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EX-32.1 - EXHIBIT 32.1 Q3-2015 - NANOSPHERE INCnsph-exh321_2015930xq3.htm
EX-31.2 - EXHIBIT 31.2 Q3-2015 - NANOSPHERE INCnsph-exh312_2015930xq3.htm
EX-31.1 - EXHIBIT 31.1 Q3-2015 - NANOSPHERE INCnsph-exh311_2015930xq3.htm
EX-32.2 - EXHIBIT 32.2 Q3-2015 - NANOSPHERE INCnsph-exh322_2015930xq3.htm

 
 
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 September 30, 2015
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
 
x
 
 
 
 
Non-accelerated filer
¨
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 November 2, 2015 was 8,233,652
 
 



NANOSPHERE, INC.
INDEX
 






PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
Nanosphere, Inc.
Condensed Balance Sheets
(dollars in thousands, except share and per share amounts)
(Unaudited)

 
September 30, 2015
 
December 31, 2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
12,339

 
$
21,053

Restricted cash
4,000

 

Accounts receivable - net of allowance for doubtful accounts
3,314

 
4,292

Inventories
6,775

 
9,387

Other current assets
298

 
380

Total current assets
26,726

 
35,112

Property and equipment - net of accumulated depreciation
8,413

 
5,072

Intangible Assets - net of accumulated amortization
1,905

 
2,080

Other Assets
75

 
75

Total assets
$
37,119

 
$
42,339

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
2,383

 
$
1,827

Accrued compensation
1,592

 
943

Other current liabilities
3,234

 
3,173

Debt - net
15,474

 
9,716

Total current liabilities
22,683

 
15,659

Total liabilities
22,683

 
15,659

Commitments and contingencies
 
 
 
Stockholders' equity:
 
 
 
Convertible preferred stock, $0.01 par value; 10,000,000 shares authorized;
 
 
 
Series A: no shares issued and outstanding as of September 30, 2015, and December 31, 2014, respectively

 

Series B: no shares issued and outstanding as of September 30, 2015, and December 31, 2014, respectively

 

Common stock, $0.01 par value; 150,000,000 shares authorized; 8,233,652 shares and 5,866,318 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively
82

 
59

Additional paid-in capital
461,185

 
448,527

Accumulated deficit
(446,831
)
 
(421,906
)
Total stockholders’ equity
14,436

 
26,680

Total liabilities and stockholders' equity
$
37,119

 
$
42,339

See notes to unaudited condensed financial statements.


1


Nanosphere, Inc.
Condensed Statements of Operations and Comprehensive Loss
(dollars and shares in thousands except per share data)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
Product sales
$
4,888

 
$
3,688

 
$
14,224

 
$
9,643

Total revenue
4,888

 
3,688

 
14,224

 
9,643

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
3,931

 
2,361

 
8,801

 
6,053

Research and development
3,467

 
5,534

 
11,576

 
14,705

Sales, general, and administrative
5,409

 
5,054

 
16,240

 
17,436

Restructuring costs

 

 
513

 

Total costs and expenses
12,807

 
12,949

 
37,130

 
38,194

Loss from operations
(7,919
)
 
(9,261
)
 
(22,906
)
 
(28,551
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(880
)
 
(341
)
 
(2,022
)
 
(1,072
)
Other income
1

 

 
3

 
5

Total other expense
(879
)
 
(341
)
 
(2,019
)
 
(1,067
)
Net, and comprehensive loss
$
(8,798
)
 
$
(9,602
)
 
$
(24,925
)
 
$
(29,618
)
 
 
 
 
 
 
 
 
Deemed dividend on convertible preferred stock, due to beneficial conversion feature
$
(1,133
)
 
$

 
$
(6,936
)
 
$

Loss attributable to common shareholders
$
(9,931
)
 
$
(9,602
)
 
$
(31,861
)
 
$
(29,618
)
 
 
 
 
 
 
 
 
Net loss per common share - basic and diluted
$
(1.31
)
 
$
(2.52
)
 
$
(4.81
)
 
$
(7.77
)
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding - basic and diluted
7,595

 
3,815

 
6,623

 
3,813

See notes to unaudited condensed financial statements.


2


Nanosphere, Inc.
Condensed Statements of Cash Flows
(dollars in thousands)
(Unaudited) 
 
Nine Month Periods Ended
September 30,
 
2015
 
2014
OPERATING ACTIVITIES:
 
 
 
Net loss
$
(24,925
)
 
$
(29,618
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation
1,269

 
1,306

Amortization of intangible assets
243

 
245

Amortization of financing costs and accretion of debt discount
436

 
241

Share-based compensation
740

 
2,631

Provision for doubtful accounts
102

 
89

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
876

 
(572
)
Inventories
(385
)
 
(2,435
)
Other current assets
82

 
(55
)
Accounts payable
(104
)
 
494

Accrued and other current liabilities
1,036

 
1,383

Net cash used in operating activities
(20,630
)
 
(26,291
)
INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(1,171
)
 
(2,147
)
Purchases of intangible asset
(68
)
 

Restricted cash
(4,000
)
 

Net cash used in investing activities
(5,239
)
 
(2,147
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from the issuance of debt with warrants
20,000

 

Payments on debt
(9,916
)
 
(1,175
)
Debt issuance costs
(968
)
 

Proceeds from the issuance of convertible preferred stock with warrants
8,800

 

Equity issuance costs
(761
)
 

Proceeds from stock option exercise

 
653

Net cash provided by financing activities
17,155

 
(522
)
Net decrease in cash and cash equivalents
(8,714
)
 
(28,960
)
Cash and cash equivalents - Beginning of period
21,053

 
41,467

Cash and cash equivalents - End of period
$
12,339

 
$
12,507

NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Reclassification of inventory to (from) property and equipment
$
2,780

 
$
747

Capital expenditures included in accounts payable
671

 
257

Conversion of convertible preferred stock to common stock
7,699

 

Deemed dividend on conversion of preferred stock to common stock
3,211

 

Deemed dividend on convertible preferred stock, due to beneficial conversion feature
3,725

 

Placement agent warrants in connection with convertible preferred stock
340

 

Warrants issued with convertible preferred stock
3,211

 

Warrants issued with debt
3,902

 

SUPPLEMENTAL DISCLOSURE:
 
 
 
Cash paid for interest
1,266

 
818

See notes to unaudited condensed financial statements.

3


Nanosphere, Inc.
Condensed Statement of Stockholders' Equity
(dollars in thousands)
(Unaudited)

 
Convertible Preferred Stock
 
 
 
 
 
 
 
 
 
 
Series A
 
Series B
 
Common Stock
 
 
 
 
 
 
 
Shares
Amount
 
Shares
Amount
 
Shares
Amount
 
Additional Paid in Capital
 
Accumulated Deficit
 
Total
Balance at January 1, 2015


 


 
5,866

59

 
448,527

 
(421,906
)
 
26,680

Warrants issued with debt


 


 


 
3,902

 

 
3,902

Issuance of convertible preferred stock
4

4,400

 
4

4,400

 


 

 

 
8,800

Costs related to the issuance of convertible preferred stock

(388
)
 

(373
)
 


 

 

 
(761
)
Issuance of placement agent warrants in connection with the convertible preferred stock

(175
)
 

(165
)
 


 
340

 

 

Issuance of warrants with convertible preferred stock

(1,606
)
 

(1,605
)
 


 
3,211

 

 

Beneficial conversion feature of convertible preferred stock

(2,227
)
 

(1,498
)
 


 
3,725

 
 
 

Deemed dividend related to immediate accretion of beneficial conversion feature of convertible preferred stock

2,227

 

1,498

 


 
(3,725
)
 

 

Deemed dividend on conversion of preferred stock to common stock

1,606

 

1,605

 


 
(3,211
)
 

 

Conversion of convertible preferred stock to common stock
(4
)
(3,837
)
 
(4
)
(3,862
)
 
2,372

23

 
7,676

 

 

Forfeiture of restricted stock


 


 
(4
)

 

 

 

Share-based compensation expense


 


 


 
740

 

 
740

Net loss


 


 


 

 
(24,925
)
 
(24,925
)
Balance as September 30, 2015

$

 

$

 
8,234

$
82

 
$
461,185

 
$
(446,831
)
 
$
14,436


See notes to unaudited condensed financial statements.


4


Nanosphere, Inc.
Notes to Condensed Financial Statements
(Unaudited)
1. Description of Business and Significant Accounting Policies
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 condensed financial statements should be read in conjunction with the Company’s most recent audited financial statements for the year ended December 31, 2014 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 condensed 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 was $0.2 million and $0.3 million for the three and nine month periods ended September 30, 2015, respectively, and $0.1 million for the three and nine month periods ended September 30, 2014, respectively.
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 condensed financial statements are related to inventories, property and equipment, intangible assets, debt, preferred stock, warrants, and share-based compensation. Actual results could differ from those estimates.
Fair Value of Financial Instruments - The carrying amount of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable approximate their fair values. Fair value of debt was $15.6 million and $9.8 million at September 30, 2015 and December 31, 2014, respectively.
Reverse Stock Split - On April 7, 2015, the Company's Board of Directors and shareholders approved a 20-to-1 reverse split of the Company's issued and outstanding common stock, effective at the close of business on April 8, 2015. The effect of this event has been reflected in all the share quantities and per share amounts in these financial statements. The shares of common stock authorized remained at 150 million and retained a par value of $0.01.

Debt, with Detachable Warrants -  The Company accounts for debt with detachable warrants in accordance with ASC 470:  Debt and allocated proceeds received to the debt and detachable warrants based on relative fair values. The Company assessed the classification of its common stock purchase warrants as of the date of the transaction and determined that such instruments meet the criteria for equity classification. The warrants are reported on the condensed balance sheet as a component of additional paid in capital within stockholders’ equity.

The Company recorded the related issue costs and value ascribed to the warrants as a reduction of the debt.  The discount is amortized utilizing the effective interest method over the term of the debt.  The unamortized discount, if any, upon repayment of the notes will be expensed to interest expense. In accordance with ASC Subtopic 470-20, the Company determined the effective interest rate of the debt was 20.9%. The Company has also evaluated its debt and warrants in accordance with the provisions of ASC 815, Derivatives and Hedging, including consideration of embedded derivatives requiring bifurcation.

Convertible Preferred Stock -  The Company accounts for convertible preferred stock with detachable warrants in accordance with ASC 470:  Debt and allocated proceeds received to the convertible preferred stock and detachable warrants based on relative fair values. The Company evaluated the classification of its convertible preferred stock and warrants and

5


determined that such instruments meet the criteria for equity classification. The Company recorded the related issue costs and value ascribed to the warrants as a reduction of the convertible preferred stock.  

The Company has also evaluated its convertible preferred stock and warrants in accordance with the provisions of ASC 815, Derivatives and Hedging, including consideration of embedded derivatives requiring bifurcation.
Beneficial conversion feature - The issuance of the convertible preferred stock generated a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The Company recognized the BCF by allocating the intrinsic value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per share on the commitment date, to additional paid-in capital, resulting in a discount on the convertible preferred stock. As the convertible preferred stock may be converted immediately, we have recognized the BCF as a deemed dividend in the statement of operations.
Impairment of Intangible Assets - The Company monitors the carrying value of long-lived assets for potential impairment and tests the recoverability of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. If a change in circumstance occurs, the Company performs a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. If cash flows cannot be separately and independently identified for a single asset, the Company will determine whether impairment has occurred for the group of assets for which the Company can identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows, the Company measures any impairment by comparing the fair value of the asset or asset group to its carrying value.
Evaluation Equipment - The Company monitors inventory held at customer sites for evaluation (“Evaluation Equipment”). Upon determination that such Evaluation Equipment is no longer available for sale and is to remain with the customer, Evaluation Equipment is reclassified to property plant and equipment as leased equipment, which is typically after twelve months following initial placement. During the three and nine month periods ended September 30, 2015, the Company reclassified $2.9 million of Evaluation Equipment to property, plant, and equipment.  The Company commences depreciation on the date of transfer and such Evaluation Equipment is depreciated over a three year period.
New Accounting Pronouncements - In May 2014, the FASB issued Accounting Standard Update No. 2014-09, Revenue from Contracts with Customers, (“ASU No. 2014-09”) an updated standard on revenue recognition. ASU No. 2014-09 provides enhancements to the quality and consistency of how revenue is reported by companies while also improving comparability in the financial statements of companies reporting using International Financial Reporting Standards or GAAP. The main purpose of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element arrangements. In July 2015, the FASB voted to approve a one-year deferral of the effective date of ASU No. 2014-09, which will be effective for the Company in the first quarter of 2018 and may be applied on a full retrospective or modified retrospective approach. The Company is evaluating the impact of implementation and transition approach of this standard on its financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This ASU explicitly requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. In connection with each annual and interim period, management will assess if there is substantial doubt about an entity’s ability to continue as a going concern within one year after the issuance date. Management will consider relevant conditions that are known (and reasonably knowable) at the issuance date. Substantial doubt exists if it is probable that the entity will be unable to meet its obligations within one year after the issuance date. Disclosures will be required if conditions give rise to substantial doubt. The new standard will be effective for all entities in the first annual period ending after December 15, 2016. Early adoption is permitted. The Company currently discloses its uncertainty about its ability to continue as a going concern. The Company does not expect the adoption of ASU No. 2014-15 to have a material impact on its disclosures or its consolidated financial statement.
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. ASU No. 2015-03 is effective for the interim and annual periods ending after December 15, 2015, with early

6


adoption permitted. As of June 30, 2015, the Company adopted ASU No. 2015-03 and such adoption resulted in debt issuance costs for all periods presented to be reclassified to debt.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330) - Simplifying the Measurement of Inventory ("ASU 2015-11"), which simplifies the subsequent measurement of inventories by replacing the lower of cost or market test with a lower of cost and net realizable value test. The guidance applies only to inventories for which cost is determined by methods other than last-in first-out ("LIFO") and the retail inventory method. The guidance in ASU No. 2015-11 is effective for periods beginning after December 15, 2016 and early adoption is permitted. The Company will adopt this pronouncement in the first quarter of 2017 and is currently evaluating the impact, if any, adoption will have on its financial position and results of operations.

Reclassifications - Certain information as of December 31, 2014 presented in the financial statements have been reclassified to the current presentation. These reclassifications include: i) the reclassification of $0.1 million of debt issuance costs upon the early adoption of ASU No. 2015-03 to debt on the condensed balance sheets, ii) the combination of warrants to acquire common stock within additional paid in capital on the condensed balance sheets and condensed statement of stockholders’ equity, and iii) the separate presentation of depreciation and amortization and accounts receivable and provision for doubtful accounts on the condensed statements of cash flows, iv) the combination of foreign exchange gain/ loss and interest income on the income statement. These reclassifications had no impact on the results of operations, financial position, or cash flows.
Restricted Cash - Any cash that is legally restricted from use is recorded in restricted cash on the condensed balance sheets. The new term loan facility (See Note 2) requires the Company to maintain a minimum account balance which is considered to be restricted cash. The restricted cash balance was $4 million on September 30, 2015 and there was no restricted cash on December 31, 2014.
Comprehensive Loss - The Company’s comprehensive loss is equal to its net loss for all periods presented.
2. Liquidity, Capital Resources and Recent Developments
Liquidity and Capital Resources
As of September 30, 2015, the Company has incurred net losses of $446.8 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. The Company had cash and cash equivalents of $16.3 million, of which $4 million is restricted cash as of September 30, 2015 and net cash used in operating activities of $20.6 million for the nine months period ended September 30, 2015.
In addition, our current term loan facility (“2015 Loan Agreement”) provides for minimum quarterly amortization ratios of (i) the aggregate of our cash operating expenses, cash interest expenses and capital expenditures, to (ii) our gross profits. The Company did not meet the required amortization ratio of 3.5 for the quarter ended September 30, 2015, and may not achieve the required amortization ratio of 2.6 for the quarter ending December 31, 2015. If the Company fails to satisfy the required amortization ratio for any two out of three successive quarters, the date on which the first amortization payment is due under the term loan facility would accelerate to the next following payment date, and the minimum quarterly amortization rate would increase to approximately $3.3 million, resulting in a payoff of the current amount outstanding under the term loan facility in six fiscal quarters.
Management is uncertain that its current and anticipated cash resources will be sufficient to support currently forecasted operations through at least the next twelve months, and therefore, the Company will need additional debt or equity financing in the future to execute its business plan and to be able to continue as a going concern. Capital outlays and operating expenditures may increase over the next twelve months as the Company expands its infrastructure, manufacturing capacity and research and development activities to support commercialization of our products. These capital outlays and operating expenditures would be curtailed if the Company is not successful in raising additional funds. Many of the aspects of the Company’s forecasts involve management’s judgments and estimates that include factors that could be beyond our control and actual results could differ. These and other factors could cause our forecasted plans to be unsuccessful which could have a material adverse effect on our operating results, financial condition, and liquidity.

7


Term Loan Facility with NSPH Funding LLC and SWK Funding LLC
On May 14, 2015 (the "Closing Date") the Company entered into a Loan and Security Agreement ("2015 Loan Agreement") with NSPH Funding LLC, an affiliate of Life Sciences Alternative Funding, LLC, and SWK Funding LLC, as lenders (together, the “New Lenders”) providing for the New Lenders to advance term loans in an aggregate amount of up to $30 million (the “Loan”) to the Company. NSPH Funding LLC also agreed to act as agent under the loan facility (the “Collateral Agent”).
Also on the Closing Date, concurrent with the Company's entry into the 2015 Loan Agreement, the Company drew down $20.0 million of the Loan, terminated its existing debt facility, and repaid approximately $8.9 million in full satisfaction of all outstanding liabilities and obligations under such prior debt facility. The remaining $10 million of the New Lenders’ commitment (the “Second Advance”) can be drawn upon satisfaction of certain other conditions on or before May 14, 2016, including the Company achieving trailing six month revenue of at least $12 million during any consecutive six month period; and the Company selling no less than 100 cumulative new units during any 12 month period starting January 1, 2015. There can be no assurance that the Company will achieve the foregoing requirements in order to be able to draw the Second Advance.
Under the original terms of the 2015 Loan Agreement, the Company was required to (i) raise at least $6.0 million in net proceeds from either equity financings or licensing or strategic partnership transactions on or before January 14, 2016 (the “Capital Requirement”), and (ii) maintain a minimum of $3.0 million in accounts that are subject to a control agreement in favor of the Collateral Agent. As further described below, on June 11, 2015 the Company completed a registered direct offering of series B preferred stock and warrants to purchase shares of common stock for approximately $4.0 million in net proceeds to the Company. On July 29, 2015 the Company and the New Lenders entered into an amendment to the 2015 Loan Agreement (the “Amendment”) that reduced the Capital Requirement to $4.0 million and included the Lenders’ acknowledgement that the Capital Requirement has been fully satisfied. The Amendment also modified the minimum account balance in the Company’s accounts that are subject to a control agreement in favor of the Collateral Agent, by increasing the minimum balance to $4.0 million concurrent with the entry into the Amendment and providing that it shall increase to $5.0 million after the earlier of the funding of the Second Advance or December 31, 2016.
Under the 2015 Loan Agreement, the Company will pay interest only (the “Interest Only Period”) on a quarterly basis until the earlier of (i) three years from the Closing Date or (ii) the Company’s failure to satisfy a ratio of certain expenses to gross profit as set forth in the 2015 Loan Agreement. At the conclusion of the Interest Only Period, the Company will be required to repay a portion of the outstanding principal and all accrued interest on a quarterly basis through the maturity date of the Loan depending on certain revenue thresholds established under the 2015 Loan Agreement, but subject to certain caps on the principal amount to be paid per fiscal quarter as established under the 2015 Loan Agreement.
The term of the Loan (including the second tranche, if advanced) is six years, or earlier if the Company fails to satisfy a ratio of certain expenses to gross profits or if an event of default occurs, all as set forth in the 2015 Loan Agreement. Interest on the Loan will accrue at a rate of 11.50% per annum plus the greater of (i) 1.00% or (ii) LIBOR. The interest rate will increase by 5.00% upon the occurrence and during the continuation of an event of default under the 2015 Loan Agreement. A facility fee for the Loan of $0.45 million was paid upon execution of the 2015 Loan Agreement. A final fee equal to 5.00% of the aggregate principal amount of the Loan funded (without regard to prepayments during the term of the Loan) at such time will be due upon any repayment of the Loan or acceleration of the Loan. In the event that the Loan is prepaid or accelerated for any reason prior to the third anniversary of the Closing Date, a prepayment fee equal to 2.00% of the principal amount prepaid (if prior to the first anniversary of the Effective Date) or 1.00% (if after the first anniversary but prior to the third anniversary of the Closing Date) is also payable. The Loan is secured by substantially all of the assets of the Company, including, without limitation, the Company’s intellectual property.
The 2015 Loan Agreement includes customary negative covenants that restrict the Company from incurring additional debt, paying dividends, disposing of material assets (except for sales in the ordinary course). The 2015 Loan Agreement also provides for customary events of default, including among others, nonpayment of principal, interest, fees or other amounts; material inaccuracy of representations; material adverse change; violation of covenants; and bankruptcy or insolvency of the Company. If an event of default occurs under the 2015 Loan Agreement, the entire outstanding balance would become immediately due and payable upon notice in certain instances from the Collateral Agent or New Lenders (or on an automatic basis in the event of a bankruptcy or insolvency event).
As consideration for the funding of the Loan and the New Lenders’ commitment thereunder, on the Closing Date the Company issued warrants to the New Lenders to acquire an aggregate of up to 1,000,000 shares of common stock, par value $0.01 (the “Common Stock”) with an exercise price of $0.01 per share and an expiration date that is ten years from the date of the 2015 Loan Agreement (the “Lender Warrants”). At the time of issuance, the relative fair value of the warrants was estimated at $3.9 million using the Black-Scholes model and recorded as a debt discount.

8


Series A Convertible Preferred Stock
 
On May 11, 2015, the Company issued $4.4 million of series A convertible preferred stock (the "Series A Preferred Stock") (which are convertible into a total of 1,168,659 shares of common stock at a conversion price of $3.765) and warrants to purchase shares of common stock exercisable for up to 1,168,659 additional shares of common stock, in the aggregate at exercise price of $3.65 per share (the "Series A Investor Warrants"). In connection with the Series A Offering, and as partial payment of the placement agent’s fees in connection therewith, the Company issued to the placement agent and certain of its principals warrants to purchase an aggregate of 70,120 shares of common stock at an exercise price of $4.45 per share (the “Series A Placement Agent Warrants, and together with the Series A Investor Warrants, the “Series A Warrants”). The Series A Warrants are exercisable for 4.5 to 5 years commencing November 14, 2015. At the time of issuance, the relative fair value of the Series A Investor Warrants was estimated at $1.6 million using the Black-Scholes model and recorded as issuance costs. The Series A Preferred Stock is perpetual and does not have a required dividend right or voting rights and has a liquidation preference of $0.01 per share. As of September 30, 2015, all 4,400 shares of Series A Preferred Stock had been converted into 1,168,659 shares of common stock.
The Company completed the issuance and sale of the Series A Preferred Stock and Series A Warrants on May 14, 2015. Net proceeds from the Series A Offering after placement agent fees and other offering expenses were approximately $4.0 million.
Series B Convertible Preferred Stock
On June 8, 2015, the Investors waived the Lock-Up Restriction and the Company issued $4.4 million of series B convertible preferred stock (the “Series B Preferred Stock”) (which are convertible into a total of 1,203,800 shares of common stock at a conversion price of $3.655) and warrants to purchase shares of common stock exercisable for up to 1,203,800 additional shares of common stock, in the aggregate at an exercise price of $3.54 per share (the “Series B Investor Warrants”). In connection with the Series B Offering, and as partial payment of the placement agent’s fees in connection therewith, the Company issued to the placement agent and certain of its principals warrants to purchase an aggregate of 72,230 shares of common stock at an exercise price of $3.54 per share (the “Series B Placement Agent Warrants, and together with the Series B Investor Warrants, the “Series B Warrants”). The Series B Warrants are exercisable for 4.5 to 5 years commencing December 11, 2015. At the time of issuance, the relative fair value of the Series B Investor Warrants was estimated at $1.6 million using the Black-Scholes model and recorded as issuance costs. The Series B Preferred Stock is perpetual and does not have a required dividend right or voting rights and has a liquidation preference of $0.01 per share. As of September 30, 2015, all 4,400 shares of Series B Preferred Stock has been converted into 1,203,800 shares of common stock.
The Company completed the issuance and sale of the Series B Preferred Stock and Series B Warrants on June 11, 2015. Net proceeds from the Series B Offering after placement agent fees and other offering expenses were approximately $4.0 million.
The Lender Warrants, Series A Warrants, and Series B Warrants can be settled in shares of our common stock by cashless exercise in lieu of payment of the exercise price at the option of the holder. The warrants contain no mandatory redemption features and no repurchase obligations requiring the transferring of assets and are for a fixed number of shares, except for customary anti-dilution adjustments.
Under the original terms of the 2015 Loan Agreement, the Company was required to (i) raise at least $6.0 million in net proceeds from either equity financings or licensing or strategic partnership transactions on or before January 14, 2016 (the “Capital Requirement”), and (ii) maintain a minimum of $3.0 million in accounts that are subject to a control agreement in favor of the Collateral Agent. On June 11, 2015 the Company completed a registered direct offering of series B preferred stock and warrants to purchase shares of common stock for approximately $4.0 million in net proceeds to the Company. On July 29, 2015 the Company and the New Lenders entered into an amendment to the 2015 Loan Agreement (the “Amendment”) that reduced the Capital Requirement to $4.0 million and included the Lenders’ acknowledgement that the Capital Requirement has been fully satisfied. The Amendment also modified the minimum account balance in the Company’s accounts that are subject to a control agreement in favor of the Collateral Agent, by increasing the minimum balance to $4.0 million concurrent with the entry into the Amendment and providing that it shall increase to $5.0 million after the earlier of the funding of the Second Advance or December 31, 2016.
3. Debt
The following table summarizes the Company's debt as of September 30, 2015 and December 31, 2014:

9


 
September 30, 2015
 
December 31, 2014
Silicon Valley Bank and Oxford Finance LLC
$

 
$
9,919

Debt discount, inclusive of issue costs

 
(203
)
 

 
9,716

NSPH Funding LLC and SWK Funding LLC
20,000

 

Debt discount, inclusive of issue costs
(4,526
)
 

Debt
$
15,474

 
$
9,716

The following table sets forth the contractual future principal payments as of September 30, 2015:
Years Ending December 31
 
2015 (October 1 to December 31)
$

2016

2017
1,000

2018
3,500

2019
6,000

Thereafter
9,500


4. 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 nine month periods ended September 30, 2015 and 2014. 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 nine month periods ended September 30, 2015 and 2014 excluded 0 and 29,600 shares of restricted stock, respectively (see Note 5). While these restricted shares of stock are included in outstanding shares on the condensed 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.
The computations of diluted net loss per common share for the three and nine month periods ended September 30, 2015 and 2014 did not include the outstanding shares of restricted stock, options to acquire common stock, common stock warrants, and convertible preferred stock, as the inclusion of these securities would have been antidilutive:
 
Nine Months Ended September 30,
 
2015
 
2014
Restricted stock

 
29,600

Stock options
631,080

 
268,122

Common stock warrants
3,521,610

 
6,801

 
4,152,690

 
304,523

5. Equity Incentive Plan
The Company’s board of directors has adopted and the shareholders have approved the Nanosphere, Inc. 2000 Equity Incentive Plan (the “2000 Plan”), the Nanosphere, Inc. 2007 Long-Term Incentive Plan (the “2007 Plan”) and the Nanosphere, Inc. 2014 Long-Term Incentive Plan (the “2014 Plan,” and together with the 2000 Plan and the 2007 Plan, the “Plans”). Upon adoption of the 2014 Plan at the Company’s annual meeting of shareholders on May 28, 2014, the 2000 Plan and 2007 Plan were terminated. 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, generally over three to four years of service, while other

10


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 11% of the options granted and outstanding contain “accelerated vesting” provisions. The fair values of the Company’s option awards granted during the nine months ended September 30, 2015, were estimated at the dates of grant using the Black-Scholes option pricing model with the following assumptions: 
Expected dividend yield
0.00
%
Expected volatility
77% - 78%

Risk free interest rate
1.49% - 1.92%

Weighted-average expected option life in years
5.5 - 6.0

Estimated weighted-average fair value on the date of grant based on the above assumptions
$1.09 - $3.38

Estimated forfeiture rate for unvested options
10% - 18.03%

The expected volatility for option awards granted in 2015 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 $0.2 million and $0.7 million in the three and nine month periods ended September 30, 2015, respectively, and $0.8 million and $2.6 million for the same periods ended September 30, 2014, respectively.
As of September 30, 2015, the total compensation cost not yet recognized related to the non-vested stock option awards is approximately $1.4 million, which is expected to be recognized over the next three years, with a weighted average term of 1.9 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 September 30, 2015, for the nine month period ended is presented below: 
Options
 
Number of
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term in years
 
Aggregate
Intrinsic
Value of
Options
Outstanding - January 1, 2015
 
266,356

 
$
73.20

 
 
 
 
Granted
 
436,923

 
$
1.69

 
 
 
 
Exercised
 

 
$

 
 
 
 
Expired
 
(63,523
)
 
$
67.24

 
 
 
 
Forfeited
 
(8,676
)
 
$
9.76

 
 
 
 
Outstanding - September 30, 2015
 
631,080

 
$
16.58

 
8.66
 
$

Exercisable - September 30, 2015
 
160,009

 
$
66.19

 
5.45
 
$

Vested and Expected to Vest - September 30, 2015
 
542,572

 
$
19.00

 
5.50
 
$

No options were exercised in the nine month period ended September 30, 2015, and 467,500 options were exercised in the same period ended in 2014.
Included in the number of options outstanding at September 30, 2015 are 20,077 options with a weighted average exercise price of $106.98 per share, which have accelerated vesting provisions based on the criteria mentioned above. The total

11


fair value of shares vested during the three and nine months ended September 30, 2015 was $0.1 million and $1.0 million, respectively, and $0.1 million and $1.9 million, for the same periods in 2014.
A summary of the restricted shares activity under the plans as of September 30, 2015, for the nine month period ended is presented below:
Restricted Stock
 
Number of
Shares
Outstanding - January 1, 2015
 
29,175

Granted
 

Vested
 
(24,050
)
Forfeited
 
(5,125
)
Outstanding - September 30, 2015
 

During the three months ended September 30, 2015, the Company recognized no restricted stock compensation expense due to forfeitures, and less than $0.1 million of restricted stock compensation expense during the nine months ended September 30, 2015. Restricted stock compensation expenses for the three and nine months ended September 30, 2014 were $0.5 million and $1.7 million respectively. As of September 30, 2015, there are no outstanding restricted stock.
6. Preferred Stock

Series A Convertible Preferred Stock
 
The Company issued and sold 4,400 shares of Series A Preferred Stock to the Investors on May 14, 2015. The Series A Preferred Stock, par value $0.01, was sold for $1,000 per share and was convertible at any time at the holder’s option, and did actually convert in a series of conversions in May and June 2015, at a conversion rate of $3.765 per share into 1,168,659 shares of the Company's common stock.
In a concurrent private placement, the Company issued the Series A Warrants to the Investors and the placement agent for the Series A Offering, which are exercisable into up to 1,238,779 shares of our common stock with the 1,168,659 Series A Investor Warrants having an exercise price of $3.65 per share and the Series A Placement Agent Warrants having an exercise price of $4.45 per share, in each case subject to certain customary anti-dilution adjustments. The Series A Investor Warrants are exercisable at any time between November 14, 2015 and November 14, 2020. The Series A Placement Agent Warrants are exercisable at any time between November 14, 2015 and May 14, 2020. The Series A Warrants can be settled in shares of our common stock by cashless exercise in lieu of payment of the exercise price at the option of the investors if the underlying shares are not then registered for resale. The Series A Warrant holders will participate in any dividends declared and paid to common stock holders on an ‘as-exercised’ basis, and will be held in abeyance until the warrants are exercised.
The Company has determined that the Series A Warrants qualify for accounting as equity instruments rather than as liabilities. As of the May 14, 2015 issuance date, the Company estimated the fair value of the Series A Investor Warrants at $3.2 million under the Black-Scholes option pricing model using the following primary assumptions: contractual term of 5.5 years, volatility rate of 77.26%, risk-free interest rate of 1.62% and expected dividend rate of 0%. Based on the Series A Investor Warrant’s relative fair value to the fair value of the Series A Preferred Stock, $1.6 million of the $4.4 million of proceeds was allocated to the Series A Investor Warrants, creating a corresponding preferred stock discount in the same amount.  
The Company assessed the Series A Preferred Stock and the related Series A Warrants under ASC Topic 480, “Distinguishing Liabilities from Equity” (“ASC 480”), ASC Topic 815, “Derivatives and Hedging” (“ASC 815”), and ASC Topic 470, “Debt” (“ASC 470”). The preferred stock contains an embedded feature allowing an optional conversion by the holder into common stock which meets the definition of a derivative. However, we determined that the preferred stock is an “equity host” (as described by ASC 815) for purposes of assessing the embedded derivative for potential bifurcation and that the optional conversion feature is clearly and closely associated to the preferred stock host; therefore the embedded derivative does not require bifurcation and separate recognition under ASC 815. We determined there to be a beneficial conversion feature (“BCF”) requiring recognition at its intrinsic value. Since the conversion option of the preferred stock was immediately exercisable, the amount allocated to the BCF was immediately accreted to preferred dividends, resulting in an increase in the carrying value of the preferred stock. We also assessed the Series A Warrants under ASC 815 and determined that they did not initially meet the definition of a derivative,

12


but will require evaluation on an on-going basis. As of September 30, 2015, we determined that the warrants still did not meet the definition of a derivative and continued to qualify for equity recognition.
On May 14, 2015 the Company recorded a deemed dividend of $2.2 million related to the beneficial conversion feature with the issuance of the Series A Convertible Preferred stock.
As of June 30, 2015, all Series A Preferred Stock had converted to common stock. Upon conversion the Company recorded an additional deemed dividend of $1.6 million.
Series B Convertible Preferred Stock
The Company issued and sold 4,400 shares of Series B Preferred Stock on June 11, 2015. The Series B Preferred Stock, par value $0.01, was sold for $1,000 per share and is convertible at any time at the holder’s option and did actually convert in a series of conversions in June and September 2015, at a conversion rate of $3.655 per share (subject to certain, customary anti-dilution provisions) into 1,203,800 shares of the Company's common stock.
In a concurrent private placement, the Company issued the Series B Warrants to the Investors and the placement agent for the Series B Offering for no additional consideration. The Series B Warrants are exercisable into up to 1,276,060 shares of our common stock at an exercise price of $3.54 per share (subject to certain, customary anti-dilution provisions). The Series B Investor Warrants are exercisable at any time between December 11, 2015 and December 11, 2020. The Series B Placement Agent Warrants are exercisable at any time between December 11, 2015 and June 08, 2020. The terms of the Series B Warrants and related registration rights agreement are otherwise identical to those of the Series A Warrants. As of the June 11, 2015 issuance date, the Company estimated the fair value of the Series B Investor Warrants at $2.9 million under the Black-Scholes option pricing model using the following primary assumptions: contractual term of 5.5 years, volatility rate of 77.36%, risk-free interest rate of 1.82% and expected dividend rate of 0%. Based on the Series B Investor Warrant’s relative fair value to the fair value of the Series B Stock, $1.6 million of the $4.4 million of proceeds was allocated to the Series B Investor Warrants, creating a corresponding preferred stock discount in the same amount.
We assessed the Series B Preferred Stock and Series B Warrants using the same methodology as for the Series A Preferred Stock and Series A Warrants(see discussion above), and resulting in the same determinations.  
On June 8, 2015 the Company recorded a deemed dividend of $1.5 million related to the beneficial conversion feature with the issuance of the Series B Convertible Preferred stock.
For the three and nine month periods ended September 30, 2015, 3,107 and 4,400 of Series B Preferred Stock, respectively, had converted to common stock. Upon conversion, for the three and nine month periods ended September 30, 2015, the Company recorded an additional deemed dividend of $1.1 million and $1.6 million, respectively.
7. Intangible Assets
Intangible assets, consisting of purchased intellectual property, as of September 30, 2015 and December 31, 2014 comprise the following (in thousands):
 
September 30, 2015
 
December 31, 2014
 
Cost
 
Additions
 
Accumulated
Amortization
 
Net
 
Cost
 
Accumulated
Amortization
 
Net
Intellectual property - licenses
$
3,263

 
$
68

 
$
(1,640
)
 
$
1,691

 
$
3,263

 
$
(1,432
)
 
$
1,831

Patents
455

 
 
 
(241
)
 
214

 
455

 
(206
)
 
249

Total
$
3,718

 
$
68

 
$
(1,881
)
 
$
1,905

 
$
3,718

 
$
(1,638
)
 
$
2,080

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 in the table below is based on licenses for which the licensed technology is being used as of September 30, 2015.
The Company reviews its long-lived assets for impairment as a single asset group whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company will continue to monitor the recoverability of its long-lived assets. If results continue to decline, it could result in revisions to management’s estimates of the fair value of the asset group and may result in future charges.

13


Amortization expense for intangible assets was $0.1 million, and $0.2 million for the three and nine month periods ended September 30, 2015, and 2014 respectively. Estimated future amortization expense is as follows (in thousands):  
Years Ending December 31
 
2015 (October 1 to December 31)
$
81

2016
317

2017
301

2018
219

2019
211

Thereafter
776


8. 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 September 30, 2015, 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 7). Certain license agreements have minimum annual royalty payments, and such minimum payments are $0.2 million in 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.
9. Commitments and Contingencies
In November 2013, the Company exercised its renewal option on the lease at its corporate headquarters, and the lease term was extended to May 2017. Rent and operating expenses associated with the office and laboratory space were $0.2 million and $0.5 million for the three and nine months periods ended September 30, 2015, and 2014, respectively.
On January 1, 2015 the Company was leasing 40,749 square feet of space for its administrative, executive, research and development, and manufacturing functions. On February 16, 2015, the Company exercised an option under its lease to acquire an additional 7,721 square feet of space at its corporate headquarters to expand its manufacturing facility, now leasing a total of 48,470 square feet.
With this additional space, the annual future minimum obligations, including common area maintenance (CAM), for the operating leases as of September 30, 2015, are as follows (in thousands): 
Years Ending December 31
Operating
Lease & CAM
(in thousands)
2015 (October to December 31)
$
125

2016
793

2017
350

Total minimum lease payments
$
1,268


14


10. Restructuring Costs
In January 2015, the Company eliminated certain full time positions, and recorded a restructuring expense of $0.5 million for severance. The Company has paid the severance through September 2015. The table below shows the beginning provision, and payments made during each of the three months periods ended:
 
Three months ended March 31, 2015
 
Three months ended June 30, 2015
 
Three months ended September 30, 2015
 
Cost
 
Payments
 
Balance
 
Payments
 
Balance
 
Payments
 
Balance
Provision for Restructure (in thousands)
$
513

 
$
(266
)
 
$
247

 
$
(198
)
 
$
49

 
$
(49
)
 
$


11. Supplemental Financial Information
Inventories (in thousands):
 
September 30, 2015
 
December 31, 2014
Raw materials
 
$
3,386

 
$
3,041

Work-in-process
 
130

 
162

Finished goods
 
3,259

 
6,184

Inventories
 
$
6,775

 
$
9,387

 
Accounts Receivable (in thousands):
 
 September 30, 2015
 
December 31, 2014
Accounts receivable
 
$
3,502

 
$
4,379

Allowance for doubtful accounts
 
(188
)
 
(87
)
Accounts receivable - net
 
$
3,314

 
$
4,292

 
Property and Equipment (in thousands):
 
September 30, 2015
 
December 31, 2014
Property and equipment - at cost
 
$
22,008

 
$
22,435

Less accumulated depreciation
 
(16,579
)
 
(18,624
)
Construction-in-Progress
 
2,984

 
1,261

Property and equipment - net
 
$
8,413

 
$
5,072

 
Other Current Liabilities (in thousands):
 
September 30, 2015
 
December 31, 2014
Accrued clinical trial expenses
 
$
780

 
$
1,858

Accrued license fees
 
41

 
65

All other
 
2,413

 
1,250

Other current liabilities
 
$
3,234

 
$
3,173


 
Three months ended September 30,
 
Nine months ended September 30,
Product Reporting:
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Instruments
$
815

 
$
1,278

 
$
2,433

 
$
2,291

Consumables
4,073

 
2,410

 
11,791

 
7,352

Total revenues
$
4,888

 
$
3,688

 
$
14,224

 
$
9,643

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

15


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:
 
if we do not achieve significant product revenue, we may not be able to meet our cash requirements without obtaining additional capital from external sources, and if we are unable to do so, we may have to curtail or cease operations;
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;
our inability to manage our anticipated growth, constraints or inefficiencies caused by unanticipated acceleration and deceleration of customer demand;
the adequacy of our response to the U.S. Food and Drug Administration (“FDA”) warning letter that we received on January 22, 2015;
our ability to retain and attract senior executives and key scientific and technical personnel to execute our business plan;
our ability to continue as a going concern; 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, 2014, 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.

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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 detect multiple targets simultaneously on a single sample. We are dedicated to enhancing medicine by providing targeted molecular diagnostic tests that can lead to earlier disease detection, optimal patient treatment and improved healthcare economics. The Verigene System includes a bench-top molecular diagnostics workstation that is a universal platform for genomic and protein testing. .
We believe the Verigene System is differentiated by its ease of use, superior analytical performance and ability to detect many targets on a single test, referred to as “multiplexing”. It provides lower cost for laboratories not already performing molecular diagnostic testing and enables full range of hospital laboratories and hospitals without advanced diagnostic capabilities to perform molecular genetic and for infectious disease 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.
The Verigene System is comprised of a microfluidics processor and a touchscreen reader. Certain assays, such as the Warfarin metabolism and hypercoagulation tests, were cleared by the U.S. Food and Drug Administration ("FDA") for use with the original Verigene System processor. Subsequently, we developed and launched a second generation Verigene System processor (the "Processor SP") that incorporates sample preparation, target amplification and detection in a sample to result format.
In addition, we are currently in development of a next generation Verigene system that will deliver improved user interface. This system is designed to provide reduced time to result, improved user interface, including a single room temperature cartridge all in a fully automated sample to result system with an optimized footprint. We plan to begin clinical trials by the end of 2015.
At this time, we believe our current Verigene System instrument inventory levels are sufficient to meet demand. With our next generation Verigene System in development, we will closely monitor inventory levels and forecasted sales to manage our investment to meet demand while managing the risk of obsolete inventory. A significant portion of our inventory is instruments held at outside customers for evaluation prior to purchase. These instruments may not convert to sales and may be returned to the Company. If returned, these instruments are refurbished and remain available for sale inventory. The cost basis of our inventory is reduced for any products that are considered excessive or obsolete based upon assumptions about future demands and market conditions. If actual future demands or market conditions are less favorable than those projected by management, inventory writedowns may be required.    
Our Applications
The following table summarizes the FDA and CE In-Vitro Diagnostic Mark ("CE IVD Mark") regulatory status of our current and near term applications of genetic and infectious disease tests on the Verigene System:
 

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Assay
FDA Status(1)
CE IVD Mark Status(2)
Infectious Disease Assays:
 
 
Respiratory Virus with Sub-Typing (RV+)
510(k) cleared
CE IVD Marked
Respiratory Pathogens/Expanded Panel (RP Flex)
510(k) cleared
CE IVD Marked
Bloodstream Infection (BSI) Panels
 
 
•    Blood Culture – Gram Positive (BC-GP)
510(k) cleared
CE IVD Marked
•    Blood Culture – Gram Negative (BC-GN)
510(k) cleared
CE IVD Marked
C. difficile (CDF)
510(k) cleared
CE IVD Marked
Enteric Panel (EP)
510(k) cleared
 
Enteric Panel on Next Gen Verigene platform (EP)
In development
In development
Human Pharmacogenetic Assays:
 
 
Warfarin Metabolism (CYP2C9)
510(k) cleared(3)
CE IVD Marked
Hypercoagulation (FV, FII, MTHFR Panel)
510(k) cleared(3)
CE IVD Marked
CYP2C19 Genetic Variance
510(k) cleared
CE IVD Marked


(1)
For further description of our FDA regulatory requirements, please refer to the section “Regulation by the United States Food and Drug Administration” in our Annual Report on Form 10-K for the year ended December 31, 2014.
(2)
For further description of our CE IVD Mark regulatory requirements, please refer to the section “Foreign Government Regulation” in our Annual Report on Form 10-K for the year ended December 31, 2014.
(3)
Currently cleared only for use with the original Verigene Processor.
The following table lists our international regulatory submissions and status thereof:
International Submissions & Approvals
Country
Assay
Saudi Arabia
Mexico
Japan
South Korea
Infectious Disease Assays:
 
 
 
 
Respiratory Virus with Sub-Typing (RV+)
Approved
Approved
 
 
Blood Culture – Gram Positive (BC-GP)
Approved
Approved
Submitted
Submitted
Blood Culture – Gram Negative (BC-GN)
Approved
 
Submitted
 
C. difficile (CDF)
Approved
 
 
 
Human Pharmacogenetic Assays:
 
 
 
 
Hypercoagulation (FV, FII, MTHFR Panel)
Approved
 
 
 
CYP2C19 Genetic Variance
 
 
 
Submitted

Infectious Disease Assays
The conversion of traditional culture based methods of microbiology testing methods to more rapid molecular methods is driven by the need to identify infectious diseases more quickly, allowing a more rapid commencement of appropriate clinical intervention. Microbiology labs require 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 the ability to identify infectious pathogens and antibiotic resistance in hours as compared to days using traditional methods.
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

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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.
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. Additionally, we have received 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 (RV+) 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.
The RV+ test has been further expanded to include additional viral and bacterial respiratory pathogens. This expanded panel, RP Flex, is designed to enable hospital-based laboratories to identify complex infections for a broader patient population. We obtained CE IVD Mark for the RP Flex in the second quarter of 2015 and received 510(k) clearance in the third quarter of 2015. The RP Flex contains a panel of 16 viral and bacterial targets and allows for the selection of any combination of targets for an individual sample. In addition, the RP Flex also provides pricing matched to the targets selected, therefore combining clinical utility with healthcare economics. This flexible panel addresses the varied respiratory testing needs of patients, labs and clinicians with a single comprehensive, yet cost-effective solution.
Nanosphere has developed and is continuing to develop bloodstream infection panels for the earlier detection of specific bacteria and resistance markers present in patients with bloodstream infections. These panels include gram-positive, gram-negative and yeast pathogens as well as resistance markers. These assays are designed to enable physicians to detect bacterial strains infecting patients and thus prescribe the most appropriate antibiotic regimen within 2.5 hours after positive blood culture and Gram strain identification rather than after several days, which is typical for current traditional culture assays. The sensitivity and specificity of bloodstream infection tests enable clinicians to make better therapeutic decisions sooner, thus improving patient outcomes and reducing costs. Multiple treatments are often initiated before these current traditional assays are complete. This early detection capability also allows patients to avoid unnecessary treatments that may expose them to serious side effects. The first bloodstream infection panel developed was for the detection of gram-positive organisms (BC-GP) that represent approximately 65% of bloodstream infections. In June 2012, we received a de novo 510(k) clearance, representing the first ever molecular bloodstream infection test to market the full BC-GP panel. In January 2014, we received 510(k) clearance for our gram-negative ("BC-GN") assay representing approximately 35% of bloodstream infections.
Diarrhea caused by bacterial and viral infection represents a significant healthcare burden in the U.S. Since symptoms alone are insufficient to make treatment decisions, rapid identification of the bacterial or viral cause of diarrhea is critical for optimal patient management, limiting the prescription of inappropriate or unnecessary antibiotics. Nanosphere has an active program in the development of diagnostic tests for gastrointestinal/enteric infections. We developed a molecular 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.
Nanosphere has also developed a multiplexed molecular enteric pathogens (EP) test which tests for a wide spectrum of bacteria and viruses causing gastrointestinal infections. This EP test is a cost-effective alternative to conventional identification methods that are time- and labor-intensive. We received 510(k) clearance from the FDA in October 2014 for our EP test and obtained CE IVD Mark in the second quarter of 2015. In addition, we have a next generation Enteric panel that incorporates our Flex capability that will allow for user selected targets of bacterial, viral and parasitic targets all in a Flex pricing format similar to our recently cleared respiratory Flex panel. We believe these Flexpanels provide clinical and economic value to laboratories, clinicians and providers.
Human and Pharmacogenetic Assays
Pharmacogenomics is a 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

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with these capabilities. The ease-of-use and reduced complexity of the Verigene System enables any hospital to perform these tests.
We received 510(k) clearance from the FDA for a warfarin metabolism assay performed on our Original Verigene 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. CE IVD Mark was obtained for this assay during the first quarter of 2011.
We also received 510(k) clearance from the FDA for a hypercoagulation assay performed on our Original Verigene Processor. This is a human genetic test to determine the existence of certain genetic mutations that are hereditary contributory factors in forming blood clots. This Verigene test detects the F5, F2, and MTHFR genes that are associated with hypercoagulation (i.e., thrombophilia). CE IVD Mark was obtained for this assay on the Processor SP during the fourth quarter of 2011.
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™.
Ultra-Sensitive Protein Assays
We also have the capability to detect proteins at high sensitivity alone, or in combination with nucleic acid targets. In the future, we may develop diagnostic tests for markers utilizing this ultra-sensitive capability that can be used to diagnose a variety of medical conditions including cardiovascular, respiratory, cancer, autoimmune, neurodegenerative and other diseases.
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 $8.8 million and $24.9 million for the three and nine month periods ended September 30, 2015 and $9.6 million and $29.6 million for the same periods in 2014. As of September 30, 2015, we had an accumulated deficit of approximately $446.8 million. Our operations to date have been funded principally through capital contributions from investors in six 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%.
On May 14, 2015 we entered into a new $30.0 million loan facility with NSPH Funding LLC, an affiliate of Life Sciences Alternative Funding LLC, and SWK Funding LLC, as lenders, and immediately drew down $20.0 million, terminated our loan agreement with Silicon Valley Bank and Oxford Finance LLC, and repaid approximately $8.9 million in full satisfaction of all outstanding liabilities and obligations to the Silicon Valley Bank and Oxford Finance LLC. Also on May 14, 2015, we completed the issuance and sale of shares of series A convertible preferred stock and unregistered common stock warrants for aggregate net proceeds to us of approximately $4.0 million. On June 11, 2015, we completed the issuance and sale of shares of series B convertible preferred stock and unregistered common stock warrants for aggregate net proceeds to us of approximately $4.0 million. See "Note 2 - Liquidity and Capital Resources" for a description of these transactions.
Revenue
Product sales revenue is derived from the sale or rental of the Verigene System, including test instruments and cartridges and related products sold to hospitals and commercial laboratories. Our marketing efforts are focused on driving product sales, and we have observed that initial customer validation and implementation of our Blood-Culture assays have averaged between nine and twelve months.  
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 provided under leases, rentals, and additions to valuation accounts and reserves to reflect future costs of meeting obligations created by the sale of these products. Costs associated with custom assay development contracts also include labor associated with assay development, validation and testing.

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Research and Development Expenses
Research and development expenses primarily include all costs incurred during the development of the Verigene System instruments and disposable test cartridges, and the expenses associated with developing manufacturing systems and processes. 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.
Sales, General and Administrative Expenses
Sales, general and administrative expenses principally 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. 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 personnel are needed to drive and support customer growth.
Interest Income
Interest income principally includes interest earned on our excess cash balances. Such balances are primarily invested in money market and bank checking accounts at major financial institutions. We expect that continued low interest rates will significantly limit our interest income in the near term.
Interest Expense
Interest expense includes the interest charges related to our debt borrowings, including non-cash amortization of debt discount and issuance costs.
Three Month Period Ended September 30, 2015 Compared to the Three Month Period Ended September 30, 2014
Revenues
Revenues were $4.9 million for the three months ended September 30, 2015, as compared to $3.7 million for the same period in 2014. This growth in revenue was driven primarily by our expanding customer base and utilization of our test menu to our U.S. microbiology customers, which increased revenues by 69% to $4.1 million. Instrument sales for the three months ended September 2015 were down by $0.5 million when compared with the same period in 2014. There were approximately 26 customer placements during the third quarter of 2015.
Cost of Sales
Cost of sales increased to $3.9 million for the three months ended September 30, 2015 from $2.4 million in the same period of 2014. This 66% increase in cost of goods sold was due to the following: (1) a 32% increase in revenues, (2) an increase to our warranty and inventory reserve of $0.5 million due to recent experience and (3) additional expense of $0.25 million related to leased evaluation equipment held at customer locations.
Net of these specific reserves, cost of goods sold was $3.1 million, a 29% increase when compared to the same period last year, due primarily to the increased cartridge sales during the third quarter of 2015.
Gross Margin
Gross margins decreased to 20% in the three months ended September 30, 2015 from 36% in the same period of 2014. This decrease of 16% is due to the items discussed in cost of sales above.
Net of these specific reserves, gross margin was 36%, and remained flat when compared with the same period in 2014.
Research and Development Expenses
Research and development expenses were $3.5 million for the three months ended September 30, 2015 compared to $5.5 million for the same period in 2014. This decrease is due to reduced spending on clinical trials as we completed our study of the Enteric assays, and the reduction in workforce that took place at the beginning of 2015.

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Sales, General and Administrative Expenses
Sales, general and administrative expenses increased slightly in the three months ended September 30, 2015 to $5.4 million from $5.1 million during the same period in 2014. This $0.3 million increase is primarily due to an increase in legal, accounting and financial services provided to the Company to support our finance organization.

Nine month Period Ended September 30, 2015 Compared to the Nine month Period Ended September 30, 2014
Revenues
Revenues were $14.2 million for the nine month period ended September 30, 2015, as compared to $9.6 million for same period in 2014. This growth in revenue was driven primarily by our expanding customer base and utilization of our test menu to our U.S. microbiology customers, which increased revenues by 60% to $11.8 million. Instrument sales grew over 6% to $2.4 million, and there were approximately 76 customer placements during the first nine months of 2015.
Cost of Sales
Cost of sales was $8.8 million for the nine month period ended September 30, 2015 compared to $6.1 million for the nine month period ended September 30, 2014. This 45% increase in cost of goods sold was due to an increase in our revenues.
Net of these specific reserves, cost of goods sold was $8.0 million, a 31% increase when compared to the same period last year, due primarily to the increased cartridge and instrument sales during the course of the year.
Gross Margin
Gross margins increased to 38% for the nine months period ended September 30, 2015, from 37% in the same period in 2014.
Net of these specific reserves, gross margin is at 43%, an increase of 6% when compared with the same period in 2014. This improvement in margin is attributed to operational efficiencies.
Research and Development Expenses
Research and development expenses was $11.6 million for the nine month period ended September 30, 2015, a decrease of $3.1 million from $14.7 million for the nine month period ended September 30, 2014. This decrease was primarily due to the reduction in staffing and associated travel expenses. Clinical trial expenses were higher in the first quarter of 2014 due to the clinical study work associated with our Enteric panel, which is now complete.
Sales, General and Administrative Expenses
Sales, general and administrative expenses was $16.2 million for the nine month period ended September 30, 2015, a decrease of $1.2 million from $17.4 million for the same period in 2014. There was an overall decrease in travel expenses of $0.4 million, and marketing expenses of $0.1 million in the nine months ended September 30, 2015.
Liquidity and Capital Resources
From our inception in December 1999 through September 30, 2015, 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, $35.4 million from our October 2009 underwritten public offering, $32.2 million from our May 2011 underwritten public offering, $27.0 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, $27.8 million from our September 2013 underwritten public offering of common stock, $18.5 million from our October 2014 underwritten public offering of common stock, $4.0 million from our May 2015 registered direct offering of series A convertible preferred stock and concurrent private placement of common stock warrants, $4.0 million from our June 2015 registered direct offering of series B convertible preferred stock and concurrent private placement of common stock warrants, and $10.3 million from government grants. We have devoted substantially all of these funds to research and development and sales, general and administrative 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 September 30, 2015, we had an accumulated deficit of approximately $446.8 million. While we are currently in the commercialization stage of operations, we have not yet achieved

22


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 at least the next twelve months. After giving effect to our recent reduction in force in January 2015, the elimination of certain open positions as of December 31, 2014, our convertible preferred and common stock warrant offerings that we completed in May and June 2015, our new $30.0 million term loan facility that we entered into in May 2015, and the concurrent termination of our loan facility with Silicon Valley Bank and Oxford Finance, LLC, our current and anticipated cash resources will likely be insufficient to support currently forecasted operations beyond the next six months, and we will need additional debt or equity financing in the future to execute our business plan and to be able to continue as a going concern. In addition, our current term loan facility provides for minimum quarterly amortization ratios of (i) the aggregate of our cash operating expenses, cash interest expenses and capital expenditures, to (ii) our gross profits. We did not meet the required amortization ratio of 3.5 for the quarter ended September 30, 2015, and we may not achieve the required amortization ratio of 2.6 for the quarter ending December 31, 2015. If we fail to satisfy the required amortization ratio for any two out of three successive quarters, the date on which the first amortization payment is due under the term loan facility would accelerate to the next following payment date, and the minimum quarterly amortization rate would increase to approximately $3.3 million, resulting in a payoff of the current amount outstanding under the term loan facility in six fiscal quarters.
Market conditions, including a historically low price for our common stock, will likely limit our ability to raise additional capital on favorable terms, or at all, and the terms of any public or private offerings of debt or equity securities likely would be significantly dilutive to existing shareholders. Management also believes that, if necessary, it can implement plans in the short term to conserve existing cash should additional financing activities be delayed but that these efforts will not enable the Company to continue operations through at least the next twelve months. Capital outlays and operating expenditures that would otherwise increase over the next twelve months as the Company expands its infrastructure, manufacturing capacity and research and development activities to support commercialization of our products may need to be curtailed, which may not be advantageous for the Company's business operations.
There is no certainty that we would be able to obtain any of the additional debt or equity financing on commercially reasonable terms or at all, and we may continue to evaluate a full range of potential strategic alternatives. Additional equity funding could be dilutive to existing stockholders. If we fail to obtain the necessary debt or equity financing when needed, we may not be able to execute our planned development and commercialization efforts, which would have a material adverse effect on our growth strategy and our results of operations and financial condition. If we are unable to generate sufficient capital from operations or raise additional funds, we will need to do one or more of the following:
delay, scale-back or eliminate research and development of some or all of assays or the next generation Verigene System;
license third parties to develop and commercialize products or technologies that we would otherwise seek to develop and commercialize ourselves;
accelerate our exploration of strategic alternatives, including attempting to sell our company which could then be on disadvantageous terms;
cease operations; or
file for bankruptcy
The occurrence of any of the foregoing events would have a material adverse effect on our growth strategy and our results of operations and financial condition, and there can be no assurance that we would be able to continue as a going concern.
A customer may purchase the Verigene System instruments, lease them from a third party or enter into a reagent rental agreement. 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 charge for each cartridge is a rental fee for use of the equipment. We may need to increase our investment in such systems rented to customers in order to support future customer growth.
As of September 30, 2015, we had $16.3 million in cash and cash equivalents, which includes $4.0 million

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restricted cash, as compared to $21.1 million at December 31, 2014, a decrease $4.8 million. The decrease in cash and cash equivalents was principally due to the net proceeds received for the debt and equity financing of approximately $17.2 million, offset with the use of cash in operating activities of $20.6 million and investing activities of approximately $5.2 million. Net cash used in operating activities decreased $5.7 million from $26.3 million to $20.6 million for the nine months ended September 30, 2014 and 2015, respectively. This reduction is due to increased revenue and margins, improved inventory and cash management, including the timeliness of collections of accounts receivables.
Net cash used in investing activities was $5.2 million for the nine months ended September 30, 2015, compared to $2.1 million for the same period in 2014, due to the restricted cash balance of $4.0 million required by our new term loan facility, offset by reduced capital expenditures.
There was net $17.2 million provided by our debt and equity financing activities during the nine months ended September 30, 2015, compared to $0.5 million of cash provided by financing activities for the same period in 2014, due to proceeds from our stock option exercises offset by payment on our debt.
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 savings. The amount and the timing of the additional capital we will need to raise, if any, 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. 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.

Indefinite-lived Asset Impairment Assessment
        
We continue to monitor our performance and do not believe an event has occurred that would result in an indefinite-lived asset impairment at quarter end. However, if results continue to decline, it would result in revisions to management’s estimates of the fair value of the Company’s indefinite-lived assets and may result in future impairment charges.

Nasdaq Listing

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On September 19, 2014, the Company received a deficiency letter from the Listing Qualifications Department of The NASDAQ Stock Market, notifying the Company that, for the prior 30 consecutive business days, the bid price of the Company’s common stock was not maintained at the minimum $1.00 per share as required for continued listing on The NASDAQ Global Market. In October 2014, the Company transferred the listing of its common stock to the NASDAQ Capital Market and on April 8, 2015 effected a 20-to-1 reverse split of its common stock. The Company’s common stock has had a minimum bid price of at least $1.00 every trading day subsequent to the Company effecting the reverse stock split. On April 23, 2015, the Listing Qualifications Department of The NASDAQ Stock Market notified the Company, that the Company has regained compliance with Listing Rule 5450(a)(1).
Contractual Obligations and Commitments
On January 1, 2015, the Company was leasing 40,749 square feet of space for its administrative, executive, research and development, and manufacturing functions. On February 16, 2015, the Company exercised an option under its lease to acquire an additional 7,721 square feet of space at its corporate headquarters to expand the manufacturing facility, now leasing a total of 48,470 square feet. This lease expires on May 31, 2017.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing or unconsolidated special-purpose entities as of September 30, 2015.
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 September 30, 2015 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 increase or 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 September 30, 2015.
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 Interim 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 September 30, 2015. 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 Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure. Based upon this evaluation, the Chief Executive Officer and the Interim Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2015.
(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.

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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, 2014, 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, 2014.
Item 6.
Exhibits, Financial Statement Schedules
 
Exhibit
Number
 
Exhibit Description
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 September 30, 2015, formatted in XBRL: (i) Condensed Balance Sheets (unaudited), (ii) Condensed Statements of Operations and Comprehensive Loss (unaudited), (iii) Condensed Statements of Stockholders’ Equity (unaudited), (iv) Condensed Statements of Cash Flows (unaudited), and (v) Notes to unaudited Condensed Financial Statements.







*
Filed herewith
 

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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.
 
NANOSPHERE, INC.
 
By:
/s/ Michael K. McGarrity
 
 
Michael K. McGarrity
 
 
President and Chief Executive Officer
 
Date: November 9, 2015
 
By:
/s/ Farzana Moinuddin
 
 
Farzana Moinuddin
 
 
Interim Chief Financial Officer and Treasurer
 
Date: November 9, 2015


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