htgm-10q_20150331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-37369

 

HTG Molecular Diagnostics, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

86-0912294

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

3430 E. Global Loop

Tucson, AZ

85706

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (877) 289-2615

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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  o    No  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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 small reporting company)

  

Small reporting company

 x

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 June 1, 2015, the registrant had 6,826,041 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

1

Item 1.

Financial Statements (Unaudited)

1

 

Condensed Balance Sheets

1

 

Condensed Statements of Operations

3

 

Condensed Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit

4

 

Condensed Statements of Cash Flows

6

 

Notes to Unaudited Condensed Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4.

Controls and Procedures

30

PART II.

OTHER INFORMATION

32

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

59

Item 5.

Other Information

60

Item 6.

Exhibits

60

Signatures

61

Exhibit Index

62

 

 

 

i


 

PART I—FINANCIAL INFORMATION

 

 

Item 1. Financial Statements.

HTG Molecular Diagnostics, Inc.

Condensed Balance Sheets

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,564,244

 

 

$

3,613,392

 

Accounts receivable, net

 

 

852,285

 

 

 

801,125

 

Inventory, net allowance of $76,194 at March 31, 2015 and

$54,269 at December 31, 2014

 

 

2,095,486

 

 

 

1,685,814

 

Prepaid expenses and other

 

 

122,149

 

 

 

112,035

 

Total current assets

 

 

4,634,164

 

 

 

6,212,366

 

 

 

 

 

 

 

 

 

 

Deferred financing and offering costs

 

 

1,742,707

 

 

 

1,369,281

 

 

 

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

 

 

 

Office equipment

 

 

417,664

 

 

 

414,424

 

Leasehold improvements

 

 

236,999

 

 

 

234,602

 

Laboratory and manufacturing equipment

 

 

2,331,857

 

 

 

2,009,818

 

Field equipment

 

 

228,124

 

 

 

286,044

 

Software

 

 

140,248

 

 

 

140,248

 

 

 

 

3,354,892

 

 

 

3,085,136

 

Less accumulated depreciation and amortization

 

 

(2,065,424

)

 

 

(1,938,537

)

Property and equipment, net

 

 

1,289,468

 

 

 

1,146,599

 

Total assets

 

$

7,666,339

 

 

$

8,728,246

 

 

1


 

HTG Molecular Diagnostics, Inc.

Condensed Balance Sheets (Continued)

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Liabilities and stockholders' deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

878,973

 

 

$

948,429

 

Accrued liabilities

 

 

1,692,892

 

 

 

1,499,750

 

Deferred revenue

 

 

32,015

 

 

 

41,248

 

Term loan

 

 

1,644,845

 

 

 

813,715

 

Convertible notes, less discount

 

 

2,290,178

 

 

 

 

Total current liabilities

 

 

6,538,903

 

 

 

3,303,142

 

Redeemable convertible preferred stock warrant liability

 

 

1,079,295

 

 

 

730,543

 

Term loan payable - non-current, net of discount

 

 

8,935,282

 

 

 

9,705,655

 

NuvoGen obligation - non-current

 

 

8,804,425

 

 

 

8,677,859

 

Other

 

 

51,069

 

 

 

58,380

 

Total liabilities

 

 

25,408,974

 

 

 

22,475,579

 

Redeemable convertible preferred stock:

 

 

 

 

 

 

 

 

Series A, $0.001 par value; $1,406,369 liquidation value; 1,292,084 shares authorized;

   1,292,084 shares both issued and outstanding at March 31, 2015 and

   December 31, 2014

 

 

1,402,907

 

 

 

1,402,687

 

Series B, $0.001 par value; $2,104,811 liquidation value;  11,919,624 shares authorized;

   6,789,712 shares both issued and outstanding at March 31, 2015 and

   December 31, 2014

 

 

2,099,886

 

 

 

2,099,310

 

Series C-1, $0.001 par value; $4,581,944 liquidation value; 17,530,800 shares authorized;

   13,242,612 shares both issued and outstanding at March 31, 2015 and

   December 31, 2014

 

 

4,568,581

 

 

 

4,567,525

 

Series C-2, $0.001 par value; $2,244,343 liquidation value; 19,262,522 shares authorized;

   9,948,331 shares both issued and outstanding at March 31, 2015 and

   December 31, 2014

 

 

2,224,957

 

 

 

2,223,506

 

Series D, $0.001 par value; $68,604,412 liquidation value; 237,031,908 shares authorized;

   139,529,173 shares both issued and outstanding at March 31, 2015 and

   December 31, 2014

 

 

37,787,179

 

 

 

37,174,666

 

Series E, $0.001 par value; $21,081,517 liquidation value; 185,046,445 shares authorized;

   45,989,722 shares both issued and outstanding at March 31, 2015,

   45,938,041 shares both issued and outstanding at  December 31, 2014

 

 

8,760,524

 

 

 

8,454,899

 

Total redeemable convertible preferred stock

 

 

56,844,034

 

 

 

55,922,593

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 600,000,000 shares authorized;

  335,152 and 333,756 shares issued and outstanding, respectively, at March 31, 2015,

  334,003 and 332,607 shares issued and outstanding , respectively, at December 31, 2014

 

 

334

 

 

 

333

 

Distributions in excess of capital

 

 

(2,255,166

)

 

 

(1,426,556

)

Treasury stock – 1,396 shares, at cost

 

 

(75,000

)

 

 

(75,000

)

Accumulated deficit

 

 

(72,256,837

)

 

 

(68,168,703

)

Total stockholders' deficit

 

 

(74,586,669

)

 

 

(69,669,926

)

Total liabilities and stockholders' deficit

 

$

7,666,339

 

 

$

8,728,246

 

 

See notes to the condensed financial statements (unaudited)

 

2


 

HTG Molecular Diagnostics, Inc.

Condensed Statements of Operations

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

 

2014

 

Revenue:

 

 

 

 

 

 

 

 

Product

 

$

727,438

 

 

$

370,007

 

Service

 

 

62,292

 

 

 

214,850

 

Other

 

 

234,585

 

 

 

241,666

 

Total revenue

 

 

1,024,315

 

 

 

826,523

 

Cost of revenue

 

 

894,627

 

 

 

642,408

 

Gross margin

 

 

129,688

 

 

 

184,115

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

3,439,269

 

 

 

2,076,801

 

Research and development

 

 

688,214

 

 

 

857,483

 

Total operating expenses

 

 

4,127,483

 

 

 

2,934,284

 

Operating loss

 

 

(3,997,795

)

 

 

(2,750,169

)

 

 

 

 

 

 

 

 

 

Income from change in stock warrant valuation

 

 

388,960

 

 

 

 

Interest expense

 

 

(479,299

)

 

 

(74,507

)

Other expense, net

 

 

 

 

 

(2,912

)

Net loss before income taxes

 

 

(4,088,134

)

 

 

(2,827,588

)

Income taxes

 

 

 

 

 

 

Net loss

 

 

(4,088,134

)

 

 

(2,827,588

)

Accretion of stock issuance costs

 

 

(24,077

)

 

 

(22,481

)

Accretion of Series E warrant discount

 

 

(87,470

)

 

 

(51,377

)

Accretion of Series D and E redeemable convertible preferred stock dividends

 

 

(798,582

)

 

 

(740,637

)

Net loss attributable to common stockholders

 

$

(4,998,263

)

 

$

(3,642,083

)

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

 

$

(14.99

)

 

$

(37.80

)

Shares used in computing net loss per share attributable to common stockholders, basic

   and diluted

 

 

333,408

 

 

 

96,349

 

See notes to the condensed financial statements (unaudited)

 

 

3


 

HTG Molecular Diagnostics, Inc.

Condensed Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit

(Unaudited)

 

 

 

Redeemable Convertible Preferred Stock

 

 

 

Series A

 

 

Series B

 

 

Series C-1

 

 

Series C-2

 

 

Series D

 

 

Series E

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

Balance at January 1, 2015

 

 

1,292,084

 

 

$

1,402,687

 

 

 

6,789,712

 

 

$

2,099,310

 

 

 

13,242,612

 

 

$

4,567,525

 

 

 

9,948,331

 

 

$

2,223,506

 

 

 

139,529,173

 

 

$

37,174,666

 

 

 

45,938,041

 

 

$

8,454,899

 

Exercise of Series E warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

51,681

 

 

 

11,312

 

Exercise of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accretion of redeemable convertible preferred stock issuance costs

 

 

 

 

 

220

 

 

 

 

 

 

576

 

 

 

 

 

 

1,056

 

 

 

 

 

 

1,451

 

 

 

 

 

 

12,441

 

 

 

 

 

 

8,333

 

Accretion of Series E warrant discount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

87,470

 

Accretion of Series D and E redeemable convertible preferred stock dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

600,072

 

 

 

 

 

 

198,510

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2015

 

 

1,292,084

 

 

$

1,402,907

 

 

 

6,789,712

 

 

$

2,099,886

 

 

 

13,242,612

 

 

$

4,568,581

 

 

 

9,948,331

 

 

$

2,224,957

 

 

 

139,529,173

 

 

$

37,787,179

 

 

 

45,989,722

 

 

$

8,760,524

 

 

See notes to the condensed financial statements (unaudited)

 

 

4


 

 

 

 

Stockholders’ Deficit

 

 

 

 

 

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

In Excess

 

 

Treasury

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

of Capital

 

 

Stock

 

 

Deficit

 

 

Total

 

Balance at January 1, 2015

 

 

332,607

 

 

$

333

 

 

$

(1,426,556

)

 

$

(75,000

)

 

$

(68,168,703

)

 

$

(69,669,926

)

Exercise of Series E warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

1,149

 

 

 

1

 

 

 

4,971

 

 

 

 

 

 

 

 

 

4,972

 

Share-based compensation expense

 

 

 

 

 

 

 

 

76,548

 

 

 

 

 

 

 

 

 

76,548

 

Accretion of redeemable convertible preferred stock issuance costs

 

 

 

 

 

 

 

 

(24,077

)

 

 

 

 

 

 

 

 

(24,077

)

Accretion of Series E warrant discount

 

 

 

 

 

 

 

 

(87,470

)

 

 

 

 

 

 

 

 

(87,470

)

Accretion of Series D and E redeemable convertible preferred stock dividends

 

 

 

 

 

 

 

 

(798,582

)

 

 

 

 

 

 

 

 

(798,582

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,088,134

)

 

 

(4,088,134

)

Balance at March 31, 2015

 

 

333,756

 

 

$

334

 

 

$

(2,255,166

)

 

$

(75,000

)

 

$

(72,256,837

)

 

$

(74,586,669

)

 

See notes to the condensed financial statements (unaudited)

 

 

5


 

HTG Molecular Diagnostics, Inc.

Condensed Statements of Cash Flows

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

 

2014

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(4,088,134

)

 

$

(2,827,588

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

151,493

 

 

 

119,517

 

Accretion of discount on NuvoGen obligation

 

 

126,566

 

 

 

47,500

 

Bad debt recovery, net

 

 

(16,146

)

 

 

-

 

Provision for excess inventory

 

 

21,926

 

 

 

-

 

Amortization of term loan deferred financing costs

 

 

3,508

 

 

 

-

 

Amortization of discount on term loan

 

 

36,520

 

 

 

-

 

Amortization of final payment premium on term loan

 

 

24,237

 

 

 

-

 

Amortization of discount on convertible notes

 

 

32,006

 

 

 

-

 

Share-based compensation

 

 

76,548

 

 

 

42,417

 

Change in redeemable convertible preferred stock warrant liability

 

 

(388,960

)

 

 

-

 

Amortization of convertible notes financing costs

 

 

15,107

 

 

 

-

 

Gain/Loss on disposal of assets

 

 

49,341

 

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(35,014

)

 

 

(117,818

)

Inventory

 

 

(431,598

)

 

 

(106,524

)

Prepaid expenses and other

 

 

(10,114

)

 

 

(96,165

)

Accounts payable

 

 

(69,456

)

 

 

(223,288

)

Accrued liabilities

 

 

83,393

 

 

 

(445,476

)

Accrued interest

 

 

13,151

 

 

 

-

 

Deferred revenue

 

 

(9,233

)

 

 

(64,548

)

Other long term liabilities

 

 

-

 

 

 

(112,500

)

Net cash used in operating activities

 

 

(4,414,859

)

 

 

(3,784,473

)

Investing activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(343,703

)

 

 

(126,880

)

Net cash used in investing activities

 

 

(343,703

)

 

 

(126,880

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

4,972

 

 

 

-

 

Draws on line of credit

 

 

-

 

 

 

750,000

 

Proceeds from exercise of E warrants

 

 

7,196

 

 

 

-

 

Deferred offering costs

 

 

(219,908

)

 

 

-

 

Deferred convertible note financing costs

 

 

(75,535

)

 

 

-

 

Payments on equipment lease

 

 

(7,311

)

 

 

-

 

Proceeds from sale of Series E preferred stock, net of issuance costs

 

 

-

 

 

 

7,415,552

 

Proceeds from convertible notes

 

 

3,000,000

 

 

 

-

 

Net cash provided by financing activities

 

 

2,709,414

 

 

 

8,165,552

 

Increase (decrease) in cash and cash equivalents

 

 

(2,049,148

)

 

 

4,254,199

 

Cash and cash equivalents at beginning of year

 

 

3,613,392

 

 

 

1,815,288

 

Cash and cash equivalents at end of period

 

$

1,564,244

 

 

$

6,069,487

 

Noncash investing and financing activities

 

 

 

 

 

 

 

 

Accretion of preferred stock issuance costs

 

$

24,077

 

 

$

22,481

 

Exercise of Series E warrants

 

 

4,116

 

 

 

-

 

Accretion of Series E warrant discount

 

 

87,470

 

 

 

51,377

 

Accretion of Series D and E redeemable convertible preferred stock dividends

 

 

798,582

 

 

 

740,637

 

Accrual of deferred offering and finance costs

 

 

96,598

 

 

 

-

 

Allocation of Series E warrant convertible notes debt discount

 

 

741,828

 

 

 

-

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

 

233,750

 

 

$

2,733

 

 

See notes to the condensed financial statements (unaudited)

 

6


 

HTG Molecular Diagnostics, Inc.

Notes to Unaudited Financial Statements

 

Note 1. Description of Business

HTG Molecular Diagnostics, Inc. (the “Company”) is a commercial stage company that developed and markets a novel technology platform to facilitate the routine use of complex molecular profiling. The Company’s HTG Edge platform, consisting of instrumentation, consumables and software analytics, is used in sample profiling applications including tumor profiling, molecular diagnostic testing and biomarker development. The Company’s HTG Edge platform automates the molecular profiling of genes and gene activity using its proprietary nuclease protection chemistry on a wide variety of biological samples. The Company derives revenue from the sale of instruments, consumables and related services.

The Company operates in one segment and its customers are primarily located in the United States. For the three months ended March 31, 2015 and 2014, approximately 4% and 32%, respectively, of the Company’s revenue was generated from sales to customers located outside of the United States.

 

 

Note 2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim unaudited condensed financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and reflect the accounts of the Company as of March 31, 2015.  Accordingly they do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America (“GAAP”) for complete financial statements.  The accompanying interim unaudited, condensed 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, as of and for the periods presented.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.  These financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the fiscal year ended December 31, 2014, included in the Company’s final prospectus supplement filed with the SEC on May 6, 2015, and related to the Company’s Registration Statement on Form S-1/A (File No. 333-201313).

Reverse Stock Split

On April 27, 2015, the Company effected a one-for-107.39 reverse stock split of its common stock.  All common share and per common share information has been retroactively adjusted to reflect this reverse stock split.

 

Liquidity

The Company has had recurring operating losses and negative cash flows from operations since inception.  The Company completed its initial public offering (“IPO”) on May 11, 2015, in which it sold a total of 3,570,000 shares of common stock at $14.00 per share for total gross proceeds of approximately $50 million.  Additional proceeds of $1.3 million were subsequently received when an additional 90,076 shares of common stock were sold pursuant to the partial exercise by the underwriters of their over-allotment option at $14.00 per share. After underwriters’ fees and commissions and other expenses of the offering, the Company’s aggregate net proceeds were approximately $45.4 million.  The Company expects that the net proceeds from the IPO and its pre-existing cash and cash equivalents, together with interest thereon, will be sufficient to fund its operations for at least the next 12 months.  The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full fiscal year or any other period.  The Company expects to need to raise additional equity or debt capital at some point in the future until its revenue reaches a level sufficient to provide for self-sustaining cash flows.  There can be no assurance that additional equity or debt financing will be available on acceptable terms, if at all, or that our revenue will reach a level sufficient to provide for self-sustaining cash flows.    

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company’s significant estimates include revenue recognition, stock-based compensation expense, the value of the warrant liability, the resolution of uncertain tax positions, income tax valuation allowances, recovery of long lived assets and provisions for doubtful accounts, inventory obsolescence and inventory valuation.  Actual results could materially differ from those estimates.

7


 

Accounts Receivable, net

Accounts receivable represent valid claims against debtors and have been reported net of an allowance for doubtful accounts of $68,922 and $85,068 at March 31, 2015 and December 31, 2014, respectively.  Management reviews accounts receivable to identify where collectability may not be probable based on the specific identification method.  There was a bad debt recovery for $16,146 and $0 for the three months ended March 31, 2015 and 2014, respectively.  

Fair Value of Financial Instruments

The carrying value of financial instruments classified as current assets and current liabilities approximate fair value due to their liquidity and short-term nature.  The carrying amount of the Company’s asset-secured growth capital term loan (the “Growth Term Loan”) and convertible notes were estimated using Level 3 inputs and approximates fair value since the interest rate approximates the market rate for debt securities with similar terms and risk characteristics.  

Inventory, net

Inventory, consisting of raw materials and finished goods, is stated at the lower of cost (first-in, first-out) or market. The Company reserves or writes down its inventory for estimated obsolescence, or unmarketable inventory, in an amount equal to the difference between the cost of inventory and the estimated market value, based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by the Company, additional inventory write-downs may be required. Inventory impairment charges establish a new cost basis for inventory and charges are not reversed subsequently to income, even if circumstances later suggest that increased carrying amounts are recoverable.

For the three months ended March 31, 2015 the Company recorded an increase in the inventory reserve of $21,926 to adjust for estimated shrinkage and obsolescence.  For the three months ended March 31, 2014 there was no change in inventory reserve balance.

During the quarter ended March 31, 2015, the Company determined that the average period of time customers use to evaluate the Company’s equipment generally ranges from 90 to 180 days and in certain circumstances the evaluation period may need to be extended beyond that period.  HTG Edge instruments at customer locations under evaluation agreements are included in finished goods inventory. Equipment that is under evaluation for purchase remains in inventory as the Company maintains title to the equipment throughout the evaluation period. If the customer has not completed the purchase of the instrument by the end of the initial evaluation period, the Company will determine whether to extend the evaluation period or have the equipment returned to the Company. However, in no case will the evaluation period exceed one year. If the customer has not purchased the equipment or entered into a reagent agreement with the Company after evaluating for one year, the cost of the equipment is written off to cost of goods sold if the customer is allowed to continue use of the equipment.

Prior to January 1, 2015, the Company recorded equipment under evaluation more than 90 days in property and equipment and has reclassified equipment with a net book value of $210,606 at December 31, 2014 under evaluation for longer than 90 days and less than one year from property and equipment to inventory.  

Property and Equipment, net

Property and equipment are stated at historical cost and depreciated over their useful lives, which range from three to five years, using the straight-line method.  Leasehold improvements are amortized using the straight-line method over the lesser of the remaining lease term or the estimated useful life.  Field equipment is amortized using the straight-line method over the lesser of the period of the related reagent agreement or the estimated useful life.  Depreciation and leasehold improvement amortization expense was $151,493 and $107,830 for the three months ended March 31, 2015 and 2014, respectively.  

Costs incurred in the development and installation of software for internal use are expensed or capitalized, depending on whether they are incurred in the preliminary project stage (expensed), application development stage (capitalized), or post-implementation stage (expensed).  Amounts capitalized following project completion are amortized on a straight-line basis over the useful life of the developed asset, which is generally three years.  In addition to the amounts above, amortization expense for capitalized software costs was $0 and $ 11,687 for the three months ended March 31, 2015 and 2014, respectively.  

Stock Issuance Costs

Certain costs incurred in connection with the issuance of the Company’s Redeemable Convertible Preferred Stock (the “Preferred Stock”) have been deferred and are being accreted.  Stock issuance costs are accreted to distributions in excess of capital using the effective interest method.  Accretion was $24,077 and $22,481 for the three months ended March 31, 2015 and 2014, respectively.  

8


 

Deferred Financing Costs

Certain costs incurred in connection with the Growth Term Loan have been deferred and are being amortized.  Debt issuance costs are amortized over the term of the Growth Term Loan using the effective interest method.  Costs incurred in connection with the issuance of notes under the Company’s two note and warrant purchase agreements dated December 30, 2014 (the “Note Agreements”) in February and March 2015 have been deferred and are being amortized.  These costs are being amortized over the term of the Note Agreements using the straight-line accretion method, which approximates the effective interest method in this instance.  The Company has recorded approximately $132,050 and $75,131 of deferred financing costs in the accompanying balance sheet as of March 31, 2015 and December 31, 2014.  Amortization was $18,615 and $0 for the three months ended March 31, 2015 and 2014.  

Deferred Offering Costs

Deferred offering costs represent legal, accounting and other direct costs related to the IPO, which was completed in May 2015.  Future costs will be deferred until the completion of the initial public offering, at which time they will be reclassified to additional paid-in capital as a reduction of the proceeds.  The Company has recorded approximately $1.6 million and $1.3 million of deferred offering costs as a non-current asset in the accompanying balance sheet as of March 31, 2015 and December 31, 2014, respectively.  

Deferred Revenue

Deferred revenue represents cash receipts for products or services to be provided in future periods.  When products are delivered or services are rendered, deferred revenue is then recognized as earned.  

Revenue Recognition

The Company recognizes revenue from the sale of instruments, consumables and related services when the following four basic criteria are met:  (1) a contract has been entered into with a customer or persuasive evidence of an arrangement exists, (2) delivery has occurred or services rendered, (3) the fee is fixed and determinable, and (4) collectability is reasonably assured.  

Sale of instruments and consumables

Instrument product revenue is generally recognized upon installation and calibration by our field service engineers, unless the customer has specified any other acceptance criteria.  The sale of instruments and related installation and calibration are considered to be one unit of accounting, as instruments are required to be professionally installed and calibrated before use.  Installation generally occurs within a week of shipment.  

Consumables are considered to be separate units of accounting as they are sold separately.  Consumables revenue is recognized upon transfer of ownership, which is generally upon shipment.  The Company’s standard term and conditions provide that no right of return exists for instruments or consumables.  

When a contract involves multiple elements, the items included in the arrangement (deliverables) are evaluated to determine whether they represent separate units of accounting.  The Company performs this evaluation at the inception of an arrangement and as each item is delivered in the arrangement.  Generally, the Company accounts for a deliverable (or a group of deliverables) separately if the delivered item has stand-alone value to the customer, the customer is given a general right of return relative to the delivered item, and delivery or performance of the undelivered item or service is probable and substantially in the Company’s control. When multiple elements can be separated into separate units of accounting, arrangement consideration is allocated at the inception of the arrangement, based on each deliverables’ relative selling price. All revenue from contracts determined not to have separate units of accounting is recognized based on consideration of the most substantive delivery factor of all the elements in the contract.

The Company provides instruments to certain customers under a reagent agreement. Under these agreements, the Company installs instruments in the customer’s facility without a fee and the customer agrees to purchase consumable products at a stated price over the term of the agreement; in some instances the agreements do not contain a minimum purchase requirement. Terms range from several months to multiple years and may automatically renew in several month or multiple year increments unless either party notifies the other in advance that the agreement will not renew. This represents a multiple element arrangement and because all consideration under the reagent agreement is contingent on the sale of consumables, no consideration has been allocated to the instrument and no revenue has been recognized upon installation of the instrument. The cost of the instrument under the agreement is expected to be recovered in the fees charged for consumables, to the extent sold, over the term of the agreement. Revenue is recognized as consumables are shipped.

9


 

In reagent rental agreements, the Company retains title to the instrument and title is transferred to the customer at no additional charge at the conclusion of the initial arrangement. Because the pattern of revenue from the arrangement cannot be reasonably estimated, the cost of the instrument is amortized on a straight-line basis over the term of the arrangement, unless there is no minimum consumable product purchase in which case the instrument would be expensed as cost of goods sold. Cost to maintain the instrument while title remains with the Company is charged to cost of sales as incurred.

Service Revenue

For contracts related to custom panel design services and sample processing, the Company utilizes a proportional performance revenue recognition model, under which revenue is recognized as performance occurs based on the relative outputs of the performance that have occurred up to that point in time under the respective agreement. The Company includes all applicable costs incurred related to custom panel design services, including research and development costs and general and administrative expenses, in cost of revenue.

The Company also provides contract research services under cost plus fixed fee government contracts. Revenue is recognized under government contracts using the percentage-of-completion method of accounting. Under the percentage-of-completion method, contract research revenue is recognized as the work progresses and services are rendered and costs are incurred. The fixed fee is recognized in proportion to costs incurred compared to total estimated costs. The Company includes all applicable costs incurred from government contracts, including general and administrative expenses on government contracts, in cost of revenue.

Anticipated losses, if any, on contracts are charged to earnings as soon as they are identified. Anticipated losses cover all costs allocable to contracts. Revenue arising from claims or change orders is recorded either as income or as an offset against a potential loss only when the amount of the claim can be estimated and its realization is probable.

Other Revenue

Other revenue includes license and grant revenue.

License revenue is generated from the licensing of the Company’s internally developed intellectual property to third parties. The revenue may be generated by nonrefundable up-front payments and license fees, milestone and other contingent payments, or royalties based on sales of commercialized products. Licensing fees are recognized on a straight-line basis over the term of the license agreement for agreements requiring specific continuing performance obligations with deferral of all or a portion of these fees. If it cannot be concluded that a license fee is fixed or determinable at the outset of an arrangement, amounts are recognized as income as payments from third parties become due. No licensing fees were included in other revenue for the three months ended March 31, 2015 and 2014.

Grant revenue is earned when expenditures relating to the projects under these awards are incurred.

Concentration Risks

Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents and uncollateralized accounts receivable.  The Company maintains the majority of its cash balances in the form of cash deposits in bank checking and money market accounts in amounts in excess of federally insured limits.  Management believes, based upon the quality of the financial institution, that the credit risk with regard to these deposits is not significant.

The Company sells its instruments, consumables, sample processing services, custom panel design services and contract research services primarily to biopharmaceutical companies, academic institutions and molecular labs.  The Company routinely assesses the financial strength of its customers and credit losses have been minimal to date.

Approximately 25%, 23% and 21% of the Company’s revenue was derived from three customers for the three months ended March 31, 2015 and 19%, 12% and 10% were derived from three customers for the three months ended March 31, 2014.  Three customers accounted for approximately 27%, 23% and 14% of the Company’s net accounts receivable as of March 31, 2015.  The Company derived 23% and 29% of its total revenue from grants and contracts, primarily from one organization during the 3 month periods ended March 31, 2015 and 2014, respectively.

The Company currently relies on a single vendor to manufacture its HTG Edge processor and reader and additional single suppliers to supply subcomponents used in the processor.  A loss of any of these suppliers could significantly delay the delivery of HTG Edge systems, which in turn would materially affect the Company’s ability to generate revenue.

10


 

New Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP.

The revised revenue standard is effective for public entities for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The FASB issued exposure drafts to change certain aspects of and delay the effective date of ASU 2014-09 by one year, but these drafts have not yet been approved.  The Company is currently evaluating the impact of our pending adoption of ASU 2014-09 on our financial statements and has not yet determined the method by which we will adopt the standard.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Going Concern (“ASU 2014-15”). ASU 2014-15 provides GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The standard will be effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company does not believe the adoption of this standard will have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued an accounting standards update entitled “ASU 2015-03, Interest – Imputation of Interest:  Simplifying the presentation of Debt Issuance Costs”.  The standard requires entities to present debt issuance costs on the balance sheet as a direct deduction from the related debt liability rather than as an asset, and the amortization is reported as interest expense.  The result of application of this guidance would be to reduce the deferred financing costs balance, with a corresponding reduction to the long term liabilities to which the debt issuance costs relate in the condensed balance sheets.  The standard does not affect recognition and measurement of debt issuance costs.  The Company expects to adopt ASU 2015-03 on January 1, 2016.  

Subsequent Events

The Company has evaluated events occurring subsequent to the end of the period and determined that, other than as disclosed below, there were no other material events that require recognition or disclosure in the financial statements.  

In April 2015, the Company issued $1.5 million of convertible notes pursuant to the Note Agreements.  

On May 11, 2015, the Company completed its IPO, whereby the Company sold a total of 3,570,000 shares of common stock at $14.00 per share for total gross proceeds of approximately $50 million.  An additional 90,076 shares were subsequently sold pursuant to the partial exercise by the underwriters of their over-allotment option resulting in additional gross proceeds of approximately $1.3 million.  After underwriters’ fees and commissions and other expenses of the offering, the Company’s aggregate net proceeds were approximately $45.4 million.  

In connection with the initial closing of the IPO on May 11, 2015:  

·

the Company issued 710,060 shares of its Series D preferred stock upon the exercise of outstanding warrants, for which it received aggregate cash consideration of approximately $1,750 for such exercises;

·

all outstanding shares of the Company’s convertible preferred stock were converted into 2,134,192 shares of common stock;  

·

the Company issued 374,632 shares of its common stock to the holders of the Company’s previously outstanding Series D preferred stock and Series E preferred stock in connection with the conversion of such shares into shares of the Company’s common stock as payment for accrued dividends on such shares;

·

an aggregate of $4.5 million in outstanding principal and accrued interest under convertible promissory notes automatically converted into 324,591 shares of the Company’s common stock at a conversion price of $14.00 per share;

11


 

·

the Company’s Series C-2 preferred stock warrants and Convertible Note Warrants (See Note 9 and Note 10) converted to 1,488 and 144,772 warrants for common shares, respectively; and

·

the Company reserved 938,858 shares of common stock for future issuance under its 2014 equity incentive plan (including 12,752 shares of common stock reserved under our 2011 plan).  In addition, the Company reserved 110,820 shares of common stock for future issuance under its 2014 employee stock purchase plan.  

The remaining notes under the first note Agreement and those available under the second Note Agreement were terminated in connection with the IPO.

 

 

Note 3. Inventory

Inventory, net of reserves, consisted of the following as of the date indicated:

 

 

 

March 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Raw materials

 

$

150,040

 

 

$

174,150

 

Work in process

 

 

 

 

 

 

Finished goods

 

 

1,945,446

 

 

 

1,511,664

 

 

 

$

2,095,486

 

 

$

1,685,814

 

 

 

Note 4. Fair Value Instruments

Fair value measurements used by the Company for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements are based on the premise that fair value represents an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the following three-tier fair value hierarchy has been used in determining the input used in measuring fair value:

 

 

 

 

Level 1

 – 

Quoted process in active markets for identical assets or liabilities on the reporting date. Financial assets in Level 1 include the amounts held in money market accounts classified as cash equivalents.

 

 

 

Level 2

 – 

Pricing inputs are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

 

 

Level 3

 – 

Pricing inputs are generally unobservable and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require management’s judgment or estimation of assumptions that market participants would use in pricing the assets or liabilities. The fair values are therefore determined using factors that involve considerable judgment and interpretations, including but not limited to private and public comparables, third-party appraisals, discounted cash flow models, and fund manager estimates. Financial liabilities in this category include the Company’s preferred stock warrants.

 

The following table provides information about the Company’s financial assets and liabilities measured at fair value on a recurring basis at March 31, 2015 and December 31, 2014, respectively:

 

 

 

Balance at

March 31,

2015

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Balance at

December 31,

2014

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Asset included in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Markets

 

$

1,816,071

 

 

$

1,816,071

 

 

$

 

 

$

 

 

$

3,608,890

 

 

$

3,608,890

 

 

$

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Growth Term Loan warrants

 

$

231,140

 

 

$

 

 

$

 

 

$

231,140

 

 

$

301,508

 

 

$

 

 

$

 

 

$

301,508

 

Preferred Stock warrants

 

$

120,418

 

 

$

 

 

$

 

 

$

120,418

 

 

$

429,035

 

 

$

 

 

$

 

 

$

429,035

 

Convertible Note warrants

 

$

727,737

 

 

$

 

 

$

 

 

$

727,737

 

 

$

 

 

$

 

 

$

 

 

$

 

 

There are no other financial instruments subject to fair value measurement on a recurring basis.

12


 

Transfers to/from Levels 1, 2, and 3 are recognized at the end of the reporting period.  There were no transfers between levels for the three months ended March 31, 2015 or the year ended December 31, 2014.  The Company used its May 2015 IPO pricing as an input for measurement of the fair value of its Level 3 preferred stock warrant liabilities at March 31, 2015 and the Black-Scholes option pricing model, and other valuation models for measuring the fair value of its Level 3 preferred stock warrant liabilities at December 31, 2014.

The Company’s warrant liabilities were categorized as Level 3 because they were valued based on unobservable inputs and management judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such financial instruments.

The March 31, 2015 and December 31, 2014 fair value assessments used the Black-Sholes option pricing model using the following assumptions:  

 

 

 

March 31, 2015

 

December 31, 2014 

 

Fair value of Series B/C/D Stock and Series E Stock shares on grant date or measurement date

 

$0.01 – $0.12

 

$0.14 – $0.22

 

Exercise price

 

$0.01 – $0.346

 

$0.01 – $0.346

 

Expected risk-free interest rate

 

0.4 – 1.90%

 

1.20%

 

Expected volatility

 

55 – 75%

 

70%

 

Expected term

 

0.7 – 9.4 years

 

4.1 years

 

Expected dividend yield

 

0%

 

0 – 8%

 

 

The volatility assumption is based on the volatility of publicly traded industry competitors as adjusted for future expectations. The expected term was based on the Company’s historical experience and future expectations with regard to the exercise of the preferred stock warrants and the probability of conversion of the underlying preferred stock. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected terms of the warrants. At December 31, 2014 the fair value of the Company’s redeemable convertible preferred stock was determined by a valuation model that considered both income and market-based valuations of the Company’s enterprise value.

The expected dividend yield at December 31, 2014 is consistent with the dividend rate on the Company’s redeemable convertible preferred stock. The assumptions used in the Black-Scholes option pricing model are inherently subjective and involve significant judgment. Any change in the fair value was recognized as a component of other income (expense) in the statements of operations.

A reconciliation of the beginning and ending liabilities measured at fair value on a recurring basis using Level 3 inputs for March 31, 2015 and December 31, 2014 are as follows:

 

 

March 31, 2015

 

December 31, 2014

 

Beginning balance

$

730,543

 

$

44,120

 

Issuance of Series E Warrants

 

 

 

2,190,708

 

Exercise of Series E Warrants

 

(4,116)

 

 

(1,889,201

)

Exercise of Series D Warrants

 

 

 

(4,020

)

Issuance of Convertible Note Warrants

 

741,828

 

 

 

Change in stock warrant valuation

 

(388,960)

 

 

388,936

 

Ending balance

$

1,079,295

 

$

730,543

 

 

 

 

 

 

 

 

 

 

13


 

Note 5. Debt Obligations.

Growth Term Loan

In August 2014, the Company entered into the Growth Term Loan with a syndicate of two lending institutions. The first tranche of the Growth Term Loan (“Growth Term Loan A”) of $11.0 million was funded at closing with a second tranche of $5.0 million (“Growth Term Loan B”) is available to be drawn with the completion of the Company’s IPO in May 2015 for 60 days following the effective date of the IPO. The Company received the proceeds, net of a $0.3 million original issue discount.  The Company also booked a discount for the issuance of warrants with the debt (See Note 7).  The original issuance discount and warrant discount are being amortized, using the effective interest method, over the term of the Growth Term Loan A.  Amortization expense was $0.1 million and $0 for the periods ended March 31, 2015 and 2014, respectively, and is included in interest expense in the accompanying condensed statement of operations.  The Growth Term Loan A bears interest at the fixed rate of 8.5% and matures in September 2018 and, at least through September 2015, is payable in monthly interest-only payments. The interest-only payment period is extendable through January 31, 2016, upon funding of the second tranche prior to its expiration. Following the interest-only payment period, equal monthly payments of $347,000 consisting of principal and interest amortized over the remaining term of the loan are due.  The Growth Term Loan requires the Company to maintain compliance with specific reporting covenants and does not require financial covenants.  The Growth Term Loan is secured by a lien covering substantially all of the Company’s assets, excluding patents, trademarks and other intellectual property rights (except for rights to payment related to the sale, licensing or disposition of such intellectual property rights) and certain other specified property.  The Company paid $0.1 million in financing costs upon entering the Growth Term Loan.  The agreement includes preferred stock warrants to purchase 2,512,562 shares of Series E Stock (“the “Series E Loan Warrants”) at a price of $0.2189 per share or at the purchase price of the next round of equity sold if no further shares of Series E Stock are sold.  The warrants to purchase shares of Series E Stock expire on August 22, 2024 (See Note 8).  

The principal repayments due under the term loan as of March 31, 2015, are as follows:

 

2015

 

$

813,715

 

2016

 

 

3,432,771

 

2017

 

 

3,736,197

 

2018

 

 

3,017,317

 

Total Growth Term Loan payments

 

 

11,000,000

 

Less discount

 

 

(500,311

)

Plus final fee premium

 

 

80,438

 

Total Growth Term Loan, net

 

$

10,580,127

 

 

Convertible Notes

On December 30, 2014, the Company entered into two, separate subordinated convertible promissory note agreements, (“the Note Agreements”).

Under the first Note Agreement, the Company was able to issue up to $7,339,165 of notes to existing investors at five future, individual closings of up to $1,500,000 each upon ten days’ notice to participating investors. The date and time of the closings must be approved by the unanimous vote or written consent of those members of the Company’s Board of Directors who are not affiliated with the participating investors. When issued, the notes bear annual interest at 8% and mature on March 31, 2016. Any outstanding principal and accrued interest has automatically converted into shares of the Company’s common stock with the Company’s qualified initial public offering in May 2015. In addition, pursuant to the first Note Agreement the Company issued to participating investors warrants to purchase up to 5,029,114 shares of Series E preferred stock at $0.2189 per share, discussed further in Note 8.

Under the second Note Agreement, the Company can issue up to $6,203,971 of subordinated convertible notes to existing investors at four future, individual closings of up to $1,703,971 each upon ten days’ notice to participating investors. The date and time of the closings must be approved by the Company’s Board of Directors, including a majority of the directors elected by the holders of the Company’s Series E Convertible Preferred Stock (the “Series E Directors”) and participating investors whose applicable closing commitment amount for such closing equals or exceeds 50% of the aggregate principal amount of the notes to be sold at such closing. When issued, the notes bear annual interest at 8% and mature on March 31, 2016. Any outstanding principal and accrued interest is automatically converted into shares of the Company’s common stock in the event of a qualified initial public offering or a private placement of preferred stock, each with gross proceeds of at least $20,000,000. In addition, pursuant to the second Note Agreement the Company issued to participating investors warrants to purchase up to 4,282,472 shares of Series E preferred stock at $0.2189 per share, discussed further in Note 8.  None of the notes under the second Note Agreement were issued prior to the IPO in May 2015.  

As of the Company’s qualified initial public offering the number of shares into which the notes will be converted is equal to the outstanding principal and accrued interest divided by the $14.00 price per share paid by investors purchasing such newly issued equity securities.

14


 

Under each of the Note Agreements, the failure of a principal or major participating investor to invest their committed amount at each of the closings resulted in the conversion of a percentage of the investor’s preferred shares into common shares at the applicable conversion rates in effect pursuant to the Company’s restated certificate of incorporation. Under the first Note Agreement, failure of a principal investor to purchase their committed amount will resulted in the conversion of their entire holdings of preferred stock into common stock, at conversion rates then in effect. Under the second Note Agreement, up to 80% of the total preferred stock held by such investor will be converted into common stock, at conversion rates then in effect. In addition, failure to purchase the full committed amount in any closing will result in the termination of the applicable investor’s warrants, in whole or in part, and the forgiveness and extinguishment of 80% of the aggregate principal amount of the applicable investor’s outstanding notes, if any. In the event the Company sold new shares of stock in a qualified initial public offering or preferred stock in a private placement, an investor’s failure to participate in the subsequent equity financing, in an amount equal to their applicable remaining committed amount under the Note Agreements, would result in the conversion of up to 80% of the non-participating investor’s aggregate preferred stock holding as of the closing date of the subsequent equity financing, along with a reduction of up to 80% of the non-participating investor’s warrants. Pursuant to the provisions of the second Note Agreement, certain preferred shares were optionally converted into common stock as of December 30, 2014. As of March 31, 2015, all principal participating investors in the first Note Agreement had met their obligations to purchase the committed amount under the agreement.

Certain provisions of the first Note Agreement terminated (including the investors’ obligations to purchase notes thereunder) immediately prior to the closing of the qualified initial public offering in May 2015.  Certain provisions of the second Note Agreement terminated (including the investors’ obligations to purchase notes thereunder) immediately prior to the registration statement covering a public offering of the Company’s securities under the Securities Act of 1933, as amended, becoming effective in May 2015.

As of December 31, 2014, there were no borrowings on the Note Agreements.

Below is a summary of the convertible notes issued as of March 31, 2015:

 

Date Issued

 

Draw Amount