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 |
| Amount to be Registered |
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| Proposed Maximum Offering Price Per Share |
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| Proposed Maximum Aggregate Offering Price |
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| Amount of Registration Fee(3) | ||||
| Shares of common stock, par value $0.001 per share |
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| 10,949,689 | (1) |
| $ | 1.85 | (2) |
| $ | 20,256,925 |
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| $ | 2,763.04 |
| Total: |
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| 10,949,689 |
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| $ | 20,256,925 |
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| $ | 2,763.04 |
| (1) | Consists of 1,067,317 shares of common stock, 7,513,372 shares of common stock issuable upon the conversion of 2,987.0167 shares of Series 1 Convertible Preferred Stock and 2,369,000 shares of common stock issuable upon the exercise of warrants. Pursuant to Rule 416 under the Securities Act of 1933, as amended, there is also being registered hereby such indeterminate number of additional shares of common stock of WaferGen Bio-systems, Inc. as may be issued or issuable because of stock splits, stock dividends, stock distributions, and similar transactions. |
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| (2) | Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933 and based on the average of the high and low bid prices of our common stock on October 7, 2013, as reported by the OTCQB Marketplace. |
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| (3) | Paid at the time of original filing on October 9, 2013. |
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 prospectus is not complete and may be changed. The selling stockholders may not sell these securities under this prospectus until the registration statement of which it is a part and filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED OCTOBER 9, 2013
WAFERGEN BIO-SYSTEMS, INC.
PROSPECTUS
Up to 10,949,689 Shares of Common Stock
This prospectus relates to the offering by the selling stockholders of WaferGen Bio-systems, Inc. of up to 10,949,689 shares of common stock, par value $0.001 per share. These shares include 1,067,317 shares of issued and outstanding shares of common stock, 7,513,372 shares of common stock issuable upon the conversion of 2,987.0167 shares of Series 1 Convertible Preferred Stock and 2,369,000 shares of common stock issuable upon the exercise of warrants issued to the selling stockholders on August 27, 2013, pursuant to an Exchange Agreement. The common stock, Series 1 Convertible Preferred Stock and warrants were issued in exchange for Series A-1 Convertible Preferred Stock, par value $0.001 per share, with a liquidation preference of approximately $17.1 million, Convertible Promissory Notes with a principal amount of approximately $17.1 million and Warrants exercisable for 565,180 shares.
The selling stockholders have advised us that they will sell the shares of common stock from time to time in the open market, on the OTCQB Marketplace, in privately negotiated transactions or a combination of these methods, at market prices prevailing at the time of sale, at prices related to the prevailing market prices or at negotiated prices.
We will not receive any proceeds from the sale of common stock by the selling stockholders.
Our common stock is traded on the OTCQB Marketplace under the symbol “WGBS.” On October 7, 2013, the closing price of our common stock was $1.85 per share.
Investing in our common stock involves a high degree of risk. Before making any investment in our common stock, you should read and carefully consider the risks described in this prospectus under “Risk Factors” beginning on page 7 of this prospectus.
You should rely only on the information contained in this prospectus or any prospectus supplement or amendment thereto. We have not authorized anyone to provide you with different information.
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.
This prospectus is dated , 2013
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| F-1 |
This summary does not contain all of the information that should be considered before investing in our common stock. Investors should read the entire prospectus carefully, including the more detailed information regarding our business, the risks of purchasing our common stock discussed in this prospectus under “Risk Factors” beginning on page 7 of this prospectus and our financial statements and the accompanying notes beginning on page F-1 of this prospectus.
As used in this prospectus, unless content requires otherwise, “WaferGen,” our “Company,” “we,” “us,” and “our” refer, prior to the Merger discussed below, to Wafergen, Inc. and after the Merger, to WaferGen Bio-systems, Inc. (or “WBSI”), together with its consolidated subsidiaries as a combined entity. On May 31, 2007, Wafergen, Inc. was acquired by WBSI. In the transactions, Wafergen, Inc. merged with a subsidiary of WBSI and became a wholly owned subsidiary of WBSI (the “Merger”). Wafergen, Inc. was considered the “acquirer” for accounting purposes, and accordingly the historical financial statements of Wafergen, Inc. for periods prior to the Merger replaced those of WBSI.
Our Company
Since we commenced operations in 2003, we have been engaged in the development of systems for gene expression quantification, genotyping and stem cell research. Since 2008, 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 and pharmaceutical drug discovery industries.
Our SmartChip products are aimed at researchers who perform genetic analysis, primarily at pharmaceutical and biotech companies, academic and private research centers and diagnostics companies involved in biomarker discovery and genetic research. Many scientists believe that much of the work to seek new therapeutic solutions will be directed at understanding the expression level of key relevant segments of DNA (i.e. genes and other regulatory elements), as well as the changes in their sequence (i.e. mutations such as single nucleotide polymorphisms (“SNPs”)). 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. Increasingly, researchers are focusing their attention on studying physiological phenomena at the molecular level and are consequently committing their research budgets to acquiring research tools that help them develop personalized therapies.
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 mRNA, microRNA and lncRNA expression level measurement, as well as SNP genotyping. In August 2010, we formally launched our first generation SmartChip 5K System, which was an innovative real-time polymerase chain reaction (“real-time 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. 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 next-generation sequencing (“NGS”). In July 2012, we launched the SmartChip MyDesign System, which is the second-generation instrument with significantly upgraded capabilities. First, the new system allows customers to dispense their own assays into a SmartChip, 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.
Most recently, our R&D efforts have been concentrated on the commercialization of the SmartChip Target Enrichment (“TE”) System. This new product is designed to perform a critical sample preparation step prior to targeted NGS. The 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.
We employ a business model that primarily generates revenue from both the sale of instruments (i.e. the SmartChip System) and a recurring revenue stream from the sale of consumables (i.e. the SmartChip Panel), similar to the “razor and razor blade” business model.
1
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 five 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.
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.
Since inception, we have incurred substantial operating losses. As of June 30, 2013, our accumulated deficit was $71,516,562. 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.
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,” before investing in our common stock. 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;
• we have experienced a decline 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;
• 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 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; and
• 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.
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Corporate Information
Wafergen, Inc. was incorporated in Delaware on October 22, 2002. 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 subsidiaries in Malaysia and 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
This prospectus relates to the resale from time to time by the selling stockholders identified in this prospectus of up to 10,949,689 shares of our common stock, par value $0.001 per share. These shares of common stock include shares of issued and outstanding common stock, shares of common stock issuable upon the conversion of Series 1 Convertible Preferred Stock and shares of common stock issuable upon the exercise of warrants. The shares of common stock, Series 1 Convertible Preferred Stock and warrants were issued to the selling stockholders on August 27, 2013, pursuant to an Exchange Agreement, as described below under “--August 2013 Exchange.” No shares of common stock are being offered for sale by us.
| Common stock offered by the selling stockholders |
| 10,949,689 |
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| Common stock to be outstanding after the offering |
| 17,262,867 |
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| Use of Proceeds |
| We will not receive any proceeds from the sale of common stock offered by the selling stockholders under this prospectus. |
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| Risk Factors |
| See the section titled “Risk Factors” and the other information included in this prospectus for a discussion of the factors you should consider carefully before deciding to invest in our common stock. |
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| OTCQB Marketplace Symbol |
| “WGBS” |
The number of shares of common stock offered by the selling stockholders consists of:
• 1,067,317 shares of common stock issued and outstanding;
• 7,513,372 shares of common stock issued and outstanding upon conversion of 2,987.0167 outstanding shares of Series 1 Convertible Preferred Stock; and
• 2,369,000 shares of common stock issuable upon exercise of outstanding warrants.
The number of shares of our common stock to be outstanding after this offering is based on 419,428 shares outstanding as of August 27, 2013, following a 1-for-99.39 reverse stock split, as described below under “--Reverse Stock Split,” plus 5,893,750 shares of common stock issued to accredited investors in a separate private placement in August and September of 2013 and assumes the issuance of 7,513,372 shares of our common stock upon the full conversion or exercise of 2,987.0167 shares of Series 1 Convertible Preferred Stock and warrants to purchase 2,369,000 shares of common stock held by the selling stockholders and excludes:
• 1,625,000 additional shares of common stock that will be issuable upon the conversion of 646.0351 outstanding shares of Series 1 Convertible Preferred Stock issued to accredited investors in a Private Placement in August and September of 2013;
• 123,944 shares of common stock issuable upon the exercise of outstanding options with exercise prices ranging from $0.02 to $237.54 and a weighted average exercise price of $34.01 per share;
• 5,073,443 shares of common stock issuable upon the exercise of outstanding warrants with exercise prices ranging from $2.60 to $298.17 and a weighted average exercise price of $4.22 per share.
3
• 284,718 shares of common stock issuable, should we elect to pay the cash redemption amount of $2,829,817 in shares, upon the conversion of 888,888 outstanding Series A convertible preference shares issued by our Malaysian subsidiary, based on the applicable stock price floor of $9.94 exceeding 85% of the average ten day trailing stock price of $1.99;
• 591,191 shares of common stock issuable upon the conversion of 444,444 outstanding Series B convertible preference shares issued by our Malaysian subsidiary, based on an average ten day trailing stock price of $1.99;
• 32,536 shares of common stock issuable upon the conversion of 3,233,734 outstanding Series C convertible preference shares issued by our Malaysian subsidiary;
• 10,845 shares of common stock issuable upon the conversion of 1,077,911 convertible preference shares issuable by our Malaysian subsidiary upon exercise by certain investors of an option to purchase such convertible preference shares at a price of $230.52 per share; and
• 17,644 shares of common stock reserved for future issuance under our 2008 Stock Incentive Plan.
August 2013 Exchange
On May 25, 2011, we entered into a Purchase Agreement with the selling stockholders (the “2011 Purchase Agreement”). Pursuant to the 2011 Purchase Agreement, we previously issued to the selling stockholders (i) certain shares of Series A-1 Convertible Preferred Stock, par value $0.001 per share, (ii) certain Convertible Promissory Notes convertible into shares of Series A-2 Convertible Preferred Stock, par value $0.001 per share, and (iii) certain warrants (the “2011 Warrants” and together with the Series A-1 Preferred Shares and the Convertible Notes, the “2011 Securities”) to purchase shares of our common stock.
On August 27, 2013, we entered into an exchange agreement (the “Exchange Agreement”) with the selling stockholders. Pursuant to the Exchange Agreement, the selling stockholders agreed to exchange (the “August 2013 Exchange”) all their 2011 Securities for shares of our common stock, shares of newly designated Series 1 Convertible Preferred Stock, par value $0.001 per share, and warrants to purchase shares of common stock. In the aggregate, the Company exchanged Series A-1 Preferred Shares with a liquidation preference of $17,081,913, Convertible Notes with a principal amount of $17,084,894 and 2011 Warrants exercisable for 565,180 shares of common stock for 2,987.0167 shares of Series 1 Convertible Preferred Stock, 1,067,317 shares of our common Stock and warrants exercisable for 2,369,000 shares of common stock.
The August 2013 Exchange was completed after giving effect to the one-for-99.39 reverse stock split described below under “--Reverse Stock Split.” After completing the August 2013 Exchange, we retired the Series A-1 Preferred Shares, and no Series A Preferred Shares remained issued or outstanding and none will be issued in the future.
The warrants issued pursuant to the August 2013 Exchange are exercisable at any time before August 27, 2018 at an initial exercise price of $2.60 per share with cashless exercise.
The issuances of the new securities to the selling stockholders pursuant to the Exchange Agreement were exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(2) under the Securities Act and Rule 506 of Regulation D.
In connection with the Exchange Agreement, we entered into a Registration Rights Agreement dated as of August 27, 2013 with the selling stockholders, pursuant to which we agreed to register under the Securities Act the offering and sale by the selling stockholders of the common shares issued pursuant to the Exchange Agreement, the shares of common stock to be issued upon the conversion of the Series 1 Preferred Shares and the shares of common stock to be issued upon the exercise of the exchange warrants.
For more information regarding the August 2013 Exchange and the terms of the Series 1 Convertible Preferred Stock, see “Certain Relationships and Related Transactions--August 2013 Exchange” and “Description of Securities--Description of Preferred Stock” included elsewhere in this prospectus.
4
Reverse Stock Split
On August 26, 2013, we filed with the Secretary of State of the State of Nevada a certificate of amendment to our articles of incorporation, which effectuated as of August 27, 2013, at 1:01 p.m. Pacific Time (the “Effective Time”) a reverse stock split of our common stock by a ratio of one-for-99.39 (the “Reverse Split”). At the Effective Time, every 99.39 outstanding shares of common stock became one share of common stock. No fractional shares were, issued in connection with the Reverse Split. Stockholders who were otherwise entitled to receive a fractional share of common stock received one whole share of common stock. The Reverse Split did not change the number of shares of common or preferred stock that the Company is authorized to issue, or the par value of the Company’s common or preferred stock.
On August 27, 2013, we received approval from the Financial Industry Regulatory Authority (“FINRA”) to effectuate the Reverse Split in the market at the open of business on August 28, 2013. At such time, our Common Stock had a new CUSIP number, 93041P 209, and our trading symbol was temporarily changed to “WGBSD.” The added “D” remained for 20 business days after which our trading symbol reverted back to “WGBS.”
The Reverse Split resulted in a proportionate adjustment to the per share exercise price and the number of shares of common stock issuable upon the exercise of outstanding warrants and stock options, as well as the number of shares of common stock eligible for issuance under our 2008 Stock Incentive Plan.
All of the information in this prospectus except for the financial statements on pages F-1 to F-43 has been presented to reflect the impact of the one-for-99.39 Reverse Split. The financial statements on pages F-1 to F-43 are unchanged from the versions previously filed.
Plan of Distribution
This offering is not being underwritten. The selling stockholders will sell their shares of our common stock at prevailing market prices or privately negotiated prices. The selling stockholders themselves directly, or through their agents, or through their brokers or dealers, may sell their shares from time to time, in (i) privately negotiated transactions, (ii) in one or more transactions, including block transactions in accordance with the applicable rules of the OTCQB Marketplace or (iii) otherwise in accordance with the section of this prospectus entitled “Plan of Distribution.” To the extent required, the specific shares to be sold, the names of the selling stockholders, the respective purchase prices and public offering prices, the names of any agent, broker or dealer and any applicable commission or discounts with respect to a particular offer will be described in an accompanying prospectus. In addition, any securities covered by this prospectus which qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this prospectus.
For additional information on the methods of sale, you should refer to the section of this prospectus entitled “Plan of Distribution,” beginning on page 23.
Other Recent Events
2013 Private Placement
On August 27, 2013 and September 30, 2013, we entered into a Securities Purchase Agreement with certain accredited investors, including the selling stockholders, for the private sale of units at $50,000 per unit. Each unit consisted of (1) either 25,000 shares of our common stock or 9.9390 shares of the Series 1 Convertible Preferred Stock and (2) warrants to purchase 12,500 shares of common stock. At the initial closing of the offering on August 27, 2013, we received gross proceeds of $13,668,500 and issued a total of 5,209,250 shares of common stock, 646.0351 shares of Series 1 Convertible Preferred Stock (convertible into a total of 1,625,000 shares of common stock) and 3,417,129 warrants. At the second and final closing of the offering on September 30, 2013, we received gross proceeds of $1,369,000 and issued a total of 684,500 shares of common stock and 342,250 warrants.
The warrants are exercisable at any time within five years of the applicable issuance date at an initial exercise price of $2.60 per share with cashless exercise in the event a registration statement covering the resale of the shares of common stock underlying the warrants is not in effect by the six month anniversary of the issuance of the warrants.
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Table of Contents
We engaged a registered broker dealer to serve as placement agent for the 2013 Private Placement and the placement agent received (a) selling commissions aggregating 10% of the gross proceeds of the units sold to the investors that the placement agent introduced to the Company (collectively, “PA Investor Parties”) plus 5% of the gross proceeds of the securities sold to investors who are officers or directors of the Company or existing investors in the Company that the placement agent did not introduce to the Company (collectively, “Company Investor Parties”), (b) five-year warrants to purchase for $50,000 per unit (subject to certain adjustments) such number of units as is equal to 10% of the number of units issued to PA Investor Parties plus 5% of the number of units issued to Company Investor Parties in the 2013 Private Placement, and (c) reimbursement by the Company for certain expenses, not to exceed $100,000, incurred in connection with the 2013 Private Placement.
We intend to use the net proceeds from the Securities Purchase Agreement for general corporate and working capital purposes, including commercialization activities intended to increase revenues from sales of the Company’s target enrichment and other products.
The issuances of the new securities to the investors pursuant to the Securities Purchase Agreement were exempt from the registration requirements of the Securities Act pursuant to Section 4(2) under the Securities Act and Rule 506 of Regulation D.
We entered into a Registration Rights Agreement dated as of August 27, 2013 with the investors, other than the placement agent, pursuant to which we agreed to register under the Securities Act the offering and sale by the investors of the shares of common stock sold pursuant to the Securities Purchase Agreement, the shares of common stock to be issued upon conversion of the Series 1 Preferred Shares, and the shares of common stock to be issued upon exercise of the warrants.
For more information regarding the terms of the 2013 Private Placement and Series 1 Convertible Preferred Stock, see “Certain Relationships and Related Transactions--2013 Private Placement” and “Description of Securities--Description of Preferred Stock” included elsewhere in this prospectus.
Promissory Note Owing to Malaysian Subsidiary
On August 27, 2013, we issued promissory notes (the “Malaysia Notes”) in favor of the Company’s subsidiary WaferGen Biosystems (M) Sdn. Bhd., a company organized under the laws of Malaysia (“WGBM”). The Malaysia Notes were issued in consideration of WGBM’s cancellation of our obligations under a term loan owing to WGBM which, as of June 30, 2013, had an outstanding loan balance of approximately $5.3 million. The Malaysia Notes have a seven-year term and require a single balloon payment of $6.6 million at the end of the seven-year term.
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The following risk factors should be considered carefully in addition to the other information contained in this prospectus. This prospectus contains forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. These statements are only predictions. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause our customers’ or our industry’s actual results, levels of activity, performance or achievements expressed or implied by these forward-looking statements, to differ. “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as other sections in this prospectus, discuss some of the factors that could contribute to these differences.
The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
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 common stock.
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 $8.2 million for the year ended December 31, 2012, and $6.9 million for the six months ended June 30, 2013. As of June 30, our accumulated deficit was $71.5 million. We have not achieved operating profitability on a quarterly or annual basis.
Historically, there have been limited sales of any of our products, and having sold ten systems in the fifteen months ended March 31, 2011, we experienced no system sales during the fifteen months ended June 30, 2012, and sold two systems in the six months ended December 31, 2012, and one system in the six months ended June 30, 2013. 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, and $0.4 million for the six months ended June 30, 2013. 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.
Furthermore, any additional debt or equity financing that we may need may not be available on terms favorable to us, or at all. 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.
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Table of Contents
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. We have included an explanatory paragraph in Note 1 of our consolidated financial statements for the year ended December 31, 2012, 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. Our accumulated deficit at December 31, 2012, was $64.6 million. Our consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.
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.
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. 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 SmartChip System 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 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 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.
Currency risk related to assets, obligations and expenses denominated in foreign currencies could negatively impact our operating results and financial condition.
At June 30, 2013, the Company had approximately $0.9 million in net assets denominated in the local currency in Luxembourg, for which the functional reporting currency is the U.S. dollar. The Company’s Malaysia subsidiary had net assets of $5.6 million denominated in U.S. dollars which are revalued in the local reporting currency at the end of each reporting period, with exchange gains or losses being credited or charged against income. Further, both subsidiaries incur significant amounts of their expenses in their respective local currency. Fluctuations in exchange rates could negatively impact our business operating results and financial condition by resulting in exchange losses or increased expenses. Translation adjustments in any particular reporting period could significantly affect, positively or negatively, our reported operating results.
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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 and service projects, 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.
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, including our chief executive officer and chief financial officer. 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, 2013, we concluded that our disclosure controls and procedures were effective as of June 30, 2013, 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.
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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., Idaho Technology, 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;
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• 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.
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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 may be adversely affected by environmental, health and safety laws, regulations and liabilities.
As we pursue our business plan, we will become 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 can 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.
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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.
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.
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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
Even though we are not a California corporation, our common stock could still be subject to a number of key provisions of the California General Corporation Law.
Under Section 2115 of the California General Corporation Law (“CGCL”), corporations not organized under California law may still be subject to a number of key provisions of the CGCL. This determination is based on whether the corporation has significant business contacts with California and if more than 50% of its voting securities of record are held by persons having addresses in California. In the immediate future, the majority of our business operations, revenue and payroll will be conducted in, derived from, and paid to residents of California. Therefore, depending on our ownership, we could be subject to some provisions of the CGCL. Among the more important provisions are those relating to the election and removal of directors, cumulative voting, standards of liability and indemnification of directors, distributions, dividends and repurchases of shares, stockholder meetings, approval of some corporate transactions, dissenters’ and appraisal rights, and inspection of corporate records. If we are required to comply with these provisions, this compliance could cause us to incur additional administrative and legal expenses and divert our management’s time and attention from the operation of our business.
Because we have become public by means of a reverse merger, we may not be able to attract the attention of major brokerage firms.
There may be risks associated with our becoming a public company through a “reverse merger.” Securities analysts of major brokerage firms may not provide coverage of us since there is no incentive to brokerage firms to recommend the purchase of our common stock. No assurance can be given that brokerage firms will, in the future, want to conduct any secondary offerings on our behalf. Also, if securities analysts do not cover our common stock, the lack of research coverage may adversely affect its market price.
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Risks Related to Our Common Stock
Our stock price could be volatile and investors may have difficulty selling their shares.
Our common stock is currently available for trading in the over-the-counter market and is quoted on the OTCQB Marketplace under the symbol “WGBS.” For the six-month period ended August 27, 2013, the daily trading volume for shares of our common stock on a post-reverse-split basis ranged from 0 to 3,367 shares traded per day, and the average daily trading volume during such six-month period was 167 shares, with no shares traded on 58 of the 126 trading days. Accordingly, our investors who wish to dispose of their shares of common stock on any given trading day may not be able to do so or may be able to dispose of only a portion of their shares of common stock.
We may never be able to satisfy the qualitative or quantitative listing requirements for our common stock to be listed on an exchange. These factors may severely limit the liquidity of our common stock and may likely have a material adverse effect on the market price of our common stock and on our ability to raise additional capital.
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 30, 2013, the intra-day trading price on a post-reverse-split basis has fluctuated from a low of $1.65 to a high of $313.08. 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;
• the limited number of holders of the common stock, and the limited liquidity available through the OTCQB Marketplace;
• 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.
Our common stock may be considered “penny stock” and may be difficult to sell.
The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is currently less than $5.00 per share and therefore is designated as a “penny stock” according to SEC rules. This designation requires any broker or dealer selling these securities to disclose some information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell the common stock and may affect the ability of investors to sell their shares. These regulations may likely have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock. In addition, since the common stock is currently traded on the OTC Bulletin Board, investors may find it difficult to obtain accurate quotations of the common stock and may experience a lack of buyers to purchase our stock or a lack of market makers to support the stock price.
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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 7,380,495 shares were issued and outstanding as of September 30, 2013, and 10,000,000 shares of preferred stock, par value $0.001 per share, of which 3,663 are designated as Series 1 Convertible Preferred Stock, 3,633.0518 of which were issued and outstanding. These shares of Series 1 Convertible Preferred Stock have no voting rights, a liquidation preference of $0.001 per share, and were convertible into 9,138,372 shares of common stock (subject to ownership caps). 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 September 30, 2013, our Malaysian subsidiary had outstanding 4,567,066 Convertible Preference Shares not held by the Company which were potentially convertible into an aggregate of 908,446 shares of our common stock, and we had outstanding options to purchase an aggregate of 123,944 shares of our common stock and outstanding warrants and comparable instruments to purchase an aggregate of 7,453,288 shares of our common stock, 1,270,091 of which have certain anti-dilution protections against future dilutive events (including the issuance of stock at a price below their exercise price). The future 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.
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 principal stockholders will have significant voting power and may take actions that may not be in the best interests of other stockholders.
Our officers and directors, and their affiliates, control approximately 6% of our outstanding common stock. Additionally, our officers and directors and their affiliates hold securities that are convertible into a substantial number of shares of common stock. If our officers and directors and their affiliates converted all convertible securities held by them up to the maximum permitted by ownership caps, they would hold approximately 18% of our outstanding common stock. Pursuant to the Exchange Agreement entered into by the Company with investors (“Investors”) in connection with the August 2013 Exchange, for as long as at least 50% of the shares of Series 1 Convertible Preferred Shares issued in connection with the August 2013 Exchange and/or shares of common stock issued upon conversion thereof remain outstanding, the Company and each Investor who is a current member of the Company’s management or board of directors is required to use reasonable best efforts to ensure that (including with respect to such Investors, by voting (or consenting with respect thereto) any shares of common stock then owned by them accordingly) two individuals, as may be designated by Great Point Partners, LLC from time to time, are elected as members of the Company’s Board of Directors. Scott Davidson and Joseph Pesce are each managing directors of Great Point Partners, LLC, and were designated by Great Point Partners, LLC to serve as members of the Board. 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.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information contained in this prospectus may contain forward-looking statements. 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, and 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.
17
This prospectus covers the resale from time to time by the selling stockholders identified in the table below of:
• Up to 1,067,317 shares of our common stock issued under the terms of the August 2013 Exchange;
• Up to 7,513,372 shares of our common stock issuable upon the conversion of 2,987.0167 shares of Series 1 Convertible Preferred Stock issued under the terms of the August 2013 Exchange; and
• Up to 2,369,000 shares of our common stock issuable upon exercise of warrants issued under the terms of the August 2013 Exchange.
Pursuant to registration rights agreement executed in connection with the August 2013 Exchange, we have filed with the SEC a registration statement on Form S-1, of which this prospectus forms a part, under the Securities Act to register these resales. The selling stockholders identified in the table below may from time to time offer and sell under this prospectus any or all of the shares of common stock described under the column “Shares of Common Stock Being Offered in the Offering” in the table below.
The table below has been prepared based upon the information furnished to us by the selling stockholders. The selling stockholders identified below may have sold, transferred or otherwise disposed of some or all of their shares since the date on which the information in the following table is presented in transactions exempt from or not subject to the registration requirements of the Securities Act. Information concerning the selling stockholders may change from time to time and, if necessary, we will amend or supplement this prospectus accordingly. We cannot provide an estimate as to the number of shares of common stock that will be held by the selling stockholders upon termination of the offering covered by this prospectus because the selling stockholders may offer some or all of their shares of common stock under this prospectus.
The following table sets forth the name of each selling stockholder, the nature of any position, office or other material relationship, if any, which the selling stockholder has had, within the past three years, with us or with any of our predecessors or affiliates, and the number of shares of our common stock beneficially owned by the stockholder before this offering. The number of shares owned are those beneficially owned, as determined under the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose.
Under these rules, beneficial ownership includes any shares of common stock as to which a person has sole or shared voting power or investment power and any shares of common stock which the person has the right to acquire within 60 days through the exercise of any option, warrant or right, through conversion of any security or pursuant to the automatic termination of a power of attorney or revocation of a trust, discretionary account or similar arrangement. 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.
We have assumed all shares of common stock reflected on the table will be sold from time to time in the offering covered by this prospectus. Because the selling stockholders may offer all or any portions of the shares of common stock listed in the table below, no estimate can be given as to the amount of those shares of common stock covered by this prospectus that will be held by the selling stockholders upon the termination of the offering.
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(2) Shares of Common Stock Being Offered in this Offering consists of 285,323 shares of common stock issuable on conversion of Series 1 Convertible Preferred Stock and 78,773 shares of common stock issuable upon the exercise of warrants. Shares of Common Stock Underlying Convertible Securities Owned Before this Offering includes 72,076 shares of common stock not offered in this Offering issuable upon the conversion of Series 1 Convertible Preferred Stock and 36,038 shares of common stock not offered in this Offering issuable upon the exercise of warrants exercisable within 60 days of September 30, 2013.
(3) Shares of Common Stock Being Offered in this Offering consists of 713,449 shares of common stock issuable on conversion of Series 1 Convertible Preferred Stock and 196,973 shares of common stock issuable upon the exercise of warrants. Shares of Common Stock Underlying Convertible Securities Owned Before this Offering includes 163,597 shares of common stock not offered in this Offering issuable upon the conversion of Series 1 Convertible Preferred Stock and 81,799 shares of common stock not offered in this Offering issuable upon the exercise of warrants exercisable within 60 days of September 30, 2013.
(4) Shares of Common Stock Being Offered in this Offering consists of 38,672 shares of common stock issuable on conversion of Series 1 Convertible Preferred Stock and 10,677 shares of common stock issuable upon the exercise of warrants. Shares of Common Stock Underlying Convertible Securities Owned Before this Offering includes 9,769 shares of common stock not offered in this Offering issuable upon the conversion of Series 1 Convertible Preferred Stock and 4,885 shares of common stock not offered in this Offering issuable upon the exercise of warrants exercisable within 60 days of September 30, 2013.
(5) Shares of Common Stock Being Offered in this Offering consists of 19,338 shares of common stock issuable on conversion of Series 1 Convertible Preferred Stock and 5,339 shares of common stock issuable upon the exercise of warrants. Shares of Common Stock Underlying Convertible Securities Owned Before this Offering includes 4,885 shares of common stock not offered in this Offering issuable upon the conversion of Series 1 Convertible Preferred Stock and 2,443 shares of common stock not offered in this Offering issuable upon the exercise of warrants exercisable within 60 days of September 30, 2013.
(6) Shares of Common Stock Being Offered in this Offering consists of 702,185 shares of common stock issuable on conversion of Series 1 Convertible Preferred Stock and 193,863 shares of common stock issuable upon the exercise of warrants. Shares of Common Stock Underlying Convertible Securities Owned Before this Offering includes 177,380 shares of common stock not offered in this Offering issuable upon the conversion of Series 1 Convertible Preferred Stock and 88,690 shares of common stock not offered in this Offering issuable upon the exercise of warrants exercisable within 60 days of September 30, 2013.
(7) Shares of Common Stock Being Offered in this Offering consists of 404,399 shares of common stock issuable on conversion of Series 1 Convertible Preferred Stock and 111,649 shares of common stock issuable upon the exercise of warrants.
(8) Shares of Common Stock Being Offered in this Offering consists of 175,723 shares of common stock issuable on conversion of Series 1 Convertible Preferred Stock and 48,514 shares of common stock issuable upon the exercise of warrants.
20
(9) Shares of Common Stock Being Offered in this Offering consists of 56,175 shares of common stock issuable on conversion of Series 1 Convertible Preferred Stock and 15,509 shares of common stock issuable upon the exercise of warrants. Shares of Common Stock Underlying Convertible Securities Owned Before this Offering includes 14,190 shares of common stock not offered in this Offering issuable upon the conversion of Series 1 Convertible Preferred Stock and 7,095 shares of common stock not offered in this Offering issuable upon the exercise of warrants exercisable within 60 days of September 30, 2013. Dr. Jeffrey R. Jay, M.D. ("Dr. Jay") has voting control and investment power over the securities owned by the selling stockholder. Dr. Jay’s address is c/o Great Point Partners, LLC, 165 Mason Street, 3rd Floor, Greenwich, CT 06830. See also notes 10-12 and 24.
(10) Shares of Common Stock Being Offered in this Offering consists of 28,086 shares of common stock issuable on conversion of Series 1 Convertible Preferred Stock and 7,754 shares of common stock issuable upon the exercise of warrants. Shares of Common Stock Underlying Convertible Securities Owned Before this Offering includes 7,095 shares of common stock not offered in this Offering issuable upon the conversion of Series 1 Convertible Preferred Stock and 3,548 shares of common stock not offered in this Offering issuable upon the exercise of warrants exercisable within 60 days of September 30, 2013. Dr. Jay has voting control and investment power over the securities owned by the selling stockholder. Dr. Jay’s address is c/o Great Point Partners, LLC, 165 Mason Street, 3rd Floor, Greenwich, CT 06830. See also notes 9, 11, 12 and 24.
(11) Shares of Common Stock Being Offered in this Offering consists of 28,086 shares of common stock issuable on conversion of Series 1 Convertible Preferred Stock and 7,754 shares of common stock issuable upon the exercise of warrants. Shares of Common Stock Underlying Convertible Securities Owned Before this Offering includes 7,095 shares of common stock not offered in this Offering issuable upon the conversion of Series 1 Convertible Preferred Stock and 3,548 shares of common stock not offered in this Offering issuable upon the exercise of warrants exercisable within 60 days of September 30, 2013. Dr. Jay has voting control and investment power over the securities owned by the selling stockholder. Dr. Jay’s address is c/o Great Point Partners, LLC, 165 Mason Street, 3rd Floor, Greenwich, CT 06830. See also notes 9, 10, 12 and 24.
(12) Shares of Common Stock Being Offered in this Offering consists of 112,351 shares of common stock issuable on conversion of Series 1 Convertible Preferred Stock and 31,018 shares of common stock issuable upon the exercise of warrants. Shares of Common Stock Underlying Convertible Securities Owned Before this Offering includes 28,381 shares of common stock not offered in this Offering issuable upon the conversion of Series 1 Convertible Preferred Stock and 14,191 shares of common stock not offered in this Offering issuable upon the exercise of warrants exercisable within 60 days of September 30, 2013. Dr. Jay has voting control and investment power over the securities owned by the selling stockholder. Dr. Jay’s address is c/o Great Point Partners, LLC, 165 Mason Street, 3rd Floor, Greenwich, CT 06830. See also notes 9 -11 and 24.
(13) Shares of Common Stock Being Offered in this Offering consists of 70,217 shares of common stock and 19,386 shares of common stock issuable upon the exercise of warrants. Shares of Common Stock Underlying Convertible Securities Owned Before this Offering includes 12,500 shares of common stock not offered in this Offering issuable upon the exercise of warrants exercisable within 60 days of September 30, 2013. Paul Schimmel has voting control and investment power over the securities owned by the selling stockholder. Its address is 9822 la Jolla Farms Rd, La Jolla, CA 92037-1135.
(14) Shares of Common Stock Being Offered in this Offering consists of 883,488 shares of common stock issuable on conversion of Series 1 Convertible Preferred Stock and 243,918 shares of common stock issuable upon the exercise of warrants. Shares of Common Stock Underlying Convertible Securities Owned Before this Offering includes 198,050 shares of common stock not offered in this Offering issuable upon the conversion of Series 1 Convertible Preferred Stock and 99,025 shares of common stock not offered in this Offering issuable upon the exercise of warrants exercisable within 60 days of September 30, 2013. Deerfield Mgmt, L.P. is the general partner of the selling stockholder. Deerfield Management Company, L.P. is the investment manager of the selling stockholder. James E. Flynn, the sole member of the general partner of each of Deerfield Mgmt, L.P. and Deerfield Management Company, L.P., has the power to vote or dispose of the securities held by the selling stockholder. Its address is c/o Deerfield Management Company, L.P., 780 Third Avenue, 37th Fl, New York, NY 10017. See also notes 15, 16 and 17.
(15) Shares of Common Stock Being Offered in this Offering consists of 1,012,409 shares of common stock issuable on conversion of Series 1 Convertible Preferred Stock and 279,511 shares of common stock issuable upon the exercise of warrants. Shares of Common Stock Underlying Convertible Securities Owned Before this Offering includes 226,950 shares of common stock not offered in this Offering issuable upon the conversion of Series 1 Convertible Preferred Stock and 113,475 shares of common stock not offered in this Offering issuable upon the exercise of warrants exercisable within 60 days of September 30, 2013. Deerfield Mgmt, L.P. is the general partner of the selling stockholder. Deerfield Management Company, L.P. is the investment manager of the selling stockholder. James E. Flynn, the sole member of the general partner of each of Deerfield Mgmt, L.P. and Deerfield Management Company, L.P., has the power to vote or dispose of the securities held by the selling stockholder. Its address is c/o Deerfield Management Company, L.P., 780 Third Avenue, 37th Fl, New York, NY 10017. See also notes 14, 16 and 17.
21
(16) Shares of Common Stock Being Offered in this Offering consists of 739,400 shares of common stock issuable on conversion of Series 1 Convertible Preferred Stock and 204,137 shares of common stock issuable upon the exercise of warrants. Shares of Common Stock Underlying Convertible Securities Owned Before this Offering includes 233,325 shares of common stock not offered in this Offering issuable upon the conversion of Series 1 Convertible Preferred Stock and 116,663 shares of common stock not offered in this Offering issuable upon the exercise of warrants exercisable within 60 days of September 30, 2013. Deerfield Mgmt, L.P. is the general partner of the selling stockholder. Deerfield Management Company, L.P. is the investment manager of the selling stockholder. James E. Flynn, the sole member of the general partner of each of Deerfield Mgmt, L.P. and Deerfield Management Company, L.P., has the power to vote or dispose of the securities held by the selling stockholder. Its address is c/o Deerfield Management Company, L.P., 780 Third Avenue, 37th Fl, New York, NY 10017. See also notes 14, 15 and 17.
(17) Shares of Common Stock Being Offered in this Offering consists of 1,156,498 shares of common stock issuable on conversion of Series 1 Convertible Preferred Stock and 319,292 shares of common stock issuable upon the exercise of warrants. Shares of Common Stock Underlying Convertible Securities Owned Before this Offering includes 191,675 shares of common stock not offered in this Offering issuable upon the conversion of Series 1 Convertible Preferred Stock and 95,838 shares of common stock not offered in this Offering issuable upon the exercise of warrants exercisable within 60 days of September 30, 2013. Deerfield Mgmt, L.P. is the general partner of the selling stockholder. Deerfield Management Company, L.P. is the investment manager of the selling stockholder. James E. Flynn, the sole member of the general partner of each of Deerfield Mgmt, L.P. and Deerfield Management Company, L.P., has the power to vote or dispose of the securities held by the selling stockholder. Its address is c/o Deerfield Management Company, L.P., 780 Third Avenue, 37th Fl, New York, NY 10017. See also notes 14, 15 and 16.
(18) Shares of Common Stock Being Offered in this Offering consists of 702,184 shares of common stock and 193,863 shares of common stock issuable upon the exercise of warrants. Shares of Common Stock Underlying Convertible Securities Owned Before this Offering includes 13,750 shares of common stock not offered in this Offering issuable upon the exercise of warrants exercisable within 60 days of September 30, 2013. Dominique Sémon has voting control and investment power over the securities owned by the selling stockholder. Its address is 424 West 33rd Street, Suite 520, New York, NY 10001.
(19) Shares of Common Stock Being Offered in this Offering consists of 112,349 shares of common stock and 31,018 shares of common stock issuable upon the exercise of warrants. Shares of Common Stock Owned Before this Offering includes shares held by Mr. Shivji and his affiliates. Shares of Common Stock Underlying Convertible Securities Owned Before this Offering includes 38,724 shares of common stock not offered in this Offering issuable upon the exercise of warrants and options held by Mr. Shivji and his affiliates exercisable within 60 days of September 30, 2013. Alnoor Shivji, our Chairman of the Board, has voting control and investment power over the securities owned by The Shivji Family Trust dated June 12, 2000.
(20) Shares of Common Stock Being Offered in this Offering consists of 70,218 shares of common stock and 19,386 shares of common stock issuable upon the exercise of warrants. Shares of Common Stock Underlying Convertible Securities Owned Before this Offering includes 35,922 shares of common stock not offered in this Offering issuable upon the exercise of warrants and options held by Mr. Coradini and exercisable within 60 days of September 30, 2013. Mr. Coradini is a member of our board of directors.
(21) Shares of Common Stock Being Offered in this Offering consists of 28,087 shares of common stock and 7,755 shares of common stock issuable upon the exercise of warrants. Shares of Common Stock Underlying Convertible Securities Owned Before this Offering includes 6,445 shares of common stock not offered in this Offering issuable upon the exercise of warrants and options held by Mr. Kanter and exercisable within 60 days of September 30, 2013. Mr. Kanter is a member of our board of directors. See also note 22.
(22) Shares of Common Stock Being Offered in this Offering consists of 14,044 shares of common stock and 3,877 shares of common stock issuable upon the exercise of warrants. Shares of Common Stock Underlying Convertible Securities Owned Before this Offering includes 12,500 shares of common stock not offered in this Offering issuable upon the exercise of warrants held by The Kanter Family Foundation and exercisable within 60 days of September 30, 2013. Mr. Kanter, a member of our board of directors, has voting control and investment power over, but disclaims beneficial ownership of, the securities owned by The Kanter Family Foundation. See also note 21.
(23) Shares of Common Stock Being Offered in this Offering consists of 70,218 shares of common stock and 19,386 shares of common stock issuable upon the exercise of warrants. Shares of Common Stock Underlying Convertible Securities Owned Before this Offering includes 7,426 shares of common stock not offered in this Offering issuable upon the exercise of warrants exercisable within 60 days of September 30, 2013. Helen M. Carroll and Linda G. Williams share voting control and investment power over the securities owned by the selling stockholder. Its address is Goodman’s Bay Corporate Centre, Ground Floor, West Bay Street, P.O. Box N-3933, Nassau, Bahamas, Attention: Helen M. Carroll.
(24) Shares held by funds and certain managed accounts with respect to which Great Point Partners, LLC acts as investment manager (the “GPP Investors”). Each of Dr. Jay, as senior managing member of Great Point Partners, LLC, and Mr. David Kroin, as special managing member of Great Point Partners, LLC, has voting and investment power with respect to such shares. Notwithstanding the foregoing, Great Point Partners, LLC, Dr. Jay and Mr. Kroin disclaim beneficial ownership of any such shares, except to the extent of their respective pecuniary interests. The selling stockholder’s address is c/o Great Point Partners, LLC, 165 Mason Street, 3rd Floor, Greenwich, CT 06830. Pursuant to the Exchange Agreement entered into by the Company with investors (“Investors”) in connection with the August 2013 Exchange, for as long as at least 50% of Series 1 Convertible Preferred Stock issued in connection with the August 2013 Exchange and/or shares of common stock issued upon conversion thereof remain outstanding, the Company and each Investor who is a current member of the Company’s management or board of directors is required to use reasonable best efforts, including with respect to such Investors, by voting (or consenting with respect thereto) any shares of common stock then owned by them accordingly, to ensure that two individuals, as may be designated by Great Point Partners, LLC from time to time, are elected as members of the Company’s board of directors. Scott Davidson and Joseph Pesce are each managing directors of Great Point Partners, LLC, and were designated by Great Point Partners, LLC to serve as members of the Board.
22
DETERMINATION OF OFFERING PRICE
The selling stockholders will determine at what price they may sell the shares of common stock offered by this prospectus, and such sales may be made at prevailing market prices, or at privately negotiated prices.
The selling stockholders and any of their pledgees, donees, transferees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling stockholders may use any one or more of the following methods when selling shares:
• ordinary brokerage transactions and transactions in which the broker-dealer solicits investors;
• block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
• purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
• an exchange distribution in accordance with the rules of the applicable exchange;
• privately negotiated transactions;
• to cover short sales made after the date that this registration statement is declared effective by the SEC;
• broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;
• through the distribution of common stock by any selling stockholder to its partners, members or stockholders;
• any other method permitted pursuant to applicable law; and
• a combination of any such methods of sale.
The selling stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the selling stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The compensation of any particular broker-dealer may be in excess of what is customary in the types of transactions involved.
The selling stockholders may from time to time pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell shares of common stock from time to time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus.
Upon a selling stockholder’s notification to us that any material arrangement has been entered into with a broker-dealer for the sale of such stockholder’s common stock through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer, a supplement to this prospectus will be filed, if required, pursuant to Rule 424(b) under the Securities Act disclosing (i) the name of each such selling stockholder and of the participating broker-dealer(s), (ii) the number of shares involved, (iii) the price at which such shares of common stock were sold, (iv) the commissions paid or discounts or concessions allowed to such broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus, and (vi) other facts material to the transaction. In addition, upon our being notified in writing by a selling stockholder that a donee or pledgee intends to sell more than 500 shares of common stock, a supplement to this prospectus will be filed if then required in accordance with applicable securities law.
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The selling stockholders also may transfer the shares of common stock in other circumstances, in which case the donees, assignees, transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus and may sell the shares of common stock from time to time under this prospectus after we have filed any necessary supplements to this prospectus under Rule 424(b), or other applicable provisions of the Securities Act, supplementing or amending the list of selling stockholders to include such donee, assignee, transferee, pledgee, or other successor-in-interest as a selling stockholder under this prospectus.
In the event that the selling stockholders are deemed to be “underwriters,” any broker-dealers or agents that are involved in selling the shares will be deemed to be “underwriters” within the meaning of the Securities Act, in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Discounts, concessions, commissions and similar selling expenses, if any, that can be attributed to the sale of the shares of common stock will be paid by the selling stockholder and/or the purchasers. Each selling stockholder has represented and warranted to us that it acquired the securities subject to this registration statement in the ordinary course of such selling stockholder’s business and, at the time of its purchase of such securities such selling stockholder had no agreements or understandings, directly or indirectly, with any person to distribute any such securities.
If a selling stockholder uses this prospectus for any sale of the common stock, it will be subject to any applicable prospectus delivery requirements of the Securities Act. The selling stockholders will be responsible to comply with the applicable provisions of the Securities Act and the Exchange Act, and the rules and regulations thereunder promulgated, including, without limitation, Regulation M, as applicable to such selling stockholders in connection with resales of their respective shares under this registration statement.
We have agreed with the selling stockholders to keep this registration statement effective until all of the shares covered by this registration statement have been sold, or may be sold without volume or manner-of-sale restrictions pursuant to Rule 144 promulgated under the Securities Act, without the requirement for us to be in compliance with the current public information requirement under Rule 144.
We are required to pay all fees and expenses incident to the registration of the shares, but we will not receive any proceeds from the sale of the common stock. We have agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
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We will not receive proceeds from the sale of common stock under this prospectus. We will, however, receive approximately $6.2 million from the selling stockholders if they exercise their warrants in full, on a cash basis, which we will use for working capital and general corporate purposes. The warrant holders may exercise their warrants at any time until their expiration, as further described under “Description of Securities.” Because the warrant holders may exercise the warrants in their own discretion, if at all, we cannot plan on specific uses of proceeds beyond application of proceeds to general corporate purposes. We have agreed to bear the expenses (other than any underwriting discounts or commissions or agent’s commissions) in connection with the registration of the common stock being offered hereby by the selling stockholders.
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK AND RELATED MATTERS
Trading Information
Our common stock is currently quoted on the OTCQB Marketplace maintained by the NASD under the symbol WGBS.
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 closing bid prices for our common stock on a post-reverse-split basis for the fiscal quarters indicated as reported on the OTCQB Marketplace (previously the OTC Bulletin Board). The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
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| High |
| Low |
| 2011 |
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| First Quarter ended March 31, 2011 |
| 129.21 |
| 83.49 |
| Second Quarter ended June 30, 2011 |
| 96.41 |
| 45.72 |
| Third Quarter ended September 30, 2011 |
| 66.59 |
| 27.83 |
| Fourth Quarter ended December 31, 2011 |
| 30.81 |
| 9.94 |
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| 2012 |
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| First Quarter ended March 31, 2012 |
| 21.87 |
| 10.93 |
| Second Quarter ended June 30, 2012 |
| 14.91 |
| 6.96 |
| Third Quarter ended September 30, 2012 |
| 9.94 |
| 4.97 |
| Fourth Quarter ended December 31, 2012 |
| 7.95 |
| 1.99 |
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| 2013 |
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|
|
|
| First Quarter ended March 31, 2013 |
| 6.96 |
| 1.99 |
| Second Quarter ended June 30, 2013 |
| 5.96 |
| 2.98 |
| Third Quarter ended September 30, 2013 |
| 3.98 |
| 1.75 |
Our common stock is thinly traded and any reported sale prices may not be a true market-based valuation of our common stock. On October 7, 2013, the closing bid price of our common stock, as reported on the OTCQB Marketplace, was $1.85.
As of October 7, 2013, there were 349 holders of record of our common stock.
Trades in our common stock may be subject to Rule 15g-9 under the Exchange Act, which imposes requirements on broker/dealers who sell securities subject to the rule to persons other than established customers and accredited investors. For transactions covered by the rule, broker/dealers must make a special suitability determination for purchasers of the securities and receive the purchaser’s written agreement to the transaction before the sale.
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The SEC also has rules that regulate broker/dealer practices in connection with transactions in “penny stocks.” Penny stocks generally are equity securities with a price of less than $5.00 (other than securities listed on some national exchanges, provided that the current price and volume information with respect to transactions in that security is provided by the applicable exchange or system). The penny stock rules require a broker/dealer, before effecting a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker/dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker/dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker/dealer and salesperson compensation information, must be given to the customer orally or in writing before effecting the transaction, and must be given to the customer in writing before or with the customer’s confirmation. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for shares of 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.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information regarding our compensation plans under which equity securities are authorized for issuance to our employees on a post-reverse-split basis as of December 31, 2012:
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| Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) |
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| Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) |
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| Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) |
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| Plan Category |
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| Equity compensation plans approved by security holders |
|
| 114,896 |
| $ | 41.67 |
| $ | 29,503 |
|
| Equity compensation plans not approved by security holders |
|
| — |
|
| — |
|
| — |
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| Total |
|
| 114,896 |
| $ | 41.67 |
| $ | 29,503 |
|
Additional information regarding our equity compensation plans is provided in Note 8 to our consolidated financial statements on pages F-16 to F-18 of this prospectus.
26
Data is included in this section is extracted from the previously filed financial statements included on pages F-1 to F-43 of this prospectus as adjusted to reflect the impact of the 1-for-99.39 reverse stock split effected on August 27, 2013.
Selected audited financial information for fiscal 2012 and 2011 is as follows:
Consolidated Statements of Operations
|
|
| Year Ended December 31, |
| ||||
|
|
| 2012 |
| 2011 |
| ||
|
|
|
|
|
|
|
|
|
| Revenue |
| $ | 586,176 |
| $ | 522,931 |
|
|
|
|
|
|
|
|
|
|
| Cost of revenue |
|
| 420,877 |
|
| 1,401,904 |
|
|
|
|
|
|
|
|
|
|
| Gross profit (loss) |
|
| 165,299 |
|
| (878,973) |
|
|
|
|
|
|
|
|
|
|
| Operating expenses: |
|
|
|
|
|
|
|
| Sales and marketing |
|
| 791,915 |
|
| 3,311,433 |
|
| Research and development |
|
| 6,161,548 |
|
| 8,290,550 |
|
| General and administrative |
|
| 2,977,812 |
|
| 6,221,884 |
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
| 9,931,275 |
|
| 17,823,867 |
|
|
|
|
|
|
|
|
|
|
| Operating loss |
|
| (9,765,976) |
|
| (18,702,840) |
|
|
|
|
|
|
|
|
|
|
| Other income and (expenses): |
|
|
|
|
|
|
|
| Interest income |
|
| 7,420 |
|
| 15,218 |
|
| Interest expense (including excess debt discount of $2,255,074 expensed as interest in the year ended December 31, 2011) |
|
| (2,082,558) |
|
| (3,336,217) |
|
| Gain on revaluation of derivative liabilities, net |
|
| 3,759,146 |
|
| 9,271,985 |
|
| Liquidated damages for late S-1 registration |
|
| — |
|
| (532,161) |
|
| Miscellaneous income (expense) |
|
| (116,147) |
|
| 166,184 |
|
|
|
|
|
|
|
|
|
|
| Total other income and (expenses) |
|
| 1,567,861 |
|
| 5,585,009 |
|
|
|
|
|
|
|
|
|
|
| Net loss before provision for income taxes |
|
| (8,198,115) |
|
| (13,117,831) |
|
|
|
|
|
|
|
|
|
|
| Provision for income taxes |
|
| (21,453) |
|
| 27,247 |
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
| (8,176,662) |
|
| (13,145,078) |
|
|
|
|
|
|
|
|
|
|
| Accretion on Series A and B convertible preference shares of subsidiary associated with premium |
|
| — |
|
| 15,242 |
|
| Accretion on Series A-1 Convertible Preferred Stock associated with beneficial conversion feature |
|
| — |
|
| (9,250,009) |
|
| Series A-1 preferred dividend |
|
| (801,534) |
|
| (458,208) |
|
|
|
|
|
|
|
|
|
|
| Net loss attributable to common stockholders |
| $ | (8,978,196) |
| $ | (22,838,053) |
|
|
|
|
|
|
|
|
|
|
| Net loss per share - basic and diluted (1) |
| $ | (21.42) |
| $ | (54.74) |
|
|
|
|
|
|
|
|
|
|
| Shares used to compute net loss per share - basic and diluted (1) |
|
| 419,165 |
|
| 417,104 |
|
(1) Adjusted from the previously filed financial statements to reflect the impact of the 1-for-99.39 reverse stock split effected on August 27, 2013.
Selected unaudited financial information for the three and six months ended June 30, 2013 and 2012, is as follows:
Condensed Consolidated Statements of Operations (Unaudited)
|
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| ||||||||
|
|
| 2013 |
| 2012 |
| 2013 |
| 2012 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Product |
| $ | 121,248 |
| $ | 20,158 |
| $ | 216,402 |
| $ | 93,391 |
|
| License and royalty |
|
| 125,000 |
|
| — |
|
| 208,333 |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenue |
|
| 246,248 |
|
| 20,158 |
|
| 424,735 |
|
| 93,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of product revenue |
|
| 76,780 |
|
| 10,590 |
|
| 142,368 |
|
| 100,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit (loss) |
|
| 169,468 |
|
| 9,568 |
|
| 282,367 |
|
| (7,604) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Sales and marketing |
|
| 609,296 |
|
| 158,278 |
|
| 951,927 |
|
| 412,831 |
|
| Research and development |
|
| 1,263,267 |
|
| 1,606,860 |
|
| 2,665,347 |
|
| 3,617,724 |
|
| General and administrative |
|
| 564,770 |
|
| 707,837 |
|
| 1,225,418 |
|
| 1,884,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
| 2,437,333 |
|
| 2,472,975 |
|
| 4,842,692 |
|
| 5,914,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating loss |
|
| (2,267,865) |
|
| (2,463,407) |
|
| (4,560,325) |
|
| (5,922,429) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other income and (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest income |
|
| 892 |
|
| 1,277 |
|
| 2,087 |
|
| 5,559 |
|
| Interest expense |
|
| (1,092,091) |
|
| (452,512) |
|
| (1,972,629) |
|
| (815,567) |
|
| Gain (loss) on revaluation of derivative liabilities, net |
|
| 115,237 |
|
| 1,485,470 |
|
| (478,480) |
|
| 2,562,191 |
|
| Miscellaneous income |
|
| 79,621 |
|
| 172,354 |
|
| 67,343 |
|
| 22,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total other income and (expenses) |
|
| (896,341) |
|
| 1,206,589 |
|
| (2,381,679) |
|
| 1,774,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss before provision for income taxes |
|
| (3,164,206) |
|
| (1,256,818) |
|
| (6,942,004) |
|
| (4,147,438) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Provision for income taxes |
|
| (1,051) |
|
| 12,812 |
|
| 2,661 |
|
| 26,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
| (3,163,155) |
|
| (1,269,630) |
|
| (6,944,665) |
|
| (4,174,325) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accretion on Series A and B convertible preference shares of subsidiary associated with premium |
|
| (2,489,899) |
|
| — |
|
| (2,489,899) |
|
| — |
|
| Series A-1 preferred dividend |
|
| (209,268) |
|
| (199,124) |
|
| (415,952) |
|
| (395,789) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss attributable to common stockholders |
| $ | (5,862,322) |
| $ | (1,468,754) |
| $ | (9,850,516) |
| $ | (4,570,114) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss per share – basic and diluted (1) |
| $ | (13.98) |
| $ | (3.50) |
| $ | (23.49) |
| $ | (10.91) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Shares used to compute net loss per share – basic and diluted (1) |
|
| 419,367 |
|
| 419,122 |
|
| 419,366 |
|
| 419,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Adjusted from the previously filed financial statements to reflect the impact of the 1-for-99.39 reverse stock split effected on August 27, 2013.
28
Selected summarized unaudited quarterly financial information for fiscal 2012 and 2011 is as follows:
|
|
| Year Ended December 31, 2012 |
| ||||||||||
|
|
| First |
| Second |
| Third |
| Fourth |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenue |
| $ | 73,233 |
| $ | 20,158 |
| $ | 176,608 |
| $ | 316,177 |
|
| Gross profit (loss) |
| $ | (17,172 | ) | $ | 9,568 |
| $ | 32,281 |
| $ | 140,622 |
|
| Net gains (losses) on derivative revaluations |
| $ | 1,076,721 |
| $ | 1,485,470 |
| $ | (385,209 | ) | $ | 1,582,164 |
|
| Net loss |
| $ | (2,904,695 | ) | $ | (1,269,630 | ) | $ | (2,967,580 | ) | $ | (1,034,757 | ) |
| Net loss attributable to common stockholders |
| $ | (3,101,360 | ) | $ | (1,468,754 | ) | $ | (3,169,192 | ) | $ | (1,238,890 | ) |
| Net loss per share – basic and diluted (1) |
| $ | (7.40 | ) | $ | (3.50 | ) | $ | (7.56 | ) | $ | (2.95 | ) |
|
|
| Year Ended December 31, 2011 |
| ||||||||||
|
|
| First |
| Second |
| Third |
| Fourth |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenue |
| $ | 351,032 |
| $ | 44,905 |
| $ | 89,088 |
| $ | 37,906 |
|
| Gross profit (loss) |
| $ | 210,083 |
| $ | 30,963 |
| $ | (403,158 | ) | $ | (716,861 | ) |
| Net gains (losses) on derivative revaluations |
| $ | 381,829 |
| $ | (1,619,723 | ) | $ | 8,624,976 |
| $ | 1,884,903 |
|
| Net income (loss) |
| $ | (3,803,829 | ) | $ | (9,209,548 | ) | $ | 3,580,921 |
| $ | (3,712,622 | ) |
| Net income (loss) attributable to common stockholders |
| $ | (3,867,949 | ) | $ | (18,590,846 | ) | $ | 3,222,282 |
| $ | (3,601,540 | ) |
| Net income (loss) per share – basic (1) |
| $ | (9.34 | ) | $ | (44.63 | ) | $ | 7.71 |
| $ | (8.59 | ) |
| Net income (loss) per share – diluted (1) |
| $ | (9.34 | ) | $ | (44.63 | ) | $ | 3.34 |
| $ | (8.59 | ) |
(1) Adjusted from the previously filed financial statements to reflect the impact of the 1-for-99.39 reverse stock split effected on August 27, 2013.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
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 sales of systems for gene expression quantification, genotyping and stem cell research for the life sciences and pharmaceutical drug discovery industries. Most recently, the Company’s R&D efforts have been concentrated on the commercialization of the SmartChip Target Enrichment System. 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 and service projects, 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 our operating results are not a good indicator of future performance.
29
Table of Contents
Results of Operations
Three and Six Months Ended June 30, 2013 Compared to Three and Six Months Ended June 30, 2012
The following table presents selected items in the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2013 and 2012, respectively:
|
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| ||||||||
|
|
| 2013 |
| 2012 |
| 2013 |
| 2012 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Product |
| $ | 121,248 |
| $ | 20,158 |
| $ | 216,402 |
| $ | 93,391 |
|
| License and royalty |
|
| 125,000 |
|
| — |
|
| 208,333 |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenue |
|
| 246,248 |
|
| 20,158 |
|
| 424,735 |
|
| 93,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of product revenue |
|
| 76,780 |
|
| 10,590 |
|
| 142,368 |
|
| 100,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit (loss) |
|
| 169,468 |
|
| 9,568 |
|
| 282,367 |
|
| (7,604 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Sales and marketing |
|
| 609,296 |
|
| 158,278 |
|
| 951,927 |
|
| 412,831 |
|
| Research and development |
|
| 1,263,267 |
|
| 1,606,860 |
|
| 2,665,347 |
|
| 3,617,724 |
|
| General and administrative |
|
| 564,770 |
|
| 707,837 |
|
| 1,225,418 |
|
| 1,884,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
| 2,437,333 |
|
| 2,472,975 |
|
| 4,842,692 |
|
| 5,914,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating loss |
|
| (2,267,865 | ) |
| (2,463,407 | ) |
| (4,560,325 | ) |
| (5,922,429 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other income and (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest income |
|
| 892 |
|
| 1,277 |
|
| 2,087 |
|
| 5,559 |
|
| Interest expense |
|
| (1,092,091 | ) |
| (452,512 | ) |
| (1,972,629 | ) |
| (815,567 | ) |
| Gain (loss) on revaluation of derivative liabilities, net |
|
| 115,237 |
|
| 1,485,470 |
|
| (478,480 | ) |
| 2,562,191 |
|
| Miscellaneous income |
|
| 79,621 |
|
| 172,354 |
|
| 67,343 |
|
| 22,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total other income and (expenses) |
|
| (896,341 | ) |
| 1,206,589 |
|
| (2,381,679 | ) |
| 1,774,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss before provision for income taxes |
|
| (3,164,206 | ) |
| (1,256,818 | ) |
| (6,942,004 | ) |
| (4,147,438 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Provision for income taxes |
|
| (1,051 | ) |
| 12,812 |
|
| 2,661 |
|
| 26,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
| $ | (3,163,155 | ) | $ | (1,269,630 | ) | $ | (6,944,665 | ) | $ | (4,174,325 | ) |
30
Product Revenue
The following table presents our product revenue for the three and six months ended June 30, 2013 and 2012, respectively:
| Three Months Ended June 30, |
|
| Six Months Ended June 30, | ||||||||||||
| 2013 |
| 2012 |
| % Change |
|
| 2013 |
| 2012 |
| % Change | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 121,248 |
| $ | 20,158 |
| 501% |
|
| $ | 216,402 |
| $ | 93,391 |
| 132% |
For the three months ended June 30, 2013, product revenue increased by $101,090, or 501%, as compared to the three months ended June 30, 2012. The increase is primarily due to the partial recognition of revenue for the sale of a SmartChip Real-Time PCR System in the 2013 period, which accounted for 62% of our product revenue for the quarter, compared to none in the 2012 period. There was also an increase in sales of our Real-Time PCR Chip panels, accounting for 31% of product revenue in the 2013 period compared to 19% in the 2012 period, offset by a small decrease in other product revenue in the 2013 period.
For the six months ended June 30, 2013, product revenue increased by $123,011, or 132%, as compared to the six months ended June 30, 2012. The increase is primarily due to the recognition of revenue for the sale of a SmartChip Real-Time PCR System in the 2013 period, which accounted for 73% of our year to date product revenue, compared to none in the 2012 period. This was offset by small decreases in sales of our Real-Time PCR Chip panels and in other product revenue, and the absence of any SmartSlide sales, which represented 16% of revenue in the 2012 period.
Future product revenue will depend on market acceptance of our new open format SmartChip products which were launched in July 2012 and our SmartChip target enrichment products launched in April 2013.
License and Royalty Revenue
The following table presents our license and royalty revenue for the three and six months ended June 30, 2013 and 2012, respectively:
| Three Months Ended June 30, |
|
| Six Months Ended June 30, | ||||||||||||
| 2013 |
| 2012 |
| % Change |
|
| 2013 |
| 2012 |
| % Change | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 125,000 |
| $ | — |
| N/A |
|
| $ | 208,333 |
| $ | — |
| N/A |
For the three and six months ended June 30, 2013, license and royalty revenue was $125,000 and $208,333, respectively, as compared to none in the six months ended June 30, 2012. This revenue was generated by an agreement signed in 2013. Future license revenue is expected to be not less than $125,000 per quarter in the near future.
Cost of Product Revenue
The following table presents the cost of product revenue for the three and six months ended June 30, 2013 and 2012, respectively:
| Three Months Ended June 30, |
|
| Six Months Ended June 30, | ||||||||||||
| 2013 |
| 2012 |
| % Change |
|
| 2013 |
| 2012 |
| % Change | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 76,780 |
| $ | 10,590 |
| 625% |
|
| $ | 142,368 |
| $ | 100,995 |
| 41% |
Cost of product revenue includes the cost of products paid to third party vendors, raw materials, labor and overhead for products manufactured internally, and reserves for warranty and inventory obsolescence.
For the three months ended June 30, 2013, cost of revenue increased by $66,190, or 625%, as compared to the three months ended June 30, 2012. The increase related primarily to the increase in product revenue and an increase in the provision for excess inventory in the 2013 period.
For the six months ended June 30, 2013, cost of revenue increased by $41,373, or 41%, as compared to the six months ended June 30, 2012. The increase related primarily to the increase in product revenue, offset by added provisions for excess inventory in the 2012 period.
31
Sales and Marketing
The following table presents sales and marketing expenses for the three and six months ended June 30, 2013 and 2012, respectively:
| Three Months Ended June 30, |
|
| Six Months Ended June 30, | ||||||||||||
| 2013 |
| 2012 |
| % Change |
|
| 2013 |
| 2012 |
| % Change | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 609,296 |
| $ | 158,278 |
| 285% |
|
| $ | 951,927 |
| $ | 412,831 |
| 131% |
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, 2013, sales and marketing expenses increased by $451,018, or 285%, as compared to the three months ended June 30, 2012. The increase resulted primarily from increases in headcount and the scale-up of sales and marketing activities which had been scaled back in the 2012 period.
For the six months ended June 30, 2013, sales and marketing expenses increased by $539,096, or 131%, as compared to the six months ended June 30, 2012. The increase resulted primarily from increases in headcount and the scale-up of sales and marketing activities.
We expect sales and marketing expenses will continue to increase during 2013 as we build our sales and marketing headcount and activities to commercialize our products.
Research and Development
The following table presents research and development expense for the three and six months ended June 30, 2013 and 2012, respectively:
| Three Months Ended June 30, |
|
| Six Months Ended June 30, | ||||||||||||
| 2013 |
| 2012 |
| % Change |
|
| 2013 |
| 2012 |
| % Change | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 1,263,267 |
| $ | 1,606,860 |
| (21)% |
|
| $ | 2,665,347 |
| $ | 3,617,724 |
| (26)% |
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, 2013, research and development expenses decreased by $343,593, or 21%, as compared to the three months ended June 30, 2012. The decrease resulted primarily from a decrease in headcount, the absence of a one-time expense for severance costs for a reduction in force in April 2012 and reductions in the costs of depreciation and expensed materials and reagents.
For the six months ended June 30, 2013, research and development expenses decreased $952,377, or 26%, as compared to the six months ended June 30, 2012. The decrease resulted primarily from a significant decrease in headcount in April 2012 and reductions in the costs of depreciation and expensed materials and reagents.
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.
32
General and Administrative
The following table presents general and administrative expenses for the three and six months ended June 30, 2013 and 2012, respectively:
| Three Months Ended June 30, |
|
| Six Months Ended June 30, | ||||||||||||
| 2013 |
| 2012 |
| % Change |
|
| 2013 |
| 2012 |
| % Change | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 564,770 |
| $ | 707,837 |
| (20)% |
|
| $ | 1,225,418 |
| $ | 1,884,270 |
| (35)% |
General and administrative expenses consist primarily of personnel costs for finance, human resources and general management, as well as professional fees, such as expenses for legal and accounting services.
For the three months ended June 30, 2013, general and administrative expenses decreased $143,067, or 20%, as compared to the three months ended June 30, 2012. The decrease resulted primarily from decreases in personnel-related costs and professional fees.
For the six months ended June 30, 2013, general and administrative expenses decreased $658,852, or 35%, as compared to the six months ended June 30, 2012. The decrease resulted primarily from decreases in headcount and related personnel costs, professional fees, board costs, recruitment costs and the absence of a one-time expense for severance costs related to the termination of our former Chief Operating Officer and Chief Financial Officer in March 2012.
We expect our general and administrative expenses for the remainder of 2013 to remain at a similar level to that of the first six months, although they may be adversely affected by legal and other professional services relating to fundraising activities.
Interest Income
The following table presents interest income for the three and six months ended June 30, 2013 and 2012, respectively:
| Three Months Ended June 30, |
|
| Six Months Ended June 30, | ||||||||||||
| 2013 |
| 2012 |
| % Change |
|
| 2013 |
| 2012 |
| % Change | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 892 |
| $ | 1,277 |
| (30)% |
|
| $ | 2,087 |
| $ | 5,559 |
| (62)% |
The interest income is solely earned on cash balances held in interest-bearing bank accounts.
For the three months ended June 30, 2013, interest income decreased by $385, or 30%, as compared to the three months ended June 30, 2012. For the six months ended June 30, 2013, interest income decreased by $3,472, or 62%, as compared to the six months ended June 30, 2012. The decrease in both periods was mainly due to a decrease in the average cash invested in interest-bearing accounts.
Interest Expense
The following table presents interest expense for the three and six months ended June 30, 2013 and 2012, respectively:
| Three Months Ended June 30, |
|
| Six Months Ended June 30, | ||||||||||||
| 2013 |
| 2012 |
| % Change |
|
| 2013 |
| 2012 |
| % Change | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 1,092,091 |
| $ | 452,512 |
| 141% |
|
| $ | 1,972,629 |
| $ | 815,567 |
| 142% |
For the three months ended June 30, 2013, interest expense increased $639,579, or 141%, as compared to the three months ended June 30, 2012. For the six months ended June 30, 2013, interest expense increased $1,157,062, or 142%, as compared to the six months ended June 30, 2012. The increase in both periods was due to higher charges for 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 the May 2011 Private Placement. These are amortized using the effective yield method, which weights the interest charges towards the latter stages of the contractual term of the debt.
33
Gain (loss) on Revaluation of Derivative Liabilities, Net
The following table represents the gain (loss) on revaluation of derivative liabilities, net for the three and six months ended June 30, 2013 and 2012, respectively:
| Three Months Ended June 30, |
|
| Six Months Ended June 30, | ||||||||||||
| 2013 |
| 2012 |
| % Change |
|
| 2013 |
| 2012 |
| % Change | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 115,237 |
| $ | 1,485,470 |
| (92)% |
|
| $ | (478,480) |
| $ | 2,562,191 |
| N/A |
Our derivative liabilities arise due to the variable number of shares of our common stock that may be issued upon the exercise of those warrants with certain anti-dilution protection, upon the exchange of Series A and Series B CPS of our Malaysian subsidiary, and under the conversion element of our CPNs.
The net gain from revaluation of derivative liabilities for the three months ended June 30, 2013, was $115,237, compared to a net gain of $1,485,470 for the three months ended June 30, 2012. The net loss from revaluation of derivative liabilities for the six months ended June 30, 2013, was $478,480, compared to a net gain of $2,562,191 for the six months ended June 30, 2012. Gains and losses are directly attributable to revaluations of all of our derivative liabilities 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 $3.98 on June 30, 2013, compared to $5.96 on March 31, 2013, $2.98 on December 31, 2012, $6.96 on June 30, 2012, $14.91 on March 31, 2012, and $15.90 on December 31, 2011. Further, due to the short weighted average expected remaining term of the CPNs, the related liability declined by more than 99% in the six months ended June 30, 2013.
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
The following table presents miscellaneous income for the three and six months ended June 30, 2013 and 2012, respectively:
| Three Months Ended June 30, |
|
| Six Months Ended June 30, | ||||||||||||
| 2013 |
| 2012 |
| % Change |
|
| 2013 |
| 2012 |
| % Change | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 79,621 |
| $ | 172,354 |
| (54)% |
|
| $ | 67,343 |
| $ | 22,808 |
| 195% |
For the three months ended June 30, 2013, we recorded miscellaneous income of $79,621, compared to income of $172,354 for the three months ended June 30, 2012. For the six months ended June 30, 2013, we recorded miscellaneous income of $67,343, compared to income of $22,808 for the six months ended June 30, 2012. Miscellaneous income or expense is the result of net foreign currency exchange gains and losses, mainly in our Malaysian subsidiary, WGBM, principally due to revaluation of the inter-company loan account at the balance sheet date. WGBM presently has a net receivable on its dollar denominated balances, so if the value of the Malaysian Ringgit decreases against the dollar, income is recorded, whereas if it increases against the dollar, an expense is recorded. Foreign currency exchange gains and losses also arise on our subsidiary in Luxembourg, and on U.S. expenses denominated in foreign currencies.
Provision for income taxes
The following table presents the provision for income taxes for the three and six months ended June 30, 2013 and 2012, respectively:
| Three Months Ended June 30, |
|
| Six Months Ended June 30, | ||||||||||||
| 2013 |
| 2012 |
| % Change |
|
| 2013 |
| 2012 |
| % Change | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (1,051) |
| $ | 12,812 |
| N/A |
|
| $ | 2,661 |
| $ | 26,887 |
| (90)% |
For the three and six months ended June 30, 2013, we recorded a credit of $1,051 and a charge of $2,661, respectively, for U.S. state income taxes. For the three and six months ended June 30, 2012, we recorded a charge for income taxes of $12,812 and $26,887, respectively, being an interim estimate of Malaysian taxes payable on interest income, mostly arising on its loan to WaferGen Bio-systems, Inc., plus U.S. state taxes. The Company has provided a full valuation allowance against its net deferred tax assets.
34
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
The following table presents selected items in our condensed consolidated statements of operations for the years ended December 31, 2012 and 2011, respectively:
|
|
| Year Ended December 31, |
| ||||
|
|
| 2012 |
| 2011 |
| ||
|
|
|
|
|
|
|
|
|
| Revenue |
| $ | 586,176 |
| $ | 522,931 |
|
|
|
|
|
|
|
|
|
|
| Cost of revenue |
|
| 420,877 |
|
| 1,401,904 |
|
|
|
|
|
|
|
|
|
|
| Gross profit (loss) |
|
| 165,299 |
|
| (878,973 | ) |
|
|
|
|
|
|
|
|
|
| Operating expenses: |
|
|
|
|
|
|
|
| Sales and marketing |
|
| 791,915 |
|
| 3,311,433 |
|
| Research and development |
|
| 6,161,548 |
|
| 8,290,550 |
|
| General and administrative |
|
| 2,977,812 |
|
| 6,221,884 |
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
| 9,931,275 |
|
| 17,823,867 |
|
|
|
|
|
|
|
|
|
|
| Operating loss |
|
| (9,765,976 | ) |
| (18,702,840 | ) |
|
|
|
|
|
|
|
|
|
| Other income and (expenses): |
|
|
|
|
|
|
|
| Interest income |
|
| 7,420 |
|
| 15,218 |
|
| Interest expense |
|
| (2,082,558 | ) |
| (3,336,217 | ) |
| Gain on revaluation of derivative liabilities, net |
|
| 3,759,146 |
|
| 9,271,985 |
|
| Liquidated damages for late S-1 registration |
|
| — |
|
| (532,161 | ) |
| Miscellaneous income (expense) |
|
| (116,147 | ) |
| 166,184 |
|
|
|
|
|
|
|
|
|
|
| Total other income and (expenses) |
|
| 1,567,861 |
|
| 5,585,009 |
|
|
|
|
|
|
|
|
|
|
| Net loss before provision for income taxes |
|
| (8,198,115 | ) |
| (13,117,831 | ) |
|
|
|
|
|
|
|
|
|
| Provision for income taxes |
|
| (21,453 | ) |
| 27,247 |
|
|
|
|
|
|
|
|
|
|
| Net loss |
| $ | (8,176,662 | ) | $ | (13,145,078 | ) |
Revenue
The following table represents our revenue for the years ended December 31, 2012 and 2011:
| Year Ended December 31, | |||||||||
| 2012 |
|
| 2011 |
|
| % Change | |||
|
|
|
|
|
|
|
|
|
|
|
| $ | 586,176 |
|
| $ | 522,931 |
|
|
| 12% |
For the year ended December 31, 2012, revenue increased by $63,245, or 12%, as compared to the year ended December 31, 2011. The increase is primarily due to increases in the number of SmartChip Real-Time PCR Systems and Real-Time PCR Chip panels sold, offset by decreases in the sales price of the SmartChip Real-Time PCR System and in the volume of other services.
Future revenue will depend on market acceptance of our new open format SmartChip products which were launched on July 10, 2012.
35
Cost of Revenue
The following table represents our cost of revenue for the years ended December 31, 2012 and 2011:
| Year Ended December 31, | |||||||||
| 2012 |
|
| 2011 |
|
| % Change | |||
|
|
|
|
|
|
|
|
|
|
|
| $ | 420,877 |
|
| $ | 1,401,904 |
|
|
| (70)% |
Cost of 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, 2012, cost of revenue decreased by $981,027, or 70%, as compared to the year ended December 31, 2011. The decrease related primarily to a reduction in added provisions for excess inventory, offset by increases in the number of SmartChip Real-Time PCR Systems and Real-Time PCR Chip panels sold in the year ended December 31, 2012.
Sales and Marketing Expenses
The following table represents our sales and marketing expenses for the years ended December 31, 2012 and 2011:
| Year Ended December 31, | |||||||||
| 2012 |
|
| 2011 |
|
| % Change | |||
|
|
|
|
|
|
|
|
|
|
|
| $ | 791,915 |
|
| $ | 3,311,433 |
|
|
| (76)% |
Sales and marketing expenses consist primarily of salaries and other personnel-related expenses of our sales and marketing team, and the costs associated with various marketing programs. For the year ended December 31, 2012, sales and marketing expenses decreased by $2,519,518, or 76%, as compared to the year ended December 31, 2011. The decrease resulted primarily from decreases in personnel costs due to a reduction in headcount due to the scaling back of selling and marketing activities while we established the support of our technology with key opinion leaders.
We expect sales and marketing expenses will increase during 2013 as we build our sales and marketing headcount and activities to commercialize our products.
Research and Development Expenses
The following table represents our research and development expenses for the years ended December 31, 2012 and 2011:
| Year Ended December 31, | |||||||||
| 2012 |
|
| 2011 |
|
| % Change | |||
|
|
|
|
|
|
|
|
|
|
|
| $ | 6,161,548 |
|
| $ | 8,290,550 |
|
|
| (26)% |
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, 2012, research and development expenses decreased $2,129,002, or 26%, as compared to the year ended December 31, 2011. The decrease resulted primarily from decreases in expenditure on consumable materials and reagents, lower consulting costs and a reduction in headcount.
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.
General and Administrative Expenses
The following table represents our general and administrative expenses for the years ended December 31, 2012 and 2011:
| Year Ended December 31, | |||||||||
| 2012 |
|
| 2011 |
|
| % Change | |||
|
|
|
|
|
|
|
|
|
|
|
| $ | 2,977,812 |
|
| $ | 6,221,884 |
|
|
| (52)% |
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 year ended December 31, 2012, general and administrative expenses decreased $3,244,072, or 52%, as compared to the year ended December 31, 2011. The decrease resulted primarily from decreases in personnel costs, mainly for salaries and discretionary bonuses paid to senior management, stock compensation costs, investor relations costs, recruitment costs and legal, accounting and other professional fees.
We expect our general and administrative expenses to be lower in 2013 due to reduced consultancy and other outside service costs.
Interest Income
The following table represents our interest income for the years ended December 31, 2012 and 2011:
| Year Ended December 31, | |||||||||
| 2012 |
|
| 2011 |
|
| % Change | |||
|
|
|
|
|
|
|
|
|
|
|
| $ | 7,420 |
|
| $ | 15,218 |
|
|
| (51)% |
Interest income is solely earned on cash balances held in interest-bearing bank accounts. For the year ended December 31, 2012, interest income decreased $7,798, or 51%, as compared to the year ended December 31, 2011. The decrease was mainly due to a decrease in the average cash invested in interest-bearing accounts.
Interest Expense
The following table represents our interest expense for the years ended December 31, 2012 and 2011:
| Year Ended December 31, | |||||||||
| 2012 |
|
| 2011 |
|
| % Change | |||
|
|
|
|
|
|
|
|
|
|
|
| $ | 2,082,558 |
|
| $ | 3,336,217 |
|
|
| (38)% |
For the year ended December 31, 2012, interest expense decreased $1,253,659, or 38%, as compared to the year ended December 31, 2011. The decrease was mostly due to the absence of a one-time non-cash interest expense of $2,255,074 related to the Convertible Promissory Notes (“CPNs”) issued in May 2011, and of interest charges related to the term loan of $2,000,000 obtained in December 2010 and repaid in May 2011, which included $222,275 in accelerated deferred financing costs plus $83,585 arising due to early repayment in the year ended December 31, 2011 (see Note 5 to the Consolidated Financial Statements in Part II, Item 8). This decrease was offset by interest of 5% being payable on the CPNs for the full year in 2012, and the amortization of debt discount and loan origination fees on these CPNs.
Gain on Revaluation of Derivative Liabilities, net
The following table represents the gain on revaluation of derivative liabilities, net for the years ended December 31, 2012 and 2011:
| Year Ended December 31, | |||||||||
| 2012 |
|
| 2011 |
|
| % Change | |||
|
|
|
|
|
|
|
|
|
|
|
| $ | 3,759,146 |
|
| $ | 9,271,985 |
|
|
| (59)% |
Our derivative liabilities arise due to the variable number of shares of our common stock that may be issued upon the exercise of those warrants with certain anti-dilution protection, upon the exchange of Series A and Series B Convertible Preference Shares (“CPS”) of our Malaysian subsidiary, and under the conversion element of our CPNs.
37
Table of Contents
The net gain from revaluation of derivative liabilities for the year ended December 31, 2012, was $3,759,146, compared to $9,271,985 for the year ended December 31, 2011. Gains and losses are directly attributable to revaluations of all of our derivatives and result primarily from a net decrease or increase, respectively, in our stock price in the period. Our closing stock price was $2.98 on December 31, 2012, compared to $15.90 on December 31, 2011, and $67.59 on May 27, 2011, when our convertible promissory notes were issued. We recorded a charge of approximately $1.2 million on December 31, 2011, when the lapse of the redemption option on the Series B CPS of our Malaysian subsidiary caused the derivative liability arising on the conversion element to increase.
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.
Liquidated Damages for Late S-1 Registration
The following table presents the liquidated damages we incurred for the years ended December 31, 2012 and 2011, due to the late registration of certain shares issuable in connection with the May 2011 Private Placement:
| Year Ended December 31, | |||||||||
| 2012 |
|
| 2011 |
|
| % Change | |||
|
|
|
|
|
|
|
|
|
|
|
| $ | — |
|
| $ | 532,161 |
|
|
| (100)% |
Liquidated damages were incurred as a result of the delayed effectiveness of our registration statement associated with the May 2011 Private Placement. Under the terms of the applicable registration rights agreement, we had until October 11, 2011, to have our initial registration statement declared effective by the SEC. We exceeded that time frame and were obligated to pay liquidated damages of approximately 1.8% of the gross funds received in the May 2011 Private Placement.
Miscellaneous Income (Expense)
The following table represents our miscellaneous income (expense) for the years ended December 31, 2012 and 2011:
| Year Ended December 31, | |||||||||
| 2012 |
|
| 2011 |
|
| % Change | |||
|
|
|
|
|
|
|
|
|
|
|
| $ | (116,147) |
|
| $ | 166,184 |
|
|
| N/A |
For the year ended December 31, 2012, we recorded miscellaneous expense of $116,147, compared to income of $166,184 for the year ended December 31, 2011. Miscellaneous income and expense is the result of net foreign currency exchange gains and losses, mainly in our Malaysian subsidiary, WGBM, principally due to revaluation of the inter-company account at the balance sheet date. WGBM presently has a net receivable on its dollar denominated balances, so if the value of the Malaysian Ringgit decreases against the dollar, income is recorded, whereas if it increases against the dollar, an expense is recorded. Foreign currency exchange gains and losses also arise on our subsidiary in Luxembourg, and on U.S. expenses denominated in foreign currencies.
Provision for Income Taxes
The following table presents the provision for income taxes for the years ended December 31, 2012 and 2011, respectively:
| Year Ended December 31, | |||||||||
| 2012 |
|
| 2011 |
|
| % Change | |||
|
|
|
|
|
|
|
|
|
|
|
| $ | (21,453) |
|
| $ | 27,247 |
|
|
| N/A |
For the year ended December 31, 2012, we recorded a net credit of $21,453 for income taxes, representing a reversal of $27,179 overprovided for Malaysia taxes in 2011 less U.S. state taxes of $5,726. For the year ended December 31, 2011, we recorded a charge of $27,247 for income taxes, representing the estimated amount of Malaysian taxes payable on interest income, mostly due to a loan to the U.S. parent. We have provided a full valuation allowance against our net deferred tax assets.
38
Liquidity and Capital Resources
From inception through June 30, 2013, the Company has raised a total of $3,665,991 from the issuance of notes payable, $66,037 from the sale of Series A Preferred Stock, $1,559,942 from the sale of Series B Preferred Stock, $31,226,191, net of offering costs, from the sale of common stock and warrants, $8,842,256, net of offering costs, from the sale of CPS of our Malaysian subsidiary, $1,842,760, net of origination fees, from a secured term loan, and $27,492,876, net of offering costs and liquidated damages for late registration, from the sale of the Series A-1 Convertible Preferred Stock, convertible promissory notes and warrants in the May 2011 Private Placement. As of June 30, 2013, the Company had $3,035,998 in unrestricted cash and cash equivalents, and working capital of $1,456,412.
Net Cash Used in Operating Activities
The Company experienced negative cash flow from operating activities for the six months ended June 30, 2013 and 2012, in the amounts of $3,161,750 and $5,713,647, respectively. The cash used in operating activities in the six months ended June 30, 2013, was due to cash used to fund a net loss of $6,944,665, adjusted for non-cash expenses related to depreciation and amortization, stock-based compensation, net losses on revaluation of derivative liabilities, interest converted to principal on convertible promissory notes, inventory provision and amortization of debt discount totaling $2,964,913, and cash provided by a change in working capital of $818,002. The cash used in operating activities in the six months ended June 30, 2012, was due to cash used to fund a net loss of $4,174,325, adjusted for non-cash expenses related to depreciation and amortization, stock-based compensation, exchange gain on issuance of convertible preference shares of subsidiary, net gains on revaluation of derivative liabilities, interest converted to principal on CPNs, inventory provision and amortization of debt discount totaling $1,045,950, and cash used by a change in working capital of $493,372. The decrease in cash used in the six months ended June 30, 2013, compared to 2012, was driven primarily by the decrease in the net operating loss from $5,922,429 to $4,560,325, and by cash provided by the change in working capital.
The Company experienced negative cash flow from operating activities for the years ended December 31, 2012 and 2011, in the amounts of $8,867,888 and $16,626,884, respectively. The cash used in operating activities in the year ended December 31, 2012, was due to cash used to fund a net loss of $8,176,662, adjusted for non-cash expenses related to depreciation and amortization, stock-based compensation, net gains on revaluation of derivative liabilities, interest converted to principal on CPNs, inventory provision and amortization of debt discount totaling $421,596, and cash used by a change in working capital of $269,630. The cash used in operating activities in the year ended December 31, 2011, was due to cash used to fund a net loss of $13,145,078, adjusted for non-cash expenses related to depreciation and amortization, stock-based compensation, liquidated damages for late S-1 registration, exchange gain on issuance of Series C CPS of our Malaysian subsidiary, gains on revaluation of derivative liabilities, excess debt discount expensed as interest, inventory provision and amortization of debt discount totaling $3,303,705, and cash used by a change in working capital of $178,101. The decrease of $7,758,996 in cash used in the year ended December 31, 2012, compared to 2011 was driven primarily by the decrease in the net operating loss from $18,702,840 to $9,765,976, offset by a reduction in the increase in inventory provision and in non-cash operating expenses, most notably stock compensation expense.
Net Cash Used in Investing Activities
The Company used $34,347 in the six months ended June 30, 2013, and $8,519 in the six months ended June 30, 2012, to acquire property and equipment.
The Company used $54,767 in the year ended December 31, 2012, and $621,120 in the year ended December 31, 2011, to acquire property and equipment, mostly for use in research and development activities.
Net Cash Provided by Financing Activities
There were no financing activities in the six months ended June 30, 2013 or 2012.
There were no financing activities in the year ended December 31, 2012.
Cash provided by financing activities in the year ended December 31, 2011, was $30,366,494. Our Malaysian subsidiary received $5,052,303, including an exchange gain and net of issuance costs, in exchange for the issuance of 3,233,734 Series C CPS, and we received $27,492,876, net of issuance costs and liquidated damages paid for late S-1 registration, from the issuance of Series A-1 Convertible Preferred Stock, convertible promissory notes and warrants in the May 2011 Private Placement and $9,200 from the exercise of stock options. This was offset by payments of $8,852 on capital lease obligations, $448 in income taxes for restricted stock forfeited and $2,178,585 to extinguish all liabilities under a term loan.
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Availability of Additional Funds
We believe funds available at June 30, 2013, along with funds raised in the August and September 2013 Private Placement and our revenue, will fund our operations into 2015. To continue our operations thereafter, we may need to raise further capital, through the sale of additional securities or otherwise, to support our future operations. 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 commitments for capital expenditures totaling approximately $100,000, all for equipment to be used for manufacturing SmartChip products. Our future capital requirements and the adequacy of our available funds will depend on many factors, most notably our ability to successfully commercialize our new high throughput open platform SmartChip products and services.
While we believe we have sufficient cash to fund our operating, investing and financing activities into 2015, we believe it likely that additional capital will be needed to sustain our operations thereafter. We may be unable to raise sufficient additional capital when we need it on favorable terms, or at all. The conversion of the CPS of our Malaysian subsidiary, 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 needed capital we may not be able to continue our efforts to develop and commercialize our SmartChip 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 (M) Sdn. Bhd., our Malaysian subsidiary, and WaferGen Biosystems Europe S.a.r.l., our Luxembourg 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 sufficient uncertainties exist regarding the future realization of deferred tax assets, and, accordingly, a full valuation allowance is required, amounting to approximately $28,000,000 at December 31, 2012. As a result of the 2013 Private Placement, the availability of NOLs and tax credit carry-forwards and the corresponding valuation allowance were both significantly reduced due to the ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986 and similar state provisions. 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.
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Warranty Reserve
Our standard warranty agreement is one year from shipment for SmartChip cyclers and dispensers. 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 for restricted stock it is based on the Company’s closing share price on the measurement date. Amounts expensed with respect to options were $182,701 and $179,908, net of estimated forfeitures, for the six months ended June 30, 2013 and 2012, 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 six months ended June 30, 2013 and 2012, was $4.23 and $8.39, respectively. Fair values were estimated using the following assumptions:
|
| Six Months Ended June 30, |
| ||
|
| 2013 |
| 2012 |
|
|
|
|
|
|
|
| Risk-free interest rate | 0.71% |
| 0.71% - 1.09% |
|
| Expected term | 4.75 Years |
| 4.75 Years |
|
| Expected volatility | 108.14% |
| 65.02% - 98.80% |
|
| 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 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. To the extent that our common stock has not been traded for as long as the expected remaining term of the options, we use a weighted average of the historic volatility of a group of publicly traded companies over the retrospective period corresponding to the expected remaining term of the options on the measurement date. 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. To the extent that our common stock has been traded for longer than the expected remaining term of the options, this weighted average is used to determine 50% of the volatility, with our own historic volatility used to determine the remaining 50%. 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.
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Derivative Liabilities
Our derivative liabilities arise due to the variable number of shares of our common stock that may be issued upon the exercise of those warrants with certain anti-dilution protection, upon the exchange of Series A and Series B CPS of our Malaysian subsidiary, and under the conversion element of our convertible promissory notes. We evaluate the liability for all of our derivatives using a Monte Carlo Simulation approach, using assumptions provided by management reflecting conditions at the valuation dates.
The fair value of the derivative liability for the conversion element of convertible promissory notes at June 30, 2013, was estimated to be $439, using our closing stock price of $3.98 and assumptions including estimated volatility of 148.74%, a risk-free interest rate of 0.03%, a zero dividend rate and a contractual term of 1.41 years. The fair value of this derivative liability at March 31, 2013, was estimated to be $155,990, using our closing stock price of $5.96 and assumptions including estimated volatility of 131.11%, a risk-free interest rate of 0.10%, a zero dividend rate and a contractual term of 1.66 years. The fair value of this derivative liability at December 31, 2012, was estimated to be $274,928, using our closing stock price of $2.98 and assumptions including estimated volatility of 126.91%, a risk-free interest rate of 0.13%, a zero dividend rate and a contractual term of 1.91 years. The fair value of this derivative liability at June 30, 2012, was estimated to be $401,921, using our closing stock price of $6.96 and assumptions including estimated volatility of 112.40%, a risk-free interest rate of 0.23%, a zero dividend rate and a contractual term of 2.41 years. The fair value of this derivative liability at March 31, 2012, was estimated to be $1,081,869, using our closing stock price of $14.91 and assumptions including estimated volatility of 94.40%, a risk-free interest rate of 0.25%, a zero dividend rate and a contractual term of 2.66 years. The fair value of this derivative liability at December 31, 2011, was estimated to be $1,931,295, using our closing stock price of $15.90 and assumptions including estimated volatility of 82.82%, a risk-free interest rate of 0.18%, a zero dividend rate and a contractual term of 2.91 years.
The total fair value of the derivative liability for warrants at June 30, 2013, was estimated to be $701,857, using our closing stock price of $3.98 and assumptions including estimated volatilities of 130.24% to 131.31%, risk-free interest rates of 0.13% to 0.19%, a zero dividend rate and estimated remaining terms of 0.77 to 1.19 years. The total fair value of this derivative liability at March 31, 2013, was estimated to be $225,764, using our closing stock price of $5.96 and assumptions including estimated volatilities of 94.54% to 128.32%, risk-free interest rates of 0.05% to 0.18%, a zero dividend rate and estimated remaining terms of 0.14 to 1.39 years. The total fair value of this derivative liability at December 31, 2012, was estimated to be $102,695, using our closing stock price of $2.98 and assumptions including estimated volatilities of 117.58% to 131.42%, risk-free interest rates of 0.08% to 0.21%, a zero dividend rate and estimated remaining terms of 0.38 to 1.58 years. The total fair value of this derivative liability at June 30, 2012, was estimated to be $329,414, using our closing stock price of $6.96 and assumptions including estimated volatilities of 96.38% to 118.21%, risk-free interest rates of 0.20% to 0.33%, a zero dividend rate and estimated remaining terms of 0.89 to 1.99 years. The total fair value of this derivative liability at March 31, 2012, was estimated to be $355,990, using our closing stock price of $14.91 and assumptions including estimated volatilities of 86.75% to 100.11%, risk-free interest rates of 0.21% to 0.36%, a zero dividend rate and estimated remaining terms of 1.14 to 2.19 years. The total fair value of this derivative liability at December 31, 2011, was estimated to be $655,219, using our closing stock price of $15.90 and assumptions including estimated volatilities of 80.66% to 85.13%, risk-free interest rates of 0.16% to 0.32%, a zero dividend rate and estimated remaining terms of 1.25 to 2.39 years.
The fair value of the derivative liability for the conversion element of Series B CPS of our Malaysian subsidiary at June 30, 2013, was estimated to be $1,213,727, using our closing stock price of $3.98 and assumptions including estimated volatility of 135.80%, a risk-free interest rate of 0.11%, a zero dividend rate and an estimated remaining term of 0.61 years. The fair value of this derivative liability at March 31, 2013, was estimated to be $1,212,385, using our closing stock price of $5.96 and assumptions including estimated volatility of 130.91%, a risk-free interest rate of 0.13%, a zero dividend rate and an estimated remaining term of 0.81 years. The fair value of this derivative liability at December 31, 2012, was estimated to be $1,210,909, using our closing stock price of $2.98 and assumptions including estimated volatility of 125.53%, a risk-free interest rate of 0.16%, a zero dividend rate and an estimated remaining term of 1.00 years. The fair value of this derivative liability at June 30, 2012, was estimated to be $1,327,769, using our closing stock price of $6.96 and assumptions including estimated volatility of 106.00%, a risk-free interest rate of 0.26%, a zero dividend rate and an estimated remaining term of 1.41 years. The fair value of this derivative liability at March 31, 2012, was estimated to be $1,248,385, using our closing stock price of $14.91 and assumptions including estimated volatility of 90.76%, a risk-free interest rate of 0.27%, a zero dividend rate and an estimated remaining term of 1.61 years. The fair value of this derivative liability at December 31, 2011, was estimated to be $1,245,101, using our closing stock price of $15.90 and assumptions including estimated volatility of 81.69%, a risk-free interest rate of 0.28%, a zero dividend rate and an estimated remaining term of 1.81 years.
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The fair value of the derivative liability for Series A CPS of our Malaysian subsidiary at June 30, 2013, was estimated to be $770,641, using our closing stock price of $3.98 and assumptions including estimated volatilities of 111.30% to 123.77%, risk-free interest rates of 0.02% to 0.08%, a zero dividend rate and estimated remaining terms of 0.11 to 0.41 years. The fair value of this derivative liability at March 31, 2013, was estimated to be $1,207,762, using our closing stock price of $5.96 and assumptions including estimated volatilities of 115.56% to 128.08%, risk-free interest rates of 0.08% to 0.12%, a zero dividend rate and estimated remaining terms of 0.30 to 0.66 years. The fair value of this derivative liability at December 31, 2012, was estimated to be $619,652, using our closing stock price of $2.98 and assumptions including estimated volatilities of 123.55% to 127.94%, risk-free interest rates of 0.11% to 0.15%, a zero dividend rate and estimated remaining terms of 0.55 to 0.90 years. The fair value of this derivative liability at June 30, 2012, was estimated to be $1,346,035, using our closing stock price of $6.96 and assumptions including estimated volatilities of 105.96% to 114.25%, risk-free interest rates of 0.22% to 0.26%, a zero dividend rate and estimated remaining terms of 1.05 to 1.41 years. The fair value of this derivative liability at March 31, 2012, was estimated to be $2,204,365, using our closing stock price of $14.91 and assumptions including estimated volatilities of 89.99% to 96.41%, risk-free interest rates of 0.23% to 0.28%, a zero dividend rate and estimated remaining terms of 1.30 to 1.66 years. The fair value of this derivative liability at December 31, 2011, was estimated to be $2,135,715, using our closing stock price of $15.90 and assumptions including estimated volatilities of 81.15% to 82.83%, risk-free interest rate of 0.28%, a zero dividend rate and estimated remaining terms of 1.55 to 1.90 years.
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, and historical experience. For our convertible promissory notes, we consider a blend of expected remaining terms prior to partial conversion into the Company’s Series A-2 Convertible Preferred Stock, giving consideration to the likelihood of conversion under various scenarios, and a further blend of expected remaining terms prior to partial conversion into common stock, all based on management’s projections of when such conversions would occur within the contractual term. 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. To the extent that our common stock has not been traded for as long as the expected remaining term of the instrument, we use a weighted average of 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. 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. To the extent that our common stock has been traded for longer than the expected remaining term of the instrument, this weighted average is used to determine 50% of the volatility, with our own historic volatility used to determine the remaining 50%. 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.
Contractual Obligations
In October, 2009, the Company signed an operating lease for 19,186 square feet of office and laboratory space for our headquarters in Fremont, California, covering the period November 1, 2009, through April 30, 2015, with no rent payable for the first six months. Following an amendment in June 2012 to the timing of payments, the total expenditure commitment was approximately $2.23 million (of which $1.16 million remained as at June 30, 2013), plus maintenance fees.
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Table of Contents
Recently Issued Accounting Pronouncements
See the “Recent Accounting Pronouncements” in Note 2 to the Condensed Consolidated Financial Statements page F-33 for information related to the adoption of new accounting standards in the first six months of 2013, none of which had a material impact on our condensed consolidated financial statements.
Cautionary Factors That May Affect Future Results
This Report and other written reports and oral statements made from time to time by the Company may contain so-called “forward-looking statements,” all of which are subject to risks and uncertainties. One can identify these forward-looking statements by their use of words such as “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects” and other words of similar meaning. One can identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company’s growth strategy, financial results and product and development programs.
One must carefully consider any such statement and should understand that many factors could cause actual results to differ from the Company’s forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially.
Information regarding market and industry statistics contained in this Report is included based on information available to the Company that it believes is accurate. It is generally based on industry and other publications that are not produced for purposes of securities offerings or economic analysis. The Company has not reviewed or included data from all sources, and cannot assure investors of the accuracy or completeness of the data included in this Report. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. The Company does not assume the obligation to update any forward-looking statement. You should carefully evaluate such statements in light of factors described in the Company’s filings with the SEC, especially on Forms 10-K, 10-Q and 8-K. In various filings the Company has identified important factors that could cause actual results to differ from expected or historic results. You should understand that it is not possible to predict or identify all such factors. Consequently, the reader should not consider any such list to be a complete list of all potential risks or uncertainties.
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Overview
Since we commenced operations in 2003, we have been engaged in the development of systems for gene expression quantification, genotyping and stem cell research. Since 2008, 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 and pharmaceutical drug discovery industries.
Our SmartChip products are aimed at researchers who perform genetic analysis, primarily at pharmaceutical and biotech companies, academic and private research centers and diagnostics companies involved in biomarker discovery and genetic research. Many scientists believe that much of the work to seek new therapeutic solutions will be directed at understanding the expression level of key relevant segments of DNA [1] (i.e. genes and other regulatory elements), as well as the changes in their sequence (i.e. mutations such as single nucleotide polymorphisms (“SNPs”)). 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. Increasingly, researchers are focusing their attention on studying physiological phenomena at the molecular level and are consequently committing their research budgets to acquiring research tools that help them develop personalized therapies.
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 mRNA, microRNA and lncRNA expression level measurement, as well as SNP genotyping. In August 2010, we formally launched our first generation SmartChip 5K System, which was an innovative real-time polymerase chain reaction (“real-time PCR”) [2] 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. 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 next-generation sequencing [3] (“NGS”). In July 2012, we launched the SmartChip MyDesign System, which is the second-generation instrument with significantly upgraded capabilities. First, the new system allows customers to dispense their own assays into a SmartChip, 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.
Most recently, our R&D efforts have been concentrated on the commercialization of the SmartChip Target Enrichment (“TE”) System. This new product is designed to perform a critical sample preparation step prior to targeted NGS. The 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 has shown some promise in early pilot studies and might offer advantages over the existing chemistries and platforms. Although these advantages could ultimately help WaferGen successfully compete in the high potential emerging market for clinical sequencing, the Company needs to perform additional studies to confirm the initial results, and would ultimately face considerable competition, including the competing sample preparation kits from NGS instrument manufacturers such as Illumina, Inc. (“Illumina”) and Life Technologies Corporation (“LIFE”).
[1] DNA (Deoxyribonucleic acid) – A polymeric molecule consisting of deoxyribonucleotide building blocks that in a double-stranded helical form is the genetic material of most organisms.
[2] Polymerase Chain Reaction (PCR) – 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 datapoints as the reaction progresses. The polymerase enzyme uses an initial sample DNA strand as a template and uses it to synthesize the 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.
[3] 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.
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WaferGen employs a business model that primarily generates revenue from the sale of instruments (i.e. the SmartChip System) and a recurring revenue stream from the sale of consumables (i.e. the SmartChip Panel), similar to the “razor and razor blade” business model.
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 transactions, Wafergen, Inc. merged with a subsidiary of WaferGen Bio-systems, Inc. and became a wholly owned subsidiary of WaferGen Bio-systems, Inc.
Products
Gene Expression Technology Overview
Genes are segments of DNA that carry discreet information packets of the genome that provide codes for ultimately synthesizing individual 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 RNA [4] . Like DNA, RNA also has four types of bases that bond with just one type of base on the DNA strand allowing 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 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 complex 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.
Although all humans contain the same set of genes, the actual sequence of each gene may vary from one individual to another. 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” in the DNA sequence between the two copies of the same gene. 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.
Gene expression is 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: sequencing, microarrays and real-time PCR.
RNA Sequencing is an evolving NGS technique that has recently emerged as method for evaluating global gene expression patterns. NGS typically requires time and cost intensive library preparation, sequencing and data analysis and the results are not always quantitative. As a result, many researchers are verifying 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 time and cost effective solution.
[4] 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 turning genes on and off.
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Microarrays consist of miniscule amounts of hundreds or thousands of gene sequences that are chemically attached to a surface, such as a microchip, a glass slide, or a bead. When a gene is activated in a cell, cellular machinery transcribes the gene’s DNA sequence into messenger RNA (“mRNA”). To determine which genes are turned on and which are turned off in a given cell, the mRNA molecules present in that cell are collected and labeled by attaching a fluorescent dye. The labeled mRNA is placed onto a DNA microarray slide. The mRNA that was present in the cell, together with its fluorescent tag, will then hybridize—or bind—to its complementary DNA on the microarray, which can then be measured using a scanner.
However, microarrays have limited sensitivity, accuracy and dynamic range. Consequently, one obtains only a partial view of the expression profile when utilizing microarrays due to the limited sensitivity. The overlooked genes may be important in a particular disease state. Furthermore, as a result of limitations in specificity and accuracy, the discovery of genes identified by microarray technology requires further validation using real-time PCR.
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.
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.
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 MultiSample Nanodispenser (“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) oligoneucleotide [5] 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 genetic analysis using the SmartChip System is expected to require one day versus what would currently take days to weeks to discover the gene expression signature with microarrays and then verify the signature with real time PCR utilizing existing genetic analysis systems. 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 per chip. We offer a throughput capability that allows hundreds of samples on a single chip.
[5] An oligonucleotide is a short nucleic acid polymer, typically with twenty or fewer bases.
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We believe our SmartChip System is also capable of achieving time savings when 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.
• Human microRNA Panel V3. MicroRNA species have a key regulatory role in the functioning of gene expression. To evaluate these species, our microRNA Panel V3 is used to quantitatively measure the expression for the most disease-relevant 1,100 human microRNA species in quadruplicate. The panel includes pre-optimized primer pairs that have been selected using strict bioinformatics criteria to provide single-base discrimination, high sensitivity and reproducible amplification.
• Human Oncology Panel V2. Our Human Oncology Panel is used for cancer-related pathway profiling. The panel is pre-loaded with optimized real-time PCR assays in quadruplicate for each of the over 1,200 oncology-related genes.
• Human Long Non-Coding RNA-1 Panels. lncRNA-1 panels are used for profiling the emerging area of “dark matter” RNAs, which are believed to be key regulators of transcription, with possible relevance to processes as diverse as cancer progression and embryonic differentiation. The panel contains over 1,700 triplicate, pre-dispensed extensively tested PCR assays to provide lncRNA validation with precision and sensitivity.
SmartChip Target Enrichment (TE) System
The concept of the SmartChip TE System 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 having individual PCR reactions, the 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 are planning to offer multiple consumable formats of different densities (number of nano-wells), so that depending on the number of targets required for a particular study, a single sample can be dispensed over the whole chip. This approach has two advantages - first, it is easier to extract the amplified material without cross-contamination with other samples, and second, we can offer a simple and cheap single-sample dispenser, thereby reducing the customers’ barrier to purchase due to high capital investment.
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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 guidance [6] calls for drug companies to voluntarily submit pharmacogenomic data to support their drug development programs.
• 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 acquired [7] sequence variants/mutations and hence identify genes critical in the development of human cancers.
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 this patient group are then validated using a larger patient group.
This sequential process may take from many months to a few years to complete using currently available techniques. The limitation in today’s gene expression studies is the use of microarrays as a starting point for discovery, which only provides a partial glimpse of the expression profile. Real-time PCR techniques, which offer significantly increased sensitivity, are limited in throughput and are cost prohibitive for whole genome analysis. It would cost in excess of $100,000 per analysis (assuming $1 per assay, plus reference, plus triplicates) to study even a single whole genome (30,000 genes) sample and will take many months to complete this study (reported in a MicroArray Quality Control study conducted by the FDA published in September 2006 in Nature Biotechnology [8] ). 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.
[6] FDA News Release - March 22, 2005 – issued a final guidance titled “Pharmacogenomic Data Submissions.”
[7] 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.
[8] The MicroArray Quality Control (MAQC) project shows inter- and intra-platform reproducibility of gene expression measurements, Nature Biotechnology, Vol. 24:9, p 1151, September 2006.
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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.
Future Applications – From Research to Diagnostics: New biomarkers for 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 primary industry competitors in the markets in which WaferGen plans to enter and compete are LIFE, Affymetrix, Inc., Fluidigm Corporation and Illumina. Other companies known to be currently serving the genetic analysis market include Agilent Technologies, 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., PerkinElmer, Inc., NanoString Technologies, Inc., Sequenom, Inc., RainDance Technologies, Inc., Qiagen N.V., Biometra Biomedizinische Analytik GmbH, Enzo Biochem, Inc., Idaho Technologies, 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, technology, 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
In November 2011, we announced a revised plan to commercialize and increase adoption of our SmartChip System to address the rapidly changing needs of the life sciences research market and to better anticipate future needs of researchers. In July 2012, we announced the launch of an open format product offering for our SmartChip System which allows customers to dispense their own assays and samples into SmartChips in a variety of configurations, thus enabling an easy and rapid design of new experiments. We decided to invest significantly in scientific resources focused on a strategy to engage an array of key opinion leaders in our target market, enabling the profiling and validation of high-value genomic targets.
With the advent of next-generation sequencing into the life science marketplace in 2007, there has been a dramatic increase in the amount of genomic content that is available to researchers beyond what other genomic technologies have generated. However, there is an equally dramatic and rapidly growing unmet need to validate and confirm the results of this sequencing information to find clinically relevant biomarkers. In particular, the data from RNA sequencing experiments, in which researchers are evaluating gene expression levels, is well suited to the high throughput validation of the SmartChip platform. This ability to accurately make quantitative genome measurements is an integral tool in enabling researchers to verify the results coming from next-generation sequencers. Once verified, this content creates a larger, longer term opportunity for us as we significantly increase the ability of researchers to validate high value genomic targets for their ultimate use in developing new and improved drugs and diagnostic tests.
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However, WaferGen has very limited sales and marketing resources. We will need to make substantial investments into our sales and marketing infrastructure in order to be competitive in the marketplace (see “Risk Factors” above).
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 $2.67 million for the six months ended June 30, 2013, $6.16 million for the year ended December 31, 2012, and $8.29 million for the year ended December 31, 2011.
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 five 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. 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.
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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 7, 2013, we had 32 regular employees, all of whom were employed full-time, compared to 32 regular employees as of December 31, 2012, 31 of whom were employed full-time, and 54 regular employees as of December 31, 2011, 52 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 as of December 31, 2012, are as follows:
| Location |
| Square Feet |
| Primary Use |
| Lease Terms |
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| Fremont, CA |
| 19,186 sq ft |
| Corporate Office and Lab |
| Lease expires April 30, 2015 |
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| Luxembourg |
| 1,000 sq ft |
| Lab and Office |
| Leased quarter to quarter |
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| Kulim, Malaysia |
| 5,194 sq ft |
| Administration and Lab |
| Lease expires December 31, 2013 |
Our existing facilities are not being used at full capacity and 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 the Company’s operating results for any particular future period, depending on the level of income for such period.
Coalesce v. WaferGen. On April 24, 2012, an action entitled Coalesce Corporation (“Coalesce”) v. WaferGen Bio-systems, Inc. was filed in the Alameda County Superior Court. Coalesce, a company that had been providing marketing services between 2006 and 2010, sued the Company for alleged non-payment of sums due, breach of contract, misrepresentation and unjust enrichment. On September 5, 2012, Coalesce filed an amended complaint, with additional claims, for compensatory damages in excess of $500,000 and other compensation. On April 15, 2013, the case was referred to mediation. The first mediation session was held on August 7, 2013, resulting in further requests for documentation by both parties. The Company believes the claim to be substantially without merit, and while no assurance can be given regarding the outcome of this litigation, management believes that the resolution of this matter will not have a material adverse effect on the Company’s financial position and results of operations.
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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Set forth below is certain information regarding our directors and executive officers:
| Name |
| Age |
| Position |
| Alnoor Shivji |
| 57 |
| Chairman of the Board |
| Robert Coradini |
| 53 |
| Director |
| Scott Davidson |
| 43 |
| Director |
| Dr. R. Dean Hautamaki |
| 50 |
| Director |
| Makoto Kaneshiro |
| 55 |
| Director |
| Joel Kanter |
| 56 |
| Director |
| Joseph Pesce |
| 64 |
| Director |
| Dr. Timothy Triche |
| 69 |
| Director |
| Dr. Ivan Trifunovich |
| 50 |
| Chief Executive Officer, President and Director |
| John Harland |
| 61 |
| Chief Financial Officer and Vice President of Finance |
Our bylaws provide that the Company’s board of directors (the “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 nine. Our directors hold office for one-year terms until the earlier of their death, resignation or removal or until their successors have been elected and qualified. Any vacancies occurring in the Board between annual meetings may be filled by the vote of a majority of the remaining directors. Our officers are appointed by the Board and serve at the discretion of the Board.
There are no family relationships among our directors and executive officers. Pursuant to the Exchange Agreement entered into by the Company with investors (“Investors”) in connection with the August 2013 Exchange, for as long as at least 50% of the shares of Series 1 Convertible Preferred Shares issued in connection with the August 2013 Exchange and/or shares of common stock issued upon conversion thereof remain outstanding, the Company and each Investor who is a current member of the Company’s management or board of directors is required to use reasonable best efforts to ensure that (including with respect to such Investors, by voting (or consenting with respect thereto) any shares of common stock then owned by them accordingly) two individuals, as may be designated by Great Point Partners, LLC from time to time, are elected as members of the Board. Mr. Davidson and Mr. Pesce are each Managing Directors of Great Point Partners, LLC, and were designated by Great Point Partners to serve as members of the Board.
Directors and Executive Officers
Alnoor Shivji, Chairman of the Board. Mr. Shivji is a co-founder of WaferGen and has been Chairman of the Board since October 2002. Mr. Shivji also served as our Chief Executive Officer and President from April 2003 until October 2011. Between December 2003 and July 2006, he was also the Investment Director at VPSA, Inc. in Paris, France, and between October 2001 and February 2002, he was the President and Chief Executive Officer of Redwave Networks, Inc. From April 2001 to August 2001, Mr. Shivji was President of Metro Switching Division of Ciena Corp. Between August 1998 and March 2001, he was the Founder, President and Chief Executive Officer of Cyras Systems. He co-founded Fiberlane Communications, Inc. and was President of Fiberlane Communications (Canada), Inc. from December 1996 to April 1998. Mr. Shivji also co-founded Osiware, an enterprise software company sold to Infonet Services Corporation, which was later bought by BT Group plc. Currently, he is a General Partner with Global Asset Capital, a venture capital firm with which he has been associated since March 2002, and has a long history advising and investing in Silicon Valley startups. Mr. Shivji has a BS degree from University of British Columbia.
Robert Coradini, Director. Mr. Coradini has served as our director since October 2009. He has over twenty years of experience in the healthcare industry and has focused on turnarounds, mergers & acquisitions and building global businesses. Mr. Coradini has served as a chief executive and company president for various subsidiaries of the Johnson & Johnson Company since 1996, including service as President, New Ventures of Johnson & Johnson Consumer Group of Companies from 2005 until May 2009, service as World Wide President of Cardiovations / Ethicon from 2003 until 2005, service as President of LifeScan from 2000 to 2003 and as President of Cordis Endovascular from 1997 through 1999. Mr. Coradini was also head of Business Development for Johnson & Johnson Medical Devices & Diagnostic group from 1999 through 2000. Prior to joining Johnson & Johnson, Mr. Coradini was business manager for GE Medical Systems, Inc. Mr. Coradini currently serves on the board of directors of Mela Sciences, a publicly traded medical device company and does advisory work for a number of private healthcare companies. Since June 2013, he has also been serving as their Interim CEO and President. Mr. Coradini has his MBA with a concentration in Finance, Marketing & International Business from Columbia University Graduate School of Business and a B.A. in Biology & Economics, with High Distinctions in Economics, from the University of Rochester.
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Scott Davidson, Director. Mr. Davidson has served as our director since January 2012. Mr. Davidson has served as a Managing Director of Great Point Partners, LLC since April 2005, where he has led the firm’s investment efforts in medical device, diagnostics and life science tools companies. Prior to that, he provided strategic consulting services to medical device companies from March 2004 to March 2005. Previously, Mr. Davidson served as Managing Director and Senior Research Analyst at Piper Jaffray, Associate Director at Bear Stearns, and as a Research Associate at Robertson, Stephens & Company. In those three prior roles, Mr. Davidson analyzed the securities of medical device companies and made investment recommendations to institutional clients. Earlier in his career, Mr. Davidson worked as an Investment Analyst for Canaan Partners, a venture capital firm. Mr. Davidson holds an A.B. in Economics from Harvard College and an M.B.A. from the Stanford Graduate School of Business.
Dr. R. Dean Hautamaki, Director. Dr. Hautamaki has served as our director since May 2007. Dr. Hautamaki is a practicing physician and since January 2005 has been the Assistant Clinical Professor of Medicine at the Florida State University College of Medicine in Tallahassee, Florida. From September 2003 to December 2005, Dr. Hautamaki was the 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.
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 and prior to that was the Executive Director of Overseas Investment for CSK Venture Capital Co., Ltd., where he had been since 2001. Previously, Mr. Kaneshiro was Executive Vice President of Sega.com and Sega of America. Before Sega, he was a member of the business development and corporate planning team of Sony Corporation of America. 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.
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 boards of directors of several public companies, including Dr. Tattoff, Inc., Magna-Lab, Inc. and Medgenics, Inc., as well as a number of private concerns. Mr. Kanter has a B.A. in Political Science and a B.A. in Psychology from Tulane University.
Joseph Pesce, Director. Mr. Pesce has served as our director since January 2012. Mr. Pesce has served as a Managing Director and Operating Partner of Great Point Partners, LLC since January 2011. Previously, he served as Managing Director and Chief Risk Officer of Thomas H. Lee Partners, L.P. from June 2010, prior to which he had served as its Chief of Operations from May 2006 and as its Chief Financial Officer from July 2001, when he joined the firm. Prior to that, Mr. Pesce spent over 25 years in senior financial positions in high technology, healthcare and consulting services companies. Mr. Pesce is a Certified Public Accountant, and he holds an A.B. in Mathematics from Boston College and an M.B.A. from Wharton School of the University of Pennsylvania.
Dr. Timothy Triche, Director. Dr. Triche has served as our director since February 2011. Dr. Triche also serves on our Scientific Advisory Board, which he joined in June 2010. Dr. Triche serves as director of the Center of Personalized Medicine at the University of Southern California. From July 1988 to July 2010, Dr. Triche was the Chair of Pathology at the Children’s Hospital Los Angeles, California. Dr. Triche serves as Chairman of the Board of Directors of Genome DX and Novelix, and serves on the Board of Directors of LTC and NanoValent. Dr. Triche has an A.B. degree in physics and biology from Cornell University and an M.D. and Ph.D. in medicine from Tulane University Medical Center.
Ivan Trifunovich, Chief Executive Officer, President and Director. Dr. Trifunovich has served as our Chief Executive Officer, President and director since March 2012. Dr. Trifunovich served as President, Chief Executive Officer and Chairman of the Board of Helicos BioSciences Corporation [9] 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 M.B.A. at the University of Pennsylvania’s Wharton School of Business.
[9] In November 2012, Helicos BioSciences Corporation filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code.
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Table of Contents
John Harland, Chief Financial Officer and Vice President of Finance. Mr. Harland has served as our Chief Financial Officer and Vice President of Finance since March 2012, and joined us as our Director of Finance and Controller in June 2011. Mr. Harland has 29 years of experience in senior financial roles at biotechnology, medical device and other high-technology companies. Prior to joining the Company, from April 2010 to June 2011, he served as a financial consultant to emerging growth companies. From October 2008 to April 2010, he served as vice president, finance and administration for Trinity Biosystems, Inc., and from June 2006 to October 2008, he served as chief financial officer for Light Dimensions, Inc., a maker of LED-based skincare devices. Mr. Harland has served as chief financial officer for four companies that completed initial public offerings during his term of service, including Alliance Fiber Optic Products, Inc., Neurobiological Technologies, Inc., Cardiovascular Imaging Systems, Inc. and Circadian, Inc. Mr. Harland began his career as an auditor at Arthur Young & Company and holds an M.A. in Business Studies and Natural Sciences from Cambridge University and an M.B.A. in Taxation and Finance from Golden Gate University.
Committees
The Board has five standing committees: the Audit Committee, the Nominating and Corporate Governance Committee; the Compensation Committee; the Finance Committee; and the Applications and Diagnostic Committee.
Audit Committee
Our Audit Committee is authorized to: approve the firm to be engaged as our independent registered public accounting firm for the next fiscal year; review with our independent registered public accounting firm the scope and results of their audit and any related management letter; consult with our independent registered public accounting firm and our management with regard to our accounting methods and adequacy of our internal controls over financial reporting; approve the professional services rendered by our independent registered public accounting firm; review the independence, management consulting services and fees of our independent registered public accounting firm; inquire about significant risks or exposures and methods to minimize such risk; ensure effective use of audit resources; and prepare and supervise the SEC reporting requirements. The Board has adopted an Audit Committee Charter, a copy of which is on our website, www.wafergen.com. The Audit Committee currently consists of Dr. Hautamaki, Mr. Kanter (Chairman) and Mr. Pesce. The Board has concluded that Mr. Kanter meets the definition of “audit committee financial expert” as such term is defined by SEC rules and has determined that Mr. Kanter is independent under the rules of the NASDAQ Stock Market (see “Director Independence” below).
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee is appointed by the Board (i) to oversee the selection of new directors, (ii) to oversee the function of the Board in its committees and (iii) to evaluate the Board’s performance as well as the relationship between the Board and our management. The Nominating and Corporate Governance Committee considers several factors in evaluating candidates for nomination to the Board of Directors, including the candidate’s knowledge of the Company and its business and the candidate’s business experience and credentials. The Board has adopted a Nominating and Corporate Governance Committee Charter, a copy of which is available on our website, www.wafergen.com. The Nominating and Corporate Governance Committee currently consists of Mr. Coradini (Chairman), Dr. Hautamaki, Mr. Kaneshiro and Mr. Kanter.
Compensation Committee
The Compensation Committee assists the Board in discharging its responsibilities relating to compensation of our executive officers and directors. The Compensation Committee, among other things, (i) reviews and approves our compensation programs and arrangements, (ii) determines the objectives of our executive officer compensation programs, (iii) ensures appropriate corporate performance measures and goals regarding executive officer compensation are set and determines the extent to which they are achieved and any related compensation earned and (iv) monitors the administration of our incentive-compensation plans and equity-based plans as in effect and as adopted from time to time by the Board. The Board has adopted a Compensation Committee Charter, a copy of which is available on our website, www.wafergen.com. The Compensation Committee currently consists of Mr. Coradini, Mr. Kaneshiro and Mr. Kanter (Chairman).
55
Finance Committee
The Finance Committee was formed to oversee areas of finance, including budget development and execution, tracking and evaluating performance, closely monitoring cash, evaluating potential strategic transactions and conducting other financing activities. The Board has adopted a Finance Committee Charter, a copy of which is available on our website, www.wafergen.com. The Finance Committee currently consists of Mr. Coradini, Mr. Davidson, Mr. Kanter and Mr. Pesce.
Applications and Diagnostic Committee
Our Applications and Diagnostic Committee is charged with identifying and negotiating high value applications for the Company’s diagnostics platform. The Applications and Diagnostic Committee currently consists of Mr. Davidson, Dr. Hautamaki, Mr. Shivji and Dr. Triche (Chairman).
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers and persons who own more than ten percent of a registered class of our equity securities to file reports of ownership and changes in ownership with the SEC. Such persons are required by SEC regulations to furnish us with copies of all such filings. Based solely on our review of copies of such filings, we believe that all reporting persons complied on a timely basis with all Section 16(a) filing requirements during the year ended December 31, 2012, except as described below:
| Name |
| No. of Late Reports |
| No. of Transactions That Were Not Reported on a Timely Basis |
| Failure to File a Required Form |
| John Harland |
| 1 |
| 1 |
| 0 |
| Alnoor Shivji |
| 1 |
| 2 |
| 0 |
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 principal executive officer, principal financial officer and principal accounting officer, 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 report and document that we file with, or submit to, the Securities and Exchange Commission 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.
56
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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
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 October 4, 2013, are deemed to be beneficially owned and outstanding for computing the share ownership and percentage of the person holding such options, warrants or other rights, but are not deemed outstanding for computing the percentage of any other person.
|
|
| Number of |
|
|
| ||
|
|
| Shares |
| Percentage |
| ||
|
|
| Beneficially |
| Beneficially |
| ||
| Name of Beneficial Owner |
| Owned |
| Owned (1) |
| ||
| 5% Holders: |
|
|
|
|
|
|
|
| Affiliates of Deerfield Management Company, L.P. |
|
| 818,233 | (2) |
| 9.98 | % |
| Entities affiliated with Great Point Partners, LLC |
|
| 818,233 | (3) |
| 9.98 | % |
| Merlin Nexus III, LP |
|
| 737,337 | (4) |
| 9.98 | % |
| Directors and Executive Officers: |
|
|
|
|
|
|
|
| Alnoor Shivji |
|
| 285,551 | (5) |
| 3.83 | % |
| Robert Coradini |
|
| 191,190 | (6) |
| 2.57 | % |
| Joel Kanter |
|
| 103,765 | (7) |
| 1.40 | % |
| Ivan Trifunovich |
|
| 15,092 | (8) |
| * |
|
| Dr. R. Dean Hautamaki |
|
| 9,460 | (9) |
| * |
|
| Dr. Timothy Triche |
|
| 3,994 | (10) |
| * |
|
| Makoto Kaneshiro |
|
| 3,871 | (11) |
| * |
|
| John Harland |
|
| 3,307 | (12) |
| * |
|
| Scott Davidson |
|
| 2,264 | (13) |
| * |
|
| Joseph Pesce |
|
| 2,264 | (13) |
| * |
|
| Directors and Executive Officers as a Group (10 persons) |
|
| 620,758 |
|
| 8.20 | % |
__________
| * | Less than 1% |
(1) Based on 7,380,495 shares of our common stock issued and outstanding as of October 4, 2013.
57
(3) Consists of (i) 813,705 shares of common stock issuable upon conversion of Series 1 Convertible Preferred Stock collectively owned by each of Biomedical Value Fund, LP (“BVF”), Biomedical Offshore Value Fund, Limited (“BOVF”), Biomedical Institutional Value Fund, LP (“BIVF”), Lyrical Multi-Manager Fund, LP (“Lyrical”), Lyrical Multi-Manager Offshore Fund, Ltd., (“LMMO”), Class D Series of GEF-PS, LP (“GEF-PS”), David J. Morrison (“Morrison”), WS Investments II, LLC (“WS”), Thomas C. Jay QPERT (“QPERT”), Carolyn Jay Trust (“Carolyn Trust”), Jeffrey Jay Jr. Trust (“Jay Trust”) and Jeffrey and Mary Ellen Jay (“Jay,” and together with QPERT, Carolyn Trust and Jay Trust, the “Jay Owners”), (ii) 2,264 shares of common stock issuable upon the exercise of options that are exercisable within 60 days and are held in the name of Scott Davidson, and (iii) 2,264 shares of common stock issuable upon the exercise of options that are exercisable within 60 days and are held in the name of Joseph Pesce. Mr. Davidson and Mr. Pesce hold such options as nominees for funds and accounts with respect to which Great Point Partners, LLC acts as investment manager (the “GPP Investors”) and are directors of the Company serving as the designees of Great Point Partners, LLC. Each of Mr. Davidson, Mr. Pesce and Great Point Partners, LLC disclaims beneficial ownership of such shares, except to the extent of their pecuniary interests. Does not include (i) 3,682,872 shares of common stock issuable on conversion of Series 1 Convertible Preferred Stock, (ii) 1,414,974 shares of common stock issuable upon the exercise of warrants collectively owned by each of BVF, BOVF, BIVF, Lyrical, LMMO, GEF-PS, Morrison, WS and the Jay Owners, the conversion or exercise of which would result in total beneficial ownership by such reporting persons exceeding the Ownership Cap of 9.98%, and (iii) options to purchase 754 shares of common stock held in the name of each of Mr. Davidson and Mr. Pesce as nominees for funds and accounts with respect to which Great Point Partners, LLC acts as investment manager, that are not exercisable within 60 days. Great Point Partners, LLC acts as the investment manager with respect to the shares beneficially owned by each of BVF, BOVF, BIVF, Lyrical, LMMO, GEF-PS, Morrison, and WS. Dr. Jeffrey R. Jay, M.D. (“Dr. Jay”) has the sole voting and sole dispositive power with respect to the shares beneficially owned by the Jay Owners. The address of Great Point Partners, LLC and Dr. Jay is 165 Mason Street, 3rd Floor, Greenwich, CT 06830. See also footnote (13) in this section.
(4) Consists of (i) 729,684 shares of common stock, and (ii) 7,653 shares of common stock issuable upon the exercise of warrants. Does not include 199,960 shares of common stock issuable upon the exercise of warrants, the exercise of which would result in total beneficial ownership by such reporting person exceeding the Ownership Cap of 9.98%. The address of Merlin Nexus III, LP is 424 West 33rd Street, Suite 520, New York, NY 10001.
(5) Consists of (i) 25,703 shares of common stock, (ii) 6,192 shares of common stock issuable upon the exercise of currently exercisable warrants, (iii) 2,465 shares of common stock issuable upon the exercise of options that are exercisable within 60 days, (iv) 188,645 shares of common stock held by The Shivji Family Trust, (v) 60,335 shares of common stock issuable upon the exercise of currently exercisable warrants held by The Shivji Family Trust, (vi) 487 shares of common stock held by each of the Shivji Children’s Trust fbo Zahra Shivji, the Shivji Children’s Trust fbo Suraya Shivji and the Jameel Shivji Irrevocable Trust (the “Shivji Children’s Trusts”), and (vii) 250 shares of common stock issuable upon the exercise of currently exercisable warrants held by each of the three Shivji Children’s Trusts. Excludes options to purchase 754 shares of common stock that are not exercisable within 60 days. Mr. Shivji and his wife, Mariam Shivji, are the co-trustees of The Shivji Family Trust and each of the three Shivji Children’s Trusts (together, the “Shivji Trusts”). Mr. Shivji disclaims beneficial ownership of the securities held by each of the Shivji Trusts, except to the extent he has a pecuniary interest therein.
(6) Consists of (i) 135,882 shares of common stock, (ii) 52,039 shares of common stock issuable upon the exercise of currently exercisable warrants, and (iii) 3,269 shares of common stock issuable upon the exercise of options that are exercisable within 60 days. Excludes options to purchase 754 shares of common stock that are not exercisable within 60 days.
(7) Consists of (i) 33,389 shares of common stock, (ii) 10,255 shares of common stock issuable upon the exercise of currently exercisable warrants, (iii) 3,945 shares of common stock issuable upon the exercise of options that are exercisable within 60 days, (iv) 39,799 shares of common stock held by the Kanter Family Foundation, and (v) 16,377 shares of common stock issuable upon exercise of currently exercisable warrants held by the Kanter Family Foundation. Excludes options to purchase 880 shares of common stock that are not exercisable within 60 days. Mr. Kanter has voting control and investment power over, but disclaims beneficial ownership of, the securities owned by the Kanter Family Foundation.
(8) Consists of 15,092 shares of common stock issuable upon the exercise of options that are exercisable within 60 days. Excludes options to purchase 15,092 shares of common stock that are not exercisable within 60 days.
(9) Consists of (i) 139 shares of common stock, (ii) 6,385 shares of common stock issuable upon the exercise of options that are exercisable within 60 days, (iii) 2,283 shares of common stock held by Cojack Investment Opportunities, LLC (“Cojack”), and (iv) 653 shares of common stock issuable upon the exercise of currently exercisable warrants held by Cojack. Excludes options to purchase 754 shares of common stock that are not exercisable within 60 days.
58
(10) Consists of (i) 101 shares of common stock, and (ii) 3,893 shares of common stock issuable upon the exercise of options that are exercisable within 60 days. Excludes options to purchase 814 shares of common stock that are not exercisable within 60 days.
(11) Consists of (i) 302 shares of common stock, and (ii) 3,569 shares of common stock issuable upon the exercise of options that are exercisable within 60 days. Excludes options to purchase 754 shares of common stock that are not exercisable within 60 days.
(12) Consists of 3,307 shares of common stock issuable upon the exercise of options that are exercisable within 60 days. Excludes options to purchase 2,930 shares of common stock that are not exercisable within 60 days.
(13) Consists of 2,264 shares of common stock issuable upon the exercise of options that are exercisable within 60 days. Excludes options to purchase 754 shares of common stock that are not exercisable within 60 days. Scott Davidson and Joseph Pesce do not beneficially own any shares of WaferGen Bio-systems, Inc. Their options are held solely as nominees for funds managed by Great Point Partners, LLC (whose interests are recorded in footnote (3) in this section), of whom they are both managing directors.
59
The following table presents summary information regarding the compensation of (i) our principal executive officer, (ii) our other executive officer who was serving as an executive officer at the end of 2012 and (iii) our two former executive officers who jointly served as our principal executive officer during 2012, neither of whom were serving as executive officers at the end of 2012 (such officers are referred to herein as our “Named Executive Officers”) for the years ended December 31, 2012 and 2011.
|
|
| (b) Fiscal |
| (c) Salary |
| (d) Bonus |
| (e) Stock Awards(5) |
|
| (f) Option Awards(6) |
| (i) All Other Compensation |
|
| (j) Total | ||||||
| (a) Name and Principal Position |
| Year |
| ($) |
| ($) |
| ($) |
|
| ($) |
| ($) |
|
| ($) | ||||||
| Ivan Trifunovich |
| 2012 |
| $ | 293,182 | (1) |
| $ | — |
| $ | — |
| $ | 299,511 |
| $ | — |
|
| $ | 592,693 |
| Chief Executive Officer, President and Director |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| John Harland |
| 2012 |
| $ | 192,700 | (2) |
| $ | 10,000 |
| $ | –– |
| $ | 42,044 |
| $ | — |
|
| $ | 244,744 |
| Chief Financial Officer and Vice President of Finance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mona Chadha |
| 2012 |
| $ | 55,690 | (3) |
| $ | — |
| $ | — |
| $ | –– |
| $ | 134,783 | (3) |
| $ | 190,473 |
| Former Office of the President, Chief Operating Officer, Executive Vice President of Marketing and Business Development and Secretary |
| 2011 |
| $ | 230,846 |
|
| $ | 149,375 |
| $ | 28,125 |
| $ | –– |
| $ | –– |
|
| $ | 408,346 |
| Donald Huffman |
| 2012 |
| $ | 53,320 | (4) |
| $ | — |
| $ | — |
| $ | –– |
| $ | 67,837 | (4) |
| $ | 121,157 |
| Former Office of the President and Chief Financial Officer |
| 2011 |
| $ | 225,000 |
|
| $ | 49,215 |
| $ | 7,071 |
| $ | –– |
| $ | –– |
|
| $ | 281,286 |
__________
(1) Mr. Trifunovich joined the Company on March 8, 2012, and an annual salary of $360,000 commenced on that date pursuant to such executive officer’s employment agreement with us.
(2) Mr. Harland became an executive officer on March 26, 2012, and his annual salary of $200,000 commenced on that date pursuant to such executive officer’s employment agreement with us.
(3) Ms. Chadha’s employment with us was terminated on March 26, 2012. In connection with her separation agreement effective March 26, 2012, the Company paid such former executive $117,500 in severance payments and $17,283 in vacation payments in 2012.
(4) Mr. Huffman’s employment with us was terminated on March 26, 2012. In connection with his separation agreement effective March 26, 2012, the Company paid such former executive $56,250 in severance payments and $11,587 in vacation payments in 2012.
(5) Amounts in this column reflect the aggregate grant date fair value of stock awards granted in the fiscal year computed in accordance with FASB ASC Topic 718, excluding the impact of estimated forfeitures related to service-based vesting conditions. For more information, see Note 2, “Summary of Significant Accounting Policies—Stock-Based Compensation” on page F-10 and Note 8, “Stock Awards” on pages F-16 to F-18.
(6) Amounts in this column reflect the aggregate grant date fair value of option awards granted in the fiscal year computed in accordance with FASB ASC Topic 718, excluding the impact of estimated forfeitures related to service-based vesting conditions. For more information, see Note 2, “Summary of Significant Accounting Policies—Stock-Based Compensation” on page F-10 and Note 8, “Stock Awards” on pages F-16 to F-18.
60
Outstanding Equity Awards at Fiscal Year-End 2012
|
|
| Number of Securities Underlying Unexercised Options Exercisable (#) |
| Number of Securities Underlying Unexercised Options Unexercisable (#) |
|
|
|
| ||||||
|
|
|
|
| Option Exercise Price ($) |
|
| ||||||||
|
|
|
|
|
| Option Expiration Date | |||||||||
|
|
|
|
|
| ||||||||||
| Name |
|
|
|
| ||||||||||
| Ivan Trifunovich |
|
| — |
|
|
| 30,184 | (1) |
|
| 13.91 |
|
| 3/8/2019 |
| John Harland |
|
| 264 |
|
|
| 440 | (2) |
|
| 31.80 |
|
| 9/19/2018 |
|
|
|
| 1,614 |
|
|
| 3,919 | (3) |
|
| 10.54 |
|
| 5/17/2019 |
__________
(1) Represents the unvested portion of an option grant that vests as follows: 1/3rd of the shares vest when the optionee completes 12 months of continuous service after the vesting start date (March 8, 2012), and an additional 1/12th of the shares vest when the optionee completes each full three months of continuous service thereafter.
(2) Represents the unvested portion of an option grant that vests as follows: 1/48th of the shares vest when the optionee completes each full month of continuous service through June 13, 2015.
(3) Represents the unvested portion of an option grant that vests as follows: 1/48th of the shares vest when the optionee completes each full month of continuous service through October 5, 2015.
Employment Agreements
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. Under the employment agreement, Dr. Trifunovich receives an annual base salary of $360,000 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 30,184 shares of our common stock with an exercise price equal to $13.91 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. Dr. Trifunovich is entitled to additional annual option awards at the beginning of each year as necessary to bring his fully diluted equity interest in the Company to 5% at the time of each such grant pursuant to the terms of his employment agreement. 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. 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.
61
Table of Contents
The Company has also agreed that Dr. Trifunovich will be entitled to payment in the event that 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. 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.
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.
John Harland
On June 13, 2011, we entered into a letter agreement with John Harland to serve as our Director of Finance and Corporate Controller. Under the letter agreement, Mr. Harland was entitled to receive an annual base salary of $180,000, which was raised to $200,000 upon his appointment as our Interim Chief Financial Officer and Vice President of Finance on March 26, 2012, and is subject to reviews by our Compensation Committee. Mr. Harland is also entitled to receive a bonus of up to 50% of his salary under certain circumstances upon a change of control or capital being raised, subject to review by our Compensation Committee, which may also award performance-based bonuses in its discretion.
Director Compensation
The table below summarizes the compensation paid by the Company to non-employee directors for the fiscal year ended December 31, 2012.
|
|
| (b) Fees Earned |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
| or Paid |
|
| (c) Stock |
|
| (d) Option |
|
| (g) All Other |
|
|
|
| |||||
|
|
| in Cash |
|
| Awards (1) |
|
| Awards (2) |
|
| Compensation |
|
| (h) Total |
| |||||
| (a) Name |
| ($) |
|
| ($) |
|
| ($) |
|
| ($) |
|
| ($) |
| |||||
| Robert Coradini |
|
| 3,750 |
|
|
| 1,400 |
|
|
| 12,801 |
|
|
| — |
|
|
| 17,951 |
|
| Scott Davidson |
|
| — |
|
|
| — |
|
|
| 11,467 |
|
|
| — |
|
|
| 11,467 |
|
| Dr. R. Dean Hautamaki |
|
| 7,500 |
|
|
| 1,400 |
|
|
| 12,801 |
|
|
| — |
|
|
| 21,701 |
|
| Makoto Kaneshiro |
|
| 3,750 |
|
|
| 1,400 |
|
|
| 12,801 |
|
|
| — |
|
|
| 17,951 |
|
| Joel Kanter |
|
| 11,250 |
|
|
| 1,400 |
|
|
| 14,712 |
|
|
| — |
|
|
| 27,362 |
|
| Joseph Pesce |
|
| — |
|
|
| — |
|
|
| 11,467 |
|
|
| — |
|
|
| 11,467 |
|
| Alnoor Shivji |
|
| 3,750 |
|
|
| 1,400 |
|
|
| 12,801 |
|
|
| 231,845 | (3) |
|
| 249,796 |
|
| Dr. Timothy Triche |
|
| 3,750 |
|
|
| 1,400 |
|
|
| 21,633 |
|
|
| 118,800 | (4) |
|
| 145,583 |
|
__________
(1) Amounts in this column reflect the aggregate grant date fair value of stock awards granted in the fiscal year computed in accordance with FASB ASC Topic 718, excluding the impact of estimated forfeitures related to service-based vesting conditions. For more information, see Note 2, “Summary of Significant Accounting Policies—Stock-Based Compensation” on page F-10 and Note 8, “Stock Awards” on pages F-16 to F-18. On January 3, 2012, Messrs. Coradini, Kaneshiro, Kanter and Shivji and Drs. Hautamaki and Triche were each granted 101 shares of restricted stock, of which 50 vested immediately, 13 vested on April 3, 2012, 13 vested on July 3, 2012, and 12 vested on October 3, 2012. Each of these awards had a grant date fair value of $1,400. As of December 31, 2012, the aggregate number of outstanding restricted stock held by each of these six non-employee directors was 13, which vested on January 3, 2013.
62
(2) 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, excluding the impact of estimated forfeitures related to service-based vesting conditions. For more information, see Note 2, “Summary of Significant Accounting Policies—Stock-Based Compensation” on page F-10 and Note 8, “Stock Awards” on pages F-16 to F-18. On January 3, 2012, Messrs. Coradini, Kaneshiro, Kanter and Shivji and Drs. Hautamaki and Triche were each granted an option to purchase 201 shares of common stock, of which 25% vest on each of April 3, 2012, July 3, 2012, October 3, 2012, and January 3, 2013. Each of these awards had a grant date fair value of $1,334. On March 1, 2012, Dr. Triche was granted an option to purchase 1,006 shares of common stock, immediately vested, which had a grant date fair value of $8,832. On May 17, 2012, each non-employee member of the Board except Mr. Kanter was granted an option to purchase 1,509 shares of common stock, of which 25% vest on each of July 1, 2012, October 1, 2012, January 1, 2013, and April 1, 2013. Each of these awards had a grant date fair value of $11,467. On May 17, 2012, Mr. Kanter was granted an option to purchase 1,760 shares of common stock, of which 25% vest on each of July 1, 2012, October 1, 2012, January 1, 2013, and April 1, 2013, which had a grant date fair value of $13,378. As of December 31, 2012, the aggregate number of outstanding options held by each non-employee director was 2,514 for Mr. Coradini, 1,509 for Mr. Davidson, 5,630 for Dr. Hautamaki, 2,814 for Mr. Kaneshiro, 3,065 for Mr. Kanter, 1,509 for Mr. Pesce, 5,145 for Mr. Shivji and 3,198 for Dr. Triche.
(3) Mr. Shivji resigned as Chief Executive Officer of the Company effective October 19, 2011, and continued to serve the Company as a consultant, for which he was paid $2,500 per month, until October 19, 2012. The amount in this column includes $24,032 for consultancy fees and $207,813 in severance that was paid in fiscal 2012 in connection with his service as Chief Executive Officer.
(4) Prior to joining the Board in February 2011, Dr. Triche served as a member of our Scientific Advisory Board. He continued to serve the Company as a consultant until February 28, 2013, and the amount in this column represents consultancy fees earned in 2012.
Effective as of April 1, 2012, the board of directors approved the following annual compensation for all non-employee directors:
Each non-employee director shall receive annually a stock option to purchase 1,509 shares of our common stock, or, in the case of the chairperson of our Audit Committee, 1,760 shares of our common stock, with 25% of the shares subject to the stock option vesting each quarter following April 1 of the year of grant.
In addition, in March 2012 the Board approved of the compensation to be paid to Dr. Triche as chair of the Applications and Diagnostics Committee as follows: upon initial appointment to such committee, Dr. Triche received an option to purchase 1,006 shares of the Company’s common stock, which option was 100% vested upon grant.
Non-employee directors are also reimbursed for traveling expenses, if any, related to attending Board meetings.
63
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
December 2009 Private Placement
On December 23, 2009, December 30, 2009, and January 6, 2010, we sold in a private placement 34,110 units consisting of an aggregate of 34,110 shares of our common stock and five-year warrants to purchase an aggregate of up to 8,528 shares of our common stock with an exercise price of $248.48 per share. Under certain circumstances, the warrants are exercisable using cashless exercise. The purchase price for the units was $149.09 per unit, or $5,085,500 in the aggregate.
The purchasers included the Jameel Shivji Irrevocable Trust, the Shivji Children’s Trust fbo Zahra Shivji and the Shivji Children’s Trust fbo Suraya Shivji (each, a “Shivji Children’s Trust”) and The Shivji Family Trust (together with the Shivji Children’s Trusts, the “Shivji Trusts”) (all of which are affiliates of Alnoor Shivji, our Chairman and, at the time of the purchase, also our President and Chief Executive Officer), Cojack Investment Opportunities, LLC (“Cojack”) (which is an affiliate of Dr. Raymond Dean Hautamaki, a member of our board of directors), and certain other investors that participated in our previous private placements. The Shivji Trusts and Cojack purchased 1,174, and 201 units, respectively, for an aggregate purchase price of $175,000, and $30,000, respectively. The Shivji Trusts and Cojack each participated in the December 2009 Private Placement on substantially the same terms as the other purchasers.
July 2010 Registered Direct Offering
On July 1, 2010, we priced a registered direct offering by entering into a securities purchase agreement with certain investors. Pursuant to the terms of the securities purchase agreement, we sold an aggregate of 60,384 shares of our common stock and warrants to purchase a total of 30,192 shares of our common stock to such investors for gross proceeds of $7,202,000 on July 7, 2010. The common stock and warrants were sold in units, with each unit consisting of one share of common stock and a warrant to purchase 50% of a share of common stock. The purchase price per unit was $119.27. Subject to certain ownership limitations, the warrants were exercisable immediately at an exercise price of $154.05 per share. The warrants expire on July 7, 2015, five years after the issuance date, and under certain circumstances are exercisable using cashless exercise. The number of shares issuable upon exercise of the warrants and the exercise price of the warrants are adjustable in the event of stock splits, combinations and reclassifications, but not in the event of the issuance by us of additional securities.
The investors included (i) The Shivji Family Trust (which is an affiliate of Alnoor Shivji, our Chairman and, at the time of the purchase, also our President and Chief Executive Officer), which purchased 8,384 units in the offering for $1,000,001, (ii) Robert Coradini, a member of our board of directors, who purchased 1,258 units in the offering for $150,000, (iii) Dr. Robert Hariri, a member of our board of directors at that time, who purchased 402 units in the offering for $48,000, (iv) Nadine Smith, a member of our board of directors at that time, who purchased 1,677 units in the offering for $200,000, and (v) Cojack (which is an affiliate of Dr. Raymond Dean Hautamaki, a member of our board of directors), which purchased 1,006 units in the offering for $120,000. The Shivji Family Trust, Mr. Coradini, Dr. Hariri, Ms. Smith and Cojack each participated in the July 2010 Registered Direct Offering on substantially the same terms as the other investors.
May 2011 Private Placement
On May 27, 2011, we sold 2,937,500 shares of Series A-1 Convertible Preferred Stock, convertible promissory notes in the principal amount of $15,275,000 and warrants to purchase an aggregate of up to 565,180 shares of our common stock (collectively, the “Series A Securities”) in a private placement for an aggregate purchase price of $30,550,000. Subject to certain ownership limitations, shares of Series A-1 Convertible Preferred Stock were convertible into shares of common stock at a conversion price of $51.68, the convertible promissory notes were convertible into shares of common stock at a conversion price of $56.65 and the warrants were exercisable at an exercise price of $61.62 per share. The warrants were due to expire on May 27, 2016, five years after the issuance date, and under certain circumstances were exercisable using cashless exercise. Under registration rights agreements entered in connection with the sale of the units, the purchasers were entitled “piggyback” registration rights.
64
As indicated in the below table, the purchasers included certain persons who, to our knowledge, owned more than 5% of our common stock, and directors:
|
|
|
| Shares of |
|
|
|
|
|
| |
|
|
|
| Series A-1 |
|
|
|
|
|
| |
|
|
|
| Convertible |
| Convertible |
|
|
|
| |
|
|
|
| Preferred |
| Promissory |
|
|
|
| |
| Name of Beneficial Owner |
|
| Stock |
| Notes |
|
| Warrants(5) |
| |
| 5% Holders: |
|
|
|
|
|
|
|
|
|
|
| Affiliates of Deerfield Management Company, L.P. (1) |
|
| 1,298,076.92 |
| $ | 6,750,000 |
|
| 249,752 |
|
| Entities affiliated with Great Point Partners, LLC (2) |
|
| 1,274,038.90 |
| $ | 6,625,000 |
|
| 245,127 |
|
| Merlin Nexus III, LP |
|
| 240,384.62 |
| $ | 1,250,000 |
|
| 46,250 |
|
| Directors: |
|
|
|
|
|
|
|
|
|
|
| Alnoor Shivji and The Shivji Family Trust dated June 12, 2000 (3) |
|
| 38,461.54 |
| $ | 200,000 |
|
| 7,400 |
|
| Robert Coradini |
|
| 24,038.46 |
| $ | 125,000 |
|
| 4,625 |
|
| Joel Kanter and The Kanter Family Foundation (4) |
|
| 14,423.07 |
| $ | 75,000 |
|
| 2,775 |
|
__________
(1) Comprises Series A Securities purchased by Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., Deerfield Special Situations Fund, L.P. and Deerfield Special Situations Fund International, Limited. For further information see “Security Ownership of Certain Beneficial Owners and Management” above.
(2) Comprises Series A Securities purchased by Biomedical Value Fund, LP, Biomedical Offshore Value Fund, Limited, Biomedical Institutional Value Fund, LP, Lyrical Multi-Manager Fund, LP, Class D Series of GEF-PS, LP, David J. Morrison, WS Investments III, LLC, Thomas C. Jay QPERT, Carolyn Jay Trust, Jeffrey Jay Jr. Trust and Jeffrey and Mary Ellen Jay. All of these funds are administered by Great Point Partners, LLC. Scott Davidson and Joseph Pesce, each of whom is (but was not at the time of purchase) a member of the Board, are managing directors of Great Point Partners, LLC. For further information see “Security Ownership of Certain Beneficial Owners and Management” above.
(3) Comprises Series A Securities purchased by The Shivji Family Trust dated June 12, 2000. Alnoor Shivji, a member of the Board, and his wife, Mariam Shivji, are the co-trustees of The Shivji Family Trust. For further information see “Security Ownership of Certain Beneficial Owners and Management” above.
(4) Comprises Series A Securities purchased by Joel Kanter, a member of the Board, and The Kanter Family Foundation, which Mr. Kanter has voting control and investment power over. For further information see “Security Ownership of Certain Beneficial Owners and Management” above.
(5) Reported on a post-reverse-split basis.
August 2013 Exchange
On August 27, 2013, we issued 1,067,317 shares of our common stock, 2,987.0167 shares of Series 1 Convertible Preferred Stock and warrants to purchase an aggregate of up to 2,369,000 shares of our common stock in exchange for all of the securities issued in the May 2011 Private Placement. Subject to certain ownership limitations, each share of Series 1 Convertible Preferred Stock is convertible into 2,515.3432 shares of our common stock and the warrants are exercisable at an exercise price of $2.60 per share. The warrants expire on August 27, 2018, five years after the issuance date, and under certain circumstances are exercisable using cashless exercise.
65
As indicated in the below table, the investors included certain persons who, to our knowledge, owned more than 5% of our common stock, and directors:
|
|
|
|
|
| Shares of Series 1 Convertible Preferred Stock |
|
|
|
| |
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
| Common Stock |
|
|
|
|
| ||
| Name of Beneficial Owner |
|
|
|
|
| Warrants |
| |||
| 5% Holders: |
|
|
|
|
|
|
|
|
|
|
| Affiliates of Deerfield Management Company, L.P. (1) |
|
| — |
|
| 1,507.4661 |
|
| 1,046,858 |
|
| Entities affiliated with Great Point Partners, LLC (2) |
|
| — |
|
| 1,479.5506 |
|
| 1,027,471 |
|
| Merlin Nexus III, LP |
|
| 702,184 |
|
| — |
|
| 193,863 |
|
| Directors: |
|
|
|
|
|
|
|
|
|
|
| Alnoor Shivji and The Shivji Family Trust dated June 12, 2000 (3) |
|
| 112,349 |
|
| — |
|
| 31,018 |
|
| Robert Coradini |
|
| 70,218 |
|
| — |
|
| 19,386 |
|
| Joel Kanter and The Kanter Family Foundation (4) |
|
| 42,131 |
|
| — |
|
| 11,632 |
|
__________
(1) Comprises Securities acquired by Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., Deerfield Special Situations Fund, L.P. and Deerfield Special Situations International Master Fund, L.P. For further information see “Security Ownership of Certain Beneficial Owners and Management” above.
(2) Comprises Securities acquired by Biomedical Value Fund, LP, Biomedical Offshore Value Fund, Limited, Biomedical Institutional Value Fund, LP, Lyrical Multi-Manager Fund, LP, Lyrical Multi-Manager Offshore Fund, Ltd., Class D Series of GEF-PS, LP, David J. Morrison, WS Investments III, LLC, Thomas C. Jay QPERT, Carolyn Jay Trust, Jeffrey Jay Jr. Trust and Jeffrey and Mary Ellen Jay. All of these funds are administered by Great Point Partners, LLC. Scott Davidson and Joseph Pesce, each of whom is a member of the Board, are managing directors of Great Point Partners, LLC. For further information see “Security Ownership of Certain Beneficial Owners and Management” above.
(3) Comprises Securities acquired by The Shivji Family Trust dated June 12, 2000. Alnoor Shivji, a member of the Board, and his wife, Mariam Shivji, are the co-trustees of The Shivji Family Trust. For further information see “Security Ownership of Certain Beneficial Owners and Management” above.
(4) Comprises Securities acquired by Joel Kanter, a member of the Board, and The Kanter Family Foundation, which Mr. Kanter has voting control and investment power over. For further information see “Security Ownership of Certain Beneficial Owners and Management” above.
Pursuant to the Exchange Agreement entered into by the Company with the investors in connection with the August 2013 Exchange, for as long as at least 50% of the shares of Series 1 Convertible Preferred Stock issued in connection with the August 2013 Exchange and/or shares of common stock issued upon conversion thereof remain outstanding, the Company and each Investor who is a current member of the Company’s management or board of directors is required to use reasonable best efforts to ensure that (including with respect to such Investors, by voting (or consenting with respect thereto) any shares of common stock then owned by them accordingly) two individuals, as may be designated by Great Point Partners, LLC from time to time, are elected as members of the Board. Mr. Davidson and Mr. Pesce are each Managing Directors of Great Point Partners, LLC, and were designated by Great Point Partners to serve as members of the Board.
For more information regarding the terms of the August 2013 Exchange and the Series 1 Convertible Preferred Stock, see “Prospectus Summary--August 2013 Exchange” and “Description of Securities--Description of Preferred Stock” included elsewhere in this prospectus.
2013 Private Placement
On August 27, 2013 and September 30, 2013, we sold an aggregate of 5,893,750 shares of our common stock, 646.0351 shares of Series 1 Convertible Preferred Stock and warrants to purchase an aggregate of up to 3,759,379 shares of our common stock in the 2013 Private Placement for an aggregate purchase price of $15,037,500. Subject to certain ownership limitations, each share of Series 1 Convertible Preferred Stock is convertible into 2,515.3432 shares of our common stock and the warrants are exercisable at an exercise price of $2.60 per share. The warrants expire five years after the applicable issuance date, and under certain circumstances are exercisable using cashless exercise.
66
As indicated in the below table, the investors included certain persons who, to our knowledge, owned more than 5% of our common stock, and directors:
|
|
|
|
|
|
| Shares of Series 1 Convertible Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| Aggregate Purchase Price |
|
|
|
|
|
| |
|
|
|
| Common Stock |
|
|
|
| ||
| Name of Beneficial Owner |
|
|
|
| Warrants |
| |||
| 5% Holders: |
|
|
|
|
|
|
|
|
|
| Affiliates of Deerfield Management Company, L.P. (1) | $ | 1,700,000 |
| — |
| 337.9260 |
| 425,001 |
|
| Entities affiliated with Great Point Partners, LLC (2) | $ | 1,550,000 |
| — |
| 308.1091 |
| 387,503 |
|
| Merlin Nexus III, LP | $ | 55,000 |
| 27,500 |
| — |
| 13,750 |
|
| Directors: |
|
|
|
|
|
|
|
|
|
| Alnoor Shivji and The Shivji Family Trust dated June 12, 2000 (3) | $ | 100,000 |
| 50,000 |
| — |
| 25,000 |
|
| Robert Coradini | $ | 125,000 |
| 62,500 |
| — |
| 31,250 |
|
| Joel Kanter and The Kanter Family Foundation (4) | $ | 60,000 |
| 30,000 |
| — |
| 15,000 |
|
__________
(1) Comprises Securities acquired by Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., Deerfield Special Situations Fund, L.P. and Deerfield Special Situations International Master Fund, L.P. For further information see “Security Ownership of Certain Beneficial Owners and Management” above.
(2) Comprises Securities acquired by Biomedical Value Fund, LP, Biomedical Offshore Value Fund, Limited, Biomedical Institutional Value Fund, LP, Class D Series of GEF-PS, LP, David J. Morrison, WS Investments II, LLC, Thomas C. Jay QPERT, Carolyn Jay Trust, Jeffrey Jay Jr. Trust and Jeffrey and Mary Ellen Jay. All of these funds are administered by Great Point Partners, LLC. Scott Davidson and Joseph Pesce, each of whom is a member of the Board, are managing directors of Great Point Partners, LLC. For further information see “Security Ownership of Certain Beneficial Owners and Management” above.
(3) Comprises Securities acquired by The Shivji Family Trust dated June 12, 2000. Alnoor Shivji, a member of the Board, and his wife, Mariam Shivji, are the co-trustees of The Shivji Family Trust. For further information see “Security Ownership of Certain Beneficial Owners and Management” above.
(4) Comprises Securities acquired by Joel Kanter, a member of the Board, and The Kanter Family Foundation, which Mr. Kanter has voting control and investment power over. For further information see “Security Ownership of Certain Beneficial Owners and Management” above.
For more information regarding the terms of the 2013 Private Placement and the Series 1 Convertible Preferred Stock, see “Prospectus Summary--2013 Private Placement” and “Description of Securities--Description of Preferred Stock” included elsewhere in this prospectus.
Compensation Arrangements
See “Executive Compensation,” above for information about employment agreements and other compensation arrangements between us and our executive officers and directors.
Director Independence
We are not currently listed on any national securities exchange. However, in evaluating the independence of the members and the Board, we utilize the rules of the NASDAQ Stock Market.
The Board has determined that Messrs. Coradini, Davidson, Kaneshiro, Kanter and Pesce and Drs. Hautamaki and Triche are independent.
67
Authorized Capital Stock
Our articles of incorporation, as amended and restated, authorizes 310,000,000 shares of capital stock, par value $0.001 per share, of which 300,000,000 are shares of common stock and 10,000,000 are shares of “blank-check” preferred stock.
Description of Common Stock
We are authorized to issue 300,000,000 shares of common stock, 7,380,495 shares of which were issued and outstanding as of October 4, 2013. The holders of our common stock are entitled to one vote per share on all matters submitted to a vote of the stockholders, including the election of directors. Generally, all matters to be voted on by stockholders must be approved by a majority of the votes entitled to be cast by all shares of common stock that are present in person or represented by proxy, subject to any voting rights granted to holders of any preferred stock. Except as otherwise provided by law, and subject to any voting rights granted to holders of any preferred stock, amendments to our Articles of Incorporation generally must be approved by a majority of the votes entitled to be cast by all outstanding shares of common stock. Our Articles of Incorporation do not provide for cumulative voting in the election of directors. Subject to any preferential rights of any outstanding series of preferred stock created by our board of directors from time to time, the holders of our common stock will be entitled to cash dividends as may be declared, if any, by our board of directors from funds available. Subject to any preferential rights of any outstanding series of preferred stock, upon liquidation, dissolution or winding up of our company, the holders of our common stock will be entitled to receive pro rata all assets available for distribution to the holders.
Description of Preferred Stock
We are authorized to issue 10,000,000 shares of “blank check” preferred stock. Our board of directors is vested with authority to divide the shares of preferred stock into series and to fix and determine the relative designation, powers, preferences and rights of the shares of any series and the qualifications, limitations, or restrictions or any unissued series of preferred stock. Our board of directors has designated 3,663 shares of our preferred stock as Series 1 Convertible Preferred Stock, of which 3,633.0518 shares are issued and outstanding. The Series 1 Convertible Preferred Stock has preferences and rights as set forth in a Certificate of Designation. Prior to August 27, 2013, our board of directors had designated 9,000,000 shares of Series A Preferred Stock, of which 4,500,000 shares were designated Series A-1 Preferred Stock, 2,937,499.97 shares of which were issued and outstanding, and 4,500,000 shares were designated Series A-2 Preferred Stock, none of which were issued or outstanding. After giving effect to the Exchange, the Company retired the Series A-1 Preferred Shares subject to the Exchange and no Series A Preferred Shares remained issued and outstanding and none will be issued in the future.
Holders of Series 1 Preferred Shares are entitled to be paid a liquidation preference equal to $0.001 per share. The Series 1 Certificate of Designation provides, among other things, that the Company shall not pay any dividends on shares of common stock (other than dividends in the form of common stock) unless and until such time as it pays dividends on each Series 1 Preferred Share on an as-converted basis. Other than as set forth in the previous sentence, the Series 1 Certificate of Designation provides that no other dividends shall be paid on Series 1 Preferred Shares and that the Company shall pay no dividends (other than dividends in the form of common stock) on shares of common stock unless it simultaneously complies with the previous sentence.
With certain exceptions, as described in the Certificate of Designation, the Series 1 Preferred Shares have no voting rights. However, as long as any shares of Series 1 Preferred Shares remain outstanding, the Certificate of Designation provides that we shall not, without the affirmative vote of holders of not less than 67% of the then outstanding Series 1 Preferred Shares, (a) alter or change adversely the powers, preferences or rights given to the Series 1 Preferred Shares or alter or amend the Certificate of Designation, (b) increase the number of authorized shares of Series 1 Preferred, (c) effect a stock split or reverse stock split of the Series 1 Preferred Shares or any like event, or (d) enter into any agreement with respect to any of the foregoing.
Each Series 1 Preferred Share is convertible at any time at the holder’s option into a number of shares of common stock equal to $10,000 per share, plus an amount equal to any accrued (whether or not declared) or declared, but unpaid, dividends on such share (the “Stated Value”), divided by the Conversion Price (the “Conversion Ratio”). The “Conversion Price” is initially $3.9756, subject to adjustment for stock splits, stock dividends, distributions, subdivisions and combinations. Additionally, the Series 1 Certificate of Designation requires each holder to automatically convert its Series 1 Preferred Shares on November 15, 2013, and on each May 15 and November 15 thereafter to the fullest extent such conversion may be effected without causing such holder’s beneficial ownership of common stock to exceed the Beneficial Ownership Limitation (defined below). Notwithstanding the foregoing, the Series 1 Certificate of Designation further provides that we shall not effect any conversion of Series 1 Preferred Shares, with certain exceptions, to the extent that, after giving effect to an attempted conversion, the holder of Series 1 Preferred Shares (together with such holder’s affiliates, and any other person whose beneficial ownership of common stock would be aggregated with the holder’s for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, and the applicable regulations thereunder, including any “group” of which the holder is a member) would beneficially own a number of shares of common stock in excess of 9.98% of the shares of our common stock then outstanding.
68
Table of Contents
Liability and Indemnification of Directors and Officers
Nevada Revised Statutes (NRS) Sections 78.7502 and 78.751 provide us with the power to indemnify any of our directors and officers. The director or officer must have conducted himself/herself in good faith and reasonably believe that his/her conduct was in, or not opposed to, our best interests. In a criminal action, the director or officer must not have had reasonable cause to believe his/her conduct was unlawful.
Under NRS Section 78.751, advances for expenses may be made by agreement if the director or officer affirms in writing that he/she believes he/she has met the standards and will personally repay the expenses if it is determined the officer or director did not meet the standards.
Our bylaws include an indemnification provision under which we have the power to indemnify, to the extent permitted under Nevada law, our current and former directors and officers, or any person who serves or served at our request for our benefit as a director or officer of another corporation or our representative in a partnership, joint venture, trust or other enterprise, against all expenses, liability and loss reasonably incurred by reason of being or having been a director, officer or representative of ours or any of our subsidiaries. We may make advances for expenses upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he/she is not entitled to be indemnified by us. If Section 2115 of the CGCL is applicable to us, the laws of California also will govern.
Our articles of incorporation provide a limitation of liability such that no director or officer shall be personally liable to us or any of our stockholders for damages for breach of fiduciary duty as a director or officer, involving any act or omission of any such director or officer, provided there was no intentional misconduct, fraud or a knowing violation of the law, or payment of dividends in violation of NRS Section 78.300.
We have entered into separate indemnification agreements with our directors and officers which would require us, among other things, to indemnify them against certain liabilities which may arise by reason of their status or service as directors or officers to the fullest extent permitted by law. At present, there is no pending litigation or proceeding involving any of our directors or officers of regarding which indemnification is sought, nor are we aware of any threatened litigation that may result in claims for indemnification. We also maintain insurance policies that indemnify our directors and officers against various liabilities, including liabilities arising under the Securities Act, that might be incurred by any director or officer in his or her capacity as such.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted for our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event a claim for indemnification against such liabilities (other than payment by us for expenses incurred or paid by a director, officer or controlling person of ours in successful defense of any action, suit, or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction, the question of whether such indemnification by it is against public policy in the Securities Act and will be governed by the final adjudication of such issue.
Anti-Takeover Effects of Provisions of Nevada State Law
In the future we may become subject to Nevada’s control share law. A corporation is subject to Nevada’s control share law if it has more than 200 stockholders, at least 100 of whom are stockholders of record and residents of Nevada, and if the corporation does business in Nevada or through an affiliated corporation.
The law focuses on the acquisition of a “controlling interest” which means the ownership of outstanding voting shares is sufficient, but for the control share law, to enable the acquiring person to exercise the following proportions of the voting power of the corporation in the election of directors: (1) one-fifth or more but less than one-third, (2) one-third or more but less than a majority, or (3) a majority or more. The ability to exercise voting power may be direct or indirect, as well as individual or in association with others.
69
The effect of the control share law is that the acquiring person, and those acting in association with that person, obtain only voting rights in the control shares as are conferred by a resolution of the stockholders of the corporation, approved at a special or annual meeting of stockholders. The control share law contemplates that voting rights will be considered only once by the other stockholders. Thus, there is no authority to take away voting rights from the control shares of an acquiring person once those rights have been approved. If the stockholders do not grant voting rights to the control shares acquired by an acquiring person, those shares do not become permanent non-voting shares. The acquiring person is free to sell its shares to others. If the buyers of those shares themselves do not acquire a controlling interest, their shares do not become governed by the control share law.
If control shares are accorded full voting rights and the acquiring person has acquired control shares with a majority or more of the voting power, any stockholder of record, other than an acquiring person, who has not voted in favor of approval of voting rights is entitled to demand fair value for the stockholder’s shares.
Nevada’s control share law may have the effect of discouraging corporate takeovers.
In addition to the control share law, Nevada has a business combination law, which prohibits some business combinations between Nevada corporations and “interested stockholders” for three years after the “interested stockholder” first becomes an “interested stockholder” unless the corporation’s board of directors approves the combination in advance. For purposes of Nevada law, an “interested stockholder” is any person who is (1) the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting shares of the corporation, or (2) an affiliate or associate of the corporation and at any time within the three previous years was the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the then outstanding shares of the corporation. The definition of the term “business combination” is sufficiently broad to cover virtually any kind of transaction that would allow a potential acquirer to use the corporation’s assets to finance the acquisition or otherwise to benefit its own interests rather than the interests of the corporation and its other stockholders.
The effect of Nevada’s business combination law is to potentially discourage parties interested in taking control of our company from doing so if it cannot obtain the approval of our board of directors.
Transfer Agent
The transfer agent for our common stock is Continental Stock Transfer & Trust Company. The transfer agent address is 17 Battery Place, 8th Fl., New York, NY 10004, and its telephone number is 1-800-509-5586.
The validity of the common stock being offered hereby has been passed upon by McDonald Carano Wilson, LLP, Reno, Nevada.
SingerLewak LLP, an independent registered public accounting firm, have audited our financial statements for the years ended December 31, 2012 and 2011, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
70
CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT
Our Audit Committee approved of the engagement of SingerLewak LLP (“SingerLewak”) as our new independent registered public accounting firm on April 15, 2011, and dismissed Rowbotham and Company LLP (“Rowbotham”) from that role on April 15, 2011.
During our fiscal year ended December 31, 2010, and through April 15, 2011, we did not consult with SingerLewak regarding any matters described in Items 304(a)(2)(i) or 304(a)(2)(ii) of Regulation S-K.
The reports of Rowbotham on our consolidated financial statements for the fiscal year ended December 31, 2010, did not contain an adverse opinion or a disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principles, except that our audited financial statements included in our annual report on Form 10-K for the year ending December 31, 2010, contained an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.
During our fiscal year ended December 31, 2010, and through April 15, 2011, there were no “reportable events” (as defined in Item 304(a)(1)(v) of Regulation S-K), except that in connection with management’s assessment of our internal control over financial reporting, we identified certain material weaknesses in our internal control over financial reporting as follows:
(A) as of the end each of the first two quarters of the year ended December 31, 2010, we identified the following material weaknesses in our internal control over financial reporting: (i) we had not designed or otherwise maintained adequate controls to ensure that we adopted new accounting policies with respect to non-routine matters, such as the accounting of warrants with anti-dilution protection; (ii) we had not adequately divided, or compensated for, incompatible functions among personnel to reduce the risk that a potential material misstatement of the financial statements would occur without being prevented or detected; and (iii) we had insufficient documentation of our information technology general control environment;
(B) as of the end of the third quarter for the year ended December 31, 2010: (i) we had not adequately divided, or compensated for, incompatible functions among personnel to reduce the risk that a potential material misstatement of the financial statements would occur without being prevented or detected; (ii) we had insufficient documentation of our information technology general control environment; and (iii) we relied on our external auditors to review and adjust our accounting and related financial disclosures regarding the Redeemable Convertible Preference Shares of our subsidiary; and
(C) as of the end of the fourth quarter for the year ended December 31, 2010, we identified the following material weaknesses in our internal control over financial reporting: (i) we had not adequately divided, or compensated for, incompatible functions among personnel to reduce the risk that a potential material misstatement of the financial statements would occur without being prevented or detected; and (ii) we relied on our external auditors to review and adjust our accounting and related financial disclosures regarding the Redeemable Convertible Preference Shares of our subsidiary.
Our Audit Committee discussed each of the matters contained in the third and fourth paragraphs above with Rowbotham. We authorized Rowbotham to respond fully to the inquiries of our successor accountants concerning each of these matters.
During our fiscal year ended December 31, 2010, and through April 15, 2011, we did not have any disagreements with Rowbotham on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of Rowbotham, would have caused it to make reference to the subject matter of the disagreements in connection with its reports on the consolidated financial statements for such years.
71
WHERE YOU CAN FIND MORE INFORMATION
We file annual reports, quarterly reports, current reports, proxy statements and other information with the SEC. You may read or obtain a copy of these reports at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549, on official business days during the hours of 10:00 am to 3:00 pm. You may obtain information on the operation of the public reference room and its copy charges by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains registration statements, reports, proxy information statements and other information regarding registrants that file electronically with the SEC. The address of the website is http://www.sec.gov.
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock being offered by this prospectus. This prospectus is part of that registration statement. This prospectus does not contain all of the information set forth in the registration statement or the exhibits to the registration statement. For further information with respect to us and the shares we are offering pursuant to this prospectus, you should refer to the registration statement and its exhibits. Statements contained in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete, and you should refer to the copy of that contract or other documents filed as an exhibit to the registration statement. You may read or obtain a copy of the registration statement at the SEC’s public reference room and website referred to above.
72
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Unaudited Condensed Consolidated Financial Statements |
| Page |
|
|
|
|
| Condensed Consolidated Balance Sheets – June 30, 2013, and December 31, 2012 |
| F- 28 |
|
|
|
|
|
| F- 29 | |
|
|
|
|
| Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012 |
| F- 30 |
|
|
|
|
|
| F- 31 |
73
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
WaferGen Bio-systems, Inc.
We have audited the accompanying consolidated balance sheets of WaferGen Bio-systems, Inc. and subsidiaries (collectively, the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WaferGen Bio-systems, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements the Company has incurred operating losses and negative cash flows since inception. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ SingerLewak LLP
San Jose, California
March 22, 2013
F-1
|
|
| December 31, 2012 |
| December 31, 2011 |
| ||
| Assets |
|
|
|
|
|
|
|
| Current assets: |
|
|
|
|
|
|
|
| Cash and cash equivalents |
| $ | 6,328,753 |
| $ | 15,117,172 |
|
| Accounts receivable |
|
| 307,759 |
|
| 29,382 |
|
| Inventories, net |
|
| 495,486 |
|
| 745,008 |
|
| Prepaid expenses and other current assets |
|
| 134,567 |
|
| 186,138 |
|
|
|
|
|
|
|
|
|
|
| Total current assets |
|
| 7,266,565 |
|
| 16,077,700 |
|
|
|
|
|
|
|
|
|
|
| Property and equipment, net |
|
| 874,062 |
|
| 1,714,090 |
|
| Other assets |
|
| 756,831 |
|
| 852,093 |
|
|
|
|
|
|
|
|
|
|
| Total assets |
| $ | 8,897,458 |
| $ | 18,643,883 |
|
|
|
|
|
|
|
|
|
|
| Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
| Current liabilities: |
|
|
|
|
|
|
|
| Accounts payable |
| $ | 474,436 |
| $ | 772,411 |
|
| Accrued payroll and related costs |
|
| 235,404 |
|
| 646,715 |
|
| Other accrued expenses |
|
| 1,063,813 |
|
| 682,284 |
|
|
|
|
|
|
|
|
|
|
| Total current liabilities |
|
| 1,773,653 |
|
| 2,101,410 |
|
|
|
|
|
|
|
|
|
|
| Long-term debt, net of current portion |
|
| 3,393,159 |
|
| 1,405,967 |
|
| Derivative liabilities |
|
| 2,208,184 |
|
| 5,967,330 |
|
|
|
|
|
|
|
|
|
|
| Total liabilities |
|
| 7,374,996 |
|
| 9,474,707 |
|
|
|
|
|
|
|
|
|
|
| Commitments and contingencies (Notes 5 and 16) |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
| Stockholders’ equity: |
|
|
|
|
|
|
|
| Series A, B and C convertible preference shares of subsidiary |
|
| 6,117,134 |
|
| 6,117,134 |
|
| Preferred Stock: $0.001 par value; 10,000,000 shares authorized; 2,937,500 shares issued and outstanding at December 31, 2012 and 2011 |
|
| 9,838,569 |
|
| 9,838,569 |
|
| Common Stock: $0.001 par value; 300,000,000 shares authorized; 41,680,902 and 41,619,402 shares issued and outstanding at December 31, 2012 and 2011 |
|
| 41,681 |
|
| 41,619 |
|
| Additional paid-in capital |
|
| 49,892,346 |
|
| 49,504,516 |
|
| Accumulated deficit |
|
| (64,571,897 | ) |
| (56,395,235 | ) |
| Accumulated other comprehensive income |
|
| 204,629 |
|
| 62,573 |
|
|
|
|
|
|
|
|
|
|
| Total stockholders’ equity |
|
| 1,522,462 |
|
| 9,169,176 |
|
|
|
|
|
|
|
|
|
|
| Total liabilities and stockholders’ equity |
| $ | 8,897,458 |
| $ | 18,643,883 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-2
Consolidated Statements of Operations and Comprehensive Loss
|
|
| Year Ended December 31, |
| ||||
|
|
| 2012 |
| 2011 |
| ||
|
|
|
|
|
|
|
|
|
| Revenue |
| $ | 586,176 |
| $ | 522,931 |
|
|
|
|
|
|
|
|
|
|
| Cost of revenue |
|
| 420,877 |
|
| 1,401,904 |
|
|
|
|
|
|
|
|
|
|
| Gross profit (loss) |
|
| 165,299 |
|
| (878,973 | ) |
|
|
|
|
|
|
|
|
|
| Operating expenses: |
|
|
|
|
|
|
|
| Sales and marketing |
|
| 791,915 |
|
| 3,311,433 |
|
| Research and development |
|
| 6,161,548 |
|
| 8,290,550 |
|
| General and administrative |
|
| 2,977,812 |
|
| 6,221,884 |
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
| 9,931,275 |
|
| 17,823,867 |
|
|
|
|
|
|
|
|
|
|
| Operating loss |
|
| (9,765,976 | ) |
| (18,702,840 | ) |
|
|
|
|
|
|
|
|
|
| Other income and (expenses): |
|
|
|
|
|
|
|
| Interest income |
|
| 7,420 |
|
| 15,218 |
|
| Interest expense (including excess debt discount of $2,255,074 expensed as interest in the year ended December 31, 2011) |
|
| (2,082,558 | ) |
| (3,336,217 | ) |
| Gain on revaluation of derivative liabilities, net |
|
| 3,759,146 |
|
| 9,271,985 |
|
| Liquidated damages for late S-1 registration |
|
| — |
|
| (532,161 | ) |
| Miscellaneous income (expense) |
|
| (116,147 | ) |
| 166,184 |
|
|
|
|
|
|
|
|
|
|
| Total other income and (expenses) |
|
| 1,567,861 |
|
| 5,585,009 |
|
|
|
|
|
|
|
|
|
|
| Net loss before provision for income taxes |
|
| (8,198,115 | ) |
| (13,117,831 | ) |
|
|
|
|
|
|
|
|
|
| Provision for income taxes |
|
| (21,453 | ) |
| 27,247 |
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
| (8,176,662 | ) |
| (13,145,078 | ) |
|
|
|
|
|
|
|
|
|
| Accretion on Series A and B convertible preference shares of subsidiary associated with premium |
|
| — |
|
| 15,242 |
|
| Accretion on Series A-1 Convertible Preferred Stock associated with beneficial conversion feature |
|
| — |
|
| (9,250,009 | ) |
| Series A-1 preferred dividend |
|
| (801,534 | ) |
| (458,208 | ) |
|
|
|
|
|
|
|
|
|
| Net loss attributable to common stockholders |
| $ | (8,978,196 | ) | $ | (22,838,053 | ) |
|
|
|
|
|
|
|
|
|
| Net loss per share - basic and diluted |
| $ | (0.22 | ) | $ | (0.55 | ) |
|
|
|
|
|
|
|
|
|
| Shares used to compute net loss per share - basic and diluted |
|
| 41,660,953 |
|
| 41,455,980 |
|
|
|
|
|
|
|
| ||
| Comprehensive Loss: |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Net loss |
| $ | (8,176,662 | ) | $ | (13,145,078 | ) |
|
|
|
|
|
|
|
|
|
| Foreign currency translation adjustments |
|
| 142,056 |
|
| (225,304 | ) |
|
|
|
|
|
|
|
|
|
| Total comprehensive loss |
| $ | (8,034,606 | ) | $ | (13,370,382 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Consolidated Statements of Stockholders’ Equity
|
|
| Series A, B and C |
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| ||||||||||||||
|
|
| Convertible Preference |
| Series A-1 |
|
|
|
| Additional |
|
|
| Other |
|
|
| ||||||||||||||
|
|
| Shares of Subsidiary |
| Preferred Stock |
|
| Common Stock |
| Paid-in |
| Accumulated |
| Comprehensive |
|
|
| ||||||||||||||
|
|
| Shares |
| Amount |
| Shares |
| Amount |
|
| Shares |
| Amount |
| Capital |
| Deficit |
| Income |
| Total |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Balances as of January 1, 2011 |
|
| — |
| $ | — |
| — |
| $ | — |
|
| 41,175,464 |
| $ | 41,175 |
| $ | 38,881,075 |
| $ | (43,265,399 | ) | $ | 287,877 |
| $ | (4,055,272 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Restricted stock issued for services, net of forfeitures |
|
| — |
|
| — |
| — |
|
| — |
|
| 240,444 |
|
| 240 |
|
| (688 | ) |
| — |
|
| — |
|
| (448 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuance of common stock for cash upon exercise of options, net of 121,246 shares forfeited in cashless exercise |
|
| — |
|
| — |
| — |
|
| — |
|
| 203,494 |
|
| 204 |
|
| 8,996 |
|
| — |
|
| — |
|
| 9,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuance of Series C convertible preference shares of subsidiary |
|
| 3,233,734 |
|
| 4,993,728 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 4,993,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Reclassification of Series A convertible preference shares of subsidiary to permanent equity resulting from amendment to terms of redemption option |
|
| 888,888 |
|
| 206 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Reclassification of Series B convertible preference shares of subsidiary to permanent equity due to lapse of redemption option |
|
| 444,444 |
|
| 1,123,200 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1,123,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuance of Series A-1 Convertible Preferred Stock for cash, net of allocated offering costs of $886,422 |
|
| — |
|
| — |
| 2,937,500 |
|
| 9,838,569 |
|
| — |
|
| — |
|
| 9,250,009 |
|
| — |
|
| — |
|
| 19,088,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuance of warrants, net of allocated offering costs of $806,039 |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| 8,946,378 |
|
| — |
|
| — |
|
| 8,946,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Transfer on waiver of anti-dilution rights related to 1,051,074 warrants |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| 315,803 |
|
| — |
|
| — |
|
| 315,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Transfer on waiver of cure amount rights related to convertible promissory notes |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| 573,923 |
|
| — |
|
| — |
|
| 573,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stock-based compensation |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| 779,029 |
|
| — |
|
| — |
|
| 779,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (13,145,078 | ) |
| — |
|
| (13,145,078 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accretion on Series A-1 Convertible Preferred Stock associated with beneficial conversion feature |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (9,250,009 | ) |
| — |
|
| — |
|
| (9,250,009 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accretion on redeemable convertible preference shares of subsidiary associated with premium |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 15,242 |
|
| — |
|
| 15,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Translation adjustment |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (225,304 | ) |
| (225,304 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balances as of December 31, 2011 |
|
| 4,567,066 |
| $ | 6,117,134 |
| 2,937,500 |
| $ | 9,838,569 |
|
| 41,619,402 |
| $ | 41,619 |
| $ | 49,504,516 |
| $ | (56,395,235 | ) | $ | 62,573 |
| $ | 9,169,176 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Consolidated Statements of Stockholders’ Equity
|
|
| Series A, B and C |
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| ||||||||||||||
|
|
| Convertible Preference |
| Series A-1 |
|
|
|
| Additional |
|
|
| Other |
|
|
| ||||||||||||||
|
|
| Shares of Subsidiary |
| Preferred Stock |
|
| Common Stock |
| Paid-in |
| Accumulated |
| Comprehensive |
|
|
| ||||||||||||||
|
|
| Shares |
| Amount |
| Shares |
| Amount |
|
| Shares |
| Amount |
| Capital |
| Deficit |
| Income |
| Total |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Balances as of January 1, 2012 |
|
| 4,567,066 |
| $ | 6,117,134 |
| 2,937,500 |
| $ | 9,838,569 |
|
| 41,619,402 |
| $ | 41,619 |
| $ | 49,504,516 |
| $ | (56,395,235 | ) | $ | 62,573 |
| $ | 9,169,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Restricted stock issued for services, net of forfeitures |
|
| — |
|
| — |
| — |
|
| — |
|
| 61,500 |
|
| 62 |
|
| (62 | ) |
| — |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stock-based compensation |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| 387,892 |
|
| — |
|
| — |
|
| 387,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (8,176,662 | ) |
| — |
|
| (8,176,662 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Translation adjustment |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 142,056 |
|
| 142,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balances as of December 31, 2012 |
|
| 4,567,066 |
| $ | 6,117,134 |
| 2,937,500 |
| $ | 9,838,569 |
|
| 41,680,902 |
| $ | 41,681 |
| $ | 49,892,346 |
| $ | (64,571,897 | ) | $ | 204,629 |
| $ | 1,522,462 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Consolidated Statements of Cash Flows
|
|
| Year Ended December 31, |
| ||||
|
|
| 2012 |
| 2011 |
| ||
|
|
|
|
|
|
| ||
| Cash flows from operating activities: |
|
|
|
|
|
|
|
| Net loss |
| $ | (8,176,662 | ) | $ | (13,145,078 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
| Depreciation and amortization |
|
| 903,291 |
|
| 834,861 |
|
| Stock-based compensation |
|
| 387,892 |
|
| 779,029 |
|
| Exchange gain on issuance of convertible preference shares of subsidiary |
|
| — |
|
| (58,575 | ) |
| Gain on revaluation of derivative liabilities, net |
|
| (3,759,146 | ) |
| (9,271,985 | ) |
| Liquidated damages for late S-1 registration |
|
| — |
|
| 532,161 |
|
| Excess debt discount expensed as interest |
|
| — |
|
| 2,255,074 |
|
| Interest converted to principal on convertible promissory notes |
|
| 801,645 |
|
| 460,383 |
|
| Provision for excess and obsolete inventory |
|
| 59,175 |
|
| 1,052,266 |
|
| Amortization of debt discount |
|
| 1,185,547 |
|
| 113,081 |
|
| Change in operating assets and liabilities: |
|
|
|
|
|
|
|
| Restricted cash |
|
| — |
|
| 100,651 |
|
| Accounts receivable |
|
| (278,457 | ) |
| 749,010 |
|
| Inventories |
|
| 190,299 |
|
| (1,523,541 | ) |
| Prepaid expenses and other assets |
|
| 146,783 |
|
| 483,943 |
|
| Accounts payable |
|
| (298,086 | ) |
| (424,479 | ) |
| Accrued payroll and related costs |
|
| (411,506 | ) |
| 207,068 |
|
| Other accrued expenses |
|
| 381,337 |
|
| 229,247 |
|
|
|
|
|
|
|
|
|
|
| Net cash used in operating activities |
|
| (8,867,888 | ) |
| (16,626,884 | ) |
|
|
|
|
|
|
|
|
|
| Cash flows from investing activities: |
|
|
|
|
|
|
|
| Purchase of property and equipment |
|
| (54,767 | ) |
| (621,120 | ) |
|
|
|
|
|
|
|
|
|
| Net cash used in investing activities |
|
| (54,767 | ) |
| (621,120 | ) |
|
|
|
|
|
|
|
|
|
| Cash flows from financing activities: |
|
|
|
|
|
|
|
| Repayment of capital lease obligations |
|
| — |
|
| (8,852 | ) |
| Net proceeds from issuance of Series C convertible preference shares of subsidiary |
|
| — |
|
| 5,052,303 |
|
| Repayment of term loan |
|
| — |
|
| (2,178,585 | ) |
| Net proceeds from issuance of Series A-1 convertible preferred stock, convertible promissory notes and warrants |
|
| — |
|
| 27,492,876 |
|
| Proceeds from issuance of common stock and warrants, net of offering costs |
|
| — |
|
| 9,200 |
|
| Payment of taxes for restricted stock forfeited |
|
| — |
|
| (448 | ) |
|
|
|
|
|
|
|
|
|
| Net cash provided by financing activities |
|
| — |
|
| 30,366,494 |
|
|
|
|
|
|
|
|
|
|
| Effect of exchange rates on cash |
|
| 134,236 |
|
| (211,259 | ) |
|
|
|
|
|
|
|
|
|
| Net increase (decrease) in cash and cash equivalents |
|
| (8,788,419 | ) |
| 12,907,231 |
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents at beginning of the period |
|
| 15,117,172 |
|
| 2,209,941 |
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents at end of the period |
| $ | 6,328,753 |
| $ | 15,117,172 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 1. The Company
General. WaferGen Bio-systems, Inc. and its subsidiaries (the “Company”) are engaged in the development, manufacture and sale of systems used for gene expression quantification, genotyping and stem cell research. The Company’s products are aimed at researchers who perform genetic analysis, primarily at pharmaceutical and biotech companies, academic and private research centers and diagnostics companies involved in biomarker discovery and genetic research. Through the SmartChip products, the Company plans to provide new performance standards with significant savings in time and cost for professionals in the field of gene expression research and to facilitate biomarker discovery, toxicology, and clinical research.
Wafergen, Inc. was incorporated in the State of Delaware on October 22, 2002, and was acquired by WaferGen Bio-systems, Inc. in a reverse merger on May 31, 2007.
On January 24, 2008, the Company formed a new subsidiary in Kulim Hi-Tech Park, Kedah, Malaysia. This subsidiary, WaferGen Biosystems (M) Sdn. Bhd. (“WGBM”), is involved in various initiatives to support a number of the Company’s ongoing development and commercialization goals. The Company owns 100% of the common stock and 8.2% (including all shares that have been assumed by the Company pursuant to exercises of exchange rights) of the preference shares of this entity. The Company expects that all of the subsidiary’s preference shares will be converted into shares of the Company, however if all preference shares were converted into common stock of WGBM, the Company would own 72.8% of WGBM’s common stock. See Note 6 below.
On August 30, 2011, the Company formed a new wholly owned subsidiary in Luxembourg, to establish a presence for its marketing and research activities in Europe.
On May 27, 2011, the Company completed a private placement offering (the “May 2011 Private Placement”) with certain accredited investors, pursuant to which the Company sold an aggregate of approximately 2,937,500 shares of Series A-1 Convertible Preferred Stock at a stated value of $5.20 per share, with each share being convertible into ten shares of common stock, convertible promissory notes in the aggregate principal amount of $15,275,000, convertible into an aggregate of approximately 2,679,824 shares of Series A-2 Convertible Preferred Stock at a price of $5.70 per share, with each share being convertible into ten shares of common stock, and warrants to purchase 56,173,248 shares of the Company’s common stock at an exercise price of $0.62 per whole share. The Company received aggregate gross proceeds of $30,550,000, which after deducting issuance costs of $2,524,963 and liquidated damages of $532,161 paid for late S-1 registration left net proceeds of $27,492,876.
Subject to certain ownership limitations, the warrants issued in the May 2011 Private Placement were exercisable immediately and will expire five years from the date of issuance. They include a provision for excess shares in the event of a change in ownership and contain standard anti-dilution clauses in the event of recapitalization, stock splits or combinations, merger or reorganization, dividends or distributions and similar equity adjustments, but do not contain anti-dilution provisions that would prevent them from being considered indexed to the Company’s common stock, so they are accounted for within stockholders’ equity.
The Company retained a selling agent in connection with this registered direct offering, and pursuant to the terms of a selling agency agreement, the Company paid the selling agents an aggregate fee totaling approximately $2,120,125.
Management’s Plan. The Company has incurred operating losses and negative cash flows from operations since its inception. Management expects that revenues will increase as a result of current and future product releases. However, the Company also expects to incur additional expenses for the development and expansion of its products, marketing campaigns, and operating costs as it expands its operations. Therefore, the Company expects operating losses and negative cash flows to continue for the foreseeable future. It is management’s plan to obtain additional working capital through additional financings. The Company believes that it will be successful in expanding operations, gaining market share, and raising additional funds. However, there can be no assurance that in the event the Company requires additional financing, such financing will be available at terms which are favorable, or at all. Failure to generate sufficient cash flows from operations or raise additional capital could have a material adverse effect on the Company’s ability to achieve its intended business objectives. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
F-7
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Going Concern. The Company’s consolidated financial statements have been presented on a basis that contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company continues to face significant risks associated with the successful execution of its strategy given the current market environment for similar companies and failure to generate sufficient revenues or raise additional capital could have a material adverse effect on the Company’s ability to continue as a going concern and to achieve its intended business objectives. These facts raise substantial doubt about the Company’s ability to continue as a going concern, and there can be no assurance that the Company will be successful in its efforts to enhance its liquidity situation. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 2. Summary of Significant Accounting Policies
Basis of Presentation. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
Principles of Consolidation. The consolidated financial statements include the financial statements of WaferGen Bio-systems, Inc. and its subsidiaries. All significant transactions and balances between the WaferGen Bio-systems, Inc. and its subsidiaries have been eliminated in consolidation.
Use of Estimates. Preparing financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results and outcomes could differ from these estimates and assumptions.
Cash and Cash Equivalents. The Company considers all highly liquid debt investments with a remaining maturity of three months or less when purchased to be cash and cash equivalents.
Restricted Cash. Cash and cash equivalents that are restricted as to withdrawal or usage under the terms of contractual agreements are recorded as restricted cash.
Foreign Currencies. Assets and liabilities of non-U.S. subsidiaries for which the local currency is the functional currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average rates of exchange prevailing during each reporting period. Remeasurement adjustments resulting from this process are charged or credited to other comprehensive income (loss). Foreign exchange gains and losses for assets and liabilities of the Company’s non-U.S. subsidiaries for which the functional currency is the U.S. dollar are recorded in miscellaneous income (expense) in the Company’s consolidated statement of operations.
Fair Value of Financial Instruments. The carrying amounts of accounts receivable, prepaid expenses, other assets, accounts payable, accrued payroll and related costs and other accrued expenses approximate fair value due to the short-term maturities of these instruments.
Concentration of Credit Risk. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash in commercial banks. Accounts in the United States are secured by the Federal Deposit Insurance Corporation. Accounts in Malaysia are also guaranteed by the Malaysian government. The Company’s total deposits at commercial banks usually exceed the balances insured. The Company generally requires no collateral from its customers.
Accounts Receivable. An allowance for doubtful accounts will be recorded based on a combination of historical experience, aging analysis, and information on specific accounts. Account balances will be written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Inventory. Inventory is recorded at the lower of cost (first-in, first-out) or market value. Additionally, the Company evaluates its inventory in terms of excess and obsolete exposures.
Advertising Costs. Advertising costs of nil and $32,780 were expensed as incurred in the years ended December 31, 2012 and 2011, respectively.
F-8
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Property and Equipment. Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets as follows:
| Equipment | 3 to 5 years |
| Tools and molds | 3 years |
| Leasehold improvements | 3 to 5 years, or remaining lease term if shorter |
| Furniture and fixtures | 5 years |
Costs of maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred. Upon retirement or sale, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operating expenses.
Deferred Financing Costs. Costs incurred in connection with the issuance of debt are capitalized and amortized as interest expense using the effective interest method. The unamortized amounts are included in other assets.
Impairment of Long-Lived Assets. The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance of long-lived assets may not be recoverable. When factors indicate that long-lived assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted future cash flows over the remaining life of the long-lived assets in measuring whether they are recoverable. If the estimated undiscounted future cash flows do not exceed the carrying value of the asset, a loss is recorded as the excess of the asset’s carrying value over its fair value. No assets were determined to be impaired in 2012 and 2011.
Income Taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in income in the period that includes the enactment date. Accounting for deferred tax represents the best estimate of the likely future tax consequences of events that have been recognized in the Company’s consolidated financial statements and tax returns and their future probability. A valuation allowance is recorded for loss carry-forwards and other deferred tax assets where it is more likely than not that such loss carry-forwards and deferred tax assets will not be realized. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes.
Governmental Subsidies. Incentives received from governments in the form of grants are recorded as a reduction in expense in accordance with their purpose. Grants awarded for the purpose of matching specified expenditures are not recognized until a definitive agreement has been signed by both parties; thereafter income is recognized to the extent that the related expenses have been incurred. The Company recognized $243,778 in governmental subsidies in the year ended December 31, 2012, which was offset against operating expenses in the statement of operations.
Revenue Recognition. The Company recognizes revenue when (i) delivery of product has occurred or services have been rendered, (ii) there is persuasive evidence of a sale arrangement, (iii) selling prices are fixed or determinable, and (iv) collectability from the customers (individual customers and distributors) is reasonable assured. Revenue consists primarily of revenue generated from the sale of the Company’s products. Revenue is recorded when the risk and rewards of ownership are transferred to the Company’s customers (individual customers and distributors). This generally occurs when the Company’s products are shipped from its facility as title has passed. Revenue is recorded net of estimated cash discount. The Company estimates and accrues an allowance for sale returns at the time the product is sold. To date, sales returns have not been material. Distributors have a fourteen day inspection period however this period is not an acceptance provision that purports to be a trial or evaluation purpose, is not an acceptance provision that grants a right of return or exchange on the basis of subjective matters, and is not an acceptance provision based on customer-specific objective criteria. The fourteen day inspection period is an acceptance provision that is based on seller-specified objective criteria.
Revenue from multi-deliverable arrangements is recognized for each element on delivery of product or completion of service. A typical multi-deliverable arrangement would be the shipment of capital equipment to a customer, followed by the delivery of services or of expendable equipment, provided such delivery is both probable and substantially within the Company’s control. Revenue for each deliverable is allocated based on full list selling prices, although if none of the deliverables is disproportionately discounted relative to the overall discount, this allocation is approximated by using the actual selling price of each deliverable to the customer. The actual cost of revenue for each deliverable is recognized when the revenue for that deliverable is recognized.
F-9
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Stock-Based Compensation. The Company measures the fair value of all stock-based awards to employees, including stock options, on the grant date and records the fair value of these awards, net of estimated forfeitures, to compensation expense over the service period. The fair value of awards to consultants is measured on the dates on which performance of services is completed, with interim valuations recorded at balance sheet dates while performance is in progress. The fair value of options is estimated using the Black-Scholes valuation model, and of restricted stock is based on the Company’s closing share price on the measurement date.
Change in Fair Value of Derivatives. The Company recognizes its warrants with certain anti-dilution protection, the Series A convertible preference shares of its Malaysian subsidiary, and the conversion element of its convertible promissory notes and of the Series B convertible preference shares of its Malaysian subsidiary as derivative liabilities. Such liabilities are valued when the financial instruments are initially issued or the derivative first requires recognition and are also revalued at each reporting date, with the change in their respective fair values being recorded as a gain or loss on revaluation within other income and expenses in the statement of operations. The Company determines the fair value of all of its derivative liabilities using a Monte Carlo Simulation approach, with key input variables provided by management.
Warranty Reserve. The Company’s standard warranty agreement is one year from shipment of certain products. The Company accrues for anticipated warranty costs upon shipment of these products. The Company’s warranty reserve is based on management’s judgment regarding anticipated rates of warranty claims and associated repair costs, and is updated quarterly.
Research and Development. Research and development costs are charged to operations as incurred.
Other Comprehensive Income. Other comprehensive income arises solely due to the cumulative translation adjustments which ensue from the Company’s accounting policy for foreign currencies.
Net Income (Loss) Per Share. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding plus common share equivalents from conversion of dilutive stock options, warrants, and restricted stock using the treasury method, and convertible securities using the as-converted method, except when antidilutive. In the event of a net loss, the effects of all potentially dilutive shares are excluded from the diluted net loss per share calculation as their inclusion would be antidilutive.
Reclassification. Certain reclassifications have been made to prior periods’ data to conform to the current presentation. These reclassifications had no effect on reported net losses.
Recent Accounting Pronouncements.
In May 2011, the FASB issued ASU 2011‑04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011‑04”). ASU 2011‑04 results in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. The Company adopted this guidance effective January 1, 2012, and its adoption did not have a material impact on the Company’s consolidated financial condition or results of operations.
In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013‑02”). ASU 2013‑02 requires entities to report the effect of reclassifications out of accumulated other comprehensive income on the respective line items in the statement of operations. The Company adopted this guidance effective October 1, 2012, and its adoption had no impact on the Company’s consolidated financial condition or results of operations.
F-10
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 3. Inventories
Inventories, net of provisions for potentially excess, obsolete or impaired goods, consisted of the following at December 31, 2012 and 2011:
|
|
| December 31, 2012 |
| December 31, 2011 |
| ||
|
|
|
|
|
|
|
|
|
| Raw materials |
| $ | 158,316 |
| $ | 167,765 |
|
|
|
|
|
|
|
|
|
|
| Work in process |
|
| 179,314 |
|
| 191,450 |
|
|
|
|
|
|
|
|
|
|
| Finished goods |
|
| 157,856 |
|
| 385,793 |
|
|
|
|
|
|
|
|
|
|
| Inventories, net |
| $ | 495,486 |
| $ | 745,008 |
|
NOTE 4. Property and Equipment
Property and equipment consisted of the following at December 31, 2012 and 2011:
|
|
| December 31, 2012 |
| December 31, 2011 |
| ||
|
|
|
|
|
|
|
|
|
| Equipment |
| $ | 2,883,447 |
| $ | 2,876,490 |
|
| Tools and molds |
|
| 24,620 |
|
| 97,687 |
|
| Leasehold improvements |
|
| 111,356 |
|
| 105,327 |
|
| Furniture and fixtures |
|
| 148,261 |
|
| 154,930 |
|
|
|
|
|
|
|
|
|
|
| Total property and equipment |
|
| 3,167,684 |
|
| 3,234,434 |
|
|
|
|
|
|
|
|
|
|
| Less accumulated depreciation and amortization |
|
| (2,293,622 | ) |
| (1,520,344 | ) |
|
|
|
|
|
|
|
|
|
| Property and equipment, net |
| $ | 874,062 |
| $ | 1,714,090 |
|
Depreciation and amortization expense totaled $903,291 and $834,861 for the years ended December 31, 2012 and 2011, respectively.
NOTE 5. Long Term Obligations
On December 7, 2010, the Company entered a $2,000,000 Loan and Security Agreement (“LSA”) with Oxford Finance Corporation (“Oxford”). Borrowings under this term loan were at an interest rate of approximately 13%, and for the first six months, interest only was repayable, after which the balance of principal and interest were repayable in equal monthly installments over a thirty month period. The Company granted Oxford a first priority security interest in substantially all of its assets, excluding its intellectual property.
The Company issued a total of 95,368 warrants to Oxford in connection with the LSA. These warrants have a term of five years, and an exercise price of $1.468. Utilizing the Black-Scholes valuation model and assumptions of the fair value of common stock of $1.41, an expected term of four years, estimated volatility of 43.96%, a zero dividend rate and a risk-free interest rate of 1.305%, the Company determined the total allocated fair value of the warrants to be $46,230.
Further, the Company incurred initial costs of $157,240 to obtain the LSA, which contained a provision providing for a termination fee of $95,000. The total financing costs of $298,470 were amortized as a non-cash interest expense over the period of the loan using the effective interest method.
The loan was repaid in full on May 27, 2011. At this date, the unamortized financing costs of $222,275 plus additional costs of $83,585 arising from early termination were expensed as interest.
F-11
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
On May 27, 2011, the Company sold convertible promissory notes in the aggregate principal amount of $15,275,000, convertible into an aggregate of approximately 2,679,824 shares of Series A-2 Convertible Preferred Stock at a price of $5.70 per share, with each share being convertible into ten shares of common stock. The convertible promissory notes were sold along with convertible preferred stock and warrants for aggregate gross proceeds of $30,550,000, which after deducting issuance costs of $2,524,963 left net proceeds of $28,025,037. Interest on the convertible promissory notes accrues at a rate of 5% per annum, and may either be paid on the last day of each fiscal quarter, or added to the principal amount of the notes, at the Company’s option.
Using the relative fair value of the securities issued, the Company initially allocated the gross proceeds of $30,550,000 to the convertible promissory notes ($10,072,592), the Series A-1 convertible preferred stock ($10,724,991 - see Note 7) and the warrants ($9,752,417 - see Note 9). However, until September 30, 2011, the convertible promissory notes contained features that adjusted the number of shares issuable to investors in the event the Company requested conversion of the convertible promissory notes in certain circumstances. They also contain features affording the holder additional shares in the event of certain organic changes to the Company. Because these features result in the embedded conversion element not being considered indexed to the Company’s equity, the Company recognizes the conversion element of the convertible promissory notes as a derivative liability at its fair value. A liability of $11,495,163 (see below) was thus recognized on the date of issuance, and this is marked to its fair value through income in all subsequent periods. Because the fair value of the conversion element exceeded the net proceeds initially allocated to the convertible promissory notes, the Company recognized a loss of $2,255,074 at the date the convertible promissory notes were issued. The loss is reflected as additional interest expense.
In summary, the Company allocated the gross proceeds and issuance costs as follows:
| Security |
| Allocated Fair Value |
| Issuance Costs |
| Interest Expense |
| Net Allocation |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Series A-1 Convertible Preferred Stock |
| $ | 10,724,991 |
| $ | (886,422 | ) | $ | — |
| $ | 9,838,569 |
|
| Convertible promissory notes |
|
| 10,072,592 |
|
| (832,502 | ) |
| 2,255,074 |
|
| 11,495,164 |
|
| Warrants |
|
| 9,752,417 |
|
| (806,039 | ) |
| — |
|
| 8,946,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 30,550,000 |
| $ | (2,524,963 | ) | $ | 2,255,074 |
| $ | 30,280,111 |
|
The debt discount related to the debt element of the convertible promissory notes of $14,442,497 is being amortized as non-cash interest expense using the effective yield method over the 3.5 year contractual term of the convertible promissory notes. The $832,502 in issuance costs allocated to the convertible promissory notes was recorded as a deferred financing cost, which is also being amortized as a non-cash interest expense using the effective yield method over the 3.5 year contractual term of the promissory notes.
The Company values the derivative liability for the conversion element of the convertible promissory notes using a Monte Carlo Simulation approach, using critical assumptions provided by management reflecting conditions at the valuation dates.
The fair value of this derivative liability at May 27, 2011, was estimated to be $11,495,163, using a closing stock price of $0.68, and based on assumptions which included an estimated volatility of 64.31%, a risk-free interest rate of 0.21%, a zero dividend rate and a contractual term of 3.5 years. The fair value of this derivative liability at December 31, 2011, was estimated to be $1,931,295, using a closing stock price of $0.16, and based on assumptions which included an estimated volatility of 82.82%, a risk-free interest rate of 0.18%, a zero dividend rate and a contractual term of 2.91 years. The fair value of this derivative liability at December 31, 2012, was estimated to be $274,928, using a closing stock price of $0.03, and based on assumptions which included an estimated volatility of 126.91%, a risk-free interest rate of 0.13%, a zero dividend rate and a contractual term of 1.91 years (see Note 10).
During the year ended December 31, 2012, the decrease in the fair value of the derivative liability of $1,656,367 was recorded as a revaluation gain. On September 30, 2011, Company and the note holders modified the convertible promissory note to eliminate the feature that adjusted the number of shares issuable to investors in the event the Company requested conversion of the convertible promissory notes in certain circumstances. This modification reduced the fair value of the conversion element derivative by $573,923. The gain from that reduction in value was recognized as an increase in Stockholders’ Equity. During the year ended December 31, 2011, the remainder of the decrease in the fair value of the derivative liability of $8,989,945 was recorded as a revaluation gain (see Note 10).
F-12
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The balance of the convertible promissory notes comprises the following at December 31, 2012 and 2011:
|
|
| December 31, 2012 |
| December 31, 2011 |
| ||
|
|
|
|
|
|
|
|
|
| Convertible Promissory Notes Payable: |
|
|
|
|
|
|
|
| Face value |
| $ | 15,275,000 |
| $ | 15,275,000 |
|
| Interest added to principal |
|
| 1,262,028 |
|
| 460,383 |
|
| Stated value |
|
| 16,537,028 |
|
| 15,735,383 |
|
| Debt discount – conversion element, net of accumulated amortization of $1,298,628 and $113,081 respectively |
|
| 13,143,869 |
|
| 14,329,416 |
|
|
|
|
|
|
|
|
|
|
| Notes payable, net of debt discount |
| $ | 3,393,159 |
| $ | 1,405,967 |
|
The Company leases its office space for use in its operations under non-cancellable operating leases that expire in April 2015 and December 2013.
Aggregate future minimum obligations for leases in effect as of December 31, 2012, are as follows:
|
|
| Operating Leases |
| |
|
|
|
|
|
|
| Year ending December 31, |
|
|
|
|
| 2013 |
| $ | 488,265 |
|
| 2014 |
|
| 635,340 |
|
| 2015 |
|
| 218,175 |
|
|
|
|
|
|
|
| Total minimum obligations |
| $ | 1,341,780 |
|
Rent expense totaled $597,261 and $758,908 for the years ended December 31, 2012 and 2011, respectively.
NOTE 6. Convertible Preference Shares of Subsidiary
In 2008, the Company’s Malaysian subsidiary, WGBM, issued Series A convertible preference shares (“CPS”) to Malaysian Technology Development Corporation Sdn. Bhd. (“MTDC”), a venture capital and development firm in Malaysia, in a private placement under a Share Subscription and Shareholders’ Agreement dated May 8, 2008, at the U.S. dollar equivalent of $2.25 per share. In 2009 and 2010, WGBM issued Series B CPS to Expedient Equity Ventures Sdn. Bhd. (“EEV”) and Prima Mahawangsa Sdn. Bhd. (“PMSB”), both venture capital and development firms in Malaysia, in a private placement under a Share Subscription Agreement dated April 3, 2009, (“Series B SSA”) at the U.S. dollar equivalent of $2.25 per share. In 2009, WGBM issued Series B CPS to Kumpulan Modal Perdana Sdn. Bhd. (“KMP”), a venture capital and development firm in Malaysia, in a private placement under a Share Subscription Agreement dated July 1, 2009, at the U.S. dollar equivalent of $2.25 per share.
In 2010, both EEV and KMP exercised their option (see Paragraph (b) below) to sell to the Company their holdings of 222,222 and 188,057 Series B CPS, respectively, in exchange for shares of the Company’s common stock.
F-13
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
These transactions, along with the issuance of Series C CPS in 2011 (see below), are summarized as follows:
| Class |
| Number |
| Initial |
| Issuance |
| Gross |
| Issuance |
| Exchange |
| Net Cash |
| Date if |
| CPS | ||||
| of CPS |
| of CPS |
| Investor |
| Date |
| Proceeds |
| (Costs) |
| Gain (loss) |
| Proceeds |
| Exchanged |
| Outstanding | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Series A |
| 444,444 |
| MTDC |
| 07/18/2008 |
| $ | 1,000,000 |
| $ | (30,000 | ) | $ | — |
| $ | 970,000 |
| — |
| 444,444 |
| Series A |
| 444,444 |
| MTDC |
| 11/27/2008 |
|
| 1,000,000 |
|
| (30,000 | ) |
| — |
|
| 970,000 |
| — |
| 444,444 |
| Series B |
| 111,111 |
| EEV |
| 06/08/2009 |
|
| 250,000 |
|
| (19,393 | ) |
| (18,029 | ) |
| 212,578 |
| 08/17/2010 |
| — |
| Series B |
| 111,111 |
| EEV |
| 03/09/2010 |
|
| 250,000 |
|
| (8,929 | ) |
| (3,005 | ) |
| 238,066 |
| 08/17/2010 |
| — |
| Series B |
| 222,222 |
| PMSB |
| 09/23/2009 |
|
| 500,000 |
|
| (7,500 | ) |
| — |
|
| 492,500 |
| — |
| 222,222 |
| Series B |
| 222,222 |
| PMSB |
| 05/13/2010 |
|
| 500,000 |
|
| (5,000 | ) |
| — |
|
| 495,000 |
| — |
| 222,222 |
| Series B |
| 188,057 |
| KMP |
| 09/18/2009 |
|
| 423,128 |
|
| (11,319 | ) |
| — |
|
| 411,809 |
| 09/29/2010 |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Subtotal |
| 1,743,611 |
|
|
|
|
|
| 3,923,128 |
|
| (112,141 | ) |
| (21,034 | ) |
| 3,789,953 |
|
|
| 1,333,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Series C |
| 3,233,734 |
| MTDC |
| 03/10/2011 |
|
| 5,000,000 |
|
| (6,272 | ) |
| 58,575 |
|
| 5,052,303 |
| — |
| 3,233,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 4,977,345 |
|
|
|
|
| $ | 8,923,128 |
| $ | (118,413 | ) | $ | 37,541 |
| $ | 8,842,256 |
|
|
| 4,567,066 |
Under the terms of a Deed of Adherence dated April 3, 2009 (and under the Series C SSA, as defined below), certain rights of the holders of the Series A CPS were modified. In addition, under the terms of the Series B SSA, the use of funds raised through the issuance of both Series A and Series B CPS was restricted, requiring at least 60% of the total to be utilized for the Company’s operations in Malaysia.
Following these modifications, the rights of the holders of Series A and B CPS included, but were not limited to, the right:
(a) to put to the Company their CPS (or ordinary shares in WGBM received on conversion of those CPS under paragraph (c) below) at any time during the year 2011 that the share price of the Company’s common stock is below $2.25 in order to redeem for cash (or, at the holder’s option, shares of Company common stock of equivalent value) the amount originally invested in USD plus a premium of 8%, compounded annually, with yearly rests (each year’s accrued interest would be forfeited in the event of redemption prior to the anniversary of the initial investment) (the “Redemption Option,” since amended for Series A and expired for Series B, see below);
(b) to cause the Company to exchange their CPS for common stock of the Company at an exchange rate of US$2.25 per share of common stock, provided, in the case of Series B CPS, that commencing on August 1, 2010, if during the 10-day trading period immediately prior to the holder’s exercise notice the average closing price of the Company’s common stock is less than US$2.647, then the holder may exchange CPS at an exchange rate equal to 85% of such 10-day average closing price. This option expires on May 8, 2013, for MTDC’s Series A CPS, on April 3, 2014, for EEV’s and PMSB’s Series B CPS and on July 1, 2014, for KMP’s Series B CPS (the “Conversion Option,” since exercised by EEV and KMP);
(c) to convert their CPS into ordinary shares of the subsidiary, WGBM, at any time, at a conversion rate of three ordinary shares per $100 invested in CPS;
(d) to cause the subsidiary, WGBM, to redeem the CPS in whole or in part at any time after December 31, 2011, for the principal paid plus a premium of 20% per annum, not compounding, from funds legally available for distribution (i.e. retained earnings; there is presently an accumulated deficit in WGBM in excess of $3 million);
(e) of first offer on any transfers or new issuance of subsidiary shares; and
(f) for each of Series A and Series B CPS, to appoint one of the seven directors of the subsidiary (see below also).
Since the Conversion Option affords holders of Series B CPS the right to receive a variable number of shares of the Company’s common stock, this feature is not indexed to the Company’s equity and is therefore accounted for as a derivative liability, with the estimated fair value being calculated at each reporting date using a Monte Carlo Simulation approach, using key input variables provided by management, with changes in fair value recorded as gains or losses on revaluation in non-operating income (expense).
F-14
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
On December 31, 2011, the Series B CPS Redemption Option lapsed. The Series B CPS recorded in temporary equity was transferred to permanent equity and the value of the derivative liability for the conversion element, now the only substantive right available to PMSB, increased significantly as a result.
Series B CPS fair values at December 31, 2012 and 2011, were estimated to be $1,210,909 and $1,245,101, respectively, using a closing stock price of $0.03 and $0.16, respectively, and based on the following assumptions:
|
| December 31, 2012 |
| December 31, 2011 |
|
|
|
|
|
|
|
| Risk-free interest rate | 0.16% |
| 0.28% |
|
| Expected remaining term | 1.00 Years |
| 1.81 Years |
|
| Expected volatility | 125.53% |
| 81.69% |
|
| Dividend yield | 0% |
| 0% |
|
The net decrease in the fair value of the Series B CPS derivative liability of $34,192 during the year ended December 31, 2012, was recorded as a revaluation gain, and the net increase in the fair value of this derivative liability of $1,051,013 (which arose principally due to the lapse of the conversion option) during the year ended December 31, 2011, was recorded as a revaluation loss (see Note 10).
Based on the average closing price of the Company’s common stock of $0.030 in the 10-day trading period immediately prior to December 31, 2012, PMSB could have converted their Series B CPS into 39,215,686 shares of such stock had they exercised the Conversion Option on that date.
On December 9, 2011, the terms of the Series A CPS were amended by a Letter Agreement with MTDC (the “MTDCLA”) to extend the period during which MTDC could exercise the Redemption Option from December 31, 2011, to April 3, 2014. In addition, the holder’s option to elect to receive shares of Company common stock of equivalent value (see above) was amended to give the Company the option, upon the exercise of the Redemption Option, to pay in shares of its common stock at an Applicable Stock Price (“ASP”), calculated as 85% of the average closing price of that stock during the 10-day trading period immediately prior to MTDC’s exercise notice. Further, the ASP is subject to a ceiling of $1.55 and a floor of $0.10.
The amendment that allows the Company to settle the Redemption Option in a variable number of shares causes the Redemption Option to no longer be considered indexed to the Company’s equity. As a result, the Company recognized the Redemption Option as an embedded derivative requiring bifurcation effective December 9, 2011. The Company valued the Redemption Option utilizing a Monte Carlo Simulation, using a stock price of $0.16 and assumptions of estimated volatilities of 78.02% to 80.22%, risk-free interest rates of 0.27% and estimated remaining terms of 1.61 to 1.96 years; the fair value of the Redemption Option was estimated to be $2,198,828. The host instrument (the Series A CPS absent the Redemption Option) is not redeemable and therefore should be classified as part of permanent equity. Accordingly, this modification to the Series A CPS resulted in (1) the recognition of a derivative liability of $2,198,828, (2) the elimination of temporary equity of $2,519,424, and (3) an increase in permanent equity of $320,596. As the fair value of the amended Series A CPS was $320,390 less than the carrying amount of the accreted Series A CPS prior to the amendment, $320,390 of the amount transferred to permanent equity was treated as reversal of prior accretion of the Series A CPS.
Series A CPS fair values at December 31, 2012 and 2011, were estimated to be $619,652 and $2,135,715, respectively, using a closing stock price of $0.03 and $0.16, respectively, and based on the following assumptions:
|
| December 31, 2012 |
| December 31, 2011 |
|
|
|
|
|
|
|
| Risk-free interest rate | 0.11% - 0.15% |
| 0.28% |
|
| Expected remaining term | 0.55 – 0.90 Years |
| 1.55 - 1.90 Years |
|
| Expected volatility | 123.55% - 127.94% |
| 81.15% - 82.83% |
|
| Dividend yield | 0% |
| 0% |
|
The net decrease in the fair value of the Series A CPS derivative liability of $1,516,063 and $63,113 during the year ended December 31, 2012, and during the 22 days ended December 31, 2011, respectively, was recorded as a revaluation gain (see Note 10).
F-15
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
On December 31, 2012, the cash value of the Redemption Option was $2,720,978. Since 85% of the average closing price of the Company’s common stock of $0.030 in the 10-day trading period immediately prior to December 31, 2012, was less than the ASP floor of $0.10, the Company could have settled this liability by issuing 27,209,779 shares of its common stock if MTDC had exercised the Conversion Option on that date.
On March 10, 2011, WGBM issued 3,233,734 Series C CPS to MTDC in a private placement at the U.S. dollar equivalent of $1.5462 per share, representing the first subscription under a Share Subscription Agreement dated December 14, 2010, (“Series C SSA”) to sell 3,233,734 Series C CPS at an initial closing and, should MTDC so elect within 36 months of the initial closing, to sell 1,077,911 shares of Series C CPS at a subsequent closing at the U.S. dollar equivalent of US$2.3193 per share (see Note 9). MTDC may also elect to convert their Series C CPS into ordinary shares of the subsidiary, WGBM, at any time, at a conversion rate of one ordinary share per 100 CPS. MTDC may appoint one of the seven directors of the subsidiary (in addition to the director they may appoint as the holder of Series A CPS), and an additional independent director may be jointly appointed by MTDC and the Company. Each Series C CPS issued at the initial closing can convert into one share of the Company on April 3, 2014 (this was extended from December 20, 2011, by the MTDCLA), and each Series C CPS issued at the subsequent closing will convert into one share of the Company on the anniversary of that closing, but the Series C may convert at any earlier date following each closing at MTDC’s option.
WGBM is authorized to issue 200,000,000 preference shares with a par value of RM0.01. There were 4,977,345 preference shares (including 410,279 Series B CPS held by the Company upon exercise by EEV and KMP of their options) issued and outstanding at December 31, 2012 and 2011.
NOTE 7. Preferred Stock
The Company has 10,000,000 shares of preferred stock authorized. Effective May 26, 2011, the Company designated 4,500,000 shares as Series A-1 Convertible Preferred Stock and 4,500,000 shares as Series A-2 Convertible Preferred Stock (together, the “Series A Preferred Stock”). Each share of Series A Preferred Stock is convertible into ten shares of common stock, subject to an ownership cap whereby conversion may not occur to the extent the holder would own more than 9.985% of the common stock following conversion, and entitles the holder to receive dividends, as, when and if declared by the Company’s Board of Directors, at an annual rate of 5% of the stated value per share of the respective series. Such dividends accrue, compounding quarterly, and accumulate on each share of Series A Preferred Stock from the date of issuance, whether or not declared, until November 27, 2014, when the right to further dividends ceases. The Series A Preferred Stock has no voting rights, and in the event of liquidation ranks senior to common stock.
Effective May 27, 2011, the Company sold an aggregate of 2,937,499.97 shares of Series A-1 Convertible Preferred Stock with a stated value of $5.20 per share. The Company recorded the allocated valuation of $10,724,991 (see Note 5), less allocated issuance costs of $886,422, as Series A-1 Convertible Preferred Stock within permanent equity. The Company also recognized a beneficial conversion feature calculated as the number of potential conversion shares multiplied by the excess of the market price of the common stock on the issuance date over the price per conversion share based on the valuation allocated to the Series A-1 Convertible Preferred Stock. Since this preferred stock is immediately convertible and not redeemable, this non-contingent beneficial conversion feature of $9,250,009 was recorded as a one-time accretion expense.
As of December 31, 2012, $1,259,742 of undeclared dividends had been accrued with respect to the outstanding Series A-1 Convertible Preferred Stock, of which $801,534 and $458,208 related to the year ended December 31, 2012 and 2011, respectively.
NOTE 8. Stock Awards
The Company has awards outstanding under three plans - the 2003 Incentive Stock Plan (the “2003 Plan”), the 2007 Stock Option Plan (the “2007 Plan”) and the 2008 Stock Incentive Plan (the “2008 Plan”) (collectively, the “Plans”). Under the 2003 Plan and 2007 Plan, incentive stock options, nonqualified stock options, restricted stock and restricted stock units could be granted. Awards vested over varying periods, as specified by the Company’s Board of Directors for each grant, and are exercisable for a maximum period of ten years after date of grant. Both of these plans have been frozen, resulting in no further shares being available for grant.
The Company presently issues awards under the 2008 Plan, initially adopted by the Company’s stockholders on June 5, 2008, and subsequently amended to authorize the issuance of additional shares of the Company’s common stock. The purpose of the 2008 Plan is to provide an incentive to retain the employment of directors, officers, consultants, advisors and employees of the Company, to attract new personnel whose training, experience and ability are considered valuable, to encourage the sense of proprietorship, and to stimulate the active interest of such persons in the Company’s development and financial success. Under the 2008 Plan, the Company is authorized to issue incentive stock options, non-qualified stock options, restricted stock and restricted stock units, although no more than 50% of the authorized shares may be granted pursuant to awards of restricted stock and restricted stock units. Awards that expire or are canceled generally become available for issuance again under the 2008 Plan. The number of shares of the Company’s common stock available under the 2008 Plan will be subject to adjustment in the event of a stock split, stock dividend or other extraordinary dividend, or other similar change in the Company’s common stock or capital structure. Awards may vest over varying periods, as specified by the Company’s Board of Directors for each grant, and have a maximum term of seven years from the grant date. The 2008 Plan is administered by the Company’s Board of Directors.
F-16
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The Company has issued both options and restricted stock (including restricted stock units) under the Plans. Restricted stock grants afford the recipient the opportunity to receive shares of common stock, subject to certain terms, whereas options give them the right to purchase common stock at a set price. Both the Company’s options and restricted stock issued to employees generally have vesting restrictions that are eliminated over a four-year period, although vesting may be over a shorter period, or may occur on the grant date, depending on the terms of each individual award.
A summary of stock option and restricted stock transactions is as follows:
|
|
|
|
| Stock Options |
| Restricted Stock |
| ||||||
|
|
|
|
|
|
| Weighted |
|
|
| Weighted |
| ||
|
|
| Shares |
| Number of |
| Average |
| Number of |
| Average |
| ||
|
|
| Available |
| Options |
| Exercise |
| Options |
| Grant-Date |
| ||
|
|
| For Grant |
| Outstanding |
| Price |
| Outstanding |
| Fair Value |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at January 1, 2011 |
| 2,191,821 |
| 5,543,893 |
| $ | 1.5218 |
| 127,500 |
| $ | 1.6422 |
|
| 2008 Plan Amendment |
| 8,000,000 |
| — |
| $ | — |
| — |
| $ | — |
|
| Granted |
| (1,504,635 | ) | 1,153,550 |
| $ | 0.6427 |
| 351,085 |
| $ | 0.8497 |
|
| Exercised |
| — |
| (324,740 | ) | $ | 0.3220 |
| — |
| $ | — |
|
| Vested |
| — |
| — |
| $ | — |
| (362,944 | ) | $ | 0.8909 |
|
| Forfeited |
| 1,247,521 |
| (1,140,021 | ) | $ | 1.2928 |
| (110,000 | ) | $ | 1.6050 |
|
| Canceled |
| 370,364 |
| (925,782 | ) | $ | 1.7061 |
| (641 | ) | $ | 2.3900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at December 31, 2011 |
| 10,305,071 |
| 4,306,900 |
| $ | 1.3978 |
| 5,000 |
| $ | 1.2500 |
|
| Granted |
| (9,785,500 | ) | 9,724,000 |
| $ | 0.1164 |
| 61,500 |
| $ | 0.1385 |
|
| Vested |
| — |
| — |
| $ | — |
| (59,000 | ) | $ | 0.2325 |
|
| Forfeited |
| 1,471,073 |
| (1,471,073 | ) | $ | 0.5925 |
| — |
| $ | — |
|
| Canceled |
| 937,342 |
| (1,135,329 | ) | $ | 1.3123 |
| — |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at December 31, 2012 |
| 2,927,986 |
| 11,424,498 |
| $ | 0.4193 |
| 7,500 |
| $ | 0.1400 |
|
The following table summarizes information concerning outstanding options as of December 31, 2012:
|
|
|
|
| Weighted |
|
|
|
|
| ||
|
|
|
|
| Average |
| Weighted |
|
|
| ||
|
|
|
|
| Remaining |
| Average |
| Aggregate |
| ||
|
|
| Number of |
| Contractual |
| Exercise |
| Intrinsic |
| ||
| Options |
| Shares |
| Life (in Years) |
| Price |
| Value |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding |
| 11,424,498 |
| 5.71 |
| $ | 0.4193 |
| $ | 2,898 |
|
| Vested and expected to vest |
| 10,262,319 |
| 5.66 |
| $ | 0.4502 |
| $ | 2,898 |
|
| Exercisable |
| 4,123,060 |
| 4.82 |
| $ | 0.8747 |
| $ | 2,898 |
|
The aggregate intrinsic value in the preceding table represents the total pre-tax value (i.e., the difference between the Company’s stock price and the exercise price) of stock options outstanding as of December 31, 2012, based on our common stock closing price of $0.03, which would have been received by the option holders had all their in-the-money options been exercised as of that date.
F-17
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The weighted average fair value of options granted in the years ended December 31, 2012 and 2011, was $0.08 and $0.29, respectively. These fair values were estimated using the following assumptions (see also Note 10):
|
|
|
| Year Ended December 31, |
| |||
|
|
|
| 2012 |
|
| 2011 |
|
|
|
|
|
|
|
|
|
|
| Risk-free interest rate |
|
| 0.71% - 1.14% |
|
| 0.79% - 2.24% |
|
| Expected term |
|
| 4.75 Years |
|
| 4.75 Years |
|
| Expected volatility |
|
| 65.02% - 103.61% |
|
| 42.44% - 66.83% |
|
| Dividend yield |
|
| 0% |
|
| 0% |
|
The grant date fair value of options vested in the years ended December 31, 2012 and 2011, was $334,650 and $463,168, respectively. No options were exercised during the year ended December 31, 2012. The Company received $104,566 for the 324,740 options exercised during the year ended December 31, 2011, which had an intrinsic value of $203,399.
The amounts expensed for stock-based compensation totaled $387,892 and $779,029 for the years ended December 31, 2012 and 2011, respectively. The sums expensed include $120 and $130,230 for restricted stock awards to consultants in the years ended December 31, 2012 and 2011, respectively.
At December 31, 2012, the total stock-based compensation cost not yet recognized, net of estimated forfeitures, was $509,984. This cost is expected to be recognized over an estimated weighted average amortization period of 2.20 years. No amounts related to stock-based compensation costs have been capitalized. The tax benefit and the resulting effect on cash flows from operations and financial activities, related to stock-based compensation costs were not recognized as the Company currently provides a full valuation allowance for all of its deferred taxes.
NOTE 9. Warrants
The Company has incurred liabilities for the estimated fair value of derivative warrant instruments. The estimated fair value of the derivative warrant instruments has been calculated using a Monte Carlo Simulation approach, with key input variables provided by management, as of each issuance date, with the valuation offset against additional paid in capital, and at each reporting date, with changes in fair value recorded as gains or losses on revaluation in non-operating income (expense).
Fair values at December 31, 2012 and 2011, were estimated to be $102,695 (with the fair value per warrant share ranging from $0.0000006 to $0.02) and $655,219 (with the fair value per warrant share ranging from $0.02 to $0.10), respectively, using a closing stock price of $0.03 and $0.16, respectively, and based on the following assumptions:
|
| December 31, 2012 |
| December 31, 2011 |
|
|
|
|
|
|
|
| Risk-free interest rate | 0.08% - 0.21% |
| 0.16% - 0.32% |
|
| Expected remaining term | 0.38 - 1.58 Years |
| 1.25 - 2.39 Years |
|
| Expected volatility | 117.58% - 131.42% |
| 80.66% - 85.13% |
|
| Dividend yield | 0% |
| 0% |
|
During the year ended December 31, 2012, the decrease in the fair value of the warrant derivative liability of $552,524 was recorded as a revaluation gain. In connection with the fundraising in May 27, 2011, members of management, with warrants to purchase a total of 1,051,074 shares with an estimated fair value of $315,803 following anti-dilution adjustments as of that date, waived their right to any future anti-dilution adjustments, so this estimated fair value was transferred to stockholders’ equity. During the year ended December 31, 2011, the remainder of the decrease in the fair value of the warrant derivative liability of $1,269,940 was recorded as a revaluation gain (see Note 10).
F-18
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
A summary of outstanding common stock warrants as of December 31, 2012, is as follows:
| Securities Into Which |
| Warrants |
| Warrants Subject |
| Exercise |
| Expiration |
| Warrants are Convertible |
| Outstanding |
| to Anti-Dilution |
| Price |
| Date |
|
|
|
|
|
|
|
|
|
|
| Common stock |
| 56,173,248 |
| — |
| $0.6200 |
| May 2016 |
| Common stock |
| 4,487,656 |
| 3,718,425 |
| $0.7800 |
| June and August 2014 |
| Common stock |
| 2,875,736 |
| 2,774,050 |
| $0.8400 |
| December 2014 and January 2015 |
| Common stock |
| 2,265,071 |
| 2,084,914 |
| $0.8400 |
| May 2013 |
| Common stock |
| 95,368 |
| — |
| $1.4680 |
| December 2015 |
| Common stock |
| 203,500 |
| — |
| $1.5000 |
| July 2015 |
| Common stock |
| 3,000,830 |
| — |
| $1.5500 |
| July 2015 |
| Common stock |
| 200,000 |
| — |
| $3.0000 |
| December 2014 and November 2015 |
|
|
|
|
|
|
|
|
|
|
| Subtotal |
| 69,301,409 |
| 8,577,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Series C CPS |
| 1,077,911 |
| — |
| $2.3193 |
| March 2014 |
|
|
|
|
|
|
|
|
|
|
| Total |
| 70,379,320 |
| 8,577,389 |
|
|
|
|
The warrants expiring in May 2016 were issued in conjunction with the May 2011 Private Placement (see Note 1), and were valued at the time of issuance utilizing the Black-Scholes valuation model, using an exercise price of $0.62, a closing stock price of $0.68 and assuming an estimated volatility of 89.58%, a risk free interest rate of 1.03%, a zero dividend rate and an expected term of 3.5 years. These warrants include the right to receive consideration for the unexercised portion of the warrant, based on a Black-Scholes model set forth in the warrants, in the event of certain substantial changes in ownership or trading status of the Company. This contingent embedded derivative will be accounted for only if such an event should occur.
The warrants expiring in December 2014 and January 2015 were originally issued in December 2009 and January 2010 with an exercise price of $2.50 and entitled the holders thereof to purchase an aggregate of 966,247 shares. As a result of anti-dilution adjustments with respect to such warrants pursuant to their terms, such warrants, as of December 31, 2012, had an exercise price of $0.84 and entitled the holders thereof to purchase an aggregate of 2,875,736 shares. In connection with the May 2011 Private Placement, members of management with warrants to purchase a total of 101,686 shares (after giving effect to prior anti-dilution adjustments) waived their right to further anti-dilution adjustments.
The warrants expiring in June and August 2014 were originally issued in June and August 2009 with an exercise price of $2.00 and entitled the holders thereof to purchase an aggregate of 1,750,185 shares. As a result of anti-dilution adjustments with respect to such warrants pursuant to their terms, such warrants, as of December 31, 2012, had an exercise price of $0.78 and entitled the holders thereof to purchase an aggregate of 4,487,656 shares. In connection with the May 2011 Private Placement, members of management with warrants to purchase a total of 769,231 shares (after giving effect to prior anti-dilution adjustments) waived their right to further anti-dilution adjustments.
The warrants expiring in May 2013 were originally issued in May 2008 with an exercise price of $3.00 and entitled the holders thereof to purchase an aggregate of 634,220 shares. As a result of anti-dilution adjustments with respect to such warrants pursuant to their terms, such warrants, as of December 31, 2012, had an exercise price of $0.84 and entitled the holders thereof to purchase an aggregate of 2,265,071 shares. In connection with the May 2011 Private Placement, members of management with warrants to purchase a total of 180,157 shares (after giving effect to prior anti-dilution adjustments) waived their right to further anti-dilution adjustments.
The 95,368 warrants expiring in December 2015 were issued in December 2010 in conjunction with obtaining a term loan (see Note 5).
The Series C SSA (see Note 6) grants the holders of the Series C CPS the right to subscribe for a further 1,077,911 CPS at a price of $2.3193. Since these Series C CPS would convert into common stock of the Company within one year of the subscription date, this right is, for accounting purposes, equivalent to a warrant to purchase the Company’s common stock.
F-19
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 10. Fair Value of Financial Instruments
Fair value measurements are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”).
Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”). The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity to identify transactions that are not orderly.
The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The three hierarchy levels are defined as follows:
Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;
Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
Credit risk adjustments are applied to reflect the Company’s own credit risk when valuing all liabilities measured at fair value.
The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2012 and 2011:
|
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
| December 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
| $ | 6,328,753 |
| $ | — |
| $ | — |
| $ | 6,328,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total assets |
| $ | 6,328,753 |
| $ | — |
| $ | — |
| $ | 6,328,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Warrant derivative liabilities |
| $ | — |
| $ | — |
| $ | 102,695 |
| $ | 102,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Conversion element of promissory notes |
|
| — |
|
| — |
|
| 274,928 |
|
| 274,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Conversion element of Series B CPS |
|
| — |
|
| — |
|
| 1,210,909 |
|
| 1,210,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Series A CPS derivative liabilities |
|
| — |
|
| — |
|
| 619,652 |
|
| 619,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total liabilities |
| $ | — |
| $ | — |
| $ | 2,208,184 |
| $ | 2,208,184 |
|
F-20
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
|
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
| December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
| $ | 15,117,172 |
| $ | — |
| $ | — |
| $ | 15,117,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total assets |
| $ | 15,117,172 |
| $ | — |
| $ | — |
| $ | 15,117,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Warrant derivative liabilities |
| $ | — |
| $ | — |
| $ | 655,219 |
| $ | 655,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Conversion element of promissory notes |
|
| — |
|
| — |
|
| 1,931,295 |
|
| 1,931,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Conversion element of Series B CPS |
|
| — |
|
| — |
|
| 1,245,101 |
|
| 1,245,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Series A CPS derivative liabilities |
|
| — |
|
| — |
|
| 2,135,715 |
|
| 2,135,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total liabilities |
| $ | — |
| $ | — |
| $ | 5,967,330 |
| $ | 5,967,330 |
|
The following tables present a reconciliation of all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2012 and 2011:
|
|
|
|
| Conversion |
|
|
|
|
|
|
| |||||
|
|
|
|
| Element of |
| Conversion |
|
|
|
|
| |||||
|
|
| Warrant |
| Promissory |
| Element of |
| Series A CPS |
|
|
| |||||
|
|
| Derivatives |
| Notes |
| Series B CPS |
| Derivatives |
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at January 1, 2012 |
| $ | 655,219 |
| $ | 1,931,295 |
| $ | 1,245,101 |
| $ | 2,135,715 |
| $ | 5,967,330 |
|
| Issuances |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| Revaluation (gains) losses included in other income and expenses |
|
| (552,524 | ) |
| (1,656,367 | ) |
| (34,192 | ) |
| (1,516,063 | ) |
| (3,759,146 | ) |
| Settlements |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| Balance at December 31, 2012 |
| $ | 102,695 |
| $ | 274,928 |
| $ | 1,210,909 |
| $ | 619,652 |
| $ | 2,208,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total gains (losses) included in other income and expenses attributable to liabilities still held as of December 31, 2012 |
| $ | 552,524 |
| $ | 1,656,367 |
| $ | 34,192 |
| $ | 1,516,063 |
| $ | 3,759,146 |
|
|
|
|
|
| Conversion |
|
|
|
|
|
|
| |||||
|
|
|
|
| Element of |
| Conversion |
|
|
|
|
| |||||
|
|
| Warrant |
| Promissory |
| Element of |
| Series A CPS |
|
|
| |||||
|
|
| Derivatives |
| Notes |
| Series B CPS |
| Derivatives |
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at January 1, 2011 |
| $ | 2,240,962 |
| $ | — |
| $ | 194,088 |
| $ | — |
| $ | 2,435,050 |
|
| Issuances |
|
| — |
|
| 11,495,163 |
|
| — |
|
| 2,198,828 |
|
| 13,693,991 |
|
| Revaluation (gains) losses included in other income and expenses |
|
| (1,269,940 | ) |
| (8,989,945 | ) |
| 1,051,013 |
|
| (63,113 | ) |
| (9,271,985 | ) |
| Settlements |
|
| (315,803 | ) |
| (573,923 | ) |
| — |
|
| — |
|
| (889,726 | ) |
| Balance at December 31, 2011 |
| $ | 655,219 |
| $ | 1,931,295 |
| $ | 1,245,101 |
| $ | 2,135,715 |
| $ | 5,967,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total gains (losses) included in other income and expenses attributable to liabilities still held as of December 31, 2011 |
| $ | 1,324,165 |
| $ | 8,989,945 |
| $ | (1,051,013 | ) | $ | 63,113 |
| $ | 9,326,210 |
|
Assumptions used in evaluating the warrant derivative liabilities, the conversion element of the promissory notes, the conversion element of the Series B CPS and the Series A CPS derivative liabilities are discussed in Notes 9, 5, 6 and 6, respectively. The principal assumptions used, and their impact on valuations, are as follows:
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.
F-21
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
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, and historical experience. For the convertible promissory notes, the Company considers a blend of expected remaining terms prior to partial conversion into Series A-2 Convertible Preferred Stock, giving consideration to the likelihood of conversion under various scenarios, and a further blend of expected remaining terms prior to partial conversion into common stock, all based on management’s projections of when such conversions would occur within the contractual term. 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 the Company’s common stock price has fluctuated or is expected to fluctuate. To the extent that Company’s common stock has not been traded for as long as the expected remaining term of the instrument, the Company uses a weighted average of 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. 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. To the extent that the Company’s common stock has been traded for longer than the expected remaining term of the instrument, equal weighting is applied to this weighted average and to the Company’s own historic volatility over the same term to determine expected volatility. An increase in the expected volatility will increase the fair value and the associated derivative liability.
Dividend Yield. The Company has not made any dividend payments and does 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.
NOTE 11. Cash Flow Information
Cash paid during the years ended December 31, 2012 and 2011, is as follows (interest paid in the year ended December 31, 2011, excludes $178,585 which was paid to Oxford relating to termination of the term loan and was expensed as interest, as described in Note 5):
|
|
| Year Ended December 31, |
| ||||
|
|
| 2012 |
| 2011 |
| ||
|
|
|
|
|
|
|
|
|
| Interest |
| $ | — |
| $ | 127,062 |
|
|
|
|
|
|
|
|
|
|
| Income taxes paid |
| $ | 41,567 |
| $ | 24,817 |
|
|
|
|
|
|
|
|
|
|
| Income taxes (received) |
| $ | (25,539 | ) | $ | — |
|
Supplemental disclosure of non-cash investing and financing activities for the years ended December 31, 2012 and 2011, is as follows:
|
|
| Year Ended December 31, |
| ||||
|
|
| 2012 |
| 2011 |
| ||
|
|
|
|
|
|
|
|
|
| Warrant derivative liabilities transferred to equity on waiver of future anti-dilution rights |
| $ | — |
| $ | 315,803 |
|
|
|
|
|
|
|
|
|
|
| Conversion element of convertible promissory notes transferred to equity on modification of terms (See Note 5) |
| $ | — |
| $ | 573,923 |
|
|
|
|
|
|
|
|
|
|
| Conversion element bifurcated on issuance of convertible promissory notes |
| $ | — |
| $ | 11,495,163 |
|
|
|
|
|
|
|
|
|
|
| Interest converted to principal on convertible promissory notes |
| $ | 801,645 |
| $ | 460,383 |
|
|
|
|
|
|
|
|
|
|
| Beneficial conversion feature related to Series A-1 Convertible Preferred Stock |
| $ | — |
| $ | 9,250,009 |
|
|
|
|
|
|
|
|
|
|
| Inventory transferred to property and equipment |
| $ | — |
| $ | 750,501 |
|
|
|
|
|
|
|
|
|
|
| Accretion on Series A and B convertible preference shares of subsidiary associated with premium |
| $ | — |
| $ | (15,242 | ) |
F-22
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 12. Income Taxes
The provision for income taxes consists of the following for the years ended December 31, 2012 and 2011:
|
|
| Year Ended December 31, |
| ||||
|
|
| 2012 |
| 2011 |
| ||
|
|
|
|
|
|
|
|
|
| Current: |
|
|
|
|
|
|
|
| Federal |
| $ | — |
| $ | — |
|
| State |
|
| 5,726 |
|
| — |
|
| Foreign |
|
| (27,179 | ) |
| 27,247 |
|
|
|
|
|
|
|
|
|
|
| Total Current |
| $ | (21,453 | ) | $ | 27,247 |
|
|
|
|
|
|
|
|
|
|
| Deferred: |
|
|
|
|
|
|
|
| Federal |
| $ | — |
| $ | — |
|
| State |
|
| — |
|
| — |
|
| Foreign |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
| Total Deferred |
| $ | — |
| $ | — |
|
|
|
|
|
|
|
|
|
|
| Provision for income taxes |
| $ | (21,453 | ) | $ | 27,247 |
|
A reconciliation of the provision for income taxes with the expected provision for income taxes computed by applying the federal statutory income tax rate of 34% to the net loss before provision for income taxes for the years ended December 31, 2012 and 2011:
|
|
| Year Ended December 31, |
| ||||
|
|
| 2012 |
| 2011 |
| ||
|
|
|
|
|
|
|
|
|
| Provision for income taxes at federal statutory rate |
| $ | (2,787,359 | ) | $ | (4,460,063 | ) |
| Federal research and development tax credits |
|
| (94,794 | ) |
| (160,003 | ) |
| Expenses not deductible, income not taxable |
|
| (473,203 | ) |
| (2,705,607 | ) |
| Foreign loss taxed at lower rates |
|
| 164,828 |
|
| 232,280 |
|
| Change in federal valuation allowance |
|
| 3,169,075 |
|
| 7,120,640 |
|
|
|
|
|
|
|
|
|
|
| Provision for income taxes |
| $ | (21,453 | ) | $ | 27,247 |
|
The components of the deferred tax assets as of December 31, 2012 and 2011, are as follows:
|
|
| December 31, |
| December 31, |
| ||
|
|
| 2012 |
| 2011 |
| ||
| Deferred tax assets: |
|
|
|
|
|
|
|
| Net operating loss carry-forwards |
| $ | 25,034,778 |
| $ | 21,588,554 |
|
| Capitalized start-up cost and research and development cost |
|
| 607,983 |
|
| 891,708 |
|
| Research and development tax credit |
|
| 1,389,625 |
|
| 1,239,795 |
|
| Depreciation on property and equipment |
|
| (156,361 | ) |
| (366,292 | ) |
| Stock-based compensation |
|
| 405,742 |
|
| 677,381 |
|
| Reserves and accruals |
|
| 719,909 |
|
| 666,336 |
|
|
|
|
|
|
|
|
|
|
| Total deferred tax asset |
|
| 28,001,676 |
|
| 24,697,482 |
|
|
|
|
|
|
|
|
|
|
| Valuation allowance |
|
| (28,001,676 | ) |
| (24,697,482 | ) |
|
|
|
|
|
|
|
|
|
| Net deferred tax assets |
| $ | — |
| $ | — |
|
F-23
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The following deferred income taxes were provided for the years ended December 31, 2012 and 2011:
|
|
| Year Ended December 31, |
| ||||
|
|
| 2012 |
| 2011 |
| ||
| Deferred tax assets: |
|
|
|
|
|
|
|
| Net operating loss carry-forwards |
| $ | 3,446,224 |
| $ | 6,635,471 |
|
| Capitalized start-up cost and research and development cost |
|
| (283,725 | ) |
| 127,807 |
|
| Research and development tax credit |
|
| 149,830 |
|
| (274,775 | ) |
| Depreciation on property and equipment |
|
| 209,931 |
|
| (476,501 | ) |
| Stock-based compensation |
|
| (271,639 | ) |
| 677,381 |
|
| Reserves and accruals |
|
| 53,573 |
|
| 519,602 |
|
| Valuation allowance |
|
| (3,304,194 | ) |
| (7,208,985 | ) |
|
|
|
|
|
|
|
|
|
| Net deferred income taxes |
| $ | — |
| $ | — |
|
Management believes that, based on a number of factors, it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company has provided a full valuation allowance against its net deferred tax assets. At December 31, 2012, the Company had federal and state net operating loss carry-forwards (“NOLs”) of approximately $64,200,000 and $54,800,000, respectively, and foreign operating loss carry-forwards of approximately $3,200,000. The federal and state NOLs will expire in various periods from 2026 through 2032.
At December 31, 2012, the Company had research and development tax credits of approximately $800,000 and $900,000 available to offset future income taxes, if any, for federal and California state purposes, respectively. These federal tax credits will expire in various periods from 2027 through 2032 and the California state tax credits can be carried forward indefinitely.
Utilization of NOLs and tax credit carry-forwards may be subject to substantial limitation due to the ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of NOLs and tax credits before utilization.
The Company files U.S. federal and various state income tax returns. There are no prior year tax returns under audit by taxing authorities, and management is not aware of any impending audits. As a result of the Company’s NOL carry-forwards, all tax years from 2006 through 2012 remain subject to federal and state tax examination.
The Company has established tax reserves for uncertain tax positions totaling $721,000 and $645,000 as of December 31, 2012 and 2011, respectively. A reconciliation of the change in unrecognized tax benefits is as follows:
|
|
| Year Ended December 31, |
| ||||
|
|
| 2012 |
| 2011 |
| ||
| Beginning Balance |
| $ | 645,000 |
| $ | — |
|
| Additions based on tax positions related to prior years |
|
| — |
|
| 497,000 |
|
| Additions based on tax positions related to the current year |
|
| 76,000 |
|
| 148,000 |
|
| Ending Balance |
| $ | 721,000 |
| $ | 645,000 |
|
All of the unrecognized tax benefits are recognized in the Company’s financial statements as a reduction in the Company’s deferred tax assets. Accordingly, the Company has not accrued any interest or penalties related to unrecognized tax benefits. Because the Company has a full valuation allowance against its deferred tax assets, there will be no income tax effect of releasing the unrecognized tax benefits. The Company expects no significant changes to its uncertain tax positions in the next 12 months.
NOTE 13. Net Income (Loss) Per Share
Basic and diluted net income (loss) per share are shown on the Statements of Operations.
No adjustment has been made to the net loss for charges, gains, losses and accretion related to Series A, B and C CPS, Series A-1 Convertible Preferred Stock and convertible promissory notes, as the effect would be anti-dilutive due to the net loss.
F-24
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The following outstanding stock options and warrants (on an as-converted into common stock basis) and shares issuable or contingently issuable upon conversion of restricted stock, Series A, B and C CPS, Series A-1 Convertible Preferred Stock and convertible promissory notes were excluded from the computation of diluted net loss per share attributable to holders of common stock as they had antidilutive effects for the years ended December 31, 2012 and 2011:
|
|
| Year Ended December 31, |
| ||
|
|
| 2012 |
| 2011 |
|
|
|
|
|
|
|
|
| Common share equivalents issuable upon exercise of common stock options |
| 121,032 |
| 247,294 |
|
|
|
|
|
|
|
|
| Shares issuable upon vesting of restricted stock |
| 18,695 |
| 54,082 |
|
|
|
|
|
|
|
|
| Shares issuable upon conversion of Series A CPS |
| 27,799,325 |
| 23,844,479 |
|
|
|
|
|
|
|
|
| Shares issuable upon conversion of Series B CPS |
| 39,215,686 |
| 9,263,548 |
|
|
|
|
|
|
|
|
| Shares issuable upon conversion of Series C CPS |
| 3,233,734 |
| 2,631,285 |
|
|
|
|
|
|
|
|
| Shares issuable upon conversion of Series A-1 Convertible Preferred Stock |
| 31,019,035 |
| 17,788,797 |
|
|
|
|
|
|
|
|
| Shares issuable upon conversion of convertible promissory notes |
| 28,309,426 |
| 16,231,668 |
|
|
|
|
|
|
|
|
| Total common share equivalents excluded from denominator for diluted earnings per share computation |
| 129,716,933 |
| 70,061,153 |
|
NOTE 14. Segment Information, Geographic Data, and Significant Customers
Operating segments are defined as component of the Company’s business for which separate financial information is available that is evaluated by the Company’s chief operating decision maker in deciding how to allocate resources and assessing performance. The Company presently has only one operating segment.
Revenue by geographic areas for the years ended December 31, 2012 and 2011, are as follows:
|
|
| Year Ended December 31, |
| ||||
|
|
| 2012 |
| 2011 |
| ||
|
|
|
|
|
|
|
|
|
| United States |
| $ | 495,547 |
| $ | 207,045 |
|
| International: |
|
|
|
|
|
|
|
| Europe(1) |
|
| 47,159 |
|
| 297,371 |
|
| Asia |
|
| 43,470 |
|
| 18,515 |
|
|
|
|
|
|
|
|
|
|
| Total revenue |
| $ | 586,176 |
| $ | 522,931 |
|
__________
(1) Sales to Europe in 2011 included approximately $270,000 to Belgium.
Revenues are attributed to geographical areas based on where the Company’s products are shipped.
Long-lived assets by geographic areas as of December 31, 2012 and 2011, are as follows:
|
|
| 2012 |
| 2011 |
| ||
|
|
|
|
|
|
|
|
|
| United States |
| $ | 690,454 |
| $ | 1,387,283 |
|
| Malaysia |
|
| 183,608 |
|
| 326,807 |
|
|
|
|
|
|
|
|
|
|
| Total long-lived assets |
| $ | 874,062 |
| $ | 1,714,090 |
|
F-25
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Customers accounting for more than 10% of either total revenues during the years ended December 31, 2012 or 2011, or accounts receivable as at December 31, 2012 or 2011, are tabulated as follows:
|
| Revenues, Year Ended December 31, |
| Accounts Receivable, December 31, |
| ||||||||||||||||
|
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Customer A | $ | 146,000 |
| 25% |
| $ | — |
| — |
| $ | 140,000 |
| 45% |
| $ | — |
| — |
|
| Customer B | $ | 131,465 |
| 22% |
| $ | 628 |
| 0% |
| $ | — |
| — |
| $ | 628 |
| 2% |
|
| Customer C | $ | 124,473 |
| 21% |
| $ | — |
| — |
| $ | 150,145 |
| 49% |
| $ | — |
| — |
|
| Customer D | $ | — |
| — |
| $ | 269,609 |
| 52% |
| $ | — |
| — |
| $ | — |
| — |
|
| Customer E | $ | — |
| — |
| $ | 66,750 |
| 13% |
| $ | — |
| — |
| $ | 11,250 |
| 38% |
|
| Customer F | $ | 19,185 |
| 3% |
| $ | 57,492 |
| 11% |
| $ | 15,000 |
| 5% |
| $ | 9,700 |
| 33% |
|
| Customer G | $ | — |
| — |
| $ | 2,975 |
| 1% |
| $ | — |
| — |
| $ | 2,975 |
| 10% |
|
NOTE 15. Benefit Plan
The Company has a 401(k) plan that allows eligible U.S. employees to contribute up to 50 percent of their annual compensation to the plan, subject to certain limitations. Each employee directs their contributions, which vest immediately, across a series of mutual funds. The Company does not make matching contributions and the costs of administering the 401(k) plan are not significant.
NOTE 16. Contingencies
From time to time the Company may be involved in claims arising in connection with its business. Based on information currently available, the Company believes that the amount, or range, of reasonably possible losses in connection with any pending actions against it, including the matter described below, in excess of established reserves, in the aggregate, not to be material to its consolidated financial condition or cash flows. However, losses may be material to the Company’s operating results for any particular future period, depending on the level of income or loss for such period.
Coalesce v. WaferGen. On April 24, 2012, an action entitled Coalesce Corporation (“Coalesce”) v. WaferGen Bio-systems, Inc. was filed in the Alameda County Superior Court. Coalesce, a company that had been providing marketing services between 2006 and 2010, sued the Company for alleged non-payment of sums due, breach of contract, misrepresentation and unjust enrichment. On September 5, 2012, Coalesce filed an amended complaint, with additional claims, for compensatory damages in excess of $500,000 and other compensation. On October 30, 2012, the Company filed a notice of demurrer to Coalesce’s complaint seeking to dismiss the complaint in its entirety. The Company believes the claim to be substantially without merit, and while no assurance can be given regarding the outcome of this litigation, management believes that the resolution of this matter will not have a material adverse effect on the Company’s financial position and results of operations. Related legal costs are being expensed as incurred.
NOTE 17. Quarterly Financial Data (Unaudited)
Selected summarized quarterly financial information for fiscal 2012 and 2011 is as follows:
|
|
| Year Ended December 31, 2012 |
| ||||||||||
|
|
| First |
| Second |
| Third |
| Fourth |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenue |
| $ | 73,233 |
| $ | 20,158 |
| $ | 176,608 |
| $ | 316,177 |
|
| Gross profit (loss) |
| $ | (17,172 | ) | $ | 9,568 |
| $ | 32,281 |
| $ | 140,622 |
|
| Net gains (losses) on derivative revaluations |
| $ | 1,076,721 |
| $ | 1,485,470 |
| $ | (385,209 | ) | $ | 1,582,164 |
|
| Net income (loss) |
| $ | (2,904,695 | ) | $ | (1,269,630 | ) | $ | (2,967,580 | ) | $ | (1,034,757 | ) |
| Net income (loss) attributable to common stockholders |
| $ | (3,101,360 | ) | $ | (1,468,754 | ) | $ | (3,169,192 | ) | $ | (1,238,890 | ) |
| Net income (loss) per share – basic and diluted |
| $ | (0.07 | ) | $ | (0.04 | ) | $ | (0.08 | ) | $ | (0.03 | ) |
F-26
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
|
|
| Year Ended December 31, 2011 |
| ||||||||||
|
|
| First |
| Second |
| Third |
| Fourth |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenue |
| $ | 351,032 |
| $ | 44,905 |
| $ | 89,088 |
| $ | 37,906 |
|
| Gross profit (loss) |
| $ | 210,083 |
| $ | 30,963 |
| $ | (403,158 | ) | $ | (716,861 | ) |
| Net gains (losses) on derivative revaluations |
| $ | 381,829 |
| $ | (1,619,723 | ) | $ | 8,624,976 |
| $ | 1,884,903 |
|
| Net income (loss) |
| $ | (3,803,829 | ) | $ | (9,209,548 | ) | $ | 3,580,921 |
| $ | (3,712,622 | ) |
| Net income (loss) attributable to common stockholders |
| $ | (3,867,949 | ) | $ | (18,590,846 | ) | $ | 3,222,282 |
| $ | (3,601,540 | ) |
| Net income (loss) per share – basic |
| $ | (0.09 | ) | $ | (0.45 | ) | $ | 0.08 |
| $ | (0.09 | ) |
| Net income (loss) per share – diluted |
| $ | (0.09 | ) | $ | (0.45 | ) | $ | 0.03 |
| $ | (0.09 | ) |
F-27
Condensed Consolidated Balance Sheets
|
|
| June 30, 2013 |
| December 31, 2012 |
| ||
| Assets |
|
| (Unaudited) |
|
|
|
|
| Current assets: |
|
|
|
|
|
|
|
| Cash and cash equivalents |
| $ | 3,035,998 |
| $ | 6,328,753 |
|
| Accounts receivable |
|
| 34,554 |
|
| 307,759 |
|
| Inventories, net |
|
| 517,044 |
|
| 495,486 |
|
| Prepaid expenses and other current assets |
|
| 267,294 |
|
| 134,567 |
|
|
|
|
|
|
|
|
|
|
| Total current assets |
|
| 3,854,890 |
|
| 7,266,565 |
|
|
|
|
|
|
|
|
|
|
| Property and equipment, net |
|
| 497,480 |
|
| 874,062 |
|
| Other assets |
|
| 666,617 |
|
| 756,831 |
|
|
|
|
|
|
|
|
|
|
| Total assets |
| $ | 5,018,987 |
| $ | 8,897,458 |
|
|
|
|
|
|
|
|
|
|
| Liabilities and Stockholders’ Equity (Deficit) |
|
|
|
|
|
|
|
| Current liabilities: |
|
|
|
|
|
|
|
| Accounts payable |
| $ | 636,135 |
| $ | 474,436 |
|
| Accrued payroll and related costs |
|
| 289,319 |
|
| 235,404 |
|
| Other accrued expenses |
|
| 1,473,024 |
|
| 1,063,813 |
|
|
|
|
|
|
|
|
|
|
| Total current liabilities |
|
| 2,398,478 |
|
| 1,773,653 |
|
|
|
|
|
|
|
|
|
|
| Long-term debt, net of discount |
|
| 5,271,313 |
|
| 3,393,159 |
|
| Derivative liabilities |
|
| 2,686,664 |
|
| 2,208,184 |
|
|
|
|
|
|
|
|
|
|
| Total liabilities |
|
| 10,356,455 |
|
| 7,374,996 |
|
|
|
|
|
|
|
|
|
|
| Series A and B convertible preference shares of subsidiary |
|
| 3,613,305 |
|
| 1,123,406 |
|
|
|
|
|
|
|
|
|
|
| Commitments and contingencies (Note 12) |
|
| –– |
|
| –– |
|
|
|
|
|
|
|
|
|
|
| Stockholders’ equity (deficit): |
|
|
|
|
|
|
|
| Series C convertible preference shares of subsidiary |
|
| 4,993,728 |
|
| 4,993,728 |
|
| Preferred Stock: $0.001 par value; 10,000,000 shares authorized; 2,937,500 shares issued and outstanding at June 30, 2013, and December 31, 2012 |
|
| 9,838,569 |
|
| 9,838,569 |
|
| Common Stock: $0.001 par value; 300,000,000 shares authorized; 41,680,902 shares issued and outstanding at June 30, 2013, and December 31, 2012 |
|
| 41,681 |
|
| 41,681 |
|
| Additional paid-in capital |
|
| 47,585,232 |
|
| 49,892,346 |
|
| Accumulated deficit |
|
| (71,516,562 | ) |
| (64,571,897 | ) |
| Accumulated other comprehensive income |
|
| 106,579 |
|
| 204,629 |
|
|
|
|
|
|
|
|
|
|
| Total stockholders’ equity (deficit) |
|
| (8,950,773 | ) |
| 399,056 |
|
|
|
|
|
|
|
|
|
|
| Total liabilities and stockholders’ equity (deficit) |
| $ | 5,018,987 |
| $ | 8,897,458 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-28
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
|
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| ||||||||
|
|
| 2013 |
| 2012 |
| 2013 |
| 2012 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Product |
| $ | 121,248 |
| $ | 20,158 |
| $ | 216,402 |
| $ | 93,391 |
|
| License and royalty |
|
| 125,000 |
|
| — |
|
| 208,333 |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenue |
|
| 246,248 |
|
| 20,158 |
|
| 424,735 |
|
| 93,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of product revenue |
|
| 76,780 |
|
| 10,590 |
|
| 142,368 |
|
| 100,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit (loss) |
|
| 169,468 |
|
| 9,568 |
|
| 282,367 |
|
| (7,604 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Sales and marketing |
|
| 609,296 |
|
| 158,278 |
|
| 951,927 |
|
| 412,831 |
|
| Research and development |
|
| 1,263,267 |
|
| 1,606,860 |
|
| 2,665,347 |
|
| 3,617,724 |
|
| General and administrative |
|
| 564,770 |
|
| 707,837 |
|
| 1,225,418 |
|
| 1,884,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
| 2,437,333 |
|
| 2,472,975 |
|
| 4,842,692 |
|
| 5,914,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating loss |
|
| (2,267,865 | ) |
| (2,463,407 | ) |
| (4,560,325 | ) |
| (5,922,429 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other income and (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest income |
|
| 892 |
|
| 1,277 |
|
| 2,087 |
|
| 5,559 |
|
| Interest expense |
|
| (1,092,091 | ) |
| (452,512 | ) |
| (1,972,629 | ) |
| (815,567 | ) |
| Gain (loss) on revaluation of derivative liabilities, net |
|
| 115,237 |
|
| 1,485,470 |
|
| (478,480 | ) |
| 2,562,191 |
|
| Miscellaneous income |
|
| 79,621 |
|
| 172,354 |
|
| 67,343 |
|
| 22,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total other income and (expenses) |
|
| (896,341 | ) |
| 1,206,589 |
|
| (2,381,679 | ) |
| 1,774,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss before provision for income taxes |
|
| (3,164,206 | ) |
| (1,256,818 | ) |
| (6,942,004 | ) |
| (4,147,438 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Provision for income taxes |
|
| (1,051 | ) |
| 12,812 |
|
| 2,661 |
|
| 26,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
| (3,163,155 | ) |
| (1,269,630 | ) |
| (6,944,665 | ) |
| (4,174,325 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accretion on Series A and B convertible preference shares of subsidiary associated with premium |
|
| (2,489,899 | ) |
| — |
|
| (2,489,899 | ) |
| — |
|
| Series A-1 preferred dividend |
|
| (209,268 | ) |
| (199,124 | ) |
| (415,952 | ) |
| (395,789 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss attributable to common stockholders |
| $ | (5,862,322 | ) | $ | (1,468,754 | ) | $ | (9,850,516 | ) | $ | (4,570,114 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss per share – basic and diluted |
| $ | (0.14 | ) | $ | (0.04 | ) | $ | (0.24 | ) | $ | (0.11 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Shares used to compute net loss per share – basic and diluted |
|
| 41,680,902 |
|
| 41,656,737 |
|
| 41,680,819 |
|
| 41,652,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Comprehensive Loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
| $ | (3,163,155 | ) | $ | (1,269,630 | ) | $ | (6,944,665 | ) | $ | (4,174,325 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign currency translation adjustments |
|
| (85,571 | ) |
| (267,612 | ) |
| (98,050 | ) |
| (32,924 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total comprehensive loss |
| $ | (3,248,726 | ) | $ | (1,537,242 | ) | $ | (7,042,715 | ) | $ | (4,207,249 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-29
Condensed Consolidated Statements of Cash Flows (Unaudited)
|
|
| Six Months Ended June 30, |
| ||||
|
|
| 2013 |
| 2012 |
| ||
|
|
|
|
|
|
| ||
| Cash flows from operating activities: |
|
|
|
|
|
|
|
| Net loss |
| $ | (6,944,665 | ) | $ | (4,174,325 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
| Depreciation and amortization |
|
| 409,777 |
|
| 482,255 |
|
| Stock-based compensation |
|
| 182,785 |
|
| 186,459 |
|
| (Gain) loss on revaluation of derivative liabilities, net |
|
| 478,480 |
|
| (2,562,191 | ) |
| Interest converted to principal on convertible promissory notes |
|
| 416,009 |
|
| 395,843 |
|
| Provision for excess and obsolete inventory |
|
| 15,717 |
|
| 69,307 |
|
| Amortization of debt discount |
|
| 1,462,145 |
|
| 382,377 |
|
| Change in operating assets and liabilities: |
|
|
|
|
|
|
|
| Accounts receivable |
|
| 273,182 |
|
| (7,800 | ) |
| Inventories |
|
| (37,275 | ) |
| (25,121 | ) |
| Prepaid expenses and other assets |
|
| (43,629 | ) |
| 139,766 |
|
| Accounts payable |
|
| 161,707 |
|
| (208,239 | ) |
| Accrued payroll and related costs |
|
| 54,095 |
|
| (313,944 | ) |
| Other accrued expenses |
|
| 409,922 |
|
| (78,034 | ) |
|
|
|
|
|
|
|
|
|
| Net cash used in operating activities |
|
| (3,161,750 | ) |
| (5,713,647 | ) |
|
|
|
|
|
|
|
|
|
| Cash flows from investing activities: |
|
|
|
|
|
|
|
| Purchase of property and equipment |
|
| (34,347 | ) |
| (8,519 | ) |
|
|
|
|
|
|
|
|
|
| Net cash used in investing activities |
|
| (34,347 | ) |
| (8,519 | ) |
|
|
|
|
|
|
|
|
|
| Effect of exchange rates on cash |
|
| (96,658 | ) |
| (33,878 | ) |
|
|
|
|
|
|
|
|
|
| Net decrease in cash and cash equivalents |
|
| (3,292,755 | ) |
| (5,756,044 | ) |
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents at beginning of the period |
|
| 6,328,753 |
|
| 15,117,172 |
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents at end of the period |
| $ | 3,035,998 |
| $ | 9,361,128 |
|
|
|
|
|
|
|
|
|
|
| Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
| Cash paid for interest |
| $ | 4,341 |
| $ | — |
|
| Cash paid for income taxes |
| $ | 18,582 |
| $ | 23,249 |
|
| Cash (received) for income taxes |
| $ | (1,051 | ) | $ | — |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-30
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 1. The Company
General – WaferGen Bio-systems, Inc. and its subsidiaries (the “Company”) are engaged in the development, manufacture and sales of systems for gene expression quantification, genotyping and stem cell research. Most recently, the Company’s R&D efforts have been concentrated on the commercialization of the SmartChip Target Enrichment System. The Company’s products are aimed at researchers who perform genetic analysis, primarily at pharmaceutical and biotech companies, academic and private research centers and diagnostics companies involved in biomarker discovery and genetic research. Through its SmartChip products, the Company plans to provide new performance standards with significant savings in time and cost for professionals in the field of gene expression research and to facilitate biomarker discovery, toxicology, and clinical research.
Wafergen, Inc. was incorporated in the State of Delaware on October 22, 2002, and was acquired by WaferGen Bio-systems, Inc. in a reverse merger on May 31, 2007.
On January 24, 2008, the Company formed a new subsidiary in Malaysia. This subsidiary, WaferGen Biosystems (M) Sdn. Bhd. (“WGBM”), supports the Company’s ongoing development and commercialization goals. The parent company owns 100% of the common stock and 8.2% (including all shares that have been assumed by the parent company pursuant to exercises of exchange rights) of the preference shares of WGBM. The holders of these preference shares have certain rights, including the right to exchange such shares for common stock of the parent company and to have them redeemed by WGBM from funds legally available for distribution (see Note 5), which may be more beneficial than conversion into common stock of WGBM, but if such conversion were to occur, the parent company would own 72.8% of WGBM’s common stock.
On August 30, 2011, the Company formed a new wholly owned subsidiary in Luxembourg, WaferGen Biosystems Europe S.a.r.l., to establish a presence for its marketing and research activities in Europe.
Management’s Plan. – The Company has incurred operating losses and negative cash flows from operations since its inception. Management expects that revenues will increase as a result of current and future product releases. However, the Company also expects to incur additional expenses for the development and expansion of its products, marketing campaigns, and operating costs as it expands its operations. Therefore, the Company expects operating losses and negative cash flows to continue for the foreseeable future. It is management’s plan to obtain additional working capital through additional financings. The Company believes that it will be successful in expanding operations, gaining market share, and raising additional funds. However, there can be no assurance that in the event the Company requires additional financing, such financing will be available at terms which are favorable, or at all. Failure to generate sufficient cash flows from operations or raise additional capital could have a material adverse effect on the Company’s ability to achieve its intended business objectives. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
Going Concern. – The Company’s condensed consolidated financial statements have been presented on a basis that contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company continues to face significant risks associated with the successful execution of its strategy given the current market environment for similar companies and failure to generate sufficient revenues or raise additional capital could have a material adverse effect on the Company’s ability to continue as a going concern and to achieve its intended business objectives. These facts raise substantial doubt about the Company’s ability to continue as a going concern, and there can be no assurance that the Company will be successful in its efforts to enhance its liquidity situation. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 2. Summary of Significant Accounting Policies
Basis of Presentation – The Company has prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to these rules and regulations. These condensed consolidated financial statements should be read in conjunction with our audited financial statements and footnotes related thereto for the year ended December 31, 2012, included in our Form 10‑K filed with the SEC. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position and the results of its operations and cash flows. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year.
F-31
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Basis of Consolidation – The condensed consolidated financial statements include the financial statements of WaferGen Bio-systems, Inc. and its subsidiaries. All significant transactions and balances between the WaferGen Bio-systems, Inc. and its subsidiaries have been eliminated in consolidation.
Use of Estimates – Preparing condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results and outcomes could differ from these estimates and assumptions.
Foreign Currencies – Assets and liabilities of non-U.S. subsidiaries for which the local currency is the functional currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average rates of exchange prevailing during each reporting period. Translation adjustments resulting from this process are charged or credited to other comprehensive income (loss). Foreign exchange gains and losses for assets and liabilities of the Company’s non-U.S. subsidiaries for which the functional currency is the U.S. dollar are recorded in miscellaneous income (expense) in the Company’s condensed consolidated statements of operations.
Accounts Receivable – An allowance for doubtful accounts will be recorded based on a combination of historical experience, aging analysis, and information on specific accounts. Account balances will be written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Inventory – Inventory is recorded at the lower of cost (first-in, first-out) or market value. Additionally, the Company evaluates its inventory in terms of excess and obsolete exposures and records provisions where necessary.
Governmental Subsidies – Incentives received from governments in the form of grants are recorded as a reduction in expense in accordance with their purpose. Grants awarded for the purpose of matching specified expenditures are not recognized until a definitive agreement has been signed by both parties; thereafter income is recognized to the extent that the related expenses have been incurred. The Company recognized governmental subsidies of $69,494 and nil in the three months ended June 30, 2013 and 2012, respectively and $149,590 and nil in the six months ended June 30, 2013 and 2012, respectively, which were offset against operating expenses in the statement of operations.
Stock-Based Compensation – The Company measures the fair value of all stock-based awards to employees, including stock options, on the grant date and records the fair value of these awards, net of estimated forfeitures, to compensation expense over the service period. The fair value of awards to consultants is measured on the dates on which performance of services is completed, with interim valuations recorded at balance sheet dates while performance is in progress. The fair value of options is estimated using the Black-Scholes valuation model, and of restricted stock is based on the Company’s closing share price on the measurement date.
Change in Fair Value of Derivatives – The Company recognizes its warrants with certain anti-dilution protection, the Series A convertible preference shares of its Malaysian subsidiary, and the conversion element of its convertible promissory notes and of the Series B convertible preference shares of its Malaysian subsidiary as derivative liabilities. Such liabilities are valued when the financial instruments are initially issued or the derivative first requires recognition and are also revalued at each reporting date, with the change in their respective fair values being recorded as a gain or loss on revaluation within other income and expenses in the statement of operations. The Company determines the fair value of all of its derivative liabilities using a Monte Carlo Simulation approach, with key input variables provided by management.
Warranty Reserve – The Company’s standard warranty agreement is one year from shipment of certain products. The Company accrues for anticipated warranty costs upon shipment of these products. The Company’s warranty reserve is based on management’s judgment regarding anticipated rates of warranty claims and associated repair costs, and is updated quarterly.
Net Income (Loss) Per Share – Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding plus common share equivalents from conversion of dilutive stock options, warrants, and restricted stock using the treasury method, and convertible securities using the as-converted method, except when antidilutive. In the event of a net loss, the effects of all potentially dilutive shares are excluded from the diluted net loss per share calculation as their inclusion would be antidilutive.
Reclassification – Certain reclassifications have been made to prior periods’ data to conform to the current presentation. These reclassifications had no effect on reported net losses.
F-32
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Recent Accounting Pronouncements
In March 2013, the FASB issued ASU 2013‑05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity” (“ASU 2013‑05”). ASU 2013‑05 clarifies the circumstances under which the cumulative translation adjustment arising from the consolidation of entities for which the functional currency is not the U.S. dollar should be released into net income. The Company adopted this guidance effective January 1, 2013, and its adoption did not have a material impact on the Company’s consolidated financial condition or results of operations.
NOTE 3. Inventories
Inventories, net of provisions for potentially excess, obsolete or impaired goods, consisted of the following at June 30, 2013, and December 31, 2012:
|
|
| June 30, 2013 |
| December 31, 2012 |
| ||
|
|
|
|
|
|
| ||
| Raw materials |
| $ | 118,765 |
| $ | 158,316 |
|
|
|
|
|
|
|
|
|
|
| Work in process |
|
| 156,741 |
|
| 179,314 |
|
|
|
|
|
|
|
|
|
|
| Finished goods |
|
| 241,538 |
|
| 157,856 |
|
|
|
|
|
|
|
|
|
|
| Inventories, net |
| $ | 517,044 |
| $ | 495,486 |
|
NOTE 4. Long Term Obligations
On May 27, 2011, the Company sold convertible promissory notes in the aggregate principal amount of $15,275,000, convertible into an aggregate of approximately 2,679,824 shares of Series A-2 Convertible Preferred Stock at a price of $5.70 per share, with each share being convertible into ten shares of common stock. The convertible promissory notes were sold along with convertible preferred stock and warrants for aggregate gross proceeds of $30,550,000, which after deducting issuance costs of $2,524,963 left net proceeds of $28,025,037. Interest on the convertible promissory notes accrues at a rate of 5% per annum, and may either be paid on the last day of each fiscal quarter, or added to the principal amount of the notes, at the Company’s option.
Using the relative fair value of the securities issued, the Company initially allocated the gross proceeds of $30,550,000 as follows:
| Security |
| Allocated Fair Value |
| Issuance Costs |
| Interest Expense |
| Net Allocation |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Series A-1 Convertible Preferred Stock |
| $ | 10,724,991 |
| $ | (886,422 | ) | $ | — |
| $ | 9,838,569 |
|
| Convertible promissory notes |
|
| 10,072,592 |
|
| (832,502 | ) |
| 2,255,074 |
|
| 11,495,164 |
|
| Warrants |
|
| 9,752,417 |
|
| (806,039 | ) |
| — |
|
| 8,946,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 30,550,000 |
| $ | (2,524,963 | ) | $ | 2,255,074 |
| $ | 30,280,111 |
|
The debt discount (which includes the discount associated with the embedded conversion derivative) related to the debt element of the convertible promissory notes of $14,442,497 is being amortized as non-cash interest expense using the effective yield method over the 3.5 year contractual term of the convertible promissory notes. The $832,502 in issuance costs allocated to the convertible promissory notes was recorded as a deferred financing cost, which is also being amortized as a non-cash interest expense using the effective yield method over the 3.5 year contractual term of the promissory notes.
The Company values the derivative liability for the conversion element of the convertible promissory notes using a Monte Carlo Simulation approach, using assumptions provided by management reflecting conditions at the valuation dates.
F-33
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
The fair value of this derivative liability at June 30, 2013 and 2012, was estimated to be $439 and $401,921, respectively, using a closing stock price of $0.04 and $0.07, respectively, and based on the following assumptions:
|
| June 30, 2013 |
| June 30, 2012 |
|
|
|
|
|
|
|
| Risk-free interest rate | 0.03% |
| 0.23% |
|
| Remaining contractual term | 1.41 Years |
| 2.41 Years |
|
| Expected volatility | 148.74% |
| 112.40% |
|
| Dividend yield | 0% |
| 0% |
|
The fair value of this derivative liability at December 31, 2012 and 2011, was estimated to be $274,928 and $1,931,295, respectively. The decrease in the fair value of this derivative liability of $274,489 and $1,529,374 during the six months ended June 30, 2013 and 2012, respectively, was recorded as a revaluation gain (see Note 9).
The balance of the convertible promissory notes comprises the following at June 30, 2013, and December 31, 2012:
|
| June 30, 2013 |
| December 31, 2012 | ||
|
|
|
|
|
|
|
| Convertible Promissory Notes Payable: |
|
|
|
|
|
| Face value | $ | 15,275,000 |
| $ | 15,275,000 |
| Interest added to principal |
| 1,678,037 |
|
| 1,262,028 |
| Stated value |
| 16,953,037 |
|
| 16,537,028 |
| Debt discount – conversion element, net of accumulated amortization of $2,760,773 and $1,298,628 respectively |
| 11,681,724 |
|
| 13,143,869 |
|
|
|
|
|
|
|
| Notes payable, net of debt discount | $ | 5,271,313 |
| $ | 3,393,159 |
NOTE 5. Convertible Preference Shares of Subsidiary
In 2008, the Company’s Malaysian subsidiary, WGBM, issued Series A convertible preference shares (“CPS”) to Malaysian Technology Development Corporation Sdn. Bhd. (“MTDC”), a venture capital and development firm in Malaysia, in a private placement under a Share Subscription and Shareholders’ Agreement dated May 8, 2008, at the U.S. dollar equivalent of $2.25 per share. In 2009 and 2010, WGBM issued Series B CPS to Expedient Equity Ventures Sdn. Bhd. (“EEV”) and Prima Mahawangsa Sdn. Bhd. (“PMSB”), both venture capital and development firms in Malaysia, in a private placement under a Share Subscription Agreement dated April 3, 2009, (“Series B SSA”) at the U.S. dollar equivalent of $2.25 per share. In 2009, WGBM issued Series B CPS to Kumpulan Modal Perdana Sdn. Bhd. (“KMP”), a venture capital and development firm in Malaysia, in a private placement under a Share Subscription Agreement dated July 1, 2009, at the U.S. dollar equivalent of $2.25 per share.
In 2010, both EEV and KMP exercised their option (see Paragraph (b) below) to sell to the Company their holdings of 222,222 and 188,057 Series B CPS, respectively, in exchange for shares of the Company’s common stock.
These transactions, along with the issuance of Series C CPS in 2011 (see below), are summarized as follows:
| Class |
| Number |
| Initial |
| Issuance |
| Gross |
| Issuance |
| Exchange |
| Net Cash |
| Date if |
| CPS |
| ||||
| of CPS |
| of CPS |
| Investor |
| Date |
| Proceeds |
| (Costs) |
| Gain (loss) |
| Proceeds |
| Exchanged |
| Outstanding |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Series A |
| 444,444 |
| MTDC |
| 07/18/2008 |
| $ | 1,000,000 |
| $ | (30,000 | ) | $ | — |
| $ | 970,000 |
| — |
| 444,444 |
|
| Series A |
| 444,444 |
| MTDC |
| 11/27/2008 |
|
| 1,000,000 |
|
| (30,000 | ) |
| — |
|
| 970,000 |
| — |
| 444,444 |
|
| Series B |
| 111,111 |
| EEV |
| 06/08/2009 |
|
| 250,000 |
|
| (19,393 | ) |
| (18,029 | ) |
| 212,578 |
| 08/17/2010 |
| — |
|
| Series B |
| 111,111 |
| EEV |
| 03/09/2010 |
|
| 250,000 |
|
| (8,929 | ) |
| (3,005 | ) |
| 238,066 |
| 08/17/2010 |
| — |
|
| Series B |
| 222,222 |
| PMSB |
| 09/23/2009 |
|
| 500,000 |
|
| (7,500 | ) |
| — |
|
| 492,500 |
| — |
| 222,222 |
|
| Series B |
| 222,222 |
| PMSB |
| 05/13/2010 |
|
| 500,000 |
|
| (5,000 | ) |
| — |
|
| 495,000 |
| — |
| 222,222 |
|
| Series B |
| 188,057 |
| KMP |
| 09/18/2009 |
|
| 423,128 |
|
| (11,319 | ) |
| — |
|
| 411,809 |
| 09/29/2010 |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Subtotal |
| 1,743,611 |
|
|
|
|
|
| 3,923,128 |
|
| (112,141 | ) |
| (21,034 | ) |
| 3,789,953 |
|
|
| 1,333,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Series C |
| 3,233,734 |
| MTDC |
| 03/10/2011 |
|
| 5,000,000 |
|
| (6,272 | ) |
| 58,575 |
|
| 5,052,303 |
| — |
| 3,233,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 4,977,345 |
|
|
|
|
| $ | 8,923,128 |
| $ | (118,413 | ) | $ | 37,541 |
| $ | 8,842,256 |
|
|
| 4,567,066 |
|
F-34
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Under the terms of a Deed of Adherence dated April 3, 2009 (and under the Series C SSA, as defined below), certain rights of the holders of the Series A CPS were modified. In addition, under the terms of the Series B SSA, the use of funds raised through the issuance of both Series A and Series B CPS was restricted, requiring at least 60% of the total to be utilized for the Company’s operations in Malaysia.
Following these modifications, the rights of the holders of Series A and B CPS included, but were not limited to, the right:
(a) to put to the Company their CPS (or ordinary shares in WGBM received on conversion of those CPS under paragraph (c) below) at any time during the year 2011 that the share price of the Company’s common stock is below $2.25 in order to redeem for cash (or, at the holder’s option, shares of Company common stock of equivalent value) the amount originally invested in USD plus a premium of 8%, compounded annually, with yearly rests (each year’s accrued interest would be forfeited in the event of redemption prior to the anniversary of the initial investment) (the “Redemption Option,” since amended for Series A and expired for Series B, see below);
(b) to cause the Company to exchange their CPS for common stock of the Company at an exchange rate of US$2.25 per share of common stock, provided, in the case of Series B CPS, that commencing on August 1, 2010, if during the 10-day trading period immediately prior to the holder’s exercise notice the average closing price of the Company’s common stock is less than US$2.647, then the holder may exchange CPS at an exchange rate equal to 85% of such 10-day average closing price. This option, previously exercised by EEV and KMP, has expired for MTDC’s Series A CPS and expires on April 3, 2014, for PMSB’s Series B CPS (the “Conversion Option”);
(c) to convert their CPS into ordinary shares of the subsidiary, WGBM, at any time, at a conversion rate of three ordinary shares per $100 invested in CPS;
(d) to cause the subsidiary, WGBM, to redeem the CPS in whole or in part at any time after December 31, 2011, for the principal paid plus a premium of 20% per annum, not compounding, from funds legally available for distribution (which is determined based on stock par value, premiums paid and retained earnings) (the “WGBM Redemption Right”);
(e) of first offer on any transfers or new issuance of subsidiary shares; and
(f) for each of Series A and Series B CPS, to appoint one of the seven directors of the subsidiary (see below also).
Since the Conversion Option affords holders of Series B CPS the right to receive a variable number of shares of the Company’s common stock, this feature is not indexed to the Company’s equity and is therefore accounted for as a derivative liability, with the estimated fair value being calculated at each reporting date using a Monte Carlo Simulation approach, using key input variables provided by management, with changes in fair value recorded as gains or losses on revaluation in non-operating income (expense).
On December 31, 2011, the Series B CPS Redemption Option lapsed. The value of the derivative liability for the conversion element increased significantly as a result. During the quarter ended June 30, 2013, the Company recorded an adjustment to accrete the Series B CPS to their maximum redemption amount under the WGBM Redemption Right at the balance sheet date, net of the related derivatives, and recorded this amount in temporary equity with a related deemed dividend which was charged against additional paid-in capital.
Series B CPS derivative liability fair values at June 30, 2013 and 2012, were estimated to be $1,213,727 and $1,327,769, respectively, using a closing stock price of $0.04 and $0.07, respectively, and based on the following assumptions:
|
| June 30, 2013 |
| June 30, 2012 |
|
|
|
|
|
|
|
| Risk-free interest rate | 0.11% |
| 0.26% |
|
| Expected remaining term | 0.61 Years |
| 1.41 Years |
|
| Expected volatility | 135.80% |
| 106.00% |
|
| Dividend yield | 0% |
| 0% |
|
F-35
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Series B CPS derivative liability fair values at December 31, 2012 and 2011, were estimated to be $1,210,909 and $1,245,101, respectively. The increase in the fair value of this derivative liability of $2,818 and $82,668 during the six months ended June 30, 2013 and 2012, respectively, was recorded as a revaluation loss (see Note 9).
Pursuant to a notice dated March 14, 2013, PMSB sought to exercise such redemption rights with respect to its Series B CPS. WGBM responded in a letter dated April 3, 2013 that under the Malaysian Company Act 1965, WGBM did not have funds legally available for distribution and accordingly could not legally redeem PMSB’s Series B CPS. PMSB’s Series B CPS have not yet been redeemed and PMSB retains ownership of such CPS, along with the WGBM Redemption Right and other rights associated with such CPS.
Based on the average closing price of the Company’s common stock of $0.040 in the 10-day trading period immediately prior to June 30, 2013, PMSB could have received 29,411,765 shares of such stock assuming exercise of the Conversion Option on that date. In a letter dated May 29, 2013, counsel for PMSB indicated that PMSB intended to pursue winding-up proceedings against WGBM (see Note 12).
On December 9, 2011, the terms of the Series A CPS were amended by a Letter Agreement with MTDC (the “MTDCLA”) to extend the period during which MTDC could exercise the Redemption Option from December 31, 2011 to April 3, 2014. In addition, the holder’s option to elect to receive shares of Company common stock of equivalent value (see above) was amended to give the Company the option, upon the exercise of the Redemption Option, to pay in shares of its common stock at an Applicable Stock Price (“ASP”), calculated as 85% of the average closing price of that stock during the 10-day trading period immediately prior to MTDC’s exercise notice. Further, the ASP is subject to a ceiling of $1.55 and a floor of $0.10. The amendment that allows the Company to settle the Redemption Option in a variable number of shares causes the Redemption Option to no longer be considered indexed to the Company’s equity. As a result, the Company recognizes the Redemption Option as an embedded derivative requiring bifurcation and the host instrument (the Series A CPS absent the Redemption Option) as part of temporary equity. During the quarter ended June 30, 2013, the Company recorded an adjustment to accrete the Series A CPS to their maximum redemption amount under the WGBM Redemption Right at the balance sheet date, net of the related derivatives, and recorded this amount in temporary equity with a related deemed dividend which was charged against additional paid-in capital.
The Series A CPS derivative liability fair values at June 30, 2013 and 2012, were estimated to be $770,641 and $1,346,035, respectively, using a closing stock price of $0.04 and $0.07, respectively, and based on the following assumptions:
|
| June 30, 2013 |
| June 30, 2012 |
|
|
|
|
|
|
|
| Risk-free interest rate | 0.02% - 0.08% |
| 0.22% - 0.26% |
|
| Expected remaining term | 0.11 - 0.41 Years |
| 1.05 - 1.41 Years |
|
| Expected volatility | 111.30 - 123.77% |
| 105.96 - 114.25% |
|
| Dividend yield | 0% |
| 0% |
|
Series A CPS derivative liability fair values at December 31, 2012 and 2011, were estimated to be $619,652 and $2,135,715, respectively. The increase in the fair value of this derivative liability of $150,989 during the six months ended June 30, 2013, was recorded as a revaluation loss and the decrease in the fair value of this derivative liability of $789,680 during the six months ended June 30, 2012, was recorded as a revaluation gain (see Note 9).
On June 30, 2013, the cash value of the Redemption Option was $2,720,978. Since 85% of the average closing price of the Company’s common stock of $0.040 in the 10-day trading period immediately prior to June 30, 2013, was less than the ASP floor of $0.10, if MTDC had requested redemption/conversion on that date, the Company could have settled this liability by issuing 27,209,779 shares of its common stock.
On March 10, 2011, WGBM received $5,000,000, less issuance costs totaling $6,272, in exchange for the issuance of 3,233,734 Series C convertible preference shares (“CPS”) to MTDC, in a private placement at the U.S. dollar equivalent of $1.5462 per share, representing the first subscription under a Share Subscription Agreement dated December 14, 2010, (“Series C SSA”) to sell 3,233,734 Series C CPS at an initial closing and, should MTDC so elect within 36 months of the initial closing, to sell 1,077,911 shares of Series C CPS at a subsequent closing at the U.S. dollar equivalent of US$2.3193 per share. MTDC may also elect to convert their Series C CPS into ordinary shares of the subsidiary, WGBM, at any time, at a conversion rate of one ordinary share per 100 CPS. MTDC may appoint one of the seven directors of WGBM (in addition to the director it may appoint as the holder of Series A CPS), and an additional independent director may be jointly appointed by MTDC and the Company. Each Series C CPS issued at theinitial closing can convert into one share of the Company on April 3, 2014 (this was extended from December 20, 2011, by the MTDCLA), and each Series C CPS issued at the subsequent closing will convert into one share of the Company on the anniversary of that closing, but the Series C may convert at any earlier date following each closing at MTDC’s option.
WGBM is authorized to issue 200,000,000 preference shares with a par value of RM0.01. There were 4,977,345 preference shares (including 410,279 Series B CPS held by the Company upon exercise by EEV and KMP of their options) issued and outstanding at June 30, 2013, and December 31, 2012.
F-36
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 6. Preferred Stock
The Company has 10,000,000 shares of preferred stock authorized. Effective May 26, 2011, the Company designated 4,500,000 shares as Series A-1 Convertible Preferred Stock and 4,500,000 shares as Series A-2 Convertible Preferred Stock (together, the “Series A Preferred Stock”). Each share of Series A Preferred Stock is convertible into ten shares of common stock, subject to an ownership cap whereby conversion may not occur to the extent the holder would own more than 9.985% of the common stock following conversion, and entitles the holder to receive dividends, as, when and if declared by the Company’s Board of Directors, at an annual rate of 5% of the stated value per share of the respective series. Such dividends accrue, compounding quarterly, and accumulate on each share of Series A Preferred Stock from the date of issuance, whether or not declared, until November 27, 2014, when the right to further dividends ceases. The Series A Preferred Stock has no voting rights, and in the event of liquidation ranks senior to common stock.
Effective May 27, 2011, the Company sold an aggregate of 2,937,499.97 shares of Series A-1 Convertible Preferred Stock with a stated value of $5.20 per share. The Company recorded the allocated valuation of $10,724,991 (see Note 4), less allocated issuance costs of $886,422, as Series A-1 Convertible Preferred Stock within permanent equity.
As of June 30, 2013, $1,675,694 of undeclared dividends had been accrued with respect to the outstanding Series A-1 Convertible Preferred Stock, of which $209,268 and $199,124 relate to the three months ended June 30, 2013 and 2012, respectively and $415,952 and $395,789 relate to the six months ended June 30, 2013 and 2012, respectively.
NOTE 7. Stock Awards
The Company has awards outstanding under three plans - the 2003 Incentive Stock Plan (the “2003 Plan”), the 2007 Stock Option Plan (the “2007 Plan”) and the 2008 Stock Incentive Plan (the “2008 Plan”) (collectively, the “Plans”). Under the 2003 Plan and 2007 Plan, incentive stock options, nonqualified stock options, restricted stock and restricted stock units could be granted. Awards vested over varying periods, as specified by the Company’s Board of Directors for each grant, and are exercisable for a maximum period of ten years after date of grant. Both of these plans have been frozen, resulting in no further shares being available for grant.
The Company presently issues awards under the 2008 Plan, initially adopted by the Company’s stockholders on June 5, 2008, and subsequently amended to authorize the issuance of additional shares of the Company’s common stock. The purpose of the 2008 Plan is to provide an incentive to retain the employment of directors, officers, consultants, advisors and employees of the Company, to attract new personnel whose training, experience and ability are considered valuable, to encourage the sense of proprietorship, and to stimulate the active interest of such persons in the Company’s development and financial success. Under the 2008 Plan, the Company is authorized to issue incentive stock options, non-qualified stock options, restricted stock and restricted stock units, although no more than 50% of the authorized shares may be granted pursuant to awards of restricted stock and restricted stock units. Awards that expire or are canceled generally become available for issuance again under the 2008 Plan. The number of shares of the Company’s common stock available under the 2008 Plan will be subject to adjustment in the event of a stock split, stock dividend or other extraordinary dividend, or other similar change in the Company’s common stock or capital structure. Awards may vest over varying periods, as specified by the Company’s Board of Directors for each grant, and have a maximum term of seven years from the grant date. The 2008 Plan is administered by the Company’s Board of Directors.
The Company has issued both options and restricted stock (including restricted stock units) under these Plans. Restricted stock grants afford the recipient the opportunity to receive shares of common stock, subject to certain terms, whereas options give them the right to purchase common stock at a set price. Both the Company’s options and restricted stock issued to employees generally have vesting restrictions that are eliminated over a four-year period, although vesting may be over a shorter period, or may occur on the grant date, depending on the terms of each individual award.
F-37
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
A summary of stock option and restricted stock transactions in the six months ended June 30, 2013, is as follows:
|
|
|
| Stock Options |
| Restricted Stock |
| |||||||||
|
|
|
|
|
| Weighted Average Exercise Price |
|
|
| Weighted Average Grant Date Fair Value |
| |||||
|
| Shares Available For Grant |
| Number of Options Outstanding |
|
| Number of Shares Outstanding |
|
| |||||||
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at January 1, 2013 |
| 2,927,986 |
|
| 11,424,498 |
| $ | 0.4193 |
|
| 7,500 |
| $ | 0.1400 |
|
| Granted |
| (1,225,000 | ) |
| 1,225,000 |
| $ | 0.0560 |
|
| — |
| $ | — |
|
| Vested |
| –– |
|
| –– |
| $ | –– |
|
| (7,500 | ) | $ | 0.1400 |
|
| Forfeited |
| 457,917 |
|
| (457,917 | ) | $ | 0.0979 |
|
| –– |
| $ | –– |
|
| Canceled |
| 177,083 |
|
| (456,542 | ) | $ | 1.1782 |
|
| –– |
| $ | –– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at June 30, 2013 |
| 2,337,986 |
|
| 11,735,039 |
| $ | 0.3644 |
|
| — |
| $ | — |
|
No options were exercised during the six months ended June 30, 2013 or 2012. The aggregate intrinsic value of options outstanding and exercisable at June 30, 2013, was $2,365, based on our common stock closing price of $0.04. Aggregate intrinsic value is the total pretax amount (i.e., the difference between the Company’s stock price and the exercise price) that would have been received by the option holders had all their in-the-money options been exercised.
The weighted average grant date fair value of options awarded in the six months ended June 30, 2013 and 2012, was $0.04 and $0.08, respectively. Fair values were estimated using the following assumptions:
|
| Six Months Ended June 30, |
| ||
|
| 2013 |
| 2012 |
|
|
|
|
|
|
|
| Risk-free interest rate | 0.71% |
| 0.71% - 1.09% |
|
| Expected term | 4.75 Years |
| 4.75 Years |
|
| Expected volatility | 108.14% |
| 65.02% ‑ 98.80% |
|
| Dividend yield | 0% |
| 0% |
|
The amounts expensed for stock-based compensation totaled $77,983 and $80,941 for the three months ended June 30, 2013 and 2012, respectively, and $182,785 and $186,459 for the six months ended June 30, 2013 and 2012, respectively.
At June 30, 2013, the total stock-based compensation cost not yet recognized, net of estimated forfeitures, was $382,950. This cost is expected to be recognized over an estimated weighted average amortization period of 1.75 years. No amounts related to stock-based compensation costs have been capitalized. The tax benefit and the resulting effect on cash flows from operating and financing activities related to stock-based compensation costs were not recognized as the Company currently provides a full valuation allowance for all of its deferred taxes.
NOTE 8. Warrants
The Company records warrants with certain anti-dilution protection as liabilities, with the estimated fair value being calculated at each reporting date using a Monte Carlo Simulation approach, with key input variables provided by management, with changes in fair value recorded as gains or losses on revaluation in non-operating income (expense).
The aggregate fair value of such warrants at June 30, 2013 and 2012, was estimated to be $701,857 (with the fair value per warrant share ranging from $0.09 to $0.13) and $329,414 (with the fair value per warrant share ranging from $0.001 to $0.052), respectively, using a closing stock price of $0.04 and $0.07, respectively, and based on the following assumptions:
|
| June 30, 2013 |
| June 30, 2012 |
|
|
|
|
|
|
|
| Risk-free interest rate | 0.13% - 0.19% |
| 0.20% - 0.33% |
|
| Expected remaining term | 0.77 - 1.19 Years |
| 0.89 - 1.99 Years |
|
| Expected volatility | 130.24% - 131.31% |
| 96.38% - 118.21% |
|
| Dividend yield | 0% |
| 0% |
|
F-38
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
The aggregate fair value of such warrants at December 31, 2012 and 2011, was estimated to be $102,695 and $655,219, respectively. During the six months ended June 30, 2013, an increase in the fair value of the warrant derivative liability of $599,162 was recorded as a revaluation loss and during the six months ended June 30, 2012, a decrease in the fair value of the warrant derivative liability of $325,805 was recorded as a revaluation gain (see Note 9).
A summary of outstanding common stock warrants as of June 30, 2013, is as follows:
| Securities Into Which Warrants are Convertible |
| Total Warrants Outstanding |
| Warrants Subject to Anti-Dilution |
| Exercise Price |
| Expiration Date |
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
| Common stock |
| 56,173,248 |
| — |
| $0.6200 |
| May 2016 |
| Common stock |
| 4,487,656 |
| 3,718,425 |
| $0.7800 |
| June and August 2014 |
| Common stock |
| 2,875,736 |
| 2,774,050 |
| $0.8400 |
| December 2014 and January 2015 |
| Common stock |
| 95,368 |
| — |
| $1.4680 |
| December 2015 |
| Common stock |
| 203,500 |
| — |
| $1.5000 |
| July 2015 |
| Common stock |
| 3,000,830 |
| — |
| $1.5500 |
| July 2015 |
| Common stock |
| 200,000 |
| — |
| $3.0000 |
| December 2014 and November 2015 |
|
|
|
|
|
|
|
|
|
|
| Subtotal |
| 67,036,338 |
| 6,492,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Series C CPS |
| 1,077,911 |
| — |
| $2.3193 |
| March 2014 |
|
|
|
|
|
|
|
|
|
|
| Total |
| 68,114,249 |
| 6,492,475 |
|
|
|
|
The warrants expiring in May 2016 were issued in conjunction with the May 2011 Private Placement, and were recorded at an allocated valuation of $9,752,417 (see Note 4), less allocated issuance costs of $806,039, at the time of issuance. These warrants include the right to receive consideration for the unexercised portion of the warrant, based on a Black-Scholes model set forth in the warrants, in the event of certain substantial changes in ownership or trading status of the Company. This contingent embedded derivative will be accounted for only if such an event should occur.
The warrants expiring in June and August 2014 were originally issued in June and August 2009 with an exercise price of $2.00 and entitled the holders thereof to purchase an aggregate of 1,750,185 shares. As a result of anti-dilution adjustments with respect to such warrants pursuant to their terms, such warrants, as of June 30, 2013, had an exercise price of $0.78 and entitled the holders thereof to purchase an aggregate of 4,487,656 shares. In connection with the May 2011 Private Placement, members of management with warrants to purchase a total of 769,231 shares (after giving effect to prior anti-dilution adjustments) waived their right to further anti-dilution adjustments.
The warrants expiring in December 2014 and January 2015 were originally issued in December 2009 and January 2010 with an exercise price of $2.50 and entitled the holders thereof to purchase an aggregate of 966,247 shares. As a result of anti-dilution adjustments with respect to such warrants pursuant to their terms, such warrants, as of June 30, 2013, had an exercise price of $0.84 and entitled the holders thereof to purchase an aggregate of 2,875,736 shares. In connection with the May 2011 Private Placement, members of management with warrants to purchase a total of 101,686 shares (after giving effect to prior anti-dilution adjustments) waived their right to further anti-dilution adjustments.
The Series C SSA (see Note 5) grants the holders of the Series C CPS the right to subscribe for a further 1,077,911 CPS at a price of $2.3193. Since these Series C CPS would convert into common stock of the Company within one year of the subscription date, this right is, for accounting purposes, equivalent to a warrant to purchase the Company’s common stock.
NOTE 9. Fair Value of Financial Instruments
Fair value measurements are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”).
F-39
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”). The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity to identify transactions that are not orderly.
The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The three hierarchy levels are defined as follows:
Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;
Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at June 30, 2013 and December 31, 2012:
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
| June 30, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
| Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents | $ | 3,035,998 |
| $ | — |
| $ | — |
| $ | 3,035,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total assets | $ | 3,035,998 |
| $ | — |
| $ | — |
| $ | 3,035,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Warrant derivative liabilities | $ | — |
| $ | — |
| $ | 701,857 |
| $ | 701,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Conversion element of promissory notes |
| — |
|
| — |
|
| 439 |
|
| 439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Conversion element of Series B CPS |
| — |
|
| — |
|
| 1,213,727 |
|
| 1,213,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Series A CPS derivative liabilities |
| — |
|
| — |
|
| 770,641 |
|
| 770,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total liabilities | $ | — |
| $ | — |
| $ | 2,686,664 |
| $ | 2,686,664 |
|
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
| December 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
| Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents | $ | 6,328,753 |
| $ | — |
| $ | — |
| $ | 6,328,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total assets | $ | 6,328,753 |
| $ | — |
| $ | — |
| $ | 6,328,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Warrant derivative liabilities | $ | — |
| $ | — |
| $ | 102,695 |
| $ | 102,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Conversion element of promissory notes |
| — |
|
| — |
|
| 274,928 |
|
| 274,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Conversion element of Series B CPS |
| — |
|
| — |
|
| 1,210,909 |
|
| 1,210,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Series A CPS derivative liabilities |
| — |
|
| — |
|
| 619,652 |
|
| 619,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total liabilities | $ | — |
| $ | — |
| $ | 2,208,184 |
| $ | 2,208,184 |
|
F-40
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
The following tables present a reconciliation of all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2013 and 2012:
|
|
|
| Conversion Element of Promissory Notes |
|
|
|
|
|
|
| |||||
|
|
|
|
| Conversion Element of Series B CPS |
|
|
|
|
| ||||||
|
| Warrant Derivatives |
|
|
| Series A CPS Derivatives |
|
|
| |||||||
|
|
|
|
|
| Total |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at January 1, 2013 | $ | 102,695 |
| $ | 274,928 |
| $ | 1,210,909 |
| $ | 619,652 |
| $ | 2,208,184 |
|
| Issuances |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| Revaluation (gains) losses included in other income and (expenses) |
| 599,162 |
|
| (274,489 | ) |
| 2,818 |
|
| 150,989 |
|
| 478,480 |
|
| Settlements |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| Balance at June 30, 2013 | $ | 701,857 |
| $ | 439 |
| $ | 1,213,727 |
| $ | 770,641 |
| $ | 2,686,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total gains (losses) included in other income and (expenses) attributable to liabilities still held as of June 30, 2013 | $ | (599,163 | ) | $ | 274,489 |
| $ | (2,818 | ) | $ | (150,989 | ) | $ | (478,481 | ) |
|
|
|
| Conversion Element of Promissory Notes |
|
|
|
|
|
|
| |||||
|
|
|
|
| Conversion Element of Series B CPS |
|
|
|
|
| ||||||
|
| Warrant Derivatives |
|
|
| Series A CPS Derivatives |
|
|
| |||||||
|
|
|
|
|
| Total |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at January 1, 2012 | $ | 655,219 |
| $ | 1,931,295 |
| $ | 1,245,101 |
| $ | 2,135,715 |
| $ | 5,967,330 |
|
| Issuances |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| Revaluation (gains) losses included in other income and (expenses) |
| (325,805 | ) |
| (1,529,374 | ) |
| 82,668 |
|
| (789,680 | ) |
| (2,562,191 | ) |
| Settlements |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| Balance at June 30, 2012 | $ | 329,414 |
| $ | 401,921 |
| $ | 1,327,769 |
| $ | 1,346,035 |
| $ | 3,405,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total gains (losses) included in other income and (expenses) attributable to liabilities still held as of June 30, 2012 | $ | 325,805 |
| $ | 1,529,374 |
| $ | (82,668 | ) | $ | 789,680 |
| $ | 2,562,191 |
|
Assumptions used in evaluating the warrant derivative liabilities, the conversion element of the promissory notes, the conversion element of the Series B CPS and the Series A CPS derivative liabilities are discussed in Notes 8, 4, 5 and 5, respectively. The principal assumptions used, and their impact on valuations, are as follows:
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, and historical experience. For the convertible promissory notes, the Company considers a blend of expected remaining terms prior to partial conversion into Series A-2 Convertible Preferred Stock, giving consideration to the likelihood of conversion under various scenarios, and a further blend of expected remaining terms prior to partial conversion into common stock, all based on management’s projections of when such conversions would occur within the contractual term. 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 the Company’s common stock price has fluctuated or is expected to fluctuate. To the extent that the Company’s common stock has not been traded for as long as the expected remaining term of the instrument, the Company uses a weighted average of 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. 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. To the extent that the Company’s common stock has been traded for longer than the expected remaining term of the instrument, equal weighting is applied to this weighted average and to the Company’s own historic volatility over the same term to determine expected volatility. An increase in the expected volatility will increase the fair value and the associated derivative liability.
F-41
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Dividend Yield. The Company has not made any dividend payments and does 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.
NOTE 10. Net Loss Per Share
Basic and diluted net loss per share are shown on the statement of operations.
No adjustment has been made to the net loss for charges, gains, losses and accretion related to Series A, B and C CPS, Series A-1 Convertible Preferred Stock and convertible promissory notes, as the effect would be anti-dilutive due to the net loss.
The following outstanding stock options (on an as-converted into common stock basis) and shares issuable or contingently issuable upon conversion of restricted stock, Series A, B and C CPS, Series A-1 Convertible Preferred Stock and convertible promissory notes were excluded from the computation of diluted net loss per share attributable to holders of common stock as they had antidilutive effects for the three and six months ended June 30, 2013 and 2012:
|
| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||
|
| 2013 |
| 2012 |
| 2013 |
| 2012 |
|
|
|
|
|
|
|
|
|
| Common share equivalents issuable upon exercise of common stock options | 63,544 |
| 191,935 |
| 69,780 |
| 381,187 |
|
|
|
|
|
|
|
|
|
| Shares issuable upon vesting of restricted stock | — |
| 22,665 |
| 83 |
| 26,058 |
|
|
|
|
|
|
|
|
|
| Shares issuable upon conversion of Series A CPS | 28,887,716 |
| 26,747,885 |
| 28,887,716 |
| 26,747,885 |
|
|
|
|
|
|
|
|
|
| Shares issuable upon conversion of Series B CPS | 29,411,764 |
| 15,898,251 |
| 29,411,764 |
| 15,898,251 |
|
|
|
|
|
|
|
|
|
| Shares issuable upon conversion of Series C CPS | 3,233,734 |
| 3,233,734 |
| 3,233,734 |
| 3,233,734 |
|
|
|
|
|
|
|
|
|
| Shares issuable upon conversion of Series A-1 convertible preferred stock | 32,363,069 |
| 30,783,412 |
| 32,162,240 |
| 30,673,156 |
|
|
|
|
|
|
|
|
|
| Shares issuable upon conversion of convertible promissory notes | 29,562,624 |
| 28,129,553 |
| 29,381,681 |
| 27,954,468 |
|
|
|
|
|
|
|
|
|
| Total common share equivalents excluded from denominator for diluted earnings per share computation | 123,522,451 |
| 105,007,435 |
| 123,146,998 |
| 104,914,739 |
NOTE 11. Concentrations
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash in commercial banks. Accounts in the United States are secured by the Federal Deposit Insurance Corporation. Accounts in Luxembourg and Malaysia are similarly guaranteed. The Company’s total deposits at commercial banks usually exceed the balances insured.
The Company generally requires no collateral from its customers. No provision was made for doubtful accounts at June 30, 2013, or December 31, 2012.
F-42
Table of Contents
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Customers accounting for more than 10% of total revenues during the three or six months ended June 30, 2013 or 2012, are tabulated as follows:
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| ||||||||||||||||
|
| 2013 |
| 2012 |
| 2013 |
| 2012 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
| Customer A | $ | 125,000 |
| 51% |
| $ | — |
| — |
| $ | 208,333 |
| 49% |
| $ | — |
| — |
|
| Customer B | $ | 77,519 |
| 31% |
| $ | — |
| — |
| $ | 161,242 |
| 38% |
| $ | — |
| — |
|
| Customer C | $ | 26,870 |
| 11% |
| $ | — |
| — |
| $ | 26,870 |
| 6% |
| $ | — |
| — |
|
| Customer D | $ | — |
| — |
| $ | 7,650 |
| 38% |
| $ | — |
| — |
| $ | 7,650 |
| 8% |
|
| Customer E | $ | — |
| — |
| $ | 4,229 |
| 21% |
| $ | — |
| — |
| $ | 9,251 |
| 10% |
|
| Customer F | $ | — |
| — |
| $ | 3,750 |
| 19% |
| $ | — |
| — |
| $ | 16,475 |
| 18% |
|
| Customer G | $ | — |
| — |
| $ | 2,819 |
| 14% |
| $ | — |
| — |
| $ | 2,819 |
| 3% |
|
| Customer H | $ | — |
| — |
| $ | — |
| — |
| $ | — |
| — |
| $ | 27,754 |
| 30% |
|
| Customer I | $ | — |
| — |
| $ | — |
| — |
| $ | — |
| — |
| $ | 15,000 |
| 16% |
|
NOTE 12. Contingencies
From time to time the Company may be involved in claims arising in connection with its business. Based on information currently available, the Company believes that the amount, or range, of reasonably possible losses in connection with any pending actions against it, including the matter described below, in excess of established reserves, in the aggregate, not to be material to its consolidated financial condition or cash flows. However, losses may be material to the Company’s operating results for any particular future period, depending on the level of income or loss for such period.
Coalesce v. WaferGen. On April 24, 2012, an action entitled Coalesce Corporation (“Coalesce”) v. WaferGen Bio-systems, Inc. was filed in the Alameda County Superior Court. Coalesce, a company that had been providing marketing services between 2006 and 2010, sued the Company for alleged non-payment of sums due, breach of contract, misrepresentation and unjust enrichment. On September 5, 2012, Coalesce filed an amended complaint, with additional claims, for compensatory damages in excess of $500,000 and other compensation. On April 15, 2013, the case was referred to mediation. The Company believes the claim to be substantially without merit, and while no assurance can be given regarding the outcome of this litigation, management believes that the resolution of this matter will not have a material adverse effect on the Company’s financial position and results of operations. Related legal costs are being expensed as incurred.
WaferGen Malaysia. In a letter dated May 29, 2013, counsel for PMSB (see Note 5) indicated that PMSB intended to pursue winding-up proceedings against WGBM pursuant to Section 218(1)(e) and/or (i) of the Malaysian Companies Act, 1965. Such proceedings have not yet commenced.
Pursuant to the Series C SSA (see Note 5), the shareholders of WGBM agreed that the subscription amounts raised through the issuance of Series C CPS would be used, among other things, to provide a term loan to the Company for its working capital requirements (the “Intercompany Loan”). The Intercompany Loan was made over the course of 2011 in the amount of $5,000,000. As of June 30, 2013, the Intercompany Loan balance, including accrued interest at the London Inter-Bank Offer Rate (presently 3.25%), was approximately $5.3 million.
The Company and WGBM are currently in discussions concerning the potential conversion of the Intercompany Loan into promissory notes to be issued by the Company to WGBM and which would require a single payment of $6.6 million in seven years.
It is anticipated that WGBM and the Company will continue to have discussions with PMSB as well as MTDC regarding PMSB’s attempts to redeem its Series B CPS in WGBM, or alternatively force a winding up of WGBM. However, there can be no assurance that those discussions will lead to a negotiated outcome or that PMSB will not be successful in its efforts to either redeem its Series B CPS or have WGBM wound up. For as long as WGBM remains a consolidated subsidiary of the Company, the Company’s debt to WGBM will eliminate in consolidation. However, in the event that WGBM is liquidated, its assets, including the Company’s debt, could be distributed to WGBM’s investors, in which case the Company would be required to record such debt on its balance sheet, with an offsetting reduction in derivative liabilities and temporary equity.
F-43
WAFERGEN BIO-SYSTEMS, INC.
PROSPECTUS
Up to 10,949,689 shares of common stock, par value $0.001 per share
, 2013
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Set forth below is an estimate (except for registration fees, which are actual) of the approximate amount of the fees and expenses payable by us in connection with the issuance and distribution of the shares of common stock.
| EXPENSE |
| AMOUNT | |
|
|
|
| |
| Registration Fees |
| $ | 2,763 |
| Legal Fees |
|
| 76,000 |
| Accounting Fees |
|
| 10,000 |
| Miscellaneous Fees and Expenses |
|
| 2,000 |
|
|
|
|
|
| Total |
| $ | 90,763 |
Item 14. Indemnification of Directors and Officers.
Nevada Revised Statutes (“NRS”) Sections 78.7502 and 78.751 provide us with the power to indemnify any of our directors, officers, employees and agents. The person entitled to indemnification must have conducted himself in good faith, and must reasonably believe that his conduct was in, or not opposed to, our best interests. In a criminal action, the director, officer, employee or agent must not have had reasonable cause to believe that his conduct was unlawful.
Under NRS Section 78.751, advances for expenses may be made by agreement if the director or officer affirms in writing that he has met the standards for indemnification and will personally repay the expenses if it is determined that such officer or director did not meet those standards.
Our bylaws include an indemnification provision under which we have the power to indemnify, to the extent permitted under Nevada law, our current and former directors and officers, or any person who serves or served at our request for our benefit as a director or officer of another corporation or our representative in a partnership, joint venture, trust or other enterprise, against all expenses, liability and loss reasonably incurred by reason of being or having been a director, officer or representative of ours or any of our subsidiaries. We may make advances for expenses upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he/she is not entitled to be indemnified by us. If Section 2115 of the CGCL is applicable to us, the laws of California also will govern.
Our articles of incorporation provide a limitation of liability such that no director or officer shall be personally liable to us or any of our stockholders for damages for breach of fiduciary duty as a director or officer, involving any act or omission of any such director or officer, provided there was no intentional misconduct, fraud or a knowing violation of the law, or payment of dividends in violation of NRS Section 78.300.
We have entered into separate indemnification agreements with our directors and officers which would require us, among other things, to indemnify them against certain liabilities which may arise by reason of their status or service as directors or officers to the fullest extent permitted by law. At present, there is no pending litigation or proceeding involving any of our directors or officers of regarding which indemnification is sought, nor are we aware of any threatened litigation that may result in claims for indemnification. We also maintain insurance policies that indemnify our directors and officers against various liabilities, including liabilities arising under the Securities Act, that might be incurred by any director or officer in his or her capacity as such.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of ours under Nevada law or otherwise, we have been advised the opinion of the Securities and Exchange Commission is that such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event a claim for indemnification against such liabilities (other than payment by us for expenses incurred or paid by a director, officer or controlling person of ours in successful defense of any action, suit, or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction, the question of whether such indemnification by it is against public policy in the Securities Act and will be governed by the final adjudication of such issue.
II-1
Item 15. Recent Sales of Unregistered Securities.
Malaysian Financings
On April 3, 2009, WaferGen Bio-systems, Inc. (“WBSI”) and our Malaysian subsidiary, WaferGen Biosystems (M) Sdn. Bhd. (“WGBM”) entered into a subscription agreement with two investors pursuant to which WGBM agreed to sell 666,666 shares of Series B Redeemable Convertible Preference Shares (“Series B RCPS”) to these investors in a private placement at a price of US$2.25 per share. On July 1, 2009, WBSI and WGBM entered into a subscription agreement with another investor pursuant to which WGBM agreed to sell 188,057 shares of Series B RCPS to another investor under substantially the same terms. The aggregate purchase price for the Series B RCPS is US$1.9 million, all of which was received between June 8, 2009, and May 13, 2010.
The Series B RCPS (the “RCPS”) have a liquidation preference over WGBM’s ordinary shares in an amount equal to the purchase price of the RCPS, plus any accrued but unpaid dividends. WGBM is not obligated to declare or pay dividends on the RCPS. Holders of the RCPS generally will not have voting rights, except as required under Malaysian law. WGBM will be required to obtain the consent of the holders of at least a majority of the outstanding RCPS prior to taking certain actions. Each RCPS will be convertible into ordinary shares of WGBM at the option of the holder at any time based on the applicable conversion rate at such time.
The holders of the RCPS have the right, at any time after December 31, 2011, to cause WGBM to redeem the RCPS at a price equal to the purchase price of the RCPS, plus a redemption premium of 20% per annum, from funds legally available for distribution. The holders of the RCPS also have certain put rights with respect to their shares as follows: (1) the holders will have the right to cause WBSI to exchange their RCPS for common stock of WBSI at an effective exchange rate of US$223.63 per share of WBSI common stock, provided that if during the 10-day trading period immediately prior to the holder’s conversion notice the average closing price of WBSI’s common stock is less than US$263.09, then the holder’s Series B RCPS shall convert at an exchange rate equal to 85% of such 10-day average closing price; (2) the holders had the right to cause WBSI to purchase all of the RCPS at a price of US$2.25 per share, plus interest at a rate of 8% per annum with yearly rests, if (x) there was a breach of the subscription agreement by WBSI or WGBM or (y) during the year 2011, the price of WBSI’s stock was below US$223.63 or the holder was unable to exercise its put as described in clause (1) above as a result of any breach or default of the subscription agreement by WBSI.
On March 10, 2011, WGBM received $5,000,000, less issuance costs totaling $6,272, in exchange for the issuance of 3,233,734 Series C Convertible Preference Shares (“CPS”) to MTDC, in a private placement at the U.S. dollar equivalent of $1.5462 per share, representing the first subscription under a Share Subscription Agreement dated December 14, 2010, (“SSA”) to sell 3,233,734 Series C CPS at an initial closing and, should MTDC so elect within 36 months of the initial closing, to sell 1,077,911 shares of Series C CPS at a subsequent closing at the U.S. dollar equivalent of US$2.3193 per share. Each 99.39 Series C CPS will convert into one share of WBSI’s common stock on the anniversary of each closing, or at any earlier date MTDC’s option. MTDC may also elect to convert their Series C CPS into ordinary shares of our subsidiary, WGBM, at any time, at a conversion rate of one ordinary share per 100 CPS.
The proceeds from the private placements have been or will be used to support the high-volume manufacturing of our SmartChip System.
December 2009 Private Placement
On December 23, 2009, December 30, 2009, and January 6, 2010, we sold, in a private placement, 34,110 units consisting of an aggregate of 34,110 shares of our common stock and five-year warrants to purchase an aggregate of up to 8,528 shares of our common stock with an exercise price of $248.48 per share. Under certain circumstances, the warrants will be exercisable using cashless exercise. The purchase price for the units was $149.09 per unit, or $5,085,500 in the aggregate.
The purchasers included the Jameel Shivji Irrevocable Trust, the Shivji Children’s Trust fbo Zahra Shivji and the Shivji Children’s Trust fbo Suraya Shivji (each, a “Shivji Children’s Trust”) and The Shivji Family Trust (together with the Shivji Children’s Trusts, the “Shivji Trusts”) (all of which are affiliates of Alnoor Shivji, our Chairman and, at the time of the purchase, also our President and Chief Executive Officer), Cojack Investment Opportunities, LLC (“Cojack”) (which is an affiliate of Dr. R. Dean Hautamaki, a member of our board of directors), and certain other investors that participated in our previous private placements. The Shivji Trusts and Cojack purchased 1,174, and 201 units, respectively, for an aggregate purchase price of $175,000, and $30,000, respectively. The Shivji Trusts and Cojack each participated in the December 2009 Private Placement on substantially the same terms as the other purchasers.
II-2
Net proceeds received from the December 2009 Private Placement were used for research and development, sales and marketing, an investor relations program and repayment of debt and for working capital and other general corporate purposes.
May 2011 Private Placement
On May 27, 2011, we sold 2,937,500 shares of Series A-1 Convertible Preferred Stock, Convertible Promissory Notes in the principal amount of $15,275,000 convertible at $56.65 per share and warrants to purchase an aggregate of up to 565,180 shares of common stock in a private placement for an aggregate purchase price of $30,550,000. Subject to certain ownership limitations, the warrants were exercisable immediately at an exercise price of $61.62 per share. The warrants were due to expire on May 27, 2016, five years after the issuance date, and under certain circumstances were exercisable using cashless exercise. Under registration rights agreements entered in connection with the sale of the units, the purchasers were entitled “piggyback” registration rights.
The purchasers included The Shivji Family Trust (an affiliate of Alnoor Shivji, our Chairman and, at the time of the purchase, also our President and Chief Executive Officer), Joel Kanter, a member of our board of directors, The Kanter Family Foundation (“The Kanter Foundation,” which is an affiliate of Joel Kanter) and Robert Coradini, a member of our board of directors. The Shivji Family Trust purchased 38,461.54 shares of Series A-1 Convertible Preferred Stock, a Convertible Promissory Note in the principal amount of $200,000 and warrants to purchase an aggregate of up to 7,400 shares of common stock for an aggregate purchase price of $400,000. Joel Kanter purchased 9,615.38 shares of Series A-1 Convertible Preferred Stock, a Convertible Promissory Note in the principal amount of $50,000 and warrants to purchase an aggregate of up to 1,850 shares of common stock for an aggregate purchase price of $100,000. The Kanter Foundation purchased 4,807.69 shares of Series A-1 Convertible Preferred Stock, a Convertible Promissory Note in the principal amount of $25,000 and warrants to purchase an aggregate of up to 925 shares of common stock for an aggregate purchase price of $50,000. Robert Coradini purchased 24,038.46 shares of Series A-1 Convertible Preferred Stock, a Convertible Promissory Note in the principal amount of $125,000 and warrants to purchase an aggregate of up to 4,625 shares of common stock for an aggregate purchase price of $250,000. The Shivji Family Trust, Joel Kanter, The Kanter Foundation and Robert Coradini each participated in the May 2011 Private Placement on substantially the same terms as the other purchasers.
Net proceeds received from the May 2011 Private Placement will be used for expanding the commercialization capabilities of the company to market the SmartChip Real-Time PCR system and related products, and for working capital and general corporate purposes.
August 2013 Exchange
On August 27, 2013, we issued 1,067,317 shares of common stock, 2,987.0167 shares of Series 1 Convertible Preferred Stock and warrants to purchase an aggregate of up to 2,369,000 shares of common stock in exchange for all of the securities issued in the May 2011 Private Placement. Subject to certain ownership limitations, each share of Series 1 Convertible Preferred Stock is convertible into 2,515.3432 shares of our common stock and the warrants are exercisable immediately at an exercise price of $2.60 per share. The warrants expire on August 27, 2018, five years after the issuance date, and under certain circumstances are exercisable using cashless exercise.
The acquirers of securities in the exchange included Entities affiliated with Great Point Partners, LLC (for which Scott Davidson and Joseph Pesce, both members of our board of directors, serve as managing directors), The Shivji Family Trust (an affiliate of Alnoor Shivji, our Chairman), Joel Kanter, a member of our board of directors, The Kanter Family Foundation (“The Kanter Foundation,” which is an affiliate of Joel Kanter) and Robert Coradini, a member of our board of directors. Entities affiliated with Great Point Partners, LLC acquired 1,479.5506 shares of Series 1 Preferred Stock (convertible into 3,721,577 shares common stock, subject to an ownership cap which limits the number of shares of common stock to 9.98% of the common stock outstanding) and warrants to purchase an aggregate of up to 1,027,471 shares of common stock in exchange for securities surrendered. The Shivji Family Trust acquired 112,349 shares of common stock and warrants to purchase an aggregate of up to 31,018 shares of common stock in exchange for securities surrendered. Joel Kanter acquired 28,087 shares of common stock and warrants to purchase an aggregate of up to 7,755 shares of common stock in exchange for securities surrendered. The Kanter Foundation acquired 14,044 shares of common stock and warrants to purchase an aggregate of up to 3,877 shares of common stock in exchange for securities surrendered. Robert Coradini acquired 70,218 shares of common stock and warrants to purchase an aggregate of up to 19,386 shares of common stock in exchange for securities surrendered.
We received no cash proceeds from the exchange.
II-3
2013 Private Placement
On August 27, 2013 and September 30, 2013, we sold, in a private placement, 300.75 units consisting of an aggregate of 5,893,750 shares of our common stock, 646.0351 shares of Series 1 Convertible Preferred Stock and five-year warrants to purchase an aggregate of up to 3,759,379 shares of our common stock. Each share of Series 1 Convertible Preferred Stock is convertible into 2,515.3432 shares of our common stock and the warrants are exercisable immediately at an exercise price of $2.60 per share. The warrants expire five years after the issuance date and, under certain circumstances, the warrants are exercisable using cashless exercise. The purchase price for the units was $50,000 per unit, or $15,037,500 in the aggregate.
The purchasers included Entities affiliated with Great Point Partners, LLC (for which Scott Davidson and Joseph Pesce, both members of our board of directors, serve as managing directors), The Shivji Family Trust (an affiliate of Alnoor Shivji, our Chairman), Joel Kanter, a member of our board of directors, The Kanter Family Foundation (“The Kanter Foundation,” which is an affiliate of Joel Kanter) and Robert Coradini, a member of our board of directors. Entities affiliated with Great Point Partners, LLC purchased 308.1091 shares of Series 1 Preferred Stock (convertible into 775,000 shares common stock, subject to an ownership cap which limits the number of shares of common stock to 9.98% of the common stock outstanding) and warrants to purchase an aggregate of up to 387,503 shares of common stock for an aggregate purchase price of $1,550,000. The Shivji Family Trust purchased 50,000 shares of common stock and warrants to purchase an aggregate of up to 25,000 shares of common stock for an aggregate purchase price of $100,000. Joel Kanter purchased 5,000 shares of common stock and warrants to purchase an aggregate of up to 2,500 shares of common stock for an aggregate purchase price of $10,000. The Kanter Foundation purchased 25,000 shares of common stock and warrants to purchase an aggregate of up to 12,500 shares of common stock for an aggregate purchase price of $50,000. Robert Coradini purchased 62,500 shares of common stock and warrants to purchase an aggregate of up to 31,250 shares of common stock for an aggregate purchase price of $125,000.
Net proceeds received from the 2013 Private Placement will be used for general corporate and working capital purposes, including commercialization activities intended to increase revenues from sales of our target enrichment and other products.
The Malaysian Financings were made solely in “offshore transactions,” as defined in Regulation S under the Securities Act. The December 2009 Private Placement, the May 2011 Private Placement, the 2013 Private Placement and the August 2013 Exchange were made solely to “accredited investors,” as defined in Regulation D under the Securities Act, or “qualified institutional buyers” as defined in Rule 144A(a) under the Securities Act. The securities sold in the Malaysian Financings, the December 2009 Private Placement, the May 2011 Private Placement and the 2013 Private Placement and those issued in the August 2013 Exchange were not, prior to their issuance, registered under the Securities Act, or the securities laws of any state, and were offered and sold in reliance on the exemption from registration afforded by Section 4(2) and Regulation D (Rule 506) or Regulation S under the Securities Act and corresponding provisions of state securities laws, which exempt transactions by an issuer not involving any public offering.
Item 16. Exhibits and Financial Statement Schedules
Financial Statement Schedules
All financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
Exhibits
A list of exhibits filed herewith or incorporated by reference is contained in the Exhibit Index which is incorporated herein by reference.
II-4
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after the effective date of this registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of a prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
(iii) to include any material information with respect to the plan of distribution not previously disclosed in this registration statement or any material change to such information in this registration statement.
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration, by means of a post-effective amendment, any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
(i) if the registrant is relying on Rule 430B: (A) each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and (B) each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or
(ii) if the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
II-5
(5) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: (i) any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; (ii) any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; (iii) the portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and (iv) any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
(6) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant, pursuant to the foregoing provisions or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
(7) That for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(8) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fremont, State of California, on October 9, 2013.
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| WAFERGEN BIO-SYSTEMS, INC.
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| By: | /s/ IVAN TRIFUNOVICH |
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| Ivan Trifunovich |
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| Chief Executive Officer and President |
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KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Alnoor Shivji, Ivan Trifunovich and John Harland as his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement on Form S-1, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or any of them, or of their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
| SIGNATURE |
| TITLE |
| DATE |
| /s/ IVAN TRIFUNOVICH |
|
Chief Executive Officer and President |
| October 9, 2013 |
| Ivan Trifunovich |
| (Principal Executive Officer) |
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| /s/ JOHN HARLAND |
| Chief Financial Officer and Vice President of Finance |
| October 9, 2013 |
| John Harland |
| (Principal Financial Officer and Principal Accounting Officer) |
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| /s/ ALNOOR SHIVJI |
| Chairman of the Board |
| October 9, 2013 |
| Alnoor Shivji |
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| /s/ ROBERT CORADINI |
| Director |
| October 9, 2013 |
| Robert Coradini |
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| /s/ SCOTT DAVIDSON |
| Director |
| October 9, 2013 |
| Scott Davidson |
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| /s/ DR. R. DEAN HAUTAMAKI |
| Director |
| October 9, 2013 |
| Dr. R. Dean Hautamaki |
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| /s/ MAKOTO KANESHIRO |
| Director |
| October 9, 2013 |
| Makoto Kaneshiro |
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| /s/ JOEL KANTER |
| Director |
| October 9, 2013 |
| Joel Kanter |
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| /s/ JOSEPH PESCE |
| Director |
| October 9, 2013 |
| Joseph Pesce |
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| /s/ DR. TIMOTHY TRICHE |
| Director |
| October 9, 2013 |
| Dr. Timothy Triche |
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II-7
Exhibit Index
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| Incorporated by Reference | ||||||
| Exhibit Number |
| Exhibit Description |
| Filed Herewith |
| Form |
| Period Ending |
| Exhibit |
| Filing Date |
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| 3.1 |
| Amended and Restated Articles of Incorporation of WaferGen Bio-systems, Inc., dated January 31, 2007 |
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| 8-K |
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| 3.1 |
| 2/1/2007 |
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| 3.2 |
| Certificate of Amendment to the Amended and Restated Articles of Incorporation of the Company |
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| 8-K |
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| 3.1 |
| 8/28/2013 |
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| 3.3 |
| Certificate of Designation of the Series 1 Convertible Preferred Stock |
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| 8-K |
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| 3.2 |
| 8/28/2013 |
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| 3.4 |
| Certificate of Withdrawal of Certificate of Designation of the Series A-1 Convertible Preferred Stock and the Series A-2 Convertible Preferred Stock |
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| 8-K |
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| 3.3 |
| 8/28/2013 |
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| 3.5 |
| Bylaws of WaferGen Bio-systems, Inc. |
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| SB-2 |
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| 3.2 |
| 8/9/2006 |
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| 3.6 |
| First Amendment to Bylaws of WaferGen Bio-systems, Inc. |
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| 8-K |
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| 3.2 |
| 6/1/2011 |
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| 3.7 |
| Second Amendment to Bylaws of WaferGen Bio-systems, Inc. |
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| 8-K |
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| 3.2 |
| 10/19/2011 |
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| 4.1 |
| Form of Warrants to purchase shares of Common Stock of the Company, issued June 16, 2009, to investors in the Company’s 2009 private placement offering of units of securities |
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| 10-Q |
| 6/30/2009 |
| 10.6 |
| 8/10/2009 |
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| 4.2 |
| Form of Warrant to purchase shares of Common Stock of the Company, issued to Spencer Trask Ventures, Inc. and certain related parties in connection with the Company’s 2009 private placement offering of units of securities |
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| 10-Q |
| 6/30/2009 |
| 10.8 |
| 8/10/2009 |
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| 4.3 |
| Form of Warrants to purchase shares of Common Stock of the Company, issued December 23, 2009, to investors in the Company’s December 2009 and January 2010 private placement offering of units of securities |
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| S-1 |
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| 10.59 |
| 3/2/2010 |
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| 4.4 |
| Form of Warrants to purchase shares of Common Stock of the Company, issued July 7, 2010, to investors in the Company’s July 2010 offering of units of securities |
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| 8-K |
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| 4.1 |
| 7/8/2010 |
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| 4.5 |
| Form of Warrant to purchase shares of Common Stock of the Company, issued July 7, 2010, to placement agents and certain related parties in connection with the Company’s July 2010 offering of units of securities |
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| 10-Q |
| 6/30/2010 |
| 10.3 |
| 8/16/2010 |
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| 4.6 |
| Warrant to purchase shares of Common Stock of the Company, issued December 7, 2010, to Oxford Finance Corporation |
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| 8-K |
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| 10.2 |
| 12/13/2010 |
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| 4.7 |
| Form of Warrant to purchase shares of Common Stock of the Company, issued August 27, 2013, to investors in the Company’s August 2013 exchange offering |
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| 8-K |
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| 4.1 |
| 8/28/2013 |
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| 4.8 |
| Form of Warrants to purchase shares of Common Stock of the Company, issued August 27, 2013, to investors in the Company’s August and September 2013 private placement offering of units of securities |
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| 8-K |
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| 4.1 |
| 8/28/2013 |
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| 4.9 |
| Form of Warrant to purchase shares of Common Stock of the Company, issued August 27, 2013, to the placement agent and certain related parties in connection with the Company’s August and September 2013 private placement offering of units of securities |
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| 8-K |
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| 4.2 |
| 8/28/2013 |
| 4.10 | Form of Promissory Note in favor of WaferGen Biosystems (M) Sdn. Bhd. dated August 15, 2013 | X | ||||||||||
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| 5.1 |
| Opinion of McDonald Carano Wilson LLP |
| X |
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| 10.1 † |
| WaferGen Bio-systems, Inc. 2008 Stock Incentive Plan |
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| 8-K |
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| 10.1 |
| 7/3/2008 | |
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| 10.2 † |
| Form of Non-Qualified Stock Option award under 2008 Stock Incentive Plan |
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| 10-K |
| 12/31/2008 |
| 10.35 |
| 3/27/2009 |
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| 10.3 |
| Share Subscription Agreement and Shareholders’ Agreement dated May 8, 2008, by and among WaferGen Bio-systems, Inc., Malaysian Technology Development Corporation Sdn. Bhd. and WaferGen Biosystems (M) Sdn. Bhd. |
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| 10-Q |
| 9/30/2008 |
| 10.1 |
| 11/14/2008 |
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| 10.4 |
| Put Agreement dated May 28, 2008, by and among WaferGen Bio-systems, Inc. and Holders of the Series A Redeemable Convertible Preference Shares in WaferGen Biosystems (M) Sdn. Bhd. |
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| 10-Q |
| 9/30/2008 |
| 10.2 |
| 11/14/2008 |
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II-8
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| Incorporated by Reference | ||||||||
| Exhibit Number |
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Exhibit Description |
| Filed Herewith | Form |
| Period Ending |
| Exhibit |
| Filing Date | |
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| 10.5 |
| Share Subscription Agreement dated April 3, 2009, by and among WaferGen Bio-systems, Inc., WaferGen Biosystems (M) Sdn. Bhd., Prima Mahawangsa Sdn. Bhd. and Expedient Equity Ventures Sdn. Bhd. |
| 8-K |
| 10.1 |
| 4/14/2009 | ||||
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| 10.6 |
| Put Agreement dated April 3, 2009, by and among WaferGen Bio-systems, Inc. and Holders of Series B Redeemable Convertible Preference Shares in WaferGen Biosystems (M) Sdn. Bhd. |
| 8-K |
| 10.2 |
| 4/14/2009 | ||||
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| 10.7 |
| Deed of Adherence to the Share Subscription and Shareholders’ Agreement dated May 8, 2008, by and among WaferGen Bio-systems, Inc., WaferGen Biosystems (M) Sdn. Bhd., Prima Mahawangsa Sdn. Bhd., Expedient Equity Ventures Sdn. Bhd. and Malaysian Technology Development Corporation Sdn. Bhd. |
| 10-Q | 3/31/2009 | 10.4 |
| 5/12/2009 | ||||
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| 10.8 |
| Registration Rights Agreement, dated June 16, 2009, between WaferGen Bio-systems, Inc., and the investors party thereto in connection with the Company’s 2009 private placement offering of units of securities |
| 10-Q | 6/30/2009 | 10.7 |
| 8/10/2009 | ||||
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| 10.9 |
| Share Subscription Agreement dated July 1, 2009, by and among WaferGen Bio-systems, Inc., WaferGen Biosystems (M) Sdn. Bhd. and Kumpalan Modal Perdana Sdn. Bhd. |
| 10-Q | 9/30/2009 | 10.1 |
| 11/13/2009 | ||||
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| 10.10 |
| Put Agreement dated July 1, 2009, by and among WaferGen Bio-systems, Inc. and Holders of Series B Redeemable Convertible Preference Shares in WaferGen Biosystems (M) Sdn. Bhd. |
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| 10-Q |
| 9/30/2009 |
| 10.2 |
| 11/13/2009 | |
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| 10.11 |
| Deed of Adherence dated July 1, 2009, to the Share Subscription and Shareholders’ Agreement dated May 8, 2008, and the Share Subscription Agreement dated April 3, 2009, by and among WaferGen Bio-systems, Inc., WaferGen Biosystems (M) Sdn. Bhd., Prima Mahawangsa Sdn. Bhd., Expedient Equity Ventures Sdn. Bhd., Malaysian Technology Development Corporation Sdn. Bhd. and Kumpalan Modal Perdana Sdn. Bhd. |
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| 10-Q |
| 9/30/2009 |
| 10.4 |
| 11/13/2009 | |
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| 10.12 |
| Lease Agreement by and between Wafergen, Inc. and LBA Realty Fund III-Company VII, LLC dated October 22, 2009 |
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| 10-Q |
| 9/30/2009 |
| 10.6 |
| 11/13/2009 | |
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| 10.13 |
| Registration Rights Agreement, dated December 23, 2009, between WaferGen Bio-systems, Inc., and the investors party thereto in connection with the Company’s December 2009 and January 2010 private placement offering of units of securities |
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| S-1 |
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| 10.60 |
| 3/2/2010 | |
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| 10.14 |
| Share Subscription Agreement dated December 14, 2010, by and among WaferGen Bio-systems, Inc., WaferGen Biosystems (M) Sdn. Bhd. and Malaysian Technology Development Corporation Sdn. Bhd. |
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| 8-K |
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| 10.1 |
| 12/15/2010 | |
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| 10.15 |
| Put Agreement dated December 14, 2010, by and among WaferGen Bio-systems, Inc. and Malaysian Technology Development Corporation Sdn. Bhd. |
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| 8-K |
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| 10.2 |
| 12/15/2010 | |
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| 10.16 |
| Amended and Restated Shareholders’ Agreement dated December 14, 2010, by and among WaferGen Bio-systems, Inc., WaferGen Biosystems (M) Sdn. Bhd., Malaysian Technology Development Corporation Sdn. Bhd. and Prima Mahawangsa Sdn. Bhd. |
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| 8-K |
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| 10.3 |
| 12/15/2010 | |
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| 10.17 † |
| Employment Separation Agreement, dated October 19, 2011, by and among Alnoor Shivji and WaferGen Bio-systems, Inc. |
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| 10-Q |
| 9/30/2011 |
| 10.7 |
| 11/21/2011 | |
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| 10.18 |
| Letter Agreement Regarding Extension of Time to Exercise Put Option and Related Matters, entered into on December 9, 2011, by and among WaferGen Bio-systems, Inc., WaferGen Biosystems (M) Sdn Bhd and Malaysian Technology Development Corporation Sdn Bhd. |
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| 8-K |
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| 10.1 |
| 12/15/2011 | |
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| 10.19 |
| Letter Agreement, dated as of January 12, 2012, by and among WaferGen Bio-systems, Inc. and the parties signatory thereto |
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| 8-K |
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| 10.1 |
| 1/13/2012 | |
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| 10.20 † |
| WaferGen Bio-systems, Inc. 2008 Stock Incentive Plan, as amended |
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| 8-K |
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| 10.1 |
| 1/5/2012 | |
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| 10.21 † |
| Executive Employment Agreement, dated as of March 8, 2012, by and between Ivan Trifunovich and WaferGen Bio-systems, Inc. |
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| 8-K |
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| 10.1 |
| 3/9/2012 | |
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II-9
