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 March 31, 2009
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 | 90-0416683 | |||||
(State or other jurisdiction of incorporation or organization) | (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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer 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 had 24,830,932 shares of common stock outstanding as of May 12, 2009.
Page | |||||||
Part I | FINANCIAL INFORMATION | ||||||
Item 1. | Financial Statements (Unaudited) | 1 | |||||
Condensed Consolidated Balance Sheets (Unaudited) | 1 | ||||||
Condensed Consolidated Statements of Operations (Unaudited) | 2 | ||||||
Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited) | 3 | ||||||
Condensed Consolidated Statements of Cash Flows (Unaudited) | 7 | ||||||
Notes to the Condensed Consolidated Financial Statements (Unaudited) | 8 | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 | |||||
Item 4. | Controls and Procedures | 30 | |||||
Part II | OTHER INFORMATION | 31 | |||||
Item 1. | Legal Proceedings | 31 | |||||
Item 1A. | Risk Factors | 31 | |||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 32 | |||||
Item 3. | Defaults Upon Senior Securities | 33 | |||||
Item 4. | Submission of Matters to a Vote of Security Holders | 33 | |||||
Item 5. | Other Information | 33 | |||||
Item 6. | Exhibits | 34 | |||||
SIGNATURES | 35 | ||||||
EXHIBIT INDEX | 36 | ||||||
PART I FINANCIAL INFORMATION
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
March 31, 2009 | December 31, 2008 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,064,492 | $ | 2,597,413 | ||||
Accounts receivables | 17,696 | 40,757 | ||||||
Inventories | 219,301 | 227,272 | ||||||
Prepaid expenses and other current assets | 87,015 | 135,629 | ||||||
Total current assets | 1,388,504 | 3,001,071 | ||||||
Property and equipment, net | 841,375 | 795,339 | ||||||
Other assets | 15,490 | 15,690 | ||||||
Total assets | $ | 2,245,369 | $ | 3,812,100 | ||||
Liabilities and Stockholders’ Equity (Deficit) | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 959,080 | $ | 904,094 | ||||
Accrued rent | 24,794 | 31,671 | ||||||
Accrued payroll | 161,604 | 160,242 | ||||||
Accrued vacation | 191,885 | 181,377 | ||||||
Accrued other expenses | 189,217 | 72,012 | ||||||
Current portion of capital lease obligations | 50,007 | 55,934 | ||||||
Total current liabilities | 1,576,587 | 1,405,330 | ||||||
Capital lease obligations, net of current portion | 18,270 | 24,928 | ||||||
Redeemable convertible preference shares in subsidiary | 2,012,916 | 1,977,916 | ||||||
Commitments and contingencies | — | — | ||||||
Stockholders’ equity (deficit): | ||||||||
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 March 31, 2009 and December 31, 2008 | 24,831 | 24,831 | ||||||
Additional paid-in capital | 20,500,992 | 20,397,789 | ||||||
Accumulated deficit | (21,845,060 | ) | (20,032,260 | ) | ||||
Accumulated other comprehensive income (loss) | (43,167 | ) | 13,566 | |||||
Total stockholders’ equity (deficit) | (1,362,404 | ) | 403,926 | |||||
Total liabilities and stockholders’ equity (deficit) | $ | 2,245,369 | $ | 3,812,100 | ||||
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)
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, | Period From October 22, 2002 (Inception) to | |||||||||||
2009 | 2008 | March 31, 2009 | ||||||||||
Revenue | $ | 41,838 | $ | 181,640 | $ | 957,972 | ||||||
Cost of revenue | 15,832 | 75,017 | 357,731 | |||||||||
Gross margin | 26,006 | 106,623 | 600,241 | |||||||||
Operating expenses: | ||||||||||||
Sales and marketing | 135,848 | 385,174 | 2,316,862 | |||||||||
Research and development | 959,888 | 952,441 | 11,656,278 | |||||||||
General and administrative | 732,166 | 689,043 | 8,122,320 | |||||||||
Total operating expenses | 1,827,902 | 2,026,658 | 22,095,460 | |||||||||
Operating loss | (1,801,896 | ) | (1,920,035 | ) | (21,495,219 | ) | ||||||
Other income and (expenses): | ||||||||||||
Interest income | 3,072 | 31,717 | 248,437 | |||||||||
Interest expense | (2,832 | ) | (3,973 | ) | (314,716 | ) | ||||||
Miscellaneous income (expense) | 23,856 | — | (54,648 | ) | ||||||||
Total other income and (expenses) | 24,096 | 27,744 | (120,927 | ) | ||||||||
Net loss before provision for income taxes | (1,777,800 | ) | (1,892,291 | ) | (21,616,146 | ) | ||||||
Provision for income taxes | — | — | — | |||||||||
Net loss | (1,777,800 | ) | (1,892,291 | ) | (21,616,146 | ) | ||||||
Accretion on Redeemable Convertible Preference Shares in Subsidiary | (35,000 | ) | — | (72,916 | ) | |||||||
Accretion on Series B Preferred Stock | — | — | (155,998 | ) | ||||||||
Net loss applicable to common stockholders | $ | (1,812,800 | ) | $ | (1,892,291 | ) | $ | (21,845,060 | ) | |||
Net loss per share - basic and diluted | $ | (0.07 | ) | $ | (0.08 | ) | ||||||
Shares used to compute net loss per share - basic and diluted | 24,830,932 | 23,217,846 | ||||||||||
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 | — | $ | — | — | $ | — | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
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) | |||||||||||
[
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.
3
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of 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) | |||||||||||
[
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.
4
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of 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, 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.
5
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited)
[
Accumulated | |||||||||||||||||||||||
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 $88,743 | — | — | 1,585,550 | 1,586 | 3,477,158 | — | — | 3,478,744 | |||||||||||||||
Issuance of Common Stock in May 2008 for cash | — | — | 27,536 | 27 | 4,052 | — | — | 4,079 | |||||||||||||||
Stock-based compensation | — | — | — | — | 388,650 | — | — | 388,650 | |||||||||||||||
Net loss | — | — | — | — | — | (8,041,437) | — | (8,041,437) | |||||||||||||||
Accretion on Redeemable Convertible Preference Shares in Subsidiary | — | — | — | — | — | (37,916) | — | (37,916) | |||||||||||||||
Translation adjustment | — | — | — | — | — | — | 13,566 | 13,566 | |||||||||||||||
Balances as of December 31, 2008 | — | $ | — | 24,830,932 | $ | 24,831 | $ | 20,397,789 | $ | (20,032,260) | $ | 13,566 | $ | 403,926 | |||||||||
Total comprehensive income (loss) | $ | (8,041,437) | $ | 13,566 | $ | (8,027,871) | |||||||||||||||||
[
Accumulated | |||||||||||||||||||||||
Additional | Other | ||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | |||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Income (loss) | Total | ||||||||||||||||
Balances as of January 1, 2009 | — | $ | — | 24,830,932 | $ | 24,831 | $ | 20,397,789 | $ | (20,032,260) | $ | 13,566 | $ | 403,926 | |||||||||
Stock-based compensation | — | — | — | — | 103,203 | — | — | 103,203 | |||||||||||||||
Net loss | — | — | — | — | — | (1,777,800) | — | (1,777,800) | |||||||||||||||
Accretion on Redeemable Convertible Preference Shares in Subsidiary | — | — | — | — | — | (35,000) | — | (35,000) | |||||||||||||||
Translation adjustment | — | — | — | — | — | — | (56,733) | (56,733) | |||||||||||||||
Balances as of March 31, 2009 | — | $ | — | 24,830,932 | $ | 24,831 | $ | 20,500,992 | $ | (21,845,060) | $ | (43,167) | $ | (1,362,404) | |||||||||
Total comprehensive income (loss) | $ | (1,777,800) | $ | (56,733) | $ | (1,834,533) | |||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
(A Development Stage Company)
Three Months Ended March 31, | Period From October 22, 2002 (Inception) to | |||||||||||
2009 | 2008 | March 31, 2009 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net loss | $ | (1,777,800 | ) | $ | (1,892,291 | ) | $ | (21,616,146 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
Depreciation and amortization | 90,125 | 50,472 | 510,673 | |||||||||
Non cash miscellaneous income | — | — | (5 | ) | ||||||||
Stock-based compensation | 103,203 | 122,935 | 1,792,734 | |||||||||
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 | |||||||||
Change in operating assets and liabilities: | ||||||||||||
Accounts receivable | 23,061 | (88,966 | ) | (17,696 | ) | |||||||
Inventories | (4,892 | ) | (45,241 | ) | (232,164 | ) | ||||||
Prepaid expenses and other current assets | 48,493 | 28,031 | (87,200 | ) | ||||||||
Other assets | — | (10,008 | ) | (15,795 | ) | |||||||
Accounts payable | 57,319 | 60,594 | 962,764 | |||||||||
Accrued rent | (6,137 | ) | 6,142 | 25,932 | ||||||||
Accrued payroll | 1,362 | 12,060 | 161,604 | |||||||||
Accrued vacation | 10,728 | 14,026 | 192,217 | |||||||||
Accrued other expenses | 119,010 | 60,223 | 191,969 | |||||||||
Net cash used in operating activities | (1,335,528 | ) | (1,682,023 | ) | (17,802,566 | ) | ||||||
Cash flows from investing activities: | ||||||||||||
Purchase of property and equipment | (131,240 | ) | (246,063 | ) | (1,107,265 | ) | ||||||
Net cash used in investing activities | (131,240 | ) | (246,063 | ) | (1,107,265 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Advances from (repayments to) related party, net | — | — | 61,588 | |||||||||
Repayment of capital lease obligations | (12,585 | ) | (55,575 | ) | (177,149 | ) | ||||||
Proceeds from issuance of notes payable | — | — | 3,665,991 | |||||||||
Net Proceeds from issuance of Redeemable Convertible Preference Shares in Subsidiary | — | — | 1,940,000 | |||||||||
Repayments on notes payable | — | — | (510,000 | ) | ||||||||
Proceeds from issuance of Series A Preferred Stock | — | — | 66,037 | |||||||||
Proceeds from issuance of Series B Preferred Stock | — | — | 1,559,942 | |||||||||
Proceeds from issuance of Common Stock, net of offering costs | — | — | 13,404,991 | |||||||||
Net cash provided by (used in) financing activities | (12,585 | ) | (55,575 | ) | 20,011,400 | |||||||
Effect of exchange rates on cash | (53,568 | ) | — | (37,077 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | (1,532,921 | ) | (1,983,661 | ) | 1,064,492 | |||||||
Cash and cash equivalents at beginning of the period | 2,597,413 | 5,189,858 | — | |||||||||
Cash and cash equivalents at end of the period | $ | 1,064,492 | $ | 3,206,197 | $ | 1,064,492 | ||||||
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)
NOTE 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, its name was changed to La Burbuja Café, Inc. On January 1, 2007, its name was changed to WaferGen Bio-systems, Inc.
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 on the same terms 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. had 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.
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 | ||
8
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
We filed a registration statement (the “Registration Statement”) registering for resale (i) the shares of Common Stock included in the units sold in the offering, (ii) the shares of Common Stock underlying the warrants included in the units sold and (iii) the shares of Common Stock underlying the warrants issued to the Placement Agent in connection with the offering, consistent with the terms and provisions of the Registration Rights Agreement from the offering, which Registration Statement became effective on January18, 2008.
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 of its shareholders whereby all the assets and liabilities of WaferGen Bio-systems, Inc. just prior to the Merger were assigned to such shareholders in exchange for their surrender of 4,277,778 shares of common stock of WaferGen Bio-systems, Inc. In addition, all of Wafergen, Inc.’s existing Series A Preferred Stock, Series B Preferred Stock, and common stock was converted into common stock of Wafergen Bio-systems, Inc. pursuant to the terms of the merger agreement based on an exchange ratio of .53991522 for 1.
A summary of the common stock outstanding of WaferGen Bio-systems, Inc. subsequent to the above was 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 of Wafergen, Inc.’s outstanding 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.
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. The Company owns 100% of the common stock and none of the preferred stock of this entity. See NOTE 6 below.
9
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
The transactions between WaferGen Bio-systems, Inc. and Wafergen, Inc. have 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 accounting the acquirer, Wafergen, Inc. 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.
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.
Going Concern - The Company's condensed consolidated financial statements have been presented on a basis that contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company continues to face significant risks associated with the successful execution of its strategy given the current market environment for similar companies and failure to generate sufficient revenues or raise additional capital could have a material adverse effect on the Company’s ability to continue as a going concern and to achieve its intended business objectives. These facts raise substantial doubt about the Company’s ability to continue as a going concern. There can be no assurance that the Company will be successful in its efforts to enhance its liquidity situation. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
10
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 2. | Summary of Significant Accounting Policies |
Basis of Presentation - The Company has prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to these rules and regulations. These condensed consolidated financial statements should be read in conjunction with our audited financial statements and footnotes related thereto for the year ended December 31, 2008 included in our Form 10-K filed with the SEC. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position and the results of its operations and cash flows.
The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year.
Basis of Consolidation - The condensed consolidated financial statements include the account of WaferGen Bio-systems, Inc. and its subsidiaries. Intercompany transactions and balances have been eliminated.
Use of Estimates - Preparing condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results and outcomes could differ from these estimates and assumptions.
Foreign Currencies - - Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where that local currency is the functional currency, are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average rates of exchange prevailing during each reporting period. Remeasurement adjustments resulting from this process are charged or credited to other comprehensive income (loss).
Concentration of Credit Risk - Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash in commercial banks. Accounts in the United States are secured by the Federal Deposit Insurance Corporation. Accounts in Malaysia are also guaranteed by the Malaysian government. The Company’s total deposits at commercial banks usually exceed the balances insured.
At March 31, 2009, two customers accounted for 60% and 23%, respectively, of accounts receivable. At December 31, 2008, two customers accounted for 90% and 10%, respectively, of accounts receivable.
For three months ended March 31, 2009, two customers accounted for 68% and 25%, respectively, of total revenues. For three months ended March 31, 2008, five customers accounted for 31%, 18%, 16%, 15% and 15%, respectively, of total revenues.
11
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
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, net of estimated forfeitures, 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 for the three months ended March 31, 2009 and 2008:
March 31, 2009 | March 31, 2008 | |||||||
Weighted-average grant date fair value | $ | 0.36 | $ | 0.50 | ||||
Risk free interest rate | 1.55 | % | 3.03 | % | ||||
Expected lives | 4.75 Years | 5 Years | ||||||
Expected volatility | 40.04%-41.49 | % | 18.91 | % | ||||
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. Since the Company’s stock has not been trade for as long as the expected term of the options, the Company uses a weighted average of the historic volatility of four comparable companies over the retrospective period corresponding to the expected life of the Company’s own options on the grant date. Extra weighting is attached to those companies most similar in terms of size and business activity. An increase in the expected volatility life will increase the fair value and the related compensation expense.
Dividend yields - 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 yields will decrease the fair value and the related compensation expense.
Forfeiture rates - This is a measure of the amount of awards that are expected to not vest. An increase in the estimated forfeiture rates will decrease the related compensation expense.
12
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Net 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 March 31, 2009 and 2008:
Three Months Ended March 31, | |||||
2009 | 2008 | ||||
Shares issuable upon exercise of common stock options | 522,955 | 751,692 | |||
Shares issuable upon exercise of common stock warrants | — | 29,772 | |||
Shares issuable upon conversion of RCPS | 888,888 | — | |||
Total common share equivalents excluded from denominator for diluted EPS computation | 1,411,843 | 781,464 | |||
Recent Accounting Pronouncements
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2/124-2”). FSP FAS 115-2/124-2 requires entities to separate any other-than-temporary impairment of a debt security into two components when there are credit related losses associated with the impaired debt security for which management asserts that it does not have the intent to sell the security, and it is more likely than not that it will not be required to sell the security before recovery of its cost basis. The amount of the other-than-temporary impairment related to a credit loss is recognized in earnings, and the amount of the other-than-temporary impairment related to other factors is recorded in other comprehensive loss. FSP FAS 115-2/124-2 is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We expect the adoption of FSP FAS 115-2/124-2 will not have a material impact on our consolidated financial condition or results of operations.
In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are Not Orderly” (“FSP FAS 157-4”). Under FSP FAS 157-4, if an entity determines that there has been a significant decrease in the volume and level of activity for the asset or the liability in relation to the normal market activity for the asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect fair value. In addition, if there is evidence that the transaction for the asset or liability is not orderly, the entity shall place little, if any weight on that transaction price as an indicator of fair value. FSP FAS 157-4 is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We expect the adoption of FSP FAS 157-4 will not have a material impact on our consolidated financial condition or results of operations.
13
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 require disclosures about fair value of financial instruments in interim and annual financial statements. FSP FAS 107-1 and APB 28-1 are effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We expect the adoption of FSP FAS 107-1 and APB 28-1 will not have a material impact on our consolidated financial condition or results of operations.
We adopted FAS No. 141(R) on January 1, 2009, the first day of our 2009 fiscal year. FAS No. 141(R) significantly changed the accounting for business combinations. Under FAS No. 141(R), an acquiring entity is required to recognize all the assets acquired and all the liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. Transaction costs are no longer included in the measurement of the business acquired. Instead, these costs are expensed as they are incurred. FAS No. 141(R) also includes a substantial number of new disclosure requirements. FAS No. 141(R) applies to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, which for us was the beginning of our 2009 fiscal year. The adoption of FAS No. 141(R) did not have a material impact on our financial statements.
We partially adopted FAS No. 157 on January 1, 2008, the first day of our 2008 fiscal year. FSP FAS No. 157-2, “Effective Date of Financial Accounting Standards Board (“FASB”) Statement No. 157” (“FSP FAS No. 157-2”), amended FAS No. 157 by delaying its effective date, by one year, for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. In accordance with FSP FAS No. 157-2, we adopted the provisions of FAS No. 157 to non-financial assets and non-financial liabilities on January 1, 2009, the first day of our 2009 fiscal year. This adoption did not have a material impact on our financial statements.
We adopted FAS No. 160 on January 1, 2009, the first day of our 2009 fiscal year. FAS No. 160 establishes new accounting and reporting standards for noncontrolling interests, previously known as minority interest, in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of noncontrolling interests as equity in the consolidated financial statements separate from the parent’s equity. The amount of net income or loss attributable to the noncontrolling interests is included in consolidated net income on the face of the income statement. FAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss is measured using the fair value of the noncontrolling equity investment on the deconsolidation date. FAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interests. FAS No. 160 is applied prospectively for fiscal years and interim periods within those fiscal years, beginning with the current fiscal year, except for the presentation and disclosure requirements, which are applied retrospectively for all periods presented. The adoption of FAS No. 160 did not have a material impact on our financial statements.
We adopted FAS No. 161 on January 1, 2009, the first day of our 2009 fiscal year. FAS No. 161 requires enhanced disclosure of derivatives and hedging activities in order to improve the transparency of financial reporting. Under FAS No. 161, entities are required to provide enhanced disclosures relating to: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedge items are accounted for under FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS No. 133”), and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. FAS No. 161 is applied prospectively to all derivative instruments and non-derivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under FAS No. 133 for all financial statements issued for fiscal years and interim periods beginning with our current fiscal year. The adoption of FAS No. 161 did not have a material impact on our financial statements.
14
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 3. | Inventories |
Inventories consisted of the following at March 31, 2009 and December 31, 2008:
March 31, 2009 | December 31, 2008 | |||||||
Finished goods | $ | 219,301 | $ | 227,272 | ||||
Inventories | $ | 219,301 | $ | 227,272 | ||||
NOTE 4. | Property and Equipment, net |
Property and equipment, net consisted of the following at March 31, 2009 and December 31, 2008:
March 31, 2009 | December 31, 2008 | |||||||
Equipment | $ | 1,150,979 | $ | 1,014,212 | ||||
Tools & molds | 72,437 | 72,437 | ||||||
Leasehold improvements | 62,419 | 63,163 | ||||||
Furniture and fixtures | 41,324 | 42,206 | ||||||
Total property and equipment | 1,327,159 | 1,192,018 | ||||||
Less accumulated depreciation and amortization | (485,784 | ) | (396,679 | ) | ||||
Property and equipment, net | $ | 841,375 | $ | 795,339 | ||||
Depreciation and amortization expense totaled $90,125 and $50,472 for the three months ended March 31, 2009 and 2008, respectively, and $510,673 for the period from inception to March 31, 2009.
Equipment includes the following amounts under leases:
March 31, 2009 | December 31, 2008 | |||||||
Cost | $ | 178,712 | $ | 178,712 | ||||
Accumulated depreciation | (78,532 | ) | (63,639 | ) | ||||
Total | $ | 100,180 | $ | 115,073 | ||||
15
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 5. | Capital Lease Obligation |
The Company leases equipment under two capital leases that expire in January 2010 and August 2011. The balance outstanding on a third lease was repaid in August 2008. Aggregate future obligations under the capital leases in effect as of March 31, 2009 are as follows:
Capital Leases | ||||
Year ending March 31, | ||||
2010 | $ | 54,082 | ||
2011 | 13,675 | |||
2012 | 5,698 | |||
Total minimum lease obligations | 73,455 | |||
Less amounts representing interest | (5,178 | ) | ||
Present value of future minimum lease payments | 68,277 | |||
Less current portion of capital lease obligation | (50,007 | ) | ||
Capital lease obligation, less current portion | $ | 18,270 | ||
Interest expense related to capital leases totaled $2,202 and $3,973 for the three months ended March 31, 2009 and 2008, respectively, and $20,066 for the period from inception to March 31, 2009.
NOTE 6. | Redeemable Convertible Preference Shares in Subsidiary |
On July 18, 2008, the Company’s Malaysian subsidiary, WaferGen Biosystems (M) Sdn. Bhd. (“WGBM”), received $1,000,000, less 3% issuance costs, in exchange for the issuance of redeemable convertible preference shares (“RCPS”) of WGBM in a private placement to Malaysian Technology Development Corporation Sdn. Bhd. (“MTDC”), a venture capital and development firm in Malaysia. WGBM sold 444,444 RCPS in this private placement at the U.S. dollar equivalent of $2.25 per share. A second closing occurred on November 27, 2008, and proceeds of $1,000,000, less 3% issuance costs, from the sale of an additional 444,444 shares of RCPS were received.
The rights of the holders of RCPS include, but are not limited to, the right (a) to cause the subsidiary to redeem the RCPS in whole or in part any time after the Subsequent Closing from funds legally available for distribution; (b) to cause the Company to exchange their RCPS for Common Stock of the Company at a rate of $2.25 per share of Common Stock; (c) to put to Alnoor Shivji, our CEO and President, their RCPS for $2.25 in cash per share in the event that Mr. Shivji transfers, prior to May 15, 2009, in one or more transactions, more than 2,185,960 shares of Common Stock to one or more persons other than his affiliates or relatives; (d) to put to the Company their ordinary shares received on conversion of RCPS during the year 2011 if the share price is below $2.25, and at any time in 2011, redeem for cash (or shares in WaferGen Bio-systems, Inc. of equivalent value) the amount invested in USD plus 6% premium, compounded annually, with yearly rests; (e) of first offer on any transfers or new issuance of subsidiary shares; and (f) to appoint one of the six directors of the subsidiary.
16
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
The balance in RCPS comprises the following at March 31, 2009 and December 31, 2008:
March 31, 2009 | December 31, 2008 | ||||||||
Proceeds from issuance of RCPS | $ | 2,000,000 | $ | 2,000,000 | |||||
Issuance costs | (60,000 | ) | (60,000 | ) | |||||
Accretion of issuance costs | 10,416 | 5,416 | |||||||
Accretion of redemption premium | 62,500 | 32,500 | |||||||
Total RCPS | $ | 2,012,916 | $ | 1,977,916 | |||||
WGBM is authorized to issue 200,000,000 RCPS with a par value of RM0.01. There were 888,888 RCPS issued and outstanding as at March 31, 2009 and December 31, 2008.
NOTE 7. | Stock Options and Warrants |
In 2003, the Company’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, the Company 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. The 2003 Plan was frozen when the 2007 Plan was adopted, resulting in no further options available for grant.
In January, 2007 WaferGen Bio-systems, Inc’s Board of Directors and stockholders adopted the 2007 Stock Option Plan (the “2007 Plan”). The purpose of the 2007 Plan was to provide an incentive to retain the employment of directors, officer, 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 2007 Plan, the Company was authorized to issue incentive stock options intended to qualify under Section 422 of the Code, non-qualified stock options and restricted stock. The 2007 Plan was administered by the Company’s Board of Directors. The 2007 Plan was frozen when the 2008 Plan was adopted, resulting in no further options available for grant.
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. Awards may vest over varying periods, as specified by the Company’s Board of Directors for each grant, and have a maximum term of seven years from the grant date. The 2008 Plan is administered by the Company’s Board of Directors.
17
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
A summary of stock option transactions in the fifteen months ended March 31, 2009 is as follows:
Stock Options | ||||||||||||
Actual Options | Equivalent Number of | Equivalent Weighted | ||||||||||
Available for | Options | Average | ||||||||||
Grant | Outstanding | Exercise Price | ||||||||||
Balance at January 1, 2008 | 390,500 | 2,268,736 | $ | 1.3469 | ||||||||
2008 Plan | 2,000,000 | — | — | |||||||||
2007 Plan frozen | (10,500 | ) | — | — | ||||||||
Granted | (1,807,000 | ) | 1,807,000 | 1.6704 | ||||||||
Exercised | — | (27,536 | ) | 0.1482 | ||||||||
Forfeited | 161,500 | (310,458 | ) | 2.0023 | ||||||||
Cancelled | — | (51,042 | ) | 1.9751 | ||||||||
Balance at December 31, 2008 | 734,500 | 3,686,700 | 1.4505 | |||||||||
Granted | (441,000 | ) | 441,000 | 1.3787 | ||||||||
Forfeited | 15,000 | (15,000 | ) | 1.0000 | ||||||||
Cancelled | — | (37,500 | ) | 2.2000 | ||||||||
Balance at March 31, 2009 | 308,500 | 4,075,200 | $ | 1.4375 | ||||||||
The table above reflects corrections to the actual options available for grant from those recorded in our Form 10-K for the year ended December 31, 2008, as this did not reflect the freezing of the 2007 Plan on adoption of the 2008 Plan.
The weighted average fair value of awards granted in the three months ended March 31, 2009 and 2008 was $0.36 and $0.50, respectively. The fair value of shares vested in the three months ended March 31, 2009 and 2008, was $82,827 and $135,128, respectively.
As at March 31, 2009, the aggregate intrinsic value of options outstanding was $512,491, and of options exercisable was $423,117. Aggregate intrinsic value is the total pretax amount (i.e., the difference between the Company’s stock price and the exercise price) that would have been received by the option holders had all their in-the-money options been exercised.
18
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
The following table summarizes information concerning outstanding options as of March 31, 2009:
Options Outstanding | Options Exercisable | ||||||||||||||||
Number | Weighted | Number | Weighted | ||||||||||||||
Outstanding | Average | Weighted | Exercisable | Average | Weighted | ||||||||||||
Range of | as of | Remaining | Average | as of | Remaining | Average | |||||||||||
Exercise | March | Contractual | Exercise | March | Contractual | Exercise | |||||||||||
Prices | 31, 2009 | Life (in Years) | Price | 31, 2009 | Life (in Years) | Price | |||||||||||
$0.0002 | - | $0.0185 | 202,466 | 5.07 | $ | 0.0061 | 195,718 | 5.03 | $ | 0.0056 | |||||||
$0.1482 | - | $0.4630 | 429,234 | 7.61 | 0.3561 | 372,826 | 7.65 | 0.3821 | |||||||||
$0.6000 | - | $1.0000 | 408,500 | 6.62 | 0.8776 | 30,000 | 6.66 | 0.6667 | |||||||||
$1.1000 | - | $1.6500 | 1,695,500 | 7.48 | 1.3937 | 398,337 | 8.22 | 1.5087 | |||||||||
$1.9500 | - | $3.0000 | 1,339,500 | 7.93 | 2.2265 | 708,501 | 7.50 | 2.3767 | |||||||||
4,075,200 | 7.44 | $ | 1.4375 | 1,705,382 | 7.40 | $ | 1.4357 | ||||||||||
There were no options exercised during the three months ended March 31, 2009 or 2008.
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.
The amounts expensed for stock-based compensation totaled $103,203 and $122,935 for the three months ended March 31, 2009 and 2008, respectively, and $1,792,734 for the period from inception to March 31, 2009.
At March 31, 2009, the total stock-based compensation cost not yet recognized was $859,476. This cost is expected to be recognized over an estimated weighted average amortization period of 2.73 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.
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WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
A summary of outstanding Common Stock Warrants as of March 31, 2009 is as follows:
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 2013 | ||||
Total | 3,666,121 | |||||||
Cash Flow Information |
Cash paid during the three months ended March 31, 2009 and 2008 and the period from inception to March 31, 2009 is as follows:
Period From October 22, | ||||||||||||
Three Months Ended March 31, | 2002 (Inception) to | |||||||||||
2009 | 2008 | March 31, 2009 | ||||||||||
Interest | $ | 2,484 | $ | 3,973 | $ | 35,821 | ||||||
Income taxes | $ | — | $ | — | $ | — | ||||||
Supplemental disclosure of non-cash investing and financing activities for the three months ended March 31, 2009 and 2008 and the period from inception to March 31, 2009 is as follows:
Period From October 22, | ||||||||||||
Three Months Ended March 31, | 2002 (Inception) to | |||||||||||
2009 | 2008 | March 31, 2009 | ||||||||||
Accretions on Series B Preferred Stock | $ | — | $ | — | $ | 155,998 | ||||||
Accretion on Redeemable convertible Preference Shares | $ | 35,000 | $ | — | $ | 72,916 | ||||||
Conversion of due to a stockholder to notes payable | $ | — | $ | — | $ | 61,588 | ||||||
Issuance of warrants with notes payable | $ | — | $ | — | $ | 171,053 | ||||||
Conversion of debt to Common Stock | $ | — | $ | — | $ | 240,000 | ||||||
Conversion of debt to Series A Preferred Stock | $ | — | $ | — | $ | 2,977,579 | ||||||
Deposit in equipment in 2007 lapsed in 2008 | $ | — | $ | 51,446 | $ | 51,446 | ||||||
Property and equipment acquired with capital leases | $ | — | $ | 131,550 | $ | 256,326 | ||||||
Inventory capitalized | $ | 12,863 | $ | — | $ | 12,863 | ||||||
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WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 9. | Fair Value of Financial Instruments |
FASB Statement No. 157, “Fair Value Measurements,” (“SFAS 157”) established a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”).
Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, we primarily use prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”). We also consider the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity in accordance with FSP FAS 157-4 (see Note 2).
The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The three hierarchy levels are defined as follows:
Level 1 - Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities; |
Level 2 - Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; |
Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. |
Credit risk adjustments are applied to reflect the company’s own credit risk when valuing all liabilities measured at fair value. The 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.
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at March 31, 2009:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Cash and cash equivalents | $ | 1,064,492 | $ | — | $ | — | $ | 1,064,492 | ||||||||
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WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 10. | Contingencies |
From time to time we may be involved in claims arising in connection with our business. Although there can be no assurance as to the ultimate outcome, we generally have denied, or believe we have a meritorious defense and will deny, liability in all cases pending against the Company, including the matters described below, and we intend to defend vigorously each such case. Based on information currently available, we believe that the amount, or range, of reasonably possible losses in connection with the actions against us, including the matters described below, in excess of established reserves, in the aggregate, not to be material to our consolidated financial condition or cash flows. However, losses may be material to the Company’s operating results for any particular future period, depending on the level of income for such period.
Gordon v. WaferGen. In February 2009, an action entitled Kimberly E. Gordon v. WaferGen, Inc. was filed in the Alameda County Superior Court. This is an automobile personal injury lawsuit, in which it is alleged that a then WaferGen employee negligently operated a vehicle, injuring the plaintiff. The complaint seeks damages for medical costs, pain and suffering and lost income. The basis of alleged vicarious liability against the Company is that the former employee was driving a vehicle in the scope and course of his employment with the Company. The facts are disputed by the Company. The damages sought are unspecified. Discovery is in process. A conference is scheduled for June 23, 2009, at which time a trial will likely be scheduled.
We anticipate that we will expend significant financial and managerial resources to defend our intellectual property rights in the future if we believe that our rights have been infringed. We also anticipate that we will expend significant financial and managerial resources to defend against claims that our products and services infringe upon the intellectual property rights of third parties.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described.
The information contained in this Form 10-Q is intended to update the information contained in our annual report on Form 10-K for the year ended December 31, 2008, as amended, filed with the Security and Exchange Commission (the “Form 10-K”), and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” our audited consolidated financial statements and the notes thereto, and other information contained in the Form 10-K. 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 and the notes thereto included elsewhere in this Form 10-Q.
Forward-Looking Statements
Information included in this Form 10-Q may contain forward-looking statements. Except for the historical information contained in this discussion of the business and the discussion and analysis of financial condition and results of operations, the matters discussed herein are forward looking statements. These forward looking statements include but are not limited to 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 Form 10-K, these risks and uncertainties may include consumer trends, business cycles, scientific developments, changes in governmental policy and regulation, currency fluctuations, economic trends in the United States and inflation. Forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that any projections or other expectations included in any forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors. Except as required by applicable laws, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
Company Overview and Background
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.
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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.
Results of Operations
The following table presents selected items in the condensed consolidated statements of operations for the three months ended March 31, 2009 and 2008, respectively:
Three Months ended March 31, | ||||||||
2009 | 2008 | |||||||
Revenue | $ | 41,838 | $ | 181,640 | ||||
Cost of revenue | 15,832 | 75,017 | ||||||
Gross margin | 26,006 | 106,623 | ||||||
Operating expenses: | ||||||||
Sales and marketing | 135,848 | 385,174 | ||||||
Research and development | 959,888 | 952,441 | ||||||
General and administrative | 732,166 | 689,043 | ||||||
Total operating expenses | 1,827,902 | 2,026,658 | ||||||
Operating loss | (1,801,896 | ) | (1,920,035 | ) | ||||
Other income and (expenses): | ||||||||
Interest income | 3,072 | 31,717 | ||||||
Interest expense | (2,832 | ) | (3,973 | ) | ||||
Miscellaneous income | 23,856 | — | ||||||
Total other income | 24,096 | 27,744 | ||||||
Net loss before provision for income taxes | (1,777,800 | ) | (1,892,291 | ) | ||||
Provision for income taxes | — | — | ||||||
Net loss | $ | (1,777,800 | ) | $ | (1,892,291 | ) | ||
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Revenue
The following table presents our revenue for the three months ended March 31, 2009 and 2008, respectively:
Three Months Ended March 31, | |||||||||||
2009 | 2008 | % Change | |||||||||
$ | 41,838 | $ | 181,640 | (76.97 | ) % | ||||||
For the three months ended March 31, 2009, revenue decreased by $139,802, or 76.97%, as compared to the three months ended March 31, 2008. The decrease resulted primarily from generally poor economic conditions and reductions in government funding causing potential customers to defer their planned expenditures.
Cost of revenue
The following table presents the cost of revenue for the three months ended March 31, 2009 and 2008, respectively:
Three Months Ended March 31, | |||||||||||
2009 | 2008 | % Change | |||||||||
$ | 15,832 | $ | 75,017 | (78.90 | ) % | ||||||
Cost of sales includes the cost of products paid to third party vendors.
For the three months ended March 31, 2009, cost of revenue decreased by $59,185, or 78.90%, as compared to the three months ended March 31, 2008. The decrease related primarily to the decrease in revenues, as the costs for our products remained substantially unchanged.
Sales and Marketing
The following table presents the sales and marketing expenses for the three months ended March 31, 2009 and 2008, respectively:
Three Months Ended March 31, | |||||||||||
2009 | 2008 | % Change | |||||||||
$ | 135,848 | $ | 385,174 | (64.73 | ) % | ||||||
For the three months ended March 31, 2009, sales and marketing expenses decreased by $249,326, or 64.73%, as compared to the three months ended March 31, 2008. The decrease resulted primarily from reductions in salaries and wages due to a decrease in the head count of sales employees, and reductions in sales commissions and in promotion and advertising costs. We expect selling expenses to remain at these relatively lower levels as we increase the percentage of sales to distributors.
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Research and Development
The following table presents the research and development expense for the three months ended March 31, 2009 and 2008, respectively:
Three Months Ended March 31, | |||||||||||
2009 | 2008 | % Change | |||||||||
$ | 959,888 | $ | 952,441 | 0.78 | % | ||||||
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 March 31, 2009, research and development expenses increased $7,447, or 0.78%, as compared to the three months ended March 31, 2008. The increase resulted primarily from an increase in activity related to development of the SmartChip™ System, including expenses incurred by our Malaysian subsidiary, offset by a reduction in activity related to SmartSlide™ System. We believe a substantial investment in research and development is essential to remain competitive and expand into additional markets. Accordingly, we expect our research and development expenses to increase as we grow.
General and Administrative
The following table presents the general and administrative expenses for the three months ended March 31, 2009 and 2008, respectively:
Three Months Ended March 31, | |||||||||||
2009 | 2008 | % Change | |||||||||
$ | 732,166 | $ | 689,043 | 6.26 | % | ||||||
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 March 31, 2009, general and administrative expenses increased $43,123, or 6.26%, as compared to the three months ended March 31, 2008. The increase was mostly due to higher legal and professional fees. 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 ended March 31, 2009 and 2008, respectively:
Three Months Ended March 31, | |||||||||||
2009 | 2008 | % Change | |||||||||
$ | 3,072 | $ | 31,717 | (90.31 | ) % | ||||||
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The interest income is solely earned on cash balances held in interest-bearing bank accounts.
For the three months ended March 31, 2009, interest income decreased $28,645, or 90.31%, as compared to the three months ended March 31, 2008. This decrease was due to a reduction in the average cash invested in interest-bearing accounts and in the interest rates afforded.
Interest Expense
The following table presents the interest expense for the three months ended March 31, 2009 and 2008, respectively:
Three Months Ended March 31, | |||||||||||
2009 | 2008 | % Change | |||||||||
$ | 2,832 | $ | 3,973 | (28.72 | ) % | ||||||
The interest expense for both periods was mostly incurred due to our capital lease obligations.
For the three months ended March 31, 2009, interest expense decreased $1,141, or 28.72%, as compared to the three months ended March 31, 2008. The decrease was mostly due to a reduction in the balances outstanding on our capital leases.
Miscellaneous Income
The following table presents the miscellaneous income for the three months ended March 31, 2009 and 2008, respectively:
Three Months Ended March 31, | |||||||||||
2009 | 2008 | % Change | |||||||||
$ | 23,856 | $ | - | N/A | % | ||||||
Miscellaneous income in 2009 was the result of net foreign currency exchange gains in our Malaysian subsidiary.
Headcount
Our consolidated headcount as of May 12, 2009 comprised 32 regular employees, compared to 31 regular employees as of December 31, 2008.
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Liquidity and Capital Resources
From inception through March 31, 2009, 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, $13,404,991, net of offering costs, from the sale of common stock and warrants, and $1,940,000, net of offering costs, from the sale of redeemable convertible preferred stock in its Malaysian subsidiary. As of March 31, 2009, we had $1,064,492 in cash and cash equivalents, and negative working capital of $188,083, with no additional capital resources presently available.
Net Cash Used in Operating Activities
The Company experienced negative cash flow from operating activities for the three months ended March 31, 2009 and 2008 in the amounts of $1,335,528 and $1,682,023, respectively. The cash used in operating activities in the three months ended March 31, 2009 was due to cash used to fund a net operating loss of $1,777,800, adjusted for non-cash expenses related to depreciation and amortization and stock-based compensation of $193,328, as off-set by cash provided from a change in working capital of $248,944. The decrease in cash used in the three months ended March 31, 2009 compared to 2008 was driven primarily by the reduction in the net operating loss.
Net Cash Used in Investing Activities
The Company used $131,240 (net of inventory capitalized) in the three months ended March 31, 2009, and $246,063 (net of a deposit of $51,446 made in 2007 applied to a 2008 purchase) in the three months ended March 31, 2008, to acquire property and equipment.
Cash used in financing activities in the three months ended March 31, 2009 was $12,585 related to repayments on capital leases for equipment used to expand and upgrade our laboratory to accommodate our research and development activities the SmartChip™ products. The reduction from the payments of $55,575 in the three months ended March 31, 2008 was due to the early repayment of one lease in August 2008, when the equipment was shipped to Malaysia.
Availability of Additional Funds
The Company expects to raise a further $1,470,000, net of issuance costs, from the sale of 666,666 redeemable convertible preference shares (RCPS) in our Malaysian subsidiary. On April 3, 2009, WGBM, entered into a subscription agreement with Prima Mahawangsa Sdn. Bhd. (“PMSB”), and Expedient Equity Ventures Sdn. Bhd. (“EEV”), both venture capital and development firms in Malaysia, pursuant to which WGBM has agreed to sell 666,666 shares of Series B redeemable convertible preference shares (“RCPS”) to the investors (444,444 to PMSB and 222,222 to EEV) in a private placement at a price of US$2.25 per share. The terms are similar to those of the RCPS previously issued by WGBM to MTDC (see NOTE 6 to the Condensed Consolidated Financial Statements in Part I, Item 1, for further information), except that the option to put to the Company their ordinary shares received on conversion of RCPS at any time during the year 2011 if the share price is below $2.25 for cash redemption (or shares in WaferGen Bio-systems, Inc. of equivalent value) is for the amount invested in USD plus a premium of 8%, not 6%. The closing of this private placement is expected to occur by the end of May 2009. The closing is subject to certain conditions and there can be no assurance that the closing will occur in a timely manner, if at all. Funds raised are restricted in use, such that 60% of the total investment raised through the issuance of the Series A and Series B RCPS will be utilized for the operations of the Company in Malaysia.
We expect that the net proceeds from the sale of RCPS in May 2009 will fund our operations through June 2009. We expect we will need to raise further capital, through the sale of additional equity securities or otherwise, 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.
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While we believe we have sufficient cash to fund our operating, investing, and financing activities in the near term, we expect that additional working capital will be needed to fund the commercialization and manufacture of our SmartChip™ products which is currently foreseen by management. We may be unable to raise sufficient additional capital when we need it or to raise capital on favorable terms. The conversion of redeemable convertible preference shares in our subsidiary, and the sale of equity or convertible debt securities in the future, may be dilutive to our stockholders, and debt financing arrangements may require us to pledge certain assets and enter into covenants that could restrict certain business activities or our ability to incur further indebtedness, and may contain other terms that are not favorable to us or our stockholders. If we are unable to obtain 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.
Principles of Consolidation
The consolidated financial statements of WaferGen Bio-systems, Inc. include the accounts of WaferGen, Inc. and 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 approximately $8,324,000 at December 31, 2008. 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. Amounts expensed were $103,203 and $122,935, net of estimated annual forfeitures of 5% and zero, respectively, for the three months ended March 31, 2009 and 2008, respectively.
The fair value of each option grant has been estimated using the following assumptions for the three months ended March 31:
March 31, 2009 | March 31, 2008 | |||||||
Weighted-average grant date fair value | $ | 0.36 | $ | 0.50 | ||||
Risk free interest rate | 1.55 | % | 3.03 | % | ||||
Expected lives | 4.75 Years | 5 Years | ||||||
Expected volatility | 40.04%-41.49 | % | 18.91 | % | ||||
Dividend yields | 0 | % | 0 | % | ||||
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Recent Accounting Pronouncements
See the “Recent Accounting Pronouncements” in NOTE 2 to the Condensed Consolidated Financial Statements in Part I, Item 1 for information related to the adoption of new accounting standards in the first quarter of 2009, none of which had a material impact on our financial statements, and the future adoption of recently issued accounting pronouncements, which we do not expect will have a material impact on our financial statements.
Item 4. Controls and Procedures
Management's Report on Internal Control over Financial Reporting
Changes in Internal Control over Financial Reporting
There was no material change in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
From time to time we may be involved in claims arising in connection with our business. Although there can be no assurance as to the ultimate outcome, we generally have denied, or believe we have a meritorious defense and will deny, liability in all cases pending against the Company, including the matters described below, and we intend to defend vigorously each such case. Based on information currently available, we believe that the amount, or range, of reasonably possible losses in connection with the actions against us, including the matters described below, in excess of established reserves, in the aggregate, not to be material to our consolidated financial condition or cash flows. However, losses may be material to the Company’s operating results for any particular future period, depending on the level of income for such period.
Gordon v. WaferGen. In February 2009, an action entitled Kimberly E. Gordon v. WaferGen, Inc. was filed in the Alameda County Superior Court. This is an automobile personal injury lawsuit, in which it is alleged that a then WaferGen employee negligently operated a vehicle, injuring the plaintiff. The complaint seeks damages for medical costs, pain and suffering and lost income. The basis of alleged vicarious liability against the Company is that the former employee was driving a vehicle in the scope and course of his employment with the Company. The facts are disputed by the Company. The damages sought are unspecified. Discovery is in process. A conference is scheduled for June 23, 2009, at which time a trial will likely be scheduled.
In addition, we anticipate that we will expend significant financial and managerial resources to defend our intellectual property rights in the future if we believe that our rights have been infringed. We also anticipate that we will expend significant financial and managerial resources to defend against claims that our products and services infringe upon the intellectual property rights of third parties.
Item 1A. Risk Factors
There are no material changes from the risk factors set forth in Part I, Item 1A, in our Annual Report on Form 10K for the year ended December 31, 2008.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides certain information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of shares of the Company’s common stock in the first quarter of 2009:
ISSUER PURCHASES OF EQUITY SECURITIES(1) | ||||
Period | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2) |
Month #1 (Jan. 1- Jan. 31, 2009) | 43,869 | $1.12 | 43,869 | 188,631 |
Month #2 (Feb. 1- Feb. 28, 2009) | 44,534 | $1.20 | 44,534 | 144,097 |
Month #3 (Mar. 1- Mar. 31, 2009) | 10,337 | $1.23 | 10,337 | — |
Total | 98,740 | $1.17 | 98,740 | — |
(1) The Company did not purchase any shares of its common stock during the first quarter of 2009.
On November 14, 2008, the Company’s Chairman, President and Chief Executive Officer and Director, Alnoor Shivji, entered into a “Rule 10b5-1 Plan,” with instructions to purchase 2,000 shares of the Company’s common stock (for the account of The Shivji Family Trust dated June 12, 2000) each week from December 2, 2008, through May 20, 2009, at the market price (subject to a maximum price of $2.00 per share).
On December 15, 2008, Mr. Shivji amended his Rule 10b5-1 Plan, and two other Directors, Nadine Smith and Dr. Dean Hautamaki, entered into new Rule 10b5-1 Plans. As amended, Mr. Shivji’s plan called for The Shivji Family Trust to purchase up to 10,000 shares per week at the prevailing market price (subject to a maximum price of $2.25 per share) through March 18, 2009. Ms. Smith’s plan called for her to purchase up to 10,000 shares per week at the prevailing market price (subject to a limit of $2.25 per share) through March 6, 2009. Dr. Hautamaki’s plan called for his affiliate, Cojack Investment Opportunities, LLC, to purchase up to 2,500 shares per week at the prevailing market price (subject to a limit of $2.25 per share and an aggregate limit of $20,000) through March 2, 2009.
As of March 31, 2009, The Shivji Family Trust had purchased a total of 60,513 shares, Ms. Smith had purchased a total of 38,120 shares and Cojack Investment Opportunities, LLC had purchased a total of 16,800 shares under their respective Rule 10b5-1 Plans.
Although the shares covered by these plans were purchased by or for the account of each of The Shivji Family Trust, Ms. Smith and Cojack Investment Opportunities, LLC and not by or for the account of the Company, each of them may be deemed to be an “affiliated purchaser” (as defined in Rule 10b-18). The purchases under the plans were intended be carried out within the safe-harbor requirements of Rule 10b-18. The volume limitations and other requirements under Rule 10b-18 limited the number of shares purchased by each of the purchasers in certain weeks.
(2) As of March 31, 2009. As of the date of this Report, no additional shares may be purchased under the Rule 10b5-1 Plans.
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Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Nomination of Directors
There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors implemented since the filing of Amendment No. 1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
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Item 6. Exhibits
Exhibit Number | Description | ||
10.1 | Share Subscription Agreement dated April 3, 2009, by and among WaferGen Bio-systems, Inc.,WaferGen Biosystems (M) Sdn. Bhd., Primar Mahawangsa Sdn. Bhd. and Expedient Equity Ventures SdnBhd. (incorporated herein by reference to the Company’s Current Report on Form 8-K filed with the Commission on April 14, 2009) | ||
10.2 | Form of Put Agreement by and among WaferGen Bio-systems, Inc., Primar Mahawangsa Sdn. Bhd. and Expedient Equity Ventures Sdn Bhd. (incorporated herein by reference to the Company’s Current Report on Form 8-K filed with the Commission on April 14, 2009) | ||
10.3 | Form of Put Agreement by and among Alnoor Shivji, Primar Mahawangsa Sdn. Bhd. and Expedient EquityVentures Sdn. Bhd. (incorporated herein by reference to the Company’s Current Report on Form 8-K filed with the Commission on April 14, 2009) | ||
10.4 | * | Deed of Adherence to the Share Subscription and Shareholders’ Agreement dated May 8, 2008, by and among WaferGen Bio-systems, Inc., WaferGen Biosystems (M) Sdn. Bhd., Primar Mahawangsa Sdn. Bhd., Expedient Equity Ventures Sdn. Bhd. and Malaysian Technology Development Corporation Sdn. Bhd. | |
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 Chief Executive Officer (This certification is being furnished and shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.) | |
32.2 | * | Section 1350 Certification of Chief Financial Officer (This certification is being furnished and shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.) | |
* Filed/furnished herewith. |
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SIGNATURES
Pursuant to 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: May 12, 2009 | ||||||
By: /s/ Amjad Huda | |||||||
Amjad Huda | |||||||
Chief Financial Officer (principal financial and accounting officer) |
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EXHIBIT INDEX
Exhibit Number | Description | |||
10.4 | Deed of Adherence to the Share Subscription and Shareholders’ Agreement dated May 8, 2008, by and among WaferGen Bio-systems, Inc.,WaferGen Biosystems (M) Sdn. Bhd., Primar Mahawangsa Sdn. Bhd., Expedient Equity Ventures Sdn. Bhd. and Malaysian Technology Development Corporation Sdn. Bhd. | |||
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 Chief Executive Officer | |||
32.2 | Section 1350 Certification of Chief Financial Officer | |||
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