Stock Option Plan

In June 2004, the Company adopted the Trovagene Stock Option Plan, as amended (the “2004 Plan”), under which up to 6,000,000 shares common stock were reserved for issuance to directors and eligible employees, including executive officers and consultants. Generally, vesting for options granted under the Plan was from three to four years, and options expired after a 10-year period. Options were granted at an exercise price not less than the fair market value at the date of grant. As of December 31, 2014, the 2004 Plan was expired. As of December 31, 2013, there were 1,788,921 shares available for issuance under the 2004 Plan.

During 2013, the Company issued 260,000 options over the authorized number of options in the 2004 Plan. As per FASB 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 2004 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.

In July 2013, an option to purchase 90,000 shares of common stock was granted to a member of the Board for services provided outside of routine Board activities. This option was vested in full upon grant. The fair value of this option was approximately $500,000 and is included in general and administrative expenses.

The Trovagene, Inc. 2014 Equity Incentive Plan (the “2014 EIP’), authorizing up to 2,500,000 shares of common stock for issuance under the 2014 EIP, was approved by the Board in June 2014 and approved by the stockholders of the Company at the September 17, 2014 Annual Meeting of Stockholders. An additional 2,500,000 shares of common stock was authorized for issuance by the Board in March 2015 and was approved by the stockholders at the June 10, 2015 Annual Meeting of Stockholders.

As of December 31, 2015, there were 1,361,832 shares available for issuance under the 2014 EIP.

Stock-based compensation has been recognized in operating results as follows:



	Years ended December 31,
	2015		2014		2013
In cost of revenue	$	39,676	$	—	$	—
In research and development expenses	1,499,009		796,008		549,465
In selling and marketing expense	768,146		145,239		70,626
In general and administrative expenses	1,639,196		1,128,947		1,359,273
Total stock-based compensation	$	3,946,027	$	2,070,194	$	1,979,364

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 years indicated below:



	Years ended December 31,
	2015	2014	2013
Risk-free interest rate	1.35% - 2.15%	1.42% - 2.1%	0.74% - 1.5%
Dividend yield	0%	0%	0%
Expected volatility (range)	73% - 77%	81% - 86%	82% - 100%
Expected volatility (weighted-average)	75%	85%	91%
Expected term (in years)	6.0 years	5.8 years	5.0 years

Risk-free interest rate — Based on the daily yield curve rates for U.S. Treasury obligations with maturities that correspond to the expected term of the Company’s stock options.

Dividend yield — Trovagene has not paid any dividends on common stock since its inception and does not anticipate paying dividends on its common stock in the foreseeable future.

Expected volatility — Based on the historical volatility of a group of peer companies with attributes similar to Trovagene.

Expected term — The expected option term represents the period that stock-based awards are expected to be outstanding based on the simplified method provided in Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment (“SAB No. 107”), which averages an award’s weighted-average vesting period and expected term for “plain vanilla” share options. Under SAB No. 107, options are considered to be “plain vanilla” if they have the following basic characteristics: (1) are granted “at-the-money”; (2) exercisability is conditioned upon service through the vesting date; (3) termination of service prior to vesting results in forfeiture; (4) limited exercise period following termination of service; and (5) are non-transferable and non-hedgeable.

Forfeitures — FASB ASC Topic 718 (“ASC 718”) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates forfeitures based on its historical experience.

The weighted-average fair value per share of all options granted during the years ended December 31, 2015, 2014, and 2013, estimated as of the grant date using the Black-Scholes option valuation model, was $4.60, $3.16 and $4.54 per share, respectively.

The unrecognized compensation cost related to non-vested stock options outstanding at December 31, 2015 and 2014 was $10,430,604 and $4,862,030, respectively. The weighted-average remaining contractual term at December 31, 2015 and 2014 for options outstanding and vested options was 3.1 years and 3.0 years, respectively.

The total intrinsic value of stock options exercised was $1,382,255, $0 and $275,492 during the years ended December 31, 2015, 2014 and 2013, respectively. The total fair value of shares vested during the years ended December 31, 2015, 2014 and 2013 was $2,634,688, $1,960,256 and $1,633,071, respectively.

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



	Number of Options		Weighted-Average Exercise Price Per Share		Intrinsic Value		Weighted-Average Remaining Contractual Life
Balance outstanding, December 31, 2012	3,711,303		$	4.69	$	8,301,484	6.3 years
Granted	1,144,760		$	6.33
Exercised	(52,500	)	$	4.30
Forfeited	(516,018	)	$	4.35
Balance outstanding, December 31, 2013	4,287,545		$	5.18	$	5,896,329	6.7 years
Granted	1,410,038		$	4.42
Forfeited	(784,111	)	$	7.08
Balance outstanding, December 31, 2014	4,913,472		$	4.66	$	2,808,083	7.6 years
Granted	2,688,500		$	7.02
Exercised	(265,166	)	$	3.25
Forfeited	(388,176	)	$	7.75
Balance outstanding, December 31, 2015	6,948,630		$	5.45	$	5,903,466	7.8 years
Vested and exercisable, December 31, 2015	2,825,398		$	4.38	$	4,194,205	6.0 years

ASC 718 requires that cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for options exercised (excess tax benefits) be classified as cash inflows from financing activities and cash outflows from operating activities. Due to Trovagene’s accumulated deficit position, no tax benefits have been recognized in the cash flow statement.