U.S.
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 FORM
10-KSB
 
 xANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
fiscal year ended December 31,
2007
 oTRANSITION
REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
transition period from
[    ] to [    ]
 333-136424
 (Commission
File Number)
 
 WaferGen
Bio-systems, Inc.
 (Exact
Name of Registrant as Specified in Charter)
 
 
 Nevada
              20-3699764(State
      or other jurisdiction of incorporation)
              (IRS
      Employer Identification No.)
 Bayside
Technology Center
 46531
Fremont Blvd.
 Fremont,
CA  94538
 (Address
of principal executive offices, including zip code)
 Issuer’s
telephone number: (510) 651-4450
 
 Securities
registered pursuant to Section 12(b) of the Act:  None
 Securities
registered pursuant to Section 12(g) of the Act:  None
 
 Check whether the
issuer(1) has filed all reports required to filed by Section 13 or 15(d) of the
Securities Exchange Act during the past 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 o
  Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.  x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  YES o   NO x
 State
Issuer’s revenues for the fiscal year ended December 31, 2007:
$228,973.
 
 The
aggregate market value of WaferGen Bio-systems, Inc. Common Stock, $0.001 par
value, held by non-affiliates, computed by reference to the average of the
closing price as reported by OTCBB on March 28, 2008, was $23,873,718. Shares of
common stock held by each executive and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
 
 Number of
shares of Common Stock of WaferGen- Bio-systems, Inc, $0.001 per value, issued
and outstanding as of March 28, 2008: 23,217.846.
  DOCUMENTS
INCORPORATED BY REFERENCE
 
 Portions
of the Registrant’s Definitive Proxy Statement for the 2008 Annual Meeting are
incorporated by reference into Part III of this Form 10-KSB.
 
 Transitional
Small Business Disclosure Format (check one):  YesoNo x
  
 
  TABLE OF
CONTENTS
 
 Page
 FORWARD-LOOKING
      STATEMENTS
              1PART
      IITEM
      1.
              Description
      of Business
              1ITEM
      2.
              Description
      of Property
              19ITEM
      3.
              Legal
      Proceedings
              19ITEM
      4.
              Submission
      of Matters to a Vote of Security Holders
              19PART
      IIITEM
      5.
              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
              20ITEM
      6.
              Management’s
      Discussion and Analysis or Plan of Operations
              22ITEM
      7.
              Financial
      Statements and Supplementary Data
              29ITEM
      8.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              54ITEM
      8A.
              Controls
      and Procedures
              54ITEM
      8B.
              Other
      Information
              55PART
      IIIITEM
      9.
              Directors,
      Executive Officers, Promoters, Control Persons and Corporate Governance;
      Compliance with Section 16(a) of the
      Exchange Act
              56ITEM
      10.
              Executive
      Compensation
              56ITEM
      11.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              56ITEM
      12.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              56ITEM
      13.
              Exhibits
              56ITEM
      14.
              Principal
      Accountant Fees and Services
              56SIGNATURES
              57EXHIBIT
      INDEX
              58
  
  FORWARD
LOOKING STATEMENTS
  Safe
Harbor Statement under the Private Securities Litigation Reform Act of
1995
  Information
included in this Form 10-KSB may contain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). 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-KSB, 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.
  
  PART
I
  Item 1.
              Description
      of Business
  As
used in this Current Report on Form 10-KSB, 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”).  In
connection with the Merger, the officers and board members of WBSI immediately
prior to the Merger resigned and were replaced by the officers and board members
of Wafergen, Inc. immediately prior to the Merger along with certain newly
elected board members.
  Company
Background and Overview
  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.
  We intend
to develop instruments and other commercial products to serve the genetic
analysis segment of the life science 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).
  The
expression of a gene is fundamental in understanding many disease processes and
hence, drug efficacy. For example, in the field of oncology 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
 
 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. cDNA: - a DNA
complementary to a RNA, and synthesized from it in vitro by reverse
transcription.
  1
  specifically
targeting biomarkers include Herceptin, used in the treatment of breast cancer,
and Gleevac, used in the treatment of chronic myelogenous leukemia. We also
believe an era of personalized treatment providing options for patients with
certain malignancies will expand to other diseases. 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
currently produce and sell our SmartSlideTM Micro-incubation System and we are
developing a gene expression product, the SmartChipTM Real Time PCR 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 are completing
development of our SmartChipTM System, which is an innovative 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. The SmartChipTM System’s
high density, rapid cycling configuration is expected to provide throughput
levels that are expected to deliver clinical research solutions at a fraction of
the time and cost currently afforded by existing competing systems.
  The
current market cost of real-time polymerase chain reaction (“real-time
PCR”)2, 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 cost approximately $0.03 per acquired
data point.
  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 would take 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 100,000 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, 384-well, or a single
sample. Some new entrants in the market place like Biotrove & Fluidigm offer
medium throughput solution of 3,000-10,000 assays per chip. However are
associated with high instrument and running cost or suffer from poor performance
and will be difficult to scale up to whole genome on a single chip.
  According
to UBS Investment Research Report: Life
Sciences, December 11, 2006 and Frost
& Sullivan Report - U.S. qRT-PCR Markets - October 5, 2006 Deutsche Bank
Research Report - Pharmacogenomics is the “new new” thing in Healthcare,
December 11, 2006, and our own estimates, the genetic analysis market had
approximately $2.8 billion in worldwide revenues in 2007. Overall growth for the
market is forecast at a compounded annual growth rate (CAGR) of 10-16% and
global revenue is estimated to reach $4.9 billion by 2012.
  WaferGen
intends to employ a business model that generates revenue from the sale of both
instruments and a recurring revenue stream from the sale of consumables, similar
to the “razor and razor blade” business model.
  We
introduced our SmartSlideTM System during 2006 and made our first sales during
October 2006. We generated approximately $228,973 of revenue and $5,957,664 of
total loss during 2007. During the final stages of The Smart ChipTM System
development we expect to incur significant additional costs completing
development and commercializing this product. We have produced an alpha version
of the Smart Chip Real Time PCR system, but we have not produced a commercially
available product or made any sales of our Smart ChipTM System. Our sales of
SmartSlideTM Systems have been sold to several leading
 
 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.
  2
  research
institutions including Abbott Labs, NASA, Harvard University, The Mayo Clinic,
Memorial Sloan-Kettering, UCLA, University of Southern California, VA Medical
Center, University of California at Davis, University of North Texas, Eisai
Research, and the University of Georgia.
  Technology
Overview
  Genes are
segments of DNA that carry separate information packets of the genome. Gene
expression profiles are used to provide information on roughly 30,000 genes
within the human genome. Life science researchers use gene expression analysis
to study the differential expression of genes in normal versus disease states.
The permanent DNA sequence in each human cell is transcribed or copied into RNA
(combinations of nucleic acids)3which
is then translated into functional proteins. In disease, gene expression
profiles may demonstrate the over or under-expression of genes. There are two
technologies used to measure gene expression, microarray and real-time
PCR.
  Microarrays
consist of different nucleic acid probes that are chemically attached to a
surface, such as a microchip, glass slide, or a bead. Microarrays are based upon
hybridization technology to detect the presence of a specific gene sequence and
to analyze genetic information. DNA and RNA are made of defined nucleic acid
sequences that bind to unique complementary sequences to form a hybrid. This
binding of single strands of DNA or RNA to form double-stranded DNA or RNA is
termed hybridization. Scientists utilize the hybridization phenomenon to measure
the amount of expression or presence of a gene in a particular
sample.
  Microarrays
have limited sensitivity, accuracy and dynamic range. Human genes are expressed
across a six log range, with most species of RNA being present in less than 100
copies. The dynamic range of microarrays is estimated to be 2-3 logs and thus
microarrays are unable to detect a 2 fold difference at lower expression
levels, capturing only 20-40% of the expressed genes. Consequently,
one obtains only a partial view of the expression profile when utilizing
microarrays. These overlooked genes may be important in a particular disease
state (limited sensitivity). 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. Traditional PCR is an enzymatic process to increase the
number of DNA copies for easier detection. Real-time PCR permits quantitative
analysis, rather than just a qualitative yes/no. In many cases it is important
to determine the number of DNA copies in a given 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
it 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.
  We
believe our SmartChipTM System, assuming successful development and
commercialization, would combine the best of both existing technologies - whole
genome analysis enabled by microarrays with the sensitivity and accuracy of
real-time PCR. Our SmartChipTM System will be provided with pico-liter
(one-trillionth of a liter) dispensing into a 33,000-100,000 well chip that will
allow for high throughput real- time PCR or the real time amplification of
the entire human genome in triplicate. Our SmartChipTM chips are designed with
evaporation control measures that allow for the use of nano-liter (one-billionth
of a liter) 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.
 
 3 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.
  3
  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.


Microarray
              SmartChipTM
              Real
      -Time PCR#
      of Genes
              Whole
      Genome
              Whole
      Genome
              <1000Dynamic
      Range
              2
      to 3 logs
              6
      logs
              6
      logsQuantitative
              Semi
              Yes
              YesThroughput
      per
                run
              1
      Sample
                30,000
      genes
                (actually
      only 20 -30%
                of
      expressed genes)
              1
      Sample
                30,000
      genes
                Many
      genes x many
                samples
              Few
      samples (96 -384)
                x
      few genesSensitivity
              100,000
      starting copies
              1-10
      starting copies
              1-10
      starting copiesProject
      Process
              Multiple
      steps
              Single
      step
              2
      stepsTime
      per run
                Hybridization
      or
                PCR
              20
      hours
              15-20
      minutes
              2
      hoursWhole
      Genome
                Assay
      Time
              Days
              Day
              MonthsCost/gene
              3.3
      cents
                plus
      cost real –time PCR
                validation
              3.3
      cents
              $1
      - 2Cost/whole
                genome
              $1000
      plus cost
                validation
              $1000
              >$100,000
      -185,000


Competition
  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 NimbleGen Systems, Inc., 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.
  Some new
competitors, such as Biotrove and Fluidigm have recently begun offering
instrument-only solutions. These companies have micro-channel based technologies
that offer throughput of 6,000 to 10,000 assays per instrument.
  4
  Products
  SmartChipTM System
  Our
SmartChipTM System is designed asan integrated
instrument capable of 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
      33,000 assays chip for study of gene panels or for candidate genes of
      interest to customers; and
  ·
                A
      High throughput whole genome version of 100,000 assays chip for whole
      genome studies in triplicate.
 The alpha
SmartChipTM System has been built to thermally cycle and detects the fluorescent
signal output from real-time PCR runs on the chips.  This compact
system is intended to allow for the use of very small reaction volumes, which
are dispensed using a pico-liter dispenser, while improving detection
sensitivity and assuring uniformity across the chip.
  The
SmartChipTM System is expected to perform quantitative gene expression and
genotyping assays on whole genomes at a competitive price (3.3 cents per
acquired data point compared to $1 per data point for current real-time PCR
assays). This system is expected to have the ability to perform genome-wide
nano-volume (100 nl) real-time PCR assays in triplicates, performed in minutes
using pre-fabricated real-time PCR chips. The system is expected to have
superior performance for a whole genome or high-throughput system and a dynamic
range of 6 logs for gene expression with high sensitivity.
  Some of
the key challenges that are addressed with the SmartChipTM System are multi-head
pico-liter dispensing, evaporation control, sealing, scalability, fast thermal
cycling, temperature control and optimized 1,000 genes in 100nL reaction
volume.
  To date,
we have designed 5,500-, 33,000-, and 100,000- well chips and already
implemented the 5,500- well chip. With these 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, which we have also demonstrated. We have also completed 100 pico-liter
dispensing with evaporation control. Certain of the milestones that we have yet
to achieve prior to launching the SmartChipTM System are specified in the
SmartChipTM Product Road Map Chart.
  Market
Opportunities: SmartChipTM System Product Potential
  Sequencing
of the human genome has led to a new healthcare paradigm where disease is
understood at the molecular level, allowing the potential for a patient to be
diagnosed according to genetic information and treated with drugs designed to
work on specific molecular targets. This has led to the need for accurate,
highly sensitive, high throughput gene expression data by researchers,
clinicians and pharmaceutical companies. We believe the SmartChipTM System, with
its advantages of higher throughput, lower cost, superior sensitivity, and
accuracy will make these multiple market applications a practical
reality.
  We
believe the SmartChipTM System will become the technology of choice in both
research and clinical settings.
  ·
                Biomarker
      Discovery. Identification of 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) and the likelihood of therapeutic
      response to a specific genetic profile (pharmacogenomics). Recently issued
      FDA guidance4calls
      for drug companies to voluntarily submit pharmacogenomic data to support
      their drug development
programs.
  4 FDA News
Release - March 22, 2005 - issued a final guidance titled “Pharmacogenomic Data
Submissions.”
   5
   ·
                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 acquired sequence 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 (messenger RNAs) 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 (2 to 200) are evaluated using real-time PCR in a different
subset of patients (50 to 100). The differentially expressed genes in this
patient cohort 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/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 recent MACQ study conducted by the FDA and
published in September 2006 in Nature Biotechnology).5Biomarker
investigation requires multiples of such analyses to confirm
discovery.
  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, loci of single nucleotide
mismatches/polyphormisms (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.
  Recently,
the FDA has asked for voluntary data submission utilizing these genetic
approaches in clinical trials.6 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. Other PCR-based techniques
typically process 96 to 384 gene expression studies with many competing
technologies, the researcher is typically limited to the amount of the
biological sample to prepare RNA. We also believe our technology can be easily
scaled to meet future higher-throughput needs.
  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
 
 5 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.
 6 FDA News
Release - March 22, 2005 - issued a final guidance titled “Pharmacogenomic Data
Submissions.
  6
  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 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 - 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 1/100
to 1/10,000 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.
  Sales
and Marketing
  We
utilize a seasoned life science marketing team and WaferGen-employed direct
sales and application support personnel.  In 2008, we expect to
increase our sales and support by an addition two employees for selling
SmartSlideTM and SmartChipTM Systems. We are in the process of identifying life
science distributors to sell and support our product line in Europe and the Far
East.
  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.
  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, we have an exclusive license under PCR patents from Delft
University of Technology, Netherlands. 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.
  7
 
 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 23 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.
  Risk
Factors
  In
addition to the other information in this Annual Report on Form 10-KSB, the
factors and risks listed below, among others, could affect our future
performance and should be carefully considered in evaluating our
outlook.
  
 Risks Related to Our Company and Our
Business
 
  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 $5,957,664 for the year ended
December 31, 2007. As of December 31, 2007, our accumulated deficit was
$11,952,907. 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 gross revenues for December 31, 2007 were $228,973. If our
revenues grow more slowly 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.
  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.
   8
  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 $9.2 million in net proceeds
in our June 2007 private placement and we expect that such proceeds, together
with our income, could fund our operations for a period of approximately six
months. 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;
  ·
              responding
      to competitive pressures;
  ·
              complying
      with regulatory requirements such as licensing and registration;
      and
  ·
              maintaining
      compliance with applicable laws.
  9
  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 required additional
capital, we may have to curtail our growth plans or cut back on existing
business and, 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.
  10
 
 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.
  New
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, 2007, 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, 2007 was $11.95 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, reduce the scope of our
operations or discontinue our operations. We may not be able to raise necessary
equity or debt financing on acceptable terms or at all.
  11
  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, 2007, we concluded
that there were material weaknesses in our internal controls and procedures as
of December 31, 2007. 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.
  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 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.
  12
  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:
  ·
              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.
  13
 
 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.
  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.
  14
 
 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.
  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
   15
  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.
  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.
  16
  Ethical, legal
and social concerns surrounding the use of genetic information could reduce
demand for our products.
  Genetic
testing has raised ethical issues regarding privacy and the appropriate uses of
the resulting information. For these reasons, governmental authorities and
others may call for limits on or regulation of the use of genetic testing or
prohibit testing for genetic predisposition to certain conditions, particularly
for those that have no known cure. Similarly, such concerns may lead individuals
to refuse to use genetics tests even if permissible. Any of these scenarios
could reduce the potential markets for our products.
  
 Risks Related to Our
Organization
 
  Even
though we are not a California corporation, our common stock could still be
subject to a number of key provisions of the California General Corporation
Law.
  Under
Section 2115 of the California General Corporation Law (CGCL), corporations not
organized under California law may still be subject to a number of key
provisions of the CGCL. This determination is based on whether the corporation
has significant business contacts with California and if more than 50% of its
voting securities 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. This 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.
  17
 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 14, 2007, the price has
fluctuated from a low of $1.06 to a high of $2.60. 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;
 
 ·
                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 23,217,846 shares were issued and outstanding as of
December 31, 2007, 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, 2007, we have outstanding
options to purchase an aggregate of 2,268,736 shares of our common stock and
warrants to purchase an aggregate of 3,031,901 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.
  18
  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 41% 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.
  Item
      2.
              Description
      of Property
  Our
principal administrative and laboratory facility totals approximately 11,222
square feet and is located in Fremont, California. We currently lease such
facilities for $11,222 per month, which increases during the term of the lease.
The term of the lease expires on March 31, 2010.
  Our
existing facility is not yet being used at full capacity and management believes
that this facility is adequate and suitable for current and anticipated
needs.
  Item
      3.
              Legal
      Proceedings
  From time
to time we may be involved in claims arising in the ordinary course of business.
To our knowledge, no legal proceedings, government actions, administrative
actions, investigations or claims are currently pending against us or involve us
that, in the opinion of our management, could reasonably be expected to have a
material adverse effect on our business and financial condition.
  We
anticipate that we will expend significant financial and managerial resources to
the defense of 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.
  19
 
 PART
II
   Item
      5.
              Market
      for Common Equity, Related Stockholder Matters and Small Business 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.
  The
transfer agent for our common stock is ContinentalStock Transfer and Trust
Company at 17 Battery Place, New York, New York 10004.
  HIGH
                
                
                LOWFiscal Year ended December 31, 2007Fourth
      Quarter
                
                $
                2.28
                
                
                $
                1.21Third
      Quarter
                
                $
                2.40
                
                
                $
                1.55Second
      Quarter
                
                $
                2.40
                
                
                $
                1.65
   There are
no historical prices available prior to the merger with WaferGen in May 31,
2007.
  As of
March 25, 2008, there were approximately 102 owners of record of our common
stock.
  Trades in
our common stock may be subject to Rule 15g-9 of 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.
  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.
  20
 
 We
consider our common stock to be thinly traded and any reported sale prices may
not be a true market-based valuation of our common stock. On December 31, 2007
the closing price of our common stock, as reported on the OTC was $2.00.
  Recent
Sales of Unregistered Securities
  Sales
by WaferGen
  On
January 1, 2007, WaferGen borrowed $162,000 from Alnoor Shivji in exchange for
two promissory notes. On January 30, 2007, Alnoor Shivji and WaferGen entered
into a Note and Warrant Purchase Agreement, pursuant to which Mr. Shivji was
granted the right purchase up to $300,000 of promissory notes and warrants to
purchase up to 98,684 shares of WaferGen’s common stock, subject to adjustment.
Pursuant to this Agreement, on January 30, 2007, Mr. Shivji purchased three
promissory notes in the aggregate principal amount of $262,000, by converting
his earlier loans for $162,000 and advancing $100,000 in new funds to WaferGen,
and three warrants to purchase an aggregate of 86,182 shares of WaferGen’s
Series B Preferred Stock at a purchase price of $0.76 per share until the
earlier of (i) five years from the date of grant or (ii) the date WaferGen
closes its initial public offering. The notes issued to Mr. Shivji bore interest
at the rate of 7% per annum and was paid in full on June 30, 2007.
  On
February 28, 2007, Mr. Shivji and WaferGen amended the terms of the Note and
Warrant Purchase Agreement to allow for the purchase by Mr. Shivji of up to
$400,000 of promissory notes and warrants to purchase up to 131,579 shares of
WaferGen’s common stock, subject to adjustment. In connection with this
amendment, on February 28, 2007, Mr. Shivji purchased an additional promissory
note in the principal amount of $138,000 and a five-year warrant to purchase an
additional 45,397 shares of WaferGen’s
Series B Preferred Stock at a purchase price of $0.76 per share. The note issued
to Mr. Shivji bore interest at the rate of 7% per annum and was paid
in full on June 30, 2007.
  On March
30, 2007, Mr. Shivji and WaferGen amended the terms of the Note and Warrant
Purchase Agreement to allow for the purchase by Mr. Shivji of up to $650,000 of
promissory notes and warrants to purchase up to 213,816 shares of WaferGen’s
common stock, subject to adjustment. In connection with this amendment, on March
30, 2007, Mr. Shivji purchased an additional promissory note in the principal
amount of $250,000 and a five-year warrant to purchase an additional 82,237
shares of WaferGen’s Series B Preferred Stock at a purchase price of $0.76 per
share. The note issued to Mr. Shivji bore interest at the rate of 7% per
annum and was paid in full on June 30, 2007.
  On May
14, 2007, Mr. Shivji made an additional loan to WaferGen in the amount of
$100,000. There were no warrants issued in connection with this loan. The note
issued to Mr. Shivji bore interest at the rate of 7% per annum and was paid
in full on June 30, 2007. Mr. Shivji is an accredited investor as defined under
Regulation D, Rule 501(a) promulgated by the SEC.
  The
transactions described above 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.
None of the securities were sold through an underwriter and accordingly, there
were no underwriting discounts or commissions involved.
 21
 
 Sales
by WBSI
  As of May
31, 2007, WBSI accepted subscriptions for a total of 7,178,444.33 units in a
private placement, consisting of an aggregate of 7,178,447 shares of WBSI’s
common stock and five-year warrants to purchase an aggregate of an additional
2,153,533 shares of WBSI’s common stock at an exercise price of $2.25 per share,
at $1.50 per unit, pursuant to the terms of a Confidential Private Placement
Memorandum, dated April 16, 2007. We received gross proceeds from such closing
of the private placement of $10,767,666.50 (which includes $240,000 of
outstanding indebtedness converted into units).
  The
private placement was made solely to “accredited investors,” as that term is
defined in Regulation D 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.
  Net
proceeds received from the private placement were to be 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.
  Rodman
& Renshaw, LLC acted as the placement agent in the private placement (the
“Placement Agent”). In connection with the closing of the private placement on
May 31, 2007, the Company paid the Placement Agent: (i) a cash fee of
$683,736.66 (equal to 7% of the aggregate purchase price paid by each purchaser
of units in the private placement, other than up to $1,000,000 of units
purchased by existing stockholders of WaferGen and units issued upon the
conversion of outstanding indebtedness), (ii) five-year warrants to purchase
455,825 shares of our common stock (equal to 7% of the number of shares of our
common stock on which the cash fee is payable for units sold in the private
placement), at an exercise price of $2.25 per share, with mandatory registration
rights covering the shares of common stock underlying the warrants, and (iii)
reimbursement for all reasonable out of pocket expenses incurred in connection
with the engagement, including, but not limited to, the reasonable expenses of
counsel.
  See
Exhibits 10.21(1) and 10.22(1) attached hereto for a description of WBSI
securities issued in connection with the Merger. The issuance of the securities
in the Merger was 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.
   Item 6.
              Management’s
      Discussion and Analysis or Plan of
Operations
  This
discussion should be read in conjunction with the other sections of this Report,
including Item 1 and Item 7 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-KSB. See
“Cautionary Factors That May Affect Future Results.” Our actual results may
differ materially.
  22
  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, 2007, WaferGen’s accumulated deficit was $11,952,907 and the total
stockholders’ equity was $4,598,240. 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.
 Results
of Operations
   Year
Ended December 31, 2007 Compared to Year Ended December
31, 2006
  The
following table presents selected items in our condensed consolidated statements
of operations for the years ended December 31, 2007 and 2006,
respectively:
  December
      31,2007
                      
                      
                      2006Revenues
                      
                      $
                      228,973
                      
                      
                      $
                      50,495Cost
      of sales
                      
                      
                      79,116
                      
                      
                      
                      14,750Gross
      margin
                      
                      
                      149,857
                      
                      
                      
                      35,745Operating
      expenses:Sales
      and marketing
                      
                      
                      848,818
                      
                      
                      
                      152,405Research
      and development
                      
                      
                      2,429,273
                      
                      
                      
                      1,624,237General
      and administrative
                      
                      
                      2,802,938
                      
                      
                      
                      945,554Total
      operating expenses
                      
                      
                      6,081,029
                      
                      
                      
                      2,722,196Operating
      loss
                      
                      
                      (5,931,172
                      )
                      
                      
                      (2,686,451
                      )Total
      Other income and (expenses):Interest
      income
                      
                      
                      163,047
                      
                      
                      
                      —Interest
      expense
                      
                      
                      (189,539
                      )
                      
                      
                      —Total
      Other income and (expenses)
                      
                      
                      (26,492
                      )
                      
                      
                      —Net
      loss before provision for income taxes
                      
                      
                      (5,957,664
                      )
                      
                      
                      (2,686,451
                      )Provision
      for income taxes
                      
                      
                      —
                      
                      
                      
                      —Net
      loss
                      
                      $
                      (5,957,664
                      )
                      
                      $
                      (2,686,451
                      )
  23
  The
following tables represent selected items in our condensed consolidated
statements of operations for the years ended December 31, 2007 and
2006:
  Revenues
  The
following table represents our revenue for the years ended December 31, 2007 and
2006:
  December 31,2007
                
                2006
                
                %
      Change$
                
                228,973
                
                $
                
                50,495
                
                
                
                353.5
      %
  Revenues
for the year ended December 31, 2007 increased by $ 178,478. In 2007, WaferGen
began selling its SmartSlide products with a new team of sales personal,
allowing it to generate minimal revenues for the first time since
inception.
  Costs
of Sales
  The
following table represents our cost for the years ended December 31, 2007 and
2006:
  December 31,2007
              
              2006
              
              %
      Change$
              79,116
              
              $
              14,750
              
              
              436.4
      %
  C ost of
sales includes the cost of product paid to third party vendors.  For the
year ended December 31, 2007, cost of sales increased by $64,366. The increase
is related to the increased sales during the year ended December 31,
2007.
  Sales
and Marketing Expenses
  The
following table represents our sales and marketing expense for the years ended
December 31, 2007 and 2006:
  December 31,2007
              
              2006
              
              %
      Change$
              848,818
              
              $
              152,405
              
              
              456.9
      %
 
  Sales and
marketing expenses consist primarily of compensation cost of our sales and
marketing team and cost associated with various marketing programs. For the year
ended December 31, 2007, sales and marketing expenses increased $696,413. The
increase resulted primarily due to an increase head count resulting in greater
salaries and wages.  We expect our sales and marketing expenses to increase
in absolute dollars as we expand our staff to develop our sales and marketing
infrastructure, and incur additional costs to support the growth in our
business.
  Research
and Development Expenses
  The
following table represents our research and development expenses for the years
ended December 31, 2007 and 2006:
  December 31,2007
              
              2006
              
              %
      Change$
              2,429,273
              
              $
              1,624,237
              
              
              49.6
      %
 
 24
  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.
  For the
year ended December 31, 2007, research and development expenses increased
$805,036.  The increase resulted primarily from an increased 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 with more lab equipment, and an increase in stock-based compensation
associated with the issuance of stock options.
  General
and Administrative Expenses
  The
following table represents our general and administrative expenses for the year
ended December 31, 2007 and 2006:
  December 31,2007
              
              2006
              
              %
      Change$
              2,802,938
              
              $
              945,554
              
              
              196.4
      %
  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, 2007, general and administrative expenses increased
$1,857,384. The increase resulted primarily from an increased head count
resulting in greater salaries and wages, an increase in stock-based compensation
associated with the issuance of restricted common stock and stock options, legal
and professional fees related to the filing of a registration statement and
other documents to comply with regulations related to the Merger.
  Interest
Income
  The
following table represents our interest income for the year ended
December 31, 2007 and 2006:
  December 31,2007
              
              2006
              
              %
      Change$
              163,047
              
              $
              —
              
              N/A
      %
  The
increase in interest income was a result of excess cash being invested in
interest-bearing vehicles during the year ending December 31, 2007.
  Interest
Expense
  The
following table represents our interest expense for the year ended
December 31, 2007 and 2006:
  December 31,2007
              
              2006
              
              %
      Change$
              189,539
              
              $
              —
              
              N/A
      %
  Interest
expenses consist of $171,053 of amortization associated with the debt discount
and $18,486 of interest expense.
  25
 
 Liquidity and Capital Resources
  As of
December 31, 2007, WaferGen had cash of $5,189,858. WaferGen has historically
met its liquidity requirements through borrowings and through the sale of equity
securities. As of December 31, 2007, WaferGen had working capital of
$4,296,516.
  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.WaferGen experienced negative cash flow from operating
activities for the year ended December 31, 2007 in the amounts of $4,737,175.
The cash used in operating activities in the year ended December 31, 2007
was due to cash used to fund a net operating loss of $5,078,975, adjusted for
non-cash expenses related to depreciation and amortization, stock-based
compensation, and miscellaneous income, as off-set by cash provided from a
change in working capital of $341,800.
  Net Cash Used in Investing
Activities.WaferGen use cash of $256,223 to acquire property and
equipment.
  Net Cash Provided By Financing
Activities.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 an 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.
  26
  We expect
that the net proceeds could fund our operations for a period of
approximately nine months. 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 and SmartSlideTM 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.
  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 $5,056,326 at December 31, 2007. 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 $0.51 for the year ended December 31, 2007 and
$1.23 for the year ended December 31, 2006. Amounts expensed were $648,988 and
$642,076 for the year ended December 31, 2007 and 2006, and $1,300,881 for the
period from inception to December 31, 2007.
  The fair
value of each option grant has been estimated using the following
assumptions:
  December
      31,
                2007
              
              December
      31,
                2006Risk
      Free Interest rate
              4.26%-4.85
              %
              4.57%-5.07
              %Expected
      Lives
              5
      Years
              
              5
      YearsExpected
      Volatility
              19%-21
              %
              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. The average daily price volatility of the Small Cap Medical
Equipment Index was used for the period corresponding to the expected life. 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.
  27
  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, 2007 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
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”), which is an interpretation of FAS No. 109, “Accounting
for Income Taxes” (“FAS 109”). FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements in accordance
with FAS 109 and prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The adoption of FIN 48 did not have a
significant effect on the Company’s financial statements.
  In March
2006, the FASB issued FAS No. 156, “Accounting for Servicing of Financial
Assets-An Amendment of FASB Statement No. 140” (“FAS 156”). FAS 156 requires
that all separately recognized servicing assets and servicing liabilities be
initially measured at fair value, if practicable. The statement permits, but
does not require, the subsequent measurement of servicing assets and servicing
liabilities at fair value. FAS 156 is effective as of the beginning of the first
fiscal year that begins after September 15, 2006, with earlier adoption
permitted. The adoption of FAS 156 did not have an effect on the Company’s
financial statements.
  In
September 2006, the FASB issued FAS No. 157, “Fair Value Measurements” (“FAS
157”). FAS 157 defines fair value, establishes a framework for measuring fair
value and expands disclosure of fair value measurements. FAS 157 applies under
other accounting pronouncements that require or permit fair value measurements
and accordingly, does not require any new fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Company does not believe that the adoption of FAS 157
will have a significant effect on its financial statements.
  In
September 2006, the SEC released SAB 108 “Considering the effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements” (“SAB 108”). SAB 108 addresses the process of quantifying financial
statement misstatements, such as addressing both the carryover and reversing
effects of prior year misstatements on the current year financial statements.
SAB 108 became effective for our fiscal year ended December 31, 2006. The
adoption of this statement had no impact on our financial position or results of
operations.
  In
February 2007, the FASB issued FAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities" (“FAS 159”). FAS 159 permits entities to
choose to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. FAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently assessing the impact
of FAS No. 159 on its financial position and results of operations and have not
yet elected this fair value option for any assets or liabilities.
  28
 
 In
December, 2007, the FASB issued Statement 141R, “Business Combinations” (FAS
141R). FAS 141R replaces FAS 141.  FAS 141R requires the acquirer of a
business to recognize and measure the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree at fair
value.  FAS 141R applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008.  The
effective date for the Company will be January 1, 2009.  We have not
yet determined the impact of SFAS 141R related to future acquisitions, if any,
on our consolidated financial statements.
  In
February 2008, the FASB issued FASB Staff Position No. 140-3 Accounting for
Transfers of Financial Assets and Repurchase Transactions (FSP 140-3). This
position provides guidance on accounting for a transfer of a financial asset and
a repurchase financing. This statement will become effective for the Company as
of January 1, 2009, and is not expected to result in additional disclosures nor
expected to have a material effect on the Company’s results of operations or
financial condition.
  In
February 2008, the FASB issued FASB Staff Position No. FAS 157-1, Application of
FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13. This staff position amends
FASB Statement No. 157, Fair Value Measurements, to exclude FASB Statement No.
13, Accounting for Leases, and other accounting pronouncements that address fair
value measurements for purposes of lease classification or measurement under
Statement 13. This statement is not expected to have a material effect on the
Company’s results of operations or financial condition.
  Cautionary
Factors That May Affect Future Results
  This Form
10-KSB 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.
  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. One should carefully evaluate such statements in light of factors
described in the Company’s filings with the SEC, especially on Forms 10-KSB,
10-QSB and 8-K. In various filings the Company has identified important factors
that could cause actual results to differ from expected or historic results. The
Company notes these factors for investors as permitted by the Private Securities
Litigation Reform Act of 1995. One 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
      7.
              Financial
      Statements and Supplementary Data
  The
following financial statements are filed as a part of this report:
  ·
              Report
      of Independent Registered Public Accounting
  Firms
  ·
              Consolidated
      Financial Statements
  ·
              Balance
      Sheet
  ·
              Statements
      of Operations  ·
                Consolidated
      Statements of Series B Preferred Stock and Stockholders’ Equity
      (Deficit)
  ·
                Consolidated
      Statements of Cash Flows
  ·
                Notes
      to the Consolidated Financial
Statements  29
   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 sheet of WaferGen Bio-systems,
Inc. (a development stage company) (the "Company") as of December 31,
2007, and the related consolidated statements of operations, Series B preferred
stock and stockholders’ equity (deficit), and cash flows for each of the
years in the two year period ended December 31, 2007 and for the
period from October 22, 2002 (inception) to December 31, 2007. 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 has determined that it 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, 2007, and the results of their operations and their cash flows
for each of the years in the two year period ended December
31, 2007 and from October 22, 2002 (inception) to December 31, 2007,
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 28, 2008
 30
 WAFERGEN BIO-SYSTEMS, INC.
 (A
Development Stage Company)
  Consolidated
Balance Sheet
  
 December
      31,2007AssetsCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    5,189,858Accounts
      receivables
                    
                    
                    139,827Inventories
                    
                    
                    62,521Prepaid
      expenses and other current assets
                    
                    
                    87,487Total
      current assets
                    
                    
                    5,479,693Property
      and equipment, net
                    
                    
                    321,159Other
      assets
                    
                    
                    54,016Total
      assets
                    
                    $
                    5,854,868Liabilities,
      Series B Preferred Stock, and Stockholders’Equity
      (Deficit)Current
      liabilities:Accounts
      payable
                    
                    $
                    560,641Accrued
      rent
                    
                    
                    19,340Accrued
      payroll
                    
                    
                    414,519Accrued
      vacation
                    
                    
                    156,234Current
      portion of capital lease obligations
                    
                    
                    32,443Total
      current liabilities
                    
                    
                    1,183,177Capital
      lease obligations, net of current portion
                    
                    
                    73,451Commitment
      and contingencies
                    
                    
                    —Stockholders’
      equity (deficit):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; 23,217,846
      shares issued and outstanding at December 31, 2007
                    
                    
                    23,218Additional paid-in capital
                    
                    
                    16,527,929Accumulated deficit
                    
                    
                    (11,952,907
                    )Total
      stockholders’ equity (deficit)
                    
                    
                    4,598,240Total
      liabilities, Series B Preferred Stock, and stockholders’ equity
      (deficit)
                    
                    $
                    5,854,868
  The
accompany notes are an integral part of these consolidated financial
statements.
 31
  WAFERGEN
BIO-SYSTEMS, INC.
 (A
Development Stage Company)
  Consolidated
Statements of Operations
  Period
      From October 22,Year
      ended
                
                
                2002
      (Inception) toDecember
      31,
                
                
                December
      31,2007
                
                
                2006
                
                
                2007Revenues
                
                $
                228,973
                
                
                $
                50,495
                
                
                $
                294,268Cost
      of sales
                
                
                79,116
                
                
                
                14,750
                
                
                
                100,866Gross margin
                
                
                149,857
                
                
                
                35,745
                
                
                
                193,402Operating
      expenses:Sales
      and marketing
                
                
                848,818
                
                
                
                152,405
                
                
                
                1,001,223Research and development
                
                
                2,429,273
                
                
                
                1,624,237
                
                
                
                6,068,128General and administrative
                
                
                2,802,938
                
                
                
                945,554
                
                
                
                4,786,974Total
      operating expenses
                
                
                6,081,029
                
                
                
                2,722,196
                
                
                
                11,856,325Operating
      loss
                
                
                (5,931,172
                )
                
                
                (2,686,451
                )
                
                
                (11,662,923
                )Other
      income and (expenses):Interest
      income
                
                
                163,047
                
                
                
                —
                
                
                
                163,047Interest
      expense
                
                
                (189,539
                )
                
                
                —
                
                
                
                (297,033
                )Total
      other income and (expenses)
                
                
                (26,492
                )
                
                
                —
                
                
                
                (133,986
                )Net
      loss before provision for income taxes
                
                
                (5,957,664
                )
                
                
                (2,686,451
                )
                
                
                (11,796,909
                )Provision
      for income taxes
                
                
                —
                
                
                
                —
                
                
                
                —Net
      loss
                
                
                (5,957,664
                )
                
                
                (2,686,451
                )
                
                
                (11,796,909
                )Accretion
      on Series B Preferred Stock
                
                
                (51,998
                )
                
                
                (104,000
                )
                
                
                (155,998
                )Net
      loss applicable to common stockholders
                
                $
                (6,009,662
                )
                
                $
                (2,790,451
                )
                
                $
                (11,952,907
                )Net
      loss per share - basic and diluted
                
                $
                (0.40
                )
                
                $
                (0.81
                )Shares
      used to compute net loss per share - basic and diluted
                
                $
                15,119,255
                
                
                $
                3,448,260
  The
accompany notes are an integral part of these consolidated financial
statements.
 32
 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.
   33
  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.
   34
  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
  The
accompany notes are an integral part of these consolidated financial
statements.
   35
  WAFERGEN
BIO-SYSTEMS, INC.
 (A
Development Stage Company)
  Consolidated
Statements of Cash Flows
  Period
      FromOctober
      22, 2002Year
      ended
                
                
                (Inception)
      toDecember
      31,
                
                
                December
      31,2007
                
                
                2006
                
                
                2007Cash
      flows from operating activities:Net loss
                
                $
                (5,957,664
                )
                
                $
                (2,686,451
                )
                
                $
                (11,796,909
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                
                
                58,653
                
                
                
                23,581
                
                
                
                126,299Non
      cash miscellaneous income
                
                
                (5
                )
                
                
                —
                
                
                
                (5
                )Stock-based
      compensation
                
                
                648,988
                
                
                
                642,076
                
                
                
                1,300,881Issuance
      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
                
                
                (105,398
                )
                
                
                (34,429
                )
                
                
                (139,827
                )Inventories
                
                
                (62,521
                )
                
                
                —
                
                
                
                (62,521
                )Prepaid
      expenses and other current assets
                
                
                (76,431
                )
                
                
                2,384
                
                
                
                (87,487
                )Other
      assets
                
                
                —
                
                
                
                —
                
                
                
                (2,570
                )Accounts
      payable
                
                
                167,453
                
                
                
                145,198
                
                
                
                560,641Accrued
      rent
                
                
                19,340
                
                
                
                —
                
                
                
                19,340Accrued
      payroll
                
                
                264,519
                
                
                
                150,000
                
                
                
                414,519Accrued
      vacation
                
                
                134,838
                
                
                
                2,488
                
                
                
                156,234Net
      cash used in operating activities
                
                
                (4,737,175
                )
                
                
                (1,755,153
                )
                
                
                (9,182,858
                )Cash
      flows from investing activities:Deposit
      on Equipment of property and equipment
                
                
                (51,446
                )
                
                
                —
                
                
                
                (51,446
                )Purchase
      of property and equipment
                
                
                (204,777
                )
                
                
                —
                
                
                
                (322,682
                )Net
      cash used in investing activities
                
                
                (256,223
                )
                
                
                —
                
                
                
                (374,128
                )Cash
      flows from financing activities:Advances from (repayments to) related party, net
                
                
                —
                
                
                
                37,519
                
                
                
                61,588Repayment of capital lease obligations
                
                
                (18,882
                )
                
                
                —
                
                
                
                (18,882
                )Proceeds from issuance of notes payable
                
                
                688,412
                
                
                
                —
                
                
                
                3,665,991Repayments 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
                
                
                —
                
                
                
                1,559,942
                
                
                
                1,559,942Proceeds from issuance of Common Stock, net of offering
    costs
                
                
                9,921,531
                
                
                
                7
                
                
                
                9,922,168Net
      cash provided by financing activities
                
                
                10,147,098
                
                
                
                1,597,468
                
                
                
                14,746,844Net
      increase in cash
                
                
                5,153,700
                
                
                
                (157,685
                )
                
                
                5,189,858Cash
      and cash equivalents at beginning of the period
                
                
                36,158
                
                
                
                193,843
                
                
                
                —Cash
      and cash equivalents at end of the period
                
                $
                5,189,858
                
                
                $
                36,158
                
                
                $
                5,189,858
  The
accompany notes are an integral part of these consolidated financial
statements.
  36
  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 the name was changed to La Burbuja Café, Inc. On January 1, 2007 the
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 have filed, within 120 days of the initial closing date of the
offering, 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 became effective on
January18, 2008.
  37
 WAFERGEN BIO-SYSTEMS, INC.
 (A
Development Stage Company)
 Notes to the Consolidated
Financial Statements
 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,
merge or consolidation. These warrants also provide the holders with
weighted-average anti-dilution price protection.
  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.
  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.
  38
 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 wholly-owned
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.
  FairValue 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 $100,000. Accounts are secured by the Federal Deposit Insurance
Corporation up to $100,000.
  The Company
generally requires no collateral from its customers. At
December 31, 2007, three customers accounted for 32%, 32%, and 15% of
accounts receivable. For the year ended December 31,2007, three customers
accounted for 20%, 20% and 11%  of total revenues. For the year ended
December 31, 2006, three customers accounted for 70%, 20%, and
10%.
  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, 2007 is fully
collectible.
  39
  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, generally three 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 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, “Revenues 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 customer is reasonable assured. Revenue from the
sale of product is recognized when title passes to the customer. Sales are
recorded net of estimated cash discount.
  Expense
Recognition.Expenses are charged to
expense as incurred.
  Stock-BasedCompensation.
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.
  40
 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
      31,2007
                
                
                2006Weighted-average
      grant date fair value
                
                $
                0.51
                
                
                $
                1.23Risk
      free interest rate
                
                
                4.26%-4.85
                %
                
                
                4.57%-5.07
                %Expected
      lives
                
                5
      Years
                
                
                5
      YearsExpected
      volatility
                
                
                19%-21
                %
                
                
                21
                %Dividend
      yields
                
                
                0
                %
                
                
                0
                %
 
 Amounts
expensed were $648,988 and $642,076 for the years ended December 31, 2007 and
2006 and $1,300,881 for the period from inception to December 31,
2007.
  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. The average daily price volatility of the Small Cap Medical Equipment
was used for the retrospective period corresponding to the expected life. 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.
  Comprehensive
Loss.The
Company has no components of comprehensive income (loss) other than its net loss
and, accordingly, comprehensive loss is the same as the net loss for all periods
presented.
  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.
   41
 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, 2007 and 2006:
 December
      31,
                
                
                December
      31,2007
                
                
                2006Options issuable upon exercise of common stock options
                
                
                704,952
                
                
                
                399,844Shares issuable upon exercise of Series A preferred stock
      option
                
                
                —
                
                
                
                229,909Shares issuable upon exercise of Common Stock warrants
                
                
                37,931
                
                
                
                —Shares issuable upon conversion of preferred stock
                
                
                2,056,606
                
                
                
                4,163,396Total
                
                
                2,799,355
                
                
                
                4,793,149
  Reclassification. Certain
financial statement reclassifications have been made to the period ending
December 31, 2006 to conform to the period ending December 31,
2007.
  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. All
sales have been to customers located in the United States. All long-lived assets
are within the United States.
   Recent Accounting
Pronouncements.In June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”), which is an interpretation of FAS No. 109, “Accounting
for Income Taxes” (“FAS 109”). FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements in accordance
with FAS 109 and prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The adoption of FIN 48 did not have a
significant effect on the Company’s financial statements.
  In March
2006, the FASB issued FAS No. 156, “Accounting for Servicing of Financial
Assets-An Amendment of FASB Statement No. 140” (“FAS 156”). FAS 156 requires
that all separately recognized servicing assets and servicing liabilities be
initially measured at fair value, if practicable. The statement permits, but
does not require, the subsequent measurement of servicing assets and servicing
liabilities at fair value. FAS 156 is effective as of the beginning of the first
fiscal year that begins after September 15, 2006, with earlier adoption
permitted. The adoption of FAS 156 did not have an effect on the Company’s
financial statements.
  In
September 2006, the FASB issued FAS No. 157, “Fair Value Measurements” (“FAS
157”). FAS 157 defines fair value, establishes a framework for measuring fair
value and expands disclosure of fair value measurements. FAS 157 applies under
other accounting pronouncements that require or permit fair value measurements
and accordingly, does not require any new fair value measurements. FAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Company does not believe that the adoption of FAS 157
will have a significant effect on its financial statements.
  42
 WAFERGEN BIO-SYSTEMS, INC.
 (A
Development Stage Company)
  Notes
to the Consolidated Financial Statements
   In
September 2006, the SEC released SAB 108 “Considering the effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements” (“SAB 108”). SAB 108 addresses the process of quantifying financial
statement misstatements, such as addressing both the carryover and reversing
effects of prior year misstatements on the current year financial statements.
SAB 108 became effective for our fiscal year ended December 31, 2006. The
adoption of this statement had no impact on our financial position or results of
operations.
  In February 2007, the FASB issued FAS
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities"
(“FAS 159”). FAS 159 permits entities to choose to measure many financial assets
and financial liabilities at fair value. Unrealized gains and losses on items
for which the fair value option has been elected are reported in earnings. FAS
No. 159 is effective for fiscal years beginning after November 15, 2007. The
Company is currently assessing the impact of FAS No. 159 on its financial
position and results of operations and have not yet elected this fair value
option for any assets or liabilities.
  In
December, 2007, the FASB issued Statement 141R, “Business Combinations” (FAS
141R). FAS 141R replaces FAS 141.  FAS 141R requires the acquirer of a
business to recognize and measure the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree at fair
value.  FAS 141R applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008.  The
effective date for the Company will be January 1, 2009.  We have not
yet determined the impact of SFAS 141R related to future acquisitions, if any,
on our consolidated financial statements.
  In
February 2008, the FASB issued FASB Staff Position No. 140-3 Accounting for
Transfers of Financial Assets and Repurchase Transactions (FSP 140-3). This
position provides guidance on accounting for a transfer of a financial asset and
a repurchase financing. This statement will become effective for the Company as
of January 1, 2009, and is not expected to result in additional disclosures nor
expected to have a material effect on the Company’s results of operations or
financial condition.
  In
February 2008, the FASB issued FASB Staff Position No. FAS 157-1, Application of
FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13. This staff position amends
FASB Statement No. 157, Fair Value Measurements, to exclude FASB Statement No.
13, Accounting for Leases, and other accounting pronouncements that address fair
value measurements for purposes of lease classification or measurement under
Statement 13. This statement is not expected to have a material effect on the
Company’s results of operations or financial condition.
   NOTE 3.
              Inventories
  Inventories
consisted of the following at December 31, 2007:
  December
      31,2007Finished
      goods
                  
                  $
                  62,521Inventories
                  
                  $
                  62,521
  43
 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,
2007:
  December
      31,2007Equipment
                  
                  $
                  389,255Leasehold
      improvements
                  
                  
                  41,365Furniture
      and fixtures
                  
                  
                  16,838Total
      property and equipment
                  
                  
                  447,458Less
      accumulated depreciation and amortization
                  
                  
                  (126,299
                  )Property
      and equipment, net
                  
                  $
                  321,159
  Depreciation
and amortization expense totaled $58,653 and $23,381 for the year ended December
31, 2007 and 2006, and $126,299 for the period from inception to December 31,
2007.
  In 2007,
the Company entered into a capital lease agreement for equipment, As of December
31, 2007, equipment includes $124,776 of equipment under capital lease and
accumulated amortization of assets under capital lease was $13,441.
   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
                
                $
                —
  Interest
expense totaled $189,539 for year ended December 31, 2007, none for December 31,
2006, and $297,033 for the period from inception to December 31, 2007. Interest
expense, excluding amortization of the discount on the note payable to a
stockholder was $18,486 for the year ended 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 is being amortized and
charged to operations as interest expense over the maturity periods of the notes
payable to the stockholder.
  44
 WAFERGEN BIO-SYSTEMS, INC.
 (A
Development Stage Company)
  Notes
to the Consolidated Financial Statements
   NOTE
      6.
              Commitments
      and Contingencies
  The
Company leases its office space for use in its operations under a noncancelable
operating lease that expires in March 2010.  The Company leases some
equipment under capital leases that expire in dates through August
2011.
  Aggregate
future minimum lease obligations for certain leases in effect as of December 31,
2007 are as follows:
  Operating
      Lease
                    
                    
                    Capital
      LeasesYear ending December 31:2008
                    
                    $
                    134,664
                    
                    
                    $
                    39,9042009
                    
                    
                    141,494
                    
                    
                    
                    39,9042010
                    
                    
                    35,715
                    
                    
                    
                    31,1612011
                    
                    
                    —
                    
                    
                    
                    9,117Total
      minimum lease obligations
                    
                    $
                    311,873
                    
                    
                    
                    120,086Less
      amounts representing interest
                    
                    
                    
                    
                    
                    
                    (14,192
                    )Present
      value of future minimum lease payments
                    
                    
                    
                    
                    
                    
                    105,894Less
      current portion of capital lease obligation
                    
                    
                    
                    
                    
                    
                    (32,433
                    )Capital
      lease obligation, less current portion
                    
                    
                    
                    
                    
                    $
                    73,461
  Rent
expense totaled $138,917 and $44,200 for the years ended December 31, 2007 and
2006 and $274,125 for the period from inception to December 31,
2007.
   NOTE
      7.
              Common
      and Preferred Stock
  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.
  During
2006, the Company’s Board of Directors authorized a second amendment and
restatement of the Company’s Certificate of Incorporation. The Company’s second
amended and restated Certificate of Incorporation, authorizes the Company to
issue a total of 43,000,000 shares of stock, consisting of 26,000,000 shares of
Common Stock, 10,000,000 shares of Series A Preferred Stock and 7,000,000 shares
of Series B Preferred Stock.
  
 NOTE 8.
              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.
  45
 WAFERGEN BIO-SYSTEMS, INC.
 (A
Development Stage Company)
  Notes
to the Consolidated Financial Statements
   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.
  A summary
of stock option transactions is as follows:
  Stock
      OptionsOptions
                  
                  
                  Number
      of
                  
                  
                  WeightedAvailable
      for
                  
                  
                  Options
                  
                  
                  AverageGrant
                  
                  
                  Outstanding
                  
                  
                  Exercise
      PriceShares
      originally reserved
                  
                  
                  1,500,000
                  
                  
                  
                  —
                  
                  
                  $
                  —Granted
                  
                  
                  (510,000
                  )
                  
                  
                  510,000
                  
                  
                  
                  0.0001Forfeited
                  
                  
                  245,000
                  
                  
                  
                  (245,000
                  )
                  
                  
                  0.0001Balance
      at December 31, 2003
                  
                  
                  1,235,000
                  
                  
                  
                  265,000
                  
                  
                  
                  0.0001Granted
                  
                  
                  (185,000
                  )
                  
                  
                  185,000
                  
                  
                  
                  0.0028Forfeited
                  
                  
                  30,000
                  
                  
                  
                  (30,000
                  )
                  
                  
                  0.0001Balance
      at December 31, 2004
                  
                  
                  1,080,000
                  
                  
                  
                  420,000
                  
                  
                  
                  0.0013Granted
                  
                  
                  (120,000
                  )
                  
                  
                  120,000
                  
                  
                  
                  0.0100Balance
      at December 31, 2005
                  
                  
                  960,000
                  
                  
                  
                  540,000
                  
                  
                  
                  0.0032Additional
      shares reserved
                  
                  
                  1,000,000
                  
                  
                  
                  —
                  
                  
                  
                  —Granted
                  
                  
                  (356,000
                  )
                  
                  
                  356,000
                  
                  
                  
                  0.0800Exercised
                  
                  
                  —
                  
                  
                  
                  (70,000
                  )
                  
                  
                  0.0001Forfeited
                  
                  
                  65,000
                  
                  
                  
                  (65,000
                  )
                  
                  
                  0.0247Balance
      at December 31, 2006
                  
                  
                  1,669,000
                  
                  
                  
                  761,000
                  
                  
                  
                  0.0376Granted
                  
                  
                  (530,000
                  )
                  
                  
                  530,000
                  
                  
                  
                  0.2484Exercised
                  
                  
                  —
                  
                  
                  
                  (50,000
                  )
                  
                  
                  0.0100Forfeited
                  
                  
                  —
                  
                  
                  
                  (10,799
                  )
                  
                  
                  0.1482Exchange
      ratio adjustment
                  
                  
                  —
                  
                  
                  
                  (570,965
                  )
                  
                  
                  —Plan
      frozen
                  
                  
                  (1,139,000
                  )
                  
                  
                  —
                  
                  
                  
                  —Balance
      at December 31, 2007
                  
                  
                  —
                  
                  
                  
                  659,236
                  
                  
                  $
                  0.2399
  The number of options exercisable as of December 31, 2007 and 2006
were 623,040 and 298,146. The weighted-average exercise price for options that
are exercisable is $0.0069 and $0.0012 at December 31, 2006 and
2005.
  Upon
completion of the Merger, WaferGen Bio-systems, Inc. also 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 number of stock options outstanding
is 410,875 (761,000 times .53991522) post Merger.
  On
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, no-qualified stock options and restricted stock. The
2007 Plan shall be administered by the Company’s Board of Director.
  46
 WAFERGEN BIO-SYSTEMS, INC.
 (A
Development Stage Company)
  Notes
to the Consolidated Financial Statements
   A summary of the stock option transactions under the 2007 Plan is as
follows:
  Stock
      OptionsOptions
                  
                  Number
      of
                  
                  WeightedAvailable
      for
                  
                  Options
                  
                  AverageGrant
                  
                  Outstanding
                  
                  Exercise
      PriceShares
      originally reserved
                  
                  
                  2,000,000
                  
                  
                  
                  —
                  
                  
                  $
                  —Granted
                  
                  
                  (1,609,500
                  )
                  
                  
                  1,609,500
                  
                  
                  
                  1.80Balance
      at December 31, 2007
                  
                  
                  390,500
                  
                  
                  
                  1,609,500
                  
                  
                  $
                  1.80
  The
following table Summarizes information concerning outstanding options as of
December 31, 2007:
  Options Outstanding
                
                
                Options ExercisableNumber
                
                
                Weighted
                
                
                
                
                
                Number
                
                
                WeightedOutstanding
                
                
                Average
                
                
                Weighted
                
                
                Exercisable
                
                
                Average
                
                
                Weighted
                
                
                Agregateas
      of
                
                
                Remaining
                
                
                Average
                
                
                as
      of
                
                
                Remaining
                
                
                Average
                
                
                IntrinsicExercise
                
                
                December
                
                
                Contractual
                
                
                Exercise
                
                
                December
                
                
                Contractual
                
                
                Exercise
                
                
                ValuePrice
                
                
                
                31, 2007
                
                
                Life (in Years)
                
                
                Price
                
                
                
                31, 2007
                
                
                Life (in Years)
                
                
                Price$
                0.000152-0.000228
                
                
                
                137,678
                
                
                
                5.79
                
                
                $
                0.0002
                
                
                
                134,079
                
                
                
                5.75
                
                
                $
                0.0002
                
                
                $
                269,925$
                0.018521-0.027782
                
                
                
                64,790
                
                
                
                7.59
                
                
                
                0.0185
                
                
                
                39,144
                
                
                
                7.59
                
                
                
                0.0185
                
                
                
                72,244$
                0.148171-0.222257
                
                
                
                173,312
                
                
                
                8.57
                
                
                
                0.1482
                
                
                
                63,192
                
                
                
                8.57
                
                
                
                0.1482
                
                
                
                102,824$
                0.463036-0.694554
                
                
                
                283,456
                
                
                
                9.02
                
                
                
                0.4630
                
                
                
                269,958
                
                
                
                9.02
                
                
                
                0.4630
                
                
                
                396,019$
                1.50-2.25
                
                
                
                1,609,500
                
                
                
                9.50
                
                
                
                1.8002
                
                
                
                116,667
                
                
                
                9.43
                
                
                
                1.5827
                
                
                
                50,1672,268,736
                
                
                
                9.07
                
                
                $
                1.3287
                
                
                
                623,040
                
                
                
                8.26
                
                
                $
                0.5390
                
                
                $
                891,179
  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 105,000 shares,
56,690 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 is immediately exercisable into shares of Series A Preferred Stock at a
per share price of $0.14 and expire on any date during the earlier of (i)
calendar year 2007 and (ii) the calendar year in which a change in control has
occurred. The Company determined the fair market value of the option to be
$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, 2007. In February 2007, this option was
exercised.
  47
 WAFERGEN BIO-SYSTEMS, INC.
 (A
Development Stage Company)
  Notes
to the Consolidated Financial Statements







The
following table summarizes the Company’s unvested stock option activity for the
year ended December 31, 2007:




Number
              
              
              Weighted
      Average Grantof
              
              
              Date
      FairShares
              
              
              ValueUnvested
      at January 1, 2007
              
              
              249,902
              
              
              $
              1.81Granted
              
              
              1,895,655
              
              
              
              0.66Exercised
              
              
              (10,685
              )
              
              
              0.14Forfeited
              
              
              (10,799
              )
              
              
              1.34Vested
              
              
              (478,377
              )
              
              
              1.68Unvested
      at December 31, 2007
              
              
              1,645,696
              
              
              $
              0.54




The
aggregate intrinsic value is the total pretax intrinsic value (i.e., the
difference between the Company’s estimated stock price at December 31, 2007 and
the exercise price, multiplied by the number of in-the-money options) that would
have been received by the option holders had all the option holders exercised
their options on December 31, 2007. The aggregate intrinsic value for options
outstanding was $2,777,098 at December 31, 2007 and the aggregate intrinsic
value for options exercisable was $998,271 at December 31, 2007. The aggregate
intrinsic value for options exercised was $69,500.




The
amounts expensed for stock-based compensation totaled $648,988, $642,076 for the
year ended December 31, 2007 and 2006 and $1,300,881 for the period from
inception to December 31, 2007.




At
December 31, 2007, there was $706,569 of total stock-based compensation costs
which is expected to be recognized over an estimated weighted average
amortization period from January 2008 to October 2011. 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, 2007 is as
follows:




Exercise
                
                ExpirationSecurities
      into which warrants are convertible
                
                Shares
                
                Price
                
                DateCommon
      Stock
                
                
                115,442
                
                $
                1.41
                
                Jan.,
      Feb., and March 2012Common
      Stock
                
                
                2,402,533
                
                $
                2.25
                
                May
      and June 2012Common
      Stock
                
                
                513,926
                
                $
                2.25
                
                May
      and June 2012Total
                
                
                3,031,901


48


WAFERGEN BIO-SYSTEMS, INC.
 (A
Development Stage Company)
  Notes
to the Consolidated Financial Statements






NOTE
      9.
            Income
      Taxes




The
provision for income taxes consists of the following for the years ended
December 31, 2007 and 2006 and the period from inception to December
31, 2007:




Period
      FromOctober 22,2002(Inception)
      toDecember
      31,
            
            December
      31,
            
            December 31,2007
            
            2006
            
            2007Currently
      payable (refundable):Federal
            $
            —
            
            $
            —
            
            $
            —State
            
            —
            
            
            —
            
            
            —Total
      current
            
            —
            
            
            —
            
            
            —Deferred:Federal
            
            —
            
            
            —
            
            
            —State
            
            —
            
            
            —
            
            
            —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, 2007 and 2006 and the period from inception to December
31, 2007 is as follows:




Period
      FromOctober
      22,2002(Inception)
      toDecember
      31,
                
                December
      31,
                
                December
      31,2007
                
                2006
                
                2007Pro
      Provision for income taxes at federal statutory rate
                
                $
                (2,025,606
                )
                
                $
                (913,393
                )
                
                $
                (4,010,949
                )Federal
      research and development tax credits
                
                
                (289,179
                )
                
                
                —
                
                
                
                (289,179
                )Expenses
      not deductible
                
                
                460,507
                
                
                
                —
                
                
                
                460,507Change
      in federal valuation allowance
                
                
                1,854,278
                
                
                
                913,393
                
                
                
                3,839,621Provision
      for income taxes
                
                $
                —
                
                
                $
                —
                
                
                $
                —


49




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, 2007 and 2006 are as
follows:




December
      31,
                
                
                December
      31,2007
                
                
                2006Deferred
      tax assets:Net
      operating loss carryforwards
                
                $
                3,225,483
                
                
                $
                —Capitalized
      start-up cost and research and development cost
                
                
                1,046,170
                
                
                
                2,148,836Stock-based
      compensation
                
                
                —
                
                
                
                279,271Research
      and development tax credit
                
                
                582,982
                
                
                
                —depreciation
      on property and equipment
                
                
                21,770
                
                
                
                —Accruals
                
                
                179,921
                
                
                
                73,426Total
      deferred tax asset
                
                
                5,056,326
                
                
                
                2,501,533Valuation
      allowance
                
                
                (5,056,326
                )
                
                
                (2,501,533
                )Net
      deferred tax assets
                
                $
                —
                
                
                $
                —


Deferred
income were provided for the following items for the years ended December 31,
2007 and 2006 and the period from inception to December 31, 2007:




Period
      FromOctober
      22,2002(Inception)
      toDecember
      31,
                
                
                December
      31,
                
                
                December
      31,2007
                
                
                2006
                
                
                2007Deferred
      tax assets:Net
      operating loss carryforwards
                
                $
                3,225,483
                
                
                $
                —
                
                
                $
                3,225,483Capitalized
      start-up cost and research and development cost
                
                
                (1,102,666
                )
                
                
                810,485
                
                
                
                1,046,170Stock-based
      compensation
                
                
                (279,271
                )
                
                
                275,065
                
                
                
                —Research
      and development tax credit
                
                
                582,982
                
                
                
                —
                
                
                
                582,982depreciation
      on property and equipment
                
                
                21,770
                
                
                
                —
                
                
                
                21,770Accruals
                
                
                106,495
                
                
                
                65,326
                
                
                
                179,921Valuation
      allowance
                
                
                (2,554,793
                )
                
                
                (1,150,876
                )
                
                
                (5,056,326
                )Net
      deferred income taxes
                
                $
                —
                
                
                $
                —
                
                
                $
                —


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, 2007 the Company had federal and state net operating loss
carryforwards of approximately $7,525,000. The federal and state net operating
loss carryforwards will expire in various periods through 2027.




At
December 31, 2007, the Company had federal and state research and development
tax credits of approximately $300,000. The federal research and development tax
credits will expire in various periods through 2027 and the California state
research and development tax credit can be carried forward
indefinitely.




50


WAFERGEN BIO-SYSTEMS, INC.
 (A
Development Stage Company)
 Notes to the Consolidated
Financial Statements


Utilization
of net operating loss carryforwards 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.




NOTE 10.
              Related
      Party Transactions
  During
the year ended December 31, 2007, a shareholder converted $61,588 of accounts
payable to a note payable.
  NOTE 11.
              Cash
      Flow Information
  Cash paid
during the years ended December 31, 2007 and 2006 and the period from inception
to December 31, 2007 is as follows:




Period
      FromOctober 22,2002(Inception)
      toDecember
      31,
            
            December
      31,
            
            December 31,2007
            
            2006
            
            2007Interest
            $
            18,486
            
            $
            —
            
            $
            18,486Income
      taxes
            $
            —
            
            $
            —
            
            $
            —


51


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, 2007 and 2006 and the period from inception to December
31, 2007 is as follows:




Year
      ended
                December
      31,
              
              
              Period
      From
                October
      22,2002
                (Inception)
      to
                December
      31,2007
              
              
              
              2006
              
              
              
              2007Accretions
      on Series B Preferred Stock
              
              $
              51,998
              
              
              $
              104,000
              
              
              $
              155,998Conversion
      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
              
              $
              —
              
              
              $
              —
              
              
              $
              2,977,579Property
      and equipment acquired with capital leases
              
              $
              124,776
              
              
              $
              —
              
              
              $
              124,776




Note
      12.
            Subsequent
      Events




On February 26, 2008, the
Company and Terry W. Osborn, the Company’s former chief operating officer of the
Company, mutually agreed to terminate the employment of Mr. Osborn effective as
of February 26, 2008.   In connection with the termination of Mr.
Osborn’s employment, the Company and Mr. Osborn entered into a mutual separation
agreement.  Pursuant to the terms of the agreement, Mr. Osborn will
receive severance in the amount of approximately $17,000.  In
addition, the Company will accelerate the vesting of (1) options to purchase
27,536 shares previously granted to Mr. Osborn with an exercise price of
$0.14817 per share, and (2) options to purchase 37,500 shares previously granted
to Mr. Osborn with an exercise price of $2.25 per share.  The parties
also have released each other from certain claims they may have against each
other.




On
January 24, 2008, the Company announced the formal opening of its new,
state-of-the-art subsidiary in Kulim Hi-Tech Park, Kedah, Malaysia. With the
opening, the subsidiary, WaferGen Biosystems (M) Sdn. Bhd., will launch various
initiatives to support a number of WaferGen's ongoing SmartChipTM Real-Time PCR
System development and commercialization goals. Most critically, this new
organization will oversee several research and development activities related to
the SmartChipTM Real-Time PCR System, pursue and establish valuable research and
development collaborations with local universities and government-run research
centers, and coordinate production of the SmartChipTM system with WaferGen's
Malaysia-based contract manufacturer.









52


WAFERGEN BIO-SYSTEMS, INC.
 (A
Development Stage Company)
  13.
              Quarterly
      Financial Data  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
                  )Accretuion
      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
                  )Sahres
      used to compute net loss per share - basic and diluted
                  
                  
                  3,629,129
                  
                  
                  
                  10,107,941
                  
                  
                  
                  23,217,846
                  
                  
                  
                  23,217,846
  Year
      ended December 31, 2006First
                    
                    
                    Second
                    
                    
                    Third
                    
                    
                    FourthRevenues
                    
                    $
                    10,000
                    
                    
                    $
                    —
                    
                    
                    $
                    31,500
                    
                    
                    $
                    4,995Cost
      of sales
                    
                    
                    3,000
                    
                    
                    
                    —
                    
                    
                    
                    9,390
                    
                    
                    
                    2,360Gross
      margin
                    
                    
                    7,000
                    
                    
                    
                    —
                    
                    
                    
                    22,110
                    
                    
                    
                    2,635Operating
      expenses:Sales
      and marketing
                    
                    
                    30,844
                    
                    
                    
                    43,929
                    
                    
                    
                    38,632
                    
                    
                    
                    39,000Research
      and development
                    
                    
                    231,327
                    
                    
                    
                    287,983
                    
                    
                    
                    231,793
                    
                    
                    
                    873,134General
      and administrative
                    
                    
                    123,374
                    
                    
                    
                    156,194
                    
                    
                    
                    115,896
                    
                    
                    
                    550,090Total
      operating expenses
                    
                    
                    385,545
                    
                    
                    
                    488,106
                    
                    
                    
                    386,321
                    
                    
                    
                    1,462,224Operating
      loss
                    
                    
                    (378,545
                    )
                    
                    
                    (488,106
                    )
                    
                    
                    (364,211
                    )
                    
                    
                    (1,459,589
                    )Other
      income and (expenses):Interest
      income
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Interest
      expense
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Total
      other income and (expenses)
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Net
      loss before provision for income taxes
                    
                    
                    (378,545
                    )
                    
                    
                    (488,106
                    )
                    
                    
                    (364,211
                    )
                    
                    
                    (1,459,589
                    )Provision
      for income taxes
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Net
      loss
                    
                    
                    (378,545
                    )
                    
                    
                    (488,106
                    )
                    
                    
                    (364,211
                    )
                    
                    
                    (1,459,589
                    )Accretuion
      on Series B Preferred Stock
                    
                    
                    (26,000
                    )
                    
                    
                    (26,000
                    )
                    
                    
                    (26,000
                    )
                    
                    
                    (26,000
                    )Net loss applicable to common stockholders
                    
                    $
                    (404,545
                    )
                    
                    $
                    (514,106
                    )
                    
                    $
                    (390,211
                    )
                    
                    $
                    (1,485,589
                    )Net
      loss per share - basic and diluted
                    
                    $
                    (0.11
                    )
                    
                    $
                    (0.15
                    )
                    
                    $
                    (0.11
                    )
                    
                    $
                    (0.43
                    )Sahres
      used to compute net loss per share - basic and diluted
                    
                    
                    3,535,672
                    
                    
                    
                    3,431,146
                    
                    
                    
                    3,463,072
                    
                    
                    
                    3,488,932
 53


Item
      8.
            Changes
      In and Disagreements with Accountants on Accounting and Financial
      Disclosure.




None.




Item
      8A.
            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) of the Exchange Act. Our disclosure
controls and procedures are designed to ensure that information required to be
disclosed in the report we file or submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in the
SEC’s forms, and that such information is accumulated and communicated to our
management including our Chief Executive Officer and Chief Financial Officer, 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, 2007, the Company’s
disclosure controls and procedures were not effective.




Management’s
Report on Internal Control Over Financial Reporting




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange
Act.  Internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements in accordance with 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, 2007. 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, 2007:




1.
            The Company
      has not established adequate financial reporting monitoring activities to
      mitigate the risk of management override,
  specifically:




a.
            Delegation
      of authority has not been formally
documented;




b.
            Insufficient
      oversight of accounting principle implementation;
  and




c.
            Insufficient
      oversight of external audit
functions;




2.
            There
      is a strong reliance on the external auditors to review and adjust the
      annual and quarterly financial statements, to monitor new accounting
      principles, and to ensure compliance with GAAP and SEC disclosure
      requirements;




3.
            There is a strong reliance on the
      external attorneys to review and edit the annual and quarterly filings and
      to ensure compliance with SEC disclosure requirements;
      and  54




4.
            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 weaknesses noted above, management has concluded that we did not
maintain effective internal control over financial reporting as of December 31,
2007, 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.
            Our
      Chief Executive Officer and our Chief Financial Officer will prepare a
      formal documentation of delegation policy that will be reviewed and
      approved by the Board;




2.
            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;




3.
            The
      Company will conduct a review of existing sign-off and review procedures
      as well as document control protocols for critical accounting
      spreadsheets.  The Company will also increase management’s
      review of key financial documents and records;
  and




4.
            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.  However, Company management
      does review, and will increase the review of, financial statements on a
      monthly basis, and the Company’s external auditor conducts reviews on a
      quarterly basis.  These actions, in addition to the improvements
      identified above, will minimize any risk of a potential material
      misstatement occurring.




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 the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to 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




There
were no changes in our internal control over financial reporting during the
fourth quarter ended December 31, 2007 that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.




Item
      8B.
            Other
      Information.




None.


55


PART
III




Item
      9.
            Directors,
      Executive Officers, Promoters and Control Persons; Compliance with Section
      16(a) of the Exchange Act




Information
with respect to this item is incorporated by reference from our definitive proxy
statement (or amendment to this Annual Report on Form 10-KSB) to be filed with
the Commission within 120 days of the end of the fiscal year ended December
31, 2007.




Item
      10.
            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-KSB) to be filed with
the Commission within 120 days of the end of the fiscal year ended December 31,
2007.




Item 11.
            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-KSB) to be filed with
the Commission within 120 days of the end of the fiscal year ended December 31,
2007.




Item
      12.
            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-KSB) to be filed with
the Commission within 120 days of the end of the fiscal year ended December 31,
2007.




Item 13.
            Exhibits




Information
with respect to this item is incorporated by reference from our definitive proxy
statement (or amendment to this Annual Report on Form 10-KSB) to be filed with
the Commission within 120 days of the end of the fiscal year ended December 31,
2007.




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-KSB) to be filed with
the Commission within 120 days of the end of the fiscal year ended December 31,
2007.




56





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 31, 2008
            
            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
      31, 2008/s/  AMJAD
      HUDAAmjad
      Huda
            
            Chief
      Financial Officer (Principal Financial Officer) and
      Director
            
            March
      31, 2008/s/ VICTOR
      JOSEPHVictor
      Joseph
            
            Chief
      Technology Office and Director
            
            March
      31, 2008/s/  DR.
      R. DEAN HAUTAMAKIDr.
      R. Dean Hautamaki
            
            Director
            
            March
      31, 2008/s/  JOEL
      KANTERJoel
      Kanter
            
            Director
            
            March
      31, 2008/s/  MAKOTO
      KANESHIROMakoto
      Kaneshiro
            
            Director
            
            March
      31, 2008


57




EXHIBIT
INDEX




Exhibit No.
            Description2.1
      (1)
            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
      (1)
            Certificate
      of Merger, dated as of May 31, 2007, of Wafergen Acquisition Corp. with
      and into WaferGen, Inc.3.1
      (2)
            Certificate
      of Incorporation of WBSI3.2
      (3)
            Certificate
      of Amendment to Certificate of Incorporation of WBSI, changing name to
      WaferGen Bio-Systems, Inc. and increasing the authorized
      capital3.3
      (4)
            Bylaws
      of WBSI10.1
      (1)*
            WaferGen
      Bio-Systems, Inc. 2007 Stock Option Plan10.2
      (1)
            Note
      and Warrant Purchase Agreement between WaferGen, Inc. and Alnoor Shivji,
      dated as of January 30, 200710.3
      (1)
            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, 2007,10.4
      (1)
            Form
      of Warrants, made as of January 30, 2007, to purchase up to an aggregate
      of 86,182 shares of WaferGen’s Series B Preferred Stock10.5
      (1)
            Amendment,
      dated February 28, 2007, to Note and Warrant Purchase Agreement, dated
      January 30, 200710.6
      (1)
            7%
      Promissory Note, dated February 28, 2007, in the principal amount of
      $138,000, issued pursuant to the Note and Warrant Purchase Agreement,
      dated January 30, 2007, as amended10.7
      (1)
            Warrant,
      made as of February 28, 2007, to purchase up to 45,395 shares of
      WaferGen’s Series B Preferred Stock, issued pursuant to the Note and
      Warrant Purchase Agreement, dated January 30, 2007, as
    amended10.8
      (1)
            Second
      Amendment, dated March 30, 2007, to Note and Warrant Purchase Agreement,
      dated January 30, 200710.9
      (1)
            7%
      Promissory Note, dated March 30, 2007, in the principal amount of
      $250,000, issued pursuant to the Note and Warrant Purchase Agreement,
      dated January 30, 2007, as amended10.10
      (1)
            Warrant,
      made as of March 30, 2007, to purchase up to 82,237 shares of WaferGen’s
      Series B Preferred Stock, issued pursuant to the Note and Warrant Purchase
      Agreement, dated January 30, 2007, as amended10.11
      (1)
            Form
      of Allonge to Promissory Notes, dated as of March 31,
  200710.12
      (1)
            Third
      Amendment, dated May 14, 2007, to Note and Warrant Purchase Agreement,
      dated January 30, 200710.13
      (1)
            7%
      Promissory Note, dated May 14, 2007, in the principal amount of $100,000,
      issued pursuant to the Note and Warrant Purchase Agreement, dated January
      30, 2007, as amended10.14
      (1)
            Form
      of Second Allonge to Promissory Notes, dated as of May 14,
      200710.15
      (1)
            Letter
      from Matthew Markin dated as of May 31, 2007, resigning as a director and
      officer of WBSI and its direct and indirect
subsidiaries10.16
      (1)
            Letter
      from Maria Maribel Jaramillo De La O dated as of May 31, 2007, resigning
      as a director and officer of WBSI and its direct and indirect
      subsidiaries10.17
      (1)
            Placement
      Agency Agreement dated April 12, 2007, between WaferGen, Inc. and Rodman
      & Renshaw, LLC10.18
      (1)
            Form
      of Lockup Agreement10.19
      (1)
            Form
      of Subscription Agreement10.20
      (1)
            Form
      of Registration Rights Agreement10.21
      (1)
            Form
      of Warrants issued to investors in a private placement the initial closing
      of which was held on May 31, 200710.22
      (1)
            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
      (1)
            Escrow
      Agreement, dated as of May 31, 2007, among WBSI, Alnoor Shivji and
      Gottbetter & Partners, LLP, as Escrow Agent10.24
      (1)
            Split-Off
      Agreement, dated as of May 31, 2007, between WBSI, WaferGen, Inc., La
      Burbuja Leaseco, Inc. and Maria Maribel Jaramillo de La
  O




58




10.25
      (1)
            General
      Release Agreement, dated as of May 31, 2007, among WBSI, Maria Maribel
      Jaramillo De La O, La Burbuja Leaseco, Inc. and WaferGen,
    Inc.10.26
      (1)*
            Employment
      Agreement dated May 31, 2007, between WBSI and Alnoor
    Shivji10.27
      (1)*
            Employment
      Agreement dated May 31, 2007, between WBSI and Amjad
  Huda10.28
      (1)*
            Employment
      Agreement dated May 31, 2007, between WBSI and Victor
    Joseph10.29
            Mutual
      Separation Agreement, dated February 26, 2008, between the Company and
      Terry Osborn10.30
            Code
      of Business Conduct and Ethics21.1
            Subsidiaries23.1
            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 Officer32.2
            Section 1350
      Certification of Chief Financial
Officer





(1) Incorporated
herein by reference to the identically numbered Exhibit to the Company’s current
Report on Form 8-K filed on June 5, 2007.




(2) 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.




(3) Incorporated
herein by reference to Exhibit 3.1 to the Company’s current Report on Form 8-K
filed with the Commission January 31, 2007.




(4) 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.







*
                Indicates a
      management contract or compensatory plan or
  arrangement.


59