WaferGen Bio-systems' (WGBS) CEO Rollie Carlson on Q2 2016 Results - Earnings Call Transcript

| About: WaferGen Bio-Systems, (WGBS)

WaferGen Bio-systems, Inc. (NASDAQ:WGBS)

Q2 2016 Earnings Conference Call

August 9, 2016 5:00 PM ET

Executives

Mike Henighan – Chief Financial Officer

Rollie Carlson – President and Chief Executive Officer

Analysts

Jeffrey Cohen – Ladenburg Thalmann

William Blake – Investor

Operator

Greeting and welcome to the WaferGen Bio-systems’ Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Mike Henighan, Chief Financial Officer for WaferGen Bio-systems. Thank you. You may begin.

Mike Henighan

Thank you and good afternoon. This is Michael Henighan, WaferGen’s CFO. Welcome to the WaferGen Bio-systems second quarter 2016 Financial Results Conference Call. Joining me on the call today is Dr. Rollie Carlson, WaferGen’s President and CEO. Before we get underway, I’d like to ask everyone to take note of our Safe Harbor paragraph that appears at the end of the press release issued this afternoon covering the company’s financial results.

This paragraph states that for any forward-looking statements that we may speak of are only as of today’s date August 9, 2016 are subject to inherent risks and uncertainties including those described in our SEC filings and should not be unduly relied upon, except as otherwise required by federal security laws, the company disclaims any obligation or undertaking to publicly release any updates or revisions to forward-looking statements contain herein or elsewhere to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.

Now I’d like to turn the call over to Dr. Carlson. Rollie, go ahead please.

Rollie Carlson

Thank you, Mike. Good afternoon and thank you everyone for joining the call. Today, I’ll take you through our recent accomplishments. And following my remarks Mike Henighan will discuss our financial results for the quarter ended June 30, 2016. Of course, the most significant event in the second quarter was our announcement of our merger agreement with Takara Bio USA Holdings Inc.

The merger is significant as it will couple WaferGen’s high throughput isolated single system, but Takara Bio smarter RNA-Seq single cell reagents. For customers in our industry, Takara Bio’s Clontech division is widely known as having first-in-class reagents for single cell analysis. The merger will also significantly expand both companies’ offerings in the fast growing single cell and immuno-sequencing markets, and give customers greater access to these products through a broader global and commercial reach.

WaferGen’s SmartChip PCR and Apollo platforms are also highly complementary to Takara Bio’s PCR and enzyme molecular biology reagent portfolio. And a combination presents new opportunities in genetic analysis including the clinical and applied markets. I’m confident that through this merger, we will submit a leadership position in the genomics research market and our combined solutions will accelerate breakthrough scientific and medical discoveries worldwide.

The merger is subject to receipt of shareholder approval. While details of the merger agreement can be found on SEC’s website at www.sec.gov, let me summarize the main elements of the proposed transaction. WaferGen stockholders will receive cash in exchange for their shares of WaferGen stock and the Takara Bio subsidiary will merge into WaferGen with WaferGen’s surviving the merger as a wholly-owned subsidiary of Takara Bio.

The aggregate amount to be paid by Takara Bio will be equal to a revenue multiple amount minus certain potential adjustments. Because the amount to repay to shareholders will depend on WaferGen’s 2016 revenue, we will not be able to determine an exact price until the fiscal 2016 audit has been completed. The revenue multiple amount will be equal to WaferGen’s consolidated 2016 revenues multiplied by two times if revenues are less than $6 million to 2.5 times if revenues are equal to or greater than $6 million or less than $9 million or 3.5 times if revenues are equal to or greater than $9 million. The revenue multiple amount is capped at $50 million.

Concurrently with the execution of the merger agreement WaferGen and Takara Bio entered into a deposit agreement that provides for two $2.5 million payments to be made by Takara Bio to WaferGen following receipt shareholder approval of the merger agreement. These funds are expected to be used to satisfy WaferGen’s liquidity requirements through the completion of the merger. Any amounts paid by Takara Bio to WaferGen under the deposit agreement, but have not been returned to Takara Bio will be deducted from the aggregate consideration.

The merger agreement provides for a variety of other potential reductions to the aggregate consideration, including the amount of any transaction fees paid by Takara Bio on behalf of WaferGen. Approval of the merger agreement by WaferGen’s stockholders is required in order for WaferGen and Takara Bio to consummate the merger. WaferGen intends to solicit its stockholders’ proxies to vote on the merger agreement at a special meeting of stockholders.

In connection with the solicitation WaferGen intends to distribute proxy materials including filing proxy statement with SEC. Stockholders are urged to read the proxy statement carefully and when it becomes available as it will contain some important information about the merger. Copies of documents filed by WaferGen with the SEC maybe obtained free of charge at the SEC’s website at www.sec.gov.

We are truly excited about the prospect of the merger with Takara Bio, which will broaden the market access to WaferGen’s products. Fortuitously as we were in a process of seeking new distribution representation in Japan at the time of our merger discussions, we were able to jumpstart our partnership by entering into an exclusive distribution agreement in Japan with Takara Bio. The agreement is for promotion and the technical support of the ICELL8 Single-Cell System, our SmartChip Real-Time PCR system, our SmartChip Target Enrichment System, and the Apollo DNA RNA library prep system. We believe Takara Bio will rapidly accelerate adoption of our clinical research products in the ICELL8 Single-Cell System in Japan.

Now, let’s take a closer look at our performance in the second quarter of 2016 and our outlook for the remainder of the year. The second quarter set another new record for WaferGen with revenue of $2.5 million surpassing the $2.4 million we achieved in the fourth quarter of 2015. This represents 56% growth over second quarter of 2015 and 30% growth over the first quarter of 2016. While our core focus continues to be the market penetration of the ICELL8 Single-Cell System, our base business also performed well.

In the second quarter of 2016, we placed four ICELL8 systems. Of note, one of these was placed at the prestigious Max Planck Institute for Heart and Lung Research in Germany and another with National Jewish Health, which is the leading respiratory hospital in the United States that offers treatment and research for a variety of pulmonary and cardiac related disorders. Those of you who have followed WaferGen closely over part of National Jewish Health was one of our four early access collaborators. And we’re pleased that Dr. Max Seibold, who is performing a transcriptome sequencing study on human airway epithelial cells has purchased the ICELL8 system for his laboratory.

During the quarter, we continued to expand protection of WaferGen’s innovations with a new U.S. patent allowance for both method and system claims to process genetic material from Multi-Well Arrays. This allows significantly strengthened the claim of our core family of patents, which support WaferGen’s SmartChip and ICELL8 Single-Cell products and applications. It enabled the ability to uniquely extract discrete reactions performed in the nanowells. This step is a key differentiator, which makes WaferGen’s technology very cost-effective and user-friendly by allowing the reactions from thousands of individual nanowells to be processed in a single tube.

With the allowance of this application, WaferGen now owns five total issued patents and two allowed applications that cover multiple key attributes of the company’s SmartChip technology. As we look towards the remainder of 2016, WaferGen is well positioned to continue meaningful sales growth. Based up on the feedback we are receiving from potential customers, leading pharmaceutical companies and academic institutions, the demand for our ICELL8 Single-Cell System remains strong, although the sales cycle is taking larger than we originally envisioned.

Based upon our strong performance in the second quarter as well as the continued contributions from our base business, we are revising our full year 2016 revenues from $12 million to $13 million to now be in the range of $10 million to $12 million. As a reminder, this represents an increase of between 39% and 57% growth over a full-year 2017 total revenues. Importantly, we ended the second quarter with $7.4 million in cash and continue to believe that our cash runway extends into 2017.

I’ll now hand the call over to Mike for a more detailed review of our financial results for the three and six months ended June 30, 2016. Mike?

Mike Henighan

Thank you, Rollie. Before we begin the financial review, I would like to let everyone know that NASDAQ granted us an extension to December 19, 2016 to reach the minimum bid standard. Now let’s start with the second quarter results discussion. For the three months ended June 30, 2016, total revenue comprising of products and services only increased 56% or $907,000 to $2.5 million compared to the three months ended June 30, 2015, which included $125,000 of license and royalty revenue. The increase in revenue was primarily due to our SmartChip product line, which increased $833,000 or 97% over the prior year.

In aggregate, our SmartChip products represented 67% of the revenue in the three months ended June 30, 2016 compared to 53% in the comparable 2015 period. SmartChip capital equipment revenue in the three months ended June 30, 2016 improved 305% from the comparable 2015 period and revenue from SmartChip panels, consumable and services was up 28% from the comparable 2015 period. These were offset by the absence of license and royalty revenue, the related agreement having terminated at the end of January 2016. Apollo revenue was up 10% or $74,000 for the three months ended June 30, 2016 compared to the prior year. Even though revenues increased year-over-year Apollo products contribution declined to 33% of total revenue compared to 47% in 2015.

Gross profit was $1.1 million in the second quarter of 2016, up 20% from $934,000 in the second quarter of 2015. Gross margin on product sales decreased to 44% in the second quarter of 2016, compared to 54% in the second quarter of 2015. This was due to a shift and product to systems another items, which have a lower gross margin as compared to the mix of products in the same quarter of 2015.

Additionally, we have begun selling more products through distributors, which affords a lower gross margin than direct sales. Total operating expenses in the second quarter of 2016 were $5.9 million, up $1.1 million or 23% as compared to $4.8 million in the 2015 quarter. This is comprised primarily of $599,000 increase or 49%. In sales and marketing costs related to increased staffing, which resulted in higher wage and related costs and facility costs.

Additionally, G&A expenses increased $401,000 or 32% related to legal and professional fees incurred as part of our proposed merger and higher stock compensation costs. R&D cost increased by $111,000 or 5% due to increased personnel and facility costs. Our net loss for the June 2016 quarter was $4.9 million compared to a net loss of $3.8 million in June 2015 quarter. The increase in net loss was attributed to higher spending for personnel costs, merger cost and the cost of relocating our headquarters.

Now let’s discuss the six months ending June 30, 2016. For the six months ending June 30, 2016, revenue increased 61% or $1.7 million to $4.4 million. The increase is primarily due to the revenue expansion of our SmartChip products including our new isolate single cell products, which increased 64% of product revenue in the six months ended June 30, 2016, an increase of 110% over the revenue in the six months ended June 30, 2015, when SmartChip products and services represented 53% of product revenue.

The primary driver for our SmartChip systems, which increased 349% of the revenue in the six months ended June 30, 2015. Additionally, SmartChip Panels, consumables and services increased 18%, compared to the six months ended June 30, 2015. These increases were primarily offset by a decline of $208,000 in license and royalty revenue for an agreement, which was terminated in January 2016. Revenue for our Apollo products, which represented 36% of our product revenue in the first six months of 2016 increased $425,000 or 36% over the six months ended June 30, 2015, due to increased revenue in all portions of the product line.

For the six months ended June 30, 2016, gross profit was $2.2 million, up 32% from $1.7 million in the prior year. Gross margin on products sales decreased to 49% for the six months ended June 30, 2016, compared to 57% for the same period of 2015. The decline in gross margin was due to an increase in revenue for products with a lower gross margin than in the prior year.

Total operating expenses for the six months ended June 30, 2016 were $11.3 million, a 12% increase over $10.1 million in the same period of 2015. This was comprised primarily of $1.1 million or 46% increase in sales and marketing expenses related to higher personnel costs due to increased worldwide staffing and the conclusion of the European expense matching grant.

Our net loss for the six months ended June 30, 2016 was $9.3 million, compared to a net loss of $8.6 million in the corresponding 2015 period. Mainly due to an increase in sales and marketing expenditures related to selling the isolate systems and merger costs. At June 30, 2016, we had cash and cash equivalents of $7.4 million, compared to $15.2 million at December 31, 2015.

Total cash used in the second quarter was $823,000 less than in the prior quarter. We continue to believe that our cash runway will extend into 2017. Additionally once the merger agreement is approved by shareholders, we will be able to draw as much as $5 million from Takara to cover operating cost until the merger is complete.

Now I’d like to hand the call back to Rollie.

Rollie Carlson

Thank you, Mike. 2016 is a pivotal year for WaferGen. I look forward to updating you on our further progress and the Takara Bio merger during the balance of 2016.

With that, I’d be happy to open up the call to questions.

Question-and-Answer Session

Operator

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Jeffrey Cohen from Ladenburg Thalmann.

Jeffrey Cohen

Hi, Michael, and hi, Rollie, can you hear me, okay.

Rollie Carlson

Yes, Jeff. How are you today.

Jeffrey Cohen

Just fine. Thanks for taking the questions in advance. Just a few out here, so firstly do you expect to update your guidance next quarter as well. Should we expect that in your Q3 announcement?

Rollie Carlson

We don’t expect the change in our guidance.

Jeffrey Cohen

Okay, okay, got it. Michael, can you give me a little more clarity I got some of the percentage in the numbers. Can you give me a breakdown from this quarter as far as equipment and consumables.

Mike Henighan

Well, Jeffrey, we don’t give out that split. What we can, I guess let’s put it this way, I guess the best way to phrase it is, it was a big quarter for instruments and hardware that consumables were only 39% including service for the whole quarter, which is one of the lowest since I’ve been here.

Jeffrey Cohen

Okay. For this quarter at least, for the second quarter.

Mike Henighan

Yes.

Jeffrey Cohen

Okay. As part of the discussion you talked about the four placements for the quarter, that brings the total up to is eight or nine. Can you talk about this?

A – Mike Henighan

It eight placements.

Jeffrey Cohen

Got it. And the four, – you mentioned I heard the first two did you list the second two…

A – Mike Henighan

No, no. I didn’t. As I mentioned we have not identified every placement that we make – but of those of institutions of significance that shows the versatility of the spectrum…

Jeffrey Cohen

Okay, got it. I guess – could you discuss for us a little bit about the Takara situation in Japan and how it’s going as far as personnel and uptake and equipment and what you’re seeing from that territory and how Takara plans to perhaps use that as a testing ground for future geographies.

Rollie Carlson

As you know we just consummated that, that agreement and we’ve had a great interaction with Takara. And training their folks both commercially and then also technically in our systems here in Fremont. And now they have the ability and knowledge of the systems kind of particular applications and we know that there are already our discussions with potential customers at this point in time. We had some relationships in Japan previously, so we wanted to make sure that we transferred those relationships and also customers to Takara to make sure that they’re being supported very well, which is extremely important in the situation like that. And now it’s onto prospecting for new business.

This is going to be the first we’ve ever ICELL8 outside of the US and Europe, which has been our focus as I’ve mentioned in our previous call. So this will be the first opportunity in a major market outside of US and Europe in Japan. And we think that that coupled with Takara’s reagents which we – as you know, we have an open system that’s going to be able to really help them penetrate that market for us.

Operator

Thank you. Our next question is from William Blake, Investor.

William Blake

Yes, good afternoon. I see that in your lease you expect is a $12 million to $13 million of revenue for the total years is that your guidance.

Rollie Carlson

No. Our guidance was at the beginning of the year between $12 million and $13 million. And we have revised that to $10 million to $12 million William.

William Blake

So it’s down. So in other words if you use the multiplier 3.5 for the consideration. You’re – right now, at the top would be $12 million, right, on the merger agreement.

Rollie Carlson

Yes, that’s our current guidance.

Unidentified Analyst

Okay. Is there any – that is – that I mean that may turn in the second half of the year I mean as you see – you see further – I mean that’s your guidance, but there could be more instruments placed during that period of time, right.

Rollie Carlson

Yes. I mean we’re optimistic about the outlook. We have a very strong pipeline and a number of customers that are evaluating systems.

Unidentified Analyst

Okay. But basically in order to get to the $15 million, we got to do $13.5 million, right, in revenue, the Cap is $15 million on the merger agreement, correct?

Mike Henighan

The Cap is $15 million and that would workout to about $14 – between $14.2 million and $14.3 million.

Unidentified Analyst

Okay, right, right. So the issue is these valued at $12 million and the question is could you accelerate that in the next six months? I mean would that be possible.

Mike Henighan

At this point, as we said our guidance is $12 million, but there’s nothing that’s going to stop us if the opportunity arises to raise it higher.

Unidentified Analyst

Well. And the question is I don’t know what the lead time is on some of this and whether it’s even feasible because of the time period to from the sale to delivery. And maybe on that I’m just – go ahead, I mean I don’t what it would be to get an extra $2 million of revenue to meet the $14.25 and the $50 million. I’m just trying to understand how many more machines would you have to sell or what would you have to do…

Rollie Carlson

Well, we have a range of machines and products that we sell. So being able to put a single number machines would be difficult. Our hardware the range for lead time can be anywhere from a couple months up to six months to nine months of lead time. So there’s still a lot of opportunity and options to be able to move forward beyond $12 million, but at this time we’re staying with $12 million.

Unidentified Analyst

Okay, so it’s not impossible could be happen. But you’re comfortable with the $12 million, right.

Rollie Carlson

Yes. And the $12 million is a very comfortable range for us.

Unidentified Analyst

All right. Well I guess – I mean there’s nothing after – I mean the merger agreement goes through in 2016, whatever you do in 2017 is academic, so it’s only what you do for revenue this year that counts to the merger consideration, correct?

Rollie Carlson

Correct.

Unidentified Analyst

Okay. Right, that’s all I had. I just wanted to clarify. And thank you.

Rollie Carlson

Thank you, William.

Mike Henighan

Thank you.

Operator

Our next question is from [indiscernible].

Unidentified Analyst

Good afternoon, gentleman. The government is spending tremendous amount of money on a moon shot for cancer. Given the prevalence [ph] of our cell analysis system, what effort has been made by WaferGen to ascertain grant money, that’s one question.

My second question has to do with the incremental monthly expenditures for rent. And whether or not that was a wise decision given the sales volume that we’re now projecting.

My third question has to do with Takara and whether or not between now and the proxy vote, whether or not that deal in any way could be turned down or walked away by Takara. And I think that’s it. And thank you.

Rollie Carlson

Thank you, Antony. Good to speak with you. As far as the government spending in moon shot on cancer, certainly as far as the allocations are grant and we tracked who is recipients of grants. At this point in time we actually have two or three customers that have applied for grants in that category. And we’re hopeful of the one that we’ll receive and then two, have an option to be able to purchase the ICELL8. So part of our selling equations, so to speak, is to “follow the money” and that certainly is where a bonus of money is coming just starting now and into the future.

Mike Henighan

Okay. On your second question regarding the rent on the new location, part of the main reason we did move was that the lease on the old building had of course a lot of the landlord to terminate the lease early if he was able to rent the entire building, which had come to fruition and he exercised that option. In terms of where we went, our needs for building include wet lab space and that is something that although Bay Area is a very big spot for life science business, wet labs are difficult to find. This place was as competitive or better than any other place we found.

If we looked to incubator spot across the road from us, rent was another dollar a square foot over what we’re paying, plus and that was before they considered tenant improvements and would have been a six-month to nine-month lead time. So we think we got a very good deal in terms of location, price and quickness with which we are able to move.

And your third question. I’m sorry it was…

Unidentified Analyst

Can Takara walk away from this deal before the proxy vote?

Mike Henighan

No, basically they do not have an opportunity to exit the deal. The merger conditions are based – the only thing they have in there is in the merger conditions. We have to adopt, the company shareholders have to approve the merger. We have to provide them with our audited financial results and there can be no material adverse effects that would impact us. The first two we think we will be able to get through. The third one, we do not see as any issue and also our common stock must repay enlisted, which again we do not see is an issue.

Unidentified Analyst

Mike, one final question, is there still an opportunity for another firm to make a higher bid.

Mike Henighan

We are required – our Board of Directors are required to look at any superior offer. However, we are not allowed to go out and solicit any offers.

Unidentified Analyst

Thank you very much. I appreciate it.

Mike Henighan

Thank you, Antony.

Operator

Our next question is from [indiscernible] Capital.

Unidentified Analyst

Hey guys, I’m a little bit confused now. Based on what I read, if you guys do more than $9 million in revenues, the multiplier will be $3.5 million. Is that incorrect?

Mike Henighan

That is correct Mitch [ph].

Unidentified Analyst

Okay. So the gentleman that asked that question before about the $10 million to $12 million is also it’s over $9 million, you max out on the multiple.

Mike Henighan

We max out on the multiple, but there’s an absolute dollar maximum of $50 million.

Unidentified Analyst

Right.

Mike Henighan

And that would – go ahead.

Unidentified Analyst

Yes. That I understand. I thought this is the real hard question was this, how do you come up with the amount of shares outstanding in order to calculate what a shareholder would get based on $3.5 multiple. Can you give us a little clarity on how you would calculate the shares outstanding in order to come up with a multiplier that would be equivalent to the approximate value of what the shareholder would get.

Mike Henighan

Certainly. Right now, if you look at our shares outstanding and our preferred stock, which would automatically at the time of the merger convert along with outstanding our issues and stock options. The would be about 24.2 billion shares, in round numbers. And if the price goes above $1.44 a share, then people who have the warrants that are at a $1.43 a share – I’m sorry $1.44 a share, would get the difference in price between whatever is the deal price per share is and the price they would be paying for the warrants.

Unidentified Analyst

So the 24 million shares outstanding would include all of the warrants converted into common stock.

Mike Henighan

No, that’s without the warrants.

Unidentified Analyst

How many warrants are there outstanding.

Mike Henighan

Warrants outstanding is – there’s two groups, but for all practical purposes, at a $1.44, there are 17,700 warrants – I’m sorry 17,700,000 million…

Unidentified Analyst

17 million.

Mike Henighan

Yes.

Unidentified Analyst

Okay. So when we get the difference between that gets complicated, okay. Okay, I’ll try to digest that. So if you convert the warrants and you’d have closer to 40 million shares outstanding, but they would only – okay so you’re looking at about a $1, at a 3.5 multiple you’re looking at about $1.20. So I don’t think those warrants would even be in the money.

Mike Henighan

Well. We’ll see to help you out, shortly will be distributing our proxy which can also be – will be found on the SEC website. And that will contain a much more detailed explanation of the calculation and some samples for you to go by.

Unidentified Analyst

Okay.

Mike Henighan

It will be much easier to look at those.

Unidentified Analyst

Okay. Thank you very much.

Mike Henighan

Thank you, Mitch.

Operator

Our next question is from [indiscernible].

Unidentified Analyst

Hello, Rollie?

Mike Henighan

Yes, hello, Alex.

Unidentified Analyst

Hi, Rollie, how are you? I’m doing very, very well. I basically I’m the leader of the statutes message board – we have a lot of loans there and a lot of loans we are very much involved with the company and a lot of faith in you guys. And I’ve been following you from more than 10 years and I think it just one of the best deals out there. And I know you turn this company around and I know it hasn’t been easy. And the couple of question I have for you is okay, going back to what the last call you said the warrants, they received the difference in the price between what the buyout offer is and warrants are, does that mean they will affect payout price for the regular shareholders?

Mike Henighan

This is Mike Henighan. Yes, we will have a small impact.

Unidentified Analyst

Okay.

Mike Henighan

Depending on how high it is – if we pick or be clearly $1.45 as this price before we consider them they will get a penny a share.

Unidentified Analyst

Okay, they will get a – okay, so all right. Now first of all do you think that they – that most warrant holders will exercise these warrants considering that it’s going to affect how much they get in the end if the merger does eventually go through?

Mike Henighan

Well, if they hold their warrants until the merger, they’re automatically converted if they are in the money.

Unidentified Analyst

Okay. All right.

Mike Henighan

And we have no way to be able to guess if anyone’s going to exercise early or not.

Unidentified Analyst

Okay, so even if the prices goes let’s say to $2 in the exercise do you think that if you guys at the $10 million revenue during the half multiple which is $35 million. Do you think that will affect, I mean do you still think there is a possibility at that $35 million that the shareholders will even if all the warrants are convert the shareholders will still get a minimum of $1.50 a share.

Mike Henighan

At this time, I’d rather not try to come in on that because there is a lot of variables that we don’t know the answer to right now.

Unidentified Analyst

Okay.

Mike Henighan

Again when our proxy comes out there hasn’t really good examples for you.

Unidentified Analyst

Okay, well, let me ask you this, do you think that if we hit the 3.5 multiple we had $10 million or $35 million – if all the warrants will convert do you have any clue what the least possible though your shareholders will get in the merger. Would it be under $120, would it be under $141 so do you have any color on that?

Mike Henighan

I honestly could not make a legitimate estimate for you.

Unidentified Analyst

Okay.

Mike Henighan

Again the issue is if it’s below $1.40 there is no benefit in them exercising because they will look to money.

Unidentified Analyst

Okay. All right, other question is last quarter you guys have said that you had 14 ICELLs in late stage evaluations. And I know now only four were sold do you know why we sold only four in this last quarter when so many were on late stage evaluations.

Rollie Carlson

Well, we were in – we have a pipeline and we have evaluations that are done based upon our data and some we were actually demonstrating the system itself. As I mentioned on the call, Alex is that the selling cycle was taking a little bit longer but also I actually just say – because ICELL8 can afford customers something that is really quite unique it’s a new system.

Unidentified Analyst

Okay.

Rollie Carlson

That our pipeline remained strong and we – the attributes of the system are old enough very well.

Unidentified Analyst

Well, I think your system, I mean from everything I see your system seems to be the best I mean I know Fluidigm and BDX are your competitors but I also know note that has been does not compare to yours do you think that in the future in the next quarter it would be unreasonable to expect the ICELL8 sales to go from four to eight let’s say or is it hard to say.

Rollie Carlson

Well, all I can say is we have a strong – we have a strong pipeline Alex and so there is a multiple customers that are addressed in the system.

Unidentified Analyst

Okay, other question is can you – I have heard different things I used to speak, I speak on with Michael before on the phone and I used to speak to Brian Ritchie when you guys just company for IR, and I have heard differing opinions on what ICELL cost, can you comment on that, can you give us an idea of about what the ICELL8 cost.

Rollie Carlson

Those priced for ICELL8 full system is $250,000.

Unidentified Analyst

Okay, perfect and do you – big thing that genome industries very competitive do you have to give discounts to potential customers.

Rollie Carlson

Yes, we are open to discounts, if it maybe necessary but many circumstances I’ve got.

Unidentified Analyst

Many circumstances you do not.

Rollie Carlson

It may not be necessary.

Unidentified Analyst

Okay. The other question I had for you is, all right let’s say. I think recently as I have noticed from being in the statutes message board the amount of watches on our board has increased by like 3,000 people and the company has been getting a lot more attention and even though there has been a massive sell off after that, did you think this is more attributable to the EPS miss and the fact that many investors don’t understand what they are doing. I think it has the lease going, would you guys a lot more attention and I think as time goes forward the PPS will continue to improve.

My question to you is if the PPS at some in time let’s say it hits two or 250 whatever, let’s just say it hits two. Then do you go to Takara and say listen according to our merger deal it’s a ready to dial as its basically the top end of what we would get if we hit the 3.5 multiple and $12 million do you go to Takara at that point and say I think at this point you guys need to come up with a higher offer and a straight out buyout prices opposed to what you’ve seen us.

Rollie Carlson

Well, I think most WaferGen and Takara have to buy-buy our merger agreement that we have. And so we have to perform very, very well and they also have that opportunity be able to grow the business through Takara.

Unidentified Analyst

So you basically saying that if the PPS did reach a point where its obviously higher than what Takara would pay, you would not go to Takara and ask them for a better offer. Am I correct on that?

Rollie Carlson

Well, as we said we are bound by the agreement and its tough thing but you can always speculate on what’s going on elsewhere so we rather not be speculative at this point.

Unidentified Analyst

Okay my other question to you is and I know you can’t comment much on this but can you in any way say perform tell me even if its just a hint, has there been interest from other companies as in WGBS and whether it’s a buyer to merger just talking to you guys has any other companies if you can discuss it with me or can’t tell me I know you might not be able to. Can you tell me if any other companies have approached WGBS and started conversations now that they know the Takara has gone into a merger deal with you and started conversations about what it would take to acquire WGBS?

Rollie Carlson

Alex, we can’t speak to that.

Unidentified Analyst

You can’t speak to that okay. Okay and when do you think the proxy will go out for the shareholder vote?

Rollie Carlson

Right now we are talking with the SEC on some fine points on the proxy we hope to be complete it soon our guess is late September or October for the shareholder meeting.

Unidentified Analyst

Okay, so in other words we probably will not have anything in the mail as to whether to vote yes or no until September or October.

Rollie Carlson

Well, we have to give it send the proxy out 30 days prior to the shareholder meeting.

Unidentified Analyst

Okay, I did have one more question for you, I’m just trying to remember what it was, all right. So, September or October we will get the proxy. I can’t remember this other question. So – okay, here is my other question, okay now I’m sure you guys believe as well as I do that as times goes on WaferGen is going to get more popular and your revenues are just kind of increased and so forth and so on. And I know you don’t even another offering because of the fact that Takara was going to give you guys $10 million or $5 million in January as a loan payment if needed to get you through when the merger closes.

Why do you think if now the WaferGen is gaining such recognize and has such an incredible product? Why do you think at this point that you guys are willing to settle for such a global offer as oppose to basically continuing to do what you’re doing and stuff and wait for maybe better buyout offers to come or maybe just keep growing the product until the PPS keeps going up and more recognition comes to your company. Is it because you don’t want to do another offering or is there another reason for that.

Rollie Carlson

Well, as we mentioned we thought that we believe this is a very good deal by not only the synergy between the companies. But our board determined the deal was in the best interest of the shareholders for a variety of reasons and its impossible to adequately address all those regions but certainly the fact that its clearly company would after you go out and be able to raise additional capital for the longer term there is risk that are associated with that.

Unidentified Analyst

Okay. All right well, okay well I do want to say again I want to thank you both, Michael thank you very much every time I’ve called you. You’ve always been very welcoming and answering my questions and you’ve answered them as best as you can. I also want to thank you guys for when you did have life side partners and Brian was excellent to talk to on the phone. I know you’re now using Acorn Management and how much do you think Acorn can help you guys and perhaps increasing your PPS and also perhaps if that happens and getting you better buyout offers do you think that will be a big help in that?

Mike Henighan

We are not utilizing the Acorn in that name.

Unidentified Analyst

You’re not using them any more.

Mike Henighan

Yes, as I said we are not utilizing them in that name.

Unidentified Analyst

You’re not utilizing them that capacity but you’re still using them.

Mike Henighan

We are no longer working with Acorn. Thank you.

Unidentified Analyst

I was not aware of that because I had seen that you guys had higher inside – I was not aware of that. Okay, I have another question.

When I talked to Michael a month ago, you said you guys are going to announce that the CR that WaferGen had gotten the expansion through December. I did not see it – I did not hear it during the conference call earlier. But am I correct that you guys have an expansion through like middle of December?

Mike Henighan

Alex, this is Mike. At the very beginning of my talk about the results, we mentioned that – yes, we did get that.

Unidentified Analyst

Okay. I misunderstood. I’m sorry.

Mike Henighan

That’s okay. I appreciate all your questions. We share – have someone else share for a while please.

Unidentified Analyst

Yes, no problem. Again, thank you guys for answering all my questions and thank you for everything. And I wish you guys the best.

Mike Henighan

Thank you.

Rollie Carlson

Thank you, Alex.

Operator

Our next question is from [indiscernible]

Unidentified Analyst

Hi, Rollie. First, just on the guidance on Japan sales a quarter, just like kind of testaments in the things they want couple of things we are buying for multiple sales and then just what would be the standard for you if those are incentivized to kind of just for that year –you said you saw something in December, we have to pay either 2.5 or 3.5 times of sale amount so they may could, you know what? If you wait till January, we will give it to you for free and everyone’s kind better off.

Rollie Carlson

Well, all I can say is that David, this is that we – Takara is actively looking to sell product at this point in time. And so it’s an opportunity I think that for them to have – want to get up to speed on our technology and commercial positioning of that.

Unidentified Analyst

One more from me, I mean, I definitely agree on sales around the system, but Takara is the highest that kind of delay their sales of six months so like. To me it seems odd, there wouldn’t be some sort of – I think you guys said maybe $500,000 or $600,000 internal revenue last year. But things are not at least like, I guess, to guarantee a minimum depend sales because whatever they tell us, may or may not kind of do their best because the sales are up here. Although long-term obviously our service are online, but you have to at least see it like the potential for kind of delaying revenue and how it helps them.

Rollie Carlson

Yes. So I can appreciate your concern.

Unidentified Analyst

So are you going to share kind of this quarter’s Japan breakdown or…

Rollie Carlson

No, I can’t. We don’t – we have not broken down our distributors sales in the past.

Unidentified Analyst

Okay. I think I saw in the 10-K for last year, the sales by Asia-Pacific region or maybe it was on Bloomberg at least – but – okay. And then also obviously the range moved from 12% to 13% and 10% to 12% like. As we get more information, the range you are paying for current period, you are having in kind of confidence interval on that 10% to 12% number, seems like, obviously, 12% to 13% wasn’t like a very confident estimate of full year.

Rollie Carlson

Well, I mean we revise as we’ve had more information understand what our selling cycle is with the mix of products that we have at this point in time. And so we provided revised guidance in mid-year of what we know now.

Unidentified Analyst

All right. We’re like to start the year with a $1 million wide guidance, and then half way through the year to move to a $2 million wide guidance, obviously it means it become more uncertain. So I’m wondering if you can kind of say like are you 90% to fall between tenant fall or is that you are like 20% confidence interval, 30% confidence interval or any sort. I think, to say a range or not say, the probability of Takara is in a range of kind of a relevant unlike a mathematical standpoint.

Mike Henighan

This is Mike Henighan again. At this point we just want to say that our estimate is 10% to 12% and we really don’t want to get into a lot of conjecture on a lot – all of the details in terms of confidence or anything else.

Unidentified Analyst

Okay, it’s tough to interrupt a range if you say like yes 1% confidence, it’s more like – because its 0% to 100%, but 1% of time is between kind of 12%, but it’s not kind of a useful metrics. So based on the huge wide guidance and say, are calling above or below or within that range.

Mike Henighan

All we could say David is that the guidance that we have and we are letting our shareholders know what the range is that we believe that the company is going to become into at the end of the year.

Unidentified Analyst

Okay. I guess this is helpful to have comment regarding range, the range is meaningless like the range is also 0% to 100% but it’s 100% to 0%. So I guess it’s not helpful, but it depends more like 12% to 13% was obviously not a very great estimate. I don’t know. I guess I understand you’re not – you don’t want say a number, but I guess is it tough hear a range and then I kind of hear, doesn’t know I mean anything since the range has been changed so much quarter-to-quarter. So anyway – not really my questions are kind of a professional mark, but thanks for your comment and answering my questions.

Mike Henighan

Thank you, David.

Operator

Our next question is from .indiscernible].

Unidentified Analyst

Yes. Hi, hopefully you can hear me. Just wanted to ask a couple questions around the shift you mentioned from your higher gross margin products to some lower gross margin systems. Do you see this – in this last quarter – do you see this as just an anomaly and that you expect that we’ll be seeing the higher gross margin products going forward or do you see this more of a trend shifting to this – these lower gross margin systems? And if so, what do you think the catalyst is there? And then secondly, what strategies are you planning to deploy to reduce or improve the gross margins on those systems.

Mike Henighan

Well, generally speaking or as you said, our hardware is a lower margins in the reagent. And selling the hardware is a leading item and the reagents follow. You look at it is every system you sale will follow months later with the stream of revenue depending on the machine that can be quick or be a little slow on the pickup, but it will – the balance will come back. It is always been a bit of a phenomenon for us when we do surge ahead on instruments, our gross margin goes down. And after a while as reagent sales for those instruments pickup, we’re able to improve our margins.

Unidentified Analyst

Okay. And so on I’m sure with the introduction of the ICELL8 system, it being a new product, I’m sure the gross margins aren’t probably where you would like to see them. Do you have any specific things you’re going after to improve on that hardware gross margin as well as the others?

Mike Henighan

We wouldn’t like to get into specifics of any one machine. Obviously, like any company, we’re doing all we can to maintain the best gross margin and gross profit we can for the company.

Rollie Carlson

But clearly you get economy – you get economy with scale as you are able to sell more units. And then as Michael said, in an installed base we have basically a razor, razorblade model. And with a new product that’s being introduced, then you will have situations where you’ll have lower margins on the instruments. But it has gone back and forth in the brand how as a utilization of reagents that occur as good as – as you get more applications that’s one thing that we’re looking at for our installed base on all of our instrumentation and to take advantage of that. And that’s one way that almost all our science companies are try to improve their margin profile by expanding the utilization of their instrumentation.

Unidentified Analyst

Sure. Okay, thank you.

Mike Henighan

All right. Thank you, Andrew.

Operator

Ladies and gentlemen, we have reached the end of question-and-answer session. Now I would like to turn the call back to management for closing remarks.

Rollie Carlson

Again, I’d like to thank everybody for joining on the call and also the detail questions that we received. We believe that the future for – not only the WaferGen products but also the prospect of coming together with Takara is a very good deal for shareholders. And I would like to encourage everyone again to go to the SEC website that you’d be able to look at not only the existing document, but which we do have frequently asked questions associated with the merger that we posted on May 18 and with prior proxy. To review that and it also to stay tuned for what will be the definitive proximity agreement which we hope to be able to add the shareholders in the near future. Thank you very much.

Operator

Thank you. This concludes today’s conference. You may disconnect your lines at this time. Have a wonderful day.

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