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 June 30, 2008
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 333-136424
WaferGen Bio-systems, Inc.
(Exact name of Registrant as specified in its charter)
Nevada | 20-3699764 | |||
(State of incorporation) | (I.R.S. Employer Identification Number) | |||
Bayside Technology Center
46531 Fremont Blvd.
Fremont, CA 94538
(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 o
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 o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
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 has 24,830,932 shares of common stock outstanding as of August 12, 2008.
Page | |||||||
Part I | FINANCIAL INFORMATION | ||||||
Item 1. | Financial Statements. | 1 | |||||
Condensed Consolidated Balance Sheets (Unaudited) | 1 | ||||||
Condensed Consolidated Statements of Operations (Unaudited) | 2 | ||||||
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) | 3 | ||||||
Condensed Consolidated Statements of Cash Flows (Unaudited) | 10 | ||||||
Notes to Condensed Consolidated Financial Statements (Unaudited) | 11 | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 28 | |||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | 37 | |||||
Item 4. | Controls and Procedures. | 37 | |||||
Part II | OTHER INFORMATION | 39 | |||||
Item 1. | Legal Proceedings. | 39 | |||||
Item 1A. | Risk Factors | 39 | |||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 51 | |||||
Item 3. | Defaults Upon Senior Securities. | 52 | |||||
Item 4. | Submission of Matters to a Vote of Security Holders. | 52 | |||||
Item 5. | Other Information. | 52 | |||||
Item 6. | Exhibits. | 52 | |||||
SIGNATURES | 53 | ||||||
EXHIBIT INDEX | 54 | ||||||
PART I FINANCIAL INFORMATION
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 4,257,597 | $ | 5,189,858 | ||||
Accounts receivables | 241,620 | 139,827 | ||||||
Inventories | 129,300 | 62,521 | ||||||
Prepaid expenses and other current assets | 100,375 | 87,487 | ||||||
Total current assets | 4,728,892 | 5,479,693 | ||||||
Property and equipment, net | 829,355 | 321,159 | ||||||
Other assets | 12,788 | 54,016 | ||||||
Total assets | $ | 5,571,035 | $ | 5,854,868 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 643,233 | $ | 560,641 | ||||
Accrued rent | 30,508 | 19,340 | ||||||
Accrued payroll | 159,576 | 414,519 | ||||||
Accrued vacation | 186,554 | 156,234 | ||||||
Accrued other expenses | 123,684 | — | ||||||
Current portion of capital lease obligations | 72,472 | 32,443 | ||||||
Total current liabilities | 1,216,027 | 1,183,177 | ||||||
Capital lease obligations, net of current portion | 84,423 | 73,451 | ||||||
Commitment and contingencies | — | — | ||||||
Stockholders’ equity : | ||||||||
Preferred Stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding | — | — | ||||||
Common Stock: $0.001 par value; 300,000,000 shares authorized; 24,830,932 shares issued and outstanding at June 30, 2008 and December 31, 2007 | 24,831 | 23,218 | ||||||
Additional paid-in capital | 20,228,253 | 16,527,929 | ||||||
Accumulated deficit | (15,988,415 | ) | (11,952,907 | ) | ||||
Accumulated other comprehensive income | 5,916 | — | ||||||
Total stockholders’ equity | 4,270,585 | 4,598,240 | ||||||
Total liabilities and stockholders’ equity | $ | 5,571,035 | $ | 5,854,868 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Three Months Ended | Six Months Ended | Period From October 22, 2002 (Inception) to | ||||||||||||||||||
June 30, | June 30, | June 30, | ||||||||||||||||||
2008 | 2007 | 2008 | 2007 | 2008 | ||||||||||||||||
Revenues | $ | 176,851 | $ | 300 | $ | 358,491 | $ | 60,760 | $ | 652,759 | ||||||||||
Cost of sales | 57,048 | — | 132,065 | 21,774 | 232,931 | |||||||||||||||
Gross margin | 119,803 | 300 | 226,426 | 38,986 | 419,828 | |||||||||||||||
Operating expenses: | ||||||||||||||||||||
Sales and marketing | 295,506 | 137,788 | 680,680 | 289,970 | 1,681,903 | |||||||||||||||
Research and development | 1,345,621 | 361,948 | 2,298,062 | 761,706 | 8,366,190 | |||||||||||||||
General and administrative | 633,764 | 384,495 | 1,322,807 | 809,156 | 6,109,781 | |||||||||||||||
Total operating expenses | 2,274,891 | 884,231 | 4,301,549 | 1,860,832 | 16,157,874 | |||||||||||||||
Operating loss | (2,155,088 | ) | (883,931 | ) | (4,075,123 | ) | (1,821,846 | ) | (15,738,046 | ) | ||||||||||
Other income and (expenses): | ||||||||||||||||||||
Interest income | 18,064 | 15,781 | 49,781 | 15,781 | 212,828 | |||||||||||||||
Interest expense | (3,252 | ) | (143,724 | ) | (7,225 | ) | (186,526 | ) | (304,258 | ) | ||||||||||
Miscellaneous expense | (2,941 | ) | — | (2,941 | ) | — | (2,941 | ) | ||||||||||||
Total other income and (expenses) | 11,871 | (127,943 | ) | 39,615 | (170,745 | ) | (94,371 | ) | ||||||||||||
Net loss before provision for income taxes | (2,143,217 | ) | (1,011,874 | ) | (4,035,508 | ) | (1,992,591 | ) | (15,832,417 | ) | ||||||||||
Provision for income taxes | — | — | — | — | — | |||||||||||||||
Net loss | (2,143,217 | ) | (1,011,874 | ) | (4,035,508 | ) | (1,992,591 | ) | (15,832,417 | ) | ||||||||||
Accretion on Series B Preferred Stock | — | (20,799 | ) | — | (51,998 | ) | (155,998 | ) | ||||||||||||
Net loss applicable to common stockholders | $ | (2,143,217 | ) | $ | (1,032,673 | ) | $ | (4,035,508 | ) | $ | (2,044,589 | ) | $ | (15,988,415 | ) | |||||
Net loss per share - basic and diluted | $ | (0.09 | ) | $ | (0.10 | ) | $ | (0.17 | ) | $ | (0.30 | ) | ||||||||
Shares used to compute net loss per share - basic and diluted | 23,965,978 | 10,107,941 | 23,591,912 | 6,886,433 | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
(A Development Stage Company)
Series B | Series A | Additional | ||||||||||||||||||||||||
Preferred Stock | Preferred Stock | Common Stock | Paid-in | Accumulated | ||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||
Balances as of October 22, 2002 | — | $ | — | — | $ | — | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
Net loss | — | — | — | — | — | — | — | — | — | |||||||||||||||||
Balances as of December 31, 2002 | — | $ | — | — | $ | — | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Series B Preferred Stock and Stockholders’ Equity (Deficit) (Unaudited)
Series B | Series A | Additional | ||||||||||||||||||||||||
Preferred Stock | Preferred Stock | Common Stock | Paid-in | Accumulated | ||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||
Balances as of January 1, 2003 | — | $ | — | — | $ | — | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
Net loss | — | — | — | — | — | — | — | (533,985) | (533,985) | |||||||||||||||||
Balances as of December 31, 2003 | — | $ | — | — | $ | — | — | $ | — | $ | — | $ | (533,985) | $ | (533,985) | |||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company
Condensed Consolidated Statements of Series B Preferred Stock and Stockholders’ Equity (Deficit) (Unaudited)
Series B | Series A | Additional | ||||||||||||||||||||||||
Preferred Stock | Preferred Stock | Common Stock | Paid-in | Accumulated | ||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||
Balances as of January 1, 2004 | — | $ | — | — | $ | — | — | $ | — | $ | — | $ | (533,985) | $ | (533,985) | |||||||||||
Issuance of Common Stock in June for cash | — | — | — | — | 2,483,610 | 2,484 | (2,024) | — | 460 | |||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | 1,242 | — | 1,242 | |||||||||||||||||
Net loss | — | — | — | — | — | — | — | (1,124,360) | (1,124,360) | |||||||||||||||||
Balances as of December 31, 2004 | — | $ | — | — | $ | — | 2,483,610 | $ | 2,484 | $ | (782) | $ | (1,658,345) | $ | (1,656,643) | |||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Series B Preferred Stock and Stockholders’ Equity (Deficit) (Unaudited)
Series B | Series A | Additional | ||||||||||||||||||||||||
Preferred Stock | Preferred Stock | Common Stock | Paid-in | Accumulated | ||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||
Balances as of January 1, 2005 | — | $ | — | — | $ | — | 2,483,610 | $ | 2,484 | $ | (782) | $ | (1,658,345) | $ | (1,656,643) | |||||||||||
Issuance of Series A Preferred Stock in February | ||||||||||||||||||||||||||
upon conversion of notes payable and accrued interest | — | — | 5,915,219 | 592 | — | — | 3,134,481 | — | 3,135,073 | |||||||||||||||||
Issuance of Common Stock in September for cash | — | — | — | — | 917,856 | 918 | (748) | — | 170 | |||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | 8,575 | — | 8,575 | |||||||||||||||||
Net loss | — | — | — | — | — | — | — | (1,494,449) | (1,494,449) | |||||||||||||||||
Balances as of December 31, 2005 | — | $ | — | 5,915,219 | $ | 592 | 3,401,466 | $ | 3,402 | $ | 3,141,526 | $ | (3,152,794) | $ | (7,274) | |||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Series B Preferred Stock and Stockholders’ Equity (Deficit) (Unaudited)
Series B | Series A | Additional | ||||||||||||||||||||||||
Preferred Stock | Preferred Stock | Common Stock | Paid-in | Accumulated | ||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||
Balances as January 1, 2006 | — | $ | — | 5,915,219 | $ | 592 | 3,401,466 | $ | 3,402 | $ | 3,141,526 | $ | (3,152,794) | $ | (7,274) | |||||||||||
Issuance of Common Stock in January for cash | — | — | — | — | 4,049 | 4 | (3) | — | 1 | |||||||||||||||||
Issuance of Series B Preferred Stock in February for cash | 2,052,552 | 1,559,942 | — | — | — | — | — | — | — | |||||||||||||||||
Issuance of restricted shares in March for services | — | — | — | — | 24,296 | 24 | (24) | — | — | |||||||||||||||||
Issuance of Common Stock in June for cash | — | — | — | — | 8,099 | 8 | (7) | — | 1 | |||||||||||||||||
Issuance of restricted shares in July for services | — | — | — | — | 10,798 | 11 | (11) | — | — | |||||||||||||||||
Issuance of restricted shares in August for services | — | — | — | — | 16,197 | 16 | (16) | — | — | |||||||||||||||||
Issuance of Common Stock in August for cash | — | — | — | — | 17,007 | 17 | (14) | — | 3 | |||||||||||||||||
Accretions on Series B Preferred Stock | — | 104,000 | — | — | — | — | — | (104,000) | (104,000) | |||||||||||||||||
Issuance of restricted shares in November for services | — | — | — | — | 5,399 | 5 | (5) | — | — | |||||||||||||||||
Issuance of Common Stock in November for cash | — | — | — | — | 8,639 | 9 | (7) | — | 2 | |||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | 642,076 | — | 642,076 | |||||||||||||||||
Net loss | — | — | — | — | — | — | — | (2,686,451) | (2,686,451) | |||||||||||||||||
Balances as of December 31, 2006 | 2,052,552 | $ | 1,663,942 | 5,915,219 | $ | 592 | 3,495,950 | $ | 3,496 | $ | 3,783,515 | $ | (5,943,245) | $ | (2,155,642) | |||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Series B Preferred Stock and Stockholders’ Equity (Unaudited)
Series B | Series A | Additional | ||||||||||||||||||||||||
Preferred Stock | Preferred Stock | Common Stock | Paid-in | Accumulated | ||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||
Balances as January 1, 2007 | 2,052,552 | $ | 1,663,942 | 5,915,219 | $ | 592 | 3,495,950 | $ | 3,496 | $ | 3,783,515 | $ | (5,943,245) | $ | (2,155,642) | |||||||||||
Issuance of Common Stock in January for cash | — | — | — | — | 26,996 | 27 | 473 | — | 500 | |||||||||||||||||
Issuance of restricted shares in January for services | — | — | — | — | 134,979 | 135 | (135) | — | — | |||||||||||||||||
Issuance of Series A Preferred Stock in February for cash | — | — | 471,698 | 47 | — | — | 65,990 | — | 66,037 | |||||||||||||||||
Issuance of WaferGen Bio-systems, Inc. Common Stock to | ||||||||||||||||||||||||||
Wafergen, Inc.'s Preferred shareholders in May | (2,052,552) | (1,715,940) | (6,386,917) | (639) | 4,556,598 | 4,557 | 1,712,022 | — | 1,715,940 | |||||||||||||||||
Issuance of Units for cash and notes payable in May and June, | ||||||||||||||||||||||||||
net of offering costs of $1,917,956 | — | — | — | — | 8,008,448 | 8,008 | 10,086,704 | — | 10,094,712 | |||||||||||||||||
WaferGen Bio-systems, Inc. shares outstanding | — | — | — | — | 11,277,782 | 11,278 | (11,278) | — | — | |||||||||||||||||
Common Stock cancelled in May in accordance with Split-Off | ||||||||||||||||||||||||||
Agreement | — | — | — | — | (4,277,778) | (4,278) | 4,278 | — | — | |||||||||||||||||
Issuance of warrants in May and June to a placement agent | — | — | — | — | — | — | 66,319 | — | 66,319 | |||||||||||||||||
Issuance of warrants with debt in January, February, and March | — | — | — | — | — | — | 171,053 | — | 171,053 | |||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | 648,988 | — | 648,988 | |||||||||||||||||
Accretions on Series B Preferred Stock | — | 51,998 | — | — | — | — | — | (51,998) | (51,998) | |||||||||||||||||
Common Stock cancelled in July | — | — | — | — | (5,129) | (5) | — | — | (5) | |||||||||||||||||
Net loss | — | — | — | — | — | — | — | (5,957,664) | (5,957,664) | |||||||||||||||||
Balance as of December 31, 2007 | — | $ | — | — | $ | — | $ | 23,217,846 | $ | 23,218 | $ | 16,527,929 | $ | (11,952,907) | $ | 4,598,240 | ||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
Accumulative | |||||||||||||||||||||||||
Additional | Other | ||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | |||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Income | Total | ||||||||||||||||||
Balances as of January 1, 2008 | — | $ | — | 23,217,846 | $ | 23,218 | $ | 16,527,929 | $ | (11,952,907) | $ | — | $ | 4,598,240 | |||||||||||
Issuance of Units for cash in May , net of offering costs of $88,748 | — | — | 1,585,550 | 1,586 | 3,477,159 | — | — | 3,478,745 | |||||||||||||||||
Issuance of Common Stock in May 2008 for cash | — | — | 27,536 | 27 | 4,052 | — | — | 4,079 | |||||||||||||||||
Stock-based compensation | — | — | — | — | 219,113 | — | — | 219,113 | |||||||||||||||||
Net loss | — | — | — | — | — | (4,035,508) | — | (4,035,508) | |||||||||||||||||
Translation adjustment | — | — | — | — | — | — | 5,916 | 5,916 | |||||||||||||||||
Comprehensive Income | — | — | — | — | — | (4,035,508) | 5,916 | (4,029,592) | |||||||||||||||||
Balances as of June 30, 2008 | — | $ | — | 24,830,932 | $ | 24,831 | $ | 20,228,253 | $ | (15,988,415) | $ | 5,916 | $ | 4,270,585 | |||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
9
(A Development Stage Company)
Six Months Ended | Period From October 22, 2002 (Inception) to | |||||||||||
June 30, | June 30, | |||||||||||
2008 | 2007 | 2008 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net loss | $ | (4,035,508 | ) | $ | (1,992,591 | ) | $ | (15,832,417 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
Depreciation and amortization | 124,799 | 13,769 | 251,098 | |||||||||
Non cash miscellaneous income | — | — | (5 | ) | ||||||||
Stock-based compensation | 219,113 | 169,752 | 1,519,994 | |||||||||
Issuance of Series A Preferred Stock for legal services | — | — | 50,000 | |||||||||
Issuance of Series A Preferred Stock for interest owed | — | — | 107,494 | |||||||||
Amortization of debt discount | — | 171,053 | 171,053 | |||||||||
Change in operating assets and liabilities: | ||||||||||||
Accounts receivable | (101,793 | ) | (507 | ) | (241,620 | ) | ||||||
Inventories | (66,779 | ) | (45,870 | ) | (129,300 | ) | ||||||
Prepaid expenses and other current assets | (12,888 | ) | (1,035,917 | ) | (100,375 | ) | ||||||
Other assets | (10,237 | ) | — | (12,807 | ) | |||||||
Accounts payable | 82,592 | 557,097 | 643,233 | |||||||||
Accrued rent | 11,328 | — | 30,668 | |||||||||
Accrued payroll | (254,943 | ) | (529 | ) | 159,576 | |||||||
Accrued vacation | 30,320 | 98,132 | 186,554 | |||||||||
Accrued other | 123,752 | 4,835 | 123,752 | |||||||||
Net cash used in operating activities | (3,890,244 | ) | (2,060,776 | ) | (13,073,102 | ) | ||||||
Cash flows from investing activities: | ||||||||||||
Refund of deposit on property and equipment | 51,446 | — | — | |||||||||
Purchase of property and equipment | (512,280 | ) | (36,621 | ) | (834,962 | ) | ||||||
Net cash used in investing activities | (460,834 | ) | (36,621 | ) | (834,962 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Advances from (repayments to) related party, net | — | 21,999 | 61,588 | |||||||||
Repayment of capital lease obligations | (69,649 | ) | — | (88,531 | ) | |||||||
Proceeds from issuance of notes payable | — | 688,412 | 3,665,991 | |||||||||
Repayments on notes payable | — | (510,000 | ) | (510,000 | ) | |||||||
Proceeds from issuance of Series A Preferred Stock | — | 66,037 | 66,037 | |||||||||
Proceeds from issuance of Series B Preferred Stock | — | — | 1,559,942 | |||||||||
Proceeds from issuance of Common Stock, net of offering costs | 3,482,824 | 9,921,531 | 13,404,992 | |||||||||
Net cash provided by financing activities | 3,413,175 | 10,187,979 | 18,160,019 | |||||||||
Effect of exchange rates on cash | 5,642 | — | 5,642 | |||||||||
Net increase (decrease) in cash and cash equivalents | (932,261 | ) | 8,090,582 | 4,257,597 | ||||||||
Cash and cash equivalents at beginning of the period | 5,189,858 | 36,158 | — | |||||||||
Cash and cash equivalents at end of the period | $ | 4,257,597 | $ | 8,126,740 | $ | 4,257,597 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
10
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
1. | The Company |
General - Wafergen, Inc. was incorporated in the State of Delaware on October 22, 2002.
Scuttlebutt Yachts, Inc. was incorporated in the state of Nevada on August 4, 2005. On June 20, 2006 the name was changed to La Burbuja Café, Inc. On January 1, 2007 the name was changed to WaferGen Bio-systems, Inc.
On January 24, 2008, the Company formed a new subsidiary in Kulim Hi- Tech Park, Kedah, Malaysia. The subsidiary, WaferGen Biosystem (M) Sdn. Bhd., will launch various initiatives to support a number of the Company’s ongoing development and commercialization goals.
Merger - On May 31, 2007, Wafergen, Inc. was acquired by WaferGen Bio-systems, Inc. In the transaction, Wafergen, Inc. merged with a subsidiary of WaferGen Bio-systems, Inc. and became a wholly-owned subsidiary of WaferGen Bio-systems, Inc. (the “Merger”). The officers and board members of WaferGen Bio-systems, Inc. resigned and were replaced by officers of Wafergen, Inc. along with newly elected board members.
Concurrent with the closing of the Merger, WaferGen Bio-systems, Inc. consummated a private offering (the “Offering”) of 7,178,444 units of its securities (the “Units”), at a purchase price of $1.50 per Unit, consisting of an aggregate of 7,178,447 shares of common stock and warrants to purchase an aggregate of an additional 2,153,533 share of common stock for a period of five years at an exercise price of $2.25 per share (the “Investor Warrants”), which Investor Warrants are callable by the Company under certain circumstances.
On June 12, 2007, WaferGen Bio-systems, Inc. sold an additional 830,000 units consisting of an aggregate of 830,000 shares of common stock and warrants to purchase an aggregate of 249,000 shares of common stock.
Wafergen, Inc. issued notes payable to a stockholder, our Chief Executive Officer, in the aggregate amount of $750,000. Rather than accepting cash consideration for Units acquired by the same individual, the Company agreed to issue at the first closing 160,000 Units at a rate of one Unit for each $1.50 of debt in consideration of his cancellation of $240,000 of existing notes payable.
11
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
A summary is as follows:
Gross proceeds from initial offering | $ | 10,767,668 | ||
Gross proceeds from additional offering | 1,245,000 | |||
Gross proceeds | 12,012,668 | |||
Offering costs: | ||||
Paid | (1,851,637 | ) | ||
Issuance of warrants to placement agent | (66,319 | ) | ||
Total offering costs | (1,917,956 | ) | ||
Gross proceeds less offering costs | 10,094,712 | |||
Issuance of warrants to placement agent | 66,319 | |||
Cancellation of debt | (240,000 | ) | ||
Net proceeds | $ | 9,921,031 | ||
The exercise price and number of shares of our common stock issuable on exercise of the warrants may be adjusted in certain circumstances, including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. These warrants also provide the holders with weighted-average anti-dilution price protection.
The warrants, at the option of the holder, may be exercised by cash payment of the exercise price or by “cashless exercise.” A “cashless exercise” means that in lieu of paying the aggregate purchase price for the shares being purchased upon exercise of the warrants in cash, the holder will forfeit a number of shares underlying the warrants with a “fair market value” equal to such aggregate exercise price. WaferGen Bio-systems, Inc. will not receive additional proceeds to the extent that warrants are exercised by cashless exercise.
Contemporaneously with the closing of the Merger, WaferGen Bio-systems, Inc. executed a Split-Off Agreement with certain shareholders whereby all the assets and liabilities of WaferGen Bio-systems, Inc. just prior to the Merger were exchanged for 4,277,778 shares of common stock of WaferGen Bio-systems, Inc. In addition, Wafergen, Inc. Series A Preferred Stock, Series B Preferred Stock, and common stock was converted into common stock of Wafergen Bio-systems, Inc. based on an exchange ratio of .53991522 for 1.
12
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
A summary of the common stock outstanding of WaferGen Bio-systems, Inc. subsequent to the above is as follows:
WaferGen Bio-systems, Inc. shares outstanding prior to the Merger | 11,277,782 | |||
Shares issued to Wafergen, Inc. shareholders | 8,214,523 | |||
Shares issued in the Offering | 8,008,448 | |||
Shares cancelled in accordance with the Split-off Agreement | (4,277,778 | ) | ||
Total shares outstanding | 23,222,975 | |||
WaferGen Bio-systems, Inc. also assumed all outstanding Wafergen, Inc.’s stock options and warrants with proportionate adjustments to the number of underlying shares and exercise prices based on an exchange ratio of .53991522 for 1.
The transaction between WaferGen Bio-systems, Inc. and Wafergen, Inc. has been treated as a reverse merger and recapitalization of Wafergen, Inc. for reporting purposes. Wafergen, Inc. is the acquirer for accounting purposes. WaferGen Bio-systems, Inc. is the issuer. The historical financial statements for periods prior to the acquisition become those of the acquirer. In a recapitalization, historical stockholders' equity of the acquirer prior to the merger is retroactively restated for the equivalent number of shares received in the merger after giving effect to any difference in par value of the issuer's and acquirer's stock with an offset to additional paid-in capital. Accumulated deficit of the acquirer is carried forward after the acquisition. Operations prior to the merger are those of the accounting acquirer. Earnings per share for the periods prior to the merger are restated to reflect the equivalent number of shares outstanding.
WaferGen Bio-systems, Inc. and subsidiaries (the “Company”) is engaged in the development, manufacture and sales of systems for gene expression, genotyping and stem cell research for the life sciences, pharmaceutical drug discovery and biomarker discovery and diagnostic products industries. The Company’s products are aimed at professionals 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. Through the SmartChip™ and SmartSlide™ products, the Company plans to provide new performance standards with significant savings of time and cost for professionals in the field of gene expression research facilitating biomarker discovery, toxicology, and clinical research.
13
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Management’s Plan - The Company has incurred operating losses and negative cash flows from operations since its inception. Management expects that revenues will increase as a result of current and future product releases. However, the Company also expects to incur additional expenses for the development and expansion of its products, marketing campaigns, and operating costs as it expands its operations. Therefore, the Company expects operating losses and negative cash flows to continue for the foreseeable future and anticipates that losses will increase from current levels as the Company continues to grow and develop. It is management’s plan to obtain additional working capital through additional financings. The Company believes that it will be successful in expanding operations, gaining market share, and raising additional funds. However, there can be no assurance that in the event the Company requires additional financing, such financing will be available at terms which are favorable, or at all. Failure to generate sufficient cash flows from operations or raise additional capital could have a material adverse effect on the Company's ability to achieve its intended business objectives. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
2. | Summary of Significant Accounting Policies |
Basis of Presentation - The Company has prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to these rules and regulations. These condensed consolidated financial statements should be read in conjunction with our audited financial statements and footnotes related thereto for the year ended December 31, 2007 included in our Form 10-KSB/A 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 financial statements include the account of WaferGen Bio-systems, Inc. and its subsidiaries. Intercompany transactions and balances have been eliminated.
Use of Estimates - Preparing 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.
14
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Foreign Currencies - Assets and liabilities are recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and expense are translated at the average rates of exchange prevailing during the year. Translation adjustments resulting from this process are charged or credited to other comprehensive income.
Reclassification - Certain financial statement reclassifications have been made to prior period amounts to conform to the current period presentation.
Stock-Based Compensation - The Company measures the fair value of all stock-based awards, including stock options, on the grant date and records the fair value of these awards to compensation expense over the service period. The fair value is estimated using the Black-Scholes valuation model.
The fair value of each option grant has been estimated using the following assumptions:
June 30, | June 30, | |||||||
2008 | 2007 | |||||||
Weighted-average grant date fair value | $ | 0.46 | $ | 0.37 | ||||
Risk free interest rate | 2.90%-3.34 | % | 4.85 | % | ||||
Expected lives | 5 Years | 5 Years | ||||||
Expected volatility | 18.81%-18.91 | % | 20.00 | % | ||||
Dividend yields | 0 | % | 0 | % | ||||
Risk-free interest rate - This is the U.S treasury rate for the day of the grant having a term approximating the expected life of the option. An increase in the risk-free interest rate will increase the fair value and the related compensation expense.
Expected lives - 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 term, the contractual term, and the historical lives. An increase in the expected life will increase the fair value and the related compensation expense.
Expected volatility - This is a measure of the amount by which the stock price has fluctuated or is expected to fluctuate. The average daily price volatility of the Small Cap Medical Equipment was used for the retrospective period corresponding to the expected life. An increase in the expected volatility will increase the fair value and the related compensation expense.
Dividend yield - The Company has not made any dividend payments nor does it have plans to pay dividends in the foreseeable future. An increase in the dividend yield will decrease the fair value and the related compensation expense.
15
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Loss Per Share– Basic net loss per share to common stockholders is calculated based on the weighted-average number of shares of common stock outstanding during the period, excluding those shares that are subject to repurchase by or forfeiture to the Company. Diluted net loss per share attributable to common stockholders would give effect to the dilutive effect of common stock issuable upon the exercise or conversion of stock options and warrants. Dilutive securities have been excluded from the diluted net loss per share computations as they have an antidilutive effect due to the Company’s net loss.
The following outstanding stock options, warrants, and preferred stock (on an as-converted into common stock basis) 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 months ended June 30, 2008 and 2007and the six months ended June 30, 2008 and 2007.
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||
Shares issuable upon exercise of common stock options | 1,235,991 | 875,923 | 1,194,653 | 644,331 | ||||||||
Shares issuable upon exercise of Common Stock warrants | 586,517 | 43,098 | 586,517 | 43,098 | ||||||||
Shares issuable upon conversion of preferred stock | — | 3,037,732 | — | 4,113,212 | ||||||||
Denominator for basic and diluted calculations | 1,822,508 | 3,956,753 | 1,781,170 | 4,800,641 | ||||||||
16
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Recent Accounting Pronouncements - - In February 2008, the FASB issued FASB Staff Position (FSP) Financial Accounting Standard (FAS) 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions,” and FSP FAS 157-2, “Effective Date of FASB Statement No. 157.” FSP FAS 157-1 removes leasing from the scope of SFAS No. 157, “Fair Value Measurements.” FSP FAS 157-2 delays the effective date of SFAS No. 157 from 2008 to 2009 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, at least annually.
In September 2006, the FASB finalized SFAS No. 157 which became effective January 1, 2008, except as amended by FSP FAS 157-1 and FSP FAS 157-2 as described above. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements; however, it does not require any new fair value measurements. The provisions of SFAS No. 157 were applied prospectively to fair value measurements and disclosures for financial assets and financial liabilities and nonfinancial assets and nonfinancial liabilities recognized or disclosed at fair value in the financial statements on at least an annual basis beginning in the first quarter of 2008. The adoption of this Statement did not have a material effect on the condensed consolidated financial statements for fair value measurements made during the first quarter of 2008. While the Company does not expect the adoption of this Statement to have a material impact on its consolidated financial statements in subsequent reporting periods, the company continues to monitor any additional implementation guidance that is issued that addresses the fair value measurements for certain financial assets and nonfinancial assets and nonfinancial liabilities not disclosed at fair value in the consolidated financial statements on at least an annual basis.
In May 2008, the SFAS No. 162, “The hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that presented in conformity with generally accepted accounting principles in the United States of America. SFAS No. 162 will be effective 60 days following the SEC’s approval of the PCAOB amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company does not believe SFAS No. 162 will have a significant impact on the Company’s consolidated financial statements.
In June 2008, the FASB issued Staff Position FSP EITF No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1). The FSP provides that unvested shares-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform to the provisions in this FSP. Early application of this FSP is prohibited. The adoption of FSP No. EITF 03-6-1 is not anticipated to have a material effect on our consolidated financial statements.
17
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
3. | Inventories |
Inventories consisted of the following at June 30, 2008 and December 31, 2007:
June 30, | December 31, | ||||||
2008 | 2007 | ||||||
Finished goods | $ | 129,300 | $ | 62,521 | |||
Inventories | $ | 129,300 | $ | 62,521 | |||
4. | Property and Equipment, net |
Property and equipment, net consisted of the following at June 30, 2008 and December 31, 2007:
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
Equipment | $ | 926,662 | $ | 389,255 | ||||
Tools and molds | 66,208 | — | ||||||
Leasehold improvements | 59,059 | 41,365 | ||||||
Furniture and fixtures | 28,514 | 16,838 | ||||||
Total property and equipment | 1,080,443 | 447,458 | ||||||
Less accumulated depreciation and amortization | (251,088 | ) | (126,299 | ) | ||||
Property and equipment, net | $ | 829,355 | $ | 321,159 | ||||
Depreciation and amortization expense totaled $74,327 and $7,062 for the three months ended June 30, 2008 and 2007, $124,799and $ 13,769 for the six months ended June 30, 2008 and 2007, and $ 251,098 for the period from inception to June 30, 2008.
In January 2008, the Company entered into a capital lease agreement for equipment. As of June 30, 2008, equipment includes $256,326 of equipment under capital leases; and accumulated amortization of assets under capital leases was $54,335.
18
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
5. | Capital Lease Obligation |
The Company leases some equipment under capital leases that expire during various dates through August 2011.
Aggregate future minimum lease obligations for certain leases in effect as of June 30, 2008 are as follows:
Capital Leases | ||||
Year ending June 30: | ||||
2009 | $ | 84,024 | ||
2010 | 67,065 | |||
2011 | 20, 234 | |||
2012 | 2,278 | |||
Total minimum lease obligations | 173,601 | |||
Less amounts representing interest | (16,706 | ) | ||
Present value of future minimum lease payments | 156,895 | |||
Less current portion of capital lease obligation | (72,472 | ) | ||
Capital lease obligation, less current portion | $ | 84,423 |
Interest expense totaled $3,252 and none for the three months ended June 30, 2008 and 2007, $7,225 and none for the six months ended June 30, 2008 and 2007, and $9,806 for the period from inception to June 30, 2008.
6. | Common and Preferred Stock |
Common Stock - Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when and if declared by the Board of Directors, subject to the prior rights of holders of all classes of stock outstanding. Since inception, no dividends have been declared.
Preferred Stock - The cumulative amount of Series B Preferred Stock dividends that are unearned and undeclared prior to the Merger was $155,998.
7. | Stock Options and Warrants |
In 2003, Wafergen, Inc.’s Board of Directors adopted a 2003 Incentive Stock Plan (the “2003 Plan”). The 2003 Plan authorized the Board of Directors to grant incentive stock options and nonstatutory stock options to employees, directors, and consultants for up to 1,500,000 shares of common stock. Under the Plan, incentive stock options and nonqualified stock options can be granted. Incentive stock options are to be granted at a price that is no less than 100% of the fair value of the stock at the date of grant. Options will be vested over a period according to the Option Agreement, and are exercisable for a maximum period of ten years after date of grant. Options granted to stockholders who own more than 10% of the outstanding stock of the Company at the time of grant must be issued at an exercise price no less than 110% of the fair value of the stock on the date of grant.
In November 2006, Wafergen, Inc. increased the aggregate number of shares of common stock that may be issued under the 2003 Plan to a total authorized reserve of 2,500,000 shares, a 1,000,000 share increase.
19
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Upon completion of the Merger, WaferGen Bio-systems, Inc. also assumed all outstanding Wafergen, Inc.’s stock options with proportionate adjustments to the number of underlying shares and exercise prices based on an exchange ratio of ..53991522 for 1. In addition, the 2003 Plan was frozen resulting in no additional options available for grant.
A summary of stock option transactions under the 2003 Plan is as follows:
Stock Options | |||||||||
Options | Number of | Weighted | |||||||
Available for | Options | Average | |||||||
Grant | Outstanding | Exercise Price | |||||||
Balance at January 1, 2008 | — | 659,236 | $ | 0.2399 | |||||
Options exercised | — | (27,536) | $ | 0.1482 | |||||
Balance at June 30, 2008 | — | 631,700 | $ | 0.2439 | |||||
20
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
On June 5, 2008, the Company's stockholders adopted the 2008 Stock Incentive Plan (the "2008 Plan") following approval of the 2008 Plan by the Board of Directors. The 2008 Plan authorizes the issuance of up to 2,000,000 shares of common stock pursuant to the terms of the 2008 Plan. 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, persons of training, experience and ability, to attract new directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage the sense of proprietorship, and to stimulate the active interest of such persons into the Company's development and financial success. Under the 2008 Plan, the Company is authorized to issue incentive stock options intended to qualify under Section 422 of the Code, non-qualified stock options and restricted stock. The 2008 Plan shall be administered by the Company's Board of Directors.
A summary of stock option transactions under the 2007 and 2008 Plans are as follows:
Stock Options | ||||||||||
Options | Number of | Weighted | ||||||||
Available for | Options | Average | ||||||||
Grant | Outstanding | Exercise Price | ||||||||
Balance at January 1, 2007 | 390,500 | 1,609,500 | $ | 1.80 | ||||||
2008 Plan | 2,000,000 | — | ||||||||
Granted | (545,000) | 545,000 | $ | 2.03 | ||||||
Forfeited | 112,500 | (112,500) | $ | 2.20 | ||||||
Balance at June 30, 2008 | 1,958,000 | 2,042,000 | $ | 2.02 | ||||||
21
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Options Outstanding | Options Exercisable | |||||||||||||||
Number | Weighted | Number | Weighted | |||||||||||||
Outstanding | Average | Weighted | Exercisable | Average | Weighted | |||||||||||
as of | Remaining | Average | as of | Remaining | Average | |||||||||||
Exercise | June | Contractual | Exercise | June | Contractual | Exercise | ||||||||||
Price | 30, 2008 | Life (in Years) | Price | 30, 2008 | Life (in Years) | Price | ||||||||||
$ | 0.000152-0.000228 | 137,676 | 5.23 | $ | 0.0002 | 137,227 | 5.22 | $ | 0.0002 | |||||||
$ | 0.018521-0.027782 | 64,790 | 7.09 | $ | 0.0185 | 45,893 | 7.09 | $ | 0.0185 | |||||||
$ | 0.148171-0.222257 | 145,778 | 8.06 | $ | 0.1482 | 68,505 | 8.05 | $ | 0.1482 | |||||||
$ | 0.463036-0.694554 | 283,456 | 8.52 | $ | 0.4630 | 274,458 | 8.52 | $ | 0.4630 | |||||||
$ | 1.50-2.25 | 2,042,000 | 9.13 | $ | 1.8405 | 334,167 | 9.08 | $ | 1.7581 | |||||||
2,673,700 | 8.76 | $ | 1.4633 | 860,250 | 8.10 | $ | 0.8435 | |||||||||
The following table summarizes the unvested stock option activity for the three months ended June 30, 2008:
Weighted | |||||||
Average | |||||||
Grant | |||||||
Number | Date | ||||||
of | Fair | ||||||
Shares | Value | ||||||
Unvested at January 1, 2008 | 1,645,696 | $ | 0.54 | ||||
Granted | 545,000 | $ | 0.46 | ||||
Forfeited | (112,500) | $ | 0.47 | ||||
Vested | (264,746) | $ | 0.58 | ||||
Unvested at June 30, 2008 | 1,813,450 | $ | 0.53 | ||||
The aggregate intrinsic value is the total pretax intrinsic value (i.e., the difference between the Company’s estimated stock price at June 30, 2008 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all the option holders exercised their options on June 30, 2008. The aggregate intrinsic value for options outstanding was $3,165,790 at June 30, 2008 and the aggregate intrinsic value for options exercisable was $1,626,956 at June 30, 2008. There were 27,536 options exercised during the three months ended June 30, 2008. The aggregate intrinsic value for the options exercised was $50,991.
22
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
The Company has issued restricted common stock grants. The restricted common stock grants offer the recipient the opportunity to receive shares of common stock, rather than options that would give them the right to purchase common stock at a set price. The restricted common stock grants entitle the holder to receive shares of common stock subject to certain terms. The Company’s restricted common stock generally has vesting restrictions that are eliminated over a four-year period.
The Company determined the amount of share-based compensation in connection with the restricted stock grants based on the fair value of the Company’s common stock on the respective grant dates. The restricted stock awards totaled 355,000 shares, 191,670 shares post-merger, and the fair market value at grant date ranged from $0.75 to $1.50. The compensation is being charged to operations over the same period as the restrictions are eliminated.
Amounts expensed for stock-based compensation totaled $96,178 and $97,168 for the three months ended June 30, 2008 and 2007, $219,113 and $169,752 for the six months ended June 30, 2008 and 2007, and $1,519,994 for the period from inception to June 30, 2008.
At June 30, 2008, there was $860,039 of total stock-based compensation costs which is expected to be recognized over an estimated weighted average amortization period of 3.03 years. No amounts related to stock-based compensation costs have been capitalized. The tax benefit and the resulting effect on cash flows from operations and financial activities, related to stock-based compensation costs were not recognized as the Company currently provides a full valuation allowance for all of its deferred taxes.
Exercise | Expiration | |||||||
Securities into which warrants are convertible | Shares | Price | Date | |||||
Common Stock | 115,442 | $ | 1.41 | Jan., Feb., and March 2012 | ||||
Common Stock | 2,916,459 | $ | 2.25 | May and June 2012 | ||||
Common Stock | 634,220 | $ | 3.00 | May 2018 | ||||
Total | 3,666,121 | |||||||
23
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
In May 2008, the Company issued and sold an aggregate of 1,585,550 shares of the Company's common stock and warrants to purchase an aggregate of up to 634,220 shares of the Company's common stock in a private placement for total proceeds of approximately $3.6 million. The purchase price of the shares of common stock was $2.25 per share, with the warrants have an exercise price of $3.00 per share. The warrants have a five-year term and standard broad-based weighted-average anti-dilution protection. Proceeds from the financing are being used for general corporate purposes including the continued advancement of the Company's SmartChip(TM) Real-Time PCR System, as well as the expansion of the Company's global commercialization campaign for its SmartSlide(TM) Micro-Incubation System.
Cash Flow Information |
Cash paid during the six months ended June 30, 2008 and 2007 and the period from inception to June 30, 2008 is as follows:
Period From | ||||||||||||
October 22, | ||||||||||||
2002 | ||||||||||||
Six Months Ended | (Inception) to | |||||||||||
June 30, | June 30, | |||||||||||
2008 | 2007 | 2008 | ||||||||||
Interest | $ | 7,225 | $ | 15,473 | $ | 25,771 | ||||||
Income taxes | $ | — | $ | — | $ | — | ||||||
24
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Supplemental disclosure of non-cash investing and financing activities for the six months ended June 30, 2008 and 2007 and the period from inception to June 30, 2008 is as follows:
Period From | ||||||||||||
October 22, | ||||||||||||
2002 | ||||||||||||
Six Months Ended | (Inception) to | |||||||||||
June 30, | June 30, | |||||||||||
2008 | 2007 | 2008 | ||||||||||
Accretions on Series B Preferred Stock | $ | — | $ | 51,998 | $ | 155,998 | ||||||
Conversion of due to a stockholder to notes payable | $ | — | $ | 61,588 | $ | 61,588 | ||||||
Issuance of warrants with notes payable | $ | — | $ | 171,053 | $ | 171,053 | ||||||
Conversion of debt to Common Stock | $ | — | $ | 240,000 | $ | 240,000 | ||||||
Conversion of debt to Series A Preferred Stock | $ | — | $ | — | $ | 2,977,579 | ||||||
Property and equipment acquired with capital leases | $ | 131,550 | $ | — | $ | 256,326 | ||||||
25
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
9. | Fair Value |
The Company adopted the provisions of SFAS No. 157 as amended by FSP FAS 157-1 and FSP FAS 157-2 on January 1, 2008. Pursuant to the provisions of FSP FAS 157-2, the Company will not apply the provisions of SFAS No. 157 until January 1, 2009 for the following major categories of nonfinancial assets and liabilities from the consolidated balance sheet: property and equipment. The Company recorded no change to its opening balance of accumulated deficit as of January 1, 2008 as it did not have any financial instruments requiring retrospective application per the provisions of SFAS No. 157.
Fair Value Hierarchy - SFAS No. 157 specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the company’s own assumptions of market participant valuation (unobservable inputs). In accordance with SFAS No. 157, these two types of inputs have created the following fair value hierarchy:
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.
SFAS No. 157 requires the use of observable market data if such data is available without undue cost and effort.
Measurement of Fair Value - The Company measures fair value as an exit price using the procedures described below for all assets and liabilities measured at fair value. When available, the company uses unadjusted quoted market prices to measure fair value and classifies such items within Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based or independently-sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be inputs that are readily observable. If quoted market prices are not available, the valuation model used generally depends on the specific asset or liability being valued.
Credit risk adjustments are applied to reflect the company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the company’s own credit risk as observed in the credit default swap market.
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WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at June 30, 2008:
Level 1 | Level 2 | Level 3 | Total | ||||||||
Cash and cash equivalents | $ | 4,257,597 | $ | — | $ | — | $ | 4,257,597 |
10. Subsequent Events
On July 18, 2008, the Company’s Malaysian subsidiary, WaferGen Biosystems (M) Sdn. Bhd., received $ 1.0 million in exchange for the issuance of redeemable convertible preferred shares of WaferGen Biosystems (M) Sdn. Bhd., in a private placement to Malaysian Technology Development Corporation Sdn. Bhd. (MTDC), a venture capital and development firm in Malaysia. WaferGen Biosystems (M) Sdn. Bhd., sold 444,444 redeemable convertible preferred shares in the private placement at the U.S. dollar equivalent of $2.25 per share. WaferGen Biosystems (M) Sdn. Bhd., will sell an additional 444,444 redeemable convertible preferred shares in the subsidiary at the U.S. dollar equivalent of $2.25 per share if the subsidiary achieves certain agreed-upon milestones. The convertible preferred shares are exchangeable at the option of the holder into such number of shares of common stock of the Company equal to the aggregate investment made in the subsidiary divided by U.S. $2.25 per share. Proceeds from this financing will be used to support the high-volume manufacturing of the Company’s SmartChip (TM) Real-Time PCR System.
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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. This discussion contains forward-looking statements.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Information included in this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 the Company’s plans for sales growth and expectations of gross margin, expenses, new product introduction, and the Company’s liquidity and capital needs. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology. In addition to the risks and uncertainties described in “Risk Factors” contained in the annual report on Form 10-KSB/A filed with the Security and Exchange Commission on April 29, 2008, 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.
The Information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-KSB/A for the year ended December 31, 2007 and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and other information contained in such Form 10-KSB/A. The following discussion and analysis also should be read together with our condensed consolidated financial statements and the notes to the condensed consolidated financial statements included elsewhere in this Form 10-Q.
Company Overview and Background
WaferGen was incorporated in Delaware on October 22, 2002. WaferGen is engaged in the development, manufacture and sale of systems for gene expression, genotyping and stem-cell research for the life sciences, pharmaceutical drug discovery and biomarker discovery and diagnostic products industries. WaferGen’s products are aimed at professionals 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. Through the SmartChip™ System and SmartSlide™ System products, WaferGen plans 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.
WaferGen’s 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 its 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 WaferGen’s revenue growth or cause a sequential decline in quarterly revenue. Due to the possibility of fluctuations in WaferGen’s revenue and net income or loss, WaferGen believes that quarterly comparisons of its operating results are not a good indication of future performance.
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Results of Operations
The following table presents selected items in the condensed consolidated statements of operations for the three months and six months ended June 30, 2008 and 2007, respectively:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenues | $ | 176,851 | $ | 300 | $ | 358,491 | $ | 60,760 | ||||||||
Cost of sales | 57,048 | — | 132,065 | 21,774 | ||||||||||||
Gross margin | 119,803 | 300 | 226,426 | 38,986 | ||||||||||||
Operating expenses: | ||||||||||||||||
Sales and marketing | 295,506 | 137,788 | 680,680 | 289,970 | ||||||||||||
Research and development | 1,345,621 | 361,948 | 2,298,062 | 761,706 | ||||||||||||
General and administrative | 633,764 | 384,495 | 1,322,807 | 809,156 | ||||||||||||
Total operating expenses | 2,274,891 | 884,231 | 4,301,549 | 1,860,832 | ||||||||||||
Operating loss | (2,155,088 | ) | (883,931 | ) | (4,075,123 | ) | (1,821,846 | ) | ||||||||
Other income and (expenses): | ||||||||||||||||
Interest income | 18,064 | 15,781 | 49,781 | 15,781 | ||||||||||||
Interest expense | (3,252 | ) | (143,724 | ) | (7,225 | ) | (186,526 | ) | ||||||||
Foreign exchange (loss) | (2,941 | ) | — | (2,941 | ) | — | ||||||||||
Total other income and (expenses) | 11,871 | (127,943 | ) | 39,615 | (170,745 | ) | ||||||||||
Net loss before provision for income taxes | (2,143,217 | ) | (1,011,874 | ) | (4,035,508 | ) | (1,992,591 | ) | ||||||||
Provision for income taxes | — | — | — | — | ||||||||||||
Net loss | $ | (2,143,217 | ) | $ | (1,011,874 | ) | $ | (4,035,508 | ) | $ | (1,992,591 | ) | ||||
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Revenues
The following table presents the revenue for the three months and six ended June 30, 2008 and 2007, respectively:
Three Months Ended | Six Months Ended | ||||||||||||||||||||
June 30, | June 30, | ||||||||||||||||||||
2008 | 2007 | % Change | 2008 | 2007 | % Change | ||||||||||||||||
$ | 176,851 | $ | 300 | 58,850.33 | % | $ | 358,491 | $ | 60,760 | 490.01 | % | ||||||||||
In 2007, we began selling our SmartSlide products, allowing us to generate minimal revenues for the first time since inception.
For the three months ended June 30, 2008, revenues increased by $176,551 or 58,850.20% as compared to the three months ended June 30, 2007. The increase resulted primarily from the utilization of distributors and an expanded sales team to sell products in 2008 as compared to 2007.
For the six months ended June 30, 2008, revenues increased $297,731 or 490.01% as compared to the six months ended June 30, 2007. The increase resulted primarily from the utilization of distributors and an expanded sales team to sell products in 2008 as compared to 2007.
Cost of sales
The following table presents the cost of sales for the three months and six months ended June 30, 2008 and 2007, respectively:
Three Months Ended | Six Months Ended | ||||||||||||||||||||
June 30, | June 30, | ||||||||||||||||||||
2008 | 2007 | % Change | 2008 | 2007 | % Change | ||||||||||||||||
$ | 57,048 | $ | — | N/A | % | $ | 132,065 | $ | 21,774 | 506.53 | % | ||||||||||
Cost of sales includes the cost of products paid to third party vendors.
For the three months ended June 30, 2008, cost of sales was $57,048 compared to none for the three months ended June 30, 2007. For the six months ended June 30, 2008, cost of sales increased by $110,291 or 506.53% as compared to the six months ended June 30, 2007. The increase for both periods related primarily to the increase in revenues as the costs for our products remained unchanged.
Sales and Marketing
The following table presents the sales and marketing expense for the three months and six months ended June 30, 2008 and 2007, respectively:
Three Months Ended | Six Months Ended | ||||||||||||||||||||
June 30, | June 30, | ||||||||||||||||||||
2008 | 2007 | % Change | 2008 | 2007 | % Change | ||||||||||||||||
$ | 295,506 | $ | 137,788 | 114.46 | % | $ | 680,680 | $ | 289,970 | 134.74 | % | ||||||||||
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For the three months ended June 30, 2008, sales and marketing expenses increased $157,718 or 114.46% as compared to the three months ended June 30, 2007. The increase resulted primarily from an increase in stock-based compensation associated with the issuance of stock options and an increased head count, including the hiring of a Vice President of Sales, resulting in greater salaries and wages.
For the six months ended June 30, 2008, sales and marketing expenses increased $390,710 or 134.74% as compared to the six months ended June 30, 2007. The increase resulted primarily from an increase in stock-based compensation associated with the issuance of stock options, additional expenses incurred as a result an increased head count, including the hiring of a Vice President of Sales, resulting in greater salaries and wages, and some additional professional fees.
We expect selling and marketing to continue to increase as we expand our staff, develop our sales and marketing infrastructure and incur additional costs to support the growth in our business.
Research and Development
The following table presents the research and development expense for the three months and six months ended June 30, 2008 and 2007, respectively:
Three Months Ended | Six Months Ended | ||||||||||||||||||||
June 30, | June 30, | ||||||||||||||||||||
2008 | 2007 | % Change | 2008 | 2007 | % Change | ||||||||||||||||
$ | 1,345,621 | $ | 361,948 | 271.77 | % | $ | 2,298,062 | $ | 761,706 | 201.70 | % |
Research and development expenses consist primarily of salaries and other personnel-related expenses, laboratory supplies and other expenses related to the design, development, testing and enhancement of our products. Research and development expenses are expensed as they are incurred.
For the three months ended June 30, 2008, research and development expenses increased $983,673 or 271.77% as compared to the three months ended June 30, 2007. For the six months ended June 30, 2008, research and development expenses increased $1,536,356 or 201.70% as compared to the six months ended June 30, 2007. The increase for both periods resulted primarily from an increase in head count resulting in greater salaries and wages, an increase in research and development supplies used for product development and testing, our move to a new facility which allowed us to increase the amount of lab equipment on hand, and an increase in stock-based compensation associated with the issuance of stock options.
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We believe a substantial investment in research and development is essential to remain and expand into additional markets. Accordingly, we expect our research and development expenses to increase as we expand
General and Administrative
The following table presents the general and administrative expenses for the three months and six months ended June 30, 2008 and 2007, respectively:
Three Months Ended | Six Months Ended | ||||||||||||||||||||
June 30, | June 30, | ||||||||||||||||||||
2008 | 2007 | % Change | 2008 | 2007 | % Change | ||||||||||||||||
$ | 633,764 | $ | 384,495 | 64.83 | % | $ | 1,322,807 | $ | 809,156 | 63.48 | % |
WaferGen’s general and administrative expenses consist primarily of personnel costs for finance, human resources, business development, and general management, as well as professional fees, such as expenses for legal and accounting services.
For the three months ended June 30, 2008, general and administrative expenses increased $249,269 or 64.83% as compared to the three months ended June 30, 2007. For the six months ended June 30, 2008, general and administrative expenses increased $513,651 or 63.48% as compared to the six months ended June 30, 2007. The increase for both periods resulted primarily from an increase in head count resulting in greater salaries and wages, an increase in stock-based compensation associated with the issuance of stock options, and legal and professional fees related to the filing of registration statements and other documents in connection with the May 2007 private placement and reverse merger as described elsewhere in this Form 10-Q.
We expect our general and administrative expenses to increase as the Company expands its staff, develops its infrastructure and incurs additional costs to support the growth in its business.
Interest Income
The following table presents the interest income for the three months and six months ended June 30, 2008 and 2007, respectively:
Three Months Ended | Six Months Ended | ||||||||||||||||||||
June 30, | June 30, | ||||||||||||||||||||
2008 | 2007 | % Change | 2008 | 2007 | % Change | ||||||||||||||||
$ | 18,064 | $ | 15,781 | 14.47 | % | $ | 49,781 | $ | 15,781 | 215.45 | % |
Interest income was $18,064 for the three months ended June 30, 2008 as compared to $15,781 for the three months ended June 30, 2007. This increase was the result of excess cash being invested in interest-bearing instruments.
Interest income was $49,781for the six months ended June 30, 2008 as compared to $15,781 for the six months ended June 30, 2007. The increase was the result of excess cash being invested in interest-bearing instruments.
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Interest Expense
The following table presents the interest expense for the three months and six months ended June 30, 2008 and 2007, respectively:
Three Months Ended | Six Months Ended | ||||||||||||||||||||
June 30, | June 30, | ||||||||||||||||||||
2008 | 2007 | % Change | 2008 | 2007 | % Change | ||||||||||||||||
$ | 3,252 | $ | 143,724 | (97.74) | % | $ | 7,225 | $ | 186,526 | (96.13) | % |
For the three months ended June 30, 2008, interest expense decreased $140,472 as compared to the three months ended June 30, 2007. The decrease was a result of amortization associated with the debt discount and interest expenses associated with a stockholder note that was repaid in 2007. The interest expense in 2008 was due to our capital lease obligations.
For the six months ended June 30, 2008, interest expense decreased $179,301 as compared to the six months ended June 30, 2007. The decrease was a result of amortization associated with the debt discount and interest expenses associated with a stockholder note that was repaid in 2007. The interest expense in 2008 was due to our capital lease obligations.
Headcount
Our consolidated headcount as of August 14, 2008 comprised 31 regular employees and 1 temporary employee, compared to 23 regular employees and no temporary employees as of December 31, 2007.
Liquidity and Capital Resources
From inception through June 30, 2008, the Company raised a total of $3,665,991 from the issuance of notes payable, $66,037 from the sale of Series A Preferred Stock, $1,559,942 from the sale of Series B Preferred Stock, and $13,404,992 from the sale of common stock and warrants, net of offering costs. As of June 30, 2008, we had $4,257,597 in cash and cash equivalents and $3,512,865 in working capital, and no additional capital resources available.
Net Cash Used in Operating Activities
The Company experienced negative cash flow from operating activities for the six months ended June 30, 2008 and 2007 in the amounts of $3,890,244 and $2,060,776, respectively. The cash used in operating activities in the six months ended June 30, 2008 was due to cash used to fund a net operating loss of $4,035,508, adjusted for non-cash expenses related to depreciation and amortization stock-based compensation of $343,912, as off-set by cash provided from a change in working capital of $198,648.This decrease is driven primarily by decreased use of cash to fund operating activities and losses.
Net Cash Used in Investing Activities
The Company used $512,280 in the six months ended June 30, 2008, and $36,621 in the six months ended June 30, 2007 to acquire property and equipment. A deposit on property and equipment of $51,446 made in 2007 was applied toward purchase in 2008.
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In May 2008, the Company received net cash of $3,478,745 from the sale of 1,585,550 shares of common stock and warrants to purchase 634,220 shares of common stock with an exercise price of $3.00 per share. The warrants have a five-year term and standard broad-based weighted-average anti-dilution protection. In addition, in May 2008, WaferGen received $4,079 from the exercise of stock options for a combined net cash proceeds of $3,482,824.
Cash used in financing activities in the six months ended June 30, 2008 was $69,649 related to repayments on capital leases used in the Lab for expansion and upgrading of our Lab to accommodate our performance in the research and development of the SmartChip™ products.
Cash provided by financing activities in the six months ended June 30, 2007 was $10,187,979, and primarily related to the acquisition of WaferGen, Inc. by WaferGen Bio-systems, Inc. on May 31, 2007. In the transactions, WaferGen, Inc. merged with a subsidiary of WaferGen Bio-systems, Inc. and became a wholly-owned subsidiary of WaferGen Bio-systems, Inc. (the “Merger”). The officers and board members of WaferGen Bio-systems, Inc. resigned and were replaced by officers of WaferGen, Inc. along with newly elected board members. In connection with the Merger, we issued 7,178,447 shares of our common stock at the first closing of the private placement for gross proceeds of $10,767,668, net cash proceeds of $10,527,668 as $240,000 worth of shares were issued in exchange for the cancellation of $240,000 of notes payable to a stockholder. In addition, these investors received five-year warrants to purchase an additional 2,153,533 shares of our common stock at an exercise price of $2.25 per share. Further, in June 2007 at a second closing under the private placement, we sold an additional 830,001 shares of our common stock for gross proceeds of $1,245,000, and these investors received five-year warrants to purchase an additional 249,000 shares of our common stock at an exercise price of $2.25 per share. In connection with the 2007 private placement, we incurred offering costs which totaled $1,917,956, of which $1,851,637 was paid in cash and $66,319 was due to the issuance of warrants. This resulted in net cash proceeds of $9,921,031 being raised from the private placement.
In January 2007, we sold 26,996 shares of Common Stocks for $500 for combined net cash proceeds of $9,921,531.
In February 2007, we sold 471,698 shares of Series A Preferred Stock for cash proceeds of $66,037.
During the six months ended June 30, 2007, we borrowed $688,412 from a stockholder and issued notes payable and repaid $510,000 of the notes payable to him.
We expect that the net proceeds from the sale of common stock and warrants in May 2008 will fund our operations through January 2009. We are currently considering several different financing alternatives to support the Company’s operations thereafter. 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. However, our future capital requirements and the adequacy of our available funds will depend on many factors, including, our ability to successfully commercialize our SmartChip™ and SmartSlide™ products, competing technological and market developments and the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service offerings.
While we believe we have sufficient cash to fund our operating, investing, and financing activities in the near term, additional working capital may be needed if we experience growth above that which is currently foreseen by management. If our capital resources are unable to meet our capital requirements, we will have to raise additional funds. We may be unable to raise sufficient additional capital when we need it or to raise capital on favorable terms. 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 adequate funds on reasonable terms, we may be required to curtail operations significantly or to obtain funds by entering into financing agreements on unattractive terms.
Subsequent Event
Subsequent to June 30, 2008, the Company's Malaysian subsidiary, WaferGen Biosystems (M) Sdn. Bhd., received $1.0 million on July 18, 2008 in exchange for the issuance of redeemable convertible preferred shares of WaferGen Biosystems (M) Sdn. Bhd., in a private placement to Malaysian Technology Development Corporation Sdn. Bhd. (MTDC), a venture capital and development firm in Malaysia. WaferGen Biosystmes (M) Sdn. Bhd. sold 444,444 redeemable convertible preferred shares in the private placement at the U.S. dollar equivalent of $2.25 per share. WaferGen Biosystmes (M) Sdn. Bhd., will sell an additional 444,444 redeemable convertible preferred shares in the subsidiary at the U.S. dollar equivalent of $2.25 per share if the subsidiary achieves certain agreed-upon milestones. The convertible preferred shares are exchangeable at the option of the holder into such number of shares of common stock of the COmpany equal to the aggregate investment made in the subsidiary divided by the U.S. $2.25 per share.
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Principles of Consolidation
The consolidated financial statements of WaferGen Bio-system, Inc. include the accounts of WaferGen Biosystems (M) Sdn Bhd., a Malaysia subsidiary. All significant inter-company transactions and balances are eliminated in consolidation.
Critical Accounting Policies and Estimates
Deferred Tax Valuation Allowance. We believe sufficient uncertainties exist regarding the future realization of deferred tax assets, and, accordingly, a full valuation allowance is required, amounting to $5,056,326 at December 31, 2007. 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.
Stock-Based Compensation. We measure the fair value of all stock-based awards, including stock options, on the grant date and record the fair value of these awards as compensation expense over the service period. The fair value is estimated using the Black-Scholes valuation model.
June 30, | June 30, | |||||||
2008 | 2007 | |||||||
Weighted-average grant date fair value | $ | 0.46 | $ | 0.37 | ||||
Risk free interest rate | 2.90%-3.34 | % | 4.85 | % | ||||
Expected lives | 5 Years | 5 Years | ||||||
Expected volatility | 18.81%-18.91 | % | 20.00 | % | ||||
Dividend yields | 0 | % | 0 | % | ||||
Risk-free interest rate - This is the United States treasury rate for the day of the grant having a term approximating the expected life of the option. An increase in the risk-free interest rate will increase the fair value and the related compensation expense.
Expected lives - 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 vesting term, contractual term, and historical lives. An increase in the expected life will increase the fair value and the related compensation expense.
Expected volatility - This is a measure of the amount by which the stock price has fluctuated or is expected to fluctuate. The average daily price volatility of the Small Cap Medical Equipment Index was used for the period corresponding to the expected life. An increase in the expected volatility life will increase the fair value and the related compensation expense.
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Dividend yield - We have not made any dividend payments nor do we have plans to pay dividends in the foreseeable future. An increase in the dividend yield will decrease the fair value and the related compensation expense.
Recent Accounting Pronouncements
In February 2008, the FASB issued FASB Staff Position (FSP) Financial Accounting Standard (FAS) 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions,” and FSP FAS 157-2, “Effective Date of FASB Statement No. 157.” FSP FAS 157-1 removes leasing from the scope of SFAS No. 157, “Fair Value Measurements.” FSP FAS 157-2 delays the effective date of SFAS No. 157 from 2008 to 2009 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, at least annually.
In September 2006, the FASB finalized SFAS No. 157 which became effective January 1, 2008 except as amended by FSP FAS 157-1 and FSP FAS 157-2 as described above. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements; however, it does not require any new fair value measurements. The provisions of SFAS No. 157 were applied prospectively to fair value measurements and disclosures for financial assets and financial liabilities and nonfinancial assets and nonfinancial liabilities recognized or disclosed at fair value in the financial statements on at least an annual basis beginning in the first quarter of 2008. The adoption of this Statement did not have a material effect on the condensed consolidated financial statements for fair value measurements made during the second quarter of 2008. While the Company does not expect the adoption of this Statement to have a material impact on its consolidated financial statements in subsequent reporting periods, the company continues to monitor any additional implementation guidance that is issued that addresses the fair value measurements for certain financial assets and nonfinancial assets and nonfinancial liabilities not disclosed at fair value in the consolidated financial statements on at least an annual basis.
In May 2008, the SFAS No. 162, “The hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that presented in conformity with generally accepted accounting principles in the United States of America. SFAS No. 162 will be effective 60 days following the SEC’s approval of the PCAOB amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company does not believe SFAS No. 162 will have a significant impact on the Company’s consolidated financial statements.
In June 2008, the FASB issued Staff Position FSP EITF No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1). The FSP provides that unvested shares-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008., and interim periods within those fiscal years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform to the provisions in this FSP. Early application of this FSP is prohibited. The adoption of FSP No. EITF 03-6-1 is not anticipated to have a material effect on our consolidated financial statements.
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Not required for smaller reporting companies.
Item 4. Controls and Procedures
As of the end of the period covered by this Quarterly Report, management performed, with the participation of our Chief Executive Officer and Chief 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 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 SEC’s forms, and that such information is accumulated and communicated to our management including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on the evaluation and the identification of the material weaknesses in internal control over financial reporting described below, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2008, the Company’s disclosure controls and procedures were not effective.
We identified the following material weaknesses in our disclosure and control procedures as of June 30, 2008:
1. | In particular, the Company has not established adequate financial reporting monitoring activities to mitigate the risk of management override, specifically: |
a. | Delegation of authority has not been formally documented; |
b. | Insufficient oversight of accounting principle implementation; and |
c. | Insufficient oversight of external audit functions; |
2. | There is a strong reliance on the external auditors to review and adjust the annual and quarterly financial statements, to monitor new accounting principles, and to ensure compliance with GAAP and SEC disclosure requirements; |
3. | There is a strong reliance on the external attorneys to review and edit the annual and quarterly filings and to ensure compliance with SEC disclosure requirements; and |
4. | We have not adequately divided, or compensated for, incompatible functions among personnel to reduce the risk that a potential material misstatement of the financial statements would occur without being prevented or detected. |
Management is in the process of improving its disclosure controls and procedures through the following actions:
1. | The preparation by our Chief Executive Officer and our Chief Financial Officer of a formal delegation policy that will be reviewed and approved by the Board; |
2. | As a small business, the Company does not have the resources to install a dedicated staff with deep expertise in all facets of SEC disclosure and GAAP compliance. As is the case with many small businesses, the Company will continue to work with its external auditors and attorneys as it relates to new accounting principles and changes to SEC disclosure requirements. The Company has found that this approach worked well in the past and believes it to be the most cost effective solution available for the foreseeable future; |
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3. | A review of existing sign-off and review procedures as well as document control protocols for critical accounting spreadsheets, and an increase in management’s review of key financial documents and records; and |
4. | As a small business, the Company does not have the resources to fund sufficient staff to ensure a complete segregation of responsibilities within the accounting function. However, Company management does review, and will increase the review of, financial statements on a monthly basis, and the Company’s external auditor conducts reviews on a quarterly basis. These actions, in addition to the improvements identified above, will minimize any risk of a potential material misstatement occurring. |
There were no changes in our internal control over financial reporting during the first quarter ended June 30, 2008 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
From time to time we may be involved in claims arising in the ordinary course of business. To our knowledge there are no pending or threatened legal proceedings, government actions, administrative actions, investigations or claims against the Company.
In addition to the other information in this Quarterly Report on Form 10-Q, the factors and risks listed below, among others, could affect our future performance and should be carefully considered in evaluating our outlook.
Risks Related to Our Company and Our Business
We have a history of operating losses which may continue, in which case we may not be able to reach profitability.
We have a history of losses and may continue to incur operating and net losses for the foreseeable future. We incurred a net loss of $2,143,217 for the three months ended June 30, 2008. As of June 30, 2008, our accumulated deficit was $15,988,415. We have not achieved profitability on a quarterly or annual basis. We may not be able to reach a level of revenue to achieve profitability. To date, our revenues have been insignificant and not sufficient to achieve our business plan. Our gross revenues for the six months ended June 30, 2008 were $358,491. If our revenues grow more slowly than anticipated or if operating expenses exceed expectations, then we may not be able to achieve profitability in the near future or at all, which may depress our stock price.
We are a development stage company with limited operating history for investors to evaluate our business.
We are a development stage company and have had limited operations in the genetic analysis segment of the life science industry. Since we are a company with a limited operating history developing products focused on the analysis of genetic function and variation, it is difficult for potential investors to evaluate our business. To date, we have developed only one commercialized product, the SmartSlide™System, and our future operations and growth will likely depend on our ability to successfully develop and market our SmartChip™products. Our proposed operations are subject to all of the risks inherent in light of the expenses, difficulties, complications and delays frequently encountered in connection with the formation of any new business, as well as those risks that are specific to the life science industry. In evaluating us, investors should consider the delays, expenses, problems and uncertainties frequently encountered by companies developing markets for new products, services and technologies. We may never overcome these obstacles and become profitable.
Because our business depends on research and development spending levels for pharmaceutical and biotechnology companies and academic and governmental research institutions, our success and our operating results will substantially depend on these customers.
We expect that our revenues in the foreseeable future will be derived primarily from products and services provided to a relatively small number of pharmaceutical and biotechnology companies and academic, governmental and other research institutions. Our success will depend upon their demand for and use of our products and services. Our operating results may fluctuate substantially due to reductions and delays in research and development expenditures by these customers. For example, reductions in capital or operating expenditures by these customers may result in lower than expected instrumentation sales and similarly, reductions in operating expenditures by these customers could result in lower than expected sales by us.
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We expect that our results of operations will fluctuate, which could cause our stock price to decline.
Our revenue is subject to fluctuations due to the timing of sales of high-value products and services projects, the impact of seasonal spending patterns, the timing and size of research projects our customers perform, changes in overall spending levels in the life sciences industry, the timing and amount of government grant funding programs and other unpredictable factors that may affect customer ordering patterns. Given the difficulty in predicting the timing and magnitude of sales for our products and services, we may experience quarter-to-quarter fluctuations in revenue and/or a sequential decline in quarterly revenue.
In addition, because of our continued research, marketing and hiring in connection with our SmartChip™product, we expect operating expenses to continue to increase significantly. Accordingly, if revenue does not grow as anticipated, we may not be able to achieve and maintain profitability. Any significant delays in the commercial launch of our products, unfavorable sales trends in our existing product lines, or impacts from the other factors mentioned above could adversely affect our revenue growth or cause a sequential decline in quarterly revenues. Due to the possibility of fluctuations in our revenue and expenses, we believe that quarterly comparisons of our operating results are not a good indication of our future performance. If our operating results fluctuate or do not meet the expectations of stock market analysts and investors, our stock price probably would decline.
We have a limited history of commercial sales of systems and consumable products, and our success depends on our ability to develop commercially successful products and on market acceptance of our new and relatively unproven technologies.
We may not possess all of the resources, capability and intellectual property rights necessary to develop and commercialize all of the products or services that may result from our technologies. Sales of our SmartSlide™stem cell research and cell biology systems only began in October 2006, and some of our other technologies, such as our gene expression analysis technologies, are in the early stages of market introduction or are still in development. You should evaluate us in light of the uncertainties and complexities affecting similarly situated companies developing tools for the life sciences and pharmaceutical industries. We must conduct a substantial amount of additional research and development before some of our products will be ready for sale, and we currently have fewer resources available for research and development activities than many of our competitors. We may not be able to develop or launch new products in a timely manner, or at all, or they may not meet customer requirements or be of sufficient quality or at a price that enables us to compete effectively in the marketplace. Challenges frequently encountered in connection with the development or early commercialization of products and services using new and relatively unproven technologies might limit our ability to develop and successfully commercialize these products and services. In addition, we may need to enter into agreements to obtain the intellectual property rights necessary to commercialize some of our products or services, which may not be available on favorable terms, or at all.
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We will need to raise additional capital to meet our business requirements in the future and such capital raising may be costly or difficult to obtain and could dilute current stockholders’ ownership interests.
We will need to raise additional capital in the future, which may not be available on reasonable terms or at all. We raised approximately $9.2 million and $3.6 million in net proceeds in our June 2007 and May 2008 private placement. We expect that such proceeds, together with our income, could fund our operations from the date hereof to February 2009. We will need to raise additional funds through public or private debt or equity financings to meet various business objectives including, but not limited to:
pursuing growth opportunities, including more rapid expansion; |
acquiring complementary businesses; |
making capital improvements to improve our infrastructure; |
hiring qualified management and key employees; |
developing new services, programming or products; |
responding to competitive pressures; |
complying with regulatory requirements such as licensing and registration; and |
maintaining compliance with applicable laws. |
Any additional capital raised through the sale of equity or equity backed securities may dilute current stockholders’ ownership percentages and could also result in a decrease in the market value of our equity securities.
The terms of any securities issued by us in future capital transactions may be more favorable to new investors, and may include preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect on the holders of any of our securities then outstanding.
Furthermore, any additional debt or equity financing that we may need may not be available on terms favorable to us, or at all. If we are unable to obtain required additional capital, we may have to curtail our growth plans or cut back on existing business and, further, we may not be able to continue operating if we do not generate sufficient revenues from operations needed to stay in business.
We may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we issue, such as convertible notes and warrants, which may adversely impact our financial condition.
We may encounter difficulties in managing our expected growth, which could increase our losses.
We expect to experience rapid and substantial growth in order to achieve our operating plans, which will place a strain on our human and capital resources. If we are unable to manage this growth effectively, our losses could increase. Our ability to manage our operations and growth effectively requires us to continue to expend funds to enhance our operational, financial and management controls, reporting systems and procedures and to attract and retain sufficient numbers of talented employees. If we are unable to scale up and implement improvements to our manufacturing process and control systems in an efficient or timely manner, or if we encounter deficiencies in existing systems and controls, then we will not be able to make available the products required to successfully commercialize our technology.
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Failure to attract and retain sufficient numbers of talented employees will further strain our human resources and could impede our growth.
Our financial condition could be adversely affected in the event of uninsured or inadequately insured loss or damage.
We may not be able to obtain insurance policies on terms affordable to us that would adequately insure our business and property against damage, loss or claims by third parties. To the extent our business or property suffers any damages, losses or claims by third parties, which are not covered or adequately covered by insurance, the financial condition of our Company may be materially adversely affected.
If we lose our key personnel or are unable to attract and retain additional qualified personnel, we may be unable to achieve our goals.
We are highly dependent on our management and scientific personnel, including our chief executive officer, chief financial officer, chief technology officer and chief scientific officer. The loss of any of their services could adversely impact our ability to achieve our business objectives. We will need to hire additional qualified personnel with expertise in molecular biology, chemistry, biological information processing, sales, marketing and technical support. We compete for qualified management and scientific personnel with other life science companies, universities and research institutions, particularly those focusing on genomics. Competition for these individuals, particularly in the San Francisco Bay area, is intense, and the turnover rate can be high. Failure to attract and retain management and scientific personnel would prevent us from pursuing collaborations or developing our products or technologies.
Our planned activities will require additional expertise in specific industries and areas applicable to the products developed through our technologies, including the life sciences and healthcare industries. Thus, we will need to add new personnel, including management, and develop the expertise of existing management. The failure to do so could impair the growth of our business.
New rules, including those contained in and issued under the Sarbanes-Oxley Act of 2002, may make it difficult for us to retain or attract qualified officers and directors, which could adversely affect the management of our business and our ability to obtain or retain listing of our common stock.
We may be unable to attract and retain those qualified officers, directors and members of Board of Directors committees required to provide for our effective management because of the changes in the rules and regulations that govern publicly held companies, including, but not limited to, certifications by principal executive officers. The enactment of Sarbanes-Oxley has resulted in the issuance of a series of rules and regulations and the strengthening of existing rules and regulations by the SEC, as well as the adoption of more stringent rules by the stock exchanges. The perceived increased personal risk associated with these recent changes may deter qualified individuals from accepting roles as directors and executive officers.
Further, some of these recent changes heighten the requirements for board or committee membership, particularly with respect to an individual’s independence and level of experience in finance and accounting matters. We may have difficulty attracting and retaining directors with the requisite qualifications. If we are unable to attract and retain qualified officers and directors, the management of our business and our ability to obtain or retain the listing of our common stock on any stock exchange (assuming we elect to seek and are successful in obtaining such listing) could be adversely affected.
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We are a holding company that depends on cash flow from our wholly-owned subsidiary to meet our obligations.
After the Merger, we became a holding company with no material assets other than the stock of our wholly-owned subsidiary. Accordingly, all our operations are conducted by WaferGen, our wholly-owned subsidiary. We currently expect that the earnings and cash flow of our subsidiary will primarily be retained and used by it in its operations, including servicing any debt obligations it may have now or in the future.
All of our former liabilities survived the Merger and there may be undisclosed liabilities that could have a negative impact on our financial condition.
Pursuant to the Merger, we acquired the business of WaferGen as our sole line of business, and accordingly are not pursuing our prior business. Although due diligence activities were performed on us and WaferGen prior to the Merger, the due diligence process may not have revealed all liabilities (actual or contingent) of us or WaferGen that existed or which may arise in the future relating to our activities before the consummation of the Merger. Notwithstanding that all of our then-known liabilities were transferred to Leaseco pursuant to the split-off in connection with the Merger, it is possible that claims for liabilities may still be made against us, which we will be required to defend or otherwise resolve. The provisions and terms of the merger agreement and split-off may not be sufficient to protect us from claims and liabilities and any breaches of related representations and warranties. Although escrow provisions and limited post-closing adjustments in the merger agreement are available to the stockholders of WaferGen and our pre-Merger stockholders, there is no comparable protection offered to our other stockholders. Any liabilities remaining from our pre-Merger company or WaferGen could harm our financial condition.
We may not be able to continue as a going concern.
Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have a history of operating losses that are likely to continue in the future. Significant losses from operations and our dependence on equity and debt financing raise substantial doubt about our ability to continue as a going concern. Our accumulated deficit at June 30, 2008 was $16.0 million. Our financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.
Our operations must begin to provide sufficient revenues to improve our working capital position. If we are unable to become profitable and cannot generate cash flow from our operating activities sufficient to satisfy our current obligations and meet our capital investment objectives, we may be required to raise additional capital or debt to fund our operations, reduce the scope of our operations or discontinue our operations. We may not be able to raise necessary equity or debt financing on acceptable terms or at all.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or detect fraud. Consequently, investors could lose confidence in our financial reporting and this may decrease the trading price of our stock.
We must maintain effective disclosure and internal controls to provide reliable financial reports. We have been assessing our controls to identify areas that need improvement. Based on our evaluation as of December 31, 2007, we concluded that there were material weaknesses in our internal controls and procedures as of December 31, 2007. We also concluded as of June 30, 2008 that our disclosure controls and procedures were not effective as of such date. We are in the process of implementing improvements to our controls, but have not yet completed implementing these changes. Failure to implement these changes to our controls or any others that we identify as necessary to maintain an effective system of such controls could harm our operating results and cause investors to lose confidence in our reported financial information. Any such loss of confidence would have a negative effect on the trading price of our stock.
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Because we are not yet required to comply with rules requiring the adoption of certain corporate governance measures, our stockholders have limited protections against interested director transactions, conflicts of interest and similar matters.
Sarbanes-Oxley, as well as rule changes proposed and enacted by the SEC, the New York and American Stock Exchanges and The Nasdaq Stock Market, as a result of Sarbanes-Oxley, require the implementation of various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to securities which are listed on those exchanges. Because we are not presently required to comply with many of the corporate governance provisions, we have not yet adopted these measures.
Until we comply with the corporate governance measures adopted by the national securities exchanges after the enactment of Sarbanes-Oxley, regardless of whether such compliance is required, the absence of standards of corporate governance may leave our stockholders without protections against interested director transactions, conflicts of interest and similar matters and investors may be reluctant to provide us with funds in the future if we determine it is necessary to raise additional capital. We intend to comply with all applicable corporate governance measures relating to director independence as soon as practicable.
Litigation or other proceedings or third-party claims of intellectual property infringement could require us to spend significant time and money and could prevent us from selling our products or services or impact our stock price.
Our commercial success depends in part on our non-infringement of the patents or proprietary rights of third parties and the ability to protect our own intellectual property.
Third parties may assert that we are employing their proprietary technology without authorization even if we are not. As we enter new markets, competitors may assert that our products infringe their intellectual property rights as part of a business strategy to impede our successful entry into those markets. Third parties such as ABI, the Roche family of companies, Biometra biomedizinische Analytik GmbH, Stratagene Corporation, Bio-Rad Laboratories, Inc., Eppendorf Incorporated, Enzo Biochem, Inc., Affymetrix, Agilent Technologies, Inc., GE Healthcare, Inc., Beckman Coulter, Inc., Illumina, and others may have obtained and may in the future obtain patents and claim that manufacture, use and/or sale of our technologies, methods or products infringes these patents. We could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against these claims even if we are eventually successful in defending ourselves against these claims. Furthermore, parties making claims against us may be able to obtain injunctive or other relief, which effectively could block our ability to further develop, commercialize, manufacture, use and sell methods and products, and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties, or be prohibited from making, using or selling certain methods and/or products. We may not be able to obtain these licenses at a reasonable cost, or at all. In that event, we could encounter delays in product introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses on favorable terms could prevent us from commercializing products, and the prohibition of sale of any of our products could materially affect our ability to grow and to attain profitability.
Our proprietary intellectual property rights may not adequately protect our products and technologies.
Although we have filed a number of United States and international patent applications, we have no issued patents covering our products or technologies. Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection for our products and technologies. We may only be able to protect products and technologies from unauthorized use by third parties to the extent that valid and enforceable patents or trade secrets cover them. Furthermore, the degree of future protection of our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep a competitive advantage.
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The patent positions of life sciences companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in such companies’ patents has emerged to date in the United States. The laws of some countries other than the United States do not protect intellectual property rights to the same extent as the laws of the United States, and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology and/or pharmaceuticals, which could make it difficult for us to stop the infringement of any patents we may obtain in such countries. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business. Changes in either the patent laws or in interpretations of patent laws in the United States or other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents. For example:
we might not have been the first to conceive or reduce to practice one or more inventions disclosed in our pending patent applications; |
we might not have been the first to file patent applications for these inventions; |
others may independently develop similar or alternative products and technologies or duplicate any of our products and technologies; |
it is possible that none of our pending patent applications will result in issued patents, and even if they issue as patents, they may not provide a basis for commercially viable products, and/or may not provide us with any competitive advantages, or may be challenged and invalidated by third parties; |
we may not develop additional proprietary products and technologies that are patentable; and |
third-party patents may have an adverse effect on our ability to continue to grow our business. |
We have applied, and continue to apply, for patents covering our intellectual property (e.g., products and technologies and uses thereof), as we deem appropriate. However, we may fail to apply for patents on products and/or technologies in a timely fashion or at all.
We also rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. While we attempt to use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, or scientific and other advisors may unintentionally or willfully disclose our information to competitors. If we were to attempt to enforce a claim that a third-party had illegally obtained and was using our trade secrets, it could be expensive and time consuming, and the outcome could be unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets than courts inside the United States. Moreover, if our competitors independently develop equivalent knowledge, methods and know-how, it may be difficult for us to enforce our intellectual property and our business could be harmed.
If we are not able to defend the patent or trade secret protection position of our products and technologies, then we may not be able to exclude competitors from developing or marketing competing products, and we may not generate enough revenue from product sales to justify the cost of development of our products and to achieve or maintain profitability.
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We may be unable to protect the intellectual property rights of the third parties from whom we license certain of our intellectual property or with whom we have entered into other strategic relationships, which could negatively impact our competitive advantage.
Certain of our intellectual property rights are currently licensed from third parties and, in the future, we intend to continue to license intellectual property from key strategic partners. We are, and will continue to be, reliant upon such third parties to protect their intellectual property rights to any licensed technology. Such third parties may not protect the intellectual property rights that we license from them and we may be unable defend such intellectual property rights on our own or we may have to undertake costly litigation to defend the intellectual property rights of such third parties. There can be no assurances that we will continue to have proprietary rights to any of the intellectual property that we license from such third parties or otherwise have the right to use through similar strategic relationships. Any loss or limitations on use with respect to our right to use such intellectual property licensed from third parties or otherwise obtained from third parties or with whom we have entered into strategic relationships could negatively impact our competitive advantage.
We expect intense competition in our target markets, which could render our products and/or technologies obsolete, result in significant price reductions or substantially limit the volume of products that we sell. This would limit our ability to compete and achieve and maintain profitability. If we cannot continuously develop and commercialize new products, our revenue may not grow as intended.
Future competition will likely come from existing competitors as well as other companies seeking to develop new technologies for analyzing genetic information. Some of our competitors have various products and/or methodologies for gene detection, expression, characterization, and/or analyses that may be competitive with our products and/or methodologies. In addition, pharmaceutical and biotechnology companies have significant needs for genomic information and may choose to develop or acquire competing technologies to meet these needs. In the molecular diagnostics field, competition will likely come from established diagnostic companies, companies developing and marketing DNA probe tests for genetic and other diseases and other companies conducting research on new technologies to ascertain and analyze genetic information. Further, in the event that we develop new technology and products that compete with existing technology and products of well-established companies, there can be no guarantee that the marketplace will readily adopt any such new technology and products that we may introduce in the future.
The market for genetic research and molecular diagnostic products is highly competitive, with several large companies already having significant market share. Established genetic research and diagnostic companies also have an installed base of instruments in several markets, including clinical and reference laboratories. In addition, these companies have formed alliances with genomics companies which provide them access to genetic information that may be incorporated into their diagnostic tests. We may not be able to compete effectively with these companies.
Our manufacturing capacity may limit our ability to sell our products.
We are in the process of developing the capacity to meet our anticipated demand for our products. There are uncertainties inherent in expanding our manufacturing capabilities and we may not be able to increase our capacity in a timely manner. For example, manufacturing and product quality issues may arise as we increase production rates at our manufacturing facility and launch new products. As a result, we may experience difficulties in meeting customer demand, in which case we could lose customers or be required to delay new product introductions, and demand for our products could decline. Due to the intricate nature of manufacturing products, we may encounter similar or previously unknown manufacturing difficulties in the future that could significantly reduce production yields, impact our ability to launch or sell these products, or to produce them economically, prevent us from achieving expected performance levels or cause us to set prices that hinder wide adoption by customers.
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If we are unable to develop and maintain our manufacturing capability, we may not be able to launch or support our products in a timely manner, or at all.
We currently possess only one facility capable of manufacturing our products and services for both sale to our customers and internal use. If a natural disaster were to significantly damage our facility or if other events were to cause our operations to fail, these events could prevent us from developing and manufacturing our products and services. If our networks or storage infrastructure were to fail for an extended period of time, it would adversely impact our ability to manufacture our products on a timely basis and may prevent us from achieving our expected shipments in any given period.
We may be adversely affected by environmental, health and safety laws, regulations and liabilities.
As we pursue our business plan, we will become subject to a variety of federal, state and municipal environmental, health and safety laws based on our use of hazardous materials in both our manufacturing and research and development operations. These laws and regulations can often require expensive compliance procedures or operational changes to limit actual or potential impacts to the environment. A violation of these laws and regulations can result in substantial fines, criminal sanctions and/or operational shutdown. Furthermore, we may become liable for the investigation and cleanup of environmental contamination, whether intentional or unintentional, and we could be responsible for damages related to the clean-up of such contamination or individual injury caused by such contamination. We may also be subject to related claims by private parties alleging property damage and personal injury due to exposure to hazardous or other materials as a result of such contamination. Some of these matters may require expending significant amounts for investigation, cleanup or other costs. Events such as these could negatively impact our financial position.
Our sales, marketing and technical support organization may limit our ability to sell our products.
We currently have limited resources available for sales and marketing and technical support services as compared to some of our primary competitors. In order to effectively commercialize our gene expression systems and other products to follow, we will need to expand our sales, marketing and technical support staff both domestically and internationally. We may not be successful in establishing or maintaining either a direct sales force or distribution arrangements to market our products and services. In addition, we compete primarily with much larger companies that have larger sales and distribution staffs and a significant installed base of products in place, and the efforts from a limited sales and marketing force may not be sufficient to build the market acceptance of our products required to support continued growth of our business.
We may be exposed to liability due to product defects.
The risk of product liability claims is inherent in the testing, manufacturing, marketing and sale of research products for therapeutic and diagnostic development. We may seek to acquire additional insurance for clinical liability risks. We may not be able to obtain such insurance or general product liability insurance on acceptable terms or in sufficient amounts. A product liability claim or recall could negatively impact our financial position.
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Risks Related to Our Industry
Our success depends upon the continued emergence and growth of markets for analysis of genetic variation and biological function.
We design our products primarily for applications in the life sciences and pharmaceutical industries. The usefulness of our technology depends in part upon the availability of genetic data and its usefulness in identifying or treating disease. We are initially focusing on markets for analysis of genetic variation and biological function, namely gene expression profiling. This market is new and emerging, and may not develop as quickly as we anticipate, or reach its full potential. Other methods of analysis of genetic variation and biological function may emerge and displace the methods we are developing. Also, researchers may not seek or be able to convert raw genetic data into medically valuable information through the analysis of genetic variation and biological function. In addition, factors affecting research and development spending generally, such as changes in the regulatory environment affecting life sciences and pharmaceutical companies, and changes in government programs that provide funding to companies and research institutions, could harm our business. If useful genetic data is not available or if our target markets do not develop in a timely manner, demand for our products may grow at a slower rate than we expect, and we may not be able to achieve or sustain profitability.
We may not be able to deliver acceptable products to our customers due to the rapidly evolving nature of genetic sequence information upon which our products are based.
The genetic sequence information upon which we may rely to develop and manufacture our products is contained in a variety of public and private databases throughout the world. These databases are rapidly expanding and evolving. In addition, the accuracy of such databases and resulting genetic research is dependent on various scientific interpretations, and it is not expected that global genetic research efforts will result in standardized genetic sequence databases for particular genomes in the near future. Although we have implemented ongoing internal quality control efforts to help ensure the quality and accuracy of our products, the fundamental nature of our products requires us to rely on genetic sequence databases and scientific interpretations which are continuously evolving. As a result, these variables may cause us to develop and manufacture products that incorporate sequence errors or ambiguities. The magnitude and importance of these errors depends on multiple and complex factors that would be considered in determining the appropriate actions required to remedy any inaccuracies. Our inability to timely deliver acceptable products as a result of these factors would likely adversely affect our relationship with customers, and could negatively impact our financial condition.
We face risks associated with technological obsolescence and emergence of standardized systems for genetic analysis.
High throughput genetic analyses and quantitative detection methodologies (including, for example, PCR) is undergoing rapid evolution and technological changes. New technologies, techniques or products could emerge which might allow the packaging and analysis of genomic information at densities similar to, or even higher than, our existing or future technology. Other companies may begin to offer products that are directly competitive with, or are technologically superior to, our products. There can be no assurance that we will be able to maintain our technological advantages over emerging technologies in the future. Over time, we will need to respond to technological innovation in a rapidly changing industry. Standardization of tools and systems for genetic research is still ongoing and there can be no assurance that our products will emerge as the standard for genetic research. The emergence of competing technologies and systems as market standards for genetic research may result in our products becoming uncompetitive which would have an adverse effect on our business and prospects.
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Our success depends on the continuous development of new products and our ability to manage the transition from our older products to new products.
We compete in markets that are new, intensely competitive, highly fragmented and rapidly changing, and many of our current and potential competitors have significantly greater financial, technical, marketing and other resources than we do. In addition, many current and potential competitors have greater name recognition, more extensive customer bases and access to proprietary genetic content. The continued success of our products will depend on our ability to produce products with smaller feature sizes and create greater information capacity at our current or lower costs. The successful development, manufacture and introduction of our new products is a complicated process and depend on our ability to manufacture and supply enough products in sufficient quantity and quality and at acceptable cost in order to meet customer demand. If we fail to keep pace with emerging technologies or are unable to develop, manufacture and introduce new products, we will become uncompetitive, our pricing and margins will decline, and our business will suffer.
Our failure to successfully manage the transition between our older products and new products may adversely affect our financial results. As we introduce new or enhanced products, we must successfully manage the transition from older products to minimize disruption in customers’ ordering patterns, avoid excessive levels of older product inventories and provide sufficient supplies of new products to meet customer demands. When we introduce new or enhanced products, we face numerous risks relating to product transitions, including the inability to accurately forecast demand and difficulties in managing different sales and support requirements due to the type or complexity of the new products.
Ethical, legal and social concerns surrounding the use of genetic information could reduce demand for our products.
Genetic testing has raised ethical issues regarding privacy and the appropriate uses of the resulting information. For these reasons, governmental authorities and others may call for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, such concerns may lead individuals to refuse to use genetics tests even if permissible. Any of these scenarios could reduce the potential markets for our products.
Risks Related to Our Organization
Even though we are not a California corporation, our common stock could still be subject to a number of key provisions of the California General Corporation Law.
Under Section 2115 of the California General Corporation Law (CGCL), corporations not organized under California law may still be subject to a number of key provisions of the CGCL. This determination is based on whether the corporation has significant business contacts with California and if more than 50% of its voting securities are held of record by persons having addresses in California. In the immediate future, we will continue our business and operations and a majority of our business operations, revenue and payroll will be conducted in, derived from, and paid to residents of California. Therefore, depending on our ownership, we could be subject to some provisions of the CGCL. Among the more important provisions are those relating to the election and removal of directors, cumulative voting, standards of liability and indemnification of directors, distributions, dividends and repurchases of shares, stockholder meetings, approval of some corporate transactions, dissenters’ and appraisal rights, and inspection of corporate records. If we are required to comply with these provisions, this compliance could cause us to incur additional administrative and legal expenses and divert our management’s time and attention from the operation of our business.
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Because WaferGen has become public by means of a reverse merger, we may not be able to attract the attention of major brokerage firms.
There may be risks associated with WaferGen’s becoming a public company through a “reverse merger.”Securities analysts of major brokerage firms may not provide coverage of us since there is no incentive to brokerage firms to recommend the purchase of our common stock. No assurance can be given that brokerage firms will, in the future, want to conduct any secondary offerings on our behalf. Also, if securities analysts do not cover our common stock, the lack of research coverage may adversely affect its market price.
Risks Related to Our Common Stock
Our common stock has a limited bid history and prospective investors may not be able to resell their shares at their purchase price, if at all.
Our common stock is currently available for trading in the over-the-counter market and is quoted on the OTC Bulletin Board under the symbol “WGBS.OB.”Prior to the closing of the Merger, there was no bid history for our common stock and there is no assurance that a regular trading market will develop or, if developed, will be sustained. This may severely limit the liquidity of our common stock, and may likely have a material adverse effect on the market price of our common stock and on our ability to raise additional capital.
The market price of the common stock has fluctuated significantly since it was first quoted on the OTC Bulletin Board on June 6, 2007. Since this date, through August 10, 2008, the price has fluctuated from a low of $1.06 to a high of $2.75. The price of our common stock may continue to fluctuate significantly in response to factors, some of which are beyond our control, including the following:
actual or anticipated variations in operating results; |
the limited number of holders of the common stock, and the limited liquidity available through the OTC Bulletin Board; |
changes in financial estimates by securities analysts; |
changes in the economic performance and/or market valuations of other biotechnology companies; |
our announcement of significant acquisitions, strategic partnerships, joint ventures or capital commitments; |
additions or departures of key personnel; and |
sales or other transactions involving our capital stock. |
Our common stock may be considered “penny stock”and may be difficult to sell.
The SEC has adopted regulations which generally define “penny stock “to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is currently less than $5.00 per share and therefore is designated as a “penny stock “according to SEC rules. This designation requires any broker or dealer selling these securities to disclose some information concerning the transaction obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell the common stock and may affect the ability of investors to sell their shares. These regulations may likely have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock. In addition, since the common stock is currently traded on the OTC Bulletin Board, investors may find it difficult to obtain accurate quotations of the common stock and may experience a lack of buyers to purchase our stock or a lack of market makers to support the stock price.
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Stockholders may experience dilution of their ownership interests because of the future issuance of additional shares of our common stock and our preferred stock.
In the future, we may issue our authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of our present stockholders. We are authorized to issue an aggregate of 310,000,000 shares of capital stock consisting of 300,000,000 shares of common stock, par value $0.001 per share, of which 24,830,932 shares were issued and outstanding as of June 30, 2008, and 10,000,000 shares of “blank check “preferred stock, par value $0.001 per share, of which no shares are issued and outstanding. The preferred stock will have preferences and rights as may be determined by our board of directors at the time of issuance. Specifically, our board of directors has the authority to issue preferred stock without further stockholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into common stock, which could decrease the relative voting power of the common stock or result in dilution to our existing stockholders. In addition, as of June 30, 2008, we have outstanding options to purchase an aggregate of 2,673,700 shares of our common stock and warrants to purchase an aggregate of 3,666,121 shares of our common stock. The future exercise of these options and warrants will subject our existing stockholders to experience dilution of their ownership interests. We may also issue additional shares of common stock or other securities that are convertible into or exercisable for common stock in connection with hiring or retaining employees, future acquisitions, future sales of our securities for capital raising purposes, or for other business purposes. The future issuance of any additional shares of our common stock may create downward pressure on the trading price of our common stock. There can be no assurance that we will not be required to issue additional shares, warrants or other convertible securities in the future in conjunction with any capital raising efforts, including at a price (or exercise prices) below the price at which shares of our common stock are then traded.
Our principal stockholders will have significant voting power and may take actions that may not be in the best interests of other stockholders.
Our officers, directors, principal stockholders and their affiliates control a significant portion of our outstanding common stock. If these stockholders act together, they will be able to exert significant control over our management and affairs requiring stockholder approval, including approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of our common stock. This concentration of ownership may not be in the best interests of all our stockholders.
Stockholders should not anticipate receiving cash dividends on our stock.
We have never declared or paid any cash dividends or distributions on our capital stock. We currently intend to retain future earnings to support operations and to finance expansion and therefore do not anticipate paying any cash dividends on our common stock in the foreseeable future.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information required by this Item has previously been provided in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 21, 2008.
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Item 3. Defaults Upon Senior Securities
Not applicable to the three months ended June 30, 2008.
Item 4. Submission of Matters to a Vote of Security Holders
Our annual meeting of the shareholders was held on June 5, 2008. The election of six directors to the Board of Directors and a proposal to approve the WaferGen Bio-system, Inc. 2008 Equity Incentive Plan were the only matters submitted to a vote.
The following table sets forth the results of voting for the election of the Board of Directors:
Election of Directors Name | Votes For | Votes Withheld | Abstentions | Broker Non-Votes | ||||
Alnoor Shivji | 17,559,763 | 5,700 | 0 | 5,652,383 | ||||
Amjad Huda | 16,890,296 | 675,167 | 0 | 5,652,383 | ||||
Victor Joseph | 17,563,863 | 1,600 | 0 | 5,652,383 | ||||
Makoto Kanashiro | 17,563,863 | 1,600 | 0 | 5,652,383 | ||||
Dr. Dean Hautamaki | 17,563,863 | 1,600 | 0 | 5,652,383 | ||||
Joel Kanter | 16,897,196 | 668,267 | 0 | 5,652,383 |
The following results represent the votes cast for the WaferGen Bio-systems, Inc. 2008 Equity Incentive Plan:
Votes For | Votes Against | Abstentions | Broker Non-Votes | |||
12,494,781 | 10,000 | 0 | 5,060,682 |
The following results represent the vote cast for ratification of Rowbotham & Company LLP as the independent auditors for the fiscal year ending December 31, 2008.
Votes For | Votes Against | Abstentions | Broker Non-Votes | |||
17,563,863 | 100 | 1,500 | 0 |
Item 5. Other Information
Not applicable to the three months ended June 30, 2008.
Item 6. Exhibits
Exhibit Number | Description | |
31.1* | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | |
31.2* | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | |
32.1* | Section 1350 Certification of Principal Executive Officer and Principal Financial Officer |
* Filed herewith. | |
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In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WAFERGEN BIO-SYSTEMS, INC. | |||
Dated: August 14, 2008 | By: | /s/ Amjad Huda | |
Amjad Huda | |||
Chief Financial Officer (principal financial and accounting officer) |
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Exhibit Number | Description | |
31.1 * | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | |
31.2 * | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | |
32.1 * | Section 1350 Certification of Principal Executive Officer and Principal Financial Officer |
* Filed herewith. |
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