HTG MOLECULAR DIAGNOSTICS, INC - Quarter Report: 2016 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2016

OR

Commission File Number: 000-37369

HTG Molecular Diagnostics, Inc.

(Exact Name of Registrant as Specified in its Charter)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

Table of Contents

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).

HTG Molecular Diagnostics, Inc.

Condensed Balance Sheets

See notes to the unaudited condensed financial statements.

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HTG Molecular Diagnostics, Inc.

Condensed Statements of Operations

(Unaudited)

See notes to the unaudited condensed financial statements.

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HTG Molecular Diagnostics, Inc.

Condensed Statements of Comprehensive Loss

(Unaudited)

See notes to the unaudited condensed financial statements.

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HTG Molecular Diagnostics, Inc.

Condensed Statement of Changes in Stockholders’ Equity

(Unaudited)

See notes to the unaudited condensed financial statements.

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HTG Molecular Diagnostics, Inc.

Condensed Statements of Cash Flows

(Unaudited)

See notes to the unaudited condensed financial statements.

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HTG Molecular Diagnostics, Inc.

Notes to Unaudited Condensed Financial Statements

Note 1. Description of Business

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

The Company operates in one segment and its customers are primarily located in the United States. For the three months ended March 31, 2016 and 2015, approximately 11% and 4%, respectively, of the company’s revenue was generated from sales to customers located outside of the United States.

Note 2. Basis of Presentation

Basis of Presentation

The accompanying interim unaudited condensed financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and reflect the accounts of the Company as of March 31, 2016.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America (“GAAP”) for complete financial statements. The accompanying interim unaudited, condensed financial statements reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the Company’s financial position and the results of its operations and cash flows, as of and for the periods presented.  The unaudited condensed balance sheet at December 31, 2015 has been derived from the audited financial statements at that date but does not include all of the information and disclosures required by GAAP for annual financial statements. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the fiscal year ended December 31, 2015, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2016.

Reclassifications

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

Going Concern

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

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Change in Accounting Principle

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

Use of Estimates

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

Concentration Risks

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

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

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

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

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

New Accounting Pronouncements

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

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The revised revenue standard is effective for public entities for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on its financial statements and has not yet determined the method by which it will adopt the standard.

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

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

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

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

Note 3. Inventory

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

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

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

Note 4. Fair Value Instruments

The carrying value of financial instruments classified as current assets and current liabilities approximate fair value due to their liquidity and short-term nature. Investments that are classified as available-for-sale are recorded at fair value, which was determined using quoted market prices, broker dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The Company’s portfolio of available-for-sale securities comprises U.S. Treasuries, U.S. government sponsored agency obligations and high credit quality corporate debt securities classified as available-for-sale securities.

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

There are no other financial instruments subject to fair value measurement on a recurring basis. Transfers to/from Levels 1, 2 and 3 are recognized at the end of the reporting period. There were no transfers between levels for the three months ended March 31, 2016 and 2015.  

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

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

Note 5. Available for Sale Securities

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

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

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

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

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

Note 6. Property and Equipment

Property and equipment, net, consists of the following:

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

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

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

Note 7. Accrued Liabilities

Accrued liabilities consist of the following:

Employee compensation and benefits liability decreased as a result of the payment of the fiscal year 2015 annual performance-based bonuses during the first quarter 2016. Non-officer bonuses were paid out in cash while officer bonuses were paid in the form of fully vested shares of common stock granted under the 2014 Plan (Note 11).

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Note 8. Debt Obligations

Growth Term Loan

In August 2014, the Company entered into a Loan and Security Agreement (the “Growth Term Loan”) with a syndicate of two lending institutions. The first tranche of the Growth Term Loan (“Growth Term Loan A”) of $11.0 million was funded at the August 2014 closing. A second tranche of $5.0 million (“Growth Term Loan B”) was initially available to be drawn until July 4, 2015. In August 2015, the Company and its lenders amended the Growth Term Loan to extend the availability of Growth Term Loan B until March 31, 2016. The Company borrowed the remaining $5.0 million availability under Growth Term Loan B in March 2016. The amendment also extended the monthly interest-only payment period until April 1, 2016. Following the interest-only payment period, equal monthly payments of principal and interest amortized over the remaining term of the loan will be due for all funds drawn under Growth Term Loan A and B. Growth Term Loan A and B bear interest at the fixed rates of 8.5% and 8.75%, respectively and mature in September 2018. Should a prepayment be made, Company will be obligated to pay a prepayment fee equal to (i) 3% of the principal amount prepaid if the growth term loan is prepaid on or before the first anniversary of the August 2015 amendment, (ii) 2% of the principal amount repaid if the growth term loan is prepaid after the first anniversary but on or prior to the second anniversary of the August 2015 amendment and (iii) 1% of the principal amount repaid if the growth term loan is repaid after the second anniversary of the August 2015 amendment and prior to maturity. The amendment also increased the final payment percentage to 4.75%. The Growth Term Loan requires the Company to maintain compliance with specific reporting covenants and does not require financial covenants. The Growth Term Loan is secured by a lien covering substantially all of the Company’s assets, excluding patents, trademarks and other intellectual property rights (except for rights to payment related to the sale, licensing or disposition of such intellectual property rights) and certain other specified property.  

The Company received the Growth Term Loan A proceeds net of a $0.3 million original issue discount. The Company also recorded a discount for the issuance of warrants with Growth Term Loan A. The original issuance discount and warrant discount are being amortized, using the effective interest method, over the term of the Growth Term Loan A. Amortization expense was $51,908 and $45,397 for the three months ended March 31, 2016 and 2015, respectively, and is included in interest expense in the accompanying condensed statements of operations. In addition, the Company has recorded approximately $44,947 and $52,377 of deferred financing costs net of the related debt in the accompanying condensed balance sheets as of March 31, 2016 and December 31, 2015, respectively, in accordance with ASC 2015-03, which was adopted on January 1, 2016. Deferred financing cost amortization expense was $7,431 and $3,508 for the three months ended March 31, 2016 and 2015, respectively, and is included in interest expense in the accompanying condensed statements of operations.

The final fee premium relating to Growth Term Loan B of $237,500 will be amortized to interest expense, using the effective interest method, over the remaining Term of Growth Term Loan B beginning in April 2016. The Company issued 45,307 common stock warrants at $2.759 per share and 5,317 common stock warrants at $23.51 per share in accordance with the Growth Term Loan B agreement. The fair value of the discount of $122,460, was calculated using the Black-Scholes option pricing model at March 31, 2016 using the following key inputs:

The Company analyzed these outstanding Growth Term Loan B warrants to determine whether they meet the definition of a derivative and, if so, whether they also meet the scope exception that contracts issued or held by the reporting entity that are both (1) indexed to its own stock and (2) classified in stockholders’ equity shall not be considered to be derivative instruments. Determining whether an instrument (or embedded feature) is indexed to an entity's own stock apply to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by ASC 815 and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. The Company has concluded that these warrants should be equity-classified since they contain no provisions which would require the Company to account for the warrants as a derivative liability. The warrant discount is being amortized to interest expense, using the effective interest method, over the term of Growth Term Loan B beginning in April 2016.

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The principal repayments due under the term loan as of March 31, 2016, are as follows:

Convertible Notes

On December 30, 2014, the Company entered into two, separate subordinated convertible promissory note agreements (“the Note Agreements”). The Note Agreements provided that upon a qualified equity financing, pursuant to which the Company raised either through a qualified initial public offering (“IPO”) of common stock or through a qualifying private placement of convertible preferred stock, gross offering proceeds of at least $20,000,000 from the sale of shares to new investors, the outstanding principal amount and all accrued but unpaid interest under convertible notes issued pursuant to the Note Agreements would automatically convert into shares of common stock or preferred stock, whichever was sold in the offering. The number of shares into which the convertible notes were convertible was equal to the outstanding principal and accrued interest divided by the price per share paid by investors purchasing such newly issued equity securities.

Draws under the first Note Agreement in February, March and April 2015 totaled $4.5 million. There were no draws under the second Note Agreement prior to the Company’s IPO in May 2015. Amortization of the Note Agreement discount and deferred financing fees associated with the Note Agreements was $0 and $32,006 for the three months ended March 31, 2016 and 2015, respectively, and was included in interest expense in the accompanying condensed statements of operations. The remaining unamortized discount and deferred financing fees were written off with the conversion of the convertible notes and accrued interest into 324,591 shares of common stock at a conversion price of $14.00 per share at the IPO.  

Note 9. Other Agreements

NuvoGen Obligation

The Company entered into an asset purchase agreement in 2001, as amended, with NuvoGen Research, LLC (“NuvoGen”) to acquire certain intellectual property from NuvoGen. The Company accounted for the transaction as an asset acquisition. However, as the intellectual property was determined to not have an alternative future use, the upfront consideration was expensed. In exchange for the intellectual property, the Company initially paid NuvoGen 5,587 shares of the Company’s common stock, fixed payments of $740,000 over the first two years of the agreement and agreed to pay NuvoGen 6% of its yearly revenue, which would be applied to any fixed payments, until the total aggregate cash compensation paid to NuvoGen under the agreement equaled $15,000,000. Certain terms of the agreement were amended in November 2003, September 2004, November 2012 and February 2014. Pursuant to the latest amendment to the agreement, through 2017, the Company is only required to pay a yearly fixed fee, in quarterly installments, to NuvoGen in the range of $543,750 to $800,000, and may defer any accrued revenue-based payments. Beginning in 2018, we are obligated to pay the greater of $400,000 or 6% of the Company’s applicable annual revenues, plus amounts, if any, deferred in the 2016 and 2017 periods by which 6% of revenue exceeds the applicable fixed fee plus 5% interest on such deferred amounts until the obligation is paid in full. The obligation is currently non-interest bearing and was, but is no longer, secured by certain patents and trademarks.

The Company recorded the obligation at the estimated present value of the future payments using a discount rate of 2.5%, the Company’s estimate of its effective borrowing rate for similar obligations. Unamortized debt discount was $231,539 and $283,621 at March 31, 2016 and December 31, 2015, respectively. Discount accreted during the three months ended March 31, 2016 and 2015 was $52,082 and $125,566, respectively.  

Pursuant to the closing of the Growth Term Loan in August 2014 (Note 8), the Company agreed to accelerate certain minimum payments pursuant to the asset purchase agreement and NuvoGen agreed to terminate its security interest in the originally pledged patents and trademarks. Remaining minimum payments that were otherwise due for 2014, 2015 and the first quarter of 2016, amounting to $868,750 were paid in advance. No further payment is due under the asset purchase agreement until the second quarter of 2016. The acceleration of payments did not significantly change the minimum cash flows and therefore had no significant accounting effect.

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The remaining payments due to NuvoGen at March 31, 2016, are, minimally, as follows, although actual payments could be significantly more than provided in the table in the out years to the extent that 6% of revenue exceeds $400,000:

Illumina, Inc. Agreement

In October 2014, the Company entered into a development and component supply agreement with Illumina, Inc. for the development and worldwide commercialization by the Company of up to two complete diagnostic gene expression profiling tests for with Illumina’s diagnostic instruments, using components supplied by Illumina. The Company refers to these diagnostic gene expression profiling tests as IVD test kits. The IVD test kits may be used in two discrete testing fields chosen by the Company, one or both of which may relate to oncology for breast, lung, lymphoma or melanoma tumors, and up to one of which may relate to transplant, chronic obstructive pulmonary disease, or immunology/autoimmunity. The Company provided notice to Illumina of its first testing selection during the quarter ended March 31, 2015. The Company must provide notice to Illumina of its second selected field, if any, by October 2016.

Following the Company’s selection of the testing field for each IVD test kit, the Company and Illumina have agreed to negotiate a development plan for the development and regulatory approval of the applicable IVD test kit. Illumina has agreed to provide development and regulatory support as part of the plan. Upon mutual agreement of the first development plan in the fourth quarter of 2015, the Company paid Illumina a $100,000 fee. The Company is also required to pay Illumina up to $1.0 million in the aggregate upon achievement of specified regulatory milestones relating to the IVD test kits, though no additional milestones have been reached through March 31, 2016. In addition, the Company has agreed to pay Illumina a single digit percentage royalty on net sales of any IVD test kits that the Company commercializes pursuant to the agreement. Ongoing research and development costs for these programs have been expensed as incurred.

The agreement will expire on the earlier of October 2019 or the date which the last to expire development plan under the agreement is completed. The Company may terminate the agreement at any time upon 90 days’ written notice and may terminate any development plan under the agreement upon 30 days’ prior written notice. Illumina may terminate the agreement upon 30 days’ prior written notice if the Company undergoes certain changes of control or immediately if the Company fails to select a testing field for an IVD test kit within 24 months following the date of the agreement. Either party may terminate the agreement upon the other party’s material breach of the agreement that remains uncured for 30 days, or upon the other party’s bankruptcy

Invetech PTY Ltd. Agreement

In September 2015, the Company entered into a development and professional services agreement with Invetech PTY Ltd., for the conduct of research and development of a next generation automated sample library preparation instrument. This instrument is to be a low volume throughput version of the Company’s existing HTG EdgeSeq system technology and is being referred to as Project JANUS during development.  

The agreement requires the execution of a development plan for each stage of the project. Upon full execution and delivery of each development plan, the Company will pay Invetech development fee installments for that development plan. Stage 0 was completed during the second half of 2015 and Stage 1.1 was initiated during the first quarter 2016, resulting in $704,300 of research and development expense. This amount is included in the condensed statements of operations for the three months ended March 31, 2016.

The agreement will remain in effect through completion of all tasks and our acceptance of all deliverables under each development plan unless terminated earlier as provided for in the agreement.

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Life Technologies Corporation Agreement

In March 2016, the Company entered into an Authorization, Supply and Regulatory Authorization Agreement with Life Technologies Corporation (“LTC”), a wholly owned subsidiary of Thermo Fisher Scientific, Inc., for the development and worldwide commercialization by the Company of up to five RNA-based next generation sequencing panels (“HTG Assays”) for use with LTC’s sequencing instruments and components supplied to end-users by LTC.

Pursuant to the agreement, the Company has agreed to obtain its requirements for certain components to be used in the development of HTG Assays from LTC. As such, in March 2016, the Company purchased approximately $250,000 of LTC products and equipment. LTC has agreed to provide support in the Company’s efforts to obtain regulatory approval of the HTG Assays.  The Company is required to pay LTC a milestone payment in the mid-six figure dollar range upon certain regulatory achievements for each HTG Assay. In addition, the Company has agreed to pay LTC a single digit percentage royalty on net sales of any HTG Assays that the Company commercializes pursuant to the agreement.

Absent early termination, the initial term of the agreement will expire in March 2021 and thereafter will automatically renew for additional two year terms for as long as the Company continues to develop or sell HTG Assays. Either party may terminate the agreement by written notice delivered to the other party at least 60 days prior to the expiration of any then-current term. Either party may terminate the agreement (a) upon the other party’s material breach that remains uncured for 30 days, (b) upon the other party’s bankruptcy or (c) upon written notice in the event the party providing notice reasonably determines that continued performance under the agreement would violate any regulatory law, or any other applicable law or regulation or U.S. Food and Drug Administration (“FDA”) guidance.  

Note 10. Net Loss Per Share

Net loss per share attributable to common stockholders is computed by dividing the net loss allocable to common stockholders by the weighted-average number of shares of common stock or common stock equivalents outstanding. Outstanding stock options, warrants and convertible preferred stock have not been included in the calculation of diluted net loss per share attributable to common stockholders because to do so would be anti-dilutive. Accordingly, the numerator and the denominator used in computing both basic and diluted net loss per share for each period are the same. The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net loss per share for the periods presented:

The following outstanding options, warrants and convertible preferred stock were excluded from the computation of diluted net loss per share for the periods presented because their effect would have been anti-dilutive:

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Note 11. Stockholders’ Equity

Common Stock

The Company amended its certificate of incorporation on May 11, 2015, to decrease the number of authorized shares from 600,000,000 to 200,000,000 shares. The 200,000,000 authorized shares of common stock have a par value of $0.001 per share. As of March 31, 2016, 7,006,317 shares were issued. As of December 31, 2015, 6,845,638 shares were issued.  

Each share of common stock is entitled to one vote. All shares of common stock rank equally as to voting and all other matters that the holders are entitled to vote on. The shares of common stock have no preemptive or conversion rights, no redemption or sinking fund provisions, no liability for further call or assessment, and are not entitled to cumulative voting rights.  

Preferred Stock

Pursuant to the Company’s certificate of incorporation the Company has been authorized to issue 10,000,000 shares of preferred stock, each having a par value of $0.001. The preferred stock may be issued from time to time in one or more series with the authorization of the Company’s Board of Directors. The Board of Directors have the ability to determine voting power for each series issued, as well as designation, preferences, and relative, participating, optional or other rights and such qualifications, limitations or restrictions thereof. No shares of preferred stock have been issued to date.    

Stock-based Compensation

On May 11, 2015, 940,112 shares were reserved for issuance under the Company’s 2014 Equity Incentive Plan (the “2014 Plan”), including 14,006 shares from the 2011 Plan. On March 24, 2016, 273,769 additional shares were registered and reserved for issuance under the Company’s 2014 Equity Incentive Plan. As of March 31, 2016, there were 588,507 shares available for issuance under the 2014 Plan.  

As of March 31, 2016, options to purchase 1,045,060 shares of common stock were outstanding, including 477,472 options that were fully vested. As of March 31, 2016, there was total unrecognized compensation expense of $1,103,971 related to unvested stock options, which the Company expects to recognize over a weighted-average period of approximately 2.97 years.

A summary of the Plans’ stock option activity is as follows:

The Company issued 27,500 restricted stock units (“RSUs”) in the year ended December 31, 2015 at a weighted average grant date fair value of $5.45. The RSUs vested 100% on March 31, 2016. Compensation expense of $62,652 was recognized relating to the RSUs for the three months ended March 31, 2016. There is no unrecognized compensation expense related to RSUs.

The stock-based compensation expense recorded in the condensed statements of operations for the periods ended March 31, 2016 and 2015 were $170,048 and $76,548, respectively.

2014 Employee Stock Purchase Plan

In April 2015, the company’s stockholders approved the 2014 Employee Stock Purchase Plan (“ESPP”), which became effective in May 2015. Initially, the ESPP authorized the issuance of up to 110,820 shares of common stock pursuant to the purchase rights granted to the Company’s employees or to employees of the Company’s designated affiliates. The number of shares of common stock reserved for issuance automatically increased in accordance with the plan by 68,442 on January 1, 2016. The ESPP enables participants to contribute up to 15% of such participant’s eligible compensation during a defined period (not to exceed 27 months) to

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purchase common stock of the Company. The purchase price of common stock under the ESPP will be the lesser of:  (i) 85% of the fair market value of the Company’s common stock on the first date of an offering or (2) 85% of the fair market value of a share of the Company’s common stock on the date of purchase. No shares of stock have been purchased under the plan since its initiation in January 2016. The first purchase date will be June 10, 2016.

Note 12. Commitments and Contingencies

Legal Matters

The Company’s industry is characterized by frequent claims and litigation, including claims regarding intellectual property and product liability. As a result, the Company may be subject to various legal proceedings from time to time. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors. Any current litigation is considered immaterial and counter claims have been assessed as remote.

Severance Agreements and Retention Plans

The Company has entered into employment agreements or other arrangements with certain executive officers which provide salary continuation payments, bonuses and, in certain instances, the acceleration of the vesting of certain equity awards to individuals in the event that the individual is terminated other than for cause, as defined in the applicable agreements or arrangements.

Indemnification Agreements

In the course of operating our business, the Company has entered into, and continues to enter into, separate indemnification agreements with the Company’s directors and executive officers, in addition to the indemnification provided for in the Company’s amended and restated bylaws. These agreements may require the Company to indemnify its directors and executive officers for certain expenses incurred by a director executive officer in any action or proceeding arising out of their services as one of the Company’s directors or executive officers.

Leases

The Company leases office and laboratory space under two non-cancelable operating leases in Tucson, Arizona. The Company amended its existing facilities leases in August 2015 to extend the terms for approximately five years and to undergo leasehold improvements to expand and improve its existing research, development, operations and administration office facilities. The lease amendment includes an increase of $804,000 in total monthly rent over the remaining term of the leases. The landlord constructed certain leasehold improvements as an incentive to extend the leases. The total cost of the improvements constructed by the landlord of $710,000 was capitalized when the construction was completed in February 2016, to be depreciated over the remaining term of the lease agreement. The incentive of $710,000 is recognized as deferred rent within other current liabilities and other liabilities on the condensed balance sheets, and will be accreted at $11,833 per month over the lease term as a reduction of rent expense.  

The Company entered into a construction contract in the third quarter 2015 for the expansion and improvement of its laboratory and office spaces, for which the Company incurred approximately $540,000 through the first quarter of 2016. Remaining commitments under this commitment are approximately $250,000.    

As a result of the amendments, the Company’s annual minimum real estate lease payments before common area maintenance charges, which commenced in February 2016 and continue through 2021, are as follows:

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As of March 31, 2016, the Company also has capital lease commitments consisting of $156,000 of leases for computer equipment varying in length from 36 to 48 months and an equipment financing arrangement of approximately $51,000 with a vendor that expires in December 2017 that have not been included in the minimum lease payments schedule above.  

Merck Non-Exclusive License Agreement

In June 2012, the Company entered into a non-exclusive license agreement with Merck Sharp & Dohme Co. (“Merck”) whereby the Company agreed to sublicense certain intellectual property related to breast cancer biomarkers with the intent to develop, manufacture and commercialize a diagnostic test utilizing this technology. The Company agreed to pay Merck certain contingent milestone payments between $50,000 and $1,000,000 and future royalties of 3%-6% of sales derived from such products developed that utilize the licensed technology. No amounts have been accrued or paid under this agreement as the Company has not achieved any of the milestone targets or developed any products that utilize the licensed technology.  

Product Warranty

The following is a summary of the Company’s general product warranty liability for the three months ended March 31, 2016:  

Prior to September 30, 2015, no warranty reserves were recorded by the Company.  

Note 13. Income Taxes

The Company provides for income taxes based upon management’s estimate of taxable income or loss for each respective period. The Company recognizes an asset or liability for the deferred tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. These temporary differences would result in deductible or taxable amounts in future years, when the reported amounts of the assets are recovered or liabilities are settled, respectively.

In each period since inception, the Company has recorded a valuation allowance for the full amount of its net deferred tax assets, as the realization of the net deferred tax assets is uncertain. As a result, the Company has not recorded any federal or state income tax benefit in the statements of operations; however, state income tax expense has been recorded for state minimum taxes.

The Company periodically reviews its filing positions for all open tax years in all U.S. Federal, state and international jurisdictions where the Company is or might be required to file tax returns or other required reports.

The Company applies a two-step approach to recognizing and measuring uncertain tax positions. The Company evaluates the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation process, if any. The term “more likely than not” means a likelihood of more than 50 percent. Otherwise, the Company may not recognize any of the potential tax benefit associated with the position. The Company recognizes a benefit for a tax position that meets the “more likely than not” criterion at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon its effective resolution. Unrecognized tax benefits involve management’s judgment regarding the likelihood of the benefit being sustained. The final resolution of uncertain tax positions could result in adjustments to recorded amounts and may affect the Company’s results of operations, financial position and cash flows. The Company has not identified any uncertain tax positions at March 31, 2016 or December 31, 2015.

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties at March 31, 2016 and December 31, 2015, respectively, and has not recognized interest or penalties of significance during the three months ended March 31, 2016 and 2015, respectively, since there are no material unrecognized tax benefits. Management believes no material change to the amount of unrecognized tax benefits will occur within in the next 12 months.

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The Company has established a valuation allowance against the entire tax asset. As a result, the Company does not recognize any tax benefit until it is in a taxpaying position and, therefore, more likely to realize the tax benefit. Past and subsequent equity offerings by the Company, and other transactions that have an impact on the Company’s ownership structure, may trigger Sections 382 and 383 provisions of the Internal Revenue Code on special limitations on net operating losses and credits following ownership change. Such limitations may limit or eliminate the potential future tax benefit to be realized by the Company from its accumulated NOLs and research and development credits.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our financial statements and notes thereto for the year ended December 31, 2015 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 24, 2016. This discussion and analysis contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward looking statements include, but are not limited to, statements about:

In some cases, you can identify these statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expects,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of those terms, and similar expressions. These forward-looking statements reflect our management’s beliefs and views with respect to future events and are based on estimates and assumptions as of the date of this filing and are subject to risks and uncertainties. We discuss many of these risks in greater detail in Part II, Item 1A - “Risk Factors” and elsewhere in this filing. You should carefully read the “Risk Factors” section of this filing to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. These statements, like all statements in this report, speak only as of their date, and except as required by law, we assume no obligation to update these forward-looking statements publically, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we make. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

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Overview

We are a commercial stage company that develops and markets products based on a novel technology platform to facilitate the routine use of complex molecular profiling. Our HTG Edge and HTG EdgeSeq platforms automate sample processing and can quickly, robustly and simultaneously profile hundreds or thousands of molecular targets from samples a fraction of the size required by prevailing technologies. Our objective is to establish the HTG Edge and HTG EdgeSeq platforms as standards in molecular profiling and make this capability accessible to all molecular labs from research to the clinic. We believe that our target customers desire high quality molecular profiling information in a multiplexed panel format from increasingly smaller and less invasive samples, with the ability to collect such information locally to minimize turnaround time and cost.

Our HTG Edge system is capable of running both our original, plate-based chemistry, which quantifies RNA using our plate reader included with the system, and our HTG EdgeSeq chemistry, which is detected using NGS instrumentation provided by the end user. We also have the flexibility to provide the HTG Edge instrument without our plate reader or a dedicated HTG EdgeSeq system for those customers whose focus is NGS readout of our HTG EdgeSeq chemistry. We plan to launch a new version of our HTG EdgeSeq system in 2017 that will target the low-throughput lab market. This program, referred to as “Project JANUS” for development, is expected to increase our addressable market by enabling efficient molecular profiling of smaller quantity batches of samples.  

Our innovative platforms and menu of molecular profiling panels are being utilized by a wide range of customers including biopharmaceutical companies, academic institutions and molecular labs to simultaneously analyze a comprehensive set of molecular information from valuable clinical samples and substantially improve the lab’s workflow efficiency. We currently market several proprietary molecular profiling panels that address the needs of customers in high impact areas of translational research and biopharmaceutical biomarker and companion diagnostics. In addition, we have a focused development pipeline that includes planned panels for translational research, drug development and molecular diagnostics. Our product strategy is to build complete profiling panels of established and emerging molecular targets for broader and disease-specific approaches.

We have incurred significant losses since our inception, and we have never been profitable. We incurred net losses of $7.0 million and $4.1 million for the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, we had an accumulated deficit of $96.6 million and we had available cash and cash equivalents totaling approximately $4.9 million and investments in highly liquid corporate and government debt securities totaling $27.9 million.  

Recent Developments

In March 2016, we entered into a long-term agreement with Life Technologies Corporation, a wholly owned subsidiary of Thermo Fisher Scientific, or Thermo Fisher, under which we will have the right to develop a number of in-vitro diagnostic (“IVD”) tests for use with Thermo Fisher’s next-generation sequencing Ion PGM Dx System, which provides important options for our planned diagnostic menu.  

To complement our direct sales and support approach internationally, in the first quarter of 2016, we entered into distribution agreements with Durviz s.l. Parque Tecnologico de Valencia covering Spain and Portugal and Gamidor Diagnostics covering Israel.

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Results of Operations

Comparison of the Three Months Ended March 31, 2016 and 2015

Revenue

We generate revenue from the sale of our HTG Edge and HTG EdgeSeq platforms, including our HTG Edge and HTG EdgeSeq systems, our proprietary consumables and related services, such as sample processing for pharmaceutical customers. Consumables consist primarily of our molecular profiling panels, which we refer to as assays and test menu. Total revenue for the three months ended March 31, 2016 decreased by 16% to $0.9 million compared to total revenue of $1.0 million for the three months ended March 31, 2015. Excluding our 2015 non-recurring grant revenue, our combined product and service revenue increased $76,000 or 9.6% for the first quarter 2016 compared to the same period in 2015.  For the first quarter 2016 overall, we experienced slower adoption of our instruments in the academic market, offset by higher revenues from service for biopharmaceutical customers, discussed further below.  

Product revenue

Product revenue includes revenue from the sale of instruments and consumables. Total product revenue for the three months ended March 31, 2016 was $0.6 million compared to $0.7 million for the three months ended March 31, 2015. Instrument revenue for the three months ended March 31, 2016 was $80,000 compared with $200,000 for the three months ended March 31, 2015 as one additional instrument was sold in 2015 than in 2016. Consumables revenue was nearly equivalent at $0.5 million for the three months ended March 31, 2016 and 2015. We were late to release our improved miRNA product, which delayed the placement of and conversion of instruments being purchased or evaluated in concert with our miRNA product and slowed miRNA consumable sales in the first quarter 2016 as compared to the first quarter 2015. We expect completion of the improved miRNA product and the recent expansion of our sales and marketing staff, together with prioritization of customer training and support, will accelerate adoption of our products in the coming periods. For the remainder of 2016, we expect our product revenue to increase in both absolute dollars and as a percentage of total revenue primarily as a result of an increasing installed base and the sale of consumables to this installed base.  

Service revenue

Service revenue, consisting of sample processing and custom panel design, primarily for biopharmaceutical customers increased to $265,000 for the three months ended March 31, 2016, compared to $62,000 for the three months ended March 31, 2015. Although we strategically shifted our primary focus away from our former service business model encompassing custom assay design services

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and sample processing, our recent increase to service revenue reflects our success working with biopharmaceutical collaborations. The resulting service revenue is the result of biopharmaceutical companies who have chosen the HTG EdgeSeq system for use in their drug development programs. These biopharmaceutical service revenues have and are expected to yield gross margins that exceed our instrument but are below our consumable product gross margins. For the remainder of 2016, we expect our service revenue to increase in both absolute dollars and as a percentage of total revenue compared to our 2015 service revenue primarily as a result of increased service volumes with biopharmaceutical customers.

Other revenue

Other revenue was $0 and $0.2 million for the three months ended March 31, 2016 and 2015. Other revenue consisted of grant funding provided by the U.S. National Institute of Health, or NIH, for a Phase 2 grant that was completed in June 2015.  

Cost of revenue

Cost of revenue decreased by $51,000, or 6%, in the three months ended March 31, 2016 compared with the three months ended March 31, 2015. Cost of revenue increased as a percentage of total revenue year over year due primarily to fixed manufacturing costs. During the quarter ended March 31, 2016, we completed facility improvements creating 5,000 square feet of dedicated manufacturing and operations space, which has allowed us to begin manufacturing our instruments and consumables in our Tucson facilities, versus historical manufacturing outsourcing. These improvements have resulted in an increase to our fixed operating costs; however, we expect these improvements will eventually result in decreases to our cost of production on a per unit and overall basis. Cost of revenue included $0.5 million and $0.4 million in largely fixed manufacturing costs for the three months ended March 31, 2016 and 2015, respectively. As our future revenues increase, we do not expect these fixed cost components to increase on a linear basis and expect these costs to decrease as a percentage of our revenue.

Research and development expenses

Research and development expenses were $2.0 million for the three months ended March 31, 2016 compared to $0.7 million for the three months ended March 31, 2015. Increases in research and development expenses in 2016 continue to be driven, as anticipated, by research and development headcount growth in support of our focus on next-generation platform and test panel expansion programs. Specifically, development fee installments of $0.7 million for the three months ended March 31, 2016 associated with our Project JANUS instrument program accounted for the largest portion of this increase year over year. We expect our research and development expenses to remain at the level incurred in the first quarter 2016, or increase, through the duration of the development of our next generation platform program and the FDA’s approval of our first in vitro diagnostic panel.  

Selling, general and administrative expenses

Selling, general and administrative expenses increased by $1.3 million, or 36%, in the three months ended March 31, 2016 compared with the three months ended March 31, 2015. The increase was driven by higher sales and marketing costs, primarily related to the expansion of commercial sales activities for our profiling systems. In addition, our general and administrative costs increased by $0.6 million, primarily due to increases in payroll costs, professional fees and insurance premiums, primarily for insurance coverage of our directors and officers. The increase in professional fees is related to financial audits, legal and consulting fees, all related to being a public company. We anticipate that these selling, general and administrative expenses will continue to increase as we expand the commercialization of our products and services both domestically and abroad.  

Gain from change in stock warrant valuation

Gain from the change in stock warrant valuation for the three months ended March 31, 2015 was a result of a decrease in the value of our preferred stock warrants during that period, primarily attributable to the proximity to and increased likelihood assessed of a successful IPO at that time. There was no gain or loss from change in stock warrant valuation for the three months ended March 31, 2016, as all remaining preferred stock warrants converted to common stock warrants at the time of our IPO.

Interest expense

Interest expense decreased by $87,000 for the three months ended March 31, 2016 as compared with the three months ended March 31, 2015. The decrease related primarily to the accretion of interest and financing cost related to the convertible notes financing in the three months ended March 31, 2015. There were no convertible notes outstanding and no related interest expense for the three months ended March 31, 2016.

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Cash Flows for the Three Months Ended March 31, 2016 and 2015

The following table summarizes the primary sources and uses of cash for each of the periods presented:

Operating Activities

Net cash used in operating activities for the three months ended March 31, 2016 was $6.1 million and reflected (i) the net loss of $7.0 million, (ii) net non-cash items of $0.7 million, consisting primarily depreciation and amortization of $0.4 million, amortization of the discount on the NuvoGen obligation and of the discount, final payment premium and deferred financing costs on the growth term loan of $0.1 million, and share-based compensation of $0.2 million and (iii) a net cash inflow from changes in balances of operating assets and liabilities of $0.2 million, consisting primarily of increase in accounts payable due to the investment in capital assets for the improvements to our manufacturing and operations facilities though the first quarter of 2016.  

Net cash used in operating activities for the three months ended March 31, 2015 was $4.4 million and reflected (i) the net loss of $4.1 million, (ii) net non-cash items of $0.1 million, consisting primarily of depreciation and amortization of $0.2 million, amortization of the discount on the Nuvogen obligation of $0.1 million and a decrease in warrant valuation of $0.4 million and (iii) a net cash outflow from changes in balances of operating assets and liabilities of $0.5 million. The significant items comprising the changes in balances of operating assets and liabilities were an increase of $0.4 million in inventory and an increase in accrued liabilities and accrued interest of $0.1 million due to increase costs incurred as we prepared to become a public company and the issuance of convertible notes in the first quarter of 2015.

Investing Activities

Net cash provided by investing activities of $2.8 million for the three months ended March 31, 2016 was comprised primarily of maturities of $3.0 million of available-for-sale securities during the period. In the first quarter of 2015, our investing activities consisted primarily of the purchase of laboratory and office equipment.

Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2016 consisted primarily of $5.0 million in proceeds from the draw of our growth term loan B availability in March 2016.  

Net cash provided by financing activities for the three months ended March 31, 2015 included $3.0 million in proceeds from convertible notes, partially offset by deferred financing costs incurred in the period of $0.3 million.

Liquidity and Capital Resources

Since our inception, our operations have primarily been financed through the issuance of our common stock, redeemable convertible preferred stock, the incurrence of debt and cash received from product sales, services revenue and other income. Through March 31, 2016, we had received net proceeds of $52.9 million from the issuances of preferred stock, including preferred stock issued on conversion of promissory notes, $45.4 million of net proceeds from the issuance of our common stock, $0.8 million in proceeds from a prior term loan, approximately $7.7 million in grants, $15.6 million from our growth term loan (net of $0.4 million original issue discount), $4.5 million from convertible note issuances and $32.2 million from service and product revenue. As of March 31, 2016, we had $32.7 million in cash, cash equivalents and short-term available-for-sale investments and $25.0 million of debt outstanding on our growth term loan payable, NuvoGen obligation and capital lease obligations. Amounts due on the convertible notes as well as the related accrued interest were automatically converted into 324,591 shares of our common stock in connection with the initial closing of our IPO in May 2015.  

We have had recurring operating losses and negative cash flows from operations since inception, and we have an accumulated deficit of approximately $96.6 million as of March 31, 2016.

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On May 11, 2015, we completed the initial closing of our IPO, where we sold 3,570,000 shares of our common stock at a price of $14.00 per share, which excluded the underwriters’ exercise of their over-allotment option, available for thirty days after May 5, 2015. We received additional net proceeds of approximately $1.3 million with the sale of 90,076 additional shares of our common stock at $14.00 per share pursuant to the partial exercise by our underwriters of their over-allotment option. As a result of our IPO, we raised approximately $45.4 million in net proceeds after deducting underwriting discounts and commissions of $3.6 million and estimated offering expenses of $2.3 million.

In August 2014, we entered into an asset-secured growth capital term loan with Oxford Finance, LLC and Silicon Valley Bank. We borrowed the first tranche of the term loan in the amount of $11.0 million in August 2014 and the second tranche of the term loan in the amount of $5.0 million in March 2016. The first and second tranches of the term loan accrue interest annually at 8.5% and 8.75%, respectively and mature on September 1, 2018. The term loan was payable in monthly interest-only payments through March 31, 2016, and requires equal monthly payments of principal and interest amortized for the remaining term of the loan. Payments under the loan could result in a significant reduction of our working capital.      

Funding Requirements

We continued to use cash in our operating activities during the three months ended March 31, 2016 and we believe we will need to raise additional capital to support the commercialization and development efforts related to our current and future products, repay our debt obligations in accordance with their contractual payment terms and fund our operating activities in the future. Future funding requirements will depend on a number of factors, including the cost and timing of establishing additional sales, marketing and distribution capabilities, the ongoing cost of research and development activities, the cost and timing of regulatory clearances and approvals, the effect of competing technology and market developments, the nature and timing of companion diagnostic development collaborations we may establish, and the extent to which we acquire or invest in businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions. Our estimates of the amount of cash necessary to fund our operations, development and commercialization activities may prove to be wrong, and we could exhaust our available financial resources faster than anticipated in our forecasts.  

Additional capital may not be available at such times or in amounts needed by us. Even if capital is available, it might be available only on unfavorable terms. If we are unable to raise additional capital in the future when required and in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue our planned product development or the commercialization or our planned product development efforts of our current and any future products, or we may be required to significantly reduce expenses, sell assets, seek a merger or joint venture partner, file for protection from creditors or liquidate our assets. If we raise additional funds through the issuance of additional debt or equity securities, it could result in additional fixed payment obligations, and/or dilution of current stockholders.    

Our financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have had recurring operating losses and negative cash flows from operations since our inception and have an accumulated deficit of approximately $96.6 million, which, without additional financing in the interim, raises substantial doubt about our ability to continue as a going concern. As of March 31, 2016, we had available cash, cash equivalents and investments in short and long term available-for-sale securities of approximately $32.8 million. In order to continue as a going concern, we believe that we will need to raise additional equity or debt capital in the future until our revenue reaches a level sufficient to provide for self-sustaining cash flows. There can be no assurance that additional equity or debt financing will be available on acceptable terms, or at all, or that our revenue will reach a level sufficient to provide for self-sustaining cash flows. Our financial statements do not include any adjustments that may result from the outcome of these uncertainties.

Contractual Obligations

As of March 31, 2016, there have been no material changes to our contractual obligations and commitments outside of the ordinary course of business from those disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations” in our Annual Report on Form 10-K filed with the SEC on March 24, 2016 other than the drawing of the $5.0 million funds available to us under tranche B of our growth term loan in March 2016.  

Off-Balance Sheet Arrangements

Through March 31, 2016, we have not entered into any off-balance sheet arrangements as defined by applicable SEC regulations.

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Recent Accounting Pronouncements

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

The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our financial statements and have not yet determined the method by which we will adopt the standard.

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

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. Under the new guidance, lessees will be required to recognize for all leases (with the exception of short-term leases) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.  

The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods for those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the effect that this guidance will have on our financial statements.    

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

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

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operation is based on our financial statements, which have been prepared in accordance with GAAP. 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Items subject to estimates based on judgments include, but are not limited to: revenue recognition, stock-based compensation expense, the value of the warrant liability, the resolution of uncertain tax position, income tax valuation allowances,

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recovery of long-lived assets and provisions for doubtful accounts, inventory obsolescence and inventory valuation. Actual results could differ from these estimates and such differences could affect the results of operations in future periods.

There were no changes in our significant accounting policies and estimates during the three months ended March 31, 2016 from those set forth in “Critical Accounting Policies and Significant Judgments and Estimates” in our December 31, 2015 Annual Report on Form 10-K filed with the SEC on March 24, 2016.

Emerging Growth Company Status

We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risks in the ordinary course of our business. These risks primarily relate to interest rates. We had cash and cash equivalents of $4.9 million at March 31, 2016, which consist of money market funds. Such interest-bearing instruments carry a degree of risk; however, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. Our debt is at fixed interest rates. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our financial statements. Our investments in available-for-sale securities are at some risk for losses from possible volatility in the market. However, our investments are in a low risk portfolio comprised of U.S. Treasuries, U.S. government sponsored agency obligation and high credit quality corporate debt securities which have an average credit rating of AA. We do not anticipate exposure to significant market risk based upon our conservative investment policy.  

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported with the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  

In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

As of March 31, 2016, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting.

There were no changes in our internal controls over financial reporting during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We are in the very early stages of the costly and challenging process of compiling the systems and processing documentation necessary to perform the evaluation needed to comply with Section 404 of the Sarbanes-Oxley Act. We are not currently in compliance with, and we cannot be certain when we will be able to implement the requirements of, Section 404 of the Sarbanes-Oxley Act.

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We continue to review, document and test our internal control over financial reporting.  

Commencing with our fiscal year ending December 31, 2016, we must perform system and process evaluation and testing of our internal controls over financial reporting, to allow management to report on the effectiveness of our internal controls over financial reporting in our Annual Report on Form 10-K for that year, as required by Section 404 of the Sarbanes-Oxley Act.

We might not be able to complete our evaluation, testing or any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are designed and operating effectively, which could result in a loss of investor confidence in the accuracy and completeness of our financial reports.  

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are not engaged in any material legal proceedings. However, in the normal course of business, we may from time to time be named as a party to legal claims, actions and complaints, including matters involving employment, intellectual property others.

Item 1A. Risk Factors.

An investment in shares of our common stock involves a high degree of risk. You should carefully consider the following information about these risks, as well as the other information in this report, before deciding to purchase, hold or sell shares of our common stock. The occurrence of any of the following risks could have a material adverse effect on our business, financial condition, results of operations and future growth prospects. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment. We have marked with an asterisk (*) those risk factors that did not appear as separate risk factors in, or reflect changes to the risk factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 24, 2016.  

Risks Related to our Business and Strategy

We have incurred losses since our inception and expect to incur losses for the foreseeable future. We cannot be certain that we will achieve or sustain profitability.*

We have incurred losses since our inception and expect to incur losses in the future. We incurred net losses of $7.0 million and $4.1 million during the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, we had an accumulated deficit of $96.6 million. We expect that our losses will continue for the foreseeable future as we will be required to invest significant additional funds toward expansion of our product development and manufacturing facilities, development of our next generation instrument platforms, including our low volume HTG EdgeSeq system (Project JANUS), development of our new HTG EdgeSeq assay panels, including our initial IVD assay, and the commercialization of our HTG Edge and HTG EdgeSeq systems and our proprietary consumables. We also expect that our selling, general and administrative expenses will continue to increase due to the additional costs associated with market development activities, expanding our staff to sell and support our products, and the increased administrative costs associated with being a public company. Our ability to achieve or, if achieved, sustain profitability is based on numerous factors, many of which are beyond our control, including the market acceptance of our products, competitive product development and our market penetration and margins. We may never be able to generate sufficient revenue to achieve or, if achieved, sustain profitability.

We might not be able to continue as a going concern absent our ability to raise additional equity or debt capital.*

Our report on Form 10Q for the period ending March 31, 2016, includes disclosures stating that our reoccurring losses from operations since inception and negative cash flows from operating activities raise substantial doubt about our ability to continue as a going concern. We have had reoccurring operating losses and negative cash flows from operations since inception, and we have an accumulated deficit of approximately $96.6 million as of March 31, 2016. As of March 31, 2016, the Company had available cash, cash equivalents and investments in short and long term available-for-sale securities of approximately $32.8 million. In order to continue as a going concern, we will need, among other things, to raise additional capital until our revenue reaches a level sufficient to provide for self-sustaining cash flows. There can be no assurance that additional equity or debt financing will be available on acceptable terms if at all or that our revenue will reach a level sufficient to provide for self-sustaining cash flows. The financial statements included do not include any adjustments that might result from the outcome of these uncertainties. If we are unable to obtain sufficient funding, our business, prospects, financial condition and results of operations will be materially and adversely affected. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements, and it is likely that investors will lose all or part of their investment. If we seek additional financing to fund our business activities in the future and there remains doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all.

We will need to raise additional capital to fund our operations. If we are unsuccessful in attracting new capital, we may not be able to continue operations or may be forced to sell assets to do so. Alternatively, capital may not be available to us on favorable terms, or at all. If available, financing terms may lead to significant dilution to our stockholders’ equity.*

We are not profitable and have had negative cash flow from operations. To date, to fund our operations and develop and commercialize our products, we have relied primarily on equity and debt financings and revenue generated from the sale of our

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HTG Edge and HTG EdgeSeq systems, the sale of our proprietary consumables, and related services. We will likely need to obtain additional funds to finance our operations. In addition, our estimates of the amount of cash necessary to fund our operations and development and commercialization activities may prove to be wrong, and we could spend our available financial resources much faster than we currently expect. Additional capital may not be available, at such times or in amounts as needed by us. Even if capital is available, it might be available only on unfavorable terms. Any additional equity or convertible debt financing into which we enter could be dilutive to our existing stockholders. Any future debt financing into which we enter may impose covenants upon us that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If access to sufficient capital is not available as and when needed, our business will be materially impaired and we may be required to cease operations, curtail one or more product development or commercialization programs, or we may be required to significantly reduce expenses, sell assets, seek a merger or joint venture partner, file for protection from creditors or liquidate all our assets. Any of these factors could harm our operating results.

Payments under the instruments governing our indebtedness may reduce our working capital. In addition, a default under our term loan agreement could cause a material adverse effect on our financial position.*

In August 2014, we obtained a $16.0 million term loan from Oxford Finance LLC and Silicon Valley Bank, which we collectively refer to as the lenders. Under the terms of the loan agreement, the lenders initially provided us with a term loan of $11.0 million. In March 2016, we borrowed the remaining $5.0 million pursuant to the loan agreement. The loan, which is secured by a lien covering substantially all of our assets, excluding patents, trademarks and other intellectual property rights (except for rights to payment related to the sale, licensing or disposition of such intellectual property rights) and certain other specified property, requires us to pay interest-only payments through March 31, 2016, and principal and interest payments thereafter through September 2018. Payments under the loan could result in a significant reduction of our working capital.

Pursuant to the terms of the asset purchase agreement, as amended, with NuvoGen Research, LLC, or NuvoGen, pursuant to which we acquired certain intellectual property, we agreed to pay NuvoGen the greater of $400,000 or 6% of our yearly revenue until the total aggregate cash compensation paid to NuvoGen under the agreement equals $15.0 million. To date, we have paid NuvoGen approximately $5.8 million. We paid our fixed fees for 2015 and the first quarter of 2016 in advance, and our next payment is due in April 2016. For the remainder of 2016 and 2017, we are required to pay a yearly fixed fee, in quarterly installments, to NuvoGen in the range of $543,750 to $800,000, and may defer the accrued revenue-based payments. Beginning in 2018, we are again obligated to pay the greater of $400,000 or 6% of our annual revenue plus amounts, if any, deferred in the 2016 and 2017 periods by which 6% of revenue exceeds the applicable fixed fee plus 5% interest on any such deferred amounts until the obligation is repaid in full. Payments to NuvoGen could result in a significant reduction in our working capital.

Our term loan agreement requires us, and any debt arrangements we may enter into in the future may require us, to comply with various covenants that limit our ability to, among other things:

These restrictions could inhibit our ability to pursue our business strategies. If we default under our obligations under the loan agreement, the lenders could proceed against the collateral granted to them to secure our indebtedness or declare all obligation under the loan agreement to be due and payable. In certain circumstances, procedures by the lenders could result in a loss by us of all of our equipment and inventory, which are included in the collateral granted to the lenders. If any indebtedness under the loan agreement were to be accelerated, there can be no assurance that our assets would be sufficient to repay in full that indebtedness. In addition, upon any distribution of assets pursuant to any liquidation, insolvency, dissolution, reorganization or similar proceeding, the holders of secured indebtedness will be entitled to receive payment in full from the proceeds of the collateral securing our secured

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indebtedness before the holders of other indebtedness or our common stock will be entitled to receive any distribution with respect thereto.

We may incur additional indebtedness in the future. The debt instruments governing such indebtedness may contain provisions that are as, or more, restrictive than the provisions governing our existing indebtedness under the loan agreement. If we are unable to repay, refinance or restructure our indebtedness when payment is due, the lenders could proceed against the collateral granted to them to secure such indebtedness or force us into bankruptcy or liquidation.

Our HTG EdgeSeq product portfolio requires the use of next generation sequencing (“NGS”) instrumentation and reagents and could be adversely affected by actions of third party NGS product manufacturers over whom we have no control.*

A key element of our strategy is to establish our HTG EdgeSeq system as the best sample and library preparation method for clinical applications of next generation sequencers. We depend at least in part on the availability of NGS instrumentation and reagents, and the ability of our HTG EdgeSeq products to operate seamlessly with NGS instrumentation. Any significant interruption or delay in the ability of our HTG EdgeSeq solution or related panels to operate on NGS instrumentation could reduce demand for our products and result in a loss of customers.

A key element of our strategy is to establish our HTG EdgeSeq system as the best front-end platform for clinical applications of NGS. Our reputation, and our ability to continue to establish or develop our technology for clinical applications of next generation sequencers, are dependent upon the availability of NGS instrumentation and the reliable performance of our products with NGS instrumentation. We are not able to control the providers of NGS instrumentation, which increases our vulnerability to interoperability problems with the products that they provide. For example, providers of NGS instruments may discontinue existing products, or introduce new NGS instrumentation products with little or no notice to us. This may cause some of our products not to be operable with one or more NGS instruments or may adversely affect regulatory approvals of our future IVD HTG EdgeSeq products, potentially for extended periods of time. Any interruption in the ability of our products to operate on NGS instruments could harm our reputation or decrease market acceptance of our products, and our business, financial condition and operating results may be materially and adversely affected. We also could experience additional expense in developing new products or changes to existing products to meet developments in NGS instrumentation, and our business, financial condition and operating results may be materially and adversely affected.

Current medical device regulation in the U.S. and other jurisdictions requires manufacturers of IVD molecular profiling tests that use NGS detection, referred to as NGS IVD tests, to include in regulatory submissions, technical information about the NGS products that are required for performance of, but are not supplied with, the NGS IVD test. These regulatory agencies also require that the NGS instrumentation have “locked” software for the detection of the NGS IVD test results. Thus, to obtain regulatory approval for NGS IVD tests, manufacturers like us, currently must have arrangements with NGS product manufacturers to gain access to technical information and NGS instrument software. We currently have agreements with the two most significant product manufacturers that we believe grant us the rights that we need from those manufacturers to develop, manufacture and sell up to seven future HTG EdgeSeq NGS IVD tests in specified fields, subject to, among other things, the manufacturers’ rights to terminate such agreements and discontinue products or implement product design changes that could adversely affect our HTG EdgeSeq NGS IVD tests. In addition, if regulatory agencies do not change their requirements for NGS IVD test approval or clearance and the NGS instrument manufacturers close their systems to third party NGS IVD test development (in general or with specific NGS IVD test manufacturers) and we are not able to maintain or enforce our agreements with such manufacturers, we may not be able to meet our commercial goals and our business, financial condition and operating results may be materially and adversely affected.

The development of future products is dependent on new methods and/or technologies that we may not be successful in developing.

We are planning to expand our product offerings in the fields of detecting RNA fusions and other gene rearrangements and DNA mutations, such as expressed DNA mutations, and copy number variations, or CNVs. We believe we have successfully demonstrated proof of concept that our technology is able to detect these fusions and expressed DNA mutations, but to date our work in this area has only been on a very small scale or may not have the specificity required for certain applications. We cannot guarantee that we will be able to successfully develop these applications on a commercial scale. If we are unsuccessful at developing additional applications involving RNA fusions, DNA mutations or CNVs, we may be limited in the breadth of additional products we can offer in the future, which could impact our future revenues and profits.

We are currently developing a new version of our HTG EdgeSeq system, which we expect to launch in 2017, that will target the lower-volume throughput lab market. This program, which we refer to as “Project JANUS” is expected to increase our addressable market by enabling efficient molecular profiling of smaller quantity batches of samples. This program involves the development of new chemistry that is not currently compatible with our existing HTG Edge or HTG EdgeSeq platforms. If we are unable to

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successfully develop this new version of our HTG EdgeSeq system and on the timeframe we anticipate, our addressable market will be limited, which could harm our business, results of operations and financial condition.    

We may not be able to develop new products or enhance the capabilities of our systems to keep pace with rapidly changing technology and customer requirements, which could have a material adverse effect on our business and operating results.

Our success depends on our ability to develop new products and applications for our technology in existing and new markets, while improving the performance and cost-effectiveness of our systems. New technologies, techniques or products could emerge that might offer better combinations of price and performance than our current or future products and systems. Existing or future markets for our products, including gene expression analysis, liquid-based specimen analysis (e.g., plasma, blood and urine), single-cell analysis and copy number variation, as well as potential markets for our diagnostic product candidates, are characterized by rapid technological change and innovation. It is critical to our success that we anticipate changes in technology and customer requirements and successfully introduce new, enhanced and competitive technologies to meet our customers’ and prospective customers’ needs on a timely and cost-effective basis. At the same time, however, we must carefully manage the introduction of new products. If customers believe that such products will offer enhanced features or be sold for a more attractive price, they may delay purchases until such products are available. We may also have excess or obsolete inventory of older products as we transition to new products and our experience in managing product transitions is very limited. If we do not successfully innovate and introduce new technology into our product lines or effectively manage the transitions to new product offerings, our revenues and results of operations will be adversely impacted.

Competitors may respond more quickly and effectively than we do to new or changing opportunities, technologies, standards or customer requirements. We anticipate that we will face increased competition in the future as existing companies and competitors develop new or improved products and as new companies enter the market with new technologies.

If we do not successfully manage the development and launch of new products, our financial results could be adversely affected.

We face risks associated with launching new products and with undertaking to comply with regulatory requirements for certain of our products. If we encounter development or manufacturing challenges or discover errors during our product development cycle, the product launch date(s) may be delayed. The expenses or losses associated with unsuccessful product development or launch activities or lack of market acceptance of our new products could adversely affect our business or financial condition.

If we do not achieve, sustain or successfully manage our anticipated growth, our business and growth prospects will be harmed.

Our current personnel, systems and facilities may not be adequate to support our business plan and future growth. Our need to effectively manage our operations, growth and various projects requires that we, among other things:

Moreover, growth will place significant strains on our management and our operational and financial systems and processes. For example, expanded market penetration of our HTG Edge and HTG EdgeSeq systems and related proprietary panels, and future development and approval of diagnostic products, are key elements of our growth strategy that will require us to hire and retain additional sales and marketing, regulatory, manufacturing and quality assurance personnel. If we do not successfully forecast the timing and cost of the development of new panels and diagnostic products, the regulatory clearance or approval for product marketing of any future diagnostic products or the demand and commercialization costs of such products, or manage our anticipated expenses accordingly, our operating results will be harmed.

Our future success is dependent upon our ability to expand our customer base and introduce new applications.

Our current customer base is primarily composed of biopharmaceutical companies, academic institutions and molecular labs that perform analyses using our HTG Edge or HTG EdgeSeq systems and consumables for research use only, which means that they may not be used for clinical diagnostic purposes. Our success will depend, in part, upon our ability to increase our market penetration

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among these customers and to expand our market by developing and marketing new clinical diagnostic tests and research-use-only applications, and to introduce diagnostic products into clinical laboratories after obtaining the requisite regulatory clearances or approvals. We may not be able to successfully complete development of or commercialize any of our planned future tests and applications. To achieve these goals, we will need to conduct substantial research and development, conduct clinical validation studies, expend significant funds, expand and scale-up our research and development and manufacturing processes and facilities, expand and train our sales force; and seek and obtain regulatory clearance or approvals of our new tests and applications, as required by applicable regulations. Additionally, we must demonstrate to laboratory directors, physicians and third-party payors that any future diagnostic products are effective in obtaining clinically relevant information that can inform treatment decisions, and that our HTG Edge and HTG EdgeSeq systems and related panels can enable an equivalent or superior approach than other available technology. Furthermore, we expect that increasing the installed base of our HTG Edge and HTG EdgeSeq systems will increase demand for our relatively high margin panels. If we are not able to successfully increase our installed base of the HTG Edge and HTG EdgeSeq systems, sales of our panels and our margins may not meet expectations. Attracting new customers and introducing new panels requires substantial time and expense. Any failure to expand our existing customer base, or launch new panels or diagnostic products, would adversely affect our ability to improve our operating results.

Our financial results may vary significantly from quarter to quarter or may fall below the expectations of investors or securities analysts, each of which may adversely affect our stock price.

Investors should consider our business and prospects in light of the risks and difficulties we expect to encounter in the new, uncertain and rapidly evolving markets in which we compete. Because these markets are new and evolving, predicting their future growth and size is difficult. We expect that our visibility into future sales of our products, including volumes, prices and product mix between instruments and panels, will continue to be limited and could result in unexpected fluctuations in our quarterly and annual operating results.

Numerous other factors, many of which are outside our control, may cause or contribute to significant fluctuations in our quarterly and annual operating results. For example, two customers accounted for 45% of our revenue for the year ended December 31, 2015. If orders from these customers were reduced or discontinued, our revenue in future periods may materially decrease. Fluctuations in our operating results may make financial planning and forecasting difficult. In addition, these fluctuations may result in unanticipated decreases in our available cash, which could negatively affect our business and prospects. Factors that may contribute to fluctuations in our operating results include many of the risks described in this section. In addition, one or more of such factors may cause our revenue or operating expenses in one period to be disproportionately higher or lower relative to the others. Our products involve a significant capital commitment from our customers and accordingly involve a lengthy sales cycle. We may expend significant effort in attempting to make a particular sale, which may be deferred by the customer or never occur. Accordingly, comparing our operating results on a period-to-period basis may not be meaningful, and investors should not rely on our past results as an indication of our future performance. If such fluctuations occur or if our operating results deviate from our expectations or the expectations of investors or securities analysts, our stock price may be adversely affected.

Our sales cycle is lengthy and variable, which makes it difficult for us to forecast revenue and other operating results.

Our sales process involves numerous interactions with multiple individuals within any given organization, and often includes in-depth analysis by potential customers of our products (where in some instances we will provide a demonstration unit for their use and evaluation), performance of proof-of-principle studies, preparation of extensive documentation and a lengthy review process. As a result of these factors, the capital investment required in purchasing our instruments, and the budget cycles of our customers, the time from initial contact with a customer to our receipt of a purchase order can vary significantly and be up to 12 months or longer. Given the length and uncertainty of our sales cycle, we have in the past experienced, and likely will in the future experience, fluctuations in our instrument sales on a period-to-period basis. In addition, any failure to meet customer expectations could result in customers choosing to retain their existing systems or to purchase systems other than ours.

If the utility of our HTG Edge and HTG EdgeSeq systems, proprietary profiling panels and solutions in development is not supported by studies published in peer-reviewed medical publications, the rate of adoption of our current and future solutions and the rate of reimbursement of our future products by third-party payors may be negatively affected.

We anticipate that we will need to maintain a continuing presence in peer-reviewed publications to promote adoption of our solutions by biopharmaceutical companies, academic institutions and molecular labs and to promote favorable coverage and reimbursement decisions. We believe that peer-reviewed journal articles that provide evidence of the utility of our current and future solutions or the technology underlying the HTG Edge and HTG EdgeSeq platforms and future solutions are important to our commercial success. It is critical to the success of our sales efforts that we educate a sufficient number of clinicians and administrators about our HTG Edge and HTG EdgeSeq systems, our current panels and our future solutions, and demonstrate the research and clinical benefits of these solutions. Our customers may not adopt our current and future solutions, and third-party payors may not

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cover or adequately reimburse our future products, unless they determine, based on published peer-reviewed journal articles and the experience of other researchers and clinicians, that our system and related applications provide accurate, reliable, useful and cost-effective information. Peer-reviewed publications regarding our platforms and solutions may be limited by many factors, including delays in the completion of, poor design of, or lack of compelling data from studies that would be the subject of the article. If our current and future solutions or the technology underlying our HTG Edge and HTG EdgeSeq platforms, our current tests and assays or our future solutions do not receive sufficient favorable exposure in peer-reviewed publications, the rate of research and clinician adoption and positive coverage and reimbursement decisions could be negatively affected.

We provide our HTG Edge and HTG EdgeSeq systems and profiling panels free of charge or through other arrangements to customers or key opinion leaders through evaluation agreements or reagent rental programs, and these programs may not be successful in generating recurring revenue from sales of our systems and proprietary panels.*

We sell our HTG Edge and HTG EdgeSeq systems and profiling panels under different arrangements in order to expand our installed base and facilitate the adoption of our platform.

In some instances we provide equipment free of charge under evaluation agreements for a limited period of time to permit the user to evaluate the system for their purposes in anticipation of a decision to purchase the system. We retain title to the equipment under such arrangements unless a decision to purchase is made, and in most cases, require evaluation customers to purchase a minimum quantity of consumables during the evaluation period.

When we place a system under a reagent rental agreement, we install equipment in the customer’s facility without a fee and the customer agrees to purchase consumable products at a stated priced over the term of the agreement. While some of these agreements did not historically contain a minimum purchase requirement, we have included a minimum purchase requirement in all reagent rental agreements in 2015 and the first quarter of 2016, and will continue to do so in the future. We retain title to the equipment and such title is transferred to the customer at no additional charge at the conclusion of the initial arrangement. The cost of the instrument under the agreement is expected to be recovered in the fees charged for consumables, to the extent sold, over the term of the agreement.

Other arrangements might include a collaboration agreement whereby an academic or a commercial collaborator agrees to provide samples free of charge in exchange for the use of a HTG Edge and/or HTG EdgeSeq system at no cost in furtherance of a research or clinical project.

Any of the foregoing arrangements could result in lost revenues and profit and potentially harm our long term goal of achieving profitable operations. In addition, despite the fact we require customers who receive systems we continue to own to carry insurance sufficient to protect us against any equipment losses, we cannot guarantee that they will maintain such coverage, which may expose us to a loss of the value of the equipment in the event of any loss or damage.

There are instances where we provide our systems to key opinion leaders free of charge, to gather data and publish the results of their research to assist our marketing efforts. We have no control over some of the work being performed by these key opinion leaders, or whether the results will be satisfactory. It is possible that the key opinion leader may generate data that is unsatisfactory and could potentially harm our marketing efforts. In addition, customers may from time to time create negative publicity about their experience with our systems, which could harm our reputation and negatively affect market perception and adoption of our platform.

Placing our HTG Edge and HTG EdgeSeq systems under evaluation agreements, under reagent rental agreements or with our key opinion leaders without receiving payment for the instruments could require substantial additional working capital to provide additional units for sale to our customers.

A significant amount of our inventory consists of instruments held by prospective customers who are evaluating our products and may not be converted to revenue on the timeframe that we anticipate or at all.*

As of March 31, 2016, approximately $664,000 of our inventory consisted of HTG Edge or HTG EdgeSeq instruments held by customers who are evaluating and testing our products, including our HTG EdgeSeq products. If a material number of these prospective customers do not adopt our products within the time periods that we estimate, or at all, then we will not be able to convert the inventory held by these customers into revenues. If we are unable to sell this inventory to other customers or if it becomes obsolete as we introduce and expand the customer base for our dedicated HTG EdgeSeq system, which became available in the third quarter of 2015, we may be required to write off a significant portion of this inventory.

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Our strategy of developing companion diagnostic products may require large investments in working capital and may not generate any revenues.

A key component of our strategy is the development of companion diagnostic products designed to determine the appropriate patient population for administration of a particular medication, to more successfully treat a variety of illnesses. Successfully developing a companion diagnostic product depends both on regulatory approval for administration of the therapeutic, as well as regulatory approval of the diagnostic product. We may be successful in developing products that would be useful as companion diagnostic products, and potentially receive regulatory approval for such products, however the biopharmaceutical companies that develop the corresponding therapeutics may ultimately be unsuccessful in obtaining regulatory approval for any such therapeutic, or, even if successful, select a competing technology to use in their regulatory submission instead of ours. The development of companion diagnostic products requires a significant investment of working capital which may not result in any future income. This could require us to raise additional funds which could dilute our current investors, or could impact our ability to continue our operations in the future.

Our current business depends on levels of research and development spending by academic and governmental research institutions and biopharmaceutical companies, a reduction in which could limit demand for our products and adversely affect our business and operating results.

Our revenue will be derived initially from sales of our HTG Edge and HTG EdgeSeq systems, proprietary panels, and the development of custom panels for biopharmaceutical companies, academic institutions and molecular labs worldwide for research applications. The demand for our products will depend in part upon the research and development budgets of these customers, which are impacted by factors beyond our control, such as: