Item 1. Financial Statements (Unaudited)
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
(As Restated,
See Note 14)
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,483,041
|
|
|
$
|
6,328,753
|
|
Accounts receivable
|
|
|
349,550
|
|
|
|
307,759
|
|
Inventories, net
|
|
|
363,843
|
|
|
|
495,486
|
|
Prepaid expenses and other current assets
|
|
|
159,821
|
|
|
|
134,567
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
15,356,255
|
|
|
|
7,266,565
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
351,342
|
|
|
|
874,062
|
|
Other assets
|
|
|
46,287
|
|
|
|
756,831
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
15,753,884
|
|
|
$
|
8,897,458
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
722,532
|
|
|
$
|
474,436
|
|
Accrued payroll and related costs
|
|
|
1,289,975
|
|
|
|
235,404
|
|
Other accrued expenses
|
|
|
1,553,093
|
|
|
|
1,063,813
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,565,600
|
|
|
|
1,773,653
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of discount
|
|
|
—
|
|
|
|
3,393,159
|
|
Derivative liabilities
|
|
|
10,025,132
|
|
|
|
2,208,184
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
13,590,732
|
|
|
|
7,374,996
|
|
|
|
|
|
|
|
|
|
|
Series A and B convertible preference shares of subsidiary
|
|
|
4,021,956
|
|
|
|
1,123,406
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 12)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Series C convertible preference shares of subsidiary
|
|
|
4,993,728
|
|
|
|
4,993,728
|
|
Preferred Stock: $0.001 par value; 10,000,000 shares authorized; 3,633.0518 shares of Series 1 issued and outstanding at September 30, 2013; 2,937,500 shares of Series A-1 issued and outstanding at December 31, 2012
|
|
|
16,773,733
|
|
|
|
9,838,569
|
|
Common Stock: $0.001 par value; 300,000,000 shares authorized; 7,380,495 and 419,367 shares issued and outstanding at September 30, 2013 and December 31, 2012
|
|
|
7,380
|
|
|
|
419
|
|
Additional paid-in capital
|
|
|
58,760,356
|
|
|
|
49,933,608
|
|
Accumulated deficit
|
|
|
(82,324,894
|
)
|
|
|
(64,571,897
|
)
|
Accumulated other comprehensive (loss) income
|
|
|
(69,107
|
)
|
|
|
204,629
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity (deficit)
|
|
|
(1,858,804
|
)
|
|
|
399,056
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity (deficit)
|
|
$
|
15,753,884
|
|
|
$
|
8,897,458
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
(As Restated,
|
|
|
|
|
|
(As Restated,
|
|
|
|
|
|
|
See Note 14)
|
|
|
|
|
|
See Note 14)
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
264,547
|
|
|
$
|
176,608
|
|
|
$
|
480,949
|
|
|
$
|
269,999
|
|
License and royalty
|
|
|
125,000
|
|
|
|
—
|
|
|
|
333,333
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
389,547
|
|
|
|
176,608
|
|
|
|
814,282
|
|
|
|
269,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
|
192,814
|
|
|
|
144,327
|
|
|
|
335,182
|
|
|
|
245,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
196,733
|
|
|
|
32,281
|
|
|
|
479,100
|
|
|
|
24,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
625,390
|
|
|
|
124,692
|
|
|
|
1,577,317
|
|
|
|
537,523
|
|
Research and development
|
|
|
1,581,449
|
|
|
|
1,237,617
|
|
|
|
4,246,796
|
|
|
|
4,855,341
|
|
General and administrative
|
|
|
1,217,899
|
|
|
|
521,901
|
|
|
|
2,443,317
|
|
|
|
2,406,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,424,738
|
|
|
|
1,884,210
|
|
|
|
8,267,430
|
|
|
|
7,799,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(3,228,005
|
)
|
|
|
(1,851,929
|
)
|
|
|
(7,788,330
|
)
|
|
|
(7,774,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
830
|
|
|
|
672
|
|
|
|
2,917
|
|
|
|
6,231
|
|
Interest expense
|
|
|
(848,464
|
)
|
|
|
(564,009
|
)
|
|
|
(2,821,093
|
)
|
|
|
(1,379,576
|
)
|
Gain (loss) on revaluation of derivative liabilities, net
|
|
|
623,613
|
|
|
|
(385,209
|
)
|
|
|
145,133
|
|
|
|
2,176,982
|
|
Loss on extinguishment of debt
|
|
|
(4,970,410
|
)
|
|
|
—
|
|
|
|
(4,970,410
|
)
|
|
|
—
|
|
Issuance of warrants due to organic change
|
|
|
(2,553,318
|
)
|
|
|
—
|
|
|
|
(2,553,318
|
)
|
|
|
—
|
|
Miscellaneous income (expense)
|
|
|
167,952
|
|
|
|
(181,247
|
)
|
|
|
235,295
|
|
|
|
(158,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and (expenses)
|
|
|
(7,579,797
|
)
|
|
|
(1,129,793
|
)
|
|
|
(9,961,476
|
)
|
|
|
645,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before provision for income taxes
|
|
|
(10,807,802
|
)
|
|
|
(2,981,722
|
)
|
|
|
(17,749,806
|
)
|
|
|
(7,129,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
530
|
|
|
|
(14,142
|
)
|
|
|
3,191
|
|
|
|
12,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(10,808,332
|
)
|
|
|
(2,967,580
|
)
|
|
|
(17,752,997
|
)
|
|
|
(7,141,905
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion on Series 1 convertible preferred stock associated with beneficial conversion feature
|
|
|
(898,623
|
)
|
|
|
—
|
|
|
|
(898,623
|
)
|
|
|
—
|
|
Accretion on Series A and B convertible preference shares of subsidiary associated with premium
|
|
|
(408,651
|
)
|
|
|
—
|
|
|
|
(2,898,550
|
)
|
|
|
—
|
|
Series A-1 preferred dividend
|
|
|
(131,219
|
)
|
|
|
(201,612
|
)
|
|
|
(547,171
|
)
|
|
|
(597,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(12,246,825
|
)
|
|
$
|
(3,169,192
|
)
|
|
$
|
(22,097,341
|
)
|
|
$
|
(7,739,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic and diluted
|
|
$
|
(4.35
|
)
|
|
$
|
(7.56
|
)
|
|
$
|
(18.02
|
)
|
|
$
|
(18.47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute net loss per share – basic and diluted
|
|
|
2,814,655
|
|
|
|
419,028
|
|
|
|
1,226,570
|
|
|
|
419,123
|
|
Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,808,332
|
)
|
|
$
|
(2,967,580
|
)
|
|
$
|
(17,752,997
|
)
|
|
$
|
(7,141,905
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(175,686
|
)
|
|
|
220,921
|
|
|
|
(273,736
|
)
|
|
|
187,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
$
|
(10,984,018
|
)
|
|
$
|
(2,746,659
|
)
|
|
$
|
(18,026,733
|
)
|
|
$
|
(6,953,908
|
)
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(As Restated,
|
|
|
|
|
|
|
See Note 14)
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,752,997
|
)
|
|
$
|
(7,141,905
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
560,220
|
|
|
|
694,836
|
|
Stock-based compensation
|
|
|
260,068
|
|
|
|
285,483
|
|
Gain on revaluation of derivative liabilities, net
|
|
|
(145,133
|
)
|
|
|
(2,176,982
|
)
|
Interest converted to principal on convertible promissory notes
|
|
|
547,866
|
|
|
|
597,484
|
|
Provision for excess and obsolete inventory
|
|
|
492
|
|
|
|
60,353
|
|
Amortization of debt discount
|
|
|
2,094,335
|
|
|
|
718,918
|
|
Loss on extinguishment of debt
|
|
|
4,970,410
|
|
|
|
—
|
|
Issuance of warrants due to organic change
|
|
|
2,553,318
|
|
|
|
—
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(41,854
|
)
|
|
|
(14,607
|
)
|
Inventories
|
|
|
131,151
|
|
|
|
111,953
|
|
Prepaid expenses and other assets
|
|
|
99,589
|
|
|
|
(15,019
|
)
|
Accounts payable
|
|
|
248,105
|
|
|
|
(472,092
|
)
|
Accrued payroll and related costs
|
|
|
1,055,332
|
|
|
|
(394,674
|
)
|
Other accrued expenses
|
|
|
490,692
|
|
|
|
106,869
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(4,928,406
|
)
|
|
|
(7,639,383
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(41,906
|
)
|
|
|
(41,262
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(41,906
|
)
|
|
|
(41,262
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of Series 1 convertible preferred stock, common stock and warrants
|
|
|
13,393,162
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
13,393,162
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
(268,562
|
)
|
|
|
178,358
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
8,154,288
|
|
|
|
(7,502,287
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of the period
|
|
|
6,328,753
|
|
|
|
15,117,172
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period
|
|
$
|
14,483,041
|
|
|
$
|
7,614,885
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
4,341
|
|
|
$
|
—
|
|
Cash paid for income taxes
|
|
$
|
26,182
|
|
|
$
|
32,614
|
|
Cash (received) for income taxes
|
|
$
|
(1,051
|
)
|
|
$
|
(25,539
|
)
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Exchange of convertible promissory notes for
common stock and Series 1 convertible preferred stock
|
|
$
|
6,035,360
|
|
|
$
|
—
|
|
Exchange of Series A-1 convertible preferred stock for common stock and Series 1 convertible preferred stock
|
|
$
|
9,838,569
|
|
|
$
|
—
|
|
Issuance of warrants to placement agent
|
|
$
|
1,147,021
|
|
|
$
|
—
|
|
Accretion on Series 1 convertible preferred stock associated with beneficial conversion feature
|
|
$
|
898,623
|
|
|
$
|
—
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
General
– WaferGen Bio-systems, Inc. and its subsidiaries (the “Company”) are engaged in the development, manufacture and sales of systems for gene expression quantification, genotyping and stem cell research. Most recently, the Company’s R&D efforts have been concentrated on the commercialization of the SmartChip Target Enrichment System. The Company’s products are aimed at researchers who perform genetic analysis, primarily at pharmaceutical and biotech companies, academic and private research centers and diagnostics companies involved in biomarker discovery and genetic research. Through its SmartChip products, the Company plans to provide new performance standards with significant savings in time and cost for professionals in the field of gene expression research and to facilitate biomarker discovery, toxicology, and clinical research.
Wafergen, Inc. was incorporated in the State of Delaware on October 22, 2002, and was acquired by WaferGen Bio-systems, Inc. in a reverse merger on May 31, 2007.
On January 24, 2008, the Company formed a new subsidiary in Malaysia. This subsidiary, WaferGen Biosystems (M) Sdn. Bhd. (“WGBM”), supports the Company’s ongoing development and commercialization goals. As of September 30, 2013, the parent company owned 100% of the common stock and 8.2% (including all shares that had been assumed by the parent company pursuant to exercises of exchange rights) of the preference shares of WGBM. The holders of these preference shares have certain rights, including the right to exchange such shares for common stock of the parent company and to have them redeemed by WGBM from funds legally available for distribution (see Note 5), which may be more beneficial than conversion into common stock of WGBM, but if such conversion were to occur, the parent company would own 72.8% of WGBM’s common stock. See also Note 13, “Subsequent Events.”
On August 30, 2011, the Company formed a new wholly owned subsidiary in Luxembourg, WaferGen Biosystems Europe S.a.r.l., to establish a presence for its marketing and research activities in Europe.
On August 27, 2013, the Company effected a reverse stock split of its common stock by a ratio of one-for-99.39 (the “Reverse Split”). Every 99.39 outstanding shares of common stock became one share of common stock. No fractional shares were issued in connection with the Reverse Split. Stockholders who were otherwise entitled to receive a fractional share of common stock received one whole share of common stock. The Reverse Split did not change the number of shares of common or preferred stock that the Company is authorized to issue, or the par value of the Company’s common or preferred stock.
The Reverse Split resulted in a proportionate adjustment to the per share exercise price and the number of shares of common stock issuable upon the exercise of outstanding warrants and stock options, as well as the number of shares of common stock eligible for issuance under the 2008 Stock Incentive Plan. All of the information in these financial statements has been presented to reflect the impact of the one-for-99.39 Reverse Split on a retroactive basis.
On August 27, 2013, the Company entered into an exchange agreement (the “Exchange Agreement”) with investors who, in May 2011, purchased (i) certain shares of Series A-1 Convertible Preferred Stock, par value $0.001 per share, (ii) certain Convertible Promissory Notes convertible into shares of Series A-2 Convertible Preferred Stock, par value $0.001 per share, and (iii) certain warrants (the “2011 Warrants” and together with the Series A-1 Preferred Shares and the Convertible Notes, the “2011 Securities”) to purchase shares of common stock. Pursuant to the Exchange Agreement, these investors agreed to exchange all their 2011 Securities for shares of the Company’s common stock, shares of newly designated Series 1 Convertible Preferred Stock, par value $0.001 per share, and warrants to purchase shares of common stock (the “2013 Exchange”). In the aggregate, the Company exchanged Series A-1 Preferred Shares with a liquidation preference of $17,081,913, Convertible Promissory Notes (“CPNs”) with a principal amount of $17,084,894 and 2011 Warrants exercisable for 565,180 shares of common stock for 2,987.0167 shares of Series 1 Convertible Preferred Stock, 1,067,317 shares of our common stock and warrants exercisable for 2,369,000 shares of common stock. These warrants are exercisable at any time before August 27, 2018, at an exercise price of $2.60 per share, with cashless exercise permitted.
The Company employed an Option Pricing Model to determine the relative fair values of securities surrendered in the 2013 Exchange, using a stock price of $2.00 and assumptions including estimated volatility of 84.26%, a risk-free interest rate of 1.16%, a zero dividend rate and an estimated remaining term of 4.00 years. The relative fair value assigned to the CPNs was $10,422,956. The excess of this amount over the net carrying amount of the liabilities relating to CPNs of $5,452,546 on the exchange date was recorded as loss on extinguishment of debt of $4,970,410 within other income and expenses. The balance related to Series A-1 Convertible Preferred Stock was transferred to additional paid-in capital within stockholders’ equity. The exchange of warrants is further described in Note 8.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
On August 27, 2013 and September 30, 2013, the Company completed a private placement offering (the “2013 Private Placement”) with certain accredited investors for the sale of units at $50,000 per unit (“Unit”). Each Unit consisted of (1) either 25,000 shares of our common stock or 9.9390 shares of the Series 1 Convertible Preferred Stock and (2) warrants to purchase 12,500 shares of common stock. At the initial closing of the offering on August 27, 2013, the Company received gross proceeds of $13,668,500 and issued a total of 5,209,250 shares of common stock, 646.0351 shares of Series 1 Convertible Preferred Stock (convertible into a total of 1,625,000 shares of common stock) and 3,417,129 warrants. At the second and final closing of the offering on September 30, 2013, the Company received gross proceeds of $1,369,000 and issued a total of 684,500 shares of common stock and 342,250 warrants.
In total, the Company sold an aggregate of 5,893,750 shares of common stock, 646.0351 shares of Series 1 Convertible Preferred Stock and warrants to purchase 3,759,379 shares of common stock for $2.60 in the 2013 Private Placement, and received aggregate gross proceeds of $15,037,500. The Company incurred issuance costs in connection with the 2013 Private Placement totaling $2,791,359 (including the fair value of unit warrants issued to the placement agent of $1,147,021, as discussed below). The following reflects the allocation of these proceeds to the new securities issued:
Security / Account
|
|
Allocated Proceeds
|
|
|
Issuance Costs
|
|
|
Reallocation
|
|
|
Final Allocation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock
|
|
$
|
8,508,451
|
|
|
$
|
(2,186,972
|
)
|
|
$
|
(6,321,479
|
)
|
|
$
|
—
|
|
Series 1 Convertible Preferred Stock
|
|
|
2,351,376
|
|
|
|
(604,387
|
)
|
|
|
—
|
|
|
|
1,746,989
|
|
Warrants
|
|
|
4,177,673
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,177,673
|
|
Common stock at par value
|
|
|
—
|
|
|
|
—
|
|
|
|
5,894
|
|
|
|
5,894
|
|
Additional paid-in capital
|
|
|
—
|
|
|
|
—
|
|
|
|
6,315,585
|
|
|
|
6,315,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,037,500
|
|
|
$
|
(2,791,359
|
)
|
|
$
|
—
|
|
|
$
|
12,246,141
|
|
Subject to certain ownership limitations, the warrants are exercisable at any time within five years of the applicable issuance date at an initial exercise price of $2.60 per share with cashless exercise in the event a registration statement covering the resale of the shares of common stock underlying the warrants is not in effect within six months of the issuance of the warrants. According to the warrants’ terms, a fundamental transaction could give rise to an obligation of the Company to pay cash to its warrant holders, which prevents them from being accounted for within stockholders’ equity. Accordingly, they were recorded as liabilities on their issuance date and are revalued at each reporting date, with the change in their fair values being recorded as a gain or loss on revaluation within other income and expenses in the statement of operations.
The Company retained a placement agent in connection with the 2013 Private Placement, and pursuant to the terms of a placement agent agreement, the Company paid the placement agent an aggregate fee totaling approximately $1,339,750. In addition, the Company issued the placement agent 23.34 unit warrants at the initial closing and 2.54 unit warrants at the final closing. Each unit warrant entitles the placement agent to purchase a Unit for $50,000 with terms identical to those issued in the 2013 Private Placement, except that the warrants expire on the fifth anniversary of the issuance date of the unit warrant. The fair value of the 23.34 unit warrants issued on August 27, 2013, was estimated to be $1,036,605, using a closing stock price of $2.00 and assumptions including estimated volatility of 84.27%, a risk-free interest rate of 1.16%, a zero dividend rate and an estimated remaining term of 4.00 years. The fair value of the 2.54 unit warrants issued on September 30, 2013, was estimated to be $110,416, using a closing stock price of $1.96 and assumptions including estimated volatility of 85.06%, a risk-free interest rate of 1.01%, a zero dividend rate and an estimated remaining term of 4.00 years. The total estimated fair value of $1,147,021 was included in the 2013 Private Placement offering costs.
NOTE 2. Summary of Significant Accounting Policies
Basis of Presentation
– The Company has prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to these rules and regulations. These condensed consolidated financial statements should be read in conjunction with our audited financial statements and footnotes related thereto for the year ended December 31, 2012, included in our Form 10-K filed with the SEC. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position and the results of its operations and cash flows. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Basis of Consolidation
– The condensed consolidated financial statements include the financial statements of WaferGen Bio-systems, Inc. and its subsidiaries. All significant transactions and balances between WaferGen Bio-systems, Inc. and its subsidiaries have been eliminated in consolidation.
Use of Estimates
– Preparing condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results and outcomes could differ from these estimates and assumptions.
Foreign Currencies
– Assets and liabilities of non-U.S. subsidiaries for which the local currency is the functional currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average rates of exchange prevailing during each reporting period. Translation adjustments resulting from this process are charged or credited to other comprehensive income (loss). Foreign exchange gains and losses for assets and liabilities of the Company’s non-U.S. subsidiaries for which the functional currency is the U.S. dollar are recorded in miscellaneous income (expense) in the Company’s condensed consolidated statements of operations.
Accounts Receivable
– An allowance for doubtful accounts will be recorded based on a combination of historical experience, aging analysis, and information on specific accounts. Account balances will be written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Inventory
– Inventory is recorded at the lower of cost (first-in, first-out) or market value. Additionally, the Company evaluates its inventory in terms of excess and obsolete exposures and records provisions where necessary.
Governmental Subsidies
– Incentives received from governments in the form of grants are recorded as a reduction in expense in accordance with their purpose. Grants awarded for the purpose of matching specified expenditures are not recognized until a definitive agreement has been signed by both parties; thereafter income is recognized to the extent that the related expenses have been incurred. The Company recognized governmental subsidies of $86,577 and $168,560 in the three months ended September 30, 2013 and 2012, respectively and $236,167 and $168,560 in the nine months ended September 30, 2013 and 2012, respectively, which were offset against operating expenses in the statement of operations.
Stock-Based Compensation
– The Company measures the fair value of all stock-based awards to employees, including stock options, on the grant date and records the fair value of these awards, net of estimated forfeitures, to compensation expense over the service period. The fair value of awards to consultants is measured on the dates on which performance of services is completed, with interim valuations recorded at balance sheet dates while performance is in progress. The fair value of options is estimated using the Black-Scholes valuation model, and the fair value 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 cash settlement provisions or with certain anti-dilution protection, the redemption option of the Series A convertible preference shares of its Malaysian subsidiary, and the conversion element of both its convertible promissory notes and of the Series B convertible preference shares of its Malaysian subsidiary as derivative liabilities. Such liabilities are valued when the financial instruments are initially issued or the derivative first requires recognition and are also revalued at each reporting date, with the change in their respective fair values being recorded as a gain or loss on revaluation within other income and expenses in the statement of operations. The Company determines the fair value of all of its derivative liabilities using a Monte Carlo Simulation approach, with key input variables provided by management.
Warranty Reserve
– The Company’s standard warranty agreement is one year from shipment of certain products. The Company accrues for anticipated warranty costs upon shipment of these products. The Company’s warranty reserve is based on management’s judgment regarding anticipated rates of warranty claims and associated repair costs, and is updated quarterly.
Net Income (Loss) Per Share
– Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding plus common share equivalents from conversion of dilutive stock options, warrants, and restricted stock using the treasury method, and convertible securities using the as-converted method, except when antidilutive. In the event of a net loss, the effects of all potentially dilutive shares are excluded from the diluted net loss per share calculation as their inclusion would be antidilutive.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Reclassification
– Certain reclassifications have been made to prior periods’ data to conform to the current presentation. These reclassifications had no effect on reported net losses.
Recent Accounting Pronouncements
In March 2013, the FASB issued ASU 2013-05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity” (“ASU 2013-05”). ASU 2013-05 clarifies the circumstances under which the cumulative translation adjustment arising from the consolidation of entities for which the functional currency is not the U.S. dollar should be released into net income. The Company adopted this guidance effective January 1, 2013, and its adoption did not have a material impact on the Company’s consolidated financial condition or results of operations. The Company expects to release $69,107 of accumulated other comprehensive loss into operations in the three months ending December 31, 2013 (see Note 13).
NOTE 3. Inventories
Inventories, net of provisions for potentially excess, obsolete or impaired goods, consisted of the following at September 30, 2013, and December 31, 2012:
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
$
|
94,021
|
|
|
$
|
158,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,364
|
|
|
|
179,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181,458
|
|
|
|
157,856
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
363,843
|
|
|
$
|
495,486
|
|
NOTE 4. Long Term Obligations
On May 27, 2011, the Company sold convertible promissory notes in the aggregate principal amount of $15,275,000, convertible into an aggregate of approximately 2,679,824 shares of Series A-2 Convertible Preferred Stock at a price of $5.70 per share, with each 9.939 shares being convertible into one share 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 accrued at a rate of 5% per annum, and could either be paid on the last day of each fiscal quarter, or added to the principal amount of the notes, at the Company’s option.
Using the relative fair value of the securities issued, the Company initially allocated the gross proceeds of $30,550,000 as follows:
Security
|
|
Allocated Fair Value
|
|
|
Issuance Costs
|
|
|
Interest Expense
|
|
|
Net Allocation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A-1 Convertible Preferred Stock
|
|
$
|
10,724,991
|
|
|
$
|
(886,422
|
)
|
|
$
|
—
|
|
|
$
|
9,838,569
|
|
Convertible promissory notes
|
|
|
10,072,592
|
|
|
|
(832,502
|
)
|
|
|
2,255,074
|
|
|
|
11,495,164
|
|
Warrants
|
|
|
9,752,417
|
|
|
|
(806,039
|
)
|
|
|
—
|
|
|
|
8,946,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
30,550,000
|
|
|
$
|
(2,524,963
|
)
|
|
$
|
2,255,074
|
|
|
$
|
30,280,111
|
|
The debt discount (which included the discount associated with the embedded conversion derivative) related to the debt element of the convertible promissory notes of $14,442,497 was, prior to the 2013 Exchange (see Note 1), 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 was 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.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
The Company valued the derivative liability for the conversion element of the convertible promissory notes using a Monte Carlo Simulation approach, using assumptions provided by management reflecting conditions at the valuation dates.
The fair value of this derivative liability had diminished to nil by the time of the 2013 Exchange. At September 30, 2012, the fair value was estimated to be $458,310, using a closing stock price of $7.95 and assumptions including estimated volatility of 126.57%, a risk-free interest rate of 0.16%, a zero dividend rate and a contractual term of 2.16 years.
The fair value of this derivative liability at December 31, 2012 and 2011, was estimated to be $274,928 and $1,931,295, respectively. The decrease in the fair value of this derivative liability of $274,928 and $1,472,985 during the nine months ended September 30, 2013 and 2012, respectively, was recorded as a revaluation gain (see Note 9).
The balance of the convertible promissory notes comprises the following at September 30, 2013, and December 31, 2012:
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Convertible Promissory Notes Payable:
|
|
|
|
|
|
|
Face value
|
|
$
|
15,275,000
|
|
|
$
|
15,275,000
|
|
Interest added to principal
|
|
|
1,809,894
|
|
|
|
1,262,028
|
|
Stated value
|
|
|
17,084,894
|
|
|
|
16,537,028
|
|
Debt discount – conversion element, net of accumulated amortization of $3,392,963 and $1,298,628 respectively
|
|
|
11,049,534
|
|
|
|
13,143,869
|
|
|
|
|
|
|
|
|
|
|
Notes payable, net of debt discount, prior to exchange
|
|
|
6,035,360
|
|
|
|
3,393,159
|
|
|
|
|
|
|
|
|
|
|
Amount extinguished in 2013 Exchange
|
|
|
(6,035,360
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Notes payable, net of debt discount
|
|
$
|
—
|
|
|
$
|
3,393,159
|
|
The Company recorded a loss on early extinguishment of debt of $4,970,410 as a result of the 2013 Exchange (see Note 1).
NOTE 5. Convertible Preference Shares of Subsidiary
In 2008, the Company’s Malaysian subsidiary, WGBM, issued Series A convertible preference shares (“CPS”) to Malaysian Technology Development Corporation Sdn. Bhd. (“MTDC”), a venture capital and development firm in Malaysia, in a private placement under a Share Subscription and Shareholders’ Agreement dated May 8, 2008, at the U.S. dollar equivalent of $2.25 per share. In 2009 and 2010, WGBM issued Series B CPS to Expedient Equity Ventures Sdn. Bhd. (“EEV”) and Prima Mahawangsa Sdn. Bhd. (“PMSB”), both venture capital and development firms in Malaysia, in a private placement under a Share Subscription Agreement dated April 3, 2009, (“Series B SSA”) at the U.S. dollar equivalent of $2.25 per share. In 2009, WGBM issued Series B CPS to Kumpulan Modal Perdana Sdn. Bhd. (“KMP”), a venture capital and development firm in Malaysia, in a private placement under a Share Subscription Agreement dated July 1, 2009, at the U.S. dollar equivalent of $2.25 per share.
In 2010, both EEV and KMP exercised their option (see Paragraph (b) below) to sell to the Company their holdings of 222,222 and 188,057 Series B CPS, respectively, in exchange for shares of the Company’s common stock.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
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 $223.63 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$223.63 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$263.09, then the holder may exchange CPS at an exchange rate equal to 85% of such 10-day average closing price. This option, previously exercised by EEV and KMP, has expired for MTDC’s Series A CPS and expires on April 3, 2014, for PMSB’s Series B CPS (the “Conversion Option);
|
|
(c)
|
to convert their CPS into ordinary shares of the subsidiary, WGBM, at any time, at a conversion rate of three ordinary shares per $100 invested in CPS;
|
|
(d)
|
to cause the subsidiary, WGBM, to redeem the CPS in whole or in part at any time after December 31, 2011, for the principal paid plus a premium of 20% per annum, not compounding, from funds legally available for distribution (which is determined based on stock par value, premiums paid and retained earnings) (the “WGBM Redemption Right”);
|
|
(e)
|
of first offer on any transfers or new issuance of subsidiary shares; and
|
|
(f)
|
for each of Series A and Series B CPS, to appoint one of the seven directors of the subsidiary (see below also).
|
Since the Conversion Option affords holders of Series B CPS the right to receive a variable number of shares of the Company’s common stock, this feature is not indexed to the Company’s equity and is therefore accounted for as a derivative liability, with the estimated fair value being calculated at each reporting date using a Monte Carlo Simulation approach, using key input variables provided by management, with changes in fair value recorded as gains or losses on revaluation in non-operating income (expense).
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
On December 31, 2011, the Series B CPS Redemption Option lapsed. The value of the derivative liability for the conversion element increased significantly as a result. Subsequently, the Company has recorded adjustments to accrete the Series B CPS to their maximum redemption amount under the WGBM Redemption Right at the balance sheet date, net of the related derivatives, and recorded this amount in temporary equity with a related deemed dividend which was charged against additional paid-in capital.
Series B CPS derivative liability fair values at September 30, 2013 and 2012, were estimated to be $1,300,923 and $1,334,545, respectively, using a closing stock price of $1.96 and $7.95, respectively, and based on the following assumptions:
|
September 30, 2013
|
|
September 30, 2012
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
|
|
Expected remaining term
|
|
|
|
|
Expected volatility
|
|
|
|
|
Dividend yield
|
|
|
|
|
Series B CPS derivative liability fair values at December 31, 2012 and 2011, were estimated to be $1,210,909 and $1,245,101, respectively. The net increase in the fair value of this derivative liability of $90,014 and $89,444 during the nine months ended September 30, 2013 and 2012, respectively, was recorded as a revaluation loss (see Note 9).
Pursuant to a notice dated March 14, 2013, PMSB sought to exercise such redemption rights with respect to its Series B CPS. WGBM responded in a letter dated April 3, 2013 that under the Malaysian Company Act 1965, WGBM did not have funds legally available for distribution and accordingly could not legally redeem PMSB’s Series B CPS. As of September 30, 2013, PMSB’s Series B CPS had not yet been redeemed and PMSB retained ownership of such CPS, along with the WGBM Redemption Right and other rights associated with such CPS. In October 2013 the Company purchased PMSB’s 444,444 Series B CPS for $70,000 (see Note 13).
Based on the average closing price of the Company’s common stock of $1.99 in the 10-day trading period immediately prior to September 30, 2013, PMSB could have converted their Series B CPS into 591,191 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 $154.05 and a floor of $9.94. The amendment that allows the Company to settle the Redemption Option in a variable number of shares causes the Redemption Option to no longer be considered indexed to the Company’s equity. As a result, the Company recognizes the Redemption Option as an embedded derivative requiring bifurcation and the host instrument (the Series A CPS absent the Redemption Option) as part of temporary equity. The Company has recorded an adjustment to accrete the Series A CPS to their maximum redemption amount under the WGBM Redemption Right at the balance sheet date, net of the related derivatives, and recorded this amount in temporary equity with a related deemed dividend which was charged against additional paid-in capital.
The Series A CPS derivative liability fair values at September 30, 2013 and 2012, were estimated to be $424,794 and $1,563,664, respectively, using a closing stock price of $1.96 and $7.95, respectively, and based on the following assumptions:
|
September 30, 2013
|
|
September 30, 2012
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
|
|
Expected remaining term
|
|
|
|
|
Expected volatility
|
|
|
|
|
Dividend yield
|
|
|
|
|
Series A CPS derivative liability fair values at December 31, 2012 and 2011, were estimated to be $619,652 and $2,135,715, respectively. The net decrease in the fair value of this derivative liability of $194,858 and $572,051 during the nine months ended September 30, 2013 and 2012, respectively, was recorded as a revaluation gain (see Note 9).
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
On September 30, 2013, the cash value of the Redemption Option was $2,829,817. Since 85% of the average closing price of the Company’s common stock of $1.99 in the 10-day trading period immediately prior to September 30, 2013, was less than the ASP floor of $9.94, the Company could have settled this liability by issuing 284,718 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 8). Each 99.39 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 99.39 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. 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.
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 September 30, 2013, and December 31, 2012. See also Note 13.
NOTE 6. Preferred Stock
The Company has 10,000,000 shares of preferred stock authorized. Effective August 27, 2013, the Company designated 3,663 shares as Series 1 Convertible Preferred Stock. The Series 1 Convertible Preferred Stock has no voting rights, and holders are entitled to a liquidation preference equal to $0.001 per share. Each share of Series 1 Convertible Preferred Stock is convertible into 2,515.3436 shares of common stock, subject to an ownership cap whereby conversion may not occur to the extent the holder would own more than 9.98% of the common stock following conversion.
On August 27, 2013, the Company issued 2,987.0167 shares of Series 1 Convertible Preferred Stock in conjunction with the Exchange Agreement (see Note 1) and sold 646.0351 shares of Series 1 Convertible Preferred Stock in the 2013 Private Placement (see Note 1). All of these 3,633.0518 shares remain outstanding as of September 30, 2013. 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 1 Convertible Preferred Stock. Since this preferred stock is immediately convertible and not redeemable, this non-contingent beneficial conversion feature of $898,623 was recorded as a one-time accretion expense.
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 9.939 shares of Series A Preferred Stock was convertible into one share of common stock, subject to an ownership cap, and entitled 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 accrued, compounding quarterly, and accumulated 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 would cease. The Series A Preferred Stock had no voting rights, and in the event of liquidation ranked senior to common stock. After giving effect to the 2013 Exchange, the Company retired the Series A-1 Preferred Shares that were exchanged for common stock and Series 1 preferred stock and no Series A Preferred Shares remained issued and outstanding and none will be issued in the future.
Effective May 27, 2011, the Company sold an aggregate of 2,937,499.97 shares of Series A-1 Convertible Preferred Stock with a stated value of $5.20 per share. The Company recorded the allocated valuation of $10,724,991 (see Note 4), less allocated issuance costs of $886,422, as Series A-1 Convertible Preferred Stock within permanent equity.
As of August 27, 2013, $1,806,913 of undeclared dividends had been accrued with respect to the outstanding Series A-1 Convertible Preferred Stock, of which $131,219 and $201,612 related to the three months ended September 30, 2013 and 2012, respectively and $547,171 and $597,401 related to the nine months ended September 30, 2013 and 2012, respectively.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 7. Stock Awards
The Company has awards outstanding under three plans - the 2003 Incentive Stock Plan (the “2003 Plan”), the 2007 Stock Option Plan (the “2007 Plan”) and the 2008 Stock Incentive Plan (the “2008 Plan”) (collectively, the “Plans”). Under the 2003 Plan and 2007 Plan, incentive stock options, nonqualified stock options, restricted stock and restricted stock units could be granted. Awards vested over varying periods, as specified by the Company’s Board of Directors for each grant, and are exercisable for a maximum period of ten years after date of grant. Both of these plans have been frozen, resulting in no further shares being available for grant.
The Company presently issues awards under the 2008 Plan, initially adopted by the Company’s stockholders on June 5, 2008, and subsequently amended to authorize the issuance of additional shares of the Company’s common stock. The purpose of the 2008 Plan is to provide an incentive to retain the employment of directors, officers, consultants, advisors and employees of the Company, to attract new personnel whose training, experience and ability are considered valuable, to encourage the sense of proprietorship, and to stimulate the active interest of such persons in the Company’s development and financial success. Under the 2008 Plan, the Company is authorized to issue incentive stock options, non-qualified stock options, restricted stock and restricted stock units, although no more than 50% of the authorized shares may be granted pursuant to awards of restricted stock and restricted stock units. Awards that expire or are canceled generally become available for issuance again under the 2008 Plan. The number of shares of the Company’s common stock available under the 2008 Plan will be subject to adjustment in the event of a stock split, stock dividend or other extraordinary dividend, or other similar change in the Company’s common stock or capital structure. Awards may vest over varying periods, as specified by the Company’s Board of Directors for each grant, and have a maximum term of seven years from the grant date. The 2008 Plan is administered by the Company’s Board of Directors.
The Company has issued both options and restricted stock (including restricted stock units) under these Plans. Restricted stock grants afford the recipient the opportunity to receive shares of common stock, subject to certain terms, whereas options give them the right to purchase common stock at a set price. Both the Company’s options and restricted stock issued to employees generally have vesting restrictions that are eliminated over a four-year period, although vesting may be over a shorter period, or may occur on the grant date, depending on the terms of each individual award.
A summary of stock option and restricted stock transactions in the nine months ended September 30, 2013, is as follows:
|
|
|
Stock Options
|
|
Restricted Stock
|
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
Shares
|
|
Number of
|
|
Average
|
|
Number of
|
|
Average
|
|
|
Available
|
|
Options
|
|
Exercise
|
|
Shares
|
|
Grant-Date
|
|
|
For Grant
|
|
Outstanding
|
|
Price
|
|
Outstanding
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2013
|
|
|
29,503
|
|
|
|
114,896
|
|
|
$
|
41.67
|
|
|
|
72
|
|
|
$
|
13.91
|
|
Granted
|
|
|
(18,861
|
)
|
|
|
18,861
|
|
|
$
|
4.95
|
|
|
|
—
|
|
|
$
|
—
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
(72
|
)
|
|
$
|
13.91
|
|
Forfeited
|
|
|
4,617
|
|
|
|
(4,617
|
)
|
|
$
|
9.98
|
|
|
|
—
|
|
|
$
|
—
|
|
Canceled
|
|
|
2,385
|
|
|
|
(5,196
|
)
|
|
$
|
118.82
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2013
|
|
|
17,644
|
|
|
|
123,944
|
|
|
$
|
34.01
|
|
|
|
—
|
|
|
$
|
—
|
|
No options were exercised during the nine months ended September 30, 2013 or 2012. The aggregate intrinsic value of options outstanding and exercisable at September 30, 2013, was $1,166, based on our common stock closing price of $1.96. Aggregate intrinsic value is the total pretax amount (i.e., the difference between the Company’s stock price and the exercise price) that would have been received by the option holders had all their in-the-money options been exercised.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
The weighted average grant date fair value of options awarded in the nine months ended September 30, 2013 and 2012, was $3.72 and $8.37, respectively. Fair values were estimated using the following assumptions:
|
Nine Months Ended September 30,
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.71% - 1.14%
|
|
Expected term
|
|
|
4.75 Years
|
|
Expected volatility
|
|
|
65.02% - 98.80%
|
|
Dividend yield
|
|
|
0%
|
|
The amounts expensed for stock-based compensation totaled $77,283 and $99,024 for the three months ended September 30, 2013 and 2012, respectively, and $260,068 and $285,483 for the nine months ended September 30, 2013 and 2012, respectively. These sums include $120 expensed in the three and nine months ended September 30, 2012 for restricted stock awards to consultants; there was no such expense in 2013.
At September 30, 2013, the total stock-based compensation cost not yet recognized, net of estimated forfeitures, was $356,698. This cost is expected to be recognized over an estimated weighted average amortization period of 1.66 years. No amounts related to stock-based compensation costs have been capitalized. The tax benefit and the resulting effect on cash flows from operating and financing activities related to stock-based compensation costs were not recognized as the Company currently provides a full valuation allowance for all of its deferred taxes.
NOTE 8. Warrants
A summary of outstanding common stock warrants as of September 30, 2013, is as follows:
Securities Into Which
|
|
Total Warrants
|
|
Warrants Recorded
|
|
Exercise
|
|
Expiration
|
Warrants are Convertible
|
|
Outstanding
|
|
as Liabilities
|
|
Price
|
|
Date
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
6,128,379
|
|
6,128,379
|
|
$2.60
|
|
August and September 2018
|
Common stock
|
|
717,905
|
|
717,905
|
|
$4.04
|
|
June and August 2014
|
Common stock
|
|
552,186
|
|
552,186
|
|
$4.22
|
|
December 2014 and January 2015
|
Common stock
|
|
7,740
|
|
—
|
|
$77.52
|
|
June and August 2014
|
Common stock
|
|
1,022
|
|
—
|
|
$83.49
|
|
December 2014 and January 2015
|
Common stock
|
|
960
|
|
—
|
|
$145.90
|
|
December 2015
|
Common stock
|
|
2,047
|
|
—
|
|
$149.09
|
|
July 2015
|
Common stock
|
|
30,192
|
|
—
|
|
$154.05
|
|
July 2015
|
Common stock
|
|
2,012
|
|
—
|
|
$298.17
|
|
December 2014 and November 2015
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
7,442,443
|
|
7,398,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C CPS
|
|
10,845
|
|
—
|
|
$230.52
|
|
March 2014
|
|
|
|
|
|
|
|
|
|
Total
|
|
7,453,288
|
|
7,398,470
|
|
|
|
|
In addition, there are 25.88 unit warrants outstanding which expire in August and September 2018, recorded as liabilities, each entitling the holder to purchase, for $50,000, 25,000 shares of common stock and 12,500 warrants to purchase one share of common stock at an exercise price of $2.60, expiring in August and September 2018 (see Note 1).
The warrants expiring in August and September 2018 comprise 2,369,000 warrants issued in the 2013 Exchange and 3,417,129 and 342,250 issued in the initial and final closing, respectively, of the 2013 Private Placement (see Note 1).
The 2,369,000 warrants issued in the 2013 Exchange were to directly compensate holders of warrants issued in May 2011. Those warrants included 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. Such a change in ownership occurred on August 27, 2013. The Company recorded a one-time expense of $2,553,318 representing the excess of the fair value of the new warrants over those they replaced. The total fair value of the 2,369,000 new warrants was estimated to be $2,637,387 utilizing a Black-Scholes model, the exercise price of $2.60, a stock price of $2.00 and assumptions including estimated volatility of 84.26%, risk-free interest rate of 1.16%, a zero dividend rate and expected remaining term of 4.00 years. The total fair value of the 565,180 warrants
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
exchanged was estimated to be $84,069 utilizing a Black-Scholes model, the exercise price of $61.62, a stock price of $2.00 and assumptions including estimated volatility of 119.54%, risk-free interest rate of 0.46%, a zero dividend rate and expected remaining term of 2.20 years.
The warrants expiring in June and August 2014 were originally issued in June and August 2009 with an exercise price of $198.78 and entitled the holders thereof to purchase an aggregate of 17,609 shares. As a result of anti-dilution adjustments with respect to such warrants pursuant to their terms, such warrants, as of May 27, 2011, had an exercise price of $77.52 and entitled the holders thereof to purchase an aggregate of 45,152 shares. In connection with the May 2011 Private Placement, members of management with warrants to purchase a total of 7,740 shares (after giving effect to prior anti-dilution adjustments) waived their right to further anti-dilution adjustments. As a result of anti-dilution adjustments with respect to the remaining 37,412 warrants pursuant to their terms, such warrants, as of September 30, 2013, had an exercise price of $4.04 and entitled the holders thereof to purchase an aggregate of 717,905 shares.
The warrants expiring in December 2014 and January 2015 were originally issued in December 2009 and January 2010 with an exercise price of $248.48 and entitled the holders thereof to purchase an aggregate of 9,722 shares. As a result of anti-dilution adjustments with respect to such warrants pursuant to their terms, such warrants, as of May 27, 2011, had an exercise price of $83.49 and entitled the holders thereof to purchase an aggregate of 28,934 shares. In connection with the May 2011 Private Placement, members of management with warrants to purchase a total of 1,022 shares (after giving effect to prior anti-dilution adjustments) waived their right to further anti-dilution adjustments. As a result of anti-dilution adjustments with respect to the remaining 27,912 warrants pursuant to their terms, such warrants, as of September 30, 2013, had an exercise price of $4.22 and entitled the holders thereof to purchase an aggregate of 552,186 shares.
The Series C SSA (see Note 5) grants the holders of the Series C CPS the right to subscribe for a further 1,077,911 CPS at a price of $2.3193, with each 99.39 Series C CPS convertible into one share of the Company’s common stock. 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.
The Company records warrants and unit warrants with certain anti-dilution protection or cash settlement provisions as liabilities, with the estimated fair value being calculated at each reporting date using a Monte Carlo Simulation approach, with key input variables provided by management, with changes in fair value recorded as gains or losses on revaluation in non-operating income (expense).
The aggregate fair value of such warrants at September 30, 2013 and 2012, was estimated to be $8,299,415 and $433,829, respectively, using a closing stock price of $1.96 and $7.95, respectively, and based on the following assumptions:
|
September 30, 2013
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate fair value of such warrants at December 31, 2012 and 2011, was estimated to be $102,695 and $655,219, respectively, and the aggregate fair value of warrants and unit warrants issued during the three months ended September 30, 2013, was estimated to be $7,962,081 on their issuance dates. During the nine months ended September 30, 2013, the increase in the fair value of the warrant derivative liability not arising from new issuances of $234,639 was recorded as a revaluation loss and during the nine months ended September 30, 2012, a decrease in the fair value of the warrant derivative liability of $221,390 was recorded as a revaluation gain (see Note 9).
NOTE 9. Fair Value of Financial Instruments
Fair value measurements are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”).
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”). The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity to identify transactions that are not orderly.
The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The three hierarchy levels are defined as follows:
|
Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
|
|
Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;
|
|
Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
|
The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2013 and December 31, 2012:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
September 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,483,041
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,483,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
14,483,041
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,483,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,299,415
|
|
|
$
|
8,299,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion element of Series B CPS
|
|
|
—
|
|
|
|
—
|
|
|
|
1,300,923
|
|
|
|
1,300,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A CPS derivative liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
424,794
|
|
|
|
424,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,025,132
|
|
|
$
|
10,025,132
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,328,753
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,328,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,328,753
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,328,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
102,695
|
|
|
$
|
102,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion element of promissory notes
|
|
|
—
|
|
|
|
—
|
|
|
|
274,928
|
|
|
|
274,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion element of Series B CPS
|
|
|
—
|
|
|
|
—
|
|
|
|
1,210,909
|
|
|
|
1,210,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A CPS derivative liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
619,652
|
|
|
|
619,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,208,184
|
|
|
$
|
2,208,184
|
|
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
The following tables present a reconciliation of all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2013 and 2012:
|
|
|
|
|
Conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Element of
|
|
|
Conversion
|
|
|
|
|
|
|
|
|
|
Warrant
|
|
|
Promissory
|
|
|
Element of
|
|
|
Series A CPS
|
|
|
|
|
|
|
Derivatives
|
|
|
Notes
|
|
|
Series B CPS
|
|
|
Derivatives
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2013
|
|
$
|
102,695
|
|
|
$
|
274,928
|
|
|
$
|
1,210,909
|
|
|
$
|
619,652
|
|
|
$
|
2,208,184
|
|
Issuances
|
|
|
7,962,081
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,962,081
|
|
Revaluation (gains) losses included in other income and (expenses)
|
|
|
234,639
|
|
|
|
(274,928
|
)
|
|
|
90,014
|
|
|
|
(194,858
|
)
|
|
|
(145,133
|
)
|
Settlements
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance at September 30, 2013
|
|
$
|
8,299,415
|
|
|
$
|
—
|
|
|
$
|
1,300,923
|
|
|
$
|
424,794
|
|
|
$
|
10,025,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) included in other income and (expenses) attributable to liabilities still held as of September 30, 2013
|
|
$
|
(234,640
|
)
|
|
$
|
—
|
|
|
$
|
(90,014
|
)
|
|
$
|
194,858
|
|
|
$
|
(129,796
|
)
|
|
|
|
|
|
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)
|
|
|
(221,390
|
)
|
|
|
(1,472,985
|
)
|
|
|
89,444
|
|
|
|
(572,051
|
)
|
|
|
(2,176,982
|
)
|
Settlements
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance at September 30, 2012
|
|
$
|
433,829
|
|
|
$
|
458,310
|
|
|
$
|
1,334,545
|
|
|
$
|
1,563,664
|
|
|
$
|
3,790,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) included in other income and (expenses) attributable to liabilities still held as of September 30, 2012
|
|
$
|
221,390
|
|
|
$
|
1,472,985
|
|
|
$
|
(89,444
|
)
|
|
$
|
572,051
|
|
|
$
|
2,176,982
|
|
Assumptions used in evaluating the warrant derivative liabilities, the conversion element of the promissory notes, the conversion element of the Series B CPS and the Series A CPS derivative liabilities are discussed in Notes 8, 4, 5 and 5, respectively. The principal assumptions used, and their impact on valuations, are as follows:
Risk-Free Interest Rate.
This is the U.S. Treasury rate for the measurement date having a term equal to the weighted average expected remaining term of the instrument. An increase in the risk-free interest rate will increase the fair value and the associated derivative liability.
Expected Remaining Term.
This is the period of time over which the instrument is expected to remain outstanding and is based on management’s estimate, taking into consideration the remaining contractual life, and historical experience. For the convertible promissory notes, the Company considers a blend of expected remaining terms prior to partial conversion into Series A-2 Convertible Preferred Stock, giving consideration to the likelihood of conversion under various scenarios, and a further blend of expected remaining terms prior to partial conversion into common stock, all based on management’s projections of when such conversions would occur within the contractual term. An increase in the expected remaining term will increase the fair value and the associated derivative liability.
Expected Volatility.
This is a measure of the amount by which the Company’s common stock price has fluctuated or is expected to fluctuate. To the extent that the Company’s common stock has not been traded for as long as the expected remaining term of the instrument, the Company uses a weighted average of the historic volatility of a group of publicly traded companies over the retrospective period corresponding to the expected remaining term of the instrument on the measurement date. The group of publicly traded companies is selected from the same industry or market index, with extra weighting attached to those companies most similar in terms of business activity, size and financial leverage. To the extent that the Company’s common stock has been traded for longer than the expected remaining term of the instrument, equal weighting is applied to this weighted average and to the Company’s own historic volatility over the same term to determine expected volatility. An increase in the expected volatility will increase the fair value and the associated derivative liability.
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.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 10. Net Loss Per Share
Basic and diluted net loss per share are shown on the statement of operations.
No adjustment has been made to the net loss for charges, gains, losses and accretion related to Series A and B CPS, Series A-1 Convertible Preferred Stock and convertible promissory notes, as the effect would be anti-dilutive due to the net loss.
The following outstanding stock options, warrants and unit warrants (on an as-converted into common stock basis) and shares issuable or contingently issuable upon conversion of restricted stock, Series 1 convertible preferred stock, Series A, B and C CPS, Series A-1 convertible preferred stock and convertible promissory notes were excluded from the computation of diluted net loss per share attributable to holders of common stock as they had antidilutive effects for the three and nine months ended September 30, 2013 and 2012:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common share equivalents issuable upon exercise of common stock options
|
|
|
591
|
|
|
|
975
|
|
|
|
836
|
|
|
|
3,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common share equivalents issuable upon exercise of common stock warrants
|
|
|
472,968
|
|
|
|
—
|
|
|
|
282,437
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common share equivalents issuable upon exercise of unit warrants
|
|
|
112,010
|
|
|
|
—
|
|
|
|
53,459
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issuable upon vesting of restricted stock
|
|
|
—
|
|
|
|
153
|
|
|
|
1
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issuable upon conversion of Series 1 convertible preferred stock
|
|
|
2,876,011
|
|
|
|
—
|
|
|
|
969,205
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issuable upon conversion of Series A CPS
|
|
|
293,844
|
|
|
|
274,359
|
|
|
|
293,844
|
|
|
|
274,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issuable upon conversion of Series B CPS
|
|
|
591,191
|
|
|
|
164,402
|
|
|
|
591,191
|
|
|
|
164,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issuable upon conversion of Series C CPS
|
|
|
32,536
|
|
|
|
32,536
|
|
|
|
32,536
|
|
|
|
32,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issuable upon conversion of Series A-1 convertible preferred stock
|
|
|
204,011
|
|
|
|
313,863
|
|
|
|
283,513
|
|
|
|
310,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issuable upon conversion of convertible promissory notes
|
|
|
186,140
|
|
|
|
286,559
|
|
|
|
258,870
|
|
|
|
283,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total common share equivalents excluded from denominator for diluted earnings per share computation
|
|
|
4,769,302
|
|
|
|
1,072,847
|
|
|
|
2,765,892
|
|
|
|
1,068,198
|
|
Effective October 24, 2013, the Company issued 736,573 new shares of its common stock in exchange for 292.8319 shares of Series 1 Convertible Preferred Stock.
NOTE 11. Concentrations
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash in commercial banks. Accounts in the United States are secured by the Federal Deposit Insurance Corporation. Accounts in Luxembourg and Malaysia are similarly guaranteed. The Company’s total deposits at commercial banks usually exceed the balances insured.
The Company generally requires no collateral from its customers. No provision was made for doubtful accounts at September 30, 2013, or December 31, 2012.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Customers accounting for more than 10% of total revenues during the three or nine months ended September 30, 2013 or 2012, are tabulated as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
$
|
125,000
|
|
|
|
32
|
%
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
333,333
|
|
|
|
41
|
%
|
|
$
|
—
|
|
|
|
—
|
|
Customer B
|
|
$
|
123,201
|
|
|
|
32
|
%
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
123,201
|
|
|
|
15
|
%
|
|
$
|
—
|
|
|
|
—
|
|
Customer C
|
|
$
|
114,600
|
|
|
|
29
|
%
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
114,600
|
|
|
|
14
|
%
|
|
$
|
—
|
|
|
|
—
|
|
Customer D
|
|
$
|
7,664
|
|
|
|
2
|
%
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
168,906
|
|
|
|
21
|
%
|
|
$
|
—
|
|
|
|
—
|
|
Customer E
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
115,000
|
|
|
|
65
|
%
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
131,465
|
|
|
|
49
|
%
|
Customer F
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
27,754
|
|
|
|
10
|
%
|
NOTE 12. Contingencies
From time to time the Company may be involved in claims arising in connection with its business. Based on information currently available, the Company believes that the amount, or range, of reasonably possible losses in connection with any pending actions against it, including the matter described below, in excess of established reserves, in the aggregate, not to be material to its consolidated financial condition or cash flows. However, losses may be material to the Company’s operating results for any particular future period, depending on the level of income or loss for such period.
Coalesce v. WaferGen.
On April 24, 2012, an action entitled Coalesce Corporation (“Coalesce”) v. WaferGen Bio-systems, Inc. was filed in the Alameda County Superior Court. Coalesce, a company that had been providing marketing services between 2006 and 2010, sued the Company for alleged non-payment of sums due, breach of contract, misrepresentation and unjust enrichment. On September 5, 2012, Coalesce filed an amended complaint, with additional claims, for compensatory damages in excess of $500,000 and other compensation. On April 15, 2013, the case was referred to mediation. The first mediation session was held on August 7, 2013, resulting in further requests for documentation by both parties. The Company believes the claim to be substantially without merit, and while no assurance can be given regarding the outcome of this litigation, management believes that the resolution of this matter will not have a material adverse effect on the Company’s financial position and results of operations. Related legal costs are being expensed as incurred.
NOTE 13. Subsequent Events
In October 2013 the Company purchased PMSB’s 444,444 Series B Convertible Preference Shares of WGBM for $70,000.
In October 2013 the Company entered an agreement with WGBM and MTDC to liquidate WGBM. The intercompany balance between the Company and WGBM includes notes with a face value of $6.6 million, maturing on August 15, 2020 (the “Malaysia Notes”). The Malaysia Notes were issued on August 15, 2013, in consideration of WGBM’s cancellation of the Company’s obligations under a term loan owing to WGBM which, as of that date, had an outstanding loan balance of approximately $5.3 million. The Malaysia Notes will be divided in increments of $100,000 each, of which the Company will receive 14 and MTDC the remaining 52. At any time prior to their maturity date, the Company may issue MTDC shares of its common stock with a value, based on the average closing price in the preceding 30 days, equal to the face value of their notes. The remaining net assets of WGBM of approximately $300,000 will be distributed 22.42% to the Company and 77.78% to MTDC. As a result of the liquidation of WGBM, the Company may be required to record Malaysia Notes with an aggregate face value of $5.2 million as debt, net of debt discount initially estimated to be approximately $3 million, on its balance sheet, with an offsetting reduction in derivative liabilities and temporary equity. The liquidation of WGBM is not expected to have a material net impact on the Company’s consolidated financial condition or results of operations.
NOTE 14. Restatement of Financial Statements
The Company has determined that warrants and unit warrants issued during the three months ended September 30, 2013, could, in certain circumstances, require cash settlement and therefore should be classified as liabilities, as opposed to stockholders’ equity in the Company’s Original Report. In addition, the number of shares used to compute
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
basic and diluted net loss per share for the nine months ended September 30, 2013, was miscalculated. As a result, the Company has restated its condensed consolidated financial statements as of and for the three and nine months ended September 30, 2013, to correct these accounting errors.
This restatement has resulted in certain adjustments to our financial statements which are described in detail below.
|
|
September 30, 2013
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
Reported
|
|
Adjustment
|
|
As Restated
|
|
Condensed Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
2,236,080
|
|
$
|
7,789,052
|
(1)
|
$
|
10,025,132
|
|
Total liabilities
|
|
|
5,801,680
|
|
|
7,789,052
|
|
|
13,590,732
|
|
Preferred Stock
|
|
|
17,100,978
|
|
|
(327,245
|
)
(2)
|
|
16,773,733
|
|
Additional paid-in capital
|
|
|
66,395,192
|
|
|
(7,634,836
|
)
(3)
|
|
58,760,356
|
|
Accumulated deficit
|
|
|
(82,497,923
|
)
|
|
173,029
|
(4)
|
|
(82,324,894
|
)
|
Total stockholders’ equity (deficit)
|
|
|
5,930,248
|
|
|
(7,789,052
|
)
|
|
(1,858,804
|
)
|
|
|
Three Months Ended September 30, 2013
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
Reported
|
|
Adjustment
|
|
As Restated
|
|
Condensed Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
389,547
|
|
$
|
—
|
|
$
|
389,547
|
|
Gross profit
|
|
|
196,733
|
|
|
—
|
|
|
196,733
|
|
Operating loss
|
|
|
(3,228,005
|
)
|
|
—
|
|
|
(3,228,005
|
)
|
Gain on revaluation of derivative liabilities, net
|
|
|
450,584
|
|
|
173,029
|
(4)
|
|
623,613
|
|
Total other income and (expenses)
|
|
|
(7,752,826
|
)
|
|
173,029
|
|
|
(7,579,797
|
)
|
Net loss
|
|
|
(10,981,361
|
)
|
|
173,029
|
|
|
(10,808,332
|
)
|
Accretion on Series 1 preferred stock associated with beneficial conversion feature
|
|
|
(702,970
|
)
|
|
(195,653
|
)
(5)
|
|
(898,623
|
)
|
Net loss attributable to common stockholders
|
|
|
(12,224,201
|
)
|
|
(22,624
|
)
(6)
|
|
(12,246,825
|
)
|
Net loss per share - basic and diluted
|
|
|
(4.34
|
)
|
|
(0.01
|
)
|
|
(4.35
|
)
|
|
|
Nine Months Ended September 30, 2013
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
Reported
|
|
Adjustment
|
|
As Restated
|
|
Condensed Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
814,282
|
|
$
|
—
|
|
$
|
814,282
|
|
Gross profit
|
|
|
479,100
|
|
|
—
|
|
|
479,100
|
|
Operating loss
|
|
|
(7,788,330
|
)
|
|
—
|
|
|
(7,788,330
|
)
|
(Loss) gain on revaluation of derivative liabilities, net
|
|
|
(27,896
|
)
|
|
173,029
|
(4)
|
|
145,133
|
|
Total other income and (expenses)
|
|
|
(10,134,505
|
)
|
|
173,029
|
|
|
(9,961,476
|
)
|
Net loss
|
|
|
(17,926,026
|
)
|
|
173,029
|
|
|
(17,752,997
|
)
|
Accretion on Series 1 preferred stock associated with beneficial conversion feature
|
|
|
(702,970
|
)
|
|
(195,653
|
)
(5)
|
|
(898,623
|
)
|
Net loss attributable to common stockholders
|
|
|
(22,074,717
|
)
|
|
(22,624
|
)
(6)
|
|
(22,097,341
|
)
|
Net loss per share - basic and diluted
|
|
|
(31.11
|
)
|
|
13.09
|
(7)
|
|
(18.02
|
)
|
Shares used to compute net loss per share - basic and diluted
|
|
|
709,639
|
|
|
516,931
|
(8)
|
|
1,226,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statements of Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(17,926,026
|
)
|
|
173,029
|
(4)
|
|
(17,752,997
|
)
|
Loss (gain) on revaluation of derivative liabilities, net
|
|
|
27,896
|
|
|
(173,029
|
)
|
|
(145,133
|
)
|
Net cash used in operating activities
|
|
|
(4,928,406
|
)
|
|
—
|
|
|
(4,928,406
|
)
|
__________
|
(1)
|
Represents the warrant derivative liability as of September 30, 2013, related to warrants and unit warrants with cash settlement provisions issued during the three months ended September 30, 2013 (see Notes 8 and 9).
|
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
|
(2)
|
Represents
the reduction in allocation of 2013 Private Placement proceeds to Series 1 Convertible Preferred Stock resulting from the correction of the allocation of proceeds to the warrants recorded as liabilities at their fair value (see Note 1).
|
|
(3)
|
Represents
the warrant derivative liability on the date of issuance related to warrants and unit warrants with cash settlement provisions issued during the three months ended September 30, 2013, less the corrected allocation of 2013 Private Placement proceeds to Series 1 Convertible Preferred Stock resulting from an allocation of proceeds to the warrants recorded as liabilities at their fair value (see Notes 1, 8 and 9).
|
|
(4)
|
Represents the gain on revaluation of warrants and unit warrants between their issuance date and September 30, 2013 (see Notes 8 and 9).
|
|
(5)
|
Represents the increase in 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) due to the reduction in allocation of 2013 Private Placement proceeds to Series 1 Convertible Preferred Stock resulting from the corrected allocation of proceeds to the warrants recorded as liabilities at their fair value (see Notes 1 and 6).
|
|
(6)
|
Represents the gain on revaluation of warrants and unit warrants between their issuance date and September 30, 2013, less the increase in beneficial conversion feature due to the reduction in allocation of 2013 Private Placement proceeds to Series 1 Convertible Preferred Stock (see Notes 1, 6, 8 and 9).
|
|
(7)
|
Represents the combined impact of adjustments in (6) above and (8) below.
|
|
(8)
|
Represents the adjustment to the weighted average shares outstanding used to compute basic and diluted net loss per share in the nine months ended September 30, 2013, for which, due to a spreadsheet error, the Company’s Original Report recorded the weighted average shares outstanding in the 21 months ended September 30, 2013.
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described.
The information contained in this Form 10-Q is intended to update the information contained in our annual report on Form 10-K for the year ended December 31, 2012 (the “Form 10-K”), and our quarterly report on Form 10-Q for the quarter ended March 31, 2013, and June 30, 2013 (the “First and Second Quarter Forms 10-Q”), both as filed with the Securities and Exchange Commission (“SEC”), and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the notes thereto, and other information contained in the Form 10-K and the First and Second Quarter Forms 10-Q. The following discussion and analysis also should be read together with our condensed consolidated financial statements and the notes thereto included elsewhere in this Form 10-Q.
Forward-Looking Statements
Information included in this Form 10-Q may contain forward-looking statements. Except for the historical information contained in this discussion of the business and the discussion and analysis of financial condition and results of operations, the matters discussed herein are forward looking statements. These forward looking statements may include but are not limited to the Company’s plans for sales growth and expectations of gross margin, expenses, new product introduction, and the Company’s liquidity and capital needs. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology. In addition to the risks and uncertainties described in “Risk Factors” contained in the Form 10-K, these risks and uncertainties may include consumer trends, business cycles, scientific developments, changes in governmental policy and regulation, currency fluctuations, economic trends in the United States and inflation. Forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that any projections or other expectations included in any forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors. Except as required by applicable laws, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
Company Overview and Background
Since beginning operations in 2003, we have been engaged in the development, manufacture and sales of systems for gene expression quantification, genotyping and stem cell research for the life sciences and pharmaceutical drug discovery industries. Most recently, the Company’s R&D efforts have been concentrated on the commercialization of the SmartChip Target Enrichment System. Our products are aimed at researchers who perform genetic analysis and cell biology, primarily at pharmaceutical and biotech companies, academic and private research centers and diagnostics companies involved in biomarker research. We plan to provide new performance standards with significant savings of time and cost for professionals in the field of gene expression research and to facilitate biomarker discovery, toxicology and clinical research through the SmartChip products and services.
Our revenue is subject to fluctuations due to the timing of sales of high-value products and service projects, the impact of seasonal spending patterns, the timing and size of research projects our customers perform, changes in overall spending levels in the life science industry and other unpredictable factors that may affect customer ordering patterns. Any significant delays in the commercial launch or any lack or delay of commercial acceptance of new products, unfavorable sales trends in existing product lines, or impacts from the other factors mentioned above, could adversely affect our revenue growth or cause a sequential decline in quarterly revenue. Due to the possibility of fluctuations in our revenue and net income or loss, we believe that quarterly comparisons of our operating results are not a good indicator of future performance.
Since inception, we have incurred substantial operating losses. As of September 30, 2013, our accumulated deficit was $82,324,894. Losses have principally occurred as a result of the substantial resources required for the research, development and manufacturing start-up costs required to commercialize our initial products. We expect to continue to incur substantial costs for research and development activities for at least the next year as we expand and improve our core technology and its applications in the life science research market.
Results of Operations
The following table presents selected items in the condensed consolidated statements of operations for the three and nine months ended September 30, 2013 and 2012, respectively:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
264,547
|
|
|
$
|
176,608
|
|
|
$
|
480,949
|
|
|
$
|
269,999
|
|
License and royalty
|
|
|
125,000
|
|
|
|
—
|
|
|
|
333,333
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
389,547
|
|
|
|
176,608
|
|
|
|
814,282
|
|
|
|
269,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
|
192,814
|
|
|
|
144,327
|
|
|
|
335,182
|
|
|
|
245,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
196,733
|
|
|
|
32,281
|
|
|
|
479,100
|
|
|
|
24,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
625,390
|
|
|
|
124,692
|
|
|
|
1,577,317
|
|
|
|
537,523
|
|
Research and development
|
|
|
1,581,449
|
|
|
|
1,237,617
|
|
|
|
4,246,796
|
|
|
|
4,855,341
|
|
General and administrative
|
|
|
1,217,899
|
|
|
|
521,901
|
|
|
|
2,443,317
|
|
|
|
2,406,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,424,738
|
|
|
|
1,884,210
|
|
|
|
8,267,430
|
|
|
|
7,799,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(3,228,005
|
)
|
|
|
(1,851,929
|
)
|
|
|
(7,788,330
|
)
|
|
|
(7,774,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
830
|
|
|
|
672
|
|
|
|
2,917
|
|
|
|
6,231
|
|
Interest expense
|
|
|
(848,464
|
)
|
|
|
(564,009
|
)
|
|
|
(2,821,093
|
)
|
|
|
(1,379,576
|
)
|
Gain (loss) on revaluation of derivative liabilities, net
|
|
|
623,613
|
|
|
|
(385,209
|
)
|
|
|
145,133
|
|
|
|
2,176,982
|
|
Loss on extinguishment of debt
|
|
|
(4,970,410
|
)
|
|
|
—
|
|
|
|
(4,970,410
|
)
|
|
|
—
|
|
Issuance of warrants due to organic change
|
|
|
(2,553,318
|
)
|
|
|
—
|
|
|
|
(2,553,318
|
)
|
|
|
—
|
|
Miscellaneous income (expense)
|
|
|
167,952
|
|
|
|
(181,247
|
)
|
|
|
235,295
|
|
|
|
(158,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and (expenses)
|
|
|
(7,579,797
|
)
|
|
|
(1,129,793
|
)
|
|
|
(9,961,476
|
)
|
|
|
645,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before provision for income taxes
|
|
|
(10,807,802
|
)
|
|
|
(2,981,722
|
)
|
|
|
(17,749,806
|
)
|
|
|
(7,129,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
530
|
|
|
|
(14,142
|
)
|
|
|
3,191
|
|
|
|
12,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,808,332
|
)
|
|
$
|
(2,967,580
|
)
|
|
$
|
(17,752,997
|
)
|
|
$
|
(7,141,905
|
)
|
Product Revenue
The following table presents our product revenue for the three and nine months ended September 30, 2013 and 2012, respectively:
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
2013
|
|
2012
|
|
% Change
|
|
|
2013
|
|
2012
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
264,547
|
|
$
|
176,608
|
|
50%
|
|
|
$
|
480,949
|
|
$
|
269,999
|
|
78%
|
For the three months ended September 30, 2013, product revenue increased by $87,939, or 50%, as compared to the three months ended September 30, 2012. The increase is due to sales of our target enrichment product line which we launched mid-2013.
For the nine months ended September 30, 2013, product revenue increased by $210,950, or 78%, as compared to the nine months ended September 30, 2012. The increase is due to sales of our target enrichment product line and an additional open platform Real-Time PCR System.
License and Royalty Revenue
The following table presents our license and royalty revenue for the three and nine months ended September 30, 2013 and 2012, respectively:
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
2013
|
|
2012
|
|
% Change
|
|
|
2013
|
|
2012
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
125,000
|
|
$
|
—
|
|
N/A
|
|
|
$
|
333,333
|
|
$
|
—
|
|
N/A
|
For the three and nine months ended September 30, 2013, license and royalty revenue was $125,000 and $333,333, respectively, as compared to none in the nine months ended September 30, 2012. This revenue was generated by an agreement signed in 2013. Future license revenue is expected to be not less than $125,000 per quarter in the near future.
Cost of Product Revenue
The following table presents our cost of product revenue for the three and nine months ended September 30, 2013 and 2012, respectively:
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
2013
|
|
2012
|
|
% Change
|
|
|
2013
|
|
2012
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
192,814
|
|
$
|
144,327
|
|
34%
|
|
|
$
|
335,182
|
|
$
|
245,322
|
|
37%
|
Cost of product revenue includes the cost of products paid to third party vendors and raw materials, labor and overhead for products manufactured internally, and reserves for warranty and inventory obsolescence.
For the three months ended September 30, 2013, cost of revenue increased by $48,487, or 34%, as compared to the three months ended September 30, 2012. The increase related primarily to the increase in revenue.
For the nine months ended September 30, 2013, cost of revenue increased by $89,860, or 37%, as compared to the nine months ended September 30, 2012. The increase related primarily to the increase in revenue, offset by a reduction in provisions for excess inventory.
Sales and Marketing
The following table presents our sales and marketing expenses for the three and nine months ended September 30, 2013 and 2012, respectively:
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
2013
|
|
2012
|
|
% Change
|
|
|
2013
|
|
2012
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
625,390
|
|
$
|
124,692
|
|
402%
|
|
|
$
|
1,577,317
|
|
$
|
537,523
|
|
193%
|
Sales and marketing expenses consist primarily of compensation costs of our sales and marketing team, commissions and the costs associated with various marketing programs.
For the three months ended September 30, 2013, sales and marketing expenses increased by $500,698, or 402%, as compared to the three months ended September 30, 2012. The increase resulted primarily from increases in headcount and sales and marketing activities that had been scaled back in the 2012 period.
For the nine months ended September 30, 2013, sales and marketing expenses increased by $1,039,794, or 193%, as compared to the nine months ended September 30, 2012. The increase resulted primarily from increases in headcount and sales and marketing activities.
We expect sales and marketing expenses will continue to increase during 2013 as we build our sales and marketing headcount and activities to commercialize our products.
Research and Development
The following table presents our research and development expense for the three and nine months ended September 30, 2013 and 2012, respectively:
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
2013
|
|
2012
|
|
% Change
|
|
|
2013
|
|
2012
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,581,449
|
|
$
|
1,237,617
|
|
28%
|
|
|
$
|
4,246,796
|
|
$
|
4,855,341
|
|
(13)%
|
Research and development expenses consist primarily of salaries and other personnel-related expenses, laboratory supplies and other expenses related to the design, development, testing and enhancement of our products. Research and development expenses are expensed as they are incurred.
For the three months ended September 30, 2013, research and development expenses increased by $343,832, or 28%, as compared to the three months ended September 30, 2012. The increase resulted primarily from a one-time accrual of retention incentives in the quarter.
For the nine months ended September 30, 2013, research and development expenses decreased $608,545, or 13%, as compared to the nine months ended September 30, 2012. The decrease resulted primarily from a significant decrease in headcount in April 2012 and reductions in the costs of depreciation and expensed materials, offset by the one-time accrual of retention incentives.
We believe a substantial investment in research and development is essential in the long term to remain competitive and expand into additional markets. Accordingly, we expect our research and development expenses to remain at a high level of total expenditures for the foreseeable future.
General and Administrative
The following table presents our general and administrative expenses for the three and nine months ended September 30, 2013 and 2012, respectively:
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
2013
|
|
2012
|
|
% Change
|
|
|
2013
|
|
2012
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,217,899
|
|
$
|
521,901
|
|
133%
|
|
|
$
|
2,443,317
|
|
$
|
2,406,171
|
|
2%
|
General and administrative expenses consist primarily of personnel costs for finance, human resources and general management, as well as professional fees, such as expenses for legal and accounting services.
For the three months ended September 30, 2013, general and administrative expenses increased by $695,998, or 133%, as compared to the three months ended September 30, 2012. The increase resulted primarily from the accrual of a discretionary bonus awarded to our CEO, plus a one-time accrual of retention incentives for other U.S. employees, severance costs for Malaysian employees and legal fees incurred in conjunction with our capital restructuring.
For the nine months ended September 30, 2013, general and administrative expenses increased by $37,146, or 2%, as compared to the nine months ended September 30, 2012. The increase resulted primarily from increases in the accrual of a discretionary bonus awarded to our CEO, plus a one-time accrual of retention incentives for other employees, and higher legal fees incurred in conjunction with our capital restructuring, substantially offset by consulting fees, recruitment costs, travel and lodging expenses, and the absence of a one-time expense for severance costs related to the termination of our former Chief Operating Officer and Chief Financial Officer in early 2012.
We expect our general and administrative expenses to be lower for the remainder of 2013 due to the non-recurrence of the discretionary bonus, retention incentives, severance costs and high legal fees incurred in the three months ended September 30, 2013.
Interest Income
The following table presents our interest income for the three and nine months ended September 30, 2013 and 2012, respectively:
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
2013
|
|
2012
|
|
% Change
|
|
|
2013
|
|
2012
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
830
|
|
$
|
672
|
|
24%
|
|
|
$
|
2,917
|
|
$
|
6,231
|
|
(53)%
|
The interest income is solely earned on cash balances held in interest-bearing bank accounts.
For the three months ended September 30, 2013, interest income increased by $158, or 24%, as compared to the three months ended September 30, 2012. For the nine months ended September 30, 2013, interest income decreased by $3,314, or 53%, as compared to the nine months ended September 30, 2012. The steady decrease was mainly due to a decrease in the average cash invested in interest-bearing accounts until September 2013, when funds from our 2013 Private Placement were invested. Interest income is expected to increase in the three months ending December 31, 2013, but due to low interest rates it will not be significant.
Interest Expense
The following table presents our interest expense for the three and nine months ended September 30, 2013 and 2012, respectively:
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
2013
|
|
2012
|
|
% Change
|
|
|
2013
|
|
2012
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
848,464
|
|
$
|
564,009
|
|
50%
|
|
|
$
|
2,821,093
|
|
$
|
1,379,576
|
|
104%
|
For the three months ended September 30, 2013, interest expense increased by $284,455, or 50%, as compared to the three months ended September 30, 2012. For the nine months ended September 30, 2013, interest expense increased $1,441,517, or 104%, as compared to the nine months ended September 30, 2012. The increase in both periods was primarily due to higher charges for amortization of the debt discount and loan origination fees related to the convertible promissory notes (“CPNs”) in the aggregate principal amount of $15,275,000 issued in the May 2011 Private Placement. These were amortized using the effective yield method, which weights the interest charges towards the latter stages of the contractual term of the debt. This was offset by the reduction in the number of days for which the CPNs were outstanding, as they were exchanged for non-interest-bearing securities under the terms of the Exchange Agreement on August 27, 2013, and since such date interest expense has not been significant.
Gain (Loss) on Revaluation of Derivative Liabilities, Net
The following table represents the gain (loss) on revaluation of our derivative liabilities, net for the three and nine months ended September 30, 2013 and 2012, respectively:
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
2013
|
|
2012
|
|
% Change
|
|
|
2013
|
|
2012
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
623,613
|
|
$
|
(385,209
|
)
|
N/A
|
|
|
$
|
145,133
|
|
$
|
2,176,982
|
|
N/A
|
Our derivative liabilities arise due to the cash settlement provisions in certain warrants and unit warrants and the variable number of shares of our common stock that may be issued upon the exercise of those warrants with certain anti-dilution protection, upon the exchange of Series A and Series B convertible preference shares (“CPS”) of our Malaysian subsidiary, and, until August 27, 2013, under the conversion element of our CPNs.
The net gain from revaluation of derivative liabilities for the three months ended September 30, 2013, was $623,613, compared to a net loss of $385,209 for the three months ended September 30, 2012. The net gain from revaluation of derivative liabilities for the nine months ended September 30, 2013, was $145,133, compared to a net gain of $2,176,982 for the nine months ended September 30, 2012. Gains and losses are directly attributable to revaluations of all of our derivatives and (with the exception of Series B CPS) result primarily from a net decrease or increase, respectively, in our stock price in the period. Our closing stock price was $1.96 on September 30, 2013, compared to $3.98 on June 30, 2013, and $2.98 on December 31, 2012, and was $7.95 on September 30, 2012, compared to $6.96 on June 30, 2012, and $15.90 on December 31, 2011. Future gains or losses on revaluation will result primarily from net decreases or increases, respectively, in our stock price during the reporting period. Derivative liabilities will also decrease as the remaining term of each instrument diminishes.
Loss on Extinguishment of Debt
The following table presents the loss on extinguishment of debt we recognized in the three and nine months ended September 30, 2013 and 2012, respectively:
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
2013
|
|
2012
|
|
% Change
|
|
|
2013
|
|
2012
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,970,410
|
|
$
|
—
|
|
N/A
|
|
|
$
|
4,970,410
|
|
$
|
—
|
|
N/A
|
Loss on extinguishment of debt is a one-time non-cash charge recorded as a result of the CPNs being exchanged for other securities per the terms of the Exchange Agreement on August 27, 2013. No comparable costs are expected in the foreseeable future.
Issuance of warrants due to organic change
The following table presents the charge for issuance of warrants due to organic change that we incurred for the three and nine months ended September 30, 2013 and 2012, respectively:
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
2013
|
|
2012
|
|
% Change
|
|
|
2013
|
|
2012
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,553,318
|
|
$
|
—
|
|
N/A
|
|
|
$
|
2,553,318
|
|
$
|
—
|
|
N/A
|
The charge for issuance of warrants due to organic change is a one-time non-cash charge recorded as a result of the warrants issued in May 2011 (the “May 2011 Warrants”) being exchanged for securities with a greater value. Per the terms of the May 2011 warrants, holders were entitled to compensation should an Organic Change, as defined therein, occur, and the issuance of new shares in the 2013 Private Placement that occurred on August 27, 2013, met that definition. No comparable costs are expected in the foreseeable future.
Miscellaneous Income (Expense)
The following table presents miscellaneous income (expense) for the three and nine months ended September 30, 2013 and 2012, respectively:
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
2013
|
|
2012
|
|
% Change
|
|
|
2013
|
|
2012
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
167,952
|
|
$
|
(181,247
|
)
|
N/A
|
|
|
$
|
235,295
|
|
$
|
(158,439
|
)
|
N/A
|
For the three months ended September 30, 2013, we recorded miscellaneous income of $167,952, compared to an expense of $181,247 for the three months ended September 30, 2012. For the nine months ended September 30, 2013, we recorded miscellaneous income of $235,295, compared to an expense of $158,439 for the nine months ended September 30, 2012. Miscellaneous income or expense is the result of net foreign currency exchange gains and losses, mainly in our Malaysian subsidiary, WGBM, principally due to revaluation of the inter-company loan account at the balance sheet date. WGBM presently has a net receivable on its dollar denominated balances, so if the value of the Malaysian Ringgit decreases against the dollar, income is recorded, whereas if it increases against the dollar, an expense is recorded. Foreign currency exchange gains and losses also arise on our subsidiary in Luxembourg, and on U.S. expenses denominated in foreign currencies.
Provision for income taxes
The following table presents our provision for income taxes for the three and nine months ended September 30, 2013 and 2012, respectively:
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
2013
|
|
2012
|
|
% Change
|
|
|
2013
|
|
2012
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
530
|
|
$
|
(14,142
|
)
|
N/A
|
|
|
$
|
3,191
|
|
$
|
12,745
|
|
N/A
|
For the three and nine months ended September 30, 2013, we recorded a charge of $530 and $3,191, respectively, for U.S. state taxes. For the three and nine months ended September 30, 2012, we recorded a credit of $14,142 and a charge of $12,745, respectively, for income taxes, being an interim estimate of Malaysian taxes payable on interest income, mostly arising on WGBM’s loan to WaferGen Bio-systems, Inc., reduced by an overprovision for such taxes in 2011, plus U.S. state taxes. The Company has provided a full valuation allowance against its net deferred tax assets.
Headcount
Our consolidated headcount as of November 11, 2013, comprised 25 regular employees, all of whom were employed full-time, compared to 32 regular employees as of December 31, 2012, 31 of whom were employed full-time.
Liquidity and Capital Resources
From inception through September 30, 2013, the Company has raised a total of $3,665,991 from the issuance of notes payable, $66,037 from the sale of Series A Preferred Stock, $1,559,942 from the sale of Series B Preferred Stock, $31,226,191, net of offering costs, from the sale of common stock and warrants, $8,842,256, net of offering costs, from the sale of CPS of our Malaysian subsidiary, $1,842,760, net of origination fees, from a secured term loan, $27,492,876, net of offering costs and liquidated damages for late registration, from the sale of the Series A-1 Convertible Preferred Stock, CPNs and warrants in the May 2011 Private Placement, and $13,393,162, net of offering costs, from the sale of common stock, Series 1 Convertible Preferred Stock and warrants in the 2013 Private Placement. As of September 30, 2013, the Company had $14,483,041 in unrestricted cash and cash equivalents, and working capital of $11,790,655.
Net Cash Used in Operating Activities
The Company experienced negative cash flow from operating activities for the nine months ended September 30, 2013 and 2012, in the amounts of $4,928,406 and $7,639,383, respectively. The cash used in operating activities in the nine months ended September 30, 2013, was due to cash used to fund a net loss of $17,752,997, adjusted for non-cash expenses related to depreciation and amortization, stock-based compensation, net gains on revaluation of derivative liabilities, interest converted to principal on CPNs, inventory provision, amortization of debt discount, loss on extinguishment of debt and issuance of warrants due to organic change totaling $10,841,576, and cash provided by a change in working capital of $1,983,015. The cash used in operating activities in the nine months ended September 30, 2012, was due to cash used to fund a net loss of $7,141,905, adjusted for non-cash expenses related to depreciation and amortization, stock-based compensation, net gains on revaluation of derivative liabilities, interest converted to principal on CPNs, inventory provision and amortization of debt discount totaling $180,092, and cash used by a change in working capital of $677,570. The decrease in cash used in the nine months ended September 30, 2013, compared to 2012, was driven primarily by the cash provided by, and lack of cash used in, the change in working capital.
Net Cash Used in Investing Activities
The Company used $41,906 in the nine months ended September 30, 2013, and $41,262 in the nine months ended September 30, 2012, to acquire property and equipment.
Net Cash Provided by Financing Activities
Cash provided by financing activities in the nine months ended September 30, 2013, was $13,393,162, all from the issuance of common stock, Series 1 preferred stock and warrants in the 2013 Private Placement.
There were no financing activities in the nine months ended September 30, 2012.
Availability of Additional Funds
We believe funds available at September 30, 2013, along with our revenue, will fund our operations into 2015. To continue our operations thereafter, we may need to raise further capital, through the sale of additional securities or otherwise, to support our future operations. Our operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. At the present time, we have commitments for capital expenditures totaling approximately $100,000, all for equipment to be used for manufacturing SmartChip products. Our future capital requirements and the adequacy of our available funds will depend on many factors, most notably our ability to successfully commercialize our new high throughput open platform SmartChip products and services.
While we believe we have sufficient cash to fund our operating, investing and financing activities into 2015, we believe it likely that additional capital will be needed to sustain our operations thereafter. We may be unable to raise sufficient additional capital when we need it on favorable terms, or at all. The conversion of the Malaysia Notes, and the sale of equity or convertible debt securities in the future, may be dilutive to our stockholders, and debt financing arrangements may require us to pledge certain assets and enter into covenants that could restrict certain business activities or our ability to incur further indebtedness, and may contain other terms that are not favorable to us or our stockholders. If we are unable to obtain needed capital we may not be able to continue our efforts to develop and commercialize our SmartChip products and services and may be forced to significantly curtail or suspend our operations.
Principles of Consolidation
The consolidated financial statements of WaferGen Bio-systems, Inc. include the accounts of Wafergen, Inc., WGBM, our Malaysian subsidiary, and WaferGen Biosystems Europe S.a.r.l., our Luxembourg subsidiary. All significant inter-company transactions and balances are eliminated in consolidation.
Critical Accounting Policies and Estimates
Deferred Tax Valuation Allowance
We believe sufficient uncertainties exist regarding the future realization of deferred tax assets, and, accordingly, a full valuation allowance is required, amounting to approximately $28,000,000 at December 31, 2012. As a result of the 2013 Private Placement, the availability of NOLs and tax credit carry-forwards and the corresponding valuation allowance were both significantly reduced due to the ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986 and similar state provisions. In subsequent periods, if and when we generate pre-tax income, a tax expense will not be recorded to the extent that the remaining valuation allowance can be used to offset that expense. Once a consistent pattern of pre-tax income is established or other events occur that indicate that the deferred tax assets will be realized, additional portions or all of the remaining valuation allowance will be reversed back to income. Should we generate pre-tax losses in subsequent periods, a tax benefit will not be recorded and the valuation allowance will be increased.
Inventory Valuation
Inventories are stated at the lower of cost and market value. We perform a detailed assessment of inventory on a regular basis, which includes, among other factors, a review of projected demand requirements, product pricing, product expiration and product lifecycle. As a result of this assessment, we record provisions for potentially excess, obsolete or impaired goods, when appropriate, in order to reduce the reported amount of inventory to its net realizable value. If actual demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Warranty Reserve
Our standard warranty agreement is one year from shipment for SmartChip cyclers and dispensers. We accrue for anticipated warranty costs upon shipment of these products. Our warranty reserve is based on management’s judgment regarding anticipated rates of warranty claims and associated repair costs, and we update our assessment quarterly.
Stock-Based Compensation
We measure the fair value of all stock option and restricted stock awards to employees on the grant date, and record the fair value of these awards, net of estimated forfeitures, as compensation expense over the service period. The fair value of options is estimated using the Black-Scholes valuation model, and for restricted stock it is based on the Company’s closing share price on the measurement date. Amounts expensed with respect to options were $260,068 and $277,761, net of estimated forfeitures, for the nine months ended September 30, 2013 and 2012, respectively. These sums exclude the compensation expense for restricted stock awards, for which the fair value is based on our closing stock price on the grant date for directors and employees, and on the dates on which performance of services is recognized for consultants.
The weighted average grant date fair value of options awarded in the nine months ended September 30, 2013 and 2012, was $3.72 and $8.37, respectively. Fair values were estimated using the following assumptions:
|
Nine Months Ended September 30,
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.71% - 1.14%
|
|
Expected term
|
|
|
4.75 Years
|
|
Expected volatility
|
|
|
65.02% - 98.80%
|
|
Dividend yield
|
|
|
0%
|
|
Risk-Free Interest Rate
. This is the U.S. Treasury rate for the day of the grant having a term equal to the expected term of the option. An increase in the risk-free interest rate will increase the fair value and the related compensation expense.
Expected Term
. This is the period of time over which the award is expected to remain outstanding and is based on management’s estimate, taking into consideration the vesting terms, the contractual life, and historical experience. An increase in the expected term will increase the fair value and the related compensation expense.
Expected Volatility
. This is a measure of the amount by which our common stock price has fluctuated or is expected to fluctuate. To the extent that our common stock has not been traded for as long as the expected remaining term of the options, we use a weighted average of the historic volatility of a group of publicly traded companies over the retrospective period corresponding to the expected remaining term of the options on the measurement date. The group of publicly traded companies is selected from the same industry or market index, with extra weighting attached to those companies most similar in terms of business activity, size and financial leverage. To the extent that our common stock has been traded for longer than the expected remaining term of the options, this weighted average is used to determine 50% of the volatility, with our own historic volatility used to determine the remaining 50%. An increase in the expected volatility will increase the fair value and the related compensation expense.
Dividend Yield
. We have not made any dividend payments and do not plan to pay dividends in the foreseeable future. An increase in the dividend yield will decrease the fair value and the related compensation expense.
Forfeiture Rate
. This is a measure of the amount of awards that are expected to not vest. An increase in the estimated forfeiture rate will decrease the related compensation expense.
Derivative Liabilities
Our derivative liabilities arise due to the cash settlement provisions in certain warrants and unit warrants and the variable number of shares of our common stock that may be issued upon the exercise of those warrants with certain anti-dilution protection, upon the exchange of Series A and Series B CPS of our Malaysian subsidiary, and under the conversion element of our CPNs. We evaluate the liability for all of our derivatives using a Monte Carlo Simulation approach, using assumptions provided by management reflecting conditions at the valuation dates.
There was no longer a derivative liability for the conversion element of convertible promissory notes at September 30, 2013, its fair value having diminished to nil by the time of the Exchange Agreement on August 27, 2013. The fair value of this derivative liability at June 30, 2013, was estimated to be $439, using our closing stock price of $3.98 and assumptions including estimated volatility of 148.74%, a risk-free interest rate of 0.03%, a zero dividend rate and a contractual term of 1.41 years. The fair value of this derivative liability at December 31, 2012, was estimated to be $274,928, using our closing stock price of $2.98 and assumptions including estimated volatility of 126.91%, a risk-free interest rate of 0.13%, a zero dividend rate and a contractual term of 1.91 years. The fair value of this derivative liability at September 30, 2012, was estimated to be $458,310, using our closing stock price of $7.95 and assumptions including estimated volatility of 126.57%, a risk-free interest rate of 0.16%, a zero dividend rate and a contractual term of 2.16 years. The fair value of this derivative liability at June 30, 2012, was estimated to be $401,921, using our closing stock price of $6.96 and assumptions including estimated volatility of 112.40%, a risk-free interest rate of 0.23%, a zero dividend rate and a contractual term of 2.41 years. The fair value of this derivative liability at December 31, 2011, was estimated to be $1,931,295, using our closing stock price of $15.90 and assumptions including estimated volatility of 82.82%, a risk-free interest rate of 0.18%, a zero dividend rate and a contractual term of 2.91 years.
The total fair value of the derivative liability for warrants and unit warrants at September 30, 2013, was estimated to be $8,299,415, using our closing stock price of $1.96 and assumptions including estimated volatilities of 85.06% to 112.18%, risk-free interest rates of 0.07% to 1.01%, a zero dividend rate and estimated remaining terms of 0.71 to 4.00 years. The total fair value of warrants and unit warrants issued during the three months ended September 30, 2013, was estimated to be $7,962,081, the majority of which were issued on August 27, 2013, on which date fair values were estimated using a stock price of $2.00 and assumptions including estimated volatility of 84.27%, a risk-free interest rate of 1.16%, a zero dividend rate and an estimated remaining term of 4.00 years. The total fair value of this derivative liability at June 30, 2013, was estimated to be $701,857, using our closing stock price of $3.98 and assumptions including estimated volatilities of 130.24% to 131.31%, risk-free interest rates of 0.13% to 0.19%, a zero dividend rate and estimated remaining terms of 0.77 to 1.19 years. The total fair value of this derivative liability at December 31, 2012, was estimated to be $102,695, using our closing stock price of $2.98 and assumptions including estimated volatilities of 117.58% to 131.42%, risk-free interest rates of 0.08% to 0.21%, a zero dividend rate and estimated remaining terms of 0.38 to 1.58 years. The total fair value of this derivative liability at September 30, 2012, was estimated to be $433,829, using our closing stock price of $7.95 and assumptions including estimated volatilities of 106.78% to 122.48%, risk-free interest rates of 0.15% to 0.22%, a zero dividend rate and estimated remaining terms of 0.64 to 1.79 years. The total fair value of this derivative liability at June 30, 2012, was estimated to be $329,414, using our closing stock price of $6.96 and assumptions including estimated volatilities of 96.38% to 118.21%, risk-free interest rates of 0.20% to 0.33%, a zero dividend rate and estimated remaining terms of 0.89 to 1.99 years. The total
fair value of this derivative liability at December 31, 2011, was estimated to be $655,219, using our closing stock price of $15.90 and assumptions including estimated volatilities of 80.66% to 85.13%, risk-free interest rates of 0.16% to 0.32%, a zero dividend rate and estimated remaining terms of 1.25 to 2.39 years.
The fair value of the derivative liability for the conversion element of Series B CPS of our Malaysian subsidiary at September 30, 2013, was estimated to be $1,300,923, using our closing stock price of $1.96 and assumptions including estimated volatility of 102.38%, a risk-free interest rate of 0.04%, a zero dividend rate and an estimated remaining term of 0.51 years. The fair value of this derivative liability at June 30, 2013, was estimated to be $1,213,727, using our closing stock price of $3.98 and assumptions including estimated volatility of 135.80%, a risk-free interest rate of 0.11%, a zero dividend rate and an estimated remaining term of 0.61 years. The fair value of this derivative liability at December 31, 2012, was estimated to be $1,210,909, using our closing stock price of $2.98 and assumptions including estimated volatility of 125.53%, a risk-free interest rate of 0.16%, a zero dividend rate and an estimated remaining term of 1.00 years. The fair value of this derivative liability at September 30, 2012, was estimated to be $1,334,545, using our closing stock price of $7.95 and assumptions including estimated volatility of 119.55%, a risk-free interest rate of 0.18%, a zero dividend rate and an estimated remaining term of 1.21 years. The fair value of this derivative liability at June 30, 2012, was estimated to be $1,327,769, using our closing stock price of $6.96 and assumptions including estimated volatility of 106.00%, a risk-free interest rate of 0.26%, a zero dividend rate and an estimated remaining term of 1.41 years. The fair value of this derivative liability at December 31, 2011, was estimated to be $1,245,101, using our closing stock price of $15.90 and assumptions including estimated volatility of 81.69%, a risk-free interest rate of 0.28%, a zero dividend rate and an estimated remaining term of 1.81 years.
The fair value of the derivative liability for Series A CPS of our Malaysian subsidiary at September 30, 2013, was estimated to be $424,794, using our closing stock price of $1.96 and assumptions including estimated volatilities of 77.99% to 78.79%, risk-free interest rates of 0.02% to 0.03%, a zero dividend rate and estimated remaining terms of 0.10 to 0.16 years. The fair value of this derivative liability at June 30, 2013, was estimated to be $770,641, using our closing stock price of $3.98 and assumptions including estimated volatilities of 111.30% to 123.77%, risk-free interest rates of 0.02% to 0.08%, a zero dividend rate and estimated remaining terms of 0.11 to 0.41 years. The fair value of this derivative liability at December 31, 2012, was estimated to be $619,652, using our closing stock price of $2.98 and assumptions including estimated volatilities of 123.55% to 127.94%, risk-free interest rates of 0.11% to 0.15%, a zero dividend rate and estimated remaining terms of 0.55 to 0.90 years. The fair value of this derivative liability at September 30, 2012, was estimated to be $1,563,664, using our closing stock price of $7.95 and assumptions including estimated volatilities of 120.84% to 125.60%, risk-free interest rates of 0.16% to 0.18%, a zero dividend rate and estimated remaining terms of 0.80 to 1.16 years. The fair value of this derivative liability at June 30, 2012, was estimated to be $1,346,035, using our closing stock price of $6.96 and assumptions including estimated volatilities of 105.96% to 114.25%, risk-free interest rates of 0.22% to 0.26%, a zero dividend rate and estimated remaining terms of 1.05 to 1.41 years. The fair value of this derivative liability at December 31, 2011, was estimated to be $2,135,715, using our closing stock price of $15.90 and assumptions including estimated volatilities of 81.15% to 82.83%, risk-free interest rate of 0.28%, a zero dividend rate and estimated remaining terms of 1.55 to 1.90 years.
Risk-Free Interest Rate
. This is the U.S. Treasury rate for the measurement date having a term equal to the weighted average expected remaining term of the instrument. An increase in the risk-free interest rate will increase the fair value and the associated derivative liability.
Expected Remaining Term
. This is the period of time over which the instrument is expected to remain outstanding and is based on management’s estimate, taking into consideration the remaining contractual life, and historical experience. For our convertible promissory notes, we consider a blend of expected remaining terms prior to partial conversion into the Company’s Series A-2 Convertible Preferred Stock, giving consideration to the likelihood of conversion under various scenarios, and a further blend of expected remaining terms prior to partial conversion into common stock, all based on management’s projections of when such conversions would occur within the contractual term. An increase in the expected remaining term will increase the fair value and the associated derivative liability.
Expected Volatility
. This is a measure of the amount by which our common stock price has fluctuated or is expected to fluctuate. To the extent that our common stock has not been traded for as long as the expected remaining term of the instrument, we use a weighted average of the historic volatility of a group of publicly traded companies over the retrospective period corresponding to the expected remaining term of the instrument on the measurement date. The group of publicly traded companies is selected from the same industry or market index, with extra weighting attached to those companies most similar in terms of business activity, size and financial leverage. To the extent that our common stock has been traded for longer than the expected remaining term of the instrument, this weighted average is used to determine 50% of the volatility, with our own historic volatility used to determine the remaining 50%. An increase in the expected volatility will increase the fair value and the associated derivative liability.
Dividend Yield
. We have not made any dividend payments and do not plan to pay dividends in the foreseeable future. An increase in the dividend yield will decrease the fair value and the associated derivative liability.
Recent Accounting Pronouncements
See the “Recent Accounting Pronouncements” in Note 2 to the Condensed Consolidated Financial Statements in Part I, Item 1 for information related to the adoption of new accounting standards in the first nine months of 2013, none of which had a material impact on our condensed consolidated financial statements.
Off-Balance Sheet Arrangements
As of September
30, 2013, we had no off-balance sheet arrangements.
Item 4. Controls and Procedures
Management’s Report on Internal Control over Financial Reporting
As of the end of the period covered by this Quarterly Report, management performed, with the participation of our principal executive officer and principal financial officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934 (the “Exchange Act”). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the report we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such information is accumulated and communicated to our management including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures. Based on the evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2013, the Company’s disclosure controls and procedures were not effective.
We identified the following material weaknesses in our internal controls over financial reporting as of September 30, 2013:
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1)
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We had not designed or otherwise maintained adequate controls to ensure that we identify all of the clauses in warrant agreements which could cause such warrants to require liability classification; and
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2)
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There
was an operating deficiency in the calculation of the weighted average number of shares outstanding in a manual spreadsheet, and in the subsequent review process, which failed to detect and correct the error
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Both of these material weaknesses have resulted in the need to file amended financial statements, as disclosed in the Explanatory Note at the front of this Quarterly Report on Form 10-Q/A and in Note 14 to the condensed consolidated financial statements.
Changes in Internal Control over Financial Reporting
There was no material change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.