htgm-10q_20160930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2016

OR

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

Commission File Number: 001-37369

 

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      No  

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      No  

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

 

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

   (Do not check if a smaller reporting company)

  

Small reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of November 4, 2016, the registrant had 7,065,254 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 (Deficit)

 

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

 

24

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

30

Item 4.

 

Controls and Procedures

 

31

PART II.

 

OTHER INFORMATION

 

33

Item 1.

 

Legal Proceedings

 

33

Item 1A.

 

Risk Factors

 

33

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

62

Item 5.

 

Other Information

 

62

Item 6.

 

Exhibits

 

62

Signatures

 

63

Exhibit Index

 

64

 

 

 

i


 

PART I—FINANCIAL INFORMATION

 

 

Item 1. Financial Statements (Unaudited).

HTG Molecular Diagnostics, Inc.

Condensed Balance Sheets

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Assets

 

(Unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,523,824

 

 

$

3,293,983

 

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

 

 

11,097,140

 

 

 

28,201,507

 

Accounts receivable

 

 

591,861

 

 

 

716,246

 

Inventory, net of allowance of $667,553 at September 30, 2016 and $284,319 at

   December 31, 2015

 

 

1,867,685

 

 

 

2,201,301

 

Prepaid insurance

 

 

215,236

 

 

 

234,777

 

Prepaid expenses and other

 

 

226,070

 

 

 

210,440

 

Total current assets

 

 

19,521,816

 

 

 

34,858,254

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

2,603,901

 

Property and equipment, net

 

 

3,666,947

 

 

 

1,932,213

 

Total assets

 

$

23,188,763

 

 

$

39,394,368

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity (deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,117,830

 

 

$

724,805

 

Accrued liabilities

 

 

1,292,285

 

 

 

1,915,268

 

Deferred revenue

 

 

283,663

 

 

 

47,476

 

NuvoGen obligation

 

 

582,614

 

 

 

543,750

 

Term loan

 

 

6,254,688

 

 

 

3,059,068

 

Other current liabilities

 

 

270,041

 

 

 

29,243

 

Total current liabilities

 

 

9,801,121

 

 

 

6,319,610

 

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

 

 

6,902,379

 

 

 

7,737,586

 

NuvoGen obligation - non-current, net of discount

 

 

8,169,861

 

 

 

8,415,122

 

Other

 

 

530,159

 

 

 

28,652

 

Total liabilities

 

 

25,403,520

 

 

 

22,500,970

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 200,000,000 shares authorized at September 30, 2016

   and December 31, 2015, 7,060,269 and 7,058,873 shares issued and outstanding,

   respectively, at September 30, 2016, 6,845,638 and 6,844,242 shares issued and

   outstanding, respectively, at December 31, 2015

 

 

7,059

 

 

 

6,844

 

Additional paid-in-capital

 

 

107,786,467

 

 

 

106,569,405

 

Treasury stock – 1,396 shares, at cost

 

 

(75,000

)

 

 

(75,000

)

Accumulated other comprehensive loss

 

 

(320

)

 

 

(41,357

)

Accumulated deficit

 

 

(109,932,963

)

 

 

(89,566,494

)

Total stockholders’ equity (deficit)

 

 

(2,214,757

)

 

 

16,893,398

 

Total liabilities and stockholders' equity (deficit)

 

$

23,188,763

 

 

$

39,394,368

 

 

See notes to the unaudited condensed financial statements.

 

 

1


 

HTG Molecular Diagnostics, Inc.

Condensed Statements of Operations

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

506,065

 

 

$

973,956

 

 

$

1,683,382

 

 

$

2,349,740

 

Service

 

 

407,836

 

 

 

37,000

 

 

 

1,991,567

 

 

 

150,292

 

Other

 

 

 

 

 

 

 

 

 

 

 

325,789

 

Total revenue

 

 

913,901

 

 

 

1,010,956

 

 

 

3,674,949

 

 

 

2,825,821

 

Cost of revenue

 

 

1,125,009

 

 

 

809,015

 

 

 

2,901,455

 

 

 

2,538,590

 

Gross margin

 

 

(211,108

)

 

 

201,941

 

 

 

773,494

 

 

 

287,231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

3,937,600

 

 

 

3,717,402

 

 

 

13,343,945

 

 

 

10,883,161

 

Research and development

 

 

1,910,116

 

 

 

1,309,573

 

 

 

6,515,808

 

 

 

2,951,009

 

Total operating expenses

 

 

5,847,716

 

 

 

5,026,975

 

 

 

19,859,753

 

 

 

13,834,170

 

Operating loss

 

 

(6,058,824

)

 

 

(4,825,034

)

 

 

(19,086,259

)

 

 

(13,546,939

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from change in stock warrant valuation

 

 

 

 

 

 

 

 

 

 

 

(239,683

)

Interest expense

 

 

(490,825

)

 

 

(378,656

)

 

 

(1,422,171

)

 

 

(1,334,103

)

Interest income

 

 

26,196

 

 

 

37,788

 

 

 

92,767

 

 

 

48,930

 

Loss on settlement of convertible debt

 

 

 

 

 

 

 

 

 

 

 

(705,217

)

Other

 

 

35,011

 

 

 

8,239

 

 

 

53,453

 

 

 

78,873

 

Total other income (expense)

 

 

(429,618

)

 

 

(332,629

)

 

 

(1,275,951

)

 

 

(2,151,200

)

Net loss before income taxes

 

 

(6,488,442

)

 

 

(5,157,663

)

 

 

(20,362,210

)

 

 

(15,698,139

)

Income taxes

 

 

 

 

 

 

 

 

4,259

 

 

 

 

Net loss

 

 

(6,488,442

)

 

 

(5,157,663

)

 

 

(20,366,469

)

 

 

(15,698,139

)

Accretion of stock issuance costs

 

 

 

 

 

 

 

 

 

 

 

(35,046

)

Accretion of Series E warrant discount

 

 

 

 

 

 

 

 

 

 

 

(127,616

)

Accretion of Series D and E redeemable convertible preferred stock

   dividends

 

 

 

 

 

 

 

 

 

 

 

(1,165,932

)

Net loss attributable to common stockholders

 

$

(6,488,442

)

 

$

(5,157,663

)

 

$

(20,366,469

)

 

$

(17,026,733

)

Net loss per share attributable to common stockholders, basic and

   diluted

 

$

(0.92

)

 

$

(0.76

)

 

$

(2.92

)

 

$

(4.56

)

Shares used in computing net loss per share attributable to common

   stockholders, basic and diluted

 

 

7,053,010

 

 

 

6,829,687

 

 

 

6,985,924

 

 

 

3,735,852

 

 

See notes to the unaudited condensed financial statements.

 

 

2


 

HTG Molecular Diagnostics, Inc.

Condensed Statements of Comprehensive Loss

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net loss

 

$

(6,488,442

)

 

$

(5,157,663

)

 

$

(20,366,469

)

 

$

(15,698,139

)

Other comprehensive income (loss), net of tax effect:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on short and long-term investments

 

 

(2,836

)

 

 

12,993

 

 

 

41,037

 

 

 

4,754

 

Comprehensive loss

 

 

(6,491,278

)

 

 

(5,144,670

)

 

 

(20,325,432

)

 

 

(15,693,385

)

Less: Accretion of stock issuance costs

 

 

 

 

 

 

 

 

 

 

 

(35,046

)

Less: Accretion of Series E warrant discount

 

 

 

 

 

 

 

 

 

 

 

(127,616

)

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

 

 

 

 

 

 

 

 

 

 

 

(1,165,932

)

Comprehensive loss attributable to common stockholders

 

$

(6,491,278

)

 

$

(5,144,670

)

 

$

(20,325,432

)

 

$

(17,021,979

)

 

See notes to the unaudited condensed financial statements.

 

 

 

3


HTG Molecular Diagnostics, Inc.

Condensed Statement of Changes in Stockholders’ Equity (Deficit)

(Unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Treasury

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Loss

 

 

Deficit

 

 

Equity (Deficit)

 

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

 

Exercise of stock options

 

 

4,712

 

 

 

5

 

 

 

10,127

 

 

 

 

 

 

 

 

 

 

 

 

10,132

 

Stock-based compensation expense

 

 

36,762

 

 

 

37

 

 

 

552,017

 

 

 

 

 

 

 

 

 

 

 

 

552,054

 

Employee stock purchase plan purchases

 

 

39,978

 

 

 

40

 

 

 

167,681

 

 

 

 

 

 

 

 

 

 

 

 

167,721

 

Growth Term Loan B warrant discount

 

 

 

 

 

 

 

 

122,460

 

 

 

 

 

 

 

 

 

 

 

 

122,460

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,366,469

)

 

 

(20,366,469

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

41,037

 

 

 

 

 

 

41,037

 

Balance at September 30, 2016

 

 

7,058,873

 

 

$

7,059

 

 

$

107,786,467

 

 

$

(75,000

)

 

$

(320

)

 

$

(109,932,963

)

 

$

(2,214,757

)

 

See notes to the unaudited condensed financial statements.

 

 

 

4


HTG Molecular Diagnostics, Inc.

Condensed Statements of Cash Flows

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(20,366,469

)

 

$

(15,698,139

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,086,752

 

 

 

473,799

 

Accretion of discount on NuvoGen obligation

 

 

156,103

 

 

 

229,232

 

Bad debt expense, net of recoveries

 

 

 

 

 

44,854

 

Provision for excess inventory

 

 

437,893

 

 

 

273,752

 

Amortization of Growth Term Loan discount and issuance costs

 

 

415,355

 

 

 

274,486

 

Loss on settlement of convertible notes

 

 

 

 

 

705,217

 

Amortization of discount on convertible notes

 

 

 

 

 

90,222

 

Stock-based compensation expense

 

 

552,054

 

 

 

223,787

 

Change in redeemable convertible preferred stock warrant liability

 

 

 

 

 

239,683

 

Accretion of incentive from landlord

 

 

(94,667

)

 

 

 

Accrued interest on available-for-sale securities investments

 

 

130,576

 

 

 

 

Loss on disposal of assets

 

 

 

 

 

67,780

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

124,385

 

 

 

59,444

 

Inventory

 

 

(104,277

)

 

 

(854,120

)

Prepaid expenses and other

 

 

3,911

 

 

 

(505,918

)

Accounts payable

 

 

367,529

 

 

 

(254,423

)

Accrued liabilities

 

 

(258,073

)

 

 

(47,367

)

Deferred revenue

 

 

236,187

 

 

 

(8,532

)

Net cash used in operating activities

 

 

(17,312,741

)

 

 

(14,686,243

)

Investing activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,859,155

)

 

 

(950,278

)

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

 

 

23,000,000

 

 

 

 

Purchase of available-for-sale securities

 

 

(3,381,271

)

 

 

(36,473,957

)

Net cash provided by (used in) investing activities

 

 

17,759,574

 

 

 

(37,424,235

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from initial public offering

 

 

 

 

 

47,654,190

 

Deferred offering costs

 

 

 

 

 

(1,002,930

)

Proceeds from Growth Term Loan

 

 

5,000,000

 

 

 

 

Payments on Growth Term Loan

 

 

(2,932,482

)

 

 

 

Proceeds from convertible notes

 

 

 

 

 

4,500,000

 

Deferred convertible note financing costs

 

 

 

 

 

(75,523

)

Payments on capital leases

 

 

(99,863

)

 

 

(21,933

)

Proceeds from exercise of stock options

 

 

10,132

 

 

 

34,048

 

Proceeds from exercise of Series E warrants

 

 

 

 

 

8,948

 

Proceeds from issuance of convertible note warrants

 

 

 

 

 

1,354

 

Proceeds from shares purchased under the stock purchase plan

 

 

167,721

 

 

 

 

Payments on NuvoGen obligation

 

 

(362,500

)

 

 

 

Settlement of fractional common shares

 

 

 

 

 

(2,925

)

Net cash provided by financing activities

 

 

1,783,008

 

 

 

51,095,229

 

Increase (decrease) in cash and cash equivalents

 

 

2,229,841

 

 

 

(1,015,249

)

Cash and cash equivalents at beginning of period

 

 

3,293,983

 

 

 

3,613,392

 

Cash and cash equivalents at end of period

 

$

5,523,824

 

 

$

2,598,143

 

Noncash investing and financing activities

 

 

 

 

 

 

 

 

Accretion of preferred stock issuance costs

 

$

 

 

$

35,046

 

Net exercise of Series D and Series E warrants

 

 

 

 

 

(95,914

)

Accretion of Series E warrant discount

 

 

 

 

 

127,616

 

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

 

 

 

 

 

1,165,932

 

Deferred offering costs reclassified to distributions in excess of capital

 

 

 

 

 

2,297,079

 

Allocation of Series E warrant convertible notes debt discount

 

 

 

 

 

741,828

 

Conversion of convertible notes and related accrued interest to common stock

 

 

 

 

 

4,544,384

 

Conversion of convertible preferred stock to common stock

 

 

 

 

 

(57,356,049

)

Reclassification of convertible preferred stock liability warrants to equity warrants

 

 

 

 

 

(1,616,140

)

Fixed asset purchases payable and accrued at period end

 

 

25,496

 

 

 

272,847

 

Stock issued for settlement of accrued bonus

 

 

(364,910

)

 

 

 

Purchase of property and equipment under capital lease

 

 

226,835

 

 

 

 

Incentive from landlord

 

 

710,000

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

850,713

 

 

$

701,250

 

 

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 and nine months ended September 30, 2016, approximately 15% and 11%, respectively, of the Company’s revenue was generated from sales to customers located outside of the United States, compared with 24% and 11%, respectively, for the three and nine months ended September 30, 2015.

 

 

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 September 30, 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 implemented the criteria of Accounting Standards Update (“ASU”) No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, in the first quarter of 2016. In accordance with this guidance, management has assessed the Company’s ability to continue as a going concern within one year of the filing date of this Quarterly Report on          Form 10‑Q with the SEC. 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. However, the Company has had recurring operating losses and negative cash flows from operations since its inception and has an accumulated deficit of approximately $109.9 million. As of September 30, 2016, the Company had available cash, cash equivalents and investments in short term available-for-sale securities of approximately $16.6 million, and had current liabilities of approximately $10.0 million plus an additional $6.9 million in long-term liabilities attributable to its growth term loan. Management believes that the Company’s existing resources will be sufficient to fund the Company’s planned operations and expenditures until mid-way through the second quarter of 2017. However, the Company cannot provide assurances that its plans will not change or that changed circumstances will not result in the depletion of its capital resources more rapidly than it currently anticipates. These circumstances raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that may result from the outcome of these uncertainties.  

The Company will need to raise additional capital to fund its operations until its revenue reaches a level sufficient to provide for self-sustaining cash flows. There can be no assurance that additional capital will be available on acceptable terms, or that the Company’s revenue will reach a level sufficient to provide for self-sustaining cash flows. If sufficient additional capital is not available as and when needed, the Company may have to delay, scale back or discontinue one or more product development programs, curtail its commercialization activities, significantly reduce expenses, sell assets (potentially at a discount to their fair value or carrying value),

6


enter into relationships with third parties to develop or commercialize independently, cease operations altogether, pursue an acquisition of the Company at a price that may result in up to a total loss on investment for its stockholders, file for bankruptcy or seek other protection from creditors, or liquidate all assets.

Change in Accounting Principle

In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-03, Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). 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. The Company adopted ASU 2015-03 effective January 1, 2016. As such, prepaid expenses and other and term loan payable – non-current, net of discount have been restated as of December 31, 2015 to reflect the retrospective reclassification of $52,377 of Growth Term Loan deferred financing fees from prepaid expenses and other to term loan payable – non-current, net of discount and debt issuance costs.

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, 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, available‑for‑sale debt securities 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 and nine months ended September 30, 2016 and 2015 as follows:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Instruments

 

$

5,846

 

 

$

338,231

 

 

$

88,146

 

 

$

597,426

 

Consumables

 

 

500,219

 

 

 

635,725

 

 

 

1,595,236

 

 

 

1,752,314

 

Total product sales

 

$

506,065

 

 

$

973,956

 

 

$

1,683,382

 

 

$

2,349,740

 

 

The Company’s top three customers accounted for 27%, 24% and 9% of the Company’s revenue for the three months ended September 30, 2016, compared with 26%, 16% and 12% for the three months ended September 30, 2015. The top three customers accounted for 38%, 14% and 7% of the Company’s revenue for the nine months ended September 30, 2016, compared with 29%, 10% and 6% of the Company’s revenue for the nine months ended September 30, 2015.

 

The top two customers accounted for approximately 59% and 11% of the Company’s net accounts receivable as of September 30, 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.

7


Recent 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 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 fiscal years and interim periods within those fiscal years beginning after December 15, 2017, 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 last in, first out (“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 concepts 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 this standard, 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 and interim periods within those fiscal years beginning after December 15, 2018. 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 that the adoption of this standard will have on its financial statements.

In March 2016, the FASB issued ASU No. 2016-08, 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 ASU 2014-09. 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 ASU 2016-08, 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. ASU 2016-08 will be effective for public entities for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. In addition, entities are required to adopt ASU 2016-08 by using the same transition method they used to adopt ASU 2014-09. The Company is currently evaluating the effect the adoption of ASU 2016-08 will have on its financial statements.

In April 2016, the FASB issued ASU No. 2016-09, Share-Based Payment: Simplifying the Accounting for Share-Based Payments. The standard 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 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 April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”). The amendments in this standard affect the guidance in ASU 2014-09 by clarifying two aspects: identifying performance obligations and the licensing implementation guidance. ASU 2016-10 will have the same effective date and transition requirements as ASU 2014-09. The Company is currently evaluating the effect the adoption of ASU 2016-10 will have on its financial statements.  

8


In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients (“ASU 2016-12”)The amendments in this standard affect the guidance in ASU 2014-09 by clarifying certain specific aspects of ASU 2014-09, including assessment of collectability, treatment of sales taxes and contract modifications, and providing certain technical corrections. ASU 2016-12 will have the same effective date and transition requirements as ASU 201409. The Company is currently evaluating the effect the adoption of ASU 2016-12 will have on its financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses, which requires the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The standard will be effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. The Company does not believe the adoption of this standard will have a significant impact on its financial statements. 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years with early adoption permitted, including adoption in an interim period. The Company is currently evaluating the effect that the adoption of ASU 2016-15 will have on its financial statements.

 

 

Note 3. Inventory

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 retains 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. 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. If the customer has not purchased the equipment or entered into a reagent agreement with the Company within one year, the equipment is returned to the Company or the customer is allowed to continue use of the equipment in which case the cost of the equipment is written off to selling, general and administrative expense.

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Raw materials

 

$

1,584,273

 

 

$

1,274,840

 

Work in process

 

 

1,991

 

 

 

 

Finished goods

 

 

948,974

 

 

 

1,210,780

 

Total gross inventory

 

 

2,535,238

 

 

 

2,485,620

 

Less inventory allowance

 

 

(667,553

)

 

 

(284,319

)

 

 

$

1,867,685

 

 

$

2,201,301

 

For the three and nine months ended September 30, 2016, the Company recorded adjustments to provision for excess inventory $288,130 and $437,893, respectively, resulting in a net adjustment to inventory allowance of $291,692 and $383,234, respectively. For the three and nine months ended September 30, 2015, the Company recorded adjustments to provision for excess inventory of $76,799 and $330,088, respectively, resulting in a net adjustment to the inventory allowance of $62,872 and $273,752, respectively. Adjustments in these periods to the allowance for estimated shrinkage and obsolescence and excess inventory were recognized within cost of revenue in the condensed statements of operations. During the nine months ended September 30, 2016 and 2015, the Company wrote off $54,659 and $56,336, respectively, of obsolete inventory against the inventory allowance.

 

 

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.

9


Financial assets and liabilities measured at fair value are classified in their entirety in 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 September 30, 2016 and December 31, 2015, respectively in the fair value hierarchy:

 

 

 

Balance at September 30, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Asset included in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market securities

 

$

4,897,198

 

 

$

 

 

$

 

 

$

4,897,198

 

Investments available-for-sale at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government obligations

 

$

1,302,991

 

 

$

 

 

$

 

 

$

1,302,991

 

U.S. government agency obligations

 

$

 

 

$

3,582,980

 

 

$

 

 

$

3,582,980

 

Corporate debt securities

 

$

 

 

$

6,211,169

 

 

$

 

 

$

6,211,169

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 and nine months ended September 30, 2016 or 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.

Fair values of these assets 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 or 2 securities for the periods ended September 30, 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 September 30, 2016 and December 31, 2015:  

 

 

September 30, 2016

 

 

 

 

 

 

Gross

 

 

Gross

 

 

Fair Value