3. Accounting for Share-Based Payments

Stock Options

ASC Topic 718 “Compensation—Stock Compensation” requires companies to measure the cost of employee services received in exchange for the award of equity instruments based on the estimated fair value of the award at the date of grant. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award. ASC Topic 718 did not change the way Trovagene accounts for non-employee stock-based compensation. Trovagene accounts for shares of common stock, stock options and warrants issued to non-employees based on the fair value of the stock, stock option or warrant, if that value is more reliably measurable than the fair value of the consideration or services received. The Company accounts for stock options issued and vesting to non-employees in accordance with ASC Topic 505-50 “Equity-Based Payment to Non-Employees” whereas the value of the stock compensation is based upon the measurement date as determined at either: a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Accordingly the fair value of these options is being “marked to market” quarterly until the measurement date is determined.

Stock-based compensation expense related to Trovagene options have been recognized in operating results as follow:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Included in research and development expense	$	124,447	$	37,399	$	426,656	$	68,879
Included in general and administrative expense	844,629		92,960		1,231,237		280,131
Total stock-based compensation expense	$	969,076	$	130,359	$	1,657,893	$	349,010

During the quarter ended September 30, 2013, an option to purchase 90,000 shares of common stock was granted to a Board Director for services provided outside of routine Board of Directors’ services. The fair value of this option was approximately $500,000 and is included in general and administrative expenses.

The unrecognized compensation cost related to non-vested stock options outstanding at September 30, 2013 and 2012, net of expected forfeitures, was $3,170,227 and $1,457,061, respectively, to be recognized over a weighted-average remaining vesting period of approximately three and four years, 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 assumptions during the following periods indicated.

	Nine Months Ended September 30, 2013		Nine Months Ended September 30, 2012
Risk-free interest rate	0.74-1.48	%	0.62-1.04	%
Dividend yield	0	%	0	%
Expected volatility	95-100	%	90	%
Expected term (in years)	5 yrs		5 yrs

A summary of stock option activity and of changes in stock options outstanding under the Plan is presented below:

	Number of Options		Weighted Average Exercise Price Per Share		Intrinsic Value
Balance outstanding, December 31, 2012	3,711,303		$	4.69
Granted	710,427		$	6.69
Exercised	(41,667	)	$	4.50
Forfeited	(486,019	)	$	4.32
Balance outstanding, September 30, 2013	3,894,044		$	5.11	$	9,645,929
Exercisable at September 30, 2013	2,084,383		$	5.60	$	4,770,228

During the quarter ended June 30, 2013, the Company had issued 260,000 options over the authorized number of options in the Plan. As per ASC Topic 815-40, the options were accounted for as liabilities and recorded at fair value with the changes in fair value being recorded in the Company’s statement of operations. Stockholder approval was obtained on July 18, 2013 to increase the number of authorized shares in the Plan from 3,666,667 to 6,000,000. Accordingly, the options were remeasured as of the date of stockholder approval with the change recorded in stock based compensation expense and the $23,024 liability was reclassified to additional paid in capital.

Warrants

A summary of warrant activity is presented below:

	Number of Warrants		Weighted Average Exercise Price		Remaining Contractual Term Years
Balance outstanding, December 31, 2012	6,985,070		$	3.96	5.41
Granted	50,000		$	8.00	2.38
Exercised	(728,488	)	$	4.99	4.34
Balance outstanding, September 30, 2013	6,306,582		$	3.88	4.68

The Company issued a warrant to purchase 50,000 shares of common stock at an exercise price of $8.00 per share, during the nine months ended September 30, 2013. The warrants were issued in connection with an agreement to provide services related to investor and public relations materials and expire three years from date of grant. The estimated fair value of the warrant was determined on the date of grant using the Black-Scholes option valuation model using the following assumptions: a risk-free interest rate of 0.42%, dividend yield of 0%, expected volatility of 97% and expected term of three years. The resulting fair value of $198,791 was recorded as stock based compensation expense.