UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




Form
10-K





[ X ]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




For the
fiscal year ended December 31, 2008





[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934




For the
transition period from __________ to ______________







Commission
File Number 333-136424




WaferGen Bio-systems,
Inc.


(Exact
Name of Registrant as Specified in its Charter)





Nevada
            20-3699764(State
      or other jurisdiction of incorporation or organization)
            (IRS
      Employer Identification No.)Bayside
      Technology Center46531
      Fremont Blvd.Fremont,
      CA
            
            94538(Address
      of principal executive offices)
            
            (Zip
      Code)








Registrant’s
telephone number, including area code: (510) 651-4450




Securities
registered under Section 12(b) of the Exchange Act:





Title of each class:
            
            
            Name
      of each exchange on which registered:None
            
            
            None





Securities
registered under Section 12(g) of the Exchange Act:





Common
      stock, $0.001 par value per share(Title
      of Class)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes [
]




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 [
] No [X]








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 [X]
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.





Large
accelerated filer £                                                                                   Accelerated
filer £


Non-accelerated
filer £                                                                                     Smaller
reporting company [X]


(Do not
check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    Yes [ ] No [X]





As of
June 30, 2008 (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 $55,516,178. As of
that date, 20,187,701 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 28, 2009, the registrant had a total of 24,830,932 shares of common stock
issued and outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the registrant’s Definitive Proxy Statement for its 2009 Annual Meeting of
Stockholders (the “Proxy Statement”) are incorporated by reference in Part III
of this Report.

















TABLE OF
CONTENTS





Page


FORWARD-LOOKING
      STATEMENTS
              
              
              1PART
      IITEM
      1.
              Business
              
              
              2ITEM 1A.
              Risk
      Factors
              
              
              11ITEM 1B.
              Unresolved
      Staff Comments.
              
              
              21ITEM
      2.
              Properties
              
              
              21ITEM
      3.
              Legal
      Proceedings
              
              
              21ITEM
      4.
              Submission
      of Matters to a Vote of Security Holders
              
              
              21PART
      IIITEM
      5.
              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
              
              
              22ITEM
      7.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              
              
              24ITEM
      8.
              Financial
      Statements and Supplementary Data
              
              
              32ITEM
      9.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              
              
              61ITEM 9A(T).
              Controls
      and Procedures
              
              
              61ITEM 9B.
              Other
      Information
              
              
              62PART
      IIIITEM
      10.
              Directors,
      Executive Officers and Corporate Governance
              
              
              63ITEM
      11.
              Executive
      Compensation
              
              
              63ITEM
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              
              
              63ITEM
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              
              
              63ITEM
      14.
              Principal
      Accountant Fees and Services
              
              
              63PART
      IVITEM
      15.
              Exhibits
      and Financial Statement Schedules
              
              
              64SIGNATURES
              
              
              
              66EXHIBIT INDEX
              
              
              
              67
















FORWARD
LOOKING STATEMENTS




Information
included in this Form 10-K may contain forward-looking statements. Except for
the historical information contained in this discussion of the business and the
discussion and analysis of financial condition and results of operations, the
matters discussed herein are forward looking statements. These forward looking
statements include but are not limited to the Company’s plans for sales growth
and expectations of gross margin, expenses, new product introduction, and the
Company’s liquidity and capital needs. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,”
“believe,” “intend” or “project” or the negative of these words or other
variations on these words or comparable terminology. In addition to the risks
and uncertainties described in “Risk Factors” below and elsewhere in this Form
10-K, these risks and uncertainties may include consumer trends, business
cycles, scientific developments, changes in governmental policy and regulation,
currency fluctuations, economic trends in the United States and inflation.
Forward-looking statements are based on assumptions that may be incorrect, and
there can be no assurance that any projections or other expectations included in
any forward-looking statements will come to pass. Our actual results could
differ materially from those expressed or implied by the forward-looking
statements as a result of various factors. Except as required by applicable
laws, we undertake no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.




































































































As used in this Annual Report on
Form 10-K, all references to the “Company,” “we,” “our” and “us” for periods
prior to May 31, 2007 refer to WaferGen, Inc. (or “WaferGen”) and for periods on
or after May 31, 2007 refer to WaferGen Bio-systems, Inc. (or
“WBSI”).  On May 31, 2007, WaferGen was acquired by
WBSI.  In the transactions, WaferGen merged with a subsidiary of WBSI
and became a wholly-owned subsidiary of WBSI (the “Merger”). WaferGen was
considered the “acquirer” for accounting purposes, and accordingly the
historical financial statements of WaferGen for periods prior to the Merger
replaced those of WBSI.








1








PART
I




Item
      1.
            Business




Overview





WaferGen
was incorporated in Delaware on October 22, 2002. Our offices are located in
Silicon Valley in Fremont, California. Since beginning operations in 2003, we
have been seeking to develop novel products for cell biology and genetic
analysis. On May 31, 2007, WaferGen merged with a subsidiary of WBSI and became
a wholly-owned subsidiary of WBSI, which is continuing the business of WaferGen
as a publicly traded company.




We intend to develop instruments and
other commercial products to serve the genetic analysis segment of the life
sciences industry. Pharmaceutical and biotech companies spent in excess of $55.2
billion in 2006 for new drug discovery. We believe that many of these efforts
seek new therapeutic drugs, and that much of this spending will be directed at
developments at the molecular level for understanding the expression of specific
segments of DNA1(or genes).





We
currently produce and sell our SmartSlideTM Micro-incubation System
(“SmartSlideTM System”), and we are developing a gene expression and genotyping
product, the SmartChipTM Real Time PCR System (“SmartChipTM System”).





The
SmartSlideTM System provides a controlled environment and physiological
conditions for time lapse imaging studies, allowing researchers to characterize,
differentiate, and proliferate various cells, as well as providing optimal
growth conditions for cells that are difficult to grow, such as stem and primary
cells. We introduced our SmartSlideTM System through the early access
program during 2006 and made our first sales during October 2006. We generated
$621,866 of revenue from sales of SmartSlideTM in 2008. Our SmartSlideTM Systems
have been sold to several leading research institutions including Abbott
Labs, NASA, Harvard University, the Mayo Clinic, Memorial Sloan-Kettering,
UCLA, the University of Southern California, VA Medical Centers, the University
of California at Davis, the University of North Texas, Eisai Research, and the
University of Georgia.





In 2008,
SmartSlideTM System sales were generated from a handful of customers only.
However, we believe that there is an extensive market of more than 35,000
research laboratories around the world that are potential SmartSlideTM System
customers, and that  as the Company grows and further develops its
sales efforts, we will increase our  customer base.




We
are completing development of our SmartChipTM System, which is an innovative
real-time polymerase chain reaction (“real-time PCR”)2 tool to allow scientists, in a single step, to
achieve greater sensitivity and accuracy in gene expression than present
methods, allowing identification of the full spectrum of expressed genes (rather
than only a portion thereof), with the ability to discriminate small changes in
expression. Gene expression is fundamental in understanding many disease
processes and hence, drug efficacy. For example, in the field of oncology
(cancer treatment), greater understanding of gene expression by certain types of
cancerous cells has led to the discovery of specific disease biomarkers that
allow clinicians more accurate diagnosis, prognosis and treatment options for
their patients. Examples of drugs developed by others specifically
targeting biomarkers include Herceptin, used in the treatment of breast cancer,
and Gleevac, used in the treatment of chronic myelogenous leukemia. Researchers
are targeting at the molecular level and are focusing attention and research
budgets on research tools that help them to develop therapies for other highly
prevalent disease states, including heart and lung disease, arthritis, and
diabetes. We believe that an era is dawning of personalized treatment based
on genetic analysis that will initially provide options for patients with
certain malignancies and will expand to other diseases. The SmartChipTM
System’s high density, rapid cycling configuration is expected to provide
throughput levels that are expected to will deliver clinical research solutions
at a fraction of the time and cost currently possible with existing competing
systems. The SmartChipTM System will be also be used for
Genotyping.





During
the final stages of the SmartChipTM System development we expect to incur
significant additional costs completing development and commercialization of
this product. We have produced an alpha version of the SmartChipTM System, but we
have not produced a commercially available product or made any sales of our
SmartChipTM System.





1
              DNA:
      (Deoxyribonucleic acid) - A polymeric molecule consisting
      of deoxyribonucleotide building blocks that in a double-stranded,
      double helical form is the genetic material of most
    organisms.


2
              Polymerase
      Chain Reaction (PCR) - PCR is an enzymatic process to increase the number
      of copies of DNA for easier detection.  Real-time PCR
      chemistries allow for detection of the reaction in the early phase rather
      than the late phase of the reaction.The
      polymerase enzyme “reads” an intact 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 piece. 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.





2










WaferGen
intends to employ a business model that generates both revenue from the sale of
instruments and a recurring revenue stream from the sale of consumables, similar
to the “razor and razor blade” business model.





Products





SmartSlideTM Micro-Incubation
System





We have developed and are currently
marketing the SmartSlideTM System, a first-of-its-kind family of integrated
fluidics exchange micro-incubation products that work seamlessly with inverted
microscopes3. This breakthrough technology provides a
controlled environment and physiological conditions for cell biology and stem
cell researchers to conduct complex time lapse imaging studies to characterize,
differentiate and proliferate cells, as well as grow stem, primary and other
difficult to cultivate cells. These innovative capabilities allow
researchers to pursue cutting-edge research topics that are not addressable with
existing technology.





We estimate that more than 35,000
research laboratories around the world own and use inverted microscopes for cell
research, creating a very substantial addressable market for the SmartSlideTM
System family of products.





The core element of our SmartSlideTM
System is the compact, sterile and disposable SmartSlide-6 Micro-Incubator,
which is a multi-well plate designed to maintain cells at specific physiological
conditions for prolonged cell or tissue imaging.  The SmartSlide-6
Micro-Incubator allows for programmable fluidics exchanging, enabling the
delivery of up to six nutrient media and gas into each of its six individual
wells in both intermittent and continuous perfusion modes. The SmartSlide-6
Micro-incubator is connected to the SmartSlideTM controller unit. Biological
tissue/cells are grown directly on the SmartSlideTM Micro-Incubators, and the
controller unit provides the right temperature, gas and/or nutrient conditions
to the SmartSlideTM Micro-Incubator. This system eliminates the need for
shuttling plates back and forth between the microscope stage and lab
incubator.  With the constant change of media, cells can be kept alive
on the SmartSlideTM System for more than a month.





WaferGen has developed a family of
SmartSlideTM System products built upon the SmartSlide-6 Micro-Incubator that
offer cell biology and stem cell researchers varying levels of control over
specific environmental conditions such as nutrient flow, temperature, humidity,
and gas.  Some of the competitive products to the SmartSlideTM System are
environmental chambers or enclosures. However, these products do not provide
automated exchange of nutrients like the SmartSlideTM System does.





The SmartSlideTM System offers its
customers a number of critical advantages as compared to current
instruments.





Functionality:




·
            Maintains
      cells at specific physiological conditions that keep them viable for
      extended periods


o
            Ability
      to control nutrient flow, temperature, humidity, and
  gas





·
            Enables
      programmable integrated fluidics
exchange


o
            Up
      to six nutrient media and gas into each of six individual
      wells


o
            Both
      batch and continuous perfusion
modes





·
            Easy-to-use
      software allows for complete walk-away
  automation





·
            Integrates
      seamlessly with inverted microscope





Applications:




·
            Enables
      complex time lapse imaging studies to characterize, differentiate and
      proliferate cells





·
            Supports
      growing of stem, primary and other difficult to cultivate cells in
      consistently optimal physiological
conditions





3
              An
      inverted microscope is a microscope with its light source above the stage
      pointing down, while the objective is below the stage pointing up; they
      are used for observing living cells or organisms at the bottom of a large
      container (e.g., a tissue culture flask) under more natural conditions
      than on a glass slide, as is the case with a conventional
      microscope.





3











·
            Broad
      applicability may offer key benefits in additional areas including in
      vitro fertilization, cancer stem cell/chemotherapy monitoring, infectious
      disease, and pilot to scale-up
  bioprocessing





In addition to the initial stem cell
and primary cell research and imaging applications that we are currently
pursuing, we also expect SmartSlideTM System’s innovative approach to have
potential applications in a number of additional important areas
including:





·
            In
      vitro fertilization


·
            Cancer
      stem cell/chemotherapy monitoring


·
            Infectious
      diseases





Gene Expression Products





Genomics Background





DNA is a molecule, contained in the
chromosomes in the nucleus of each living cell, that encodes the genetic
instructions used in the development and functioning of all known organisms
(other than some viruses). The DNA segments that carry this genetic information
are called genes. (Other DNA segments are involved in regulating the use of
the genes or have merely structural purposes.)  Chemically, DNA
consists of a long chain of simple units called nucleotides, with a backbone
made of sugar and phosphate groups. Attached to each sugar in the backbone is
one of four types of molecules called bases. It is the sequence of these four
bases along the backbone that encodes information, like a four-letter
alphabet.




DNA does not usually exist as a single
molecule, but instead as a tightly associated pair of molecules. These two
long strands entwine like vines, in the shape of a double helix.  Each
type of base on one strand forms a bond with just one type of base on the other
strand. This is called complementary base pairing. Thus a particular sequence of
bases on one strand will only bind with an exactly complementary sequence on
another strand.The
binding of single strands of DNA to form double-stranded DNA is termed
hybridization.




Genes are segments of DNA that carry
separate information packets of the genome. 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 bond with just one type of base on the DNA
strand.  This complementary base pairing of DNA onto RNA is called
transcription.  The transcribed RNA strand then separates from the DNA
strand and acts as a template for the cell’s machinery to construct functional
proteins.  The sequence of the RNA bases specifies the sequence of the
20 standard amino acids that make up proteins.  This process of
translating genes in DNA into functional proteins is called gene
expression.




Proteins are essential parts of
organisms and participate in every process within cells. Many proteins are
enzymes that catalyze biochemical reactions and are vital to metabolism.
Proteins also have structural or mechanical functions, such as in muscle and the
cellular “scaffolding” that maintains cell shape. Other proteins are important
in cell signaling, immune responses, cell adhesion and cell
division.




Every person inherits two copies of
each gene, one from each parent. The two copies of each gene may be identical,
or they may be different. (When they differ, the different versions are called
alleles.) These differences are referred to as genetic variation. Examples of
the physical consequences of genetic variation include differences in eye and
hair color. Genetic variation can also 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. A common form of genetic variation is a single-nucleotide
polymorphism, or SNP. A SNP is a variation in a single “letter” in the DNA
sequence between the two copies of the same gene.  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.







4
              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 is RNA interference
      that helps regulate turning genes on and
off.





4










Another
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 complex organisms like 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.




Gene Expression Technology
Overview




Gene expression is used to provide
information on the roughly 30,000 genes within 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
differently between the two populations. Such differences can lead to
identifications of genes that may be indicative of a disease state. One such
example is the HER2 gene known to play a role in breast cancer. Furthermore it
can also help physicians make treatment decisions. Researchers are conducting
many studies to identify a single or multiple genes that play a role in a
particular disease. There are two technologies used to measure gene
expression, microarray and real-time PCR.




Microarrays consist of minuscule
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. As described above, the RNA is complementary and therefore will
bind to the original portion of the DNA strand from which it was
copied.  To determine which genes are turned on and which are turned
off in a given cell, the messenger RNA 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. A special scanner is used to measure the fluorescent areas on
the microarray. If a particular gene is very active, it produces many
molecules of messenger RNA, which hybridize to the DNA on the microarray and
generate a very bright fluorescent area. Genes that are somewhat active produce
fewer mRNAs, which results in dimmer fluorescent spots. If there is no
fluorescence, none of the messenger molecules have hybridized to the DNA,
indicating that the gene is inactive.




However,
microarrays have limited sensitivity, accuracy and dynamic range. Human genes
are expressed across a “six log” range (a single copy to a million
copies) in a cell, with most species of RNA being present in fewer than 100
copies. The dynamic range of microarrays is estimated to be 2 to 3
logs5. Microarrays are able to detect genes that are
expressed in large numbers of copies but misses genes that are present in fewer
than 100 copies. Thus microarrays capture only 20-40% of the
expressed genes. Consequently, one obtains only a partial view of the expression
profile when utilizing microarrays due to the limited sensitivity. These
overlooked genes may be important in a particular disease state. As a
consequence of these limitations, the discovery of genes identified by
microarray technology requires further validation using real-time
PCR.




The
second technology, real-time PCR, represents a sensitive and accurate method to
measure gene expression. PCR is an enzymatic process in which a short 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.  Furthermore,
real-time PCR chemistries allow for the detection in the early phase, rather
than the later phase of these reactions, thereby decreasing process time and
increasing accuracy.




Because
real-time PCR does not measure thousands of genes simultaneously (like a
microarray analysis), real-time PCR has low 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 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 biomarker discovery and
validation.





5
              Log
      (logarithm) range is the standard way of expressing sensitivity range; it
      is calculated by a serial dilution of the sample, with each tenfold
      dilution being one log; if, for example, a sample is diluted four times by
      tenfold, and a device is able to detect a gene signal in all these
      dilutions, then the dynamic range of the detector is said to be three
      logs.





5










SmartChipTM
System





We
believe our SmartChipTM System, assuming successful development and
commercialization, would combine the best of both existing gene expression
technologies - whole genome analysis enabled by microarrays with the sensitivity
and accuracy of real-time PCR,a
single platform that enables biomarker discovery and validation in a single
step.   Our SmartChipTM System will be provided with picoliter
(one-trillionth of a liter) dispensing of oligoneucleotide6 reagents and nanoliter (one-billionth of a
liter) dispensing of samples into a 5,000 to 30,000 well chip that will allow
for high throughput real-time PCR amplification of the entire human genome in
triplicate. Our SmartChipTM System chips are designed with evaporation control
measures that allow for the use of nanoliter volumes, fast thermal cycling and
temperature control. Our software system is being developed to also analyze the
high throughput data after the completion of the real-time PCR analysis. The
user friendly, content-ready SmartChipTM System is being designed to be able to
accept samples out of the box, incorporating many of the necessary substrates
and chemicals.




The
SmartChipTM System is being engineered to deliver superior performance with the
combination of high sensitivity and high throughput on a single chip, enabling
scientists to rapidly view a large dynamic range of the expressed genes of the
human genome. The genetic analysis using the SmartChipTM System is expected to
require one day versus what would currently take days to weeks to complete
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 one chip per patient or, in the
case of real-time PCR, a few genes per patient. We believe that we can
solve these problems.




The
following table outlines benefits we believe could be realized from the use of a
SmartChipTM System compared to our estimates of the microarray and real-time PCR
technologies in use today.








Current
      Gene Expression PlatformsMicroarray
                  Real-time PCR
                  SmartChipTMWhole
      Genome
                  Yes
                  No
                  YesDynamic
      Range
                  2
      to 3 logs
                  6
      logs
                  6
      logsQuantitative
                  Semi
                  Yes
                  YesNumber
      of Samples per run
                  1
      Sample / 10,000 genes
                  Few
      samples (96-384) x few genes
                  1
      sample / 5,000 genes
                    1
      sample / 30,000 genesSensitivity
                  100,000
      starting copies
                  1-10
      starting copies
                  1-10
      starting copiesProject
      Process
                  Multiple
      steps
                  Two
      steps
                  Single
      stepWhole
      Genome Assay Time
                  Days
                  Months
                  DayWhole
      Genome Gene Express Chip Cost
                  $250-$1,000
      includes validation cost
                  >
      $100,000 - $185,000
                  $2,500
      - $3,500Instrument
      Selling Price
                  $250,000
      - $450,000
                  $80,000
      - $260,000
                  $200,000
      - $300,000Cost
      / Assay
                  N/A
                  $1
      - $1.50
                  $0.13








6             
An oligonucleotide is a short nucleic acid polymer, typically with twenty or
fewer bases.





6








The
current market cost of real-time polymerase chain reaction (“real-time PCR”),
which we believe researchers currently view as the “gold standard” for genetic
analysis, is approximately $1.00 per data point. We believe that our development
of the SmartChipTM System, which is designed to utilize real-time PCR, will
ultimately cost approximately $0.03 per acquired data point when
commercialized.





We
believe our SmartChipTM System is also capable of achieving time-savings when
compared to existing technologies. Research analyzing the whole genome utilizing
currently available real-time PCR technology takes weeks to months. Our goal for
design and development of our SmartChipTM System is to develop the ability to
quantitatively analyze the whole genome with the performance of real-time PCR
technology, which, if we succeed, could be as short as a single day, and would
represent a significant advancement. In addition, our development of the
SmartChipTM System seeks to allow 5,000 - 30,000 data points per chip, which
could enable a large number of reactions to run in parallel, thus addressing the
unmet needs of the clinical trial market. We believe today’s leading
technologies are limited in throughput of 96-well or 384-wells. Some new
entrants in the market place like Biotrove and Fluidigm offer medium throughput
solutions of 3,000 to 10,000 assays per chip; however, we believe that these are
associated with high instrument and running costs or suffer from poor
performance and will be difficult to scale up to whole genome on a single
chip.





Our
SmartChipTM System is designed asan integrated
instrument capable of fast thermal cycling, real-time detection and software for
control and analysis. The product, upon completion, will be available with
primer-ready chips for gene expression and genotyping analysis.




We are
planning to commercialize our SmartChipTM System with two chip
configurations:




·
            A
      5,000-assay chip for study of gene panels or for candidate genes of
      interest to customers; and




·
            A
      high-throughput whole-genome version with 30,000 assays per
      chip.




An
“alpha” version of the SmartChipTM System has been tested at the University of
Pittsburgh Medical Center (UPMC) under a funding grant from the National
Institutes of Health (NIH).  This testing was done to conduct novel
gene expression research in the area of lung disease.  Successful
demonstration of  sample dispensing, thermal cycling, and real-time
fluorescent signal detection of 1,000 oncology genes (in triplicate with
negative controls) was achieved on 5,000-wellcontent-ready
SmartChipsTMusing
small amounts of RNA samples (300-500ngs) from chronic obstructive
pulmonary disease (COPD), idiopathic pulmonary fibrosis (IPF) and healthy
patients.  The researchers’ goal is to identify and validate disease
relevant gene expression signatures and microenvironments, while also generating
relevant module maps of COPD and IPF that will help to characterize the diseases
and their underlying causes.  Additionally, this research will include
the development and application of the PulmoSmartChipTM, a custom designed
SmartChipTM molecular phenotyping assay for COPD and IPF.  The
PulmoSmartChipTM, which will include the lowest number of genes that distinguish
all phenotypes of IPF and COPD, will be used to identify and validate module
networks (sets of genes that are co-regulated to carry out a common
function) capable of predicting the natural history of the diseases and
patients’ response to specific therapeutics.  Researchers at UPMC
believe that the availability of these modules, as well as the validated
PulmoSmartChip assay that allows their measurement using parallel quantitative
real-time PCR, will be a significant step in laying the foundations for the
introduction of personalized medicine approaches in pulmonary
medicine.





We expect
to produce additional “beta” versions of the SmartChip System in 2009, and to
transfer the manufacturing of commercial systems to a third party in
Malaysia.





To date,
we have designed 5,000- and 30,000-well chips and already implemented the 5,000-
well chip in alpha version. With these 5,000- well chips, we have
demonstrated our ability to perform several key steps required in a commercial
version of the SmartChipTM System, including fast thermal cycling. This requires
the ability to seal the sample wells on the chip, which we have also
demonstrated. We have also completed 100 nanoliter dispensing with evaporation
control. Additional milestones that we have yet to achieve prior to launching
the SmartChipTM System are:





·
            Presentation
      and/or publication of the alpha results in conferences and journals
      respectively;




·
            Complete
      second phase of alpha testing to validate the SmartChipTM platform
      (comparing results from microarrays) and bio-marker discovery for lung
      cancer;





·
            Complete
      beta testing to further validate the platform and biomarker discovery on
      Wound Healing;




·
            Launch
      a limited access program with selected customers, whom we may charge only
      for chips and not the instruments;
and




·
            Launch
      broad commercialization of our 5,000-well
chip.







7





In
addition, we will have to build and test our 30,000-well chip platform and test
its analytical performance in terms of sensitivity, reproducibility and
precision in comparison to our 5,000-well chip and other commercial Real-Time
PCR instruments available in the market.




In
January 2009, we entered into research collaboration with the University of
Texas Southwestern Medical Center for the SmartChipTM System. UT
Southwestern will conduct novel research projects using the SmartChipTM System in
order to identify and validate gene expression biomarkers related to wound
healing.  Additionally, researchers will aim to examine the impact the
identified biomarkers have on patients’ response to
treatment.  WaferGen and UT Southwestern scientists believe that the
research conducted as part of this collaboration may lead to the discovery of
the relative importance of specific genes associated with wound
healing.  In turn, this critical genetic information may ultimately
provide physicians with new tools for determining appropriate treatments for
wound healing. The UT Southwestern research collaboration will further validate
the SmartChipTM System.





We
believe the SmartChipTM System, with its advantages of higher throughput, lower
cost, superior sensitivity, and accuracy will have multiple market
applications.




We
believe the SmartChipTM System will become the technology of choice in both
research and clinical settings.




·
            Biomarker
      Discovery. New targets (biomarkers) for drugs can be identified
      through the analysis of gene profile expression in diseased cells.
      Potential applications include disease states such as diabetes, arthritis,
      and certain commonly occurring
cancers.





·
            Drug Validation 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
      guidance7calls for drug
      companies to voluntarily submit pharmacogenomic data to support their drug
      development programs.





·
            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.





·
            Detection of Rare
      Mutations. The Cancer Genome Project is using the human genome
      sequence and high throughput mutation detection techniques to identify
      somatically acquired8sequence
      variants/mutations and hence identify genes critical in the development of
      human cancers.





Target and 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. It would cost in excess of
$100,000 per analysis (assuming $1 per assay plus reference plus triplicates) to
study even a single whole genome (30,000 genes) sample and will take many months
to complete this study (reported in a MicroArray Quality Controlstudy
conducted by the FDA published in September 2006 in Nature Biotechnology).9Biomarker investigation
requires multiples of such analyses to confirm discovery.







7
              FDA
      News Release - March 22, 2005 - issued a final guidance titled
      “Pharmacogenomic Data
Submissions.”


8
              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.


9
              The
      MicroArray Quality Control (MAQC) project shows inter- and intra-platform
      reproducibility of gene expression measurements, Nature Biotechnology,
      Vol. 24:9, p 1151, September
2006.





8








Drug Development and Clinical Trial
Validation: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 trials for pattern recognition and
toxicity profiling. 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 can process only one sample
at a time. Thus, for a clinical trial of 1,000 patients, one would need to use
1,000 chips. Established real time PCR instrument suppliers typically process 96
to 384 assays, Our SmartChipTM System is expected to offer the ability to study
many samples in candidate genes of interest with 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 intends to use
allele-specific PCR with the SmartChipTM System to enable genotyping at multiple
sites in multiple samples, as well as to provide a robust solution for detecting
rare mutations.  Current allele-selective PCR is able to reliably genotype
SNPs (germ-line) and also reliably detect 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





SmartSlideSystems





The competitive products to the SmartSlideTM System are environmental
chambers or enclosures. However, these products do not provide automated
exchange of nutrients like the SmartSlideTM  System
does.  The main competitors are Solent, Bioptechs (a US company), Oko
Labs (an Italian company), and Tokai Hit (Japanese company).




Solent is the dominant manufacturer of environmental chambers that are
plexiglass enclosures built around the entire microscope. They have limited
capability to control the temperature and gas environment around the entire
microscope. They are designed for short-term imaging experiments since they do
not have the capability to change media.




Bioptechs, Oko Labs and Tokai Hit all market and sell imaging enabling systems
that compete with our SmartSlideTM50 System. They can accommodate multi-well
tissue culture plates or a single well and control the temperature and gas
environment only. They do not have the capability to change media or
continuously perfuse and therefore we do not believe that they can compete
effectively with our SmartSlideTM System 100, 150 and 200 Systems when the
customer requires long term imaging that requires media changing or perfusing
capability.





SmartChip
Systems





We
believe the primary industry competitors in the markets in which WaferGen plans
to enter and compete are Applied Biosystems (“ABI,” which is a division of
Applera Corporation), Affymetrix, Inc. (“Affymetrix”) and Illumina, Inc.
(“Illumina”). Other companies known to be currently serving the genetic analysis
market include Agilent Technologies, Inc., GE Healthcare (a business segment of
General Electric Company), Bio-Rad Laboratories, Inc., Stratagene Corporation,
Eppendorf AG, Beckman Coulter, Inc. and F. Hoffmann-La Roche & Co. Minor
players in the same market include Fluidigm Corporation and BioTrove, Inc. 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, technology, and other resources than we
do. Affymetrix is the leader in microarrays for whole genome analysis, and ABI
is the market leader for real-time PCR. We believe gene expression is a growing
market and this market is driven by the need for better solutions to solve
scientific challenges. These established competitors could compete with us by
developing new products similar to our SmartChipTM 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.





9









Some new
competitors, such as BioTrove and Fluidigm have recently begun offering higher
throughput solution than existing competitors providing instruments and chips
with 3,000-10,000 assays per chip; however, we believe that these are associated
with high instrument and running costs or suffer from poor performance and will
be difficult to scale up to whole genome on a single chip.





Sales
and Marketing




We
utilize a seasoned life science marketing team and WaferGen-employed direct
sales and application support personnel for SmartSlideTM.  We have
started exploring and will continue exploring in 2009 sales channel partners who
are already marketing other similar products. We have established a number of
life science distributors in Europe and the Far East for the SmartSlideTM. We
expect to hire new sales and support personnel for marketing SmartChipTM
Systems.





Seasonality




We do not
have sufficient product history to determine seasonality with a high degree of
confidence. It is expected that customers’ purchasing patterns will not show
significant seasonal variation, although demand for our products may be lowest
in the first quarter of the calendar year and 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.





Amount
Spent on Research and Development





Our
research and development efforts are aimed at finding new varieties of products,
improving existing products, improving product quality and reducing production
costs. We expensed research and development costs of $4,628,262 for the year
ended December 31, 2008 and $2,429,273 for the year ended December 31,
2007.





Intellectual
Property and Other Proprietary Rights




We intend
to pursue 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. In our in-licensing
arrangements, we have obtained intellectual property rights from third parties
related to the development and marketing of the products, integration or
applications covered by such licensed intellectual property. We have a number of
pending patent applications that relate to the SmartChipTM and SmartSlideTM
products. 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. 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 scientists, engineers and business managers to support our
product development and commercialization activities. Their efforts will
continue to focus on selling, improving and refining our core technologies,
including our SmartSlideTM System and our SmartChipTM System products. We
currently have 32 full-time employees. None of our employees is 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.










10





Item
1A. Risk Factors




The
following risk factors should be considered carefully in addition to the other
information contained in this report. This report contains forward-looking
statements. Forward-looking statements relate to future events or our future
financial performance. 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.





Risks
Related to Our Company and Our Business





Difficult
Conditions in the Global Capital Markets may significantly affect Our Ability to
Raise Additional Capital and Begin Operations.




The
ongoing worldwide financial and credit crisis may continue
indefinitely.  Because of severely reduced market liquidity, we may
not be able to raise additional capital when we need it.  Because the
future of our business will depend on the completion of one or more investment
transactions for which, most likely, we will need additional capital, we may not
be able to complete such transactions or acquire revenue producing
assets.  As a result, we may not be able to generate income and, to
conserve capital, we may be forced to curtail our current business activities or
cease operations entirely.




Currency risk
related to obligations and expenses denominated in Malaysian Ringgit could
negatively impact our operating results and financial
condition.




All of the redeemable convertible
preferred shares issued by ourMalaysiasubsidiary were issued in
consideration for MalaysianRinggit, and significant amounts of
our subsidiary’s expenses are paid for in this currency. AtDecember31, 2008,the Company had$1,194,198in assetsinMalaysia. Fluctuations in the exchange rate
could negatively impact our business operating results and financial condition
by resulting in exchange losses or increased expenses, and could increase the
likelihood that the investors in the Malaysia subsidiary may elect to convert
theirredeemable
convertible preferred shares into shares of common stock of WaferGen at the
conversion price of US$2.25 per share.Translation adjustments in any
particular reporting period could significantly affect, positively or
negatively, our reported operating results.




We
have a history of operating losses which may continue, in which case we may not
be able to reach profitability.




We have a history of losses and may continue to incur operating and net losses
for the foreseeable future. We incurred a net loss of $8,041,437 for the year
ended December 31, 2008. As of December 31, 2008, our accumulated deficit was
$20,032,260. We have not achieved profitability on a quarterly or annual basis.
We may not be able to reach a level of revenue to achieve profitability. To
date, our revenues have been insignificant and not sufficient to achieve our
business plan. Our revenues for the year ended December 31, 2008 were $621,866.
If our revenues grow slower than anticipated or if operating expenses exceed
expectations, then we may not be able to achieve profitability in the near
future or at all, which may depress our stock price.




We
are a development stage company with limited operating history for investors to
evaluate our business.




We are a
development stage company and 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. To date, we have developed only one commercialized product, the
SmartSlideTM System, and our future operations and growth will likely depend on
our ability to successfully develop and market our SmartChipTM products. Our
proposed operations are subject to all of the risks inherent in light of the
expenses, difficulties, complications and delays frequently encountered in
connection with the formation 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.







11





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 and services 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 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.




In
addition, because of our continued research, marketing and hiring in connection
with our SmartChipTM product, we expect operating expenses to continue to
increase significantly. Accordingly, if revenue does not grow as anticipated, we
may 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 operating 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.




We
have a limited history of commercial sales of systems and consumable products,
and our success depends on our ability to develop commercially successful
products and on market acceptance of our new and relatively unproven
technologies.




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. Sales of our SmartSlideTM stem cell research and
cell biology systems only began in October 2006, and some of our other
technologies, such as our gene expression analysis technologies, are in the
early stages of market introduction or are still in development. You should
evaluate us in light of the uncertainties and complexities affecting similarly
situated companies developing tools for the life sciences and pharmaceutical
industries. We must conduct a substantial amount of additional research and
development before some of our products will be ready for sale, and 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
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 will
need to raise additional capital in the future, which may not be available on
reasonable terms or at all. We raised approximately $9.9 million in net proceeds
in our June 2007 private placement and approximately $3.5 million in net
proceeds in our May 2008 private placement, and we expect that such proceeds,
together with our income, will fund our operations through May 2009. We will
need to raise additional funds through public or private debt or equity
financings to meet various business objectives including, but not limited
to:




·
            pursuing
      growth opportunities, including more rapid
  expansion;




·
            acquiring
      complementary businesses;




·
            making
      capital improvements to improve our
  infrastructure;




·
            hiring
      qualified management and key
employees;




·
            developing
      new services, programming or
products;







12





·      responding
to competitive pressures;




·
            complying
      with regulatory requirements such as licensing and registration;
      and




·
            maintaining
      compliance with applicable laws.




Any
additional capital raised through the sale of equity or equity backed 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.





Furthermore,
any additional debt or equity financing that we may need may not be available on
terms favorable to us, or at all. 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 "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.




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 notes and warrants, which may adversely impact our
financial condition.




We
may encounter difficulties in managing our expected growth, which could increase
our losses.




We expect
to experience rapid and substantial growth in order to achieve our operating
plans, which will place a strain on our human and capital resources. If we are
unable to manage this growth effectively, our losses could increase. Our ability
to manage our operations and growth effectively requires us to continue to
expend funds to enhance our operational, financial and management controls,
reporting systems and procedures and to attract and retain sufficient numbers of
talented employees. If we are unable to scale up and implement improvements to
our manufacturing process and control systems in an efficient or timely manner,
or if we encounter deficiencies in existing systems and controls, then we will
not be able to make available the products required to successfully
commercialize our technology.




Failure
to attract and retain sufficient numbers of talented employees will further
strain our human resources and could impede our growth.




Our
financial condition could be adversely affected in the event of uninsured or
inadequately insured loss or damage.




We may
not be able to obtain insurance policies on terms affordable to us that would
adequately insure our business and property against damage, loss or claims by
third parties. To the extent our business or property suffers any damages,
losses or claims by third parties, which are not covered or adequately covered
by insurance, the financial condition of our Company may be materially adversely
affected.




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, including our chief
executive officer, chief financial officer, chief technology officer and chief
scientific officer. The loss of any of their services could adversely impact our
ability to achieve our business objectives. We will need to hire additional
qualified personnel with expertise in molecular biology, chemistry, biological
information processing, sales, marketing and technical support. 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 would prevent us from pursuing
collaborations or developing our products or technologies.




Our
planned activities will require additional expertise in specific industries and
areas applicable to the products developed through our technologies, including
the life sciences and healthcare industries.




Thus, we
will need to add new personnel, including management, and develop the expertise
of existing management. The failure to do so could impair the growth of our
business.













13





Corporate
governance rules, including those contained in and issued under the
Sarbanes-Oxley Act of 2002, may make it difficult for us to retain or attract
qualified officers and directors, which could adversely affect the management of
our business and our ability to obtain or retain listing of our common
stock.




We may be
unable to attract and retain those qualified officers, directors and members of
Board of Directors committees required to provide for our effective management
because of the changes in the rules and regulations that govern publicly held
companies, including, but not limited to, certifications by principal executive
officers. The enactment of Sarbanes-Oxley has resulted in the issuance of a
series of rules and regulations and the strengthening of existing rules and
regulations by the SEC, as well as
the adoption of more stringent rules by the stock exchanges. The perceived
increased personal risk associated with these recent changes may deter qualified
individuals from accepting roles as directors and executive
officers.




Further,
some of these recent changes heighten the requirements for board or committee
membership, particularly with respect to an individual’s independence and level
of experience in finance and accounting matters. We may have difficulty
attracting and retaining directors with the requisite qualifications. If we are
unable to attract and retain qualified officers and directors, the management of
our business and our ability to obtain or retain the listing of our common stock
on any stock exchange (assuming we elect to seek and are successful in obtaining
such listing) could be adversely affected.




We
are a holding company that depends on cash flow from our wholly-owned subsidiary
to meet our obligations.




After the
Merger, we became a holding company with no material assets other than the stock
of our wholly-owned subsidiary. Accordingly, all our operations are
conducted by WaferGen, our wholly-owned subsidiary. We currently expect that the
earnings and cash flow of our subsidiary will primarily be retained and used by
it in its operations, including servicing any debt obligations it may have now
or in the future.




All
of our former liabilities survived the Merger and there may be undisclosed
liabilities that could have a negative impact on our financial
condition.




Pursuant
to the Merger, we acquired the business of WaferGen as our sole line of
business, and accordingly are not pursuing our prior business. Although due
diligence activities were performed on us and WaferGen prior to the Merger, the
due diligence process may not have revealed all liabilities (actual or
contingent) of us or WaferGen that existed or which may arise in the future
relating to our activities before the consummation of the Merger.
Notwithstanding that all of our then-known liabilities were transferred to
Leaseco pursuant to the split-off in connection with the Merger, it is possible
that claims for liabilities may still be made against us, which we will be
required to defend or otherwise resolve. The provisions and terms of the merger
agreement and split-off may not be sufficient to protect us from claims and
liabilities and any breaches of related representations and warranties. Although
escrow provisions and limited post-closing adjustments in the merger agreement
are available to the stockholders of WaferGen and our pre-Merger stockholders,
there is no comparable protection offered to our other stockholders. Any
liabilities remaining from our pre-Merger company or WaferGen could harm our
financial condition.




We
may not be able to continue as a going concern.




Our
consolidated financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. We have a history of operating losses that are
likely to continue in the future. We have included an explanatory paragraph in
Note 1 of our financial statements for the year ended December
31, 2008, to the effect that our significant losses from operations and our
dependence on equity and debt financing raise substantial doubt about our
ability to continue as a going concern. Our accumulated deficit at
December 31, 2008 was $20.03 million. Our financial statements do not
include any adjustments that might be necessary should we be unable to continue
as a going concern.




Our
operations must begin to provide sufficient revenues to improve our working
capital position. If we are unable to become profitable and cannot generate cash
flow from our operating activities sufficient to satisfy our current obligations
and meet our capital investment objectives, we may be required to raise
additional capital or debt to fund our operations, curtail our development
activities and growth plans and/or be forced to sell assets, perhaps on
unfavorable terms, 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. We may not be able to raise necessary equity
or debt financing on acceptable terms or at all.





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 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, 2008, we concluded
that there were material weaknesses in our internal controls and procedures as
of December 31, 2008. We are in the process of implementing improvements to our
controls, but have not yet completed implementing these changes. Failure to
implement these changes to our controls or any others that we identify as
necessary to maintain an effective system of such controls could harm 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 stock.





14







Because
we are not yet required to comply with rules requiring the adoption of certain
corporate governance measures, our stockholders have limited protections against
interested director transactions, conflicts of interest and similar
matters.




Sarbanes-Oxley,
as well as rule changes proposed and enacted by the SEC, the New York and
American Stock Exchanges and The NASDAQ Stock Market, as a result of
Sarbanes-Oxley, require the implementation of various measures relating to
corporate governance. These measures are designed to enhance the integrity of
corporate management and the securities markets and apply to securities which
are listed on those exchanges. Because we are not presently required to comply
with many of the corporate governance provisions, we have not yet adopted these
measures.




Until we
comply with the corporate governance measures adopted by the national securities
exchanges after the enactment of Sarbanes-Oxley, regardless of whether such
compliance is required, the absence of standards of corporate governance may
leave our stockholders without protections against interested director
transactions, conflicts of interest and similar matters and investors may be
reluctant to provide us with funds in the future if we determine it is necessary
to raise additional capital. We intend to comply with all applicable corporate
governance measures relating to director independence as soon as
practicable.




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 ABI, the Roche family of companies,
Biometra biomedizinische Analytik GmbH, Stratagene Corporation, Bio-Rad
Laboratories, Inc., Eppendorf Incorporated, Enzo Biochem, Inc., Affymetrix,
Agilent Technologies, Inc., GE Healthcare, Inc., Beckman Coulter, Inc.,
Illumina, 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 have no issued patents covering our products or technologies. Our commercial
success will depend in part on obtaining and maintaining patent protection and
trade secret protection for our products and technologies. 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:







15








·
            we
      might not have been the first to conceive or reduce to practice one or
      more inventions disclosed in our pending patent
    applications;




·
            we
      might not have been the first to file patent applications for these
      inventions;




·
            others
      may independently develop similar or alternative products and technologies
      or duplicate any of our products and
  technologies;





·
            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;




·
            we
      may not develop additional proprietary products and technologies that are
      patentable; and




·
            third-party
      patents may have an adverse effect on our ability to continue to grow our
      business.





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.




Certain
of our intellectual property rights are currently licensed from third parties
and, in the future, we intend to continue to license intellectual property from
key strategic partners. We are, and will continue to be, 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.







16





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.
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 these 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 which 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.




We are in
the process of developing the capacity to meet our anticipated demand for 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.




We
may be adversely affected by environmental, health and safety laws, regulations
and liabilities.




As we
pursue our business plan, we will become 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 can 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 and marketing and technical
support services as compared to some of our primary competitors. In order to
effectively commercialize our gene expression 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 from 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.







17




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.




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) is 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 and
prospects.




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.







18








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 aCaliforniacorporation, 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 are held
of record by persons having


addresses
in California. In the immediate future, we will continue our business and
operations and a 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.




Because
WaferGen has become public by means of a reverse merger, we may not be able to
attract the attention of major brokerage firms.




There may
be risks associated with WaferGen’s becoming a public company through a “reverse
merger.” Securities analysts of major brokerage firms may not provide coverage
of us since there is no incentive to brokerage firms to recommend the purchase
of our common stock. No assurance can be given that brokerage firms will, in the
future, want to conduct any secondary offerings on our behalf. Also, if
securities analysts do not cover our common stock, the lack of research coverage
may adversely affect its market price.




Risks
Related to Our Common Stock





Our common stock
has a limited bid history and prospective investors may not be able to resell
their shares at their purchase price, if at all.




Our common stock is currently
available for trading in the over-the-counter market and is quoted on the OTC
Bulletin Board under the symbol “WGBS.OB.” Prior to the
closing of the Merger, there was no bid history for our common stock and there
is no assurance that a regular trading market will develop or, if developed,
will be sustained. We may not ever be able to satisfy the qualitative or
quantitative listing requirements for our Common Stock to be listed on an
exchange. These factors may severely limit the liquidity of our
common stock, and may likely have a material adverse effect on the market price
of our common stock and on our ability to raise additional capital.




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, 2008, the price has fluctuated from a low of $0.56 to a high
of $2.90. 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;





·
            the
      limited number of holders of the common stock, and the limited liquidity
      available through the OTC Bulletin
Board;





19








·
            changes
      in financial estimates by securities
analysts;





·
            changes
      in the economic performance and/or market valuations of other
      biotechnology 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.







Our
common stock may be considered “penny stock” and may be difficult to
sell.




The SEC
has adopted regulations which generally define “penny stock” to be an equity
security that has a market price of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to specific exemptions. The market
price of our common stock is currently less than $5.00 per share and therefore
is designated as a “penny
stock” according to SEC rules. This designation requires any broker or
dealer selling these securities to disclose some information concerning the
transaction, obtain a written agreement from the purchaser and determine that
the purchaser is reasonably suitable to purchase the securities. These rules may
restrict the ability of brokers or dealers to sell the common stock and may
affect the ability of investors to sell their shares. These regulations may
likely have the effect of limiting the trading activity of our common stock and
reducing the liquidity of an investment in our common stock. In addition, since
the common stock is currently traded on the OTC Bulletin Board, investors may
find it difficult to obtain accurate quotations of the common stock and may
experience a lack of buyers to purchase our stock or a lack of market makers to
support the stock price.




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 24,830,932 shares were issued and outstanding as of
December 31, 2008, and 10,000,000 shares of “blank check” preferred
stock, par value $0.001 per share, of which no shares are issued and
outstanding. The 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, 2008, we have outstanding
options to purchase an aggregate of 3,686,700 shares of our common stock and
warrants to purchase an aggregate of 3,666,121 shares of our common stock. The
future exercise of these options and warrants 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 will have significant voting power and may take actions
that may not be in the best interests of other stockholders.




Our
officers, directors, principal stockholders and their affiliates control
approximately
21%of our outstanding common stock. If these stockholders 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 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.





20








Item
1B. Unresolved Staff Comments





None.





Item
      2.
            Properties




We do not own any real
property.  Our leased facilities as of December 31, 2008 are as
follows:





LOCATION
            
            SQUARE
      FEET
            
            PRIMARY
      USE
            
            LEASE
      TERMSFremont,
      CA
            11,222
      sq ft
            Corporate
      Office
            Lease
      expires March 31, 2010; lease payments of $11,000 per
  monthKulim,
      Malaysia
            
            5,194
      sq ft
            
            Administration
      and Lab
            
            Lease
      expires December 31, 2010; lease payments of 5,194 RM per
      month




Our
existing facilities are not yet being used at full capacity and management
believes that these facilities are adequate and suitable for current and
anticipated needs.





Item 3. Legal Proceedings




From time to time we may be involved in
claims arising in connection with our business. Although there can be no
assurance as to the ultimate outcome, we generally have denied, or believe we
have a meritorious defense and will deny, liability in all cases pending against
the Company, including the matters described below, and we intend to defend
vigorously each such case. Based on information currently available, we believe
that the amount, or range, of reasonably possible losses in connection with the
actions against us, including the matters described below, in excess of
established reserves, in the aggregate, not to be material to our consolidated
financial condition or cash flows. However, losses may be material to the
Company’s operating results for any particular future period, depending on the
level of income for such period.





Gordon v. WaferGen. In February 2009, an
action entitled Kimberly E.
Gordonv. WaferGen
Inc, was filed in the Alameda County Superior Court. This is an
automobile personal injury lawsuit, in which it is alleged that a then WaferGen
employee negligently operated a vehicle, injuring the plaintiff. The complaint
seeks damages for medical costs, pain and suffering and lost income. The basis
of alleged vicarious liability against the Company is that the former employee
was driving a vehicle in the scope and course of his employment with the
Company. The facts are disputed by the Company.  The damages sought
are unspecified.  Discovery is in process. A conference is
scheduled for June 23, 2009, at which time a trial will likely be
scheduled.




In
addition, we anticipate that we will expend significant financial and managerial
resources to defend our intellectual property rights in the future if we believe
that our rights have been infringed. We also anticipate that we will expend
significant financial and managerial resources to defend against claims that our
products and services infringe upon the intellectual property rights of third
parties.




Item
      4.
            Submission
      of Matters to a Vote of Security
Holders




None.










21











PART
II






Item
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities




Trading
Information




Our
common stock is currently quoted on the OTC Bulletin Board maintained by
the NASD under the symbol WGBS.OB. As soon as practicable, and assuming we
satisfy all necessary initial listing requirements, we intend to apply to have
our common stock listed for trading on the American Stock Exchange or The NASDAQ
Stock Market, although we cannot be certain that any of these applications will
be approved or that we will ever be able to satisfy the qualitative or
quantitative listing requirements for our common stock to be listed on an
exchange.




The
transfer agent for our common stock is ContinentalStock Transfer and Trust
Company at 17 Battery Place, New York, New York 10004.





The
following table sets forth the high and low closing bid prices for our
Common Stock for the fiscal quarters indicated as reported on the OTCBB. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.




High
                                  
                                  Low2007First
      Quarter ended March 31, 2007
                                  
                                  
                                  -
                                  
                                  
                                  -Second
      Quarter ended June30, 2007
                                  
                                  
                                  2.40
                                  
                                  
                                  1.65Third
      Quarter ended September 30, 2007
                                  
                                  
                                  2.40
                                  
                                  
                                  1.55Fourth
      Quarter ended December 31, 2007
                                  
                                  
                                  2.28
                                  
                                  
                                  1.212008First
      Quarter ended March 31, 2008
                                  
                                  
                                  2.25
                                  
                                  
                                  1.50Second
      Quarter ended June 30, 2008
                                  
                                  
                                  2.75
                                  
                                  
                                  1.70Third
      Quarter ended September 30, 2008
                                  
                                  
                                  2.35
                                  
                                  
                                  1.35Fourth
      Quarter ended December 31, 2008
                                  
                                  
                                  1.30
                                  
                                  
                                  0.60




There are
no historical prices available prior to the merger with WaferGen in May 31,
2007. Our common stock is thinly traded and any reported sale prices may
not be a true market-based valuation of our common stock. On December 31, 2008,
the closing bid price of our common stock, as reported on the OTC Bulletin Board
was $1.18.




As of
March 20, 2009, there were approximately 82 owners
of record of our common stock.




Trades in
our common stock may be subject to Rule 15g-9 under the Exchange Act, which
imposes requirements on broker/dealers who sell securities subject to the rule
to persons other than established customers and accredited investors. For
transactions covered by the rule, broker/dealers must make a special suitability
determination for purchasers of the securities and receive the purchaser’s
written agreement to the transaction before the sale.




The SEC
also has rules that regulate broker/dealer practices in connection with
transactions in “penny stocks.” Penny stocks generally are equity securities
with a price of less than $5.00 (other than securities listed on some national
exchanges, provided that the current price and volume information with respect
to transactions in that security is provided by the applicable exchange or
system). The penny stock rules require a broker/dealer, before effecting a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document prepared by the SEC that provides
information about penny stocks and the nature and level of risks in the penny
stock market. The broker/dealer also must provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker/dealer
and its salesperson in the transaction, and monthly account statements showing
the market value of each penny stock held in the customer’s account. The bid and
offer quotations, and the broker/dealer and salesperson compensation
information, must be given to the customer orally or in writing before effecting
the transaction, and must be given to the customer in writing before or with the
customer’s confirmation. These disclosure requirements may have the effect of
reducing the level of trading activity in the secondary market for shares of
common stock.













22





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





Information
relating to our equity compensation plans is incorporated by reference to the
definitive proxy statement for our 2009 annual meeting of stockholders.
Additional information regarding our equity compensation plans is provided in
Note 9 to our financial statements in this annual report.





Recent
Sales of Unregistered Securities




On May
19, 2008, WBSI sold in a private placement 1,585,550 units consisting of an
aggregate of 1,585,550 shares its common stock and five-year warrants to
purchase an aggregate of up to 634,220 shares of its common stock with an
exercise price of $3.00 per share. Under certain circumstances, the Warrants
will be exercisable using cashless exercise. The purchase price for the units
was $2.25 per unit, or $3,567,487 in the aggregate.





The
purchase agreement for the units contains certain negative covenants that
restrict: (i) for 180 days after the closing the ability of the Company and its
subsidiaries to issue shares of common stock or equivalents (subject to certain
exempt issuances), and (ii) for 24 months after closing, the ability of the
Company to enter into variable rate transactions. The investors are also
entitled to “piggyback” registration rights.





The
Purchasers included The Shivji Family Trust dated June 12, 2000 (which is an
affiliate of Alnoor Shivji, our Chairman, President and Chief Executive
Officer), Cojack Investment Opportunities, LLC (which is an affiliate of Dr.
Raymond Dean Hautamaki, a member of our board of directors), Nadine Smith (now a
member of our board of directors (but not at the time)), and certain other
investors that participated in the Company’s previous private placements. The
Shivji Family Trust, Cojack Investment Opportunities and Ms. Smith purchased
111,110, 30,000 and 222,220 units, respectively (for an aggregate purchase price
of $249,998, $67,500 and $499,995, respectively. The Shivji Family Trust, Cojack
Investment Opportunities and Ms. Smith each participated in the private
placement on substantially the same terms as the other purchasers.





Net
proceeds received from the private placement were used for research and development,
sales and marketing, an investor relations program and repayment of debt and for
working capital and other general corporate purposes.





The
private placement was made solely to “accredited investors,” as defined in
Regulation D under the Securities Act, or“qualified
institutional buyers” as defined in Rule 144A(a) under the Securities Act. The
units and the common stock sold in the private placement were not registered
under the Securities Act, or the securities laws of any state, and were offered
and sold in reliance on the exemption from registration afforded by Section 4(2)
and Regulation D (Rule 506) under the Securities Act and corresponding
provisions of state securities laws, which exempt transactions by an issuer not
involving any public offering.





On
July 18, 2008, the Company’s Malaysian subsidiary, WaferGen Biosystems (M) Sdn.
Bhd., received $1.0 million in exchange for the issuance of redeemable
convertible preferred shares (RCPS) of WaferGen Biosystems (M) Sdn. Bhd., in a
private placement to Malaysian Technology Development Corporation Sdn. Bhd.
(MTDC), a venture capital and development firm in Malaysia. WaferGen Biosystems
(M) Sdn. Bhd., sold 444,444 RCPS in the private placement at the U.S. dollar
equivalent of $2.25 per share.  WaferGen Biosystems (M) Sdn. Bhd.
received an additional $1.0 million in exchange for an additional 444,444 RCPS
at the U.S. dollar equivalent of $2.25 per share (the "Subsequent Closing") on
November 27, 2008. The RCPS are convertible at any time at the option of
the holder into shares of ordinary stock of WaferGen Bio-systems, Inc. at a rate
of 100 RCPS for one ordinary share.  The RCPS have voting rights in the
Malaysian subsidiary.  The RCPS are not entitled to any dividends
unless declared by the board of directors of the subsidiary.  The RCPS
have a liquidation preference of US$2.25 per share plus accrued and unpaid
dividend, in the event of liquidation of the subsidiary. Holders of RCPS have
the right (a) to cause the subsidiary to redeem the RCPS in whole or in part any
time after the Subsequent Closing from funds legally available for distribution;
(b) to cause the Company to exchange their RCPS for Common Stock of the Company
at a rate of $2.25 per share of Common Stock; (c) to put to Alnoor Shivji, our
CEO and President, their RCPS for $2.25 in cash per share in the event that Mr.
Shivji transfers, prior to May 15, 2009, in one or more transactions, more than
2,185,960 shares of Common Stock to one or more persons other than his
affiliates or relatives; (d) to put to the Company their ordinary shares
received on conversion of RCPS during the year 2011 if the share price is below
$2.25, and at any time in 2011, redeem for cash (or shares in WaferGen
Bio-systems, Inc. of equivalent value) the amount invested in USD plus 6%
premium, compounded annually, with yearly rests; (e) of first offer on any
transfers or new issuance of subsidiary shares; and (f) to appoint one of the
six directors of the subsidiary. The terms of the RCPS limit the ability of the
subsidiary to change its business, dispose of substantially all of its assets,
pay dividends, issue shares to any party with preference over the RCPS,
liquidate, or engage in certain other transactions. Proceeds from this
financing are being used to support the high-volume manufacturing
of the Company’s SmartChipTM System.





23








Purchases
of Equity Securities by the Issuer and Affiliated Purchasers





The following table provides certain
information with respect to purchases made by or on behalf of the Company or any
“affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act)
of shares of the Company’s common stock in the fourth quarter of
2008:







ISSUER
      PURCHASES OF EQUITY SECURITIES(1)Period
              (a)
      Total Number of Shares
      Purchased
              (b)
      Average Price Paidper
      Share
              (c)
      Total Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
              (d)
      Maximum Number of Shares that May Yet Be Purchased Under the Plans or ProgramsMonth
      #1 (Oct. 1- Oct. 31, 2008)
              —
              N/A
              —
              —Month
      #2 (Nov. 1- Nov. 30, 2008)
              —
              N/A
              —
              —Month
      #3 (Dec. 1- Dec. 31, 2008)
              16,693
              $0.99
              16,693
              232,500 (2)Total
              16,693
              $0.99
              16,693
              —





(1)            
The Company did not purchase any shares of its common stock during the fourth
quarter of 2008.





On
November 14, 2008, the Company’s Chairman, President and Chief Executive Officer
and Director, Alnoor Shivji, entered into a “Rule 10b5-1 Plan,” with
instructions to purchase 2,000 shares of the Company’s common stock (for the
account of The Shivji Family Trust dated June 12, 2000) each week from December
2, 2008, through May 20, 2009, at the market price (subject to a maximum price
of $2.00 per share).




On December
15, 2008, the Mr. Shivji amended his Rule 10b5-1 Plan, and two other Directors,
Nadine Smith and Dr. Dean Hautamaki, entered into new Rule 10b5-1
Plans.  As amended, Mr. Shivji’s plan called for The Shivji Family
Trust to purchase up to 10,000 shares per week at the prevailing market price
(subject to a maximum price of $2.25 per share) through March 18,
2009.  Ms. Smith's plan called for her to purchase up to 10,000 shares
per week at the prevailing market price (subject to a limit of $2.25 per share)
through March 6, 2009.  Dr. Hautamaki’s plan called for his affiliate,
Cojack Investment Opportunities, LLC, to purchase up to 2,500 shares per week at
the prevailing market price (subject to a limit of $2.25 per share and an
aggregate limit of $20,000) through March 2, 2009.





As of
December 31, 2008, The Shivji Family Trust had purchased a total of 10,693
shares, Ms. Smith had purchased a total of 1,700 shares and Dr. Hautamaki had
purchased a total of 4,300 shares under their respective Rule 10b5-1 Plans.
Subsequent to December 31, 2008, through the termination date of each plan, The
Shivji Family Trust purchased a total of 49,820 shares, Ms. Smith purchased a
total of 36,420 shares and Dr. Hautamaki purchased a total of 12,500 shares
under their respective Rule 10b5-1 Plans.





Although the
shares covered by these plans were purchased by or for the account of each of
Mr. Shivji, Ms. Smith and Dr. Hautamaki (or their affiliates) and not by or for
the account of the Company, each of them may be deemed to be an “affiliated
purchaser” (as defined in Rule 10b-18).  The purchases under
the plans were intended be carried out within the safe-harbor requirements of
Rule 10b-18.  The volume limitations and other requirements under Rule
10b-18 limited the number of shares purchased by each of the purchasers in
certain weeks.




(2)  As of December 31, 2008. As of the
date of this Report, no additional shares may be purchased under the Rule 10b5-1
Plans.








Item 7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations




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 Current Report on Form 10-K. See
“Cautionary Factors That May Affect Future Results.” Our actual results may
differ materially.







Company
Overview




WaferGen
was incorporated in Delaware on October 22, 2002. WaferGen is engaged in the
development, manufacture and sale of systems for gene expression, genotyping and
stem-cell research for the life sciences, pharmaceutical drug discovery and
biomarker discovery and diagnostic products industries. WaferGen’s products are
aimed at professionals who perform genetic analysis and cell biology, primarily
at pharmaceutical and biotech companies, academic and private research centers
and diagnostics companies involved in biomarker research. Through the SmartChipTM
System and SmartSlideTM System products, WaferGen plans to provide new
performance standards with significant savings of time and cost for
professionals in the field of gene expression research and to facilitate
biomarker discovery, toxicology and clinical research.




WaferGen’s
revenue is subject to fluctuations due to the timing of sales of high-value
products and service projects, the impact of seasonal spending patterns, the
timing and size of research projects its customers perform, changes in overall
spending levels in the life science industry and other unpredictable factors
that may affect customer ordering patterns. Any significant delays in the
commercial launch or any lack or delay of commercial acceptance of new products,
unfavorable sales trends in existing product lines, or impacts from the other
factors mentioned above, could adversely affect WaferGen’s revenue growth or
cause a sequential decline in quarterly revenue. Due to the possibility of
fluctuations in WaferGen’s revenue and net income or loss, WaferGen believes
that quarterly comparisons of its operating results are not a good indication of
future performance.




Since
inception, WaferGen has incurred substantial operating losses. As of December
31, 2008, WaferGen’s accumulated deficit was $20,032,260 and the total
stockholders’ equity was $403,926. Losses have principally occurred as a result
of the substantial resources required for the research, development, and
manufacturing scale-up effort required to commercialize WaferGen’s initial
products and services. WaferGen expects to continue to incur substantial costs
for research, development, and manufacturing scale-up activities over the next
several years. WaferGen will also need to increase its selling, general and
administrative costs as it builds up its sales and marketing infrastructure to
expand and support the sale of systems, other products, and
services.





We expect
that the cash we have available will fund our operations only
through May 2009.  We are currently considering several different
financing alternatives to support the Company’s 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 and
distribution on their shares. See “Liquidity and Capital Resources”
below.










24





Results
of Operations




Year
Ended December 31, 2008 Compared to Year Ended December
31, 2007




The
following table presents selected items in our condensed consolidated statements
of operations for the years ended December 31, 2008 and 2007,
respectively:




Year
      endedDecember
      31,2008
                                                              
                                                              
                                                              2007Revenues
                                                              
                                                              $
                                                              621,866
                                                              
                                                              
                                                              $
                                                              228,973Cost
      of sales
                                                              
                                                              
                                                              241,033
                                                              
                                                              
                                                              
                                                              79,116Gross
      margin
                                                              
                                                              
                                                              380,833
                                                              
                                                              
                                                              
                                                              149,857Operating
      expenses:Sales
      and marketing
                                                              
                                                              
                                                              1,179,791
                                                              
                                                              
                                                              
                                                              848,818Research
      and development
                                                              
                                                              
                                                              4,628,262
                                                              
                                                              
                                                              
                                                              2,429,273General
      and administrative
                                                              
                                                              
                                                              2,603,180
                                                              
                                                              
                                                              
                                                              2,802,938Total
      operating expenses
                                                              
                                                              
                                                              8,411,233
                                                              
                                                              
                                                              
                                                              6,081,029Operating
      loss
                                                              
                                                              
                                                              (8,030,400
                                                              )
                                                              
                                                              
                                                              (5,931,172
                                                              )Other
      income and (expenses):Interest
      income
                                                              
                                                              
                                                              82,318
                                                              
                                                              
                                                              
                                                              163,047Interest
      expense
                                                              
                                                              
                                                              (14,851
                                                              )
                                                              
                                                              
                                                              (189,539
                                                              )Miscellaneous
      expense
                                                              
                                                              
                                                              (78,504
                                                              )
                                                              
                                                              
                                                              —Total
      other income and (expenses)
                                                              
                                                              
                                                              (11,037
                                                              )
                                                              
                                                              
                                                              (26,492
                                                              )Net
      loss before provision for income taxes
                                                              
                                                              
                                                              (8,041,437
                                                              )
                                                              
                                                              
                                                              (5,957,664
                                                              )Provision
      for income taxes
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              —Net
      loss
                                                              
                                                              $
                                                              (8,041,437
                                                              )
                                                              
                                                              $
                                                              (5,957,664
                                                              )





25











Revenues




The
following table represents our revenue for the years ended December 31, 2008 and
2007:




December
      31,2008
                          
                          
                          2007
                          
                          
                          %
      Change$
                          621,866
                          
                          
                          $
                          228,973
                          
                          
                          
                          171.59
                          %


Revenues
for the year ended December 31, 2008 increased by $ 392,893. In 2007, WaferGen
began selling its SmartSlideTM products with a new team of sales personnel,
allowing it to generate minimal revenues for the first time since
inception.The increase
resulted primarily from signing up more distributors globally and an expanded
sales team who sold products in 2008 as compared to 2007.




Costs
of Sales




The following
table represents our costs of sales for the years ended December 31, 2008 and
2007:




December
      31,2008
                      
                      
                      2007
                      
                      
                      %
      Change$
                      241,033
                      
                      
                      $
                      79,116
                      
                      
                      
                      204.66
                      %


Cost of
sales includes the cost of product paid to third party vendors.  For the
year ended December 31, 2008, cost of sales increased by $161,917. The increase
is related to the increased sales during the year ended December 31,
2008.




Sales
and Marketing Expenses




The
following table represents our sales and marketing expenses for the years ended
December 31, 2008 and 2007:




December
      31,2008
                      
                      
                      2007
                      
                      
                      %
      Change$
                      1,179,791
                      
                      
                      $
                      848,818
                      
                      
                      
                      38.99
                      %


Sales and marketing expenses consist
primarily of compensation cost of our sales and marketing team and costs
associated with various marketing programs. For the year ended December 31,
2008, sales and marketing expenses increased $330,973 from 2007. The increase
resulted primarily from an increase in stock-based compensation associated with
the issuance of stock options, additional expenses incurred as a result of an
increased head count related to sales, resulting in greater salaries and wages,
increase in sales commissions and additional professional fees for sales
consulting.






Research
and Development Expenses




The
following table represents our research and development expenses for the years
ended December 31, 2008 and 2007:




December
      31,2008
                      
                      
                      2007
                      
                      
                      %
      Change$
                      4,628,262
                      
                      
                      $
                      2,429,273
                      
                      
                      
                      90.52
                      %


Research
and development expenses consist primarily of salaries and personnel-related
expenses, laboratory supplies and other expenses related to the design,
development, testing and enhancement of our product. We expense our research and
development expenses as they incur.  We expect our research and development
expenses to increase in absolute dollars as we expand our product
base.
















26











For the year ended December 31, 2008,
research and development expenses increased $2,198,989 from 2007. The increase
resulted primarily from an increase in head count resulting in greater salaries
and wages, an increase in research and development supplies used for product
development and testing, our move to a new facility in March 2007, which allowed
us to increase the amount of lab equipment on hand, and an increase in
stock-based compensation associated with the issuance of stock options in our
United States operations. Additionally, we formed a new subsidiary in Malaysia
to support our ongoing development and commercialization goals. This resulted in
an across the board increase in our costs associated with research and
development and activities of our new Malaysian subsidiary.








General
and Administrative Expenses




The
following table represents our general and administrative expenses for the year
ended December 31, 2008 and 2007:




December
      31,2008
                      
                      
                      2007
                      
                      
                      %
      Change$
                      2,603,180
                      
                      
                      $
                      2,802,938
                      
                      
                      
                      (7.13
                      )
      %


Our
general and administrative expenses consist primarily of personnel costs for
finance, human resources, business development and general management, as well
as professional fees, such as expenses for legal and accounting services. We
expect our general and administrative expenses to increase in absolute dollars
as we expand our staff, develop our infrastructure and incur additional costs to
support the growth in our business.




For the year ended December 31, 2008,
general and administrative expenses decreased $199,758 from 2007. The decrease
is related to a reduction of expenses related to legal and professional fees
following the completion of our reverse merger and May 2007 private placement
and filing and effectiveness of our registration statement, as described
elsewhere in this Form 10-K in our United States Operations. This decrease was
off-set by an across the board increase in our costs associated with general and
administrative expenses of our new Malaysian subsidiary.




Interest
Income




The
following table represents our interest income for the year ended
December 31, 2008 and 2007:




December
      31,2008
                      
                      
                      2007
                      
                      
                      %
      Change$
                      82,318
                      
                      
                      $
                      163,047
                      
                      
                      
                      (49.51
                      )
      %


For  the
year ended December 31, 2008, interest income decreased $80,729 compared to
2007. This decrease was the result of a reduction in the amount
of cash on hand being invested in interest-bearing
instruments.




Interest
Expense




The
following table represents our interest expense for the year ended
December 31, 2008 and 2007:




December
      31,2008
                      
                      
                      2007
                      
                      
                      %
      Change$
                      14,851
                      
                      
                      $
                      189,539
                      
                      
                      
                      (92.16
                      )
      %


For the
year ended December 31, 2008, interest expense decreased by $174,688 as compared
to the year ended December 31, 2007. The decrease was a result of  the
repayment of a stockholder note in June 2007. The interest expense in
2008 was due to our capital lease obligations.












27










Miscellaneous
Expense





The following table represents our
miscellaneous expense for the year ended December 31, 2008 and
2007:




December
      31,2008
                      
                      
                      2007
                      
                      
                      %
      Change$
                      78,504
                      
                      
                      $
                      -
                      
                      
                      
                      N/A
                      %





For the year ended December 31, 2008,
miscellaneous expense increased by $78,504 as compared to none for the year
ended December 31, 2007. The increase was a result of the foreign exchange from
our subsidiary in Malaysia due to the fluctuation between the currency in which
the company operates in and the US dollar.





Liquidity
and Capital Resources





As of
December 31, 2008, WaferGen had cash of $2,597,413. WaferGen has historically
met its liquidity requirements through borrowings and through the sale of equity
securities. As of December 31, 2008, WaferGen had working capital of
$1,595,741.




Borrowings. From inception
through December 31, 2007, WaferGen raised a total of $3,665,991 from the
issuance of notes payable to related and unrelated parties. WaferGen issued
notes that totaled $688,412 for the twelve months ended December 31, 2007 and
$1,497,520 and $1,480,059 in 2004 and 2005, respectively. All of these notes
issued in 2004 and 2005, together with accrued but unpaid interest of $107,494,
were converted into Series A Preferred Stock in 2005.





Sales of Equity Securities.
From inception through December 31, 2007, WaferGen has raised a total of $1,137
from the sale of 6,420,000 shares of its Common Stock. From inception to March
31, 2007, WaferGen has raised a total of $1,559,942 from the sale of 2,052,552
shares of Series B Preferred Stock.





Sales of Notes and Warrants.
On January 1, 2007, WaferGen borrowed $162,000 from Alnoor Shivji in exchange
for two promissory notes. On January 30, 2007, Mr. Shivji and WaferGen entered
into a Note and Warrant Purchase Agreement, pursuant to which WaferGen agreed to
sell to Mr. Shivji (i) up to $300,000 of 7% promissory notes and (ii) warrants
to purchase up to 98,684 shares of Series B Preferred Stock at $0.76 per share.
On January 30, 2007, Mr. Shivji purchased $262,000 of promissory notes under
this Note and Warrant Purchase Agreement by converting his earlier loans of
$162,000 and advancing an additional $100,000 of additional funds to
WaferGen.





On February 28, 2007, Mr. Shivji agreed
to increase the aggregate amount available under the Note and Warrant Purchase
Agreement from $300,000 to $400,000 and WaferGen agreed to increase the number
of shares of Series B Preferred Stock that may be purchased pursuant to the
warrants issued to Mr. Shivji from 98,684 to 131,579. In connection with this
amendment to the Note and Warrant Purchase Agreement, Mr. Shivji advanced an
additional $100,000 to WaferGen.





On March 30, 2007, Mr. Shivji agreed to
increase the aggregate amount available under the Note and Warrant Purchase
Agreement from $400,000 to $650,000 and WaferGen agreed to increase the number
of shares of Series B Preferred Stock that may be purchased pursuant to the
warrants issued to Mr. Shivji from 131,579 to 213,816 shares. In connection with
this amendment to the Note and Warrant Purchase Agreement, Mr. Shivji advanced
an additional $250,000 to WaferGen.





On February 7, 2007, Mr. Shivji
exercised his warrants to purchase 471,698 shares of Series A Preferred Stock in
exchange for $66,037.





Net
Cash Used in Operating Activities




The
Company experienced negative cash flow from operating activities for
the years ended December 31, 2008 and 2007 in the amounts of $7,284,180 and
$4,737,175, respectively.  The cash used in operating activities in
the year ended December 31, 2008 was due to cash used to fund a net operating
loss of $8,041,437, adjusted for non-cash expenses related to depreciation and
amortization and stock-based compensation of $682,899, as off-set by cash
provided from a change in working capital of $74,358. This decrease is driven
primarily by the use of cash to fund operating activities and
losses.




Net Cash Used in Investing
Activities




The
Company used $601,897 in the year ended December 31, 2008, and $204,777 in the
year ended December 31, 2007 to acquire property and equipment.  A deposit
on property and equipment of $51,446 made in 2007 was applied toward purchase in
2008.







28





Net Cash
Provided by Financing Activities




Cash provided by financing activities in the year ended December 31, 2008 was
$5,277,141.




Cash used in financing activities in
the year ended December 31, 2008 was $145,682 related to repayments on capital
leases used in the lab for expansion and upgrading of our lab to accommodate our
performance in the research and development of the SmartChipTM
products.




Cash
provided by financing activities primarily related to the sale of 1,585,550
shares of common stock and warrants for $3,478,744, net of offering costs.
WaferGen received $4,079, from the exercise of stock options for a combined net
cash proceeds of $3,482,823.




On July 18, 2008, the Company’s
Malaysian subsidiary, WaferGen Biosystems (M) Sdn. Bhd., received $ 1.0 million
in exchange for the issuance of redeemable convertible preferred shares (RCPS)
of WaferGen Biosystems (M) Sdn. Bhd., in a private placement to Malaysian
Technology Development Corporation Sdn. Bhd.  A “Subsequent Closing”
has been completed, and proceeds of $1.0 million from the sale of an additional
444,444 RCPS were received on November 27, 2008.  For the two tranches of
investment, WaferGen received a combined $1,940,000, net of offering
costs.




WaferGen's financing activities
provided $10,147,098 of cash for the year ended December 31, 2007. Cash provided
by financing activities, was primarily due to the issuance of Common Stock in
the amount of $9,921,531, the issuance of $688,412 of notes payable, and $66,037
of Series A Preferred Stock off-set by the repayment on note payable of $510,000
and repayment of capital lease for $18,882.




In
connection with the Merger, we sold a total of 8,008,445 shares of our Common
Stock for gross proceeds of $12,012,668 through the private placement in May
2007. In addition, these investors received five-year warrants to purchase an
additional 2,402,533 shares of our Common Stock at exercise price of $2.25 per
share. In connection with the Private Placement, we incurred placement agent
fees totaling $837,205, and issued five-year warrants to purchase an additional
455,825 shares of our Common Stock at an exercise price of $2.25 per share to
the Placement Agent. In addition, we incurred other professional fees and
expenses totaling approximately $1,080,000 in connection with the
Merger.




We
expect that the net proceeds from the sale of common stock and warrants in May
2008 and the RCPS in July and November 2008 will fund our operations
through May 2009.  We are currently considering several different
financing alternatives to support the Company’s operations
thereafter.  Our operating needs include the planned costs to operate
our business, including amounts required to fund working capital and capital
expenditures. At the present time, we have no material commitments for capital
expenditures. However, our future capital requirements and the adequacy of our
available funds will depend on many factors, including our ability to
successfully commercialize our SmartChipTM System and SmartSlideTM System
products, competing technological and market developments, and the need to enter
into collaborations with other companies or acquire other companies or
technologies to enhance or complement our product and service offerings. 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.




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 sufficient uncertainties exist regarding the future
realization of deferred tax assets, and, accordingly, a full valuation allowance
is required, amounting to $8,324,022 at December 31, 2008. In subsequent
periods, if and when we generate pre-tax income, a tax expense will not be
recorded to the extent that the remaining valuation allowance can be used to
offset that expense. Once a consistent pattern of pre-tax income is established
or other events occur that indicate that the deferred tax assets will be
realized, additional portions or all of the remaining valuation allowance will
be reversed back to income. Should we generate pre-tax losses in subsequent
periods, a tax benefit will not be recorded and the valuation allowance will be
increased.




Stock-Based Compensation.We
measure the fair value of all stock-based awards, including stock options, on
the grant date and record the fair value of these awards as compensation expense
over the service period. The fair value is estimated using the Black-Scholes
valuation model.




The
weighted-average fair value was $0.28 for the year ended December 31, 2008 and
$0.51 for the year ended December 31, 2007. Amounts expensed were $388,650 and
$648,988 for the years ended December 31, 2008 and 2007, and $1,689,531 for
the period from inception to December 31, 2008.





29














The fair
value of each option grant has been estimated using the following
assumptions:




December
      31,
                                  
                                  
                                  December
      31,2008
                                  
                                  
                                  2007Weighted-average
      grant date fair value
                                  
                                  $
                                  0.28
                                  
                                  
                                  $
                                  0.51Risk
      free interest rate
                                  
                                  
                                  2.37%-3.34
                                  %
                                  
                                  
                                  4.26%-4.85
                                  %Expected
      lives
                                  
                                  4.75-5
      Years
                                  
                                  
                                  5
      YearsExpected
      volatility
                                  
                                  
                                  17%-33
                                  %
                                  
                                  
                                  19%-21
                                  %Dividend
      yields
                                  
                                  
                                  0
                                  %
                                  
                                  
                                  0
                                  %




Risk-Free Interest Rate. This
is the United States treasury rate for the day of the grant having a term
approximating the expected life of the option. An increase in the risk-free
interest rate will increase the fair value and the related compensation
expense.




Expected Life. 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 vesting term,
contractual term, and historical lives. An increase in the expected life will
increase the fair value and the related compensation expense.




Expected Volatility. This is
a measure of the amount by which the stock price has fluctuated or is expected
to fluctuate.  Since the Company’s stock has not been traded for as
long as the expected term of its options, the Company uses a weighted average of
the historic volatility of four comparable companies over
the retrospective period corresponding to the expected life of the Company’s own
options on the grant date.  Extra weighting is attached to those
companies most similar in terms of size and business activity. An increase in
the expected volatility life will increase the fair value and the related
compensation expense.




Dividend Yield. We have not
made any dividend payments nor do we have plans to pay dividends in the
foreseeable future. An increase in the dividend yield will decrease the fair
value and the related compensation expense.







Contractual
Obligations




On
April 23, 2007, we entered into a First Amendment to Lease, effective as of
May 1, 2007, which amended our existing lease for approximately 11,222
square feet of space in an office building located in Fremont, California. The
leased space serves as our only corporate office. The amendment extended the
termination date of the lease from December 31, 2008 to March 31,
2010. In addition, it increased the basic annual rent (as defined in the lease),
commencing April 31, 2007, to $8,417 until December 31, 2007 with an increase to
$11,222 until February 28, 2009, and a final increase to $11,905 until March 31,
2010.




Recently
Issued Accounting Pronouncements




In June
2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) No. Emerging Issues Task Force (EITF) 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities.
FSP No. EITF 03-6-1 concluded that unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents (whether paid
or unpaid) are participating securities and shall be included in the computation
of basic earnings per share (EPS) pursuant to the two-class method.  This
FSP becomes effective for us on January 1, 2009.  Early adoption of the FSP
is not permitted; however, it will apply retrospectively to EPS data for all
periods presented in the financial statements or in financial data.  We do
not currently expect that this FSP will have a material impact on our EPS data
in fiscal year 2009 or on EPS for any prior periods.











30








In May
2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS 162 identifies the sources of
accounting principles and the framework for selecting principles to be used in
the preparation and presentation of financial statements in accordance with
generally accepted accounting principles in the United States of America.
 The adoption of SFAS 162 will not have an effect on our consolidated
financial statements.





In March
2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities –an amendment of SFAS 133.  SFAS
161 seeks to improve financial reporting for derivative instruments and hedging
activities by requiring enhanced disclosures regarding the impact on financial
position, financial performance, and cash flows.  SFAS 161 is effective for
us on January 1, 2009.  Since SFAS 161 requires only additional disclosures
concerning derivatives and hedging activities, the adoption of SFAS 161 will not
affect our financial condition, results of operations or cash
flows.





As
amended in February 2008 by FSP No. FAS 157-2, Effective Date of FASB Statement No.
157,SFAS 157, Fair
Value Measurements,defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. FSP
FAS 157-2 defers the effective date of SFAS 157 for all nonfinancial assets
and liabilities, except those items recognized or disclosed at fair value on an
annual or more frequently recurring basis, until January 1, 2009.  As such,
we partially adopted the provisions of SFAS 157 effective January 1, 2008.
 We expect to adopt the remaining provisions of SFAS 157 beginning in
2009.  We expect the adoption of SFAS 157 to impact the way in which we
calculate fair value for our annual impairment review of goodwill and
non-amortizable intangible assets, and when conditions exist that require us to
calculate the fair value of long-lived assets; however, we do not expect this
adoption to have a material impact on our consolidated financial
statements.





In
December 2007, the FASB issued SFAS 141R, Business Combinations.
 SFAS 141R continues to require the purchase method of accounting to be
applied to all business combinations, but it significantly changes the
accounting for certain aspects of business combinations.  Under SFAS 141R,
an acquiring entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions.  SFAS 141R will change the accounting treatment for
certain specific acquisition related items including: (1) expensing acquisition
related costs as incurred; (2) valuing noncontrolling interests at fair value at
the acquisition date; and (3) expensing restructuring costs associated with an
acquired business.  SFAS 141R also includes a substantial number of new
disclosure requirements.  SFAS 141R is to be applied prospectively to
business combinations for which the acquisition date is on or after January 1,
2009.  We expect SFAS 141R will have an impact on our accounting for future
business combinations once adopted but the effect is dependent upon the
acquisitions that are made in the future.





In
December 2007, SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, was issued. SFAS 160 establishes new
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary (minority interest) is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements and separate from the parent company’s equity.
 Among other requirements, this statement requires consolidated net income
to be reported at amounts that include the amounts attributable to both the
parent and the noncontrolling interest.  It also requires disclosure, on
the face of the consolidated statement of income, of the amounts of consolidated
net income attributable to the parent and to the noncontrolling income interest.
 This statement is effective for us on January 1, 2009. When implemented,
prior periods will be recast for the changes required by SFAS 160.  The
adoption of this standard will not have a material impact on our consolidated
financial statements.




Cautionary
Factors That May Affect Future Results




This Form
10-K and other written reports and oral statements made from time to time by the
Company may contain so-called “forward-looking statements,” all of which are
subject to risks and uncertainties. One can identify these forward-looking
statements by their use of words such as “expects,” “plans,” “will,”
“estimates,” “forecasts,” “projects” and other words of similar meaning. One can
identify them by the fact that they do not relate strictly to historical or
current facts. These statements are likely to address the Company’s growth
strategy, financial results and product and development programs. One must
carefully consider any such statement and should understand that many factors
could cause actual results to differ from the Company’s forward-looking
statements. These factors include inaccurate assumptions and a broad variety of
other risks and uncertainties, including some that are known and some that are
not. No forward-looking statement can be guaranteed and actual future results
may vary materially.



















31














Information
regarding market and industry statistics contained in this Report is included
based on information available to the Company that it believes is accurate. It
is generally based on industry and other publications that are not produced for
purposes of securities offerings or economic analysis. The Company has not
reviewed or included data from all sources, and cannot assure investors of the
accuracy or completeness of the data included in this Report. Forecasts and
other forward-looking information obtained from these sources are subject to the
same qualifications and the additional uncertainties accompanying any estimates
of future market size, revenue and market acceptance of products and services.
The Company does not assume the obligation to update any forward-looking
statement. You should carefully evaluate such statements in light of factors
described in the Company’s filings with the SEC, especially on Forms 10-K, 10-Q
and 8-K. In various filings the Company has identified important factors that
could cause actual results to differ from expected or historic results. You
should understand that it is not possible to predict or identify all such
factors. Consequently, the reader should not consider any such list to be a
complete list of all potential risks or uncertainties.







Item
      8.
            Financial
      Statements and Supplementary Data




Index to consolidated financial
      statements
              
              
              PageReport of
      Independent Registered Public Accounting Firm
              
              
              33Consolidated
      Balance
      Sheets
              
              
              34Consolidated
      Statements of Operations
              
              
              35Consolidated
      Statements of Series B Preferred Stock and Stockholders’ Equity
      (Deficit)
              
              
              36Consolidated
      Statements of Cash
      Flows
              
              
              39Notes to the
      Consolidated Financial Statements
              
              
              40






















32














Report
of Independent Registered Public Accounting Firm






The Board
of Directors and Stockholders of


WaferGen
Bio-systems, Inc.:




We have
audited the accompanying consolidated balance sheets of  WaferGen
Bio-systems, Inc. (a development stage company) (the "Company") as of December
31, 2008 and 2007, and the related consolidated statements of operations, Series
B preferred stock and stockholders’ equity (deficit), and cash flows
for the years then ended and for the period from October 22, 2002
(inception) to December 31, 2008. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated 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
consolidated 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 of 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 consolidated 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 positions of the Company, as of
December 31, 2008 and 2007, and the results of their operations and their
cash flows for the years then ended and for the cumulative period from
October 22, 2002 (inception) to December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.




The
accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the
consolidated financial statements, the Company has incurred net losses
since its inception and has experienced liquidity problems. Those conditions
raise substantial doubt about the Company’s ability to continue as a going
concern. Management’s plans in regarding to those matters are described in Note
1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.








/s/ Rowbotham & Company
LLP




San
Francisco, California


March 26,
2009








33








WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)




Consolidated
Balance Sheets







December
      31,2008
                                                  
                                                  
                                                  2007AssetsCurrent
      assets:Cash
      and cash equivalents
                                                  
                                                  $
                                                  2,597,413
                                                  
                                                  
                                                  $
                                                  5,189,858Accounts
      receivables
                                                  
                                                  
                                                  40,757
                                                  
                                                  
                                                  
                                                  139,827Inventories
                                                  
                                                  
                                                  227,272
                                                  
                                                  
                                                  
                                                  62,521Prepaid
      expenses and other current assets
                                                  
                                                  
                                                  135,629
                                                  
                                                  
                                                  
                                                  87,487Total
      current assets
                                                  
                                                  
                                                  3,001,071
                                                  
                                                  
                                                  
                                                  5,479,693Property
      and equipment, net
                                                  
                                                  
                                                  795,339
                                                  
                                                  
                                                  
                                                  321,159Other
      assets
                                                  
                                                  
                                                  15,690
                                                  
                                                  
                                                  
                                                  54,016Total
      assets
                                                  
                                                  $
                                                  3,812,100
                                                  
                                                  
                                                  $
                                                  5,854,868Liabilities and Stockholders’
      EquityCurrent
      liabilities:Accounts
      payable
                                                  
                                                  $
                                                  904,094
                                                  
                                                  
                                                  $
                                                  560,641Accrued
      rent
                                                  
                                                  
                                                  31,671
                                                  
                                                  
                                                  
                                                  19,340Accrued
      payroll
                                                  
                                                  
                                                  160,242
                                                  
                                                  
                                                  
                                                  414,519Accrued
      vacation
                                                  
                                                  
                                                  181,377
                                                  
                                                  
                                                  
                                                  156,234Accrued
      other expenses
                                                  
                                                  
                                                  72,012
                                                  
                                                  
                                                  
                                                  —Current
      portion of capital lease obligations
                                                  
                                                  
                                                  55,934
                                                  
                                                  
                                                  
                                                  32,443Total
      current liabilities
                                                  
                                                  
                                                  1,405,330
                                                  
                                                  
                                                  
                                                  1,183,177Capital
      lease obligations, net of current portion
                                                  
                                                  
                                                  24,928
                                                  
                                                  
                                                  
                                                  73,451Minority
      interest
                                                  
                                                  
                                                  1,977,916
                                                  
                                                  
                                                  
                                                  —Commitment
      and contingencies
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —Stockholders’
      equity :Preferred
      Stock, $0.001 par value; 10,000,000 shares authorized; no shares issued
      and outstanding
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —Common Stock: $0.001 par value; 300,000,000 shares authorized; 24,830,932
      and 23,217,846 sharesissued
      and outstanding at December 31, 2008 and December 31,2007
                                                  
                                                  
                                                  24,831
                                                  
                                                  
                                                  
                                                  23,218Additional
      paid-in capital
                                                  
                                                  
                                                  20,397,789
                                                  
                                                  
                                                  
                                                  16,527,929Deficit
      accumulated during the development stage
                                                  
                                                  
                                                  (20,032,260
                                                  )
                                                  
                                                  
                                                  (11,952,907
                                                  )Accumulated
      other comprehensive income
                                                  
                                                  
                                                  13,566
                                                  
                                                  
                                                  
                                                  —Total
      stockholders’ equity
                                                  
                                                  
                                                  403,926
                                                  
                                                  
                                                  
                                                  4,598,240Total
      liabilities and stockholders’ equity
                                                  
                                                  $
                                                  3,812,100
                                                  
                                                  
                                                  $
                                                  5,854,868


The
accompany notes are an integral part of these consolidated financial
statements.








34


WAFERGEN
BIO-SYSTEMS, INC.
 (A
Development Stage Company)
  Consolidated
Statements of Operations





Year
      ended
                                                  
                                                  
                                                  Period
      From October 22, 2002 (Inception) toDecember
      31,
                                                  
                                                  
                                                  December
      31,2008
                                                  
                                                  
                                                  2007
                                                  
                                                  
                                                  2008Revenues
                                                  
                                                  $
                                                  621,866
                                                  
                                                  
                                                  $
                                                  228,973
                                                  
                                                  
                                                  $
                                                  916,134Cost
      of sales
                                                  
                                                  
                                                  241,033
                                                  
                                                  
                                                  
                                                  79,116
                                                  
                                                  
                                                  
                                                  341,899Gross
      margin
                                                  
                                                  
                                                  380,833
                                                  
                                                  
                                                  
                                                  149,857
                                                  
                                                  
                                                  
                                                  574,235Operating
      expenses:Sales
      and marketing
                                                  
                                                  
                                                  1,179,791
                                                  
                                                  
                                                  
                                                  848,818
                                                  
                                                  
                                                  
                                                  2,181,014Research
      and development
                                                  
                                                  
                                                  4,628,262
                                                  
                                                  
                                                  
                                                  2,429,273
                                                  
                                                  
                                                  
                                                  10,696,390General
      and administrative
                                                  
                                                  
                                                  2,603,180
                                                  
                                                  
                                                  
                                                  2,802,938
                                                  
                                                  
                                                  
                                                  7,390,154Total
      operating expenses
                                                  
                                                  
                                                  8,411,233
                                                  
                                                  
                                                  
                                                  6,081,029
                                                  
                                                  
                                                  
                                                  20,267,558Operating
      loss
                                                  
                                                  
                                                  (8,030,400
                                                  )
                                                  
                                                  
                                                  (5,931,172
                                                  )
                                                  
                                                  
                                                  (19,693,323
                                                  )Other
      income and (expenses):Interest
      income
                                                  
                                                  
                                                  82,318
                                                  
                                                  
                                                  
                                                  163,047
                                                  
                                                  
                                                  
                                                  245,365Interest
      expense
                                                  
                                                  
                                                  (14,851
                                                  )
                                                  
                                                  
                                                  (189,539
                                                  )
                                                  
                                                  
                                                  (311,884
                                                  )Miscellaneous
      expense
                                                  
                                                  
                                                  (78,504
                                                  )
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (78,504
                                                  )Total
      other income and (expenses)
                                                  
                                                  
                                                  (11,037
                                                  )
                                                  
                                                  
                                                  (26,492
                                                  )
                                                  
                                                  
                                                  (145,023
                                                  )Net
      loss before provision for income taxes
                                                  
                                                  
                                                  (8,041,437
                                                  )
                                                  
                                                  
                                                  (5,957,664
                                                  )
                                                  
                                                  
                                                  (19,838,346
                                                  )Provision
      for income taxes
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —Net
      loss
                                                  
                                                  
                                                  (8,041,437
                                                  )
                                                  
                                                  
                                                  (5,957,664
                                                  )
                                                  
                                                  
                                                  (19,838,346
                                                  )Accretion
      on Redeemable Convertible Preferred Stock
                                                  
                                                  
                                                  (37,916
                                                  )
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (37,916
                                                  )Accretion
      on Series B Preferred Stock
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (51,998
                                                  )
                                                  
                                                  
                                                  (155,998
                                                  )Net
      loss applicable to common stockholders
                                                  
                                                  $
                                                  (8,079,353
                                                  )
                                                  
                                                  $
                                                  (6,009,662
                                                  )
                                                  
                                                  $
                                                  (20,032,260
                                                  )Net
      loss per share - basic and diluted
                                                  
                                                  $
                                                  (0.33
                                                  )
                                                  
                                                  $
                                                  (0.40
                                                  )Shares
      used to compute net loss per share - basic and diluted
                                                  
                                                  
                                                  24,214,807
                                                  
                                                  
                                                  
                                                  15,119,255


The
accompany notes are an integral part of these consolidated financial
statements.








35








WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)




Consolidated
Statements of Series B Preferred Stock and Stockholders’ Equity
(Deficit)







Series B
                                                                    
                                                                    Series A
                                                                    
                                                                    
                                                                    
                                                                    AdditionalPreferred Stock
                                                                    
                                                                    Preferred Stock
                                                                    
                                                                    Common Stock
                                                                    
                                                                    Paid-in
                                                                    
                                                                    AccumulatedShares
                                                                    
                                                                    Amount
                                                                    
                                                                    Shares
                                                                    
                                                                    Amount
                                                                    
                                                                    Shares
                                                                    
                                                                    Amount
                                                                    
                                                                    Capital
                                                                    
                                                                    Deficit
                                                                    
                                                                    TotalBalances
      as of October 22, 2002
                                                                    
                                                                    —
                                                                    
                                                                    $
                                                                    —
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    $
                                                                    —
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    $
                                                                    —
                                                                    
                                                                    $
                                                                    —
                                                                    
                                                                    $
                                                                    —
                                                                    
                                                                    $
                                                                    —Net
      loss
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    —Balances
      as of December 31, 2002
                                                                    
                                                                    —
                                                                    
                                                                    $
                                                                    —
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    $
                                                                    —
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    $
                                                                    —
                                                                    
                                                                    $
                                                                    —
                                                                    
                                                                    $
                                                                    —
                                                                    
                                                                    $
                                                                    —





Series B
                                                                                  
                                                                                  Series A
                                                                                  
                                                                                  
                                                                                  
                                                                                  AdditionalPreferred Stock
                                                                                  
                                                                                  Preferred Stock
                                                                                  
                                                                                  Common Stock
                                                                                  
                                                                                  Paid-in
                                                                                  
                                                                                  AccumulatedShares
                                                                                  
                                                                                  Amount
                                                                                  
                                                                                  Shares
                                                                                  
                                                                                  Amount
                                                                                  
                                                                                  Shares
                                                                                  
                                                                                  Amount
                                                                                  
                                                                                  Capital
                                                                                  
                                                                                  Deficit
                                                                                  
                                                                                  TotalBalances
      as of January 1, 2003
                                                                                  
                                                                                  —
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  $
                                                                                  —Net
      loss
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  (533,985)
                                                                                  
                                                                                  
                                                                                  (533,985)Balances
      as of December 31, 2003
                                                                                  
                                                                                  —
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  $
                                                                                  (533,985)
                                                                                  
                                                                                  $
                                                                                  (533,985)
 Series B
                                                                                  
                                                                                  Series A
                                                                                  
                                                                                  
                                                                                  
                                                                                  AdditionalPreferred Stock
                                                                                  
                                                                                  Preferred Stock
                                                                                  
                                                                                  Common Stock
                                                                                  
                                                                                  Paid-in
                                                                                  
                                                                                  AccumulatedShares
                                                                                  
                                                                                  Amount
                                                                                  
                                                                                  Shares
                                                                                  
                                                                                  Amount
                                                                                  
                                                                                  Shares
                                                                                  
                                                                                  Amount
                                                                                  
                                                                                  Capital
                                                                                  
                                                                                  Deficit
                                                                                  
                                                                                  TotalBalances
      as of January 1, 2004
                                                                                  
                                                                                  —
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  $
                                                                                  (533,985)
                                                                                  
                                                                                  $
                                                                                  (533,985)Issuance
      of Common Stock in June for cash
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  2,483,610
                                                                                  
                                                                                  
                                                                                  2,484
                                                                                  
                                                                                  
                                                                                  (2,024)
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  460Stock-based
      compensation
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  1,242
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  1,242Net
      loss
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  (1,124,360)
                                                                                  
                                                                                  
                                                                                  (1,124,360)Balances
      as of December 31, 2004
                                                                                  
                                                                                  —
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  
                                                                                  2,483,610
                                                                                  
                                                                                  $
                                                                                  2,484
                                                                                  
                                                                                  $
                                                                                  (782)
                                                                                  
                                                                                  $
                                                                                  (1,658,345)
                                                                                  
                                                                                  $
                                                                                  (1,656,643)


The
accompany notes are an integral part of these consolidated financial
statements.










36





WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)




Consolidated
Statements of Series B Preferred Stock and Stockholders’ Equity
(Deficit)




Series B
                                                                        
                                                                        Series A
                                                                        
                                                                        
                                                                        
                                                                        AdditionalPreferred Stock
                                                                        
                                                                        Preferred Stock
                                                                        
                                                                        Common Stock
                                                                        
                                                                        Paid-in
                                                                        
                                                                        AccumulatedShares
                                                                        
                                                                        Amount
                                                                        
                                                                        Shares
                                                                        
                                                                        Amount
                                                                        
                                                                        Shares
                                                                        
                                                                        Amount
                                                                        
                                                                        Capital
                                                                        
                                                                        Deficit
                                                                        
                                                                        TotalBalances
      as of January 1, 2005
                                                                        
                                                                        —
                                                                        
                                                                        $
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        $
                                                                        —
                                                                        
                                                                        
                                                                        2,483,610
                                                                        
                                                                        $
                                                                        2,484
                                                                        
                                                                        $
                                                                        (782)
                                                                        
                                                                        $
                                                                        (1,658,345)
                                                                        
                                                                        $
                                                                        (1,656,643)Issuance
      of Series A Preferred Stock in February upon
                                                                          conversion of
      notes payable and accrued interest
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        5,915,219
                                                                        
                                                                        
                                                                        592
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        3,134,481
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        3,135,073Issuance
      of Common Stock in September for cash
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        917,856
                                                                        
                                                                        
                                                                        918
                                                                        
                                                                        
                                                                        (748)
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        170Stock-based
      compensation
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        8,575
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        8,575Net
      loss
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        (1,494,449)
                                                                        
                                                                        
                                                                        (1,494,449)Balances
      as of December 31, 2005
                                                                        
                                                                        —
                                                                        
                                                                        $
                                                                        —
                                                                        
                                                                        
                                                                        5,915,219
                                                                        
                                                                        $
                                                                        592
                                                                        
                                                                        
                                                                        3,401,466
                                                                        
                                                                        $
                                                                        3,402
                                                                        
                                                                        $
                                                                        3,141,526
                                                                        
                                                                        $
                                                                        (3,152,794)
                                                                        
                                                                        $
                                                                        (7,274)






Series B
                                                                            
                                                                            Series A
                                                                            
                                                                            
                                                                            
                                                                            AdditionalPreferred Stock
                                                                            
                                                                            Preferred Stock
                                                                            
                                                                            Common Stock
                                                                            
                                                                            Paid-in
                                                                            
                                                                            AccumulatedShares
                                                                            
                                                                            Amount
                                                                            
                                                                            Shares
                                                                            
                                                                            Amount
                                                                            
                                                                            Shares
                                                                            
                                                                            Amount
                                                                            
                                                                            Capital
                                                                            
                                                                            Deficit
                                                                            
                                                                            TotalBalances
      as January 1, 2006
                                                                            
                                                                            —
                                                                            
                                                                            $
                                                                            —
                                                                            
                                                                            
                                                                            5,915,219
                                                                            
                                                                            $
                                                                            592
                                                                            
                                                                            
                                                                            3,401,466
                                                                            
                                                                            $
                                                                            3,402
                                                                            
                                                                            $
                                                                            3,141,526
                                                                            
                                                                            $
                                                                            (3,152,794)
                                                                            
                                                                            $
                                                                            (7,274)Issuance
      of Common Stock in January for cash
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            4,049
                                                                            
                                                                            
                                                                            4
                                                                            
                                                                            
                                                                            (3)
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            1Issuance
      of Series B Preferred Stock in February for cash
                                                                            
                                                                            2,052,552
                                                                            
                                                                            
                                                                            1,559,942
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —Issuance
      of restricted shares in March for services
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            24,296
                                                                            
                                                                            
                                                                            24
                                                                            
                                                                            
                                                                            (24)
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —Issuance
      of Common Stock in June for cash
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            8,099
                                                                            
                                                                            
                                                                            8
                                                                            
                                                                            
                                                                            (7)
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            1Issuance
      of restricted shares in July for services
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            10,798
                                                                            
                                                                            
                                                                            11
                                                                            
                                                                            
                                                                            (11)
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —Issuance
      of restricted shares in August for services
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            16,197
                                                                            
                                                                            
                                                                            16
                                                                            
                                                                            
                                                                            (16)
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —Issuance
      of Common Stock in August for cash
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            17,007
                                                                            
                                                                            
                                                                            17
                                                                            
                                                                            
                                                                            (14)
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            3Accretions
      on Series B Preferred Stock
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            104,000
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            (104,000)
                                                                            
                                                                            
                                                                            (104,000)Issuance
      of restricted shares in November for services
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            5,399
                                                                            
                                                                            
                                                                            5
                                                                            
                                                                            
                                                                            (5)
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —Issuance
      of Common Stock in November for cash
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            8,639
                                                                            
                                                                            
                                                                            9
                                                                            
                                                                            
                                                                            (7)
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            2Stock-based
      compensation
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            642,076
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            642,076Net
      loss
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            (2,686,451)
                                                                            
                                                                            
                                                                            (2,686,451)Balances
      as of December 31, 2006
                                                                            
                                                                            2,052,552
                                                                            
                                                                            $
                                                                            1,663,942
                                                                            
                                                                            
                                                                            5,915,219
                                                                            
                                                                            $
                                                                            592
                                                                            
                                                                            
                                                                            3,495,950
                                                                            
                                                                            $
                                                                            3,496
                                                                            
                                                                            $
                                                                            3,783,515
                                                                            
                                                                            $
                                                                            (5,943,245)
                                                                            
                                                                            $
                                                                            (2,155,642)


The
accompany notes are an integral part of these consolidated financial
statements.










37








WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)




Consolidated
Statements of Series B Preferred Stock and Stockholders’ Equity
(Deficit)




Series B
                                                                        
                                                                        Series A
                                                                        
                                                                        
                                                                        
                                                                        AdditionalPreferred Stock
                                                                        
                                                                        Preferred Stock
                                                                        
                                                                        Common Stock
                                                                        
                                                                        Paid-in
                                                                        
                                                                        AccumulatedShares
                                                                        
                                                                        Amount
                                                                        
                                                                        Shares
                                                                        
                                                                        Amount
                                                                        
                                                                        Shares
                                                                        
                                                                        Amount
                                                                        
                                                                        Capital
                                                                        
                                                                        Deficit
                                                                        
                                                                        TotalBalances
      as January 1, 2007
                                                                        
                                                                        2,052,552
                                                                        
                                                                        $
                                                                        1,663,942
                                                                        
                                                                        
                                                                        5,915,219
                                                                        
                                                                        $
                                                                        592
                                                                        
                                                                        
                                                                        3,495,950
                                                                        
                                                                        $
                                                                        3,496
                                                                        
                                                                        $
                                                                        3,783,515
                                                                        
                                                                        $
                                                                        (5,943,245)
                                                                        
                                                                        $
                                                                        (2,155,642)Issuance
      of Common Stock in January for cash
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        26,996
                                                                        
                                                                        
                                                                        27
                                                                        
                                                                        
                                                                        473
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        500Issuance
      of restricted shares in January for services
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        134,979
                                                                        
                                                                        
                                                                        135
                                                                        
                                                                        
                                                                        (135)
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —Issuance
      of Series A Preferred Stock in February for cash
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        471,698
                                                                        
                                                                        
                                                                        47
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        65,990
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        66,037Issuance
      of WaferGen Bio-systems, Inc. Common Stock
                                                                          to
      Wafergen, Inc.;'s Preferred shareholders in May
                                                                        
                                                                        (2,052,552)
                                                                        
                                                                        
                                                                        (1,715,940)
                                                                        
                                                                        
                                                                        (6,386,917)
                                                                        
                                                                        
                                                                        (639)
                                                                        
                                                                        
                                                                        4,556,598
                                                                        
                                                                        
                                                                        4,557
                                                                        
                                                                        
                                                                        1,712,022
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        1,715,940Issuance
      of Units for cash and notes payable in May and
                                                                          June,
      net of offering costs of $1,917,956
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        8,008,448
                                                                        
                                                                        
                                                                        8,008
                                                                        
                                                                        
                                                                        10,086,704
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        10,094,712WaferGen
      Bio-systems, Inc. shares outstanding
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        11,277,782
                                                                        
                                                                        
                                                                        11,278
                                                                        
                                                                        
                                                                        (11,278)
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —Common
      Stock cancelled in May in accordance with
                                                                          Split-Off
      Agreement
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        (4,277,778)
                                                                        
                                                                        
                                                                        (4,278)
                                                                        
                                                                        
                                                                        4,278
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —Issuance
      of warrants in May and June to a placement
                                                                          agent
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        66,319
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        66,319Issuance
      of warrants with debt in January, February, and
                                                                          March
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        171,053
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        171,053Stock-based
      compensation
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        648,988
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        648,988Accretions
      on Series B Preferred Stock
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        51,998
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        (51,998)
                                                                        
                                                                        
                                                                        (51,998)Common
      Stock cancelled in July
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        (5,129)
                                                                        
                                                                        
                                                                        (5)
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        (5)Net
      loss
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        
                                                                        (5,957,664)
                                                                        
                                                                        
                                                                        (5,957,664)Balance
      as of December 31, 2007
                                                                        
                                                                        —
                                                                        
                                                                        $
                                                                        —
                                                                        
                                                                        
                                                                        —
                                                                        
                                                                        $
                                                                        —
                                                                        
                                                                        
                                                                        23,217,846
                                                                        
                                                                        $
                                                                        23,218
                                                                        
                                                                        $
                                                                        16,527,929
                                                                        
                                                                        $
                                                                        (11,952,907)
                                                                        
                                                                        $
                                                                        4,598,240


AccumulativeAdditional
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    OtherPreferred Stock
                                                                                                    
                                                                                                    Common Stock
                                                                                                    
                                                                                                    Paid-in
                                                                                                    
                                                                                                    Accumulated
                                                                                                    
                                                                                                    ComprehensiveShares
                                                                                                    
                                                                                                    Amount
                                                                                                    
                                                                                                    Shares
                                                                                                    
                                                                                                    Amount
                                                                                                    
                                                                                                    Capital
                                                                                                    
                                                                                                    Deficit
                                                                                                    
                                                                                                    Income
                                                                                                    
                                                                                                    
                                                                                                    TotalBalances
      as of January 1, 2008
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    $
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    23,217,846
                                                                                                    
                                                                                                    $
                                                                                                    23,218
                                                                                                    
                                                                                                    $
                                                                                                    16,527,929
                                                                                                    
                                                                                                    $
                                                                                                    (11,952,907)
                                                                                                    
                                                                                                    $
                                                                                                    —
                                                                                                    
                                                                                                    $
                                                                                                    4,598,240Issuance
      of Units for cash  in May , net of offering costs of
      $88,743
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    1,585,550
                                                                                                    
                                                                                                    
                                                                                                    1,586
                                                                                                    
                                                                                                    
                                                                                                    3,477,158
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    3,478,744Accretion
      on Redeemable Convertible Preferred Stock
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    (37,916)
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    (37,916)Issuance
      of Common Stock in May 2008 for cash
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    27,536
                                                                                                    
                                                                                                    
                                                                                                    27
                                                                                                    
                                                                                                    
                                                                                                    4,052
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    4,079Stock-based
      compensation
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    388,650
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    388,650Net
      loss
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    (8,041,437)
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    (8,041,437)Translation
      adjustment
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    13,566
                                                                                                    
                                                                                                    
                                                                                                    13,566Total
      Comprehensive Income (loss)
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    (8,041,437)
                                                                                                    
                                                                                                    
                                                                                                    13,566
                                                                                                    
                                                                                                    
                                                                                                    (8,027,871)Balances
      as of December 31, 2008
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    $
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    24,830,931
                                                                                                    
                                                                                                    $
                                                                                                    24,831
                                                                                                    
                                                                                                    $
                                                                                                    20,397,789
                                                                                                    
                                                                                                    $
                                                                                                    (20,032,260)
                                                                                                    
                                                                                                    $
                                                                                                    13,566
                                                                                                    
                                                                                                    $
                                                                                                    403,926


The
accompany notes are an integral part of these consolidated financial
statements.





38








WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)




Consolidated
Statements of Cash Flows





Year
      ended
                                          
                                          
                                          Period
      From October 22, 2002 (Inception) toDecember
      31,
                                          
                                          
                                          December
      31,2008
                                          
                                          
                                          2007
                                          
                                          
                                          2008Cash
      flows from operating activities:Net
      loss
                                          
                                          $
                                          (8,041,437
                                          )
                                          
                                          $
                                          (5,957,664
                                          )
                                          
                                          $
                                          (19,838,346
                                          )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                          
                                          
                                          294,249
                                          
                                          
                                          
                                          58,653
                                          
                                          
                                          
                                          420,548Non
      cash miscellaneous income
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (5
                                          )
                                          
                                          
                                          (5
                                          )Stock-based
      compensation
                                          
                                          
                                          388,650
                                          
                                          
                                          
                                          648,988
                                          
                                          
                                          
                                          1,689,531Issuance
      of Series A Preferred Stock for legal services
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          50,000Issuance
      of Series A Preferred Stock for interest owed
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          107,494Amortization
      of debt discount
                                          
                                          
                                          —
                                          
                                          
                                          
                                          171,053
                                          
                                          
                                          
                                          171,053Change
      in operating assets and liabilities:Accounts
      receivable
                                          
                                          
                                          99,070
                                          
                                          
                                          
                                          (105,398
                                          )
                                          
                                          
                                          (40,757
                                          )Inventories
                                          
                                          
                                          (164,751
                                          )
                                          
                                          
                                          (62,521
                                          )
                                          
                                          
                                          (227,272
                                          )Prepaid
      expenses and other current assets
                                          
                                          
                                          (48,206
                                          )
                                          
                                          
                                          (76,431
                                          )
                                          
                                          
                                          (135,693
                                          )Other
      assets
                                          
                                          
                                          (13,225
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (15,795
                                          )Accounts
      payable
                                          
                                          
                                          344,804
                                          
                                          
                                          
                                          431,203
                                          
                                          
                                          
                                          905,445Accrued
      rent
                                          
                                          
                                          12,729
                                          
                                          
                                          
                                          19,340
                                          
                                          
                                          
                                          32,069Accrued
      payroll
                                          
                                          
                                          (254,277
                                          )
                                          
                                          
                                          769
                                          
                                          
                                          
                                          160,242Accrued
      vacation
                                          
                                          
                                          25,255
                                          
                                          
                                          
                                          134,838
                                          
                                          
                                          
                                          181,489Accrued
      others
                                          
                                          
                                          72,959
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          72,959Net
      cash used in operating activities
                                          
                                          
                                          (7,284,180
                                          )
                                          
                                          
                                          (4,737,175
                                          )
                                          
                                          
                                          (16,467,038
                                          )Cash
      flows from investing activities:Deposit
      on property and equipment
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (51,446
                                          )
                                          
                                          
                                          —Purchase
      of property and equipment
                                          
                                          
                                          (601,897
                                          )
                                          
                                          
                                          (204,777
                                          )
                                          
                                          
                                          (976,025
                                          )Net
      cash used in investing activities
                                          
                                          
                                          (601,897
                                          )
                                          
                                          
                                          (256,223
                                          )
                                          
                                          
                                          (976,025
                                          )Cash
      flows from financing activities:Advances
      from (repayments to) related party, net
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          61,588Repayment
      of capital lease obligations
                                          
                                          
                                          (145,682
                                          )
                                          
                                          
                                          (18,882
                                          )
                                          
                                          
                                          (164,564
                                          )Proceeds
      from issuance of notes payable
                                          
                                          
                                          —
                                          
                                          
                                          
                                          688,412
                                          
                                          
                                          
                                          3,665,991Proceeds
      from issuance of Redeemable Convertible Preferred Stock, net of offering
      costs
                                          
                                          
                                          1,940,000
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          1,940,000Repayments
      on notes payable
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (510,000
                                          )
                                          
                                          
                                          (510,000
                                          )Proceeds
      from issuance of Series A Preferred Stock
                                          
                                          
                                          —
                                          
                                          
                                          
                                          66,037
                                          
                                          
                                          
                                          66,037Proceeds
      from issuance of Series B Preferred Stock
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          1,559,942Proceeds
      from issuance of Common Stock, net of offering costs
                                          
                                          
                                          3,482,823
                                          
                                          
                                          
                                          9,921,531
                                          
                                          
                                          
                                          13,404,991Net
      cash provided by financing activities
                                          
                                          
                                          5,277,141
                                          
                                          
                                          
                                          10,147,098
                                          
                                          
                                          
                                          20,023,985Effect
      of exchange rates on cash
                                          
                                          
                                          16,491
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          16,491Net
      increase (decrease) in cash and cash equivalents
                                          
                                          
                                          (2,592,445
                                          )
                                          
                                          
                                          5,153,700
                                          
                                          
                                          
                                          2,597,413Cash
      and cash equivalents at beginning of the period
                                          
                                          
                                          5,189,858
                                          
                                          
                                          
                                          36,158
                                          
                                          
                                          
                                          —Cash
      and cash equivalents at end of the period
                                          
                                          $
                                          2,597,413
                                          
                                          
                                          $
                                          5,189,858
                                          
                                          
                                          $
                                          2,597,413


The
accompany notes are an integral part of these consolidated financial
statements.







39







WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)




Notes
to the Consolidated Financial Statements






NOTE
      1.
            The
      Company




WaferGen,
Inc. was incorporated in the State of Delaware on October 22, 2002. Scuttlebutt
Yachts, Inc. was incorporated in the state of Nevada on August 4, 2005. On June
20, 2006, its name was changed to La Burbuja Cafe, Inc. On January 1, 2007, its
name was changed to WaferGen Bio-systems, Inc.





Merger




On
May 31, 2007, WaferGen, Inc. was acquired by WaferGen Bio-systems, Inc. In
the transactions, WaferGen, Inc. merged with a subsidiary of WaferGen
Bio-systems, Inc. and became a wholly-owned subsidiary of WaferGen Bio-systems,
Inc. (the “Merger”). The officers and board members of WaferGen Bio-systems,
Inc. resigned and were replaced by officers of WaferGen, Inc. along with newly
elected board members.




Concurrent
with the closing of the Merger, WaferGen Bio-systems, Inc. consummated a private
offering (the “Offering”) of 7,178,444 units of its securities (the “Units”), at
a purchase price of $1.50 per Unit, consisting of an aggregate of 7,178,447
shares of Common Stock and warrants to purchase an aggregate of an additional
2,153,533 share of Common Stock for a period of five years at an exercise price
of $2.25 per share (the “Investor Warrants”), which Investor Warrants are
callable by the Company under certain circumstances.




On
June 12, 2007, WaferGen Bio-systems, Inc. sold an additional 830,000 Units
consisting of an aggregate of 830,001 shares of Common Stock and warrants to
purchase an aggregate of 249,000 shares of Common Stock.




WaferGen,
Inc. issued notes payable to a stockholder, our Chief Executive Officer, in the
aggregate amount of $750,000. Rather than accepting cash consideration for Units
acquired by the same individual, the Company agreed to issue at the first
closing 160,000 Units at a rate of one Unit for each $1.50 of debt in
consideration of his cancellation of $240,000 of existing notes
payable.




A summary
is as follows:




Gross
      proceeds from initial offering
                              
                              $
                              10,767,668Gross
      proceeds from additional offering
                              
                              
                              1,245,000Gross
      proceeds
                              
                              
                              12,012,668Offering
      costs:Paid
                              
                              
                              (1,851,637
                              )Issuance
      of warrants to placement agent
                              
                              
                              (66,319
                              )Total
      offering costs
                              
                              
                              (1,917,956
                              )Gross
      proceeds less offering costs
                              
                              
                              10,094,712Issuance
      of warrants to placement agent
                              
                              
                              66,319Cancellation
      of debt
                              
                              
                              (240,000
                              )Net
      proceeds
                              
                              $
                              9,921,031




We filed a
registration statement (the “Registration Statement”) registering for resale (i)
the shares of Common Stock included in the units sold in the offering, (ii) the
shares of Common Stock underlying the warrants  included in the units
sold and (iii) the shares of Common Stock underlying the warrants issued to the
Placement Agent in connection with the offering, consistent with the terms
and provisions of the Registration Rights Agreement from the offering, which
Registration Statement became effective on January18, 2008.





The
exercise price and number of shares of our common stock issuable on exercise of
the warrants may be adjusted in certain circumstances, including in the event of
a stock dividend, or our recapitalization, reorganization, merger or
consolidation. These warrants also provide the holders with weighted-average
anti-dilution price protection.





40





WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements







The
warrants, at the option of the holder, may be exercised by cash payment of the
exercise price or by “cashless exercise.” A “cashless exercise” means that in
lieu of paying the aggregate purchase price for the share being purchased upon
exercise of the warrants in cash, the holder will forfeit a number of shares
underlying the warrants with a “fair market value” equal to such aggregate
exercise price. WaferGen Bio-systems, Inc, will not receive additional proceeds
to the extent that warrants are exercised by cashless exercise.




Contemporaneously
with the closing of the Merger, WaferGen Bio-systems, Inc. executed a Split-Off
Agreement with certain shareholders whereby all the assets and liabilities of
WaferGen Bio-systems, Inc. just prior to the Merger were exchanged for 4,277,778
shares of common stock of WaferGen Bio-systems, Inc. In addition, WaferGen, Inc.
Series A Preferred Stock, Series B Preferred Stock, and Common Stock was
converted into Common Stock of WaferGen Bio-systems, Inc. based on an exchange
ratio of .53991522 for 1.




A summary
of the Common Stock outstanding of WaferGen Bio-systems, Inc. subsequent to the
above is as follows:




WaferGen
      Bio-systems, Inc. shares outstanding prior to the Merger
                            
                            
                            11,277,782Shares
      issued to WaferGen, Inc. shareholders
                            
                            
                            8,214,523Shares
      issued in the Offering
                            
                            
                            8,008,448Shares
      cancelled in accordance with the Split-off Agreement
                            
                            
                            (4,277,778
                            )Total
      shares outstanding
                            
                            
                            23,222,975




WaferGen
Bio-systems, Inc. also assumed all outstanding WaferGen, Inc.’s stock options
and warrants with proportionate adjustments to the number of underlying shares
and exercise prices based on an exchange ratio of .53991522 for 1.




The
transaction between WaferGen Bio-systems, Inc. and WaferGen, Inc. has been
treated as a reverse merger and recapitalization of WaferGen, Inc. for reporting
purposes. WaferGen, Inc. is the acquirer for accounting purposes. WaferGen
Bio-systems, Inc. is the issuer. The historical financial statements for periods
prior to the acquisition become those of the acquirer. In a recapitalization,
historical stockholders' equity of the acquirer prior to the merger is
retroactively restated for the equivalent number of shares received in the
merger after giving effect to any difference in par value of the issuer's
and acquirer's stock with an offset to additional paid-in capital. Accumulated
deficit of the acquirer is carried forward after the acquisition. Operations
prior to the merger are those of the accounting acquirer. Earnings per share for
the periods prior to the merger are restated to reflect the equivalent number of
shares outstanding.





On January 24, 2008, the Company formed a new subsidiary in Kulim Hi-Tech Park,
Kedah, Malaysia. The subsidiary, WaferGen Biosystem (M) Sdn. Bhd., will launch
various initiatives to support a number of the Company’s ongoing development and
commercialization goals. The Company owned 100% of the common stock and
none of the preferred stock of this entity.





On May 19, 2008, the Company sold in a private placement 1,585,550 units
consisting of an aggregate of 1,585,550 shares of its common stock and five-year
warrants to purchase an aggregate of up to 634,220 shares of its common stock
with an exercise price of $3.00 per share. Under certain circumstances, the
Warrants will be exercisable using cashless exercise. The purchase price for the
units was $2.25 per unit, or $3,567,487 in the aggregate.





The purchase agreement for the units contains certain negative covenants that
restrict: (i) for 180 days after the closing the ability of the Company and its
subsidiaries to issue shares of common stock or equivalents (subject to certain
exempt issuances), and (ii) for 24 months after closing, the ability of the
Company to enter into variable rate transactions. The investors are also
entitled to “piggyback” registration rights.





WaferGen
Bio-systems, Inc. and subsidiaries (the “Company”) is engaged in the
development, manufacture and sales of systems for gene expression, genotyping
and stem cell research for the life sciences, pharmaceutical drug discovery and
biomarker discovery and diagnostic products industries. The Company’s products
are aimed at professionals who perform genetic analysis and cell biology,
primarily at pharmaceutical and biotech companies, academic and private research
centers, and diagnostics companies involved in biomarker research. Through the
SmartChipTM and SmartSlideTM products, the Company plans to provide new
performance standards with significant savings of time and cost for
professionals in the field of gene expression research facilitating biomarker
discovery, toxicology, and clinical research.





41





WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements








Management’s Plan.The
Company has incurred operating losses and negative cash flows from operations
since its inception. Management expects that revenues will increase as a result
of current and future product releases. However, the Company also expects to
incur additional expenses for the development and expansion of its products,
marketing campaigns, and operating costs as it expands its operations.
Therefore, the Company expects operating losses and negative cash flows to
continue for the foreseeable future and anticipates that losses will increase
from current levels as the Company continues to grow and develop. It is
management’s plan to obtain additional working capital through additional
financings. The Company believes that it will be successful in expanding
operations, gaining market share, and raising additional funds. However, there
can be no assurance that in the event the Company requires additional financing,
such financing will be available at terms which are favorable, or at all.
Failure to generate sufficient cash flows from operations or raise additional
capital could have a material adverse effect on the Company's ability to achieve
its intended business objectives. These factors raise substantial doubt about
the Company’s ability to continue as a going concern.




Going Concern.The
Company's consolidated financial statements have been presented on a basis that
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company continues to face significant risks
associated with the successful execution of its strategy given the current
market environment for similar companies and failure to generate sufficient
revenues or raise additional capital could have a material adverse effect on the
Company’s ability to continue as a going concern and to achieve its intended
business objectives. These facts raise substantial doubt about the Company’s
ability to continue as a going concern, and there can be no assurance that the
Company will be successful in its efforts to enhance its liquidity situation.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.





NOTE
      2.
            Summary
      of Significant Accounting Policies





Bases of
Presentation.The accompanying
consolidated financial statements have been prepared in accordance with
accounting principals 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 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.
We consider all highly liquid debt investments with a remaining maturity of
three months or less when purchased to be cash and cash
equivalents.




Foreign  Currencies.
Assets and liabilities are recorded in foreign currencies are translated at the
exchange rate on the balance sheet date. Revenue and expenses are translated at
the average rates of exchange during each reporting period. Translation
adjustment resulting from this process are charged or credited to other
comprehensive income (loss).





Fair Value of
Financial Instruments. The carrying amounts of cash, accounts receivable,
prepaid expenses and other current assets, other assets, accounts payable,
accrued payroll, accrued vacation, and due to related party approximate fair
value due to the short-term maturities of these instruments.




Concentration of
Credit Risk.Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and accounts receivable. The Company
places its cash in a commercial bank. Accounts at the commercial bank at
times exceed the Federal Deposit Insurance Corporation limit.




The
Company generally requires no collateral from its customers. At
December 31, 2008, two customers accounted for 90% and 10% of accounts
receivable. At December 31, 2007, three customers accounted for 32%, 32% and 15%
of accounts receivable. For the year ended December 31, 2008, three
customers accounted for 13%, 11% and 9% of total revenues. For the year
ended December 31, 2007, three customers accounted for 20%, 20%, and 11% of
total revenues.




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. The Company has not recorded an allowance against its receivables based
on management's estimate that the balance at December 31, 2008 and 2007 is fully
collectible.





42








WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements








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.
Inventory cost includes the cost of the product the Company paid to third party
vendors.




Prepaid
Expenses. Prepaid expenses are advance payment for products or services
that will be used in operations and expensed based on usage, events, or the
passing of time.




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               
Useful lives of 1 to 3 years or 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.




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 exceed the carrying value of the asset, a loss is recorded as the
excess of the assets carrying value over its fair value. No assets were
determined to be impaired in 2008 and 2007.




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. 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.




Revenue
Recognition.The
Company recognizes revenue based on the recognition criteria set forth in the
SEC’s Staff Accounting Bulletin 104, “Revenue Recognition”,which
is when delivery of product has occurred or services have been rendered and
there is persuasive evidence of a sale arrangement, selling prices are fixed or
determinable, and collectability from the customers (individual customers and
distributors) is reasonable assured . Revenue consists primarily of revenue
generated from the sale of the Company’s products. Revenue is recorded when
the risk and rewards of ownership are transferred to our customers (individual
customers and distributors). This generally occurs when the Company’s products
are shipped from our facility as title has passed. Revenue is recorded net of
estimated cash discount.  The Company estimates and accrues warranty
costs at the time the product is sold. To date, warranty accruals and warranty
costs have not been material.  The Company estimates and accrues an
allowance for sale returns at the time the product is sold. To date, sales
returns have not been material. Distributors have a fourteen day inspection
period however this period is not an acceptance provision that purports to be a
trial or evaluation purpose, is not an acceptance provision that grants a right
of return or exchange on the basis of subjective matters, and is not an
acceptance provision based on customer-specific objective criteria. The fourteen
day inspection period is an acceptance provision that is based on
seller-specified objective criteria.




Expense
Recognition.Expenses are charged to
expense as incurred.




Stock-Based
Compensation. The Company measures the fair value of all stock-based
awards, including stock options, on the grant date and records the fair value of
these awards to compensation expense over the service period. The fair value is
estimated using the Black-Scholes valuation model.















43











WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements







The fair
value of each option grant has been estimated using the following
assumptions:




December
      31,
                      
                      
                      December
      31,2008
                      
                      
                      2007Weighted-average
      grant date fair value
                      
                      $
                      0.28
                      
                      
                      $
                      0.51Risk
      free interest rate
                      
                      
                      2.37%-3.34
                      %
                      
                      
                      4.26%-4.85
                      %Expected
      lives
                      
                      4.75-5
      Years
                      
                      
                      5
      YearsExpected
      volatility
                      
                      
                      17%-33
                      %
                      
                      
                      19%-21
                      %Dividend
      yields
                      
                      
                      0
                      %
                      
                      
                      0
                      %


Risk-free
Interest Rate. This is the U.S treasury rate for the day of the grant
having a term approximating the expected life of the option. An increase in the
risk-free interest rate will increase the fair value and the related
compensation expense.




Expected Life. 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 vesting term, contractual term, and historical lives. An
increase in the expected life will increase the fair value and the related
compensation expense.




Expected Volatility. This is a measure of the amount by which the stock
price has fluctuated or is expected to fluctuate.  Since the Company’s
stock has not been traded for as long as the expected term of its options, the
Company uses a weighted average of the historic volatility of four comparable
companies over
the retrospective period corresponding to the expected life of the Company’s own
options on the grant date.  Extra weighting is attached to those
companies most similar in terms of size and business activity. An increase in
the expected volatility life will increase the fair value and the related
compensation expense.




Dividend Yield. The Company has not made any dividend payments
nor does it have plans to pay dividends in the foreseeable future. An increase
in the dividend yield will decrease the fair value and the related compensation
expense.




Research and
Development.Research
and development costs are charged to operations as incurred.




Other
Comprehensive Income.Other Comprehensive Income arises solely due to
the cumulative translation adjustments which ensue from our Accounting Policy
for Foreign Currencies.




Net Loss Per
Share.Basic
net loss per share to common stockholders is calculated based on the
weighted-average number of shares of common stock outstanding during the period
excluding those shares that are subject to repurchase by the Company. Diluted
net loss per share attributable to common shareholders would give effect to the
dilutive effect of potential common stock consisting of stock options, warrants,
and preferred stock. Dilutive securities have been excluded from the diluted net
loss per share computations as they have an antidilutive effect due to the
Company's net loss.









44







WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)




Notes
to the Consolidated Financial Statements




The following outstanding stock options, warrants, and preferred stock (on an
as-converted into common stock basis) were excluded from the computation of
diluted net loss per share attributable to holders of common stock as they had
an antidilutive effect as of December 31, 2008 and 2007:




December
      31,
                      
                      
                      December
      31,2008
                      
                      
                      2007Options
      issuable upon exercise of common stock options
                      
                      
                      524,954
                      
                      
                      
                      704,952Shares
      issuable upon exercise of Common Stock warrants
                      
                      
                      —
                      
                      
                      
                      37,931Shares
      issuable upon conversion of preferred stock
                      
                      
                      —
                      
                      
                      
                      2,056,606Shares
      issuable upon conversion of RCPS
                      
                      
                      240,741
                      
                      
                      
                      —Total
                      
                      
                      765,695
                      
                      
                      
                      2,799,489




Segments.
Segments are defined as components of the Company's business for which separate
financial information is available that is evaluated by the Company's chief
operating decision maker (its CEO) in deciding how to allocate resources and
assess performance. The Company has only one overall operating segment. Sales
have been to customers and distributors located in different countries. All
long-lived assets are within the United States and Malaysia.




Recent Accounting
Pronouncements. In June 2008, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position (FSP) No. Emerging Issues Task Force (EITF)
03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities.  FSP No. EITF 03-6-1 concluded that unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of basic earnings per share (EPS) pursuant
to the two-class method.  This FSP becomes effective for us on January 1,
2009.  Early adoption of the FSP is not permitted; however, it will apply
retrospectively to EPS data for all periods presented in the financial
statements or in financial data.  We do not currently expect that this FSP
will have a material impact on our EPS data in fiscal year 2009 or on EPS for
any prior periods.





In May
2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS 162 identifies the sources of
accounting principles and the framework for selecting principles to be used in
the preparation and presentation of financial statements in accordance with
generally accepted accounting principles in the United States of America.
 The adoption of SFAS 162 will not have an effect on our consolidated
financial statements.





In March
2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities –an amendment of SFAS 133.  SFAS
161 seeks to improve financial reporting for derivative instruments and hedging
activities by requiring enhanced disclosures regarding the impact on financial
position, financial performance, and cash flows.  SFAS 161 is effective for
us on January 1, 2009.  Since SFAS 161 requires only additional disclosures
concerning derivatives and hedging activities, the adoption of SFAS 161 will not
affect our financial condition, results of operations or cash
flows.





As
amended in February 2008 by FSP No. FAS 157-2, Effective Date of FASB Statement No.
157,SFAS 157, Fair
Value Measurements,defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements.
 FSP FAS 157-2 defers the effective date of SFAS 157 for all
nonfinancial assets and liabilities, except those items recognized or disclosed
at fair value on an annual or more frequently recurring basis, until January 1,
2009.  As such, we partially adopted the provisions of SFAS 157 effective
January 1, 2008.  We expect to adopt the remaining provisions of
SFAS 157 beginning in 2009.  We expect the adoption of SFAS 157 to
impact the way in which we calculate fair value for our annual impairment review
of goodwill and non-amortizable intangible assets, and when conditions exist
that require us to calculate the fair value of long-lived assets; however, we do
not expect this adoption to have a material impact on our consolidated financial
statements.











45








WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements








In
December 2007, the FASB issued SFAS 141R, Business Combinations.
 SFAS 141R continues to require the purchase method of accounting to be
applied to all business combinations, but it significantly changes the
accounting for certain aspects of business combinations.  Under SFAS 141R,
an acquiring entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions.  SFAS 141R will change the accounting treatment for
certain specific acquisition related items including: (1) expensing acquisition
related costs as incurred; (2) valuing noncontrolling interests at fair value at
the acquisition date; and (3) expensing restructuring costs associated with an
acquired business.  SFAS 141R also includes a substantial number of new
disclosure requirements.  SFAS 141R is to be applied prospectively to
business combinations for which the acquisition date is on or after January 1,
2009.  We expect SFAS 141R will have an impact on our accounting for future
business combinations once adopted but the effect is dependent upon the
acquisitions that are made in the future.





In
December 2007, SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, was issued. SFAS 160 establishes new
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary.  It clarifies that
a noncontrolling interest in a subsidiary (minority interest) is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements and separate from the parent company’s equity.
 Among other requirements, this statement requires consolidated net income
to be reported at amounts that include the amounts attributable to both the
parent and the noncontrolling interest.  It also requires disclosure, on
the face of the consolidated statement of income, of the amounts of consolidated
net income attributable to the parent and to the noncontrolling income interest.
 This statement is effective for us on January 1, 2009. When implemented,
prior periods will be recast for the changes required by SFAS 160.  The
adoption of this standard will not have a material impact on our consolidated
financial statements.








NOTE 3.
            Inventories




Inventories
consisted of the following at December 31, 2008 and 2007:




2008
                          
                          
                          2007Finished
      goods
                          
                          $
                          227,272
                          
                          
                          $
                          62,521Inventories
                          
                          $
                          227,272
                          
                          
                          $
                          62,521





46







WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)




Notes
to the Consolidated Financial Statements




NOTE4.
            Property
      and Equipment




Property
and equipment consisted of the following at December 31, 2008 and
2007:




December
      31,2008
                          
                          
                          2007Equipment
                          
                          $
                          1,014,212
                          
                          
                          $
                          389,255Tools
      & molds
                          
                          
                          72,437
                          
                          
                          
                          —Leasehold
      improvements
                          
                          
                          63,163
                          
                          
                          
                          41,365Furniture and
      fixtures
                          
                          
                          42,206
                          
                          
                          
                          16,838Total
      property and equipment
                          
                          
                          1,192,018
                          
                          
                          
                          447,458Less
      accumulated depreciation and amortization
                          
                          
                          (396,679
                          )
                          
                          
                          (126,299
                          )Property and
      equipment, net
                          
                          $
                          795,339
                          
                          
                          $
                          321,159
  Depreciation
and amortization expense totaled $294,249 and $58,653 for the year ended
December 31, 2008 and 2007, and $420,548 for the period from inception to
December 31, 2008.





Equipment
includes the following amounts under leases:








December
      31,2008
                                    
                                    
                                    2007Cost
                                    $
                                    178,712
                                    
                                    $
                                    $124,776Accumulated
      depreciation
                                    
                                    (63,639)
                                    
                                    
                                    (13,441)Total
                                    $
                                    115,073
                                    
                                    $
                                    111,335











47








WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements








NOTE 5.
            Notes
      Payable




The
activity in the notes payable to a stockholder, our Chief Executive Officer, for
the year ended December 31, 2007 is as follow:





Due to
      related party converted into a note payable
                        
                        $
                        61,588Cash
      received in exchange for notes payable to a stockholder
                        
                        
                        688,412Total
      notes payable to a stockholder
                        
                        
                        750,000Cancellation of
      notes payable to a stockholder in exchange for Units
                        
                        
                        (240,000
                        )Repayment of
      notes payable to a stockholder
                        
                        
                        (510,000
                        )Notes
      payable to a stockholder outstanding at December 31, 2007
                        
                        $
                        —




In
conjunction with the issuance of the notes payable to the stockholder, the
Company issued warrants to purchase a total of 213,816 shares, 115,442 shares
post-merger, of its Series B Preferred Stock at an exercise price of $0.76 per
share, $1.41 per share post-merger. The warrants are exercisable for a period of
five years. Utilizing the Black-Scholes valuation model and the following
assumptions: estimated volatility of 21%, a contractual life of five years, a
zero dividend rate, 4.67% risk free interest rate, and the fair value of the
Series B Preferred Stock of $1.40 per share, the Company determined the
allocated fair value of the warrants to be $171,053. This amount was
recorded as a discount on the notes payable to a stockholder and was amortized
and charged
to operations as interest expense in 2007.








NOTE
      6.
            Commitments
      and Contingencies




The
Company leases its office space for use in its operations under a noncancelable
operating leases that expire in March and December 2010.  The
Company leases equipment under two capital leases that expire in January 2010
and August 2011.


Aggregate
future minimum lease obligations for leases in effect as of December 31, 2008
are as follows:


Operating
      Leases
                        
                        
                        Capital
      LeasesYear
      ending December 31,2009
                        
                        $
                        173,096
                        
                        
                        $
                        61,4292010
                        
                        
                        67,317
                        
                        
                        
                        17,3492011
                        
                        
                        —
                        
                        
                        
                        9,117Total
      minimum lease obligations
                        
                        $
                        240,413
                        
                        
                        $
                        87,895Less
      amounts representing interest
                        
                        
                        
                        
                        
                        
                        (7,033
                        )Present
      value of future minimum lease payments
                        
                        
                        
                        
                        
                        
                        80,862Less
      current portion of capital lease obligation
                        
                        
                        
                        
                        
                        
                        (55,934
                        )Capital
      lease obligation, less current portion
                        
                        
                        
                        
                        
                        $
                        24,928


Rent
expense totaled $210,133 and $138,917 for the years ended December 31, 2008 and
2007 and $484,258 for the period from inception to December 31,
2008.





48





WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements








Interest
expense related to capital leases totaled $14,851 and $3,013 for the years ended
December 31, 2008 and 2007 respectively, and $17,864 for the period from
inception to December 31, 2008.





NOTE
      7.
            Minority
      Interest





On July
18, 2008, the Company’s Malaysian subsidiary, WaferGen Biosystems (M) Sdn. Bhd.,
received $1,000,000, less 3% issuance costs, in exchange for the issuance of
redeemable convertible preferred shares (RCPS) of WaferGen Biosystems (M) Sdn.
Bhd., in a private placement to Malaysian Technology Development Corporation
Sdn. Bhd. (MTDC), a venture capital and development firm in Malaysia. WaferGen
Biosystems (M) Sdn. Bhd., sold 444,444 RCPS in this private placement at the
U.S. dollar equivalent of $2.25 per share.  The "Subsequent Closing"
has been completed and the proceeds of $1,000,000, less 3% issuance costs, from
the sale of an additional 444,444 shares of redeemable convertible preferred
shares were received on November 27, 2008.




The
rights of the holders of RCPS include, but are not limited to, the
right (a) to cause the subsidiary to redeem the RCPS in whole or in part
any time after the Subsequent Closing from funds legally available for
distribution; (b) to cause the Company to exchange their RCPS for Common Stock
of the Company at a rate of $2.25 per share of Common Stock; (c) to put to
Alnoor Shivji, our CEO and President, their RCPS for $2.25 in cash per share in
the event that Mr. Shivji transfers, prior to May 15, 2009, in one or more
transactions, more than 2,185,960 shares of Common Stock to one or more persons
other than his affiliates or relatives; (d) to put to the Company their
ordinary shares received on conversion of RCPS during the year 2011 if the share
price is below $2.25, and at any time in 2011, redeem for cash (or shares in
WaferGen Bio-systems, Inc. of equivalent value) the amount invested in USD plus
6% premium, compounded annually, with yearly rests; (e) of first offer on any
transfers or new issuance of subsidiary shares; and (f) to appoint one of the
six directors of the subsidiary.




Minority interest is as follows:




December
      31,
                  
                  
                  December
      31,2008
                  
                  
                  2007Proceeds from
      issuance of RCPS
                  
                  $
                  2,000,000
                  
                  
                  $
                  —Issuance
      costs
                  
                  
                  (60,000
                  )
                  
                  
                  —Accretion of
      issuance
                  
                  
                  5,416
                  
                  
                  
                  —Accretion of
      redemption premium
                  
                  
                  32,500
                  
                  
                  
                  —Total
      Minority Interest
                  
                  $
                  1,977,916
                  
                  
                  $
                  —




NOTE
8.              
Common and Preferred
Stock





The Company is authorized to
issue two classes of stock, Common Stock and Preferred Stock. The total number
of shares which the Company is authorized to issue is 310,000,000 shares:
300,000,000 shares of Common Stock, par value $0.001 per share, and 10,000,000
shares of Preferred Stock, par value $0.001 per share.




Common
Stock.Each
share of Common Stock is entitled to one vote. The holders of Common Stock are
also entitled to receive dividends whenever funds are legally available and when
and if declared by the Board of Directors, subject to the prior rights of
holders of all classes of stock outstanding. Since inception, no dividends have
been declared.




Preferred
Stock. The cumulative amount of Series B Preferred Stock dividends
that are unearned and undeclared prior to the Merger were $155,998. Prior to the
Merger, the carrying amount of Series B Preferred Stock included accretions
related to the liquidation and redemption feature in the amount of
$155,998.








49










WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)




Notes
to the Consolidated Financial Statements






NOTE
      9.
            Stock
      Options and Warrants




In 2003,
the Company’s Board of Directors adopted a 2003 Incentive Stock Plan (the “2003
Plan”). The 2003 Plan authorized the Board of Directors to grant incentive
stock options and nonstatutory stock options to employees, directors, and
consultants for up to 1,500,000 shares of common stock. Under the Plan,
incentive stock options and nonqualified stock options can be granted. Incentive
stock options are to be granted at a price that is no less than 100% of the fair
value of the stock at the date of grant. Options will be vested over a period
according to the Option Agreement, and are exercisable for a maximum period of
ten years after date of grant. Options granted to stockholders who own more than
10% of the outstanding stock of the Company at the time of grant must be
issued at an exercise price no less than 110% of the fair value of the stock on
the date of grant.




In
November 2006, the Company increased the aggregate number of shares of Common
Stock that may be issued under the 2003 Plan to a total authorized reserve of
2,500,000 shares, a 1,000,000 share increase.





In
January, 2007 WaferGen Bio-systems, Inc’s Board of Directors and stockholders
adopted the 2007 Stock Option Plan (the “2007 Plan”). The purpose of the 2007
Plan is to provide an incentive to retain the employment of directors, officer,
consultants, advisors and employees of the Company, persons of training,
experience and ability, to attract new directors, officers, consultants,
advisors and employees whose services are considered valuable, to encourage the
sense of proprietorship, and to stimulate the active interest of such persons
into the Company’s development and financial success. Under the 2007 Plan, the
Company is authorized to issue incentive stock options intended to qualify under
Section 422 of the Code, non-qualified stock options and restricted stock. The
2007 Plan shall be administered by the Company’s Board of
Directors.




On
June 5, 2008, the Company's stockholders adopted the 2008 Stock Incentive
Plan (the "2008 Plan") following approval of the 2008 Plan by the Board of
Directors. The 2008 Plan authorizes the issuance of up to 2,000,000 shares of
common stock pursuant to the terms of the 2008 Plan. The purpose of the 2008
Plan is to provide an incentive to retain the employment of directors, officers,
consultants, advisors and employees of the Company, persons of training,
experience and ability, to attract new directors, officers, consultants,
advisors and employees whose services are considered valuable, to encourage the
sense of proprietorship, and to stimulate the active interest of such persons
into the Company's development and financial success. Under the 2008 Plan, the
Company is authorized to issue incentive stock options intended to qualify under
Section 422 of the Code, non-qualified stock options and restricted stock.
Awards may vest over varying periods, as specified by the Company's Board of
Directors for each grant, and have a maximum term of seven years from the grant
date. The 2008 Plan is administered by the Company's Board of
Directors.





50







WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)




Notes
to the Consolidated Financial Statements







A summary
of stock option transactions in the last two years is as follows:




Stock OptionsActual
      Options
                                    
                                    Equivalent Number
      of
                                    
                                    Equivalent WeightedAvailable
      for
                                    
                                    Options
                                    
                                    AverageGrant
                                    
                                    Outstanding
                                    
                                    Exercise
      PriceBalance at January 1, 2007
                                    
                                    
                                    1,669,000
                                    
                                    
                                    410,876
                                    
                                    $
                                    0.06962007
      Plan
                                    
                                    
                                    2,000,000
                                    
                                    
                                    —
                                    
                                    
                                    —Granted
                                    
                                    
                                    (2,139,500)
                                    
                                    
                                    1,895,655
                                    
                                    
                                    1.4681Exercised
                                    
                                    
                                    —
                                    
                                    
                                    (26,996)
                                    
                                    
                                    0.01002003
      Plan frozen
                                    
                                    
                                    (1,139,000)
                                    
                                    
                                    —
                                    
                                    
                                    —Forfeited
                                    
                                    
                                    —
                                    
                                    
                                    (10,799)
                                    
                                    
                                    0.1482Balance
      at December 31, 2007
                                    
                                    
                                    390,500
                                    
                                    
                                    2,268,736
                                    
                                    
                                    1.34692008
      Plan
                                    
                                    
                                    2,000,000
                                    
                                    
                                    —
                                    
                                    
                                    —Granted
                                    
                                    
                                    (1,807,000)
                                    
                                    
                                    1,807,000
                                    
                                    
                                    1.6704Exercised
                                    
                                    
                                    —
                                    
                                    
                                    (27,536)
                                    
                                    
                                    0.1482Forfeited
                                    
                                    
                                    310,458
                                    
                                    
                                    (310,458)
                                    
                                    
                                    2.0023Cancelled
                                    
                                    
                                    51,042
                                    
                                    
                                    (51,042)
                                    
                                    
                                    1.9751Balance
      at December 31, 2008
                                    
                                    
                                    945,000
                                    
                                    
                                    3,686,700
                                    
                                    $
                                    1.4505




Upon
completion of the Merger, WaferGen Bio-systems, Inc. assumed all outstanding
WaferGen, Inc's stock options with proportionate adjustments to the number of
underlying shares and exercise prices based on an exchange ratio of .53991522
for 1.  In addition, the 2003 Plan was frozen resulting in no
additional options available for grant. The table above includes the post-merger
equivalent number of options outstanding and weighted average prices, as
adjusted for the exchange ratio.





The
weighted average fair value of awards granted in the years ended December 31,
2008 and 2007, was $0.28 and $0.61, respectively.  The fair value of shares
vested in the years ended December 31, 2008 and 2007, was $333,303 and $452,010,
respectively.















51







WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)




Notes
to the Consolidated Financial Statements










The
following table Summarizes information concerning outstanding options as of
December 31, 2008:







Options
      Outstanding
                                                              
                                                              
                                                              Options
      ExercisableNumber
                                                              
                                                              Weighted
                                                              
                                                              
                                                              
                                                              
                                                              Number
                                                              
                                                              WeightedOutstanding
                                                              Average
                                                              Weighted
                                                              Exercisable
                                                              Average
                                                              WeightedRange
      of
                                                              as
      of
                                                              Remaining
                                                              Average
                                                              as
      of
                                                              Remaining
                                                              AverageExercise
                                                              December
      31,
                                                              Contractual
                                                              Exercise
                                                              December
      31,
                                                              Contractual
                                                              ExercisePrices
                                                              2008
                                                              Life
      (in Years)
                                                              Price
                                                              2008
                                                              Life
      (in Years)
                                                              Price$0.0002
                                                              -
                                                              $0.0185
                                                              
                                                              202,466
                                                              
                                                              5.32
                                                              
                                                              $
                                                              0.0061
                                                              
                                                              191,668
                                                              
                                                              5.25
                                                              
                                                              $
                                                              0.0053$0.1482
                                                              -
                                                              $0.4630
                                                              
                                                              429,234
                                                              
                                                              7.86
                                                              
                                                              
                                                              0.3561
                                                              
                                                              362,872
                                                              
                                                              7.90
                                                              
                                                              
                                                              0.3878$0.6000
                                                              -
                                                              $1.0000
                                                              
                                                              382,500
                                                              
                                                              6.84
                                                              
                                                              
                                                              0.8693
                                                              
                                                              20,000
                                                              
                                                              6.87
                                                              
                                                              
                                                              0.6000$1.3500
                                                              -
                                                              $2.1000
                                                              
                                                              1,860,000
                                                              
                                                              8.13
                                                              
                                                              
                                                              1.5807
                                                              
                                                              379,576
                                                              
                                                              8.49
                                                              
                                                              
                                                              1.5653$2.2000
                                                              -
                                                              $3.0000
                                                              
                                                              812,500
                                                              
                                                              7.85
                                                              
                                                              
                                                              2.3643
                                                              
                                                              589,792
                                                              
                                                              7.69
                                                              
                                                              
                                                              2.42643,686,700
                                                              
                                                              8.23
                                                              
                                                              $
                                                              1.4505
                                                              
                                                              1,543,908
                                                              
                                                              7.62
                                                              
                                                              $
                                                              1.4113




The
aggregate intrinsic value of options outstanding and exercisable at December 31,
2008 was $710,181 and $524,216, respectively.  Aggregate intrinsic value is
the total pretax amount (i.e., the difference between the Company’s stock price
and the exercise price) that would have been received by the option holders had
all their in-the-money options been exercised.




The
Company received $4,079 for the 27,536 options that were exercised during the
year ended December 31, 2008, which had an aggregate intrinsic value of
$50,991. There were no options exercised during the year ended December 31,
2007.





The
Company has issued restricted Common Stock grants. The restricted common stock
grants offer the recipient the opportunity to receive shares of common stock,
rather than options that would give them the right to purchase common stock at a
set price. The restricted common stock grants entitle the holder to receive
shares of common stock subject to certain terms. The Company’s restricted common
stock generally has vesting restrictions that are eliminated over a four-year
period.




The
Company determined the amount of share-based compensation in connection with the
restricted stock grants based on the fair value of the Company’s common stock on
the respective grant dates. The restricted stock awards totaled 355,000 shares,
191,670 shares post-merger, and the fair market value at grant date ranged
from $0.75 to $1.50. The compensation is being charged to operations over the
same period as the restrictions are eliminated.




In
November 2006, the Company issued fully vested Series A Preferred Stock option
exercisable into 471,698 shares of Series A Preferred Stock to a founder. The
option was immediately exercisable into shares of Series A Preferred Stock
at a per share price of $0.14 and expired on any date during the earlier of (i)
calendar year 2007 and (ii) the calendar year in which a change in control
occurred. The Company determined the fair market value of the option was
$575,450 using the following assumptions: risk free interest rate of 4.60%, no
dividend yield, expected volatility of 21%, and an expected life of one year.
Amounts expensed were $575,450 for the year ended December 31, 2006, and the
period from inception to December 31, 2008. In February 2007, this option was
exercised.













52







WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)




Notes
to the Consolidated Financial Statements











The
amounts expensed for stock-based compensation totaled $388,650 and $648,988 for
the years ended December 31, 2008 and 2007, respectively, and $1,689,531 for the
period from inception to December 31, 2008.




At
December 31, 2008, the total stock-based compensation cost not yet recognized,
net of estimated forfeitures, was $813,200. This cost is expected to be
recognized over an estimated weighted average amortization period of 2.78
years.  No amounts related to stock-based compensation costs have been
capitalized. The tax benefit and the resulting effect on cash flows from
operations and financial activities, related to stock-based compensation costs
were not recognized as the Company currently provides a full valuation allowance
for all of its deferred taxes.




In May
2007 and June 2007, the Company issued fully vested Common Stock warrants
exercisable into 513,926 shares of Common Stock to a placement agent in
connection with the Offering. The warrants are immediately exercisable into
shares of Common Stock at a per share price of $2.25 and expire in May and June
of 2012. The Company determined the fair market value of the warrants to be
$66,319 using the following assumptions: fair market value of common stock of
$1.50 for first closing and $1.70 for second closing, risk free interest rate of
4.85%, no dividend yield, expected volatility of 20%, and an expected life of
two and one-half years. This amount was recorded as offering costs.




A summary
of outstanding Common Stock Warrants as of December 31, 2008 is as
follows:




Exercise
                              
                              ExpirationSecurities
      into which warrants are convertible
                              
                              Shares
                              
                              Price
                              
                              DateCommon
      Stock
                              
                              
                              115,442
                              
                              $
                              1.41
                              
                              Jan.,
      Feb., and March 2012Common
      Stock
                              
                              
                              2,916,459
                              
                              $
                              2.25
                              
                              May
      and June 2012Common
      Stock
                              
                              
                              634,220
                              
                              $
                              3.00
                              
                              May  2013Total
                              
                              
                              3,666,121





53







WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)




Notes
to the Consolidated Financial Statements






NOTE
      10.
            Income
      Taxes




The
provision for income taxes consists of the following for the years ended
December 31, 2008 and 2007and the period from inception to December
31, 2008:




Period
      FromOctober
      22,2002December
      31,
                  
                  December
      31,
                  
                  (Inception)
      toDecember
      31,2008
                  
                  2007
                  
                  2008Current
      payable (refundable):Federal
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —State
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Foreign
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Total
      Current
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —Deferred:Federal
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —State
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Foreign
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Total
      Deferred
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —Provision for
      income taxes
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —








A
reconciliation of the provision for income taxes with the expected provision for
income taxes computed by applying the federal statutory income tax rate 34% to
the net loss before provision for income taxes for the years ended
December 31, 2008 and 2007and the period from inception to December
31, 2008 is as follows:





Period
      FromOctober
      22,2002December
      31,
                        
                        December
      31,
                        
                        (Inception)
      toDecember
      31,2008
                        
                        2007
                        
                        2008Provision for
      income taxes at federal statutory rate
                        $
                        (2,746,980
                        )
                        $
                        (2,025,606
                        )
                        $
                        (6,757,929
                        )Federal
      research and development tax credits
                        
                        (150,000
                        )
                        
                        (289,179
                        )
                        
                        (439,179
                        )Expenses not
      deductible
                        
                        137,379
                        
                        
                        460,507
                        
                        
                        597,886Foreign
      loss taxed at lower rates
                        
                        64,774
                        
                        
                        —
                        
                        
                        64,774Change
      in federal valuation allowance
                        
                        2,694,827
                        
                        
                        1,854,278
                        
                        
                        6,534,448Provision for
      income taxes
                        $
                        —
                        
                        $
                        —
                        
                        $
                        —





54







WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)




Notes
to the Consolidated Financial Statements




The
components of the deferred tax assets as of December 31, 2008 and 2007 are as
follows:




December
      31,
                                    
                                    December
      31,2008
                                    
                                    2007Deferred tax
      assets:Net
      operating loss carry-forwards
                                    $
                                    6,613,525
                                    
                                    $
                                    3,225,483Capitalized
      start-up cost and research and development cost
                                    
                                    915,399
                                    
                                    
                                    1,046,170Research and
      development tax credit
                                    
                                    700,546
                                    
                                    
                                    582,982Depreciation on
      property and equipment
                                    
                                    12,603
                                    
                                    
                                    21,770Accruals
                                    
                                    81,949
                                    
                                    
                                    179,921Total
      deferred tax asset
                                    
                                    8,324,022
                                    
                                    
                                    5,056,326Valuation
      allowance
                                    
                                    (8,324,022
                                    )
                                    
                                    (5,056,326
                                    )Net
      deferred tax assets
                                    $
                                    —
                                    
                                    $
                                    —


The
following deferred income taxes were provided for the years ended December 31,
2008 and 2007, and the period from inception to December 31, 2008:







Period
      FromOctober
      22,2002December
      31,
                            
                            December
      31,
                            
                            (Inception)
      toDecember
      31,2008
                            
                            2007
                            
                            2008Deferred tax
      assets:Net
      operating loss carry-forwards
                            $
                            3,388,042
                            
                            $
                            3,225,483
                            
                            $
                            6,613,525Capitalized
      start-up cost and research and development cost
                            
                            (130,771
                            )
                            
                            (1,102,666
                            )
                            
                            915,399Stock-based
      compensation
                            
                            —
                            
                            
                            (279,271
                            )
                            
                            —Research and
      development tax credit
                            
                            117,564
                            
                            
                            582,982
                            
                            
                            700,546Depreciation on
      property and equipment
                            
                            (9,167
                            )
                            
                            21,770
                            
                            
                            12,603Accruals
                            
                            (97,972
                            )
                            
                            106,495
                            
                            
                            81,949Valuation
      allowance
                            
                            (3,267,696
                            )
                            
                            (2,554,793
                            )
                            
                            (8,324,022
                            )Net
      deferred income taxes
                            $
                            —
                            
                            $
                            —
                            
                            $
                            —

















55








WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)




Notes
to the Consolidated Financial Statements











Based on
the available objective evidence, management believes 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. There are no prior year tax returns under audit by taxing authorities,
and management is not aware of any impending audits.




At
December 31, 2008 the Company had federal and state net operating loss
carry-forwards of approximately $14,950,000 and foreign operating loss
carry-forwards of approximately $810,000. The federal, state, and foreign net
operating loss carry-forwards will expire in various periods through
2028.




At
December 31, 2008, the Company had federal and state research and development
tax credits of approximately $350,000. The federal research and development tax
credits will expire in various periods through 2028 and the California state
research and development tax credit can be carried forward
indefinitely.





Utilization
of net operating loss carry-forwards may be subject to substantial limitation
due to the ownership change limitations provided by the Internal Revenue Code of
1986 and similar state provisions. The annual limitation may result in the
expiration of net operating losses and tax credits before
utilization.




Tax years that remain open for examination include 2005, 2006, 2007, and
2008.





NOTE 11. Related
Party Transactions




During
the year ended December 31, 2008 there were no related party transactions, and
in the year ended December 31, 2007 a shareholder converted $61,588 of accounts
payable to a note payable.




NOTE 12.
            Cash
      Flow Information




Cash paid
during the years ended December 31, 2008 and 2007 and the period from inception
to December 31, 2008 is as follows:


Period
      FromOctober
      22,2002Year
      ended
                              
                              (Inception)
      toDecember
      31,
                              
                              December
      31,2008
                              
                              2007
                              
                              2008Interest
                              $
                              14,851
                              
                              $
                              18,486
                              
                              $
                              33,337Income
      taxes
                              $
                              —
                              
                              $
                              —
                              
                              $
                              —





56







WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements






Supplemental
disclosure of non-cash investing and financing activities for the years ended
December 31, 2008 and 2007 and the period from inception to December
31, 2008 is as follows:




Period
      FromOctober
      22,2002Year
      ended
                              
                              
                              (Inception)
      toDecember
      31,
                              
                              
                              December
      31,2008
                              
                              
                              2007
                              
                              
                              2008Accretions on
      Series B Preferred Stock
                              
                              $
                              —
                              
                              
                              $
                              51,998
                              
                              
                              $
                              155,998Accretion on
      Redeemable Convertible Preferred Stock
                              
                              $
                              37,916
                              
                              
                              $
                              —
                              
                              
                              $
                              37,916Conversion of
      due to a stockholder to notes payable
                              
                              $
                              —
                              
                              
                              $
                              61,588
                              
                              
                              $
                              61,588Issuance of
      warrants with notes payable
                              
                              $
                              —
                              
                              
                              $
                              171,053
                              
                              
                              $
                              171,053Conversion of
      debt to Common Stock
                              
                              $
                              —
                              
                              
                              $
                              240,000
                              
                              
                              $
                              240,000Conversion of
      debt to Series A Preferred Stock
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              2,977,579Deposit
      in equipment in 2007 lapsed in 2008
                              
                              $
                              51,446
                              
                              
                              $
                              —
                              
                              
                              $
                              51,446Property and
      equipment acquired with capital leases
                              
                              $
                              131,550
                              
                              
                              $
                              124,376
                              
                              
                              $
                              256,326


NOTE
13.             
Fair Value of Financial Instruments





The Company
adopted the provisions of SFAS No. 157 as amended by FSP FAS 157-1 and FSP FAS
157-2 on January 1, 2008. Pursuant to the provisions of FSP FAS 157-2, the
Company will not apply the provisions of SFAS No. 157 until January 1, 2009 for
the following major categories of nonfinancial assets and liabilities from the
consolidated balance sheet: property and equipment. The Company recorded no
change to its opening balance of accumulated deficit as of January 1, 2008 as it
did not have any financial instruments requiring retrospective application per
the provisions of SFAS No. 157.




Fair Value
Hierarchy - SFAS No. 157 specifies a hierarchy of valuation techniques based
upon whether the inputs to those valuation techniques reflect assumptions other
market participants would use based upon market data obtained from independent
sources (observable inputs) or reflect the company’s own assumptions of market
participant valuation (unobservable inputs). In accordance with SFAS No. 157,
these two types of inputs have created the following fair value
hierarchy:




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; and




Level 3 - Prices or valuations that
require inputs that are both significant to the fair value measurement and
unobservable.




SFAS No. 157 requires
the use of observable market data if such data is available without undue cost
and effort.







57










WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements




Measurement of Fair Value -The Company measures fair value as an
exit price using the procedures described below for all assets and liabilities
measured at fair value. When available, the company uses unadjusted quoted
market prices to measure fair value and classifies such items within Level 1. If
quoted market prices are not available, fair value is based upon internally
developed models that use, where possible, current market-based or
independently-sourced market parameters such as interest rates and currency
rates. Items valued using internally generated models are classified according
to the lowest level input or value driver that is significant to the valuation.
Thus, an item may be classified in Level 3 even though there may be inputs that
are readily observable. If quoted market prices are not available, the valuation
model used generally depends on the specific asset or liability being
valued.




Credit risk
adjustments are applied to reflect the company’s own credit risk when valuing
all liabilities measured at fair value. The methodology is consistent with that
applied in developing counterparty credit risk adjustments, but incorporates the
company’s own credit risk as observed in the credit default swap
market.




The following table
presents the Company’s assets and liabilities that are measured at fair value on
a recurring basis at December 31, 2008:








Level
      1
                    
                    
                    Level
      2
                    
                    
                    Level
      3
                    
                    
                    TotalCash
      and cash equivalents
                    
                    $
                    2,597,413
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    2,597,413




NOTE
14.             
Contingencies




From time to time we may be involved in
claims arising in connection with our business. Although there can be no
assurance as to the ultimate outcome, we generally have denied, or believe we
have a meritorious defense and will deny, liability in all cases pending against
the Company, including the matters described below, and we intend to defend
vigorously each such case. Based on information currently available, we believe
that the amount, or range, of reasonably possible losses in connection with the
actions against us, including the matters described below, in excess of
established reserves, in the aggregate, not to be material to our consolidated
financial condition or cash flows. However, losses may be material to the
Company’s operating results for any particular future period, depending on the
level of income for such period.
 
 Gordon v. WaferGen. In February 2009, an
action entitled Kimberly E.
Gordonv. WaferGen
Inc, was filed in the Alameda County Superior Court. This is an
automobile personal injury lawsuit, in which it is alleged that a then WaferGen
employee negligently operated a vehicle, injuring the plaintiff. The complaint
seeks damages for medical costs, pain and suffering and lost income. The basis
of alleged vicarious liability against the Company is that the former employee
was driving a vehicle in the scope and course of his employment with the
Company. The facts are disputed by the Company.  The damages sought
are unspecified.  Discovery is in process.  A conference is
scheduled for June 23, 2009, at which time a trial will likely be
scheduled.
 
 We
anticipate that we will expend significant financial and managerial resources to
defend our intellectual property rights in the future if we believe that our
rights have been infringed. We also anticipate that we will expend significant
financial and managerial resources to defend against claims that our products
and services infringe upon the intellectual property rights of third
parties.




NOTE
15.             
Business Segment Information




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 (its CEO) in deciding how to allocate resources and
assessing performance. The Company has only one operating segment.














58










WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements









Revenue by
geographic areas for the years ended December 31, 2008 and 2007 are as
follows:





2008
                                                                                                                  
                                                                                                                  
                                                                                                                  2007North
      America
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  318,377
                                                                                                                  
                                                                                                                  $
                                                                                                                  208,673Asia
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  60,773
                                                                                                                  
                                                                                                                  
                                                                                                                  20,300Europe
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  210,330
                                                                                                                  
                                                                                                                  
                                                                                                                  —Other
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  32,386
                                                                                                                  
                                                                                                                  
                                                                                                                  —Total minority
      interest
                                                                                                                  $
                                                                                                                  621,866
                                                                                                                  
                                                                                                                  $
                                                                                                                  228,973Long-lived
      assets by geographic areas as of December 31 are as
    follows:United
      States
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  613,256
                                                                                                                  
                                                                                                                  $
                                                                                                                  321,159Malaysia
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  182,083
                                                                                                                  
                                                                                                                  
                                                                                                                  —Total
      long-lived assets
                                                                                                                  
                                                                                                                  $
                                                                                                                  795,339
                                                                                                                  
                                                                                                                  $
                                                                                                                  321,159







59







WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)




Notes
to the Consolidated Financial Statements









NOTE
16.             
Quarterly Financial
Data





Notes
to the Consolidated Financial Statements





Year
      ended December 31, 2008First
                                                            
                                                            
                                                            Second
                                                            
                                                            
                                                            Third
                                                            
                                                            
                                                            FourthRevenues
                                                            
                                                            $
                                                            181,640
                                                            
                                                            
                                                            $
                                                            176,851
                                                            
                                                            
                                                            $
                                                            197,951
                                                            
                                                            
                                                            $
                                                            65,424Cost
      of sales
                                                            
                                                            
                                                            75,017
                                                            
                                                            
                                                            
                                                            57,048
                                                            
                                                            
                                                            
                                                            73,956
                                                            
                                                            
                                                            
                                                            35,012Gross
      margin
                                                            
                                                            
                                                            106,623
                                                            
                                                            
                                                            
                                                            119,803
                                                            
                                                            
                                                            
                                                            123,995
                                                            
                                                            
                                                            
                                                            30,412Operating
      expenses:Sales
      and marketing
                                                            
                                                            
                                                            385,174
                                                            
                                                            
                                                            
                                                            295,506
                                                            
                                                            
                                                            
                                                            328,289
                                                            
                                                            
                                                            
                                                            170,822Research
      and development
                                                            
                                                            
                                                            952,441
                                                            
                                                            
                                                            
                                                            1,345,621
                                                            
                                                            
                                                            
                                                            1,205,511
                                                            
                                                            
                                                            
                                                            1,124,689General
      and administrative
                                                            
                                                            
                                                            689,043
                                                            
                                                            
                                                            
                                                            633,764
                                                            
                                                            
                                                            
                                                            648,966
                                                            
                                                            
                                                            
                                                            631,407Total operating
      expenses
                                                            
                                                            
                                                            2,026,658
                                                            
                                                            
                                                            
                                                            2,274,891
                                                            
                                                            
                                                            
                                                            2,182,766
                                                            
                                                            
                                                            
                                                            1,926,918Operating
      loss
                                                            
                                                            
                                                            (1,920,035
                                                            )
                                                            
                                                            
                                                            (2,155,088
                                                            )
                                                            
                                                            
                                                            (2,058,771
                                                            )
                                                            
                                                            
                                                            (1,896,506
                                                            )Other
      income and (expenses):Interest
      income
                                                            
                                                            
                                                            31,717
                                                            
                                                            
                                                            
                                                            18,064
                                                            
                                                            
                                                            
                                                            16,709
                                                            
                                                            
                                                            
                                                            15,828Interest expense
                                                            
                                                            
                                                            (3,973
                                                            )
                                                            
                                                            
                                                            (3,252
                                                            )
                                                            
                                                            
                                                            (4,957
                                                            )
                                                            
                                                            
                                                            (2,669
                                                            )Miscellaneous expense
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            (2,941
                                                            )
                                                            
                                                            
                                                            (23,298
                                                            )
                                                            
                                                            
                                                            (52,265
                                                            )Total other income
      and (expenses)
                                                            
                                                            
                                                            27,744
                                                            
                                                            
                                                            
                                                            11,871
                                                            
                                                            
                                                            
                                                            (11,546
                                                            )
                                                            
                                                            
                                                            (39,106
                                                            )Net loss before provision
      for income taxes
                                                            
                                                            
                                                            (1,892,291
                                                            )
                                                            
                                                            
                                                            (2,143,217
                                                            )
                                                            
                                                            
                                                            (2,070,317
                                                            )
                                                            
                                                            
                                                            (1,935,612
                                                            )Provision
      for income taxes
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Net loss
                                                            
                                                            
                                                            (1,892,291
                                                            )
                                                            
                                                            
                                                            (2,143,217
                                                            )
                                                            
                                                            
                                                            (2,070,317
                                                            )
                                                            
                                                            
                                                            (1,935,612
                                                            )Accretion
      on Redeemable Convertible Preferred Stock
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            (14,583
                                                            )
                                                            
                                                            
                                                            (23,333
                                                            )Net
      loss applicable to common stockholders
                                                            
                                                            $
                                                            (1,892,291
                                                            )
                                                            
                                                            $
                                                            (2,143,217
                                                            )
                                                            
                                                            $
                                                            (2,084,900
                                                            )
                                                            
                                                            $
                                                            (1,958,945
                                                            )Net
      loss per share - basic and diluted
                                                            
                                                            $
                                                            (0.08
                                                            )
                                                            
                                                            $
                                                            (0.09
                                                            )
                                                            
                                                            $
                                                            (0.08
                                                            )
                                                            
                                                            $
                                                            (0.08
                                                            )Shares
      used to compute net loss per share - basic and diluted
                                                            
                                                            
                                                            23,217,846
                                                            
                                                            
                                                            
                                                            23,965,978
                                                            
                                                            
                                                            
                                                            24,830,932
                                                            
                                                            
                                                            
                                                            24,830,932










60











WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements




Year
      ended December 31, 2007First
                                          
                                          
                                          Second
                                          
                                          
                                          Third
                                          
                                          
                                          FourthRevenues
                                          
                                          $
                                          60,460
                                          
                                          
                                          $
                                          300
                                          
                                          
                                          $
                                          6,700
                                          
                                          
                                          $
                                          161,513Cost
      of sales
                                          
                                          
                                          21,774
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          1,770
                                          
                                          
                                          
                                          55,572Gross
      margin
                                          
                                          
                                          38,686
                                          
                                          
                                          
                                          300
                                          
                                          
                                          
                                          4,930
                                          
                                          
                                          
                                          105,941Operating
      expenses:Sales
      and marketing
                                          
                                          
                                          152,182
                                          
                                          
                                          
                                          137,788
                                          
                                          
                                          
                                          277,248
                                          
                                          
                                          
                                          281,600Research
      and development
                                          
                                          
                                          399,758
                                          
                                          
                                          
                                          361,948
                                          
                                          
                                          
                                          728,288
                                          
                                          
                                          
                                          939,279General
      and administrative
                                          
                                          
                                          424,661
                                          
                                          
                                          
                                          384,495
                                          
                                          
                                          
                                          773,656
                                          
                                          
                                          
                                          1,220,126Total
      operating expenses
                                          
                                          
                                          976,601
                                          
                                          
                                          
                                          884,231
                                          
                                          
                                          
                                          1,779,192
                                          
                                          
                                          
                                          2,441,005Operating
      loss
                                          
                                          
                                          (937,915
                                          )
                                          
                                          
                                          (883,931
                                          )
                                          
                                          
                                          (1,774,262
                                          )
                                          
                                          
                                          (2,335,064
                                          )Other
      income and (expenses):Interest
      income
                                          
                                          
                                          —
                                          
                                          
                                          
                                          15,781
                                          
                                          
                                          
                                          82,960
                                          
                                          
                                          
                                          64,306Interest
      expense
                                          
                                          
                                          (42,802
                                          )
                                          
                                          
                                          (143,724
                                          )
                                          
                                          
                                          (308
                                          )
                                          
                                          
                                          (2,705
                                          )Total
      other income and (expenses)
                                          
                                          
                                          (42,802
                                          )
                                          
                                          
                                          (127,943
                                          )
                                          
                                          
                                          82,652
                                          
                                          
                                          
                                          61,601Net
      loss before provision for income taxes
                                          
                                          
                                          (980,717
                                          )
                                          
                                          
                                          (1,011,874
                                          )
                                          
                                          
                                          (1,691,610
                                          )
                                          
                                          
                                          (2,273,463
                                          )Provision
      for income taxes
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —Net
      loss
                                          
                                          
                                          (980,717
                                          )
                                          
                                          
                                          (1,011,874
                                          )
                                          
                                          
                                          (1,691,610
                                          )
                                          
                                          
                                          (2,273,463
                                          )Accretion
      on Series B Preferred Stock
                                          
                                          
                                          (31,199
                                          )
                                          
                                          
                                          (20,799
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —Net
      loss applicable to common stockholders
                                          
                                          $
                                          (1,011,916
                                          )
                                          
                                          $
                                          (1,032,673
                                          )
                                          
                                          $
                                          (1,691,610
                                          )
                                          
                                          $
                                          (2,273,463
                                          )Net
      loss per share - basic and diluted
                                          
                                          $
                                          (0.28
                                          )
                                          
                                          $
                                          (0.10
                                          )
                                          
                                          $
                                          (0.07
                                          )
                                          
                                          $
                                          (0.10
                                          )Shares
      used to compute net loss per share - basic and diluted
                                          
                                          
                                          3,629,129
                                          
                                          
                                          
                                          10,107,941
                                          
                                          
                                          
                                          23,217,846
                                          
                                          
                                          
                                          23,217,846





Item
      9.
            Changes
      In and Disagreements with Accountants on Accounting and Financial
      Disclosure.




None.




Item
9A(T).    Controls and Procedures.




As of the end of the period covered by this Annual Report,
management performed, with the participation of our Chief Executive Officer and
Chief 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 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 Chief Executive Officer and Chief 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 Chief Executive Officer and Chief Financial Officer concluded that,
as of December 31, 2008, the Company’s disclosure controls and procedures were
not effective.







61










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 Chief Executive Officer and Chief
Financial Officer, and effected by our Board of Directors, 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 Chief Executive Officer and Chief
Financial Officer, an assessment, including testing of the effectiveness, of our
internal control over financial reporting as of December 31, 2008. Management’s
assessment of internal control over financial reporting was conducted using the
criteria in Internal Control over Financial Reporting – Guidance for Smaller
Public Companies issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”).




A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely
basis.   In connection with management’s assessment of our
internal control over financial reporting as required under Section 404 of the
Sarbanes-Oxley Act of 2002, we identified the following material weaknesses in
our internal control over financial reporting as of December 31,
2008:




1.
            There
      is a strong reliance on the external auditors to review and adjust the
      annual and quarterly financial statements and related financial
      disclosure, to monitor new accounting principles and their implementation,
      and to ensure compliance with GAAP and SEC disclosure
      requirements;2.
            There
      is a strong reliance on the external attorneys to review and edit our
      periodic, annual and quarterly reports and to ensure compliance
      with SEC disclosure requirements; and3.
            We
      have not adequately divided, or compensated for, incompatible functions
      among personnel to reduce the risk that a potential material misstatement
      of the financial statements would occur without being prevented or
      detected.




Because
of the material weakness noted above, management has concluded that we did not
maintain effective internal control over financial reporting as of December 31,
2008, based on Internal Control over Financial Reporting – Guidance for Smaller
Public Companies issued by COSO.




Remediation
of Material Weaknesses in Internal Control Over Financial Reporting




Management
is in the process of addressing its material weaknesses in an effort to improve
its system of internal control over financial reporting through the following
actions:






1.
              Employees
      have received formal training on both GAAP and SEC disclosure
      requirements, which has reduced our reliance on external auditors to
      review and edit the annual and quarterly financial statements and
      related financial disclosure and to ensure compliance with SEC
      disclosure requirements.  Nevertheless, as a small business, the
      Company does not have the resources to install a dedicated staff with deep
      expertise in all facets of SEC disclosure and GAAP
      compliance.  As is the case with many small businesses, the
      Company will continue to work with its external auditors and
      attorneys as it relates to new accounting principles and changes
      to SEC disclosure requirements.  The Company has found that
      this approach worked well in the past and believes it to be the most cost
      effective solution available for the foreseeable future.2.
              Employees
      have received formal training on SEC disclosure requirements, which has
      reduced our reliance on external attorneys to review and
      edit our periodic, annual and quarterly filings and to
      ensure compliance with SEC disclosure
      requirements.  Further, the Company is introducing the
      use of compliance checklists which cover our
      periodic, quarterly and annual SEC reports; and3.
              The
      Company has introduced employee access restrictions within our
      accounting system, in accordance with the formally adopted Financial
      Delegation Policy described below.  Nevertheless, as a small
      business, the Company does not have the resources to fund
      sufficient staff to ensure a complete segregation of responsibilities
      within the accounting function, and we remain reliant on management
      oversight.




We
believe that the foregoing initiatives will enable us to improve our internal
controls over financial reporting. Management is committed to continuing efforts
aimed at improving the design adequacy and operational effectiveness of its
system of internal controls.  The remediation efforts noted above will
be subject to the Company's internal control assessment, testing and
evaluation process.




This
Annual Report does not include an attestation report of our 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 temporary rules of
the SEC that permit the Company to provide only management’s
report in this annual report.




Changes
in Internal Control over Financial Reporting




During
the fourth quarter of fiscal 2008, we implemented new controls, which
constitute a material change in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act). These new controls include:




1.
            A
      formal Financial Delegation Policy has been documented and approved
      by the Audit Committee of the Board of Directors.  Further,
      the Company had previously introduced and effectively maintained
      employee access restrictions within its accounting system, in accordance
      with this Policy.  This control has been effectively operating for a
      sufficient period to address the material weakness relating to
      delegation of authority not having been formally
      documented.




2.
            As
      reported in our Form 10-Q for the quarter ended September 30, 2008, the
      Audit Committee of the Board of Directors has formally adopted a Charter
      and is directing, overseeing, reviewing and approving the work of the
      external auditors.  This control has been effectively operating for a
      sufficient period to address the material weakness relating to
      insufficient oversight of external audit
  functions.








These
controls were implemented to address two of the material weaknesses identified
by management in 2007, neither of which was reported as remediated
as at September 30, 2008.




Item
9B.        Other
Information










62













PART
III





Item
      10.
            Directors,
      Executive Officers and Corporate
Governance




Information
with respect to this item is incorporated by reference from our definitive proxy
statement (or amendment to this Annual Report on Form 10-K) to be filed with the
Commission within 120 days of the end of the fiscal year ended December 31,
2008.




Item
      11.
            Executive
      Compensation




Information
with respect to this item is incorporated by reference from our definitive proxy
statement (or amendment to this Annual Report on Form 10-K) to be filed with the
Commission within 120 days of the end of the fiscal year ended December 31,
2008.




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 (or amendment to this Annual Report on Form 10-K) to be filed with the
Commission within 120 days of the end of the fiscal year ended December 31,
2008.




Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence




Information
with respect to this item is incorporated by reference from our definitive proxy
statement (or amendment to this Annual Report on Form 10-K) to be filed with the
Commission within 120 days of the end of the fiscal year ended December 31,
2008.





Item
      14.
            Principal
      Accountant Fees and Services




Information
with respect to this item is incorporated by reference from our definitive proxy
statement (or amendment to this Annual Report on Form 10-K) to be filed with the
Commission within 120 days of the end of the fiscal year ended December 31,
2008.













63








PART
IV




Item
15.                      Exhibits,Financial Statement
Schedules.





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 Exhibits are being filed with this Annual Report on Form
10-K.




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:




·
            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;




·
            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;




·
            may
      apply standards of materiality in a way that is different from what may be
      viewed as material to you or other investors;
  and




·
            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.




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.”






Exhibit No.
                    Description2.1(4)
                    Agreement
      and Plan of Merger and Reorganization, dated as of May 31, 2007, by and
      among WBSI, WaferGen Acquisition Corp., and WaferGen, Inc.2.2(4)
                    Certificate
      of Merger and Reorganization, dated as of May 31, 2007, by and among WBSI,
      WaferGen Acquisition Corp., and WaferGen, Inc.3.1(1)
                    Certificate
      of Incorporation of WBSI3.2(3)
                    Certificate
      of Amendment to the Certificate of Incorporation of WBSI, datedJanuary
      31, 20073.3(2)
                    Bylaws
      of WBSI4.1(4)
                    Lockup
      Agreement dated January 14, 2008, among WGBS, Rodman & Renshaw LLC and
      R&R Biotech Partners LLC10.1(5)†
                    WaferGen
      Bio-systems, Inc. 2007 Stock Option Plan10.2(5)†
                    Note
      and Warrant Purchase Agreement between WaferGen, Inc. and Alnoor Shivji,
      dated as of January 30, 200710.3(5)†
                    Form
      of 7% Promissory Notes, in the aggregate principal amount of $262,000,
      issued pursuant to the Note and Warrant Purchase Agreement, dated January
      30, 200710.4(5)†
                    Form
      of Warrants, made as of January 30, 2007, to purchase up to an aggregate
      of 86,182 shares of WBSI’s Series B Preferred Stock10.5(5)†
                    Amendment,
      dated February 28, 2007, to Note and Warrant Purchase Agreement, dated
      January 30, 200710.6(5)†
                    7%
      Promissory Note, dated February 28, 2007, in the aggregate principal
      amount of $138,000, issued pursuant to the Note and Warrant Purchase
      Agreement, dated January 30, 2007, as amended10.7(5)†
                    Warrant,
      made as of February 28, 2007, to purchase up to 45,395 shares of WBSI’s
      Series B Preferred Stock, issued pursuant to the Note and Warrant Purchase
      Agreement, dated January 30, 2007, as amended10.8(5)†
                    Second
      Amendment, dated March 30, 2007, to Note and Warrant Purchase Agreement,
      dated January 30, 200710.9(5)†
                    7%
      Promissory Note, dated March 30, 2007, in the aggregate principal amount
      of $250,000, issued pursuant to the Note and Warrant Purchase Agreement,
      dated January 30, 2007, as amended10.10(5)†
                    Warrant,
      made as of March 30, 2007, to purchase up to 82,237 shares of WBSI’s
      Series B Preferred Stock, issued pursuant to the Note and Warrant Purchase
      Agreement, dated January 30, 2007, as amended10.11(5)†
                    Form
      of Allonge to Promissory Notes, dated as of March 31, 200710.12(5)†
                    Third
      Amendment, dated May 14, 2007, to Note and Warrant Purchase Agreement,
      dated January 30, 200710.13(5)†
                    7%
      Promissory Note, dated May 14 , 2007, in the aggregate principal amount of
      $100,000, issued pursuant to the Note and Warrant Purchase Agreement,
      dated January 30, 2007, as amended10.14(5)†
                    Form
      of Second Allonge to Promissory Notes, dated as of May 14,
      200710.15
                    [Reserved]10.16
                    [Reserved]10.17(5)
                    Placement
      Agency Agreement dated April 12, 2007, between WaferGen, Inc. and Rodman
      & Renshaw, LLC10.18(5)
                    Form
      of Lockup Agreement10.19(5)
                    Form
      of Subscription Agreement10.20(5)
                    Form
      of Registration Rights Agreement10.21(5)
                    Form
      of Warrants issued to investors in a private placement, the initial
      closing of which was held on May 31, 200710.22(5)
                    Form
      of Warrant issued to Placement Agent in connection with a private
      placement, the initial closing of which was held on May 31,
      200710.23(5)
                    Escrow
      Agreement, dated as of May 31, 2007, by and among WBSI, Alnoor Shivji and
      Gottbetter & Partners, LLP, as Escrow Agent10.24(5)
                    Split-Off
      Agreement, dated as of May 31, 2007, by and among WBSI, WaferGen, Inc., La
      Burbuja Leaseco, Inc. and Maria Maribel Jaramillo de La O10.25(5)
                    General
      Release Agreement, dated as of May 31, 2007, by and among WBSI, WaferGen,
      Inc., La Burbuja Leaseco, Inc. and Maria Maribel Jaramillo de La
      O10.26(5)†
                    Employment
      Agreement dated May 31, 2007, between WBSI and Alnoor Shivji10.27(5)†
                    Employment
      Agreement dated May 31, 2007, between WBSI and Amjad Huda10.28(5)†
                    Employment
      Agreement dated May 31, 2007, between WBSI and Victor Joseph10.29(6)
                    Mutual
      Separation Agreement, dated February 26, 2008, between the Company and
      Terry Osborn10.30(6)
                    Code
      of Business Conduct and Ethics10.31(7)
                    Securities
      Purchase Agreement, dated May 19, 2008, by and among WaferGen Bio-systems,
      Inc. and the purchasers identified on the signature pages
      thereto10.32(8)
                    Form
      of Common Stock Purchase Warrant10.33(9)†
                    WaferGen
      Bio-Systems, Inc. 2008 Stock Incentive Plan10.34
                    [Reserved]10.35*†
                    Form
      of Non-Qualified Stock Option award under 2008 Stock Incentive
      Plan10.36(10)
                    Share
      Subscription Agreement and Shareholders’ Agreement dated May 8, 2008, by
      and among Holders defined therein and WaferGen Biosystems (M) Sdn.
      Bhd.10.37(11)
                    Put
      Agreement dated May 28, 2008, by and among WaferGen Bio-systems, Inc.,
      Malaysian Technology Development Corporation Sdn. Bhd., and WaferGen
      Biosystems (M) Sdn. Bhd.10.38(12)
                    Put
      Agreement dated May 28, 2008, by and among Alnoor Shivji, WaferGen
      Bio-systems, Inc., Malaysian Technology Development Corporation Sdn. Bhd.,
      and WaferGen Biosystems (M) Sdn. Bhd.10.39*†
                    Letter
      Agreement dated January 16, 2009, by and between WBSI and Alnoor
      Shivji10.40*†
                    Letter
      Agreement dated January 16, 2009, by and between WBSI and Amjad
      Huda10.41*†
                    Letter
      Agreement dated January 16, 2009, by and between WBSI and Victor
      Joseph10.42*
                    Form
      of WBSI Distribution Agreement21.1*
                    Subsidiaries
      of the Registrant23.1*
                    Letter
      of Consent from Independent Registered Public Accounting Firm, Rowbotham
      & Company, LLP31.1*
                    Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2*
                    Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1*
                    Section
      1350 Certification of Chief Executive Officer  (This certification is being
      furnished and shall not be deemed “filed” with the SEC for purposes of
      Section 18 of the Exchange Act, or otherwise subject to the liability
      of that section, and shall not be deemed to be incorporated by reference
      into any filing under the Securities Act or the Exchange Act, except to
      the extent that the Registrant specifically incorporates it by
      reference.)32.2*
                    Section
      1350 Certification of Chief Financial Officer  (This certification is being
      furnished and shall not be deemed “filed” with the SEC for purposes of
      Section 18 of the Exchange Act, or otherwise subject to the liability
      of that section, and shall not be deemed to be incorporated by reference
      into any filing under the Securities Act or the Exchange Act, except to
      the extent that the Registrant specifically incorporates it by
      reference.)


64





(1)
              Incorporated
      herein by reference to Exhibit 3.1 to the Company’s Registration Statement
      on Form SB-2 filed with the Commission on August 9,
  2006.
 
 (2)
              Incorporated
      herein by reference to Exhibit 3.2 to the Company’s Registration Statement
      on Form SB-2 filed with the Commission on August 9,
      2006.
 
 (3)
              Incorporated
      herein by reference to Exhibit 3.1 to the Company’s current Report on Form
      8-K filed with the Commission February 1,
2007.
 
 (4)
                Incorporated
      herein by reference to Exhibit 4.1 to Amendment No. 2 to the Company's
      Registration Statement on Form SB-2 filed with the Commission on January
      16, 2008(5)
                Incorporated
      herein by reference to identically numbered Exhibit to the Company’s
      current Report on Form 8-K filed with the Commission on June 5,
      2007
 
 (6)
              Incorporated
      herein by reference to the identically numbered Exhibit to the Company’s
      Annual Report on Form 10-K filed with the Commission on March 31,
      2008.
 
 (7)
              Incorporated
      herein by reference as Exhibit 10.1 to the Company’s Current Report on
      Form 8-K filed with the Commission on May 21,
  2008.
 
 (8)
              Incorporated
      herein by reference as Exhibit 10.2 to the Company’s Current Report on
      Form 8-K filed with the Commission on May 21,
  2008.
 
 (9)
              Incorporated
      herein by reference as Exhibit 10.1 to the Company’s Current Report on
      Form 8-K filed with the Commission on July 3,
  2008.
 
 (10)
              Incorporated
      herein by reference as Exhibit 10.1 to the Company’s Quarterly Report on
      Form 10-Q field with the Commission on November 14,
  2008.
 
 (11)
              Incorporated
      herein by reference as Exhibit 10.2 to the Company’s Quarterly Report on
      Form 10-Q filed with the Commission on November 14,
  2008.
 
 (12)
              Incorporated
      herein by reference as Exhibit 10.3 to the Company’s Quarterly Report on
      Form 10-Q filed with the Commission on November 14,
  2008.
 
 *
              Filed/furnished
      herewith.
 
 †
              
              Indicates
      a management contract or compensatory plan or
  arrangement.







65





SIGNATURES




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.







WAFERGEN
      BIO-SYSTEMS, INC.By:
            /s/  ALNOOR
      SHIVJIDate:
      March 26, 2009
            
            Alnoor
      ShivjiChairman,
      President and Chief Executive Officer




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.





SIGNATURE
            
            TITLE
            
            DATE/s/  ALNOOR
      SHIVJIAlnoor
      Shivji
            
            Chairman,
      President and Chief Executive Officer (Principal Executive
      Officer)
            
            March
      27, 2009/s/  AMJAD
      HUDAAmjad
      Huda
            
            Chief
      Financial Officer (Principal Financial Officer) and
      Director
            
            March
      27, 2009/s/ VICTOR
      JOSEPHVictor
      Joseph
            
            Chief
      Technology Officer and Director
            
            March
      27, 2009/s/  DR.
      R. DEAN HAUTAMAKIDr.
      R. Dean Hautamaki
            
            Director
            
            March
      27, 2009/s/  JOEL
      KANTERJoel
      Kanter
            
            Director
            
            March
      27, 2009/s/  MAKOTO
      KANESHIROMakoto
      Kaneshiro
            
            Director
            
            March
      27, 2008








/s/  NADINE
      SMITHNadine
      Smith
            
            Director
            
            March
      27, 2008










66







EXHIBIT
INDEX
 
 Exhibit No.
                    Description10.35
                    Form
      of Non-Qualified Stock Option award under 2008 Stock Incentive
      Plan10.39
                    Letter
      Agreement dated January 16, 2009, by and between WBSI and Alnoor
      Shivji10.40
                    Letter
      Agreement dated January 16, 2009, by and between WBSI and Amjad
      Huda10.41
                    Letter
      Agreement dated January 16, 2009, by and between WBSI and Victor
      Joseph10.42
                    Form
      of WBSI Distribution Agreement21.1
                    Subsidiaries
      of the Registrant23.1
                    Letter
      of Consent from Independent Registered Public Accounting Firm, Rowbotham
      & Company, LLP31.1
                    Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2
                    Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1
                    Section
      1350 Certification of Chief Executive Officer  (This certification is being
      furnished and shall not be deemed “filed” with the SEC for purposes of
      Section 18 of the Exchange Act, or otherwise subject to the liability
      of that section, and shall not be deemed to be incorporated by reference
      into any filing under the Securities Act or the Exchange Act, except to
      the extent that the Registrant specifically incorporates it by
      reference.)32.2
                    Section
      1350 Certification of Chief Financial Officer  (This certification is being
      furnished and shall not be deemed “filed” with the SEC for purposes of
      Section 18 of the Exchange Act, or otherwise subject to the liability
      of that section, and shall not be deemed to be incorporated by reference
      into any filing under the Securities Act or the Exchange Act, except to
      the extent that the Registrant specifically incorporates it by
      reference.)
     67