htgm-10q_20180331.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 March 31, 2018

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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)

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if he registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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 May 4, 2018, the registrant had 28,371,119 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 as of March 31, 2018 and December 31, 2017

 

1

 

 

Condensed Statements of Operations for the Three Months Ended March 31, 2018 and 2017

 

2

 

 

Condensed Statements of Comprehensive Loss for the Three Months Ended March 31, 2018 and 2017

 

3

 

 

Condensed Statement of Changes in Stockholders’ Equity (Deficit) for the Three Months Ended March 31, 2018

 

4

 

 

Condensed Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017

 

5

 

 

Notes to Unaudited Condensed Financial Statements

 

6

Item 2.

 

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

 

26

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

35

Item 4.

 

Controls and Procedures

 

36

PART II.

 

OTHER INFORMATION

 

37

Item 1.

 

Legal Proceedings

 

37

Item 1A.

 

Risk Factors

 

37

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

66

Item 5.

 

Other Information

 

66

Item 6.

 

Exhibits

 

66

Signatures

 

69

 

 

 

i


 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited).

HTG Molecular Diagnostics, Inc.

Condensed Balance Sheets 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

(Unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

20,530,960

 

 

$

9,968,600

 

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

 

 

25,125,209

 

 

 

 

Accounts receivable

 

 

2,836,526

 

 

 

6,356,268

 

Contract assets

 

 

167,835

 

 

 

 

Inventory, net of allowance of $63,943 at March 31, 2018 and $62,142

   at December 31, 2017

 

 

1,042,017

 

 

 

1,180,521

 

Prepaid expenses and other

 

 

464,562

 

 

 

443,068

 

Total current assets

 

 

50,167,109

 

 

 

17,948,457

 

 

 

 

 

 

 

 

 

 

Deferred offering costs

 

 

 

 

 

2,953

 

Deferred MidCap revolving loan costs

 

 

79,197

 

 

 

 

Property and equipment, net

 

 

3,099,479

 

 

 

3,304,890

 

Total assets

 

$

53,345,785

 

 

$

21,256,300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity (deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,216,115

 

 

$

2,438,798

 

Accrued liabilities

 

 

1,681,183

 

 

 

3,746,786

 

Contract liabilities - current

 

 

462,934

 

 

 

665,882

 

NuvoGen obligation - current

 

 

560,668

 

 

 

496,442

 

Growth Term Loan payable - net of discount and debt issuance costs

 

 

 

 

 

5,793,599

 

Other current liabilities

 

 

202,564

 

 

 

200,460

 

Total current liabilities

 

 

5,123,464

 

 

 

13,341,967

 

NuvoGen obligation - non-current, net of discount

 

 

7,268,161

 

 

 

7,520,913

 

Convertible note, related party - net of debt issuance costs

 

 

2,964,123

 

 

 

2,960,760

 

MidCap Term Loan payable - net of discount and debt issuance costs

 

 

6,585,731

 

 

 

 

Other non-current liabilities

 

 

435,017

 

 

 

492,197

 

Total liabilities

 

 

22,376,496

 

 

 

24,315,837

 

Commitments and Contingencies (Note 13)

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 200,000,000 shares authorized at March 31, 2018

   and December 31, 2017, 28,358,925 shares issued and outstanding at March 31, 2018

   and 13,929,763 shares issued and outstanding at December 31, 2017

 

 

28,359

 

 

 

13,929

 

Additional paid-in-capital

 

 

170,898,089

 

 

 

131,492,595

 

Accumulated other comprehensive loss

 

 

(11,151

)

 

 

 

Accumulated deficit

 

 

(139,946,008

)

 

 

(134,566,061

)

Total stockholders’ equity (deficit)

 

 

30,969,289

 

 

 

(3,059,537

)

Total liabilities and stockholders' equity (deficit)

 

$

53,345,785

 

 

$

21,256,300

 

 

See notes to the unaudited condensed financial statements.

 

 

1


 

HTG Molecular Diagnostics, Inc.

Condensed Statements of Operations

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

Product and product-related services

 

$

1,733,546

 

 

$

1,371,169

 

Collaborative development services

 

 

2,425,106

 

 

 

 

Total revenue

 

 

4,158,652

 

 

 

1,371,169

 

Cost of revenue

 

 

1,137,063

 

 

 

1,295,302

 

Gross margin

 

 

3,021,589

 

 

 

75,867

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

5,657,832

 

 

 

4,238,467

 

Research and development

 

 

2,589,286

 

 

 

1,267,063

 

Total operating expenses

 

 

8,247,118

 

 

 

5,505,530

 

Operating loss

 

 

(5,225,529

)

 

 

(5,429,663

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense

 

 

(182,517

)

 

 

(398,420

)

Interest income

 

 

133,163

 

 

 

12,089

 

Loss on extinguishment of Growth Term Loan

 

 

(105,064

)

 

 

 

Total other income (expense)

 

 

(154,418

)

 

 

(386,331

)

Net loss before income taxes

 

 

(5,379,947

)

 

 

(5,815,994

)

Provision for income taxes

 

 

 

 

 

280

 

Net loss

 

$

(5,379,947

)

 

$

(5,816,274

)

Net loss per share, basic and diluted

 

$

(0.22

)

 

$

(0.73

)

Shares used in computing net loss per share, basic and diluted

 

 

24,704,128

 

 

 

7,971,097

 

 

See notes to the unaudited condensed financial statements.

 

 

2


 

HTG Molecular Diagnostics, Inc.

Condensed Statements of Comprehensive Loss

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Net loss

 

$

(5,379,947

)

 

$

(5,816,274

)

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

 

 

 

 

 

 

 

 

Unrealized gain (loss) on short-term investments

 

 

(11,151

)

 

 

354

 

Comprehensive loss

 

$

(5,391,098

)

 

$

(5,815,920

)

 

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

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity (Deficit)

 

Balance at December 31, 2017

 

 

13,929,763

 

 

$

13,929

 

 

$

131,492,595

 

 

$

-

 

 

$

(134,566,061

)

 

$

(3,059,537

)

Exercise of stock options

 

 

18,028

 

 

 

18

 

 

 

40,486

 

 

 

 

 

 

 

 

 

40,504

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,143,188

 

 

 

 

 

 

 

 

 

1,143,188

 

Vesting of restricted stock awards

 

 

269,551

 

 

 

270

 

 

 

 

 

 

 

 

 

 

 

 

270

 

Net share settlement of restricted stock award

 

 

(34,769

)

 

 

(35

)

 

 

(133,478

)

 

 

 

 

 

 

 

 

(133,513

)

Employee stock purchase plan

 

 

 

 

 

 

 

 

14,453

 

 

 

 

 

 

 

 

 

14,453

 

Issuance of common stock from ATM Offering, net of issuance costs of $17,000

 

 

261,352

 

 

 

262

 

 

 

556,444

 

 

 

 

 

 

 

 

 

556,706

 

Issuance of common stock from underwritten public offering, net of     issuance costs of $2.6 million

 

 

13,915,000

 

 

 

13,915

 

 

 

37,710,401

 

 

 

 

 

 

 

 

 

37,724,316

 

MidCap Term Loan warrant discount

 

 

 

 

 

 

 

 

74,000

 

 

 

 

 

 

 

 

 

74,000

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,379,947

)

 

 

(5,379,947

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(11,151

)

 

 

 

 

 

(11,151

)

Balance at March 31, 2018

 

 

28,358,925

 

 

$

28,359

 

 

$

170,898,089

 

 

$

(11,151

)

 

$

(139,946,008

)

 

$

30,969,289

 

 

See notes to the unaudited condensed financial statements.

 

 

 

4


HTG Molecular Diagnostics, Inc.

Condensed Statements of Cash Flows

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(5,379,947

)

 

$

(5,816,274

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

356,204

 

 

 

296,045

 

Accretion of discount on NuvoGen obligation

 

 

(2,952

)

 

 

50,124

 

Provision for excess inventory

 

 

11,280

 

 

 

192,427

 

Amortization of Growth Term Loan discount and issuance costs

 

 

62,951

 

 

 

122,583

 

Loss on extinguishment of Growth Term Loan

 

 

105,064

 

 

 

 

Amortization of QNAH Convertible Note issuance costs

 

 

3,363

 

 

 

 

Amortization of MidCap Credit Facility discount and issuance costs

 

 

2,924

 

 

 

 

Stock-based compensation expense

 

 

1,143,458

 

 

 

396,646

 

Employee stock purchase plan expense

 

 

14,453

 

 

 

14,888

 

Accretion of incentive from landlord

 

 

(35,500

)

 

 

(35,500

)

Accrued interest on available-for-sale securities investments

 

 

(66,195

)

 

 

(5,573

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

3,351,907

 

 

 

181,312

 

Inventory

 

 

127,224

 

 

 

63,198

 

Prepaid expenses and other

 

 

(21,494

)

 

 

64,765

 

Deferred offering costs

 

 

2,953

 

 

 

10,830

 

Accounts payable

 

 

(78,239

)

 

 

311,036

 

Accrued liabilities

 

 

(2,065,603

)

 

 

(388,339

)

Contract liabilities

 

 

(233,078

)

 

 

(93,874

)

Net cash used in operating activities

 

 

(2,701,227

)

 

 

(4,635,706

)

Investing activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(457,828

)

 

 

(65,385

)

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

 

 

 

 

 

1,700,000

 

Purchase of available-for-sale securities

 

 

(25,070,165

)

 

 

 

Net cash (used in) provided by investing activities

 

 

(25,527,993

)

 

 

1,634,615

 

Financing activities

 

 

 

 

 

 

 

 

Proceeds from MidCap Credit Facility

 

 

7,000,000

 

 

 

 

MidCap Credit Facility lender fees

 

 

(228,459

)

 

 

 

Payments on Growth Term Loan

 

 

(1,684,626

)

 

 

(1,546,612

)

Payments for extinguishment of Growth Term Loan

 

 

(4,276,988

)

 

 

 

Proceeds from public offering, net

 

 

37,932,290

 

 

 

 

Public offering costs

 

 

(207,974

)

 

 

 

Proceeds from ATM Offering, net

 

 

556,706

 

 

 

 

Payments on NuvoGen obligation

 

 

(185,574

)

 

 

(200,000

)

Payments on capital leases

 

 

(20,786

)

 

 

(27,199

)

Proceeds from exercise of stock options

 

 

40,504

 

 

 

35,023

 

Taxes paid for net share settlement of restricted stock awards

 

 

(133,513

)

 

 

 

Net cash provided by (used in) financing activities

 

 

38,791,580

 

 

 

(1,738,788

)

Increase (decrease) in cash and cash equivalents

 

 

10,562,360

 

 

 

(4,739,879

)

Cash and cash equivalents at beginning of period

 

 

9,968,600

 

 

 

7,507,659

 

Cash and cash equivalents at end of period

 

$

20,530,960

 

 

$

2,767,780

 

Noncash investing and financing activities

 

 

 

 

 

 

 

 

Fixed asset purchases payable and accrued at period end

 

$

3,486

 

 

$

44,256

 

Deferred offering costs payable and accrued at period end

 

 

 

 

 

76,262

 

Equipment purchased through capital lease

 

 

31,340

 

 

 

 

Debt issuance costs payable and accrued at period end

 

 

193,931

 

 

 

 

MidCap Term Loan fees and warrant discount

 

 

389,000

 

 

 

 

Retirement of treasury stock

 

 

 

 

 

75,000

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

83,397

 

 

$

225,713

 

Cash paid for taxes

 

 

 

 

 

280

 

 

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 provider of instruments, reagents and services for molecular profiling applications. The Company derives revenue from sales of its HTG EdgeSeq automation system and integrated next-generation sequencing-based HTG EdgeSeq assays, from research services including sample processing and custom research use only (“RUO”) assay design and from collaborative development services.

 

The Company operates in one segment and its customers are located primarily in the United States and Europe. For the three months ended March 31, 2018 approximately 79% of the Company’s revenue was generated from sales originated by customers located outside of the United States, compared with 18% for the three months ended March 31, 2017. The increase in sales originated by customers located outside of the United States is primarily the result of collaborative development services revenue generated from the Master Assay Development, Commercialization and Manufacturing Agreement (the “Governing Agreement”) with QIAGEN Manchester Limited (“QML”), a wholly owned subsidiary of QIAGEN N.V. (see Note 16), which accounted for 73% of sales to customers located outside of the United States for the three months ended March 31, 2018.

 

 

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 (“SEC”) and reflect the accounts of the Company as of March 31, 2018 and for the quarters ended March 31, 2018 and 2017. 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 accompanying interim unaudited condensed balance sheet at December 31, 2017 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 interim unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the fiscal year ended December 31, 2017, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 23, 2018.

 

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.

 

Revenue Recognition

The Company adopted the Financial Accounting Standards Board (“FASB”) new revenue standard, Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), on January 1, 2018 using the full retrospective approach. The adoption of this standard did not have an effect on 2017 or 2016 revenue recognition or have a cumulative effect on opening equity, as the timing and measurement of revenue recognition is materially the same under ASC 606 as it was under the prior relevant guidance.

 

For contracts where the period between when the Company transfers a promised good or service to the customer and when the customer pays is one year or less, the Company has elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component.

 

The Company has made a policy election to exclude from the measurement of the transaction price all taxes assessed by a government authority that are both imposed on and concurrent with a specific revenue producing transaction and collected by the Company from a customer. Such taxes may include but are not limited to sales, use, value added and certain excise taxes.

6


 

Contract Assets

Contract assets represent the Company’s right to consideration in exchange for goods or services that the Company has transferred to a customer, for which rights to payment are conditional upon something other than the passage of time.

 

Contract Liabilities

Contract liabilities represent cash receipts for products or services to be delivered in future periods, including up-front fees received relating to custom RUO assay design and sample processing services and collaboration development services. When products or services outputs are delivered to customers, contract liabilities are recognized as earned. Up-front fees received for custom RUO assay design or collaborative development services are recognized on a proportional performance basis as design or development procedures are completed and outputs are produced.

 

Product Warranty

The Company generally provides a one-year warranty on its HTG EdgeSeq systems covering the performance of system hardware and software in conformance with customer specifications under normal use and protecting against defects in materials and workmanship. The Company may, at its option, replace, repair or exchange products covered under valid warranty claims. This assurance-type warranty is not deemed to be a separate performance obligation under the Company’s contracts with customers for the sale of instruments, as its purpose is to ensure that the product complies with agreed-upon specifications following installation of the instrument. A provision for estimated warranty costs is recognized at the time of sale, through cost of revenue, based upon recent historical experience and other relevant information as it becomes available. The Company continuously assesses the adequacy of its product warranty accrual by reviewing actual claims and adjusts the provision as needed.

 

Debt Issuance Costs

Costs incurred to issue non-revolving debt instruments are recognized as a reduction to the related debt balance in the accompanying interim unaudited condensed balance sheets and amortized to interest expense over the contractual term of the related debt using the effective interest method. Costs incurred to issue revolving debt instruments are deferred as an asset in the accompanying interim unaudited condensed balance sheets and amortized on a straight-line basis to interest expense over the term of the revolving commitment.

 

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, bonus accrual, income tax valuation allowances, recovery of long-lived assets, inventory obsolescence and inventory valuation. Actual results could materially differ from those estimates.

 

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. Investments that are classified as available-for-sale are recorded at fair value, which was determined using quoted market prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. In October 2017, the Company received $3.0 million in gross proceeds from, and issued a subordinated convertible promissory note (the “QNAH Convertible Note”) in that principal amount to, QIAGEN North American Holdings, Inc. (“QNAH”). As of March 31, 2018, the estimated aggregate fair value of the QNAH Convertible Note is approximately $3.6 million. The fair value estimate is based on the note’s discounted cash flows and estimated option value of the conversion terms. The estimated fair value of the QNAH Convertible Note represents a Level 3 measurement. The fair value of the MidCap Term Loan (see Note 8) is also estimated using Level 3 inputs and approximates fair value as the interest rate approximates the market rate for debt securities with similar terms and risk characteristics. The NuvoGen obligation is an obligation relating to an asset purchase transaction with a then-common stockholder of the Company. Although the obligation is considered a financial instrument, the Company is unable to reasonably determine its fair value as the remaining payments due under the obligation will be made at the greater of a minimum fixed quarterly payment or 6% of revenue, causing variability in the timing and amount of payments and the term of the obligation.

 

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

7


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 instrument, related consumables, sample processing services, custom RUO assay design and collaborative development 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’s top three customers accounted for 59%, 9% and 8% of the Company’s total revenue for the three months ended March 31, 2018, compared with 21%, 20% and 17% for the three months ended March 31, 2017. The top two customers accounted for approximately 68% and 11% of the Company’s accounts receivable as of March 31, 2018, compared with approximately 66% and 11% as of December 31, 2017. The largest of these amounts represents accounts receivable relating to work performed under three statements of work entered into under the Company’s Governing Agreement with QML.

 

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

 

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under U.S. 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 were required under prior U.S. GAAP.

 

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.

 

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments in this standard affect the guidance in ASU 2014-09 by clarifying two aspects: identifying performance obligations and the licensing implementation guidance.

 

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients. 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.

 

The new revenue standard and the standards that amend it were 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 adopted ASC 606 using the full retrospective approach, which did not have an effect on 2017 revenue recognition and did not have a cumulative effect on opening equity, as the timing and measurement of revenue recognition is materially the same as under ASC 605. The Company has presented additional quantitative and qualitative disclosures regarding identified revenue streams and performance obligations for the first quarter ended March 31, 2018 (see Note 9 and Note 16). The Company has also identified and implemented changes to its business processes and internal controls relating to implementation of the new standard.

 

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, (“ASU 2016-01”), which requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair

8


value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The Company adopted ASU 2016-01 as of January 1, 2018, at which time the standard did not have a significant impact on its interim unaudited condensed 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. The Company adopted ASU No. 2016-15 as of January 1, 2018, at which time the adoption of this standard did not have a significant impact on its interim unaudited condensed financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. The new standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The Company adopted ASU No. 2017-09 as of January 1, 2018. The adoption of this update did not impact the Company’s interim unaudited condensed financial statements.

 

New Accounting Pronouncements

The following are new FASB ASUs that have not been adopted by the Company as of March 31, 2018, grouped by their respective effective dates:

 

January 1, 2019

In February 2016, the FASB issued ASU No. 2016-02, Leases, (“ASU 2016-02”). Under this standard, which applies to both lessors and lessees, lessees will be required to recognize all leases (except for short-term leases) as a lease liability, which is a lessee’s obligation to make lease payments arising from a lease measured on a discounted basis, and as 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 effect of adoption of this standard on the Company’s financial statements depends on the leases existing at January 1, 2018. Based on the Company’s office and equipment leases at that date and considering the practical expedients, the Company expects that adoption of ASU 201602 will not have a material effect on its statements of operations, will result in a gross-up on its balance sheets of less than $2.0 million relating to office and equipment leases and will have no effect on its statements of cash flows. The Company will continue to assess the new guidance and its potential applicability, to new agreements that the Company may enter into subsequent to March 31, 2018 through the date of adoption.

 

In July 2017, the FASB issued ASU 2017-11, Accounting for Certain Financial Instruments with Down Round Features. This new standard makes limited changes to previous guidance on classifying certain financial instruments as either liabilities or equity. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years with early adoption permitted, including adoption in an interim period. When considering the Company’s existing financial instruments, the Company does not believe the adoption of this standard will have an effect on its financial statements.

 

January 1, 2020

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 carried at amortized cost held at the reporting date based on historical experience, current conditions and reasonable forecasts. The updated guidance also amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists. 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 is 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, given the high credit quality of the obligors to its available-for-sale debt securities and its limited history of bad debt expense relating to trade accounts receivable.

9


 

Note 3. Inventory

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Raw materials

 

$

918,451

 

 

$

984,328

 

Work in process

 

 

376

 

 

 

376

 

Finished goods

 

 

187,133

 

 

 

257,959

 

Total gross inventory

 

 

1,105,960

 

 

 

1,242,663

 

Less inventory allowance

 

 

(63,943

)

 

 

(62,142

)

 

 

$

1,042,017

 

 

$

1,180,521

 

 

The reserve for shrinkage and excess inventory was $63,943 and $62,142 as of March 31, 2018 and December 31, 2017, respectively. For the three months ended March 31, 2018 and 2017, the Company recorded net increases in the inventory reserve of $1,801 and $3,823, respectively, to adjust for estimated shrinkage and obsolescence. For the three months ended March 31, 2018 and 2017, increase in inventory reserve of $11,280 and $192,427, respectively, have been included in the cost of revenue in the accompanying interim unaudited condensed statements of operations.

 

 

Note 4. Fair Value Instruments

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 March 31, 2018 and December 31, 2017, respectively:

 

 

 

Balance at March 31, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Asset included in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market securities

 

$

17,470,074

 

 

$

 

 

$

 

 

$

17,470,074

 

Investments available-for-sale at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government obligations

 

$

9,943,245

 

 

$

 

 

$

 

 

$

9,943,245

 

Corporate debt securities

 

$

 

 

$

15,181,964

 

 

$

 

 

$

15,181,964

 

Total

 

$

27,413,319

 

 

$

15,181,964

 

 

$

 

 

$

42,595,283

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Asset included in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market securities

 

$

8,521,054

 

 

$

 

 

$

 

 

$

8,521,054

 

Total

 

$

8,521,054

 

 

$

 

 

$

 

 

$

8,521,054

 

 

There are no other financial instruments subject to fair value measurement on a recurring basis. Transfers to and 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, 2018 or for the year ended December 31, 2017.

 

Level 1 instruments include investments in money market funds, U.S. Treasuries and U.S. government agency obligations. 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 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.

 

10


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 March 31, 2018 or December 31, 2017 and did not have any Level 3 financial assets or liabilities during either of these periods.

 

 

Note 5. Available-for-Sale Securities

The Company’s portfolio of available-for-sale securities consists of U.S. Treasuries and high credit quality corporate debt securities. The following is a summary of the Company’s available-for-sale securities at March 31, 2018:  

 

 

March 31, 2018

 

 

 

 

 

 

Gross

 

 

Gross

 

 

Fair Value

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

(Net Carrying

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Amount)

 

U.S. Treasury securities

$

9,953,065

 

 

$

 

 

$

(9,820

)

 

$

9,943,245

 

Corporate debt securities

 

15,183,295

 

 

 

 

 

 

(1,331

)

 

 

15,181,964

 

Total available-for-sale securities

$

25,136,360

 

 

$

 

 

$

(11,151

)

 

$

25,125,209

 

 

The Company had no available-for-sale securities at December 31, 2017.

 

The net adjustment to unrealized holding gains (losses) on available-for-sale securities, net of tax in other comprehensive income totaled $(11,151) for the three months ended March 31, 2018, and $354 for the three months ended March 31, 2017.

 

Contractual maturities of debt investment securities at March 31, 2018 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

 

U.S. Treasury securities

$

9,943,245

 

 

$

 

 

$

9,943,245

 

Corporate debt securities

 

15,181,964

 

 

 

 

 

 

15,181,964

 

Total available-for-sale securities

$

25,125,209

 

 

$

 

 

$

25,125,209

 

 

The following table 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, 2018:

 

 

Under 1 Year

 

 

1 to 2 Years

 

 

Total

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Gross

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

U.S. Treasury securities

$

9,943,245

 

 

$

(9,820

)

 

$

 

 

$

 

 

$

9,943,245

 

 

$

(9,820

)

Corporate debt securities

 

2,387,990

 

 

 

(1,331

)

 

 

 

 

 

 

 

 

2,387,990

 

 

 

(1,331

)

Total available-for-sale securities with unrealized losses

$

12,331,235

 

 

$

(11,151

)

 

$

 

 

$

 

 

$

12,331,235

 

 

$

(11,151

)

 

For debt securities, the Company 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

11


to sell or it is more likely than not that the Company will be required to sell the debt securities. The Company did not have any other-than-temporary impairment in its available-for-sale securities at March 31, 2018 or December 31, 2017.

 

 

Note 6. Property and Equipment

Property and equipment, net, consists of the following as of the dates indicated:

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Furniture & fixtures

 

$

666,673

 

 

$

582,007

 

Leasehold improvements

 

 

1,887,113

 

 

 

1,863,698

 

Equipment used in manufacturing

 

 

2,147,331

 

 

 

1,963,558

 

Equipment used in research & development

 

 

1,355,839

 

 

 

1,328,556

 

Equipment used in the field

 

 

130,552

 

 

 

130,552

 

Software

 

 

373,683

 

 

 

373,683

 

Construction in progress

 

 

87,298

 

 

 

255,641

 

 

 

 

6,648,489

 

 

 

6,497,695

 

Less: accumulated depreciation and amortization

 

 

(3,549,010

)

 

 

(3,192,805

)

 

 

$

3,099,479

 

 

$

3,304,890

 

 

Depreciation and leasehold improvement amortization expense was $356,204 and $296,045 for the three months ended March 31, 2018 and 2017, respectively.

 

 

Note 7. Accrued Liabilities

Accrued liabilities consist of the following as of the dates indicated:

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Accrued employee bonuses

 

$

867,628

 

 

$

3,049,109

 

Payroll and employee benefit accruals

 

 

483,882

 

 

 

369,275

 

Accrued professional fees

 

 

97,562

 

 

 

101,150

 

Accrued interest

 

 

41,464

 

 

 

45,544

 

Other accrued liabilities

 

 

190,647

 

 

 

181,708

 

 

 

$

1,681,183

 

 

$

3,746,786

 

 

 

12


Note 8. Debt Obligations

 

Growth Term Loan

Total amortization expense for warrant and original issuance discounts in connection with the growth capital term loans under the Loan and Security Agreement dated August 22, 2014 between the Company and Oxford Finance, LLC and Silicon Valley Bank (the “Growth Term Loan”) was $28,188 and $54,405 for the three months ended March 31, 2018 and 2017, respectively, and is included in interest expense in the accompanying condensed statements of operations. Deferred financing cost amortization expense relating to the Growth Term Loan was $2,982 and $5,593 for the three months ended March 31, 2018 and 2017, respectively, and is included in interest expense in the accompanying interim unaudited condensed statements of operations. The Company recorded $0 and $58,538 of discounts associated with the Growth Term Loan in the accompanying interim unaudited condensed balance sheets as of March 31, 2018 and December 31, 2017, respectively.

 

Extinguishment of Growth Term Loan upon MidCap Credit Facility Closing

In March 2018, the Company repaid all principal and interest amounts outstanding under the Growth Term Loan in an aggregate amount equal to approximately $4.3 million, including collateral agent legal fees and prepayment fees. The repayment was funded with net proceeds from the MidCap Credit Facility (see description of the MidCap Credit Facility below). As a result of the repayment, the Company recorded a loss on extinguishment of the Growth Term Loan of $105,064, including remaining unamortized discounts of $67,272 and prepayment and other Growth Term Loan lender fees in the accompanying interim unaudited condensed statements of operations for the three months ended March 31, 2018. All obligations under the Growth Term Loan have terminated.

 

MidCap Credit Facility

On March 26, 2018 (the “MidCap Closing Date”), the Company entered into a Credit and Security Agreement (Term Loan) (the “MidCap Term Loan”) and a Credit and Security Agreement (Revolving Loan) (the “MidCap Revolving Loan” and together with the MidCap Term Loan, the “MidCap Credit Facility”) with MidCap Financial Trust, as agent. MidCap Financial Trust subsequently assigned its rights and obligations as agent to MidCap Funding IV Trust.

The MidCap Term Loan provides a secured term loan facility in an aggregate principal amount of up to $20.0 million. The Company borrowed the first advance of $7.0 million (“MidCap Tranche 1”) on the MidCap Closing Date. Under the terms of the MidCap Term Loan, the second advance of $13.0 million (“MidCap Tranche 2”) will be available to the Company on or before September 30, 2019, subject to the Company’s satisfaction of certain conditions described in the MidCap Term Loan, including (a) the Company achieving the first commercial sale of an FDA-approved diagnostic assay utilizing next generation sequencing under its Governing Agreement with QML, and (b) delivery to MidCap of subordination documents in respect of the QNAH Convertible Note (or the satisfaction of alternative arrangements as provided in the MidCap Term Loan, as described below).

MidCap Tranche 1 was used to repay in full all outstanding amounts and fees due under the Growth Term Loan. The proceeds remaining from MidCap Tranche 1 and, if borrowed, the proceeds from MidCap Tranche 2, are expected to be used for working capital and general corporate purposes.

MidCap Tranche 1, and if borrowed MidCap Tranche 2, each bear interest at a floating rate equal to 7.25% per annum, plus the greater of (i) 1.25% or (ii) one-month LIBOR. Interest on each term loan advance is due and payable monthly in arrears and was calculated at a rate of 9.133% for interest accrued as of March 31, 2018. Principal on each term loan advance is payable in 36 equal monthly installments beginning April 1, 2020 until paid in full on March 1, 2023. Prepayments of the term loans under the MidCap Term Loan, in whole or in part, will be subject to early termination fees in an amount equal to 3.0% of principal prepaid if prepayment occurs on or prior to the first anniversary of the MidCap Closing Date, 2.0% of principal prepaid if prepayment occurs after the first anniversary of the MidCap Closing Date but on or prior to the second anniversary of the MidCap Closing Date, and 1.0% of principal prepaid if prepayment occurs after the second anniversary of the MidCap Closing Date and prior to or on the third anniversary of the MidCap Closing Date. In connection with execution of the MidCap Term Loan, the Company paid MidCap a $100,000 origination fee.

Upon termination of the MidCap Term Loan, the Company is required to pay an exit fee equal to 4.50% of the principal amount of all term loans advanced to the Company under the MidCap Term Loan.

The MidCap Term Loan requires that the Company deliver subordination documents with respect to the QNAH Convertible Note, or that the QNAH Convertible Note otherwise be converted or prepaid, on or before June 30, 2018. If neither of such events occurs by such date, the Company must deposit approximately $3.3 million into an escrow account by July 15, 2018. Such escrowed funds will be released to the Company upon subsequent delivery of the requisite subordination documents or conversion of the QNAH Convertible Note. If neither delivery of the subordination documents or conversion of the QNAH Convertible Note occurs, such funds will be applied by the escrow agent to repay in full the QNAH Convertible Note at maturity (or in connection with a

13


prepayment at the direction of the Company), subject to (i) the Company having drawn MidCap Tranche 2, (ii) the Company having unrestricted cash and cash equivalents held in a deposit or securities account subject to a control agreement in favor of the Agent in a minimum amount of $20.0 million and (iii) there being no default under the MidCap Credit Facility.

The MidCap Revolving Loan provides a secured revolving credit facility in an aggregate principal amount of up to $2.0 million. The Company may request an increase in the total commitments under the MidCap Revolving Loan by up to an additional $8.0 million, subject to agent and lender approval and the satisfaction of certain conditions. Availability of the revolving credit facility under the MidCap Revolving Loan will be based upon a borrowing base formula and periodic borrowing base certifications valuing certain of the Company’s accounts receivable and inventory, as reduced by certain reserves, if any. Further, initial availability of the revolving credit facility is conditioned upon completion of an initial borrowing base audit, and the establishment of certain lockbox arrangements by May 10, 2018. There were no amounts outstanding under the MidCap Revolving Loan as of March 31, 2018. The proceeds of any loans under the MidCap Revolving Loan may be used for working capital and general corporate purposes.

Loans under the MidCap Revolving Loan accrue interest at a floating rate equal to 4.25% per annum, plus the greater of (i) 1.25% or (ii) one-month LIBOR. Accrued interest on the revolving loans will be paid monthly and revolving loans may be borrowed, repaid and re-borrowed until March 1, 2023, when all outstanding amounts must be repaid. Subject to certain exceptions, termination or permanent reductions of the revolving loan commitment under the MidCap Revolving Loan will be subject to termination fees in an amount equal to 3.0% of the commitment amount terminated or reduced if such termination or reduction occurs on or prior to the first anniversary of the MidCap Closing Date, 2.0% of the commitment amount terminated or reduced if such termination or reduction occurs after the first anniversary of the MidCap Closing Date but on or prior to the second anniversary of the MidCap Closing Date, and 1.0% of the commitment amount terminated or reduced if such termination or reduction occurs after the second anniversary of the MidCap Closing Date and prior to or on the third anniversary of the MidCap Closing Date.

In connection with the MidCap Revolving Loan, the Company is required to pay customary fees, including an origination fee of 0.50% of the original commitment amount at closing (and an equivalent origination fee with respect to any increased commitments at the time of the applicable increase), a monthly unused line fee of 0.50% per annum based upon the average daily unused portion of the revolving credit facility and a monthly collateral management fee of 0.50% per annum based upon the average daily used portion of the revolving credit facility. The Company is also required to maintain a minimum drawn balance of not less 20% of availability under the revolving line. If the Company does not maintain such minimum drawn balance, it is required to pay monthly interest and fees as if an amount equal to 20% of availability had been drawn down under the revolving line.

The Company’s obligations under the MidCap Credit Facility are secured by a security interest in substantially all of its assets, excluding intellectual property (which is subject to a negative pledge). Additionally, the Company’s future subsidiaries, if any, may be required to become co-borrowers or guarantors under the MidCap Credit Facility.

The MidCap Credit Facility contains customary affirmative covenants and customary negative covenants limiting the Company’s ability and the ability of the Company’s subsidiaries, if any, to, among other things, dispose of assets, undergo a change in control, merge or consolidate, make acquisitions, incur debt, incur liens, pay dividends, repurchase stock and make investments, in each case subject to certain exceptions. Commencing with the calendar quarter ending on the later of (a) March 31, 2019 and (b) the last day of the calendar quarter in which MidCap Tranche 2 is funded, the Company must also comply with a financial covenant relating to trailing twelve-month minimum Net Revenue requirements (as defined in the MidCap Credit Facility), tested on a quarterly basis.

The MidCap Credit Facility also contains customary events of default relating to, among other things, payment defaults, breaches of covenants, a material adverse change, delisting of the Company’s common stock, bankruptcy and insolvency, cross defaults with certain material indebtedness and certain material contracts, judgments, and inaccuracies of representations and warranties. Upon an event of default, agent and the lenders may declare all or a portion of the Company’s outstanding obligations to be immediately due and payable and exercise other rights and remedies provided for under the agreement. During the existence of an event of default, interest on the obligations could be increased by 3.0%.

 

The Company granted the lender ten-year warrants to purchase 18,123 shares of the Company’s common stock at $7.73 per share as a result of Tranche 1. Upon drawdown of Tranche 2, the Company will issue additional ten-year warrants to purchase shares of the Company’s common stock in an aggregate amount equal to 2.0% of the amount drawn, divided by the exercise price per share for that tranche (defined as 1.5 times the volume-weighted average closing price of the Company’s common stock for the ten business days immediately preceding the business day before the issue date). The fair value of the warrants on the date of issuance was approximately $74,000, determined using the Black-Scholes option-pricing model, and was recorded as a discount to the MidCap Term Loan.

 

The Company recognized approximately $729,269 of debt discount associated with the MidCap Term Loan, resulting from fees and debt issuance costs, in the accompanying interim unaudited condensed balance sheets as of March 31, 2018. Amortization of the debt

14


discount associated with the MidCap Term Loan was approximately $2,701 for the three months ended March 31, 2018 and was included in interest expense in the accompanying interim unaudited condensed statements of operations. Costs incurred in connection with the issuance of the Midcap Revolving Loan of $79,197 and presented as MidCap revolving loan costs in the accompanying interim unaudited condensed balance sheets as of March 31, 2018. Amortization of deferred MidCap revolving loan costs was $223 for the three months ended March 31, 2018 and is included in interest expense in the accompanying interim unaudited condensed statements of operations.

 

Other Debt Obligations to Related Parties

Refer to Note 16 below for discussion of debt obligation to related parties.

 

 

Note 9. Revenue from Contracts with Customers

Revenue from contracts with customers is recognized when, or as, the Company satisfies its performance obligations by delivering the promised goods or service deliverables to the customers. A good or service deliverable is transferred to a customer when, or as, the customer obtains control of that good or service deliverable. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized by measuring the Company’s progress in satisfying the performance obligation in a manner that depicts the transfer of the goods or services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that the Company determines the customer obtains control over the promised good or service deliverable. The amount of revenue recognized reflects the consideration the Company expects to be entitled to in exchange for those promised goods or services (i.e., the “transaction price”). In determining the transaction price, the Company considers multiple factors, including the effects of variable consideration. Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. In determining when to include variable consideration in the transaction price, the Company considers the range of possible outcomes, the predictive value of its past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of the Company’s influence, such as the judgment and actions of third parties.

 

Product and Product-related Services Revenue

The Company had product and product-related services revenue consisting of revenue from the sale of instruments and consumables and the use of the HTG EdgeSeq proprietary technology to process samples and design custom RUO assays for the three months ended March 31, 2018 and 2017 as follows:

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Product revenue:

 

 

 

 

 

 

 

 

     Instrument

 

$

11,358

 

 

$

22,579

 

     Consumables

 

 

252,012

 

 

 

518,565

 

Total product revenue

 

 

263,370