HTG MOLECULAR DIAGNOSTICS, INC. You should read the following discussion and analysis together with our consolidated financial statements and related notes included elsewhere in this Annual Report. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those expressed or implied in any forward-looking statements due to various factors, including those set forth under the caption "Item 1A. Risk Factors." All forward-looking statements included in this Annual Report are based on information available to us as of the time we file this Annual Report and, except as required by law, we undertake no obligation to update publicly or revise any forward-looking statements. In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Annual Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain. InDecember 2022 , we completed a reverse stock split of our outstanding shares of common stock pursuant to which every 12 shares of issued and outstanding common stock were exchanged for one share of common stock. All share and per share amounts within this Annual Report have been adjusted to reflect the reverse stock split for all periods and dates presented.
Overview
We are focused on advancing precision medicine and drug discovery through our innovative transcriptome-wide profiling and advanced drug discovery platform technologies. Building on more than a decade of pioneering innovation, our proprietary next-generation HTG EdgeSeq technology is the basis for our tech-driven hybrid business model allowing our RNA molecular profiling applications to be more effective, efficient and relevant and also serving as a key component of the engine behind our platform-based drug discovery process. Central to our business strategy is our drug discovery engine, which uses our captive transcriptomic profiling capabilities combined with a proprietary medicinal chemistry machine learning platform to render an AI-driven drug candidate optimization platform. We are using this platform to innovate drug discovery with the goal of building best-in-class molecules for known pharmacologic targets across multiple disease areas, better, faster and in a more cost-effective manner. The training data sets for our machine learning platform utilize our own primary data generated specifically for this purpose. This high quality, standardized data provides a clear advantage over other platform approaches which are typically dependent upon publicly available data. The medicinal chemistry portion of our platform allows for rapid design and in silico evaluation of large chemical libraries in order to prioritize and select compounds for synthesis and advancement into early testing. These data are then integrated and processed into an iterative loop using a series of proprietary machine learning algorithms prior to further advancing the molecules to more traditional drug discovery studies. We expect that this will allow for rapid identification, selection and optimization of drug candidates for entrance into development. Further, we believe that our ability to rapidly iterate between primary data and computational analyses gives us valuable information and insights for candidate molecule design and selection. To date, we have used our transcriptome-informed drug discovery engine to develop an early pipeline of drug candidate molecules for two known pharmacologic targets, both of which can target several potential therapeutic indications, but with a current focus on oncology and neurodegenerative diseases. We believe that our technology provides a differentiated and potentially disruptive approach to drug discovery, that may allow ourselves and our partners to potentially improve upon key attrition factors, namely efficacy and toxicity, early in the discovery process, thereby allowing for better chances for candidate success when entering development.
Our business strategy is to build our drug discovery pipeline in order to out-license certain drug candidates and carry other candidates into preclinical and early development ourselves. In addition, we would expect to retain and potentially capitalize upon CDx rights through the clinical development and commercialization of these assets where appropriate.
We also operate a profiling business in life science tools. Our profiling
product and service solutions enable targeted RNA profiling using a small amount
of biological sample, in liquid or solid forms. Our menu of HTG EdgeSeq assays,
including our HTP, which has been designed to measure approximately 20,000 mRNA
targets using our HTG EdgeSeq technology, is automated on our HTG EdgeSeq
system, which applies NGS tools, enabling the generation of gene expression data
in a timely manner utilizing our simplified workflow. We seek to leverage key
business drivers in molecular profiling for biomarker analysis and diagnostics,
including the acceleration of precision medicine, the migration of molecular
testing to NGS-based applications, the movement to smaller and less invasive
biopsies, the need for greater diagnostic sensitivity, the need to conform to
challenging healthcare economics and the need for automation and an easily
deployable workflow, including simplified bioinformatics. These capabilities
enable customers to extend the use of limited biological samples for
retrospective or prospective analysis, gaining further understanding of the
molecular drivers of disease with the goal of developing biomarker-driven
targeted therapies.
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Our existing products include instruments, consumables and software that, as an
integrated platform, automate sample processing and can quickly, robustly and
simultaneously profile hundreds, thousands or tens of thousands of molecular
targets from samples which are a fraction of the size required by many
prevailing technologies. Customers can access our technology by purchasing our
HTG EdgeSeq system and assays for their internal use or through our Tucson,
Arizona -based VERI/O service laboratory, including molecular profiling of
cohorts and development of custom RUO panels to support early-stage clinical
programs and investigational-use-only assays for clinical trials. However, with
the release of our HTP, revenue from our RUO assay design services is expected
to be lower than historical levels, as our RUO assay design services revenue is
replaced by HTP consumables purchases and sample processing laboratory services
using our HTP. Our product and service solutions have enabled us to access a
number of early-stage biomarker discovery programs. We believe this approach
will enable new opportunities collaborating with biopharmaceutical companies in
their future drug development programs.
Our Drug Discovery Approach
InJune 2021 , we announced the formation of HTG Therapeutics, with the addition of several highly experienced drug development professionals to our leadership team. Throughout 2021, we strengthened our HTG EdgeSeq technology platform and added new profiling capabilities, including epitranscriptomic profiling, which currently provides the capability to generate over 40,000 biological data points from each experimental sample. By leveraging these profiling technologies in the drug discovery process, integrated with an advanced AI and machine learning-based medicinal chemistry approach, we have established a novel transcriptome-informed small molecule discovery engine at the core of our HTG Therapeutics business unit which we believe will generate drug candidate molecules that are intrinsically lower risk and will have greater potential for clinical development success when compared to currently existing early-stage drug discovery methods in the biopharmaceutical industry. We further expect that this approach to small molecule discovery can be applied agnostically across therapeutic areas and is scalable and flexible, allowing us to adapt our strategic and therapeutic focus rapidly as new information emerges on the pathogenesis of diseases. We believe that our approach will potentially provide multiple revenue opportunities, including collaboration or out-licensing arrangements for small molecule drug candidates we generate from as early as lead optimization through early preclinical development, the out-licensing of our technology to pharmaceutical companies to enable them to implement our advanced drug discovery approach into their own internal discovery efforts, and potentially new companion diagnostic opportunities to support the related clinical development programs for molecules that are brought forward through this novel discovery approach. In the first half of 2022, we released a series of white papers after demonstrating the utility of our proprietary technologies as a key component of our novel transcriptome-informed drug discovery and design approach and applying the approach to our initial therapeutic target. As anticipated, the results of our studies summarized in these white papers supported our approach and its ability to reveal indication-specific effects and potential undesirable effects in our first target through analysis of transcriptomic profiles from compound-treated human cell line test systems. Throughout the second half of 2022, we continued to work to strengthen our drug discovery core platform technology, including advancing the machine learning component of our platform with the refinement of key proprietary algorithms while continuing to generate our own internal data supporting training sets. In addition, we made capital investments to establish internal cell culture capabilities to support the expansion of our cell-based test system models. Our medicinal chemistry effort has produced a series of chemical libraries for our first target, and our most advanced library for this target has entered preclinical characterization, with a series of data generated including early efficacy in two different disease states. As a result of the progress made throughout 2022, we filed a patent application inDecember 2022 , which included claims directed toward specific compounds, pharmaceutical compositions and methods of treating or preventing disease by administration of the compounds. Our initial therapeutic pipeline is focused on oncology and degenerative neuroscience, emphasizing pharmacologic targets with understood roles in the progression of diseases in these areas. The most advanced discovery program in oncology is a small molecule program for treatment of liquid tumors. We expect to continue lead optimization of this program through the end of the first quarter of 2023, with advancement to support entry into preclinical development later in the year. HTG Therapeutics has a second oncology directed small molecule program for the treatment of a solid tumor type that is nearing completion in the hit-to-lead discovery phase, with lead optimization efforts planned through the second quarter of 2023 and subsequent preparation for potential preclinical development expected by the end of 2023. In our neuroscience pipeline, we have completed early discovery stage efforts and chemical library generation for candidate small molecules for application to neurodegenerative conditions which are expected to enter the hit-to-lead phase in the second half of 2023. 60 -------------------------------------------------------------------------------- We expect to initiate several early discovery-stage programs evaluating small molecule candidates against a variety of different cancers, from which we plan to select candidates for additional indications to continually expand our drug discovery pipeline. As additional candidates are identified, we may choose to retain certain candidates internally to be advanced through early development, with the intention to increase the value of these pipeline assets before moving to license or partner for further development. In parallel to these therapy-area specific programs, we continue to enrich the proprietary dataset that supports our transcriptome-informed drug discovery platform and to evolve and refine the complementary AI and machine learning portions of our drug discovery engine throughout these discovery processes. Finally, we would expect to maintain the exclusive rights and the opportunity to solely develop new CDx assays relating to these drug candidates as they move through the increasingly advanced stages of development with our future collaboration partners, further growing our existing gene expression profiling business.
Revenue and Commercialization of our Profiling Products
We believe the future financial performance of our profiling business will continue to be driven by adoption and utilization of our HTG EdgeSeq instruments and consumables, and an overall increase in the number and type of customers using our technology. As such, we believe the primary measures of adoption for our profiling technology are the number of total active customers, the number of active programs in our biopharmaceutical company customer pipeline, the number of instruments actively producing revenue in our installed base and revenue growth relating to new and existing customers. Total active customers and active installed base reflect customers and instruments that have generated revenue for the Company within the last 12 months. To be included in our active programs metric, a program needs to be associated with a pharma sponsored clinical trial, be traceable to a program on clinicaltrials.gov and have generated revenue for the Company within the last 12 months. As ofDecember 31, 2022 , we had 78 active customers, 73 active programs and 42 instruments actively producing revenue in our installed base, compared with 82 active customers, 62 active programs and 51 instruments actively producing revenue in our installed base as ofDecember 31, 2021 . Our profiling business continues to experience the ripple effects of the COVID-19 pandemic and has not yet recovered to pre-pandemic revenue levels, as seen in a year over year decrease in two out of three of the metrics discussed above, active customer base and active instruments. This trend reflects the continued challenge of the significant reduction of and delay in clinical trial activities during the pandemic generating lower quantities of retrospective samples for testing, budget reductions, labor shortages and supply chain issues being faced by a number of our customers. In response to these trends, our focus has shifted to the quality and sustainability of future revenue, including higher revenue per sample, larger cohorts and minimum batch sizes for service in our VERI/O laboratory. Given the length of our profiling business sales cycle and ongoing concerns regarding the economy throughout our industry, we expect to continue to see fluctuations in our profiling revenue on a period-to-period basis despite our ongoing focus on continuing to identify new opportunities to effectively commercialize our profiling technology and seek expanded commercial partnering channels. As a result of these profiling revenue trends, we have taken actions to reduce operating expenses and minimize the impact of reduced revenue on our operating loss and cash utilization, including a significant reduction in force late in the second quarter of 2022. We will continue to make appropriate operating adjustments in support of what we believe will be a quickly evolving, best-in-class drug discovery company and our existing gene expression profiling business.
2022 Equity Financings
InMarch 2022 , we entered into a Securities Purchase Agreement (the "March 2022 Securities Purchase Agreement") with a single investor pursuant to which we agreed to issue to the investor 270,415 units at a price of$27.744 per unit (less$0.012 for each pre-funded warrant purchased in lieu of a share of common stock) for net proceeds, after deducting the placement agent fees and other fees and expenses, of approximately$7.0 million . Each unit consisted of one share of common stock (or one pre-funded warrant in lieu thereof), a common warrant to purchase one share of common stock with a term of 24 months from the issuance date, and a common warrant to purchase one share of common stock with a term of 66 months from the issuance date. Each of the common warrants became exercisable commencing onSeptember 21, 2022 and has an exercise price of$24.744 per share. Each pre-funded warrant had an exercise price of$0.012 per share.May 2022 , the 200,911 pre-funded warrants were exercised for proceeds of$2,411 . InDecember 2022 , in connection with a best-efforts public offering, we entered into a Securities Purchase Agreement (the "December 2022 Securities Purchase Agreement") with a certain institutional investor, pursuant to which we issued and sold to the investor 1,290,322 units at a combined public offering price of$7.75 per share (less$0.001 for each pre-funded warrant purchased in lieu of a share of common stock) for net proceeds, after deducting the placement agent fees and expenses and other fees and expenses, of approximately$8.7 million . Each unit consisted of one share of common stock (or one pre-funded warrant in lieu thereof), a common warrant to purchase one share of common stock with a term of 24 months from the issuance date, and a common warrant to purchase one share of common stock with a term of 60 months from the issuance date. Each of these common warrants has an exercise price of$7.50 per share. InDecember 2022 , the 1,188,322 pre-funded warrants were exercised for proceeds of$1,188 . 61 --------------------------------------------------------------------------------
Financial Operations Overview and Consolidated Results of Operations
Comparison of the Years Ended
Years Ended December 31, Change
2022 2021 $ %
Product and product-related services
revenue $ 6,366,220 $ 8,906,828 $ (2,540,608 ) (29 %)
Operating expenses:
Cost of product and product-related
services revenue 4,572,134 4,094,980 477,154 12 %
Selling, general and administrative 15,841,790 16,546,740
(704,950 ) (4 %)
Research and development 6,781,892 6,088,934 692,958 11 %
Total operating expenses 27,195,816 26,730,654 465,162 2 %
Operating loss (20,829,596 ) (17,823,826 ) (3,005,770 ) 17 %
Gain on forgiveness of PPP Loan - 1,735,792 (1,735,792 ) (100 %)
Other income (expense), net (754,043 ) (1,034,661 ) 280,618 (27 %)
Net loss before income taxes $ (21,583,639 ) $ (17,122,695 ) Product and product-related services revenue
Our product and product-related services revenue is generated primarily through the sale of our profiling instruments and consumables and sample processing services performed on behalf of pharmaceutical companies, academic research centers and molecular testing laboratories.
RUO profiling is currently made available to our customers through product and service offerings. Customers can purchase our HTG EdgeSeq instrument and related consumables, which consist primarily of our proprietary molecular profiling panels and other assay components, for use in their own facilities. They can also access our technology through contracted RUO profiling services using our HTG EdgeSeq instruments and RUO consumables to process their samples in our VERI/O laboratory and through the development of custom RUO panels which are expected to generate future sample processing or RUO consumables revenue. Product and product-related services revenue, which includes revenue generated through the sale of our HTG EdgeSeq instruments and consumables and from services performed for customers using our proprietary RUO technology, decreased by 29% to$6.4 million for the year endedDecember 31, 2022 compared with$8.9 million for the year endedDecember 31, 2021 , and was comprised of the following: Years Ended December 31, 2022 2021 Product revenue: Instrument$ 609,627 $ 1,385,665 Consumables 3,140,420 3,786,923 Total product revenue 3,750,047 5,172,588 Product-related services revenue: Custom RUO assay design 20,000
48,350
RUO sample processing 2,596,173
3,685,890
Total product-related services revenue 2,616,173
3,734,240
Total product and product-related services revenue
Product revenue, which includes gene expression profiling revenue generated through the sale of our HTG EdgeSeq instruments and consumables, decreased by 28% to$3.8 million for the year endedDecember 31, 2022 , compared with$5.2 million for the year endedDecember 31, 2021 . The decrease in new instrument placements when compared with the prior year is consistent with the decrease in new customers added in 2022 compared with 2021. As we have worked to right size our business to profiling revenue trends experienced since the beginning of the COVID-19 pandemic inMarch 2020 , our commercial team has prioritized its efforts on expanding business with existing customers and seeking out new customers with larger studies and those with expectations of more extensive future profiling needs. This resulted in the need to place fewer new instruments in 2022, as many of our customers purchased instruments in prior years or have opted to use our laboratory or a certified reference laboratory who previously purchased our instruments to run their samples. Consumables revenue reflected the slower than anticipated recovery of our business to pre-COVID-19 levels. Consumables revenue generated from the sale of our HTP, commercially launched inAugust 2021 , was$1.8 million and$1.3 million for the years endedDecember 31, 2022 and 2021, respectively. HTP consumables revenue represented 47% of our product revenue for the year endedDecember 31, 2022 , compared with 25% of our product revenue for the year endedDecember 31, 2021 reflecting expanding adoption of that product by new and existing customers since its launch. 62 -------------------------------------------------------------------------------- Product-related services revenue, consisting of RUO sample processing using our HTG EdgeSeq instruments and consumables in our VERI/O laboratory and custom RUO assay design, decreased by 30% to$2.6 million for the year endedDecember 31, 2022 , compared with$3.7 million for the year endedDecember 31, 2021 . RUO sample processing revenue decreased primarily due to the timing of several biopharma programs pending decisions from data generated in previous studies using our technology, continued delays in our ability to obtain customer samples for planned sample processing programs, and our customers' reprioritizing their programs due to continuing impacts of COVID-19 on their operations. Revenue generated from sample processing services using our HTP was$0.9 million and$0.1 million for the years endedDecember 31, 2022 and 2021, respectively, and represented 34% and 3% of our product-related services revenue for the years endedDecember 31, 2022 and 2021, respectively.
Cost of product and product-related services revenue
Cost of product and product-related services revenue includes both product-related and services-related costs. Product-related costs include the aggregate costs incurred in manufacturing, delivering, installing and servicing instruments and consumables. The components of our product-related costs of revenue include consumables and lab supplies, subcomponent and servicing costs, manufacturing costs incurred internally (which include direct labor costs), and equipment and infrastructure expenses associated with the manufacturing and distribution of our products. Due to the fixed nature of certain of these expenses, such as overhead, equipment and infrastructure, associated with our regulated industry and our expectations for further growth in customer demand, we expect our cost of product and product-related services revenue as a percentage to decrease over time as our product and product-related services revenue increases, further absorbing these fixed costs. Cost of product and product-related services revenue increased by 12% to$4.6 million for the year endedDecember 31, 2022 compared with$4.1 million for the year endedDecember 31, 2021 . This increase primarily reflects an increase in excess inventory allowance of$1.1 million in the fourth quarter of 2022, reflecting our estimation of inventory in excess of our projections of future demand for certain of our products and$0.5 million of Employee Retention Credit ("ERC") benefits that served to partially offset compensation expense in 2021 but did not recur in 2022. This increase was partially offset by a decrease in direct and indirect costs incurred consistent with lower year over year product and product-related services revenue.
Selling, general and administrative expenses
Selling, general and administrative expenses consist primarily of personnel costs for our sales and marketing, regulatory, legal, executive management and finance functions. The expenses also include third-party professional and consulting fees incurred by these functions, promotional expenses and facility and overhead costs relating to our administrative offices. Selling, general and administrative expenses decreased by 4% to$15.8 million for the year endedDecember 31, 2022 compared with$16.5 million for the year endedDecember 31, 2021 . This decrease primarily reflects a decrease in legal fees incurred to protect our intellectual property and decreased compensation and stock-based compensation expenses following a reduction in force completed in the second quarter of 2022. This decrease was partially offset by$0.8 million of ERC benefits that served to offset a portion of compensation expense in 2021 but did not recur in 2022.
Research and development expenses
Research and development expenses increased by 11% to$6.8 million for the year endedDecember 31, 2022 , compared with$6.1 million for the year endedDecember 31, 2021 . This increase in research and development expense for the year endedDecember 31, 2022 compared with the same period in 2021 reflects$0.4 million of ERC benefits that served to offset a portion of compensation expense in 2021, and an increase in research and development spending associated with efforts to build and strengthen our drug discovery engine in 2021. This increase was partially offset by a decrease in profiling product development as we shifted focus to our therapeutics efforts and to maintenance and marketing of our existing product portfolio following commercial release of our HTP inAugust 2021 .
Gain on forgiveness of PPP Loan
InMay 2021 , upon receipt of the notification that the PPP Loan and related accrued interest had been forgiven by theU.S. Small Business Administration and that the note associated with the PPP Loan had been cancelled, we reversed the liabilities related to the PPP Loan and recorded a gain on forgiveness of PPP Loan of approximately$1.7 million .
Other income (expense)
As of bothDecember 31, 2022 and 2021, we had outstanding obligations due to NuvoGen under an asset purchase agreement and to SVB under the SVB Term Loan. Interest expense related to these obligations and to the discount, deferred financing fee and final fee premium amortization of amounts associated with these obligations was$0.9 million and$1.1 for the years endedDecember 31, 2022 and 2021, respectively. This decrease in interest expense was primarily the result of a$2.5 million payment made to SVB as part of the Term Loan Amendment which, in addition to regularly scheduled SVB Term Loan and NuvoGen obligation payments, resulted in a decreased balance on which interest is being accrued and/or paid. 63 --------------------------------------------------------------------------------
Cash Flows for the Years Ended
The following table summarizes the primary sources and uses of cash for each of
the periods presented:
Years Ended December 31, Change
2022 2021 $ %
Net cash provided by (used
in):
Operating activities $ (18,407,791 ) $ (16,508,554 ) $ (1,899,237 ) 12 %
Investing activities 12,420,233 (6,664,744 ) 19,084,977 (286 %)
Financing activities 8,604,820 10,391,622 (1,786,802 ) (17 %)
Effect of exchange rate on
cash (6,355 ) (16,186 ) 9,831 (61 %)
Increase (decrease) in cash
and cash equivalents $ 2,610,907 $ (12,797,862 ) $ 15,408,769 (120 %)
Operating Activities
Net cash used in operating activities for the year ended December 31, 2022
increased by 12% to $18.4 million compared with $16.5 million for the year ended
December 31, 2021 . This increase for the year ended December 31, 2022 reflected
(i) the net loss of $21.6 million and (ii) net non-cash items of $3.3 million
consisting primarily of provision for excess inventory of $1.2 million ,
stock-based compensation expense of $0.8 million , depreciation and amortization
expense of $0.6 million , amortization of loan discount and issuance costs of
$0.4 million , non-cash operating lease expense of $0.4 million and gain on
abandonment and disposal of assets of $0.1 million ; and (iii) a net cash outflow
from changes in balances of operating assets and liabilities of $0.1 million .
Net cash used in operating activities for the year ended December 31, 2021 was
$16.5 million and reflected (i) the net loss of $17.1 million and (ii) net
non-cash items of $1.6 million consisting primarily of the gain on the
forgiveness of our PPP loan of $1.7 million , stock-based compensation expense of
$1.3 million , depreciation and amortization expense of $0.7 million ,
amortization of loan discount and issuance costs of $0.5 million , non-cash
operating lease expense of $0.5 million and loss on abandonment and disposal of
assets of $0.2 million ; and (iii) a net cash outflow from changes in balances of
operating assets and liabilities of $1.0 million .
Investing Activities
Net cash provided by investing activities for the year endedDecember 31, 2022 increased by 286% to$12.4 million compared with net cash used in investing activities of$6.7 million for the year endedDecember 31, 2021 . Net cash provided by investing activities for the year endedDecember 31, 2022 consisted primarily of the maturity of$20.0 million of the available-for-sale securities and the proceeds from the sale of property and equipment of$0.1 million , partially offset by the purchases of available-for-sale securities of$7.6 million . Net cash used in investing activities for the year endedDecember 31, 2021 was$6.7 million and consisted primarily of purchases of available-for-sale securities of$18.6 million and purchases of laboratory equipment and other fixed assets during the year of$0.6 million , partially offset by the maturity of$12.6 million of the available-for-sale securities.
Financing Activities
Net cash provided by financing activities for the year endedDecember 31, 2022 decreased by 17% to$8.6 million compared with$10.4 million for the year endedDecember 31, 2021 . This activity for the year endedDecember 31, 2022 consisted primarily of$9.1 million of proceeds net of commissions and issuance costs from theDecember 2022 Securities Purchase Agreement (see Note 14 of the accompanying consolidated financial statements),$7.0 million in net proceeds from theMarch 2022 Securities Purchase Agreement (see Note 14 to the accompanying consolidated financial statements) and$0.8 million in proceeds from our 2022 Insurance Note, partially offset by$6.8 million of payments on our SVB Term Loan,$0.5 million of payments made on our outstanding NuvoGen obligation, and$1.0 million of payments made on our 2021 and 2022 Insurance Notes. Net cash provided by financing activities for the year endedDecember 31, 2021 was$10.4 million and consisted primarily of$10.7 million in net proceeds from sales of our common stock in an "at the market offering" and$0.9 million in proceeds from our stock purchase agreement (the "LP Purchase Agreement") withLincoln Park Capital Fund, LLC ("Lincoln Park"),$0.1 million in proceeds from shares purchased under stock purchase plans, partially offset by$0.5 million of payments made on our outstanding NuvoGen obligation, and$0.7 million of payments made on our 2020 and 2021 Insurance Notes. 64 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Since our inception, our operations have primarily been financed through the issuance of our common stock, preferred stock, the incurrence of debt and cash received from product sales, services revenue and other income. As ofDecember 31, 2022 , we had$12.2 million in cash and cash equivalents, current liabilities of$8.3 million and$4.1 million of long-term liabilities primarily relating to our NuvoGen obligation and operating leases. InJune 2020 , we entered into the SVB Term Loan with SVB. The proceeds from the SVB Term Loan, together with cash on hand, were used to repay in full all outstanding amounts and fees due under our prior MidCap Credit Facility and a subordinated convertible note that has since been repaid. Our SVB Term Loan bears interest at a floating rate equal to the greater of 2.50% above the Prime Rate (as defined in the Loan Agreement) and 5.75%. InJuly 2022 , we entered into the Term Loan Amendment with SVB. Under the Term Loan Amendment, SVB agreed to remove the financial covenant under the Loan Agreement. In exchange for this accommodation, we prepaid$2.5 million of outstanding principal under the SVB Term Loan. The remaining outstanding principal amount due under the SVB Term Loan will continue to be paid in equal monthly payments of principal and interest through the maturity date ofDecember 1, 2023 . InMarch 2022 , we entered into a Securities Purchase Agreement with a single investor pursuant to which we issued and sold to the investor 270,415 units at a price of$27.744 per unit (less$0.012 for each pre-funded warrant purchased in lieu of a share of common stock) for net proceeds, after deducting the placement agent fees and other fees and expenses, of approximately$7.0 million . Each unit consisted of one share of common stock (or one pre-funded warrant in lieu thereof), a common warrant to purchase one share of our common stock with a term of 24 months from the issuance date, and a common warrant to purchase one share of our common stock with a term of 66 months from the issuance date. Each of these common warrants became exercisable commencing onSeptember 21, 2022 and has an exercise price of$24.744 per share. Each pre-funded warrant had an exercise price of$0.012 per share and had no expiration date. InMay 2022 , all of the 200,911 pre-funded warrants were exercised for proceeds of$2,411 . InDecember 2022 , in connection with a best-efforts public offering, we entered into a Securities Purchase Agreement (the "December 2022 Securities Purchase Agreement") with a certain institutional investor, pursuant to which we issued and sold to the investor 1,290,322 units at a combined public offering price of$7.75 per share (less$0.001 for each pre-funded warrant purchased in lieu of a share of common stock) for net proceeds, after deducting the Placement Agent fees and expenses and other estimated fees and expenses of approximately$8.7 million . Each unit consisted of one share of common stock (or one pre-funded warrant in lieu thereof), a common warrant to purchase one share of common stock with a term of 24 months from the issuance date, and a common warrant to purchase one share of common stock with a term of 60 months from the issuance date. Each of these common warrants has an exercise price of$7.50 per share. InDecember 2022 , all of the 1,188,322 pre-funded warrants were exercised for proceeds of$1,188 . The current volatility in the equity markets may create additional challenges to raising a sufficient amount of capital through an equity financing in the near term. If sufficient additional capital is not available as and when needed, we may have to delay, scale back or discontinue one or more product development programs, curtail our commercial activities, significantly reduce expenses, sell assets (potentially at a discount to their fair value or carrying value), enter into relationships with third parties to develop or commercialize products or technologies that we otherwise would have sought to develop or commercialize independently, pursue a sale of the Company at a price that may result in a significant loss on investment for our stockholders, file for bankruptcy or seek other protection from creditors, or liquidate all assets. In addition, if we default under any of the terms of the Loan Agreement, including as a result of a material adverse change,Silicon Valley Bridge Bank could accelerate the payment of the SVB Term Loan and ultimately foreclose on our assets.
Contractual Obligations, Commitments and Material Cash Requirements
We have had recurring operating losses and negative cash flows from operations since our inception and have an accumulated deficit of$229.9 million as ofDecember 31, 2022 . As ofDecember 31, 2022 , we had cash and cash equivalents of$12.2 million and had current liabilities of$8.3 million . As ofDecember 31, 2022 , we also had approximately$4.1 million of long-term liabilities outstanding, relating to our NuvoGen obligation, and our financing and operating leases. We currently expect that our existing resources will only be sufficient to fund our planned operations and expenditures until at leastJuly 2023 . In addition, potentially changing circumstances, including those related to a resurgence of COVID-19, inflation and high interest rates, may also result in the depletion of our capital resources more rapidly than we currently anticipate. These circumstances raise substantial doubt about our ability to continue as a going concern. 65 --------------------------------------------------------------------------------
Our primary capital needs, including contractual obligations and commitments, which are subject to change, include:
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Debt Obligations - As ofDecember 31, 2022 , our outstanding debt balance was$3.8 million . See Note 8, "Debt Obligations" within our consolidated financial statements for further detail of our SVB Term Loan, the remaining balance of which is included in current liabilities in the accompanying consolidated balance sheets as ofDecember 31, 2022 , as the remaining payments are due within the next twelve months.
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NuvoGen Obligation - As ofDecember 31, 2022 , our NuvoGen obligation balance was$4.0 million . See Note 10, "Other Agreements" within our consolidated financial statements for further detail and the timing of expected future payments.
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Operating Leases - As ofDecember 31, 2022 , our contractual commitment for operating leases was$1.0 million . See Note 11, "Leases" within our consolidated financial statements for further detail of our lease obligations and the timing of expected future payments, including a three-year maturity schedule.
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Planned costs to operating our business, including amounts required to fund working capital and capital expenditures.
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Support of commercialization efforts related to our current and future products.
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Continued advancement of research and development efforts, including those related to our HTG Therapeutics business unit.
Until our revenue reaches a level sufficient to support self-sustaining cash flows, if ever, we expect to finance our cash needs through public or private equity offerings, debt financings, or other capital sources which may include strategic collaborations, licensing arrangements or other arrangements with third parties. The current volatility in the equity markets may create additional challenges to raising a sufficient amount of capital through an equity financing in the near term. Future funding requirements will depend on a number of factors, including our ability to generate significant revenue, our ability to repay our debt obligations as they become due, 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. Additional capital may not be available at such times or in amounts needed by us. Even if sufficient capital is available to us, 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 delay, scale back or discontinue one or more product development programs, curtail our commercialization activities, significantly reduce expenses, sell assets (potentially at a discount to their fair value or carrying value), enter into relationships with third parties to develop or commercialize products or technologies that we otherwise would have sought to develop or commercialize independently, cease operations altogether, pursue an acquisition of our company at a price that may result in a significant loss on investment to our stockholders, file for bankruptcy, seek other protection from creditors, or liquidate all of our assets. In addition, if we default under our SVB Term Loan agreement, including as a result of a "material adverse change," our lender could foreclose on our assets. The definition of "material adverse change" is broad and includes a material impairment in the value of the collateral securing the SVB Term Loan, a material adverse change in our business, operations, or condition (financial or otherwise), and a material impairment of the prospect of repayment of any portion of the SVB Term Loan. As the remaining payments under the SVB Term Loan are due within twelve months ofDecember 31, 2022 , the impact of a material adverse change would be to accelerate the payment of this short-term debt further.
Recent Accounting Pronouncements
For a summary of recent accounting pronouncements applicable to our consolidated financial statements, see "Note 2. Basis of Presentation and Summary of Significant Accounting Policies" in Part II, Item 8, Notes to Consolidated Financial Statements.
Critical Accounting Policies and Significant Judgments and Critical Accounting Estimates
Management's discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance 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.
Critical accounting policies and estimates are those that we consider most
important to the portrayal of our financial condition and results of operations
because they require our most difficult, subjective or complex judgments, often
as a result of the need to make estimates about the effect of matters that are
inherently uncertain. Our critical accounting policies and estimates include
those related to revenue recognition, fair value measurements and inventory
valuation. Actual results could materially differ from these estimates and such
differences could affect the results of operations in future periods.
66
--------------------------------------------------------------------------------Revenue from Contracts with Customers
Revenue from contracts with customers is recognized when, or as, we satisfy our performance obligations by delivering the promised goods or service deliverables to our customers. A good or service deliverable is transferred to a customer when, or as, the customer obtains control of that good or service deliverable. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized by measuring our progress in satisfying the performance obligation in a manner that depicts the transfer of the goods or services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that we determine the customer obtains control over the promised good or service deliverable. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for those promised goods or services (i.e., the "transaction price"). In determining the transaction price, we consider multiple factors, including the effects of variable consideration. Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. In determining when to include variable consideration in the transaction price, we consider the range of possible outcomes, the predictive value of our past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of our influence, such as the judgment and actions of third parties.
For contracts where the period between when we transfer a promised good or service to the customer and when the customer pays is one year or less, we have elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component.
We have made a policy election to exclude from the measurement of the transaction price all taxes assessed by a government authority that are both imposed on and concurrent with a specific revenue producing transaction and collected from a customer. Such taxes may include but are not limited to sales, use, value added and certain excise taxes.
Product and Product-related Services Revenue
Sale of instruments and consumables
The delivery of each instrument and related installation and calibration are considered to be a single performance obligation, as the HTG EdgeSeq instrument must be professionally installed and calibrated prior to use. Instrument product revenue is generally recognized upon installation and calibration of the instrument by field service engineers, which represents the point at which the customer has the ability to use the instrument and has accepted the asset. Installation generally occurs within one month of instrument shipment. The delivery of each consumable is a separate performance obligation. Consumables revenue is recognized upon transfer of control, which represents the point when the customer has legal title and the significant risks of ownership of the asset. Our standard terms and conditions provide that no right of return exists for instruments and consumables, unless replacement is necessary due to delivery of defective or damaged product. Customer payment terms vary but are typically between 30 and 90 days of revenue being earned from shipment or delivery, as applicable. Shipping and handling fees charged to customers for instruments shipped are included in the consolidated statements of operations as part of product and product-related services revenue. Shipping and handling costs for products shipped to customers are included in the consolidated statements of operations as part of cost of product and product-related services revenue. For sales of consumables inthe United States , standard delivery terms are FOB shipping point, unless otherwise specified in the customer contract, reflecting transfer of control to the customer upon shipment. Standard delivery terms for sales to customers outside ofthe United States are FOB delivery point, unless otherwise specified in the customer contract. We have elected the practical expedient to account for shipping and handling as activities to fulfill the promise to transfer the consumables. We provide instruments to certain customers under reagent rental agreements. Under these agreements, an instrument is installed in the customer's facility without a fee and the customer agrees to purchase consumable products at a stated price over the term of the agreement; in some instances, the agreements do not contain a minimum purchase requirement. Terms range from several months to multiple years and may automatically renew in several month or multiple year increments unless either party notifies the other in advance that the agreement will not renew. We measure progress toward complete satisfaction of this performance obligation to provide the instrument and deliver the consumables using an output method based on the number of consumables delivered in relation to the total consumables to be provided under the reagent rental agreement. This is considered to be representative of the delivery of outputs under the arrangement and the best measure of progress because the customer benefits from the instrument only in conjunction with the consumables. We expect to recover the cost of the instrument under the agreement through the fees charged for consumables, to the extent sold, over the term of the agreement. 67 -------------------------------------------------------------------------------- In reagent rental agreements, we retain title to the instrument and title is transferred to the customer at no additional charge at the conclusion of the initial arrangement. The cost of the instrument is amortized on a straight-line basis over the term of the arrangement, unless there is no minimum consumable product purchase, in which case the instrument would be expensed as cost of product and product-related services revenue upon installation. Cost to maintain the instrument while we hold title is charged to selling, general and administrative expense as incurred.
Service revenue
Sample Processing Services
We also provide sample preparation and processing services and molecular profiling of retrospective cohorts for our customers through our VERI/O laboratory, whereby the customer provides samples to be processed using HTG EdgeSeq technology specified in the order. Customers are charged a per sample fee for sample processing services which is recognized as revenue upon delivery of a data file to the customer showing the results of testing and completing delivery of the agreed upon service. This is when the customer can use and benefit from the results of testing and we have the present right to payment.
Fair Value Measurements
We establish the fair value of all of our financial assets and liabilities, which are recognized and disclosed at fair value in the consolidated financial statements, using the price that would be received to sell an asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is used to measure fair value. The three levels of the fair value hierarchy are as follows:
Level 1 - Quoted prices in active markets for identical assets and liabilities.
Level 2 - Pricing inputs are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable and include situations where there is little, if any, market activity for the investment.
Our portfolio of securities comprises high credit quality corporate debt securities classified as available-for-sale securities.
Inventory Valuation
Inventory consists of raw materials and finished goods which are stated at the lower of cost (first-in, first-out) or net realizable value. We assess the valuation of our inventory on a periodic basis and make adjustments to the value for estimated obsolescence, inventory in excess of reasonably expected near term sales or unmarketable inventory, in an amount equal to the difference between the cost of inventory and the estimated market value, based upon assumption about future demand and market conditions. Such estimates are difficult to make under most economic conditions. Our excess inventory review process includes analysis of sales forecasts and expected customer demand, careful management of product utilization and future purchasing and coordinating with manufacturing to maximize recovery of excess inventory. If actual market conditions are less favorable than those projected, additional inventory write-downs may be required. Inventory impairment charges establish a new cost basis for inventory and charges are not reversed subsequently to income, even if circumstances later suggest that increased carrying amounts are recoverable. If actual market conditions are more favorable than anticipated, inventory previously written down may be sold to customers, resulting in lower cost of sales and lower operating loss than expected in that period.
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