Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 1. The Company
General –
WaferGen Bio-systems, Inc. and its subsidiaries (the “Company”) are engaged in the development, manufacture and sale of systems for genomic technology solutions for single-cell analysis and clinical research. The Company’s ICELL8™ Single-Cell System is a cutting edge platform that can isolate thousands of single cells and process specific cells for analysis, including Next Generation Sequencing (“NGS”). The Company’s SmartChip™ platform can be used for profiling and validating molecular biomarkers, and can perform massively parallel singleplex PCR for one-step target enrichment and library preparation for clinical NGS. The Company’s Apollo 324™ system can be used to process DNA and RNA from clinical samples to NGS-ready libraries. The Company’s products are aimed at researchers who perform genetic analysis, primarily at pharmaceutical and biotech companies, academic and private research centers and diagnostics companies involved in biomarker discovery and genetic research. Through the SmartChip and Apollo product lines, the Company plans to provide new performance standards with significant savings in time and cost for professionals in the field of gene expression research and to facilitate biomarker discovery, toxicology and clinical research.
Wafergen, Inc. was incorporated in the State of Delaware on October 22, 2002, and was acquired by WaferGen Bio-systems, Inc. in a reverse merger on May 31, 2007.
On August 30, 2011, the Company formed a new wholly owned subsidiary in Luxembourg to establish a presence for its marketing and research activities in Europe.
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 the Company’s audited financial statements and footnotes related thereto for the year ended
December 31, 2015
, included in the Company’s Form 10-K filed with the SEC. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position and the results of its operations and cash flows. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year.
Basis of Consolidation
– The condensed consolidated financial statements include the financial statements of WaferGen Bio-systems, Inc. and its subsidiaries. All significant transactions and balances between the WaferGen Bio-systems, Inc. and its subsidiaries have been eliminated in consolidation.
Use of Estimates
– Preparing condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results and outcomes could differ from these estimates and assumptions.
Foreign Currencies
– Foreign exchange gains and losses for assets and liabilities of the Company’s non-U.S. subsidiaries for which the functional currency is the U.S. dollar are recorded in miscellaneous income (expense) in the Company’s statement of operations. The Company has no subsidiaries for which the local currency is the functional currency.
Accounts Receivable
– An allowance for doubtful accounts will be recorded based on a combination of historical experience, aging analysis, and information on specific accounts. Account balances will be written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Inventory
– Inventory is recorded at the lower of cost (first-in, first-out) or net realizable value. Additionally, the Company evaluates its inventory in terms of excess and obsolete exposures and records provisions as needed.
Goodwill and Long-lived Intangible Assets
– Goodwill is tested for impairment on an annual basis in the fourth quarter and between annual tests if events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable. Impairment losses, if any, are recorded in the statement of operations as “impairment of goodwill” within operating expenses.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Long-lived intangibles are carried at cost less accumulated amortization and are subject to review for impairment when events or circumstances indicate that the carrying value may not be recoverable. Amortization is recognized over the estimated useful life of the respective asset on a straight-line basis except for customer lists, which are amortized in proportion to the present value of projected cash flows within their estimated useful lives, since this methodology more closely reflects the pattern in which economic benefits are derived.
Revenue Recognition
– The Company recognizes revenue when (i) delivery of product has occurred or services have been rendered, (ii) there is persuasive evidence of a sale arrangement, (iii) selling prices are fixed or determinable, and (iv) collectability from the customers (individual customers and distributors) is reasonably assured. Revenue consists primarily of revenue generated from the sale of the Company’s products. Revenue is recorded when the risk and rewards of ownership are transferred to the Company’s customers. This generally occurs when the Company’s products are shipped from its facility as title has passed. Revenue is recorded net of estimated cash discounts. The Company estimates and accrues an allowance for sales returns at the time the product is sold. To date, sales returns have not been material.
Revenue from multi-deliverable arrangements is recognized for each element on delivery of product or completion of service. A typical multi-deliverable arrangement would be the shipment of capital equipment to a customer, followed by the delivery of services or of expendable equipment, provided such delivery is both probable and substantially within the Company’s control. Revenue for each deliverable is allocated based on full list selling prices, although if none of the deliverables is disproportionately discounted relative to the overall discount, this allocation is approximated by using the actual selling price of each deliverable to the customer. The actual cost of revenue for each deliverable is recognized when the revenue for that deliverable is recognized.
Governmental Subsidies
– Incentives received from governments in the form of grants are recorded as a reduction in expense in accordance with their purpose. Grants awarded for the purpose of matching specified expenditures are not recognized until a definitive agreement has been signed by both parties; thereafter income is recognized to the extent that the related expenses have been incurred. The Company recognized
no
governmental subsidies in the
three months ended March 31,
2016
, the balance of available matching funds having been fully used by March 31, 2015, and
$164,000
in the
three months ended March 31,
2015
, which was offset against operating expenses in the statement of operations.
Stock-Based Compensation
– The Company measures the fair value of all stock-based awards to employees, including stock options, on the grant date and records the fair value of these awards, net of estimated forfeitures, to compensation expense over the service period. The fair value of awards to consultants is measured on the dates on which performance of services is completed, with interim valuations recorded at balance sheet dates while performance is in progress. The fair value of options is estimated using the Black-Scholes valuation model, and of restricted stock is based on the Company’s closing share price on the measurement date.
Change in Fair Value of Derivatives
– The Company recognizes (or recognized until the time of their settlement) its warrants with certain cash settlement provisions or with certain anti-dilution protection as derivative liabilities. Such liabilities are valued when the financial instruments are initially issued or the derivative first requires recognition and are also revalued at each reporting date, with the change in their respective fair values being recorded as a gain or loss on revaluation within other income and expenses in the statement of operations. The Company determines the fair value of those warrants for which no anti-dilution adjustment is projected prior to the expiration date using the Black-Scholes valuation model, and all other derivative liabilities using a Monte Carlo Simulation approach, with key input variables provided by management.
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 May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 will replace most of the existing revenue recognition guidance within U.S. GAAP. The core principle of this guidance is that an entity should recognize revenue for the transfer of goods or services to customers in an amount that it expects to be entitled to receive for those goods or services. In doing so, companies will be required to make certain judgments and estimates, including identifying contract performance obligations, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price among separate performance obligations. Further, ASU 2014-09 will require companies to make additional disclosures. ASU 2014-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those years, and will become effective for the Company beginning on January 1, 2017, with early adoption not permitted. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective date” (“ASU 2015-14”),which permits deferral of the effective date of ASU 2014-09 by one year, so the Company may delay adopting the standard until January 1, 2018. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations” (“ASU 2016-08”), in April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”) and in May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”). ASU 2016-08, ASU 2016-10 and ASU 2016-12 all update and clarify the guidance previously issued in ASU 2014-09 and will become effective for the Company when it adopts ASU 2014-09. ASU 2014-09, as amended, allows for
two
methods of adoption, a full retrospective method or a modified retrospective approach with the cumulative effect recognized at the date of initial application. The Company is in the process of determining both the timing and the method of adoption and its impact on the Company’s consolidated financial condition and results of operations.
In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements – Going Concern (Topic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 will add guidance to U.S. GAAP that is presently available only in auditing standards, and provide clarification of such guidance. Further, an assessment of going concern will be required at each interim reporting period (in addition to the existing auditing guideline of an annual assessment), and will require a look-forward period of one year from the date of issuance (as opposed to the existing auditing guideline of
one
year from the balance sheet date). ASU 2014-15 is effective for annual periods ending after December 15, 2016, with early adoption permitted, and will become effective for the Company for the year ending December 31, 2016, and for each interim period thereafter. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial condition or results of operations.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires the recognition of lease assets (representing the value of the right to use the property over the lease term) and lease liabilities (representing the present value of future liabilities) by lessees for those leases presently classified as operating leases (superseding the previous requirement that they be expensed over the lease term, without recognition of assets and liabilities). ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, and will become effective for the Company beginning on January 1, 2019. The Company is in the process of determining the impact on the Company’s consolidated financial condition and results of operations.
In April 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 permits entities to make an accounting policy election to account for forfeitures as they occur when recognizing the expense of share-based compensation (as opposed to the existing requirement to use estimated forfeitures), reduces the tax withholding threshold at which equity accounting is permitted for shares withheld on vesting and requires that payments by an employer when withholding shares for tax-withholding purposes be reported as financing activities within the statement of cash flows, along with guidance related to excess tax benefits. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. The Company adopted this standard effective January 1, 2016, without electing to change its existing accounting policy of accounting for forfeitures based on expected vesting, and its adoption did not have a significant impact on the Company’s consolidated financial condition or results of operations.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 3. Inventories
Inventories, net of provisions for potentially excess, obsolete or impaired goods, consisted of the following at
March 31, 2016
, and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
(in thousands)
|
Raw materials
|
$
|
303
|
|
|
$
|
630
|
|
Work in process
|
319
|
|
|
288
|
|
Finished goods
|
1,242
|
|
|
1,080
|
|
Inventories, net
|
$
|
1,864
|
|
|
$
|
1,998
|
|
NOTE 4. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill in the
three months ended March 31,
2016
, were as follows:
|
|
|
|
|
|
(in thousands)
|
Balance at January 1, 2016
|
$
|
990
|
|
Additions
|
—
|
|
Balance at March 31, 2016
|
$
|
990
|
|
Other intangible assets as of
March 31, 2016
, consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Net
Accumulated
Amortization
|
|
Intangible
Assets
|
|
|
|
(in thousands)
|
|
|
Purchased technology
|
$
|
360
|
|
|
$
|
225
|
|
|
$
|
135
|
|
Customer lists and trademarks
|
1,500
|
|
|
828
|
|
|
672
|
|
Total as of March 31, 2016
|
$
|
1,860
|
|
|
$
|
1,053
|
|
|
$
|
807
|
|
The estimated future amortization expenses by fiscal year are as follows:
|
|
|
|
|
|
(in thousands)
|
Year ending December 31,
|
|
2016 (nine months remaining)
|
$
|
316
|
|
2017
|
314
|
|
2018
|
148
|
|
2019
|
29
|
|
|
|
Total amortization
|
$
|
807
|
|
Intangible asset amortization expense was
$105,000
and
$112,000
for the
three months ended March 31,
2016
and
2015
, respectively.
NOTE 5. Long Term Obligations
On August 15, 2013, the Company issued WaferGen Biosystems (M) Sdn. Bhd. (“WGBM”), a wholly owned subsidiary in Malaysia, notes with a face value of
$6.6 million
, maturing on
August 15, 2020
(the “Malaysian Notes”), in consideration of WGBM’s cancellation of the Company’s obligations under a term loan owing to WGBM which, as of that date, had an outstanding loan balance of approximately
$5.3 million
. Under the terms of an agreement between the Company, WGBM and Malaysian Technology Development Corporation Sdn. Bhd. (“MTDC,” a major investor in WGBM’s preference shares), upon liquidation of WGBM
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(which occurred on November 26, 2013), the Malaysian Notes were divided such that the Company received notes with an aggregate principal amount of
$1.4 million
and MTDC received notes with an aggregate principal amount of
$5.2 million
(the “MTDC Notes”). The MTDC Notes were recorded using an effective interest rate of
17.39%
and are summarized as follows at
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
(in thousands)
|
MTDC Notes Payable:
|
|
|
|
Face value
|
$
|
5,200
|
|
|
$
|
5,200
|
|
Debt discount, net of accumulated amortization of $813 and $710 at March 31, 2016 and December 31, 2015, respectively
|
2,730
|
|
|
2,833
|
|
Notes payable, net of debt discount
|
$
|
2,470
|
|
|
$
|
2,367
|
|
At any time prior to the MTDC Notes’ maturity date, the Company may issue to MTDC shares of the Company’s common stock with a value, based on the average closing price in the preceding
30
days, equal to the face value of the MTDC Notes. Based on an average closing price of
$0.6590
in the
30
days preceding
March 31, 2016
, the MTDC Notes could have been settled by issuing
7,891,000
shares of the Company’s common stock.
The Company also leases equipment under
three
capital leases that expire between December 2017 and May 2018. Aggregate future minimum obligations for capital leases in effect as of
March 31, 2016
, are as follows:
|
|
|
|
|
|
Capital Leases
|
|
(in thousands)
|
Year ending March 31,
|
|
2017
|
$
|
192
|
|
2018
|
154
|
|
2019
|
5
|
|
|
|
Total minimum obligations
|
351
|
|
|
|
Amounts representing interest
|
(13
|
)
|
|
|
Present value of future minimum payments
|
338
|
|
|
|
Current portion of long term obligations
|
(182
|
)
|
|
|
Long term obligations, less current portion
|
$
|
156
|
|
NOTE 6. Preferred Stock
The Company has
10,000,000
shares of preferred stock authorized. Effective October 20, 2015, the Company designated
1,108
shares as Series 2 Convertible Preferred Stock. Each share of Series 2 Convertible Preferred Stock was convertible into
10,000
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. The Series 2 Convertible Preferred Stock has
no
voting rights and is on a par with common stock on an as-converted basis with respect to dividend rights and distributions of assets in the event of liquidation, without regard to the ownership cap.
On October 21, 2015, the Company sold
1,108
shares of Series 2 Convertible Preferred Stock in a public offering. As of
March 31, 2016
,
678
shares of Series 2 Convertible Preferred Stock issued had been converted into
6,780,000
shares of common stock and
430
shares of Series 2 Convertible Preferred Stock remained outstanding.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 7. Stock Awards
The Company has awards outstanding under
3
plans: the 2003 Incentive Stock Plan (the “2003 Plan”), the 2007 Stock Option Plan (the “2007 Plan”) and the 2008 Stock Incentive Plan (the “2008 Plan”) (collectively, the “Plans”). In addition, there are
178,000
inducement options and
50,000
inducement restricted stock units outstanding that were awarded to executive officers on August 27, 2014 and May 12, 2015, not covered by the Plans, with the same standard terms as non-qualified stock options or restricted stock units awarded under the 2008 Plan. In addition, there are
292,000
conditional options issued to the Company’s executive chairman on January 22, 2016 (the “January 2016 Conditional Award”), not presently covered by the Plans. The January 2016 Conditional Award is conditional on the Company obtaining stockholder approval to amend the 2008 Plan to authorize at least
2,000,000
additional shares. In the event of failure to receive such stockholder approval by June 30, 2016, the January 2016 Conditional Award would convert into a cash-settled stock appreciation right. Since the possibility of cash settlement remains, the January 2016 Conditional Award is presently recorded as a liability at its fair value as of March 31, 2016.
Under the 2003 Plan and 2007 Plan, incentive stock options, nonqualified stock options, restricted stock and restricted stock units could be granted. Awards vested over varying periods, as specified by the Company’s Board of Directors for each grant, and are exercisable for a maximum period of
ten
years after date of grant. Both of these plans have been frozen, resulting in no further shares being available for grant. The Company presently issues most of its awards under the 2008 Plan, initially adopted by the Company’s stockholders on June 5, 2008, and subsequently amended to authorize the issuance of additional shares of the Company’s common stock. The purpose of the 2008 Plan is to provide an incentive to retain the employment of directors, officers, consultants, advisors and employees of the Company, to attract new personnel whose training, experience and ability are considered valuable, to encourage the sense of proprietorship, and to stimulate the active interest of such persons in the Company’s development and financial success.
Under the 2008 Plan, the Company is authorized to issue incentive stock options, non-qualified stock options, restricted stock and restricted stock units. Awards that expire or are canceled generally become available for issuance again under the 2008 Plan. The number of shares of the Company’s common stock available under the 2008 Plan will be subject to adjustment in the event of a stock split, stock dividend or other extraordinary dividend, or other similar change in the Company’s common stock or capital 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), mostly under the Plans. Restricted stock grants afford the recipient the opportunity to receive shares of common stock, subject to certain terms, whereas options give them the right to purchase common stock at a set price. Both the Company’s options and restricted stock issued to employees generally have vesting restrictions that are eliminated over
three
or
four
years, although vesting may be over a shorter period, or may occur on the grant date, depending on the terms of each individual award.
A summary of stock option (including conditional options) and restricted stock transactions in the
three months ended March 31, 2016
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Restricted Stock
|
|
Shares
Available
for Grant
|
|
Number of
Options
Outstanding
|
|
Weighted
Average
Exercise
Price
|
|
Number of
Shares
Outstanding
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
|
|
(in thousands, except per share amounts)
|
|
|
Balance at January 1, 2016
|
438
|
|
|
477
|
|
|
$
|
11.43
|
|
|
451
|
|
|
$
|
3.77
|
|
Granted
|
(434
|
)
|
|
593
|
|
|
$
|
0.56
|
|
|
133
|
|
|
$
|
0.69
|
|
Forfeited
|
5
|
|
|
—
|
|
|
$
|
—
|
|
|
(5
|
)
|
|
$
|
0.95
|
|
Balance at March 31, 2016
|
9
|
|
|
1,070
|
|
|
$
|
5.26
|
|
|
579
|
|
|
$
|
3.09
|
|
No
options were exercised during the
three months ended March 31, 2016
or
2015
. The aggregate intrinsic value of options (including conditional options) outstanding and exercisable at
March 31, 2016
, was
$47,000
and
$23,000
, respectively, based on the Company’s common stock closing price of
$0.64
. 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 the options (including conditional options) awarded in the
three months ended March 31, 2016
and
2015
, was estimated to be
$0.41
and
$2.38
, respectively, using a grant date closing stock price of
$0.56
and
$3.19
on the award dates in
2016
and
2015
, respectively, and based on the following assumptions:
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Risk-free interest rate
|
1.23% - 1.40%
|
|
|
1.25
|
%
|
Expected remaining term
|
3.50 - 4.50 Years
|
|
|
3.55 Years
|
|
Expected volatility
|
110.45% - 111.44%
|
|
|
119.36
|
%
|
Dividend yield
|
—
|
%
|
|
—
|
%
|
The amounts expensed for equity-classified stock-based compensation totaled
$264,000
and
$746,000
for the
three months ended March 31,
2016
and
2015
, respectively, and for liability-classified stock-based compensation totaled
$132,000
and nil for the
three months ended March 31, 2016
and
2015
, respectively.
At
March 31, 2016
, the total stock-based compensation cost not yet recognized, net of estimated forfeitures, was
$1,450,000
. This cost is expected to be recognized over an estimated weighted average amortization period of
1.89
years.
No
amounts related to stock-based compensation costs have been capitalized. The tax benefit and the resulting effect on cash flows from operating and financing activities related to stock-based compensation costs were not recognized as the Company currently provides a full valuation allowance for all of its related deferred taxes.
NOTE 8. Warrants
A summary of outstanding common stock warrants as of
March 31, 2016
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Into Which
|
|
Total Warrants
|
|
Warrants Recorded
|
|
Exercise
|
|
Expiration
|
Warrants are Convertible
|
|
Outstanding
|
|
as Liabilities
|
|
Price
|
|
Date
|
|
|
(in thousands, except per share amounts)
|
|
|
Common stock
|
|
17,250
|
|
|
—
|
|
|
$
|
1.44
|
|
|
October 2020
|
Common stock
|
|
450
|
|
|
—
|
|
|
$
|
1.44
|
|
|
October 2018
|
Common stock
|
|
4,600
|
|
|
—
|
|
|
$
|
5.00
|
|
|
August 2019
|
Common stock
|
|
120
|
|
|
—
|
|
|
$
|
6.25
|
|
|
August 2017
|
Common stock
|
|
613
|
|
|
111
|
|
|
$
|
26.00
|
|
|
August and September 2018
|
Total
|
|
23,033
|
|
|
111
|
|
|
|
|
|
|
In addition, there are
25.88
unit warrants outstanding, which expire in August and September 2018,
0.35
of which are recorded as liabilities, each entitling the holder to purchase, for
$50,000
,
2,500
shares of common stock and
1,250
warrants to purchase
one
share of common stock at an exercise price of
$26.00
, expiring in August and September 2018.
The Company records warrants and unit warrants with certain anti-dilution protection or certain cash settlement provisions as liabilities, with the estimated fair value of those warrants for which
no
anti-dilution adjustment is projected prior to the expiration date being calculated using the Black-Scholes valuation model, with all others being calculated using a Monte Carlo Simulation approach, using key input variables provided by management, at each reporting date. Changes in fair value are recorded as gains or losses on revaluation in non-operating income (expense).
The aggregate fair value of those warrants and unit warrants accounted for as liabilities as of
March 31, 2016
and
2015
, was estimated to be
$2,000
and
$190,000
, respectively, using a closing stock price of
$0.64
and
$4.53
, respectively, and based on the following assumptions:
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
|
|
|
|
|
|
|
|
March 31, 2016
|
|
March 31, 2015
|
Risk-free interest rate
|
0.75% - 0.76%
|
|
|
0.91% - 0.93%
|
|
Expected remaining term
|
2.17 - 2.25 Years
|
|
|
3.07 - 3.15 Years
|
|
Expected volatility
|
104.57% - 105.89%
|
|
|
112.92% - 113.14%
|
|
Dividend yield
|
—
|
%
|
|
—
|
%
|
The aggregate fair value of such warrants and unit warrants at
December 31, 2015
and
2014
, was estimated to be
$4,000
and
$126,000
, respectively. During the
three months ended March 31, 2016
, the decrease in the fair value of the warrant derivative liability of
$2,000
was recorded as a revaluation gain. During the
three months ended March 31, 2015
, the increase in the fair value of the warrant derivative liability of
$64,000
was recorded as a revaluation loss (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”). Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”). The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity to identify transactions that are not orderly.
The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The three hierarchy levels are defined as follows:
Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;
Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The following tables present the Company’s liabilities that are measured at fair value on a recurring basis at
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
March 31, 2016
|
|
|
(in thousands)
|
|
|
Recurring Financial Liabilities:
|
|
|
|
|
|
|
|
Warrant derivative liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Contingent earn-out payments
|
—
|
|
|
—
|
|
|
45
|
|
|
45
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
47
|
|
|
$
|
47
|
|
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
December 31, 2015
|
|
|
(in thousands)
|
|
|
Recurring Financial Liabilities:
|
|
|
|
|
|
|
|
Warrant derivative liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
4
|
|
Contingent earn-out payments
|
—
|
|
|
—
|
|
|
44
|
|
|
44
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
48
|
|
|
$
|
48
|
|
The following tables present a reconciliation of all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the
three months ended March 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
Derivatives
|
|
Contingent
Earn-out
Payments
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Balance at January 1, 2016
|
$
|
4
|
|
|
$
|
44
|
|
|
$
|
48
|
|
Issuances
|
—
|
|
|
—
|
|
|
—
|
|
Gain on revaluation of warrant derivative liabilities, net
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
Change in contingent earn-out adjustment included in interest expense
|
—
|
|
|
1
|
|
|
1
|
|
Settlements
|
—
|
|
|
—
|
|
|
—
|
|
Balance at March 31, 2016
|
$
|
2
|
|
|
$
|
45
|
|
|
$
|
47
|
|
Total gains (losses) included in other income and expenses attributable to liabilities still held as of March 31, 2016
|
$
|
2
|
|
|
$
|
(1
|
)
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
Derivatives
|
|
Contingent
Earn-out
Payments
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Balance at January 1, 2015
|
$
|
126
|
|
|
$
|
279
|
|
|
$
|
405
|
|
Issuances
|
—
|
|
|
—
|
|
|
—
|
|
Loss on revaluation of warrant derivative liabilities, net
|
64
|
|
|
—
|
|
|
64
|
|
Change in contingent earn-out adjustment included in interest expense
|
—
|
|
|
12
|
|
|
12
|
|
Settlements
|
—
|
|
|
—
|
|
|
—
|
|
Balance at March 31, 2015
|
$
|
190
|
|
|
$
|
291
|
|
|
$
|
481
|
|
Total gains (losses) included in other income and expenses attributable to liabilities still held as of March 31, 2015
|
$
|
(64
|
)
|
|
$
|
(12
|
)
|
|
$
|
(76
|
)
|
The liability for contingent earn-out payments arises from the Company’s requirement to pay IntegenX Inc. (“IntegenX”) a percentage of revenues of the product line that the Company acquired from IntegenX in January 2014 (the “Apollo Business”), on a sliding scale up to
20%
, should certain revenue targets be achieved in 2014, 2015 and 2016. The fair value of the acquisition earn-out contingencies is determined using a modeling technique based on significant unobservable inputs calculated using a probability-weighted revenue approach. At
December 31, 2014
, the fair value was estimated using future annual revenues ranging from
$3.4 million
to
$7.7 million
and a discount rate of
14%
. At
March 31, 2015
, the annual revenue estimates were unchanged from the estimates at December 31, 2014, the liability increasing due to a reduction in the amount of discount, which was expensed as interest. At
December 31, 2015
, the estimate of fair value was updated using future annual revenue ranging from
$3.1 million
to
$5.0 million
and a discount rate of
14%
. At
March 31, 2016
, the annual revenue estimates are unchanged from the estimates at December 31, 2015, the liability increasing due to a reduction in the amount of discount, which was expensed as interest.
Assumptions used in evaluating the warrant derivative liabilities are discussed in Note 8. The principal assumptions used, and their impact on valuations, are as follows:
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Risk-Free Interest Rate.
This is the U.S. Treasury rate for the measurement date having a term equal to the weighted average expected remaining term of the instrument. An increase in the risk-free interest rate will increase the fair value and the associated derivative liability.
Expected Remaining Term.
This is the period of time over which the instrument is expected to remain outstanding and is based on management’s estimate, taking into consideration the remaining contractual life, historical experience and the possibility of liquidation. An increase in the expected remaining term will increase the fair value and the associated derivative liability.
Expected Volatility.
This is a measure of the amount by which the Company’s common stock price has fluctuated or is expected to fluctuate. The Company applies equal weighting to the Company’s own historic volatility and the historic volatility of a group of publicly traded companies over the retrospective period corresponding to the expected remaining term of the instrument on the measurement date. The Company applies a reduced weighting to its own historic volatility during the period prior to August 27, 2013, when it was highly leveraged. The group of publicly traded companies is selected from the same industry or market index, with extra weighting attached to those companies most similar in terms of business activity, size and financial leverage. An increase in the expected volatility will increase the fair value and the associated derivative liability.
Dividend Yield.
The Company has not made any dividend payments and does not plan to pay dividends in the foreseeable future. An increase in the dividend yield will decrease the fair value and the associated derivative liability.
There were no transfers between Level 1, Level 2 and Level 3 of the fair value hierarchy during the
three months ended March 31, 2016
or
2015
.
NOTE 10. Net Loss Per Share
Basic and diluted net loss per share are shown on the statement of operations.
No adjustment has been made to the net loss for charges related to MTDC Notes, 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 2 Convertible Preferred Stock and MTDC Notes were excluded from the computation of diluted net loss per share attributable to holders of common stock as they had antidilutive effects for the
three months ended March 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
Common share equivalents issuable upon exercise of common stock options
|
|
57
|
|
|
41
|
|
Shares issuable upon vesting of restricted stock
|
|
572
|
|
|
248
|
|
Shares issuable upon conversion of Series 2 Convertible Preferred Stock
|
|
4,300
|
|
|
—
|
|
Shares issuable upon conversion of MTDC Notes
|
|
7,891
|
|
|
1,157
|
|
Total common share equivalents excluded from denominator for diluted earnings per share computation
|
|
12,820
|
|
|
1,446
|
|
NOTE 11. Concentrations
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash in commercial banks. Accounts in the United States are secured by the Federal Deposit Insurance Corporation. Accounts in Luxembourg are similarly guaranteed. The Company’s total deposits at commercial banks usually exceed the balances insured.
The Company generally requires no collateral from its customers.
No
provision was made for doubtful accounts at
March 31, 2016
, or December 31, 2015.
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Customers accounting for more than
10%
of total revenues during either the
three
months ended
March 31, 2016
or
2015
, as well as revenues in the corresponding period, are tabulated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
|
(in thousands, except percentages)
|
Customer A
|
$
|
275
|
|
|
14
|
%
|
|
$
|
—
|
|
|
—
|
%
|
Customer B
|
$
|
223
|
|
|
12
|
%
|
|
$
|
209
|
|
|
18
|
%
|
Customer C
|
$
|
217
|
|
|
11
|
%
|
|
$
|
—
|
|
|
—
|
%
|
Customer D
|
$
|
42
|
|
|
2
|
%
|
|
$
|
125
|
|
|
11
|
%
|
NOTE 12. Contingencies
From time to time the Company may be involved in claims arising in connection with its business. Based on information currently available, the Company believes that the amount, or range, of reasonably possible losses in connection with any pending actions against it in excess of established reserves, in the aggregate, not to be material to its consolidated financial condition or cash flows. However, losses may be material to the Company’s operating results for any particular future period, depending on the level of income or loss for such period.