Trovagene: For, Against Or Abstain?

Oct.24.12 | About: TrovaGene, Inc. (TROV)

Several days ago, Trovagene (NASDAQ:TROV) filed a Form 14A for its December 10 shareholders meeting. Most companies' annual meetings are rather boring affairs. Shareholders vote on directors' terms, executive compensation plans, employee stock schemes, approve the accounting firm for the coming year, etc. Most of time, management gets what it wants. After the executive team fields the usual softball questions from a few individual shareholders, they tally the votes, bang the gavel and head home.

Trovagene is not a typical company, though. If you read my previous articles and/or blog posts, you know that I perceive it to be purely a hype stock. It is a sexy story (transrenal nucleic acid testing) with little behind it but some enterprising promoters and a bit of recent money.

Considering TROV's entertaining profile, I decided to take a closer look at its proxy statement. Unsurprisingly, I noticed several interesting items:

1. Shareholders will elect six directors. A summary bio of each director begins on page six. Depending on the person, the bios include employment history going back as far as the early 1980's. Presumably, only the relevant work is included. Fair enough. One director's bio seems a bit unusual due to omission of, what I consider to be, very relevant work history.

Gabriele M. Cerrone's backgrounder (p7) curiously omits his role as Co-Chairman of Xenomics, Inc. (Trovagene's former self) from July 8, 2005 until at least 2007 when the company assumed its current moniker. This would seem to be pertinent information when considering him for a board seat. His work history is detailed as far back as 1999. Why is this missing? This information is also curiously absent from Trovagene's 5/29/12 prospectus.

Mr. Cerrone is the person who orchestrated the reverse merger with Used Kar Parts and Xenomics back in 2004. Reverse mergers are questionable maneuvers employed to avoid the regulatory (disclosure) requirements of original exchange listings. Predictably, Xenomics' history is quite odious, characterized by its crowning achievement, the 6/14/06 secondary offering where most of the shareholders cashed out concurrent with the restatement of its financials as mandated by the SEC.

I certainly assume that the shareholders are aware of Mr. Cerrone's background. There is no credible reason to exclude it from the 14A. I wonder why it was omitted?

2. Mr. Cerrone orchestrated the Etherogen acquisition on 8/6/10. On page 17 under "Certain Relationships and Related Transactions", it states that Trovagene issued 2,043,797 shares of common stock to Etherogen's shareholders (Mr. Cerrone received 300,000 shares) representing a then-current value of $2,771,389. Trovagene accounted for the transaction as an "acquisition of assets". Incredibly, Trovagene then states that the assets purchased were "de minimus" or minimal. They assumed a note that was some sort of intangible asset related to an unnamed patent. They assigned a value of $104,700 to this intangible. The remaining $2,666,689 (TROV's amount is $200 more) was designated as "the excess of the fair value of the consideration issued over the fair value of the net assets acquired". This sounds like goodwill. Trovagene, however, recorded the premium as "purchased in process research and development expense-related party". I am not sure exactly what this means but the transaction looks identical to the MultiGEN acquisition where Trovagene purchased a business that was not really a business. It does not appear that TROV bought anything of value. It is another chimera.

Trovagene is nothing if not fun to follow. I consider myself well informed in most matters financial, but I have a difficult time seeing its rationale in some of its maneuvers. It issues stock to acquire businesses with no real assets. It all seems a bit malodorous.

3. Under "Employment And Other Agreements" on page 16, TROV explains Dr. Shuh's employment agreement. His base salary as CEO is $275,000. This explains where some of the $10M capital raise is going because Dr. Shuh's 2011 salary was only ~$57k. More interestingly, though, is the codicil where he will receive a $3.47M bonus if TROV's stock trades above $7.50 for 90 consecutive trading days supported by a daily trading volume of at least 20,833. The average daily volume for TROV over the last 90 days has been ~60k shares so the volume requirement should not be an issue. Achieving the price target, though, will require more "marketing communications". The bullish press releases should continue unabated.

As I stated in my article, Trovagene: Technology in a Cup?, hype has a typical life of 12 - 24 months. TROV is approximately six months into the cycle so the future should be bullish through 2013. I also believe that if management executes its promotional plan well, then a market cap of $200M is possible. This equates to a share price, assuming no dilution, of ~$16. I think that a more realistic price target is $7.50 because it aligns with Dr. Shuh's employment agreement. If the price reaches this level, which it should, then pay close attention to any selling by insiders. If the selling ramps up, then individual investors should consider exiting.

And, lastly, if you see a secondary offering whereby many shareholders are selling (like Xenomics in '06) then take heed. Longs will not get a better signal to exit.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.