Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2014
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission file number: 000-53252
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WaferGen Bio-systems, Inc.
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(Exact Name of Registrant as Specified in its Charter)
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Nevada
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90-0416683
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(State or other jurisdiction of incorporation or organization)
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(IRS Employer Identification No.)
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7400 Paseo Padre Parkway, Fremont, CA
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94555
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(Address of principal executive offices)
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(Zip Code)
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(510) 651-4450
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(Registrant’s telephone number, including area code)
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Securities registered under Section 12(b) of the Exchange Act:
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Title of each class: None
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Name of each exchange on which registered: None
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Securities registered under Section 12(g) of the Exchange Act:
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Common stock, $0.001 par value per share
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(Title of Class)
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ¨
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Accelerated filer ¨
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Non-accelerated filer ¨ (Do not check if a smaller reporting company)
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Smaller reporting company þ
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of June 30, 2014 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of voting and nonvoting common equity held by non-affiliates of the registrant was $11,270,838. As of that date, 901,667 shares of the registrant’s common stock, $0.001 par value per share, were held by non-affiliates. For purposes of this information, the outstanding shares of common stock that were held by directors and executive officers of the registrant were deemed to be shares of common stock held by affiliates at that date. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 16, 2014, the registrant had a total of 5,659,768 shares of common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days after the end of the fiscal year ended December 31, 2014. Portions of such proxy statement are incorporated by reference into Part III of this Form 10-K.
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PART I
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PART II
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PART III
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PART IV
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Information included in this Form 10-K may contain forward-looking statements. Forward-looking statements relate to future events or our future financial performance. These forward-looking statements include but are not limited to our plans for sales growth and expectations of gross margin, expenses, new product introduction, integration and potential benefits of our recent business acquisition, and our liquidity and capital needs. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. These statements are only predictions. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause our customers’ or our industry’s actual results, levels of activity, performance or achievements expressed or implied by these forward-looking statements, to differ. “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as other sections in this report, discuss some of the factors that could contribute to these differences.
The forward-looking statements made in this report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
This report also contains market data related to our business and industry. These market data include projections that are based on a number of assumptions. If these assumptions turn out to be incorrect, actual results may differ from the projections based on these assumptions. As a result, our markets may not grow at the rates projected by these data, or at all. The failure of these markets to grow at these projected rates may have a material adverse effect on our business, results of operations, financial condition and the market price of our common stock.
As used in this Annual Report on Form 10-K, unless the context otherwise requires or where otherwise indicated, the terms “WaferGen,” the “Company,” “we,” “our” and “us” refer to WaferGen Bio-systems, Inc. and its subsidiaries, except where it is made clear that the term means only the parent company.
PART I
Overview
Since we commenced operations in 2003, we have been engaged in the development of systems for gene expression quantification, genotyping and stem cell research. Since 2008, our primary focus has been on the development, manufacture and marketing of our SmartChip System, a genetic analysis platform used for profiling and validating molecular biomarkers in the life sciences and pharmaceutical drug discovery industries.
Our SmartChip 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. Many scientists believe that much of the work to seek new therapeutic solutions will be directed at understanding the expression level of key relevant segments of DNA1 (i.e. genes and other regulatory elements), as well as the changes in their sequence (i.e. mutations such as single nucleotide polymorphisms (“SNPs”)). Gene expression is fundamental to the understanding of many disease processes and hence, drug efficacy. For example, in the field of oncology (cancer treatment), greater understanding of gene expression in certain types of cancerous cells has led to the discovery of specific disease biomarkers that will allow clinicians to provide more accurate diagnosis, prognosis and treatment options for their patients. Increasingly, researchers are focusing their attention on studying physiological phenomena at the molecular level and are consequently committing their research budgets to acquiring research tools that help them develop personalized therapies.
We are primarily focused on marketing a flexible, open format genetic analysis system, the WaferGen SmartChip System, which provides a range of high throughput capabilities including mRNA, microRNA and lncRNA expression level measurement, as well as SNP genotyping. In August 2010, we formally launched our first generation SmartChip 5K System, which was an innovative real-time polymerase chain reaction (“real-time PCR”)2 tool enabling scientists to study thousands of genes simultaneously clustered in gene specific pathways. The results of such studies are potentially leading to the discovery and validation of clinically relevant disease signatures. We believe that the SmartChip System is well suited for the large and growing genomics markets, including for researchers seeking to confirm and expand on discoveries made with the growing use of next-generation sequencing3 (“NGS”). In July 2012, we launched the SmartChip MyDesign System, which is the second-generation instrument with significantly upgraded capabilities. First, the new system allows customers to dispense their own assays into a SmartChip, which gives them much greater flexibility and faster experiment turnaround time. Second, we have enabled SNP genotyping on the SmartChip by validating appropriate chemistries and supplying the requisite software. The SmartChip System’s high density, nanoliter-scale format can provide throughput levels that facilitate the development of life science clinical research solutions at a fraction of the time and cost currently possible with existing competing systems.
Recently, our R&D efforts have been concentrated on the development of Smart-Chip-based solutions for Single Cell Genomics. Most biological measurements to date have been performed on a population of cells or tissues. Such studies lack the ability to discriminate critical events occurring at an individual cell level and hence, would report results that reflect an average for the population under investigation. However, diseases such as cancer or diabetes start from a single cell that has acquired a deleterious mutation. Furthermore, single cell analysis has already resulted in the identification of new cell types in neuronal and immune cell populations. Identifying and understanding such rare events amidst a population of normal cells is the challenge that SmartChip-based single cell analysis aims to solve.
The SmartChip, along with the ability to dispense nanoliter volumes (using the MultiSample NanoDispenser (“MSND”)) into these wells, makes this an ideal vehicle for isolating and processing thousands of single cells for RNA-seq and/or qPCR
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DNA (Deoxyribonucleic acid) – A polymeric molecule consisting of deoxyribonucleotide building blocks that in a double-stranded helical form is the genetic material of most organisms.
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Polymerase Chain Reaction (PCR) – PCR is an enzymatic process designed to increase the number of copies of DNA for easier detection. Real-time PCR chemistries allow for monitoring a PCR reaction throughout its phases by collecting continuous data points as the reaction progresses. The polymerase enzyme uses an initial sample DNA strand as a template and uses it to synthesize the a new strand, which sets in motion a chain reaction in which the DNA template is exponentially amplified, generating millions or more copies of the DNA target. Real-time PCR simultaneously amplifies and quantifies (as an absolute number of copies or relative amount) a targeted DNA molecule in real time after each amplification cycle.
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Next Generation Sequencing – Sequencing is the determination of the order of nucleotide building blocks that make up the primary structure in DNA molecules. Early determination methods were discovered in the 1970s and 1980s. NGS refers to more current automated methods that rely upon sequencing-by-synthesis approaches, enabling an easier and considerably faster analysis.
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based applications. The physical separation of wells in the SmartChip affords better protection against cross-contamination than the emulsion-based systems that are pursued by our competitors.
Previously, our R&D efforts were concentrated on the commercialization of the SmartChip Target Enrichment™ (“TE”) System. This new product has been designed to perform a critical sample preparation step prior to targeted NGS. The targeted sequencing is aimed at deciphering the nucleic acid sequence of a certain portion of the genome (the targets), for example a set of genes of interest, as opposed to the whole genome. In order to limit the sequencing to the targets of interest, scientists are using various techniques including PCR to treat the nucleic acid samples prior to sequencing. WaferGen is using its SmartChip consumable to conduct massively parallel individual PCR reactions for TE. This approach offers certain advantages over existing chemistries and platforms. Although these advantages could help WaferGen successfully compete in the high potential emerging market for clinical sequencing, the Company faces considerable competition, including the competing sample preparation kits from NGS instrument manufacturers such as Illumina, Inc. (“Illumina”) and Life Technologies Corporation (“LIFE”).
In January 2014, we acquired IntegenX Inc.’s product line used in connection with developing, manufacturing, marketing and selling instruments and reagents relating to library preparation for next generation sequencing, including the Apollo 324™ instrument and the PrepX™ reagents. The fully automated Apollo 324™ library prep solution has been a market leader in the low to medium throughput NGS market segment with an expanding installed base, serving a diverse set of clients from university research labs, pharmaceutical and agricultural companies, to diagnostic clinical labs. We believe customers favor the Apollo 324™ library prep solution for its reliability, turnaround and hands-on time, as well as sample quantity input requirement. We intend to build upon its success with innovative new applications for this system, as well as with integrated products that include the SmartChip TE platform.
WaferGen employs a business model that primarily generates revenue from the sale of instruments (i.e. the SmartChip System™ and Apollo 324™ instruments) and a recurring revenue stream from the sale of consumables (i.e. the SmartChip Panels™ and PrepX™ reagents), similar to the “razor and razor blade” business model.
Wafergen, Inc. was incorporated in the state of Delaware in October 2002. On May 31, 2007, Wafergen, Inc. was acquired by WaferGen Bio-systems, Inc., a Nevada corporation. In the transaction, Wafergen, Inc. merged with a subsidiary of WaferGen Bio-systems, Inc. and became a wholly owned subsidiary of WaferGen Bio-systems, Inc.
Products
Gene Expression Technology Overview
Genes are segments of genomic DNA that encode discreet information that ultimately help synthesize individual biomolecules/proteins. This information is read when the two strands of DNA “unzip” and the series of bases representing a gene are copied into the related nucleic acid RNA4. Like DNA, RNA also has four types of bases that can bond as a pair with four types of bases in the DNA strand based on pairing rules that allow the DNA sequence of the gene to encode a specific RNA sequence. This decoding of DNA genes into RNA is called transcription. The transcribed RNA strand then separates from the DNA strand and acts either in a regulatory fashion to modulate cellular processes or as a template for the cell’s machinery to construct functional proteins. As gene expression (including translation into functional proteins) is dependent upon RNA levels present in the cell, interrogation of RNA levels has become the most widely adopted means for quantifying this process.
One contributor to disease and dysfunction is the over- or under-expression of genes within an organism’s cells. A very complex network of genes interacts to maintain health in organisms such as humans. Although most cells contain an organism’s full set of genes, each cell, according to its function, expresses only a fraction of this set of genes in different quantities and at different times. The challenge for scientists is to delineate the associated genes’ expression patterns and their relationship to disease.
Although all humans contain the same set of genes, the actual sequence of each gene may vary from one individual to another, as well as between cells in the same individual. This phenomenon is commonly referred to as genetic variation and can have important medical consequences. Genetic variation affects disease susceptibility, including predisposition to cancer, diabetes, cardiovascular disease and Alzheimer’s disease. In addition, genetic variation may cause people to respond differently to the same drug treatment. One common form of genetic variation is a single-nucleotide polymorphism, or SNP.
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RNA (Ribonucleic acid) – A polymeric molecule consisting of ribonucleotide building blocks. The three major types in cells are ribosomal RNA (rRNA), transfer RNA (tRNA), and messenger RNA (mRNA), each of which performs an essential role in protein synthesis. RNAi ‘s are small RNA molecules that help regulate turning genes on and off.
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A SNP is a variation in a single “letter” at a specific position in the DNA sequence that differs from a reference sequence for a population. While in some cases a single SNP will be responsible for medically important effects, it is now believed that combinations of SNPs may contribute to the development of most common diseases. Since there are generally millions of SNPs in an individual, it is important to investigate many SNPs simultaneously in order to discover medically valuable information.
Gene expression is used to provide information on the more than 30,000 genes in the human genome. Life science researchers use gene expression profiling to study the differences in expression of genes in a normal versus a disease state. For example, a comparison of gene expression profile of breast cancer patients to those of normal patients will provide an indication of genes that are expressed differentially between the two populations. Such differences can lead to identifications of genes that may be indicative of a disease state. Furthermore, such differences can help physicians make treatment decisions. Researchers are conducting studies to identify single or multiple genes that play a role in a particular disease.
There are three primary technologies used to study gene expression: sequencing, microarrays and real-time PCR.
RNA Sequencing is an evolving NGS technique that has emerged as a method for evaluating global gene expression patterns. NGS typically requires time and cost intensive library preparation, sequencing and data analysis and the results are not always quantitative. As a result, many researchers are verifying their NGS finding using real-time PCR. Furthermore, subsequent to sequencing based discovery and real-time PCR validation, interrogation of the expression pattern of identified target genes in large numbers of samples requires a more time and cost effective solution.
Microarrays consist of miniscule amounts of hundreds or thousands of gene sequences that are chemically attached to a surface, such as a microchip, a glass slide, or a bead. When a gene is activated in a cell, cellular machinery transcribes the gene’s DNA sequence into messenger RNA (“mRNA”). To determine which genes are turned on and which are turned off in a given cell, the mRNA molecules present in that cell are collected and labeled by attaching a fluorescent dye. The labeled mRNA is placed onto a DNA microarray slide. The mRNA that was present in the cell, together with its fluorescent tag, will then hybridize—or bind—to its complementary DNA on the microarray, which can then be measured using a scanner.
However, microarrays have limited sensitivity, accuracy and dynamic range. Consequently, one obtains only a partial view of the expression profile when utilizing microarrays due to the limited sensitivity. The overlooked genes may be important in a particular disease state. Furthermore, as a result of limitations in specificity and accuracy, the discovery of genes identified by microarray technology requires further validation using real-time PCR.
Real-time PCR represents the most sensitive and accurate method to measure gene expression. PCR is an enzymatic process in which a strand of DNA is copied multiple times, or amplified, so that it can be more readily detected and analyzed. The vast majority of PCR methods use thermal cycling, i.e., alternately heating and cooling the sample to a defined series of temperature steps. These thermal cycling steps are necessary to physically separate the strands in a DNA double helix (at high temperatures), which are then used as the template during DNA synthesis (at lower temperatures) by the DNA polymerase enzyme to selectively amplify the target DNA.
Traditional PCR merely increases the number of DNA copies for easier detection. Real-time PCR permits quantitative analysis, rather than just a qualitative yes/no as to the presence of a gene. Real-time PCR can produce an absolute measurement, such as number of copies of mRNA per nanoliter of sample, or a relative measurement in comparison to expression of the same gene in another sample. Real-time PCR chemistries allow for the detection of amplicon amounts in the exponential phase of these reactions where the amount of product can be extrapolated to accurately determine the amount of target in the sample prior to amplification.
Traditional real-time PCR does not measure thousands of genes simultaneously (like microarray analysis), resulting in limited throughput and relatively high cost, making it unfeasible for whole genome analysis or for very high throughput studies. Thus, in practice, researchers typically first use microarray or RNA Sequencing to identify which genes are over- or under-expressed in the whole genome and then apply real-time PCR to a specific set of those genes to accurately quantify gene expression. The process is referred to as discovery and validation.
MicroRNA molecules are small non-protein-coding single-stranded RNA molecules of 21-23 nucleotides in length that function as negative regulators of gene expression by targeting specific mRNA molecules. This either inhibits translation or promotes mRNA degradation. We believe cancer diagnosis, prognosis, and treatment are important potential clinical applications of microRNA profiling.
SmartChip System
Our SmartChip System provides a suite of gene expression and genome analysis technologies enabling both biomarker discovery and validation on a single platform with the sensitivity and accuracy of real-time PCR. WaferGen’s SmartChip Real-Time PCR System consists of two instrumentation components: a SmartChip MSND for applying sample, assay and reaction mix to the SmartChip Panels, and a SmartChip Cycler for thermal cycling and collecting data from the real-time PCR assays. For large studies, our SmartChips are provided with sub-nanoliter (one-billionth of a liter) oligonucleotide5 reagents of the customer’s choosing pre-loaded in the wells. For smaller projects, the user has the flexibility to purchase empty SmartChips and both samples and assays can be dispensed into the SmartChips at the customer’s site using the MSND. Sub-microliter (one-millionth of a liter) dispensing of samples into a 5,184-well chip enables high throughput real-time PCR amplification of pathway-based gene discovery. Our SmartChip Panels are designed with evaporation control measures that allow for the use of nanoliter volumes, thermal cycling and temperature control. Our software system also analyzes the high throughput data after the completion of the real-time PCR analysis. The user friendly, content-ready SmartChip System is designed to accept samples out of the box, incorporating many of the necessary substrates and chemicals.
The SmartChip System is engineered to deliver superior performance with the combination of high sensitivity and high throughput on a single chip, enabling scientists to broadly view gene expression patterns over a large dynamic range. The genetic analysis using the SmartChip System is expected to require one day versus what would currently take days to weeks to discover the gene expression signature with microarrays and then verify the signature with real time PCR utilizing existing genetic analysis systems. As more clinical studies are carried out using validated gene sets, we believe the market will require, and demand, higher throughput solutions to process large numbers of clinical samples. Today’s solutions typically allow only a few patients’ samples per chip. We offer a throughput capability that allows hundreds of samples on a single chip.
We believe our SmartChip System is also capable of saving time compared to existing technologies. Research analyzing the whole genome utilizing currently available real-time PCR technology takes weeks to months due to multiple plates and hundreds of pipetting steps required. Our SmartChip System has the ability to quantitatively analyze the gene specific pathways or whole genome with the performance of real-time PCR technology in as short as a single day, and represents a significant advancement. In addition, our development of the SmartChip System seeks to allow 5,184 data points per chip, which could enable a large number of reactions to run in parallel, thus addressing unmet needs of the clinical trial market, compared to today’s leading technologies, which are limited in throughput to 96 wells, 384 wells and 1,536 wells. Competitors in the market place that offer high throughput, like the Fluidigm Biomark, which offers a maximum throughput of 9,200 assays per chip, still limits the validation market by offering products that can only run up to 96 assays and samples on a single chip.
SmartChip System Capabilities
Our SmartChip System is an integrated instrument and software system capable of dispensing 100nl reactions into the 5,184-well SmartChip, thermal cycling, real-time detection and primary data analysis, and provides the following capabilities:
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Open-Platform Custom Assays (MyDesign). Our SmartChip System was upgraded in 2012 to provide the capability to customize our open platform panels for gene expression and genotyping studies according to the researcher’s specific needs. The customer has the flexibility to dispense both assays and samples into the 5,184 nanowell panels in numerous configurations. The system has access to millions of predesigned PCR assays for the detection of human, mouse and rat genes. Applications include: validation of genomic next-generation sequencing, RNA-Seq and Chip-Seq data; validation of microarray results; and expansion of assay panels to better understand biological systems.
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Custom SNP Genotyping Panels. Although a single SNP may be responsible for medically important effects, it is now believed that combinations of SNPs may contribute to the development of most common diseases. Our custom SNP Genotyping Panels are developed to cost-effectively investigate multiple SNP genotypes simultaneously and are customized for the required scope of the study. Genotyping clusters from single or multiple runs are visualized using our SmartChip System’s proprietary software.
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Human microRNA Panel V3. MicroRNA species have a key regulatory role in the functioning of gene expression. To evaluate these species, our microRNA Panel V3 is used to quantitatively measure the expression for the most disease-relevant 1,100 human microRNA species in quadruplicate. The panel includes pre-optimized primer pairs that have been selected using strict bioinformatics criteria to provide single-base discrimination, high sensitivity and reproducible amplification.
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Human Oncology Panel V2. Our Human Oncology Panel is used for cancer-related pathway profiling. The panel is pre-loaded with optimized real-time PCR assays in quadruplicate for each of the over 1,200 oncology-related genes.
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Human Long Non-Coding RNA-1 Panels. lncRNA-1 panels can be used for profiling “dark matter” RNAs, which are believed to be key regulators of transcription, with possible relevance to processes as diverse as cancer progression and embryonic differentiation. The panel contains over 1,700 triplicate, pre-dispensed extensively tested PCR assays to provide lncRNA validation with precision and sensitivity.
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SmartChip Target Enrichment (TE) System
The concept of the SmartChip TE System is to use the SmartChip consumable for amplifying the targets of interest via PCR and then remove the resulting amplified material for further processing prior to sequencing. The key purported advantage of our approach is that we conduct massively parallel individual PCR reactions for target enrichment, whereas other PCR-based techniques use highly multiplexed PCR, which means that they conduct hundreds, if not thousands of PCR reactions in a single tube. By having individual PCR reactions, the SmartChip TE System offers a much better controlled chemo-enzymatic process that might ultimately translate into higher quality sequencing results. This should be especially important in clinical sequencing, where assays of a high sensitivity and specificity are required. We are planning to offer multiple consumable formats of different densities (number of nano-wells), so that depending on the number of targets required for a particular study, a single sample can be dispensed over the whole chip. This approach has two advantages - first, it is easier to extract the amplified material without cross-contamination with other samples, and second, we can offer a simple and cheap single-sample dispenser, thereby reducing the customers’ barrier to purchase due to high capital investment.
SmartChip Single Cell isolation system
We are currently pursuing two approaches to deposit individual cells into the SmartChip:
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Poisson Distribution. The Poisson distribution method uses our existing products - SmartChip and MSND - in the market. In addition, software to image cells, identify wells that contain a single cell and the ability to add reagents to wells that contain single cells will be offered. The Poisson distribution method aims to process 1,000 to 2,000 individual cells per chip. Furthermore, the MSND can also be used process tens to hundreds of cells from multiple samples in the same SmartChip. Thus, the SmartChip-based single cell system will be the only system on the market that can span the gamut of hundreds to thousands of cells.
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Targeted Deposition. In this method, the real estate of the chip is maximized to isolate thousands of cells from a single sample. By this method, over 4,000 individual cells may be processed from a single chip. The software that was developed for the Poisson distribution method can be used as an independent check to ensure that reagents are dispensed only to wells that contain a single cell. To provide flexibility in throughput, multiple configurations of the SmartChip that contain 1,000 to 5,000 wells will be offered. To provide ultimate flexibility in processing individual cells from multiple samples, the MSND will be engineered to be able to recognize and deposit individual cells into the SmartChip.
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Apollo 324™ Library Preparation
In January 2014, we entered into an Asset Purchase Agreement with IntegenX Inc. (“IntegenX”), pursuant to which we acquired substantially all of the assets of its product line used in connection with developing, manufacturing, marketing and selling instruments and reagents relating to library preparation for next generation sequencing, including the Apollo 324™ instrument and the PrepX™ reagents (the “Apollo Business”). The purchase price for the Apollo Business comprised (1) a cash payment of $2.0 million, (2) a $1.25 million secured promissory note (the “IntegenX Note”), (3) up to three earn-out payments payable, if at all, in 2015, 2016 and 2017, respectively (the “Earnout”), and (4) our assumption of certain liabilities, including obligations to perform under contracts and liabilities for certain accrued but unpaid vacation for certain employees. The IntegenX Note was repaid in full in September 2014.
The Apollo 324™ System is a compact, walk-away automation platform offering DNA, RNA-Seq, and ChIP-Seq library preparation kits for analysis on popular NGS platforms from Illumina (GA, HiSeq and MiSeq), LIFE (Ion Proton and Ion Torrent PGM), and Roche (GS Junior, GS FLX and GS FLX+). The intuitive and easy-to-use PrepX™ automation protocols and reagent kits enable the set-up of a run with as little as 15 minutes of hands-on time. The user can return in about 90 minutes for sequencer-ready DNA or ChIP-Seq libraries, or about 5 hours for RNA-seq libraries. The system offers the flexibility to start a run with a single library without wasting reagents.
We expect the Apollo Business will be highly synergistic with our existing products, especially our SmartChip TE System offerings. Serving the same customer base, the two products together address a wide spectrum of customer needs in sample preparation for NGS and enable one-stop shopping for laboratories performing targeted sequencing. The fully automated Apollo 324™ library prep solution has been a market leader in the low to medium throughput NGS market segment with an expanding installed base, serving a diverse set of clients from university research labs, pharmaceutical and agricultural companies, to diagnostic clinical labs. We believe customers favor the Apollo 324™ library prep solution for its reliability, turnaround and hands-on time, as well as sample quantity input requirement. We intend to build upon its success with innovative new applications for this system, as well as with integrated products that include the SmartChip TE platform.
Market Applications of the SmartChip System
We believe the SmartChip System, with its advantages of higher throughput, lower cost, and superior sensitivity, can address the following markets:
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Biomarker Discovery and Validation. New targets for drugs can be identified through the analysis of gene profile expression (biomarkers) in diseased cells. Potential applications include cancers, arthritis, and lung diseases.
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Drug Efficacy and Optimization. Genetic analysis is being used to determine the likely toxicity (toxicogenomics) of new drugs and the likelihood of therapeutic response to a specific genetic profile (pharmacogenomics). FDA guidance6 calls for drug companies to voluntarily submit pharmacogenomic data to support their drug development programs.
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Drug Response Monitoring. Patient outcomes can be improved by evaluation of a proposed drug’s potency and specificity in order to determine individualized patient dosing, thereby decreasing adverse drug reactions, and improving drug efficacy.
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Detection of Rare Mutations. The Cancer Genome Project is using the human genome sequence and high throughput mutation detection techniques to identify somatically acquired7 sequence variants/mutations and hence identify genes critical in the development of human cancers.
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Biomarker Discovery and Validation: Gene expression patterns (biomarkers) related to specific diseases are becoming increasingly important in drug development. Comparison of gene expression patterns between normal and diseased patients or expression profiles in the presence or absence of drugs leads to discovery of genes or a set of genes that can be used in drug development. This requires monitoring of tens, hundreds or thousands of mRNAs in large numbers. A typical genetic analysis currently involves the use of microarrays to identify genes, which are either over-expressed or under-expressed in a small subset of patients. After detailed bioinformatics analysis, a number of differentially expressed genes (two to 200) are evaluated using real-time PCR in a different subset of patients (50 to 100). The differentially expressed genes in this patient group are then validated using a larger patient group.
This sequential process may take from many months to a few years to complete using currently available techniques. The limitation in today’s gene expression studies is the use of microarrays as a starting point for discovery, which only provides a partial glimpse of the expression profile. Real-time PCR techniques, which offer significantly increased sensitivity, are limited in throughput and are cost prohibitive for whole genome analysis. Biomarker investigation requires multiples of such analyses to confirm discovery.
Drug Efficacy and Optimization: Clinical trials are the most expensive phase for pharmaceutical drug development. The use of gene expression and genotyping is becoming critical to identify a safe drug (toxicogenomics) for the right patient population (pharmacogenomics). Once a set of genes (biomarker) is identified, they are used in numerous samples in clinical
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FDA News Release - March 22, 2005 – issued a final guidance titled “Pharmacogenomic Data Submissions.”
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Mutations rising in individual cells in the body outside the “germ-line” (sperm and egg) cells that created the individual, and hence not present in all of a person’s cells.
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trials for pattern recognition, toxicity profiling and patient selection. Similarly, locations of SNPs involved in disease variation and metabolism are also being utilized in clinical trials to understand disease predisposition, requiring thousands of samples to be analyzed.
In its pharmacogenomic data submissions guidance referred to above, the FDA has asked for voluntary data submission utilizing these genetic approaches in clinical trials. This has created a need for reliable, high throughput, cost-effective technologies. Today’s hybridization-based techniques cannot process more than 24 samples at a time. Thus, for a clinical trial of 1,000 patients, one would need to use at least 40 chips. Established real time PCR instrument suppliers typically process 96 to 1,536 data points. Our SmartChip System has the ability to study 5,184 assays on a single chip, and thus offers a marked increase in the number of samples that can be evaluated in a single run. This format also enables investigators to interrogate the expression of a large panel of genes of interest with a limited amount of the biological sample.
Drug Response Monitoring: In addition to studying gene expression, genotyping measures genetic variation in the DNA. Sometimes it is not a single variation but the combination of these sequence differences that may lead to a disease state or a response to a specific therapy. For this reason, researchers look at patterns of these variations in a large number of healthy and affected patients in order to correlate SNPs with a specific disease. Large-scale genotyping studies are being conducted in various genome centers around the world, driven by available research funds, resulting in the greater demand for cost effective high throughput solutions.
Detection of Rare Mutations: The Cancer Genome Project’s DNA sequencing of patients’ tumors is underway and is rapidly defining cancer-causing mutations. Today, this is accomplished by using hybridization approaches which are unable to detect rare somatic mutations. Such techniques require the use of more sensitive methods like PCR and require genotyping of many samples (50 to 500). WaferGen uses allele-specific PCR with the SmartChip System to enable genotyping at multiple sites in multiple samples, as well as to provide a robust solution for detecting rare mutations. Allele-selective PCR is able to reliably detect SNPs (germ-line) as well as minority (somatic) mutations at sensitivity range of 100 to 10,000 mutations.
Future Applications – From Research to Diagnostics: New biomarkers for gene expression and genotyping are eventually expected to become essential for practicing physicians to identify the right drug for the right patients and lead to new ways of diagnosing and monitoring diseases. Biomarkers and platforms that are being used in clinical trials for a particular therapy are expected to become standard for molecular diagnostics. This market is still in its early development.
Competition
We believe the industry leaders in the markets in which WaferGen competes are LIFE, Fluidigm Corporation, Illumina, Agilent Technologies, Inc. and PerkinElmer, Inc. Other companies known to be currently serving the genetic analysis market include Affymetrix, Inc., GE Healthcare (a business segment of General Electric Company), Bio-Rad Laboratories, Inc., Eppendorf AG, Beckman Coulter, Inc., Luminex Corporation, Cepheid, Pacific Biosciences of California, Inc., NanoString Technologies, Inc., Sequenom, Inc., RainDance Technologies, Inc., Qiagen N.V., Biometra Biomedizinische Analytik GmbH, Enzo Biochem, Inc., Idaho Technologies, Inc. and the Roche family of companies. The marketplace for gene expression technologies is highly competitive, with many of the major players already controlling significant market share, many of which have significantly greater financial, technological and other resources than we do. Illumina is the leader in microarrays and LIFE is the market leader for real-time PCR. These two companies also have a commanding market share in NGS. We believe gene expression is a growing market and this market is driven by the need for real-time PCR performance for discovery, and a higher throughput platform for validation, to overcome the limitations of microarrays and real time PCR technologies that are currently used for discovery and validation respectively. WaferGen’s SmartChip Real Time PCR System is presently the only platform that offers a single solution for both biomarker discovery and validation with low running costs, simplified workflow and fast results. Our competitors could compete with us by developing new products similar to our SmartChip System. Even though we believe that we have created a unique solution, this does not mean that our competitors will not develop effective products to compete with our products.
Sales and Marketing
In July 2012, we announced the launch of an open format product offering for our SmartChip System which allows customers to dispense their own assays and samples into SmartChips in a variety of configurations, thus enabling an easy and rapid design of new experiments. We decided to invest in scientific resources focused on a strategy to engage an array of key opinion leaders in our target market, enabling the profiling and validation of high-value genomic targets. We also ramped up our investment in sales and marketing activities at that time.
With the advent of next-generation sequencing into the life science marketplace in 2007, there has been a dramatic increase in the amount of genomic content that is available to researchers beyond what other genomic technologies have generated. However, there is an equally dramatic and rapidly growing unmet need to validate and confirm the results of this sequencing information to find clinically relevant biomarkers. In particular, the data from RNA sequencing experiments, in which researchers are evaluating gene expression levels, is well suited to the high throughput validation of the SmartChip platform. This ability to accurately make quantitative genome measurements is an integral tool in enabling researchers to verify the results coming from next-generation sequencers. This content creates a larger, longer term opportunity for us as we significantly increase the ability of researchers to validate high value genomic targets for their ultimate use in developing new and improved drugs and diagnostic tests.
Despite the increased investment, WaferGen still has limited sales and marketing resources compared to some of our competitors. We will need to maintain substantial investments in our sales and marketing infrastructure in order to be competitive in the marketplace (see “Risk Factors” below).
Seasonality
We do not have sufficient product history to determine seasonality with a high degree of confidence. We expect that customers’ purchasing patterns will not show significant seasonal variation, although demand for our products may be highest in the fourth quarter of the calendar year as pharmaceutical and academic customers typically spend unused budget allocations before the end of the fiscal year.
Sources and Availability of Raw Material and Principal Suppliers
The raw materials used in the manufacturing of our products are for the most part readily available from numerous sources.
Research and Development
Our research and development efforts are aimed at developing new products and new applications, improving existing products, improving product quality and reducing production costs. Our research and development expenses were approximately $6.72 million for the year ended December 31, 2014 and $5.40 million for the year ended December 31, 2013.
Intellectual Property and Other Proprietary Rights
We are pursuing an intellectual property portfolio, including filing a number of U.S. and international patent applications and in-licensing certain patents covering products, methodologies, integration and applications. We presently have four patents issued and five pending in the U.S. with respect to our SmartChip products and technologies, and a number of pending SmartChip-related patent applications worldwide. We also have one U.S. patent pending with respect to our Apollo 324™ products and technologies. In addition to our patents, we rely on trade secrets, know-how, and copyright and trademark protection. Our success may depend on our ability to protect our intellectual property rights.
Government Regulation and Environmental Matters
We are subject to a variety of federal, state and municipal environmental and safety laws based on our use of hazardous materials in both our manufacturing and research and development operations. We believe that we are in material compliance with applicable environmental laws and regulations. Compliance with environmental laws does not currently cause us to incur material costs. If we cause contamination to the environment, intentionally or unintentionally, we could be responsible for damages related to the clean-up of such contamination or individual injury caused by such contamination. We cannot predict how changes in the laws and regulations will impact how we conduct our business operations in the future or whether the costs of compliance will increase in the future.
Regulation by governmental authorities in the United States and other countries is not expected to be a significant factor in the manufacturing, labeling, distribution and marketing of our products and systems.
Employees
We have assembled a team of highly qualified scientists, engineers and business managers to support our product development and commercialization activities. Their efforts will continue to focus on expanding, improving and commercializing our core technologies. As of December 31, 2014, we had 46 regular employees, 45 of whom were employed full-time, compared to 28 regular employees as of December 31, 2013, all of whom were employed full-time. None of our employees are represented by a labor union, and we consider our employee relations to be good. We believe that our future success will depend, in part, on our continued ability to attract, hire and retain qualified personnel.
We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This discussion highlights some of the risks that may affect future operating results. These are the risks and uncertainties we believe are most important to consider. We cannot be certain that we will successfully address these risks. If we are unable to address these risks, our business may not grow, our stock price may suffer and we may be unable to stay in business. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations.
Risks Related to Our Company and Our Business
We have generated only limited sales, have a history of operating losses and we may not be able to reach profitability.
We have a history of losses and expect to continue to incur operating and net losses for the foreseeable future. We incurred a net loss of $10.7 million for the year ended December 31, 2014. As of December 31, 2014, our accumulated deficit was $91.5 million. We have not achieved operating profitability on a quarterly or annual basis.
Historically, there have been limited sales of any of our products. Our revenues were $2.2 million for the year ended December 31, 2010, $0.5 million for the year ended December 31, 2011, $0.6 million for the year ended December 31, 2012, $1.3 million for the year ended December 31, 2013 and $6.0 million for the year ended December 31, 2014, of which $2.1 million was attributable to the Apollo Business that we acquired in January 2014. We will need to significantly grow our revenues to become profitable.
We will need to raise additional capital to meet our business requirements in the future and such capital raising may be costly or difficult to obtain and could dilute current stockholders’ ownership interests.
We have incurred losses since inception and expect to continue to incur losses until we are able to significantly grow our revenues. Accordingly we may need additional financing to maintain and expand our business. Such financing may not be available on favorable terms, if at all. Any additional capital raised through the sale of equity or equity linked securities may dilute current stockholders’ ownership percentages and could also result in a decrease in the market value of our equity securities. The terms of any securities issued by us in future capital transactions may be more favorable to new investors, and may include preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect on the holders of any of our securities then outstanding.
If we are unable to obtain additional financing on a timely basis, we may have to curtail our development activities and growth plans and/or be forced to sell assets, perhaps on unfavorable terms, which would have a material adverse effect on our business, financial condition and results of operations, and ultimately could be forced to discontinue our operations and liquidate, in which event it is unlikely that stockholders would receive any distribution on their shares. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” below. Further, we may not be able to continue operating if we do not generate sufficient revenues from operations needed to stay in business.
In addition, we may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we issue, such as convertible promissory notes and warrants, which may adversely impact our financial results.
Our success depends on our ability to develop commercially successful products and on market acceptance of our new and relatively unproven technologies.
Our future is dependent upon the success of the current and future generations of one or more of the products we sell or propose to sell, including the SmartChip System and Apollo instruments. We may not possess all of the resources, capability and intellectual property rights necessary to develop and commercialize all of the products or services that may result from our technologies. Our long-term viability, growth and profitability will depend upon successful testing, approval and commercialization of the SmartChip System incorporating our technology resulting from our research and development activities. Adverse or inconclusive results in the development and testing of our products could significantly delay or ultimately preclude commercialization of our technology. Accordingly, there is only a limited basis upon which to evaluate our business and prospects. An investor in our Company should consider the challenges, expenses, and difficulties we will face as an emerging company seeking to develop and manufacture a new product in a relatively new market.
We must conduct a substantial amount of additional research and development before some of our products will be ready for sale. We currently have fewer resources available for research and development activities than many of our competitors. We may not be able to develop or launch new products in a timely manner, or at all, or they may not meet customer requirements or be of sufficient quality or at a price that enables us to compete effectively in the marketplace. Challenges frequently encountered in connection with the development or early commercialization of products and services using new and relatively unproven technologies might limit our ability to develop and successfully commercialize these products and services. In addition, we may need to enter into agreements to obtain the intellectual property rights necessary to commercialize some of our products or services, which may not be available on favorable terms, or at all.
We have a limited operating history for investors to evaluate our business.
We have had limited operations in the genetic analysis segment of the life science industry. Since we are a company with a limited operating history developing products focused on the analysis of genetic function and variation, it is difficult for potential investors to evaluate our business. Our future operations and growth will likely depend on our ability to fully develop and market our SmartChip and Apollo products and services. Our proposed operations are subject to all of the risks inherent in developing and growing a new business in light of the expenses, difficulties, complications and delays frequently encountered in connection with the development of any new business, as well as those risks that are specific to the life science industry. In evaluating us, investors should consider the delays, expenses, problems and uncertainties frequently encountered by companies developing markets for new products, services and technologies. We may never overcome these obstacles and become profitable.
Because our business depends on research and development spending levels for pharmaceutical and biotechnology companies and academic and governmental research institutions, our success and our operating results will substantially depend on these customers.
We expect that our revenues in the foreseeable future will be derived primarily from products and services provided to a relatively small number of pharmaceutical and biotechnology companies and academic, governmental and other research institutions. Our success will depend upon their demand for and use of our products and services. Our operating results may fluctuate substantially due to reductions and delays in research and development expenditures by these customers. For example, reductions in capital or operating expenditures by these customers may result in lower than expected instrumentation sales and similarly, reductions in operating expenditures by these customers could result in lower than expected sales by us.
We expect that our results of operations will fluctuate, which could cause our stock price to decline.
Our revenue is subject to fluctuations due to the timing of sales of high-value products, the impact of seasonal spending patterns, the timing and size of research projects our customers perform, changes in overall spending levels in the life sciences industry, the timing and amount of government grant funding programs and other unpredictable factors that may affect customer ordering patterns. Given the difficulty in predicting the timing and magnitude of sales for our products and services, we may experience quarter-to-quarter fluctuations in revenue and/or a sequential decline in quarterly revenue.
If revenue does not grow significantly, we will not be able to achieve and maintain profitability. Any significant delays in the commercial launch of our products, unfavorable sales trends in our existing product lines, or impacts from the other factors mentioned above could adversely affect our revenue growth or cause a sequential decline in quarterly revenues. Due to the
possibility of fluctuations in our revenue and expenses, we believe that quarterly comparisons of our results are not a good indication of our future performance. If our operating results fluctuate or do not meet the expectations of stock market analysts and investors, our stock price probably would decline.
If we lose our key personnel or are unable to attract and retain additional qualified personnel, we may be unable to achieve our goals.
We are highly dependent on our management and scientific personnel. The loss of their services could adversely impact our ability to achieve our business objectives. We compete for qualified management and scientific personnel with other life science companies, universities and research institutions, particularly those focusing on genomics. Competition for these individuals, particularly in the San Francisco Bay area, is intense, and the turnover rate can be high. Failure to attract and retain management and scientific personnel could materially adversely affect our business, financial condition and results of operations.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or detect fraud. Consequently, investors could lose confidence in our financial reporting and this may decrease the trading price of our common stock.
We must maintain effective disclosure and internal controls to provide reliable financial reports. We have been assessing our controls to identify areas that need improvement. Based on our evaluation as of December 31, 2014, we concluded that our disclosure controls and procedures were effective as of December 31, 2014, however we have identified material weaknesses in the past and may do so again in the future. Failure to maintain the improvements in our controls as necessary to maintain an effective system of such controls could harm our ability to accurately report our operating results and cause investors to lose confidence in our reported financial information. Any such loss of confidence would have a negative effect on the trading price of our common stock.
Any failure to maintain adequate disclosure and internal controls may result in restatements of our financial statements and may cause us to become subject to additional risks and uncertainties, including, among others, increased professional fees and expenses, the increased possibility of legal proceedings and review by the Securities and Exchange Commission (the “SEC”) and other regulatory bodies and could subject us to civil or criminal penalties, shareholder class actions or derivative actions. We could face monetary judgments, penalties or other sanctions that could have a material adverse effect on our business, financial condition and results of operations and could cause our stock price to decline.
Litigation or other proceedings or third-party claims of intellectual property infringement could require us to spend significant time and money and could prevent us from selling our products or services or adversely impact our stock price.
Our commercial success depends in part on our non-infringement of the patents or proprietary rights of third parties and the ability to protect our own intellectual property.
Third parties may assert that we are employing their proprietary technology without authorization even if we are not. As we enter new markets, we expect that competitors will likely assert that our products infringe their intellectual property rights as part of a business strategy to impede our successful entry into those markets. Third parties such as Life Technologies Corporation, the Roche family of companies, Biometra Biomedizinische Analytik GmbH, Bio-Rad Laboratories, Inc., Eppendorf AG, Enzo Biochem, Inc., Affymetrix, Inc., Illumina, Inc., Agilent Technologies, Inc., GE Healthcare, Beckman Coulter, Inc., Sequenom, Inc., RainDance Technologies, Inc., Qiagen N.V., Idaho Technology, Inc., PerkinElmer, Inc., Fluidigm Corporation, Cepheid, Pacific Biosciences of California, Inc., the Exiqon family of companies, Luminex Corporation and others may have obtained and may in the future obtain patents and claim that manufacture, use and/or sale of our technologies, methods or products infringes these patents. We could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against these claims even if we are eventually successful in defending ourselves against these claims. Furthermore, parties making claims against us may be able to obtain injunctive or other relief, which effectively could block our ability to further develop, commercialize, manufacture, use and sell methods and products, and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties, or be prohibited from making, using or selling certain methods and/or products. We may not be able to obtain these licenses at a reasonable cost, or at all. In that event, we could encounter delays in product introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses on favorable terms could prevent us from commercializing products, and the prohibition of sale of any of our products could materially affect our ability to grow and to attain profitability.
Our proprietary intellectual property rights may not adequately protect our products and technologies.
Although we have filed a number of United States and international patent applications, we presently have four patents issued in the United States, which do not cover all of our products and technologies. Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection for our products and technologies. Patent law relating to claims in the technology fields in which we operate is uncertain, so we cannot be assured the patent rights we have, or may obtain in future, will be valuable or enforceable. We may only be able to protect products and technologies from unauthorized use by third parties to the extent that valid and enforceable patents or trade secrets cover them. Furthermore, the degree of future protection of our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep a competitive advantage.
The patent positions of life sciences companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in such companies’ patents has emerged to date in the United States. The laws of some countries other than the United States do not protect intellectual property rights to the same extent as the laws of the United States, and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology and/or pharmaceuticals, which could make it difficult for us to stop the infringement of any patents we may obtain in such countries. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business. Changes in either the patent laws or in interpretations of patent laws in the United States or other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents. For example:
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we might not have been the first to conceive or reduce to practice one or more inventions disclosed in our pending patent applications;
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we might not have been the first to file patent applications for these inventions;
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others may independently develop similar or alternative products and technologies or duplicate any of our products and technologies;
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it is possible that none of our pending patent applications will result in issued patents, and even if they issue as patents, they may not provide a basis for commercially viable products, and/or may not provide us with any competitive advantages, or may be challenged and invalidated by third parties;
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we may not develop additional proprietary products and technologies that are patentable; and
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third-party patents may have an adverse effect on our ability to continue to grow our business.
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We have applied, and continue to apply, for patents covering our intellectual property (e.g., products and technologies and uses thereof), as we deem appropriate. However, we may fail to apply for patents on products and/or technologies in a timely fashion or at all.
We also rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. While we attempt to use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, or scientific and other advisors may unintentionally or willfully disclose our information to competitors. If we were to attempt to enforce a claim that a third-party had illegally obtained and was using our trade secrets, it could be expensive and time consuming, and the outcome could be unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets than courts inside the United States. Moreover, if our competitors independently develop equivalent knowledge, methods and know-how, it may be difficult for us to enforce our intellectual property and our business could be harmed.
If we are not able to defend the patent or trade secret protection position of our products and technologies, then we may not be able to exclude competitors from developing or marketing competing products, and we may not generate enough revenue from product sales to justify the cost of development of our products and to achieve or maintain profitability.
We may be unable to protect the intellectual property rights of the third parties from whom we license certain of our intellectual property or with whom we have entered into other strategic relationships, which could negatively impact our competitive advantage.
We do not presently have significant intellectual property rights licensed from third parties but, in the future, we may have to license intellectual property from key strategic partners. We may become reliant upon such third parties to protect their intellectual property rights to any licensed technology. Such third parties may not protect the intellectual property rights that we license from them and we may be unable defend such intellectual property rights on our own or we may have to undertake costly litigation to defend the intellectual property rights of such third parties. There can be no assurances that we will continue to have proprietary rights to any of the intellectual property that we license from such third parties or otherwise have the right to use through similar strategic relationships. Any loss or limitations on use with respect to our right to use such intellectual property licensed from third parties or otherwise obtained from third parties or with whom we have entered into strategic relationships could negatively impact our competitive advantage.
We expect intense competition in our target markets, which could render our products and/or technologies obsolete, result in significant price reductions or substantially limit the volume of products that we sell. This would limit our ability to compete and achieve and maintain profitability. If we cannot continuously develop and commercialize new products, our revenue may not grow as intended.
Future competition will likely come from existing competitors as well as other companies seeking to develop new technologies for analyzing genetic information, such as next generation sequencing. Some of our competitors have various products and/or methodologies for gene detection, expression, characterization, and/or analyses that may be competitive with our products and/or methodologies. In addition, pharmaceutical and biotechnology companies have significant needs for genomic information and may choose to develop or acquire competing technologies to meet those needs. In the molecular diagnostics field, competition will likely come from established diagnostic companies, companies developing and marketing DNA probe tests for genetic and other diseases and other companies conducting research on new technologies to ascertain and analyze genetic information. Further, in the event that we develop new technology and products that compete with existing technology and products of well-established companies, there can be no guarantee that the marketplace will readily adopt any such new technology and products that we may introduce in the future.
The market for genetic research and molecular diagnostic products is highly competitive, with several large companies already having significant market share. Established genetic research and diagnostic companies also have an installed base of instruments in several markets, including clinical and reference laboratories. In addition, these companies have formed alliances with genomics companies that provide them access to genetic information that may be incorporated into their diagnostic tests. We may not be able to compete effectively with these companies.
Our manufacturing capacity may limit our ability to sell our products.
There are uncertainties inherent in expanding our manufacturing capabilities and we may not be able to increase our capacity in a timely manner. For example, manufacturing and product quality issues may arise as we increase production rates at our manufacturing facility and launch new products. As a result, we may experience difficulties in meeting customer demand, in which case we could lose customers or be required to delay new product introductions, and demand for our products could decline. Due to the intricate nature of manufacturing products, we may encounter similar or previously unknown manufacturing difficulties in the future that could significantly reduce production yields, impact our ability to launch or sell these products, or to produce them economically, prevent us from achieving expected performance levels or cause us to set prices that hinder wide adoption by customers.
If we are unable to develop and maintain our manufacturing capability, we may not be able to launch or support our products in a timely manner, or at all.
We currently possess only one facility capable of manufacturing our products and services for both sale to our customers and internal use. If a natural disaster were to significantly damage our facility or if other events were to cause our operations to fail, these events could prevent us from developing and manufacturing our products and services. If our networks or storage infrastructure were to fail for an extended period of time, it would adversely impact our ability to manufacture our products on a timely basis and may prevent us from achieving our expected shipments in any given period.
Our reliance on outside manufacturers and suppliers to provide certain instruments could subject us to risks that may harm our business.
From time to time we may change manufacturers, and any new manufacturer engaged by us may not perform as expected. If our vendors experience shortages or delays in their manufacture of our instruments, or if we experience quality problems with our vendors, then our shipment schedules could be significantly delayed or costs significantly increased. Certain of our instruments may be manufactured by a single vendor, which could magnify the risk of shortages.
We may be adversely affected by environmental, health and safety laws, regulations and liabilities.
We are subject to a variety of federal, state and municipal environmental, health and safety laws based on our use of hazardous materials in both our manufacturing and research and development operations. These laws and regulations often require expensive compliance procedures or operational changes to limit actual or potential impacts to the environment. A violation of these laws and regulations can result in substantial fines, criminal sanctions and/or operational shutdown. Furthermore, we may become liable for the investigation and cleanup of environmental contamination, whether intentional or unintentional, and we could be responsible for damages related to the clean-up of such contamination or individual injury caused by such contamination. We may also be subject to related claims by private parties alleging property damage and personal injury due to exposure to hazardous or other materials as a result of such contamination. Some of these matters may require expending significant amounts for investigation, cleanup or other costs. Events such as these could negatively impact our financial position.
Our sales, marketing and technical support organization may limit our ability to sell our products.
We currently have limited resources available for sales, marketing and technical support services as compared to some of our primary competitors. In order to effectively commercialize our genetic analysis systems and other products to follow, we will need to expand our sales, marketing and technical support staff both domestically and internationally. We may not be successful in establishing or maintaining either a direct sales force or distribution arrangements to market our products and services. In addition, we compete primarily with much larger companies that have larger sales and distribution staffs and a significant installed base of products in place, and the efforts of a limited sales and marketing force may not be sufficient to build the market acceptance of our products required to support continued growth of our business.
We may be exposed to liability due to product defects.
The risk of product liability claims is inherent in the testing, manufacturing, marketing and sale of research products for therapeutic and diagnostic development. We may seek to acquire additional insurance for clinical liability risks. We may not be able to obtain such insurance or general product liability insurance on acceptable terms or in sufficient amounts. A product liability claim or recall could negatively impact our financial position.
We may not realize the anticipated benefits of past or future acquisitions, and integration of these acquisitions may disrupt our business and management.
In January 2014, we entered into an Asset Purchase Agreement with IntegenX, pursuant to which we acquired substantially all of the assets of the Apollo Business (a product line used in connection with developing, manufacturing, marketing and selling instruments and reagents relating to library preparation for next generation sequencing, including the Apollo 324™ instrument and the PrepX™ reagents). In the future we may acquire additional companies, product lines, or technologies or enter into joint ventures or other strategic initiatives. We may not realize the anticipated benefits of this acquisition or any other future acquisition and any acquisition has numerous risks. These risks include the following: difficulty in assimilating the operations and personnel of the acquired company; difficulty in effectively integrating the acquired technologies or products with our current products and technologies; difficulty in maintaining controls, procedures, and policies during the transition and integration; disruption of our ongoing business and distraction of our management and employees from other opportunities and challenges due to integration issues; difficulty integrating the acquired company’s accounting, management information, and other administrative systems; inability to retain key technical and sales personnel of the acquired business; inability to retain key customers, vendors, and other business partners of the acquired business; inability to achieve the financial and strategic goals for the acquired and combined businesses; incurring acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results; potential failure of the due diligence processes to identify significant issues with product quality, legal and financial liabilities, among other things; potential inability to assert
that internal controls over financial reporting are effective. Mergers and acquisitions of companies are inherently risky, and ultimately, if we do not complete the integration of the acquired business successfully and in a timely manner, we may not realize the anticipated benefits of the acquisitions to the extent anticipated, which could adversely affect our business, financial condition, or results of operations.
Risks Related to Our Industry
Our success depends upon the continued emergence and growth of markets for analysis of genetic variation and biological function.
We design our products primarily for applications in the life sciences and pharmaceutical industries. The usefulness of our technology depends in part upon the availability of genetic data and its usefulness in identifying or treating disease. We are initially focusing on markets for analysis of genetic variation and biological function, namely gene expression profiling. This market is new and emerging, and may not develop as quickly as we anticipate, or reach its full potential. Other methods of analysis of genetic variation and biological function may emerge and displace the methods we are developing. Also, researchers may not seek or be able to convert raw genetic data into medically valuable information through the analysis of genetic variation and biological function. In addition, factors affecting research and development spending generally, such as changes in the regulatory environment affecting life sciences and pharmaceutical companies, and changes in government programs that provide funding to companies and research institutions, could harm our business. If useful genetic data is not available or if our target markets do not develop in a timely manner, demand for our products may grow at a slower rate than we expect, and we may not be able to achieve or sustain profitability.
We may not be able to deliver acceptable products to our customers due to the rapidly evolving nature of genetic sequence information upon which our products are based.
The genetic sequence information upon which we may rely to develop and manufacture our products is contained in a variety of public and private databases throughout the world. These databases are rapidly expanding and evolving. In addition, the accuracy of such databases and resulting genetic research is dependent on various scientific interpretations, and it is not expected that global genetic research efforts will result in standardized genetic sequence databases for particular genomes in the near future.
Although we have implemented ongoing internal quality control efforts to help ensure the quality and accuracy of our products, the fundamental nature of our products requires us to rely on genetic sequence databases and scientific interpretations which are continuously evolving. As a result, these variables may cause us to develop and manufacture products that incorporate sequence errors or ambiguities. The magnitude and importance of these errors depends on multiple and complex factors that would be considered in determining the appropriate actions required to remedy any inaccuracies. Our inability to timely deliver acceptable products as a result of these factors would likely adversely affect our relationship with customers, and could negatively impact our financial condition.
We face risks associated with technological obsolescence and emergence of standardized systems for genetic analysis.
High throughput genetic analyses and quantitative detection methodologies (including, for example, PCR) are undergoing rapid evolution and technological changes. New technologies, techniques or products could emerge which might allow the packaging and analysis of genomic information at densities similar to, or even higher than, our existing or future technology. Other companies may begin to offer products that are directly competitive with, or are technologically superior to, our products. There can be no assurance that we will be able to maintain our technological advantages over emerging technologies in the future. Over time, we will need to respond to technological innovation in a rapidly changing industry. Standardization of tools and systems for genetic research is still ongoing and there can be no assurance that our products will emerge as the standard for genetic research. The emergence of competing technologies and systems as market standards for genetic research may result in our products becoming uncompetitive which would have an adverse effect on our business.
Our success depends on the continuous development of new products and our ability to manage the transition from our older products to new products.
We compete in markets that are new, intensely competitive, highly fragmented and rapidly changing, and many of our current and potential competitors have significantly greater financial, technical, marketing and other resources than we do. In addition, many current and potential competitors have greater name recognition, more extensive customer bases and access to
proprietary genetic content. The continued success of our products will depend on our ability to produce products with smaller feature sizes and create greater information capacity at our current or lower costs. The successful development, manufacture and introduction of our new products is a complicated process and depend on our ability to manufacture and supply enough products in sufficient quantity and quality and at acceptable cost in order to meet customer demand. If we fail to keep pace with emerging technologies or are unable to develop, manufacture and introduce new products, we will become uncompetitive, our pricing and margins will decline, and our business will suffer.
Our failure to successfully manage the transition between our older products and new products may adversely affect our financial results. As we introduce new or enhanced products, we must successfully manage the transition from older products to minimize disruption in customers’ ordering patterns, avoid excessive levels of older product inventories and provide sufficient supplies of new products to meet customer demands. When we introduce new or enhanced products, we face numerous risks relating to product transitions, including the inability to accurately forecast demand and difficulties in managing different sales and support requirements due to the type or complexity of the new products.
Ethical, legal and social concerns surrounding the use of genetic information could reduce demand for our products.
Genetic testing has raised ethical issues regarding privacy and the appropriate uses of the resulting information. For these reasons, governmental authorities and others may call for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, such concerns may lead individuals to refuse to use genetics tests even if permissible. Any of these scenarios could reduce the potential markets for our products.
Risks Related to Our Organization
Even though we are not a California corporation, our common stock could still be subject to a number of key provisions of the California General Corporation Law.
Under Section 2115 of the California General Corporation Law (“CGCL”), corporations not organized under California law may still be subject to a number of key provisions of the CGCL. This determination is based on whether the corporation has significant business contacts with California and if more than 50% of its voting securities of record are held by persons having addresses in California. In the immediate future, the majority of our business operations, revenue and payroll will be conducted in, derived from, and paid to residents of California. Therefore, depending on our ownership, we could be subject to some provisions of the CGCL. Among the more important provisions are those relating to the election and removal of directors, cumulative voting, standards of liability and indemnification of directors, distributions, dividends and repurchases of shares, stockholder meetings, approval of some corporate transactions, dissenters’ and appraisal rights, and inspection of corporate records. If we are required to comply with these provisions, this compliance could cause us to incur additional administrative and legal expenses and divert our management’s time and attention from the operation of our business.
The requirements of being a public company may strain our resources, divert our management’s attention and affect our ability to attract and retain qualified board members.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are required to comply with the applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act and other applicable securities rules and regulations. We are subject to the Nasdaq Capital Market’s rules and regulations. Compliance with these rules and regulations have increased our legal and financial compliance costs, made some activities more difficult, time-consuming or costly and increased demand on our systems and resources. Among other things, the Exchange Act requires that we file annual, quarterly and current reports with respect to our business and results of operations and maintain effective disclosure controls and procedures and internal controls over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal controls over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and results of operations. Although we currently employ staff to comply with these requirements, we may need to hire even more employees in the future, which will increase our costs and expenses.
Risks Related to Our Common Stock
Our stock price could be volatile.
The market price of the common stock has fluctuated significantly since it was first quoted on the OTC Bulletin Board on June 6, 2007. Since this date, through December 31, 2014, the intra-day trading price has fluctuated from a low of $2.85 to a high of $3,130.79. The price of our common stock may continue to fluctuate significantly in response to factors, some of which are beyond our control, including the following:
|
|
·
|
actual or anticipated variations in operating results;
|
|
|
·
|
changes in the economic performance and/or market valuations of other life science companies;
|
|
|
·
|
our announcement of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
|
|
|
·
|
additions or departures of key personnel; and
|
|
|
·
|
sales or other transactions involving our capital stock.
|
Even with our common stock being traded on the Nasdaq Capital Market, there can be no assurance that investors will be interested in purchasing our common stock when our stockholders want to dispose of their shares or at prices that are attractive to our stockholders.
Although our common stock is listed on the Nasdaq Capital Market, there can be no assurance that we will continue to meet the requirements for our common stock will continue to trade on this exchange.
Since our Nasdaq listing application was approved effective August 22, 2014, we are required to comply with certain Nasdaq listing requirements, including, without limitation, with respect to our corporate governance, finances, stock trading volume and stock price. If we fail to meet any of these requirements, our shares could be delisted from the Nasdaq Capital Market, and we could expect a significant decline in the liquidity of our stock. In the month ended September 30, 2014, when our common stock was traded on the Nasdaq Capital Market, the daily trading volume for shares of our common stock ranged from 2,606 to 40,229 shares traded per day, and the average daily trading volume during such one-month period was 15,825 shares. This compares to the three-month period ended June 30, 2014, when our common stock was traded on the over-the-counter market and was quoted on the OTCQB. In this period, the daily trading volume for shares of our common stock ranged from 0 to 2,577 shares traded per day, and the average daily trading volume during such three-month period was 200 shares, with no shares traded on 31 of the 63 trading days.
Stockholders may experience dilution of their ownership interests because of the future issuance of additional shares of our common stock and our preferred stock.
In the future, we may issue our authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of our present stockholders. We are authorized to issue an aggregate of 310,000,000 shares of capital stock consisting of 300,000,000 shares of common stock, par value $0.001 per share, of which 5,659,768 shares were issued and outstanding as of December 31, 2014, and 10,000,000 shares of preferred stock, par value $0.001 per share, of which 3,663 are designated as Series 1 Convertible Preferred Stock, none of which were issued and outstanding. The Series 1 Convertible Preferred Stock has no voting rights and a liquidation preference of $0.001 per share. Future issuances of preferred stock will have preferences and rights as may be determined by our board of directors at the time of issuance. Specifically, our board of directors has the authority to issue preferred stock without further stockholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into common stock, which could decrease the relative voting power of the common stock or result in dilution to our existing stockholders.
In addition, as of December 31, 2014, we had notes in favor of Malaysian Technology Development Corporation Sdn. Bhd. (“MTDC”) outstanding with a face value of $5.2 million which we could have settled by issuing an aggregate of 1,528,558 shares of our common stock, and we had 225,000 outstanding restricted stock units, outstanding options to purchase an aggregate of 187,212 shares of our common stock, outstanding unit warrants to purchase 64,700 shares of our common stock
and 32,350 warrants to purchase shares of our common stock, and outstanding warrants to purchase an aggregate of 5,344,007 shares of our common stock. The future vesting or exercise of these securities will subject our existing stockholders to experience dilution of their ownership interests.
We may also issue additional shares of common stock or other securities that are convertible into or exercisable for common stock in connection with hiring or retaining employees, future acquisitions, future sales of our securities for capital raising purposes, or for other business purposes. The future issuance of any additional shares of our common stock may create downward pressure on the trading price of our common stock. There can be no assurance that we will not be required to issue additional shares, warrants or other convertible securities in the future in conjunction with any capital raising efforts, including at a price (or exercise prices) below the price at which shares of our common stock are then traded.
Our principal stockholders have significant voting power and may take actions that may not be in the best interests of other stockholders.
Our principal stockholder owns 25% of our outstanding common stock, in addition to which we have two stockholders that each own 10% and one stockholder that owns 9%. If all of these security holders act together, they will be able to exert significant control over our management and affairs requiring stockholder approval, including approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of our common stock. This concentration of ownership may not be in the best interests of all our stockholders.
Stockholders should not anticipate receiving cash dividends on our common stock.
We have never declared or paid any cash dividends or distributions on our capital stock. We currently intend to retain future earnings to support operations and to finance expansion and therefore do not anticipate paying any cash dividends on our common stock in the foreseeable future.
None.
We do not own any real property. Our leased facilities as of December 31, 2014, are as follows:
|
Location
|
Square Feet
|
Primary Use
|
Lease Terms
|
|||
|
Fremont, CA
|
19,186 sq ft
|
Corporate Office, Laboratory and Manufacturing
|
Lease expires April 30, 2018
|
|||
|
Luxembourg
|
1,000 sq ft
|
Laboratory and Office
|
Leased quarter to quarter
|
Our existing facilities are not being used at full capacity and management believes that these facilities are adequate and suitable for current needs.
From time to time we may be involved in claims arising in connection with our business. Based on information currently available, we believe that the amount, or range, of reasonably possible losses in connection with any pending actions against us, in excess of established reserves, in the aggregate, not to be material to our consolidated financial condition or cash flows. However, losses may be material to the Company’s operating results for any particular future period, depending on the level of income for such period.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Trading Information
Since August 22, 2014, our common stock has been traded on the Nasdaq Capital Market under the symbol WGBS. Prior to that, our common stock was quoted on the OTCQB Marketplace maintained by the NASD (previously the OTC Bulletin Board). The transfer agent for our common stock is Continental Stock Transfer and Trust Company at 17 Battery Place, New York, NY 10004.
The following table sets forth the high and low sales prices (for periods when our common stock traded on the Nasdaq Capital Market) and high and low intra-day bid information (for periods when our common stock traded on the OTCQB Marketplace or the OTC Bulletin Board) for our common stock for the fiscal quarters indicated as reported on the Nasdaq Capital Market, the OTCQB Marketplace or the OTC Bulletin Board, as applicable. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, adjusted for reverse stock splits, and may not represent actual transactions.
|
2013
|
High
|
Low
|
||||||
|
First Quarter ended March 31, 2013
|
89.45 | 19.88 | ||||||
|
Second Quarter ended June 30, 2013
|
59.63 | 29.82 | ||||||
|
Third Quarter ended September 30, 2013
|
39.76 | 16.50 | ||||||
|
Fourth Quarter ended December 31, 2013
|
35.00 | 12.00 | ||||||
|
2014
|
||||||||
|
First Quarter ended March 31, 2014
|
30.00 | 15.00 | ||||||
|
Second Quarter ended June 30, 2014
|
20.00 | 7.90 | ||||||
|
Third Quarter ended September 30, 2014
|
25.00 | 4.00 | ||||||
|
Fourth Quarter ended December 31, 2014
|
5.25 | 2.85 | ||||||
Particularly prior to our listing on the Nasdaq Capital Market, our common stock has been thinly traded. Any reported sale prices may not be a true market-based valuation of our common stock. On December 31, 2014, the closing bid price of our common stock, as reported on the Nasdaq Capital Market, was $3.00.
As of March 16, 2015, there were approximately 350 holders of record of our common stock.
Dividend Policy
We have never declared or paid dividends on shares of our common stock. We intend to retain future earnings, if any, to support the development of our business and therefore do not anticipate paying cash dividends for the foreseeable future. Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including current financial condition, operating results and current and anticipated cash needs.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information regarding our compensation plans under which equity securities are authorized for issuance to our employees as of December 31, 2014:
|
Number of
|
|||||||||||
|
Securities
|
|||||||||||
|
Remaining
|
|||||||||||
|
Number of
|
Available for
|
||||||||||
|
Securities to
|
Future Issuance
|
||||||||||
|
Be Issued
|
Under Equity
|
||||||||||
|
Upon
|
Compensation
|
||||||||||
|
Exercise of
|
Weighted-Average
|
Plans
|
|||||||||
|
Outstanding
|
Exercise Price of
|
(Excluding
|
|||||||||
|
Options,
|
Outstanding
|
Securities
|
|||||||||
|
Warrants and
|
Options, Warrants
|
Reflected in
|
|||||||||
|
Rights
|
and Rights
|
Column (a))
|
|||||||||
|
Plan Category
|
(a)
|
(b)
|
(c)
|
||||||||
|
Equity compensation plans approved by security holders
|
88,280
|
(1)
|
$
|
52.84
|
894,407
|
||||||
|
Equity compensation plans not approved by security holders
|
98,932
|
(2)
|
$
|
4.60
|
—
|
||||||
|
Total
|
187,212
|
$
|
27.35
|
894,407
|
|||||||
Additional information regarding our equity compensation plans is provided in Note 8 to our Consolidated Financial Statements in Part II, Item 8 in this Annual Report.
|
(1)
|
Does not reflect 225,000 restricted stock units that do not have an exercise price.
|
|
(2)
|
In connection with our entrance into employment agreements in August 2014 with Michael P. Henighan, our chief financial officer, and Keith Warner, our chief operating officer, we granted Mr. Henighan and Mr. Warner certain inducement option awards. Subject to certain adjustments, Mr. Henighan’s award agreement grants him options to purchase up to 28,266 shares of our common stock at a price of $4.60 per share and Mr. Warner’s award agreement grants him options to purchase up to 70,666 shares of our common stock at a price of $4.60 per share. The options vest over three years, with one-third of the options vesting on the first anniversary of the grant date and the remaining two-thirds vesting in eight quarterly installments over the following two years.
|
This discussion should be read in conjunction with the other sections of this Report, including Item 1 and Item 8 and the related exhibits. The various sections of this discussion contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this Annual Report on Form 10-K. See “Item 1A – Risk Factors.” Our actual results may differ materially.
Company Overview
Since beginning operations in 2003, we have been engaged in the development, manufacture and sale of systems for gene expression quantification, genotyping and stem cell research for the life sciences and pharmaceutical drug discovery industries. Most recently, our 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 operating results are not a good indication of future performance.
Since inception, we have incurred substantial operating losses. As of December 31, 2014, our accumulated deficit was $91,531,032. 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.
We expect that the cash we have available will fund our operations into 2016. We are currently considering several different financing alternatives to support our operations thereafter. If we are unable to obtain such additional financing on a timely basis, we may have to curtail our development activities and growth plans and/or be forced to sell assets, perhaps on unfavorable terms, which would have a material adverse effect on our business, financial condition and results of operations, and ultimately could be forced to discontinue our operations and liquidate, in which event it is unlikely that stockholders would receive any distribution on their shares. See “Liquidity and Capital Resources” below.
Acquisition of Assets from IntegenX Inc.
In January 2014, we entered into an Asset Purchase Agreement with IntegenX Inc. (“IntegenX”), pursuant to which we acquired substantially all of the assets of its product line used in connection with developing, manufacturing, marketing and selling instruments and reagents relating to library preparation for next generation sequencing, including the Apollo 324™ instrument and the PrepX™ reagents (the “Apollo Business”). The purchase price for the Apollo Business comprised (1) a cash payment of $2.0 million, (2) a $1.25 million secured promissory note (the “IntegenX Note”), (3) up to three earn-out payments payable, if at all, in 2015, 2016 and 2017, respectively (the “Earnout”), and (4) our assumption of certain liabilities, including obligations to perform under contracts and liabilities for certain accrued but unpaid vacation for certain employees. The IntegenX note was repaid in full in September 2014.
The Earnout contemplates three earn-out payments based on gross revenues from certain products of the Apollo Business (“Covered Revenues”). In particular:
|
|
·
|
If, in 2014, Covered Revenues exceed $4 million but are less than $6 million, we will pay IntegenX an amount equal to 15% of the amount by which the 2014 Covered Revenues exceed $4 million. If, in 2014, Covered Revenues exceed $6 million, we will pay IntegenX an amount equal to the sum of (i) $300,000 plus (ii) 20% of the amount by which the 2014 Covered Revenues exceed $6 million.
|
|
|
·
|
If, in 2015, Covered Revenues exceed $4 million but are less than $6 million, we will pay IntegenX an amount equal to 10% of the amount by which the 2015 Covered Revenues exceed $4 million. If, in 2015, Covered Revenues exceed $6 million but are less than $10 million, we will pay IntegenX an amount equal to the sum of (i) $200,000 plus (ii) 15% of the amount by which the 2015 Covered Revenues exceed $6 million. If, in 2015, Covered Revenues exceed $10 million, we will pay IntegenX an amount equal to (i) $800,000 plus (ii) 20% of the amount by which the 2015 Covered Revenues exceed $10 million.
|
|
|
·
|
If, in 2016, Covered Revenues exceed $4 million but are less than $10 million, we will pay IntegenX an amount equal to 10% of the amount by which the 2016 Covered Revenues exceed $4 million. If, in 2016, Covered Revenues exceed $10 million but are less than $15 million, we will pay IntegenX an amount equal to the sum of (i) $600,000 plus (ii) 15% of the amount by which the 2016 Covered Revenues exceed $10 million. If, in 2016, Covered Revenues exceed $15 million, we will pay IntegenX an amount equal to (i) $1.35 million plus (ii) 20% of the amount by which the 2016 Covered Revenues exceed $15 million.
|
On June 30, 2014, we effected a reverse stock split of our common stock by a ratio of one-for-ten (the “2014 Reverse Split”). Every ten outstanding shares of common stock became one share of common stock. No fractional shares were issued in connection with the 2014 Reverse Split. Stockholders who were otherwise entitled to receive a fractional share of common stock received one whole share of common stock. The 2014 Reverse Split did not change the number of shares of common or preferred stock that we are authorized to issue, or the par value of our common or preferred stock. Except as otherwise noted in this Annual Report on Form 10-K, all share numbers are presented on a post-2014 Reverse Split basis.
2014 Public Offering
On August 27, 2014, we completed a public offering (the “2014 Public Offering”) of 2,000 Units (the “Units”) for $10,000 per Unit, with each Unit consisting of 2,000 shares of our common stock and 2,000 warrants to purchase one share of our common stock. In aggregate, we issued 4,000,000 shares of our common stock (excluding 600,000 shares of common stock sold by certain stockholders to the underwriters) and 4,600,000 warrants to purchase shares of our common stock (inclusive of 600,000 shares of common stock we sold from the full exercise of the overallotment option of warrants granted to the underwriters). Subject to certain ownership limitations, the warrants are exercisable at any time within five years of their issuance date at an exercise price of $5.00 per share. Our total gross proceeds from the offering were $20,000,006. After deducting underwriting discounts, commissions and offering expenses payable by us, we received aggregate net proceeds totaling approximately $18.0 million.
We retained underwriters in connection with the 2014 Public Offering, and pursuant to the terms of an underwriting agreement, we paid the underwriters an aggregate fee totaling approximately $1,675,000. In addition, we issued the underwriters 120,000 warrants at the closing of the 2014 Offering, each warrant entitling the holder to purchase one share of our common stock for $6.25 at any time within five years of their issuance date.
In connection with the 2014 Public Offering, our shares began trading on the Nasdaq Capital Market.
Results of Operations
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
The following table presents selected items in our consolidated statements of operations for the years ended December 31, 2014 and 2013, respectively:
|
Year Ended December 31,
|
||||||||
|
2014
|
2013
|
|||||||
|
Revenue:
|
||||||||
|
Product
|
$ | 5,501,342 | $ | 846,414 | ||||
|
License and royalty
|
500,000 | 458,333 | ||||||
|
Total revenue
|
6,001,342 | 1,304,747 | ||||||
|
Cost of revenue
|
2,572,399 | 574,195 | ||||||
|
Gross profit
|
3,428,943 | 730,552 | ||||||
|
Operating expenses:
|
||||||||
|
Sales and marketing
|
4,739,789 | 2,240,116 | ||||||
|
Research and development
|
6,716,689 | 5,399,775 | ||||||
|
General and administrative
|
4,422,180 | 3,013,104 | ||||||
|
Total operating expenses
|
15,878,658 | 10,652,995 | ||||||
|
Operating loss
|
(12,449,715 | ) | (9,922,443 | ) | ||||
|
Other income and (expenses):
|
||||||||
|
Interest expense, net
|
(503,044 | ) | (2,877,627 | ) | ||||
|
Contingent earn-out adjustment
|
229,300 | — | ||||||
|
Gain (loss) on revaluation of derivative liabilities, net
|
2,200,200 | (506,195 | ) | |||||
|
Gain on settlement of derivative liability
|
— | 1,012,351 | ||||||
|
Loss on extinguishment of debt
|
(128,546 | ) | (4,970,410 | ) | ||||
|
Issuance of warrants due to organic change
|
— | (2,553,318 | ) | |||||
|
Gain on liquidation of subsidiary
|
— | 3,386,297 | ||||||
|
Miscellaneous income (expense)
|
(37,958 | ) | 171,414 | |||||
|
Total other income and (expenses)
|
1,759,952 | (6,337,488 | ) | |||||
|
Net loss before provision for income taxes
|
(10,689,763 | ) | (16,259,931 | ) | ||||
|
Provision for income taxes
|
3,100 | 6,341 | ||||||
|
Net loss
|
$ | (10,692,863 | ) | $ | (16,266,272 | ) | ||
Product Revenue
The following table represents our product revenue for the years ended December 31, 2014 and 2013:
|
Year Ended December 31,
|
|||||||||
|
2014
|
2013
|
% Change
|
|||||||
|
$
|
5,501,342
|
$
|
846,414
|
550%
|
|||||
For the year ended December 31, 2014, product revenue increased by $4,654,928, or 550%, as compared to the year ended December 31, 2013. The increase is primarily due to revenue from the newly-acquired Apollo Business, which accounted for 39% of our product revenue in the year ended December 31, 2014, compared to none in 2013. We also increased sales of SmartChip Real-Time PCR Systems and SmartChip Target Enrichment Systems (“TE”, launched in mid-2013), which
represented 41% of our product revenue in the year ended December 31, 2014, and were more than 3.5 times the revenue in 2013. There was also a significant increase in sales of our Real-Time PCR Chip panels and other projects and services, which represented 20% of product revenue in the year ended December 31, 2014, and were more than 5 times the revenue in 2013.
License and Royalty Revenue
The following table represents our license and royalty revenue for the years ended December 31, 2014 and 2013:
|
Year Ended December 31,
|
|||||||||
|
2014
|
2013
|
% Change
|
|||||||
|
$
|
500,000
|
$
|
458,333
|
9%
|
|||||
For the year ended December 31, 2014, license and royalty revenue increased by $41,667, or 9%, as compared to the year ended December 31, 2013. This increase reflects revenue recognition for one additional month of license and royalty fees in the year ended December 31, 2014, as compared to the year ended December 31, 2013. This revenue was generated by an agreement signed at the beginning of February 2013, expected to generate revenue of $500,000 annually for three years.
Cost of Product Revenue
The following table represents our cost of product revenue for the years ended December 31, 2014 and 2013:
|
Year Ended December 31,
|
|||||||||
|
2014
|
2013
|
% Change
|
|||||||
|
$
|
2,572,399
|
$
|
574,195
|
348%
|
|||||
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 year ended December 31, 2014, cost of product revenue increased by $1,998,204, or 348%, as compared to the year ended December 31, 2013. The increase related primarily to the increase in units sold, which also increased our product revenue. This was offset by improved profit margins, which increased from 32% to 53% of product revenue. These improved margins were caused principally by reductions in the provision for excess inventory and by an increase in the percentage of revenue from consumables, which generate higher margins than system sales.
Sales and Marketing
The following table represents our sales and marketing expenses for the years ended December 31, 2014 and 2013:
|
Year Ended December 31,
|
|||||||||
|
2014
|
2013
|
% Change
|
|||||||
|
$
|
4,739,789
|
$
|
2,240,116
|
112%
|
|||||
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 year ended December 31, 2014, sales and marketing expenses increased by $2,499,673, or 112%, as compared to the year ended December 31, 2013. The increase resulted primarily from increases in headcount largely due to our hiring employees with the Apollo Business and increased European sales activity. Additional expense also arose due to amortization related to intangible assets acquired with the Apollo Business, recruitment costs, an out-of-court settlement, increased commissions due to increased revenue and the scale-up of marketing activities, including travel and subsistence and the cost of presenting at one major trade show.
We expect sales and marketing expenses will increase during 2015 as we build our sales and marketing headcount and activities to commercialize our products and increase sales-based commissions.
Research and Development
The following table represents our research and development expenses for the years ended December 31, 2014 and 2013:
|
Year Ended December 31,
|
|||||||||
|
2014
|
2013
|
% Change
|
|||||||
|
$
|
6,716,689
|
$
|
5,399,775
|
24%
|
|||||
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 year ended December 31, 2014, research and development expenses increased $1,316,914, or 24%, as compared to the year ended December 31, 2013. The increase resulted primarily from increases in headcount, most notably due to hiring our new Chief Technology Officer and other staff to work on the single cell project plus employees acquired with the Apollo Business. The increase in single cell development activity resulted in increased reagent and other material costs. These increases were offset by reductions in the cost of instrument development following the launch of TE, along with lower depreciation costs.
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, although we expect these expenses will continue to decline as a percentage of revenue.
General and Administrative
The following table represents our general and administrative expenses for the years ended December 31, 2014 and 2013:
|
Year Ended December 31,
|
|||||||||
|
2014
|
2013
|
% Change
|
|||||||
|
$
|
4,422,180
|
$
|
3,013,104
|
47%
|
|||||
General and administrative expenses consist primarily of personnel costs for finance, human resources, business development, investor relations and general management, as well as professional fees, such as expenses for legal and accounting services. For the year ended December 31, 2014, general and administrative expenses increased $1,409,076, or 47%, as compared to the year ended December 31, 2013. The increase resulted primarily from recording a non-cash charge of approximately $600,000 related to stock options awarded to our Chief Executive Officer in May 2014, an increase in accrued performance bonuses, an increase in consultancy costs, principally due to outsourcing the CFO and controller functions between late March and late August and the acquisition of the Apollo Business, and the hiring of a Chief Operating Officer in August. This was offset by the absence of a one-time accrual of a discretionary bonus awarded to our CEO, the accrual of retention incentives for other U.S. employees and severance costs for Malaysian employees, along with a reduction in legal fees incurred in conjunction with our capital restructuring in 2013.
We expect our general and administrative expenses to remain at a similar level in 2015.
Interest Expense, net
The following table represents our interest expense, net for the years ended December 31, 2014 and 2013:
|
Year Ended December 31,
|
|||||||||
|
2014
|
2013
|
% Change
|
|||||||
|
$
|
503,044
|
$
|
2,877,627
|
(83)%
|
|||||
For the year ended December 31, 2014, net interest expense decreased $2,374,583, or 83%, as compared to the year ended December 31, 2013. The decrease was primarily due to the absence of charges for 5% interest and 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 a May 2011 private placement of our securities following their conversion into equity securities on August 27, 2013.
This decrease was offset by interest on the $5,200,000 in long-term debt issued to Malaysian Technology Development Corporation Sdn. Bhd. (“MTDC”), an investor in WaferGen Biosystems (M) Sdn. Bhd. (“WGBM”), our now-dissolved Malaysian subsidiary (the “MTDC Notes”), and on the IntegenX Note until it was repaid on September 12, 2014. We also incurred an interest charge of approximately $100,000 related to the interest element of our contingent earn-out adjustment relating to the Apollo Business acquisition.
Interest on the MTDC Notes is expected to be approximately $370,000 in 2015, rising each year up to $732,000 in 2019, the last full year before this debt matures. There will also be a charge totaling $70,000 related to our earn-out contingency over the next two years.
Contingent Earn-out Adjustment
The following table represents income recorded from our contingent earn-out adjustment for the years ended December 31, 2014 and 2013:
|
Year Ended December 31,
|
|||||||||
|
2014
|
2013
|
% Change
|
|||||||
|
$
|
229,300
|
$
|
—
|
N/A
|
|||||
Our contingent earn-out adjustment represents the impact of change in the estimated fair value of acquisition earn-outs, all of which relates to Covered Revenues from the Apollo Business acquired on January 6, 2014. The fair value of acquisition earn-out contingencies is based on expectations and other such estimates related to the specific earn-out target, all of which are subject to modification with changing circumstances until the contingency is resolved. The fair value of acquisition earn-out contingencies prior to resolution is determined using a modeling technique with significant unobservable inputs calculated using a probability-weighted approach. Key assumptions include discount rates for present value factor, which are based on industry specific weighted average cost of capital, adjusted for, among other things, time and risk, as well as forecasted annual earnings before interest, taxes, depreciation and amortization and forecasted annual revenues over the life of the earn-outs. Adjustments to the fair value of earn-outs are included in earnings, with the portion of the adjustment relating to the time value of money being recorded as interest expense, net and the non-interest portion of the change in earn-outs as a separate non-operating item in the statement of operations.
During the year ended December 31, 2014, as a result of the assessment of actual and projected revenue scenarios, the Company determined that revenues were expected to be below the amounts estimated at the time of the acquisition. No amounts were payable with respect to 2014 revenue, and the probability-weighted estimates of revenue in 2015 and 2016 have been reassessed downwards, resulting in an adjustment of $229,300 (before the interest expense offset) in the year ended December 31, 2014. Should actual Covered Revenues in 2015 and 2016 exceed our estimates, a charge will be recorded, whereas if they fall short of our latest estimates, additional non-operating income will be reported.
Gain (Loss) on Revaluation of Derivative Liabilities, net
The following table represents the gain (loss) on revaluation of derivative liabilities, net for the years ended December 31, 2014 and 2013:
|
Year Ended December 31,
|
|||||||||
|
2014
|
2013
|
% Change
|
|||||||
|
$
|
2,200,200
|
$
|
(506,195)
|
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 and, until the time of their settlement in 2013, upon the exchange of Series A and Series B Convertible Preference Shares (“CPS”) of our now-dissolved Malaysian subsidiary, and under the conversion element of our CPNs.
The net gain from revaluation of derivative liabilities for the year ended December 31, 2014, was $2,200,200, compared to a net loss of $506,195 for the year ended December 31, 2013. 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 $3.00 on December 31, 2014, compared to $20.00 on December 31, 2013, $20.00 on August 27, 2013 (the date that warrants with cash settlement provisions, our largest derivative, were issued) and $29.82 on December 31, 2012.
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 increase if the volatility of our stock price increases (as occurred between August 27 and December 31, 2013, this being the principal cause of the overall loss on revaluation for that year) and decrease as the remaining term of each instrument diminishes. With the present number of warrants accounted for as liabilities, at our closing stock price of $3.00 on December 31, 2014, an increase in our share price of $1.00 would generate a revaluation loss of approximately $60,000; conversely, a decrease in our share price of $1.00 would generate a revaluation gain of approximately $60,000. Should our stock price rise above $10.00, the impact of a $1.00 change on our share price would increase to approximately $80,000.
Gain on Settlement of Derivative Liability
The following table presents the gain on settlement of derivative liability we recognized for the years ended December 31, 2014 and 2013:
|
Year Ended December 31,
|
|||||||||
|
2014
|
2013
|
% Change
|
|||||||
|
$
|
—
|
$
|
1,012,351
|
N/A
|
|||||
Gain on settlement of derivative liability is a one-time non-cash credit recorded as a result of the purchase of our Series B CPS from the original investor in 2013 for less than the fair value of their derivative liability on the date of purchase. There was no comparable credit in 2014 and none is expected in the future.
Loss on Extinguishment of Debt
The following table presents the loss on extinguishment of debt we recognized for the years ended December 31, 2014 and 2013:
|
Year Ended December 31,
|
|||||||||
|
2014
|
2013
|
% Change
|
|||||||
|
$
|
128,546
|
$
|
4,970,410
|
N/A
|
|||||
Loss on extinguishment of debt in the year ended December 31, 2014, is a one-time non-cash charge recorded as a result of the early repayment of the IntegenX Note on September 12, 2014. Loss on extinguishment of debt in the year ended December 31, 2013, 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 near future, although if the MTDC Notes had been repaid or exchanged for shares of our common stock on December 31, 2014, we would have recorded a one-time non-cash charge of approximately $3.2 million.
Issuance of Warrants due to Organic Change
The following table presents the charge for issuance of warrants that we incurred in the years ended December 31, 2014 and 2013:
|
Year Ended December 31,
|
|||||||||
|
2014
|
2013
|
% Change
|
|||||||
|
$
|
—
|
$
|
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 of our common stock in a private placement in August 2013 met that definition. There was no comparable charge in 2014 and none is expected in the foreseeable future.
Gain on Liquidation of Subsidiary
The following table presents the gain recognized on liquidation of a subsidiary for the years ended December 31, 2014 and 2013:
|
Year Ended December 31,
|
|||||||||
|
2014
|
2013
|
% Change
|
|||||||
|
$
|
—
|
$
|
3,386,297
|
N/A
|
|||||
Gain on liquidation of subsidiary in the year ended December 31, 2013, is a non-cash gain recorded as a result of the liquidation of our Malaysian subsidiary on November 26, 2013, principally due to the extinguishment of the $4,993,728 cost of Series C CPS recorded in permanent equity. Our estimate of the final gain on liquidation of subsidiary did not change in the year ended December 31, 2014. No significant gains or losses are expected in the near future, although a small gain or loss will likely be recorded in the year ended December 31, 2015, when the liquidator’s final distribution of assets is expected.
Miscellaneous Income (Expense)
The following table represents our miscellaneous income (expense) for the years ended December 31, 2014 and 2013:
|
Year Ended December 31,
|
|||||||||
|
2014
|
2013
|
% Change
|
|||||||
|
$
|
(37,958)
|
$
|
171,414
|
N/A
|
|||||
For the year ended December 31, 2014, we recorded miscellaneous expense of $37,958, compared to miscellaneous income of $171,414 for the year ended December 31, 2013. Miscellaneous income and expense is the result of net foreign currency exchange gains and losses, and historically arose mainly in WGBM, our now-dissolved Malaysian subsidiary, principally due to revaluation of the inter-company account at each balance sheet date. Up until the final revaluation at the time of liquidation, WGBM had a net receivable on its dollar denominated balances, so if the value of the Malaysian Ringgit decreased against the dollar, income was recorded, whereas if it increased against the dollar, an expense was recorded. Foreign currency exchange gains and losses also arise on our subsidiary in Luxembourg, and on U.S. expenses denominated in foreign currencies. The expense in the year ended December 31, 2014, arose primarily due to the decline in value of cash and other assets denominated in Euros, due to the strengthening of the U.S. dollar. Following the liquidation of WGBM, miscellaneous income and expense is not expected to be significant in future years.
Provision for Income Taxes
The following table presents the provision for income taxes for the years ended December 31, 2014 and 2013, respectively:
|
Year Ended December 31,
|
|||||||||
|
2014
|
2013
|
% Change
|
|||||||
|
$
|
3,100
|
$
|
6,341
|
(51)%
|
|||||
For the year ended December 31, 2014, we recorded a net charge of $3,100 for income taxes, all of which is for U.S. state income. For the year ended December 31, 2013, we recorded a net charge of $6,341 for income taxes, representing $3,191 for U.S. state income taxes and $3,150 for Luxembourg taxes. We have provided a full valuation allowance against our net deferred tax assets.
Liquidity and Capital Resources
From inception through December 31, 2014, we have 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 in various private placements, $8,842,256, net of offering costs, from the sale of CPS of WGBM, our now-dissolved Malaysian subsidiary, $1,842,760, net of origination fees, from a secured term loan, and $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 a May 2011 private placement, $13,393,162, net of offering costs, from the sale of common stock, Series 1 Convertible Preferred Stock and warrants in an August 2013 private placement, and $17,971,681, net of offering costs, from the sale of common stock and warrants in the 2014 Public Offering. We also had, as of December 31, 2014, Notes with a principal amount $5,200,000 owing to MTDC, an investor in WGBM. As of December 31, 2014, we had $14,732,107 in unrestricted cash and cash equivalents, and working capital of $13,583,889.
Net Cash Used in Operating Activities
We experienced negative cash flow from operating activities for the years ended December 31, 2014 and 2013 in the amounts of $10,287,401 and $8,221,214, respectively. The cash used in operating activities in the year ended December 31, 2014, was due to cash used to fund a net loss of $10,692,863, adjusted for non-cash expenses related to depreciation and amortization, stock-based compensation, net gain on revaluation of derivative liabilities, interest converted to principal on long-term debt, inventory provision, amortization of debt discount and loss on extinguishment of debt totaling $494,548, and cash provided by a change in working capital of $900,010. The cash used in operating activities in the year ended December 31, 2013, was due to cash used to fund a net loss of $16,266,272, adjusted for non-cash expenses related to depreciation and amortization, stock-based compensation, net losses on revaluation of derivative liabilities, gain on settlement of derivative liability, interest converted to principal on long-term debt, inventory provision, amortization of debt discount, loss on extinguishment of debt, issuance of warrants due to organic change and gain on liquidation of subsidiary totaling $7,236,878, and cash provided by a change in working capital of $808,180. The increase of $2,066,187 in cash used in the year ended December 31, 2014, compared to 2013, was driven primarily by the increase in the net operating loss from $9,922,443 to $12,449,715 and cash not yet provided by the increase in accounts receivable, offset by an increase in non-cash expenses (principally stock compensation and amortization of intangibles) included in the operating loss and an increase in accrued bonuses (2013 bonuses having been paid during that year).
Net Cash Used in Investing Activities
We used $2,000,000 in the year ended December 31, 2014, to acquire the Apollo Business. Further, we used $334,592 and $91,545 in the years ended December 31, 2014 and 2013, respectively, to acquire property and equipment. In addition, we transferred cash of $433,411 to WGBM’s liquidator in the year ended December 31, 2013.
Net Cash Provided by Financing Activities
Net cash provided by financing activities in the year ended December 31, 2014, was $16,645,454, being $17,971,681 from the issuance of common stock and warrants in the 2014 Public Offering, offset by $1,318,219 used to repay the IntegenX Note and $8,008 to repay a capital lease. Cash provided by financing activities in the year ended December 31, 2013, was $13,393,162, all from the issuance of common stock, Series 1 Convertible Preferred Stock and warrants in an August 2013 private placement, offset by the $70,000 we used to acquire WGBM’s Series B CPS.
Availability of Additional Funds
We believe funds available at December 31, 2014, along with our revenue, are sufficient to fund our operations into 2016. To continue our operations thereafter, it is likely that we will need to raise further capital, through the sale of additional securities or otherwise. Our operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. At the present time, we have no material commitments for capital expenditure. Our future capital requirements and the adequacy of our available funds will depend on many factors, most notably our ability to successfully commercialize our products and services.
While we believe we have sufficient cash to fund our operating, investing and financing activities in the near term, we consider it likely that additional capital will be needed to sustain our operations before we achieve profitability. We have no commitments to obtain any additional funds and there can be no assurance that we will be able to raise sufficient additional capital as we need it on favorable terms, or at all. The conversion of our MTDC 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 additional capital as needed we may not be able to continue our efforts to develop and commercialize our 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., WaferGen Biosystems Europe S.a.r.l., our Luxembourg subsidiary and, prior to its liquidation, WGBM, our now-dissolved Malaysian subsidiary. All significant inter-company transactions and balances are eliminated in consolidation.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, result of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
Critical Accounting Policies and Estimates
Deferred Tax Valuation Allowance. We believe substantial uncertainties exist regarding the future realization of deferred tax assets, and, accordingly, a full valuation allowance is required, amounting to approximately $35,000,000 at December 31, 2014. 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 and Apollo systems. 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 of restricted stock is based on our closing share price on the measurement date. Amounts expensed with respect to options were $942,587 and $321,140, net of estimated forfeitures, for the years ended December 31, 2014 and 2013, 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 years ended December 31, 2014 and 2013, respectively, were $6.33 and $37.25. These fair values were estimated using the following assumptions:
|
Year Ended December 31,
|
||||
|
2014
|
2013
|
|||
|
Risk-free interest rate
|
1.43% - 1.57%
|
0.71% - 1.22%
|
||
|
Expected term
|
4.75 Years
|
4.75 Years
|
||
|
Expected volatility
|
93.89% - 105.97%
|
96.73% - 108.14%
|
||
|
Dividend yield
|
0%
|
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. We apply 50% weighting to our own historic volatility and 50% to the historic volatility of a group of publicly traded companies over the retrospective period corresponding to the expected term of the options on the measurement date. Since August 2013, when we reduced our leverage through an exchange of previously issued preferred stock and convertible promissory notes for shares of our common stock, we have applied a reduced weighting to our own historic volatility during the period in which we were 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 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 and, until the time of their settlement in 2013, 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 those warrants for which no anti-dilution adjustment is projected prior to the expiration date using the Black-Scholes valuation model, and all other derivatives using a Monte Carlo Simulation approach, using critical assumptions provided by management reflecting conditions at the valuation dates.
Our derivatives are revalued at each balance sheet date, and at the time of issuance and settlement, and are estimated making assumptions regarding the following variables:
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 our common stock price has fluctuated or is expected to fluctuate. We apply 50% weighting to our own historic volatility and 50% to 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. Since August 2013, when we reduced our leverage through an exchange of previously issued preferred stock and convertible promissory notes for shares of our common stock, we have applied a reduced weighting to our own historic volatility during the period in which we were 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. 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.
Contractual Obligations
In October, 2009, we signed an operating lease for 19,186 square feet of office and laboratory space for our headquarters in Fremont, California, covering the period November 1, 2009 through April 30, 2015, which was amended in June 2012 and again in June 2014, extending the period of the lease until April 30, 2018. The remaining expenditure commitment as of
December 31, 2014, is approximately $1.5 million, plus maintenance fees. In addition, we have obligations under two capital leases for equipment totaling $0.4 approximately million.
Recently Issued Accounting Pronouncements
See the “Recent Accounting Pronouncements” in Note 2 to the Consolidated Financial Statements in Part II, Item 8 for information related to the adoption of new accounting standards in 2014, none of which had a material impact on our financial statements, and the future adoption of recently issued accounting pronouncements, which we do not expect will have a material impact on our financial statements.
|
Index to Consolidated Financial Statements
|
Page
|
|
The Board of Directors and Stockholders
WaferGen Bio-systems, Inc.
We have audited the accompanying consolidated balance sheets of WaferGen Bio-systems, Inc. and subsidiaries (collectively, the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WaferGen Bio-systems, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ SingerLewak LLP
San Jose, California
March 17, 2015
|
December 31, 2014
|
December 31, 2013
|
|||||||
|
Assets
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 14,732,107 | $ | 10,708,646 | ||||
|
Accounts receivable
|
1,481,250 | 367,266 | ||||||
|
Inventories, net
|
812,778 | 292,650 | ||||||
|
Prepaid expenses and other current assets
|
379,543 | 350,540 | ||||||
|
Total current assets
|
17,405,678 | 11,719,102 | ||||||
|
Property and equipment, net
|
869,304 | 269,618 | ||||||
|
Goodwill
|
990,000 | — | ||||||
|
Intangible assets, net
|
1,362,100 | — | ||||||
|
Other assets
|
79,898 | 42,209 | ||||||
|
Total assets
|
$ | 20,706,980 | $ | 12,030,929 | ||||
|
Liabilities and Stockholders’ Equity (Deficit)
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable
|
$ | 1,494,208 | $ | 980,887 | ||||
|
Accrued payroll and related costs
|
1,379,449 | 289,053 | ||||||
|
Other accrued expenses
|
831,561 | 1,143,335 | ||||||
|
Current portion of long-term debt
|
116,571 | — | ||||||
|
Total current liabilities
|
3,821,789 | 2,413,275 | ||||||
|
Long-term debt, net of discount and current portion
|
2,235,671 | 1,683,942 | ||||||
|
Derivative liabilities
|
126,168 | 9,147,507 | ||||||
|
Other liabilities
|
443,482 | — | ||||||
|
Total liabilities
|
6,627,110 | 13,244,724 | ||||||
|
Commitments and contingencies (Notes 7 and 17)
|
— | — | ||||||
|
Stockholders’ equity (deficit):
|
||||||||
|
Preferred Stock: $0.001 par value; 10,000,000 shares authorized; 0 and 2,944.7080 shares of Series 1 Convertible Preferred Stock issued and outstanding at December 31, 2014 and 2013
|
— | 13,595,662 | ||||||
|
Common Stock: $0.001 par value; 300,000,000 shares authorized; 5,884,768 and 911,256 shares issued and outstanding at December 31, 2014 and 2013
|
105,610,902 | 66,028,712 | ||||||
|
Accumulated deficit
|
(91,531,032 | ) | (80,838,169 | ) | ||||
|
Total stockholders’ equity (deficit)
|
14,079,870 | (1,213,795 | ) | |||||
|
Total liabilities and stockholders’ equity (deficit)
|
$ | 20,706,980 | $ | 12,030,929 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
|
Year Ended December 31,
|
||||||||
|
2014
|
2013
|
|||||||
|
Revenue:
|
||||||||
|
Product
|
$ | 5,501,342 | $ | 846,414 | ||||
|
License and royalty
|
500,000 | 458,333 | ||||||
|
Total revenue
|
6,001,342 | 1,304,747 | ||||||
|
Cost of revenue
|
2,572,399 | 574,195 | ||||||
|
Gross profit
|
3,428,943 | 730,552 | ||||||
|
Operating expenses:
|
||||||||
|
Sales and marketing
|
4,739,789 | 2,240,116 | ||||||
|
Research and development
|
6,716,689 | 5,399,775 | ||||||
|
General and administrative
|
4,422,180 | 3,013,104 | ||||||
|
Total operating expenses
|
15,878,658 | 10,652,995 | ||||||
|
Operating loss
|
(12,449,715 | ) | (9,922,443 | ) | ||||
|
Other income and (expenses):
|
||||||||
|
Interest expense, net
|
(503,044 | ) | (2,877,627 | ) | ||||
|
Contingent earn-out adjustment
|
229,300 | — | ||||||
|
Gain (loss) on revaluation of derivative liabilities, net
|
2,200,200 | (506,195 | ) | |||||
|
Gain on settlement of derivative liability
|
— | 1,012,351 | ||||||
|
Loss on extinguishment of debt
|
(128,546 | ) | (4,970,410 | ) | ||||
|
Issuance of warrants due to organic change
|
— | (2,553,318 | ) | |||||
|
Gain on liquidation of subsidiary
|
—
|
3,386,297 | ||||||
|
Miscellaneous income (expense)
|
(37,958 | ) | 171,414 | |||||
|
Total other income and (expenses)
|
1,759,952 | (6,337,488 | ) | |||||
|
Net loss before provision for income taxes
|
(10,689,763 | ) | (16,259,931 | ) | ||||
|
Provision for income taxes
|
3,100 | 6,341 | ||||||
|
Net loss
|
(10,692,863 | ) | (16,266,272 | ) | ||||
|
Accretion on Series 1 convertible preferred stock associated with beneficial conversion feature
|
— | (898,623 | ) | |||||
|
Series A-1 preferred dividend
|
— | (547,171 | ) | |||||
|
Net loss attributable to common stockholders
|
$ | (10,692,863 | ) | $ | (17,712,066 | ) | ||
|
Net loss per share - basic and diluted
|
$ | (4.17 | ) | $ | (58.16 | ) | ||
|
Shares used to compute net loss per share - basic and diluted
|
2,567,063 | 304,527 | ||||||
|
Comprehensive Loss:
|
||||||||
|
Net loss
|
$ | (10, 692,863 | ) | $ | (16,266,272 | ) | ||
|
Foreign currency translation adjustments
|
— | (201,975 | ) | |||||
|
Total comprehensive loss
|
$ | (10, 692,863 | ) | $ | (16,468,247 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
|
Series C
|
Accumulated
|
|||||||||||||||||||||||||||||||||||||||
|
Convertible Preference
|
Preferred Stock
|
Other
|
||||||||||||||||||||||||||||||||||||||
|
Shares of Subsidiary
|
Series A-1
|
Series 1
|
Common Stock
|
Accumulated
|
Comprehensive
|
|||||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Shares
|
Amount
|
Shares
|
Amount
|
Deficit
|
Income
|
Total
|
|||||||||||||||||||||||||||||||
|
Balances as of January 1, 2013
|
3,233,734 | $ | 4,993,728 | 2,937,500 | — | $ | 9,838,569 | 41,937 | $ | 49,934,027 | $ | (64,571,897 | ) | $ | 204,629 | $ | 399,056 | |||||||||||||||||||||||
|
Share round-ups in reverse stock split
|
— | — | — | — | — | 70 | — | — | — | — | ||||||||||||||||||||||||||||||
|
Exchange of Series A-1 Convertible Preferred Stock, convertible promissory notes and warrants for common stock, Series 1 Convertible Preferred Stock and warrants
|
— | — | (2,937,500 | ) | 2,987.0168 | 5,188,175 | 106,732 | 5,150,712 | — | — | 10,338,887 | |||||||||||||||||||||||||||||
|
Issuance of common stock, Series 1 Convertible Preferred Stock and warrants for cash, net of offering costs of $2,791,359
|
— | — | — | 646.0351 | 1,746,989 | 589,375 | 7,220,102 | — | — | 8,967,091 | ||||||||||||||||||||||||||||||
|
Redemption of Series B convertible preference shares of subsidiary
|
— | — | — | — | — | — | 1,123,200 | — | — | 1,123,200 | ||||||||||||||||||||||||||||||
|
Conversion of Series 1 Convertible Preferred Stock into common stock
|
— | — | — | (688.3439 | ) | (3,178,071 | ) | 173,142 | 3,178,071 | — | — | — | ||||||||||||||||||||||||||||
|
Extinguishment of Series C convertible preference shares and accumulated other comprehensive income on liquidation of subsidiary
|
(3,233,734 | ) | (4,993,728 | ) | — | — | — | — | — | — | (2,654 | ) | (4,996,382 | ) | ||||||||||||||||||||||||||
|
Accretion on Series 1 Convertible Preferred Stock associated with beneficial conversion feature
|
— | — | — | — | — | — | (898,623 | ) | — | — | (898,623 | ) | ||||||||||||||||||||||||||||
|
Stock-based compensation
|
— | — | — | — | — | — | 321,223 | — | — | 321,223 | ||||||||||||||||||||||||||||||
|
Net loss
|
— | — | — | — | — | — | — | (16,266,272 | ) | — | (16,266,272 | ) | ||||||||||||||||||||||||||||
|
Translation adjustment
|
— | — | — | — | — | — | — | — | (201,975 | ) | (201,975 | ) | ||||||||||||||||||||||||||||
|
Balances as of December 31, 2013
|
— | $ | — | — | 2,944.7080 | $ | 13,595,662 | 911,256 | $ | 66,028,712 | $ | (80,838,169 | ) | $ | — | $ | (1,213,795 | ) | ||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Stockholders’ Equity (Deficit) (continued)
|
Series 1 Preferred Stock
|
Common Stock
|
Accumulated
|
||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Deficit
|
Total
|
|||||||||||||||||
|
Balances as of January 1, 2014
|
2,944.7080
|
$
|
13,595,662
|
911,256
|
$
|
66,028,712
|
$
|
(80,838,169
|
)
|
$
|
(1,213,795
|
)
|
||||||||||
|
Share round-ups in reverse stock split
|
—
|
—
|
573
|
—
|
—
|
—
|
||||||||||||||||
|
Issuance of common stock and warrants for cash, net of offering costs of $2,424,091
|
—
|
—
|
4,000,000
|
17,575,915
|
—
|
17,575,915
|
||||||||||||||||
|
Issuance of warrants to underwriters
|
—
|
—
|
—
|
395,766
|
—
|
395,766
|
||||||||||||||||
|
Conversion of Series 1 Convertible Preferred Stock into common stock
|
(2,944.7080
|
)
|
(13,595,662
|
)
|
740,695
|
13,595,662
|
—
|
—
|
||||||||||||||
|
Reclassification of warrants following change of terms to remove cash settlement provision
|
—
|
—
|
—
|
6,821,139
|
—
|
6,821,139
|
||||||||||||||||
|
Restricted stock units issued for services, net of forfeitures
|
—
|
—
|
231,412
|
—
|
—
|
—
|
||||||||||||||||
|
Stock-based compensation
|
—
|
—
|
832
|
1,193,708
|
—
|
1,193,708
|
||||||||||||||||
|
Net loss
|
—
|
—
|
—
|
—
|
(10,692,863
|
)
|
(10,692,863
|
)
|
||||||||||||||
|
Balances as of December 31, 2014
|
—
|
$
|
—
|
5,884,768
|
$
|
105,610,902
|
$
|
(91,531,032
|
)
|
$
|
14,079,870
|
|||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
|
Year Ended December 31,
|
||||||||
|
2014
|
2013
|
|||||||
|
Cash flows from operating activities:
|
||||||||
|
Net loss
|
$ | (10,692,863 | ) | $ | (16,266,272 | ) | ||
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||
|
Depreciation and amortization
|
821,776 | 692,489 | ||||||
|
Stock-based compensation
|
1,193,708 | 321,223 | ||||||
|
(Gain) loss on revaluation of derivative liabilities, net
|
(2,200,200 | ) | 506,195 | |||||
|
Gain on settlement of derivative liability
|
— | (1,012,351 | ) | |||||
|
Interest converted to principal on long-term debt
|
68,219 | 547,866 | ||||||
|
Provision for excess and obsolete inventory
|
(840,544 | ) | (77,568 | ) | ||||
|
Amortization of debt discount
|
333,947 | 2,121,593 | ||||||
|
Loss on extinguishment of debt
|
128,546 | 4,970,410 | ||||||
|
Issuance of warrants due to organic change
|
— | 2,553,318 | ||||||
|
Gain on liquidation of subsidiary
|
— | (3,386,297 | ) | |||||
|
Change in operating assets and liabilities:
|
||||||||
|
Accounts receivable
|
(1,113,984 | ) | (60,921 | ) | ||||
|
Inventories
|
819,261 | 280,404 | ||||||
|
Prepaid expenses and other assets
|
(66,692 | ) | (51,532 | ) | ||||
|
Accounts payable
|
513,321 | 506,464 | ||||||
|
Accrued payroll and related costs
|
1,026,396 | 52,535 | ||||||
|
Other accrued expenses
|
(278,292 | ) | 81,230 | |||||
|
Net cash used in operating activities
|
(10,287,401 | ) | (8,221,214 | ) | ||||
|
Cash flows from investing activities:
|
||||||||
|
Purchase of property and equipment
|
(334,592 | ) | (91,545 | ) | ||||
|
Acquisition of business
|
(2,000,000 | ) | — | |||||
|
Cash of former subsidiary transferred to liquidator
|
— | (433,411 | ) | |||||
|
Net cash used in investing activities
|
(2,334,592 | ) | (524,956 | ) | ||||
|
Cash flows from financing activities:
|
||||||||
|
Net proceeds from issuance of common stock and warrants (and Series 1 Convertible Preferred Stock in 2013 only)
|
17,971,681 | 13,393,162 | ||||||
|
Repayment of capital lease obligations
|
(8,008 | ) | — | |||||
|
Repayment of promissory note
|
(1,318,219 | ) | — | |||||
|
Purchase of Series B convertible preference shares of former subsidiary
|
— | (70,000 | ) | |||||
|
Net cash provided by financing activities
|
16,645,454 | 13,323,162 | ||||||
|
Effect of exchange rates on cash
|
— | (197,099 | ) | |||||
|
Net increase in cash and cash equivalents
|
4,023,461 | 4,379,893 | ||||||
|
Cash and cash equivalents at beginning of the period
|
10,708,646 | 6,328,753 | ||||||
|
Cash and cash equivalents at end of the period
|
$ | 14,732,107 | $ | 10,708,646 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flows (continued)
|
Year Ended December 31,
|
||||||||
|
2014
|
2013
|
|||||||
|
Supplemental disclosures of cash flow information:
|
||||||||
|
Cash paid for interest
|
$ | 70,796 | $ | 4,341 | ||||
|
Cash paid for income taxes
|
$ | 3,100 | $ | 28,559 | ||||
|
Cash (received) for income taxes
|
$ | — | $ | (1,051 | ) | |||
|
Supplemental disclosure of non-cash investing and financing activities:
|
||||||||
|
Property and equipment acquired with capital leases
|
$ | 363,815 | $ | — | ||||
|
Warrant derivative liabilities transferred to equity on waiver of potential cash settlement provisions
|
$ | 6,821,139 | $ | — | ||||
|
Inventory transferred to property and equipment
|
$ | 107,155 | $ | — | ||||
|
Issuance of promissory note, net of debt discount, in business acquisition
|
$ | 1,100,000 | $ | — | ||||
|
Initial valuation of revenue earn-out contingency in business acquisition
|
$ | 410,000 | $ | — | ||||
|
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 underwriters and placement agents
|
$ | 395,766 | $ | 1,147,021 | ||||
|
Accretion on Series 1 convertible preferred stock associated with beneficial conversion feature
|
$ | — | $ | 898,623 | ||||
|
Issuance of long-term debt, net of debt discount, upon liquidation of subsidiary
|
$ | — | $ | 1,656,684 | ||||
|
Extinguishment of Series C convertible preference shares upon liquidation of subsidiary
|
$ | — | $ | 4,993,728 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
40
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
General. WaferGen Bio-systems, Inc. and its subsidiaries (the “Company”) are engaged in the development, manufacture and sale of systems used for gene expression quantification, genotyping and stem cell research. The Company’s products are aimed at researchers who perform genetic analysis, primarily at pharmaceutical and biotech companies, academic and private research centers and diagnostics companies involved in biomarker discovery and genetic research. Through the SmartChip 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 January 24, 2008, the Company formed a subsidiary, WaferGen Biosystems (M) Sdn. Bhd. (“WGBM”), in Malaysia. Prior to WGBM’s liquidation on November 26, 2013, the Company owned 100% of the common stock and 17.2% (comprising shares that had been assumed by the Company) of the preference shares of this entity, with the remaining preference shares owned by Malaysian Technology Development Corporation Sdn. Bhd. (“MTDC”). See Notes 7 and 8 below.
On August 30, 2011, the Company formed a 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 “2013 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 2013 Reverse Split. Stockholders who were otherwise entitled to receive a fractional share of common stock received one whole share of common stock. The 2013 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.
On June 30, 2014, the Company effected a reverse stock split of its common stock by a ratio of one-for-ten (the “2014 Reverse Split”). Every ten outstanding shares of common stock became one share of common stock. No fractional shares were issued in connection with the 2014 Reverse Split. Stockholders who were otherwise entitled to receive a fractional share of common stock received one whole share of common stock. The 2014 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 2013 Reverse Split and 2014 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 combined impact of the 2013 Reverse Split and the 2014 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 (“CPNs”) 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 Convertible Preferred Stock and the CPNs, 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 Convertible Preferred Stock with a liquidation preference of $17,081,913, CPNs with a principal amount of $17,084,894 and 2011 Warrants exercisable for 56,518 shares of common stock for 2,987.0168 shares of Series 1 Convertible Preferred Stock, 106,732 shares of our common stock and warrants exercisable for 236,900 shares of common stock. These warrants are exercisable at any time before August 27, 2018, at an exercise price of $26.00 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 $20.00 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
41
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
$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 11.
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 2,500 shares of our common stock or 9.9390 shares of the Series 1 Convertible Preferred Stock and (2) warrants to purchase 1,250 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 520,925 shares of common stock, 646.0351 shares of Series 1 Convertible Preferred Stock (convertible into a total of 162,500 shares of common stock) and 341,713 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 68,450 shares of common stock and 34,225 warrants.
In total, the Company sold an aggregate of 589,375 shares of common stock, 646.0351 shares of Series 1 Convertible Preferred Stock and warrants to purchase 375,938 shares of common stock for $26.00 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 Fair Value
|
Issuance Costs
|
Final Allocation
|
|||||||||
|
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 | |||||||||
|
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 $26.00 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 at the time of issuance, a fundamental transaction could have given rise to an obligation of the Company to pay cash to its warrant holders, which prevented them from being accounted for within stockholders’ equity. Accordingly, they were recorded as liabilities on their issuance date and were 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 until such time as their terms were amended (see Note 11).
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 $20.00 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 $19.60 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.
On January 6, 2014, the Company acquired substantially all of the assets of the product line of IntegenX Inc. (“IntegenX”) used in connection with developing, manufacturing, marketing and selling instruments and reagents relating to library preparation for next generation sequencing (“NGS”), including the Apollo 324™ instrument and the PrepX™ reagents (the “Apollo Business”). See Note 3 below.
On August 27, 2014, the Company completed a public offering (the “2014 Public Offering”) of 2,000 Units (the “Units”) for $10,000 per Unit, with each Unit consisting of 2,000 shares of the Company’s common stock and 2,000 warrants to purchase one share of common stock. In aggregate, the Company issued 4,000,000 shares of its common stock (excluding 600,000 shares of common stock sold by certain stockholders to the underwriters) and 4,600,000 warrants to purchase shares of its
42
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
common stock (inclusive of 600,000 shares of common stock sold by the Company from the full exercise of the overallotment option of warrants granted to the underwriters). Subject to certain ownership limitations, the warrants are exercisable at any time within five years of their issuance date at an exercise price of $5.00 per share. The total gross proceeds from the offering to the Company were $20,000,006. After deducting underwriting discounts, commissions and offering expenses payable by the Company, the aggregate net proceeds received by the Company totaled approximately $18.0 million.
The Company retained underwriters in connection with the 2014 Public Offering, and pursuant to the terms of an underwriting agreement, the Company paid the underwriters an aggregate fee totaling approximately $1,675,000. In addition, the Company issued the underwriters 120,000 warrants at the closing of the 2014 Offering, each warrant entitling the holder to purchase one share of common stock for $6.25 at any time within five years of their issuance date. The aggregate fair value of these warrants when they were issued on August 27, 2014, was estimated to be $395,766, using a closing stock price of $4.60 and assumptions including estimated volatility of 108.07%, a risk-free interest rate of 1.48%, a zero dividend rate and an estimated remaining term of 4.50 years. This estimated fair value was recorded in offering costs.
NOTE 2. Summary of Significant Accounting Policies
Basis of Presentation. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
Principles of Consolidation. The consolidated financial statements include the financial statements of WaferGen Bio-systems, Inc. and its subsidiaries. All significant transactions and balances between the WaferGen Bio-systems, Inc. and its subsidiaries have been eliminated in consolidation.
Use of Estimates. Preparing financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results and outcomes could differ from these estimates and assumptions.
Cash and Cash Equivalents. The Company considers all highly liquid debt investments with a remaining maturity of three months or less when purchased to be cash and cash equivalents. Cash and cash equivalents that are restricted as to withdrawal or usage under the terms of contractual agreements, if any, are recorded as restricted cash.
Foreign Currencies. Assets and liabilities of non-U.S. subsidiaries for which the local currency is the functional currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average rates of exchange prevailing during each reporting period. 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 consolidated statements of operations.
Fair Value of Financial Instruments. The carrying amounts of accounts receivable and accounts payable approximate fair value due to the short-term maturities of these instruments. See also the Company’s accounting policy for “Change in Fair Value of Derivatives.”
Concentration of Credit Risk. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash in commercial banks. Accounts in the United States are secured by the Federal Deposit Insurance Corporation. Accounts in 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.
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 as needed.
43
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Goodwill and Other 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.”
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 (See also the Company’s accounting policy for “Impairment of Long-Lived Assets.”) 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.
Property and Equipment. Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets as follows:
|
Equipment
|
3 to 5 years
|
|
Tools and molds
|
3 years
|
|
Leasehold improvements
|
3 to 5 years, or remaining lease term if shorter
|
|
Furniture and fixtures
|
5 years
|
Costs of maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred. Upon retirement or sale, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operating expenses.
Advertising Costs. Advertising costs of nil were expensed as incurred in the years ended December 31, 2014 and 2013.
Deferred Financing Costs. Costs incurred in connection with the issuance of debt are capitalized and amortized as interest expense using the effective interest method. The unamortized amounts are included in other assets.
Impairment of Long-Lived Assets. The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance of long-lived assets may not be recoverable. When factors indicate that long-lived assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted future cash flows over the remaining life of the long-lived assets in measuring whether they are recoverable. If the estimated undiscounted future cash flows do not exceed the carrying value of the asset, a loss is recorded as the excess of the asset’s carrying value over its fair value. No assets were determined to be impaired in 2014 and 2013.
Income Taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in income in the period that includes the enactment date. Accounting for deferred tax represents the best estimate of the likely future tax consequences of events that have been recognized in the Company’s consolidated financial statements and tax returns and their future probability. A valuation allowance is recorded for loss carry-forwards and other deferred tax assets where it is more likely than not that such loss carry-forwards and deferred tax assets will not be realized. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes.
Governmental Subsidies. Incentives received from governments in the form of grants are recorded as a reduction in expense in accordance with their purpose. Grants awarded for the purpose of matching specified expenditures are not recognized until a definitive agreement has been signed by both parties; thereafter income is recognized to the extent that the related expenses have been incurred. The Company recognized governmental subsidies of $559,442 and $311,079 in the years ended December 31, 2014 and 2013, respectively, which were offset against operating expenses in the statement of operations.
Revenue Recognition. The Company recognizes revenue when (i) delivery of product has occurred or services have been rendered, (ii) there is persuasive evidence of a sale arrangement, (iii) selling prices are fixed or determinable, and (iv) collectability from the customers (individual customers and distributors) is 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 (individual customers and distributors). This generally occurs when the Company’s
44
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
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. Distributors have a fourteen day inspection period however this period is not an acceptance provision that purports to be a trial or evaluation purpose, is not an acceptance provision that grants a right of return or exchange on the basis of subjective matters, and is not an acceptance provision based on customer-specific objective criteria. The fourteen day inspection period is an acceptance provision that is based on seller-specified objective criteria.
Revenue from multi-deliverable arrangements is recognized for each element on delivery of product or completion of service. A typical multi-deliverable arrangement would be the shipment of capital equipment to a customer, followed by the delivery of services or of expendable equipment, provided such delivery is both probable and substantially within the Company’s control. Revenue for each deliverable is allocated based on full list selling prices, although if none of the deliverables is disproportionately discounted relative to the overall discount, this allocation is approximated by using the actual selling price of each deliverable to the customer. The actual cost of revenue for each deliverable is recognized when the revenue for that deliverable is recognized.
Stock-Based Compensation. The Company measures the fair value of all stock-based awards to employees, including stock options, on the grant date and records the fair value of these awards, net of estimated forfeitures, to compensation expense over the service period. The fair value of awards to consultants is measured on the dates on which performance of services is completed, with interim valuations recorded at balance sheet dates while performance is in progress. The fair value of options is estimated using the Black-Scholes valuation model, and 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 (or recognized until the time of their settlement) its warrants with certain 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 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 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.
Research and Development. Research and development costs are charged to operations as incurred.
Other Comprehensive Income. Other comprehensive income has arisen solely due to the cumulative translation adjustments ensuing from the Company’s accounting policy for foreign currencies.
Net Income (Loss) Per Share. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding plus common share equivalents from conversion of dilutive stock options, warrants, and restricted stock using the treasury method, and convertible securities using the as-converted method, except when antidilutive. In the event of a net loss, the effects of all potentially dilutive shares are excluded from the diluted net loss per share calculation as their inclusion would be antidilutive.
Reclassification. Certain reclassifications have been made to prior periods’ data to conform to the current presentation. These reclassifications had no effect on reported net losses.
Recent Accounting Pronouncements.
In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”). ASU 2014-08 clarifies the circumstances under which discontinued operations should be reported and
45
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
increases the disclosure requirements. ASU 2014-08 is effective for annual periods beginning after December 15, 2014, and interim periods within those years, and became effective for the Company on January 1, 2015. The adoption of this standard did not have a material impact on the Company’s consolidated financial condition or results of operations.
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. ASU 2014-09 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 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 January 2015, the FASB issued ASU 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items” (“ASU 2015-01”). Under ASU 2015-01, items which are both unusual in nature and infrequent in occurrence will be reported as a separate line item in the Statement of Operations in accordance with the guidance that is already in place for unusual items (those items that are either unusual in nature or infrequent in occurrence). ASU 2015-01 is effective for annual periods beginning after December 15, 2015, with early adoption permitted. The Company has adopted this standard effective January 1, 2014, and its adoption had no impact on the Company’s consolidated financial condition or results of operations.
In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU 2015-02”). Under ASU 2015-02, the guidelines for determining whether certain legal entities should be consolidated will be amended. ASU 2015-02 is effective for annual periods beginning after December 15, 2015, and interim periods within those years, with early adoption permitted. The Company has adopted this standard effective January 1, 2014, and its adoption had no impact on the Company’s consolidated financial condition or results of operations.
NOTE 3. Acquisitions
On January 6, 2014, the Company acquired the Apollo Business (see Note 1). Since that date the results of its operations have been included in the consolidated financial statements. As a result of the acquisition, the Company can now offer a wide spectrum of products for sample preparation for NGS to laboratories performing targeted sequencing. The Company expects to achieve significant synergies, especially in its sales and marketing efforts, since the SmartChip and Apollo products and services serve the same customer base.
The total purchase price for the Apollo Business is summarized as follows:
|
Cash
|
$
|
2,000,000
|
||
|
Promissory note (see Note 7)
|
1,100,000
|
|||
|
Contingent earn-out payments
|
410,000
|
|||
|
Total
|
$
|
3,510,000
|
46
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The contingent consideration arrangement requires the Company to pay IntegenX a percentage of revenues, on a sliding scale up to 20%, should certain revenue targets be achieved in 2014, 2015 and 2016. We estimated the fair value of the contingent consideration using a probability-weighted discounted cash flow model based on key assumptions including annual revenues ranging from $4.0 million to $9.9 million and a discount rate of 14%. This is measured as a Level 3 fair value liability (see Note 13).
In connection with the Apollo Business acquisition, the Company allocated the total purchase consideration to the net assets and liabilities acquired, including identifiable intangible assets, based on their respective fair values at the acquisition date.
The following table summarizes the allocation of the purchase price to the fair value of the respective assets and liabilities acquired:
|
Inventory
|
$
|
606,000
|
||
|
Property and equipment
|
118,000
|
|||
|
Intangible assets:
|
||||
|
Customer lists and trademarks
|
1,500,000
|
|||
|
Purchased technology
|
360,000
|
|||
|
Goodwill (1)
|
990,000
|
|||
|
Total assets
|
3,574,000
|
|||
|
Liabilities – accrued vacation
|
(64,000
|
)
|
||
|
Total purchase price
|
$
|
3,510,000
|
__________
|
(1)
|
Goodwill, which represents the excess of the purchase price over the fair value of tangible and identified intangible assets acquired, is attributable primarily to expected synergies and the assembled workforce. All of the goodwill is expected to be deductible for income tax purposes except to the extent that it arose due to an over-estimate of contingent earn-out payments.
|
In addition, the Company incurred and expensed costs directly related to this acquisition totaling approximately $140,000, of which $95,000 and $45,000 was incurred in the years ended December 31, 2014 and 2013, respectively, and is included in general and administrative expenses in the consolidated statement of operations.
Selected amounts related to the Apollo Business included in the Company’s consolidated statement of operations for the year ended December 31, 2014, are as follows:
|
Revenue
|
$
|
2,121,696
|
||
|
Net loss
|
$
|
(2,499,000
|
)
|
The unaudited pro forma information in the table below summarizes the combined results of operations of WaferGen Bio-systems, Inc. and subsidiaries with those of the Apollo Business as though these entities were combined as of January 1, 2013. The results of the Apollo Business for the year ended December 31, 2013, are based on the actual historic Abbreviated Financial Statements prepared for the year ended December 31, 2013, and for the year ended December 31, 2014, are based on the Company’s results of operations, adjusted for estimated operating expenses in the five days prior to the acquisition. The pro forma financial information for all periods presented also includes the removal of direct acquisition-related costs, the additional charges for interest expense on acquisition-related borrowing, and the actual depreciation and amortization that would have been charged assuming the fair value adjustments to property and equipment and intangible assets had been applied as of January 1, 2013. This unaudited pro forma information is summarized as follows:
|
Year Ended December 31,
|
||||||||
|
2014
|
2013
|
|||||||
|
Total revenue
|
$ | 6,001,342 | $ | 4,245,586 | ||||
|
Net loss
|
$ | (10,491,119 | ) | $ | (17,593,069 | ) | ||
|
Net loss per share - basic and diluted
|
$ | (4.09 | ) | $ | (62.52 | ) | ||
47
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The pro forma financial information as presented above is for informational purposes only and is not indicative of the consolidated results of operations of future periods or the results of operations that would have been achieved had the acquisition had taken place on January 1, 2013.
NOTE 4. Inventories
Inventories, net of provisions for potentially excess, obsolete or impaired goods, consisted of the following at December 31, 2014 and 2013:
|
December 31, 2014
|
December 31, 2013
|
|||||||
|
Raw materials
|
$ | 54,620 | $ | 125,068 | ||||
|
Work in process
|
250,935 | 46,974 | ||||||
|
Finished goods
|
507,223 | 120,608 | ||||||
|
Inventories, net
|
$ | 812,778 | $ | 292,650 | ||||
NOTE 5. Property and Equipment
Property and equipment consisted of the following at December 31, 2014 and 2013:
|
December 31, 2014
|
December 31, 2013
|
|||||||
|
Equipment
|
$ | 3,080,849 | $ | 2,161,715 | ||||
|
Tools and molds
|
11,543 | 11,543 | ||||||
|
Leasehold improvements
|
85,711 | 82,848 | ||||||
|
Furniture and fixtures
|
95,083 | 93,518 | ||||||
|
Total property and equipment
|
3,273,186 | 2,349,624 | ||||||
|
Less accumulated depreciation and amortization
|
(2,403,882 | ) | (2,080,006 | ) | ||||
|
Property and equipment, net
|
$ | 869,304 | $ | 269,618 | ||||
Depreciation and amortization expense related to property and equipment totaled $323,876 and $692,489 for the years ended December 31, 2014 and 2013, respectively. Equipment includes the following amounts under leases at December 31, 2014 and 2013:
|
December 31, 2014
|
December 31, 2013
|
|||||||
|
Cost
|
$ | 455,162 | $ | — | ||||
|
Accumulated depreciation
|
— | — | ||||||
|
Total
|
$ | 455,162 | $ | — | ||||
NOTE 6. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill in the year ended December 31, 2014, were as follows:
|
Balance at January 1, 2014
|
$
|
—
|
||
|
Additions (see Note 3)
|
990,000
|
|||
|
Balance at December 31, 2014
|
$
|
990,000
|
48
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Other intangible assets as of December 31, 2014, consist of:
|
Gross
|
Note
|
|||||||||||
|
Carrying
|
Accumulated
|
Intangible
|
||||||||||
|
Amount
|
Amortization
|
Assets
|
||||||||||
|
Purchased technology
|
$
|
360,000
|
$
|
100,000
|
$
|
260,000
|
||||||
|
Customer lists and trademarks
|
1,500,000
|
397,900
|
1,102,100
|
|||||||||
|
Total as of December 31, 2014
|
$
|
1,860,000
|
$
|
497,900
|
$
|
1,362,100
|
||||||
The estimated future amortization expenses by fiscal year are as follows:
|
Year ending December 31,
|
||||
|
2015
|
$
|
449,900
|
||
|
2016
|
421,000
|
|||
|
2017
|
313,900
|
|||
|
2018
|
148,500
|
|||
|
2019
|
28,800
|
|||
|
Total amortization
|
$
|
1,362,100
|
Intangible asset amortization expense for the years ended December 31, 2014 and 2013, was $497,900 and nil, respectively.
NOTE 7. Long Term Obligations
On May 27, 2011, the Company sold convertible promissory notes (“CPNs”) 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 (see Note 9) at a price of $5.70 per share, with each 99.39 shares being convertible into one share of common stock. The CPNs were sold along with Series A-1 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 CPNs 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.
The debt discount related to the debt element of the convertible promissory notes of $14,442,497 was, prior to their exchange for equity securities on August 27, 2013 (the “2013 Exchange”), being amortized as non-cash interest expense using the effective yield method over the 3.5 year contractual term of the CPNs. $832,502 in issuance costs allocated to the CPNs was recorded as a deferred financing cost, which was also being amortized as a non-cash interest expense using the effective yield method over their 3.5 year contractual term.
The Company valued the derivative liability for the conversion element of the CPNs using a Monte Carlo Simulation approach, using assumptions provided by management reflecting conditions at the valuation dates.
The fair value of this derivative liability at December 31, 2012, was estimated to be $274,928. It had diminished to nil by the time of the 2013 Exchange. The decrease in the fair value of this derivative liability of $274,928 during the year ended December 31, 2013, was recorded as a revaluation gain (see Note 13). The Company recorded a loss on early extinguishment of debt of $4,970,410 as a result of the 2013 Exchange (see Note 1).
On August 15, 2013, the Company issued WGBM 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 MTDC (see Notes 1 and 8), upon liquidation of WGBM (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”).
49
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The MTDC Notes were recorded using an effective interest rate of 17.39% and are summarized as follows at December 31, 2014 and 2013:
|
December 31, 2014
|
December 31, 2013
|
|||||||
|
MTDC Notes Payable:
|
||||||||
|
Face value
|
$ | 5,200,000 | $ | 5,200,000 | ||||
|
Debt discount, net of accumulated amortization of $339,751 and 27,258 at December 31, 2014 and 2013, respectively
|
3,203,565 | 3,516,058 | ||||||
|
Notes payable, net of debt discount
|
$ | 1,996,435 | $ | 1,683,942 | ||||
At any time prior to their maturity date, the Company may issue 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 $3.4019 in the 30 days preceding December 31, 2014, the MTDC Notes could have been settled by issuing 1,528,558 shares of the Company’s common stock.
As part of the consideration for the Apollo Business (see Notes 1 and 3), the Company issued a $1.25 million secured promissory note to IntegenX (the “IntegenX Note”), due on January 6, 2017 (the “Maturity Date”). The IntegenX Note earned simple interest at 8% per annum over its three year term, payable on the Maturity Date. It was repayable early without premium or penalty at the Company’s option at any time and it had to be repaid within 45 days of the closing of an equity offering yielding the Company net cash proceeds of at least $15,000,000. Such an equity offering closed on August 27, 2014 (see Note 1) and the IntegenX Note was repaid on September 12, 2014.
The IntegenX Note was recorded using an effective interest rate of 11.60% and is summarized as follows at December 31 and January 6, 2014:
|
December 31, 2014
|
January 6, 2014
|
|||||||
|
IntegenX Notes Payable:
|
||||||||
|
Face value
|
$ | 1,250,000 | $ | 1,250,000 | ||||
|
Interest added to principal
|
68,219 | — | ||||||
|
Stated value
|
1,318,219 | 1,250,000 | ||||||
|
Debt discount, net of accumulated amortization of $21,454 and nil at September 12 and January 6, 2014, respectively
|
128,546 | 150,000 | ||||||
|
Notes payable, net of debt discount, prior to repayment
|
1,189,673 | 1,100,000 | ||||||
|
Loss on extinguishment of debt
|
128,546 | — | ||||||
|
Balance repaid to IntegenX
|
(1,318,219 | ) | — | |||||
|
Notes payable, net of debt discount
|
$ | — | $ | 1,100,000 | ||||
The Company recorded a loss on early extinguishment of debt of $128,546 as a result of the repayment of the IntegenX Note on September 12, 2014.
The Company leases office space for use in its operations under a non-cancellable operating lease that expires in April 2018. The Company also leases equipment under two capital leases that expires in December 2017 and January 2018.
50
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Aggregate future minimum obligations for leases in effect as of December 31, 2014, are as follows:
|
Operating Leases
|
Capital Leases
|
|||||||
|
Year ending December 31,
|
||||||||
|
2015
|
$ | 438,707 | $ | 129,284 | ||||
|
2016
|
451,868 | 129,284 | ||||||
|
2017
|
465,424 | 120,189 | ||||||
|
2018
|
159,796 | — | ||||||
|
Total minimum obligations
|
$ | 1,515,795 | 378,757 | |||||
|
Amounts representing interest
|
(22,950 | ) | ||||||
|
Present value of future minimum payments
|
355,807 | |||||||
|
Current portion of long term obligations
|
(116,571 | ) | ||||||
|
Long term obligations, less current portion
|
$ | 239,236 | ||||||
Rent expense totaled $365,665 and $604,558 for the years ended December 31, 2014 and 2013, respectively.
NOTE 8. Convertible Preference Shares of Subsidiary
Prior to its dissolution in November 2013, in 2008, the Company’s former Malaysian subsidiary, WGBM, issued Series A Convertible Preference Shares (“CPS”) to MTDC (see Notes 1 and 7), 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. In October 2013 the Company purchased PMSB’s 444,444 Series B CPS for $70,000.
These transactions, along with the issuance of Series C CPS in 2011 (see below), were summarized as follows immediately prior to the liquidation of WGBM on November 26, 2013:
|
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
|
10/11/2013
|
—
|
|||||||||||||
|
Series B
|
222,222
|
PMSB
|
05/13/2010
|
500,000
|
(5,000
|
)
|
—
|
495,000
|
10/11/2013
|
—
|
|||||||||||||
|
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
|
888,888
|
|||||||||||||||
|
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
|
4,122,622
|
|||||||||||||
51
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The holders of Series B CPS had the right to cause the Company to exchange their CPS for common stock of the Company at an exchange rate of US$2,236.30 per share of common stock, provided that 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 was less than US$2,630.90, then the holder could exchange CPS at an exchange rate equal to 85% of such 10-day average closing price. Since this afforded the holders the right to receive a variable number of shares of the Company’s common stock, this feature was not indexed to the Company’s equity and was 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).
On October 11, 2013, the Company purchased the remaining Series B CPS for $70,000. Series B CPS derivative liability fair values at October 11, 2013 and December 31, 2012, were estimated to be $1,082,351 and $1,210,909, respectively, using a closing stock price of $20.00 and $29.82, respectively, and based on the following assumptions:
|
October 11, 2013
|
December 31, 2012
|
|||
|
Risk-free interest rate
|
0.07%
|
0.16%
|
||
|
Expected remaining term
|
0.48 Years
|
1.00 Years
|
||
|
Expected volatility
|
97.39%
|
125.53%
|
||
|
Dividend yield
|
0%
|
0%
|
The net decrease in the fair value of this derivative liability of $128,558 during the period ended October 11, 2013, was recorded as a revaluation gain (see Note 13). The difference between the fair value of the derivative liability and the amount for which it was settled on October 11, 2013, was recorded as a gain on settlement of derivative liability of $1,012,351.
The holders of Series A CPS had the right to redeem their shares for cash (or, at the Company’s option, shares of Company 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) in the amount originally invested in USD plus a premium of 8%, compounded annually. In addition, the ASP was subject to a ceiling of $1,540.55 and a floor of $99.39. Since this afforded the holders the right to receive a variable number of shares of the Company’s common stock, this feature caused the Series A CPS to not be indexed to the Company’s equity. As a result, the Company recognized this right as an embedded derivative requiring bifurcation and the host instrument (the Series A CPS absent this option) as part of temporary equity.
The Series A CPS derivative liability fair values at November 26, 2013, the date on which WGBM was liquidated, and December 31, 2012, were estimated to be $446,602 and $619,652, respectively, using a closing stock price of $20.00 and $29.82, respectively, and based on the following assumptions:
|
November 26, 2013
|
December 31, 2012
|
|||
|
Risk-free interest rate
|
0.07%
|
0.11% - 0.15%
|
||
|
Expected remaining term
|
0.08 Years
|
0.55 - 0.90 Years
|
||
|
Expected volatility
|
175.31%
|
123.55 - 127.94%
|
||
|
Dividend yield
|
0%
|
0%
|
The net decrease in the fair value of this derivative liability of $173,050 during the period ended November 26, 2013, was recorded as a revaluation gain (see Note 13). The fair value of this derivative liability on November 26, 2013, was considered in the determination of the gain on liquidation of subsidiary.
On March 10, 2011, WGBM received $5,000,000, less issuance costs totaling $6,272, in exchange for the issuance of 3,233,734 Series C convertible preference shares (“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. MTDC could 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. Each 993.9 Series C CPS issued at the initial closing was convertible into one share of the Company on April 3, 2014, and each 993.9 Series C CPS issued at the subsequent closing was convertible into one share of the Company on the anniversary of that closing, but the Series C was convertible at any earlier date following each closing at MTDC’s option.
52
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The net sum of $4,993,728 received on issuance of Series C CPS was recorded in stockholders’ equity; this sum was considered in the determination of the gain on liquidation of subsidiary on November 26, 2013. WGBM was authorized to issue 200,000,000 preference shares with a par value of RM0.01. Due to the liquidation of WGBM, no shares remained authorized, issued or outstanding as of December 31, 2014 or 2013.
NOTE 9. 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 was convertible into 251.53436 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 2,987.0168 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). The Company 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 was immediately convertible and not redeemable, this non-contingent beneficial conversion feature of $898,623 was recorded as a one-time accretion expense. As of December 31, 2014, all the 3,633.0519 shares of Series 1 Convertible Preferred Stock have been converted into 913,837 shares of common stock.
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 99.39 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 2,937,500 shares of Series A-1 Convertible Preferred Stock with a stated value of $5.20 per share. As of August 27, 2013, when all of the outstanding Series A-1 Convertible Preferred Stock was exchanged for common stock and Series 1 Convertible Preferred Stock in conjunction with the Exchange Agreement (see Note 1), $1,806,913 of undeclared dividends had been accrued, of which $547,171 related to the year ended December 31, 2013.
NOTE 10. 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”). In addition, there are 98,932 inducement options outstanding that were awarded to executive officers on August 27, 2014, not covered by the Plans, with the same standard terms as non-qualified stock options awarded under the 2008 Plan. Under the 2003 Plan and 2007 Plan, incentive stock options, non-qualified 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. This includes amendments adopted by the Company’s stockholders on May 29, 2014, which increased the total number of shares authorized for issuance from 14,589 to 314,589, and on November 17, 2014, which further increased the total number of shares authorized for issuance from 314,589 to 1,214,589. 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
53
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
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.
The weighted average grant date fair value of options awarded in the years ended December 31, 2014 and 2013, was $6.33 and $37.25, respectively. These fair values were estimated using the following assumptions (see also Note 13):
|
Year Ended December 31,
|
||||
|
2014
|
2013
|
|||
|
Risk-free interest rate
|
1.43% - 1.57%
|
0.71% - 1.22%
|
||
|
Expected term
|
4.75 Years
|
4.75 Years
|
||
|
Expected volatility
|
93.89% - 105.79%
|
96.73% - 108.14%
|
||
|
Dividend yield
|
0%
|
0%
|
||
A summary of stock option and restricted stock transactions in the two years ended December 31, 2014, is as follows:
|
Stock Options
|
Restricted Stock
|
|||||||||||||||||||
|
Weighted
|
Weighted
|
|||||||||||||||||||
|
Shares
|
Number of
|
Average
|
Number of
|
Average
|
||||||||||||||||
|
Available
|
Options
|
Exercise
|
Awards
|
Grant-Date
|
||||||||||||||||
|
For Grant
|
Outstanding
|
Price
|
Outstanding
|
Fair Value
|
||||||||||||||||
|
Balance at January 1, 2013
|
2,951 | 11,489 | $ | 416.70 | 6 | $ | 139.15 | |||||||||||||
|
Granted
|
(1,887 | ) | 1,887 | $ | 49.50 | — | $ | — | ||||||||||||
|
Vested
|
— | — | $ | — | (6 | ) | $ | 139.15 | ||||||||||||
|
Forfeited
|
1,247 | (1,247 | ) | $ | 106.67 | — | $ | — | ||||||||||||
|
Canceled
|
468 | (776 | ) | $ | 937.83 | — | $ | — | ||||||||||||
|
Balance at December 31, 2013
|
2,779 | 11,353 | $ | 353.92 | — | $ | — | |||||||||||||
|
2008 Plan Amendments
|
1,200,000 | — | — | — | $ | — | ||||||||||||||
|
Granted
|
(320,970 | ) | 178,490 | $ | 8.79 | 241,412 | $ | 4.80 | ||||||||||||
|
Vested
|
— | — | $ | — | (6,412 | ) | $ | 14.00 | ||||||||||||
|
Forfeited
|
10,604 | (604 | ) | $ | 80.10 | (10,000 | ) | $ | 4.57 | |||||||||||
|
Canceled
|
1,994 | (2,027 | ) | $ | 204.66 | — | $ | — | ||||||||||||
|
Balance at December 31, 2014
|
894,407 | 187,212 | $ | 27.35 | 225,000 | $ | 4.54 | |||||||||||||
The following table summarizes information concerning outstanding options as of December 31, 2014:
|
Weighted
|
||||||||||||||||
|
Average
|
Weighted
|
|||||||||||||||
|
Remaining
|
Average
|
Aggregate
|
||||||||||||||
|
Number of
|
Contractual
|
Exercise
|
Intrinsic
|
|||||||||||||
|
Options
|
Shares
|
Life (in Years)
|
Price
|
Value
|
||||||||||||
|
Outstanding
|
187,212 | 6.43 | $ | 27.35 | $ | — | ||||||||||
|
Vested and expected to vest
|
171,389 | 6.41 | $ | 29.40 | $ | — | ||||||||||
|
Exercisable
|
80,778 | 6.17 | $ | 55.35 | $ | — | ||||||||||
54
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The aggregate intrinsic value in the preceding table represents the total pre-tax value (i.e., the difference between the Company’s stock price and the exercise price) of stock options outstanding as of December 31, 2014, based on our common stock closing price of $3.00, which would have been received by the option holders had all their in-the-money options been exercised as of that date.
The grant date fair value of options vested in the years ended December 31, 2014 and 2013, was $899,022 and $396,304, respectively. No options were exercised during the two years ended December 31, 2014. The total fair value of restricted stock vested in the years ended December 31, 2014 and 2013, was $19,236 and $179, respectively.
The amounts expensed for stock-based compensation totaled $1,193,708 and $321,223 for the years ended December 31, 2014 and 2013, respectively.
At December 31, 2014, the total stock-based compensation cost not yet recognized, net of estimated forfeitures, was $1,085,824. This cost is expected to be recognized over an estimated weighted average amortization period of 2.27 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 11. Warrants
A summary of outstanding common stock warrants as of December 31, 2014, is as follows:
|
Securities Into Which
|
Total Warrants
|
Warrants Recorded
|
Exercise
|
Expiration
|
|||||||||||
|
Warrants are Convertible
|
Outstanding
|
as Liabilities
|
Price
|
Date
|
|||||||||||
|
Common stock
|
4,600,000 | — | $ | 5.00 |
August 2019
|
||||||||||
|
Common stock
|
120,000 | — | $ | 6.25 |
August 2019
|
||||||||||
|
Common stock
|
7,698 | 7,698 | $ | 7.59 |
January 2015
|
||||||||||
|
Common stock
|
612,838 | 110,527 | $ | 26.00 |
August and September 2018
|
||||||||||
|
Common stock
|
96 | — | $ | 1,459.05 |
December 2015
|
||||||||||
|
Common stock
|
205 | — | $ | 1,490.85 |
July 2015
|
||||||||||
|
Common stock
|
3,019 | — | $ | 1,540.55 |
July 2015
|
||||||||||
|
Common stock
|
151 | — | $ | 2,981.70 |
November 2015
|
||||||||||
|
Total
|
5,344,007 | 118,225 | |||||||||||||
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 (see Note 1).
The warrants expiring in August 2019 comprise 4,600,000 warrants with an exercise price of $5.00 issued to investors and 120,000 warrants with an exercise price of $6.25 issued to underwriters in the 2014 Public Offering (see Note 1).
The warrants expiring in January 2015 were originally issued in January 2010 with an exercise price of $2,484.75 and entitled the holders thereof to purchase an aggregate of 24 shares. As a result of anti-dilution adjustments with respect to such warrants pursuant to their terms, such warrants, as of December 31, 2014, had an exercise price of $7.59 and entitled the holders thereof to purchase an aggregate of 7,698 shares.
The warrants expiring in August and September 2018 comprise 236,900 warrants issued in the 2013 Exchange and 341,713 and 34,225 issued in the initial and final closing, respectively, of the 2013 Private Placement (see Note 1).
The 236,900 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 236,900 new warrants was estimated to be $2,637,387 utilizing a Black-Scholes model, the exercise price of $26.00, a stock price of $20.00 and assumptions including estimated volatility of 84.26%, risk-free interest rate of 1.16%, a zero dividend
55
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
rate and expected remaining term of 4.00 years. The total fair value of the 56,518 warrants exchanged was estimated to be $84,069 utilizing a Black-Scholes model, the exercise price of $616.20, a stock price of $20.00 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 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).
On March 31, 2014, the Company amended the terms of 412,933 warrants and 22.54 unit warrants to eliminate certain potential cash settlement provisions such that the liability was settled, having received consent from their holders. The fair value of the securities settled and reclassified as equity on March 31, 2014, was estimated to be $6,109,179. On June 30, 2014, the Company similarly amended the terms of a further 89,378 warrants and 2.99 unit warrants such that the liability was settled, having received consent from their holders after March 31, 2014. The fair value of the securities settled and reclassified as equity on June 30, 2014, was estimated to be $711,960, based on assumptions described below. There were no such reclassifications in the six months ended December 31, 2014.
The aggregate fair value of those warrants and unit warrants accounted for as liabilities as of December 31, 2014 and 2013, was estimated to be $126,168 and $9,147,507, respectively, using a closing stock price of $3.00 and $20.00, respectively, and, other than those warrants with a de minimis value on the valuation date, based on the following assumptions:
|
December 31, 2014
|
December 31, 2013
|
|||
|
Risk-free interest rate
|
1.18% - 1.20%
|
0.09% - 1.36%
|
||
|
Expected remaining term
|
3.29 - 3.37 Years
|
0.46 - 3.80 Years
|
||
|
Expected volatility
|
118.75% - 118.93%
|
95.39% - 118.65%
|
||
|
Dividend yield
|
0%
|
0%
|
The aggregate fair value of such warrants at December 31, 2012, was estimated to be $102,695, and the aggregate fair value of warrants and unit warrants issued during the year ended December 31, 2013, was estimated to be $7,962,081 on their issuance dates. During the year ended December 31, 2014, to the extent that it did not arise from settlements, the decrease in the fair value of the warrant derivative liability of $2,200,200 was recorded as a revaluation gain, and during the year ended December 31, 2013, to the extent that it did not arise from new issuances, the increase in the fair value of the warrant derivative liability of $1,082,731 was recorded as a revaluation loss (see Note 13).
NOTE 12. Benefit Plan
The Company has a 401(k) plan that allows eligible U.S. employees to contribute up to 50 percent of their annual compensation to the plan, subject to certain limitations. Each employee directs their contributions, which vest immediately, across a series of mutual funds. The Company’s matching contributions totaled nil and $696 in the years ended December 31, 2014 and 2013, respectively, and the costs of administering the 401(k) plan are not significant.
56
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 13. 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 at December 31, 2014 and 2013:
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
December 31, 2014
|
||||||||||||||||
|
Recurring Financial Liabilities:
|
||||||||||||||||
|
Warrant derivative liabilities
|
$ | — | $ | — | $ | 126,168 | $ | 126,168 | ||||||||
|
Contingent earn-out payments
|
279,000 | 279,000 | ||||||||||||||
|
Total liabilities
|
$ | — | $ | — | $ | 405,168 | $ | 405,168 | ||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
December 31, 2013
|
||||||||||||||||
|
Recurring Financial Liabilities:
|
||||||||||||||||
|
Warrant derivative liabilities
|
$ | — | $ | — | $ | 9,147,507 | $ | 9,147,507 | ||||||||
|
Total liabilities
|
$ | — | $ | — | $ | 9,147,507 | $ | 9,147,507 | ||||||||
57
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The following tables present a reconciliation of all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2014 and 2013:
|
Contingent
|
||||||||||||
|
Warrant
|
Earn-out
|
|||||||||||
|
Derivatives
|
Payments
|
Total
|
||||||||||
|
Balance at January 1, 2014
|
$ | 9,147,507 | $ | — | $ | 9,147,507 | ||||||
|
Issuances
|
— | 410,000 | 410,000 | |||||||||
|
Revaluation gains included in gain on revaluation of derivative liabilities, net
|
(2,200,200 | ) | — | (2,200,200 | ) | |||||||
|
Change in undiscounted contingent earn-out liability
|
— | (229,300 | ) | (229,300 | ) | |||||||
|
Change in contingent earn-out adjustment included in interest expense
|
— | 98,300 | 98,300 | |||||||||
|
Settlements
|
(6,821,139 | ) | — | (6,821,139 | ) | |||||||
|
Balance at December 31, 2014
|
$ | 126,168 | $ | 279,000 | $ | 405,168 | ||||||
|
Total gains included in other income and expenses attributable to liabilities still held as of December 31, 2014
|
$ | 1,239,773 | $ | 131,000 | $ | 1,370,773 | ||||||
|
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
|
1,082,731 | (274,928 | ) | (128,558 | ) | (173,050 | ) | 506,195 | ||||||||||||
|
Settlements
|
— | — | (1,082,351 | ) | (446,602 | ) | (1,528,953 | ) | ||||||||||||
|
Balance at December 31, 2013
|
$ | 9,147,507 | $ | — | $ | — | $ | — | $ | 9,147,507 | ||||||||||
|
Total gains (losses) included in other income and expenses attributable to liabilities still held as of December 31, 2013
|
$ | (1,082,732 | ) | $ | — | $ | — | $ | — | $ | (1,082,732 | ) | ||||||||
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 11, 7, 8 and 8, 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, 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. Since the 2013 Exchange, the Company has applied a reduced weighting to its own historic volatility during the period in which 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.
58
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The liability for contingent earn-out payments arise from the Company’s requirement to pay IntegenX a percentage of revenues of the Apollo Business (see Notes 1 and 3), on a sliding scale up to 20%, should certain revenue targets be achieved in 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, we estimated the fair value of the contingent consideration using a probability-weighted discounted cash flow model based on key assumptions including future annual revenues ranging from $3.4 million to $7.7 million and a discount rate of 14%. There were no contingent earn-out payments as of December 31, 2013.
There were no transfers between Level 1, Level 2 and Level 3 of the fair value hierarchy during the years ended December 31, 2014 or 2013.
NOTE 14. Segment Information, Geographic Data, and Significant Customers
Operating segments are defined as component of the Company’s business for which separate financial information is available that is evaluated by the Company’s chief operating decision maker in deciding how to allocate resources and assessing performance. The Company presently has only one operating segment.
Revenue by geographic areas for the years ended December 31, 2014 and 2013, are as follows:
|
Year Ended December 31,
|
||||||||
|
2014
|
2013
|
|||||||
|
United States
|
$ | 3,559,154 | $ | 105,251 | ||||
|
International:
|
||||||||
|
Canada
|
234,302 | 165,329 | ||||||
|
Asia Pacific(1)
|
1,287,436 | 979,437 | ||||||
|
Europe
|
920,450 | 54,730 | ||||||
|
Total revenue
|
$ | 6,001,342 | $ | 1,304,747 | ||||
__________
(1) Sales to Asia Pacific included approximately $665,000 and $647,000 to Japan in 2014 and 2013, respectively, and $457,000 and $330,000 to China in 2014 and 2013, respectively.
Revenues are attributed to geographical areas based on where the Company’s products are shipped.
Customers accounting for more than 10% of either total revenues during the years ended December 31, 2014 or 2013, or accounts receivable as at December 31, 2014 or 2013, are tabulated as follows:
|
Revenues, Year Ended December 31,
|
Accounts Receivable, December 31,
|
|||||||||||||||||||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||||||||||||||||||
|
Customer A
|
$ | 168,274 | 3 | % | $ | — | — | $ | 179,499 | 12 | % | $ | — | — | ||||||||||||||||||
|
Customer B
|
$ | 188,117 | 3 | % | $ | — | — | $ | 170,354 | 12 | % | $ | — | — | ||||||||||||||||||
|
Customer C
|
$ | 500,000 | 8 | % | $ | 458,333 | 35 | % | $ | — | — | $ | — | — | ||||||||||||||||||
|
Customer D
|
$ | 261,507 | 4 | % | $ | 191,271 | 15 | % | $ | 29,654 | 2 | % | $ | 65,600 | 18 | % | ||||||||||||||||
|
Customer E
|
$ | 3,933 | 0 | % | $ | 188,552 | 14 | % | $ | — | — | $ | 19,646 | 5 | % | |||||||||||||||||
|
Customer F
|
$ | 164,529 | 3 | % | $ | 162,779 | 12 | % | $ | — | — | $ | 170,071 | 46 | % | |||||||||||||||||
|
Customer G
|
$ | 4,500 | 0 | % | $ | 138,328 | 11 | % | $ | — | — | $ | 17,808 | 5 | % | |||||||||||||||||
Long-lived assets by geographic areas as of December 31, 2014 and 2013, are as follows:
|
2014
|
2013
|
|||||||
|
United States
|
$ | 856,546 | $ | 250,295 | ||||
|
Europe
|
12,758 | 19,323 | ||||||
| — | ||||||||
|
Total long-lived assets
|
$ | 869,304 | $ | 269,618 | ||||
59
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 15. Net Income (Loss) Per Share
Basic and diluted net income (loss) per share are shown on the Statements of Operations.
No adjustment has been made to the net loss for charges, gains, losses and accretion related to Series A and B CPS, MTDC Notes, Series A-1 Convertible Preferred Stock and CPNs, 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, MTDC Notes, Series A-1 convertible preferred stock and CPNs were excluded from the computation of diluted net loss per share attributable to holders of common stock as they had antidilutive effects for the years ended December 31, 2014 and 2013:
|
Year Ended December 31,
|
||||||||
|
2014
|
2013
|
|||||||
|
Common share equivalents issuable upon exercise of common stock options
|
21,943 | 61 | ||||||
|
Common share equivalents issuable upon exercise of common stock warrants
|
1,031,117 | 59,184 | ||||||
|
Common share equivalents issuable upon exercise of unit warrants
|
— | 12,898 | ||||||
|
Shares issuable upon vesting of restricted stock
|
79,268 | — | ||||||
|
Shares issuable upon conversion of Series 1 Convertible Preferred Stock
|
477,640 | 291,230 | ||||||
|
Shares issuable upon conversion of Series A CPS
|
— | 26,651 | ||||||
|
Shares issuable upon conversion of Series B CPS
|
— | 47,019 | ||||||
|
Shares issuable upon conversion of Series C CPS
|
— | 2,933 | ||||||
|
Shares issuable upon settlement of MTDC Notes
|
1,528,558 | 29,050 | ||||||
|
Shares issuable upon conversion of Series A-1 Convertible Preferred Stock
|
— | 21,181 | ||||||
|
Shares issuable upon conversion of convertible promissory notes
|
— | 19,337 | ||||||
|
Total common share equivalents excluded from denominator for diluted earnings per share computation
|
3,138,526 | 509,544 | ||||||
NOTE 16. Income Taxes
The Company’s net loss before provision for income taxes comprises the following for the years ended December 31, 2014 and 2013:
|
Year Ended December 31,
|
||||||||
|
2014
|
2013
|
|||||||
|
U.S
|
$ | (10,375,292 | ) | $ | (15,765,490 | ) | ||
|
Foreign
|
(314,471 | ) | (494,441 | ) | ||||
|
Net loss before provision for income taxes
|
$ | (10,689,763 | ) | $ | (16,259,931 | ) | ||
60
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The provision for income taxes consists of the following for the years ended December 31, 2014 and 2013:
|
Year Ended December 31,
|
||||||||
|
2014
|
2013
|
|||||||
|
Current:
|
||||||||
|
Federal
|
$ | — | $ | — | ||||
|
State
|
3,100 | 3,191 | ||||||
|
Foreign
|
— | 3,150 | ||||||
|
Total Current
|
$ | 3,100 | $ | 6,341 | ||||
|
Deferred:
|
||||||||
|
Federal
|
$ | — | $ | — | ||||
|
State
|
— | — | ||||||
|
Foreign
|
— | — | ||||||
|
Total Deferred
|
$ | — | $ | — | ||||
|
Provision for income taxes
|
$ | 3,100 | $ | 6,341 | ||||
A reconciliation of the provision for income taxes with the expected provision for income taxes computed by applying the federal statutory income tax rate of 34% to the net loss before provision for income taxes for the years ended December 31, 2014 and 2013:
|
Year Ended December 31,
|
||||||||
|
2014
|
2013
|
|||||||
|
Provision for income taxes at federal statutory rate
|
$ | (3,634,519 | ) | $ | (5,528,377 | ) | ||
|
Federal research and development tax credits
|
(153,429 | ) | (100,535 | ) | ||||
|
Derivative revaluations and settlements
|
(748,068 | ) | (172,106 | ) | ||||
|
Adjustments related to 2013 Exchange
|
— | 3,313,162 | ||||||
|
Expenses not deductible, income not taxable and other
|
(8,699 | ) | 64,489 | |||||
|
Foreign loss taxed at lower rates
|
106,920 | 170,813 | ||||||
|
Change in federal valuation allowance
|
4,440,895 | 2,258,895 | ||||||
|
Provision for income taxes
|
$ | 3,100 | $ | 6,341 | ||||
The components of the deferred tax assets as of December 31, 2014 and 2013, are as follows:
|
December 31,
|
December 31,
|
|||||||
|
2014
|
2013
|
|||||||
|
Deferred tax assets:
|
||||||||
|
Net operating loss carry-forwards
|
$ | 32,741,321 | $ | 28,412,473 | ||||
|
Capitalized research and development cost
|
445,854 | 526,919 | ||||||
|
Goodwill and intangible assets
|
133,047 | — | ||||||
|
Research and development tax credit
|
1,819,895 | 1,559,952 | ||||||
|
Depreciation on property and equipment
|
52,297 | 27,536 | ||||||
|
Stock-based compensation
|
811,810 | 454,125 | ||||||
|
Reserves and accruals
|
724,521 | 774,786 | ||||||
|
Total deferred tax asset
|
36,728,745 | 31,755,791 | ||||||
|
Valuation allowance
|
(35,452,624 | ) | (30,344,332 | ) | ||||
|
Deferred tax assets net of valuation allowance
|
1,276,121 | 1,411,459 | ||||||
|
Deferred tax liability:
|
||||||||
|
Discount on debt issuance
|
(1,276,121 | ) | (1,411,459 | ) | ||||
|
Net deferred tax assets
|
$ | — | $ | — | ||||
61
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Management believes that, based on a number of factors, it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company has provided a full valuation allowance against its net deferred tax assets. At December 31, 2014, the Company had federal and state net operating loss carry-forwards (“NOLs”) of approximately $84.8 million and $66.8 million, respectively, and foreign operating loss carry-forwards of approximately $1.0 million. The federal and state NOLs will expire in various periods from 2026 through 2034.
At December 31, 2014, the Company had research and development tax credits of approximately $1.1 million and $1.1 million available to offset future income taxes, if any, for federal and California state purposes, respectively. These federal tax credits will expire in various periods from 2027 through 2034 and the California state tax credits can be carried forward indefinitely.
Utilization of NOLs and tax credit carry-forwards is subject to substantial limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 (“IRC”) Sections 382 and 383, respectively, and similar state provisions. On August 27, 2013, there was a substantial ownership change due to the 2013 Exchange and 2013 Private Placement (see Note 1), resulting in forfeitures in 2013. On August 27, 2014, there was another substantial ownership change due to the 2014 Public Offering (see Note 1), resulting in further forfeitures in 2014. The annual limitation may result in the expiration of further NOLs and tax credits before utilization. The Company has not yet evaluated the impact of the IRC Sections 382 and 383 limitations on its recorded NOLs and tax credits in 2013 and 2014, nor has it determined whether there have been any other substantial ownership changes in 2011 or prior years, so the recognized amount of deferred tax assets (and related 100% valuation allowance) has not been adjusted, although management estimates that a significant majority of the recorded NOLs and tax credits have already been effected and will need to be written off. This has no impact on the income tax expense due to the provision of a full valuation allowance against all net deferred tax assets.
The net valuation allowance increased by approximately $5.1 million and $2.3 million during the years ended December 31, 2014 and 2013, respectively, primarily due to the generation of net operating loss and credit carry-forwards.
The Company files U.S. federal and various state income tax returns. There are no prior year tax returns under audit by taxing authorities, and management is not aware of any impending audits. As a result of the Company’s NOL carry-forwards, all tax years from 2006 through 2014 remain subject to federal and state tax examination.
The Company has established tax reserves for uncertain tax positions totaling $945,000 and $810,000 as of December 31, 2014 and 2013, respectively. A reconciliation of the change in unrecognized tax benefits is as follows:
|
Year Ended December 31,
|
||||||||
|
2014
|
2013
|
|||||||
|
Beginning Balance
|
$ | 810,000 | $ | 721,000 | ||||
|
Additions based on tax positions related to the current year
|
135,000 | 89,000 | ||||||
|
Ending Balance
|
$ | 945,000 | $ | 810,000 | ||||
All of the unrecognized tax benefits are recognized in the Company’s financial statements as a reduction in the Company’s deferred tax assets. Accordingly, the Company has not accrued any interest or penalties related to unrecognized tax benefits. Because the Company has a full valuation allowance against its deferred tax assets, there will be no income tax effect of releasing the unrecognized tax benefits. The Company expects no significant changes to its uncertain tax positions in the next 12 months.
NOTE 17. 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
62
WAFERGEN BIO-SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
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. In August 2014, the plaintiff and Company agreed to an out-of-court settlement. Related legal costs were expensed as incurred.
NOTE 18. Quarterly Financial Data (Unaudited)
Selected summarized quarterly financial information for fiscal 2014 and 2013 is as follows:
|
Year Ended December 31, 2014
|
||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
Revenue
|
$ | 1,405,513 | $ | 1,733,908 | $ | 1,250,201 | $ | 1,611,720 | ||||||||
|
Gross profit
|
$ | 798,940 | $ | 975,500 | $ | 875,425 | $ | 779,078 | ||||||||
|
Net gains on derivative revaluations
|
$ | 215,956 | $ | 1,158,240 | $ | 589,336 | $ | 465,968 | ||||||||
|
Non-recurring gains, credits and (charges) related to restructuring
|
$ | — | $ | — | $ | (128,546 | ) | $ | — | |||||||
|
Net loss
|
$ | (2,545,615 | ) | $ | (2,103,412 | ) | $ | (2,780,535 | ) | $ | (3,263,301 | ) | ||||
|
Net loss attributable to common stockholders
|
$ | (2,545,615 | ) | $ | (2,103,412 | ) | $ | (2,780,535 | ) | $ | (3,263,301 | ) | ||||
|
Net loss per share – basic and diluted
|
$ | (2.79 | ) | $ | (2.28 | ) | $ | (1.02 | ) | $ | (0.58 | ) | ||||
|
Year Ended December 31, 2013
|
||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
Revenue
|
$ | 178,487 | $ | 246,248 | $ | 389,547 | $ | 490,465 | ||||||||
|
Gross profit
|
$ | 112,899 | $ | 169,468 | $ | 196,733 | $ | 251,452 | ||||||||
|
Net gains (losses) on derivative revaluations
|
$ | (593,717 | ) | $ | 115,237 | $ | 623,613 | $ | (651,328 | ) | ||||||
|
Non-recurring gains, credits and (charges) related to restructuring
|
$ | — | $ | — | $ | (7,523,728 | ) | $ | 4,398,648 | |||||||
|
Net income (loss)
|
$ | (3,781,510 | ) | $ | (3,163,155 | ) | $ | (10,808,332 | ) | $ | 1,486,725 | |||||
|
Net income (loss) attributable to common stockholders
|
$ | (3,988,194 | ) | $ | (5,862,322 | ) | $ | (12,246,825 | ) | $ | 4,385,275 | |||||
|
Net income (loss) per share – basic
|
$ | (95.10 | ) | $ | (139.79 | ) | $ | (43.51 | ) | $ | 5.19 | |||||
|
Net income (loss) per share – diluted
|
$ | (95.10 | ) | $ | (139.79 | ) | $ | (43.51 | ) | $ | 2.46 | |||||
None.
As of the end of the period covered by this 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) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are those 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 rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures. Based on the evaluation and the identification of the material weaknesses in internal control over financial reporting described below, our principal executive officer and principal financial officer concluded that, as of December 31, 2014, the Company’s disclosure controls and procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by the Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles (GAAP). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has conducted, with the participation of our principal executive officer and principal financial officer, an assessment, including testing of the effectiveness, of our internal control over financial reporting as of December 31, 2014. Management’s assessment of internal control over financial reporting was conducted using the criteria of the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework while utilizing the additional guidance contained in COSO’s Internal Control over Financial Reporting – Guidance for Smaller Public Companies. Based on that assessment, our management has concluded that our internal control over financial reporting was effective as of December 31, 2014.
Attestation Report of Registered Public Accounting Firm
This Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
PART III
Information with respect to this item is incorporated by reference from our definitive proxy statement to be filed with the Commission within 120 days of the end of the fiscal year ended December 31, 2014.
Information with respect to this item is incorporated by reference from our definitive proxy statement to be filed with the Commission within 120 days of the end of the fiscal year ended December 31, 2014.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information with respect to this item is incorporated by reference from our definitive proxy statement to be filed with the Commission within 120 days of the end of the fiscal year ended December 31, 2014.
Information with respect to this item is incorporated by reference from our definitive proxy statement to be filed with the Commission within 120 days of the end of the fiscal year ended December 31, 2014.
Information with respect to this item is incorporated by reference from our definitive proxy statement to be filed with the Commission within 120 days of the end of the fiscal year ended December 31, 2014.
PART IV
Financial Statement Schedules
All financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
Exhibits
The following documents are being filed with this Annual Report on Form 10-K.
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(1)
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Financial Statements (see “Financial Statements and Supplementary Data” at Item 8 and incorporated herein by reference).
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(2)
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Financial Statement Schedules (Schedules to the Financial Statements have been omitted because the information required to be set forth therein is not applicable or is shown in the accompanying Financial Statements or notes thereto).
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(3)
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Exhibits (The Exhibits required to be filed as a part of this Annual Report on Form 10-K are listed in the Exhibit Index).
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In reviewing the agreements included as exhibits to this Form 10-K, please remember that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. The agreements may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the parties to the applicable agreement and:
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·
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should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
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·
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have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
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·
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may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
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·
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were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.
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Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Form 10-K and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov. See “Available Information.”
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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WAFERGEN BIO-SYSTEMS, INC.
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By:
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/s/ IVAN TRIFUNOVICH
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Date: March 17, 2015
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Ivan Trifunovich
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Chief Executive Officer
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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SIGNATURE
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TITLE
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DATE
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/s/ IVAN TRIFUNOVICH
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Ivan Trifunovich
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Chairman, President and Chief Executive Officer
(principal executive officer)
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March 17, 2015
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/s/ MICHAEL P. HENIGHAN
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Michael P. Henighan
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Chief Financial Officer
(principal financial officer
and principal accounting officer)
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March 17, 2015
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/s/ DR. R. DEAN HAUTAMAKI
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Dr. R. Dean Hautamaki
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Director
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March 17, 2015
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/s/ MAKOTO KANESHIRO
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Makoto Kaneshiro
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Director
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March 17, 2015
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/s/ JOEL KANTER
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Joel Kanter
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Director
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March 17, 2015
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/s/ WILLIAM McKENZIE
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William McKenzie
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Director
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March 17, 2015
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/s/ ROBERT SCHUEREN
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Robert Schueren
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Director
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March 17, 2015
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Incorporated by Reference
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||||||||||||
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Exhibit
Number
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Exhibit Description
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Filed
Herewith
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Form
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Period
Ending
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Exhibit
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Filing Date
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||||||
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2.1
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Asset Purchase Agreement dated January 6, 2014 by and between Wafergen, Inc. and IntegenX Inc.
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S-1/A
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2.1
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1/27/2014
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||||||||
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3.1
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Amended and Restated Articles of Incorporation of WaferGen Bio-systems, Inc., dated January 31, 2007
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8-K
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3.1
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2/1/2007
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||||||||
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3.2
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Certificate of Amendment to the Amended and Restated Articles of Incorporation of the Company
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8-K
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3.1
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8/28/2013
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||||||||
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3.3
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Certificate of Designation of the Series 1 Convertible Preferred Stock
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8-K
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3.2
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8/28/2013
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||||||||
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3.4
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Certificate of Withdrawal of Certificate of Designation of the Series A-1 Convertible Preferred Stock and the Series A-2 Convertible Preferred Stock
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8-K
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3.3
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8/28/2013
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||||||||
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3.5
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Amended and Restated Bylaws of WaferGen Bio-systems, Inc.
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8-K
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3.1
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11/18/2014
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||||||||
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4.1
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Form of Warrants to purchase shares of Common Stock of the Company, issued July 7, 2010, to investors in the Company’s July 2010 offering of units of securities
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8-K
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4.1
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7/8/2010
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||||||||
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4.2
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Form of Warrant to purchase shares of Common Stock of the Company, issued July 7, 2010, to placement agents and certain related parties in connection with the Company’s July 2010 offering of units of securities
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10-Q
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6/30/2010
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10.3
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8/16/2010
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4.3
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Warrant to purchase shares of Common Stock of the Company, issued December 7, 2010, to Oxford Finance Corporation
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8-K
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10.2
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12/13/2010
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||||||||
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4.4
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Form of Warrants to purchase shares of Common Stock of the Company, issued August 27, 2013, to investors in the Company’s August 2013 exchange offering
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8-K
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4.1
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8/28/2013
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||||||||
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4.5
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Form of Warrants to purchase shares of Common Stock of the Company issued to investors in the Company’s August and September 2013 private placement offering of units of securities
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8-K
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4.1
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8/28/2013
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||||||||
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4.6
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Form of Warrant to purchase shares of Common Stock of the Company issued to the placement agent and certain related parties in connection with the Company’s August and September 2013 private placement offering of units of securities
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8-K
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4.2
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8/28/2013
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4.7
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Form of Promissory Note in favor of WaferGen Biosystems (M) Sdn. Bhd. dated August 15, 2013
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S-1
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4.10
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10/9/2013
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4.8
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Form of Amendment to Common Stock Purchase Warrant (Exchange Transaction) issued August 27, 2013, to investors in the Company’s August 2013 exchange offering
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S-1
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4.11
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5/28/2014
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4.9
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Form of Amendment to Common Stock Purchase Warrant (Private Placement Transaction) issued to investors in the Company’s August and September 2013 private placement offering of units of securities
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S-1
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4.12
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5/28/2014
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4.10
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Form of Amendment to Common Stock Purchase Warrant (Placement Agent Warrants) issued to the placement agent and certain related parties in connection with the Company’s August and September 2013 private placement offering of units of securities
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S-1
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4.13
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5/28/2014
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4.11
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Form of Warrant to purchase shares of Common Stock of the Company, issued August 27, 2014, to investors in the Company’s August 2014 public offering
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S-1/A
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4.15
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8/19/2014
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4.12
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Form of Underwriter Warrant to purchase shares of Common Stock of the Company, issued August 27, 2014, to underwriters and certain related parties in the Company’s August 2014 public offering
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S-1/A
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4.16
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7/18/2014
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4.13
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Form of Common Stock Certificate
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S-1/A
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4.14
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7/18/2014
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Incorporated by Reference
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||||||||||||
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Exhibit
Number
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Exhibit Description
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Filed
Herewith
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Form
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Period
Ending
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Exhibit
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Filing Date
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||||||
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10.1 †
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WaferGen Bio-systems, Inc. 2008 Stock Incentive Plan
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8-K
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10.1
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7/3/2008
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10.2 †
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Form of Non-Qualified Stock Option award under 2008 Stock Incentive Plan
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10-K
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12/31/2008
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10.35
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3/27/2009
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10.3
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Lease Agreement by and between the Company and LBA Realty Fund III-Company VII, LLC dated October 22, 2009
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10-Q
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9/30/2009
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10.6
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11/13/2009
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10.4
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Registration Rights Agreement dated December 23, 2009, by and among the parties to the Company’s December 2009 and January 2010 private placement offering of units of securities
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S-1
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10.60
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3/2/2010
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10.5 †
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Executive Employment Agreement, dated as of March 8, 2012, by and between the Company and Ivan Trifunovich
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8-K
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10.1
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3/9/2012
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10.6
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Amendment dated as of June 26, 2012, to Lease Agreement by and between the Company and LBA Realty Fund III-Company VII, LLC dated October 22, 2009
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10-Q
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9/30/2012
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10.1
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11/9/2012
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10.7 †
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Severance Benefits Agreement, dated January 10, 2013, by and between the Company and John Harland
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8-K
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10.1
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1/14/2013
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10.8
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Exchange Agreement dated August 27, 2013
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8-K
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10.1
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8/27/2013
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10.9
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Registration Rights Agreement dated August 27, 2013, by and among the parties to the Exchange Agreement dated August 27, 2013
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8-K
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10.2
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8/27/2013
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10.10
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Form of Securities Purchase Agreement dated August 27, 2013, by and among the Company and the investors signatory thereto
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8-K
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10.1
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8/27/2013
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10.11
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Form of Registration Rights Agreement dated August 27, 2013, by and among the parties to the Securities Purchase Agreement dated August 27, 2013
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8-K
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10.2
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8/27/2013
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10.12
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Agreement dated October 25, 2013, by and among WaferGen Biosystems (M) Sdn. Bhd., WaferGen Bio-systems, Inc. and Malaysian Technology Development Corporation Sdn. Bhd.
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S-1
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10.30
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10/31/2013
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10.13
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Secured Promissory Note dated January 6, 2014 issued by the Company to IntegenX Inc.
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8-K
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10.2
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1/6/2014
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10.14
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Security Agreement dated January 6, 2014 by and between the Company and IntegenX Inc.
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8-K
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10.3
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1/6/2014
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10.15
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Amendment dated as of June 27, 2014, to Lease Agreement by and between the Company and LBA Realty Fund III-Company VII, LLC dated October 22, 2009
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S-1
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10.17
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7/18/2014
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10.16
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Letter Agreement, dated as of July 17, 2014, by and among certain affiliates of Great Point Partners, LLC and the Company
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S-1
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10.18
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7/18/2014
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10.17 †
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Executive Employment Agreement, dated as of August 12, 2014, by and between the Company and Michael Henighan
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8-K
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10.1
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8/18/2014
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10.18 †
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Executive Employment Agreement, dated as of August 13, 2014, by and between the Company and Keith Warner
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8-K
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10.2
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8/18/2014
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10.19 †
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Nonstatutory Stock Option issued August 27, 2014, to Keith Warner
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10-Q
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9/30/2014
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10.4
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11/12/2014
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10.20 †
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Nonstatutory Stock Option issued August 27, 2014, to Michael P. Henighan
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10-Q
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9/30/2014
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10.5
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11/12/2014
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10.21 †
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WaferGen Bio-systems, Inc. 2008 Stock Incentive Plan, as amended
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DEF-14A
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Appendix B
|
10/8/2014
|
||||||||
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Incorporated by Reference
|
||||||||||||
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Exhibit
Number
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Exhibit Description
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Filed
Herewith
|
Form
|
Period
Ending
|
Exhibit
|
Filing Date
|
||||||
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21.1
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Subsidiaries of the Registrant
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X
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23.1
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Consent of Independent Registered Public Accounting Firm
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X
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31.1
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Rule 13a-14(a)/15d-14(a) Certification of principal executive officer
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X
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31.2
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Rule 13a-14(a)/15d-14(a) Certification of principal financial officer
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X
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||||||||||
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32.1
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Section 1350 Certification of principal executive officer (This certification is being furnished and shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.)
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X
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||||||||||
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32.2
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Section 1350 Certification of principal financial officer (This certification is being furnished and shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.)
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X
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101 §
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The following financial information from the Company’s Annual Report on Form 10-K for the period ended December 31, 2014, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets at December 31, 2014 and 2013, (ii) the Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2014 and 2013, (iii) the Consolidated Statements of Stockholders’ Equity for the two years ended December 31, 2014, (iv) the Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013, and (v) Notes to Consolidated Financial Statements
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X
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†
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Indicates a management contract or compensatory plan or arrangement.
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§
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Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.
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70