Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

 

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**FORM 10-Q**

 

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**(MarkOne)**

 

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

 

**Forthe quarterly period ended June 30, 2008**

** **

**or**

 

| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**For thetransition period from               to**

 

**CommissionFile Number 001-33282**

 

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**XTENT,INC.**

(Exact Name of Registrantas Specified in Its Charter)

 

| **Delaware**                     | ** ** | **41-2047573**      |
|----------------------------------|------------|---------------------|
| (State or Other  Jurisdiction of |       | (I.R.S. Employer    |
| Incorporation or  Organization)  |       | Identification No.) |

 

**125Constitution Drive**

**MenloPark, California 94025-1118**

(Address of principalexecutive offices, including Zip Code)

 

**(650)475-9400**

(Registrant’s telephonenumber, including area code)

 

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Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90days.     YES   x    NO   o

 

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

 

| Large accelerated  filer  o              |   |   |   | Accelerated filer  o         |
|-----------------------------------------------|--------|--------|--------|-----------------------------------|
|                                          |   |   |   |                              |
| Non-accelerated  filer  o                |   |   |   | Smaller reporting company  x |
| (Do not check if a smaller reporting company) |   |   |

 

As of August 5, 2008, there were 23,244,674 sharesof XTENT, Inc. common stock outstanding.

 

 

 

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Table of Contents

 

**XTENT,INC.**

**FORM 10-Q**

**TABLE OFCONTENTS**

 
| ** **                                         | ** ** | ** **                                                                                  | ** ** | **Page** |
|----------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------|
| **Part I:  Financial  Information** |
|                                               |       |                                                                                        |       |     |
| Item 1.                                       |       | Condensed  Financial Statements (unaudited):                                                |       | 3        |
|                                               |       |                                                                                        |       |     |
|                                               |       | Condensed  Balance Sheets                                                                   |       | 3        |
|                                               |       |                                                                                        |       |     |
|                                               |       | Condensed Statements of Operations                                                          |       | 4        |
|                                               |       |                                                                                        |       |     |
|                                               |       | Condensed Statements of Cash Flows                                                          |       | 5        |
|                                               |       |                                                                                        |       |     |
|                                               |       | Notes to  Condensed Financial Statements                                                    |       | 6        |
|                                               |       |                                                                                        |       |     |
| Item 2.                                       |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       | 16       |
|                                               |       |                                                                                        |       |     |
| Item 3.                                       |       | Quantitative  and Qualitative Disclosures About Market Risk                                 |       | 23       |
|                                               |       |                                                                                        |       |     |
| Item 4.                                       |       | Controls and  Procedures                                                                    |       | 24       |
|                                               |       |                                                                                        |       |     |
| **Part II:  Other  Information**    |
|                                               |       |                                                                                        |       |     |
| Item 1.                                       |       | Legal Proceedings                                                                           |       | 25       |
|                                               |       |                                                                                        |       |     |
| Item 1A.                                      |       | Risk  Factors                                                                               |       | 25       |
|                                               |       |                                                                                        |       |     |
| Item 2.                                       |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |       | 46       |
|                                               |       |                                                                                        |       |     |
| Item 3.                                       |       | Defaults Upon  Senior Securities                                                            |       | 46       |
|                                               |       |                                                                                        |       |     |
| Item 4.                                       |       | Submission of  Matters to a Vote of Security Holders                                        |       | 46       |
|                                               |       |                                                                                        |       |     |
| Item 5.                                       |       | Other Information                                                                           |       | 47       |
|                                               |       |                                                                                        |       |     |
| Item 6.                                       |       | Exhibits                                                                                    |       | 48       |
|                                               |       |                                                                                        |       |     |
| Signatures                                         |       |                                                                                        |       | 49       |
|                                               |       |                                                                                        |       |     |
| Certifications                                     |       |                                                                                        |       |     |

 

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**PART I: FINANCIAL INFORMATION**

 

**ITEM 1. CONDENSED FINANCIALSTATEMENTS (UNAUDITED)**

 

**XTENT,INC.**

**(adevelopment stage company)**

**CONDENSEDBALANCE SHEETS**

**(unaudited;in thousands, except per share amounts)**

 
| ** **                                                                                                                                                                                                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                    | ** ** | **2008**          | ** ** | **2007 (1)**          | ** ** |
| **ASSETS**                                                                                                                                                                                                                    | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                                                                               |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                                     |       | $                 | 11,660     |                  | $          | 13,366 |   |
| Short-term investments                                                                                                                                                                                                        |       | 22,767            |       | 44,394                |       |
| Prepaid expenses and other current assets                                                                                                                                                                                     |       | 1,090             |       | 905                   |       |
| Total current assets                                                                                                                                                                                                          |       | 35,517            |       | 58,665                |       |
|                                                                                                                                                                                                                          |       |              |       |                  |       |
| Property and equipment, net                                                                                                                                                                                                   |       | 3,811             |       | 3,601                 |       |
| Other non-current assets                                                                                                                                                                                                      |       | 179               |       | 149                   |       |
| Total assets                                                                                                                                                                                                                  |       | $                 | 39,507     |                  | $          | 62,415 |   |
|                                                                                                                                                                                                                          |       |              |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                 | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                                                                                                                          |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                                                              |       | $                 | 1,981      |                  | $          | 1,960 |   |
| Accrued liabilities                                                                                                                                                                                                           |       | 2,181             |       | 2,124                 |       |
| Total current liabilities                                                                                                                                                                                                     |       | 4,162             |       | 4,084                 |       |
|                                                                                                                                                                                                                          |       |              |       |                  |       |
| Commitments and contingencies (note 6)                                                                                                                                                                                        |       |              |       |                  |       |
|                                                                                                                                                                                                                          |       |              |       |                  |       |
| Stockholders’ Equity:                                                                                                                                                                                                    |       |              |       |                  |       |
| Common stock: $0.001 par value; 100,000 shares authorized at  June 30, 2008 and December 31, 2007; 23,148 and 23,015 shares  issued and outstanding at June 30, 2008 and December 31, 2007,  respectively |       | 23                |       | 23                    |       |
| Additional paid-in capital                                                                                                                                                                                                    |       | 153,699           |       | 151,496               |       |
| Deferred stock-based compensation                                                                                                                                                                                             |       | (195              | )          | (364                  | )          |
| Accumulated other comprehensive income                                                                                                                                                                                        |       | 21                |       | 36                    |       |
| Deficit accumulated during development stage                                                                                                                                                                                  |       | (118,203          | )          | (92,860               | )          |
| Total stockholders’ equity                                                                                                                                                                                               |       | 35,345            |       | 58,331                |       |
|                                                                                                                                                                                                                          |       |              |       |                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                               |       | $                 | 39,507     |                  | $          | 62,415 |   |

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(1)    The condensed balance sheet at December 31,2007 has been derived from the audited financial statements at that date, butdoes not include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financial statements.

 

The accompanying notesare an integral part of these condensed financial statements.

 

 

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**XTENT, INC.**

**(adevelopment stage company)**

**CONDENSEDSTATEMENTS OF OPERATIONS**

**(unaudited;in thousands, except per share amounts)**

 
| ** **                                                                                          | ** ** | ** **             | ** ** | ** **           | ** ** | ** **        | ** ** | ** ** | ** ** | **Cumulative**         | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|-------------------|------------|------------|------------|------------------------|------------|
| ** **                                                                                          | ** ** | ** **             | ** ** | ** **           | ** ** | ** **        | ** ** | ** ** | ** ** | **Period from**        | ** ** |
| ** **                                                                                          | ** ** | ** **             | ** ** | ** **           | ** ** | ** **        | ** ** | ** ** | ** ** | **June 13, 2002** | ** ** |
| ** **                                                                                          | ** ** | ** **             | ** ** | ** **           | ** ** | ** **        | ** ** | ** ** | ** ** | **(Date of**           | ** ** |
| ** **                                                                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** | **Inception) to** | ** ** |
| ** **                                                                                          | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** | **June 30,** | ** ** |
| ** **                                                                                          | ** ** | **2008**               | ** ** | **2007**             | ** ** | **2008**          | ** ** | **2007**   | ** ** | **2008**               | ** ** |
| ** **                                                                                          | ** ** | ** **             | ** ** | ** **           | ** ** | ** **        | ** ** | ** ** | ** ** | ** **             | ** ** |
| Operating expenses:                                                                                 |       |                   |       |                 |       |              |       |       |       |                   |       |
| Research and development (1)                                                                        |       | $                      | 9,818      |                 | $          | 7,704             |       | $          | 19,239     |                   | $          | 13,927 |   | $ | 93,653 |   |
| General and administrative (1)                                                                      |       | 3,331                  |       | 2,801                |       | 6,773             |       | 5,262      |       | 30,316                 |       |
| Total operating expenses                                                                            |       | 13,149                 |       | 10,505               |       | 26,012            |       | 19,189     |       | 123,969                |       |
|                                                                                                |       |                   |       |                 |       |              |       |       |       |                   |       |
| Loss from operations                                                                                |       | (13,149                | )          | (10,505              | )          | (26,012           | )          | (19,189    | )          | (123,969               | )          |
|                                                                                                |       |                   |       |                 |       |              |       |       |       |                   |       |
| Interest and other income, net                                                                      |       | 263                    |       | 1,049                |       | 669               |       | 1,798      |       | 5,766                  |       |
|                                                                                                |       |                   |       |                 |       |              |       |       |       |                   |       |
| Net loss                                                                                            |       | (12,886                | )          | (9,456               | )          | (25,343           | )          | (17,391    | )          | (118,203               | )          |
|                                                                                                |       |                   |       |                 |       |              |       |       |       |                   |       |
| Deemed dividend related to beneficial conversion feature of  redeemable convertible preferred stock |       | —                 |       | —               |       | —            |       | —     |       | (13,095                | )          |
|                                                                                                |       |                   |       |                 |       |              |       |       |       |                   |       |
| Net loss attributable to common stockholders                                                        |       | $                      | (12,886    | )                    | $          | (9,456            | )          | $          | (25,343    | )                      | $          | (17,391 | ) | $ | (131,298 | ) |
|                                                                                                |       |                   |       |                 |       |              |       |       |       |                   |       |
| Net loss per share attributable to common stockholders - basic and  diluted                         |       | $                      | (0.56      | )                    | $          | (0.42             | )          | $          | (1.10      | )                      | $          | (0.93 | ) |   |   |
|                                                                                                |       |                   |       |                 |       |              |       |       |       |                   |       |
| Weighted-average common shares outstanding - basic and diluted                                      |       | 23,033                 |       | 22,551               |       | 22,978            |       | 18,649     |       |                   |       |

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(1)          Includes thefollowing stock-based compensation charges:

 
| Research and development   |   | $      | 393    |   | $      | 348    |   | $      | 781    |   | $      | 736 |   | $ | 3,842 |   |
|----------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|-----|--------|---|-------|--------|
| General and administrative |   | $      | 695    |   | $      | 413    |   | $      | 1,345  |   | $      | 832 |   | $ | 4,499 |   |
|                       |   |   |   |   |   |   |   |   |   |   |   |

 

The accompanyingnotes are an integral part of these condensed financial statements.

 

 

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**XTENT, INC.**

**(adevelopment stage company)**

**CONDENSEDSTATEMENTS OF CASH FLOWS**

**(unaudited;in thousands)**

 
| ** **                                                                                   | ** ** | ** **                         | ** ** | ** **        | ** ** | **Cummulative**        | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                                                   | ** ** | ** **                         | ** ** | ** **        | ** ** | **Period from**        | ** ** |
| ** **                                                                                   | ** ** | ** **                         | ** ** | ** **        | ** ** | **June 13, 2002** | ** ** |
| ** **                                                                                   | ** ** | ** **                         | ** ** | ** **        | ** ** | **(Date of**           | ** ** |
| ** **                                                                                   | ** ** | ** **                         | ** ** | ** **        | ** ** | **Inception) to**      | ** ** |
| ** **                                                                                   | ** ** | **Six Months Ended June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                                                                   | ** ** | **2008**                           | ** ** | **2007**          | ** ** | **2008**               | ** ** |
| ** **                                                                                   | ** ** | ** **                         | ** ** | ** **        | ** ** | ** **             | ** ** |
| **Cash flows from operating activities:**                                                    | ** ** | ** **                         | ** ** | ** **        | ** ** | ** **             | ** ** |
| Net loss                                                                                     |       | $                                  | (25,343    | )                 | $          | (17,391                | )          | $ | (118,203 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities:                 |       |                               |       |              |       |                   |       |
| Depreciation and amortization                                                                |       | 650                                |       | 544               |       | 3,367                  |       |
| Amortization of securities discount                                                          |       | (268                               | )          | (735              | )          | (1,973                 | )          |
| Gain (loss) on sale of investments                                                           |       | (26                                | )          | —            |       | (6                     | )          |
| Loss on disposal of property and equipment                                                   |       | —                             |       | —            |       | 163                    |       |
| Stock-based compensation expense                                                             |       | 2,126                              |       | 1,568             |       | 8,341                  |       |
| Stock issued in exchange for services                                                        |       | —                             |       | —            |       | 231                    |       |
| Changes in operating assets and liabilities:                                                 |       |                               |       |              |       |                   |       |
| Prepaid expenses and other current assets                                                    |       | (323                               | )          | (236              | )          | (1,005                 | )          |
| Accrued interest receivable on securities                                                    |       | 138                                |       | (137              | )          | (234                   | )          |
| Accounts payable                                                                             |       | 21                                 |       | 537               |       | 1,866                  |       |
| Accrued liabilities                                                                          |       | 99                                 |       | 708               |       | 2,272                  |       |
| Net cash used in operating activities                                                        |       | (22,926                            | )          | (15,142           | )          | (105,181               | )          |
|                                                                                         |       |                               |       |              |       |                   |       |
| **Cash flows from investing activities:**                                                    | ** ** | ** **                         | ** ** | ** **        | ** ** | ** **             | ** ** |
| Purchase of investments                                                                      |       | (11,901                            | )          | (73,194           | )          | (130,139               | )          |
| Proceeds from maturities of investments                                                      |       | 23,845                             |       | 16,500            |       | 95,424                 |       |
| Proceeds from sale of investments                                                            |       | 9,963                              |       | —            |       | 13,949                 |       |
| Restricted cash                                                                              |       | (30                                | )          | —            |       | (30                    | )          |
| Purchase of property and equipment                                                           |       | (862                               | )          | (993              | )          | (7,338                 | )          |
| Proceeds from sale of property and equipment                                                 |       | 2                                  |       | —            |       | 20                     |       |
| Net cash provided by (used in) investing activities                                          |       | 21,017                             |       | (57,687           | )          | (28,114                | )          |
|                                                                                         |       |                               |       |              |       |                   |       |
| **Cash flows from financing activities:**                                                    | ** ** | ** **                         | ** ** | ** **        | ** ** | ** **             | ** ** |
| Proceeds from issuance of redeemable convertible preferred stock, net  of issuance costs     |       | —                             |       | —            |       | 75,592                 |       |
| Proceeds from initial public offering, net of offering costs                                 |       | —                             |       | 69,112            |       | 68,237                 |       |
| Principal payments on capital lease obligations                                              |       | —                             |       | —            |       | (23                    | )          |
| Proceeds from issuance of common stock and exercise of stock options                         |       | 203                                |       | 41                |       | 1,149                  |       |
| Net cash provided by financing activities                                                    |       | 203                                |       | 69,153            |       | 144,955                |       |
|                                                                                         |       |                               |       |              |       |                   |       |
| Net increase (decrease) in cash and cash equivalents                                         |       | (1,706                             | )          | (3,676            | )          | 11,660                 |       |
| Cash and cash equivalents at beginning of period                                             |       | 13,366                             |       | 23,105            |       | —                 |       |
|                                                                                         |       |                               |       |              |       |                   |       |
| Cash and cash equivalents at end of period                                                   |       | $                                  | 11,660     |              | $          | 19,429                 |       | $ | 11,660 |   |
|                                                                                         |       |                               |       |              |       |                   |       |
| **Supplemental disclosure of noncash investing and  financing activities:**                  | ** ** | ** **                         | ** ** | ** **        | ** ** | ** **             | ** ** |
| Deferred stock-based compensation                                                            |       | $                                  | —     |              | $          | —                 |       | $ | 1,272 |   |
| Reversal of deferred stock-based compensation                                                |       | $                                  | (37        | )                 | $          | (13                    | )          | $ | (132 | ) |
| Dividend related to beneficial conversion feature of redeemable  convertible preferred stock |       | $                                  | —     |              | $          | —                 |       | $ | (13,095 | ) |
| Equipment acquired under capital leases                                                      |       | $                                  | —     |              | $          | —                 |       | $ | (23 | ) |
| Vesting of restricted common stock from early exercises                                      |       | $                                  | 42         |              | $          | 52                     |       | $ | 417 |   |
| Deferred initial public offering costs                                                       |       | $                                  | —     |              | $          | 875                    |       | $ | 875 |   |
| Changes in net unrealized gains on investments                                               |       | $                                  | (15        | )                 | $          | (30                    | )          | $ | 21 |   |
|                                                                                         |       |                               |       |              |       |                   |       |

 

The accompanyingnotes are an integral part of these condensed financial statements.

 

 

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**XTENT,INC.**

**NOTESTO CONDENSED FINANCIAL STATEMENTS**

**(unaudited)**

 

**NOTE 1 - Organization and Basis ofPresentation**

 

**Organization**

 

XTENT, Inc. (the “Company”), was incorporated inthe state of Delaware on June 13, 2002 (“inception”), and is focused ondeveloping and commercializing innovative drug eluting stent systems for thetreatment of coronary artery disease. The Company is in the development stageand since inception has devoted substantially all of its time and efforts todeveloping products, raising capital and recruiting personnel.

 

The Company has incurred net operating losses eachyear since inception. At June 30, 2008, the Company had an accumulateddeficit of $118.2 million. The Company has not achieved positive cashflows from operations in any year since inception. In February 2007, theCompany completed its initial public offering raising net proceeds of$68.2 million. In order to continue its operations, the Company mustachieve profitable operations, obtain additional debt financing or selladditional shares of its equity securities. The Company plans to selladditional equity or debt securities or obtain a credit facility during 2008.There can be no assurance that the Company will be able to obtain additionaldebt or equity financing on terms acceptable to the Company, or at all. Thefailure of the Company to obtain sufficient funds on acceptable terms whenneeded could require the Company to reduce the scope of, delay, or eliminatesome or all of the planned clinical trials, research, development andcommercialization activities, which could have a material adverse effect on theCompany’s business, results of operations and financial condition.

 

Management is currently working toward its objectiveof realizing profitability by obtaining regulatory approval of its products inthe United States and Europe. The failure of the Company to obtain approval ofits products from regulatory authorities could have a material adverse effecton the Company’s business, results of operations, future cash flows andfinancial condition.

 

**Basis ofPresentation**

 

The accompanying unaudited condensed financialstatements have been prepared by the Company in accordance with the accountingprinciples generally accepted in the United States of America for interimfinancial information and pursuant to the instructions to Form 10-Q and Article 10of Regulation S-X of the Securities and Exchange Commission.  Accordingly,they do not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements.  In theopinion of management, all adjustments (consisting only of normal recurringadjustments) considered necessary for a fair statement have beenincluded.  The results for the three and six months ended June 30,2008 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2008, or for any future period.  Theseunaudited condensed financial statements and notes should be read inconjunction with the audited financial statements and the notes theretoincluded in the Company’s Annual Report on Form 10-K for the year ended December 31,2007, filed with the Securities and Exchange Commission on March 17, 2008.

 

**NOTE 2 - Summary of SignificantAccounting Policies**

 

***Cash and Cash Equivalents***

 

The Company considers all highly liquid investmentspurchased with an original maturity of three months or less at the date ofpurchase to be cash equivalents. The Company deposits cash and cash equivalentswith high credit quality financial institutions. Cash equivalents consistprimarily of liquid money market funds and U.S. Treasury and agency securities.

 

***Investments***

 

Investments with an original maturity of more thanthree months and less than one year at the date of purchase are considered tobe short-term. Investments consist primarily of fixed income securities. TheCompany classifies its investments as available-for-sale in accordance with Statementof Financial Accounting Standards (“SFAS”) No. 115, *Accounting for Certain Investments in Debt and EquitySecurities* and they are recorded at fair value. The fair value of 

 

 

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investments is based on quoted market prices. As of June 30,2008 all of the Company’s investments were short-term in nature.

 

Unrealized gains and losses are reported as accumulatedother comprehensive income (loss), which is a separate component ofstockholders’ equity, until realized. Premiums (or discounts) on investmentsare amortized (or accreted) to interest and other income, net over the life ofthe investment. Realized gains and losses on investments sold are included ininterest and other income, net in the Company’s statement of operations.

 

The Company reviews its short-term investments on aregular basis to evaluate whether or not any security has experienced another-than-temporary decline in fair value. If the Company believes that another-than-temporary decline exists in one of its marketable securities, itwrites down these investments to the fair value and records the write-downwithin interest and other income, net in the Company’s statement of operations.

 

***RestrictedCash***

 

The Company has restricted cash in the amount of$30,000 related to a certificate of deposit held as security against creditcards used by employees in the purchasing department.

 

***Concentration of Credit Risk***

 

The Company’s financial instruments that are exposedto concentration of credit risk consist primarily of cash and cash equivalentsand short-term investments. Financial instruments are comprised primarily ofmoney market funds and U.S. Government and agency securities rated A1 and P1 orbetter. The Company’s cash and cash equivalents are mainly deposited with onemajor financial institution, which at times exceeds the amount of insuranceprovided by the Federal Deposit Insurance Corporation on such deposits. TheCompany mitigates the concentration of credit risk by placing percentage limitson the maximum portion of the investment portfolio which may be invested in anyone investment instrument. The Company has not recognized any losses from creditrisks on such accounts during any of the periods presented and believes that itis not exposed to any significant risk on these balances.

 

***Comprehensive Income (Loss)***

 

Comprehensive income (loss) is defined as the changein equity from transactions and other events and circumstances other than thoseresulting from investments by owners and distributions to owners. The Company’sunrealized gains (losses) on available-for-sale securities represent the onlycomponent of other comprehensive loss that was excluded from the Company’s netloss and is reflected as a component of stockholders’ equity.

 

Total comprehensive loss during the three and sixmonths ended June 30, 2008 and 2007 consisted of:

 
| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                   | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                   | ** ** | **2008**               | ** ** | **2007**             | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                   | ** ** | **(in thousands)**     | ** ** | **(in thousands)**   | ** ** |
|                                                         |       |                   |       |                 |       |   |   |   |   |
| Net loss attributable to common stockholders                 |       | $                      | (12,886    | )                    | $          | (9,456 | ) | $ | (25,343 | ) | $ | (17,391 | ) |
| Change in unrealized losses on available-for-sale securities |       | (110                   | )          | (1                   | )          | (15 | ) | (30 | ) |
|                                                         |       |                   |       |                 |       |   |   |   |   |
| Comprehensive loss                                           |       | $                      | (12,996    | )                    | $          | (9,457 | ) | $ | (25,358 | ) | $ | (17,421 | ) |
|                                                         |       |                   |       |                 |       |   |   |   |   |

 

***Net Loss per Common Share***

 

Basic and diluted net loss per common share iscomputed using the weighted-average number of shares of common stock outstandingduring the period. Potentially dilutive shares consisting of stock options,common stock subject to repurchase, redeemable convertible preferred stock andshares issuable under the Employee Stock Purchase Plan were not included in thediluted net loss per common share calculations for all periods presentedbecause the inclusion of such shares would have had an antidilutive effect.

 

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A reconciliation of the numerator and denominator usedin the calculation of basic and diluted net loss per common share is asfollows:

 
| ** **                                                                                                | ** ** | **Three Months Ended June 30,**               | ** ** | **Six Months Ended June 30,**                 | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                | ** ** | **2008**                                      | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                                                | ** ** | **(in thousands, except per share  amounts)** | ** ** | **(in thousands, except per share  amounts)** | ** ** |
|                                                                                                      |       |                                          |       |                                          |       |   |   |   |   |
| Numerator:                                                                                                |       |                                          |       |                                          |       |   |   |   |   |
| Net loss attributable to common stockholders                                                              |       | $                                             | (12,886    | )                                             | $          | (9,456 | ) | $ | (25,343 | ) | $ | (17,391 | ) |
|                                                                                                      |       |                                          |       |                                          |       |   |   |   |   |
| Denominator:                                                                                              |       |                                          |       |                                          |       |   |   |   |   |
| Weighted-average common shares outstanding                                                                |       | 23,107                                        |       | 22,865                                        |       | 23,078 |   | 18,989 |   |
| Less: Weighted-average unvested common shares subject to repurchase                                       |       | (74                                           | )          | (314                                          | )          | (100 | ) | (340 | ) |
| Weighted-average common shares outstanding used in computing basic  and diluted net loss per common share |       | 23,033                                        |       | 22,551                                        |       | 22,978 |   | 18,649 |   |
|                                                                                                      |       |                                          |       |                                          |       |   |   |   |   |
| Net loss per share attributable to common stockholders - basic and  diluted                               |       | $                                             | (0.56      | )                                             | $          | (0.42 | ) | $ | (1.10 | ) | $ | (0.93 | ) |

 

The following potentially dilutive shares wereexcluded from the computation of diluted net loss per common share for theperiods presented because including them would have an antidilutive effect:

 
| ** **                                         | ** ** | **Periods Ended**  | ** ** |
|----------------------------------------------------|------------|--------------------|------------|
| ** **                                         | ** ** | **June 30,**  | ** ** |
| ** **                                         | ** ** | **2008**           | ** ** | **2007** | ** ** |
| ** **                                         | ** ** | **(in thousands)** | ** ** |
|                                               |       |               |       |   |   |
| Options to purchase common stock                   |       | 2,860              |       | 1,957 |   |
| Common stock subject to repurchase                 |       | 59                 |       | 286 |   |
| Shares issuable under Employee Stock Purchase Plan |       | 37                 |       | 27 |   |

 

***Recent and AdoptedAccounting Pronouncements***

 

In May 2008, the FASB issued SFAS No. 162, *The Hierarchy of Generally Accepted Accounting Principles*.  SFAS No. 162 identifies the sources ofaccounting principles and the framework for selecting the principles used inthe preparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles (the GAAPhierarchy).  SFAS No. 162 willbecome effective 60 days following the SEC’s approval of the Public CompanyAccounting Oversight Board amendments to AU Section 411, *The Meaning of Present Fairly in Conformity With Generally AcceptedAccounting Principles*.  TheCompany does not expect the adoption of SFAS No. 162 to have a materialeffect on the Company’s financial position, operating results or cash flows.

 

In June 2007, the FASB ratified Emerging IssuesTask Force (“EITF”) Issue No. 07-3, *Accountingfor Nonrefundable Advance Payments for Goods or Services to Be Used in FutureResearch and Development Activities* (“EITF No. 07-3”). EITF No. 07-3requires nonrefundable advance payments for goods and services that will beused or rendered for future research and development activities be deferred andcapitalized. Such amounts should be recognized as an expense as the goods aredelivered or the related services are performed. EITF No. 07-3 waseffective for the Company in the year beginning January 1, 2008. Theadoption of EITF No. 07-3 did not have a material impact on the Company’sfinancial position, operating results or cash flows.

 

In February 2007, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards No. 159,*The Fair Value Option for Financial Assetsand Financial Liabilities-including an amendment of FAS115* (“SFAS No. 159”).SFAS No. 159 allows companies to choose, at specified election dates, tomeasure eligible 

 

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financial assets and liabilities at fair value thatare not otherwise required to be measured at fair value. Unrealized gains andlosses shall be reported on items for which the fair value option has beenelected in earnings at each subsequent reporting date. SFAS No. 159 alsoestablishes presentation and disclosure requirements. SFAS No. 159 waseffective for the Company in the year beginning January 1, 2008. Theadoption of SFAS 159 did not have a material impact on the Company’s financialposition, operating results or cash flows.

 

On January 1, 2008, the Company adopted SFAS No. 157,*Fair Value Measurements*, (“SFAS 157”) asit relates to financial assets and financial liabilities. In February 2008,the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”)No. FAS 157-2, *Effective Date of FASBStatement No. 157,* which delayed the effective date of SFAS 157for all non-financial assets and non-financial liabilities, except those thatare recognized or disclosed at fair value in the financial statements on atleast an annual basis, until January 1, 2009 for calendar year-endentities. Also in February 2008, the FASB issued FSP No. FAS 157-1*, Application of FASB Statement No. 157 to FASB Statement No. 13and Other Accounting Pronouncements That Address Fair Value Measurements forPurposes of Lease Classification or Measurement under Statement 13,*which states that SFAS No. 13, *Accounting for Leases,*(“SFAS 13”) and other accounting pronouncements that address fair valuemeasurements for purposes oflease classification or measurement under SFAS 13 areexcluded from the provisions of SFAS 157, except for assets and liabilitiesrelated to leases assumed in a business combination that are required to bemeasured at fair value under SFAS No. 141, *BusinessCombinations,* (“SFAS 141”) or SFAS No. 141 (revised 2007) *Business Combinations,* (“SFAS 141(R)”). SFAS 157 definesfair value, establishes a framework for measuring fair value in accountingprinciples generally accepted in the United States of America, and expandsdisclosures about fair value measurements. The provisions of this standardapply to other accounting pronouncements that require or permit fair valuemeasurements and are to be applied prospectively with limited exceptions. Theadoption of SFAS 157 did not have a material impact on the Company’s financialposition, operating results or cash flows. The Company has not yet determinedthe impact on its financial statements from the adoption of SFAS No. 157as it pertains to non-financial assets and non-financial liabilities.

 

**NOTE 3 - Investments**

 

Short-term investments, which are classified asavailable-for-sale, had maturities of less than one year and consisted of thefollowing:

 
| ** **                          | ** ** | **Amortized**      | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**  | ** ** |
|-------------------------------------|------------|--------------------|------------|----------------|------------|----------------|------------|-----------|------------|
| **As of June 30, 2008**        | ** ** | **Cost**           | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value** | ** ** |
| ** **                          | ** ** | **(in thousands)** | ** ** |
|                                |       |               |       |           |       |           |       |      |       |
| US government and agency securities |       | $                  | 22,746     |           | $          | 23             |       | $         | (2         | ) | $ | 22,767 |   |
| Total                               |       | $                  | 22,746     |           | $          | 23             |       | $         | (2         | ) | $ | 22,767 |   |

 

 
| ** **                          | ** ** | **Amortized**       | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**  | ** ** |
|-------------------------------------|------------|---------------------|------------|----------------|------------|----------------|------------|-----------|------------|
| **As of December 31, 2007**    | ** ** | **Cost**            | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value** | ** ** |
|                                | ** ** | **(in  thousands)** | ** ** |
|                                |       |                |       |           |       |           |       |      |       |
| Commercial paper                    |       | $                   | 4,685      |           | $          | 21             |       | $         | —     |   | $ | 4,706 |   |
| US government and agency securities |       | 33,694              |       | 21             |       | (9             | )          | 33,706    |       |
| Corporate bonds                     |       | 5,979               |       | 3              |       | —         |       | 5,982     |       |
| Total                               |       | $                   | 44,358     |           | $          | 45             |       | $         | (9         | ) | $ | 44,394 |   |
|                                |       |                |       |           |       |           |       |      |       |

 

***Fair ValueMeasurements***

 

In the first quarter of 2008, we adopted SFAS No. 157,*Fair Value Measurements* for financialassets and liabilities. This standard defines fair value as the price thatwould be received upon the sale of an asset or paid to transfer a liability inan orderly transaction between market participants at the measurement date(exit price). SFAS No. 157 classifies the inputs used to measure fairvalue into the following hierarchy:

 

·  Level 1:        Observable inputs such asquoted prices (unadjusted) in active markets for identical assets orliabilities.

 

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·  Level 2:        Inputsother than quoted prices that are observable for the asset or liability, eitherdirectly or indirectly. These include quoted prices for similar assets orliabilities in active markets and quoted prices for identical or similar assetsor liabilities in markets that are not active.

 

·  Level 3:       Unobservable inputs that reflect thereporting entity’s own assumptions.

 

The fair value hierarchy of the Company’s marketablesecurities at fair value in connection with the adoption of SFAS No. 157consisted of the following as of June 30, 2008:

 
| ** **                          | ** ** | ** **             | ** ** | **Significant Other** | ** ** | **Significant Other** | ** ** |
|-------------------------------------|------------|------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **Balance as of**      | ** ** | **Observable Inputs** | ** ** | **Observable Inputs** | ** ** |
| ** **                          | ** ** | **June 30, 2008** | ** ** | **(Level 1)**         | ** ** | **(Level 2)**         | ** ** |
| ** **                          | ** ** | **(in thousands)**     | ** ** |
|                                |       |                   |       |                  |       |                  |       |
| Money market funds (1)              |       | $                      | 10,691     |                  | $          | 10,691                |       | $ | — |   |
| US government and agency securities |       | 22,767                 |       | —                |       | 22,767                |       |
| Total                               |       | $                      | 33,458     |                  | $          | 10,691                |       | $ | 22,767 |   |

----

(1)          Money marketfunds are classified as part of cash equivalents on the condensed balance sheet

 

 **NOTE 4 -Common Stock**

 

On February 1, 2007, the Company sold 4,700,000shares of its common stock at a public offering price of $16.00 per share. Netcash proceeds from the Initial Public Offering were approximately$68.2 million, after deducting underwriting discounts and commissions andother offering costs.

 

Each share of common stock has the right to one vote.The holders of common stock are entitled to dividends when funds are legallyavailable and when declared by the Board of Directors.

 

***Restricted common stock***

 

Certain common stock option holders have the right toexercise unvested options, subject to a repurchase right held by the Company torepurchase the stock, at the original exercise price, in the event of voluntaryor involuntary termination of employment of the stockholder. In accordance withEmerging Issues Task Force Issue No. 00-23, *Issues Related to the Accounting for Stock Compensation*under APB 25 and FASB Interpretation No. 44, *Accounting for Certain Transactions Involving StockCompensation*, the Company accounts for the cash received inconsideration for the early exercised options as a liability. As of June 30,2008 and December 31, 2007, there were approximately 59,000 and 164,000shares of common stock, respectively, subject to repurchase, and a relatedliability of $24,000 and $66,000, respectively.

 

 

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**NOTE 5 - Stock Option Plans**

 

***Stock-basedcompensation and valuation assumptions***

 

The Company calculates the fair value of each optionaward on the date of grant using the Black-Scholes option pricing model. Thefollowing assumptions were used for each respective period:

 
| ** **               | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **               | ** ** | **2008**                             | ** ** | **2007**                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|                     |       |                                 |       |                               |       |   |   |   |   |
| **Stock Options:**       | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Expected volatility      |       | 61%                                  |       | 54%                                |       | 60% |   | 54% |   |
| Risk free rate           |       | 2.63%  - 3.57%                       |       | 4.55%  - 5.05%                     |       | 2.45%  - 3.57% |   | 4.55%  - 5.05% |   |
| Dividend yield           |       | 0%                                   |       | 0%                                 |       | 0% |   | 0% |   |
| Expected term (in years) |       | 4.65                                 |       | 4.65                               |       | 4.65 |   | 4.65 |   |
|                     |       |                                 |       |                               |       |   |   |   |   |
| **ESPP:**                | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Expected volatility      |       | 100%                                 |       | 42%                                |       | 42%  - 100% |   | 42%  - 50% |   |
| Risk free rate           |       | 1.90%                                |       | 4.90%                              |       | 1.90%  - 3.56% |   | 4.90%  - 5.13% |   |
| Dividend yield           |       | 0%                                   |       | 0%                                 |       | 0% |   | 0% |   |
| Expected term (in years) |       | 0.5                                  |       | 0.5                                |       | 0.5 |   | 0.50  to 0.79 |   |

 

The expected term of stock options represents theweighted-average period the stock options are expected to remain outstandingand is based on the option vesting term, contractual terms and industry peersas the Company did not have sufficient historical information to developreasonable expectations about future exercise patterns and post-vestingemployment termination behavior. ESPP terms are for the purchase periodsstarting February 1, 2007 (Initial Public Offering) and May 15, 2007,both of which ended on November 15, 2007, the purchase period that beganon November 15, 2007 and ended on May 15, 2008, and the purchaseperiod that began on May 15, 2008 and will end on November 15, 2008.

 

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The expected stock price volatility assumptions forthe Company’s stock options and ESPP for the three and six months ended June 30,2008 and 2007 were determined by examining the historical volatilities forindustry peers in combination with the historical volatility of the Companysince its Initial Public Offering on February 1, 2007. The Company willcontinue to analyze the historical stock price volatility and expected termassumptions as more historical data for the Company’s common stock becomesavailable.

 

The risk-free interest rate assumption at the date ofgrant is based on the interest rate on U.S Treasury instruments whose term wasconsistent with the expected term of the Company’s stock options and ESPP.

 

The expected dividend assumption is based on theCompany’s history and expectation of dividend payouts. In addition,SFAS 123(R) requires forfeitures to be estimated at the time of grantand revised, if necessary, in subsequent periods if actual forfeitures differfrom those estimates. Forfeitures were estimated based on historicalexperience. Prior to the adoption of SFAS 123(R), the Companyaccounted for forfeitures as they occurred.

 

Stock option activity for the six months ended June 30,2008 was as follows:

 
| ** **                               | ** ** | ** **                                                 | ** ** | **Options Outstanding** | ** ** |
|------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------|------------|
| ** **                               | ** ** | ** **                                                 | ** ** | ** **              | ** ** | **Weighted** | ** ** |
| ** **                               | ** ** | **Shares**                                                 | ** ** | **Number**              | ** ** | **Average** | ** ** |
| ** **                               | ** ** | **Available**                                              | ** ** | **of**                  | ** ** | **Exercise** | ** ** |
| ** **                               | ** ** | **for Grant**                                              | ** ** | **Shares**              | ** ** | **Price** | ** ** |
| ** **                               | ** ** | **(in thousands, except weighted average exercise price)** | ** ** |
|                                     |       |                                                       |       |                    |       |   |   |
| **Balance as of December 31, 2007** |       | 67                                                         |       | 2,167                   |       | $ | 5.12 |   |
|                                     |       |                                                       |       |                    |       |   |   |
| Additional shares reserved               |       | 1,821                                                      |       | —                  |       | — |   |
| Options granted                          |       | (876                                                       | )          | 876                     |       | 6.81 |   |
| Options exercised                        |       | —                                                     |       | (90                     | )          | 0.79 |   |
| Options canceled                         |       | 93                                                         |       | (93                     | )          | 6.75 |   |
|                                     |       |                                                       |       |                    |       |   |   |
| **Balance as of June 30, 2008**     |       | 1,105                                                      |       | 2,860                   |       | $ | 5.72 |   |
|                                     |       |                                                       |       |                    |       |   |   |

 

***Non-Employee Stock-based Compensation***

 

No shares of common stock were granted tonon-employees during the six months ended June 30, 2008 or the year ended December 31,2007. During the years ended December 31, 2006 and 2005, the Companygranted 51,000 and 39,750 shares, respectively, of common stock at exerciseprices ranging from $0.40 to $11.20 per share in exchange for services fromconsultants. Stock-based compensation expense related to stock options grantedto non-employees is recognized as the stock options are earned. The Companybelieves that the estimated fair value of the stock options is more readilymeasurable than the fair value of the services rendered.

 

The fair value of the stock options granted tonon-employees is calculated at each reporting date using the Black—Scholesoptions pricing model using the following assumptions:

 
| ** **                            | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                            | ** ** | **2008**                             | ** ** | **2007**                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                            | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Expected volatility                   |       | 59%                                  |       | 57%                                |       | 56%  - 59% |   | 57% |   |
| Risk free rate                        |       | 3.34%  to 4.25%                      |       | 5.00%                              |       | 2.71%  to 4.25% |   | 4.60%  to 4.77% |   |
| Dividend yield                        |       | 0%                                   |       | 0%                                 |       | 0% |   | 0% |   |
| Contractual remaining term (in years) |       | 6  to 9                              |       | 7  to 10                           |       | 6  to 9 |   | 7  to 10 |   |

 

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Stock-based compensation expense will fluctuate as thefair value of the common stock fluctuates. In connection with the grant of stockand stock options to non-employees, the Company recorded stock-basedcompensation charges of approximately $0.8 million for the period from June 13,2002 (inception) to June 30, 2008. For the six months ended June 30,2008 and 2007, the Company recorded stock-based compensation charges fornon-employees of approximately $8,000 and $120,000, respectively.

 

**NOTE 6 - Commitments andContingencies**

 

***Operating Lease***

 

In May 2007, the Company entered into anamendment to the lease agreement pursuant to which it leases its offices andmanufacturing facilities. The lease amendment extends the term of the leasethrough May 31, 2012. The Company may terminate the lease for any reasonon or after May 1, 2009, and the landlord may terminate the lease on orafter that date provided it has obtained certain redevelopment rights withrespect to the leased premises.

 

As of June 30, 2008, future minimum leasepayments under non-cancelable operating leases are as follows:

 
| ** **                | ** ** | ** **         | ** ** | **Remainder of** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------|------------|--------------------|------------|-----------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                | ** ** | **Total**          | ** ** | **2008**              | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** |
| ** **                | ** ** | **(in thousands)** | ** ** |
|                      |       |               |       |                  |       |       |       |       |       |       |       |       |       |
| Minimum lease commitments | ** ** | **$**              | **1,928**  | ** **            | **$**      | **234**    | ** ** | **$**      | **479**    | ** ** | **$**      | **493**    | ** ** | **$** | **508** | ** ** | **$** | **214** | ** ** |
|                      |       |               |       |                  |       |       |       |       |       |       |       |       |       |
|                           |            |                    |            |                       |            |            |            |            |            |            |            |            |            |  |  |  |  |  |  |

 

***Royalty and Milestone Obligations***

 

The Company has entered into royalty agreements withBiosensors and SurModics for proprietary materials that are critical to thesuccess of the Company’s products. The terms of the agreements call formilestone payments prior to achieving sales, and quarterly royalty paymentsbased on the greater of specified minimums or a percentage of net sales. As of December 31, 2007 and June 30, 2008, future minimum royaltypayments for these suppliers were approximately $2.1 and $2.0 million,respectively. During the year ended December 31, 2007 and six months endedJune 30, 2008, the Company made minimum royalty payments of $40,000 foreach of the periods.

 

***License Agreements***

 

In July 2006, the Company entered into a licenseagreement with Millimed, A/S for certain intellectual property related tothe Company’s business. In consideration for this license, the Company made aninitial payment of $350,000 in cash and issued 15,000 shares of common stockduring the year ended December 31, 2006. In addition, the license agreement provided for an additional payment of$200,000 upon the achievement of certain milestones. The Company also hascontingent milestone payments of $20,000 that are payable to another licensorupon achievement of milestones.  Nomilestone payments were made on these license agreements during the year ended December 31,2007 and the six months ended June 30, 2008.  See Note 8 - Subsequent Events.

 

***Purchase Commitments***

 

In April 2007, the Company entered into a supplyagreement with Fortimedix B.V., under which Fortimedix B.V. agreed tomanufacture and deliver stents for use in the Company’s products. The terms ofthe agreement require minimum purchases over two years at contractual pricesset in Euros. As of June 30, 2008, outstanding purchase order commitmentsfor stents were approximately $377,000 based on the exchange rate on June 30,2008. Under the terms of the supply agreement, any further annual purchasecommitments have been delayed until the Company receives approval from the FDAto begin clinical trials in the United States.

 

In December 2007, the Company entered into theAmended and Restated License Agreement with Biosensors InternationalGroup, Ltd., under which the Company purchases the drug coating used onits stents under purchase commitments which totaled approximately $426,000 asof June 30, 2008. In addition, the Company will also pay royalties toBiosensors under the license agreement when revenues are generated from productsales.

 

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On October 17, 2007, the Company entered into aContract Research Organization Agreement with Bailer Research, Inc., underwhich Bailer will provide certain monitoring services with respect to theCompany’s United States clinical trial when approval is received from the FDAto begin the clinical trial. The commitment under this contract is estimated tobe between $11 to $13 million over a period of 79 months. Paymentswill be made in installments based on trial related milestones.

 

On January 28, 2008, the Company entered into acontract with Cardiovascular Research Foundation (“CRF”) under which CRF willperform certain data coordination and analysis services in connection with theCompany’s clinical trial in the United States. The Company estimates that it will pay a total of $6.9 to $7.7 millionto CRF over a period of approximately 75 months.  Payments will be made in installments basedon related trial milestones.

 

On April 7, 2008, the Company entered into anagreement with Vascotube GMBH under which the Company has committed to purchaseminimum quantities of material over the next twelve month period.  As of June 30, 2008, the Company has aremaining commitment in the amount of approximately $502,000 remaining underthis agreement.

 

***Contingencies***

 

The Company is not currently subject to any materiallegal proceedings. The Company may from time to time, however, become a partyto various legal proceedings arising in the ordinary course of business.

 

***Indemnifications***

 

In the normal course of business, the Company entersinto contracts and agreements that contain a variety of representations andwarranties and provide for general indemnifications. The Company’s exposureunder these agreements is unknown because it involves claims that may be madeagainst the Company in the future, but have not yet been made. To date, theCompany has not paid any claims or been required to defend any action relatedto its indemnification obligations. However, the Company may record charges inthe future as a result of these indemnification obligations.

 

In accordance with the Company’s amended and restatedcertificate of incorporation and bylaws, the Company has indemnificationobligations to its officers and directors for certain events or occurrences,subject to certain limits, while they are serving at the Company’s request insuch capacity. The Company also has entered into indemnification agreementswith its directors and officers, pursuant to which it has indemnificationobligations to them. There have been no claims to date and the Company has adirector and officer insurance policy that may enable it to recover a portionof any amounts paid for future claims.

 

**NOTE 7****- Income Taxes**

 

Effective January 1, 2007, the Company adoptedthe provisions of FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes: An Interpretation of FASBStatement No. 109* (“FIN  No. 48”).  As of June 30,2008, the Company has no unrecognized tax benefit.

 

The Company’s practice is to recognize interest and/orpenalties related to income tax matters in income tax expense.  TheCompany had no accrual for interest or penalties at June 30, 2008 or December 31,2007, respectively.

 

The Company files U.S. Federal and California statetax returns. The Company is currently not subject to income tax examinationsand, in general, all tax years remain open due to net operating losses.

 

**NOTE 8****- Subsequent Events**

 

***MillimedContract***

 

On July 24, 2008,the Company entered into an assignment agreement with Millimed, A/S assigningto the Company the entire and exclusive right, title and interest in certainintellectual property that the Company previously licensed from Millimedpursuant to a license agreement dated July 10, 2006.  In consideration of this assignment theCompany issued 50,000 shares of unregistered common stock to a third party at$3.00 per share.  Pursuant to the termsof the assignment agreement, the third party paid $150,000 directly toMillimed.  The $200,000 milestone paymentthat was required under the original license agreement is no longer required.

 

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***Reductionin Force***

 

On July 10, 2008 theCompany announced an initiative to reduce employee headcount by eliminatingapproximately 46 regular jobs and 26 temporary positions to reduce costs, conservecash for U.S. clinical trials, and prepare for additional financing that theCompany will seek during the second half of 2008.  This reduction represented approximately 34%of the total workforce and was completed in July 2008.  The company estimates that the total cashpayments and expenses to be incurred in connection with this reduction inworkforce will be approximately $300,000 to $400,000, including approximately$100,000 of non-cash expenses.  Most ofthese expenses are expected to be incurred in the third quarter of 2008.

 

 

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**ITEM 2.   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**INTRODUCTION**

 

The following discussion should be read in conjunctionwith the financial statements and the related notes included in this Form 10-Q,in our Form 10-K for the year ended December 31, 2007 and in ourother filings with the Securities and Exchange Commission (“SEC”). ThisQuarterly Report on Form 10-Q contains forward-looking statements withinthe meaning of the federal securities laws. These statements include, but arenot limited to, those concerning the following: future events, our futurefinancial performance, business strategy, product introductions and plans andobjectives of management for future operations, regulatory approvals andclinical timelines. Forward-looking statements are subject to risks anduncertainties that could cause actual results and events to differ materially.For a detailed discussion of these risks and uncertainties, see Part II,Item 1A “Risk Factors” below. We undertake no obligation to updateforward-looking statements to reflect events or circumstances occurring afterthe date of this Form 10-Q.

 

**BUSINESSOVERVIEW**

 

We are a development stage medical device companyfocused on developing and commercializing our proprietary Custom NX drugeluting stent, or DES, systems to treat coronary artery disease, or CAD. Sinceinception we have devoted substantially all of our resources to start-upactivities, raising capital and research and development, including productdesign, testing, manufacturing and clinical trials. We have focused ourdevelopment efforts on creating our Custom NX DES Systems, which allow aphysician to deploy single or multiple stents of customizable length with asingle device. We have not yet received any government regulatory approvalsnecessary to commercialize any of our products.

 

We are conducting clinical trials to evaluate ourCustom NX stent and stent delivery systems. In May 2008, the six monthclinical data from our CUSTOM III clinical trial were presented at the annualEuroPCR meeting in Barcelona, Spain.  In October 2007,the two year clinical data from our CUSTOM I clinical trial and the one yearclinical data from our CUSTOM II clinical trial were presented at the 2007Transcatheter Cardiovascular Therapeutics conference in Washington D.C. Webelieve the data from these clinical trials provided preliminary evidence ofsafety and efficacy and supports further development of our in-situcustomization approach.

 

We will need CE Mark in the European Union in order tocommercialize our products in the European Union and certain other countriesthat recognize CE Mark. In December 2007, we submitted an application forCE Mark to our European Notified Body using the data from our CUSTOM I, IIand III clinical trials.  In July 2008,our Notified Body forwarded to us a response from the Medicines EvaluationBoard, or MEB, which reviews the drug portion of our CE Mark application.  The response indicates that the MEB mayrequire additional clinical data, including a randomized trial, beforeproviding us with CE Mark.  We expect tomeet with a panel from the MEB in the fourth quarter of this year to furtherdiscuss their response and potential alternatives, if any.

 

We will need premarket approval, or PMA, from the U.S.Food and Drug Administration, or FDA, before we can market our products in theUnited States, which we expect will require data from large clinical trials ofup to 2,500 patients. To initiate our CUSTOM IV trial in the United States, wemust first obtain clearance of an investigational device exemption, or IDE,from the FDA. In September 2007, we applied for our IDE and in October 2007we received questions back from the FDA regarding our IDE application. Since then, we have established an agreed upon timeline of deliverables and,while we believe we remain on track to receive IDE approval in 2008, we nowexpect to commence our pivotal trial in the U.S. in 2009.

 

In July 2008 we completed an initiative to reduceemployee headcount by approximately 46 regular jobs and 26 temporarypositions.  This reduction represented34% of the total workforce.  We estimatethat the total expenses incurred in connection with this reduction in workforcewill be approximately $300,000 to $400,000, including approximately $100,000 ofnon-cash expenses.  We anticipate thatour average monthly cost savings from this workforce reduction initiativecombined with other cost saving initiatives will be approximately $1.3 million.

 

To date, we have not generated any revenue from ourdevelopment activities and will not be able to generate revenue until one ofour products is approved, if ever. We have incurred net losses in each year sinceour inception in June 2002. Through June 30, 2008, we had anaccumulated deficit of $118.2 million. We expect our losses to continue toincrease as we expand our clinical trial activities and initiatecommercialization activities. Since inception we have financed our operationsprimarily through the sale of our equity securities. On February 1, 2007we completed the initial public offering of our common stock which raised netproceeds of $68.2 million. We plan to raise additional capital in 2008through the sale of equity or debt securities or by obtaining a creditfacility.

 

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In May 2004, we entered into a license agreementwith Biosensors. Pursuant to the agreement, we obtained worldwide non-exclusiverights to use Biosensors’ drug coating on our products, and agreed to payspecified minimum royalties and royalties based on net sales of our products.In December 2007, we entered into an amended and restated licenseagreement with Biosensors. Pursuant to the original agreement, Biosensorsformulated the drug coating and we purchased the drug coating from them. Underthe restated agreement, we have the right to purchase the drug and polymercomponents separately and formulate the coating ourselves. At this time, webelieve we have completed the work necessary to perform the formulationourselves but we will continue to purchase the drug coating formulated by Biosensorsuntil we obtain certain regulatory approvals necessary in order to perform ourown formulation for clinical purposes.

 

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

We base the discussion and analysis of our financialcondition, results of operations and liquidity and capital resources upon ourunaudited condensed financial statements, which we prepare in accordance withU.S. generally accepted accounting principles. In preparing these financialstatements, we must make estimates and judgments that affect the reportedamounts of assets, liabilities, and expenses. We evaluate our estimates basedon historical experience and various other assumptions we believe arereasonable under the circumstances. Our actual results could differ materiallyfrom these estimates under different assumptions or conditions.

 

**FINANCIALOPERATIONS**

 

***Revenue***

 

To date, we have notgenerated any revenue from the sale of our stent systems.

 

***Research and Development***

 

Since inception, we have devoted a significant amountof resources to develop our Custom NX DES Systems. We expect our research anddevelopment expenditures to increase as we continue to devote significantresources to developing our products, in particular, completing the clinicaltrials necessary to support regulatory approval. From our inception through June 30,2008, we incurred $93.7 million in research and development expenses.

 

***General and Administrative***

 

General and administrative expenses consist primarilyof compensation for executive, finance, marketing and administrative personnelincluding stock-based compensation. Other significant expenses includeprofessional fees for accounting and legal services associated with our effortsto obtain and maintain protection for intellectual property related to our CustomNX DES Systems. From our inception through June 30, 2008, we incurred$30.3 million in general and administrative expenses.

 

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**RESULTS OF OPERATIONS**

 

**COMPARISON OF THREE MONTHS ENDED JUNE30, 2008 AND 2007**

 

***Revenue***

 

We did not generate anyrevenue during the three months ended June 30, 2008 or 2007.

 

***Research andDevelopment***

 

| ** **                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Dollar** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|------------|------------|
| ** **                        | ** ** | **2008**                                        | ** ** | **2007**   | ** ** | **Change** | ** ** |
| ** **                        | ** ** | **(in thousands)**                         | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research and development expenses |       | $                                               | 9,818      |       | $          | 7,704 |   | $ | 2,114 |   |
|                                   |            |                                                 |            |            |            |  |  |  |  |  |

 

The $2.1 million increase in research and developmentexpenses for the three months ended June 30, 2008, compared to the threemonths ended June 30, 2007, was primarily attributable to:

 

· An increase of $0.8 million for prototype parts,supplies, and outside services related to product development for ourCustom NX DES systems;

 

·  An increase of $1.3 million in personnelcosts related to the hiring of additional employees in our research anddevelopment and manufacturing departments; and

 

 ·  An increase of $0.3 million in rent,depreciation on equipment and facilities costs as we expanded our manufacturingcapacity; offset by

 

·  A decrease of$0.3 million in expenses related to the support of our clinical researchstudies in 2008 as compared to the higher expense related to support of ourCUSTOM III clinical trial in the second quarter of 2007.

 

We expect our research and development expenses toincrease significantly as we continue the development of our Custom NX DESSystems and conduct additional clinical trials.

 

***General andAdministrative***

 

| ** **                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Dollar** | ** ** |
|-------------------------------------|------------|-------------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2008**                                        | ** ** | **2007**   | ** ** | **Change** | ** ** |
| ** **                          | ** ** | **(in thousands)**                         | ** ** | ** ** | ** ** |
| ** **                          | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and administrative expenses |       | $                                               | 3,331      |       | $          | 2,801 |   | $ | 530 |   |
|                                     |            |                                                 |            |            |            |  |  |  |  |  |

 

 

The $0.5 million increase in general andadministrative expenses for the three months ended June 30, 2008, comparedto the three months ended June 30, 2007, was primarily attributable to:

 

· An increase of $0.3 million in employee stock-based compensationexpense;

 

·  An increase of$0.1 million due to spending for trade shows, travel and marketing materials;and

 

·  An increase of$0.1 million in rent, depreciation on equipment and facilities costs as weexpand our manufacturing capacity.

 

We expect our general and administrative expenses toincrease significantly due to the costs associated with the commercializationof our products.

 

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***Interest and OtherIncome, Net***

 

| ** **                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Dollar** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|------------|------------|
| ** **                     | ** ** | **2008**                                        | ** ** | **2007**   | ** ** | **Change** | ** ** |
| ** **                     | ** ** | **(in thousands)**                         | ** ** | ** ** | ** ** |
| ** **                     | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest and other income, net |       | $                                               | 263        |       | $          | 1,049 |   | $ | (786 | ) |
|                                |            |                                                 |            |            |            |  |  |  |  |  |

 

 

The $0.8 million decrease in interest and otherincome, net, for the three months ended June 30, 2008, compared to thethree months ended June 30, 2007, was primarily attributable to a decreasein the levels of cash, cash equivalents and short-term investments, as well aslower average interest rates.

 

 **COMPARISON OFSIX MONTHS ENDED JUNE 30, 2008 AND 2007**

 

***Revenue***

 

We did not generate anyrevenue during the six months ended June 30, 2008 or 2007.

 

***Research andDevelopment***

 

| ** **                        | ** ** | **Six Months Ended  June 30,** | ** ** | **Dollar** | ** ** |
|-----------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **                        | ** ** | **2008**                                      | ** ** | **2007**   | ** ** | **Change** | ** ** |
| ** **                        | ** ** | **(in thousands)**                       | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research and development expenses |       | $                                             | 19,239     |       | $          | 13,927 |   | $ | 5,312 |   |
|                                   |            |                                               |            |            |            |  |  |  |  |  |

 

The $5.3 million increase in research and developmentexpenses for the six months ended June 30, 2008, compared to the sixmonths ended June 30, 2007, was primarily attributable to:

 

·  An increase of $2.7 million in personnelcosts related to the hiring of additional employees in our research anddevelopment and manufacturing departments;

 

·  An increase of$1.9 million for prototype parts, supplies, and outside services related to productdevelopment for our Custom NX DES systems; and

 

·  An increase of$0.7 million in rent, depreciation on equipment and facilities costs as weexpanded our manufacturing capacity.

 

***General andAdministrative***

 

| ** **                          | ** ** | **Six Months Ended  June 30,** | ** ** | **Dollar** | ** ** |
|-------------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2008**                                      | ** ** | **2007**   | ** ** | **Change** | ** ** |
| ** **                          | ** ** | **(in thousands)**                       | ** ** | ** ** | ** ** |
| ** **                          | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and administrative expenses |       | $                                             | 6,773      |       | $          | 5,262 |   | $ | 1,511 |   |
|                                     |            |                                               |            |            |            |  |  |  |  |  |

 

The $1.5 million increase in general andadministrative expenses for the six months ended June 30, 2008, comparedto the six months ended June 30, 2007, was primarily attributable to:

 

·  An increase of$0.8 million in personnel costs related to the hiring of additional employeesin our administration departments;

 

·  An increase of$0.1 million due to spending for trade shows, travel and marketing materials;

 

·  An increase of$0.3 million in insurance and other administrative expenses; and

 

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·  An increase of$0.3 million in rent, depreciation on equipment and facilities costs as weexpand our manufacturing capacity.

 

***Interest and OtherIncome, Net***

 

| ** **                     | ** ** | **Six Months Ended  June 30,** | ** ** | **Dollar** | ** ** |
|--------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **                     | ** ** | **2008**                                      | ** ** | **2007**   | ** ** | **Change** | ** ** |
| ** **                     | ** ** | **(in thousands)**                       | ** ** | ** ** | ** ** |
| ** **                     | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest and other income, net |       | $                                             | 669        |       | $          | 1,798 |   | $ | (1,129 | ) |
|                                |            |                                               |            |            |            |  |  |  |  |  |

 

The $1.1 million decrease in interest and otherincome, net, for the six months ended June 30, 2008, compared to the sixmonths ended June 30, 2007, was primarily attributable to a decrease inthe levels of cash, cash equivalents and short-term investments, as well aslower average interest rates.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our cash and cash equivalents, and short-terminvestments balances as of June 30, 2008 and December 31, 2007 aresummarized as follows:

 

| ** **                                                 | ** ** | **As of  June 30,  2008** | ** ** | **As of  December 31,  2007** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                 | ** ** | **(in thousands)**             | ** ** |
|                                                       |       |                                |       |                                    |       |
| Cash and cash equivalents                                  |       | $                                   | 11,660     |                                    | $          | 13,366 |   |
| Short-term investments                                     |       | 22,767                              |       | 44,394                                  |       |
|                                                       |       |                                |       |                                    |       |
| Total cash and cash equivalents and short-term investments |       | $                                   | 34,427     |                                    | $          | 57,760 |   |

 

***Sources of Liquidity***

 

We are in the development stage and have incurredlosses since our inception in June 2002. As of June 30, 2008, we hadan accumulated deficit of $118.2 million. Prior to our Initial Public Offering,we funded our operations from the private placements of our convertible preferredstock resulting in aggregate net proceeds of $75.6 million through December 31,2006. On February 1, 2007, we completed our Initial Public Offering,raising $68.2 million in net proceeds. We plan to sell additional equityor debt securities or obtain a credit facility during 2008.  There can beno assurance that the Company will be able to obtain additional debt or equityfinancing on terms acceptable to the Company, or at all. The failure of theCompany to obtain sufficient funds on acceptable terms when needed could requirethe Company to reduce the scope of, delay, or eliminate some or all of the plannedclinical trials, research and development and commercialization activities,which could have a material adverse effect on the Company’s business, resultsof operations and financial condition.

 

The process of developing our products will continueto require significant research and development, clinical trials and regulatoryapprovals.  These activities, together with increases in selling, generaland administrative expenses, as we prepare for a commercial launch of ourproducts in Europe, are expected to result in substantial operating losses forthe next several years.

 

As of June 30, 2008, we did not have anyoutstanding or available debt financing arrangements, we had working capital of$31.4 million, and our primary source of liquidity was $34.4 million in cashand cash equivalents and short-term investments.

 

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***Cash Flows***

 

Our operating, investing and financing activities forthe six months ended June 30, 2008 and June 30, 2007 are summarizedas follows:

 

| ** **                                          | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                      | ** ** | **2007** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                       | ** ** |
|                                                |       |                                          |       |   |   |
| Net cash used in operating activities               |       | $                                             | (22,926    | ) | $ | (15,142 | ) |
| Net cash provided by (used in) investing activities |       | 21,017                                        |       | (57,687 | ) |
| Net cash provided by financing activities           |       | 203                                           |       | 69,153 |   |
|                                                |       |                                          |       |   |   |
| Net decrease in cash and cash equivalents           |       | $                                             | (1,706     | ) | $ | (3,676 | ) |

 

***OperatingActivities***

 

Net cash used in operating activities was$22.9 million for the six months ended June 30, 2008, compared to$15.1 million for the six months ended June 30, 2007. The net cash used inoperating activities for the six months ended June 30, 2008 and 2007primarily reflects expenses related to product development and clinicaltrials.  These expenses were partially offset by depreciation andamortization, amortization of securities discounts, gain on sale of investments,non-cash stock-based compensation and non-cash changes in operating assets andliabilities.

 

***InvestingActivities***

 

Net cash provided by investing activities was$21.0 million for the six months ended June 30, 2008, compared to netcash used in investing activities of $57.7 million for the six months ended June 30,2007. Net cash provided by investing activities for the six months ended June 30,2008 was attributable to the proceeds from the sales of investments of $10.0million and the proceeds from the maturities of investments of $23.8 million,which were partially offset by the purchase of short-term investments of $11.9million and the purchase of property and equipment of $0.9 million. Net cashused in investing activities for the six months ended June 30, 2007 wasprimarily attributable to the purchase of short-term investments of $73.2million and the purchase of property and equipment of $1.0 million, which waspartially offset by the sale of short-term investments of $16.5 million.

 

***FinancingActivities***

 

Net cash provided by financing activities for the sixmonths ended June 30, 2008 was $203,000, compared to $69.2 million for thesix months ended June 30, 2007. Net cash provided by financing activitiesfor the six months ended June 30, 2008 was attributable to the proceedsfrom the exercise of stock options and the purchase of stock through theEmployee Stock Purchase Plan. Net cash provided by financing activities for thesix months ended June 30, 2007 was primarily attributable to our InitialPublic Offering in February 2007.

 

***Operating Capitaland Capital Expenditure Requirements***

 

To date, we have not commercialized any products. Wedo not anticipate generating any revenue unless and until we successfullyobtain CE Mark or FDA marketing approval for, and begin selling, our Custom NXDES Systems. We anticipate that we will continue to incur substantial netlosses for the next several years as we develop our products, conduct andcomplete clinical trials, pursue additional applications for our technologyplatform, expand our clinical development team and corporate infrastructure,and prepare for the potential commercial launch of our products.

 

We believe our existing cash and cash equivalents andshort-term investments and interest income we earn on these balances, will besufficient to meet our anticipated cash requirements through the middle of thesecond quarter of 2009. We plan to sell additional equity or debt securities orobtain a credit facility during 2008. Any such required additional capital maynot be available on reasonable terms, if at all. The sale of additional equityand debt securities may result in additional dilution to our stockholders. Ifwe raise additional funds through the issuance of debt securities, thesesecurities could have rights senior to those of our common stock and couldcontain covenants that would restrict our operations. We may require additionalcapital beyond our currently forecasted amounts. For example, we will need toraise additional funds in order to build our sales force and commercialize ourproducts. Any such required additional capital may not be available onreasonable terms, if at all. If we are unable to obtain additional financing,we may be required to reduce the scope of, delay, or eliminate some or all of,our planned clinical trials, research, development and commercializationactivities, which could materially harm our business.We anticipate spending approximately$45.0 million to complete our CUSTOM IV and V clinical trials. Inaddition, we will spend additional funds for regulatory approvals and foractivities to commercialize our Custom NX DES Systems, if approved. Thedevelopment of any new applications of our custom length stent technology andnew products will also require the expenditure of significant financialresources and take several years to complete.

 

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Our forecasts for the period of time through which ourfinancial resources will be adequate to support our operations and the costs tocomplete development of products are forward-looking statements and involverisks and uncertainties, and actual results could vary materially and negativelyas a result of a number of factors, including the factors discussed in the “RiskFactors” contained in Item 1A of Part II of this report. We havebased these estimates on assumptions that may prove to be wrong, and we couldutilize our available capital resources sooner than we currently expect.

 

Because of the numerous risks and uncertaintiesassociated with the development of medical devices, such as our Custom NX DESSystems, we are unable to estimate the exact amounts of capital outlays andoperating expenditures necessary to complete ongoing clinical trials andsuccessfully deliver a commercial product to market. Our future fundingrequirements will depend on many factors, including but not limited to:

 

·                  the scope, rate of progress and cost ofour clinical trials and other research and development activities;

 

·                  the cost of filing and prosecuting patentapplications and defending and enforcing our patent and other intellectualproperty rights;

 

·                  the cost of defending, in litigation orotherwise, any claims that we infringe third-party patent or other intellectualproperty rights;

 

·                  the terms and timing of anycollaborative, licensing and other arrangements that we may establish;

 

·                  the cost and timing of regulatoryapprovals;

 

·                  the cost and timing of establishingsales, marketing and distribution capabilities;

 

·                  the cost of establishing clinical andcommercial supplies of our products and any products that we may develop;

 

·                  the effect of competing technological andmarket developments; and

 

·                  licensing technologies for futuredevelopment.

 

Future capital requirements will also depend on theextent to which we acquire or invest in businesses, products and technologies,although we currently have no commitments or agreements relating to any ofthese types of transactions.

 

***Contractual Obligations***

 

Our principal commitments as of June 30, 2008consist of obligations under operating leases and purchase obligations that weenter into through the normal course of business. See Note 6 of our Notes toCondensed Financial Statements for more detailed information.

 

***Off-Balance SheetArrangements***

 

Since inception, we havenot engaged in any off-balance sheet activities as defined inRegulation S-K Item 303(a)(4).

 

***Recent and Adopted Accounting Pronouncements***

 

In May 2008, the FASB issued SFAS No. 162, *The Hierarchy of Generally Accepted Accounting Principles*.  SFAS No. 162 identifies the sources ofaccounting principles and the framework for selecting the principles used inthe preparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles (the GAAPhierarchy).  SFAS No. 162 willbecome effective 60 days following the SEC’s approval of the Public CompanyAccounting Oversight Board amendments to AU Section 411, *The Meaning of Present Fairly in Conformity With Generally AcceptedAccounting Principles*.  We donot expect the adoption of SFAS No. 162 to have a material effect on ourfinancial position, operating results or cash flows.

 

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In June 2007, the FASB ratified Emerging IssuesTask Force (“EITF”) Issue No. 07-3, *Accountingfor Nonrefundable Advance Payments for Goods or Services to Be Used in FutureResearch and Development Activities* (“EITF No. 07-3”). EITF No. 07-3requires nonrefundable advance payments for goods and services that will beused or rendered for future research and development activities be deferred andcapitalized. Such amounts should be recognized as an expense as the goods aredelivered or the related services are performed. EITF No. 07-3 waseffective for us in the year beginning January 1, 2008. The adoption ofEITF No. 07-3 did not have a material impact on our financial position,operating results or cash flows .

 

In February 2007, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards No. 159,*The Fair Value Option for Financial Assetsand Financial Liabilities—including an amendment of FAS115* (“SFAS No. 159”).SFAS No. 159 allows companies to choose, at specified election dates, tomeasure eligible financial assets and liabilities at fair value that are nototherwise required to be measured at fair value. Unrealized gains and lossesshall be reported on items for which the fair value option has been elected inearnings at each subsequent reporting date. SFAS No. 159 also establishespresentation and disclosure requirements. SFAS No. 159 was effective forus in the year beginning January 1, 2008 and will be appliedprospectively. The adoption of SFAS 159 did not have a material impact on ourfinancial position, operating results or cash flows.

 

On January 1, 2008, we adopted SFAS No. 157,*Fair Value Measurements*, (“SFAS 157”) asit relates to financial assets and financial liabilities. In February 2008,the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”)No. FAS 157-2, *Effective Date of FASBStatement No. 157,* which delayed the effective date of SFAS 157for all non-financial assets and non-financial liabilities, except those thatare recognized or disclosed at fair value in the financial statements on atleast an annual basis, until January 1, 2009 for calendar year-endentities. Also in February 2008, the FASB issued FSP No. FAS 157-1, *Application of FASB Statement No. 157 to FASB Statement No. 13and Other Accounting Pronouncements That Address Fair Value Measurements forPurposes of Lease Classification or Measurement under Statement 13,*which states that SFAS No. 13, *Accounting for Leases,*(“SFAS 13”) and other accounting pronouncements that address fair valuemeasurements for purposes of lease classification or measurement under SFAS 13are excluded from the provisions of SFAS 157, except for assets and liabilitiesrelated to leases assumed in a business combination that are required to bemeasured at fair value under SFAS No. 141, *BusinessCombinations,* (“SFAS 141”) or SFAS No. 141 (revised 2007), *Business Combinations,* (“SFAS 141(R)”). SFAS 157 definesfair value, establishes a framework for measuring fair value in accountingprinciples generally accepted in the United States of America, and expandsdisclosures about fair value measurements. The provisions of this standardapply to other accounting pronouncements that require or permit fair valuemeasurements and are to be applied prospectively with limited exceptions. Theadoption of SFAS 157 did not have a material impact on our financial position,operating results or cash flows. We have not yet determined the impact on ourfinancial statements from the adoption of SFAS No. 157 as it pertains tonon-financial assets and non-financial liabilities.

 

**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

**Interestrate risk**

 

The primary objective of our investment activities isto preserve our capital for the purpose of funding operations while at the sametime maximizing the income we receive from our investments withoutsignificantly increasing risk. To achieve these objectives, our investmentpolicy allows us to maintain a portfolio of cash equivalents and investments ina variety of marketable securities, including commercial paper, money marketfunds and U.S. government and agency securities. Our cash and cash equivalentsas of June 30, 2008 consist primarily of liquid money market funds andU.S. government and agency securities. Our short-term investments as of June 30,2008 consist primarily of U.S. government and agency securities. Due to theshort-term nature of our investments, we believe that there is no materialexposure to interest rate risk.

 

**Exchangerate risk**

 

Under our Supply Agreement with Fortimedix B.V., wehave market risk exposure to adverse changes in foreign exchange rates. Thecost of the stents we purchase from Fortimedix requires payment in euros.Fluctuations in the euro to U.S. dollar exchange rate therefore impacts thecost of our product. To date, we have not experienced any significant negativeforeign exchange transaction losses. We expect higher product costs if there isa decline in the exchange rate between the U.S. dollar and the euro. Based uponthe supply agreement, any further annual purchase commitments have been delayeduntil we receive approval from the FDA to begin clinical trials in the UnitedStates. As a policy, we do not engage in speculative or leveraged transactions,nor do we hold financial instruments for trading purposes.

 

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If we expand our overseas operations, our operatingresults may become subject to more significant fluctuations based on changes inexchange rates of foreign currencies in relation to the U.S. dollar. We willperiodically analyze our exposure to currency fluctuations and may adjust ourpolicies to address any future potential exchange rate risk.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

**Disclosure Controls and Procedures**

 

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in the reportsthat we file or submit under the Exchange Act is recorded, processed,summarized, and reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure.

 

We carried out an evaluation, under the supervisionand with the participation of our management, including our Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act). Based upon this evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective as of June 30, 2008.

 

**Changesin Internal Control Over Financial Reporting**

 

No change in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) occurred during the three months ended June 30, 2008 thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II:OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

None

 

**ITEM 1A. RISK FACTORS**

 

**Risks Related to Our Business**

 

**We are a development stage companywith a history of losses, and we expect to incur net losses for the foreseeablefuture.**

 

We have incurred net losses since our inception in June 2002.For the years ended December 31, 2007, 2006, and 2005, we had net lossesof $38.8 million, $25.0 million and $14.0 million, respectively.As of June 30, 2008, we had an accumulated deficit of $118.2 million.To date, we have financed our operations primarily through private placementsof our equity securities and our Initial Public Offering, completed on February 1,2007, and have devoted substantially all of our resources to research anddevelopment and clinical studies related to our Custom NX DES Systems, whichconsist of the Custom NX 36 and the Custom NX 60. Since we have not received aCE Mark or approval from the U.S. Food and Drug Administration (“FDA”) or anyother regulatory authority for our products, we are unable to market ourcurrent products and have not generated any revenue since our inception. Weexpect our research and development expenses to increase significantly inconnection with our clinical trials and other product development activities.If we receive CE Mark or FDA approval of our Custom NX DES Systems, we expectto incur significant sales and marketing expenses and manufacturing expenses aswe commercialize our products. As a result, we expect to continue to incursignificant and increasing operating losses for the foreseeable future. Theselosses will continue to have an adverse effect on our stockholders’ equity.

 

**We will need substantial additionalfunding and may be unable to raise capital when needed, which would force us todelay, reduce or eliminate our product development programs orcommercialization efforts.**

 

We plan to raise additional capital by sellingadditional equity or debt securities or by obtaining a credit facility during2008. We will need to raise substantial additional capital to:

 

· fund our operations and clinical trials;

 

· continue our research and development;

 

· scale-up our manufacturing operations;

 

· defend, in litigation or otherwise, any claims thatwe infringe third-party patent or other intellectual property rights;

 

· commercialize our products, if any such productsreceive regulatory approval for commercial sale; and

 

· acquire or in-license companies, products orintellectual property.

 

We believe our existing cash and cash equivalentbalances and interest we earn on these balances, will be sufficient to meet ouranticipated cash requirements through the middle of the second quarter of 2009.However, our future funding requirements will depend on many factors,including:

 

· the scope, rate of progress and cost of our clinicaltrials and other research and development activities;

 

· the cost of filing and prosecuting patentapplications and defending and enforcing our patent and other intellectualproperty rights;

 

· the cost of defending, in litigation or otherwise,any claims that we infringe third-party patent or other intellectual propertyrights;

 

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· the terms and timing of any collaborative, licensingand other arrangements that we may establish;

 

· the cost and timing of regulatory approvals;

 

· the cost and timing of establishing sales, marketingand distribution capabilities;

 

· the cost of establishing clinical and commercialsupplies of our products and any products that we may develop;

 

· the effect of competing technological and marketdevelopments;

 

· licensing technologies for future development; and

 

· the extent to which we acquire or invest inbusinesses, products and technologies, although we currently have nocommitments or agreements relating to any of these types of transactions.

 

We plan to sell additional equity or debt securitiesor obtain a credit facility during 2008. Any such required additional capitalmay not be available on reasonable terms, if at all. The sale of additionalequity and debt securities may result in additional dilution to ourstockholders. If we raise additional funds through the issuance of debtsecurities, these securities could have rights senior to those of our commonstock and could contain covenants that would restrict our operations. To raisecapital, we may decide to sell unregistered stock at a discount to market withor without the issuance of warrants. The sale of securities at a discount orthe issuance of warrants may result in additional dilution to our existingstockholders. In connection with this type of financing, we would likely beobligated to register such shares for resale at a later date. If we raiseadditional funds through collaboration and licensing arrangements with thirdparties, it may be necessary to relinquish some rights to our technologies orour products, or grant licenses on terms that are not favorable to us. If weare unable to raise adequate funds, we may have to liquidate some or all of ourassets or delay, reduce the scope of or eliminate some or all of ourdevelopment programs.

 

We may require additional capital beyond our currentlyforecasted amounts. For example, we will need to raise additional funds inorder to build our sales force and commercialize our products. Any suchrequired additional capital may not be available on reasonable terms, if atall. We anticipate spending approximately $45.0 million to complete ourCUSTOM IV and V clinical trials. In addition, we will spend additional fundsfor regulatory approvals and for activities to commercialize our Custom NX DESsystems, if approved. The development of any new applications of our customlength stent technology and new products will also require the expenditure ofsignificant financial resources and take several years to complete.

 

If adequate funds are not available, we may have todelay development or commercialization of our products or license to thirdparties the rights to commercialize products or technologies that we wouldotherwise seek to commercialize. We also may have to reduce marketing, customersupport or other resources devoted to our products. Any of these factors couldharm our financial condition.

 

**We are wholly dependent on a thirdparty for the development of the drug coating placed on our drug eluting stentsand any delay or failure by such third party to successfully develop the drugcoating or to submit acceptable Drug Master Files, or MAFs, to regulatoryauthorities could delay our clinical trials or prevent or delaycommercialization of our Custom NX DES Systems.**

 

In May 2004, we entered into a license agreementwith Biosensors. In December 2007, we entered into an amended and restatedlicense agreement with Biosensors which superseded the prior agreement.Pursuant to the agreement, we obtained non-exclusive rights to use Biosensors’drug coating on our stent platform. The drug coating consists of Biolimus A9 ® , an anti-inflammatory drug that is aderivative of rapamycin, and PolyLactic Acid (“PLA”), a biodegradable polymerused to release the drug over time. In January 2008, Biosensors announcedthat it had received CE Mark approval for its BioMatrix drug eluting stentwhich uses the Biolimus A9 and PLA drug coating. The drug coating has not beenapproved for any use in the United States or any other jurisdiction.

 

To date, Biosensors has made only limited publicdisclosures regarding filings it has made with the FDA in connection with theDrug Master File, or MAF, for its BioMatrix drug eluting stent. In order toobtain CE Mark and IDE approval for our Custom NX DES Systems, we requireBiosensors, acting on our behalf, to submit MAFs related to our drug coating toour Notified Body and the FDA. Although Biosensors received CE Mark for itsBiomatrix stent, there can be no guarantee that any MAF that Biosensors submitsto a regulatory authority on our behalf will be acceptable.

 

We submitted our application for CE Mark of our CustomNX DES systems in December 2007.  InJuly 2008, our Notified Body forwarded to us a response from the MedicinesEvaluation Board, or MEB, which reviews the drug portion of our CE Markapplication.  The response indicates thatthe MEB may require additional clinical data, including a randomized trialbefore providing us with CE Mark.  Weexpect to meet with a panel from the MEB in the fourth quarter of this year tofurther discuss the response and potential alternatives, if any. As part of ourapplication for CE Mark, Biosensors submitted a MAF related to our drug coatingto the designated Notified Body who reviews our CE Mark application. We willhave to obtain a favorable opinion on this MAF from the MEB in the Netherlandsbefore our designated Notified Body can provide us with CE Mark.

 

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In July 2008, Biosensors received questions from theMEB regarding the MAF. Any delays Biosensors experiences or problems it has inresponding to these questions may substantially delay the commercialization ofour Custom NX DES systems in Europe as well as certain non-European countriesthat recognize the European Union’s CE Mark.

 

In order to obtain IDE approval from the FDA allowingus to initiate our CUSTOM IV clinical trial in the United States and in orderto obtain the PMA allowing us to commercialize our Custom NX DES Systems in theUnited States, we need Biosensors to submit acceptable MAFs related to our drugcoating to the FDA on our behalf. Any delays Biosensors experiences or problemsit has in developing these acceptable MAFs or responding to questions the FDAmay have concerning the MAFs may substantially delay our currently planned clinicaltrials and the development of our products and we may be required to restartclinical programs with an alternative drug coating.

 

In the event we experience these delays or need torestart clinical programs, our regulatory and commercialization timelines willneed to be extended and we may experience a significant decline in our stockprice.

 

**We currently do not have, and maynever have, any products available for sale and our efforts to obtain productapprovals and commercialize our products may not succeed or may result indelays for many reasons.**

 

We are a development stage medical device company witha limited history of operations and we currently do not have any productsavailable for sale or other sources of revenue. Our ability to generate revenuedepends entirely upon the successful clinical development, regulatory approvaland commercialization of our Custom NX DES Systems. Our products underdevelopment and any other products that we develop will require extensiveadditional clinical testing, regulatory approval and significant marketingefforts before they can be sold and generate any revenue. Our efforts tocommercialize our products may not succeed for a number of reasons including:

 

· our products may not demonstrate safety and efficacyin our clinical trials;

 

· we are wholly dependent on the efforts undertaken bythe supplier of the drug coating for our products, and may be significantlyimpacted by any regulatory delays or barriers that our supplier may encounterin submitting an adequate or acceptable MAF for the drug coating to theregulatory authorities on our behalf;

 

· we may not be able to obtain regulatory approvals forour products, or the approved indications for our products may be narrower thanwe seek;

 

· we may experience delays in our development program,including initiation and completion of our clinical trials;

 

· any products that are approved may not be accepted inthe marketplace by physicians and patients;

 

· physicians may not receive adequate coverage andreimbursement for procedures using our products;

 

· any rapid technological change may make ourtechnology and products obsolete;

 

· we may not be able to manufacture our Custom NX DESSystems in commercial quantities or at an acceptable cost;

 

· we may not have adequate financial or other resourcesto complete the development and commercialization of our Custom NX DES Systems;and

 

· we may be sued for infringement of intellectualproperty rights and could be enjoined from manufacturing or selling ourproducts.

 

We cannot market our products in the European Unionuntil we receive a CE Mark or in the United States until we receive PMA. If weare not successful in the initiation and completion of clinical trials for thedevelopment, approval and commercialization of our Custom NX DES Systems forthe treatment of coronary artery disease (“CAD”), we may never generate anyrevenue and may be forced to cease operations.

 

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**We have not received, and may neverreceive, FDA or other regulatory approvals to market our Custom NX DES Systems.**

 

Our Custom NX DES Systems are combination products,incorporating both a drug element and a medical device, and the combinationdevice will be regulated as a Class III medical device in the UnitedStates. Information regarding the drug coating for our stents will be reviewedby the FDA’s Center for Drug Evaluation and Research (“CDER”) based on the MAFsubmitted by Biosensors on our behalf, and the device will be reviewed by theFDA’s Center for Devices and Radiological Health (“CDRH”), with the overallproduct subject to approval by CDRH as a medical device. We believe that noseparate approval for the drug independent of the device is required.

 

We do not currently have the necessary regulatoryapprovals to market our Custom NX DES Systems or any other products in theUnited States or in any foreign market, including the European Union. If weobtain the necessary regulatory approvals, we plan initially to launch ourproducts in the European Union and later in the United States. Regulatoryapproval in the European Union for our products will require us to successfullyobtain CE Mark from our designated Notified Body. In March 2007, theEuropean Medicines Agency proposed new guidelines for the approval of drugeluting stents. These new guidelines, which are more rigorous than the previousstandards, were finalized in May 2008 and will become effective in December 2008.

 

The regulatory approval process in the United Statesfor our products involves, among other things, successfully receivingauthorization from the FDA to conduct clinical trials under an investigationaldevice exemption (“IDE”), completing pre-clinical and clinical trials, andapplying for and obtaining PMA from the FDA. The PMA process requires us todemonstrate the safety and efficacy of our products to the FDA’s satisfaction.This process is expensive and uncertain and requires detailed and comprehensivescientific and human clinical data. While the FDA review process generallytakes one to three years after filing the PMA application, our PMA applicationreview could take much longer and may never result in the FDA granting PMA. TheFDA could delay, limit or deny approval of our PMA application for manyreasons, including:

 

· our stent systems may not be safe or effective or maynot otherwise meet the FDA’s requirements;

 

· the data from our pre-clinical studies and clinicaltrials may be insufficient to support approval;

 

· the manufacturing process or facilities we or our suppliersuse may not meet stringent regulatory requirements;

 

· the information provided by the supplier of the drugcoating in the MAF it submits to the FDA on our behalf may be inadequate; and

 

· changes in FDA approval policies or adoption of newregulations may require us to provide additional data.

 

We will also have to obtain similar, and in some casesmore stringent, foreign regulatory approval in order to commercialize ourproducts outside of the United States. Even if approved, our Custom NX DES Systemsmay not be approved for the indications that are necessary or desirable forsuccessful commercialization. We may not obtain the necessary regulatoryapprovals to market our products in the European Union, United States or inother markets. Any delay in, or failure to receive or maintain, approval forour products could prevent us from generating revenue or achievingprofitability.

 

**Preliminary third-party data hasraised concerns that drug eluting stents may cause an increase in late-stentthrombosis. In the event that regulatory authorities determine that suchconcerns are valid or otherwise require additional study and analysis, we mayexperience a delay in obtaining or we may be unable to obtain regulatoryclearances for our products and, even if approved, the market acceptance of ourproducts may be significantly impaired.**

 

On September 14, 2006, the FDA issued a *Statement on Coronary Drug-Eluting Stents*, which discusses recent clinical data presented at the March 2006American College of Cardiology Scientific Sessions in Atlanta, Georgia and atthe September 2006 European Society of Cardiology AnnualMeeting/World Congress of Cardiology Meeting in Barcelona, Spain. This datasuggested a small but significant increase in the rate of death and myocardialinfarction, or heart attack, potentially due to late-stent thrombosis, inpatients treated with drug eluting stents at 18 months to three yearsafter stent implantation. The FDA stated that, while these studies have raisedimportant questions regarding the safety and efficacy of drug eluting stents,it is not possible to fully characterize the mechanisms, risks and incidencerates of late-stent thrombosis following implantation of drug eluting stentsbased on currently available data. The FDA has not issued any 

 

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new position to date regarding the safety of drugeluting stents. In March 2008, the FDA published draft guidance regardingnon-clinical and clinical studies for drug eluting stents.  The draftguidance includes recommendations regarding the following areas:

 

· Engineering testing,

 

· Biocompatibility testing,

 

· Animal studies,

 

· Chemistry and manufacturing controls,

 

· Clinical pharmacology and drug release,

 

· Drug pharmacology, toxicology and safety data,

 

· Clinical studies, and

 

· Post approval studies.

 

In April 2008, the FDA also conducted a publicworkshop on the draft guidance documents and provided clarification on theabove matters. Although the draft guidelines are currently considerednon-binding recommendations, they have been published for public comment and itis expected that the FDA will conduct any application review for new drugeluting stent catheter systems following the general principles highlighted inthe guidance.

 

**If Biosensors fails to supply us withsufficient quantities of our drug coating, development and commercialization ofour Custom NX DES Systems may be prevented or delayed as a result.**

 

We obtain our entire supply of the drug coating, PLAand BA9 for our stents from Biosensors and we are unaware of any alternativesource for this drug coating. Under the amended and restated license agreementwhich we entered into with Biosensors in December 2007, we have the rightto purchase the components of the drug coating, which are the drug and the PLA,from Biosensors in order to perform the coating formulation ourselves. Webelieve we have completed the work necessary to perform the formulationourselves, but we will continue to purchase the formulated drug coating fromBiosensors until we obtain certain regulatory approvals necessary in order toperform our own formulation for clinical purposes. We do not have the right touse alternate suppliers for this drug coating that we obtain from Biosensors,or the components of the drug coating which we plan to purchase from them inthe future. In addition, there is no other source for the drug coating orcomponents and we are contractually restricted from obtaining Biolimus A9 fromany other source and we have not in-licensed an alternative drug for use in theevent we are unable to obtain a sufficient supply of Biolimus A9. Currently,Biosensors relies on a sole-source, Nippon Kayaku, a third-party Japanesepharmaceutical company, to manufacture and supply them with Biolimus A9,which Biosensors mixes with the PLA. We have no relationship with, controlover, or contact with this pharmaceutical company and cannot contract directlywith it to obtain Biolimus A9 if we are unable to obtain Biolimus A9 fromBiosensors. In addition, the pharmaceutical company is subject to significantlegal and regulatory requirements with regard to the production ofBiolimus A9, including onerous current Good Manufacturing Practicesregulations (“GMP”), which are strictly enforced by the FDA, and the Ministryof Health, Labor, and Welfare in Japan and any failure on the part of thepharmaceutical company to comply with these requirements may interruptBiosensors’ supply of Biolimus A9 and ultimately, our supply of the drugcoating. Biosensors has also entered into, and may continue to enter into,agreements to supply the drug coating to other licensees. Our clinical trialsand the development and commercialization of our Custom NX DES Systems could beprevented or delayed if:

 

· the supplier of our drug coating is unable or refusesto meet our demand;

 

· our license agreement with Biosensors terminates forany reason, including insolvency or our failure to obtain CE Mark orcommercialize within one year of the date upon which the MAF that Biosensorssubmits in connection with our CE Mark application is approved by the MEB; or

 

· the supplier of our drug coating does not meetregulatory quality requirements and other specifications, certain regulatoryapprovals need to be obtained.

 

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To date, our drug coating requirements have beenlimited to small quantities that we need to conduct our development andpre-clinical and clinical trials. If we obtain market approval for ourproducts, we anticipate that we will require substantially larger quantities ofthe drug coating or the components of the drug coating. Biosensors may notprovide us with sufficient quantities of the drug coating or components andsuch supply may not meet our quality requirements or other specifications. Forexample, we have, in the past, experienced interruptions in the supply ofadequate quantities of acceptable drug coating. In addition, Biosensors hasinformed us that it plans to close its Newport Beach, California facility wherethe drug coating that it currently supplies to us is formulated.  In orderto use drug coating formulation prepared at another Biosensors facility, or atour own facility, for the manufacture of devices intended for clinical use,certain regulatory approvals need to be obtained.  If such regulatoryapprovals are not acquired before the closure of the Newport Beach facility, wemay experience an interruption in the supply of drug coating suitable for usein clinical trials.   In the event we do not receive adequate supplies ofacceptable drug coating or components, we will likely be unable to locate analternative supplier, or any alternative drug, in a timely manner or oncommercially reasonable terms, if at all. Any additional new source forBiolimus A9, the PLA or the drug coating will require the consent of Biosensorsand prior FDA approval, which will require significant time and effort to obtainand there can be no assurance that we will obtain such regulatory approval. Theinability to obtain sufficient quantities of the drug coating or components, orany delay in obtaining such supply could delay our clinical trials or affectthe commercialization of our Custom NX DES Systems, which could have asignificant adverse affect on our future operations.

 

**We rely on third parties to test thedrug coating for our stents, and these third parties may use test methods thatothers may claim as their own. If we must obtain a license to use these methodsor develop new testing methods, we may experience delays in our ability toinitiate clinical trials or to obtain regulatory approvals for our products asa result.**

 

Certain tests related to the drug coating on ourstents must be performed before the stents can be used in U.S. clinical trialsor approved for commercial sale. We have agreed with Biosensors that we will beresponsible for performing some of these tests. We have not developed thetechnology or methods to perform all this testing in-house, and plan to rely onthird parties to conduct some of the testing. We have identified certain thirdparties who we believe have the capability to conduct this testing usingmethods that do not violate the proprietary rights of others. We can provide noassurance, however, that these testing methods will not violate such rights. Ifothers assert rights to these testing methods, we may need to obtain a licensegiving us the right to use the testing methods or identify or develop othermethods for performing the required testing. We cannot assure you that alicense will be available to us or that it will be available on terms that areagreeable to us. If we are unable to obtain a license, we cannot assure youthat we will be able to identify or develop alternate testing methods that meetour needs without delaying our regulatory submissions or approvals. This mayresult in a delay in the release of, or an inability to release, our stents foruse in U.S. clinical trials or commercial products and our ability to generaterevenue would be adversely affected as a result.

 

**We do not have long-term dataregarding the safety and efficacy of our Custom NX DES Systems. Any long-termdata that is generated may not be consistent with our limited short-term data,which could affect the regulatory approval of our products or the rate at whichour products are adopted.**

 

An important factor in our clinical trials, upon whichthe safety and efficacy of our Custom NX DES Systems may be measured, is therate of restenosis, or the renarrowing of the treated artery over time, and therate of reintervention, or retreatment following the procedures using theCustom NX DES Systems. We believe that physicians and regulators will comparethe rates of long-term restenosis and reintervention for our Custom NX DESSystems against other drug eluting or bare metal stent procedures and otheralternative procedures.

 

If, in our planned large-scale comparative pivotalclinical trial, we fail to demonstrate restenosis and reintervention rates, aswell as other clinical trial end-points and performance, comparable to otherdrug eluting and bare metal stents that have been approved by the FDA, ourability to successfully market our Custom NX DES Systems may be significantlylimited. If the long-term rates of restenosis and reintervention do not meetregulators’ or physicians’ expectations, our Custom NX DES Systems may notreceive regulatory approval or, if approved, may not become widely adopted andphysicians may recommend that patients receive alternative drug eluting stents,such as the Cypher ® stent, the Taxus ® Express2TM stent, the Endeavor ® stent, the XienceTM V stentand the PromusTM stent, the five drug eluting stents currentlymarketed in the United States. Another important factor upon which the safetyand efficacy of our Custom NX DES Systems will be measured is the incidence oflate-stent thrombosis following procedures using our drug eluting stents. Someclinical data suggests a small but significant increase in the rate of deathand heart attack associated with drug eluting stents when compared to baremetal stents, possibly due to late-stent thrombosis. The FDA convened a publicmeeting of its Circulatory System Devices Advisory Panel on December 7 and8, 2006 with the intention of obtaining additional 

 

 

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information on the risks, timing and incidence ratesof late-stent thrombosis. In March 2008, the FDA published draft guidanceregarding non-clinical and clinical studies for drug eluting stents See “Preliminarythird-party data has raised concerns that drug eluting stents may cause anincrease in late-stent thrombosis.” We cannot assure you that our long-termdata, once obtained, will be different than that suggested in the recentstudies regarding late-stent thrombosis.

 

Additionally, other efficacy factors may influence aphysician’s decision over what stents to deploy. Our Custom NX DES Systems’stent segments may separate excessively at the time of deployment in the arteryor over time. Any such separation may lead to restenosis occurring between thesegments or other adverse events. If the results obtained from our clinicaltrials indicate that our products are not as safe or effective as othertreatment options or as current short-term data would suggest, our products maynot be approved, adoption of our products may suffer and our business would beharmed.

 

**If our pre-clinical studies orclinical trials do not meet safety or efficacy endpoints, or if we experience significantdelays in completing these studies or trials, our ability to commercialize ourCustom NX DES Systems or other products and our financial position will beimpaired.**

 

Before marketing and selling our Custom NX DES Systemsor any other products, we must successfully complete pre-clinical studies andclinical trials that demonstrate that our products are safe and effective. Wecurrently have a very limited amount of clinical data regarding the safety andefficacy of our Custom NX DES Systems, and no published data beyond two years.The results from our limited short-term clinical experience for our Custom NXDES Systems do not necessarily predict long-term clinical benefit and may notbe replicated in subsequent clinical trials. Furthermore, all of our existingdata has been produced in studies that involve relatively small patient groups,and the data may not be reproduced in wider patient populations. We plan toconduct additional large-scale clinical trials to determine whether ourproducts are safe and effective and to support our applications for regulatoryapproval in the United States. We expect that one or more of these additionalclinical studies will be a comparative study comparing the safety and efficacyof our stents to the Xience stent, the Promus stent, the Cypher stent, theTaxus Express2 stent or the Endeavor ® stent, the five drug eluting stentsmarketed in the United States, or to other stents that may become approved formarketing in the United States, and that these studies will involve largepatient populations of approximately 2,500 patients.

 

The commencement or completion of any of our clinicaltrials may be delayed or halted for numerous reasons, including, but notlimited to, the following:

 

· Biosensors fails to submit on our behalf and in atimely fashion, if at all, a MAF for the drug coating with the FDA, or suchfiling fails to meet regulatory requirements;

 

· Biosensors fails to respond in a timely manner, if atall, to questions that the FDA may have concerning a MAF Biosensors submits tothe FDA on our behalf, in connection with our IDE submission;

 

· the FDA or other regulatory authorities do notapprove our clinical trial protocols or our clinical trials, or suspend orplace a clinical trial on hold;

 

· patients do not enroll in clinical trials at the ratewe expect;

 

· third-party clinical investigators do not conductfollow-up visits with patients or patients drop out of the clinical trial atrates we do not expect;

 

· patients experience adverse events, which may or maynot be related to our products;

 

· patients die during a clinical trial for a variety ofreasons, including the advanced stage of their disease and medical problems,which may or may not be related to our products;

 

· third-party clinical investigators do not perform ourclinical trials on our anticipated schedule or consistent with the clinicaltrial protocol, good clinical practices or other regulatory requirements, orother third-party organizations do not perform data collection and analysis ina timely or accurate manner;

 

· regulatory inspections of our clinical trials ormanufacturing facilities, which may, among other things, require us toundertake corrective action or suspend or terminate our clinical trials ifinvestigators find us or our suppliers not in compliance with regulatoryrequirements;

 

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· changes in governmental regulations or administrativeactions;

 

· the interim results of our clinical trials areinconclusive or negative; or

 

· our clinical trial designs, although approved, areinadequate to demonstrate safety and/or efficacy.

 

Before we can commence our planned pivotal clinicaltrial in the United States for our Custom NX DES Systems, we must receive theFDA’s approval of our IDE application. In September 2007, we applied forour IDE and in October 2007 we received questions back from the FDAregarding our IDE application.  Since then, we have established an agreed upontimeline of deliverables and, while we believe we remain on track to receiveIDE approval in 2008, we now expect to commence our pivotal trial in the U.S.in 2009.

 

Product development, including pre-clinical studiesand clinical testing, is a long, expensive and uncertain process and is subjectto delays. It may take us several years to complete our testing, if we completeit at all, and a clinical trial may fail at any stage. Furthermore, dataobtained from any clinical trial may be inadequate to support a PMA applicationor any foreign regulatory applications. Additionally, pre-clinical and clinicaldata can also be interpreted in different ways, which could delay, limit orprevent regulatory approval for our products.

 

**Clinical trials necessary to supporta PMA application will be expensive and will require the enrollment of largenumbers of patients, and suitable patients may be difficult to identify andrecruit.**

 

Clinical trials necessary to support a PMA applicationfor our Custom NX DES Systems will be expensive and will require the enrollmentof large numbers of patients, and suitable patients may be difficult toidentify and recruit. The clinical trials supporting the PMA applications forthe Cypher stent, the Taxus Express2 stent and the Endeavor stent, which areapproved by the FDA and currently marketed, involved patient populations ofapproximately 1,000, 1,300 and 1,100 respectively. We expect that we willprovide the FDA with data on approximately 2,500 patients with 12-monthfollow-up to support our PMA application. The FDA may require us to submit dataon a greater number of patients or a longer follow-up period. For example, atan FDA workshop held in April 2008, the FDA recommended 18 month follow-upon at least 50% of patients. Patient enrollment in clinical trials andcompletion of patient follow-up depend on many factors, including the size ofthe patient population, the nature of the trial protocol, the proximity ofpatients to clinical sites and the eligibility criteria for the clinical trialand patient compliance. For example, patients may be discouraged from enrollingin our clinical trials if the trial protocol requires them to undergo extensivepost-treatment procedures or follow-up to assess the safety and efficacy of ourproducts, or they may be persuaded to participate in contemporaneous clinicaltrials of competitive products. In addition, patients participating in ourclinical trials may die before completion of the trial or suffer adversemedical events unrelated to our products. Delays in patient enrollment orfailure of patients to continue to participate in a clinical trial may cause anincrease in costs and delays or result in the failure of the clinical trial.

 

**Physicians may not widely adopt ourCustom NX DES Systems unless they determine, based on experience, long-termclinical data and published peer reviewed journal articles, that the use of ourCustom NX DES System provides a safe and effective alternative to otherexisting treatments for coronary artery disease, and meets other physicianexpectations.**

 

Physicians tend to be slow to change their medicaltreatment practices because of perceived liability risks arising from the useof new products and the uncertainty of third-party coverages and reimbursement.We believe that physicians will not widely adopt our Custom NX DES Systemsunless they determine, based on experience, long-term clinical data andpublished peer reviewed journal articles, that the use of our Custom NX DESSystems provides a safe and effective alternative to other existing treatmentsfor coronary artery disease, including coronary artery bypass grafting (“CABG”),balloon angioplasty, bare metal stents and other drug eluting stents, such asJohnson & Johnson’s Cypher stent and Boston Scientific’s TaxusExpress2 stent. In particular, the use of bare metal stents has reportedlyincreased, and the use of drug eluting stents has reportedly decreased, atcertain hospitals in the United States and elsewhere as a result of recentclinical data indicating a higher incidence rate of late stent thrombosis. Wecannot predict the effect that this or other data questioning the safety ofdrug eluting stents will have on the drug eluting stent market.

 

We cannot provide any assurance that the datacollected from our current and planned clinical trials will be sufficient todemonstrate that our Custom NX DES Systems are an attractive alternative toother drug eluting stent procedures. If we fail to demonstrate safety andefficacy that is at least comparable to other drug eluting or bare metal stentsthat have received regulatory approval and that are available on the market,our ability to successfully market our Custom NX DES Systems will besignificantly limited. Even if the data collected from clinical studies or clinicalexperience indicate positive results, each physician’s actual experience withour Custom NX DES Systems will vary. Clinical trials conducted with our 

 

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Custom NX DES Systems have involved proceduresperformed by physicians who are technically proficient and are high-volumeusers of drug eluting stents. Consequently, both short- and long-term resultsreported in these clinical trials may be significantly more favorable thantypical results of practicing physicians, which could negatively impact ratesof adoption of our products. In addition to safety and efficacy, we believethat product characteristics such as ease of use and consistency of performanceare also important. If we are not able to meet physician expectations withrespect to these characteristics, market acceptance and adoption of ourproducts may be impacted. We also believe that published peer-reviewed journalarticles and recommendations and support by influential physicians regardingour Custom NX DES Systems will be important for market acceptance and adoption,and we cannot assure you that we will receive these recommendations andsupport, or that supportive articles will be published.

 

**Problems with the stent to be used inthe control group during our planned U.S. pivotal clinical trial couldadversely affect its outcome.**

 

We expect our pivotal clinical trial in the UnitedStates to compare the performance, including safety and efficacy, of ourproducts against that of a currently marketed drug eluting stent, or a drugeluting stent that becomes approved for marketing in the near future. Ourplanned pivotal clinical trial could be significantly delayed or harmed if thestent we use for the control group experiences problems. We may use one of thefive currently marketed drug eluting stents, the Xience V stent, the Promusstent, the Cypher stent, the Taxus Express2 stent or the Endeavor stent, or adrug eluting stent that becomes approved for marketing in the near future, asthe control stent in our planned pivotal clinical trial. In July 2004,Boston Scientific announced the recall of approximately 85,000 Taxus stentsystems and approximately 11,000 Express2 stent systems due to characteristicsin the delivery catheters that had the potential to impede balloon deflationduring a balloon angioplasty procedure. In August 2004, Boston Scientificannounced that it would recall an additional 3,000 Taxus stents. If prior to orduring the enrollment and treatment period for our planned pivotal clinicaltrial, there is a recall of the control stent or the control stent is removedfrom the market, our trial would likely be substantially delayed. The FDA couldalso require us to redesign the clinical trial based on an alternative controlstent. Any significant delay or redesign could impair our ability tocommercialize our Custom NX DES Systems.

 

**Our products are based on a newtechnology, and we have only limited experience in regulatory affairs, whichmay affect our ability or the time required to obtain necessary regulatoryapprovals, if at all.**

 

Drug eluting stents were introduced in the UnitedStates in 2003. To date, the FDA has approved only the Taxus Express2, theCypher,  the Endeavor, the Xience V andthe Promus drug eluting stents for commercial sale. Because drug eluting stentsare relatively new and long-term success measures have not been completelyvalidated, regulatory agencies, including the FDA, may take significantly moretime in evaluating product approval applications for those types of products.For example, there are currently several methods of measuring restenosis and wedo not know which of these metrics, or combination of these metrics, will beconsidered appropriate by the FDA for evaluating the clinical efficacy ofstents. Treatments may exhibit a favorable measure using one of thesemetrics and an unfavorable measure using another metric. Any change in theaccepted metrics may result in reconfiguration of, and delays in, our clinicaltrials. Furthermore, the result of recent studies suggesting a correlationbetween drug eluting stents and incidents of late-stent thrombosis may furtherdelay and complicate the regulatory pathway for our products. Additionally, wehave limited experience in filing and prosecuting the applications necessary togain regulatory approvals, and we have limited personnel and resources todedicate to the filing and prosecution of these applications. As a result, wemay experience a long regulatory process in connection with obtainingregulatory approvals for our products.

 

**If the third parties on which we relyto conduct our clinical trials and to assist us with pre-clinical developmentdo not perform as contractually required or expected, we may not be able toobtain regulatory approval for or commercialize our products.**

 

We do not have the ability to independently conductclinical trials for our products, and we must rely on third parties, such ascontract research organizations, medical institutions, clinical investigatorsand contract laboratories to conduct our clinical trials. In addition, we relyon third parties to assist with the pre-clinical development of our products.If these third parties do not successfully carry out their contractual dutiesor regulatory obligations or meet expected deadlines, if these third partiesneed to be replaced, or if the quality or accuracy of the data they obtain iscompromised due to the failure to adhere to our clinical protocols orregulatory requirements or for other reasons, our pre-clinical developmentactivities or clinical trials may be extended, delayed, suspended orterminated, and we may not be able to obtain regulatory approval for orsuccessfully commercialize our products on a timely basis, if at all.Furthermore, our third-party clinical trial investigators may be delayed inconducting our clinical trials for reasons outside of their control.

 

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**Even if our products are approved byregulatory authorities, if we or our suppliers fail to comply with ongoingregulatory requirements, or if we experience unanticipated problems with ourproducts, these products could be subject to restrictions or withdrawal fromthe market.**

 

Any product for which we obtain marketing approval,along with the manufacturing processes, post-approval clinical data andpromotional activities for such product, will be subject to continual reviewand periodic inspections by the FDA and other regulatory bodies. In particularwe and our suppliers are required to comply with the Quality System Regulation(“QSR”), for the manufacture of our Custom NX DES Systems and GMP for themanufacture of our drug coating and other regulations, which cover the methodsand documentation of the design, testing, production, control, qualityassurance, labeling, packaging, storage and shipping of any product for whichwe obtain marketing approval. The FDA enforces the GMP and QSR throughunannounced inspections. We and our third-party manufacturers and suppliershave not yet been inspected by the FDA and will have to successfully completesuch inspections before we receive regulatory approvals for our products.Failure by us or one of our suppliers, including the supplier of our drugcoating, to comply with statutes and regulations administered by the FDA andother regulatory bodies, or failure to take adequate response to anyobservations, could result in, among other things, any of the followingenforcement actions:

 

· warning letters or untitled letters;

 

·fines and civil penalties;

 

· unanticipated expenditures;

 

· delays in approving, or refusal to approve, ourproducts;

 

· withdrawal or suspension of approval by the FDA orother regulatory bodies;

 

· product recall or seizure;

 

· orders for physician notification or device repair,replacement or refund;

 

· interruption of production;

 

· operating restrictions;

 

· injunctions; and

 

· criminal prosecution.

 

If any of these actions were to occur it would harmour reputation and cause our product sales and profitability to suffer.Furthermore, our key component suppliers may not currently be or may notcontinue to be in compliance with applicable regulatory requirements.

 

Even if regulatory approval of a product is granted,the approval may be subject to limitations on the indicated uses for which theproduct may be marketed. If the FDA determines that our promotional materials,training or other activities constitute promotion of an unapproved use, itcould request that we cease or modify our training or promotional materials orsubject us to regulatory enforcement actions. It is also possible that otherfederal, state or foreign enforcement authorities might take action if theyconsider our training or other promotional materials to constitute promotion ofan unapproved use, which could result in significant fines or penalties underother statutory authorities, such as laws prohibiting false claims forreimbursement.

 

Moreover, any modification to a device that hasreceived FDA approval that could significantly affect its safety oreffectiveness, or that would constitute a major change in its intended use,design or manufacture, requires a new approval from the FDA. If the FDAdisagrees with any determination by us that new approval is not required, wemay be required to cease marketing or to recall the modified product until weobtain approval. In addition, we could also be subject to significantregulatory fines or penalties.

 

In addition, we may be required to conduct costlypost-market testing and surveillance to monitor the safety or efficacy of ourproducts, and we will be required to report adverse events and malfunctionsrelated to our products. Later discovery 

 

 

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of previously unknown problems with our products,including unanticipated adverse events or adverse events of unanticipatedseverity or frequency, manufacturing problems, or failure to comply withregulatory requirements such as QSR or GMP, may result in restrictions on suchproducts or manufacturing processes, withdrawal of the products from themarket, voluntary or mandatory recalls, fines, suspension of regulatoryapprovals, product seizures, injunctions or the imposition of civil or criminalpenalties. For example, Boston Scientific has initiated significant recalls ofits stent products due to manufacturing and other quality issues associatedwith the products.

 

Further, healthcare laws and regulations may changesignificantly in the future. Any new healthcare laws or regulations mayadversely affect our business. A review of our business by courts or regulatoryauthorities may result in a determination that could adversely affect ouroperations. Also, the healthcare regulatory environment may change in a waythat restricts our operations.

 

**Failureto obtain regulatory approval in foreign jurisdictions will prevent us frommarketing our products abroad.**

 

We intend to market our products in internationalmarkets. In order to market our products in the European Union and many otherforeign jurisdictions, we must obtain separate regulatory approvals. Theapproval procedure varies among countries and can involve additional testing,and the time required to obtain approval may differ from that required toobtain FDA approval. The foreign regulatory approval process may include all ofthe risks associated with obtaining FDA approval in addition to other risks. Wemay not obtain foreign regulatory approvals on a timely basis, if at all.Approval by the FDA does not ensure approval by regulatory authorities in othercountries, and approval by one foreign regulatory authority does not ensureapproval by regulatory authorities in other foreign countries or by the FDA. Wemay not be able to file for regulatory approvals and may not receive necessaryapprovals to commercialize our products in any market.

 

**Risks Related to Our Intellectual Property**

 

**Thirdparties hold a large number of patents related to stents and we do not haverights to many of these patents.**

 

Intellectual property rights, including in particularpatent rights, play a critical role in the medical device industry, andtherefore in our business. We face significant risks relating to patents, bothas to our own patent position as well as to patents held by third parties. Ifany third-party intellectual property claim against us is successful, we couldbe prevented from commercializing our Custom NX DES Systems or other products.

 

There are numerous U.S. and foreign issued patents andpending patent applications owned by third parties with patent claims in areasthat are the focus of our product development efforts. We are aware of patentsowned by third parties, to which we do not have licenses, that relate to, amongother things:

 

· use of rapamycin or its analogs to treat restenosis;

 

· stent structures and materials;

 

· catheters used to deliver stents; and

 

· stent manufacturing and coating processes.

 

Cordis, a subsidiary of Johnson & Johnson, isthe owner of a number of patents and patent applications directed to the useand delivery of rapamycin or its analogs mixed in a polymer coating on a drugeluting stent for the treatment of restenosis. These include, withoutlimitation, the “Wright” family of patents and the “Falotico” family ofpatents.  Wyeth owns, and has licensed to Cordis, the “Morris” family ofpatents which are directed to the use of rapamycin for the treatment ofrestenosis, including the delivery of rapamycin from a stent impregnated withthe drug.

 

Boston Scientific holds rights to the “Grainger”family of patents directed to methods of inhibiting smooth muscle cellproliferation, or growth, using certain compounds and to the “Kunz” family ofpatents directed to methods for maintaining vessel luminal area with a stentthat includes a cytostatic, or cell division inhibiting, agent.

 

Various patents owned by third parties are directed tostent structures and materials. These patents include a group of “Lau” patentsthat were owned by Guidant Corporation, a newly acquired subsidiary of BostonScientific whose stent technology has been acquired by Abbott Vascular subjectto certain rights retained by Boston Scientific, which are directed to flexiblestent structures. The “Boneau” family of patents, owned by Medtronic, aredirected to stents comprising multiple closed-loop elements. The “Fariabi”family of patents, formerly owned by Guidant, are directed to stents 

 

 

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comprising cobalt- chromium alloys. The “Israel” and “Pinchasik”families of patents, owned by Medinol, are directed to stents with meanderingstrut patterns. A patent owned by Wall is directed to a radially collapsiblemesh sleeve.

 

Other third-party patents are directed to stentdelivery catheter technology. There are also a number of patents that were heldby Guidant Corporation directed to rapid exchange catheters for angioplasty andstent delivery. These include, without limitation, the “Yock” and “Horzewski”families of patents, directed to rapid exchange angioplasty catheters, and the “Lau”family of patents directed to rapid exchange stent catheters. Boston Scientificowns other patents directed to rapid exchange angioplasty catheters, including,the “Bonzel” family of patents. Medtronic owns certain patents directed toguidewire handling technology in stent delivery catheters, including certainpatents issued to Crittenden and Kramer. A patent issued to Fischell isdirected to a sheathed stent delivery catheter. Guidant Corporation also held apatent issued to Cox, directed to a stent delivery catheter having anadjustable-length balloon. Certain patents owned by Boston Scientific or itssubsidiaries are also directed to stent delivery catheters havingadjustable-length balloons. Certain patents owned by third parties relate tomethods for coating stents. For example, the “Hossainy” family of patents thatwere held by Guidant Corporation are directed to methods of coating stents witha primer layer and a reservoir layer.

 

The patents described above could be found to coverour technology and may materially and adversely affect our business. Inaddition, these patents are given only as examples and there may be otherpatents in addition to those described above that may materially and adverselyaffect our business. Moreover, because patent applications can take many yearsto issue, there may be currently pending applications, unknown to us, which maylater result in issued patents that pose a material risk to us.

 

**Many of our competitors are muchlarger than we are, with significant resources and incentives to initiatelitigation against us.**

 

Based on the prolific litigation that has occurred inthe stent industry and the fact that we may pose a competitive threat to somelarge and well-capitalized companies that own or control patents relating tostents and their use, manufacture and delivery, we believe that it is possiblethat one or more third parties will assert a patent infringement claim againstthe manufacture, use or sale of our Custom NX DES Systems based on one or moreof these patents. It is also possible that a lawsuit asserting patentinfringement and related claims will be filed against us and it is possiblethat a lawsuit may have already been filed against us of which we are notaware. A number of these patents are owned by very large and well-capitalizedcompanies that are active participants in the stent market. As the number ofcompetitors in the drug eluting stent market grows, the possibility ofinadvertent patent infringement by us or a patent infringement claim against usincreases.

 

These companies have maintained their position in themarket by, among other things, establishing intellectual property rightsrelating to their products and enforcing these rights aggressively againsttheir competitors and new entrants into the market. All of the major companiesin the stent and related markets, including Abbott Vascular (which acquiredGuidant’s stent technology), Boston Scientific, Johnson & Johnson andMedtronic, have been repeatedly involved in patent litigation relating tostents since at least 1997. The stent and related markets have experiencedrapid technological change and obsolescence in the past, and our competitorshave strong incentives to stop or delay the introduction of new products andtechnologies. We may pose a competitive threat to many of the companies in thestent and related markets. Accordingly, many of these companies will have astrong incentive to take steps, through patent litigation or otherwise, toprevent us from commercializing our products.

 

**Any lawsuit, whether initiated by usto enforce our intellectual property rights or by a third party against usalleging infringement, may cause us to expend significant financial and otherresources, and may divert our attention from our business.**

 

In any infringement lawsuit, a third party could seekto enjoin, or prevent, us from commercializing our Custom NX DES Systems or anyfuture products, may seek damages from us and any such lawsuit would likely be expensivefor us to defend against. Our involvement in intellectual property litigationcould result in significant expense. Some of our competitors, such as BostonScientific, Johnson & Johnson, Abbott Vascular and Medtronic, haveconsiderable resources available to them and a strong economic incentive toundertake substantial efforts to stop or delay us from bringing our Custom NXDES Systems to market and achieving market acceptance. We, on the other hand,are a development stage 

 

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company with comparatively few resources available tous to engage in costly and protracted litigation. A court may determine that patentsheld by third parties are valid and infringed by us and we may be required to:

 

· pay damages, including up to treble damages and theother party’s attorneys’ fees, which may be substantial;

 

· cease the development, manufacture, use and sale ofproducts that infringe the patent rights of others, including our Custom NX DESSystems, through a court-imposed sanction called an injunction;

 

· expend significant resources to redesign ourtechnology so that it does not infringe others’ patent rights, or to develop oracquire non-infringing intellectual property, which may not be possible;

 

· discontinue manufacturing or other processesincorporating infringing technology; or

 

· obtain licenses to the infringed intellectualproperty, which may not be available to us on acceptable terms, or at all.

 

Any development or acquisition of non-infringingproducts or technology or licenses could require the expenditure of substantialtime and other resources and could have a material adverse effect on ourbusiness and financial results. If we are required to, but cannot, obtain alicense to valid patent rights held by a third party, we would likely beprevented from commercializing the relevant product. We believe that it isunlikely that we would be able to obtain a license to any necessary patentrights controlled by companies against which we would compete directly. If weneed to redesign products to avoid third-party patents, we may suffersignificant regulatory delays associated with conducting additional studies orsubmitting technical, manufacturing or other information related to theredesigned product and, ultimately, in obtaining regulatory approval.

 

While our products are in clinical trials, and priorto commercialization, we believe our activities in the United States related tothe submission of data to the FDA could fall within the scope of the statutoryinfringement exemption that covers activities related to developing informationfor submission to the FDA. However, this statutory exemption would not coverour stent manufacturing or other activities in the United States that supportoverseas clinical trials or commercial sales if those activities are not alsoreasonably related to developing information for submission to the FDA.Currently available drug eluting stents are manufactured outside of the UnitedStates, which may insulate manufacturers from adverse rulings on U.S. patentinfringement claims. In an adverse ruling, a court may order an injunctionrequiring a company to stop its U.S. domestic manufacturing operations. Wecurrently do not have any plans to manufacture our stents outside of the UnitedStates and any finding of patent infringement against us in the United Statescould result in our being enjoined from manufacturing our products in theUnited States and could affect our ability to sell our products in the EuropeanUnion. In any event, the fact that no third party has asserted a patentinfringement claim against us to date should not be taken as an indication, orprovide any level of comfort, that a patent infringement claim will not beasserted against us prior to or upon commercialization.

 

In addition, some of our agreements, including ouragreement with Biosensors for the supply of the drug coating and our agreementwith SurModics for the supply of the lubricious coating on our catheter requireus to indemnify the other party in certain circumstances where our productshave been found to infringe a patent or other proprietary rights of others. Anindemnification claim against us may require us to pay substantial sums to ourlicensor or supplier, including its attorneys’ fees.

 

**If we are unable to obtain andmaintain intellectual property protection covering our products, others may beable to make, use or sell our products, which would adversely affect ourrevenue.**

 

Our ability to protect our products from unauthorizedor infringing use by third parties depends substantially on our ability toobtain and maintain valid and enforceable patents. As of June 30, 2008 wehad seven issued U.S. patents, one of which is under exclusive license,covering certain aspects of the technology that we intend to commercialize anda number of other issued patents and pending patent applications in the UnitedStates and abroad. Due to evolving legal standards relating to thepatentability, validity and enforceability of patents covering medical devicesand pharmaceutical inventions and the scope of claims made under these patents,our ability to obtain and enforce patents is uncertain and involves complexlegal and factual questions. Accordingly, rights under any of our issuedpatents may not provide us with commercially meaningful protection for ourproducts or afford us a commercial advantage against our competitors or theircompetitive products or processes. In addition, patents may not issue from anypending or future patent applications owned by or licensed to us, and moreover,patents that have issued to us or may issue in the future may not be valid orenforceable. Further, even if valid and enforceable, our patents may not besufficiently broad to prevent others from marketing products like ours, despiteour patent rights.

 

The validity of our patent claims depends, in part, onwhether prior art references exist that describe or render obvious ourinventions as of the filing date of our patent applications. We may not haveidentified all prior art, such as U.S. and foreign patents or publishedapplications or published scientific literature, that could adversely affectthe validity of our 

 

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issued patents or the patentability of our pendingpatent applications. For example, patent applications in the United States aremaintained in confidence for up to 18 months after their filing. In somecases, however, patent applications remain confidential in the United StatesPatent and Trademark Office (“USPTO”), for the entire time prior to issuance asa U.S. patent. Patent applications filed in countries outside the United Statesare not typically published until at least 18 months from their firstfiling date. Similarly, publication of discoveries in the scientific or patentliterature often lags behind actual discoveries. Therefore, we cannot becertain that we were the first to invent, or the first to file patentapplications relating to, our stent technologies. In the event that a thirdparty has also filed a U.S. patent application covering our stents or a similarinvention, we may have to participate in an adversarial proceeding, known as aninterference, declared by the USPTO to determine priority of invention in theUnited States. It is possible that we may be unsuccessful in the interference,resulting in a loss of some portion or all of our position in the UnitedStates. The laws of some foreign jurisdictions do not protect intellectualproperty rights to the same extent as in the United States, and many companieshave encountered significant difficulties in protecting and defending suchrights in foreign jurisdictions. If we encounter such difficulties or we areotherwise precluded from effectively protecting our intellectual propertyrights in foreign jurisdictions, our business prospects could be substantiallyharmed.

 

We may initiate litigation to enforce our patentrights, which may prompt our adversaries in such litigation to challenge thevalidity, scope or enforceability of our patents. If a court decides that ourpatents are not valid, not enforceable or of a limited scope, we will not havethe right to stop others from using our technology.

 

We also rely on trade secret protection to protect ourinterests in proprietary know-how and for processes for which patents aredifficult to obtain or enforce. We may not be able to protect our trade secretsadequately. In addition, we rely on non-disclosure and confidentialityagreements with employees, consultants and other parties to protect, in part,trade secrets and other proprietary technology. These agreements may bebreached and we may not have adequate remedies for any breach. Moreover, othersmay independently develop equivalent proprietary information, and third partiesmay otherwise gain access to our trade secrets and proprietary knowledge. Anydisclosure of confidential data into the public domain or to third partiescould allow our competitors to learn our trade secrets and use the informationin competition against us.

 

We are aware that another medical business that holdspatents to certain stent designs has used the name XTENT for limited purposesin the past. If it turns out that the other business has superior trademarkrights in the name, and if the other business were to challenge our use of theXTENT name, we would then need to convince a court that there is no likelihoodof consumer confusion. If we were unsuccessful in court, then we could be heldliable for trademark infringement and we might then have to change our name aswell as pay monetary damages. If we were forced to change our name, we maysuffer from a loss of brand recognition, we may be required to retrieve productand interrupt supply, and may have to devote substantial resources advertisingand marketing our products under a new brand name.

 

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**Risks Related to Commercialization**

 

**The medical device industry is highlycompetitive and subject to rapid technological change. If our competitors arebetter able to develop and market products that are safer, more effective, lesscostly or otherwise more attractive than any products that we may develop, ourcommercial opportunity will be reduced or eliminated.**

 

The medical device industry is highly competitive andsubject to rapid and profound technological change. Our success depends, inpart, upon our ability to maintain a competitive position in the development oftechnologies and products for use in the treatment of CAD.

 

We face competition from established pharmaceuticaland biotechnology companies, as well as from academic institutions, governmentagencies and private and public research institutions in the United States andabroad. Most of the companies developing or marketing competing products arepublicly traded or divisions of publicly-traded companies, and these companiesenjoy several competitive advantages, including:

 

· greater financial and human resources for productdevelopment, sales and marketing, and patent litigation;

 

· significantly greater name recognition;

 

· established relations with healthcare professionals,customers and third-party payors;

 

· additional lines of products, and the ability tooffer rebates or bundle products to offer higher discounts or incentives togain a competitive advantage;

 

· established distribution networks; and

 

· greater experience in conducting research anddevelopment, manufacturing, clinical trials, obtaining regulatory approval forproducts and marketing approved products.

 

For example, Johnson & Johnson, BostonScientific, Medtronic and Abbott Laboratories, four companies with far greaterfinancial and marketing resources than we possess, have each developed, and areactively marketing, drug eluting stents that have been approved by the FDA. Wemay be unable to demonstrate that our Custom NX DES Systems offer anyadvantages over Johnson & Johnson’s Cypher stent, Boston Scientific’sTaxus Express2 or Promus stents, Abbott Laboratories’ Xience V stent orMedtronic’s Endeavor stent. Smaller or early-stage companies may also prove tobe significant competitors, particularly through collaborative arrangementswith, or mergers with or acquisitions by, large and established companies orthrough the development of novel products and technologies.

 

The industry in which we operate has undergone, and isexpected to continue to undergo, rapid and significant technological change,and we expect competition to intensify as technical advances are made. Ourcompetitors may develop and patent processes or products earlier than us,obtain regulatory approvals for competing products more rapidly than us, anddevelop more effective or less expensive products or technologies that renderour technology or products obsolete or non-competitive. For example, we areaware of companies that are developing various other less-invasive technologiesfor treating CAD, which could make our stent platform obsolete. We also competewith our competitors in recruiting and retaining qualified scientific andmanagement personnel, establishing clinical trial sites and patientregistration for clinical trials, as well as in acquiring technologies andtechnology licenses complementary to our programs or advantageous to ourbusiness. If our competitors are more successful than us in these matters, ourbusiness may be harmed.

 

**If we are unable to establish salesand marketing capabilities or enter into and maintain arrangements with thirdparties to sell and market our Custom NX DES Systems, our business may beharmed.**

 

We do not have a sales organization and have noexperience as a company in the sales, marketing and distribution of stentsystems or other medical devices. To be successful in commercializing ourproducts we must either develop a sales and marketing infrastructure or enterinto distribution arrangements with others to market and sell our products. Wehave not yet hired any European sales people or entered into any third-partydistribution agreements.

 

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After establishing our European sales channels, if ourCustom NX DES Systems are approved for commercial sale in the United States, wecurrently plan to establish our own direct U.S. sales force. If we develop ourown marketing and sales capabilities, our sales force will be competing withthe experienced and well-funded marketing and sales operations of our moreestablished competitors. Developing a sales force is expensive and timeconsuming and could delay or limit the success of any product launch. We maynot be able to develop this capacity on a timely basis or at all. If we areunable to establish sales and marketing capabilities, we will need to contractwith third parties to market and sell our products in the United States. To theextent that we enter into arrangements with third parties to perform sales,marketing and distribution services in the United States or internationally,our product revenue could be lower than if we directly marketed and sold ourproducts, or any other stent system or related device that we may develop.Furthermore, to the extent that we enter into co-promotion or other marketingand sales arrangements with other companies, any revenue received will dependon the skills and efforts of others, and we do not know whether these effortswill be successful. Some of our future distributors may market their ownproducts or distribute other companies’ products that compete with ours, andthey may have an incentive not to devote sufficient efforts to marketing ourproducts. If we are unable to establish and maintain adequate sales, marketingand distribution capabilities, independently or with others, we may not be ableto generate product revenue and may not become profitable.

 

**We have limited device manufacturingand drug coating capabilities and manufacturing personnel, and if our devicemanufacturing and drug coating facilities or our suppliers are unable toprovide an adequate supply of products, our growth could be limited and ourbusiness could be harmed.**

 

We currently have limited resources, facilities and experienceto commercially manufacture the device component of our products and apply thedrug coating to the stents. In addition, pursuant to the terms of the restatedlicense agreement with Biosensors, we are in the process of preparing toperform our own drug coating formulation, a process currently performed byBiosensors. In order to produce our Custom NX DES Systems in the quantitiesthat we anticipate will be required to meet anticipated market demand, we willneed to increase, or scale-up, the production process by a significant factorover our current level of production. There are technical challenges toscaling-up manufacturing capacity and developing commercial-scale manufacturingfacilities that will require the investment of substantial additional funds andhiring and retaining additional management and technical personnel who have thenecessary manufacturing experience. We may not successfully complete anyrequired scale-up in a timely manner or at all. If we are unable to do so, wemay not be able to produce products in sufficient quantities to meet therequirements for the launch of the product or to meet future demand, if at all.If we develop and obtain regulatory approval for our products and are unable tomanufacture a sufficient supply of our products, our revenue, business andfinancial prospects would be adversely affected. In addition, if the scaled-upproduction process is not efficient or produces stents that do not meet qualityand other standards, our future gross margins may decline.

 

We currently assemble our Custom NX DES Systems andapply the drug coating at our facilities in Menlo Park, California. Under theterms of our lease agreement for these facilities, our landlord may terminateour lease at any time on or after May 1, 2009 by giving us 180 days’notice, if it has obtained certain redevelopment rights with respect to theleased premises. Prior to the commercial launch of our product, our leasedpremises will have to be inspected and approved by the FDA, and will likelyrequire additional certifications by the State of California Department ofHealth Services (“CDHS”). Our facility and quality systems are also required topass annual audits for purposes of International Standardisation Organization (“ISO”)compliance. If audits and inspections of our facilities determine that ourfacility does not meet applicable standards, or if there is a disruption to ourexisting manufacturing facility, or if our landlord elects to terminate ourlease on or after May 1, 2009, we will have no other means ofmanufacturing our products until we are able to restore the manufacturingcapability at our facility or lease alternative manufacturing facilities andobtain regulatory approval for these facilities. Because our Menlo Parkfacilities are located in a seismic zone, we face the risk that an earthquakemay damage our facilities and disrupt our operations. If we are unable toproduce sufficient quantities of our products for use in our current andplanned clinical trials, if we obtain regulatory approval of our products andare unable to produce sufficient quantities of our products to support ourplanned commercial activities or if our manufacturing process yieldssubstandard products, our development and commercialization efforts would be delayed.

 

**If the cost of our drug coating orother components of our stent systems increase significantly, our business andour results of operations may be harmed.**

 

Under the terms of our license agreement withBiosensors, the price we pay for our drug coating or the components thereofonce we begin performing the formulation of the coating ourselves, may increaseas Biosensors’ cost of manufacturing and supplying the drug coating orcomponents increases. We have experienced one price increase in the past 

 

 

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and we may experience additional increases in thefuture. If we experience significant increases in the cost of our drug coatingor other key components of our stent systems, our business and our results ofoperations may be harmed.

 

**Our manufacturing facilities and themanufacturing facilities of our suppliers must comply with strictly enforcedregulatory requirements. If we fail to achieve regulatory approval for thesemanufacturing facilities, our business and our results of operations would beharmed.**

 

Completion of our clinical trials andcommercialization of our products require access to, or the development of,manufacturing facilities that comply with QSR and GMP. We may establish amanufacturing facility outside of the United States and can provide noassurance that our manufacturing facility would meet applicable foreignregulatory requirements or standards at acceptable cost, on a timely basis, orat all. In addition, the FDA must approve facilities that manufacture ourproducts for domestic commercial purposes, as well as the manufacturingprocesses and specifications for the product. Biosensors and suppliers ofcomponents of, and products used to manufacture, our products must also complywith FDA and foreign regulatory requirements, which often require significanttime, money and record-keeping and quality assurance efforts and subject us andour suppliers to potential regulatory inspections and stoppages. We,Biosensors, or our other suppliers may not satisfy these regulatoryrequirements. If we or our suppliers do not achieve required regulatoryapproval for our manufacturing operations, our commercialization efforts couldbe delayed, which would harm our business and our results of operations.

 

**We depend on single-source suppliersfor some of the components in our Custom NX DES Systems. The loss of thesesuppliers could delay our clinical trials or prevent or delay commercializationof our Custom NX DES Systems.**

 

Although we have identified several vendors for thecomponents of our products, some of our components are currently provided byonly one vendor, or a single-source supplier. In addition to our reliance onBiosensors as the only source for the supply of our drug coating, we alsodepend on SurModics, which provides the slippery coating on our sheath. We donot have long-term contracts with some of our third-party suppliers ofcomponents used in the manufacture of our stent delivery catheters or thecobalt chromium tubing and laser-precision cutting process required to producethe stent segments included in our device. In addition, we do not havelong-term contracts with our third-party suppliers of some of the equipment andcomponents that are used in our manufacturing process and we do not carry asignificant inventory of most components used in our products. Establishingadditional or replacement suppliers for these components, and obtaining any additionalregulatory approvals that may result from adding or replacing suppliers, willtake a substantial amount of time. We may also have difficulty obtainingsimilar components from other suppliers that are acceptable to the FDA orforeign regulatory authorities. Furthermore, since some of these suppliers arelocated outside of the United States, we are subject to foreign export laws andU.S. import and customs regulations, which complicate and could delay shipmentsto us. Some of our suppliers are also our competitors and may be reluctant tosupply components to us on favorable terms, if at all.

 

If we have to switch to replacement suppliers, we willface additional regulatory delays and the manufacture and delivery of ourCustom NX DES Systems would be interrupted for an extended period of time,which would delay completion of our clinical trials or commercialization of ourproducts. In addition, we will be required to obtain prior regulatory approvalfrom the FDA or foreign regulatory authorities to use different suppliers orcomponents that may not be as safe or as effective. As a result, regulatoryapproval of our products may not be received on a timely basis or at all.

 

**If we do not achieve our projecteddevelopment goals in the time frames we announce and expect, thecommercialization of our products may be delayed and, as a result, our stockprice may decline.**

 

From time to time, we may estimate and publiclyannounce the anticipated timing of the accomplishment of various clinical,regulatory and other product development goals, which we sometimes refer to asmilestones. These milestones could include obtaining CE Mark approval in theEuropean Union, the initiation of our pivotal U.S. clinical trial for ourCustom NX DES Systems, the enrollment of patients in our clinical trials, therelease of data from our clinical trials and other clinical and regulatoryevents. The actual timing of these milestones could vary dramatically comparedto our estimates, in some cases for reasons beyond our control. We cannotassure you that we will meet our projected milestones and if we do not meetthese milestones as publicly announced, the commercialization of our productsmay be delayed and, as a result, our stock price may decline.

 

 

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**Wemay not be successful in our efforts to expand our portfolio of products anddevelop additional technologies.**

 

A key element of our strategy is to discover, developand commercialize a portfolio of new products in addition to our Custom NX DESSystems. We are seeking to do so through our internal research programs andintend to explore strategic collaborations for the development of new productsutilizing our stent technology. Research programs to identify new diseasetargets, products and delivery techniques require substantial technical,financial and human resources, whether or not any products are ultimatelyidentified. We may determine that one or more of our pre-clinical programs donot have sufficient potential to warrant the allocation of resources, such asthe potential development of our stent technology for the treatment ofperipheral artery disease (“PAD”). Our research programs may initially showpromise in identifying potential products, yet fail to yield products forclinical development for many reasons, including the following:

 

· the research methodology used may not be successfulin identifying potential products;

 

· competitors may develop alternatives that render ourproducts obsolete;

 

· our products may not be deployed safely oreffectively;

 

· products may on further study be shown to haveharmful side effects or other characteristics that indicate they are unlikelyto be effective;

 

· our clinical trials may not be successful; and

 

· we may not receive regulatory approval.

 

**We depend on our officers, and if weare not able to retain them or recruit additional qualified personnel, ourbusiness will suffer.**

 

We are highly dependent on our President and ChiefExecutive Officer, Gregory D. Casciaro and our other officers. Due to thespecialized knowledge each of our officers possesses with respect tointerventional cardiology and our operations, the loss of service of any of ourofficers could delay or prevent the successful completion of our clinicaltrials and the commercialization of our Custom NX DES Systems. Each of our officersmay terminate their employment without notice and without cause or good reason.We carry key person life insurance on Mr. Casciaro but not on our otherofficers.

 

Upon receiving regulatory approval for our products,we expect to rapidly expand our operations and grow our research anddevelopment, product development and administrative operations. Our growth willrequire hiring a significant number of qualified clinical, scientific,commercial and administrative personnel. Accordingly, recruiting and retainingsuch personnel in the future will be critical to our success. There is intensecompetition from other companies and research and academic institutions forqualified personnel in the areas of our activities. Our offices are located inthe San Francisco Bay Area, where competition for personnel withhealthcare industry skills is intense. If we fail to identify, attract, retainand motivate these highly skilled personnel, we may be unable to continue ourdevelopment and commercialization activities.

 

**If we are unable to manage ourexpected growth, we may not be able to commercialize our products, includingour Custom NX DES Systems.**

 

If we obtain CE Mark and FDA approval for ourproducts, we intend to continue to rapidly expand our operations and grow ourresearch and development, product development and administrative operations andinvest substantially in our manufacturing facilities. This expansion has and isexpected to continue to place a significant strain on our management andoperational and financial resources. In particular, the commencement of ourplanned pivotal clinical trial in the United States will consume a significantportion of management’s time and our financial resources. To manage anyexpected growth and to commercialize our Custom NX DES Systems, we will berequired to improve existing, and implement new, operational and financialsystems, procedures and controls and expand, train and manage our growingemployee base. Our current and planned personnel, systems, procedures and controlsmay not be adequate to support our anticipated growth. If we are unable tomanage our growth effectively, our business could be harmed.

 

 

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**Risks Related to Our Industry**

 

**If we fail to obtain an adequatelevel of reimbursement for our products from third-party payors, there may beno commercially viable markets for our products or the markets may be muchsmaller than expected.**

 

Our failure to receive adequate reimbursement orpricing approvals in the United States or internationally would negativelyimpact market acceptance of our products in the markets in which thoseapprovals are sought. The efficacy, safety, performance and cost-effectivenessof our products under development and of any competing products are some of thefactors that will determine the availability of coverage and level of reimbursement.In the United States, a preliminary threshold for coverage and payment ofmedical devices and drugs generally includes approvals or clearances from theFDA. In addition, there is significant uncertainty concerning third-partycoverage and reimbursement of newly approved medical products and drugs. Futurelegislation, regulation or coverage and reimbursement policies of third-partypayors may adversely affect the demand for our products currently underdevelopment and limit our ability to profitably sell our products. Third-partypayors continually attempt to contain or reduce healthcare costs by challengingthe prices charged for healthcare products and services, resulting in adownward pressure of reimbursement rates generally. Under recent regulatorychanges to the methodology for calculating payments for current inpatientprocedures in certain hospitals, Medicare payment rates for surgical andcardiac procedures have been decreased, including approximately 10% to 14%reductions for those procedures using drug eluting stents. The reductions areto be transitioned over the three year period that began in fiscal year 2007.The Centers for Medicare and Medicaid Services (“CMS”), responsible foradministering the Medicare program, also indicated it will begin to moveforward with developing revised reimbursement codes that better reflect theseverity of the patient’s condition in the hospital inpatient prospectivepayment system for fiscal year 2008. If coverage and reimbursement for ourproducts is unavailable, insufficient or limited in scope or amount, or ifpricing is set at unsatisfactory levels, market acceptance of our productswould be impaired and our future revenues, if any, would be adversely affected.

 

**Legislativeor regulatory reform of the healthcare system may affect our ability to sellour products profitably.**

 

In the United States and in certain foreignjurisdictions, there have been a number of legislative and regulatory proposalsto change the regulatory and healthcare systems in ways that could impact ourability to sell our products profitably, if at all. In the United States inrecent years, new legislation has been proposed at the federal and state levelsthat would effect major changes in the healthcare system. In addition, newregulations and interpretations of existing healthcare statutes and regulationsare frequently adopted. Post-payment reviews of claims also are conducted. Forexample, in 2005 the Office of Inspector General of the U.S. Department ofHealth and Human Services (“OIG”) audited certain sample claims paid byMedicare contracts for in-patient and out-patient claims involving arterialstent implantation to determine whether Medicare payments for these serviceswere appropriate. The OIG found that 20 of 72 reviewed claims did not meetMedicare reimbursement requirements. Findings of ongoing or widespreadinappropriate billing of arterial stents could lead to increased scrutiny inthis area, which in turn, could affect our ability to raise capital, obtainadditional collaborators and market our products. We also expect to experiencepricing pressures in connection with the future sale of our products due to thetrend toward managed health care, the increasing influence of healthmaintenance organizations and additional legislative proposals. Our results ofoperations could be adversely affected by these and other future healthcarereforms.

 

**Weface the risk of product liability claims and may not be able to obtaininsurance.**

 

Our business exposes us to the risk of product liabilityclaims that is inherent in the testing, manufacturing and marketing of medicaldevices. We may be subject to product liability claims if our stents cause, ormerely appear to have caused, an injury. Claims may be made by patients,consumers, healthcare providers, third-party strategic collaborators or othersselling our products. Although we have product liability and clinical trialliability insurance that we believe is appropriate, this insurance is subjectto deductibles and coverage limitations. Our current product liabilityinsurance may not continue to be available to us on acceptable terms, if atall, and, if available, the coverages may not be adequate to protect us againstany future product liability claims. In addition, if any of our products areapproved for marketing, we may seek additional insurance coverage. If we areunable to obtain insurance at acceptable cost or on acceptable terms withadequate coverage or otherwise protect against potential product liabilityclaims, we will be exposed to significant liabilities, which may harm ourbusiness. A product liability claim, recall or other claim with respect touninsured liabilities or for amounts in excess of insured liabilities couldhave a material adverse effect on our business, financial condition and resultsof operations.

 

We may be subject to claims against us even if theapparent injury is due to the actions of others. For example, we rely on theexpertise of physicians, nurses and other associated medical personnel toperform the medical procedure and related 

 

 

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processes to implant our coronary stents intopatients. If these medical personnel are not properly trained or are negligent,the therapeutic effect of our stents may be diminished or the patient maysuffer critical injury, which may subject us to liability. In addition, aninjury that is caused by the activities of our suppliers, such as those whoprovide us with cobalt chromium tubing for our stents, those that laser cut ourstents or the supplier of our drug coating, may be the basis for a claimagainst us.

 

These liabilities could prevent or interfere with ourproduct commercialization efforts. Defending a suit, regardless of merit, couldbe costly, could divert management’s attention from our business and mightresult in adverse publicity, which could result in the withdrawal of, orinability to recruit, clinical trial patient participants or result in reducedacceptance of our products in the market.

 

**Risks Related to Our Operations**

 

**Our operations involve hazardousmaterials, and we must comply with environmental laws and regulations, whichcan be expensive.**

 

We are subject to a variety of federal, state andlocal regulations relating to the use, handling, storage, disposal, and humanexposure to hazardous and toxic materials. We could incur costs, fines, andcivil and criminal sanctions, third-party property damage or personal injuryclaims, or could be required to incur substantial investigation or remediationcosts, if we were to violate or become liable under environmental laws. We donot have insurance for environmental liabilities and liability underenvironmental laws can be joint and several and without regard to comparativefault. Environmental laws could become more stringent over time, imposinggreater compliance costs and increasing risks and penalties associated withviolations, which could harm our business. Compliance with current or futureenvironmental and safety laws and regulations could restrict our ability toexpand our facilities, impair our research, development or production efforts,or require us to incur other significant expenses. There can be no assurancethat violations of environmental laws or regulations will not occur in thefuture as a result of the inability to obtain permits, human error, accident,equipment failure or other causes.

 

**We have limited experience complyingwith public company obligations, including recently enacted changes insecurities laws and regulations. Compliance with these requirements willincrease our costs and require additional management resources, and we stillmay fail to comply.**

 

We operated as a private company until February 2007and prior to that, we were not subject to many of the requirements applicableto public companies. Recently enacted and proposed changes in the laws andregulations affecting public companies, including the provisions of theSarbanes-Oxley Act of 2002 and rules related to corporate governance andother matters subsequently adopted by the SEC and NASDAQ Global Market, willresult in increased administrative costs to us and increased legal andaccounting fees. The impact of these events and heightened corporate governancestandards could also make it more difficult for us to attract and retainqualified persons to serve on our board of directors, our board committees oras executive officers.

 

As directed by Section 404 of the Sarbanes-OxleyAct of 2002, the SEC adopted rules requiring us to include a report ofmanagement on our internal control over financial reporting in our annualreports on Form 10-K. In addition, in our annual report on Form 10-Kfor the year ending December 31, 2009, the independent registered publicaccounting firm auditing our financial statements must attest to theeffectiveness of our internal control over financial reporting. We may beunable to comply with these requirements by the applicable deadlines. We willbe testing our internal control over financial reporting in connection with Section 404requirements and could, as part of that documentation and testing, identifymaterial weaknesses, significant deficiencies or other areas requiring furtherattention or improvement.

 

**Weexpect that the price of our common stock will fluctuate substantially.**

 

There has been a public market for our common stockfor a limited amount of time. The market price for our common stock will beaffected by a number of factors, including:

 

· the results of our clinical trials;

 

· the timing of our regulatory approvals;

 

· announcements related to litigation;

 

 

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· statements made by Biosensors relating to regulationor supply of the drug coating;

 

· the announcement of new products or serviceenhancements by us or our competitors;

 

· quarterly variations in our or our competitors’results of operations;

 

· changes in earnings estimates, investors’perceptions, recommendations by securities analysts or our failure to achieveanalysts’ earning estimates;

 

· the low trading volume of our common stock;

 

· developments in our industry, including changes in third-partyreimbursement; and

 

· general market conditions and other factors unrelatedto our operating performance or the operating performance of our competitors.

 

These factors maymaterially and adversely affect the market price of our common stock.

 

**Our directors, officers and principalstockholders have significant voting power and may take actions that may not bein the best interests of our other stockholders.**

 

As of June 30, 2008, our officers, directors andprincipal stockholders each holding more than 5% of our common stockcollectively will control approximately 66.8% of our outstanding common stock.As a result, these stockholders, if they act together, will be able to controlthe management and affairs of our company and most matters requiringstockholder approval, including the election of directors and approval ofsignificant corporate transactions. This concentration of ownership may havethe effect of delaying or preventing a change in control and might adverselyaffect the market price of our common stock. This concentration of ownershipmay not be in the best interests of our other stockholders.

 

**Volatilityin the stock price of other companies may contribute to volatility in our stockprice.**

 

The NASDAQ Global Market, particularly in recentyears, has experienced significant volatility with respect to medicaltechnology, pharmaceutical, biotechnology and other life science companystocks. The volatility of medical technology, pharmaceutical, biotechnology andother life science company stocks often does not relate to the operatingperformance of the companies represented by the stock. Further, there has beenparticular volatility in the market price of securities of early stage anddevelopment stage life science companies. These broad market and industryfactors may seriously harm the market price of our common stock, regardless ofour operating performance. In the past, following periods of volatility in themarket price of a company’s securities, securities class action litigation hasoften been instituted. A securities class action suit against us could resultin substantial costs, potential liabilities and the diversion of management’sattention and resources.

 

**Anti-takeover provisions in ouramended and restated certificate of incorporation and amended and restatedbylaws, and Delaware law, contain provisions that could discourage a takeover.**

 

Anti-takeover provisions of our amended and restatedcertificate of incorporation and amended and restated bylaws and Delaware lawmay have the effect of deterring or delaying attempts by our stockholders toremove or replace management, engage in proxy contests and effect changes incontrol. The provisions of our charter documents include:

 

· a classified board so that only one of the threeclasses of directors on our board of directors is elected each year;

 

· elimination of cumulative voting in the election ofdirectors;

 

· procedures for advance notification of stockholdernominations and proposals;

 

· the ability of our board of directors to amend ourbylaws without stockholder approval;

 

· a supermajority stockholder vote requirement foramending certain provisions of our amended and restated certificate ofincorporation and our amended and restated bylaws; and

 

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· the ability of our board of directors to issue up to10,000,000 shares of preferred stock without stockholder approval upon theterms and conditions and with the rights, privileges and preferences as ourboard of directors may determine.

 

In addition, as a Delaware corporation, we are subjectto Delaware law, including Section 203 of the Delaware General CorporationLaw. In general, Section 203 prohibits a Delaware corporation fromengaging in any business combination with any interested stockholder for aperiod of three years following the date that the stockholder became aninterested stockholder unless certain specific requirements are met as setforth in Section 203. These provisions, alone or together, could have theeffect of deterring or delaying changes in incumbent management, proxy contestsor changes in control.

 

**We have not paid dividends in thepast and do not expect to pay dividends in the future, and any return oninvestment may be limited to the value of our stock.**

 

We have never paid cash dividends on our common stockand do not anticipate paying cash dividends on our common stock in theforeseeable future. The payment of dividends on our common stock will depend onour earnings, financial condition and other business and economic factorsaffecting us at such time as our board of directors may consider relevant. Ifwe do not pay dividends, our stock may be less valuable because a return onyour investment will only occur if our stock price appreciates.

 

**ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

On February 1, 2007, we sold 4.7 millionshares at $16.00 per share in the initial public offering of our common stock.Net cash proceeds from the offering were $68.2 million, after deductingapproximately $7.0 million of underwriting discounts and commissions andother offering costs. We registered the Initial Public Offering of our commonstock, par value $0.001 per share, on a Registration Statement on Form S-1,as amended, (Registration No. 333-136371), which was declared effective onJanuary 31, 2007. Of the $68.2 million in net proceeds, through June 30,2008, we have spent approximately $63.1 million including:$4.4 million for sales and marketing initiatives not including $0.5million of stock compensation expense, $46.3 million for research anddevelopment activities not including $2.3 million of stock compensationexpense, $9.5 million for operating and general corporate purposes notincluding $3.0 million of stock compensation expense and $2.9 million forproperty and equipment in order to expand our manufacturing capability toconduct our CUSTOM III, IV and V clinical trials and prepare forcommercialization outside the United States. In addition, we invested the proceeds from the offering in short-term,investment grade, interest-bearing instruments.

 

**ITEM 3. DEFAULTS UPON SENIORSECURITIES**

 

None.

 

**ITEM 4. SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

On June 18,2008, we held an annual meeting of our stockholders at our corporateheadquarters in Menlo Park, California. The first item of business at themeeting was the election of three Class II directors. Each of the threenominees, Michael A. Carusi, Arthur T. Taylor and Allan R. Will, were electedby a majority of votes present at the meeting as follows:

 

| **Name**          | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|-------------------|------------|--------------------|------------|-------------------------|------------|
| Michael A. Carusi |       | 21,564,249         |       | 536,278                 |       |
| Arthur T. Taylor  |       | 22,065,590         |       | 34,937                  |       |
| Allan R. Will     |       | 22,074,444         |       | 26,083                  |       |

 

On June 18,2008, our Board of Directors appointed Christopher M. Smith to serve as a Class Idirector filling a vacancy that was created when the Board increased the numberof authorized directors from 8 to 9.  Mr. Smith’sterm will continue until our 2010 annual meeting of stockholders.

 

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Thename of each director other than Messrs. Carusi, Taylor and Will, whoseterm of office as a director continued after the annual meeting of stockholdersis set forth below:

 

Henry A. Plain, Jr.

 

Gregory D. Casciaro

 

Michael L. Eagle

 

Robert E. Flaherty

 

Christopher M. Smith

 

Edward W. Unkart

 

Thesecond item of business at the meeting was a proposal to approve the amendedXTENT, Inc. 2006 Equity Incentive Plan and to increase the number ofshares available for issuance thereunder from 1,512,762 shares to 2,412,762 shares,an increase of 900,000 shares.  Theamended Equity Incentive Plan with the increase of shares available forissuance thereunder was approved by a majority of shares present at the meetingwith 18,522,196 votes in favor, 1,666,231 votes against and 2,370 abstentions.

 

Thethird item of business at the meeting was the ratification of the appointmentof PricewaterhouseCoopers LLP as our independent registered public accountingfirm for the year ending December 31, 2008. The appointment ofPricewaterhouseCoopers LLP was ratified with 22,086,058 votes in favor, novotes against and 14,469 abstentions.

 

**ITEM 5. OTHER INFORMATION**

 

None.

 

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**ITEM 6. EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                          |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2(1)              |       | Amended and Restated Certificate of Incorporation.                                                                                                                                                                                                                       |
| 3.4(1)              |       | Amended and Restated Bylaws.                                                                                                                                                                                                                                             |
| 4.1(1)              |       | Specimen Common Stock certificate of the Registrant.                                                                                                                                                                                                                     |
| 10.1(1)             |       | Form of Indemnification Agreement for directors  and executive officers.                                                                                                                                                                                            |
| 10.2(1)             |       | 2002 Stock Plan and form of stock option agreements  used thereunder.                                                                                                                                                                                                    |
| 10.3(1)             |       | 2006 Equity Incentive Plan and form of stock option  agreement used thereunder.                                                                                                                                                                                          |
| 10.4(1)             |       | 2006 Employee Stock Purchase Plan.                                                                                                                                                                                                                                       |
| 10.5(1)             |       | Amended and Restated Investor Rights Agreement dated  May 5, 2006 by and among the Registrant and certain stockholders.                                                                                                                                             |
| 10.6(1)             |       | Business Park Lease dated September 15, 2003,  as amended November 22, 2005, by and between the Registrant  and 125 Constitution Associates, L.P. for office space located at  125 Constitution Drive, Menlo Park, California, 94025-1118. |
| 10.8(1)†       |       | Master License Agreement dated December 30,  2002, as amended June 30, 2006, by and between the Registrant and  SurModics, Inc.                                                                                                                           |
| 10.9(1)             |       | License Agreement dated July 10, 2006 by and  between the Registrant and Millimed A/S.                                                                                                                                                                              |
| 10.10(2)†      |       | Supply Agreement dated April 2, 2007 by and  between Registrant and Fortimedix B.V.                                                                                                                                                                                 |
| 10.11(3)            |       | Second Amendment to Lease dated May 17, 2007 by  and between the Registrant and 125 Constitution Associates, L.P.                                                                                                                                                   |
| 10.12(4)†      |       | Amended and Restated License Agreement dated  December 3, 2007 by and between Registrant, Biosensors International  Group, Ltd. and Biosensors Europe S.A.                                                                                                |
| 31.1                |       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                |
| 31.2                |       | Certification of Chief Financial Officer 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.                                                                                                           |

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(1)          Incorporated by reference from ourRegistration Statement on Form S-1 (Registration No. 333-136371),which was declared effective on January 31, 2007.

 

(2)          Incorporated by reference from ourQuarterly Report on Form 10-Q for the quarter ended March 31, 2007,filed May 14, 2007.

 

(3)          Incorporated by reference from ourQuarterly Report on Form 10-Q for the quarter ended June 30, 2007,filed August 13, 2007.

 

(4)          Incorporated by reference from our AnnualReport on Form 10-K for the year ended December 31, 2007, filed March 17,2008.

 

†                  Portions of the exhibit have been omittedpursuant to a request for confidential treatment. The confidential portionshave been filed with the SEC.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
| ** **                            | **XTENT, Inc.** |
|---------------------------------------|----------------------|
| ** **                            | ** **           |
|                                  |                 |   |
| Date:  August 12, 2008 | By:                  | /s/ GREGORY D.  CASCIARO |
| ** **                            |                 | **GREGORY  D. CASCIARO** |
| ** **                            |                 | **President  and Chief Executive Officer** |
| ** **                            |                 | **(Principal  Executive Officer)** |
| ** **                            |                 | ** ** |
|                                  |                 |   |
| Date:  August 12, 2008 | By:                  | /s/ TIMOTHY D.  KAHLENBERG |
| ** **                            |                 | **TIMOTHY  D. KAHLENBERG** |
| ** **                            |                 | **Chief  Financial Officer** |
| ** **                            |                 | **(Principal  Accounting and Financial Officer)** |

 

 

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