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 June 30, 2018
 
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 July 31, 2018 , the issuer had 17,688,773 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)
 
 
June 30, 2018
 
December 31, 2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
18,485,950

 
$
8,225,764

Short-term investment
31,500

 
—

Accounts receivable and unbilled receivable
124,082

 
77,095

Prepaid expenses and other current assets
1,001,840

 
1,165,828

Total current assets
19,643,372

 
9,468,687

Property and equipment, net
1,803,921

 
2,426,312

Other assets
320,749

 
389,942

Total Assets
$
21,768,042

 
$
12,284,941

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
565,413

 
$
825,244

Accrued expenses
2,303,366

 
1,454,587

Deferred rent, current portion
349,565

 
334,424

Current portion of long-term debt
—

 
1,331,515

Total current liabilities
3,218,344

 
3,945,770

Derivative financial instruments—warrants
67,847

 
649,387

Deferred rent, net of current portion
1,004,689

 
1,183,677

Total Liabilities
4,290,880

 
5,778,834

 
 
 
 
Commitments and contingencies (Note 8)


 


 
 
 
 
Stockholders’ equity
 
 
 
Preferred stock, $0.001 par value, 20,000,000 shares authorized; 277,100 designated as Series A Convertible Preferred Stock; 60,600 shares outstanding at June 30, 2018 and December 31, 2017 with liquidation preference of $606,000 at June 30, 2018 and December 31, 2017; 8,860 designated as Series B Convertible Preferred Stock; 5,650 and 0 shares outstanding at June 30, 2018 and December 31, 2017, respectively
66

 
60

Common stock, $0.0001 par value, 150,000,000 shares authorized; 17,305,004 and 4,399,299 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
7,173

 
5,279

Additional paid-in capital
201,720,972

 
179,546,954

Accumulated deficit
(184,251,049
)
 
(173,046,186
)
Total stockholders’ equity
17,477,162

 
6,506,107

Total liabilities and stockholders’ equity
$
21,768,042

 
$
12,284,941

 
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 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Royalties
$
52,423

 
$
44,810

 
$
101,478

 
$
110,636

Diagnostic services
39,345

 
55,501

 
79,347

 
84,363

Clinical research services
20,045

 
1,700

 
31,124

 
2,050

Total revenues
111,813

 
102,011

 
211,949

 
197,049

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues
204,436

 
338,203

 
570,780

 
954,629

Research and development
1,952,767

 
981,715

 
3,836,605

 
5,261,545

Selling, general and administrative
2,150,871

 
4,674,152

 
4,655,848

 
8,278,776

Restructuring charges (benefit)
243,335

 
(3,806
)
 
243,335

 
1,715,998

Total operating expenses
4,551,409

 
5,990,264

 
9,306,568

 
16,210,948

 
 
 
 
 
 
 
 
Loss from operations
(4,439,596
)
 
(5,888,253
)
 
(9,094,619
)
 
(16,013,899
)
 
 
 
 
 
 
 
 
Net interest income (expense)
35,277

 
(431,871
)
 
32,812

 
(861,268
)
Gain (loss) from change in fair value of derivative financial instruments—warrants
711,229

 
(71,428
)
 
581,540

 
484,078

Gain (loss) on extinguishment of debt
17,974

 
(1,655,825
)
 
17,974

 
(1,655,825
)
Other (loss) income, net
(71,839
)
 
1,566

 
(70,839
)
 
1,566

Net loss
(3,746,955
)
 
(8,045,811
)
 
(8,533,132
)
 
(18,045,348
)
 
 
 
 
 
 
 
 
Preferred stock dividend payable on Series A Convertible Preferred Stock
(6,060
)
 
(6,060
)
 
(12,120
)
 
(12,120
)
Deemed dividend recognized on beneficial conversion features of Series B Convertible Preferred Stock issuance
(2,769,533
)
 
—

 
(2,769,533
)
 
—

 
 
 
 
 
 
 
 
Net loss attributable to common stockholders
$
(6,522,548
)
 
$
(8,051,871
)
 
$
(11,314,785
)
 
$
(18,057,468
)
 
 
 
 
 
 
 
 
Net loss per common share — basic
$
(0.88
)
 
$
(3.12
)
 
$
(1.88
)
 
$
(7.00
)
Net loss per common share — diluted
$
(0.88
)
 
$
(3.12
)
 
$
(1.88
)
 
$
(7.00
)
 
 
 
 
 
 
 
 
Weighted-average shares outstanding — basic
7,423,463

 
2,582,645

 
6,026,345

 
2,581,372

Weighted-average shares outstanding — diluted
7,423,463

 
2,582,645

 
6,026,345

 
2,581,372

 
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 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(3,746,955
)
 
$
(8,045,811
)
 
$
(8,533,132
)
 
$
(18,045,348
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
  Foreign currency translation loss
—

 
(9,543
)
 
—

 
(11,942
)
Unrealized gain or reversal of previous losses on securities available-for-sale
—

 
9,519

 
—

 
9,065

Total other comprehensive loss
—

 
(24
)
 
—

 
(2,877
)
 
 
 
 
 
 
 
 
Total comprehensive loss
(3,746,955
)
 
(8,045,835
)
 
(8,533,132
)
 
(18,048,225
)
 
 
 
 
 
 
 
 
Preferred stock dividend payable on Series A Convertible Preferred Stock
(6,060
)
 
(6,060
)
 
(12,120
)
 
(12,120
)
Deemed dividend recognized on beneficial conversion features of Series B Convertible Preferred Stock issuance
(2,769,533
)
 
—

 
(2,769,533
)
 
—

 
 
 
 
 
 
 
 
Comprehensive loss attributable to common stockholders
$
(6,522,548
)
 
$
(8,051,895
)
 
$
(11,314,785
)
 
$
(18,060,345
)

See accompanying notes to the unaudited condensed consolidated financial statements.


5
Table of Contents


TROVAGENE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)

 
Preferred Stock
Shares
 
Preferred Stock
Amount
 
Common Stock
Shares
 
Common Stock
Amount
 
Additional
Paid-In Capital
 
Accumulated Deficit
 
Total
Stockholders’ Equity
Balance, January 1, 2018
60,600

 
$
60

 
4,399,299

 
$
5,279

 
$
179,546,954

 
$
(173,046,186
)
 
$
6,506,107

Stock-based compensation
—

 
—

 
—

 
—

 
1,627,431

 
—

 
1,627,431

Sale of common stock and warrants, net of expenses
—

 
—

 
9,140,000

 
914

 
11,778,611

 
—

 
11,779,525

Sale of Series B Convertible Preferred Stock, net of expenses
8,860

 
9

 
—

 
—

 
4,386,753

 
—

 
4,386,762

Deemed dividend recognized on beneficial conversion features of Series B Convertible Preferred Stock issuance
—

 
—

 
—

 
—

 
2,769,533

 
(2,769,533
)
 
—

Issuance of common stock upon exercise of warrants
—

 
—

 
473,497

 
569

 
1,612,098

 
—

 
1,612,667

Issuance of common stock upon vesting of restricted stock units
—

 
—

 
75,400

 
90

 
(90
)
 
—

 
—

Issuance of common stock upon conversion of Series B Convertible Preferred Stock
(3,210
)
 
(3
)
 
3,210,000

 
321

 
(318
)
 
—

 
—

Preferred stock dividend payable on Series A Convertible Preferred Stock
—

 
—

 
—

 
—

 
—

 
(12,120
)
 
(12,120
)
Issuance of common stock for share rounding as a result of reverse stock split
—

 
—

 
6,808

 
—

 
—

 
—

 
—

Cumulative adjustment upon adoption of ASC 606
—

 
—

 
—

 
—

 
—

 
109,922

 
109,922

Net loss
—

 
—

 
—

 
—

 
—

 
(8,533,132
)
 
(8,533,132
)
Balance, June 30, 2018
66,250

 
$
66

 
17,305,004

 
$
7,173

 
$
201,720,972

 
$
(184,251,049
)
 
$
17,477,162


See accompanying notes to the unaudited condensed consolidated financial statements.


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Table of Contents

TROVAGENE, INC. 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six Months Ended June 30,
 
2018
 
2017
Operating activities
 
 
 
Net loss
$
(8,533,132
)
 
$
(18,045,348
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Loss on disposal of assets
198,099

 
28,097

Impairment loss
187,500

 
485,000

Depreciation and amortization
483,495

 
645,962

Stock based compensation expense
1,627,431

 
1,696,184

(Gain) loss on extinguishment of debt
(17,974
)
 
1,655,825

Accretion of final fee premium
—

 
293,614

Amortization of discount on debt
—

 
113,780

Net realized loss on short-term investments
—

 
6,400

Amortization of premiums on short-term investments
—

 
9,230

Deferred rent
(163,847
)
 
(136,776
)
Interest income accrued on short-term investments
—

 
(90,330
)
Change in fair value of derivative financial instruments—warrants
(581,540
)
 
(484,078
)
Changes in operating assets and liabilities:
 
 
 
Increase in other assets
(199,743
)
 
—

Decrease (increase) in accounts receivable and unbilled receivable
62,935

 
(56,985
)
Decrease in prepaid expenses and other current assets
191,321

 
243,571

Increase in accounts payable and accrued expenses
638,701

 
280,520

Net cash used in operating activities
(6,106,754
)
 
(13,355,334
)
 
 
 
 
Investing activities:
 
 
 
Capital expenditures, net
(5,100
)
 
(20,738
)
Maturities of short-term investments
—

 
16,431,837

Purchases of short-term investments
(31,500
)
 
(8,804,604
)
Sales of short-term investments
—

 
16,434,553

Net cash (used in) provided by investing activities
(36,600
)
 
24,041,048

 
 
 
 
Financing activities:
 
 
 
Proceeds from sales of common stock and warrants, net of expenses
11,779,525

 
106,791

Proceeds from sales of Series B Convertible Preferred Stock, net of expenses
4,386,762

 
—

Proceeds from exercise of warrants
1,612,667

 
—

Payment upon debt extinguishment
(175,381
)
 
(1,613,067
)
Repayments of long-term debt
—

 
(15,000,000
)
Repayments of equipment line of credit
(1,200,033
)
 
(313,052
)
Net cash provided by (used in) financing activities
16,403,540

 
(16,819,328
)
Effect of exchange rate changes on cash and cash equivalents
—

 
2,411

Net change in cash and cash equivalents
10,260,186

 
(6,131,203
)
Cash and cash equivalents—Beginning of period
8,225,764

 
13,915,094

Cash and cash equivalents—End of period
$
18,485,950

 
$
7,783,891

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

 
$
800

Cash paid for interest
$
22,482

 
$
629,952

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Preferred stock dividend payable on Series A Convertible Preferred Stock
$
12,120

 
$
12,120

Deemed dividend recognized for beneficial conversion features of Series B Convertible Preferred Stock issuance
$
2,769,533

 
$
—

Common stock issued upon conversion of Series B Convertible Preferred Stock
$
321

 
$
—

 
See accompanying notes to the unaudited condensed consolidated financial statements.

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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, oncology therapeutics company, using a precision medicine strategy to develop drugs that target mitosis (cell division) to treat various types of cancer, including leukemias/lymphomas and solid tumors.

Trovagene’s lead drug candidate, PCM-075, is a Polo-like Kinase 1 (“PLK1”) highly-selective adenosine triphosphate (“ATP”) competitive inhibitor. PCM-075 has shown preclinical antitumor activity as a single agent and synergy in combination with numerous different chemotherapeutics, including cisplatin, cytarabine, doxorubicin, gemcitabine and paclitaxel, as well as targeted therapies, such as abiraterone acetate (Zytiga ® ), histone deacetylase (“HDAC”) inhibitors, such as belinostat (Beleodaq ® ), Quizartinib (AC220), a development stage FLT3 inhibitor, and bortezomib (Velcade ® ). These therapeutics are used clinically for the treatment of many leukemias/lymphomas and solid tumor cancers, including Acute Myeloid Leukemia (“AML”), Non-Hodgkin Lymphoma (“NHL”), metastatic Castration-Resistant Prostate Cancer (“mCRPC”), Adrenocortical Carcinoma (“ACC”), and Triple Negative Breast Cancer (“TNBC”).

PCM-075 was developed to have high selectivity to PLK1 (at low nanomolar IC 50 levels), to be administered orally, and to have a relatively short drug half-life of approximately 24 hours compared to other pan PLK inhibitors. A safety study of PCM-075 has been successfully completed in patients with advanced metastatic solid tumors and published in 2017 in Investigational New Drugs . The Company has two active Investigational New Drug (“INDs”) applications in place with the U.S. Food and Drug Administration (“FDA”) for PCM-075, allowing the Company to pursue clinical development in leukemias/lymphomas and solid tumor cancers. Trovagene continues to focus on advancing its two active clinical trials with PCM-075. The Company is currently enrolling a Phase 1b/2 open-label clinical trial of PCM-075 in combination with standard-of-care chemotherapy in patients with AML. The Phase 1b/2 clinical trial is being led by Hematologist Jorge Eduardo Cortes, M.D., Deputy Department Chair, Department of Leukemia, Division of Cancer Medicine, the University of Texas MD Anderson Cancer Center. Nine clinical trial sites across the U.S. are currently participating in this trial. In addition, the Company is recruiting patients for its Phase 2 open-label clinical trial of PCM-075 in combination with abiraterone acetate (Zytiga ® ) and prednisone in patients with mCRPC. This trial is being led by Dr. David Einstein at the Genitourinary Oncology Program at Beth Israel Deaconess Medical Center (“BIDMC”) and Harvard Medical School and, in addition to BIDMC, this trial is being conducted at Dana Farber Cancer Institute (“DFCI”) and Massachusetts General Hospital (“MGH”).

Trovagene’s intellectual property and proprietary technology enables the Company to analyze circulating tumor DNA (“ctDNA”) and clinically actionable markers to identify patients most likely to respond to specific cancer therapies. The Company plans to continue to vertically integrate its biomarker strategy with the development of targeted cancer therapeutics.
 
Basis of Presentation
 
The accompanying unaudited interim condensed consolidated financial statements of Trovagene, which include all accounts of its wholly owned subsidiary, Trovagene, Srl (dissolved in October 2017), 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, 2017 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

8

and the notes thereto for the year ended December 31, 2017 included in the Company’s annual report on Form 10-K filed with the SEC on February 26, 2018.

The Company made a reverse split of its common stock, $0.0001 par value, at a ratio of 1 for 12 , effective June 1, 2018. All share and per share information in the unaudited condensed consolidated financial statements and the accompanying notes have been retroactively adjusted to reflect the reverse stock split for all periods presented.

Liquidity
 
Trovagene’s condensed consolidated financial statements as of June 30, 2018 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.
 
The Company has incurred net losses since its inception and has negative operating cash flows. Considering the Company’s current cash resources, including the net proceeds received from the offering of its equity securities in June 2018, management believes the Company’s existing resources will be sufficient to fund the Company’s planned operations through June 2019. On April 6, 2018, the Company paid off the outstanding Loan and Security Agreement (“Equipment Line of Credit”) entered in November 2015 to Silicon Valley Bank (“SVB”). 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. 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. 
 
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 would 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;

•
Introducing operation and business development initiatives to bring in new revenue streams;

•
Reducing operating costs by identifying internal synergies; and

•
Engaging in strategic partnerships.

As of July 31, 2018, the Company has received approximately $1.6 million upon exercise of 5,681,667 warrants in connection with the December 2017 public offering. The Company continually assesses its spending plans to effectively and efficiently address its liquidity needs.


9

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 had a period of 180 calendar days, or until March 5, 2018, to regain compliance with the minimum bid price requirement.

On March 6, 2018, the NASDAQ Capital Market informed the Company that it is eligible for an additional 180 calendar day period until September 4, 2018 to regain compliance with the minimum $1.00 bid price per share 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.

2. Summary of Significant Accounting Policies
 
During the six months ended June 30, 2018 , there have been no changes to the Company’s significant accounting policies as described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2017 , except as described below.
 
Revenue Recognition
 
The Company recognizes revenue when control of its products and services is transferred to its customers in an amount that reflects the consideration it expects to receive from its customers in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. The Company considers a performance obligation satisfied once it has transferred control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. The Company recognizes revenue for satisfied performance obligations only when it determines there are no uncertainties regarding payment terms or transfer of control. For sales-based royalties, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
 
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 estimates and records licensee’s sales based on historical usage rate and collectability.
 
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. This revenue stream does not meet the criteria for contracts with a customer under ASC 606 because it is not probable that the Company will collect substantially all the consideration to which it will be entitled in exchange for the goods and services transferred, nor can it reliably determine the expected transaction price. Therefore, 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.


10

Clinical Research Revenue

Revenue from clinical research 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, which is when control of the product is deemed to be transferred.

Restructuring

Restructuring costs are included in loss from operations in the 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 was completed as of December 31, 2017. In May 2018, the Company closed its Clinical Laboratory Improvement Amendments (“CLIA”) - certified laboratory operations. Costs associated with winding down the CLIA laboratory were recorded in the restructuring cost in the June 30, 2018 financial statements. See Note 9 to the consolidated financial statements for further information.
 
Net Loss Per Share
 
Basic and diluted net loss per share is presented in conformity with ASC Topic 260, Earnings per Share , for all periods presented. In accordance with this guidance, basic net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted-average common shares outstanding during the period. Preferred dividends are included in income available to common stockholders in the computation of basic and diluted earnings per share. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common share equivalents outstanding for the period. Common share equivalents are only included when their effect is dilutive.
 
The following table sets forth the computation of basic and diluted earnings per share:
 
 
Three Months
Ended June 30,
 
Six Months
Ended June 30,
 
2018
 
2017
 
2018
 
2017
Numerator: Net loss attributable to common shareholders
$
(6,522,548
)
 
$
(8,051,871
)
 
$
(11,314,785
)
 
$
(18,057,468
)
Adjustment for gain from change in fair value of derivative financial instruments — warrants
—

 
—

 
—

 
—

Net loss used for diluted loss per share
$
(6,522,548
)
 
$
(8,051,871
)
 
$
(11,314,785
)
 
$
(18,057,468
)
Denominator for basic and diluted net loss per share:
 
 
 
 
 
 
 
Weighted-average shares used to compute basic loss per share
7,423,463

 
2,582,645

 
6,026,345

 
2,581,372

Adjustments to reflect assumed exercise of warrants
—

 
—

 
—

 
—

Weighted-average shares used to compute diluted net loss per share
7,423,463

 
2,582,645

 
6,026,345

 
2,581,372

Net loss per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
(0.88
)
 
$
(3.12
)
 
$
(1.88
)
 
$
(7.00
)
Diluted
$
(0.88
)
 
$
(3.12
)
 
$
(1.88
)
 
$
(7.00
)


11

The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because their effect was anti-dilutive:
 
 
June 30,
 
2018
 
2017
Options to purchase Common Stock
540,998

 
299,096

Warrants to purchase Common Stock
22,189,533

 
360,740

Restricted Stock Units
12,401

 
121,025

Series A Convertible Preferred Stock
5,261

 
5,261

Series B Convertible Preferred Stock
5,650,000

 
—

 
28,398,193

 
786,122


Recent Accounting Pronouncements
 
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.

3. Fair Value Measurements
 
The following table presents the Company’s assets and liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of June 30, 2018 and December 31, 2017 :
 
 
Fair Value Measurements at
June 30, 2018
 
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)
$
18,469,871

 
$
—

 
$
—

 
$
18,469,871

Total Assets
$
18,469,871

 
$
—

 
$
—

 
$
18,469,871

Liabilities:
 
 
 
 
 
 
 
Derivative financial instruments — warrants
$
—

 
$
—

 
$
67,847

 
$
67,847

Total Liabilities
$
—

 
$
—

 
$
67,847

 
$
67,847

 
Fair Value Measurements at
December 31, 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)
$
8,309,964

 
$
—

 
$
—

 
$
8,309,964

Total Assets
$
8,309,964

 
$
—

 
$
—

 
$
8,309,964

Liabilities:
 
 
 
 
 
 
 
Derivative financial instruments — warrants
$
—

 
$
—

 
$
649,387

 
$
649,387

Total Liabilities
$
—

 
$
—

 
$
649,387

 
$
649,387

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

12


The following table sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the six months ended June 30, 2018 :
 
Description
 
Balance at
December 31, 2017
 
Realized (gains) or losses
 
Balance at
June 30, 2018
Derivative financial instruments — warrants
 
$
649,387

 
$
(581,540
)
 
$
67,847

 
The change in the fair value of the “derivative financial instruments—warrants” is recorded as a gain or loss 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 and ASC Topic 480-10. 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. Property and Equipment
 
Property and equipment consist of the following:
 
 
As of June 30,
2018
 
As of December 31,
2017
Furniture and office equipment
$
1,072,156

 
$
1,076,709

Leasehold improvements
1,994,514

 
1,994,514

Laboratory equipment
912,940

 
1,426,581

 
3,979,610

 
4,497,804

Less—accumulated depreciation and amortization
(2,175,689
)
 
(2,071,492
)
Property and equipment, net
$
1,803,921

 
$
2,426,312

 
5. 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. Interest only payments were 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. On April 6, 2018, the Company paid approximately $1,100,000 to SVB. This payment repaid the outstanding Equipment Line of Credit loan in full. The Company recorded $25,161 in interest expense related to the Equipment Line of Credit during the six months ended June 30, 2018 .
 
6. Derivative Financial Instruments — Warrants
 
Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Contracts in Entity’s Own Equity (“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.
 

13

The range of assumptions used to determine the fair value of the warrants valued using the Black-Scholes option pricing model during the periods indicated was:
 
 
Six Months Ended June 30,
 
2018
 
2017
Estimated fair value of Trovagene common stock
0.77-4.20

 
13.80-15.12

Expected warrant term
0.5-5.1 years

 
1.5-1.8 years

Risk-free interest rate
1.76-2.71%

 
1.27-1.38%

Expected volatility
91-131%

 
98-109%

Dividend yield
0
%
 
0
%

Expected volatility is based on historical volatility of Trovagene’s common stock. The warrants have a transferability provision and based on guidance provided in 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, 2017
 
Balance of derivative financial instruments — warrants liability
 
467,584

 
$
649,387

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

 
(581,540
)
June 30, 2018
 
Balance of derivative financial instruments — warrants liability
 
467,584

 
$
67,847

 
7. Stockholders’ Equity
 
Common Stock
 
During the six months ended June 30, 2018 , the Company issued a total of 12,905,705 shares of Common Stock. The Company received gross proceeds of approximately $18.0 million from the sale of 9,140,000 shares of its common stock, 20,700,000 warrants, and 8,860 shares of Series B Convertible Preferred Stock through an underwritten public offering in June 2018. 473,497 shares were issued upon exercise of warrants for a weighted-average price of $3.41 . 75,400 shares were issued upon vesting of restricted stock units (“RSUs”) and 3,210,000 shares were issued upon conversion of 3,210 shares of Series B Convertible Preferred Stock. In addition, 6,808 shares were issued for share rounding as a result of the reverse stock split.
 
Stock Options
 
Stock-based compensation expense related to Trovagene equity awards have been recognized in operating results as follow:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Included in research and development expense
$
111,812

 
$
206,463

 
$
507,521

 
$
578,663

Included in cost of revenue
(9,143
)
 
15,209

 
30,488

 
41,365

Included in selling, general and administrative expense
118,631

 
600,069

 
1,089,422

 
1,201,378

Benefit from restructuring
—

 
(46,356
)
 
—

 
(125,222
)
Total stock-based compensation expense
$
221,300

 
$
775,385

 
$
1,627,431

 
$
1,696,184

 

14

The unrecognized compensation cost related to non-vested stock options outstanding at June 30, 2018 and 2017 , net of expected forfeitures, was $650,165 and $3,456,979 , respectively, which is expected to be recognized over a weighted-average remaining vesting period of 1.4 and 2.5 years , respectively. The weighted-average remaining contractual term of outstanding options as of June 30, 2018 was approximately 7.8 years . The total fair value of stock options vested during the six months ended June 30, 2018 and 2017 was $1,246,260 and $2,796,924 , respectively.

The estimated fair value of stock option awards was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions during the following periods indicated:
 
 
Six Months Ended June 30,
 
2018
 
2017 (1)
Risk-free interest rate
2.43
%
 
—
%
Dividend yield
0
%
 
0
%
Expected volatility
90.32
%
 
—
%
Expected term
5.2 years

 
0.0 years

 
(1)  No options granted during the six months ended June 30, 2017.

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, 2017
374,251

 
$
48.52

 
$
—

Granted
263,077

 
$
3.60

 
 

Canceled / Forfeited
(95,121
)
 
$
50.17

 
 

Expired
(1,209
)
 
$
36.00

 
 

Balance outstanding, June 30, 2018
540,998

 
$
26.41

 
$
—

Exercisable at June 30, 2018
402,488

 
$
31.04

 
$
—

 
On May 30, 2018, the number of authorized shares in the Trovagene 2014 Equity Incentive Plan (“2014 EIP”) was increased from 791,667 to 1,458,334 . As of June 30, 2018 there were 801,939 shares available for issuance under the 2014 EIP.

Restricted Stock Units

There were no RSUs granted during the six months ended June 30, 2018 . The weighted-average grant date fair value of the RSUs was $19.08 per share during the six months ended June 30, 2017 .

A summary of the RSU activity is presented below:
 
Number of Shares
 
Weighted-Average
Grant Date Fair Value
Per Share
 
Intrinsic Value
Non-vested RSUs outstanding, December 31, 2017
106,200

 
$
17.22

 
$
391,878

Vested
(75,400
)
 
$
14.21

 
$
266,491

Forfeited
(18,399
)
 
$
24.60

 
 
Non-vested RSUs outstanding, June 30, 2018
12,401

 
$
24.60

 
$
9,549


At June 30, 2018 and 2017 , total unrecognized compensation cost related to non-vested RSUs were $220,482 and $1,310,838 , both of which are expected to be recognized over a weighted-average period of 2.5 years , respectively. The total fair value of vested RSUs during the six months ended June 30, 2018 and 2017 were $1,071,069 and $1,097,880 , respectively.

15


Warrants
 
A summary of warrant activity and changes in warrants outstanding, including both liability and equity classifications is presented below:
 
 
Total Warrants (1)
 
Weighted-Average
Exercise Price
Per Share
 
Weighted-Average
Remaining Contractual
Term (1)
Balance outstanding, December 31, 2017
1,936,641

 
$
11.34

 
4.4
Granted
20,700,000

 
$
1.10

 
 
Exercised
(447,108
)
 
$
3.60

 
 
Balance outstanding, June 30, 2018
22,189,533

 
$
1.94

 
4.9
 
(1) Excluded the pre-funded warrants to purchase 26,389 shares of common stock at a nominal exercise price of $0.12 per share. The pre-funded warrants were exercised in full during the six months ended June 30, 2018 .

Series B Convertible Preferred Stock

On June 12, 2018, the Company closed an underwritten public offering for total gross proceeds of $18.0 million . The securities offered by the Company consisted of (i) 9,140,000 shares of common stock, at an offering price of $1.00 per share, (ii) warrants to purchase an aggregate of 20,700,000 shares of common stock, including the over-allotment option for 2,700,000 option warrants, at an exercise price of $1.10 per share, and (iii) 8,860 shares of Series B Convertible Preferred Stock, with a stated value of  $1,000 , and convertible into an aggregate of 8,860,000 shares of common stock. The conversion feature of the Series B Convertible Preferred Stock at the time of issuance was determined to be beneficial on commitment date. Because the Series B Convertible Preferred Stock is perpetual with no stated maturity date, and the conversions may occur any time from inception, the Company immediately recorded a one-time, non-cash deemed dividend of $2.8 million related to the beneficial conversion feature arising from the issuance of Series B Convertible Preferred Stock. This one-time, non-cash deemed dividend increased the Company’s net loss attributable to common stockholders and net loss per share.

The holders of Series B Convertible Preferred Stock are entitled to receive dividends on an as-if-converted-to-Common-Stock basis when, as and if such dividends are paid on shares of the Common Stock. Each share of Series B Convertible Preferred Stock shall entitle the holder to vote on an as-if-converted-to-Common-Stock basis (not exceeding the Beneficial Ownership Limitation). Upon any liquidation, dissolution or winding-up of the Company, the holders of Series B Convertible Preferred Stock are entitled to participate on an as-if-converted-to-Common Stock basis (without giving effect to the Beneficial Ownership Limitation) with holders of the Common Stock in any distribution of assets of the Company. Each share of Series B Convertible Preferred Stock is convertible at the option of the holder into that number of shares of Common Stock determined by dividing the stated value of $1,000 per share, by the conversion price of $1.00 per share.

As of June 30, 2018 and 2017 , there were 5,650 and 0 shares of Series B Convertible Preferred Stock outstanding.

8. 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.
 

16

Research and Development and Clinical Trial Agreements

In March 2017, the Company entered into a license agreement with Nerviano Medical Sciences S.r.l. (“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 in patients with leukemias/lymphomas and solid tumor cancers. Upon execution of the agreement, the Company paid $2.0 million in license fees which were expensed to research and development costs. Under the agreement, the Company is committed to pay $1.0 million for services provided by Nerviano, such as the costs to manufacture drug product, no later than June 30, 2019. As of June 30, 2018 , approximately $366,000 has been paid for services provided. Terms of the agreement also provide for the Company to pay royalties based on certain development and sales milestones.
 
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 it has legal liabilities that are probable or reasonably possible that require either accrual or disclosure. 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.

9. Restructuring Charges

In May 2018, the Company closed its CLIA laboratory operations in order to streamline the Company’s business model. The loss recognized from disposition of CLIA laboratory was reported as restructuring charges, a component of operating loss, in the June 30, 2018 condensed consolidated financial statements. During the six months ended June 30, 2018, the Company recorded total restructuring charges of approximately $243,000 for CLIA laboratory disposal transactions, of which, approximately $187,000 was related to impairment loss on CLIA laboratory license and approximately $56,000 was related to loss on disposal of property and equipment and other non-capital assets.

In March 2017, the Company announced a strategic restructuring plan in connection with the expansion of precision medicine therapeutics to its business. The restructuring plan included a reduction in force and was 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 six months ended June 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.

10. Subsequent Event

On July 30, 2018, the Company entered into a Severance Agreement and Mutual Release (the “Agreement”) with William Welch, the Company’s former Chief Executive Officer, specifying the terms of Mr. Welch’s termination of service with the Company.  Pursuant to the Agreement, Mr. Welch will be paid a lump sum of $350,000 less applicable federal, state and local tax withholdings on the eighth day after execution of the Agreement. The severance payment amount has been accrued within the condensed consolidated balance sheet as of June 30, 2018. The Agreement contains mutual releases on behalf of Mr. Welch and the Company.

17

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, 2017 , filed on February 26, 2018, and on Form 10-Q for the period ended March 31, 2018, filed on May 8, 2018. 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 clinical-stage, oncology therapeutics company, using a precision medicine strategy to develop drugs that target mitosis (cell division) to treat various types of cancer, including leukemias/lymphomas and solid tumors.

On March 15, 2017, we announced that we licensed PCM-075, a PLK1 inhibitor, from Nerviano, pursuant to a license agreement with Nerviano dated March 13, 2017. PCM-075 was developed to have high selectivity to PLK1 (at low nanomolar IC 50 levels), to have ideal pharmacokinetics, including oral bioavailability and administration and a drug half-life of approximately 24 hours. A safety study of PCM-075 has been successfully completed in patients with advanced metastatic solid tumors and published in 2017 in Investigational New Drugs. We currently are enrolling a Phase 1b/2 open-label clinical trial of PCM-075 in combination with standard-of-care chemotherapy in patients with AML. The Phase 1b/2 clinical trial is led by Hematologist Jorge Eduardo Cortes, M.D., Deputy Department Chair, Department of Leukemia, Division of Cancer Medicine, The University of Texas MD Anderson Cancer Center. Nine clinical trial sites across the U.S. are currently participating in this trial. In addition, the Company is recruiting patients for its Phase 2 open-label clinical trial of PCM-075 in combination with abiraterone acetate (Zytiga ® ) and prednisone in patients with mCRPC. This trial is being led by Dr. David Einstein at the Genitourinary Oncology Program at BIDMC and Harvard Medical School and, in addition to BIDMC, this trial is being conducted at DFCI and MGH.

Our intellectual property and proprietary technology enables us to analyze ctDNA and clinically actionable biomarkers to identify patients most likely to respond to specific cancer therapies. We plan to continue to vertically integrate our tumor genomics technology with the development of targeted cancer therapeutics.

We believe PCM-075 is the only first-in-class, 3 rd generation PLK1 selective ATP competitive inhibitor with apparent antitumor activity in different preclinical models, currently in clinical trials. Polo-like kinase family consists of 5 members (PLK1-PLK5) and they are involved in multiple functions in cell division, including the regulation of centrosome maturation,

18
Table of Contents

checkpoint recovery, spindle assembly, cytokinesis, apoptosis and many others. PLK1 is essential for the maintenance of genomic stability during cell division (“mitosis”). The over-expression of PLK1 can lead to immature cell division followed by aneuploidy and cell death, a hallmark of cancer. PLK1 is over-expressed in a wide variety of leukemias/lymphomas and solid tumor cancers, including acute myeloid leukemia, non-hodgkin lymphoma, prostate, lung, breast, ovarian and adrenocortical carcinoma. In addition, several studies have shown that over-expression of PLK1 is associated with poor prognosis.

Studies have shown that inhibition of polo-like-kinases can lead to tumor cell death, including a Phase 2 study in AML where response rates with a prior PLK inhibitor of up to 31% were observed when used in conjunction with a standard therapy for AML (low-dose cytarabine - “LDAC”) versus a 13.3% response rate with LDAC alone. We believe the more selective nature of PCM-075 to PLK1, its 24-hour half-life and oral bioavailability, as well as the reversibility of its on-target hematological toxicities may prove useful in addressing clinical therapeutic needs across a variety of cancers.

PCM-075 has been tested in vivo in different xenograft and transgenic models suggesting tumor growth inhibition or tumor regression when used in combination with other therapies. PCM-075 has been tested for antiproliferative activity on a panel of 148 tumor cell lines and appeared highly active with an IC 50 (a measure concentration for 50% target inhibition) below 100 nM in 75 cell lines and IC 50 values below 1 uM in 133 out of 148 cell lines. PCM-075 also appears active in cells expressing multi-drug resistant (“MDR”) transporter proteins and we believe PCM-075’s apparent ability to overcome the MDR transporter resistance mechanism in cancer cells could prove useful in broader drug combination applications.

In preclinical studies, synergy (interaction of discrete drugs such that the total effect is greater than the sum of the individual effects) has been demonstrated with PCM-075 when used in combination with numerous different chemotherapeutics, including cisplatin, cytarabine, doxorubicin, gemcitabine and paclitaxel, as well as targeted therapies, such as abiraterone acetate (Zytiga ® ), HDAC inhibitors, such as belinostat (Beleodaq ® ), Quizartinib (AC220), a development stage FLT3 inhibitor, and bortezomib (Velcade ® ). These therapeutics are used clinically for the treatment of many leukemias/lymphomas and solid tumor cancers, including AML, NHL, mCRPC, ACC, and TNBC.

We continue to focus on advancing our two active clinical trials with PCM-075. We have achieved a number of key milestones in the first half of 2018 and anticipate achieving the following milestones during the second half of 2018:

Phase 1b/2 Trial of PCM-075 in Combination with Either Low-Dose Cytarabine or Decitabine for the Treatment of Acute Myeloid Leukemia.

•
Complete Phase 1b dose escalation cohorts and identify the recommended Phase 2 dose (“RP2D”) for the Phase 2 continuation trial (dependent upon the number of dose escalation cohorts required to reach the maximum tolerated dose or RP2D of PCM-075).
•
Provide topline preliminary safety and efficacy data on the combination of PCM-075 + LDAC and the combination of PCM-075 + decitabine in patients treated through the end of 2018.
•
Present data from the AML trial at the 60 th annual American Society of Hematology (“ASH”) conference in December 2018.
•
Initiate the Phase 2 segment of the AML trial, which will enroll 32 patients for continued evaluation of safety and preliminary efficacy of PCM-075 in combination with either LDAC or decitabine (provided the RP2D has been determined in Phase 1b).
Phase 2 trial of PCM-075 in Combination with Abiraterone Acetate (Zytiga ® ) and Prednisone for the Treatment of Metastatic Castration-Resistant Prostate Cancer.
•
Complete enrollment and cycle 1 of treatment of the 3 safety lead-in patients with PCM-075 at 24 mg/m 2 in combination with abiraterone acetate (Zytiga ® ) and prednisone.
•
Evaluate the three lead-in patients in the mCRPC trial for safety.
•
Provide topline preliminary safety and efficacy data of PCM-075 in combination with abiraterone acetate (Zytiga ® ) and prednisone in patients treated through the end of 2018.

During the first half of 2018, we have advanced our business with the following activities:

•
Announced Preliminary Clinical Data from First Dosing Cohort Demonstrating Durable Treatment Effect of PCM-075 in Combination with Cytarabine or Decitabine in Patients with Relapsed or Refractory AML.


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On June 27, 2018, we announced preliminary clinical data from the first dosing cohort showing a treatment effect with PCM-075 in combination with LDAC or decitabine, as measured by decreases in leukemic cells in both peripheral blood and bone marrow in patients in its ongoing Phase 1b/2 trial in relapsed or refractory AML. Both blood and bone marrow samples were obtained from patients with relapsed or refractory AML enrolled in the Phase 1b/2 trial prior to, and at timepoints following administration of PCM-075, in combination with cytarabine or decitabine. Among the 6 patients evaluated, no dose-limiting toxicities were observed that would prohibit further escalation of the PCM-075 dosing. Three patients exhibited substantial reductions in the percentage of both circulating leukemic cells within the blood and leukemic cells within the bone marrow. Two of these three patients continued on treatment in the second cycle and further decreases in circulating leukemic cells in the blood and within the bone marrow were observed. One patient had a decrease in his bone marrow blasts from 96% to 40% at the end of cycle 2 and has continued on treatment in cycle 3.

•
Announced the Start of Recruitment and Enrollment for Phase 2 Clinical Trial of PCM-075 in Combination with Zytiga ® in Patients with mCRPC.
 
On June 21, 2018, we announced we have received Institutional Review Board approval from Dana-Farber/Harvard Cancer Center and our Phase 2 clinical trial of PCM-075 in combination with Zytiga ® (abiraterone acetate) and prednisone in mCRPC is officially activated and recruiting patients. The trial is being conducted by BIDMC, DFCI, and MGH. David Einstein, MD, Genitourinary Oncology Program at BIDMC, is the principal investigator for the trial.

•
Announced Completion of First Dosing Cohort of Patients Treated with PCM-075 in Combination with Decitabine in Ongoing Phase 1b/2 AML trial.

On June 15, 2018, we announced completion of the first dose cohort of PCM-075 in combination with decitabine in our Phase 1b/2 clinical trial in patients with AML. Three patients were treated with PCM-075 at 12 mg/m 2 , administered orally, once daily, on days 1-5 of the treatment cycle, in combination with decitabine. The combination of PCM-075 and decitabine was well tolerated in all patients. The independent Safety Review Committee (“SRC”) has recommended escalating to the second dose cohort of three patients at 18 mg/m 2 of PCM-075 (approximately a 50% increase) in combination with decitabine.

•
Announced Completion of First Dosing Cohort of Patients in Ongoing Phase 1b/2 AML trial of PCM-075 in AML.

On May 17, 2018, we announced the completion of the first dose cohort in our Phase 1b/2 clinical trial of PCM-075 in combination with LDAC, in AML. Three patients were treated with PCM-075 at 12 mg/m 2 , administered orally, once daily, on days 1-5 of the treatment cycle, in combination with LDAC. Patients eligible for Phase 1b have relapsed or refractory disease and may have received as many as three prior regimens for treatment of their AML. The combination of PCM-075 and LDAC was well tolerated in all patients. The independent SRC has recommended escalating to the second dose cohort of three patients at PCM-075 at 18 mg/m 2 (approximately a 50% increase) in combination with LDAC.

•
Announced Presentation of Data at American Association for Cancer Research (“AACR”) Meeting 2018 on Pharmacodynamic and Tumor Biomarkers During Treatment with PCM-075 and Low-Dose Cytarabine.

On April 17, 2018, we announced the presentation of pharmacodynamic and biomarker data from the first patient to complete a safety treatment cycle in our Phase 1b/2 clinical trial of PCM-075 in AML at the AACR annual meeting in Chicago, IL . The poster entitled Pharmacodynamic and Tumor Biomarker Analysis of a PLK1 Inhibitor, PCM-075, in a Phase 1b/2 Trial for Acute Myeloid Leukemia presents the methodology developed to track dynamic changes in blood leukemic cells, genomic alterations and PLK1 inhibition in AML patients treated with PCM-075 in combination with LDAC.

•
Announced Presentation of data at AACR Meeting 2018 Showing Synergy of PCM-075 in Combination with FLT3 Inhibitors in AML.

On April 16, 2018, we announced the presentation of data showing that PCM-075 exhibits synergistic activity when combined with FLT3 inhibitors in a human xenograft AML model, at the AACR Annual Meeting in Chicago, IL. The poster entitled Selective Polo-like Kinase 1 (PLK1) Inhibitor PCM-075 is Highly Active Alone and Shows Synergy When Combined with FLT3 Inhibitors in Models of Acute Myeloid Leukemia (AML) presents data demonstrating that

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PCM-075 in combination with quizartinib (Daiichi-Sankyo) resulted in 97.3% tumor growth inhibition, compared to 77.9% with quizartinib and 80.2% with PCM-075 as monotherapy.

•
Announced First Patient Successfully Completes Cycle 1 of Treatment with PCM-075 in Combination with Low-Dose Cytarabinein AML Trial.

On March 5, 2018, we announced that the initial patient successfully completed the first cycle 1 of treatment in our Phase 1b/2 multicenter trial of PCM-075 in combination with LDAC in patients with AML. The patient tolerated the combination well and correlative analyses of blood samples, taken at specified time points, also indicated activity on leukemic blood cells. A significant decrease in the percentage of blood leukemic cells was observed within 24 hours of administering PCM-075 + LDAC. By day 15, within the treatment cycle, the greatest effect was observed with blood leukemic cells showing a decrease from greater than 40% to less than 5%. Additionally, the same tumor DNA mutations (ASXL1 and SRSF2) were detected in the bone marrow and blood, indicating consistency across samples and validity of the analyses. Both DNA mutations appeared to quantitatively track with the decrease in blood leukemic cells.

•
Announced Presentation of Data Showing Synergy of PCM-075 in Combination with Zytiga ® (abiraterone acetate) in Castration-Resistant Prostate Cancer Model at 2018 Genitourinary Cancers Symposium.

On February 9, 2018, we announced that preclinical data demonstrating the synergy of PCM-075, our highly-selective PLK1 Inhibitor, in combination with abiraterone acetate (Zytiga ® - Johnson & Johnson), will be featured as a Poster Presentation at the 2018 Genitourinary Cancers Symposium on February 9th, in San Francisco, California. The poster entitled Combination of Selective Polo-like Kinase 1 (PLK1) Inhibitor PCM-075 with Abiraterone in Prostate Cancer and Non-Androgen-Driven Cancer Models showcases data from Dr. Michael Yaffe’s lab at the Koch Institute for Integrative Cancer Research at Massachusetts Institute of Technology and will be presented by Dr. Jesse Patterson. The underlying mechanism of synergy was further examined by performing gene-expression comparison across more than 30 different synergistic and non-synergistic cell lines across multiple tumor types. From this analysis, multiple hypothesis-generating mechanisms were identified, one of which was the retinoic acid pathway, which when activated is predictive of synergy.

Our accumulated deficit through June 30, 2018 is $184,251,049 . To date, we have generated minimal revenues and expect to incur additional losses to perform further research and development activities. 

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 research and development expenses, and competing technologies being developed by organizations with significantly greater resources.
 
Off-Balance Sheet Arrangements
 
We had no off-balance sheet arrangements as of June 30, 2018 .
 
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, 2017 , filed with the SEC on February 26, 2018. There have been no changes to our critical accounting policies other than adoption of ASC 606 since December 31, 2017 .


21
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RESULTS OF OPERATIONS
 
Three Months Ended June 30, 2018 and 2017
 
Revenues
 
Our total revenues were $111,813 and $102,011 for the three months ended June 30, 2018 and 2017 , respectively. The components of our revenues were as follows:
 
 
Three Months Ended June 30,
 
2018
 
2017
 
Increase (Decrease)
Royalties
$
52,423

 
$
44,810

 
$
7,613

Diagnostic services
39,345

 
55,501

 
(16,156
)
Clinical research services
20,045

 
1,700

 
18,345

Total revenues
$
111,813

 
$
102,011

 
$
9,802

 
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 amount of payments received was lower in 2018 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 control of supplies and/or test results are transferred to customers (upon delivery). There were more sales of clinical research services for the three months ended June 30, 2018 as compared to the same period of 2017.

We expect our royalties to fluctuate as the royalties are sales-based or usage-based royalties on our intellectual property license. Revenue recognition of the royalty depends on the timing and overall sales activities of the licensees. In addition, we expect a decrease in our diagnostic service revenue and clinical research revenue as a result of disposition of our CLIA laboratory and as we focus on the development of oncology therapeutics.
 
Cost of Revenues
 
Our total cost of revenues was $204,436 for the three months ended June 30, 2018 , compared to $338,203 in the same period of 2017 . Cost of revenues mainly relates to the costs of our diagnostic service revenues. The costs are recognized at the completion of testing. The decrease in cost of revenues for the three months ended June 30, 2018 compared to the same period of last year is mainly due to the disposition of our CLIA laboratory. 
 
Research and Development Expenses
 
Research and development expenses consisted of the following:
 
 
Three Months Ended June 30,
 
2018
 
2017
 
Increase (Decrease)
Salaries and staff costs
$
513,331

 
$
291,195

 
$
222,136

Stock-based compensation
111,812

 
206,463

 
(94,651
)
Outside services, consultants and lab supplies
1,115,009

 
217,570

 
897,439

Facilities
183,327

 
219,614

 
(36,287
)
Travel and scientific conferences
20,210

 
28,861

 
(8,651
)
Fees, license and other
9,078

 
18,012

 
(8,934
)
Total research and development
$
1,952,767

 
$
981,715

 
$
971,052

 
Research and development expenses increase d by $971,052 to $1,952,767 for the three months ended June 30, 2018 from $981,715 for the same period in 2017 . The overall increase in research and development expenses was primarily due to the increased outside service costs for clinical studies related to the development of our lead drug candidate, PCM-075. We expect an increase in research and development costs as we complete the development of PCM-075.


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Table of Contents

Selling, General and Administrative Expenses
 
Selling, general and administrative expenses consisted of the following:
 
 
Three Months Ended June 30,
 
2018
 
2017
 
Increase (Decrease)
Salaries and staff costs
$
1,109,476

 
$
755,171

 
$
354,305

Board of Directors’ fees
121,616

 
113,501

 
8,115

Stock-based compensation
118,631

 
600,069

 
(481,438
)
Outside services and consultants
276,543

 
263,810

 
12,733

Legal and accounting fees
125,033

 
2,325,239

 
(2,200,206
)
Facilities and insurance
275,975

 
350,992

 
(75,017
)
Travel and conferences
44,041

 
181,016

 
(136,975
)
Fees, license and other
79,556

 
84,354

 
(4,798
)
Total selling, general and administrative
$
2,150,871


$
4,674,152


$
(2,523,281
)
 
Selling, general and administrative expenses decrease d by $2,523,281 to $2,150,871 for the three months ended June 30, 2018 from $4,674,152 for the same period in 2017 . The significant components of the decrease were primarily due to the decrease in legal and accounting fees and stock-based compensation. In the second quarter of 2017, we accrued a litigation related loss contingency expense of approximately $2.1 million for the settlement of complaints with our former CEO and CFO. 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. Our selling, 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

In May 2018, we closed our CLIA laboratory operations in order to streamline our business model. The loss recognized from disposition of CLIA laboratory was reported as restructuring charges in the June 30, 2018 condensed consolidated financial statements. For the three months ended June 30, 2018, we recorded total restructuring charges of $243,000 for CLIA laboratory disposal transactions, of which, $187,000 was related to impairment loss on CLIA laboratory license and $56,000 was related to loss on disposal of property and equipment and other non-capital assets.

In March 2017, we announced a strategic restructuring plan in connection with the expansion of precision medicine therapeutics to our business. The restructuring plan included a reduction in force and was completed in the last quarter of 2017. The $3,806 restructuring benefit for the three months ended June 30, 2017 was primarily due to stock-based compensation reversal for certain terminated employees offset by increased employee termination costs.

Net Interest Income (Expense)
 
Net interest income was $35,277 for the three months ended June 30, 2018 as compared to $431,871 net interest expense for the same period of 2017 , 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 and 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 June 30, 2018 , the derivative financial instruments — warrants liabilities were revalued to $67,847 , resulting in a decrease in value of $711,229 from March 31, 2018 , based primarily upon 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 decrease in value upon remeasurement at June 30, 2018 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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Table of Contents

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

 
Three Months Ended June 30,
 
2018
 
2017
 
Increase (Decrease)
Net loss attributable to common shareholders
$
(6,522,548
)
 
$
(8,051,871
)
 
$
(1,529,323
)
Net loss per common share — basic
$
(0.88
)
 
$
(3.12
)
 
$
(2.24
)
Net loss per common share — diluted
$
(0.88
)
 
$
(3.12
)
 
$
(2.24
)
 
 
 
 
 
 
Weighted average shares outstanding — basic
7,423,463

 
2,582,645

 
4,840,818

Weighted average shares outstanding — diluted
7,423,463

 
2,582,645

 
4,840,818

 
The $1,529,323 decrease in net loss attributable to common shareholders and the $2.24 decrease in basic net loss per share was primarily the result of a decrease in operating expenses of $1.4 million for the three months ended June 30, 2018 compared to the same period in the prior year, and a loss on extinguishment of debt of $1.7 million from the same period of 2017; offset by a one-time, non-cash deemed dividend of $2.8 million recognized from beneficial conversion features of Series B Convertible Preferred Stock issuance. Basic net loss per share in 2018 was also impacted by the increase in basic weighted average shares outstanding resulting primarily from the sales of approximately 10.9 million shares of common stock through public offerings and direct registered offering and the issuance of approximately 3.2 million shares of common stock upon conversion of Series B Convertible Preferred Stock.

Net loss and per share amounts - Non-GAAP Measures - deemed dividend recognized from beneficial conversion features of Series B Convertible Preferred Stock issuance analysis:

 
Three Months Ended June 30,
 
2018
 
2017
 
Increase (Decrease)
Net loss attributable to common shareholders
$
(6,522,548
)
 
$
(8,051,871
)
 
$
(1,529,323
)
Adjustment for preferred stock dividend recognized from beneficial conversion features of Series B Convertible Preferred Stock issuance
2,769,533

 
—

 
2,769,533

Total net loss attributable to common shareholders
$
(3,753,015
)
 
$
(8,051,871
)
 
$
1,240,210

 
 
 
 
 
 
Net loss per common share — basic and diluted
$
(0.44
)
 
$
(3.12
)
 
$
(2.68
)
 
 
 
 
 
 
Weighted average shares outstanding — basic and diluted
7,423,463

 
2,582,645

 
4,840,818

Adjustment for Series B Convertible Preferred Stock
1,179,670

 
—

 
1,179,670

Total weighted average shares outstanding — basic and diluted
8,603,133

 
2,582,645

 
6,020,488


Series B Convertible Preferred Stock was offered to purchasers of the Class A units (common stock) in the June underwritten public offering if, together with the purchase of Class A units, the purchaser, with its affiliates and certain related parties, would beneficially own more than 4.99% of our outstanding stock immediately following the consummation of the offering. The Series B Convertible Preferred Stock serves solely as an ownership blocker. Each share of Series B Convertible Preferred Stock is convertible at the option of the holder into that number of shares of Common Stock determined by dividing the stated value of $1,000 per share, by the conversion price equal to $1.00 per share ($1.00 being the purchase price of each Class A unit). The fair value of the common stock into which the Series B Preferred Stock is convertible exceeded the allocated purchase price fair value of the Series B Convertible Preferred Stock at the date of issuance. As such, we concluded that the Series B Convertible Preferred Stock contained a beneficial conversion feature and a corresponding accounting entry and financial statement disclosure was required. Because our Series B Convertible Preferred Stock is perpetual with no stated maturity date, and the conversions may occur any time from inception, we immediately recognized the beneficial conversion feature as a one-time, non-cash deemed dividend at issuance. There will be no need to account for any subsequent similar one-time, non-cash dividends for Series B Convertible Preferred Stock issued in the June public offering.


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Table of Contents

If not for the requirement to account for this one-time, non-cash deemed dividend arising from this conversion feature which solely accommodated purchasers allowing them to not own more than 4.99% of the Common Stock, the net loss per common share — basic and diluted would have been reduced by $2,769,533 to $3,753,015 and the weighted average shares outstanding — basic and diluted would have been 8,603,133 (converting the remaining 5,650 shares of Series B Preferred Stock to common stock), and would result in a net loss per share of $0.44 .

Six Months Ended June 30, 2018 and 2017
 
Revenues
 
Our total revenues were $211,949 and $197,049 for the six months ended June 30, 2018 and 2017 , respectively. The components of our revenues were as follows:

 
Six Months Ended June 30,
 
2018
 
2017
 
Increase (Decrease)
Royalties
$
101,478

 
$
110,636

 
$
(9,158
)
Diagnostic services
79,347

 
84,363

 
(5,016
)
Clinical research services
31,124

 
2,050

 
29,074

Total revenues
$
211,949

 
$
197,049

 
$
14,900

 
The overall increase in revenue was mainly a result of increased revenue from clinical research services. 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 control of supplies and/or test results are transferred to customers (upon delivery).

We expect our royalties to fluctuate as the royalties are sales-based or usage-based royalties on our intellectual property license. Revenue recognition of the royalty depends on the timing and overall sales activities of the licensees. In addition, we expect a decrease in our diagnostic service revenue and clinical research revenue as a result of disposition of our CLIA laboratory and as we focus on the development of oncology therapeutics.
 
Cost of Revenues
 
Our total cost of revenues was $570,780 for the six months ended June 30, 2018 , compared to $954,629 in the same period of 2017 . Cost of revenues mainly relates to the costs of our diagnostic service revenues. The costs are recognized at the completion of testing. The decrease in cost of revenues for the six months ended June 30, 2018 compared to the same period of last year is mainly due to the lower volume of tests processed and the disposition of the CLIA laboratory. 
 
Research and Development Expenses
 
Research and development expenses consisted of the following:

 
Six Months Ended June 30,
 
2018
 
2017
 
Increase (Decrease)
Salaries and staff costs
$
915,399

 
$
1,166,572

 
$
(251,173
)
Stock-based compensation
507,521

 
578,663

 
(71,142
)
Outside services, consultants and lab supplies
1,964,997

 
852,364

 
1,112,633

Facilities
374,718

 
587,515

 
(212,797
)
Travel and scientific conferences
59,428

 
44,901

 
14,527

Fees, licenses and other
14,542

 
2,031,530

 
(2,016,988
)
Total research and development
$
3,836,605

 
$
5,261,545

 
$
(1,424,940
)

Research and development expenses decrease d by $1,424,940 to $3,836,605 for the six months ended June 30, 2018 from $5,261,545 for the same period in 2017 . Our costs have decreased primarily due to the decrease in fees, licenses and other, offset by the increase in outside services, consultants and lab supplies costs. The decrease in fees, license and other was

25
Table of Contents

primarily due to the $2.0 million license fee payment in March 2017 to Nerviano for development and commercialization rights to PCM-075. The increase in services, consultants and lab supplies costs was mainly due to the clinical studies related to the development of PCM-075. We expect increase in research and development expenses as we continue the development of our lead drug candidate.

Selling, General and Administrative Expenses
 
Selling, general and administrative expenses consisted of the following:

 
Six Months Ended June 30,
 
2018
 
2017
 
Increase (Decrease)
Salaries and staff costs
$
1,799,646

 
$
2,176,764

 
$
(377,118
)
Board of Directors’ fees
249,944

 
227,120

 
22,824

Stock-based compensation
1,089,422

 
1,201,378

 
(111,956
)
Outside services and consultants
467,605

 
607,430

 
(139,825
)
Legal and accounting fees
288,053

 
2,785,921

 
(2,497,868
)
Facilities and insurance
531,028

 
620,330

 
(89,302
)
Travel and conferences
100,498

 
464,949

 
(364,451
)
Fees, license and other
129,652

 
194,884

 
(65,232
)
Total selling, general and administrative
$
4,655,848

 
$
8,278,776

 
$
(3,622,928
)
 
Selling, general and administrative expenses decrease d by $3,622,928 to $4,655,848 for the six months ended June 30, 2018 from $8,278,776 for the same period in 2017 . The overall decrease in selling, general and administrative expenses was primarily due to the decrease in legal fees and the reduction in force. Legal fees decreased primarily as a result of a litigation related loss contingency accrual of $2.1 million during the six months ended June 30, 2017. As part of our restructuring in 2017, we reduced the number of our selling, general and administrative personnel, bringing down our average headcount to nine from fifteen in the same period of the prior year.

Restructuring

In May 2018, we closed our CLIA laboratory operations in order to streamline our business model. The loss recognized from disposition of CLIA laboratory was reported as restructuring charges in the June 30, 2018 condensed consolidated financial statements. For the six months ended June 30, 2018, we recorded total restructuring charges of $243,000 for CLIA laboratory disposal transactions, of which, $187,000 was related to impairment loss on CLIA laboratory license and $56,000 was related to loss on disposal of property and equipment and other non-capital assets.

In March 2017, we announced a strategic restructuring plan in connection with the addition of precision medicine therapeutics to our business. The restructuring plan included a reduction in force and was 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 six months ended June 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 Income (Expense)
 
Net interest income was $32,812 for six months ended June 30, 2018 , compared to $861,268 net interest expense for the same period of 2017 . The decrease of net interest expense is primarily due to a decrease in interest expense of approximately $948,000, resulting from pay-off of our $15.0 million term loan and 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 June 30, 2018 , the derivative financial instruments — warrants liabilities were revalued to $67,847 , resulting in a decrease in value of $581,540 from December 31, 2017 , based primarily upon 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 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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Table of Contents

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

 
Six Months Ended June 30,
 
2018
 
2017
 
Increase (Decrease)
Net loss attributable to common shareholders
$
(11,314,785
)
 
$
(18,057,468
)
 
$
(6,742,683
)
Net loss per common share — basic
$
(1.88
)
 
$
(7.00
)
 
$
(5.12
)
Net loss per common share — diluted
$
(1.88
)
 
$
(7.00
)
 
$
(5.12
)
 
 
 
 
 
 
Weighted average shares outstanding — basic
6,026,345

 
2,581,372

 
3,444,973

Weighted average shares outstanding — diluted
6,026,345

 
2,581,372

 
3,444,973

 
The $6,742,683 decrease in net loss attributable to common shareholders and the $5.12 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, offset by a one-time, non-cash deemed dividend recognized from beneficial conversion features of Series B Convertible Preferred Stock issuance. Basic net loss per share in 2018 was also impacted by the increase in basic weighted average shares outstanding resulting primarily from the sales of approximately 10.9 million shares of common stock through public offerings and direct registered offering and the issuance of approximately 3.2 million shares of common stock upon conversion of Series B Convertible Preferred Stock.

Net loss and per share amounts - Non-GAAP Measures - deemed dividend recognized from beneficial conversion features of Series B Convertible Preferred Stock issuance analysis:

 
Six Months Ended June 30,
 
2018
 
2017
 
Increase (Decrease)
Net loss attributable to common shareholders
$
(11,314,785
)
 
$
(18,057,468
)
 
$
(6,742,683
)
Adjustment for preferred stock dividend recognized from beneficial conversion features of Series B Convertible Preferred Stock issuance
2,769,533

 
—

 
2,769,533

Total net loss attributable to common shareholders
$
(8,545,252
)
 
$
(18,057,468
)
 
$
(3,973,150
)
 
 
 
 
 
 
Net loss per common share — basic and diluted
$
(1.29
)
 
$
(7.00
)
 
$
(5.71
)
 
 
 
 
 
 
Weighted average shares outstanding — basic and diluted
6,026,345

 
2,581,372

 
3,444,973

Adjustment for Series B Convertible Preferred Stock
593,094

 
—

 
593,094

Total weighted average shares outstanding — basic and diluted
6,619,439

 
2,581,372

 
4,038,067


Series B Convertible Preferred Stock was offered to purchasers of the Class A units (common stock) in the June underwritten public offering if, together with the purchase of Class A units, the purchaser, with its affiliates and certain related parties, would beneficially own more than 4.99% of our outstanding stock immediately following the consummation of the offering. The Series B Convertible Preferred Stock serves solely as an ownership blocker. Each share of Series B Convertible Preferred Stock is convertible at the option of the holder into that number of shares of Common Stock determined by dividing the stated value of $1,000 per share, by the conversion price equal to $1.00 per share ($1.00 being the purchase price of each Class A unit). The fair value of the common stock into which the Series B Preferred Stock is convertible exceeded the allocated purchase price fair value of the Series B Convertible Preferred Stock at the date of issuance. As such, we concluded that the Series B Convertible Preferred Stock contained a beneficial conversion feature and a corresponding accounting entry and financial statement disclosure was required. Because our Series B Convertible Preferred Stock is perpetual with no stated maturity date, and the conversions may occur any time from inception, we immediately recognized the beneficial conversion feature as a one-time, non-cash deemed dividend at issuance. There will be no need to account for any subsequent similar one-time, non-cash dividends for Series B Convertible Preferred Stock issued in the June public offering.


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If not for the requirement to account for this one-time, non-cash deemed dividend arising from this conversion feature which solely accommodated purchasers allowing them to not own more than 4.99% of the Common Stock, the net loss per common share — basic and diluted would have been reduced by $2,769,533 to $8,545,252 and the weighted average shares outstanding — basic and diluted would have been $6,619,439 (converting the remaining 5,650 shares of Series B Preferred Stock to common stock), and would result in a net loss per share of $1.29 .

LIQUIDITY AND CAPITAL RESOURCES
 
As of June 30, 2018 , we had $18,485,950 in cash and cash equivalents. Net cash used in operating activities for the six months ended June 30, 2018 was $6,106,754 , compared to $13,355,334 for the six months ended June 30, 2017 . Our use of cash was primarily a result of the net loss of $8,533,132 for the six months ended June 30, 2018 , adjusted for non-cash items related to stock-based compensation of $1,627,431 , gain on extinguishment of debt of $17,974 , impairment loss of $187,500 , depreciation and amortization of $483,495 , and the gain from the change in fair value of derivative financial instruments — warrants of $581,540 . The changes in our operating assets and liabilities consisted of higher accounts payable and accrued expenses, an increase in other asset, and a decrease in accounts receivable and unbilled receivable and prepaid expenses. At our current and anticipated level of operating loss, we expect to continue to incur an operating cash outflow for the next several years.
 
Net cash used in investing activities was $36,600 during the six months ended June 30, 2018 , compared to $24,041,048 provided by investing activities for the same period in 2017 . Investing activities during the six months ended June 30, 2018 consisted of purchase of short-term investments of $31,500 and net purchases for capital equipment of $5,100 , while investing activities during the six months ended June 30, 2017 consisted primarily of net sales and maturities of short-term investments of $24,061,786.
 
Net cash provided in financing activities was $16,403,540 during the six months ended June 30, 2018 , compared to $16,819,328 used in financing activities for the same period in 2017 . Financing activities during the six months ended June 30, 2018  related primarily to sales of Common Stock and Series B Convertible Preferred Stock and proceeds from exercise of warrants, offset by the pay-off of our Equipment Line of Credit. Financing activities during the same period of the prior year consisted primarily of the pay-off of term loan.
 
As of June 30, 2018 , and December 31, 2017 , we had working capital of $16,425,028 and $5,522,917 , respectively. 
 
On July 30, 2018, we entered into a Severance Agreement and Mutual Release with William Welch, our former Chief Executive Officer, specifying the terms of Mr. Welch’s termination of service with us. Pursuant to the Agreement, Mr. Welch will be paid a lump sum of $350,000 less applicable federal, state and local tax withholdings on the eighth day after execution of the Agreement. The severance payment amount has been accrued within the condensed consolidated balance sheet as of June 30, 2018. The Agreement contains mutual releases on behalf of Mr. Welch and us.

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, we believe our existing resources will be sufficient to fund our planned operations through June 2019. 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 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. 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 all options to raise additional capital, increase revenue, as well as reduce costs, in an effort to strengthen our liquidity position, which may include the following: (1) Raising capital through public and private equity offerings; (2) Introducing operation and business development initiatives to bring in new revenue streams; (3) Reducing

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operating costs by identifying internal synergies; (4) Engaging in strategic partnerships. We continually assess our spending plans to effectively and efficiently address our liquidity needs.

NASDAQ Notice

On September 5, 2017, we received a written notice from the 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 had until March 5, 2018, to regain compliance with the minimum bid price requirement.

On March 6, 2018, the NASDAQ Capital Market informed the Company that it was eligible for an additional 180 calendar day period until September 4, 2018 to regain compliance with the minimum $1.00 bid price per share 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, 2017 .

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Interest Rate Risk
 
Our cash and cash equivalent primary consists of deposits and money market deposits managed by commercial banks as of June 30, 2018 . The goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments.

Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of interest rates, particularly because 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.

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
 
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 six months ended June 30, 2018 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

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executive and financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2018 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 June 30, 2018 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 8 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, 2017 and Form 10-Q for the period ended March 31, 2018.

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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
101.LAB
 
XBRL Taxonomy Extension Labels Linkbase
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase


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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.
 
 
 
August 3, 2018
By:
/s/ Thomas Adams
 
 
Thomas Adams
 
 
Interim Chief Executive Officer (Principal Executive Officer and Principal Financial Officer)


32


    
Exhibit 4.1

CONFIDENTIAL SEVERANCE AGREEMENT AND MUTUAL RELEASE
This Confidential Severance Agreement and Mutual Release (“Agreement”) is made as of July 30, 2018 (the “Effective Date”) by and between William Welch (“Welch”), a resident of San Diego, CA, and Trovagene, Inc. (“Trovagene” or the “Company”), which is located at 11055 Flintkote Ave., San Diego, CA 92121 (collectively referred to as the “Parties” or individually referred to as a “Party”).
RECITALS
WHEREAS, Welch agreed to an Employment Agreement with the Company, dated May 6, 2016 (the “Employment Agreement”) and a Stock Award Agreement with the Company, dated August 15, 2017 (the “Stock Award Agreement”);
WHEREAS, Welch’s employment at the Company terminated on June 22, 2018;
WHEREAS, the Parties wish to resolve any and all disputes, claims, complaints, grievances, charges, actions, petitions, and demands that the Company may have against Welch and that Welch may have against the Company and any of the Company Releasees (as defined below) including, but not limited to, any and all claims arising out of or in any way related to any alleged employment relationship or separation between Welch and the Company;
NOW, THEREFORE, in consideration of the mutual promises made herein, the Company and Welch hereby agree as follows:
COVENANTS
1. Recitals . The foregoing recitals are hereby incorporated into and made a part of the Parties’ covenants and Agreement.
2. Consideration . The consideration that all Parties give and receive for this Agreement shall be the mutual releases, the Severance Payment, and other terms and conditions contained herein.
3. No Admission of Liability . The Parties understand and acknowledge that this Agreement constitutes a compromise and settlement of any and all actual or potential disputed claims. No action taken by the Parties hereto, either previously or in connection with this Agreement, shall be deemed or construed to be (a) an admission of the truth or falsity of any actual or potential claims or (b) an acknowledgment or admission by the Party of any fault or liability whatsoever to another Party or to any third party.
4. Severance Payment . Without any admission of liability whatsoever, the Company has paid Welch $70,055.65, less applicable federal, state, local and other payroll deductions, representing his unpaid salary up to June 22, 2018 and will pay Welch $350,000.00, less applicable federal, state and local tax withholdings, on the eighth day after the date of execution of this Agreement and shall be paid by wire transfer of same day funds to an account or accounts specified in writing by Welch (with any changes to such account to be provided to the Company in writing).
5. Release of Claims by the Company . In consideration for, among other terms, Welch’s release of claims pursuant to Section 6, the Company hereby fully, forever, irrevocably, and unconditionally releases, remises, and forever discharges Welch from all claims, charges, complaints, causes of action, and suits of any kind that, whether presently known or unknown, suspected or unsuspected, arising from any omissions, acts, facts, or damages that have occurred up until and including the Effective Date of this Agreement.
This release does not release Welch from any obligations incurred under this Agreement. This release does not release Welch from any continuing obligations to the Company surviving under his Employment Agreement to the extent they are not inconsistent with the terms of this Agreement, including but not limited to his obligations with respect to the Restrictive Covenants set forth in Section 14 of the Employment Agreement. This release does not release claims that cannot be released as a matter of law. The Company represents that it has made no assignment or transfer of any right, claim, complaint, charge, duty, obligation, demand, cause of action, or other matter waived or released by this Section. The Company and Welch agree that, by entering into this Agreement, the Company does not waive rights or claims that may arise after the date this Agreement is executed.




6. Release of Claims by Welch . In consideration for, among other terms, the Severance Payment and the release of claims pursuant to Section 5, Welch, on his own behalf and on behalf of his respective heirs, family members, executors, agents, and assigns, hereby fully, forever, irrevocably and unconditionally releases, remises, and discharges the Company and each of its current and former officers, directors, employees, agents, investors, attorneys, shareholders, administrators, affiliates, benefit plans, plan administrators, insurers, trustees, divisions, and subsidiaries, and predecessor and successor corporations and assigns (collectively, the “Company Releasees”) from any and all claims, charges, complaints, demands, actions, causes of action, suits, rights, debts, sums of money, costs, accounts, covenants, contracts, agreements, promises, doings, omissions, damages, executions, obligations, liabilities, and expenses (including attorneys’ fees and costs), of every kind and nature whether presently known or unknown, suspected or unsuspected, that Welch may possess against any of the Company Releasees arising from any omissions, acts, facts, or damages that have occurred up until and including the Effective Date of this Agreement, including, without limitation:
a. any and all claims relating to or arising from any alleged board member and/or employment relationships between Welch and the Company and any alleged termination of such relationships;
b. any and all claims for payment of any additional compensation as a result of his employment at the Company or under the Employment Agreement and Stock Award Agreement, except as provided for herein;
c. any and all claims for payment of “Severance” under Section 9 of the Employment Agreement;
d. any and all claims for wrongful discharge of employment; termination in violation of public policy; discrimination; harassment; retaliation; breach of contract, both express and implied; breach of covenant of good faith and fair dealing, both express and implied; promissory estoppel; negligent or intentional infliction of emotional distress; fraud; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage; unfair business practices; defamation; libel; slander; negligence; personal injury; assault; battery; invasion of privacy; false imprisonment; conversion; and disability benefits;
e. any and all claims for violation of any federal, state, or municipal statute, including, but not limited to, Title VII of the Civil Rights Act of 1964; the Civil Rights Act of 1991; the Rehabilitation Act of 1973; the Americans with Disabilities Act of 1990; the Equal Pay Act; the Fair Labor Standards Act; the Fair Credit Reporting Act; the Age Discrimination in Employment Act of 1967 (“ADEA”); the Older Workers Benefit Protection Act; the Employee Retirement Income Security Act of 1974; the Worker Adjustment and Retraining Notification Act; the Family and Medical Leave Act; the Sarbanes-Oxley Act of 2002; the Immigration Control and Reform Act; the California Family Rights Act; the California Labor Code; the California Workers’ Compensation Act; and the California Fair Employment and Housing Act;
f. any and all claims for violation of the Federal or any state constitution;
g. any and all claims arising out of any other laws and regulations relating to employment or employment discrimination;
h. any and all claims relating to, or arising from, Welch’s right to purchase, or actual purchase of shares of stock of the Company, including, without limitation, any claims for fraud, misrepresentation, breach of fiduciary duty, breach of duty under applicable state corporate law, and securities fraud under any state or federal law; and
i. any and all claims for attorneys’ fees and costs.
Welch agrees that the release set forth in this section shall be and remain in effect in all respects as a complete general release as to the matters released. This release does not extend to any obligations incurred under this Agreement, including the insurance and indemnification provisions in Section 26 of this Agreement. This release does not release claims that cannot be released as a matter of law, including, but not limited to, Welch’s right to file a charge with or participate in a charge by the Equal Employment Opportunity Commission, or any other local, state, or federal administrative body or government agency that is authorized to enforce or administer laws related to employment, against the Company (with the understanding that any such filing or participation does not give Welch the right to recover any monetary damages against the Company; Welch’s release of claims herein bars Welch from recovering such monetary relief from the Company). Welch represents that he has made no assignment or transfer of any right, claim, complaint, charge, duty, obligation, demand, cause of action, or other matter waived or released by this Section. The Company and Welch agree that, by entering into this Agreement, Welch does not waive rights or claims that may arise after the date this Agreement is executed.




7. Acknowledgment of Waiver of Claims under ADEA . Welch acknowledges that he is waiving and releasing any rights he may have under the Age Discrimination in Employment Act of 1967 (“ADEA”), and that this waiver and release is knowing and voluntary. Welch agrees that this waiver and release does not apply to any rights or claims that may arise under the ADEA after the Effective Date of this Agreement. Welch acknowledges that the consideration given for this waiver and release is in addition to anything of value to which Welch was already entitled. Welch further acknowledges that he has been advised by this writing that: (a) he should consult with an attorney prior to executing this Agreement; (b) he has twenty-one (21) days within which to consider this Agreement; (c) he has seven (7) days following his execution of this Agreement to revoke this Agreement; (d) this Agreement shall not be effective until after the revocation period has expired; and (e) nothing in this Agreement prevents or precludes Welch from challenging or seeking a determination in good faith of the validity of this waiver under the ADEA, nor does it impose any condition precedent, penalties, or costs for doing so, unless specifically authorized by federal law. In the event Welch signs this Agreement and returns it to the Company in less than the 21-day period identified above, Welch hereby acknowledges that he has freely and voluntarily chosen to waive the time period allotted for considering this Agreement. Welch acknowledges and understands that revocation must be accomplished by a written notification to the person executing this Agreement on the Company’s behalf that is received prior to the Effective Date. The parties agree that changes, whether material or immaterial, do not restart the running of the 21-day period.
8. California Civil Code Section 1542 . The Parties acknowledge that they have been advised to consult with legal counsel and are familiar with the provisions of California Civil Code Section 1542, a statute that otherwise prohibits the release of unknown claims, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.
The Parties, being aware of said code section, agree to expressly waive any rights they may have thereunder, as well as under any other statute or common law principles of similar effect.
9. Payment of Salary and Receipt of All Benefits . Welch acknowledges and represents that, other than the consideration set forth in this Agreement, the Company has paid or provided all salary, wages, bonuses, accrued vacation/paid time off, premiums, leaves, housing allowances, relocation costs, interest, severance, outplacement costs, fees, reimbursable expenses, commissions, stock, stock options, vesting, and any and all other benefits and compensation due to Welch, subject to Welch’s right to continue health care coverage under COBRA. Welch expressly waives any right to seek reimbursement for any premiums related to continuing health coverage under COBRA.
10. Survival of Prior Covenants . Notwithstanding anything herein, Welch and the Company agree that Paragraph 14 of the Employment Agreement shall remain in full force and effect, with exception that Welch is not prohibited to own more than 2% of the shares of any public or private companies.
11. Representation Regarding Return of Company Property, Confidential Information, and Trade Secrets . As a material inducement to enter this Agreement, Welch represents and warrants that he has returned all Company property, including any items, documents, or files containing Company confidential and/or proprietary information, trade secrets, or other intellectual property. Welch expressly agrees to keep confidential, and not hereafter disclose to any person, firm, corporation, governmental agency, or other entity, any trade secret, proprietary information, or confidential information of the Company, including, but not limited to, information relating to trade secrets, processes, methods, pricing, pricing strategies, customer lists, customer contacts, marketing plans, product introductions, advertising or promotional programs, sales, its financial health, and other confidential business matters.
12. Representation Regarding Disclosure of Material, Non-Public Information . Welch represents and warrants that, except under NDA with a reasonable expectation the information would not be further disclosed or used for a basis for trading in the Company’s stock, he has not disclosed any material, non-public information obtained as result of his employment to any shareholder of the Company or other third party.
13. Confidentiality . Except as required for SEC reporting purposes, the Parties agree to maintain in complete confidence the existence of this Agreement, the contents and terms of this Agreement, and the consideration for this Agreement (hereinafter collectively referred to as “Severance Information”). The Parties agree that they will not publicize, directly or indirectly, any Severance Information. Except as required by law, the Parties may disclose Severance Information only to the Court in any proceedings to enforce the terms of this Agreement, attorney(s), accountants, and any professional tax advisors to the extent that they need to know the Severance Information in order to provide advice on tax treatment or to prepare tax




returns, and must prevent disclosure of any Severance Information to all other third parties. To the extent it is reasonably necessary for business purposes, the Parties are authorized to disclose that all disputes between the Parties known as of the Effective Date of this agreement have been fully resolved.
14. No Cooperation . Welch agrees that he will not knowingly encourage, counsel, or assist any attorneys or their clients in the presentation or prosecution of any disputes, differences, grievances, claims, charges, or complaints related directly or indirectly to the matters released in Section 6 of this Agreement by any third party against any of the Company Releasees, unless under a subpoena or other court order to do so or as related directly to the ADEA waiver in this Agreement. Welch agrees both to immediately notify the Company upon receipt of any such subpoena or court order, and to furnish, within three (3) business days of its receipt, a copy of such subpoena or other court order. If approached by anyone for counsel or assistance in the presentation or prosecution of any disputes, differences, grievances, claims, charges, or complaints related directly or indirectly to the matters released in Section 6 of this Agreement against any of the Company Releasees, Welch shall state no more than that he cannot provide counsel or assistance.
15. Non-Disparagement . The Parties each agree to refrain from any disparagement, defamation, libel, or slander of any of each other, and agree to refrain from any tortious interference with the contracts and relationships of any of the other. Welch agrees to refrain from any disparaging statements about the Company or any of the other Releasees including, without limitation, the business, products, intellectual property, financial standing, future, or employment/compensation/benefit practices of the Company. Welch shall direct any inquiries by potential future employers to the Company’s human resources department. The Company agrees to provide Welch with a neutral reference, and that upon inquiry, Company will only inform any individual or company inquiring about Welch (a) the period of Welch’s employment; and (b) the last position held by Welch at the Company. Notwithstanding the foregoing, Company shall be allowed to publicly disclose that Welch’s employment with Company has ended and Welch has left to pursue other opportunities, and that Welch shall waive all claims, actual or potential, related to such permitted disclosure.
16. Costs . The Parties shall each bear their own costs, attorneys’ fees, and other fees incurred in connection with the Disputes and the preparation of this Agreement.
17. Authority . The Company represents and warrants that the undersigned has the authority to act on behalf of the Company and to bind the Company and all who may claim through it to the terms and conditions of this Agreement. Welch represents and warrants that he has the capacity to act on his own behalf and on behalf of all who might claim through him to bind them to the terms and conditions of this Agreement. Each Party warrants and represents that there are no liens or claims of lien or assignments in law or equity or otherwise of or against any of the claims or causes of action released herein.
18. No Representations . The Parties each represent that they have had an opportunity to consult with an attorney, and have carefully read and understand the scope and effect of the provisions of this Agreement. No Party has relied upon any representations or statements made by any other Party that are not specifically set forth in this Agreement.
19. Entire Agreement . This Agreement represents the entire agreement and understanding between the Company and Welch concerning the subject matter of this Agreement and Welch’s employment with and separation from the Company and the events leading thereto and associated therewith, and supersedes and replaces any and all prior agreements and understandings concerning the subject matter of this Agreement and Welch’s relationship with the Company, including his Employment Agreement, except as expressly indicated herein.
20. Severability . In the event that any provision or any portion of any provision hereof or any surviving agreement made a part hereof becomes or is declared by a court of competent jurisdiction or arbitrator to be illegal, unenforceable, or void, this Agreement shall continue in full force and effect without said provision or portion of provision.
21. Attorneys’ Fees . In the event that any Party brings an action to enforce or effect its rights under this Agreement, the prevailing Party shall be entitled to recover its costs and expenses, including the costs of litigation, court fees, and reasonable attorneys’ fees incurred in connection with such an action.
22. No Oral Modification . This Agreement may only be amended in a writing signed by each of the Parties hereto.
23. Cooperation .    The Company agrees with Welch that the lock-up provisions of Section 9 of the Stock Award Agreement are hereby terminated and the Company will cooperate with the Company’s transfer agent in connection with the removal of the legend on Common Stock Certificate number T00661, and provide such consents or take such commercially




reasonable actions as may be required to remove such legend beginning on the eighth day after the date of execution of this Agreement.
24. Breach . In addition to the rights provided in the “Attorneys’ Fees” section above, Welch acknowledges and agrees that any material breach of this Agreement, unless such breach constitutes a legal action by Welch challenging or seeking a determination in good faith of the validity of the waiver herein under the ADEA, or of any surviving provision of the Employment Agreement shall entitle the Company immediately to recover and/or cease providing the consideration provided to Welch under this Agreement and to obtain damages, except as provided by law.
25. Tax Consequences . The Company makes no representations or warranties with respect to the tax consequences of the payments and any other consideration provided to Welch or made on his behalf under the terms of this Agreement. Welch agrees and understands that he is responsible for payment, if any, of local, state, and/or federal taxes on the payments and any other consideration provided hereunder by the Company and any penalties or assessments thereon. Welch further agrees to indemnify and hold the Company harmless from any claims, demands, deficiencies, penalties, interest, assessments, executions, judgments, or recoveries by any government agency against the Company for any amounts claimed due on account of (a) Welch’s failure to pay or delayed payment of federal or state taxes, or (b) damages sustained by the Company by reason of any such claims, including attorneys’ fees and costs.
26. Survival of D&O Insurance Coverage and Indemnification.
a. Insurance . To the extent that the Company maintains any errors and omissions or other liability insurance covering officers and directors (“Insurance”), Welch shall continue to be covered under such policy or policies for the periods that he is or was serving as an employee, officer, director or consultant of or to the Company or any subsidiary or affiliate in accordance with the terms of such Insurance. However, nothing herein shall in any way require the Company to continue to maintain any Insurance; provided, that the Company shall provide to Welch notice of any material modification (including a copy of such modification) or termination of Insurance.
b. Indemnification. Notwithstanding any provisions of this Agreement to the contrary, the terms of any indemnification agreement or provision applicable to Welch by reason of the fact that he is or was serving as an employee, officer, director or consultant of or to the Company or any subsidiary or affiliate shall survive his termination of employment and any expiration or termination of this Agreement. Notwithstanding the terms of any indemnification agreement, the Company shall continue to indemnify Welch for his prior services to the Company or at the Company’s request to another entity to the maximum extent permitted under California law, and to pay or reimburse reasonable expenses in advance of the final disposition of the proceeding to the maximum extent permitted from time to time by the laws of California, provided, that Welch shall be required to repay any advanced amounts if the standard of conduct for indemnification thereunder is not met.
27. Governing Law . This Agreement shall be governed by the laws of the State of California, without regard for choice-of-law provisions. The Parties consent to personal and exclusive jurisdiction and venue in the state or federal courts located in San Diego, California.
28. Counterparts . This Agreement may be executed in counterparts and by facsimile, and each counterpart and facsimile shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned.
29. Voluntary Execution of Agreement . Welch understands and agrees that he executed this Agreement voluntarily, without any duress or undue influence on the part or behalf of the Company or any third party, with the full intent of releasing all of his claims against the Company and any of the other Releasees. Welch acknowledges that:
a)
he has read this Agreement;
b)
he has been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of his own choice or has elected not to retain legal counsel;
c)
he understands the terms and consequences of this Agreement and of the releases it contains; and
d)
he is fully aware of the legal and binding effect of this Agreement.





IN WITNESS WHEREOF, the Parties have executed this Agreement on the respective dates set forth below.

 
WILLIAM WELCH, an individual
Dated:       July 30           , 2018
/s/ William Welch
 
William Welch


 
TROVAGENE, INC., a Delaware Corporation
Dated:       July 30           , 2018
/s/ Thomas Adams
 
Thomas Adams
Interim Chief Executive Officer






Exhibit 31.1
 
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
 
I, Thomas Adams, 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.
 
August 3, 2018
/s/ Thomas Adams
 
Thomas Adams
 
Interim 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 June 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas Adams, Interim 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.
 
August 3, 2018
/s/ Thomas Adams
 
Thomas Adams
 
Interim Chief Executive Officer (Principal Executive Officer and Principal Financial Officer)