BDO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 001-37369
HTG Molecular Diagnostics, Inc.
(Exact name of Registrant as specified in its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
3430 E. Global Loop, Tucson, AZ
(Address of principal executive offices)
86-0912294
(I.R.S. Employer
Identification No.)
85706
(Zip Code)
Registrant’s telephone number, including area code: (877) 289-2615
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001 per share
Trading Symbol(s)
HTGM
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
Non-accelerated filer
☐
☒
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☒
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock
on The Nasdaq Capital Market on June 30, 2021 (the last business day of the Registrant’s most recently completed second fiscal quarter), was $42,885,725.
The number of shares of Registrant’s Common Stock outstanding as of March 15, 2022 was 7,590,733.
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PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
[Reserved]
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Consolidated Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
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Unless the context requires otherwise, references to “HTG,” “HTG Molecular Diagnostics,” “we,” “us” and “our” refer to HTG Molecular
PART I
Diagnostics, Inc.
Forward-Looking Statements
This Annual Report on Form 10-K, including the sections entitled “Business,” “Risk Factors” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” may contain forward-looking statements. We may, in some cases, use words such as “anticipate,”
“believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “continue,” “seek,” “project,” “should,” “will,” “would” or the
negative of those terms, and similar expressions that convey uncertainty of future events or outcomes, to identify these forward-looking statements. Any
statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Forward-looking statements in this
Annual Report include, but are not limited to, statements about:
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our ability to successfully commercialize our products and services, including our HTG EdgeSeq assays and corresponding automation
systems;
our ability to generate sufficient revenue or raise additional capital to meet our working capital needs;
our ability to generate revenue from our products and services and drive revenue streams;
the impact of the COVID-19 pandemic on our business;
our ability to develop new technologies to expand our product offerings;
the activities anticipated to be performed by us and third parties under design and development projects and programs, and the expected
benefits and outcomes of such projects and programs;
the implementation of our business model and strategic plans for our business;
the regulatory landscape for our products, domestically and internationally;
our strategic relationships, including with holders of intellectual property relevant to our technologies, manufacturers of next-generation
sequencing (“NGS”) instruments and consumables, critical component suppliers, distributors of our products, and third parties who conduct
our clinical studies;
our intellectual property position;
our ability to comply with the restrictions of our debt facility and meet our debt obligations;
our expectations regarding the market size and growth potential for our life sciences and diagnostic businesses;
our expectations regarding trends in the demand for sample processing by our biopharmaceutical company customers;
our ability to secure regulatory clearance or approval, domestically and internationally, for the clinical use of our products;
any estimates regarding expenses, future revenue and capital requirements; and
our ability to sustain and manage growth, including our ability to develop new products and enter new markets.
These forward-looking statements reflect our management’s beliefs and views with respect to future events, are based on estimates and assumptions
as of the filing date of this Annual Report and are subject to risks and uncertainties. We discuss many of these risks in greater detail under “Risk Factors.”
Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management
to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking statements we may make. 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.
Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we undertake no obligation
to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
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RISK FACTOR SUMMARY
Below is a summary of the principal factors that make an investment in our common stock speculative or risky. This summary does not address all of
the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below under the
heading “Risk Factors” and should be carefully considered, together with other information in this Annual Report on Form 10-K and our other filings with
the SEC before making investment decisions regarding our common stock.
• We have incurred losses since our inception and expect to incur losses for the foreseeable future. We cannot be certain that we will achieve or
sustain profitability.
• We will need to raise additional capital to fund our operations in the future. If we are unsuccessful in attracting new capital, we may not be able
to continue operations or may be forced to sell assets to do so. Alternatively, capital may not be available to us on favorable terms, or at all. If
available, financing terms may lead to significant dilution of our stockholders’ equity.
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Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and share prices.
If we are unable to successfully commercialize our products, our business may be adversely affected.
COVID-19 has adversely affected our business and is expected to have an impact on our business for the foreseeable future.
Our financial results may vary significantly from quarter to quarter or may fall below the expectations of investors or securities analysts, each
of which may adversely affect our stock price.
• We may not be able to develop new products or enhance the capabilities of our systems to keep pace with rapidly changing technology and
customer requirements, which could have a material adverse effect on our business and operating results.
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Our HTG EdgeSeq product portfolio requires the use of NGS instrumentation and reagents and could be adversely affected by actions of third-
party NGS product manufacturers over whom we have no control.
Our HTG Therapeutics business strategy may require significant investments in working capital and may not generate any revenue.
The life sciences research and diagnostic markets are highly competitive. We face competition from enhanced or alternative technologies and
products, which could render our products and/or technologies obsolete. If we fail to compete effectively, our business and operating results
will suffer.
Our current business depends on levels of research and development spending by academic and governmental research institutions and
biopharmaceutical companies, a reduction in which could limit demand for our products and adversely affect our business and operating
results.
As part of our current business model, we intend to seek and enter into strategic development collaborations and licensing arrangements with
third parties to develop diagnostic tests, as well as therapeutic development partnerships and collaborations.
• We are dependent on third-party suppliers for certain subcomponents of our products, including a single supplier for one subcomponent of our
HTG EdgeSeq instruments.
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Limitations in the use of our products could harm our reputation or decrease market acceptance of our products; undetected errors or defects in
our products could harm our reputation, decrease market acceptance of our products or expose us to product liability claims.
Payments under the instruments governing our indebtedness may reduce our working capital. In addition, a default under our SVB Term Loan
could cause a material adverse effect on our financial position.
If any members of our management team were to leave us or we are unable to recruit, train and retain key personnel, we may not achieve our
goals.
Approval and/or clearance by the FDA and foreign regulatory authorities for any future diagnostic tests will take significant time and require
significant research, development and clinical study expenditures and ultimately may not succeed.
If we are unable to protect our intellectual property effectively, our business will be harmed.
• We may need to depend on certain technologies that are licensed to us. We do not control these technologies and any loss of our rights to them
could prevent us from selling some of our products.
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Item 1. Business.
Overview
We are a life sciences company advancing precision medicine through our innovative transcriptome-wide profiling technology. Building on more
than a decade of pioneering innovation and partnerships with biopharma leaders and major academic institutes, our proprietary next-generation HTG
EdgeSeq technology is designed to make the development of life science tools and diagnostics more effective and efficient and to unlock a differentiated
and disruptive approach to drug discovery.
Our 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 is automated on our HTG EdgeSeq system, which applies genomic sequencing tools that generate gene expression data in a timely
manner utilizing a simplified workflow for customers. 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 analysis, gaining further understanding of the molecular drivers of disease with the goal of developing biomarker-driven targeted therapies.
We also believe our HTG EdgeSeq technology can be used as a platform technology in clinical applications that will simplify, consolidate and reduce the
cost of NGS-based diagnostic workflows and in commercialized companion diagnostic (“CDx”) tests.
Our existing products include instruments, consumables, including assay kits, and software that, as an integrated platform, automate sample
processing and can quickly, robustly and simultaneously profile tens, hundreds or thousands of molecular targets from samples a fraction of the size
required by many prevailing technologies. We believe that our target customers and collaborators desire high quality molecular profiling data in a
multiplexed panel format from increasingly smaller and less invasive samples, providing our customers and collaborators with the option to analyze such
data locally to minimize turnaround time and cost.
Biopharmaceutical companies are continually working to improve their drug development processes and the efficacy and safety of their drugs. We
believe that our technology can support these initiatives by providing a seamless solution from biomarker discovery to a CDx test that can be used to assist
clinicians in confidently prescribing these drugs to their patients. Our products and service solutions allow us to partner with our biopharmaceutical
company customers to identify molecular biomarkers that can help determine which patients are most likely to benefit from a particular drug, validate these
biomarkers in clinical trials and partner to commercialize the validated CDx assay. Customers can access our technology by purchasing our platform and
assays for their internal use or by engaging us to perform certain services, including molecular profiling of respective cohorts in our VERI/O laboratory and
development of custom RUO panels to support early-stage clinical programs, investigational-use-only assays for clinical trials or CDx assays for approved
drugs. Our product and service solutions have provided us with a number of early-stage biomarker discovery programs and new opportunities to
collaborate with biopharmaceutical companies in their drug development programs.
In addition, we believe that our newly formed drug discovery business unit will allow us to leverage our proprietary HTG Transcriptome Panel
(“HTP”) and epitranscriptome profiling technologies and apply them early in the drug discovery process in conjunction with our machine learning-based
chemical library design platform, to ultimately yield de-risked drug candidate molecules with greater potential for clinical success.
2021 Highlights and Recent Developments
Our development efforts over the past 18 months have been primarily focused on completing feasibility and development of our HTG
Transcriptome Panel, including supporting our Early Adopter Program (“EAP”), where approximately 30 scientific collaborators throughout the U.S. and
EU have partnered with us to explore potential applications of HTP in their research and clinical programs. We expect our EAP collaborators to assist us
with customer testimonials, white papers, technical notes and peer-reviewed publications highlighting their use of HTP and overall experience relative to
alternative technologies. The release of HTP, coupled with our existing whole transcriptome miRNA panel, is expected to allow us to not only continue to
expand our position within oncology, but to diversify the use of our panels in other critical markets such as immunology, infectious disease, diabetes,
cardiology and neurology. We also expect to focus our future development efforts on the expansion of the sample types available for use with both of these
assays, with an initial focus on liquid biopsies.
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In the future, we expect to grow our active installed base and drive larger consumable annuities as customer demand for our menu of proprietary
panels, including HTP, increases as we add to the utility of existing panels by expanding applications on our HTG EdgeSeq Reveal software and as
European customers implement our existing or custom assays for use in clinical diagnostic testing as laboratory developed tests (“LDT”) under Clinical
Laboratory Improvement Amendments (“CLIA”) regulations. We remain focused on high quality instrument placements and consumable pull through as
the primary indicators of future commercial adoption and success in our business.
We also announced the formation of our new drug discovery business unit, HTG Therapeutics, in June 2021 with the addition of several highly
experienced drug development professionals to our leadership team. HTG Therapeutics intends to utilize our HTP and epitranscriptome profiling
technologies, integrated with a machine learning-based chemical library design platform to better-inform the design and selection of drug candidate
molecules. Working with our Tucson-based research and development teams, HTG Therapeutics has engaged several external collaborators who are
expected to contribute meaningful sample cohorts across multiple disease and therapy areas to identify early candidate molecules with therapeutic promise.
These efforts are aimed at the generation of high-quality primary data that we believe could lead to new pharma partnerships in drug discovery and early
development by the second half of 2022 and beyond.
COVID-19 and international efforts to control its spread have significantly curtailed the movement of people, goods and services worldwide,
including in regions where we sell our products and services and conduct our business over the past year. We experienced a significant slowing in our
product and product-related services revenue beginning in March 2020 and throughout the year ended December 31, 2021 due to continued disruptions to
our customers’ businesses from the pandemic and, in many instances, their prioritization of projects in areas related to COVID-19. In addition, we have
experienced extended shipment times and increases in cost of product as ongoing supply chain disruptions have impacted the ability of certain suppliers to
produce the materials necessary to build our products and perform our testing services. Despite the impacts of COVID-19 on our revenue and operations,
we met all of our key development milestones throughout 2020 and 2021 and have not experienced any substantive manufacturing delays from raw
material shortages. While most of our customers have now reopened their facilities, at least on a limited basis, it remains unknown whether COVID-19 will
continue to materially impact our financial condition, liquidity and results of operations in future periods due to further shutdowns, social distancing
measures or illness.
Our Strategy
Our objective is to establish our solutions as the standard in molecular profiling, CDx development and molecular diagnostics, and to make their
benefits accessible to all molecular labs from research to the clinic and from discovery to diagnostics. We believe our HTG EdgeSeq can be leverage into a
number of revenue verticals. In our profiling business, we have historically focused on growing our research use only (“RUO”) profiling, molecular
diagnostics and companion diagnostic collaboration opportunities. In addition, we believe there is an opportunity to expand our HTG EdgeSeq technology
platform into other areas, including drug discovery.
The key components of our strategy are:
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Expand our position in translational medicine with our RUO molecular profiling products. We believe the market for gene expression
analysis for translational medicine is large and growing quickly. We have built targeted panels in oncology, immuno-oncology, immune
response and microRNA that enable scientists to look at gene expression patterns to identify molecular subtypes, study key pathways and to
discover and validate biomarker hypotheses to help drive precision medicine. In 2020, we expanded the utility of these panels by adding new
applications to interrogate the tumor micro-environment such as tumor inflammation and immunophenotyping signatures in our HTG
EdgeSeq Reveal software. In 2021, we further expanded our product offerings and capabilities with the release of our HTP Transcriptome
Panel, allowing customers to measure approximately 20,000 mRNA targets from the human transcriptome. This product enables gene
expression analysis of the transcriptome from significantly less sample input and from lower quality samples, as a result of its reliance on our
HTG EdgeSeq proprietary technology. We further expect this product to accelerate the expansion of our target customer base outside of
oncology and autoimmune and into markets such as diabetes, cardiology and neurology.
Partner with other diagnostic developers to develop, or develop independently, molecular diagnostic panels with high medical utility. Our
HTG EdgeSeq platform technology was developed with features that we believe solve many of the challenges facing NGS-based assays and
workflows. We plan to leverage our core HTG EdgeSeq technology to partner with other test developers and CLIA certified labs to develop
molecular diagnostic tests or to enable LDT development. We further expect HTP to be an additional platform on which we will partner with
these customers and build proprietary HTG diagnostic panels.
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Re-establish companion diagnostics collaborations with biopharmaceutical companies. We believe collaborations with biopharmaceutical
companies with late-stage drug development programs have the potential to lead to us generating companion diagnostic consumables
revenue. As of December 31, 2021, our technology and products were used in 62 active development programs across leading
biopharmaceutical companies which are incorporating biomarkers and potentially companion diagnostics in their drug development
programs. We are able to develop novel RNA-based gene classifiers to help biopharmaceutical companies and leading translational medicine
researchers better understand and predict durable response to drug candidates. We may also develop novel RNA profiling tests that can
provide important biomarker information in immuno-oncology, autoimmune and other disease areas such as diabetes, cardiology and
neurology. In 2020, we signed a 10-year non-exclusive agreement with QIAGEN Manchester Limited (“QML”) to leverage its global
commercial expertise and global distribution reach specifically for CDx assays as new companion diagnostics collaboration opportunities are
identified in the future.
Leverage our existing capabilities to expand the utility of our HTG EdgeSeq proprietary technology through HTG Therapeutics. HTG
Therapeutics is focused on improving the existing drug discovery process by using our proprietary HTG EdgeSeq technologies. We believe
that the benefits of our proprietary technology, including the ability to cost-effectively generate high volumes of relevant data in a short
period of time, make HTG Therapeutics well-suited to improve upon and potentially disrupt existing early-stage drug discovery methods.
HTG Therapeutics intends to use our HTP and epitranscriptome profiling technologies, integrated with a machine learning-based chemical
library design platform, to better-inform the design and selection of drug candidate molecules that will be intrinsically de-risked and
therefore, have increased opportunities for development success.
Through the development of our therapeutics business strategy and building of a leadership team to support the strategy in the second half of
2021, we believe we can now complete initial proof of approach in the first half of 2022 and continue on to focus on delivering therapeutic
candidate molecules for novel and well validated targets in the second half of 2022 and beyond. Specifically, we are producing an initial
whitepaper that will capture the foundational aspects of our novel approach to drug discovery in the first quarter of 2022 and expect to follow
that with an additional proof-of-approach whitepaper in the second quarter of 2022. Through the second half of 2022, we expect to design
multiple chemical libraries for our first therapeutic target of focus and to complete cell-based model screens for transcriptomic profiling. The
data generated from this process is expected to inform chemistry for further optimization, with the goal of yielding well annotated and
significantly de-risked drug candidates suitable for further development. We believe this model will be used to identify subsequent drug
candidates that will either be licensed to drug development partners at this stage or potentially retained internally for progression into early
development, in an effort to further increase the value of the assets prior to licensing or partnering.
Establish collaborations with biopharmaceutical companies potentially informed by HTG Therapeutics efforts in the future. We believe
collaborations with biopharmaceutical companies with late-stage drug development programs have the potential to create additional
companion diagnostic consumables revenue. In addition, our plans to improve upon the existing drug discovery processes through HTG
Therapeutics are expected to inform or drive future collaborative development programs with drug candidate molecules that are intrinsically
de-risked and have a greater potential for success in development.
Continue to establish our systems workflow as the best solution for RNA clinical sequencing. We intend to continue to establish our
technology as the optimal complementary workflow with next-generation sequencers. We believe our differentiated HTG EdgeSeq chemistry
will accelerate adoption of RNA biomarkers by leveraging the large and growing installed base of next-generation sequencers. We are
engaged with industry and corporate partners, including Illumina, Inc. and Thermo Fisher Scientific, Inc. to position our HTG EdgeSeq
products as the benchmark for workflow in targeted sequencing applications.
Expand the addressable market of our profiling business through new applications and expansion into new disease states and sample types.
Over the past two years, we released several new applications focused on oncology to interrogate the tumor micro-environment, such as
tumor inflammation and immunophenotyping signatures available in our HTG EdgeSeq Reveal software. We expect continued development
of these new applications will allow us to reach new customers focused on additional disease areas and markets.
Our Market Opportunities
Cancer Molecular Profiling and Genomics in Life Science Research
Molecular profiling is the analysis of biomarkers, including DNA, RNA and protein, in biological samples, such as tissue, cells, blood and other
biofluids, to identify gene expression patterns or genomic changes. The HTG EdgeSeq technology coupled with NGS is making it possible to perform these
characterizations in unprecedented ways, resulting in a shift from the traditional approach of looking at one target at a time to the simultaneous analysis of
potentially tens, hundreds or thousands of gene targets.
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Among what we believe are the most promising applications of molecular profiling is the targeted sequencing of RNA from patient samples to
identify gene expression patterns or molecular markers of disease that can aid in diagnosis, gauge patient prognosis or predict response to an available
therapy. These applications have launched a fundamental shift towards personalized medicine where an individual patient’s molecular profile is used to
guide treatment.
The market for RNA-Seq is estimated to be approximately $1.0 billion and growing annually at 10-20%. The gene expression component of that
market is estimated to be approximately $820.0 million and growing at the same rate. With these metrics in mind, we expect our target market, NGS-based
gene expression profiling, to be between $1.3 billion and $2.0 billion by 2024.
Therapy Driven Diagnostics - Companion Diagnostics
The World Health Organization estimates that cancer will lead to the deaths of 17.0 million people per year by 2030. As a result, biopharmaceutical
companies are aggressively deploying biomarker driven strategies to improve the response rates to existing and new drugs in development as well as
combination therapies. These companies are looking for technology solutions that can more effectively identify the biological root causes of disease and aid
the discovery of biomarkers to better develop and target drugs to the correct patients. The companion diagnostic market is currently estimated at $2.6
billion and growing approximately 20% annually. We believe that the acceleration of investment into immunotherapy drugs will also be a catalyst for future
companion diagnostics for combination therapies where RNA gene expression classification is expected to be important.
When a molecular biomarker panel is used for selection of patients in a Phase 2 or Phase 3 clinical trial to demonstrate safety and efficacy of a new
drug, the drug and biomarker test are often submitted to the applicable regulatory agency for approval together. In the United States, upon U.S. Food and
Drug Administration (“FDA”) approval or clearance of the CDx test, the patient must be tested with the CDx test prior to being treated with the drug.
Companion diagnostic tests have a clear clinical utility which generally supports favorable reimbursement decisions. We believe there are currently
approximately 3,100 oncology clinical trials, approximately 24% of which are interrogating RNA. This percentage has more than doubled since 2014, and
we believe this percentage will approach 50% by 2025.
Molecular Diagnostics – NGS-based Workflows
Complexities and Challenges of Molecular Diagnostics Today
Currently, molecular profiling is typically conducted in the clinical setting using a variety of profiling techniques and instrumentation platforms
across multiple laboratory departments, and, in many situations, sent to distant labs. These techniques include immunohistochemistry (“IHC”), fluorescent
in situ hybridization (“FISH”), polymerase chain reaction (“PCR”), gene expression arrays (“GEA”) and NGS. This distributed profiling approach has
accelerated the use of molecular profiling and increased the need to make the process more accessible and routine. However, molecular profiling is also
highly specialized because many current technologies are complex, require multiple capital-intensive workflows and are not economically scalable to the
case volume of the local laboratory. The fragmentation of methods, smaller sample sizes, sample logistics and information flow has created significant
challenges for labs, physicians and patients.
Drug Discovery for the Biopharmaceutical Sector
The biopharmaceutical sector has increasingly relied on the “open science” model whereby companies pursue a diverse set of strategies leveraging
internal research and development efforts as well as turning to external research and development, scientific collaborations and in-licensing opportunities to
advance new drug discoveries, meet currently unmet needs and help more patients. Fully integrated pharmaceutical companies have evolved to use open
science as a ground to supplement their internal pipeline efforts with new drug candidates and/or new emerging technologies. It is not uncommon among
the fully integrated companies to have strategic goals where half of the pipeline is from internal efforts whereas the remaining half is populated through
assets that are either in-licensed, partnered or acquired through strategic acquisitions. Some fully integrated pharmaceutical companies rely solely on
external science and innovation.
We believe that our approach of utilizing our established RNA profiling capabilities, integrated into a drug discovery platform with advanced
medicinal chemistry technologies, will result in more well-informed molecule design and selection and potentially provide multiple revenue opportunities.
These revenue opportunities may include collaboration or licensing arrangements for any small molecule drug candidates we generate, either at early- or
mid-stage development, out-licensing 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
those molecules.
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Our Profiling Solution
At the core of our solution is our proprietary chemistry known as quantitative nuclease protection (“qNPA”). Our qNPA-based chemistry provides a
sensitive and efficient method for analyzing RNA as it eliminates the need for nucleic acid extraction, reverse transcription, complicated bioinformatics
steps and other complex processes. We designed and developed our automation platform and software analysis tools to optimize the capabilities of our
chemistry, provide fast turnaround time and enable ease of use to molecular labs. Our chemistry and automation platform are highly adaptable, so when
molecular profiling needs change or emerge, we expect to be able to efficiently add new applications to address these needs.
HTG EdgeSeq Chemistry
Our HTG EdgeSeq chemistry is shown schematically in the figure below. Specifically, DNA nuclease protection probes, or DNA protection probes,
which include a target-specific region flanked by universal wing sequences are hybridized to targeted RNAs. Target RNA can be both soluble and cross-
linked in the biological matrix. Universal DNA wingmen are hybridized to the wings to prevent S1 nuclease digestion. S1 nuclease is added to remove
single-stranded nucleic acids, including unhybridized DNA protection probes and RNA. Following S1 nuclease treatment, the only remaining DNA
protection probes in the reaction are those hybridized to targeted RNA and wingmen to form a hybridized heteroduplex. This produces an approximately
1:1 ratio of DNA protection probes to the RNA targeted in the sample. DNA protection probes are labeled with sequencing adaptors and molecular
barcodes in a PCR reaction. The labeled DNA protection probes are cleaned up, quantified, pooled, and ready for sequencing using standard NGS
protocols. Data from the NGS instrument is processed and reported by the parser software provided with the HTG EdgeSeq platform.
Key Advantages of our HTG EdgeSeq Chemistry
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Multiplexing tens, hundreds or thousands of gene targets. Measuring multiple genes in a single reaction can be challenging with competitive
technologies due to the complex interactions of reaction components. With our HTG EdgeSeq chemistry, we can profile almost 22,000 genes
using a single panel. The high level of gene multiplexing allows for significantly lower amounts of tissue to be used per sample than in
competitive low-plex profiling technologies.
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No RNA extraction. Competitive technologies for assessing RNA generally require RNA that is isolated and purified from the sample. These
time-consuming steps may lead to some RNA loss and bias the test outcome. In formalin fixed paraffin embedded (“FFPE”) tissues, for
example, it has been reported that a fraction of the RNA is lost in the purification process because it cannot be separated from insoluble tissue
components and the fixation and embedding process or long storage times for FFPE tissue may damage the RNA and break it into smaller,
more difficult to analyze fragments. This makes molecular profiling of small FFPE tissues particularly challenging and can result in testing
failures and loss of precious samples due to insufficient RNA yield. These biases introduced by RNA extraction cannot be overcome and may
be propagated throughout the subsequent analysis. Our proprietary chemistry does not require RNA extraction for FFPE samples or most
other sample types (we recommend extracting RNA from fresh-frozen tissue samples to prevent processing variability) and improves
utilization of precious samples, thereby improving workflow and reducing costs by eliminating a step known to bias the data.
No cDNA synthesis. Many competitive technologies, most prominently RT-quantitative PCR (“RT-qPCR”) and traditional RNA sequencing,
require conversion of RNA into complementary DNA (cDNA) for analysis. When damaged and fragmented RNA is used, these small RNA
strands become increasingly difficult to convert into cDNA in an accurate and reproducible manner. Our proprietary chemistry does not
require conversion of the RNA to cDNA by reverse transcription, removing a technical difficulty experienced with competitive technologies.
Short protection probes. Many samples contain RNA degraded by various combinations of storage conditions, age, poor processing, and
fixation. In these samples, the RNA is damaged and fragmented into smaller strands. Utilizing short protection probes of 50 bases or less, we
believe our proprietary chemistry is more efficient than competitive technologies that require longer strands of RNA for quantitation.
Simplicity. Our proprietary chemistry is simple, with fewer steps than competing technologies. Compared to RT-qPCR, our chemistry does
not require extraction or cDNA synthesis. Compared to traditional RNA sequencing, our chemistry does not require extraction, cDNA
synthesis, shearing, rRNA depletion, ligation, adenylation, or size selection. We believe that the accumulation of these steps required by other
technologies results in the introduction of biases, sample degradation and increased opportunities for operator error.
HTG Instrument Platform
Our instrument and assays were developed internally and are manufactured in Tucson, AZ under ISO 13485:2016 certified procedures using our
proprietary HTG EdgeSeq chemistry to simplify multiplexed nucleic acid testing in research and clinical laboratories. The entire workflow from sample
preparation to a molecular profiling report can be accomplished in as few as 36 hours for 96 samples. With the speed, flexibility, sensitivity, and accuracy
of our HTG EdgeSeq platform, combined with the system’s ability to work effectively with small sample volumes, researchers can profile tens, hundreds or
thousands of different genes per sample.
The HTG EdgeSeq platform consists of a processor (shown above), a host computer and integrated software. The processor is a fully automated
instrument that prepares biological samples for quantitation using proprietary, electronically barcoded, single-use consumables. The instrument has barcode
scanner units to process the two-dimensional barcodes printed on the consumables loaded into the instrument. The barcoded consumables are single-use in
order to reduce operator errors, eliminate cross-contamination and provide chain of custody traceability for the samples. The robotic liquid handling within
the instrument is engineered for reliable performance and low maintenance. The walking path of the robot is programmed to minimize any chance of
contamination of the reagents or samples. One host computer supports up to six processors allowing laboratories to easily expand their capacity by adding
processors.
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Applications of our HTG EdgeSeq technology combine the HTG EdgeSeq platform with a NGS platform to enable the quantitative analysis of
hundreds or thousands of RNA targets in a single panel. The sample library is prepared on the processor, then labeled with molecular sequencing adaptors
and tags. The labeled samples are cleaned up, quantified, pooled, and sequenced on a NGS platform using standard protocols. Data from the NGS
instrument are processed and reported by the parser software included with the system. HTG EdgeSeq panels are currently available to process from one to
96 samples in a single batch.
In addition to direct sales of our systems, we utilize several alternative arrangements to provide customer access to our platform. Our platform can
be purchased directly by our customers, who also then purchase HTG EdgeSeq assays and other consumables from us on an as-needed basis. In some
instances, we provide our instruments free of charge on a limited basis to facilitate customer evaluation prior to acquisition. We also may choose to install
instruments for our customers at no cost, in exchange for an agreement to purchase assays and other consumables from us at a stated price and volume over
the term of the agreement or allow customers to rent our instrument for a monthly fee. As of December 31, 2021, we had an installed base of 81
instruments (consisting of 59 systems sold, five covered under reagent rental or standard rental agreements, 10 evaluation units and seven systems with key
opinion leaders).
Our Competitive Advantages
We believe that our HTG EdgeSeq technology provides us with a number of competitive advantages that set us apart from others in our industry and
that will continue to drive new customers toward our solutions. Our products and services are designed to work with many different biological sample
types, can generate robust results from very small samples, and obviate the need for many of the sample-preparation steps associated with traditional
molecular techniques. Our platform and assays enable the simultaneous detection and quantitation of tens, hundreds or thousands of molecular targets and
are capable, now or in the future, of profiling multiple parameters such as RNA expression levels, RNA-expressed gene fusions and RNA modifications in
a single testing workflow that can use NGS detection for quantitative measurement.
We believe we are well positioned with the following key product benefits:
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Optimize sample utilization. Our platform can analyze several thousand genes from extremely small sample volumes such as a single five-
micron section of tissue or 15 microliters of plasma or serum. With the launch of our transcriptome panel, the analysis plex increases 10
times, while maintaining minimal sample input requirements. Our technology allows customers to do more with less, which meets the needs
of clinical or pre-clinical laboratories where today there is often not enough patient sample to do all the testing desired. We believe providing
customers the ability to work with extremely small sample volumes will be a significant driver of adoption of our technology and systems.
Compatibility with multiple sample types. Our proprietary technology allows customers to profile and unlock molecular information from a
wide variety of biological samples such as FFPE tissue, cultured cells, and blood-based sample types such as PAXgene, serum and plasma.
We have successfully demonstrated the ability to profile these and other sample types and believe we ultimately can profile most clinically
relevant sample types, including cell-free circulating nucleic acids from tumors, a rapidly developing area of investigation which is referred
to as a liquid biopsy. We believe that the capabilities of our technology will allow us to efficiently expand applications, regardless of sample
type.
Flexible and adaptable chemistry allows for use in multiple applications. We believe our proprietary chemistry provides the ability to
measure a variety of molecular targets in many necessary applications, including RNA expression levels and expressed RNA gene
rearrangements (such as gene fusions and insertions), and offers the ability to quantify these applications on a variety of NGS platforms. This
flexibility provides customers the ability to optimize their use of our technologies based on their specific throughput, workflow and
application needs. Our proprietary chemistry is comparatively simple, with fewer steps than competing technologies. For example, compared
to RT-qPCR, our chemistry does not require cDNA synthesis. Compared to traditional RNA sequencing, our chemistry does not require
extraction, cDNA synthesis, shearing, rRNA depletion, among other library preparation steps. We believe that the elimination of these steps
helps prevent biases associated with these steps, sample degradation and opportunities for operator error.
Robust data. Molecular profiling produces large amounts of information that is used, among other things, to make important decisions, such
as identifying potential drug targets or selecting a patient for a therapeutic treatment. This information is valuable only to the extent it
accurately represents the true biology of the test sample and the same answer can be produced under many different conditions. Our
chemistry is highly specific and sensitive, meaning it can detect the right target even when very little is present in the sample. Our system
produces consistent results on a replicate-to-replicate, day-to-day and instrument-to-instrument basis.
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Automation provides superior workflow and ease of use. Our technology is designed with fewer workflow steps in part due to the elimination
of the need for complex sample-preparation processes such as extraction, cDNA synthesis, selection, depletion and shearing. This enables
customers to limit hands-on time and the need for specialized skills, resulting in turnaround times of approximately 36 hours. Additionally,
our HTG EdgeSeq platform further integrates sample preparation for targeted sequencing and greatly simplifies the data bioinformatics, so
customers looking to leverage their NGS instrument can seamlessly add this capability to their current workflows.
Simplified bioinformatics. Our HTG EdgeSeq Reveal software provides data in a simple and easy to use format through a simple graphical
user interface that is flexible for researchers and can be used to deliver patient reports. The HTG EdgeSeq parser software, which processes
the data generated from the NGS platform, is modular so that new panels can be added without any changes to the underlying software or
hardware. We believe the simplicity of our bioinformatics solution will help drive the adoption of our platform.
Revenue and Commercialization of our Products
We currently market proprietary molecular profiling panels targeting early and late-stage drug development programs with potential breakthrough
therapies. We market these panels to biopharmaceutical companies, with which we may collaborate in biomarker development programs. We believe these
programs could facilitate our commercialization of companion diagnostic tests. In addition, our panels are used in pre-clinical and clinical research areas,
which, we also believe, will facilitate our commercialization of diagnostic tests, including tumor classifiers and prognostic tests.
Our product and product-related services revenue is generated through the sale of our profiling instruments and consumables, sample processing
services and custom assay design services to biopharmaceutical companies, academic research centers and molecular testing laboratories.
Customers can purchase our HTG EdgeSeq instrument and related consumables, which consist primarily of our proprietary molecular profiling panels
and other assay components. Our currently marketed panels are:
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HTG Transcriptome Panel. HTP is expertly designed to provide extensive coverage of most human mRNA transcripts. The panel can
simultaneously interrogate 19,398 gene targets using FFPE, PAXgene and extracted RNA samples, generating data for up to 96 samples in
less than three days. HTP uses our proprietary workflow and leverages the sensitivity and dynamic range of NGS, allowing researchers to
generate reliable results using limited sample amount.
HTG EdgeSeq miRNA Whole-Transcriptome Assay. Human microRNAs (“miRNA”) are short non-coding strands of RNA that are used by
the cell for gene expression regulation. The HTG EdgeSeq miRNA Whole-Transcriptome Assay enables the simultaneous profiling of 2,083
miRNAs, allowing new, potentially clinically relevant miRNA profiles to be discovered. Our ability to efficiently profile small FFPE samples
or as little as 15 µL of plasma or serum is a significant differentiator in the rapidly growing miRNA market.
HTG EdgeSeq Oncology Biomarker Panel. This RNA expression panel measures the expression of up to 2,549 genes associated with tumor
biology for profiling tumor tissues, analyzing cancer pathways, identifying therapeutic targets and drug response markers, and identifying
new biomarkers across both solid tumors and hematolymphoid neoplasms. We worked with key opinion leaders to identify the genes in this
panel, which we believe is a comprehensive list of genes targeting known signaling pathways and receptor gene families implicated in cancer.
Representative genes in this panel include EGFR, HER2, HER3, HER4, PD-1 and FGFR. When paired with our HTG EdgeSeq miRNA
Whole-Transcriptome Assay (above), we provide customers with a comprehensive solution for profiling their large sample archives for novel
expression signatures.
HTG EdgeSeq Precision Immuno-Oncology Panel. The NGS-based HTG EdgeSeq Precision Immuno-Oncology Panel is designed to measure
the immune response both inside the tumor and the surrounding microenvironment. By leveraging the high sensitivity and dynamic range of
NGS instrumentation, this powerful tool measures 1,392 genes from a single section of FFPE tissue, extracted RNA or PAXgene samples.
HTG Immune Response Panel. The HTG EdgeSeq Immune Response Panel leverages the sensitivity and dynamic range of NGS to measure
genes implicated in a variety of autoimmune diseases as well as immune response to infectious disease, including COVID-19. The panel
measures 2,002 transcripts in a single well, allowing users to obtain a broad profile of genes associated with autoinflammatory, autoimmune
and infectious disease, and enables multiplex profiling from FFPE and PAXgene samples.
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HTG EdgeSeq Pan B-Cell Lymphoma Panel. The HTG EdgeSeq Pen B-Cell Lymphoma Panel measures gene expression of mRNA targets
commonly associated with indolent and aggressive lymphomas to help identify lymphoma subgroups to elucidate the transcription response
of disease state and drug therapy. With 298 gene targets, the HTG EdgeSeq Pan B-Cell Lymphoma Panel addresses the heterogeneity of B-
cell lymphomas, including published signatures and drug targets.
HTG EdgeSeq DLBCL Cell of Origin Assay. DLBCL tumors are frequently classified into either ABC or GCB subtypes by measuring the
molecular profile of the tumor. These two subtypes display different clinical pathologies, as patients with the GCB subtype of DLBCL tend to
respond differently than those of the ABC subtype. With many of the large number of new DLBCL-targeting drugs appearing to have greater
efficacy in one of the subtypes, a need for a reliable, FFPE-based cell of origin classification assay has emerged. This product is labeled RUO
and is available as an IUO for use in late-stage drug programs to stratify patients.
HTG Mouse mRNA Tumor Response Panel. The HTG EdgeSeq Mouse mRNA Tumor Response Panel detects 1,659 mouse mRNA targets to
measure genes implicated in preclinical mouse models of human disease. Built around core signaling pathways and immune response
mechanisms in oncology and other disease states, the HTG EdgeSeq mRNA Tumor Response Panel enables multiplex profiling from a
variety of sample types, including FFPE, cell lines and extracted RNA samples. Applications include modeling oncogenesis, studying the
immune response to mouse and patent-derived xenografts, and investigational therapeutic response studies.
HTG EdgeSeq DLBCL Cell of Origin Assay EU and HTG EdgeSeq ALKPlus EU. HTG EdgeSeq DLBCL Cell of Origin Assay EU and HTG
EdgeSeq ALKPlus EU are IVD assays. These products have obtained CE-marking in Europe where they are available for diagnostic use by
customers in Europe and are not available for sale in North America. With the EU’s transition to IVD Medical Device Regulation scheduled
for May 2022, we would need to comply with these requirements in order for these products to remain on the EU market other than for
research use only. At this time, we do not intend to attempt compliance with these requirements and, where applicable, do not have
appropriate licenses or permits to conduct diagnostic testing services.
Customers can also access our technology through contracted services. Pre-clinical services, including custom assay design and sample processing
services provided by our VERI/O laboratory, allow our customers to identify and validate biomarker signatures across their drug portfolios or patient
cohorts more efficiently. Our VERI/O laboratory is a high-volume molecular laboratory focused solely on providing high-quality data from our proprietary
molecular profiling technology. These services provide our customers expedited access to our technology at a competitive price. For our biopharmaceutical
company customers, we offer an end-to-end solution leveraging a single technology from discovery to diagnostics.
Through collaboration with biopharmaceutical company customers, we believe we are uniquely positioned to provide comprehensive services to
design, develop and manufacture custom targeted assays with complex molecular diagnostic signatures as investigational use only (“IUO”) assays for use
in global prospective or retrospective clinical trials. Our expertise in medical device design control and global regulatory submissions, coupled with our
ISO 13485:2016 certified quality system, enable us to support potential CDx programs. Although our initial focus primarily has been in oncology, we offer
customers a full solution from biomarker discovery to deployment of CDx assays across numerous disease states. Utilizing NGS as our method of detection
provides our customers with the benefits of our highly multiplexed and extraction-free chemistry and the sensitivity and dynamic range of the sequencers,
providing a powerful value proposition and complete workflow.
We have previously generated collaborative development services revenue through three statements of work entered into under our prior Master
Assay Development, Commercialization and Manufacturing Agreement with QML. Under these agreements, we and QML combined our technological and
commercial strengths to offer biopharmaceutical companies a complete NGS-based solution for the development, manufacture and commercialization of
CDx assays in support of and in conjunction with, biopharmaceutical companies’ drug development programs. Remaining agreed upon procedures
associated with these statements of work were completed in 2020 and no additional collaborative development services programs were entered into in
2021.
Our Drug Discovery Approach
Currently, approximately 90% of drugs fail in clinical development due to insufficient efficacy and/or safety issues and, in many instances, these
issues are not revealed until considerable time has passed and tens or even hundreds of millions of dollars have been spent in the discovery and
development stages of these programs. Through key learnings from our collaborative development services experiences, we have designed a new approach
to drug discovery that leverages the benefits of our HTP and epitranscriptome profiling technologies in RNA profiling, sequencing and other scientific
applications, including drug discovery and development. We believe the competitive advantages provided by our technology, compared with other profiling
technologies, are the ability to process smaller sample volumes of multiple sample types with faster turnaround times and a simplified workflow.
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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 machine learning-based medicinal chemistry approach, we have
established a novel transcriptome-informed small molecule discovery platform at the core of our HTG Therapeutics business unit which we believe will
generate drug candidate molecules that are intrinsically de-risked and will have greater potential for clinical development success when compared to
currently existing early-stage drug discovery methods in the biopharmaceutical industry. We have begun our initial studies using validated targets and cell-
based test systems and believe this approach with extensive, new data generated from the application of these RNA-based profiling technologies will allow
us to significantly de-risk drug candidate molecule selection earlier in the process, allowing for greater confidence in development candidate nomination
earlier in the drug development process. This is expected to increase the probability of success in clinical development, reducing the likelihood of costly
failed clinical trials and ultimately development failures. We believe 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 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 expect to focus our efforts on a series of milestones aimed at experimentally demonstrating our proof of approach of using
our core and extended technology solutions early in the drug discovery process. We also expect to continue our efforts to identify early therapeutic drug
candidate molecules that we would look to out-license or potentially partner with biotech or pharma companies to take into early development in the
second half of 2022. As additional candidates are identified, we may seek 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. Finally, we expect to maintain
the 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 collaboration partners, further growing our existing gene expression profiling business.
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The market has been slow to adopt RNA technology due to the high cost and long timelines experienced by researchers and biopharmaceutical
companies using other existing RNA technologies. We believe our core profiling technology and the logical application of it to drug discovery will allow us
to offer broader and more practical solutions for a wide range of new, potential customers and collaboration partners in this space.
Research and Development
We are committed to the continued evolution of our HTG EdgeSeq technology platform, including development of new and continuous
improvement of the performance and reliability of existing assays, as well as the expansion of its uses for drug discovery and other areas where we and our
customers believe RNA can be used to advance scientific discovery. We have assembled an experienced research and development team with the scientific,
engineering, software and process talent that we believe is necessary to successfully grow our business. In addition, we added resources to our leadership
team throughout the second half of 2021 with the expertise to drive our HTG Therapeutics business unit and its strategic objectives in the area of drug
discovery.
As of December 31, 2021, our research and development team consisted of 27 employees across the disciplines of research and development,
platform development and chemistry, therapeutics and bioinformatics.
Sales and Marketing
We distribute our instruments and consumables via direct sales in the United States and Europe and through distributors in parts of Europe and other
countries. As of December 31, 2021, our U.S. sales and marketing organization consisted of 16 employees including 10 in direct sales or sales
management, four in sales support and two in marketing. In addition to our U.S. sales team, as of December 31, 2021, we had six direct sales and support
employees in Europe and distribution agreements in several additional countries. This sales model provides us with direct sales coverage in Austria,
Belgium, France, Germany, Luxembourg, the Netherlands, the United Kingdom and Switzerland, with distributors in Bulgaria, Croatia, Czech Republic,
Denmark, Estonia, Finland, Hungary, Ireland, Israel, Italy, Kosovo, Leetonia, Lithuania, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain and
Sweden.
Our sales and marketing efforts target biopharmaceutical companies, clinical research centers and clinical diagnostic labs focused on sample
profiling for translational research, biomarker/companion assay development and lab-developed diagnostic testing. We intend to promote adoption of our
HTG EdgeSeq platform, sample profiling panels and future molecular diagnostic assays upon marketing clearance or approval by the FDA, by expanding
our U.S. sales force, building a greater direct sales presence in Europe, expanding international distribution and continuing to collaborate with key opinion
leaders to validate our platform and to influence utilization of our products.
Manufacturing and Suppliers
We primarily manufacture our products within our facility in Tucson, AZ. External resources are leveraged for their specific expertise in either
producing components for our HTG EdgeSeq instrument and raw materials for our consumables in accordance with our designs or based on their catalog
products which are utilized as is within our designs. We manufacture HTG EdgeSeq instruments and reagent kits at our Tucson, Arizona facility, which has
been certified to ISO 13485:2016 standards. We believe that our existing manufacturing capacity is sufficient to meet our needs for at least the next several
years.
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We require a wide variety of raw materials, electronic and mechanical components, chemical and biochemical materials and other supplies to
manufacture our products. While multiple commercial sources provide the majority of these required components and supplies, we currently rely on a
single supplier to manufacture a subcomponent used in our HTG EdgeSeq instrument. As part of our standard supply management process, we
continuously monitor material availability, vendor status and supply chain disruptions to identify and mitigate potential risks by expanding material and
source alternatives. Although there are a limited number of manufacturers for components of this type, we believe that other suppliers could provide similar
products on comparable terms if identification of additional sources should be necessary in the future. In addition, while we attempt to keep our inventory
at minimal levels, we closely monitor inventory of this subcomponent and purchase incremental inventory in this area as circumstances warrant to protect
our supply chain. Similarly, if the capabilities of our suppliers and subcomponent manufacturers are limited or stopped, due to the COVID-19 pandemic,
disasters, quality, regulatory or other reasons, it could negatively impact our ability to manufacture our products and could adversely affect sales and
operating results.
Instruments
We assemble and test our HTG EdgeSeq instruments at our Tucson, Arizona facility. Instrument component vendors are qualified under our quality
system and reviewed regularly to ensure that manufacturing standards are met and maintained. We award contracts for estimated annual quantities of
components and, considering the replenishment lead times of our vendors, take delivery of batches covering approximately one month of demand at a time.
Consumables
We manufacture and test our HTG EdgeSeq consumables at our Tucson, Arizona facility. Raw material vendors are selected using precise standards
and are reviewed regularly for compliance with our specific quality requirements. We purchase raw material stock in quantities that often exceed projected
annual demand. We produce batches of finished goods approximating quarterly demand and supervise inventory on a minimum/maximum basis to ensure
that we are replenishing our finished goods and raw material ahead of demand.
Competition
We have categorized known competition into:
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Other molecular platform offerings, such as PCR-based technologies, microarrays and next-generation sequencers from companies such as
Abbott Molecular, Affymetrix, Inc., Agilent Technologies, Inc., BioRad Laboratories, Invitae (acquired by ArcherDx, Inc.), Fluidigm
Corporation, Illumina, Inc., Luminex Corporation, NanoString Technologies, Inc., Personal Genome Diagnostics (acquired by Labcorp),
entities owned and controlled by QIAGEN N.V., Roche Diagnostics, a division of the Roche Group of companies, and Thermo Fisher
Scientific, Inc.;
Centralized CLIA certified labs offering molecular profiling and gene expression tests as laboratory-developed tests (“LDTs”) such as Caris,
Inc., Exact Sciences, Inc., Guardant Health, Inc., Foundation Medicine, Inc., NeoGenomics, Inc., Personalis, Inc. and Trovagene, Inc.; and
Decentralized CLIA certified labs developing LDTs locally such as major cancer centers.
We believe that the principal competitive factors in all our target markets include:
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accuracy and reproducibility of results;
flexibility and ease-of-use;
compatibility with existing laboratory processes, tools and methods;
reputation among customers;
cost of capital equipment;
cost of consumables and supplies; and
innovation in product offerings.
We believe that additional competitive factors specific to the diagnostics market include:
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breadth of clinical decisions that can be influenced by information generated by tests;
volume, quality, and strength of clinical and analytical validation data;
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availability of coverage and adequate reimbursement for testing services; and
economic benefit accrued to customers based on testing services enabled by product.
We believe the automation afforded by our HTG EdgeSeq platform coupled with fast turnaround time, high multiplexing capability, lysis only/no
extraction protocol and low sample requirement gives us numerous competitive advantages in our target markets, as discussed in more detail elsewhere in
this report.
While we believe that we compete favorably based on the factors described above, many of our competitors are more highly capitalized and/or have
been in existence for a longer period, and enjoy several competitive advantages over us, including:
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Greater name and brand recognition, financial and human resources;
Broader product lines;
Larger sales forces and more established distributor networks;
Substantial intellectual property portfolios;
Larger and more established customer bases and relationships; and
Better established, larger scale and lower cost manufacturing capabilities.
The biopharmaceutical sector is populated with companies advancing new or differentiated approaches to discovery and experimental therapeutics by
way of different platform technologies or modalities with intent for application to specific disease areas through focus on pharmacologic targets or through
phenotypic approaches. Each approach has inherent scientific risks that are intrinsic to the discovery sciences for molecule selection, as these efforts
provide the early pipeline assets that progress into the more established and regulated stages of drug development. We believe that our approach, which is
grounded in our exceptional RNA profiling capabilities now being applied to experimental systems used in conjunction with an advanced medicinal
chemistry technology, will result in more well-informed design and selection of small molecule drug candidates very early on in the drug discovery
process, thereby allowing for greater chances for success of these molecules. As such, we believe our approach differentiates us from the competition as the
early de-risking of small molecule design and selection is at the core of our strategy, with the flexibility for application across multiple therapy areas.
Intellectual Property
Our success depends in large part on our ability to develop and maintain intellectual property rights relating to key aspects of the technology
employed in our HTG EdgeSeq platform and assays, maintain any strategic licenses to use intellectual property owned by third parties, preserve the
confidentiality of our trade secrets and operate without infringing the valid and enforceable patents and other proprietary rights of third parties. We rely
upon certain patents, registered and common law trademarks, trade secrets, know-how, invention and patent assignment agreements and continuing
technological innovation to develop and maintain our competitive position.
Since 2020 and throughout the year ended December 31, 2021, we incurred legal expenses to defend our core intellectual property against potential
infringement by a competitor. These legal expenses, and any future legal expenses that will be incurred in defense of our intellectual property, have been
expensed as incurred to selling, general and administrative expense in our consolidated statements of operations. We continue to seek resolution of these
infringement claims, and we intend to continue to protect, defend and extend our intellectual property rights in our technology vigorously and aggressively.
Patents and Patent Applications
As of December 31, 2021, our patent portfolio included 12 patent families that, collectively, consisted of five issued U.S. patents, 55 granted foreign
patents (variously in Australia, Canada, China, Japan, France, Germany, Italy, Spain, and United Kingdom), and 20 patent applications pending in the
United States and foreign jurisdictions (including one allowed in Canada). This portfolio is directed to our nuclease-protection-based technologies, other
nucleic-acid detection methods, and to methods for DLBCL and distinguishing indeterminate nevi from melanoma. Our patent portfolio will help us
maintain an exclusive position in key areas of our business, including targeted nuclease-protection based sequencing, and DLBCL COO applications of our
technology. In addition, this portfolio may provide out‑licensing opportunities, such as, for methods of detecting melanoma. There were 10 granted patents,
including one U.S. patent, directed to our novel HTG EdgeSeq methods in the portfolio as of December 31, 2021. The HTG EdgeSeq method patents will
expire in April 2032. Our patent portfolio includes five applications directed towards our direct-target sequencing HTG EdgeSeq methods, five applications
directed towards our methods of subtyping DLBCL, and seven applications directed towards our methods of detecting DNA and RNA in the same sample.
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Trade Secrets
We also rely on trade secrets, including unpatented know-how, technology and other proprietary information to maintain our competitive position.
We seek to protect these trade secrets, in part, by entering into nondisclosure and confidentiality agreements with parties who have access to them, such as
our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. We also enter
into invention or patent assignment agreements with our employees and consultants that obligate them to assign to us any inventions developed in the
course of their work for us. We cannot provide any assurance, however, that we have entered into such agreements with all relevant parties, or that these
parties will abide by the terms of these agreements. Despite measures taken to protect our intellectual property, unauthorized parties might copy or
commercially exploit aspects of our technology or obtain and use information that we regard as proprietary.
For additional information relating to the risks associated with our intellectual property position see “Risk Factors – Risks Related to our Intellectual
Property.”
Agreements with Third Parties
Asset Purchase Agreement with NuvoGen Research, LLC
We entered into an asset purchase agreement dated January 9, 2001, as amended in November 2003, September 2004, November 2012 and February
2014, with NuvoGen Research, LLC (“NuvoGen”) to acquire certain intellectual property from NuvoGen (“NuvoGen obligation”). The acquired
technology generally relates to our former array-based nuclease protection panels. Pursuant to the terms of the agreement, in exchange for the acquired
technology, we agreed to pay NuvoGen aggregate cash compensation of $15.0 million. On an annual basis, we are currently obligated to pay the greater of
$0.4 million or 6% of our annual revenue, until the total aggregate cash compensation paid to NuvoGen under the agreement totals $15.0 million. Interest
on the remaining unpaid obligation has been accrued since January 1, 2019 and compounds annually at a rate of 2.5% per year. Accrued interest on this
unpaid obligation is payable on the date that the remaining obligation is paid in full.
SVB Term Loan
On June 24, 2020, we entered into a Loan and Security Agreement (the “Loan Agreement”), with Silicon Valley Bank (“SVB”), as lender, which
provides a secured term loan in the principal amount of $10.0 million (the “SVB Term Loan”). The proceeds from the SVB Term Loan were fully funded
on the June 25, 2020. 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 the Credit and Security Agreement (Term Loan) and Credit and Security Agreement (Revolving Loan) entered into with MidCap Financial Trust, as
agent (the “MidCap Credit Facility”) and a subordinated convertible promissory note to QIAGEN North American Holdings, Inc. (the QNAH Convertible
Note”). Our obligations under the SVB Term Loan are secured by a security interest in substantially all of our assets, excluding intellectual property (which
is subject to a negative pledge).
The SVB Term Loan bears interest at a floating rate equal to the greater of 2.5% 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 allows for interest-only payments through June 30,
2021. The interest only period may be extended for six months upon the achievement of an equity milestone as fully defined in the Loan Agreement. The
ultimate interest-only period will be followed by 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, will be subject to early termination fees of up to 3% and we will be required to pay a final
fee equal to 8% of the principal amount of the SVB Term Loan upon termination of the Loan Agreement.
The Loan Agreement contains customary affirmative covenants and customary negative covenants limiting our ability and the ability of our
subsidiaries, if any, to, among other things, dispose of assets, undergo a change in control, merge or consolidate, make acquisitions, incur debt, incur liens,
pay dividends, repurchase stock and make investments, in each case subject to certain exceptions. We must also comply with a financial covenant requiring
us to maintain unrestricted cash, including short term available-for-sale securities, at an account with SVB of not less than the greater of (i) $12.5 million
and (ii) an amount equal to six times the amount of our average monthly Cash Burn (as defined in the Loan Agreement) over the trailing three months.
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Third-Party Coverage and Reimbursement
Clinical laboratories acquire our instrumentation through a capital purchase, capital lease or reagent purchasing agreement. These laboratories offer
their customers a menu of testing services using LDTs, which they may develop using consumables they purchase from us. Our customers generate revenue
for these testing services by collecting payments from third-party payors, including public and private payors, as well as patient co-payments. In the United
States, claims for Medicare coverage are processed by private Medicare Administrative Contractors (“MACs”) such as Novitas and Cahaba on behalf of the
Centers for Medicare & Medicaid Services (“CMS”), and coverage for specific test codes are specified in Local Coverage Determinations (“LCDs”) issued
by individual MACs or National Coverage Determinations (“NCDs”) which apply to all MACs. Private payors issue their own coverage determinations
that are largely reflective of the CMS LCDs and NCDs. HTG closely monitors trends in coverage through interactions with customers, industry
associations such as the College of American Pathologists (“CAP”) and the Association for Molecular Pathology (“AMP”) and industry consultants; these
trends are key considerations in our product development plans. In Europe, coverage for molecular diagnostic testing is varied. Countries with statutory
health insurance (e.g., Germany, France, the Netherlands) tend to be more progressive in technology adoption with favorable reimbursement for molecular
diagnostic testing. In countries such as the United Kingdom with tax-based insurance, adoption and reimbursement for molecular diagnostic testing is not
uniform and is influenced by local budgets. Failure by our U.S. and ex-U.S. customers who use our tests to obtain coverage and sufficient reimbursement
from healthcare payors or adverse changes in government and private third-party payors’ policies could have a material adverse effect on our business,
financial condition, results of operations and future growth prospects.
Government Regulation – Medical Device Regulations
United States
Our products and operations are subject to extensive and rigorous regulation by the FDA and other federal, state, local and foreign authorities.
Currently we are limited to marketing our products in the United States for research use only, which means that we cannot make any diagnostic or clinical
claims. However, we intend to seek regulatory clearances or approvals in the United States and other jurisdictions to market certain assays for diagnostic
purposes. The companion diagnostic tests under development by HTG are classified as “medical devices” under the United States Food, Drug and
Cosmetic Act (“FDCA”). The FDA regulates, among other things, the research, development, testing, manufacturing, approval, labeling, storage,
recordkeeping, advertising, promotion and marketing, distribution, post approval monitoring and reporting and import and export of medical devices in the
United States to assure the safety and effectiveness of such products for their intended use.
Unless an exemption applies, each new or significantly modified medical device we seek to commercially distribute in the United States will require
either a premarket notification to the FDA requesting permission for commercial distribution under Section 510(k) of the FDCA, also referred to as a
510(k) clearance, or approval from the FDA of a premarket approval (“PMA”) application. Both the 510(k) clearance and PMA submission can be
expensive, and lengthy, and require payment of significant user fees, unless an exemption is available. We believe that our companion diagnostic tests
under development would be eligible for the less burdensome 510(k) regulatory pathway.
Device Classification
Under the FDCA, medical devices are classified into one of three classes – Class I, Class II or Class III – depending on the degree of risk associated
with each medical device and the extent of control needed to provide reasonable assurances with respect to safety and effectiveness.
Class I devices are those for which safety and effectiveness can be reasonably assured by adherence to a set of regulations, referred to as General
Controls, which require compliance with the applicable portions of the FDA’s Quality System Regulation (“QSR”) facility registration and product listing,
reporting of adverse events and malfunctions, and appropriate, truthful and non-misleading labeling and promotional materials. Most Class I products are
exempt from the premarket notification requirements.
Class II devices are those that are subject to the General Controls, as well as Special Controls, which can include performance standards, guidelines
and post market surveillance. Most Class II devices are subject to premarket review and clearance by the FDA. Premarket review and clearance by the FDA
for Class II devices is accomplished through the 510(k) premarket notification process. Under the 510(k) process, the manufacturer must submit to the
FDA a premarket notification, demonstrating that the device is “substantially equivalent,” to either:
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a device that was legally marketed prior to May 28, 1976, the date upon which the Medical Device Amendments of 1976 were enacted; or
another commercially available, similar device that was cleared through the 510(k) process.
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To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same
technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or
effectiveness than the predicate device. Clinical data are sometimes required to support substantial equivalence.
After a 510(k) notice is submitted, the FDA determines whether to accept it for substantive review. If it lacks necessary information for substantive
review, the FDA will refuse to accept the 510(k) notification. If it is accepted for filing, the FDA begins a substantive review. By statute, the FDA is
required to complete its review of a 510(k) notification within 90 days of receiving the 510(k) notification. As a practical matter, clearance often takes
longer, and clearance is never assured. Although many 510(k) premarket notifications are cleared without clinical data, the FDA may require further
information, including clinical data, to make a determination regarding substantial equivalence, which may significantly prolong the review process. If the
FDA agrees that the device is substantially equivalent, it will grant clearance to commercially market the device.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a new or
major change in its intended use, will require a new 510(k) clearance or, depending on the modification, could require a PMA application. The FDA
requires each manufacturer to make this determination initially, but the FDA can review any such decision and can disagree with a manufacturer’s
determination. If the FDA disagrees with a manufacturer’s determination regarding whether a new premarket submission is required for the modification of
an existing device, the FDA can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or approval of a PMA
application is obtained. If the FDA requires us to seek 510(k) clearance or approval of a PMA application for any modifications to a previously cleared
product, we may be required to cease marketing or recall the modified device until we obtain this clearance or approval. In addition, in these circumstances,
we may be subject to significant regulatory fines or penalties for failure to submit the requisite PMA application(s). In addition, the FDA is currently
evaluating the 510(k) process and may make substantial changes to industry requirements.
The PMA Process
If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is classified into Class III, the device
sponsor must then fulfill the much more rigorous premarketing requirements of the PMA process, or seek reclassification of the device through the de novo
process. A manufacturer can also submit a petition for direct de novo review if the manufacturer is unable to identify an appropriate predicate device and
the new device or new use of the device presents a moderate or low risk.
A PMA application typically includes, but is not limited to, extensive technical information regarding device design and development, pre-clinical
and clinical study data, manufacturing information, labeling and financial disclosure information for the clinical investigators in the device studies.
Post-Approval Requirements
After the FDA permits a device to enter commercial distribution, numerous regulatory requirements apply. These include, but are not limited to:
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the registration and listing regulation, which requires manufacturers to register all manufacturing facilities and list all medical devices placed
into commercial distribution;
the QSR, which requires manufacturers, including third-party manufacturers, to follow elaborate design, testing, production, control,
supplier/contractor selection, complaint handling, documentation and other quality assurance procedures during the manufacturing process;
labeling regulations and unique device identification requirements;
advertising and promotion requirements;
restrictions on sale, distribution or use of a device;
the FDA’s general prohibition against promoting products for unapproved or “off-label” uses;
the Medical Device Reporting (“MDR”) regulation, which requires that manufacturers report to the FDA if their device may have caused or
contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were
to reoccur;
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medical device correction and removal reporting regulations, which require that manufacturers report to the FDA field corrections and
product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may
present a risk to health;
an order of repair, replacement or refund;
device tracking requirements; and
post-approval study and post market surveillance requirements.
Our facilities, records and manufacturing processes are subject to periodic unscheduled inspections by the FDA. Failure to comply with the
applicable United States medical device regulatory requirements could result in, among other things, warning letters, untitled letters, fines, injunctions,
consent decrees, civil penalties, unanticipated expenditures, repairs, replacements, refunds, recalls or seizures of products, operating restrictions, total or
partial suspension of production, the FDA’s refusal to issue certificates to foreign governments needed to export products for sale in other countries, the
FDA’s refusal to grant future premarket clearances or approvals, withdrawals or suspensions of current product clearances or approvals and criminal
prosecution.
Research Use Only
An RUO product is one that is not intended for clinical diagnostic use and must be labeled “For Research Use Only”. Not for use in diagnostic
procedures.” Products that are intended for research use only and are properly labeled as RUO are exempt from compliance with the FDA requirements
discussed above, including the approval or clearance and most QSR requirements. A product labeled RUO but intended to be used diagnostically may be
viewed by the FDA as adulterated and misbranded under the FDC Act and is subject to FDA enforcement activities. The FDA may consider the totality of
the circumstances surrounding distribution and use of an RUO product, including how the product is marketed, when determining its intended use. In
November 2013 the FDA issued a guidance document entitled “Distribution of In Vitro Diagnostic Products Labeled for Research Use Only or
Investigational Use Only” (the “RUO Guidance”) which highlights the FDA’s interpretation that distribution of RUO products with any labeling,
advertising or promotion that suggests that clinical laboratories can validate the test through their own procedures and subsequently offer it for clinical
diagnostic use as a laboratory developed test is in conflict with RUO status. The RUO Guidance further articulates the FDA’s position that any assistance
offered in performing clinical validation or verification, or similar specialized technical support, to clinical laboratories, conflicts with RUO status.
European Union
The European Union (“EU”) has also adopted requirements that affect our products. These requirements include establishing standards that address
creating a certified quality system as well as several directives that address specific product areas. The most significant of these currently effective
directives is the In Vitro Diagnostic Medical Device Directive (“IVDD”) which includes:
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Essential Requirements. The IVDD specifies “essential requirements” that all medical devices must meet. The requirements are similar to
those adopted by the FDA relating to quality systems and product labeling.
Conformity Assessment. Unlike United States regulations, which require virtually all devices to undergo some level of premarket review by
the FDA, the IVDD currently allows manufacturers to bring many devices to market using a process in which the manufacturer certifies that
the device conforms to the essential requirements of the IVDD for that device. A small number of products must go through a more formal
premarket review process. Devices that comply with the requirements of a relevant directive will be entitled to bear the CE conformity
marking, indicating that the device conforms to the essential requirements of the applicable directives and, accordingly, can be marketed
throughout the EU and European Economic Area.
Vigilance. The IVDD also specifies requirements for post market reporting similar to those adopted by the FDA.
On May 26, 2017, the EU released a new regulatory framework, the In Vitro Diagnostic Medical Device Regulation (“IVDR”) which is expected to
replace IVDD. Our CE/IVD marked products must continue to meet the requirements of IVDD for commercialization in the EU until the requirements of
IVDR take effect on May 26, 2022. At this time we do not anticipate moving to the requirements of IVDR for our existing CE/IVD marked products. As
such, these products will no longer be available other than for research use only after that date.
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Other International
Several other countries, including Australia, Canada, China and Japan, have adopted or are in the process of adopting standards for medical devices
sold in those countries. Many of these standards are loosely patterned after those adopted by the EU, but with elements unique to each country. Although
there is a trend towards harmonization of quality system standards, regulations in each country may vary substantially, which can affect timelines of
introduction. We routinely monitor these developments and address compliance with the various country requirements as new standards are adopted.
Government Regulation – Fraud and Abuse and Other Healthcare Regulation
We may be subject to various federal and state healthcare laws, including, but not limited to, anti-kickback, false claims, data privacy and security,
and transparency laws. Penalties for violations of these healthcare laws include, but are not limited to, significant criminal, civil and administrative
penalties, damages, fines, disgorgement, imprisonment, possible exclusion from Medicare, Medicaid and other federal healthcare programs, additional
reporting requirements and/or oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-
compliance with these laws and the curtailment or restructuring of operations. These laws include the following:
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the federal Anti-Kickback Statute, which makes it illegal for any person, including a prescription drug manufacturer (or a party acting on its
behalf), to knowingly and willfully solicit, receive, offer or pay any remuneration that is intended to induce or reward referrals, including the
purchase, recommendation, order or prescription of a particular drug, for which payment may be made under a federal healthcare program,
such as Medicare or Medicaid. Moreover, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act of 2010 (collectively, the ACA) provides that the government may assert that a claim including items or services resulting
from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act;
the federal civil and criminal false claims laws, including the civil False Claims Act that can be enforced by private citizens through civil
whistleblower or qui tam actions, and civil monetary penalties laws prohibit individuals or entities from, among other things, knowingly
presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement
to avoid, decrease or conceal an obligation to pay money to the federal government;
the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) which prohibits, among other things, executing or
attempting to execute a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;
federal physician self-referral statute, commonly known as the Stark Law, which prohibits, among other things, physicians who have a
financial relationship, including an investment, ownership or compensation relationship with an entity, from referring Medicare and Medicaid
patients to the entity for designated health services, which include clinical laboratory services, unless an exception applies. Similarly, entities
may not bill Medicare, Medicaid or any other party for services furnished pursuant to a prohibited referral;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and their implementing regulations, which
imposes obligations, including mandatory contractual terms, on “covered entities,” including certain healthcare providers, health plans, and
healthcare clearinghouses, and their respective “business associates” that create, receive, maintain or transmit individually identifiable health
information for or on behalf of a covered entity as well as their covered subcontractors, with respect to safeguarding the privacy, security and
transmission of individually identifiable health information;
the federal Physician Payments Sunshine Act, which requires applicable manufacturers of covered drugs, devices, biologics and medical
supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions, to
annually report to CMS information regarding payments and other transfers of value to physicians (defined to include doctors, dentists,
optometrists, podiatrists and chiropractors), other healthcare professionals (such as physicians assistants and nurse practitioners) and teaching
hospitals as well as information regarding ownership and investment interests held by physicians and their immediate family members; and
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analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws which may apply to sales or marketing
arrangements and claims involving healthcare items or services reimbursed by non- governmental third-party payors, including private
insurers, state laws that require biotechnology companies to comply with the biotechnology industry’s voluntary compliance guidelines and
the relevant compliance guidance promulgated by the federal government and may require drug manufacturers to report information related
to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures, state laws that require
biotechnology companies to report information on the pricing of certain drug products, state and local laws that require the registration of
pharmaceutical sales representatives, and state and foreign laws that govern the privacy and security of health information in some
circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating
compliance efforts. For example, the EU has established its own data security and privacy legal framework, including the European General
Data Protection Regulation (“GDPR”), which contains new provisions specifically directed at the processing of health information, higher
sanctions and extra-territoriality measures intended to bring non-EU companies under the regulation. Over time we may expand our business
operations to include additional operations in the EU. With such expansion, we would be subject to increased governmental regulation,
including the GDPR, in the EU countries in which we operate. In addition, California recently enacted legislation that has been dubbed the
first “GDPR-like” law in the United States. Known as the California Consumer Privacy Act (“CCPA”), it creates new individual privacy
rights for consumers (as that word is broadly defined in the law) and places increased privacy and security obligations on entities handling
personal data of consumers or households. The CCPA requires covered companies to provide new disclosures to California consumers,
provide such consumers new ways to opt-out of certain sales of personal information, and allows for a new cause of action for data breaches.
Healthcare Reform
There have been and we anticipate that there will be healthcare reform measures that may be adopted in the future that may result in more rigorous
coverage criteria and additional downward pressure on the reimbursement for healthcare products and services. For example, the ACA, which substantially
changed healthcare financing and delivery by both governmental and private insurers, remains subject to challenge. On June 17, 2021, the U.S. Supreme
Court dismissed a challenge on procedural grounds that argued the ACA is unconstitutional in its entirety because the “individual mandate” was repealed
by Congress. Thus, the ACA will remain in effect in its current form. However, it is possible that the ACA will be subject to judicial or Congressional
challenges in the future. Congress and the Biden administration are considering various health reform measures. Further, it is possible that additional
governmental action will be taken in response to the COVID-19 pandemic. Moreover, payment methodologies may be subject to changes in healthcare
legislation and regulatory initiatives.
The Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act (“FCPA”) prohibits any U.S. individual or business from paying, offering, or authorizing payment or offering of
anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign
entity to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United
States to comply with accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions of the
corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations.
Human Capital
Our ability to identify and recruit strong candidates into our company and to retain and develop current talent within our organization is a critical
factor in our continued growth and performance improvement. We continue to initiate programs to promote our organizational culture and to identify the
best possible new talent as the organization grows and new positions are made available. We believe our culture and commitment to our employees result in
the attraction and retention of qualified talent, while providing significant value to our company and its stockholders. As of December 31, 2021, we had 87
full-time and one part-time employee, of which 15 are employed in administration, 21 in manufacturing and operations, 27 in research and development,
three in regulatory and quality affairs, and 22 in direct sales and marketing. Of these employees, six were located in Europe and all others were located in
the United States. We believe that our success will depend, in part, on our ability to attract and retain qualified personnel. We have never experienced a
work stoppage due to labor difficulties and believe that our relations with our employees are good. None of our U.S. employees are represented by labor
unions. Collective bargaining is established by law in France. We and our French employees have agreed to the terms of the applicable collective
bargaining agreements.
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Corporate Information
We were originally incorporated in Arizona in October 1997 as “High Throughput Genomics, Inc.” In December 2000, we reincorporated in
Delaware as “HTG, Inc.” and in March 2011 we changed our name to “HTG Molecular Diagnostics, Inc.” Our principal executive offices are located at
3430 E. Global Loop, Tucson, AZ 85706, and our telephone number is (877) 289-2615. Our corporate website address is www.htgmolecular.com.
Information contained on or accessible through our website is not a part of this report, and the inclusion of our website address in this report is an inactive
textual reference only.
This report contains references to our trademarks, including VERI/O and HTG EdgeSeq, and to trademarks belonging to other entities. Solely for
convenience, trademarks and trade names referred to in this report, including logos, artwork and other visual displays, may appear without
the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our
rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or
trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
We are also a “smaller reporting company” as defined in the Securities Exchange Act of 1934 (the “Exchange Act”) and have elected to take
advantage of certain of the scaled disclosures available to smaller reporting companies.
Where You Can Find Additional Information
We make available free of charge through our investor relations website, www.htgmolecular.com, our annual reports, quarterly reports, current
reports, proxy statements and all amendments to those reports as soon as reasonably practicable after such material is electronically filed or furnished with
the SEC. These reports may also be obtained without charge by contacting Investor Relations, HTG Molecular Diagnostics, Inc., 3430 E. Global Loop,
Tucson, Arizona 85706, e-mail: info@htgmolecular.com. Our Internet website and the information contained therein or incorporated therein are not
intended to be incorporated into this Annual Report on Form 10-K. In addition, the SEC maintains an Internet site that contains reports, proxy and
information statements and other information regarding reports that we file or furnish electronically with them at www.sec.gov.
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Item 1A. Risk Factors.
RISK FACTORS
An investment in shares of our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the
other information in this report, and in our other public filings, before deciding to purchase, hold or sell shares of our common stock. The occurrence of
any of the following risks could have a material adverse effect on our business, financial condition, results of operations and future growth prospects or
cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from
time to time. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment. You should
consider all of the risk factors described when evaluating our business.
Risks Related to our Business and Strategy
We have incurred losses since our inception and expect to incur losses for the foreseeable future. We cannot be certain that we will achieve or sustain
profitability.
We have incurred losses since our inception and expect to incur losses in the future. We incurred net losses of $17.1 million and $20.9 million for
the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, we had an accumulated deficit of $208.3 million. We expect that our
losses will continue for the foreseeable future as we will be required to invest significant additional funds to support product development, including
development of new proprietary HTG EdgeSeq panels and products, the commercialization of our HTG EdgeSeq platform and proprietary consumables
and advancement of our HTG Therapeutics business unit. We also expect that our selling, general and administrative expenses will continue to increase due
to the additional costs associated with market development activities and expanding our staff to sell and support our products and services. Our ability to
achieve or, if achieved, sustain profitability is based on numerous factors, many of which are beyond our control, including the market acceptance of our
products and services, competitive product development and our market penetration and margins. We may never be able to generate sufficient revenue to
achieve or, if achieved, sustain profitability.
We will need to raise additional capital to fund our operations in the future. If we are unsuccessful in attracting new capital, we may not be able to
continue operations or may be forced to sell assets to do so. Alternatively, capital may not be available to us on favorable terms, or if at all. If available,
financing terms may lead to significant dilution of our stockholders’ equity.
We are not profitable and have had negative cash flow from operations since our inception. To fund our operations and develop and commercialize
our products, we have relied primarily on equity and debt financings and revenue generated from the sale of our HTG EdgeSeq platform, proprietary
consumables, related services and collaborative development service arrangements with biopharmaceutical company customers. We cannot be certain that
our existing resources will be sufficient to fund our planned operations and expenditures for at least the next 12 months from the date of this report.
Potentially changing circumstances, including those related to COVID-19, 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. We will need to obtain additional funds to
finance our operations. Additional capital may not be available at such times or amounts as needed by us. Historically we have financed our business in
part by access to the capital markets. Even if capital is available, it might be available only on unfavorable terms. Any additional equity or convertible debt
financing into which we enter could be dilutive to our existing stockholders. Any future debt financing into which we enter may impose covenants upon us
that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our stock, make certain
investments and engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms
that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, we may
need to relinquish rights to our technologies or our products or grant licenses on terms that are not favorable to us. If access to sufficient capital is not
available as and when needed, our business will be materially impaired, and we may be required to cease operations, curtail one or more product
development or commercialization programs, or significantly reduce expenses, sell assets, seek a merger or joint venture partner, file for protection from
creditors or liquidate all of our assets. Any of these factors could harm our operating results.
Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and share price.
The global economy, including credit and financial markets, has experienced extreme volatility and disruptions, including severely diminished
liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation
rates and uncertainty about economic stability. For example, the COVID-19 pandemic resulted in widespread unemployment, economic slowdown and
extreme volatility in the capital markets. Similarly, the current Russia-Ukraine conflict has created extreme volatility in the global capital markets and is
expected to have further global economic consequences, including disruptions of the global supply chain and energy markets. Any such volatility and
disruptions may have
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adverse consequences on us or the third parties on whom we rely. If the equity and credit markets deteriorate, including as a result of political unrest or war,
it may make any necessary debt or equity financing more difficult to obtain in a timely manner or on favorable terms, more costly or more dilutive.
If we are unable to successfully commercialize our products, our business may be adversely affected.
Our HTG Edge system was introduced for sale in the life sciences research market in the third quarter of 2013. Our HTG EdgeSeq chemistry was
introduced for sale in the life sciences research market in the third quarter of 2014. Our dedicated HTG EdgeSeq platform was introduced for sale in the life
sciences research market in the fourth quarter of 2015 and has been our primary product focus since 2016. Our VERI/O service laboratory was announced
in June 2016. Our first diagnostic assay, based on our HTG EdgeSeq chemistry and automated on our HTG EdgeSeq platform, was introduced for sale in
Europe in July 2016. We commercially launched our HTG Transcriptome Panel in August 2021. Although we believe that the HTG Transcriptome Panel
will be a foundational product for RUO profiling, future companion diagnostics and potential proprietary diagnostic products and will allow us to further
expand our product offerings outside of oncology and autoimmune and into additional markets such as transplant and diabetes, we have only recently
initiated commercial sales of this panel and it may not have the commercial success that we anticipate or hope for, or that it will allow us to expand our
product offerings. We currently market our products through our own sales force in the United States and Europe and have distributors in parts of Europe.
We intend to expand our sales and support teams in the United States and in Europe and to establish additional distributor and/or third-party contract sales
team relationships in other parts of the world. However, we may not be able to market and sell our products effectively. Our sales of life science research
products, profiling and diagnostic products, and potential future products will depend in large part on our ability to successfully increase the scope of our
marketing efforts and establish and maintain a sales force commensurate with our then applicable markets. If we do not build and maintain an efficient and
effective sales force and distributor relationships targeting these markets, our business and operating results will be adversely affected.
If our HTG EdgeSeq platform and proprietary profiling panels fail to achieve and sustain sufficient market acceptance, or we are not able to continue
to expand our service or collaborative relationships with biopharmaceutical customers, either directly or through a collaboration partner, we will not
generate expected revenue, and our prospects may be harmed.
We are currently focused on selling our HTG EdgeSeq platform and profiling panels within the life sciences research market and, where approved,
in the diagnostic market. We plan to develop panels for many different disease states including companion diagnostics to determine the proper course of
treatment for those diseases. We may experience reluctance, or refusal, on the part of physicians to order, and third-party payors to cover and provide
adequate reimbursement for, our panels if the results of our research and clinical studies, and our sales and marketing activities relating to communication
of these results, do not convey to physicians, third-party payors and patients that the HTG EdgeSeq platform and related profiling panels provide equivalent
or better diagnostic information than other available technologies and methodologies. We believe our panels represent an emerging methodology in
diagnosing disease states, and we may have to overcome resistance among physicians to adopting it for the marketing of our products to be successful.
Even if we are able to obtain regulatory approval from the U.S. Food and Drug Administration (“FDA”) or other applicable regulatory authorities, the use
of our panels may not become the standard diagnostic tool for those diseases on which we plan to focus our efforts.
In addition, a key component of our strategy is to develop diagnostic tools in conjunction with biopharmaceutical companies’ drug development
programs, to help assess the proper course of treatment for specific diseases. Even if we are successful in developing those diagnostic tools and receive
regulatory approval, we still may not be successful in marketing those diagnostic tests. Furthermore, the decision to advance an underlying drug candidate
through clinical trials and ultimately to commercialization is at the discretion of biopharmaceutical companies with which we collaborate. Our
biopharmaceutical partners may take certain actions that could negatively impact the utility and marketability of our diagnostic tests. For example, our
biopharmaceutical partners could:
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determine not to actively pursue the development or commercialization of an applicable drug candidate, including due to the failure to
demonstrate sufficient efficacy, the occurrence of safety or tolerability issues, or any number of other reasons;
fail to obtain necessary regulatory approval of an applicable drug candidate;
obtain regulatory approval for a drug candidate in a manner that neither requires nor recommends the use of a companion diagnostic test prior
to its use; or
choose alternative diagnostic tests to market with their products instead of ours.
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To the extent that we develop diagnostic assays for a biopharmaceutical company in collaboration with a collaboration partner, we may not have
responsibility for some or all aspects of developing, marketing or commercializing any resulting diagnostic tests. In addition to this biopharmaceutical
partner risk, a collaboration partner may take certain actions that could negatively impact the development, utility and marketability of the applicable
diagnostic tests. For example, a collaboration partner could fail to satisfy or fall behind in its obligations to us or to the biopharmaceutical company for
which we develop a companion diagnostic test, which may delay development, regulatory approvals, market development and/or commercialization of the
applicable companion diagnostic test.
Our agreement with QML is non-exclusive and, in the future, either party may be unwilling to partner with the other, and we may be unable to
implement a feasible partnering relationship for the development, manufacture, marketing and/or commercialization of companion diagnostic assays on
acceptable terms, or at all. If we are unable to implement such a relationship, our efforts to develop, manufacture and commercialize companion diagnostic
assays may be significantly delayed and limited in scale, or may not occur at all. Any of these events could limit our diagnostic test sales and revenue and
have a material adverse effect on our business, operating results and financial condition.
COVID-19 has adversely affected our business and is expected to have an impact on our business for the foreseeable future.
Our business, including our workforce, supply chain and customer base, has been adversely affected by COVID‑19.
COVID-19 has caused several states and countries to implement quarantines and/or significant restrictions on travel. In addition, affected regions,
including several states within the United States, have previously implemented work restrictions that limited many employees from going to work.
Moreover, COVID-19 has resulted in business closures and a substantial reduction in economic activity in the United States and worldwide. The emergence
of new variants of the SARS-CoV-2 virus raises the possibility that recurring cycles of restrictions will be imposed in the future, notwithstanding increasing
vaccination and immunity levels.
While significant uncertainty remains as to the future impact of the COVID-19 pandemic on our operations, and on the global economy as a whole,
COVID-19 had a negative impact on our product and product-related services revenue in 2020 and 2021. While we have seen some recovery in customers
returning to work, we believe this period of reduced revenue will continue into 2022 as many customers have not returned to historical operating levels, are
not yet allowing visitors on site at their facilities or have not resumed previously planned studies. The extent of this impact is likely to vary from customer
to customer depending upon how they are or have been directly or indirectly impacted by local stay-at-home orders and other social distancing measures,
priorities for the customers when the immediate impacts of the pandemic have passed, and the workforce and supplier impacts that each customer has
experienced during the pandemic.
The effects of the stay-at-home orders and our work-from-home policies may negatively impact productivity, disrupt our business and delay our
development programs and regulatory timelines and negatively impact our commercial activities, the magnitude of which will depend, in part, on the length
and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course. In addition, these widespread outbreaks of
illness could adversely affect our workforce resulting in serious health issues and absenteeism.
It is also possible that further COVID-19 outbreaks will continue to impact our workforce, supply chains or distribution networks or otherwise
impact our ability to conduct sample processing services in our laboratory or to travel to customer facilities for commercial or support functions in the
future. Governmental mandates may require forced shutdowns of our facilities for extended or indefinite periods. Pandemic outbreaks, including the
COVID-19, could also substantially interfere with general commercial activity related to our supply chain and customer base, which could have a material
adverse effect on our financial condition, results of operations, business or prospects. Restrictions resulting from COVID-19 may disrupt our supply chains
or distribution networks or limit our ability to obtain sufficient materials for our consumables or instruments and may disrupt our ability to process
customer samples or perform collaborative development services. Further, to the extent our customers’ businesses are adversely affected by the pandemic,
they might delay or reduce purchases from us or collaborative development projects with us, which could adversely affect our results of operations. The
effects of ongoing or future health epidemics on our business remain uncertain and subject to change. While we do not know the full extent of potential
delays or impacts on the global economy, these effects could have a material adverse impact on our operations, financial position and liquidity.
Our business operations might be disrupted or adversely affected by catastrophic events.
We manufacture our HTG EdgeSeq instrument and consumable products and perform our RUO profiling and collaborative development services in
our Tucson, Arizona facilities. In addition, our Tucson facilities are the center for order processing, receipt of critical components of our HTG EdgeSeq
instrument and shipping products to customers. We do not have redundant facilities. Damage or the inability to utilize our Tucson facilities and the
equipment we use to perform research, development or services and manufacture our products could be costly, and we would require substantial lead-time
to repair or replace this facility and equipment. The Tucson facilities may be harmed or rendered inoperable by natural or man-made disasters, including
flooding, wind damage,
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power spikes and power outages, which may render it difficult or impossible for us to perform these critical functions for some period of time. The inability
to manufacture consumables or instruments, process customer samples, perform development services or ship products to customers for even a short period
of time may result in the loss of customers or harm our reputation, and we may be unable to regain those customers in the future. Although we possess
insurance for damage to our property and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses and may not
continue to be available to us on acceptable terms, or at all. In addition, natural disasters or other catastrophic events in various parts of the world, including
interruptions in the supply of natural resources, political and governmental changes, disruption in transportation networks or delivery services, severe
weather conditions, wildfires and other fires, explosions, actions of animal rights activists, terrorist attacks, earthquakes, wars, conflicts (including the
current Russia-Ukraine conflict), and public health issues could disrupt our operations or those of our collaborators, contractors and vendors or contribute
to unfavorable economic or other conditions that could adversely impact us.
Our financial results may vary significantly from quarter to quarter or may fall below the expectations of investors or securities analysts, each of which
may adversely affect our stock price.
Investors should consider our business and prospects considering the risks and difficulties we expect to encounter in the new, uncertain and rapidly
evolving markets in which we compete. Because these markets are new and evolving, predicting their future growth and size is difficult. We expect that our
visibility into future sales of our products, including volumes, prices and product mix between instruments, consumables and services, will continue to be
limited and could result in unexpected fluctuations in our quarterly and annual operating results.
Numerous other factors, many of which are outside our control, may cause or contribute to significant fluctuations in our quarterly and annual
operating results. For example, two customers accounted for 20% and 10% of our revenue for the year ended December 31, 2021. The two largest
customers accounted for 18%, and 17% of our accounts receivable balance as of December 31, 2021. The third and fourth largest customers accounted for
10% each of our accounts receivable balance as of December 31, 2021. If orders from our top customers are discontinued and we are unable to establish
new projects or continue to expand our customer base, our revenue in future periods may materially decrease. In addition, we experienced a significant
slowing of product and product-related services revenue generation beginning in March 2020 as a result of COVID-19. This period of reduced revenue
continued through the remainder of 2020 and continuing into 2021 due to disruptions to our customers’ businesses as a result of the pandemic. The extent
of this impact on our ongoing business is likely to vary from customer to customer depending upon how they are directly or indirectly impacted by local
stay-at-home orders and other social distancing measures, priorities for the customers when the immediate impacts of the pandemic have passed, and the
workforce and supplier impacts that each customer has experienced during the pandemic. Fluctuations in our operating results may make financial planning
and forecasting difficult. In addition, these fluctuations may result in unanticipated decreases in our available cash, which could negatively affect our
business and prospects. Factors that may contribute to fluctuations in our operating results include many of the risks described under the caption “Risk
Factors – Risks Related to Our Business and Strategy” of this report. In addition, one or more of such factors may cause our revenue or operating expenses
in one period to be disproportionately higher or lower relative to the others. Our products involve a significant capital commitment from our customers or
may depend on customer studies that have variable or indefinite timelines and accordingly, involve a lengthy sales cycle. We may expend significant effort
in attempting to make a particular sale, which may be deferred by the customer or never occur. Accordingly, comparing our operating results on a period-
to-period basis may not be meaningful, and investors should not rely on our past results as an indication of our future performance. If such fluctuations
occur or if our operating results deviate from our expectations or the expectations of investors or securities analysts, our stock price may be adversely
affected.
Our sales cycle is lengthy and variable, which makes it difficult for us to forecast revenue and other operating results.
Our sales process involves numerous interactions with multiple individuals within any given organization, and often includes in-depth analysis by
potential customers of our products (where in some instances we will provide a demonstration unit for their use and evaluation), performance of proof-of-
principle studies, preparation of extensive documentation and a lengthy review process. As a result of these factors, the capital investment required in
purchasing our instrument and the budget cycles of our customers, the time from initial contact with a customer to our receipt of a purchase order can vary
significantly and be up to 12 months or longer. Given the length and uncertainty of our sales cycle, we have in the past experienced, and likely will in the
future experience, fluctuations in our product and product-related services revenue on a period-to-period basis. In addition, any failure to meet customer
expectations could result in customers choosing to retain their existing systems or service providers or to purchase systems or services other than ours. The
revenue that we expect to earn from our collaborative development services are also subject to an extended, variable timeline based on each project
agreement, which will likely result in fluctuations in our collaborative development services revenue on a period-to-period basis as well.
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We may not be able to develop new products or enhance the capabilities of our systems to keep pace with rapidly changing technology and customer
requirements, which could have a material adverse effect on our business and operating results.
Our success depends on our ability to develop new products and applications for our technology in existing and new markets, while improving the
performance and cost-effectiveness of our systems. New technologies, techniques or products could emerge that might offer better combinations of price
and performance than our current or future products and systems. Existing or future markets for our products, including gene expression analysis, liquid-
based specimen analysis (e.g., plasma, blood and urine) and single-cell analysis, as well as potential markets for our diagnostic product candidates, are
characterized by rapid technological change and innovation. It is critical to our success that we anticipate changes in technology and customer requirements
and successfully introduce new, enhanced and competitive technologies to meet our customers’ and prospective customers’ needs on a timely and cost-
effective basis. At the same time, however, we must carefully manage the introduction of new products. If customers believe that such products will offer
enhanced features or be sold for a more attractive price, they may delay purchases until such products are available. We may also have excess or obsolete
inventory of older products as we transition to new products and our experience in managing product transitions is very limited. If we do not successfully
innovate and introduce new technology into our product lines or effectively manage the transitions to new product offerings, our revenue and results of
operations will be adversely impacted.
Competitors may respond more quickly and effectively than we do to new or changing opportunities, technologies, standards or customer
requirements. We anticipate that we will face increased competition in the future as existing companies and competitors develop new or improved products
and as new companies enter the market with new technologies.
If we do not successfully manage the development and launch of new products, our financial results could be adversely affected.
We face risks associated with launching new products and with undertaking to comply with regulatory requirements for certain types of our
products. If we encounter development or manufacturing challenges, adjust our product development priorities, or discover deficiencies during our product
development cycle, the product launch date(s) may be delayed, or certain product development projects may be terminated. The expenses or losses
associated with unsuccessful product development or launch activities or lack of market acceptance of our new products could adversely affect our business
or financial condition.
Our future success is dependent upon our ability to expand our customer base and introduce new applications.
Our current customer base is primarily composed of biopharmaceutical companies, academic institutions and molecular labs that perform analyses
using or directly or indirectly obtain services based on our HTG EdgeSeq platform and consumables for research use only, which means that the products
or data from services may not be used for clinical diagnostic purposes. We have obtained CE markings in Europe for our HTG EdgeSeq consumables,
including our HTG EdgeSeq DLBCL Cell of Origin Assay EU and our HTG EdgeSeq ALKPlus EU. These products may be used by customers for
diagnostic purposes in Europe. With the EU transition to IVD Medical Device Regulation in May 2022, we would need to comply with these requirements
in order to remain on the EU market other than research use only. Currently, we do not intend to and, where applicable, do not have appropriate licenses or
permits to conduct diagnostic testing services. Our success will depend, in part, upon our ability to increase our market penetration among our customer
bases and to expand our market by developing and marketing new companion diagnostic tests and RUO applications (whether product or service). We may
not be able to successfully complete development of or commercialize any of our planned future tests and applications. To achieve these goals, we will
need to conduct substantial research and development, conduct clinical validation studies, expend significant funds, expand and scale-up our research,
development, service and manufacturing processes and facilities, enter into service and collaborative development services arrangements with
biopharmaceutical company customers, expand and train our sales force; and seek and obtain regulatory clearance or approvals of our new tests and
applications, as required by applicable regulations. Additionally, we must demonstrate to laboratory directors, physicians and third-party payors that our
current and any future diagnostic products are effective in obtaining clinically relevant information that can inform treatment decisions, and that our HTG
EdgeSeq platform and related panels can enable an equivalent or superior approach than other available technology. Furthermore, we expect that a
combination of increasing the installed base of our HTG EdgeSeq instruments and entering into additional service and custom RUO assay design
agreements with biopharmaceutical customers will drive increased demand for our relatively high margin panels. If we are not able to successfully increase
our installed base and biopharmaceutical customer relationships, then sales of our products and services, and our margins for these revenue items may not
meet expectations. Attracting new customers and introducing new products and services requires substantial time and expense. Any failure to expand our
existing customer base, or launch new products, including diagnostic products or services, would adversely affect our ability to improve our operating
results.
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The development of future products is dependent on new methods and/or technologies that we may not be successful in developing.
We commercially launched our HTG Transcriptome Panel in August 2021. Although we believe that the HTG Transcriptome Panel will be a
foundational product for RUO profiling, future companion diagnostics and potential proprietary diagnostic products, and will allow us to further expand
our product offerings outside of oncology and autoimmune and into additional markets such as transplant and diabetes, we have only recently initiated
commercial sales of this panel and it may not have the commercial success that we anticipate or hope for, or that it will allow us to expand our product
offerings. In July 2021, we formed a new drug discovery business unit, HTG Therapeutics, which is expected to use our HTG Transcriptome Panel and an
epitranscriptome profiling technology to profile RNA modifications, and we expect that, by leveraging these profiling technologies earlier in the drug
discovery process, HTG Therapeutics will generate lead compounds faster, and with potentially more favorable efficacy and toxicity profiles. However,
there can be no assurance that HTG Therapeutics will be able to accomplish these goals or will otherwise be successful. In addition, we are building a full
machine learning-based chemical library design platform, which is expected to better predict the binding properties of a drug candidate to its target. If we
are unsuccessful at developing this full machine learning-based chemical library design platform, or it, HTG Therapeutics or our HTG Transcriptome Panel
do not provide the benefits that we anticipate, our future revenue opportunities will be limited.
Our HTG EdgeSeq product portfolio requires the use of NGS instrumentation and reagents and could be adversely affected by actions of third-party
NGS product manufacturers over whom we have no control.
A key element of our strategy is to establish our HTG EdgeSeq technology as the best sample and library preparation method for clinical
applications of next-generation sequencers. We depend at least in part on the availability of NGS instrumentation and reagents, and the ability of our HTG
EdgeSeq products to operate seamlessly with NGS instrumentation. Any significant interruption or delay in the ability of our HTG EdgeSeq products to
operate on or with NGS instrumentation could reduce demand for our products and result in a loss of customers.
Our reputation, and our ability to continue to establish or develop our technology for clinical applications of next-generation sequencers, are
dependent upon the availability of NGS instrumentation and the reliable performance of our products with NGS instrumentation. We are not able to control
the providers of NGS instrumentation, which increases our vulnerability to interoperability problems with the products that they provide. For example,
providers of NGS instruments may discontinue existing products, or introduce new NGS instrumentation products with little or no notice to us. This may
cause some of our products not to be operable with one or more NGS instruments or may adversely affect regulatory approvals of our future IVD HTG
EdgeSeq products, potentially for extended periods of time. Any interruption in the ability of our products to operate on NGS instruments could harm our
reputation or decrease market acceptance of our products, and our business, financial condition and operating results may be materially and adversely
affected. We also could experience additional expense in developing new products or changes to existing products to meet developments in NGS
instrumentation, including fees charged by our development partners to access new technology, and our business, financial condition and operating results
may be materially and adversely affected.
Current medical device regulation in the United States and other jurisdictions requires manufacturers of IVD molecular profiling tests that use NGS
detection, referred to as NGS IVD tests, to include in regulatory submissions, technical information about the NGS products that are required for
performance of, but are not supplied with, the NGS IVD test. These regulatory agencies also require that the NGS instrumentation have “locked” software
for the detection of the NGS IVD test results. Thus, to obtain regulatory approval for NGS IVD tests, manufacturers like us, currently must have
arrangements with NGS product manufacturers to gain access to technical information and NGS instrument software. We currently have agreements with
two NGS product manufacturers that grant us rights to develop, manufacture and sell future HTG EdgeSeq NGS IVD tests in specified fields, subject to,
among other things, the NGS product manufacturers’ rights to terminate such agreements and discontinue products or implement product design changes
that could adversely affect our HTG EdgeSeq NGS IVD tests. There can be no assurance that our agreements with these NGS product manufacturers, or
any future NGS product manufacturers that we contract with, will not be terminated earlier than we currently expect, that a NGS product manufacturer will
perform its contractual duties to us, or that we will otherwise receive the benefits we anticipate receiving under those agreements. In addition, if regulatory
agencies do not change their requirements for NGS IVD test approval or clearance and the NGS instrument manufacturers close their systems to third-party
NGS IVD test development (in general or with specific NGS IVD test manufacturers) and we are not able to maintain or enforce our agreements with such
manufacturers, we may not be able to meet our commercial goals and our business, financial condition and operating results may be materially and
adversely affected.
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If we do not achieve, sustain or successfully manage our anticipated growth, our business and growth prospects will be harmed.
Our current personnel, systems and facilities may not be adequate to support our business plan and future growth. Our need to effectively manage
our operations, growth and various projects requires that we, among other things:
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continue to improve our operational, financial, management and regulatory compliance controls and reporting systems and procedures;
attract and retain sufficient numbers of talented employees;
manage our commercialization activities effectively and in a cost-effective manner;
manage our relationship with third parties related to the development and commercialization of our products; and
manage our development efforts effectively while carrying out our contractual obligations to contractors and other third parties.
Moreover, growth will place significant strains on our management and our operational and financial systems and processes. For example, expanded
market penetration of our HTG EdgeSeq platform and related proprietary panels, and future development and approval of diagnostic products, are key
elements of our growth strategy that will require us to hire and retain additional sales and marketing, regulatory, manufacturing and quality assurance
personnel. If we do not successfully forecast the timing and cost of the development of new panels and diagnostic products, the regulatory clearance or
approval for product marketing of any future diagnostic products or the demand and commercialization costs of such products, or manage our anticipated
expenses accordingly, our operating results will be harmed.
If regulatory limitations are placed on our products our business and growth will be harmed.
In many jurisdictions, including the United States, we are currently limited to marketing our HTG EdgeSeq platform and proprietary profiling
panels for research use only, which means that we cannot make any diagnostic or clinical claims for those products in those jurisdictions.
We obtained the right to CE mark the HTG EdgeSeq DLBCL Cell of Origin Assay EU and the HTG EdgeSeq ALKPlus Assay EU for sale as IVDs
in Europe, in July 2016 and March 2017, respectively. With the EU transition to IVD Medical Device Regulation in May 2022, we would need to comply
with these requirements in order to remain on the EU market other than research use only. While our current ex-U.S. strategy is to focus our efforts on the
RUO market, in the event we want to expand our ex-U.S. business opportunities outside of research use only there would likely be additional clinical
validations and certifications that we would need to obtain and there can be no assurance that we would be able obtain to obtain any such validations or
certifications on a timely basis, or at all. In addition, if clinical diagnostic laboratories or other customers outside the United States do not accept our tests,
our ability to grow our business outside of the United States could be compromised.
Our HTG Therapeutics business strategy may require significant investments in working capital and may not generate any revenue.
In July 2021, we formed a new drug discovery business unit, HTG Therapeutics. This business unit is expected to use our HTG Transcriptome Panel
and an epitranscriptome profiling technology evolved from our original HTG EdgeSeq technology, HTG EpiEdgeSeq, to profile RNA modifications. By
leveraging these profiling technologies earlier in the drug discovery process, our objective is for HTG Therapeutics to generate lead compounds faster, and
with potentially more favorable efficacy and toxicity profiles, with the ultimate goal of generating interest from pharmaceutical companies that results in
research or licensing collaborations for, or acquisitions of, these compounds. However, while we have hired experienced employees and added drug
development depth to our Board of Directors, as a company we have no prior experience with drug discovery and development and may not be successful
in this endeavor. Moreover, drug discovery and development is expensive and will require investments in working capital by us that may be significant.
Even if we are successful in partnering for one or more early-stage drug discovery programs with a pharmaceutical company, we will need to expend
potentially significant capital resources on these programs prior to any such partnering, and potentially after, and there can be no assurance that we will
generate meaningful revenue from these programs. We will need to raise additional funds in order to finance the implementation of our HTG Therapeutics
business strategy, which could dilute our current investors or could impact our ability to continue our operations in the future.
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We expect to generate a portion of our revenue internationally and are subject to various risks relating to our international activities, which could
adversely affect our operating results.
For the year ended December 31, 2021, approximately 31% of our revenue was generated from sales originated by customers located outside of the
United States, compared with 35% for year ended December 31, 2020. We expect that a percentage of our future revenue will continue to come from
international sources, and we expect to expand our overseas operations and develop opportunities in additional areas. Engaging in international business
involves a number of difficulties and risks, including:
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required compliance with existing and changing foreign regulatory requirements and laws;
required compliance with anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act and U.K. Bribery Act, data privacy requirements,
labor laws and anti-competition regulations;
export and import restrictions;
various reimbursement, pricing and insurance regimes;
laws and business practices favoring local companies;
longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;
political and economic instability, including due to the current Russia-Ukraine conflict;
potentially adverse tax consequences, tariffs, customs charges, bureaucratic requirements and other trade barriers, including transfer pricing,
value added and other tax systems, double taxation and restrictions and/or taxation on repatriation of earnings;
tariffs, customs charges, bureaucratic requirements and other trade barriers;
difficulties and costs of staffing and managing foreign operations, including difficulties and costs associated with foreign employment laws;
increased financial accounting and reporting burdens and complexities; and
difficulties protecting, procuring, or enforcing intellectual property rights, including from reduced or varied protection for intellectual
property rights in some countries.
As we expand internationally our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign
currency exchange rates. Historically, most of our revenue has been denominated in U.S. dollars, although we have sold our products and services in local
currency outside of the United States, principally the Euro. Our expenses are generally denominated in the currencies in which our operations are located,
which is primarily in the United States. As our operations in countries outside of the United States grows, our results of operations and cash flows will
increasingly be subject to fluctuations due to changes in foreign currency exchange rates, which could negatively impact our results of operations in the
future. For example, if the value of the U.S. dollar increases relative to foreign currencies, in the absence of an offsetting change in local currency prices,
our revenue could be adversely affected as we convert revenue from local currencies to U.S. dollars.
If we dedicate significant resources to our international operations and are unable to manage these risks effectively, our business, operating results
and prospects will suffer. Moreover, we cannot be certain that the investment and additional resources required in establishing operations in other countries
will produce desired levels of revenue or profitability.
In addition, any failure to comply with applicable legal and regulatory obligations could negatively impact us in a variety of ways that include, but
are not limited to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export
privileges, seizure of products and restrictions on certain business activities.
If the utility of our HTG EdgeSeq platform, proprietary profiling panels, services and solutions in development is not supported by studies published in
peer-reviewed medical publications, the rate of adoption of our current and future products and the rate of reimbursement of our future products by
third-party payors may be negatively affected.
We anticipate that we will need to maintain a continuing presence in peer-reviewed publications to promote adoption of our products by
biopharmaceutical companies, academic institutions and molecular labs and to promote favorable coverage and reimbursement decisions. We believe that
peer-reviewed journal articles that provide evidence of the utility of our current and future products or the technology underlying the HTG EdgeSeq
platform, consumables and services are important to our commercial success. It is critical to the success of our sales efforts that we educate a sufficient
number of clinicians and administrators about our
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HTG EdgeSeq technology, including our HTG EpiEdgeSeq technology, our current panels and services and our future solutions, and demonstrate the
research and clinical benefits of these solutions. Our customers may not adopt our current and future solutions, and third-party payors may not cover or
adequately reimburse our future products, unless they determine, based on published peer-reviewed journal articles and the experience of other researchers
and clinicians, that our products provide accurate, reliable, useful and cost-effective information. Peer-reviewed publications regarding our products and
solutions may be limited by many factors, including delays in the completion of, poor design of, or lack of compelling data from studies that would be the
subject of the article. If our current and future product and product-related service solutions or the technology underlying such products and services do not
receive sufficient favorable exposure in peer-reviewed publications, the rate of research and clinical adoption and positive coverage and reimbursement
decisions could be negatively affected.
We may provide our HTG EdgeSeq instrument and profiling panels free of charge or through other arrangements to customers or key opinion leaders
through evaluation agreements or reagent rental programs, and these programs may not be successful in generating recurring revenue from sales of
our systems and proprietary panels.
We sell our HTG EdgeSeq instrument and profiling panels under different arrangements to expand our installed base and facilitate the adoption of
our platform.
In some instances, we provide equipment free of charge under evaluation agreements for a limited period of time to permit the user to evaluate the
system for their purposes in anticipation of a decision to purchase the system. We retain title to the equipment under such arrangements unless the evaluator
purchases the equipment, and in most cases, require evaluation customers to purchase a minimum quantity of consumables during the evaluation period.
When we place a system under a reagent rental agreement, we install equipment in the customer’s facility without a fee and the customer agrees to
purchase consumable products at a stated price over the term of the agreement. While some of these agreements did not historically contain a minimum
purchase requirement, we have included a minimum purchase requirement in all current reagent rental agreements and will continue to do so in the future.
We retain title to the equipment and such title is transferred to the customer at no additional charge at the end of the initial arrangement. The cost of the
instrument under the agreement is expected to be recovered in the fees charged for consumables, to the extent sold, over the term of the agreement.
Other arrangements might include a research agreement whereby an academic collaborator agrees to provide biological samples in exchange for the
use of an HTG EdgeSeq instrument at no cost in furtherance of the collaborator’s professional goals and/or the educational or research objectives of an
applicable institution.
Any of the foregoing arrangements could result in lost revenue and profit and potentially harm our long-term goal of achieving profitable
operations. In addition, we require customers who receive systems that we continue to own to carry insurance sufficient to protect us against any equipment
losses, we cannot guarantee that they will maintain such coverage, which may expose us to a loss of the value of the equipment in the event of any loss or
damage.
There are instances where we provide our systems to key opinion leaders free of charge, to gather data and publish the results of their research to
assist our marketing efforts. We have no control over some of the work being performed by these key opinion leaders, or whether the results will be
satisfactory. It is possible that the key opinion leader may generate data that is unsatisfactory and could potentially harm our marketing efforts. In addition,
customers may from time to time create negative publicity about their experience with our systems, which could harm our reputation and negatively affect
market perception and adoption of our platform.
Placing our HTG EdgeSeq instruments under evaluation agreements, under reagent rental agreements or with our key opinion leaders without
receiving payment for the instruments could require substantial additional working capital to provide additional units for sale to our customers.
We face risks related to handling of hazardous materials and other regulations governing environmental safety.
Our operations are subject to complex and stringent environmental, health, safety and other governmental laws and regulations that both public
officials and private individuals may seek to enforce. Our activities that are subject to these regulations include, among other things, our use of hazardous
materials and the generation, transportation and storage of waste. We could discover that we or an acquired business is not in material compliance with
these regulations. Existing laws and regulations may also be revised or reinterpreted, or new laws and regulations may become applicable to us, whether
retroactively or prospectively, that may have a negative effect on our business and results of operations. It is also impossible to eliminate completely the
risk of accidental environmental contamination or injury to individuals. In such an event, we could be liable for any damages that result, and any liability
could exceed our resources or any applicable insurance coverage we may have, which events could adversely affect our business.
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The life sciences research and diagnostic markets are highly competitive. We face competition from enhanced or alternative technologies and products,
which could render our products and/or technologies obsolete. If we fail to compete effectively, our business and operating results will suffer.
We face significant competition in the life sciences research and diagnostics markets. We currently compete with both established and early-stage
life sciences research companies that design, manufacture and market instruments and consumables for gene expression analysis, liquid-based specimen
analysis (e.g., plasma, blood and urine), single-cell analysis, PCR, digital PCR, other nucleic acid detection and additional applications. These companies
use well-established laboratory techniques such as microarrays or qPCR as well as newer technologies such as next-generation sequencing. We believe our
principal competitors in the life sciences research market are Abbott Molecular, Affymetrix, Inc., Agilent Technologies, Inc., BioRad Laboratories, Invite
(acquired by Archer Dx, Inc.), Fluidigm Corporation, Illumina, Inc., Luminex Corporation, NanoString Technologies, Inc., Personal Genome Diagnostics
(acquired by Labcorp), entities owned and controlled by QIAGEN N.V., Roche Diagnostics, a division of the Roche Group of companies, and Thermo
Fisher Scientific, Inc. In addition, there are several other market entrants in the process of developing novel technologies for the life sciences market. One
or more of our competitors could develop a product that is superior to a product we offer or intend to offer, or our technology and products may be rendered
obsolete or uneconomical by advances in existing technologies.
Within the diagnostic market, there are competitors that manufacture systems for sales to hospitals and laboratories and other competitors that offer
tests conducted through CLIA certified laboratories. We will also compete with commercial diagnostics companies. Most of our current competitors are
either publicly traded, or are divisions of publicly traded companies, and enjoy a number of competitive advantages over us, including:
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greater name and brand recognition, financial and human resources;
broader product lines;
larger sales forces and more established distributor networks;
substantial intellectual property portfolios;
larger and more established customer bases and relationships; and
better established, larger scale, and lower cost manufacturing capabilities.
We believe that the principal competitive factors in all of our target markets include:
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cost of capital equipment;
cost of consumables and supplies;
reputation among customers;
innovation in product offerings;
flexibility and ease-of-use;
accuracy and reproducibility of results; and
compatibility with existing laboratory processes, tools and methods.
We believe that additional competitive factors specific to the diagnostics market include:
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breadth of clinical decisions that can be influenced by information generated by tests;
volume, quality, and strength of clinical and analytical validation data;
availability of coverage and adequate reimbursement for testing services; and
economic benefit accrued to customers based on testing services enabled by products.
Our products may not compete favorably, and we may not be successful in the face of increasing competition from new products and technologies
introduced by our existing competitors or new companies entering our markets. In addition, our competitors may have or may develop products or
technologies that currently or in the future will enable them to produce competitive products with greater capabilities or at lower costs than ours. Any
failure to compete effectively could materially and adversely affect our business, financial condition and operating results.
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Our current business depends on levels of research and development spending by academic and governmental research institutions and
biopharmaceutical companies, a reduction in which could limit demand for our products and adversely affect our business and operating results.
Our revenue is currently derived from sales of our HTG EdgeSeq instrument and related proprietary panels, the design of custom RUO assays and
sample processing for research applications to biopharmaceutical companies, academic institutions and molecular labs, predominantly in the United States
and Europe, and collaborative development services. The demand for our products and services will depend in part upon the research and development
budgets of these customers, which are impacted by factors beyond our control, such as:
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changes in government programs that provide funding to research institutions and companies;
macroeconomic conditions and the political climate;
changes in the regulatory environment;
differences in budgetary cycles;
market-driven pressures to consolidate operations and reduce costs; and
market acceptance of relatively new technologies, such as ours.
We believe that any uncertainty regarding the availability of research funding may adversely affect our operating results and may adversely affect
sales to customers or potential customers that rely on government funding. In addition, academic, governmental and other research institutions that fund
research and development activities may be subject to stringent budgetary constraints that could result in spending reductions, reduced allocations or
budget cutbacks, which could jeopardize the ability of these customers to purchase our products or services. Our operating results may fluctuate
substantially due to reductions and delays in research and development expenditures by these customers. Any decrease in our customers’ budgets or
expenditures, or in the size, scope or frequency of capital or operating expenditures, could materially and adversely affect our business, operating results
and financial condition.
As part of our current business model, we intend to seek to enter into strategic development collaborations and licensing arrangements with third
parties.
We have relied, and expect to continue to rely, on strategic development collaborations and licensing agreements with third parties to develop or in-
license technologies based on which products or services we may develop or offer. We have entered into agreements with third parties to facilitate or enable
our development of assays, and ultimately diagnostic tests, to aid in the diagnosis of oncology diseases, such as breast cancer and melanoma, and other
diseases. We intend to enter into additional similar agreements with life sciences companies, biopharmaceutical companies and other researchers for future
diagnostic products. In addition, we intend to enter into early-stage drug discovery and development collaborations. However, we cannot guarantee that we
will enter into any additional agreements or collaborations. For example, our life sciences research or biopharmaceutical customers are not obligated to
collaborate with us or license technology to us, and they may choose to develop diagnostic products themselves or collaborate with our competitors.
Establishing development collaborations and licensing arrangements is difficult and time-consuming. Discussions may not lead to development
collaborations or licenses on favorable terms, or at all. Potential collaborators or licensors may elect not to work with us based upon their assessment of our
financial, regulatory or intellectual property position. To the extent that we enter new collaborative development or licensing agreements, they may never
result in the successful development or commercialization of
future tests or other products for a variety of reasons, including because our collaborators may not succeed in performing their obligations or may choose
not to cooperate with us. We cannot control the amount and timing of our collaborators’ resources that will be devoted to performing their responsibilities
under our agreements with them. Moreover, to the extent we agree to work exclusively with a party in a given area, our opportunities to collaborate with
others would be limited. Even if we establish new relationships, they may never result in the successful development or commercialization of future tests or
other products. Disputes with our collaborators could also impair our reputation or result in development delays, decreased revenue and litigation expenses.
Our research and development efforts will be hindered if we are not able to contract with third parties for access to archival patient samples.
Our future development of products for clinical indications will require access to archival patient samples for which data relevant to the clinical
indication of interest is known. We rely on our ability to secure access to these archived patient samples, including FFPE tissue, plasma, serum, whole
blood preserved in PAXgene, or various cytology preparations, together with the information pertaining to the clinical outcomes of the patients from which
the samples were taken. Owners or custodians of relevant
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samples may be difficult to identify and/or identified samples may be of poor quality or limited in number or amount. Additionally, others compete with us
for access to these samples for both research and commercial purposes. Even when an appropriate cohort of samples is identified, the process of negotiating
access to these samples can be lengthy because it typically involves numerous parties and approval levels to resolve complex issues such as usage rights,
institutional review board approval, privacy rights, publication rights, and intellectual property ownership. In addition, in some instances the cost to acquire
samples can be prohibitively expensive. If we are not able to negotiate access to archived patient samples on a timely basis and on acceptable terms, or at
all, or if our competitors or others secure access to these samples before us, our ability to research, develop and commercialize future products will be
limited or delayed.
We are dependent on third-party suppliers for certain subcomponents of our products, including a single supplier for one subcomponent of our HTG
EdgeSeq instruments.
We rely on third-party suppliers to supply certain subcomponents used in our HTG EdgeSeq instruments and consumables, including a single
supplier, In Position Technologies, to produce a certain subcomponent used in our HTG EdgeSeq instruments. While we periodically forecast our needs for
these subcomponents, our contracts with these suppliers do not commit them to carry inventory or make available any particular quantities, and the
suppliers may give other customers’ needs higher priority than ours and we may not be able to obtain adequate supplies in a timely manner or on
commercially reasonable terms. If we were to lose any of these suppliers, we may not be able to identify or enter into agreements with alternative suppliers
on a timely basis on acceptable terms, or at all. In addition, we have in the past experienced supply issues, as well as quality control problems such as
shipment errors, with certain of our suppliers, and may experience problems in the future. If we should encounter delays or difficulties in securing the
quality and quantity of subcomponents we require for our products, our supply chain would be interrupted or our products may not perform as expected,
which would adversely affect our sales. A loss or performance failure of any of these suppliers could significantly delay the delivery or impact the
performance of our products, which in turn would materially affect our ability to generate revenue. If any of these events occur, our business and operating
results could be materially harmed.
We may encounter manufacturing difficulties that could impede or delay production of our HTG EdgeSeq platform.
We began manufacturing our HTG EdgeSeq platform internally in 2016. We have limited experience with manufacturing the system and our internal
manufacturing operations may encounter difficulties involving, among other things, scale-up of manufacturing processes, production efficiency and output,
regulatory compliance, quality control and quality assurance, and shortages of qualified personnel. Any failure in our planned internal manufacturing
operations could cause us to be unable to meet demand for these systems, delay the delivery of the system to customers, and harm our business
relationships and reputation.
If we encounter difficulties in our planned internal manufacturing operations, we may need to engage a third-party supplier, provided we cannot be
sure we will be able to do so in a timely manner, or at all, or on favorable terms.
Any of these factors could cause us to delay or suspend production of our HTG EdgeSeq platform, entail unplanned additional costs and materially
harm our business, results of operations and financial condition.
We rely on distributors for sales of our products in several markets outside of the United States.
We have established exclusive and non-exclusive distribution agreements for our HTG EdgeSeq platform and related profiling panels within parts of
Europe and the Middle East. We intend to continue to grow our business internationally, and to do so, in addition to expanding our own direct sales and
support team, we plan to attract additional distributors and sales partners to maximize the commercial opportunity for our products. We cannot guarantee
that we will be successful in attracting desirable distribution and sales partners or that we will be able to enter into such arrangements on favorable terms.
Distributors and sales partners may not commit the necessary resources to market and sell our products to the level of our expectations or may favor
marketing the products of our competitors. If current or future distributors or sales partners do not perform adequately, or we are unable to enter into
effective arrangements with distributors or sales partners in particular geographic areas, we may not realize long-term international revenue growth.
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Developing companion diagnostic products may require large investments in working capital and may not generate any revenue.
A component of our strategy is the development of companion diagnostic products designed to determine the appropriate patient population for
administration of a particular therapeutic to more successfully treat a variety of illnesses. We may now choose to develop companion diagnostic products
independently or with a collaboration partner. Successfully developing a companion diagnostic product depends both on regulatory approval for
administration of the therapeutic, as well as regulatory approval of the associated diagnostic product. Even if we are successful in developing products that
would be useful as companion diagnostic products, and potentially receive regulatory approval for such products, the biopharmaceutical companies that
develop the corresponding therapeutics may ultimately be unsuccessful in obtaining regulatory approval for any such therapeutic, or, even if successful,
select a competing technology to use in their regulatory submission instead of ours. The development, especially the
independent development, of companion diagnostic products requires a significant investment of working capital, which may not result in any future
income. This could require us to raise additional funds which could dilute our current investors or could impact our ability to continue our operations in the
future.
Limitations in the use of our products could harm our reputation or decrease market acceptance of our products; undetected errors or defects in our
products could harm our reputation, decrease market acceptance of our products or expose us to product liability claims.
Our products are subject to the limitations set forth in the product labeling, which may not satisfy the needs of all customers. For example, in the
past we have introduced new panels that initially were intended to be used with specific sample types. Because our customers desire that our panels be
broadly applicable to many biological sample types, these initial limitations could harm our reputation or decrease market acceptance of our products. If
that occurs, we may incur significant costs, the attention of our key personnel could be diverted, or other significant customer relations problems may arise,
which could harm our business and operating results.
Similarly, our products may contain undetected errors or defects when first introduced or as new versions are released. Since our current customers
use our products for research and, if cleared or approved for diagnostic applications, disruptions or other performance problems with our products may
damage our customers’ businesses and could harm our reputation. If that occurs, we may incur significant costs, the attention of our key personnel could be
diverted, or other significant customer relations problems may arise. We may also be subject to warranty and liability claims for damages related to errors
or defects in our products. A material liability claim or other occurrence that harms our reputation or decreases market acceptance of our products could
harm our business and operating results.
The sale and use of products or services based on our technologies, or activities related to our research and clinical studies, could lead to the filing of
product liability claims if someone were to allege that one of our products contained a design or manufacturing defect which resulted in the failure to
adequately perform the analysis for which it was designed. A product liability claim could result in substantial damages and be costly and time consuming
to defend, either of which could materially harm our business or financial condition. We cannot assure investors that our product liability insurance could
adequately protect our assets from the financial impact of defending a product liability claim. Any product liability claim brought against us, with or
without merit, could increase our product liability insurance rates or prevent us from securing insurance coverage in the future.
Payments under the instruments governing our indebtedness may reduce our working capital. In addition, a default under our SVB Term Loan could
cause a material adverse effect on our financial position.
Pursuant to the terms of the NuvoGen obligation, we have paid NuvoGen $10.6 million, and are required to annually pay NuvoGen the greater of
$400,000 or 6% of our yearly revenue until the total aggregate cash compensation paid to NuvoGen under the agreement equals $15.0 million. Payments to
NuvoGen will result in a reduction in our working capital as we continue to make payments on this obligation.
The SVB Term Loan requires us, and any debt arrangements we may enter into in the future may require us, to comply with various covenants that
limit our ability to, among other things:
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dispose of assets;
complete mergers or acquisitions;
incur indebtedness or modify existing debt agreements;
amend or modify certain material agreements;
engage in additional lines of business;
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encumber assets;
pay dividends or make other distributions to holders of our capital stock;
make specified investments; and
engage in transactions with our affiliates.
These restrictions could inhibit our ability to pursue our business strategies. If we default under our obligations under the SVB Term Loan, the
lender could proceed against the collateral granted to them to secure our indebtedness or declare all obligation under the SVB Term Loan to be due and
payable. In certain circumstances, procedures by the lender could result in a loss by us of all of our equipment and inventory, which are included in the
collateral granted to the lender. Our intellectual property is not included in the collateral granted to the lender but is subject to a negative pledge. In
addition, upon any distribution of assets pursuant to any liquidation, insolvency, dissolution, reorganization or similar proceeding, the holders of secured
indebtedness will be entitled to receive payment in full from the proceeds of the collateral securing our secured indebtedness before the holders of other
indebtedness or our common stock will be entitled to receive any distribution with respect thereto.
Changes in laws or regulations that are applied adversely to us or our customers may have a material adverse effect on our business, cash flow,
financial condition or results of operations.
New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could adversely affect our
business operations and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified
or applied adversely to us. For example, the Biden administration and Congress have proposed various U.S. federal tax law changes, which if enacted could
have a material impact on our business, cash flow, financial condition or results of operations. In addition, it is uncertain if and to what extent various states
will conform to federal tax laws. Future tax reform legislation could have a material impact on the value of our deferred tax assets, could result in
significant one-time charges, and could increase our future U.S. tax expense.
Our ability to use net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2021, we had federal net operating loss carryforwards (“NOLs”) to offset future taxable income of $194.0 million, of which
$121.8 million will begin to expire after 2023 if not utilized, while the remainder can be carried forward indefinitely. A lack of future taxable income would
adversely affect our ability to utilize these NOLs. Under current law, our federal NOLs incurred in tax years beginning after December 31, 2017 may be
carried forward indefinitely but the deductibility of these federal NOLs in tax years beginning after December 31, 2021 is limited to 80% of taxable
income. In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “IRC”), and corresponding provisions of state law,
a corporation that undergoes an “ownership change” (generally defined as a greater than 50% change, by value, in its equity ownership over a three-year
period) is subject to limitations on its ability to utilize its pre-ownership change NOL carryforwards and certain other pre-ownership change tax attributes
to offset post-ownership change income or taxes. We believe we may have already experienced one or more ownership changes and may in the future
experience one or more additional ownership changes, and thus, our ability to utilize pre-ownership change NOL carryforwards and other pre-ownership
change tax attributes to offset post-ownership change income or taxes may be limited. Such limitations may cause a portion of our NOL and credit
carryforwards to expire before we are able to utilize them. In addition, at the state level, there may be periods during which the use of NOL carryforwards
is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. We have recorded a full valuation allowance related to
our NOLs and other deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets.
Acquisitions or joint ventures could disrupt our business, cause dilution to our stockholders and otherwise harm our business.
We may acquire other businesses, products or technologies as well as pursue strategic alliances, joint ventures, technology licenses or investments in
complementary businesses. We have limited experience with respect to business, product or technology acquisitions or the formation of collaborations,
strategic alliances and joint ventures or investing in complementary businesses. Any of these transactions could be material to our financial condition and
operating results and expose us to many risks, including:
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disruption in our relationships with customers, distributors or suppliers as a result of such a transaction;
unanticipated liabilities related to acquired companies;
difficulties integrating acquired personnel, technologies and operations into our existing business;
diversion of management time and focus from operating our business to acquisition integration challenges;
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increases in our expenses and reductions in our cash available for operations and other uses; and
possible write-offs or impairment charges relating to acquired businesses.
Foreign acquisitions involve unique risks in addition to those mentioned above, including those related to integration of operations across different
cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. Also, the anticipated
benefit of any acquisition may not materialize. Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the
incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm our financial condition. We cannot
predict the number, timing or size of future joint ventures or acquisitions, or the effect that any such transactions might have on our operating results.
If any members of our management team were to leave us or we are unable to recruit, train and retain key personnel, we may not achieve our goals.
Our future success depends on our ability to recruit, train, retain and motivate key personnel, including our senior management, research and
development, manufacturing, service and sales and marketing personnel. If we were to lose one or more of our key employees, we may experience
difficulties in competing effectively, developing our technologies and implementing our business strategies. Competition for qualified personnel is intense,
and we may not be able to attract talent. Our growth depends, in part, on attracting, retaining and motivating highly trained sales personnel with the
necessary scientific background and ability to understand our systems at a technical level to effectively identify and sell to potential new customers,
including new biopharmaceutical company customers. In particular, the commercialization of our HTG EdgeSeq platform and related panels requires us to
continue to establish and maintain sales and support teams to optimize the markets for research tools and, where approved, diagnostic assays, and to fully
optimize a broad array of diagnostic market opportunities as we receive approval for any future diagnostic products. We do not maintain fixed term
employment contracts or key man life insurance relating to any of our employees. Because of the complex and technical nature of our products and the
dynamic market in which we compete, any failure to retain our management team or to attract, train, retain and motivate other qualified personnel could
materially harm our operating results and growth prospects.
Our operating results may be harmed if we are required to collect sales, services or other related taxes for our products and services in jurisdictions
where we have not historically done so.
We do not believe that we are required to collect sales, use, services or other similar taxes from our customers in certain jurisdictions. However, one
or more countries or states may seek to impose sales, use, services, or other tax collection obligations on us, including for past sales. A successful assertion
by one or more jurisdictions that we should collect sales or other taxes on the sale of our products and services could result in substantial tax liabilities for
past sales and decrease our ability to compete for future sales. Each country and each state has different rules and regulations governing sales and use taxes
and these rules and regulations are subject to varying interpretations that may change over time. We review these rules and regulations periodically and,
when we believe sales and use taxes apply in a particular jurisdiction, voluntarily engage tax authorities in order to determine how to comply with their
rules and regulations. However, we cannot guarantee that we will not be subject to sales and use taxes or related penalties for past sales in jurisdictions
where we presently believe sales and use taxes are not due.
Providers of goods or services are typically held responsible by taxing authorities for the collection and payment of any applicable sales and similar
taxes. If one or more taxing authorities determines that taxes should have, but have not, been paid with respect to our products and services, we may be
liable for past taxes in addition to being required to collect sales or similar taxes in respect of our products and services going forward. Liability for past
taxes may also include substantial interest and penalty charges. Our customer contracts provide that our customers must pay all applicable sales and similar
taxes. Nevertheless, customers may be reluctant to pay back taxes and may refuse responsibility for interest or penalties associated with those taxes or we
may determine that it would not be feasible to seek reimbursement. If we are required to collect and pay back taxes and the associated interest and penalties
and if our customers do not reimburse us for all or a portion of these amounts, we will have incurred unplanned expenses that may be substantial.
Moreover, imposition of such taxes on our products and services going forward will effectively increase the cost of such products and services to our
customers.
Many states are also pursuing legislative expansion of the scope of goods and services that are subject to sales and similar taxes as well as the
circumstances in which a vendor of goods and services must collect such taxes. Following the U.S. Supreme Court decision in South Dakota v. Wayfair,
Inc., states are now free to levy taxes on sales of goods and services based on an “economic nexus,” regardless of whether the seller has a physical presence
in the state. Furthermore, legislative proposals have been introduced in Congress that would provide states with additional authority to impose such taxes.
Accordingly, it is possible that either federal or state legislative changes may require us to collect additional sales and similar taxes from our customers in
the future.
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Our insurance policies are expensive and protect us only from some business risks, which may leave us exposed to significant uninsured liabilities.
We do not carry insurance for all categories of risk that our business may encounter. Some of the policies we currently maintain include general
liability, foreign liability, employee benefits liability, property, automobile, umbrella, workers’ compensation, crime (including cybercrime), fiduciary,
products liability, pollution, errors and omissions and directors’ and officers’ insurance. We do not know, however, if we will be able to maintain existing
insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our
cash position and results of operations.
Performance issues, service interruptions or price increases by our shipping carriers could adversely affect our business and harm our reputation and
ability to provide our services on a timely basis.
Expedited, reliable shipping is essential to our operations. We rely heavily on providers of transport services for reliable and secure point-to-point
transport of our HTG EdgeSeq instrument and consumables to our customers and, as applicable, customers’ samples to our laboratory, and for enhanced
tracking of these shipments. Should a carrier encounter delivery performance issues such as loss, damage or destruction of any instrumentation,
consumables or samples, it would be costly to replace such instrumentation or consumables in a timely manner and may be difficult to replace customers’
samples lost or damaged in shipping, and such occurrences may damage our reputation and lead to decreased demand for our products and increased cost
and expense to our business. In addition, any significant increase in shipping rates could adversely affect our operating margins and results of operations.
Similarly, strikes, severe weather, natural disasters or other service interruptions affecting delivery services we use would adversely affect our ability to
process orders for our products or receive recipient samples on a timely basis.
Changes in funding for the FDA, the SEC and other government agencies could hinder their ability to hire and retain key leadership and other
personnel, prevent new products and services from being developed or commercialized in a timely manner or otherwise prevent those agencies from
performing normal functions on which the operation of our business may rely, which could negatively impact our business.
The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels,
ability to hire and retain key personnel and accept payment of user fees, and statutory, regulatory, and policy changes. Average review times at the agency
have fluctuated in recent years as a result. In addition, government funding of the SEC and other government agencies on which our operations may rely,
including those that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.
Disruptions at the FDA and other agencies may also slow the time necessary for new drugs or diagnostic products to be reviewed and/or approved
by necessary government agencies, which would adversely affect our business. For example, over the last several years, the U.S. government has shut
down several times and certain regulatory agencies, such as the FDA and the SEC, have had to furlough critical FDA, SEC and other
government employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to
timely review and process our regulatory submissions, which could have a material adverse effect on our business. Further, future government shutdowns
could impact our ability to access the public markets and obtain necessary capital in order to properly capitalize and continue our operations.
Cyber security risks and the failure to maintain the confidentiality, integrity and availability of our data, computer hardware, software, internet
applications and related tools and functions could result in damage to our reputation and/or subject us to costs, fines, penalties, lawsuits, business
interruption or otherwise adversely affect our business.
Our business requires collecting, processing, manipulating, analyzing, disclosing and storing large amounts of proprietary, confidential and sensitive
data, including personal information about our employees and others, information we collect from samples we process, intellectual property, trade secrets,
and proprietary business information owned or controlled by ourselves or other third parties. In addition, we rely on enterprise software systems and third-
party service providers and sub-processors to operate and manage our business. The confidentiality, availability, integrity and protection of our data is
critical to our business and relevant stakeholders have a high expectation that we will adequately protect confidential and sensitive data, including personal
data. We also maintain personally identifiable information. Our business therefore depends on the continuous, effective, reliable and secure operation of our
data, computer hardware, software, networks, internet servers and related infrastructure including those of our collaborators, service providers and
contractors. To the extent that our hardware and software malfunction or access to our data is interrupted or otherwise compromised, our business could
suffer. If we, our service providers, partners or other relevant third parties have experienced or in the future experience any security incident(s) that result in
any data loss, deletion or destruction, unauthorized access to, loss of, unauthorized acquisition or disclosure of, or inadvertent exposure of sensitive
information, or compromise related to the security, confidentiality, integrity or availability of our (or their) information technology, software, services,
communications or data, it may result in a material adverse impact, including without limitation, regulatory investigations or enforcement actions,
litigation, indemnity obligations, negative publicity and financial loss. Further, failures or significant downtime of our information
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technology or telecommunication systems or those used by our third-party service providers could cause significant interruptions in our operations,
including preventing us from conducting tests or research and development activities and preventing us from managing the administrative aspects of our
business.
The regulatory environment governing information, security and privacy is increasingly demanding and continues to evolve. Maintaining
compliance with applicable security and privacy regulations may increase our operating costs. Although we have implemented physical, technical and
administrative safeguards designed to protect our data, information technology systems and communications software, we are still vulnerable to natural or
man-made hazards, such as natural disasters, fire, storm, flood, power loss, wind damage, terrorism, war, telecommunications failures, physical or software
break-ins, inadvertent acts, malicious intrusion, malware, data leakage, viruses and similar events. Moreover, we are vulnerable to cyberattacks, malicious
internet-based activity and online and offline fraud, which are prevalent and continue to increase. In addition to traditional computer “hackers,” threat
actors, software bugs, malicious code (such as viruses and worms), employee theft or misuse, denial-of-service attacks (such as credential stuffing), and
ransomware attacks, sophisticated nation-state and nation-state supported actors now engage in attacks (including advanced persistent threat intrusions).
We may also be the subject of phishing attacks, viruses, malware installation, server malfunction, software or hardware failures, loss of data and other
computer assets, adware or other similar issues. Ransomware attacks, including those from organized criminal threat actors, nation-states and nation-state
supported actors, are becoming increasingly prevalent and severe and can lead to significant interruptions, delays, or outages in our operations, loss of data
(including sensitive customer information), loss of income, significant extra expenses to restore data or systems, reputational loss and the diversion of
funds. To alleviate the financial, operational and reputational impact of a ransomware attack, it may be preferable to make extortion payments, but we may
be unwilling or unable to do so (including, for example, if applicable laws or regulations prohibit such payments). Similarly, supply chain attacks have
increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain have not been compromised or that
they do not contain exploitable defects or bugs that could result in a breach of or disruption to our systems and networks or the systems and networks of
third parties that support us and our services. Additionally, due to the COVID-19 pandemic and our remote workforce, there is an increased risk to our
information technology assets and data. These events may result in damage to or the impairment of key business processes, or the loss or corruption of
confidential information, including intellectual property, proprietary business information and personal data. Such disruptions and breaches of security
could have a material adverse effect on our business, financial condition and results of operations.
We could be required to expend significant resources, fundamentally change our business activities and practices or modify our services, software,
operations or information technology in an effort to protect against security breaches and to mitigate, detect and remediate actual and potential
vulnerabilities and security incidents. There can be no assurances that our security measures or those of our service providers, partners, and other third
parties will be effective in protecting against all security breaches and the material adverse impacts that may arise from such breaches.
Despite the security controls we have in place, cyber events are very difficult to avoid. We have experienced specific instances of cyber events,
including attempted compromises, in the past, and there could be unauthorized access, acquisition, disclosure and use of non-public information (including
personal data) in the future. The techniques used to attack information technology systems are sophisticated, change frequently and may originate from less
regulated and remote areas of the world. As a result, we or relevant third parties on which we rely may not be able to address these techniques proactively
or implement adequate preventative measures. If our data or information technology systems (or those of third parties upon which we rely) are
compromised, we could be subject to reputational damage, fines, penalties, damages, litigation and enforcement actions, and we could lose trade secrets,
the occurrence of which could harm our business. In addition, such a compromise may require notification to governmental agencies, supervisory bodies,
credit reporting agencies, the media or individuals pursuant to contract or various federal, state and foreign data protection, privacy and security laws,
regulations and guidelines, if applicable. Such disclosures are costly, and the disclosures or the failure to comply with such requirements, could lead to
material adverse impacts, including without limitation, negative publicity, a loss of customer confidence in our services or security measures or breach of
contract claims. There can be no assurance that the limitations of liability in our contracts would be enforceable or adequate or would otherwise protect us
from liabilities or damages if we fail to comply with applicable data protection laws, privacy policies or data protection obligations related to information
security or security breaches. We cannot be sure that our insurance coverage will be adequate or sufficient to protect us from or adequately mitigate
liabilities or damages with respect to claims, costs, expenses, litigation, fines, penalties, business loss, data loss, regulatory actions or material adverse
impacts arising out of our privacy and security practices, processing or security incidents we may experience, or that such coverage will continue to be
available on commercially reasonable terms or at all. The successful assertion of one or more large claims against us that exceeds our available insurance
coverage, or results in changes to our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements)
could have an adverse effect on our business. In addition, we cannot be sure that our existing insurance coverage and coverage for errors and omissions will
continue to be available on acceptable terms or that our insurers will not deny coverage as to any future claim.
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We are subject to stringent and changing privacy and data security laws, contractual obligations, self-regulatory schemes, government regulation, and
standards related to data privacy and security. The actual or perceived failure by us, our customers, partners or vendors to comply with U.S. and
foreign privacy and data protection laws, regulations and standards, external and internal privacy and security policies and representations, and other
privacy and data-security related obligations may adversely affect our reputation, legal liability, business, operations and financial performance.
We are subject to or affected by numerous federal, state and foreign laws and regulations, as well as regulatory guidance, governing the collection,
use, disclosure, retention, processing and security of personal data, such as information that we collect about employees and patients in the United States
and abroad. The global data protection landscape is rapidly evolving, and implementation standards and enforcement practices are likely to remain
uncertain for the foreseeable future. This evolution may create uncertainty in our business, affect our or our collaborators’, service providers’ and
contractors’ ability to operate in certain jurisdictions or to collect, store, transfer use and share personal data, necessitate the acceptance of more onerous
obligations in our contracts, result in liability or impose additional costs on us. The cost of compliance with these laws, regulations and standards is high
and is likely to increase in the future. We are also subject to the terms of our external and internal privacy and security policies, representations,
certifications, standards, publications, frameworks, and contractual obligations related to our collection, processing, use and disclosure of personal data
and/or other confidential information. Although we endeavor to comply with our published policies and other obligations, and take steps to ensure that our
external and internal privacy and security policies and representations are not inaccurate, incomplete, deceptive, unfair, or misrepresentative of our actual
practices, we may at times fail to do so or may be perceived to have failed to do so. Compliance with these and any other applicable privacy and data
security laws, regulations and obligations is a rigorous and time-intensive process, and we may be required to put in place additional mechanisms,
potentially at significant expense, to ensure compliance with the new data protection rules. Any failure or perceived failure by us or our collaborators,
service providers and contractors to comply with federal, state or foreign laws or regulation, our internal policies and procedures, representations or our
contracts governing processing, of personal data could result in negative publicity, disruptions or interruptions in our operations, fines, penalties (including
changes to our data practices), lawsuits, liability, an inability to process personal data, diversion of management time and effort and proceedings against us
by governmental entities or others, all of which could adversely affect our business, financial condition, results of operations and growth prospects.
Furthermore, the laws are not consistent, and compliance in the event of a widespread data breach is costly. In many jurisdictions, enforcement actions and
consequences for noncompliance are rising.
In the United States, California adopted the California Consumer Privacy Act (“CCPA”), which became effective in January 2020. The CCPA
establishes a privacy framework for covered businesses, including an expansive definition of personal information and data privacy rights for California
residents. The CCPA includes a framework with potentially severe statutory damages and private rights of action. The CCPA may impact our business
activities and exemplifies the vulnerability of our business to the evolving regulatory environment related to personal data. As we expand our operations,
the CCPA may increase our compliance costs and potential liability. The CCPA will be expanded substantially on January 1, 2023, when the California
Privacy Rights Act of 2020 (“CPRA”) becomes fully operative. The CPRA will significantly modify the CCPA, including by expanding consumers’ rights
with respect to certain sensitive personal information. The CPRA also creates a new state agency that will be vested with authority to implement and
enforce the CCPA and the CPRA. We may be subject to additional U.S. privacy regulations in the future, including the Virginia Consumer Data Protection
Act, or VCDPA, and the Colorado Privacy Act, both of which become effective in 2023. New legislation proposed or enacted in a number of states may
impose, or have the potential to impose, additional obligations on companies that collect, store, use, retain, disclose, transfer and otherwise process
confidential, sensitive and personal information, and will continue to shape the data privacy environment nationally. To the extent multiple state-level laws
are introduced with inconsistent or conflicting standards and there is no federal law to preempt such laws, compliance with such laws could be difficult and
costly to achieve.
Our operations abroad may also be subject to increased scrutiny or attention from data protection authorities. Many countries in these regions have
established or are in the process of establishing privacy and data security legal frameworks with which we, our collaborators, service providers and
contractors must comply. For example, the EU has adopted the General Data Protection Regulation (EU) 2016/679 (“GDPR”), which went into effect in
May 2018 and introduces strict requirements for processing the personal data of individuals in the EU. The GDPR has and will continue to increase
compliance burdens on us, including by mandating potentially burdensome documentation requirements and granting certain rights to individuals to control
how we collect, use, disclose, retain and process information about them. The processing of sensitive personal data, such as health information, may
impose heightened compliance burdens under the GDPR and is a topic of active interest among foreign regulators. In addition, the GDPR provides for
more robust regulatory enforcement and fines of up to €20 million or 4% of the annual global revenue of the noncompliant company, whichever is greater.
As we expand into other foreign countries and jurisdictions, we may be subject to additional laws and regulations that may affect how we conduct business.
Further, the UK’s decision to leave the EU, often referred to as Brexit, has created uncertainty with regard to the regulation of data protection in the UK,
including with respect to whether laws or regulations will apply to us consistent with the GDPR in the future and how data transfers to and from the UK
will be regulated.
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European data protection laws, including the GDPR, generally restrict the transfer of personal data from Europe, including the European Economic
Area, United Kingdom and Switzerland, to the United States and most other countries unless the parties to the transfer have implemented specific
safeguards to protect the transferred personal data. One of the primary safeguards allowing U.S. companies to import personal data from Europe has been
certification to the EU-U.S. Privacy Shield and Swiss-U.S. Privacy Shield frameworks administered by the U.S. Department of Commerce. However, the
Court of Justice of the European Union recently invalidated the EU-U.S. Privacy Shield. The same decision also raised questions about whether one of the
primary alternatives to the EU-U.S. Privacy Shield, namely, the European Commission’s Standard Contractual Clauses, can lawfully be used for personal
data transfers from Europe to the United States or most other countries. The European Commission recently proposed updates to the SCCs, and additional
regulatory guidance has been released that seeks to impose additional obligations on companies seeking to rely on the SCCs. However, at present, there are
few, if any, viable alternatives to the EU-U.S. Privacy Shield and the Standard Contractual Clauses. Similarly, the Swiss Federal Data Protection and
Information Commissioner recently opined that the Swiss-U.S. Privacy Shield is inadequate for transfers from Europe to the United States and the United
Kingdom, whose data protection laws are similar to those of the European Union, may similarly invalidate use of the EU-U.S. Privacy Shield and Swiss-
U.S. Privacy Shield, respectively, as mechanisms for lawful personal data transfers from those countries to the United States. As such, if we are unable to
rely valid data transfer solution for personal data transfers for Europe, we will face increased exposure to substantial fines under European data protection
laws as well as injunctions against processing personal data from Europe. Inability to import personal data from the European Economic Area, United
Kingdom or Switzerland may also restrict our activities in Europe; limit our ability to collaborate with service providers, contractors and other companies
subject to European data protection laws; and require us to increase our data processing capabilities in Europe at significant expense. Additionally, other
countries outside of Europe have enacted or are considering enacting similar cross-border data transfer restrictions and laws requiring local data residency,
which could increase the cost and complexity of delivering our services and operating our business.
Risks Related to Government Regulation and Diagnostic Product Reimbursement
Approval and/or clearance by the FDA and foreign regulatory authorities for any diagnostic tests will take significant time and require significant
research, development and clinical study expenditures and ultimately may not succeed.
Before we begin to label and market our products for use as clinical diagnostics in the United States, including as companion diagnostics, unless an
exemption applies, we will be required to obtain either 510(k) clearance or PMA from the FDA. In addition, we may be required to seek FDA clearance or
approval for any changes or modifications to our products that could significantly affect their safety or effectiveness or would constitute a change in
intended use. The PMA and 510(k) clearance processes can be expensive, time-consuming and uncertain. In addition to the time required to conduct
clinical studies, if necessary, it generally takes from four to twelve months from submission of an application to obtain 510(k) clearance, and nine to 18
months for a PMA; however, it may take longer, and 510(k) clearance or PMA approval may never be obtained. Even if the FDA accepts a 510(k) or PMA
submission for filing, the FDA may request additional information or clinical studies during its review. Our ability to obtain additional regulatory
clearances or approvals for new products and indications may be significantly delayed or may never be obtained. The requirements of the more rigorous
PMA process could delay product introductions and increase the costs associated with FDA compliance. As with all IVD products, the FDA reserves the
right to redefine the regulatory path at the time of submission or during the review process and could require a more burdensome approach. Even if we
were to obtain regulatory approval or clearance, it may not be for the uses we believe are important or commercially attractive, in which case we would not
be permitted to market our product for those uses.
A 510(k) clearance or PMA submission for any future medical device product would likely place substantial restrictions on how the device is
marketed or sold, and we will be required to continue to comply with extensive regulatory requirements, including, but not limited to Quality Systems
Regulations (“QSRs”), registering manufacturing facilities, listing the products with the FDA, and complying with labeling, marketing, complaint handling,
adverse event and medical device reporting requirements and corrections and removals. We cannot assure you that we will successfully maintain the
clearances or approvals we may receive in the future. In addition, any clearances or approvals we obtain may be revoked if any issues arise that bring into
question our products’ safety or effectiveness. Any failure to maintain compliance with FDA regulatory requirements could harm our business, financial
condition and results of operations.
Sales of our diagnostic products outside the United States will be subject to foreign regulatory requirements governing clinical studies, vigilance
reporting, marketing approval, manufacturing, product licensing, pricing and reimbursement. These regulatory requirements vary greatly from country to
country. As a result, the time required to obtain approvals outside the United States may differ from that required to obtain FDA approval and we may not
be able to obtain foreign regulatory approvals on a timely basis or at all. Approval by the FDA does not ensure approval by regulatory authorities in other
countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other countries or by the FDA and foreign
regulatory authorities could require additional testing. In addition, the FDA regulates exports of medical devices. Failure to comply with these regulatory
requirements or obtain required approvals could impair our ability to commercialize our diagnostic products outside of the United States.
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Our research use only products for the life sciences market could become subject to regulation as medical devices by the FDA or other regulatory
agencies in the future, which could increase our costs and delay our commercialization efforts, thereby materially and adversely affecting our life
sciences business and results of operations.
In the United States, our products are currently labeled and sold for research use only, and not for the diagnosis or treatment of disease, and are sold
to a variety of parties, including biopharmaceutical companies, academic institutions and molecular labs. Because such products are not intended for use in
clinical practice in diagnostics, and the products cannot include clinical or diagnostic claims, they are exempt from many regulatory requirements otherwise
applicable to medical devices. In particular, while the FDA regulations require that RUO products be labeled, “For Research Use Only. Not for use in
diagnostic procedures,” the regulations do not otherwise subject such products to the FDA’s pre- and post-market controls for medical devices.
A significant change in the laws governing RUO products or how they are enforced may require us to change our business model in order to
maintain compliance. For instance, in November 2013 the FDA issued a guidance document entitled “Distribution of In Vitro Diagnostic Products Labeled
for Research Use Only or Investigational Use Only” (the “RUO Guidance”) which highlights the FDA’s interpretation that distribution of RUO products
with any labeling, advertising or promotion that suggests that clinical laboratories can validate the test through their own procedures and subsequently offer
it for clinical diagnostic use as a laboratory developed test is in conflict with RUO status. The RUO Guidance further articulates the FDA’s position that
any assistance offered in performing clinical validation or verification, or similar specialized technical support, to clinical laboratories, conflicts with RUO
status. If we engage in any activities that the FDA deems to be in conflict with the RUO status held by the products that we sell, we may be subject to
immediate, severe and broad FDA enforcement action that would adversely affect our ability to continue operations. Accordingly, if the FDA finds that we
are distributing our RUO products in a manner that is inconsistent with its regulations or guidance, we may be forced to stop distribution of our RUO tests
until we are in compliance, which would reduce our revenue, increase our costs and adversely affect our business, prospects, results of operations and
financial condition. In addition, the FDA’s proposed implementation for a new framework for the regulation of LDTs may negatively impact the LDT
market and thereby reduce demand for RUO products.
If the FDA requires marketing authorization of our RUO products in the future, there can be no assurance that the FDA will ultimately grant any
clearance or approval requested by us in a timely manner, or at all.
We expect to rely on third parties to conduct any future studies of our diagnostic products that may be required by the FDA or other regulatory
authorities, and those third parties may not perform satisfactorily.
We do not have the ability to independently conduct the clinical studies or other studies that may be required to obtain FDA and other regulatory
clearance or approval for our diagnostic products, including the HTG EdgeSeq instrument and related proprietary panels. Accordingly, we expect to rely on
third parties, such as medical institutions, CRO’s and clinical investigators, and providers of NGS instrumentation, to conduct such studies and/or to
provide information necessary for our submissions to regulatory authorities. Our reliance on these third parties for clinical development activities or
information will reduce our control over these activities. These third parties may not complete activities on schedule or conduct studies in accordance with
regulatory requirements or our study design. Similarly, providers of NGS instrumentation may not place the same importance on our regulatory
submissions as we do. Our reliance on third parties that we do not control will not relieve us of any applicable requirement to prepare, and ensure
compliance with, the various procedures required under good clinical practices, or the submission of all information required in connection with requested
regulatory approvals. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines if the
third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised due to their failure to adhere to our clinical protocols or
regulatory requirements or for other reasons, our studies may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory
approval for our diagnostic products.
Even if we are able to obtain regulatory approval or clearance for our diagnostic products, we will continue to be subject to ongoing and extensive
regulatory requirements, and our failure to comply with these requirements could substantially harm our business.
If we receive regulatory approval or clearance for our diagnostic products, we will be subject to ongoing FDA obligations and continued regulatory
oversight and review, such as compliance with QSRs, inspections by the FDA, continued adverse event and malfunction reporting, corrections and
removals reporting, registration and listing, and promotional restrictions, and we may also be subject to additional FDA post-marketing obligations. If we
are not able to maintain regulatory compliance, we may not be permitted to market our diagnostic products and/or may be subject to fines, injunctions, and
civil penalties; recall or seizure of products; operating restrictions; and criminal prosecution. In addition, we may be subject to similar regulatory
compliance actions of foreign jurisdictions.
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If Medicare and other third-party payors in the United States and foreign countries do not approve coverage and adequate reimbursement for our
future clinical diagnostic tests enabled by our technology, the commercial success of our diagnostic products would be compromised.
We plan to develop, obtain regulatory approval for and sell clinical diagnostics products for a number of different indications. Successful
commercialization of our clinical diagnostic products depends, in large part, on the availability of coverage and adequate reimbursement for testing services
using our diagnostic products from third-party payors, including government insurance plans, managed care organizations and private insurance plans.
There is significant uncertainty surrounding third-party coverage and reimbursement for the use of tests that incorporate new technology, such as the HTG
EdgeSeq platform and related applications and assays. Reimbursement rates have the potential to fluctuate depending on the region in which the testing is
provided, the type of facility or treatment center at which the testing is done, and the third-party payor responsible for payment. If our customers are unable
to obtain positive coverage decisions from third-party payors approving reimbursement for our tests at adequate levels, the commercial success of our
products would be compromised, and our revenue would be significantly limited. Even if we do obtain favorable reimbursement for our tests, third-party
payors may withdraw their coverage policies, review and adjust the rate of reimbursement, require co-payments from patients or stop paying for our tests,
which would reduce revenue for testing services based on our technology and demand for our diagnostic products.
The American Medical Association Current Procedural Terminology (“CPT”) Editorial Panel created CPT codes that could be used by our
customers to report testing for certain large-scale multianalyte genomic sequencing procedures (“GSPs”), including our diagnostic products, if approved.
Effective January 1, 2015, these codes allow for uniform reporting of broad genomic testing panels using technology similar to ours. While these codes
standardize reporting for these tests, coverage and payment rates for GSPs remain uncertain and we cannot guarantee that coverage and reimbursement for
these tests will be provided in the amounts we expect, or at all. We cannot assure that CMS and other third-party payors will establish reimbursement rates
sufficient to cover the costs incurred by our customers in using our clinical diagnostic products, if approved.
Even if we are able to establish coverage and reimbursement codes for our clinical diagnostic products in development, we will continue to be
subject to significant pricing pressure, which could harm our business, results of operations, financial condition and prospects.
Third-party payors, including managed care organizations as well as government payors such as Medicare and Medicaid, have increased their efforts
to control the cost, utilization and delivery of healthcare services, which may include decreased coverage or reduced reimbursement. From time to time,
Congress has considered and implemented changes to the Medicare fee schedules in conjunction with budgetary legislation, and pricing and payment
terms, including the possible requirement of a patient co-payment for Medicare beneficiaries for laboratory tests covered by Medicare, and are subject to
change at any time. Reductions in the reimbursement rate of third-party payors have occurred and may occur in the future. Reductions in the prices at
which testing services based on our technology are reimbursed in the future could result in pricing pressures and have a negative impact on our revenue. In
many countries outside of the United States, various coverage, pricing and reimbursement approvals are required. We expect that it will take several years
to establish broad coverage and reimbursement for testing services based on our products with payors in countries outside of the United States, and our
efforts may not be successful.
We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and other federal and state healthcare laws applicable to
our business and marketing practices. If we are unable to comply, or have not complied, with such laws, we could face substantial penalties.
Our operations may be, and may continue to be, directly, or indirectly through our customers, subject to various federal and state fraud and abuse
laws, including, without limitation, the federal and state anti-kickback statutes, false claims statutes, civil monetary penalties laws, patient data privacy and
security laws, physician transparency laws and marketing compliance laws. These laws may impact, among other things, our proposed sales and marketing
and education programs.
The laws that may affect our ability to operate include, but are not limited to:
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The Federal Anti-kickback Statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or paying any
remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in-kind, to induce, or in return
for, either the referral of an individual, or the purchase, lease, order or recommendation of any good, facility, item or service for which
payment may be made, in whole or in part, under a federal healthcare program, such as the Medicare and Medicaid programs; a person or
entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation, rather, if one purpose
of the remuneration is to induce referrals, the Federal Anti-Kickback Statute is violated.
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•
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•
•
•
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The federal physician self-referral prohibition, commonly known as the Stark Law, which prohibits, among other things, physicians who have
a financial relationship, including an investment, ownership or compensation relationship with an entity, from referring Medicare and
Medicaid patients to that entity for designated health services, which include clinical laboratory services, unless an exception applies.
Similarly, entities may not bill Medicare, Medicaid or any other party for services furnished pursuant to a prohibited referral. Unlike the
Federal Anti-Kickback Statute, the Stark Law is a strict liability statute, meaning that all of the requirements of a Stark Law exception must
be met in order to be compliant with the law.
Federal civil and criminal false claims laws, including the federal civil False Claims Act, and civil monetary penalties laws, which prohibit,
among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment or approval from
Medicare, Medicaid or other governmental third-party payors that are false or fraudulent, knowingly making a false statement material to an
obligation to pay or transmit money to the Federal Government or knowingly concealing or knowingly and improperly avoiding or
decreasing an obligation to pay money to the Federal Government, which may apply to entities that provide coding and billing advice to
customers; the Federal Government may assert that a claim including items or services resulting from a violation of the Federal Anti-
Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act.
The Federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which created additional federal civil and criminal
statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or
obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody
or control of, any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying,
concealing, or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of,
or payment for, healthcare benefits, items or services relating to healthcare matters; similar to the Federal Anti-Kickback Statute, a person or
entity does not need to have actual knowledge of the healthcare fraud statute or specific intent to violate it to have committed a violation.
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”), and their respective
implementing regulations, which impose requirements on covered entities, which include certain healthcare providers, health plans, and
healthcare clearinghouses as well as their respective business associates and their contractors that perform services for them that involve the
use, maintenance, or disclosure of individually identifiable health information, relating to the privacy, security and transmission of
individually identifiable health information.
The Federal Physician Payments Sunshine Act, which require certain manufacturers of drugs, devices, biologicals and medical supplies for
which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report
annually to CMS information related to payments or other transfers of value made to physicians, defined to include physicians, dentists,
optometrists, podiatrists and chiropractors, other healthcare practitioners (such as physicians assistants and nurse practitioners), and teaching
hospitals, as well as applicable manufacturers and group purchasing organizations to report annually to CMS certain ownership and
investment interests held by physicians and their immediate family members.
State law equivalents of each of the above federal laws, such as anti-kickback, self-referral, and false claims laws which may apply to our
business practices, including but not limited to, research, distribution, sales and marketing arrangements as well as submitting claims
involving healthcare items or services reimbursed by any third-party payor, including commercial insurers; state laws that require device
companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the
Federal Government that otherwise restricts payments that may be made to healthcare providers; state laws that require device manufacturers
to file reports with states regarding marketing information, such as the tracking and reporting of gifts, compensations and other remuneration
and items of value provided to healthcare professionals and entities (compliance with such requirements may require investment in
infrastructure to ensure that tracking is performed properly, and some of these laws result in the public disclosure of various types of
payments and relationships, which could potentially have a negative effect on our business and/or increase enforcement scrutiny of our
activities); and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each
other in significant ways, with differing effects.
Promotional activities for FDA-regulated products have been the subject of significant enforcement actions brought under healthcare reimbursement
laws, fraud and abuse laws, and consumer protection statutes, among other theories. Advertising and promotion of medical devices are also regulated by the
Federal Trade Commission and by state regulatory and enforcement authorities. In addition, under the Federal Lanham Act and similar state laws,
competitors and others can initiate litigation relating to advertising claims.
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In addition, the approval and commercialization of any of our product candidates outside the United States will also likely subject us to foreign
equivalents of the healthcare laws mentioned above, among other foreign laws.
Because of the breadth of these laws and the narrowness of the statutory exceptions and regulatory safe harbors available under such laws, it is
possible that some of our business activities, including our relationships with physicians and other health care providers, and our evaluation, reagent rental
and collaborative development agreements with customers, and sales and marketing efforts could be subject to challenge under one or more of such laws.
If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be
subject to significant penalties, including administrative, civil and criminal penalties, damages, fines, imprisonment, disgorgement, exclusion from
participation in federal healthcare programs, such as Medicare and Medicaid, contractual damages, reputational harm, additional reporting requirements
and/or oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws,
and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.
Our employees, independent contractors, principal investigators, consultants, commercial partners and vendors may engage in misconduct or other
improper activities, including non-compliance with regulatory standards and requirements.
We are exposed to the risk of fraud or other misconduct by our employees, independent contractors, principal investigators, consultants, commercial
partners and vendors. Misconduct by these parties could include intentional, reckless or negligent failures to, among other things: (i) comply with the
regulations of the FDA, CMS, the Department of Health and Human Services Office of Inspector General (“OIG”) and other similar foreign regulatory
bodies; (ii) provide true, complete and accurate information to the FDA and other similar regulatory bodies; (iii) comply with manufacturing standards we
have established; (iv) comply with healthcare fraud and abuse laws and regulations in the United States and similar foreign fraudulent misconduct laws; or
(v) report financial information or data accurately, or disclose unauthorized activities to us. These laws may impact, among other things, our activities with
collaborators and key opinion leaders, as well as our sales, marketing and education programs. In particular, the promotion, sales, marketing and business
arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and
other abusive practices. These laws may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer
incentive programs and other business arrangements. Such misconduct could also involve the improper use of information obtained in the course of clinical
studies, which could result in regulatory sanctions and cause serious harm to our reputation. We currently have a code of conduct applicable to all of our
employees, but it is not always possible to identify and deter employee misconduct, and our code of conduct and the other precautions we take to detect and
prevent this activity may not be effective in controlling unknown or unmanaged risks or losses, or in protecting us from governmental investigations or
other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not
successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of
significant civil, criminal and administrative penalties, damages, monetary fines, disgorgement, imprisonment, possible exclusion from participation in
Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, additional
reporting requirements and/or oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-
compliance with these laws, and curtailment of our operations. Any of these actions or investigations could result in substantial costs to us, including legal
fees, and divert the attention of management from operating our business.
Healthcare policy changes, including recently enacted legislation reforming the United States healthcare system, may have a material adverse effect on
our financial condition and results of operations.
On April 1, 2014, the Protecting Access to Medicare Act of 2014 (“PAMA”) was signed into law, which, among other things, significantly altered the
current payment methodology under the Medicare Clinical Laboratory Fee Schedule (“CLFS”). Effective January 1, 2018, the CLFS is based on weighted
median private payor rates as required by PAMA. Under the law, starting January 1, 2016 and every three years thereafter (or annually in the case of advanced
diagnostic lab tests), applicable clinical laboratories must report laboratory test payment data for each Medicare-covered clinical diagnostic lab test that it
furnishes. The reported data must include the payment rate (reflecting all discounts, rebates, coupons and other price concessions) and the volume of each test
that was paid by each private payor (including health insurance issuers, group health plans, Medicare Advantage plans and Medicaid managed care
organizations). Reporting of payment data under PAMA for clinical diagnostic laboratory tests has been delayed on numerous occasions. Based on current law,
between January 1, 2023 and March 31, 2023, applicable laboratories will be required to report on data collected during January 1, 2019 and June 30, 2019.
This data will be utilized to determine 2024 to 2026 CLFS rates. The payment rate applies to laboratory tests furnished by a hospital laboratory if the test is
separately paid under the hospital outpatient prospective payment system. In addition, CMS updated the statutory phase-in provisions such that the rates for
clinical diagnostic laboratory tests in 2020 could not be reduced by more than 10% of the rates for 2019. Pursuant to the Coronavirus Aid, Relief, and
Economic Security Act (the “CARES
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Act”), the statutory phase-in of the payment reductions has been extended through 2024, with a 0% reduction cap for 2021-2022, and a 15% reduction cap for
2023 through 2025. It is still too early to predict the full impact on reimbursement for our products in development.
Also, under PAMA, CMS is required to adopt temporary billing codes to identify new tests and new advanced diagnostic laboratory tests that have
been cleared or approved by the FDA. For an existing test that is cleared or approved by the FDA and for which Medicare payment is made as of April 1,
2014, CMS is required to assign a unique billing code if one has not already been assigned by the agency. In addition to assigning the code, CMS was
required to publicly report payment for the tests. We cannot determine at this time the full impact of the law, including its implementing regulations, on our
business, financial condition and results of operations.
The Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the
“ACA”), made changes that significantly impacted the biopharmaceutical and medical device industries and clinical laboratories. For example, the ACA
imposes a multifactor productivity adjustment to the reimbursement rate paid under Medicare for certain clinical diagnostic laboratory tests, which may
reduce payment rates. These or any future proposed or mandated reductions in payments may apply to some or all of the clinical laboratory tests that our
diagnostics customers use our technology to deliver to Medicare beneficiaries, and may reduce demand for our diagnostic products.
Other significant measures contained in the ACA include, for example, coordination and promotion of research on comparative clinical
effectiveness of different technologies and procedures, initiatives to revise Medicare payment methodologies, such as bundling of payments across the
continuum of care by providers and physicians, and initiatives to promote quality indicators in payment methodologies. The ACA also includes significant
new fraud and abuse measures, including required disclosures of financial arrangements with physician customers, lower thresholds for violations and
increasing potential penalties for such violations. However, the future of the ACA is uncertain. There have been executive, judicial and Congressional
challenges to certain aspects of the ACA. For example, then-President Trump signed several Executive Orders and other directives designed to delay the
implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. Congress
considered legislation to repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, it has enacted
laws that modify certain provisions of the ACA. For example, legislation enacted in 2017, informally titled the Tax Cuts and Jobs Act (the “Tax Act”),
includes a provision that repealed, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals who
fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. On June 17, 2021, the U.S.
Supreme Court dismissed a challenge on procedural grounds that argued the ACA is unconstitutional in its entirety because the “individual mandate” was
repealed by Congress. Thus, the ACA will remain in effect in its current form. Further, prior to the U.S. Supreme Court ruling, on January 28, 2021,
President Biden issued an executive order to initiate a special enrollment period for purposes of obtaining health insurance coverage through the ACA
marketplace. The executive order also instructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to
healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that
create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA. It is possible that the ACA will be subject to
judicial or Congressional challenges in the future. It is unclear how such challenges and the healthcare reform measures of the Biden administration will
impact the ACA and our business.
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. On August 2, 2011, then-President Obama
signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to
Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years
2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes reductions to Medicare payments to
providers of 2% per fiscal year, which went into effect on April 1, 2013, and, following the passage of other legislative amendments, will stay in effect
through 2031 unless additional Congressional action is taken. However, COVID-19 relief legislation, including the CARES Act, has suspended the 2%
Medicare sequester from May 1, 2020 through March 31, 2022. Under current legislation, the actual reduction in Medicare payments will vary from 1% in
2022 to up to 3% in the final fiscal year of this sequester. Further, Congress and the Biden administration are considering additional health reform
measures. On January 2, 2013, then-President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further
reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers and increased the statute of limitations
period for the government to recover overpayments to providers from three to five years.
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Various healthcare reform proposals have also emerged from federal and state governments. Changes in healthcare law or policy, such as the
creation of broad test utilization limits for diagnostic products in general or requirements that Medicare patients pay for portions of clinical laboratory tests
or services received, could substantially impact the sales of our tests, increase costs and divert management’s attention from our business. In addition, sales
of our tests outside of the United States will subject us to foreign regulatory requirements, which may also change over time.
We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or in countries outside of the United States in
which we may do business, or the effect any future legislation or regulation will have on us. The full impact of the ACA, as well as other laws and reform
measures that may be proposed and adopted in the future, remains uncertain, but may continue the downward pressure on medical device pricing,
especially under the Medicare program, and may also increase our regulatory burdens and operating costs, which could have a material adverse effect on
our business operations.
Risks Related to Intellectual Property
If we are unable to protect our intellectual property effectively, our business will be harmed.
We rely on patent protection as well as trademark, copyright, trade secret and other intellectual property rights protection and contractual restrictions
to protect our proprietary technologies, all of which provide limited protection and may not adequately protect our rights or permit us to gain or keep any
competitive advantage. Our U.S. and foreign patent and patent application portfolio relates to our nuclease-protection-based technologies as well as to lung
cancer and melanoma and DLBCL biomarker panels discovered using our nuclease-protection-based technology. We have exclusive or non-exclusive
licenses to multiple U.S. and foreign patents and patent applications covering technologies that we may elect to utilize in developing diagnostic tests for use
on our HTG EdgeSeq platform. Those licensed patents and patent applications cover technologies related to the diagnosis of breast cancer and melanoma.
If we fail to protect our intellectual property, third parties may be able to compete more effectively against us and we may incur substantial litigation
costs in our attempts to recover or restrict use of our intellectual property.
We cannot assure investors that any of our currently pending or future patent applications will result in issued patents, and we cannot predict how
long it will take for such patents to be issued. Further, we cannot assure investors that other parties will not challenge any patents issued to us or that courts
or regulatory agencies will hold our patents to be valid or enforceable. We cannot guarantee investors that we will be successful in defending challenges
made against our patents. Any successful third-party challenge to our patents could result in the unenforceability or invalidity of such patents.
The patent positions of life sciences companies can be highly uncertain and involve complex legal and factual questions for which important legal
principles remain unresolved. No consistent policy regarding the breadth of claims allowed in such companies’ patents has emerged to date in the United
States. Furthermore, in the biotechnology field, courts frequently render opinions that may adversely affect the patentability of certain inventions or
discoveries, including opinions that may adversely affect the patentability of methods for analyzing or comparing nucleic acids molecules, such as RNA or
DNA.
The patent positions of companies engaged in development and commercialization of molecular diagnostic tests are particularly uncertain. Various
courts, including the U.S. Supreme Court, have recently rendered decisions that impact the scope of patentability of certain inventions or discoveries
relating to molecular diagnostics. Specifically, these decisions stand for the proposition that patent claims that recite laws of nature (for example, the
relationships between gene expression levels and the likelihood of risk of recurrence of cancer) are not themselves patentable unless those patent claims
have sufficient additional features that provide practical assurance that the processes are genuine inventive applications of those laws rather than patent
drafting efforts designed to monopolize the law of nature itself. What constitutes a “sufficient” additional feature is uncertain. Accordingly, this evolving
case law in the United States may adversely impact our ability to obtain new patents and may facilitate third-party challenges to our existing owned and
licensed patents.
The laws of some non-U.S. countries do not protect intellectual property rights to the same extent as the laws of the United States, and many
companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. The legal systems of certain countries,
particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to
biotechnology, which could make it difficult for us to stop the infringement of our patents. Proceedings to enforce our patent rights in foreign jurisdictions
could result in substantial cost and divert our efforts and attention from other aspects of our business.
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Changes in either the patent laws or in interpretations of patent laws in the United States or other countries may diminish the value of our
intellectual property. We cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents. For example:
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We might not have been the first to make the inventions covered by each of our patents and pending patent applications.
We might not have been the first to file patent applications for these inventions.
Others may independently develop similar or alternative products and technologies or duplicate any of our products and technologies.
It is possible that none of our pending patent applications will result in issued patents, and even if they issue as patents, they may not provide
a basis for commercially viable products, may not provide us with any competitive advantages, or may be challenged and invalidated by third
parties.
We may not develop additional proprietary products and technologies that are patentable.
The patents of others may have an adverse effect on our business.
We apply for patents covering our products and technologies and uses thereof, as we deem appropriate. However, we may fail to apply for
patents on important products and technologies in a timely fashion or at all.
In addition to pursuing patents on our technology, we take steps to protect our intellectual property and proprietary technology by entering into
confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our
advisors. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the
event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure. Monitoring
unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. If we were to
enforce a claim that a third-party had illegally obtained and was using our trade secrets, it would be expensive and time consuming, and the outcome would
be unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets.
In addition, competitors could purchase our products and attempt to replicate some or all of the competitive advantages we derive from our
development efforts, willfully infringe our intellectual property rights, design around our protected technology or develop their own competitive
technologies that fall outside of our intellectual property rights. If our intellectual property is not adequately protected so as to protect our market against
competitors’ products and methods, our competitive position could be adversely affected, as could our business.
We have not yet registered certain of our trademarks, including “HTG Edge,” “HTG EdgeSeq,” “VERI/O,” “qNPA,” “HTG Transcriptome Panel”
and “HTG EpiEdgeSeq” in all of our potential markets. If we apply to register these trademarks, our applications may not be allowed for registration, and
our registered trademarks may not be maintained or enforced. In addition, opposition or cancellation proceedings may be filed against our trademark
applications and registrations, and our trademarks may not survive such proceedings. If we do not secure registrations for our trademarks, we may
encounter more difficulty in enforcing them against third parties than we otherwise would.
To the extent our intellectual property, including licensed intellectual property, offers inadequate protection, or is found to be invalid or
unenforceable, we would be exposed to a greater risk of direct competition. If our intellectual property does not provide adequate protection against our
competitors’ products, our competitive position could be adversely affected, as could our business. Both the patent application process and the process of
managing patent disputes can be time consuming and expensive.
We may be involved in lawsuits to protect or enforce our patent or other proprietary rights, to determine the scope, coverage and validity of others’
patent or other proprietary rights, or to defend against third-party claims of intellectual property infringement, any of which could be time-intensive
and costly and may adversely impact our business or stock price.
We may from time to time receive notices of claims of infringement and misappropriation or misuse of other parties’ proprietary rights, including
with respect to third-party trade secrets, infringement by us of third-party patents and trademarks or other rights, or challenges to the validity or
enforceability of our patents, trademarks or other rights. Some of these claims may lead to litigation. We cannot assure investors that such actions will not
be asserted or prosecuted against us or that we will prevail in any or all such actions.
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Litigation may be necessary for us to enforce our patent and other proprietary rights or to determine the scope, coverage and validity of the
proprietary rights of others. The outcome of any litigation or other proceeding is inherently uncertain and might not be favorable to us. In addition, any
litigation that may be necessary in the future could result in substantial costs, even if we were to prevail, and diversion of resources and could have a
material adverse effect on our business, operating results or financial condition.
As we move into new markets and applications for our products, incumbent participants in such markets may assert their patents and other
proprietary rights against us as a means of slowing our entry into such markets or as a means to extract substantial license and royalty payments from us.
Our competitors and others may now and in the future have significantly larger and more mature patent portfolios than we currently have. In addition,
future litigation may involve patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our own
patents may provide little or no deterrence or protection. Therefore, our commercial success may depend in part on our non-infringement of the patents or
proprietary rights of third parties. Numerous significant intellectual property issues have been litigated, and will likely continue to be litigated, between
existing and new participants in our existing and targeted markets and competitors may assert that our products infringe their intellectual property rights as
part of a business strategy to impede our successful entry into those markets. We have not conducted comprehensive freedom-to-operate searches to
determine whether the commercialization of our products or other business activities would infringe patents issued to third parties. Third parties may assert
that we are employing their proprietary technology without authorization. In addition, our competitors and others may have patents or may in the future
obtain patents and claim that use of our products infringes these patents. We could incur substantial costs and divert the attention of our management and
technical personnel in defending against any of these claims. Parties making claims against us may be able to obtain injunctive or other relief, which could
block our ability to develop, commercialize and sell products, and could result in the award of substantial damages against us. In the event of a successful
claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties or be prohibited from selling
certain products. We may not be able to obtain these licenses at a reasonable cost, if at all. We could therefore incur substantial costs related to royalty
payments for licenses obtained from third parties, which could negatively affect our margins. In addition, we could encounter delays in product
introductions while we attempt to develop alternative methods or products to avoid infringing third-party patents or proprietary rights. Defense of any
lawsuit or failure to obtain any of these licenses on favorable terms could prevent us from commercializing products, and the prohibition of sale of any of
our products could materially affect our ability to grow and gain market acceptance for our products.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of
our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there
could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive
these results to be negative, it could have a substantial adverse effect on the price of our common stock.
In addition, our agreements with some of our suppliers, distributors, customers and other entities with whom we do business require us to defend or
indemnify these parties to the extent they become involved in infringement claims against us, including the claims described above. We could also
voluntarily agree to defend or indemnify third parties in instances where we are not obligated to do so if we determine it would be important to our business
relationships. If we are required or agree to defend or indemnify any of these third parties in connection with any infringement claims, we could incur
significant costs and expenses that could adversely affect our business, operating results, or financial condition.
We may need to depend on certain technologies that are licensed to us. We do not control these technologies and any loss of our rights to them could
prevent us from selling some of our products.
We have entered into several license agreements with third parties for certain licensed technologies that are, or may become relevant to the products
we market, or plan to market. In addition, we may in the future elect to license third-party intellectual property to further our business objectives and/or as
needed for freedom to operate for our products. We do not and will not own the patents, patent applications or other intellectual property rights that are a
subject of these licenses. Our rights to use these technologies and employ the inventions claimed in the licensed patents, patent applications and other
intellectual property rights are or will be subject to the continuation of and compliance with the terms of those licenses.
We might not be able to obtain licenses to technology or other intellectual property rights that we require. Even if such licenses are obtainable, they
may not be available at a reasonable cost or multiple licenses may be needed for the same product (e.g., stacked royalties). We could therefore incur
substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our margins. Further, we could
encounter delays in product introductions, or interruptions in product sales, as we develop alternative methods or products.
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In some cases, we do not or may not control the prosecution, maintenance, or filing of the patents or patent applications to which we hold licenses,
or the enforcement of these patents against third parties. As a result, we cannot be certain that drafting or prosecution of the licensed patents and patent
applications by the licensors have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable
patents and other intellectual property rights.
Certain of the U.S. patent rights we own, have licensed or may license relate to technology that was developed with U.S. government grants, in
which case the U.S. government has certain rights in those inventions, including, among others, march-in license rights. In addition, federal regulations
impose certain domestic manufacturing requirements with respect to any products within the scope of those U.S. patent claims.
We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of our employees’
former employers.
Many of our employees were previously employed at other medical diagnostic companies, including our competitors or potential competitors.
Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or
disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. If we fail in
defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights. A loss of key research personnel work
product could hamper or prevent our ability to commercialize certain potential products, which could severely harm our business. Even if we are successful
in defending against these claims, litigation could result in substantial costs and be a distraction to management.
Our products contain third-party open-source software components, and failure to comply with the terms of the underlying open-source software
licenses could restrict our ability to sell our products.
Our products contain software tools licensed by third-party authors under “open-source” licenses. Use and distribution of open-source software may
entail greater risks than use of third-party commercial software, as open-source licensors generally do not provide warranties or other contractual
protections regarding infringement claims or the quality of the code. Some open-source licenses contain requirements that we make available source code
for modifications or derivative works we create based upon the type of open-source software we use. If we combine our proprietary software with open-
source software in a certain manner, we could, under certain open-source licenses, be required to release the source code of our proprietary software to the
public. This would allow our competitors to create similar products with less development effort and time and ultimately could result in a loss of product
sales.
Although we monitor our use of open-source software to avoid subjecting our products to conditions we do not intend, the terms of many open-
source licenses have not been interpreted by U.S. courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated
conditions or restrictions on our ability to commercialize our products. Moreover, we cannot assure investors that our processes for controlling our use of
open-source software in our products will be effective. If we are held to have breached the terms of an open-source software license, we could be required
to seek licenses from third parties to continue offering our products on terms that are not economically feasible, to re-engineer our products, to discontinue
the sale of our products if re-engineering could not be accomplished on a timely basis, or to make generally available, in source code form, our proprietary
code, any of which could adversely affect our business, operating results, and financial condition.
We use third-party software that may be difficult to replace or cause errors or failures of our products that could lead to lost customers or harm to our
reputation.
We use software licensed from third parties in our products. In the future, this software may not be available to us on commercially reasonable
terms, or at all. Any loss of the right to use any of this software could result in delays in the production of our products until equivalent technology is either
developed by us, or, if available, is identified, obtained and integrated, which could harm our business. In addition, any errors or defects in third-party
software, or other third-party software failures could result in errors, defects or cause our products to fail, which could harm our business and be costly to
correct. Many of these providers attempt to impose limitations on their liability for such errors, defects or failures, and if enforceable, we may have
additional liability to our customers or third-party providers that could harm our reputation and increase our operating costs.
We will need to maintain our relationships with third-party software providers and to obtain software from such providers that do not contain any
errors or defects. Any failure to do so could adversely impact our ability to deliver reliable products to our customers and could harm our results of
operations.
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Risks Related to Being a Public Company
Complying with the laws and regulations affecting public companies increases our costs and the demands on management and could harm our
operating results.
As a public company, we will continue to incur significant legal, accounting and other expenses. The Exchange Act requires, among other things,
that we file annual, quarterly and current reports with respect to our business and operating results. In addition, the Sarbanes-Oxley Act and rules
subsequently implemented by the SEC and Nasdaq, impose numerous requirements on public companies, including corporate governance requirements.
Our management and other personnel will need to continue to devote a substantial amount of time to compliance with these laws and regulations. These
requirements have resulted and will continue to result in significant legal, accounting, and financial compliance costs and have made and will continue to
make some activities more time consuming and costly.
As a “non-accelerated filer” we have availed ourselves of the exemption from the requirement that our independent registered public accounting
firm attest to the effectiveness of our internal control over financial reporting under Section 404. When our independent registered public accounting firm is
required to undertake an assessment of our internal control over financial reporting, the cost of our compliance with Section 404 will correspondingly
increase. Our compliance with applicable provisions of Section 404 will require that we incur substantial accounting expense and expend significant
management time on compliance-related issues as we implement additional corporate governance practices and comply with reporting requirements.
Moreover, if we are not able to comply with the requirements of Section 404 applicable to us in a timely manner, or if we or our independent registered
public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of
our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional
financial and management resources.
Furthermore, investor perceptions of our company may suffer if deficiencies are found, and this could cause a decline in the market price of our
stock. Irrespective of compliance with Section 404, any failure of our internal control over financial reporting could have a material adverse effect on our
stated operating results and harm our reputation. If we are unable to implement these requirements effectively or efficiently, it could harm our operations,
financial reporting, or financial results and could result in an adverse opinion on our internal controls from our independent registered public accounting
firm.
We are a “smaller reporting company” and a “non-accelerated filer” and any decision on our part to comply only with certain reduced reporting and
disclosure requirements applicable to smaller reporting companies or non-accelerated filers could make our common stock less attractive to investors.
We are a “smaller reporting company” and a “non-accelerated filer” as defined in the Exchange Act, and for as long as we continue to be a “smaller
reporting company” or a “non-accelerated filer,” we may choose to take advantage of exemptions from various reporting requirements applicable to other
public companies but not to “smaller reporting companies” or “non-accelerated filers,” including, but not limited to, not being required to have our
independent registered public accounting firm audit our internal control over financial reporting under Section 404 (for so long as we are a “non-
accelerated filer”) and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements (for so long as we are
a “smaller reporting company”). We expect to be both a “smaller reporting company” and a “non-accelerated filer” in 2022. We cannot predict if investors
will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of
any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.
Risks Related to Our Common Stock
We expect that our stock price will fluctuate significantly.
The trading price of our common stock may be highly volatile and could be subject to wide fluctuations in response to various factors, some of
which are beyond our control. These factors include:
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actual or anticipated quarterly variation in our results of operations or the results of our competitors;
announcements by us or our competitors of new products, significant contracts, commercial relationships or capital commitments;
failure to obtain or delays in obtaining product approvals or clearances from the FDA or foreign regulators;
adverse regulatory or coverage and reimbursement announcements;
issuance of new or changed securities analysts’ reports or recommendations for our stock;
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developments or disputes concerning our intellectual property or other proprietary rights;
commencement of, or our involvement in, litigation;
market conditions in the life sciences and molecular diagnostics markets;
manufacturing disruptions;
any future sales of our common stock or other securities;
any change to the composition of our Board of Directors, executive officers or key personnel;
our failure to meet applicable Nasdaq listing standards and the possible delisting of our common stock from Nasdaq;
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
general economic conditions and slow or negative growth of our markets
other events or factors, including those resulting from such events, or the prospect of such events, including war, terrorism and other
international conflicts, such as the recent Russian invasion of Ukraine as well as continued and any new sanctions against Russia by, among
others, the United States and the European Union, which restrict a wide range of trade and financial dealings with Russia and Russia parties,
public health issues including health epidemics or pandemics, such as COVID-19, and natural disasters such as fire, hurricanes, earthquakes,
tornados or other adverse weather and climate conditions, whether occurring in the United States or elsewhere, any of which could disrupt
our operations, disrupt the operations of our suppliers or result in political or economic instability; and
the other factors described in this report under the caption “Risk Factors – Risks Related to Our Common Stock.”
The stock market in general, and market prices for the securities of health technology companies like ours in particular, have from time to time
experienced volatility that often has been unrelated to the operating performance of the underlying companies. COVID-19, for example, has resulted in
significant volatility in the stock market over the last several months. These broad market and industry fluctuations may adversely affect the market price of
our common stock, regardless of our operating performance. In several recent situations where the market price of a stock has been volatile, holders of that
stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit against
us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and harm our operating results.
In addition, to date our common stock has generally been sporadically and thinly traded. As a consequence, the trading of relatively small quantities
of our shares may disproportionately influence the price of our common stock in either direction. The price for our common stock could decline
precipitously if even a moderate amount of our common stock is sold on the market without commensurate demand.
Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in
additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.
We expect that significant additional capital will be needed in the future to continue our planned operations. We may sell common stock, convertible
securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock,
convertible securities or other equity securities in more than one transaction, investors may be materially diluted by these and subsequent sales. New
investors could also gain rights superior to our existing stockholders.
Pursuant to our 2020 Equity Incentive Plan (“2020 Plan”), we are authorized to grant stock options and other equity-based awards to our employees,
directors and consultants. Pursuant to our 2021 Inducement Plan (“Inducement Plan”), we are authorized to grant up to 300,000 shares to new employees as
inducements material to such new employees entering into employment with us. The number of shares which may be granted under the Inducement Plan
may be increased in the future by our board of directors without stockholder approval. In addition, our amended and restated 2014 Employee Stock
Purchase Plan (“ESPP”) authorizes us to offer, sell and issue shares to our employees. Increases in the number of shares available for future grant or
purchase may result in additional dilution, which could cause our stock price to decline.
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If we are unable to continue to satisfy the applicable continued listing requirements of Nasdaq, our common stock could be delisted.
Our common stock is currently listed on The Nasdaq Capital Market under the symbol “HTGM.” In order to maintain this listing, we must continue
to satisfy minimum financial and other continued listing requirements and standards. There can be no assurance that we will be able to continue to comply
with the applicable listing standards.
If we were not able to comply with applicable listing standards, our shares of common stock would be subject to delisting. The delisting of our
common stock from trading on Nasdaq may have a material adverse effect on the market for, and liquidity and price of, our common stock and impair our
ability to raise capital. Delisting from Nasdaq could also have other negative results, including, without limitation, the potential loss of confidence by
customers and employees, the loss of institutional investor interest and fewer business development opportunities. In the event that our common stock is
delisted from Nasdaq and is not eligible for quotation or listing on another market or exchange, trading of our common stock could be conducted only in
the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such
event, it could become more difficult to dispose of, or obtain accurate price quotations for, our common stock, and there would likely also be a reduction in
our coverage by securities analysts and the news media, which could cause the price of our common stock to decline further.
We do not intend to pay dividends on our common stock in the foreseeable future.
We have never declared or paid any cash dividend on our common stock. We currently anticipate that we will retain future earnings for the
development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. In addition,
our ability to pay cash dividends is currently prohibited by the terms of our debt facility, and any future debt financing arrangement may contain terms
prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. Any return to stockholders will therefore be limited to
the appreciation of their stock.
Provisions in our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for
a third-party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders or remove our current management.
Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others,
even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management.
These provisions include:
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authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued without
stockholder approval;
limiting the removal of directors by the stockholders;
creating a staggered board of directors;
prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;
eliminating the ability of stockholders to call a special meeting of stockholders; and
establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted
upon at stockholder meetings.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more
difficult for stockholders to replace members of our Board of Directors, which is responsible for appointing the members of our management. In addition,
we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested
stockholder, unless such transactions are approved by our Board of Directors. This provision could have the effect of delaying or preventing a change of
control, whether or not it is desired by or beneficial to our stockholders. Further, other provisions of Delaware law may also discourage, delay or prevent
someone from acquiring us or merging with us.
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Our amended and restated certificate of incorporation and amended and restated bylaws provide that the Court of Chancery of the State of Delaware is
the exclusive forum for certain disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial
forum for disputes with us or our directors, officers, or employees.
Our amended and restated certificate of incorporation and our amended and restated bylaws provide that, unless we consent in writing to the
selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive
forum for (1) any derivative action or proceeding brought on our behalf; (2) any action asserting a claim of breach of a fiduciary duty owed by any of our
directors, officers or other employees to us or our stockholders; (3) any action asserting a claim against us or any of our directors or officers or other
employees arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate or our amended and restated
bylaws; and/or (4) any action asserting a claim against us or any of our directors or officers or other employees governed by the internal affairs doctrine.
The foregoing provisions do not apply to actions brought to enforce a duty or liability created by the Securities Act or the Exchange Act, or any other claim
for which the federal courts have exclusive jurisdiction.
These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us
or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to
find the exclusive forum provision in our governing documents to be inapplicable or unenforceable in an action, we may incur further significant additional
costs associated with resolving the dispute in other jurisdictions, all of which could seriously harm our business.
General Risk Factors
Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall.
Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could depress the
market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the
effect that sales may have on the prevailing market price of our common stock.
If we fail to maintain proper and effective internal controls, our ability to produce accurate consolidated financial statements on a timely basis could be
impaired.
We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of The Nasdaq Stock
Market (“Nasdaq”). The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures. Internal control
over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We have
performed system and process evaluation and testing of our internal controls over financial reporting to allow management to report annually on the
effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. This has required and will require that
we incur substantial professional fees and internal costs to augment our accounting and finance functions and that we expend significant management
efforts as we continue to make this assessment and ensure maintenance of proper internal controls on an ongoing basis.
If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we fail to establish and
maintain proper and effective internal control over financial reporting, we may not be able to produce timely and accurate consolidated financial
statements, and our ability to accurately report our financial results could be adversely affected. If that were to happen, the market price of our stock could
decline, and we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities.
If securities or industry analysts do not publish research reports about our business, or if they issue an adverse opinion about our business, our stock
price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our
business. If one or more of the analysts who cover us issues an adverse opinion about our company, our stock price would likely decline. If one or more of
these analysts ceases coverage of us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause
our stock price or trading volume to decline.
54
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate facilities are comprised of 37,100 square feet of administrative, laboratory and manufacturing spaces located in Tucson, Arizona. We
occupy these facilities pursuant to two separate leases. Following its amendment in January 2019, which amended the lease to add approximately 7,000
square feet of additional administrative, manufacturing and laboratory space effective August 2019, the first lease concerns 24,500 square feet housing our
administrative, manufacturing, and lab services facilities. The second lease concerns 12,600 square feet of space used for our research and development
facilities.
We first amended these leases in August 2015 to, among other things, align and extend the lease terms to expire in January 2021. Upon amendment
of the first lease in 2019, the lease for the additional space was aligned to this January 2021 expiration. In December 2020, the leases were again amended
to extend their terms for one additional year, through January 2022 and again in September 2021 to extend the terms of the leases for three years, through
January 31, 2025. The lease extension allows for an additional extension of two years upon the same terms and conditions of the existing amended lease
agreements, except that lease rates would be adjusted to rates applicable to like-kind buildings within the market at the time we elect to exercise the
extension option, but in no event to less than the last applicable rental rate. Base rent payable is currently approximately $24,000 per month and $16,000
per month, respectively, under the first and second leases, in each case for the remaining terms of the respective leases.
We believe that our existing facilities are adequate to meet our business requirements for the reasonably foreseeable future and that additional space
will be available on commercially reasonable terms, if required.
Item 3. Legal Proceedings.
We are not engaged in any material legal proceedings. However, in the normal course of business, we may from time to time be named as a party
to legal claims, actions and complaints, including matters involving employment, intellectual property others. Although we anticipate that we will continue
to incur legal fees in the coming periods to defend our intellectual property rights, we do not believe that there are any claims or actions pending against us
currently, the ultimate disposition of which could have a material adverse effect on our consolidated results of operation, financial condition or cash flows.
Item 4. Mine Safety Disclosures.
Not applicable.
55
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is traded on The Nasdaq Capital Market under the symbol “HTGM.” Trading of our common stock on The Nasdaq Stock Market
commenced on May 6, 2015 in connection with our initial public offering.
On March 15, 2022, the last reported sale price of our common stock was $1.99 per share.
Holders
As of March 15, 2022, there were approximately 113 registered holders of our common stock. The actual number of stockholders is greater than this
number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.
Dividends
We have never declared or paid any cash dividends on our common stock. We anticipate that we will retain all available funds and any future
earnings, if any, for use in the operation of our business and do not anticipate paying cash dividends in the foreseeable future. In addition, the Loan
Agreement materially restricts, and future debt instruments we issue may materially restrict, our ability to pay dividends on our common stock. Payment of
future cash dividends, if any, will be at the discretion of the board of directors after considering various factors, including our financial condition, operating
results, current and anticipated cash needs, the requirements of current or then-existing debt instruments and other factors the board of directors deems
relevant.
Item 6. [Reserved].
56
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 November 2020, we completed a reverse stock split of our outstanding shares of common stock pursuant to which every fifteen (15) shares of
issued and outstanding common stock were exchanged for one share of common stock. All share and per share amounts within Management’s Discussion
and Analysis of Financial Condition and Results of Operations have been adjusted to reflect the reverse stock split for all periods and dates presented.
Overview
We are a life sciences company advancing precision medicine through our innovative transcriptome-wide profiling technology. Building on more
than a decade of pioneering innovation and partnerships with biopharma leaders and major academic institutes, our proprietary HTG EdgeSeq RNA
platform technology is designed to make the development of life science tools and diagnostics more effective and efficient and to unlock a differentiated
and disruptive approach to drug discovery.
Our 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 is automated on our HTG EdgeSeq system, which applies genomic sequencing tools that generate gene expression data in a timely
manner utilizing a simplified workflow for customers. 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 analysis, gaining further understanding of the molecular drivers of disease with the goal of developing biomarker-driven targeted therapies.
We also believe our HTG EdgeSeq technology can be used as a platform technology in clinical applications that will simplify, consolidate and reduce the
cost of NGS-based diagnostic workflows and in commercialized CDx tests.
Our existing products include instruments, consumables, including assay kits, and software that, as an integrated platform, automate sample
processing and can quickly, robustly and simultaneously profile tens, hundreds or thousands of molecular targets from samples a fraction of the size
required by many prevailing technologies. We believe that our target customers and collaborators desire high quality molecular profiling data in a
multiplexed panel format from increasingly smaller and less invasive samples, providing our customers and collaborators with the option to analyze such
data locally to minimize turnaround time and cost.
Biopharmaceutical companies are continually working to improve their drug development processes and the efficacy and safety of their drugs. We
believe that our technology can support these initiatives by providing a seamless solution from biomarker discovery to a commercialized companion
diagnostic test that can be used to assist clinicians in confidently prescribing these drugs to their patients. Our products and service solutions allow us to
partner with our biopharmaceutical company customers to identify molecular biomarkers that can help determine which patients are most likely to benefit
from a particular drug, validate these biomarkers in clinical trials and partner to commercialize the validated CDx assay. Customers can access our
technology by purchasing our platform and assays for their internal use or by engaging us to perform certain services, including molecular profiling of
respective cohorts in our VERI/O laboratory and development of custom RUO panels to support early-stage clinical programs, investigational-use-only
assays for clinical trials or companion diagnostic assays for approved drugs. Our product and service solutions have provided us with a number of early-
stage biomarker discovery programs and new opportunities to collaborate with biopharmaceutical companies in their drug development programs.
In addition, we believe that our newly formed drug discovery business unit will allow us to leverage our HTP and epitranscriptome profiling
technologies and apply them early in the drug discovery process in conjunction with our machine learning-based chemical library design platform, to
ultimately yield de-risked drug candidate molecules with greater potential for clinical success.
57
We believe our future financial performance will be driven by continued 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, today we believe the primary measures of
adoption for our 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, 2021, we had 82 active customers, 62 active
programs and 51 instruments actively producing revenue in our installed base.
Our ability to increase instrument and consumable revenue depends on several factors, including (i) adoption of our HTG EdgeSeq platform by our
expanding customer base, including increasing market share for our proprietary panels for the research market; (ii) the efforts of our sales and marketing
teams to demonstrate the utility of our products and technology; (iii) our ability to develop and market novel molecular profiling panels designed to meet
customer needs, including unmet medical needs; (iv) our ability to demonstrate the benefits of our products to key opinion leaders so they publish
information supporting those benefits; (v) pricing and reimbursement; (vi) our ability to expand the addressable market of our HTG EdgeSeq platform
through the development of new applications; (vii) our product capabilities compared with competition; and (viii) successful outcomes to our companion
diagnostic collaborations. Given the length of the sales cycle we have experienced historically, we expect fluctuations in our instrument and consumables
sales on a period-to-period basis.
2021 Highlights and Recent Developments
Our development efforts over the past 18 months have been primarily focused on completing feasibility and development of the HTG Transcriptome
Panel, including supporting our Early Adopter Program (EAP), where approximately 30 scientific collaborators throughout the U.S. and EU have partnered
with us to explore potential applications of the HTG Transcriptome Panel in their research and clinical programs. We expect our EAP collaborators to assist
us with customer testimonials, white papers, technical notes and peer-reviewed publications highlighting their use of the HTG Transcriptome Panel and
overall experience relative to alternative technologies. The release of the HTG Transcriptome Panel, coupled with our existing whole transcriptome miRNA
panel, is expected to allow us to not only continue to expand our position within oncology, but to diversify the use of our panels in other critical markets
such as immunology, infectious disease, diabetes, cardiology and neurology. We also expect to focus our future development efforts on the expansion of the
sample types available for use with both of these assays, with an initial focus on liquid biopsies.
In the future, we expect to grow our active installed base and drive larger consumable annuities as customer demand for our menu of proprietary
panels, including HTP increases, as we add to the utility of existing panels by expanding applications on our HTG EdgeSeq Reveal software and as
European customers implement our existing or custom assays for use in clinical diagnostic testing as LDT’s under CLIA regulations. We remain focused on
high quality instrument placements and consumable pull through as the primary indicators of future commercial adoption and success in our business.
We also announced the formation of our new drug discovery business unit, HTG Therapeutics, in June 2021 with the addition of several highly
experienced drug development professionals to our leadership team. HTG Therapeutics intends to utilize our HTP and epitranscriptome profiling
technologies, integrated with a machine learning-based chemical library design platform to better-inform the design and selection of drug candidate
molecules. Working with our Tucson-based research and development teams, HTG Therapeutics has engaged several external collaborators who are
expected to contribute meaningful sample cohorts across multiple disease and therapy areas to identify early candidate molecules with therapeutic promise.
These efforts are aimed at the generation of high-quality primary data that we believe could lead to new pharma partnerships in drug discovery and early
development by the second half of 2022 and beyond.
COVID-19 and international efforts to control its spread have significantly curtailed the movement of people, goods and services worldwide,
including in regions where we sell our products and services and conduct our business over the past year. We experienced a significant slowing in our
product and product-related services revenue beginning in March 2020 and throughout the year ended December 31, 2021 due to continued disruptions to
our customers’ businesses from the pandemic and, in many instances, their prioritization of projects in areas related to COVID-19. In addition, we have
experienced extended shipment times and increases in cost of product as ongoing supply chain disruptions have impacted the ability of certain suppliers to
produce the materials necessary to build our product and perform our testing services. Despite the impacts of COVID-19 on our revenue and operations, we
met all of our key development milestones throughout 2020 and 2021 and have not experienced any substantive manufacturing delays from raw material
shortages. While most of our customers have now reopened their facilities, at least on a limited basis, it remains unknown whether COVID-19 will
continue to materially impact our financial condition, liquidity and results of operations in future periods due to further shutdowns, social distancing
measures or illness.
58
In March 2022, we entered into a Securities Purchase Agreement (the “March 2022 Purchase Agreement”) with a single investor pursuant to which
we agreed to issue to the investor 3,244,987 units at a price of $2.312 per unit (less $0.001 for each pre-funded warrant purchased in lieu of a share of
common stock) for gross proceeds, before deducting the placement agent fees and other estimated fees and expenses, of approximately $7.5 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 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 the common warrants is exercisable six months following the closing date and has an exercise price of $2.062 per share. Each pre-funded
warrant has an exercise price of $0.001 per share and does not expire until exercised in full.
Financial Operations Overview and Consolidated Results of Operations
Comparison of the Years Ended December 31, 2021 and 2020
Revenue:
Product and product-related services
Collaborative development services
Total 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
Loss on extinguishment of MidCap Credit Facility and QNAH Convertible Note
Other income (expense), net
Net loss before income taxes
Revenue
Years Ended December 31,
2020
2021
Change
$
%
$
8,906,828
—
$
8,906,828
7,890,854 $ 1,015,974
(658,010)
357,964
658,010
8,548,864
4,094,980
16,546,740
6,088,934
26,730,654
(17,823,826)
1,735,792
—
(1,034,661)
(17,122,695) $
$
3,991,532
103,448
18,063,064 (1,516,324)
6,079,907
9,027
28,134,503 (1,403,849)
(19,585,639) 1,761,813
— 1,735,792
522,394
(286,891)
(522,394)
(747,770)
(20,855,803) $ 3,733,108
13%
(100%)
4%
3%
(8%)
0%
(5%)
(9%)
100%
(100%)
38%
(18%)
Our product and product-related services revenue is generated through the sale of our profiling instruments and consumables, sample processing
services and custom assay design services to biopharmaceutical companies, academic research centers and molecular testing laboratories.
RUO profiling is currently made available to our customers through product sales 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. Customers can also
access our technology through contracted services. We perform these services using our HTG EdgeSeq instruments and RUO consumables to process
samples in our VERI/O laboratory. Our proprietary technology is also used to develop custom RUO panels which are expected to generate future sample
processing or RUO consumables revenue.
We have also previously generated collaborative development services revenue through three statements of work entered into under our prior Master
Assay Development, Commercialization and Manufacturing Agreement (the “Governing Agreement”) with QIAGEN Manchester Limited (“QML”).
Under these agreements, we and QML combined our technological and commercial strengths to offer biopharmaceutical companies a complete NGS-based
solution for the development, manufacture and commercialization of companion diagnostic assays in support of and in conjunction with, biopharmaceutical
companies’ drug development programs. Remaining agreed upon procedures associated with these statements of work were completed in the prior year and
no additional collaborative development services programs have been entered into as of December 31, 2021. Although we continue to seek potential, new
customer collaborations, we currently do not anticipate additional revenue from existing or new collaborative development services programs in
2022.
Total revenue increased by 4% to $8.9 million for the year ended December 31, 2021 compared with total revenue of $8.5 million for the year ended
December 31, 2020. While we continued to experience slowing as a result of the COVID-19 pandemic throughout the first half of 2021, we began to see
the majority of our customers resume planned studies in the second half of the year.
59
Product and product-related services 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, increased by 13% to $8.9 million for the year ended December 31, 2021
compared with $7.9 million for the year ended December 31, 2020, and was comprised of the following:
Product revenue:
Instruments
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
Years Ended December 31,
Change
2021
2020
$
%
$
1,385,665 $
3,786,923
5,172,588
869,035 $
3,030,612
3,899,647
516,630
756,311
1,272,941
48,350
3,685,890
3,734,240
$
8,906,828 $
1,393,316
2,597,891
3,991,207
7,890,854 $
(1,344,966)
1,087,999
(256,967)
1,015,974
59%
25%
33%
(97%)
42%
(6%)
13%
Product revenue, which includes gene expression profiling revenue generated through the sale of our HTG EdgeSeq instruments and consumables,
increased by 33% to $5.2 million for the year ended December 31, 2021 compared with $3.9 million for the year ended December 31, 2020. This increase
primarily reflects additional instrument placements made during the year with biopharmaceutical companies and academic medical centers when compared
to the prior year, when most of our customers had closed their laboratories due to COVID-19. In addition, consumables product revenue for the year ended
December 31, 2021 included revenue recognized from the sale of HTG Transcriptome Panel consumables. Revenue from the sale of the HTG
Transcriptome Panel represented 34% of our consumables revenue for the year ended December 31, 2021. Product revenue represented 58% and 46% of
our total revenue for the years ended December 31, 2021 and 2020, respectively.
Product-related services revenue, consisting of RUO sample processing using HTG EdgeSeq instruments and consumables in our VERI/O
laboratory and custom RUO assay development services, decreased by 6% to $3.7 million for the year ended December 31, 2021 compared with $4.0
million for the year ended December 31, 2020. The decrease in product-related service revenue is a result of an increase in RUO sample processing revenue
of 42% to $3.7 million compared to $2.6 million for the years ended December 31, 2021 and 2020, respectively, offset by a 97% decrease in custom RUO
assay design services to $48,000 compared to $1.4 million for the years ended December 31, 2021 and 2020, respectively. Product-related services revenue
represented 42% and 47% of our total revenue for the years ended December 31, 2021 and 2020, respectively.
Cost of product and product-related services revenue
Cost of product and product-related services revenue includes 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 3% to $4.1 million for the year ended December 31, 2021 compared with $4.0
million for the year ended December 31, 2020. This increase in cost of product and product-related services revenue for the year ended December 31, 2021
compared with the same period in 2020 primarily reflects an increase in product and product-related services revenue offset by a reduction of compensation
expense in our cost of product and product-related services from Employee Retention Credits (“ERC”) secured in the first three quarters of 2021 in
accordance with the Federal Consolidated Appropriations Act.
60
Selling, general and administrative expenses
Selling, general and administrative expenses consist primarily of personnel costs for our sales and marketing, regulatory, legal, executive
management, finance and accounting functions. The expenses also include third-party professional and consulting fees incurred by these functions,
promotional expenses and facility and overhead costs for our administrative offices. Selling, general and administrative expenses decreased by 8% to $16.5
million for the year ended December 31, 2021 compared with $18.1 million for the year ended December 31, 2020. This decrease in selling, general and
administrative expense for the year ended December 31, 2021 compared with the same period in 2020 reflects a decrease in stock-based and other
compensation-related expense items, as well as ERC benefits secured in the first three quarters of 2021. Offsetting the reduction in compensation-related
expense items, was an increase in legal costs related to protecting our intellectual property. We anticipate these higher legal costs to protect and defend our
intellectual property will continue into 2022.
Research and development expenses
Research and development expenses represent costs to develop new proprietary panels and technologies, including the technology related to our
HTG Therapeutics business unit, costs to continue improving and expanding the utility of our HTG EdgeSeq technology, and amounts incurred to perform
collaborative development services. These expenses include payroll and related expenses, consulting expenses, laboratory supplies, facilities and
equipment. Research and development costs are expensed as incurred. Research and development expenses were $6.1 million for both of the years ended
December 31, 2021 and 2020, and included $0 and $0.5 million of costs relating to our collaborative development services revenue for the years ended
December 31, 2021 and 2020, respectively. Despite the decrease in collaborative development services expense year over year, research and development
expense remained consistent with prior year as a result of approximately $1.4 million of technology, consulting and personnel investments made for the
year ended December 31, 2021 relating to HTG Therapeutics.
Other income (expense)
In addition to interest expense and income related to our debt, contractual obligations and available-for-sale securities investments, we have
recorded other non-operating activities in our consolidated statements of operations for both the years ended December 31, 2021 and 2020. Upon receipt in
of the notification that the PPP Loan and related accrued interest had been forgiven by the U.S. Small Business Administration and that the PPP Loan note
had been cancelled in May 2021, we reversed the liabilities related to the PPP Loan and recorded a gain on forgiveness of PPP Loan of approximately $1.7
million. In 2020, as a result of the repayment of all amounts and fees outstanding under the MidCap Credit Facility and the QNAH Convertible Note with
proceeds from the SVB Term Loan, we recorded a loss on extinguishment of MidCap Credit Facility and QNAH Convertible Note of approximately $0.5
million.
As of both December 31, 2021 and 2020, we had outstanding obligations due to NuvoGen under an asset purchase agreement and an SVB Term
Loan obligation. Interest expense and non-cash interest expense recognized for discount, deferred financing fee amortization and final fee premium
amounts relating to these obligations was $1.0 million for both the years ended December 31, 2021 and 2020. Interest income related to our available-for-
sale debt securities investments included in other income (expense) in the consolidated statements of operations decreased by 88% to $30,000 for the year
ended December 31, 2021 as compared with $0.3 million for the year ended December 31, 2020 due to a decrease of maturities of available-for-sale
securities combined with lower interest rates in 2021.
Cash Flows for the Years Ended December 31, 2021 and 2020
The following table summarizes the primary sources and uses of cash for each of the periods presented:
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rate on cash
Increase (decrease) in cash, cash equivalents and restricted cash
Years Ended December 31,
2020
2021
Change
$
%
$
$
$
(16,508,554)
(6,664,744)
10,391,622
(16,186)
(12,797,862) $
(16,292,377)
(216,177)
18,731,107 (25,395,851)
9,049,478
1,342,144
19,609
(35,795)
11,507,817 (24,305,679)
1%
(136%)
15%
(183%)
(211%)
61
Operating Activities
Net cash used in operating activities for the year ended December 31, 2021 increased by 1% to $16.5 million compared with $16.3 million for the
year ended December 31, 2020. This increase for the year ended December 31, 2021 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.
Net cash used in operating activities for the year ended December 31, 2020 was $16.3 million and reflected (i) the net loss of $20.9 million and (ii)
net non-cash items of $4.7 million, consisting primarily of stock-based compensation of $1.6 million, depreciation and amortization of $1.3 million, non-
cash operating lease expense of $0.6 million and loss on extinguishment of the Midcap Credit Facility and QNAH Convertible Note of $0.5 million.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2021 increased by 136% to $6.7 million compared with net cash provided by
investing activities of $18.7 million for the year ended December 31, 2020. Net cash used in investing activities for the year ended December 31, 2021
consisted primarily of purchases of available-for-sale securities of $18.6 million, partially offset by the maturity of $12.6 million of the available-for-sale
securities and the purchase of $0.6 million of laboratory equipment and other fixed assets during the year.
Net cash provided by investing activities for the year ended December 31, 2020 consisted primarily of purchases of available-for-sale securities of
$12.5 million, partially offset by the maturity of $31.7 million of the available-for-sale securities and the purchase of $0.5 million of laboratory equipment
and other fixed assets during the year.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2021 increased by 15% to $10.4 million compared with $9.0 million for
the year ended December 31, 2020. This activity for the year ended December 31, 2021 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”), 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.
Net cash provided by financing activities for the year ended December 31, 2020 was $9.0 million. This activity for the year ended December 31,
2020 consisted primarily of $7.5 million in net proceeds from our underwritten public and private offerings, $1.7 million in proceeds from our PPP Loan
and $0.6 million in payments on our NuvoGen obligation
Liquidity and Capital Resources
Since our inception, our operations have primarily been financed through the issuance of our common stock, redeemable convertible preferred stock,
the incurrence of debt and cash received from product sales, services revenue and other income. As of December 31, 2021, we had $21.9 million in cash,
cash equivalents and investments in short-term available-for-sale securities, and current liabilities of $9.9 million. As of December 31, 2021, we also had
approximately $10.1 million of long-term liabilities outstanding, relating to our SVB Term Loan, our NuvoGen obligation, and our financing and operating
leases.
62
In February 2020, we issued 41,100 shares of our Series A convertible preferred stock (“Series A Preferred”) to accredited investors, in exchange
for the investors surrendering to us for cancellation an aggregate of 274,000 shares of our common stock. In addition, we sold an aggregate of 10,170
additional shares of our Series A Preferred to the accredited investors for aggregate gross proceeds of $0.6 million, and transaction costs of approximately
$37,000. Each share of Series A Preferred is convertible into 6.67 shares of our common stock, subject to proportional adjustment and beneficial ownership
limitations. In June 2020, the investors elected to convert 27,500 shares of Series A Preferred to common stock, resulting in the issuance of 183,333 shares
of the Company’s common stock. The remaining 23,770 shares of Series A Preferred remain outstanding as of December 31, 2021. In the event of our
liquidation, dissolution or winding up, holders of Series A Preferred will participate pari passu with any distribution of proceeds to holders of our common
stock. Holders of Series A Preferred are entitled to receive dividends on shares of Series A Preferred equal (on an as converted to common stock basis) to
and in the same form as dividends actually paid on our common stock. Shares of Series A Preferred generally have no voting rights, except as required by
law.
In March 2020, we 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, we have the right to sell to Lincoln Park up to $20.0 million of
shares of our common stock (“Purchase Shares”) from time to time over the 36-month term of the LP Purchase Agreement. The purchase price of the
Purchase Shares will be based on recent closing prices of our common stock at the time of sale. We issued Lincoln Park an aggregate of 41,026 shares of
our common stock as consideration for their purchase commitment pursuant to the LP Purchase Agreement. As of December 31, 2021, 352,004 shares of
our common stock have been sold to Lincoln Park under the LP Purchase Agreement for aggregate proceeds of $1.9 million. Pursuant to the March 2022
Purchase Agreement, we may not sell any shares under the LP Purchase Agreement for the remainder of the 36-month term of the LP Purchase Agreement.
In April 2020, we received the proceeds from the PPP Loan in the amount of $1.7 million from SVB, as lender, pursuant to the Paycheck Protection
Program of the CARES Act. In May 2021, we received notification from SVB that the PPP Loan and related accrued interest, totaling $1,735,792, was
forgiven in full by the U.S. Small Business Administration, and the PPP Loan note was canceled.
In June 2020, we entered into a Loan and Security Agreement (the “Loan Agreement”) for an asset-secured loan in the principal amount of
$10.0 million with Silicon Valley Bank (“SVB”), as lender (the “SVB Term Loan”). The proceeds from the SVB Term Loan were fully funded on
June 25, 2020. 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 MidCap Credit Facility and the QNAH Convertible Note. 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 and Security Agreement) and 5.75% and originally required interest-only payments payable
monthly in arrears through June 30, 2021. This interest-only period has been extended for an additional six months as a result of the Company’s
achievement of the equity milestone defined in the Loan Agreement. The extended interest-only period will be followed by equal monthly payments
of principal and interest through the maturity date of December 1, 2023. In addition, we must comply with a financial covenant requiring that we
maintain a certain amount of unrestricted cash, including investments in short term available-for-sale securities, under the Loan Agreement (see
Note 8 to our consolidated financial statements included elsewhere in this report). We expect that we could be out of compliance with this
unrestricted minimum cash covenant as early as mid-2022 unless we are successful in raising additional equity capital or are able to amend the
covenant with the bank. 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, ceases altogether, 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 the Loan Agreement, SVB could accelerate the payment of the SVB Term Loan and ultimately foreclose on our assets.
Contractual Obligations, Commitments and Material Cash Requirements
We have had recurring operating losses and negative cash flows from operations since our inception and have an accumulated deficit of $208.3
million as of December 31, 2021. As of December 31, 2021, we had cash, cash equivalents and investments in short-term available-for-sale securities of
$21.9 million and had current liabilities of $9.9 million. As of December 31, 2021, we also had approximately $10.1 million of long-term liabilities
outstanding, relating to our SVB Term Loan, our NuvoGen obligation, and our financing and operating leases.
63
We cannot be certain that our existing resources will be sufficient to fund our planned operations and expenditures for at least the next 12 months
from issuance of these consolidated financial statements. Potentially changing circumstances, including those related to COVID-19, 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, 2021, our outstanding debt balance was $10.3 million. See Note 8, “Debt Obligations” within our
consolidated financial statements for further detail of our debt and the timing of expected future payments.
NuvoGen Obligation – As of December 31, 2021, our NuvoGen obligation balance was $4.4 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, 2021, our contractual commitment for operating leases was $1.5 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 four-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; and
Continued advancement of research and development efforts, including those related to our planned transcriptome panel.
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. 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, our lender could foreclose on our assets.
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 with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting period. 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, stock-based compensation expense, inventory valuation, fair value measurements and income taxes.
Actual results could materially differ from these estimates and such differences could affect the results of operations in future periods.
64
Revenue from Contracts with Customers
Revenue from contracts with customers is recognized when, or as, we satisfy our performance obligations by delivering the promised goods or
service deliverables to our customers. A good or service deliverable is transferred to a customer when, or as, the customer obtains control of that good or
service deliverable. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is
recognized by measuring our progress in satisfying the performance obligation in a manner that depicts the transfer of the goods or services to the
customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that we determine the customer obtains
control over the promised good or service deliverable. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange
for those promised goods or services (i.e., the “transaction price”). In determining the transaction price, we consider multiple factors, including the effects
of variable consideration. Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount
of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. In determining when to include variable
consideration in the transaction price, we consider the range of possible outcomes, the predictive value of our past experiences, the time period of when
uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of our influence, such as the judgment and actions
of third parties.
For contracts where the period between when we transfer a promised good or service to the customer and when the customer pays is one year or
less, we have elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component.
We have made a policy election to exclude from the measurement of the transaction price all taxes assessed by a government authority that are both
imposed on and concurrent with a specific revenue producing transaction and collected from a customer. Such taxes may include but are not limited to
sales, use, value added and certain excise taxes.
Product and Product-related Services Revenue
Sale of instruments and consumables
The delivery of each instrument and related installation and calibration are considered to be a single performance obligation, as the HTG EdgeSeq
instrument must be professionally installed and calibrated prior to use. Instrument product revenue is generally recognized upon installation and calibration
of the instrument by field service engineers, which represents the point at which the customer has the ability to use the instrument and has accepted the
asset. Installation generally occurs within one month of instrument shipment.
The delivery of each consumable is a separate performance obligation. Consumables revenue is recognized upon transfer of control, which
represents the point when the customer has legal title and the significant risks of ownership of the asset. Our standard terms and conditions provide that no
right of return exists for instruments and consumables, unless replacement is necessary due to delivery of defective or damaged product. Customer payment
terms vary but are typically between 30 and 90 days of revenue being earned from shipment or delivery, as applicable.
Shipping and handling fees charged to customers for instruments shipped are included in the consolidated statements of operations as part of product
and product-related services revenue. Shipping and handling costs for products shipped to customers are included in the consolidated statements of
operations as part of cost of product and product-related services revenue.
For sales of consumables 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.
65
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.
Custom RUO Assay Development
We enter into custom RUO assay design agreements that may generate up-front fees and subsequent payments that might be earned upon
completion of design process phases. Progress is measured toward complete satisfaction of the performance obligation to perform custom RUO assay
design 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 assay design service revenue can fluctuate substantially based on the completion
of design-related phases.
Collaborative Development Services
We follow ASC 606, Revenue from Contracts with Customers and ASC 808, Collaborative Arrangements to determine the appropriate recognition
of revenue under our collaborative research, development and commercialization agreements. For the year ended December 31, 2020, collaborative
development services revenue was generated from our Governing Agreement with QML. We have determined that the statements of work signed under the
Governing Agreement are collaborative arrangements and that QML meets the definition of a customer under ASC 606. Additionally, each SOW is a
separate contract with a single performance obligation to provide development services. Under each SOW, QML pays a monthly fee for development work
performed by us and our subcontractors. The monthly fee is based on the employee and materials costs incurred during the month, which is subject to
significant variability from period to period and unknown until the costs are incurred. Therefore, the monthly fee, which is based on use of hours and costs
as a measure of progress, is included in the transaction price and recognized as revenue over time when the costs are incurred and the monthly fee is billed
to QML. As we have the right to consideration from the customer in an amount that corresponds directly to the value to the customer of our performance
completed to date, we recognize revenue in the amount to which we have the right to invoice. It is at this time that it is probable that a significant reversal
in the amount of cumulative revenue recognized will not occur. We also share any net profits resulting from performance of the development work with
QML as determined pursuant to the Governing Agreement. Such profit-sharing payment(s) is deemed to be variable consideration using the expected value
method and is included in the transaction price upon completion of the respective SOW deliverables, acceptance of corresponding deliverables, and the
mutual agreement by both parties on the calculation of net profit, which is when it is probable that a significant reversal in the amount of cumulative
revenue recognized will not occur.
Because each SOW has an expected duration of one year or less, we have elected the practical expedient in ASC 606-10-50-14(a) to not disclose
information about its remaining performance obligations for each SOW.
66
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 reserve or
write down inventory 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. If
actual market conditions are less favorable than those projected, additional inventory adjustments 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.
Leases
We account for our leases under ASC 842, Leases (“ASC 842”). Under this guidance, 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 lease liability, calculated by
discounting fixed lease payments over the lease term at the rate implicit in the lease or our 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, we have elected to combine lease and non-lease components for all classes of assets currently
under lease, including facilities and computer equipment. We have also excluded short-term leases having initial terms of 12 months or less from the new
guidance as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term for these leases.
Stock-Based Compensation
We recognize compensation costs related to stock-based payments to employees, including grants under our equity incentive plans of stock options
and restricted stock units (“RSUs”) and stock purchase rights granted under our ESPP, based on the estimated fair value of the awards on the date of grant.
The fair value of RSUs is based on the quoted market price of our common stock on the date of grant. We do not estimate the number of awards expected
to be forfeited but instead we account for them as they occur. The fair value of ESPP rights and stock options granted pursuant to our equity incentive plans
is estimated on the date of grant using the Black-Scholes option pricing model. The determination of the fair value using the Black-Scholes option pricing
model is affected by the fair value of our common stock 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. These estimates involve inherent uncertainties. Changes to the assumptions that we have used in the Black-Sholes option pricing model could
significantly impact the compensation expense that has been recognized in our consolidated statements of operations. If we had made different
assumptions, our stock-based compensation expense, net loss and net loss per share of common stock could have been significantly different.
67
Item 7A. Quantitative and Qualitative 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 Statements and Supplementary Data.
68
Report of Independent Registered Public Accounting Firm (BDO USA, LLP; Los Angeles, California USA; PCAOB ID#: 243)
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Operations for the Years ended December 31, 2021 and 2020
Consolidated Statements of Comprehensive Loss for the Years ended December 31, 2021 and 2020
Consolidated Statements of Changes in Stockholders’ Equity for the Years ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows for the Years ended December 31, 2021 and 2020
Notes to Consolidated Financial Statements
F-2
F-4
F-5
F-6
F-7
F-8
F-9
F-1
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, 2021 and 2020,
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, 2021 and 2020, 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 $2.7
million at December 31, 2021. 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
F-2
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.
Assessing whether any known or knowable factors occurred subsequent to year end that impact management’s forecast of future inventory usage.
Evaluating the reasonableness of certain management forecasts by comparing forecasted sales for the current period to actual sales for the current
period and quantifying the impact of any variations on future forecasts.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2014.
Los Angeles, California
March 29, 2022
F-3
HTG Molecular Diagnostics, Inc.
Consolidated Balance Sheets
Assets
Current assets:
Cash and cash equivalents
Short-term investments available-for-sale, at fair value
Accounts receivable, net of allowance of $20,315 at December 31, 2021 and
$0 at December 31, 2020
Inventory, net of allowance of $25,306 at December 31, 2021 and $26,052 at
December 31, 2020 – current
Prepaid expenses and other
Total current assets
Property and equipment, net
Other non-current assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Accrued liabilities
Contract liabilities – current
NuvoGen obligation – current
Current portion of long-term debt
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
Other non-current liabilities
Total liabilities
Commitments and Contingencies (Note 15)
Stockholders’ equity:
Series A convertible preferred stock, $0.001 par value; 23,770 shares authorized, issued and outstanding
at December 31, 2021 and 2020
Common stock, $0.001 par value; 26,666,667 shares authorized at December 31,
2021 and 2020, 7,588,085 shares issued and outstanding at December 31, 2021
and 5,199,997 shares issued and outstanding at December 31, 2020
Additional paid-in-capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders' equity
December 31,
2021
2020
$
9,599,950 $
12,343,456
$
$
2,092,466
1,987,753
1,163,339
27,186,964
1,345,361
1,118,886
809,476
30,460,687 $
1,649,440 $
2,022,569
124,941
548,301
5,167,586
413,865
16,808
9,943,510
3,900,880
5,178,629
949,461
88,383
20,060,863
22,397,812
6,298,075
1,588,767
1,492,126
1,094,273
32,871,053
1,009,097
1,227,402
90,356
35,197,908
1,348,762
1,459,878
185,083
512,729
3,022,139
685,220
22,563
7,236,374
4,479,396
8,568,308
368,682
60,488
20,713,248
24
24
7,588
218,723,349
1,894
(208,333,031)
10,399,824
30,460,687 $
5,200
205,661,999
5,298
(191,187,861)
14,484,660
35,197,908
$
The accompanying notes are an integral part of these consolidated financial statements.
F-4
HTG Molecular Diagnostics, Inc.
Consolidated Statements of Operations
Revenue:
Product and product-related services
Collaborative development services
Total 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
Loss on extinguishment of MidCap Credit Facility and
QNAH Convertible Note
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
Years Ended December 31,
2021
2020
$
$
8,906,828
—
8,906,828
7,890,854
658,010
8,548,864
4,094,980
16,546,740
6,088,934
26,730,654
(17,823,826)
(1,064,545)
29,884
—
1,735,792
—
701,131
(17,122,695)
(22,475)
(17,145,170)
(2.47)
6,936,131
$
$
3,991,532
18,063,064
6,079,907
28,134,503
(19,585,639)
(1,024,774)
254,736
22,268
—
(522,394)
(1,270,164)
(20,855,803)
(14,415)
(20,870,218)
(4.51)
4,627,918
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-5
HTG Molecular Diagnostics, Inc.
Consolidated Statements of Comprehensive Loss
Net loss
Other comprehensive income (loss), net of tax effect:
Unrealized gain on short-term investments
Foreign currency translation adjustment
Total other comprehensive income (loss)
Comprehensive loss
Years Ended December 31,
$
2021
(17,145,170) $
2020
(20,870,218)
—
(3,404)
(3,404)
$
(17,148,574)
$
9
10,253
10,262
(20,859,956)
The accompanying notes are an integral part of these consolidated financial statements.
F-6
HTG Molecular Diagnostics, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
Balance at January 1, 2020
Stock-based compensation expense
Release of restricted stock awards
Net share settlement of restricted stock awards
Stock issued under stock purchase plans
Issuance of common stock from ATM offering, net of
commissions and issuance costs of approximately $0.3 million
Issuance of Series A convertible preferred stock in private
placement, net of issuance costs of approximately $37,000
Cancellation of common stock received in exchange for Series A
convertible preferred stock
Issuance of Series A convertible preferred stock in exchange for
outstanding common stock
Conversion of Series A convertible preferred stock for common
stock
Shares issued, including stock compensation expense in
connection with LP Purchase Agreement
Exercise of pre-funded warrants
Issuance of common stock warrants in connection with SVB
Term Loan
Cash in lieu of fractional shares related to reverse stock split
Net loss
Unrealized gain on short-term investments
Foreign currency translation adjustment
Balance at December 31, 2020
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 pre-funded warrants
Exercise of stock options
Net loss
Foreign currency translation adjustment
Balance at December 31, 2021
Series A Convertible
Preferred Stock
Common Stock
Shares
Amount
Amount
- $
—
—
—
—
Shares
- 3,872,682 $
—
7,911
(1,764)
6,286
—
—
—
—
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive Accumulated
Income (Loss)
Deficit
Total
Stockholders'
Equity
3,873 $ 194,288,368 $
1,584,666
111
(14,047)
62,156
—
8
(2)
6
(4,964) $ (170,317,643) $ 23,969,634
1,584,666
119
(14,049)
62,162
—
—
—
—
—
—
—
—
—
—
955,240
955
7,544,883
10,170
10
—
—
562,945
—
—
(274,000)
(274)
(2,424,626)
41,100
41
—
—
2,424,859
(27,500)
(27)
183,333
183
(156)
—
—
—
—
238,658
211,784
239
212
1,181,844
31,556
—
—
—
—
—
—
—
—
7,545,838
—
562,955
—
(2,424,900)
—
2,424,900
—
—
—
-
1,182,083
31,768
—
—
—
—
—
23,770 $
—
—
—
—
—
—
—
(133)
—
—
—
—
—
—
—
24 5,199,997 $
—
—
4,529
—
(611)
—
—
—
33,963
—
—
—
—
—
—
420,000
(560)
—
—
—
5,200 $ 205,661,999 $
1,317,351
—
(3,239)
57,669
125,794
—
4
—
—
34
—
—
—
—
420,000
—
(560)
—
(20,870,218) (20,870,218)
—
9
9
10,253
10,253
5,298 $ (191,187,861) $ 14,484,660
1,317,351
4
(3,239)
57,669
125,828
—
—
—
—
—
—
—
—
—
—
—
— 2,050,879
2,051 10,663,768
—
— 10,665,819
—
—
—
—
—
23,770 $
154,372
—
144,881
—
75
—
—
—
—
—
24 7,588,085 $
154
145
—
—
—
899,826
(145)
326
—
—
7,588 $ 218,723,349 $
—
—
—
899,980
—
—
—
326
—
(17,145,170) (17,145,170)
—
(3,404)
(3,404)
1,894 $ (208,333,031) $ 10,399,824
—
The accompanying notes are an integral part of these consolidated financial statements.
F-7
HTG Molecular Diagnostics, Inc.
Consolidated Statements of Cash Flows
Operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Accretion of discount on NuvoGen obligation
Provision for excess inventory
Amortization of QNAH Convertible Note issuance costs
Amortization of MidCap Credit Facility discount and issuance costs
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
Stock compensation expense in connection with LP Purchase Agreement
Gain on forgiveness of PPP Loan
Loss on extinguishment of Midcap Credit Facility and QNAH Convertible Note
Loss on abandonment and disposal of assets, net
Changes in operating assets and liabilities:
Accounts receivable
Inventory
Prepaid expenses and other
Deferred offering costs
Accounts payable
Accrued liabilities
Contract liabilities
Operating lease liabilities
Net cash used in operating activities
Investing activities
Purchase 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 issuance of SVB Term Loan
Payment of SVB Term Loan issuance costs
Payments for extinguishment of MidCap Credit Facility
Payments for extinguishment of QNAH Convertible Note
Proceeds from ATM Offering, net of commissions of $0.3 million
Proceeds from LP Purchase Agreement
Proceeds from PPP Loan
Proceeds from Series A convertible preferred stock in private placement
Payments on NuvoGen obligation
Proceeds from exercise of pre-funded warrants
Payments on financing leases
Proceeds from exercise of stock options
Taxes paid for net share settlement of restricted stock awards
Cash in lieu of fractional shares related to reverse stock split
Proceeds from shares purchased under stock purchase plans
Payments on 2021 and 2020 Insurance Notes
Net cash provided by financing activities
Effect of exchange rates on cash
Increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of noncash investing and financing activities
Issuance of Series A convertible preferred stock in exchange for outstanding common stock
Issuance of common stock upon conversion of Series A convertible preferred stock
Issuance of common stock warrants in connection with SVB Term Loan
Issuance of common stock from cashless exercise of pre-funded warrants
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
2021 and 2020 Insurance Notes issued for insurance premiums
Reclassification of contract liability to refund liability
Disposal of fully depreciated assets
Gain on forgiveness of PPP Loan
Supplemental cash flow information
Cash paid for interest
Cash paid for taxes
Years Ended December 31,
2021
2020
$
(17,145,170 )
$
(20,870,218 )
721,246
(12,288 )
174,589
—
—
470,281
1,317,355
57,669
20,315
458,001
(25,018 )
—
(1,735,792 )
—
180,008
(805,736 )
(1,365,384 )
619,226
—
453,337
616,447
(38,314 )
(469,326 )
(16,508,554 )
(644,381 )
12,600,000
(18,620,363 )
(6,664,744 )
—
—
—
—
10,665,819
899,980
—
—
(530,656 )
—
(22,563 )
326
(3,239 )
—
125,828
(743,873 )
10,391,622
(16,186 )
(12,797,862 )
22,397,812
9,599,950
-
—
—
145
1,302,457
16,128
746,360
—
635,870
1,735,792
$
$
599,922
12,665
$
1,346,560
(12,936 )
53,298
6,505
101,482
243,541
1,584,785
21,186
—
629,501
(72,503 )
205,538
—
522,394
105,063
1,575,409
(256,940 )
284,921
140,320
(23,801 )
(409,035 )
(683,716 )
(783,731 )
(16,292,377 )
(453,552 )
31,650,000
(12,465,341 )
18,731,107
10,000,000
(115,193 )
(7,438,623 )
(3,000,000 )
7,545,838
976,545
1,717,000
562,955
(645,949 )
31,768
(41,134 )
—
(14,049 )
(560 )
40,976
(570,096 )
9,049,478
19,609
11,507,817
10,889,995
22,397,812
2,424,900
1,622,500
420,000
—
447,987
18,817
735,195
281,722
—
—
869,857
17,514
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-8
HTG Molecular Diagnostics, Inc.
Notes to Consolidated Financial Statements
Note 1. Description of Business, Basis of Presentation and Principles of Consolidation
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. The Company derives revenue from sales of its HTG EdgeSeq system and integrated next-generation sequencing-
based (“NGS-based”) HTG EdgeSeq assays, from sample processing services performed in its VERI/O laboratory and from collaborative development
services.
The Company operates in one segment and its customers and distributors are geographically located primarily in the United States and Europe. For sales to
distributors, their locations may be different from the locations of the end customers. For the year ended December 31, 2021, approximately 31% of the
Company’s revenue was generated from sales originated by customers located outside of the United States, compared with 35% for the year ended
December 31, 2020.
COVID-19 Pandemic
The full impact of the COVID-19 pandemic continues to evolve as of the date of this report and management continues to actively monitor the potential
impact of the global situation on its financial condition, liquidity, operations, suppliers, industry and workforce. Given the ongoing evolution of the
COVID-19 pandemic, including resurgences in many areas of the world and the global responses to curb its spread, the Company is not able to fully
estimate the effects of the COVID-19 pandemic on its results of operations, financial condition or liquidity.
The Company experienced a significant slowing of product and product-related services revenue generation beginning in March 2020 and believes that
while it has seen some recovery, this impact will continue to be seen at some level at least through the first half of 2022. The extent of this impact 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, prioritization by those customers as the immediate impacts of the pandemic have passed, and the workforce and supplier impacts that each
customer has experienced during the pandemic. The Company has not experienced delays in its development efforts because of stay-at-home orders despite
its efforts to prioritize the safety of its employees during this pandemic. In addition, the impact of the COVID-19 pandemic 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 on the global economy could adversely affect the Company’s business and the businesses of
its vendors, partners and customers, and could result in future reductions in sales and operating results.
While there remains uncertainty as to the ultimate impact of the COVID-19 pandemic, 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.
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 November 2020, the Company completed a reverse stock split of its outstanding shares of common stock pursuant to
which every fifteen 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, 2021 and
2020.
F-9
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 $208.3 million as of December 31, 2021. As of December 31, 2021, the
Company had working capital of $17.2 million and long-term liabilities of $10.1 million. The Company’s liability balances consist primarily of its debt
obligations, including an asset-secured loan with Silicon Valley Bank (“SVB”) (the “SVB Term Loan”) (see Note 8), as well as an obligation to NuvoGen
Research, LLC (the “NuvoGen obligation”) (see Note 10). Potentially changing circumstances, including COVID-19 uncertainties, may result in the
depletion of the Company’s capital resources more rapidly than it currently anticipates, resulting in the Company not having adequate resources to fund its
planned operations and expenditures for at least the next 12 months and to comply with the financial covenant in the Loan and Security Agreement for the
SVB Term Loan (the “Loan Agreement”). These circumstances raise substantial doubt about the Company’s ability to continue as a going concern. 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. In addition, the Company must comply with a financial covenant
in the Loan Agreement requiring the Company to maintain unrestricted cash, including short term available-for-sale securities, 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. The Company currently expects that it may not be in compliance with this unrestricted cash covenant as early as mid-2022
unless it is successful in raising additional equity capital or is able to amend the covenant with SBV. If the Company breaches the covenant, the Company
may have to delay, scale back or discontinue one or more product development programs, curtail its commercialization activities, significantly reduce
expenses, sell assets (potentially at a discount to their fair value or carrying value), 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, or liquidate all assets. In addition, if the Company defaults under 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 foreclose on the Company’s assets.
Note 2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. The Company’s 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 obsolescence and valuation of inventory,
accounts receivable, allowance for doubtful accounts and available-for-sale securities. Actual results could materially differ from those estimates,
especially in light of the significant uncertainty that remains as to the full impact of COVID-19 on the Company’s operations, as well as those of its
workforce, supply chains, distribution networks and those of its customers.
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, commercial paper, 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.
F-10
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 loss, 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 income (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.
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,
2021, the estimated aggregate fair value of the NuvoGen obligation is approximately $4.6 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.
F-11
Inventory
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. Cost is
determined using a standard cost system, whereby the standard costs are updated periodically to reflect current costs. Net realizable value is the estimated
selling price in the ordinary course of business less reasonably predictable costs of completion and disposal. The Company reserves or writes down its
inventory for estimated obsolescence or 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 assumptions about future demand and market conditions. If actual
market conditions are less favorable than those projected by the Company, 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. The Company classifies inventory as long-term when the Company expects to utilize the inventory beyond its normal
operating cycle.
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 as of December 31, 2021 was $204,638 compared with $50,855 as of December 31, 2020.
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 collaborative
development services agreement where applicable 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, 2021 and 2020.
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.
F-12
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. Cost incurred to issue the MidCap Credit and Security Agreement (Revolving Loan) under the Company’s credit facility with MidCap Financial
Trust (the “MidCap Credit Facility”) were deferred as an asset in the consolidated balance sheets and amortized on a straight-line basis to interest expense
over the term of the revolving commitment until extinguishment of the MidCap Credit Facility in June 2020 (see Note 8).
Contract Liabilities
Contract liabilities represent cash receipts for products or services to be delivered in future periods, including up-front fees received relating to custom
research use only (“RUO”) assay design and collaborative development services. When products or services are delivered to customers, contract liabilities
are recognized as earned. Up-front fees received for custom RUO assay design or collaborative development services are recognized 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
The Company accounts for its revenue in accordance with Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”)
606, Revenue from Contracts with Customers (“ASC 606”) and ASC 808, Collaborative Arrangements (“ASC 808”).
For contracts where the period between when the Company transfers a promised good or service to the customer and when the customer pays is one year or
less, the Company has elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing
component.
The Company has made a policy election to exclude from the measurement of the transaction price all taxes assessed by a government authority that are
both imposed on and concurrent with a specific revenue producing transaction and collected by the Company from a customer. Such taxes may include but
are not limited to sales, use, value added and certain excise taxes.
See Note 9 for additional discussion of the Company’s revenue recognition policies.
COVID-19 Related Credits and Relief
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to COVID‑19. On April 21, 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
$1.7 million from SVB, as lender (see Note 8). 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 accrued interest, totaling $1,735,792, were forgiven by the U.S. Small Business Administration
(“SBA”), and that the PPP Loan note had been canceled.
There is no guidance in U.S. GAAP that specifically addresses the accounting by a business entity that obtains a forgivable loan from a government entity.
Notwithstanding the absence of specific guidance in U.S. GAAP and given the significant uncertainties related to whether many entities that received loans
are qualified for a PPP Loan and would meet the conditions for loan forgiveness, the Company accounted for the PPP Loan as debt in accordance with
FASB, ASC 470, Debt. Based upon the guidance in ASC 470, the Company recorded a liability for the total amount of the loan upon receipt of the
proceeds. Upon confirmation from the SBA that the PPP Loan was forgiven in full and the PPP Loan had been canceled, the Company reversed the liability
and related accrued interest and recorded a gain on forgiveness of the PPP Loan.
F-13
In December 2020, the Consolidated Appropriations Act (the “Appropriations Act”) was signed into law to further address the ongoing impacts of COVID-
19. The Appropriations Act introduced several additional potential credits and benefits for employers to consider applying for, including, but not limited to,
the ability for employers who have previously obtained a PPP Loan to potentially also qualify for Employee Retention Credits (“ERC”), initially created as
part of the CARES Act. The ERC provided a per employee credit to eligible businesses based on a percentage of qualified wages and health insurance
benefits paid to employees. The benefit was provided as a refundable payroll tax credit claimed quarterly as a reduction to payroll taxes or cash refunds.
The initial credit available was equal to 50% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages per employee
through December 31, 2021. In March 2021, the American Rescue Plan of 2021 was enacted to, amongst other things, extend and expand ERC benefits
through December 31, 2021. In accordance with these additional relief provisions, the tax credit was increased to 70% of qualified wages paid to
employees during a quarter, and the limit on qualified wages per employee was increased to $10,000 of qualified wages per quarter. In November 2021, the
Infrastructure Investment and Jobs Act was signed into law and ends the employee retention credit early, making wages paid after September 30, 2021,
ineligible for the credit.
The Company qualified for certain ERC benefits during the years ended December 31, 2021 and 2020. As there is no guidance in U.S. GAAP that
specifically addresses the accounting for the receipt of government assistance similar to the ERC, the Company considered two primary approaches in
accounting for the ERC. The first was as government grants, by reference to ASC 958-605, Not-for-Profit-Entities Revenue Recognition, and the other by
reference to IAS 20, Accounting for Government Grants and Disclosure of Government Assistance. With reference to IAS 20, the Company considered the
following: (1) Under this model, the Company would not recognize government assistance until reasonably sure any conditions attached to the assistance
would be met, and the Company would in fact receive the funds. (2) Once the Company was reasonably certain the conditions were met, the Company
would then record the earnings impact of the grants over the periods in which the Company recognizes the costs the grants are intended to pay for. These
costs should be recognized as expenses. (3) The funds could be recorded as other income or as an offset to related qualifying expenses. The Company has
historically offset actual expenses that are reimbursed within the applicable expense line. Because the ERC was intended to reimburse the Company for
actual costs incurred during the given period or quarter, the Company determined that it was most reasonable to account for these credits as an offset to the
qualifying payroll expenses.
ERC benefits of approximately $1.7 million and $0.5 million were included in operating expenses as an offset to the related compensation costs in the
accompanying consolidated statements of operations for the years ended December 31, 2021 and 2020, respectively, as follows:
Cost of product and product-related services revenue
Selling, general and administrative
Research and development
Years Ended December 31,
2020
2021
$
$
467,481 $
795,650
444,888
1,708,019 $
108,714
229,025
135,744
473,483
ERC benefits receivable of $0.4 million and $0.5 million were included in prepaid expenses and other in the accompanying consolidated balance sheets as
of December 31, 2021 and 2020, respectively. The Company has also applied the guidance in ASU No. 2021-10, Government Assistance (Topic 832):
Disclosures by Business Entities about Government Assistance (“ASU No. 2021-10) retrospectively to the ERC in its financial reporting for the years
ended December 31, 2021 and 2020.
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 we do 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.
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.
F-14
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 technology and
product offerings, including the technology related to the Company’s HTG Therapeutics business units, costs to continue improving and expanding the
utility of the HTG EdgeSeq technology, as well as those related to third-party collaborative development agreements, for which related revenue is included
in collaborative development services revenue in the consolidated statements of operations. There were no costs associated with collaborative development
services included in research and development expense in the consolidated statements of operations for the year ended December 31, 2021.
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 we have 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. We record the valuation allowance in the period we determine that it is more likely than
not that net deferred tax assets will not be realized. For the years ended December 31, 2021 and 2020, we have 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 benefit will be sustained in a court of last resort, the Company does not recognize a tax benefit 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 (loss) in the consolidated statements of
changes in stockholder’s equity.
Comprehensive Income (Loss)
Comprehensive income (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.
F-15
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 bank checking and money market accounts in amounts in excess of
federally insured limits. Management believes, based upon the quality of the financial institutions, that the credit risk with regard to these deposits is not
significant.
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 20% and 10% of the Company’s total revenue for the year ended December 31, 2021, compared with the
top customer accounting for 11% of the Company’s total revenue for the year ended December 31, 2020. 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. The largest two customers accounted for approximately 9% each
of the Company’s accounts receivable as of December 31, 2020.
Two vendors accounted for 28% and 16% of the Company’s accounts payable as of December 31, 2021, compared with two vendors who accounted for
21% and 20% of the Company’s accounts payable as of December 31, 2020.
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.
Recently Adopted Accounting Pronouncements
In November 2021, the FASB issued ASU No. 2021-10, Government Assistance (Topic 842): Disclosures by Business Entities about Government
Assistance, which aims to provide increased transparency by requiring business entities to disclose information about certain types of governmental
assistance they receive in the notes to the financial statements. The disclosures include information around the nature of the assistance, the related
accounting policies used to account for government assistance, the effect of government assistance on the entity’s financial statements, and any significant
terms and conditions of the agreements, including commitments and contingencies. The new guidance does not apply to transactions that a business
accounts for under the income tax, revenue recognition, gain contingency or debt rules. The guidance in ASU 2021-10 was effective for financial
statements of all entities for annual periods beginning after December 15, 2021. The Company has early adopted this guidance retrospectively, applying it
to all transactions within the scope of the amendments reflected in its consolidated financial statements as of and for the years ended December 31, 2021
and 2020. As the Company’s accounting for ERC benefits was in accordance with this guidance, the impact of adoption was limited to disclosures relating
to these transactions.
In October 2020, the FASB issued ASC Update (“ASU”) No. 2020-10, Codification Improvements (“Update No. 2020-10”), which amended a variety of
topics in the FASB Codification in order to improve the consistency of the Codification and the application thereof, while leaving GAAP unchanged.
Update No. 2020-10 was effective for fiscal years beginning after December 15, 2020 for public business entities. The Company’s adoption of this standard
on January 1, 2021 did not have a material impact on its consolidated financial statements or related footnote disclosures.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which
is intended to simplify various aspects of the accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740
and also clarifies and amends existing guidance to improve consistent application. This standard was effective for fiscal years and interim periods within
those fiscal years, beginning after December 15, 2020. The Company’s adoption of this standard on January 1, 2021 did not have a material impact on its
consolidated financial statements or related footnote disclosures
F-16
Recent Accounting Pronouncements
The following are new FASB ASUs that had not been adopted by the Company as of December 31, 2021:
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 public business entities, excluding entities eligible to be smaller reporting companies as
defined by the SEC, for fiscal years and interim periods within those fiscal years, beginning after December 15, 2021. For all other entities, the standard
will be 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 is effective for fiscal years and
interim periods within those fiscal years beginning after December 15, 2022. Early adoption is permitted, including in any interim period. The Company
will continue to assess the possible impact of this standard, but currently does not expect the adoption of this standard will have a significant impact on its
consolidated financial statements, given the high credit quality of the obligors to its available-for-sale debt securities and its history of minimal bad debt
expense relating to trade accounts receivable.
Note 3. Inventory
Inventory, net of allowance, consisted of the following as of the date indicated:
Raw materials
Work in process
Finished goods
Total gross inventory
Less inventory allowance
December 31,
2021
2020
$
$
1,964,407 $
312,803
447,145
2,724,355
(25,306)
2,699,049 $
1,079,528
147,455
291,195
1,518,178
(26,052)
1,492,126
Inventory of $2.0 million and $0.7 million was included in inventory – current and other non-current assets, respectively, in the consolidated balance sheets
as of December 31, 2021. There was no inventory classified as long-term as of December 31, 2020.
For the years ended December 31, 2021 and 2020, the Company recorded adjustments to the provision for excess inventory of $174,589 and $53,298,
respectively. Adjustments in these periods to the allowance for estimated shrinkage, obsolescence and excess inventory and to the inventory reserve have
been included in cost of product and product-related services revenue in the consolidated statements of operations.
F-17
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,
2021 and 2020, respectively, in the fair value hierarchy:
Asset included in:
Cash and cash equivalents
Money market securities
Investments available-for-sale at fair value
Corporate debt securities
Total
Asset included in:
Cash and cash equivalents
Money market securities
Corporate debt securities
Investments available-for-sale at fair value
Corporate debt securities
Total
Level 1
Level 2
Level 3
Total
December 31, 2021
$
9,083,302 $
— $
— $
9,083,302
—
$
9,083,302
12,343,456
12,343,456
$
$
—
—
$
12,343,456
21,426,758
Level 1
Level 2
Level 3
Total
December 31, 2020
$
17,497,282 $
— $
4,499,270
— $
17,497,282
4,499,270
—
$
17,497,282
6,298,075
10,797,345
$
$
—
—
$
6,298,075
28,294,627
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, 2021 and 2020.
Level 1 instruments include investments in money market funds. These instruments are valued using quoted market prices for identical unrestricted
instruments in active markets. The Company defines active markets for debt instruments based on both the average daily trading volume and the number of
days with trading activity. Level 2 instruments include corporate debt securities, including commercial paper. 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, 2021 or 2020 and did not have any Level 3 financial assets or liabilities during either of these periods.
Note 5. Available-for-Sale Securities
The Company’s portfolio of available-for-sale securities consists of high credit quality corporate debt securities as of December 31, 2021. The
following is a summary of the Company’s available-for-sale securities as of December 31, 2021 and 2020:
Corporate debt securities
Total available-for-sale securities
Amortized
Cost
12,343,456
12,343,456 $
$
December 31, 2021
Gross
Unrealized
Gains
Gross
Unrealized
Losses
—
— $
Fair Value
(Net Carrying
Amount)
12,343,456
12,343,456
—
— $
F-18
Corporate debt securities
Total available-for-sale securities
Amortized
Cost
6,298,075
6,298,075 $
$
December 31, 2020
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
(Net Carrying
Amount)
—
— $
—
— $
6,298,075
6,298,075
There were no gross unrealized losses relating to the Company’s available-for-sale securities investments as of December 31, 2021. The net
adjustment to unrealized holding gains on short-term investments, net of tax in other comprehensive income were immaterial for each of the years ended
December 31, 2021 and 2020.
Contractual maturities of debt investment securities as of December 31, 2021 are shown below. Expected maturities will differ from contractual
maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
Corporate debt securities
Total available-for-sale securities
Under
1 Year
12,343,456
12,343,456 $
$
1 to 2 Years
—
— $
Total
12,343,456
12,343,456
The Company conducts a regular assessment of its debt securities with unrealized losses to determine whether securities have OTTI considering,
among other factors, the nature of the securities, credit rating or financial condition of the issuer, the extent and duration of the unrealized loss, expected
cash flows of underlying collateral, market conditions and whether the Company intends to sell or it is more likely than not that the Company will be
required to sell the debt securities. As the Company did not have any unrealized losses as of December 31, 2021, there was no OTTI of its available-for-
sale securities as of that date.
Note 6. Property and Equipment
Property and equipment, net consisted of the following as of the dates indicated:
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
December 31,
2021
2020
$
872,877 $
1,931,762
2,432,242
2,343,930
216,218
480,740
8,277,769
(7,158,883)
1,118,886
$
$
1,082,717
1,943,534
2,166,743
2,506,644
208,005
420,301
8,327,944
(7,100,542)
1,227,402
Depreciation and leasehold improvement amortization expense was $0.7 million and $1.3 million for the years ended December 31, 2021 and 2020,
respectively.
Note 7. Accrued Liabilities
Accrued liabilities consisted of the following as of the dates indicated:
Accrued employee bonuses
Payroll and employee benefit accruals
Accrued product warranty
Other accrued liabilities
F-19
December 31,
2021
2020
$
$
1,254,355 $
389,385
97,512
281,317
2,022,569
$
436,799
694,058
92,696
236,325
1,459,878
Note 8. Debt Obligations.
Current portion of long-term debt consisted of the following as of the dates indicated:
SVB Term Loan
PPP Loan
2021 Insurance Note
2020 Insurance Note
December 31,
2021
2020
5,000,000
—
167,586
—
5,167,586
$
$
2,000,000
857,040
—
165,099
3,022,139
$
$
Long-term debt, net of current portion, discount and debt issuance costs, consisted of the following as of the dates indicated:
SVB Term Loan, net of discount and debt issuance costs
PPP Loan
December 31,
2021
2020
$
$
5,178,629
—
5,178,629
$
$
7,708,348
859,960
8,568,308
SVB Term Loan
On June 24, 2020 (the “Closing Date”), the Company entered into the Loan Agreement with SVB.
The proceeds from the SVB Term Loan in the amount of $10.0 million were fully funded on June 25, 2020. Together with cash on hand, the proceeds
were used to repay in full all outstanding amounts and fees due under the MidCap Credit Facility in an aggregate amount equal to $7.5 million,
including collateral agent legal fees and prepayment fees, in addition to the Company’s subordinated convertible promissory note to QNAH (the
“QNAH Convertible Note”) and related accrued interest in the aggregate amount of $3.2 million. As a result of the repayment, the Company recorded
a loss on extinguishment of the MidCap Credit Facility and the QNAH Convertible Note of $0.5 million in other income (expense) in the
accompanying consolidated statements of operations for the year ended December 31, 2020. All obligations under the MidCap Credit Facility and the
QNAH Convertible Note were fulfilled as a result of this extinguishment.
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
Company is obligated to make 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 2.0% of principal prepaid if
prepayment occurs after the first anniversary of the Closing Date but on or prior to the second anniversary of the Closing Date, and 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 equal to 8.00% of the principal amount of the SVB Term Loan.
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. In addition, the Company must comply with a financial covenant in the SVB Term Loan requiring the Company to
maintain unrestricted cash, including short term available-for-sale securities, 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.
F-20
In connection with the Loan Agreement, the Company granted to SVB a warrant to purchase up to 42,894 shares of the Company’s common stock at
a purchase price of $11.6565 per share. The warrant will expire on June 24, 2030 and may be exercised for cash or at the election of the holder on a
cashless, net exercise basis. The fair value of the warrant on the date of issuance was approximately $0.4 million, determined using the Black-Scholes
option-pricing model, and was recorded as a discount to the SVB Term Loan, with a corresponding credit to additional paid in capital since the
warrant met the requirements to be classified as equity.
The Company included $0.6 million and $1.1 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 long-term debt, net of current portion, discount and debt issuance costs in the accompanying
consolidated balance sheets as of December 31, 2021 and 2020, respectively. Amortization of the debt discount associated with the SVB Term Loan
was $0.5 million and $0.2 million for the years ended December 31, 2021 and 2020, respectively, and was included in interest expense in the
consolidated statements of operations. The effective interest rate for the year ended December 31, 2021 was 10.47%.
The remaining principal repayments due under the SVB Term Loan as of December 31, 2021 are as follows for each fiscal year:
2022
2023
Total SVB Term Loan payments
Less discount and deferred financing costs
Plus final fee premium
Total SVB Term Loan, net
Paycheck Protection Program Loan
$
$
5,000,000
5,000,000
10,000,000
(621,371)
800,000
10,178,629
On April 21, 2020, the Company received proceeds from a PPP Loan in the amount of $1.7 million from SVB, as lender. The PPP Loan was evidenced by a
promissory note which bore interest at an annual rate of 1%, and contained customary events of default relating to, among other things, payment defaults
and breaches of representations, warranties or terms of the PPP Loan documents. Under the CARES Act and PPP Flexibility Act, loan forgiveness was
available for the sum of documented payroll costs (including benefits), rent and utility obligations, and interest on certain of the Company’s other debt
obligations incurred during the 24-week period beginning on the date of loan approval, as defined by the applicable guidelines and the SBA. The Company
applied for full PPP Loan forgiveness in October 2020.
On May 26, 2021, the Company received notification from SVB that the PPP Loan and related accrued interest was forgiven in full by the SBA, and the
PPP Loan note had been cancelled. Accordingly, the Company recorded a gain on forgiveness of the PPP Loan of $1.7 million for the year ended
December 31, 2021, included in other income (expense) in the accompanying consolidated statements of operations. The PPP Loan is subject to SBA
review at any time before or after the SBA remits payment to the lender. The Company has not accrued any liability associated with risk of an adverse SBA
review.
Insurance Note
On April 27, 2020, the Company entered into a commercial financing agreement to extend the payment period related to its director and officer insurance
policy (the “2020 Insurance Note”). The 2020 Insurance Note required a down payment to be made upon signing the agreement equal to approximately
$0.2 million. The unpaid premium balance of approximately $0.7 million was financed at an annual rate of 3.61% and was repaid in nine equal monthly
payments of principal and interest through February 2021.
On May 5, 2021, the Company entered into a new commercial financing agreement to extend the payment period related to its director and officer
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 has been financed at an annual rate of 3.57% and is to
be repaid in nine equal monthly payments of principal and interest beginning in June 2021. The 2021 Insurance Note contains customary events of default
relating to, among other things, payment defaults and breaches of representations, warranties or terms of the 2021 Insurance Note documents, and may be
prepaid by the Company at any time prior to maturity with no prepayment penalties.
F-21
Note 9. Revenue from Contracts with Customers
Revenue from contracts with customers is recognized when, or as, the Company satisfies its performance obligations by delivering the promised goods or
service deliverables to the customers. A good or service deliverable is transferred to a customer when, or as, the customer obtains control of that good or
service deliverable. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is
recognized by measuring the Company’s progress in satisfying the performance obligation in a manner that depicts the transfer of the goods or services to
the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that the Company determines the
customer obtains control over the promised good or service deliverable. The amount of revenue recognized reflects the consideration the Company expects
to be entitled to in exchange for those promised goods or services (i.e., the “transaction price”). In determining the transaction price, the Company
considers multiple factors, including the effects of variable consideration. Variable consideration is included in the transaction price only to the extent it is
probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are
resolved. In determining when to include variable consideration in the transaction price, the Company considers the range of possible outcomes, the
predictive value of its past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to
factors outside of the Company’s influence, such as the judgment and actions of third parties.
Product and Product-related Services Revenue
The Company had product and product-related services revenue consisting of revenue from the sale of instruments and consumables and the use of the
HTG EdgeSeq proprietary technology to process samples and design custom RUO assays for the years ended December 31, 2021 and 2020 as follows:
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
Years Ended December 31,
2021
2020
$
$
1,385,665 $
3,786,923
5,172,588
48,350
3,685,890
3,734,240
8,906,828 $
869,035
3,030,612
3,899,647
1,393,316
2,597,891
3,991,207
7,890,854
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 in ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations.
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. 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 the Company’s customers for instruments and consumables shipped are included in the consolidated statements of
operations as part of product and product-related services revenue. Shipping and handling costs for sold products shipped to the Company’s customers are
included in the consolidated statements of operations as part of cost of product and product-related services revenue.
F-22
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. The Company has 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 instruments 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.
In reagent rental agreements, the Company retains 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 title remains with the Company is charged to selling, general and administrative expense as incurred.
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 and Related Agreements
The Company enters into custom RUO assay design agreements that may generate up-front fees and subsequent payments that might 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 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 assay design service revenue can fluctuate substantially based on
the completion of design-related phases.
The Company did not recognize any custom RUO assay design revenue from performance obligations that were satisfied in previous periods during the
years ended December 31, 2021 and 2020.
F-23
Collaborative Development Services Revenue
The Company enters into collaborative development services agreements with biopharmaceutical companies for the development of NGS-based companion
diagnostic assays in support of and in conjunction with, biopharmaceutical companies’ drug development programs. These collaborative development
services agreements may generate upfront fees, and in some cases subsequent milestone payments that may be earned upon completion of certain product
development milestones or activities. The Company follows ASC 606 and ASC 808 to determine the appropriate recognition of revenue under its
collaborative research, development and commercialization agreements. For the year ended December 31, 2020, collaborative development services
revenue was generated through statements of work entered into under a Master Assay Development, Commercialization and Manufacturing Agreement
(the “Governing Agreement”) with QIAGEN Manchester Limited (“QML”) discussed below.
Collaborative development services
Years Ended December 31,
2021
2020
$
— $
658,010
Master Assay Development, Commercialization and Manufacturing Agreement
The Governing Agreement created the framework for QML and the Company to combine their technological and commercial strengths to offer
biopharmaceutical companies a complete NGS-based solution for the development, manufacture and commercialization of companion diagnostic assays.
Under the Governing Agreement, the parties jointly sought companion diagnostic programs with biopharmaceutical companies, with QML entering into
sponsor project agreements with interested biopharmaceutical companies for specified projects, and QML and the Company entering into statements of
work which set forth the rights and obligations of QML and the Company with respect to each project. In November 2019, the Company elected to
terminate the Governing Agreement with QML. The Company’s termination of the Governing Agreement did not terminate active statements of work
under the Governing Agreement. Remaining agreed upon procedures associated with these statements of work were completed in the prior year and no
additional collaborative development services programs have been entered into as of December 31, 2021.
Because each SOW has an expected duration of one year or less, the Company has elected the practical expedient in ASC 606-10-50-14(a) to not disclose
information about its remaining performance obligations for each SOW.
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 at the point in time that the data files are delivered for sample processing services or as the Company satisfies
its performance obligations over time for RUO assay design and extended warranty services. Contract liabilities of $0.1 million were included in contract
liabilities – current and an additional immaterial amount of contract liabilities were included in other non-current liabilities in the consolidated balance
sheets as of December 31, 2021, 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
Custom RUO
Assay Design
Sample
Processing
Total Contract
Liability
Balance at January 1, 2021
Deferral of revenue
Recognition of deferred revenue
Balance at December 31, 2021
Balance at January 1, 2020
Deferral of revenue
Recognition of deferred revenue
Transfer to refund liability
Balance at December 31, 2020
$
$
$
103,580 $
286,349
(261,400)
128,529
$
- $
-
-
—
$
93,884 $
587,091
(650,354)
30,621
Product
Revenue
Custom RUO
Assay Design
Sample
Processing
66,216 $
566,733
(632,949)
—
—
$
438,090
124,404
(186,888)
(281,722)
93,884
197,464
873,440
(911,754)
159,150
Total Contract
Liability
599,454
1,191,182
(1,311,450)
(281,722)
197,464
$
$
$
95,148 $
500,045
(491,613)
—
$
103,580
$
F-24
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 $0.1
million and $0.2 million during the years ended December 31, 2021 and 2020, 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 2022 include $72,624 of revenue-based payments payable as of December 31, 2021 and an estimate of additional
revenue-based payments to be made throughout the remainder of 2022 relating to revenue generated in the first, second and third quarters of 2022 using
actual revenue generated in the same quarters in 2021. 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:
2022
2023
2024
2025
2026
2027 and beyond
Total NuvoGen obligation payments
Plus interest accretion
Total NuvoGen obligation, net
$
$
548,301
400,000
400,000
400,000
400,000
2,233,792
4,382,093
67,088
4,449,181
The Company has recorded the obligation at the estimated present value of the future payments using a discount rate of 2.5%, which represents the
Company’s estimate of its effective borrowing rate for similar obligations. The unamortized interest accretion was $(67,088) and $(79,376) as of December
31, 2021 and 2020, respectively. Discount accreted during the years ended December 31, 2021 and 2020 was $(12,288), and $(12,935), 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, 2021 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 December 2020 to extend the terms of the leases for one year, through January 31, 2022 and again in
September 2021 to extend the terms of the leases for three years, through January 31, 2025. The lease extensions were treated as lease modifications for
accounting purposes, and allow 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.
F-25
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:
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,
2021
2020
$
$
503,130 $
88,708
591,838
$
752,413
125,792
878,205
Years Ended December 31,
2021
2020
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
$
$
$
$
514,453
1,302,457
3.1
5.8%
As of December 31, 2021, remaining maturities of the Company’s operating leases are as follows:
2022
2023
2024
2025
Total
Less present value discount
Total operating lease liabilities
Less operating lease liabilities – current
Operating lease liabilities - non-current
Financing Leases
$
$
883,252
447,987
1.7
8.0%
481,548
484,719
484,631
40,382
1,491,280
(127,954)
1,363,326
(413,865)
949,461
The Company has a 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 does not have any material financing leases
where it acts as a lessor. The components of lease cost for financing leases were as follows:
Financing leases
Amortization of right-of-use assets
Interest on lease liability
Total financing lease cost
F-26
Years Ended December 31,
2020
2021
$
$
23,118
5,793
28,911
$
$
42,826
8,938
51,764
The table below summarizes other information related to the Company’s financing leases:
Weighted-average remaining lease term – financing leases
Weighted-average discount rate – financing leases
As of December 31, 2021, remaining maturities of the Company’s financing leases are as follows:
2022
2023
2024
Total
Less present value discount
Financing lease liabilities, net
Years Ended December 31,
2020
2021
2.8
9.77%
$
$
3.4
9.77%
20,716
18,396
16,080
55,192
(7,081)
48,111
Financing lease liabilities net of discount of $48,111, of which $16,807 and $31,304 were included in other current liabilities and other non-current
liabilities, respectively, and financing right-of-use assets of $43,651, were included in property and equipment, net, in the consolidated balance sheet as of
December 31, 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:
Numerator:
Net loss
Denominator:
Weighted-average shares outstanding-basic and diluted *
Net loss per share, basic and diluted
Years Ended December 31,
2021
2020
$
(17,145,170)
$
(20,870,218)
$
6,936,131
(2.47)
$
4,627,918
(4.51)
*Reflects the retrospective adjustment related to the reverse stock split completed on November 20, 2020.
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:
Options to purchase common stock
Series A Preferred
Common stock warrants
Unvested restricted stock units
Note 13. Warrants
Years Ended December 31,
2021
2020
559,336
158,545
58,688
31,177
487,227
158,545
58,688
12,214
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.
F-27
In connection with the Securities Purchase Agreement (see Note 14), the Company issued and sold pre-funded warrants exercisable for an aggregate of
360,779 shares of common stock. The total exercise price of the pre-funded warrants is $9.75 per share, $9.60 of which was pre-funded and paid to the
Company upon issuance of the pre-funded warrants. The remaining exercise price of the pre-funded warrants is $0.15 per share. In March 2020, 211,784 of
the pre-funded warrants were exercised for proceeds of $31,768. In June 2021, the remaining 148,995 pre-funded warrants were exercised on a cashless,
net exercise basis, resulting in the issuance of 144,881 shares of common stock.
In connection with the SVB Term Loan (see Note 8), the Company granted to SVB a warrant to purchase up to 42,894 shares of the Company’s common
stock at a purchase price of $11.6565 per share. The warrant will expire on June 24, 2030 and may be exercised for cash or at the election of the holder on a
cashless, net exercise basis.
The following table shows the common stock warrants outstanding as of December 31, 2021:
Warrant Issuance Date
August 2014
December 2014
March 2016
March 2018
June 2020
Note 14. Stockholders’ Equity
Reverse Stock Split
Shares of
Common Stock
Underlying
Warrants
Exercise
Price/Share
Expiration Date
$
1,914
9,651
3,021
1,208
42,894
352.65
210.00
41.40
115.95
11.6565
2024
2022
2026
2028
2030
On November 20, 2020, the Company completed a reverse stock split of its outstanding shares of common stock pursuant to which every fifteen (15)
shares of issued and outstanding common stock were exchanged for one share of its 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 $4.27 per share.
All share and per share amounts included within these financial statements have been retrospectively adjusted to reflect the reverse stock split.
Equity Offerings
Securities Purchase Agreement
In September 2019, concurrently with the closing of an underwritten public offering, the Company entered into a Securities Purchase Agreement (the
“Securities Purchase Agreement”) with certain institutional accredited investors (the “Purchasers”), pursuant to which the Company sold to the Purchasers,
in a private placement transaction, warrants to purchase up to an aggregate of 360,779 shares of its common stock (“Warrant Shares”), at a price of $9.60
per warrant (which $9.60 price relates to the pre-funded portion of the total $9.75 exercise price per share). Each pre-funded warrant has a remaining
exercise price of $0.15 per share and became immediately exercisable upon issuance, subject to certain beneficial ownership limitations. For further
discussion of pre-funded warrant activity see Note 13.
ATM Offering
In November 2019, the Company entered into a Controlled Equity Offering Sales Agreement (the “Cantor Sales Agreement”) with 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”). The Company paid
Cantor a commission of 3.0% of the aggregate gross proceeds from each sale of shares for all sales made under this agreement. The shares were offered and
sold pursuant to the Company’s prior shelf registration statement on Form S-3 (File No. 333-229045).
During the year ended December 31, 2021, the Company sold 2,050,879 shares of common stock under the ATM Offering at then-market prices for total
gross proceeds of approximately $11.0 million. After paying sales commissions owed in connection with the ATM Offering of approximately $0.3 million,
the Company’s aggregate net proceeds for the year ended December 31, 2021 were approximately $10.7 million.
F-28
During the year ended December 31, 2020, the Company sold 955,240 shares of common stock under the ATM Offering at then‑market prices for total
gross proceeds of $7.9 million. After deferred offering costs of $0.1 million and paying sales commissions owned in connection with the ATM Offering of
$0.2 million, the Company’s aggregate net proceeds for the year ended December 31, 2020 were $7.5 million.
Exchange and Private Placement
On February 25, 2020, the Company entered into an Exchange and Purchase Agreement (the “Exchange Agreement”) with certain accredited investors (the
“Investors”) pursuant to which the Company agreed to (i) issue to 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 274,000 shares of its common stock (the “Exchange”) 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 (the “Private Placement”), both of which were completed prior to the end of February 2020.
In February 2020, in connection with the Exchange Agreement and the planned issuance of shares of Series A Preferred pursuant to the Exchange and
Private Placement, the Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (the
“Series A Certificate of Designation”). The Series A Certificate of Designation establishes and designates the Series A Preferred and the rights, preferences
and privileges thereof.
Each share of Series A Preferred is convertible into 6.67 shares of the Company’s common stock, subject to proportional adjustment and beneficial
ownership limitations. In June 2020, certain of the Investors elected to convert 27,500 shares of Series A Preferred to common stock in the aggregate,
resulting in the issuance of 183,333 shares of the Company’s common stock. The remaining 23,770 Series A Preferred shares remain outstanding as of
December 31, 2021.
In the event of the Company’s liquidation, dissolution or winding up, holders of Series A Preferred will participate pari passu with any distribution of
proceeds to holders of the Company’s common stock. Holders of Series A Preferred are entitled to receive dividends on shares of Series A Preferred equal
(on an as converted to common stock basis) to and in the same form as dividends actually paid on the Company’s common stock. Shares of Series A
Preferred generally have no voting rights, except as required by law.
LP Purchase Agreement
On March 24, 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 has 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. The Company
may sell up to 20,000 shares of its common stock to Lincoln Park in a regular purchase on any single business day that the closing price of its stock is not
below $1.50. The minimum purchase amount per day must be equal to or greater than $150,000 to the extent the Company chooses to sell shares to Lincoln
Park. This amount may be increased to up to 23,333 shares if the closing price of the Company’s common stock is not below $7.50 and to up to 26,666
shares if the closing price of the Company’s common stock is not below $11.25. In each case, the maximum amount of any single business day’s Purchase
Shares may be increased up to 166,666 shares. The Company may direct Lincoln Park to purchase shares as often as every business day subject to the
limitations outlined above. For each sale of common stock during the period of the agreement, the purchase price of the Purchase Shares will be established
by a formula based on the recent closing prices of the Company’s common stock leading up to the date of sale. In addition to the regular purchases, the
Company may also direct Lincoln Park to purchase other amounts as accelerated purchases or as additional accelerated purchases if the closing sales price
of the Company’s common stock exceeds certain threshold prices as set forth in the LP Purchase Agreement.
Under applicable rules of The Nasdaq Capital Market, in no event may the Company issue or sell to Lincoln Park under the LP Purchase Agreement shares
of its common stock in excess of 19.99% of the shares of the Company’s common stock outstanding immediately prior to execution of the LP Purchase
Agreement (the “Exchange Cap”), unless (i) the Company obtains stockholder approval to issue shares of its common stock in excess of the Exchange Cap
or (ii) the average price of all applicable sales of its common stock to Lincoln Park under the LP Purchase Agreement equals or exceeds $5.2155, such that
issuances and sales of the common stock to Lincoln Park under the purchase agreement would be exempt from the issuance limitation under applicable
Nasdaq rules. The Company determined that the right to sell additional shares represents a freestanding put option under derivative accounting guidance,
but has a fair value of zero, and therefore no additional accounting was required.
F-29
Lincoln Park has no right to require the Company to sell any shares of its common stock to Lincoln Park, but Lincoln Park is obligated to make purchases
as directed by the Company, subject to the limitations outlined above. In all instances, the Company may not sell shares of its common stock to Lincoln
Park under the LP Purchase Agreement if doing so would result in Lincoln Park beneficially owning more than 9.99% of the Company’s common stock.
The Company issued Lincoln Park an aggregate of 41,026 shares of its common stock as consideration for their purchase commitment pursuant to the LP
Purchase Agreement. The Company did not receive cash proceeds from the issuance of such shares. The value of this commitment consideration, as well as
related transaction costs of approximately $0.1 million was included in selling, general and administrative expense in the accompanying consolidated
statements of operations during the year ended December 31, 2020.
During the year ended December 31, 2021, the Company sold 154,372 shares of common stock under the LP Purchase Agreement at a weighted average
price of $5.83 per share for total gross proceeds of $0.9 million compared to 197,632 shares of common stock at a weighted average price of $4.94 per
share for total gross proceeds of $1.0 million during the year ended December 31, 2020.
Pursuant to the March 2022 Purchase Agreement (see Note 17), the Company may not sell any shares of its common stock under the LP Purchase
Agreement for the remainder of the 36-month term of the LP Purchase Agreement.
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.
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
The Company initially established the 2001 Stock Option Plan (the “2001 Plan”), which included incentive and nonqualified stock options and restricted
stock to be granted to directors, officers, employees, consultants and others. The 2001 Plan terminated, and no further awards were granted under the 2001
Plan upon the effective date of the Company’s 2011 Equity Incentive Plan (the “2011 Plan”). In May 2015, the 2011 Plan terminated, and no further awards
were granted under the 2011 plan upon the effective date of the Company’s 2014 Equity Incentive Plan (the “2014 Plan”).
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 2014 Plan. Upon approval of the 2020 Plan, 744,685 shares, including 68,552 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 2014 Plan.
There were 558,865 shares of the Company’s common stock available for issuance under the 2020 Plan as of December 31, 2021 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), the 2011 Plan or the 2001 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.
F-30
In July 2021, the Company’s Board of Directors adopted the Company’s 2021 Inducement Plan (the “2021 Inducement Plan”), pursuant to which 300,000
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 160,000 shares of the Company’s stock available for issuance under the 2021 Inducement Plan as of December 31, 2021, 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 2020 Plan. 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 or on the employee’s hire date for new hire grants. 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:
Selling, general and administrative
Research and development
Cost of product and product-related services revenue
Years Ended December 31,
2021
2020
$
$
1,154,000
141,281
22,074
1,317,355
$
$
1,461,190
106,267
17,328
1,584,785
The following table summarizes stock option activity during the two-year period ended December 31, 2021:
Weighted-
Average
Exercise Price
Per Share
Weighted-
Average
Remaining
Contractual
Life (Years)
Number of
Shares
Balance at January 1, 2020
Granted
Exercised
Forfeited
Expired/Cancelled
Balance at December 31, 2020
Granted
Exercised
Forfeited
Expired/Cancelled
Balance at December 31, 2021
Exercisable at December 31, 2020
Exercisable at December 31, 2021
193,660 $
387,178
-
(67,369)
(26,242)
487,227 $
153,833
(75)
(52,874)
(28,775)
559,336 $
187,031 $
298,987 $
35.55
7.81
-
12.99
32.04
16.78
5.45
4.35
11.98
20.39
13.93
27.07
20.14
F-31
Aggregate
Intrinsic Value
781
8.0 $
$
-
8.6 $
1,536
$
107
8.2 $
7.5 $
7.4 $
30,267
305
6,269
The weighted-average fair value of stock options granted was $4.38 and $6.40 for the years ended December 31, 2021 and 2020, respectively. The 2020
stock option activity includes no Inducement Awards granted during the year ended December 31, 2020 compared with 110,000 Inducement Awards
granted during the year ended December 31, 2021. As of December 31, 2021, total unrecognized compensation cost related to non-vested stock options was
approximately $1.3 million, which is expected to be recognized over approximately 2.52 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
Expected dividend yield
2021
$4.07 - 6.25
0.85% - 1.20%
104.2% - 107.3%
5.2 to 6.1 years
0%
2020
$4.35 - 11.25
0.34% - 1.65%
109.1% - 149.9%
5.4 to 5.9 years
0%
•
•
•
•
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, 2021 and 2020.
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 during the two-year period ended December 31, 2021:
Balance at January 1, 2020
Granted
Released
Forfeited
Balance at December 31, 2020
Granted
Released
Forfeited
Balance at December 31, 2021
Vested and unissued at December 31, 2021
Number of
Shares
Weighted-
Average
Grant Date
Fair Value
Per Share
14,916 $
7,000
(7,911)
(1,791)
12,214 $
30,000
(4,529)
(6,508)
31,177 $
4,148 $
43.65
7.83
35.85
41.23
28.61
5.20
29.13
24.18
6.93
9.60
The weighted-average fair value of RSUs granted was $5.20 and $7.83 for the years ended December 31, 2021 and 2020, respectively. The 2020 RSU
award activity includes no Inducement Awards granted during the year ended December 31, 2020 compared with 30,000 Inducement Awards granted
during the year ended December 31, 2021. As of December 31, 2021, total unrecognized compensation cost related to non-vested RSUs was approximately
$0.2 million, which is expected to be recognized over approximately 1.47 years.
F-32
Vested and unissued awards at December 31, 2021 represents RSU awards granted in August 2018 and November 2021 for which a portion of the awards
vested on December 31, 2021, but for which issuance of shares occurred in January 2022.
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) 13,000 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, 500,000 shares of the Company’s common stock
were reserved for issuance under the Amended 2014 ESPP in addition to 24,285 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:
Selling, general and administrative
Research and development
Cost of product and product-related services revenue
Years Ended December 31,
2021
2020
$
$
34,219
11,643
11,807
57,669
$
$
12,106
5,248
3,832
21,186
During the year ended December 31, 2021, employees purchased the following shares at the end of each of the six-month purchase periods:
Total number of shares purchased
June 2021
December 2021
Number of
Shares
Price
per Share
Number of
Shares
Price
per Share
13,637 $
3.92
20,326 $
3.56
During the year ended December 31, 2020, 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:
ESPP Group:
Group A
Group B
Total number of shares purchased
June 2020
December 2020
Number of
Shares
Price
per Share
Number of
Shares
Price
per Share
3,033 $
-
3,033
8.29
N/A
2,857 $
396
3,253
4.87
4.87
As of December 31, 2021, approximately 503,959 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.
F-33
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
Expected dividend yield
2021
$4.67 - 5.85
0.04% - 0.08%
71.9% - 89.2%
0.5 years
0%
2020
$8.70 - 9.75
0.18% - 1.58%
65.8% - 88.9%
0.5 years
0%
•
•
•
•
•
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, 2021 and 2020.
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.
Stock Purchase Plan
In December 2015, the Board of Directors adopted a Stock Purchase Plan (the “Purchase Plan”) which allows directors, any individual deemed by the
Board of Directors to be an officer for purposes of Section 16 of the Exchange Act, and anyone designated by the Board of Directors as eligible to
participate in the Purchase Plan to purchase shares of the Company’s common stock from the Company at fair market value. The aggregate number of
shares of common stock that may be issued under the Purchase Plan shall not exceed 16,666 shares of common stock, and a maximum of 500 shares of
common stock may be purchased by any one participant on any one purchase date. The Board of Directors or an authorized committee must review and
approve each individual request to purchase common stock under the Purchase Plan. No stock was sold under the Purchase Plan during the years ended
December 31, 2021 and 2020. As of December 31, 2021, there were 11,658 shares available for issuance under the Purchase Plan.
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.
F-34
Product Warranty
The following is a summary of the Company’s general product warranty liability. Product warranty liabilities of approximately $97,000 and $23,000 were
included in accrued liabilities and other non-current liabilities, respectively, in the accompanying consolidated balance sheets as of December 31, 2021.
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.
Beginning balance
Cost of warranty claims
Increase in warranty reserve
Ending balance
Defined Contribution Plan
Years Ended December 31,
2021
2020
$
$
92,696
(166,641)
194,330
120,385
$
$
94,482
(32,866)
31,080
92,696
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 (the “IRC”). 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 not done so during the years ended December 31, 2021 and 2020.
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 $3.2 million and $3.0 million of uncertain tax positions as of December 31, 2021 and 2020, 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, 2021 or 2020, and has not recognized interest or penalties during the years ended December 31, 2021 and 2020, 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.
F-35
The following table summarizes loss before income taxes:
U.S. pre-tax loss
Foreign pre-tax gain (loss)
Loss before income taxes
The components of income tax expense are as follows:
Current:
Federal
State
Foreign
Total current income tax expense
Deferred:
Federal
State
Foreign
Total deferred income tax expense
Total income tax expense
Years Ended December 31,
2021
(17,156,070)
33,375
(17,122,695)
$
$
2020
(20,855,184)
(619)
(20,855,803)
Years Ended December 31,
2021
2020
—
13,769
8,706
22,475
$
$
$
—
—
—
— $
22,475 $
—
10,860
3,555
14,415
—
—
—
—
14,415
$
$
$
$
$
$
$
The Company’s actual income tax expense for the years ended December 31, 2021 and 2020 differ from the expected amount computed by applying the
statutory federal income tax rate to loss before income taxes as follows:
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
Years Ended December 31,
2021
2020
$
$
(3,586,925)
(1,177,951)
240,177
(2,171)
53,340
(360,570)
9,048
(265,362)
(212,408)
(6,395)
5,331,692
22,475
$
$
(4,379,719)
(832,055)
310,811
3,685
26,120
—
31,850
(218,991)
(197,836)
(5,694)
5,276,244
14,415
F-36
Deferred tax assets and liabilities comprise the following:
Deferred tax assets:
Net operating loss carryforwards
Research and development credits
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
Other
Total deferred tax liabilities
Net deferred tax assets (liabilities)
Years Ended December 31,
2021
2020
$
$
$
47,752,053
3,940,199
42,802
6,806
304,019
1,196,563
366,653
711,343
54,320,438
(53,958,617)
361,821
361,821
—
361,821
-
$
43,308,483
3,475,341
50,429
6,653
313,117
1,274,896
269,147
211,574
48,909,640
(48,626,925)
282,715
257,705
25,010
282,715
-
As of December 31, 2021, the Company has estimated federal and state net operating loss (“NOL”) carryforwards of approximately $194.0 million and
$125.6 million for federal and state income tax purposes, respectively. $121.8 million of the federal NOLs are scheduled to expire from 2023 through 2037,
while the remaining NOLs do not expire. $124.6 million of the state NOLs are scheduled to expire from 2024 through 2041, while the remaining NOLs do
not expire. The Company’s federal and state tax credit carryforwards begin expiring in 2022.
For financial reporting purposes, valuation allowances of $54.0 million and $48.6 million at December 31, 2021 and 2020, 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 $5.3
million for the year ended December 31, 2021 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:
Balance at beginning of year
Increases to prior positions
Decreases to prior positions
Increases for current year positions
Balance at end of year
Years Ended December 31,
2021
2020
$
$
$
2,960,842
—
(6,395)
238,884
3,193,331 $
2,731,015
—
(5,694)
235,521
2,960,842
F-37
As of December 31, 2021, the Company had $3.2 million of gross unrecognized tax benefits, related to research and experimental tax credits. The
Company had no unrecognized tax benefits as of December 31, 2021, 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.
The CARES Act contained certain income tax relief provisions, including a modification to the limitation of business interest expense for tax years
beginning in 2019 and 2020. In addition, the CARES Act permitted NOL carryovers and carrybacks to offset 100% of taxable income for taxable years
beginning before 2021, and allowed NOLs incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a
refund of previously paid income taxes. The Company did not experience any material impacts to its tax status or reporting as a result of these provisions.
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, 2021, the earliest year subject to examination is 2018 for U.S. federal tax purposes. The earliest year subject to
examination is 2017 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, 2002 and thereafter remain subject to examination by the United States and certain states.
Note 17. Subsequent Events
On March 21, 2022, pursuant to a Securities Purchase Agreement (the “March 2022 Purchase Agreement”) with a single investor the Company issued and
sold to the investor 3,244,987 units at a price of $2.312 per unit (less $0.001 for each pre-funded warrant purchased in lieu of a share of common stock) for
gross proceeds to the Company, before deducting the placement agent fees and other estimated fees and expenses, of approximately $7.5 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 the Company’s common
stock with a term of 24 months from the issuance date, and a common warrant to purchase one share of the Company’s common stock with a term of 66
months from the issuance date. Each of the common warrants is exercisable six months following the closing date, and has an exercise price of $2.062 per
share. Each pre-funded warrant has an exercise price of $0.001 per share and does not expire until exercised in full.
The securities sold under the March 2022 Purchase Agreement have not been registered under the Securities Act or any state securities laws. The Company
has agreed to file a resale registration statement with the SEC for purposes of registering the resale of the shares of common stock issued and issuable
pursuant to the March 2022 Purchase Agreement within 10 days following the filing of this Annual Report on Form 10-K.
F-38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current
reports that we file with the SEC is recorded, processed, summarized and reported with the time periods specified in the SEC’s rules and forms, and that
such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of
assurance, management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the
design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in
conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
As of December 31, 2021, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based on that evaluation, our Chief Executive Officer and our
Chief Financial Officer have concluded that, as of December 31, 2021, our disclosure controls and procedures were effective at the reasonable assurance
level.
Management’s Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Exchange Act Rules 13a-15(f). Internal control over financial reporting is a process designed under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the
United States of America. The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations,
including the exercise of judgment in designing, implementing, operating and evaluating the controls and procedures, and the inability to eliminate
misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can
only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and
presentation.
We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on our evaluation of
the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective at the
reasonable assurance level as of December 31, 2021.
Changes in Internal Control Over Financial Reporting
An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of any change in our internal control over financial reporting that occurred during our last fiscal quarter and that has materially affected,
or is reasonably likely to materially affect, our internal control over financial reporting. That evaluation did not identify any change in our internal control
over financial reporting that occurred during the quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
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Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections.
Not applicable.
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Item 10. Directors, Executive Officers and Corporate Governance.
Executive Officers and Directors
The following table sets forth certain information regarding our current executive officers and directors:
PART III
Name
Executive Officers
John L. Lubniewski
Shaun D. McMeans
Byron T. Lawson
Non-Employee Directors
Ann F. Hanham, Ph.D. (3)
Harry A. George (1)
Michelle R. Griffin (1)(2)
Donnie M. Hardison (2)
Christopher P. Kiritsy (1)(4)
James T. LaFrance (1)(3)
Lee R. McCracken (2)(3)
Age
Position(s)
58 President, Chief Executive Officer and Director
60 Senior Vice President, Chief Financial Officer, Treasurer and Secretary
47 Senior Vice President, Chief Commercial Officer
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Chair of Board of Directors
73 Director
56 Director
71 Director
57 Director
63 Director
64 Director
(1) Member of the audit committee.
(2) Member of the compensation committee.
(3) Member of the nominating and governance committee.
(4)
Appointed to the Board of Directors in January 2022.
Executive Officers
John L. Lubniewski. Mr. Lubniewski has served as our President and Chief Executive Officer and as a member of our Board of Directors since April
2019 and before that served as our President and Chief Operating Officer since April 2018. Prior to this, he served as our Senior Vice President and Chief
Business Officer since April 2011. Mr. Lubniewski joined us from Ventana Medical Systems, Inc. (“Ventana”), a medical diagnostics company and member
of the Roche Group, and the global headquarters of Roche Tissue Diagnostics (“RTD”) where he served in leadership roles for nine years both before and
after the acquisition of Ventana by Roche Holdings, Inc. (“Roche”) in March 2008. From August 2010 to April 2011, Mr. Lubniewski was Senior Vice
President and Lifecycle Leader, Advanced Staining Platforms at Ventana. From January 2008 to August 2010, Mr. Lubniewski served as Senior Vice
President and Lifecycle Leader, Clinical Assays at RTD, with responsibility for three lifecycle teams, technical marketing and medical marketing and
global accountability for all RTD clinical assay products. Prior to the Roche acquisition of Ventana, Mr. Lubniewski served at Ventana as Senior Vice
President, Advanced Staining Business Unit, Vice President Worldwide Marketing and Translational Diagnostic Business Unit, and General Manager,
Research Products. In these roles, Mr. Lubniewski was responsible for a variety of assay and platform development and commercialization efforts. Prior to
Ventana, Mr. Lubniewski worked for over ten years in a variety of divisional, sector and corporate leadership roles at Corning, Incorporated, a
multinational technology company that specializes in specialty glass, ceramics and related materials and technologies including advanced optics, primarily
for industrial and scientific applications. Mr. Lubniewski earned a Bachelor of Science degree in Chemical Engineering from Clarkson University. Our
Board of Directors believes that Mr. Lubniewski’s extensive executive management experience in commercialization, marketing, strategic planning and
management of operations, as well as his service as our Chief Executive Officer, qualify him to serve on our Board of Directors.
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Shaun D. McMeans. Mr. McMeans has served as our Senior Vice President and Chief Financial Officer since February 2018 and as our Vice
President and Chief Financial Officer since February 2012. Prior to joining us, Mr. McMeans was Vice President – Finance of Securaplane Technologies,
Inc., a product supply company and division of Meggitt PLC, an aerospace, defense and energy conglomerate, from May 2011 to February 2012. Mr.
McMeans was a financial consultant from February 2008 to April 2011, working both in an individual capacity and as a partner for Tatum LLC, a
consulting company. Prior to February 2008, Mr. McMeans was Chief Financial Officer for The Long Companies, a full service residential and commercial
real estate division of Berkshire Hathaway, Inc. Mr. McMeans also worked for over five years at LXU Healthcare, Inc., a manufacturer and distributor of
specialty surgical equipment, as Controller and then Chief Financial and Operating Officer. In his early career, Mr. McMeans worked in roles of increasing
responsibility, including Director of Finance, for Burnham Holdings, Inc., formerly Burnham Corporation, a manufacturer and distributor of residential and
commercial hydronic heating equipment. Mr. McMeans received his Bachelor of Science degree in Accounting from The Pennsylvania State University.
Byron T. Lawson. Mr. Lawson has served as our Senior Vice President and Chief Commercial Officer since January 2020 and previously served as
our Senior Vice President, Pharma Business Unit since January 2018. Prior to this, he served as our Vice President, Commercial Operations since April
2016 and Senior Director, Commercial Options since October 2012. Mr. Lawson joined us from Ventana, where he worked for nearly 15 years and served
in a variety of roles with increasing responsibility in the North American commercial organization. He also served in the United States Air Force for
nearly 10 years between Active and Reserve Duty as a certified Histology Technician.
Non-Employee Directors
Ann F. Hanham Ph.D. Dr. Hanham has served on our Board of Directors since August 2016 and has served as chair of our Board of Directors since
January 2021. Prior to this, Dr. Hanham served as Lead Independent Director from April 2019 to December 2020 and as chair of our Board of Directors
from March 2017 to March 2019. Since March 2017, Dr. Hanham has provided independent management consulting as a sole proprietor. Previously, she
was the founding and managing partner of BAR Capital LLC, an investment company, a position she has held from December 2013 to March 2017. From
February 2000 to November 2013, Dr. Hanham was the Managing Director and General Partner of Burrill and Company, a life science investment
company. Prior to that, Dr. Hanham held positions of increasing responsibility in product development, medical affairs, and clinical and regulatory affairs at
various companies, including InterMune Inc., Otsuka America Pharmaceuticals, Inc. (“Otsuka”), Celtrix Pharmaceuticals, Inc. (“Celtrix”), and Becton
Dickinson and Company (“BD”). InterMune, Inc., Otsuka and Celtrix are, or prior to respective acquisitions, were clinical-stage biopharmaceutical
companies, and BD is a life sciences discovery and diagnostics company. Dr. Hanham also currently serves on the board of directors of SCYNEXIS
(Nasdaq: SCYX). Dr. Hanham received her Bachelor of Science degree from the University of Toronto, Canada; her M.Sc. degree, in biology, from Simon
Fraser University, Canada; and her Ph.D. degree, in biology, from the University of British Columbia, Canada. Our Board of Directors believes that Dr.
Hanham’s extensive industry and executive experience, and her experience serving on the board of directors of other public companies qualifies her to
serve on our Board of Directors.
Harry A. George. Mr. George has served on our board of directors since 2002 and served as the chair of our board of directors from December 2007
until September 2013. Mr. George co-founded Solstice Capital, a venture capital firm, in 1995 and serves as its Managing General Partner. Mr. George
served as President and CFO of Radiance Therapeutics from June 2018 to September 2020. He has also served as a member of the board of directors of a
number of other private and public companies and is currently serving on the boards of directors of Radiance Therapeutics, Medipacs, Inc., Post.Bid.Ship,
Inc., AdiCyte, Inc., RxActuator, Inc. and Splash Pharmaceuticals, Inc. Mr. George is also a member of the boards of directors of several non-profit
organizations, including Southern Arizona Leadership Council, Desert Angels and Start-up Tucson, a member of the Board of Visitors of the McGuire
Center for Entrepreneurship, and an advisor to Tech Launch Arizona. Prior to 1995, Mr. George was co-founder, Director, and Vice-President of Finance
for Interleaf Inc., a software products company. Prior to his time at Interleaf, Mr. George was co-founder, Director and Vice President of Finance of
Kurzweil Computer Products, Inc., a computer products company, which subsequently was purchased by Xerox Imaging Systems. Mr. George received his
Bachelor of Arts degree from Bowdoin College and, in 2012, received an Honorary Doctorate of Science from the University of Arizona. Also in 2012, the
Arizona BioIndustry Association conferred upon Mr. George the John McGarrity Bioscience Leader of the Year Award. Mr. George’s detailed knowledge
of our company and long tenure with us, together with his more than 40 years of experience serving as founder, operating officer, or investor with
successful rapid growth technology-related companies qualify him to serve on our board of directors.
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Michelle R. Griffin. Ms. Griffin has served on our Board of Directors since August 2018. Ms. Griffin currently serves as a member of the board of
directors and chair of the audit committee for Acer Therapeutics, Inc (Nasdaq: ACER), Adaptive Biotechnologies Corp (Nasdaq: ADPT) and Chinook
Therapeutics, Inc. (Nasdaq KDNY). She has also served on the board of directors and as audit committee chair for PhaseRx, Inc. (Nasdaq:PZRX) from
2016 to 2018, OncoGenex Pharmaceuticals Inc. (Nasdaq: OGXI) from 2008 to 2011, and Sonus Pharmaceuticals, Inc. (Nasdaq: SNUS) from 2004 to 2008.
Ms. Griffin served as executive vice president, operations, and chief financial officer at OncoGenex from 2011 to 2013; served as acting chief executive,
senior vice president and chief operating officer at Trubion Pharmaceuticals, Inc. (Nasdaq: TRBN) from 2009 until its acquisition in 2010 and as its chief
financial officer from 2006 to 2009; and served as senior vice president and chief financial officer of Dendreon Corp. (Nasdaq: DNRN) from 2005 to 2006.
Ms. Griffin began her career in the biopharmaceuticals industry in 1994 at Corixa Corp. (Nasdaq: CRXA) and served as its chief financial officer from its
IPO in 1997 until 2005 when Corixa was acquired by GlaxoSmithKline plc. She received a post‐graduate certificate in accounting and an MBA from
Seattle University, a Bachelor of Science degree in statistics and marketing from George Mason University and has passed the certified public accountant
exam. Our Board of Directors believes that Ms. Griffin’s financial and accounting expertise and extensive executive experience qualifies her to serve on
our Board of Directors.
Donnie M. Hardison. Mr. Hardison has served on our Board of Directors since May 2016. Since February 2021, he has been working as an
independent healthcare consultant. He was most recently the President and Chief Executive Officer, and served on the board of directors, of
Biotheranostics, Inc., a molecular diagnostic company focused on oncology, from February 2017 until it was acquired by Hologic, Inc. in February 2021.
From April 2010 to March 2016, Mr. Hardison was the President and Chief Executive Officer of Good Start Genetics, a molecular genetic testing and
information company. For more than 20 years prior to that, Mr. Hardison held various executive and senior management positions at companies including
Laboratory Corporation of America (“LabCorp”) a clinical laboratory company, Exact Sciences Corporation, a molecular diagnostics company, OnTarget,
Inc., a sales and marketing consulting company, Quest Diagnostics Inc., a clinical laboratory company, SmithKline Beecham Corporation, a pharmaceutical
company, and others. He currently serves as an independent director or advisor of several private companies, including Stemina Biomarker Discovery, Inc.,
Seventh Sense Biosystems, BioPorto, Inc. and IQuity, Inc. He also served on the board of directors of Exact Sciences Corporation (Nasdaq: EXAS) from
May 2000, through its initial public offering in February 2001, until August 2007. Mr. Hardison received his Bachelor of Arts degree, in political science,
from the University of North Carolina, Chapel Hill. Our Board of Directors believes that Mr. Hardison’s broad private and public company background, his
extensive executive and industry experience, his experience with newly emerging and well-established companies, and his extensive commercial and
operational experience qualify him to serve on our Board of Directors.
Christopher P. Kiritsy. Mr. Kiritsy has served on our Board of Directors since January 2022. Mr. Kiritsy currently serves as audit and compensation
committee chairs and on the board of directors of Pieris Pharmaceuticals, Inc. (Nasdaq: PIRS). Since 2018, Mr. Kiritsy has been the managing member of
Precision Kapital, LLC, a private investment and advisory firm that he founded. Prior to forming Precision Kapital, Mr. Kiritsy co-founded Arisaph
Pharmaceuticals, Inc. (“Arisaph”) and served as Arisaph’s President and Chief Executive Officer until its exit in 2018. At Arisaph, Mr. Kiritsy evolved the
drug discovery organization from an academic orientation to a clinical development enterprise, taking several cardiometabolic products into clinical
development. Prior to Arisaph, Mr. Kiritsy served as Executive Vice President, Corporate Development and Chief Financial Officer of Kos
Pharmaceuticals, Inc. (Nasdaq: KOSP). Mr. Kiritsy is a seasoned entrepreneur, who possesses more than 25 years of business and technical experience in
the biopharmaceutical industry. He received his Bachelor of Arts degree in Biology from Bowdoin College and an MBA from Boston University. Our
Board of Directors believes that Mr. Kiritsy’s extensive industry and executive experience, and his experience serving on the board of directors of another
public company qualify him to serve on our Board of Directors.
James (Jim) T. LaFrance. Mr. LaFrance has served on our board of directors since December 2015. Mr. LaFrance has over thirty-five years of
diagnostic industry experience working since January 2015 as a sales, marketing, strategy development and commercial operational management
consultant for LaFrance Consulting LLC, a firm he founded. He current serves on two additional boards, Aspira Women's health (Nasdaq: AWH); formerly
Vermillion, Inc. (Nasdaq: VRMC) as chairman, and as an independent director of privately held Personal Genome Diagnostics in Baltimore, Maryland. He
served as interim Chief Executive Officer of Vermillion, Inc. in 2014 and as Chief Executive Officer of Omnyx, LLC for GE Healthcare from 2012 to
2013. Mr. LaFrance held a series of Senior Management roles at Ventana Medical Systems (now Roche Tissue Diagnostics), or Ventana, including general
management of the North American and international commercial operations. Prior to working for Ventana, Mr. LaFrance served in leadership roles in
strategic marketing and business development at Bayer Diagnostics. He earned a Bachelor of Arts degree in Economics from the University of Connecticut
and holds an MBA from the University of Notre Dame. Our Board of Directors believes that Mr. LaFrance’s extensive industry and executive experience,
and his experience serving on the board of directors of another public company qualify him to serve on our Board of Directors.
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Lee R. McCracken. Mr. McCracken has served on our board of directors since October 2015. Since May 2021, Mr. McCracken currently serves
as Entrepreneur in Residence at Thorne HealthTech, a leader in the development of innovative solutions for personalized approaches to health and
wellbeing, and Chair of the Drawbridge Health, Inc. board of directors, a company focused on enabling personal diagnostic testing. From June 2017 to
April 2021, Mr. McCracken was the Chief Executive Officer of Drawbridge Health, Inc. From May 2016 to May 2017 and from April 2013 to March 2014,
Mr. McCracken was a strategic and restructuring consultant in the regenerative medicine and diagnostics industries through his firm, McCracken
Consulting. In addition, he served as Chief Executive Officer of Gensignia Life Sciences, Inc., a molecular diagnostics company, from April 2014 through
May 2016.
Mr. McCracken previously held executive positions or roles with significant responsibility at several biotechnology and therapeutics companies, including
Pathwork Diagnostics, Inc., Prometheus Laboratories Inc., GenStar Therapeutics Corporation, CombiChem Inc., and Allergan Inc., as well as at the
investment companies, 3i Capital and Union Venture. Mr. McCracken received his MBA from the Anderson School of Management at the University of
California, Los Angeles, his Master of Computer Science (MCS) from the University of Dayton, and his Bachelor of Science degree in Commerce from
Santa Clara University. Our Board of Directors believes Mr. McCracken’s extensive executive and industry experience and his broad knowledge of
molecular diagnostics qualify him to serve on our Board of Directors.
Board Composition
Our business and affairs are organized under the direction of our board of directors, which currently consists of seven members. The primary
responsibilities of our Board of Directors are to provide oversight, strategic guidance, counseling and direction to our management. Our Board of Directors
meets on a regular basis and additionally as required.
Our Board of Directors has determined that all of our directors other than Mr. Lubniewski are independent directors, as defined by Rule 5605(a)(2)
of the Nasdaq Listing Rules. The Nasdaq independence definition includes a series of objective tests, including that the director is not, and has not been for
at least three years, one of our employees and that neither the director nor any of his family members has engaged in various types of business dealings
with us. In addition, as required by Nasdaq rules, our Board of Directors has made a subjective determination as to each independent director that no
relationships exist, which, in the opinion of our Board of Directors, would interfere with the exercise of independent judgment in carrying out the
responsibilities of a director. In making these determinations, our Board of Directors reviewed and discussed information provided by the directors and us
regarding each director’s business and personal activities and relationships as they may relate to us and our management. There are no family relationships
among any of our directors or executive officers.
In accordance with the terms of our amended and restated certificate of incorporation, our Board of Directors is divided into three classes, as
follows:
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Class I, which consists of Mr. McCracken and Mr. LaFrance, whose terms will expire at our annual meeting of stockholders to be held in
2022.
Class II, which consists of Mr. Lubniewski, Mr. George and Mr. Hardison, whose terms will expire at our annual meeting of stockholders to
be held in 2023; and
Class III, which consists of Dr. Hanham and Ms. Griffin, whose terms will expire at our annual meeting of stockholders to be held in 2024.
At each annual meeting of stockholders, the successors to directors whose terms then expire will serve until the third annual meeting following their
election and until their successors are duly elected and qualified. The authorized number of directors may be changed only by resolution of our Board of
Directors. Any additional directorships resulting from an increase in the number of directors will be distributed between the three classes so that, as nearly
as possible, each class will consist of one-third of the directors. This classification of the board of directors may have the effect of delaying or preventing
changes in our control or management. Our directors may be removed for cause by the affirmative vote of the holders of at least 66 2/3% of our voting
stock.
Board Leadership Structure
As a general policy, our Board of Directors believes that separation of the positions of Chair and Chief Executive Officer reinforces the
independence of the Board from management, creates an environment that encourages objective oversight of management’s performance and enhances the
effectiveness of the Board as a whole.
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Dr. Hanham serves as Chair of our Board of Directors and Mr. Lubniewski serves as our Chief Executive Officer. Dr. Hanham presides over Board
of Directors meetings, sets meeting agendas, ensures the duties, responsibilities and roles of members of our Board of Directors are clearly understood,
ensures that our Board of Directors receives appropriate and timely information, material and reports from management regarding our business, provides
input to the Board regarding candidates for nomination or appointment to the Board and Board committees, and performs such additional duties as set forth
in our bylaws and as our Board of Directors may otherwise determine and delegate.
We also have a separate chair for each committee of our Board of Directors. The chair of each committee is expected to report at least annually to
our Board of Directors on the activities of their respective committee in fulfilling their responsibilities as detailed in their respective charters or specify any
shortcomings should that be the case.
Role of the Board in Risk Oversight
One of the key functions of our Board of Directors is informed oversight of our risk management process. The Board does not have a standing risk
management committee, but rather administers this oversight function directly through the Board of Directors as a whole, as well as through various
standing Board committees that address risks inherent in their respective areas of oversight. The risk oversight process includes receiving regular reports
from Board committees and members of senior management to enable our Board of Directors to understand our risk identification, risk management and
risk mitigation strategies with respect to areas of potential material risk, including operations, finance, legal, regulatory, strategic and reputational risk. In
particular, our Board of Directors is responsible for monitoring and assessing strategic risk exposure and our Audit Committee has the responsibility to
consider and discuss our major financial risk exposures and the steps our management has taken to monitor and control these exposures, including
guidelines and policies to govern the process by which risk assessment and management is undertaken. The Audit Committee also monitors compliance
with legal and regulatory requirements. Oversight by the Audit Committee includes direct communication with our external auditors. Our Nominating and
Governance Committee monitors the effectiveness of our corporate governance practices, including whether they are successful in preventing illegal or
improper liability-creating conduct. Our Compensation Committee assesses and monitors whether any of our compensation policies and programs has the
potential to encourage excessive risk-taking.
Board Committees
Our Board of Directors has established an audit committee, a compensation committee and a nominating and governance committee.
Audit Committee
Our Audit Committee consists of Ms. Griffin, Mr. George, Mr. LaFrance and Mr. Kiritsy. Ms. Griffin serves as the chair of our Audit Committee.
Our Board of Directors has determined that each of the members of our Audit Committee satisfies the Nasdaq Stock Market and SEC independence
requirements. The functions of this committee include, among other things:
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evaluating the performance, independence and qualifications of our independent auditors and determining whether to retain our existing
independent auditors or engage new independent auditors;
reviewing and approving the engagement of our independent auditors to perform audit services and any permissible non-audit services;
monitoring the rotation of partners of our independent auditors on our engagement team as required by law;
prior to engagement of any independent auditor, and at least annually thereafter, reviewing relationships that may reasonably be thought to
bear on their independence, and assessing and otherwise taking the appropriate action to oversee the independence of our independent
auditor;
reviewing our annual and quarterly financial statements and reports, including the disclosures contained under the caption “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” and discussing the statements and reports with our independent
auditors and management;
reviewing with our independent auditors and management significant issues that arise regarding accounting principles and financial statement
presentation and matters concerning the scope, adequacy and effectiveness of our financial controls;
reviewing with management and our auditors any earnings announcements and other public announcements regarding material developments;
establishing procedures for the receipt, retention and treatment of complaints received by us regarding financial and cybersecurity-related
controls, accounting or auditing matters and other matters;
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preparing the report that the SEC requires in our annual proxy statement;
reviewing and providing oversight of any related-person transactions in accordance with our related-person transaction policy and reviewing
and monitoring compliance with legal and regulatory responsibilities, including our code of business conduct and ethics;
reviewing our major financial and cybersecurity risk exposures, including the guidelines and policies to govern the process by which risk
assessment and risk management is implemented;
reviewing on a periodic basis our investment policy; and
reviewing and evaluating on an annual basis the performance of the Audit Committee, including compliance of the Audit Committee with its
charter.
Our Board of Directors has determined that each member of the audit committee meets the requirements for financial literacy under the applicable
rules and regulations of the SEC and the Nasdaq Stock Market. It has also determined that Ms. Griffin qualifies as an audit committee financial expert
within the meaning of SEC regulations and meets the financial sophistication requirements of the Nasdaq Listing Rules. In making this determination, our
Board of Directors has considered Ms. Griffin’s formal education and experience in financial and executive roles. Both our independent registered public
accounting firm and management periodically meet privately with our Audit Committee. The audit committee operates under a written charter that satisfies
the applicable standards of the SEC and the Nasdaq Stock Market.
Compensation Committee
Our Compensation Committee consists of Ms. Griffin, Mr. Hardison, and Mr. McCracken. Mr. Hardison serves as the chair of our Compensation
Committee. Our Board of Directors has determined that each of the members of our Compensation Committee is a non-employee director, as defined in
Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and satisfies the Nasdaq Stock Market
independence requirements. None of these individuals has ever been an executive officer or employee of ours. The functions of this committee include,
among other things:
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reviewing, modifying and approving (or if it deems appropriate, making recommendations to the full Board of Directors regarding) our
overall compensation strategy and policies;
reviewing and recommending to our Board of Directors the compensation and other terms of employment of our executive officers;
reviewing and recommending to our Board of Directors the performance goals and objectives relevant to the compensation of our executive
officers and assessing their performance against these goals and objectives;
reviewing and approving (or if it deems it appropriate, making recommendations to the full Board of Directors regarding) the equity incentive
plans, compensation plans and similar programs advisable for us, as well as modifying, amending or terminating existing plans and programs;
evaluating risks associated with our compensation policies and practices and assessing whether risks arising from our compensation policies
and practices for our employees are reasonably likely to have a material adverse effect on us;
reviewing and approving (or if it deems it appropriate, making recommendations to the full Board of Directors regarding) the type and
amount of compensation to be paid or awarded to our non-employee board members;
establishing policies for allocating between long-term and currently paid out compensation, between cash and non-cash compensation and the
factors used in deciding between the various forms of compensation;
establishing policies with respect to votes by our stockholders to approve executive compensation as required by Section 14A of the
Exchange Act and determining our recommendations regarding the frequency of advisory votes on executive compensation;
reviewing and assessing the independence of compensation consultants, legal counsel and other advisors as required by Section 10C of the
Exchange Act;
establishing elements of corporate performance for purposes of increasing or decreasing compensation;
administering our equity incentive plans;
establishing policies with respect to equity compensation arrangements;
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reviewing regional and industry-wide compensation practices and trends to assess the competitiveness of our executive compensation
programs and evaluating the effectiveness of our compensation policy and strategy in achieving expected benefits to us;
reviewing the adequacy of its charter on a periodic basis;
reviewing with management and approving our disclosures under the caption “Compensation Discussion and Analysis” in our periodic
reports or proxy statements to be filed with the SEC, if applicable;
preparing the report that the SEC requires in our annual proxy statement, if applicable; and
reviewing and assessing on an annual basis the performance of the Compensation Committee.
The compensation committee operates under a written charter that satisfies the applicable standards of the SEC and the Nasdaq Stock Market.
In 2021, our Compensation Committee retained Radford, an Aon Hewitt company and a provider of compensation market intelligence to the
technology and life sciences industries, to provide a report summarizing relevant benchmark data relating to industry-appropriate peers and make
recommendations regarding base salary, target total cash (base salary plus target cash incentives) and the amounts and terms of long-term equity incentive
awards for our executives as well as to benchmark and make recommendations regarding the initial and annual cash retainer amounts for directors and
chairpersons of our Board of Directors and the various committees and the amounts and terms of initial and annual long-term equity incentive awards for
directors. No work performed by Radford during fiscal year 2021 raised a conflict of interest.
None of our executive officers currently serves, or has served during the last completed fiscal year, on the compensation committee or board of
directors of any other entity that has one or more executive officers serving as a member of our Board of Directors or Compensation Committee.
Nominating and Governance Committee
Our Nominating and Governance Committee consists of Dr. Hanham, Mr. McCracken and Mr. LaFrance. Dr. Hanham serves as the chair of our
Nominating and Governance Committee. Our Board of Directors has determined that each of the members of this committee satisfies the Nasdaq Stock
Market independence requirements. The functions of this committee include, among other things:
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identifying, reviewing and evaluating candidates to serve on our Board of Directors consistent with criteria approved by our Board of
Directors;
determining the minimum qualifications for service on our Board of Directors;
evaluating director performance on the board and applicable committees of the board and determining whether continued service on our
Board is appropriate;
evaluating, nominating and recommending individuals for membership on our Board of Directors;
evaluating nominations by stockholders of candidates for election to our Board of Directors;
considering and assessing the independence of members of our Board of Directors;
developing a set of corporate governance policies and principles, including a code of business conduct and ethics, periodically reviewing and
assessing these policies and principles and their application and recommending to our Board of Directors any changes to such policies and
principles;
assist the chair of our Board of Directors or lead independent director in developing effective board of directors meeting practices and
procedures;
oversee and review the processes and procedures used by us to provide information to our Board of Directors and its committees;
assist the members of our Compensation Committee, as requested, in determining the compensation paid to non-employee directors for their
service on our Board of Directors and its committees and recommend any changes considered appropriate to our full board of directors for
approval;
periodically review with our Chief Executive Officer the plans for succession to the offices of our Chief Executive Officer and other key
executive officers and make recommendations to our Board of Directors with respect to the selection of appropriate individuals to succeed
those positions;
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reviewing the adequacy of its charter on an annual basis; and
annually evaluating the performance of the Nominating and Governance Committee.
The nominating and governance committee operates under a written charter, which the nominating and governance committee reviews and evaluates
at least annually.
The nominating and governance committee will consider qualified director candidates recommended by stockholders in compliance with our
procedures and subject to applicable inquiries. The nominating and governance committee’s evaluation of candidates recommended by stockholders does
not differ materially from its evaluation of candidates recommended from other sources. Any stockholder may recommend nominees for director by writing
to Dr. Ann F. Hanham, Ph.D., Chair of the Nominating and Governance Committee of the Board of Directors, HTG Molecular Diagnostics, Inc., 3430 E.
Global Loop, Tucson, Arizona 85706, giving the name and address of the stockholder on whose behalf the submission is made, the number of Company
shares that are owned beneficially by such stockholder as of the date of the submission, the full name of the proposed candidate, a description of the
proposed candidate’s business experience for at least the previous five years, complete biographical information for the proposed candidate and a
description of the proposed candidate’s qualifications as a director. All of these communications will be reviewed by our Nominating and Governance
Committee, for further review and consideration in accordance with this policy.
Limitation on Liability and Indemnification of Directors and Officers
Our amended and restated certificate of incorporation and bylaws limits our directors’ and officers’ liability to the fullest extent permitted under
Delaware corporate law. Delaware corporate law provides that directors of a corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except for liability:
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for any transaction from which the director derives an improper personal benefit;
for any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;
under Section 174 of the Delaware General Corporation Law (unlawful payment of dividends or redemption of shares); or
for any breach of a director’s duty of loyalty to the corporation or its stockholders.
If the Delaware General Corporation Law is amended to authorize corporate action further eliminating or limiting the personal liability of directors
or officers, then the liability of our directors or officers shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation
Law, as so amended.
Delaware law and our amended and restated bylaws provide that we will, in certain situations, indemnify any person made or threatened to be made
a party to a proceeding by reason of that person’s former or present official capacity with us against judgments, penalties, fines, settlements and reasonable
expenses. Any person is also entitled, subject to certain limitations, to payment or reimbursement of reasonable expenses (including attorneys’ fees and
disbursements) in advance of the final disposition of the proceeding.
In addition, we have entered, and intend to continue to enter, into separate indemnification agreements with our directors and executive officers.
These agreements, among other things, require us to indemnify our directors and executive officers for certain expenses, including attorneys’ fees,
judgments, fines and settlement amounts incurred by a director or executive officer in any action or proceeding arising out of their services as one of our
directors or executive officers or as a director or executive officer of any other company or enterprise to which the person provides services at our request.
We believe that these provisions in our amended and restated certificate of incorporation and amended bylaws and these indemnification agreements
are necessary to attract and retain qualified persons as directors and officers. We also maintain a directors’ and officers’ insurance policy pursuant to which
our directors and officers are insured against liability for actions taken in their capacities as directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or control persons, in the opinion of
the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
81
Stockholder Communications with the Board of Directors
We have adopted a formal process by which stockholders may communicate with the Board or any of its directors. Stockholders who wish to
communicate with the Board may do so by sending written communications addressed to: Attn: Corporate Secretary, 3430 E. Global Loop, Tucson,
Arizona, 85706. These communications will be reviewed by the Secretary, who will determine whether the communication is appropriate for presentation
to the Board or the relevant director. The purpose of this screening is to allow the Board to avoid having to consider irrelevant or inappropriate
communications (such as advertisements, solicitations and hostile communications).
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all officers, directors and employees. The Code of Business Conduct and
Ethics is available on our website at www.htgmolecular.com. If we make any substantive amendments to the Code of Business Conduct and Ethics or
grants any waiver from a provision of the Code to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on
our website.
Item 11. Executive Compensation.
Our named executive officers for the year ended December 31, 2021, which consist of our principal executive officer and our two other most highly
compensated executive officers as of December 31, 2021, are as follows:
•
•
•
John L. Lubniewski, our President and Chief Executive Officer;
Shaun D. McMeans, Senior Vice President and Chief Financial Officer; and
Byron Lawson, Senior Vice President and Chief Commercial Officer.
Summary Compensation Table
Name and principal position
John L. Lubniewski
President and Chief Executive
Officer
Shaun D. McMeans
Senior Vice President and Chief
Financial Officer
Byron T. Lawson
Chief Commercial Officer
Year
2021
2020
2021
2020
2021
2020
Salary
($)
Option
awards
($) (1)
Non-equity
incentive
plan
compensation
($) (2)
All other
compensation
($) (3)
460,000
416,000
370,000
358,000
333,000
303,000
—
276,000
930,747
—
396,744
—
182,093
93,600
139,860
48,330
106,560
45,450
741
741
741
741
741
741
Total
($)
736,741
1,441,088
510,601
803,815
440,301
531,284
(1) We did not grant option awards to our named executive officers in 2021. The dollar amounts in this column represent the aggregate grant date fair
value of stock option awards granted in 2020. These amounts have been computed in accordance with FASB ASC Topic 718, using the Black-
Scholes option pricing model. For a discussion of valuation assumptions, see Note 14 “Stockholders’ Equity” to our consolidated financial
statements included elsewhere in this Annual Report on Form 10-K.
(2)
(3)
Amounts shown represent annual performance-based bonuses earned for 2021 and 2020.
Amount shown represents premiums for life, disability and accidental death and dismemberment insurance paid by us on behalf of the named
executive officer.
Annual Base Salary
The base salary of our named executive officers is generally set forth in each officer’s employment letter agreement with us and periodically
reviewed and adjusted by our Board of Directors, based on the recommendation of our Compensation Committee and following analyses conducted by
independent third-party consultants. In January 2022, the base salaries for Mr. Lubniewski, Mr. McMeans and Mr. Lawson were increased to $538,000,
$385,000 and $345,000, respectively.
82
Annual Performance-Based Bonus Opportunity
In addition to base salaries, our named executive officers are eligible to receive annual performance-based bonuses, which are designed to provide
appropriate incentives to our executives to achieve defined annual corporate goals and to reward our executives for individual achievement towards these
goals. As with annual base salary, the target annual performance-based bonus percentage for each of our named executive officers is determined by our
Board of Directors, based on the recommendation of our Compensation Committee and input from independent third-party consultants. The annual
performance-based bonus each named executive officer is awarded is generally based on the extent to which we achieve the corporate goals that our Board
of Directors establishes each year. At the end of the year, our Board of Directors reviews our performance against each corporate goal and approves the
extent to which we achieved each of our corporate goals.
Our Board of Directors will generally consider each named executive officer’s individual contributions towards reaching our annual corporate goals
but does not typically establish specific individual goals for our named executive officers. There is no minimum bonus percentage or amount established
for the named executive officers and, thus, the bonus amounts vary from year to year based on corporate and individual performance. For 2021,
Mr. Lubniewski was eligible to receive a target bonus of up to 75% of his base salary pursuant to the terms of his employment letter agreement described
below. For 2021, Mr. McMeans was eligible to receive a target bonus of up to 45% of his base salary pursuant to the terms of his employment letter
agreement described below. For 2021, Mr. Lawson was eligible to receive a target bonus of up to 50% of his base salary pursuant to the terms of his
employment letter agreement described below.
The corporate goals established by our Board of Directors for 2021 were based upon financial and strategic goals. Specific goals included direct
revenue growth, customer metrics and objectives related to product development. The financial and strategic goals were weighted at 20% and 80%,
respectively, towards overall corporate goal achievement. There was no minimum percentage of corporate goals that was required to be achieved to earn a
bonus. No specific individual goals were established for any of our named executive officers for 2021.
In January 2022, our Board of Directors determined that the 2021 corporate goals related to direct revenue growth, customer metrics and product
development had been achieved at an aggregate level of 80%, to be allocated based on individual performance objectives. As a result, our Board of
Directors awarded bonuses of $276,000, $139,860 and $106,560 to Mr. Lubniewski, Mr. McMeans and Mr. Lawson, respectively, representing the
performance-adjusted percentage of each executive’s target bonus for the period.
Equity-Based Incentive Awards
Our equity-based incentive awards are designed to align our interests with those of our employees and consultants, including our named executive
officers. Our Board of Directors or any authorized committee thereof is responsible for approving equity grants, which include to date, stock options and
RSUs. Vesting of the stock option and RSU awards is tied to continuous service with us and serves as an additional retention measure. Our executives
generally are awarded an initial stock option grant upon commencement of employment. Additional equity awards may occur periodically to specifically
incentivize executives to achieve certain corporate goals or to reward executives for exceptional performance. As of December 31, 2021, our named
executive officers have been granted both stock option awards and RSUs.
Prior to the initial public offering, we granted all equity awards pursuant to the 2011 Plan and the 2001 Plan. All equity awards granted since our
initial public offering have been granted pursuant to the 2014 Plan, the 2020 Plan and the 2021 Inducement Plan, the terms of which are described below
under “—Equity Benefit Plans.” All stock options are granted with a per share exercise price equal to no less than the fair market value of a share of our
common stock on the date of the grant of such award.
Generally, our stock option and RSU awards vest over a one to four-year period subject to the holder’s continuous service to us. Should the Board of
Directors deem it appropriate, stock option awards may be granted with an early exercise feature which would allow the holder to exercise and receive
unvested shares of our stock, so that the holder may have a greater opportunity for gains on the shares to be taxed at long-term capital gains rates rather
than ordinary income rates. From time to time as our Board of Directors considers appropriate, we may grant stock options or RSUs that vest upon
achievement of performance goals.
83
Agreements with Named Executive Officers
We have entered into letter agreements with each of our named executive officers. The letter agreements generally provide for at-will employment
and set forth the named executive officer’s initial base salary, eligibility for employee benefits, in some cases, and severance benefits upon a qualifying
termination of employment. In addition, each of our named executive officers has executed a form of our standard confidential information and invention
assignment agreement. The key terms of the letter agreements with our named executive officers are described below. Any potential payments and benefits
due upon a qualifying termination of employment or a change in control are further described below under “– Potential Payments and Benefits upon
Termination or Change in Control.”
Employment Letter Agreement Mr. Lubniewski. We entered into an amended and restated letter agreement with Mr. Lubniewski in March 2019 that
replaced his previous December 2014 letter agreement. The agreement sets forth certain agreed upon terms and conditions of employment. Mr. Lubniewski
was initially entitled to receive an annual base salary of $460,000 (which has been increased, most recently in January 2022 to $538,000), an annual target
performance bonus of up to 75% of his base salary as determined by the Board of Directors following analysis conducted by independent third-party
consultants, and certain severance benefits, which were superseded and replaced by the terms of our Severance Plan, as further described below under “—
Potential Payments and Benefits upon Termination or Change of Control.” Mr. Lubniewski’s base salary and target bonus percentage are subject to
modification from time to time in the discretion of our Board of Directors or any authorized committee thereof.
Employment Letter Agreement with Mr. McMeans. We entered into an amended and restated letter agreement with Mr. McMeans in July 2019 that
replaced his previous December 2014 letter agreement. The agreement sets forth certain agreed upon terms and conditions of employment. Mr. McMeans
was initially entitled to an annual base salary of $370,000 (which has been increased, most recently in January 2022 to $385,000), an annual target
performance bonus of up to 40% of his base salary (increased in January 2022 to 55% of base salary) as determined by the board of directors, and certain
severance benefits, which were superseded and replaced by the terms of our Severance Plan, as further described below under “—Potential Payments and
Benefits upon Termination or Change of Control.” Mr. McMeans’ base salary and target bonus percentage are subject to modification from time to time in
the discretion of our Board of Directors or any authorized committee thereof.
Employment Letter Agreement with Mr. Lawson. We entered into an amended and restated letter agreement with Mr. Lawson in July 2019 that
replaced his previous letter agreement and became effective in June 2017. The agreement sets forth certain agreed upon terms and conditions of
employment. Mr. Lawson was initially entitled to receive an annual base salary of $333,000 (which has been increased, most recently in January 2022 to
$345,000), an annual target performance bonus of up to 50% of his base salary as determined by our Board of Directors, and certain severance benefits,
which were superseded and replaced by the terms of our Severance Plan, as further described below under “—Potential Payments and Benefits upon
Termination or Change of Control.” Mr. Lawson’s base salary and target bonus percentage are subject to modification from time to time in the discretion of
our Board of Directors or any authorized committee thereof.
Potential Payments and Benefits upon Termination or Change of Control
In October 2020, our Compensation Committee adopted our Severance and Change in Control Plan, or the Severance Plan, which provides for
severance and/or change in control benefits to our named executive officers upon (i) a “change in control termination” or (ii) a “regular termination” (each
as described below). Upon a change in control termination, each of our named executive officers is entitled to receive continued payment of his base salary
for a specified period of time (18 months for Mr. Lubniewski, 15 months for Mr. McMeans and 12 months for Mr. Lawson), payment of COBRA
premiums for a period of time (up to 18 months for Mr. Lubniewski, 15 months for Mr. McMeans and 12 months for Mr. Lawson) and accelerated vesting
of outstanding time-vesting equity awards. Upon a regular termination, each of our named executive officers is entitled to receive continued payment of his
base salary for a specified period of time (12 months for Mr. Lubniewski, 12 months for Mr. McMeans and 9 months for Mr. Lawson) and payment of
COBRA premiums for a period of time (up to 12 months for Mr. Lubniewski, 12 months for Mr. McMeans and 9 months for Mr. Lawson). All severance
benefits under the Severance Plan are subject to the executive’s execution of an effective release of claims against the Company. The Severance Plan
superseded and replaced any change in control or severance benefit plans previously provided to our named executive officers, including any such benefits
in their amended and restated letter agreements with us.
For purposes of the Severance Plan, a “regular termination” is an involuntary termination (i.e., a termination other than for cause (and not as a result
of death or disability) or a resignation for good reason, as defined in the Severance Plan) that does not occur during the period of time beginning three
months prior to, and ending 12 months following, a “change in control” (as defined in the 2020 Plan), or the “change in control period.” A “change in
control termination” is a regular termination that occurs during the change in control period.
84
For purposes of the Severance Plan, “cause” generally means the occurrence of any of the following events, conditions or actions with respect to the
executive: (1) conviction of any felony or crime involving fraud or dishonesty; (2) participation in any material fraud, material act of dishonesty or other
material act of misconduct against us; (3) willful and habitual neglect of the executive’s duties after written notice and opportunity to cure; (4) material
violation of any fiduciary duty or duty of loyalty owed to us; (5) breach of any material term of any material contract with us which has a material adverse
effect on us; (6) knowing violation of any material company policy which has a material adverse effect on us; or (7) knowing violation of state or federal
law in connection with the performance of the executive’s job which has a material adverse effect on us.
For purposes of the Severance Plan, “good reason” generally means the following undertaken by us with respect to the executive without the
executive’s prior written consent: (1) a material reduction in base salary; (2) a material reduction in the executive’s authority, duties or responsibilities; (3) a
material reduction in the authority, duties or responsibilities of the supervisor to whom the executive is required to report (which, with respect to Mr.
Lubniewski, includes a change requiring him to report to a corporate officer or employee rather than directly to the Board of Directors); (4) a material
breach by the Company of any provision of the Severance Plan or any other material agreement between the executive and the Company concerning the
terms and conditions of the executive’s employment; or (5) a relocation of the executive’s principal place of employment to a place that increases the
executive’s one-way commute by more than 50 miles.
Each of our named executive officers holds stock options and RSUs under our equity incentive plans that were granted subject to our form of stock
option and RSU agreements. A description of the termination and change of control provisions in such equity incentive plans and stock options and RSUs
granted thereunder is provided below under “– Equity Benefit Plans” and the specific vesting terms of each named executive officer’s stock options and
RSUs are described below under “– Outstanding Equity Awards at Fiscal Year-End.”
85
Outstanding Equity Awards at Fiscal Year-End
The following table presents information concerning equity awards held by our named executive officers as of December 31, 2021.
Option Awards
Stock Awards
John L. Lubniewski
Name
Shaun D. McMeans
Byron T. Lawson
Grant
Date/Vesting
Commencement
Date
3/08/2012
2/01/2013
8/06/2013
3/20/2014
12/29/2014
2/16/2016
2/13/2017
8/16/2018
5/23/2019
8/15/2019
1/23/2020
8/20/2020
8/16/2018
3/08/2012
2/01/2013
8/06/2013
3/20/2014
12/29/2014
2/16/2016
2/13/2017
8/16/2018
8/15/2019
1/23/2020
8/20/2020
8/16/2018
10/3/2012
2/1/2013
8/6/2013
3/20/2014
12/29/2014
11/25/2015
5/25/2016
1/31/2017
5/31/2017
7/25/2017
8/16/2018
8/6/2019
9/12/2019
1/7/2020
8/20/2020
8/16/2018
(1)
(2)
(1)
(4)
(1)
(1)
(4)
(1)
(3)
(4)
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
—
—
—
—
—
—
—
828
2,081
—
—
51,646
—
—
—
—
—
—
—
—
828
—
—
21,514
—
—
—
—
—
—
—
—
—
—
—
250
—
—
—
11,594
—
186
233
869
1,987
248
2,333
1,333
5,838
17,919
7,500
35,833
28,354
—
558
123
869
2,020
155
1,333
1,233
5,838
3,166
15,833
11,819
—
62
13
124
350
124
666
333
666
333
500
1,750
4,333
2,333
4,666
6,406
—
86
Option
Exercise Price
($)
32.25
32.25
32.25
32.25
193.35
35.40
28.80
51.00
33.30
14.25
9.90
7.20
32.25
32.25
32.25
32.25
193.35
35.40
28.80
51.00
14.25
9.90
7.20
32.25
32.25
32.25
32.25
193.35
76.20
42.25
26.25
51.90
35.85
51.00
20.70
12.00
11.25
7.20
Number of
Shares or
Units of Stock
That Have
Not Vested
(#)
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($)
—
—
—
—
—
—
—
—
—
—
—
—
21,063
—
—
—
—
—
—
—
—
—
—
—
10,353
—
—
—
—
—
—
—
—
—
—
—
—
413
—
—
—
—
—
—
—
—
—
—
—
203
Option
Expiration Date
3/08/2022
2/01/2023
8/06/2023
3/20/2024
12/29/2024
2/15/2026
2/13/2027
8/16/2028
5/23/2029
8/15/2029
1/23/2030
8/20/2030
3/08/2022
2/01/2023
8/06/2023
3/20/2024
12/29/2024
2/15/2026
2/13/2027
8/16/2028
8/15/2029
1/23/2030
8/20/2030
10/3/2022
2/1/2023
8/6/2023
3/20/2024
12/29/2024
11/25/2025
5/25/2026
1/31/2027
5/31/2027
7/25/2027
8/16/2028
8/6/2029
9/12/2029
1/7/2030
8/20/2030
163
8,313
(1)
(2)
(3)
(4)
Stock options vest over four years as follows: 1/16th of the outstanding shares vest at the end of each calendar quarter over a period of
approximately four years, subject to the individual’s continued service with us through each vesting date.
Stock options vest at the end of each month beginning January 30, 2020, with 50% vesting in the first year and 25% vesting in each of years 2 and 3,
subject to the individual’s continued service with us through each vesting date.
Stock options vest in equal monthly installments over a two-year period, subject to the individual’s continued service with us through each vesting
date.
RSUs vest over four years as follows: 1/16th of the award vests at the end of each calendar quarter over a period of approximately four years, subject
to the individual’s continued service with us through each vesting date.
Equity Benefit Plans
2021 Inducement Plan
In July 2021, the Company’s Board of Directors adopted the Company’s 2021 Inducement Plan (the “2021 Inducement Plan”), pursuant to which
300,000 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 160,000 shares of the Company’s stock available for issuance under the 2021 Inducement Plan as of December 31, 2021, 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.
Stock Awards. The 2021 Inducement Plan provides for the grant of nonstatutory stock options (“NSOs”), stock appreciation rights, restricted
stock awards, restricted stock unit awards, performance awards and other awards.
Share Reserve. Subject to adjustment for certain changes in our capitalization, the aggregate number of shares of our common stock that may be
issued under the 2021 Inducement Plan will not exceed 300,000 shares.
If any shares of our common stock issued pursuant to an award granted under the 2021 Inducement Plan are forfeited back to or redeemed or
repurchased by us because of the failure to meet a contingency or condition required for the vesting of such shares, then such shares will become available
again for issuance under the 2021 Inducement Plan.
The following shares of our common stock will not become available again for issuance under the 2021 Inducement Plan: (i) any shares
repurchased by us on the open market with the proceeds of the exercise or strike price of an award granted under the 2021 Inducement Plan or a Prior Plan
Award; and (ii) in the event that a stock appreciation right granted under the 2021 Inducement Plan or a stock appreciation right that is a Prior Plan Award
is settled in shares, the gross number of shares subject to such award.
Eligibility. Awards may only be granted to persons who are Eligible Employees described in Section 1(a) of the Plan, where the Award is an
inducement material to the individual’s entering into employment with the Company or an Affiliate within the meaning of Rule 5635(c)(4) of the Nasdaq
Marketplace Rules or is otherwise permitted pursuant to Rule 5635(c) of the Nasdaq Marketplace Rules.
Administration. The 2021 Inducement Plan will be administered by our Board of Directors, which may in turn delegate some or all of the
administration of the 2021 Inducement Plan to a committee or committees composed of members of the board of directors. Our Board of Directors has
delegated concurrent authority to administer the 2021 Inducement Plan to our Compensation Committee, but may, at any time, revest in itself some or all of
the power delegated to our Compensation Committee. We refer to the plan administrator as the “Plan Administrator” herein.
2020 Equity Incentive Plan
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 2014 Plan. As of December 31, 2021, option awards covering an aggregate of
252,275 shares of our common stock under the 2020 Plan were outstanding.
Stock Awards. The 2020 Plan provides for the grant of incentive stock options (“ISOs”), nonstatutory stock options (“NSOs”), stock appreciation
rights, restricted stock awards, restricted stock unit awards, performance awards and other awards.
87
Share Reserve. Subject to adjustment for certain changes in our capitalization, the aggregate number of shares of our common stock that may be
issued under the 2020 Plan will not exceed 744,685 shares, which number is the sum of (i) the number of shares remaining available for the grant of new
awards under the 2014 Plan (excluding shares available for the grant of inducement awards under the 2014 Plan’s inducement share pool) as of
immediately prior to the effective date of the 2020 Plan; (ii) 676,133 new shares; and (iii) the number of the Prior Plan Returning Shares (as defined
below), if any, as such shares become available from time to time.
The “Prior Plan Returning Shares” are shares of our common stock subject to outstanding awards granted under the 2014 Plan (excluding shares
available for the granting of inducement awards under the 2014 Plan), the 2011 Plan or 2001 Plan (together, the “Prior Plans,” and each such award, a
“Prior Plan Award”) 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 us because of the failure to meet a contingency or condition required for the vesting of such shares. The
number of shares of our common stock available for issuance under the 2020 Plan will be reduced or increased by (i) one share for each share of common
stock issued pursuant to an Appreciation Award (as defined in the 2020 Plan), and (ii) 1.5 shares for each share of common stock issued pursuant to a Full
Value Award (as defined in the 2020 Plan). The following actions will not result in an issuance of shares of our common stock under the 2020 Plan and
accordingly will not reduce the number of shares of our common stock available for issuance under the 2020 Plan: (i) the expiration or termination of any
portion of an award granted under the 2020 Plan without the shares covered by such portion of the award having been issued; or (ii) the settlement of any
portion of an award granted under the 2020 Plan in cash.
If any shares of our common stock issued pursuant to an award granted under the 2020 Plan are forfeited back to or redeemed or repurchased by
us because of the failure to meet a contingency or condition required for the vesting of such shares, then such shares will become available again for
issuance under the 2020 Plan.
The following shares of our common stock will not become available again for issuance under the 2020 Plan: (i) any shares that are reacquired or
withheld (or not issued) by us to satisfy the exercise or strike price of an award granted under the 2020 Plan or a Prior Plan Award (including any shares
subject to such award that are not delivered because such award is exercised through a reduction of shares subject to such award); (ii) any shares that are
reacquired or withheld (or not issued) by us to satisfy a tax withholding obligation in connection with an award granted under the 2020 Plan or a Prior Plan
Award; (iii) any shares repurchased by us on the open market with the proceeds of the exercise or strike price of an award granted under the 2020 Plan or a
Prior Plan Award; and (iv) in the event that a stock appreciation right granted under the 2020 Plan or a stock appreciation right that is a Prior Plan Award is
settled in shares, the gross number of shares subject to such award.
Eligibility. All of our (including our affiliates’) employees, non-employee directors and consultants are eligible to participate in the 2020 Plan
and may receive all types of awards other than incentive stock options. Incentive stock options may be granted under the 2020 Plan only to our (including
our affiliates’) employees.
Administration. The 2020 Plan will be administered by our Board of Directors, which may in turn delegate some or all of the administration of
the 2020 Plan to a committee or committees composed of members of the board of directors. Our Board of Directors has delegated concurrent authority to
administer the 2020 Plan to our Compensation Committee, but may, at any time, revest in itself some or all of the power delegated to our Compensation
Committee. We refer to the plan administrator as the “Plan Administrator” herein.
Subject to the terms of the 2020 Plan, the Plan Administrator may determine the recipients, the types of awards to be granted, the number of
shares of our common stock subject to or the cash value of awards, and the terms and conditions of awards granted under the 2020 Plan, including the
period of their exercisability and vesting. The Plan Administrator has the authority to provide for accelerated exercisability and vesting of awards. Subject
to the limitations set forth below, the Plan Administrator also determines the fair market value applicable to an award and the exercise or strike price of
stock options and stock appreciation rights granted under the 2020 Plan.
In addition, the Plan Administrator may delegate to one or more executive officers the authority to designate employees who are not executive
officers to be recipients of certain awards and the number of shares of our common stock subject to such awards. Under any such delegation, the Plan
Administrator will specify the total number of shares of our common stock that may be subject to the awards granted by such executive officer. The
executive officer may not grant an award to himself or herself.
88
Repricing; Cancellation and Re-Grant of Stock Options or Stock Appreciation Rights. Under the 2020 Plan, unless our stockholders have
approved such an action within 12 months prior to such an event, the Plan Administrator does not have the authority to reprice any outstanding stock option
or stock appreciation right by (1) reducing the exercise or strike price of the stock option or stock appreciation right, or (2) canceling any outstanding stock
option or stock appreciation right that has an exercise or strike price greater than the then-current fair market value of our common stock in exchange for
cash or other awards.
Limit on Non-Employee Director Compensation. Pursuant to the 2020 Plan, the aggregate value of all compensation granted or paid, as
applicable, by the Company to any individual for service as a non-employee director with respect to any period commencing on the date of the annual
meeting of stockholders for a particular year and ending on the day immediately prior to the date of the annual meeting of stockholders for the next
subsequent year (the “Annual Period”), including awards granted and cash fees paid by the Company to such non-employee director, will not exceed (i)
$400,000 in total value or (ii) in the event such non-employee director is first appointed or elected to the Board of Directors during such Annual Period,
$600,000 in total value, in each case calculating the value of any equity awards based on the grant date fair value of such equity awards for financial
reporting purposes.
Dividends and Dividend Equivalents. The 2020 Plan provides that dividends or dividend equivalents may be paid or credited with respect to any
shares of our common stock subject to an award other than an option or stock appreciation right, as determined by the Plan Administrator and contained in
the applicable award agreement; provided, however, that (i) no dividends or dividend equivalents may be paid with respect to any such shares before the
date such shares have vested, (ii) any dividends or dividend equivalents that are credited with respect to any such shares will be subject to all of the terms
and conditions applicable to such shares under the terms of the applicable award agreement (including any vesting conditions), and (iii) any dividends or
dividend equivalents that are credited with respect to any such shares will be forfeited to us on the date such shares are forfeited to or repurchased by us due
to a failure to vest.
Stock Options. Stock options may be granted under the 2020 Plan pursuant to stock option agreements. The 2020 Plan permits the grant of stock
options that are intended to qualify as ISOs and NSOs.
The exercise price of a stock option granted under the 2020 Plan may not be less than 100% of the fair market value of the common stock subject
to the stock option on the date of grant and, in some cases (see “-Limitations on Incentive Stock Options” below), may not be less than 110% of such fair
market value.
The term of stock options granted under the 2020 Plan may not exceed ten years from the date of grant and, in some cases (see “-Limitations on
Incentive Stock Options” below), may not exceed five years from the date of grant. Except as otherwise provided in a participant’s stock option agreement
or other written agreement with us or one of our affiliates, if a participant’s service relationship with us or any of our affiliates (“continuous service” as
defined in the 2020 Plan) terminates (other than for cause (as defined in the 2020 Plan) or the participant’s death or disability (as defined in the 2020 Plan)),
the participant may exercise any vested stock options for up to three months following the participant’s termination of continuous service. Except as
otherwise provided in a participant’s stock option agreement or other written agreement with us or one of our affiliates, if a participant’s continuous service
terminates due to the participant’s disability, the participant may exercise any vested stock options for up to 12 months following the participant’s
termination due to the participant’s disability. Except as otherwise provided in a participant’s stock option agreement or other written agreement with us or
one of our affiliates, if a participant’s continuous service terminates due to the participant’s death (or the participant dies within a specified period following
termination of continuous service), the participant’s beneficiary may exercise any vested stock options for up to 18 months following the participant’s
death. Except as explicitly provided otherwise in a participant’s stock option agreement or other written agreement with us or one of our affiliates, if a
participant’s continuous service is terminated for cause, all stock options held by the participant will terminate upon the participant’s termination of
continuous service and the participant will be prohibited from exercising any stock option from and after such termination date. Except as otherwise
provided in a participant’s stock option agreement or other written agreement with us or one of our affiliates, the term of a stock option may be extended if
a participant’s continuous service terminates for any reason other than for cause and, at any time during the applicable post-termination exercise period, the
exercise of the stock option would be prohibited by applicable laws or the sale of any common stock received upon such exercise would violate our insider
trading policy. In no event, however, may a stock option be exercised after its original expiration date.
Acceptable forms of consideration for the purchase of our common stock pursuant to the exercise of a stock option under the 2020 Plan will be
determined by the Plan Administrator and may include payment: (i) by cash, check, bank draft or money order payable to us; (ii) pursuant to a program
developed under Regulation T as promulgated by the Federal Reserve Board; (iii) by delivery to us of shares of our common stock (either by actual
delivery or attestation); (iv) by a net exercise arrangement (for NSOs only); or (v) in other legal consideration approved by the Plan Administrator.
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Stock options granted under the 2020 Plan may become exercisable in cumulative increments, or “vest,” as determined by the Plan Administrator
at the rate specified in the stock option agreement. Shares covered by different stock options granted under the 2020 Plan may be subject to different
vesting schedules as the Plan Administrator may determine.
The Plan Administrator may impose limitations on the transferability of stock options granted under the 2020 Plan in its discretion. Generally, a
participant may not transfer a stock option granted under the 2020 Plan other than by will or the laws of descent and distribution or, subject to approval by
the Plan Administrator, pursuant to a domestic relations order. However, the Plan Administrator may permit transfer of a stock option in a manner that is
not prohibited by applicable tax and securities laws. Options may not be transferred to a third-party financial institution for value.
Limitations on Incentive Stock Options. In accordance with current federal tax laws, the aggregate fair market value, determined at the time of
grant, of shares of our common stock with respect to ISOs that are exercisable for the first time by a participant during any calendar year under all of our
stock plans may not exceed $100,000. The stock options or portions of stock options that exceed this limit or otherwise fail to qualify as ISOs are treated as
NSOs. No ISO may be granted to any person who, at the time of grant, owns or is deemed to own stock possessing more than 10% of our total combined
voting power unless the following conditions are satisfied:
•
•
the exercise price of the ISO must be at least 110% of the fair market value of the common stock subject to the ISO on the date of grant; and
the term of the ISO must not exceed five years from the date of grant.
Subject to adjustment for certain changes in our capitalization, the aggregate maximum number of shares of our common stock that may be
issued pursuant to the exercise of ISOs under the 2020 Plan is 1,495,097 shares.
Stock Appreciation Rights. Stock appreciation rights may be granted under the 2020 Plan pursuant to stock appreciation right agreements. Each
stock appreciation right is denominated in common stock share equivalents. The strike price of each stock appreciation right will be determined by the Plan
Administrator but will in no event be less than 100% of the fair market value of the common stock subject to the stock appreciation right on the date of
grant. The term of stock appreciation rights granted under the 2020 Plan may not exceed ten years from the date of grant. The Plan Administrator may also
impose restrictions or conditions upon the vesting of stock appreciation rights that it deems appropriate. The appreciation distribution payable upon
exercise of a stock appreciation right may be paid in shares of our common stock, in cash, in a combination of cash and stock, or in any other form of
consideration determined by the Plan Administrator and set forth in the stock appreciation right agreement. Stock appreciation rights will be subject to the
same conditions upon termination of continuous service and restrictions on transfer as stock options under the 2020 Plan.
Restricted Stock Awards. Restricted stock awards may be granted under the 2020 Plan pursuant to restricted stock award agreements. A restricted
stock award may be granted in consideration for cash, check, bank draft or money order payable to us, the participant’s services performed for us, or any
other form of legal consideration acceptable to the Plan Administrator. Shares of our common stock acquired under a restricted stock award may be subject
to forfeiture to or repurchase by us in accordance with a vesting schedule to be determined by the Plan Administrator. Rights to acquire shares of our
common stock under a restricted stock award may be transferred only upon such terms and conditions as are set forth in the restricted stock award
agreement. Upon a participant’s termination of continuous service for any reason, any shares subject to restricted stock awards held by the participant that
have not vested as of such termination date may be forfeited to or repurchased by us.
Restricted Stock Unit Awards. Restricted stock unit awards may be granted under the 2020 Plan pursuant to restricted stock unit award
agreements. Payment of any purchase price may be made in any form of legal consideration acceptable to the Plan Administrator. A restricted stock unit
award may be settled by the delivery of shares of our common stock, in cash, in a combination of cash and stock, or in any other form of consideration
determined by the Plan Administrator and set forth in the restricted stock unit award agreement. Restricted stock unit awards may be subject to vesting in
accordance with a vesting schedule to be determined by the Plan Administrator. Except as otherwise provided in a participant’s restricted stock unit award
agreement or other written agreement with us, restricted stock units that have not vested will be forfeited upon the participant’s termination of continuous
service for any reason.
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Performance Awards. The 2020 Plan allows us to grant performance awards. A performance award is an award that may vest or may be
exercised, or that may become earned and paid, contingent upon the attainment of certain performance goals during a performance period. A performance
award may require the completion of a specified period of continuous service. The length of any performance period, the performance goals to be achieved
during the performance period, and the measure of whether and to what degree such performance goals have been attained will be determined by the Plan
Administrator in its discretion. In addition, to the extent permitted by applicable law and the applicable award agreement, the Plan Administrator may
determine that cash may be used in payment of performance awards.
Performance goals under the 2020 Plan will be established by the board of directors for a performance period. The performance criteria used to
establish such goals may be based on any measure of performance selected by the board of directors.
Performance goals may be based on a Company-wide basis, with respect to one or more business units, divisions, affiliates or business segments,
and in either absolute terms or relative to the performance of one or more comparable companies or the performance of one or more relevant indices.
Unless specified otherwise by the Plan Administrator (i) in the award agreement at the time the award is granted or (ii) in such other document setting forth
the performance goals at the time the performance goals are established, the Plan Administrator will appropriately make adjustments in the method of
calculating the attainment of the performance goals for a performance period as follows: (1) to exclude restructuring and/or other nonrecurring charges; (2)
to exclude exchange rate effects; (3) to exclude the effects of changes to generally accepted accounting principles; (4) to exclude the effects of any statutory
adjustments to corporate tax rates; (5) to exclude the effects of items that are “unusual” in nature or occur “infrequently” as determined under generally
accepted accounting principles; (6) to exclude the dilutive effects of acquisitions or joint ventures; (7) to assume that any business divested by the
Company achieved performance objectives at targeted levels during the balance of a performance period following such divestiture; (8) to exclude the
effect of any change in the outstanding shares of common stock of the Company by reason of any stock dividend or split, stock repurchase, reorganization,
recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change, or any distributions to common
stockholders other than regular cash dividends; (9) to exclude the effects of stock based compensation and the award of bonuses under the Company’s
bonus plans; (10) to exclude costs incurred in connection with potential acquisitions or divestitures that are required to be expensed under generally
accepted accounting principles; (11) to exclude the goodwill and intangible asset impairment charges that are required to be recorded under generally
accepted accounting principles; (12) to exclude the effect of any other unusual, non-recurring gain or loss or other extraordinary item; and (13) to exclude
the effects of the timing of acceptance for review and/or approval of submissions to the U.S. Food and Drug Administration or any other regulatory body.
In addition, the Plan Administrator retains the discretion to define the manner of calculating the performance criteria it selects to use for a
performance period and to reduce, increase or eliminate the compensation or economic benefit due upon the attainment of any performance goal.
Other Awards. Other forms of awards valued in whole or in part by reference to, or otherwise based on, our common stock, may be granted either
alone or in addition to other awards under the 2020 Plan; provided that any such award will be treated as a Full Value Award. Subject to the terms of the
2020 Plan, the Plan Administrator will have sole and complete authority to determine the persons to whom and the time or times at which such other
awards will be granted, the number of shares of our common stock to be granted and all other terms and conditions of such other awards.
Clawback Policy. Awards granted under the 2020 Plan will be subject to recoupment in accordance with any clawback policy that we are
required to adopt pursuant to the listing standards of any national securities exchange or association on which our securities are listed or as is otherwise
required by the Dodd-Frank Wall Street Reform and Consumer Protection Act or other applicable law, and any other clawback policy that the Company
adopts. In addition, the board of directors may impose such other clawback, recovery or recoupment provisions in an award agreement as the board of
directors determines necessary or appropriate, including but not limited to a reacquisition right in respect of previously acquired shares of common stock or
other cash or property upon the occurrence of cause.
Changes to Capital Structure. In the event of certain capitalization adjustments, the Plan Administrator will appropriately and proportionately
adjust: (i) the class(es) and maximum number of shares of our common stock subject to the 2020 Plan; (ii) the class(es) and maximum number of shares of
our common stock that may be issued pursuant to the exercise of ISOs; and (iii) the class(es) and number of shares of our common stock and the exercise,
strike or purchase price per share of our common stock subject to outstanding awards.
Corporate Transaction and Change in Control. The following applies to each outstanding award under the 2020 Plan in the event of a corporate
transaction (as defined in the 2020 Plan and described below) or a change in control (as defined in the 2020 Plan and described below), unless provided
otherwise in the applicable award agreement or in any other written agreement between a participant and the Company or an affiliate. The term
“Transaction” will mean such corporate transaction or change in control.
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In the event of a Transaction, any awards outstanding under the 2020 Plan may be assumed, continued or substituted for by any surviving or
acquiring corporation (or its parent company) (such entity, the “acquiring entity”), and any reacquisition or repurchase rights held by us with respect to the
award may be assigned to the acquiring entity. If the acquiring entity does not assume, continue or substitute for such awards, then with respect to any such
awards that are held by participants whose continuous service has not terminated prior to the effective time of the Transaction (such participants, the
“current participants”), the vesting (and exercisability, if applicable) of such awards will be accelerated in full to a date prior to the effective time of the
Transaction (contingent upon the effectiveness of the Transaction), and such awards will terminate if not exercised (if applicable) at or prior to the effective
time of the Transaction, and any reacquisition or repurchase rights held by us with respect to such awards will lapse (contingent upon the effectiveness of
the Transaction). With respect to the vesting of performance awards that will accelerate upon the occurrence of a Transaction, unless otherwise provided in
the relevant award agreement, the vesting of such performance awards will accelerate at 100% of the target level upon the occurrence of the Transaction. If
the acquiring entity does not assume, continue or substitute for such awards, then any such awards that are held by persons other than current participants
will terminate if not exercised (if applicable) at or prior to the effective time of the Transaction, except that any reacquisition or repurchase rights held by us
with respect to such awards will not terminate and may continue to be exercised notwithstanding the Transaction.
In the event an award will terminate if not exercised at or prior to the effective time of a Transaction, the Plan Administrator may provide that the
holder of such award may not exercise such award but instead will receive a payment equal in value to the excess, if any, of (i) the value of the property the
participant would have received upon the exercise of the award, over (ii) any exercise price payable by such holder in connection with such exercise.
Under the 2020 Plan, a “corporate transaction” generally means the consummation of any one or more of the following events: (1) a sale or other
disposition of all or substantially all of our assets; (2) a sale or other disposition of at least 50% of our outstanding securities; (3) a merger, consolidation or
similar transaction where we do not survive the transaction; or (4) a merger, consolidation or similar transaction where we do survive the transaction but the
shares of our common stock outstanding immediately before such transaction are converted or exchanged into other property by virtue of the transaction.
Under the 2020 Plan, a “change in control” generally means the occurrence of any one or more of the following events: (1) the acquisition by any
person, entity or group of our securities representing more than 50% of the combined voting power of our then outstanding securities, other than by virtue
of a merger, consolidation, or similar transaction; (2) a consummated merger, consolidation or similar transaction in which our stockholders immediately
before such transaction do not own, directly or indirectly, more than 50% of the combined voting power of the surviving entity (or the parent of the
surviving entity) in substantially the same proportions as their ownership immediately prior to such transaction; or (3) a consummated sale, lease, exclusive
license or other disposition of all or substantially all of our assets, other than to an entity, more than 50% of the combined voting power of which is owned
by our stockholders in substantially the same proportions as their ownership of our outstanding voting securities immediately prior to such transaction.
Plan Amendments and Termination. The Plan Administrator will have the authority to amend or terminate the 2020 Plan at any time. However,
except as otherwise provided in the 2020 Plan, no amendment or termination of the 2020 Plan may materially impair a participant’s rights under his or her
outstanding awards without the participant’s consent. We will obtain stockholder approval of any amendment to the 2020 Plan as required by applicable
law and listing requirements.
2014 Equity Incentive Plan
Our Board of Directors adopted the 2014 Plan in December 2014 and our stockholders approved the 2014 Plan in April 2015. The 2014 Plan
became effective on May 5, 2015 in connection with our initial public offering. In August 2020, upon the effective date of the 2020 Plan, the 2014 Plan
ceased to be available for new grants of equity awards, and any shares remaining available for issuance under the 2014 Plan (excluding shares available for
the granting of inducement awards under the 2014 Plan’s inducement share pool) became available for issuance under the 2020 Plan.
Share Reserve. Initially, the aggregate number of shares of our common stock that may be issued pursuant to stock awards under the 2014 Plan
was the sum of (1) 61,707 shares, plus (2) the number of shares (not to exceed 40,587 shares) (i) reserved for issuance under our 2011 Plan at the time the
2014 Plan became effective, and (ii) any shares subject to outstanding stock options or other stock awards that were granted under our 2011 Plan or 2001
Plan that, on or after the effective date of the 2014 Plan, are forfeited, terminate, expire or are otherwise not issued. Additionally, the number of shares of
our common stock reserved for issuance under the 2014 Plan automatically increased on January 1 of each year, beginning on January 1, 2016 and
continuing through and including January 1, 2020, by 4% of the total number of shares of our capital stock outstanding on December 31 of the preceding
calendar year, or a lesser number of shares determined by our Board of Directors. The maximum number of shares of our common stock that may be issued
upon the exercise of ISOs under the 2014 Plan is 120,000 shares.
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If a stock award granted under the 2014 Plan expires or otherwise terminates without being exercised in full, or is settled in cash, the shares of
our common stock not acquired pursuant to the stock award again will become available for subsequent issuance under the 2014 Plan. In addition, the
following types of shares of our common stock under the 2014 Plan may become available for the grant of new stock awards under the 2014 Plan:
(1) shares that are forfeited to or repurchased by us prior to becoming fully vested; (2) shares withheld to satisfy income or employment withholding taxes;
or (3) shares used to pay the exercise or purchase price of a stock award. Shares issued under the 2014 Plan may be previously unissued shares or
reacquired shares bought by us on the open market.
In May 2019, 13,333 shares were reserved for issuance under the 2014 Plan pursuant to an amendment approved by our Board of Directors
pursuant to Rule 5635(c)(4) of the Nasdaq Listing Rules, to be used 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 (“Inducement Awards”).
As of December 31, 2021, option awards covering an aggregate of 182,095 shares of our common stock, and an additional 1,177 RSU awards
have been granted under the 2014 Plan and were outstanding.
Administration. Our Board of Directors, or a duly authorized committee thereof, has the authority to administer the 2014 Plan. Subject to the
terms of the 2014 Plan, our Board of Directors or the authorized committee, referred to herein as the plan administrator, determines recipients, dates of
grant, the numbers and types of stock awards to be granted and the terms and conditions of the stock awards, including the period of their exercisability,
vesting schedule and change of control provision applicable to a stock award, if any. Subject to the limitations set forth below, the plan administrator will
also determine the exercise price, strike price or purchase price of awards granted and the types of consideration to be paid for the award.
The plan administrator has the authority to modify outstanding awards under the 2014 Plan. Subject to the terms of the 2014 Plan, the plan
administrator has the authority to reduce the exercise, purchase or strike price of any outstanding stock award, cancel any outstanding stock award in
exchange for new stock awards, cash or other consideration, or take any other action that is treated as a repricing under generally accepted accounting
principles, with the consent of any adversely affected participant.
Stock Options. ISOs and NSOs are granted pursuant to stock option agreements adopted by the plan administrator. The plan administrator
determines the exercise price for a stock option, within the terms and conditions of the 2014 Plan, provided that the exercise price of a stock option
generally cannot be less than 100% of the fair market value of our common stock on the date of grant. Stock options granted under the 2014 Plan vest at the
rate specified by the plan administrator.
The plan administrator determines the term of stock options granted under the 2014 Plan, up to a maximum of ten years. Unless the terms of an
optionholder’s stock option agreement provide otherwise, if an optionholder’s service relationship with us, or any of our affiliates, ceases for any reason
other than disability, death or cause, the optionholder may generally exercise any vested options for a period of three months following the cessation of
service. The option term may be extended in the event that exercise of the option following such a termination of service is prohibited by applicable
securities laws or our insider trading policy. If an optionholder’s service relationship with us or any of our affiliates ceases due to disability or death, or an
optionholder dies within a certain period following cessation of service, the optionholder or a beneficiary may generally exercise any vested stock options
for a period of 12 months in the event of disability and 18 months in the event of death. In the event of a termination for cause, stock options generally
terminate immediately upon the termination of the individual for cause. In no event may an option be exercised beyond the expiration of its term.
Acceptable consideration for the purchase of common stock issued upon the exercise of a stock option will be determined by the plan
administrator and may include (1) cash, check, bank draft or money order, (2) a broker-assisted cashless exercise, (3) the tender of shares of our common
stock previously owned by the optionholder, (4) a net exercise of the option if it is an NSO, and (5) other legal consideration approved by the plan
administrator.
Unless the plan administrator provides otherwise, stock options generally are not transferable except by will, the laws of descent and distribution,
or pursuant to a domestic relations order. An optionholder may designate a beneficiary, however, who may exercise the option following the optionholder’s
death.
Tax Limitations on Incentive Stock Options. The aggregate fair market value, determined at the time of grant, of our common stock with respect
to ISOs that are exercisable for the first time by an optionholder during any calendar year under all of our stock plans may not exceed $100,000. Stock
options or portions thereof that exceed such limit will generally be treated as NSOs. No ISO may be granted to any person who, at the time of the grant,
owns or is deemed to own stock possessing more than 10% of our total combined voting power or that of any of our affiliates unless (1) the option exercise
price is at least 110% of the fair market value of the stock subject to the option on the date of grant, and (2) the term of the ISO does not exceed five years
from the date of grant.
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Restricted Stock Unit Awards. Restricted stock unit awards are granted pursuant to restricted stock unit award agreements adopted by the plan
administrator. RSUs may be granted in consideration for any form of legal consideration. An RSU award may be settled by cash, delivery of stock, a
combination of cash and stock as deemed appropriate by the plan administrator, or in any other form of consideration set forth in the restricted stock unit
award agreement. RSUs typically vest and underlying shares of common stock are delivered as outlined in the applicable RSU agreements following the
grantee’s satisfaction of minimum statutory employee tax withholding requirements, where applicable. Employee RSU agreements generally provide that
vesting is accelerated only in certain circumstances, that delivery of the underlying shares of common stock is conditioned on the grantee’s satisfying
certain vesting conditions outlined in the award, and that the grantee’s employment continue with the Company through the vesting date. Additionally,
dividend equivalents may be credited in respect of shares covered by an RSU award. Except as otherwise provided in the applicable award agreement,
RSUs that have not vested will be forfeited upon the participant’s cessation of continuous service for any reason.
Changes to Capital Structure. In the event that there is a specified type of change in our capital structure, such as a stock split or recapitalization,
appropriate adjustments will be made to (1) the class and maximum number of shares reserved for issuance under the 2014 Plan, (2) the class and
maximum number of shares by which the share reserve may increase automatically each year, (3) the class and maximum number of shares that may be
issued upon the exercise of ISOs, (4) the class and maximum number of shares subject to stock awards that can be granted in a calendar year (as established
under the 2014 Plan pursuant to Section 162(m) of the Code) and (5) the class and number of shares and exercise price, strike price, or purchase price, if
applicable, of all outstanding stock awards.
Corporate Transactions. In the event of certain specified significant corporate transactions, the plan administrator has the discretion to take any
of the following actions with respect to stock awards:
•
•
•
•
•
•
arrange for the assumption, continuation or substitution of a stock award by a surviving or acquiring entity or parent company;
arrange for the assignment of any reacquisition or repurchase rights held by us to the surviving or acquiring entity or parent company;
accelerate the vesting of the stock award and provide for its termination at or prior to the effective time of the corporate transaction;
arrange for the lapse of any reacquisition or repurchase right held by us;
cancel or arrange for the cancellation of the stock award in exchange for such cash consideration, if any, as our Board of Directors may deem
appropriate; or
make a payment equal to the excess of (1) the value of the property the participant would have received upon exercise of the stock award over
(2) the exercise price otherwise payable in connection with the stock award.
Our plan administrator is not obligated to treat all stock awards, even those that are of the same type, in the same manner.
Under the 2014 Plan, a corporate transaction is generally the consummation of (1) a sale or other disposition of all or substantially all of our
assets, (2) a sale or other disposition of at least 90% of our outstanding securities, (3) a merger, consolidation or similar transaction following which we are
not the surviving corporation, or (4) a merger, consolidation or similar transaction following which we are the surviving corporation but the shares of our
common stock outstanding immediately prior to such transaction are converted or exchanged into other property by virtue of the transaction.
Change of Control. The plan administrator may provide, in an individual award agreement or in any other written agreement between a
participant and us that the stock award will be subject to additional acceleration of vesting and exercisability in the event of a change of control. For
example, certain of our employees may receive an award agreement that provides for vesting acceleration upon the individual’s termination without cause
or resignation for good reason (including a material reduction in the individual’s base salary, duties, responsibilities or authority, or a material relocation of
the individual’s principal place of employment with us) in connection with a change of control. Under the 2014 Plan, a change of control is generally
(1) the acquisition by a person or entity of more than 50% of our combined voting power other than by merger, consolidation or similar transaction; (2) a
consummated merger, consolidation or similar transaction immediately after which our stockholders cease to own more than 50% of the combined voting
power of the surviving entity; (3) a consummated sale, lease or exclusive license or other disposition of all or substantially of our assets; or (4) our
stockholders approve a plan of our complete dissolution or liquidation or our complete dissolution or liquidation otherwise occurs.
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All stock options granted under the 2014 Plan to our named executive officers provide that vesting and exercisability of such stock options will
be accelerated in full following a change in control if, immediately prior to or within 12 months after the effective time of such change in control, the
optionholder’s continuous service terminates due to an involuntary termination without cause or due to a voluntary termination with good reason. Several
terms are specifically defined in the 2014 Plan for purposes of this “double-trigger” provision; in particular, (i) “good reason” is generally defined as (1) a
material reduction in the optionholder’s annual base salary, except pursuant to a salary reduction program affecting substantially all of our employees that
does not disproportionately affect the optionholder; (2) a material reduction in the optionholder’s authority, duties or responsibilities; (3) any failure by us
to continue any material benefit plan or program in which the optionholder was participating immediately prior to the change in control, or any action by us
that would adversely affect the optionholder’s participation in or reduce his/her benefits under such benefit plan or program, or deprive him/her of any
fringe benefit enjoyed immediately prior to the change in control, unless, taken as a whole, we provide for optionholder participation in comparable benefit
plans or programs; (4) a relocation of the optionholder’s principal place of employment more than 50 miles; or (5) a material breach by us of any provision
of the 2014 Plan or an option agreement under the 2014 Plan or any other material agreement between the optionholder and us concerning the terms and
conditions of employment or service with us; and (ii) “cause” is generally defined as the occurrence of any of the following events: (A) the optionholder’s
commission of any felony or any crime involving fraud, dishonesty or moral turpitude under the laws of the United States or any state thereof; (B) the
optionholder’s attempted commission of, or participation in, a fraud or act of dishonesty against us; (C) the optionholder’s intentional, material violation of
any contract or agreement between the optionholder and us or of any statutory duty owed to us; (D) the optionholder’s unauthorized use or disclosure of
our confidential information or trade secrets; or (E) the optionholder’s gross misconduct.
Amendment and Termination. Our Board of Directors has the authority to amend, suspend, or terminate the 2014 Plan, provided that such action
does not materially impair the existing rights of any participant without such participant’s written consent. No ISOs may be granted after the tenth
anniversary of the date our Board of Directors adopted the 2014 Plan.
2011 Equity Incentive Plan
General. Our Board of Directors and our stockholders approved our 2011 Plan in March 2011. The 2011 Plan was subsequently amended by our
Board of Directors and our stockholders, most recently in February 2014. The 2011 Plan is the successor to and continuation of our 2001 Plan. As of
December 31, 2021, option awards under the 2011 Plan covering an aggregate of 14,966 shares of our common stock were outstanding. No additional
awards will be granted under the 2011 Plan and all outstanding awards granted under the 2011 Plan that are repurchased, forfeited, expire or are cancelled
will become available for grant under the 2020 Plan in accordance with its terms. Our Board of Directors, or a duly authorized committee thereof, has the
authority to administer the 2011 Plan. Our Board of Directors may also delegate certain authority to one or more of our officers. The plan administrator has
the authority to modify outstanding awards under our 2011 Plan, including the authority to reduce the exercise, purchase or strike price of any outstanding
stock award, cancel any outstanding stock award in exchange for new stock awards, cash or other consideration, or take any other action that is treated as a
repricing under generally accepted accounting principles, with the consent of any adversely affected participant.
Stock Options. ISOs and NSOs are granted pursuant to stock option agreements adopted by the plan administrator. The plan administrator
determines the exercise price for a stock option, within the terms and conditions of the 2011 Plan, provided that the exercise price of a stock option
generally cannot be less than 100% of the fair market value of our common stock on the date of grant. Stock options granted under the 2011 Plan vest at the
rate specified by the plan administrator.
The plan administrator determines the term of stock options granted under the 2011 Plan, up to a maximum of 10 years. Unless the terms of an
optionholder’s stock option agreement provide otherwise, if an optionholder’s service relationship with us, or any of our affiliates, ceases for any reason
other than disability, death or cause, the optionholder may generally exercise any vested stock options for a period of three months following the cessation
of service. The stock option term may be extended in the event that exercise of the option following such a termination of service is prohibited by
applicable securities laws or our insider trading policy. If an optionholder’s service relationship with us or any of our affiliates ceases due to disability or
death, or an optionholder dies within a certain period following cessation of service, the optionholder or a beneficiary may generally exercise any vested
stock options for a period of 12 months in the event of disability and 18 months in the event of death. In the event of a termination for cause, stock options
generally terminate immediately upon the termination of the individual for cause. In no event may an option be exercised beyond the expiration of its term.
95
Corporate Transactions. Unless otherwise provided in a stock award agreement or other written agreement between us and a participant, in the
event of certain specified significant corporate transactions, the plan administrator has the discretion to take any of the following actions with respect to
stock awards:
•
•
•
•
•
•
arrange for the assumption, continuation or substitution of a stock award by a surviving or acquiring entity or parent company;
arrange for the assignment of any reacquisition or repurchase rights held by us to the surviving or acquiring entity or parent company;
accelerate the vesting, in whole or in part, of the stock award and provide for its termination prior to the effective time of the corporate
transaction;
arrange for the lapse of any reacquisition or repurchase right held by us;
cancel or arrange for the cancellation of the stock award in exchange for such cash consideration, if any, as our Board of Directors may deem
appropriate; or
make a payment equal to the excess of (a) the value of the property the participant would have received upon exercise of the stock award over
(b) the exercise price otherwise payable in connection with the stock award.
Our plan administrator is not obligated to treat all stock awards, even those that are of the same type, in the same manner.
Under the 2011 Plan, a corporate transaction is generally defined as the consummation of (1) a sale or other disposition of all or substantially all
of our assets, (2) a sale or other disposition of at least 90% of our outstanding securities, (3) a merger, consolidation or similar transaction following which
we are not the surviving corporation, or (4) a merger, consolidation or similar transaction following which we are the surviving corporation but the shares
of our common stock outstanding immediately prior to such transaction are converted or exchanged into other property by virtue of the transaction.
Change of Control. The plan administrator may provide, in an individual award agreement or in any other written agreement between a
participant and us that the stock award will be subject to additional acceleration of vesting and exercisability in the event of a change of control. Under the
2011 Plan, a change of control is generally defined as (1) the acquisition by a person or entity of more than 50% of our combined voting power other than
by merger, consolidation or similar transaction, (2) a consummated merger, consolidation or similar transaction immediately after which our stockholders
cease to own more than 50% of the combined voting power of the surviving entity, (3) approval by the stockholders or our Board of Directors of a plan of
complete dissolution or liquidation of us or our complete dissolution or liquidation occurs or (4) a consummated sale, lease or exclusive license or other
disposition of all or substantially of our assets.
Certain stock options granted under the 2011 Plan, including the stock options held by our named executive officers, provide that if immediately
prior to a change of control the participant’s service with the Company has not terminated, the option will accelerate vesting with respect to 25% of the
then-unvested portion of the option; if the option continues, the remaining 75% of the unvested option will continue to vest on the option’s original
schedule prior to the change of control and will accelerate vesting in full in the event that the participant’s continuous service is terminated without cause or
by the participant for good reason within the 12 months following the change of control. “Good reason” for purposes of this “double-trigger” provision is
generally defined as (1) an assignment of duties or responsibilities to the participant that results in a material diminution of the participant’s function; (2) a
material reduction in the participant’s annual base salary; (3) failure to continue the participant’s benefit plans or programs, any action that would adversely
affect the participant’s participation in any benefit plan, reduce the participant’s benefits under any benefit plan or deprive the participant of any fringe
benefit; or (4) a relocation of the participant’s business office more than 50 miles.
2001 Stock Option Plan
Our Board of Directors and our stockholders approved our 2001 Plan, which became effective in February 2001. The 2001 Plan terminated and
no further awards were granted under the 2001 Plan upon the effective date of the 2011 Plan. As of December 31, 2020, option awards under the 2001 Plan
covering an aggregate of 73 shares of our common stock were outstanding.
96
2014 Employee Stock Purchase Plan
General. Our Board of Directors adopted the 2014 ESPP in December 2014 and our stockholders approved the 2014 ESPP in April 2015. The
2014 ESPP became effective on May 5, 2015 in connection with our initial public offering. The purpose of our employee stock purchase plans is to retain
the services of new employees and secure the services of new and existing employees while providing incentives for such individuals to exert maximum
efforts toward our success and that of our affiliates. The employee stock purchase plans are intended to qualify as an “employee stock purchase plan”
within the meaning of Section 423 of the Code. Our Board of Directors has delegated its authority to administer the ESPP to our compensation committee.
The 2014 ESPP initially authorized the issuance of 7,388 shares of our common stock pursuant to purchase rights granted to our employees or to
employees of any of our designated affiliates. The number of shares of our common stock reserved for issuance automatically increases on January 1 of
each calendar year, from January 1, 2016 through January 1, 2024 by the least of (1) 1% of the total number of shares of our common stock outstanding on
December 31 of the preceding calendar year, (2) 13,000 shares, or (3) a number determined by our Board of Directors that is less than (1) and (2).
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, 500,000 shares of the Company’s
common stock were reserved for issuance under the Amended 2014 ESPP in addition to 24,285 shares of the Company’s common stock reserved for
issuance under the original 2014 Employee Stock Purchase Plan. The Amended 2014 ESPP does not contain an evergreen provision.
Offerings and Purchases. The Amended 2014 ESPP is implemented through a series of offerings of purchase rights to eligible employees. Under
the Amended 2014 ESPP, we may specify offerings with durations of not more than 27 months and may specify shorter purchase periods within each
offering. Each offering will have one or more purchase dates on which shares of our common stock will be purchased for employees participating in the
offering. Generally, all regular employees, including executive officers, subject to certain restrictions, employed by us or by any of our designated affiliates,
may participate in the Amended 2014 ESPP and may contribute, normally through payroll deductions, up to 15% of their earnings for the purchase of our
common stock under the Amended 2014 ESPP. Unless otherwise determined by our Board of Directors, common stock will be purchased for accounts of
employees participating in the Amended 2014 ESPP at a price per share equal to the lower of (1) 85% of the fair market value of a share of our common
stock on the first date of an offering or (2) 85% of the fair market value of a share of our common stock on the date of purchase.
Changes to Capital Structure. In the event that there occurs a change in our capital structure through such actions as a stock split, merger,
consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, large nonrecurring cash dividend,
liquidating dividend, combination of shares, exchange of shares, change in corporate structure or similar transaction, the board of directors will make
appropriate adjustments to (1) the number of shares reserved under the Amended 2014 ESPP, (2) the maximum number of shares by which the share
reserve may increase automatically each year and (3) the number of shares and purchase price of all outstanding purchase rights.
Corporate Transactions. In the event of certain significant corporate transactions, including the consummation of: (1) a sale of all our assets,
(2) the sale or disposition of 90% of our outstanding securities, (3) a merger or consolidation where we do not survive the transaction and (4) a merger or
consolidation where we do survive the transaction but the shares of our common stock outstanding immediately prior to such transaction are converted or
exchanged into other property by virtue of the transaction, any then-outstanding rights to purchase our stock under the Amended 2014 ESPP may be
assumed, continued or substituted for by any surviving or acquiring entity (or its parent company). If the surviving or acquiring entity (or its parent
company) elects not to assume, continue or substitute for such purchase rights, then the participants’ accumulated payroll contributions will be used to
purchase shares of our common stock within ten business days prior to such corporate transaction, and such purchase rights will terminate immediately.
Plan Amendments, Termination. Our Board of Directors has the authority to amend or terminate our Amended 2014 ESPP, provided that except
in certain circumstances any such amendment or termination may not materially impair any outstanding purchase rights without the holder’s consent. We
will obtain stockholder approval of any amendment to our Amended 2014 ESPP as required by applicable law or listing requirements.
401(k) Plan
We maintain a tax-qualified retirement plan that provides eligible employees with an opportunity to save for retirement on a tax advantaged
basis. All participants’ interests in their deferrals are 100% vested when contributed. We made no matching contributions into the 401(k) plan for either of
the year ended December 31, 2021. Pre-tax contributions are allocated to each participant’s individual account and are then invested in selected investment
alternatives according to the participants’ directions. The 401(k) plan is intended to qualify under Sections 401(a) and 501(a) of the Code. As a tax-
qualified retirement plan, contributions to the 401(k) plan and earnings on those contributions are not taxable to the employees until distributed from the
401(k) plan, and all contributions are deductible by us when made.
97
Director Compensation
The following table sets forth in summary form information concerning the compensation that we paid or awarded during the year ended
December 31, 2021 to each of our non-employee directors:
Name
Ann F. Hanham
Michelle R. Griffin
Harry A. George
Donnie M. Hardison
James T. LaFrance
Lee R. McCracken
Timothy B. Johnson (2)
Fees Earned or Paid
in Cash ($)
Option Awards ($)
(1)
Total ($)
75,000
56,000
42,500
47,000
47,500
46,000
4,677
25,000
25,000
25,000
25,000
25,000
25,000
—
100,000
81,000
67,500
72,000
72,500
71,000
4,677
(1)
As of December 31, 2021, the aggregate number of outstanding options to purchase our common stock held by our non-employee directors were:
Dr. Hanham: 10,398, Ms. Griffin: 9,999, Mr. George: 10,532; Mr. Hardison: 10,798; Mr. LaFrance: 10,798, Mr. McCracken: 10,798 and Mr.
Johnson 21,737. The dollar amounts in this column represent the aggregate grant date fair value of stock option awards granted in 2021. These
amounts have been computed in accordance with FASB ASC Topic 718, using the Black-Scholes option pricing model. For further discussion of
valuation assumptions, see Note 14 “Stockholders’ Equity” to our consolidated financial statements included elsewhere in this Annual Report on
Form 10-K.
(2) Mr. Johnson served as our Executive Chairman until his resignation in January 2021.
We have reimbursed and will continue to reimburse all of our non-employee directors for their travel, lodging and other reasonable expenses
incurred in attending meetings of our Board of Directors and committees of our Board of Directors, and will pay for the travel, lodging and other
reasonable expenses incurred by our employee directors to attend meetings of our Board of Directors and, as applicable, committees of our Board of
Directors.
Pursuant to our non-employee director compensation policy, non-employee director compensation for service on our Board of Directors was as
follows as of January 1, 2021:
•
•
•
•
•
•
an annual cash retainer of $35,000;
an additional annual cash retainer of $30,000 for service as Chair of our Board of Directors;
an additional annual cash retainer of $15,000, $12,000 and $10,000 for service as the chair of our Audit Committee, Compensation
Committee and Nominating and Governance Committee, respectively;
an additional annual cash retainer of $7,500, $6,000 and $5,000 for service as member of our Audit Committee, Compensation Committee
and Nominating and Governance Committee, respectively;
an automatic annual option grant to purchase 4,000 shares of our common stock for each non-employee director who is serving on our Board
of Directors on the date of each annual stockholder meeting and who has served as a member of our Board of Directors for a minimum of six
months, in each case vesting on the earliest to occur of (i) the date that is 12 months following the grant date and (ii) the following year’s
annual stockholder meeting; and
upon first joining our Board of Directors an automatic initial option grant to purchase 8,000 shares of our common stock on the date of grant.
One-third of the shares will vest twelve months after the date of grant and the remaining shares will vest monthly in equal installments over a
two-year period thereafter such that the stock option is fully vested on the third anniversary of the date of grant. A director who, in the one
year prior to his or her initial election to serve on the board of directors as a non-employee director, served as an employee of the company
will not be eligible for an initial grant.
Each of the option grants described above will vest and become exercisable subject to the director’s continuous service with us through each
applicable vesting date, provided that each option will vest in full upon a change of control, as defined under the 2020 Plan. The stock options will be
granted under the 2020 Plan, the terms of which are described in more detail above under “– Equity Benefit Plans – 2020 Equity Incentive Plan.”
98
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides certain information with respect to all of the Company’s equity compensation plans in effect as of December 31,
2021.
Equity Compensation Plan Information
Plan Category
Equity compensation plans approved by security
holders:
2011 Equity Incentive Plan
2014 Equity Incentive Plan (1) (2)
Amended 2014 Employee Stock Purchase Plan (3)
2020 Equity Incentive Plan
Equity compensation plans not approved by security holders (4)
Total
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights (a)
Weighted-average
exercise price of
outstanding
options, warrants
and rights (b)
Number of
securities
remaining
available for
issuance under
equity compensation
plans (excluding
securities reflected
in column (a) (c)
14,966
183,272
—
252,275
140,000
590,513
49.94
26.12
N/A
6.87
5.29
—
—
479,674
558,865
160,000
1,038,539
(1)
(2)
(3)
(4)
On January 1 of each year from January 1, 2016 through and including January 1, 2020, the number of shares authorized for issuance under the 2014
Plan was automatically increased by a number equal to 4% of the total number of shares of our common stock outstanding on December 31 of the
preceding calendar year, or such lesser number of shares determined by our Board of Directors. Upon adoption of the 2020 Plan in August 2020,
there were no additional annual authorized share increases.
The number of shares to be issued upon exercise of outstanding options, RSUs, warrants and rights under the 2014 Equity Incentive Plan includes
1,177 outstanding RSU awards. These shares have been excluded from weighted-average exercise price in column (b) above.
On January 1 of each year from January 1, 2016 through and including January 1, 2020, the number of shares authorized for issuance under our
2014 Employee Stock Purchase Plan was automatically increased by a number equal to the least of: (a) 1% of the total number of shares of our
common stock outstanding on December 31 of the preceding calendar year; (b) 13,000 shares; and (c) a number determined by the board of directors
that is less than the amounts set forth in the foregoing clauses (a) and (b). In August 2021, the Company’s stockholders, upon the recommendation of
the Company’s Board of Directors, approved the Amended 2014 ESPP. Upon approval of the Amended 2014 ESPP, 500,000 shares of the
Company’s common stock were reserved for issuance under the Amended 2014 ESPP in addition to 24,285 shares of the Company’s common stock
reserved for issuance under the original 2014 Employee Stock Purchase Plan. The Amended 2014 ESPP 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
300,000 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 160,000 shares of the Company’s stock available for issuance under the 2021 Inducement Plan as of December
31, 2021.
99
Principal Stockholders
The following table sets forth certain information regarding the ownership of the Company’s common stock as of February 28, 2022 by: (i) each
director; (ii) each of our executive officers named in the Summary Compensation Table above; (iii) all executive officers and directors of the Company as a
group; and (iv) all those known by the Company to be beneficial owners of more than five percent of its common stock.
The table is based upon information supplied by officers, directors and principal stockholders, Schedules 13G filed with the SEC and other
sources believed to be reliable by us. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, the
Company believes that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as
beneficially owned. Applicable percentages are based on 7,590,733 shares outstanding on February 28, 2022, adjusted as required by rules promulgated by
the SEC. Unless otherwise indicated, the address for each person or entity listed in the table is c/o HTG Molecular Diagnostics, Inc., 3430 E. Global Loop,
Tucson, Arizona 85706.
Name and address of beneficial owner
Greater than 5% stockholders
Samjo Capital, LLC, Samjo Management, LLC and Andrew N. Wiener (1)
599 Lexington Avenue, Floor 21
New York, NY 10022
AIGH Capital Management LLC, AIGH Investment Partners LLC and Orin Hirschman (2)
6006 Berkeley Avenue
Baltimore, MD 21209
Cowen Prime Advisors (3)
599 Lexington Avenue, Floor 21
New York, NY 10022
The Hewlett Fund LP (4)
100 Merrick Road, Suite 400W
Rockville Centre, NY 11570
Larry Lytton (5)
467 Central Park West
New York, NY 10025
Directors and named executive officers
John L. Lubniewski (6)
Shaun D. McMeans (7)
Byron Lawson (8)
Ann Hanham (9)
Harry A. George (10)
Michelle R. Griffin (11)
Donnie M. Hardison (12)
James T. LaFrance (13)
Lee McCracken (14)
All current executive officers and directors as a
group (9 persons) (15)
*
Represents beneficial ownership of less than one percent.
100
Common Stock Beneficially Owned
Shares
Percentage
615,100
614,000
593,133
523,887
521,691
123,225
54,567
28,196
6,884
18,757
6,165
7,631
7,631
7,131
260,187
8.1%
8.1%
7.8%
6.9%
6.9%
1.6%
*
*
*
*
*
*
*
*
3.3%
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Samjo Capital, LLC and Samjo Management, LLC, Delaware limited liability companies and Andrew N. Wiener, as sole managing member of these
entities have reported shared voting power over 590,000 shares of the Company’s common stock and Mr. Wiener reports having sole voting power
over an additional 25,100 shares of the Company’s common stock. This information is based on the Schedule 13G filed on February 8, 2022 with
the SEC.
AIGH Capital Management, LLC, a Maryland limited liability company, AIGH Investment Partners, LLC, a Delaware limited liability company,
and Orin Hirschman, Managing Member of AIGH Investment Partners, LLC and president of AIGH Investment Partners, LLC have reported shared
voting power over 614,000 shares of Company’s common stock. This information is based on the Schedule 13G filed on February 11, 2022 with the
SEC.
Cowen Prime Advisors LLC (“CPA”) is a registered investment adviser under the Investment Advisers Act of 1940. In its role as investment adviser,
CPA possesses discretionary investment authority to determine the identity and amount of securities to be bought and sold, including 593,133 shares
of the Company’s common stock. These securities are owned by various clients, who have retained sole proxy voting authority over all of the shares.
However, CPA has sole authority to dispose of the position as appropriate. CPA reported the total number of shares beneficially owned by CPA as
discretionary investment manager in the Information Table filed by CPA as part of its third quarter 2021 Form 13F filing. Andrew N. Wiener, one of
the portfolio managers of the CPA Samjo Investment Program (“SI”), is also the sole Managing Member of Samjo Capital, LLC and Samjo
Management, LLC which serve as the General Partner and Management Company, respectively, of Samjo Partners, LP, an investment partnership
(hedge fund) and HAFF Partners LP, a family investment partnership, both of which employ investment strategies that are similar to those employed
in the CPA SI program. Samjo Capital, LLC, Samjo Management, LLC, Samjo Partners, LP and HAFF Partners LP are not affiliated with CPA. Mr.
Wiener, along with his fellow CPA SI portfolio managers, is responsible for the decision to invest client accounts of CPA SI in shares of this issuer.
In addition to Mr. Wiener’s portfolio management responsibilities for CPA SI, Mr. Wiener may invest, and from time to time has, invested assets of
his non-CPA clients in shares of this same issuer. However, because these non-CPA clients are an unaffiliated outside business activity of Mr.
Wiener over which CPA has no control or other relationship, CPA does not make joint filings with respect to any shares of the issuer held by any
non-CPA clients. To the best of CPA’s knowledge and belief, Mr. Wiener reports the ownership of shares by such non-CPA clients separately to the
extent required and is identified as the reporting person. This information is based on the Schedule 13G filed on February 9, 2022 with the SEC.
The Hewlett Fund LP may be deemed to be the beneficial owner of 523,887 shares of the Company’s common stock. This information is based on
the Schedule 13G filed on January 4, 2022 with the SEC.
Laurence W. Lytton may be deemed to be the beneficial owner of 521,691 shares, including 519,259 shares for which he has reported sole voting
and dispositive power over and 2,432 shares for which he has reported shared voting and dispositive power of the Company’s common stock. This
information is based on the Schedule 13G filed on February 15, 2022 with the SEC.
Includes 111,591 shares that Mr. Lubniewski has the right to acquire from us within 60 days of February 28, 2022 pursuant to the exercise of stock
options and the vesting of RSUs.
Includes 46,245 shares that Mr. McMeans has the right to acquire from us within 60 days of February 28, 2022 pursuant to the exercise of stock
options and the vesting of RSUs.
Includes 24,364 shares that Mr. Lawson has the right to acquire from us within 60 days of February 28, 2022 pursuant to the exercise of stock
options and the vesting of RSUs.
Includes 6,398 shares that Dr. Hanham has the right to acquire from us within 60 days of February 28, 2022 pursuant to the exercise of stock
options.
(10) Consists of (i) 9,624 shares beneficially owned by Solstice Capital II LP and (ii) 6,532 shares that Mr. George has the right to acquire from us within
60 days of February 28, 2022 pursuant to the exercise of stock options. Mr. George is the managing member of Solstice Capital II LP and has joint
voting and investment power over the shares held by Solstice Capital II LP.
(11)
Includes 5,999 shares that Ms. Griffin has the right to acquire from us within 60 days of February 28, 2022 pursuant to the exercise of stock options.
(12)
(13)
(14)
Includes 6,798 shares that Mr. Hardison has the right to acquire from us within 60 days of February 28, 2022 pursuant to the exercise of stock
options.
Includes 6,798 shares that Mr. LaFrance has the right to acquire from us within 60 days of February 28, 2022 pursuant to the exercise of stock
options.
Includes 6,798 shares that Mr. McCracken has the right to acquire from us within 60 days of February 28, 2022 pursuant to the exercise of stock
options.
(15) The number of shares beneficially owned consists of (a) the shares described in Notes (6) through (14).
101
Item 13. Certain Relationships and Related Transactions, and Director Independence.
We have adopted a written related-person transactions policy that sets forth our policies and procedures regarding the identification, review,
consideration and oversight of “related-person transactions.” For purposes of our policy only, a “related-person transaction” is a transaction, arrangement or
relationship (or any series of similar transactions, arrangements or relationships) in which we and any “related person” are participants involving an amount
that exceeds the lesser of $120,000 or one percent of the average of the Company’s total assets at year-end for the last two completed fiscal years.
Transactions involving compensation for services provided to us as an employee, consultant or director are not considered related-person
transactions under this policy. A “related person” is any executive officer, director or a holder of more than five percent of our common stock, including
any of their immediate family members and any entity owned or controlled by such persons.
Under the policy, where a transaction has been identified as a related-person transaction, management must present information regarding the
proposed related-person transaction to our Audit Committee (or, where review by our Audit Committee would be inappropriate, to another independent
body of our Board of Directors) for review. The presentation must include a description of, among other things, the material facts, the direct and indirect
interests of the related persons, the benefits of the transaction to us and whether any alternative transactions are available. To identify related-person
transactions in advance, we rely on information supplied by our executive officers, directors and certain significant stockholders. In considering related-
person transactions, our Audit Committee or other independent body of our Board of Directors takes into account the relevant available facts and
circumstances including, but not limited to:
•
•
•
•
•
the risks, costs and benefits to us;
the impact on a director’s independence in the event the related person is a director, immediate family member of a director or an entity with
which a director is affiliated;
the terms of the transaction;
the availability of other sources for comparable services or products; and
the terms available to or from, as the case may be, unrelated third parties or to or from our employees generally.
In the event a director has an interest in the proposed transaction, the director must recuse himself or herself from the deliberations and approval.
The following sections summarize transactions since January 1, 2020 to which we have been a party, in which the amount involved in the
transaction exceeded the lesser of $120,000 or one percent of the average of the Company’s total assets at year-end for the last two completed fiscal years,
and in which any of our directors, executive officers or, to our knowledge, beneficial owners of more than 5% of our capital stock or any member of the
immediate family of any of the foregoing persons had or will have a direct or indirect material interest, other than equity and other compensation,
termination, change in control and other arrangements, which are described under “Executive Compensation” and “Director Compensation.”
Employment Arrangements
We currently have written employment agreements with our executive officers. For information about our employment agreements with our
named executive officers, refer to “Executive Compensation – Agreements with our Named Executive Officers.”
Stock Options Granted to Executive Officers and Directors
We have granted stock options to our executive officers and directors, as more fully described in “Executive Compensation – Outstanding Equity
Awards at Fiscal Year-End.”
Indemnification Agreements
We have entered into, and intend to continue to enter into, separate indemnification agreements with our directors and executive officers, in
addition to the indemnification provided for in our amended and restated bylaws. These agreements, among other things, require us to indemnify our
directors and executive officers for certain expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by a director or executive
officer in any action or proceeding arising out of their services as one of our directors or executive officers or any other company or enterprise to which the
person provides services at our request. We believe that these bylaw provisions and indemnification agreements are necessary to attract and retain qualified
persons as directors and officers.
102
The limitation of liability and indemnification provisions in our amended and restated certificate of incorporation and amended and restated
bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. They may also reduce the likelihood of
derivative litigation against directors and officers, even though an action, if successful, might benefit us and our stockholders. A stockholder’s investment
may be harmed to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.
Director Independence
Our Board of Directors has determined that all of our directors other than Mr. Lubniewski are independent directors, as defined by Rule 5605(a)
(2) of the Nasdaq Listing Rules. The Nasdaq independence definition includes a series of objective tests, including that the director is not, and has not been
for at least three years, one of our employees and that neither the director nor any of his family members has engaged in various types of business dealings
with us. In addition, as required by Nasdaq rules, our Board of Directors has made a subjective determination as to each independent director that no
relationships exist, which, in the opinion of our Board of Directors, would interfere with the exercise of independent judgment in carrying out the
responsibilities of a director. In making these determinations, our Board of Directors reviewed and discussed information provided by the directors and us
with regard to each director’s business and personal activities and relationships as they may relate to us and our management.
Item 14. Principal Accounting Fees and Services.
The following table summarizes the fees of BDO USA, LLP, our independent registered public accounting firm, for 2021 and 2020.
Fee Category
Audit fees (1)
Audit-related fees
Tax fees
All other fees
Total fees
December 31,
2021
2020
$
$
409,889
—
—
—
409,889
$
$
501,000
—
—
—
501,000
(1)
Audit fees consist of fees for professional services provided primarily in connection with the annual audit of our consolidated financial statements,
quarterly reviews and services associated with SEC registration statements and other documents issued in connection with securities offerings
including comfort letters and consents.
Pre-Approval Policies and Procedures
Pursuant to its charter, the audit committee must review and approve, in advance, the scope and plans for the audits and the audit fees and
approve in advance (or, where permitted under the rules and regulations of the SEC, subsequently) all non-audit services to be performed by the
independent auditor that are not otherwise prohibited by law and any associated fees. The audit committee may delegate to one or more members of the
committee the authority to pre-approve audit and permissible non-audit services, as long as this pre-approval is presented to the full committee at scheduled
meetings. All fees described above were pre-approved by the audit committee.
103
Item 15. Exhibits, Financial Statement Schedules.
PART IV
(a)(1) Consolidated Financial Statements - The consolidated financial statements filed as part of this Annual Report on Form 10-K are listed on the Index
to Financial Statements in Item 8.
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or the notes
thereto.
(a)(3) Exhibits
The exhibits required by Item 601 of Regulation S-K are listed in paragraph (b) below.
(b)
Exhibits.
The exhibits listed on the Exhibit Index immediately preceding the signature page to this Annual Report on Form 10-K are filed herewith or are
incorporated by reference to exhibits previously filed with the SEC.
104
Exhibit
Number
2.1
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
10.1+
Exhibit Index
Description
Asset Purchase Agreement dated January 9, 2001, as amended by and between the Registrant, NuvoGen, LLC, Stephen Felder and
Richard Kris (incorporated by reference to Exhibit 2.1 to the Registrant’s registration Statement on Form S-1, as amended (File No. 333-
201313), originally filed with the SEC on December 30, 2014).
Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current
Report on Form 8-K, filed with the SEC on May 12, 2015).
Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit
3.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on November 19, 2020).
Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (incorporated by reference to
Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 0001-37369), filed with the SEC on February 26, 2020).
Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-
K, filed with the SEC on May 12, 2015).
Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
Form of Common Stock Certificate of the Registrant (incorporated by reference to Exhibit 4.2 of the Registrant’s Annual Report on Form
10-K for the year ended December 31, 2020, filed with the SEC on March 25, 2021).
Series E Preferred Stock Warrant issued by the Registrant to Silicon Valley Bank, dated August 22, 2014 (incorporated by reference to
Exhibit 4.4 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-201313), originally filed with the SEC on
December 30, 2014).
Series E Preferred Stock Warrant issued by the Registrant to Oxford Finance LLC, dated August 22, 2014 (incorporated by reference to
Exhibit 4.5 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-201313), originally filed with the SEC on
December 30, 2014).
Common Stock Warrant issued by the Registrant to Oxford Finance LLC, dated March 28, 2016 (incorporated by reference to Exhibit 4.1
to the Registrant’s Current Report on Form 8-K, filed with the SEC on June 30, 2016).
Warrant issued to MidCap Funding XXVIII Trust, dated March 26, 2018 (incorporated by reference to Exhibit 4.10 to the Registrant’s
Quarterly Report on Form 10-Q (File No. 001-37369), filed with the SEC on May 10, 2018).
Warrant to Purchase Common Stock, issued to Silicon Valley Bank on June 24, 2020 (incorporated by reference to Exhibit 4.1 to the
Registrant’s Current Report on Form 8-K, filed with the SEC on June 25, 2020).
Form of Pre-Funded Warrant issued on March 21, 2022 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on
Form 8-K (File No. 001-37369), filed with the SEC on March 21, 2022).
Form of Common Stock Warrant (24-month term) issued on March 21, 2022 (incorporated by reference to Exhibit 4.2 to the Registrant’s
Current Report on Form 8-K (File No. 001-37369), filed with the SEC on March 21, 2022).
Form of Common Stock Warrant (66-month term) issued on March 21, 2022 (incorporated by reference to Exhibit 4.3 to the Registrant’s
Current Report on Form 8-K (File No. 001-37369), filed with the SEC on March 21, 2022).
Registration Rights Agreement, dated as of March 17, 2022 between the Registrant and the purchaser party thereto (incorporated by
reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K (File No. 001-37369), filed with the SEC on March 21, 2022).
Description of Common Stock.
Form of Indemnity Agreement by and between the Registrant and its directors and officers (incorporated by reference to Exhibit 10.1 to
the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-201313), originally filed with the SEC on December 30,
2014).
105
Exhibit
Number
10.2+
HTG Molecular Diagnostics, Inc. 2011 Equity Incentive Plan and Forms of Stock Option Agreement, Notice of Exercise and Stock
Option Grant Notice thereunder (incorporated by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1, as
amended (File No. 333-201313), originally filed with the SEC on December 30, 2014).
Description
10.3+
HTG Molecular Diagnostics, Inc. 2014 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 10.7 to the Registrant’s
Quarterly Report on Form 10-Q (File No. 001-37369), filed with the SEC on May 9, 2019).
10.4+
Standard Forms of Stock Option Agreement, Notice of Exercise and Stock Option Grant Notice under the HTG Molecular Diagnostics,
Inc. 2014 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-
Q (File No. 001-37369), filed with the SEC on May 9, 2019).
10.5+
Forms of Stock Option Agreement, Notice of Exercise and Stock Option Grant Notice for Inducement Award Recipients under the HTG
Molecular Diagnostics, Inc. 2014 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 10.9 to the Registrant’s
Quarterly Report on Form 10-Q (File No. 001-37369), filed with the SEC on May 9, 2019).
10.6+
HTG Molecular Diagnostics, Inc. 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K (File No. 0001-37369), filed with the Commission on August 20, 2020).
10.7+
Form of Stock Option Grant Notice, Option Agreement and Notice of Exercise under the HTG Molecular Diagnostics, Inc. 2020 Equity
Incentive Plan (incorporated by reference to Exhibit 99.2 to the Registrant’s Registration Statement on Form S-8 (File No. 333-248207),
filed with the Commission on August 20, 2020).
10.8+
Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under the HTG Molecular Diagnostics, Inc.
2020 Equity Incentive Plan (incorporated by reference to Exhibit 99.3 to the Registrant’s Registration Statement on Form S-8 (File No.
333-248207), filed with the Commission on August 20, 2020).
10.9+
HTG Molecular Diagnostics, Inc. Amended and Restated 2014 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1
to the Registrant’s Current Report on Form 8-K (File No. 001-37369), filed with the Commission on August 19, 2021).
10.10
HTG Molecular Diagnostics, Inc. 2021 Inducement Plan (incorporated by reference to Exhibit 99.1 to the Registrant’s Registration
Statement on Form S-8 (File No. 333-258977), filed with the Commission on August 20, 2021).
10.11
Form of Stock Option Grant Notice, Option Agreement and Notice of Exercise under the HTG Molecular Diagnostics, Inc. 2021
Inducement Plan (incorporated by reference to Exhibit 99.2 to the Registrant’s Registration Statement on Form S-8 (File No. 333-
258977), filed with the Commission on August 20, 2021).
10.12
Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under the HTG Molecular Diagnostics, Inc.
2021 Inducement Plan (incorporated by reference to Exhibit 99.3 to the Registrant’s Registration Statement on Form S-8 (File No. 333-
258977), filed with the Commission on August 20, 2021).
10.13
HTG Molecular Diagnostics, Inc. Amended and Restated Stock Purchase Plan (incorporated by reference to Exhibit 10.3 to the
Registrant’s Quarterly Report on Form 10-Q (File No. 001-37369), filed with the SEC on August 9, 2016).
10.14+
HTG Molecular Diagnostics, Inc. Amended and Restated Non-Employee Director Compensation Policy (incorporated by reference to
Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K (File No. 001-37369), filed with the SEC on March 25, 2021).
10.15+
HTG Molecular Diagnostics, Inc. Severance and Change in Control Plan (incorporated by reference to Exhibit 10.13 to the Registrant’s
Annual Report on Form 10-K (File No. 001-37369), filed with the SEC on March 25, 2021).
10.16+
Employment Agreement, dated April 1, 2019, by and between John L. Lubniewski and the Registrant (incorporated by reference to
Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed with the SEC on April 2, 2019).
10.17+
Employment Agreement, dated July 28, 2019, by and between Shaun D. McMeans and the Registrant (incorporated by reference to
Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37369), filed with the SEC on November 12, 2019).
106
Exhibit
Number
10.18+
Employment Agreement, dated July 28, 2019, by and between Byron Lawson and the Registrant (incorporated by reference to Exhibit
10.47 to the Registrant’s Annual Report on Form 10-K (File No. 001-37369), filed with the SEC on March 25, 2020).
Description
10.19
Standard Commercial-Industrial Multi Tenant Triple Net Lease dated July 11, 2008 by and between the Registrant and Pegasus Properties
LP (incorporated by reference to Exhibit 10.12 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-
201313), originally filed with the SEC on December 30, 2014).
10.20
Second Amendment to Lease Agreement (Suite 300 – Laboratory), dated December 8, 2020, by and between the Registrant and Pegasus
Properties, L.P. (incorporated by reference to Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K (File No. 001-37369), filed
with the SEC on March 25, 2021).
10.21
Second Amendment to Lease Agreement (Suite 100 - Administration - to include Suite 200), dated January 28, 2019, by and between
Pegasus Properties, L.P. and the Registrant (incorporated by reference to Exhibit 10.34 to the Registrant’s Annual Report on Form 10-K,
filed with the SEC on March 7, 2019).
10.22
Third Amendment to Lease Agreement (Suite 100 – Administration), dated December 8, 2020, by and between the Registrant and
Pegasus Properties, L.P. (incorporated by reference to Exhibit 10.20 to the Registrant’s Annual Report on Form 10-K (File No. 001-
37369), filed with the SEC on March 25, 2021).
10.23
Third Amendment, dated September 27, 2021, to Standard Commercial-Industrial Multi Tenant Triple Net Lease, dated July 11, 2008,
between the Company and Pegasus Properties L.P. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K (File No. 0001-37369), filed with the SEC on September 29, 2021).
10.24
Fourth Amendment, dated September 27, 2021, to Standard Commercial-Industrial Multi Tenant Triple Net Lease, dated May 11, 2011,
between the Company and Pegasus Properties L.P. (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form
8-K (File No. 0001-37369), filed with the SEC on September 29, 2021).
10.25
Loan and Security Agreement dated June 24, 2020, by and among the Registrant and Silicon Valley Bank (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37369), filed with the SEC on June 24, 2020).
23.1
24.1
31.1
31.2
32.1
32.2
Consent of Independent Registered Public Accounting Firm.
Power of Attorney. Reference is made to the signature page hereto.
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
107
+
Indicates management contract or compensatory plan.
Item 16. Form 10-K Summary.
None.
108
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized.
HTG Molecular Diagnostics, Inc.
SIGNATURES
Date: March 29, 2022
By:
/s/ John L. Lubniewski
John L. Lubniewski
Chief Executive Officer
(Principal Executive Officer)
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John L. Lubniewski and
Shaun D. McMeans, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign
any amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
Signature
/s/ John L. Lubniewski
John L. Lubniewski
/s/ Shaun D. McMeans
Shaun D. McMeans
/s/ Laura L. Godlewski
Laura L. Godlewski
/s/ Ann F. Hanham
Ann F. Hanham
/s/ Harry A. George
Harry A. George
/s/ Michelle R. Griffin
Michelle R. Griffin
/s/ Donnie M. Hardison
Donnie M. Hardison
/s/ Christopher P. Kiritsy
Christopher P. Kiritsy
/s/ James T. LaFrance
James T. LaFrance
/s/ Lee R. McCracken
Lee R. McCracken
Title
President and Chief Executive Officer and Director
(Principal Executive Officer)
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Senior Vice President of Finance and Administration
(Principal Accounting Officer)
Date
March 29, 2022
March 29, 2022
March 29, 2022
Chair of Board of Directors
March 29, 2022
Director
Director
Director
Director
Director
Director
109
March 29, 2022
March 29, 2022
March 29, 2022
March 29, 2022
March 29, 2022
March 29, 2022
DESCRIPTION OF COMMON STOCK
Exhibit 4.12
The following summary describes the material terms of the common stock, par value $0.001 per share, of HTG Molecular Diagnostics, Inc.
(“we,” “us” and “our”). The description of common stock is qualified by reference to our amended and restated certificate of incorporation and our
amended and restated bylaws, which are incorporated by reference as exhibits to the Annual Report on Form 10-K of which this exhibit is a part.
General
Our amended and restated certificate of incorporation authorizes us to issue up to 26,666,667 shares of common stock In addition, under our
amended and restated certificate of incorporation, our board of directors has the authority, without further action by stockholders, to designate up to
10,000,000 shares of preferred stock, par value $0.001 per share, in one or more series and to fix the rights, preferences, privileges, qualifications and
restrictions granted to or imposed upon the preferred stock, including dividend rights, conversion rights, voting rights, rights and terms of redemption,
liquidation preference and sinking fund terms, any or all of which may be greater than the rights of our common stock. The issuance of preferred stock
could adversely affect the voting power of holders of common stock and reduce the likelihood that common stockholders will receive dividend payments
and payments upon liquidation. The issuance could also have the effect of decreasing the market price of the common stock. The issuance of preferred
stock also could have the effect of delaying, deterring or prevent a change in control of us.
Our board of directors previously designated 51,270 shares of preferred stock as Series A Convertible Preferred Stock (“Series A Preferred”), of
which 23,770 shares are issued and outstanding as of the end of the period covered by the Annual Report on Form 10-K of which this exhibit is a part. Each
share of Series A Preferred is convertible into 6.67 shares of our common stock at the election of the holder, subject to proportional adjustment and
beneficial ownership limitations as provided in the Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred
Stock. Each share of Series A Preferred that is converted into common stock resumes the status of authorized but unissued shares of preferred stock and
shall no longer be designated as Series A Preferred.
Voting
Our common stock is entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders, including the
election of directors, and does not have cumulative voting rights. Accordingly, the holders of a majority of the shares of our common stock entitled to vote
in any election of directors can elect all of the directors standing for election.
Dividends
Subject to preferences that may be applicable to any then outstanding preferred stock, the holders of common stock are entitled to receive
dividends, if any, as may be declared from time to time by our board of directors out of legally available funds. Holders of Series A Preferred are entitled to
receive dividends on shares of Series A Preferred equal (on an as-converted to common stock basis) to and in the same form as dividends actually paid on
our common stock.
Liquidation
In the event of our liquidation, dissolution or winding up, holders of our common stock and holders of Series A Preferred will be entitled to
share ratably (on an as-converted to common stock basis) in the net assets legally available for distribution to stockholders after the payment of all of our
debts and other liabilities, subject to the satisfaction of any liquidation preference granted to the holders of any outstanding shares of preferred stock.
Rights and Preferences
Holders of our common stock have no preemptive, conversion or subscription rights, and there are no redemption or sinking fund provisions
applicable to our common stock. The rights, preferences and privileges of the holders of our common stock are subject to, and may be adversely affected
by, the rights of the holders of shares of any series of our preferred stock that we may designate and issue in the future.
Anti-Takeover Effects of Provisions of Our Amended and Restated Certificate of Incorporation, Our Bylaws and Delaware Law
Delaware Anti-Takeover Law
We are subject to Section 203 of the Delaware General Corporation Law, or Section 203. Section 203 generally prohibits a public Delaware
corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years following the time that such stockholder
became an interested stockholder, unless:
•
•
•
prior to such time the board of directors of the corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder;
upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder)
those shares owned (i) by persons who are directors and also officers and (ii) employee stock plans in which employee participants
do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange
offer; or
at or subsequent to such time the business combination is approved by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock
which is not owned by the interested stockholder.
Section 203 defines a business combination to include:
•
•
•
•
•
any merger or consolidation involving the corporation and the interested stockholder;
any sale, transfer, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the corporation;
subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the
interested stockholder;
subject to exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share of the stock
of any class or series of the corporation beneficially owned by the interested stockholder; and
the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting
stock of the corporation and any entity or person affiliated with or controlling or controlled by the entity or person.
Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws
Provisions of our amended and restated certificate of incorporation and amended and restated bylaws may delay or discourage transactions
involving an actual or potential change in our control or change in our management,
including transactions in which stockholders might otherwise receive a premium for their shares or transactions that our stockholders might otherwise deem
to be in their best interests. Therefore, these provisions could adversely affect the price of our common stock. Among other things, our amended and
restated certificate of incorporation and amended and restated bylaws:
•
•
•
•
•
•
•
•
•
•
permit our board of directors to issue up to 10,000,000 shares of preferred stock, with any rights, preferences and privileges as they
may designate (including the right to approve an acquisition or other change of control);
provide that the authorized number of directors may be changed only by resolution of the board of directors;
provide that directors may only be removed, subject to any limitation imposed by law, by the holders of at least 66 2/3% of the
voting power of all of our then-outstanding shares of the capital stock entitled to vote generally at an election of directors;
provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the
affirmative vote of a majority of directors then in office, even if less than a quorum;
divide our board of directors into three classes;
require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders
and not be taken by written consent;
provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as
directors at a meeting of stockholders must provide advance notice in writing in a timely manner and also specify requirements as to
the form and content of a stockholder’s notice;
do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of common stock entitled to
vote in any election of directors to elect all of the directors standing for election, if they should so choose);
provide that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (1) any derivative action or
proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors or
officers to us or our stockholders, (3) any action asserting a claim against the us arising pursuant to any provision of the Delaware
General Corporation Law or our certificate of incorporation or bylaws, or (4) any action asserting a claim against us governed by
the internal affairs doctrine; provided, however, the foregoing forum selection provisions do not apply to actions arising under the
Securities Act of 1933, as amended, or the Exchange Act of 1934, as amended; and
provide that special meetings of our stockholders may be called only by the chairman of the board, our Chief Executive Officer or
by the board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors.
The amendment of any of these provisions, with the exception of the ability of our board of directors to issue shares of preferred stock and
designate any rights, preferences and privileges thereto, would require approval by the holders of at least 66 2/3% of our then outstanding common stock.
Nasdaq Capital Market Listing
Our common stock is listed on The Nasdaq Capital Market under the symbol “HTGM.”
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, LLC. The transfer agent and registrar’s
address is 6201 15th Avenue, Brooklyn, New York 11219.
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
HTG Molecular Diagnostics, Inc.
Tucson, Arizona
We hereby consent to the incorporation by reference in the Registration Statements on Form S‑3 (No. 333-262357) and Form S-8
(Nos. 333-203930, 333-208325, 333-210401, 333-216942, 333-222571, 333-229303, 333-231349, 333-235961, 333-248207, 333-
252142 and 333-258977) of HTG Molecular Diagnostics, Inc. of our report dated March 29, 2022, relating to the consolidated
financial statements, which appears in this Form 10-K. Our report contains an explanatory paragraph regarding the Company’s
ability to continue as a going concern.
/s/ BDO USA, LLP
Los Angeles, California
March 29, 2022
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, John L. Lubniewski, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K for the year ended December 31, 2021 of HTG Molecular Diagnostics, Inc.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 29, 2022
By:
/s/ John L. Lubniewski
John L. Lubniewski
President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Shaun D. McMeans, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K for the year ended December 31, 2021 of HTG Molecular Diagnostics, Inc.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 29, 2022
By:
/s/ Shaun D. McMeans
Shaun D. McMeans
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of HTG Molecular Diagnostics, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2021
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §
906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the
Company.
Date: March 29, 2022
By:
/s/ John L. Lubniewski
John L. Lubniewski
President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of HTG Molecular Diagnostics, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2021
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §
906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the
Company.
Date: March 29, 2022
By:
/s/ Shaun D. McMeans
Shaun D. McMeans
Chief Financial Officer
(Principal Financial Officer)