UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2015~~2016



o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-53252



	WaferGen Bio-systems, Inc.
	(Exact Name of Registrant as Specified in its Charter)



	Nevada		90-0416683
	(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)



	~~7400 Paseo Padre Parkway,~~34700 Campus Drive, Fremont, CA		94555
	(Address of principal executive offices)		(Zip Code)



	(510) 651-4450
	(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

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 Exchange Act. (Check one):



Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The Registrant had ~~14,456,653~~18,927,726 shares of common stock outstanding as of November ~~10, 2015.~~9, 2016.

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TABLE OF CONTENTS

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PART I FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except par value)


	September 30, 2015			December 31, 2014			September 30, 2016			December 31, 2015
Assets	(Unaudited)						(Unaudited)
Current assets:
Cash and cash equivalents	$	3,672		$	14,732		$	5,147		$	15,236
Accounts receivable	1,974			1,481
Inventories, net	1,534			813
Accounts receivable, net of allowance ($30 in 2016, none in 2015)							1,620			2,201
Inventories							1,391			1,998
Prepaid expenses and other current assets	436			380			517			404
Total current assets	7,616			17,406			8,675			19,839
Property and equipment, net	941			869			992			1,052
Goodwill	990			990			990			990
Intangible assets, net	1,025			1,362			596			912
Other assets	80			80			138			80
Total assets	$	10,652		$	20,707		$	11,391		$	22,873
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,022		$	1,494		$	2,020		$	2,029
Accrued payroll and related costs	1,606			1,379			1,587			1,200
Current portion of long-term debt	178			117			186			180
Other current liabilities	965			832			981			917
Total current liabilities	4,771			3,822			4,774			4,326
Long-term debt, net of discount and current portion	2,516			2,235			2,751			2,570
Warrant derivative liabilities	18			126
Deferred income taxes							128			128
Other liabilities	356			444			69			152
Total liabilities	7,661			6,627			7,722			7,176
Commitments and contingencies (Notes 5 and 12)
Stockholders’ equity:
Preferred Stock: $0.001 par value; 10,000 shares authorized; none issued and outstanding at September 30, 2015 and December 31, 2014	—			—
Common Stock: $0.001 par value; 300,000 shares authorized; 6,140 and 5,884 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively	106,625			105,611
Preferred Stock: $0.001 par value; 10,000 shares authorized; 1.108 and 0.430 shares of Series 2 Convertible Preferred Stock issued and outstanding, respectively, at September 30, 2016 and December 31, 2015							2,214			2,214
Common Stock: $0.001 par value; 300,000 shares authorized; 19,317 and 19,163 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively							121,266			120,329
Accumulated deficit	(103,634		)	(91,531		)	(119,811		)	(106,846		)
Total stockholders’ equity	2,991			14,080			3,669			15,697
Total liabilities and stockholders’ equity	$	10,652		$	20,707		$	11,391		$	22,873

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014			2016			2015			2016			2015
Revenue:
Product	$	1,885		$	1,125		$	4,391		$	4,014		$	2,394		$	1,885		$	6,799		$	4,391
License and royalty	125			125			375			375			—			125			42			375
Total revenue	2,010			1,250			4,766			4,389			2,394			2,010			6,841			4,766
Cost of product revenue	848			374			1,938			1,739			1,124			848			3,377			1,938
Gross profit	1,162			876			2,828			2,650			1,270			1,162			3,464			2,828
Operating expenses:
Sales and marketing	1,425			962			3,890			3,599			1,737			1,425			5,342			3,890
Research and development	2,387			1,909			7,137			4,749			2,219			2,387			6,881			7,137
General and administrative	781			1,133			3,635			3,234			880			781			3,873			3,635
Total operating expenses	4,593			4,004			14,662			11,582			4,836			4,593			16,096			14,662
Operating loss	(3,431		)	(3,128		)	(11,834		)	(8,932		)	(3,566		)	(3,431		)	(12,632		)	(11,834		)
Other income and (expenses):
Interest expense, net	(113		)	(108		)	(326		)	(320		)	(117		)	(113		)	(337		)	(326		)
Gain on revaluation of warrant derivative liabilities, net	68			589			108			1,963			1			68			4			108
Loss on extinguishment of debt	—			(129		)	—			(129		)
Miscellaneous expense	—			(5		)	(49		)	(9		)
Miscellaneous income (expense)													7			—			10			(49		)
Total other income and (expenses)	(45		)	347			(267		)	1,505			(109		)	(45		)	(323		)	(267		)
Net loss before provision for income taxes	(3,476		)	(2,781		)	(12,101		)	(7,427		)	(3,675		)	(3,476		)	(12,955		)	(12,101		)
Provision for income taxes	—			—			2			3			(5		)	—			10			2
Net loss	$	(3,476	)	$	(2,781	)	$	(12,103	)	$	(7,430	)	$	(3,670	)	$	(3,476	)	$	(12,965	)	$	(12,103	)
Net loss per share - basic and diluted	$	(0.61	)	$	(1.02	)	$	(2.13	)	$	(4.87	)	$	(0.19	)	$	(0.61	)	$	(0.69	)	$	(2.13	)
Shares used to compute net loss per share - basic and diluted	5,707			2,728			5,681			1,527			18,928			5,707			18,826			5,681

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)


	Nine Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2016			2015
Cash flows from operating activities:
Net loss	$	(12,103	)	$	(7,430	)	$	(12,965	)	$	(12,103	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	647			633			775			647
Stock-based compensation	1,108			935			979			1,108
Gain on revaluation of warrant derivative liabilities, net	(108		)	(1,963		)	(4		)	(108		)
Allowance for doubtful accounts							30			—
Provision for excess and obsolete inventory	(60		)	(683		)	259			(60		)
Interest converted to principal on long-term debt	—			68
Amortization of debt discount	272			251			322			272
Loss on extinguishment of debt	—			129
Change in operating assets and liabilities:
Accounts receivable	(493		)	(1,387		)	551			(493		)
Inventories	(719		)	583			248			(719		)
Prepaid expenses and other assets	(57		)	(216		)	(171		)	(57		)
Accounts payable	528			917			(9		)	528
Accrued payroll and related costs	227			586			387			227
Other accrued expenses	46			(242		)	(15		)	46
Net cash used in operating activities	(10,712		)	(7,819		)	(9,613		)	(10,712		)
Cash flows from investing activities:
Purchase of property and equipment	(146		)	(215		)	(299		)	(146		)
Acquisition of business	—			(2,000		)
Net cash used in investing activities	(146		)	(2,215		)	(299		)	(146		)
Cash flows from financing activities:
Repayment of capital lease obligations	(108		)	—			(135		)	(108		)
Net proceeds from issuance of common stock and warrants	—			17,972
Repayment of promissory note	—			(1,318		)
Payment of taxes for restricted stock forfeited	(94		)	—
Net cash provided by (used in) financing activities	(202		)	16,654
Net increase (decrease) in cash and cash equivalents	(11,060		)	6,620
Payment of taxes for restricted stock forfeited, net							(42		)	(94		)
Net cash used in financing activities							(177		)	(202		)
Net decrease in cash and cash equivalents							(10,089		)	(11,060		)
Cash and cash equivalents at beginning of the period	14,732			10,709			15,236			14,732
Cash and cash equivalents at end of the period	$	3,672		$	17,329		$	5,147		$	3,672


Supplemental disclosures of cash flow information:
Cash paid for interest	$	19	$	69	$	10	$	19
Cash paid for income taxes	$	2	$	3	$	13	$	2

Supplemental disclosure of non-cash investing and financing activities:
Property and equipment acquired with capital leases $ 178
$ —
Inventory transferred to property and equipment $ 58
$ 45
Issuance of promissory note, net of debt discount, in business acquisition $ —
$ 1,100
Initial valuation of revenue earn-out contingency in business acquisition $ —
$ 410
Warrant derivative liabilities transferred to equity on waiver of potential cash settlement provisions $ —
$ 6,821
Issuance of warrants to underwriters $ —
$ 396



Supplemental disclosure of non-cash investing and financing activities:
Property and equipment acquired with capital leases	$	—	$	178
Inventory transferred to property and equipment	$	102	$	58
Property and equipment transferred to inventory	$	2	$	—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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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 sale of systems for genomic technology solutions for ~~single cell~~single-cell analysis and clinical research. The Company’s ICELL8™ ~~Single Cell~~Single-Cell System is a cutting edge platform ~~which~~that can isolate thousands of single cells and ~~processes~~process specific cells for analysis, including Next Generation Sequencing ~~("NGS"~~(“NGS”). The Company’s SmartChip™ platform can be used for profiling and validating molecular biomarkers, and can perform massively parallel singleplex PCR for one-step target enrichment and library preparation for clinical NGS. The Company’s Apollo 324™ system can be used to process DNA and RNA from clinical samples to NGS-ready libraries. 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 and Apollo product lines, 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 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 June 30, 2014, the Company effected a reverse stock split of its common stock by a ratio of one-for-ten (the “2014 Reverse Split”). Every ten outstanding shares of common stock became one share of common stock. No fractional shares were issued in connection with the 2014 Reverse Split. Stockholders who were otherwise entitled to receive a fractional share of common stock received one whole share of common stock. The 2014 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.

The 2014 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 the 2008 Stock Incentive Plan. All of the information in these financial statements has been presented to reflect the impact of the one-for-ten 2014 Reverse Split on a retroactive basis.

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~~the Company’s audited financial statements and footnotes related thereto for the year ended December 31, ~~2014,~~2015, included in ~~our~~the Company’s 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.

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 – 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 statement of operations. The Company has no subsidiaries for which the local currency is the functional currency.

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~~WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES~~

~~Notes to the Condensed Consolidated Financial Statements (Unaudited)~~

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 net realizable value. Additionally, the Company evaluates its inventory in terms of excess and obsolete exposures and records provisions as needed.

Goodwill and Long-lived Intangible Assets – Goodwill is tested for impairment on an annual basis in the fourth quarter and between annual tests if events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable. Impairment losses, if any, are recorded in the statement of operations as “impairment of goodwill” within operating expenses.

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WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

Long-lived intangibles are carried at cost less accumulated amortization and are subject to review for impairment when events or circumstances indicate that the carrying value may not be recoverable. Amortization is recognized over the estimated useful life of the respective asset on a straight-line basis except for customer lists, which are amortized in proportion to the present value of projected cash flows within their estimated useful lives, since this methodology more closely reflects the pattern in which economic benefits are derived.

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 reasonably 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. This generally occurs when the Company’s products are shipped from its facility as title has passed. Revenue is recorded net of estimated cash discounts. The Company estimates and accrues an allowance for sales returns at the time the product is sold. To date, sales returns have not been material.

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.

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 no governmental subsidies in the three months ended September 30, 2016 or 2015, or in the nine months ended September 30, 2016, the balance of available matching funds having been fully used by March 31, 2015, and ~~$162,000 in the three months ended September 30, 2014. The Company~~ recognized ~~governmental subsidies of~~ $164,000 ~~and $335,000~~ in the nine months ended September 30, 2015, ~~and 2014, respectively,~~ which ~~were~~was 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 (or recognized until the time of their settlement) its warrants with certain cash settlement provisions or with certain anti-dilution protection 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 those warrants for which no anti-dilution adjustment is projected prior to the expiration date using the Black-Scholes valuation model, and all other derivative liabilities using a Monte Carlo Simulation approach, with key input variables provided by management.

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~~WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES~~

~~Notes to the Condensed Consolidated Financial Statements (Unaudited)~~

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.

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WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

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 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 will replace most of the existing revenue recognition guidance within U.S. GAAP. The core principle of this guidance is that an entity should recognize revenue for the transfer of goods or services to customers in an amount that it expects to be entitled to receive for those goods or services. In doing so, companies will be required to make certain judgments and estimates, including identifying contract performance obligations, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price among separate performance obligations. Further, ASU 2014-09 will require companies to make additional disclosures. ASU 2014-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those years, and will become effective for the Company beginning on January 1, 2017, with early adoption not permitted. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective date” (“ASU 2015-14”),which permits deferral of the effective date of ASU 2014-09 by one year, so the Company may delay adopting the standard until January 1, 2018. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations” (“ASU 2016-08”), in April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”) and in May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”). ASU 2016-08, ASU 2016-10 and ASU 2016-12 all update and clarify the guidance previously issued in ASU 2014-09 and will become effective for the Company when it adopts ASU 2014-09. ASU 2014-09, as amended, allows for two methods of adoption, a full retrospective method or a modified retrospective approach with the cumulative effect recognized at the date of initial application. The Company is in the process of determining both the timing and the method of adoption and its impact on the Company’s consolidated financial condition and results of operations.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements – Going Concern (Topic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 will add guidance to U.S. GAAP that is presently available only in auditing standards, and provide clarification of such guidance. Further, an assessment of going concern will be required at each interim reporting period (in addition to the existing auditing guideline of an annual assessment), and will require a look-forward period of one year from the date of issuance (as opposed to the existing auditing guideline of one year from the balance sheet date). ASU 2014-15 is effective for annual periods ending after December 15, 2016, with early adoption permitted, and will become effective for the Company for the year ending December 31, 2016, and for each interim period thereafter. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial condition or results of operations.

In ~~April 2015,~~February 2016, the FASB issued ASU ~~2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”~~2016-02, “Leases (Topic 842)” (“ASU ~~2015-03”~~2016-02”). ASU ~~2015-03~~2016-02 requires ~~issuance costs related~~the recognition of lease assets (representing the value of the right to ~~a recognized debt liability to~~use the property over the lease term) and lease liabilities (representing the present value of future liabilities) by lessees for those leases presently classified as operating leases (superseding the previous requirement that they be ~~presented in~~expensed over the ~~balance sheet as an offset against the recorded liability, similar to debt discounts. Such issuance costs were previously recorded as assets. The~~lease term, without recognition of assets and ~~measurement guidance for debt issuance costs are unchanged.~~liabilities). ASU ~~2015-03~~2016-02 is effective for ~~annual periods~~fiscal years beginning after December 15, ~~2015,~~2018, and interim periods within those years, and will become effective for the Company beginning on January 1, 2019. The Company is in the process of determining the impact on the Company’s consolidated financial condition and results of operations.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 permits entities to make an accounting policy election to account for forfeitures as they occur when recognizing the expense of share-based compensation (as opposed to the existing requirement to use estimated forfeitures), reduces the tax withholding threshold at which equity accounting is permitted for shares withheld on vesting and requires that payments by an employer when withholding shares for tax-withholding purposes be reported as financing activities within the statement of cash flows, along with guidance related to excess tax benefits. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. In August 2015, the FASB issued ASU 2015-15, “Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update)” (“ASU 2015-15”). ASU 2015-15 notes that the SEC would permit the issuance costs related to a line-of-credit being deferred and the unamortized portion being presented as an asset, regardless of whether there are outstanding borrowings. The Company adopted ~~ASU 2015-03~~this standard effective January 1, ~~2015~~2016, without electing to change its existing accounting policy of accounting for forfeitures based on expected vesting, and ~~ASU 2015-15 effective July 1, 2015 and, since it has no debt issuance costs recorded for any period that will be presented after the former date, neither~~its adoption ~~had any~~did not have a significant impact on the Company’s consolidated financial condition or results of operations.

In ~~July 2015,~~August 2016, the FASB issued ASU ~~2015-11, “Inventory~~2016-15, “Statement of Cash Flows (Topic ~~330)~~230): ~~Simplifying the Measurement~~Classification of ~~Inventory”~~Certain Cash Receipts and Cash Payments” (“ASU ~~2015-11”~~2016-15”). ASU ~~2015-11 requires inventory that is recorded using~~2016-15 provides guidance on the ~~first-in, first-out (FIFO) or average cost method to be measured at the lower of cost~~required presentation and ~~net realizable value (defined as the estimated selling prices~~classification in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation), as opposed to the existing requirement to measure such inventory at the lower of cost and market value. ASU 2015-11 is effective for annual periods beginning after

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WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

statement of cash flows for various issues for which there has been diversity in practice in the past. ASU 2016-15 is effective for fiscal years beginning after December 15, ~~2016,~~2017, and interim periods within those years, with early adoption permitted. The Company adopted this standard effective July 1, ~~2015,~~2016, and its adoption did not have a significant 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 September 30, ~~2015,~~2016, and December 31, ~~2014:~~2015:


	September 30, 2015		December 31, 2014		September 30, 2016		December 31, 2015
	(in thousands)				(in thousands)
Raw materials	$	399	$	55	$	388	$	630
Work in process	474		251		271		288
Finished goods	661		507		732		1,080
Inventories, net	$	1,534	$	813	$	1,391	$	1,998

NOTE 4. Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill in the nine months ended September 30, ~~2015,~~2016, were as follows:

(in thousands)
Balance at January 1, 2015 $ 990

Additions —

Balance at September 30, 2015 $ 990



	(in thousands)
Balance at January 1, 2016	$	990
Additions	—
Balance at September 30, 2016	$	990

Other intangible assets as of September 30, ~~2015,~~2016, consist of:


	Gross Carrying Amount		Net Accumulated Amortization		Intangible Assets		Gross Carrying Amount		Net Accumulated Amortization		Intangible Assets
			(in thousands)						(in thousands)
Purchased technology	$	360	$	175	$	185	$	360	$	275	$	85
Customer lists and trademarks	1,500		660		840		1,500		989		511
Total as of September 30, 2015	$	1,860	$	835	$	1,025
Total as of September 30, 2016							$	1,860	$	1,264	$	596

The estimated future amortization expenses by fiscal year are as follows:


	(in thousands)		(in thousands)
Year ending December 31,
2015 (three months remaining)	$	113
2016	421
2016 (three months remaining)			$	105
2017	314		314
2018	148		148
2019	29		29

Total amortization	$	1,025	$	596

Intangible asset amortization expense was $106,000 and $112,000 for the three months ended September 30, 2016 and 2015, respectively, and $316,000 and $337,000 for the nine months ended September 30, 2016 and 2015, respectively.

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Intangible asset amortization expense was $112,000 and $124,000 for the three months ended September 30, 2015 and 2014, respectively, and $337,000 and $373,000 for the nine months ended September 30, 2015 and 2014, respectively.

NOTE 5. Long Term Obligations

On August 15, 2013, the Company issued WaferGen Biosystems (M) Sdn. Bhd. (“WGBM”), a wholly owned subsidiary in Malaysia, notes with a face value of $6.6 million, maturing on August 15, 2020 (the “Malaysian Notes”), in consideration of WGBM’s cancellation of the Company’s obligations under a term loan owing to WGBM which, as of that date, had an outstanding loan balance of approximately $5.3 million. Under the terms of an agreement between the Company, WGBM and Malaysian Technology Development Corporation Sdn. Bhd. (“MTDC,” a major investor in WGBM’s preference shares), upon liquidation of WGBM (which occurred on November 26, 2013), the Malaysian Notes were divided such that the Company received notes with an aggregate principal amount of $1.4 million and MTDC received notes with an aggregate principal amount of $5.2 million (the “MTDC Notes”). The MTDC Notes were recorded using an effective interest rate of 17.39% and are summarized as follows at September 30, ~~2015~~2016 and December 31, ~~2014:~~2015:


	September 30, 2015		December 31, 2014		September 30, 2016		December 31, 2015
	(in thousands)				(in thousands)
MTDC Notes Payable:
Face value	$	5,200	$	5,200	$	5,200	$	5,200
Debt discount, net of accumulated amortization of $611 and $339 at September 30, 2015 and December 31, 2014, respectively	2,932		3,204
Debt discount, net of accumulated amortization of $1,032 and $710 at September 30, 2016 and December 31, 2015, respectively					2,511		2,833
Notes payable, net of debt discount	$	2,268	$	1,996	$	2,689	$	2,367

At any time prior to the MTDC Notes’ maturity date, the Company may issue to MTDC shares of the Company’s common stock with a value, based on the average closing price in the preceding 30 days, equal to the face value of the MTDC Notes. Based on an average closing price of ~~$1.6086~~$0.8400 in the 30 days preceding September 30, ~~2015,~~2016, the MTDC Notes could have been settled by issuing ~~3,233,000~~6,190,000 shares of the Company’s common stock.

On January 6, 2014, the Company acquired substantially all of the assets of the product line of IntegenX Inc. (“IntegenX”) used in connection with developing, manufacturing, marketing and selling instruments and reagents relating to library preparation for NGS, including the Apollo 324™ instrument and the PrepX™ reagents (the “Apollo Business”). In connection with this acquisition, the Company issued a $1.25 million secured promissory note to IntegenX (the “IntegenX Note”), due on January 6, 2017 (the “Maturity Date”). The IntegenX Note earned simple interest at 8% per annum over its three year term, payable on the Maturity Date. It was repayable early without premium or penalty at the Company’s option at any time and it had to be repaid within 45 days of the closing of an equity offering yielding the Company net cash proceeds of at least $15,000,000. Such an equity offering closed on August 27, 2014, and the IntegenX Note was repaid on September 12, 2014.

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~~Notes to the Condensed Consolidated Financial Statements (Unaudited)~~

The Company also leases equipment under three capital leases that expire between December 2017 and May 2018. Aggregate future minimum obligations for capital leases in effect as of September 30, ~~2015,~~2016, are as follows:


	Capital Leases			Capital Leases
	(in thousands)			(in thousands)
Year ending September 30,
2016	$	192
2017	192			$	192
2018	63			63
thereafter				—

Total minimum obligations	447			255

Amounts representing interest	(21		)	(7		)

Present value of future minimum payments	426			248

Current portion of long term obligations	(178		)	(186		)

Long term obligations, less current portion	$	248		$	62

NOTE 6. Preferred Stock

The Company has 10,000,000 shares of preferred stock authorized. Effective ~~August 27, 2013,~~October 20, 2015, the Company designated ~~3,663~~1,108 shares as Series 12 Convertible Preferred Stock. ~~The Series 1 Convertible Preferred Stock had no voting rights, and holders were entitled to a liquidation preference equal to $0.001 per share.~~ Each share of Series 12 Convertible Preferred Stock was convertible into ~~251.53436~~10,000 shares of common stock, subject to an ownership cap whereby conversion ~~could~~may not occur to the extent the holder would own more than 9.98% of the common stock following conversion. The Series 2 Convertible Preferred Stock has no voting rights and is on a par with common stock on an as-converted basis with respect to dividend rights and distributions of assets in the event of liquidation, without regard to the ownership cap.

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

On ~~August 27, 2013,~~October 21, 2015, the Company ~~issued 2,987~~sold 1,108 shares of Series ~~1 Convertible Preferred Stock in exchange for previously-issued securities and sold 646 shares of Series 1~~2 Convertible Preferred Stock in a ~~private placement. By December 31, 2014, all~~public offering. As of ~~the 3,633~~September 30, 2016, 678 shares of Series 12 Convertible Preferred Stock issued had been converted into ~~914,000~~6,780,000 shares of common ~~stock. The Company subsequently retired all~~stock and 430 shares of ~~the~~ Series 12 Convertible Preferred Stock ~~none of which remains issued and outstanding and none will be issued in the future.~~remained outstanding.

NOTE 7. Stock Awards

The Company has awards outstanding under 3 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”). In addition, there are 178,000 inducement options and ~~50,000~~33,000 inducement restricted stock units outstanding that were awarded to executive officers on August 27, 2014 and May 12, 2015, not covered by the Plans, with the same standard terms as non-qualified stock options or restricted stock units awarded under the 2008 Plan. 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 most of its 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. This includes an amendment adopted by the Company’s stockholders on May 25, 2016, which increased the total number of shares authorized for issuance from 1,215,000 to 3,715,000. 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. 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

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~~Notes to the Condensed Consolidated Financial Statements (Unaudited)~~

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.

On January 22, 2016, 292,000 conditional options were issued to the Company’s executive chairman (the “January 2016 Conditional Award”). The January 2016 Conditional Award was not covered by the Plans at the time of issuance and was conditional on the Company obtaining stockholder approval to amend the 2008 Plan to authorize at least 2,000,000 additional shares. In the event of failure to receive such stockholder approval by June 30, 2016, the January 2016 Conditional Award would convert into a cash-settled stock appreciation right. Due to the possibility of cash settlement, the January 2016 Conditional Award was initially recorded as a liability, with its fair value updated at each balance sheet date. When stockholder approval to authorize an additional 2,500,000 shares was obtained on May 25, 2016, the January 2016 Conditional Award was revalued at its fair value on that date, since when it has been reflected as an option awarded under the 2008 Plan and has not been subject to revaluation.

The weighted average grant date fair value of the options awarded in the nine months ended September 30, 2016 and 2015, measured on the date on which potential cash settlement provisions were eliminated, was estimated to be $0.59 and $2.56, respectively, using grant date closing stock prices ranging from $0.56 to $0.99 on the valuation dates in 2016 and $3.19 to $3.78 on the award dates in 2015, respectively, and based on the following assumptions:



	Nine Months Ended September 30,
	2016		2015
Risk-free interest rate	1.13% - 1.40%		1.25% - 1.44%
Expected remaining term	3.33 - 4.50 Years		3.55 - 4.50 Years
Expected volatility	105.05% - 111.44%		106.11% - 119.36%
Dividend yield	—	%	—	%

The Company has issued both options and restricted stock (including restricted stock units), mostly under the Plans. Restricted stock grants afford the recipient the opportunity to receive shares of common stock, subject to certain terms, whereas options give

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

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 three or four years, 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 (including conditional options) and restricted stock transactions in the nine months ended September 30, ~~2015,~~2016, is as follows:


			Stock Options				Restricted Stock						Stock Options			Restricted Stock
	Shares Available for Grant		Number of Options Outstanding		Weighted Average Exercise Price		Number of Shares Outstanding		Weighted Average Grant-Date Fair Value		Shares Available for Grant		Number of Options Outstanding	Weighted Average Exercise Price		Number of Shares Outstanding		Weighted Average Grant-Date Fair Value
			(in thousands, except per share amounts)										(in thousands, except per share amounts)
Balance at January 1, 2015	895		188		$	27.35	225		$	4.54
Balance at January 1, 2016											438		477	$	11.43	451		$	3.77
2008 Plan Amendment											2,500		—	$	—	—		$	—
Granted	(499	)	361		$	3.43	337		$	4.03	(726	)	592	$	0.56	133		$	0.69
Vested	—		—		$	—	(71	)	$	4.54	—		—	$	—	(174	)	$	3.81
Forfeited	81		(70	)	$	4.62	(57	)	$	4.25	20		—	$	—	(20	)	$	1.24
Canceled	1		(1	)	$	365.81	—		$	—
Balance at September 30, 2015	478		478		$	12.22	434		$	4.18
Balance at September 30, 2016											2,232		1,069	$	5.26	390		$	2.83

No options were exercised during the nine months ended September 30, ~~2015~~2016 or ~~2014.~~2015. The aggregate intrinsic value of options outstanding and exercisable at September 30, ~~2015,~~2016, was ~~nil,~~$172,000 and $85,000, respectively, based on ~~our~~the Company’s common stock closing price of ~~$1.36.~~$0.85. 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 the options awarded in the nine months ended September 30, 2015 and 2014, was estimated to be $2.56 and $6.33, respectively, using grant date closing stock prices ranging from $3.19 to $3.78 on award dates in 2015 and $4.60 to $14.00 on the award dates in 2014, and based on the following assumptions:

Nine months ended September 30,
2015 2014
Risk-free interest rate 1.25% - 1.44%
1.43% - 1.57%
Expected remaining term 3.55 - 4.50 Years
4.75 Years
Expected volatility 106.11% - 119.36%
93.89% - 105.97%
Dividend yield — % — %

~~The~~ amounts expensed for stock-based compensation totaled ~~$149,000~~$225,000 and ~~$175,000~~$149,000 for the three months ended September 30, ~~2015~~2016 and ~~2014,~~2015, respectively, and ~~$1,108,000~~$979,000 and ~~$935,000~~$1,108,000 for the nine months ended September 30, ~~2015~~2016 and ~~2014,~~2015, respectively.

At September 30, ~~2015,~~2016, the total stock-based compensation cost not yet recognized, net of estimated forfeitures, was ~~$1,620,000.~~$1,034,000. This cost is expected to be recognized over an estimated weighted average amortization period of ~~2.31~~1.49 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 related deferred taxes.

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~~Notes to the Condensed Consolidated Financial Statements (Unaudited)~~

NOTE 8. Warrants

A summary of outstanding common stock warrants as of September 30, ~~2015,~~2016, is as follows:


Securities Into Which	Total Warrants	Warrants Recorded	Exercise		Expiration	Total Warrants	Warrants Recorded	Exercise		Expiration
Warrants are Convertible	Outstanding	as Liabilities	Price		Date	Outstanding	as Liabilities	Price		Date
	(in thousands, except per share amounts)					(in thousands, except per share amounts)
Common stock	4,600	—	$	5.00	August 2019	17,250	—	$	1.44	October 2020
Common stock	120	—	$	6.25	August 2017	450	—	$	1.44	October 2018
Common stock	613	111	$	26.00	August and September 2018	4,600	—	$	5.00	August 2019
Common stock						120	—	$	6.25	August 2017
Common stock						613	111	$	26.00	August and September 2018
Total	5,333	111				23,033	111

In addition, there are 25.88 unit warrants outstanding, which expire in August and September 2018, 0.35 of which are recorded as liabilities, each entitling the holder to purchase, for $50,000, 2,500 shares of common stock and 1,250 warrants to purchase one share of common stock at an exercise price of $26.00, expiring in August and September 2018.

The Company records warrants and unit warrants with certain anti-dilution protection or certain cash settlement provisions as liabilities, with the estimated fair value of those warrants for which no anti-dilution adjustment is projected prior to the expiration

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

date being calculated using the Black-Scholes valuation model, with all others being calculated using a Monte Carlo Simulation approach, using key input variables provided by management, at each reporting date. Changes in fair value are recorded as gains or losses on revaluation in non-operating income (expense).

On March 31, 2014, the Company amended the terms of 413,000 warrants and 22.54 unit warrants expiring in August and September 2018 to eliminate certain potential cash settlement provisions such that the liability was settled, having received consent from their holders. The fair value of the securities settled and reclassified as equity on March 31, 2014, was estimated to be $6,109,000, based on assumptions described below. On June 30, 2014, the Company similarly amended the terms of a further 89,000 warrants and 2.99 unit warrants such that the liability was settled, having received consent from their holders after March 31, 2014. The fair value of the securities settled and reclassified as equity on June 30, 2014, was estimated to be $712,000. There have been no such reclassifications since June 30, 2014.

The aggregate fair value of those warrants and unit warrants accounted for as liabilities as of September 30, ~~2015~~2016 and ~~2014 (including warrants which have subsequently expired or been reclassified as equity),~~2015, was estimated to be ~~$18,000~~$0 and ~~$363,000,~~$18,000, respectively, using a closing stock price of ~~$1.36~~$0.85 and ~~$4.35,~~$1.36, respectively, and based on the following assumptions:



	September 30, ~~2015~~2016		September 30, ~~2014~~2015
Risk-free interest rate	~~0.81%~~0.72% - ~~0.84%~~0.73%		~~0.02%~~0.81% - ~~1.28%~~0.84%
Expected remaining term	~~2.62~~1.71 - ~~2.70~~1.80 Years		~~0.23~~2.62 - ~~3.60~~2.70 Years
Expected volatility	~~106.20%~~87.12% - ~~109.95%~~88.44%		~~118.65%~~106.20% - ~~140.41%~~109.95%
Dividend yield	—	%	—	%

The aggregate fair value of such warrants and unit warrants at December 31, ~~2014~~2015 and ~~2013,~~2014, was estimated to be $4,000 and $126,000, ~~and $9,147,000,~~ respectively. During the nine months ended September 30, 2016, the decrease in the fair value of the warrant derivative liability of $4,000 was recorded as a revaluation gain. During the nine months ended September 30, 2015, the decrease in the fair value of the warrant derivative liability of $108,000 was recorded as a revaluation gain. During the nine months ended September 30, 2014, to the extent that it did not arise from settlements, the decrease in the fair value of the warrant derivative liability of $1,963,000 was recorded as a revaluation gain (see Note 9).

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~~Notes to the Condensed Consolidated Financial Statements (Unaudited)~~

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”). 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 liabilities that are measured at fair value on a recurring basis at September 30, ~~2015~~2016 and December 31, ~~2014:~~

Level 1 Level 2 Level 3 Total
September 30, 2015 (in thousands)
Recurring Financial Liabilities:
Warrant derivative liabilities $ —
$ —
$ 18
$ 18
Contingent earn-out payments —
—
314
314
Total liabilities $ —
$ —
$ 332
$ 332
2015:

Level 1 Level 2 Level 3 Total
December 31, 2014 (in thousands)
Recurring Financial Liabilities:
Warrant derivative liabilities $ —
$ —
$ 126
$ 126
Contingent earn-out payments —
—
279
279
Total liabilities $ —
$ —
$ 405
$ 405

1211

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Notes to the Condensed Consolidated Financial Statements (Unaudited)



	Level 1		Level 2		Level 3		Total
September 30, 2016			(in thousands)
Recurring Financial Liabilities:
Warrant derivative liabilities	$	—	$	—	$	—	$	—
Contingent earn-out payments	—		—		48		48
Total liabilities	$	—	$	—	$	48	$	48



	Level 1		Level 2		Level 3		Total
December 31, 2015			(in thousands)
Recurring Financial Liabilities:
Warrant derivative liabilities	$	—	$	—	$	4	$	4
Contingent earn-out payments	—		—		44		44
Total liabilities	$	—	$	—	$	48	$	48

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 nine months ended September 30, ~~2015~~2016 and ~~2014:~~2015:


	Warrant Derivatives			Contingent Earn-out Payments			Total			Warrant Derivatives			Contingent Earn-out Payments			Total
				(in thousands)									(in thousands)
Balance at January 1, 2015	$	126		$	279		$	405
Balance at January 1, 2016										$	4		$	44		$	48
Issuances	—			—			—			—			—			—
Gain on revaluation of warrant derivative liabilities, net	(108		)	—			(108		)	(4		)	—			(4		)
Change in contingent earn-out adjustment included in interest expense	—			35			35			—			4			4
Settlements	—			—			—			—			—			—
Balance at September 30, 2015	$	18		$	314		$	332
Total gains (losses) included in other income and expenses attributable to liabilities still held as of September 30, 2015	$	108		$	(35	)	$	73
Balance at September 30, 2016										$	—		$	48		$	48
Total gains (losses) included in other income and expenses attributable to liabilities still held as of September 30, 2016										$	4		$	(4	)	$	—


	Warrant Derivatives			Contingent Earn-out Payments		Total			Warrant Derivatives			Contingent Earn-out Payments			Total
				(in thousands)								(in thousands)
Balance at January 1, 2014	$	9,147		$	—	$	9,147
Balance at January 1, 2015									$	126		$	279		$	405
Issuances	—			410		410			—			—			—
Gain on revaluation of warrant derivative liabilities, net	(1,963		)	—		(1,963		)	(108		)	—			(108		)
Change in contingent earn-out adjustment included in interest expense									—			35			35
Settlements	(6,821		)	—		(6,821		)	—			—			—
Balance at September 30, 2014	$	363		$	410	$	773
Total gains included in other income and expenses attributable to liabilities still held as of September 30, 2014	$	1,277		$	—	$	1,277
Balance at September 30, 2015									$	18		$	314		$	332
Total gains (losses) included in other income and expenses attributable to liabilities still held as of September 30, 2015									$	108		$	(35	)	$	73

The liability for contingent earn-out payments arises from the Company’s requirement to pay IntegenX Inc. (“IntegenX”) a percentage of revenues of the ~~Apollo Business~~product line that the Company acquired from IntegenX in January 2014 (the “Apollo Business”), on a sliding scale up to 20%, should certain revenue targets be achieved in 2014, 2015 and 2016. The fair value of the acquisition earn-out contingencies is determined using a modeling technique based on significant unobservable inputs calculated using a

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WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

probability-weighted revenue approach. The Company initially estimated the fair value of the contingent consideration using a probability-weighted discounted cash flow model based on key assumptions including annual revenues ranging from $4.0 million to $9.9 million and a discount rate of 14%. At December 31, 2014, the ~~estimate of~~ fair value was ~~updated~~estimated using future annual revenues ranging from $3.4 million to $7.7 million and a discount rate of 14%. At September 30, 2015, the annual revenue estimates were unchanged from the estimates at December 31, 2014, the liability increasing due to a reduction in the amount of discount, which was expensed as interest. At December 31, 2015, the estimate of fair value was updated using future annual revenue ranging from $3.1 million to $5.0 million and a discount rate of 14%. At September 30, 2016, the annual revenue estimates are unchanged from the estimates at December 31, 2015, the liability increasing due to a reduction in the amount of discount, which was expensed as interest.

Assumptions used in evaluating the warrant derivative liabilities are discussed in Note 8. 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, historical experience and the possibility of liquidation. An increase in the expected remaining term will increase the fair value and the associated derivative liability.

Expected Volatility. This is a measure of the amount by which the Company’s common stock price has fluctuated or is expected to fluctuate. The Company applies equal weighting to the Company’s own historic volatility and the historic volatility of a group

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~~Notes to the Condensed Consolidated Financial Statements (Unaudited)~~

of publicly traded companies over the retrospective period corresponding to the expected remaining term of the instrument on the measurement date. The Company applies a reduced weighting to its own historic volatility during the period prior to August 27, 2013, when it was highly leveraged. The group of publicly traded companies is selected from the same industry or market index, with extra weighting attached to those companies most similar in terms of business activity, size and financial leverage. An increase in the expected volatility will increase the fair value and the associated derivative liability.

Dividend Yield. 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.

There were no transfers between Level 1, Level 2 and Level 3 of the fair value hierarchy during the nine months ended September 30, ~~2015~~2016 or ~~2014.~~2015.

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 related to MTDC Notes, ~~or Series 1 Convertible Preferred Stock,~~ as the effect would be anti-dilutive due to the net loss.

The following outstanding stock options, warrants and unit warrants (on an as-converted into common stock basis) and shares issuable or contingently issuable upon conversion of restricted stock, Series 12 Convertible Preferred Stock and MTDC 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 nine months ended September 30, ~~2015~~2016 and ~~2014:~~2015:


	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended September 30,		Nine Months Ended September 30,
	2015	2014	2015	2014	2016	2015	2016	2015
	(in thousands)		(in thousands)		(in thousands)		(in thousands)
Common share equivalents issuable upon exercise of common stock options	—	22	6	13	224	—	144	6
Common share equivalents issuable upon exercise of warrants	—	995	—	432
Shares issuable upon vesting of restricted stock	441	88	371	30	392	441	491	371
Shares issuable upon conversion of Series 1 Convertible Preferred Stock	—	447	—	639
Shares issuable upon conversion of Series 2 Convertible Preferred Stock					4,300	—	4,300	—
Shares issuable upon conversion of MTDC Notes	3,233	1,180	3,233	1,180	6,190	3,233	6,190	3,233
Total common share equivalents excluded from denominator for diluted earnings per share computation	3,674	2,732	3,610	2,294	11,106	3,674	11,125	3,610

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WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

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 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. An allowance for doubtful accounts of $30,000 was provided as of September 30, 2016. No such provision was made ~~for doubtful accounts at September 30, 2015, or~~as of December 31, ~~2014.~~2015.

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~~WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES~~

~~Notes to the Condensed Consolidated Financial Statements (Unaudited)~~

Customers accounting for more than 10% of total revenues during ~~any of~~ the three ~~and~~or nine ~~month periods~~months ended September 30, 2016 or 2015, ~~and 2014,~~ as well as revenues in all corresponding periods, are tabulated as follows:


	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended September 30,								Nine Months Ended September 30,
	2015				2014				2015				2014				2016				2015				2016				2015
	(in thousands, except percentages)								(in thousands, except percentages)								(in thousands, except percentages)								(in thousands, except percentages)
Customer A	$	291	14	%	$	—	—	%	$	291	6	%	$	—	—	%	$	240	10	%	$	—	—	%	$	240	4	%	$	—	—	%
Customer B	$	221	11	%	$	30	2	%	$	629	13	%	$	55	1	%	$	153	6	%	$	—	—	%	$	998	15	%	$	—	—	%
Customer C	$	—	—	%	$	167	13	%	$	6	—	%	$	167	4	%	$	1	—	%	$	291	14	%	$	50	1	%	$	291	6	%
Customer D	$	125	6	%	$	125	10	%	$	375	8	%	$	375	9	%	$	—	—	%	$	221	11	%	$	344	5	%	$	629	13	%

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 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.

~~NOTE 13. Subsequent Events~~

In connection with a public offering on October 21, 2015, the Company received approximately $15.7 million, net of issuance costs of approximately $1.6 million, for the issuance of 6.17 million shares of its common stock (inclusive of 2.25 million shares sold from the full exercise of the overallotment option granted to the underwriters), 1,108 shares of its Series 2 Convertible Preferred Stock (convertible into 11.08 million shares of common stock, subject to ownership limitations) and warrants to purchase 17.25 million shares of its common stock (inclusive of 2.25 million warrants sold from the full exercise of the overallotment option of warrants granted to the underwriters). Subject to certain ownership limitations, the warrants are exercisable at any time within five years of the issuance date at an exercise price of $1.44 per share. The Company also issued warrants to purchase 450,000 shares of its common stock for $1.44 per share, expiring after three years, to the underwriters in connection with the public offering.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described.

The information contained in this Form 10-Q is intended to update the information contained in our annual report on Form 10-K for the year ended December 31, ~~2014~~2015 (the “Form 10-K”), and our quarterly reports on Form 10-Q for the quarters ended March 31, ~~2015~~2016 and June 30, ~~2015~~2016 (the “First and Second Quarter Forms 10-Q”), all as filed with the Securities and Exchange Commission, and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the notes thereto, and other information contained in the Form 10-K and the First and Second Quarter Forms 10-Q. The following discussion and analysis also should be read together with our condensed consolidated financial statements and the notes thereto included elsewhere in this Form 10-Q.

Forward-Looking Statements

Information included in this Form 10-Q 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, ~~integration and potential benefits of our recent business acquisition, and~~ our liquidity and capital ~~needs.~~needs and the completion of the transactions contemplated by our merger agreement with Takara Bio USA Holdings, Inc. and certain other parties thereto. 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,” “plan,” “anticipate,” “estimate,” “believe,” “intend,” “contemplate,” “predict,” “project,” “potential” or “continue” 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” contained in the Form 10-K, 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.

Company Overview and Background

Since beginning operations in 2003, we have been engaged in the development, manufacture and sale of genomic technology solutions for ~~single cell~~single-cell analysis and clinical research. Our ICELL8^TM ~~Single Cell~~ Single-Cell System is a cutting edge platform that can isolate thousands of single cells and process specific cells for analysis, including Next Generation Sequencing ~~("NGS"~~(“NGS”). Our SmartChip^TM platform can be used for profiling and validating molecular biomarkers, and can perform massively parallel singleplex PCR for one step target enrichment and library preparation for clinical NGS. Our Apollo 324^TM system can be used to process DNA and RNA from clinical samples to NGS-ready libraries. Most recently, our R&D efforts have been concentrated on the development and commercialization of our ~~single cell~~single-cell products. Our products are aimed at researchers who perform genetic analysis and cell biology, primarily at pharmaceutical and biotech companies, academic and private research centers and diagnostics companies involved in biomarker research. We plan to provide new performance standards with significant savings of time and cost for professionals in the field of gene expression research and to facilitate biomarker discovery, toxicology and clinical research through the SmartChip products and services.

Our revenue is subject to fluctuations due to the timing of sales of high-value products 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.

Since inception, we have incurred substantial operating losses. As of September 30, ~~2015,~~2016, our accumulated deficit was approximately ~~$103.6~~$119.8 million. Losses have principally occurred as a result of the substantial resources required for the research,

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development and manufacturing start-up costs required to commercialize our initial products. We expect to continue to incur

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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.

Results of Operations

The following table presents selected items in the condensed consolidated statements of operations for the three and nine months ended September 30, ~~2015~~2016 and ~~2014,~~2015, respectively:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014			2016			2015			2016			2015
	(in thousands)						(in thousands)						(in thousands)						(in thousands)
Revenue:
Product	$	1,885		$	1,125		$	4,391		$	4,014		$	2,394		$	1,885		$	6,799		$	4,391
License and royalty	125			125			375			375			—			125			42			375
Total revenue	2,010			1,250			4,766			4,389			2,394			2,010			6,841			4,766
Cost of product revenue	848			374			1,938			1,739			1,124			848			3,377			1,938
Gross profit	1,162			876			2,828			2,650			1,270			1,162			3,464			2,828
Operating expenses:
Sales and marketing	1,425			962			3,890			3,599			1,737			1,425			5,342			3,890
Research and development	2,387			1,909			7,137			4,749			2,219			2,387			6,881			7,137
General and administrative	781			1,133			3,635			3,234			880			781			3,873			3,635
Total operating expenses	4,593			4,004			14,662			11,582			4,836			4,593			16,096			14,662
Operating loss	(3,431		)	(3,128		)	(11,834		)	(8,932		)	(3,566		)	(3,431		)	(12,632		)	(11,834		)
Other income and (expenses):
Interest expense, net	(113		)	(108		)	(326		)	(320		)	(117		)	(113		)	(337		)	(326		)
Gain on revaluation of warrant derivative liabilities, net	68			589			108			1,963			1			68			4			108
Loss on extinguishment of debt	—			(129		)	—			(129		)
Miscellaneous expense	—			(5		)	(49		)	(9		)
Miscellaneous income (expense)													7			—			10			(49		)
Total other income and (expenses)	(45		)	347			(267		)	1,505			(109		)	(45		)	(323		)	(267		)
Net loss before provision for income taxes	(3,476		)	(2,781		)	(12,101		)	(7,427		)	(3,675		)	(3,476		)	(12,955		)	(12,101		)
Provision for income taxes	—			—			2			3			(5		)	—			10			2
Net loss	$	(3,476	)	$	(2,781	)	$	(12,103	)	$	(7,430	)	$	(3,670	)	$	(3,476	)	$	(12,965	)	$	(12,103	)

Product Revenue

The following table presents our product revenue for the three and nine months ended September 30, ~~2015~~2016 and ~~2014,~~2015, respectively:


Three Months Ended September 30,	Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended September 30,					Nine Months Ended September 30,
2015		2014		% Change		2015		2014		% Change
2016												2016	2015		% Change		2016		2015		% Change
(dollars in thousands)	(dollars in thousands)					(dollars in thousands)						(dollars in thousands)					(dollars in thousands)
$	1,885	$	1,125	68	%	$	4,391	$	4,014	9	%	2,394	$	1,885	27	%	$	6,799	$	4,391	55	%

For the three months ended September 30, ~~2015,~~2016, product revenue increased by ~~$760,000,~~$509,000, or ~~68%~~27%, as compared to the three months ended September 30, ~~2014.~~2015. The increase is primarily due to ~~increases~~an increase in sales of SmartChip ~~capital equipment~~systems in the three months ended September 30, ~~2015,~~2016, with revenue of $925,000, up ~~121%~~62% from the comparable ~~2014~~2015 period, ~~and sales of our Real-Time PCR Chip panels and services, with revenue up 103% from the comparable 2014 period.~~mainly due to ICELL8 sales. SmartChip capital equipment represented ~~30%~~39% of our product revenue in the three months ended September 30, ~~2015,~~2016, compared to ~~23%~~only 30% in the ~~2014 period, and Real-Time PCR Chip~~2015 period. There was also an increase in sales of our SmartChip panels and services, which increased by 14% from the comparable 2015 period in dollar terms and represented 33% of revenue in the three months ended September 30, 2016, compared to 37% in the comparable 2015 period. Revenue from the Apollo Business increased by $57,000 from the comparable 2015 period due to an increase in sales of systems. The Apollo Business accounted for 28% of our product revenue in the three months ended September 30, ~~2015,~~2016, compared to ~~31%~~33% in the ~~2014~~comparable 2015 period.

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For the nine months ended September 30, 2016, product revenue increased by $2,408,000, or 55%, as compared to the nine months ended September 30, 2015. The increase is primarily due to an increase in sales of SmartChip systems in the nine months ended September 30, 2016, with revenue of $2,602,000, up 175% from the comparable 2015 period, mainly due to ICELL8 sales. SmartChip capital equipment represented 38% of our product revenue in the nine months ended September 30, 2016, compared to only 22% in the 2015 period. There was also an increase in sales of our SmartChip panels and services, which increased by 16% from the comparable 2015 period in dollar terms and represented 29% of revenue in the nine months ended September 30, 2016, compared to 38% in the comparable 2015 period. Revenue from the Apollo Business ~~also~~ increased ~~up 17%~~by $482,000 from the comparable ~~2014~~2015 period due to ~~an increase~~increases in sales of both capital equipment and consumables. The Apollo Business accounted for 33% of our product revenue in the ~~three months ended September 30, 2015, compared to 46% in the comparable 2014 period when overall revenue was lower.~~

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~~For the~~ nine months ended September 30, 2015, product revenue increased by $377,000, or 9%, as compared to the nine months ended September 30, 2014. The increase is primarily due to an increase in sales of our SmartChip Real-Time PCR Chip panels and services in the nine months ended September 30, 2015, with revenue up 103% from the comparable 2014 period, partially offset by a decrease in sales of SmartChip capital equipment, with revenue down 41% from the comparable 2014 period. SmartChip capital equipment represented 22% of our product revenue in the nine months ended September 30, 2015,2016, compared to 40% in the ~~2014 period, and Real-Time PCR Chip panels and services represented 38% of our product revenue in the nine months ended September 30,~~comparable 2015 compared to 21% in the 2014 period. Revenue from the Apollo Business also increased, up 12% from the comparable 2014 period, mainly due to an increase in capital equipment sales. The Apollo Business accounted for 40% of our product revenue in the nine months ended September 30, 2015, compared to 39% in the comparable 2014 period.

License and Royalty Revenue

The following table presents our license and royalty revenue for the three and nine months ended September 30, ~~2015~~2016 and ~~2014,~~2015, respectively:


Three Months Ended September 30,	Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended September 30,					Nine Months Ended September 30,
2015		2014		% Change		2015		2014		% Change
2016												2016	2015		% Change		2016		2015		% Change
(dollars in thousands)	(dollars in thousands)					(dollars in thousands)						(dollars in thousands)					(dollars in thousands)
$	125	$	125	—	%	$	375	$	375	—	%	—	$	125	(100	)%	$	42	$	375	(89	)%

~~For~~We had no license and royalty revenue in the three ~~and~~months ended September 30, 2016, as compared to $125,000 in the three months ended September 30, 2015. For the nine months ended September 30, ~~2015,~~2016, license and royalty revenue ~~was unchanged from~~decreased by $333,000, or 89%, as compared to the ~~three and~~ nine months ended September 30, ~~2014.~~2015. This revenue was generated by an agreement signed at the beginning of February 2013, ~~expected to generate~~which generated revenue of $500,000 annually for three ~~years.~~years until the agreement was terminated at the end of January 2016.

Cost of Product Revenue

The following table presents the cost of our product revenue for the three and nine months ended September 30, ~~2015~~2016 and ~~2014,~~2015, respectively:


Three Months Ended September 30,	Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended September 30,					Nine Months Ended September 30,
2015		2014		% Change		2015		2014		% Change
2016												2016	2015		% Change		2016		2015		% Change
(dollars in thousands)	(dollars in thousands)					(dollars in thousands)						(dollars in thousands)					(dollars in thousands)
$	848	$	374	127	%	$	1,938	$	1,739	11	%	1,124	$	848	33	%	$	3,377	$	1,938	74	%

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

For the three months ended September 30, ~~2015,~~2016, cost of product revenue increased by ~~$474,000,~~$276,000, or ~~127%~~33%, as compared to the three months ended September 30, ~~2014.~~2015. The increase related primarily to the increase in product revenue in the three months ended September 30, ~~2015, partially offset by~~2016, and also due to a decrease in ~~margins, primarily~~gross margin, which declined from 55% to 53%, mainly due to an increase from 33% to 48% in the ~~higher~~ percentage of revenue derived from sales of capital equipment, ~~sales,~~ which ~~afford~~affords lower ~~margins than sales of consumables.~~margins.

For the nine months ended September 30, ~~2015,~~2016, cost of product revenue increased by ~~$199,000,~~$1,439,000, or ~~11%~~74%, as compared to the nine months ended September 30, ~~2014.~~2015. The increase related primarily to the increase in product revenue in the nine months ended September 30, ~~2015.~~2016, and also due to a decrease in gross margin, which declined from 56% to 50%, mainly due to an increase from 33% to 52% in the percentage of revenue derived from sales of capital equipment, which affords lower margins.

Sales and Marketing

The following table presents our sales and marketing expenses for the three and nine months ended September 30, ~~2015~~2016 and ~~2014,~~2015, respectively:


Three Months Ended September 30,	Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended September 30,					Nine Months Ended September 30,
2015		2014		% Change		2015		2014		% Change
2016												2016	2015		% Change		2016		2015		% Change
(dollars in thousands)	(dollars in thousands)					(dollars in thousands)						(dollars in thousands)					(dollars in thousands)
$	1,425	$	962	48	%	$	3,890	$	3,599	8	%	1,737	$	1,425	22	%	$	5,342	$	3,890	37	%

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

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For the three months ended September 30, ~~2015,~~2016, sales and marketing expenses increased by ~~$463,000,~~$312,000, or ~~48%~~22%, as compared to the three months ended September 30, ~~2014.~~2015. This increase resulted primarily increases in personnel costs due to an increased headcount in the United States and higher commissions due to increased revenue, partially offset by a decrease in recruitment costs.

For the nine months ended September 30, 2016, sales and marketing expenses increased by $1,452,000, or 37%, as compared to the nine months ended September 30, 2015. This increase resulted primarily from increases in personnel costs due to an increased headcount in the United States, ~~where headcount is~~ higher ~~and~~costs in Europe, mostly due to the conclusion of a matching grant (a governmental subsidy under which 50% of eligible costs were reimbursed, which was fully depleted by March 31, 2015), higher commissions due to increased revenue, and an increase in facilities costs, primarily due to the ~~2015 period, and higher recruitment costs,~~expense of relocating our headquarters. These increases were partially offset by ~~a reduction~~reductions in ~~consulting~~recruitment costs, ~~as more activities have been performed in-house by the additional headcount.~~

~~For the nine months ended September 30, 2015, sales~~consultancy costs and marketing expenses increased by $291,000, or 8%, as compared to the nine months ended September 30, 2014. This increase resulted primarily from increases in personnel costs in the United States, where headcount is higher, and in Europe, mostly due to the depletion of the matching grant during the 2015 period, partially offset by a reduction in product marketingseverance costs.

We expect our sales and marketing expenses for the remainder of ~~2015~~2016 to remain at a similar level to that of the ~~third quarter.~~first nine months.

Research and Development

The following table presents our research and development expenses for the three and nine months ended September 30, ~~2015~~2016 and ~~2014,~~2015, respectively:


Three Months Ended September 30,	Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended September 30,					Nine Months Ended September 30,
2015		2014		% Change		2015		2014		% Change
2016												2016	2015		% Change		2016		2015		% Change
(dollars in thousands)	(dollars in thousands)					(dollars in thousands)						(dollars in thousands)					(dollars in thousands)
$	2,387	$	1,909	25	%	$	7,137	$	4,749	50	%	2,219	$	2,387	(7	)%	$	6,881	$	7,137	(4	)%

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 September 30, ~~2015,~~2016, research and development expenses ~~increased $478,000,~~decreased by $168,000, or ~~25%~~7%, as compared to the three months ended September 30, 2014. The increase resulted primarily from increased activities related to the development and commercialization of our single cell products, along with higher stock compensation and facilities costs, partially offset by a reduction in recruiting costs and in accrued performance bonuses, because the comparable charge in 2014 represented nine months' expense, as no performance bonuses had been projected as of June 30, 2014.

2015. For the nine months ended September 30, ~~2015,~~2016, research and development expenses ~~increased $2,388,000,~~decreased by $256,000, or ~~50%~~4%, as compared to the nine months ended September 30, ~~2014.~~2015. The ~~increase~~decrease in both the three- and nine-month periods ended September 30, 2016, as compared to the prior year periods, resulted primarily from ~~increased~~a reduction in activities related to the development and commercialization of our single cell products, causing us to incur higher personnel costs (including accrued performance bonuses and stock compensation costs) and facilities costs. This increase was partially offset by a reduction in activities related to the development of target enrichmentsingle-cell products which ~~are now established~~we launched into the market in ~~the market.~~October 2015.

We believe a substantial investment in research and development is essential in the long term to remain competitive and expand into additional markets. Accordingly, we expect our research and development expenses to remain at a high level relative to total expenditures for the foreseeable future. However, if revenues grow as forecast by management, research and development expenses should decrease as a percentage of revenues.

General and Administrative

The following table presents our general and administrative expenses for the three and nine months ended September 30, ~~2015~~2016 and ~~2014,~~2015, respectively:


Three Months Ended September 30,	Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended September 30,					Nine Months Ended September 30,
2015		2014		% Change		2015		2014		% Change
2016												2016	2015		% Change		2016		2015		% Change
(dollars in thousands)	(dollars in thousands)					(dollars in thousands)						(dollars in thousands)					(dollars in thousands)
$	781	$	1,133	(31	)%	$	3,635	$	3,234	12	%	880	$	781	13	%	$	3,873	$	3,635	7	%

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.

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For the three months ended September 30, ~~2015,~~2016, general and administrative expenses ~~decreased $352,000,~~increased by $99,000, or ~~31%~~13%, as compared to the three months ended September 30, ~~2014.~~2015. The ~~decrease~~increase resulted primarily from ~~reductions~~increases in consultancy costs, as the CFO and controller functions are no longer outsourced, accrued performance bonuses due to the comparable charge in 2014 representing nine months' expense because no performance bonuses had been projected as of June 30, 2014, and stock compensation expense ~~principally due to the reversal of expenses~~and legal and professional fees incurred related to the ~~elimination~~proposed merger contemplated by our Agreement and Plan of ~~the position of Chief Operating Officer.~~Merger dated May 12, 2016 (the “Merger Agreement”) with Takara Bio USA Holdings, Inc. (“Takara”) and certain other parties thereto, partially offset by a reduction in investor relations expense.

For the nine months ended September 30, ~~2015,~~2016, general and administrative expenses increased ~~$401,000,~~by $238,000, or ~~12%~~7%, as compared to the nine months ended September 30, ~~2014.~~2015. The increase resulted primarily from ~~an increase in personnel costs~~the substantial legal and professional fees incurred related to our Chief Financial Officer and former Chief Operating Officer, both hired late in August 2014, and the costs of our Executive Chairman following the hiring of our new Chief Executive Officer in May 2015. In addition, we incurred one-off costs in the 2015 period for the recruitment of our Chief Executive Officer and severance costs related to the elimination of the position of Chief Operating Officer. We also incurred higher investor relations costs, largely in conjunction with being Nasdaq-listed. These increases wereproposed merger, partially offset by ~~reductions~~decreases in consultancy costs, as the CFO and controller functions were outsourced for five months in the 2014 period, in professional fees, principally due to one-off costs in the 2014 period related to the IntegenX acquisition, and inseverance expense, stock compensation expense ~~mainly caused by a lower expense for options awarded to our former Chief Executive Officer per his employment contract.~~and recruitment costs.

Interest Expense, Net

The following table presents interest expense, net for the three and nine months ended September 30, ~~2015~~2016 and ~~2014,~~2015, respectively:


Three Months Ended September 30,	Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended September 30,					Nine Months Ended September 30,
2015		2014		% Change		2015		2014		% Change
2016												2016	2015		% Change		2016		2015		% Change
(dollars in thousands)	(dollars in thousands)					(dollars in thousands)						(dollars in thousands)					(dollars in thousands)
$	113	$	108	5	%	$	326	$	320	2	%	117	$	113	4	%	$	337	$	326	3	%

For the three months ended September 30, ~~2015,~~2016, interest expense increased ~~$5,000,~~by $4,000, or 5%4%, as compared to the three months ended September 30, ~~2014.~~2015. For the nine months ended September 30, ~~2015,~~2016, interest expense increased by ~~$6,000~~$11,000, or 3%, as compared to the nine months ended September 30, ~~2014.~~2015. The increase in both periods was due to the higher cost of debt discount amortization related to the ~~$5,200,000~~$5.2 million in long-term debt issued to Malaysian Technology Development Corporation Sdn. Bhd. (“MTDC”), an investor in WaferGen Biosystems (M) Sdn. Bhd. (“WGBM”), our now-dissolved Malaysian subsidiary (the “MTDC Notes”), which are being amortized using the effective yield method, which weights the interest charges towards the latter stages of the contractual term of the debt. Interest on the MTDC Notes is expected to be ~~approximately $370,000~~$439,000 in ~~2015,~~2016, rising each year up to $732,000 in 2019, the last full year before this debt matures. ~~There~~The increase in each period was ~~also an increase due~~partially offset by a decrease in interest expense related to ~~capital leases and~~ our earn-out contingency. ~~These increases were offset by the absence of the 8% interest and amortization charges on the IntegenX Note which we repaid in September 2014.~~

Gain on Revaluation of Warrant Derivative Liabilities, Net

The following table represents the gain on revaluation of warrant derivative liabilities, net for the three and nine months ended September 30, ~~2015~~2016 and ~~2014,~~2015, respectively:


Three Months Ended September 30,	Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended September 30,					Nine Months Ended September 30,
2015		2014		% Change		2015		2014		% Change
2016												2016	2015		% Change		2016		2015		% Change
(dollars in thousands)	(dollars in thousands)					(dollars in thousands)						(dollars in thousands)					(dollars in thousands)
$	68	$	589	(88	)%	$	108	$	1,963	(94	)%	1	$	68	(99	)%	$	4	$	108	(96	)%

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

The net gain from revaluation of warrant derivative liabilities for the three months ended September 30, ~~2015,~~2016, was ~~$68,000,~~$1,000, compared to a net gain of ~~$589,000~~$68,000 for the three months ended September 30, ~~2014.~~2015. The net gain from revaluation of warrant derivative liabilities for the nine months ended September 30, ~~2015,~~2016, was ~~$108,000,~~$4,000, compared to a net gain of ~~$1,963,000~~$108,000 for the nine months ended September 30, ~~2014.~~2015. Gains and losses are directly attributable to revaluations of our derivative liabilities and result primarily from a net decrease or increase, respectively, in our stock price in the period. Our closing stock price was $0.85 on September 30, 2016, compared to $0.82 on June 30, 2016 and $0.73 on December 31, 2015, and was $1.36 on September 30, 2015, compared to $3.15 on June 30, 2015 and $3.00 on December 31, ~~2014, and was $4.35 on September 30, 2014, compared to $12.50 on June 30, 2014 and $20.00 on December 31, 2013. In all four periods, the gain was caused principally~~

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by the decrease in our stock price. The impact of changes in parameters was significantly reduced in the 2015 periods as there were only 118,000 warrants accounted for as liabilities at the start of 2015, compared to 740,000 at the start of 2014. The related derivative liability as of September 30, ~~2015, was only $18,000,~~2016, had declined to a de minimis value, so we do not expect future gains and losses to be material.

~~Loss on Extinguishment~~

Table of ~~Debt~~Contents

Miscellaneous Income (Expense)

The following table presents ~~loss on extinguishment of debt~~miscellaneous income (expense) for the three and nine months ended September 30, ~~2015~~2016 and ~~2014,~~2015, respectively:

Three Months Ended September 30, Nine Months Ended September 30,
2015 2014 % Change 2015 2014 % Change
(dollars in thousands) (dollars in thousands)
$ —
$ 129
N/A $ —
$ 129
N/A

There was no loss on extinguishment of debt in the three or nine months ended September 30, 2015. Loss on extinguishment of debt in the three and nine months ended September 30, 2014, is a one-time non-cash charge recorded as a result of the early repayment on September 12, 2014, of a promissory note with a face value of $1.25 million that was issued to IntegenX in conjunction with our acquisition of the Apollo Business in January 2014. No comparable costs are expected in the near future, although if the MTDC Notes had been repaid or exchanged for shares of our common stock on September 30, 2015, we would have recorded a one-time non-cash charge of approximately $2.9 million.

~~Miscellaneous Expense~~

~~The following table presents miscellaneous expense for the three and nine months ended September 30, 2015 and 2014, respectively:~~


Three Months Ended September 30,	Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended September 30,				Nine Months Ended September 30,
2015		2014		% Change		2015		2014		% Change
2016												2016	2015		% Change	2016		2015			% Change
(dollars in thousands)	(dollars in thousands)					(dollars in thousands)						(dollars in thousands)				(dollars in thousands)
$	—	$	5	(100	)%	$	49	$	9	444	%	7	$	—	N/A	$	10	$	(49	)	N/A

For the three months ended September 30, ~~2015,~~2016, we recorded miscellaneous income of $7,000, compared to no ~~miscellaneous~~ income or expense ~~compared to an expense of $5,000~~ for the three months ended September 30, ~~2014.~~2015. For the nine months ended September 30, ~~2015,~~2016, we recorded miscellaneous income of $10,000, compared to expense of $49,000 ~~compared to an expense of $9,000~~ for the nine months ended September 30, ~~2014.~~2015. Miscellaneous income or expense is the result of net foreign currency exchange gains or losses which arise on our subsidiary in Luxembourg and on U.S. expenses denominated in foreign currencies. The principal reason for the ~~expense~~income in the nine months ended September 30, 2016, is net assets of $0.6 million being denominated in Euros, which increased in value against the U.S. dollar by 3% during the period, whereas in the nine months ended September 30, 2015, is net assets of ~~$400,000 being~~$0.4 million denominated in Euros ~~which decreased~~declined in value against the U.S. dollar by 8% during the period.

Provision for Income Taxes

The following table presents the provision for income taxes for the three and nine months ended September 30, ~~2015~~2016 and ~~2014,~~2015, respectively:


Three Months Ended September 30,	Three Months Ended September 30,				Nine Months Ended September 30,						Three Months Ended September 30,					Nine Months Ended September 30,
2015		2014		% Change	2015		2014		% Change
2016											2016		2015		% Change	2016		2015		% Change
(dollars in thousands)	(dollars in thousands)				(dollars in thousands)						(dollars in thousands)					(dollars in thousands)
$	—	$	—	N/A	$	2	$	3	(33	)%	(5	)	$	—	N/A	$	10	$	2	400	%

For the three months ended September 30, 2016, we reversed a charge of $5,000 for U.S. state income taxes. We recorded no income tax expense infor the three months ended September 30, ~~2015 or 2014.~~2015. For the nine months ended September 30, ~~2015~~2016 and ~~2014,~~2015, we recorded a charge of ~~$2,000~~$8,000 and ~~$3,000,~~$2,000, respectively, for U.S. state income taxes. We also recorded a charge of $2,000 for the nine months ended September 30, 2016, for foreign taxes. We have recorded a liability to the extent that our deferred tax liabilities arise from assets with indefinite lives and have provided a full valuation allowance against the remainder our net deferred tax assets.

Headcount

Our consolidated headcount as of November ~~10, 2015,~~9, 2016, comprised 5256 regular employees, 5155 of whom were employed full-time, compared to 4654 regular employees as of December 31, ~~2014, 45~~2015, 53 of whom were employed full-time.

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Liquidity and Capital Resources

As of September 30, ~~2015,~~2016, our principal source of liquidity was ~~$3.7~~$5.1 million in cash and cash equivalents. We had working capital of ~~$2.8~~$3.9 million. Our funding has primarily been generated by the issuance of equity securities, which includes ~~$18.0~~$15.7 million and ~~$13.4~~$18.0 million raised, net of offering costs, in ~~2014~~2015 and ~~2013,~~2014, respectively. We also had, as of September 30, ~~2015,~~2016, Notes with a principal amount of $5.2 million owing to MTDC, repayable in August 2020.

Net Cash Used in Operating Activities

We experienced negative cash flow from operating activities for the nine months ended September 30, ~~2015~~2016 and ~~2014,~~2015, in the amounts of $9,613,000 and $10,712,000, respectively. The cash used in operating activities in the nine months ended September 30, 2016, was due to cash used to fund a net loss of $12,965,000, adjusted for non-cash expenses related to depreciation and ~~$7,819,000, respectively.~~amortization, stock-based compensation, gain on revaluation of warrant derivative liabilities, allowance for doubtful accounts, inventory provision and amortization of debt discount totaling $2,361,000, and cash provided by a change in working capital of $991,000. The cash used in operating activities in the nine months ended September 30, 2015, was due to cash used to fund a net loss of $12,103,000, adjusted for non-cash expenses related to depreciation and amortization, stock-based compensation, gain on

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revaluation of warrant derivative liabilities, inventory provision and amortization of debt discount totaling $1,859,000, and cash used by a change in working capital of $468,000. The cash used in operating activities in the nine months ended September 30, 2014, was due to cash used to fund a net loss of $7,430,000, adjusted for non-cash expenses related to depreciation and amortization, stock-based compensation, gain on revaluation of warrant derivative liabilities, inventory provision, interest converted to principal on long-term debt, amortization of debt discount and loss on extinguishment of debt totaling $630,000, and cash provided by a change in working capital of $241,000.

Net Cash Used in Investing Activities

We used $299,000 and $146,000 in the nine months ended September 30, 2016 and 2015, respectively, to acquire property and ~~$215,000~~equipment.

Net Cash Used in Financing Activities

We used $135,000 and $108,000 in the nine months ended September 30, ~~2014, to acquire property~~2016 and 2015, respectively, in repayments on capital leases for equipment. ~~Further,~~We also used $42,000 and $94,000 in the nine months ended September 30, ~~2014, we used $2,000,000 to acquire the Apollo Business.~~

~~Net Cash Provided by Financing Activities~~

~~In the nine months ended September 30,~~2016 and 2015, ~~we used $108,000 in repayments on capital leases for equipment and $94,000~~respectively, to pay income taxes for restricted stock forfeited. Cash provided by financing activities in the nine months ended September 30, 2014, was $16,654,000, being $17,972,000 from the issuance of common stock and warrants in the 2014 Public Offering, offset by $1,318,000 used to repay the IntegenX Note.

Availability of Additional Funds

We believe funds available at September 30, ~~2015,~~2016, along with our revenue, ~~and cash received from the sale of our equity securities in October 2015,~~ are sufficient to fund our operations into 2017. To continue our operations thereafter, we may need to raise further capital, through the sale of additional securities or otherwise. Our operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. At the present time, we have no material commitments for capital expenditures. Our future capital requirements and the adequacy of our available funds will depend on many factors, most notably our ability to successfully commercialize our products and services.

We may need additional capital to maintain and expand our operations. WeExcept to the extent available pursuant to our Deposit Agreement dated May 12, 2016, with Takara, we have no commitments to obtain any additional funds and there can be no assurance that we will be able to raise sufficient additional capital as we need it on favorable terms, or at all. Additionally, our ability to raise additional capital is limited by the terms of the Merger Agreement. The conversion of our MTDC Notes, ~~and~~as well as the sale of equity or convertible debt securities in the future, may be dilutive to our stockholders, and debt financing arrangements may require us to pledge certain assets and enter into covenants that could restrict certain business activities or our ability to incur further indebtedness, and may contain other terms that are not favorable to us or our stockholders. If we are unable to obtain additional capital as needed we may not be able to continue our efforts to develop and commercialize our products and services and may be forced to significantly curtail or suspend our operations.

Principles of Consolidation

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

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Critical Accounting Policies and Estimates

Deferred Tax Valuation Allowance

We believe substantial uncertainties exist regarding the future realization of deferred tax assets and, accordingly, to the extent that it does not relate to a liability related to indefinite-lived assets, a full valuation allowance is required, amounting to approximately ~~$35,000,000~~$41 million at December 31, ~~2014.~~2015. 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~~net realizable 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, ICELL8s and dispensers and Apollo systems. We accrue for anticipated warranty costs upon shipment of these products. Our warranty reserve is based on management’s judgment regarding anticipated rates of warranty claims and associated repair costs, and we update our assessment quarterly.

Stock-Based Compensation

We measure the fair value of all stock option and restricted stock awards to employees on the grant date and record the fair value of these awards, net of estimated forfeitures, as compensation expense over the service period. The fair value of options is estimated using the Black-Scholes valuation model, and of restricted stock is based on our closing share price on the measurement date. Amounts expensed with respect to options (including the January 2016 Conditional Award) were ~~$659,000~~$387,000 and ~~$813,000,~~$659,000, net of estimated forfeitures, for the nine months ended September 30, ~~2015~~2016 and ~~2014,~~2015, respectively. These sums exclude the compensation expense for restricted stock awards, for which the fair value is based on our closing stock price on the grant date for directors and employees, and on the dates on which performance of services is recognized for consultants.

The weighted average grant date fair value of the options awarded in the nine months ended September 30, 2016 and 2015, ~~and 2014,~~measured on the date on which potential cash settlement provisions were eliminated, was estimated to be ~~$2.56~~$0.59 and ~~$6.33,~~$2.56, respectively, based on the following assumptions:


	Nine months ended September 30,				Nine Months Ended September 30,
	2015		2014		2016		2015
Risk-free interest rate	1.25% - 1.44%		1.43% - 1.57%		1.13% - 1.40%		1.25% - 1.44%
Expected remaining term	3.55 - 4.50 Years		4.75 Years		3.33 - 4.50 Years		3.55 - 4.50 Years
Expected volatility	106.11% - 119.36%		93.89% - 105.97%		105.05% - 111.44%		106.11% - 119.36%
Dividend yield	—	%	—	%	—	%	—	%

The grant date fair values of options are estimated using the following assumptions:

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

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

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

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

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

~~Warrant Derivative Liabilities~~

Our derivative liabilities arise due to the cash settlement provisions in certain warrants and unit warrants and (until the time of their expiry) the variable number of shares of our common stock that may have been issuable upon the exercise of those warrants with certain anti-dilution protection. We evaluate the liability for those warrants for which no anti-dilution adjustment is projected prior to the expiration date using the Black-Scholes valuation model, and all other derivatives using a Monte Carlo Simulation approach, using critical assumptions provided by management reflecting conditions at the valuation dates.

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

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

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

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

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.

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Recent Accounting Pronouncements

See the “Recent Accounting Pronouncements” in Note 2 to the Condensed Consolidated Financial Statements in Part I, Item 1 for information related to the issuance of new accounting standards in the first nine months of ~~2015,~~2016, none of which had a material impact on our condensed consolidated financial statements.

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Item 4. Controls and Procedures

Management’s Report on Internal Control over Financial Reporting

As of the end of the period covered by this Quarterly Report, our management performed, with the participation of our principal executive officer and principal financial officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the report we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures. Based on the evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, ~~2015,~~2016, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There was no material change in our internal control over financial reporting that occurred during the quarter ended September 30, ~~2015,~~2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this report,You should consider the risks and uncertainties ~~that we believe are most important for you to consider are discussed in~~described under Item 1A of Part I ~~“Item 1A. Risk Factors” in~~of our ~~most recent~~ Annual Report on Form ~~10-K. Other than~~10-K for the fiscal year ended December 31, 2015, which we filed with the Securities and Exchange Commission on March 25, 2016, together with all other information contained or incorporated by reference in this Quarterly Report on Form 10-Q when evaluating our business and our prospects. There are no material changes from the risk factors set forth ~~below, there have been no material changes to~~in Part I, Item 1A, in our Annual Report on Form 10-K for the ~~risk factors described in that report.~~year ended December 31, 2015.

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

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

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

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

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



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



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



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



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



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



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



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

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



	·	~~differing labor regulations;~~



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



	·	~~potential changes in or interpretations of tax laws;~~



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



	·	~~difficulty in enforcing agreements in foreign legal systems.~~

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

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

Since becoming listed on the Nasdaq Capital Market on August 22, 2014, we are required to comply with certain Nasdaq listing requirements, including, without limitation, with respect to our corporate governance, finances and stock price. If we fail to meet any of these requirements, our shares could be delisted. In particular, Nasdaq rules include a $1.00 minimum bid price requirement. In October 2015 our common stock traded at a price as high as $2.68 and as low as $0.80. In the period October 23 to November 3, 2015, our common stock closed trading below $1.00 for 8 consecutive business days before closing above $1.00 on November 4, 2015. As of November 10, 2015, our common stock had closed below $1.00 for 4 consecutive business days. If our common stock closes trading below $1.00 for a period of 30 consecutive business days, we expect the Listing Qualification Department of The Nasdaq Stock Market will send us a letter indicating that we are not in compliance with the minimum bid price requirement and, subject to various conditions, giving us a period of 180 days to regain compliance with minimum bid price requirement. If at any time during this 180 day period the closing bid price of our common stock is at least $1.00 for a minimum of ten consecutive business days, we will regain compliance, although there can be no assurance that we would be able to stay in compliance. We may not be able to qualify for an extension of the 180 day period to regain compliance. In order to avoid being delisted, we may be forced to attempt to implement a reverse stock split, which would require approval from our stockholders.

If our common stock were delisted from the Nasdaq Capital Market, it would likely lead to a number of negative implications, including an adverse effect on the price of our common stock, reduced liquidity in our common stock, the loss of federal preemption of state securities laws and greater difficulty in obtaining financing. In the event of a delisting, we would expect to take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements.

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~~Item 5. Other Information~~

On October 21, 2015, we completed a public offering (the “Public Offering”) of an aggregate of 6,170,000 shares of our common stock, 17,250,000 warrants to purchase shares of our common stock (“Public Warrants”) and 1,108 shares of our Series 2 Convertible Preferred Stock, par value $0.001 per share (“Series 2 Shares”) (inclusive of 2,250,000 shares of our common stock and 2,250,000 Public Warrants from the full exercise of the overallotment option granted to the underwriters). The Public Warrants were issued under a warrant agreement by and between us and Continental Stock Transfer & Trust Company. Subject to certain ownership limitations and subject to adjustment in certain circumstances, each of the Series 2 Shares is convertible at any time into 10,000 shares of common stock. Subject to certain ownership limitations and subject to adjustment in certain circumstances, the Public Warrants are exercisable at any time within five years of their issuance date at an exercise price of $1.44 per share.

As part of the consideration to the underwriters for the Public Offering, we issued to Ladenburg Thalmann & Co., Inc., Chardan Capital Markets, LLC and Dougherty & Company, the underwriters for such offering, an aggregate of 450,000 warrants to purchase shares of our common stock, at an exercise price equal to $1.44 per share on or before October 21, 2018 (“Underwriter Warrants”). The exercise price and number of shares issuable upon exercise of the Underwriter Warrants are subject to adjustment in certain circumstances. The Underwriter Warrants were granted pursuant to Section 4(a)(2) of the Securities Act of 1933.

We did not receive any proceeds from the issuance of the Underwriter Warrants. However, from the Public Offering we received gross proceeds of $17.25 million and, after deducting underwriting discounts and commissions and estimated offering expenses, estimated net proceeds of $15.7 million. We intend to use the net proceeds from the Public Offering for research and development and commercialization activities for our single cell products, for sales and marketing activities and for general corporate and working capital purposes.

Item 6. Exhibits

The exhibits required to be filed as a part of this report are listed in the Exhibit Index.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		WAFERGEN BIO-SYSTEMS, INC.

Dated:	November ~~12, 2015~~10, 2016

		By: /s/ MICHAEL P. HENIGHAN
		Michael P. Henighan
		Chief Financial Officer
		(principal financial and accounting officer)

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EXHIBIT INDEX



Exhibit
No.		Description

~~3.1~~		~~Amended and Restated Articles of Incorporation of the Company, as such articles have been amended, restated, supplemented or otherwise modified~~

~~4.1~~		~~Form of Warrant to purchase shares of Common Stock of the Company, issued October 21, 2015, to underwriters in the Company’s October 2015 public offering~~

~~4.2~~		Warrant Agreement dated October 21, 2015, by and between the Company and Continental Stock Transfer & Trust Company, relating to warrants to purchase shares of Common Stock of the Company issued to investors in the Company’s October 2015 public offering

31.1		Rule 13a-14(a)/15d-15(e) Certification of principal executive officer

31.2		Rule 13a-14(a)/15d-15(e) Certification of principal financial officer

32.1		Section 1350 Certification of principal executive officer

32.2		Section 1350 Certification of principal financial officer

101 §		The following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, ~~2015,~~2016, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets at September 30, ~~2015~~2016 and December 31, ~~2014,~~2015, (ii) the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, ~~2015~~2016 and ~~2014,~~2015, (iii) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2015~~2016 and ~~2014,~~2015, and (iv) Notes to the Condensed Consolidated Financial Statements.

__________



§		Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.

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				Page
Part I	FINANCIAL INFORMATION

		Item 1.	Financial Statements (Unaudited)	1

			Condensed Consolidated Balance Sheets	1

			Condensed Consolidated Statements of Operations	2

			Condensed Consolidated Statements of Cash Flows	3

			Notes to the Condensed Consolidated Financial Statements	4

		Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1615

		Item 4.	Controls and Procedures	2523


Part II	OTHER INFORMATION

		Item 1.	Legal Proceedings	2624

		Item 1A.	Risk Factors	26

		~~Item 5.~~	~~Other Information~~	2824

		Item 6.	Exhibits	2824

SIGNATURES				2925

EXHIBIT INDEX				3026