Stock-Based Compensation

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.

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.

During the year ended December 31, 2016, the Company had issued 996,000 options to its executive officers and non-employee directors that were over the authorized number of shares available in the 2014 EIP and were subject to shareholder approval. As per ASC Topic 718, the options were accounted for as liabilities and recorded at fair value with the changes in fair value being recorded in the Company’s consolidated statements of operations. Stockholder approval was obtained on May 17, 2016 to increase the number of authorized shares in the 2014 EIP from 5,000,000 to 7,500,000. Accordingly, the options were remeasured as of the date of stockholder approval with the change recorded in stock based compensation expense and the $217,333 liability was reclassified to additional paid in capital.

As of December 31, 2016, there were 2,829,858 shares available for issuance under the 2014 EIP.

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



	Years ended December 31,
	2016			2015		2014
In cost of revenue	$	122,301		$	39,676	$	—
In research and development expenses	2,420,696			1,499,009		796,008
In selling and marketing expense	2,111,366			768,146		145,239
In general and administrative expenses	2,910,156			1,639,196		1,128,947
Benefit from restructuring	(60,203		)	—		—
Total stock-based compensation	$	7,504,316		$	3,946,027	$	2,070,194

Stock Options

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,
	2016	2015	2014
Risk-free interest rate	0.93% - 1.89%	1.35% - 2.15%	1.42% - 2.1%
Dividend yield	0%	0%	0%
Expected volatility (range)	80% - 134%	73% - 77%	81% - 86%
Expected volatility (weighted-average)	103%	75%	85%
Expected term (in years)	5.5 years	6.0 years	5.8 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 Trovagene’s common stock.

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, 2016, 2015, and 2014, estimated as of the grant date using the Black-Scholes option valuation model, was $3.60, $4.60 and $3.16 per share, respectively.

The unrecognized compensation cost related to non-vested stock options outstanding at December 31, 2016 and 2015 was $8,211,896 and $10,430,604, respectively. The weighted-average remaining amortization period at December 31, 2016 and 2015 for non-vested stock options was 2.8 years and 3.1 years, respectively.

The total intrinsic value of stock options exercised was $1,932,799, $1,382,255 and $0 during the years ended December 31, 2016, 2015 and 2014, respectively. The total fair value of shares vested during the years ended December 31, 2016, 2015 and 2014 was $6,261,655, $2,634,688 and $1,960,256, 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, 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
Granted	3,246,250		$	5.02
Exercised	(1,335,271	)	$	3.81
Forfeited	(3,330,981	)	$	5.63
Balance outstanding, December 31, 2016	5,528,628		$	5.49	$	—	7.7 years
Vested and exercisable, December 31, 2016	2,415,461		$	5.18	$	—	6.4 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.

Restricted Stock Units

Under guidance provided by ASC Topic 718 “Compensation—Stock Compensation” for share-based payments, stock-based compensation cost for restricted stock units is measured at the grant date based on the closing market price of the Company’s common stock at the grant date and recognized ratably over the service period through the vesting date. All restricted stock units were granted with no purchase price. Vesting of the restricted stock units is generally subject to service conditions, while vesting of certain units are based on attainment of specific performance objectives. There were no restricted stock units granted during the year ended December 31, 2015 and 2014.

A summary of the restricted stock unit activity is presented below:



	Number of Shares		Weighted Average Grant Date Fair Value Per Share		Intrinsic Value
Non-vested restricted stock units outstanding, December 31, 2015	—		$	—
Granted	402,000		$	4.06
Vested	(95,000	)	$	4.27
Forfeited	(35,000	)	$	3.99
Non-vested restricted stock units outstanding, December 31, 2016	272,000		$	3.99	$	571,200

All restricted stock units outstanding as of December 31, 2016 vested on January 2, 2017. At December 31, 2016, total unrecognized compensation cost related to non-vested restricted stock units was $4,430, which is expected to be recognized over one day. The total intrinsic value of restricted stock units vested was $293,781 during the year ended December 31, 2016. The total fair value of restricted stock units vested during the year ended December 31, 2016 was $405,550.