Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

OR

 

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

For the transition period from                      to                     

Commission File Number 001-33775

 

 

Nanosphere, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		36-4339870
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

4088 Commercial Avenue		Northbrook, Illinois 60062
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (847) 400-9000

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x  Yes     ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		x		Smaller reporting company		¨

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

The number of outstanding shares of the registrant’s common stock, par value $0.01 per share, as of August 2, 2013 was 58,040,106.

 

 

 

---

Table of Contents

NANOSPHERE, INC.

INDEX

 

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets			1
Statements of Operations			2
Statements of Cash Flows			3
Notes to Financial Statements			4-8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			9-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk			17
Item 4. Controls and Procedures			17
Part II. OTHER INFORMATION
Item 1. Legal Proceedings			18
Item 1A. Risk Factors			18
Item 6. Exhibits			18

---

Table of Contents

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

Nanosphere, Inc.

Balance Sheets

(dollars in thousands)

(Unaudited)

 

		June 30,				December 31,
		2013				2012
CURRENT ASSETS:
Cash and cash equivalents		$	31,963			$	33,139
Accounts receivable			1,182				1,027
Inventories			8,523				7,326
Other current assets			392				284
Total current assets			42,060				41,776
PROPERTY AND EQUIPMENT— Net			3,278				2,872
INTANGIBLE ASSETS — Net of accumulated amortization			2,571				2,733
OTHER ASSETS			337				76
TOTAL		$	48,246			$	47,457
CURRENT LIABILITIES:
Accounts payable		$	1,541			$	2,446
Accrued compensation			965				899
Other current liabilities			2,179				1,880
Total current liabilities			4,685				5,225
LONG-TERM LIABILITIES:
Long-term debt			11,766				—
Total liabilities			16,451				5,225
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value; 100,000,000 shares authorized; 57,962,606 and 44,040,437 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively			580				561
Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued			—				—
Additional paid-in capital			395,539				388,868
Warrants to acquire common stock			246				992
Accumulated deficit			(364,570	)			(348,189	)
Total stockholders’ equity			31,795				42,232
TOTAL		$	48,246			$	47,457

See notes to financial statements.

 

1

---

Table of Contents

Nanosphere, Inc.

Statements of Operations

(dollars and shares in thousands except per share data)

(Unaudited)

 

		Three Month Periods Ended June 30,								Six Month Periods Ended June 30,
		2013				2012				2013				2012
REVENUE:
Product sales		$	1,852			$	1,315			$	4,221			$	2,601
Grant and contract revenue			—				30				—				43
Total revenue			1,852				1,345				4,221				2,644
COSTS AND EXPENSES:
Cost of sales			1,269				884				2,806				1,797
Research and development			3,092				4,716				7,154				9,151
Sales, general, and administrative			5,129				4,196				10,438				8,221
Total costs and expenses			9,490				9,796				20,398				19,169
Loss from operations			(7,638	)			(8,451	)			(16,177	)			(16,525	)
OTHER INCOME (EXPENSE):
Foreign exchange gain (loss)			(1	)			(1	)			(3	)			(2	)
Interest expense			(213	)			—				(213	)			—
Interest income			5				13				12				27
Total other income (expense)			(209	)			12				(204	)			25
NET LOSS		$	(7,847	)		$	(8,439	)		$	(16,381	)		$	(16,500	)
Net loss per common share — basic and diluted		$	(0.14	)		$	(0.19	)		$	(0.29	)		$	(0.38	)
Weighted average number of common shares outstanding — basic and diluted			56,998				43,716				56,400				43,716

See notes to financial statements.

 

2

---

Table of Contents

Nanosphere, Inc.

Statements of Cash Flows

(dollars in thousands)

(Unaudited)

 

		Six Month Periods  Ended June 30,
		2013				2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(16,381	)		$	(16,500	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			1,059				1,329
Amortization of financing costs, accretion of debt discount and other			43				—
Share-based compensation			958				1,139
Changes in operating assets and liabilities:
Accounts receivable			(155	)			(6	)
Inventories			(1,938	)			(2,015	)
Other current assets			(108	)			(212	)
Accounts payable			(990	)			842
Accrued and other current liabilities			351				(48	)
Net cash used in operating activities			(17,161	)			(15,471	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(477	)			(44	)
Investments in intangible assets			—				(25	)
Net cash used in investing activities			(477	)			(69	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt			12,000				—
Debt issuance costs			(278	)			—
Proceeds from the issuance of common stock, net of offering expenses			4,691				—
Proceeds from stock option exercise			49				—
Net cash provided by financing activities			16,462				—
NET DECREASE IN CASH AND CASH EQUIVALENTS			(1,176	)			(15,540	)
CASH AND CASH EQUIVALENTS — Beginning of period			33,139				39,273
CASH AND CASH EQUIVALENTS — End of period		$	31,963			$	23,733
NONCASH INVESTING AND FINANCING ACTIVITIES:
Reclassification of inventory to (from) property and equipment		$	741			$	(197	)
Capital expenditures included in accounts payable			85				—

See notes to financial statements.

 

3

---

Table of Contents

Nanosphere, Inc.

Notes to Financial Statements

As of June 30, 2013 and

For the Three and Six Month Periods June 30, 2013 and 2012

(Unaudited)

1. Description of Business

Nanosphere, Inc. (the “Company”) develops, manufactures and markets an advanced molecular diagnostics platform, the Verigene System, that enables simple, low cost, and highly sensitive genomic and protein testing on a single platform.

Basis of Presentation — The accompanying unaudited condensed financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and in conformity with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, unless otherwise noted herein, necessary to present fairly the results of operations, financial position and cash flows have been made. Therefore, these financial statements should be read in conjunction with the Company’s most recent audited financial statements for the year ended December 31, 2012 and notes thereto included in the Company’s Annual Report on Form 10-K. The results of operations for any interim period are not necessarily indicative of the results of operations expected for the full year.

The accompanying 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.

Deferred Financing Costs— Costs incurred to issue debt are deferred and amortized as a component of interest expense using the effective interest method over the term of the related debt agreement. Amortization expense of deferred financing costs began with the incurrence of the debt in May 2013 and was less than $0.1 million during the three months period ending June 30, 2013

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes thereto. The Company’s significant estimates included in the preparation of the financial statements are related to inventories, property and equipment, intangible assets and share-based compensation. Actual results could differ from those estimates.

2. Liquidity and Capital Resources

The Company has incurred net losses attributable to common stock of $364.6 million since inception, and has funded those losses primarily through the sale and issuance of equity securities and secondarily through the issuance of debt. While the Company is currently in the commercialization stage of operations, the Company has not yet achieved profitability and anticipates that it will continue to incur net losses in the foreseeable future.

In May 2013, the Company entered into a $22 million loan agreement with Silicon Valley Bank and Oxford Finance LLC. The Company drew down $12 million of the facility and the remaining $10 million can be drawn upon achievement of certain conditions. See Note 8. Debt for a detailed description of this debt agreement.

Management believes that its current cash balances and cash resources should be sufficient to support forecasted operations through at least the next twelve months. However, the Company operates in a market that makes its prospects difficult to evaluate, and the Company may need additional debt or equity financing in the future to execute on its business plans beyond the next twelve months. Management also believes that, if necessary, it can implement plans in the short term to conserve existing cash should additional financing activities be delayed. Capital outlays and operating expenditures will occur over the next twelve months as the Company expands its infrastructure, commercialization, manufacturing, and research and development activities.

3. Net Loss Per Common Share

Basic and diluted net loss per common share have been calculated in accordance with ASC Topic 260, “Earnings Per Share”, for the three and six month periods ended June 30, 2013 and 2012. As the Company had a net loss in each of the periods presented, basic and diluted net loss per common share are the same.

The computation of basic net loss per common share for the three and six month periods ended June 30, 2013 and 2012 excluded 143,250 and 299,000 shares of restricted stock, respectively (see Note 6). While these restricted shares of stock are included in outstanding shares on the balance sheet, these restricted shares are excluded from basic net loss per common share in accordance with ASC Topic 260 due to the forfeiture provisions associated with these shares.

 

4

---

Table of Contents

The computations of diluted net loss per common share for the three and six month periods ended June 30, 2013 and 2012 did not include the outstanding shares of restricted stock as well as the effects of the following options to acquire common stock and common stock warrants as the inclusion of these securities would have been antidilutive:

 

		Three and Six Month Periods Ended June 30,
		2013				2012
Restricted stock			143,250				299,000
Restricted stock units			220,000				—
Stock options			6,487,205				6,093,936
Common stock warrants			136,019				164,925
			6,986,474				6,557,861

4. Intangible Assets

Intangible assets, consisting of purchased intellectual property, as of June 30, 2013 and December 31, 2012 comprise the following (in thousands):

 

		June 30, 2013												December 31, 2012
		Cost				Accumulated Amortization				Net				Cost				Accumulated Amortization				Net
Intellectual property - licenses		$	4,061			$	(1,809	)		$	2,252			$	4,061			$	(1,660	)		$	2,401
Patents			455				(136	)			319				455				(123	)			332
		$	4,516			$	(1,945	)		$	2,571			$	4,516			$	(1,783	)		$	2,733

Amortization expense for intangible assets was $0.1 million and $0.2 million for the three and six month periods ended June 30, 2013, respectively, and was $0.1 million and $0.2 million for the three and six month periods ended June 30, 2012. Estimated future amortization expense is as follows:

 

Years Ending December 31
2013 (Period from July 1 to December 31)		$	162
2014			325
2015			320
2016			308
2017			291
Thereafter			1,165

Licenses are amortized from the date of initial use of the licensed technology and such amortization continues over the remaining life of the license. The future amortization expense reflected above is based on licenses for which the licensed technology is being used as of June 30, 2013.

5. Related Party Transactions

Dr. Chad Mirkin, a co-founder of the Company, provides contracted research and development services to the Company and is reimbursed for these services based upon negotiated contract rates. The Company incurred expenses of less than $0.1 million for these services in each of the three and six month periods ended June 30, 2013 and 2012. On March 27, 2013, the Company advised Dr. Mirkin that his consulting agreement would not be renewed and would expire pursuant to its terms on May 31, 2013. On April 22, 2013, Dr. Mirkin advised the Company that he would not stand for re-election to the Company’s board of directors at the 2013 annual meeting and would retire from the board of directors at the expiration of his current term.

 

5

---

Table of Contents

6. Equity Incentive Plan

The Company’s board of directors has adopted and the shareholders have approved the Nanosphere 2000 Equity Incentive Plan (the “2000 Plan”) and the Nanosphere 2007 Long-Term Incentive Plan (the “2007 Plan”). The plans authorize the compensation committee to grant stock options, share appreciation rights, restricted shares, restricted share units, unrestricted shares, incentive stock options, deferred share units and performance awards. Option awards are generally granted with an exercise price equal to or above the fair value of the Company’s common stock at the date of grant with ten year contractual terms. Certain options vest ratably over four years of service, while other options cliff vest after seven years of service but provide for accelerated vesting contingent upon the achievement of various company-wide performance goals, such as decreasing time to market for new products and entering into corporate collaborations (as defined in the option grant agreements). For these “accelerated vesting” options, 20-25% of the granted option shares will vest upon the achievement of each of four or five milestones as defined in the option grant agreements, with any remaining unvested options vesting on the seven year anniversary of the option grant dates. Approximately 18% of the options granted and outstanding contain “accelerated vesting” provisions. The fair values of the Company’s option awards granted during the six month period ended June 30, 2013 were estimated at the dates of grant using the Black-Scholes option pricing model with the following assumptions:

 

Expected dividend yield			0	%
Expected volatility			86	%
Risk free interest rate			0.95	%
Weighted-average expected option life			6.00 years
Estimated weighted-average fair value on the date of grant based on the above assumptions		$	2.00
Estimated forfeiture rate for unvested options			15.8	%

The expected volatility for option awards granted in 2013 was based on the Company’s actual historical volatility. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grants for periods consistent with the expected life of the option. The expected life of options that vest ratably over four years of service is derived from the average of the vesting period and the term of the option as defined in the Plans, following the guidance in Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin Nos. 107 and 110. The Company estimates the expected life of options with accelerated vesting terms giving consideration to the dates that the Company expects to achieve key milestones under the option agreements and the term of the option.

Total compensation cost recognized for all stock option awards was $0.4 million and $0.7 million in the three and six month periods ended June 30, 2013, respectively, and $0.4 million and $0.9 million for the three and six month periods ended June 30, 2012, respectively.

As of June 30, 2013, the total compensation cost not yet recognized related to the nonvested stock option awards is approximately $4.6 million, which amount is expected to be recognized over the next three years, with a weighted average term of 1.8 years. Certain milestone events are deemed probable of achievement prior to their seven year vesting term, and the acceleration of vesting resulting from the achievement of such milestone events has been factored into the weighted average vesting term. While the Company does not have a formally established policy, as a practice the Company has delivered newly issued shares of its common stock upon the exercise of stock options.

A summary of option activity under the plans as of June 30, 2013, and for the six month period then ended is presented below:

 

Options		Number of Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term				Aggregate Intrinsic Value of Options
Outstanding — January 1, 2013			5,999,875			$	3.99
Granted			1,261,375			$	2.79
Exercised			(28,765	)		$	1.17
Expired			(19,892	)		$	6.12
Forfeited			(725,388	)		$	3.86
Outstanding — June 30, 2013			6,487,205			$	3.78				6.84			$	3,077,633
Exercisable — June 30, 2013			3,681,709			$	4.48				5.47			$	1,311,872
Vested and Expected to Vest—June 30, 2013			6,358,152			$	3.80				6.81			$	2,996,408

There were 28,765 options exercised in the six month period ended June 30, 2013 and no options were exercised in the six month period ended June 30, 2012.

 

6

---

Table of Contents

Included in the number of options outstanding at June 30, 2013 are 1,175,986 options with a weighted average exercise price of $5.31 per share and accelerated vesting provisions based on the criteria mentioned above. The total fair value of shares vested during the three and six month periods ended June 30, 2013 was $0.7 million and $0.8 million, respectively, and was $1.1 million for the three and six month periods ended June 30, 2012.

In April 2013 the Board granted equity compensation awards to certain executives consisting of stock options to purchase 1,100,000 shares of common stock that vest in four equal annual installments commencing in April 2014, and restricted share units (“RSUs”) pursuant to which the executives may receive 220,000 shares of common stock upon the attainment by the Company of certain performance goals in 2013.

As of January 1, 2013, there were 299,000 shares of restricted stock outstanding under the 2007 Plan and during the six month period ended June 30, 2013, 84,673 shares were forfeited and 5,000 additional shares of restricted stock were granted. The restricted shares vest 50% on the two-year anniversary of the grant date and are subject to forfeiture until vested and vest 50% on the four-year anniversary of the grant date and are subject to forfeiture until vested. There were 76,077 shares that vested during the six month period ended June 30, 2013. The Company recognized $0.3 million and $0.4 million in restricted stock compensation expense during the three and six month periods ended June 30, 2013 and recognized $0.1 million and $0.2 million during the three and six month periods ended June 30, 2012. As of June 30, 2013, the total compensation cost not yet recognized related to the nonvested restricted stock awards was approximately $0.2 million, which amount is expected to be recognized over a weighted average term of less than one year.

7. License Agreements

The Company has entered into several nonexclusive license agreements with various companies covering certain technologies which are embedded in the Company’s diagnostic instruments and diagnostic test products. As of June 30, 2013, the Company has paid aggregate initial license fees of $3.8 million for these licenses, and has agreed to pay a percentage of net sales as royalties, in percentage amounts ranging from less than 1.0% to 12.0%. These initial license fees were capitalized as intangible assets (see Note 4). Certain of the license agreements have minimum annual royalty payments, and such minimum payments are $0.2 million in each of the fiscal years 2013, 2014 and 2015 and are less than $0.1 million annually thereafter through the dates the respective licenses terminate. These licenses expire at various times, corresponding to the subject patents expirations, which currently range from 2015 to 2027.

8. Debt

On May 6, 2013, the Company entered into a $22 million Loan and Security Agreement with Silicon Valley Bank and Oxford Finance LLC (together, the “Lenders”) for a loan (the “Loan Agreement”). The Company drew down $12 million of the facility on May 6, 2013 evidenced by secured promissory notes (the “Notes”) executed by the Company. The remaining $10 million of the facility can be drawn between December 1, 2013 and April 30, 2014 and then only if Nanosphere achieves revenues from product sales in excess of $13.8 million for a rolling 12-month period ending no later than February, 2014, and achieves certain other conditions.

The loans are secured by substantially all of the assets of the Company.

Under the Loan Agreement, the Company will repay interest only on a monthly basis for the first 12 months and thereafter the Company will repay the principal and interest on a monthly basis for 36 months through the maturity date. If the second loan is drawn by the Company, the Company has the option to extend the interest only period another 12 months followed by the 36 months of principal and interest amortization period. Interest on the first loan is fixed at 9.25% per annum and interest on the second loan, if drawn, will be a fixed rate determined based on the LIBOR plus a spread, but in no event less than 9.25% per annum.

The term of the initial loan is four years and extended to five years if the second loan is received. The term of the second loan, if received, will be four years from the date received. The facility fee paid for the first loan was $120,000 with another $100,000 due upon the earlier of the funding of the second loan or the maturity, acceleration or prepayment of the first loan. The Loan Agreement also requires an additional loan fee of $240,000 (2% of the amount borrowed) payable at the maturity, acceleration or prepayment of the first loan. If the second loan is drawn, the Loan Agreement requires an additional loan fee of $200,000 (2% of the amount borrowed) payable at the maturity, acceleration or prepayment of the second loan. If the second loan is drawn and Nanosphere elects to extend the interest only period, an additional loan fee of $440,000 (an additional 2% on the entire loan balance) would be payable at the maturity, acceleration or prepayment of the loan.

 

7

---

Table of Contents

The Loan Agreement contains customary events of default, including among others, nonpayment of principal, interest, fees or other amounts; material inaccuracy of representations; violation of covenants; and certain bankruptcy events. If an event of default occurs under the Loan Agreement, the entire outstanding balance under the Loan Agreement may become immediately due and payable.

In connection with the Loan Agreement and as partial consideration for the issuance of the loan thereunder, the Company issued warrants to the Lenders to acquire 136,019 shares of the Company’s common stock with an exercise price of $2.6467.

9. Stockholders’ Equity

As of June 30, 2013 there were outstanding warrants to acquire 136,019 shares of common stock at an exercise price of $2.6467 per share and an expiration date of May 6, 2020. These warrants were issued to Silicon Valley Bank and Oxford Finance LLC in connection with the May 6, 2013 loan agreement described in Note 8. Debt. In accordance with GAAP, the Company accounts for the warrants as equity instruments. The Company estimated the initial fair value of the warrants issued to be $0.2 million using the Black-Scholes pricing model with the following assumptions: closing price per share of common stock of $2.65, volatility of 74.15%, expected term of 7 years, risk-free interest rate of 0.97% and dividend yield of zero.

Warrants for 1,135,194 shares of common stock with an exercise price of $17.50 expired unexercised in April 2011 and warrants for 164,925 shares of common stock with an exercise price of $8.75 per share expired in April 2013.

10. Commitments and Contingencies

Rent and operating expenses associated with the office and laboratory space were $0.1 million and $0.2 million for the three and six month periods ended June 30, 2013, respectively, and $0.2 million and $0.3 million for the three and six month periods ended June 30, 2012, respectively.

Annual future minimum obligations for the operating leases as of June 30, 2012, are as follows (in thousands):

 

Years Ending December 31		Operating Lease
2013 (Period from July 1 to December 31)		$	234
2014			196
Total minimum lease payments		$	430

11. Supplemental Financial Information

 

Inventories:		June 30, 2013				December 31, 2012
		(in thousands)
Raw materials		$	2,010			$	1,910
Work-in-process			112				300
Finished goods			6,401				5,116
Total		$	8,523			$	7,326

 

Property and Equipment – Net:		June 30, 2013				December 31, 2012
		(in thousands)
Total property and equipment — at cost		$	20,739			$	19,626
Less accumulated depreciation			(17,461	)			(16,754	)
Property and equipment - net		$	3,278			$	2,872

 

Other Current Liabilities:		June 30, 2013				December 31, 2012
		(in thousands)
Accrued clinical trial expenses		$	332			$	205
Accrued license fees			943				855
All other			904				820
Total		$	2,179			$	1,880

 

8

---

Table of Contents

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q regarding our strategy, future operations, future financial position, future net sales, projected expenses, products’ placements, performance and acceptance, prospects and plans and management’s objectives, as well as the growth of the overall market for our products in general and certain products in particular and the relative performance of other market participants, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievement to be materially different from those expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “will,” “would,” “should,” “could,” “can,” “predict,” “potential,” “continue,” “objective,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. These forward-looking statements reflect our current views about future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Our actual results may differ materially from those anticipated by these forward-looking statements as a result of various factors, including but not limited to:

 

•

inaccurate estimates of the potential market size for our products (including the hospital lab market in general and the blood stream infection (BSI) market in particular) or failure of the market for these products to grow as anticipated;

 

•

the past performance of other companies which we believe to have been in a market position analogous to where we believe we are now may not be predictive of our future results in the manner we believe them to be;

 

•

our analysis of who our competitors have been, who they are now and who they will be in the future (particularly in the infectious disease product markets) and our predictions of relevant future performance may be inaccurate;

 

•

comparisons of actual financial results for another company to what we predict will be our future financial results may be inappropriate;

 

•

predictions of customer metrics needed to achieve profitability and their relationship to our cash flow position, needs and expenses may prove to be inaccurate;

 

•

entrance of other competitors or other factors causing us to lose competitive advantage in the sample-to-result MDx market;

 

•

a lack of commercial acceptance of the Verigene System, its array of tests, and the development of additional tests, which could negatively affect our financial results;

 

•

failure of third-party payors to reimburse our customers for the use of our clinical diagnostic products or reduction of reimbursement levels, which could harm our ability to sell our products;

 

•

failure of our products to perform as expected or to obtain certain approvals or the questioning of the reliability of the technology on which our products are based, which could cause lost revenue, delayed or reduced market acceptance of our products, increased costs and damage to our reputation;

 

9

---

Table of Contents

•

our inability to manage our anticipated growth, constraints or inefficiencies caused by unanticipated acceleration and deceleration of customer demand; and

 

•

those set forth under “Risk Factors” in our Annual Report on Form 10-K, as amended from time to time under “Risk Factors” in our Quarterly Reports on Form 10-Q.

These forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q. Unless required by U.S. federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statement is made or to conform these statements to actual results. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item 1A.—Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, as supplemented or amended from time to time under “Item 1A.—Risk Factors” in our Quarterly Reports on Form 10-Q, and elsewhere in this Quarterly Report on Form 10-Q.

Business Overview

We develop, manufacture and market an advanced molecular diagnostics platform, the Verigene System, that enables simple, low cost and highly sensitive genomic and protein testing on a single platform. Our proprietary nanoparticle technology provides the ability to run multiple tests simultaneously on the same sample. The Verigene System includes a bench-top molecular diagnostics workstation that is a universal platform for genomic and protein testing. While many systems currently available on the market provide a diagnostic result for one test or a few tests within a specific market niche, the Verigene System provides for multiple tests to be performed on a single platform, including both genomic and protein assays, from a single sample.

The Verigene System is differentiated by its ease of use, rapid turnaround times and ability to detect many targets on a single test, referred to as “multiplexing.” It provides lower cost for laboratories already performing molecular diagnostic testing and enables smaller laboratories and hospitals without advanced diagnostic capabilities to perform genetic testing. Our ability to detect proteins, which can be as much as 100 times more sensitive than current technologies for certain targets, may enable earlier detection of and intervention in diseases associated with known biomarkers as well as the introduction of tests for new biomarkers that exist in concentrations too low to be detected by current technologies. We are focused on the clinical diagnostics market.

Our test menu is designed to fulfill the following unmet hospital laboratory needs:

 

1)

the conversion of microbiology to molecular methods to more rapidly pinpoint infectious diseases;

 

2)

point-of-care pharmacogenetics to ensure that appropriate therapies are prescribed; and

 

3)

earlier detection of life threatening disease through ultra-sensitive protein assays.

The Verigene System is comprised of a microfluidics processor, a touchscreen reader and disposable test cartridges. Certain assays, such as the Warfarin metabolism and hyper-coagulation tests, were cleared by the U.S. Food and Drug Administration (“FDA”) for use with the original Verigene System processor (the “Original Processor”). Subsequently, we developed and launched a second generation Verigene System processor (the “Processor SP”) that handles the same processing steps as the Original Processor and incorporates sample preparation. Some of our current customers continue to use the Original Processor for hyper-coagulation testing and Warfarin metabolism testing. Our development plans are focused on expanding the menu of tests that will run on the Processor SP, and we plan to develop and seek regulatory approval of all future assays on the Processor SP.

Our Applications

The following table summarizes the FDA and CE In-Vitro Diagnostic Mark (“CE IVD Mark”) regulatory status of our near-term genomic and protein assays on the Verigene System:

 

10

---

Table of Contents

Assay		FDA Status(1)		CE IVD Mark Status(2)
Infectious Disease Assays
Respiratory Virus with Sub-Typing (RV+)		510(k) cleared		CE IVD Marked
Blood Infection Panels •   Blood Culture – Staphylococcus (BC-S) •   Blood Culture – Gram Positive (BC-GP) •   Blood Culture – Gram Negative (BC-GN) •   Blood Culture – Yeast (BC-Y)		510(k) cleared 510(k) cleared In development In development		CE IVD Marked CE IVD Marked CE IVD Marked In development
C. difficile (CDF)		510(k) cleared		CE IVD Marked
Enteric Panel (EP)		In development		In development
Human and Pharmacogenetic Assays
Warfarin Metabolism (CYP2C9)		510(k) cleared(3)		CE IVD Marked
Hyper-Coagulation (FV, FII, MTHFR Panel)		510(k) cleared(3)		CE IVD Marked
CYP2C19 Genetic Variance		510(k) cleared		CE IVD Marked
Ultra-Sensitive Protein Assays
Cardiac Troponin I		In development		In development
Prostate-Specific Antigen (PSA)		Research use only

 

(1)	For further description of our FDA regulatory requirements, please refer to the section “Regulation by the United States Food and Drug Administration” beginning on page 10 of our Annual Report on Form 10-K for the year ended December 31, 2012.

(2)	For further description of our CE IVD Mark regulatory requirements, please refer to the section “Foreign Government Regulation” beginning on page 13 of our Annual Report on Form 10-K for the year ended December 31, 2012.

(3)	Currently cleared only for use with the Original Processor.

Infectious Disease Assays

The conversion of microbiology to molecular methods is driven by the need to identify infectious diseases more quickly, allowing a more rapid commencement of clinical intervention. Microbiology labs need tests that can rapidly detect a wide range of potential infectious agents in an automated system. The Verigene System provides the multiplexing, rapid turnaround and ease-of-use needed by these labs. Our infectious disease menu and the Processor SP provide microbiology labs with a compelling solution for conversion to molecular testing.

We have received 510(k) clearance from the FDA for our respiratory panel that detects the presence of influenza A and B as well as respiratory syncytial virus (“RSV”) A and B. Influenza is commonly known as the seasonal flu and RSV is a respiratory virus that infects the lungs and breathing passages. RSV is the most common cause of bronchitis and pneumonia in children under the age of one year and has become a significant concern for older adults. Our respiratory panel provides physicians with a highly accurate and fast determination of which virus is present. This test result guides the most appropriate treatment therapy.

 

11

---

Table of Contents

In the fourth quarter of 2009, we received 510(k) clearance from the FDA for our respiratory panel on the Processor SP. We believe that our respiratory assay on the Processor SP offers a simple-to-use molecular test for diagnosing respiratory infections and the flu, while providing improved sensitivity over currently available rapid tests. We have received 510(k) clearance for a package insert change for this assay confirming that the novel H1N1 virus is detected as a positive Influenza A when using our respiratory assay and the Processor SP.

In the first quarter of 2011, we received 510(k) clearance from the FDA and obtained CE IVD Mark for our respiratory assay that includes subtyping for seasonal H1 virus, seasonal H3 virus, and the 2009 novel H1N1 virus, commonly known as swine flu, as well as the targets on our previously cleared respiratory assay. We believe this is the first sample-to-result molecular respiratory test to include all of these viruses, thus lowering the cost of molecular respiratory testing for hospitals and demonstrating the multiplexing capability of the Verigene System. The demand for this test will be highly dependent upon the seasonality and prevalence of respiratory viruses.

We developed a test to detect C. difficile, a bacterium that can cause symptoms ranging from diarrhea to life-threatening inflammation of the colon. For our C. difficile test, we received 510(k) clearance from the FDA in the fourth quarter of 2012 and obtained CE IVD Mark in the first quarter of 2013.

We are developing blood stream infection panels for the earlier detection of specific bacteria and resistance markers within patients with blood stream infections. These panels include gram positive, gram negative and fungal pathogens and resistance markers. These assays are designed to enable physicians to detect bacterial strains infecting patients and thus prescribe the most appropriate antibiotic regimen within 24 hours rather than after several days. Treatment is sometimes begun before current traditional assays are complete and we believe that this early detection capability will allow patients to avoid unnecessary treatments that may expose them to serious side effects. The first blood stream infection panel developed was the gram positive that represents approximately 65% of blood stream infections. In the fourth quarter of 2011 we obtained CE IVD Mark for the BC-GP and received FDA 510(k) clearance of BC-S, a subset of the BC-GP panel. In June 2012 we received a de novo 510(k) clearance to market the full BC-GP panel. In September 2012 we received a 510(k) clearance which expanded the intended use of BC-GP for use with all adult blood culture bottles. The BC-GN assay is in clinical trials and we obtained CE IVD Mark for this assay in the first quarter of 2013. The BC-Y panel is in development.

Our development efforts also include an enteric bacteria test. Our enteric bacteria assay identifies the Enterobacteriaceae species that most often result from food poisoning. The enteric assay tests for a wide spectrum of bacteria and viruses that are treated with various antibiotics and other drug therapies. This assay will require regulatory clearance from the FDA and submission to corresponding foreign regulatory bodies.

We also plan to develop an expanded respiratory infection panel that includes additional targets that are not included in our existing respiratory virus assay.

Human and Pharmacogenetic Assays

Hospitals need faster, less expensive and easier-to-use human and pharmacogenetic tests that can be run on-site for their patients. Our Verigene System and human and pharmacogenetic test menu addresses these hospital needs. Pharmacogenomics is an emerging subset of human genetic testing that correlates gene variation with a drug’s efficacy or toxicity. These tests play a key role in the advancement of personalized medicine where drug therapies and dosing are guided by each patient’s genetic makeup. There is a growing demand on laboratories to implement molecular diagnostic testing, but the cost and complexity of existing technologies and the need for specialized personnel and facilities have limited the number of laboratories with these capabilities. The ease-of-use and reduced complexity of the Verigene System enables any hospital to address these testing needs.

We have received 510(k) clearance from the FDA for a warfarin metabolism assay performed on our Original Processor. This is a pharmacogenetic test to determine the existence of certain genetic mutations that affect the metabolism of warfarin-based drugs, including Coumadin^®, the most-prescribed oral anticoagulant. This assay has been CE IVD Marked during the first quarter of 2011, and we may submit an FDA application for this assay to allow its use on the Processor SP, although we have no immediate plans to do so.

In the fourth quarter of 2012 we received 510(k) clearance from the FDA for a CYP2C19 genetic variance test. This assay was CE IVD Marked during the first quarter of 2011. This test detects variances in the cytochrome P-450 2C19 gene. These genetic variances are associated with deficient metabolism of CYP2C19-metabolized therapeutic agents including clopidogrel, more commonly known by the trade name Plavix^™.

 

12

---

Table of Contents

Ultra-Sensitive Protein Assays

Our ability to detect proteins at sensitivity levels that can be 100 times greater than current technologies may enable earlier detection of and intervention in diseases as well as enable the introduction of tests for new biomarkers that exist in concentrations too low to be detected by current technologies. We have developed, are currently developing or plan to develop diagnostic tests for markers that reveal the existence of a variety of medical conditions including cardiovascular, respiratory, cancer, autoimmune, neurodegenerative and other diseases.

The first ultra-sensitive protein test we plan to commercialize is for cardiac troponin I (“cTnI”), which is the gold standard biomarker for diagnosis of myocardial infarction, or heart attack, and identification of patients with acute coronary syndromes at risk for cardiovascular events. We may submit an assay for 510(k) clearance for use as a diagnostic tool for acute coronary syndromes, although we have no immediate plans to do so. Currently, we are focused on investigating the potential to sell primary functional components of this assay to commercial labs as a marker for cardiac risk. Early studies suggest that our ultra-sensitive cTnI test may also be a useful monitoring tool for chronic heart failure (“CHF”) patients. Larger studies and regulatory hurdles will need to be cleared before we market the assay for CHF monitoring purposes.

In addition to the cardiac troponin I assay, we have developed an ultra-sensitive prostate-specific antigen (“PSA”) test for early diagnosis of recurrent prostate cancer. We also may develop ultra-sensitive protein assays in the areas of immunology, allergy and cancer.

Financial Operations Overview

Since inception we have incurred net losses each year, and we expect to continue to incur losses for the foreseeable future. Our net loss was $7.8 million for the three month period ended June 30, 2013 and $8.4 million for the three month period ended June 30, 2012. As of June 30, 2013, we had an accumulated deficit of approximately $364.6 million. Our operations to date have been funded principally through capital contributions from investors in three underwritten public offerings of common stock and, prior thereto, in private placements of our convertible preferred stock which was converted to common stock in 2007. In May 2013, the Company entered into a $22 million loan agreement with Silicon Valley Bank and Oxford Finance LLC secured by all the assets of the Company and bearing an interest rate of 9.25%. Proceeds are to be used for working capital needs and to fund general business requirements. The Company drew down $12 million of the facility on May 6, 2013, and the remaining $10 million can be drawn upon achievement of certain financial conditions. Under the loan agreement, Nanosphere will repay interest only on a monthly basis for the first 12 months and thereafter Nanosphere will repay the principal and interest on a monthly basis for 36 months through the maturity date. If the second loan amount is drawn by Nanosphere, the Company has the option to extend the interest only period extends another 12 months followed by the 36 months of principal and interest amortization period. See Note 9. Stockholders’ Equity in the Notes to Financial Statements for a description of warrants issued to Silicon Valley Bank and Oxford Finance LLC in connection with this debt agreement.

Revenue

Product sales revenue is derived from the sale or lease of the Verigene System, including consumables and related products sold to research laboratories and hospitals. Grant and contract revenue consists of funds received under contracts and government grants, including funds for the reimbursement of certain research and development expenses. Our market efforts are focused on driving product sales rather than grants and contracts.

Cost of Sales

Cost of sales represents the cost of materials, direct labor and other manufacturing overhead costs incurred to produce Verigene cartridges and instruments, as well as royalties on product sales, amortization of purchased intellectual property relevant to products available for sale and depreciation of instruments leased to customers. Labor, validation and testing costs associated with our custom assay development contracts are also included in cost of sales.

 

13

---

Table of Contents

Research and Development Expenses

Research and development expenses include all costs incurred during the development of the Verigene System and assays, and the expenses associated with fulfilling our development obligations related to the United States government contracts and grants. Such expenses include salaries and benefits for research and development personnel, consulting services, materials, patent-related costs and other expenses. We expense all research and development costs in the periods in which they are incurred. We expect research and development expenses to grow modestly as we continue to develop future generations of the Verigene System and expand the genomic and protein tests.

Sales, General and Administrative Expenses

Sales, general and administrative expenses include compensation for employees in our sales, customer service, marketing, management and administrative functions. We also include professional services, facilities, technology, communications and administrative expenses in sales, general and administrative. Clinical trial expenses related to regulatory filings and post marketing studies are included in sales, general and administrative expenses. The professional services costs primarily consist of legal and accounting costs. We expect sales and marketing expenses will increase as additional sales and customer support are needed to drive and support customer growth.

Interest Income

Interest income includes interest earned on our excess cash balances. Such balances are invested in money market and bank checking accounts at major financial institutions. We anticipate that interest income will decline as capital reserves are consumed by operating losses and working capital. Recent declines in interest rates will also contribute to reduced interest income for the foreseeable future.

Three month Period Ended June 30, 2013 Compared to the Three month Period Ended June 30, 2012

Revenues

Revenues were $1.9 million for the three month period ended June 30, 2013, as compared to $1.3 million for the three month period ended June 30, 2012. This 38% increase in revenue was driven primarily by an increase in test cartridge sales to our US microbiology customers.

Cost of Sales

Cost of sales increased to $1.3 million for the three month period ended June 30, 2013 from $0.9 million for the three month period ended June 30, 2012. This 44% increase in cost was due to higher volume of cartridge sales during the second quarter of 2013.

Research and Development Expenses

Research and development expenses decreased to $3.1 million for the three month period ended June 30, 2013 from $4.7 million for the three month period ended June 30, 2012 due to reduced spending on development goods and materials and the capitalization of certain raw material inventory items that were previously expensed.

Sales, General and Administrative Expenses

Sales, general and administrative expenses increased in the second quarter of 2013 to $5.1 million compared to $4.2 million for the second quarter of 2012. This was due to increased payroll and travel expenses from the expansion of our sales and customer support team, increased stock compensation expense and increased spending on cartridges for clinical trials.

Six month Period Ended June 30, 2013 Compared to the Six month Period Ended June 30, 2012

Revenues

Revenues were $4.2 million for the six month period ended June 30, 2013, as compared to $2.6 million for the six month period ended June 30, 2012. Product sales increased $1.6 million from the six month period ended June 30, 2012 to the same period in 2013 primarily due to a 113% increase in sales of cartridges to our US microbiology customers.

 

14

---

Table of Contents

Cost of Sales

Cost of sales was $2.8 million for the six month period ended June 30, 2013 and $1.8 million for the six month period ended June 30, 2012. The $1.0 million increase in cost of sales for the six month period ended June 30, 2013 was due to the higher volume of cartridge units sold during the six month period.

Research and Development Expenses

Research and development expenses decreased from $9.2 million for the six month period ended June 30, 2012 to $7.2 million for the six month period ended June 30, 2013. The $2.0 million decrease in research and development expenses for the six month period ended June 30, 2012 resulted primarily from a shift in resources from development roles into manufacturing roles with the labor cost being captured as inventory valuation and cost of goods sold and the capitalization of certain raw material inventory items that were previously expensed.

Sales, General and Administrative Expenses

Sales, general and administrative expenses increased from $8.2 million for the six month period ended June 30, 2012 to $10.4 million for the six month period ended June 30, 2013 due to sales and customer support expansion.

Liquidity and Capital Resources

From our inception in December 1999 through June 30, 2013, we have received net proceeds of $103.9 million from the sale of convertible preferred stock and issuance of notes payable that were exchanged for convertible preferred stock, $102.2 million from our November 2007 initial public offering of common stock, $35.4 million from our October 2009 underwritten public offering of common stock, $32.2 million from our May 2011 underwritten public offering of common stock, $27 million from our July 2012 underwritten public offering of common stock, $4.7 million from our May 2013 underwritten public offering, $11.7 million from our May 2013 issuance of debt and warrants, and $10.3 million from government grants. We have devoted substantially all of our investments to research, development, manufacturing and SG&A expenses. Since our inception, we have generated minimal revenues from the sale of the Verigene System, including consumables and related products, to our initial clinical customers, research laboratories and government agencies. We also incurred significant losses and, as of June 30, 2013, we had an accumulated deficit of approximately $364.6 million. While we are currently in the commercialization stage of operations, we have not yet achieved profitability and anticipate that we will continue to incur net losses in the foreseeable future.

We do not anticipate achieving positive operating cash flow in the next twenty-four months. We expect to increase investment in additional manufacturing scale-up, and to add to sales, marketing and customer support personnel during this time period. Achievement of positive cash flow from operations will depend upon revenue resulting from adoption of both our current products and future products that depend upon regulatory clearance. Demand for our respiratory products is directly proportional to the size and duration of the annual season for influenza and other respiratory illnesses. Any unanticipated acceleration or deceleration of customer demand for our products relative to projections will have a material effect on our cash flows. Management believes that its current cash balances and cash resources should be sufficient to support forecasted operations through at least the next twelve months. However, the Company operates in a market that makes its prospects difficult to evaluate, and the Company may need additional debt or equity financing in the future to execute its business plans beyond the next twelve months. Management also believes that, if necessary, it can implement plans in the short term to conserve existing cash should additional financing activities be delayed or should the company be unable to access the second draw of $10 million under the May 2013 debt agreement. Capital outlays and operating expenditures will occur over the next twelve months as the Company expands its infrastructure, commercialization, manufacturing, and research and development activities.

A customer may purchase the Verigene System instruments, lease them from a third party or enter into a reagent rental agreement with the Company. Our reagent rental agreements include customer commitments to purchase a certain minimum volume of cartridges over the term of the agreement. As part of these agreements, a portion of the selling price for each cartridge is a rental fee for use of the equipment. We will increase our investment in such systems to support future product placements under reagent rental agreements. We have established a relationship with a third party financing company to provide our customers with lease financing for Verigene equipment. This arrangement may help mitigate the demand on our capital resources as it allows us to recover the cost of such systems immediately, instead of over three to five years.

 

15

---

Table of Contents

As of June 30, 2013, we had $32.0 million in cash and cash equivalents as compared to $33.1 million at December 31, 2012, a decrease of $1.1 million. The decrease in cash and cash equivalents was principally used to fund the first six months’ operating activities, including the period’s net loss and spending to increase net working capital, partially offset by the $16.4 million increase in cash from the May 2013 debt and stock offerings.

Net cash used in operating activities increased from $15.5 million for the six months ended June 30, 2012 to $17.2 million for the six months ended June 30, 2013 due to increased investment in working capital to support the increased sales volumes.

Net cash used in investing activities was $0.5 million for the six months ended June 30, 2013, compared to $0.1 million for the six months ended June 30, 2012. This capital spending was for the purchases of machines to support our clinical trials and expenditures for higher-capacity manufacturing equipment in 2013.

There was $16.5 million of net cash provided by financing activities for the six month period ended June 30, 2013. In May 2013, the Company received $11.7 million in net proceeds from the issuance of debt and warrants related to the first tranche of the $22 million debt facility. Also in May 2013, the company received $4.7 million in net proceeds from its public stock offering.

We may need to increase our capital outlays and operating expenditures over the next several years as we expand our product offering, drive product adoption, further scale-up manufacturing and implement product cost saving techniques. The amount and the timing of the additional capital we will need to raise depend on many factors, including:

 

•

the level of research and development investment required to maintain and improve our technology;

 

•

the amount and growth rate of our revenues;

 

•

changes in product development plans needed to address any difficulties in manufacturing or commercializing the Verigene System and enhancements to our system;

 

•

the costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;

 

•

competing technological and market developments;

 

•

our need or decision to acquire or license complementary technologies or acquire complementary businesses; and

 

•

changes in regulatory policies or laws that affect our operations.

We cannot be certain that additional capital will be available when and as needed or that our actual cash requirements will not be greater than anticipated. If we require additional capital at a time when investment in diagnostics companies or in the marketplace in general is limited due to the then prevailing market or other conditions, we may not be able to raise such funds at the time that we desire or any time thereafter or on terms that are acceptable to us. In addition, if we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we obtain additional debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, and the terms of the debt securities issued could impose significant restrictions on our operations. If we raise additional funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our technologies or products, or grant licenses on terms that are not favorable to us.

Contractual Obligations and Commitments

The Company’s contractual obligations and commitments have not changed materially from the disclosures included in the Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on February 28, 2013.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing or unconsolidated special-purpose entities.

 

16

---

Table of Contents

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk is currently confined to our cash and cash equivalents. We have not used derivative financial instruments for speculation or trading purposes. The primary objective of our investment activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and short-term investments through a variety of securities, including commercial paper, money market funds and corporate debt securities. Our cash and cash equivalents through June 30, 2013 included amounts in bank checking and liquid money market accounts. As a result, we believe we have minimal interest rate risk; however, a one percentage point decrease in the average interest rate on our portfolio, if such a decrease were possible, would have reduced interest income to zero for the three month period ended June 30, 2013.

 

Item 4.

Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Management of the Company, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of June 30, 2013. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2013.

(b) Changes in Internal Control over Financial Reporting

There have been no material changes to the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

17

---

Table of Contents

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

We are from time to time subject to various claims and legal actions during the ordinary course of our business. We believe that there are currently no claims or legal actions that would, in management’s judgment based on information currently available, have a material adverse effect on our results of operations or financial condition.

 

Item 1A.

Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012, which could materially affect our business, financial condition or future results. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

Item 6.

Exhibits, Financial Statement Schedules

 

Exhibit Number		Exhibit Description
4.1		Warrant to purchase common stock dated May 6, 2013 issued to Silicon Valley Bank (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K as filed on May 7, 2013 and incorporated herein by reference).
4.2		Warrant to purchase common stock dated May 6, 2013 issued to Oxford Finance LLC (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K as filed on May 7, 2013 and incorporated herein by reference).
4.3		Warrant to purchase common stock dated May 6, 2013 issued to Oxford Finance LL (filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K as filed on May 7, 2013 and incorporated herein by reference).
10.1		Severance Agreement and General Release dated as of April 11, 2013 by and between the Company and William P. Moffitt, III (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q as filed on May 8, 2013 and incorporated herein by reference).
10.2		Severance Agreement and General Release dated as of April 23, 2013 by and between the Company and Timothy J. Patno (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 25, 2013 and incorporated herein by reference).
10.3		Loan and Security Agreement dated as of May 6, 2013 among Oxford Finance LLC, as collateral agent, and Oxford Finance LLC and Silicon Valley Bank, as Lenders, and the Company (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K as filed on May 7, 2013 and incorporated herein by reference).
10.4		Secured Promissory Note dated May 6, 2013 issued to Silicon Valley Bank (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K as filed on May 7, 2013 and incorporated herein by reference).

 

18

---

Table of Contents

10.5		Secured Promissory Note dated May 6, 2013 issued to Oxford Finance LLC (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K as filed on May 7, 2013 and incorporated herein by reference).
10.6		Secured Promissory Note dated May 6, 2013 issued to Oxford Finance LLC (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K as filed on May 7, 2013 and incorporated herein by reference).
31.1*		Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.1*		The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, formatted in XBRL: (i) Balance Sheets (unaudited), (ii) Statements of Operations (unaudited), (iii) Statements of Stockholders’ Equity (unaudited), (iv) Statements of Cash Flows (unaudited), and (v) Notes of Consolidated Financial Statements.

 

*	Filed herewith

 

19

---

Table of Contents

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.

 

Date: August 6, 2013

 

Date: August 6, 2013