Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
WaferGen Bio-systems, Inc.
We have audited the accompanying consolidated balance sheets of WaferGen Bio-systems, Inc. and subsidiaries (collectively, the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WaferGen Bio-systems, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles
.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements the Company has incurred operating losses and negative cash flows since inception. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/
s/ SingerLewak LLP
San Jose, California
March 22, 2013
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,328,753
|
|
|
$
|
15,117,172
|
|
Accounts receivable
|
|
|
307,759
|
|
|
|
29,382
|
|
Inventories, net
|
|
|
495,486
|
|
|
|
745,008
|
|
Prepaid expenses and other current assets
|
|
|
134,567
|
|
|
|
186,138
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
7,266,565
|
|
|
|
16,077,700
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
874,062
|
|
|
|
1,714,090
|
|
Other assets
|
|
|
756,831
|
|
|
|
852,093
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,897,458
|
|
|
$
|
18,643,883
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
474,436
|
|
|
$
|
772,411
|
|
Accrued payroll and related costs
|
|
|
235,404
|
|
|
|
646,715
|
|
Other accrued expenses
|
|
|
1,063,813
|
|
|
|
682,284
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,773,653
|
|
|
|
2,101,410
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
3,393,159
|
|
|
|
1,405,967
|
|
Derivative
liabilities
|
|
|
2,208,184
|
|
|
|
5,967,330
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
7,374,996
|
|
|
|
9,474,707
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 5 and 16)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Series A, B and C convertible preference shares of subsidiary
|
|
|
6,117,134
|
|
|
|
6,117,134
|
|
Preferred Stock: $0.001 par value; 10,000,000 shares authorized; 2,937,500 shares issued and outstanding at December 31, 2012 and 2011
|
|
|
9,838,569
|
|
|
|
9,838,569
|
|
Common Stock: $0.001 par value; 300,000,000 shares authorized; 41,680,902 and 41,619,402 shares issued and outstanding at December 31, 2012 and 2011
|
|
|
41,681
|
|
|
|
41,619
|
|
Additional paid-in capital
|
|
|
49,892,346
|
|
|
|
49,504,516
|
|
Accumulated deficit
|
|
|
(64,571,897
|
)
|
|
|
(56,395,235
|
)
|
Accumulated other comprehensive income
|
|
|
204,629
|
|
|
|
62,573
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
1,522,462
|
|
|
|
9,169,176
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
8,897,458
|
|
|
$
|
18,643,883
|
|
The accompanying notes are an integral part of these consolidated financial statements.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
586,176
|
|
|
$
|
522,931
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
420,877
|
|
|
|
1,401,904
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
165,299
|
|
|
|
(878,973
|
)
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
791,915
|
|
|
|
3,311,433
|
|
Research and development
|
|
|
6,161,548
|
|
|
|
8,290,550
|
|
General and administrative
|
|
|
2,977,812
|
|
|
|
6,221,884
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
9,931,275
|
|
|
|
17,823,867
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(9,765,976
|
)
|
|
|
(18,702,840
|
)
|
|
|
|
|
|
|
|
|
|
Other income and (expenses):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
7,420
|
|
|
|
15,218
|
|
Interest
expense (including excess debt discount of $2,255,074 expensed as interest in the year ended
December 3
1, 2011)
|
|
|
(2,082,558
|
)
|
|
|
(3,336,217
|
)
|
Gain on revaluation
of
derivative liabilities, net
|
|
|
3,759,146
|
|
|
|
9,271,985
|
|
Liquidated damages for late S-1 registration
|
|
|
—
|
|
|
|
(532,161
|
)
|
Miscellaneous income (expense)
|
|
|
(116,147
|
)
|
|
|
166,184
|
|
|
|
|
|
|
|
|
|
|
Total other income and (expenses)
|
|
|
1,567,861
|
|
|
|
5,585,009
|
|
|
|
|
|
|
|
|
|
|
Net loss before provision for income taxes
|
|
|
(8,198,115
|
)
|
|
|
(13,117,831
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
(21,453
|
)
|
|
|
27,247
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(8,176,662
|
)
|
|
|
(13,145,078
|
)
|
|
|
|
|
|
|
|
|
|
Accretion on Series A and B convertible preference shares of subsidiary associated with premium
|
|
|
—
|
|
|
|
15,242
|
|
Accretion on Series A-1 Convertible Preferred Stock associated with beneficial conversion feature
|
|
|
—
|
|
|
|
(9,250,009
|
)
|
Series A-1 preferred dividend
|
|
|
(801,534
|
)
|
|
|
(458,208
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(8,978,196
|
)
|
|
$
|
(22,838,053
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.22
|
)
|
|
$
|
(0.55
|
)
|
|
|
|
|
|
|
|
|
|
Shares used to compute net loss per share - basic and diluted
|
|
|
41,660,953
|
|
|
|
41,455,980
|
|
Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,176,662
|
)
|
|
$
|
(13,145,078
|
)
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
142,056
|
|
|
|
(225,304
|
)
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
$
|
(8,034,606
|
)
|
|
$
|
(13,370,382
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
|
|
Series A, B and C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Convertible Preference
|
|
|
Series A-1
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Shares of Subsidiary
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of January 1, 2011
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
41,175,464
|
|
|
$
|
41,175
|
|
|
$
|
38,881,075
|
|
|
$
|
(43,265,399
|
)
|
|
$
|
287,877
|
|
|
$
|
(4,055,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock issued for services, net of forfeitures
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
240,444
|
|
|
|
240
|
|
|
|
(688
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash upon exercise of options, net of 121,246 shares forfeited in cashless exercise
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
203,494
|
|
|
|
204
|
|
|
|
8,996
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series C convertible preference shares of subsidiary
|
|
|
3,233,734
|
|
|
|
4,993,728
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,993,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of Series A convertible preference shares of subsidiary to permanent equity resulting from amendment to terms of redemption option
|
|
|
888,888
|
|
|
|
206
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of Series B convertible preference shares of subsidiary to permanent equity due to lapse of redemption option
|
|
|
444,444
|
|
|
|
1,123,200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,123,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series A-1 Convertible Preferred Stock for cash, net of allocated offering costs of $886,422
|
|
|
—
|
|
|
|
—
|
|
|
|
2,937,500
|
|
|
|
9,838,569
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,250,009
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,088,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants, net of allocated offering costs of $806,039
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,946,378
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,946,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer on waiver of anti-dilution rights related to 1,051,074 warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
315,803
|
|
|
|
—
|
|
|
|
—
|
|
|
|
315,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer on waiver of cure amount rights related to convertible promissory notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
573,923
|
|
|
|
—
|
|
|
|
—
|
|
|
|
573,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
779,029
|
|
|
|
—
|
|
|
|
—
|
|
|
|
779,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(13,145,078
|
)
|
|
|
—
|
|
|
|
(13,145,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion on Series A-1 Convertible Preferred Stock associated with beneficial conversion feature
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,250,009
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,250,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion on redeemable convertible preference shares of subsidiary associated with premium
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,242
|
|
|
|
—
|
|
|
|
15,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(225,304
|
)
|
|
|
(225,304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2011
|
|
|
4,567,066
|
|
|
$
|
6,117,134
|
|
|
|
2,937,500
|
|
|
$
|
9,838,569
|
|
|
|
41,619,402
|
|
|
$
|
41,619
|
|
|
$
|
49,504,516
|
|
|
$
|
(56,395,235
|
)
|
|
$
|
62,573
|
|
|
$
|
9,169,176
|
|
The accompanying notes are an integral part of these consolidated financial statements.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
|
|
Series A, B and C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Convertible Preference
|
|
|
Series A-1
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Shares of Subsidiary
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of January 1, 2012
|
|
|
4,567,066
|
|
|
$
|
6,117,134
|
|
|
|
2,937,500
|
|
|
$
|
9,838,569
|
|
|
|
41,619,402
|
|
|
$
|
41,619
|
|
|
$
|
49,504,516
|
|
|
$
|
(56,395,235
|
)
|
|
$
|
62,573
|
|
|
$
|
9,169,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock issued for services, net of forfeitures
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
61,500
|
|
|
|
62
|
|
|
|
(62
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
387,892
|
|
|
|
—
|
|
|
|
—
|
|
|
|
387,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,176,662
|
)
|
|
|
—
|
|
|
|
(8,176,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
142,056
|
|
|
|
142,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2012
|
|
|
4,567,066
|
|
|
$
|
6,117,134
|
|
|
|
2,937,500
|
|
|
$
|
9,838,569
|
|
|
|
41,680,902
|
|
|
$
|
41,681
|
|
|
$
|
49,892,346
|
|
|
$
|
(64,571,897
|
)
|
|
$
|
204,629
|
|
|
$
|
1,522,462
|
|
The accompanying notes are an integral part of these consolidated financial statements.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,176,662
|
)
|
|
$
|
(13,145,078
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
903,291
|
|
|
|
834,861
|
|
Stock-based compensation
|
|
|
387,892
|
|
|
|
779,029
|
|
Exchange gain on issuance of convertible preference shares of subsidiary
|
|
|
—
|
|
|
|
(58,575
|
)
|
Gain on revaluation of derivative liabilities, net
|
|
|
(3,759,146
|
)
|
|
|
(9,271,985
|
)
|
Liquidated damages for late S-1 registration
|
|
|
—
|
|
|
|
532,161
|
|
Excess debt discount expensed as interest
|
|
|
—
|
|
|
|
2,255,074
|
|
Interest converted to principal on convertible promissory notes
|
|
|
801,645
|
|
|
|
460,383
|
|
Provision for excess and obsolete inventory
|
|
|
59,175
|
|
|
|
1,052,266
|
|
Amortization of debt discount
|
|
|
1,185,547
|
|
|
|
113,081
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
—
|
|
|
|
100,651
|
|
Accounts receivable
|
|
|
(278,457
|
)
|
|
|
749,010
|
|
Inventories
|
|
|
190,299
|
|
|
|
(1,523,541
|
)
|
Prepaid expenses and other assets
|
|
|
146,783
|
|
|
|
483,943
|
|
Accounts payable
|
|
|
(298,086
|
)
|
|
|
(424,479
|
)
|
Accrued payroll and related costs
|
|
|
(411,506
|
)
|
|
|
207,068
|
|
Other accrued expenses
|
|
|
381,337
|
|
|
|
229,247
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(8,867,888
|
)
|
|
|
(16,626,884
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(54,767
|
)
|
|
|
(621,120
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(54,767
|
)
|
|
|
(621,120
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayment of capital lease obligations
|
|
|
—
|
|
|
|
(8,852
|
)
|
Net proceeds from issuance of Series C convertible preference shares of subsidiary
|
|
|
—
|
|
|
|
5,052,303
|
|
Repayment of term loan
|
|
|
—
|
|
|
|
(2,178,585
|
)
|
Net proceeds from issuance of Series A-1 convertible preferred stock, convertible promissory notes and warrants
|
|
|
—
|
|
|
|
27,492,876
|
|
Proceeds from issuance of common stock and warrants, net of offering costs
|
|
|
—
|
|
|
|
9,200
|
|
Payment of taxes for restricted stock forfeited
|
|
|
—
|
|
|
|
(448
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
—
|
|
|
|
30,366,494
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
134,236
|
|
|
|
(211,259
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(8,788,419
|
)
|
|
|
12,907,231
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of the period
|
|
|
15,117,172
|
|
|
|
2,209,941
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period
|
|
$
|
6,328,753
|
|
|
$
|
15,117,172
|
|
The accompanying notes are an integral part of these consolidated financial statements.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
General.
WaferGen Bio-systems, Inc. and its subsidiaries (the “Company”) are engaged in the development, manufacture and sale of systems used for gene expression quantification, genotyping and stem cell research. The Company’s products are aimed at researchers who perform genetic analysis, primarily at pharmaceutical and biotech companies, academic and private research centers and diagnostics companies involved in biomarker discovery and genetic research. Through the SmartChip products, the Company plans to provide new performance standards with significant savings in time and cost for professionals in the field of gene expression research and to facilitate biomarker discovery, toxicology, and clinical research.
Wafergen, Inc. was incorporated in the State of Delaware on October 22, 2002, and was acquired by WaferGen Bio-systems, Inc. in a reverse merger on May 31, 2007.
On January 24, 2008, the Company formed a new subsidiary in Kulim Hi-Tech Park, Kedah, Malaysia. This subsidiary, WaferGen Biosystems (M) Sdn. Bhd. (“WGBM”), is involved in various initiatives to support a number of the Company’s ongoing development and commercialization goals. The Company owns 100% of the common stock and 8.2% (including all shares that have been assumed by the Company pursuant to exercises of exchange rights) of the preference shares of this entity. The Company expects that all of the subsidiary’s preference shares will be converted into shares of the Company, however if all preference shares were converted into common stock of WGBM, the Company would own 72.8% of WGBM’s common stock. See Note 6 below.
On August 30, 2011, the Company formed a new wholly owned subsidiary in Luxembourg, to establish a presence for its marketing and research activities in Europe.
On May 27, 2011, the Company completed a private placement offering
(the “May 2011 Private Placement”)
with certain accredited investors, pursuant to which the Company sold an aggregate of approximately 2,937,500 shares of Series A-1 Convertible Preferred Stock at a stated value of $5.20 per share, with each share being convertible into ten shares of common stock, convertible promissory notes in the aggregate principal amount of $
15,275,000, convertible into an aggregate of approximately 2,679,824 shares of
Series A-2 Convertible Preferred Stock at a price of $5.70 per share, with each share being convertible into ten shares of common stock,
and warrants to purchase 56,173,248 shares of the Company’s common stock at an exercise price of $0.62 per whole share. The Company received aggregate gross proceeds of $30,550,000, which after deducting issuance costs of $2,524,963
and liquidated damages of $532,161
paid for late S-1 registration
left net proceeds of $27,492,876.
Subject to certain ownership limitations,
the warrants
issued in the May 2011 Private Placement
were exercisable immediately and will expire five years from the date of issuance. They
include a provision for excess shares in the event of a change in ownership and
contain standard anti-dilution clauses in the event of recapitalization, stock splits or combinations, merger or reorganization, dividends or distributions and similar equity adjustments, but do not contain anti-dilution provisions that would prevent them from being considered indexed to the Company’s common stock, so they are accounted for within stockholders’ equity.
The Company retained a selling agent in connection with this registered direct offering, and pursuant to the terms of a selling agency agreement, the Company
paid the selling agents an aggregate fee totaling approximately $2,120,125
.
Management’s Plan.
The
Company
has incurred operating losses and negative cash flows from operations since its inception. Management expects that revenues will increase as a result of current and future product releases. However, the Company also expects to incur additional expenses for the development and expansion of its products, marketing campaigns, and operating costs as it expands its operations. Therefore, the Company expects operating losses and negative cash flows to continue for the foreseeable future. It is management’s plan to obtain additional working capital through additional financings. The Company believes that it will be successful in expanding operations, gaining market share, and raising additional funds. However, there can be no assurance that in the event the Company requires additional financing, such financing will be available at terms which are favorable, or at all. Failure to generate sufficient cash flows from operations or raise additional capital could have a material adverse effect on the Company’s ability to achieve its intended business objectives. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Going Concern.
The
Company’s
consolidated financial statements have been presented on a basis that contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company continues to face significant risks associated with the successful execution of its strategy given the current market environment for similar companies and failure to generate sufficient revenues or raise additional capital could have a material adverse effect on the Company’s ability to continue as a going concern and to achieve its intended business objectives. These facts raise substantial doubt about the Company’s ability to continue as a going concern, and there can be no assurance that the Company will be successful in its efforts to enhance its liquidity situation. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 2. Summary of Significant Accounting Policies
Basis of Presentation.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
Principles of Consolidation
. The consolidated financial statements include the financial statements of WaferGen Bio-systems, Inc. and its subsidiaries. All significant transactions and balances between the WaferGen Bio-systems, Inc. and its subsidiaries have been eliminated in consolidation.
Use of Estimates
. Preparing financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results and outcomes could differ from these estimates and assumptions.
Cash and Cash Equivalents
. The Company considers all highly liquid debt investments with a remaining maturity of three months or less when purchased to be cash and cash equivalents.
Restricted Cash
. Cash and cash equivalents that are restricted as to withdrawal or usage under the terms of contractual agreements are recorded as restricted cash.
Foreign Currencies
. Assets and liabilities of non-U.S.
subsidiaries
for which the local currency is the functional currency
are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average rates of exchange prevailing during each reporting period. Remeasurement adjustments resulting from this process are charged or credited to other comprehensive income (loss).
Foreign exchange gains and losses for assets and liabilities of the Company’s
non-U.S.
subsidiaries for which the functional currency is the U.S. dollar are recorded in miscellaneous income (expense) in the Company’s consolidated statement of operations.
Fair Value of Financial Instruments
. The carrying amounts of accounts receivable, prepaid expenses, other assets, accounts payable, accrued payroll and related costs and other accrued expenses approximate fair value due to the short-term maturities of these instruments.
Concentration of Credit Risk
. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash in commercial banks. Accounts in the United States are secured by the Federal Deposit Insurance Corporation. Accounts in Malaysia are also guaranteed by the Malaysian government. The Company’s total deposits at commercial banks usually exceed the balances insured. The Company generally requires no collateral from its customers.
Accounts Receivable
. An allowance for doubtful accounts will be recorded based on a combination of historical experience, aging analysis, and information on specific accounts. Account balances will be written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Inventor
y
. Inventory is recorded at the lower of cost (first-in, first-out) or market value. Additionally, the Company evaluates its inventory in terms of excess and obsolete exposures.
Advertising Costs.
Advertising costs of nil and $32,780 were expensed as incurred in the years ended December 31, 2012 and 2011, respectively.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Property and Equipment
. Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets as follows:
Equipment
|
3 to 5 years
|
Tools and molds
|
3 years
|
Leasehold improvements
|
3 to 5 years, or remaining lease term if shorter
|
Furniture and fixtures
|
5 years
|
Costs of maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred. Upon retirement or sale, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operating expenses.
Deferred Financing Costs
. Costs incurred in connection with the issuance of debt are capitalized and amortized as interest expense using the effective interest method. The unamortized amounts are included in other assets.
Impairment of Long-Lived Assets
. The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance of long-lived assets may not be recoverable. When factors indicate that long-lived assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted future cash flows over the remaining life of the long-lived assets in measuring whether they are recoverable. If the estimated undiscounted future cash flows do not exceed the carrying value of the asset, a loss is recorded as the excess of the asset’s carrying value over its fair value. No assets were determined to be impaired in 2012 and 2011.
Income Taxes
. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in income in the period that includes the enactment date. Accounting for deferred tax represents the best estimate of the likely future tax consequences of events that have been recognized in the Company’s consolidated financial statements and tax returns and their future probability. A valuation allowance is recorded for loss carry-forwards and other deferred tax assets where it is more likely than not that such loss carry-forwards and deferred tax assets will not be realized. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes.
Governmental Subsidies
. Incentives received from governments in the form of grants are recorded as a reduction in expense in accordance with their purpose. Grants awarded for the purpose of matching specified expenditures are not recognized until a definitive agreement has been signed by both parties; thereafter income is recognized to the extent that the related expenses have been incurred. The Company recognized $243,778 in governmental subsidies in the year ended December 31, 2012, which was offset against operating expenses in the statement of operations.
Revenue Recognition
. The Company recognizes revenue when (i) delivery of product has occurred or services have been rendered, (ii) there is persuasive evidence of a sale arrangement, (iii) selling prices are fixed or determinable, and (iv) collectability from the customers (individual customers and distributors) is reasonable assured. Revenue consists primarily of revenue generated from the sale of the Company’s products. Revenue is recorded when the risk and rewards of ownership are transferred to the Company’s customers (individual customers and distributors). This generally occurs when the Company’s products are shipped from its facility as title has passed. Revenue is recorded net of estimated cash discount. The Company estimates and accrues an allowance for sale returns at the time the product is sold. To date, sales returns have not been material. Distributors have a fourteen day inspection period however this period is not an acceptance provision that purports to be a trial or evaluation purpose, is not an acceptance provision that grants a right of return or exchange on the basis of subjective matters, and is not an acceptance provision based on customer-specific objective criteria. The fourteen day inspection period is an acceptance provision that is based on seller-specified objective criteria.
Revenue from multi-deliverable arrangements is recognized for each element on delivery of product or completion of service. A typical multi-deliverable arrangement would be the shipment of capital equipment to a customer, followed by the delivery of services or of expendable equipment, provided such delivery is both probable and substantially within the Company’s control. Revenue for each deliverable is allocated based on full list selling prices, although if none of the deliverables is
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
disproportionately discounted relative to the overall discount, this allocation is approximated by using the actual selling price of each deliverable to the customer. The actual cost of revenue for each deliverable is recognized when the revenue for that deliverable is recognized.
Stock-Based Compensation
. The Company measures the fair value of all stock-based awards to employees, including stock options, on the grant date and records the fair value of these awards, net of estimated forfeitures, to compensation expense over the service period. The fair value of awards to consultants is measured on the dates on which performance of services is completed, with interim valuations recorded at balance sheet dates while performance is in progress. The fair value of options is estimated using the Black-Scholes valuation model, and of restricted stock is based on the Company’s closing share price on the measurement date.
Change in Fair Value of Derivatives
.
The Company recognizes its
warrants with certain anti-dilution protection,
the Series A convertible preference shares of its Malaysian subsidiary
, and
the conversion element of its convertible promissory notes and of the Series B convertible preference shares of its Malaysian subsidiary as derivative liabilities. Such liabilities are valued when the financial instruments are initially issued or the derivative first requires recognition and are also revalued at each reporting date, with the change in their respective fair values being recorded as a gain or loss on revaluation within other income and expenses in the statement of operations. The Company determines the fair value of all of its derivative liabilities using a Monte Carlo Simulation approach, with key input variables provided by management.
Warranty Reserve
.
The Company’s
standard
warranty agreement is one year from shipment of certain products. The Company accrues for anticipated warranty costs upon shipment of these products. The Company’s warranty reserve is based on management’s judgment regarding anticipated rates of warranty claims and associated repair costs, and is updated quarterly.
Research and Development
. Research and development costs are charged to operations as incurred.
Other Comprehensive Income
. Other comprehensive income arises solely due to the cumulative translation adjustments which ensue from the Company’s accounting policy for foreign currencies.
Net Income (Loss) Per Share.
Basic
net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding plus common share equivalents from conversion of dilutive stock options, warrants, and restricted stock using the treasury method, and convertible securities using the as-converted method, except when antidilutive. In the event of a net loss, the effects of all potentially dilutive shares are excluded from the diluted net loss per share calculation as their inclusion would be antidilutive
.
Reclassification.
Certain reclassifications have been made to prior periods’ data to conform to the current presentation. These reclassifications had no effect on reported net losses.
Recent Accounting Pronouncements
.
In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). ASU 2011-04 results in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. The Company adopted this guidance effective January 1, 2012, and its adoption did not have a material impact on the Company’s consolidated financial condition or results of operations.
In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”). ASU 2013-02 requires entities to report the effect of reclassifications out of accumulated other comprehensive income on the respective line items in the statement of operations. The Company adopted this guidance effective October 1, 2012, and its adoption had no impact on the Company’s consolidated financial condition or results of operations
.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 3. Inventories
Inventories, net of provisions for potentially excess, obsolete or impaired goods, consisted of the following at December 31, 2012 and 2011:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
158,316
|
|
|
$
|
167,765
|
|
|
|
|
|
|
|
|
|
|
Work in process
|
|
|
179,314
|
|
|
|
191,450
|
|
|
|
|
|
|
|
|
|
|
Finished goods
|
|
|
157,856
|
|
|
|
385,793
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
495,486
|
|
|
$
|
745,008
|
|
NOTE 4. Property and Equipment
Property and equipment consisted of the following at December 31, 2012 and 2011:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
2,883,447
|
|
|
$
|
2,876,490
|
|
Tools and molds
|
|
|
24,620
|
|
|
|
97,687
|
|
Leasehold improvements
|
|
|
111,356
|
|
|
|
105,327
|
|
Furniture and fixtures
|
|
|
148,261
|
|
|
|
154,930
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
3,167,684
|
|
|
|
3,234,434
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
(2,293,622
|
)
|
|
|
(1,520,344
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
874,062
|
|
|
$
|
1,714,090
|
|
Depreciation and amortization expense totaled $903,291 and $834,861 for the years ended December 31, 2012 and 2011, respectively.
NOTE 5. Long Term Obligations
On December 7, 2010, the Company entered a $2,000,000 Loan and Security Agreement (“LSA”) with Oxford Finance Corporation (“Oxford”). Borrowings under this term loan were at an interest rate of approximately 13%, and for the first six months, interest only was repayable, after which the balance of principal and interest were repayable in equal monthly installments over a thirty month period. The
Company granted Oxford a first priority security interest in substantially all of its assets, excluding its intellectual property
.
The Company issued a total of 95,368 warrants to Oxford in connection with the LSA. These warrants have a term of five years, and an exercise price of $1.468. Utilizing the Black-Scholes valuation model and assumptions of the fair value of common stock of $1.41, an expected term of four years, estimated volatility of 43.96%, a zero dividend rate and a risk-free interest rate of 1.305%, the Company determined the total allocated fair value of the warrants to be $46,230.
Further, the Company incurred initial costs of $157,240 to obtain the LSA, which contained a provision providing for a termination fee of $95,000.
The total financing costs of $298,470 were amortized as a non-cash interest expense over the period of the loan using the effective interest method.
The loan was repaid in full on May 27, 2011. At this date, the unamortized financing costs of $222,275 plus additional costs of $83,585 arising from early termination were expensed as interest.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
On May 27, 2011, the Company sold convertible promissory notes in the aggregate principal amount of $
15,275,000, convertible into an aggregate of approximately 2,679,824 shares of
Series A-2 Convertible Preferred Stock at a price of $5.70 per share, with each share being convertible into ten shares of common stock. The convertible promissory notes were sold along with convertible preferred stock
and warrants for aggregate gross proceeds of $30,550,000, which after deducting issuance costs of $2,524,963 left net proceeds of $28,025,037
. Interest on the convertible promissory notes accrues at a rate of 5% per annum, and may either be paid on the last day of each fiscal quarter, or added to the principal amount of the notes, at the Company’s option.
Using the relative fair value of the securities issued, the Company initially allocated the gross proceeds of $30,550,000 to the convertible promissory notes ($10,072,592), the Series A-1 convertible preferred stock ($10,724,991 - see Note 7) and the warrants ($9,752,417 - see Note 9). However, until September 30, 2011, the convertible promissory notes contained features that adjusted the number of shares issuable to investors in the event the Company requested conversion of the convertible promissory notes in certain circumstances. They also contain features affording the holder additional shares in the event of certain organic changes to the Company. Because these features result in the embedded conversion element not being considered indexed to the Company’s equity, the Company recognizes the conversion element of the convertible promissory notes as a derivative liability at its fair value. A liability of $11,495,163 (see below) was thus recognized on the date of issuance, and this is marked to its fair value through income in all subsequent periods. Because the fair value of the conversion element exceeded the net proceeds initially allocated to the convertible promissory notes, the Company recognized a loss of $2,255,074 at the date the convertible promissory notes were issued. The loss is reflected as additional interest expense.
In summary, the Company allocated the gross proceeds and issuance costs as follows:
Security
|
|
Allocated Fair Value
|
|
|
Issuance Costs
|
|
|
Interest Expense
|
|
|
Net Allocation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A-1 Convertible Preferred Stock
|
|
$
|
10,724,991
|
|
|
$
|
(886,422
|
)
|
|
$
|
—
|
|
|
$
|
9,838,569
|
|
Convertible promissory notes
|
|
|
10,072,592
|
|
|
|
(832,502
|
)
|
|
|
2,255,074
|
|
|
|
11,495,164
|
|
Warrants
|
|
|
9,752,417
|
|
|
|
(806,039
|
)
|
|
|
—
|
|
|
|
8,946,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
30,550,000
|
|
|
$
|
(2,524,963
|
)
|
|
$
|
2,255,074
|
|
|
$
|
30,280,111
|
|
The debt discount related to the debt element of the convertible promissory notes of $14,442,497 is being amortized as non-cash interest expense using the effective yield method over the 3.5 year contractual term of the convertible promissory notes. The $832,502 in issuance costs allocated to the convertible promissory notes was recorded as a deferred financing cost, which is also being amortized as a non-cash interest expense using the effective yield method over the 3.5 year contractual term of the promissory notes.
The Company values the derivative liability for the conversion element of the convertible promissory notes using a Monte Carlo Simulation approach, using critical assumptions provided by management reflecting conditions at the valuation dates.
The fair value of this derivative liability at May 27, 2011, was estimated to be $11,495,163, using a closing stock price of $0.68, and based on assumptions which included an estimated volatility of 64.31%, a risk-free interest rate of 0.21%, a zero dividend rate and a contractual term of 3.5 years. The fair value of this derivative liability at December 31, 2011, was estimated to be $1,931,295, using a closing stock price of $0.16, and based on assumptions which included an estimated volatility of 82.82%, a risk-free interest rate of 0.18%, a zero dividend rate and a contractual term of 2.91 years. The fair value of this derivative liability at December 31, 2012, was estimated to be $274,928, using a closing stock price of $0.03, and based on assumptions which included an estimated volatility of 126.91%, a risk-free interest rate of 0.13%, a zero dividend rate and a contractual term of 1.91 years (see Note 10).
During the year ended December 31, 2012, the decrease in the fair value of the derivative liability of $1,656,367 was recorded as a revaluation gain. On September 30, 2011, Company and the note holders modified the convertible promissory note to eliminate the feature that adjusted the number of shares issuable to investors in the event the Company requested conversion of the convertible promissory notes in certain circumstances. This modification reduced the fair value of the conversion element derivative by $573,923. The gain from that reduction in value was recognized as an increase in Stockholders’ Equity. During the year ended
December 31
, 2011, the remainder of the decrease in the fair value of the derivative liability of $
8,989,945
was recorded as
a revaluation gain
(see Note 10).
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The balance of the convertible promissory notes comprises the following at
December 3
1, 2012 and 2011:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Convertible Promissory Notes Payable:
|
|
|
|
|
|
|
Face value
|
|
$
|
15,275,000
|
|
|
$
|
15,275,000
|
|
Interest added to principal
|
|
|
1,262,028
|
|
|
|
460,383
|
|
Stated value
|
|
|
16,537,028
|
|
|
|
15,735,383
|
|
Debt discount – conversion element, net of accumulated amortization of $1,298,628 and $113,081 respectively
|
|
|
13,143,869
|
|
|
|
14,329,416
|
|
|
|
|
|
|
|
|
|
|
Notes payable, net of debt discount
|
|
$
|
3,393,159
|
|
|
$
|
1,405,967
|
|
The Company leases its office space for use in its operations under non-cancellable operating leases that expire in April 2015 and December 2013.
Aggregate future minimum obligations for leases in effect as of December 31, 2012 are as follows:
|
|
Operating Leases
|
|
|
|
|
|
|
Year ending December 31,
|
|
|
|
|
2013
|
|
$
|
488,265
|
|
2014
|
|
|
635,340
|
|
2015
|
|
|
218,175
|
|
|
|
|
|
|
Total minimum obligations
|
|
$
|
1,341,780
|
|
Rent expense totaled $597,261 and $758,908 for the years ended December 31, 2012 and 2011, respectively.
NOTE 6. Convertible Preference Shares of Subsidiary
In
2008, the Company’s Malaysian subsidiary, WGBM, issued Series A convertible preference shares (“CPS”) to Malaysian Technology Development Corporation Sdn. Bhd. (“MTDC”), a venture capital and development firm in Malaysia, in a private placement under a Share Subscription and Shareholders’ Agreement dated May 8, 2008, at the U.S. dollar equivalent of $2.25 per share. In 2009 and 2010, WGBM issued Series B CPS to Expedient Equity Ventures Sdn. Bhd. (“EEV”) and Prima Mahawangsa Sdn. Bhd. (“PMSB”), both venture capital and development firms in Malaysia, in a private placement under a Share Subscription Agreement dated April 3, 2009, (“Series B SSA”) at the U.S. dollar equivalent of $2.25 per share. In 2009, WGBM issued Series B CPS to Kumpulan Modal Perdana Sdn. Bhd. (“KMP”), a venture capital and development firm in Malaysia, in a private placement under a Share Subscription Agreement dated July 1, 2009, at the U.S. dollar equivalent of $2.25 per share.
In 2010, both EEV and KMP exercised their option (see Paragraph (b) below) to sell to the Company their holdings of 222,222 and 188,057 Series B CPS, respectively, in exchange for shares of the Company’s common stock.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
These transactions, along with the issuance of Series C CPS in 2011 (see below), are summarized as follows:
Class
|
|
Number
|
|
Initial
|
|
Issuance
|
|
Gross
|
|
Issuance
|
|
Exchange
|
|
Net Cash
|
|
Date if
|
|
CPS
|
|
of CPS
|
|
of CPS
|
|
Investor
|
|
Date
|
|
Proceeds
|
|
(Costs)
|
|
Gain (loss)
|
|
Proceeds
|
|
Exchanged
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
444,444
|
|
MTDC
|
|
07/18/2008
|
|
$
|
1,000,000
|
|
$
|
(30,000
|
)
|
$
|
—
|
|
$
|
970,000
|
|
—
|
|
444,444
|
|
Series A
|
|
444,444
|
|
MTDC
|
|
11/27/2008
|
|
|
1,000,000
|
|
|
(30,000
|
)
|
|
—
|
|
|
970,000
|
|
—
|
|
444,444
|
|
Series B
|
|
111,111
|
|
EEV
|
|
06/08/2009
|
|
|
250,000
|
|
|
(19,393
|
)
|
|
(18,029
|
)
|
|
212,578
|
|
08/17/2010
|
|
—
|
|
Series B
|
|
111,111
|
|
EEV
|
|
03/09/2010
|
|
|
250,000
|
|
|
(8,929
|
)
|
|
(3,005
|
)
|
|
238,066
|
|
08/17/2010
|
|
—
|
|
Series B
|
|
222,222
|
|
PMSB
|
|
09/23/2009
|
|
|
500,000
|
|
|
(7,500
|
)
|
|
—
|
|
|
492,500
|
|
—
|
|
222,222
|
|
Series B
|
|
222,222
|
|
PMSB
|
|
05/13/2010
|
|
|
500,000
|
|
|
(5,000
|
)
|
|
—
|
|
|
495,000
|
|
—
|
|
222,222
|
|
Series B
|
|
188,057
|
|
KMP
|
|
09/18/2009
|
|
|
423,128
|
|
|
(11,319
|
)
|
|
—
|
|
|
411,809
|
|
09/29/2010
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
1,743,611
|
|
|
|
|
|
|
3,923,128
|
|
|
(112,141
|
)
|
|
(21,034
|
)
|
|
3,789,953
|
|
|
|
1,333,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C
|
|
3,233,734
|
|
MTDC
|
|
03/10/2011
|
|
|
5,000,000
|
|
|
(6,272
|
)
|
|
58,575
|
|
|
5,052,303
|
|
—
|
|
3,233,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,977,345
|
|
|
|
|
|
$
|
8,923,128
|
|
$
|
(118,413
|
)
|
$
|
37,541
|
|
$
|
8,842,256
|
|
|
|
4,567,066
|
|
Under the terms of a Deed of Adherence dated April 3, 2009 (and under the Series C SSA, as defined below), certain rights of the holders of the Series A CPS were modified. In addition, under the terms of the Series B SSA, the use of funds raised through the issuance of both Series A and Series B CPS was restricted, requiring at least 60% of the total to be utilized for the Company’s operations in Malaysia.
Following these modifications, the rights of the holders of Series A and B CPS included, but were not limited to, the right:
|
(a)
|
to put to the Company their CPS (or ordinary shares in WGBM received on conversion of those CPS under paragraph (c) below) at any time during the year 2011 that the share price of the Company’s common stock is below $2.25 in order to redeem for cash (or, at the holder’s option, shares of Company common stock of equivalent value) the amount originally invested in USD plus a premium of 8%, compounded annually, with yearly rests (each year’s accrued interest would be forfeited in the event of redemption prior to the anniversary of the initial investment) (the “Redemption Option,” since amended for Series A and expired for Series B, see below);
|
|
(b)
|
to cause the Company to exchange their CPS for common stock of the Company at an exchange rate of US$2.25 per share of common stock, provided, in the case of Series B CPS, that commencing on August 1, 2010, if during the 10-day trading period immediately prior to the holder’s exercise notice the average closing price of the Company’s common stock is less than US$2.647, then the holder may exchange CPS at an exchange rate equal to 85% of such 10-day average closing price. This option expires on May 8, 2013, for MTDC’s Series A CPS, on April 3, 2014, for EEV’s and PMSB’s Series B CPS and on July 1, 2014, for KMP’s Series B CPS (the “Conversion Option,” since exercised by EEV and KMP);
|
|
(c)
|
to convert their CPS into ordinary shares of the subsidiary, WGBM, at any time, at a conversion rate of three ordinary shares per $100 invested in CPS;
|
|
(d)
|
to cause the subsidiary, WGBM, to redeem the CPS in whole or in part at any time after December 31, 2011, for the principal paid plus a premium of 20% per annum, not compounding, from funds legally available for distribution (i.e. retained earnings; there is presently an accumulated deficit in WGBM in excess of $3 million);
|
|
(e)
|
of first offer on any transfers or new issuance of subsidiary shares; and
|
|
(f)
|
for each of Series A and Series B CPS, to appoint one of the seven directors of the subsidiary (see below also).
|
Since the Conversion Option affords holders of Series B CPS the right to receive a variable number of shares of the Company’s common stock, this feature is not indexed to the Company’s equity and is therefore accounted for as a derivative liability, with the
estimated fair value being calculated at each reporting date using a Monte Carlo Simulation approach, using key input variables provided by management, with changes in fair value recorded as gains or losses on revaluation in non-operating income (expense).
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
On December 31, 2011, the Series B CPS Redemption Option lapsed. The Series B CPS recorded in temporary equity was transferred to permanent equity and the value of the derivative liability for the conversion element, now the only substantive right available to PMSB, increased significantly as a result.
Series B CPS fair values at December 31, 2012 and 2011, were estimated to be $1,210,909 and $1,245,101, respectively, using a closing stock price of $0.03 and $0.16, respectively, and based on the following assumptions:
|
December 31, 2012
|
|
December 31, 2011
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
|
|
Expected remaining term
|
|
|
|
|
Expected volatility
|
|
|
|
|
Dividend yield
|
|
|
|
|
The net decrease in the fair value of the Series B CPS derivative liability of $34,192 during the year ended December 31, 2012, was recorded as a revaluation gain, and the net increase in the fair value of this derivative liability of $1,051,013 (which arose principally due to the lapse of the conversion option) during the year ended December 31, 2011, was recorded as a revaluation loss (see Note 10).
Based on the average closing price of the Company’s common stock of $0.030 in the 10-day trading period immediately prior to December 31, 2012, PMSB could have converted their Series B CPS into 39,215,686 shares of such stock had they exercised the Conversion Option on that date.
On December 9, 2011, the terms of the Series A CPS were amended by a Letter Agreement with MTDC (the “MTDCLA”) to extend the period during which MTDC could exercise the Redemption Option from December 31, 2011 to April 3, 2014. In addition, the holder’s option to elect to receive shares of Company common stock of equivalent value (see above) was amended to give the Company the option, upon the exercise of the Redemption Option, to pay in shares of its common stock at an Applicable Stock Price (“ASP”), calculated as 85% of the average closing price of that stock during the 10-day trading period immediately prior to MTDC’s exercise notice. Further, the ASP is subject to a ceiling of $1.55 and a floor of $0.10.
The amendment that allows the Company to settle the Redemption Option in a variable number of shares causes the Redemption Option to no longer be considered indexed to the Company’s equity. As a result, the Company recognized the Redemption Option as an embedded derivative requiring bifurcation effective December 9, 2011. The Company valued the Redemption Option utilizing a Monte Carlo Simulation, using a stock price of $0.16 and assumptions of estimated volatilities of 78.02% to 80.22%, risk-free interest rates of 0.27% and estimated remaining terms of 1.61 to 1.96 years; the fair value of the Redemption Option was estimated to be $2,198,828. The host instrument (the Series A CPS absent the Redemption Option) is not redeemable and therefore should be classified as part of permanent equity. Accordingly, this modification to the Series A CPS resulted in (1) the recognition of a derivative liability of $2,198,828, (2) the elimination of temporary equity of $2,519,424, and (3) an increase in permanent equity of $320,596. As the fair value of the amended Series A CPS was $320,390 less than the carrying amount of the accreted Series A CPS prior to the amendment, $320,390 of the amount transferred to permanent equity was treated as reversal of prior accretion of the Series A CPS.
Series A CPS fair values at December 31, 2012 and 2011, were estimated to be $619,652 and $2,135,715, respectively, using a closing stock price of $0.03 and $0.16, respectively, and based on the following assumptions:
|
December 31, 2012
|
|
December 31, 2011
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
|
|
Expected remaining term
|
|
|
|
|
Expected volatility
|
|
|
|
|
Dividend yield
|
|
|
|
|
The net decrease in the fair value of the Series A CPS derivative liability of $1,516,063 and $63,113 during the year ended December 31, 2012, and during the 22 days ended December 31, 2011, respectively, was recorded as a revaluation gain (see Note 10).
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
On December 31, 2012, the cash value of the Redemption Option was $2,720,978. Since 85% of the average closing price of the Company’s common stock of $0.030 in the 10-day trading period immediately prior to December 31, 2012, was less than the ASP floor of $0.10, the Company could have settled this liability by issuing 27,209,779 shares of its common stock if MTDC had exercised the Conversion Option on that date.
On March 10, 2011, WGBM issued 3,233,734 Series C CPS to MTDC in a private placement at the U.S. dollar equivalent of $1.5462 per share, representing the first subscription under a Share Subscription Agreement dated December 14, 2010, (“Series C SSA”) to sell 3,233,734 Series C CPS at an initial closing and, should MTDC so elect within 36 months of the initial closing, to sell 1,077,911 shares of Series C CPS at a subsequent closing at the U.S. dollar equivalent of US$2.3193 per share (see Note 9). MTDC may also elect to convert their Series C CPS into ordinary shares of the subsidiary, WGBM, at any time, at a conversion rate of one ordinary share per 100 CPS. MTDC may appoint one of the seven directors of the subsidiary (in addition to the director they may appoint as the holder of Series A CPS), and an additional independent director may be jointly appointed by MTDC and the Company. Each Series C CPS issued at the initial closing can convert into one share of the Company on April 3, 2014 (this was extended from December 20, 2011, by the MTDCLA), and each Series C CPS issued at the subsequent closing will convert into one share of the Company on the anniversary of that closing, but the Series C may convert at any earlier date following each closing at MTDC’s option.
WGBM is authorized to issue 200,000,000 preference shares with a par value of RM0.01. There were 4,977,345 preference shares (including 410,279 Series B CPS held by the Company upon exercise by EEV and KMP of their options) issued and outstanding at December 31, 2012 and 2011
.
NOTE 7. Preferred Stock
The Company has 10,000,000 shares of preferred stock authorized. Effective May 26, 2011, the Company designated 4,500,000 shares as Series A-1 Convertible Preferred Stock and 4,500,000 shares as Series A-2 Convertible Preferred Stock (together, the “Series A Preferred Stock”). Each share of Series A Preferred Stock is convertible into ten shares of common stock, subject to an ownership cap whereby conversion may not occur to the extent the holder would own more than 9.985% of the common stock following conversion, and entitles the holder to receive dividends, as, when and if declared by the Company’s Board of Directors, at an annual rate of 5% of the stated value per share of the respective series. Such dividends accrue, compounding quarterly, and accumulate on each share of Series A Preferred Stock from the date of issuance, whether or not declared, until November 27, 2014, when the right to further dividends ceases. The Series A Preferred Stock has no voting rights, and in the event of liquidation ranks senior to common stock.
Effective May 27, 2011, the Company sold an aggregate of 2,937,499.97 shares of Series A-1 Convertible Preferred Stock with a stated value of $5.20 per share. The Company recorded the allocated valuation of $10,724,991 (see Note 5), less allocated issuance costs of $886,422, as Series A-1 Convertible Preferred Stock within permanent equity. The Company also recognized a beneficial conversion feature calculated as the number of potential conversion shares multiplied by the excess of the market price of the common stock on the issuance date over the price per conversion share based on the valuation allocated to the Series A-1 Convertible Preferred Stock. Since this preferred stock is immediately convertible and not redeemable, this non-contingent beneficial conversion feature of $9,250,009 was recorded as a one-time accretion expense.
As of December 31, 2012, $1,259,742 of undeclared dividends had been accrued with respect to the outstanding Series A-1 Convertible Preferred Stock, of which $801,534 and $458,208 related to the year ended December 31, 2012 and 2011, respectively.
NOTE 8. Stock Awards
The Company has awards outstanding under three plans - the 2003 Incentive Stock Plan (the “2003 Plan”), the 2007 Stock Option Plan (the “2007 Plan”) and
the 2008 Stock Incentive Plan (the “2008 Plan”) (collectively, the “Plans”)
. Under the 2003 Plan and 2007 Plan, incentive stock options, nonqualified stock options, restricted stock and restricted stock units could be granted. Awards vested
over varying periods,
as specified by the Company’s Board of Directors for each grant
, and are exercisable for a maximum period of ten years after date of grant. Both of these plans have been frozen, resulting in no further shares being available for grant.
The Company presently issues awards under the 2008 Plan, initially adopted by the Company’s stockholders on June 5, 2008, and subsequently amended to authorize the issuance of additional shares of the Company’s common stock. The purpose of the 2008 Plan is to provide an incentive to retain the employment of directors, officers, consultants, advisors and employee of the Company, to attract new personnel whose training, experience and ability are considered valuable, to encourage the sense of proprietorship, and to stimulate the active interest of such persons in the Company’s development and financial success. Under the 2008 Plan, the Company is authorized to issue incentive stock options, non-qualified stock options, restricted stock the Company, to attract new personnel whose training, experience and ability are considered valuable, to encourage the sense of proprietorship, and to stimulate the active interest of such persons in the Company’s development and financial success. Under the 2008 Plan, the Company is authorized to issue incentive stock options, non-qualified stock options, restricted stock
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
and restricted stock units, although no more than 50% of the authorized shares may be granted pursuant to awards of restricted stock and restricted stock units. Awards that expire or are canceled generally become available for issuance again under the 2008 Plan. The number of shares of the Company’s common stock available under the 2008 Plan will be subject to adjustment in the event of a stock split, stock dividend or other extraordinary dividend, or other similar change in the Company’s common stock or capital structure. Awards may vest over varying periods, as specified by the Company’s Board of Directors for each grant, and have a maximum term of seven years from the grant date. The 2008 Plan is administered by the Company’s Board of Directors
.
The Company has issued both options and restricted stock (including restricted stock units) under the Plans. Restricted stock grants afford the recipient the opportunity to receive shares of common stock, subject to certain terms, whereas options give them the right to purchase common stock at a set price. Both the Company’s options and restricted stock issued to employees generally have vesting restrictions that are eliminated over a four-year period, although vesting may be over a shorter period, or may occur on the grant date, depending on the terms of each individual award
.
A summary of stock option
and restricted stock transactions
is as follows:
|
|
|
|
|
Stock Options
|
|
Restricted Stock
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
Number of
|
|
|
Average
|
|
Number of
|
|
Average
|
|
|
|
Available
|
|
|
Options
|
|
|
Exercise
|
|
Options
|
|
Grant-Date
|
|
|
|
For Grant
|
|
|
Outstanding
|
|
|
Price
|
|
Outstanding
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2011
|
|
2,191,821
|
|
|
5,543,893
|
|
|
$
|
1.5218
|
|
127,500
|
|
$
|
1.6422
|
|
2008 Plan Amendment
|
|
8,000,000
|
|
|
—
|
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
Granted
|
|
(1,504,635
|
)
|
|
1,153,550
|
|
|
$
|
0.6427
|
|
351,085
|
|
$
|
0.8497
|
|
Exercised
|
|
—
|
|
|
(324,740
|
)
|
|
$
|
0.3220
|
|
—
|
|
$
|
—
|
|
Vested
|
|
—
|
|
|
—
|
|
|
$
|
—
|
|
(362,944
|
)
|
$
|
0.8909
|
|
Forfeited
|
|
1,247,521
|
|
|
(1,140,021
|
)
|
|
$
|
1.2928
|
|
(110,000
|
)
|
$
|
1.6050
|
|
Canceled
|
|
370,364
|
|
|
(925,782
|
)
|
|
$
|
1.7061
|
|
(641
|
)
|
$
|
2.3900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
10,305,071
|
|
|
4,306,900
|
|
|
$
|
1.3978
|
|
5,000
|
|
$
|
1.2500
|
|
Granted
|
|
(9,785,500
|
)
|
|
9,724,000
|
|
|
$
|
0.1164
|
|
61,500
|
|
$
|
0.1385
|
|
Vested
|
|
—
|
|
|
—
|
|
|
$
|
—
|
|
(59,000
|
)
|
$
|
0.2325
|
|
Forfeited
|
|
1,471,073
|
|
|
(1,471,073
|
)
|
|
$
|
0.5925
|
|
—
|
|
$
|
—
|
|
Canceled
|
|
937,342
|
|
|
(1,135,329
|
)
|
|
$
|
1.3123
|
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
2,927,986
|
|
|
11,424,498
|
|
|
$
|
0.4193
|
|
7,500
|
|
$
|
0.1400
|
|
The following table summarizes information concerning outstanding options as of December 31, 2012:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Intrinsic
|
|
Options
|
|
Shares
|
|
|
Life (in Years)
|
|
|
Price
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
11,424,498
|
|
|
|
5.71
|
|
|
$
|
0.4193
|
|
|
$
|
2,898
|
|
Vested and expected to vest
|
|
|
10,262,319
|
|
|
|
5.66
|
|
|
$
|
0.4502
|
|
|
$
|
2,898
|
|
Exercisable
|
|
|
4,123,060
|
|
|
|
4.82
|
|
|
$
|
0.8747
|
|
|
$
|
2,898
|
|
The aggregate intrinsic value in the preceding table represents the total pre-tax value (i.e., the difference between the Company’s stock price and the exercise price) of stock options outstanding as of December 31, 2012, based on our common stock closing price of $0.03, which would have been received by the option holders had all their in-the-money options been exercised as of that date.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The weighted average fair value of options granted in the years ended December 31, 2012 and 2011, was $0.08 and $0.29, respectively. These fair values were estimated using the following assumptions (see also Note 10):
|
Year Ended December 31,
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
Risk-free interest rate
|
0.71% - 1.14%
|
|
|
0.79% - 2.24%
|
|
Expected term
|
4.75 Years
|
|
|
4.75 Years
|
|
Expected volatility
|
65.02% - 103.61%
|
|
|
42.44% - 66.83%
|
|
Dividend yield
|
0%
|
|
|
0%
|
|
The grant date fair value of options vested in the years ended December 31, 2012 and 2011, was $334,650 and $463,168, respectively. No options were exercised during the year ended December 31, 2012. The Company received $104,566 for the 324,740 options exercised during the year ended December 31, 2011, which had an intrinsic value of $203,399.
The amounts expensed for stock-based compensation totaled $387,892 and $779,029 for the years ended December 31, 2012 and 2011, respectively. The sums expensed include $120 and $130,230 for restricted stock awards to consultants in the years ended December 31, 2012 and 2011, respectively.
At December 31, 2012, the total stock-based compensation cost not yet recognized, net of estimated forfeitures, was $509,984. This cost is expected to be recognized over an estimated weighted average amortization period of 2.20 years. No amounts related to stock-based compensation costs have been capitalized. The tax benefit and the resulting effect on cash flows from operations and financial activities, related to stock-based compensation costs were not recognized as the Company currently provides a full valuation allowance for all of its deferred taxes.
NOTE 9. Warrants
The Company has incurred liabilities for the estimated fair value of derivative warrant instruments. The estimated fair value of the derivative warrant instruments has been calculated using a Monte Carlo Simulation approach, with key input variables provided by management, as of each issuance date, with the valuation offset against additional paid in capital, and at each reporting date, with changes in fair value recorded as gains or losses on revaluation in non-operating income (expense).
Fair values at December 31, 2012 and 2011, were estimated to be $102,695 (with the fair value per warrant share ranging from $0.0000006 to $0.02) and $655,219 (with the fair value per warrant share ranging from $0.02 to $0.10)
, respectively, using a closing stock price of $0.03 and $0.16, respectively, and based on the following assumptions:
|
December 31, 2012
|
|
December 31, 2011
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.16% - 0.32
%
|
|
Expected remaining term
|
|
|
1.25 -
2.39
Years
|
|
Expected volatility
|
|
|
80.66% - 85.13%
|
|
Dividend yield
|
|
|
0%
|
|
During the year ended
December 31
, 2012, the decrease in the fair value of the warrant derivative liability of $
552,524
was recorded as
a revaluation gain
. In connection with the fundraising in May 27, 2011, members of management, with warrants to purchase a total of 1,051,074 shares with an estimated fair value of $
315,803 following anti-dilution adjustments as of that date,
waived their right to any future anti-dilution adjustments, so this estimated fair value was transferred to stockholders’ equity. During the year ended
December 31
, 2011, the remainder of the decrease in the fair value of the warrant derivative liability of $
1,269,940
was recorded as
a revaluation gain
(see Note 10).
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
A summary of outstanding common stock warrants as of December 31, 2012 is as follows:
Securities Into Which
|
|
Warrants
|
|
Warrants Subject
|
|
Exercise
|
|
Expiration
|
Warrants are Convertible
|
|
Outstanding
|
|
to Anti-Dilution
|
|
Price
|
|
Date
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
56,173,248
|
|
—
|
|
$0.6200
|
|
May 2016
|
Common stock
|
|
4,487,656
|
|
3,718,425
|
|
$0.7800
|
|
June and August 2014
|
Common stock
|
|
2,875,736
|
|
2,774,050
|
|
$0.8400
|
|
December 2014 and January 2015
|
Common stock
|
|
2,265,071
|
|
2,084,914
|
|
$0.8400
|
|
May 2013
|
Common stock
|
|
95,368
|
|
—
|
|
$1.4680
|
|
December 2015
|
Common stock
|
|
203,500
|
|
—
|
|
$1.5000
|
|
July 2015
|
Common stock
|
|
3,000,830
|
|
—
|
|
$1.5500
|
|
July 2015
|
Common stock
|
|
200,000
|
|
—
|
|
$3.0000
|
|
December 2014 and November 2015
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
69,301,409
|
|
8,577,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C CPS
|
|
1,077,911
|
|
—
|
|
$2.3193
|
|
March 2014
|
|
|
|
|
|
|
|
|
|
Total
|
|
70,379,320
|
|
8,577,389
|
|
|
|
|
The warrants expiring in May 2016 were issued in conjunction with the May 2011 Private Placement (see Note 1), and were valued at the time of issuance utilizing the Black-Scholes valuation model, using an exercise price of $0.62, a closing stock price of $0.68 and assuming an estimated volatility of 89.58%, a risk free interest rate of 1.03%, a zero dividend rate and an expected term of 3.5 years. These warrants include the right to receive consideration for the unexercised portion of the warrant, based on a Black-Scholes model set forth in the warrants, in the event of certain substantial changes in ownership or trading status of the Company. This contingent embedded derivative will be accounted for only if such an event should occur.
The
warrants expiring in December 2014 and January 2015 were originally issued in December 2009 and January 2010 with an exercise price of $2.50 and entitled the holders thereof to purchase an aggregate of 966,247 shares. As a result of anti-dilution adjustments with respect to such warrants pursuant to their terms, such warrants, as of December 31, 2012, had an exercise price of $0.84 and entitled the holders thereof to purchase an aggregate of 2,875,736 shares. In connection with the May 2011 Private Placement, members of management with warrants to purchase a total of 101,686 shares (after giving effect to prior anti-dilution adjustments) waived their right to further anti-dilution adjustments
.
The warrants expiring in June and August 2014 were originally issued in June and August 2009 with an exercise price of $2.00 and entitled the holders thereof to purchase an aggregate of 1,750,185 shares. As a result of anti-dilution adjustments with respect to such warrants pursuant to their terms, such warrants, as of December 31, 2012, had an exercise price of $0.78 and entitled the holders thereof to purchase an aggregate of 4,487,656 shares. In connection with the May 2011 Private Placement, members of management with warrants to purchase a total of 769,231 shares (after giving effect to prior anti-dilution adjustments) waived their right to further anti-dilution adjustments
.
The
warrants expiring in May 2013 were originally issued in May 2008 with an exercise price of $3.00 and entitled the holders thereof to purchase an aggregate of 634,220 shares. As a result of anti-dilution adjustments with respect to such warrants pursuant to their terms, such warrants, as of December 31, 2012, had an exercise price of $0.84 and entitled the holders thereof to purchase an aggregate of 2,265,071 shares. In connection with the May 2011 Private Placement, members of management with warrants to purchase a total of 180,157 shares (after giving effect to prior anti-dilution adjustments) waived their right to further anti-dilution adjustments
.
The 95,368 warrants expiring in December 2015 were issued in December 2010 in conjunction with obtaining a term loan (see Note 5).
The Series C SSA (see Note 6) grants the holders of the Series C CPS the right to subscribe for a further 1,077,911 CPS at a price of $2.3193. Since these Series C CPS would convert into common stock of the Company within one year of the subscription date, this right is, for accounting purposes, equivalent to a warrant to purchase the Company’s common stock.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 10. Fair Value of Financial Instruments
Fair value measurements are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”).
Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”). The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity to identify transactions that are not orderly.
The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The
three
hierarchy levels are defined as follows:
Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;
Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
Credit risk adjustments are applied to reflect the Company’s own credit risk when valuing all liabilities measured at fair value.
The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at
December 3
1, 2012 and 2011:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
December 3
1, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,328,753
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,328,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,328,753
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,328,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
102,695
|
|
|
$
|
102,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion element of promissory notes
|
|
|
—
|
|
|
|
—
|
|
|
|
274,928
|
|
|
|
274,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion element of Series B CPS
|
|
|
—
|
|
|
|
—
|
|
|
|
1,210,909
|
|
|
|
1,210,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A CPS derivative liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
619,652
|
|
|
|
619,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,208,184
|
|
|
$
|
2,208,184
|
|
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
December 3
1, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,117,172
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,117,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
15,117,172
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,117,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
655,219
|
|
|
$
|
655,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion element of promissory notes
|
|
|
—
|
|
|
|
—
|
|
|
|
1,931,295
|
|
|
|
1,931,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion element of Series B CPS
|
|
|
—
|
|
|
|
—
|
|
|
|
1,245,101
|
|
|
|
1,245,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A CPS derivative liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
2,135,715
|
|
|
|
2,135,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,967,330
|
|
|
$
|
5,967,330
|
|
The following tables present a reconciliation of all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended
December 31
, 2012 and 2011:
|
|
|
|
|
Conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Element of
|
|
|
Conversion
|
|
|
|
|
|
|
|
|
|
Warrant
|
|
|
Promissory
|
|
|
Element of
|
|
|
Series A CPS
|
|
|
|
|
|
|
Derivatives
|
|
|
Notes
|
|
|
Series B CPS
|
|
|
Derivatives
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2012
|
|
$
|
655,219
|
|
|
$
|
1,931,295
|
|
|
$
|
1,245,101
|
|
|
$
|
2,135,715
|
|
|
$
|
5,967,330
|
|
Issuances
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Revaluation (gains) losses included in other income and expenses
|
|
|
(552,524
|
)
|
|
|
(1,656,367
|
)
|
|
|
(34,192
|
)
|
|
|
(1,516,063
|
)
|
|
|
(3,759,146
|
)
|
Settlements
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance at December 31, 2012
|
|
$
|
102,695
|
|
|
$
|
274,928
|
|
|
$
|
1,210,909
|
|
|
$
|
619,652
|
|
|
$
|
2,208,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) included in other income and expenses attributable to liabilities still held as of December 31, 2012
|
|
$
|
552,524
|
|
|
$
|
1,656,367
|
|
|
$
|
34,192
|
|
|
$
|
1,516,063
|
|
|
$
|
3,759,146
|
|
|
|
|
|
|
Conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Element of
|
|
|
Conversion
|
|
|
|
|
|
|
|
|
|
Warrant
|
|
|
Promissory
|
|
|
Element of
|
|
|
Series A CPS
|
|
|
|
|
|
|
Derivatives
|
|
|
Notes
|
|
|
Series B CPS
|
|
|
Derivatives
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2011
|
|
$
|
2,240,962
|
|
|
$
|
—
|
|
|
$
|
194,088
|
|
|
$
|
—
|
|
|
$
|
2,435,050
|
|
Issuances
|
|
|
—
|
|
|
|
11,495,163
|
|
|
|
—
|
|
|
|
2,198,828
|
|
|
|
13,693,991
|
|
Revaluation (gains) losses included in other income and expenses
|
|
|
(1,269,940
|
)
|
|
|
(8,989,945
|
)
|
|
|
1,051,013
|
|
|
|
(63,113
|
)
|
|
|
(9,271,985
|
)
|
Settlements
|
|
|
(315,803
|
)
|
|
|
(573,923
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(889,726
|
)
|
Balance at December 31, 2011
|
|
$
|
655,219
|
|
|
$
|
1,931,295
|
|
|
$
|
1,245,101
|
|
|
$
|
2,135,715
|
|
|
$
|
5,967,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) included in other income and expenses attributable to liabilities still held as of December 31, 2011
|
|
$
|
1,324,165
|
|
|
$
|
8,989,945
|
|
|
$
|
(1,051,013
|
)
|
|
$
|
63,113
|
|
|
$
|
9,326,210
|
|
Assumptions used in evaluating the warrant derivative liabilities, the conversion element of the promissory notes, the conversion element of the Series B CPS and the Series A CPS derivative liabilities are discussed in Notes 9, 5, 6 and 6, respectively. The principal assumptions used, and their impact on valuations, are as follows:
Risk-Free Interest Rate.
This is the U.S. Treasury rate for the measurement date having a term equal to the weighted average expected remaining term of the instrument. An increase in the risk-free interest rate will increase the fair value and the associated derivative liability.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Expected Remaining Term.
This is the period of time over which the instrument is expected to remain outstanding and is based on management’s estimate, taking into consideration the remaining contractual life, and historical experience. For
the convertible promissory notes,
the Company
considers a blend of expected remaining terms prior to partial conversion into Series A-2 Convertible Preferred Stock, giving consideration to the likelihood of conversion under various scenarios, and a further blend of expected remaining terms prior to partial conversion into common stock, all based on management’s projections of when such conversions would occur within the contractual term.
An increase in the expected remaining term will increase the fair value and the associated derivative liability.
Expected Volatility.
This is a measure of the amount by which the Company’s common stock price has fluctuated or is expected to fluctuate. To the extent that Company’s common stock has not been traded for as long as the expected remaining term of the
instrument
, the Company uses a weighted average of the historic volatility of a group of publicly traded companies over the retrospective period corresponding to the expected remaining term of the
instrument
on the measurement date. The group of publicly traded companies is selected from the same industry or market index, with extra weighting attached to those companies most similar in terms of business activity, size and financial leverage. To the extent that the Company’s common stock has been traded for longer than the expected remaining term of the
instrument
,
equal weighting is applied to this weighted average and to the Company’s own historic volatility over the same term to determine expected volatility.
An increase in the expected volatility will increase the fair value and the
associated derivative liability.
Dividend Yield.
The Company
has not made any dividend payments and does
not
plan to pay dividends in the foreseeable future. An increase in the dividend yield will decrease the fair value and the associated derivative liability.
NOTE 11. Cash Flow Information
Cash paid during the years ended December 31, 2012 and 2011, is as follows
(interest paid in the year ended
December 31
, 2011, excludes $178,585 which was paid to Oxford relating to termination of the term loan and was expensed as interest
, as described in Note 5):
|
|
Year Ended December 31
,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
—
|
|
|
$
|
127,062
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
41,567
|
|
|
$
|
24,817
|
|
|
|
|
|
|
|
|
|
|
Income taxes (received)
|
|
$
|
(25,539
|
)
|
|
$
|
—
|
|
Supplemental disclosure of non-cash investing and financing activities for the years ended
December 31
, 2012 and 2011, is as follows:
|
|
Year Ended December 31
,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Warrant derivative liabilities transferred to equity on waiver of future anti-dilution rights
|
|
$
|
—
|
|
|
$
|
315,803
|
|
|
|
|
|
|
|
|
|
|
Conversion element of convertible promissory notes transferred to equity on modification of terms (See Note 5)
|
|
$
|
—
|
|
|
$
|
573,923
|
|
|
|
|
|
|
|
|
|
|
Conversion element bifurcated on issuance of convertible promissory notes
|
|
$
|
—
|
|
|
$
|
11,495,163
|
|
|
|
|
|
|
|
|
|
|
Interest converted to principal on convertible promissory notes
|
|
$
|
801,645
|
|
|
$
|
460,383
|
|
|
|
|
|
|
|
|
|
|
Beneficial conversion feature related to Series A-1 C
onvertible
Preferred Stock
|
|
$
|
—
|
|
|
$
|
9,250,009
|
|
|
|
|
|
|
|
|
|
|
Inventory transferred to property and equipment
|
|
$
|
—
|
|
|
$
|
750,501
|
|
|
|
|
|
|
|
|
|
|
Accretion on
Series A and B
convertible preference shares of subsidiary associated with premium
|
|
$
|
—
|
|
|
$
|
(15,242
|
)
|
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 12. Income Taxes
The provision for income taxes consists of the following for the years ended December 31, 2012 and 2011:
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
5,726
|
|
|
|
—
|
|
Foreign
|
|
|
(27,179
|
)
|
|
|
27,247
|
|
|
|
|
|
|
|
|
|
|
Total Current
|
|
$
|
(21,453
|
)
|
|
$
|
27,247
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total Deferred
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
(21,453
|
)
|
|
$
|
27,247
|
|
A reconciliation of the provision for income taxes with the expected provision for income taxes computed by applying the federal statutory income tax rate of 34% to the net loss before provision for income taxes for the years ended December 31, 2012 and 2011:
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Provision for income taxes at federal statutory rate
|
|
$
|
(2,787,359
|
)
|
|
$
|
(4,460,063
|
)
|
Federal research and development tax credits
|
|
|
(94,794
|
)
|
|
|
(160,003
|
)
|
Expenses not deductible, income not taxable
|
|
|
(473,203
|
)
|
|
|
(2,705,607
|
)
|
Foreign loss taxed at lower rates
|
|
|
164,828
|
|
|
|
232,280
|
|
Change in federal valuation allowance
|
|
|
3,169,075
|
|
|
|
7,120,640
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
(21,453
|
)
|
|
$
|
27,247
|
|
The components of the deferred tax assets as of December 31, 2012 and 2011, are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carry-forwards
|
|
$
|
25,034,778
|
|
|
$
|
21,588,554
|
|
Capitalized start-up cost and research and development cost
|
|
|
607,983
|
|
|
|
891,708
|
|
Research and development tax credit
|
|
|
1,389,625
|
|
|
|
1,239,795
|
|
Depreciation on property and equipment
|
|
|
(156,361
|
)
|
|
|
(366,292
|
)
|
Stock-based compensation
|
|
|
405,742
|
|
|
|
677,381
|
|
Reserves and accruals
|
|
|
719,909
|
|
|
|
666,336
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
|
28,001,676
|
|
|
|
24,697,482
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(28,001,676
|
)
|
|
|
(24,697,482
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The following deferred income taxes were provided for the years ended December 31, 2012 and 2011:
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carry-forwards
|
|
$
|
3,446,224
|
|
|
$
|
6,635,471
|
|
Capitalized start-up cost and research and development cost
|
|
|
(283,725
|
)
|
|
|
127,807
|
|
Research and development tax credit
|
|
|
149,830
|
|
|
|
(274,775
|
)
|
Depreciation on property and equipment
|
|
|
209,931
|
|
|
|
(476,501
|
)
|
Stock-based compensation
|
|
|
(271,639
|
)
|
|
|
677,381
|
|
Reserves and accruals
|
|
|
53,573
|
|
|
|
519,602
|
|
Valuation allowance
|
|
|
(3,304,194
|
)
|
|
|
(7,208,985
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
Management believes that, based on a number of factors, it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company has provided a full valuation allowance against its net deferred tax assets. At December 31, 2012, the Company had federal and state net operating loss carry-forwards (“NOLs”) of approximately $64,200,000 and $54,800,000, respectively, and foreign operating loss carry-forwards of approximately $3,200,000. The federal and state NOLs will expire in various periods from 2026 through 2032
.
At December 31, 2012, the Company had research and development tax credits of approximately $800,000 and $900,000 available to offset future income taxes, if any, for federal and California state purposes, respectively. These federal tax credits will expire in various periods from 2027 through 2032 and the California state tax credits can be carried forward indefinitely.
Utilization of NOLs and tax credit carry-forwards may be subject to substantial limitation due to the ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of NOLs and tax credits before utilization.
The Company files U.S. federal and various state income tax returns. There are no prior year tax returns under audit by taxing authorities, and management is not aware of any impending audits. As a result of the Company’s NOL carry-forwards, all tax years from 2006 through 2012 remain subject to federal and state tax examination.
The Company has established tax reserves for uncertain tax positions totaling $721,000 and $645,000 as of December 31, 2012 and 2011, respectively. A reconciliation of the change in unrecognized tax benefits is as follows:
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Beginning Balance
|
|
$
|
645,000
|
|
|
$
|
—
|
|
Additions based on tax positions related to prior years
|
|
|
—
|
|
|
|
497,000
|
|
Additions based on tax positions related to the current year
|
|
|
76,000
|
|
|
|
148,000
|
|
Ending Balance
|
|
$
|
721,000
|
|
|
$
|
645,000
|
|
All of the unrecognized tax benefits are recognized in the Company’s financial statements as a reduction in the Company’s deferred tax assets. Accordingly, the Company has not accrued any interest or penalties related to unrecognized tax benefits. Because the Company has a full valuation allowance against its deferred tax assets, there will be no income tax effect of releasing the unrecognized tax benefits. The Company expects no significant changes to its uncertain tax positions in the next 12 months.
NOTE 13. Net Income (Loss) Per Share
Basic and diluted net income (loss) per share are shown on the Statements of Operations.
No adjustment has been made to the net loss
for charges, gains, losses and accretion related to Series A, B and C CPS, Series A-1 Convertible Preferred Stock and convertible promissory notes
, as the effect would be anti-dilutive due to the net loss.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The
following outstanding stock options and warrants (on an as-converted into common stock basis) and shares issuable or contingently issuable upon conversion of restricted stock, Series A, B and C CPS, Series A-1 Convertible Preferred Stock and convertible promissory notes were excluded from the computation of diluted net loss per share attributable to holders of common stock as they had antidilutive effects
for the years ended December 31, 2012 and 2011:
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Common share equivalents issuable upon exercise of common stock options
|
|
|
121,032
|
|
|
|
247,294
|
|
|
|
|
|
|
|
|
|
|
Shares issuable upon vesting of restricted stock
|
|
|
18,695
|
|
|
|
54,082
|
|
|
|
|
|
|
|
|
|
|
Shares issuable upon conversion of Series A CPS
|
|
|
27,799,325
|
|
|
|
23,844,479
|
|
|
|
|
|
|
|
|
|
|
Shares issuable upon conversion of Series B CPS
|
|
|
39,215,686
|
|
|
|
9,263,548
|
|
|
|
|
|
|
|
|
|
|
Shares issuable upon conversion of Series C CPS
|
|
|
3,233,734
|
|
|
|
2,631,285
|
|
|
|
|
|
|
|
|
|
|
Shares issuable upon conversion of Series A-1 C
onvertible
Preferred Stock
|
|
|
31,019,035
|
|
|
|
17,788,797
|
|
|
|
|
|
|
|
|
|
|
Shares issuable upon conversion of convertible promissory notes
|
|
|
28,309,426
|
|
|
|
16,231,668
|
|
|
|
|
|
|
|
|
|
|
Total common share equivalents excluded from denominator for diluted earnings per share computation
|
|
|
129,716,933
|
|
|
|
70,061,153
|
|
NOTE 14. Segment Information,
Geographic Data, and Significant Customers
Operating segments are defined as component of the Company’s business for which separate financial information is available that is evaluated by the Company’s chief operating decision maker in deciding how to allocate resources and assessing performance. The Company presently has only one operating segment.
Revenue by geographic areas for the years ended December 31, 2012 and 2011, are as follows:
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
495,547
|
|
|
$
|
207,045
|
|
International:
|
|
|
|
|
|
|
|
|
Europe
(1)
|
|
|
47,159
|
|
|
|
297,371
|
|
Asia
|
|
|
43,470
|
|
|
|
18,515
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
586,176
|
|
|
$
|
522,931
|
|
__________
(1) Sales to Europe in 2011 included approximately $270,000 to Belgium.
Revenues are attributed to geographical areas based on where the Company’s products are shipped.
Long-lived assets by geographic areas as of December 31, 2012 and 2011, are as follows:
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
690,454
|
|
|
$
|
1,387,283
|
|
Malaysia
|
|
|
183,608
|
|
|
|
326,807
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
874,062
|
|
|
$
|
1,714,090
|
|
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Customers accounting for more than 10% of either total revenues during the years ended
December 3
1, 2012 or 2011, or accounts receivable as at
December 3
1, 2012 or 2011, are tabulated as follows:
|
Revenues, Year Ended December 31,
|
|
Accounts Receivable, December 31,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
$
|
146,000
|
|
25%
|
|
$
|
—
|
|
—
|
|
$
|
140,000
|
|
45%
|
|
$
|
—
|
|
—
|
|
Customer B
|
$
|
131,465
|
|
22%
|
|
$
|
628
|
|
0%
|
|
$
|
—
|
|
—
|
|
$
|
628
|
|
2%
|
|
Customer C
|
$
|
124,473
|
|
21%
|
|
$
|
—
|
|
—
|
|
$
|
150,145
|
|
49%
|
|
$
|
—
|
|
—
|
|
Customer D
|
$
|
—
|
|
—
|
|
$
|
269,609
|
|
52%
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
—
|
|
Customer E
|
$
|
—
|
|
—
|
|
$
|
66,750
|
|
13%
|
|
$
|
—
|
|
—
|
|
$
|
11,250
|
|
38%
|
|
Customer F
|
$
|
19,185
|
|
3%
|
|
$
|
57,492
|
|
11%
|
|
$
|
15,000
|
|
5%
|
|
$
|
9,700
|
|
33%
|
|
Customer G
|
$
|
—
|
|
—
|
|
$
|
2,975
|
|
1%
|
|
$
|
—
|
|
—
|
|
$
|
2,975
|
|
10%
|
|
NOTE 15. Benefit Plan
The Company has a 401(k) plan that allows eligible U.S. employees to contribute up to 50 percent of their annual compensation to the plan, subject to certain limitations. Each employee directs their contributions, which vest immediately, across a series of mutual funds. The Company does not make matching contributions and the costs of administering the 401(k) plan are not significant.
NOTE 16. Contingencies
From
time to time the Company may be involved in claims arising in connection with its business. Based on information currently available, the Company believes that the amount, or range, of reasonably possible losses in connection with any pending actions against it,
including the matter described below,
in excess of established reserves, in the aggregate, not to be material to its consolidated financial condition or cash flows. However, losses may be material to the Company’s operating results for any particular future period, depending on the level of income or loss for such period.
Coalesce v. WaferGen.
On April 24, 2012, an action entitled Coalesce Corporation (“Coalesce”) v. WaferGen Bio-systems, Inc. was filed in the Alameda County Superior Court. Coalesce, a company that had been providing marketing services between 2006 and 2010, sued the Company for alleged non-payment of sums due, breach of contract, misrepresentation and unjust enrichment. On September 5, 2012, Coalesce filed an amended complaint, with additional claims, for compensatory damages in excess of $500,000 and other compensation. On October 30, 2012, the Company filed a notice of demurrer to Coalesce’s complaint seeking to dismiss the complaint in its entirety. The Company believes the claim to be substantially without merit, and while no assurance can be given regarding the outcome of this litigation, management believes that the resolution of this matter will not have a material adverse effect on the Company’s financial position and results of operations.
Related legal costs are being expensed as incurred
.
NOTE 17. Quarterly Financial Data (Unaudited)
Selected summarized quarterly financial information for fiscal 2012 and 2011 is as follows:
|
|
Year Ended December 31, 2012
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
73,233
|
|
|
$
|
20,158
|
|
|
$
|
176,608
|
|
|
$
|
316,177
|
|
Gross profit (loss)
|
|
$
|
(17,172
|
)
|
|
$
|
9,568
|
|
|
$
|
32,281
|
|
|
$
|
140,622
|
|
Net gains (losses) on derivative revaluations
|
|
$
|
1,076,721
|
|
|
$
|
1,485,470
|
|
|
$
|
(385,209
|
)
|
|
$
|
1,582,164
|
|
Net income (loss)
|
|
$
|
(2,904,695
|
)
|
|
$
|
(1,269,630
|
)
|
|
$
|
(2,967,580
|
)
|
|
$
|
(1,034,757
|
)
|
Net income (loss) attributable to common stockholders
|
|
$
|
(3,101,360
|
)
|
|
$
|
(1,468,754
|
)
|
|
$
|
(3,169,192
|
)
|
|
$
|
(1,238,890
|
)
|
Net income (loss) per share – basic and diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.03
|
)
|
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
|
|
Year Ended December 31, 2011
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
351,032
|
|
|
$
|
44,905
|
|
|
$
|
89,088
|
|
|
$
|
37,906
|
|
Gross profit (loss)
|
|
$
|
210,083
|
|
|
$
|
30,963
|
|
|
$
|
(403,158
|
)
|
|
$
|
(716,861
|
)
|
Net gains (losses) on derivative revaluations
|
|
$
|
381,829
|
|
|
$
|
(1,619,723
|
)
|
|
$
|
8,624,976
|
|
|
$
|
1,884,903
|
|
Net income (loss)
|
|
$
|
(3,803,829
|
)
|
|
$
|
(9,209,548
|
)
|
|
$
|
3,580,921
|
|
|
$
|
(3,712,622
|
)
|
Net income (loss) attributable to common stockholders
|
|
$
|
(3,867,949
|
)
|
|
$
|
(18,590,846
|
)
|
|
$
|
3,222,282
|
|
|
$
|
(3,601,540
|
)
|
Net income (loss) per share – basic
|
|
$
|
(0.09
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
0.08
|
|
|
$
|
(0.09
|
)
|
Net income (loss) per share – diluted
|
|
$
|
(0.09
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.09
|
)
|