htgm-10q_20160331.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, 2016

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  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, 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 May 6, 2016, the registrant had 7,008,983 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 

 


 

Table of Contents

 

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements (Unaudited)

 

1

 

 

Condensed Balance Sheets

 

1

 

 

Condensed Statements of Operations

 

2

 

 

Condensed Statements of Comprehensive Loss

 

3

 

 

Condensed Statement of Changes in Stockholders’ Equity

 

4

 

 

Condensed Statements of Cash Flows

 

5

 

 

Notes to Unaudited Condensed Financial Statements

 

6

Item 2.

 

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

 

20

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

27

Item 4.

 

Controls and Procedures

 

27

PART II.

 

OTHER INFORMATION

 

29

Item 1.

 

Legal Proceedings

 

29

Item 1A.

 

Risk Factors

 

29

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

56

Item 5.

 

Other Information

 

56

Item 6.

 

Exhibits

 

56

Signatures

 

57

Exhibit Index

 

58

 

 

 

i


 

PART I—FINANCIAL INFORMATION

 

 

Item 1. Financial Statements (Unaudited).

HTG Molecular Diagnostics, Inc.

Condensed Balance Sheets

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Assets

 

(Unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,922,696

 

 

$

3,293,983

 

Short-term investments available-for-sale, at fair value

 

 

25,231,370

 

 

 

28,201,507

 

Accounts receivable, net

 

 

574,566

 

 

 

716,246

 

Inventory, net of allowance of $302,556 at March 31, 2016 and $284,319 at

   December 31, 2015

 

 

2,365,962

 

 

 

2,201,301

 

Prepaid insurance

 

 

61,008

 

 

 

234,777

 

Prepaid expenses and other

 

 

264,671

 

 

 

210,440

 

Total current assets

 

 

33,420,273

 

 

 

34,858,254

 

 

 

 

 

 

 

 

 

 

Long-term investments available-for-sale, at fair value

 

 

2,620,676

 

 

 

2,603,901

 

Property and equipment, net

 

 

3,712,294

 

 

 

1,932,213

 

Total assets

 

$

39,753,243

 

 

$

39,394,368

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,231,788

 

 

$

724,805

 

Accrued liabilities

 

 

1,250,849

 

 

 

1,915,268

 

Deferred revenue

 

 

25,448

 

 

 

47,476

 

NuvoGen obligation

 

 

743,750

 

 

 

543,750

 

Term loan

 

 

5,993,009

 

 

 

3,059,068

 

Other current liabilities

 

 

234,044

 

 

 

29,243

 

Total current liabilities

 

 

10,478,888

 

 

 

6,319,610

 

Term loan payable - non-current, net of discount and debt issuance costs

 

 

9,784,163

 

 

 

7,737,586

 

NuvoGen obligation - non-current, net of discount

 

 

8,267,204

 

 

 

8,415,122

 

Other

 

 

659,245

 

 

 

28,652

 

Total liabilities

 

 

29,189,500

 

 

 

22,500,970

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 200,000,000 shares authorized at March 31, 2016 and

   December 31, 2015, 7,006,317 and 7,004,921 shares issued and outstanding,

   respectively, at March 31, 2016, 6,845,638 and 6,844,242 shares issued and

   outstanding, respectively, at December 31, 2015

 

 

7,005

 

 

 

6,844

 

Additional paid-in-capital

 

 

107,226,662

 

 

 

106,569,405

 

Treasury stock – 1,396 shares, at cost

 

 

(75,000

)

 

 

(75,000

)

Accumulated other comprehensive loss

 

 

(2,006

)

 

 

(41,357

)

Accumulated deficit

 

 

(96,592,918

)

 

 

(89,566,494

)

Total stockholders’ equity

 

 

10,563,743

 

 

 

16,893,398

 

Total liabilities and stockholders' equity

 

$

39,753,243

 

 

$

39,394,368

 

 

See notes to the unaudited condensed financial statements.

 

 

1


 

HTG Molecular Diagnostics, Inc.

Condensed Statements of Operations

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

Product

 

$

600,190

 

 

$

727,438

 

Service

 

 

265,042

 

 

 

62,292

 

Other

 

 

 

 

 

234,585

 

Total revenue

 

 

865,232

 

 

 

1,024,315

 

Cost of revenue

 

 

843,470

 

 

 

894,627

 

Gross margin

 

 

21,762

 

 

 

129,688

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

4,693,708

 

 

 

3,439,269

 

Research and development

 

 

1,994,101

 

 

 

688,214

 

Total operating expenses

 

 

6,687,809

 

 

 

4,127,483

 

Operating loss

 

 

(6,666,047

)

 

 

(3,997,795

)

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

Gain from change in stock warrant valuation

 

 

 

 

 

388,960

 

Interest expense

 

 

(392,457

)

 

 

(479,375

)

Interest income

 

 

35,479

 

 

 

76

 

Total other income (expense)

 

 

(356,978

)

 

 

(90,339

)

Net loss before income taxes

 

 

(7,023,025

)

 

 

(4,088,134

)

Income taxes

 

 

3,399

 

 

 

 

Net loss

 

 

(7,026,424

)

 

 

(4,088,134

)

Accretion of stock issuance costs

 

 

 

 

 

(24,077

)

Accretion of Series E warrant discount

 

 

 

 

 

(87,470

)

Accretion of Series D and E redeemable convertible preferred stock dividends

 

 

 

 

 

(798,582

)

Net loss attributable to common stockholders

 

$

(7,026,424

)

 

$

(4,998,263

)

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

 

$

(1.02

)

 

$

(14.99

)

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

   and diluted

 

 

6,885,522

 

 

 

333,408

 

 

See notes to the unaudited condensed financial statements.

 

 

2


 

HTG Molecular Diagnostics, Inc.

Condensed Statements of Comprehensive Loss

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Net loss

 

$

(7,026,424

)

 

$

(4,088,134

)

Other comprehensive income, net of tax effect:

 

 

 

 

 

 

 

 

Unrealized gain on short and long-term investments

 

 

39,351

 

 

 

 

Comprehensive loss

 

 

(6,987,073

)

 

 

(4,088,134

)

Less:  Accretion of stock issuance costs

 

 

 

 

 

(24,077

)

Less:  Accretion of Series E warrant discount

 

 

 

 

 

(87,470

)

Less:  Accretion of Series D and E redeemable convertible preferred stock dividends

 

 

 

 

 

(798,582

)

Comprehensive loss attributable to common stockholders

 

$

(6,987,073

)

 

$

(4,998,263

)

 

See notes to the unaudited condensed financial statements.

 

 

 

3


HTG Molecular Diagnostics, Inc.

Condensed Statement of Changes in Stockholders’ Equity

(Unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Treasury

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balance at January 1, 2016

 

 

6,844,242

 

 

$

6,844

 

 

$

106,569,405

 

 

$

(75,000

)

 

$

(41,357

)

 

$

(89,566,494

)

 

$

16,893,398

 

Stock issued for payment of 2015 annual bonus

 

 

133,179

 

 

 

133

 

 

 

364,777

 

 

 

 

 

 

 

 

 

 

 

 

364,910

 

Stock-based compensation expense

 

 

27,500

 

 

 

28

 

 

 

170,020

 

 

 

 

 

 

 

 

 

 

 

 

170,048

 

Growth Term Loan B warrant discount

 

 

 

 

 

 

 

 

122,460

 

 

 

 

 

 

 

 

 

 

 

 

122,460

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,026,424

)

 

 

(7,026,424

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39,351

 

 

 

 

 

 

39,351

 

Balance at March 31, 2016

 

 

7,004,921

 

 

$

7,005

 

 

$

107,226,662

 

 

$

(75,000

)

 

$

(2,006

)

 

$

(96,592,918

)

 

$

10,563,743

 

 

See notes to the unaudited condensed financial statements.

 

 

 

4


HTG Molecular Diagnostics, Inc.

Condensed Statements of Cash Flows

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(7,026,424

)

 

$

(4,088,134

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

357,023

 

 

 

151,493

 

Accretion of discount on NuvoGen obligation

 

 

52,082

 

 

 

126,566

 

Bad debt expense, net of recoveries

 

 

 

 

 

(16,146

)

Provision for excess inventory

 

 

30,542

 

 

 

21,926

 

Amortization of deferred financing costs

 

 

7,431

 

 

 

3,508

 

Amortization of discount on term loan

 

 

51,908

 

 

 

36,520

 

Amortization of final payment premium on term loan

 

 

43,640

 

 

 

24,237

 

Amortization of discount on convertible notes

 

 

 

 

 

32,006

 

Stock-based compensation expense

 

 

170,048

 

 

 

76,548

 

Change in redeemable convertible preferred stock warrant liability

 

 

 

 

 

(388,960

)

Amortization of convertible note financing costs

 

 

 

 

 

15,107

 

Accretion of incentive from landlord

 

 

(23,666

)

 

 

 

 

Accrued interest on available-for-sale securities investments

 

 

(7,288

)

 

 

 

Loss on disposal of assets

 

 

 

 

 

49,341

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

141,680

 

 

 

(35,014

)

Inventory

 

 

(195,203

)

 

 

(431,598

)

Prepaid expenses and other

 

 

119,538

 

 

 

(10,114

)

Accounts payable

 

 

714,361

 

 

 

(69,456

)

Accrued liabilities

 

 

(537,061

)

 

 

96,544

 

Deferred revenue

 

 

(22,028

)

 

 

(9,233

)

Net cash used in operating activities

 

 

(6,123,417

)

 

 

(4,414,859

)

Investing activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(220,570

)

 

 

(343,703

)

Sales, redemptions and maturities of available-for-sale securities

 

 

3,000,000

 

 

 

 

Net cash provided by (used in) investing activities

 

 

2,779,430

 

 

 

(343,703

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

 

 

 

4,972

 

Proceeds from exercise of E warrants

 

 

 

 

 

7,196

 

Deferred offering costs

 

 

 

 

 

(219,908

)

Deferred convertible note financing costs

 

 

 

 

 

(75,535

)

Payments on capital leases

 

 

(27,300

)

 

 

(7,311

)

Proceeds from term loan

 

 

5,000,000

 

 

 

 

Proceeds from issuance of convertible note warrants

 

 

 

 

 

3,000,000

 

Net cash provided by financing activities

 

 

4,972,700

 

 

 

2,709,414

 

Increase (decrease) in cash and cash equivalents

 

 

1,628,713

 

 

 

(2,049,148

)

Cash and cash equivalents at beginning of period

 

 

3,293,983

 

 

 

3,613,392

 

Cash and cash equivalents at end of period

 

$

4,922,696

 

 

$

1,564,244

 

Noncash investing and financing activities

 

 

 

 

 

 

 

 

Accretion of preferred stock issuance costs

 

$

 

 

$

24,077

 

Exercise of Series E warrants

 

 

 

 

 

(4,116

)

Accretion of Series E warrant discount

 

 

 

 

 

87,470

 

Accretion of Series D and Series E redeemable convertible preferred stock dividends

 

 

 

 

 

798,582

 

Accrual of deferred offering and finance costs

 

 

 

 

 

96,598

 

Allocation of Series E warrant convertible notes debt discount

 

 

 

 

 

741,828

 

Allocation of term loan B warrant discount

 

 

122,460

 

 

 

 

Fixed asset purchases payable and accrued for payment at period end

 

 

1,030,174

 

 

 

 

Stock issued for payment of 2015 annual bonus

 

 

(364,910

)

 

 

 

Purchase of property and equipment under capital lease

 

 

176,360

 

 

 

 

Incentive from landlord

 

 

710,000

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

237,397

 

 

$

233,750

 

 

See notes to the unaudited condensed financial statements.

 

 

5


HTG Molecular Diagnostics, Inc.

Notes to Unaudited Condensed Financial Statements

 

Note 1. Description of Business

HTG Molecular Diagnostics, Inc. (the “Company”) is a commercial stage company that develops and markets a novel technology platform to facilitate the routine use of complex molecular profiling. The Company’s HTG Edge and HTG EdgeSeq platforms, consisting of instrumentation, consumables and software analytics, are used in sample profiling applications including tumor profiling, molecular diagnostic testing and biomarker development. The Company’s HTG Edge and HTG EdgeSeq platforms automate 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, 2016 and 2015, approximately 11% and 4%, respectively, of the company’s revenue was generated from sales to customers located outside of the United States.

 

 

Note 2. Basis of Presentation

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, 2016.  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 unaudited condensed balance sheet at December 31, 2015 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 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, 2015, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2016.

Reclassifications

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations. 

Going Concern

The Company has implemented the criteria of ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, as of the first quarter 2016. In accordance with this guidance, management has assessed the Company’s ability to continue as a going concern within one year of the issuance date of this Form 10-Q with the SEC in May 2016. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has had recurring operating losses and negative cash flows from operations since its inception and has an accumulated deficit of approximately $96.6 million, which, without additional financing in the interim, raise substantial doubt about the Company’s ability to continue as a going concern. As of March 31, 2016, the Company had available cash, cash equivalents and investments in short and long term available-for-sale securities of approximately $32.8 million. In order to continue as a going concern, the Company believes that it will need to raise additional equity or debt capital 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, or at all, or that the Company’s revenue will reach a level sufficient to provide for self-sustaining cash flows. The financial statements of the Company do not include any adjustments that may result from the outcome of these uncertainties.

6


Change in Accounting Principle

The Company has adopted ASU No. 2015-03, Interest – Imputation of Interest:  Simplifying the presentation of Debt Issuance Costs, for the first quarter ended March 31, 2016. 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 to report amortization as interest expense. The requirements were to be applied on a retrospective basis. As such, growth term loan deferred financing fees previously recorded by the Company as assets have been reflected net of growth term loan liability for both of the periods reflected in the condensed balance sheets. This required a retrospective adjustment of $52,377 of deferred financing fees within the December 31, 2015 condensed balance sheet from deferred financing and offering costs asset to term loan payable – non-current, net of discount and debt issuance costs when compared to the balance sheet reported within the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2016.  

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.

 

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.

The Company had product revenue consisting of revenue from the sale of instruments and consumables for the three months ended March 31, 2016 and 2015 as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Instruments

 

$

79,181

 

 

$

203,533

 

Consumables

 

 

521,009

 

 

 

523,905

 

Total product sales

 

$

600,190

 

 

$

727,438

 

The top three customers accounted for 32%, 22% and 9% of the Company’s revenue for the three months ended March 31, 2016, compared with 25%, 23% and 21% for the three months ended March 31, 2015. The Company derived 0% and 23% of total revenue from grants and contracts primarily from one granting agency, during the three month periods ended March 31, 2016 and 2015, respectively. The largest two customers accounted for approximately 33% and 17% of the Company’s net accounts receivable as of March 31, 2016, compared with approximately 32% and 25% as of December 31, 2015.  

The Company currently relies on a single supplier to supply a subcomponent used in the HTG Edge and HTG EdgeSeq processors. A loss of this supplier could significantly delay the delivery of HTG Edge and HTG EdgeSeq systems, which in turn would materially affect the Company’s ability to generate revenue.

New Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under US 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 US GAAP.

7


The revised revenue standard is effective for public entities for annual periods beginning after December 15, 2017, 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 Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on its financial statements and has not yet determined the method by which it will adopt the standard.

In July 2015, the FASB issued ASU No. 2015-11, Inventory: Simplifying the Measurement of Inventory. The standard requires inventory within the scope of the ASU to be measured using the lower of cost and net realizable value. The changes apply to all types of inventory, except those measured using LIFO or retail inventory method, and are intended to more clearly articulate the requirements for the measurement and disclosure of inventory and to simplify the accounting for inventory by eliminating the notions of replacement cost and net realizable value less a normal profit margin. The standard will be effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016. The Company does not believe the adoption of this standard will have a significant impact on its financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases. Under the new guidance, lessees will be required to recognize for all leases (with the exception of short-term leases) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods for those fiscal years. A modified retrospective transition approach is required for lessees 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 Company is currently evaluating the effect the guidance will have on its financial statements.

In March 2016, the FASB issued ASU No. 2016-18, Revenue Recognition: Clarifying the new Revenue Standard’s Principal-Versus-Agent Guidance (“ASU 2016-08”). The standard amends the principal-versus-agent implementation guidance and illustrations in the FASB’s new revenue standard ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2016-08 clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. As defined in the ASU, a specified good or service is “a distinct good or service (or a distinct bundle of goods or services) to be provided to the customer”. Therefore, for contracts involving more than one specified good or service, the Company may be the principal in one or more specified goods or services and the agent for others. The new standard will be effective for public entities for annual periods beginning after December 15, 2017, and interim periods therein. In addition, entities are required to adopt ASU 2016-08 by using the same transition method they used to adopt the new revenue standard. The Company is currently evaluating the effect the guidance will have on its financial statements.

In April 2016, FASB issued ASU No. 2016-09, Share-Based Payment: Simplifying the Accounting for Share-Based Payments. The new guidance addresses several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. The Company does not believe the adoption of this standard will have a significant impact on its financial statements.

 

 

Note 3. Inventory

For the three months ended March 31, 2016 and 2015, the Company recorded increases in the inventory reserve of $18,237 and $21,926, respectively, to adjust for estimated shrinkage and obsolescence. For the three months ended March 31, 2016 and 2015, $30,542 and $21,926 have been included in cost of revenue, respectively.

HTG Edge or HTG EdgeSeq 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. The 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 be extended beyond 180 days. HTG Edge or HTG EdgeSeq 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 and the customer is allowed to continue use of the equipment, the cost of the equipment is written off to cost of revenue.

8


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

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Raw materials

 

$

1,451,079

 

 

$

1,198,605

 

Work in process

 

 

2,160

 

 

 

 

Finished goods

 

 

912,723

 

 

 

1,002,696

 

 

 

$

2,365,962

 

 

$

2,201,301

 

 

 

Note 4. Fair Value 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. Investments that are classified as available-for-sale are recorded at fair value, which was determined using quoted market prices, broker dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The Company’s portfolio of available-for-sale securities comprises U.S. Treasuries, U.S. government sponsored agency obligations and high credit quality corporate debt securities classified as available-for-sale securities.

Financial assets and liabilities measured at fair value are classified in their entirety into the fair value hierarchy, based on the lowest level input significant to the fair value measurement. The following table classifies the Company’s financial assets and liabilities measured at fair value on a recurring basis at March 31, 2016 and December 31, 2015, respectively into the fair value hierarchy:

 

 

 

Balance at March 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Asset included in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market securities

 

$

4,922,696

 

 

$

 

 

$

 

 

$

4,922,696

 

Investments available-for-sale at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government obligations

 

$

3,304,461

 

 

$

 

 

$

 

 

$

3,304,461

 

U.S. government agency obligations

 

$

 

 

$

14,601,971

 

 

$

 

 

$

14,601,971

 

Corporate debt securities

 

$

 

 

$

9,945,614

 

 

$

 

 

$

9,945,614

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Asset included in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market securities

 

$

3,290,490

 

 

$

 

 

$

 

 

$

3,290,490

 

Investments available-for-sale at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government obligations

 

$

3,298,014

 

 

$

 

 

$

 

 

$

3,298,014

 

U.S. government agency obligations

 

$

 

 

$

14,589,378

 

 

$

 

 

$

14,589,378

 

Corporate debt securities

 

$

 

 

$

12,918,016

 

 

$

 

 

$

12,918,016

 

 

There are no other financial instruments subject to fair value measurement on a recurring basis. 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, 2016 and 2015.  

Level 1 instruments include investments in money market funds and U.S. Treasuries. These instruments are valued using quoted market prices for identical unrestricted instruments in active markets. The Company defines active markets for debt instruments based on both the average daily trading volume and the number of days with trading activity. Level 2 instruments include U.S. Government agency obligations and corporate debt securities. Valuations of Level 2 instruments can be verified to quoted prices, recent trading activity for identical or similar instruments, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g. indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.

9


Fair values of these assets and liabilities are based on prices provided by independent market participants that are based on observable inputs using market-based valuation techniques. These valuation models and analytical tools use market pricing or similar instruments that are both objective and publicly available, including matrix pricing or reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids and/or offers. The Company did not adjust any of the valuations received from these third parties with respect to any of its level 1 securities for either of the periods ended March 31, 2016 or December 31, 2015.

Note 5. Available for Sale Securities

The following is a summary of the Company’s available-for-sale securities at March 31, 2016 and December 31, 2015:  

 

 

March 31, 2016

 

 

 

 

 

 

Gross

 

 

Gross

 

 

Fair Value

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

(Net Carrying

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Amount)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury securities and obligations of US government

   agencies

$

17,906,057

 

 

$

1,593

 

 

$

(1,218

)

 

$

17,906,432

 

Corporate securities

 

9,947,995

 

 

 

125

 

 

 

(2,506

)

 

 

9,945,614

 

Total available-for-sale securities

$

27,854,052

 

 

$

1,718

 

 

$

(3,724

)

 

$

27,852,046

 

 

 

December 31, 2015

 

 

 

 

 

 

Gross

 

 

Gross

 

 

Fair Value

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

(Net Carrying

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Amount)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury securities and obligations of US government

   agencies

$

17,914,136

 

 

$

 

 

$

(26,744

)

 

$

17,887,392

 

Corporate securities

 

12,932,629

 

 

 

397

 

 

 

(15,010

)

 

 

12,918,016

 

Total available-for-sale securities

$

30,846,765

 

 

$

397

 

 

$

(41,754

)

 

$

30,805,408

 

 

The net adjustment to unrealized holding gains (losses) on available-for-sale securities in other comprehensive income totaled $39,351 and $0 for the three months ended March 31, 2016 and 2015, respectively.

Contractual maturities of debt investment securities at March 31, 2016 are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

 

 

Under

 

 

 

 

 

 

 

 

 

 

1 Year

 

 

1 to 2 Years

 

 

Total

 

US Treasury securities and obligations of US

   government agencies

$

16,604,507

 

 

$

1,301,925

 

 

$

17,906,432

 

Corporate securities

 

8,626,863

 

 

 

1,318,751

 

 

 

9,945,614

 

Total available-for-sale securities

$

25,231,370

 

 

$

2,620,676

 

 

$

27,852,046

 

 

The following tables shows the gross unrealized losses and fair values of the Company’s investments that have unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2016:

 

 

Under 1 Year

 

 

1 to 2 Years

 

 

Total

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Gross

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

US Treasury securities and obligations of US

   government agencies

$

8,487,853

 

 

$

(1,218

)

 

$

-

 

 

$

-

 

 

$

8,487,853

 

 

$

(1,218

)

Corporate securities

 

4,624,329

 

 

 

(2,506

)

 

 

 

 

 

 

 

 

 

 

4,624,329

 

 

 

(2,506

)

Total available-for-sale securities with unrealized

   losses

$

13,112,182

 

 

$

(3,724

)

 

$

-

 

 

$

-

 

 

$

13,112,182

 

 

$

(3,724

)

 

10


For debt securities, management determines whether it intends to sell or if it is more likely than not that it will be required to sell impaired securities. This determination considers current and forecasted liquidity requirements, regulatory and capital requirements and securities portfolio management. For all impaired debt securities for which there was no intent or expected requirement to sell, the evaluation considers all available evidence to assess whether it is likely the amortized cost value will be recovered. The Company conducts a regular assessment of its debt securities with unrealized losses to determine whether securities have other-than-temporary impairment considering, among other factors, the nature of the securities, credit rating or financial condition of the issuer, the extent and duration of the unrealized loss, expected cash flows of underlying collateral, market conditions and whether the Company intends to sell or it is more likely than not the Company will be required to sell the debt securities. The Company did not have any other-than-temporary impairment in its corporate debt securities for the period ended March 31, 2016.

 

 

Note 6. Property and Equipment

 

Property and equipment, net, consists of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Office equipment

 

$

445,926

 

 

$

257,296

 

Leasehold improvements

 

 

1,253,048

 

 

 

224,061

 

Laboratory and manufacturing equipment

 

 

3,299,626

 

 

 

2,442,191

 

Field equipment

 

 

180,355

 

 

 

180,355

 

Software

 

 

140,248

 

 

 

140,248

 

Construction in progress

 

 

237,553

 

 

 

175,501

 

 

 

 

5,556,756

 

 

 

3,419,652

 

Less: accumulated depreciation and

   amortization

 

 

(1,844,462

)

 

 

(1,487,439

)

 

 

$

3,712,294

 

 

$

1,932,213

 

 

Depreciation and leasehold improvement amortization expense was $357,023 and $151,493 for the three months ended March 31, 2016 and 2015, respectively.

 

At March 31, 2016, the total cost and accumulated amortization of assets under lease commitments were $322,573 and $115,520, respectively, while cost and accumulated depreciation at December 31, 2015 were $146,213 and $88,220, respectively. Leased asset amortization has been included in depreciation and amortization expense within the condensed statements of operations for the three months ended March 31, 2016 and 2015.  

 

During the quarter ended March 31, 2016, the Company capitalized landlord funded lease incentives as leasehold improvements to be amortized over the shorter of the useful life or the remaining life of the real estate lease (Note 12).

 

Note 7. Accrued Liabilities

 

Accrued liabilities consist of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Employee compensation and benefits

 

$

371,843

 

 

$

1,240,314

 

Employee compensation for future absences

 

 

141,655