Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark One)
xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017March 31, 2018
 
oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from             to            
 
COMMISSION FILE NUMBER 001-35558
 
TROVAGENE, INC.
(Exact Name of registrant as specified in its charter)
Delaware 27-2004382
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
11055 Flintkote Avenue, Suite B, San Diego, California 92121
(Address of principal executive offices) (Zip Code)
   
(858) 952-7570
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x   No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer o  Accelerated filer o 
        
 Non-accelerated filer o(Do not check if a smaller reporting company) Smaller reporting company x 
        
     Emerging growth companyo 
        
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x
 
As of October 31, 2017,April 30, 2018, the issuer had 38,106,46059,378,162 shares of Common Stock issued and outstanding.
 


Table of Contents

TROVAGENE, INC.
 
Table of Contents
 
  Page
 
   
 
   
 
   
 
   
 
   
 
   
 
   
   
   
   
 
   
   
   
   
   
   
   
   
 


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TROVAGENE, INC. 
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30, 2017 December 31, 2016March 31, 2018 December 31, 2017
Assets      
Current assets:      
Cash and cash equivalents$7,434,298
 $13,915,094
$6,657,158
 $8,225,764
Short-term investments
 23,978,022
Accounts receivable178,127
 100,460
Accounts receivable and unbilled receivable114,343
 77,095
Prepaid expenses and other current assets939,200
 956,616
1,068,144
 1,165,828
Total current assets8,551,625
 38,950,192
7,839,645
 9,468,687
Property and equipment, net3,126,969
 3,826,915
2,223,597
 2,426,312
Other assets539,309
 1,173,304
345,277
 389,942
Total Assets$12,217,903
 $43,950,411
$10,408,519
 $12,284,941
      
Liabilities and Stockholders’ Equity      
Current liabilities:      
Accounts payable$675,499
 $1,130,536
$651,671
 $825,244
Accrued expenses2,620,250
 4,021,365
1,685,178
 1,454,587
Deferred rent298,213
 285,246
341,924
 334,424
Current portion of long-term debt (in default)1,488,041
 2,360,109
Current portion of long-term debt1,174,989
 1,331,515
Total current liabilities5,082,003
 7,797,256
3,853,762
 3,945,770
Long-term debt, less current portion
 14,176,359
Derivative financial instruments—warrants2,037,712
 834,940
779,076
 649,387
Deferred rent, net of current portion1,153,316
 1,373,717
1,096,591
 1,183,677
Total Liabilities8,273,031
 24,182,272
5,729,429
 5,778,834
      
Commitments and contingencies (Note 9)

 



 

      
Stockholders’ equity      
Preferred stock, $0.001 par value, 20,000,000 shares authorized; 60,600 shares outstanding at September 30, 2017 and December 31, 2016; designated as Series A Convertible Preferred Stock with liquidation preference of $606,000 at September 30, 2017 and December 31, 201660
 60
Common stock, $0.0001 par value, 150,000,000 shares authorized; 38,105,251 and 30,696,791 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively3,811
 3,070
Preferred stock, $0.001 par value, 20,000,000 shares authorized; 60,600 shares outstanding at March 31, 2018 and December 31, 2017; designated as Series A Convertible Preferred Stock with liquidation preference of $606,000 at March 31, 2018 and December 31, 201760
 60
Common stock, $0.0001 par value, 150,000,000 shares authorized; 58,832,953 and 52,791,584 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively5,883
 5,279
Additional paid-in capital174,426,891
 167,890,984
182,401,648
 179,546,954
Accumulated other comprehensive loss(15,194) (10,773)
Accumulated deficit(170,470,696) (148,115,202)(177,728,501) (173,046,186)
Total stockholders’ equity3,944,872
 19,768,139
Total liabilities and stockholders’ equity$12,217,903
 $43,950,411
Total Stockholders’ Equity4,679,090
 6,506,107
Total Liabilities and Stockholders’ Equity$10,408,519
 $12,284,941
 
See accompanying notes to the unaudited condensed consolidated financial statements.

TROVAGENE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
2017 2016 2017 20162018 2017
Revenues:          
Royalties$58,779
 $47,236
 $169,415
 $207,869
$49,055
 $65,826
Diagnostic services58,119
 37,978
 142,482
 69,558
40,002
 28,862
Clinical research services6,431
 3,900
 8,481
 35,573
Clinical research11,079
 350
Total revenues123,329
 89,114
 320,378
 313,000
100,136
 95,038
Costs and expenses:          
Cost of revenues473,202
 424,559
 1,427,831
 1,143,293
366,344
 616,426
Research and development1,414,706
 3,937,398
 6,676,251
 11,221,876
1,883,838
 4,279,830
Selling and marketing419,927
 2,940,862
 2,442,931
 9,127,450
General and administrative3,659,587
 2,710,782
 9,915,359
 9,183,761
Restructuring (benefit) charges(46,472) 
 1,669,526
 
Selling, general and administrative2,504,977
 3,604,624
Restructuring charges
 1,719,804
Total operating expenses5,920,950
 10,013,601
 22,131,898
 30,676,380
4,755,159
 10,220,684
          
Loss from operations(5,797,621) (9,924,487) (21,811,520) (30,363,380)(4,655,023) (10,125,646)
          
Net interest expense(16,473) (354,993) (877,741) (967,522)(2,465) (429,397)
Gain from change in fair value of derivative financial instruments—warrants1,528,669
 88,208
 2,012,747
 674,834
Loss on extinguishment of debt
 
 (1,655,825) 
Other loss, net(6,541) 
 (4,975) 
(Loss) gain from change in fair value of derivative financial instruments—warrants(129,689) 555,506
Other income1,000
 
Net loss(4,291,966) (10,191,272) (22,337,314) (30,656,068)(4,786,177) (9,999,537)
          
Preferred stock dividend(6,060) (6,060) (18,180) (18,180)(6,060) (6,060)
          
Net loss attributable to common stockholders$(4,298,026) $(10,197,332) $(22,355,494) $(30,674,248)$(4,792,237) $(10,005,597)
          
Net loss per common share — basic$(0.12) $(0.34) $(0.68) $(1.02)$(0.09) $(0.32)
Net loss per common share — diluted$(0.12) $(0.34) $(0.68) $(1.04)$(0.09) $(0.32)
          
Weighted-average shares outstanding — basic36,465,672
 30,339,774
 32,826,306
 30,018,841
55,364,438
 30,961,014
Weighted-average shares outstanding — diluted36,465,672
 30,339,774
 32,826,306
 30,136,572
55,364,438
 30,961,014
 
See accompanying notes to the unaudited condensed consolidated financial statements.


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

Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
2017 2016 2017 20162018 2017
Net loss$(4,291,966) $(10,191,272) $(22,337,314) $(30,656,068)$(4,786,177) $(9,999,537)
Other comprehensive income (loss):       
Other comprehensive loss:   
Foreign currency translation loss(1,544) (81) (13,486) (1,877)
 (2,399)
Unrealized gain or reversal of previous losses on securities available-for-sale
 (7,997) 9,065
 (2,865)
 (454)
Total other comprehensive income (loss)(1,544) (8,078) (4,421) (4,742)
Total other comprehensive loss
 (2,853)
          
Total comprehensive loss(4,293,510) (10,199,350) (22,341,735) (30,660,810)(4,786,177) (10,002,390)
          
Preferred stock dividend(6,060) (6,060) (18,180) (18,180)(6,060) (6,060)
          
Comprehensive loss attributable to common stockholders$(4,299,570) $(10,205,410) $(22,359,915) $(30,678,990)$(4,792,237) $(10,008,450)

See accompanying notes to the unaudited condensed consolidated financial statements.


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

 Preferred Stock
Shares
 Preferred Stock
Amount
 Common Stock
Shares
 Common Stock
Amount
 Additional
Paid-In Capital
 Accumulated Deficit Total
Stockholders’ Equity
Balance, January 1, 201860,600
 $60
 52,791,584
 $5,279
 $179,546,954
 $(173,046,186) $6,506,107
Stock-based compensation
 
 
 
 1,406,131
 
 1,406,131
Issuance of common stock upon exercise of warrants
 
 5,136,667
 514
 1,448,653
 
 1,449,167
Issuance of common stock upon vesting of restricted stock units
 
 904,702
 90
 (90) 
 
Preferred stock dividend
 
 
 
 
 (6,060) (6,060)
Cumulative adjustment upon adoption of ASC 606
 
 
 
 
 109,922
 109,922
Net loss
 
 
 
 
 (4,786,177) (4,786,177)
Balance, March 31, 201860,600
 $60
 58,832,953
 $5,883
 $182,401,648
 $(177,728,501) $4,679,090

See accompanying notes to the unaudited condensed consolidated financial statements.

TROVAGENE, INC. 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
September 30,
Three Months Ended
March 31,
2017 20162018 2017
Operating activities      
Net loss$(22,337,314) $(30,656,068)$(4,786,177) $(9,999,537)
Adjustments to reconcile net loss to net cash used in operating activities:      
Loss on disposal of assets28,199
 
Impairment loss485,000
 

 485,000
Depreciation and amortization956,995
 693,485
252,480
 330,968
Stock based compensation expense3,117,364
 5,942,392
1,406,131
 920,799
Loss on extinguishment of debt1,655,825
 
Accretion of final fee premium293,614
 266,423

 125,012
Amortization of discount on debt113,780
 105,710

 68,223
Net realized loss on short-term investments6,400
 
Amortization of premiums on short-term investments9,230
 61,719

 10,877
Deferred rent(207,435) (133,378)(79,586) (66,119)
Interest income accrued on short-term investments(90,330) 10,122

 151,583
Change in fair value of derivative financial instruments—warrants(2,012,747) (674,834)129,689
 (555,506)
Changes in operating assets and liabilities:      
Decrease in other assets
 2,761
(Increase) decrease in accounts receivable(77,667) 13,584
Decrease (increase) in prepaid expenses and other current assets18,230
 (157,051)
(Decrease) increase in accounts payable and accrued expenses(1,908,796) 2,490,137
Decrease in accounts receivable and unbilled receivable72,674
 20,112
Decrease in prepaid expenses and other current assets97,684
 110,957
Increase (decrease) in accounts payable and accrued expenses50,958
 (360,577)
Net cash used in operating activities(19,949,652) (22,034,998)(2,856,147) (8,758,208)
      
Investing activities:      
Capital expenditures, net(136,251) (797,781)(5,100) (11,452)
Maturities of short-term investments16,431,837
 

 14,000,000
Purchases of short-term investments(8,804,604) (24,451,611)
 (8,804,604)
Sales of short-term investments16,434,553
 
Net cash provided by (used in) investing activities23,925,535
 (25,249,392)
Net cash (used in) provided by investing activities(5,100) 5,183,944
      
Financing activities:      
Proceeds from sales of common stock and warrants, net of expenses6,634,803
 2,293,857
Proceeds from exercise of options
 366,966
Borrowings under equipment line of credit
 792,251
Borrowings under long-term debt, net of costs
 7,805,086
Payment upon debt extinguishment(1,613,067) 
Repayments of long-term debt(15,000,000) (8,896,166)
Proceeds from exercise of warrants1,449,167
 
Repayments of equipment line of credit(469,578) 
(156,526) (156,526)
Net cash (used in) provided by financing activities(10,447,842) 2,361,994
Net cash provided by (used in) financing activities1,292,641
 (156,526)
Effect of exchange rate changes on cash and cash equivalents(8,837) (1,544)
 (844)
Net change in cash and equivalents(6,480,796) (44,923,940)(1,568,606) (3,731,634)
Cash and cash equivalents—Beginning of period13,915,094
 67,493,047
8,225,764
 13,915,094
Cash and cash equivalents—End of period$7,434,298
 $22,569,107
$6,657,158
 $10,183,460
      
Supplementary disclosure of cash flow activity:      
Cash paid for taxes$800
 $4,560
Cash paid for interest$650,331
 $806,228
$16,417
 $300,040
Supplemental disclosure of non-cash investing and financing activities:      
Preferred stock dividends accrued$18,180
 $18,180
$6,060
 $6,060
Leasehold improvements paid for by lessor$
 $1,860,000

See accompanying notes to the unaudited condensed consolidated financial statements.

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

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

PCM-075 was developed to have high selectivity to PLK1 (at low nanomolar IC50 levels), to be administered orally, and to have a relatively short drug half-life of approximately 24 hours compared to other pan PLK inhibitors. A safety study of PCM-075 has been successfully completed a safety study in patients with advanced metastatic solid tumors and published in 2017 in Investigational New Drugs. The Company has two active Investigational New Drug (“INDs”) applications in place with the U.S. Food and Drug Administration (“FDA”) for PCM-075, allowing the Company to pursue clinical development in hematologic malignancies and solid tumor cancers. Trovagene is currently enrolling a phasePhase 1b/2 open-label clinical trial of PCM-075 in combination with standard-of-care chemotherapy in patients with AML. The Phase 1b/2 clinical trial is led by Hematologist Jorge Eduardo Cortes, M.D., Deputy Department Chair, Department of Leukemia, Division of Cancer Medicine, The University of Texas MD Anderson Cancer Center. In addition, the Company is working with Dr. David Einstein at the Genitourinary Oncology Program at Beth Israel Deaconess Medical Center and Harvard Medical School as the principal investigator on a Phase 2 open-label clinical trial of PCM-075 in combination with abiraterone acetate (Zytiga®) and prednisone in patients with AML underway.mCRPC with plans to enroll patients later this year.

Trovagene’s intellectual property and proprietary technology enables the Company to analyze circulating tumor DNA (“ctDNA”) and clinically actionable markers to identify patients most likely to respond to specific cancer therapies. The Company plans to continue to vertically integrate its tumor genomics technology with the development of targeted cancer therapeutics.

Basis of Presentation
 
The accompanying unaudited interim condensed consolidated financial statements of Trovagene, which include all accounts of its wholly owned subsidiary, Trovagene, Srl (dissolved in October 2017), have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated.
 
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP and the rules and regulations of the Securities and Exchange Commission (“SEC”) related to a quarterly report on Form 10-Q. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations. The unaudited interim condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the Company’s financial position and the results of its operations and cash flows for the periods presented. The unaudited condensed balance sheet at December 31, 20162017 has been derived from the audited financial statements at that date but does not include all of the information and disclosures required by GAAP for annual financial statements. The operating results presented in these unaudited interim condensed consolidated financial statements are not necessarily indicative of the results that may be expected for any future periods. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements

and the notes thereto for the year ended December 31, 20162017 included in the Company’s annual report on Form 10-K filed with the SEC on March 15, 2017.February 26, 2018.

Liquidity
 
Trovagene’s condensed consolidated financial statements as of September 30, 2017March 31, 2018 have been prepared under the assumption that Trovagene will continue as a going concern, which assumes that the Company will realize its assets and satisfy its liabilities in the normal course of business. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of the uncertainty concerning the Company’s ability to continue as a going concern.
 
However, theThe Company has incurred net losses since its inception and has negative operating cash flows. TheConsidering the Company’s current cash resources, management believes the Company’s existing resources will be sufficient to fund the Company’s planned operations through July 2018. On April 6, 2018, the Company also received a default letter frompaid off the outstanding Loan and Security Agreement (“Equipment Line of Credit”) entered in November 2015 to Silicon Valley Bank (“SVB”) regarding the Loan and Security Agreement entered in November 2015 which stated that events of default had occurred and SVB will decide in its sole discretion whether or not to exercise rights and remedies.. Based on its current business plan and assumptions, the Company expects to continue to incur significant losses and require significant additional capital to further advance its clinical trial programs and support its other operations. Considering the Company’s current cash resources, including the net proceeds received from the offering of its equity securities in July 2017, management believes the Company’s existing resources will be sufficient to fund the Company’s

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

The Company cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that the Company can raise additional funds by issuing equity securities, the Company’s stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact the Company’s ability to conduct its business.
 
If the Company is unable to raise additional capital when required or on acceptable terms, it may have to significantly delay, scale back or discontinue the development and/or commercialization of one or more of its product candidates, all of which maywould have a material adverse impact on the Company’s operations. The Company may also be required to:
 
Seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; and

Relinquish licenses or otherwise dispose of rights to technologies, product candidates or products that the Company would otherwise seek to develop or commercialize themselves, on unfavorable terms.
 
The Company is evaluating the followingall options to raise additional capital increase revenue, as well as reduce costs, in an effort to strengthen its liquidity position:position, which may include the following:

Raising capital through public and private equity offerings;

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

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

Reducing operating costs by identifying internal synergies; and

Engaging in strategic partnerships; andpartnerships.

Taking actions to reduce or delay capital expenditures.

On October 25, 2017,As of April 30, 2018, the Company filed a registration statement on Form S-1has received approximately $1.6 million upon exercise of 5,681,667 warrants in connection with the SEC for a best effortsDecember 2017 public offering of up to $17.5 million of common stock and warrants.offering. The Company continually assesses anyits spending plans including a review of its discretionary spending in connection with certain strategic contracts, to effectively and efficiently address its liquidity needs.

NASDAQ Notice

On September 5, 2017, the Company received a written notice from the NASDAQ Stock Market LLC (“NASDAQ”) that it was not in compliance with NASDAQ Listing Rule 5550(a)(2) for continued listing on the NASDAQ Capital Market, as the minimum bid price of the Company’s common stock had been below $1.00 per share for 30 consecutive business days. In

accordance with NASDAQ Listing Rule 5810(c)(3)(A), the Company has a period of 180 calendar days, or until March 5, 2018, to regain compliance with the minimum bid price requirement.

On March 6, 2018, the NASDAQ Capital Market informed the Company that it is eligible for an additional 180 calendar day period until September 4, 2018 to regain compliance with the minimum $1.00 bid price per share requirement. To regain compliance, the closing bid price of the Company’s common stock must meet or exceed $1.00 per share for at least ten consecutive business days during this 180 calendar day period.


2. Summary of Significant Accounting Policies
 
Use of Estimates
The preparation of financial statementsDuring the three months ended March 31, 2018, there have been no changes to the Company’s significant accounting policies as described in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Short-Term Investments

Short-term investments consisted of corporate debt securities, U.S. treasury securities, and commercial paper. The Company classified its short-term investments as available-for-sale, as the sale of such securities may be required prior to maturity to execute management strategies. Investments classified as available-for-sale are carried at fair value, with the unrealized gains and losses reported as a component of consolidated accumulated other comprehensive income (loss) in stockholders’ equity until realized. Realized gains and losses from the sale of available-for-sale securities were determinedAnnual Report 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 basisForm 10-K for the security is established. No such impairment charges were recorded for any period presented. Premiums and discounts were amortized or accreted over the life of the related securityfiscal year ended December 31, 2017, except as an adjustment to yield using the straight-line method and included in interest income. Interest income was recognized when earned. Realized gains and losses on investments in securities were included in other income (loss) within the consolidated statements of operations. As of September 30, 2017, all of the short-term investments have been sold to satisfy the Company’s outstanding obligations under the Loan and Security Agreement dated as of June 30, 2014 upon demanding repayment by the lenders. As a result, the Company recognized net realized loss of approximately $6,400 for the nine months ended September 30, 2017.described below.

Revenue Recognition
 
RevenueThe Company recognizes revenue when control of its products and services is recognizedtransferred to its customers in an amount that reflects the consideration it expects to receive from its customers in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when persuasive evidencethe performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that an arrangement exists, deliveryare readily available to the customer and is separately identified in the contract. The Company considers a performance obligation satisfied once it has occurred,transferred control of a good or service to the price is fixedcustomer, meaning the customer has the ability to use and obtain the benefit of the good or determinable, and collection is reasonably assured.service. The Company recognizes revenue for satisfied performance obligations only when it determines there are no uncertainties regarding payment terms or transfer of control. For sales-based royalties, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
 
Milestone, Royalty and License Revenues
 
The Company licenses and sublicenses its patent rights to healthcare companies, medical laboratories and biotechnology partners. These agreements may involve multiple elements such as license fees, royalties and milestone payments. Revenue is recognized when the criteria described above have been met as well as the following:

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

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

Milestone payments are recognized when both the milestone is achieved and the related payment is received.collectability.
 
Diagnostic Service Revenues
 
Revenue for clinical laboratory tests may come from several sources, including commercial third-party payors, such as insurance companies and health maintenance organizations, government payors, such as Medicare and Medicaid in the United States, patient self-pay and, in some cases, from hospitals or referring laboratories who, in turn, might bill third-party payors for testing. TheThis revenue stream does not meet the criteria for contracts with a customer under ASC 606 because it is not probable that the Company will collect substantially all the consideration to which it will be entitled in exchange for the goods and services transferred, nor can it reliably determine the expected transaction price. Therefore, the Company is recognizing diagnostic service revenue on the cash collection basis until such time as it is able to properly estimate collections on third party reimbursements.


Clinical Research Services Revenue

Revenue from clinical research services consists of revenue from the sale of urine and blood collection supplies and tests performed under agreements with our clinical research and business development partners. Revenue wasis recognized when supplies and/or test results were delivered.are delivered, which is when control of the product is deemed to be transferred.

Cost of RevenueRefer to Note 3 to the condensed consolidated financial statements for further information.

Cost of revenue represents the cost of materials, personnel costs and costs associated with processing specimens including pathological review, quality control analyses, and delivery charges necessary to render an individualized test result. Costs associated with performing tests are recorded as the tests are processed. However, the revenue on diagnostic services is recognized on a cash collection basis resulting in costs incurred before the collection of related revenue.
Derivative Financial Instruments—Warrants
The Company has issued common stock warrants in connection with the execution of certain equity financings. Such warrants are classified as derivative liabilities under the provisions of Financial Accounting Standards Board (“FASB”) ASC 815 Derivatives and Hedging (“ASC 815”) or ASC 480 Distinguishing Liabilities from Equity (“ASC 480”)are recorded at their fair market value as of each reporting period. Such warrants do not meet the exemption that a contract should not be considered a derivative instrument if it is (1) indexed to its own stock and (2) classified in stockholders’ equity. The warrants within the scope of ASC 480 contain a feature that could require the transfer of cash in the event a change of control occurs without an authorization of our Board of Directors, and therefore classified as a liability. Changes in fair value of derivative liabilities are recorded in the consolidated statement of operations under the caption “Change in fair value of derivative instruments.”
The fair value of warrants is determined using the Black-Scholes option-pricing model using assumptions regarding the volatility of Trovagene’s common stock price, the remaining life of the warrants, and the risk-free interest rates at each period end. The Company thus uses model-derived valuations where inputs are observable in active markets to determine the fair value and accordingly classifies such warrants in Level 3 per FASB ASC Topic 820, Fair Value Measurements (“ASC 820”). At September 30, 2017 and December 31, 2016, the fair value of these warrants was $2,037,712 and $834,940, respectively, and was recorded as a liability under the caption “derivative financial instrumentswarrants” on the consolidated balance sheets.
Net Loss Per Share
 
Basic and diluted net loss per share is presented in conformity with ASC Topic 260, Earnings per Share, for all periods presented. In accordance with this guidance, basic net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted-average common shares outstanding during the period. Preferred dividends are included in income available to common stockholders in the computation of basic and diluted earnings per share. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common share equivalents outstanding for the period. Common share equivalents are only included when their effect is dilutive.

 
The following table sets forth the computation of basic and diluted earnings per share:
 
Three Months
Ended September 30,
 Nine Months
Ended September 30,
Three Months
Ended March 31,
2017 2016 2017 20162018 2017
Numerator: Net loss attributable to common shareholders$(4,298,026) $(10,197,332) $(22,355,494) $(30,674,248)$(4,792,237) $(10,005,597)
Adjustment for gain from change in fair value of derivative financial instrumentswarrants

 
 
 (533,750)
 
Net loss used for diluted loss per share$(4,298,026) $(10,197,332) $(22,355,494) $(31,207,998)$(4,792,237) $(10,005,597)
Denominator for basic and diluted net loss per share:          
Weighted-average shares used to compute basic loss per share36,465,672
 30,339,774
 32,826,306
 30,018,841
55,364,438
 30,961,014
Adjustments to reflect assumed exercise of warrants
 
 
 117,731

 
Weighted-average shares used to compute diluted net loss per share36,465,672
 30,339,774
 32,826,306
 30,136,572
55,364,438
 30,961,014
Net loss per share attributable to common stockholders:          
Basic$(0.12) $(0.34) $(0.68) $(1.02)$(0.09) $(0.32)
Diluted$(0.12) $(0.34) $(0.68) $(1.04)$(0.09) $(0.32)

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,March 31,
2017 20162018 2017
Options to purchase Common Stock4,257,031
 6,051,186
7,588,306
 4,687,566
Warrants to purchase Common Stock8,972,503
 4,546,939
18,418,853
 5,505,901
Restricted Stock Units1,277,302
 392,000
369,600
 976,991
Series A Convertible Preferred Stock63,125
 63,125
63,125
 63,125
14,569,961
 11,053,250
26,439,884
 11,233,583
 
License FeesChange in Accounting Principle

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

Restructuring

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

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

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 areCompany adopted in the same period.ASU 2016-15 as of January 1, 2018. The Company is currently evaluating the impact of adoption of ASU 2016-15 had no material impact on its consolidated statements of cash flows.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The new standard is based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Since its initial release, the FASB has issued several amendments to the standard, which include clarification of accounting guidance related to identification of performance obligations, intellectual property licenses, and principle versus agent considerations. ASU 2014-09 and all subsequent amendments (collectively, “ASC 606”) became effective for the Company on January 1, 2018. The Company adopted ASC 606 on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. Refer to Note 3 to the condensed consolidated financial statements for further details.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for most leases. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The new standard will impact the Company’s accounting for its office leases and the Company is currently evaluating the impact of the new standard on its consolidated financial statements.

In May 2014,
3. Revenue

Financial Statement Impact of Adopting ASC 606

The Company adopted ASC 606 using the FASB issued ASU 2014-09, modified retrospective method. This resulted in a cumulative adjustment to decrease the Company’s accumulated deficit by $109,922 to reflect the acceleration of revenue recognition related to its sales-based royalties for agreements with customers that were not completed as of January 1, 2018. As a result of applying the modified retrospective method to adopt the new revenue guidance, the Company recorded $109,922 to unbilled receivables under the condensed consolidated balance sheet as of January 1, 2018.

Impact of New Revenue from Contracts with Customers (“ASU 2014-09”)Guidance on Financial Statement Line Items

The following summarizes the significant changes to the Company’s condensed consolidated balance sheet and condensed consolidated statement of operations for the three months ended March 31, 2018 as a result of the adoption of ASC 606 on January 1, 2018 compared to what would have been recognized under ASC 605:

Total reported assets and equity were $30,667 greater than what would have been reported under ASC 605 as of March 31, 2018. This was due to the acceleration of future minimum customer sales-based royalty revenues under ASC 606 through the potential contract cancellation period.

$77,589 reduction of recorded revenues related to prior periods. Previously under ASC 605, there was a lag of at least one quarter before the Company was notified of customers’ sales-based royalties, and thus royalty revenues in excess of the minimum guaranteed amounts were recognized in arrears. This would have resulted in recording additional royalty revenue in the first quarter of 2018 related to eligible 2017 customer sales. For customers that only report royalty-eligible sales annually, this typically resulted in the recognition of a full year’s worth of royalties in excess of the minimum in the first quarter of the following year. However, ASC 606 requires recognition in the period earned even if amounts are unknown (subject to the constraint that a significant future reversal of this estimated revenue is not probable). Because the modified retrospective approach was applied upon adoption on January 1, 2018, this cumulative difference (amount in arrears) was adjusted to the Company’s accumulated deficit rather than recording this revenue in the first quarter of 2018.

Partially offsetting the reduction above is the $18,326 acceleration of first quarter 2018 sales-based royalty revenue in excess of minimum guaranteed amounts to the extent the amounts are known or can be estimated, and a significant reversal is not probable.

The net impact of accounting for revenue under the new standard is basedguidance increased net loss and net loss per share by $59,263 and $0.001 per basic and diluted share, respectively for the three months ended March 31, 2018.

The adoption of ASC 606 had no impact on the principle thatCompany’s cash flows from operations. The aforementioned impacts resulted in offsetting shifts in cash flows between net loss and changes in working capital balances.

Revenue Recognitions

The Company has historically derived its revenues from the following sources: (i) royalties from sublicense and patent transfer agreements, (ii) up-front fees from sublicense and patent transfer agreements, (iii) milestone payments from sublicense and patent transfer agreements, (iv) diagnostic services revenue should beand (v) clinical research revenue. These revenue streams are discussed in greater detail below.

Royalty Revenue

Royalties have comprised the majority of the Company’s revenues to date. Its licensing and patent transfer agreements provide for ongoing royalties, generally calculated as a percentage of net revenues related to the licensed or transferred intellectual property (“IP”). In addition, many of its agreements specify a minimum annual royalty amount beginning in the year of the customer’s first related sale. Because minimum royalty amounts are contractually guaranteed, they are considered fixed consideration and allocated to the performance obligations at the stated amounts in the agreements. Sales-based royalties in excess of the minimum amount are considered variable consideration as the amounts are not known until the related customer sales occur, and are therefore excluded from the transaction price. Royalty amounts are reported by customers on a quarterly or annual basis, depending on the agreement, and are typically collected by the Company in the following quarter.

Under ASC 606, fixed consideration is recognized to depictas revenue when all performance obligations have been satisfied. For existing licensing and patent transfer agreements, the sole performance obligation was the issuance of the sublicense or the transfer of promised goodsthe patent which occurred at the agreements’ inception. However, as these agreements are generally cancellable by either party with 60-90 days’ notice, a fixed contractual minimum cannot be determined at the outset of the agreement. Thus, at a given point the Company may only recognize minimum royalty revenue to be received 60-90 days in the future, as there are no guarantees beyond the minimum cancellation period. This is a slight acceleration compared to previous guidance, which did not permit future minimum royalties to be recognized in an earlier period. The cumulative adjustment to accumulated deficit upon adoption at January 1, 2018 related to this acceleration in revenue recognition was not material, at approximately $32,000.

Sales-based royalties in excess of annual minimums are considered variable consideration. Sales-based or servicesusage-based royalty based on an intellectual property license prohibits recognition of the royalty until sales or other activities occur. Historically, there has been a short lag before the Company was notified of a customer’s previous period sales, and thus sales greater than minimum royalties were recognized in arrears as these amounts became known. Under ASC 606 the Company is now required to record an estimate of sales in excess of minimums even if the exact amount is unknown. Given the Company’s relatively low revenues overall and the unpredictable nature of these sales-based royalties, such acceleration under ASC 606 has not been material. A cumulative adjustment of approximately $78,000 was recognized upon adoption as a result of this acceleration. Amounts that have been recognized as revenue but not yet billed to customers are presented as unbilled receivables on the Company’s balance sheet.

Up-Front Licensing and Patent Transfer Fees

Each of the Company’s licensing agreements contains a non-refundable up-front licensing fee for use by the customer of the related IP. The Company’s IP license grants and patent transfers are considered to be functional IP as each has immediate standalone value and distinct performance obligations and as such, revenue is recognized upon transfer of control to the customer. This is considered fixed consideration under ASC 606 and is allocated entirely to the IP grant at the amount stated in an amountthe agreement. This is consistent with the previous guidance and as such, the adoption of ASC 606 had no effect on this revenue stream as all performance obligations under existing agreements had already been satisfied, fees had been collected from customers, and the related revenues had already been recognized prior to adoption.

Milestone Payments from Sublicense and Patent Transfer Agreements

A few of the Company’s agreements with customers contain payments related to the achievement of specific milestones. However, as no milestones have been reached under these agreements in several years and the Company does not expect to achieve the remaining milestones under existing agreements, these potential amounts are excluded from the transaction price, and the adoption of ASC 606 had no effect on this revenue stream. The Company will, however, continue to update its assessment in future reporting periods regarding the likelihood of achieving outstanding milestones.

Diagnostic Service Revenue

This revenue stream is related to the performance of clinical laboratory tests and has come primarily from insurance companies and government payors, such as Medicare and Medicaid in the United States. Some revenue also comes from international private payors. Diagnostic services revenue to date has been recognized on a cash collection basis due to (i) the highly complex insurance and governmental regulations and practices that reflectsvary based on state, third party payor, etc., (ii) the Company’s relatively short commercial history with uncollected billings, (iii) the Company’s fairly high percentage of services that are billed and not collected, and (iv) significant lag times between when a sample is processed and when payment is received. While distinct performance obligations and stand-alone selling prices can be identified, we do not believe these agreements meet the criteria for contracts with a customer under ASC 606 because it is not probable that the entity will collect substantially all the consideration to which the entity expects toit will be entitled in exchange for thosethe goods or services. Since its initial release,and services transferred, nor can it reliably determine the FASB has issued several amendments to the standard, which include clarification of accounting guidance related to identification of performance obligations, intellectual property licenses, and principle versus agent considerations. ASU 2014-09 and all subsequent amendments (collectively, the “new standards”) will be effective forexpected transaction price. Therefore, the Company beginning in the first quarter of fiscal year 2018 and may be applied using either the full retrospective method, in which case the new standards would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the new standards would be recognized at the date of initial application. The Company has reviewed its revenue streams to identify potential differences in accounting as a result of the new standards. Currently, the Company does not have any significant contracts with customers given its stage of development. The Company has derived its revenues primarily from a limited number of royalty, license and diagnostic service agreements. The consideration the Company is eligible to receive under these agreements includes upfront license payments, milestone payments and royalties. Each of these agreements has unique terms that are being evaluated separately under the new standards. The new standards differ from the current accounting standard in many respects, such as in the accounting for variable consideration, including milestone payments. For example, the Company currently recognizes milestone revenue using the milestone method specified in ASC 605-28, which generally results in recognition of milestone revenue in the period that the milestone event is achieved. However, under the new standards, it is possible to startcontinued to recognize milestonethis revenue before the milestone is achieved if management determines with a high degree of certainty that amounts recorded as revenues will not have to be reversed when the uncertainty associated with the variable consideration is subsequently resolved. The Company is also continuing to assess the potential impact that the new standards may have with respect to its diagnostic service revenue which is currently recognized on a cash basis as it did under the previous guidance. Thus, the adoption of ASC 606 did not affect this revenue stream.

Clinical Research Revenue

This revenue stream consists primarily of sales of urine and blood collection basis. Undersupplies and testing services under agreements with distributors and with pharmaceutical companies. These agreements meet the new standards,criteria for contracts with a customer, have fixed prices and quantities for goods (supplies) and services (tests), and each good or service represents a distinct performance obligation and has a stand-alone selling price that is independent of other purchases by the Company may recognize diagnostic servicecustomer. Performance obligations are satisfied when goods or services are provided to the customer under ASC 606. Because testing services are very short in duration (less than two weeks) and have relatively low prices and low volumes, related costs are expensed immediately rather than recorded as contract assets, as the results would not differ significantly. Standard payment terms apply to these agreements, and thus there is no financing component nor prepayments that would result in a contract liability. Customers are invoiced and revenue is recognized simultaneously upon shipment or delivery of test results if management determinesat the stated amounts per the contract, which is consistent with a high degree of certainty that amounts recorded as revenues will not have to be reversed whenprevious guidance. Thus, the uncertainty associated with the variable consideration is subsequently resolved. The Company is continuing to assess the impact the new standards will have on its financial statements and expects to complete the assessment on or before the year-end 2017. The Company does not expect a significant change in the timing and recognition of its revenue upon adoption of the new standards. The Company expectsASC 606 did not affect reported amounts for this revenue stream.

Transaction Price Allocated to adopt the new standards using the modified retrospective method with an adjustment, if any, to beginning retained earnings for the cumulative effectFuture Performance Obligations

Licensing and patent transfer agreements may contain three possible revenue sources: up-front licensing fees, sales-based royalties and potential milestone revenue. However, all of the change.Company’s existing agreements of this type contained only a single performance obligation to provide the functional IP to the customer at the outset of the agreement. While the Company continues to receive related sales-based royalties, the related performance obligations were satisfied in previous years and thus the Company has no future performance obligations under these agreements.

3.4. 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, 2017March 31, 2018 and December 31, 2016:2017:
 
 Fair Value Measurements at
March 31, 2018
 
Quoted Prices in Active Markets for Identical Assets and Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 Total
Assets:       
Money market fund (1)$6,840,505
 $
 $
 $6,840,505
Total Assets$6,840,505
 $
 $
 $6,840,505
Liabilities:       
Derivative financial instrumentswarrants
$
 $
 $779,076
 $779,076
Total Liabilities$
 $
 $779,076
 $779,076

 Fair Value Measurements at
September 30, 2017
 
Quoted Prices in Active Markets for Identical Assets and Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 Total
Assets:       
Money market fund (1)$6,510,214
 $
 $
 $6,510,214
Total Assets$6,510,214
 $
 $
 $6,510,214
Liabilities:       
Derivative financial instrumentswarrants
$
 $
 $2,037,712
 $2,037,712
Total Liabilities$
 $
 2,037,712
 $2,037,712
Fair Value Measurements at
December 31, 2016
Fair Value Measurements at
December 31, 2017
Quoted Prices in Active Markets for Identical Assets and Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 Total
Quoted Prices in Active Markets for Identical Assets and Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 Total
Assets:              
Money market fund (1)$12,095,620
 $
 $
 $12,095,620
$8,309,964
 $
 $
 $8,309,964
Corporate debt securities (2)
 14,160,686
 
 14,160,686
Commercial paper (3)
 2,393,948
 
 2,393,948
U.S. treasury securities (2)
 8,621,892
 
 8,621,892
Total Assets$12,095,620
 $25,176,526
 $
 $37,272,146
$8,309,964
 $
 $
 $8,309,964
Liabilities:              
Derivative financial instrumentswarrants
$
 $
 $834,940
 $834,940
$
 $
 $649,387
 $649,387
Total Liabilities$
 $
 $834,940
 $834,940
$
 $
 $649,387
 $649,387
 
(1) Included as a component of cash and cash equivalents on the accompanying condensed consolidated balance sheets.

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

(3) $0 and $1,198,504 of commercial paper was included as a component of cash and cash equivalents at September 30, 2017 and December 31, 2016, respectively, and the remaining amount was included in short-term investments on the accompanying consolidated balance sheets.
 
The following table sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the ninethree months ended September 30, 2017:March 31, 2018:
 
Description Balance at
December 31, 2016
 Issuance of Derivative Financial Instruments 
Realized
Gain
 Balance at
September 30, 2017
 Balance at
December 31, 2017
 Realized (gains) or losses Balance at
March 31, 2018
Derivative financial instrumentswarrants
 $834,940
 3,215,519
 $(2,012,747) $2,037,712
 $649,387
 $129,689
 $779,076
 
The realized gains or losses onchange in the derivativefair value of the “derivative financial instruments—warrants arewarrants” is recorded as a change in fair value of derivative financial instruments—warrantsgain or loss in the Company’s consolidated statement of operations. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, the Company reviews the assets and liabilities that are subject to ASC Topic 815-40.815-40 and ASC Topic 480-10. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments that trade infrequently and therefore have little or no price transparency are classified as Level 3.

4. Short-Term Investments

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

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

 December 31, 2016
     Unrealized  
 Maturity in Years Cost Gains Losses Fair Value
Corporate debt securitiesLess than 1 year $14,165,915
 $44
 $(5,273) $14,160,686
Commercial paperLess than 1 year 1,195,444
 
 
 1,195,444
U.S. treasury securitiesLess than 1 year 8,625,728
 330
 (4,166) 8,621,892
Total Investment  $23,987,087
 $374
 $(9,439) $23,978,022

5. Property and Equipment
 
Property and equipment consist of the following:
 
As of September 30,
2017
 As of December 31,
2016
As of March 31,
2018
 As of December 31,
2017
Furniture and office equipment$1,076,709
 $1,144,741
$1,076,709
 $1,076,709
Leasehold improvements1,994,514
 1,994,514
1,994,514
 1,994,514
Laboratory equipment2,584,363
 2,449,645
1,431,681
 1,426,581
5,655,586
 5,588,900
4,502,904
 4,497,804
Less—accumulated depreciation and amortization(2,528,617) (1,761,985)(2,279,307) (2,071,492)
Property and equipment, net$3,126,969
 $3,826,915
$2,223,597
 $2,426,312
 

6. Debt
Equipment Line of Credit
  
In November 2015, the Company entered into a Loan and Security Agreement (“Equipment Line of Credit”) with SVB that provided for cash borrowings for equipment (“Equipment Advances”) of up to $2.0 million, secured by the equipment financed. Under the terms of the agreement, interest is equal to 1.25% above the Prime Rate. At September 30, 2017,March 31, 2018, the interest rate was 5.50%6.00%. Interest only payments are due on borrowings through November 30, 2016, with both interest and principal payments commencing in December 2016. All unpaid principal and interest on each Equipment Advance will be due on November 1, 2019. The Company has an obligation to make a final payment equal to 7% of total amounts borrowed at the loan maturity date. The Company is also subject to certain affirmative and negative covenants under the Equipment Line of Credit.

On June 20, 2017, the Company received a Notice of Event of Default (“Default Letter”) from SVB which stated that Events of Default had occurred and SVB will decide in its sole discretion whether or not to exercise rights and remedies. PursuantThe Company does not agree that the loan is in Default, but pursuant to the Default Letter from SVB, the Company has classified the

entire balance of $1,488,041$1,174,989 as a current liability as of September 30, 2017March 31, 2018 and also started recordingrecorded accrued interest at a default rate. The Company recorded $209,082$24,236 in interest expense related to the Equipment Line of Credit during the ninethree months ended September 30, 2017. The Company is currently working with lender for resolution.March 31, 2018.

Loan and Security Agreement
In June 2014, the Company entered into a $15,000,000 Loan and Security Agreement (“Agreement”) under which the lenders provided the Company a term loan. On July 20, 2016, the Company signed the 5th Amendment to Loan and Security Agreement to refinance its existing term loan. Under the Amendment, interest is equal to 3.75% plus the Wall Street Journal Prime Rate, subject to a floor of 7.25%. The Company is requiredpaid off the Equipment Line of Credit on April 6, 2018. Refer to make interest only payments on the outstanding amount of the loan on a monthly basis through September 1, 2017, after which equal monthly payments of principal and interest are due until the loan maturity date of February 1, 2020.

On June 1, 2017, the Company received a Notice of Event of Default from the lenders which stated that Events of Default had occurred and all of the obligation under the Agreement were immediately due and payable. On June 6, 2017, the lenders took the total pay-off amount of $16,668,583 for the principal, interest, final payment, and other amounts out of the Company’s bank accounts which satisfied all of the Company’s outstanding obligations under the Agreement. Accordingly, the Agreement was terminated in June 2017. Upon termination of the Agreement, the prepayment fee of $450,000, unamortized debt discount of $400,562 and unamortized final fee of $738,196 were recorded as loss on debt extinguishment. The Company recorded total interest expense of $801,173 relatedNote 10 to the Agreement during the nine months ended September 30, 2017.condensed consolidated financial statements for further information.
 
7. Derivative Financial Instruments — Warrants
 
Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Contracts in Entity’s Own Equity (“ASC 815-40”) or ASC Topic 480-10, Distinguishing Liabilities from Equity (“ASC 480-10”), Trovagene determined that certain warrants issued in connection with the execution of certain equity financings must be recorded as derivative liabilities. In accordance with ASC 815-40 and ASC 480-10, the warrants are also being re-measured at each balance sheet date based on estimated fair value, and any resultant change in fair value is being recorded in the Company’s condensed consolidated statements of operations. The Company estimates the fair value of these warrants using the Black-Scholes option pricing model.
 
The range of assumptions used to determine the fair value of the warrants valued using the Black-Scholes option pricing model during the periods indicated was:
 
Nine Months Ended September 30,Three Months Ended March 31,
2017 20162018 2017
Estimated fair value of Trovagene common stock0.73-1.26
 4.49-4.65
0.31-0.35
 1.15-2.10
Expected warrant term1.3-5.5 years
 2.3-2.8 years
0.8-5.1 years
 1.8-2.0 years
Risk-free interest rate1.27-1.95%
 0.71-0.87%
1.76-2.54%
 1.20-1.27%
Expected volatility86-109%
 82-89%
91-116%
 94-98%
Dividend yield0% 0%0% 0%

Expected volatility is based on historical volatility of Trovagene’s common stock. The warrants have a transferability provision and based on guidance provided in Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment (“SAB No. 107”), for instruments issued with such a provision, Trovagene used the remaining contractual term as the expected term of the warrants. The risk free rate is based on the U.S. Treasury security rates consistent with the expected remaining term of the warrants at each balance sheet date.
 
The following table sets forth the components of changes in the Company’s derivative financial instrumentswarrants liability balance, valued using the Black-Scholes option pricing method, for the periods indicated.
 
Date Description Number of Warrants 
Derivative
Instrument
Liability
December 31, 2016 
Balance of derivative financial instrumentswarrants liability
 967,295
 $834,940
  Issuance of derivative financial instruments 4,643,626
 3,215,519
  
Change in fair value of derivative financial instrumentswarrants during the period recognized as a gain in the condensed consolidated statements of operations
 
 (2,012,747)
September 30, 2017 
Balance of derivative financial instrumentswarrants liability
 5,610,921
 $2,037,712
Date Description Number of Warrants 
Derivative
Instrument
Liability
December 31, 2017 
Balance of derivative financial instrumentswarrants liability
 5,610,921
 $649,387
  
Change in fair value of derivative financial instrumentswarrants during the period recognized as a loss in the condensed consolidated statements of operations
 
 129,689
March 31, 2018 
Balance of derivative financial instrumentswarrants liability
 5,610,921
 $779,076
 
8. Stockholders’ Equity
 
Common Stock
 
During the ninethree months ended September 30, 2017,March 31, 2018, the Company issued a total of 7,408,4606,041,369 shares of Common Stock. The Company received gross proceeds of approximately $7.1 million from the sale of 6,191,5005,136,667 shares of its common stock and 4,643,626 sharewere issued upon exercise of warrants through registered direct offering and private placement in July 2017. The Company received gross proceeds of approximately $0.1 million from the sale of 102,081 shares of its common stock atfor a weighted averageweighted-average price of $1.08 under the agreement with Cantor Fitzgerald & Co. (“Agent”).$0.28. In addition, 369,487904,702 shares were issued upon vesting of restricted stock units (“RSU”), and 745,392 shares were issued upon vesting of restricted stock awards (“RSA”).
 

Stock Options
 
Stock-based compensation expense related to Trovagene equity awards have been recognized in operating results as follow:
 
Three Months Ended
September 30,
 Nine Months Ended
September 30,
Three Months Ended
March 31,
2017 2016 2017 20162018 2017
Included in research and development expense$219,480
 $872,792
 $798,143
 $1,862,069
$395,709
 $372,200
Included in cost of revenue15,633
 42,639
 56,998
 99,164
39,631
 26,156
Included in selling and marketing expense118,434
 476,865
 550,317
 1,493,744
Included in general and administrative expense1,067,633
 437,075
 1,837,128
 2,487,415
Included in selling, general and administrative expense970,791
 601,309
Benefit from restructuring
 
 (125,222) 

 (78,866)
Total stock-based compensation expense$1,421,180
 $1,829,371
 $3,117,364
 $5,942,392
$1,406,131
 $920,799
 
The unrecognized compensation cost related to non-vested stock options outstanding at September 30,March 31, 2018 and 2017, and 2016, net of expected forfeitures, was $3,271,046$2,662,066 and $10,416,565,$5,677,247, respectively, which is expected to be recognized over a weighted-average remaining vesting period of 2.21.8 and 3.02.6 years, respectively. The weighted-average remaining contractual term of outstanding options as of September 30, 2017March 31, 2018 was approximately 7.28.1 years. The total fair value of stock options vested during the ninethree months ended September 30,March 31, 2018 and 2017 was $971,488 and 2016 was $3,378,243 and $5,416,168,$1,526,211, respectively.


The estimated fair value of stock option awards was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions during the following periods indicated:
 
Nine Months Ended
September 30,
Three Months Ended
March 31,
2017 20162018 2017 (1)
Risk-free interest rate1.82% 1.48%2.43% 0%
Dividend yield0% 0%0% 0%
Expected volatility87% 103%90.28% 0%
Expected term5.2 years
 5.5 years
5.2 years
 0
(1) No options granted during the three months ended March 31, 2017.

A summary of stock option activity and changes in stock options outstanding is presented below:
 
 Total Options 
Weighted-Average
Exercise Price
Per Share
 
Intrinsic
Value
Balance outstanding, December 31, 20165,528,628
 $5.49
 $
Granted823,106
 $0.84
  
Canceled / Forfeited(2,077,246) $6.24
  
Expired(17,457) $4.74
  
Balance outstanding, September 30, 20174,257,031
 $4.23
 $381
Exercisable at September 30, 20172,492,242
 $4.79
 $
 Total Options 
Weighted-Average
Exercise Price
Per Share
 
Intrinsic
Value
Balance outstanding, December 31, 20174,490,475
 $4.04
 $
Granted3,132,831
 $0.30
  
Canceled / Forfeited(35,000) $5.82
  
Balance outstanding, March 31, 20187,588,306
 $2.49
 $154,135
Exercisable at March 31, 20185,156,223
 $2.71
 $109,892
 
On June 13, 2017, the number of authorized shares in the Trovagene 2014 Equity Incentive Plan (“2014 EIP”) was increased from 7,500,000 to 9,500,000. As of September 30, 2017March 31, 2018 there were 3,670,232338,957 shares available for issuance under the 2014 EIP.

Restricted Stock Units

There were no RSU granted during the three months ended March 31, 2018. The weighted-average grant date fair value of the RSU was $1.59 and $4.06$2.05 per share during the ninethree months ended September 30, 2017 and 2016, respectively.March 31, 2017.


A summary of the RSU activity is presented below:
 Number of Shares 
Weighted-Average
Grant Date Fair Value
Per Share
 Intrinsic Value
Non-vested RSU outstanding, December 31, 2016272,000
 $3.99
 $571,200
Granted2,249,242
 $1.59
  
Vested(369,487) $3.48
 $645,775
Forfeited(874,453) $1.75
  
Non-vested RSU outstanding, September 30, 20171,277,302
 $1.44
 $932,430
 Number of Shares 
Weighted-Average
Grant Date Fair Value
Per Share
 Intrinsic Value
Non-vested RSU outstanding, December 31, 20171,274,302
 $1.43
 $391,848
Vested(904,702) $1.18
 $266,461
Non-vested RSU outstanding, March 31, 2018369,600
 $2.05
 $129,064

At September 30,March 31, 2018 and 2017, total unrecognized compensation costcosts related to non-vested RSU was $1,011,494,were $602,134 and $1,603,214, which isare expected to be recognized over a weighted-average period of 2.5 years.2.8 and 3.3 years, respectively. The total fair valuevalues of vested RSU during the ninethree months ended September 30,March 31, 2018 and 2017 was $1,285,578.

Restricted Stock Awards

During the nine months ended September 30, 2017, a total of 745,392 shares of RSA were granted, all of which were vested immediately. The total fair value of vested RSA during the nine months ended September 30, 2017 was $596,314. The weighted-average grant date fair value of the RSA was $0.80 per share during the nine months ended September 30, 2017. There were no such awards granted during the nine months ended September 30, 2016.$1,070,914 and $1,091,580, respectively.

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, 20165,505,901
 $3.83
 1.6
Granted4,643,626
 $1.41
  
Expired(1,177,024) $5.32
  
Balance outstanding, September 30, 20178,972,503
 $2.38
 3.3
 Total Warrants (1) 
Weighted-Average
Exercise Price
Per Share
 
Weighted-Average
Remaining Contractual
Term (1)
Balance outstanding, December 31, 201723,238,853
 $0.95
 4.4
Exercised(4,820,000) $0.30
  
Balance outstanding, March 31, 201818,418,853
 $1.11
 4.0
(1) Excluded the pre-funded warrants to purchase 316,667 shares of common stock at a nominal exercise price of $0.01 per share. The pre-warrants were exercised in full during the three months ended March 31, 2018.

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

License and office space in Torino, Italy, of approximately 2,300 square feet, at a monthly rental rate of approximately $3,100 through the end of September 2017.
Research and Development and Clinical TrialService Agreements

In March 2017, the Company entered into a license agreement with Nerviano Medical Sciences S.r.l. (“Nerviano”) which granted the Company development and commercialization rights to NMS-1286937, which Trovagene refers to as PCM-075. PCM-075 is an oral, investigative drug and a highly-selective adenosine triphosphate competitive inhibitor of the serine/threonine PLK 1. The Company plans to develop PCM-075 initially in patients with AML.hematologic malignancies and solid tumor cancers. Upon execution of the agreement, the Company paid $2.0 million in license fees which were expensed to research and development costs during the nine monthsyear ended September 30,December 31, 2017. TheUnder the agreement, the Company is committed to pay $1.0 million for future services provided by Nerviano, such as the costs to manufacture drug product, no later than June 30, 2019. As of March 31, 2018, approximately $200,000 has been paid for services provided. Terms of the agreement also provide for the Company to pay royalties based on certain development and sales milestones.
 
The Company has entered into a variety of clinical trial and collaboration agreements relating to its drug development efforts. Included in research and development expense, the Company has recorded approximately $291,000 for the nine months ended September 30, 2017 relating to services provided in connection with these agreements.

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


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

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

Public Offering and Controlled Equity Offering

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

10. Restructuring Charges

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

11. Related Party Transactions

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

12. Subsequent Event

On October 25, 2017,April 6, 2018, the Company filed a registration statement on Form S-1 withpaid approximately $1,100,000 to SVB. This payment repaid the SEC for a best efforts public offeringoutstanding Equipment Line of up to $17.5 million of common stock and warrants. H.C. Wainwright & Co. is acting as placement agent.Credit loan in full.

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

for the period ended March 31, 2017, filed on May 10, 2017, and on Form 10-Q for the period ended June 30, 2017, filed on August 9, 2017.February 26, 2018. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for us to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
 
You should not rely upon forward looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
 
The following discussion and analysis is qualified in its entirety by, and should be read in conjunction with, the more detailed information set forth in the financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
 
Overview

 We are a precision medicine biotechnology company developingclinical-stage, oncology therapeutics company. Our primary focus is to develop oncology therapeutics for the treatment of hematologic and solid tumor cancers for improved cancer care, optimizing drug development by leveragingutilizing our proprietary PCM technology in tumor genomics.

On March 15, 2017, we announced that we licensed PCM-075, a PLK1 inhibitor, from Nerviano, pursuant to a license agreement with Nerviano dated March 13, 2017. PCM-075 was developed to have high selectivity to PLK1 (at low nanomolar IC50 levels), to be administered orally, and to have a relatively short drug half-life of approximately 24 hours compared to other pan PLK inhibitors. A safety study of PCM-075 has been successfully completed in patients with advanced metastatic solid tumors and published in 2017 in Investigational New Drugs. We currently are enrolling a Phase 1b/2 open-label clinical trial of PCM-075 in combination with standard-of-care chemotherapy in patients with AML. The Phase 1b/2 clinical trial is led by

Hematologist Jorge Eduardo Cortes, M.D., Deputy Department Chair, Department of Leukemia, Division of Cancer Medicine, The University of Texas MD Anderson Cancer Center. In addition, we are working with Dr. David Einstein at the Genitourinary Oncology Program at Beth Israel Deaconess Medical Center and Harvard Medical School as the principal investigator on a Phase 2 open-label clinical trial of PCM-075 in combination with abiraterone acetate (Zytiga®) and prednisone in patients with mCRPC with plans to enroll patients later this year.

Our broad intellectual property and proprietary technology enables us to measureanalyze ctDNA in urine and bloodclinically actionable biomarkers to identify and quantify clinically actionable markers for predicting responsepatients most likely to respond to specific cancer therapies. We offer our PCM technology at our CLIA-certified/CAP-accredited laboratory and plan to continue to vertically integrate our PCMtumor genomics technology with the development of precisiontargeted cancer therapeutics.

We believe wePCM-075 is the only PLK1 selective ATP competitive inhibitor, administered orally, with apparent antitumor activity in different preclinical models, currently in clinical trials. Polo-like kinase family consists of 5 members (PLK1-PLK5) and they are involved in multiple functions in cell division, including the regulation of centrosome maturation, checkpoint recovery, spindle assembly, cytokinesis, apoptosis and many others. PLK1 is essential for the maintenance of genomic stability during cell division (“mitosis”). The overexpression of PLK1 can lead to immature cell division followed by aneuploidy and cell death, a hallmark of cancer. PLK1 is over-expressed in a wide variety of hematologic and solid tumor malignancies, including acute myeloid leukemia, prostate, lung, breast, ovarian and adrenocortical carcinoma. In addition, several studies have an opportunityshown that over-expression of PLK1 is associated with poor prognosis.

Studies have shown that inhibition of polo-like-kinases can lead to utilize precision diagnosticstumor cell death, including a Phase 2 study in AML where response rates with a different PLK inhibitor were up to improve31% were observed when used in conjunction with a standardtherapy for AML (low-dose cytarabine-LDAC) versus treatment outcomes for cancer patients using our proprietary technology to detect clinically actionable mutations and monitor patientwith LDAC alone with a 13.3% response to therapy. On March 15, 2017, we announcedrate. We believe the licensingmore selective nature of PCM-075 to PLK1, its 24-hour half-life and oral bioavailability, as well as the reversibility of its on-target hematological toxicities may prove useful in addressing clinical therapeutic needs across a PLK1 inhibitor, from Nerviano. We have a supplier agreement with NerPharMa, S.r.l., a pharmaceutical manufacturing company and a subsidiaryvariety of Nerviano, to manufacture drug product for PCM-075. The agreement covers the clinical and commercial supply of PCM-075, and includes both Active Pharmaceutical Ingredients and Good Manufacturing Process production of capsules. The licensing of global development and commercialization rights to PCM-075 allows us to execute our strategy to vertically integrate our PCM technology with precision cancer therapeutics, by developing drugs where our deep understanding of tumor genomics may allow for effective targeting of appropriate cancer patients.cancers.

We have completed a Phase 1 safety study of PCM-075 in patients with advanced metastatic solid tumors and we received notification from the U.S. Food and Drug Administration (“FDA”) that our Phase 1b/2 clinical trial of PCM-075 in patients with AML may proceed. PCM-075 has positive preclinical data as a single agentbeen tested in vivo in different xenograft and transgenic models suggesting tumor growth inhibition or tumor regression when used in combination with selectother therapies. PCM-075 has been tested for antiproliferative activity on a panel of 148 tumor cell lines and appeared highly active with an IC50 (a measure concentration for 50% target inhibition) below 100 nM in 75 cell lines and IC50 values below 1 uM in 133 out of 148 cell lines. PCM-075 also appears active in cells expressing multi-drug resistant (“MDR”) transporter proteins and we believe PCM-075’s apparent ability to overcome the MDR transporter resistance mechanism in cancer cells could prove useful in broader drug combination applications.

In preclinical studies, synergy (interaction of discrete drugs such that the total effect is greater than the sum of the individual effects) has been demonstrated with PCM-075 when used in combination with more than ten different chemotherapeutics, including cisplatin, cytarabine, doxorubicin, gemcitabine and paclitaxel, as well as targeted agentstherapies, such as abiraterone acetate (Zytiga®), HDAC inhibitors, such as belinostat (Beleodaq®), Quizartinib (AC220), a development stage FLT3 inhibitor, and bortezomib (Velcade®). These therapeutics are used inclinically for the treatment of many hematologic and solid tumor cancers, including AML, Non-Hodgkin Lymphoma,NHL, mCRPC, Adrenocortical Carcinoma,ACC, and Triple Negative Breast Cancer.TNBC.

On August 16, 2017, we announced results of preclinical research indicating potential synergy of PCM-075 with an investigational FLT3 Inhibitor, Quizartinib by Daiichi Sankyo, in FLT3 mutant xenograft mouse models. This synergy assessment study was conducted for us by a third-party contract research group. Approximately one third of AML patients harbor FLT3-mutated blood cancer cells. The FDA recently approved Rydapt® (midostaurin) by Novartis for the treatment of newly diagnosed adult patients with AML that are FLT3 mutation-positive in combination with cytarabine and daunorubicin induction and cytarabine consolidation chemotherapy. There are three FLT3 inhibitors in ongoing phase 3 trials, including Quizartinib. We have significant experiencebelieve that a combination of PCM-075 with a FLT3 inhibitor for AML patients with a FLT3 mutation could extend treatment response and expertisepossibly slow or reduce resistance to FLT3 activity.

On August 21, 2017, we announced results of preclinical research indicating potential synergy of PCM-075 with biomarkersa HDAC inhibitor in NHL cell lines. This synergy assessment study was conducted by Dr. Steven Grant, Associate Director for Translational Research and technology in cancer, including AML. We are one of the patent holders of NPM1 for diagnosis and monitoring of patients. NPM1-mutated AML is a genetic marker in leukemia and accounts for approximately one-third of all AML patients. We plan to use our PCM technology to profile other dominant AML markers,co-Leader, Developmental Therapeutics Program, Massey Cancer Center. Patients with relapsed or refractory NHL, such as FLT3, DNMT3A, NRAS,cutaneous T cell lymphoma and KIT, as well asperipheral T cell lymphoma, may be prescribed approved HDAC inhibitors and we believe this continues to measure PLK1 enzymatic activitybe an area of unmet medical need. Dr. Grant’s data appeared to potentially identifyindicate that the combination of PCM-075 with Beleodaq® (belinostat), an HDAC inhibitor indicated for the treatment of patients most likelywith relapsed or refractory peripheral T-cell lymphoma, reduced cancer cells by up to respond80% in two different forms of NHL (aggressive double-hit B-cell lymphoma and mantle cell lymphoma) cell lines.


On October 11, 2017, we entered into a Patent Option Agreement with Massachusetts Institute of Technology (“MIT”) for the exclusive rights to negotiate a royalty-bearing, limited-term exclusivity license to practice world-wide patent rights to US Patent 9,566,280, subject to the rights of MIT (research, testing, and educational purposes), Ortho McNeil Pharmaceuticals-Janssen Pharmaceuticals and its Affiliates (internal research and pre-clinical drug development purposes including some laboratory research) and the federal government (government-funded inventions claimed in any patent rights and to exercise march in rights). This patent is generally directed to combination therapies including an antiandrogen or androgen antagonist and polo-like kinase inhibitor for the treatment of cancer. The Patent Option Agreement expires one-year from the effective date and includes other requirements to maintain the option period.

On October 18, 2017, we announced results of preclinical research indicating potential synergy of PCM-075 with abiraterone acetate in C4-2 prostate cancer cells. This synergy assessment study was conducted by Dr. Michael Yaffe, David H. Koch Professor of Biology and Biological Engineering at MIT. The results appeared to indicate that the combination of PCM-075 with Zytiga® (abiraterone acetate) decreased cell viability in mCRPC tumor cells and the apparent synergy observed was greater than the expected effect of combining the two drugs. Zytiga® is indicated for use in combination with prednisone for the treatment of patients with mCRPC who have received prior chemotherapy containing docetaxel. We believe there is an unmet medical need to improve on the resistance to hormone therapy and extend the benefit of response to abiraterone for mCRPC patients.

On December 7, 2017, we announced results of preclinical research showing the sensitivity of TNBC cell lines to PCM-075, data featured as a Poster Presentation at the 40th San Antonio Breast Cancer Symposium. This synergy assessment study was conducted by Dr. Jesse Patterson and Dr. Michael Yaffe, at MIT. The results appeared to measure patient therapy response.indicate that TNBC cell lines are 20-fold more sensitive to PCM-075 than estrogen receptor positive (ER+) breast cancer cell lines.

Our accumulated deficit through September 30, 2017March 31, 2018 is $170,470,696.$177,728,501. To date, we have generated minimal revenues and expect to incur additional losses to perform further research and development activities and expand commercial operations. 

During 2017,2018, we have advanced our business with the following activities:

Announced initiation plans for a Phase 2 clinical trial evaluating the combination of PCM-075 and abiraterone acetate (Zytiga®- Johnson & Johnson) in patients with mCRPC. This study is designed to have 3 clinical sites, with Dr. David Einstein at the Genitourinary Oncology Program at Beth Israel Deaconess Medical Center and Harvard Medical School as the principal investigator.
Announced preclinical research demonstrating synergy of PCM-075 with Zytiga® (abiraterone acetate) in Castration-Resistant Prostate Cancer tumor cells.
Presented data showing synergy of PCM-075 in combination with Zytiga® in a Castration-Resistant Prostate Cancer Model at the 2018 Genitourinary Cancers Symposium (ASCO GU).

Announced that the FDA granted Orphan Drug Designation to PCM-075Activated six additional clinical trial sites, for the treatmenta total of eight sites actively screening and enrolling patients, with AML.


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

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

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

Announced FDA approval of IND for Phase 1b/our Phase1b/2 multicenter trial of PCM-075 in patients with AML.

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

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

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

Engaged PRA Health Sciences, a leading, global contract research organization, to conduct our Phase 1b/Phase1b/2 clinical trial of PCM-075.

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

Submitted an IND application to FDA to conduct a Phase 1b/2 clinicalmulticenter trial of PCM-075 in combination with low-dose cytarabine in patients with AML. The patient tolerated the combination well and correlative analyses of blood samples, taken at specified time points, also indicated activity on circulating leukemic cells.

Announced expansionthat two additional patients in the initial dose escalation cohort are on treatment and receiving a 12 mg/m2 oral, daily dose of key claims for our NPM1 patent portfolio for AML.PCM-075 (Days 1-5 in a 28-day cycle) in combination with LDAC, completing enrollment of the three patients in this cohort. Additionally, patient enrollment is also complete in the first Phase 1b dose-escalation cohort of three patients to receive a 12 mg/m2 oral, daily dose of PCM-075 (Days 1-5 in a 28-day cycle) in combination with decitabine. Subsequent to this announcement, one patient in the decitabine arm was removed from the trial prior to the end of the 28-day cycle due to unrelated disease progression and will be replaced to complete this dosing cohort.

Entered into an agreementPresented data showing that PCM-075 exhibits synergistic activity when combined with FLT3 inhibitors in a global biopharmaceutical company to utilize Trovera® ctDNA tests and serviceshuman xenograft AML model, at the American Association for Cancer Research (“AACR”) Annual Meeting in cancer clinical trials.Chicago, IL.

Entered into an agreementPresented the methodology developed to track dynamic changes in blood leukemic cells, genomic alterations and PLK1 inhibition in patients treated with AstraZeneca to utilize Trovera® ctDNA test and services in prospective biomarker study.

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

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

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

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

research and development expenses, and competing technologies being developed by organizations with significantly greater resources.
 
Off-Balance Sheet Arrangements
 
We had no off-balance sheet arrangements as of September 30, 2017.March 31, 2018.
 
Critical Accounting Policies
 
Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Our accounting policies are described in ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS of our Annual Report on Form 10-K as of and for the year ended December 31, 2016,2017, filed with the SEC on March 15, 2017.February 26, 2018. There have been no changes to our critical accounting policies other than adoption of ASC 606 as described in Note 3 to the condensed consolidated financial statements since December 31, 2016.2017.

RESULTS OF OPERATIONS
 
Three Months Ended September 30,March 31, 2018 and 2017 and 2016
 
Revenues
 
Our total revenues were $123,329$100,136 and $89,114$95,038 for the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively. The components of our revenues were as follows:
 
Three Months Ended September 30,Three Months Ended March 31,
2017 2016 Increase (Decrease)2018 2017 Increase (Decrease)
Royalties$58,779
 $47,236
 $11,543
$49,055
 $65,826
 $(16,771)
Diagnostic services58,119
 37,978
 20,141
40,002
 28,862
 11,140
Clinical research services6,431
 3,900
 2,531
Clinical research11,079
 350
 10,729
Total revenues$123,329
 $89,114
 $34,215
$100,136
 $95,038
 $5,098
 
The increasedecrease in royalty income related primarilyis mainly a result of adoption of ASC 606. Based on the new revenue standards, we recorded approximately $78,000 to higher receiptsaccumulated deficit rather than recognize it to revenue in the first quarter of payments in excess of minimum royalties in comparison2018. See Note 3 to the same period of the prior year.condensed consolidated financial statements for detailed information. Revenue from diagnostic services is recognized when payment is received for the test results. The number of paymentsPayments received was higher in 20172018 as compared to the same period in the prior year. Revenue from clinical research services consists of revenue from the sale of urine and blood collection supplies and tests performed under agreements with our clinical research and business development partners. Revenue is recognized when control of supplies and/or test results are delivered.transferred to customers (upon delivery). There were more sales of clinical research services for the three months ended September 30, 2017March 31, 2018 as compared to the same period of 2016.2017.

We expect our royalties to fluctuate as the royalties are basedsales-based or usage-based royalties on our IP license. Revenue recognition of the royalty depends on the minimum royalty payments as well astiming and overall sales activities of the timing of when payments are received for royalties in excess of minimum royalties.licensees. In addition, we expect a decrease in our diagnostic service revenue may be impacted by our expansion intoand clinical research revenue as we focus on develop oncology therapeutics. We expect revenue from clinical research services to fluctuate based on timing of delivery of supplies and/or test results under agreements.
 
Cost of Revenues
 
Our total cost of revenues was $473,202$366,344 for the three months ended September 30, 2017,March 31, 2018, compared to $424,559$616,426 in the same period of 2016.2017. Cost of revenues mainly relates to the costs of our diagnostic service revenues. The costs are recognized at the completion of testing. IncreaseDecrease in cost of revenues for the three months ended September 30, 2017March 31, 2018 compared to the same period of last year is mainly due to the higher percentage allocation oflower volume of tests processed. Due to revenue being recognized when cash is received, costs incurred in one period may relate to revenue recognized in a later period which could result in negative gross margins. 

 

Research and Development Expenses
 
Research and development expenses consisted of the following:
 
Three Months Ended September 30,Three Months Ended March 31,
2017 2016 Increase (Decrease)2018 2017 Increase (Decrease)
Salaries and staff costs$301,919
 $1,407,529
 $(1,105,610)$402,068
 $875,377
 $(473,309)
Stock-based compensation219,480
 872,792
 (653,312)395,709
 372,200
 23,509
Outside services, consultants and lab supplies604,140
 1,215,889
 (611,749)849,988
 634,794
 215,194
Facilities254,681
 372,891
 (118,210)191,391
 367,901
 (176,510)
Travel and scientific conferences28,000
 51,203
 (23,203)39,218
 16,040
 23,178
Other6,486
 17,094
 (10,608)
Fees, license and other5,464
 2,013,518
 (2,008,054)
Total research and development$1,414,706
 $3,937,398
 $(2,522,692)$1,883,838
 $4,279,830
 $(2,395,992)
 
Research and development expenses decreased by $2,522,692$2,395,992 to $1,414,706$1,883,838 for the three months ended September 30, 2017March 31, 2018 from $3,937,398$4,279,830 for the same period in 2016. As a result of2017. Our costs have decreased due primarily to the two strategic restructuring activities which occurreddecreases in December 2016fees, license and other and salaries and staff costs. The decrease in fees, license and other was due to the $2.0 million license fee payment in March 2017 ourto Nerviano for development and commercialization rights to PCM-075. Our average internal research and development personnel decreased from thirty-fournineteen to six,seven, resulting in a decrease of expenses in salaries and staff costs, stock-based compensation, and travel and scientific conferences.costs. In addition, due toas a result of the shifting of our business focus, we terminated certainentered in new clinical studies and collaboration agreements. Research and development expenses incurred related to samples processed and validatedoncology therapeutics which drove the increase in connection with the clinical collaborations, as well as lab supplies, decreased accordingly.outside services costs. We expect a reduction of research and development costs that relate to CLIA services as a result of our expansion into oncology therapeutics;services; however, other costs may increase as we complete the development of PCM-075.

Selling, and Marketing Expenses
Selling and marketing expenses consisted of the following:
 Three Months Ended September 30,
 2017 2016 Increase (Decrease)
Salaries and staff costs$158,097
 $1,427,254
 $(1,269,157)
Stock-based compensation118,434
 476,865
 (358,431)
Outside services and consultants51,717
 441,699
 (389,982)
Facilities51,388
 112,573
 (61,185)
Trade shows, conferences and marketing31,017
 243,692
 (212,675)
Travel54
 212,375
 (212,321)
Other9,220
 26,404
 (17,184)
Total sales and marketing$419,927

$2,940,862

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

General and Administrative Expenses
 
GeneralSelling, general and administrative expenses consisted of the following:
 
Three Months Ended September 30,Three Months Ended March 31,
2017 2016 Increase (Decrease)2018 2017 Increase (Decrease)
Personnel and outside services costs$1,450,261
 $1,136,266
 $313,995
Salaries and staff costs$690,170
 $1,421,593
 $(731,423)
Board of Directors’ fees120,085
 122,187
 (2,102)128,328
 113,619
 14,709
Stock-based compensation1,067,633
 437,075
 630,558
970,791
 601,309
 369,482
Outside services and consultants191,062
 343,620
 (152,558)
Legal and accounting fees595,194
 695,061
 (99,867)163,020
 460,682
 (297,662)
Facilities and insurance291,547
 149,921
 141,626
255,053
 269,338
 (14,285)
Travel14,185
 47,769
 (33,584)
Fees, licenses, taxes and other120,682
 122,503
 (1,821)
Travel and conferences56,457
 283,933
 (227,476)
Fees, license and other50,096
 110,530
 (60,434)
Total general and administrative$3,659,587

$2,710,782
 $948,805
$2,504,977

$3,604,624
 $(1,099,647)
 
GeneralSelling, general and administrative expenses increaseddecreased by $948,805$1,099,647 to $3,659,587$2,504,977 for the three months ended September 30, 2017,March 31, 2018, from $2,710,782$3,604,624 for the same period in 2016.2017. The significant components of the increase wereoverall decrease in selling, general and administrative expenses was primarily due to the reduction in force. During the three months ended March 31, 2018 we decreased the number of our selling, marketing, and administrative personnel, bringing our average headcount to nine from seventeen in the same period of the prior year. The decrease of selling, general and administrative expenses was offset by an increase in personnel and outside services cost and stock-based compensation. In August 2017,Stock-based compensation, a totalnon-cash expense, will fluctuate based on the timing and amount of 745,392 sharesoptions granted, forfeitures and the fair value of immediately vested RSA were granted to our CEO. Per the agreement,options at the CEO’s income taxes associated with the RSA were also paid by our Company. Therefore, personnel costs and stock-based compensation expenses were increased.time of grant or remeasurement. Our selling, general and administrative costs may increase in future periods in order to support fundraising activities and general business activities as we continue to develop and introduce new product offerings.
 

Restructuring

On March 15, 2017, we announced a strategic restructuring plan in connection with the expansion of precision medicine therapeutics to our business. The restructuring plan includesincluded a reduction in force and is expected to bewas completed in the last quarter of 2017. The $46,472 restructuring benefitRestructuring charges of approximately $1.7 million were incurred and had been included as a component of operating loss for the three months ended September 30, 2017 was primarily due to certain employee termination costs expensed was less than estimated.March 31, 2017.

Net Interest Expense
 
Net interest expense was $16,473$2,465 and $354,993$429,397 for the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively. The decrease of net interest expense is primarily due to a decrease in interest expense, resulting from pay-off of our $15.0 million term loan. We expect net interest expense to decrease as a result of repayment of our equipment line of credit.

Change in Fair Value of Derivative Financial Instruments Warrants
 
We have issued warrants that are accounted for as derivative liabilities. As of September 30, 2017,March 31, 2018, the derivative financial instrumentswarrants liabilities were revalued to $2,037,712,$779,076, resulting in an increase in value of $1,686,850$129,689 from June 30,December 31, 2017, based primarily upon the issuance of new derivative financial instruments—warrants in connection with July fundraising activities, offset by the decreaseincrease in our stock price as well as the changes in the expected term, volatility, and risk free interest rates for the expected term. The issuance of new warrantsincrease in value was recorded as a liability under derivative financial instrumentswarrants in the condensed consolidated balance sheets. The decrease in value upon remeasurement at September 30, 2017 was recorded as a gainloss from the change in fair value of derivative financial instrumentswarrants in the condensed consolidated statement of operations.


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

Three Months Ended September 30,Three Months Ended March 31,
2017 2016 Increase (Decrease)2018 2017 Increase (Decrease)
Net loss attributable to common shareholders$(4,298,026) $(10,197,332) $(5,899,306)$(4,792,237) $(10,005,597) $(5,213,360)
Net loss per common share — basic$(0.12) $(0.34) $(0.22)$(0.09) $(0.32) $(0.23)
Net loss per common share — diluted$(0.12) $(0.34) $(0.22)$(0.09) $(0.32) $(0.23)
          
Weighted average shares outstanding — basic36,465,672
 30,339,774
 6,125,898
55,364,438
 30,961,014
 24,403,424
Weighted average shares outstanding — diluted36,465,672
 30,339,774
 6,125,898
55,364,438
 30,961,014
 24,403,424
 
The $5,899,306$5,213,360 decrease in net loss attributable to common shareholders and the $0.22$0.23 decrease in basic net loss per share was primarily the result of a decrease in operating expenses of $4,092,651$5,465,525 for the three months ended September 30, 2017March 31, 2018 compared to the same period in the prior year.
Nine Months Ended September 30, 2017 and 2016
Revenues
Our total revenues were $320,378 and $313,000 for the nine months ended September 30, 2017 and 2016, respectively. The components of our revenues were as follows:

 Nine Months Ended September 30,
 2017 2016 Increase (Decrease)
Royalties$169,415
 $207,869
 $(38,454)
Diagnostic services142,482
 69,558
 72,924
Clinical research services8,481
 35,573
 (27,092)
Total revenues$320,378
 $313,000
 $7,378
The $38,454 decrease Basic net loss per share in royalties related primarily to lower receipts of payments in excess of minimum royalties in comparison to the same period of the prior year. Revenue from diagnostic services is recognized when payment is received for the test results. The number of tests payments received were higher for the nine months ended September 30, 2017 as compared to the same period in the prior year. Revenue from clinical research services consists of revenue from the sale of urine and blood collection supplies and tests performed under agreements with our clinical research and business development partners. Revenue2018 was recognized when supplies and/or test results were delivered.

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

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

 Nine Months Ended September 30,
 2017 2016 Increase (Decrease)
Salaries and staff costs$1,468,491
 $4,263,595
 $(2,795,104)
Stock-based compensation798,143
 1,862,069
 (1,063,926)
Outside services, consultants and lab supplies1,456,504
 3,837,485
 (2,380,981)
Facilities842,196
 1,042,682
 (200,486)
Travel and scientific conferences72,901
 157,445
 (84,544)
Fees, licenses and other2,038,016
 58,600
 1,979,416
Total research and development$6,676,251
 $11,221,876
 $(4,545,625)

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

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

 Nine Months Ended September 30,
 2017 2016 Increase (Decrease)
Salaries and staff costs$977,040
 $4,266,029
 $(3,288,989)
Stock-based compensation550,317
 1,493,744
 (943,427)
Outside services and consultants219,800
 1,117,368
 (897,568)
Facilities220,860
 362,339
 (141,479)
Trade shows, conferences and marketing357,233
 1,082,883
 (725,650)
Travel71,865
 716,473
 (644,608)
Other45,816
 88,614
 (42,798)
Total sales and marketing$2,442,931
 $9,127,450
 $(6,684,519)
Selling and marketing expenses decreased by $6,684,519 to $2,442,931 for the nine months ended September 30, 2017 from $9,127,450 for the same period in 2016. The overall decrease in selling and marketing expenses was primarily due to our strategic restructuring activities. As part of our restructuring, we reduced the number of our field sales, customer support and marketing personnel, bringing down ourbasic weighted average headcount to five from twenty-two in the same period of the prior year. We expect decreases in personnel and related costs due to the reduction in force.

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

 Nine Months Ended September 30,
 2017 2016 Increase (Decrease)
Personnel and outside services costs$3,270,134
 $3,279,860
 $(9,726)
Board of Directors’ fees347,205
 345,240
 1,965
Stock-based compensation1,837,128
 2,487,415
 (650,287)
Legal and accounting fees3,358,411
 2,077,585
 1,280,826
Facilities and insurance742,405
 551,382
 191,023
Travel81,106
 151,355
 (70,249)
Fees, licenses, taxes and other278,970
 290,924
 (11,954)
Total general and administrative$9,915,359
 $9,183,761
 $731,598
General and administrative expenses increased by $731,598 to $9,915,359 for the nine months ended September 30, 2017, from $9,183,761 for the same period in 2016. The increase was primarily due to an increase in legal fees offset by the decrease of stock-based compensation. Legal fees increased primarily as a result of a litigation related loss contingency of $2.1 million expensed during the nine months ended September 30, 2017. Stock-based compensation, a non-cash expense, will fluctuate based on the timing and amount of options granted, forfeitures and the fair value of the options at the time of grant or remeasurement.

Restructuring

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

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

Change in Fair Value of Derivative Financial Instruments Warrants
We have issued warrants that are accounted for as derivative liabilities. As of September 30, 2017, the derivative financial instrumentswarrants liabilities were revalued to $2,037,712, resulting in an increase in value of $1,202,772 from December 31, 2016, based primarily upon the issuance of new derivative financial instruments—warrants in connection with July fundraising activities, offset byapproximately 6.0 million shares of common stock upon the decrease in our stock priceexercise of warrants as well as the changes in the expected term, volatility, and risk free interest rates for the expected term. The issuancevesting of new warrants was recorded as a liability under derivative financial instrumentswarrants in the condensed consolidated balance sheets. The decrease in value was recorded as a gain from the change in fair value of derivative financial instrumentswarrants in the condensed consolidated statement of operations.

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

 Nine Months Ended September 30,
 2017 2016 Increase (Decrease)
Net loss attributable to common shareholders$(22,355,494) $(30,674,248) $(8,318,754)
Net loss per common share — basic$(0.68) $(1.02) $(0.34)
Net loss per common share — diluted$(0.68) $(1.04) $(0.36)
      
Weighted average shares outstanding — basic32,826,306
 30,018,841
 2,807,465
Weighted average shares outstanding — diluted32,826,306
 30,136,572
 2,689,734
The $8,318,754 decrease in net loss attributable to common shareholders and the $0.34 decrease in basic net loss per share was primarily the result of a decrease in operating expenses compared to the same period in the prior year. This decrease was offset by a loss on extinguishment of debt of $1.7 million.RSU.

LIQUIDITY AND CAPITAL RESOURCES
 
As of September 30, 2017,March 31, 2018, we had $7,434,298$6,657,158 in cash and cash equivalents. Net cash used in operating activities for the ninethree months ended September 30, 2017March 31, 2018 was $19,949,652,$2,856,147, compared to $22,034,998$8,758,208 for the ninethree months ended September 30, 2016.March 31, 2017. Our use of cash was primarily a result of the net loss of $22,337,314$4,786,177 for the ninethree months ended September 30, 2017,March 31, 2018, adjusted for non-cash items related to stock-based compensation of $3,117,364, loss on extinguishment of debt of $1,655,825, impairment loss of $485,000,$1,406,131, depreciation and amortization of $956,995,$252,480, deferred rent of $79,586, and the gainloss from the change in fair value of derivative financial instrumentswarrants of $2,012,747.$129,689. The changes in our operating assets and liabilities consisted of lowerhigher accounts payable and accrued expenses, an increase inlower prepaid expenses, as well as decreased accounts receivable and a decreased prepaid expenses.unbilled receivable. At our current and anticipated level of operating loss, we expect to continue to incur an operating cash outflow for the next several years.
 
Net cash provided byused in investing activities was $23,925,535$5,100 during the ninethree months ended September 30, 2017,March 31, 2018, compared to $25,249,392 used in$5,183,944 provided by investing activities for the same period in 2016.2017. Investing activities during the ninethree months ended September 30, 2017March 31, 2018 consisted of net sales and maturities of short-term investments of $24,061,786 offset by net purchases for capital equipment of $136,251.$5,100, while investing activities during the three months ended March 31, 2017 consisted primarily of net maturities of short-term investments of $5,195,396.
 

Net cash used inprovided by financing activities was $10,447,842$1,292,641 during the ninethree months ended September 30, 2017,March 31, 2018, compared to $2,361,994 provided$156,526 used in financing activities for the same period in 2016.2017. Financing activities during the ninethree months ended September 30, 2017March 31, 2018 related primarily to the pay-offproceeds from exercise of long-term debt resulting in debt extinguishment offset by the salewarrants of common stock, while financing activities during the same period of the prior year consisted primarily of sales of common stock offset by repayment of long-term debt. On June 1, 2017, we received a Notice of Event of Default from the lenders which stated that Events of Default had occurred and all of the obligation under the Loan and Security Agreement dated as of June 30, 2014 were immediately due and payable. On June 6, 2017, the lenders took the total pay-off amount of $16,668,583 out of our bank accounts which satisfied all of our outstanding obligations under the Agreement. We disagree with the lenders that any Event of Default has occurred and are reserving all of our options with respect to the Agreement. $1,449,167.
 
As of September 30, 2017,March 31, 2018, and December 31, 2016,2017, we had working capital of $3,469,622$3,985,883 and $31,152,936,$5,522,917, respectively. 
 
On October 25, 2017, we filed a registration statement on Form S-1 with the SEC for a best efforts public offering of up to $17.5 million of common stock and warrants. H.C. Wainwright & Co. is acting as placement agent.

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

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

Our working capital requirements will depend upon numerous factors including but not limited to the nature, cost and timing of our research and development programs. To date, our sources of cash have been primarily limited to the sale of equity securities. We cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact our ability to conduct business. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development and/or commercialization of one or more product candidates, all of which may have a material adverse impact on our operations. We may also be required to (i) seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; or (ii) relinquish or otherwise dispose of rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves on unfavorable terms. We are evaluating the followingall options to raise additional capital, increase revenue, as well as reduce costs, in an effort to strengthen our liquidity position:position, which may include the following: (1) Raising capital through public and private equity offerings; (2) Adding capital through short-term and long-term borrowings; (3) Introducing operation and business development initiatives to bring in new revenue streams by leveraging capabilities within our CLIA lab, as well as monetizing our proprietary NextCollect™ DNA collection and preservation cup; (4)streams; (3) Reducing operating costs by identifying internal synergies; (5)(4) Engaging in strategic partnerships; and (6) Taking actions to reduce or delay capital expenditures.partnerships. We continually assess any spending plans, including a review of our discretionary spending in connection with certain strategic contracts, to effectively and efficiently address our liquidity needs.

NASDAQ Notice

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

In accordance with NASDAQ Listing Rule 5810(c)(3)(A), we have a period of 180 calendar days, or until March 5, 2018, to regain compliance with the minimum bid price requirement.

On March 6, 2018, the NASDAQ Capital Market informed the Company that it is eligible for an additional 180 calendar day period until September 4, 2018 to regain compliance with the minimum $1.00 bid price per share requirement. To regain compliance, the closing bid price of our common stock must meet or exceed $1.00 per share for at least ten consecutive business days during this 180 calendar day period.

CONTRACTUAL OBLIGATIONS
 
For a discussion of our contractual obligations see (i) our Financial Statements and Notes to Consolidated Financial Statements Note 9. Commitments and Contingencies, and (ii) Item 7 Management Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations and Commitments, included in our Annual Report on Form 10-K as of December 31, 2016.2017.

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

Our cash and cash equivalent primary consists of deposits, and money market deposits managed by commercial banks as of September 30, 2017.March 31, 2018. The goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments.

Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of interest rates, particularly because our investments are in short-term money marketable funds. Due to the short-term duration of our investment portfolio and the relatively low risk profile of our investments, a sudden change in interest rates would not have a material effect on the fair market value of our portfolio, nor our operating results or cash flows.


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

Foreign Currency Risk
 
Our foreign currency exchange risk mainly arises from our operations in Italy. Our functional and reporting currency is the United States dollar. We translate our foreign operations’ assets and liabilities denominated in foreign currencies into U.S. dollars at current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in the cumulative translation account, a component of consolidated accumulated other comprehensive income. In addition, we face the foreign currency risk as a result of entering into transactions denominated in currencies other than U.S. dollars. Changes in foreign currency exchange rates can create foreign exchange gains or losses to us.
 
Effects of Inflation
 
We do not believe that inflation and changing prices during the ninethree months ended September 30, 2017March 31, 2018 had a significant impact on our results of operations.

ITEM 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
We have performed an evaluation under the supervision and with the participation of our management, including our principal executive and financial officer, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”).  Based on that evaluation, our principal executive and financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2017March 31, 2018 to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all errors and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
 
Changes in Internal Control over Financial Reporting
 
There was no change in our internal control over financial reporting during the three months ended September 30, 2017March 31, 2018 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.  OTHER INFORMATION

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

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

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

Primarily as a result of our losses incurred to date, our expected continued future losses, and limited cash balances, we have included an explanatory paragraph in our financial statements expressing substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is contingent upon, among other factors, the sale of the shares of our common stock or obtaining alternate financing.2017.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS
 
Exhibit
Number
 Description of Exhibit
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 


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, 2017May 8, 2018By:/s/ William J. Welch
  William J. Welch
  Chief Executive Officer (Principal Executive Officer and Principal Financial Officer)


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