S-1/A 1 form_s1a.htm form_s1a.htm
As filed with the Securities and Exchange Commission on September 23, 2015
Registration No. 333-206397
 


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________

FORM S-1
(Amendment No. 1)

 
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
__________________________

WAFERGEN BIO-SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
__________________________

Nevada
3826
90-0416683
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)

7400 Paseo Padre Parkway
Fremont, CA 94555
(510) 651-4450
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)
__________________________

Rolland Carlson, President and Chief Executive Officer
7400 Paseo Padre Parkway
Fremont, CA 94555
(510) 651-4450
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
__________________________

Please send copies of all communications to:
 
Mark R. Busch
K&L Gates LLP
214 North Tryon Street, Suite 4700
Charlotte, NC 28202
(704) 331-7440
 
Michael F. Nertney
Ellenoff Grossman & Schole LLP
1345 Avenue of the Americas
New York, NY 10105
(212) 931-8705
 
__________________________

Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this registration statement.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. þ
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
 


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.  (Check one):
 
Large accelerated filer   ¨
 
Accelerated filer   ¨
Non-accelerated filer   ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company   þ
     

CALCULATION OF REGISTRATION FEE

 
 
Title of Each Class of Securities to be Registered
Proposed Maximum
Aggregate Offering
Price (1)(2)
 
 
Amount of Registration Fee
Class A Units consisting of:
   
(i) Shares of common stock, par value $0.001 per share
   
(ii) Warrants to purchase common stock (3)
   
Class B Units consisting of:
   
(i) Shares of Series 2 Convertible Preferred Stock, par value $0.001 per share
   
(ii) Shares of common stock issuable on conversion of Series 2 Convertible Preferred Stock (3)
   
(iii) Warrants to purchase common stock (3)
   
Common Stock issuable upon exercise of warrants
   
Total
$34,500,000
$4,008.90 (4)


(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.

(2) Includes $4,500,000 additional units, consisting of shares of common stock and warrants to purchase shares of common stock, that the underwriters have the option to purchase to cover over-allotments, if any.

(3) No additional consideration is payable pursuant to Rule 457(g) under the Securities Act.
 
(4) Paid at time of original filing on August 14, 2015.


The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 





The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED SEPTEMBER 23, 2015

PRELIMINARY PROSPECTUS

2,000 of Class A Units consisting of common stock and warrants
and Class B Units consisting of shares of Series 2 preferred stock and warrants
(and [●] shares of common stock underlying shares of Series 2 preferred stock and warrants)







WaferGen Bio-systems, Inc.

This is a firm commitment public offering. We are offering 2,000 Class A Units, with each Class A Unit consisting of 3,077 shares of common stock and 1,538 warrants to purchase shares of our common stock (based on an assumed offering price per common share of $3.25, which was the last reported sale price of our common stock on September 21, 2015), together with the shares of common stock underlying such warrants, at a public offering price of $10,000 per Class A Unit. Each warrant included in the Class A Units entitles its holder to purchase one share of common stock at an exercise price of $[●].

We are also offering to those purchasers, whose purchase of Class A Units in this offering would result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 9.98% of our outstanding common stock following the consummation of this offering, the opportunity to purchase, in lieu of Class A Units that would result in ownership in excess of 9.98%, Class B Units, with each Class B Unit consisting of one share of Series 2 Convertible Preferred Stock, par value $0.001 per share, convertible into 3,077 shares of common stock and 1,538 warrants to purchase shares of our common stock (based on an assumed offering price per common share of $3.25, which was the last reported sale price of our common stock on September 21, 2015), together with the shares of common stock underlying such shares of Series 2 Convertible Preferred Stock and warrants, at a public offering price of $10,000 per Class B Unit. Each warrant included in the Class B Units entitles its holder to purchase one share of common stock at an exercise price of $[●].
 
The Class A and Class B Units will not be certificated and the shares of common stock, Series 2 Convertible Preferred Stock and warrants part of such Units are immediately separable and will be issued separately in this offering. The underwriters have the option to purchase additional shares of common stock, and/or warrants to purchase shares of common stock solely to cover over-allotments, if any. The over-allotment option may be used to purchase shares of common stock, or warrants, or any combination thereof, as determined by the underwriters, but such purchases cannot exceed an aggregate of 15% of the number of shares of common stock (including the number of shares of common stock issuable upon conversion of shares of Series 2 Convertible Preferred Stock) and warrants sold in the primary offering.


Our common stock is currently traded on the Nasdaq Capital Market under the symbol “WGBS.” On September 21, 2015, the closing price of our common stock was $3.25 per share. We do not intend to apply for listing of the shares of preferred stock or warrants on any securities exchange or other trading system. The preferred stock and the warrants will be issued in book-entry form pursuant to a preferred stock agency agreement between us and Continental Stock Transfer & Trust Company, as preferred stock agent, and a warrant agreement between us and Continental Stock Transfer & Trust Company, as warrant agent, respectively.

You should read this prospectus and the documents incorporated by reference in this prospectus carefully before you invest.

Investing in the units involves a high degree of risk. Before making any investment in these securities, you should read and carefully consider the risks described in this prospectus under “Risk Factors” beginning on page 6 of this prospectus.

     
Underwriting
   
     
Discounts and
   
 
Price to Public
 
Commissions(1)
 
Proceeds to WaferGen
Per Class A Unit(2)
  $10,000     $8.00     $9,200
Per Class B Unit(2)
  $10,000     $8.00     $9,200
Total
  $20,000,000     $1,600,000     $18,400,000
__________________

(1)
We have also agreed to issue warrants to the underwriters and to reimburse the representative of the underwriters for certain expenses. See “Underwriting.”
 
(2)
The Class A and Class B Units will not be certificated and the shares of common stock, Series 2 Convertible Preferred Stock and warrants part of such Units are immediately separable and will be issued separately in this offering.  The price to the public and underwriting discounts and commission corresponds to (x) in respect of the Class A Units (i) an assumed per share price to the public of $3.24 (and a discount per share of $0.2592) and (ii) an assumed per warrant price to the public of $0.01 (and a discount per warrant of $0.0008).
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Ladenburg Thalmann
Sole Bookrunning Manager


Chardan Capital Markets
 
Dougherty & Company
Co-Manager
 
Co-Manager
 

This prospectus is dated                             , 2015



TABLE OF CONTENTS

 
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You should rely only on the information contained in this prospectus.  We have not authorized anyone to provide you with additional or different information.  The information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

No dealer, salesperson or any other person is authorized in connection with this offering to give any information or make any representations about us, the securities offered hereby or any matter discussed in this prospectus, other than those contained in this prospectus and, if given or made, the information or representations must not be relied upon as having been authorized by us.  This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the securities offered by this prospectus, or an offer to sell or a solicitation of an offer to buy any securities by anyone in any circumstance in which the offer or solicitation is not authorized or is unlawful.
 
 
 
 
 

This summary does not contain all of the information that should be considered before investing in the units. Investors should read the entire prospectus carefully, including the more detailed information regarding our business, the risks of purchasing the units discussed in this prospectus under “Risk Factors” beginning on page 6 of this prospectus and our audited financial statements and the accompanying notes for the years ended December 31, 2014 and 2013, beginning on page F-1 of this prospectus and our unaudited financial statements and the accompanying notes for the three and six months ended June 30, 2015 and 2014, beginning on page G-1 of this prospectus.

As used in this prospectus the terms “WaferGen,” the “Company,” “we,” “our” and “us” refer to WaferGen Bio-systems, Inc. and its subsidiaries, except where it is made clear that the term means only the parent company or where the context requires otherwise.

Our Company

We are an innovative biotechnology company committed to the development of a breakthrough technology platform for gene expression, genotyping, next generation sequencing (“NGS”) target enrichment and now single cell analysis which we believe will revolutionize biopharma, diagnostics and life science research. Our primary focus has been on the development, manufacture and marketing of our SmartChip System, a genetic analysis platform used for profiling and validating molecular biomarkers in the life sciences, pharmaceutical/biotech drug discovery, diagnostics and clinical laboratory industries.

Traditional molecular biology methods use 96 or 384-well plates for routine manipulation of fluids into and out of the wells in the microliter scale manually or using various liquid handling automation methods. SmartChip extends this principle through a microfabrication process that result in tens of thousands of massively-parallel nanoliter wells that are physically separated from each other. To manipulate fluids into and out of these wells, we have engineered a nano-dispenser that can not only dispense but also aspirate nanoliter volumes of liquids including single cells in suspension.

The plethora of new diagnostic and therapeutic solutions that have come into the market since the advent of the genomic era  is a direct result of understanding changes in key segments of DNA (i.e. mutations such as single nucleotide polymorphisms (“SNPs”)) and the ensuing differences in the expression levels of those segments (i.e. genes and other regulatory sequences). Gene expression is fundamental to the understanding of many disease processes and hence, drug efficacy. For example, in the field of oncology (cancer treatment), greater understanding of gene expression in certain types of cancerous cells has led to the discovery of specific disease biomarkers that will allow clinicians to provide more accurate diagnosis, prognosis and treatment options for their patients. It is known that tumors form from single cells and evolve randomly to gain different characteristics that collectively provide a significant growth advantage for the tumor. This clonal diversity plays an important role during cancer progression and it is important to know the biological role of these different cancer cells in invasion, metastasis and development of resistance to drug therapies. Increasingly, researchers are focusing their studies on physiological phenomena using molecular analysis at the single cell level and are consequently committing their research budgets to acquiring research tools that help them understand tumor evolution from a single cell and develop personalized therapies. The single cell genomics field has shown tremendous growth over the past four years due to the myriad of potential applications in cancer and biomedicine.

We are primarily focused on marketing a flexible, open format genetic analysis system, the WaferGen SmartChip System, which provides a range of high throughput capabilities including single cell analysis and differential gene expression measurement, as well as SNP genotyping and target enrichment. In 2010, we formally launched our first generation SmartChip 5K System, which was an innovative real-time polymerase chain reaction (“PCR”) tool enabling scientists to study thousands of genes simultaneously clustered in gene specific pathways. The results of such studies are potentially leading to the discovery and validation of clinically relevant disease signatures. In 2012, we launched the SmartChip MyDesign System, which is the second-generation real time PCR instrument with significantly upgraded capabilities. First, the new system allows customers to dispense their own assays into a SmartChip, using a liquid dispenser called MultiSample Nano-Dispenser (“MSND”), which gives them much greater flexibility and faster experiment turnaround time. Second, we have enabled SNP genotyping on the SmartChip by validating appropriate chemistries and supplying the requisite software. The SmartChip System’s high density, nanoliter-scale format can provide throughput levels that facilitate the development of life science clinical research solutions at a fraction of the time and cost currently possible with existing competing systems. We believe that the SmartChip System is well suited for the large and growing genomics markets, including for researchers seeking to confirm and expand on discoveries made with the growing use of NGS.

In 2013, the SmartChip and MSND were adapted for NGS library preparation needs and our R&D efforts concentrated on the commercialization of the SmartChip Target Enrichment (“TE”) System™. This new product, launched in February 2014, is designed to perform a critical sample preparation step prior to targeted DNA sequencing. Targeted sequencing is aimed at deciphering the nucleic acid sequence of a certain portion of the genome (the targets), for example a set of genes of interest,
 
 
 
 
 
 
 
as opposed to the whole genome. In order to limit the sequencing to the targets of interest, scientists are using various techniques including PCR to treat the nucleic acid samples prior to sequencing. WaferGen is using its SmartChip consumable to conduct massively parallel individual PCR reactions for TE. This approach offers certain advantages over existing chemistries and platforms. Although these advantages could help us successfully compete in the high potential emerging market for clinical sequencing, we face considerable competition, including the competing sample preparation kits from NGS instrument manufacturers such as Illumina, Inc. (“Illumina”) and Life Technologies Corporation (“LIFE,” now a division of Thermo Fisher).

Following our acquisition early in 2014 of the Apollo 324™ and PrepX™ product lines used in library preparation for NGS, we now offer one-stop shopping for NGS sample preparation and validation solutions that enable NGS instruments (such as MiSeq™ from Illumina and PGM™ from Thermo Fisher) to produce superior results in terms of accuracy, while simplifying the workflow in a cost efficient manner. We employ a business model that primarily generates revenue from the sale of instruments (i.e. the SmartChip System or Apollo 324™ instrument) and a recurring revenue stream from the sale of consumables (i.e. the SmartChip Panels or PrepX™ reagents), similar to the “razor and razor blade” business model.

Recently, we have been focused on expanding the gamut of SmartChip-based applications to include Single Cell Analysis (“SCA”). Events happening at the level of a single cell, be it a single bacterial cell that gains antibiotic resistance or a single cell that gains growth advantage in cancer, have profound consequences. The ability to identify, and understand, these harmful molecular events earlier than previously possible makes SCA the next frontier in understanding biology at the cellular level. Our SmartChip based SCA products will allow researchers to select a unique set of cells from others in a sample and determine how the targeted cell is genetically different from the other cells. SmartChip SCA products will be differentiated in the market because of these three primary features:
 
 
·
Throughput - Ability to process 1000s of cells
 
·
More Flexibility - Ability to process multiple samples and various cell sizes
 
·
More Relevant - Ability to select only certain cells of choice for processing
 
In 2015, we used the proof of concept results that we obtained in collaboration with the Broad Institute as the foundation to productize our technology. In the second quarter of 2015, we signed on four early access partners for our SmartChip SCA products – Genentech, Karolinska Instituet, National Jewish Hospital and MD Anderson Cancer Center. These early collaborations have demonstrated the SmartChip based system can reproducibly sequence thousands of cells. Feedback on various aspects of the product from these early access sites is overwhelmingly positive. Researchers particularly like the workflow ease, ability to handle multiple cell types including human patient samples such as freshly operated tumors, and the ensuing data quality. Thus, the SmartChip-based single cell system will be the only system on the market that can span the breadth of hundreds to thousands of cells and have the ability to process diverse cell types in a cost-effective fashion. While these advantages are compelling, we face competition from Fluidigm, who is the market leader and the only company to date that sells integrated SCA solutions.

Since inception, we have incurred substantial operating losses. As of June 30, 2015, our accumulated deficit was $100.2 million. Losses have principally occurred as a result of the substantial resources required for the research, development and manufacturing start-up costs required to commercialize our initial products. We expect to continue to incur substantial costs for research and development activities for at least the next year as we expand and improve our core technology and its applications in the life science research market. Without giving effect to the offering contemplated by this prospectus, we expect that the cash we have available will fund our operations into 2016.

For more information regarding our business, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” included elsewhere in this prospectus.
 
 
 
 
 
 
 
 
Summary Risk Factors

We are subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows and prospects. You should carefully consider these risks, including the risks discussed in the section entitled “Risk Factors” beginning on page 6 of this prospectus, before investing in the units. Risks relating to our business include, among others:
 
 
·
we may need to raise additional capital to meet our business requirements in the future and such capital raising may be costly or difficult to obtain and could dilute current stockholders’ ownership interests;

 
·
our sales levels have fluctuated historically, we have experienced declines in sales, and we may be unable to generate sufficient sales to achieve profitable operations;

 
·
we have a limited history of commercial sales of systems and consumable products, and our success depends on our ability to develop commercially successful products and on market acceptance of our new and relatively unproven technologies;

 
·
we have a history of losses that may continue in the future and we may not be able to continue as a going concern;

 
·
we expect to make significant investments to research and develop Smart Chip-based solutions for single cell genomics, which may not be successful;

 
·
our business depends on research and development spending levels for pharmaceutical and biotechnology companies and academic and governmental research institutions, and our success and our operating results will substantially depend on these customers;

 
·
we expect that our results of operations will continue to fluctuate, which could cause our stock price to decline;

 
·
if we lose our key personnel or are unable to attract and retain additional qualified personnel, we may be unable to achieve our goals;

 
·
we expect intense competition in our target markets, which could render our products and/or technologies obsolete, result in significant price reductions or substantially limit the volume of products that we sell, which would limit our ability to compete and achieve and maintain profitability, and if we cannot continuously develop and commercialize new products, our revenue may not grow as intended; and

 
·
we have identified material weaknesses in our disclosure controls and procedures in the past and may do so again in the future, which could affect the reliability of our financial statements and have other adverse consequences.
 
Corporate Information
 
Wafergen, Inc. was incorporated in Delaware on October 22, 2002. On May 31, 2007, Wafergen, Inc. was acquired by WaferGen Bio-systems, Inc., a Nevada corporation. In the transactions, Wafergen, Inc. merged with a subsidiary of WaferGen Bio-systems, Inc. and became a wholly owned subsidiary of WaferGen Bio-systems, Inc. WaferGen Bio-systems, Inc. was incorporated under the laws of the State of Nevada on August 4, 2005, under the name Scuttlebutt Yachts, Inc., subsequently renamed La Burbuja Cafe, Inc. on June 20, 2006, and WaferGen Bio-systems, Inc. on January 31, 2007, in anticipation of the merger with Wafergen, Inc. We also have a subsidiary in Luxembourg. Our principal executive offices are located at 7400 Paseo Padre Parkway, Fremont, California 94555. The telephone number at our principal executive offices is (510) 651-4450. Our website address is www.wafergen.com. Information contained on our website is not deemed part of this prospectus, other than our Code of Business Conduct and Ethics, which is incorporated by reference.

 
 
 
 
 
 
The Offering

The summary below describes some of the terms of the offering. For a more complete description of the common stock and warrants comprising the units, see “Description of Capital Stock.”
     
Issuer
 
WaferGen Bio-systems, Inc.
     
Units offered by us
 
We are offering 2,000 Class A Units and Class B Units. Each Class A Unit consists of [●] shares of common stock and [●] warrants to purchase shares of our common stock (together with the shares of common stock underlying warrants).
     
 Class A Units offered by us  
Each Class A Unit consists of 3,077 shares of common stock and 1,538 warrants to purchase shares of our common stock (based on an assumed offering price per common share of $3.25, which was the last reported sale price of our common stock on September 21, 2015), together with the shares of common stock underlying warrantsThe Class A Units will not be certificated and the shares of common stock and warrants part of such Unit are immediately separable and will be issued separately in this offering.
     
Public offering price per Class A Unit
 
$10,000
     
     
Class B Units offered by us
 
We are also offering to those purchasers, whose purchase of Class A Units in this offering would result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 9.98% of our outstanding common stock following the consummation of this offering, the opportunity to purchase, in lieu of Class A Units that would result in ownership in excess of 9.98%, Class B Units, with each Class B Unit consisting of one share of Series 2 Convertible Preferred Stock, par value $0.001 per share, convertible into 3,077 shares of common stock and 1,538 warrants to purchase shares of our common stock (based on an assumed offering price per common share of $3.25, which was the last reported sale price of our common stock on September 21, 2015), together with the shares of common stock underlying such shares of Series 2 Convertible Preferred Stock and warrants. No shares of Series 2 Convertible Preferred Stock were outstanding prior to this offeringThe Class B Units will not be certificated and the shares of Series 2 Convertible Preferred Stock and warrants part of such Unit are immediately separable and will be issued separately in this offering.
     
Public offering price per Class B Unit
 
$10,000
     
Over-allotment option
 
We have granted the underwriters an option to purchase up to 923,100 additional shares of common stock and/or warrants to purchase an additional 461,400 shares of common stock (based on an assumed offering price per common share of $3.25, which was the last reported sale price of our common stock on September 21, 2015). This option is exercisable, in whole or in part, for a period of 45 days from the date of this prospectus.
     
Description of warrants
 
The warrants will be exercisable beginning on the date of issuance and expire on the five (5) year anniversary of the date of issuance at an initial exercise price per share equal to [●].
     
Common stock outstanding prior to this offering
 
5,706,653(1)
     

 
 
 
 
 

Common stock outstanding after this offering (based on an assumed offering price per common share of $3.25, which was the last reported sale price of our common stock on September 21, 2015 and assuming the conversion of all Series 2 Convertible Preferred Stock issued in this offering into common stock)  
11,860,653(1)(2)
     
Use of proceeds
 
We intend to use the net proceeds from this offering for research and development and commercialization activities for our single cell products, for sales and marketing activities and for general corporate and working capital purposes. See “Use of Proceeds.”
     
Market and trading symbol
 
Our common stock is currently traded on the Nasdaq Capital Market under the symbol “WGBS.” We do not intend to apply for listing of the shares of preferred stock or warrants on any securities exchange or other trading system.
____________________    
 
(1)
The number of shares of our common stock to be outstanding both before and after this offering is based on the number of shares outstanding as of June 30, 2015, and excludes:

 
·
shares of our common stock that may be issued upon conversion of shares of Series 2 preferred stock and exercise of warrants issued in this offering;

 
·
477,687 shares of our common stock issuable upon vesting of outstanding restricted stock units;

 
·
548,356 shares of our common stock issuable upon exercise of outstanding stock options with a weighted average exercise price of $11.34 per share;

 
·
433,691 shares of our common stock reserved for future issuance under our 2008 Stock Incentive Plan, as amended; and

 
·
5,433,359 shares of our common stock reserved for issuance under warrants and unit warrants outstanding with a weighted average exercise price of $8.72 per share.

 (2)
Except as otherwise indicated, the number of shares of common stock presented in this prospectus excludes shares issuable pursuant to the exercise of the underwriters’ over-allotment option.

 
 
 
 
 

Investing in the units involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes, before investing in the units. If any of the following risks materialize, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the price of our securities could decline, and you could lose part or all of your investment.

Risks Related to Our Company and Our Business

We have generated only limited sales, have a history of operating losses and we may not be able to reach profitability.

We have a history of losses and expect to continue to incur operating and net losses for the foreseeable future. We incurred a net loss of $10.7 million for the year ended December 31, 2014 and a net loss of $8.6 million for the six months ended June 30, 2015. As of June 30, 2015, our accumulated deficit was $100.2 million. We have not achieved operating profitability on a quarterly or annual basis.

Historically, there have been only limited sales of any of our products. Our revenues were $2.2 million for the year ended December 31, 2010, $0.5 million for the year ended December 31, 2011, $0.6 million for the year ended December 31, 2012, $1.3 million for the year ended December 31, 2013, $6.0 million for the year ended December 31, 2014 (of which $2.1 million was attributable to the Apollo Business that we acquired in January 2014) and $2.8 million for the six months ended June 30, 2015. We will need to significantly grow our revenues to become profitable.


We may need to raise additional capital to meet our business requirements in the future and such capital raising may be costly or difficult to obtain and could dilute current stockholders’ ownership interests.

We have incurred losses since inception and expect to continue to incur losses until we are able to significantly grow our revenues. Accordingly we may need additional financing to maintain and expand our business. Such financing may not be available on favorable terms, if at all. Any additional capital raised through the sale of equity or equity linked securities may dilute current stockholders’ ownership percentages and could also result in a decrease in the market value of our equity securities. The terms of any securities issued by us in future capital transactions may be more favorable to new investors, and may include preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect on the holders of any of our securities then outstanding.

If we are unable to obtain such additional financing on a timely basis, we may have to curtail our development activities and growth plans and/or be forced to sell assets, perhaps on unfavorable terms, which would have a material adverse effect on our business, financial condition and results of operations, and ultimately could be forced to discontinue our operations and liquidate, in which event it is unlikely that stockholders would receive any distribution on their shares. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” below. Further, we may not be able to continue operating if we do not generate sufficient revenues from operations needed to stay in business.

In addition, we may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we issue, such as convertible promissory notes and warrants, which may adversely impact our financial results.


We may not be able to continue as a going concern.

Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have a history of operating losses that are likely to continue in the future. Our consolidated financial statements for the year ended December 31, 2014, did not include an explanatory paragraph to the effect that our significant losses from operations and our dependence on equity and debt financing raise substantial doubt about our ability to continue as a going concern. However, our accumulated deficit as of June 30, 2015, was $100.2 million and our cash and cash equivalents of $7.4 million is not sufficient to enable us to remain in business for a further twelve months without raising further capital or significantly curtailing our operations. Our consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.


Our success depends on our ability to develop commercially successful products and on market acceptance of our new and relatively unproven technologies.

Our future is dependent upon the success of the current and future generations of one or more of the products we sell or propose to sell, including the SmartChip System and Apollo instruments. We may not possess all of the resources, capability and intellectual property rights necessary to develop and commercialize all of the products or services that may result from our technologies. Our long-term viability, growth and profitability will depend upon successful testing, approval and commercialization of the SmartChip System incorporating our technology resulting from our research and development activities. Adverse or inconclusive results in the development and testing of our products could significantly delay or ultimately preclude commercialization of our technology. Accordingly, there is only a limited basis upon which to evaluate our business and prospects. An investor in our Company should consider the challenges, expenses, and difficulties we will face as an emerging company seeking to develop and manufacture a new product in a relatively new market.

We must conduct a substantial amount of additional research and development before some of our products will be ready for sale. We currently have fewer resources available for research and development activities than many of our competitors. We may not be able to develop or launch new products in a timely manner, or at all, or they may not meet customer requirements or be of sufficient quality or at a price that enables us to compete effectively in the marketplace. Challenges frequently encountered in connection with the development or early commercialization of products and services using new and relatively unproven technologies might limit our ability to develop and successfully commercialize these products and services. In addition, we may need to enter into agreements to obtain the intellectual property rights necessary to commercialize some of our products or services, which may not be available on favorable terms, or at all.


We expect to make significant investments to research and develop Smart Chip-based solutions for single cell genomics, which may not be successful.

We are currently focusing our R&D efforts on the development and commercialization of Smart Chip-based solutions for single cell genomics.  We have devoted, and expect to continue to devote, significant resources to the development of single cell products.  Our efforts to develop single cell analysis products may not be successful, may cause us to incur significant expense and may distract our management from successfully commercializing existing products.  We may not be able to introduce products for single cell genomics as quickly as anticipated.  Any single cell analysis products we develop will be subject to significant research and testing, which may be a lengthy and expensive process.  There can be no guarantee that we will develop any products that would be commercially viable. If we determine that our single cell analysis program, or any future development programs, is unlikely to succeed, we may abandon it without any return on our investment into the program.


We have a limited operating history for investors to evaluate our business.

We have had limited operations in the genetic analysis segment of the life science industry. Since we are a company with a limited operating history developing products focused on the analysis of genetic function and variation, it is difficult for potential investors to evaluate our business. Our future operations and growth will likely depend on our ability to fully develop and market our SmartChip and Apollo products and services. Our proposed operations are subject to all of the risks inherent in developing and growing a new business in light of the expenses, difficulties, complications and delays frequently encountered in connection with the development of any new business, as well as those risks that are specific to the life science industry. In evaluating us, investors should consider the delays, expenses, problems and uncertainties frequently encountered by companies developing markets for new products, services and technologies. We may never overcome these obstacles and become profitable.


Because our business depends on research and development spending levels for pharmaceutical and biotechnology companies and academic and governmental research institutions, our success and our operating results will substantially depend on these customers.

We expect that our revenues in the foreseeable future will be derived primarily from products and services provided to a relatively small number of pharmaceutical and biotechnology companies and academic, governmental and other research institutions. Our success will depend upon their demand for and use of our products and services. Our operating results may fluctuate substantially due to reductions and delays in research and development expenditures by these customers. For example, reductions in capital or operating expenditures by these customers may result in lower than expected instrumentation sales and similarly, reductions in operating expenditures by these customers could result in lower than expected sales by us.


We expect that our results of operations will fluctuate, which could cause our stock price to decline.

Our revenue is subject to fluctuations due to the timing of sales of high-value products, the impact of seasonal spending patterns, the timing and size of research projects our customers perform, changes in overall spending levels in the life sciences industry, the timing and amount of government grant funding programs and other unpredictable factors that may affect customer ordering patterns. Given the difficulty in predicting the timing and magnitude of sales for our products and services, we may experience quarter-to-quarter fluctuations in revenue and/or a sequential decline in quarterly revenue. In the six months ended June 30, 2015, our product revenue decreased by $383,000, or 13%, as compared to the six months ended June 30, 2014. There can be no assurance that we will be able to increase or maintain our current rate of product sales.


If revenue does not grow significantly, we will not be able to achieve and maintain profitability. Any significant delays in the commercial launch of our products, unfavorable sales trends in our existing product lines, or impacts from the other factors mentioned above could adversely affect our revenue growth or cause a sequential decline in quarterly revenues. Due to the possibility of fluctuations in our revenue and expenses, we believe that quarterly comparisons of our operating results are not a good indication of our future performance. If our operating results fluctuate or do not meet the expectations of stock market analysts and investors, our stock price probably would decline.


If we lose our key personnel or are unable to attract and retain additional qualified personnel, we may be unable to achieve our goals.

We are highly dependent on our management and scientific personnel. The loss of their services could adversely impact our ability to achieve our business objectives. We compete for qualified management and scientific personnel with other life science companies, universities and research institutions, particularly those focusing on genomics. Competition for these individuals, particularly in the San Francisco Bay area, is intense, and the turnover rate can be high. Failure to attract and retain management and scientific personnel could materially adversely affect our business, financial condition and results of operations.


If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or detect fraud. Consequently, investors could lose confidence in our financial reporting and this may decrease the trading price of our common stock.

We must maintain effective disclosure and internal controls to provide reliable financial reports. We have been assessing our controls to identify areas that need improvement. Based on our evaluation as of June 30, 2015, we concluded that our disclosure controls and procedures were effective as of June 30, 2015, however we have identified material weaknesses in the past and may do so again in the future. Failure to maintain the improvements in our controls  as necessary to maintain an effective system of such controls could harm our ability to accurately report our operating results and cause investors to lose confidence in our reported financial information. Any such loss of confidence would have a negative effect on the trading price of our common stock.

Any failure to maintain adequate disclosure and internal controls may result in restatements of our financial statements and may cause us to become subject to additional risks and uncertainties, including, among others, increased professional fees and expenses, the increased possibility of legal proceedings and review by the Securities and Exchange Commission (the “SEC”) and other regulatory bodies and could subject us to civil or criminal penalties, shareholder class actions or derivative actions. We could face monetary judgments, penalties or other sanctions that could have a material adverse effect on our business, financial condition and results of operations and could cause our stock price to decline.


Litigation or other proceedings or third-party claims of intellectual property infringement could require us to spend significant time and money and could prevent us from selling our products or services or adversely impact our stock price.

Our commercial success depends in part on our non-infringement of the patents or proprietary rights of third parties and the ability to protect our own intellectual property.

Third parties may assert that we are employing their proprietary technology without authorization even if we are not. As we enter new markets, we expect that competitors will likely assert that our products infringe their intellectual property rights as part of a business strategy to impede our successful entry into those markets. Third parties such as Life Technologies Corporation, the Roche family of companies, Biometra Biomedizinische Analytik GmbH, Bio-Rad Laboratories, Inc.,


Eppendorf AG, Enzo Biochem, Inc., Affymetrix, Inc., Illumina, Inc., Agilent Technologies, Inc., GE Healthcare, Beckman Coulter, Inc., Sequenom, Inc., RainDance Technologies, Inc., Qiagen N.V., Biomerieux, Inc., PerkinElmer, Inc., Fluidigm Corporation, Cepheid, Pacific Biosciences of California, Inc., the Exiqon family of companies, Luminex Corporation and others may have obtained and may in the future obtain patents and claim that manufacture, use and/or sale of our technologies, methods or products infringes these patents. We could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against these claims even if we are eventually successful in defending ourselves against these claims. Furthermore, parties making claims against us may be able to obtain injunctive or other relief, which effectively could block our ability to further develop, commercialize, manufacture, use and sell methods and 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 making, using or selling certain methods and/or products. We may not be able to obtain these licenses at a reasonable cost, or at all. In that event, we could encounter delays in product introductions while we attempt to develop alternative methods or products. 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 to attain profitability.


Our proprietary intellectual property rights may not adequately protect our products and technologies.

Although we have filed a number of United States and international patent applications, we presently have four patents issued in the United States, which do not cover all of our products and technologies. Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection for our products and technologies. Patent law relating to claims in the technology fields in which we operate is uncertain, so we cannot be assured the patent rights we have, or may obtain in future, will be valuable or enforceable. We may only be able to protect products and technologies from unauthorized use by third parties to the extent that valid and enforceable patents or trade secrets cover them. Furthermore, the degree of future protection of our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep a competitive advantage.

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. The laws of some countries other than the United States 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 and/or pharmaceuticals, which could make it difficult for us to stop the infringement of any patents we may obtain in such countries. 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. 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. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents. For example:

 
·
we might not have been the first to conceive or reduce to practice one or more inventions disclosed in our 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, and/or 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; and

 
·
third-party patents may have an adverse effect on our ability to continue to grow our business.

We have applied, and continue to apply, for patents covering our intellectual property (e.g., products and technologies and uses thereof), as we deem appropriate. However, we may fail to apply for patents on products and/or technologies in a timely fashion or at all.


We also rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. While we attempt to use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, or scientific and other advisors may unintentionally or willfully disclose our information to competitors. If we were to attempt to enforce a claim that a third-party had illegally obtained and was using our trade secrets, it could be expensive and time consuming, and the outcome could be unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets than courts inside the United States. Moreover, if our competitors independently develop equivalent knowledge, methods and know-how, it may be difficult for us to enforce our intellectual property and our business could be harmed.

If we are not able to defend the patent or trade secret protection position of our products and technologies, then we may not be able to exclude competitors from developing or marketing competing products, and we may not generate enough revenue from product sales to justify the cost of development of our products and to achieve or maintain profitability.


We may be unable to protect the intellectual property rights of the third parties from whom we license certain of our intellectual property or with whom we have entered into other strategic relationships, which could negatively impact our competitive advantage.

None of our intellectual property rights are currently licensed from third parties but, in the future, we may have to license intellectual property from key strategic partners. We may become reliant upon such third parties to protect their intellectual property rights to any licensed technology. Such third parties may not protect the intellectual property rights that we license from them and we may be unable defend such intellectual property rights on our own or we may have to undertake costly litigation to defend the intellectual property rights of such third parties. There can be no assurances that we will continue to have proprietary rights to any of the intellectual property that we license from such third parties or otherwise have the right to use through similar strategic relationships. Any loss or limitations on use with respect to our right to use such intellectual property licensed from third parties or otherwise obtained from third parties or with whom we have entered into strategic relationships could negatively impact our competitive advantage.


We expect intense competition in our target markets, which could render our products and/or technologies obsolete, result in significant price reductions or substantially limit the volume of products that we sell. This would limit our ability to compete and achieve and maintain profitability. If we cannot continuously develop and commercialize new products, our revenue may not grow as intended.

Future competition will likely come from existing competitors as well as other companies seeking to develop new technologies for analyzing genetic information, such as next generation sequencing. Some of our competitors have various products and/or methodologies for gene detection, expression, characterization, and/or analyses that may be competitive with our products and/or methodologies. In addition, pharmaceutical and biotechnology companies have significant needs for genomic information and may choose to develop or acquire competing technologies to meet these needs. In the molecular diagnostics field, competition will likely come from established diagnostic companies, companies developing and marketing DNA probe tests for genetic and other diseases and other companies conducting research on new technologies to ascertain and analyze genetic information. Further, in the event that we develop new technology and products that compete with existing technology and products of well-established companies, there can be no guarantee that the marketplace will readily adopt any such new technology and products that we may introduce in the future.

The market for genetic research and molecular diagnostic products is highly competitive, with several large companies already having significant market share. Established genetic research and diagnostic companies also have an installed base of instruments in several markets, including clinical and reference laboratories. In addition, these companies have formed alliances with genomics companies that provide them access to genetic information that may be incorporated into their diagnostic tests. We may not be able to compete effectively with these companies.


Our manufacturing capacity may limit our ability to sell our products.

There are uncertainties inherent in expanding our manufacturing capabilities and we may not be able to increase our capacity in a timely manner. For example, manufacturing and product quality issues may arise as we increase production rates at our manufacturing facility and launch new products. As a result, we may experience difficulties in meeting customer demand, in which case we could lose customers or be required to delay new product introductions, and demand for our products could decline. Due to the intricate nature of manufacturing products, we may encounter similar or previously unknown


manufacturing difficulties in the future that could significantly reduce production yields, impact our ability to launch or sell these products, or to produce them economically, prevent us from achieving expected performance levels or cause us to set prices that hinder wide adoption by customers.


If we are unable to develop and maintain our manufacturing capability, we may not be able to launch or support our products in a timely manner, or at all.

We currently possess only one facility capable of manufacturing our products and services for both sale to our customers and internal use. If a natural disaster were to significantly damage our facility or if other events were to cause our operations to fail, these events could prevent us from developing and manufacturing our products and services. If our networks or storage infrastructure were to fail for an extended period of time, it would adversely impact our ability to manufacture our products on a timely basis and may prevent us from achieving our expected shipments in any given period.


Our reliance on outside manufacturers and suppliers to provide certain instruments could subject us to risks that may harm our business.

From time to time we may change manufacturers, and any new manufacturer engaged by us may not perform as expected. If our vendors experience shortages or delays in their manufacture of our instruments, or if we experience quality problems with our vendors, then our shipment schedules could be significantly delayed or costs significantly increased. Certain of our instruments may be manufactured by a single vendor, which could magnify the risk of shortages.


We market and sell, and plan to market and sell, our products in numerous international markets. If we are unable to manage our international operations effectively, our business, financial condition and results of operations could be adversely affected.

We market and sell, and plan to market and sell, our products in a number of foreign countries, including Canada, European Union countries, Japan, China and other East Asian countries, and we are therefore subject to risks from failure to comply with foreign laws and regulations that differ from those under which we operate in the U.S. as well as U.S. rules and regulations that govern foreign activities such as the U.S. Foreign Corrupt Practices Act. In addition, we may be adversely affected by other risks associated with operating in foreign countries. Economic uncertainty in some of the geographic regions in which we operate, including developing regions, could result in the disruption of commerce and negatively impact cash flows from our operations in those areas.

Risks inherent in international operations include, but are not limited to, the following:

 
·
changes in general economic and political conditions in the countries in which we operate;

 
·
unexpected adverse changes in foreign and U.S. laws or regulatory requirements, including those with respect to permitting, export duties and quotas;

 
·
changes by foreign governments in their support of genetic analysis research;

 
·
trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could increase the prices of our products and make us less competitive in some countries;

 
·
differing local preferences and expectations for laboratory equipment and supplies;

 
·
differing approaches to genetic analysis research at pharmaceutical and biotech companies, academic and private research centers and other diagnostic companies;

 
·
fluctuations in exchange rates may affect demand for our products and may adversely affect our profitability;

 
·
difficulty of, and costs relating to compliance with, the different commercial and legal requirements of the overseas markets in which we offer and sell our products;

 
·
differing labor regulations;



 
·
difficulty in establishing, staffing and managing non-U.S. operations;

 
·
potential changes in or interpretations of tax laws;

 
·
inability to obtain, maintain or enforce intellectual property rights; and

 
·
difficulty in enforcing agreements in foreign legal systems.

Our business in foreign markets requires us to respond to rapid changes in market conditions in these countries. Our overall success as a global business depends, in part, on our ability to succeed in differing legal, regulatory, economic, social and political conditions.  We may not be able to develop and implement policies and strategies that will be effective in each location where we do business, which in turn could adversely affect our business, financial condition and results of operations.


We may be adversely affected by environmental, health and safety laws, regulations and liabilities.

We are subject to a variety of federal, state and municipal environmental, health and safety laws based on our use of hazardous materials in both our manufacturing and research and development operations. These laws and regulations often require expensive compliance procedures or operational changes to limit actual or potential impacts to the environment. A violation of these laws and regulations can result in substantial fines, criminal sanctions and/or operational shutdown. Furthermore, we may become liable for the investigation and cleanup of environmental contamination, whether intentional or unintentional, and we could be responsible for damages related to the clean-up of such contamination or individual injury caused by such contamination. We may also be subject to related claims by private parties alleging property damage and personal injury due to exposure to hazardous or other materials as a result of such contamination. Some of these matters may require expending significant amounts for investigation, cleanup or other costs. Events such as these could negatively impact our financial position.


Our sales, marketing and technical support organization may limit our ability to sell our products.

We currently have limited resources available for sales, marketing and technical support services as compared to some of our primary competitors. In order to effectively commercialize our genetic analysis systems and other products to follow, we will need to expand our sales, marketing and technical support staff both domestically and internationally. We may not be successful in establishing or maintaining either a direct sales force or distribution arrangements to market our products and services. In addition, we compete primarily with much larger companies that have larger sales and distribution staffs and a significant installed base of products in place, and the efforts from a limited sales and marketing force may not be sufficient to build the market acceptance of our products required to support continued growth of our business.


We may be exposed to liability due to product defects.

The risk of product liability claims is inherent in the testing, manufacturing, marketing and sale of research products for therapeutic and diagnostic development. We may seek to acquire additional insurance for clinical liability risks. We may not be able to obtain such insurance or general product liability insurance on acceptable terms or in sufficient amounts. A product liability claim or recall could negatively impact our financial position.


We may not realize the anticipated benefits of past or future acquisitions, and integration of these acquisitions may disrupt our business and management.

In January 2014, we entered into an Asset Purchase Agreement with IntegenX Inc. (“IntegenX”), pursuant to which we acquired substantially all of the assets of its product line used in connection with developing, manufacturing, marketing and selling instruments and reagents relating to library preparation for next generation sequencing, including the Apollo 324™ instrument and the PrepX™ reagents (the “Apollo Business”). In the future we may acquire additional companies, product lines, or technologies or enter into joint ventures or other strategic initiatives. We may not realize the anticipated benefits of this acquisition or any other future acquisition and any acquisition has numerous risks. These risks include the following: difficulty in assimilating the operations and personnel of the acquired company; difficulty in effectively integrating the acquired technologies or products with our current products and technologies; difficulty in maintaining controls, procedures, and policies during the transition and integration; disruption of our ongoing business and distraction of our management and


employees from other opportunities and challenges due to integration issues; difficulty integrating the acquired company’s accounting, management information, and other administrative systems; inability to retain key technical and sales personnel of the acquired business; inability to retain key customers, vendors, and other business partners of the acquired business; inability to achieve the financial and strategic goals for the acquired and combined businesses; incurring acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results; potential failure of the due diligence processes to identify significant issues with product quality, legal and financial liabilities, among other things; potential inability to assert that internal controls over financial reporting are effective. Mergers and acquisitions of companies are inherently risky, and ultimately, if we do not complete the integration of the acquired business successfully and in a timely manner, we may not realize the anticipated benefits of the acquisitions to the extent anticipated, which could adversely affect our business, financial condition, or results of operations.


Risks Related to Our Industry

Our success depends upon the continued emergence and growth of markets for analysis of genetic variation and biological function.

We design our products primarily for applications in the life sciences and pharmaceutical industries. The usefulness of our technology depends in part upon the availability of genetic data and its usefulness in identifying or treating disease. We are initially focusing on markets for analysis of genetic variation and biological function, namely gene expression profiling. This market is new and emerging, and may not develop as quickly as we anticipate, or reach its full potential. Other methods of analysis of genetic variation and biological function may emerge and displace the methods we are developing. Also, researchers may not seek or be able to convert raw genetic data into medically valuable information through the analysis of genetic variation and biological function. In addition, factors affecting research and development spending generally, such as changes in the regulatory environment affecting life sciences and pharmaceutical companies, and changes in government programs that provide funding to companies and research institutions, could harm our business. If useful genetic data is not available or if our target markets do not develop in a timely manner, demand for our products may grow at a slower rate than we expect, and we may not be able to achieve or sustain profitability.


We may not be able to deliver acceptable products to our customers due to the rapidly evolving nature of genetic sequence information upon which our products are based.

The genetic sequence information upon which we may rely to develop and manufacture our products is contained in a variety of public and private databases throughout the world. These databases are rapidly expanding and evolving. In addition, the accuracy of such databases and resulting genetic research is dependent on various scientific interpretations, and it is not expected that global genetic research efforts will result in standardized genetic sequence databases for particular genomes in the near future. Although we have implemented ongoing internal quality control efforts to help ensure the quality and accuracy of our products, the fundamental nature of our products requires us to rely on genetic sequence databases and scientific interpretations which are continuously evolving. As a result, these variables may cause us to develop and manufacture products that incorporate sequence errors or ambiguities. The magnitude and importance of these errors depends on multiple and complex factors that would be considered in determining the appropriate actions required to remedy any inaccuracies. Our inability to timely deliver acceptable products as a result of these factors would likely adversely affect our relationship with customers, and could negatively impact our financial condition.


We face risks associated with technological obsolescence and emergence of standardized systems for genetic analysis.

High throughput genetic analyses and quantitative detection methodologies (including, for example, PCR) are undergoing rapid evolution and technological changes. New technologies, techniques or products could emerge which might allow the packaging and analysis of genomic information at densities similar to, or even higher than, our existing or future technology. Other companies may begin to offer products that are directly competitive with, or are technologically superior to, our products. There can be no assurance that we will be able to maintain our technological advantages over emerging technologies in the future. Over time, we will need to respond to technological innovation in a rapidly changing industry. Standardization of tools and systems for genetic research is still ongoing and there can be no assurance that our products will emerge as the standard for genetic research. The emergence of competing technologies and systems as market standards for genetic research may result in our products becoming uncompetitive which would have an adverse effect on our business.




Our success depends on the continuous development of new products and our ability to manage the transition from our older products to new products.

We compete in markets that are new, intensely competitive, highly fragmented and rapidly changing, and many of our current and potential competitors have significantly greater financial, technical, marketing and other resources than we do. In addition, many current and potential competitors have greater name recognition, more extensive customer bases and access to proprietary genetic content. The continued success of our products will depend on our ability to produce products with smaller feature sizes and create greater information capacity at our current or lower costs. The successful development, manufacture and introduction of our new products is a complicated process and depends on our ability to manufacture and supply enough products in sufficient quantity and quality and at acceptable cost in order to meet customer demand. If we fail to keep pace with emerging technologies or are unable to develop, manufacture and introduce new products, we will become uncompetitive, our pricing and margins will decline, and our business will suffer.

Our failure to successfully manage the transition between our older products and new products may adversely affect our financial results. As we introduce new or enhanced products, we must successfully manage the transition from older products to minimize disruption in customers’ ordering patterns, avoid excessive levels of older product inventories and provide sufficient supplies of new products to meet customer demands. When we introduce new or enhanced products, we face numerous risks relating to product transitions, including the inability to accurately forecast demand and difficulties in managing different sales and support requirements due to the type or complexity of the new products.


Ethical, legal and social concerns surrounding the use of genetic information could reduce demand for our products.

Genetic testing has raised ethical issues regarding privacy and the appropriate uses of the resulting information. For these reasons, governmental authorities and others may call for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, such concerns may lead individuals to refuse to use genetics tests even if permissible. Any of these scenarios could reduce the potential markets for our products.


Risks Related to Our Organization

The requirements of being a public company may strain our resources, divert our management’s attention and affect our ability to attract and retain qualified board members.

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are required to comply with the applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act and other applicable securities rules and regulations. We are subject to the Nasdaq Capital Market’s rules and regulations. Compliance with these rules and regulations have increased our legal and financial compliance costs, made some activities more difficult, time-consuming or costly and increased demand on our systems and resources. Among other things, the Exchange Act requires that we file annual, quarterly and current reports with respect to our business and results of operations and maintain effective disclosure controls and procedures and internal controls over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal controls over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and results of operations. Although we currently employ staff to comply with these requirements, we may need to hire even more employees in the future, which will increase our costs and expenses.


Risks Related to this Offering, the Securities Markets and Our Securities

An investment in the units is extremely speculative and there can be no assurance of any return on any such investment.

An investment in the units is extremely speculative and there is no assurance that investors will obtain any return on their investors. Investors will be subject to substantial risks involved in an investment in the Company, including the risk of losing their entire investment.




There is no public market for the warrants.

There is no established public trading market for the warrants, and we do not expect a market to develop. In addition, we do not intend to apply for listing of the warrants on any securities exchange or trading system. Without an active market, the liquidity of the warrants is limited.


The warrants may not have any value.

The warrants will be exercisable for five (5) years from the date of issuance at an initial exercise price per share of $[●]. In the event that the price of a share does not exceed the exercise price of the warrants during the period when the warrants are exercisable, the warrants may not have any value.


A warrant does not entitle the holder to any rights as common stockholders until the holder exercises the warrant for shares of our common stock.

Until you acquire shares upon exercise of your warrants, the warrants will not provide you any rights as a common stockholder. Upon exercise of your warrants, you will be entitled to exercise the rights of a common stockholder only as to matters for which the record date occurs after the exercise date.


Our stock price historically has been, and may continue to be, volatile.

The market price of the common stock has fluctuated significantly since it was first quoted on the OTC Bulletin Board on June 6, 2007. Since this date, through September 21, 2015, the intra-day trading price has fluctuated from a low of $0.97 to a high of $3,130.79. The price of our common stock may continue to fluctuate significantly in response to factors, some of which are beyond our control, including the following:

 
·
actual or anticipated variations in operating results;

 
·
changes in the economic performance and/or market valuations of other life science companies;

 
·
our announcement of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

 
·
additions or departures of key personnel; and

 
·
sales or other transactions involving our capital stock.

There can be no assurance that investors will be interested in purchasing our common stock when our stockholders want to dispose of their shares or at prices that are attractive to our stockholders.


There can be no assurance that we will continue to meet the requirements for our common stock to trade on the Nasdaq Capital Market.

Since becoming listed on the Nasdaq Capital Market in August 22 2014, we are required to comply with certain Nasdaq listing requirements, including, without limitation, with respect to our corporate governance, finances and stock price. If we fail to meet any of these requirements, our shares could be delisted. In particular, Nasdaq rules include a $1.00 minimum bid price requirement. If our common stock fails to continue to trade above $1.00 and we fall out of compliance with this rule we may be forced to implement a reverse stock split to avoid being delisted.

If our common stock were delisted from the Nasdaq Capital Market, it would likely lead to a number of negative implications, including an adverse effect on the price of our common stock, reduced liquidity in our common stock, the loss of federal preemption of state securities laws and greater difficulty in obtaining financing. In the three months ended June 30, 2015, with our common stock being traded on the Nasdaq Capital Market, the daily trading volume for shares of our common stock ranged from 1,707 to 193,415 shares traded per day, and the average daily trading volume during such three-month period was 39,132 shares. This compares to the three-month period ended June 30, 2014, when our common stock was traded on the over-the-counter market and was quoted on the OTCQB. In this period, the daily trading volume for shares of our common stock ranged from 0 to 2,577 shares traded per day, and the average daily trading volume during such three-month period was 200 shares, with no shares traded on 31 of the 63 trading days.


The Warrants included in this Offering are unlisted securities.

The Warrants are not listed on any stock exchange or other trading system, and the Company does not plan to apply to list the Warrants on any other trading system or stock exchange. Thus, investors may be unable to liquidate their investment in the Warrants.


Stockholders may experience dilution of their ownership interests because of the future issuance of additional shares of our common stock and our preferred stock.

In the future, we may issue our authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of our present stockholders. We are authorized to issue an aggregate of 310,000,000 shares of capital stock consisting of 300,000,000 shares of common stock, par value $0.001 per share, of which 5,706,653 shares were issued and outstanding as of June 30, 2015, and 10,000,000 shares of preferred stock, par value $0.001 per share, none of which are issued and outstanding. Future issuances of preferred stock will have preferences and rights as may be determined by our board of directors at the time of issuance. Specifically, our board of directors has the authority to issue preferred stock without further stockholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into common stock, which could decrease the relative voting power of the common stock or result in dilution to our existing stockholders.

In addition, as of June 30, 2015, we had notes in favor of Malaysian Technology Development Corporation Sdn. Bhd. (“MTDC”) outstanding with a face value of $5.2 million which we could have settled by issuing an aggregate of 1,342,836 shares of our common stock, and we had 477,687 outstanding restricted stock units, outstanding options to purchase an aggregate of 548,356 shares of our common stock, outstanding unit warrants to purchase 64,700 shares of our common stock and 32,350 warrants to purchase shares of our common stock, and outstanding warrants to purchase an aggregate of 5,336,309 shares of our common stock. The future vesting or exercise of these securities will subject our existing stockholders to experience dilution of their ownership interests.

We may also issue additional shares of common stock or other securities that are convertible into or exercisable for common stock in connection with hiring or retaining employees, future acquisitions, future sales of our securities for capital raising purposes, or for other business purposes. The future issuance of any additional shares of our common stock may create downward pressure on the trading price of our common stock. There can be no assurance that we will not be required to issue additional shares, warrants or other convertible securities in the future in conjunction with any capital raising efforts, including at a price (or exercise prices) below the price at which shares of our common stock are then traded.


Our management has broad discretion to determine how to use the proceeds received from this offering, and may use them in ways that may not enhance our operating results or the price of our Common Stock.

We plan to use the net proceeds of this offering as described under “Use of Proceeds.” Our management will have broad discretion over the use and investment of the net proceeds of this offering, and accordingly investors in this offering will need to rely upon the judgment of our management with respect to the use of proceeds with only limited information concerning management’s specific intentions. It is possible that we may decide in the future not to use the proceeds of this offering in the manner in which we currently expect.


Because the public offering price of our common stock will be substantially higher than the net tangible book value per share of our outstanding common stock following this offering, new investors will experience immediate and substantial dilution.

The public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock immediately following this offering based on the total value of our tangible assets less our total liabilities. Therefore, if you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution. See the section entitled “Dilution” below for a more detailed discussion of the dilution you will incur if you purchase common stock in this offering.




If securities or industry analysts do not publish research or reports about our business, or publish inaccurate or unfavorable research reports about our business, our share price and trading volume could decline.

The trading market for our common stock will, to some extent, depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us should downgrade our shares or change their opinion of our business prospects, our share price would likely decline. If one or more of these analysts ceases coverage of our company or fails to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.


Our principal stockholders have significant voting power and may take actions that may not be in the best interests of other stockholders.

Our principal stockholder owns 25% of our outstanding common stock, in addition to which we have two stockholders that each own 10%, one stockholder that owns 9% and one stockholder that owns 6%. If all of these security holders act together, they will be able to exert significant control over our management and affairs requiring stockholder approval, including approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of our common stock. This concentration of ownership may not be in the best interests of all our stockholders.


Stockholders should not anticipate receiving cash dividends on our common stock.

We have never declared or paid any cash dividends or distributions on our capital stock. We currently intend to retain future earnings to support operations and to finance expansion and therefore do not anticipate paying any cash dividends on our common stock in the foreseeable future.
 



Information contained in this prospectus may contain forward-looking statements. Forward-looking statements relate to future events or our future financial performance. Except for the historical information contained in this discussion of the business and the discussion and analysis of financial condition and results of operations, the matters discussed herein are forward looking statements. These forward looking statements include but are not limited to our plans for sales growth and expectations of gross margin, expenses, new product introduction, our liquidity and capital needs. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology.

In addition to the risks and uncertainties described in “Risk Factors” above and elsewhere in this prospectus, these risks and uncertainties may include consumer trends, business cycles, scientific developments, changes in governmental policy and regulation, currency fluctuations, economic trends in the United States and inflation. Forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that any projections or other expectations included in any forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors.

Except as required by applicable laws, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

This prospectus also contains market data related to our business and industry. These market data include projections that are based on a number of assumptions. If these assumptions turn out to be incorrect, actual results may differ from the projections based on these assumptions. As a result, our markets may not grow at the rates projected by these data, or at all. The failure of these markets to grow at these projected rates may have a material adverse effect on our business, results of operations, financial condition and the market price of our securities.


USE OF PROCEEDS

We estimate that the net proceeds from this offering will be approximately $18.05 million, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares in full, we estimate that our net proceeds will be approximately $20.81 million, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds from this offering for research and development and commercialization activities for our single cell products, for sales and marketing activities and for general corporate and working capital purposes. See “Risk Factors.”




MARKET PRICE OF COMMON STOCK

Trading Information

Since August 22, 2014, our common stock has been traded on the Nasdaq Capital Market under the symbol WGBS. Prior to that, our common stock was quoted on the OTCQB Marketplace maintained by the NASD (previously the OTC Bulletin Board). The transfer agent for our common stock is Continental Stock Transfer and Trust Company at 17 Battery Place, New York, New York 10004.

The following table sets forth the high and low sales prices (for periods when our common stock traded on the Nasdaq Capital Market) and high and low intra-day bid information (for periods when our common stock traded on the OTCQB Marketplace or the OTC Bulletin Board) for our common stock for the fiscal quarters indicated as reported on the Nasdaq Capital Market, the OTCQB Marketplace or the OTC Bulletin Board, as applicable. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, adjusted for reverse stock splits, and may not represent actual transactions.

   
High
   
Low
 
2013
           
First Quarter ended March 31, 2013
    89.45       19.88  
Second Quarter ended June 30, 2013
    59.63       29.82  
Third Quarter ended September 30, 2013
    39.76       16.50  
Fourth Quarter ended December 31, 2013
    35.00       12.00  
                 
2014
               
First Quarter ended March 31, 2014
    30.00       15.00  
Second Quarter ended June 30, 2014
    20.00       7.90  
Third Quarter ending September 30, 2014
    25.00       4.00  
Fourth Quarter ended December 31, 2014
    5.25       2.85  
                 
2015
               
First Quarter ended March 31, 2015
    5.89       2.95  
Second Quarter ended June 30, 2015
    4.93       2.95  
Third Quarter ending September 30, 2015 (through September 21, 2015)
    3.47       0.97  

Particularly prior to our listing on the Nasdaq Capital Market, our common stock has been thinly traded. Any reported sale prices may not be a true market-based valuation of our common stock. On September 21, 2015, the closing bid price of our common stock, as reported on the Nasdaq Capital Market was $3.25.

As of September 21, 2015, there were 346 holders of record of our common stock.


DIVIDEND POLICY

We have never declared or paid dividends on shares of our common stock. We intend to retain future earnings, if any, to support the development of our business and therefore do not anticipate paying cash dividends for the foreseeable future. Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including current financial condition, operating results and current and anticipated cash needs.




DILUTION

Our net tangible book value as of June 30, 2015, was $4,191,000 or $0.73 per share of common stock. Net tangible book value per share represents total tangible assets less total liabilities, divided by the number of shares of common stock outstanding. Assuming that we issue only Class A Units (and no Class B Units) at an assumed per share offering price of $3.25, which was the last reported sale price of our common stock on the Nasdaq Capital Market on September 21, 2015, and excluding units that may be issued upon exercise of the underwriters’ overallotment option and shares of common stock that may be issued and any proceeds received upon exercise of warrants and shares of common stock issuable upon exercise of warrants and after deduction of the underwriters’ fees and estimated offering expenses payable by us, our net tangible book value as of June 30, 2015, would have been $22,241,000, or $1.88 per share. This represents an immediate increase in net tangible book value of $1.15 per share to existing stockholders and an immediate dilution in net tangible book value of $1.37 per share to purchasers of common stock in this offering.

The following table illustrates this dilution on a per share basis:

Assumed public offering price per share of common stock included in a Class A Unit
        $ 3.25  
Net tangible book value per share as of June 30, 2015
  $ 0.73          
Increase per share attributable to this offering
  $ 1.15          
As adjusted net tangible book value per share after giving effect to this offering
          $ 1.88  
Dilution per share to investors in this offering
          $ 1.37  

If the underwriter’s over-allotment option is exercised in full, dilution per share to new investors would be $1.29 per share of common stock.

The number of shares of common stock outstanding used in the calculations above is based on 5,706,653 shares outstanding as of June 30, 2015, and excludes:

 
·
shares of our common stock that may be issued upon conversion of shares of Series 2 preferred stock and exercise of warrants issued in this offering;

 
·
477,687 shares of our common stock issuable upon vesting of outstanding restricted stock units;

 
·
548,356 shares of our common stock issuable upon exercise of outstanding stock options with a weighted average exercise price of $11.34 per share;

 
·
433,691 shares of our common stock reserved for future issuance under our 2008 Stock Incentive Plan, as amended; and

 
·
5,433,359 shares of our common stock reserved for issuance under warrants and unit warrants outstanding with a weighted average exercise price of $8.72 per share.
 
 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion should be read in conjunction with the other sections of this prospectus, including the related exhibits. All amounts are recorded in this discussion on a post-reverse-split basis. The various sections of this discussion contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this prospectus. See “Risk Factors.” Our actual results may differ materially.

Company Overview

Since beginning operations in 2003, we have been engaged in the development, manufacture and sale of systems for gene expression quantification, genotyping and stem cell research for the life sciences and pharmaceutical drug discovery industries. Most recently, our R&D efforts have been concentrated on the commercialization of our single cell products. Our products are aimed at researchers who perform genetic analysis and cell biology, primarily at pharmaceutical and biotech companies, academic and private research centers and diagnostics companies involved in biomarker research. We plan to provide new performance standards with significant savings of time and cost for professionals in the field of gene expression research and to facilitate biomarker discovery, toxicology and clinical research through the SmartChip products and services.

Our revenue is subject to fluctuations due to the timing of sales of high-value products, the impact of seasonal spending patterns, the timing and size of research projects our customers perform, changes in overall spending levels in the life science industry and other unpredictable factors that may affect customer ordering patterns. Any significant delays in the commercial launch or any lack or delay of commercial acceptance of new products, unfavorable sales trends in existing product lines, or impacts from the other factors mentioned above, could adversely affect our revenue growth or cause a sequential decline in quarterly revenue. Due to the possibility of fluctuations in our revenue and net income or loss, we believe that quarterly comparisons of operating results are not a good indication of future performance.

Since inception, we have incurred substantial operating losses. As of June 30, 2015, our accumulated deficit was $100.2 million. Losses have principally occurred as a result of the substantial resources required for the research, development and manufacturing start-up costs required to commercialize our initial products. We expect to continue to incur substantial costs for research and development activities for at least the next year as we expand and improve our core technology and its applications in the life science research market.

In May 2015, we hired a new Chief Executive Officer, the former incumbent becoming our Executive Chairman. Following this transition, the role of Chief Operating Officer was eliminated in July 2015.

We believe that funds currently available, along with our revenue, will be sufficient to fund our operations into 2016. To fund our operations thereafter, we are currently considering different financing alternatives that may be available to us, including the offering described in this prospectus. If we are unable to obtain such additional financing on a timely basis, we may have to curtail our development activities and growth plans and/or be forced to sell assets, perhaps on unfavorable terms, which would have a material adverse effect on our business, financial condition and results of operations, and ultimately could be forced to discontinue our operations and liquidate, in which event it is unlikely that stockholders would receive any distribution on their shares. See “Liquidity and Capital Resources” below.


Recent Developments—Acquisition of Assets from IntegenX Inc.

In January 2014, we entered into an Asset Purchase Agreement with IntegenX, pursuant to which we acquired substantially all of the assets of the Apollo Business. The purchase price for the Apollo Business comprised (1) a cash payment of $2.0 million, (2) the $1.25 million promissory note (the “IntegenX Note”, (3) up to three earn-out payments payable, if at all, in 2015, 2016 and 2017, respectively (the “Earnout”) and (4) our assumption of certain liabilities, including obligations to perform under contracts and liabilities for certain accrued but unpaid vacation for certain employees. The IntegenX note was repaid in full in September 2014.

The Earnout contemplates three earn-out payments based on gross revenues from certain products of the Apollo Business (“Covered Revenues”). In particular:

 
·
If, in 2014, Covered Revenues exceed $4 million but are less than $6 million, we will pay IntegenX an amount equal to 15% of the amount by which the 2014 Covered Revenues exceed $4 million. If, in 2014, Covered Revenues exceed $6 million, we will pay IntegenX an amount equal to the sum of (i) $300,000 plus (ii) 20% of the amount by which the 2014 Covered Revenues exceed $6 million.


 
·
If, in 2015, Covered Revenues exceed $4 million but are less than $6 million, we will pay IntegenX an amount equal to 10% of the amount by which the 2015 Covered Revenues exceed $4 million. If, in 2015, Covered Revenues exceed $6 million but are less than $10 million, we will pay IntegenX an amount equal to the sum of (i) $200,000 plus (ii) 15% of the amount by which the 2015 Covered Revenues exceed $6 million. If, in 2015, Covered Revenues exceed $10 million, we will pay IntegenX an amount equal to (i) $800,000 plus (ii) 20% of the amount by which the 2015 Covered Revenues exceed $10 million.

 
·
If, in 2016, Covered Revenues exceed $4 million but are less than $10 million, we will pay IntegenX an amount equal to 10% of the amount by which the 2016 Covered Revenues exceed $4 million. If, in 2016, Covered Revenues exceed $10 million but are less than $15 million, we will pay IntegenX an amount equal to the sum of (i) $600,000 plus (ii) 15% of the amount by which the 2016 Covered Revenues exceed $10 million. If, in 2016, Covered Revenues exceed $15 million, we will pay IntegenX an amount equal to (i) $1.35 million plus (ii) 20% of the amount by which the 2016 Covered Revenues exceed $15 million.


2014 Public Offering

On August 27, 2014, we completed a public offering (the “2014 Public Offering”) of 2,000 Units (the “Units”) for $10,000 per Unit, with each Unit consisting of 2,000 shares of our common stock and 2,000 warrants to purchase one share of our common stock. In aggregate, we issued 4,000,000 shares of our common stock and 4,600,000 warrants to purchase shares of our common stock (inclusive of 600,000 warrants issued upon exercise of the overallotment option granted to the underwriters). Subject to certain ownership limitations, the warrants are exercisable at any time within five years of their issuance date at an exercise price of $5.00 per share. Our total gross proceeds from the offering were $20,000,006. After deducting underwriting discounts, commissions and offering expenses payable by us, we received aggregate net proceeds totaling approximately $18.0 million.

We retained underwriters in connection with the 2014 Public Offering, and pursuant to the terms of an underwriting agreement, we paid the underwriters an aggregate fee totaling approximately $1,675,000. In addition, we issued the underwriters 120,000 warrants at the closing of the 2014 Offering, each warrant entitling the holder to purchase one share of our common stock for $6.25 at any time within five years of their issuance date.

In connection with the 2014 Public Offering, our shares began trading on the Nasdaq Capital Market.


Results of Operations

Three and Six Months Ended June 30, 2015, Compared to Three and Six Months Ended June 30, 2014

The following table presents selected items in the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2015 and 2014, respectively:

   
Three Months
Ended June 30,
   
Six Months Ended
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(in thousands)
   
(in thousands)
 
Revenue:
                       
Product
  $ 1,485     $ 1,608     $ 2,506     $ 2,889  
License and royalty
    125       125       250       250  
Total revenue
    1,610       1,733       2,756       3,139  
Cost of product revenue
    676       758       1,090       1,365  
Gross profit
    934       975       1,666       1,774  
Operating expenses:
                               
Sales and marketing
    1,232       1,364       2,465       2,637  
Research and development
    2,279       1,473       4,750       2,840  
General and administrative
    1,252       1,289       2,854       2,101  
Total operating expenses
    4,763       4,126       10,069       7,578  
Operating loss
    (3,829 )     (3,151 )     (8,403 )     (5,804 )
Other income and (expenses):
                               
Interest expense, net
    (107 )     (109 )     (213 )     (212 )
Gain on revaluation of warrant derivative liabilities, net
    104       1,158       40       1,374  
Miscellaneous income (expense)
    11       (1 )     (49 )     (4 )
Total other income and (expenses)
    8       1,048       (222 )     1,158  
Net loss before provision for income taxes
    (3,821 )     (2,103 )     (8,625 )     (4,646 )
Provision for income taxes
                2       3  
Net loss
  $ (3,821 )   $ (2,103 )   $ (8,627 )   $ (4,649 )


Product Revenue

The following table presents our product revenue for the three and six months ended June 30, 2015 and 2014, respectively:

Three Months Ended June 30,
   
Six Months Ended June 30,
2015
 
2014
 
% Change
   
2015
 
2014
 
% Change
 
(dollars in thousands)
         
(dollars in thousands)
   
$
1,485
 
$
1,608
 
(8)%
   
$
2,506
 
$
2,889
 
(13)%

For the three months ended June 30, 2015, product revenue decreased by $123,000, or 8%, as compared to the three months ended June 30, 2014. The decrease is primarily due to a reduction in sales of SmartChip capital equipment in the three months ended June 30, 2015, with revenue of $271,000, down 63% from the comparable 2014 period. SmartChip capital equipment represented only 18% of our product revenue in the three months ended June 30, 2015, compared to 46% in the 2014 period. This was partially offset by an increase in sales of our Real-Time PCR Chip panels and services, which increased by 60% from the comparable 2014 period in dollar terms and represented 31% of revenue in the three months ended June 30, 2015, compared to 18% in the comparable 2014 period. Revenue from the Apollo Business increased by $170,000 from the comparable 2014 period due to an increase in capital equipment sales. The Apollo Business accounted for 51% of our product revenue in the three months ended June 30, 2015, compared to 36% in the comparable 2014 period.

For the six months ended June 30, 2015, product revenue decreased by $383,000, or 13%, as compared to the six months ended June 30, 2014. The decrease is primarily due to a reduction in sales of SmartChip capital equipment in the six months ended June 30, 2015, with revenue of $373,000, down 72% from the comparable 2014 period. SmartChip capital equipment represented only 15% of our product revenue in the six months ended June 30, 2015, compared to 47% in the 2014 period. This was partially offset by an increase in sales of our Real-Time PCR Chip panels and services, which increased by more than 100% from the comparable 2014 period in dollar terms and represented 38% of revenue in the six months ended


June 30, 2015, compared to 16% in the comparable 2014 period. Revenue from the Apollo Business increased by $104,000 from the comparable 2014 period due to an increase in capital equipment sales. The Apollo Business accounted for 47% of our product revenue in the six months ended June 30, 2015, compared to 37% in the comparable 2014 period.

License and Royalty Revenue

The following table presents our license and royalty revenue for the three and six months ended June 30, 2015 and 2014, respectively:

Three Months Ended June 30,
   
Six Months Ended June 30,
2015
 
2014
 
% Change
   
2015
 
2014
 
% Change
 
(dollars in thousands)
         
(dollars in thousands)
   
$
125
 
$
125
 
—%
   
$
250
 
$
250
 
—%

For the three and six months ended June 30, 2015, license and royalty revenue was unchanged from the three and six months ended June 30, 2014. This revenue was generated by an agreement signed at the beginning of February 2013, expected to generate revenue of $500,000 annually for three years.

Cost of Product Revenue

The following table presents the cost of our product revenue for the three and six months ended June 30, 2015 and 2014, respectively:

Three Months Ended June 30,
   
Six Months Ended June 30,
2015
 
2014
 
% Change
   
2015
 
2014
 
% Change
 
(dollars in thousands)
         
(dollars in thousands)
   
$
676
 
$
758
 
(11)%
   
$
1,090
 
$
1,365
 
(20)%

Cost of product revenue includes the cost of products paid to third party vendors and raw materials, labor and overhead for products manufactured internally, and reserves for warranty and inventory obsolescence.

For the three months ended June 30, 2015, cost of product revenue decreased by $82,000, or 11%, as compared to the three months ended June 30, 2014. The decrease related primarily to the decrease in product revenue in the three months ended June 30, 2015, with gross margin increasing from 53% to 54%.

For the six months ended June 30, 2015, cost of product revenue decreased by $275,000, or 20%, as compared to the six months ended June 30, 2014. The decrease related primarily to the decrease in product revenue and the increase in gross margin in the three months ended June 30, 2015, from 53% to 57%. The improved margin was primarily due to the higher percentage of consumables sold.

Sales and Marketing

The following table presents our sales and marketing expenses for the three and six months ended June 30, 2015 and 2014, respectively:

Three Months Ended June 30,
   
Six Months Ended June 30,
2015
 
2014
 
% Change
   
2015
 
2014
 
% Change
 
(dollars in thousands)
         
(dollars in thousands)
   
$
1,232
 
$
1,364
 
(10)%
   
$
2,465
 
$
2,637
 
(7)%

Sales and marketing expenses consist primarily of compensation costs of our sales and marketing team, commissions, and the costs associated with various marketing programs.

For the three months ended June 30, 2015, sales and marketing expenses decreased by $132,000, or 10%, as compared to the three months ended June 30, 2014. This decrease resulted primarily from a decrease in product marketing and recruiting expenses, partially offset by an increase in personnel costs in Europe, mostly due to the absence of a matching grant (a governmental subsidy under which 50% of eligible costs were reimbursed) in the 2015 period.

For the six months ended June 30, 2015, sales and marketing expenses decreased by $172,000, or 7%, as compared to the six months ended June 30, 2014. This decrease resulted primarily from a decrease in product marketing expense, partially offset by increases in personnel costs in Europe, largely due to a decrease in the matching grant in the 2015 period.



We expect our sales and marketing expenses for the remainder of 2015 to remain at a similar level to that of the first six months.

Research and Development

The following table presents our research and development expenses for the three and six months ended June 30, 2015 and 2014, respectively:

Three Months Ended June 30,
   
Six Months Ended June 30,
2015
 
2014
 
% Change
   
2015
 
2014
 
% Change
 
(dollars in thousands)
         
(dollars in thousands)
   
$
2,279
 
$
1,473
 
55%
   
$
4,750
 
$
2,840
 
67%

Research and development expenses consist primarily of salaries and other personnel-related expenses, laboratory supplies and other expenses related to the design, development, testing and enhancement of our products. Research and development expenses are expensed as they are incurred.

For the three months ended June 30, 2015, research and development expenses increased $806,000, or 55%, as compared to the three months ended June 30, 2014. For the six months ended June 30, 2015, research and development expenses increased $1,910,000, or 67%, as compared to the six months ended June 30, 2014. The increase in both periods resulted primarily from increased activities related to the development and commercialization of our single cell products, causing us to incur higher personnel costs (including accrued bonuses, none having been recorded in the comparable 2014 period, and stock compensation costs), facilities costs and expensed materials and reagents. This increase was partially offset by a reduction in activities related to the development of target enrichment products which are now established in the market.

We believe a substantial investment in research and development is essential in the long term to remain competitive and expand into additional markets. Accordingly, we expect our research and development expenses to remain at a high level relative to total expenditures for the foreseeable future.

General and Administrative

The following table presents our general and administrative expenses for the three and six months ended June 30, 2015 and 2014, respectively:

Three Months Ended June 30,
   
Six Months Ended June 30,
2015
 
2014
 
% Change
   
2015
 
2014
 
% Change
 
(dollars in thousands)
         
(dollars in thousands)
   
$
1,252
 
$
1,289
 
(3)%
   
$
2,854
 
$
2,101
 
36%

General and administrative expenses consist primarily of personnel costs for finance, human resources, business development, and general management, as well as professional fees, such as expenses for legal and accounting services.

For the three months ended June 30, 2015, general and administrative expenses decreased $37,000, or 3%, as compared to the three months ended June 30, 2014. The decrease resulted primarily from a decrease in stock compensation expense, principally related to options awarded to our then Chief Executive Officer in May 2014, the majority of which vested in the 2014 period per his employment contract, and a reduction in consultancy costs as the CFO and controller functions are no longer outsourced. These decreases were substantially offset by the costs of our Chief Operating Officer and Chief Financial Officer, both hired in August 2014, and the costs of our Executive Chairman following the hiring of our new Chief Executive Officer in May 2015, along with accrued bonuses, none having been recorded in the comparable 2014 period. We also incurred one-off costs in the 2015 period for the recruitment of our Chief Executive Officer and severance costs related to the elimination of the position of Chief Operating Officer.

For the six months ended June 30, 2015, general and administrative expenses increased $753,000, or 36%, as compared to the six months ended June 30, 2014. The increase resulted primarily from an increase in personnel costs related to our Chief Operating Officer and Chief Financial Officer, both hired in August 2014, and the costs of our Executive Chairman following the hiring of our new Chief Executive Officer in May 2015, along with accrued bonuses, none having been recorded in the comparable 2014 period. We also incurred one-off costs in the 2015 period for the recruitment of our Chief Executive Officer and severance costs related to the elimination of the position of Chief Operating Officer. We also incurred higher investor relations costs, largely in conjunction with being Nasdaq-listed. These increases were partially offset by a reduction in consultancy costs as the CFO and controller functions are no longer outsourced and a reduction in professional fees, principally one-off costs in the 2014 period related to the IntegenX acquisition.



Interest Expense, Net

The following table presents interest expense, net for the three and six months ended June 30, 2015 and 2014, respectively:

Three Months Ended June 30,
   
Six Months Ended June 30,
2015
 
2014
 
% Change
   
2015
 
2014
 
% Change
 
(dollars in thousands)
         
(dollars in thousands)
   
$
107
 
$
109
 
(2)%
   
$
213
 
$
212
 
—%

For the three months ended June 30, 2015, interest expense decreased $2,000, or 2%, as compared to the three months ended June 30, 2014. For the six months ended June 30, 2015, interest expense was essentially flat, increasing by $1,000 as compared to the six months ended June 30, 2014. The increase was due to the higher cost of debt discount amortization related to the $5,200,000 in long-term debt issued to Malaysian Technology Development Corporation Sdn. Bhd. (“MTDC”), an investor in WaferGen Biosystems (M) Sdn. Bhd. (“WGBM”), our now-dissolved Malaysian subsidiary (the “MTDC Notes”), which are being amortized using the effective yield method, which weights the interest charges towards the latter stages of the contractual term of the debt. Interest on the MTDC Notes is expected to be approximately $370,000 in 2015, rising each year up to $732,000 in 2019, the last full year before this debt matures. There was also an increase due to capital leases and our earn-out contingency. These increases were offset by the absence of the 8% interest and amortization charges on the IntegenX Note which we repaid in September 2014.

Gain on Revaluation of Derivative Liabilities, Net

The following table represents the gain on revaluation of derivative liabilities, net for the three and six months ended June 30, 2015 and 2014, respectively:

Three Months Ended June 30,
   
Six Months Ended June 30,
2015
 
2014
 
% Change
   
2015
 
2014
 
% Change
 
(dollars in thousands)
         
(dollars in thousands)
   
$
104
 
$
1,158
 
(91)%
   
$
40
 
$
1,374
 
(97)%

Our warrant derivative liabilities arise due to the cash settlement provisions in certain warrants and unit warrants and, until the time of their expiry, the variable number of shares of our common stock that may be issued upon the exercise of those warrants with certain anti-dilution protection.

The net gain from revaluation of warrant derivative liabilities for the three months ended June 30, 2015, was $104,000, compared to a net gain of $1,158,000 for the three months ended June 30, 2014. The net gain from revaluation of warrant derivative liabilities for the six months ended June 30, 2015, was $40,000, compared to a net gain of $1,374,000 for the six months ended June 30, 2014. Gains and losses are directly attributable to revaluations of our derivative liabilities and result primarily from a net decrease or increase, respectively, in our stock price in the period. Our closing stock price was $3.15 on June 30, 2015, compared to $4.53 on March 31, 2015 and $3.00 on December 31, 2014, and was $12.50 on June 30, 2014, compared to $20.00 on both March 31, 2014 and December 31, 2013. The gain in the three months ended June 30, 2015, arose principally due to the decrease in our stock price, whereas in the six months ended June 30, 2015, it arose due to decreases in expected volatility and remaining term. In the 2014 periods the gain was caused principally by the decrease in our stock price. The impact of changes in parameters was significantly reduced in the 2015 period as there were only 118,000 warrants accounted for as liabilities at the start of 2015, compared to 740,000 at the start of 2014. With the present number of outstanding warrants accounted for as liabilities, at our closing stock price of $3.15 on June 30, 2015, an increase in our share price of $1.00 would generate a revaluation loss of approximately $60,000; conversely, a decrease in our share price of $1.00 would generate a revaluation gain of approximately $50,000.

Future gains or losses on revaluation will result primarily from net decreases or increases, respectively, in our stock price during the reporting period. Derivative liabilities will also decrease as the remaining term of each instrument diminishes.



Miscellaneous Income (Expense)

The following table presents miscellaneous income (expense) for the three and six months ended June 30, 2015 and 2014, respectively:

Three Months Ended June 30,
   
Six Months Ended June 30,
2015
 
2014
 
% Change
   
2015
 
2014
 
% Change
 
(dollars in thousands)
         
(dollars in thousands)
   
$
11
 
$
(1)
 
N/A
   
$
(49)
 
$
(4)
 
N/A%

For the three months ended June 30, 2015, we recorded miscellaneous income of $11,000, compared to an expense of $1,000 for the three months ended June 30, 2014. For the six months ended June 30, 2015, we recorded miscellaneous expense of $49,000, compared to an expense of $4,000 for the six months ended June 30, 2014. Miscellaneous income or expense is the result of net foreign currency exchange gains or losses which arise on our subsidiary in Luxembourg and on U.S. expenses denominated in foreign currencies. The principal reason for the income in the three months ended June 30, 2015, is net assets of $500,000 being denominated in Euros, which increased in value against the U.S. dollar by 2% during the period, whereas in the six months ended June 30, 2015, they declined in value against the U.S. dollar by 10% during the period.

Provision for Income Taxes

The following table presents the provision for income taxes for the three and six months ended June 30, 2015 and 2014, respectively:

Three Months Ended June 30,
   
Six Months Ended June 30,
2015
 
2014
 
% Change
   
2015
 
2014
 
% Change
 
(dollars in thousands)
         
(dollars in thousands)
   
$
 
$
 
N/A
   
$
2
 
$
3
 
(33)%

We recorded no income tax expense in the three months ended June 30, 2015 or 2014. For the six months ended June 30, 2015 and 2014, we recorded a charge of $2,000 and $3,000, respectively, for U.S. state income taxes. We have provided a full valuation allowance against our net deferred tax assets.




Year Ended December 31, 2014, Compared to Year Ended December 31, 2013

The following table presents selected items in our consolidated statements of operations for the years ended December 31, 2014 and 2013, respectively:

   
Year Ended December 31,
 
   
2014
   
2013
 
             
Revenue:
           
Product
  $ 5,501,342     $ 846,414  
License and royalty
    500,000       458,333  
                 
Total revenue
    6,001,342       1,304,747  
                 
Cost of revenue
    2,572,399       574,195  
                 
Gross profit
    3,428,943       730,552  
                 
Operating expenses:
               
Sales and marketing
    4,739,789       2,240,116  
Research and development
    6,716,689       5,399,775  
General and administrative
    4,422,180       3,013,104  
                 
Total operating expenses
    15,878,658       10,652,995  
                 
Operating loss
    (12,449,715 )     (9,922,443 )
                 
Other income and (expenses):
               
Interest expense, net
    (503,044 )     (2,877,627 )
Contingent earn-out adjustment
    229,300        
Gain (loss) on revaluation of derivative liabilities, net
    2,200,200       (506,195 )
Gain on settlement of derivative liability
          1,012,351  
Loss on extinguishment of debt
    (128,546 )     (4,970,410 )
Issuance of warrants due to organic change
          (2,553,318 )
Gain on liquidation of subsidiary
          3,386,297  
Miscellaneous income (expense)
    (37,958 )     171,414  
                 
Total other income and (expenses)
    1,759,952       (6,337,488 )
                 
Net loss before provision for income taxes
    (10,689,763 )     (16,259,931 )
                 
Provision for income taxes
    3,100       6,341  
                 
Net loss
  $ (10,692,863 )   $ (16,266,272 )


Product Revenue

The following table represents our product revenue for the years ended December 31, 2014 and 2013:

Year Ended December 31,
2014
   
2013
   
% Change
                   
$
5,501,342
   
$
846,414
     
550%

For the year ended December 31, 2014, product revenue increased by $4,654,928, or 550%, as compared to the year ended December 31, 2013. The increase is primarily due to revenue from the newly-acquired Apollo Business, which accounted for 39% of our product revenue in the year ended December 31, 2014, compared to none in 2013. We also increased sales of SmartChip Real-Time PCR Systems and SmartChip Target Enrichment Systems (“TE”, launched in mid-2013), which


represented 41% of our product revenue in the year ended December 31, 2014, and were more than 3.5 times the revenue in 2013. There was also a significant increase in sales of our Real-Time PCR Chip panels and other projects and services, which represented 20% of product revenue in the year ended December 31, 2014, and were more than 5 times the revenue in 2013.


License and Royalty Revenue

The following table represents our license and royalty revenue for the years ended December 31, 2014 and 2013:

Year Ended December 31,
2014
   
2013
   
% Change
                   
$
500,000
   
$
458,333
     
9%

For the year ended December 31, 2014, license and royalty revenue increased by $41,667, or 9%, as compared to the year ended December 31, 2013. This increase reflects revenue recognition for one additional month of license and royalty fees in the year ended December 31, 2014, as compared to the year ended December 31, 2013. This revenue was generated by an agreement signed at the beginning of February 2013, expected to generate revenue of $500,000 annually for three years.


Cost of Product Revenue

The following table represents our cost of product revenue for the years ended December 31, 2014 and 2013:

Year Ended December 31,
2014
   
2013
   
% Change
                   
$
2,572,399
   
$
574,195
     
348%

Cost of product revenue includes the cost of products paid to third party vendors and raw materials, labor and overhead for products manufactured internally, and reserves for warranty and inventory obsolescence.

For the year ended December 31, 2014, cost of product revenue increased by $1,998,204, or 348%, as compared to the year ended December 31, 2013. The increase related primarily to the increase in units sold, which also increased our product revenue. This was offset by improved profit margins, which increased from 32% to 53% of product revenue. These improved margins were caused principally by reductions in the provision for excess inventory and by an increase in the percentage of revenue from consumables, which generate higher margins than system sales.


Sales and Marketing

The following table represents our sales and marketing expenses for the years ended December 31, 2014 and 2013:

Year Ended December 31,
2014
   
2013
   
% Change
                   
$
4,739,789
   
$
2,240,116
     
112%

Sales and marketing expenses consist primarily of compensation costs of our sales and marketing team, commissions and the costs associated with various marketing programs.

For the year ended December 31, 2014, sales and marketing expenses increased by $2,499,673, or 112%, as compared to the year ended December 31, 2013. The increase resulted primarily from increases in headcount largely due to our hiring employees with the Apollo Business and increased European sales activity. Additional expense also arose due to amortization related to intangible assets acquired with the Apollo Business, recruitment costs, an out-of-court settlement, increased commissions due to increased revenue and the scale-up of marketing activities, including travel and subsistence and the cost of presenting at one major trade show.

We expect sales and marketing expenses will increase during 2015 as we build our sales and marketing headcount and activities to commercialize our products and increase sales-based commissions.



Research and Development

The following table represents our research and development expenses for the years ended December 31, 2014 and 2013:

Year Ended December 31,
2014
   
2013
   
% Change
                   
$
6,716,689
   
$
5,399,775
     
24%

Research and development expenses consist primarily of salaries and other personnel-related expenses, laboratory supplies and other expenses related to the design, development, testing and enhancement of our products. Research and development expenses are expensed as they are incurred.

For the year ended December 31, 2014, research and development expenses increased $1,316,914, or 24%, as compared to the year ended December 31, 2013. The increase resulted primarily from increases in headcount, most notably due to hiring our new Chief Technology Officer and other staff to work on the single cell project plus employees acquired with the Apollo Business. The increase in single cell development activity resulted in increased reagent and other material costs. These increases were offset by reductions in the cost of instrument development following the launch of TE, along with lower depreciation costs.

We believe a substantial investment in research and development is essential in the long term to remain competitive and expand into additional markets. Accordingly, we expect our research and development expenses to remain at a high level of total expenditures for the foreseeable future, although we expect these expenses will continue to decline as a percentage of revenue.


General and Administrative

The following table represents our general and administrative expenses for the years ended December 31, 2014 and 2013:

Year Ended December 31,
2014
   
2013
   
% Change
                   
$
4,422,180
   
$
3,013,104
     
47%

General and administrative expenses consist primarily of personnel costs for finance, human resources, business development, investor relations and general management, as well as professional fees, such as expenses for legal and accounting services. For the year ended December 31, 2014, general and administrative expenses increased $1,409,076, or 47%, as compared to the year ended December 31, 2013. The increase resulted primarily from recording a non-cash charge of approximately $600,000 related to stock options awarded to our Chief Executive Officer in May 2014, an increase in accrued performance bonuses, an increase in consultancy costs, principally due to outsourcing the CFO and controller functions between late March and late August and the acquisition of the Apollo Business, and the hiring of a Chief Operating Officer in August. This was offset by the absence of a one-time accrual of a discretionary bonus awarded to our CEO, the accrual of retention incentives for other U.S. employees and severance costs for Malaysian employees, along with a reduction in legal fees incurred in conjunction with our capital restructuring in 2013.

We expect our general and administrative expenses to remain at a similar level in 2015.


Interest Expense, net

The following table represents our interest expense, net for the years ended December 31, 2014 and 2013:

Year Ended December 31,
2014
   
2013
   
% Change
                   
$
503,044
   
$
2,877,627
     
(83)%

For the year ended December 31, 2014, net interest expense decreased $2,374,583, or 83%, as compared to the year ended December 31, 2013. The decrease was primarily due to the absence of charges for 5% interest and amortization of the debt


discount and loan origination fees related to the convertible promissory notes (“CPNs”) in the aggregate principal amount of $15,275,000 issued in a May 2011 private placement of our securities following their conversion into equity securities on August 27, 2013.

This decrease was offset by interest on the $5,200,000 in long-term debt issued to Malaysian Technology Development Corporation Sdn. Bhd. (“MTDC”), an investor in WaferGen Biosystems (M) Sdn. Bhd. (“WGBM”), our now-dissolved Malaysian subsidiary (the “MTDC Notes”), and on the IntegenX Note until it was repaid on September 12, 2014. We also incurred an interest charge of approximately $100,000 related to the interest element of our contingent earn-out adjustment relating to the Apollo Business acquisition.

Interest on the MTDC Notes is expected to be approximately $370,000 in 2015, rising each year up to $732,000 in 2019, the last full year before this debt matures. There will also be a charge totaling $70,000 related to our earn-out contingency over the next two years.


Contingent Earn-out Adjustment

The following table represents income recorded from our contingent earn-out adjustment for the years ended December 31, 2014 and 2013:

Year Ended December 31,
2014
   
2013
   
% Change
                   
$
229,300
   
$
     
N/A

Our contingent earn-out adjustment represents the impact of change in the estimated fair value of acquisition earn-outs, all of which relates to Covered Revenues from the Apollo Business acquired on January 6, 2014. The fair value of acquisition earn-out contingencies is based on expectations and other such estimates related to the specific earn-out target, all of which are subject to modification with changing circumstances until the contingency is resolved. The fair value of acquisition earn-out contingencies prior to resolution is determined using a modeling technique with significant unobservable inputs calculated using a probability-weighted approach. Key assumptions include discount rates for present value factor, which are based on industry specific weighted average cost of capital, adjusted for, among other things, time and risk, as well as forecasted annual earnings before interest, taxes, depreciation and amortization and forecasted annual revenues over the life of the earn-outs. Adjustments to the fair value of earn-outs are included in earnings, with the portion of the adjustment relating to the time value of money being recorded as interest expense, net and the non-interest portion of the change in earn-outs as a separate non-operating item in the statement of operations.

During the year ended December 31, 2014, as a result of the assessment of actual and projected revenue scenarios, the Company determined that revenues were expected to be below the amounts estimated at the time of the acquisition. No amounts were payable with respect to 2014 revenue, and the probability-weighted estimates of revenue in 2015 and 2016 have been reassessed downwards, resulting in an adjustment of $229,300 (before the interest expense offset) in the year ended December 31, 2014. Should actual Covered Revenues in 2015 and 2016 exceed our estimates, a charge will be recorded, whereas if they fall short of our latest estimates, additional non-operating income will be reported.


Gain (Loss) on Revaluation of Derivative Liabilities, net

The following table represents the gain (loss) on revaluation of derivative liabilities, net for the years ended December 31, 2014 and 2013:

Year Ended December 31,
2014
   
2013
   
% Change
                   
$
2,200,200
   
$
(506,195)
     
N/A

Our derivative liabilities arise due to the cash settlement provisions in certain warrants and unit warrants and the variable number of shares of our common stock that may be issued upon the exercise of those warrants with certain anti-dilution protection and, until the time of their settlement in 2013, upon the exchange of Series A and Series B Convertible Preference Shares (“CPS”) of our now-dissolved Malaysian subsidiary, and under the conversion element of our CPNs.



The net gain from revaluation of derivative liabilities for the year ended December 31, 2014, was $2,200,200, compared to a net loss of $506,195 for the year ended December 31, 2013. Gains and losses are directly attributable to revaluations of all of our derivatives and (with the exception of Series B CPS) result primarily from a net decrease or increase, respectively, in our stock price in the period. Our closing stock price was $3.00 on December 31, 2014, compared to $20.00 on December 31, 2013, $20.00 on August 27, 2013 (the date that warrants with cash settlement provisions, our largest derivative, were issued) and $29.82 on December 31, 2012.

Future gains or losses on revaluation will result primarily from net decreases or increases, respectively, in our stock price during the reporting period. Derivative liabilities will also increase if the volatility of our stock price increases (as occurred between August 27 and December 31, 2013, this being the principal cause of the overall loss on revaluation for that year) and decrease as the remaining term of each instrument diminishes. With the present number of warrants accounted for as liabilities, at our closing stock price of $3.00 on December 31, 2014, an increase in our share price of $1.00 would generate a revaluation loss of approximately $60,000; conversely, a decrease in our share price of $1.00 would generate a revaluation gain of approximately $60,000. Should our stock price rise above $10.00, the impact of a $1.00 change on our share price would increase to approximately $80,000.


Gain on Settlement of Derivative Liability

The following table presents the gain on settlement of derivative liability we recognized for the years ended December 31, 2014 and 2013:

Year Ended December 31,
2014
   
2013
   
% Change
                   
$
   
$
1,012,351
     
N/A

Gain on settlement of derivative liability is a one-time non-cash credit recorded as a result of the purchase of our Series B CPS from the original investor in 2013 for less than the fair value of their derivative liability on the date of purchase. There was no comparable credit in 2014 and none is expected in the future.


Loss on Extinguishment of Debt

The following table presents the loss on extinguishment of debt we recognized for the years ended December 31, 2014 and 2013:

Year Ended December 31,
2014
   
2013
   
% Change
                   
$
128,546
   
$
4,970,410
     
N/A

Loss on extinguishment of debt in the year ended December 31, 2014, is a one-time non-cash charge recorded as a result of the early repayment of the IntegenX Note on September 12, 2014. Loss on extinguishment of debt in the year ended December 31, 2013, is a one-time non-cash charge recorded as a result of the CPNs being exchanged for other securities per the terms of the Exchange Agreement on August 27, 2013. No comparable costs are expected in the near future, although if the MTDC Notes had been repaid or exchanged for shares of our common stock on December 31, 2014, we would have recorded a one-time non-cash charge of approximately $3.2 million.


Issuance of Warrants due to Organic Change

The following table presents the charge for issuance of warrants that we incurred in the years ended December 31, 2014 and 2013:

Year Ended December 31,
2014
   
2013
   
% Change
                   
$
   
$
2,553,318
     
N/A

The charge for issuance of warrants due to organic change is a one-time non-cash charge recorded as a result of the warrants issued in May 2011 (the “May 2011 Warrants”) being exchanged for securities with a greater value. Per the terms of the


May 2011 Warrants, holders were entitled to compensation should an Organic Change, as defined therein, occur, and the issuance of new shares of our common stock in a private placement in August 2013 met that definition. There was no comparable charge in 2014 and none is expected in the foreseeable future.


Gain on Liquidation of Subsidiary

The following table presents the gain recognized on liquidation of a subsidiary for the years ended December 31, 2014 and 2013:

Year Ended December 31,
2014
   
2013
   
% Change
                   
$
   
$
3,386,297
     
N/A

Gain on liquidation of subsidiary in the year ended December 31, 2013, is a non-cash gain recorded as a result of the liquidation of our Malaysian subsidiary on November 26, 2013, principally due to the extinguishment of the $4,993,728 cost of Series C CPS recorded in permanent equity. Our estimate of the final gain on liquidation of subsidiary did not change in the year ended December 31, 2014. No significant gains or losses are expected in the near future, although a small gain or loss will likely be recorded in the year ended December 31, 2015, when the liquidator’s final distribution of assets is expected.


Miscellaneous Income (Expense)

The following table represents our miscellaneous income (expense) for the years ended December 31, 2014 and 2013:

Year Ended December 31,
2014
   
2013
   
% Change
                   
$
(37,958)
   
$
171,414
     
N/A

For the year ended December 31, 2014, we recorded miscellaneous expense of $37,958, compared to miscellaneous income of $171,414 for the year ended December 31, 2013. Miscellaneous income and expense is the result of net foreign currency exchange gains and losses, and historically arose mainly in WGBM, our now-dissolved Malaysian subsidiary, principally due to revaluation of the inter-company account at each balance sheet date. Up until the final revaluation at the time of liquidation, WGBM had a net receivable on its dollar denominated balances, so if the value of the Malaysian Ringgit decreased against the dollar, income was recorded, whereas if it increased against the dollar, an expense was recorded. Foreign currency exchange gains and losses also arise on our subsidiary in Luxembourg, and on U.S. expenses denominated in foreign currencies. The expense in the year ended December 31, 2014, arose primarily due to the decline in value of cash and other assets denominated in Euros, due to the strengthening of the U.S. dollar. Following the liquidation of WGBM, miscellaneous income and expense is not expected to be significant in future years.


Provision for Income Taxes

The following table presents the provision for income taxes for the years ended December 31, 2014 and 2013, respectively:

Year Ended December 31,
2014
   
2013
   
% Change
                   
$
3,100
   
$
6,341
     
(51)%

For the year ended December 31, 2014, we recorded a net charge of $3,100 for income taxes, all of which is for U.S. state income. For the year ended December 31, 2013, we recorded a net charge of $6,341 for income taxes, representing $3,191 for U.S. state income taxes and $3,150 for Luxembourg taxes. We have provided a full valuation allowance against our net deferred tax assets.




Liquidity and Capital Resources

As of June 30, 2015, our principal source of liquidity was $7.4 million in cash and cash equivalents. We had working capital of $6.1 million. Our funding has primarily been generated by the issuance of equity securities, which includes $18.0 million and $13.4 million raised, net of offering costs, in 2014 and 2013, respectively. We also had, as of June 30, 2015, Notes with a principal amount of $5.2 million owing to MTDC, repayable in August 2020.

Net Cash Used in Operating Activities

We experienced negative cash flow from operating activities for the six months ended June 30, 2015 and 2014, in the amounts of $7,108,000 and $5,064,000, respectively. The cash used in operating activities in the six months ended June 30, 2015, was due to cash used to fund a net loss of $8,627,000, adjusted for non-cash expenses related to depreciation and amortization, stock-based compensation, gain on revaluation of warrant derivative liabilities, inventory provision and amortization of debt discount totaling $1,546,000, and cash used by a change in working capital of $27,000. The cash used in operating activities in the six months ended June 30, 2014, was due to cash used to fund a net loss of $4,649,000, adjusted for non-cash expenses related to depreciation and amortization, stock-based compensation, gain on revaluation of warrant derivative liabilities, inventory provision, interest converted to principal on long-term debt and amortization of debt discount totaling $611,000, and cash provided by a change in working capital of $196,000.

We experienced negative cash flow from operating activities for the years ended December 31, 2014 and 2013 in the amounts of $10,287,401 and $8,221,214, respectively. The cash used in operating activities in the year ended December 31, 2014, was due to cash used to fund a net loss of $10,692,863, adjusted for non-cash expenses related to depreciation and amortization, stock-based compensation, net gain on revaluation of derivative liabilities, interest converted to principal on long-term debt, inventory provision, amortization of debt discount and loss on extinguishment of debt totaling $494,548, and cash provided by a change in working capital of $900,010. The cash used in operating activities in the year ended December 31, 2013, was due to cash used to fund a net loss of $16,266,272, adjusted for non-cash expenses related to depreciation and amortization, stock-based compensation, net losses on revaluation of derivative liabilities, gain on settlement of derivative liability, interest converted to principal on long-term debt, inventory provision, amortization of debt discount, loss on extinguishment of debt, issuance of warrants due to organic change and gain on liquidation of subsidiary totaling $7,236,878, and cash provided by a change in working capital of $808,180. The increase of $2,066,187 in cash used in the year ended December 31, 2014, compared to 2013, was driven primarily by the increase in the net operating loss from $9,922,443 to $12,449,715 and cash not yet provided by the increase in accounts receivable, offset by an increase in non-cash expenses (principally stock compensation and amortization of intangibles) included in the operating loss and an increase in accrued bonuses (2013 bonuses having been paid during that year).

Net Cash Used in Investing Activities

We used $98,000 in the six months ended June 30, 2015, and $123,000 in the six months ended June 30, 2014, to acquire property and equipment. Further, in the six months ended June 30, 2014, we used $2,000,000 to acquire the Apollo Business.

We used $2,000,000 in the year ended December 31, 2014, to acquire the Apollo Business. Further, we used $334,592 and $91,545 in the years ended December 31, 2014 and 2013, respectively, to acquire property and equipment. In addition, we transferred cash of $433,411 to WGBM’s liquidator in the year ended December 31, 2013.

Net Cash Provided by Financing Activities

In the six months ended June 30, 2015, we used $64,000 in repayments on capital leases for equipment and $94,000 to pay income taxes for restricted stock forfeited. There were no financing activities in the six months ended June 30, 2014.

Net cash provided by financing activities in the year ended December 31, 2014, was $16,645,454, being $17,971,681 from the issuance of common stock and warrants in the 2014 Public Offering, offset by $1,318,219 used to repay the IntegenX Note and $8,008 to repay a capital lease. Cash provided by financing activities in the year ended December 31, 2013, was $13,393,162, all from the issuance of common stock, Series 1 Convertible Preferred Stock and warrants in an August 2013 private placement, offset by the $70,000 we used to acquire WGBM’s Series B CPS.

Availability of Additional Funds

We believe funds available at June 30, 2015, along with our revenue, are sufficient to fund our operations into 2016. To continue our operations thereafter, it is likely that we will need to raise further capital, through the sale of additional securities or otherwise. Our operating needs include the planned costs to operate our business, including amounts required to


fund working capital and capital expenditures. At the present time, we have no material commitments for capital expenditures. Our future capital requirements and the adequacy of our available funds will depend on many factors, most notably our ability to successfully commercialize our products and services.

While we believe we have sufficient cash to fund our operating, investing and financing activities in the near term, we consider it likely that additional capital will be needed to sustain our operations before we achieve profitability. We have no commitments to obtain any additional funds and there can be no assurance that we will be able to raise sufficient additional capital as we need it on favorable terms, or at all. The conversion of our MTDC Notes, and the sale of equity or convertible debt securities in the future, may be dilutive to our stockholders, and debt financing arrangements may require us to pledge certain assets and enter into covenants that could restrict certain business activities or our ability to incur further indebtedness, and may contain other terms that are not favorable to us or our stockholders. If we are unable to obtain additional capital as needed we may not be able to continue our efforts to develop and commercialize our products and services and may be forced to significantly curtail or suspend our operations.


Principles of Consolidation

The consolidated financial statements of WaferGen Bio-systems, Inc. include the accounts of Wafergen, Inc., WaferGen Biosystems Europe S.a.r.l., our Luxembourg subsidiary and, prior to its liquidation, WGBM, our now-dissolved Malaysian subsidiary. All significant inter-company transactions and balances are eliminated in consolidation.


Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, result of operations, liquidity, capital expenditures or capital resources that is material to stockholders.


Critical Accounting Policies and Estimates

Deferred Tax Valuation Allowance.  We believe substantial uncertainties exist regarding the future realization of deferred tax assets, and, accordingly, a full valuation allowance is required, amounting to approximately $35,000,000 at December 31, 2014. In subsequent periods, if and when we generate pre-tax income, a tax expense will not be recorded to the extent that the remaining valuation allowance can be used to offset that expense. Once a consistent pattern of pre-tax income is established or other events occur that indicate that the deferred tax assets will be realized, additional portions or all of the remaining valuation allowance will be reversed back to income. Should we generate pre-tax losses in subsequent periods, a tax benefit will not be recorded and the valuation allowance will be increased.

Inventory Valuation.  Inventories are stated at the lower of cost and market value. We perform a detailed assessment of inventory on a regular basis, which includes, among other factors, a review of projected demand requirements, product pricing, product expiration and product lifecycle. As a result of this assessment, we record provisions for potentially excess, obsolete or impaired goods, when appropriate, in order to reduce the reported amount of inventory to its net realizable value. If actual demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Warranty Reserve.  Our standard warranty agreement is one year from shipment for SmartChip cyclers and dispensers and Apollo systems. We accrue for anticipated warranty costs upon shipment of these products. Our warranty reserve is based on management’s judgment regarding anticipated rates of warranty claims and associated repair costs, and we update our assessment quarterly.

Stock-Based Compensation.  We measure the fair value of all stock option and restricted stock awards to employees on the grant date, and record the fair value of these awards, net of estimated forfeitures, as compensation expense over the service period. The fair value of options is estimated using the Black-Scholes valuation model, and of restricted stock is based on our closing share price on the measurement date.

Amounts expensed with respect to options were $662,000 and $697,000, net of estimated forfeitures, for the six months ended June 30, 2015 and 2014, respectively. These sums exclude the compensation expense for restricted stock awards, for which the fair value is based on our closing stock price on the grant date for directors and employees, and on the dates on which performance of services is recognized for consultants.



The weighted average grant date fair value of the options awarded in the six months ended June 30, 2015 and 2014, was estimated to be $2.56 and $9.86, respectively, based on the following assumptions:

 
Six Months Ended June 30,
 
 
2015
 
2014
 
         
Risk-free interest rate
1.25% - 1.44%
 
1.43%
 
Expected remaining term
3.55 - 4.50 Years
 
4.75 Years
 
Expected volatility
106.11% - 119.36%
 
93.89%
 
Dividend yield
0%
 
0%
 

Amounts expensed with respect to options were $942,587 and $321,140, net of estimated forfeitures, for the years ended December 31, 2014 and 2013, respectively. These sums exclude the compensation expense for restricted stock awards, for which the fair value is based on our closing stock price on the grant date for directors and employees, and on the dates on which performance of services is recognized for consultants.

The weighted-average grant date fair value of options awarded in the years ended December 31, 2014 and 2013, respectively, were $6.33 and $37.25. These fair values were estimated using the following assumptions:

 
Year Ended December 31,
 
 
2014
 
2013
 
         
Risk-free interest rate
1.43% - 1.57%
 
0.71% - 1.22%
 
Expected remaining term
4.75 Years
 
4.75 Years
 
Expected volatility
93.89% - 105.97%
 
96.73% - 108.14%
 
Dividend yield
0%
 
0%
 

Risk-Free Interest Rate.  This is the U.S. Treasury rate for the day of the grant having a term equal to the expected term of the option. An increase in the risk-free interest rate will increase the fair value and the related compensation expense.

Expected Remaining Term.  This is the period of time over which the award is expected to remain outstanding and is based on management’s estimate, taking into consideration the vesting terms, the contractual life, and historical experience. An increase in the expected term will increase the fair value and the related compensation expense.

Expected Volatility.  This is a measure of the amount by which our common stock price has fluctuated or is expected to fluctuate. We apply 50% weighting to our own historic volatility and 50% to the historic volatility of a group of publicly traded companies over the retrospective period corresponding to the expected term of the options on the measurement date. We apply a reduced weighting to our own historic volatility during the period prior to August 27, 2013, when we were highly leveraged. The group of publicly traded companies is selected from the same industry or market index, with extra weighting attached to those companies most similar in terms of business activity, size and financial leverage. An increase in the expected volatility will increase the fair value and the related compensation expense.

Dividend Yield.  We have not made any dividend payments and do not plan to pay dividends in the foreseeable future. An increase in the dividend yield will decrease the fair value and the related compensation expense.

Forfeiture Rate.  This is a measure of the amount of awards that are expected to not vest. An increase in the estimated forfeiture rate will decrease the related compensation expense.

Derivative Liabilities.  Our derivative liabilities arise due to the cash settlement provisions in certain warrants and unit warrants and the variable number of shares of our common stock that may be issued upon the exercise of those warrants with certain anti-dilution protection and, until the time of their settlement in 2013, upon the exchange of Series A and Series B CPS of our Malaysian subsidiary, and under the conversion element of our CPNs. We evaluate the liability for those warrants for which no anti-dilution adjustment is projected prior to the expiration date using the Black-Scholes valuation model, and all other derivatives using a Monte Carlo Simulation approach, using critical assumptions provided by management reflecting conditions at the valuation dates.

Our derivatives are revalued at each balance sheet date, and at the time of issuance and settlement, and are estimated using the following variables:



Risk-Free Interest Rate.  This is the U.S. Treasury rate for the measurement date having a term equal to the weighted average expected remaining term of the instrument. An increase in the risk-free interest rate will increase the fair value and the associated derivative liability.

Expected Remaining Term.  This is the period of time over which the instrument is expected to remain outstanding and is based on management’s estimate, taking into consideration the remaining contractual life, historical experience and the possibility of liquidation. An increase in the expected remaining term will increase the fair value and the associated derivative liability.

Expected Volatility.  This is a measure of the amount by which our common stock price has fluctuated or is expected to fluctuate. We apply 50% weighting to our own historic volatility and 50% to the historic volatility of a group of publicly traded companies over the retrospective period corresponding to the expected remaining term of the instrument on the measurement date. Since August 2013, when we reduced our leverage through an exchange of previously issued preferred stock and convertible promissory notes for shares of our common stock, we have applied a reduced weighting to our own historic volatility during the period in which we were highly leveraged. The group of publicly traded companies is selected from the same industry or market index, with extra weighting attached to those companies most similar in terms of business activity, size and financial leverage. An increase in the expected volatility will increase the fair value and the associated derivative liability.

Dividend Yield.  We have not made any dividend payments and do not plan to pay dividends in the foreseeable future. An increase in the dividend yield will decrease the fair value and the associated derivative liability.


Recently Issued Accounting Pronouncements

See the “Recent Accounting Pronouncements” in Note 2 to the Condensed Consolidated Financial Statements on page G-6 for information related to the issuance of new accounting standards in the first six months of 2015, none of which will have a material impact on our financial statements, and the future adoption of recently issued accounting pronouncements, which we do not expect will have a material impact on our financial statements.
 

BUSINESS

Overview

We are an innovative biotechnology company committed to the development of a breakthrough technology platform for gene expression, genotyping, NGS1 target enrichment and now Single Cell Analysis (“SCA”) which we believe will revolutionize biopharma, diagnostics and life science research. Our primary focus has been on the development, manufacture and marketing of our SmartChip System, a genetic analysis platform used for profiling and validating molecular biomarkers in the life sciences, pharmaceutical/biotech drug discovery, diagnostics and clinical laboratory industries.

Traditional molecular biology methods use 96 or 384-well plates for routine manipulation of fluids into and out of the wells in the microliter scale manually or using various liquid handling automation methods. SmartChip extends this principle through a microfabrication process that result in tens of thousands of massively-parallel nanoliter wells that are physically separated from each other. To manipulate fluids into and out of these wells, we have engineered a nano-dispenser that can not only dispense but also aspirate nanoliter volumes of liquids including single cells in suspension.

We are primarily focused on marketing a flexible, open format genetic analysis system, the WaferGen SmartChip System, which provides a range of high throughput capabilities including single cell analysis and differential gene expression measurement, as well as SNP genotyping and target enrichment. In 2010, we formally launched our first generation SmartChip 5K System, which was an innovative real-time PCR2 tool enabling scientists to study thousands of genes


 
1
NGS (Next Generation Sequencing) – Sequencing is the determination of the order of nucleotide building blocks that make up the primary structure in DNA molecules. Early determination methods were discovered in the 1970s and 1980s. NGS refers to more current automated methods that rely upon sequencing-by-synthesis approaches, enabling an easier and considerably faster analysis. DNA (Deoxyribonucleic acid) is an apolymeric molecule consisting of deoxyribonucleotide building blocks that in a double-stranded helical form is the genetic material of most organisms.
 
 
2
PCR (Polymerase Chain Reaction) – PCR is an enzymatic process designed to increase the number of copies of DNA for easier detection. Real-time PCR chemistries allow for monitoring a PCR reaction throughout its phases by collecting continuous data points as the reaction progresses. The polymerase enzyme uses an initial sample DNA strand as a template and uses it to synthesize a new strand, which sets in motion a chain reaction in which the DNA template is exponentially amplified, generating millions or more copies of the DNA target. Real-time PCR simultaneously amplifies and quantifies (as an absolute number of copies or relative amount) a targeted DNA molecule in real time after each amplification cycle.


simultaneously clustered in gene specific pathways. The results of such studies are potentially leading to the discovery and validation of clinically relevant disease signatures. In 2012, we launched the SmartChip MyDesign System, which is the second-generation real time PCR instrument with significantly upgraded capabilities. First, the new system allows customers to dispense their own assays into a SmartChip, using a liquid dispenser called MultiSample Nano-Dispenser (“MSND”), which gives them much greater flexibility and faster experiment turnaround time. Second, we have enabled SNP genotyping on the SmartChip by validating appropriate chemistries and supplying the requisite software. The SmartChip System’s high density, nanoliter-scale format can provide throughput levels that facilitate the development of life science clinical research solutions at a fraction of the time and cost currently possible with existing competing systems. We believe that the SmartChip System is well suited for the large and growing genomics markets, including for researchers seeking to confirm and expand on discoveries made with the growing use of NGS.

In 2013, the SmartChip and MSND were adapted for NGS library preparation needs and our R&D efforts concentrated on the commercialization of the SmartChip Target Enrichment (“TE”) System™. This new product, launched in February 2014, is designed to perform a critical sample preparation step prior to targeted DNA sequencing. Targeted sequencing is aimed at deciphering the nucleic acid sequence of a certain portion of the genome (the targets), for example a set of genes of interest, as opposed to the whole genome. In order to limit the sequencing to the targets of interest, scientists are using various techniques including PCR to treat the nucleic acid samples prior to sequencing. WaferGen is using its SmartChip consumable to conduct massively parallel individual PCR reactions for TE. This approach offers certain advantages over existing chemistries and platforms. Although these advantages could help WaferGen successfully compete in the high potential emerging market for clinical sequencing, the Company faces considerable competition, including the competing sample preparation kits from NGS instrument manufacturers such as Illumina, Inc. (“Illumina”) and Life Technologies Corporation (“LIFE”).

Recently, our R&D efforts have been concentrated on the development of Smart-Chip-based solutions for Single Cell Genomics. Most biological measurements to date have been performed on a population of cells or tissues.  Such studies lack the ability to discriminate critical events occurring at an individual cell level and hence, would report results that reflect an average for the population under investigation. However, diseases such as cancer or diabetes start from a single cell that has acquired a deleterious mutation. Furthermore, single cell analysis has already resulted in the identification of new cell types in neuronal and immune cell populations. Identifying and understanding such rare events amidst a population of normal cells is the challenge that SmartChip-based single cell analysis aims to solve.

The SmartChip, along with the ability to dispense nanoliter volumes (using the MSND) into these wells, makes this an ideal vehicle for isolating and processing thousands of single cells for RNA-seq and/or qPCR based applications. The physical separation of wells in the SmartChip affords better protection against cross-contamination than the emulsion-based systems that are pursued by our competitors.

In January 2014, we acquired IntegenX Inc.’s product line used in connection with developing, manufacturing, marketing and selling instruments and reagents relating to library preparation for next generation sequencing, including the Apollo 324™ instrument and the PrepX™ reagents. The fully automated Apollo 324™ library prep solution has been a market leader in the low to medium throughput NGS market segment with an expanding installed base, serving a diverse set of clients from university research labs, pharmaceutical and agricultural companies, to diagnostic clinical labs. We believe customers favor the Apollo 324™ library prep solution for its flexibility, turnaround and hands-on time, as well as sample quantity input requirement. We intend to build upon its success with innovative new applications and protocols for this system.

WaferGen employs a business model that primarily generates revenue from the sale of instruments (i.e. the SmartChip System™ and Apollo 324™ instruments) and a recurring revenue stream from the sale of consumables (i.e. the SmartChip Panels™ and PrepX™ reagents), similar to the “razor and razor blade” business model.




Genomics Overview

Genes are segments of genomic DNA that encode discreet information that ultimately help synthesize individual biomolecules/proteins. This information is read when the two strands of DNA “unzip” and the series of bases representing a gene are copied into the related nucleic acid RNA3. Like DNA, RNA also has four types of bases that can bond as a pair with four types of bases in the DNA strand based on pairing rules that allow the DNA sequence of the gene to encode a specific RNA sequence. This decoding of DNA genes into RNA is called transcription. The transcribed RNA strand then separates from the DNA strand and acts either in a regulatory fashion to modulate cellular processes or as a template for the cell’s machinery to construct functional proteins. As gene expression (including translation into functional proteins) is dependent upon RNA levels present in the cell, interrogation of RNA levels has become the most widely adopted means for quantifying this process.

One contributor to disease and dysfunction is the over- or under-expression of genes within an organism’s cells. A very complex network of genes interacts to maintain health in organisms such as humans. Although most cells contain an organism’s full set of genes, each cell, according to its function, expresses only a fraction of this set of genes in different quantities and at different times. The challenge for scientists is to delineate the associated genes’ expression patterns and their relationship to disease.

Gene expression studies and whole transcriptome analysis (WTA) are used to provide information on the more than 30,000 genes in the human genome. Life science researchers use gene expression profiling to study the differences in expression of genes in a normal versus a disease state. For example, a comparison of gene expression profile of breast cancer patients to those of normal patients will provide an indication of genes that are expressed differentially between the two populations. Such differences can lead to identifications of genes that may be indicative of a disease state. Furthermore, such differences can help physicians make treatment decisions. Researchers are conducting studies to identify single or multiple genes that play a role in a particular disease.

There are three primary technologies used to study gene expression: NGS, microarrays and real-time PCR.

Single Cell Analysis Overview

NGS technologies have improved at a breathtaking pace this past decade and the costs of sequencing have decreased several orders of magnitude.  The decrease in the price/base has made possible applications that were considered impossible even five years ago.  RNA-sequencing (RNA-seq) is increasingly being used to understand gene expression differences between normal and disease states in bulk samples.  Another interesting NGS-based application is the ability to perform gene expression profiling at a single cell level for 1000s of cells and use the differences in transcriptional states of the individual cells to comprehend the various cell types that exist in heterogenous cell populations and complex tissues.  Existing technology such as Fluidigm’s microfluidic cartridge can process at best 96 individual cells. These individual cells are selected based on different size cutoffs that introduce size bias in selecting cells.  The size bias combined with low throughput has generated a need for technologies that can process thousands of cells in a cost-effective fashion and with minimal bias.

Even though RNA-Seq is becoming a mature NGS technique for evaluating global and single cell gene expression patterns, many researchers continue to verify their NGS finding using real-time PCR.  Furthermore, subsequent to sequencing based discovery and real-time PCR validation, interrogation of the expression pattern of identified target genes in large numbers of samples requires a more timely and cost effective solution.

Gene Expression Technology Overview

Real-time PCR represents the most sensitive and accurate method to measure gene expression. PCR is an enzymatic process in which a strand of DNA is copied multiple times, or amplified, so that it can be more readily detected and analyzed. The vast majority of PCR methods use thermal cycling, i.e., alternately heating and cooling the sample to a defined series of temperature steps. These thermal cycling steps are necessary to physically separate the strands in a DNA double helix (at high temperatures), which are then used as the template during DNA synthesis (at lower temperatures) by the DNA polymerase enzyme to selectively amplify the target DNA.



 
3
RNA (Ribonucleic acid)  A polymeric molecule consisting of ribonucleotide building blocks. The three major types in cells are ribosomal RNA (rRNA), transfer RNA (tRNA), and messenger RNA (mRNA), each of which performs an essential role in protein synthesis. RNAi ‘s are small RNA molecules that help regulate by turning genes on and off.
 


Traditional PCR merely increases the number of DNA copies for easier detection. Real-time PCR permits quantitative analysis, rather than just a qualitative yes/no as to the presence of a gene. Real-time PCR can produce an absolute measurement, such as number of copies of mRNA per nanoliter of sample, or a relative measurement in comparison to expression of the same gene in another sample. Real-time PCR chemistries allow for the detection of amplicon amounts in the exponential phase of these reactions where the amount of product can be extrapolated to accurately determine the amount of target in the sample prior to amplification.

Traditional real-time PCR does not measure thousands of genes simultaneously (like microarray analysis), resulting in limited throughput and relatively high cost, making it unfeasible for whole genome analysis or for very high throughput studies. Thus, in practice, researchers typically first use microarray or RNA Sequencing to identify which genes are over- or under-expressed in the whole genome and then apply real-time PCR to a specific set of those genes to accurately quantify gene expression. The process is referred to as discovery and validation.

MicroRNA molecules are small non-protein-coding single-stranded RNA molecules of 21-23 nucleotides in length that function as negative regulators of gene expression by targeting specific mRNA molecules. This either inhibits translation or promotes mRNA degradation. We believe cancer diagnosis, prognosis, and treatment are important potential clinical applications of microRNA profiling.

Although all humans contain the same set of genes, the actual sequence of each gene may vary from one individual to another, as well as between cells in the same individual. This phenomenon is commonly referred to as genetic variation and can have important medical consequences. Genetic variation affects disease susceptibility, including predisposition to cancer, diabetes, cardiovascular disease and Alzheimer’s disease. In addition, genetic variation may cause people to respond differently to the same drug treatment. One common form of genetic variation is a single-nucleotide polymorphism, or SNP.

A SNP is a variation in a single “letter” at a specific position in the DNA sequence that differs from a reference sequence for a population. While in some cases a single SNP will be responsible for medically important effects, it is now believed that combinations of SNPs may contribute to the development of most common diseases. Since there are generally millions of SNPs in an individual, it is important to investigate many SNPs simultaneously in order to discover medically valuable information.

Products

SmartChip System

Our SmartChip System provides a suite of gene expression and genome analysis technologies enabling both biomarker discovery and validation on a single platform with the sensitivity and accuracy of real-time PCR. WaferGen’s SmartChip Real-Time PCR System consists of two instrumentation components: a SmartChip MSND for applying sample, assay and reaction mix to the SmartChip Panels, and a SmartChip Cycler for thermal cycling and collecting data from the real-time PCR assays. For large studies, our SmartChips are provided with sub-nanoliter (one-billionth of a liter) oligonucleotide4 reagents of the customer’s choosing pre-loaded in the wells. For smaller projects, the user has the flexibility to purchase empty SmartChips and both samples and assays can be dispensed into the SmartChips at the customer’s site using the MSND. Sub-microliter (one-millionth of a liter) dispensing of samples into a 5,184-well chip enables high throughput real-time PCR amplification of pathway-based gene discovery. Our SmartChip Panels are designed with evaporation control measures that allow for the use of nanoliter volumes, thermal cycling and temperature control. Our software system also analyzes the high throughput data after the completion of the real-time PCR analysis. The user friendly, content-ready SmartChip System is designed to accept samples out of the box, incorporating many of the necessary substrates and chemicals.

The SmartChip System is engineered to deliver superior performance with the combination of high sensitivity and high throughput on a single chip, enabling scientists to broadly view gene expression patterns over a large dynamic range. The SmartChip System is expected to require one day to perform genetic analyses that currently take days to weeks to perform utilizing existing systems, which involve discovery of the gene expression signature with microarrays, followed by verification of the signature with real time PCR. As more clinical studies are carried out using validated gene sets, we believe the market will require, and demand, higher throughput solutions to process large numbers of clinical samples. Today’s solutions typically allow only a few patients’ samples to be processed. We offer a throughput capability that allows hundreds of samples on a single chip.



 
4
An oligonucleotide is a short nucleic acid polymer, typically with twenty or fewer bases.
 


We believe our SmartChip System is also capable of saving time compared to existing technologies. Research analyzing the whole genome utilizing currently available real-time PCR technology takes weeks to months due to multiple plates and hundreds of pipetting steps required. Our SmartChip System has the ability to quantitatively analyze the gene specific pathways or whole genome with the performance of real-time PCR technology in as short as a single day, and represents a significant advancement. In addition, our development of the SmartChip System seeks to allow 5,184 data points per chip, which could enable a large number of reactions to run in parallel, thus addressing unmet needs of the clinical trial market, compared to today’s leading technologies, which are limited in throughput to 96 wells, 384 wells and 1,536 wells. Competitors in the market place that offer high throughput, like the Fluidigm Biomark, which offers a maximum throughput of 9,200 assays per chip, still limits the validation market by offering products that can only run up to 96 assays and samples on a single chip.

SmartChip System Capabilities

Our SmartChip System is an integrated instrument and software system capable of dispensing 100nl reactions into the 5,184-well SmartChip, thermal cycling, real-time detection and primary data analysis, and provides the following capabilities:

 
·
Open-Platform Custom Assays (MyDesign). Our SmartChip System was upgraded in 2012 to provide the capability to customize our open platform panels for gene expression and genotyping studies according to the researcher’s specific needs. The customer has the flexibility to dispense both assays and samples into the 5,184 nanowell panels in numerous configurations. The system has access to millions of predesigned PCR assays for the detection of human, mouse and rat genes. Applications include: validation of genomic next-generation sequencing, RNA-Seq and Chip-Seq data; validation of microarray results; and expansion of assay panels to better understand biological systems.

 
·
Custom SNP Genotyping Panels. Although a single SNP may be responsible for medically important effects, it is now believed that combinations of SNPs may contribute to the development of most common diseases. Our custom SNP Genotyping Panels are developed to cost-effectively investigate multiple SNP genotypes simultaneously and are customized for the required scope of the study. Genotyping clusters from single or multiple runs are visualized using our SmartChip System’s proprietary software.

SmartChip Single Cell isolation system

We are currently pursuing two approaches to deposit individual cells into the SmartChip:

 
·
Poisson Distribution: The Poisson distribution method uses our existing products, SmartChip and MSND, that are already in the market. In addition, software to image cells, identify wells that contain a single cell and the ability to add reagents to wells that contain single cells will be offered. The Poisson distribution method aims to process 1,000 to 2,000 individual cells per chip. Furthermore, the MSND can also be used to process hundreds of cells from multiple samples in the same SmartChip. We collaborated with the Broad Institute to obtain proof of concept results that we are now using to develop products designed for SCA. We have signed on four early access partners for our SmartChip SCA products – Karolinska Instituet, National Jewish Hospital, Genentech and MD Anderson Cancer Center. In the recent past, we have collaborated with our early access partners to show that we can reproducibly sequence 1000s of cells. Feedback on various aspects of the product from these early access sites is overwhelmingly positive – researchers particularly like the workflow ease, ability to handle multiple cell types including human patient samples such as freshly operated tumors and the ensuing data quality. Thus, the SmartChip-based single cell system will be the only system on the market that can span the gamut of hundreds to thousands of cells and have the ability to process diverse cell types in a cost-effective fashion.

 
·
Targeted Deposition: In this method, the real estate of the chip is maximized to isolate thousands of cells from a single sample.  By this method, over 4,000 individual cells may be processed from a single chip. The software that was developed for the Poisson distribution method can be used as an independent check to ensure that reagents are dispensed only to wells that contain a single cell. To provide flexibility in throughput, multiple configurations of the SmartChip that contain 1,000 to 5,000 wells will be offered. As NGS prices continue to drop, there will be increased need to process tens of thousands of cells.  Furthermore, the need for tens of thousands of cells will be matched by targeted sequencing applications.  SmartChip is a scalable platform that can easily accommodate over 2,000 wells per chip using the existing dispenser configurations.  Such large format chips can be used not only for single cell processing but also for targeted sequencing and a combination of single cell targeted sequencing applications.




SmartChip Target Enrichment (TE) System

The concept of the SmartChip TE and Seq-Ready TE Systems is to use the SmartChip consumable for amplifying the targets of interest via PCR and then remove the resulting amplified material for further processing prior to sequencing. The key purported advantage of our approach is that we conduct massively parallel individual PCR reactions for target enrichment, whereas other PCR-based techniques use highly multiplexed PCR, which means that they conduct hundreds, if not thousands of PCR reactions in a single tube. By separating PCR reactions into individual wells, our SmartChip TE System offers a much better controlled chemo-enzymatic process that might ultimately translate into higher quality sequencing results. This should be especially important in clinical sequencing, where assays of a high sensitivity and specificity are required. We offer multiple consumable formats of different densities (number of nano-wells), so that depending on the number of targets required for a particular study, samples can be dispensed over the whole chip in flexible configurations. This enables the system to enrich targets without cross-contamination with other samples and provide the flexibility to customize targets. This system includes:

 
·
Custom Target Enrichment. Targets of interest can vary greatly based on the area of research and the needs of individual laboratories. The Seq-Ready TE system offers the ability to design amplicons which can be customized to enrich only specific targets identified by the researcher.

 
·
Seq-Ready TE MultiSample BRCA1/2 Panel. A pre-designed target enrichment panel containing 139 unique primer pairs targeting all of the coding regions in BRCA1 and BRCA2 genes, which are key genes identified for breast cancer research, is available as an off the shelf product.

Apollo 324™ Library Preparation

In January 2014, we acquired from IntegenX Inc. (“IntegenX”) substantially all of the assets used in connection with developing, manufacturing, marketing and selling instruments and reagents relating to IntegenX’s library preparation for next generation sequencing product line, including the Apollo 324™ instrument and the PrepX™ reagents (the “Apollo Business”).

The Apollo 324™ System is a compact, walk-away automation platform offering DNA, RNA-Seq, and ChIP-Seq library preparation kits for analysis on popular NGS platforms from Illumina (GA, HiSeq and MiSeq), LIFE (Ion Proton and Ion Torrent PGM), and Roche (GS Junior and GS FLX+). The intuitive and easy-to-use PrepX™ automation protocols and reagent kits enable the set-up of a run with as little as 15 minutes of hands-on time. The user can return in about 90 minutes for sequencer-ready DNA or ChIP-Seq libraries, or about 5 hours for RNA-seq libraries. The system offers the flexibility to start a run with a single library without wasting reagents.

The fully automated Apollo 324™ library prep solution has been a market leader in the low to medium throughput NGS market segment with an expanding installed base, serving a diverse set of clients from university research labs, pharmaceutical and agricultural companies, to diagnostic clinical labs. We believe customers favor the Apollo 324™ library prep solution for its reliability, turnaround and hands-on time, as well as sample quantity input requirement.

The Apollo Business is highly synergistic with our existing products, especially our SmartChip TE System offerings. Serving the same customer base, the two products together address a wide spectrum of customer needs in sample preparation for NGS and enable one-stop shopping for laboratories performing targeted sequencing.

Market Applications of the SmartChip System

We believe the SmartChip System, with its advantages of higher throughput, lower cost, and superior sensitivity, can address the following markets:

 
·
Biomarker Discovery and Validation. New targets for drugs can be identified through the analysis of gene profile expression (biomarkers) in diseased cells. Potential applications include cancers, arthritis, and lung diseases.

 
·
Drug Efficacy and Optimization. Genetic analysis is being used to determine the likely toxicity (toxicogenomics) of new drugs and the likelihood of therapeutic response to a specific genetic profile (pharmacogenomics). FDA guidance5 calls for drug companies to voluntarily submit pharmacogenomic data to support their drug development programs.


 
5
FDA News Release - March 22, 2005 – issued a final guidance titled “Pharmacogenomic Data Submissions.”
 


 
·
Drug Response Monitoring. Patient outcomes can be improved by evaluation of a proposed drug’s potency and specificity in order to determine individualized patient dosing, thereby decreasing adverse drug reactions, and improving drug efficacy.

 
·
Detection of Rare Mutations. The Cancer Genome Project is using the human genome sequence and high throughput mutation detection techniques to identify somatically acquired6 sequence variants/mutations and hence identify genes critical in the development of human cancers.

 
·
Clinical NGS Applications. Key discoveries enabled by Next Generation Sequencing, in addition to continued cost and workflow efficiencies, are resulting in the widespread adoption of NGS in clinical research and routine diagnostic applications. Leading areas driving clinical NGS include constitutional and complex diseases.

Biomarker Discovery and Validation: Gene expression patterns (biomarkers) related to specific diseases are becoming increasingly important in drug development. Comparison of gene expression patterns between normal and diseased patients or expression profiles in the presence or absence of drugs leads to discovery of genes or a set of genes that can be used in drug development. This requires monitoring of tens, hundreds or thousands of mRNAs in large numbers. A typical genetic analysis currently involves the use of microarrays to identify genes, which are either over-expressed or under-expressed in a small subset of patients. After detailed bioinformatics analysis, a number of differentially expressed genes (two to 200) are evaluated using real-time PCR in a different subset of patients (50 to 100). The differentially expressed genes in a patient group are then validated using a larger patient group. Real-time PCR techniques, which offer significantly increased sensitivity, are limited in throughput and are cost prohibitive for whole genome analysis. Biomarker investigation requires multiples of such analyses to confirm discovery.

Drug Efficacy and Optimization: Clinical trials are the most expensive phase for pharmaceutical drug development. The use of gene expression and genotyping is becoming critical to identify a safe drug (toxicogenomics) for the right patient population (pharmacogenomics). Once a set of genes (biomarker) is identified, they are used in numerous samples in clinical trials for pattern recognition, toxicity profiling and patient selection. Similarly, locations of SNPs involved in disease variation and metabolism are also being utilized in clinical trials to understand disease predisposition, requiring thousands of samples to be analyzed.

In its pharmacogenomic data submissions guidance referred to above, the FDA has asked for voluntary data submission utilizing these genetic approaches in clinical trials. This has created a need for reliable, high throughput, cost-effective technologies. Today’s hybridization-based techniques cannot process more than 24 samples at a time. Thus, for a clinical trial of 1,000 patients, one would need to use at least 40 chips. Established real time PCR instrument suppliers typically process 96 to 1,536 data points. Our SmartChip System has the ability to study 5,184 assays on a single chip, and thus offers a marked increase in the number of samples that can be evaluated in a single run. This format also enables investigators to interrogate the expression of a large panel of genes of interest with a limited amount of the biological sample.

Drug Response Monitoring: In addition to studying gene expression, genotyping measures genetic variation in the DNA. Sometimes it is not a single variation but the combination of these sequence differences that may lead to a disease state or a response to a specific therapy. For this reason, researchers look at patterns of these variations in a large number of healthy and affected patients in order to correlate SNPs with a specific disease. Large-scale genotyping studies are being conducted in various genome centers around the world, driven by available research funds, resulting in the greater demand for cost effective high throughput solutions.

Detection of Rare Mutations: The Cancer Genome Project’s DNA sequencing of patients’ tumors is underway and is rapidly defining cancer-causing mutations. Today, this is accomplished by using hybridization approaches which are unable to detect rare somatic mutations. Such techniques require the use of more sensitive methods like PCR and require genotyping of many samples (50 to 500). WaferGen uses allele-specific PCR with the SmartChip System to enable genotyping at multiple sites in multiple samples, as well as to provide a robust solution for detecting rare mutations. Allele-selective PCR is able to reliably detect SNPs (germ-line) as well as minority (somatic) mutations at sensitivity range of 100 to 10,000 mutations.



 
6
Mutations rising in individual cells in the body outside the “germ-line” (sperm and egg) cells that created the individual, and hence not present in all of a person’s cells.
 


Clinical NGS Applications: Recent advances in sequencing technology have resulted in dramatically lower sequencing costs and highly efficient workflows, enabling NGS to be used for routine clinical applications. In combination with key discoveries of clinically relevant targets enabled by NGS, this has resulted in the need for the efficient interrogation of multiple targets simultaneously. This need has been well demonstrated for key complex diseases, such as cancer, where targeted NGS panels are now used widely. Existing methods, including Sanger sequencing and traditional PCR, are limited because of inherent challenges with multiplexing, workflows, and turnaround times for large numbers of targets.

Future Applications – From Research to Diagnostics: New biomarkers for NGS, gene expression and genotyping are eventually expected to become essential for practicing physicians to identify the right drug for the right patients and lead to new ways of diagnosing and monitoring diseases. Biomarkers and platforms that are being used in clinical trials for a particular therapy are expected to become standard for molecular diagnostics. This market is still in its early development.


Competition

We believe the industry leaders in the markets in which WaferGen competes are LIFE, Fluidigm Corporation, Illumina, Agilent Technologies, Inc. and PerkinElmer, Inc. Other companies known to be currently serving the genetic analysis market include Affymetrix, Inc., GE Healthcare (a business segment of General Electric Company), Bio-Rad Laboratories, Inc., Eppendorf AG, Beckman Coulter, Inc., Luminex Corporation, Cepheid, Pacific Biosciences of California, Inc., NanoString Technologies, Inc., Sequenom, Inc., RainDance Technologies, Inc., Qiagen N.V., Biometra Biomedizinische Analytik GmbH, Enzo Biochem, Inc., Biomerieux, Inc. and the Roche family of companies. The marketplace for gene expression technologies is highly competitive, with many of the major players already controlling significant market share, many of which have significantly greater financial, technological and other resources than we do. Illumina is the leader in microarrays and LIFE is the market leader for real-time PCR. These two companies also have a commanding market share in NGS. We believe gene expression is a growing market and this market is driven by the need for real-time PCR performance for discovery, and a higher throughput platform for validation, to overcome the limitations of microarrays and real time PCR technologies that are currently used for discovery and validation respectively. WaferGen’s SmartChip Real Time PCR System is presently the only platform that offers a single solution for both biomarker discovery and validation with low running costs, simplified workflow and fast results. Our competitors could compete with us by developing new products similar to our SmartChip System. Even though we believe that we have created a unique solution, this does not mean that our competitors will not develop effective products to compete with our products.


Sales and Marketing

We have ramped up our investment in sales and marketing activities to service the academic/medical research market, pharmaceutical/biotech companies and clinical testing laboratories. We have a direct sales force in the United States and Europe and select distribution partners in other regions of the world.

Despite the increased investment, WaferGen still has limited sales and marketing resources compared to some of our competitors. We will need to increase investment in our sales and marketing infrastructure in order to be competitive in the marketplace.


Seasonality

We do not have sufficient product history to determine seasonality with a high degree of confidence. We expect that customers’ purchasing patterns will not show significant seasonal variation, although demand for our products may be highest in the fourth quarter of the calendar year as pharmaceutical and academic customers typically spend unused budget allocations before the end of the fiscal year.


Sources and Availability of Raw Material and Principal Suppliers

The raw materials used in the manufacturing of our products are for the most part readily available from numerous sources.


Research and Development

Our research and development efforts are aimed at developing new products and new applications, improving existing products, improving product quality and reducing production costs. Our research and development expenses were


approximately $4.75 million for the six months ended June 30, 2015, $6.72 million for the year ended December 31, 2014, and $5.40 million for the year ended December 31, 2013.


Intellectual Property and Other Proprietary Rights

We are pursuing an intellectual property portfolio, including filing a number of U.S. and international patent applications and in-licensing certain patents covering products, methodologies, integration and applications. We presently have four patents issued and eleven pending in the U.S. with respect to our SmartChip products and technologies, and a number of pending SmartChip-related patent applications worldwide. In addition to our patents, we rely on trade secrets, know-how, and copyright and trademark protection. Our success may depend on our ability to protect our intellectual property rights.


Government Regulation and Environmental Matters

We are subject to a variety of federal, state and municipal environmental and safety laws based on our use of hazardous materials in both our manufacturing and research and development operations. We believe that we are in material compliance with applicable environmental laws and regulations. Compliance with environmental laws does not currently cause us to incur material costs. If we cause contamination to the environment, intentionally or unintentionally, we could be responsible for damages related to the clean-up of such contamination or individual injury caused by such contamination. We cannot predict how changes in the laws and regulations will impact how we conduct our business operations in the future or whether the costs of compliance will increase in the future.

Regulation by governmental authorities in the United States and other countries is not expected to be a significant factor in the manufacturing, labeling, distribution and marketing of our products and systems.


Corporate History

Wafergen, Inc. was incorporated in the state of Delaware in October 2002. On May 31, 2007, Wafergen, Inc. was acquired by WaferGen Bio-systems, Inc., a Nevada corporation. In the transaction, Wafergen, Inc. merged with a subsidiary of WaferGen Bio-systems, Inc. and became a wholly owned subsidiary of WaferGen Bio-systems, Inc.


Employees

We have assembled a team of highly qualified scientists, engineers and business managers to support our product development and commercialization activities. Their efforts will continue to focus on expanding, improving and commercializing our core technologies. As of August 6, 2015, we had 51 regular employees, 50 of whom were employed full-time, compared to 46 regular employees as of December 31, 2014, 45 of whom were employed full-time, and 28 regular employees as of December 31, 2013, all of whom were employed full-time. None of our employees are represented by a labor union, and we consider our employee relations to be good. We believe that our future success will depend, in part, on our continued ability to attract, hire and retain qualified personnel.


Properties

We do not own any real property. Our leased facilities are as follows:

Location
 
Square Feet
 
Primary Use
 
Lease Terms
             
Fremont, CA
 
19,186 sq ft
 
Corporate Office, Laboratory and Manufacturing
 
Lease expires April 30, 2018
             
Luxembourg
 
560 sq ft
 
Office
 
Lease expires February 18, 2018
             
Luxembourg
 
274 sq ft
 
Laboratory
 
Lease expires June 30, 2017

Management believes that these facilities are adequate and suitable for current needs.




Legal Proceedings

From time to time we may be involved in claims arising in connection with our business. Based on information currently available, we believe that the amount, or range, of reasonably possible losses in connection with any pending actions against us, in excess of established reserves, in the aggregate, not to be material to our consolidated financial condition or cash flows. However, losses may be material to our operating results for any particular future period, depending on the level of income for such period.


 
 
Set forth below is certain information regarding our directors and executive officers:

Name
 
Age
 
Position
Dr. Rolland Carlson
 
61
 
Chief Executive Officer, President and Director
Dr. Ivan Trifunovich
 
52
 
Executive Chairman of the Board
Dr. R. Dean Hautamaki
 
52
 
Director
Makoto Kaneshiro
 
57
 
Director
Joel Kanter
 
58
 
Director
William McKenzie
 
63
 
Director
Robert Schueren
 
53
 
Director
Michael P. Henighan
 
63
 
Chief Financial Officer, Treasurer and Secretary

Our bylaws provide that our Board will consist of between one and fifteen members, with the number of directors determined from time to time by our Board. The number of directors is currently set at seven. Our directors hold office until the earlier of their death, resignation, or removal or until their successors have been duly elected and qualified.

There are no family relationships among our directors and executive officers.

Directors and Executive Officers

Rolland Carlson, Chief Executive Officer and President.  Dr. Carlson has served as our Chief Executive Officer, President and director since May 2015. Dr. Carlson served as President and Director of Asuragen, Inc., a molecular diagnostic company specializing in personalized diagnostics, from April 2006 to June 2014. Dr. Carlson also served as Chief Executive Officer of Asuragen, Inc. from January 2013 to June 2014 and Chief Operating Officer of Asuragen, Inc. from January 2012 to December 2012. While at Asuragen, Inc., Dr. Carlson was a co-founder of Mirna Therapeutics, a spin-out of Asuragen, which has developed novel miRNA-based therapeutics currently in Phase I clinical trials for liver and other cancers. Prior to joining Asuragen, Dr. Carlson held several senior positions at Abbott Laboratories, including Vice President, Business Development & Licensing, Global Medical Products and Vice President and Global General Manager of the Vysis, Inc., a wholly-owned subsidiary of Abbott. Earlier in his career, Dr. Carlson was responsible for business development, licensing and strategic planning to establish new pharmaceutical and diagnostic platforms for the pediatric and women’s health channels of the Ross Division of Abbott, and ran Abbott’s global custom biopharmaceutical and specialty generics pharmaceutical business. Dr. Carlson has served on the board of directors of Pristine, Inc. since April 2015. Dr. Carlson received a Ph.D. in Botany from Southern Illinois University - Carbondale. We believe Mr. Carlson’s qualifications to serve on our Board include the perspective and experience he has gained in management of a number of companies in the biosciences industry.

Ivan Trifunovich, Executive Chairman of the Board.  Dr. Trifunovich has served as our Executive Chairman of the Board of Directors since May 2015 and served as our Chief Executive Officer and President from March 2012 until May 2015. Dr. Trifunovich has served as a director since March 2012. Dr. Trifunovich served as President, Chief Executive Officer and Chairman of the Board of Helicos BioSciences Corporation1 from October 2010 to September 2012. Since August 2008, Dr. Trifunovich has served as a strategic consultant to global companies in the life sciences industry. Previously, Dr. Trifunovich served as the Senior Vice President of Third Wave Technologies, Inc., a molecular diagnostics company, from December 2001 through August 2008. Prior to joining Third Wave Technologies, Inc., Dr. Trifunovich held successive positions as Vice President of e-Business and Vice President of Research Strategy and Operations at Pharmacia Corp. Prior to joining Pharmacia, Dr. Trifunovich was a Director of New Product Marketing at Johnson & Johnson, Inc. He began his career at Bristol-Myers Squibb, Inc. as a bench scientist, where he held several positions of increasing responsibility. Dr. Trifunovich received his Ph.D. in organic chemistry at UCLA and an MBA at the University of Pennsylvania’s Wharton School of Business. We believe Dr. Trifunovich’s qualifications to serve on our Board include the perspective and experience he has gained in management of a number of companies in the life science industry, including his unique familiarity with the Company gained from serving as our president and chief executive officer for the past two years.



 
1
In November 2012, Helicos BioSciences Corporation filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code.
 


Dr. R. Dean Hautamaki, Director.  Dr. Hautamaki has served as our director since May 2007. Since September 2008 he has been a practicing physician with Hautamaki & Horiuchi Personal Physicians of Sarasota, and he has been the Assistant Clinical Professor of Medicine at the Florida State University College of Medicine in Tallahassee, Florida since January 2005. Dr. Hautamaki is Chairman of the Department of Medicine at Sarasota Memorial Hospital in Sarasota, Florida. From September 1997 through December 2005, he was a partner at Lung Associates of Sarasota in Sarasota, Florida. Dr. Hautamaki has authored over 12 papers and presented in several conferences. He also serves on the Board of Directors of two private biotechnology start-up companies, Fibralign Corporation and First Wave Technologies, Inc. We believe Dr. Hautamaki’s qualifications to serve on our Board include his expertise in the biomedical technology industry and his experience as a practicing physician.

Makoto Kaneshiro, Director.  Mr. Kaneshiro has served as our director since March 2005. Mr. Kaneshiro is a founding member of Genetic Devices, Co., Ltd. in Japan, where he has been an executive vice president and member of the Board since October 2008. From 2003 to 2004, Mr. Kaneshiro was a member of the Board of Directors of Sega Corporation which was a publicly traded company in Japan. He holds an MBA from Yale University. We believe Mr. Kaneshiro’s qualifications to serve on our Board include his experience in investment management, his experience as a board member of other public companies, and his experience in business development roles at a number of other companies.

Joel Kanter, Director.  Mr. Kanter has served as our director since June 2007. He has been in the financial services industry for over three decades and has focused on providing equity and bridge financing to small and mid-size companies. He has served as President of Windy City, Inc., a privately held investment firm, and as the Chief Executive Officer and President of Walnut Financial Services, Inc., a publicly traded company. Mr. Kanter currently serves on the board of directors of Dr. Tattoff, Inc., Magna-Lab, Inc. and Medgenics, Inc., as well as a number of private concerns, and within the past five years has served on the board of directors of Pet DRx Corporation and Vyteris, Inc. Mr. Kanter has BA degrees in Political Science and in Psychology from Tulane University. We believe Mr. Kanter’s qualifications to serve on our Board include his extensive experience in investment management and his experience serving as an executive and board member of a number of public and private biomedical and other technology companies.

William McKenzie, Director.  Mr. McKenzie joined our board of directors in December 2013. Mr. McKenzie is a business leader with a strong technical background in nucleic acid purification, immunoassay, genetics and clinical lab medicine with over 25 years of experience building new businesses in the global life sciences and diagnostics sectors.  He has served as a senior partner at Upstart Life Science, a management consultancy company, since 2012, and as Vice President and General Manager at Seracare during 2014. Mr. McKenzie held various positions at PerkinElmer from 2005 until 2012, including Business Development Director and Strategic Marketing Director of Molecular Medicine, Global Business Strategist of Genetic Screening, and Vice President and General Manager of Molecular Diagnostics. Prior to that, Mr. McKenzie worked for Millipore in positions of increasing responsibility, most notably as Strategic Marketing Director of Bioscience and General Manager of OEM Healthcare. Mr. McKenzie holds BS and MS degrees in Biology from the University of Massachusetts, is a member of the American Society for Clinical Pathology and is a registered clinical chemist. We believe Mr. McKenzie’s qualifications to serve on our Board include the perspective and experience he has gained in management of a number of companies in the biosciences industry.

Robert Schueren, Director.  Mr. Schueren joined our board of directors in January 2014. Mr. Schueren has held leadership positions in life science and diagnostic companies for more than two decades. Since April 2013, Mr. Schueren has been IntegenX Inc.’s chief executive officer and a member of its board of directors. Previously he was Vice President and General Manager, Genomics for Agilent Technologies. Prior to joining Agilent in 2010, he was the Global Head of Clinical Biomarkers and Operations, and Deputy Global Head of Molecular Medicine Labs for Genentech, Inc., a company he joined in 2006. Mr. Schueren has a BS degree in pharmacy from Temple University. We believe Mr. Schueren’s qualifications to serve on our Board include the perspective and experience he has gained in management of a number of companies in the life science industry, including as chief executive officer of IntegenX Inc. In January 2014, IntegenX sold us substantially all of the assets of its next generation sequencing library preparation business, including the Apollo 324™ instrument and PrepX™ reagents.



Director Independence

We are currently listed on the NASDAQ Capital Market, and accordingly, in evaluating the independence of the members of the Board, we utilize the rules of the NASDAQ Stock Market.

Our Board has determined that Messrs. Kaneshiro, Kanter and McKenzie and Dr. Hautamaki are “independent directors” as such term is defined by Nasdaq Marketplace Rule 5605(a)(2). Our Audit Committee currently consists of Dr. Hautamaki, Mr. Kanter (Chairman) and Mr. McKenzie. Our Nominating and Corporate Governance Committee currently consists of Dr. Hautamaki, Mr. Kaneshiro (Chairman) and Mr. Kanter. Our Compensation Committee currently consists of Mr. Kaneshiro, Mr. Kanter (Chairman) and Mr. McKenzie.

Our Board has concluded that Mr. Kanter meets the definition of “audit committee financial expert,” as defined under the applicable rules of the SEC, and that all members of the Audit Committee are “independent” within the meaning of the applicable Nasdaq listing standards and the independence standards of rule 10A-3 of the Exchange Act. Each of the members of the Audit Committee meets the requirements for financial literacy under the applicable rules and regulations of the SEC and The Nasdaq Stock Market.

Board Leadership Structure

Our Board does not have a policy on whether the offices of Chairman of the Board and Chief Executive Officer should be separate and, if they are to be separate, whether the Chairman of the Board should be selected from among the independent directors. Our Board believes that it should have the flexibility to make these determinations at any given time in the way that it believes best to provide appropriate leadership for the Company at that time. Our Board has reviewed our current Board leadership structure in light of the composition of the Board, the Company’s size, the nature of the Company’s business, the regulatory framework under which the Company operates, and other relevant factors. Considering these factors, Dr. Carlson serves as our Chief Executive Officer, Dr. Trifunovich serves as our Executive Chairman of the Board, and Mr. Kanter serves as our Lead Independent Director.

The role of our Lead Independent Director is to, among other things:

 
·
counsel our Executive Chairman and Chief Executive Officer on issues of interest/concern to the independent directors;

 
·
coordinate and develop the agenda for and chair executive sessions of our Board’s independent directors;

 
·
act as principal liaison between our independent directors and our Executive Chairman and Chief Executive Officer on sensitive issues;

 
·
lead our Board’s annual Chief Executive Officer review process and meet with our Chief Executive Officer to discuss the evaluation;

 
·
provide our Executive Chairman and Chief Executive Officer with input as to the preparation of the agenda for Board meetings; and

 
·
advise our Executive Chairman and Chief Executive Officer as to the quantity, quality and timeliness of the flow of information from management to the independent directors.

Board Role in Risk Oversight

The Board administers its risk oversight function directly and through the Audit Committee. The Board and the Audit Committee regularly discuss with management the Company’s major risk exposures, their potential financial impact on the Company, and the steps taken to monitor and control those risks.

Code of Ethics

Our Company’s Board of Directors has adopted a Code of Business Conduct and Ethics that applies to, among other persons, our Company’s officers and non-employee directors, including our principal executive officer, principal financial officer and principal accounting officer or controller, as well as persons performing similar functions. As adopted, our Code of Business Conduct and Ethics set forth written standards that are designed to deter wrongdoing and promote:



(1)
honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

(2)
full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the Securities and Exchange Commission (the “SEC”) and in other public communications made by us;

(3)
compliance with applicable government laws, rules and regulations;

(4)
the prompt internal reporting of violations of Code of Business Conduct and Ethics to an appropriate person or persons identified in the Code of Business Conduct and Ethics; and

(5)
accountability for adherence to the Code of Business Conduct and Ethics.

Our Code of Business Conduct and Ethics requires, among other things, that all of our Company’s personnel shall be accorded full access to our Chief Compliance Officer with respect to any matter which may arise relating to the Code of Business Conduct and Ethics. Further, all of our Company’s personnel are to be accorded full access to the Board if any such matter involves an alleged breach of the Code of Business Conduct and Ethics by our president, secretary, and chief financial officer.

In addition, our Code of Business Conduct and Ethics emphasizes that all employees, and particularly managers and/or supervisors, have a responsibility for maintaining financial integrity within our Company, consistent with generally accepted accounting principles, and federal, provincial and state security laws. Any employee who becomes aware of any incident involving financial or accounting manipulation or other irregularities, whether by witnessing the incident or being told of it, must report it to his or her immediate supervisor or to our Company’s president, secretary, or chief financial officer. If the incident involves an alleged breach of the Code of Business Conduct and Ethics by the president, secretary, or chief financial officer, the incident must be reported to the Audit Committee. Any failure to report such inappropriate or irregular conduct of other employees is to be treated as a severe disciplinary matter. It is against our Company policy to retaliate against any individual who reports in good faith the violation or potential violation of our Company’s Code of Business Conduct and Ethics by another.

Our Code of Business Conduct and Ethics is available on our website, www.wafergen.com.
 
 
EXECUTIVE COMPENSATION

Our compensation philosophy is to offer our executive officers compensation and benefits that are competitive and meet our goals of attracting, retaining and motivating highly skilled management, which is necessary to achieve our financial and strategic objectives and create long-term value for our stockholders. We believe the levels of compensation we provide should be competitive, reasonable and appropriate for our business needs and circumstances. The principal elements of our executive compensation program include (a) base salary, (b) discretionary annual cash bonus opportunities and (c) long-term equity compensation. We believe successful long term Company performance is more critical to enhancing stockholder value than short term results. For this reason and to conserve cash and better align the interests of management and our stockholders, we emphasize long term equity compensation and performance-based bonus opportunities over base annual salaries.

The following table presents summary information regarding the compensation of (i) the person who served as our principal executive officer during the year ended December 31, 2014, and (ii) our two other executive officers who were serving as executive officers at the end of 2014 (such officers are referred to herein as our “Named Executive Officers”), which we paid to the Named Executive Officers for the years ended December 31, 2014 and 2013.

2014 Summary Compensation Table
 
(a) Name and
Principal Position
 
(b) Fiscal
Year
 
(c) Salary
($)
   
(d) Bonus
($)
   
(f) Option
Awards(5)
($)
 
(g) Nonequity
incentive plan
compensation(6)
($)
 
(i) All Other
Compensation
($)
   
(j) Total
($)
Ivan Trifunovich
 
2014
 
$
360,000
(1)
 
$
   
$
784,107
 
$
180,000
 
$
   
$
1,324,107
Former Chief Executive Officer, President and Chairman
 
2013
 
$
360,000
(1)
 
$
360,000
(4)
 
$
       
$
1,800
(7)
 
$
721,800
Michael P. Henighan
 
2014
 
$
77,917
(2)
 
$
   
$
98,938
   
23,300
 
$
   
$
200,155
Chief Financial Officer
 
2013
 
$
   
$
   
$
       
$
   
$
Keith Warner
 
2014
 
$
118,598
(3)
 
$
   
$
247,348
   
48,900
 
$
   
$
414,846
Former Chief Operating Officer
 
2013
 
$
   
$
   
$
       
$
   
$
__________
 
(1)
Dr. Trifunovich joined the Company on March 8, 2012, and his annual salary of $360,000 commenced on that date pursuant to such executive officer’s employment agreement with us.

(2)
Mr. Henighan joined the Company on August 25, 2014, and his annual salary of $220,000 commenced on that date pursuant to such executive officer’s employment agreement with us.

(3)
Mr. Warner joined the Company on August 14, 2014, and his annual salary of $310,000 commenced on that date pursuant to such executive officer’s employment agreement with us.

(4)
Reflects a discretionary bonus awarded to Dr. Trifunovich by the Board of Directors in September 2013, upon recommendation of the Compensation Committee, in recognition of successfully transitioning the Company’s business to a new model with the potential to pursue new important applications; raising in excess of $12 million of net new equity in a 2013 private placement; simplifying the ownership of our now-dissolved Malaysian subsidiary; and simplifying the capital structure of the Company.

(5)
Amounts in this column reflect the aggregate grant date fair value of option awards granted in the fiscal year computed in accordance with FASB ASC Topic 718, using a Black-Scholes valuation model, excluding the impact of estimated forfeitures related to service-based vesting conditions. The assumptions used in the valuation of these awards are set forth in Note 10 to our consolidated financial statements, which are included in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 17, 2015. A description of the material terms of each grant is provided in the footnotes to the “Outstanding Equity Awards at Fiscal Year-End 2014” table below.

(6)
Amounts in this column reflect bonuses awarded pursuant to our Executive Short-Term Incentive Program. The awards were payable, based on 50% of Dr. Trifunovich’s base salary, 30% of Mr. Henighan’s base salary and 40% of Mr. Warner’s base salary, upon achievement of goals related to our 2014 revenue and capital raising. Mr. Henighan’s and Mr. Warner’s awards were pro-rated for their period of employment with us in 2014.

(7)
Amounts in this column reflect a reimbursement allowance for use of personal phone for Company business.
 
 
 
Outstanding Equity Awards at Fiscal Year-End 2014
 
   
Number of
 
Number of
         
   
Securities
 
Securities
         
   
Underlying
 
Underlying
   
Option
   
   
Unexercised
 
Unexercised
   
Exercise
 
Option
   
Options
 
Options
   
Price
 
Expiration
Name
 
Exercisable (#)
 
Unexercisable (#)
   
($)
 
Date
Ivan Trifunovich
   
2,767
     
251
(1)
   
139.15
   
3/8/2019
 
     
72,928
     
6,630
(2)
   
14.00
   
5/29/2021
 
Michael P. Henighan
   
     
28,266
(3)
   
4.60
   
8/27/2021
 
Keith Warner
   
     
70,666
(3)
   
4.60
   
8/27/2021
 
__________

(1)
Represents the unvested portion of an option granted on March 8, 2012, that vests over a three-year period, with one-third of the options vesting on the first anniversary of the grant date and the remaining two-thirds vesting in eight quarterly installments over the following two years, subject to Dr. Trifunovich’s continued employment with the Company through each vesting date.

(2)
Represents the unvested portion of an option granted on May 29, 2014, that vests over a three-year period commencing on March 8, 2012, such that 53,039 options were vested on the grant date, with 6,630 options vesting on June 8, 2014, 6,629 options vesting on September 8, 2014, 6,630 options vesting on December 8, 2014, and 6,630 options vesting on March 8, 2015, subject to Dr. Trifunovich’s continued employment with the Company through each vesting date.

(3)
Represents the unvested portion of an option granted on August 27, 2014, that vests over a three-year period, with one-third of the options vesting on the first anniversary of the grant date and the remaining two-thirds vesting in eight quarterly installments over the following two years, subject to the applicable employee’s continued employment with the Company through each vesting date.


Director Compensation
 
The table below summarizes the compensation paid by the Company to non-employee directors for the fiscal year ended December 31, 2014.

   
(b) Fees Earned
                   
   
or Paid
   
(c)Stock
   
(g)All Other
       
   
in Cash (1)
   
Awards (3)
   
Compensation
   
(h)Total
 
(a) Name
 
($)
   
($)
   
($)
   
($)
 
Dr. R. Dean Hautamaki
   
10,000
     
15,000
     
     
25,000
 
Makoto Kaneshiro
   
10,000
     
15,000
     
     
25,000
 
Joel Kanter
   
15,000
(2)
   
15,000
     
     
30,000
 
William McKenzie
   
10,000
     
15,000
     
     
25,000
 
Robert Schueren (appointed 1/6/14)
   
10,000
     
14,795
     
27,500
(4)
   
52,295
 
Alnoor Shivji (resigned 7/17/14)
   
7,500
(2)
   
15,000
     
15,000
(5)
   
37,500
 
__________
 
(1)
Amounts in this column reflect an annual cash retainer of $10,000 payable annually to each non-employee director.

(2)
Reflects an additional $5,000 payable annually to the Chairman of the Board and the Chairman of the Audit Committee.

(3)
Amounts in this column reflect the aggregate grant date fair value of stock awards granted in the fiscal year computed using the Company’s closing stock price on the award date, excluding the impact of estimated forfeitures related to service-based vesting conditions. On May 29, 2014, each director was awarded RSUs with a value of $15,000 on that date, based on a closing share price of $14.00, pro-rated down for those whose employment commenced after the start of the year. The stock vested on December 31, 2014, with the number vesting computed on a pro rata basis over the period of service should the non-employee director resign before the end of the year. As of December 31, 2014, there were no outstanding stock awards held by any non-employee director, and the aggregate number of outstanding options held by each non-employee director who served during 2014 was 714 for Dr. Hautamaki, 432 for Mr. Kaneshiro, 482 for Mr. Kanter, and none for Messrs. McKenzie, Schueren and Shivji.
 


(4)
Mr. Schueren earns $2,500 for consultancy services to the Company under an ongoing consultancy agreement that commenced on February 1, 2014.

(5)
Following his resignation on July 17, 2014, Mr. Shivji entered into a consultancy agreement with the Company under which, from July 1 until December 31, 2014, he earned $2,500 per month for consulting fees (in lieu of any directors’ fees otherwise due) and his stock awards continued to vest.

Effective as of February 12, 2014, the board of directors approved the following annual compensation for all non-employee directors for 2014 and future years:

 
·
Each non-employee director shall receive an annual cash retainer of $10,000. The Chairman of the Board and the Chairman of the Audit Committee shall each receive an additional annual cash retainer of $5,000; and

 
·
On the first trading day of each fiscal year, each non-employee director shall be granted restricted stock units or deferred stock units having a value of $15,000; for 2014, and only for 2014, the board of directors set the grant date as the date of the annual meeting of stockholders.

Non-employee directors are also reimbursed for all out-of-pocket expenses, if any, related to attending Board meetings.

 
Equity Compensation Plan Information

The following table sets forth information regarding our compensation plans under which equity securities are authorized for issuance to our employees as of December 31, 2014:

           
Number of
 
           
Securities
 
           
Remaining
 
   
Number of
     
Available for
 
   
Securities to
     
Future Issuance
 
   
Be Issued
     
Under Equity
 
   
Upon
     
Compensation
 
   
Exercise of
 
Weighted-Average
 
Plans
 
   
Outstanding
 
Exercise Price of
 
(Excluding
 
   
Options,
 
Outstanding
 
Securities
 
   
Warrants and
 
Options, Warrants
 
Reflected in
 
   
Rights
 
and Rights
 
Column (a))
 
Plan Category
 
(a)
 
(b)
 
(c)
 
                       
Equity compensation plans approved by security holders
   
88,280
(1)
 
$
52.84
   
894,407
 
Equity compensation plans not approved by security holders
   
98,932
(2)
 
$
4.60
   
 
Total
   
187,212
   
$
27.35
   
894,407
 
__________

(1)
Does not reflect 225,000 restricted stock units under plans approved by security holders.

(2)
In connection with our entrance into employment agreements in August 2014 with Michael P. Henighan, our chief financial officer, and Keith Warner, our chief operating officer, we granted Mr. Henighan and Mr. Warner certain inducement option awards. Subject to certain adjustments, Mr. Henighan’s award agreement grants him options to purchase up to 28,266 shares of our common stock at a price of $4.60 per share and Mr. Warner’s award agreement grants him options to purchase up to 70,666 shares of our common stock at a price of $4.60 per share. The options vest over three years, with one-third of the options vesting on the first anniversary of the grant date and the remaining two-thirds vesting in eight quarterly installments over the following two years, subject to the applicable employee’s continued employment with the Company through each vesting date.

 

Employment Agreements

Rolland Carlson

In connection with Dr. Carlson’s appointment as our Chief Executive Officer, President and director, we entered into an executive employment agreement, effective May 11, 2015. Under the employment agreement, Dr. Carlson receives an annual base salary of $350,000 per year, and he is eligible to earn an annual performance bonus of up to 50% of his then current base salary in accordance with an annual incentive plan to be established by the Company’s compensation committee or the Board. In addition, under the employment agreement and as an inducement to join the Company, Dr. Carlson received an inducement option grant to purchase 150,000 shares of our common stock. This option vests over a period of three (3) years, with one-third of the shares subject to the option vesting on the first anniversary of the grant date, and the remaining two-thirds of the shares subject to the option vesting in eight (8) equal quarterly installments over two years following the one-year anniversary of the grant date (for a three-year vesting period in total), subject to Dr. Carlson’s continued employment with the Company through each vesting date. Dr. Carlson also received an inducement restricted stock unit award covering 50,000 shares of our common stock. This restricted stock unit award vests over a period of three (3) years in three equal installments on May 29 of each of 2016, 2017 and 2018 subject to Dr. Carlson’s continued employment with the Company through each vesting date.

In addition, in the event Dr. Carlson is terminated without cause or resigns for good reason, he is entitled to (1) 12 months of his then-current base salary, of which one-half of such amount shall be paid in a single lump-sum amount, less applicable withholdings, and the remaining one-half of such amount shall be paid in the form of salary continuation on the Company’s regular payroll schedule, less applicable withholdings, over 12 months, and (2) payment of COBRA premiums up to 18 months. Dr. Carlson’s entitlement to such severance amounts are subject to his execution of a release of claims in favor of the Company.

Ivan Trifunovich

In connection with Dr. Trifunovich’s appointment as our President, Chief Executive Officer and director, we entered into an executive employment agreement, effective March 8, 2012. In connection with his transition to Executive Chairman Dr. Trifunovich’s employment agreement was amended in May 2015 to, among other things, change his position to Executive Chairman and make the term of the agreement run through June 30, 2016.  Under the employment agreement, through June 30, 2015, Dr. Trifunovich received an annual base salary of $360,000 per year and beginning July 1, 2015, his annual base salary is reduced to $180,000 per year, and he is eligible to earn an annual performance bonus of up to 50% of his then current base salary in accordance with an annual incentive plan to be established by the Company’s compensation committee or the Board. In addition, under the employment agreement, Dr. Trifunovich was granted an initial option grant of 3,018 shares of our common stock with an exercise price equal to $139.15 per share, with one-third of the shares subject to the option vesting on the first anniversary of Dr. Trifunovich’s employment with the Company and the remaining shares vesting in eight equal quarterly installments over the two years following the first anniversary of the grant date. Until May 2015 Dr. Trifunovich was entitled to additional option awards at the beginning of each year as necessary to bring the cumulative number of options awarded to him to 5% of the Company’s outstanding shares, computed on a fully diluted basis (the “Option Percentage”) pursuant to the terms of his employment agreement, at the time of each such grant, with a vesting commencement date and vesting schedule identical to his initial option grant (such that options awarded more than three years after his employment date will be fully vested on the grant date). Following May 2015 the Option Percentage was reduced to 2.5%. All of Dr. Trifunovich’s unvested options granted under his employment agreement will accelerate in the event of a change of control or if his employment is terminated (except in the case of his resignation without good reason or his termination by the Company for cause).

In addition, in the event Dr. Trifunovich is terminated without cause or resigns for good reason, he is entitled to 24 months of his then-current base salary, of which one-half of such amount shall be paid in a single lump-sum amount, less applicable withholdings, and the remaining one-half of such amount shall be paid in the form of salary continuation on the Company’s regular payroll schedule, less applicable withholdings, over 18 months. In addition, if he is terminated without cause or resigns for good reason within 3 months prior to or 12 months following a change of control of the Company, he is also entitled to receive an additional supplemental severance payment equal to the product of (i) 50% of his then-current base salary, multiplied by (ii) two, which supplemental severance payment amount shall be paid in a single lump-sum amount, less applicable withholdings. Dr. Trifunovich’s entitlement to such severance amounts are subject to his execution of a release of claims in favor of the Company.

Dr. Trifunovich is eligible to participate in a long-term incentive plan established by the Company under which he is entitled to receive a cash payment in connection with a change in control of the Company that occurs while he is employed by the Company or within six months thereafter. Under such plan, in the event of a change in control of the Company, Dr. Trifunovich will be entitled to a cash payment upon a change of control based on the aggregate equity transaction value


in such change of control transaction, as follows: (a) for a transaction with an aggregate equity transaction value of more than $50 million, and up to $75 million, he will be entitled to receive a cash payment equal to 1% of the aggregate equity transaction value; (b) for the portion, if any, of the aggregate equity transaction value in excess of $75 million and up to $100 million, he will be entitled to receive a cash payment equal to 2% of such portion of the aggregate equity transaction value; (c) for the portion, if any, of the aggregate equity transaction value in excess of $100 million and up to $150 million, he will be entitled to receive a cash payment equal to 3% of such portion of the aggregate equity transaction value; and (d) for the portion, if any, of the aggregate equity transaction value in excess of $150 million, he will be entitled to receive a cash payment equal to 5% of such portion of the aggregate equity transaction value.

Dr. Trifunovich’s employment agreement also provides that if a distribution is made of any of the assets (including cash) of the Company to holders of any class of capital stock by reason of their ownership thereof, including any distribution made in connection with a Change of Control (as defined in the agreement) during Dr. Trifunovich’s employment or within six months following termination, in such case, Dr. Trifunovich will have the right to receive a payment from the Company in connection with each such distribution equal to the amount, if any, by which (i) 5% of the total distribution amount exceeds (ii) the amount paid to him in such distribution with respect to compensatory equity interests then held by him less the exercise or other purchase price paid or payable by him for such equity interests; provided that in connection with any distribution following termination the percentages used to calculate the payment due would be reduced to 2.5%.

Dr. Trifunovich will be entitled to tax gross up payments in the event any payments due to him under the employment agreement would be subject to the excise tax imposed by Internal Revenue Code Section 4999. Dr. Trifunovich also has signed and agreed to be bound by the terms of the Company’s proprietary information and inventions assignment agreement.

Keith Warner

Mr. Warner served as our Chief Operating Officer from August 2014 until July 2015. In connection with Mr. Warner’s appointment, we entered into an executive employment agreement, effective August 13, 2014. Under the employment agreement, Mr. Warner received an annual base salary of $310,000 per year, and he was eligible to earn an annual performance bonus of up to 40% of his then current base salary in accordance with an annual incentive plan to be established by the Company’s compensation committee or the Board. In addition, under the employment agreement and as an inducement to join the Company, Mr. Warner received an inducement option grant to purchase 70,666 shares of our common stock, which equaled one and one-quarter percent (1.25%) of our then outstanding common stock calculated on an as-converted basis taking into account any outstanding convertible preferred stock on such date. This option had an exercise price of $4.60, which was the closing market price on the grant date, and vested over a period of three (3) years, with one-third of the shares subject to the option vesting on the first anniversary of the grant date, and the remaining two-thirds of the shares subject to the option vesting in eight (8) equal quarterly installments over two years following the one-year anniversary of the grant date (for a three-year vesting period in total), subject to Mr. Warner’s continued employment with the Company through each vesting date.

As a result of our determination to eliminate the Chief Operating Officer position, Mr. Warner’s employment was terminated effective as of July 15, 2015. In connection therewith and pursuant to his employment agreement, Mr. Warner signed a release of claims in favor of the Company and became entitled to receive the following severance benefits: (1) nine months of his then-current base salary, of which one-half of such amount is payable in a single lump-sum amount, less applicable withholdings, and the remaining one-half of such amount is payable in the form of salary continuation on the Company’s regular payroll schedule, less applicable withholdings, over nine months, and (2) payment of COBRA premiums up to 18 months.

Michael Henighan

Mr. Henighan has served as our Chief Financial Officer since August 2014.  In connection with Mr. Henighan’s appointment, we entered into an executive employment agreement with Mr. Henighan, effective August 25, 2014. Under the employment agreement, Mr. Henighan receives an annual base salary of $220,000 per year, and he is eligible to earn an annual performance bonus of up to 30% of his then current base salary in accordance with an annual incentive plan to be established by the Company’s compensation committee or the Board. In addition, under the employment agreement and as an inducement to join the Company, Mr. Henighan received an inducement option grant to purchase 28,266 shares of our common stock, which equaled one-half percent (0.50%) of our then outstanding common stock calculated on an as-converted basis. This option has an exercise price of $4.60, which was the closing market price on the grant date, and vests over a period of three (3) years, with one-third of the shares subject to the option vesting on the first anniversary of the grant date, and the remaining two-thirds of the shares subject to the option vesting in eight (8) equal quarterly installments over two years following the one-year anniversary of the grant date (for a three-year vesting period in total), subject to Mr. Henighan’s continued employment with the Company through each vesting date.



In addition, in the event Mr. Henighan is terminated without cause or resigns for good reason, he is entitled to (1) six months of his then-current base salary, of which one-half of such amount shall be paid in a single lump-sum amount, less applicable withholdings, and the remaining one-half of such amount shall be paid in the form of salary continuation on the Company’s regular payroll schedule, less applicable withholdings, over six months, and (2) payment of COBRA premiums up to six months. Mr. Henighan’s entitlement to such severance amounts are subject to his execution of a release of claims in favor of the Company.


CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

In March 2014, our Board of Directors adopted a written policy with regard to related person transactions, which sets forth our procedures and standards for the review, approval or ratification of any transaction required to be reported in our filings with the SEC or in which one of our executive officers or directors has a direct or indirect material financial interest, with limited exceptions. Our policy is that the Audit Committee shall review the material facts of all related person transactions (as defined in the related person transaction approval policy) and either approve or disapprove of the entry into any related person transaction. In the event that obtaining the advance approval of the Audit Committee is not feasible, the Audit Committee shall consider the related person transaction and, if the Audit Committee determines it to be appropriate, may ratify the related person transaction. In determining whether to approve or ratify a related person transaction, the Audit Committee will take into account, among other factors it deems appropriate, whether the related person transaction is on terms comparable to those available from an unaffiliated third-party under the same or similar circumstances and the extent of the related person’s interest in the transaction.

Other than as described below, and for compensation agreements and other arrangements which are described above under the heading “Executive Compensation” during 2015 and 2014 there was not, and there is not currently proposed, any transaction or series of similar transactions to which we were or will be a party in which the amount involved exceeded or will exceed $120,000 in which any director, executive officer, holder of five percent or more of any class of our capital stock or any member of their immediate family had or will have a direct or indirect material interest.

IntegenX Acquisition

In January 2014, we entered into an Asset Purchase Agreement with IntegenX, pursuant to which we acquired substantially all of the assets of the Apollo Business. The purchase price for the Apollo Business comprised (1) a cash payment of $2.0 million, (2) the $1.25 million IntegenX Note, (3) the Earnout payable, if at all, in 2015, 2016 and 2017, respectively, and (4) our assumption of certain liabilities, including obligations to perform under contracts and liabilities for certain accrued but unpaid vacation for certain employees.

The IntegenX Note accrues interest at 8.0% per year and is payable in a single payment of principal and accrued interest on January 6, 2017. However if, prior to the IntegenX Note’s maturity, we complete an equity offering yielding net cash proceeds of at least $15.0 million, we will be required to prepay the IntegenX Note within 45 days of the closing of the equity offering. To secure our obligations under the IntegenX Note, we granted IntegenX a security interest in the assets acquired from them. The Earnout contemplates three earn-out payments based on gross revenues from certain products of the Acquired Business. For more information regarding our acquisition of the IntegenX Business, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—Acquisition of Assets from IntegenX Inc.”

On January 6, 2014, following the closing of the purchase of the asset purchase from IntegenX, Robert Schueren was appointed as a member of our board of directors. Mr. Schueren is IntegenX’s chief executive officer and a member of its board of directors.

Compensation Arrangements

See “Executive Compensation,” above for information about employment agreements and other compensation arrangements between us and our executive officers and directors.

 
 
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial ownership of our common stock by (i) each person who, to our knowledge, owns more than 5% of our common stock, (ii) each of our directors and executive officers, and (iii) all of our executive officers and directors as a group. Unless otherwise indicated in the footnotes to the following table, each person named in the table has sole voting and investment power and that person’s address is: c/o WaferGen Bio-systems, Inc., 7400 Paseo Padre Parkway, Fremont, CA 94555. Shares of our common stock subject to options, warrants, or other rights currently exercisable or exercisable within 60 days of September 15, 2015, are deemed to be beneficially owned and outstanding for computing the share ownership and