Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark One)
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from             to            
 
COMMISSION FILE NUMBER 001-35558
 
TROVAGENE, INC.
(Exact Name of registrant as specified in its charter)
Delaware
 
27-2004382
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
11055 Flintkote Avenue, Suite B, San Diego, California
 
92121
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(858) 952-7570
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x   No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer 
o
 
 
Accelerated filer 
o
 
 
 
 
 
 
 
 
 
 
Non-accelerated filer 
o
(Do not check if a smaller reporting company)
 
Smaller reporting company 
x
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
o
 
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o   No  x
 
As of October 31, 2017 , the issuer had 38,106,460 shares of Common Stock issued and outstanding.
 

Table of Contents

TROVAGENE, INC.
 
Table of Contents
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TROVAGENE, INC. 
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
September 30, 2017
 
December 31, 2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
7,434,298

 
$
13,915,094

Short-term investments
—

 
23,978,022

Accounts receivable
178,127

 
100,460

Prepaid expenses and other current assets
939,200

 
956,616

Total current assets
8,551,625

 
38,950,192

Property and equipment, net
3,126,969

 
3,826,915

Other assets
539,309

 
1,173,304

Total Assets
$
12,217,903

 
$
43,950,411

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
675,499

 
$
1,130,536

Accrued expenses
2,620,250

 
4,021,365

Deferred rent
298,213

 
285,246

Current portion of long-term debt (in default)
1,488,041

 
2,360,109

Total current liabilities
5,082,003

 
7,797,256

Long-term debt, less current portion
—

 
14,176,359

Derivative financial instruments—warrants
2,037,712

 
834,940

Deferred rent, net of current portion
1,153,316

 
1,373,717

Total Liabilities
8,273,031

 
24,182,272

 
 
 
 
Commitments and contingencies (Note 9)


 


 
 
 
 
Stockholders’ equity
 
 
 
Preferred stock, $0.001 par value, 20,000,000 shares authorized; 60,600 shares outstanding at September 30, 2017 and December 31, 2016; designated as Series A Convertible Preferred Stock with liquidation preference of $606,000 at September 30, 2017 and December 31, 2016
60

 
60

Common stock, $0.0001 par value, 150,000,000 shares authorized; 38,105,251 and 30,696,791 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
3,811

 
3,070

Additional paid-in capital
174,426,891

 
167,890,984

Accumulated other comprehensive loss
(15,194
)
 
(10,773
)
Accumulated deficit
(170,470,696
)
 
(148,115,202
)
Total stockholders’ equity
3,944,872

 
19,768,139

Total liabilities and stockholders’ equity
$
12,217,903

 
$
43,950,411

 
See accompanying notes to the unaudited condensed consolidated financial statements.

3
Table of Contents

TROVAGENE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Royalties
$
58,779

 
$
47,236

 
$
169,415

 
$
207,869

Diagnostic services
58,119

 
37,978

 
142,482

 
69,558

Clinical research services
6,431

 
3,900

 
8,481

 
35,573

Total revenues
123,329

 
89,114

 
320,378

 
313,000

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues
473,202

 
424,559

 
1,427,831

 
1,143,293

Research and development
1,414,706

 
3,937,398

 
6,676,251

 
11,221,876

Selling and marketing
419,927

 
2,940,862

 
2,442,931

 
9,127,450

General and administrative
3,659,587

 
2,710,782

 
9,915,359

 
9,183,761

Restructuring (benefit) charges
(46,472
)
 
—

 
1,669,526

 
—

Total operating expenses
5,920,950

 
10,013,601

 
22,131,898

 
30,676,380

 
 
 
 
 
 
 
 
Loss from operations
(5,797,621
)
 
(9,924,487
)
 
(21,811,520
)
 
(30,363,380
)
 
 
 
 
 
 
 
 
Net interest expense
(16,473
)
 
(354,993
)
 
(877,741
)
 
(967,522
)
Gain from change in fair value of derivative financial instruments—warrants
1,528,669

 
88,208

 
2,012,747

 
674,834

Loss on extinguishment of debt
—

 
—

 
(1,655,825
)
 
—

Other loss, net
(6,541
)
 
—

 
(4,975
)
 
—

Net loss
(4,291,966
)
 
(10,191,272
)
 
(22,337,314
)
 
(30,656,068
)
 
 
 
 
 
 
 
 
Preferred stock dividend
(6,060
)
 
(6,060
)
 
(18,180
)
 
(18,180
)
 
 
 
 
 
 
 
 
Net loss attributable to common stockholders
$
(4,298,026
)
 
$
(10,197,332
)
 
$
(22,355,494
)
 
$
(30,674,248
)
 
 
 
 
 
 
 
 
Net loss per common share — basic
$
(0.12
)
 
$
(0.34
)
 
$
(0.68
)
 
$
(1.02
)
Net loss per common share — diluted
$
(0.12
)
 
$
(0.34
)
 
$
(0.68
)
 
$
(1.04
)
 
 
 
 
 
 
 
 
Weighted-average shares outstanding — basic
36,465,672

 
30,339,774

 
32,826,306

 
30,018,841

Weighted-average shares outstanding — diluted
36,465,672

 
30,339,774

 
32,826,306

 
30,136,572

 
See accompanying notes to the unaudited condensed consolidated financial statements.


4
Table of Contents

TROVAGENE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net loss
$
(4,291,966
)
 
$
(10,191,272
)
 
$
(22,337,314
)
 
$
(30,656,068
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
  Foreign currency translation loss
(1,544
)
 
(81
)
 
(13,486
)
 
(1,877
)
Unrealized gain or reversal of previous losses on securities available-for-sale
—

 
(7,997
)
 
9,065

 
(2,865
)
Total other comprehensive income (loss)
(1,544
)
 
(8,078
)
 
(4,421
)
 
(4,742
)
 
 
 
 
 
 
 
 
Total comprehensive loss
(4,293,510
)
 
(10,199,350
)
 
(22,341,735
)
 
(30,660,810
)
 
 
 
 
 
 
 
 
Preferred stock dividend
(6,060
)
 
(6,060
)
 
(18,180
)
 
(18,180
)
 
 
 
 
 
 
 
 
Comprehensive loss attributable to common stockholders
$
(4,299,570
)
 
$
(10,205,410
)
 
$
(22,359,915
)
 
$
(30,678,990
)

See accompanying notes to the unaudited condensed consolidated financial statements.


5
Table of Contents

TROVAGENE, INC. 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine Months Ended
September 30,
 
2017
 
2016
Operating activities
 
 
 
Net loss
$
(22,337,314
)
 
$
(30,656,068
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Loss on disposal of assets
28,199

 
—

Impairment loss
485,000

 
—

Depreciation and amortization
956,995

 
693,485

Stock based compensation expense
3,117,364

 
5,942,392

Loss on extinguishment of debt
1,655,825

 
—

Accretion of final fee premium
293,614

 
266,423

Amortization of discount on debt
113,780

 
105,710

Net realized loss on short-term investments
6,400

 
—

Amortization of premiums on short-term investments
9,230

 
61,719

Deferred rent
(207,435
)
 
(133,378
)
Interest income accrued on short-term investments
(90,330
)
 
10,122

Change in fair value of derivative financial instruments—warrants
(2,012,747
)
 
(674,834
)
Changes in operating assets and liabilities:
 
 
 
Decrease in other assets
—

 
2,761

(Increase) decrease in accounts receivable
(77,667
)
 
13,584

Decrease (increase) in prepaid expenses and other current assets
18,230

 
(157,051
)
(Decrease) increase in accounts payable and accrued expenses
(1,908,796
)
 
2,490,137

Net cash used in operating activities
(19,949,652
)
 
(22,034,998
)
 
 
 
 
Investing activities:
 
 
 
Capital expenditures, net
(136,251
)
 
(797,781
)
Maturities of short-term investments
16,431,837

 
—

Purchases of short-term investments
(8,804,604
)
 
(24,451,611
)
Sales of short-term investments
16,434,553

 
—

Net cash provided by (used in) investing activities
23,925,535

 
(25,249,392
)
 
 
 
 
Financing activities:
 
 
 
Proceeds from sales of common stock and warrants, net of expenses
6,634,803

 
2,293,857

Proceeds from exercise of options
—

 
366,966

Borrowings under equipment line of credit
—

 
792,251

Borrowings under long-term debt, net of costs
—

 
7,805,086

Payment upon debt extinguishment
(1,613,067
)
 
—

Repayments of long-term debt
(15,000,000
)
 
(8,896,166
)
Repayments of equipment line of credit
(469,578
)
 
—

Net cash (used in) provided by financing activities
(10,447,842
)
 
2,361,994

Effect of exchange rate changes on cash and cash equivalents
(8,837
)
 
(1,544
)
Net change in cash and equivalents
(6,480,796
)
 
(44,923,940
)
Cash and cash equivalents—Beginning of period
13,915,094

 
67,493,047

Cash and cash equivalents—End of period
$
7,434,298

 
$
22,569,107

 
 
 
 
Supplementary disclosure of cash flow activity:
 
 
 
Cash paid for taxes
$
800

 
$
4,560

Cash paid for interest
$
650,331

 
$
806,228

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Preferred stock dividends accrued
$
18,180

 
$
18,180

Leasehold improvements paid for by lessor
$
—

 
$
1,860,000

 
See accompanying notes to the unaudited condensed consolidated financial statements.

6
Table of Contents

TROVAGENE, INC.  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1. Organization and Basis of Presentation
 
Business Organization and Overview
 
Trovagene, Inc. (“Trovagene” or the “Company”) headquartered in San Diego, California, is a clinical-stage, precision medicine oncology therapeutics company. The Company’s primary focus is to develop oncology therapeutics for improved cancer care, optimizing drug development by leveraging its proprietary Precision Cancer Monitoring® (“PCM”) diagnostic technology in tumor genomics.

Trovagene’s lead drug candidate, PCM-075, is a Polo-like Kinase 1 (“PLK1”) selective adenosine triphosphate (“ATP”) competitive inhibitor. PCM-075 has shown preclinical antitumor activity as a single agent and synergy in combination with more than ten different chemotherapeutics and targeted therapies, such as Zytiga® (abiraterone acetate), Beleodaq® (belinostat), Quizartinib (AC220), a development stage FLT3 inhibitor, and Velcade® (bortezomib) in Acute Myeloid Leukemia (“AML”), metastatic Castration-Resistant Prostate Cancer (“mCRPC”) and other liquid and solid tumor cancers.

PCM-075 was developed to have high selectivity to PLK1, to be administered orally, and to have a relatively short drug half-life of approximately 24 hours compared to other PLK inhibitors. PCM-075 has completed a safety study in patients with advanced metastatic solid tumors with a phase 1b/2 clinical trial in patients with AML underway.
 
Basis of Presentation
 
The accompanying unaudited interim condensed consolidated financial statements of Trovagene, which include all accounts of its wholly owned subsidiary, Trovagene, Srl, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated.
 
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP and the rules and regulations of the Securities and Exchange Commission (“SEC”) related to a quarterly report on Form 10-Q. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations. The unaudited interim condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the Company’s financial position and the results of its operations and cash flows for the periods presented. The unaudited condensed balance sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and disclosures required by GAAP for annual financial statements. The operating results presented in these unaudited interim condensed consolidated financial statements are not necessarily indicative of the results that may be expected for any future periods. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2016 included in the Company’s annual report on Form 10-K filed with the SEC on March 15, 2017.

Liquidity
 
Trovagene’s condensed consolidated financial statements as of September 30, 2017 have been prepared under the assumption that Trovagene will continue as a going concern, which assumes that the Company will realize its assets and satisfy its liabilities in the normal course of business. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of the uncertainty concerning the Company’s ability to continue as a going concern.
 
However, the Company has incurred net losses since its inception and has negative operating cash flows. The Company also received a default letter from Silicon Valley Bank (“SVB”) regarding the Loan and Security Agreement entered in November 2015 which stated that events of default had occurred and SVB will decide in its sole discretion whether or not to exercise rights and remedies. Based on its current business plan and assumptions, the Company expects to continue to incur significant losses and require significant additional capital to further advance its clinical trial programs and support its other operations. Considering the Company’s current cash resources, including the net proceeds received from the offering of its equity securities in July 2017, management believes the Company’s existing resources will be sufficient to fund the Company’s

7

planned operations into the first quarter of 2018. In addition, the Company has based its cash sufficiency estimates on its current business plan and its assumptions that may prove to be wrong. The Company could utilize its available capital resources sooner than it currently expects, and it could need additional funding to sustain its operations even sooner than currently anticipated. These circumstances raise substantial doubt about the Company’s ability to continue as a going concern. For the foreseeable future, the Company’s ability to continue its operations is dependent upon its ability to obtain additional capital.

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, all of which may have a material adverse impact on the Company’s operations. 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 is evaluating the following options to raise additional capital, increase revenue, as well as reduce costs, in an effort to strengthen its liquidity position:

•
Raising capital through public and private equity offerings;

•
Adding capital through short-term and long-term borrowings;

•
Introducing operation and business development initiatives to bring in new revenue streams by leveraging capabilities within our CLIA lab, as well as monetizing our proprietary NextCollect™ DNA collection and preservation cup;

•
Reducing operating costs by identifying internal synergies;

•
Engaging in strategic partnerships; and

•
Taking actions to reduce or delay capital expenditures.

On October 25, 2017, the Company filed a registration statement on Form S-1 with the SEC for a best efforts public offering of up to $17.5 million of common stock and warrants. The Company continually assesses any spending plans, including a review of its discretionary spending in connection with certain strategic contracts, to effectively and efficiently address its liquidity needs.

NASDAQ Notice

On September 5, 2017, the Company received a written notice from the NASDAQ Stock Market LLC (“NASDAQ”) that it was not in compliance with NASDAQ Listing Rule 5550(a)(2) for continued listing on the NASDAQ Capital Market, as the minimum bid price of the Company’s common stock had been below $1.00 per share for 30 consecutive business days. In accordance with NASDAQ Listing Rule 5810(c)(3)(A), the Company has a period of 180 calendar days, or until March 5, 2018, to regain compliance with the minimum bid price requirement. To regain compliance, the closing bid price of the Company’s common stock must meet or exceed $1.00 per share for at least ten consecutive business days during this 180 calendar day period.


8

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

Short-Term Investments

Short-term investments consisted of corporate debt securities, U.S. treasury securities, and commercial paper. The Company classified its short-term investments as available-for-sale, as the sale of such securities may be required prior to maturity to execute management strategies. Investments classified as available-for-sale are carried at fair value, with the unrealized gains and losses reported as a component of consolidated accumulated other comprehensive income (loss) in stockholders’ equity until realized. Realized gains and losses from the sale of available-for-sale securities were determined on a specific identification basis. A decline in the market value of any available-for-sale security below cost that is determined to be other than temporary will result in an impairment charge to earnings and a new cost basis for the security is established. No such impairment charges were recorded for any period presented. Premiums and discounts were amortized or accreted over the life of the related security as an adjustment to yield using the straight-line method and included in interest income. Interest income was recognized when earned. Realized gains and losses on investments in securities were included in other income (loss) within the consolidated statements of operations. As of September 30, 2017 , all of the short-term investments have been sold to satisfy the Company’s outstanding obligations under the Loan and Security Agreement dated as of June 30, 2014 upon demanding repayment by the lenders. As a result, the Company recognized net realized loss of approximately $6,400 for the nine months ended September 30, 2017 .
 
Revenue Recognition
 
Revenue is recognized when persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable, and collection is reasonably assured.
 
Milestone, Royalty and License Revenues
 
The Company licenses and sublicenses its patent rights to healthcare companies, medical laboratories and biotechnology partners. These agreements may involve multiple elements such as license fees, royalties and milestone payments. Revenue is recognized when the criteria described above have been met as well as the following:

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

• Minimum royalties are recognized as earned, and royalties are earned based on the licensee’s use. The Company is unable to predict licensee’s sales and thus revenue is recognized upon receipt of notification from licensee and payment when collection is assured. Notification is generally one quarter in arrears.

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


9

Clinical Research Services Revenue

Revenue from clinical research services consists of revenue from the sale of urine and blood collection supplies and tests performed under agreements with our clinical research and business development partners. Revenue was recognized when supplies and/or test results were delivered.

Cost of Revenue

Cost of revenue represents the cost of materials, personnel costs and costs associated with processing specimens including pathological review, quality control analyses, and delivery charges necessary to render an individualized test result. Costs associated with performing tests are recorded as the tests are processed. However, the revenue on diagnostic services is recognized on a cash collection basis resulting in costs incurred before the collection of related revenue.
 
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 Financial Accounting Standards Board (“FASB”) ASC 815 Derivatives and Hedging (“ASC 815”) or ASC 480 Distinguishing Liabilities from Equity (“ASC 480”) 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. The warrants within the scope of ASC 480 contain a feature that could require the transfer of cash in the event a change of control occurs without an authorization of our Board of Directors, and therefore classified as a liability. 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 the volatility of Trovagene’s common stock price, the remaining life of the warrants, and the risk-free interest rates at each period end. The Company thus uses model-derived valuations where inputs are observable in active markets to determine the fair value and accordingly classifies such warrants in Level 3 per FASB ASC Topic 820, Fair Value Measurements (“ASC 820”). At September 30, 2017 and December 31, 2016 , the fair value of these warrants was $2,037,712 and $834,940 , respectively, and was recorded as a liability under the caption “derivative financial instruments — warrants” on the consolidated balance sheets.
 
Net Loss Per Share
 
Basic and diluted net loss per share is presented in conformity with ASC Topic 260, Earnings per Share , for all periods presented. In accordance with this guidance, basic net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted-average common shares outstanding during the period. Preferred dividends are included in income available to common stockholders in the computation of basic and diluted earnings per share. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common share equivalents outstanding for the period. Common share equivalents are only included when their effect is dilutive.

10

 
The following table sets forth the computation of basic and diluted earnings per share:
 
 
Three Months
Ended September 30,
 
Nine Months
Ended September 30,
 
2017
 
2016
 
2017
 
2016
Numerator: Net loss attributable to common shareholders
$
(4,298,026
)
 
$
(10,197,332
)
 
$
(22,355,494
)
 
$
(30,674,248
)
Adjustment for gain from change in fair value of derivative financial instruments — warrants
—

 
—

 
—

 
(533,750
)
Net loss used for diluted loss per share
$
(4,298,026
)
 
$
(10,197,332
)
 
$
(22,355,494
)
 
$
(31,207,998
)
Denominator for basic and diluted net loss per share:
 
 
 
 
 
 
 
Weighted-average shares used to compute basic loss per share
36,465,672

 
30,339,774

 
32,826,306

 
30,018,841

Adjustments to reflect assumed exercise of warrants
—

 
—

 
—

 
117,731

Weighted-average shares used to compute diluted net loss per share
36,465,672

 
30,339,774

 
32,826,306

 
30,136,572

Net loss per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
(0.12
)
 
$
(0.34
)
 
$
(0.68
)
 
$
(1.02
)
Diluted
$
(0.12
)
 
$
(0.34
)
 
$
(0.68
)
 
$
(1.04
)

The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because their effect was anti-dilutive:
 
 
September 30,
 
2017
 
2016
Options to purchase Common Stock
4,257,031

 
6,051,186

Warrants to purchase Common Stock
8,972,503

 
4,546,939

Restricted Stock Units
1,277,302

 
392,000

Series A Convertible Preferred Stock
63,125

 
63,125

 
14,569,961

 
11,053,250

 
License Fees

The Company expenses amounts paid to acquire licenses associated with products under development when the ultimate recoverability of the amounts paid is uncertain and the technology has no alternative future use when acquired. Acquisitions of technology licenses are charged to expense or capitalized based upon management’s assessment regarding the ultimate recoverability of the amounts paid and the potential for alternative future use. The Company has determined that technological feasibility for its product candidates is reached when the requisite regulatory approvals are obtained to make the product available for sale.

Restructuring

Restructuring costs are included in loss from operations in the condensed consolidated statements of operations. The Company has accounted for these costs in accordance with ASC Topic 420, Exit or Disposal Cost Obligations . One-time termination benefits are recorded at the time they are communicated to the affected employees. In March 2017, the Company announced a restructuring plan which is expected to be completed in the last quarter of 2017. See Note 10 to the condensed consolidated financial statements for further information.

Recent Accounting Pronouncements
 
In August 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which includes amendments that clarify how certain cash receipts and cash payments are presented in the statement of cash flows. ASU 2016-15 also provides guidance clarifying when an entity should

11

separate cash receipts and cash payments and classify them into more than one class of cash flows. The new amendments and guidance are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted provided that all amendments are adopted in the same period. The Company is currently evaluating the impact of adoption of ASU 2016-15 on its consolidated statements of cash flows.

In February 2016, the FASB issued ASU 2016-02, Leases . The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for most leases. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The new standard will impact the Company’s accounting for its office leases and the Company is currently evaluating the impact of the new standard on its consolidated financial statements.
 
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The new standard is based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Since its initial release, the FASB has issued several amendments to the standard, which include clarification of accounting guidance related to identification of performance obligations, intellectual property licenses, and principle versus agent considerations. ASU 2014-09 and all subsequent amendments (collectively, the “new standards”) will be effective for the Company beginning in the first quarter of fiscal year 2018 and may be applied using either the full retrospective method, in which case the new standards would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the new standards would be recognized at the date of initial application. The Company has reviewed its revenue streams to identify potential differences in accounting as a result of the new standards. Currently, the Company does not have any significant contracts with customers given its stage of development. The Company has derived its revenues primarily from a limited number of royalty, license and diagnostic service agreements. The consideration the Company is eligible to receive under these agreements includes upfront license payments, milestone payments and royalties. Each of these agreements has unique terms that are being evaluated separately under the new standards. The new standards differ from the current accounting standard in many respects, such as in the accounting for variable consideration, including milestone payments. For example, the Company currently recognizes milestone revenue using the milestone method specified in ASC 605-28, which generally results in recognition of milestone revenue in the period that the milestone event is achieved. However, under the new standards, it is possible to start to recognize milestone revenue before the milestone is achieved if management determines with a high degree of certainty that amounts recorded as revenues will not have to be reversed when the uncertainty associated with the variable consideration is subsequently resolved. The Company is also continuing to assess the potential impact that the new standards may have with respect to its diagnostic service revenue which is currently recognized on a cash collection basis. Under the new standards, the Company may recognize diagnostic service revenue upon delivery of test results if management determines with a high degree of certainty that amounts recorded as revenues will not have to be reversed when the uncertainty associated with the variable consideration is subsequently resolved. The Company is continuing to assess the impact the new standards will have on its financial statements and expects to complete the assessment on or before the year-end 2017. The Company does not expect a significant change in the timing and recognition of its revenue upon adoption of the new standards. The Company expects to adopt the new standards using the modified retrospective method with an adjustment, if any, to beginning retained earnings for the cumulative effect of the change.

3. Fair Value Measurements
 
The following table presents the Company’s assets and liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of September 30, 2017 and December 31, 2016 :
 

12

 
Fair Value Measurements at
September 30, 2017
 
Quoted Prices in Active Markets for Identical Assets and Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Money market fund (1)
$
6,510,214

 
$
—

 
$
—

 
$
6,510,214

Total Assets
$
6,510,214

 
$
—

 
$
—

 
$
6,510,214

Liabilities:
 
 
 
 
 
 
 
Derivative financial instruments — warrants
$
—

 
$
—

 
$
2,037,712

 
$
2,037,712

Total Liabilities
$
—

 
$
—

 
2,037,712

 
$
2,037,712

 
Fair Value Measurements at
December 31, 2016
 
Quoted Prices in Active Markets for Identical Assets and Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Money market fund (1)
$
12,095,620

 
$
—

 
$
—

 
$
12,095,620

Corporate debt securities (2)
—

 
14,160,686

 
—

 
14,160,686

Commercial paper (3)
—

 
2,393,948

 
—

 
2,393,948

U.S. treasury securities (2)
—

 
8,621,892

 
—

 
8,621,892

Total Assets
$
12,095,620

 
$
25,176,526

 
$
—

 
$
37,272,146

Liabilities:
 
 
 
 
 
 
 
Derivative financial instruments — warrants
$
—

 
$
—

 
$
834,940

 
$
834,940

Total Liabilities
$
—

 
$
—

 
$
834,940

 
$
834,940

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

(2) Included in short-term investments on the accompanying condensed consolidated balance sheets.

(3) $0 and $1,198,504 of commercial paper was included as a component of cash and cash equivalents at September 30, 2017 and December 31, 2016 , respectively, and the remaining amount was included in short-term investments on the accompanying consolidated balance sheets.
 
The following table sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the nine months ended September 30, 2017 :
 
Description
 
Balance at
December 31, 2016
 
Issuance of Derivative Financial Instruments
 
Realized
Gain
 
Balance at
September 30, 2017
Derivative financial instruments — warrants
 
$
834,940

 
3,215,519

 
$
(2,012,747
)
 
$
2,037,712

 
The realized gains or losses on the derivative financial instruments—warrants are recorded as a change in fair value of derivative financial instruments—warrants in the Company’s consolidated statement of operations. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, the Company reviews the assets and liabilities that are subject to ASC Topic 815-40. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments that trade infrequently and therefore have little or no price transparency are classified as Level 3.

4. Short-Term Investments

As of September 30, 2017 , all short-term investments have been sold to satisfy the Company’s outstanding obligations under the Loan and Security Agreement dated as of June 30, 2014 upon demanding repayment by the lenders.

The following table sets forth the composition of short-term investments as of December 31, 2016 .

 
December 31, 2016
 
 
 
 
 
Unrealized
 
 
 
Maturity in Years
 
Cost
 
Gains
 
Losses
 
Fair Value
Corporate debt securities
Less than 1 year
 
$
14,165,915

 
$
44

 
$
(5,273
)
 
$
14,160,686

Commercial paper
Less than 1 year
 
1,195,444

 
—

 
—

 
1,195,444

U.S. treasury securities
Less than 1 year
 
8,625,728

 
330

 
(4,166
)
 
8,621,892

Total Investment
 
 
$
23,987,087

 
$
374

 
$
(9,439
)
 
$
23,978,022


5. Property and Equipment
 
Property and equipment consist of the following:
 
 
As of September 30,
2017
 
As of December 31,
2016
Furniture and office equipment
$
1,076,709

 
$
1,144,741

Leasehold improvements
1,994,514

 
1,994,514

Laboratory equipment
2,584,363

 
2,449,645

 
5,655,586

 
5,588,900

Less—accumulated depreciation and amortization
(2,528,617
)
 
(1,761,985
)
Property and equipment, net
$
3,126,969

 
$
3,826,915

 

13

6. Debt
 
Equipment Line of Credit
 
In November 2015, the Company entered into a Loan and Security Agreement (“Equipment Line of Credit”) with SVB that provided for cash borrowings for equipment (“Equipment Advances”) of up to $2.0 million , secured by the equipment financed. Under the terms of the agreement, interest is equal to 1.25% above the Prime Rate. At September 30, 2017 , the interest rate was 5.50% . Interest only payments are due on borrowings through November 30, 2016, with both interest and principal payments commencing in December 2016. All unpaid principal and interest on each Equipment Advance will be due on November 1, 2019. The Company has an obligation to make a final payment equal to 7% of total amounts borrowed at the loan maturity date. The Company is also subject to certain affirmative and negative covenants under the Equipment Line of Credit.

On June 20, 2017, the Company received a Notice of Event of Default (“Default Letter”) from SVB which stated that Events of Default had occurred and SVB will decide in its sole discretion whether or not to exercise rights and remedies. Pursuant to the Default Letter, the Company has classified the entire balance of $1,488,041 as a current liability as of September 30, 2017 and also started recording accrued interest at a default rate. The Company recorded $209,082 in interest expense related to the Equipment Line of Credit during the nine months ended September 30, 2017 . The Company is currently working with lender for resolution.

Loan and Security Agreement
 
In June 2014, the Company entered into a $15,000,000 Loan and Security Agreement (“Agreement”) under which the lenders provided the Company a term loan. On July 20, 2016, the Company signed the 5th Amendment to Loan and Security Agreement to refinance its existing term loan. Under the Amendment, interest is equal to 3.75% plus the Wall Street Journal Prime Rate, subject to a floor of 7.25% . The Company is required to make interest only payments on the outstanding amount of the loan on a monthly basis through September 1, 2017, after which equal monthly payments of principal and interest are due until the loan maturity date of February 1, 2020.

On June 1, 2017, the Company received a Notice of Event of Default from the lenders which stated that Events of Default had occurred and all of the obligation under the Agreement were immediately due and payable. On June 6, 2017, the lenders took the total pay-off amount of $16,668,583 for the principal, interest, final payment, and other amounts out of the Company’s bank accounts which satisfied all of the Company’s outstanding obligations under the Agreement. Accordingly, the Agreement was terminated in June 2017. Upon termination of the Agreement, the prepayment fee of $450,000 , unamortized debt discount of $400,562 and unamortized final fee of $738,196 were recorded as loss on debt extinguishment. The Company recorded total interest expense of $ 801,173 related to the Agreement during the nine months ended September 30, 2017 .
 
7. Derivative Financial Instruments — Warrants
 
Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Contracts in Entity’s Own Equity (“ASC 815-40”) or ASC Topic 480-10, Distinguishing Liabilities from Equity (“ASC 480-10”), Trovagene determined that certain warrants issued in connection with the execution of certain equity financings must be recorded as derivative liabilities. In accordance with ASC 815-40 and ASC 480-10, the warrants are also being re-measured at each balance sheet date based on estimated fair value, and any resultant change in fair value is being recorded in the Company’s condensed consolidated statements of operations. The Company estimates the fair value of these warrants using the Black-Scholes option pricing model.
 
The range of assumptions used to determine the fair value of the warrants valued using the Black-Scholes option pricing model during the periods indicated was:
 
 
Nine Months Ended September 30,
 
2017
 
2016
Estimated fair value of Trovagene common stock
0.73-1.26

 
4.49-4.65

Expected warrant term
1.3-5.5 years

 
2.3-2.8 years

Risk-free interest rate
1.27-1.95%

 
0.71-0.87%

Expected volatility
86-109%

 
82-89%

Dividend yield
0
%
 
0
%

14


Expected volatility is based on historical volatility of Trovagene’s common stock. The warrants have a transferability provision and based on guidance provided in Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment (“SAB No. 107”) , for instruments issued with such a provision, Trovagene used the remaining 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 — warrants liability balance, valued using the Black-Scholes option pricing method, for the periods indicated.
 
Date
 
Description
 
Number of Warrants
 
Derivative
Instrument
Liability
December 31, 2016
 
Balance of derivative financial instruments — warrants liability
 
967,295

 
$
834,940

 
 
Issuance of derivative financial instruments
 
4,643,626

 
3,215,519

 
 
Change in fair value of derivative financial instruments — warrants during the period recognized as a gain in the condensed consolidated statements of operations
 
—

 
(2,012,747
)
September 30, 2017
 
Balance of derivative financial instruments — warrants liability
 
5,610,921

 
$
2,037,712

 
8. Stockholders’ Equity
 
Common Stock
 
During the nine months ended September 30, 2017 , the Company issued a total of 7,408,460 shares of Common Stock. The Company received gross proceeds of approximately $7.1 million from the sale of 6,191,500 shares of its common stock and 4,643,626 share of warrants through registered direct offering and private placement in July 2017. The Company received gross proceeds of approximately $0.1 million from the sale of 102,081 shares of its common stock at a weighted average price of $1.08 under the agreement with Cantor Fitzgerald & Co. (“Agent”). In addition, 369,487 shares were issued upon vesting of restricted stock units (“RSU”), and 745,392 shares were issued upon vesting of restricted stock awards (“RSA”).
 
Stock Options
 
Stock-based compensation expense related to Trovagene equity awards have been recognized in operating results as follow:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Included in research and development expense
$
219,480

 
$
872,792

 
$
798,143

 
$
1,862,069

Included in cost of revenue
15,633

 
42,639

 
56,998

 
99,164

Included in selling and marketing expense
118,434

 
476,865

 
550,317

 
1,493,744

Included in general and administrative expense
1,067,633

 
437,075

 
1,837,128

 
2,487,415

Benefit from restructuring
—

 
—

 
(125,222
)
 
—

Total stock-based compensation expense
$
1,421,180

 
$
1,829,371

 
$
3,117,364

 
$
5,942,392

 
The unrecognized compensation cost related to non-vested stock options outstanding at September 30, 2017 and 2016 , net of expected forfeitures, was $3,271,046 and $10,416,565 , respectively, which is expected to be recognized over a weighted-average remaining vesting period of 2.2 and 3.0 years , respectively. The weighted-average remaining contractual term of outstanding options as of September 30, 2017 was approximately 7.2 years . The total fair value of stock options vested during the nine months ended September 30, 2017 and 2016 was $3,378,243 and $5,416,168 , respectively.


15

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:
 
 
Nine Months Ended
September 30,
 
2017
 
2016
Risk-free interest rate
1.82
%
 
1.48
%
Dividend yield
0
%
 
0
%
Expected volatility
87
%
 
103
%
Expected term
5.2 years

 
5.5 years


A summary of stock option activity and changes in stock options outstanding is presented below:
 
 
Total Options
 
Weighted-Average
Exercise Price
Per Share
 
Intrinsic
Value
Balance outstanding, December 31, 2016
5,528,628

 
$
5.49

 
$
—

Granted
823,106

 
$
0.84

 
 

Canceled / Forfeited
(2,077,246
)
 
$
6.24

 
 

Expired
(17,457
)
 
$
4.74

 
 

Balance outstanding, September 30, 2017
4,257,031

 
$
4.23

 
$
381

Exercisable at September 30, 2017
2,492,242

 
$
4.79

 
$
—

 
On June 13, 2017, the number of authorized shares in the Trovagene 2014 Equity Incentive Plan (“2014 EIP”) was increased from 7,500,000 to 9,500,000 . As of September 30, 2017 there were 3,670,232 shares available for issuance under the 2014 EIP.

Restricted Stock Units

The weighted-average grant date fair value of the RSU was $1.59 and $4.06 per share during the nine months ended September 30, 2017 and 2016 , respectively.

A summary of the RSU activity is presented below:
 
Number of Shares
 
Weighted-Average
Grant Date Fair Value
Per Share
 
Intrinsic Value
Non-vested RSU outstanding, December 31, 2016
272,000

 
$
3.99

 
$
571,200

Granted
2,249,242

 
$
1.59

 
 
Vested
(369,487
)
 
$
3.48

 
$
645,775

Forfeited
(874,453
)
 
$
1.75

 
 
Non-vested RSU outstanding, September 30, 2017
1,277,302

 
$
1.44

 
$
932,430


At September 30, 2017 , total unrecognized compensation cost related to non-vested RSU was $1,011,494 , which is expected to be recognized over a weighted-average period of 2.5 years . The total fair value of vested RSU during the nine months ended September 30, 2017 was $1,285,578 .

Restricted Stock Awards

During the nine months ended September 30, 2017 , a total of 745,392 shares of RSA were granted, all of which were vested immediately. The total fair value of vested RSA during the nine months ended September 30, 2017 was $596,314 . The weighted-average grant date fair value of the RSA was $0.80 per share during the nine months ended September 30, 2017 . There were no such awards granted during the nine months ended September 30, 2016 .

16


Warrants
 
A summary of warrant activity and changes in warrants outstanding, including both liability and equity classifications is presented below:
 
 
Total Warrants
 
Weighted-Average
Exercise Price
Per Share
 
Weighted-Average
Remaining Contractual
Term
Balance outstanding, December 31, 2016
5,505,901

 
$
3.83

 
1.6
Granted
4,643,626

 
$
1.41

 
 
Expired
(1,177,024
)
 
$
5.32

 
 
Balance outstanding, September 30, 2017
8,972,503

 
$
2.38

 
3.3

9. Commitments and Contingencies
 
Executive and Consulting Agreements
 
The Company has longer-term contractual commitments with various consultants and employees. Certain employment agreements provide for severance payments.
 
Lease Agreements
 
The Company leases approximately 26,100 square feet of office and laboratory space at a monthly rental rate of approximately $68,000 . The lease will expire on December 31, 2021. The Company currently subleases certain office space and records the rental receipt under the subleases as a reduction of its rent expense. The Company also leased certain lab and office space in Torino, Italy, of approximately 2,300 square feet, at a monthly rental rate of approximately $3,100 through the end of September 2017.
 
Research and Development and Clinical Trial Agreements

In March 2017, the Company entered into a license agreement with Nerviano which granted the Company development and commercialization rights to NMS-1286937, which Trovagene refers to as PCM-075. PCM-075 is an oral, investigative drug and a highly-selective adenosine triphosphate competitive inhibitor of the serine/threonine PLK 1. The Company plans to develop PCM-075 initially in patients with AML. Upon execution of the agreement, the Company paid $2.0 million in license fees which were expensed to research and development costs during the nine months ended September 30, 2017 . The Company is committed to pay $1.0 million for future services provided by Nerviano, such as the costs to manufacture drug product, no later than June 30, 2019. Terms of the agreement also provide for the Company to pay royalties based on certain development and sales milestones.
 
The Company has entered into a variety of clinical trial and collaboration agreements relating to its drug development efforts. Included in research and development expense, the Company has recorded approximately $291,000 for the nine months ended September 30, 2017 relating to services provided in connection with these agreements.

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

Litigation
 
Trovagene does not believe that the Company has legal liabilities that are probable or reasonably possible that require either accrual or disclosure, except for the following: On March 28, 2016 the Company filed a complaint in the Superior Court of the State of California for the County of San Diego against the Company’s former CEO and CFO, for, among other things, breach of fiduciary duty for failing to present a lucrative corporate opportunity to the Company concerning promising new therapeutics in the field of precision medicine and instead taking that opportunity for their own personal benefit (the “Complaint”). The Complaint asks that these two former executives be required to turn over their interests in these new therapeutics to the Company. The former CEO and CFO filed a cross complaint in the Superior Court of the State of California

17

for the County of San Diego against the Company on May 23, 2016 for, among other things, breach of contract (the “Cross Complaint”, and together with the Complaint, collectively, the “Litigation”). On July 28, 2017, the parties settled the Litigation.  The settlement involved mutual releases by all parties involved. The net cost to Trovagene in connection with the settlement is approximately $2.1 million . Of that amount, $975,000 was the net amount paid directly to the former CEO and CFO. From time to time, the Company may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in matters may arise from time to time that may harm the Company’s business. As of the date of this report, management believes that there are no claims against the Company, which it believes will result in a material adverse effect on the Company’s business or financial condition.

Public Offering and Controlled Equity Offering

On March 15, 2017, the Company filed a Form 424B5 to amend and supplement the information in the Company’s registration statement and prospectus, dated June 13, 2016, to offer and sell additional shares of the Company’s common stock having an aggregate offering price up to $20,698,357 . The Company entered into an agreement with Cantor Fitzgerald & Co. (“Agent”) on January 25, 2013 to issue and sell up to $30,000,000 of shares of common stock through the Agent. As payment for its services, the Agent is entitled to a commission on gross proceeds of up to 3% . Gross proceeds of approximately $110,000 have been raised in 2017.

10. Restructuring Charges

On March 15, 2017, in connection with the addition of precision medicine therapeutics to its business, the Company announced a restructuring plan (the “Restructuring”) which included a reduction in force. The Restructuring is expected to be completed in the last quarter of 2017. The Company estimates that it will incur approximately $2.0 million in charges related to this Restructuring. During the nine months ended September 30, 2017 , the Company incurred approximately $1.7 million in restructuring charges which included approximately $1.2 million of personnel termination costs and an approximately $0.5 million charge related to impairment of capitalized license fees. As of September 30, 2017 , approximately $0.4 million of these restructuring costs were included in accrued liabilities in the condensed consolidated balance sheet.

11. Related Party Transactions

In March 2016, the Company engaged Rutan & Tucker, LLP, a law firm to represent Trovagene, Inc. with respect to various lawsuits. One of the partners from Rutan & Tucker, LLP, is the son of the Company’s Chairman of the Board. The fees for legal services are based on the hourly rates of the individuals performing the legal services. During the nine months ended September 30, 2017 and 2016 , the Company has incurred approximately $763,075 and $377,464 of legal expenses, net of insurance reimbursements, for services performed by Rutan & Tucker, LLP, respectively.

12. Subsequent Event

On October 25, 2017, the Company filed a registration statement on Form S-1 with the SEC for a best efforts public offering of up to $17.5 million of common stock and warrants. H.C. Wainwright & Co. is acting as placement agent.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-Looking Statements
 
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding the future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions.
 
In addition, our business and financial performance may be affected by the factors that are discussed under “Risk Factors” in the Annual Report on Form 10-K for the year ended December 31, 2016 , filed on March 15, 2017, on Form 10-Q

18
Table of Contents

for the period ended March 31, 2017, filed on May 10, 2017, and on Form 10-Q for the period ended June 30, 2017, filed on August 9, 2017. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for us to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
 
You should not rely upon forward looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
 
The following discussion and analysis is qualified in its entirety by, and should be read in conjunction with, the more detailed information set forth in the financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
 
Overview

 We are a precision medicine biotechnology company developing oncology therapeutics for improved cancer care, optimizing drug development by leveraging our proprietary PCM technology in tumor genomics. Our broad intellectual property and proprietary technology enables us to measure ctDNA in urine and blood to identify and quantify clinically actionable markers for predicting response to cancer therapies. We offer our PCM technology at our CLIA-certified/CAP-accredited laboratory and plan to continue to vertically integrate our PCM technology with the development of precision cancer therapeutics.

We believe we have an opportunity to utilize precision diagnostics to improve treatment outcomes for cancer patients using our proprietary technology to detect clinically actionable mutations and monitor patient response to therapy. On March 15, 2017, we announced the licensing of PCM-075, a PLK1 inhibitor, from Nerviano. We have a supplier agreement with NerPharMa, S.r.l., a pharmaceutical manufacturing company and a subsidiary of Nerviano, to manufacture drug product for PCM-075. The agreement covers the clinical and commercial supply of PCM-075, and includes both Active Pharmaceutical Ingredients and Good Manufacturing Process production of capsules. The licensing of global development and commercialization rights to PCM-075 allows us to execute our strategy to vertically integrate our PCM technology with precision cancer therapeutics, by developing drugs where our deep understanding of tumor genomics may allow for effective targeting of appropriate cancer patients.

We have completed a Phase 1 safety study of PCM-075 in patients with advanced metastatic solid tumors and we received notification from the U.S. Food and Drug Administration (“FDA”) that our Phase 1b/2 clinical trial of PCM-075 in patients with AML may proceed. PCM-075 has positive preclinical data as a single agent and in combination with select chemotherapeutics and targeted agents used in many hematologic and solid cancers, including AML, Non-Hodgkin Lymphoma, mCRPC, Adrenocortical Carcinoma, and Triple Negative Breast Cancer.

We have significant experience and expertise with biomarkers and technology in cancer, including AML. We are one of the patent holders of NPM1 for diagnosis and monitoring of patients. NPM1-mutated AML is a genetic marker in leukemia and accounts for approximately one-third of all AML patients. We plan to use our PCM technology to profile other dominant AML markers, such as FLT3, DNMT3A, NRAS, and KIT, as well as to measure PLK1 enzymatic activity to potentially identify patients most likely to respond to PCM-075 and to measure patient therapy response.

Our accumulated deficit through September 30, 2017 is $170,470,696 . To date, we have generated minimal revenues and expect to incur additional losses to perform further research and development activities and expand commercial operations. During 2017, we have advanced our business with the following activities:

•
Announced preclinical research demonstrating synergy of PCM-075 with Zytiga® (abiraterone acetate) in Castration-Resistant Prostate Cancer tumor cells.

•
Announced that the FDA granted Orphan Drug Designation to PCM-075 for the treatment of patients with AML.


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•
Announced the expansion and strengthening of its Board of Directors with the appointment of Athena Countouriotis, M.D. Dr. Countouriotis brings significant experience in oncology clinical development and orphan indications

•
Announced PCM-075 synergy with a HDAC Inhibitor in Non-Hodgkin Lymphoma Cell Lines. Additionally, PCM-075 demonstrates synergy in combination with more than ten chemotherapeutic and targeted therapies across a broad range of solid tumor and hematologic cancers.

•
Announced preclinical AML data shows PCM-075 significantly enhances the efficacy of a FLT3 inhibitor in combination therapy.

•
Announced FDA approval of IND for Phase 1b/2 trial of PCM-075 in patients with AML.

•
Announced peer-reviewed publication of first-in-human Phase 1 trial results with PCM-075 in the journal Investigational New Drugs. The data from the trial demonstrated PCM-075’s potential as safe and effective treatment for solid tumor and hematological malignancies.

•
Completed a registered direct offering of 6,191,500 shares of common stock and a concurrent private placement issuing warrants to purchase up to 4,643,626 shares of common stock. The net proceeds from the registered direct offering and concurrent private placement were approximately $6.5 million in July 2017.

•
Entered into an agreement with Novogene Co. Ltd. (“Novogene”), a leading global provider of genomic services and solutions and the largest sequencing capacity in the world, whereby Novogene will purchase NextCollect™, our proprietary urine collection and nucleic acid preservation device for validation in the Chinese market.

•
Engaged PRA Health Sciences, a leading, global contract research organization, to conduct our Phase 1b/2 clinical trial of PCM-075.

•
Executed a supplier agreement with NerPharMa, S.r.l., a pharmaceutical manufacturing company and a subsidiary of Nerviano Medical Sciences S.r.l., to manufacture drug product for PCM-075.

•
Submitted an IND application to FDA to conduct a Phase 1b/2 clinical trial of PCM-075 in AML.

•
Announced expansion of key claims for our NPM1 patent portfolio for AML.

•
Entered into an agreement with a global biopharmaceutical company to utilize Trovera® ctDNA tests and services in cancer clinical trials.

•
Entered into an agreement with AstraZeneca to utilize Trovera® ctDNA test and services in prospective biomarker study.

•
Announced phase 1 safety study conducted by Nerviano Medical Sciences supports planned development of PCM-075 in AML.

•
Established a Clinical Advisory Board, appointing Dr. Jorge Cortes, of MD Anderson, Dr. Sandra Silberman, a leading clinical researcher in hematology/oncology, and practicing physician at the Duke VAMC, Dr. Filip Janku, of City of Hope Cancer Center, and Dr. David Berz, of the Beverly Hills Cancer Center. Dr. Cortes and Dr. Silberman have extensive experience in the development of novel therapies for the treatment of hematologic cancers. Dr. Cortes will serve as the Principal Investigator for the Phase 1b/2 clinical trial in AML.

•
Entered into a license agreement with Nerviano that grants us exclusive global development and commercialization rights to NMS-1286937, which we refers to as PCM-075.  PCM-075 is an oral, investigative drug and a highly-selective PLK 1 inhibitor for the treatment of AML.

Our drug development efforts are in their early stages, and we cannot make estimates of the costs or the time that our development efforts will take to complete, or the timing and amount of revenues related to the sale of our drugs. The risk of completion of any program is high because of the many uncertainties involved in developing new drug candidates to market, including the long duration of clinical testing, the specific performance of proposed products under stringent clinical trial protocols, extended regulatory approval and review cycles, our ability to raise additional capital, the nature and timing of

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research and development expenses, and competing technologies being developed by organizations with significantly greater resources.
 
Off-Balance Sheet Arrangements
 
We had no off-balance sheet arrangements as of September 30, 2017 .
 
Critical Accounting Policies
 
Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Our accounting policies are described in ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS of our Annual Report on Form 10-K as of and for the year ended December 31, 2016 , filed with the SEC on March 15, 2017. There have been no changes to our critical accounting policies since December 31, 2016 .

RESULTS OF OPERATIONS
 
Three Months Ended September 30, 2017 and 2016
 
Revenues
 
Our total revenues were $123,329 and $89,114 for the three months ended September 30, 2017 and 2016 , respectively. The components of our revenues were as follows:
 
 
Three Months Ended September 30,
 
2017
 
2016
 
Increase (Decrease)
Royalties
$
58,779

 
$
47,236

 
$
11,543

Diagnostic services
58,119

 
37,978

 
20,141

Clinical research services
6,431

 
3,900

 
2,531

Total revenues
$
123,329

 
$
89,114

 
$
34,215

 
The increase in royalty income related primarily to higher receipts of payments in excess of minimum royalties in comparison to the same period of the prior year. Revenue from diagnostic services is recognized when payment is received for the test results. The number of payments received was higher in 2017 as compared to the same period in the prior year. Revenue from clinical research services consists of revenue from the sale of urine and blood collection supplies and tests performed under agreements with our clinical research and business development partners. Revenue is recognized when supplies and/or test results are delivered. There were more sales of clinical research services for the three months ended September 30, 2017 as compared to the same period of 2016.

We expect our royalties to fluctuate as the royalties are based on the minimum royalty payments as well as the timing of when payments are received for royalties in excess of minimum royalties. In addition, our diagnostic service revenue may be impacted by our expansion into oncology therapeutics. We expect revenue from clinical research services to fluctuate based on timing of delivery of supplies and/or test results under agreements.
 
Cost of Revenues
 
Our total cost of revenues was $473,202 for the three months ended September 30, 2017 , compared to $424,559 in the same period of 2016 . Cost of revenues mainly relates to the costs of our diagnostic service revenues. The costs are recognized at the completion of testing. Increase in cost of revenues for the three months ended September 30, 2017 compared to the same period of last year is mainly due to the higher percentage allocation of volume of tests processed. Due to revenue being recognized when cash is received, costs incurred in one period may relate to revenue recognized in a later period which could result in negative gross margins. 
 

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Research and Development Expenses
 
Research and development expenses consisted of the following:
 
 
Three Months Ended September 30,
 
2017
 
2016
 
Increase (Decrease)
Salaries and staff costs
$
301,919

 
$
1,407,529

 
$
(1,105,610
)
Stock-based compensation
219,480

 
872,792

 
(653,312
)
Outside services, consultants and lab supplies
604,140

 
1,215,889

 
(611,749
)
Facilities
254,681

 
372,891

 
(118,210
)
Travel and scientific conferences
28,000

 
51,203

 
(23,203
)
Other
6,486

 
17,094

 
(10,608
)
Total research and development
$
1,414,706

 
$
3,937,398

 
$
(2,522,692
)
 
Research and development expenses decrease d by $2,522,692 to $1,414,706 for the three months ended September 30, 2017 from $3,937,398 for the same period in 2016 . As a result of the two strategic restructuring activities which occurred in December 2016 and March 2017, our average internal research and development personnel decreased from thirty-four to six , resulting in a decrease of expenses in salaries and staff costs, stock-based compensation, and travel and scientific conferences. In addition, due to the shifting of our business focus, we terminated certain clinical studies and collaboration agreements. Research and development expenses incurred related to samples processed and validated in connection with the clinical collaborations, as well as lab supplies, decreased accordingly. We expect a reduction of research and development costs that relate to CLIA services as a result of our expansion into oncology therapeutics; however, other costs may increase as we complete the development of PCM-075.

Selling and Marketing Expenses
 
Selling and marketing expenses consisted of the following:
 
 
Three Months Ended September 30,
 
2017
 
2016
 
Increase (Decrease)
Salaries and staff costs
$
158,097

 
$
1,427,254

 
$
(1,269,157
)
Stock-based compensation
118,434

 
476,865

 
(358,431
)
Outside services and consultants
51,717

 
441,699

 
(389,982
)
Facilities
51,388

 
112,573

 
(61,185
)
Trade shows, conferences and marketing
31,017

 
243,692

 
(212,675
)
Travel
54

 
212,375

 
(212,321
)
Other
9,220

 
26,404

 
(17,184
)
Total sales and marketing
$
419,927


$
2,940,862


$
(2,520,935
)
 
Selling and marketing expenses decrease d by $2,520,935 to $419,927 for the three months ended September 30, 2017 from $2,940,862 for the same period in 2016 . The overall decrease in selling and marketing expenses was primarily due to our strategic restructuring activities. During the three months ended September 30, 2017 we decreased the number of our field sales, customer support and marketing personnel, bringing our average headcount to two from twenty-two in the same period of the prior year. As a result, costs associated with selling and marketing activities as well as personnel related costs were decreased accordingly. We expect decreases in personnel and related costs as a result of the reduction in force.
 

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General and Administrative Expenses
 
General and administrative expenses consisted of the following:
 
 
Three Months Ended September 30,
 
2017
 
2016
 
Increase (Decrease)
Personnel and outside services costs
$
1,450,261

 
$
1,136,266

 
$
313,995

Board of Directors’ fees
120,085

 
122,187

 
(2,102
)
Stock-based compensation
1,067,633

 
437,075

 
630,558

Legal and accounting fees
595,194

 
695,061

 
(99,867
)
Facilities and insurance
291,547

 
149,921

 
141,626

Travel
14,185

 
47,769

 
(33,584
)
Fees, licenses, taxes and other
120,682

 
122,503

 
(1,821
)
Total general and administrative
$
3,659,587


$
2,710,782

 
$
948,805

 
General and administrative expenses increase d by $948,805 to $3,659,587 for the three months ended September 30, 2017 , from $2,710,782 for the same period in 2016 . The significant components of the increase were primarily due to the increase in personnel and outside services cost and stock-based compensation. In August 2017, a total of 745,392 shares of immediately vested RSA were granted to our CEO. Per the agreement, the CEO’s income taxes associated with the RSA were also paid by our Company. Therefore, personnel costs and stock-based compensation expenses were increased. Our general and administrative costs may increase in future periods in order to support fundraising activities and general business activities as we continue to develop and introduce new product offerings.
 
Restructuring

On March 15, 2017, we announced a strategic restructuring plan in connection with the expansion of precision medicine therapeutics to our business. The restructuring plan includes a reduction in force and is expected to be completed in the last quarter of 2017. The $46,472 restructuring benefit for the three months ended September 30, 2017 was primarily due to certain employee termination costs expensed was less than estimated.

Net Interest Expense
 
Net interest expense was $16,473 and $354,993 for the three months ended September 30, 2017 and 2016 , respectively. The decrease of net interest expense is primarily due to a decrease in interest expense, resulting from pay-off of our $15.0 million term loan. We expect net interest expense to decrease as a result of repayment of our equipment line of credit.

Change in Fair Value of Derivative Financial Instruments — Warrants
 
We have issued warrants that are accounted for as derivative liabilities. As of September 30, 2017 , the derivative financial instruments — warrants liabilities were revalued to $2,037,712 , resulting in an increase in value of $1,686,850 from June 30, 2017 , based primarily upon the issuance of new derivative financial instruments—warrants in connection with July fundraising activities, offset by the decrease in our stock price as well as the changes in the expected term, volatility, and risk free interest rates for the expected term. The issuance of new warrants was recorded as a liability under derivative financial instruments — warrants in the condensed consolidated balance sheets. The decrease in value upon remeasurement at September 30, 2017 was recorded as a gain from the change in fair value of derivative financial instruments — warrants in the condensed consolidated statement of operations.


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Net Loss
 
Net loss and per share amounts were as follows:

 
Three Months Ended September 30,
 
2017
 
2016
 
Increase (Decrease)
Net loss attributable to common shareholders
$
(4,298,026
)
 
$
(10,197,332
)
 
$
(5,899,306
)
Net loss per common share — basic
$
(0.12
)
 
$
(0.34
)
 
$
(0.22
)
Net loss per common share — diluted
$
(0.12
)
 
$
(0.34
)
 
$
(0.22
)
 
 
 
 
 
 
Weighted average shares outstanding — basic
36,465,672

 
30,339,774

 
6,125,898

Weighted average shares outstanding — diluted
36,465,672

 
30,339,774

 
6,125,898

 
The $5,899,306 decrease in net loss attributable to common shareholders and the $0.22 decrease in basic net loss per share was primarily the result of a decrease in operating expenses of $4,092,651 for the three months ended September 30, 2017 compared to the same period in the prior year.
 
Nine Months Ended September 30, 2017 and 2016
 
Revenues
 
Our total revenues were $320,378 and $313,000 for the nine months ended September 30, 2017 and 2016 , respectively. The components of our revenues were as follows:

 
Nine Months Ended September 30,
 
2017
 
2016
 
Increase (Decrease)
Royalties
$
169,415

 
$
207,869

 
$
(38,454
)
Diagnostic services
142,482

 
69,558

 
72,924

Clinical research services
8,481

 
35,573

 
(27,092
)
Total revenues
$
320,378

 
$
313,000

 
$
7,378

 
The $38,454 decrease in royalties related primarily to lower receipts of payments in excess of minimum royalties in comparison to the same period of the prior year. Revenue from diagnostic services is recognized when payment is received for the test results. The number of tests payments received were higher for the nine months ended September 30, 2017 as compared to the same period in the prior year. Revenue from clinical research services consists of revenue from the sale of urine and blood collection supplies and tests performed under agreements with our clinical research and business development partners. Revenue was recognized when supplies and/or test results were delivered.

We expect our royalties to fluctuate as the royalties are based on the minimum royalty payments as well as the timing of when payments are received for royalties in excess of minimum royalties. Our diagnostic service revenue may be impacted by our expansion into oncology therapeutics. In addition, we expect revenue from clinical research services to fluctuate based on timing of delivery of supplies under agreements.
 
Cost of Revenues
 
Our total cost of revenues was $1,427,831 for the nine months ended September 30, 2017 , compared to $1,143,293 in the same period of 2016 . Cost of revenues relates to the costs of our diagnostic service revenues. The costs are recognized at the completion of testing. Increase in cost of revenues for the nine months ended September 30, 2017 compared to the same period of last year is mainly due to the higher percentage allocation of volume of tests. Due to revenue being recognized when cash is received, costs incurred in one period may relate to revenue recognized in a later period which could result in negative gross margins. 
 

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Research and Development Expenses
 
Research and development expenses consisted of the following:

 
Nine Months Ended September 30,
 
2017
 
2016
 
Increase (Decrease)
Salaries and staff costs
$
1,468,491

 
$
4,263,595

 
$
(2,795,104
)
Stock-based compensation
798,143

 
1,862,069

 
(1,063,926
)
Outside services, consultants and lab supplies
1,456,504

 
3,837,485

 
(2,380,981
)
Facilities
842,196

 
1,042,682

 
(200,486
)
Travel and scientific conferences
72,901

 
157,445

 
(84,544
)
Fees, licenses and other
2,038,016

 
58,600

 
1,979,416

Total research and development
$
6,676,251

 
$
11,221,876

 
$
(4,545,625
)

Research and development expenses decrease d by $4,545,625 to $6,676,251 for the nine months ended September 30, 2017 from $11,221,876 for the same period in 2016 . Our costs have decreased primarily due to the average number of our internal research and development personnel decreasing from thirty-three to eleven . In addition, research and development expenses incurred related to clinical studies, samples processed and validated in connection with the clinical collaborations, as well as lab supplies, decreased for the nine months ended September 30, 2017 as compared to the same period in 2016 as a result of the shifting of our business focus. The total decrease of research and development expenses was offset by the increase in fees, license and other. The increase in fees, license and other was primarily due to the $2.0 million license fee payment in March 2017 to Nerviano for development and commercialization rights to PCM-075. We expect a reduction of research and development costs that relate to CLIA services as a result of our expansion into oncology therapeutics; however, other costs may increase as we continue the development of PCM-075. 

Selling and Marketing Expenses
 
Selling and marketing expenses consisted of the following:

 
Nine Months Ended September 30,
 
2017
 
2016
 
Increase (Decrease)
Salaries and staff costs
$
977,040

 
$
4,266,029

 
$
(3,288,989
)
Stock-based compensation
550,317

 
1,493,744

 
(943,427
)
Outside services and consultants
219,800

 
1,117,368

 
(897,568
)
Facilities
220,860

 
362,339

 
(141,479
)
Trade shows, conferences and marketing
357,233

 
1,082,883

 
(725,650
)
Travel
71,865

 
716,473

 
(644,608
)
Other
45,816

 
88,614

 
(42,798
)
Total sales and marketing
$
2,442,931

 
$
9,127,450

 
$
(6,684,519
)
 
Selling and marketing expenses decreased by $6,684,519 to $2,442,931 for the nine months ended September 30, 2017 from $9,127,450 for the same period in 2016 . The overall decrease in selling and marketing expenses was primarily due to our strategic restructuring activities. As part of our restructuring, we reduced the number of our field sales, customer support and marketing personnel, bringing down our average headcount to five from twenty-two in the same period of the prior year. We expect decreases in personnel and related costs due to the reduction in force.
 

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General and Administrative Expenses
 
General and administrative expenses consisted of the following:

 
Nine Months Ended September 30,
 
2017
 
2016
 
Increase (Decrease)
Personnel and outside services costs
$
3,270,134

 
$
3,279,860

 
$
(9,726
)
Board of Directors’ fees
347,205

 
345,240

 
1,965

Stock-based compensation
1,837,128

 
2,487,415

 
(650,287
)
Legal and accounting fees
3,358,411

 
2,077,585

 
1,280,826

Facilities and insurance
742,405

 
551,382

 
191,023

Travel
81,106

 
151,355

 
(70,249
)
Fees, licenses, taxes and other
278,970

 
290,924

 
(11,954
)
Total general and administrative
$
9,915,359

 
$
9,183,761

 
$
731,598

 
General and administrative expenses increase d by $731,598 to $9,915,359 for the nine months ended September 30, 2017 , from $9,183,761 for the same period in 2016 . The increase was primarily due to an increase in legal fees offset by the decrease of stock-based compensation. Legal fees increased primarily as a result of a litigation related loss contingency of $2.1 million expensed during the nine months ended September 30, 2017. Stock-based compensation, a non-cash expense, will fluctuate based on the timing and amount of options granted, forfeitures and the fair value of the options at the time of grant or remeasurement.

Restructuring

On March 15, 2017, we announced a strategic restructuring plan in connection with the addition of precision medicine therapeutics to our business. The restructuring plan includes a reduction in force and is expected to be completed in the last quarter of 2017. Restructuring charges of approximately $1.7 million were incurred and have been included as a component of operating loss for the nine months ended September 30, 2017. Of the total restructuring charges, approximately $1.2 million was related to termination of employees and an approximately $0.5 million charge related to impaired license fees.

Net Interest Expense
 
Net interest expense was $877,741 and $967,522 for nine months ended September 30, 2017 and 2016 , respectively. The decrease of net interest expense is due to a decrease in interest expense of approximately $184,000, resulting from pay-off of our $15.0 million term loan, offset by a decrease in interest income as a result of liquidation of our short-term investments.

Change in Fair Value of Derivative Financial Instruments — Warrants
 
We have issued warrants that are accounted for as derivative liabilities. As of September 30, 2017 , the derivative financial instruments — warrants liabilities were revalued to $2,037,712 , resulting in an increase in value of $1,202,772 from December 31, 2016 , based primarily upon the issuance of new derivative financial instruments—warrants in connection with July fundraising activities, offset by the decrease in our stock price as well as the changes in the expected term, volatility, and risk free interest rates for the expected term. The issuance of new warrants was recorded as a liability under derivative financial instruments — warrants in the condensed consolidated balance sheets. The decrease in value was recorded as a gain from the change in fair value of derivative financial instruments — warrants in the condensed consolidated statement of operations.
 

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Net Loss
 
Net loss and per share amounts were as follows:

 
Nine Months Ended September 30,
 
2017
 
2016
 
Increase (Decrease)
Net loss attributable to common shareholders
$
(22,355,494
)
 
$
(30,674,248
)
 
$
(8,318,754
)
Net loss per common share — basic
$
(0.68
)
 
$
(1.02
)
 
$
(0.34
)
Net loss per common share — diluted
$
(0.68
)
 
$
(1.04
)
 
$
(0.36
)
 
 
 
 
 
 
Weighted average shares outstanding — basic
32,826,306

 
30,018,841

 
2,807,465

Weighted average shares outstanding — diluted
32,826,306

 
30,136,572

 
2,689,734

 
The $8,318,754 decrease in net loss attributable to common shareholders and the $0.34 decrease in basic net loss per share was primarily the result of a decrease in operating expenses compared to the same period in the prior year. This decrease was offset by a loss on extinguishment of debt of $1.7 million.

LIQUIDITY AND CAPITAL RESOURCES
 
As of September 30, 2017 , we had $7,434,298 in cash and cash equivalents. Net cash used in operating activities for the nine months ended September 30, 2017 was $19,949,652 , compared to $22,034,998 for the nine months ended September 30, 2016 . Our use of cash was primarily a result of the net loss of $22,337,314 for the nine months ended September 30, 2017 , adjusted for non-cash items related to stock-based compensation of $3,117,364 , loss on extinguishment of debt of $1,655,825 , impairment loss of $485,000 , depreciation and amortization of $956,995 , and the gain from the change in fair value of derivative financial instruments — warrants of $2,012,747 . The changes in our operating assets and liabilities consisted of lower accounts payable and accrued expenses, an increase in accounts receivable and a decreased prepaid expenses. At our current and anticipated level of operating loss, we expect to continue to incur an operating cash outflow for the next several years.
 
Net cash provided by investing activities was $23,925,535 during the nine months ended September 30, 2017 , compared to $25,249,392 used in investing activities for the same period in 2016 . Investing activities during the nine months ended September 30, 2017 consisted of net sales and maturities of short-term investments of $24,061,786 offset by net purchases for capital equipment of $136,251 .
 
Net cash used in financing activities was $10,447,842 during the nine months ended September 30, 2017 , compared to $2,361,994 provided in financing activities for the same period in 2016 . Financing activities during the nine months ended September 30, 2017  related primarily to the pay-off of long-term debt resulting in debt extinguishment offset by the sale of common stock, while financing activities during the same period of the prior year consisted primarily of sales of common stock offset by repayment of long-term debt. On June 1, 2017, we received a Notice of Event of Default from the lenders which stated that Events of Default had occurred and all of the obligation under the Loan and Security Agreement dated as of June 30, 2014 were immediately due and payable. On June 6, 2017, the lenders took the total pay-off amount of $16,668,583 out of our bank accounts which satisfied all of our outstanding obligations under the Agreement. We disagree with the lenders that any Event of Default has occurred and are reserving all of our options with respect to the Agreement. 
 
As of September 30, 2017 , and December 31, 2016 , we had working capital of $3,469,622 and $31,152,936 , respectively. 
 
On October 25, 2017, we filed a registration statement on Form S-1 with the SEC for a best efforts public offering of up to $17.5 million of common stock and warrants. H.C. Wainwright & Co. is acting as placement agent.

Based on our current business plan and assumptions, we expect to continue to incur significant losses and require significant additional capital to further advance our clinical trial programs and support our other operations. Considering our current cash resources, including the net proceeds received from the offering of our equity securities in July 2017, we believe our existing resources will be sufficient to fund the Company’s planned operations into the first quarter of 2018. In addition, we have based our cash sufficiency estimates on our current business plan and assumptions that may prove to be wrong. We could utilize our available capital resources sooner than we currently expect, and we could need additional funding to sustain

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our operations even sooner than currently anticipated. These circumstances raise substantial doubt about our ability to continue as a going concern.

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. To date, our sources of cash have been primarily limited to the sale of equity securities. 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 significantly delay, scale back or discontinue the development and/or commercialization of one or more product candidates, all of which may have a material adverse impact on our operations. We may also be required to (i) 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 (ii) 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. We are evaluating the following options to raise additional capital, increase revenue, as well as reduce costs, in an effort to strengthen our liquidity position: (1) Raising capital through public and private equity offerings; (2) Adding capital through short-term and long-term borrowings; (3) Introducing operation and business development initiatives to bring in new revenue streams by leveraging capabilities within our CLIA lab, as well as monetizing our proprietary NextCollect™ DNA collection and preservation cup; (4) Reducing operating costs by identifying internal synergies; (5) Engaging in strategic partnerships; and (6) Taking actions to reduce or delay capital expenditures. We continually assess any spending plans, including a review of our discretionary spending in connection with certain strategic contracts, to effectively and efficiently address our liquidity needs.

NASDAQ Notice

On September 5, 2017, we received a written notice from the NASDAQ Stock Market LLC (“NASDAQ”) that we were not in compliance with NASDAQ Listing Rule 5550(a)(2) for continued listing on the NASDAQ Capital Market, as the minimum bid price of our common stock had been below $1.00 per share for 30 consecutive business days. The Notice had no immediate effect on the listing of our common stock, and our common stock continue to trade on the NASDAQ Capital Market under the symbol “TROV”.

In accordance with NASDAQ Listing Rule 5810(c)(3)(A), we have a period of 180 calendar days, or until March 5, 2018, to regain compliance with the minimum bid price requirement. To regain compliance, the closing bid price of our common stock must meet or exceed $1.00 per share for at least ten consecutive business days during this 180 calendar day period.

CONTRACTUAL OBLIGATIONS
 
For a discussion of our contractual obligations see (i) our Financial Statements and Notes to Consolidated Financial Statements Note 9. Commitments and Contingencies , and (ii) Item 7 Management Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations and Commitments , included in our Annual Report on Form 10-K as of December 31, 2016 .

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Interest Rate Risk
 
Our primary exposure to market risk is interest income and expense sensitivity, which is affected by changes in the general level of interest rates, particularly because our equipment line of credit has a floating interest rate as of September 30, 2017 . Changes in interest rates could affect the amounts of interest that we pay in the future.

Our cash and cash equivalent primary consists of deposits, and money market deposits managed by commercial banks as of September 30, 2017 . The goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments.

Our investments are in short-term money marketable funds. Due to the short-term duration of our investment portfolio and the relatively low risk profile of our investments, a sudden change in interest rates would not have a material effect on the fair market value of our portfolio, nor our operating results or cash flows.


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We do not believe our cash and cash equivalents have significant risk of default issues; however, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. Given the current stability of financial institutions, we believe that we will not experience losses on these deposits.

Foreign Currency Risk
 
Our foreign currency exchange risk mainly arises from our operations in Italy. Our functional and reporting currency is the United States dollar. We translate our foreign operations’ assets and liabilities denominated in foreign currencies into U.S. dollars at current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in the cumulative translation account, a component of consolidated accumulated other comprehensive income. In addition, we face the foreign currency risk as a result of entering into transactions denominated in currencies other than U.S. dollars. Changes in foreign currency exchange rates can create foreign exchange gains or losses to us.
 
Effects of Inflation
 
We do not believe that inflation and changing prices during the nine months ended September 30, 2017 had a significant impact on our results of operations.

ITEM 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
We have performed an evaluation under the supervision and with the participation of our management, including our principal executive and financial officer, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”).  Based on that evaluation, our principal executive and financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2017 to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all errors and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
 
Changes in Internal Control over Financial Reporting
 
There was no change in our internal control over financial reporting during the three months ended September 30, 2017 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
 
See Note 9 to the unaudited Condensed Consolidated Financial Statements for a summary of legal proceedings.

ITEM 1A. RISK FACTORS
 
There have been no material changes from the risk factors disclosed in our Form 10-K for the year ended December 31, 2016 , Form 10-Q for the periods ended March 31, 2017, and Form 10-Q for the periods ended June 30, 2017, except for the following:

Our financial statements include an explanatory paragraph that expresses substantial doubt about our ability to continue as a going concern, indicating the possibility that we may not be able to operate in the future.

Primarily as a result of our losses incurred to date, our expected continued future losses, and limited cash balances, we have included an explanatory paragraph in our financial statements expressing substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is contingent upon, among other factors, the sale of the shares of our common stock or obtaining alternate financing.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None .

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS
 
Exhibit
Number
 
Description of Exhibit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
TROVAGENE, INC.
 
 
 
November 9, 2017
By:
/s/ William J. Welch
 
 
William J. Welch
 
 
Chief Executive Officer (Principal Executive Officer and Principal Financial Officer)


31


Exhibit 4.1


TROVAGENE, Inc.
STOCK AWARD AGREEMENT

This Stock Award Agreement (this “ Agreement ”), is made effective as of August 15, 2017 (the “ Date of Grant ”), by and between Trovagene, Inc., a Delaware corporation (the “ Company ”), and William J. Welch (the “ Participant ”).

RECITALS

WHEREAS , the Company has previously adopted the 2014 Equity Incentive Plan (as such plan may be amended, restated or otherwise modified from time to time, the “ Plan ”), which is incorporated herein by reference and made a part of this Agreement as further described in Section 8 of this Agreement, and capitalized terms not otherwise defined herein shall have the meaning ascribed to such terms in the Plan; and

WHEREAS , the Participant is an employee of the Company as of the date hereof; and

WHEREAS , the Board of Directors of the Company (the “ Board ”) has determined that it is in the best interests of the Company to make a series of awards to the Participant of shares of common stock of the Company (“ Common Stock ”), subject to certain continuing employment requirements and other terms provided for herein and in the Plan.

NOW THEREFORE , in consideration of the mutual covenants hereinafter set forth, the parties hereto agree as follows:

1.
Award of Shares .
2.

(a)
Subject to the terms and conditions of this Agreement and the Plan, on the Date of Grant the Company hereby grants to the Participant 745,392 shares of Common Stock (the “ Award Shares ”), which award shall be subject to adjustment as set forth in Section 3 hereof and Section 7 of the Plan. The grant of Award Shares on the Date of Grant is hereafter referred to as “ Grant #1 .”

(b)
In addition to Grant #1, the Company agrees to make additional grants (the “ Additional Grants ”) of Award Shares on the grant dates indicated below (“Grant Dates”), if Participant continues to be employed on such Grant Dates, which shall be subject to the same terms and conditions specified in this Agreement for Grant #1, including without limitation the Tax Payment provided in Section 14 hereof. It is intended that, in the aggregate, the Additional Grants will increase Participant’s ownership to five percent (5%) of the shares of Common Stock issued and outstanding and the number of shares indicated below for Grants #2 through #9 will be adjusted in accordance with Section 3 hereof as necessary to achieve this intent. The Additional Grants will be made at least as rapidly as provided in the following schedule, but the Compensation Committee of the Board in its discretion may decide to make such Additional Grants at an earlier date or dates, subject to Participant’s continued employment on such Grant Dates:




Grant #
Grant Date
Number of Shares
Percentage of Shares Outstanding
Grant #2
January 15, 2018
152,021
0.375%
Grant #3
April 15, 2018
152,021
0.375%
Grant #4
July _15, 2018
152,021
0.375%
Grant #5
October 15, 2018
152,021
0.375%
Grant #6
January 15, 2019
152,021
0.375%
Grant #7
April _15, 2019
152,021
0.375%
Grant #8
July 15, 2019
152,021
0.375%
Grant #9
October 15, 2019
152,018
0.375%

3.
Vesting of Award Shares . The Award Shares shall be 100% vested on the Date of Grant and each subsequent Grant Date. The right to the additional Grants will be subject to the Participant’s continued employment with the Company on each applicable Grant Date. Each of the Additional Grants shall be 100% vested on the Date of Grant.

4.
Anti-Dilution Protection . To the extent any event occurs that would cause the Restricted Shares (including Grant #1 and the Additional Grants) to constitute less than five percent (5%) of the aggregate Common Stock issued and outstanding through the period that includes the last Grant, the Company shall adjust the Additional Grants that have not been awarded to award to the Participant such additional number of shares of Common Stock as are necessary to maintain such percentage to reflect such dilution, which adjusted Additional Grants shall be subject to the same vesting and other terms and conditions specified in this Agreement, including without limitation the Tax Payment provided in Section 14 hereof.

5.
Termination of Service and Forfeiture of Award Shares . If the Participant ceases to serve as an employee of the Company (for any or no reason), all Award Shares which the Participant has received shall be subject to the applicable repurchase provisions set forth herein and, except as otherwise provided in Section 15 hereof, the Participant shall not be entitled to any Additional Grants after such termination of employment date.

6.
Rights as Holder of Award Shares . The Participant shall be the record owner of the Award Shares granted pursuant to this Agreement unless and until such Award Shares are (a) repurchased in connection with termination of the Participant’s employment pursuant to, and in accordance with, Section 7 hereof, or (b) transferred in accordance with Section 6 hereof. As a record owner of the Award Shares, the Participant shall be entitled to all rights of a holder of Award Shares as provided in this Agreement and the Plan; provided, however, that the Participant shall not be (i) eligible to receive dividends or other distributions with respect to the Award Shares until such Award Shares become vested, or (ii) entitled to vote at meetings of the Company’s shareholders with respect to the Award Shares until such Award Shares become vested. Dividends or other distributions with respect to the Award Shares that are unvested will be paid to the Participant at the time such Award Shares become vested and if such Award Shares fail to vest any dividends or other distributions with respect thereto shall be forfeited. The Participant is obligated to become a party to any agreement approved by the Board with respect to a Change in Control.

7.
Transferability . The Participant may transfer, directly or indirectly, any Award Shares only in accordance with the Plan and this Agreement. Any purported assignment, transfer or grant by the Participant, directly or indirectly, of any Award Shares in contravention of the Plan and this Agreement shall be entirely null and void.

8.
Call Rights .

(a)
Upon the date the Participant ceases to serve as an employee of the Company for any reason (a “ Call Event Date ”), the Company may elect (the “ Call Right ”) to repurchase all or any portion of the vested Award Shares held by the Participant on the Call Event Date, in accordance with the terms and




conditions set forth in this Section 7 . The Company may exercise the Call Right by delivering written notice to the Participant within twelve (12) months following the Call Event Date.

(b)
The purchase price to be paid by the Company to the Participant for each vested Restricted Share repurchased as a result of the Company’s exercise of the Call Right will be the Fair Market Value of such Restricted Share as of the date of the Company’s written notice of exercise to the Participant. The Company will pay for the vested Award Shares to be purchased by it pursuant to the Company’s exercise of the Call Right, at its option, after offset of bona fide debts owed by the Participant, by a check or wire transfer of immediately available funds. The Company will be entitled to receive customary representations and warranties from the Participant regarding such sale, including, without limitation, with respect to title and freedom from encumbrances. The closing of the purchase of the Award Shares pursuant to the Company’s exercise of the Call Right shall take place on the date designated by the Company, which date shall not be more than thirty (30) days nor less than five (5) days after the date of the written notice of exercise to the Participant. If the Company elects to defer the closing date to more than fifteen (15) days after the date of the written notice of exercise to the Participant, then (a) any portion of the applicable payment that shall not have been made as of fifteen (15) days after the date of the written notice of exercise to the Participant shall accrue interest at a rate of fifteen percent (15%) per annum, from and including the date that is fifteen (15) days after the date of the written notice of exercise, through and including the payment date. For purposes of determining the Fair Market Value purchase price, Fair Market Value will be based on the average closing price of a share of Common Stock as reported in the Wall Street Journal for the five trading days immediately preceding the date of the written notice of exercise to the Participant.

9.
Award Shares Subject to the Plan . By entering into this Agreement the Participant agrees and acknowledges that (a) the Participant has received and read a copy of the Plan and (b) the Award Shares are subject to the Plan, the terms and provisions of which are hereby incorporated herein by reference. Except as otherwise explicitly stated in this Agreement, in the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail. The grant of Award Shares pursuant to this Agreement shall not restrict in any way the adoption of any amendment to the Plan.

10.
Lock-Up of Award Shares . With respect to each grant of Award Shares, during the period beginning on the date of each grant of Award Shares until one year after such date of grant, the Participant agrees not to directly or indirectly, (i) offer, sell, offer to sell, contract to sell, hedge, pledge, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or sell (or announce any offer, sale, offer of sale, contract of sale, hedge, pledge, sale of any option or contract to purchase, purchase of any option or contract of sale, grant of any option, right or warrant to purchase or other sale or disposition), or otherwise transfer or dispose of (or enter into any transaction or device that is designed to, or could be expected to, result in the disposition by any person at any time in the future), the Award Shares subject to such grant, that are beneficially owned, within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended.

11.
No Reliance on the Company . In making the Participant’s investment decision with respect to the receipt of the Award Shares, the Participant represents and warrants that he has not relied upon the Company, any of its affiliates, counsel to the Company, or any representative of any of the foregoing for any advice of any sort, including, but not limited to, tax or securities law advice.

12.
No Right to Continued Service . This Agreement shall not be construed as giving the Participant the right to be retained in the employ of, or in any other continuing relationship with, the Company or any of its affiliates.

13.
Amendment; Waiver . Subject to Sections 8.6.4 and 8.6.5 of the Plan, no amendment or modification of any provision of this Award Agreement shall be effective unless signed in writing by or on behalf of the Company




and the Participant. No waiver of any breach or condition of this Award Agreement shall be deemed to be a waiver of any other or subsequent breach or condition whether of like or different nature.

14.
Governing Law . All issues and questions concerning the construction, validity, interpretation and enforceability of this Agreement and the exhibit hereto, and their negotiation, execution, performance or nonperformance, interpretation, termination, construction and all matters based upon, arising out of or related to any of the foregoing, whether arising in law or equity, shall be governed by, and construed in accordance with, the laws of the State of Delaware, without giving effect to any choice of law or conflict of law rules or provisions that would cause the application of the laws of any jurisdiction other than the State of Delaware.
  
15.
WAIVER OF JURY TRIAL . EACH PARTY HERETO IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING (INCLUDING COUNTERCLAIMS) RELATING TO OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE TRANSACTIONS OR RELATIONSHIPS HEREBY CONTEMPLATED OR OTHERWISE IN CONNECTION WITH THE ENFORCEMENT OF ANY RIGHTS OR OBLIGATIONS HEREUNDER.

16.
Withholding . No later than the date the Company is required to deposit the required withholding taxes after the date or dates Participant receives any Award Shares, including Award Shares awarded pursuant to the anti-dilution provisions of Section 3 hereof, the Company shall pay to or on behalf of the Participant an amount, determined by Participant’s tax accountant on an estimated basis to be the actual amount necessary to satisfy the full amount of Participant’s federal, state, and local taxes required by law or regulation (collectively, “ Taxes ”) to be paid by the Participant as a result of the receipt of the Award Shares (the “ Tax Payment ”), together with an amount equal to any Taxes incurred by the Participant as a result of the Participant’s actual or constructive receipt of the Tax Payment and shall withhold and deposit such amount with the Internal Revenue Service on Participant’s behalf. In the event of any difference between the estimated Taxes and the actual Taxes paid, the parties agree to reconcile and remit any such difference within 60 days after the latest of the date or dates Participant files his annual federal and state income tax returns for the tax year in which the Tax Payment is paid or withheld. The Tax Payment provisions of this Section 15 shall not apply with respect to any Taxes arising in connection with a Realization Bonus that in the sole discretion of the Company is paid in the form of cash in the event of the Participant’s termination without Cause or resignation for Good Reason pursuant to Section 16 hereof.

17.
Realization Bonus . Upon the consummation of a Sale of the Company, a termination by the Company without Cause (as defined in Participant’s employment agreement with the Company signed on May 6, 2016 (the “ Employment Agreement ”)), or Participant’s resignation for Good Reason (as defined in the Employment Agreement) prior to the date that all of the Additional Grants under Section 1 have been granted, Participant will be entitled to receive either: (a) a cash bonus in an amount equal to the difference between the fair market value of the Award Shares then held by Participant and the fair market value of the Award Shares Participant would have received if he held five percent (5%) of the issued and outstanding shares of Common Stock of the Company (disregarding the fair market value attributable to shares disposed of by Participant prior to the Sale of the Company, termination without Cause or resignation for Good Reason), or (b) such Additional Grants as are necessary to increase the Participant’s total Award Shares granted hereunder to equal five percent (5%) of the shares of Common Stock issued and outstanding (clauses (a) or (b) hereof collectively, the “ Realization Bonus ”). The form of payment of the Realization Bonus in cash or in Common Stock shall be within the sole discretion of the Company. As used herein, “ Sale of the Company ” means: (i) a sale or other disposition of all or substantially all (more than 50% of the total gross fair market value of all of the assets of the Company immediately before such sale, determined without regard to any liabilities associated with such assets) of the Company to a person or persons acting as a group within the 12 month period ending on the date of the most recent sale to such person or group; (ii) a sale or other disposition of more than 50% of the combined voting power of the equity interests in the Company to a person or persons acting as a group within the 12 month period ending on the date of the most recent sale of equity interests to such person or group; or (iii) a merger or consolidation of the Company with or into another entity whereby the equity holders of the Company immediately prior to such merger or consolidation do not own 50% or more of the voting securities of the




surviving company following such merger of consolidation. Notwithstanding the above, the term “Sale of the Company” shall not, however, include any future issuance of securities by the Company in a transaction designed to raise funds for its operation or expansion (e.g., where existing equity holders continue to hold their existing interests and will not receive any of the transaction proceeds), such as a secondary offering or a private offering transaction. The Realization Bonus will be paid on the consummation of the Sale of the Company (the “ Closing Date ”), or on the fifth day after termination without Cause or resignation for Good Reason. In the event of a Sale of the Company where any portion of the net transaction proceeds payable to stockholders is subject to a contingency, escrow or earn-out (“ Contingent Payments ”), the Participant’s share of any Contingent Payments will be paid at the same time and in the same manner as such Contingent Payments are made to stockholders generally in a manner intended to comply with the requirements of the transaction based payments exception under Section 409A of the Code. Notwithstanding anything contained herein to the contrary, no Contingent Payments will be payable to Participant, in his capacity as such, after the fifth anniversary of the Closing Date.

18.
Counterparts . This Agreement may be executed in counterparts (including by electronic transmission), each one of which shall be deemed an original and all of which together shall constitute one and the same Agreement.
19.
Headings . The headings and captions herein are inserted for convenience of reference only and are not intended to govern, limit or aid in the construction of any term or provision hereof.

20.
Severability . If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated.

21.
Entire Agreement . This Agreement and the Employment Agreement between the Company and the Participant dated May 6, 2016, together with all agreements referenced herein and the exhibit hereto, constitute the entire agreement and understanding among the parties hereto in respect of the subject matter hereof and thereof and supersede all prior and contemporaneous arrangements, agreements and understandings, both oral and written, whether in term sheets, presentations or otherwise among the parties hereto, or between any of them, with respect to the subject matter hereof and thereof.

[Signature Page Follows]






IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

Trovagene, Inc.



By: /s/ Thomas H. Adams _______________
Name: Thomas H. Adams
Title: Chairman


PARTICIPANT



/s/ William J. Welch _____________________
Name: William J. Welch
                    
Date: August 11, 2017








Exhibit 31.1
 
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
 
I, William J. Welch, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Trovagene, Inc. (the “Registrant”);

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions);

a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
November 9, 2017
/s/ William J. Welch
 
William J. Welch
 
Chief Executive Officer (Principal Executive Officer and Principal Financial Officer)





Exhibit 32.1
 
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Trovagene, Inc. (the “Company”) on Form 10-Q for the three months ended September 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William J. Welch, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1)                             The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)                             The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
November 9, 2017
/s/ William J. Welch
 
William J. Welch
 
Chief Executive Officer (Principal Executive Officer and Principal Financial Officer)