Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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.
In December 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.
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
In June 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 in December 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 .
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 of December 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 of December 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 and cash utilization, including a significant reduction in 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, -in-class drug discovery company and our existing gene expression profiling business.
2022 Equity Financings
In March 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 on September 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.
In December 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. In December 2022, the 1,188,322 pre-funded warrants were exercised for proceeds of $1,188.
Financial Operations Overview and Consolidated Results of Operations
Comparison of the Years Ended December 31, 2022 and 2021
Years Ended December 31,
Change
Product and product-related services revenue
Operating expenses:
Cost of product and product-related services revenue
Selling, general and administrative
Research and development
Total operating expenses
Operating loss
Gain on forgiveness of PPP Loan
Other income (expense), net
Net loss before income taxes
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 ended December 31, 2022 compared with $8.9 million for the year ended December 31, 2021, and was comprised of the following:
Years Ended December 31,
Product revenue:
Instrument
Consumables
Total product revenue
Product-related services revenue:
Custom RUO assay design
RUO sample processing
Total product-related services revenue
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 ended December 31, 2022, compared with $5.2 million for the year ended December 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 in March 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 in August 2021, was $1.8 million and $1.3 million for the years ended December 31, 2022 and 2021, respectively. HTP consumables revenue represented 47% of our product revenue for the year ended December 31, 2022, compared with 25% of our product revenue for the year ended December 31, 2021 reflecting expanding adoption of that product by new and existing customers since its launch.
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 ended December 31, 2022, compared with $3.7 million for the year ended December 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 ended December 31, 2022 and 2021, respectively, and represented 34% and 3% of our product-related services revenue for the years ended December 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 ended December 31, 2022 compared with $4.1 million for the year ended December 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 ended December 31, 2022 compared with $16.5 million for the year ended December 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 ended December 31, 2022, compared with $6.1 million for the year ended December 31, 2021. This increase in research and development expense for the year ended December 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 in August 2021.
Gain on forgiveness of PPP Loan
In May 2021, upon receipt of the notification that the PPP Loan and related accrued interest had been forgiven by the U.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 both December 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 ended December 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.
Cash Flows for the Years Ended December 31, 2022 and 2021
The following table summarizes the primary sources and uses of cash for each of the periods presented:
Years Ended December 31,
Change
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rate on cash
Increase (decrease) in cash and cash equivalents
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 ended December 31, 2022 increased by 286% to $12.4 million compared with net cash used in investing activities of $6.7 million for the year ended December 31, 2021. Net cash provided by investing activities for the year ended December 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 ended December 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 ended December 31, 2022 decreased by 17% to $8.6 million compared with $10.4 million for the year ended December 31, 2021. This activity for the year ended December 31, 2022 consisted primarily of $9.1 million of proceeds net of commissions and issuance costs from the December 2022 Securities Purchase Agreement (see Note 14 of the accompanying consolidated financial statements), $7.0 million in net proceeds from the March 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 ended December 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”) with Lincoln 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.
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 of December 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.
In June 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%. In July 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 of December 1, 2023.
In March 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 on September 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. In May 2022, all of the 200,911 pre-funded warrants were exercised for proceeds of $2,411.
In December 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. In December 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 Bank could accelerate the payment of the SVB Term Loan and ultimately 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 of December 31, 2022. As of December 31, 2022, we had cash and cash equivalents of $12.2 million and had current liabilities of $8.3 million. As of December 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 least July 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.
Our primary capital needs, including contractual obligations and commitments, which are subject to change, include:
Debt Obligations – As of December 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 of December 31, 2022, as the remaining payments are due within the next twelve months.
NuvoGen Obligation – As of December 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.
Operating Leases – As of December 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.
Planned costs to operating our business, including amounts required to fund working capital and capital expenditures.
Support of commercialization efforts related to our current and future products.
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 change,” our lender could on our assets. The definition of “material change” is broad and includes a material in the value of the collateral securing the SVB Term Loan, a material change in our business, operations, or condition (financial or otherwise), and a material 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 of December 31, 2022, the impact of a material 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.
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 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 in the 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 of the 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.
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 than expected in that period.
Item 7A. Quantitative and Qualitati ve Disclosures About Market Risk.
We are a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this item.
Item 8. Financial Statement s and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (BDO USA, LLP; Los Angeles, California USA; PCAOB ID#: 243 )
Consolidated Balance Sheets as of December 31, 2022 and 2021
Consolidated Statements of Operations for the Years ended December 31, 2022 and 2021
Consolidated Statements of Comprehensive Loss for the Years ended December 31, 2022 and 2021
Consolidated Statements of Changes in Stockholders’ Equity for the Years ended December 31, 2022 and 2021
Consolidated Statements of Cash Flows for the Years ended December 31, 2022 and 2021
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
HTG Molecular Diagnostics, Inc.
Tucson, Arizona
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of HTG Molecular Diagnostics, Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and negative operating cash flows that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Reserve for Excess and Obsolete Inventory
As more fully described in Notes 2 and 3 to the consolidated financial statements, the Company’s consolidated inventory balance was approximately $1.3 million at December 31, 2022. Inventory, consisting of raw materials, work in process and finished goods, is stated at the lower of cost (first-in, first-out) or net realizable value. The Company reserves its inventory for estimated obsolescence or inventory in excess of expected sales or unmarketable inventory, based upon assumptions about future demand and market conditions.
We identified the valuation of inventories with respect to excess and obsolete inventory as a critical audit matter. Specifically, the determination of the reserve for excess and obsolete inventory requires management to make judgments and assumptions about the future usage and sales of inventory. Auditing these elements involved especially challenging auditor judgment due to the nature and extent of audit effort required to address this matter.
The primary procedures we performed to address this critical audit matter included:
Evaluating management’s process for establishing a reserve for excess and obsolete inventory by understanding inventory management practices and assessing the appropriateness of management’s estimation.
Testing the existence of inventory items through the attendance of a physical inventory observation at the selected location.
Assessing whether any known or knowable factors occurred subsequent to year end that impact management's forecast of future inventory usage by comparing actual sales to forecasted sales for the subsequent period and assessing changes in macroeconomic conditions and scientific receptivity to the technology.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2014.
Los Angeles, California
March 30, 2023
HTG Molecular Diagnostics, Inc.
Consolidated B alance Sheets
December 31,
Assets
Current assets:
Cash and cash equivalents
Investments available-for-sale, at fair value
Accounts receivable, net of allowance of $ 0 at December 31, 2022
and $ 20,315 at December 31, 2021
Inventory, net
Prepaid expenses and other
Total current assets
Operating lease right-of-use assets
Property and equipment, net
Other non-current assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Accrued liabilities
Current portion of long-term debt, net of discount and debt issuance costs
NuvoGen obligation - current
Operating lease liabilities - current
Other current liabilities
Total current liabilities
NuvoGen obligation - non-current, net of discount
Long-term debt, net of current portion, discount and debt issuance costs
Operating lease liabilities - non-current, net of discount
Other non-current liabilities
Total liabilities
Commitments and Contingencies (Note 15)
Stockholders’ equity:
Series A convertible preferred stock, $ 0.001 par value; no shares authorized,
issued and outstanding at December 31, 2022; 23,770 shares authorized,
issued and outstanding at December 31, 2021
Common stock, $ 0.001 par value; 26,666,667 shares authorized at
December 31, 2022 and December 31, 2021; 2,213,897 shares issued
and outstanding at December 31, 2022 and 632,340 shares issued
and outstanding at December 31, 2021
Additional paid-in-capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
HTG Molecular Diagnostics, Inc.
Consolidated Statements of Operations
Years Ended December 31,
Product and product-related services revenue
Operating expenses:
Cost of product and product-related services revenue
Selling, general and administrative
Research and development
Total operating expenses
Operating loss
Other income (expense):
Interest expense
Interest income
Other income
Gain on forgiveness of PPP Loan
Total other income (expense)
Net loss before income taxes
Provision for income taxes
Net loss
Net loss per share, basic and diluted
Shares used in computing net loss per share, basic and diluted
The accompanying notes are an integral part of these consolidated financial statements.
HTG Molecular Diagnostics, Inc.
Consolidated Statem ents of Comprehensive Loss
Years Ended December 31,
Net loss
Other comprehensive loss, net of tax effect:
Foreign currency translation adjustment
Comprehensive loss
The accompanying notes are an integral part of these consolidated financial statements.
HTG Molecular Diagnostics, Inc.
Consolidated Statements of Cha nges in Stockholders’ Equity
Series A Convertible
Preferred Stock
Common Stock
Additional
Paid-In
Accumulated
Other
Comprehensive
Accumulated
Total
Stockholders'
Shares
Amount
Shares
Amount
Capital
Income (Loss)
Deficit
Equity
Balance at January 1, 2021
Stock-based compensation expense
Release of restricted stock awards
Net share settlement of restricted stock awards
Employee stock purchase plan expense
Stock issued under stock purchase plans
Issuance of common stock from ATM Offering, net of commissions of approximately $ 0.3 million
Issuance of common stock in connection with LP Purchase Agreement
Exercise of September 2019 Securities Purchase Agreement pre-funded warrants
Exercise of stock options
Net loss
Foreign currency translation adjustment
Balance at December 31, 2021
Stock-based compensation expense
Release of restricted stock awards
Net share settlement of restricted stock awards
Employee stock purchase plan expense
Stock issued under stock purchase plans
Conversion of Series A convertible preferred stock for common stock
Issuance of common stock and pre-funded warrants from March 2022 Securities Purchase Agreement, net of issuance costs of approximately $ 0.5 million
Issuance of common stock and pre-funded warrants from December 2022 Securities Purchase Agreement, net of commissions and issuance costs of approximately $ 1.3 million
Exercise of March 2022 Securities Purchase Agreement pre-funded warrants
Exercise of December 2022 Securities Purchase Agreement pre-funded warrants
Cash in lieu of fractional shares related to reverse stock split
Net loss
Foreign currency translation adjustment
Balance at December 31, 2022
The accompanying notes are an integral part of these consolidated financial statements.
HTG Molecular Diagnostics, Inc.
Consolidated Stateme nts of Cash Flows
Years Ended December 31,
Operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Accretion of interest on NuvoGen obligation
Provision for excess inventory
Amortization of SVB Term Loan discount and issuance costs
Stock-based compensation expense
Employee stock purchase plan expense
Bad debt expense
Non-cash operating lease expense
Accrued interest on available-for-sale securities investments
Gain on forgiveness of PPP Loan
(Gain) loss on abandonment and disposal of assets, net
Changes in operating assets and liabilities:
Accounts receivable
Inventory
Prepaid expenses and other
Accounts payable
Accrued liabilities
Contract liabilities
Operating lease liabilities
Net cash used in operating activities
Investing activities
Purchase of property and equipment
Proceeds from the sale of property and equipment
Maturities of available-for-sale securities
Purchase of available-for-sale securities
Net cash (used in) provided by investing activities
Financing activities
Proceeds from ATM Offering, net of commissions of approximately $ 0.3 million
Proceeds from March 2022 Securities Purchase Agreement, net of issuance costs of approximately $ 0.5 million
Proceeds from LP Purchase Agreement
Payments on NuvoGen obligation
Payments on SVB Term Loan
Payments on SVB Term Loan Amendment issuance costs
Payments on deferred offering costs
Payments on financing leases
Proceeds from exercise of stock options
Taxes paid for net share settlement of restricted stock awards
Proceeds from shares purchased under stock purchase plans
Proceeds from exercise of March 2022 Securities Purchase Agreement pre-funded warrants
Proceeds from December 2022 Securities Purchase Agreement, net of commissions and issuance costs of approximately $ 0.9 million
Proceeds from exercise of December 2022 Securities Purchase Agreement pre-funded warrants
Cash in lieu of fractional shares related to reverse stock split
Proceeds from insurance note
Payments on insurance notes
Net cash provided by financing activities
Effect of exchange rates on cash
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of noncash investing and financing activities
Fixed asset purchases payable at year end
Issuance costs payable and accrued at year end
Issuance of common stock upon conversion of Series A convertible preferred stock
Issuance of common stock from cashless exercise of pre-funded warrants
2021 Insurance Note issued for insurance premiums
Gain on forgiveness of PPP Loan
Operating lease right-of-use assets obtained in exchange for operating lease liabilities
Carrying value of demonstration units transferred from property and equipment to inventory
Disposal of fully depreciated assets
Reclassification of instrument from inventory to property and equipment
Supplemental cash flow information
Cash paid for interest
Cash paid for taxes
The accompanying notes are an integral part of these consolidated financial statements.
HTG Molecular Diagnostics, Inc.
Notes to Consolidated Financ ial Statements
Note 1. Description of Business and Basis of Presentation
HTG Molecular Diagnostics, Inc. (the “Company”) is a life science company whose mission is to advance precision medicine through its innovative transcriptome-wide profiling technology and advanced medicinal chemistry technology. The Company derives revenue primarily from sales of its HTG EdgeSeq system and integrated next-generation sequencing-based (“NGS-based”) HTG EdgeSeq research use only (“RUO”) assays and from sample processing services performed in its VERI/O laboratory.
The Company operates in one segment and its customers and distributors are located primarily in the United States and Europe. Revenue is reported based upon the geographic locations of the customers or distributors who purchase the Company's products and services. For sales to distributors, their locations may be different from the locations of the end customers. For the year ended December 31, 2022, approximately 35 % of the Company’s revenue was generated from sales originated by customers located outside of the United States, compared with 31 % for the year ended December 31, 2021.
Basis of Presentation
The consolidated financial statements and accompanying notes were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In December 2022, the Company completed a reverse stock split of its outstanding shares of common stock pursuant to which every twelve shares of issued and outstanding common stock were exchanged for one share of common stock. All share and per share amounts within the consolidated financial statements and notes thereto have been adjusted to reflect the reverse stock split for all periods and dates presented. See Note 14 for more information about the Company’s reverse stock split.
Principles of Consolidation
The Company formed a French subsidiary, HTG Molecular Diagnostics France SARL, in November 2018. The consolidated financial statements include the accounts of the Company and this wholly owned subsidiary after elimination of intercompany transactions and balances as of December 31, 2022 and 2021 .
Going Concern and Liquidity
Management has assessed the Company’s ability to continue as a going concern within one year of issuance of these consolidated financial statements. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of the assets and satisfaction of liabilities in the normal course of business. However, the Company has had recurring operating losses and negative operating cash flows since its inception and has an accumulated deficit of approximately $ 229.9 million as of December 31, 2022. As of December 31, 2022, the Company had working capital of approximately $ 7.4 million and long-term liabilities of approximately $ 4.1 million. The Company’s liability balances consist primarily of its debt obligations, including an asset-secured loan with Silicon Valley Bank (currently named Silicon Valley Bridge Bank, N.A. following the closure of Silicon Valley Bank on March 10, 2023 by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation ("FDIC") as receiver) (“SVB”), as lender, (the “SVB Term Loan”) (see Note 8), as well as an obligation to NuvoGen Research, LLC (the “NuvoGen obligation”) (see Note 10). The Company currently expects that its existing resources will be sufficient to fund its planned operations and expenditures until at least July 2023. In addition, potentially changing circumstances, including those related to a resurgence of COVID-19, inflation and high interest rates, may result in the of the Company’s capital resources more rapidly than it currently anticipates. These circumstances raise substantial about the Company’s ability to continue as a going . The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.
The Company will need to raise additional capital to fund its operations and service its long-term debt obligations until its revenue reaches a level sufficient to provide for self-sustaining cash flows. There can be no assurance that additional capital will be available on acceptable terms, or at all, or that the Company’s revenue will reach a level sufficient to provide for self-sustaining cash flows. If the Company is not able to generate additional capital, the Company may have to delay, scale back or discontinue one or more of its therapeutics development programs, curtail its 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 the Company otherwise would have sought to develop or commercialize independently, cease operations altogether, pursue a sale of the Company at a price that may result in a significant loss on investment for its stockholders, file for bankruptcy or seek other protection from creditors. In addition, if the Company defaults under any of the provisions of the Loan and Security Agreement for the SVB Term Loan (the "Loan Agreement"), SVB could charge an interest rate of 5 % above the otherwise applicable floating rate, accelerate the payment of the SVB Term Loan and ultimately on the Company’s assets.
COVID-19 Pandemic and Relief
The Company experienced a significant slowing of product and product-related services revenue generation beginning in March 2020 as a result of COVID-19. The extent of this impact has varied from customer to customer depending upon how they have been directly or indirectly impacted by local stay-at-home orders and other social distancing measures, how they have prioritized studies and previously planned trials as the immediate impacts of the pandemic have passed, and how significantly their workforces and supplier networks have been impacted by the pandemic. The Company has not experienced delays in development even with its efforts to prioritize the safety of its employees during the pandemic. In addition, the impact of COVID-19 on the Company’s ability to source raw materials and other supplies has not been significant to date. However, a change in or loss of suppliers or other supply chain or distribution network partners due to the ongoing impacts of the pandemic or a resurgence of COVID-19 on the global economy could adversely affect the Company’s business and the business of its vendors, partners and customers, and could result in future reductions in sales and operating results.
While there remains uncertainty as to the future impact of COVID-19, the Company has considered the known impacts on its business as of the date these consolidated financial statements were issued and has reflected any known or expected impacts in its consolidated financial statements, including consideration of potential impairment risks to its long-lived assets, potential accounts receivable collection risks and potential impacts to its overall liquidity position.
As a result of various government programs enacted to address the ongoing impacts of COVID-19, the Company was able to qualify for and receive Employee Retention Credits (“ERC”) during the year ended December 31, 2021. ERC benefits of approximately $ 0.5 million, $ 0.8 million, and $ 0.4 million were included in cost of product and product-related services revenue, selling, general and administrative and research and development, respectively, as an offset to the related compensation costs in the accompanying consolidated statements of operations for the year ended December 31, 2021. In November 2021, the Infrastructure Investment and Jobs Act was signed into law, making wages paid after September 30, 2021 ineligible for these credits. As such, no further ERC benefits were received for the year ended December 31, 2022. ERC benefits receivable of approximately $ 0.4 million were included in prepaid expenses and other in the accompanying consolidated balance sheets as of both December 31, 2022 and 2021.
In April 2020, the Company received proceeds from a loan pursuant to the Paycheck Protection Program (“PPP”) of the CARES Act (the “PPP Loan”) in the amount of approximately $ 1.7 million from SVB, as lender. The Company applied for full forgiveness of the PPP Loan in October 2020. In May 2021, the Company received notification that the PPP Loan and related interest, totaling approximately $ 1.7 million, were forgiven by the U.S. Small Business Administration (“SBA”), and that the PPP Loan had been canceled. Accordingly, the Company recorded a gain on forgiveness of the PPP Loan for the year ended December 31, 2021, included in other income (expense) in the accompanying consolidated statements of operations.
Laws and regulations concerning government programs, including the ERC and PPP Loan, are complex and subject to varying interpretations. Claims made under these programs may also be subject to retroactive audit and review. While the Company does not believe there is a basis for estimation of an audit or recapture risk at this time, there can be no assurance that regulatory authorities will not challenge the Company’s claim to the ERC or PPP Loan in a future period.
Note 2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company’s estimates include revenue recognition, stock-based compensation expense, bonus and warranty accrual, income tax valuation allowances and reserves, recovery of long‑lived assets, lease liability, inventory valuation, allowance for doubtful accounts and available-for-sale securities. Actual results could materially differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with financial institutions, money market instruments and high credit quality corporate debt securities purchased with a term of three months or less.
Accounts Receivable
Accounts receivable represent valid claims against debtors. Management reviews accounts receivable regularly to determine, using the specific identification method, if any receivable amounts will potentially be uncollectible and to estimate the amount of allowance for doubtful accounts necessary to reduce accounts receivable to its estimated net realizable value.
Investments in Available-for-Sale Securities
The Company classifies its debt securities, which are reported at estimated fair value with unrealized gains and losses included in accumulated other comprehensive income, net of tax, as available-for-sale securities. Investments in securities with maturities of less than one year , or where management’s intent is to use the investments to fund current operations, or to make them available for current operations, are classified as short-term investments. Realized gains, realized losses and declines in value of securities judged to be other-than-temporary, are included in other income (expense) within the consolidated statements of operations. The cost of investments for purposes of computing realized and unrealized gains and losses is based on the specific identification method. Interest earned on securities is also included in other income (expense) within the consolidated statements of operations.
The Company recognizes other-than-temporary impairment (“OTTI”) of a debt security for which there has been a decline in fair value below amortized cost if (i) management intends to sell the security, (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, or (iii) the Company does not expect to recover the entire amortized cost basis of the security. The amount by which amortized cost exceeds the fair value of a debt security that is considered to have OTTI is separated into a component representing the credit loss, which is recognized in earnings, and a component related to all other factors, which is recognized in other comprehensive loss. The measurement of the credit loss component is equal to the difference between the debt security’s amortized cost basis and the present value of its expected future cash flows discounted at the security’s effective yield. If the Company intends to sell the security, or if it is more likely than not it will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the amortized cost basis and fair value of the security. As the Company did no t have available-for-sale securities as of December 31, 2022 and did no t have any unrealized as of December 31, 2021, there was no OTTI of its available-for-sale securities as of either balance sheet date.
Fair Value of Financial Instruments
Fair value measurements are based on the premise that fair value is an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the following three-tier fair value hierarchy has been used in determining the inputs used in measuring fair value:
Level 1
Quoted prices in active markets for identical assets or liabilities on the reporting date.
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-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
Pricing inputs are generally unobservable and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require management’s judgment or estimation of assumptions that market participants would use in pricing the assets or liabilities. The fair values are therefore determined using factors that involve considerable judgment and interpretations, including but not limited to private and public comparables, third-party appraisals, discounted cash flow models, and fund manager estimates.
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 is determined using quoted market prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. The carrying value of the SVB Term Loan (see Note 8) is estimated to approximate its fair value as the interest rate approximates the market rate for debt with similar terms and risk characteristics.
The NuvoGen obligation relates to an asset purchase transaction with a then-common stockholder of the Company (see Note 10). As of December 31, 2022, the estimated aggregate fair value of the NuvoGen obligation is approximately $ 3.9 million, determined using a Monte Carlo simulation with key assumptions including future revenue, volatility, discount and risk-free rates. The estimated fair value of the NuvoGen obligation represents a Level 3 measurement.
Inventory
Inventory is stated at the lower of cost or net realizable value. The Company determines the cost of inventory using the first-in, first out method. The Company estimates the recoverability of inventory by reference to internal estimates of future demands and product life cycles, including expiration. The Company periodically analyzes its inventory levels to identify inventory that may expire prior to expected sale or has a cost basis in excess of its estimated realizable value and records a charge to expense for such inventory as appropriate. The Company classifies inventory as long-term when it expects to utilize the inventory beyond its normal operating cycle.
The Company charges cost of sales for inventory provisions to write-down our inventory to the lower of cost or net realizable value or for obsolete or excess inventory. Most of its inventory provisions relate to excess quantities of products, based on our inventory levels and future product purchase commitments compared to assumptions about future demand and market conditions. Once inventory has been written-off or written-down, it creates a new cost basis for the inventory that is not subsequently written-up, any increase in demand forecasted or inventory value of such inventory is not realized until such inventory is sold.
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 need to be extended beyond that period. However, in no case will the evaluation period exceed one year. If the customer has not purchased the equipment or entered into a reagent rental agreement with the Company after evaluating the product for one year, the equipment is returned to the Company or the customer is allowed to continue use of the equipment, in which case the equipment is written off to selling, general and administrative expense in the consolidated statements of operations. HTG EdgeSeq instruments at customer locations under evaluation agreements are included in finished goods inventory. Finished goods inventory under evaluation was approximately $ 0.1 million and $ 0.2 million as of December 31, 2022 and 2021, respectively.
Property and Equipment
Property and equipment are stated at historical cost and depreciated over their useful lives, which range from three to five years , using the straight-line method. Equipment used in the field is amortized using the straight-line method over the lesser of the period of the related reagent rental or the estimated useful life. Leasehold improvements are amortized using the straight-line method over the lesser of the remaining lease term or the estimated useful life.
Costs incurred in the development and installation of software for internal use and in the development of the Company’s website are expensed or capitalized, depending on whether they are incurred in the preliminary project stage (expensed), application development stage (capitalized), or post-implementation stage (expensed). Amounts capitalized following project completion are amortized on a straight-line basis over the useful life of the developed asset, which is generally three years .
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to the estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flow, an impairment charge is recognized in the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Although the Company has accumulated losses since inception, the Company believes the future cash flows will be sufficient to exceed the carrying value of the Company’s long-lived assets. There were no impairments of long-lived assets during the years ended December 31, 2022 and 2021 .
Leases
Arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the consolidated balance sheets as both a right-of-use asset and a lease liability for each type of lease, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right-of-use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right-of-use asset result in straight-line rent expense over the lease term. For financing leases, interest on the lease liability and the amortization of the right-of-use asset results in front-loaded expense over the lease term. Variable lease expenses are recorded to rent expense as incurred.
In calculating the right-of-use asset and lease liability, the Company elects to combine lease and non-lease components for all classes of assets currently under lease, including facilities and computer equipment. The Company excludes short-term leases having initial terms of 12 months or less as an accounting policy election and recognizes rent expense on short-term leases on a straight-line basis over the lease term for these leases.
Debt Issuance Costs and Debt Discounts
Costs incurred to issue non-revolving debt instruments are recognized as a reduction to the related debt balance in the consolidated balance sheets and amortized to interest expense over the contractual term of the related debt using the effective interest method. Costs incurred to issue the Loan Agreement with SVB were deferred as an asset in the consolidated balance sheets and are being amortized on a straight-line basis to interest expense over the term of the loan (see Note 8).
Contract Liabilities
Contract liabilities represent cash receipts for products or services to be delivered in future periods. When products or services are delivered to customers, contract liabilities are recognized as earned. Up-front fees received for custom RUO assay design are recognized over time based on the costs incurred to date compared with total expected costs as design or development procedures are completed and outputs are produced.
Revenue Recognition
Revenue from contracts with customers is recognized when, or as, the Company satisfies its performance obligations by delivering the promised goods or service deliverables to the customers. A good or service deliverable is transferred to a customer when, or as, the customer obtains control of that good or service deliverable. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized by measuring the Company’s progress in satisfying the performance obligation in a manner that depicts the transfer of the goods or services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that the Company determines the customer obtains control over the promised good or service deliverable. The amount of revenue recognized reflects the consideration the Company expects to be entitled to in exchange for those promised goods or services ( i.e. , the “transaction price”). In determining the transaction price, the Company considers multiple factors, including the effects of variable consideration. Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. In determining when to include variable consideration in the transaction price, the Company considers the range of possible outcomes, the predictive value of its past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is to factors outside of the Company’s influence, such as the judgment and actions of third parties.
For contracts where the period between when the Company transfers a promised good or service to the customer and when the customer pays is one year or less, the Company has elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component.
As the Company’s agreements for product and product-related services revenue have an expected duration of one year or less, the Company has elected the practical expedient to not disclose information about its remaining performance obligations.
The Company has also made a policy election to exclude from the measurement of the transaction price all taxes assessed by a government authority that are both imposed on and concurrent with a specific revenue producing transaction and collected by the Company from a customer. Such taxes may include but are not limited to sales, use, value added and certain excise taxes.
See Note 9 for additional discussion of the Company’s revenue recognition policies.
Product Warranty
The Company generally provides a one-year warranty on its HTG EdgeSeq platform covering the performance of system hardware and software in conformance with customer specifications under normal use and protecting against defects in materials and workmanship. The Company may, at its option, replace, repair or exchange products covered under valid warranty claims. A provision for estimated warranty costs is recognized at the time of sale, through cost of product and product-related services revenue, based upon recent historical experience and other relevant information as it becomes available. Customers have the option to purchase an extended warranty after the one-year warranty period expires. The Company continuously assesses the adequacy of its product warranty accrual by reviewing actual claims and adjusts the provision as needed. Warranty accrual is included in accrued liabilities and other non-current liabilities in the consolidated balance sheets.
Research and Development Expenses
Research and development expenses represent costs incurred internally for and externally in support of research and development activities. These costs include those generated through research and development efforts for the improvement and expansion of the Company’s proprietary profiling technology and product offerings, and payroll, related expenses, consulting expenses, laboratory supplies, facilities and equipment costs incurred to complete development milestones associated with the Company's transcriptome-informed drug discovery business, HTG Therapeutics.
Stock-based Compensation
The Company incurs stock-based compensation expense relating to grants of restricted stock units (“RSUs”) and stock options to employees, consultants and non-employee directors under its equity incentive plans, and stock purchase rights granted under its employee stock purchase plans. The Company recognizes expense for stock-based awards based on the fair value of awards on the date of grant. The fair value of RSUs is based on the quoted market price of the Company’s common stock on the date of grant. The fair value of stock purchase rights and stock options granted pursuant to the Company’s equity incentive plans is estimated on the date of grant using the Black-Scholes option pricing model. The determination of the fair value utilizing the Black-Scholes option pricing model is affected by the fair value of the Company’s stock price and several assumptions, including volatility, expected term, risk-free interest rate, and dividend yield. Generally, these assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes. The Company accounts for forfeitures as they occur.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts and tax base of assets and liabilities using enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established against net deferred tax assets for the uncertainty it presents of our ability to use the net deferred tax assets, in this case, primarily carryforwards of net operating tax losses and research and development tax credits. In assessing the realizability of net deferred tax assets the Company has assessed the likelihood that net deferred tax assets will be recovered from future taxable income, and to the extent that it is “more likely than not” that the assets will not be recovered or there is an insufficient history of operating profits, a valuation allowance is established. The Company records the valuation allowance in the period it determines that it is more likely than not that net deferred tax assets will not be realized. For the years ended December 31, 2022 and 2021, the Company has provided a full valuation allowance for all net deferred tax assets due to their current realization being considered remote in the near term. Uncertain tax positions taken or expected to be taken in a tax return are accounted for using the more likely than not threshold for financial statement recognition and measurement. Therefore, for income tax positions where it is not more likely than not that a tax will be sustained in a court of last resort, the Company does not recognize a tax in its financial statements.
Foreign Currency Translation and Foreign Currency Transactions
The Company has assets and liabilities, including accounts receivable and accounts payable, which are denominated in currencies other than its functional currency. These assets and liabilities are subject to re-measurement, the impact of which is recorded in selling, general and administrative expense within the consolidated statements of operations.
Adjustments resulting from translating foreign functional currency financial statements of the Company’s wholly owned subsidiary into U.S. Dollars are included in the foreign currency translation adjustment, a component of accumulated other comprehensive income in the consolidated statements of changes in stockholders' equity.
Comprehensive Loss
Comprehensive loss includes certain changes in equity that are excluded from net loss. Specifically, unrealized gains and losses on short-term available-for-sale investments and adjustments resulting from translating foreign functional currency financial statements into U.S. Dollars are included in comprehensive loss.
Concentration Risks
Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents and accounts receivable. The Company maintains the majority of its cash balances in the form of cash deposits in checking and money market accounts in amounts in excess of federally insured limits. In accordance with the Loan Agreement, as of December 31, 2022, the Company's cash balances were held in operating accounts at and in a custodial account at U.S. Bank subject to a control agreement with Silicon Valley Bank. On March 12, 2023, the U.S. Treasury, Federal Reserve and FDIC announced that SVB depositors will have access to all of their money beginning on March 13, 2023. Management believes that the credit risk with regard to these deposits is not significant based on the quality of the financial institution or, with respect to deposits with SVB, as a result of the guarantee provided by the U.S. Treasury, Federal Reserve and FDIC.
The Company sells its instruments, consumables, sample processing services, custom RUO assay design and collaborative development services primarily to biopharmaceutical companies, academic institutions and molecular labs. The Company routinely assesses the financial strength of its customers and credit losses have been minimal to date.
The Company’s top two customers accounted for 16 % and 14 % of the Company’s total revenue for the year ended December 31, 2022 , compared with the top two customers accounting for 20 % and 10 % of the Company’s total revenue for the year ended December 31, 2021 . The largest three customers accounted for approximately 37 % , 24 % and 13 % of the Company’s accounts receivable as of December 31, 2022 . The largest two customers accounted for approximately 18 % and 17 % of the Company’s accounts receivable as of December 31, 2021. The third and fourth largest customers accounted for approximately 10 % each of the Company’s accounts receivable as of December 31, 2021.
One vendor accounted for 13 % of the Company’s accounts payable as of December 31, 2022 , compared with two vendors who accounted for 28 % and 16 % of the Company’s accounts payable as of December 31, 2021.
The Company is also subject to supply chain risks related to the reliance on a single supplier to manufacture a subcomponent used in its HTG EdgeSeq instruments. Although there are a limited number of manufacturers for components of this type, the Company believes that other suppliers could provide similar products on comparable terms. However, a change in or loss of this supplier could significantly delay the delivery of products, which in turn would materially affect the Company’s ability to generate revenue.
Recent Accounting Pronouncements
The following are new FASB Accounting Standard Updates ("ASU") that had not been adopted by the Company as of December 31, 2022. The Company's management does not believe that any other recently issued, but not yet effective, accounting standards updates, if currently adopted, would have a material effect on the accompanying consolidated financial statements.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions ("ASU 2022-03"), which amends ASC 820 to clarify that a contractual sales restriction is not considered in measuring an equity security at fair value and to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value. ASU 2022-03 applies to both holders and issuers of equity and equity-linked securities measured at fair value. The amendments in this ASU are effective for the Company in fiscal years and interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Company is still evaluating the impact of this pronouncement on the financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and also simplifies the diluted earnings per share calculation in certain areas. The standard is effective for the Company effective for fiscal years beginning after December 15, 2023. Early adoption is permitted, and adoption must be as of the beginning of the Company’s annual fiscal year. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses , which was subsequently amended by ASU 2018-19, ASU 2019-10 and ASU 2020-02, and requires the measurement of expected credit losses for financial instruments carried at amortized cost held at the reporting date based on historical experience, current conditions and reasonable forecasts. The updated guidance also amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. With the issuance of ASU 2019-10 in November 2019, the standard will be for the Company for fiscal years and interim periods within those fiscal years beginning after December 15, 2022. The Company's adoption of this standard on January 1, 2023 is not expected to have a material impact on its consolidated financial statements or related footnote disclosures, given the high credit quality of the obligors to its available-for-sale debt securities and its history of minimal debt expense relating to trade accounts receivable.
Note 3. Inventory
Inventory - current, net of allowance, consisted of the following as of the dates indicated:
December 31,
Raw materials
Work in process
Finished goods
Total gross inventory - current
Less general inventory allowance
Inventory - non-current, net of excess inventory allowance, included in other non-current assets on the consolidated balance sheets, consisted of the following as of the dates indicated:
December 31,
Raw materials - non-current, net
Work in process - non-current, net
Finished goods - non-current
For the year ended December 31, 2022, the Company recorded adjustments to its specific inventory reserve of $ 49,249 , to reflect the projected obsolescence of a specific inventory item, and to the general inventory allowance for estimated shrinkage, obsolescence and cycle count adjustments of $ 44,762 . In addition, the Company recorded a provision for excess inventory of approximately $ 1.1 million, primarily related to the write-down of estimated excess quantities of raw materials, whose inventory levels are higher than our updated forecasts of future demand for those products.
For the year ended December 31, 2021, the Company recorded adjustments to the general inventory allowance of approximately $ 0.2 million. Adjustments in these periods to the general, specific and excess inventory allowances have been included in cost of product and product-related services revenue in the accompanying consolidated statements of operations.
Note 4. Fair Value
Financial assets and liabilities measured at fair value are classified in their entirety in the fair value hierarchy, based on the lowest level input significant to the fair value measurement. The following table classifies the Company’s financial assets measured at fair value on a recurring basis as of December 31, 2022 and 2021, respectively, in the fair value hierarchy:
December 31, 2022
Level 1
Level 2
Level 3
Total
Asset included in:
Cash and cash equivalents
Money market securities
Total
December 31, 2021
Level 1
Level 2
Level 3
Total
Asset included in:
Cash and cash equivalents
Money market securities
Investments available-for-sale at fair value
Corporate debt securities
Total
There were no other financial instruments subject to fair value measurement on a recurring basis. Transfers to and from Levels 1, 2 and 3 are recognized at the end of the reporting period. There were no transfers between levels for the years ended December 31, 2022 and 2021.
Level 1 instruments include investments in money market securities . 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 as of December 31, 2021 included corporate debt securities, including commercial paper and corporate bonds. Valuations of Level 2 instruments can be verified to quoted prices, recent trading activity for identical or similar instruments, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g. indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.
Fair values of these assets are based on prices provided by independent market participants that are based on observable inputs using market-based valuation techniques. These valuation models and analytical tools use market pricing or similar instruments that are both objective and publicly available, including matrix pricing or reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids and/or offers. The Company did not adjust any of the valuations received from these third parties with respect to any of its Level 1 or 2 securities for either of the years ended December 31, 2022 or 2021 and did not have any Level 3 financial assets or liabilities during either of these periods.
Note 5. Available-for-Sale Securities
The Company did no t have any investments in available-for-sale securities as of December 31, 2022. The Company's portfolio of available-for-sale securities as of December 31, 2021 consisted of high credit quality corporate debt securities. The following is a summary of the securities as of that date:
December 31, 2021
Gross
Gross
Fair Value
Amortized
Unrealized
Unrealized
(Net Carrying
Cost
Gains
Losses
Amount)
Corporate debt securities
Total available-for-sale securities
There were no gross unrealized gains or losses related to the Company's available-for-sale securities investments as of December 31, 2022 or 2021 . There were no net adjustments to unrealized holding gains on short-term investments, net of tax in other comprehensive income for the years ended December 31, 2022 and 2021 .
Note 6. Property and Equipment
Property and equipment, net consisted of the following as of the dates indicated:
December 31,
Furniture & fixtures
Leasehold improvements
Equipment used in manufacturing
Equipment used in research & development
Equipment used in the field
Software
Property and equipment
Less: accumulated depreciation and amortization
Depreciation and leasehold improvement amortization expense was approximately $ 0.6 million and $ 0.7 million for the years ended December 31, 2022 and 2021 , respectively.
Note 7. Accrued Liabilities
Accrued liabilities consisted of the following as of the dates indicated:
December 31,
Accrued employee bonuses
Payroll and employee benefit accruals
Accrued professional fees
Other accrued liabilities
Note 8. Debt Obligations
Current portion of long-term debt consisted of the following as of the dates indicated:
December 31,
SVB Term Loan, net of discount and debt issuance costs
2021 Insurance Note
Long-term debt, net of current portion, discount and debt issuance costs, consisted of the following as of the dates indicated:
December 31,
SVB Term Loan, net of discount and debt issuance costs
SVB Term Loan
On June 24, 2020 (the “Closing Date”), the Company entered into the SVB Term Loan with SVB, which provided a secured term loan in the principal amount of $ 10.0 million. The proceeds from the SVB Term Loan were fully funded on June 25, 2020.
The 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 %. Interest on the SVB Term Loan is due and payable monthly in arrears. The SVB Term Loan originally required interest-only payments through June 30, 2021. As a result of the Company’s achievement of an equity milestone defined in the Loan Agreement during the quarter ended June 30, 2021, the interest-only period was extended for six months through December 31, 2021. Following the extended interest-only period, the Loan Agreement required equal monthly payments of principal and interest through the maturity date of December 1, 2023 .
Prepayments of the SVB Term Loan, in whole or in part, are subject to early termination fees in an amount equal to 1.0 % of principal prepaid if prepayment occurs after the second anniversary of the Closing Date and prior to the maturity date. Upon termination of the Loan Agreement, the Company is required to pay a final fee premium equal to 8.00 % of the principal amount of the SVB Term Loan.
In July 2022, the Company and SVB entered into an amendment to the SVB Term Loan (the "Term Loan Amendment"). Under the Term Loan Amendment, the Company and SVB agreed to remove the financial covenant under the Loan Agreement that had required the Company to maintain unrestricted cash, including short term investments available-for-sale, of not less than the greater of (i) $ 12.5 million and (ii) an amount equal to six times the amount of the Company's average monthly Cash Burn (as defined in the Loan Agreement) over the trailing three months. In exchange for this accommodation, the Company prepaid $ 2.5 million of outstanding principal under the Term Loan (the "Prepayment"). SVB waived the prepayment fee that otherwise would have applied to the Prepayment. The remaining outstanding principal amount due under the Term Loan will continue to be paid in equal monthly payments of principal and interest through the maturity date of December 1, 2023 . The Term Loan Amendment was accounted for as a modification of the original SVB Term Loan.
On March 10, 2023, the FDIC took control and was appointed receiver of SVB. The SVB Term Loan remains intact and the Company will continue to make required payments through the end of the current year, at which time the SVB Term Loan will be repaid in full.
The Company’s obligations under the Loan Agreement are secured by a security interest in substantially all of its assets, excluding intellectual property (which is subject to a negative pledge), and the Company’s future subsidiaries, if any, may be required to become co-borrowers or guarantors under the Loan Agreement. If we default under our obligations under the SVB Term Loan, including as a result of a material adverse change, as defined in the SVB Term Loan, the lender could proceed against the collateral granted to them to secure our indebtedness or declare all obligations under the SVB Term Loan to be due and payable. The determination as to whether a material adverse change has occurred is not within the Company's control and it is unclear how the current managers of Silicon Valley Bridge Bank will view the SVB Term Loan from a risk standpoint and what actions they may elect to take under the SVB Term Loan to protect the financial interests of the lender.
The remaining principal repayments due under the SVB Term Loan as of December 31, 2022 are as follows:
Less discount and deferred financing costs
Plus final fee premium
Total SVB Term Loan, net
The Company included $ 0.2 million and $ 0.6 million of debt discount associated with the SVB Term Loan, resulting from fees and debt issuance costs, inclusive of the fair value of warrants issued, in current portion of long-term debt, net of discount and debt issuance costs and long-term debt, net of current portion, discount and debt issuance costs, respectively, in the accompanying consolidated balance sheets as of December 31, 2022 and 2021, respectively. Amortization of the debt discount associated with the SVB Term Loan was $ 0.4 million and $ 0.5 million for the years ended December 31, 2022 and 2021, respectively, and was included in interest expense in the consolidated statements of operations. The effective interest rates for the years ended December 31, 2022 and 2021 were 16.15 % and 10.47 %, respectively.
Insurance Note
In May 2021, the Company entered into a new commercial financing agreement to extend the payment period related to its directors and officers insurance policy (the “2021 Insurance Note”). The 2021 Insurance Note required a down payment to be made upon signing the agreement equal to approximately $ 0.4 million. The remaining unpaid premium balance of approximately $ 0.7 million was financed at an annual rate of 3.57 % and was repaid in nine equal monthly payments of principal and interest through February 2022 .
In May 2022, the Company entered into a new commercial financing agreement to extend the payment period related to its directors and officers insurance policy (the "2022 Insurance Note"). The 2022 Insurance Note required a down payment to be made upon signing the agreement equal to approximately $ 0.3 million. The remaining unpaid premium balance of approximately $ 0.8 million was financed at an annual rate of 3.32 % and was to be repaid in nine equal monthly payments of principal and interest beginning in June 2022 . The 2022 Insurance Note contained customary events of default relating to, among other things, payment defaults and breaches of representations, warranties or terms of the 2022 Insurance Note documents, and may be prepaid by the Company at any time prior to maturity with no prepayment penalties. In November 2022, the Company prepaid the remainder of the 2022 Insurance Note.
Note 9. Revenue from Contracts with Customers
Product and Product-related Services Revenue
The Company had product and product-related services revenue consisting of revenue from the sale of instruments and consumables and the use of the HTG EdgeSeq proprietary technology to process samples and design custom RUO assays for the years ended December 31, 2022 and 2021 as follows:
Years Ended December 31,
Product revenue:
Instrument
Consumables
Total product revenue
Product-related services revenue:
Custom RUO assay design
RUO sample processing
Total product-related services revenue
Total product and product-related services revenue
Revenue by primary geographic market for the years ended December 31, 2022 and 2021 was as follows:
December 31, 2022
United States
Europe
Other
Product revenue
Product-related services revenue
Total product and product-related services revenue
December 31, 2021
United States
Europe
Other
Product revenue
Product-related services revenue
Total product and product-related services revenue
Sale of instruments and consumables
The delivery of each instrument and the 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. The Company’s 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. We have elected the practical expedient to account for shipping and handling as activities to fulfill the promise to transfer the consumables.
The Company provides instruments to certain customers under reagent rental agreements. Under these agreements, the Company installs an instrument 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. The Company measures 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. The Company expects 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.
RUO Sample Processing
The Company also provides sample preparation and processing services and molecular profiling of retrospective cohorts for its customers through its 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 the Company has the present right to payment.
Custom RUO Assay Design
The Company enters into custom RUO assay design agreements that may generate up-front fees and subsequent payments that may be earned upon completion of design process phases. The Company measures progress toward complete satisfaction of its performance obligation to perform custom RUO assay design procedures using an output method based on the costs incurred to date compared with total expected costs, as this is representative of the delivery of outputs under the arrangements and the best measure of progress. However, because in most instances the assay development fees are contingent upon completion of each phase of the design project and the decision of the customer to proceed to the next phase, the amount to be included in the transaction price and recognized as revenue is limited to that which the customer is contractually obligated to pay upon completion of that phase, which is when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Changes in estimates of total expected costs are accounted for prospectively as a change in estimate. From period to period, custom RUO design services revenue can fluctuate substantially based on the completion of design-related phases.
The Company did no t recognize any custom RUO assay design revenue from performance obligations that were satisfied in previous periods during the years ended December 31, 2022 or 2021.
Contract Liabilities
The Company may receive up-front payments from customers for custom RUO assay design and sample processing services. In addition, payments for instrument extended warranty contracts are required to be made in advance. The Company recognizes such up-front payments as contract liabilities. The contract liabilities are subsequently reduced as revenue is recognized. Contract liabilities of approximately $ 0.2 million and $ 0.1 million were included in other current liabilities as of December 31, 2022 and 2021, respectively, and an additional immaterial amount of contract liabilities were included in other non-current liabilities as of each date in the consolidated balance sheets reflecting the period in which the Company expects to realize the deferred revenue.
Changes in the Company’s contract liabilities were as follows as of the dates indicated:
Product
Revenue
Sample
Processing
Total Contract
Liability
Balance at January 1, 2022
Deferral of revenue
Recognition of deferred revenue
Balance at December 31, 2022
Product
Revenue
Sample
Processing
Total Contract
Liability
Balance at January 1, 2021
Deferral of revenue
Recognition of deferred revenue
Balance at December 31, 2021
Note 10. 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 agreed to pay total aggregate cash compensation to NuvoGen under the agreement of $ 15.0 million. 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, the Company is obligated to pay the greater of $ 0.4 million or 6 % of annual revenue until the obligation is paid in full. The Company paid yearly fixed fees, in quarterly installments, to NuvoGen of $ 0.4 million as well as revenue-based payments of approximately $ 0.1 million during the years ended December 31, 2022 and 2021 , respectively, for the amount by which 6% of revenue exceeded the applicable fixed fee. Beginning on January 1, 2019 and continuing until the remaining obligation has been paid in full, interest on the remaining unpaid obligation is being accrued and will compound annually at a rate of 2.5 % per year. Accrued interest related to this obligation is payable on the date that the remaining obligation is paid in full.
Minimum payments to be made in 2023 include $ 46,031 of revenue-based payments payable as of December 31, 2022 and an estimate of additional revenue-based payments to be made throughout the remainder of 2023 relating to revenue generated in the first, second and third quarters of 2023 using actual revenue generated in the same quarters in 2022. Minimum payments for the remaining years include only the minimum payments for each year. Actual payments could be significantly more than provided in the table, to the extent that 6% of the Company’s annual revenue in those years exceeds $ 0.4 million:
2028 and beyond
Total NuvoGen obligation payments
Plus interest accretion
Total NuvoGen obligation, net
The Company recorded the obligation at the estimated present value of the future payments using a discount rate of 2.5 %, which represented the Company’s estimate of its effective borrowing rate for similar obligations. The unamortized interest accretion was $( 55,620 ) and $( 67,088 ) as of December 31, 2022 and 2021, respectively. Discount accreted during the years ended December 31, 2022 and 2021 was $( 11,467 ) , and $( 12,288 ) , respectively, and was included in interest expense in the consolidated statements of operations.
Note 11. Leases
Operating Leases
The Company leases office space under agreements classified as operating leases. The Company’s active leases as of December 31, 2022 relate to the Company’s office and manufacturing space in Tucson, Arizona, and expire in 2025 . The Company’s leases do not include any contingent rental payments, impose any financial restrictions, or contain any residual value guarantees.
The Company amended its Tucson facility leases in September 2021 to extend the terms of the leases for three years through January 31, 2025. The lease extension was treated as a lease modification for accounting purposes, and allows for an additional extension of two years on the same terms and conditions of the existing amended lease agreement, except that the lease rates would be adjusted to reflect lease rates applicable to like-kind buildings within the market at the time that the Company elects to exercise the extension options, but in no event less than the last applicable rental rate. The Company has not accounted for these renewal options in the calculation of the lease liabilities and right-of-use assets as the Company is not reasonably certain to exercise the options.
In the fourth quarter of 2022, the Company recorded an increase to its operating lease liability as the result of leasehold improvements financed by the landlord, to be repaid in equal installments over the remaining term of the lease.
In the first quarter of 2021, the Company closed its development laboratory in San Carlos, California and, as a result, $ 0.2 million of operating right-of-use assets related to the abandonment of the laboratory were written off to research and development expense for the year ended December 31, 2021.
Variable expenses generally represent the Company’s share of the landlord’s operating expenses and are recorded when incurred. Incremental borrowing rates used to discount future lease payments in calculating lease liabilities were estimated by reference to the rates for similar length secured lines of credit to the Company’s lease agreements provided by the Company’s lenders at the time that the lease liabilities were recorded, as these rates represented the cost of borrowing for secured loans of similar duration. The Company does not have any operating lease arrangements where it acts as a lessor.
The components of lease cost for operating leases were as follows:
Years Ended December 31,
Operating leases
Operating lease cost
Variable lease cost
Total rent expense
The table below summarizes other information related to the Company’s operating leases:
Years Ended December 31,
Cash paid for amounts included in measurement of operating lease liabilities
Establishment of operating lease liabilities arising from obtaining right-of-use- assets
Weighted-average remaining lease term – operating leases
Weighted-average discount rate – operating leases
Remaining maturities of the Company’s operating leases, included in operating lease liabilities – current and operating lease liabilities - non-current, net of discount, in the consolidated balance sheets as of December 31, 2022, are as follows:
Total
Less present value discount
Total operating lease liabilities
Less operating lease liabilities - current
Operating lease liabilities - non-current
Financing Leases
The Company has a small number of computer and copier equipment leases that are classified as financing leases. Incremental borrowing rates used to discount future lease payments in calculating lease liabilities were estimated by reference to information received by the Company from bankers regarding estimated current borrowing rates for collateralized loans with similar amount and duration as the leases. The Company did not have any material financing leases as of either the year ended December 31, 2022 or 2021.
Note 12. Net Loss Per Share
Basic loss per common share 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. Diluted loss per common share is computed similar to basic loss per common share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock.
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:
Years Ended December 31,
Numerator:
Net loss
Denominator:
Weighted-average shares outstanding-basic and diluted *
Net loss per share, basic and diluted
*Reflects the retrospective adjustment related to the reverse stock split completed on December 20, 2022.
The following common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because their effect would have been anti-dilutive:
Years Ended December 31,
Options to purchase common stock
Series A Preferred
Common stock warrants
Unvested restricted stock units
Note 13. Warrants
In connection with certain of its redeemable convertible preferred stock issuances, debt agreements, convertible debt and other financing arrangements, the Company has issued warrants for shares of its common stock and various issues of its redeemable convertible preferred stock which have since been converted to common stock warrants.
In connection with the March 2022 Securities Purchase Agreement (see Note 14), the Company issued and sold pre-funded warrants exercisable for an aggregate of 200,911 shares of common stock. The pre-funded warrants had an exercise price of $ 0.012 per share and were exercised in full in May 2022 for proceeds of $ 2,411 . The Company also issued and sold to the investor common warrants to purchase 270,415 shares of common stock that will expire on March 17, 2024 and common warrants to purchase an additional 270,415 shares of common stock that will expire on September 17, 2027 . Each of these common warrants became exercisable commencing September 21, 2022 and has an exercise price of $ 24.744 per share.
In connection with the December 2022 Securities Purchase Agreement (see Note 14), the Company issued and sold pre-funded warrants exercisable for an aggregate of 1,188,322 shares of common stock. The pre-funded warrants had an exercise price of $ 0.001 per share and were exercised in full in December 2022 for proceeds of $ 1,188 . The Company also issued and sold to the investor warrants to purchase 1,290,322 shares of common stock that will expire on December 23, 2027 and warrants to purchase an additional 1,290,322 shares of common stock that will expire on December 23, 2024 . Each of these common warrants became exercisable commencing December 23, 2022 and has an exercise price of $ 7.50 per share.
Also in connection with the December 2022 Securities Purchase Agreement, the Company issued warrants to purchase up to an aggregate of 38,709 shares of common stock to designees of the placement agent for the transaction. The warrants issued to the placement agent have substantially the same terms as the warrants above, except the placement agent warrants have an exercise price of $ 9.6875 per share and expire on December 21, 2027 .
The following table shows the common stock warrants outstanding as of December 31, 2022:
Warrant Issuance Date
Shares of
Common Stock
Underlying
Warrants
Exercise
Price/Share
Expiration Date
August 2014
March 2016
March 2018
June 2020
March 2022
March 2022
December 2022
December 2022
December 2022
Note 14. Stock holders’ Equity
Reverse Stock Split
On December 20, 2022, the Company completed a reverse stock split of its 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. No fractional shares were issued in the reverse stock split. Instead, fractional shares that would have otherwise resulted from the stock split were purchased by us at the applicable percentage of $ 8.20 per share. All share and per share amounts included within these consolidated financial statements have been retrospectively adjusted to reflect the reverse stock split.
Equity Offerings
September 2019 Securities Purchase Agreement
In September 2019, concurrently with the closing of an underwritten public offering, the Company entered into a Securities Purchase Agreement (the "September 2019 Securities Purchase Agreement") with certain institutional accredited investors (the "Purchasers"), pursuant to which the Company sold the Purchasers, in a private placement transaction, warrants to purchase up to an aggregate of 30,064 shares of its common stock ("Warrant Shares"), at a price of $ 115.20 per warrant (which $ 115.20 price related to the pre-funded portion of the total $ 117.00 exercise price per share). Each pre-funded warrant had a remaining exercise price of $ 1.80 per share and became immediately exercisable upon issuance, subject to certain beneficial ownership limitations. In June 2021, the remaining 12,416 pre-funded warrants were exercised on a cashless, net exercise basis, resulting in the issuance of 12,073 shares of common stock.
ATM Offering
In November 2019, the Company entered into a Controlled Equity Offering Sales Agreement with Cantor Fitzgerald & Co. ("Cantor") as sales agent, pursuant to which the Company was able to offer and sell, from time to time, through Cantor, shares of its common stock, par value $ 0.001 per share, by any method deemed to be an "at the market offering" as defined by rule 415(a)(4) under the Securities Act (the "ATM Offering").
During the year ended December 31, 2021, the Company sold 170,907 shares of common stock under the ATM Offering at then-market prices for net proceeds of approximately $ 10.7 million after paying sales commissions of approximately $ 0.3 million.
LP Purchase Agreement
In March 2020, the Company entered into a purchase agreement ("LP Purchase Agreement") with Lincoln Park Capital Fund, LLC ("Lincoln Park"), pursuant to which, upon the terms and subject to the conditions and limitations set forth therein, the Company had the right to sell to Lincoln Park up to $ 20.0 million of shares of its common stock ("Purchase Shares") from time to time over the 36-month term of the LP Purchase Agreement. During the year ended December 31, 2021, the Company sold 12,864 shares of common stock under the LP Purchase Agreement at a weighted average price of $ 69.96 per share for total gross proceeds of approximately $ 0.9 million. The LP Purchase Agreement is no longer in effect.
Exchange and Private Placement
In February 2020, the Company entered into an Exchange and Purchase Agreement with certain accredited investors pursuant to which the Company agreed to (i) issue the investors an aggregate of 41,100 shares of its newly designated Series A Convertible Preferred Stock, par value $ 0.001 per share ("Series A Preferred"), in exchange for the investors surrendering to the Company for cancellation an aggregate of 22,833 shares of its common stock and (ii) sell and issue to the investors an aggregate of 10,170 shares of Series A Preferred for an aggregate purchase price of $ 0.6 million, or $ 59.00 per share.
In March 2022, the remaining 23,770 shares of Series A Preferred were converted by the investors into an aggregate of 13,206 shares of common stock. Accordingly, no shares of Series A Preferred are outstanding as of December 31, 2022. All of the previously designated Series A Preferred have resumed the status of authorized, unissued and undesignated preferred stock, which may be designated from time to time by the Company's Board of Directors.
March 2022 Securities Purchase Agreement
In March 2022, the Company entered into a Securities Purchase Agreement (the “March 2022 Securities Purchase Agreement”) with a single investor pursuant to which it 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 estimated fees and expenses, of approximately $ 7.0 million. Each unit consists 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 on September 21, 2022 and has an exercise price of $ 24.744 per share. Each pre-funded warrant has an exercise price of $ 0.012 per share and does not expire until exercised in full. The pre-funded warrants may not be exercised if the aggregate number of shares of common stock beneficially owned by the holder thereof would exceed 9.99 % immediately after exercise thereof. In May 2022, the 200,911 pre-funded warrants were exercised for proceeds of $ 2,411 .
The common warrants issued in this transaction may not be exercised if the aggregate number of shares of common stock beneficially owned by the holder thereof would exceed 4.99 % immediately after exercise thereof, which ownership cap may be increased by the holder up to 9.99 % upon 61 days’ prior notice.
Cantor served as the placement agent in connection with the March 2022 Securities Purchase Agreement. The Company paid Cantor a fee of approximately $ 0.3 million plus reimbursement for certain out-of-pocket expenses for its role as placement agent and has incurred approximately $ 0.2 million of additional transaction costs.
December 2022 Securities Purchase Agreement
In December 2022, in connection with a best-efforts public offering, the Company entered into a Securities Purchase Agreement (the "December 2022 Securities Purchase Agreement") with a certain institutional investor, pursuant to which the Company sold 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.
The common warrants issued in this transaction may not be exercised if the aggregate number of shares of common stock beneficially owned by the holder thereof would exceed 4.99 % immediately after exercise thereof, which ownership cap may be increased by the holder up to 9.99 % upon 61 days’ prior notice.
Each pre-funded warrant had an exercise price of $ 0.001 per share and did not expire until exercised in full. In December 2022, the 1,188,322 pre-funded warrants were exercised for proceeds of $ 1,188 . Each of the common warrants became immediately exercisable upon issuance and has an exercise price of $ 7.50 per share. The exercise price of the warrants issued in this agreement is subject to adjustment for stock split, reverse splits and similar capital transactions as described in the warrants.
H.C. Wainwright & Co., LLC (the "Placement Agent") served as the exclusive placement agent in connection with the December 2022 Securities Purchase Agreement. The Company paid the Placement Agent a cash fee of 6.5 % of the aggregate gross proceeds raised at the closing of the December 2022 Securities Purchase Agreement, plus a management fee equal to 0.5 % of the gross proceeds raised at the closing, and reimbursement of certain expenses and legal fees in the amount of $ 125,000 . The Company also issued to designees of the Placement Agent warrants to purchase up to an aggregate of 38,709 shares of common stock (the “Placement Agent warrants”). The Placement Agent warrants have substantially the same terms as the warrants issued under the December 2022 Securities Purchase Agreement, except the Placement Agent warrants have an exercise price of $ 9.6875 per share and expire on December 21, 2027.
Common Stock
Pursuant to its amended and restated certificate of incorporation, the Company is authorized to issue 26,666,667 shares of common stock at a par value of $ 0.001 per share. Each share of common stock is entitled to one vote. 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 its amended and restated 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 can 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.
Series A Preferred Stock
In October 2022, the Company entered into a Purchase Agreement (the "Purchase Agreement" with Ann Hanham, Ph.D., the Chair of the Company's Board of Directors (the "Purchaser"), pursuant to which the Company agreed to issue and sell one share of the Company's newly designated Series A Preferred Stock, par value $ 0.001 per share (the "Series A Preferred Stock"), to the Purchaser for a purchase price of $ 100.00 . The Series A Preferred Stock was non-convertible, generally had voting rights only with respect to a proposal to authorize a reverse split of our common stock, and was automatically redeemed in an event certain to occur. On November 29, 2022, the one share of Series A Preferred Stock was redeemed for $ 100.00 upon stockholder approval of a reverse stock split.
Stock-based Compensation
The Company incurs stock-based compensation expense relating to the grants of RSUs and stock options to employees, non-employee directors and consultants under its equity incentive plans and through stock purchase rights granted under the ESPP.
Equity Incentive Plans
In August 2020, the Company’s stockholders, upon the recommendation of the Company’s Board of Directors, approved the 2020 Equity Incentive Plan (the “2020 Plan”) as a successor to and continuation of the previous 2001 Stock Option Plan, 2011 Equity Incentive Plan and 2014 Equity Incentive Plan (the "2014 Plan"). Upon approval of the 2020 Plan, 62,057 shares, including 5,712 remaining shares reserved for issuance under the 2014 Plan (excluding shares available for the granting of inducement awards under the 2014 Plan’s inducement share pool), were reserved for issuance under the 2020 Plan. No new awards may be granted under the 2001, 2011 or 2014 equity plans.
There were 16,668 shares of the Company’s common stock available for issuance under the 2020 Plan as of December 31, 2022 in addition to shares that may become available from time to time as shares of our common stock subject to outstanding awards granted under the 2014 Plan (excluding Inducement Awards) or the 2011 Plan that, following the effective date of the 2020 Plan (i) are not issued because such award or any portion thereof expires or otherwise terminates without all of the shares covered by such award having been issued; (ii) are not issued because such award or any portion thereof is settled in cash; or (iii) are forfeited back to or repurchased by the Company because of the failure to meet a contingency or condition required for the vesting of such shares. The 2020 Plan does not contain an evergreen provision.
In July 2021, the Company’s Board of Directors adopted the Company’s 2021 Inducement Plan (the “2021 Inducement Plan”), pursuant to which 25,000 shares were initially authorized and reserved for issuance exclusively for the grant of awards to individuals who were not previously employees or non-employee directors of the Company, as inducement material to the individuals’ entering into employment with the Company (“Inducement Awards”). There were 13,961 shares of the Company’s stock available for issuance under the 2021 Inducement Plan as of December 31, 2022, in addition to shares that may become available from time to time as shares of the Company’s common stock subject to outstanding awards granted under the 2021 Inducement Plan are forfeited back to or repurchased by the Company because of the failure to meet a contingency or condition required for the vesting of such shares.
The Company’s Board of Directors determines the grant date for all awards granted under the equity plans. The exercise price of stock options granted is generally equal to the closing price of the Company’s common stock on the date of grant. All stock options granted have a ten-year term. The vesting period of stock options and RSUs is established by the Company’s Board of Directors but typically ranges between one and four years .
Amounts recognized in the consolidated statements of operations with respect to the Company’s equity incentive plans were as follows:
Years Ended December 31,
Selling, general and administrative
Research and development
Cost of product and product-related services revenue
The following table summarizes stock option activity (including Inducement Award activity) during the two-year period ended December 31, 2022:
Number of
Shares
Weighted-
Average
Exercise Price
Per Share
Weighted-
Average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic Value
Balance at January 1, 2021
Granted
Exercised
Forfeited
Expired/Cancelled
Balance at December 31, 2021
Granted
Exercised
Forfeited
Expired/Cancelled
Balance at December 31, 2022
Exercisable at December 31, 2021
Exercisable at December 31, 2022
The weighted-average fair value of stock options granted was $ 10.50 and $ 52.56 for the years ended December 31, 2022 and 2021 , respectively. Stock option activity includes 8,748 Inducement Awards outstanding as of December 31, 2022, including 3,332 Inducement Awards granted and 3,750 Inducement Awards cancelled or forfeited during the year ended December 31, 2022 and 9,166 Inducement Awards granted during the year ended December 31, 2021. As of December 31, 2022, total unrecognized compensation cost related to non-vested stock options was approximately $ 0.8 million, which is expected to be recognized over approximately 1.87 years .
The fair value of each stock option granted has been determined using the Black-Scholes option pricing model. The material factors incorporated in the Black-Scholes model in estimating the fair value of the stock options granted for the periods presented were as follows:
Fair value of common stock on grant date
Risk-free interest rate
Expected volatility
Expected term
5.5 to 5.8 years
5.2 to 6.1 years
Expected dividend yield
Expected stock price volatility . The expected volatility assumption is derived from the volatility of the Company’s common stock during the years ended December 31, 2022 and 2021.
Risk-free interest rate . The risk-free interest rate assumption is based on observed interest rates on the date of grant with maturities approximately equal to the expected term.
Expected term . The expected term represents the period that the stock-based awards are expected to be outstanding. The Company’s historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term because of a lack of sufficient data. Therefore, the Company estimates the expected term by using the simplified method provided by the SEC. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the stock options.
Expected dividend yield . The expected dividend is assumed to be zero as the Company has never paid dividends and does not anticipate paying any dividends on its common stock.
In preparing its Black-Scholes option-pricing model fair value calculations, the Company does not estimate a forfeiture rate to calculate stock-based compensation. The Company uses judgment in evaluating the expected volatility and expected terms utilized for the Company’s stock-based compensation calculations on a prospective basis.
The following table summarizes RSU activity (including Inducement Award activity) during the two-year period ended December 31, 2022:
Number of
Shares
Weighted-
Average
Grant Date
Fair Value
Per Share
Balance at January 1, 2021
Granted
Released
Forfeited
Balance at December 31, 2021
Granted
Released
Forfeited
Balance at December 31, 2022
Vested and unissued at December 31, 2022
The weighted-average fair value of RSUs granted was $ 8.29 and $ 62.40 for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, total unrecognized compensation cost related to non-vested RSUs was approximately $ 41,600 , which is expected to be recognized over approximately 0.91 years .
RSU activity includes 1,249 Inducement Awards outstanding as of December 31, 2022, including 416 Inducement Awards granted, 1,041 Inducement Awards released and 626 Inducement Awards forfeited during the year ended December 31, 2022 and 2,500 Inducement Awards granted in the year ended December 31, 2021.
Vested and unissued awards at December 31, 2022 represents RSU awards granted in November 2021 for which a portion of the awards vested on December 31, 2022 , but for which issuance of shares occurred in January 2023.
2014 Employee Stock Purchase Plan
In April 2015, the Company’s stockholders approved the 2014 Employee Stock Purchase Plan (the “2014 ESPP"), which became effective in May 2015. Under the 2014 ESPP, the number of shares of common stock reserved for issuance automatically increased on January 1 of each calendar year, from January 1, 2016 to January 1, 2021 by the lesser of (i) 1% of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendar year, (ii) 1,083 shares, or (iii) a number determined by the Company’s Board of Directors that is less than (i) and (ii) . The 2014 ESPP enables participants to contribute up to 15 % of such participant’s eligible compensation during a defined period (not to exceed 27 months) to purchase common stock of the Company. The purchase price of common stock under the 2014 ESPP is the lesser of: (i) 85 % of the fair market value of a share of the Company’s common stock on the first day of an offering or (ii) 85 % of the fair market value of the Company’s common stock at the applicable purchase date.
In August 2021, the Company’s stockholders, upon the recommendation of the Company’s Board of Directors, approved the Amended and Restated 2014 Employee Stock Purchase Plan (the “Amended 2014 ESPP”). Upon approval of the Amended 2014 ESPP, 41,666 shares of the Company’s common stock were reserved for issuance under the Amended 2014 ESPP in addition to 2,023 shares of the Company’s common stock reserved for issuance under the original 2014 ESPP. The Amended 2014 ESPP does not contain an evergreen provision; all other provisions of the 2014 ESPP remained unchanged.
Amounts recognized in the consolidated statements of operations with respect to the Amended 2014 ESPP were as follows:
Years Ended December 31,
Selling, general and administrative
Research and development
Cost of product and product-related services revenue
During the year ended December 31, 2022, employees purchased the following shares at the end of each of the six-month purchase periods:
June 2022
December 2022
Number of
Shares
Price
per Share
Number of
Shares
Price
per Share
Total number of shares purchased
During the year ended December 31, 2021, employees entering the plan at various times throughout the offering period purchased the following shares at the end of each of the six-month purchase periods:
June 2021
December 2021
Number of
Shares
Price
per Share
Number of
Shares
Price
per Share
Total number of shares purchased
As of December 31, 2022, approximately 35,120 shares of the Company’s common stock were reserved for future issuance under the Amended 2014 ESPP.
The Company recognizes employee stock purchase plan expense based on the fair value of stock purchase rights, estimated for each six-month purchase period using the Black-Scholes option pricing model. The model requires the Company to make subjective assumptions, including expected stock price volatility, risk free rate of return and estimated life. The fair value of equity-based awards is amortized straight-line over the vesting period of the award.
The material factors incorporated in the Black-Scholes model in estimating the fair value of employee stock purchase plan stock purchase rights for the periods presented were as follows:
Fair value of common stock
Risk-free interest rate
Expected volatility
Expected term
0.5 years
0.5 years
Expected dividend yield
Fair value of common stock . Estimated as the price of the Company’s common stock on the first day of each offering period.
Expected stock price volatility . The expected volatility assumption is derived from the volatility of the Company’s common stock in recent periods for the years ended December 31, 2022 and 2021.
Risk-free interest rate . The risk-free interest rate assumption is based on observed interest rates on the first day of the purchase period with maturities approximately equal to the expected term.
Expected term . The expected term represents the length of a purchase period under the Amended 2014 ESPP.
Expected dividend yield . The expected dividend is assumed to be zero as the Company has never paid dividends and does not anticipate paying any dividends on its common stock.
Note 15. 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.
Employee Agreements
The Company has entered into Severance and Change in Control Plan agreements with certain named executive officers and various other members of management, 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 agreement.
Indemnification Agreements
In the course of operating its 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 in any action or proceeding arising out of their services as one of the Company’s directors or executive officers.
Product Warranty
The following is a summary of the Company’s general product warranty liability. Product warranty liabilities of approximately $ 73,000 and $ 15,000 were included in accrued liabilities and other non-current liabilities, respectively, in the accompanying consolidated balance sheets as of December 31, 2022. Expense relating to the recording of this reserve is recorded in cost of product and product-related services revenue within the accompanying consolidated statements of operations.
December 31,
Beginning balance
Cost of warranty claims
Increase in warranty reserve
Ending balance
Defined Contribution Plan
In January 2003, the Company established a defined contribution plan (“401(k) Plan”) under section 401(k) of the Internal Revenue Code of 1986, as amended. All employees who are over the age of 21 and who are expected to work at least 1,000 hours in a calendar year are eligible for participation in the 401(k) Plan upon commencement of employment with the Company. The Company may make discretionary contributions to the 401(k) Plan but has no t done so during the years ended December 31, 2022 and 2021 .
Note 16. 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 accompanying consolidated statements of operations; however, income tax expense has been recorded for state minimum and foreign income 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. If the tax position is not more likely than not to be sustained in a court of last resort, 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. As discussed below, the Company has estimated $3.4 million and $3.2 million of uncertain tax positions as of December 31, 2022 and 2021, respectively, related to certain tax credit carryforwards.
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 December 31, 2022 or 2021, and has not recognized interest or penalties during the years ended December 31, 2022 and 2021, since there was no reduction in income taxes paid due to uncertain tax positions. Management of the Company believes no significant change to the amount of unrecognized tax benefits will occur within the next 12 months.
The following table summarizes loss before income taxes:
Years Ended December 31,
U.S. pre-tax loss
Foreign pre-tax gain (loss)
Loss before income taxes
The components of income tax expense are as follows:
Years Ended December 31,
Current:
Federal
State
Foreign
Total current income tax expense
Deferred:
Federal
State
Foreign
Total deferred income tax expense
Total income tax expense
The Company’s actual income tax expense for the years ended December 31, 2022 and 2021 differ from the expected amount computed by applying the statutory federal income tax rate to loss before income taxes as follows:
Years Ended December 31,
Computed tax (benefit) at 21 %
State taxes, net of federal benefit
Stock-based compensation
Foreign tax rate differential
Return to provision
Nontaxable loan forgiveness
Other
Research and development tax credit - state
Research and development tax credit - federal
Uncertain tax position adjustment for prior periods
Increase in valuation allowance
Deferred tax assets and liabilities comprise the following:
Years Ended December 31,
Deferred tax assets:
Net operating loss carryforwards
Research and development credits
R&D expenditures capitalization
Deferred revenue
Inventory reserve
Fixed assets and intangibles
Accrued NuvoGen liability
Lease liability
Other
Gross deferred tax assets
Valuation allowance
Deferred tax assets, net
Deferred tax liabilities:
Right of use asset
Total deferred tax liabilities
Net deferred tax assets (liabilities)
As of December 31, 2022, the Company has estimated federal and state net operating loss (“NOL”) carryforwards of approximately $ 206.2 million and $ 155.2 million, respectively. $ 121.6 million of the federal NOLs are scheduled to expire from 2023 through 2037 , while the remaining NOLs do not expire. $ 154.2 million of the state NOLs are scheduled to expire from 2024 through 2042 , while the remaining NOLs do not expire. The Company’s federal and state tax credit carryforwards begin expiring in 2023.
For financial reporting purposes, valuation allowances of $ 59.8 million and $ 54.0 million at December 31, 2022 and 2021, respectively, have been established to offset deferred tax assets relating primarily to NOLs and research and development credits. The increase in the valuation allowance of $ 5.8 million for the year ended December 31, 2022 was primarily due to increased operating losses. The Company has established a valuation allowance against its entire net deferred tax asset. As a result, the Company does not recognize any tax benefit until it is in a taxpaying position or there is no longer negative evidence leading to the conclusion that it is more likely than not that the benefits will not be realized.
Pursuant to Sections 382 and 383 of the IRC, annual use of the Company’s NOLs and research and development credit carryforwards may be limited if there is a cumulative change in ownership of greater than 50 % within a three-year period. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. If limited, the related tax asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance. A preliminary analysis of past and subsequent equity offerings by the Company, and other transactions that have an impact on the Company’s ownership structure, concluded that the Company may have experienced one or more ownership changes under Sections 382 and 383 of the IRC. As such, the Company has established a valuation allowance as the realization of its deferred tax assets has not met the more likely than not threshold requirement. Due to the existence of the valuation allowance, further changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.
A reconciliation of the Company’s gross unrecognized tax benefits is as follows:
Years Ended December 31,
Balance at beginning of year
Increases to prior positions
Decreases to prior positions
Increases for current year positions
Balance at end of year
As of December 31, 2022, the Company had $ 3.4 million of gross unrecognized tax benefits, related to research and experimental tax credits. The Company had no unrecognized tax benefits as of December 31, 2022, which, if recognized, would affect the annual effective tax rate, due to the full valuation allowance on the deferred tax assets. Although it is possible that the amount of unrecognized benefits with respect to our uncertain tax positions will increase or decrease in the next twelve months, the Company does not expect material changes.
On August 16, 2022, the President signed into law the Inflation Reduction Act of 2022 which contained provisions effective January 1, 2023, including a 15% corporate minimum tax and a 1% excise tax on stock buybacks, both of which we expect to be immaterial to our financial results, financial position and cash flows.
The Company files income tax returns in the United States, Arizona, California, Texas, various other state jurisdictions, and France, with varying statutes of limitations. As of December 31, 2022, the earliest year subject to examination is 2019 for U.S. federal tax purposes. The earliest year subject to examination is 2018 for the state jurisdictions, and 2019 for France. However, the Company’s federal and state NOLs and tax credit carryforwards for periods ending December 31, 2003 and thereafter remain subject to examination by the United States and certain states.
