architecture, operating procedure and software specifications for this platform and will commence system development pending resource availability.
Technologies for the collection, shipment and storage of urine specimens, and transrenal nucleic acid extraction - Successful implementation of Tr-DNA or Tr-RNA technology in molecular testing is tightly linked to the availability of techniques and procedures for Tr-DNA and Tr-RNA preservation, purification and analysis. Our strategic plan includes the allocation of sufficient resources for the creation of robust, feasible and inexpensive approaches to improve the efficiency of working with urine samples.
Instrumentation/System Platform - As part of our product offerings, we intend to provide various types of automation alternatives which will further enhance the acceptance and use of our urine-based assays incorporating our transrenal platform. In this regard, there are several alternatives which we will pursue. For example, in sample extraction, we will either develop applications for existing extraction systems that already exist in laboratories or recommend that they acquire instruments that can be used with our assays. An alternative will be to explore an OEM arrangement with one of the instrument suppliers which will allow us to private label the instrument thus supporting a complete system at the customer site.
Our Business Strategy
We plan to leverage our transrenal technology to develop and market, either independently or in conjunction with corporate partners, molecular diagnostic products in each of our initial focus markets of Women’s Healthcare, infectious diseases and cancer. Our marketing strategy includes multiple approaches. In the U.S. market, we plan to either partner, acquire, or start a Clinical Laboratory Improvement Amendments of 1988, or CLIA lab(s). At the late stages of development of each product, while collecting clinical data for regulatory submissions, we intend to market the products as LDTs through the CLIA lab(s). CLIA laboratories may offer the tests and receive reimbursement under the “home brew” rules and it is our plan to establish an initial market presence and generate revenues prior to FDA clearance or approval.
As we receive FDA clearance or approval for our products, we intend to market the urine-based test kits through a U.S. commercial organization directly to CLIA medical testing laboratories. We also intend to complete business partnerships (out-license agreements) with diagnostic and pharmaceutical companies in the U.S., Europe, Asia Pacific and the rest of the world as appropriate given market conditions and opportunity. This would provide both short term (license fees) and long term (royalties) revenue streams. These licensees will license and use our platform in clinical development of their products, monitor patients taking their marketed products (i.e. TNF inhibitors) and in certain situations license the rights to develop, market and sell our transrenal products in predefined fields of use and geographic territories. We plan to become a fully integrated business in which we develop, manufacture, register, market and sell our products.
As previously discussed, we plan to pursue a CE mark in numerous countries so as to allow the commercialization of our HPV urine-based test starting in the second half of 2012. This would either be done independently, with a chosen partner(s), or a combination thereof.
In comparison with many other genetic tests, our Tr-DNA or Tr-RNA tests will be very cost effective. It involves a very simple process and can easily be automated. Therefore, major advantages of our Tr-DNA or Tr-RNA test, when commercially available, will be the ease of sample collection, excellent sensitivity and specificity, patient convenience (i.e. home-based test), non-invasive and will provide more efficient and effective monitoring protocols (i.e. for opportunistic infections).
During the last decade, medical laboratory operating margins have declined in the face of Medicare fee schedule reductions, managed care contracts, competitive bidding and other cost containment measures. If our technology were commercially available today, reimbursement would be available under the current procedural terminology, or CPT codes, for molecular-based testing. We expect to initially market our tests to independent and hospital-based laboratories at price points that we believe will translate into substantially higher operating margins than has been traditional in the laboratory industry. We believe this will create a strong incentive for laboratories to adopt our transrenal molecular diagnostic tests.
Research and Development
We have a small group of dedicated scientists that are located in our office in San Diego, CA. We plan to continue to grow this organization to 10 to 15 talented individuals that will represent a good mix of senior lead researchers and scientists (PhDs), laboratory associate scientists, and experts in clinical development and regulatory affairs of molecular diagnostics. It is our goal to have at least two self-funded development projects ongoing at all times. Completing two projects every 12 to 15 months will allow us to introduce new products to the market that could be used as lab developed tests to the CLIA labs and to simultaneously continue with the necessary clinical trials and regulatory submissions for marketing approval or clearance depending upon the nature of the product. Information and documentation systems infrastructure (e.g. design history files, firewalls, etc.) must be in place to support the confidentiality of multiple partnering programs and the rigorous scientific and regulatory oversight needed for products in the in-vitro diagnostics markets.
Intellectual Property
We consider the protection of our proprietary technologies and products to be a critical element in the success of our business. As of November 15, 2011, we had six issued U.S. patents and one issued European patent. The six issued patents expire between 2018 and 2027. All patents are directed at the detection of nucleic acid sequences and nucleic acid modifications and alterations in urine. One of the U.S. patents consists of claims directed to analysis of fetal DNA and determining the sex of a fetus and detecting diseases such as Down Syndrome caused by genetic alterations. Another of the U.S. patents consists of claims directed to detecting and monitoring cancer through urine-based testing. A broad reissued U.S. patent covers a number of nucleic acid screening and monitoring applications including cancer, transplantation, infectious diseases and fetal medicine. The European patent covers the use of our proprietary transrenal nucleic acid technology in the area of potential diagnostics and genetic testing. We have filed a number of patent applications with claims directed to methods of detection and monitoring specific diseases caused by pathogens and viruses and methods of using urine-based microRNA for detection purposes. Additionally, we have filed three provisional patent applications with claims directed to methods of detecting Down Syndrome, detecting specific diseases caused by parasites, and methods for the purification of Nucleic Acids from urine. In addition to pursuing patents and patent applications relating to our platform technology, we have and may enter into other license arrangements to obtain rights to third-party intellectual property where appropriate. Specifically, we have licensed from the inventors a patent application with claims directed to the detection of nucleophosmin (“NPM1”) protein gene mutations, corresponding gene sequences, and use of same for diagnosing, monitoring, and treating AML.
Wherever possible we seek to protect our inventions through filing U.S. patents and foreign counterpart applications in selected other countries. Because patent applications in the U.S. are maintained in secrecy for at least eighteen months after the applications are filed and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that we were the first to make the inventions covered by each of our issued or pending patent applications or that we were the first to file for protection of inventions set forth in such patent applications. Our planned or potential products may be covered by third-party patents or other intellectual property rights, in which case continued development and marketing of the products would require a license. Required licenses may not be available to us on commercially acceptable terms, if at all. If we do not obtain these licenses, we could encounter delays in product introductions while we attempt to design around the patents, or could find that the development, manufacture or sale of products requiring these licenses is foreclosed.
We may rely on trade secrets to protect our technology. Trade secrets are difficult to protect. We seek to protect our proprietary technology and processes by confidentiality agreements with our employees and certain consultants and contractors. These agreements may be breached, we may not have adequate remedies for any breach and our trade secrets may otherwise become
known or be independently discovered by competitors. To the extent that our employees or our consultants or contractors use intellectual property owned by others in their work for us, disputes may also arise as to the rights in related or resulting know-how and inventions.
Manufacturing and Distribution
We plan to introduce assays into the marketplace through ASR or LDTs in CLIA licensed laboratories, the filing of a 510(k) statement of equivalency with the FDA, the filing of a pre-market approval (“PMA”) application with the FDA as appropriate, or the pursuit of a CE Mark in countries that recognize this as a means toward garnering marketing approval. Assays may be introduced in partnership arrangements with labs or as test kits to be manufactured and sold to labs. In some cases, the test may be made available under ASR guidelines during the regulatory submission process. Because testing of some diseases under consideration are of great international interest, we may explore manufacturing and licensing partnerships overseas. We expect it will take approximately 2 years for our first kit to be broadly commercialized based on normal regulatory approval (i.e. not based on an LDT).We may rely on third party manufacturers, or set up internal manufacturing. The preferred option would be determined on a case-by-case basis and would be determined by such factors as cost, quantity requirements, etc. For internal manufacturing we would also set up all required quality systems to assure regulatory compliance and the production of a quality product. At the present time our products are still in development and we have not yet entered into manufacturing or distribution agreements. We plan to establish international partnerships which could expand the global availability of our products, and these partners may have manufacturing and distribution networks that can be leveraged.
Reimbursement
Medicare and other third-party payers will independently evaluate our technologies by, among other things, a cost/benefit analysis, assessing other available options and reviewing the published literature with respect to the results obtained from our clinical studies. Currently, CPT codes are available for molecular testing which we believe will allow our technologies to be billed following completion of a test which has been prescribed (ordered) by a physician for a patient. We believe that the existence of current CPT codes with applicability to our tests will help facilitate Medicare’s reimbursement process as well as that for third party insurance providers.
Government Regulation
Regulation by governmental authorities in the United States and other countries will be a significant factor in the development, production and marketing of any products that we may develop. The nature and extent to which such regulation may apply will vary depending on the nature of any such products and the policy of each country. Virtually all of our potential products will require regulatory allowance or approval by governmental agencies prior to commercialization, except for the LTDs as mentioned above. It is our intention to submit and obtain FDA approval or clearance and CE Marks for most of our diagnostic products. Pursuing and receiving FDA approval or clearance and CE Marks would be vital to maximizing our customer base and revenue potential for our numerous products.
FDA clearance for our products may be obtained through submission of a 510(k) statement of equivalency. Another regulatory option, albeit more complicated and expensive, is to pursue FDA approval by submitting a Pre-Market Approval (PMA) application. A 510(k) submission requires that we show equivalency of results in a clinical study with parallel comparison against an existing and FDA-recognized reference method (predicate device).
The FDA also regulates the sale of certain reagents, including our potential reagents, used by laboratories under the LDT rules to perform tests. The FDA refers to such a reagent as an Analyte-Specific Reagent ASR. ASR’s generally do not require FDA pre-market approval or clearance if they are (i) sold to clinical laboratories certified under the Clinical Laboratory Improvement Act to perform high complexity testing and (ii) are labeled in accordance with FDA requirements, including a statement that their analytical and performance characteristics have not been established. Prior to, or in lieu of FDA approval, we can sell our reagents to laboratories that meet the established criteria. The FDA also regulates all promotional materials and specifically prohibits medical and efficacy claims.
Assuming that FDA approval or clearance is received for our products, a number of other FDA requirements would apply to our manufacturing and distribution efforts. Medical device manufacturers must be registered and their products listed with the FDA, and certain adverse events, such as reagent failures, significant changes in quality control and other events requiring correction and/or replacement/removal of reagents must be documented and reported to the FDA. The FDA also regulates the product labeling, promotion, and in some cases, advertising, of medical devices. As discussed above, we must comply with the FDA’s Quality System Regulation which establishes extensive requirements for design control, quality control, validation and manufacturing. Thus, even with FDA approval or clearance, we must continue to be diligent in maintaining compliance with these various regulations, as failure to comply can lead to enforcement action. The FDA periodically inspects facilities to determine compliance with these and other requirements.
Competition
The medical diagnostic industry is characterized by rapidly evolving technology and intense competition. Our competitors include medical diagnostic companies, most of which have financial, technical and marketing resources significantly greater than our resources. In addition, there are a significant number of biotechnology companies working on evolving technologies that may supplant or make our technology obsolete. Academic institutions, governmental agencies and other public and private research organizations are also conducting research activities and seeking patent protection and may commercialize products on their own or through joint venture. We are aware of certain development projects for products to prevent or treat certain diseases targeted by us. The existence of these potential products or other products or treatments of which we are not aware, or products or treatments that may be developed in the future, may adversely affect the marketability of products developed.
Employees
As of November 15, 2011 we had two full-time employees.
An investment in our securities involves a high degree of risk. An investor should carefully consider the risks described below as well as other information contained in this registration statement. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently believe are immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected, the value of our securities could decline, and an investor may lose all or part of his or her investment.
Risks Related to Our Business
We are a development stage company and may never commercialize any of our products or services or earn a profit.
We are a development stage company and have incurred losses since we were formed. As of December 31, 2010 and June 30, 2011, we have an accumulated total deficit of $41,320,979 and $42,341,243, respectively. For the fiscal year ended December 31, 2010 and the six months ended June 30, 2011, we had net losses attributable to common stockholders of $5,487,378 and $1,020,264, respectively. To date, we have experienced negative cash flow from development of our transrenal molecular technology. We currently have no products ready for commercialization, have not generated any revenue from operations except for licensing and royalty income and expect to incur substantial net losses for the foreseeable future to further develop and commercialize the transrenal molecular technology. We cannot predict the extent of these future net losses, or when we may attain profitability, if at all. If we are unable to generate significant revenue from the transrenal molecular technology or attain profitability, we will not be able to sustain operations.
Because of the numerous risks and uncertainties associated with developing and commercializing our transrenal molecular technology and any future tests, we are unable to predict the extent of any future losses or when we will become profitable, if ever. We may never become profitable and you may never receive a return on an investment in our common stock. An investor in our common stock must carefully consider the substantial challenges, risks and uncertainties inherent in the attempted development and commercialization of tests in the medical diagnostic industry. We may never successfully commercialize transrenal molecular technology or any future tests, and our business may fail.
Our independent registered public accounting firm has expressed doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.
In their report dated November 23, 2011 our independent registered public accountants stated that our financial statements for the year ended December 31, 2010 were prepared assuming that we would continue as a going concern. Our ability to continue as a going concern is an issue raised as a result of recurring losses from operations. We continue to experience net operating losses. Our ability to continue as a going concern is subject to our ability to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities, increasing sales or obtaining loans and grants from various financial institutions where possible. Our continued net operating losses increase the difficulty in meeting such goals and there can be no assurances that such methods will prove successful.
We will need to raise substantial additional capital to commercialize our transrenal molecular technology, and our failure to obtain funding when needed may force us to delay, reduce or eliminate our product development programs or collaboration efforts.
We expect that our existing capital resources will not be sufficient to fund our operations for the next 12 months. Consequently, we will be required to raise additional capital to complete the development and commercialization of our current product candidates. The development of our business will require substantial additional capital in the future to conduct research and
development and commercialize our transrenal molecular technology. We have historically relied upon private sales of our equity and issuances of notes to fund our operations. We currently have no credit facility or committed sources of capital. If our capital resources are insufficient to meet future requirements, we will have to raise additional funds to continue the development and commercialization of our transrenal molecular technology. When we seek additional capital, we may seek to sell additional equity and/or debt securities or to obtain a credit facility, which we may not be able to do on favorable terms, or at all. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance and investor sentiment. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development and/or commercialization of one or more of our product candidates, restrict our operations or obtain funds by entering into agreements on unattractive terms.
Our stockholders may experience significant dilution as a result of any additional financing using our equity securities and/or debt securities
To the extent that we raise additional funds by issuing equity securities or convertible debt securities, our stockholders may experience significant dilution. Sale of additional equity and/or convertible debt securities at prices below certain levels will trigger anti-dilution provisions with respect to certain securities we have previously sold. If additional funds are raised through a credit facility or the issuance of debt securities or preferred stock, lenders under the credit facility or holders of these debt securities or preferred stock would likely have rights that are senior to the rights of holders of our common stock, and any credit facility or additional securities could contain covenants that would restrict our operations.
Our ability to successfully commercialize our technology will depend largely upon the extent to which third-party payors reimburse our tests.
Physicians and patients may decide not to order our products unless third-party payors, such as managed care organizations as well as government payors such as Medicare and Medicaid pay a substantial portion of the test price. Reimbursement by a third-party payor may depend on a number of factors, including a payor’s determination that our product candidates are:
· not experimental or investigational;
· medically necessary;
· appropriate for the specific patient;
· cost-effective;
· supported by peer-reviewed publications; and
· included in clinical practice guidelines.
There is uncertainty concerning third-party payor reimbursement of any test. Several entities conduct technology assessments of medical tests and devices and provide the results of their assessments for informational purposes to other parties. These assessments may be used by third-party payors and health care providers as grounds to deny coverage for a test or procedure. Our product candidates may receive negative assessments that may impact our ability to receive reimbursement of the test. Since each payor makes its own decision as to whether to establish a policy to reimburse our test, seeking these approvals may be a time-consuming and costly process.
If we are unable to obtain reimbursement approval from private payors and Medicare and Medicaid programs for our product candidates, or if the amount reimbursed is inadequate, our ability to generate revenues could be limited. Even if we are being reimbursed, insurers may withdraw their coverage policies or cancel their contracts with us at any time, stop paying for our test or reduce the payment rate for our test, which would reduce our revenue. Moreover, we may depend upon a limited number of third-party payors for a significant portion of our test revenues and if these or other third-party payors stop providing reimbursement or decrease the amount of reimbursement for our test, our revenues could decline.
The commercial success of our product candidates will depend upon the degree of market acceptance of these products among physicians, patients, health care payors and the medical community.
The use of the transrenal molecular technology has never been commercialized for any indication. Even if approved for sale by the appropriate regulatory authorities, physicians may not order diagnostic tests based upon the Tr-DNA or Tr-RNA technology, in which event we may be unable to generate significant revenue or become profitable. Acceptance of the transrenal molecular technology will depend on a number of factors including:
· acceptance of products based upon the Tr-DNA or Tr-RNA technology by physicians and patients as safe and effective diagnostic products,
· successful integration into clinical practice;
· adequate reimbursement by third parties;
· cost effectiveness;
· potential advantages over alternative treatments; and
· relative convenience and ease of administration.
Reimbursement may not be available for products based upon the transrenal molecular technology, which could impact our ability to achieve profitability.
Market acceptance, sales of products based upon the Tr-DNA or Tr-RNA technology and our profitability may depend on reimbursement policies and health care reform measures. The levels at which government authorities and third-party payors, such as private health insurers and health maintenance organizations, may reimburse the price patients pay for such products could affect whether we are able to commercialize our products. We cannot be sure that reimbursement in the U.S. or elsewhere will be available for any of our products in the future. If reimbursement is not available or is limited, we may not be able to commercialize our products.
Many of our competitors have financial, marketing and human resource assets greater than ours, and there can be no assurance that we can successfully compete with such competitors or that such competition will not have a materially adverse effect on our business, financial position or results of operations.
The technologies associated with the molecular diagnostics industry are evolving rapidly and there is intense competition within such industry. Certain molecular diagnostics companies have established technologies that may be competitive to our product candidates and any future tests that we develop. Some of these tests may use different approaches or means to obtain diagnostic results, which could be more effective or less expensive than our tests for similar indications. Moreover, these and other future competitors have or may have considerably greater resources than we do in terms of technology, sales, marketing, commercialization and capital resources. These competitors may have substantial advantages over us in terms of research and development expertise, experience in clinical studies, experience in regulatory issues, brand name exposure and expertise in sales and marketing as well as in operating central laboratory services. Many of these organizations have financial, marketing and human resources greater than ours; therefore, there can be no assurance that we can successfully compete with present or potential competitors or that such competition will not have a materially adverse effect on our business, financial position or results of operations.
If our potential medical diagnostic tests are unable to compete effectively with current and future medical diagnostic tests targeting similar markets as our potential products, our commercial opportunities will be reduced or eliminated.
The medical diagnostic industry is intensely competitive and characterized by rapid technological progress. In each of our potential product areas, we face significant competition from large biotechnology, medical diagnostic and other companies. Most of these companies have substantially greater capital resources, research and development staffs, facilities and experience at conducting clinical trials and obtaining regulatory approvals. In addition, many of these companies have greater experience and expertise in developing and commercializing products.
Since the transrenal molecular diagnostic (Tr-DNA or Tr-RNA) technology is under development, we cannot predict the relative competitive position of any product based upon the transrenal molecular technology. However, we expect that the following factors will determine our ability to compete effectively: safety and efficacy; product price; turnaround time; ease of administration; performance; reimbursement; and marketing and sales capability.
We believe that many of our competitors spend significantly more on research and development-related activities than we do. Our competitors may discover new diagnostic tools or develop existing technologies to compete with the transrenal molecular diagnostic technology. Our commercial opportunities will be reduced or eliminated if these competing products are more effective, are more convenient or are less expensive than our products.
Our failure to convince medical practitioners to order tests using our Tr-DNA technology will limit our revenue and profitability.
We believe our scientists were the first to discover Tr-DNA. Currently, there is no approved diagnostic test commercially available which can detect and analyze Tr-DNA. If we fail to convince medical practitioners to order tests using our technology, we will not be able to sell our products or license our technology in sufficient volume for us to become profitable. We will need to make leading physicians aware of the benefits of tests using our technology through published papers, presentations at scientific conferences and favorable results from our clinical studies. Our failure to be successful in these efforts would make it difficult for us to convince medical practitioners to order Tr-DNA tests for their patients and consequently our revenue and profitability will be limited.
Our failure to obtain human urine samples from medical institutions for our clinical studies will adversely impact the development of our transrenal molecular technology.
We will need establish relationships with medical institutions in order to obtain urine specimens from patients who are testing positive for a relevant infectious disease or from patients that have been diagnosed with solid tumors. We must obtain a sufficient number in order to statistically prove the equivalency of the performance of our assays versus existing assays that are already on the market. In addition, we will need to gain support from thought leaders who believe that testing a urine specimen for these molecular markers will provide superior performance. Ideally, we will need these individuals to publish support papers and articles which will be necessary to gain acceptance of our products. There is no guarantee that we will be able to obtain this support.
If our clinical studies do not prove the superiority of our technologies, we may never sell our products and services.
The results of our clinical studies may not show that tests using our transrenal molecular technology are superior to existing testing methods. In that event, we will have to devote significant financial and other resources to further research and development, and commercialization of tests using our technologies will be delayed or may never occur. Our earlier clinical studies were small and included samples from high-risk patients. The results from these earlier studies may not be representative of the results we obtain from any future studies, including our next two clinical studies, which will include substantially more samples and a larger percentage of normal-risk patients.
Our inability to establish strong business relationships with leading clinical reference laboratories to perform Tr-DNA/Tr-RNA tests using our technologies will limit our revenue growth.
A key step in our strategy is to sell diagnostic products that use our proprietary technologies to leading clinical reference laboratories that will perform Tr-DNA or Tr-RNA tests. We currently have no business relationships with these laboratories and have limited experience in establishing these business relationships. If we are unable to establish these business relationships, we will have limited ability to obtain revenues beyond the revenue we can generate from our limited in-house capacity to process tests.
We depend upon our officers, and if we are not able to retain them or recruit additional qualified personnel, the commercialization of our product candidates and any future tests that we develop could be delayed or negatively impacted.
Our success is largely dependent upon the continued contributions of our officers. Our success also depends in part on our ability to attract and retain highly qualified scientific, commercial and administrative personnel. In order to pursue our test development and commercialization strategies, we will need to attract and hire, or engage as consultants, additional personnel with specialized experience in a number of disciplines, including assay development, bioinformatics and statistics, laboratory and clinical operations, clinical affairs and studies, government regulation, sales and marketing, billing and reimbursement and information systems. There is intense competition for personnel in the fields in which we operate. If we are unable to attract new employees and retain existing employees, the development and commercialization of our product candidates and any future tests could be delayed or negatively impacted.
We will need to increase the size of our organization, and we may experience difficulties in managing growth.
We are a small company with only two full-time employees as of November 15, 2011. Future growth will impose significant added responsibilities on members of management, including the need to identify, attract, retain, motivate and integrate highly skilled personnel. We may increase the number of employees in the future depending on the progress of our development of transrenal molecular technology. Our future financial performance and our ability to commercialize Tr-DNA and Tr-RNA assays and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to:
· manage our clinical studies effectively;
· integrate additional management, administrative, manufacturing and regulatory personnel;
· maintain sufficient administrative, accounting and management information systems and controls; and
· hire and train additional qualified personnel.
We may not be able to accomplish these tasks, and our failure to accomplish any of them could harm our financial results.
If we do not receive regulatory approvals, we will not be able to develop and commercialize our transrenal molecular technology.
We need FDA approval to market products based on the transrenal molecular technology for diagnostic uses in the United States and approvals from foreign regulatory authorities to market products based on the Tr-DNA or Tr-RNA technology outside the United States. We have not yet filed an application with the FDA to obtain approval to market any of our proposed products. If we fail to obtain regulatory approval for the marketing of products based on the Tr-DNA or Tr-RNA technology, we will be unable to sell such products and will not be able to sustain operations.
The regulatory review and approval process, which may include evaluation of preclinical studies and clinical trials of products based on the Tr-DNA or Tr-RNA technology, as well as the evaluation of manufacturing processes and contract manufacturers’ facilities, is lengthy, expensive and uncertain. Securing regulatory approval for products based upon the transrenal molecular technology may require the submission of extensive preclinical and clinical data and supporting information to regulatory authorities to establish such products’ safety and effectiveness for each indication. We have limited experience in filing and pursuing applications necessary to gain regulatory approvals.
Regulatory authorities generally have substantial discretion in the approval process and may either refuse to accept an application, or may decide after review of an application that the data submitted is insufficient to allow approval of any product based upon the transrenal molecular technology. If regulatory authorities do not accept or approve our applications, they may require that we conduct additional clinical, preclinical or manufacturing studies and submit that data before regulatory authorities will reconsider such application. We may need to expend substantial resources to conduct further studies to obtain data that regulatory authorities believe is sufficient. Depending on the extent of these studies, approval of applications may be delayed by several years, or may require us to expend more resources than we may have available. It is also possible that additional studies may not suffice to make applications approvable. If any of these outcomes occur, we may be forced to abandon our applications for approval, which might cause us to cease operations.
Changes in healthcare policy could subject us to additional regulatory requirements that may delay the commercialization of our tests and increase our costs.
The U.S. government and other governments have shown significant interest in pursuing healthcare reform. Any government-adopted reform measures could adversely impact the pricing of our diagnostic products and tests in the United States or internationally and the amount of reimbursement available from governmental agencies or other third party payors. The continuing efforts of the U.S. and foreign governments, insurance companies, managed care organizations and other payors of health care services to contain or reduce health care costs may adversely affect our ability to set prices for our products and services which we believe are fair, and our ability to generate revenues and achieve and maintain profitability.
New laws, regulations and judicial decisions, or new interpretations of existing laws, regulations and decisions, that relate to healthcare availability, methods of delivery or payment for products and services, or sales, marketing or pricing, may limit our potential revenue, and we may need to revise our research and development programs. The pricing and reimbursement environment may change in the future and become more challenging due to several reasons, including policies advanced by the current executive administration in the United States, new healthcare legislation or fiscal challenges faced by government health administration authorities. Specifically, in both the United States and some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the health care system in ways that could affect our ability to sell our products profitably.
For example, in March 2010, President Obama signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or the PPACA. This law will substantially change the way health care is financed by both government health plans and private insurers, and significantly impact the pharmaceutical industry. The PPACA contains a number of provisions that are expected to impact our business and operations in ways that may negatively affect our potential revenues in the future. While it is too early to predict all the specific effects the PPACA or any future healthcare reform legislation will have on our business, they could have a material adverse effect on our business and financial condition.
In September 2007, the Food and Drug Administration Amendments Act of 2007 was enacted, giving the FDA enhanced post-marketing authority, including the authority to require post-marketing studies and clinical trials, labeling changes based on new safety information, and compliance with risk evaluations and mitigation strategies approved by the FDA. The FDA’s exercise of this authority could result in delays or increased costs during product development, clinical trials and regulatory review, increased costs to assure compliance with post-approval regulatory requirements, and potential restrictions on the sale and/or distribution of approved products.
If the FDA were to begin regulating genomic tests, we could be forced to delay commercialization of our current product candidates, experience significant delays in commercializing any future tests, incur substantial costs and time delays
associated with meeting requirements for pre-market clearance or approval and/or experience decreased demand for or reimbursement of our test.
Clinical laboratory tests like our current product offerings are regulated in the United States under CLIA as well as by applicable state laws. Diagnostic kits that are sold and distributed through interstate commerce are regulated as medical devices by the FDA. Clinical laboratory tests that are developed and validated by a laboratory for its own use are called LDTs. Most LDTs currently are not subject to FDA regulation, although reagents or software provided by third parties and used to perform LDTs may be subject to regulation. We expect that, upon the commencement of commercialization, our product candidates will be an LDT and not a diagnostic kit. As a result, we believe that our product candidates should not be subject to regulation under current FDA policies, however there is no assurance that it will not be subject to such regulation in the future. The container we expect to provide for collection and transport of tumor samples from a pathology laboratory to our clinical reference laboratory may be a medical device subject to FDA regulation and while we expect that it will be exempt from pre-market review by FDA, there is no certainty in that respect.
We cannot provide any assurance that FDA regulation, including pre-market review, will not be required in the future for our product candidates, either through new policies adopted by the FDA or new legislation enacted by Congress. It is possible that legislation will be enacted into law and may result in increased regulatory burdens for us to offer or continue to offer our product as a clinical laboratory service.
If pre-market review is required, our business could be negatively impacted until such review is completed and clearance to market or approval is obtained, and the FDA could require that we stop selling. If pre-market review is required by the FDA, there can be no assurance that our product offerings will be cleared or approved on a timely basis, if at all. Ongoing compliance with FDA regulations, such as the Quality System Regulation and Medical Device Reporting, would increase the cost of conducting our business, and subject us to inspection by the FDA and to the requirements of the FDA and penalties for failure to comply with these requirements. We may also decide voluntarily to pursue FDA pre-market review of our product offerings if we determine that doing so would be appropriate. Some competitors may develop competing tests cleared for marketing by the FDA. There may be a marketing differentiation or perception that an FDA-cleared test is more desirable than our product offerings, and that could discourage adoption and reimbursement of our test.
Should any of the reagents obtained by us from vendors and used in conducting our clinical laboratory service be affected by future regulatory actions, our business could be adversely affected by those actions, including increasing the cost of testing or delaying, limiting or prohibiting the purchase of reagents necessary to perform testing.
If the FDA decides to regulate our tests, it may require that we conduct extensive pre-market clinical studies prior to submitting a regulatory application for commercial sales. If we are required to conduct pre-market clinical studies, whether using retrospectively collected and banked samples or prospectively collected samples, delays in the commencement or completion of clinical studies could significantly increase our test development costs and delay commercialization. Many of the factors that may cause or lead to a delay in the commencement or completion of clinical studies may also ultimately lead to delay or denial of regulatory clearance or approval.
The commencement of clinical studies may be delayed due to insufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the clinical trial. We may find it necessary to engage contract research organizations to perform data collection and analysis and other aspects of our clinical studies, which might increase the cost of the studies. We will also depend on clinical investigators, medical institutions and contract research organizations to perform the studies properly. If these parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, or if the quality, completeness or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, FDA requirements or for other reasons, our clinical studies may have to be extended, delayed or terminated. Many of these factors would be beyond our control. We may not be able to enter into replacement arrangements without undue delays or considerable expenditures. If there are delays in testing as a result of the failure to perform by third parties, our research and development costs would increase, and we may not be able to obtain regulatory clearance or approval for our test. In addition, we may not be able to establish or maintain relationships with these parties on favorable terms, if at all. Each of these outcomes would harm our ability to market our test, or to become profitable.
If we are unable to protect our intellectual property effectively, we may be unable to prevent third parties from using our technologies, which would impair our competitive advantage.
We rely on patent protection as well as a combination of trademark, copyright and trade secret protection, and other contractual restrictions to protect our proprietary technologies, all of which provide limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. If we fail to protect our intellectual property, we will be unable to prevent third parties from using our technologies and they will be able to compete more effectively against us.
We cannot assure you that any of our currently pending or future patent applications will result in issued patents, or that any patents issued to us will not be challenged, invalidated or held unenforceable. We cannot guarantee you that we will be successful in defending challenges made in connection with our patents and patent applications.
In addition to our patents, we rely on contractual restrictions to protect our proprietary technology. We require our employees and third parties to sign confidentiality agreements and employees to also sign agreements assigning to us all intellectual property arising from their work for us. Nevertheless, we cannot guarantee that these measures will be effective in protecting our intellectual property rights.
We cannot guarantee that the patents issued to us will be broad enough to provide any meaningful protection nor can we assure you that one of our competitors may not develop more effective technologies, designs or methods without infringing our intellectual property rights or that one of our competitors might not design around our proprietary technologies.
If we are not able to protect our proprietary technology, trade secrets and know-how, our competitors may use our inventions to develop competing products. We own certain patents relating to the transrenal molecular technology. However, these patents may not protect us against our competitors, and patent litigation is very expensive. We may not have sufficient cash available to pursue any patent litigation to its conclusion because currently we do not generate revenues.
We cannot rely solely on our current patents to be successful. The standards that the U.S. Patent and Trademark Office and foreign patent office’s use to grant patents, and the standards that U.S. and foreign courts use to interpret patents, are not the same and are not always applied predictably or uniformly and can change, particularly as new technologies develop. As such, the degree of patent protection obtained in the U.S. may differ substantially from that obtained in various foreign countries. In some instances, patents have been issued in the U.S. while substantially less or no protection has been obtained in Europe or other countries.
We cannot be certain of the level of protection, if any that will be provided by our patents if we attempt to enforce them and they are challenged in court where our competitors may raise defenses such as invalidity, unenforceability or possession of a valid license. In addition, the type and extent of any patent claims that may be issued to us in the future are uncertain. Any patents which are issued may not contain claims that will permit us to stop competitors from using similar technology.
We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights and we may be unable to protect our rights to, or use, our transrenal molecular technology.
Third parties may challenge the validity of our patents and other intellectual property rights, resulting in costly litigation or other time-consuming and expensive proceedings, which could deprive us of valuable rights. If we become involved in any intellectual property litigation, interference or other judicial or administrative proceedings, we will incur substantial expenses and the diversion of financial resources and technical and management personnel. An adverse determination may subject us to significant liabilities or require us to seek licenses that may not be available from third parties on commercially favorable terms, if at all. Further, if such claims are proven valid, through litigation or otherwise, we may be required to pay substantial financial damages, which can be tripled if the infringement is deemed willful, or be required to discontinue or significantly delay development, marketing, selling and licensing of the affected products and intellectual property rights.
Our competitors may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent application may have priority over our patent applications and could further require us to obtain rights to issued patents covering such technologies. There may be third-party patents, patent applications and other intellectual property relevant to our potential products that may block or compete with our products or processes. If another party has filed a United States patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the United States Patent and Trademark Office to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful, resulting in a loss of our United States patent position with respect to such inventions. In addition, we cannot assure you that we would prevail in any of these suits or that the damages or other remedies if any, awarded against us would not be substantial. Claims of intellectual property infringement may require us to enter into royalty or license agreements with third parties that may not be available on acceptable terms, if at all. We may also become subject to injunctions against the further development and use of our technology, which would have a material adverse effect on our business, financial condition and results of operations
Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.
If we fail to comply with the rules under the Sarbanes-Oxley Act of 2002 related to accounting controls and procedures, or, if we discover material weaknesses and other deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult.
If we fail to comply with the rules under the Sarbanes-Oxley Act of 2002 related to disclosure controls and procedures, or, if we discover material weaknesses and other deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult. Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting if material weaknesses or significant deficiencies are discovered or if we otherwise fail to achieve and maintain the adequacy of our internal control, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock could drop significantly. In addition, we cannot be certain that material weaknesses or significant deficiencies in our internal controls will not be discovered in the future.
Risks Related to Our Common Stock
Our Series A Convertible Preferred Stock contain certain covenants that limit the way we can conduct business.
Our Series A Convertible Preferred Stock includes various covenants limiting our ability to pay dividends and make other distributions and issuing securities senior or equivalent to the Series A Convertible Preferred Stock. We also granted the investors a participation right in future financings. These covenants may limit us in raising additional capital, competing effectively, or taking advantage of new business opportunities.
The rights of the holders of common stock may be impaired by the potential issuance of preferred stock.
Our certificate of incorporation gives our board of directors the right to create new series of preferred stock. As a result, the board of directors may, without stockholder approval, issue preferred stock with voting, dividend, conversion, liquidation or other
rights which could adversely affect the voting power and equity interest of the holders of common stock. Preferred stock, which could be issued with the right to more than one vote per share, could be utilized as a method of discouraging, delaying or preventing a change of control. The possible impact on takeover attempts could adversely affect the price of our common stock. Although we have no present intention to issue any additional shares of preferred stock or to create any new series of preferred stock and the certificate of designation relating to the Series A Convertible Preferred Stock restricts our ability to issue additional series of preferred stock, we may issue such shares in the future. Without the consent of the holders of the outstanding shares of Series A Convertible Preferred Stock , we may not alter or change adversely the rights of the holders of the Series A Convertible Preferred Stock or increase the number of authorized shares of Series A Convertible Preferred Stock, create a class of stock which is senior to or on a parity with the Series A Convertible Preferred Stock , amend our certificate of incorporation in breach of these provisions or agree to any of the foregoing.
Our common stock price may be volatile and could fluctuate widely in price, which could result in substantial losses for investors.
The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including:
· technological innovations or new products and services by us or our competitors;
· clinical trial results relating to our tests or those of our competitors;
· reimbursement decisions by Medicare and other managed care organizations;
· FDA regulation of our products and services;
· the establishment of partnerships with clinical reference laboratories;
· health care legislation;
· intellectual property disputes;
· additions or departures of key personnel;
· sales of our common stock;
· our ability to integrate operations, technology, products and services;
· our ability to execute our business plan;
· operating results below expectations;
· loss of any strategic relationship;
· industry developments;
· economic and other external factors; and
· period-to-period fluctuations in our financial results.
Because we are a development stage company with no revenues to date, you should consider any one of these factors to be material. Our stock price may fluctuate widely as a result of any of the above.
In addition, trading in stock traded over the counter on the pink sheets is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with a company’s operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to our business or operating performance. Moreover, trading is often more sporadic than the trading of securities listed on a quotation system like NASDAQ or a stock exchange like the NYSE Amex. Accordingly, shareholders may have difficulty reselling any of their shares of common stock.
If our common stock remains subject to the SEC’s penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected.
Unless our securities are listed on a national securities exchange, or we have net tangible assets of $5,000,000 or more and our common stock has a market price per share of $5.00 or more, transactions in our common stock will be subject to the SEC’s “penny stock” rules. If our common stock remains subject to the “penny stock” rules promulgated under the Securities Exchange Act of 1934, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected.
Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must:
· make a special written suitability determination for the purchaser;
· receive the purchaser’s written agreement to the transaction prior to sale;
· provide the purchaser with risk disclosure documents which identify certain risks associated with investing in “penny stocks” and which describe the market for these “penny stocks” as well as a purchaser’s legal remedies; and
· obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a “penny stock” can be completed.
As a result, if our common stock becomes subject to the penny stock rules, the market price of our securities may be depressed, and you may find it more difficult to sell our securities.
Because certain of our stockholders control a significant number of shares of our common stock, they may have effective control over actions requiring stockholder approval.
As of November 15, 2011, our directors, executive officers and principal stockholders, and their respective affiliates, beneficially own approximately 32% of our outstanding shares of common stock. As a result, these stockholders, acting together, would have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, would have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership might harm the market price of our common stock by:
· delaying, deferring or preventing a change in corporate control;
· impeding a merger, consolidation, takeover or other business combination involving us; or
· discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.
We have not paid dividends on our common stock in the past and do not expect to pay dividends on our common stock for the foreseeable future. Any return on investment may be limited to the value of our common stock.
No cash dividends have been paid on our common stock. We expect that any income received from operations will be devoted to our future operations and growth. We do not expect to pay cash dividends on our common stock in the near future. Payment of dividends would depend upon our profitability at the time, cash available for those dividends, and other factors as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on an investor’s investment will only occur if our stock price appreciates.
If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not currently have and may never obtain research coverage by industry or financial analysts. If no or few analysts commence coverage of us, the trading price of our stock would likely decrease. Even if we do obtain analyst coverage, if one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Delaware law and our corporate charter and bylaws will contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. For example, our board of directors have the authority to issue up to 20,000,000 shares of preferred stock in one or more series and to fix the powers, preferences and rights of each series without stockholder approval. The ability to issue preferred stock could discourage unsolicited acquisition proposals or make it more difficult for a third party to gain control of our company, or otherwise could adversely affect the market price of our common stock. Our bylaws require that any stockholder proposals or nominations for election to our board of directors must meet specific advance notice requirements and procedures, which make it more difficult for our stockholders to make proposals or director nominations.
Furthermore, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit or restrict large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in our certificate of incorporation and bylaws and under Delaware law could discourage potential takeover attempts and could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in our market price being lower than it would without these provisions.
A sale of a substantial number of shares of our common stock may cause the price of our common stock to decline and may impair our ability to raise capital in the future.
The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of common stock.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read this discussion together with the Financial Statements, related Notes and other financial information included elsewhere in this Form 10. The following discussion contains assumptions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under “Risk Factors,” and elsewhere in this Form 10. These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements.
OVERVIEW
From August 4, 1999 (inception) through December 31, 2010 and June 30, 2011, we have sustained cumulative total deficits of $41,320,979 and $42,341,243, respectively. From inception through June 30, 2011, we have generated minimal out-licensing revenues and expect to incur additional losses to perform further research and development activities and do not currently have any commercial biopharmaceutical products. We do not expect to have such for several years, if at all.
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 drugs to market 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.
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 15. Financial Statements—Note 3 Summary of Significant Accounting Policies. The preparation of financial statements in conformity with U.S. 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 expenses during the reporting period. Actual results could differ from those estimates. We believe that the following discussion represents our critical accounting policies.
Royalty and License Revenues
Under our royalty and license agreements, we receive payments which include minimum royalty and milestone payments. We recognize royalty and license revenues when we can reliably estimate such amounts and collectability is reasonably assured.
Allowance for Doubtful Accounts
We review the collectability of accounts receivable based on an assessment of historic experience, current economic conditions, and other collection indicators. At December 31, 2010 and 2009 and June 30, 2011 we have not recorded an allowance for doubtful accounts. When accounts are determined to be uncollectible, they are written off against the reserve balance and the reserve is reassessed. When payments are received on reserved accounts, they are applied to the individual’s account and the reserve is reassessed.
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. 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 our common share price, remaining life of the warrant, and risk-free interest rates at each period end. We thus use model-derived valuations where inputs are observable in active markets to determine the fair value and accordingly classify such warrants in Level 3 per ASC 820. At December 31, 2009, 2010 and June 30, 2011, the fair value of such warrants was $740,617, $609,155 and $324,407, respectively, which we classified as derivative financial instruments’ liability on our balance sheet.
We have issued units that were price protected during the years ended December 31, 2010 and 2009, respectively. Based upon our analysis of the criteria contained in ASC Topic 815-40, we have determined that these price protected units issued in connection with the private placements must be recorded as derivative liabilities with a charge to additional paid in capital. The fair value of these price protected units was estimated using the binomial option pricing model. The binomial model requires the input of variable inputs over time, including the expected stock price volatility, the expected price multiple at which unit holders are likely to exercise their warrants and the expected forfeiture rate. We use historical data to estimate forfeiture rate and expected stock price volatility within the binomial model. The risk-free rate for periods within the contractual life of the warrant is based on the U.S. Treasury yield curve in effect at the date of grant for the expected term of the warrant. At December 31, 2009, December 31, 2010 and June 30, 2011, the fair value of such price protected units was $602,133, $1,476,783 and $1,820,833, respectively, which we classified as derivative financial instruments liability on our balance sheet.
At December 31, 2009, December 31, 2010 and June 30, 2011, the total fair value of all warrants and price protection, valued using the Black-Scholes option-pricing model and the Binomial option pricing model was $1,342,750, $2,085,938 and $2,145,240, respectively, which we classified as derivative financial instruments’ liability on our balance sheet.
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, insurance and FDA consultants, 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.
We do not currently have any commercial molecular diagnostic products, and we do not expect to have such for several years if at all. Accordingly our research and development costs are expensed as incurred. While certain of our research and development costs may have future benefits, our policy of expensing all research and development expenditures is predicated on the fact that we have no history of successful commercialization of molecular diagnostic products to base any estimate of the number of future periods that would be benefited.
In June 2007, the EITF of the FASB reached a consensus on ASC Topic 730, Research and Development which requires that non-refundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. As the related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided, the deferred amounts would be recognized as an expense. We adopted ASC Topic 730 on January 1, 2008 and the adoption did not have a material effect on our consolidated financial position, results of operations or cash flows.
Stock-Based Compensation
We rely heavily on incentive compensation in the form of stock options to recruit, retain and motivate directors, executive officers, employees and consultants. Incentive compensation in the form of stock options and warrants are designed to provide long-term incentives, develop and maintain an ownership stake and conserve cash during our development stage.
ASC Topic 718 “Compensation—Stock Compensation” requires companies to measure the cost of employee services received in exchange for the award of equity instruments based on the estimated fair value of the award at the date of grant. The estimated fair value of employee options on the date of grant was determined by using the Black-Scholes option valuation model which requires management to make certain assumptions with respect to selected model inputs. The risk-free interest rate assumption is based upon observed U.S. Treasury interest rates appropriate for the expected term of the individual stock options. We have not paid any dividends on common stock since its inception and do not anticipate paying dividends on our common stock in the foreseeable future. The computation of the expected option term is based on expectations regarding future exercises of options which generally vest over three years and have a ten year life. The expected volatility is based on the historical volatility of our stock. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We estimate future unvested option forfeitures based upon its historical experience and has incorporated this rate in determining the fair value of employee option grants. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award.
ASC Topic 718 did not change the way we account for non-employee stock-based compensation. We continue to account for shares of common stock, stock options and warrants issued to non-employees based on the fair value of the shares of stock and for the stock option or warrant, using the Black-Scholes options pricing model, if that value is more reliably measurable
than the fair value of the consideration or services received. We account for equity instruments granted to non-employees in accordance with ASC Topic 505-50 “ Equity-Based Payment to Non-Employees” whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Accordingly the fair value of these options is being “marked to market” quarterly until the measurement date is determined.
In accordance with ASC Topic 718 stock-based compensation expense related to our share-based compensation arrangements attributable to employees and non-employees is being recorded as a component of general and administrative expense and research and development expense in accordance with the guidance of Staff Accounting Bulletin 107, Topic 14, paragraph F , Classification of Compensation Expense Associated with Share-Based Payment Arrangements (“SAB 107”).
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.
Convertible Debentures
We initially had $2,225,500 of 6% convertible debentures initially due November 14, 2008 (the “Debenture” or “Debentures”). The Debentures accrued interest at the rate of 6% per annum, payable semi-annually on April 1 and November 1 of each year beginning November 1, 2007. We could, in our discretion, elect to pay interest on the Debentures in cash or in shares of our common stock, subject to certain conditions related to the market for shares of our common stock and the registration of the shares issuable upon conversion of the Debentures under the Securities Act. The Debentures were convertible at any time at the option of the holder into shares of our common stock at an initial price of $0.55 per share, subject to adjustment for certain dilutive issuances. During the year ended December 31, 2009, we entered into a Forbearance Agreement that resulted in the issuance of 5,437,472 shares of common stock in full settlement of amounts claimed for interest, penalties, late fees and liquidated damages related to the Debentures totaling $2,042,205. Under the terms of the Forbearance Agreement the maturity date was extended to December 31, 2010 and the interest rate increased to 11%. A total of 6,083,763 shares of common stock purchase warrants, expiring November 14, 2012, continued to be outstanding.
The fair value of the shares on January 30, 2009 was $0.32 based on quoted market prices totaling $1,739,959. The difference between the carrying value of the interest, penalties, late fees and liquidated damages and the fair value of the shares of $302,246 was recorded as settlement costs on the statement of operations.
The aggregate initial principal amount of $2,170,500 plus two additional issuances of $164,550 in 2009 due under the Debentures remained outstanding totaling $2,335,050. Other significant provisions of the Forbearance Agreement included the following:
· An extension of the Debentures’ maturity date to December 31, 2010
· An increase in the interest rate payable on the Debentures from 6% to 11%
· The payment of interest in the form of Company common stock on a quarterly basis
· Rights of certain holders of a majority of the Debentures regarding the appointment of two persons to our Board of Directors
· Conditions regarding the determination of compensation to be paid to our officers and directors
· A total of 6,083,763 shares of common stock purchase warrants, expiring November 14, 2012, continued to be outstanding.
The carrying value of the debenture before modification in the amount of $2,335,050 was exchanged for the fair value of the new debt in the amount $1,910,710 and the difference of $424,299 was recorded as a reduction of other forbearance agreement settlement costs in the statement of operations.
During the twelve months ended December 31, 2010 and 2009, we incurred interest expense of $256,856 and $244,656, respectively, that was paid in 1,003,021 shares. The Debenture Holders were entitled to interest expense at 11%. The total value of the shares was $256,901 based on the stock price allocation in the fair value of the price protected units issued during the years ended December 31, 2010 and 2009. The difference in the fair value of the consideration given and the amounts due to the debt holder was $244,605 and recorded as a reduction of the interest expense in our Consolidated Statements of Operations.
On July 18, 2011 the holders of our Debentures converted the amounts outstanding into 4,670,100 shares of common stock at $.22 per share based on the fair value of the units issued in recent private placements. In addition, we issued 467,010 shares of common stock valued at $102,742 to the Debenture Holders as consideration for their agreement to convert their debentures. In accordance with ASC Topic 405-20 we calculated the difference between (i) the fair value of the common stock issued and the new warrants and (ii) the carrying value of the debentures and the old warrants. This resulted in a gain on extinguishment of the debt of $623,383 and will be recorded in the third quarter of 2011.
The 6,083,763 warrants originally issued in 2006 with an expiration date of November 12, 2012 were exchanged for 6,083,763 new warrants with a new expiration date of December 31, 2017. These warrants had registration rights and in accordance with ASC 815 “ Derivatives and Hedging ”, (“ASC 815”) , we have determined that these warrants must be recorded as derivative liabilities with a charge to additional paid in capital. The fair value of these warrants on January 1, 2009, the date of adoption of ASC 815, was $884,277. This derivative liability has been marked to market at the end of each reporting period since January 1, 2009. The change in fair value for the years ended December 31, 2010 and 2009 and inception (August 4, 1999) to December 31, 2010 was a loss of $31,999, a gain of $491,586 and a gain of $459,587, respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2011 AND 2010
We had revenues of $79,863 and $18,115 during the three months ended June 30, 2011 and 2010, respectively, consisting primarily of license and royalty income.
Research and development expenses for the three months ended June 30, 2011 decreased by $48,529, or 21%, to $185,194 from $233,723 for the three months ended June 30, 2010. This decrease was due to lower lab costs and utilities.
General and administrative expenses increased by $132,563, or 28%, to $606,702 for the three months ended June 30, 2011 from $474,139 for the three months ended June 30, 2010. This increase was primarily due to (i) increased legal fees of approximately $111,000 and (ii) increased accounting fees of approximately $104,000 partially offset by (iii) a decrease in employee expenses of
approximately $30,000 primarily due to stock based compensation as a result of a decrease in our common stock price.
Net loss for the three months ended June 30, 2011 was $ 513,742 as compared to net loss of $520,879 incurred for the three months ended June 30, 2010. This decrease in our net loss of $7,137, or 1% was primarily the result of the increase in the gain in the changes in fair value of derivative instruments-warrants of approximately $28,000 from approximately $198,000 during the quarter ended June 30, 2010.
SIX MONTHS ENDED JUNE 30, 2011 AND 2010
We had revenues of $168,946 and $18,115 during the six months ended June 30, 2011 and 2010, respectively, consisting primarily of license and royalty income.
Research and development expenses for the six months ended June 30, 2011 decreased by $20,180, or 5.0%, to $ 401,304 from $421,484 for the six months ended June 30, 2010. This decrease was primarily due to decreased insurance, lab supplies and office relocation expenses.
General and administrative expenses increased by $214,364, or 23%, to $1,135,068 for the six months ended June 30, 2011 from $920,704 for the six months ended June 30, 2010. This increase was primarily due to (i) approximately $133,000 of other employee expenses in connection with settlements of litigation with former officers and directors, (ii) approximately $125,000 in legal fees and (iii) approximately $99,000 in accounting fees partially offset by (iv) a decrease in employee expenses of approximately $64,000, excluding (i) above.
Net loss for the six months ended June 30, 2011 was $1,001,144 compared to a net loss of $896,721 incurred for the six months ended June 30, 2010. This increase in our net loss of $104,423, or 12% was a result primarily of the decrease in the gain in the changes in fair value of derivative instruments-warrants of approximately $63,000 from approximately $485,000 in the six months ended June 30, 2010. This was due to a decline in the stock price of $.01 and risk free interest rate of 1% to .29%.
YEARS ENDED DECEMBER 31, 2010 AND 2009
We had revenues of $265,665 and $653,994 during the twelve months ended December 31, 2010 and 2009, respectively, consisting of license and royalty income. During the twelve months ended December 31, 2009 we received initial license fees totaling $600,000 from two licensees where revenues for the twelve months ended December 31, 2010 was comprised of only royalty income.
For the twelve months ended December 31, 2010, research and development expenses increased by $3,128,816 or 556.5% to $3,691,028 as compared to $562,212 during the twelve months ended December 31, 2009. This increase in research and development expenses was primarily attributable to (i) purchased in-process-research and development expense relating to the merger with Etherogen, Inc. (“the Merger”) which was $2,666,689. In accordance with ASC 805 Business Combinations the excess of the fair value of the consideration issued and the fair value of the net assets acquired has been recorded as purchased in process research and development expense-related party, (ii) salaries and related expenses increased by $146,489, or 37%, from $398,132 for the twelve months ended December 31, 2009,(iii) outside consultant services increased by $128,349 to $111,033 for the twelve months ended December 31, 2010 and (iv) stock based compensation expense increased by $64,429 from $21,611 for the twelve months ended December 31, 2009.
For the twelve months ended December 31, 2010, general and administrative expenses increased by approximately $293,000, or 13.0%, to approximately $1,954,000, as compared to approximately $1,661,000 during the twelve months ended December 31, 2009. The increase in expenses was primarily attributable to an increase in salaries and wages, stock based compensation and related employee benefits of approximately $720,000, which were $279,000, or 63%, higher as compared to $441,000 during the twelve months ended December 31, 2009 offset by various other items.
Net loss for the twelve months ended December 31, 2010 was $5,449,138 compared to a net loss of $2,483,807 incurred for the twelve months ended December 31, 2009. This increase in our net loss of $2,965,331, or 119%, was a result primarily of the above increases in research and development expenses and general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2011, we had $15,282 in cash and cash equivalents. Net cash used in operating activities was $1,016,892 for the six months ended June 30, 2011 and $2,088,716 and $1,234,506, for the twelve months ended December 31, 2010 and December 31, 2009, respectively. Net cash provided by financing activities was $975,000 for the six months ended June 30, 2011 and was $1,734,700 and $1,651,736 for the twelve months ended December 31, 2010 and December 31, 2009, respectively.
As of June 30, 2011 we had a negative working capital of $3,274,995 as compared to working capital deficits of $3,136,916 and $2,557,157 as of December 31, 2010 and December 31, 2009.
On July 18, 2011 the holders of our Debentures converted the amount outstanding of $2,335,050 into 4,670,100 shares of our common stock at $.22 per share valued at $1,027,242. In addition, we issued 467,010 shares of common stock valued at $102,742 to the Debenture Holders as consideration for their agreement to convert their debentures. The carrying value of the Notes extinguished, including accrued but unpaid interest, was $2,335,050. In accordance with ASC Topic 405-20 Trovagene calculated the difference between (i) the fair value of the common stock issued and the new warrants valued at $2,014,167 and (ii) the carrying value of the debentures and the old warrants valued at $2,637,550 which resulted in a net gain of $623,383 on extinguishment of the debt and will be recorded in the 3 rd quarter of 2011.
Our working capital requirements will depend upon numerous factors including but not limited to the nature, cost and timing of our research and development programs. We will be required to raise additional capital within the next twelve months to complete the development and commercialization of current product candidates, to fund the existing working capital deficit and to continue to fund operations at our current cash expenditure levels. To date, our sources of cash have been primarily limited to the sale of equity securities and debentures. We cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact our ability to conduct business. If we are unable to raise additional capital when required or on acceptable terms, we may have to (i) significantly delay, scale back or discontinue the development and/or commercialization of one or more of product candidates; (ii) seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; or (iii) relinquish or otherwise dispose of rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves on unfavorable terms.
Our consolidated financial statements as of June 30, 2011 and December 31, 2010 have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm has issued a report on our December 31, 2010 consolidated financial statements that included an explanatory paragraph referring to our recurring losses from operations and expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to generate revenue. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our corporate offices and laboratory are located at 11055 Flintkote Avenue, Suite B, San Diego, CA 92121 where we lease approximately 5,300 square feet for $9,768 per month. Our lease expires in February 2013. We believe that our facilities are adequate to support foreseeable growth in our business.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding the beneficial ownership of our common stock as of November 15, 2011 by (a) each person who is known by us to beneficially own 5% or more of our common stock, (b) each of our directors and named executive officers, and (c) all of our directors and executive officers as a group.
|
Name and Address of Beneficial Owner |
|
Amount and nature of
|
|
Percent of class (2) |
|
|
Thomas Adams |
|
3,148,234 |
(3) |
4.9 |
|
|
Andreas Braun |
|
250,000 |
(4) |
* |
|
|
Bruce Huebner |
|
76,472 |
|
* |
|
|
Gabriele Cerrone |
|
7,360,090 |
(5) |
10.9 |
|
|
Gary Jacob |
|
1,172,667 |
(6) |
1.8 |
|
|
John Brancaccio |
|
323,414 |
(7) |
* |
|
|
Stanley Tennant |
|
1,066,246 |
(8) |
1.7 |
|
|
David Robbins |
|
462,500 |
(9) |
1.0 |
|
|
All Directors and Officers as a group (7 persons) |
|
13,859,623 |
(10) |
19.8 |
|
|
5% or greater stockholder |
|
|
|
|
|
|
R. Merrill Hunter |
|
8,265,004 |
(11) |
12.3 |
|
* Less than 1%
(1) The address of each person is c/o TrovaGene, Inc., 110055 Flintkote Avenue, Suite B, San Diego, CA 92121 unless otherwise indicated herein.
(2) The calculation in this column is based upon 63,647,157 shares of common stock outstanding on November 15, 2011. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with
respect to the subject securities. Shares of common stock that are currently exercisable or exercisable within 60 days of November 15, 2011 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage beneficial ownership of such person, but are not treated as outstanding for the purpose of computing the percentage beneficial ownership of any other person.
(3) Includes (i) 800,000 shares of common stock issuable upon exercise of stock options and (ii) 274,117 shares of common stock issuable upon exercise of warrants.
(4) Consists of 250,000 shares of common stock issuable upon exercise of stock options.
(5) Consists of (i) 3,740,356 shares of common stock held by Panetta Partners, Ltd., (ii) 37,500 shares of common stock held by Mr. Cerrone, (iii) 2,560,238 shares of common stock issuable upon exercise of stock options held by Mr. Cerrone, (iv) 984,496 shares of common stock issuable upon exercise of warrants held by Panetta and (v) 37,500 shares of common stock issuable upon exercise of warrants held by Mr. Cerrone. Mr. Cerrone is the managing partner of Panetta and in such capacity only exercises voting and dispositive control over securities owned by Panetta, despite him having only a small pecuniary interest in such securities.
(6) Includes (i) 371,667 shares of common stock issuable upon exercise of stock options and (ii) 63,000 shares of common stock issuable upon exercise of warrants.
(7) Includes (i) 157,414 shares of common stock issuable upon exercise of stock options and (ii) 83,000 shares of common stock issuable upon exercise of warrants.
(8) Includes 350,000 shares of common stock issuable upon exercise of warrants.
(9) Consists of 462,500 shares of common stock issuable upon exercise of stock options.
(10) Includes 4,601,819 shares of common stock issuable upon exercise of stock options and 1,792,113 shares of common stock issuable upon exercise of warrants.
(11) Includes 3,600,000 shares of common stock issuable upon exercise of warrants.
Item 5. Directors and Executive Officers.
The names, ages and positions of our directors and executive officers as of November 15, 2011 are as follows:
|
Name |
|
Age |
|
Position |
|
Thomas H. Adams, PhD |
|
68 |
|
Chairman of the Board |
|
Antonius Schuh, Ph.D |
|
47 |
|
Chief Executive Officer |
|
David Robbins. PhD |
|
55 |
|
Vice President Research and Development |
|
John Brancaccio |
|
63 |
|
Director |
|
Gary S. Jacob |
|
64 |
|
Director |
|
Gabriele M. Cerrone |
|
39 |
|
Director |
|
Dr. Stanley Tennant |
|
60 |
|
Director |
All directors hold office until the next annual meeting of stockholders and the election and qualification of their successors. Officers are elected annually by the board of directors and serve at the discretion of the board.
The principal occupations for the past five years (and, in some instances, for prior years) of each of our directors and executive officers are as follows:
Thomas H. Adams .Thomas H. Adams has been our Chairman of the Board since April 2009. Since June 2005, Dr. Adams has served as a director of IRIS International, Inc., a diagnostics company, and as Chief Technology Officer of IRIS since April 2006. Dr. Adams served as Chairman and Chief Executive Officer of Leucadia Technologies, a privately held medical-device company, from 1998 to April 2006, when Leucadia was acquired by IRIS. In 1989, Dr. Adams founded Genta, Inc., a publicly held biotechnology company in the field of antisense technology, and served as its Chief Executive Officer until 1997. Dr. Adams founded Gen-Probe, Inc. in 1984 and served as its Chief Executive Officer and Chairman until its acquisition by Chugai Biopharmaceuticals, Inc. in 1989. Before founding Gen-Probe, Dr. Adams held management positions at Technicon Instruments and the Hyland Division of Baxter Travenol. He has significant public-company experience serving as a director of Biosite Diagnostics, Inc., a publicly held medical research firm, from 1989 to 1998 and as a director of Invitrogen, a publicly held company that develops, manufactures and markets research tools and products, from 2000 to 2002. Dr. Adams holds a Ph.D. in Biochemistry from the University of California, at Riverside. Dr. Adam’s executive leadership, particularly in the diagnostic field, and the extensive healthcare expertise he has developed qualifies Dr. Adams to serve as a director of our company.
Antonius Schuh . Antonius Schuh joined us in October 2011 as our Chief Executive Officer. Dr. Schuh co-founded Sorrento Therapeutics, Inc., a biopharmaceutical company developing monoclonal antibodies, in January 2006 and has served as Chairman of the Board since such time and Chief Executive Officer since November 2008. From April 2006 to September 2008, Dr. Schuh served as Chief Executive Officer of AviaraDx (now bioTheranostics, Inc., a bioMerieux company), a molecular diagnostic testing company that is focused on clinical applications in oncology. From March 2005 to April 2006, Dr. Schuh was Chief Executive Officer of Arcturus Bioscience Inc., a developer of laser capture microdissection and reagent systems for microgenomics. From December 1996 to February 2005, Dr. Schuh was
employed by Sequenom Inc., a publicly traded diagnostic testing and genetics analysis company. He started with Sequenom as a Managing Director and was promoted to Executive Vice President, Business Development and Marketing, and from May 2000 to February 2005, served as Sequenom’s President and Chief Executive Officer. He also previously served as the Head of Business Development at Helm AG, an international trading and distribution corporation for chemical and pharmaceutical products, and in medical and regulatory affairs positions with Fisons Pharmaceuticals (now part of Sanofi-Aventis). Since March 2009, Dr. Schuh has been appointed to the board of directors of Diogenix, Inc., a privately held molecular diagnostic company, and since May 2009, he has served as a director of Transgenomic, Inc., a public biotechnology company focused on genetic analysis and molecular diagnostics. Dr. Schuh is a certified pharmacist and earned his Ph.D. in pharmaceutical chemistry from the University of Bonn, Germany.
David Robbins. David Robbins joined us in 2006. He is currently our Vice President of Research. Prior to joining us Dr. Robbins served as founding Vice President of Research and Development at ChromoLogic. Prior to ChromoLogic, Dr. Robbins was the founding Director at ViaLogy Before joining ViaLogy, Dr. Robbins served as Research Manager at SmithKline Beecham Clinical Labs (now Quest Diagnostics) from 1997-2000. From 1994-1997 he served as Manager of Assay Development for SmithKline Pharmaceuticals’ Molecular Diagnostics Venture (now diaDexus). From 1988-1994, Dr. Robbins was a Project Manager at Abbott Labs. He received his BA in Chemistry from the Johns Hopkins University in 1978 and his Ph.D. in Biochemistry from the University of Texas at Austin in 1983.
John Brancaccio . John Brancaccio, a retired CPA, has served as a director of our company since December 2005. Since April 2004, Mr. Brancaccio has been the Chief Financial Officer of Accelerated Technologies, Inc., an incubator for medical device companies. From May 2002 until March 2004, Mr. Brancaccio was the Chief Financial Officer of Memory Pharmaceuticals Corp., a biotechnology company. From 2000 to 2002, Mr. Brancaccio was the Chief Financial Officer/Chief Operating Officer of Eline Group, an entertainment and media company. Mr. Brancaccio is currently a director of Alfacell Corporation as well as a director of Synergy Pharmaceuticals, Inc. and Callisto Pharmaceuticals, Inc. Mr. Brancaccio’s chief financial officer experience provides him with valuable financial and accounting expertise which the Board believes qualifies him to serve as a director of our company.
Gary S. Jacob. Gary S. Jacob has served as a director of our company since February 2009. Since July 2008, Dr. Jacob has been President, Chief Executive Officer and a Director of Synergy Pharmaceuticals, Inc. and as Chairman of a subsidiary of Synergy from October 2003 until July 2008. Dr. Jacob currently serves as Chief Executive Officer and a director of Callisto Pharmaceuticals, Inc., Dr. Jacob has over twenty-five years of experience in the pharmaceutical and biotechnology industries across multiple disciplines including research & development, operations and business development. Prior to 1999, Dr. Jacob served as a Monsanto Science Fellow, specializing in the field of glycobiology, and from 1997 to 1998 was Director of Functional Genomics, Corporate Science & Technology, at Monsanto Company. Dr. Jacob also served from 1990 to 1997 as Director of Glycobiology at G.D. Searle Pharmaceuticals Inc. During the period of 1986 to 1990, he was Manager of the G.D. Searle Glycobiology Group at Oxford University, England. Dr. Jacob’s broad management expertise in the pharmaceutical and biotechnology industries provides relevant experience in a number of strategic and operational areas and led to the Board’s conclusion that he should serve as a director of our company.
Gabriele M. Cerrone . Gabriele M. Cerrone has served as a director of our company since February 2010. Since July 2008, Mr. Cerrone has served as Chairman of the Board of Directors and a consultant with Synergy Pharmaceuticals, Inc. From March 1999 to January 2005 Mr. Cerrone served as a Senior Vice President of Investments of Oppenheimer & Co. Inc., a financial services firm. In May 2001, Mr. Cerrone led the restructuring of SIGA Technologies, Inc., a biotechnology company, and served on its board of directors from May 2001 to May 2003. Mr. Cerrone also co-founded FermaVir Pharmaceuticals, Inc., a biotechnology company, and served as Chairman from August 2005 to September 2007, when the company was acquired by Inhibitex, Inc., a biotechnology company. Mr. Cerrone currently serves as a director of Inhibitex, Inc. In addition, Mr. Cerrone is Chairman and a consultant to Callisto Pharmaceuticals, Inc. Mr. Cerrone is the managing partner of Panetta Partners Ltd.; a limited partnership that is a private investor in both public and private venture capital in the life sciences and technology arena as well as real estate. Mr. Cerrone’s experience in finance and investment banking allows him to contribute broad financial and strategic planning expertise and led to the Board’s conclusion that he should serve as a director of the company.
Dr. Stanley Tennant. Dr. Tennant has served as a director of our company since December 2010. Since 1983, Dr Tennant has been a cardiologist in Greensboro, NC. He graduated from Wake Forest University School of Medicine in 1978 and completed postgraduate training in Internal Medicine and Cardiology at Vanderbilt University in 1983. Dr. Tennant’s practical experience in the healthcare field led to the Board’s conclusion that he should serve as a director of our company.
Family Relationships
None.
Involvement in Certain Legal Proceedings
To our knowledge, during the last ten years, none of our directors, executive officers (including those of our subsidiaries), promoters or control persons have:
· Had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.
· Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses.
· Been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.
· Been found by a court of competent jurisdiction (in a civil action), the SEC, or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
· Been the subject to, or a party to, any sanction or order, not subsequently reverse, suspended or vacated, of any self-regulatory organization, any registered entity, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Board Leadership Structure and Board’s Role in Risk Oversight
Since April 2009, we have separated the roles of Chairman of the Board and Chief Executive Officer. Although the separation of roles has been appropriate for us during that time period, in the view of the board of directors, the advisability of the separation of these roles depends upon the specific circumstances and dynamics of our leadership.
As Chairman of the Board, Dr. Adams serves as the primary liaison between the CEO and the independent directors and provides strategic input and counseling to the CEO. With input from other members of the board of directors, committee chairs and management, he presides over meetings of the board of directors. Mr. Adams has developed an extensive knowledge of our company, its challenges and opportunities and has a productive working relationship with our senior management team.
The board of directors, as a unified body and through committee participation, organizes the execution of its monitoring and oversight roles and does not expect its Chairman to organize those functions. Our primary rationale for separating the positions of Board Chairman and the CEO is the recognition of the time commitments and activities required to function effectively as Chairman and as the CEO of a company with a relatively flat management structure. The separation of roles has also permitted the board of directors to recruit senior executives into the CEO position with skills and experience that meet the board of director’s planning for the position who may not have extensive public company board experience.
The board of directors has two standing committees—Audit and Compensation. The membership of each of the board committees is comprised of independent directors, with each of the committees having a separate chairman, each of whom is an independent director. Our non-management members of the board of directors meet in executive session at each board meeting.
Risk is inherent with every business, and how well a business manages risk can ultimately determine its success. Management is responsible for the day-to-day management of risks the company faces, while the board of directors, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, the board of directors has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed.
The board of directors believes that establishing the right “tone at the top” and that full and open communication between executive management and the board of directors are essential for effective risk management and oversight. Our CEO communicates frequently with members of the board to discuss strategy and challenges facing the company. Senior management usually attends our regular quarterly board meetings and is available to address any questions or concerns raised by the board of directors on risk management-related and any other matters. Each quarter, the board of directors receives presentations from senior management on matters involving our areas of operations.
Director Independence
Our board of directors has determined that a majority of the board consists of members are currently “independent” as that term is defined under current listing standards of NASDAQ.
Board Committees
Audit Committee
The Audit Committee’s responsibilities include: (i) reviewing the independence, qualifications, services, fees, and performance of the independent registered public accountants, (ii) appointing, replacing and discharging the independent auditors, (iii) pre-approving the professional services provided by the independent auditors, (iv) reviewing the scope of the annual audit and reports and recommendations submitted by the independent auditors, and (v) reviewing our financial reporting and accounting policies,
including any significant changes, with management and the independent auditors. The Audit Committee also prepares the Audit Committee report that is required pursuant to the rules of the SEC.
The Audit Committee currently consists of John P. Brancaccio, chairman of the Audit Committee and Thomas Adams. Our board of directors has determined that each of Mr. Brancaccio and Dr. Adams is “independent” as that term is defined under applicable SEC and NASDAQ rules. Mr. Brancaccio is our audit committee financial expert. The board of directors has adopted a written charter setting forth the authority and responsibilities of the Audit Committee.
Compensation Committee
The Compensation Committee has responsibility for assisting the board of directors in, among other things, evaluating and making recommendations regarding the compensation of the executive officers and directors of our company; assuring that the executive officers are compensated effectively in a manner consistent with our stated compensation strategy; producing an annual report on executive compensation in accordance with the rules and regulations promulgated by the SEC; periodically evaluating the terms and administration of our incentive plans and benefit programs and monitoring of compliance with the legal prohibition on loans to our directors and executive officers.
The Compensation Committee currently consists of Dr. Stanley Tennant, chairman of the Compensation Committee, Dr. Gary S. Jacob and John P. Brancaccio. Our board of directors has determined that all of the members are “independent” under the current listing standards of NASDAQ. The board of directors has adopted a written charter setting forth the authority and responsibilities of the Compensation Committee .
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee is an officer or employee of our company. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.
Code of Ethics
We have adopted a formal Code of Business Conduct and Ethics applicable to all Board members, executive officers and employees. A copy of our Code of Business Conduct and Ethics will be provided free of charge upon request to: Secretary, TrovaGene, Inc. 11055 Flintkote Avenue, San Diego, California 92121.
ITEM 6. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table provides certain summary information concerning compensation awarded to, earned by or paid to our Principal Executive Officer and two other highest paid executive officers whose total annual salary and bonus exceeded $100,000 (collectively, the “named executive officers”) for fiscal year 2010.
|
Name & Principal Position |
|
Year |
|
Salary ($) |
|
Option
|
|
Total ($) |
|
|
Dr. Andreas Braun
|
|
2010 |
|
199,038 |
|
56,744 |
|
255,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce Huebner
|
|
2010 |
|
154,565 |
|
8,594 |
|
163,159 |
|
(A) Includes his salary as Vice President and Chief Medical Officer for the period January 1, 2010 - December 31, 2010.
(1) Amount represents aggregate grant date fair value in accordance with FASB ASC Topic 718. See Note 7 to the Consolidated Financial Statements.
(2) Dr. Braun resigned from our company effective August 5, 2011. Dr. Braun was our Vice President and Chief Medical Officer until June 18, 2010 when he was appointed Acting CEO.
(3) Mr. Huebner resigned from our company on June 18, 2010. He was issued 76,472 shares of our common stock and he was granted warrants to purchase 76,472 shares of common stock valued at $8,594 and expensed in the year ended December 31, 2010.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth information for the named executive officers regarding the number of shares subject to both exercisable and unexercisable stock options, as well as the exercise prices and expiration dates thereof, as of December 31, 2010.
|
Name |
|
Number of
|
|
Number of
|
|
Option
|
|
Option
|
|
Number of
|
|
|
|
Dr. Andreas Braun |
|
–– |
|
750,000 |
(1) |
$ |
0.60 |
|
February 26, 2020 |
|
–– |
|
(1) The unexercisable options of 750,000 vest as follows: 250,000 each on February 26, 2011, 2012 and 2013.
DIRECTOR COMPENSATION
The following table sets forth summary information concerning the total compensation paid to our non-employee directors in 2010 for services to our company.
|
Name |
|
Fees Earned or Paid
|
|
Option
|
|
Total |
|
|||
|
Thomas H. Adams(2) |
|
$ |
27,000 |
|
$ |
— |
|
$ |
27,000 |
|
|
John P. Brancaccio(3) |
|
$ |
33,500 |
|
$ |
4,998 |
|
$ |
38,498 |
|
|
Gary S. Jacob(4) |
|
$ |
25,500 |
|
$ |
3,927 |
|
$ |
29,427 |
|
|
Gabriel M. Cerrone(5) |
|
$ |
18,750 |
|
$ |
3,570 |
|
$ |
22,320 |
|
(1) Amounts represent the aggregate grant date fair value for fiscal year 2010 of stock options granted in 2010 under ASC Topic 718 as discussed in Item 15. Financial Statements—Note 7 Stock Option Plan . .
(2) As of December 31, 2010, 4,800,000 stock options were outstanding, of which 1,600,000 were exercisable.
(3) As of December 31, 2010, 215,747 stock options were outstanding, of which 161,747 were exercisable.
(4) As of December 31, 20010, 405,000 stock options were outstanding, of which 355,000 were exercisable.
(5) As of December 31, 2010, 2,593,571 stock options were outstanding, of which 2,093,571 were exercisable.
Employment Agreements
On October 4, 2011, we entered into an executive agreement with Antonius Schuh, Ph.D. in which he agreed to serve as our Chief Executive Officer. The term of the agreement is effective as of October 4, 2011 and continues until October 4, 2015 and is automatically renewed for successive one year periods at the end to each term. Dr. Schuh’s compensation is $275,000 per year. Dr. Schuh is eligible to receive a cash bonus of up to 50% of his base salary per year based on meeting certain performance objectives and bonus criteria. Upon entering the agreement, Dr. Schuh was granted 3,800,000 non-qualified stock options which have an exercise price of $0.50 per share and vest annually in equal amounts over a period of four years. Dr. Schuh is also eligible to receive a realization bonus upon the occurrence of either of the following events, whichever occurs earlier;
(i) In the event that during the term of the agreement, for a period of 90 consecutive trading days, the market price of the common stock is $1.25 or more and the volume of the common stock daily trading volume is 125,000 or more, we shall pay or issue Dr. Schuh a bonus in an amount of $3,466,466 in either cash or registered common stock or a combination thereof as mutually agreed by Dr. Schuh and us; or
(ii) In the event that during the term of the agreement, a change of control occurs where the per share enterprise value of our company equals or exceeds $1.25 per share, we shall pay Dr. Schuh a bonus in an amount determined by multiplying the enterprise value by 4.0%. In the event in a change of control the per share enterprise value exceeds a minimum of $2.40 per share, $3.80 per share or $5.00 per share, Dr.
Schuh shall receive a bonus in an amount determined by multiplying the incremental enterprise value by 2.5%, 2.0% or 1.5%, respectively.
If the executive agreement is terminated by us for cause or as a result of Dr. Schuh’s death or permanent disability or if Dr. Schuh terminates his agreement voluntarily, Dr. Schuh shall receive a lump sum equal to (i) any portion of unpaid base compensation then due for periods prior to termination, (ii) any bonus or realization bonus earned but not yet paid through the date of termination and (iii) all expenses reasonably incurred by Dr. Schuh prior to date of termination. If the executive agreement is terminated by us without cause Dr. Schuh shall receive a severance payment equal to base compensation for three months if termination occurs ten months after the effective date of the agreement and six months if termination occurs subsequent to ten months from the effective date. If the executive agreement is terminated as a result of a change of control, Dr. Schuh shall receive a severance payment equal to base compensation for twelve months and all unvested stock options shall immediately vest and become fully exercisable for a period of six months following the date of termination.
On December 26, 2005, we entered into a letter agreement with David Robbins, Ph.D. to serve as Vice President of Product Development for a term of three years. Mr. Robbins received a grant of 100,000 incentive stock options with an exercise price of $1.86 per share which vested in equal amounts over a period of three years beginning January 3, 2007. The agreement contained a provision pursuant to which all of the unvested stock options would vest in the event there was a change in control of our company. The above options were fully vested at January 3, 2009.
On October 7, 2011, we entered into an employment agreement with David Robbins, Ph.D. in which he agreed to serve as our Vice President, Research and Development. The term of the agreement is effective as of October 7, 2011 and continues until October 7, 2012 and is automatically renewed for successive one year periods at the end to each term. Dr. Robbins’ salary is $195,000 per year. Dr. Robbins is eligible to receive a cash bonus of up to 25% of his base salary per year at the discretion of the Compensation Committee. If the employment agreement is terminated by us without cause, Dr. Robbins shall be entitled to a severance payment equal to three months of base salary.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
On August 6, 2010, we entered into an Agreement and Plan of Merger with E Acq Corp., our wholly-owned subsidiary, and Etherogen, Inc. pursuant to which we acquired all of the outstanding common stock of Etherogen, Inc. by issuing 12,262,782 shares of our common stock to the shareholders of Etherogen. Thomas Adams, our Chairman, Gary Jacob, a director of our company and Panetta Partners, Ltd., each were stockholders in Etherogen. Gabriele Cerrone, a director of our company, is the managing partner of Panetta and in such capacity only exercises voting and dispositive control over securities owned by Panetta, despite him having only a small pecuniary interest in such securities. Dr. Adams, Dr. Jacob and Panetta received 1,800,000, 600,000 and 1,800,000 shares of our common stock in the merger. The disinterested members of our board of directors determined that the terms of the merger and the merger agreement were fair to, and in the best interests of, the company and our stockholders and the merger was approved by the disinterested board. The fair value of the shares issued to effect the merger was $2,771,389, based on the fair value of our common stock on the date of the merger.
The merger was accounted for as an acquisition of assets for accounting purposes primarily because there were no processes acquired. The assets acquired consisted primarily of de minimus property, plant and equipment, patents, trademarks and other intellectual property, and in-process research and development. In addition, we assumed a note in the amount of $104,700 which was converted in to shares on the date of acquisition. In accordance with ASC Topic 805, Business Combinations, we recorded the total fair value of an intangible asset related to the patent of $104,700 on our consolidated balance sheet. The excess of the fair value of the consideration issued over the fair value of the net assets acquired was $2,666,869. The total excess of the fair value of the net assets acquired and the conversion of the notes was recorded as purchased in process research and development expense-related party on our consolidated statement of operations.
On July 18, 2011 the holders of our Debentures converted the amount outstanding of $2,335,050 into 4,670,100 shares of our common stock at $.22 per share valued at $1,027,242. In addition, we issued 467,010 shares of common stock valued at $102,742 to the Debenture Holders as consideration for their agreement to convert their debentures. The carrying value of the Notes extinguished, including accrued but unpaid interest, was $2,335,050. In accordance with ASC Topic 405-20 we calculated the difference between (i) the fair value of the common stock issued and the new warrants valued at $2,014,167 and (ii) the carrying value of the debentures and the old warrants valued at $2,637,550. This resulted in a net gain of $623,383 on extinguishment of the debt and will be recorded in the 3 rd quarter of 2011.
Stanley Tennant, a director of our company, and a Debenture Holder in the principal amount of $137,500 received 338,126 shares of common stock relating to the Forbearance Agreement. R. Merrill Hunter, a principal stockholder of our company, and a Debenture Holder in the principal amount of $550,000 received 1,352,504 shares of common stock relating to the Forbearance Agreement.
The 6,083,763 warrants, originally issued in 2006 with an expiration date of November 12, 2012, were exchanged for 6,083,763 new warrants with a new expiration date of December 31, 2017. These warrants had registration rights and in accordance with ASC 815 “ Derivatives and Hedging”, (“ASC 815”), which was adopted effective January 1,2009, we have determined that these warrants must be recorded as derivative liabilities with a charge to additional paid in capital. The fair value of these warrants on January 1, 2009, the date of adoption of ASC 815, was $884,277. This derivative liability has been marked to market at the end of each reporting period since January 1, 2009. The change in fair value for the six months ended June 30, 2011 and inception (August 4, 1999) to June 30, 2011 was a gain on valuation of $118,586, and $578,173, respectively.
Any future transactions with officers, directors or 5% stockholders will be on terms no less favorable to us than could be obtained from independent parties. Any affiliated transactions must be approved by a majority of our independent and disinterested directors who have access to our counsel or independent legal counsel at our expense.
Our board of directors has determined that a majority of the board consists of members who are currently “independent” as that term is defined under current listing standards of NASDAQ.
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
We are not currently a party to any material legal proceedings.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
Our common stock currently trades over the counter on the pink sheets under the symbol TROV.PK.
Our common stock was quoted on the OTC Bulletin Board under the symbol “XNOM.OB” from July 27, 2004 until June 14, 2007. Prior to July 27, 2004, our common stock was quoted on the OTC Bulletin Board under the symbol “UKAR.OB” but never traded. The following table shows the reported high and low closing bid quotations per share for our common stock based on information provided by the OTC Bulletin Board. Such over-the-counter market quotations reflect inter-dealer prices, without markup, markdown or commissions and, particularly since our common stock is traded infrequently, may not necessarily represent actual transactions or a liquid trading market. The closing price of our common stock on the Pink Sheets on November 15 2011 was $0.54 per share.
|
Fiscal 2011 |
|
High |
|
Low |
|
||
|
Third Quarter (through November 15, 2011) |
|
$ |
0.65 |
|
$ |
0.16 |
|
|
Second Quarter |
|
$ |
0.39 |
|
$ |
0.13 |
|
|
First Quarter |
|
$ |
0.50 |
|
$ |
0.27 |
|
|
Fiscal 2010 |
|
High |
|
Low |
|
||
|
Fourth Quarter |
|
$ |
0.52 |
|
$ |
0.19 |
|
|
Third Quarter |
|
$ |
0.50 |
|
$ |
0.15 |
|
|
Second Quarter |
|
$ |
0.70 |
|
$ |
0.40 |
|
|
First Quarter |
|
$ |
0.59 |
|
$ |
0.52 |
|
Number of Stockholders
As of November 15, 2011 there were 141 holders of record of our common stock.
Dividend Policy
Historically, we have not paid any dividends to the holders of our common stock and we do not expect to pay any such dividends in the foreseeable future as we expect to retain our future earnings for use in the operation and expansion of our business. Pursuant to the terms of the Series A Convertible Preferred Stock, dividends cannot be paid to the holders of our common stock so long as any dividends due on the Series A Convertible Preferred Stock remain unpaid.
Equity Compensation Plan Information
The following table summarizes information about our equity compensation plans as of December 31, 2010.
|
Plan Category |
|
Number of
|
|
Weighted-
|
|
Number of
|
|
|
|
|
|
(a) |
|
(b) |
|
© |
|
|
|
Equity Compensation Plans Approved by Stockholders(1) |
|
14,457,651 |
|
$ |
.90 |
|
7,542,349 |
|
|
Equity Compensation Plans Not Approved by Stockholders(2) |
|
15,774,338 |
|
$ |
.50 |
|
–– |
|
|
Total |
|
30,231,989 |
|
|
|
7,542,349 |
|
|
(1) Consists entirely of options.
(2) Consists entirely of warrants.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
On June 9, 2009 and July 2, 2009, we closed two private placement financings which raised gross proceeds of $275,000. We issued 550,000 shares of our common stock and warrants to purchase 550,000 shares of common stock. The purchase price paid by the investors was $.50 for each unit. The warrants expire expire on December 31, 2018. Each warrant is exercisable at $.70 per share. In connection with the issuance of the units, we relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.
During the period from October 2, 2009 to December 16, 2009 we closed seven private placement financings which raised gross proceeds of $1,190,000. We issued 2,380,000 shares of our common stock and warrants to purchase 2,380,000 shares of common stock. The purchase price paid by the investor was $.50 for each unit. The warrants expire on December 31, 2018 and are exercisable at $.50 per share. In connection with the issuance of the units, we relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.
During the year ended December 31, 2010, we closed twelve private placement financings which raised gross proceeds of $1,734,700. We issued 3,469,400 shares of our common stock and warrants to purchase 3,469,400 shares of common stock in these transactions. The purchase price paid by the investors was $.50 for each unit. The warrants expire December 31, 2018 and are exercisable at $.50 per share. In connection with the issuance of the units, we relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.
During the nine months ended September 30, 2011, we closed fifteen private placement financings which raised gross proceeds of $1,510,000. We issued 3,020,000 shares of our common stock and warrants to purchase 3,020,000 shares of common stock in these transactions. The purchase price paid by the investors was $.50 for each unit. The warrants expire December 31, 2018 and are
exercisable at $.50 per share. In connection with the issuance of the units, we relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.
On October 3, 2011, we closed a private placement which raised gross proceeds of $693,500. We issued 1,387,000 shares of our common stock and warrants to purchase 1,387,000 shares of common stock in these transactions. The purchase price paid by the investors was $.50 for each unit. The warrants expire December 31, 2018 and are exercisable at $.50 per share. In connection with the issuance of the units, we relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.
ITEM 11. DESCRIPTION OF REGISTRANT’S SECURITIES TO BE REGISTERED.
General
As of November 19, 2011, our authorized capital stock consisted of 100,000,000 million shares of common stock, $0.0001 par value per share, and 20,000,000 million shares of preferred stock, $0.001 par value per share. Our board of directors may establish the rights and preferences of the preferred stock from time to time. As of November 19, 2011, there are 63,647,157 shares of our common stock issued and outstanding and 95,600 shares of Series A convertible preferred stock are issued and outstanding.
Common Stock
Holders of our common stock are entitled to one vote per share. Our certificate of incorporation does not provide for cumulative voting. Holders of our common stock are entitled to receive ratably such dividends, if any, as may be declared by our board of directors out of legally available funds. However, the current policy of our board of directors is to retain earnings, if any, for the operation and expansion of the company and, the consent of the holders of our series A convertible preferred stock is required for the payment of any such dividends on our common stock. Upon liquidation, dissolution or winding-up, the holders of our common stock are entitled to share ratably in all of our assets which are legally available for distribution, after payment of or provision for all liabilities and the liquidation preference of any outstanding Series A convertible preferred stock. The holders of our common stock have no preemptive, subscription, redemption or conversion rights.
Preferred Stock
Our certificate of incorporation provides that our board of directors is authorized to provide for the issuance of shares of preferred stock in one or more series and, by filing a certificate of designations pursuant to the applicable law of the State of Delaware (hereinafter referred to as a “Preferred Stock Designation”), to establish from time to time for each such series the number of shares to be included in each such series and to fix the designations, powers, rights and preferences of the shares of each such series, and the qualifications, limitations and restrictions thereof. The authority of the board of directors with respect to each series of Preferred Stock includes, but is not limited to, determination of the following:
· the designation of the series, which may be by distinguishing number, letter or title;
· the number of shares of the series, which number the board of directors may thereafter (except where otherwise provided in the Preferred Stock Designation) increase or decrease (but not below the number of shares thereof then outstanding);
· whether dividends, if any, shall be paid, and, if paid, the date or dates upon which, or other times at which, such dividends shall be payable, whether such dividends shall be cumulative or noncumulative, the rate of such dividends (which may be variable) and the relative preference in payment of dividends of such series;
· the redemption provisions and price or prices, if any, for shares of the series;
· the terms and amounts of any sinking fund or similar fund provided for the purchase or redemption of shares of the series;
· the amounts payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of our corporation;
· whether the shares of the series shall be convertible into shares of any other class or series, or any other security, of our corporation or any other corporation, and, if so, the specification of such other class or series of such other security, the conversion price or prices, or rate or rates, any adjustments thereto, the date or dates on which such shares shall be convertible and all other terms and conditions upon which such conversion may be made;
· restrictions on the issuance of shares of the same series or of any other class or series; and
· the voting rights, if any, of the holders of shares of the series.
On July 13, 2005, we closed a private placement of 277,100 shares of Series A Convertible Preferred Stock (the “Series A Convertible Preferred Stock”) and 386,651 warrants to certain investors for aggregate gross proceeds of $2,771,000 pursuant to a Securities Purchase Agreement dated as of July 13, 2005. The warrants sold to the Investors are immediately exercisable at $3.25 per share and are exercisable at any time within five years from the date of issuance. These investor warrants had a fair value of $567,085 on the date of issuance using a market price of $2.40 on that date. In addition we paid an aggregate $277,102 and issued an aggregate 105,432 warrants to purchase common stock to certain selling agents. The warrants issued to the selling agents are immediately exercisable at $2.50 per share and will expire five years after issuance. The material terms of the Series A Convertible Preferred Stock consist of:
1) Dividends. Holders of the Series A Convertible Preferred Stock shall be entitled to receive cumulative dividends at the rate per share of 4% per annum, payable quarterly on March 31, June 30, September 30 and December 31, beginning with September 30, 2005. Dividends shall be payable, at our sole election, in cash or shares of common stock. As of December 31, 2009 we had recorded $76,480 in accrued cumulative unpaid preferred stock dividends. Preferred stock dividends of $38,240 for each of the years end December 31, 2009 and 2008 were recorded on the consolidated statements of operations. As of June 30, 2011 and December 31, 2010, we had recorded $133,840 and $114,720, respectively, in accrued cumulative unpaid preferred stock dividends which included $19,120 and $38,240 for the six months ended June 30, 2011 and the year ended December 31, 2010, respectively.
2) Voting Rights. Shares of the Series A Convertible Preferred Stock shall have no voting rights. However, so long as any shares of Series A Convertible Preferred Stock are outstanding, we shall not, without the affirmative vote of the holders of the shares of Series A Convertible Preferred Stock then outstanding, (a) adversely change the powers, preferences or rights given to the Series A Convertible Preferred Stock, (b) authorize or create any class of stock senior or equal to the Series A Convertible Preferred Stock, (c) amend its articles of incorporation or other charter documents, so as to affect adversely any rights of the holders of Series A Convertible Preferred Stock or (d) increase the authorized number of shares of Series A Convertible Preferred Stock.
3) Liquidation. Upon any liquidation, dissolution or winding-up of our company, the holders of the Series A Convertible Preferred Stock shall be entitled to receive an amount equal to the Stated Value per share, which is $10 per share plus any accrued and unpaid dividends.
4) Conversion Rights. Each share of Series A Convertible Preferred Stock shall be convertible at the option of the holder into that number of shares of common stock determined by dividing the Stated Value, currently $10 per share, by the conversion price, originally $2.15 per share.
5) Automatic Conversion . Beginning July 13, 2006, if the price of the common stock equals $4.30 per share for 20 consecutive trading days, and an average of 50,000 shares of common stock per day shall have been traded during the 20 trading days, we shall have the right to deliver a notice to the holders of the Series A Convertible Preferred Stock, to convert any portion of the shares of Series A Convertible Preferred Stock into shares of Common Stock at the conversion price.
Stock Options
As of November 15, 2011 we had 15,639,151 stock options issued and outstanding, of which 9,349,818 are exercisable.
Warrants
As of November 15, 2011 we had 20,833,843 warrants outstanding, all of which are exercisable.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Broadridge Corporate Issuer Solutions, Inc.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (“DGCL”) provides, in general, that a corporation incorporated under the laws of the State of Delaware, such as we are, may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than a derivative action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. In the case of a derivative action, a Delaware corporation may indemnify any such person against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification will be made in respect of any claim, issue or matter as to which such person will have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery of the State of Delaware or any other court in which such action was brought determines such person is fairly and reasonably entitled to indemnity for such expenses.
Our Certificate of Incorporation and Bylaws provide that we will indemnify our directors, officers, employees and agents to the extent and in the manner permitted by the provisions of the DGCL, as amended from time to time, subject to any permissible expansion or limitation of such indemnification, as may be set forth in any stockholders’ or directors’ resolution or by contract.
Any repeal or modification of these provisions approved by our stockholders shall be prospective only, and shall not adversely affect any limitation on the liability of any of our directors or officers existing as of the time of such repeal or modification.
We are also permitted to apply for insurance on behalf of any director, officer, employee or other agent for liability arising out of his actions, whether or not the DGCL would permit indemnification.
Anti-Takeover Effect of Certain By-Law Provisions
Certain provisions of our By-Laws are intended to strengthen the Board’s position in the event of a hostile takeover attempt. These provisions have the following effects:
· they provide that only business brought before an annual meeting by the Board or by a stockholder who complies with the procedures set forth in the By-Laws may be transacted at an annual meeting of stockholders; and
· they provide for advance notice of certain stockholder actions, such as the nomination of directors and stockholder proposals.
Disclosure of Commission Position on Indemnification for Securities Act Liabilities
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to our directors, officers and persons controlling us, we have been advised that it is the Securities and Exchange Commission’s opinion that such indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is, therefore, unenforceable.
See Item 15 — “Financial Statements and Exhibits.”
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None .
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) The following financial statements are being filed as a part of this registration statement.
TrovaGene, Inc.
Index to Consolidated Financial Statements
|
|
F-2 |
|
|
|
|
|
|
|
F-3 |
|
|
|
|
|
|
|
F-4 |
|
|
|
|
|
|
|
F-5 |
|
|
|
|
|
|
|
F-11 |
|
|
|
|
|
|
|
F-13 |
|
|
|
|
|
|
Condensed Consolidated Balance Sheets — June 30, 2011 (unaudited) and December 31, 2010 |
|
F-42 |
|
|
|
|
|
|
F-43 |
|
|
|
|
|
|
|
F-44 |
|
|
|
|
|
|
|
F-45 |
|
|
|
|
|
|
Notes to Condensed Consolidated Financial Statements (unaudited) |
|
F-46 |
(b) Exhibits
|
Exhibit
|
|
Description |
|
|
|
|
|
2.1 |
|
Agreement and Plan of Merger by and among TrovaGene, Inc., E Acq corp. and Etherogen, Inc. dated as of August 6, 2010 |
|
|
|
|
|
3.1 |
|
Amended and Restated Certificate of Incorporation of TrovaGene, Inc. |
|
|
|
|
|
3.2 |
|
By-Laws of TrovaGene, Inc. |
|
|
|
|
|
4.1 |
|
Form of Common Stock Certificate of TrovaGene, Inc. |
|
|
|
|
|
4.2 |
|
2004 Stock Option Plan (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on July 19, 2004). |
|
|
|
|
|
10.1 |
|
Employment Agreement between TrovaGene, Inc. and David Robbins dated October 7, 2011. |
|
|
|
|
|
10.2 |
|
Executive Agreement between TrovaGene, Inc. and Antonius Schuh dated October 4, 2011. |
|
|
|
|
|
14 |
|
Code of Business Conduct and Ethics Amended and Restated 2011. |
|
|
|
|
|
21 |
|
List of Subsidiaries. |
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
TrovaGene, Inc. |
|
|
|
|
|
|
|
By: |
/s/ Antonius Schuh, Ph.D |
|
|
Name: Antonius Schuh, Ph.D |
|
|
|
|
|
|
|
Title: Chief Executive Officer |
|
Date: November 23, 2011
TROVAGENE, INC.
(A Development Stage Company)
Index to Consolidated Financial Statements
|
|
F-2 |
|
|
|
|
|
|
Consolidated Balance Sheets as of December 31, 2010 and 2009 |
|
F-3 |
|
|
|
|
|
|
F-4 |
|
|
|
|
|
|
|
F-5 |
|
|
|
|
|
|
|
F-11 |
|
|
|
|
|
|
|
F-13 |
|
|
|
|
|
|
Condensed Consolidated Balance Sheets — June 30, 2011 (unaudited) and December 31, 2010 |
|
F-42 |
|
|
|
|
|
|
F-43 |
|
|
|
|
|
|
|
F-44 |
|
|
|
|
|
|
|
F-45 |
|
|
|
|
|
|
Notes to Condensed Consolidated Financial Statements (unaudited) |
|
F-46 |
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
TrovaGene, Inc.
San Diego, CA
We have audited the accompanying consolidated balance sheets of TrovaGene, Inc. and Subsidiaries (a development stage company) as of December 31, 2010 and 2009 and the related consolidated statements of operations, stockholders’ equity (deficiency), and cash flows for each of the two years in the period ended December 31, 2010 and for the period from August 4, 1999 (inception) to December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TrovaGene, Inc. and Subsidiaries at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2010 and the period from August 4, 1999 (inception) to December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
|
/s/ BDO USA, LLP |
|
|
New York, New York |
|
|
November 23, 2011 |
|
TrovaGene, Inc. and Subsidiaries
(A Development Stage Company)
|
|
|
December 31, 2010 |
|
December 31, 2009 |
|
||
|
|
|
|
|
|
|
||
|
Assets |
|
|
|
|
|
||
|
Current assets: |
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
58,703 |
|
$ |
545,166 |
|
|
Accounts receivable |
|
75,000 |
|
27,965 |
|
||
|
Prepaid expenses and other current assets |
|
151,032 |
|
75,531 |
|
||
|
Total current assets |
|
284,735 |
|
648,662 |
|
||
|
Property and equipment, net |
|
31,260 |
|
11,901 |
|
||
|
Other assets |
|
196,229 |
|
101,297 |
|
||
|
|
|
$ |
512,224 |
|
$ |
761,860 |
|
|
Liabilities and Stockholders’ Deficiency |
|
|
|
|
|
||
|
Current liabilities: |
|
|
|
|
|
||
|
Accounts payable |
|
$ |
637,863 |
|
$ |
826,316 |
|
|
Interest payable |
|
28,639 |
|
29,025 |
|
||
|
Accrued expenses |
|
420,099 |
|
236,801 |
|
||
|
Convertible debentures |
|
2,335,050 |
|
2,113,677 |
|
||
|
Total current liabilities |
|
3,421,651 |
|
3,205,819 |
|
||
|
Derivative financial instruments |
|
2,085,938 |
|
1,342,750 |
|
||
|
Commitments and Contingencies |
|
|
|
|
|
||
|
Stockholders’ deficiency |
|
|
|
|
|
||
|
Preferred stock, $0.001 par value, 20,000,000 shares authorized, 95,600 shares outstanding at December 31, 2010 and 2009, designated as Series A Convertible Preferred Stock with liquidation preference of $956,000 at December 31, 2010 and 2009 |
|
96 |
|
96 |
|
||
|
Common stock, $0.0001 par value, 100,000,000 shares authorized, 52,610,713 and 35,211,908 issued and outstanding at December 31, 2010 and December 31, 2009, respectively |
|
5,261 |
|
3,521 |
|
||
|
Additional paid-in capital |
|
36,320,257 |
|
32,043,275 |
|
||
|
Deficit accumulated during development stage |
|
(41,320,979 |
) |
(35,833,601 |
) |
||
|
Total stockholders’ deficiency |
|
(4,995,365 |
) |
(3,786,709 |
) |
||
|
|
|
$ |
512,224 |
|
$ |
761,860 |
|
The accompanying notes are an integral part of these consolidated financial statements.
TrovaGene, Inc. and Subsidiaries
(A Development Stage Company)
Consolidated Statements of Operations
|
|
|
For the years ended December 31, |
|
For the period
|
|
|||||
|
|
|
2010 |
|
2009 |
|
December 31, 2010 |
|
|||
|
Revenues |
|
$ |
265,665 |
|
$ |
653,994 |
|
$ |
1,750,549 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|||
|
Research and development |
|
1,024,159 |
|
562,212 |
|
14,618,468 |
|
|||
|
Purchased in-process research and development expense-related party |
|
2,666,869 |
|
— |
|
2,666,869 |
|
|||
|
General and administrative |
|
1,953,925 |
|
1,660,688 |
|
20,217,041 |
|
|||
|
Total operating expenses |
|
5,644,953 |
|
2,222,900 |
|
37,502,378 |
|
|||
|
Operating loss |
|
(5,379,288 |
) |
(1,568,906 |
) |
(35,751,829 |
) |
|||
|
Other income (expense): |
|
|
|
|
|
|
|
|||
|
Interest income |
|
182 |
|
— |
|
266,712 |
|
|||
|
Interest expense |
|
(115,585 |
) |
(160,981 |
) |
(1,268,736 |
) |
|||
|
Amortization of deferred debt costs and original issue discount |
|
(221,373 |
) |
(202,926 |
) |
(2,346,330 |
) |
|||
|
Change in fair value of derivative instruments |
|
266,926 |
|
273,382 |
|
1,055,333 |
|
|||
|
Liquidated damages and other forbearance agreement settlement costs |
|
— |
|
(824,376 |
) |
(1,758,111 |
) |
|||
|
Net loss |
|
(5,449,138 |
) |
(2,483,807 |
) |
(39,802,961 |
) |
|||
|
Items attributed to preferred stock: |
|
|
|
|
|
|
|
|||
|
Preferred stock dividend |
|
(38,240 |
) |
(38,240 |
) |
(269,677 |
) |
|||
|
Cumulative effect of early adoption of ASC 815-40 on November 1, 2006 |
|
— |
|
|
|
(455,385 |
) |
|||
|
Series A convertible preferred stock beneficial conversion feature accreted as a dividend |
|
— |
|
— |
|
(792,956 |
) |
|||
|
Net loss attributable to common stockholders |
|
$ |
(5,487,378 |
) |
$ |
(2,522,049 |
) |
$ |
(41,320,979 |
) |
|
Weighted average shares of common stock outstanding: |
|
|
|
|
|
|
|
|||
|
Basic and diluted |
|
42,952,748 |
|
31,178,310 |
|
|
|
|||
|
Net loss per common share: |
|
|
|
|
|
|
|
|||
|
Basic and diluted |
|
$ |
(0.13 |
) |
$ |
(0.1 |
) |
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
TrovaGene, Inc. and Subsidiaries
(A Development Stage Company)
Consolidated Statements of Stockholders’ Equity (Deficiency)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit |
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
Accumulated |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
Stock |
|
During |
|
Stockholders’ |
|
||||||
|
|
|
Common Stock |
|
Treasury Shares |
|
Paid-In |
|
Based |
|
Development |
|
Equity |
|
||||||||||
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Capital |
|
Compensation |
|
Stage |
|
(Deficiency) |
|
||||||
|
Balance, August 4, 1999 (Inception) |
|
0 |
|
$ |
0 |
|
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
|
Issuance of common stock to founders for cash at $0.0002 per share |
|
222,000,000 |
|
22,200 |
|
|
|
|
|
19,800 |
|
|
|
|
|
42,000 |
|
||||||
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,760 |
) |
(14,760 |
) |
||||||
|
Balance, January 31, 2000 |
|
222,000,000 |
|
22,200 |
|
0 |
|
0 |
|
19,800 |
|
0 |
|
(14,760 |
) |
27,240 |
|
||||||
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
(267,599 |
) |
(267,599 |
) |
||||||
|
Balance, January 31, 2001 |
|
222,000,000 |
|
22,200 |
|
0 |
|
0 |
|
19,800 |
|
0 |
|
(282,359 |
) |
(240,359 |
) |
||||||
|
Capital contribution of cash |
|
|
|
|
|
|
|
|
|
45,188 |
|
|
|
|
|
45,188 |
|
||||||
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
(524,224 |
) |
(524,224 |
) |
||||||
|
Balance, January 31, 2002 |
|
222,000,000 |
|
22,200 |
|
0 |
|
0 |
|
64,988 |
|
0 |
|
(806,583 |
) |
(719,395 |
) |
||||||
|
Issuance of common stock for cash at $0.0005 per share |
|
7,548,000 |
|
755 |
|
|
|
|
|
2,645 |
|
|
|
|
|
3,400 |
|
||||||
|
Capital contribution of cash |
|
* |
|
|
|
|
|
|
|
2,500 |
|
|
|
|
|
2,500 |
|
||||||
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
(481,609 |
) |
(481,609 |
) |
||||||
|
Balance, January 31, 2003 |
|
229,548,000 |
|
22,955 |
|
0 |
|
0 |
|
70,133 |
|
0 |
|
(1,288,192 |
) |
(1,195,104 |
) |
||||||
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
(383,021 |
) |
(383,021 |
) |
||||||
|
Balance, January 31, 2004 |
|
229,548,000 |
|
22,955 |
|
0 |
|
0 |
|
70,133 |
|
0 |
|
(1,671,213 |
) |
(1,578,125 |
) |
||||||
|
Waiver of founders’ deferred compensation |
|
|
|
|
|
|
|
|
|
1,655,031 |
|
|
|
|
|
1,655,031 |
|
||||||
|
Private placement of common stock |
|
2,645,210 |
|
265 |
|
|
|
|
|
2,512,685 |
|
|
|
|
|
2,512,950 |
|
||||||
|
Redemption of shares held by Panetta Partners, Inc. |
|
(218,862,474 |
) |
(21,886 |
) |
|
|
|
|
(478,114 |
) |
|
|
|
|
(500,000 |
) |
||||||
|
Costs associated with recapitalization |
|
|
|
|
|
|
|
|
|
(301,499 |
) |
|
|
|
|
(301,499 |
) |
||||||
|
Share exchange with founders |
|
2,258,001 |
|
226 |
|
|
|
|
|
(226 |
) |
|
|
|
|
0 |
|
||||||
|
Issuance of treasury shares |
|
|
|
|
|
350,000 |
|
35 |
|
(35 |
) |
|
|
|
|
0 |
|
||||||
|
Issuance of treasury shares to escrow |
|
350,000 |
|
35 |
|
(350,000 |
) |
(35 |
) |
0 |
|
|
|
|
|
0 |
|
||||||
|
Issuance of common stock and warrants for cash at $1.95 per share |
|
1,368,154 |
|
136 |
|
|
|
|
|
2,667,764 |
|
|
|
|
|
2,667,900 |
|
||||||
|
Issuance of 123,659 warrants to selling agents |
|
|
|
|
|
|
|
|
|
403,038 |
|
|
|
|
|
403,038 |
|
||||||
|
Finders warrants charged to cost of capital |
|
|
|
|
|
|
|
|
|
(403,038 |
) |
|
|
|
|
(403,038 |
) |
||||||
|
Deferred stock-based compensation |
|
|
|
|
|
|
|
|
|
1,937,500 |
|
(1,937,500 |
) |
|
|
0 |
|
||||||
|
Amortization of deferred stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
245,697 |
|
|
|
245,697 |
|
||||||
|
Options issued to consultants |
|
|
|
|
|
|
|
|
|
1,229,568 |
|
|
|
|
|
1,229,568 |
|
||||||
|
Warrants issued to consultants |
|
|
|
|
|
|
|
|
|
2,630,440 |
|
|
|
|
|
2,630,440 |
|
||||||
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,371,027 |
) |
(5,371,027 |
) |
||||||
|
Balance, January 31, 2005 |
|
17,306,891 |
|
$ |
1,731 |
|
0 |
|
$ |
0 |
|
$ |
11,923,247 |
|
$ |
(1,691,803 |
) |
$ |
(7,042,240 |
) |
$ |
3,190,935 |
|
The accompanying notes are an integral part of these consolidated financial statements.
TrovaGene, Inc. and Subsidiaries
(A Development Stage Company)
Consolidated Statements of Stockholders’ Equity (Deficiency) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit |
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
Accumulated |
|
Total |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
Stock |
|
During |
|
Stockholders’ |
|
|||||||
|
|
|
Preferred Stock |
|
Common Stock |
|
Treasury Shares |
|
Paid-In |
|
Based |
|
Development |
|
Equity |
|
|||||||||||||
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Capital |
|
Compensation |
|
Stage |
|
(Deficiency) |
|
|||||||
|
Balance, January 31, 2005 |
|
0 |
|
$ |
0 |
|
17,306,891 |
|
$ |
1,731 |
|
0 |
|
$ |
0 |
|
$ |
11,923,247 |
|
$ |
(1,691,803 |
) |
$ |
(7,042,240 |
) |
$ |
3,190,935 |
|
|
Private placement of common stock |
|
|
|
|
|
102,564 |
|
10 |
|
|
|
|
|
199,990 |
|
|
|
|
|
200,000 |
|
|||||||
|
Payment of selling agents fees and expenses in cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
(179,600 |
) |
|
|
|
|
(179,600 |
) |
|||||||
|
Common stock issued to selling agents |
|
|
|
|
|
24,461 |
|
2 |
|
|
|
|
|
(2 |
) |
|
|
|
|
0 |
|
|||||||
|
Private placement of common stock |
|
|
|
|
|
1,515,384 |
|
152 |
|
|
|
|
|
2,954,847 |
|
|
|
|
|
2,954,999 |
|
|||||||
|
Payment of selling agents fees and expenses in cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
(298,000 |
) |
|
|
|
|
(298,000 |
) |
|||||||
|
Issuance of 121,231 warrants issued to selling agents |
|
|
|
|
|
|
|
|
|
|
|
|
|
222,188 |
|
|
|
|
|
222,188 |
|
|||||||
|
Selling agents warrants charged to cost of capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
(222,188 |
) |
|
|
|
|
(222,188 |
) |
|||||||
|
Private placement of preferred stock and warrants for cash at $10.00 per share (restated) |
|
277,100 |
|
277 |
|
|
|
|
|
|
|
|
|
2,770,723 |
|
|
|
|
|
2,771,000 |
|
|||||||
|
Accretion of preferred stock dividends (restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
792,956 |
|
|
|
(792,956 |
) |
0 |
|
|||||||
|
Value of warrants reclassified to derivative financial instrument liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
(567,085 |
) |
|
|
|
|
(567,085 |
) |
|||||||
|
Payment of selling agents fees and expenses in cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
(277,102 |
) |
|
|
|
|
(277,102 |
) |
|||||||
|
Issuance of 105,432 warrants issued to selling agents |
|
|
|
|
|
|
|
|
|
|
|
|
|
167,397 |
|
|
|
|
|
167,397 |
|
|||||||
|
Sselling agents warrants charged to cost of capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
(167,397 |
) |
|
|
|
|
(167,397 |
) |
|||||||
|
Return of treasury shares from escrow |
|
|
|
|
|
(350,000 |
) |
(35 |
) |
350,000 |
|
35 |
|
|
|
|
|
|
|
0 |
|
|||||||
|
Retirement of treasury shares |
|
|
|
|
|
|
|
|
|
(350,000 |
) |
(35 |
) |
35 |
|
|
|
|
|
0 |
|
|||||||
|
Common stock issued for services |
|
|
|
|
|
5,000 |
|
0 |
|
|
|
|
|
16,500 |
|
|
|
|
|
16,500 |
|
|||||||
|
Stock-based compensation expense for non-employees |
|
|
|
|
|
|
|
|
|
|
|
|
|
2,928,298 |
|
|
|
|
|
2,928,298 |
|
|||||||
|
Amortization of deferred stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
645,832 |
|
|
|
645,832 |
|
|||||||
|
Preferred stock dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,741 |
) |
(60,741 |
) |
|||||||
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,844,326 |
) |
(7,844,326 |
) |
|||||||
|
Balance, January 31, 2006 (restated) |
|
277,100 |
|
$ |
277 |
|
18,604,300 |
|
$ |
1,860 |
|
0 |
|
$ |
0 |
|
$ |
20,264,807 |
|
$ |
(1,045,971 |
) |
$ |
(15,740,263 |
) |
$ |
3,480,710 |
|
The accompanying notes are an integral part of these consolidated financial statements.
TrovaGene, Inc. and Subsidiaries
(A Development Stage Company)
Consolidated Statements of Stockholders’ Equity (Deficiency) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit |
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
Accumulated |
|
Total |
|
Temporary Equity— |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
Stock |
|
During |
|
Stockholders’ |
|
Unregistered |
|
|||||||||
|
|
|
Preferred Stock |
|
Common Stock |
|
Paid-In |
|
Based |
|
Development |
|
Equity |
|
Common Stock |
|
|||||||||||||
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Capital |
|
Compensation |
|
Stage |
|
(Deficiency) |
|
Shares |
|
Amount |
|
|||||||
|
Balance, January 31, 2006 (restated) |
|
277,100 |
|
$ |
277 |
|
18,604,300 |
|
$ |
1,860 |
|
$ |
20,264,807 |
|
$ |
(1,045,971 |
) |
$ |
(15,740,263 |
) |
$ |
3,480,710 |
|
— |
|
$ |
— |
|
|
Conversion of Series A preferred stock and issuance of common stock |
|
(174,000 |
) |
(174 |
) |
826,431 |
|
83 |
|
91 |
|
|
|
|
|
— |
|
— |
|
— |
|
|||||||
|
Implementation of ASC 718 |
|
|
|
|
|
|
|
|
|
(1,045,971 |
) |
1,045,971 |
|
|
|
0 |
|
|
|
|
|
|||||||
|
Private placement of common stock |
|
|
|
|
|
754,721 |
|
75 |
|
943,326 |
|
|
|
|
|
943,401 |
|
|
|
|
|
|
||||||
|
Payment of selling agents fees and expenses in cash |
|
|
|
|
|
|
|
|
|
(118,341 |
) |
|
|
|
|
(118,341 |
) |
|
|
|
|
|||||||
|
Issuance of 94,672 warrants to selling agents |
|
|
|
|
|
|
|
|
|
55,568 |
|
|
|
|
|
55,568 |
|
|
|
|
|
|||||||
|
Selling agents warrants charged to cost of apital |
|
|
|
|
|
|
|
|
|
(55,568 |
) |
|
|
|
|
(55,568 |
) |
|
|
|
|
|||||||
|
Issuance of common stock and warrants for cash at $1.00 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000 |
|
1,000,000 |
|
|||||||
|
Payment of finders fees and expenses in cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80,000 |
) |
|||||||
|
Value of warrants classified as derivative financial instrument liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,000 |
) |
|||||||
|
Issuance of 164,550 units to finder |
|
|
|
|
|
|
|
|
|
167,856 |
|
|
|
|
|
167,856 |
|
|
|
|
|
|||||||
|
Common Stock issued for services |
|
|
|
|
|
8,696 |
|
1 |
|
9,565 |
|
|
|
|
|
9,566 |
|
|
|
|
|
|||||||
|
Value attributed to warrants issued with 6% convertible debentures |
|
|
|
|
|
|
|
|
|
1,991,822 |
|
|
|
|
|
1,991,822 |
|
|
|
|
|
|||||||
|
Reclassification of derivative financial instruments to stockholders’ equity upon adoption of ASC 815-40 |
|
|
|
|
|
|
|
|
|
567,085 |
|
|
|
(455,385 |
) |
111,700 |
|
|
|
|
|
|||||||
|
Warrants issued for services |
|
|
|
|
|
|
|
|
|
101,131 |
|
|
|
|
|
101,131 |
|
|
|
|
|
|||||||
|
Donated services |
|
|
|
|
|
|
|
|
|
62,500 |
|
|
|
|
|
62,500 |
|
|
|
|
|
|||||||
|
Stock based compensation |
|
|
|
|
|
|
|
|
|
1,572,545 |
|
|
|
|
|
1,572,545 |
|
|
|
|
|
|||||||
|
Preferred stock dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
(59,164 |
) |
(59,164 |
) |
|
|
|
|
|||||||
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,134,067 |
) |
(7,134,067 |
) |
|
|
|
|
|||||||
|
Balance, January 31, 2007 |
|
103,100 |
|
$ |
103 |
|
20,194,148 |
|
$ |
2,019 |
|
$ |
24,516,416 |
|
$ |
0 |
|
$ |
(23,388,879 |
) |
$ |
1,129,659 |
|
1,000,000 |
|
$ |
905,000 |
|
The accompanying notes are an integral part of these consolidated financial statements.
TrovaGene, Inc. and Subsidiaries
(A Development Stage Company)
Consolidated Statements of Stockholders’ Equity (Deficiency) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit |
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
Total |
|
Temporary Equity— |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
During |
|
Stockholders’ |
|
Unregistered |
|
||||||||
|
|
|
Preferred Stock |
|
Common Stock |
|
Paid-In |
|
Development |
|
Equity |
|
Common Stock |
|
||||||||||||
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Capital |
|
Stage |
|
(Deficiency) |
|
Shares |
|
Amount |
|
||||||
|
Balance, January 31, 2007 |
|
103,100 |
|
$ |
103 |
|
20,194,148 |
|
$ |
2,019 |
|
$ |
24,516,416 |
|
$ |
(23,388,879 |
) |
1,129,659 |
|
1,000,000 |
|
$ |
905,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Conversion of preferred stock to common stock |
|
(7,500 |
) |
(7 |
) |
46,875 |
|
5 |
|
2 |
|
|
|
— |
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Private placement of common stock |
|
|
|
|
|
1,700,000 |
|
170 |
|
849,830 |
|
|
|
850,000 |
|
|
|
|
|
||||||
|
Payment of selling agent fees and expenses |
|
|
|
|
|
|
|
|
|
(51,733 |
) |
|
|
(51,733 |
) |
|
|
|
|
||||||
|
Issuance of warrants to selling agents |
|
|
|
|
|
|
|
|
|
45,403 |
|
|
|
45,403 |
|
|
|
|
|
||||||
|
Selling agent warrants charged to cost of capital |
|
|
|
|
|
|
|
|
|
(45,403 |
) |
|
|
(45,403 |
) |
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Derivative liability — warrants at issuance |
|
|
|
|
|
|
|
|
|
(45,371 |
) |
|
|
(45,371 |
) |
|
|
|
|
||||||
|
Donated services |
|
|
|
|
|
|
|
|
|
275,000 |
|
|
|
275,000 |
|
|
|
|
|
||||||
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
914,847 |
|
|
|
914,847 |
|
|
|
|
|
||||||
|
Preferred stock dividend |
|
|
|
|
|
|
|
|
|
|
|
(35,054 |
) |
(35,054 |
) |
|
|
|
|
||||||
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
(4,683,141 |
) |
(4,683,141 |
) |
|
|
|
|
||||||
|
Balance, December 31, 2007 |
|
95,600 |
|
$ |
96 |
|
21,941,023 |
|
$ |
2,194 |
|
$ |
26,458,991 |
|
$ |
(28,107,074 |
) |
(1,645,793 |
) |
1,000,000 |
|
$ |
905,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Reclassification of common stock initially recorded as temporary equity |
|
|
|
|
|
1,000,000 |
|
100 |
|
904,900 |
|
|
|
905,000 |
|
(1,000,000 |
) |
(905,000 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Private placement of common stock |
|
|
|
|
|
1,984,091 |
|
198 |
|
1,144,802 |
|
|
|
1,145,000 |
|
|
|
|
|
||||||
|
Payment of selling agents fees and expenses |
|
|
|
|
|
|
|
|
|
(74,500 |
) |
|
|
(74,500 |
) |
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Conversion of debenture to common stock |
|
|
|
|
|
187,282 |
|
19 |
|
93,622 |
|
|
|
93,641 |
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Derivative liability — warrants at issuance |
|
|
|
|
|
|
|
|
|
(201,122 |
) |
|
|
(201,122 |
) |
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Donated services |
|
|
|
|
|
|
|
|
|
390,750 |
|
|
|
390,750 |
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Stock based compensation |
|
|
|
|
|
|
|
|
|
543,697 |
|
|
|
543,697 |
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Preferred stock dividend |
|
|
|
|
|
|
|
|
|
|
|
(38,240 |
) |
(38,240 |
) |
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
(5,166,240 |
) |
(5,166,240 |
) |
|
|
|
|
||||||
|
Balance, December 31, 2008 |
|
95,600 |
|
$ |
96 |
|
25,112,396 |
|
$ |
2,511 |
|
$ |
29,261,140 |
|
$ |
(33,311,554 |
) |
$ |
(4,047,807 |
) |
0 |
|
$ |
0 |
|
The accompanying notes are an integral part of these consolidated financial statements.
TrovaGene, Inc. and Subsidiaries
(A Development Stage Company)
Consolidated Statements of Stockholders’ Equity (Deficiency) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit |
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
Total |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
During |
|
Stockholders’ |
|
|||||
|
|
|
Preferred Stock |
|
Common Stock |
|
Paid-In |
|
Development |
|
Equity |
|
|||||||||
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Capital |
|
Stage |
|
(Deficiency) |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance December, 31, 2008 |
|
95,600 |
|
$ |
96 |
|
25,112,396 |
|
$ |
2,511 |
|
$ |
29,261,140 |
|
$ |
(33,311,554 |
) |
$ |
( 4,047,807 |
) |
|
Issuance of shares of common stock in connection with convertible debenture forbearance agreement |
|
|
|
|
|
5,437,472 |
|
544 |
|
1,739,415 |
|
|
|
1,739,959 |
|
|||||
|
Issuance of shares of common stock in payment of convertible debenture interest |
|
|
|
|
|
360,881 |
|
36 |
|
112,255 |
|
|
|
112,291 |
|
|||||
|
Private placements of common stock |
|
|
|
|
|
2,930,000 |
|
293 |
|
1,464,707 |
|
|
|
1,465,000 |
|
|||||
|
Issuance of common stock pursuant to a non-exclusive selling agent’s agreement ‘ |
|
|
|
|
|
413,379 |
|
41 |
|
306,696 |
|
|
|
306,737 |
|
|||||
|
Issuance of shares of common stock re settlement for consulting services rendered |
|
|
|
|
|
957,780 |
|
96 |
|
478,794 |
|
|
|
478,890 |
|
|||||
|
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
177,836 |
|
|
|
177,836 |
|
|||||
|
Preferred stock dividend |
|
|
|
|
|
|
|
|
|
|
|
(38,240 |
) |
(38,240 |
) |
|||||
|
Derivative liability — warrants and price protected units upon issuance |
|
|
|
|
|
|
|
|
|
(1,497,568 |
) |
|
|
(1,497,568 |
) |
|||||
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
(2,483,807 |
) |
(2,483,807 |
) |
|||||
|
Balance, December 31, 2009 |
|
95,600 |
|
$ |
96 |
|
35,211,908 |
|
$ |
3,521 |
|
$ |
32,043,275 |
|
$ |
(35,833,601 |
) |
$ |
(3,786,709 |
) |
The accompanying notes are an integral part of these consolidated financial statements.
TrovaGene, Inc. and Subsidiaries
(A Development Stage Company)
Consolidated Statements of Stockholders’ Equity (Deficiency) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
||||
|
|
|
Preferred Stock |
|
Common Stock |
|
Additional
|
|
Deficit
|
|
Total
|
|
||||||||
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Capital |
|
Stage |
|
(Deficiency) |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Balance, December 31, 2009 |
|
95,600 |
|
$ |
96 |
|
35,211,908 |
|
$ |
3,521 |
|
32,043,275 |
|
(35,833,601 |
) |
$ |
(3,786,709 |
) |
|
|
Issuance of shares of common stock in payment of convertible debenture interest |
|
|
|
|
|
513,712 |
|
51 |
|
115,920 |
|
|
|
115,971 |
|
||||
|
Issuance of common stock to selling agents |
|
|
|
|
|
476,000 |
|
48 |
|
(48 |
) |
|
|
— |
|
||||
|
Private placement of common stock |
|
|
|
|
|
3,469,400 |
|
347 |
|
1,734,353 |
|
|
|
1,734,700 |
|
||||
|
Consulting services settled via issuance of stock |
|
|
|
|
|
425,000 |
|
43 |
|
212,457 |
|
|
|
212,500 |
|
||||
|
Shares issued in settlement of legal fees |
|
|
|
|
|
175,439 |
|
17 |
|
99,983 |
|
|
|
100,000 |
|
||||
|
Stock issued in payment of deferred salary to former CEO |
|
|
|
|
|
76,472 |
|
8 |
|
28,338 |
|
|
|
28,346 |
|
||||
|
Shares issued in connection with Agreement & Plan of Merger with Etherogen, Inc, |
|
|
|
|
|
12,262,782 |
|
1,226 |
|
2,770,163 |
|
|
|
2,771,389 |
|
||||
|
Stock Based Compensation expense |
|
|
|
|
|
|
|
|
|
325,930 |
|
|
|
325,930 |
|
||||
|
Preferred stock dividend |
|
|
|
|
|
|
|
|
|
|
|
(38,240 |
) |
(38,240 |
) |
||||
|
Derivative liabilitiy — price protected units upon issuance |
|
|
|
|
|
|
|
|
|
(1,010,114 |
) |
|
|
(1,010,114 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
(5,449,138 |
) |
(5,449,138 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Balance, December 31, 2010 |
|
95,600 |
|
$ |
96 |
|
52,610,713 |
|
$ |
5,261 |
|
36,320,257 |
|
$ |
(41,320,979 |
) |
$ |
(4,995,365 |
) |
The accompanying notes are an integral part of these consolidated financial statements.
TrovaGene, Inc. and Subsidiaries
(A Development Stage Company)
Consolidated Statements of Cash Flows
|
|
|
Twelve months
|
|
Twelve
|
|
For the period
|
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Operating activities |
|
|
|
|
|
|
|
|||
|
Net loss |
|
$ |
(5,449,138 |
) |
$ |
(2,483,807 |
) |
$ |
(39,802,961 |
) |
|
|
|
|
|
|
|
|
|
|||
|
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|||
|
Depreciation and amortization |
|
8,388 |
|
54,554 |
|
211,514 |
|
|||
|
Stock based compensation expense |
|
325,930 |
|
177,836 |
|
11,229,346 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Founders compensation contributed to equity |
|
— |
|
— |
|
1,655,031 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Donated services contributed to equity |
|
— |
|
— |
|
829,381 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Settlement of consulting services in stock |
|
— |
|
478,890 |
|
478,890 |
|
|||
|
Amortization of deferred debt costs and original issue discount |
|
221,373 |
|
202,926 |
|
2,346,330 |
|
|||
|
Liquidated damages and other forbearance agreement settlement costs paid in stock |
|
— |
|
824,376 |
|
1,758,111 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Interest expense on convertible debentures paid in stock |
|
115,585 |
|
141,416 |
|
700,561 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Change in fair value of financial instruments(loss) gain |
|
(266,926 |
) |
(273,382 |
) |
(1,055,333 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Purchased In Process Research and Development expense-related party |
|
2,666,869 |
|
— |
|
2,666,869 |
|
|||
|
Stock issued in connection with payment of deferred salary |
|
28,346 |
|
— |
|
28,346 |
|
|||
|
Stock issued in connection with settlement of legal fees |
|
100,000 |
|
— |
|
100,000 |
|
|||
|
Stock issued in connection with consulting services |
|
112,500 |
|
— |
|
112,500 |
|
|||
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|||
|
Increase in other assets |
|
9,768 |
|
(45,384 |
) |
(91,529 |
) |
|||
|
Increase in accounts receivable |
|
(47,035 |
) |
(8,877 |
) |
(75,000 |
) |
|||
|
Increase in prepaid expenses |
|
(75,501 |
) |
(19,931 |
) |
(151,032 |
) |
|||
|
Increase (decrease) in accounts payable and accrued expenses |
|
161,125 |
|
(283,123 |
) |
912,185 |
|
|||
|
Net cash used in operating activities |
|
(2,088,716 |
) |
(1,234,506 |
) |
(18,146,791 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Investing activities: |
|
|
|
|
|
|
|
|||
|
Assets acquired in Etherogen, Inc. merger |
|
(104,700 |
) |
— |
|
(104,700 |
) |
|||
|
Capital expenditures |
|
(27,747 |
) |
(11,901 |
) |
(242,775 |
) |
|||
|
Net cash used in investing activities |
|
(132,447 |
) |
(11,901 |
) |
(347,475 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Financing activities |
|
|
|
|
|
|
|
|||
|
Proceeds from sale of 6% convertible debenture |
|
— |
|
164,550 |
|
2,335,050 |
|
|||
|
Debt issuance costs |
|
— |
|
— |
|
(297,104 |
) |
|||
|
Proceeds from sale of common stock, net of expenses |
|
1,734,700 |
|
1,465,000 |
|
14,858,505 |
|
|||
|
Proceeds from a non-exclusive selling agent’s agreement |
|
— |
|
142,187 |
|
142,187 |
|
|||
|
Note (repayment) |
|
— |
|
(120,000 |
) |
— |
|
|||
|
Costs associated with recapitalization |
|
— |
|
— |
|
(362,819 |
) |
|||
|
Proceeds from sale of preferred stock |
|
— |
|
— |
|
2,771,000 |
|
|||
|
Payment of finders’_fee on preferred stock |
|
— |
|
— |
|
(277,102 |
) |
|||
|
Redemption of common stock |
|
— |
|
— |
|
(500,000 |
) |
|||
|
Payment of preferred stock dividends |
|
— |
|
— |
|
(116,718 |
) |
|||
|
Net cash provided by financing activities |
|
1,734,700 |
|
1,651,736 |
|
18,552,969 |
|
|||
|
Net change in cash and equivalent-(decrease)increase |
|
(486,463 |
) |
405,329 |
|
58,703 |
|
|||
|
Cash and cash equivalents—Beginning of period |
|
545,166 |
|
139,837 |
|
— |
|
|||
|
Cash and cash equivalents—End of period |
|
$ |
58,703 |
|
$ |
545,166 |
|
$ |
58,703 |
|
The accompanying notes are an integral part of these consolidated financial statements.
TrovaGene, Inc. and Subsidiaries
(A Development Stage Company)
Consolidated Statements of Cash Flows - Continued
|
|
|
Twelve months
|
|
Twelve
|
|
For the period
|
|
|||
|
Supplementary disclosure of cash flow activity: |
|
|
|
|
|
|
|
|||
|
Cash paid for taxes |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|||
|
Cash paid for interest |
|
— |
|
— |
|
— |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Supplemental disclosure of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|||
|
Conversion of 174,000 shares of preferred stock into 826,431 shares of common stock: |
|
|
|
|
|
|
|
|||
|
Surrender of 174,000 shares of preferred stock |
|
$ |
— |
|
$ |
— |
|
$ |
(1,740,000 |
) |
|
Issuance of 826,431 shares of common stock |
|
— |
|
— |
|
$ |
1,740,000 |
|
||
|
Series A Preferred beneficial conversion feature accreted as a dividend |
|
— |
|
— |
|
$ |
792,956 |
|
||
|
Preferred stock dividends accrued |
|
$ |
38,240 |
|
$ |
38,240 |
|
$ |
76,480 |
|
The accompanying notes are an integral part of these consolidated financial statements.
TrovaGene, Inc. and Subsidiaries
(A Development Stage Company)
Notes to Consolidated Financial Statements
1. Business Overview
TrovaGene, Inc. (“Trovagene” or the “Company”) (formerly known as Xenomics, Inc. until its name was changed in January 2009, is a development stage molecular diagnostic company that focuses on the development and marketing of urine-based nucleic acid tests for patient/disease screening and monitoring. The Company’s novel tests predominantly use transrenal DNA (Tr-DNA) and transrenal RNA (Tr-RNA). TrovaGene’s primary focus is to leverage its urine-based (i.e. transrenal) testing platform to facilitate improvements in Women’s Healthcare. Tr-DNAs and Tr-RNAs are fragments of nucleic acids derived from dying cells inside the body. The intact DNA is fragmented in dying cells and released in the blood stream. These fragments have been shown to cross the kidney barrier and are detected in urine. In addition, there is evidence that some species of RNA or their fragments are stable enough to cross the renal barrier. These RNA can also be isolated from urine, detected and analyzed. The Company’s technology is applicable to all transrenal nucleic acids (Tr-NA). TrovaGene’s patented technology uses safe, non-invasive, cost effective and simple urine collection and can be applied to a broad range of testing including: prenatal genetic testing, infectious diseases, tumor detection and monitoring, tissue transplantation, forensic identification and for patient selection in clinical trials. TrovaGene believes that its technology is ideally suited to be used in developing molecular diagnostic assays that will allow physicians to provide very simple, non-invasive and convenient screening and monitoring tests for their patients by identifying specific biomarkers involved in the disease process. The Company’s novel assays will facilitate much improved testing compliance resulting in earlier diagnosis of disease, more targeted treatment which will be more cost effective, and improvements in the quality of life for the patient.
In 2010, TrovaGene acquired a highly sensitive CMOS detection technology for DNA, RNA as well as proteins (See Note 4). A key advantage of this technology is that it is extremely sensitive and does not require amplification (i.e. use of PCR Polymerase Chain Reaction) of nucleic acids. Therefore, it reduces the complexity and cost of molecular diagnostics as it will not require significant equipment purchases or amplification training, and as such may open up new markets for molecular diagnostics such as hospitals and independent labs that currently do not perform high complexity assays such as those requiring PCR. TrovaGene feels that this detection technology is highly complementary and synergistic with its transrenal technology, and may eventually be positioned in certain situations as a standalone molecular diagnostic device. In this regard, TrovaGene plans to leverage this novel CMOS technology toward the development of unique Women’s Healthcare diagnostics and has finalized the system architecture, operating procedure and software specifications.
As a mechanism to generate steady annual cash flow, in 2006 TrovaGene licensed a new DNA-based biomarker (NPM1) specific for a subtype of acute myeloid leukemia (AML); this marker provides valuable information and insights as to disease prognosis and monitoring for minimal residual disease (MRD). Testing for NPM1 mutations has been added to AML practice guidelines by the National Comprehensive Cancer Network (NCCN). TrovaGene has signed licenses incorporating this biomarker with Sequenom, Inc. which was terminated in March 2011 and with Ipsogen (Europe) and Asuragen (US), who have developed and are manufacturing test kits for sale to labs from which TrovaGene earns a royalty. TrovaGene has also signed non-exclusive royalty bearing licenses with various labs including LabCorp (US), InVivo Scribe (US), Skyline (Europe), MLL (Europe) and Warnex (Canada), who will be providing lab testing services for this marker. TrovaGene is actively seeking to sign additional royalty bearing non-exclusive license agreements with additional labs to provide this testing service.
Since inception on August 4, 1999, TrovaGene’s efforts have been principally devoted to research and development, securing and protecting patents and raising capital. From inception through December 31, 2010, the Company has sustained cumulative net losses attributed to common stockholders of $41,320,979. The Company’s losses have resulted primarily from expenditures incurred in connection with research and development activities, stock based compensation expense, patent filing and maintenance expenses, outside accounting and legal services and regulatory, scientific and financial consulting fees, amortization and liquidated damages. From inception through December 31, 2010, the Company has generated only limited licensing revenue from operations and expects to incur additional losses to perform further research and development activities.
TrovaGene’s product development efforts are in their early stages and the Company 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 tests to market including the long duration of clinical testing, the specific performance of proposed products under stringent protocols, the applicable regulatory approval and review cycles, the nature and timing of costs, and competing technologies being developed by organizations with significantly greater resources.
2. Basis of Presentation and Going Concern
The accompanying consolidated financial statements of TrovaGene, which include its wholly owned subsidiary Xenomics, Inc., a California corporation (“ Xenomics Sub”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated. Certain items in the comparable prior period’s financial statements have been reclassified to conform to the current period’s presentation.
Going Concern
TrovaGene’s consolidated financial statements as of December 31, 2010 have been prepared under the assumption that the Company will continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to generate additional revenue. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company will be required to raise additional capital within the next twelve months to complete the development and commercialization of current product candidates and to continue to fund operations at its current cash expenditure levels.
Cash used in operating activities was $2,088,716 and $1,234,506 for the twelve months ended December 31, 2010 and 2009, respectively. During the twelve months ended December 31, 2010 and 2009 the Company incurred net losses attributable to common stockholders of $5,487,378 and $2,522,049, respectively.
To date, TrovaGene’s sources of cash have been primarily limited to the sale of debt and equity securities. Net cash provided by financing activities for the twelve months ended December 31, 2010 and 2009 was $1,734,700, and $1,651,736, respectively. The Company cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that the Company can raise additional funds by issuing equity securities, the Company’s stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact the Company’s ability to conduct its business.
If the Company is unable to raise additional capital when required or on acceptable terms, it may have to significantly delay, scale back or discontinue the development and/or commercialization of one or more of its product candidates. The Company may also be required to:
· Seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; and
· Relinquish licenses or otherwise dispose of rights to technologies, product candidates or products that the Company would otherwise seek to develop or commercialize themselves, on unfavorable terms.
The Company has approximately $561,000 of cash in the bank at November 20, 2011. Based on the Company’s projections of future ordinary expenses and expected receipts the Company has enough cash to pay expenses through April of 2012.
Restatements
During the year ended January 31, 2006 and through March 13, 2006, the Company received several comment letters from the Securities and Exchange Commission in connection with its Form SB-2 which was filed in August 2005. While responding to those comment letters, the Company determined that financial statements for the twelve months ended January 31, 2005 and the quarterly periods within the nine months ended October 31, 2005 required restatement. Consequently, the Company amended its Annual Report on Form 10-KSB for the year ended January 31, 2005 and its Quarterly Reports on Form 10-QSB for the three months ended April 30, 2005, July 31, 2005, and October 31, 2005. Such restatements related to the accounting for the Company’s acquisition of Xenomics Sub, deferred founders’ compensation contributed to capital, stock based compensation expense, and derivative financial instruments and are described in the Company’s Amendment No. 5 to Form SB-2 filed with the Commission on March 15, 2006.
In connection with the preparation of this Form 10 the Company determined that the following inaccuracies were reflected in the financial statements included in the Company’s Annual Report on Form 10-KSB for the year ended January 31, 2006 and the Company’s Quarterly Report on Form 10-QSB for the three months ended July 31, 2005, October 31, 2005, April 30, 2006, July 31, 2006, and October 31, 2006 in connection with the issuance of Series A Convertible Preferred Stock on July 13, 2005:
a) The accounting for the classification of amounts between par value and additional paid-in-capital, and
b) The calculation of the value of the beneficial conversion feature.
Consequently, the following adjustments have been made:
a) Preferred stock was reduced by $2,203,638 with a corresponding increase to additional paid-in-capital of $2,674,385 and a decrease of $470,747 to retained earnings. There was no impact upon operating results.
b) The beneficial conversion feature was revised from $322,209 to $792,956. The total impact of this restatement on the Company’s statement of operations was to increase the net loss attributable to common stockholders for the year ended January 31, 2006 by $470,747 or $0.02 per share.
The Company and audit committee discussed the above errors and adjustments with our current independent registered public accounting firms and have determined that a restatement for the year ended January 31, 2006 was necessary to be reflected in this Form 10. The effect of this restatement is reflected in the consolidated statements of operations and stockholders’ equity (deficiency) for the period August 4, 1999 (inception) to December 31, 2010.
Change in fiscal year end
In 2007, we changed our fiscal year end from January 31 to December 31.
3. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. 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.
Cash and Cash Equivalents
Cash and cash equivalents consist of checking accounts and money market funds as of December 31, 2010 and December 31, 2009 on deposit with U.S. commercial banks, which at any point in time, may exceed federally insured limits. The FDIC has increased insured limits per depositor per insured bank. The Company regularly monitors the financial condition of the institutions at which it has depositary accounts. The risk of loss is nominal.
Royalty and License Revenues
Under the Company’s royalty and license agreements payments are received which include minimum royalty and milestone payments. The Company recognizes royalty and license revenues when we can reliably estimate such amounts and collectability is reasonably assured.
Allowance for Doubtful Accounts
The Company reviews the collectability of accounts receivable based on an assessment of historic experience, current economic conditions, and other collection indicators. At December 31, 2010 and 2009, the Company has not recorded an allowance for doubtful accounts. When accounts are determined to be uncollectible, they are written off against the reserve balance and the reserve is reassessed. When payments are received on reserved accounts, they are applied to the individual’s account and the reserve is reassessed.
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 our 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 classify such warrants in Level 3 per ASC 820. At December 31, 2009 and 2010, the fair value of such warrants was $740,617 and $609,155, respectively, which we classified as derivative financial instruments liability on its balance sheet.
The Company has issued units that were price protected during the years ended December 31, 2010 and 2009, respectively. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, TrovaGene has determined that these price protected units issued in connection with the private placements must be recorded as derivative liabilities with a charge to additional paid in capital. The fair value of these price protected units was estimated using the binomial option pricing model. The binomial model requires the input of variable inputs over time, including the expected stock price volatility, the expected price multiple at which unit holders are likely to exercise their warrants and the expected forfeiture rate. The Company uses historical data to estimate forfeiture rate and expected stock price volatility within the binomial model. The risk-free rate for periods within the contractual life of the warrant is based on the U.S. Treasury yield curve in
effect at the date of grant for the expected term of the warrant. At December 31, 2010 and 2009, the fair value of such warrants was $1,476,783 and $602,133, respectively, which the Company classified as a derivative financial instruments liability on its balance sheet.
At December 31, 2010 and 2009, the total fair value of the above warrants, valued using the Black-Scholes option-pricing model and the Binomial option pricing model was $2,085,938 and $1,342,750 which is classified as derivative financial instruments’ liability on our balance sheet.
Stock-Based Compensation
The Company relies heavily on incentive compensation in the form of stock options to recruit, retain and motivate directors, executive officers, employees and consultants. Incentive compensation in the form of stock options are designed to provide long-term incentives, develop and maintain an ownership stake and conserve cash during our development stage.
ASC Topic 718 “Compensation—Stock Compensation” requires companies to measure the cost of employee services received in exchange for the award of equity instruments based on the estimated fair value of the award at the date of grant which requires management to make certain assumptions with respect to selected model inputs. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award.
ASC Topic 718 did not change the way TrovaGene accounts for non-employee stock-based compensation. TrovaGene continues to account for shares of common stock, stock options and warrants issued to non-employees based on the fair value of the stock option or warrant, using the Black-Scholes options pricing model, if that value is more reliably measurable than the fair value of the consideration or services received. The Company accounts for equity instruments granted to non-employees in accordance with ASC Topic 505-50 “ Equity-Based Payment to Non-Employees” whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Accordingly the fair value of these options is being “marked to market” quarterly until the measurement date is determined.
In accordance with ASC Topic 718 stock-based compensation expense related to TrovaGene’s share-based compensation arrangements attributable to employees and non-employees is being recorded as a component of general and administrative expense and research and development expense in accordance with the guidance of Staff Accounting Bulletin 107, Topic 14, paragraph F , Classification of Compensation Expense Associated with Share-Based Payment Arrangements (“SAB 107”).
The estimated fair value of employee options on the date of grant was determined by using the Black-Scholes option valuation model which requires management to make certain assumptions with respect to selected model inputs. The risk-free interest rate assumption is based upon observed U.S. Treasury interest rates appropriate for the expected term of the individual stock options. The Company has not paid any dividends on common stock since its inception and does not anticipate paying dividends on its common stock in the foreseeable future. The computation of the expected option term is based on expectations regarding future exercises of options which generally vest over three years and have a ten year life. The expected volatility is based on the historical volatility of the Company’s stock. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimated future unvested option forfeitures based upon its historical experience and has incorporated this rate in determining the fair value of employee option grants.
Fair value of financial instruments
The Company has adopted FASB ASC 820 Fair Value Measurements and Disclosures (“ASC 820”) for financial assets and liabilities that are required to be measured at fair value, and non-financial assets and liabilities that are not required to be measured at fair value on a recurring basis. Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and debentures. These financial instruments are stated at their respective historical carrying amounts which approximate fair value due to their short term nature.
In accordance with Accounting Standards Codification (“ASC”) subtopic 820-10, the Company measures certain assets and liabilities at fair value on a recurring basis using the three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three tiers include:
· 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.
Property, equipment and depreciation and amortization
Expenditures for additions, renewals and improvements are capitalized at cost. Depreciation and amortization is generally computed on a straight-line method based on the estimated useful lives of the related assets. Amortization of leasehold improvemens is computed based on the shorter of the life of the asset or the term of the lease. The estimated useful lives of the major classes of depreciable assets are 3 to 5 years for lab equipment and furniture and fixtures. Expenditures for repairs and maintenance are charged to operations as incurred.
Income Taxes
Trovagene has not filed any Federal tax returns since inception. The amount of any tax liability that could arise since inception is undetermined at this time, however, the Company believes that because it has sustained losses since inception, the amount of any tax liability, if any, that could arise would be immaterial to the Company’s Consolidated Financial Statements. The Company intends to record a valuation allowance against any deferred tax assets upon the filing of its tax returns to the extent that it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. As a result there are no income tax benefits reflected in the consolidated statements of operations to offset pre-tax losses.
Contingencies
In the normal course of business, TrovaGene is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters, including, among others, government investigations, shareholder lawsuits, product and environmental liability, and tax matters. In accordance with FASB ASC Topic 450, Accounting for Contingencies , TrovaGene records such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. TrovaGene, in accordance with this guidance, does not recognize gain contingencies until realized.
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, insurance and FDA consultants, 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, if any.
TrovaGene does not currently have any commercial molecular diagnostic products, and does not expect to have such for several years if at all. Accordingly our research and development costs are expensed as incurred. While certain of our research and development costs may have future benefits, our policy of expensing all research and development expenditures is predicated on the fact that TrovaGene has no history of successful commercialization of molecular diagnostic products to base any estimate of the number of future periods that would be benefited.
In June 2007, the EITF of the FASB reached a consensus on ASC Topic 730, Research and Development which requires that non-refundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. As the related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided, the deferred amounts would be recognized as an expense. TrovaGene adopted ASC Topic 730 on January 1, 2008 and the adoption did not have a material effect on our consolidated financial position, results of operations or cash flows.
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 guide, basic and diluted net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted-average common shares outstanding during the period. Diluted weighted-average shares are the same as basic weighted-average shares because shares issuable pursuant to the exercise of
stock options would have been antidilutive. For the years ended December 31, 2010 and December 31, 2009 the following outstanding stock options and other common stock equivalents were excluded from the calculation of diluted loss per share because the effect was antidilutive.
|
|
|
12/31/10 |
|
12/31/09 |
|
|
|
|
|
|
|
|
|
Stock options |
|
14,457,651 |
|
14,762,651 |
|
|
Warrants |
|
15,774,338 |
|
12,678,377 |
|
|
Conversion of preferred stock |
|
597,500 |
|
597,500 |
|
|
Conversion of debentures |
|
4,670,100 |
|
4,670,100 |
|
|
Total dilutive instruments |
|
35,499,589 |
|
32,708,628 |
|
Share-Based Payments
In accordance with ASC Topic 718 stock-based compensation expense related to TrovaGene’s share-based compensation arrangements attributable to employees and non-employees is being recorded as a component of general and administrative expense and research and development expense in accordance with the guidance of Staff Accounting Bulletin 107 , Topic 14, paragraph F , Classification of Compensation Expense Associated with Share-Based Payment Arrangements (“SAB 107”). See Note 7.
Recent Accounting Pronouncements
In May 2011, FASB issued Accounting Standards Update (ASU) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and International Financial Reporting Standards (Topic 820) - Fair Value Measurement”. The new guidance relates to fair value measurements, related disclosures and consistent meaning of the term “fair value” in US GAAP and International Financial Reporting Standards. The amendment clarifies how to apply the existing fair value measurements and disclosures. For fair value measurements classified within Level 3, an entity is required to disclose quantitative information about the unobservable inputs. A reporting entity is also required to disclose additional information like valuation processes, a narrative description of the sensitivity of the fair value measurements to changes in unobservable inputs and the interrelationships between those unobservable inputs. The amendments specified in ASU 2011-04 were effective upon issuance. The adoption of this standard did not have a material effect on the Company’s results of operations or its financial position.
In April 2010, the FASB issued ASU 2010-13, “Compensation—Stock Compensation (Topic 718)—Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades.” ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in ASU 2010-13 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. TrovaGene expects the adoption of this standard will not have a material effect on its results of operation or its financial position.
In February 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-09, “Subsequent Events (Topic 855)—Amendments to Certain Recognition and Disclosure Requirements.” ASU 2010-09 requires an entity that is an SEC filer to
evaluate subsequent events through the date that the financial statements are issued and removes the requirement that an SEC filer disclose the date through which subsequent events have been evaluated. ASC 2010-09 was effective upon issuance. The adoption of this standard had no effect on its results of operation or its financial position.
In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 includes new disclosure requirements related to fair value measurements, including transfers in and out of Levels 1 and 2 and information about purchases, sales, issuances and settlements for Level 3 fair value measurements. This update also clarifies existing disclosure requirements relating to levels of disaggregation and disclosures of inputs and valuation techniques. The adoption of ASU 2010-06 did not have a material impact on the Company’s financial statements.
4. Merger Activities
On August 4, 1999, Xenomics, a California corporation (“Xenomics Sub”) was incorporated by its founders and promoters, L. David Tomei, Samuil Umansky and Hovsep Melkonyan. Xenomics Sub was organized in order to develop and commercialize Tr-DNA technology. Since inception, Xenomics Sub’s efforts have been principally devoted to research and development, securing and protecting our patents and raising capital.
On April 26, 2002, Used Kar Parts, Inc. (the “Company”) was incorporated in the State of Florida and planned to develop an on-line marketplace for used car parts.
On February 24, 2004, the Company’s then principal shareholder and control person entered into a Capital Stock Purchase Agreement with Panetta Partners Ltd., a limited partnership affiliated with the Company’s former Co-Chairman and current director, Gabriele M. Cerrone, pursuant to which Panetta purchased approximately 97% of the Company’s outstanding shares of common stock at the time.
On April 12, 2004, the founders of Xenomics Sub consisting of Messrs. Tomei, Umansky and Melkonyan,who are no longer with the Company, contributed $1,655,031 in deferred compensation to Xenomics Sub stockholders’ equity.
On July 2, 2004, Used Kar Parts, Inc. acquired all of the outstanding common stock of Xenomics Sub by issuing 2,258,001 shares of Used Kar Parts, Inc. common stock to Xenomics Sub’s five shareholders (the “Exchange”). The Exchange was made according to the terms of a Securities Exchange Agreement dated May 18, 2004. For accounting purposes, the acquisition has been treated as an acquisition of Used Kar Parts, Inc. by Xenomics Sub and as a recapitalization of Xenomics Sub. Accordingly, the historical financial statements prior to July 2, 2004 are those of Xenomics Sub.
In connection with the Exchange, Used Kar Parts, Inc.:
1) Redeemed 1,971,734 shares (218,862,474 shares post-split shares) from Panetta Partners Ltd., a principal shareholder, for $500,000 or $0.0023 per share.
2) Amended its articles of incorporation to change its corporate name to “Xenomics, Inc.” and to split its stock outstanding 111 for 1 (effective July 26, 2004), immediately following the redemption.
3) Entered into employment agreements with two of the former Xenomics Sub shareholders and a consulting agreement with one of the former Xenomics Sub shareholders.
4) Entered into a Voting Agreement with certain investors, the former Xenomics Sub shareholders and certain principal shareholders.
5) Entered into a Technology Acquisition Agreement with the former Xenomics Sub shareholders under which Xenomics granted an option to the former Xenomics Sub holders to re-purchase Xenomics Sub technology if Xenomics fails to apply at least 50% of the net proceeds of financing it raises to the development of Xenomics Sub technology during the period ending July 1, 2006 in exchange for all Xenomics shares and share equivalents held by the former Xenomics Sub holders at the time such option is exercised. This agreement was terminated on June 30, 2006.
6) Issued and transferred 350,000 shares of common stock to be held in escrow, in the name of the Company, to cover any undisclosed liabilities of Xenomics Sub. Such shares were treated as treasury shares. The escrow period was for one year to July 2, 2005 at which time a determination of liability was determined to be none and the shares were released.
In connection with the merger and recapitalization of the Company, the Company incurred costs of $301,499 which was accounted for as a reduction of additional paid in capital.
On August 6, 2010, TrovaGene acquired all of the outstanding common stock of Etherogen, Inc. (“Etherogen”), a related party, in exchange for 12,262,782 shares of TrovaGene common stock pursuant to the terms of the Agreement and Plan of Merger dated August 10, 2010 among TrovaGene, E ACQ Corp. and Etherogen. The fair value of the shares issued to effect the Merger was $2,771,389, based on the fair value of TrovaGene’s common stock on the date of the Merger.
The Merger was accounted for as an acquisition of assets for accounting purposes primarily because there were no processes acquired. The assets acquired consisted primarily of diminimus property, plant and equipment, patents, trademarks and other intellectual property, and in-process research and development. In addition, the Company assumed a note in the amount of $104,700 which was converted into shares on the date of acquisition. In accordance with ASC Topic 805, Business Combinations, the Company recorded the total fair value of an intangible asset related to the patent of $104,700 on the Company’s consolidated balance sheet. The excess of the fair value of the consideration issued over the fair value of the net assets acquired was $2,666,869. The total excess of the fair value of the net assets acquired and the conversion of the note was recorded as purchased in process research and development expense-related party on the Company’s consolidated statement of operations.
5 . P roperty and Equipment
Fixed assets consist of laboratory, testing and computer equipment and fixtures stated at cost. Depreciation and amortization expense for the years ended December 31, 2010 and 2009 and for the period August 4, 1999 (inception) to December 31, 2010 was $8,388, $54,554 and $211,514, respectively. Property and equipment consisted of the following:
|
|
|
December 31, |
|
December 31, |
|
||
|
|
|
2010 |
|
2009 |
|
||
|
Furniture and fixtures |
|
$ |
28,763 |
|
$ |
6,157 |
|
|
|
|
|
|
|
|
||
|
Leasehold Improvements |
|
11,207 |
|
8,671 |
|
||
|
|
|
|
|
|
|
||
|
Laboratory equipment |
|
202,804 |
|
200,199 |
|
||
|
|
|
|
|
|
|
||
|
|
|
242,774 |
|
215,027 |
|
||
|
|
|
|
|
|
|
||
|
Less—accumulated depreciation and amortization |
|
(211,514 |
) |
(203,126 |
) |
||
|
|
|
|
|
|
|
||
|
Property and equipment, net |
|
$ |
31,260 |
|
$ |
11,901 |
|
6. Stockholders’ Equity (Deficiency)
All share and per share amounts have been restated to reflect the 111 for 1 stock split which was effective July 26, 2004 as described in Note 4.
(A) Common Stock
On July 2, 2004 the Company completed a private placement of 2,645,210 shares of its common stock for aggregate proceeds of $2,512,950, or $0.95 per share. The sale was made to 17 accredited investors directly by the Company without any general solicitation or broker and thus no selling agents’ fee were paid.
On January 10, 2005 TrovaGene entered into a service agreement with Trilogy Capital Partners, Inc. (“Trilogy”) pursuant to which Trilogy provided marketing, financial, and public relations services. Pursuant to this service agreement, TrovaGene issued warrants to Trilogy to purchase 1,000,000 shares of Common Stock of TrovaGene at an exercise price of $2.95 per share. The exercise price was determined to be consistent with the price of the warrants being offered to purchasers as part of an investment unit in the then operative private placement memorandum. The warrants issued to Trilogy were exercisable upon issuance and expired on January 10, 2008. The fair value of the Trilogy warrants using the Black-Scholes methodology was $2,630,440 which was immediately expensed. The following inputs to the Black-Scholes option pricing model were used to determine fair value: (i) stock price $4.20 per share (ii) no dividend (iii) risk free interest rate 4.5% (iv) volatility of 80%. This service agreement was terminated by TrovaGene on June 12, 2006.
On January 28, 2005 the Company closed the first tranche of a private placement selling 1,368,154 shares of common stock and 342,039 warrants to certain investors (the “Investors”). The securities were sold as a unit at a price of $1.95 per unit for aggregate proceeds of $2,667,900. Each Unit consisted of one share of common stock and one quarter of a warrant to purchase one quarter share of common stock. The Investor warrants are immediately exercisable at $2.95 per share and are exercisable at any time within five years from the date of issuance. The fair value of these Investor warrants using a market price of $4.20 per share on the date of issuance was $1,198,373 using Black Scholes assumptions of 80% volatility, a risk free interest rate of 4.25%, no dividend, and an expected life of 5 years. The fair value of the Investor warrants was recorded as additional paid in capital during the year ended January 31, 2005. The Company also issued an aggregate 123,659 warrants to purchase common stock to various selling agents, which were immediately exercisable at $2.15 per share and expired five years after issuance. The selling agent warrants had a fair value of $403,038 on the date of issuance and this amount was recorded as a cost of raising capital.
On February 5, 2005 the Company completed the second tranche of the private placement described above selling an additional 102,564 shares of common stock and 25,642 warrants to the Investors at a price of $1.95 per unit for aggregate proceeds of $200,000. In addition, the Company paid an aggregate $179,600 in cash and issued 24,461 shares of common stock to certain selling agents, in lieu of cash, which had a fair value of $47,699 capitalized at $1.95 per share. The Investor and selling agent warrants have the same terms as the warrants described above issued in the first tranche.
In connection with the offer and sale of securities to the Investors the Company also entered into a Registration Rights Agreement, dated as of January 28, 2005, with the Investors pursuant to which the Company agreed to file, within 120 days after the closing, a registration statement covering the resale of the shares of common stock sold to the Investors and the shares of common stock issuable upon exercise of the Warrants issued to the Investors. In the event a registration statement covering such shares of Common Stock was not filed with the SEC by the 120 th day after the final closing of the Offering (May 28, 2005), the Company shall have paid to the investors, at the Company’s option in cash or common stock, an amount equal to 0.1125% of the gross proceeds raised in the Offering for each 30 day period that the registration statement is not filed with the SEC. On August 1, 2005 the Company filed a Form SB-2 registration statement with the Securities and Exchange Commission and the resulting liquidated damages in the amount of $16,304 was paid to the Investors and charged to other expense. Pursuant to this January 28, 2005 Registration Rights Agreement there are no additional liquidated damages for failure to have the registration statement declared effective by a specified date, or for failure to maintain its effectiveness for any specified period of time.
On April 7, 2005, the Company closed the third and final tranche of the private placement described above of 1,515,384 shares of common stock and 378,846 warrants to certain additional Investors. The securities were sold as a unit at a price of $1.95 per unit for aggregate proceeds of $2,954,999. The warrants issued to the selling agents were immediately exercisable at $2.15 per share and will expire five years after issuance. The warrants issued to Investors have the same terms as the warrants described above issued in the first tranche.
Each unit consisted of one share of common stock and a warrant to purchase one quarter share of common stock. The warrants are immediately exercisable at $2.95 per share and are exercisable at any time within five years from the date of issuance. The fair value of these Investor warrants using a market price of $2.61 per share on the date of issuance date was $694,335 using Black Scholes assumptions of 80% volatility, a risk free interest rate of 4.25%, no dividend, and an expected life of 5 years. The fair value of the Investor warrants was recorded as additional paid in capital during the year ended January 31, 2006.
The Company paid an aggregate $298,000 and issued an aggregate 121,231 warrants to purchase common stock to a selling agent. The warrants issued to the selling agent were immediately exercisable at $2.15 per share, expire five years after issuance. The warrants had a fair value of $222,188 on the date of issuance and this amount was recorded as a cost of raising capital. These April 7, 2005 Investors became parties to the same Registration Rights Agreement as the January 28, 2005 Investors.
Pursuant to ASC Topic 815-40, the warrants issued in the three tranches described above were classified as permanent equity and the fair value of $222,188 of the selling agent warrants upon issuance was recorded as additional paid in capital.
On July 20, 2006, the Company issued 640,000 shares of common stock and 320,000 warrants at $1.25 per unit and received gross proceeds of $800,000. Each unit consisted of one share of common stock and one-half a warrant to purchase one-half a share of common stock. The warrants have an exercise price of $2.00 per share and expire on July 20, 2008. In connection with this transaction, the Company paid $104,000 and issued 83,200 warrants to a selling agent. The warrants issued to selling agents have the same terms as those issued to the purchasers of common stock.
On August 14, 2006, the Company issued 114,721 shares of common stock and 57,361 warrants at $1.25 per unit and received gross proceeds of $143,401. Each unit consisted of one share of common stock and half a warrant to purchase half a share of common stock. The warrants have an exercise price of $2.00 per share and expire on August 14, 2008. In connection with this transaction, the Company paid $14,341 and issued 11,472 warrants to a selling agent. The warrants have the same terms as those issued to the purchasers of common stock.
Pursuant to the provisions of ASC 815-40, “ Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock ,” the warrants issued to the selling agents on July 20, 2006 and August 14, 2006 were classified as permanent equity and the fair value allocated to such warrants upon issuance of $55,568 was recorded as additional paid in capital.
Under the terms of the securities purchase agreement applicable to the issuance of common stock and warrants on July 20, 2006 and August 14, 2006, the Company agreed to: a) file a registration statement on or before October 18, 2006 covering the resale of the shares of the common stock and the underlying shares of the common stock issuable upon exercise of the warrants; b) use commercially reasonable efforts to cause the registration statement to be declared effective by the SEC no later than November 17, 2006 if there was no review of the registration statement performed by the SEC or December 16, 2006 if there was a review performed by the SEC; and c) use commercially reasonable efforts to keep the registration statement continuously effective. If any of the above obligations are not met (a “Breach”), the Company shall pay monthly liquidated damages in an amount equal to 1% of the gross proceeds of the amount raised in these offering for the period from the date of a breach until it is cured. Such liquidated damages may not exceed 8% of the gross proceeds or $75,472. As of the date of these financial statements, a registration statement has not been filed and the Company has recorded liquidated damages of $75,472 through December 31, 2010.
On December 21, 2006, the Company closed a private placement of 1,000,000 shares of common stock and 500,000 warrants to an institutional investor for aggregate gross proceeds of $1,000,000 pursuant to a Securities Purchase Agreement dated as of December 21, 2006. The warrants were immediately exercisable at $1.25 per share, are exercisable at any time within six (6) months from the date of issuance, and were recorded at their fair value of $15,000. The Company paid an aggregate $80,000 to a selling agent. Proceeds from the issuance of these instruments were allocated to common stock and warrants based upon their relative fair value. This resulted in an allocation of $905,000 to temporary equity (see below) and $15,000 to the warrants classified as derivative financial instruments. Under the terms of the Securities Purchase Agreement applicable to the issuance of common stock and warrants on December 21, 2006, the Company has an obligation to file a registration statement covering the resale of the shares of the common stock and the underlying shares of the common stock issuable upon exercise of the warrants on or prior to 15 days after the earlier of a financing or a series of financings wherein the Company raises an aggregate of $5,000,000 or May 14, 2007. Additionally, the Company has the obligation to use commercially reasonable efforts to cause the registration statement to be declared effective no later than 45 days after it is filed. However, the Securities Purchase Agreement is silent as to any penalties or liquidated damages if the obligations described above are not met. Consequently, since the Company’s ability to meet the above obligations are not within its control and the penalties are not determinable and could result in the Company having to settle in cash, they were classified as temporary equity in accordance with the provisions of ASC Topic 480 Distinguishing Liabilities from Equity . The warrants were marked to market from $15,000 to $20,000 at January 31, 2007, with $5,000 recorded as a change in fair value of derivative financial instruments.
On May 21, 2007, the Company modified the terms of the warrants issued in connection with the December 21, 2006 private placement and extended the term of those warrants from June 21, 2007 to August 21, 2007. This had an immaterial impact on the consolidated financial statements.
On February 15, 2008 the common shares were no longer deemed “Registrable Securities” under the Securities Purchase Agreement because of newly enacted shorter Rule 144 holding requirements which removed the requirement for registration and the eliminated risk of a cash settlement. Accordingly, the Company reclassified the common stock to permanent equity on that date.
On October 12, 2007 and October 16, 2007, the Company closed private placements of 1,400,000 shares and 300,000 shares of common stock, respectively, for aggregate gross proceeds of $850,000. The Company issued a five year warrant to purchase 100,000 shares of common stock at an exercise price of $0.50 per share to a selling agent. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, the Company has determined that the warrants issued in connection with this private placement must be recorded as derivative liabilities with a charge to additional paid in capital. The fair value of these warrants on the date of issuance was $45,371.This derivative liability has been marked to market at
the end of each reporting period.The change in fair value for the years ended December 31, 2010 and 2009 and inception (August 4, 1999) to December 31, 2010 was a loss of ($23,979), a gain of $17,550 and a gain of $18,938, respectively.
The Company paid $51,733 to a selling agent in connection with this transaction and issued warrants to purchase 100,000 shares of common stock at an exercise price of $0.50 per share which expire five years after issuance. The selling agent warrants had a fair value of $45,403 on the date of issuance and this amount was charged to additional paid in capital as a cost of raising capital.
On February 1, 2008, the Company sold a private placement of 1,075,000 shares of common stock and 322,500 warrants to investors for aggregate gross proceeds of $645,000 pursuant to a Securities Purchase Agreement dated as of February 1, 2008 (the “Private Placement”). The warrants have a two-year term and are exercisable at prices of $0.75 per share in the first year and $1.50 per share in the second year. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, the Company has determined that the warrants issued in connection with this private placement must be recorded as derivative liabilities with a charge to additional paid in capital. The fair value of these warrants on the date of issuance was $60,295.This derivative liability has been marked to market at the end of each reporting period. The change in fair value for the years ended December 31, 2010 and 2009 and inception (August 4, 1999) to December 31, 2010 was $0 gain or loss, a gain of $51 and a gain of $60,295, respectively.
On June 12, 2008, the Company raised an additional $500,000 from an investor, less a total of $74, 500 for selling agent fees and expenses in connection with this transaction, of which $350,000 was invested at the closing and an additional $150,000 was to be invested on or before August 15, 2008. The purchase price for the 909,091 shares was $.55 per share, and the investor received warrants to purchase up to 454,545 shares of the Company’s common stock at a price of $.75 per share. The warrants have a three-year term and are exercisable at a price of $0.75 per share. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, the Company has determined that the warrants issued in connection with this registered direct offering must be recorded as derivative liabilities with a charge to additional paid in capital. The fair value of these warrants on the dates of issuance was $80,632. This derivative liability has been marked to market at the end of each reporting period. The change in fair value for the years ended December 31, 2010 and 2009 and inception (August 4, 1999) to December 31, 2010 was a gain on valuation of $85,326, a loss of ($86,410) and a gain of $43,552, respectively.
On June 9, 2009 and July 2, 2009, the Company closed two private placement financings which raised gross proceeds of $275,000. The Company issued 550,000 shares of its common stock and warrants to purchase 550,000 shares of common stock. The purchase price paid by the investors was $.50 for each unit. The warrants expire after five years and are exercisable at $.70 per share. These were price-protected units and therefore are derivative liabilities in accordance with ASC Topic 815-40 to be valued using the binomial option method.
During the period from October 2, 2009 to December 16, 2009 the Company closed seven private placement financings which raised gross proceeds of $1,190,000. The Company issued 2,380,000 shares of its common stock and warrants to purchase 2,380,000 shares of common stock. The purchase price paid by the investor was $.50 for each unit. The warrants expire after six to nine years and are exercisable at $.50 per share. These were price-protected units and therefore are derivative liabilities in accordance with ASC Topic 815-40 to be valued using the binomial option method.
On August 19, 2009 in accordance with a debt conversion agreement for settlement of consulting services rendered by Gabriele Cerrone the Company issued 957,780 units consisting of 957,780 shares of common stock and warrants to purchase 957,780 shares of common stock, in settlement of a $478,890 obligation related to a consulting agreement with Gabriele M. Cerrone. The total fair value of the stock and warrants was $478,890 based on a price of $.50 per unit. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, TrovaGene has determined that the warrants issued in connection with this transaction should not be recorded as a derivative liability and have been recorded as equity. See Note 13, Related Party Transactions.
On June 30, 2009 and October 2, 2009, in accordance with an exchange agreement, a selling agent invested $164,550 in exchange for the issuance of a) 413,379 shares of common stock, b) warrants to purchase 418,854 shares of common stock and c) $164,550 of 6% convertible debenture. The warrants expire in three years and are exercisable at $.50 per share. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, TrovaGene has determined that the warrants issued in connection with this transaction should not be recorded as a derivative liability and have been recorded as equity . The fair value of the common stock and warrants issued above totaled $306,737 and was charged to operations as consideration for services rendered, with a corresponding credit to additional paid in capital.
During the twelve months ended December 31, 2010, 476,000 shares of common stock were issued to a shareholder as finders’ fees in accordance with a Board of Directors resolution dated November 6, 2009. The issuance of these shares was recorded as a cost of capital and had only a nominal par value effect on total stockholders’ equity.
In connection with the merger with Etherogen, Inc. in August 2010 the Company issued 12,262,782 shares of common stock, which shares had a fair value of $2,711,389 at issuance (see Note 4).
During the year ended December 31, 2010, the Company closed twelve private placement financings which raised gross proceeds of $1,734,700. The Company issued 3,469,400 shares of its common stock and warrants to purchase 3,469,400 shares of common stock in these transactions. The purchase price paid by the investors was $.50 for each unit. The warrants expire after eight years and are exercisable at $.50 per share. These were price-protected units and therefore are derivative liabilities in accordance with ASC Topic 815-40 to be valued using the binomial option method.
During the year ended December 31, 2010, the Company issued 425,000 shares and warrants to purchase 425,000 shares of common stock in connection with consulting agreements. The fair value used to measure compensation expense was $.50 for each unit, based on recent private placement transactions, totaling $212,500. The warrants expire after eight-nine years and are exercisable at $.50 per share. These were price-protected units and therefore are derivative liabilities in accordance with ASC Topic 815-40 to be valued using the binomial option method. A total of $112,500 was charged to general and administrative expense in the Company’s consolidated statements of operations in 2010. The remainder of $100,000 was accrued and charged to general and administrative expense in the year ended December 31, 2009.
In July of 2010, 76,472 shares of common stock were issued to a former CEO in settlement of a severance obligation totaling $28,346, which amount was charged to general and administrative expense in the Company’s consolidated statement of operations.
In August of 2010 the Company issued 175,439 shares of common stock in settlement of $100,000 of legal fees, which amount was charged to general and administrative expense in the Company’s consolidated statements of operations.
(B) Warrants
During the twelve months ended December 31, 2010 and 2009 the Company issued the following warrants to purchase shares of common stock:
|
|
|
Number
|
|
Weighted
|
|
Term |
|
|
|
Warrants Outstanding 12/31/2008 |
|
8,790,598 |
|
$ |
0.96 |
|
5 years |
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
3,887,779 |
|
$ |
0.50 |
|
3-9 years |
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding 12/31/2009 |
|
12,678,377 |
|
$ |
0.79 |
|
3-9 years |
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
4,709,654 |
|
$ |
0.50 |
|
8 years |
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
(1,613,693 |
) |
$ |
2.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding 12/31/2010 |
|
15,774,338 |
|
$ |
0.54 |
|
3-9 years |
|
On May 10, 2006, the Company entered into a license agreement wherein it obtained the exclusive rights for the genetic marker for Acute Myeloid Leukemia and intends to utilize these rights for the development of new diagnostic tools. In connection with this agreement, the Company paid $70,000 to the licensor and agreed to pay an additional $100,000 upon FDA approval of a commercial product based upon this technology and royalties of 3% of net sales and/or 10% of any sublicense income. Additionally, the Company paid a selling agent fee of $100,000 and issued warrants for the purchase of 100,000 shares of common stock at $1.80 per share. These warrants expire June 29, 2014. The value of these warrants was
determined to be $101,131 utilizing the Black Scholes model. The value of these warrants combined with the cash payments aggregated $271,131 and was immediately expensed and classified as a research and development expense.
On November 30, 2006, the Compensation Committee, in recognition of the technical assistance to be provided by Dr. Sidransky, granted warrants to purchase 300,000 shares of common stock at an exercise price of $0.65 for a period of ten years. Such warrants vest in equal amounts on the first and second anniversary dates of the grant. The Company has estimated the fair value of these warrants as of the grant date to be $172,505. This fair value was fully expensed by December 31, 2008. On November 19, 2008, Dr. Sidransky resigned his position as a member of the Board of Directors. All previously unvested options, of 150,000, were terminated on this date.
On December 20, 2006, the Compensation Committee, in connection with services provided pursuant to a consulting agreement with Mr. Cerrone, granted him warrants which vested immediately to purchase 353,570 shares of common stock at an exercise price of $0.70 for a period of ten years. The Company has estimated the fair value of these warrants as of the grant date to be $182,271 based on the Black-Scholes option pricing model. The assumptions used were as follows: (i) stock price at date of grant-$.70, (ii) term-10 years, (iii) volatility-100% and (iv) risk free interest rate-4.57%. This fair value was fully expensed as stock based compensation by January 31, 2007.
On October 29, 2008, the Company entered into a license agreement with Sequenom, Inc. In connection with this agreement, the Company issued a warrant to purchase 438,956 shares of the Company’s common stock at an exercise price of $.75 per share. The warrant expires October 29, 2013. The Company has determined that the warrant meets the criteria of a derivative liability in accordance with ASC 815-40 effective January 1, 2009. The estimated the fair value of this warrant as of the grant date was $60,195, which was charged to additional paid-in-capital in 2008, based on the Black-Scholes option pricing model. The assumptions used were as follows: (i) stock price at date of grant-$.31, (ii) term-5 years, (iii) volatility-75% and (iv) risk-free interest rate-2.77%. This fair value was expensed beginning in the fourth quarter of 2008 and charged to general and administrative expense with the offset to additional paid-in-capital. The amounts charged to general and administrative expense in the years ended December 31, 2010 and 2009 and from August 4, 1999 (Inception) to December 31, 2010 were losses of $119,024, $60,586 and $60,578, respectively. See Note 12.
The Company granted 4,709,654 and 2,930,000 warrants that were price protected during the years ended December 31, 2010 and 2009, respectively. These warrants had an exercise price of $.50 per share and had expiration dates ranging from June 30, 2014 to December 31, 2018. The fair value of these warrants was estimated using the binomial option pricing model. The binomial model requires the input of variable inputs over time, including the expected stock price volatility, the expected price multiple at which warrant holders are likely to exercise their warrants and the expected forfeiture rate. The Company uses historical data to estimate forfeiture rate and expected stock price volatility within the binomial model. The risk-free rate for periods within the contractual life of the warrant is based on the U.S. Treasury yield curve in effect at the date of grant for the expected term of the warrant. See Note 8.
(C) Series A Convertible Preferred Stock
On July 13, 2005, the Company closed a private placement of 277,100 shares of Series A Convertible Preferred Stock (the “Series A Convertible Preferred Stock”) and 386,651 warrants to certain investors for aggregate gross proceeds of $2,771,000 pursuant to a Securities Purchase Agreement dated as of July 13, 2005. The warrants sold to the Investors are immediately exercisable at $3.25 per share and are exercisable at any time within five years from the date of issuance. These investor warrants had a fair value of $567,085 on the date of issuance using a market price of $2.40 on that date. In addition the Company paid an aggregate $277,102 and issued an aggregate 105,432 warrants to purchase common stock to certain selling agents. The warrants issued to the selling agents are immediately exercisable at $2.50 per share and will expire five years after issuance. The selling agent warrants had a fair value of $167,397 on the date of issuance and this amount was recorded as a cost of raising capital.
The material terms of the Series A Convertible Preferred Stock consist of:
1) Dividends. Holders of the Series A Convertible Preferred Stock shall be entitled to receive cumulative dividends at the rate per share of 4% per annum, payable quarterly on March 31, June 30, September 30 and December 31, beginning with September 30, 2005. Dividends shall be payable, at the Company’s sole election, in cash or shares of common stock. As of December 31, 2010 and 2009, the Company had recorded $114,720 and $76,480, respectively, in accrued cumulative unpaid preferred stock dividends, included in Accrued Expenses in the Company’s consolidated balance sheets, and $38,240 was recorded for each of the years ended December 31, 2010, 2009 and 2008.
2) Voting Rights. Shares of the Series A Convertible Preferred Stock shall have no voting rights. However, so long as any shares of Series A Convertible Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the holders of the shares of Series A Convertible Preferred Stock then outstanding, (a) adversely change the powers, preferences or rights given to the Series A Convertible Preferred Stock, (b) authorize or create any class of stock senior or equal to the Series A Convertible Preferred Stock, (c) amend its articles of incorporation or other charter documents, so as to affect adversely any rights of the holders of Series A Convertible Preferred Stock or (d) increase the authorized number of shares of Series A Convertible Preferred Stock.
3) Liquidation. Upon any liquidation, dissolution or winding-up of the Company, the holders of the Series A Convertible Preferred Stock shall be entitled to receive an amount equal to the Stated Value per share, which is $10 per share plus any accrued and unpaid dividends.
4) Conversion Rights. Each share of Series A Convertible Preferred Stock shall be convertible at the option of the holder into that number of shares of common stock determined by dividing the Stated Value, currently $10 per share, by the conversion price, originally $2.15 per share.
5) Registration Rights . In connection with the offer and sale of the Series A Convertible Preferred Stock the Company also entered into a Registration Rights Agreement pursuant to which the Company agreed to file a registration statement covering the resale of the common stock attributable to conversion of Series A Convertible Preferred Stock and the shares of common stock issuable upon exercise of the preferred warrants, within 30 days of the closing date and declared effective by October 25, 2005. In the event a registration statement covering such shares of common stock was not filed within 30 days of the closing date, the Company would pay to the investors an amount equal to 0.125% of the gross proceeds raised in the Offering for each 30 day period that the registration statement was not filed. In the event a registration statement covering such shares of common stock was not declared effective by October 25, 2005 Company will pay to the investors, at the Company’s option in cash or common
stock, an amount equal to 1% of the gross proceeds raised in the Offering for each 30 day period that the registration statement was not declared effective by the SEC. The registration statement was filed on August 1, 2005 and was not declared effective until March 17, 2006. The resulting liquidated damages of $181,279 related to the registration statement not being declared effective until March 17, 2006 was recorded in the amounts of $62,601 and $118,678 during the years ended January 31, 2007 and 2006, respectively, as other expense. These amounts were paid in full as of January 31, 2007.
6) Subsequent Equity Sales . The conversion price is subject to adjustment for dilutive issuances for a period of 12 months beginning upon registration of the common stock underlying the Series A Convertible Preferred Stock. The relevant registration statement became effective March 17, 2006 and during the following twelve month period the conversion price was adjusted to $1.60 per share.
7) Automatic Conversion . Beginning July 13, 2006, if the price of the common stock equals $4.30 per share for 20 consecutive trading days, and an average of 50,000 shares of common stock per day shall have been traded during the 20 trading days, the Company shall have the right to deliver a notice to the holders of the Series A Convertible Preferred Stock, to convert any portion of the shares of Series A Convertible Preferred Stock into shares of Common Stock at the conversion price. As of the date of these financial statements, such conditions have not been met.
As per ASC 470-20 “Application of Issue 98-5 to Certain Convertible Instruments” the Company evaluated if the instrument has a beneficial conversion feature. The cash purchase and existing conversion rights were found to contain a beneficial conversion feature totaling $792,956 and the preferred stock was further discounted by this amount. The beneficial conversion amount was then accreted back to the preferred stock because the preferred stock was 100% convertible immediately. The total amount accreted back to the preferred as a dividend and charged to Deficit Accumulated during Development Stage was $792,956.
The fair value of the warrants issued in connection with this transaction was $567,085 on the date of issuance. This amount was recorded as a liability in accordance with ASC 815-40 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” because the cash liquidated damages were unlimited, which was tantamount to a cash settlement. These warrants have been marked-to-market and the liability has been adjusted with a corresponding change or benefit recorded in the statement of operations through October 31, 2006. As of November 1, 2006, the Company early adopted ASC 825-20 “Registration Payment Arrangements” which allows for registration payment arrangements to be accounted for separately in accordance with ASC 450”Contingencies”. Therefore, the financial instrument subject to the registration payment arrangement shall be recognized and measured without regard to the contingent obligation to transfer consideration pursuant to registration payment arrangement. As a result of the adoption of ASC 825-20, the Company reclassified the liability related to these warrants, ($111,700 at November 1, 2006) to equity in the amount of $567,085, with the remainder of $455,385 being adjusted to accumulated deficit. There were no additional liquidated damages required to be accrued as of January 31, 2007. During the twelve months ending January 31, 2007 and 2006 and inception to date, the Company recorded a net benefit for the change in fair value of this derivative financial instrument of $293,929, $161,456 and $455,385, respectively.
During the twelve months ended January 31, 2007, 174,000 shares of Series A Convertible Preferred Stock were converted into 826,431 shares of common stock. During the eleven months ended December 31, 2007, an additional 7,500 shares of preferred stock were converted into 46,875 shares of common stock. As of December 31, 2010 and 2009 there remained 95,600 shares of Series A Convertible Preferred Stock outstanding.
(D) Convertible Debentures
On November 14, 2006, the Company sold $2,225,500 aggregate principal amount of newly authorized 6% convertible debentures due November 14, 2008 (the “Debenture” or “Debentures”) and issued warrants for the purchase of 4,046,364 shares of the Company’s common stock at an exercise price of $0.70 per share, subject to adjustment for certain dilutive issuances and are exercisable at any time on or prior to the sixth anniversary date of issuance. The debentures paid interest at the rate of 6% per annum, payable semi-annually on April 1 and November 1 of each year beginning November 1, 2007. The Company may, in its discretion, elect to pay interest on the Debentures in cash or in shares of its common stock, subject to certain conditions related to the market for shares of its common stock and the registration of the shares issuable upon
conversion of the Debentures under the Securities Act. The debentures were convertible at any time at the option of the holder into shares of the Company’s common stock at an initial price of $0.55 per share, subject to adjustment for certain dilutive issuances. As a result of the October 2007 private placements the anti-dilution provisions in the Debentures and the warrants were triggered. As a result, the conversion price of the debentures and the exercise price of the warrants were reduced to $0.50 per share and the number of common shares issuable upon conversion of the debentures and exercise of the warrants increased to 4,451,000 and 5,664,910, respectively.
The Company incurred debt issuance costs totaling $464,960. Such costs were deferred and amortized over the two year life of the Debentures through November 2008.
In connection with the issuance of the Debentures, the Company entered into a registration rights agreement with the purchasers of the Debentures. The registration rights agreement grants registration rights to holders of shares of the Company’s common stock issuable upon conversion of the convertible debentures and upon exercise of the warrants. Pursuant to the registration rights agreement, the Company was required to file a registration statement under the Securities Act covering the resale of the registrable securities on or prior to the 15 th calendar day following the earlier of May 14, 2007 or the completion of an additional $5,000,000 of sales of securities. To the extent a registration statement was not filed prior to the 15 th calendar day the following the earlier of May 14, 2007 or the completion of an additional $5,000,000 of sales of securities, the Company was obligated to pay liquidated damages in the amount of 1.5% of the aggregate proceeds for each thirty day period until a registration statement is filed up to a maximum amount of 24% or $520,920. The Company did not file a registration statement by May 14, 2007, and recorded the maximum liquidated damages of $520,920 as of that date.
In accordance with ASC 815-40, as a result of the anti-dilution provisions in the conversion option and the warrants these instruments were classified as liabilities. At the time of issuance the Company recorded an original issue discount of $1,991,882, which was calculated based on the $1,157,260 fair value of the conversion option and the $834,562 fair value of the warrants. This discount was amortized to interest expense utilizing the interest method through the original maturity date of the debentures, November 14, 2008.
In connection with the debenture transaction, the Company issued a warrant to a finder, exercisable for 164,550 units, consisting of one share of common stock and one six-year warrant to purchase one share of common stock at an initial exercise price of $0.70 per share, subject to certain adjustments. The initial exercise price of the warrant was $0.55 per unit, subject to certain adjustments. The estimated fair value of the warrant of $167,856 on the date of issuance was amortized to interest expense utilizing the interest method through the maturity date of the debentures, November 14, 2008.
On November 14, 2008, the maturity date of the Debentures, the Company failed to pay the aggregate principal amount of $2,170,500, plus interest and penalties. Such failure represented an Event of Default under the Debentures Agreement. The Debenture holders also claimed other Events of Default under the Debentures. On January 30, 2009, the Company entered into a Forbearance Agreement with the holders of the Company’s Debentures.
Pursuant to the Forbearance Agreement, the Company issued 5,437,472 shares of its common stock to the Debenture holders in full settlement of amounts claimed due for interest, penalties, late fees and liquidated damages totaling $2,042,205. The fair value of the shares on January 30, 2009 was $0.32 based on quoted market prices totaling $1,739,959. The difference between the carrying value of the interest, penalties, late fees and liquidated damages and the fair value of the shares of $302,246 was recorded as settlement costs on the statement of operations.
The aggregate initial principal amount of $2,170,500 plus two additional issuances of $164,550 in 2009 due under the Debentures remained outstanding totaling $2,335,050. Other significant provisions of the Forbearance Agreement included the following:
· An extension of the Debentures’ maturity date to December 31, 2010
· An increase in the interest rate payable on the Debentures from 6% to 11%
· The payment of interest in the form of Company common stock on a quarterly basis
· Rights of certain holders of a majority of the Debentures regarding the appointment of two persons to the Company’s Board of Directors
· Conditions regarding the determination of compensation to be paid to the Company’s officers and directors
· A total of 6,083,763 shares of common stock purchase warrants, expiring November 14, 2012, continued to be outstanding.
The carrying value of the debenture before modification in the amount of $2,335,050 was exchanged for the fair value of the new debt in the amount $1,910,710 and the difference of $424,299 was recorded as a gain in the statement of operations.
During the twelve months ended December 31, 2010 and 2009, the Company incurred interest expense of $256,856 and $244,656, respectively, that was paid in 1,003,021 shares. The total value of the shares was $256,901 based on the stock price allocation in the fair value of the price protected units issued during the years ended December 31, 2010 and 2009. The difference in the fair value of the consideration given and the amounts due to the debenture holder was $141,271 and $103,340 for the years ended December 31, 2010 and 2009, respectively, recorded as a reduction of the interest expense in the Company’s Consolidated Statements of Operations.
On July 18, 2011 the holders of the Company’s Debentures converted the amounts outstanding of $2,335,050 into 4,670,100 shares of common stock of the Company at $.22 per share. In addition, the Company issued 467,010 shares of common stock valued at $102,742 to the Debenture Holders as consideration for their agreement to convert their debentures. In accordance with ASC Topic 405-20 Trovagene calculated the difference between (i) the fair value of the common stock issued and the new warrants and (ii) the carrying value of the debentures and the old warrants. This resulted in a gain on extinguishment of debt of $623,383 and will be recorded in the 3 rd quarter of 2011.
The 6,083,763 warrants originally issued in 2006 with an expiration date of November 12, 2012 were exchanged for 6,083,763 new warrants with a new expiration date of December 31, 2017.
(E) Former Chief Executive Warrants
On November 14, 2006, the Company also issued to the Company’s former Chief Executive (the “holder”) and the lead investor in the debenture financing, a warrant to purchase up to an aggregate of 3,500,000 units, containing one share of its common stock and one warrant, at an initial purchase price of $0.55 per unit; provided, on or prior to the time of exercise, the Company receives an aggregate of $5.0 million of financing (“the financing condition”) in addition to the above. If the financing condition was not attained on or before May 17, 2007, these lead investor’s warrants would terminate and be of no further force or effect.
On November 30, 2006 the Company amended the November 14, 2006 warrant to allow the holder to purchase until December 31, 2007 up to an aggregate 6,363,636 units, each containing one share of common stock and one common stock purchase warrant, at an initial purchase price of $0.55 per unit; provided, on or prior to the time of exercise, the Company attained the Financing Condition. The common stock purchase warrants had an initial exercise price, subject to certain adjustments, of $0.70 per share and were exercisable at any time prior to the sixth anniversary date of the grant. If the Financing Condition was not fulfilled on or before August 31, 2007, the amended and restated warrant would terminate and be of no further force or effect.
On November 30, 2006, the Company also entered into a warrant and put option agreement with the Company’s former Chief Executive . The warrant and put option agreement allows the holder thereof to purchase up to 2,727,272 additional units as described above until December 31, 2007, at an initial purchase price of $0.55 per Unit, provided, on or prior to the time of exercise, the Financing Condition was attained. The fair value of this warrant at the date of grant was $2,108,647. Upon written notice from the Company at any time after June 1, 2007 and ending the earlier of the satisfaction of the Financing Condition or December 31, 2007, the holder would, within 30 days from the date designated in the notice, purchase the number of Units specified in such notice up to the Maximum Put Amount divided by the applicable exercise price. The Maximum Put Amount was defined as the sum of $5,000,000 less the amount from the sale of securities during the period beginning on December 1, 2006 to the date of measurement including any such sales pursuant to the Company’s prior exercise in part of the put option on or before August 31, 2007. In no event shall the Maximum Put Amount exceed $500,000 in a period of thirty calendar days or $1,500,000 in the aggregate. If the Financing Condition was not fulfilled on or before August 31, 2007, the warrant and put option agreement would terminate and be of no further force or effect. Because the performance condition related to the above was not met no expense was recorded by the Company.
On August 29, 2007, the Company and the former Chief Executive of the Company entered into an amendment (the “Amendment”) to the Warrant and Put Option Agreement originally dated as of November 30, 2006 pursuant to which the Amendment extended the date the holder of the warrant has the right to purchase up to an aggregate 2,727,272 units, each containing one share of common stock and one common stock purchase warrant, at an initial purchase price of $0.55 per unit to June 30, 2008 from December 31, 2007. Such warrant was only exercisable, provided, on or prior to the time of exercise, the Financing Condition was attained. The Amendment also extended the date the Financing Condition must be met to February 29, 2008 from August 31, 2007. If the Financing Condition had not been met on or before such date, the Warrant and Put Option Agreement would terminate and be of no further force or effect.
In addition, on August 29, 2007, the Company and the former Chief Executive entered into an amendment (the “Amended Warrant Agreement”) to the Amended and Restated Warrant Agreement originally dated as of November 30, 2006 pursuant to which the Amended Warrant Agreement extended the date the holder of the warrant had the right to purchase up to an aggregate 6,363,636 units, each containing one share of common stock and one common stock purchase warrant, at an initial purchase price of $0.55 per unit to June 30, 2008 from December 31, 2007. The Amended Warrant Agreement also extended the date the Financing Condition must be met to February 29, 2008 from August 31, 2007. If the Financing Condition had not been met on or before such date, the Amended and Restated Warrant Agreement shall terminate and be of no further force or effect.
In connection with the June 12, 2008 financing, the Company entered into Amendment No. 7 , dated as of June 12, 2008, to the Warrant and Put Option Agreement originally dated as of November 30, 2006. This Amendment No. 7 extended to September 1, 2008, the date on which the Company may, at its sole discretion, exercise a put option (the “Put Option”) to require the former Chief Executive (who is the Lead Investor under the warrant agreement) to invest in the Company up to an additional $1,500,000 for the purchase of common stock at a purchase price of $.55 per share (the “Shares”). The Amendment No. 7 also credits the former Chief Executive with amounts raised to reduce his obligation under the Put Option, so that the Put Option obligation is, as of this time, reduced to $1,150,000. This extension of the put option did not have any impact on the Company’s financial statements. See Note 13, Related Party Transactions.
Concurrent with completing the Forbearance Agreement, See Note (D) above, the Company and Dr. Gianluigi Longinotti-Buitoni, the Company’s former Chief Executive, entered into a mutual release agreement under which each party delivered general releases of the other, including releases of the Company from contracts and claims related to Dr. Longinotti-Buitoni’s service to the Company and a release by the Company of its rights under the Warrant and Put Option Agreement between the parties originally dated as of November 30, 2006, as amended (the “Warrant Agreement”), including any rights resulting from the October 2, 2007 exercise by the Company of its put option under the Warrant Agreement.
7. Stock Option Plan
In June 2004 the Company adopted the TrovaGene Stock Option Plan, as amended (the “Plan”). The Plan authorizes the grant of stock options to directors, eligible employees, including executive officers and consultants. Generally, vesting for options granted under the Plan is determined at the time of grant, and options expire after a 10-year period. Options are granted at an exercise price not less than the fair market value at the date of grant.
On April 4, 2006, at the Company’s annual meeting, stockholders approved a proposal to increase the number of shares available for grant under the Plan from 5,000,000 to 12,000,000. In December 2009, the Board authorized an increase in the number of shares to be issued pursuant to the 2004 Stock Option Plan, as amended, from 12,000,000 to 22,000,000. The options granted under the Plan may be either “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended or non-qualified stock options at the discretion of the Board of Directors.
On May 24, 2005, the Compensation Committee, in recognition of the substantial time and effort to the Company’s affairs during the prior twelve months by each of Gabriele M. Cerrone, former Co-Chairman, L. David Tomei, former Co-Chairman and President of SpaXen Italia, srl, our former joint venture with the Spallanzani National Institute for Infectious Diseases in Rome, Italy, Samuil Umansky, former President and the late Hovsep Melkonyan, former Vice President, Research, accelerated the vesting of outstanding stock options dated June 24, 2004 previously granted to each such officers in the amounts of 1,050,000, 1,012,500, 1,012,500 and 675,000, respectively, so that such options vested as of May 24, 2005. The acceleration did not result in the affected employees (Mr. Umansky and Mr. Melkonyan) being able to exercise options that would have otherwise expired unexercised, therefore no change to the original accounting treatment was required under ASC 505-50 “ Equity-Based Payments to Non-Employees ”.
In addition, in May of 2005 the Compensation Committee granted additional nonqualified stock options to Messrs. Cerrone, Tomei, Umansky and Melkonyan in the amounts of 240,000, 255,000, 225,000 and 75,000, respectively,
pursuant to the Plan, as an additional incentive to perform in the future on behalf of the Company and its stockholders. Such options were exercisable at $2.50 per share with 33-1/3% of the options granted to each officer vesting on each of the first three anniversaries of the date of grant. The options pertaining to Messer’s Umansky and Melkonyan remain valid and exercisable until their expiration date of May 2015 as stipulated in the 2010 settlement agreement (see Note 12). The options for Messrs. Cerrone and Tomei were fully vested by May of 2008. Mr. Tomei left the Company in November 2006, and in accordance with his stock option agreement his options expired in November 2010. The stock based compensation expense for all of the options issued in May 2005 totaled $1,045,846 for the three years ended December 31, 2008 and inception to December 31, 2010.
The acceleration of these options fixed the measurement date prior to the original vesting therefore the Company expensed the remaining balance of deferred stock based compensation attributable to those options totaling $3,197,694 during the year ended January 31, 2006.
On June 1, 2007, Gianluigi Longinotti-Buitoni, the Company’s former Chief Executive , and Dr. David Sidransky, an independent director, entered into consulting agreements with the Company wherein they would provide strategic planning, fund raising, management, and technology development services over a three year period beginning June 1, 2007. Compensation would be in form of options to purchase 1,000,000 and 640,000 shares, respectively, of common stock at an exercise price of $0.79 per share for a period of ten years. Such options vested in varying amounts depending upon level of assistance the individuals provided to the Company and the attainment of certain revenue and per share value thresholds. The fair value of these options as of the date of the grant, assuming Mr. Buitoni and Dr. Sidransky provided assistance to the Company over a three year period and all thresholds were attained, were approximately $358,000 and $229,000 for Messers. Longinotti-Buitoni and Sidransky, respectively, utilizing the Black-Scholes model.The stock based compensation expense recorded was $0 for the years ended December 31, 2010 and 2009 and for inception to date has been approximately $179,000 and $115,000 for Mr. Buitoni and Dr. Sidransky, respectively. On November 19, 2008, Mr. Buitoni and Dr. Sidransky resigned their positions as members of the Board of Directors. All previously unvested options, which numbered 666,667 and 426,667 for Mr. Buitoni and Dr. Sidransky, respectively, were terminated on this date.
In November 2010, Mr. Umansky, the estate of the late Mr. Melkonyan and Kira Scheinerman settled their employment lawsuits against the Company which included the issuance of stock options. See Note 12.
Stock-based compensation has been recognized in operating results as follows:
|
|
|
Years ended December 31, |
|
||||
|
|
|
December 31, |
|
December 31, |
|
||
|
|
|
2010 |
|
2009 |
|
||
|
Employees—included in research and development |
|
$ |
86,040 |
|
$ |
21,611 |
|
|
Employees—included in general and administrative |
|
180,051 |
|
133,240 |
|
||
|
|
|
|
|
|
|
||
|
Subtotal employee stock based compensation |
|
266,091 |
|
154,851 |
|
||
|
|
|
|
|
|
|
||
|
Non-employees—included in research and development |
|
— |
|
— |
|
||
|
Non-employees—included in general and administrative |
|
59,839 |
|
22,985 |
|
||
|
|
|
|
|
|
|
||
|
Subtotal non-employee stock based compensation |
|
59,839 |
|
22,985 |
|
||
|
|
|
|
|
|
|
||
|
Total stock-based compensation expense |
|
$ |
325,930 |
|
$ |
177,836 |
|
The estimated fair value of stock option awards was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions during the years indicated below:
|
|
|
Years ended December 31, |
|
||
|
|
|
2010 |
|
2009 |
|
|
Risk-free interest rate |
|
1.46%-2.30% |
|
1.79%-2.48% |
|
|
Dividend yield |
|
— |
|
— |
|
|
Expected volatility |
|
100% |
|
75% |
|
|
Expected term (in years) |
|
5.0 yrs |
|
5.0 yrs |
|
|
Stock price |
|
$.22-$.23 |
|
$.23-$.25 |
|
Risk-free interest rate —Based on the daily yield curve rates for U.S. Treasury obligations with maturities which correspond to the expected term of the Company’s stock options.
Dividend yield —Trovagene has not paid any dividends on common stock since its inception and does not anticipate paying dividends on its common stock in the foreseeable future.
Expected volatility —Based on the historical volatility of Trovagene’s stock.
Expected term —Trovagene has had no stock options exercised since inception. The expected option term represents the period that stock-based awards are expected to be outstanding based on the simplified method provided in Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment , (“SAB No. 107”), which averages an award’s weighted-average vesting period and expected term for “plain vanilla” share options. Under SAB No. 107, options are considered to be “plain vanilla” if they have the following basic characteristics: (i) granted “at-the-money”; (ii) exercisability is conditioned upon service through the vesting date; (iii) termination of service prior to vesting results in forfeiture; (iv) limited exercise period following termination of service; and (v) options are non-transferable and non-hedgeable.
Forfeitures —ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Trovagene estimated future unvested option forfeitures based on historical experience of 20%.
The weighted-average fair value per share of all options granted during the twelve months ended December 31, 2010 and December 31, 2009 estimated as of the grant date using the Black-Scholes option valuation model was $0.28 and $.27 per share, respectively.
The unrecognized compensation cost related to non-vested employee stock options outstanding at December 31, 2010 and December 31, 2009 was $363,455 and $344,346, respectively. The weighted-average remaining contractual term at December 31, 2010 for options outstanding and vested options is 6.7 and 5.7 years, respectively.
A summary of stock option activity and of changes in stock options outstanding is presented below:
|
|
|
Number of
|
|
Exercise Price
|
|
Weighted
|
|
Intrinsic Value |
|
||
|
Balance outstanding, December 31, 2008 |
|
6,177,651 |
|
$0.50 to $2.50 |
|
$ |
1.43 |
|
$ |
51,429 |
|
|
Granted |
|
8,585,000 |
|
$.50 |
|
$ |
.50 |
|
|
|
|
|
Exercised |
|
— |
|
— |
|
— |
|
|
|
||
|
Forfeited |
|
— |
|
— |
|
— |
|
|
|
||
|
Balance outstanding, December 31, 2009 |
|
14,762,651 |
|
$0.50 to $2.50 |
|
$ |
.89 |
|
$ |
2,197,679 |
|
|
Granted |
|
2,160,000 |
|
$.50-$.75 |
|
$ |
.57 |
|
|
|
|
|
Exercised |
|
— |
|
— |
|
— |
|
|
|
||
|
Forfeited |
|
(2,465,000 |
) |
$.50 |
|
$ |
.50 |
|
|
|
|
|
Balance outstanding, December 31, 2010 |
|
14,457,651 |
|
$0.50 to 2.50 |
|
$ |
.90 |
|
$ |
143,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010 |
|
9,415,151 |
|
$0.50 to 2.50 |
|
$ |
1.11 |
|
$ |
65,250 |
|
ASC Topic 718 requires that cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for options exercised (excess tax benefits) be classified as cash inflows from financing activities and cash outflows from operating activities. Due to TrovaGene’s accumulated deficit position, no tax benefits have been recognized in the cash flow statement.
8. Derivative Financial Instruments
Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Contracts in Entity’s Own Equity, TrovaGene has determined that certain warrants issued in connection with the private placements must be recorded as derivative liabilities with a charge to additional paid in capital. 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 changes in fair value is being recorded in the Company’s statement of operations. The Company estimates the fair value of (i) certain of these warrants using the Black-Scholes option pricing model and (ii) estimates the fair value of the price protected units using the Binomial option pricing model in order to determine the associated derivative instrument liability and change in fair value described above.
The range of assumptions used to determine the fair value of the warrants valued using the Black-Scholes option pricing model during the periods indicated was:
|
|
|
Twelve months ended
|
|
Twelve months ended
|
|
|
Estimated fair value of warrant |
|
$0.50 to$2.50 |
|
$0.50 to$2.50 |
|
|
Expected warrant term |
|
5 years |
|
5 years |
|
|
Risk-free interest rate |
|
.19-1.02% |
|
.04-1.72% |
|
|
Expected volatility |
|
100% |
|
75% |
|
|
Dividend yield |
|
0% |
|
0% |
|
Expected volatility is based on historical volatility of Trovagene’s common stock. 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
|
|
|
|
1/1/2009 |
|
Opening balance |
|
7,399,405 |
|
$ |
1,002,841 |
|
|
|
|
|
|
|
|
|
|
|
|
3/31/2009 |
|
Change in fair value of warrants during the quarter recognized as a loss in the statement of operations |
|
— |
|
$ |
576,837 |
|
|
|
|
|
|
|
|
|
|
|
|
3/31/2009 |
|
Balance of derivative financial instruments liability |
|
7,399,405 |
|
$ |
1,579,678 |
|
|
6/30/2009 |
|
Change in fair value of warrants during the quarter recognized as income in the statement of operations |
|
— |
|
$ |
(934,789 |
) |
|
|
|
|
|
|
|
|
|
|
|
6/30/2009 |
|
Balance of derivative financial instruments liability |
|
7,399,405 |
|
$ |
644,889 |
|
|
9/30/2009 |
|
Change in fair value of warrants during the quarter recognized as a loss in the statement of operations |
|
— |
|
$ |
18,895 |
|
|
9/30/2009 |
|
Balance of derivative financial instruments liability |
|
7,399,405 |
|
$ |
663,784 |
|
|
12/31/2009 |
|
Change in fair value of warrants during the quarter recognized as a loss in the statement of operations |
|
— |
|
$ |
76,833 |
|
|
12/31/2009 |
|
Balance of derivative financial instruments liability |
|
7,399,405 |
|
$ |
740,617 |
|
|
3/31/2010 |
|
Change in fair value of warrants during the quarter recognized as income in the statement of operations |
|
— |
|
$ |
(266,632 |
) |
|
3/31/2010 |
|
Balance of derivative financial instruments liability |
|
7,399,405 |
|
$ |
473,985 |
|
|
6/30/2010 |
|
Warrants expiration |
|
(322,500 |
) |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
6/30/2010 |
|
Change in fair value of warrants during the quarter recognized as income in the statement of operations |
|
— |
|
$ |
(168,439 |
) |
|
|
|
|
|
|
|
|
|
|
|
6/30/2010 |
|
Balance of derivative financial instruments liability |
|
7,076,905 |
|
$ |
305,546 |
|
|
|
|
|
|
|
|
|
|
|
|
9/30/2010 |
|
Change in fair value of warrants during the quarter recognized as a loss in the statement of operations |
|
— |
|
$ |
347,425 |
|
|
|
|
|
|
|
|
|
|
|
|
9/30/2010 |
|
Balance of derivative financial instruments liability |
|
7,076,905 |
|
$ |
652,971 |
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2010 |
|
Change in fair value of warrants during the quarter recognized as income in the statement of operations |
|
— |
|
$ |
(43,816 |
) |
|
|
|
|
|
|
|
|
|
|
|
12/31/2010 |
|
Balance of derivative financial instruments liability |
|
7,076,905 |
|
$ |
609,155 |
|
During the years ended December 31, 2010 and 2009, Company issued 4,709,654 and 2,930,000 units at $.50 per unit. The units had a per unit price protection clause whereby from the date of issuance until the earlier of (i) thirty months from the final Closing or (ii) the closing date of a Subsequent Financing which generates within a one year period an amount equal to or in excess of $5,000,000, if the Company shall issue any Common Stock or Common Stock Equivalents, in a Subsequent Financing at an effective price per share less than the Per Unit Purchase Price, the Company shall issue to such the number of additional Units equal to (a) the Subscription Amount Investor at the Closing divided by the Discounted Purchase Price, less (b) the Units issued to such Investor at the Closing. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Contracts in Entity’s Own Equity, TrovaGene has determined that these price protected units issued in connection with the private placements must be recorded as derivative liabilities with a charge to additional paid in capital. The price protected unit’s warrants had an exercise price of $.50 per share and had expiration dates ranging from June 30, 2014 to December 31, 2018. The fair value of these price protected units was estimated using the binomial option pricing model. The binomial model requires the input of variable inputs over time, including the expected stock price volatility, the expected price multiple at which unit holders are likely to exercise their warrants and the expected forfeiture rate. The Company uses historical data to estimate forfeiture rate and expected stock price volatility within the binomial model. The risk-free rate for periods within the contractual life of the warrant is based on the U.S. Treasury yield curve in effect at the date of grant for the expected term of the warrant.
The fair value of the warrants granted during the two years ended December 31, 2010 was estimated using the following weighted average assumptions:
|
|
|
2010 |
|
2009 |
|
|
Range of risk-free interest rates |
|
.29% to 1.39% |
|
1.31% to 1.81% |
|
|
Range of expected volatility |
|
60 to 100% |
|
75% |
|
|
Expected fair value of the stock |
|
$.22-$.23 |
|
$.23-$.33 |
|
|
Weighted average remaining contractual life |
|
1.86 years |
|
2.45 years |
|
|
Expected warrant term |
|
5 years |
|
5 years |
|
The weighted average remaining contractual term of all of the Company’s warrants outstanding at December 31, 2010 and 2009 was five and six years, respectively.
The following table sets forth the components of changes in the Company’s derivative financial instruments liability balance, valued using the Binomial option pricing method, for the periods indicated:
|
|
|
|
|
|
|
Change In |
|
|
|
||||
|
|
|
|
|
|
|
Fair value |
|
|
|
||||
|
|
|
|
|
|
|
of Derivative |
|
|
|
||||
|
|
|
|
|
|
|
Liability |
|
|
|
||||
|
|
|
Number of |
|
|
|
For Previously |
|
Ending |
|
||||
|
|
|
Price Protected |
|
|
|
Outstanding |
|
Balance |
|
||||
|
|
|
Units at |
|
Derivative Liability |
|
Price Protected |
|
Derivative |
|
||||
|
Quarter |
|
Issuance |
|
For Issued Units |
|
Units(1) |
|
Liability |
|
||||
|
Beginning balance |
|
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Quarter ended 6/30/ 2009 |
|
50,000 |
|
9,622 |
|
0 |
|
9,622 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Quarter ended 9/30/ 2009 |
|
500,000 |
|
91,611 |
|
(269 |
) |
100,964 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Quarter ended 12/31/ 2009 |
|
2,380,000 |
|
512,058 |
|
(10,889 |
) |
602,133 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total at 12/31/ 2009 |
|
2,930,000 |
|
613,291 |
|
(11,158 |
) |
602,133 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Quarter ended 3/31/ 2010 |
|
863,000 |
|
188,331 |
|
(20,716 |
) |
769,748 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Quarter ended 6/30/ 2010 |
|
993,000 |
|
214,186 |
|
(29,485 |
) |
954,449 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Quarter ended 9/30/ 2010 |
|
2,628,654 |
|
559,862 |
|
(37,247 |
) |
1,477,064 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Quarter ended 12/31/ 2010 |
|
225,000 |
|
47,736 |
|
(48,017 |
) |
$ |
1,476,783 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total at 12/31/10 |
|
7,639,654 |
|
$ |
1,623,406 |
|
$ |
(146,623 |
) |
$ |
1,476,783 |
|
|
The total derivative liability for the Company at December 31, 2010 and 2009 was $2,085,938 and $1,342,750, respectively.
9. Fair Value Measurements
The following table presents the Company’s liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of December 31, 2010 and 2009:
|
Description |
|
Quoted Prices
|
|
Significant
|
|
Significant
|
|
Balance as of
|
|
||||
|
Derivative liabilities related to Warrants |
|
$ |
— |
|
$ |
— |
|
$ |
2,085,938 |
|
$ |
2,085,938 |
|
|
Description |
|
Quoted Prices
|
|
Significant
|
|
Significant
|
|
Balance as of
|
|
||||
|
Derivative liabilities related to Warrants |
|
$ |
— |
|
$ |
— |
|
$ |
1,342,750 |
|
$ |
1,342,750 |
|
The following table sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the twelve months ended December 31, 2010 and 2009:
|
Description |
|
Balance at
|
|
Fair Value of
|
|
Unrealized
|
|
Balance as of
|
|
||||
|
Derivative liabilities related to Warrants |
|
$ |
1,342,750 |
|
$ |
1,010,114 |
|
$ |
(266,926 |
) |
$ |
2,085,938 |
|
|
Description |
|
Balance at
|
|
Fair Value of
|
|
Unrealized
|
|
Balance as of
|
|
||||
|
Derivative liabilities related to Warrants |
|
$ |
118,564 |
|
$ |
1,497,568 |
|
$ |
(273,382 |
) |
$ |
1,342,750 |
|
The unrealized gains or losses on the derivative liabilities are recorded as a change in fair value of derivative liabilities in the Company’s statement of operations. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, the Company reviews the assets and liabilities that are subject to ASC Topic 815-40. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.
10. Income Taxes
Trovagene has not filed any Federal tax returns since inception. The amount of any tax liability that could arise since inception is undetermined at this time, however, the Company believes that because it has sustained losses since inception, the amount of any tax liability, if any, that could arise would be immaterial to the Company’s Consolidated Financial Statements.
Because Trovagene has not filed any Federal income tax returns it is still calculating the amount of its net operating loss carryforwards (“NOLs”). At December 31, 2010, Trovagene has estimated Federal NOL’s of approximately $18 Million. This estimate is based upon the Company’s cash used in operating activities since inception. We are not assured that when we file our Federal tax returns that the estimated NOL’s above can be substantiated.
Any net deferred tax assets will be fully offset by a valuation allowance due to uncertainties regarding realization of benefits from these future tax deductions. The utilization of these NOLs is subject to limitations based on significant past and future changes in ownership of Trovogene pursuant to Internal Revenue Code Section 382.
The Company does not believe there are any other material deferred tax items. Due to the significant doubt related to Trovagene’s ability to continue as a going concern and utilize its deferred tax assets, a valuation allowance for the full amount of the deferred tax assets has been established at December 31, 2010. As a result of this valuation allowance there are no income tax benefits reflected in the consolidated statements of operations to offset pre-tax losses.
The provisions of ASC 740-10-30-7, Accounting for Income Taxes were adopted by Trovagene on January 1, 2007 and had no effect on Trovagene’s financial position, cash flows or results of operations upon adoption, as Trovagene did not have any unrecognized tax benefits. Trovagene’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense and none have been incurred to date. Xenomics Europa LTD, a company formed in the United Kingdom during the year ended January 31, 2007, did not file the required Form 5471 with the Internal Revenue Service. The potential exposure for not filing the Form 5471 is estimated to be approximately $40,000 plus interest and penalties.
11. SpaXen Joint Venture
In March, 2004, TrovaGene organized a joint venture with the Spallanzani National Institute for Infectious Diseases (Instituto Nazionale per le Malattie Infettive, “INMI”) in Rome, Italy, in the form of a research and development company named SpaXen Italia, S.R.L (“SpaXen”). In laboratories provided to SpaXen within INMI, SpaXen scientists worked to apply the Tr-DNA technology to a broad variety of infectious diseases. Shares of SpaXen were held 50% by INMI and 50% by TrovaGene.
The Company did not consolidate the operating results of SpaXen pursuant to the provisions of ASC Topic 810- Consolidation of Variable Interest Entities , since INMI, not TrovaGene, is the primary beneficiary given the Shareholder Agreement stipulates that:
1) Any surplus found to exist following liquidation of SpaXen was the exclusive property of INMI,
2) Any newly developed intellectual property and patents thereon were the property of INMI,
3) The patent originally contributed by TrovaGene was returned to TrovaGene, and
4) SpaXen was managed by a three person Board of Directors to which TrovaGene could only appoint one representative. This provided TrovaGene with a measure of oversight but it did not provide effective control.
Effective March 27, 2007, Dr. Tomei, founder and former Co-Chairman of the Board and Chief Executive Officer of the Company, resigned from his position of President and member of the Consiglio of SpaXen. SpaXen was being managed by a sole managing director who was an employee of INMI.
In January 2008, SpaXen was liquidated. This had no impact on the Company’s financial statements.
12. Commitments and Contingencies
License Agreements
On May 10, 2006, the Company entered into a license agreement Drs. Falini and Mecucci, wherein it obtained the exclusive rights for the genetic marker for Acute Myeloid Leukemia (AML) and intends to utilize these rights for the development of new diagnostic tools. In connection with this agreement, the Company paid $70,000 to Drs. Falini and Mecucci and is obligated to pay royalties of 6% of royalty revenues and/or 10% of any sublicense income. During the years ended December 31, 2010 and 2009 and from inception (August 4, 1999) to December 31, 2010 the Company recorded license fee expenses of approximately $23,000, $0 and $23,000, respectively.
Additionally, the Company paid $100,000 and issued warrants for the purchase of 100,000 shares of common stock at $1.80 per share as a finder’s fee to an independent third party. These warrants had a value of $101,131 on the date of issuance utilizing the Black- Scholes model and expire June 29, 2014. All such payments and the value of the warrants were immediately expensed as research and development expenses.
During August 2007, the Company signed a licensing agreement with IPSOGEN SAS, a leading molecular diagnostics company with operations in France and the United States for the co-exclusive rights to develop, manufacture and market, research and diagnostic products for the stratification and monitoring of patients with acute myeloid leukemia (AML). Upon execution of this agreement, IPSOGEN paid an initial licensing fee of $120,000 and may make milestone payments upon the attainment of certain regulatory and commercial milestones. IPSOGEN will also pay the Company a royalty on any net revenues during the term of the agreement, subject to certain minimums. During the years ended December 31, 2010, 2009 and from inception (August 4, 1999) to December 31, 2010 the Company recorded royalty and license fee revenues of approximately $40,000, $27,000 and $227,000, respectively. During the years ended December 31, 2010 and 2009 and from inception (August 4, 1999) to December 31, 2010 the Company recorded license fee expenses of approximately $0, $3,700 and $3,700 respectively.
In October 2007, the Company signed a licensing agreement with ASURAGEN, Inc. for the co-exclusive rights to develop, manufacture and market, research and diagnostic products for the stratification and monitoring of patients with AML. ASURAGEN paid an initial licensing fee of $120,000 upon execution of the agreement and may make future payments to the Company upon the attainment of certain regulatory and commercial milestones. ASURAGEN will also pay the Company a royalty on any net revenues during the term of the agreement, subject to certain minimums. During the years ended December 31, 2010 and 2009 and from inception (August 4, 1999) to December 31, 2010 the Company recorded royalty and license fee revenues of approximately $50,000, $27,000 and $297,000, respectively. During the years ended December 31, 2010 and 2009 and from inception (August 4, 1999) to December 31, 2010 the Company recorded license fee expenses of approximately $0, $5,800 and $15,800 respectively.
In January 2008, the Company signed a licensing agreement with Warnex Medical Laboratories for the non-exclusive rights to develop, manufacture and market, research and diagnostic products for the stratification and monitoring of patients with AML. Warnex Medical Laboratories will pay the Company a royalty on any net revenues during the term of the agreement. The Company has not received any royalty and license fee revenues nor recorded any license fee expenses in connection with this license agreement.
In August 2008, the Company signed a licensing agreement with LabCorp for the non-exclusive rights to develop, manufacture and market, research and diagnostic products for the stratification and monitoring of patients with AML. LabCorp paid an initial licensing fee of $20,000 upon execution of the agreement. LabCorp will also pay the Company a royalty on any net revenues during the term of the agreement, subject to certain minimums. During the years ended December 31, 2010, 2009 and from inception (August 4, 1999) to December 31, 2010 the Company recorded royalty and license fee revenues of approximately $27,000, $0 and $47,000, respectively. During the years ended December 31, 2010 and 2009 and from inception (August 4, 1999) to December 31, 2010, the Company has not recorded any license fee expenses.
In October 2008, the Company signed a licensing agreement with Sequenom, Inc. for the rights to three patents for the methods for detection of nucleic acid sequences in urine. Sequenom paid an initial licensing fee of $1 million upon execution of the agreement. Sequenom will also pay the Company a royalty on any net revenues during the term of the agreement, subject to certain minimums. In March 2011, Sequenom notified the Company, in accordance with the agreement, that it was terminating the agreement effective after 60 days. The Company has also billed Sequenom for its prorata share of the minimum royalties due in 2011. During the years ended December 31, 2010 and 2009 and from inception (August 4, 1999) to December 31, 2010 the Company recorded royalty and license fee revenues of approximately $139,000, $0 and $1,139,000, respectively. During the years ended December 31, 2010, 2009 and from inception (August 4, 1999) to December 31, 2010, the Company has not recorded any license fee expenses.
In December 2008, the Company signed a licensing agreement with InVivoScribe Technologies, Inc. for the co-exclusive rights to develop, manufacture and market, research and diagnostic products for the stratification and monitoring of patients with AML. InVivoScribe Technologies paid an initial licensing fee of $10,000 upon execution of the agreement. InVivoScribe Technologies will also pay the Company a royalty on any net revenues during the term of the agreement, subject to certain minimums. During the years ended December 31, 2010 and 2009 and from inception (August 4, 1999) to December 31, 2010, the Company recorded royalty and license fee revenues of approximately $0, $0 and $10,000, respectively. During the years ended December 31, 2010 and 2009 and from inception (August 4, 1999) to December 31, 2010, the Company has not recorded any license fee expenses.
In June 2010, the Company signed a licensing agreement with Skyline Diagnostics BV for the non-exclusive rights to develop, commercialize and market, research and diagnostic laboratory services for the stratification and monitoring of patients with AML. Skyline Diagnostics BV paid an initial licensing fee of $10,000 upon execution of the agreement and may make future payments to the Company upon the attainment of certain regulatory and commercial milestones. Skyline Diagnostics BV will also pay the Company a royalty on any net revenues during the term of the agreement, subject to certain minimums. During the years ended December 31, 2010 and 2009 and from inception (August 4, 1999) to December 31, 2010, the Company recorded royalty and license fee revenues of approximately $10,000 $0 and $10,000, respectively. During the years ended December 31, 2010 and 2009 and from inception (August 4, 1999) to December 31, 2010, the Company has not recorded any license fee expenses.
In total, during the years ended December 31, 2010 and 2009, the Company recorded $0 and $600,000 of up-front license fees and $265,665 and $53,994 of royalty income, respectively. From inception (August 4, 1999) to December 31, 2010, the Company recorded $1,410,000 of license fees and $340,549 of royalty income.
Litigation
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
We are not currently a party to any material legal proceedings.
Employment and Consulting Agreements
On June 24, 2005, TrovaGene entered into an agreement with Gabriele M. Cerrone, the Company’s former Co-Chairman, to serve as a consultant for a term of three years effective July 1, 2005 with automatic renewal for successive one year periods unless either party gives notice to the other not to renew the agreement. The duties of Mr. Cerrone pursuant to the agreement consist of business development, strategic planning, capital markets and corporate financing consulting advice. Mr. Cerrone’s compensation under the agreement was $16,500 per month. Pursuant to the agreement the Company paid Mr. Cerrone a $50,000 signing bonus in July 2005. In August 2009, the Company and Mr. Cerrone ageed to terminate this consulting agreement. The fair value of the amount owed (“the obligation”) to Mr. Cerrone was determined to be $478,890, as approved by the Board of Directors. In settlement of the obligation the Company issued to Mr. Cerrone 957,780 units, consisting of 957,780 shares of the Company’s common stock and 957,780 warrants to purchase 957,780 shares of common stock of the Company, calculated by dividing the obligation by $.50 per share, as approved by the Board of Directors. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, TrovaGene has determined that the warrants issued in connection with these warrants should not be recorded as derivative liabilities.
In March of 2010, the Board of Directors of the Company authorized the issuance to Thomas Adams, in satisfaction of $100,000 consulting fee, 200,000 shares of common stock and warrants to purchase shares of common stock of the Company.
Deferred Founders Compensation
On August 15, 2000 Dr. Tomei, Mr. Umansky and Mr. Melkonyan (collectively the “Founders”) entered into employment agreements with the Company pursuant to which each Founder contributed 100% of their time to the Company with payment of their compensation deferred until the Company was sufficiently funded, sold or merged with another company.
In accordance with SAB 107, Topic 5, section T, the value of services performed by the Founders and principal shareholders was recorded as a liability and compensation expense. On April 12, 2004, in contemplation of entering into the Securities Exchange Agreement with Used Kar Parts, Inc. the Founders terminated their agreements, waiving any claims to be paid deferred compensation. On April 12, 2004, $1,655,031 of deferred Founders’ compensation liability, which had accumulated since August 15, 2000, was deemed an equity contribution and converted to additional paid-in-capital.
Lease Agreements
a) On September 15, 2004, the Company entered into a seven year lease for its previous corporate headquarters in New York City with an average annual rent of approximately $78,000 through September 30, 2011. On July 28, 2008, the Company entered into a License Agreement with Synergy Pharmaceuticals, Inc.(“Synergy”) for a portion of the above premises commencing on August 1,2008 and ending on September 30,2008 for a license fee of $9,000. On July 28, 2009, the Company assigned its rights, title and interest in the above lease to Synergy. As a result of this assignment, Synergy has assumed all of the obligations of the lease. Simultaneously with the lease assignment, Synergy delivered a check in the amount of $12,926 as a security deposit for meeting its obligations under the aforementioned lease.
b) On September 1, 2004, the Company entered a two year lease for laboratory space in New Jersey, with an approximate annual rent of $125,000 through August 31, 2006. On August 26, 2009, the company entered into a Lease Settlement Agreement (“Settlement”) with the landlord. Under the terms of the Settlement the Company agreed to pay the landlord the sum of $15,000 in full satisfaction of its obligations under the lease. The company also assigned to the landlord ownership of all the tangible property, laboratory equipment and other such equipment located at the premises.
c) On October 28, 2009, the Company entered a three year and two months lease, commencing January 1, 2010, for its current corporate headquarters located in San Diego, California with an average annual rent of approximately $132,000 through February 28, 2013. A security deposit in the amount of $65,472 was paid to the landlord.
d) During the years ended December 31, 2010 and 2009 total rent expense was approximately $151,000 and $155,000 respectively. The Company is also party to various operating lease agreements for office equipment.
Total annual commitments under current lease agreements for each of the twelve months ended December 31, are as follows:
|
2011 |
|
$ |
127,776 |
|
|
2012 |
|
135,168 |
|
|
|
2013 |
|
22,704 |
|
|
|
Total |
|
$ |
285,648 |
|
Settlement Agreements
In November 2010, Mr. Umansky and the estate of the late Mr. Melkonyan settled their employment lawsuits against the Company as follows:
A) 1) Mr. Umansky received cash payments totaling $150,000 payable in six equal installments of $25,000 commencing December 1, 2010 and ending May 1, 2011.
2) Stock options, fully vested, to purchase a total of 450,000 shares of Common Stock, $.001 par value, with an exercise price of $.50 per share and expiring November 1, 2020. The stock based compensation expense associated with these options of $81,901, using the Black Scholes fair value method, is included in Stockholders’ Equity (Deficiency) for the year ended December 31, 2010.
3) At the closing Mr. Umansky received an additional sum of $75,000 as a partial reimbursement of legal fees.
B) 1) Mr. Melkonyan’s estate received cash payments totaling $50,000 payable in six equal installments of $8,333.34 commencing December 1, 2010 and ending May 1, 2011.
2) Stock options, fully vested, to purchase a total of 200,000 shares of Common Stock, $.001 par value, with an exercise price of $.50 per share and expiring November 1, 2020. The stock based compensation expense associated with these options of $36,401, using the Black Scholes fair value method, is included in Stockholders’ Equity (Deficiency) for the year ended December 31, 2010.
As of December 31, 2010, $225,000 has been expensed in general and administrative expenses in the consolidated statements of operations. At December 31, 2010, $133,333 was outstanding and accrued for.
In November 2010, the Company entered into a Mutual Release, Settlement and Indemnification Agreement with Kira Sheinerman with respect to an action against the Company. As a result of this agreement, Ms.Sheinerman received a fully vested stock option, expiring November 17, 2020, to purchase a total of (i) 50,000 shares of Common Stock, $.001 par value, with an exercise price of $.50 per share and (ii) 75,000 shares of Common Stock, $.001 par value, with an exercise price of $.75 per share. The stock based compensation associated with these options totaling $13,211, using the Black Scholes fair value method, is included in Stockholders’ Equity (Deficiency) for the year ended December 31, 2010.
EMPLOYEE BENEFIT PLANS
Defined Contribution Plan
The Company has a retirement savings plan under Section 401(k) of the Internal Revenue Code covering its employees. The plan allows employees to defer, up to the maximum allowed, a % of their income on a pre-tax basis through contributions to the plans, plus any employee of the age of 55 can participate in the caught-up dollars as allowed by IRS codes. The Company also has a Roth investment plan that is taken after taxes. The Company does not currently make matching contributions.
13. Related Party Transactions
Gabriele M. Cerrone, the Company’s former Co-Chairman, served as a consultant to the Company from June 27, 2005 until June 2008 and is affiliated with Panetta Partners Ltd. Transactions between the Company and Mr. Cerrone and Panetta Partners, Ltd. are disclosed in Note 4, Merger Activities , Note 6, Stockholders’Equity (Deficiency), Note 7, Stock Option Plan and Note 12, Commitments and Contingencies: Employment and Consulting Agreements.
Gianluigi Longinotti-Buitoni was appointed Executive Chairman on November 14, 2006 and served without cash compensation. For financial statement reporting purposes, the Company estimated the value of his services for the period from November 14, 2006 through January 31, 2007, for the eleven months ended December 31, 2007 and for the twelve months ended December 31, 2008 to be $62,500, $275,000 and $300,000, respectively, and recorded an expense in the above periods for those amounts with corresponding increases to additional paid in capital. See Note 6, Stockholders’ Equity (Deficiency) .
Stanley Tennant, a director of the company, and a Debenture holder in the principal amount of $137,500 received 338,126 shares of common stock relating to the Forbearance Agreement. R. Merrill Hunter, a principal stockholder of the company, and a Debenture holder in the principal amount of $550,000 received 1,352,504 shares of common stock relating to the Forbearance Agreement.
14. Subsequent Events
A) On July 20, 2011, Dr. Andreas Braun, Trovagene’s Acting President and CEO, tendered his resignation effective August 5, 2011. The Company owes Dr. Braun $51,923 in deferred compensation as of the date of his resignation.
B) On August 10, 2011, the Company and Thomas Adams, Chairman of the Board of Directors, agreed to: (i) terminate the consulting arrangement between Thomas Adams and the Company (ii) deem the consideration earned under this arrangement which consisted of 200,000 shares of common stock of the Company and warrants to purchase 200,000 shares of common stock of the Company to be full payment for his services and (iii) amend and restate his April 21, 2009 stock option agreement as follows: (a) the grant date is August 5, 2011, (b) the number of options granted is for 1,822,500 shares of stock, (c) the exercise price is $.53 per share and (d) 800,000 shares vest immediately. The remaining 1,022,500 share options will vest as follows: 340,833 on August 5, 2012 and 2013 and 340,834 on August 5, 2014, provided the optionee continues to provide service to the Company and any of its subsidiaries and (e) the option expires August 5, 2021 or within 90 days of termination.
(C) During the period from July 1 to October 21, 2011 the Company closed seven private placement financings which raised gross proceeds of $1,228,500. The Company issued 2,457,000 shares of its common stock and warrants to purchase 2,457,800 shares of common stock in these transactions. The purchase price paid by the investors was $.50 for each unit. The warrants expire after eight years and are exercisable at $.50 per share. Based upon the Company’s analysis of the criteria
contained in ASC Topic 815-40, TrovaGene has determined that the units, which are price protected, issued in connection with these private placements should be recorded as derivative liabilities.
(D) On October 4, 2011, the Company entered into an executive agreement with Antonius Schuh, Ph.D. in which he agreed to serve as Chief Executive Officer. The term of the agreement is effective as of October 4, 2011 and continues until October 4, 2015 and is automatically renewed for successive one year periods at the end to each term. Dr. Schuh’s compensation is $275,000 per year. Dr. Schuh is eligible to receive a cash bonus of up to 50% of his base salary per year based on meeting certain performance objectives and bonus criteria. Upon entering the agreement, Dr. Schuh was granted 3,800,000 non-qualified stock options which have an exercise price of $0.50 per share and vest annually in equal amounts over a period of four years Dr. Schuh is also eligible to receive a realization bonus upon the occurrence of either of the following events, whichever occurs earlier;
(i) In the event that during the term of the agreement, for a period of 90 consecutive trading days, the market price of the common stock is $1.25 or more and the volume of the common stock daily trading volume is $125,000 or more, we shall pay or issue Dr. Schuh a bonus in an amount of $3,466,466 in either cash or registered common stock or a combination thereof as mutually agreed by Dr. Schuh and us; or
(ii) In the event that during the term of the agreement, a change of control occurs where the per share enterprise value of our company equals or exceeds $1.25 per share, we shall pay Dr. Schuh a bonus in an amount determined by multiplying the enterprise value by 4.0%. In the event in a change of control the per share enterprise value exceeds a minimum of $2.40 per share, $3.80 per share or $5.00 per share, Dr. Schuh shall receive a bonus in an amount determined by multiplying the incremental enterprise value by 2.5%, 2.0% or 1.5%, respectively.
If the executive agreement is terminated for cause or as a result of Dr. Schuh’s death or permanent disability or if Dr. Schuh terminates his agreement voluntarily, Dr. Schuh shall receive a lump sum equal to (i) any portion of unpaid base compensation then due for periods prior to termination, (ii) any bonus or realization bonus earned but not yet paid through the date of termination and (iii) all expenses reasonably incurred by Dr. Schuh prior to date of termination. If the executive agreement is terminated without cause Dr. Schuh shall receive a severance payment equal to base compensation for three months if termination occurs ten months after the effective date of the agreement and six months if termination occurs subsequent to ten months from the effective date. If the executive agreement is terminated as a result of a change of control, Dr. Schuh shall receive a severance payment equal to base compensation for twelve months and all unvested stock options shall immediately vest and become fully exercisable for a period of six months following the date of termination.
On December 26, 2005, TrovaGene entered into a letter agreement with David Robbins, Ph.D. to serve as Vice President of Product Development for a term of three years. Mr. Robbins received a grant of 100,000 incentive stock options with an exercise price of $1.86 per share which vested in equal amounts over a period of three years beginning January 3, 2007. The agreement contained a provision pursuant to which all of the unvested stock options would vest in the event there was a change in control of the Company. The above options were fully vested at January 31, 2009. On October 7, 2011, the Company entered into an employment agreement with Dr. Robbins, Ph.D. in which he agreed to serve as Vice President, Research and Development. The term of the agreement is effective as of October 7, 2011 and continues until October 7, 2012 and is automatically renewed for successive one year periods at the end to each term. Dr. Robbins’ salary is $195,000 per year. Dr. Robbins is eligible to receive a cash bonus of up to 25% of his base salary per year at the discretion of the Compensation Committee. If the employment agreement is terminated without cause, Dr. Robbins shall be entitled to a severance payment equal to three months of base salary.
TrovaGene, Inc. and Subsidiaries
(A development stage company)
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
Unaudited
|
|
December 31,
|
|
||
|
|
|
|
|
|
|
||
|
Assets |
|
|
|
|
|
||
|
Current assets: |
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
15,282 |
|
$ |
58,703 |
|
|
Accounts receivable |
|
— |
|
75,000 |
|
||
|
Prepaid expenses |
|
126,669 |
|
151,032 |
|
||
|
Total current assets |
|
141,951 |
|
284,735 |
|
||
|
Property and equipment, net |
|
27,657 |
|
31,260 |
|
||
|
Other assets |
|
185,404 |
|
196,229 |
|
||
|
|
|
$ |
355,012 |
|
$ |
512,224 |
|
|
|
|
|
|
|
|
||
|
Liabilities and Stockholders’ Deficency |
|
|
|
|
|
||
|
Current liabilities: |
|
|
|
|
|
||
|
Accounts payable |
|
$ |
730,734 |
|
$ |
637,863 |
|
|
Interest payable |
|
28,126 |
|
28,639 |
|
||
|
Accrued expenses |
|
322,936 |
|
420,099 |
|
||
|
Convertible debentures |
|
2,335,050 |
|
2,335,050 |
|
||
|
Total current liabilities |
|
3,416,846 |
|
3,421,651 |
|
||
|
Derivative financial instruments |
|
2,145,240 |
|
2,085,938 |
|
||
|
|
|
|
|
|
|
||
|
Commitments and contingencies |
|
|
|
|
|
||
|
Stockholders’ deficiency |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Preferred stock, $0.001 par value, 20,000,000 shares authorized, 95,600 shares outstanding at June 30, 2011 and December 31, 2010, designated as Series A Convertible Preferred Stock with liquidation preference of $956,000 at June 30, 2011 and December 31, 2010 |
|
96 |
|
96 |
|
||
|
|
|
|
|
|
|
||
|
Common stock, $0.0001 par value, 100,000,000 shares authorized, 55,165,069 and 52,610,713 issued and outstanding at June 30, 2011 and December 31, 2010, respectively |
|
5,516 |
|
5,261 |
|
||
|
|
|
|
|
|
|
||
|
Additional paid-in capital |
|
37,128,557 |
|
36,320,257 |
|
||
|
Deficit accumulated during development stage |
|
(42,341,243 |
) |
(41,320,979 |
) |
||
|
Total stockholders’ deficiency |
|
(5,207,074 |
) |
(4,995,365 |
) |
||
|
|
|
|
|
|
|
||
|
|
|
$ |
355,012 |
|
$ |
512,224 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements
TrovaGene, Inc. and Subsidiaries
(A development stage company)
Condensed Consolidated Statements of Operations
(Unaudited)
The accompanying notes are an integral part of these condensed consolidated financial statements
TrovaGene, Inc. and Subsidiaries
(A development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit |
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|||||
|
|
|
Preferred |
|
Preferred |
|
Common |
|
Common |
|
Additional |
|
During |
|
Total |
|
|||||
|
|
|
Stock |
|
Stock |
|
Stock |
|
Stock |
|
Paid-In |
|
Development |
|
Stockholders’ |
|
|||||
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Capital |
|
Stage |
|
Deficiency |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance, December 31, 2010 |
|
95,600 |
|
$ |
96 |
|
52,610,713 |
|
$ |
5,261 |
|
$ |
36,320,257 |
|
$ |
(41,320,979 |
) |
$ |
(4,995,365 |
) |
|
Issuance of shares of common stock in payment of convertible debenture interest in accordance with Forbearance Agreement |
|
|
|
|
|
256,856 |
|
26 |
|
57,124 |
|
|
|
57,150 |
|
|||||
|
Private Placement of Common Stock |
|
|
|
|
|
1,950,000 |
|
195 |
|
974,805 |
|
|
|
975,000 |
|
|||||
|
Shares issued in connection with Board Compensation |
|
|
|
|
|
250,500 |
|
25 |
|
125,225 |
|
|
|
125,250 |
|
|||||
|
Issuance of common stock to selling agent |
|
|
|
|
|
72,000 |
|
7 |
|
(7 |
) |
|
|
— |
|
|||||
|
Issuance of common stock in connection with consulting services |
|
|
|
|
|
25,000 |
|
2 |
|
12,498 |
|
|
|
12,500 |
|
|||||
|
Stock Based Compensation |
|
|
|
|
|
|
|
|
|
120,705 |
|
|
|
120,705 |
|
|||||
|
Preferred stock dividend |
|
|
|
|
|
|
|
|
|
|
|
(19,120 |
) |
(19,120 |
) |
|||||
|
Derivative liability-fair value of warrants and price protected units issued |
|
|
|
|
|
|
|
|
|
(482,050 |
) |
|
|
(482,050 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
(1,001,144 |
) |
(1,001,144 |
) |
|||||
|
Balance, June 30, 2011 |
|
95,600 |
|
$ |
96 |
|
55,165,069 |
|
$ |
5,516 |
|
$ |
37,128,557 |
|
$ |
(42,341,243 |
) |
$ |
(5,207,074 |
) |
The accompanying notes are an integral part of these condensed consolidated financial statements
TrovaGene, Inc. and Subsidiaries
(A development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
For the six months ended June 30, |
|
For the period
|
|
|||||
|
|
|
2011 |
|
2010 |
|
June 30, 2011 |
|
|||
|
Operating activities |
|
|
|
|
|
|
|
|||
|
Net loss |
|
$ |
(1,001,144 |
) |
$ |
(896,721 |
) |
$ |
(40,804,105 |
) |
|
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
|
|
|
|
|
|
|
|||
|
Depreciation and amortization |
|
5,132 |
|
3,575 |
|
216,646 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Stock based compensation expense |
|
120,705 |
|
111,528 |
|
11,350,052 |
|
|||
|
Founders compensation contributed to equity |
|
— |
|
— |
|
1,655,031 |
|
|||
|
Donated services contributed to equity |
|
— |
|
— |
|
829,381 |
|
|||
|
Settlement of consulting services per debt conversion agreement |
|
— |
|
— |
|
478,890 |
|
|||
|
Accretion of debt discount to interest expense |
|
— |
|
— |
|
2,346,330 |
|
|||
|
Liquidated damages and other forbearance agreement settlement costs paid in stock |
|
— |
|
— |
|
1,758,111 |
|
|||
|
Interest expense on convertible debentures paid in stock |
|
56,637 |
|
57,921 |
|
757,198 |
|
|||
|
Change in fair value of derivative instruments |
|
(422,749 |
) |
(485,273 |
) |
(1,478,082 |
) |
|||
|
Purchased In Process R & D re Etherogen, Inc , merger paid in stock |
|
— |
|
— |
|
2,666,869 |
|
|||
|
Stocks issued in connection with severance pay |
|
— |
|
— |
|
28,346 |
|
|||
|
Stocks issued in connection with settlement of legal fees |
|
— |
|
100,000 |
|
100,000 |
|
|||
|
Stocks issued in connection with consulting services |
|
12,500 |
|
— |
|
125,000 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|||
|
(Increase) decrease in other assets |
|
10,824 |
|
(502 |
) |
(185,405 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
(Increase) decrease in accounts receivable |
|
75,000 |
|
25,270 |
|
— |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
(Increase) decrease in prepaid expenses |
|
24,364 |
|
(18,552 |
) |
(126,668 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Increase in accounts payable and accrued expenses |
|
101,839 |
|
59,825 |
|
1,014,022 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Net cash used in operating activities |
|
(1,016,892 |
) |
(1,042,929 |
) |
(19,268,384 |
) |
|||
|
Investing activities: |
|
|
|
|
|
|
|
|||
|
Assets acquired in Etherogen, Inc. merger |
|
— |
|
— |
|
(104,700 |
) |
|||
|
Acquisition of equipment |
|
(1,529 |
) |
(26,209 |
) |
(244,303 |
) |
|||
|
Net cash used in investing activities |
|
(1,529 |
) |
(26,209 |
) |
(349,003 |
) |
|||
|
Financing activities |
|
|
|
|
|
|
|
|||
|
Proceeds from sale of 6% convertible debenture |
|
— |
|
— |
|
2,335,050 |
|
|||
|
Debt issuance costs |
|
— |
|
— |
|
(297,104 |
) |
|||
|
Proceeds from private placements of common stock, net of expenses |
|
975,000 |
|
675,000 |
|
15,833,505 |
|
|||
|
Proceeds from an exchange agreement |
|
— |
|
— |
|
142,187 |
|
|||
|
Costs associated with recapitalization |
|
— |
|
— |
|
(362,849 |
) |
|||
|
Proceeds from sale of preferred stock |
|
— |
|
— |
|
2,771,000 |
|
|||
|
Payment of finders fee on preferred stock |
|
— |
|
— |
|
(277,102 |
) |
|||
|
Redemption of common stock |
|
— |
|
— |
|
(500,000 |
) |
|||
|
Payment of preferred stock dividends |
|
— |
|
— |
|
(116,718 |
) |
|||
|
Net cash provided by financing activities |
|
975,000 |
|
675,000 |
|
19,527,969 |
|
|||
|
Net change in cash and equivalent-(decrease)increase |
|
(43,421 |
) |
(394,138 |
) |
15,282 |
|
|||
|
Cash and cash equivalents—Beginning of period |
|
58,703 |
|
545,167 |
|
— |
|
|||
|
Cash and cash equivalents—End of period |
|
$ |
15,282 |
|
151,029 |
|
$ |
15,282 |
|
|
|
Supplementary disclosure of cash flow activity: |
|
|
|
|
|
|
|
|||
|
Cash paid for taxes |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
Cash paid for interest |
|
— |
|
— |
|
— |
|
|||
|
Supplemental disclosure of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|||
|
Preferred stock dividends accrued |
|
19,120 |
|
19,120 |
|
288,798 |
|
|||
The accompanying notes are an integral part of these condensed consolidated financial statements
TrovaGene, Inc.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
1. Condensed Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements of TrovaGene, which include its wholly owned subsidiary Xenomics, Inc., a California corporation (“ Xenomics Sub”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated. Certain items in the comparable prior period’s financial statements have been reclassified to conform to the current period’s presentation. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements as of December 31, 2010 and December 31, 2009 and from inception (August 4, 1999) to December 31, 2010 and for each of the two years ended December 31, 2010 included in this Form 10. Certain items in the prior year’s financial statements have been reclassified to conform to the current year’s presentation. All intercompany balances and transactions have been eliminated. The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at June 30, 2011, and for all periods presented herein, have been made. The results of operations for the periods ended June 30, 2011 and 2010 are not necessarily indicative of the operating results for the full year.
Going Concern
TrovaGene’s consolidated financial statements as of June 30, 2011 and December 31, 2010 have been prepared under the assumption that the Company will continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to generate revenue. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company will be required to raise additional capital within the next twelve months to complete the development and commercialization of current product candidates and to continue to fund operations at its current cash expenditure levels.
Cash used in operating activities was $1,016,892 and $1,042,929 for the six months ended June 30, 2011 and 2010 respectively. During the six months ended June 30, 2011 and 2010 the Company recorded net losses attributable to common stockholders of $1,020,264 and $915,841, respectively.
To date, TrovaGene’s sources of cash have been primarily limited to the sale of debt and equity securities. Net cash provided by financing activities for the six months ended June 30, 2011 and 2010 was $975,000 and $675,000, respectively. The Company cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that the Company can raise additional funds by issuing equity securities, the Company’s stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact the Company’s ability to conduct its business.
If the Company is unable to raise additional capital when required or on acceptable terms, it may have to significantly delay, scale back or discontinue the development and/or commercialization of one or more of its product candidates. The Company may also be required to:
· Seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; and
· Relinquish licenses or otherwise dispose of rights to technologies, product candidates or products that the Company would otherwise seek to develop or commercialize themselves, on unfavorable terms.
As of June 30, 2011, TrovaGene had an accumulated deficit of $42,341,243 and expects to incur significant and increasing operating losses for the next several years.
The Company has approximately $561,000 of cash in the bank at November 20, 2011. Based on the Company’s projections of future ordinary expenses and expected receipts the Company has enough cash to pay expenses through April of 2012.
2. Net Loss Per Share
Basic and diluted net loss per share is presented in conformity with ASC Topic 260, Earnings per Share , for all periods presented. In accordance with this guide, basic and diluted net income/loss per common share was determined by dividing net income/loss applicable to common stockholders by the weighted-average common shares outstanding during the period.
Diluted weighted-average shares are the same as basic weighted-average shares when the shares issuable pursuant to the exercise of dilutive instruments would have been antidilutive.
For the three and six months ended June 30, 2011 and 2010, certain of the outstanding stock options and other common stock equivalents were excluded from the calculation of diluted income per share because the effect was anti-dilutive. The amounts excluded in the three and six months ended June 30, 2011 and 2010 were 5,734,610 and 5,267,600, respectively. Basic and diluted weighted average units outstanding were the same.
3. Accounting for Share-Based Payments
Stock Options
ASC Topic 718 “Compensation—Stock Compensation” requires companies to measure the cost of employee services received in exchange for the award of equity instruments based on the estimated fair value of the award at the date of grant. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award. ASC Topic 718 did not change the way TrovaGene accounts for non-employee stock-based compensation. TrovaGene accounts for shares of common stock, stock options and warrants issued to non-employees based on the fair value of the stock, stock option or warrant, if that value is more reliably measurable than the fair value of the consideration or services received. The Company accounts for stock options issued and vesting to non-employees in accordance with ASC Topic 505-50 “ Equity-Based Payment to Non-Employees” whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Accordingly the fair value of these options is being “marked to market” quarterly until the measurement date is determined.
Stock-based compensation expense related to TrovaGene options have been recognized in operating results as follow:
|
|
|
Three Months
|
|
Six Months
|
|
||||||||
|
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
||||
|
Employees—included in research and development |
|
$ |
2,810 |
|
$ |
2,948 |
|
$ |
5,759 |
|
$ |
5,749 |
|
|
Employees—included in general and administrative |
|
46,986 |
|
41,266 |
|
93,972 |
|
82,327 |
|
||||
|
Non-employees—included in research and development |
|
— |
|
— |
|
— |
|
— |
|
||||
|
Non-employees—included in general and administrative |
|
10,487 |
|
11,726 |
|
20,974 |
|
23,452 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total stock-based compensation expense |
|
$ |
60,283 |
|
$ |
55,940 |
|
$ |
120,705 |
|
$ |
111,528 |
|
The unrecognized compensation cost related to non-vested employee stock options outstanding at June 30, 2011 and 2010, net of expected forfeitures, was $223,641 and $363,455, respectively, to be recognized over a weighted-average remaining vesting period of approximately 5.7 and 5.4 years, respectively. This unrecognized compensation cost does not include amounts related to stock options which vest upon change of control.
The estimated fair value of stock option awards was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions during the following periods indicated.
|
|
|
Six Months
|
|
Six Months
|
|
|
Risk-free interest rate |
|
1.6 |
% |
2.30 |
% |
|
Dividend yield |
|
N/A |
|
N/A |
|
|
Expected volatility |
|
125 |
% |
75 |
% |
|
Expected term (in years) |
|
5.0 yrs. |
|
5.0 yrs. |
|
A summary of stock option activity and of changes in stock options outstanding under the Plan is presented below:
|
|
|
Number of
|
|
Exercise Price
|
|
Weighted Average
|
|
Intrinsic
|
|
|||
|
Balance outstanding, December 31, 2010 |
|
14, 457,651 |
|
$ |
0. 50 - 2.50 |
|
$ |
0.90 |
|
$ |
65,250 |
|
|
Granted |
|
9,000 |
|
$ |
0.50 |
|
$ |
0.50 |
|
|
|
|
|
Exercised |
|
— |
|
— |
|
— |
|
|
|
|||
|
Forfeited |
|
— |
|
$ |
— |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance outstanding, June 30, 2011 |
|
14,466,651 |
|
$ |
0.50 - 2.50 |
|
$ |
0.87 |
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Exercisable at June 30, 2011 |
|
9,424,818 |
|
$ |
0.50 - 2.50 |
|
$ |
1. 06 |
|
$ |
0 |
|
Warrants
The Company issued 25,000 warrants, whose weighted average exercise price was $.50 per share, in the six months ended June 30, 2011 which were issued in connection with consulting services.
4. Stockholder’s Deficiency
During the six months ended June 30, 2011, the Company issued 256,856 shares of common stock as interest on the convertible debentures and in accordance with the Forbearance Agreement. The amount charged to interest expense was $56,637 based on $.22 per share issued, determined by the price paid by investors for the common stock component of the price protected units, and is included in the Consolidated Statements of Operations.
During the six months ended June 30, 2011, the Company closed nine private placement financings which raised gross proceeds of $975,000. The Company issued 1,950,000 shares of its common stock and warrants to purchase 1,950,000 shares of common stock. The purchase price paid by the investor was $.50 for each unit, determined by the price paid by investors in recent private placements. The warrants expire after eight years and are exercisable at $.50 per share. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, TrovaGene has determined that the warrants issued in connection with these private placements should be recorded as derivative liabilities since they are all price protected. The fair value is disclosed in the above table.
During the six months ended June 30, 2011, the Company issued 250,500 units to four outside directors consisting of 250,500 shares of common stock and warrants to purchase 250,500 shares of common stock. The warrants have an exercise price of $0.50 per share, are immediately exercisable and expire December 31, 2018. The issuance of these units was in full settlement of accrued director fees payable as of December 31, 2010 totaling $125, 250 based on $.50 per share issued, determined by the price paid by investors in recent private placements. This value of the services received was deemed to be the most accurate measure of fair value in accordance with ASC Topic 718 “Compensation—Stock Compensation”. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, TrovaGene has recorded stock based compensation and the warrants issued in connection with the above transaction accounted for as equity.
During the six months ended June 30, 2011, the Company issued 72,000 units to a selling agent consisting of 72,000 shares of common stock and warrants to purchase 72,000 shares of common stock. The warrants have an exercise price of $0.50 per share, are immediately exercisable and expire December 31, 2018. The units were issued as a finder’s fee in connection with certain private placements closed during the six months ended June 30, 2011. The issuance of these units was treated as a non-compensatory cost of capital. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, TrovaGene has determined that the warrants issued in connection with the above transaction should not be recorded as derivative liabilities and accordingly were recorded as equity.
During the six months ended June 30, 2011, the Company issued 25,000 shares and warrants to purchase 25,000 of common stock in connection with a consulting agreement. The fair value used to measure compensation expense was $.50 for each unit determined by the price paid by investors in recent private placements. The warrants expire after eight-nine years and are exercisable at $.50 per share. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, TrovaGene has determined that the warrants issued in connection with the issuance above should be recorded as derivative liabilities since they are price protected. The fair value is disclosed in Note 3.
5. Derivative Financial Instruments
Effective January 1, 2009, the Company adopted provisions of ASC Topic 815-40, “Derivatives and Hedging: Contracts in Entity’s Own Equity” (“ASC Topic 815-40”). ASC Topic 815-40 clarifies the determination of whether an instrument issued by an entity (or an embedded feature in the instrument) is indexed to an entity’s own stock, which would qualify as a scope exception under ASC Topic 815-10.
Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Trovagene has determined that the warrants issued in connection with certain of its private placements must be recorded as derivative liabilities. Accordingly the warrants are also being re-measured at each balance sheet date based on estimated fair value, and any resultant changes in fair value is being recorded in the Company’s statement of operations.
The Company estimates the fair value of the warrants using the Black-Scholes model in order to determine the associated derivative instrument liability and change in fair value described above. The range of assumptions used to determine the fair value of the warrants at the end of each period of June 30, 2011 and June 30, 2010 were indicated as follows:
|
|
|
Six Months Ended
|
|
Six Months Ended
|
|
||
|
Estimated fair value of Trovagene common stock |
|
$ |
.22 |
|
$ |
.23 |
|
|
Expected warrant term |
|
5 years |
|
5 years |
|
||
|
Risk-free interest rate |
|
.29-.62 |
% |
.76-1.39 |
% |
||
|
Expected volatility |
|
125 |
% |
75 |
% |
||
|
Dividend yield |
|
— |
|
— |
|
||
Estimated fair value of the stock is based on a Black-Scholes based apportionment of the unit price paid for the shares and warrants issued in Trovagene’s private placements, which resulting stock prices were deemed to be arms-length negotiated prices. Expected volatility is based on historical volatility of Trovagene’s common stock. 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 for maturities consistent with the expected remaining term of the warrants.
Certain of Trovagene’s warrants issued during the six months ended June 30, 2011 contained a price protection clause which variable price required the Company to use a binomial model to determine fair value. The price protection clause is effective on 9,937,154 warrants in the event of a subsequent equity sale at a price lower than $.50 per share of common stock, for a period of two years from date of issuance. The input assumptions to this methodology were as follows:
|
|
|
Six Months Ended
|
|
Six Months Ended
|
|
||
|
Estimated fair value of Trovagene common stock |
|
$ |
.22 |
|
$ |
.23 |
|
|
Expected warrant term |
|
5-9 years |
|
5-9 years |
|
||
|
Risk-free interest rate |
|
2.29-2.80 |
% |
2.93-3.73 |
% |
||
|
Expected volatility |
|
90 |
% |
90 |
% |
||
|
Dividend yield |
|
— |
|
— |
|
||
The following table sets forth the components of changes in the Company’s derivative financial instruments liability balance, valued using the Black-Scholes option pricing method, for the periods indicated:
|
Date |
|
Description |
|
Warrants |
|
Derivative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2010 |
|
Balance of derivative financial instruments liability |
|
7,076,905 |
|
$ |
609,155 |
|
|
|
|
|
|
|
|
|
|
|
|
3/31/2011 |
|
Change in fair value of warrants during the quarter recognized as a gain in the statement of operations |
|
— |
|
(141,193 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
3/31/2011 |
|
Balance of derivative financial instruments liability |
|
7,076,905 |
|
$ |
467,962 |
|
|
6/30/2011 |
|
Change in fair value of warrants during the quarter recognized as a gain in the statement of operations |
|
— |
|
(143,555 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
6/30/2011 |
|
Balance of derivative financial instruments liability |
|
7,076,905 |
|
$ |
324,407 |
|
The following table sets forth the components of changes in the Company’s derivative financial instruments liability balance, valued using the Binomial option pricing method, for the periods indicated:
|
|
|
|
|
|
|
Change In |
|
|
|
|||
|
|
|
|
|
|
|
Fair value |
|
|
|
|||
|
|
|
|
|
|
|
of Derivative |
|
|
|
|||
|
|
|
|
|
|
|
Liability |
|
Ending |
|
|||
|
|
|
Number of |
|
|
|
For Previously |
|
Ending |
|
|||
|
|
|
Price Protected |
|
|
|
Outstanding |
|
Balance |
|
|||
|
|
|
Units at |
|
Derivative Liability |
|
Price Protected |
|
Derivative |
|
|||
|
Quarter |
|
Issuance (1) |
|
For Issued Units (1) |
|
Units(1) |
|
Liability (1) |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total at 12/31/10 |
|
7,639,654 |
|
$ |
1,623,406 |
|
$ |
(146,623 |
) |
$ |
1,476,783 |
|
|
Quarter ended 3/31/ 2011 |
|
1,522,500 |
|
320,791 |
|
(55,139 |
) |
1,742,435 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
Quarter ended 6/30/ 2011 |
|
775,000 |
|
161,260 |
|
(82,862 |
) |
$ |
1,820,833 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
9,937,154 |
|
$ |
2,105,457 |
|
$ |
(284,624 |
) |
|
|
|
(1) Associated with price protected rights of units purchased.
The total derivative liability for the Company at June 30, 2011 was $2,145,240.
6. Fair Value Measurements
Fair value of financial instruments
The Company has adopted FASB ASC 820 Fair Value Measurements and Disclosures (“ASC 820”) for financial assets and liabilities that are required to be measured at fair value, and non-financial assets and liabilities that are not required to be measured at fair value on a recurring basis. Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and debentures. These financial instruments are stated at their respective historical carrying amounts which approximate fair value due to their short term nature.
The following tables presents the Company’s liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of December 31, 2010 and June 30, 2011:
|
Description |
|
Quoted Prices
|
|
Significant
|
|
Significant
|
|
Balance as of
|
|
||||
|
Derivative liabilities related to Warrants |
|
$ |
— |
|
$ |
— |
|
$ |
2,085,938 |
|
$ |
2,085,938 |
|
|
Description |
|
Quoted Prices
|
|
Significant
|
|
Significant
|
|
Balance as of
|
|
||||
|
Derivative liabilities related to Warrants |
|
$ |
— |
|
$ |
— |
|
$ |
2,145,240 |
|
$ |
2,145,240 |
|
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, 2011:
|
Description |
|
Balance at
|
|
Fair Value of
|
|
Fair value of
|
|
Unrealized
|
|
Balance as of
|
|
|||||
|
Derivative liabilities related to Warrants |
|
$ |
2,085,938 |
|
$ |
— |
|
$ |
482,051 |
|
$ |
(422,749 |
) |
$ |
2,145,240 |
|
The unrealized gains or losses on the derivative liabilities are recorded as a change in fair value of derivative liabilities in the Company’s statement of operations. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, the Company reviews the assets and liabilities that are subject to ASC Topic 815-40. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.
7. Licensing Agreements
In February 2011, the Company signed a licensing agreement with MLL Munchner Leukamie Labor (“MLL”) for the non-exclusive rights to develop, manufacture and market, research and diagnostic products for the stratification and monitoring of patients with AML. MLL paid an initial licensing fee of $20,000 upon execution of the agreement which was recorded as licensing income in the consolidated financial statements. MLL will also pay the Company a royalty on any net revenues during the term of the agreement, subject to certain minimums.
8. Subsequent Events
A) On July 20, 2011, Dr. Andreas Braun, Trovagene’s Acting President and CEO, tendered his resignation effective August 5, 2011. The Company owes Dr. Braun $51,923 in deferred compensation as of the date of his resignation.
B) On August 10, 2011, the Company and Thomas Adams, Chairman of the Board of Directors, agreed to: (i) terminate the consulting arrangement between Thomas Adams and the Company (ii) deem the consideration earned under this arrangement which consisted of 200,000 shares of common stock of the Company and warrants to purchase 200,000 shares of common stock of the Company to be full payment for his services and (iii) amend and restate his April 21, 2009 stock option agreement as follows: (a) the grant date is August 5, 2011, (b) the number of options granted is for 1,822,500 shares of stock, (c) the exercise price is $.53 per share and (d) 800,000 shares vest immediately. The remaining 1,022,500 share options will vest as
follows: 340,833 on August 5, 2012 and 2013 and 340,834 on August 5, 2014, provided the optionee continues to provide service to the Company and any of its subsidiaries and (e) the option expires August 5, 2021 or within 90 days of termination.
(C) During the period from July 1 to October 21, 2011 the Company closed seven private placement financings which raised gross proceeds of $1,228,500. The Company issued 2,457,000 shares of its common stock and warrants to purchase 2,457,800 shares of common stock in these transactions. The purchase price paid by the investors was $.50 for each unit. The warrants expire after eight years and are exercisable at $.50 per share. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, TrovaGene has determined that the units, which are price protected, issued in connection with these private placements should be recorded as derivative liabilities.
(D) On October 4, 2011, TrovaGene entered into an executive agreement with Antonius Schuh, Ph.D. in which he agreed to serve as Chief Executive Officer. The term of the agreement is effective as of October 4, 2011 and continues until October 4, 2015 and is automatically renewed for successive one year periods at the end to each term. Dr. Schuh’s compensation is $275,000 per year. Dr. Schuh is eligible to receive a cash bonus of up to 50% of his base salary per year based on meeting certain performance objectives and bonus criteria. Upon entering the agreement, Dr. Schuh was granted 3,800,000 non-qualified stock options which have an exercise price of $0.50 per share and vest annually in equal amounts over a period of four years Dr. Schuh is also eligible to receive a realization bonus upon the occurrence of either of the following events, whichever occurs earlier;
(j) In the event that during the term of the agreement, for a period of 90 consecutive trading days, the market price of the common stock is $1.25 or more and the volume of the common stock daily trading volume is $125,000 or more, we shall pay or issue Dr. Schuh a bonus in an amount of $3,466,466 in either cash or registered common stock or a combination thereof as mutually agreed by Dr. Schuh and us; or
(ii) In the event that during the term of the agreement, a change of control occurs where the per share enterprise value of our company equals or exceeds $1.25 per share, we shall pay Dr. Schuh a bonus in an amount determined by multiplying the enterprise value by 4.0%. In the event in a change of control the per share enterprise value exceeds a minimum of $2.40 per share, $3.80 per share or $5.00 per share, Dr. Schuh shall receive a bonus in an amount determined by multiplying the incremental enterprise value by 2.5%, 2.0% or 1.5%, respectively.
If the executive agreement is terminated for cause or as a result of Dr. Schuh’s death or permanent disability or if Dr. Schuh terminates his agreement voluntarily, Dr. Schuh shall receive a lump sum equal to (i) any portion of unpaid base compensation then due for periods prior to termination, (ii) any bonus or realization bonus earned but not yet paid through the date of termination and (iii) all expenses reasonably incurred by Dr. Schuh prior to date of termination. If the executive agreement is terminated without cause Dr. Schuh shall receive a severance payment equal to base compensation for three months if termination occurs ten months after the effective date of the agreement and six months if termination occurs subsequent to ten months from the effective date. If the executive agreement is terminated as a result of a change of control, Dr. Schuh shall receive a severance payment equal to base compensation for twelve months and all unvested stock options shall immediately vest and become fully exercisable for a period of six months following the date of termination.
On December 26, 2005, TrovaGene entered into a letter agreement with David Robbins, Ph.D. to serve as Vice President of Product Development for a term of three years. Mr. Robbins received a grant of 100,000 incentive stock options with an exercise price of $1.86 per share which vested in equal amounts over a period of three years beginning January 3, 2007. The agreement contained a provision pursuant to which all of the unvested stock options would vest in the event there was a change in control of the Company. The above options were fully vested at January 31, 2009. On October 7, 2011, TrovaGene entered into an employment agreement with Dr. Robbins, Ph.D. in which he agreed to serve as Vice President, Research and Development. The term of the agreement is effective as of October 7, 2011 and continues until October 7, 2012 and is automatically renewed for successive one year periods at the end to each term. Dr. Robbins’ salary is $195,000 per year. Dr. Robbins is eligible to receive a cash bonus of up to 25% of his base salary per year at the discretion of the Compensation Committee. If the employment agreement is terminated without cause, Dr. Robbins shall be entitled to a severance payment equal to three months of base salary.
Exhibit 2.1
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
TROVAGENE, INC.,
E ACQ CORP.,
AND
ETHEROGEN, INC.
This AGREEMENT AND PLAN OF MERGER (this “Agreement”) is made and entered into as of August 6, 2010, among Trovagene, Inc., a Delaware corporation (“Parent”), E Acq Corp., a Delaware corporation and a newly formed wholly owned subsidiary of Parent (“EAC”) and Etherogen, Inc., a Delaware corporation (“Etherogen).
RECITALS
A. Upon the terms and subject to the conditions of this Agreement and in accordance with the Delaware General Corporation Law (“Delaware Law”), Parent, EAC and Etherogen intend to enter into a business combination transaction.
B. The Board of Directors of EAC (i) has determined that the Merger (as defined in Section 1.2 below) is consistent with and in furtherance of the long-term business strategy of EAC and fair to, and in the best interests of, EAC and its stockholders, (ii) has approved this Agreement, the Merger and the other transactions contemplated by this Agreement, and (iii) has adopted a resolution declaring the Merger advisable.
C. The Board of Directors of Parent (i) has determined that the Merger is consistent with and in furtherance of the long-term business strategy of Parent and fair to, and in the best interests of, Parent and its stockholders, (ii) has approved this Agreement, the Merger and the other transactions contemplated by this Agreement, (iii) has adopted a resolution declaring the Merger advisable and (iv) has approved the issuance of shares of Parent Common Stock (as defined below) pursuant to the Merger (the “Share Issuance”).
D. The Sole Director of Etherogen (i) has determined that the Merger is consistent with and in furtherance of the long-term business strategy of Etherogen and fair to, and in the best interests of, Etherogen and its stockholders, (ii) has approved this Agreement, the Merger and the other transactions contemplated by this Agreement, (iii) has adopted a resolution declaring the Merger advisable and (iv) has determined to submit the Agreement to stockholders of Etherogen for approval that the stockholders, without a recommendation because of the Sole Director’s interest in the transaction as a stockholder of Parent, for consideration.
NOW, THEREFORE, in consideration of the covenants, promises and representations set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger . At the Effective Time (as defined in Section 1.2 hereof) and subject to and upon the terms and conditions of this Agreement and the applicable provisions of the Delaware General Corporation Law (“Delaware Law”), EAC shall be merged with and into Etherogen (the “Merger”), the separate corporate existence of EAC shall cease and Etherogen shall continue as the surviving corporation and a wholly-owned subsidiary of Parent. The
surviving corporation after the Merger is sometimes referred to hereinafter as the “Surviving Corporation.”
1.2 Effective Time . Unless this Agreement is earlier terminated pursuant to Article VII hereof, the closing of the Merger and the other transactions contemplated by this Agreement (the “Closing”) will take place at the offices of Sommer & Schneider LLP, 595 Stewart Avenue, Suite 710, Garden City, New York 11530, at a time and date to be specified by the parties, but in no event later than two (2) business days following satisfaction or waiver of the conditions set forth in Article VI hereof. The date upon which the Closing actually occurs is herein referred to as the “Closing Date.” On the Closing Date, the parties hereto shall cause the Merger to be consummated by filing a Certificate of Merger substantially in the form annexed hereto as Exhibit A (or like instrument, a “Certificate of Merger”) with respect to the Merger with the Secretary of State of the State of Delaware, in accordance with the relevant provisions of Delaware Law (the time at which the Merger has become fully effective (or such later time as may be agreed in writing by Parent and specified in the Certificate of Merger) is referred to herein as the “Effective Time”).
1.3 Effect of the Merger . At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of Delaware Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, except as provided herein, all the property, rights, privileges, powers and franchises of EAC and Etherogen shall vest in the Surviving Corporation, and all debts, liabilities and duties of Etherogen shall become the debts, liabilities and duties of the Surviving Corporation.
1.4 Certificates of Incorporation; Bylaws .
(a) Unless otherwise determined by Parent prior to the Effective Time, at the Effective Time the Certificate of Incorporation of Etherogen as in effect immediately prior to the Effective Time shall be the Certificate of Incorporation of the Surviving Corporation at and after the Effective Time until thereafter amended in accordance with the Delaware Law and the terms of such Certificate of Incorporation.
(b) Unless otherwise determined by Parent prior to the Effective Time, (i) the Bylaws of Etherogen as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation at and after the Effective Time, until thereafter amended in accordance with Delaware Law and the terms of Certificate of Incorporation of the Surviving Corporation and such By Laws.
1.5 Directors and Officers . (a) Unless otherwise determined by Parent prior to the Effective Time, the directors of EAC immediately prior to the Effective Time shall be the directors of the Surviving Corporation and at and after the Effective Time, each to hold the office of a director of the Surviving Corporation in accordance with the provisions of Delaware Law and the Certificate of Incorporation and Bylaws of the Surviving Corporation until their successors are duly elected and qualified.
(b) Unless otherwise determined by Parent prior to the Effective Time, the officers of EAC immediately prior to the Effective Time shall be the officers of the Surviving
Corporation at and after the Effective Time, each to hold office in accordance with the provisions of the Bylaws of the Surviving Corporation.
1.6 Effect on Capital Stock . Subject to the terms and conditions of this Agreement, at the Effective Time, by virtue of the Merger and without any action on the part of Parent, EAC, Etherogen or the holders of any of the following securities, the following shall occur:
(a) Conversion of Etherogen Capital Stock . Each share of Common Stock, $0.001 par value per share of Etherogen (the “Etherogen Common Stock”) issued and outstanding immediately prior to the Effective Time (excluding any share of Etherogen Common Stock to be canceled and extinguished pursuant to Section 1.6(b) will be automatically converted (subject to Sections 1.6(d) and (e)) into 24 shares of Common Stock, par value $0.0001 per share, of Parent (the “Parent Common Stock”), such that the holders of Etherogen Common Stock will, in the aggregate, receive 12,000,000 shares of Parent Common Stock. If any shares of Etherogen Common Stock outstanding immediately prior to the Effective Time are unvested or are subject to a repurchase option, risk of forfeiture or other condition under any applicable restricted stock purchase agreement or other agreement with Etherogen, then the shares of Parent Common Stock issued in exchange for such shares of Etherogen Common Stock will also be unvested and subject to the same repurchase option, risk of forfeiture or other condition, and the certificates representing such shares of Parent Common Stock may accordingly be marked with appropriate legends. The holders of the Etherogen Common Stock will receive, in the aggregate, 12,000,000 shares of Parent Common Stock as a result of the Merger and such shares are referred to herein as the “Merger Consideration.”
(b) Cancellation of Etherogen Common Stock . Each share of Etherogen Common Stock held by Etherogen immediately prior to the Effective Time shall be canceled and extinguished without any conversion thereof.
(c) Etherogen Stock Options/Warrants . Prior to the Effective Time, all options and warrants to purchase Etherogen Common Stock then outstanding shall be cancelled.
(d) Adjustments to Merger Consideration . The Merger Consideration shall be adjusted to reflect appropriately the effect of any stock split, reverse stock split, stock dividend (including any dividend or distribution of securities convertible into or exercisable or exchangeable for Parent Common Stock), reorganization, recapitalization, reclassification, combination, exchange of shares or other like change with respect to Parent Common Stock, occurring or having a record date on or after the date hereof and prior to the Effective Time.
(e) Fractional Shares . No fraction of a share of Parent Common Stock will be issued by virtue of the Merger. In lieu thereof any fractional share will be rounded to the nearest whole share of Parent Common Stock (with .5 being rounded up).
1.7 Surrender of Certificates . (a) Parent to Provide Parent Common Stock . Promptly after the Effective Time, Parent shall make available in accordance with this Article I, the shares of Parent Common Stock issuable pursuant to Section 1.6(a) in exchange for outstanding shares of Etherogen Common Stock.
(b) Exchange Procedures . Promptly after the Effective Time, Parent shall mail to each holder of record (as of the Effective Time) of a certificate or certificates, which immediately prior to the Effective Time represented outstanding shares of Etherogen Common Stock (the “Certificates”) (i) a letter of transmittal in customary form (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Parent and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of Parent Common Stock pursuant to Section 1.6(a). Upon surrender of Certificates for cancellation to the Parent, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, the holders of such Certificates shall be entitled to receive in exchange therefor certificates representing the number of whole shares of Parent Common Stock into which their shares of Etherogen Common Stock were converted pursuant to Section 1.6(a), and the Certificates so surrendered shall forthwith be canceled. The parties agree that the letter of transmittal shall contain such representations and agreements on the part of Etherogen’s holders so that Parent’s counsel can opine that the issuance of the Merger Consideration to the Etherogen holders is an offering exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) and such representations and agreement will include the following: “By the signature below, the undersigned represents that he, she or it is an “accredited investor” as defined in Rule 501(a) of Regulation D, that the shares of Parent Common Stock are acquired for investment purposes, and will not sell, transfer or assign such shares unless the transaction is registered under the Securities Act of 1933, as amended, or an exemption from such registration is available.” Until so surrendered, outstanding Certificates will be deemed, from and after the Effective Time, to evidence only the ownership of the number of whole shares of Parent Common Stock into which such shares of Etherogen Common Stock shall have been so converted (including any voting, notice or other rights associated with the ownership of such shares of Parent Common Stock under the Certificate of Incorporation or Bylaws of Parent or under Delaware Law.
(c) Transfers of Ownership . If certificates representing shares of Parent Common Stock are to be issued in a name other than that in which the Certificates surrendered in exchange therefor are registered, it will be a condition of the issuance thereof that the Certificates so surrendered will be properly endorsed and otherwise in proper form for transfer (including the signature guaranty of an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions) with membership in an approved signature guarantee Medallion program, pursuant to S.E.C. Rule 17Ad-15) and that the persons requesting such exchange will have (i) paid to Parent or any agent designated by it any transfer fees or other taxes required by reason of the issuance of certificates representing shares of Parent Common Stock in any name other than that of the registered holder of the Certificates surrendered, or (ii) established to the satisfaction of Parent or any agent designated by it that such tax has been paid or is not payable.
(d) Required Withholding . Each of the Parent and the Surviving Corporation shall be entitled to deduct and withhold from any consideration payable or otherwise deliverable pursuant to this Agreement to any holder or former holder of Etherogen Common Stock such amounts as may be required to be deducted or withheld therefrom under the Code or state, local or foreign tax law. To the extent such amounts are so deducted or withheld, such amounts shall
be treated for all purposes under this Agreement as having been paid to the person to whom such amounts would otherwise have been paid.
(e) No Liability . Notwithstanding anything to the contrary in this Section 1.7, neither the Parent, the Surviving Corporation, nor any party hereto shall be liable to a holder of shares of Parent Common Stock, Etherogen Common Stock for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar law.
1.8 No Further Ownership Rights in Etherogen Stock . All shares of Parent Common Stock issued in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Etherogen Common Stock. After the Effective Time, there shall be no further registration of transfers on the records of the Surviving Corporation of shares of Etherogen Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article I.
1.9 Lost, Stolen or Destroyed Certificates . In the event that any Certificates shall have been lost, stolen or destroyed, the Parent shall issue and pay in exchange for such lost, stolen or destroyed Certificates, upon the making of an affidavit of that fact by the holder thereof, certificates representing the shares of Parent Common Stock into which the shares of Etherogen Common Stock represented by such Certificates were converted pursuant to Section 1.6(a); provided, however, that the Parent may, in its discretion and as a condition precedent to the issuance of such certificates representing shares of Parent Common Stock require the owner of such lost, stolen or destroyed Certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Parent or the Surviving Corporation with respect to the Certificates alleged to have been lost, stolen or destroyed.
1.10 Tax Treatment . It is intended by the parties hereto that the Merger shall constitute a reorganization within the meaning of Section 368(a) of the Code. Each of the parties hereto adopt this Agreement as a “plan of reorganization” within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations. Both prior to and after the Closing, each party’s books and records shall be maintained, and all federal, state and local income tax returns and schedules thereto shall be filed in a manner consistent with the Merger being qualified as a triangular merger under Section 368(a)(2)(D) of the Code (and comparable provisions of any applicable state or local laws) and with the Merger being qualified as a reorganization described in Section 368(a)(1)(A) of the Code (and comparable provisions of any applicable state or local laws).
1.11 Taking of Necessary Action; Further Action . If, at any time after the Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation (and/or their respective successors in interest) with full right, title and possession to all assets, property, rights, privileges, powers and franchises of Etherogen, the officers and directors of Parent and the Surviving Corporation shall be fully authorized (in the name of Etherogen and otherwise) to take all such necessary action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF ETHEROGEN
Except as set forth in the corresponding sections or subsections of the disclosure schedule delivered to EAC and Parent by Etherogen on or prior to entering into this Agreement (the “Etherogen Schedule”), Etherogen hereby represents and warrants to EAC and Parent that (all references to “Schedules” in this Agreement, unless otherwise specifically stated, are references to schedules attached to the Etherogen Schedule):
2.1 Organization of Etherogen . (a) Etherogen is a corporation duly organized, validly existing and in good standing under the laws of Delaware; has the corporate power and authority to own, lease and operate its assets and property and to carry on its business as now being conducted; and is duly qualified to do business and in good standing as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a Etherogen Material Adverse Effect. As used in this Agreement, “Etherogen Material Adverse Effect” means a material adverse effect on the condition (financial or otherwise), business, assets or results of operations of Etherogen as a whole, or on the ability of the Etherogen to consummate the transactions contemplated by this Agreement; it being understood, however, that Etherogen’s continuing to incur losses, as long as such losses are in the ordinary course of business and are comparable to those incurred by Etherogen prior to the date hereof, shall not, alone, be deemed to be a Etherogen Material Adverse Effect and neither shall any effect caused by (i) any adverse change, event or effect that is demonstrated to be caused primarily by conditions generally affecting the United States economy; (ii) any adverse change, event or effect that is demonstrated to be caused primarily by conditions generally affecting the electronics industries, (iii) any adverse change, event or effect resulting from the execution of this Agreement or the consummation or announcement of the transactions contemplated hereby (except to the extent resulting from the breach by Seller of a representation, warranty or covenant) or the taking of any action permitted by this Agreement, (iv) any adverse change, event or effect resulting from any changes in any applicable law, rule or regulation or generally accepted accounting principles, or (v) any adverse change, event or effect resulting from the commencement, occurrence or continuation of any war, armed hostilities or acts of terrorism involving the United States of America or any part thereof.
(b) Etherogen does not have any subsidiaries and does not control, directly or indirectly, or have any equity participation or similar interest in any entity.
(c) Etherogen has delivered or made available to EAC and Parent a true and correct copy of the Certificate of Incorporation and Bylaws of Etherogen as amended to date, and each such instrument is in full force and effect. Etherogen is not in violation of any of the provisions of its Certificate of Incorporation or Bylaws or equivalent governing instruments, subject only to the adoption by Etherogen’s stockholders of this Agreement.
2.2 Etherogen Capital Structure . The authorized capital stock of Etherogen consists of 520,000 shares of stock authorized, of which 500,000 are designated Common Stock, $0.001 par value per share and 20,000 are designated Preferred Stock, $0.001 par value per share. As of June 30, 2010, there were 500,000 shares of Common Stock and no shares of Preferred Stock
issued and outstanding. There are no other class of capital stock of Etherogen outstanding or authorized. All outstanding shares of Etherogen Common Stock are duly authorized, validly issued, fully paid and non-assessable and are not subject to preemptive rights created by statute, the Certificate of Incorporation or Bylaws of Etherogen, or any agreement or document to which Etherogen is a party or by which it is bound. At the Closing pursuant to this Agreement, there will be no options, warrants or rights to acquire share of Etherogen capital stock. All shares of Etherogen Common Stock subject to issuance as aforesaid, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, are duly authorized, validly issued, fully paid and nonassessable.
2.3 Obligations With Respect to Capital Stock . Except as set forth in Section 2.2, there are no equity securities, partnership interests or similar ownership interests of any class of Etherogen, or any securities exchangeable or convertible into or exercisable for such equity securities, partnership interests or similar ownership interests issued, reserved for issuance or outstanding which will not be extinguished at Closing. Except as set forth in Section 2.2, there are no options, warrants, equity securities, partnership interests or similar ownership interests, calls, rights (including preemptive rights), commitments or agreements of any character to which Etherogen is a party or by which it is bound obligating Etherogen to issue, deliver or sell, or cause to be issued, delivered or sold, or repurchase, redeem or otherwise acquire, or cause the repurchase, redemption or acquisition, of any shares of capital stock of Etherogen or obligating Etherogen to grant, extend, accelerate the vesting of or enter into any such option, warrant, equity security, partnership interest or similar ownership interest, call, right, commitment or agreement. Except as set forth in Schedule 2.3, there are no registration rights and, to the knowledge of Etherogen there are no voting trusts, proxies or other agreements or understandings with respect to any equity security of any class of Etherogen.
2.4 Authority . (a) Assuming the adoption by Etherogen’s stockholders of this Agreement (i) Etherogen has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby and thereby, (ii) the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, have been duly authorized by all necessary corporate action on the part of Etherogen, (iii) a vote of the holders of at least a majority of the outstanding shares of the Etherogen Common Stock is required for Etherogen’s stockholders to approve and adopt this Agreement and approve the Merger, (iv) this Agreement has been duly executed and delivered by Etherogen and, assuming the due authorization, execution and delivery by EAC and Parent constitute the valid and binding obligations of Etherogen, enforceable in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and other similar laws and general principles of equity, (v) the execution and delivery of this Agreement by Etherogen does not, and the performance of this Agreement by Etherogen will not, (x) conflict with or violate the Certificate of Incorporation or Bylaws of Etherogen (the “Etherogen Charter Documents”) or the equivalent organizational documents of any of its Subsidiaries, (y) subject to compliance with the requirements set forth in Section 2.4(b) below, conflict with or violate any law, rule, regulation, order, judgment or decree applicable to Etherogen or any of its Subsidiaries or by which its or any of their respective properties is bound or affected, or (z) except as set forth in Schedule 2.4, result in any breach of, or constitute a default (or an event that with notice or lapse of time or both would become a
default) under, or impair Etherogen’s rights or alter the rights or obligations of any third party under, or to Etherogen’s knowledge, give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of an Encumbrance on any of the properties or assets of Etherogen pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Etherogen is a party or by which Etherogen or its properties are bound or affected, except to the extent such conflict, violation, breach, default, impairment or other effect would not, in the case of clause (y) or (z), individually or in the aggregate, reasonably be expected to have a Etherogen Material Adverse Effect.
(b) No consent, approval, order or authorization of, or registration, declaration or filing with any court, administrative agency or commission or other governmental authority or instrumentality (“Governmental Entity”) is required by or with respect to Etherogen in connection with the execution and delivery of this Agreement, or the consummation of the transactions contemplated hereby, except for (i) the filing with the Secretary of State of Delaware of the Certificate of Merger, (ii) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable federal and state securities laws and (iii) such other consents, authorizations, filings, approvals and registrations which, if not obtained or made, individually or in the aggregate, would not be reasonably likely to have a Etherogen Material Adverse Effect.
2.5 Etherogen Financial Statements . Etherogen has provided EAC and Parent with a list of assets, list of liabilities and a list of cash deposits and disbursements (the “Etherogen Financial Information”). Except as disclosed in the Etherogen Financial Information, Etherogen does not have any liabilities (absolute, accrued, contingent or otherwise) of a nature required to be disclosed on a balance sheet or in the related notes to the consolidated financial statements if such statement were prepared in accordance with GAAP which are, individually or in the aggregate, material to the business, results of operations or financial condition of Etherogen, except liabilities incurred since June 30, 2010 in the ordinary course of business consistent with past practices and which would not reasonably be expected to have a Etherogen Material Adverse Effect.
2.6 Absence of Certain Changes or Events . Other than as set forth on Schedule 2.6, except as contemplated by this Agreement, since the date of the Etherogen Financial Statements, Etherogen has conducted its business only in, and has not engaged in any material transaction other than according to, the ordinary and usual course of such business and there has not been (i) any change that, individually or in the aggregate, has had or is reasonably likely to have a Etherogen Material Adverse Effect; (ii) any material damage, destruction or other casualty loss with respect to any material asset or property owned, leased or otherwise used by Etherogen or any of its Subsidiaries, whether or not covered by insurance; (iii) any declaration, setting aside or payment of any dividend or other distribution in cash, stock or property in respect of the capital stock of Etherogen, except for dividends or other distributions on its capital stock publicly announced prior to the date hereof and except as expressly permitted hereby; (iv) any event that would constitute a violation of Section 4.1 hereof if such event occurred after the date of this Agreement and prior to the Effective Time; or (v) any change by Etherogen in accounting principles, practices or methods. Since the date of the Etherogen Balance Sheet, except as set
forth in Schedule 2.6, there has not been any increase in the compensation payable or that could become payable by Etherogen to officers or key employees or any amendment of any Etherogen option plan other than increases or amendments in the ordinary course of business consistent with past practice or (y) as required by any relevant employment agreement, option agreement or (z) which, individually or in the aggregate, would not reasonably be expected to have a Etherogen Material Adverse Effect.
2.7 Taxes . (a) For purposes of this Agreement, (i) “Taxes” shall mean all Federal, state, local, foreign, provincial, territorial or other taxes, imports, tariffs, fees, levies or other similar assessments or liabilities and other charges of any kind, including income taxes, profits taxes, franchise taxes, ad valorem taxes, excise taxes, withholding taxes, stamp taxes or other taxes of or with respect to gross receipts, premiums, real property, personal property, windfall profits, sales, use, transfers, licensing, employment, social security, workers’ compensation, unemployment, payroll and franchises imposed by or under any law (meaning all laws, statutes, ordinances and regulations of any governmental authority including all decisions of any court having the effect of law); and any other taxes, duties or assessments, together with all interest, penalties and additions imposed with respect to such amounts; (ii) “Tax Returns” shall mean any declaration, return, report, schedule, certificate, statement or other similar document (including relating or supporting information) required to be filed with any Taxing Authority (as defined below), or where none is required to be filed with a Taxing Authority, the statement or other document issued by the applicable Taxing Authority in connection with any Tax, including, without limitation, any information return, claim for refund, amended return or declaration of estimated Tax; and (iii) “Taxing Authority” shall mean any domestic, foreign, Federal, national, provincial, state, county or municipal or other local government or court, any subdivision, agency, commission or authority thereof, or any quasi-governmental body exercising tax regulatory authority.
(b) Etherogen has not (i) filed any Tax Returns that are required to have been filed by it with all appropriate Taxing Authorities; or (ii) paid any Taxes except corporate franchise taxes. Between December 31, 2009 and the Closing Date, Etherogen has not incurred (or will incur) a Tax liability other than a Tax liability in the ordinary course of business and in accordance with past custom and practice. The assessment of any additional Taxes for periods for which Tax Returns have been filed is not expected to be material and other penalties for the failure to file such Tax Returns are not anticipated to be material. No Encumbrance exists for Taxes with respect to any of the assets or properties of Etherogen.
(c) Etherogen does not have outstanding any agreements or waivers extending, or having the effect of extending, the statute of limitations with respect to the assessment or collection of any Tax or the filing of any Tax Return.
(d) Etherogen is not a party to or bound by any tax-sharing agreement, tax indemnity obligation or similar agreement, arrangement or practice with respect to Taxes (including any advance pricing agreement, closing agreement or other agreement relating to Taxes with any Taxing Authority).
(e) Etherogen shall not be required to include in a taxable period ending after the Closing Date any taxable income attributable to income that accrued in a prior taxable period but was not recognized in any prior taxable period as a result of the installment method of accounting, the long-term contract method of accounting, the cash method of accounting or Section 481 of the Code or any comparable provision of state, local or foreign Tax law, or for any other reason.
(f) Etherogen has not made with respect to Etherogen any consent under Section 341 of the Code, no property of Etherogen is “tax exempt use property” within the meaning of Section 168(h) of the Code, and none of the assets of Etherogen is subject to a lease under Section 7701(h) of the Code or under any predecessor section thereof.
(g) Etherogen has complied in all material respects with all applicable laws relating to the payment and withholding of Taxes (including, without limitation, withholding of Taxes pursuant to Sections 1441, 1442, 3121, 3402 and 3406 of the Code or any comparable provision of any state, local or foreign laws) and has, within the time and in the manner prescribed by applicable law, withheld from and paid over to the proper Taxing Authorities all amounts required to be so withheld and paid over under applicable laws.
(h) To Etherogen’s knowledge the net operating losses (“NOL”) of Etherogen are not, as of the date hereof, subject to Section 382 or 269 of the Code, Regulation Section 1.1502-21(c), or any similar provisions or Regulations otherwise limiting the use of the NOLs of Etherogen.
(i) Etherogen is not, and has not been for the five years preceding the Closing, a “United States real property holding company” (as such term is defined in Section 897(c)(2) of the Code).
(j) As of the date hereof, to the knowledge of Etherogen, Etherogen or its affiliates has not taken or agreed to take any action or failed to take any action that would prevent the Merger from constituting a reorganization within the meaning of Section 368(a) of the Code.
(k) Any deficiency resulting from any audit or examination relating to Taxes of Etherogen by any Taxing Authority has been timely paid.
(l) No power of attorney with respect to any Taxes has been executed or filed with any Taxing Authority by or on behalf of Etherogen.
2.8 Patents and Trademarks . As used in this Agreement, “Intellectual Property” means (i) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications and patent disclosures, together with all reissuances, continuations, divisionals, substitutions, continuations-in-part, provisionals, revisions, extensions and re-examinations thereof, (ii) all trademarks, service marks, trade names, logos, corporate names and Internet domain names, including all goodwill associated therewith, and all applications, registrations and renewals in connection therewith, (iii) all copyrights and all applications, registrations and renewals in connection therewith,
(iv) all trade secrets and confidential business information (including ideas, research and development, copyrights, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information and business and marketing plans and proposals), (v) all computer programs and software (including data and related documents), (vi) all know-how , research information, research data and notebooks and (vii) all other proprietary rights. Schedule 2.8 contains a complete list of all Intellectual Property registered in Etherogen’s name and material to Etherogen’s business as conducted as of the date hereof (collectively, the “Etherogen Registered Intellectual Property”). Except as set forth on Schedule 2.8, Etherogen owns, free and clear of any Encumberances, all right, title and interest to the Etherogen Registered Intellectual Property. With respect to Intellectual Property, other than the Etherogen Registered Intellectual Property, used or held for use by Etherogen in its business as conducted as of the date hereof (the “Other Intellectual Property”), Etherogen owns, controls or has a right to use, to the extent necessary to conduct its business in a manner generally consistent with its past practice, such Other Intellectual Property which is material to Etherogen’s business. Except as set forth on Schedule 2.8, Etherogen is not a party to any outstanding options, licenses or agreements of any kind relating to (i) any Other Intellectual Property owned by any other person or entity (other than agreements with respect to commercially available “off-the-shelf” computer software) or (ii) the Etherogen Registered Intellectual Property. Etherogen has not during the preceding three years received any communications or claims nor, to Etherogen’s knowledge, is there any threatened claim, alleging that Etherogen has infringed upon, or, by conducting its business as proposed, would infringe upon the intellectual property rights of any other person which such infringement would have a Etherogen Material Adverse Effect. Except as set forth on Schedule 2.8, to the knowledge of Etherogen, no third party has interfered with, infringed upon or misappropriated any of Etherogen’s rights to the Etherogen Registered Intellectual Property or Other Intellectual Property which such interference, infringement or misappropriation would constitute a Etherogen Material Adverse Effect.
2.9 Compliance; Permits; Restrictions . (a) Except as disclosed on Schedule 2.9, to Etherogen’s knowledge Etherogen is not in default or violation of (i) any law, rule, regulation, order, judgment or decree applicable to Etherogen or by which its properties is bound or affected, or (ii) any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Etherogen is a party or by which Etherogen or its properties is bound or affected except for those defaults or violations which would not be reasonably expected to have a Etherogen Material Adverse Effect. Except as disclosed on Schedule 2.9 to the knowledge of Etherogen, no investigation or review by any Governmental Entity is pending or threatened against Etherogen, nor has any Governmental Entity indicated in writing an intention to conduct the same other than those which would not reasonably be expected to have a Etherogen Material Adverse Effect. There is no agreement, judgment, injunction, order or decree binding upon Etherogen which has or would reasonably be expected to have the effect of prohibiting or materially impairing any business practice of Etherogen, any acquisition of material property by Etherogen or the conduct of business by Etherogen as currently conducted.
(b) Etherogen hold all permits, licenses, variances, exemptions, orders and approvals from Governmental Entities which would be necessary to the conduct of the business
of Etherogen except those the absence of which would not, individually or in the aggregate, reasonably be likely to have a Etherogen Material Adverse Effect (collectively, the “Etherogen Permits”). Etherogen is in compliance in all material respects with the terms of the Etherogen Permits.
2.10 Litigation . Except as set forth on Schedule 2.10, as of the date of this Agreement, there is no action, suit, proceeding, claim, arbitration or investigation pending, including derivative suits brought by or on behalf of Etherogen or as to which Etherogen has received any notice of assertion nor, to Etherogen’s knowledge, is there a threatened action, suit, proceeding, claim, arbitration or investigation against Etherogen seeking to delay, limit or enjoin the transactions contemplated by this Agreement or which might reasonably be expected to have a Etherogen Material Adverse Effect.
2.11 Brokers’ and Finders’ Fees . Etherogen has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders’ fees or agents’ commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby.
2.12 Labor Agreements and Actions; Employee Benefit Plans . (a) Etherogen is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the knowledge of Etherogen, has sought to represent any of the employees, representatives, or agents of Etherogen. There is no strike or other labor dispute involving the Etherogen pending or, to the knowledge of Etherogen, threatened, nor does Etherogen have knowledge of any labor organization activity involving its employees.
(b) Etherogen has no profit-sharing or other retirement, bonus, deferred compensation, employment agreement, severance agreement, incentive compensation, stock purchase, stock option, severance or termination pay, hospitalization or other medical, life or other insurance, long- or short-term disability, fringe benefit, sick pay, or vacation pay, or other employee benefit plan, program, agreement, or arrangement or policy, whether formal or informal, funded or unfunded, written or unwritten, and whether legally binding or not, sponsored, maintained, contributed to or required to be contributed to by Etherogen with respect to current or former employees or any current or former director or consultant of Etherogen, and/or (ii) any trade or business, whether or not incorporated, that together with Etherogen would be deemed a “single employer” that includes Etherogen within the meaning of Section 4001(a)(14) of ERISA, and the rules and regulations promulgated thereunder (collectively, “Etherogen Benefit Plans”).
(c) Etherogen has no obligations for retiree health and life benefits under any Etherogen Benefit Plan or has ever represented, promised or contracted (whether in oral or written form) to any employee(s) that such employee(s) would be provided with retiree health or life benefits which would have a material impact on Etherogen, except as required under §601 of ERISA.
(f) Etherogen has not had any employees since inception.
2.13 Absence of Liens and Encumbrances . Etherogen has good and valid title to, or, in the case of leased properties and assets, valid leasehold interests in, all of its tangible properties and assets, real, personal and mixed, used in its business, free and clear of any encumbrances, charges, claims equitable interests, liens, options, pledges, security interests, mortgages, rights of first refusal or restrictions of any kind and nature except (i) as reflected in the Etherogen Financial Statements, (ii) for liens for taxes not yet due and payable and (iii) for such imperfections of title and encumbrances, if any, which would not be reasonably expected to have a Etherogen Material Adverse Effect (collectively the “Encumbrances”).
2.14 Environmental Matters . (a) Hazardous Materials Activities . Except as would not reasonably be likely to result in an Etherogen Material Adverse Effect (in any individual case or in the aggregate), (i) Etherogen has not transported, stored, used, manufactured, disposed of, released or exposed its employees or others to pollutants, contaminants, wastes, any toxic, radioactive or otherwise hazardous materials (“Hazardous Materials”) in violation of any law in effect on or before the Closing Date, and (ii) Etherogen has not disposed of, transported, sold, used, released, exposed its employees or others to or manufactured any product containing a Hazardous Material (collectively, “Hazardous Materials Activities”) in violation of any rule, regulation, treaty or statute promulgated by any Governmental Entity in effect prior to or as of the date hereof to prohibit, regulate or control Hazardous Materials or any Hazardous Material Activity.
(b) Environmental Liabilities . No action, proceeding, revocation proceeding, amendment procedure, writ, injunction or claim is pending, or to Etherogen’s knowledge, threatened concerning any Etherogen Permit relating to any environmental matter, Hazardous Material or any Hazardous Materials Activity of Etherogen. Etherogen does not have knowledge of any fact or circumstance which could involve Etherogen in any environmental litigation or impose upon Etherogen any environmental liability.
2.15 Agreements . (a) Except as set forth in Schedule 2.15(a), there are no written agreements between Etherogen and any of its officers, directors, employees or shareholders or any affiliate thereof.
(b) Except as set forth in Schedule 2.15(b), there are no written agreements, to which Etherogen is a party or by which it is bound which (i) involve obligations (contingent or otherwise) of, or payments to, the Etherogen in excess of $5,000, (ii) are material to the conduct and operations of the Etherogen’s business or properties (including, without limitation, the license of any Intellectual Property to or from Etherogen), (iii) restrict or materially adversely affect the development, manufacture, sale, marketing or distribution of Etherogen’s products or services, (iv) relating to the employment or compensation of any employee or consultant, (v) of duration of six months or more and not cancelable without penalty by Etherogen on 30 days or less notice or (vi) relating to the sale, lease, pledge or other disposition of any material assets of or to Etherogen.
(c) Except as set forth in Schedule 2.15(c), Etherogen, nor to Etherogen’s knowledge any other party to a Etherogen Contract (as defined below), is in breach, violation or default under, and Etherogen has not been notified that it has breached, violated or defaulted under, any of the material terms or conditions of any of the agreements, contracts or
commitments to which Etherogen or any of its Subsidiaries is a party or by which it is bound that are required to be disclosed in Schedules 2.15(a) or 2.15(b) (any such agreement, contract or commitment, a “Etherogen Contract”) in such a manner as would permit any other party to cancel or terminate any such Etherogen Contract, or would permit any other party to seek material damages or other remedies (for any or all of such breaches, violations or defaults, in the aggregate).
(d) Each of the Etherogen Contracts are legal, valid, binding and enforceable and in full force and effect with respect to the Etherogen and, to Etherogen’s knowledge with respect to each other party thereto, in either case subject to the effect of bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and except as the availability of equitable remedies may be limited by general principles of equity; and the Etherogen Contracts will continue to be legal, valid, binding and enforceable and in full force and effect with respect to Etherogen immediately following the Closing in accordance with the terms thereof as in effect prior to the Closing subject to the effect of bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and except as the availability of equitable remedies may be limited by general principles of equity.
(e) Etherogen has not been notified in writing that any party to any of the Etherogen Contracts intends to cancel, terminate, proposes to amend, not renew or exercise an option under any of Etherogen Contracts, whether in connection with the transactions contemplated hereby or otherwise does Etherogen have any knowledge of any intention by any party to any Etherogen Contract to effect any of the foregoing.
2.16 Board Approval . The Board of Directors of Etherogen has, as of the date of this Agreement, (i) determined that the Merger is fair to and in the best interests of Etherogen and its stockholders, (ii) determined to recommend that the stockholders of Etherogen adopt this Agreement and (iii) duly approved the Merger, this Agreement and the transactions contemplated hereby.
2.17 Disclosure . No representation or warranty of the parties to this Agreement and no statement in the Schedules omits to state a material fact necessary to make the statements herein or therein, in light of the circumstances in which they were made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND EAC
Except as set forth in the corresponding sections or subsections of the disclosure letter delivered to Etherogen by EAC on or prior to entering into this Agreement (the “EAC Schedule”), each of Parent and EAC hereby represents and warrants to Etherogen that:
3.1 Organization . Parent and EAC are corporations duly incorporated, validly existing and in good standing under the laws of their jurisdiction of incorporation and have all requisite power and authority to own, lease and operate their properties and to carry on their businesses as now being conducted. Parent is duly licensed or qualified to do business as a foreign corporation and is in good standing under the laws of any other state of the United States in which the character of the properties owned or leased by it or in which the transaction of its
business makes such qualification necessary, except where the failure to be so qualified or to be in good standing could not have a material adverse effect on the business, results of operations or financial condition of Parent taken as a whole, other than any effect caused by (i) any adverse change, event or effect that is demonstrated to be caused primarily by conditions generally affecting the United States economy; (ii) any adverse change, event or effect that is demonstrated to be caused primarily by conditions generally affecting the electronics industries, (iii) resulting from the execution of this Agreement or the consummation or announcement of the transactions contemplated hereby (except to the extent resulting from the breach by Parent or EAC of a representation, warranty or covenant) or the taking of any action permitted by this Agreement, (iv) resulting from any changes in any applicable law, rule or regulation or generally accepted accounting principles, or (v) resulting from the commencement, occurrence or continuation of any war, armed hostilities or acts of terrorism involving the United States of America or any part thereof (a “Parent Material Adverse Effect”). There are no facts or circumstances with respect to the existence, good standing, power, authority or qualification of any subsidiary of Parent that have had, or could, individually or in the aggregate, have a Parent Material Adverse Effect.
3.2 Capitalization .
(a) (i) The authorized capital stock of Parent consists of 200,000,000 shares of Parent Common Stock and 10,000,000 shares of preferred stock, $0.001 par value per share, of which 277,100 have been designated as Series A Convertible Preferred Stock. Parent has no other class or series of capital stock authorized. As of June 30, 2010, there were 37,400,203 shares of Parent Common Stock issued and outstanding and 95,600 shares of Series A Convertible Preferred stock issued and outstanding. Except as contemplated by this Agreement or as set forth in Schedule 3.2 , as of the date hereof, there are no existing options, warrants, calls subscriptions, convertible securities, or other rights, agreements or commitments, other than pursuant to the Parent Option Plans [Need to define], which obligate Parent to issue, transfer or sell any shares of capital stock of Parent.
(ii) The Merger Consideration, upon issuance on the terms and conditions specified in this Agreement, will be duly authorized, validly issued, fully paid and nonassessable.
(b) The authorized capital stock of EAC consists of 100 shares of common stock, no par value per share (“EAC Common Stock”), all of which shares are issued and outstanding and owned by Parent. Notwithstanding any provisions to the contrary, Parent may, in its sole discretion, increase or decrease the number of shares of authorized EAC Common Stock and the number of shares of EAC Common Stock issued and outstanding owned by Parent. EAC has not engaged in any activities other than in connection with the transactions contemplated by this Agreement.
3.3 Authorization; Binding Agreement . Each of Parent and EAC has all requisite corporate power and authority to execute and deliver this Agreement and all agreements and documents contemplated hereby. The consummation by Parent and EAC of the transactions contemplated hereby has been approved by the board of directors of Parent, the board of Directors of EAC and Parent as the sole stockholder of EAC and duly and validly authorized by
all necessary corporate action. This Agreement constitutes, and all agreements and documents contemplated hereby (when executed and delivered pursuant hereto for value received) will constitute legal, valid and binding obligations of Parent and EAC, as the case may be, enforceable against Parent and EAC in accordance with their respective terms, except as such enforcement may be limited by general principles of equity whether applied in a court of law or a court of equity and by bankruptcy, insolvency and similar laws affecting creditors’ rights and remedies generally.
3.4 Noncontravention . Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (a) conflict with or result in any breach of any provision of the certificate of incorporation, articles of incorporation or by-laws or equivalent governing instruments of Parent or EAC, (b) require any consent, approval or notice under or conflict with or result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any Contracts and Other Agreements to which the Parent is a party or by which it or any portion of its properties or assets may be bound or (c) violate any Legal Requirements applicable to the Parent or any portion of Parent’s properties or assets, except with respect to clauses (b) and (c) such matters that, individually or in the aggregate, have not had and could not have a Parent Material Adverse Effect.
3.5 Liabilities . As of July 31, 2010, Parent had no liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) except (i) liabilities or obligations reflected on, or reserved against in, a balance sheet of Parent or in the notes thereto, and (ii) liabilities or obligations incurred in the ordinary course of business which are not material in amounts.
3.6 Governmental Approvals . No consent, approval or authorization of, or declaration or filing with, any Governmental Entity on the part of Parent that has not been obtained or made is required in connection with the execution or delivery by Parent or EAC of this Agreement or the consummation by Parent or EAC of the transaction contemplated hereby, other than (a) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware, (b) filings and other applicable requirements under the Exchange Act, (c) such filings and approvals as are required to be made or obtained under the securities or “blue sky” laws of various states in connection with the issuance of Parent Common Stock contemplated under this Agreement, and (d) consents, approvals, authorizations, declarations or filings that, if not obtained or made, could not, individually or in the aggregate, have a Parent Material Adverse Effect or prevent Parent or EAC from consummating the transactions contemplated hereby.
3.7 144; Removal of Restrictive Legends .
(a) With a view to making available to holders of the Merger Consideration (each a “Holder”) the benefits of certain rules and regulations of the SEC which may permit the sale of the Merger Consideration to the public without registration, the Parent agrees to file a Form 10 on or before December 31, 2010 and at all times thereafter to:
(i) use its reasonable best efforts to file with the Commission in a timely manner all reports and other documents required of the Parent under the Securities Act and the Securities Exchange Act, and
(ii) make and keep public information available, as those terms are understood and defined in Rule 144 promulgated under the Securities Act.
(b)
(c) Upon request of a Holder, the Parent shall remove any restrictive legend from the certificates evidencing the Merger Consideration or issue to such Holder a new certificate therefor free of any transfer legend, if (i) there is an effective registration statement covering the securities represented by such certificate, or (ii) with such request, the Parent shall have received, at Holders expense (A) an opinion of counsel reasonably satisfactory to the Parent to the effect that the proposed sale, pledge, hypothecation or other transfer may be effected without registration under the Securities Act, or (B) a “no action” letter from the Commission to the effect that the distribution of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business by the Parties . During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement pursuant to its terms or the Effective Time, Etherogen shall carry on its business in the ordinary course in substantially the same manner as heretofore conducted and in substantial compliance with all applicable laws and regulations, pay their respective debts and taxes when due subject to good faith disputes over such debts or taxes, pay or perform other material obligations when due subject to good faith disputes over such obligations, and use their commercially reasonable efforts consistent with past practices and policies to (i) preserve intact their present business organization, (ii) keep available the services of each of their present officers and employees, respectively, and (iii) preserve their relationships with customers, suppliers, distributors, licensors, licensees and others with which each party has business dealings material to their respective business.
4.2 Covenants of Etherogen . Except as permitted by the terms of this Agreement (including, (i) seeking adoption by Etherogen’s stockholders of this Agreement and an amendment to the Certificate of Incorporation of Etherogen, and (ii) causing all warrants for Etherogen’s common stock to be cancelled), without the prior written consent of Parent, during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement pursuant to its terms or the Effective Time, Etherogen shall not do any of the following:
(a) Waive any stock repurchase rights, accelerate, amend or change the period of exercisability of options or restricted stock, or reprise options granted under any employee,
consultant, director or other stock plans or authorize cash payments in exchange for any options granted under any of such plans;
(b) Except as required by applicable law, grant any severance or termination pay to any officer or employee except pursuant to written agreements outstanding, or policies existing, on the date hereof and as previously disclosed in writing or made available to Parent, or adopt any new severance plan, or amend or modify or alter in any manner any severance plan, agreement or arrangement existing on the date hereof;
(c) Except in the ordinary course of business consistent with past practices, transfer or license to any person or entity or otherwise extend, amend or modify any rights to the Etherogen Registered Intellectual Property, or enter into grants to transfer or license to any person future patent rights; provided that in no event shall Etherogen license on an exclusive basis or sell any Etherogen Registered Intellectual Property (other than in connection with the abandonment of immaterial Etherogen Registered Intellectual Property after at least five business days’ written notice to Parent);
(d) Declare, set aside or pay any dividends on or make any other distributions (whether in cash, stock, equity securities or property) in respect of any capital stock or split, combine or reclassify any capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any capital stock;
(e) Purchase, redeem or otherwise acquire, directly or indirectly, any shares of capital stock of Etherogen, except (i) repurchases of unvested shares at cost in connection with the termination of the employment relationship with any employee pursuant to stock option or purchase agreements in effect on the date hereof (or any such agreements entered into in the ordinary course of business consistent with past practice by Etherogen with employees hired after the date hereof), (ii) for the purpose of funding or providing benefits under any Etherogen Benefit Plans, Etherogen Option Plans, any other stock option and incentive compensation plans, directors plans, and stock purchase and dividend reinvestment plans in accordance with past practice;
(f) Issue, deliver, sell, authorize, pledge or otherwise encumber or propose any of the foregoing with respect to any shares of capital stock or any securities convertible into shares of capital stock, or subscriptions, rights, warrants or options to acquire any shares of capital stock or any securities convertible into shares of capital stock, or enter into other agreements or commitments of any character obligating it to issue any such shares or convertible securities, or any equity-based awards (whether payable in shares, cash or otherwise) other than the issuance, delivery and/or sale of shares of Etherogen Common Stock (as appropriately adjusted for stock splits and the like) pursuant to the exercise of stock options or warrants outstanding as of the date of this Agreement.
(g) Cause, permit or submit to a vote of Etherogen’s stockholders any amendments to the Etherogen Charter Documents, except those reasonably requested by EAC or Parent as necessary or desirable the purposes of consummating the transactions contemplated by this Agreement;
(h) Acquire or agree to acquire by merging or consolidating with, or by purchasing any equity interest in or a portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to enter into any joint ventures, strategic partnerships or strategic investments; provided, that Etherogen shall not be prohibited from entering into business development deals in the ordinary course of business;
(i) Sell, lease, license, encumber or otherwise dispose of any properties or assets except in the ordinary course of business consistent with past practice, except for the sale, lease, licensing, encumbering or disposition (other than through licensing permitted by clause (c)) of property or assets which are not material, individually or in the aggregate, to the business of Etherogen;
(j) Incur any indebtedness for borrowed money or guarantee any such indebtedness of another person, issue or sell any debt securities or options, warrants, calls or other rights to acquire any debt securities of Etherogen, enter into any “keep well” or other agreement to maintain any financial statement condition or enter into any arrangement having the economic effect of any of the foregoing other than in connection with the financing of working capital consistent with past practice;
(k) Adopt or amend any Etherogen Benefit Plan or any employee stock purchase or employee stock option plan; or enter into any employment contract or collective bargaining agreement (other than offer letters and letter agreements entered into in the ordinary course of business consistent with past practice with employees who are terminable “at will”); pay any special bonus or special remuneration to any director or employee; or increase the salaries, wage rates, compensation or other fringe benefits (including rights to severance or indemnification) of its directors, officers, employees or consultants except, in each case, as may be required by law and except for (i) salary increases in the ordinary course of business consistent with past practice for non-officer employees, (ii) salary increases for officers in an amount not exceeding 5% of such officer’s salary on the date hereof and (iii) as set forth on Schedule 4.1(k);
(l) Pay, discharge, settle or satisfy any litigation (whether or not commenced prior to the date of this Agreement) or any material claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge, settlement or satisfaction, in the ordinary course of business consistent with past practice or in accordance with their terms, of liabilities recognized or disclosed in the Etherogen Balance Sheet or incurred since the date of such financial statements, or (ii) waive the benefits of, agree to modify in any manner, terminate, release any person from or knowingly fail to enforce the confidentiality or nondisclosure provisions of any agreement to which Etherogen is a party or of which Etherogen is a beneficiary, in the case of both (i) and (ii) of this Section 4.1(l), which payment, discharge, satisfaction, waiver, termination, modification, release or failure to enforce has a value to Etherogen in excess of $5,000;
(m) Except in the ordinary course of business consistent with past practice, materially modify, amend or terminate any Etherogen Contracts disclosed in Schedule 2.15 or
waive, delay the exercise of, release or assign any material rights or claims thereunder without providing prior notice to Parent;
(n) Except as required by GAAP, revalue any of its assets or make any change in accounting methods, principles or practices;
(o) Make any Tax election or accounting method change (except as required by GAAP) inconsistent with past practice that, individually or in the aggregate, is reasonably likely to adversely affect in any material respect the Tax liability or Tax attributes of Etherogen or any of its Subsidiaries, settle or compromise any material Tax liability or consent to any extension or waiver of any limitation period with respect to Taxes; or
(p) Agree in writing or otherwise to take any of the actions described in Section 4.1 (a) through (o) above.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Public Disclosure . Parent and Etherogen will consult with each other, and to the extent practicable, agree, before issuing any press release or otherwise making any public statement with respect to the Merger or this Agreement and will not issue any such press release or make any such public statement prior to such consultation, except as may be required by law or any listing agreement with a national securities exchange or Nasdaq, in which case reasonable efforts to consult with the other party will be made prior to such release or public statement. The parties will agree to the text of the joint press release announcing the signing of this Agreement.
5.2 Commercially Reasonable Efforts; Notification . (a) Upon the terms and subject to the conditions set forth in this Agreement, each of the parties agrees to use commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Merger and the other transactions contemplated by this Agreement, including to accomplish the following: (i) causing the conditions precedent set forth in Article VI to be satisfied; (ii) obtaining all necessary actions or nonactions, waivers, consents, approvals, orders and authorizations from Governmental Entities; (iii) making all necessary registrations, declarations and filings (including registrations, declarations and filings with Governmental Entities, if any); (iv) avoiding any suit, claim, action, investigation or proceeding by any Governmental Entity challenging the Merger or any other transaction contemplated by this Agreement; (v) obtaining all consents, approvals or waivers from third parties required as a result of the transactions contemplated in this Agreement; (vi) defending any suits, claims, actions, investigations or proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated hereby, including seeking to have any stay or temporary restraining order entered by any court or other Governmental Entity vacated or reversed; and (vii) executing or delivering any additional instruments reasonably necessary to
consummate the transactions contemplated by, and to fully carry out the purposes of, this Agreement.
(b) Parent shall give prompt notice to Etherogen upon obtaining knowledge that any representation or warranty made by it, or EAC contained in this Agreement has become untrue or inaccurate, or of any failure of Parent or EAC to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement, in each case, where the conditions set forth in Section 6.2(a) or Section 6.2(b) would not be satisfied as a result thereof; provided, however, that no such notification shall affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under this Agreement.
(c) Etherogen shall give prompt notice to Parent upon obtaining knowledge that any representation or warranty made by it contained in this Agreement has become untrue or inaccurate, or of any failure of Etherogen to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement, in each case, where the conditions set forth in Section 6.3(a) or Section 6.3(b) would not be satisfied as a result thereof; provided, however, that no such notification shall affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under this Agreement.
5.3 Third Party Consents . On or before the Closing Date, Parent and Etherogen will each use its commercially reasonable efforts to obtain any consents, waivers and approvals under any of its or its Subsidiaries’ respective agreements, contracts, licenses or leases required to be obtained in connection with the consummation of the transactions contemplated hereby.
5.4 Benefits; Prior Service . From and after the Effective Time, Etherogen employees shall be provided with employee benefits that are substantially similar to those provided to employees of Parent who are similarly situated. Parent shall cause employees of Etherogen to be credited with service with Etherogen for purposes of eligibility and vesting under each employee benefit plan maintained by Parent prior to the Effective Time. Parent shall have the absolute discretion to (i) cash-out Etherogen employees accrued and unused vacation, personal and sick leave days or to (ii) carry over Etherogen employees’ accrued but unused vacation, personal and sick leave days; provided, that, such service shall not be recognized to the extent that such recognition would result in duplication of benefits.
5.5 Non-Disclosure, Invention Release and Non-Competition Agreements . Etherogen shall use its commercially reasonable efforts to cause employees of Etherogen who will become employees of EAC from and after the Effective Time to enter into EAC’ standard form of Non-Disclosure, Invention Release and Non-Competition Agreement prior to the Closing.
5.6 Conveyance Taxes . Parent, EAC and Etherogen shall cooperate in the preparation, execution and filing of all returns, questionnaires, applications, or other documents regarding (i) any real property transfer gains, sales, use, transfer, value-added, stock transfer and stamp Taxes, (ii) any recording, registration and other fees, and (iii) any similar Taxes or fees that become payable in connection with the transactions contemplated hereby.
5.7 No Negotiation . Until the Effective Date, or such time, if any, as this Agreement is terminated pursuant to Article VI below, Etherogen shall not, nor shall they permit any of their respective affiliates, directors, officers, employees, investment bankers, attorneys or other agents, advisors or representatives to, directly or indirectly, (a) sell, offer or agree to sell its business, by sale of shares or assets, merger or otherwise (an “Acquisition Transaction”) other than pursuant to this Agreement, (b) solicit or initiate the submission of any proposal for an Acquisition Transaction, or (c) participate in any discussions or negotiations with, or furnish any information concerning its business to, any corporation, person or other entity in connection with a possible Acquisition Transaction other than pursuant to this Agreement.
5.8 Survival after Closing . All of the covenants and obligations of the parties to this Agreement, which by their terms are to be performed or will become effective after the Closing, including without limitation, those contained in Section 3.7 shall survive the Closing.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger . The respective obligations of each party to this Agreement to effect the Merger shall be subject to the satisfaction at or prior to the Closing Date of the following conditions, any of which may be waived if waived in writing by all of Parent, EAC and Etherogen:
(a) Stockholder Approval . This Agreement shall have been adopted and the Merger shall have been duly approved (i) by the requisite vote under applicable law and the EAC Charter Documents and (ii) by the unanimous written consent of the holders of shares of Etherogen Common Stock under applicable law and the Etherogen Charter Documents. The Share Issuance shall have been duly approved by the requisite vote under applicable law and the Articles of Incorporation and Bylaws of Parent by the board of directors of Parent.
(b) No Order . No Governmental Entity shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which is in effect and which has the effect of making the Merger illegal or otherwise prohibiting consummation of the Merger.
(c) Schedules . Each of the parties hereto shall have delivered to each other complete and accurate Schedules to this Agreement and such Schedules shall have been approved by the recipient.
(d) Exhibits . The parties shall mutually agree upon the form and substance of all the agreement attached as Exhibits to this Agreement, which agreements shall be executed and delivered to each other at the Closing Date.
6.2 Additional Conditions to Obligations of Etherogen . The obligation of Etherogen to effect the Merger shall be subject to the satisfaction at or prior to the Closing Date of each of the following conditions, any of which may be waived, in writing, exclusively by Etherogen:
(a) Representations and Warranties . The representations and warranties of Parent and EAC set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date as if made on and as of the Closing Date (except to the extent any such representation and warranty expressly speaks as of an earlier date) and Etherogen shall have received a certificate signed on behalf of Parent by the Chief Executive Officer of Parent to such effect; provided, however, that notwithstanding anything herein to the contrary, this Section 6.2(a) shall be deemed to have been satisfied even if such representations or warranties are not so true and correct unless the failure of such representations or warranties to be so true and correct, individually or in the aggregate, has had, or is reasonably likely to have, a Parent Material Adverse Effect.
(b) Agreements and Covenants. Each of Parent and EAC shall have performed or complied with, in all material respects, all agreements and covenants required by this Agreement to be performed or complied with by them on or prior to the Closing Date, and Etherogen shall have received a certificate to such effect signed on behalf of each of Parent and EAC by an authorized officer of Parent.
(c) No Closing Material Adverse Effect . Since the date hereof, there has not occurred a Parent or EAC Material Adverse Effect.
(d) Financing. During the period from June 1, 2010 to the date of Closing, Parent shall have raised aggregate gross proceeds in the amount of not less than $1,000,000 from the sale of shares and warrants in private placements.
6.3 Additional Conditions to the Obligations of Parent and EAC . The obligations of Parent and EAC to effect the Merger shall be subject to the satisfaction at or prior to the Closing Date of each of the following conditions, any of which may be waived, in writing, exclusively by Parent:
(a) Representations and Warranties . The representations and warranties of Etherogen set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date as if made on and as of the Closing Date (except to the extent any such representation and warranty expressly speaks as of an earlier date) and Parent shall have received a certificate signed on behalf of Etherogen by the Chief Executive Officer of Etherogen to such effect; provided, however, that notwithstanding anything herein to the contrary, this Section 6.3(a) shall be deemed to have been satisfied even if such representations or warranties are not so true and correct unless the failure of such representations or warranties to be so true and correct, individually or in the aggregate, has had, or is reasonably likely to have, an Etherogen Material Adverse Effect.
(b) Agreements and Covenants . Etherogen shall have performed or complied with, in all material respects, all agreements and covenants required by this Agreement to be performed or complied with by it at or prior to the Closing Date, and Parent shall have received a certificate to such effect signed on behalf of Etherogen by an authorized officer of Etherogen.
(c) No Closing Material Adverse Effect . Since the date hereof, there has not occurred an Etherogen Material Adverse Effect.
(d) Conversion of Debt and Loans . Upon Closing, any and all indebtedness (other than trade indebtedness incurred in the ordinary course of business consistent with past practices), promissory notes, shareholder and employee loans of Etherogen shall have been converted into units (the “Units’) of Parent (each Unit consisting of one share of Parent Common Stock and one warrant to purchase one share of Parent Common Stock at an exercise price equal to $0.50 per share) at a price of $0.50 per Unit.
(e) Cancellation of Warrants . All Etherogen Warrants shall have been cancelled or shall be cancelled upon consummation of the Merger, by written instrument executed by the holders of the Etherogen Warrants, reasonably acceptable to Parent.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination . This Agreement may be terminated at any time prior to the Effective Time, whether before or after the requisite approval of the stockholders of EAC and Etherogen:
(a) by mutual written consent duly authorized by the Boards of Directors of Parent and Etherogen;
(b) by either Parent or Etherogen if the Merger shall not have been consummated by August 17, 2010 (such date, or such other date that may be agreed by mutual written consent, being the “Outside Date”) for any reason; provided, however, that the right to terminate this Agreement under this Section 7.1(b) shall not be available to any party whose action or failure to act has been a principal cause of or resulted in the failure of the Merger to occur on or before such date if such action or failure to act constitutes a breach of this Agreement;
(c) by either Parent or Etherogen if a Governmental Entity shall have issued an order, decree or ruling or taken any other action, in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger, which order, decree, ruling or other action shall have become final and nonappealable or any law, order, rule or regulation is in effect or is adopted or issued, which has the effect of prohibiting the Merger;
7.2 Fees and Expenses . Except as set forth in this Section 7.2, all Expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such Expenses whether or not the Merger are consummated: As used in this Agreement, “Expenses” shall include all reasonable out-of-pocket expenses (including, without limitation, all fees and expenses of counsel, accountants, experts and consultants to a party hereto and its affiliates) incurred by a party or on its behalf in connection with or related to the authorization, preparation, negotiation, execution and performance of this Agreement and all other matters relating to the closing of the Merger and the other transactions contemplated hereby.
7.3 Amendment . This Agreement may be amended by the parties hereto by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time; provided, however, that, after the approval and adoption of this Agreement by the stockholders of EAC and Etherogen, there shall not be any amendment that by law requires further approval by the stockholders of EAC or Etherogen without the further approval of such stockholders. This Agreement may not be amended by the parties hereto except by execution of an instrument in writing signed on behalf of each of Parent, EAC and Etherogen.
7.4 Extension; Waiver . At any time prior to the Effective Time, any party hereto may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. Delay in exercising any right under this Agreement shall not constitute a waiver of such right.
7.5 Parent Capitalization. For a period of Twelve (12) months from the Closing Date, Parent will not engage in any reverse split of its issued and outstanding Common Stock or any change in the par value of its Common Stock without the unanimous consent of the Board of Directors.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Notices . All notices and other communications hereunder shall be in writing and shall be deemed given on the day of delivery if delivered personally or sent via telecopy (receipt confirmed) or on the second business day after being sent if delivered by commercial delivery service, to the parties at the following addresses or telecopy numbers (or at such other address or telecopy numbers for a party as shall be specified by like notice):
(a) if to Parent or EAC:
TrovaGene, Inc.
11055 Flintkote Avenue
San Diego, CA 92121
(b) if to Etherogen, to
Etherogen, Inc.
c/o Panetta Partners LLP
1275 First Avenue, Suite 296
New York, NY 10065
Attn: Gabriele M. Cerrone, President
8.2 Interpretation . (a) When a reference is made in this Agreement to Exhibits, such reference shall be to an Exhibit to this Agreement unless otherwise indicated. When a reference is made in this Agreement to a Section, such reference shall be to a Section of this Agreement. Unless otherwise indicated the words “include,” “includes” and “including” when used herein shall be deemed in each case to be followed by the words “without limitation.” The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. When reference is made herein to “the business of” an entity, such reference shall be deemed to include the business of all direct and indirect subsidiaries of such entity. Reference to the subsidiaries of an entity shall be deemed to include all direct and indirect subsidiaries of such entity.
(b) For purposes of this Agreement, the term “knowledge” means with respect to a party hereto, with respect to any matter in question, that any of the officers of such party has actual knowledge of such matter.
(c) For purposes of this Agreement, the term “person” shall mean any individual, corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, company (including any limited liability company or joint stock company), firm or other enterprise, association, organization, entity or Governmental Entity.
(d) For purposes of this Agreement, an “agreement,” “arrangement,” contract,” “commitment” or “plan” shall mean a legally binding, written agreement, arrangement, contract, commitment or plan, as the case may be.
8.3 Counterparts . This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart.
8.4 Entire Agreement; Third Party Beneficiaries . This Agreement and the documents and instruments and other agreements among the parties hereto as contemplated by or referred to herein, including the Parent Schedule and the Etherogen Schedule constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof. With the exception that (i) each stockholder of Etherogen shall be a third party beneficiary of Sections 1.6, 1.7, 3.2(a)(ii) and 3.7, and (ii) each person set forth on Schedule 6.2(d) shall be a third party beneficiary of Section 5.8, nothing in this Agreement, is intended or shall be construed to confer any right, remedy or claim under or by reason of this Agreement upon any Person other than the parties and successors and assigns.
8.5 Severability . In the event that any provision of this Agreement, or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void
or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision.
8.6 Other Remedies; Specific Performance . Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to seek an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which t they are entitled at law or in equity. In any action at law or suit in equity to enforce this Agreement or the rights of any of the parties hereunder, the prevailing party in such action or suit shall be entitled to receive a reasonable sum for its attorneys’ fees and all other reasonable costs and expenses incurred in such action or suit.
8.7 Governing Law . GOVERNING LAW . THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED IN THE STATE OF DELAWARE, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS; PROVIDED THAT THE FIDUCIARY DUTIES OF PARTIES, THE BOARD OF DIRECTORS OF THE RESPECTIVE PARTIES, AND THE VALIDITY OF ANY CORPORATE ACTION ON THE PART OF THE PARTIES, INCLUDING THE ADOPTION AND APPROVAL OF THE MERGER, AND OTHER MATTERS GOVERNED BY THE LAWS OF THE STATE WHICH A PARTY IS INCORPORATED SHALL BE GOVERNED BY THE LAWS OF SUCH STATE OF INCORPORATION. FOR CLARITY, SUCH CORPORATE PROCEDING AND FIDUCIARY OBLIGATIONS SHALL BE DETERMINED AS TO PARENT UNDER THE LAWS OF NEVADA AND AS TO EAC AND ETHEROGEN, THE LAWS OF THE STATE OF DELAWARE.
8.8 Rules of Construction . The parties hereto agree that they have been represented by counsel during the negotiation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
8.9 Assignment . No party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of the other parties. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns.
8.10 Waiver of Jury Trial . EACH OF PARENT, EAC AND ETHEROGEN HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR
OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE ACTIONS OF PARENT, EAC AND ETHEROGEN IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized respective officers as of the date first written above.
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E ACQ CORP. |
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ETHEROGEN, INC. |
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Exhibit 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
TROVAGENE, INC.
TrovaGene, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the “Corporation”), does hereby certify:
1. The Certificate of Incorporation of the Corporation was filed with the Secretary of State on September 21, 2009 under the name TrovaGene, Inc.
2. The Certificate of Incorporation of the Corporation is hereby amended and restated to read as follows:
FIRST: The name of the Corporation is TrovaGene, Inc. (the “Corporation”).
SECOND: The address of the Corporation’s registered office in the State of Delaware is 1013 Centre Road, in the City of Wilmington in the County of New Castle. The name of its registered agent at such address is The Corporation Service Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.
FOURTH: (a) The total number of shares of capital stock which this Corporation is authorized to issue is one hundred twenty million (120,000,000) shares, of which:
(i) one hundred million (100,000,000) shares shall be designated as Common Stock, and shall have a par value of $.0001 per share;
(ii) twenty million (20,000,000) shares shall be designated as Preferred Stock, and shall have a par value of $.001 per share; and
(b) The Board of Directors is expressly authorized at any time, and from time to time, to provide for the issuance of shares of Preferred Stock in one or more series, with such voting powers, full or limited, or without voting powers and with such designations, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issue thereof adopted by the Board of Directors and as are not stated and expressed in this Certificate of Incorporation, or any amendment thereto, including (but without limiting the generality of the foregoing) the following:
(i) the designation of such series;
(ii) the dividend rate of such series, the conditions and dates upon which such dividends shall be payable, the preference or relation which such dividends shall bear to the dividends payable on any other class or classes or of any other series of capital stock, whether such dividends shall be cumulative or noncumulative, and whether such dividends may be paid in shares of any class or series of capital stock or other securities of the Corporation;
(iii) whether the shares of such series shall be subject to redemption by the Corporation, and, if made subject to such redemption, the times, prices and other terms and conditions of such redemption;
(iv) the terms and amount of any sinking fund provided for the purchase or redemption of the shares of such series;
(v) whether or not the shares of such series shall be convertible into or exchangeable for shares of any other class or classes or series of capital stock or other securities of the Corporation, and, if provision be made for conversion or exchange, the times, prices, rates, adjustment and other terms and conditions of such conversion or exchange;
(vi) the extent, if any, to which the holders of the shares of such series shall be entitled to vote, as a class or otherwise, with respect to the election of the directors or otherwise, and the number of votes to which the holder of each share of such series shall be entitled;
(vii) the restrictions, if any, on the issue or reissue of any additional shares or series of Preferred Stock; and
(viii) the rights of the holders of the shares of such series upon the dissolution of, or upon the distribution of assets of, the Corporation.
(c) No holder of any stock of the Corporation of any class or series now or hereafter authorized, shall, as such holder, be entitled as of right to purchase or subscribe for any shares of stock of the Corporation of any class or any series now or hereafter authorized, or any securities convertible into or exchangeable for any such shares, or any warrants, options, rights or other instruments evidencing rights to subscribe for, or purchase, any such shares, whether such shares, securities, warrants, options, rights or other instruments be unissued or issued and thereafter acquired by the Corporation.
FIFTH: The number of directors constituting the Corporation’s Board of Directors shall be determined in accordance with the Bylaws of the Corporation. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. Election of directors need not be by ballot unless the By-laws of the Corporation shall so provide.
SIXTH: A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit.
SEVENTH: (a) Right to Indemnification . Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter, a “proceeding”), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as
a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in Paragraph (b) of this Article SEVENTH, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Article SEVENTH shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director of officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Article SEVENTH or otherwise. The Corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers.
(b) Right of Claimant to Bring Suit . If a claim under Paragraph (a) of this Article SEVENTH is not paid in full by the Corporation within thirty (30) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim, and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel or stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel or stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard or conduct.
(c) Non-Exclusivity of Rights . The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article SEVENTH shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise.
(d) Insurance . The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law.
EIGHTH: In furtherance and not in limitation of the powers conferred upon the Board of Directors by law, the Board of Directors shall have power to make, adopt, alter, amend or repeal from time to time By-laws of the Corporation, subject to the right of the stockholders entitled to vote with respect thereto to alter and repeal By-laws made by the Board of Directors and subject to the provisions of any By-law limiting the right of the Board of Directors to make certain modifications to the By-laws.
3. This Amended and Restated Certificate of Incorporation has been duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of Delaware.
4. The capital of the Corporation will not be reduced under or by reason of any amendment herein certified.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by its Chief Executive Officer this 31st day of December 2009.
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/s/ Bruce Huebner |
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Bruce Huebner, Chief Executive Officer |
Exhibit 3.2
BY-LAWS
OF
TROVAGENE, INC.
ARTICLE I
Corporate Offices
1. Registered Office . The registered office of TrovaGene, Inc. shall be fixed in the corporation’s Certificate of Incorporation, as the same may be amended from time to time.
2. Other Offices . The corporation’s Board of Directors (the “ Board ”) may at any time establish other offices at any place or places where the corporation is qualified to do business.
ARTICLE II
Stockholders’ Meetings
1. Places of Meetings . All meetings of stockholders shall be held at such place or places in or outside of the State of Delaware as the Board may from time to time determine or as may be designated in the notice of meeting or waiver of notice thereof, subject to any provisions of the Delaware General Corporation Law (the “ DGCL ”). The Board may, in its sole discretion, determine that a meeting of stockholders shall not be held at any place, but may instead be held solely by means of remote communication as authorized by Section 211(a)(2) of the DGCL. In the absence of any such designation or determination, stockholders’ meetings shall be held at the corporation’s principal executive office.
2. Annual Meetings . The annual meeting of stockholders shall be held on such date, time and place, either within or without the State of Delaware, and may be designated by resolution of the Board of Directors each year. At the meeting, directors shall be elected and any other proper business may be transacted. Written notice of the time and place of the annual meeting shall be given by mail to each stockholder entitled to vote at his address as it appears on the records of the corporation not less than the minimum nor more than the maximum number of days permitted under the DGCL prior to the scheduled date thereof, unless such notice is waived as provided by Section 2 of Article VIII of these By-Laws.
3. Special Meetings . A special meeting of stockholders may be called at any time at the request of any member of the Board or the chief executive officer, and shall be called by the chief executive officer or the secretary or an assistant secretary at the written request of the holders of at least 25% of the total number of shares of stock then outstanding and entitled to vote, stating the specific purpose or purposes thereof. Written notice of the time, place and specific purposes of such meetings shall be given by mail, e-mail, or facsimile to each stockholder entitled to vote thereat at his address as it appears on the records of the corporation not less than 10 days nor more than 60 days prior to the scheduled date thereof, unless such notice is waived as provided in Section 2 of Article VIII of these By-Laws. Nothing contained in this Section 3 shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board or the chief executive officer may be held.
4. Meetings Without Notice . Meetings of the stockholders may be held at any time without notice when all the stockholders entitled to vote thereat are present in person or by proxy.
5. Voting . At all meetings of stockholders, each stockholder entitled to vote on the record date as determined under Section 7 of this Article, or if not so determined as prescribed under the DGCL, shall be entitled to one vote for each share of stock standing on record in his name, subject to any restrictions or qualifications set forth in the Certificate of Incorporation or any amendment thereto (the Certificate of Incorporation as amended from time to time is hereinafter referred to as the “ Certificate of Incorporation ”).
6. Quorum . At any stockholders’ meeting, a majority of the number of shares of stock outstanding and entitled to vote thereat, present in person or by proxy, shall constitute a quorum, but a smaller interest by act of either (x) the chairperson of the meeting or (y) the stockholders entitled to vote at the meeting, may adjourn any meeting from time to time, and the meeting may be held as adjourned without further notice, subject to such limitation as may be imposed under the DGCL. When a quorum is present at any meeting, a majority of the number of shares of stock entitled to vote present thereat shall decide any question brought before such meeting unless the question is one upon which a different vote is required by express provision of the DGCL, the Certificate of Incorporation, any stockholders agreement to which the corporation is a party, or these By-Laws, in which case such express provision shall govern.
7. List of Stockholders . At least 10 days before every meeting, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order and showing the address of, and the number of shares registered in the name of, each stockholder, shall be prepared by the secretary or the transfer agent in charge of the stock ledger of the corporation. Such list shall be open for examination by any stockholder as required by the DGCL. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine such list or the books of the corporation or to vote in person or by proxy at such meeting.
8. Consents in Lieu of Meeting . Unless otherwise provided in the Certificate of Incorporation or by the DGCL, any action required by the DGCL to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if: (i) a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, and (ii) prompt notice of the taking of such action by less than unanimous written consent is given to the other stockholders to the extent and in the manner required by the DGCL.
ARTICLE III
Board of Directors
1. Number and Qualification . A board of directors shall be elected at each annual meeting of stockholders, each director so elected to serve until the election and qualification of his successor or until his earlier death, resignation or removal as provided in these By-Laws. Subject to the terms of the Certificate of Incorporation and any stockholders agreement to which the corporation is a party, the number of directors shall be such as may be determined from time to time by the Board. As of the date of the initial adoption of these By-Laws, the Board shall consist of one (1) director. In case of any increase in the number of directors between elections by the stockholders, the additional directorships shall be considered vacancies and, except as otherwise required by the Certificate of Incorporation or any stockholders agreement to which the corporation is a party, shall be filled in the manner prescribed in Article III, Section 11 of these By-Laws. No reduction of the authorized number of directors shall have the effect of removing any director before his or her term of office expires. Directors need not be stockholders.
2. Powers . The business and affairs of the corporation shall be carried on by or under the direction of the Board, which shall have all the powers authorized by the DGCL, subject to such limitations as may be provided by the Certificate of Incorporation, these By-Laws or by any stockholders agreement to which the corporation is a party.
3. Compensation . The Board may from time to time by resolution authorize the payment of fees or other compensation to the directors for services to the corporation, including, but not limited to, fees for attendance at all meetings of the Board or of the executive or other committees, and determine the amount of such fees and compensation. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor in amounts authorized or otherwise approved from time to time by the Board or the executive committee.
4. Meetings and Quorum . Meetings of the Board may be held either in or outside of the State of Delaware. Subject to the terms of the Certificate of Incorporation, a quorum shall be a majority of the directors then in office, but not less than two directors unless a Board of one director is authorized under the DGCL in which event one director shall constitute a quorum. A director will be considered present at a meeting, even though not physically present, to the extent and in the manner authorized by the DGCL. If a quorum is not present at
any meeting of the Board, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present.
The Board elected at any annual stockholders’ meeting shall, at the close of that meeting and without further notice if a quorum of directors be then present, or as soon thereafter as may be convenient, hold a meeting for the election of officers and the transaction of any other business. Subject to the terms of the Certificate of Incorporation, at such meeting the Board shall elect a chief executive officer, a president, a secretary and a treasurer, and such other officers as it may deem proper, none of whom except the chairman of the Board, if elected, need be members of the Board.
The Board may from time to time provide for the holding of regular meetings with or without notice and may fix the times and places at which such meetings are to be held. Meetings other than regular meetings may be called at any time by the chief executive officer or by the secretary or an assistant secretary upon the written request of any director.
Notice of each meeting, other than a regular meeting (unless required by the Board), shall be given to each director by mailing the same to each director at his residence or business address at least two days before the meeting or by delivering the same to him personally or by telephone or telegraph at least one day before the meeting unless, in case of exigency, the chairman of the Board, the chief executive officer or the secretary shall prescribe a shorter notice to be given personally or by telephone, telegraph, cable or wireless to all or any one or more of the directors at their respective residences or places of business.
Notice of any meeting shall state the time and place of such meeting, but need not state the purposes thereof unless otherwise required by the DGCL, the Certificate of Incorporation, these By-Laws, or the Board.
5. Record Dates . (a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix in advance a record date which, in the case of a meeting, shall not be less than the minimum nor more than the maximum number of days prior to the scheduled date of such meeting permitted under the DGCL and which, in the case of any other action, shall be not more than the maximum number of days permitted under the DGCL.
(b) If no such record date is fixed by the Board, the record date shall be that prescribed by the DGCL.
(c) A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting.
6. Executive Committee . Subject to the terms of any stockholders agreement to which the corporation is a party, the Board may by resolution passed by a majority of the whole Board provide for an executive committee of two or more directors and shall elect the members thereof to serve at the pleasure of the Board and may designate one of such members to act as chairman. Subject to the terms of any stockholders agreement to which the corporation is a party, the Board may at any time change the membership of the committee, fill vacancies in it, designate alternate members to replace any absent or disqualified members at any meeting of the executive committee, or dissolve it.
During the intervals between the meetings of the Board, the executive committee shall possess and may exercise any or all of the powers of the Board in the management or direction of the business and affairs of the corporation and under these By-Laws to the extent authorized by resolution adopted by a majority of the whole Board and to such limitations as may be imposed by the DGCL and the Certificate of Incorporation.
The executive committee may determine its rules of procedure and the notice to be given of its meetings, and it may appoint such committees and assistants as it shall from time to time deem necessary. Subject to the terms of the Certificate of Incorporation, a majority of the members of the committee shall constitute a quorum.
7. Other Committees . Subject to the terms of the Certificate of Incorporation, the Board may by resolution provide for such other committees as it deems desirable and may discontinue the same at its pleasure. Each such committee shall have the powers and perform such duties, not inconsistent with law, as may be assigned to it by the Board. No such committee, however, shall have the power or authority to (i) approve or adopt, or recommend to the stockholders, any action or matter expressly required by the DGCL to be submitted to stockholders for approval, or (ii) adopt, amend or repeal any By-Law of the corporation.
8. Conference Telephone Meetings . Any one or more members of the Board or any committee thereof may participate in meetings by means of a conference telephone or similar communication equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person of the meeting.
9. Action Without Meetings . Any action required or permitted to be taken at any meeting of the Board or any committee thereof may be taken without a meeting to the extent and in the manner authorized by the DGCL.
10. Removal of Directors . Unless otherwise restricted by statute, the Certificate of Incorporation, these By-Laws, or any stockholders agreement to which the corporation is a party, any director or the entire Board may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors.
11. Vacancies . Except as otherwise provided in the Certificate of Incorporation or any stockholders agreement to which the corporation is a party, a vacancy in
any directorship occurring by reason of death, resignation, removal, inability to act, disqualification, or any other cause, may at any time be filled for the unexpired portion of the term by a majority vote of the Board.
ARTICLE IV
Officers
1. Titles and Election . The officers of the corporation shall be comprised of a chief executive officer, a president, a secretary and a treasurer, who shall initially be elected as soon as convenient by the Board and thereafter, in the absence of earlier resignations or removals, shall be elected at the first meeting of the Board following each annual stockholders’ meeting, each of whom shall hold office at the pleasure of the Board except as may otherwise be approved by the Board or the executive committee, or until their earlier death, resignation, removal under these By-Laws or other termination of their employment. Any person may hold more than one office if the duties can be consistently performed by the same person, and to the extent permitted by the DGCL. Subject to the terms of the Certificate of Incorporation or any stockholders agreement to which the corporation is a party, the Board, in its discretion, may also at any time elect or appoint a chairman of the Board, who shall be a director, and one or more vice presidents, assistant secretaries and assistant treasurers and such other officers as it may deem advisable, each of whom shall hold office at the pleasure of the Board, except as may otherwise be approved by the Board or the executive committee, or until their earlier death, resignation, removal or other termination of employment as shall be prescribed or determined by the chief executive officer. The Board may require any officer or other employee or agent to give bond for the faithful performance of his duties in such form and with such sureties as the Board may require.
2. Duties . Subject to such extension, limitations, and other provisions as the Board, these By-Laws or the Certificate of Incorporation may from time to time prescribe or determine, the following officers shall have the following powers and duties:
(a) Chairman of the Board . The chairman of the Board, when present, shall preside at all meetings of the stockholders and of the Board and shall have such other powers and perform such other duties as the Board may prescribe from time to time.
(b) Chief Executive Officer . Subject to the authority of the Board, the chief executive officer shall have general supervision and control of the corporation’s business and shall exercise the powers and authority and perform the duties commonly incident to his office and shall, in the absence of the chairman of the Board, preside at all meetings of the stockholders and of the Board if he is a director, and shall perform such duties as the Board shall specify from time to time. The chief executive officer, unless some other person is thereunto specifically authorized by the Board, shall have authority to sign all bonds, debentures, promissory notes, deeds and contracts of the corporation.
(c) President . The president shall perform such duties as may be assigned to him from time to time by the Board or the chief executive officer. In the absence or disability of the chief executive officer, the president may, unless otherwise determined by the Board, exercise the powers and perform the duties pertaining to the office of chief executive officer.
(d) Vice President(s) . The vice president or vice presidents shall perform such duties as may be assigned to them from time to time by the Board, the chief executive officer or the president.
(e) Treasurer . The treasurer shall have charge and custody of and be responsible for all funds and securities of the corporation, shall keep or cause to be kept regular books of account for the corporation and shall perform such other duties and possess such other powers as are incident to the office of treasurer, or as shall be assigned to him by the chief executive officer, the president or by the Board.
(f) Assistant Treasurer(s) . During the absence or disability of the treasurer, the assistant treasurer, if one is elected, or if there are more than one, the one so designated by the treasurer, the chief executive officer, the president or by the Board shall have all the powers and functions of the treasurer.
(g) Secretary . The secretary shall cause notices of all meetings to be served as prescribed in these By-Laws or by statute, shall keep or cause to be kept the minutes of all meetings of the stockholders and of the Board, shall have charge of the corporate records and seal of the corporation and shall keep a register of the post office address of each stockholder which shall be furnished to him by such stockholder. He shall perform such other duties and possess such other powers as are incident to the office of secretary or as are assigned by the chief executive officer, the president or by the Board.
(h) Assistant Secretaries . During the absence or disability of the secretary, the assistant secretary, if one is elected, or if there are more than one, the one so designated by the secretary, the chief executive officer, the president or by the Board shall have all the powers and functions of the secretary.
3. Delegation of Duties . In case of the absence of any officer of the corporation, or for any other reason that may seem sufficient to the Board, the Board may delegate the powers and duties of such officer, for the time being, to any other officer, or to any director.
ARTICLE V
Stock Certificates
1. Certificates Representing Stock . Certificates representing stock in the corporation shall be signed by, or in the name of, the corporation by the chairman of the Board or
by the president or any vice president, and by the treasurer or an assistant treasurer or the secretary or an assistant secretary of the corporation. Any or all of the signatures on any such certificate may be a facsimile if authorized under the DGCL.
In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on a certificate has ceased to be such officer, transfer agent or registrar before the certificate has been issued, such certificate may nevertheless be issued and delivered by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue.
2. Transfer of Stock . Subject to the terms of any stockholders agreement to which the corporation is a party, shares of the capital stock of the corporation shall be transferable only upon the books of the corporation upon the surrender of the certificate or certificates properly assigned and endorsed for transfer. If the corporation has a transfer agent or agents or transfer clerk and registrar of transfers acting on its behalf, the signature of any officer or representative thereof may be in facsimile.
The Board or chief executive officer may appoint a transfer agent and one or more co-transfer agents and a registrar and one or more co-registrars of transfer and may make or authorize the transfer agents to make all such rules and regulations deemed expedient concerning the issue, transfer and registration of shares of stock in any manner not prohibited by the DGCL.
3. Lost Certificates . Subject to the terms of any agreement to which the corporation is a party, in case of loss or mutilation or destruction of a stock certificate, a duplicate certificate may be issued upon such terms as may be determined or authorized by the Board or the executive committee or by the chief executive officer if the Board or the executive committee does not do so.
ARTICLE VI
Fiscal Year, Bank Deposits, Checks, etc.
1. Fiscal Year . The fiscal year of the corporation shall commence or end at such time as the Board may designate.
2. Bank Deposits, Checks, etc. The funds of the corporation shall be deposited in the name of the corporation or of any division thereof in such banks or trust companies in the United States or elsewhere as may be designated from time to time by the Board or the executive committee, or by such officer or officers as the Board or the executive committee may authorize to make such designations.
All checks, drafts or other orders for the withdrawal of funds from any bank account shall be signed by such person or persons as may be designated from time to time by the Board or the executive committee. The signatures on checks, drafts or other orders for the withdrawal of funds may be in facsimile if authorized in the designation.
ARTICLE VII
Books and Records
1. Location of Books . Unless otherwise expressly required by the DGCL, the books and records of the corporation may be kept outside of the State of Delaware.
2. Examination of Books . Except as may otherwise be provided by the DGCL, the Certificate of Incorporation, these By-Laws, or any agreement to which the corporation is a party, the Board shall have power to determine from time to time whether and to what extent and at what times and places and under what conditions any of the accounts, records and books of the corporation are to be open to the inspection of any stockholder. No stockholder shall have any right to inspect any account or book or document of the corporation except as prescribed by statute or authorized by express resolution of the stockholders or of the Board, or as set forth in any agreement to which the corporation is a party.
ARTICLE VIII
Notices
1. Requirements of Notice . Whenever notice is required to be given by statute, the Certificate of Incorporation or these By-Laws, it shall not mean personal notice unless so specified, but such notice may be given in writing by depositing the same in a post office, letter box, or mail chute postpaid and addressed to the person to whom such notice is directed at the address of such person on the records of the corporation, and such notice shall be deemed given at the time when the same shall be thus mailed.
2. Waivers . Any stockholder, director or officer may, in writing or by telegram, cable or by electronic transmission at any time waive any notice or other formality required by statute, the Certificate of Incorporation or these By-Laws. Such waiver of notice, whether given before or after any meeting or action, shall be deemed equivalent to notice. Presence of a stockholder either in person or by proxy at any stockholders’ meeting and presence of any director at any meeting of the Board shall constitute a waiver of such notice as may be required by any statute, the Certificate of Incorporation or these By-Laws.
ARTICLE IX
Notice by Electronic Transmission
1. Notice by Electronic Transmission . Without limiting the manner by which notice otherwise may be given effectively to stockholders pursuant to the DGCL, the Certificate of Incorporation or these By-Laws, any notice to stockholders given by the corporation under
any provision of the DGCL, the Certificate of Incorporation or these By-Laws shall be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice to the corporation. Any such consent shall be deemed revoked if:
(i) the corporation is unable to deliver by electronic transmission two consecutive notices given by the corporation in accordance with such consent; and
(ii) such inability becomes known to the secretary or an assistant secretary of the corporation or to the transfer agent, or other person responsible for the giving of notice.
However, the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action.
Any notice given pursuant to the previous preceding paragraph shall be deemed given:
(i) if by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice;
(ii) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice;
(iii) if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and
(iv) if by any other form of electronic transmission, when directed to the stockholder.
An affidavit of the secretary or an assistant secretary or of the transfer agent or other agent of the corporation that the notice has been given by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated therein.
2. Definition Of Electronic Transmission . An “electronic transmission” means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved, and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.
3. Inapplicability . Notice by a form of electronic transmission shall not apply to Sections 164, 296, 311, 312 or 324 of the DGCL.
ARTICLE X
Powers of Attorney
The Board or the executive committee may authorize one or more of the officers of the corporation to execute powers of attorney delegating to named representatives or agents power to represent or act on behalf of the corporation, with or without power of substitution.
In the absence of any action by the Board or the executive committee, the chief executive officer or the secretary of the corporation may execute for and on behalf of the corporation waivers of notice of stockholders’ meetings and proxies for such meetings in any company in which the corporation may hold voting securities.
ARTICLE XI
Indemnification
1. Indemnification of Directors and Officers . The corporation shall indemnify and hold harmless, to the fullest extent permitted by DGCL as it presently exists or may hereafter be amended, any director or officer of the corporation who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a “Proceeding”) by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or non-profit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses reasonably incurred by such person in connection with any such action, suit, or proceeding. The corporation shall be required to indemnify a person in connection with a proceeding initiated by such person only if the proceeding was authorized by the Board.
2. Indemnification of Others . The corporation shall have the power to indemnify and hold harmless, to the extent permitted by applicable law as it presently exists or may hereafter be amended, any employee or agent of the corporation who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was an employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or non-profit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses reasonably incurred by such person in connection with any such action, suit, or proceeding.
3. Prepayment of Expenses . The corporation shall pay the expenses incurred by any officer or director of the corporation, and may pay the expenses incurred by any employee or agent of the corporation, in defending any proceeding in advance of its final
disposition; provided, however, that the payment of expenses incurred by a person in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the person to repay all amounts advanced if it should be ultimately determined that the person is not entitled to be indemnified under this Article XI or otherwise.
4. Determination; Claim . If a claim for indemnification or payment of expenses under this Article XI is not paid in full within sixty days after a written claim therefor has been received by the corporation, the claimant may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the corporation shall have the burden of proving that the claimant was not entitled to the requested indemnification or payment of expenses under applicable law.
5. Non-Exclusivity of Rights . The rights conferred on any person by this Article XI shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, these By-Laws, agreement, vote of stockholders or disinterested directors or otherwise.
6. Insurance . The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the DGCL.
7. Other Indemnification . The corporation’s obligation, if any, to indemnify any person who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or non-profit entity shall be reduced by any amount such person may collect as indemnification from such other corporation, partnership, joint venture, trust, enterprise or non-profit enterprise.
8. Amendment or Repeal . Any repeal or modification of the foregoing provisions of this Article XI shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification.
ARTICLE XII
Amendments
Subject to the provisions of the Certificate of Incorporation, any stockholders agreement to which the corporation is a party, and the provisions of the DGCL, the power to amend, alter, or repeal these By-Laws and to adopt new By-Laws may be exercised by the Board or by the stockholders.
ARTICLE XIII
Conflicts
In the event of any conflict between these By-Laws and the Certificate of Incorporation, the Certificate of Incorporation shall govern.
Exhibit 4.1
Exhibit 10.1
EXECUTIVE EMPLOYMENT AGREEMENT
This EXECUTIVE EMPLOYMENT AGREEMENT (the “ Agreement ”) dated as of October 7, 2011 is made and entered into by and between TrovaGene, Inc., a company incorporated under the laws of the state of Delaware (the “ Company ”), and David Robbins, an individual (the “ Executive ”).
WITNESSETH:
The Company desires to employ the Executive, and the Executive wishes to accept such employment with the Company, upon the terms and conditions set forth in this Agreement.
In consideration of the mutual promises and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:
1. Employment . The Company hereby agrees to employ Executive, and Executive hereby accepts such employment and agrees to perform Executive’s duties and responsibilities in accordance with the terms and conditions hereinafter set forth.
1.1 Duties and Responsibilities . Executive shall serve as Vice President, Research and Development. During the Employment Term (as defined below), Executive shall perform all duties and accept all responsibilities incident to such position and other appropriate duties as may be assigned to Executive by the Company’s Chief Executive Officer from time to time. The Company shall retain full direction and control of the manner, means and methods by which Executive performs the services for which he is employed hereunder and of the place or places at which such services shall be rendered.
1.2 Employment Term . The term of Executive’s employment under this Agreement shall commence as of October 7, 2011 (the “ Effective Date ”) and shall continue for 12 months, unless earlier terminated in accordance with Section 4 hereof. The term of Executive’s employment shall be automatically renewed for successive one (1) year periods until the Executive or the Company through the Board delivers to the other party a written notice of their intent not to renew the “Employment Term,” such written notice to be delivered at least sixty (60) days prior to the expiration of the then-effective “Employment Term” as that term is defined below. The period commencing as of the Effective Date and ending 12 months thereafter or such later date to which the term of Executive’s employment under the Agreement shall have been extended by mutual written agreement is referred to herein as the “Employment Term.”
1.3 Extent of Service . During the Employment Term, Executive agrees to use Executive’s best efforts to carry out the duties and responsibilities under Section 1.1 hereof and, subject to Section 1.1, to devote substantially all Executive’s business time, attention and energy thereto.
1.4 Base Salary . The Company shall pay Executive a base salary (the “ Base Salary ”) at the annual rate of $195,000 (U.S.), payable at such times as the Company customarily pays its other senior level executives (but in any event no less often than monthly). The Base Salary shall be subject to all state, federal, and local payroll tax withholding and any other withholdings required by law.
1.5 Incentive Compensation . Executive shall be eligible to earn a cash bonus of up to 25% of his base salary for each twelve-month period during the Employment Term at the discretion of the Company’s Board of Directors, or if the Board organizes a compensation committee, such committee (the “Committee”). Executive’s bonus, if any, shall be subject to all applicable tax and payroll withholdings.
1.6 Other Benefits . During the Employment Term, Executive shall be entitled to participate in all employee benefit plans and programs made available to the Company’s as a group or to its employees generally, as such plans or programs may be in effect from time to time (the “ Benefit Coverages ”), including, medical, dental, and vision. Executive shall be provided office space and staff assistance appropriate for Executive’s position and adequate for the performance of his duties and responsibilities.
1.7 Reimbursement of Expenses; Paid Time Off . Executive shall be provided with reimbursement of expenses related to Executive’s employment by the Company on a basis no less favorable than that which may be authorized from time to time by the Board, in its sole discretion, for senior level executives as a group. Executive shall be entitled to Paid time off and holidays in accordance with the Company’s normal personnel policies as set forth in the Company’s employee handbook
2. Confidential Information . Executive recognizes and acknowledges that by reason of Executive’s employment by and service to the Company before, during and, if applicable, after the Employment Term, Executive will have access to certain confidential and proprietary information relating to the Company’s business, which may include, but is not limited to, trade secrets, trade “know-how,” product development techniques and plans, formulas, customer lists and addresses, financing services, funding programs, cost and pricing information, marketing and sales techniques, strategy and programs, computer programs and software and financial information (collectively referred to herein as “ Confidential Information ”). Executive acknowledges that such Confidential Information is a valuable and unique asset of the Company and Executive covenants that he will not, unless expressly authorized in writing by the Company, at any time during the course of Executive’s employment use any Confidential Information or divulge or disclose any Confidential Information to any person, firm or corporation except in connection with the performance of Executive’s duties for and on behalf of the Company and in a manner consistent with the Company’s policies regarding Confidential Information. Executive also covenants that at any time after the termination of such employment, directly or indirectly, he will not use any Confidential Information or divulge or disclose any Confidential Information to any person, firm or corporation, unless such information is in the public domain through no fault of Executive or except when required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order Executive
to divulge, disclose or make accessible such information. All written Confidential Information (including, without limitation, in any computer or other electronic format) which comes into Executive’s possession during the course of Executive’s employment shall remain the property of the Company. Unless expressly authorized in writing by the Company, Executive shall not remove any written Confidential Information from the Company’s premises, except in connection with the performance of Executive’s duties for and on behalf of the Company and in a manner consistent with the Company’s policies regarding Confidential Information. Upon termination of Executive’s employment, the Executive agrees to immediately return to the Company all written Confidential Information (including, without limitation, in any computer or other electronic format) in Executive’s possession. As a condition of Executive’s continued employment with the Company and in order to protect the Company’s interest in such proprietary information, the Company shall require Executive’s execution of a Confidentiality Agreement and Inventions Agreement in the form attached hereto as Exhibit “A” , and incorporated herein by this reference.
3. Non-Competition; Non-Solicitation .
3.1 Non-Compete . The Executive hereby covenants and agrees that during the term of this Agreement and for a period of one year following the end of the Employment Term, the Executive will not, without the prior written consent of the Company, directly or indirectly, on his own behalf or in the service or on behalf of others, whether or not for compensation, engage in any business activity, or have any interest in any person, firm, corporation or business, through a subsidiary or parent entity or other entity (whether as a shareholder, agent, joint venturer, security holder, trustee, partner, Executive, creditor lending credit or money for the purpose of establishing or operating any such business, partner or otherwise) with any Competing Business in the Covered Area. For the purpose of this Section 3.1, (i) “Competing Business” means any medical diagnostic company, any contract manufacturer, any research laboratory or other company or entity (whether or not organized for profit) that has, or is seeking to develop, one or more products or therapies that is related to trans renal DNA, (ii) “Covered Area” means all geographical areas of the United States and other foreign jurisdictions where Company then has offices and/or sells its products directly or indirectly through distributors and/or other sales agents. Notwithstanding the foregoing, the Executive may own shares of companies whose securities are publicly traded, so long as ownership of such securities do not constitute more than one percent (1%) of the outstanding securities of any such company.
3.2 Non-Solicitation . The Executive further agrees that as long as the Agreement remains in effect and for a period of one (1) year from its termination, the Executive will not divert any business of the Company and/or its affiliates or any customers or suppliers of the Company and/or the Company’s and/or its affiliates’ business to any other person, entity or competitor, or induce or attempt to induce, directly or indirectly, any person to leave his or her employment with the Company and/or its affiliates.
3.3 Remedies . The Executive acknowledges and agrees that his obligations provided herein are necessary and reasonable in order to protect the Company and its affiliates and their respective business and the Executive expressly agrees that monetary damages would
be inadequate to compensate the Company and/or its affiliates for any breach by the Executive of his covenants and agreements set forth herein. Accordingly, the Executive agrees and acknowledges that any such violation or threatened violation of this Section 3 will cause irreparable injury to the Company and that, in addition to any other remedies that may be available, in law, in equity or otherwise, the Company and its affiliates shall be entitled to obtain injunctive relief against the threatened breach of this Section 3 or the continuation of any such breach by the Executive without the necessity of proving actual damages.
4. Termination:
4.1 By Company . The Company, acting by duly adopted resolutions of the Board of Directors, may, in its discretion and at its option, terminate the Executive’s employment with or without Cause, and without prejudice to any other right or remedy to which the Company or Executive may be entitled at law or in equity or under this Agreement. In the event the Company desires to terminate the Executive’s employment without Cause, the Company shall give the Executive not less than sixty (60) days advance written notice. Termination of Executive’s employment hereunder shall be deemed to be “for Cause” in the event that Executive violates any provisions of this Agreement, is guilty of any criminal act other than minor traffic violations, is guilty of willful misconduct or gross neglect, or gross dereliction of his duties hereunder or refuses to perform his duties hereunder after notice of such refusal to perform such duties or directions was given to Executive by the Chief Executive Officer or Board of Directors.
4.2 By Executive’s Death or Disability . This Agreement shall also be terminated upon the Executive’s death and/or a finding of permanent physical or mental disability, such disability expected to result in death or to be of a continuous duration of no less than twelve (12) months, and the Executive is unable to perform his usual and essential duties for the Company.
4.3 Compensation on Termination . In the event the Company terminates Executive’s employment, all payments under this Agreement shall cease, except for Base Salary to the extent already accrued. In the event of termination by reason of Executive’s death and/or permanent disability, Executive or his executors, legal representatives or administrators, as applicable, shall be entitled to an amount equal to Executive’s Base Salary accrued through the date of termination, plus a pro rata share of any annual bonus to which Executive would otherwise be entitled for the year which death or permanent disability occurs. Upon termination of Executive, if Executive executes a written release, substantially in the form attached hereto as Exhibit “B” (the “Release”), of any and all claims against the Company and all related parties with respect to all matters arising out of Executive’s employment by the Company (other than Executive’s entitlement under any employee benefit plan or program sponsored by the Company in which Executive participated), unless the Employment Term expires or termination is for Cause, the Executive shall receive, in full settlement of any claims Executive may have related to his employment by the Company, Base Salary for three (3) months from the date of termination, provided Executive is in full compliance with the provisions of Sections 2 and 3 of this Agreement. In addition, all unvested stock options granted to Executive shall immediately vest.
4.4 Voluntary Termination . Executive may voluntarily terminate the Employment Term upon sixty (60) days’ prior written notice for any reason; provided, however, that no further payments shall be due under this Agreement in that event except that Executive shall be entitled to any benefits due under any compensation or benefit plan provided by the Company for executives or otherwise outside of this Agreement.
5. General Provisions .
5.1 Modification; No Waiver . No modification, amendment or discharge of this Agreement shall be valid unless the same is in writing and signed by all parties hereto. Failure of any party at any time to enforce any provisions of this Agreement or any rights or to exercise any elections shall in no way be considered to be a waiver of such provisions, rights or elections and shall in no way affect the validity of this Agreement. The exercise by any party of any of its rights or any of its elections under this Agreement shall not preclude or prejudice such party from exercising the same or any other right it may have under this Agreement irrespective of any previous action taken.
5.2 Notices . All notices and other communications required or permitted hereunder or necessary or convenient in connection herewith shall be in writing and shall be deemed to have been given when hand delivered or mailed by registered or certified mail as follows (provided that notice of change of address shall be deemed given only when received):
If to the Company, to: TrovaGene, Inc.
11055 Flintkote Avenue
San Diego, CA 92121
If to Executive, to: David Robbins
Or to such other names or addresses as the Company or Executive, as the case may be, shall designate by notice to each other person entitled to receive notices in the manner specified in this Section.
5.3 Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of California.
5.4 Further Assurances . Each party to this Agreement shall execute all instruments and documents and take all actions as may be reasonably required to effectuate this Agreement.
5.5 Severability . Should any one or more of the provisions of this Agreement or of any agreement entered into pursuant to this Agreement be determined to be illegal or unenforceable, then such illegal or unenforceable provision shall be modified by the proper court or arbitrator to the extent necessary and possible to make such provision enforceable, and such modified provision and all other provisions of this Agreement and of each other agreement entered into pursuant to this Agreement shall be given effect separately from the provisions or portion thereof determined to be illegal or unenforceable and shall not be affected thereby.
5.6 Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of Executive and the assigns and successors of Company, but neither this Agreement nor any rights or obligations hereunder shall be assignable or otherwise subject to hypothecation by Executive (except by will or by operation of the laws of intestate succession or by Executive notifying the Company that cash payment be made to an affiliated investment partnership in which Executive is a control person) or by Company, except that Company may assign this Agreement to any successor (whether by merger, purchase or otherwise) to all or substantially all of the stock, assets or businesses of Company, if such successor expressly agrees to assume the obligations of Company hereunder.
5.7 Entire Agreement . This Agreement supersedes all prior agreements and understandings between the parties, oral or written. No modification, termination or attempted waiver shall be valid unless in writing, signed by the party against whom such modification, termination or waiver is sought to be enforced.
5.8 Counterparts; Facsimile . This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original, and all of which taken together shall constitute one and the same instrument. This Agreement may be executed by facsimile with original signatures to follow.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have executed this Agreement as of the date first written above.
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TROVAGENE, INC. |
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/s/ Thomas H. Adams |
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Name: |
Thomas H. Adams |
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Chairman |
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/s/ David Robbins |
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David Robbins |
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Executive |
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Exhibit A
Confidentiality Agreement and Inventions Agreement
Exhibit B
Release
Exhibit 10.2
EXECUTIVE AGREEMENT
This Executive Agreement (the “ Agreement ”) is made and entered into effective as of October 4, 2011 (the “ Effective Date ”), by and between Antonius Schuh, Ph.D. (the “ Executive ”) and TrovaGene, Inc., a Delaware corporation (the “ Company ”).
R E C I T A L S
A. WHEREAS, the Company wishes to retain Executive as its Chief Executive Officer; and
B. WHEREAS, Executive is a Managing Partner of Global Source Ventures LLC, an investment firm (together with its successors and assigns, “GSV”), and serves as director, officer and/or consultant of or to various entities; and
C. WHEREAS, in order to provide Executive with the financial security and sufficient encouragement to become retained by the Company, the Board of Directors of the Company (the “ Board ”) believes that it is in the best interests of the Company to provide Executive and GSV, as applicable, with certain engagement terms and severance benefits as set forth herein.
AGREEMENT
In consideration of the mutual covenants herein contained and the engagement of Executive by the Company, the parties agree as follows:
1. Definition of Terms . The following terms referred to in this Agreement shall have the following meanings:
(a) “ Cause ” shall mean any of the following: (i) the commission of an act of fraud, embezzlement or material dishonesty which is intended to result in substantial personal enrichment of Executive in connection with Executive’s engagement with the Company; (ii) Executive’s conviction of, or plea of nolo contendere , to a crime constituting a felony (other than traffic-related offenses); (iii) Executive’s gross negligence that is materially injurious to the Company; (iv) a material breach of Executive’s proprietary information agreement that is materially injurious to the Company; or (v) Executive’s (1) material failure to perform his duties as an officer of the Company, and (2) failure to “cure” any such failure within thirty (30) days after receipt of written notice from the Company delineating the specific acts that constituted such material failure and the specific actions necessary, if any, to “cure” such failure.
(b) “ Change of Control ” shall mean the occurrence of any of the following events:
(i) the date on which any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”)) obtains “beneficial ownership” (as defined in Rule 13d-3 of the Exchange Act) or a pecuniary
interest in fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities (“ Voting Stock ”);
(ii) the consummation of a merger, consolidation, reorganization, or similar transaction involving the Company, other than a transaction: (1) in which substantially all of the holders of the Voting Stock immediately prior to such transaction hold or receive directly or indirectly fifty percent (50%) or more of the voting stock of the resulting entity or a parent company thereof, in substantially the same proportions as their ownership of the Company immediately prior to the transaction; or (2) in which the holders of the Company’s capital stock immediately before such transaction will, immediately after such transaction, hold as a group on a fully diluted basis the ability to elect at least a majority of the authorized directors of the surviving entity (or a parent company); or
(iii) there is consummated a sale, lease, license or disposition of all or substantially all of the consolidated assets of the Company and its subsidiaries, other than a sale, lease, license or disposition of all or substantially all of the consolidated assets of the Company and its subsidiaries to an entity, fifty percent (50%) or more of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale, lease, license or disposition.
(c) “ Disability ” means totally and permanently disabled as defined in the Company’s disability benefit plan applicable to senior executive officers as in effect on the date thereof.
(d) “ Good Reason ” shall mean without Executive’s express written consent any of the following: (i) a significant reduction of Executive’s duties, position or responsibilities relative to Executive’s duties, position or responsibilities in effect immediately prior to such reduction, or the removal of Executive from such position, duties or responsibilities; (ii) a reduction of Executive’s compensation as in effect immediately prior to such reduction; (iii) the relocation of Executive to a facility or a location more than twenty-five (25) miles from the Company’s then current principal location; (iv) a material breach by the Company of this Agreement or any other agreement with Executive that is not corrected within fifteen (15) days after written notice from Executive (or such earlier date that the Company has notice of such material breach); or (v) the failure of the Company to obtain the written assumption of this Agreement by any successor contemplated in Section 11 below.
2. Duties and Scope of Position . During the Engagement Term (as defined below), Executive will serve as Chief Executive Officer of the Company, reporting to the Board of Directors, and assuming and discharging such responsibilities as are commensurate with Executive’s position. During the Engagement Term, Executive will provide services in a manner that will faithfully and diligently further the business of the Company and will devote a substantial portion of Executive’s business time, attention and energy thereto. Notwithstanding the foregoing, nothing in this Agreement shall restrict Executive from managing his investments, other business affairs and other matters or serving on civic or charitable boards or committees, provided that no such activities unduly interfere with the performance of his obligations under
this Agreement, provided that Executive shall honor the non competition and non solicitation terms as per Section 14 below. During the Engagement Term, Executive agrees to disclose to the Company those other companies of which he is a member of the Board of Directors, an executive officer, or a consultant.
3. Term. The term of Executive’s engagement under this Agreement shall commence as of October 4, 2011 (the “Effective Date”) and shall continue until October 4, 2015, unless earlier terminated in accordance with Section 8 hereof. The term of Executive’s engagement shall be automatically renewed for successive one (1) year periods until the Executive or the Company delivers to the other party a written notice of their intent not to renew the “Engagement Term,” such written notice to be delivered at least sixty (60) days prior to the expiration of the then-effective “Engagement Term as that term is defined below. The period commencing as of the Effective Date and ending October 4, 2015 or such later date to which the term of Executive’s engagement under the Agreement shall have been extended is referred to herein as the “ Engagement Term “ and the end of the Engagement Term is referred to herein as the “Expiration Date.”
4. Base Compensation. The Company shall pay to Executive or assigns a base compensation (the “ Base Compensation ”) of $275,000 per year (prorated for any partial year), payable in equal bimonthly installments directly to Executive’s partnership, GSV, unless otherwise specified in writing by Executive to the Company. In addition, each year during the term of this Agreement, Executive shall be reviewed for purposes of determining the appropriateness of increasing his Base Compensation hereunder. Executive bears responsibility for payment of payroll taxes and similar assessments as required by law. Executive agrees that no benefits will be provided to the Executive by the Company. For purposes of the Agreement, the term “ Base Compensation ” as of any point in time shall refer to the Base Compensation as adjusted pursuant to this Section 4.
5. Target Bonus. In addition to his Base Compensation, Executive shall be given the opportunity to earn an annual bonus (the “ Bonus ”) of up to 50% of Base Compensation, payable to GSV unless otherwise directed in writing by the Executive to the Company. The Bonus shall be earned by Executive upon the Company’s achievement of performance milestones for a fiscal year (in each case, the “ Target Year ”) to be mutually agreed upon by the Executive and the Board or its compensation committee. In the event Executive is retained by the Company for less than the full Target Year for which a Bonus is earned pursuant to this Section 5, Executive shall be entitled to receive a pro-rated Bonus for such Target Year based on the number of days Executive was retained by the Company during such Target Year divided by 365. The determinations of the Board or its compensation committee with respect to Bonuses will be final and binding.
6. Stock Option Grant. 3,800,000 non-qualified stock options (the “Initial Options”) shall be granted to Executive under SEC rule 701 and pursuant to the Company’s stock option plan upon commencement of the Engagement Term. Such options will have an exercise price equal to $0.50 per share and will vest annually in equal amounts over a period of 4 years, with 950,000 shares vesting on each one-year anniversary of the date of grant. The option agreement will include (i) a Change of Control provision whereby as of immediately prior to a Change of Control of the Company, all of the stock options will vest and become fully exercisable and a
termination provision whereby in the event Executive’s engagement is terminated voluntarily or for Cause by the Company, the unvested stock options will expire forthwith but if such engagement is terminated for any other reason (except death or Disability), the options may not be exercised at any time later than six (6) months after such termination of Executive’s engagement, and (ii) a provision that permits Executive to freely transfer the Initial Options to GSV or any other affiliate of Executive at any time. If Executive’s engagement is terminated by death or Disability, the options may be exercised within a period of one (1) year after such termination.
7. Realization Bonus . In addition to the Bonus payable under Section 5 hereof, Executive shall be entitled to either one of the following bonus events, whichever occurs earlier:
(a) In the event that prior to the Expiration Date, for a period of 90 consecutive trading days, the market price of the Company’s common stock is $1.25 per share (as adjusted for stock dividends, stock splits, recapitalizations and the like) or more and the value of the Company’s common stock daily trading volume is $125,000 or more, the Company shall pay or issue Executive (or to GSV, if the Executive instructs the Company in writing) a bonus in an amount of $3,466,466, which shall be payable by the Company in either cash or SEC registered common stock, or a combination thereof, as mutually agreed upon between Executive and the Company. Any stock portion of such Realization Bonus may be deferred at Executive’s discretion.
(b) In the event that prior to the Expiration Date, the Company engages in a Change of Control, where the Per Share Enterprise Value (as defined below) equals or exceeds $1.25 per share (as adjusted for stock dividends, stock splits, recapitalizations and the like), the Company shall pay GSV (or to the Executive, if the Executive instructs the Company in writing) a bonus in an amount determined by multiplying the Enterprise Value (as defined below) by 4.0%. In the event in a Change of Control, the Per Share Enterprise Value exceeds a minimum value of $2.40 per share, $3.80 per share or $5.00 per share (in each case, as adjusted for stock dividends, stock splits, recapitalizations and the like), Executive shall accrue a bonus in an amount determined by multiplying the incremental Enterprise Value by 2.5%, 2.0% or 1.5%, respectively.
The “ Per Share Enterprise Value ” is defined as the Enterprise Value divided by 69,329,308 shares. The “ Enterprise Value ” in the case of a Change in Control in which consideration is payable to the Company in respect of its assets or business, shall mean the total cash and non-cash (including, without limitation, the assumption of debt) consideration received by the Company or in the case of a Change in Control in which consideration is payable to the Company’s equityholders, the total cash and non-cash (including, without limitation, the assumption of debt) consideration payable to the Company’s equityholders. “Enterprise Value” shall also include, if applicable, any cash or non-cash consideration payable to the Company or to the Company’s equityholders on a contingent, earnout or deferred basis. To the extent that any consideration in a transaction is not received in cash upon the consummation of the Change in Control, the value of such non-cash consideration for purposes of calculating the Enterprise Value will be determined by the independent Board of Directors of the Company prior to the Change in Control in good faith in consultation with an independent investment bank or financial
advisor retained by Board of Directors in connection with the Change in Control transaction. In the event that less than 100% of the stock or assets of the Company is purchased in the Change in Control transaction, the Enterprise Value shall be extrapolated from the percentage of the Company’s equity securities, capital stock or assets impacted in such Change in Control transaction to determine if the applicable threshold was exceeded, but the transaction fee shall be calculated based on the actual consideration received by the Company or shareholders, as the case may be. A Realization Bonus will not be paid in a Change in Control in which neither the Company nor its equityholders receives consideration either upon, or in connection with, the occurrence or consummation of the event resulting in a Change in Control.
8. Termination .
(a) Termination by the Company . Subject to the obligations of the Company set forth in Section 8, the Company may terminate Executive’s engagement at any time and for any reason (or no reason), and with or without Cause, and without prejudice to any other right or remedy to which the Company or Executive may be entitled at law or in equity or under this Agreement. Notwithstanding the foregoing, after ten (10) months from the Effective Date, in the event the Company desires to terminate the Executive’s engagement without Cause, the Company shall give the Executive not less than sixty (60) days advance written notice. Executive’s engagement shall terminate automatically in the event of his death.
(b) Termination by Executive. Executive may voluntarily terminate the Engagement Term upon sixty (60) days’ prior written notice for any reason or no reason.
(c) Termination for Death or Disability . Subject to the obligations of the Company set forth in Section 9, Executive’s engagement shall terminate automatically upon his death. Subject to the obligations of the Company set forth in Section 9, in the event Executive is unable to perform his duties as a result of Disability during the Engagement Term, the Company shall have the right to terminate the engagement of Executive by providing written notice of the effective date of such termination.
9. Payments Upon Termination of Engagement .
(a) Termination for Cause, Death or Disability or Termination by Executive . In the event that Executive’s engagement hereunder is terminated during the Engagement Term by the Company for Cause pursuant to Section 8(a), as a result of Executive’s death or Disability pursuant to Section 8(c), or voluntarily by Executive, the Company shall compensate Executive (or in the case of death, Executive’s estate) as follows: on the date of termination the Company shall pay GSV (or to the Executive, if the Executive instructs the Company in writing) a lump sum amount equal to (i) any portion of unpaid Base Compensation then due for periods prior to the effective date of termination; (ii) any Bonus and/or Realization Bonus earned and not yet paid through the date of termination; and (iii) within 2-1/2 months following submission of proper expense reports by Executive or Executive’s estate, all expenses reasonably and necessarily incurred by Executive in connection with the business of the Company prior to the date of termination.
(b) Termination by Company Without Cause . In the event that Executive’s engagement is terminated during the Engagement Term by the Company without Cause pursuant to Section 8(a), the Company shall compensate Executive as follows:
(i) on the date of termination, the Company shall pay GSV (or to the Executive, if the Executive instructs the Company in writing) a lump sum amount equal to (A) any portion of unpaid Base Compensation then due for periods prior to the effective date of termination; (B) any Bonus and/or Realization Bonus earned and not yet paid through the date of termination; and (C) within 2-1/2 months following submission of proper expense reports by Executive, all expenses reasonably and necessarily incurred by Executive in connection with the business of the Company prior to the date of termination; and, provided that Executive executes a written release, substantially in the form attached hereto as Exhibit “B”, of any and all claims against the Company and all related parties with respect to all matters arising out of Executive’s engagement by the Company, (a) for a period of ten (10) months after the Effective Date, the Company shall pay GSV (or to the Executive, if the Executive instructs the Company in writing) the Base Compensation for three (3) months from the date of termination and (b) thereafter, the Company shall pay GSV (or to the Executive, if the Executive instructs the Company in writing) the Base Compensation for six (6) months from the date of termination. In the event Executive’s engagement is terminated without Cause and a Change of Control of the Company occurs within six (6) months of such termination, Executive also shall be entitled to the severance benefits set forth under Section 9(c).
(c) Termination in the Context of a Change of Control . Notwithstanding anything in Section 9(a) or 9(b) to the contrary, in the event of Executive’s termination of engagement with the Company either (i) by the Company without Cause at any time within six (6) months prior to the consummation of a Change of Control if, prior to or as of such termination, a Change of Control transaction was Pending (as defined in Section 9(d) below) at any time during such six (6)-month period, (ii) by Executive for Good Reason at any time within twelve (12) months after the consummation of a Change of Control, or (iii) by the Company without Cause at any time within twelve (12) months after the consummation of a Change of Control, then, Executive shall be entitled to the following payments and other benefits:
(i) on the date of termination (except as specified in clause (D)), the Company shall pay GSV (or to the Executive, if the Executive instructs the Company in writing) a lump sum amount equal to (A) any portion of unpaid Base Compensation then due for periods prior to the effective date of termination; (B) any Bonus and/or Realization Bonus earned and not yet paid through the date of termination; and (D) within 2-1/2 months following submission of proper expense reports by Executive, all expenses reasonably and necessarily incurred by Executive in connection with the business of the Company prior to the date of termination;
(ii) on the date of termination the Company shall pay to GSV (or to the Executive, if the Executive instructs the Company in writing) a lump sum amount equal to twelve (12) months of Executive’s Base Compensation then in effect as of the day of termination;
(iii) notwithstanding any provision of any stock incentive plan, stock option agreement, realization bonus, restricted stock agreement or other agreement relating to capital stock of the Company, all of the shares that are then unvested shall immediately vest and, with respect to all options, warrants and other convertible securities of the Company beneficially held by Executive, become fully exercisable for (A) a period of six months following the date of termination only if at the time of such termination there is a Change of Control transaction Pending (as defined in Section 9(d) below) or (B) if clause (A) does not apply, then such period of time set forth in the agreement evidencing the security; and
(iv) Severance benefits under this Section 9(c) and Section 9(b) above shall be mutually exclusive and severance under one such section shall prohibit severance under the other.
(d) Definition of “Pending.” For purposes of Section 9(c), a Change of Control transaction shall be deemed to be “ Pending ” each time any of the following circumstances exist: (A) the Company and a third party have entered into a confidentiality agreement that has been signed by a duly-authorized officer of the Company and that is related to a potential Change of Control transaction; or (B) the Company has received a written expression of interest from a third party, including a binding or non-binding term sheet or letter of intent, related to a potential Change of Control transaction.
10. Indemnification . (a) Executive agrees that if the Company is made a party, or is threatened to be made a party, to any action, suit or proceeding, whether civil, criminal, administrative or investigative, by a governmental or regulatory body (a “Proceeding”), with respect to payroll, withholding, benefits or related matters pursuant to this Agreement, the Company shall be indemnified and held harmless by Executive against all cost, expense, liability and loss (including, without limitation, reasonable attorney’s fees, judgments, fines, penalties, taxes and amounts paid or to be paid in settlement) reasonably incurred or suffered by the Company. The Executive shall advance to the Company all reasonable costs and expenses incurred by it in connection with a Proceeding within 20 days after receipt by the Executive of a written request, with appropriate documentation, for such advance.
(b) Promptly after receipt by the Company of notice of any claim or the commencement of any action or proceeding with respect to which the Company is entitled to indemnity hereunder, the Company shall notify the Executive in writing of such claim or the commencement of such action or proceeding, and the Executive shall (i) assume the defense of such action or proceeding, (ii) employ counsel reasonably satisfactory to the Company and (iii) pay the reasonable fees and expenses of such counsel. Notwithstanding the preceding sentence, the Company shall be entitled to employ counsel separate from counsel for the Executive and from any other party in such action if the Company reasonably determines that a conflict of interest exists, or may exist, which makes representation by counsel chosen by the Executive not advisable. In such event, the Executive shall pay, to the extent permitted by law, the reasonable fees and disbursements of such separate counsel for the Company.
11. Successors . Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets or otherwise pursuant to a Change of Control shall assume the Company’s obligations under this Agreement and agree expressly in writing to perform the Company’s obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term “Company” shall include any successor to the Company’s business and/or assets (including any parent company to the Company), whether or not in connection with a Change of Control, which becomes bound by the terms of this Agreement by operation of law or otherwise.
12. Notices . Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered (if to the Company, addressed to its Secretary at the Company’s principal place of business on a non-holiday weekday between the hours of 9 a.m. and 5 p.m.; if to Executive, via personal service to his last known residence) or three business days following the date it is mailed by U.S. registered or certified mail, return receipt requested and postage prepaid.
13. Confidential Information. Executive recognizes and acknowledges that by reason of Executive’s engagement by and service to the Company before, during and, if applicable, after the Engagement Term, Executive will have access to certain confidential and proprietary information relating to the Company’s business, which may include, but is not limited to, trade secrets, trade “know-how,” product development techniques and plans, formulas, customer lists and addresses, financing services, funding programs, cost and pricing information, marketing and sales techniques, strategy and programs, computer programs and software and financial information (collectively referred to herein as “ Confidential Information ”). Executive acknowledges that such Confidential Information is a valuable and unique asset of the Company and Executive covenants that he will not, unless expressly authorized in writing by the Company, at any time during the course of Executive’s engagement use any Confidential Information or divulge or disclose any Confidential Information to any person, firm or corporation except in connection with the performance of Executive’s duties for and on behalf of the Company and in a manner consistent with the Company’s policies regarding Confidential Information. Executive also covenants that at any time after the termination of such engagement, directly or indirectly, he will not use any Confidential Information or divulge or disclose any Confidential Information to any person, firm or corporation, unless such information is in the public domain through no fault of Executive or except when required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order Executive to divulge, disclose or make accessible such information. All written Confidential Information (including, without limitation, in any computer or other electronic format) which comes into Executive’s possession during the course of Executive’s engagement shall remain the property of the Company. Unless expressly authorized in writing by the Company, Executive shall not remove any written Confidential Information from the Company’s premises, except in connection with the performance of Executive’s duties for and on
behalf of the Company and in a manner consistent with the Company’s policies regarding Confidential Information. Upon termination of Executive’s engagement, the Executive agrees to immediately return to the Company all written Confidential Information (including, without limitation, in any computer or other electronic format) in Executive’s possession. As a condition of Executive’s engagement with the Company and in order to protect the Company’s interest in such proprietary information, the Company shall require Executive’s execution of a Confidentiality Agreement and Inventions Agreement in the form attached hereto as Exhibit “A” , and incorporated herein by this reference
14. Non-Competition; Non-Solicitation .
(a) Non-Compete . The Executive hereby covenants and agrees that during the Engagement Term and for a period of one year following the Expiration Date, the Executive will not, without the prior written consent of the Company, directly or indirectly, on his own behalf or in the service or on behalf of others, whether or not for compensation, engage in any business activity, or have any interest in any person, firm, corporation or business, through a subsidiary or parent entity or other entity (whether as a shareholder, agent, joint venturer, security holder, trustee, partner, Executive, creditor lending credit or money for the purpose of establishing or operating any such business, partner or otherwise) with any Competing Business in the Covered Area. For the purpose of this Section 14(a), (i) “ Competing Business ” means any medical diagnostic company, any contract manufacturer, any research laboratory or other company or entity (whether or not organized for profit) that has, or is seeking to develop, one or more products or therapies that is related to trans renal DNA and (ii) “ Covered Area ” means all geographical areas of the United States and other foreign jurisdictions where Company then has offices and/or sells its products directly or indirectly through distributors and/or other sales agents. Notwithstanding the foregoing, the Executive may own shares of companies whose securities are publicly traded, so long as ownership of such securities do not constitute more than one percent (1%) of the outstanding securities of any such company.
(b) Non-Solicitation . The Executive further agrees that during the Engagement Term and for a period of one (1) year from the Expiration Date, the Executive will not divert any business of the Company and/or its affiliates or any customers or suppliers of the Company and/or the Company’s and/or its affiliates’ business to any other person, entity or competitor, or induce or attempt to induce, directly or indirectly, any person to leave his or her employment with the Company and/or its affiliates; provided, however, that the foregoing provisions shall not apply to a general advertisement or solicitation program that is not specifically targeted at such employees.
(c) Remedies . The Executive acknowledges and agrees that his obligations provided herein are necessary and reasonable in order to protect the Company and its affiliates and their respective business and the Executive expressly agrees that monetary damages would be inadequate to compensate the Company and/or its affiliates for any breach by the Executive of his covenants and agreements set forth herein. Accordingly, the Executive agrees and acknowledges that any such violation or threatened violation of this Section 14 will cause irreparable injury to the Company and that, in addition to any other remedies that may be available, in law, in equity or otherwise, the Company and its affiliates shall be entitled to obtain
injunctive relief against the threatened breach of this Section 14 or the continuation of any such breach by the Executive without the necessity of proving actual damages.
15. Engagement Relationship . Executive’s engagement with the Company will be “at will,” meaning that either Executive or the Company may terminate Executive’s engagement at any time and for any reason, with or without Cause or Good Reason. Any contrary representations that may have been made to Executive are superseded by this Agreement. This is the full and complete agreement between Executive and the Company on this term. Although Executive’s duties, title, compensation and benefits, as well as the Company’s personnel policies and procedures, may change from time to time, the “at will” nature of Executive’s engagement may only be changed in an express written agreement signed by Executive and a duly authorized officer of the Company (other than Executive).
16. Miscellaneous Provisions .
(a) Modifications; No Waiver . No provision of this Agreement may be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer of the Company (other than Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.
(b) Entire Agreement . This Agreement supersedes all prior agreements and understandings between the parties, oral or written. No modification, termination or attempted waiver shall be valid unless in writing, signed by the party against whom such modification, termination or waiver is sought to be enforced.
(c) Choice of Law . The validity, interpretation, construction and performance of this Agreement shall be governed by the internal substantive laws, but not the conflicts of law rules, of the State of California.
(d) Severability . The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect.
(e) Counterparts . This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, and may be delivered by facsimile or other electronic means, but all of which shall be deemed originals and taken together will constitute one and the same Agreement.
(f) Headings . The headings of the Articles and Sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof.
(g) Construction of Agreement . In the event of a conflict between the text of the Agreement and any summary, description or other information regarding the Agreement, the text of the Agreement shall control.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.
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COMPANY: |
TrovaGene, Inc. |
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By: |
/s/ Thomas H. Adams |
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Name: |
Thomas H. Adams |
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Title: |
Chairman |
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EXECUTIVE: |
/s/ Antonius Schuh |
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Antonius Schuh, Ph.D. |
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Exhibit 14
TROVAGENE, INC.
AMENDED AND RESTATED
CODE OF BUSINESS CONDUCT AND ETHICS
TrovaGene, Inc. (the “Company”) has adopted the following Code of Business Conduct and Ethics (this “Code”) for directors, executive officers and employees of the Company. This Code is intended to focus the Board executive officers and employees on areas of ethical risk, provide guidance to directors, executive officers and employees to help them recognize and deal with ethical issues, provide mechanisms to report unethical conduct, and help foster a culture of honesty and accountability. Each director, executive officer and employee must comply with the letter and spirit of this Code.
No code or policy can anticipate every situation that may arise. Accordingly, this Code is intended to serve as a source of guiding principles for directors, executive officers and employees. Directors, executive officers and employees are encouraged to bring questions about particular circumstances that may implicate one or more of the provisions of this Code to the attention of the Chairman of the Audit Committee, who may consult with inside or outside legal counsel as appropriate.
1. Maintain Fiduciary Duties.
Directors and executive officers must be loyal to the Company and must act at all times in the best interest of the Company and its shareholders and subordinate self-interest to the corporate and shareholder good. Directors and executive officers should never use their position to make a personal profit. Directors and executive officers must perform their duties in good faith, with sound business judgment and with the care of a prudent person.
2. Conflict of Interest.
A “conflict of interest” occurs when the private interest of a director, executive officer or employee interferes in any way, or appears to interfere, with the interests of the Company as a whole. Conflicts of interest also arise when a director, executive officer or employee, or a member of his or her family(1), receives improper personal benefits as a result of his or her position as a director, executive officer or employee of the Company. Loans to, or guarantees of the obligations of, a director, executive officer or employee, or a member of his or her family, may create conflicts of interest.
Directors and executive officers must avoid conflicts of interest with the Company.
(1) The NYSE Amex Company Guide Sec. 803 defines “immediate family member” to include a person’s spouse, parents, children, siblings, mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-law, and anyone who resides in such person’s home (other than domestic employees)..
Any situation that involves, or may reasonably be expected to involve, a conflict of interest with the Company must be disclosed immediately to the Chairman of the Board.
This Code does not attempt to describe all possible conflicts of interest which could develop. Some of the more common conflicts from which directors and executive offices must refrain, however, are set out below.
· Relationship of Company with third-parties. Directors, executive officers and employees may not engage in any conduct or activities that are inconsistent with the Company’s best interests or that disrupt or impair the Company’s relationship with any person or entity with which the Company has or proposes to enter into a business or contractual relationship.
· Compensation from non-Company sources. Directors, executive officers and employees may not accept compensation, in any form, for services performed for the Company from any source other than the Company.
· Gifts. Directors, executive officers and employees and members of their families may not offer, give or receive gifts from persons or entities who deal with the Company in those cases where any such gift is being made in order to influence the actions of a director as member of the Board or the actions of an executive officer as an officer of the Company, or where acceptance of the gifts would create the appearance of a conflict of interest.
3. Corporate Opportunities.
Directors, executive officers and employees owe a duty to the Company to advance its legitimate interests when the opportunity to do so arises. Directors, executive officers and employees are prohibited from: (a) taking for themselves personally opportunities that are discovered through the use of corporate property, information or the director’s or executive officer’s position; (b) using the Company’s property, information, or position for personal gain; or (c) competing with the Company, directly or indirectly, for business opportunities, provided, however, if the Company’s disinterested directors determine that the Company will not pursue an opportunity that relates to the Company’s business, a director, executive officer or employee may do so.
4. Confidentiality.
Directors, executive officers and employees must maintain the confidentiality of information entrusted to them by the Company or its customers, and any other confidential information about the Company that comes to them, from whatever source, in their capacity as a director, executive officer or employee, except when disclosure is authorized or required by laws or regulations. Confidential information includes all non-public information that might be of use to competitors, or harmful to the Company or its customers, if disclosed.
5. Protection and Proper Use of Company Assets.
Directors, executive officers and employees must protect the Company’s
assets and ensure their efficient use. Theft, loss, misuse, carelessness and waste of assets have a direct impact on the Company’s profitability. Directors, executive officers and employees must not use Company time, employees, supplies, equipment, tools, buildings or other assets for personal benefit without prior authorization from the Chairman of the Corporate Governance/Nominating Committee or as part of a compensation or expense reimbursement program available to all directors or executive officers.
6. Fair Dealing.
Directors, executive officers and employees shall deal fairly and directors and executive officers shall oversee fair dealing by employees and officers with the Company’s directors, officers, employees, customers, suppliers and competitors. None should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other unfair dealing practices.
7. Compliance with Laws, Rules and Regulations.
Directors and executive officers shall comply, and oversee compliance by employees, officers and other directors, with all laws, rules and regulations applicable to the Company, including insider-trading laws. Transactions in Company securities are governed by Company Policy entitled “Insider Trading Policy.”
8. Accuracy of Records.
The integrity, reliability and accuracy in all material respects of the Company’s books, records and financial statements is fundamental to the Company’s continued and future business success. No director, executive officer or employee may cause the Company to enter into a transaction with the intent to document or record it in a deceptive or unlawful manner. In addition, no director, executive officer or employee may create any false or artificial documentation or book entry for any transaction entered into by the Company. Similarly, executive officers and employees who have responsibility for accounting and financial reporting matters have a responsibility to accurately record all funds, assets and transactions on the Company’s books and records.
9. Quality of Public Disclosures.
The Company is committed to providing its shareholders with information about its financial condition and results of operations as required by the securities laws of the United States. It is the Company’s policy that the reports and documents it files with or submits to the Securities and Exchange Commission, and its earnings releases and similar public communications made by the Company, include fair, timely and understandable disclosure. Executive officers and employees who are responsible for these filings and disclosures, including the Company’s principal executive, financial and accounting officers, must use reasonable judgment and perform their responsibilities honestly, ethically and objectively in order to ensure that this disclosure policy is fulfilled. The Company’s senior management are primarily responsible for monitoring the Company’s public disclosure.
10. Waivers and Amendments of the Code of Business Conduct and Ethics.
No waiver of any provisions of the Code for the benefit of a director or an executive officer (which includes without limitation, for purposes of this Code, the Company’s principal executive, financial and accounting officers) shall be effective unless (i) approved by the Board of Directors or, if permitted, a committee thereof, and (ii) if applicable, such a waiver is promptly disclosed to the Company’s shareholders in accordance with applicable United States securities laws and/or the rules and regulations of the exchange or system on which the Company’s shares are traded or quoted, as the case may be.
Any waivers of this Code for the other employees may be made by the Board of Directors, or, if permitted, a committee thereof.
All amendments to this Code must be approved by the Board of Directors or a committee thereof and, if applicable, must be promptly disclosed to the Company’s shareholders in accordance with applicable United States securities laws and/or the rules and regulations of the exchange or system on which the Company’s shares are traded or quoted, as the case may be.
11. Encouraging the Reporting of any Illegal or Unethical Behavior.
Directors and executive officers should promote ethical behavior and take steps to ensure the Company (a) encourages employees to talk to supervisors, managers and other appropriate personnel when in doubt about the best course of action in a particular situation; (b) encourages employees to report violations of laws, rules or regulations to appropriate personnel; and (c) informs employees that the Company will not permit retaliation for reports made in good faith.
Any executive officer or employee who in good faith reports a suspected violation under this Code by the Company, or its agents acting on behalf of the Company, or who in good faith raises issues or concerns regarding the company’s business or operations, may not be fired, demoted, reprimanded or otherwise harmed for, or because of, the reporting of the suspected violation, issues or concerns, regardless of whether the suspected violation involves the executive officer or employee, the executive officer’s or employee’s supervisor or senior management of the company.
In addition, any executive officer or employee who in good faith reports a suspected violation under this Code which the executive officer or employee reasonably believes constitutes a violation of a federal statute by the Company, or its agents acting on behalf of the Company, to a federal regulatory or law enforcement agency, may not be reprimanded, discharged, demoted, suspended, threatened, harassed or in any manner discriminated against in the terms and conditions of the executive officer’s or employee’s employment for, or because of, the reporting of the suspected violation, regardless of whether the suspected violation involves the executive officer or employee, the executive officer’s or employee’s supervisor or senior management of the company.
12. Communication of Code.
All directors, executive officers and employees will be supplied with a copy of this
Code upon beginning service at the Company. Updates of this Code will be provided from time to time. A copy of this Code is also available to all directors, executive officers and employees by requesting one from the human resources department or by accessing the Company’s website at www.trovagene.com.
13. Failure to Comply; Compliance Procedures.
A failure by any director or executive officer to comply with the laws or regulations governing the Company’s business, this Code or any other Company policy or requirement may result in disciplinary action, and, if warranted, legal proceedings.
Directors and executive officers should communicate any suspected violations of this Code promptly to the Chairman of the Audit Committee. The Chairman of our Audit Committee is currently John Brancaccio and he can be reached at 646-367-5903 and/or JBrancaccio@acctec.net.
Violations will be investigated by the Board or by a person or persons designated by the Board and appropriate action will be taken in the event of any violations of this Code.
ACKNOWLEDGEMENT
I acknowledge that I have reviewed and understand TrovaGene, Inc’s Code of Business Conduct and Ethics (the “Code”) and agree to abide by the provisions of the Code.
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Exhibit 21
Xenomics, Inc., a California corporation