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EX-32.1 - EXHIBIT 32.1 - Trovagene, Inc.trov-093016exhibit321.htm
EX-31.1 - EXHIBIT 31.1 - Trovagene, Inc.trov-093016exhibit311.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark One)
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
 
OR
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
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
11055 Flintkote Avenue, Suite B, San Diego, California 92121
(Address of principal executive offices) (Zip Code)
 
Issuer’s telephone Number: (858) 952-7570
 
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, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
 
Accelerated filer x
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x
 
As of October 31, 2016, the issuer had 30,615,406 shares of Common Stock issued and outstanding.
 



TROVAGENE, INC.
 
Table of Contents
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2




TROVAGENE, INC. 
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
September 30, 2016
 
December 31, 2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
22,569,107

 
$
67,493,047

Short-term investments
24,376,904

 

Accounts receivable
85,152

 
98,736

Prepaid expenses and other assets
946,388

 
789,285

Total current assets
47,977,551

 
68,381,068

Property and equipment, net
4,654,876

 
2,690,579

Other assets
371,243

 
374,004

Total Assets
$
53,003,670

 
$
71,445,651

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
925,173

 
$
1,040,868

Accrued expenses
4,558,809

 
1,903,797

Deferred rent
279,710

 
30,614

Current portion of long-term debt
801,024

 
5,225,818

Total current liabilities
6,564,716

 
8,201,097

Long-term debt, less current portion
15,595,400

 
11,246,188

Derivative financial instruments - warrants
2,622,243

 
3,297,077

Deferred rent, net of current portion
1,446,912

 

Total Liabilities
26,229,271

 
22,744,362

 
 
 
 
Commitments and contingencies (Note 9)


 


 
 
 
 
Stockholders’ equity
 
 
 
Preferred stock, $0.001 par value, 20,000,000 shares authorized; 60,600 shares outstanding at September 30, 2016 and December 31, 2015; designated as Series A Convertible Preferred Stock with liquidation preference of $606,000 at September 30, 2016 and December 31, 2015
60

 
60

Common stock, $0.0001 par value, 150,000,000 shares authorized; 30,599,140 and 29,737,601 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
3,060

 
2,974

Additional paid-in capital
166,337,512

 
157,585,498

Accumulated other comprehensive loss
(4,742
)
 

Accumulated deficit
(139,561,491
)
 
(108,887,243
)
Total stockholders’ equity
26,774,399

 
48,701,289

Total liabilities and stockholders’ equity
$
53,003,670

 
$
71,445,651

 
See accompanying notes to the unaudited condensed consolidated financial statements.


3


TROVAGENE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Royalties
$
47,236

 
$
51,301

 
$
207,869

 
$
222,931

Diagnostic services
37,978

 
6,026

 
69,558

 
10,712

Clinical research services
3,900

 

 
35,573

 

Total revenues
89,114

 
57,327

 
313,000

 
233,643

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues
424,559

 
173,537

 
1,143,293

 
429,992

Research and development
3,937,398

 
2,546,533

 
11,221,876

 
7,428,349

Selling and marketing
2,940,862

 
1,798,263

 
9,127,450

 
4,508,766

General and administrative
2,710,782

 
1,948,546

 
9,183,761

 
5,756,047

Total operating expenses
10,013,601

 
6,466,879

 
30,676,380

 
18,123,154

 
 
 
 
 
 
 
 
Loss from operations
(9,924,487
)
 
(6,409,552
)
 
(30,363,380
)
 
(17,889,511
)
 
 
 
 
 
 
 
 
Net interest expense
(354,993
)
 
(335,359
)
 
(967,522
)
 
(1,100,080
)
Gain (loss) from change in fair value of derivative financial instruments — warrants
88,208

 
4,017,212

 
674,834

 
(1,105,270
)
Other income (loss), net

 
(8,130
)
 

 
4,617

Net loss
(10,191,272
)
 
(2,735,829
)
 
(30,656,068
)
 
(20,090,244
)
 
 
 
 
 
 
 
 
Preferred stock dividend
(6,060
)
 
(6,060
)
 
(18,180
)
 
(18,180
)
 
 
 
 
 
 
 
 
Net loss attributable to common stockholders
$
(10,197,332
)
 
$
(2,741,889
)
 
$
(30,674,248
)
 
$
(20,108,424
)
 
 
 
 
 
 
 
 
Net loss per common share — basic
$
(0.34
)
 
$
(0.10
)
 
$
(1.02
)
 
$
(0.80
)
Net loss per common share — diluted
$
(0.34
)
 
$
(0.23
)
 
$
(1.04
)
 
$
(0.96
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding — basic
30,339,774

 
28,560,211

 
30,018,841

 
25,014,966

Weighted average shares outstanding — diluted
30,339,774

 
29,128,235

 
30,136,572

 
25,204,307

 
See accompanying notes to the unaudited condensed consolidated financial statements.


4


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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(10,191,272
)
 
$
(2,735,829
)
 
$
(30,656,068
)
 
$
(20,090,244
)
Other comprehensive loss:
 
 
 
 
 
 
 
  Foreign currency translation loss
(81
)
 

 
(1,877
)
 

  Unrealized loss on securities available-for-sale
(7,997
)
 

 
(2,865
)
 

Total other comprehensive loss
(8,078
)
 

 
(4,742
)
 

 
 
 
 
 
 
 
 
Total comprehensive loss
(10,199,350
)
 
(2,735,829
)
 
(30,660,810
)
 
(20,090,244
)
 
 
 
 
 
 
 
 
Preferred stock dividend
(6,060
)
 
(6,060
)
 
(18,180
)
 
(18,180
)
 
 
 
 
 
 
 
 
Comprehensive loss attributable to common stockholders
$
(10,205,410
)
 
$
(2,741,889
)
 
$
(30,678,990
)
 
$
(20,108,424
)


5


TROVAGENE, INC. 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine Months Ended
September 30,
 
2016
 
2015
Operating activities
 
 
 
Net loss
$
(30,656,068
)
 
$
(20,090,244
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Net gain on disposal of fixed assets

 
4,562

Depreciation and amortization
693,485

 
250,600

Stock based compensation expense
5,942,392

 
2,758,847

Accretion of final fee premium
266,423

 
253,028

Amortization of discount on debt
105,710

 
59,665

Amortization of premiums on short-term investments
61,719

 

Deferred rent
(133,378
)
 

Interest income accrued on short-term investments
10,122

 

Change in fair value of derivative financial instruments - warrants
(674,834
)
 
1,105,270

Changes in operating assets and liabilities:
 
 
 
Decrease (increase) in other assets
2,761

 
(10,273
)
Decrease (increase) in accounts receivable
13,584

 
(231,672
)
Increase in prepaid expenses
(157,051
)
 
(26,238
)
Increase in accounts payable and accrued expenses
2,490,137

 
616,366

Net cash used in operating activities
(22,034,998
)
 
(15,310,089
)
 
 
 
 
Investing activities:
 
 
 
Capital expenditures, net
(797,781
)
 
(1,256,988
)
Net purchases of short-term investments
(24,451,611
)
 

Net cash used in investing activities
(25,249,392
)
 
(1,256,988
)
 
 
 
 
Financing activities:
 
 
 
Proceeds from sales of common stock, net of expenses
2,293,857

 
61,215,398

Proceeds from exercise of options
366,966

 
818,251

Proceeds from exercise of warrants

 
1,389,427

Borrowings under equipment line of credit
792,251

 

Borrowings under long-term debt, net of costs
7,805,086

 

Repayments of long-term debt
(8,896,166
)
 

Net cash provided by financing activities
2,361,994

 
63,423,076

Effect of exchange rate changes on cash and cash equivalents
(1,544
)
 

Net change in cash and equivalents
(44,923,940
)
 
46,855,999

Cash and cash equivalents—Beginning of period
67,493,047

 
27,293,798

Cash and cash equivalents—End of period
$
22,569,107

 
$
74,149,797

 
 
 
 
Supplementary disclosure of cash flow activity:
 
 
 
Cash paid for taxes
$
4,560

 
$
800

Cash paid for interest
$
806,228

 
$
795,375

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

 
$
18,180

Warrants issued in connection with Amendment to the Loan and Security Agreement
$
148,885

 
$

Reclassification of derivative financial instruments - warrants to additional paid in capital
$

 
$
435,365

Leasehold improvements paid for by lessor
$
1,860,000

 
$

 
See accompanying notes to the unaudited condensed consolidated financial statements.


6


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”) is a molecular diagnostics company headquartered in San Diego, California. The Company’s primary focus is to leverage its cell-free DNA molecular diagnostic technology in cancer and other diseases. Trovagene's goal is to broadly commercialize its molecular diagnostic technology via direct sales as well as external license agreements and/or collaborations to democratize cancer care by establishing the best access for patient care. The Company’s proprietary Precision Cancer Monitoring® (“PCM”) platform measures circulating tumor DNA (“ctDNA”) in urine and blood, enabling personalized patient care.  The Company’s PCM platform as well as urine and blood based tests, also known as liquid biopsies, have the potential to dramatically improve cancer care and usher in an era of precision oncology. Trovagene’s tests are available to clinicians for the assessment of known driver mutations in lung, pancreatic, colorectal, neuroendocrine cancers, melanoma and histiocytic disorders. The Company’s noninvasive technology provides for clinically actionable information through the detection of cancer mutations and the monitoring of changes in tumor dynamics before, during, and after treatment.
 
Basis of Presentation
 
The accompanying unaudited interim condensed consolidated financial statements of Trovagene, which include its wholly owned subsidiary, Trovagene, Srl, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated.
 
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP and the rules and regulations of the Securities and Exchange Commission (“SEC”) related to a quarterly report on Form 10-Q. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations. The unaudited interim condensed consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the periods presented. All such adjustments are of a normal and recurring nature. The operating results presented in these unaudited interim condensed consolidated financial statements are not necessarily indicative of the results that may be expected for any future periods. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2015 included in the Company’s annual report on Form 10-K filed with the SEC on March 10, 2016.

Liquidity
 
Trovagene’s condensed consolidated financial statements as of September 30, 2016 have been prepared under the assumption that Trovagene will continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to generate additional revenue. Based on current plans, the Company will be required to raise additional capital in the next twelve months to complete the development and commercialization of current product candidates and to continue to fund operations at its current projected cash expenditure levels.
 
The Company cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that the Company can raise additional funds by issuing equity securities, the Company’s stockholders may experience significant dilution.  Any debt financing, if available, may involve restrictive covenants that impact the Company’s ability to conduct its business.
 
If the Company is unable to raise additional capital when required or on acceptable terms, it may have to significantly delay, scale back or discontinue the development and/or commercialization of one or more of its product candidates. The Company may also be required to:
 
Seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; and


7


Relinquish licenses or otherwise dispose of rights to technologies, product candidates or products that the Company would otherwise seek to develop or commercialize themselves, on unfavorable terms.
 
The Company has approximately $44.4 million of cash, cash equivalents and short-term investments at October 31, 2016.

2. Summary of Significant Accounting Policies
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Revenue Recognition
 
Revenue is recognized when persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable, and collection is reasonably assured.
 
Milestone, Royalty and License Revenues
 
The Company licenses and sublicenses its patent rights to healthcare companies, medical laboratories and biotechnology partners. These agreements may involve multiple elements such as license fees, royalties and milestone payments. Revenue is recognized when the criteria described above have been met as well as the following:

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

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

Milestone payments are recognized when both the milestone is achieved and the related payment is received.
 
Diagnostic Service Revenues
 
Revenue for clinical laboratory tests may come from several sources, including commercial third-party payors, such as insurance companies and health maintenance organizations, government payors, such as Medicare and Medicaid in the United States, patient self-pay and, in some cases, from hospitals or referring laboratories who, in turn, might bill third-party payors for testing. The Company is recognizing diagnostic service revenue on the cash collection basis until such time as it is able to properly estimate collections on third party reimbursements.
 
Derivative Financial Instruments—Warrants
 
The Company has issued common stock warrants in connection with the execution of certain equity financings. Such warrants are classified as derivative liabilities under the provisions of Financial Accounting Standards Board (“FASB”) ASC 815 Derivatives and Hedging (“ASC 815”) and are recorded at their fair market value as of each reporting period. Such warrants do not meet the exemption that a contract should not be considered a derivative instrument if it is (1) indexed to its own stock and (2) classified in stockholders’ equity. Changes in fair value of derivative liabilities are recorded in the condensed consolidated statements of operations under the caption “Gain (loss) from change in fair value of derivative financial instruments - warrants.”
 
The fair value of warrants is determined using the Black-Scholes option-pricing model using assumptions regarding the volatility of Trovagene’s common share price, the fair value of the underlying common shares, the remaining life of the warrant, and the risk-free interest rates at each period end. The Company thus uses model-derived valuations where inputs are observable in active markets to determine the fair value and accordingly classifies such warrants in Level 3 per ASC 820, Fair Value Measurements. At September 30, 2016, and December 31, 2015, the fair value of these warrants was $2,622,243 and

8


$3,297,077, respectively, and are recorded as a liability under the caption "Derivative financial instruments - warrants" on the balance sheet.
 
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 September 30,
 
Nine Months
Ended September 30,
 
2016
 
2015
 
2016
 
2015
Numerator: Net loss attributable to common shareholders
$
(10,197,332
)
 
$
(2,741,889
)
 
$
(30,674,248
)
 
$
(20,108,424
)
Adjustment for (gain) loss from change in fair value of derivative financial instruments - warrants

 
(4,017,212
)
 
(533,750
)
 
(4,017,212
)
Net loss used for diluted loss per share
$
(10,197,332
)
 
$
(6,759,101
)
 
$
(31,207,998
)
 
$
(24,125,636
)
Denominator for basic and diluted net loss per share:
 
 
 
 
 
 
 
Weighted average shares used to compute basic loss per share
30,339,774

 
28,560,211

 
30,018,841

 
25,014,966

Adjustments to reflect assumed exercise of warrants

 
568,024

 
117,731

 
189,341

Weighted average shares used to compute diluted net loss per share
30,339,774

 
29,128,235

 
30,136,572

 
25,204,307

Net loss per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
(0.34
)
 
$
(0.10
)
 
$
(1.02
)
 
$
(0.80
)
Diluted
$
(0.34
)
 
$
(0.23
)
 
$
(1.04
)
 
$
(0.96
)

The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because their effect was anti-dilutive:
 
 
September 30,
 
2016
 
2015
Options to purchase Common Stock
6,051,186

 
6,514,130

Warrants to purchase Common Stock
4,546,939

 
4,565,947

Restricted Stock Units
392,000

 

Series A Convertible Preferred Stock
63,125

 
63,125

 
11,053,250

 
11,143,202

 
Recent Accounting Pronouncements
 
In August 2016, the FASB issued Accounting Standards Update 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which includes amendments that clarify how certain cash receipts and cash payments are presented in the statement of cash flows. ASU 2016-15 also provides guidance clarifying when an entity should separate cash receipts and cash payments and classify them into more than one class of cash flows. The new amendments and guidance are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted provided that all amendments are adopted in the same period. The Company is currently evaluating the impact of adoption of ASU 2016-15 on its consolidated statements of cash flows.


9


In February 2016, the FASB issued Accounting Standards Update (“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 all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. 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 Company is currently evaluating the impact the adoption of the new standard will have on its consolidated financial statements.
 
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial StatementsGoing Concern, which impacts the accounting guidance related to the evaluation of an entity’s ability to continue as a going concern. The amendment establishes management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern in connection with preparing financial statements for each annual and interim reporting period. The amendment also gives guidance to determine whether to disclose information about relevant conditions and events when there is substantial doubt about an entity’s ability to continue as a going concern. The amended guidance is effective prospectively for fiscal years beginning after December 15, 2016. The new guidance is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
 
In May 2014, the FASB issued ASU 2014-9, Revenue from Contracts with Customers (“ASU 2014-9”). ASU 2014-9 provides companies with a single model for accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. In August 2015, the FASB issued ASU 2015-14, Deferral of the Effective Date, which defers the required adoption date of ASU 2014-09 by one year. As a result of the deferred effective date, ASU 2014-09 will be effective for the Company in its first quarter of fiscal year 2018. Early adoption is permitted but not before the original effective date of the first quarter of fiscal year 2017. The Company is in the process of evaluating the transition method that will be elected and the impact of adoption of ASU 2014-09 on its consolidated financial statement.

3. Fair Value Measurements
 
The following table presents the Company’s assets and liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of September 30, 2016 and December 31, 2015:
 
 
Fair Value Measurements at
September 30, 2016
 
Quoted Prices in Active Markets for Identical Assets and Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Money market fund (1)
$
19,841,032

 
$

 
$

 
$
19,841,032

Corporate debt securities (2)

 
15,887,439

 

 
15,887,439

    Commercial paper (2)

 
8,489,465

 

 
8,489,465

Total Assets
$
19,841,032

 
$
24,376,904

 
$

 
$
44,217,936

Liabilities:
 
 
 
 
 
 
 
Derivative financial instruments - warrants
$

 
$

 
$
2,622,243

 
$
2,622,243

Total Liabilities
$

 
$

 
$
2,622,243

 
$
2,622,243


10


 
Fair Value Measurements at
December 31, 2015
 
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)
$
65,016,222

 
$

 
$

 
$
65,016,222

Total Assets
$
65,016,222

 
$

 
$

 
$
65,016,222

Liabilities:
 
 
 
 
 
 
 
Derivative financial instruments - warrants
$

 
$

 
$
3,297,077

 
$
3,297,077

Total Liabilities
$

 
$

 
$
3,297,077

 
$
3,297,077

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

(2) Included in short-term investments on the accompanying condensed consolidated balance sheets.
 
The following table sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the nine months ended September 30, 2016:
 
Description
 
Balance at
December 31, 2015
 
Unrealized
Gain
 
Balance at
September 30, 2016
Derivative financial instruments - warrants
 
$
3,297,077

 
$
(674,834
)
 
$
2,622,243

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

4. Investments

Investments consist of corporate debt securities and commercial paper. The Company classifies debt securities as available-for-sale, as the sale of such securities may be required prior to maturity to execute management strategies. Investments classified as available-for-sale are carried at fair value, with the unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity until realized. Realized gains and losses from the sale of available-for-sale securities, if any, are determined on a specific identification basis. A decline in the market value of any available-for-sale security below cost that is determined to be other than temporary will result in an impairment charge to earnings and a new cost basis for the security is established. No such impairment charges were recorded for any period presented. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the straight-line method and included in interest income. Interest income is recognized when earned. Realized gains and losses on investments in securities will be included in other income (loss) within the condensed consolidated statements of operations. There were no realized gains and losses for the nine months ended September 30, 2016.

The following table sets forth the composition of securities available-for-sale as of September 30, 2016.

 
 
 
 
 
Unrealized
 
 
 
Maturity in Years
 
Cost
 
Gains
 
Losses
 
Fair Value
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
Less than 1 year
 
$
15,890,304

 
$
2,162

 
$
(5,027
)
 
$
15,887,439

Commercial paper
Less than 1 year
 
8,489,465

 

 

 
8,489,465

Total Investment
 
 
$
24,379,769

 
$
2,162

 
$
(5,027
)
 
$
24,376,904



11


5. Property and Equipment
 
Property and equipment consist of the following:
 
 
As of September 30,
2016
 
As of December 31,
2015
Furniture and office equipment
$
1,727,321

 
$
1,483,227

Leasehold improvements
1,994,514

 
39,401

Laboratory equipment
2,472,444

 
2,022,733

 
6,194,279

 
3,545,361

Less—accumulated depreciation and amortization
(1,539,403
)
 
(854,782
)
Property and equipment, net
$
4,654,876

 
$
2,690,579

 
6. Debt
 
Equipment Line of Credit
 
In November 2015, the Company entered into a Loan and Security Agreement (“Equipment Line of Credit”) with Silicon Valley Bank 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 are due on borrowings through November 30, 2016, with both interest and principal payments commencing in December 2016. Any equipment advances after November 30, 2016 are subject to principal and interest payments immediately over a 36-month period following the advance. 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. As of September 30, 2016, the Company was in compliance with all covenants.

As of September 30, 2016, $1,878,312 has been borrowed under the Equipment Line of Credit. As of September 30, 2016, amounts due under the Equipment Line of Credit included $573,929 in current liabilities and $1,328,355 in long-term liabilities, which includes $23,972 of final fee premium accretion. The Company recorded $80,176 in interest expense related to the Equipment Line of Credit during the nine months ended September 30, 2016.
 
Future principal payments of long-term debt at September 30, 2016 are as follows:

Year Ended December 31,
2016
$
104,351

2017
626,104

2018
626,104

2019
521,753

Total principal
1,878,312

Plus final fee premium accretion
23,972

Total long-term obligations
$
1,902,284


Loan and Security Agreement
 
In June 2014, the Company entered into a $15,000,000 loan and security agreement (“Agreement”) under which the lenders provided the Company a term loan. The loan is secured by a security interest in all of the Company’s assets except intellectual property, which is subject to a negative pledge. In connection with the loan, the lenders received a warrant to purchase an aggregate 85,470 shares of the Company’s common stock at an exercise price of $3.51 per share exercisable for ten years from the date of issuance. 

On July 20, 2016, the Company signed the 5th Amendment to Loan and Security Agreement (“Amendment”) to refinance its existing term loan. Under the Amendment, interest is equal to 3.75% plus the Wall Street Journal Prime Rate,

12


subject to a floor of 7.25%. The Company is required to make interest only payments on the outstanding amount of the loan on a monthly basis through September 1, 2017, after which equal monthly payments of principal and interest are due until the loan maturity date of February 1, 2020. In addition, the lenders received a warrant to purchase an aggregate 30,992 shares of the Company’s common stock at an exercise price of $4.84 per share exercisable for ten years from the date of issuance. The fair value of the warrants, totaling $148,885, was recorded as debt discount and additional paid-in capital as the warrants were equity classified. As of September 30, 2016, warrants to purchase 73,727 shares of common stock remains outstanding.
 
At the Company’s option, it may prepay all of the outstanding principal balance, subject to certain pre-payment fees ranging from 1% to 3% of the prepayment amount. In the event of a final payment of the loans under the Amendment, either in the event of repayment of the loan at maturity or upon any prepayment, the Company is obligated to pay the final fee of $1,125,000.
 
The Company is also subject to certain affirmative and negative covenants under the Agreement, including limitations on its ability to undergo certain change of control events, and is required to maintain its primary operating, deposit and securities accounts with the lender. In addition, the Company is required to be in compliance with healthcare laws and regulations and terms and conditions of healthcare permits. The Company was in compliance with all covenants as of September 30, 2016.
 
As of September 30, 2016, amounts due under the Agreement include $227,095 in current liabilities, which include $272,905 of current portion of debt discount, and $14,267,045 in long-term liabilities, which include $76,575 of final fee premium accretion. The Company recorded $1,113,943 in interest expense related to the Agreement during the nine months ended September 30, 2016.
 
Future principal payments of long-term debt at September 30, 2016 are as follows:
 
Year Ended December 31,
2016
$

2017
2,000,000

2018
6,000,000

2019
6,000,000

2020
1,000,000

Total principal
15,000,000

Less discount
(582,435
)
Plus final fee premium accretion
76,575

Total long-term obligations
$
14,494,140

 
7. Derivative Financial Instruments — Warrants
 
Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Contracts in Entity’s Own Equity, 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 Topic 815-40, the warrants are also being re-measured at each balance sheet date based on estimated fair value, and any resultant change in fair value is being recorded in the Company’s condensed consolidated statements of operations. The Company estimates the fair value of these warrants using the Black-Scholes option pricing model.
 
The range of assumptions used to determine the fair value of the warrants valued using the Black-Scholes option pricing model during the periods indicated was:
 

13


 
Nine Months Ended September 30,
 
2016
 
2015
Estimated fair value of Trovagene common stock
4.49-4.65

 
5.69-10.15

Expected warrant term
2.3-2.8 years

 
3.3-3.8 years

Risk-free interest rate
0.71-0.87%

 
0.89-1.01%

Expected volatility
82-90%

 
75-77%

Dividend yield
0
%
 
0
%

Expected volatility is based on historical volatility. The warrants have a transferability provision and based on guidance provided in SAB 107 for instruments issued with such a provision, Trovagene used the full contractual term as the expected term of the warrants. The risk free rate is based on the U.S. Treasury security rates consistent with the expected remaining term of the warrants at each balance sheet date.
 
The following table sets forth the components of changes in the Company’s derivative financial instruments - 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, 2015
 
Balance of derivative financial instruments - warrants liability
 
967,295

 
$
3,297,077

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

 
(674,834
)
September 30, 2016
 
Balance of derivative financial instruments - warrants liability
 
967,295

 
$
2,622,243

 
8. Stockholders’ Equity
 
Common Stock
 
During the nine months ended September 30, 2016, the Company issued a total of 861,539 shares of Common Stock. The Company received gross proceeds of approximately $2.4 million from the sale of 421,810 shares of its common stock at a weighted average price of $5.61 under the agreement with Cantor Fitzgerald & Co. (“Agent”). In addition, 98,396 shares were issued upon exercise of options for a weighted average price of $3.73, and 341,333 shares were issued upon net exercise of 1,236,875 options at a weighted average exercise price of $3.81.
 
Stock Options
 
Stock-based compensation expense related to Trovagene equity awards have been recognized in operating results as follow:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Included in research and development expense
$
872,792

 
$
342,122

 
$
1,862,069

 
$
1,054,443

Included in cost of revenue
42,639

 
7,518

 
99,164

 
22,468

Included in selling and marketing expense
476,865

 
225,892

 
1,493,744

 
480,006

Included in general and administrative expense
437,075

 
348,127

 
2,487,415

 
1,201,929

Total stock-based compensation expense
$
1,829,371

 
$
923,659

 
$
5,942,392

 
$
2,758,846

 
The unrecognized compensation cost related to non-vested stock options outstanding at September 30, 2016 and 2015, net of expected forfeitures, was $10,416,565 and $10,308,131, respectively, both to be recognized over a weighted-average remaining vesting period of approximately three years. The weighted average remaining contractual term of outstanding options as of September 30, 2016 was approximately eight years.


14


The estimated fair value of stock option awards was determined on the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions during the following periods indicated:
 
 
Nine Months Ended
September 30,
 
2016
 
2015
Risk-free interest rate
1.48
%
 
1.77
%
Dividend yield
0
%
 
0
%
Expected volatility
103
%
 
76
%
Expected term
5.5 years

 
6.1 years

 
A summary of stock option activity and changes in stock options outstanding is presented below:
 
 
Total Options
 
Weighted Average
Exercise Price
Per Share
 
Intrinsic
Value
Balance outstanding, December 31, 2015
6,948,630

 
$
5.45

 
$
5,903,466

Granted
3,234,750

 
5.02

 
 

Exercised
(1,335,271
)
 
3.81

 
 

Canceled / Forfeited
(2,690,146
)
 
5.44

 
 

Expired
(106,777
)
 
11.14

 
 

Balance outstanding, September 30, 2016
6,051,186

 
5.49

 
1,724,990

Exercisable at September 30, 2016
2,287,028

 
5.13

 
1,325,134

 
During the nine months ended September 30, 2016, the Company had issued 996,000 options to its executive officers and non-employee directors that were over the authorized number of shares available in the Trovagene 2014 Equity Incentive Plan (2014 EIP) and were subject to shareholder approval. As per ASC Topic 815-40, the options were accounted for as liabilities and recorded at fair value with the changes in fair value being recorded in the Company’s condensed consolidated statements of operations. Stockholder approval was obtained on May 17, 2016 to increase the number of authorized shares in the 2014 EIP from 5,000,000 to 7,500,000. Accordingly, the options were remeasured as of the date of stockholder approval with the change recorded in stock based compensation expense and the $217,333 liability was reclassified to additional paid in capital. As of September 30, 2016 there were 2,346,478 shares available for issuance under the 2014 EIP.



Restricted Stock Units

Under guidance provided by ASC Topic 718 “Compensation—Stock Compensation” for share-based payments, the fair value of our restricted stock units is based on the grant date fair value of our common stock. All restricted stock units were granted with no purchase price. Vesting of the restricted stock units is generally subject to service conditions, while vesting of certain units are based on attainment of specific performance objectives. The weighted-average grant date fair value of the restricted stock units was $4.06 per share during the nine months ended September 30, 2016. There were no restricted stock units granted during the year ended December 31, 2015.

A summary of the restricted stock unit activity is presented below:
 
Number of Shares
 
Weighted Average
Grant Date Fair Value
Per Share
Non-vested restricted stock units outstanding, December 31, 2015

 
$

Granted
402,000

 
4.06

Forfeited
(10,000
)
 
3.99

Non-vested restricted stock units outstanding, September 30, 2016
392,000

 
4.06



15


None of the restricted stock units vested during the nine months ended September 30, 2016. At September 30, 2016, total unrecognized compensation cost related to non-vested restricted stock units was $537,134, which is expected to be recognized over a weighted-average period of three months.

Warrants
 
A summary of warrant activity and changes in warrants outstanding, including both liability and equity classifications is presented below:
 
 
Total Warrants
 
Weighted Average
Exercise Price
Per Share
 
Weighted Average
Remaining Contractual
Term
Balance outstanding, December 31, 2015
5,533,242

 
$
3.86

 
2.50
Granted
30,992

 
4.84

 
 
Expired
(50,000
)
 
8.00

 
 
Balance outstanding, September 30, 2016
5,514,234

 
3.82

 
1.85

9. Commitments and Contingencies
 
Executive and Consulting Agreements
 
The Company has longer-term contractual commitments with various consultants and employees. Certain employment agreements provide for severance payments.
 
Lease Agreements
 
The Company previously leased approximately 22,600 square feet of office and laboratory space at a monthly rental rate of approximately $60,000. On April 4, 2016, the Company entered into an amendment to the lease agreement which expanded the square footage of its office space to approximately 26,100 square feet at a revised monthly rental rate of approximately $68,000. Under the amendment, the lessor provided the Company with a $1,860,000 tenant improvement allowance which the Company recorded as a deferred rent obligation. The Company will amortize the deferred rent on a straight-line basis over the life of the lease. The new lease will expire on December 31, 2021. The Company also leases certain lab and office space in Torino, Italy, of approximately 2,300 square feet, at a monthly rental rate of approximately $3,100. The lease is for a period of three years and expires December 31, 2018.
 
Research and Development Agreements
 
The Company has entered into a variety of collaboration and specimen transfer agreements relating to its development efforts. Included in research and development expense, the Company has recorded approximately $0.8 million for the nine months ended September 30, 2016 relating to services provided by the collaborators in connection with these agreements.
 
The Company is a party to various agreements under which it licenses technology on an exclusive basis in the field of human diagnostics. License fees are generally calculated as a percentage of product revenues, with rates that vary by agreement. To date, payments have not been material.

The Company has entered into a collaborative research program under which it will work to design and validate custom enrichment panels--as specified by the Company. The research partner will be reimbursed for a portion of incurred costs, plus a fixed fee for target services performed. The research agreement includes an outline for a provisional commercial agreement that provides the Company with an exclusive license to use the research partner's technology in exchange for two milestone payments. The commercial agreement has not been finalized as of September 30, 2016.

Public Offering and Controlled Equity Offering

On May 27, 2016 the Company filed a Form S-3 Registration Statement to offer and sell in one or more offerings, any combination of common stock, preferred stock, debt securities, warrants, or units having an aggregate initial offering price not exceeding $250,000,000. The preferred stock, debt securities, warrants, and units may be convertible or exercisable or exchangeable for common stock or preferred stock or other Trovagene securities. This form was declared effective on June 13,

16


2016. The Company had an agreement with Cantor Fitzgerald & Co. (“Agent”) on January 25, 2013 to issue and sell up to $30,000,000 of shares of common stock through the Agent. As payment for its services, the Agent is entitled to a 3% commission on gross proceeds. Gross proceeds of $2.4 million have been raised since the date of effectiveness of the Form S-3 on June 13, 2016.

Database Usage

In March 2016 the Company entered into an agreement with an outside vendor to develop an online database for test requisition and test results. Under the agreement, the Company is obligated to pay a fixed development fee, and a usage fee each time an external user completes and submits a test order form to the database. To date, the Company has paid the fixed development fee, but has incurred no costs in connection with the usage fees.

Other Matters

The Company may be subject to litigation or administrative proceedings related to our business, such as claims related to employment practices, commercial disputes, or patent infringement. Responding to litigation or administrative proceedings, regardless of whether they have merit, can be expensive and disruptive to normal business operations. We are not able to predict the timing or outcome of these matters.

10. Related Party Transactions

In March 2016, the Company engaged Rutan & Tucker, LLP, a law firm to represent Trovagene, Inc. with respect to various lawsuits. One of the partners from Rutan & Tucker, LLP, is the son of the Company’s Chairman of the Board. The fees for legal services are based on the hourly rates of the individuals performing the legal services. As of September 30, 2016, the Company has incurred approximately $376,000 of legal expenses for services performed by Rutan & Tucker, LLP.

In September 2015, the Company entered into a research agreement with University of Turin (“University”) to collaborate on a program of research to develop, optimize and test molecular profiling tools for plasma and urine ctDNA in cancer. Dr. Alberto Bardelli, the Principal Investigator of the University who oversees this research program is also a member of the Scientific Advisory Board of the Company. Under the agreement, the Company has committed to pay up to $743,000 for the services performed by the University. In addition, the Company may pay royalties to the University on revenue generated by the Company from the commercialization of any tools developed during the collaboration. As of September 30, 2016, the Company has incurred and recorded approximately $555,000 of research and development expenses related to the agreement. No royalty expense has been incurred as of September 30, 2016.

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, 2015, filed on March 10, 2016, and on Form 10-Q for the periods ended June 30, 2016, filed on August 4, 2016. 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.
 

17


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 molecular diagnostics company that focuses on the development and commercialization of both proprietary urine and blood-based cell-free molecular diagnostic technologies for use in the detection and monitoring of cancer mutations across a variety of medical disciplines. Our primary internal focus is to leverage our novel urine-based molecular diagnostic platform to facilitate improvements in the field of oncology, while our external focus includes entering into collaborations to develop the Company’s technology in areas such as infectious disease, urology transplantation, and prenatal genetics. Our current goal is to improve treatment outcomes for cancer patients using our proprietary technology to detect and quantitatively monitor cell-free DNA in urine and/or blood.
 
We are leveraging our proprietary molecular diagnostic technology for the detection of cell-free DNA originating from diseased cell death that can be isolated and detected from urine, blood, and tissue samples to improve disease management. 
These genetic materials are also collectively referred to as “cell-free nucleic acids,” which result when cells in the body die and release their DNA contents into the bloodstream. The circulating fragments of genetic material are eventually filtered through the kidneys and therefore, can be detected and measured in urine and blood. Cell-free nucleic acids can be used as genetic markers of disease. As such, the contents of urine or blood samples represent systemic liquid biopsies that can allow for simple, noninvasive or minimally invasive sample collection methods. Circulating tumor DNA is a subtype of cell-free DNA, and represents the mutant cell-free DNA that we use to detect and monitor cancer mutations.
 
Our fundamental ctDNA diagnostic platform, also known as Precision Cancer Monitoring®, (“PCM”) is protected by a strong intellectual property portfolio. We have developed significant intellectual property around cell-free nucleic acids in urine, the extraction of cell-free nucleic acids from urine, as well as novel assay designs, particularly our proprietary non-naturally occurring primers. Through this proprietary technology, we believe that we are at the forefront of a shift in the way diagnostic medicine is practiced, using simple, noninvasive or minimally invasive sampling and analysis of nucleic acids, which we believe will ultimately lead to more effective treatment monitoring, better management of serious illnesses such as cancer, and the ability to detect the recurrence of cancer earlier. As of September 30, 2016, our intellectual property portfolio consists of 101 issued patents worldwide and over 70 pending patent applications globally. Our patent estate includes intellectual property for the detection of cell-free nucleic acids that pass through the kidney into the urine, as well as their application in specific disease areas, including oncology, infectious disease, transplantation, urology, and prenatal genetics.
 
We believe that our proprietary PCM platform is uniquely positioned to address a high unmet clinical need in the field of oncology. Our PCM platform is designed to offer improved cancer monitoring by tracking and analyzing levels of cell-free DNA from either urine or blood samples, and is intended to provide important clinical information beyond the current standard of care. Using urine as a sample, our cancer monitoring technology enables more frequent, noninvasive monitoring of cancer mutation status, disease progression and disease recurrence. Our research and development efforts were made commercially feasible following improved Next Generation Sequencing (“NGS”) technologies which are now available at a significantly lower cost. This, combined with our extensive patent portfolio around cell-free DNA in urine, gives us a competitive advantage to leverage an emerging trend toward monitoring cancer using ctDNA as a marker of disease status. Our proprietary sample preparation process forms the basis of our PCM platform. It includes a novel technology for the extraction and isolation of ctDNA from either a urine or blood sample, proprietary non-naturally occurring primers to enrich the sample for mutant alleles, and the ability to detect nucleic acids of interest using one of several leading gene sequencing technologies such as NGS or droplet digital Polymerase Chain Reaction ("PCR"). We believe that our quantitative ctDNA detection and monitoring platform offers industry-leading sensitivity, featuring single nucleic acid molecule detection.
 
Our PCM platform is poised to overcome a significant clinical dilemma in the area of cancer treatment. Recent scientific evidence supports the molecular basis of cancer, and has resulted in a paradigm shift in the way cancer is treated. Researchers and clinicians are now focused on specific mutations that are believed to be the molecular drivers of cancer, and, as

18


a result, there is a trend in the pharmaceutical research community toward developing targeted therapies. As such, there is a need for oncologists to have an ability to track the mutational status of their patients' tumor, including a given patient’s response to treatments that are designed to target driver cancer mutations. Current monitoring tools such as imaging procedures, tissue biopsy, and circulating tumor cells are insufficient to meet the challenge of monitoring cancer mutations. Cancer imaging provides a rough indication of tumor size, but provides no information to oncologists regarding mutational status which is important for the use of molecular targeted therapies. Tissue biopsy usually involves a major surgical procedure and, in many cases, is not repeatable as there are limitations related to tissue access for serial biopsies. In some cases, biopsies may not be feasible, significantly increasing the need to determine mutational status using an alternative method. In addition, tumor heterogeneity can create challenges, as the surgeon may not obtain the proper tissue from the tumor sample. With circulating tumor cells, which are typically measured using blood tests, sensitivity is low, and such tests are technically difficult and can be expensive.
 
While an improvement over chemotherapy in many cases, targeted drug therapies are not without issues, such as their high cost and potential side effects. In order to measure effectiveness of these therapies, repeated monitoring is needed and imaging and serial biopsies have their challenges or may not be optimal. If resistance develops to a targeted cancer therapy, fast and accurate detection of emerging or changing cancer mutation status has potential to provide critical information early. Our PCM platform provides a novel solution for early detection of cancer progression using urine, a noninvasive, plentiful sample source. We continue to generate positive data supporting the clinical utility of our technology to monitor cancer using ctDNA.
 
Our accumulated deficit through September 30, 2016 is $139,561,491. To date, we have generated minimal revenues and expect to incur additional losses to perform further research and development activities and expand commercial operations. During 2016, we have advanced our business with the following activities:

Entered into preferred provider agreements with Blue Cross Blue Shield Illinois, Stratose, Inc., Multiplan, Inc., Three Rivers Provider Network, Fortified Provider Network, FedMed, Inc., American’s Choice Provider Network, and Galaxy Health Network. These combined agreements represent in-network coverage for approximately 168 million covered lives.

Presented clinical study results at the 2016 American Association for Cancer Research (“AACR”) Annual Meeting that demonstrated ctDNA assay performance for detection and monitoring KRAS mutations in urine from patients with advanced cancers.

Appointed William J. Welch, as our Chief Executive Officer, after announcing the departure of Matthew Posard, Chief Commercial Officer and the termination of Antonius Schuh and Stephen Zaniboni as our previous CEO and CFO, respectively.

Presented clinical study results for our Trovera™ ctDNA tests at the 2016 ASCO Annual Meeting. Results demonstrated highly sensitive detection of EGFR T790M mutations and validated urine ctDNA testing as an alternative to tissue and plasma.

Entered into a clinical collaboration with the University of Michigan for monitoring and early detection of pancreatic cancer utilizing the TroveraTM KRAS ctDNA liquid biopsy test.

Entered into a clinical collaboration with the USC Norris Comprehensive Cancer Center to standardize the use of TroveraTM ctDNA liquid biopsy test in patient care.

Published study results in the Journal of Thoracic Oncology that demonstrate the clinical and analytical validity of the Trovera™ urine and blood-based liquid biopsy tests to assess EGFR T790M mutational status. The data shows that the Trovera™ test successfully identifies EGFR mutations, and has high concordance with tumor tissue.

Presented clinical study results for our Trovera™ tests at the 3rd Annual Precision Medicine Congress. The presentation highlighted Trovera'sTM clinical utility in identifying driver mutations as well as the potential benefits of liquid biopsies, including: patient response to therapy, progression monitoring, and early detection.

Entered into a partnership with the Pancreatic Cancer Action Network (PanCAN) to be the liquid biopsy provider for Precision Promise--the first large-scale precision medicine trial designed to transform care and treatment for patients with pancreatic cancer.


19


Published study results in Experimental Hematology & Oncology that illustrates the clinical utility of using Trovera™ urine liquid biopsy to confirm the presence of EGFR T790M mutational status in a patient with late-stage non-small cell lung cancer. The study concluded that ctDNA analysis should be considered a valuable diagnostic tool in treatment decision-making.

Invited to present four abstracts at the International Association for the Study of Lung Cancer's (IASLC) 17th World Conference on Lung Cancer. The presentation will focus on the clinical utility of Trovera™ in detection and monitoring of the EGFR T790M resistance mutation in non-small cell lung cancer. The presentation will also include first health outcomes and a total cost of care analysis, demonstrating that a urine-testing strategy shows improved cost-savings and patients' experiences compared to a tissue-testing strategy.

Invited to present at the 31st International Papillomavirus Conference. Two abstracts will be presented. The first demonstrates clinical performance of urine and cervical samples in a Chinese screening population. These results support the utility of urine testing for cervical cancer screening among this population. The second abstract describes the analytical performance of the Trovagene HPV-UR urine test.

Our product development and commercialization 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 tests or our diagnostic services and revenues related to our license agreements. The risk of completion of any program is high because of the many uncertainties involved in bringing new diagnostic products to market including the long duration of clinical testing, the specific performance of proposed products under stringent clinical trial protocols and/or Clinical Laboratory Improvement Amendments (“CLIA”) requirements, 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 September 30, 2016.
 
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, 2015, filed with the SEC on March 10, 2016. There have been no changes to our critical accounting policies since December 31, 2015.

RESULTS OF OPERATIONS
 
Three Months Ended September 30, 2016 and 2015
 
Revenues
 
Our total revenues were $89,114 and $57,327 for the three months ended September 30, 2016 and 2015, respectively. The components of our revenues were as follows:
 
 
Three Months Ended September 30,
 
2016
 
2015
 
Increase (Decrease)
Royalties
$
47,236

 
$
51,301

 
$
(4,065
)
Diagnostic services
37,978

 
6,026

 
31,952

Clinical research services
$
3,900

 
$

 
3,900

Total revenues
$
89,114

 
$
57,327

 
$
31,787

 
Revenue from diagnostic services is recognized when payment is received for the test results. The number of tests billed and payments received were higher in 2016 as compared to the same period in the prior year. Revenue from clinical research services consists primarily of revenue from the sale of urine and blood collection supplies under agreements with our

20


clinical research and business development partners. Revenue was recognized when supplies were delivered. There was no such revenue for the three months ended September 30, 2015.

We expect our royalties to fluctuate as the royalties are based on the minimum royalty payments as well as the timing of when payments are received for royalties in excess of minimum royalties. In addition, we expect our revenue from diagnostic services to increase in future periods, but as the revenue recognition is based on cash receipts, the timing of these revenues is also uncertain. We expect revenue from clinical research services to fluctuate based on timing of delivery of supplies under agreements.
 
Cost of Revenues
 
Our total cost of revenues was $424,559 for the three months ended September 30, 2016, compared to $173,537 in the same period of 2015. Cost of revenues mainly relates to the costs of our diagnostic service revenues. The costs are recognized at the completion of testing. Due to revenue being recognized when cash is received, costs incurred in one period may relate to revenue recognized in a later period. Gross margins are negative as we begin to build test volume to cover costs associated with running our diagnostic tests as well as inefficiencies in realizing capacity related issues. Increase in cost of revenues for the three months ended September 30, 2016 compared to the same period of last year is mainly due to the increased volume of tests processed offset by decreased average cost per test.
 
Research and Development Expenses
 
Research and development expenses consisted of the following:
 
 
Three Months Ended September 30,
 
2016
 
2015
 
Increase (Decrease)
Salaries and staff costs
$
1,407,529

 
$
1,037,831

 
$
369,698

Stock-based compensation
872,792

 
342,122

 
530,670

Outside services, consultants and lab supplies
1,215,889

 
901,662

 
314,227

Facilities
372,891

 
193,926

 
178,965

Travel and scientific conferences
51,203

 
52,684

 
(1,481
)
Other
17,094

 
18,308

 
(1,214
)
Total research and development
$
3,937,398

 
$
2,546,533

 
$
1,390,865

 
Research and development expenses increased by $1,390,865 to $3,937,398 for the three months ended September 30, 2016 from $2,546,533 for the same period in 2015. Our costs have increased mainly as a result of our internal research and development personnel increasing from twenty-seven to thirty-four and the use of additional consulting and outside services. We utilize clinical studies to provide data that supports our technology for the monitoring of responsiveness to therapy and the status of diseases. The number of samples processed in connection with our research and development clinical studies increased for the three months ended September 30, 2016 as compared to the same period in 2015. We expect research and development expenses to increase as we enter into additional collaborations, and complete the development of our urine collection and DNA extraction kits and multi-plex panels.


21


Selling and Marketing Expenses
 
Selling and marketing expenses consisted of the following:
 
 
Three Months Ended September 30,
 
2016
 
2015
 
Increase (Decrease)
Salaries and staff costs
$
1,427,254

 
$
681,421

 
$
745,833

Stock-based compensation
476,865

 
225,892

 
250,973

Outside services and consultants
441,699

 
218,582

 
223,117

Facilities
112,573

 
70,665

 
41,908

Trade shows, conferences and marketing
243,692

 
432,123

 
(188,431
)
Travel
212,375

 
157,163

 
55,212

Other
26,404

 
12,417

 
13,987

Total sales and marketing
$
2,940,862


$
1,798,263


$
1,142,599

 
Selling and marketing expenses increased by $1,142,599 to $2,940,862 for the three months ended September 30, 2016 from $1,798,263 for the same period in 2015. During the three months ended September 30, 2016 we increased the number of our field sales, customer support and marketing personnel, bringing our average headcount to twenty-two from fourteen in the same period of the prior year. These additions to our commercial team support our sales and marketing activities, resulting in the increase in salaries and staff costs and stock-based compensation. The increase in outside services and consultants is due to our utilization of outside marketing consultants and agents for targeted marketing activities such as website design, product branding and printing services. We expect our selling and marketing expenses to change based on the composition of commercial team members that are focused on increasing market acceptance of our commercially available tests and the commercial introduction of future product offerings, such as our urine collection and DNA extraction kits.
 
General and Administrative Expenses
 
General and administrative expenses consisted of the following:
 
 
Three Months Ended September 30,
 
2016
 
2015
 
Increase (Decrease)
Personnel and outside services costs
$
1,136,266

 
$
879,722

 
$
256,544

Board of Directors’ fees
122,187

 
108,612

 
13,575

Stock-based compensation
437,075

 
348,127

 
88,948

Legal and accounting fees
695,061

 
286,312

 
408,749

Facilities and insurance
149,921

 
152,714

 
(2,793
)
Travel
47,769

 
97,106

 
(49,337
)
Fees, licenses, taxes and other
122,503

 
75,953

 
46,550

Total general and administrative
$
2,710,782


$
1,948,546

 
$
762,236

 
General and administrative expenses increased by $762,236 to $2,710,782 for the three months ended September 30, 2016, from $1,948,546 for the same period in 2015. The overall increase was primarily due to the increase of personnel and outside services costs and legal and accounting fees. The increase of personnel and outside services cost is primarily due to an increase in general and administrative employees, an increase in investor relations activities as our investor base has grown, and increased services related to information technology to support our overall headcount growth. The increase in legal and accounting fees primarily resulted from the lawsuit against the Company’s 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. We expect our general and administrative costs to increase as our commercial operations and research and development teams grow and if we need to retain additional legal resources.
 

22


Net interest Expense
 
Net interest expense was $354,993 and $335,359 for the three months ended September 30, 2016 and 2015, respectively. The increase of net interest expense is primarily due to an increase in interest expense, offset by an increase in interest income of approximately $62,000. This increase is due to the investment of a portion of our cash and cash equivalents in short-term investments which have a higher average yield as well as overall higher average cash and investment balances during the three months ended September 30, 2016 as compared to the same period of the prior year. We expect net interest expense to increase as a result of our debt refinancing and as our average cash and investment balances decrease.

Change in Fair Value of Derivative Financial Instruments - Warrants
 
We have issued warrants that are accounted for as derivative liabilities. As of September 30, 2016, the derivative financial instruments - warrants liabilities were revalued to $2,622,243, resulting in a decrease in value of $88,208 from June 30, 2016, based primarily upon the decrease in our stock price from $4.53 at June 30, 2016 to $4.49 at September 30, 2016 as well as the changes in the expected term 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.

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

 
Three Months Ended September 30,
 
2016
 
2015
 
Increase 
Net loss attributable to common shareholders
$
(10,197,332
)
 
$
(2,741,889
)
 
$
7,455,443

Net loss per common share — basic
$
(0.34
)
 
$
(0.10
)
 
$
0.24

Net loss per common share — diluted
$
(0.34
)
 
$
(0.23
)
 
$
0.11

 
 
 
 
 
 
Weighted average shares outstanding — basic
30,339,774

 
28,560,211

 
1,779,563

Weighted average shares outstanding — diluted
30,339,774

 
29,128,235

 
1,211,539

 
The $7,455,443 increase in net loss attributable to common shareholders and the $0.24 increase in basic net loss per share was primarily the result of an increase in operating expenses of $3,546,722, and a decrease in gain from the change in fair value of derivative financial instruments - warrants of $3,929,004 for the nine months ended September 30, 2016 compared to the same period in the prior year.
 
Nine Months Ended September 30, 2016 and 2015
 
Revenues
 
Our total revenues were $313,000 and $233,643 for the nine months ended September 30, 2016 and 2015, respectively. The components of our revenues were as follows:

 
Nine Months Ended September 30,
 
2016
 
2015
 
Increase (Decrease)
Royalties
$
207,869

 
$
222,931

 
$
(15,062
)
Diagnostic services
69,558

 
10,712

 
58,846

Clinical research services
35,573

 

 
35,573

Total revenues
$
313,000

 
$
233,643

 
$
79,357

 
The $15,062 decrease in royalties related primarily to lower receipts of payments in excess of minimum royalties in comparison to the same period of the prior year. Revenue from diagnostic services is recognized when payment is received for the test results. The number of tests billed and payments received were higher for the nine months ended September 30, 2016 as compared to the same period in the prior year. Revenue from clinical research services consists primarily of revenue from the sale of urine and blood collection supplies under agreements with our clinical research and business development partners.

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Revenue was recognized when supplies were delivered. There was no such revenue for the nine months ended September 30, 2015.

We expect our royalties to fluctuate as the royalties are based on the minimum royalty payments as well as the timing of when payments are received for royalties in excess of minimum royalties. We expect our revenue from diagnostic services to increase in future periods, but as the revenue recognition is based on cash receipts, the timing of these revenues is also uncertain. In addition, we expect revenue from clinical research services to fluctuate based on timing of delivery of supplies under agreements.
 
Cost of Revenues
 
Our total cost of revenues was $1,143,293 for the nine months ended September 30, 2016, compared to $429,992 in the same period of 2015. Cost of revenues relates to the costs of our diagnostic service revenues. The costs are recognized at the completion of testing. Due to revenue being recognized when cash is received, costs incurred in one period may relate to revenue recognized in a later period. Gross margins are negative as we begin to build test volume to cover costs associated with running our diagnostic tests as well as inefficiencies in realizing capacity related issues. Increase in cost of revenues for the nine months ended September 30, 2016 compared to the same period of last year is mainly due to the increased volume of test processed offset by decreased average cost per test.
 
Research and Development Expenses
 
Research and development expenses consisted of the following:

 
Nine Months Ended September 30,
 
2016
 
2015
 
Increase 
Salaries and staff costs
$
4,263,595

 
$
2,679,951

 
$
1,583,644

Stock-based compensation
1,862,069

 
1,054,443

 
807,626

Outside services, consultants and lab supplies
3,837,485

 
2,955,738

 
881,747

Facilities
1,042,682

 
552,259

 
490,423

Travel and scientific conferences
157,445

 
148,766

 
8,679

Other
58,600

 
37,192

 
21,408

Total research and development
$
11,221,876

 
$
7,428,349

 
$
3,793,527


Research and development expenses increased by $3,793,527 to $11,221,876 for the nine months ended September 30, 2016 from $7,428,349 for the same period in 2015. Our costs have increased primarily due to the average number of our internal research and development personnel growing from twenty to thirty-three. In addition, we purchased additional lab supplies and clinical samples to support the number of samples processed and validated in connection with our research and development clinical studies as well as the development of our urine collection and DNA extraction kits. We utilize clinical studies to provide data that supports our technology for the monitoring of responsiveness to therapy and the status of diseases. The number of samples processed in connection with our research and development clinical studies increased for the nine months ended September 30, 2016 as compared to the same period in 2015. We expect research and development expenses to increase as we enter into additional collaborations or studies and complete the development of our urine collection and DNA extraction kits and multi-plex panels.

24


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

 
Nine Months Ended September 30,
 
2016
 
2015
 
Increase
Salaries and staff costs
$
4,266,029

 
$
1,758,789

 
$
2,507,240

Stock-based compensation
1,493,744

 
480,006

 
1,013,738

Outside services and consultants
1,117,368

 
654,512

 
462,856

Facilities
362,339

 
210,153

 
152,186

Trade shows, conferences and marketing
1,082,883

 
1,005,859

 
77,024

Travel
716,473

 
330,399

 
386,074

Other
88,614

 
69,048

 
19,566

Total sales and marketing
$
9,127,450

 
$
4,508,766

 
$
4,618,684

 
Selling and marketing expenses increased by $4,618,684 to $9,127,450 for the nine months ended September 30, 2016 from $4,508,766 for the same period in 2015. During the nine months ended September 30, 2016 we increased the number of our field sales, customer support and marketing personnel, bringing our average headcount to twenty-two from eleven in the same period of the prior year. We also increased utilization of outside marketing consultants and agents for targeted marketing activities such as social media engagements and website design services.
 
General and Administrative Expenses
 
General and administrative expenses consisted of the following:

 
Nine Months Ended September 30,
 
2016
 
2015
 
Increase (Decrease)
Personnel and outside services costs
$
3,279,860

 
$
2,582,108

 
$
697,752

Board of Directors’ fees
345,240

 
339,823

 
5,417

Stock-based compensation
2,487,415

 
1,201,929

 
1,285,486

Legal and accounting fees
2,077,585

 
855,101

 
1,222,484

Facilities and insurance
551,382

 
366,109

 
185,273

Travel
151,355

 
206,741

 
(55,386
)
Fees, licenses, taxes and other
290,924

 
204,236

 
86,688

Total general and administrative
$
9,183,761

 
$
5,756,047

 
$
3,427,714

 
General and administrative expenses increased by $3,427,714 to $9,183,761 for the nine months ended September 30, 2016, from $5,756,047 for the same period in 2015. The significant components of the increase were primarily due to the increase of personnel and outside services costs, stock-based compensation and legal fees. The increase of personnel and outside services costs is due to an increase in average headcount from six to eleven to support the growth in our research, development and sales and marketing organizations, an increase in investor relations activities as our investor base has grown, and increased services related to information technology to support our overall headcount growth. In January 2016, our former CEO was granted a non-qualified stock option to purchase 350,000 shares of Common Stock at an exercise price of $5.18 per share. As the stock option was vested upon grant, the fair value of the option, which approximated $1.2 million was expensed in full during the nine months ended September 30, 2016. Legal fees increased primarily as a result of a lawsuit against the Company’s former CEO and CFO, and review of federal and state tax regulations with respect to certain executive compensation.


25


Net Interest Expense
 
Net interest expense was $967,522 and $1,100,080 for nine months ended September 30, 2016 and 2015, respectively. The decrease of net interest expense is primarily due to an increase in interest income of approximately $193,518, resulting from the investment of a portion of our cash and cash equivalents in short-term investments which have a higher average yield as well as overall higher average cash and investment balances during the nine months ended September 30, 2016 as compared to the same period of the prior year.

Change in Fair Value of Derivative Financial Instruments - Warrants
 
We have issued warrants that are accounted for as derivative liabilities. As of September 30, 2016, the derivative financial instruments - warrants liabilities were revalued to $2,622,243, resulting in a decrease in value of $674,834 from December 31, 2015, based primarily upon the decrease in our stock price from $5.40 at December 31, 2015 to $4.49 at September 30, 2016 as well as the changes in the expected term 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.
 
Net Loss
 
Net loss and per share amounts were as follows:

 
Nine Months Ended September 30,
 
2016
 
2015
 
Increase 
Net loss attributable to common shareholders
$
(30,674,248
)
 
$
(20,108,424
)
 
$
10,565,824

Net loss per common share — basic
$
(1.02
)
 
$
(0.80
)
 
$
0.22

Net loss per common share — diluted
$
(1.04
)
 
$
(0.96
)
 
$
0.08

 
 
 
 
 
 
Weighted average shares outstanding — basic
30,018,841

 
25,014,966

 
5,003,875

Weighted average shares outstanding — diluted
30,136,572

 
25,204,307

 
4,932,265

 
The $10,565,824 increase in net loss attributable to common shareholders and the $0.22 increase in basic net loss per share was primarily the result of an increase in operating expenses of $12,553,226 compared to the same period in the prior year. This increase was offset by a $674,834 gain from the change in the fair value of derivative financial instruments - warrants for the nine months ended September 30, 2016, as compared to a loss from the change in the fair value of derivative financial instruments - warrants of $1,105,270 for the same period in the prior year.

LIQUIDITY AND CAPITAL RESOURCES
 
As of September 30, 2016, we had $22,569,107 in cash and cash equivalents. Net cash used in operating activities for the nine months ended September 30, 2016 was $22,034,998, compared to $15,310,089 for the nine months ended September 30, 2015. Our use of cash was primarily a result of the net loss of $30,656,068 for the nine months ended September 30, 2016, adjusted for non-cash items related to stock-based compensation of $5,942,392, accretion of final fee premium of $266,423, amortization of discount on debt of $105,710, depreciation and amortization of $693,485, amortization of premiums on short-term investments of $61,719, deferred rent of $133,378, interest income accrued on short-term investments of $10,122, and the gain from the change in fair value of derivative financial instruments - warrants of $674,834. The changes in our operating assets and liabilities consisted of higher accounts payable and accrued expenses, an increase in prepaid expenses, and a decrease in accounts receivable and other assets. 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 $25,249,392 during the nine months ended September 30, 2016, compared to $1,256,988 for the same period in 2015. Investing activities consisted of net purchases for capital equipment that used $797,781 in cash, and net purchase of short-term investments of $24,451,611.
 
Net cash provided by financing activities was $2,361,994 during the nine months ended September 30, 2016, compared to $63,423,076 for the same period in 2015. Financing activities during the nine months ended September 30, 2016 related primarily to the sale of our common stock through a controlled equity offering and net payment of long-term debt offset by

26


borrowings under equipment line of credit. Financing activities during the same period of the prior year consisted primarily of proceeds from the sale of our common stock in underwritten public offerings.
 
As of September 30, 2016, and December 31, 2015, we had working capital of $41,412,835 and $60,179,971, respectively. As of October 31, 2016, our working capital was $52.3 million.
 
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 and ramp up of our sales and marketing function. We will be required to raise additional capital during 2017 to complete the development and commercialization of current product candidates, to fund the potential working capital deficit and to continue to fund operations at our current cash expenditure levels. To date, our sources of cash have been primarily limited to the sale of equity securities and debentures and a venture capital loan. We cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact our ability to conduct business. If we are unable to raise additional capital when required or on acceptable terms, we may have to (i) significantly delay, scale back or discontinue the development and/or commercialization of one or more of product candidates; (ii) seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; or (iii) relinquish or otherwise dispose of rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves on unfavorable terms.

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, 2015.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Interest Rate Risk
 
Our primary exposure to market risk due to changes in interest rates relates to the increase or decrease in the value of debt securities in our short-term investment portfolio and investments in short-term money marketable funds, as well as interest expense under our equipment line of credit.

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 or illiquidity, 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.

Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We attempt to increase the safety and preservation of our invested principal funds by limiting default risk, market risk, and reinvestment risk. We mitigate default risk by investing in investment grade securities. Changes in interest rates over time will increase or decrease our interest income.

Borrowings under the Company’s equipment line of credit bear interest at floating rates. Changes in interest rates could affect the amounts of interest that we pay in the future.
 
Foreign Currency Risk
 
Our foreign currency exchange risk arises from our operations in Italy. Our functional and reporting currency is the United States dollar. We translate our foreign operations’ assets and liabilities denominated in foreign currencies into U.S. dollars at current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in the cumulative

27


translation account, a component of accumulated other comprehensive income. Gains or losses from foreign currency transactions are included in other expense (income), net.
 
Effects of Inflation
 
We do not believe that inflation and changing prices during the nine months ended September 30, 2016 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 CEO and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2016 to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all errors and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
 
Changes in Internal Control over Financial Reporting
 
There was no change in our internal control over financial reporting during the three months ended September 30, 2016 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


28


PART II.  OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business, except for the following:  On March 28, 2016 we filed a complaint against Dr. Schuh and Mr. Zaniboni, for, among other things, breach of fiduciary duty.  The complaint was filed in the Superior Court of the State of California for the County of San Diego.  We are alleging that Dr. Schuh and Mr. Zaniboni failed to present a lucrative corporate opportunity to us concerning promising new therapeutics in the field of precision medicine and instead took that opportunity for their own personal benefit.  The complaint asks that Dr. Schuh and Mr. Zaniboni be required to turn over their interests in these new therapeutics to us. The parties are currently engaged in the discovery process.

On April 29, 2016, a complaint was filed against William Welch, our CEO, and our company by Pathway Genomics Corporation alleging, among other things, breach of contract and intentional interference with contractual relations. We believe the complaint is unfounded, and consists largely of baseless speculation that is contrary to fact. We plan to vigorously defend against these allegations. The parties are currently engaged in the discovery process.
 
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, 2015, and Form 10-Q for the periods ended June 30, 2016.
 


29


ITEM 6. EXHIBITS
 
Exhibit
Number
 
Description of Exhibit
 
 
 
31.1
 
Certification of Principal Executive Officer and Principal Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act.
 
 
 
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.
 
 
 
101
 
Financial statements from the quarterly report on Form 10-Q of the Company for the quarter ended September 30, 2016 filed on November 9, 2016, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) the Notes to the Condensed Consolidated Financial Statements tagged as blocks of text.


30


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
TROVAGENE, INC.
 
 
 
November 9, 2016
By:
/s/ William Welch
 
 
William Welch
 
 
Chief Executive Officer (Principal Executive Officer and Principal Financial Officer)


31