Summary of Significant Accounting Policies | Note 2. Summary of Significant Accounting Policies Accounting The financial statements and accompanying notes were prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). Liquidity The Company expects that its cash and cash equivalents, together with interest thereon, will be sufficient to fund its operations for at least the next 12 months and likely through the midpoint of the second quarter 2017. However, the Company has had recurring operating losses and negative cash flows from operations since its inception. As such, the Company expects that it will need to raise additional equity or debt capital at some point in the future until its revenue reaches a level sufficient to provide for self-sustaining cash flows. There can be no assurance that additional equity or debt financing will be available on acceptable terms, or at all, or that the Company’s revenue will reach a level sufficient to provide for self-sustaining cash flows. Use of Estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company’s significant estimates include revenue recognition, stock-based compensation expense, the value of the warrant liability, the resolution of uncertain tax positions, income tax valuation allowances, recovery of long-lived assets and provisions for doubtful accounts, inventory obsolescence and inventory valuation. Actual results could materially differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash and cash equivalents. Cash and cash equivalents consist of cash on deposit with financial institutions, money market instruments and high credit quality corporate debt securities purchased with a term of three months or less. Accounts Receivable, net Accounts receivable represent valid claims against debtors and have been reported net of an allowance for doubtful accounts of $0 and $85,068 at December 31, 2015 and 2014, respectively. The Company reviews accounts receivable to identify where collectability may not be probable based on the specific identification method. Bad debt expense, net of recoveries, was $44,854 and $115,068 for the years ended December 31, 2015 and 2014, respectively. Investments The Company classifies its securities as available-for-sale, which are reported at estimated fair value with unrealized gains and losses included in accumulated other comprehensive loss, net of tax. Realized gains, realized losses and declines in value of securities judged to be other-than-temporary, are included in other income (expense) within the 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 and dividends earned on all securities are included in other income (expense) within the statements of operations. 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. If the estimated fair value of a security is below its carrying value, the Company evaluates whether it is more likely than not that it will sell the security before its anticipated recovery in market value and whether evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. The Company also evaluates whether or not it intends to sell the investment. If the impairment is considered to be other-than-temporary, the security is written down to its estimated fair value. In addition, the Company considers whether credit losses exist for any securities. A credit loss exists if the present value of cash flows expected to be collected is less than the amortized cost basis of the security. Other-than-temporary declines in estimated fair value and credit losses are charged against other income (expense). Fair Value of Financial Instruments The carrying value of financial instruments classified as current assets and current liabilities approximate fair value due to their liquidity and short-term nature. Investments that are classified as available-for-sale are recorded at fair value, which was determined using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The carrying amounts of the Company’s asset-secured growth capital term loan (the “Growth Term Loan”) and convertible notes were estimated using Level 3 inputs and approximate fair value since the interest rate approximates the market rate for debt securities with similar terms and risk characteristics. Fair value measurements are based on the premise that fair value represents 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. Inventory, net Inventory, consisting of raw materials and finished goods, is stated at the lower of cost (first-in, first-out) or market. The Company reserves or writes down its 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 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. For the year ended December 31, 2015, the Company recorded an increase in the inventory reserve of $230,050, to adjust for estimated shrinkage and excess inventory. For the year ended December 31, 2014 the Company wrote off inventory previously reserved of $536,119, partially offset by the recording of an increase of $54,269 for estimated obsolescence, resulting in a decrease in the inventory reserve of $481,850. For the years ended December 31, 2015 and 2014, $230,754 and $54,269 have been included in cost of revenue, respectively. In the first quarter of 2015, the Company determined that the average 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. HTG Edge or HTG EdgeSeq instruments at customer locations under evaluation agreements are included in finished goods inventory. Equipment that is under evaluation for purchase remains in inventory as the Company maintains title to the equipment throughout the evaluation period. If the customer has not completed the purchase of the instrument by the end of the initial evaluation period, the Company will determine whether to extend the evaluation period or have the equipment returned to the Company. However, in no case will the evaluation period exceed one year. If the customer has not purchased the equipment or entered into a reagent rental agreement with the Company after a one-year evaluation period, the cost of the equipment is written off to cost of revenue if the customer is allowed to continue use of the equipment. Prior to January 1, 2015, the Company recorded equipment under evaluation more than 90 days in property and equipment. The Company accordingly has reclassified from property and equipment to inventory field equipment with a net book value of $210,606 at December 31, 2014 under evaluation at that time for longer than 90 days and less than one year. Property and Equipment, net 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. Leasehold improvements are amortized using the straight-line method over the lesser of the remaining lease term or the estimated useful life. Field equipment is amortized using the straight-line method over the lesser of the period of the related reagent rental agreement or the estimated useful life. Depreciation and leasehold improvement amortization expense was $662,562 for the year ended December 31, 2015, and $481,012 for the year ended December 31, 2014. Costs incurred in the development and installation of software for internal use 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. There was no amortization expense for capitalized software costs for the year ended December 31, 2015. Amortization expense for capitalized software costs was $15,583 for the year ended December 31, 2014. 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 to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flow, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. 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, 2015 or 2014. Stock Issuance Costs Certain costs incurred in connection with the issuance of the Company’s redeemable convertible preferred stock (the “Convertible Preferred Stock”) were being deferred and accreted. Stock issuance costs have historically been accreted to distributions in excess of capital using the effective interest method. Accretion was $35,046 for the year ended December 31, 2015, and $102,677 for the year ended December 31, 2014. Upon automatic conversion of the Convertible Preferred Stock to common stock in connection with the closing of the Company’s IPO in May 2015, issuance costs were no longer accreted. Deferred Financing Costs and Debt Discounts Certain costs incurred in connection with the Growth Term Loan have been deferred and are being amortized. Debt issuance costs and debt discount are amortized over the term of the Growth Term Loan using the effective interest method. In addition, prior to the IPO, costs incurred in connection with the issuance of notes under the Company’s two note and warrant purchase agreements dated December 30, 2014 (the “Note Agreements”) in February and March 2015 were capitalized and amortized over the term of the Note Agreements using the straight-line accretion method, which approximated the effective interest method in this instance. The Company has recorded approximately $52,377 and $75,131 of deferred financing costs in the accompanying balance sheets as of December 31, 2015 and 2014, respectively. Deferred financing cost amortization expense for the years ended December 31, 2015 and 2014 was $44,666 and $13,841, respectively. Amortization of growth term loan discount was $170,954 and $84,676 for the years ended December 31, 2015 and 2014. Amortization of the Note Agreement discount was $90,222 and $0 for the years ended December 31, 2015 and 2014. Growth term loan discount and amortization of the Note Agreement discount are included in interest expense in the accompanying statements of operations. The Company compared the value of the common stock issued to settle the debt with the carrying amount of the debt at the IPO closing date of May 2015, net of unamortized discount. The Company recorded a loss on settlement of convertible debt of $705,217, comprising $651,606 to write off unamortized discount and $53,611 to write off unamortized deferred financing costs relating to the convertible notes which were settled with common stock at the IPO, in the accompanying statements of operations for the year ended December 31, 2015. Deferred Offering Costs Deferred offering costs represent legal, accounting and other direct costs related to the IPO, which was completed in May 2015. In accounting for the IPO in May 2015, direct offering costs of approximately $2.3 million were reclassified to additional paid-in capital and are shown, along with underwriters’ fees paid, net against IPO proceeds received. The Company recorded $0 and $1.3 million of deferred offering costs as a non-current asset in the accompanying balance sheets as of December 31, 2015 and 2014, respectively. Deferred Revenue Deferred revenue represents cash receipts for products or services to be provided in future periods. When products are delivered or services are rendered, deferred revenue is then recognized as earned. Revenue Recognition The Company recognizes revenue from the sale of instruments, consumables and related services when the following four basic criteria are met: (1) a contract has been entered into with a customer or persuasive evidence of an arrangement exists, (2) delivery has occurred or services rendered, (3) the fee is fixed and determinable, and (4) collectability is reasonably assured. Sale of instruments and consumables The Company had product revenue consisting of revenue from the sale of instruments and consumables for the years ended December 31, 2015 and 2014 as follows: Years Ended December 31, 2015 2014 Instruments $ 789,231 $ 793,505 Consumables 2,742,797 994,700 Total product sales $ 3,532,028 $ 1,788,205 Instrument product revenue is generally recognized upon installation and calibration of the instrument by field service engineers, unless the customer has specified any other acceptance criteria. The sale of instruments and related installation and calibration are considered to be one unit of accounting, as instruments are required to be professionally installed and calibrated before use. Installation generally occurs within a month of shipment. Consumables are considered to be separate units of accounting as they are sold separately. Consumables revenue is recognized upon transfer of ownership, which is generally upon shipment. The Company’s standard terms and conditions provide that no right of return exists for instruments or consumables, unless replacement is necessary due to delivery of defective or damaged products. Shipping and handling fees charged to the Company’s customers for instruments and consumables shipped are included in the statements of operations as part of product revenue. Shipping and handling costs for sold products shipped to the Company’s customers are included on the statements of operations as part of cost of revenue. When a contract involves multiple elements, the items included in the arrangement, referred to as deliverables, are evaluated to determine whether they represent separate units of accounting. The Company performs this evaluation at the inception of an arrangement and as each item is delivered in the arrangement. Generally, the Company accounts for a deliverable (or a group of deliverables) separately if the delivered item has stand-alone value to the customer and delivery or performance of the undelivered item or service is probable and substantially in the Company’s control. When multiple elements can be separated into separate units of accounting, arrangement consideration is allocated at the inception of the arrangement, based on each deliverables’ relative selling price. All revenue from contracts determined not to have separate units of accounting is recognized based on consideration of the most substantive delivery factor of all the elements in the contract. 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. This represents a multiple element arrangement and because all consideration under the reagent rental agreement is contingent on the sale of consumables, no consideration has been allocated to the instrument and no revenue has been recognized upon installation of the instrument. 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. Revenue is recognized as consumables are shipped. 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. Because the pattern of revenue from the arrangement cannot be reasonably estimated, 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 revenue. Cost to maintain the instrument while title remains with the Company is charged to cost of revenue as incurred. The Company offers customers the opportunity to purchase separately-priced extended warranty contracts to provide for service upon conclusion of the standard one-year warranty period. The revenue from these contracts is recorded as a component of deferred revenue in the accompanying balance sheets at the inception of the contract and is recognized as revenue over the contract service period. Service Revenue For contracts related to custom panel design services and sample processing, the Company utilizes a proportional performance revenue recognition model, under which revenue is recognized as performance occurs based on the relative outputs of the performance that have occurred up to that point in time under the respective agreement. The Company includes all applicable costs incurred related to custom panel design services, including research and development costs and general and administrative expenses, in cost of revenue. Anticipated losses, if any, on contracts are charged to earnings as soon as they are identified. Anticipated losses cover all costs allocable to contracts. Revenue arising from claims or change orders is recorded either as income or as an offset against a potential loss only when the amount of the claim can be estimated and its realization is probable. Other Revenue Other revenue includes license and grant revenue. Grant revenue is earned when expenditures relating to the projects under these awards are incurred. Product Warranty The Company generally provides a one-year warranty on its HTG Edge and HTG EdgeSeq systems covering the performance of system hardware and software in conformance with customer specifications under normal use and protecting against defects in materials and workmanship. The Company may, at its option, replace, repair or exchange products covered under valid warranty claims. A provision for estimated warranty costs is recognized at the time of sale, through cost of revenue, based upon recent historical experience and other relevant information as it becomes available. The Company continuously assesses the adequacy of its product warranty accrual by reviewing actual claims and makes adjustments to the provision as needed. Due to a lack of historical data and a low rate of warranty claims, the Company had not recorded any liability for product warranty prior to the current period. Note 14 “Commitments and Contingencies” contains additional information relating to the Company’s product warranties. Research and Development Expenses Research and development expenses represent both costs incurred internally for research and development activities and costs incurred externally to fund research activities. All research and development costs are expensed as incurred. During the year ended December 31, 2015, the Company entered into a Development and Professional Services agreement with Invetech PTY Ltd. (Note 9) for the development of its low volume throughput HTG EdgeSeq platform, for which $325,000 of research and development expense was recorded for the year ended December 31, 2015. Advertising All costs associated with advertising and promotions are expensed as incurred. The amount of advertising and promotion expense was $11,761 and $18,581 for the years ended December 31, 2015 and 2014, respectively, and is included as a component of selling, general and administrative expenses on the accompanying statement of operations. Stock-Based Compensation The Company recognizes expense for share-based payments to employees, including grants of stock options and restricted stock units, based on the fair value of awards on the date of grant. The fair value of each employee stock option 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 of share-based payment awards utilizing the Black-Scholes option pricing model is affected by the fair value of the Company’s stock price and a number of 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 recognizes compensation cost for share-based payment awards with service conditions that have a graded vesting schedule on a straight-line basis over the requisite service period. However, the amount of compensation cost recognized at any time generally equals the portion of grant-date fair value of the award that is vested at that date, net of estimated forfeitures. Forfeitures are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates and an adjustment to stock-based compensation expense will be recognized at that time. Changes to assumptions used in Black-Scholes option valuation calculation and the forfeiture rate could significantly impact the compensation expense recognized by the Company. The Company considered its historical experience of pre-vesting option forfeitures as the basis to arrive at its estimated pre-vesting option forfeiture rates of 17% and 2.8% per year for the years ended December 31, 2015 and 2014, respectively. The Company reports cash flows resulting from tax deductions in excess of the compensation cost recognized from those options (excess tax benefits) as financing cash flows, if they should arise. The Company uses fair value to account for restricted stock units (RSUs). The RSUs are valued based on the quoted market price of common stock on the date of grant and amortized ratably over the life of the award. For share-based payments to nonemployee consultants, the fair value of the share-based consideration issued is used to measure the transaction, as the Company believes this to be a more reliable measure of fair value than the services received. The fair value of the award is measured at the fair value of the Company’s stock options on the date that the commitment for performance by the nonemployee consultant has been reached or performance is complete. Stock-based compensation costs are recognized as expense over the requisite service period, which is generally the vesting period for awards, on a straight-line basis. Black-Scholes assumptions used to calculate the fair value of options granted during the years ended December 31, 2015 and 2014 were as follows: 2015 2014 Fair value of common stock $ 4.88 - 14.64 $ 2.15 - 12.89 Risk-free interest rate 1.36% - 2.22% 1.65% - 2.03% Expected volatility 60.5% - 75.0% 70% Expected term 5.0 to 10 years 5.4 to 6.1 years Expected dividend yield —% —% Black-Scholes option pricing model was developed for use in estimating the fair value of short-traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of assumptions. The volatility assumption for 2015 is based on the volatility of the Company’s stock in recent periods as well as that of publicly traded industry competitors. The volatility assumption for 2014 is based on the volatility of publicly traded industry competitors and adjusted for future expectations. The expected term of options is based on the utilization of the simplified method, which utilizes the contract term and vesting period to derive the expected term. The Company has elected to use the simplified method because the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to its equity shares being publicly traded for less than one year. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected terms of the stock option grant. The Company does not anticipate paying a dividend, and, therefore, no expected dividend yield was used. Stock-based compensation cost amounted to the following: Year Ended December 31, 2015 2014 Selling, general and administrative $ 367,000 $ 163,540 Research and development 38,426 21,426 $ 405,426 $ 184,966 The weighted-average fair value of stock options granted was $3.61 and $2.51 for the years ended December 31, 2015 and 2014, respectively. As of December 31, 2015, total unrecognized compensation cost related to stock-based compensation awards was approximately $788,875, which is expected to be recognized over approximately 2.9 years. Income Taxes The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using the 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 the Company’s ability to use the net deferred tax assets, in this case the net operating tax loss carryforwards and research and development tax credits in the future. In assessing the realizability of net deferred tax assets, the Company assesses the likelihood that net deferred tax assets will be recovered from future taxable income, and to the extent that recovery is not likely or there is insufficient operating history, a valuation allowance is established. The Company records the valuation allowance in the period the Company determines it is “more likely than not” that net deferred tax assets will not be realized. For the years ended December 31, 2015 and 2014, the Company has provided a full valuation allowance for all net deferred tax assets due to their current realization being considered remote in the near term. The Company accounts for uncertain tax position taken or expected to be taken in a tax return using the more-likely-than-not threshold for financial statement recognition and measurement. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. No material uncertain tax positions have been identified or recorded in the financial statements as of December 31, 2015 and 2014. In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17, Income Taxes Balance Sheet Classification of Deferred Taxes Comprehensive loss Comprehensive loss includes certain changes in equity that are excluded from net loss. Specifically, unrealized gains and losses on short and long-term available-for-sale investments are included in comprehensive loss. Concentration Risks Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents and uncollateralized accounts receivable. The Company maintains the majority of its cash balances in the form of cash deposits in bank checking and money market accounts in amounts in excess of federally insured limits. Management believes, based upon the quality of the financial institution, that the credit risk with regard to these deposits is not significant. The Company sells its instruments, consumables, sample processing services, custom panel design services and contract research services primarily to biopharmaceutical companies, academic institutions and molecular labs. The Company routinely assesses the financial strength of its customers and credit losses have been minimal to date. The top two customers accounted for 38% and 7% of the Company’s revenue for the year ended December 31, 2015, compared with 12% and 7% for the year ended December 31, 2014. The Company derived 8% and 31% of its total revenue from grants and contracts, primarily from one organization during the years ended December 31, 2015 and 2014. The largest two customers accounted for approximately 32% and 25% of the Company’s net accounts receivable as of December 31, 2015. One customer accounted for approximately 31% of the Company’s net accounts receivable at December 31, 2014. The Company currently relies on a single supplier to supply several of the subcomponents used in the HTG Edge and HTG EdgeSeq processors. A loss of this supplier could significantly delay the delivery of HTG Edge and HTG EdgeSeq systems, which in turn would materially affect the Company’s ability to generate revenue. New Accounting Pronouncements In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers The revised revenue standard is effective for public entities for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on its financial statements and has not yet determined the method by which it will adopt the standard. In August 2014, the FASB issued ASU N |