Table of Contents

 

 

 

**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**  |
|--------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                                   |                                                                                                    |
| **For  the quarterly period ended June 30, 2009** |
|                                                   |                                                                                                    |
| **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**

**Menlo Park,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 markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or such shorter period that the registrant wasrequired to submit and post such files).   YES  o      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) |   |                               |

 

Indicate by check mark whether the registrant is ashell company (as defined by Rule 12b-2 of the Exchange Act)Yes  o   No  x

 

As of July 15, 2009, there were 23,501,228 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 |       | 14       |
|                                               |                                                                                        |       |     |
| Item 3.                                       | Quantitative  and Qualitative Disclosures About Market Risk                                 |       | 22       |
|                                               |                                                                                        |       |     |
| Item 4.                                       | Controls and  Procedures                                                                    |       | 23       |
|                                               |                                                                                        |       |     |
| **Part II:  Other  Information**    |
|                                               |                                                                                        |       |     |
| Item 1.                                       | Legal Proceedings                                                                           |       | 23       |
|                                               |                                                                                        |       |     |
| Item 1A.                                      | Risk  Factors                                                                               |       | 23       |
|                                               |                                                                                        |       |     |
| 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                                        |       | 47       |
|                                               |                                                                                        |       |     |
| Item 5.                                       | Other Information                                                                           |       | 47       |
|                                               |                                                                                        |       |     |
| Item 6.                                       | Exhibits                                                                                    |       | 47       |
|                                               |                                                                                        |       |     |
| Signatures                                         |                                                                                        |       | 48       |
|                                               |                                                                                        |       |     |
| Certifications                                     |                                                                                        |       |     |

 

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Table of Contents

 

**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,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                    | ** ** | **2009**          | ** ** | **2008 (1)**          | ** ** |
| **ASSETS**                                                                                                                                                                                                                    |       |              |       |                  |       |
| Current  assets:                                                                                                                                                                                                              |       |              |       |                  |       |
| Cash  and cash equivalents                                                                                                                                                                                                    |       | $                 | 9,968      |                  | $          | 13,373 |   |
| Short-term  investments                                                                                                                                                                                                       |       | —            |       | 5,752                 |       |
| Prepaid  expenses and other current assets                                                                                                                                                                                    |       | 423               |       | 432                   |       |
| Total  current assets                                                                                                                                                                                                         |       | 10,391            |       | 19,557                |       |
|                                                                                                                                                                                                                          |       |              |       |                  |       |
| Property  and equipment, net                                                                                                                                                                                                  |       | 1,500             |       | 4,100                 |       |
| Other  non-current assets                                                                                                                                                                                                     |       | 45                |       | 338                   |       |
| Total  assets                                                                                                                                                                                                                 |       | $                 | 11,936     |                  | $          | 23,995 |   |
|                                                                                                                                                                                                                          |       |              |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                 |       |              |       |                  |       |
| Current  liabilities:                                                                                                                                                                                                         |       |              |       |                  |       |
| Accounts  payable                                                                                                                                                                                                             |       | $                 | 389        |                  | $          | 943 |   |
| Accrued  liabilities                                                                                                                                                                                                          |       | 801               |       | 1,544                 |       |
| Total  current liabilities                                                                                                                                                                                                    |       | 1,190             |       | 2,487                 |       |
|                                                                                                                                                                                                                          |       |              |       |                  |       |
| Commitments  and contingencies (note 7)                                                                                                                                                                                       |       |              |       |                  |       |
|                                                                                                                                                                                                                          |       |              |       |                  |       |
| Stockholders’  Equity:                                                                                                                                                                                                   |       |              |       |                  |       |
| Common  stock: $0.001 par value; 100,000 shares authorized at June 30, 2009 and  December 31, 2008; 23,481 and 23,325 shares issued and outstanding at June 30,  2009 and December 31, 2008, respectively |       | 23                |       | 23                    |       |
| Additional  paid-in capital                                                                                                                                                                                                   |       | 156,677           |       | 155,511               |       |
| Deferred  stock-based compensation                                                                                                                                                                                            |       | —            |       | (56                   | )          |
| Accumulated  other comprehensive income                                                                                                                                                                                       |       | —            |       | 11                    |       |
| Deficit  accumulated during development stage                                                                                                                                                                                 |       | (145,954          | )          | (133,981              | )          |
| Total  stockholders’ equity                                                                                                                                                                                              |       | 10,746            |       | 21,508                |       |
|                                                                                                                                                                                                                          |       |              |       |                  |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                              |       | $                 | 11,936     |                  | $          | 23,995 |   |

 

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(1)          The condensed balance sheet at December 31, 2008has been derived from the audited financial statements at that date, but doesnot include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements.

 

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,** | ** ** |
| ** **                                                                                           | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009**          | ** ** | **2008**   | ** ** | **2009**               | ** ** |
| ** **                                                                                           | ** ** | ** **             | ** ** | ** **           | ** ** | ** **        | ** ** | ** ** | ** ** | ** **             | ** ** |
| Operating  expenses:                                                                                 |       |                   |       |                 |       |              |       |       |       |                   |       |
| Research  and development (1)                                                                        |       | $                      | 519        |                 | $          | 9,818             |       | $          | 5,173      |                   | $          | 19,239 |   | $ | 110,757 |   |
| General  and administrative (1)                                                                      |       | 1,578                  |       | 3,331                |       | 4,341             |       | 6,773      |       | 38,801                 |       |
| Loss  on impairment of long-lived assets                                                             |       | —                 |       | —               |       | 2,494             |       | —     |       | 2,494                  |       |
| Total  operating expenses                                                                            |       | 2,097                  |       | 13,149               |       | 12,008            |       | 26,012     |       | 152,052                |       |
|                                                                                                 |       |                   |       |                 |       |              |       |       |       |                   |       |
| Loss  from operations                                                                                |       | (2,097                 | )          | (13,149              | )          | (12,008           | )          | (26,012    | )          | (152,052               | )          |
|                                                                                                 |       |                   |       |                 |       |              |       |       |       |                   |       |
| Interest  income and other income (expense), net                                                     |       | (20                    | )          | 263                  |       | 35                |       | 669        |       | 6,098                  |       |
|                                                                                                 |       |                   |       |                 |       |              |       |       |       |                   |       |
| Net  loss                                                                                            |       | (2,117                 | )          | (12,886              | )          | (11,973           | )          | (25,343    | )          | (145,954               | )          |
|                                                                                                 |       |                   |       |                 |       |              |       |       |       |                   |       |
| Deemed  dividend related to beneficial conversion feature of redeemable convertible  preferred stock |       | —                 |       | —               |       | —            |       | —     |       | (13,095                | )          |
|                                                                                                 |       |                   |       |                 |       |              |       |       |       |                   |       |
| Net  loss attributable to common stockholders                                                        |       | $                      | (2,117     | )                    | $          | (12,886           | )          | $          | (11,973    | )                      | $          | (25,343 | ) | $ | (159,049 | ) |
|                                                                                                 |       |                   |       |                 |       |              |       |       |       |                   |       |
| Net  loss per share attributable to common stockholders - basic and diluted                          |       | $                      | (0.09      | )                    | $          | (0.56             | )          | $          | (0.51      | )                      | $          | (1.10 | ) |   |   |
|                                                                                                 |       |                   |       |                 |       |              |       |       |       |                   |       |
| Weighted-average  common shares outstanding - basic and diluted                                      |       | 23,391                 |       | 23,033               |       | 23,358            |       | 22,978     |       |                   |       |

 

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| (1)          Includes the following stock-based  compensation charges: |   |   |   |   |   |   |   |
|---------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Research  and development                                                                                           |   | $      | 107    |   | $      | 393    |   | $ | 363 |   | $ | 781 |   | $ | 4,842 |   |
| General  and administrative                                                                                         |   | $      | 280    |   | $      | 695    |   | $ | 788 |   | $ | 1,345 |   | $ | 6,377 |   |

 

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,** | ** ** |
| ** **                                                                                   | ** ** | **2009**                           | ** ** | **2008**          | ** ** | **2009**               | ** ** |
| ** **                                                                                   | ** ** | ** **                         | ** ** | ** **        | ** ** | ** **             | ** ** |
| **Cash flows from operating  activities:**                                                   |       |                               |       |              |       |                   |       |
| Net loss                                                                                     |       | $                                  | (11,973    | )                 | $          | (25,343                | )          | $ | (145,954 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:                 |       |                               |       |              |       |                   |       |
| Depreciation and amortization                                                                |       | 347                                |       | 650               |       | 4,368                  |       |
| Amortization of securities discount                                                          |       | (9                                 | )          | (268              | )          | (2,080                 | )          |
| Gain on sale of investments                                                                  |       | —                             |       | (26               | )          | (6                     | )          |
| Loss on disposal of property and equipment                                                   |       | —                             |       | —            |       | 188                    |       |
| Impairment of long-lived assets                                                              |       | 2,494                              |       | —            |       | 2,494                  |       |
| Stock-based compensation expense                                                             |       | 1,151                              |       | 2,126             |       | 11,219                 |       |
| Stock issued in exchange for services                                                        |       | —                             |       | —            |       | 381                    |       |
| Changes in operating assets and liabilities:                                                 |       |                               |       |              |       |                   |       |
| Prepaid expenses and other current assets                                                    |       | 245                                |       | (323              | )          | (467                   | )          |
| Accrued interest receivable on securities                                                    |       | 27                                 |       | 138               |       | (1                     | )          |
| Accounts payable                                                                             |       | (554                               | )          | 21                |       | 274                    |       |
| Accrued liabilities                                                                          |       | (740                               | )          | 99                |       | 916                    |       |
| Net cash used in operating activities                                                        |       | (9,012                             | )          | (22,926           | )          | (128,668               | )          |
|                                                                                         |       |                               |       |              |       |                   |       |
| **Cash flows from investing  activities:**                                                   |       |                               |       |              |       |                   |       |
| Purchase of investments                                                                      |       | —                             |       | (11,901           | )          | (142,322               | )          |
| Proceeds from maturities of investments                                                      |       | 5,750                              |       | 23,845            |       | 130,459                |       |
| Proceeds from sale of investments                                                            |       | —                             |       | 9,963             |       | 13,949                 |       |
| Purchase of property and equipment                                                           |       | (241                               | )          | (862              | )          | (8,547                 | )          |
| Restricted cash                                                                              |       | 30                                 |       | (30               | )          | —                 |       |
| Proceeds from sale of property and equipment                                                 |       | —                             |       | 2                 |       | 20                     |       |
| Net cash provided by (used in) investing activities                                          |       | 5,539                              |       | 21,017            |       | (6,441                 | )          |
|                                                                                         |       |                               |       |              |       |                   |       |
| **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                                |       | —                             |       | —            |       | 68,237                 |       |
| Principal payments on capital lease obligations                                              |       | —                             |       | —            |       | (23                    | )          |
| Proceeds from issuance of common stock and exercise  of stock options                        |       | 68                                 |       | 203               |       | 1,271                  |       |
| Net cash provided by financing activities                                                    |       | 68                                 |       | 203               |       | 145,077                |       |
|                                                                                         |       |                               |       |              |       |                   |       |
| Net (decrease) increase in cash and cash  equivalents                                        |       | (3,405                             | )          | (1,706            | )          | 9,968                  |       |
| Cash and cash equivalents at beginning of period                                             |       | 13,373                             |       | 13,366            |       | —                 |       |
|                                                                                         |       |                               |       |              |       |                   |       |
| Cash and cash equivalents at end of period                                                   |       | $                                  | 9,968      |              | $          | 11,660                 |       | $ | 9,968 |   |
|                                                                                         |       |                               |       |              |       |                   |       |
| **Supplemental disclosure of noncash  investing and financing activities:**                  |       |                               |       |              |       |                   |       |
| Deferred stock-based compensation                                                            |       | $                                  | —     |              | $          | —                 |       | $ | 1,272 |   |
| Reversal of deferred stock-based compensation                                                |       | $                                  | (22        | )                 | $          | (37                    | )          | $ | (183 | ) |
| 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                                     |       | $                                  | 3          |              | $          | 42                     |       | $ | 441 |   |
| Deferred initial public offering costs                                                       |       | $                                  | —     |              | $          | —                 |       | $ | 875 |   |
| Changes in net unrealized gains on investments                                               |       | $                                  | (11        | )                 | $          | (15                    | )          | $ | — |   |

 

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, 2009, the Company had an accumulateddeficit of $146.0 million. The Company has not achieved positive cash flowsfrom operations in any year since inception. In February 2007, the Companycompleted its initial public offering raising net proceeds of$68.2 million. In January 2009, the Company announced a reduction inits headcount of approximately 115 employees, or 94% of its totalworkforce.  As of March 31, 2009,the reduction was substantially complete, and three full-time employees remainafter June 30, 2009.  During thefirst quarter of 2009, the Company was exploring strategic alternatives withthe assistance of Piper Jaffray & Co., including, without limitation,a merger, a sale of substantially all Company assets, a financing, or a sale ofa portion of the Company’s assets, such as its peripheral stent technology, itsdrug eluting balloon technology, or its bioabsorbable stent technology.  On May 11, 2009, the Company’s board ofdirectors concluded that it appeared unlikely that a strategic transaction at avaluation materially in excess of the estimated liquidation value would beachieved in the near term.  Based onthese and other factors, the board of directors concluded that a statutorydissolution and liquidation was in the best interests of the Company and itsstockholders and therefore adopted a Plan of Complete Liquidation andDissolution, or Plan of Dissolution, and recommended approval of the Plan ofDissolution by the Company’s stockholders. The Company filed a definitive proxy statement with the UnitedStates Securities and Exchange Commission on June 8, 2009 and on orabout that date the Company mailed the proxy statement to its stockholders ofrecord for the purpose of obtaining stockholder approval of the Plan ofDissolution at a meeting originally scheduled to occur on July 9, 2009.  On July 7, 2009, the Company announcedthat it had postponed the special meeting of its stockholders until August 3,2009 in order to allow for further discussions with two parties about atransaction that would be an alternative to liquidation and dissolution.

 

If the Company’s stockholders approve the Plan ofDissolution, the Company will not engage in any business activities except forthe purpose of preserving the value of the Company’s assets, winding up theCompany’s business and affairs, selling and liquidating all assets, includingintellectual property, paying all liabilities, terminating all agreements andpreparing to make distributions to stockholders, in accordance with the Plan ofDissolution.  The Company believes thatthe cash and cash equivalents and related interest income are sufficient tomeet the anticipated cash requirements under the Plan of Dissolution.

 

If the Company’s stockholders do not approve the Planof Dissolution, the board of directors will explore the alternatives then availableto the Company.  The Company believesthat the existing cash and cash equivalents and related interest income aresufficient to meet anticipated cash requirements through at least December 31,2009.

 

The Company continues to report as a development stagecompany, since planned principal operations have not commenced.  The basis of accounting has not changed as aresult of the board of director’s approval of the Plan of Dissolution as thePlan of Dissolution is subject to stockholder approval.  The Company operates in a single segment andmanagement uses one measure of financial performance and does not segment itsbusiness for internal reporting.

 

**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 six months ended June 30, 2009 are notnecessarily indicative of the results that may be expected for the year ending December 31,2009, or for any future period.  These unaudited condensed financialstatements and notes should be read in conjunction with the audited financialstatements and the notes thereto included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008, filed with the Securities andExchange Commission on March 24, 2009.

 

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**NOTE 2 - Summary of SignificantAccounting Policies**

 

***Cash and CashEquivalents***

 

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 with high creditquality financial institutions. Cash equivalents consist primarily of liquidmoney market funds, U.S. government securities and fixed income securities withoriginal maturity dates of less than three months.

 

***Short-term Investments***

 

Short-term investments with an original maturity ofmore than three months and less than one year at the date of purchase areconsidered to be short-term. Short-term investments consist primarily of fixedincome securities. The Company classifies its investments as available-for-salein accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115,*Accounting for Certain Investments in Debtand Equity Securities* and they are recorded at fair value. The fairvalue of short-term investments is based on quoted market prices. As of June 30,2009, the Company did not have any short-term investments.

 

Unrealized gains and losses are reported asaccumulated other comprehensive income (loss), which is a separate component ofstockholders’ equity, until realized. Premiums (or discounts) on short-terminvestments are amortized (or accreted) to interest and other income, net overthe life of the investment. Realized gains and losses on short-term investmentssold are included in interest and other income, net in the Company’s statementof 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.

 

***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, commercial paper and U.S. Government and agency securitiesrated A1 and P1 or better. The Company’s cash is primarily 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 credit losses onsuch instruments during any of the periods presented and believes that it isnot exposed to any significant risk on these instruments.

 

***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, 2009 and 2008 consisted of:

 
| ** **                                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                           | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                           | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                           | ** ** | **(in thousands)**     | ** ** | **(in thousands)**   | ** ** |
|                                                                 |       |                   |       |                 |       |   |   |   |   |
| Net  loss attributable to common stockholders                        |       | $                      | (2,117     | )                    | $          | (12,886 | ) | $ | (11,973 | ) | $ | (25,343 | ) |
| Change  in unrealized gains (losses) onavailable-for-sale securities |       | —                 |       | (110                 | )          | (11 | ) | (15 | ) |
|                                                                 |       |                   |       |                 |       |   |   |   |   |
| Comprehensive  loss                                                  |       | $                      | (2,117     | )                    | $          | (12,996 | ) | $ | (11,984 | ) | $ | (25,358 | ) |

 

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***Net Loss per CommonShare***

 

Basic and diluted net loss per common share iscomputed using the weighted-average number of shares of common stockoutstanding during the period. Potentially dilutive shares consisting of stockoptions, common stock subject to repurchase, redeemable convertible preferredstock and shares issuable under the Employee Stock Purchase Plan were notincluded in the diluted net loss per common share calculations for all periodspresented because the inclusion of such shares would have had an antidilutiveeffect.

 

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,**           | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2009**                                      | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                                                 | ** ** | **(in  thousands, except per share amounts)** | ** ** | **(in  thousands, except per share amounts)** | ** ** |
| ** **                                                                                                 | ** ** | ** **                                    | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Numerator:                                                                                                 | ** ** | ** **                                    | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  loss attributable to common stockholders                                                              |       | $                                             | (2,117     | )                                             | $          | (12,886 | ) | $ | (11,973 | ) | $ | (25,343 | ) |
|                                                                                                       |       |                                          |       |                                          |       |   |   |   |   |
| Denominator:                                                                                               |       |                                          |       |                                          |       |   |   |   |   |
| Weighted-average  common shares outstanding                                                                |       | 23,391                                        |       | 23,107                                        |       | 23,359 |   | 23,078 |   |
| Less:  Weighted-average unvested common shares subject to repurchase                                       |       | —                                        |       | (74                                           | )          | (1 | ) | (100 | ) |
| Weighted-average  common shares outstanding used in computing basic and diluted net loss per  common share |       | 23,391                                        |       | 23,033                                        |       | 23,358 |   | 22,978 |   |
|                                                                                                       |       |                                          |       |                                          |       |   |   |   |   |
| Net  loss per share attributable to common stockholders - basic and diluted                                |       | $                                             | (0.09      | )                                             | $          | (0.56 | ) | $ | (0.51 | ) | $ | (1.10 | ) |

 

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:

 
| ** **                                          | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------|------------|
| ** **                                          | ** ** | **June 30,**    | ** ** |
| ** **                                          | ** ** | **2009**             | ** ** | **2008** | ** ** |
| ** **                                          | ** ** | **(in thousands)**   | ** ** |
|                                                |       |                 |       |   |   |
| Options  to purchase common stock                   |       | 1,488                |       | 2,860 |   |
| Common  stock subject to repurchase                 |       | —               |       | 59 |   |
| Shares  issuable under Employee Stock Purchase Plan |       | —               |       | 37 |   |

 

***Recent and AdoptedAccounting Pronouncements***

 

In February 2007,the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities—Including anamendment of FASB Statement No. 115* (“SFAS No. 159”). SFASNo. 159 expands the use of fair value accounting but does not affectexisting standards which require assets or liabilities to be carried at fairvalue. The objective of SFAS No. 159 is to improve financial reporting byproviding companies with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions. Under SFAS No. 159, acompany may elect to use fair value to measure eligible items at specifiedelection dates and report unrealized gains and losses on items for which thefair value option has been elected in earnings at each subsequent reportingdate. Eligible items include, but are not limited to, accounts and loansreceivable, available-for-sale and held-to-maturity securities, equity methodinvestments, accounts payable, guarantees, issued debt and firm commitments. Ifelected, SFAS No. 159 is effective for fiscal years beginning after November 15,2007. The adoption of SFAS 159 has not impacted the Company’s results ofoperations and financial condition as the Company has not elected the fairvalue option for any of its eligible items.

 

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On April 1, 2009,the Company adopted FSP SFAS 107-1 and APB 28-1, *Interim Disclosures about Fair Value of Financial Instruments.*  ThisFSP amends SFAS No. 107, *Disclosuresabout Fair Value of Financial Instruments*, to requirepublicly-traded companies, as defined in APB Opinion No. 28, *Interim Financial Reporting*, to providedisclosures on the fair value of financial instruments in interim financialstatements.  Prior to the issuance of FSP FAS No. 107-1 and APBOpinion No. 28-1, the fair values of those assets and liabilities weredisclosed only once each year. With the issuance of FSP FAS No. 107-1 andAPB Opinion No. 28-1, the Company will now be required to disclose thisinformation on a quarterly basis, providing quantitative and qualitativeinformation about fair value estimates for all financial instruments notmeasured in the condensed balance sheets at fair value. The adoption of the newdisclosure requirements did not have a material impact on the Company’scondensed financial condition, results of operations, or cash flows.

 

On January 1, 2009, the Company adopted SFAS No. 157-2,*Effective Date of FASB Statement No. 157*,(“FSP SFAS 157-2”), which delays the effective date of SFAS No. 157 forall nonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis to fiscal years beginning November 15, 2008.  The adoption of FSP SFAS No. 157-2 didnot have a material impact on the Company’s financial position, operatingresults or cash flows.

 

On January 1, 2009,the Company adopted SFAS No. 157-3, *Determining the Fair Valueof a Financial Asset When the Market for That Asset Is Not Active,* (“FSPSFAS 157-3”), which clarifies theapplication of Statement 157 in a market that is not active and provides anexample to illustrate key considerations in determining the fair value of afinancial asset when the market for that financial asset is not active.  The adoption of FSP SFAS No. 157-3did not have a material impact on the Company’s financial position, operatingresults or cash flows.

 

On April 1, 2009, the Company adopted FSP SFAS157-4, *Determining Fair Value When theVolume and Level of Activity for the Asset or Liability Have SignificantlyDecreased and Identifying Transactions That Are Not Orderly,* or FSPSFAS 157-4, which provides additional guidance for estimating fair value inaccordance with SFAS 157 when the volume and level of activity for the asset orliability have significantly decreased.  This FSP re-emphasizes thatregardless of market conditions the fair value measurement is an exit priceconcept as defined in SFAS 157.  This FSP clarifies and includesadditional factors to consider in determining whether there has been asignificant decrease in market activity for an asset or liability and providesadditional clarification on estimating fair value when the market activity foran asset or liability has declined significantly.  The scope of thisFSP does not include assets and liabilities measured under level 1inputs.  FSP SFAS 157-4 is applied prospectively to all fair valuemeasurements where appropriate.  The adoption of the provisions ofFSP SFAS 157-4 did not have a material impact on the Company’s condensedfinancial condition, results of operations, or cash flows.

 

On April 1, 2009, the Company adopted FSP SFAS No. 115-2and SFAS No. 124-2, *Recognition andPresentation of Other-Than-Temporary Impairments* (“FSP SFAS No. 115-2and SFAS No. 124-2”).  FSP SFAS115-2 and SFAS No. 124-2 amends the other-than-temporary impairmentguidance in U.S. GAAP for debt securities to make the guidance more operationaland to improve the presentation and disclosure of other-than-temporaryimpairments on debt and equity securities in the financial statements.  The adoption of FSP SFAS No. 115-2 andSFAS No. 124-2 did not have a material impact on the Company’s financialposition, operating results or cash flows.

 

On April 1, 2009, the Company adopted SFAS No. 165,*Subsequent Events* (“SFAS 165”).  SFAS No. 165 is intended to establishgeneral standards of accounting for and disclosure of events that occur afterthe balance sheet date but before financial statements are issued or areavailable to be issued.  It requires thedisclosure of the date through which an entity has evaluated subsequent eventsand the basis for selecting that date, that is, whether that date representsthe date the financial statements were issued or were available to be issued.  The adoption of SFAS No. 165 did nothave a material impact on the Company’s condensed financial condition, resultsof operations or cash flows.

 

**NOTE 3 - Investments**

 

The Company had no short term investments as of June 30,2009.  At December 31, 2008,short-term investments, which are classified as available-for-sale, hadmaturities of less than one year and consisted of the following:

 
| ** **                            | ** ** | **Amortized**      | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**  | ** ** |
|---------------------------------------|------------|--------------------|------------|----------------|------------|----------------|------------|-----------|------------|
| **As of December 31, 2008**      | ** ** | **Cost**           | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value** | ** ** |
| ** **                            | ** ** | **(in thousands)** | ** ** |
|                                  |       |               |       |           |       |           |       |      |       |
| U.S. government and agency securities |       | $                  | 5,741      |           | $          | 11             |       | $         | —     |   | $ | 5,752 |   |
|                                       |            |                    |            |                |            |                |            |           |            |  |  |  |  |

 

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**NOTE 4 — Fair Value Measurements**

 

***Fair Value Measurements***

 

SFAS No. 157, *Fair Value Measurements,*defines fair value as the price that would be received upon the sale of anasset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date (exit price). SFAS No. 157 classifiesthe inputs used to measure fair value into the following hierarchy:

 

·  Level1:     Observable inputs such as quoted prices(unadjusted) in active markets for identical assets or liabilities.

 

·  Level2:      Inputs other than quoted prices that areobservable for the asset or liability, either directly or indirectly. Theseinclude quoted prices for similar assets or liabilities in active markets andquoted prices for identical or similar assets or liabilities in markets thatare not active.

 

·  Level3:     Unobservable inputs that reflect the reportingentity’s own assumptions.

 

***Cash and CashEquivalents***

 

The Company’s cash equivalents are classified withinLevel 1 or Level 2 of the fair value hierarchy because they are valued usingquoted market prices, broker or dealer quotations, or alternative pricingsources with reasonable levels of price transparency. The fair value hierarchyof the Company’s marketable securities at fair value in connection with theadoption of SFAS No. 157 consisted of the following as of June 30,2009 and December 31, 2008:

 
| ** **                      | ** ** | ** **             | ** ** | **Significant Other** | ** ** | **Significant Other** | ** ** |
|---------------------------------|------------|------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **Balance as of**      | ** ** | **Observable Inputs** | ** ** | **Observable Inputs** | ** ** |
| ** **                      | ** ** | **June 30, 2009** | ** ** | **(Level 1)**         | ** ** | **(Level 2)**         | ** ** |
| ** **                      | ** ** | **(in thousands)**     | ** ** |
|                            | ** ** | ** **             |       |                  |       |                  |       |
| Money  market funds (1)         |       | $                      | 7,900      |                  | $          | 7,900                 |       | $ | — |   |
| U.S.  government securities (1) |       | 2,000                  |       | —                |       | 2,000                 |       |
| Total                           |       | $                      | 9,900      |                  | $          | 7,900                 |       | $ | 2,000 |   |

 
| ** **                             | ** ** | ** **                 | ** ** | **Significant Other** | ** ** | **Significant Other** | ** ** |
|----------------------------------------|------------|----------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **Balance as of**          | ** ** | **Observable Inputs** | ** ** | **Observable Inputs** | ** ** |
| ** **                             | ** ** | **December 31, 2008** | ** ** | **(Level 1)**         | ** ** | **(Level 2)**         | ** ** |
| ** **                             | ** ** | **(in thousands)**         | ** ** |
|                                   | ** ** | ** **                 |       |                  |       |                  |       |
| Money  market funds (1)                |       | $                          | 11,613     |                  | $          | 11,613                |       | $ | — |   |
| U.S.  Treasury Notes (1)               |       | 1,003                      |       | —                |       | 1,003                 |       |
| U.S.  government and agency securities |       | 5,752                      |       | —                |       | 5,752                 |       |
| Total                                  |       | $                          | 18,368     |                  | $          | 11,613                |       | $ | 6,755 |   |

 

----

(1)  Classified as part of cash equivalents on the balance sheet

 

***Assets Measured atFair Value on a Nonrecurring Basis***

 

As discussed in Note 1,the Company terminated 94% of its workforce during the quarter ended March 31,2009.  The Company evaluates therecoverability of property and equipment in accordance with FAS 144, “*Accounting for the impairment, or disposal, oflong-lived assets*” whenever events or changes in circumstancesindicate that the carrying value of a long-lived asset may not be recoverable. The Company recorded a non-cash charge of $2.5 million relating to theimpairment of long-lived assets, which is included in continuing operations forthe quarter ended March 31, 2009.  An estimate of fair value wasbased on a market approach obtained through an external assessment oflong-lived asset values by considering the market participant assumptionsaffecting the value to be realized through an auction of property andequipment.  Management’s assessment of fair value has not changed as of June 30,2009. In accordance with SFAS 157-2, the $1.5 million valuation of long-livedassets is assessed based on unobservable inputs, and grouped as level 3 withinthe fair value hierarchy.

 

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**NOTE 5 - 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 30,2009, there were no shares subject to repurchase and at December 31, 2008,there were approximately 7,000 shares of common stock subject to repurchase,and a related liability of approximately $3,000.

 

**NOTE 6 - 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. Theexpected term of stock options represents the weighted-average period the stockoptions are expected to remain outstanding and is based on the option vestingterm, contractual terms and industry peers as the Company does not havesufficient historical information to develop reasonable expectations aboutfuture exercise patterns and post-vesting employment termination behavior.  Beginning in 2008, the expected termassumption was based on the Company’s historical settlement experience. ESPPterms are for the purchase period that began on November 15, 2007 andended on May 15, 2008, and the purchase period that began on May 15,2008 and ended on November 17, 2008. The ESPP was suspended in January 2009, and all funds for thepurchase period that began on November 17, 2008 were refunded to employees.

 

The expected stock price volatility assumptions forthe Company’s stock options and ESPP for the three and six months ended June 30,2008 were determined by examining the historical volatilities for industry peersin combination with the historical volatility of the Company since its InitialPublic Offering on February 1, 2007. Volatility for three and six monthsended June 30, 2009 was not assessed, as there were no stock optionsgranted or ESPP requiring measurement during the period.

 

The risk-free interest rate assumption at the date ofgrant is based on the interest rate on U.S Treasury instruments whose term isconsistent 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, forfeituresare estimated at the time of grant based on historical experience and revised,if necessary, in subsequent periods if actual forfeitures differ from thoseestimates. Stock option activity for the six months ended June 30, 2009was 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,  2008** |       | 1,364                                                       |       | 2,516                   |       | $ | 5.47 |   |
|                                      |       |                                                        |       |                    |       |   |   |
| Additional shares reserved                |       | 933                                                         |       | —                  |       | — |   |
| Options exercised                         |       | —                                                      |       | (156                    | )          | 0.44 |   |
| Options forfeited/expired                 |       | 872                                                         |       | (872                    | )          | 6.67 |   |
|                                      |       |                                                        |       |                    |       |   |   |
| **Balance as of June 30, 2009**      |       | 3,169                                                       |       | 1,488                   |       | $ | 5.29 |   |

 

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

 

The Company accounts for equity instruments to or heldby non-employees at their fair value on the measurement date in accordance withEITF 96-18.  Stock-based compensationexpense related to stock options granted to non-employees is recognized as thestock options are earned. The Company believes that the estimated fair value ofthe stock options is more readily measurable than the fair value of theservices rendered.

 

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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 $0.9 million for the period from June 13,2002 (inception) to June 30, 2009. For the six months ended June 30,2009 and 2008, the Company recorded stock-based compensation charges fornon-employees of approximately $42,000 and $8,000, respectively.

 

**NOTE 7 - 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. In September 2008, a second amendmentextended the lease termination option such that the Company may terminate thelease for any reason on or after May 1, 2010, and the landlord mayterminate the lease on or after that date provided it has obtained certainredevelopment rights with respect to the leased premises.

 

As of June 30, 2009, future minimum leasepayments under non-cancelable operating leases are as follows:

 
| ** **                 | ** **   | **Total**          | ** **   | **2009**     | ** **   | **2010**     | ** **   | **2011**     | ** **   | **2012**     | ** **   |
|----------------------------|--------------|--------------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|
| ** **                 | ** **   | **(in thousands)** | ** **   |
|                       | *** *** | *** ***       | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Minimum  lease commitments | ** **   | **$**              | **1,455**    | ** **   | **$**        | **240**      | ** **   | **$**        | **493**      | ** **   | **$**        | **508** | ** ** | **$** | **214** | ** ** |
|                            |              |                    |              |              |              |              |              |              |              |              |              |  |  |  |  |  |

 

***License Agreements***

 

The Company has entered into license agreements with Biosensors andSurModics for proprietary materials that are critical to the success of theCompany’s products. The terms of the agreements call for milestone paymentsprior to achieving sales, and quarterly royalty payments based on the greaterof specified minimums or a percentage of net sales. As of June 30, 2009future minimum royalty payments to these suppliers are approximately $1.6million. During the year ended December 31, 2008 and the six months ended June 30,2009, the Company made minimum royalty payments of $80,000 and $40,000,respectively. Under the terms of the license agreement with SurModics, anadditional $20,000 milestone payment is payable to SurModics once the Companyreceives regulatory approval authorizing it to market its products, and thisamount was paid in the six months ended June 30, 2009 based upon theCompany’s receipt of CE Mark in March 2009. No milestone payments weremade on this license agreement during the year ended December 31,2008.  Based on the achievement ofcertain milestones, minimum royalty payments to Biosensors of $100,000 per yearare payable, and $29,000 has been accrued in six months ended June 30,2009.  No royalties were paid toBiosensors in the year ended December 31, 2008.

 

In July 2006, theCompany entered into a license agreement with Millimed, Inc. for certainintellectual property related to the Company’s business. In consideration forthis license, the Company made an initial payment of $350,000 in cash andissued 15,000 shares of common stock during the year ended December 31,2006. In addition, the license agreement provided for an additional payment of$200,000 upon achievement of certain milestones.  On July 24, 2008, the Company enteredinto an assignment agreement with Millimed, assigning to the Company the entireand exclusive right, title and interest in previously licensed intellectualproperty.  In consideration of thisassignment the Company issued 50,000 shares of unregistered common stock to athird party at $3.00 per share.  Pursuantto the terms of the assignment agreement, the third party paid $150,000directly to Millimed.  The $200,000milestone payment that was required under the original license agreement is nolonger required.

 

***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. Under the terms of the supply agreement, any further annualpurchase commitments have been delayed until the Company receives IDE approvalfrom the FDA. In May 2009, the Company received a conditional IDE approvalfrom the FDA which requires the Company to address certain technicalissues about which the FDA has questions before a full IDE approval will begranted.

 

In December 2007, the Company entered into theAmended and Restated License Agreement with Biosensors InternationalGroup, Ltd., under which the Company purchases the drug and polymercomponents used on its stents. As of June 30, 2009, there were nooutstanding purchase commitments with Biosensors.  The Company will pay royalties to Biosensorsunder the license agreement when revenues are generated from product sales.

 

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***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 8****- 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 30,2009, 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, 2009 or December 31,2008.

 

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 9** -**Reduction inForce**

 

OnJuly 10, 2008, the Company announced an initiative to reduce employeeheadcount by eliminating 46 regular jobs and 26 temporary positions.  This reduction represented approximately 34%of the total workforce and was completed in July 2008.  The total cash payments and expenses incurredin connection with this reduction in workforce was approximately $210,000, ofwhich $170,000 was included in research and development and $40,000 wasincluded in general and administrative in the Statement of Operations.  The total expense included approximately$7,000 of non-cash expenses.  All amountswere paid during the quarter ended September 30, 2008.

 

On January 21, 2009the Company announced an initiative to reduce employee headcount by 115 employeesor 94% of the total workforce.  As of June 30,2009, headcount has been reduced by 119 employees and the related expenserecognized for the six month period ending on that date was approximately $1.4million, of which $0.7 million was included in research and development and$0.7 million was included in general and administrative in the Statement ofOperations.

 

Asof June 30, 2009, the Company has three remaining employees, all of whomhave retention agreements entered into in order to secure their continuedservice through the completion of a strategic transaction, or in the absencethereof, to wind down and liquidate the Company.  The expense associated with these agreementsis being expensed over the related retention periods.  As of June 30, 2009, we have recorded aliability of $0.4 million associated with these agreements.

 

**NOTE 10** -**Dissolution**

 

OnMay 11, 2009, the board of directors adopted a Plan of CompleteLiquidation and Dissolution, or Plan of Dissolution, and recommended approvalof the Plan of Dissolution to the Company’s stockholders.  The Company filed a definitive proxystatement with the United States Securities and Exchange Commission on June 8, 2009for the purpose of obtaining stockholder approval of the Plan ofDissolution.  The Plan of Dissolution issubject to approval by stockholders at a special meeting of stockholders whichis scheduled to be held on August 3, 2009.

 

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ThePlan of Dissolution contemplates an orderly windup of our business andoperations.  If our shareholders approvethe Plan of Dissolution, we intend to file a certificate of dissolution,satisfy or resolve our remaining liabilities and obligations, including but notlimited to contingent liabilities and claims, ongoing clinical trialobligations, and costs associated with the liquidation and dissolution, andmake one or more distributions to our shareholders of cash available fordistribution, subject to applicable legal requirements.  Following shareholder approval of the Plan ofDissolution and the filing of a certificate of dissolution, we anticipatedelisting our common stock from NASDAQ.

 

**NOTE 11** —**Subsequent Events**

 

TheCompany has performed an evaluation of subsequent events through July 24,2009, which is the date the financial statements were issued.

 

**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, 2008 and in ourother filings with the Securities and Exchange Commission, or 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 company thathas focused 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 performing research and development, includingproduct design, 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 in the United States.

 

Over the past four years, we have been conductingclinical trials to evaluate our Custom NX 36 and Custom NX 60 stent and stentdelivery systems. In October 2008, the one year data from our CUSTOM IIIclinical trial, the two year data from our CUSTOM II clinical trial and thethree year data from our CUSTOM I clinical trial were presented at the 2008Transcatheter Cardiovascular Therapeutics conference in Washington D.C. Webelieve the data from these clinical trials provides preliminary evidence of safetyand efficacy and support further development of our in-situ customizationapproach. In March 2009, we received CE Mark approval for our Custom NXDES Systems authorizing us to market our products in the European Union andcertain other countries that recognize CE Mark. Even though we have received CE Mark, we do not have adequate resourcesto commercialize our products in Europe.

 

We will need premarketapproval, or PMA, from the U.S. Food and Drug Administration, or FDA, before wecan market our products in the United States, which we expect would requiredata from a large clinical trial of up to 2,100 patients. We expected to obtainthis data through our CUSTOM IV and CUSTOM IV Angio clinical trials. In May 2009,we received a conditional IDE approval from the FDA which requires the Company to address certain technicalissues about which the FDA has questions before a full IDE approval will begranted. Even if we were to address all of the FDA’s questions, we currently do not have adequateresources to initiate our CUSTOM IV or CUSTOM IV Angio clinical trials.

 

To date, we have not generated any revenue from ourdevelopment activities and will not be able to generate revenue unless weobtain additional financing to support commercialization of our products in theEuropean Union. We have incurred net losses in each year since our inception inJune 2002. Through June 30, 2009, we had an accumulated deficit of$146.0 million.

 

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**RECENTDEVELOPMENTS**

 

InJanuary 2009, we notified our employees that we were initiating aheadcount reduction that would impact 94% of our 122 employees.  The reduction was substantially completed in March 2009.In connection with the reduction in force and our plans to explore strategicalternatives, we entered into retention and severance agreements with nine ofour employees, including our executive officers.  Pursuant to these agreements, we have agreedto make retention payments to each of these employees, provided theiremployment is not terminated for cause prior to the date upon which we completea strategic transaction, or the employee’s expected termination date, whicheveris earlier.  Three of these employeeswere terminated on March 31, 2009, one was terminated on April 30,2009 and two were terminated on June 30, 2009.  The Company currently has three employees,including Gregory D. Casciaro, our President and Chief Executive Officer, andtwo non-executive employees.

 

InJanuary 2009, we announced a reduction in our headcount of approximately115 employees, or 94% of our workforce. As of March 31, 2009, the reduction was substantially complete andthree full-time employees remain after June 30, 2009. During the firstquarter of 2009, the Company was exploring strategic alternatives with theassistance of Piper Jaffray & Co., including, without limitation, amerger, a sale of substantially all our assets, a financing, or a sale of a portionof our assets, such as our peripheral stent technology, our drug elutingballoon technology or our bioabsorbable stent technology.  On May 11, 2009, our board of directorsconcluded that it appeared unlikely that a strategic transaction at a valuationmaterially in excess of the estimated liquidation value could be achieved inthe near term.  This conclusion was basedon the lack of success, despite concerted efforts through the fourth quarter of2008 and first quarter of 2009, to secure additional financing or identify astrategic transaction that would provide value to our stockholders or reducethe risks of our ongoing operations, including the risks associated withtechnology in a relatively early stage of development, the time and cashrequirements associated with commercializing our Custom NX DES Systems, theneed for additional financing, and the highly uncertain and currentlyunfavorable financing and economic climate. Based on this and other factors,our board of directors concluded that a statutory dissolution and liquidationwas in the best interests of XTENT and its stockholders and therefore adopted aPlan of Complete Liquidation and Dissolution, or Plan of Dissolution, andrecommended approval of the Plan of Dissolution by our stockholders. We filed adefinitive proxy statement with the United States Securities and ExchangeCommission on June 8, 2009 and on or about that date we mailed theproxy statement to our stockholders of record for the purpose of obtainingstockholder approval of the Plan of Dissolution at a meeting originallyscheduled to occur on July 9, 2009. On July 7, 2009, we announced that we had postponed the specialmeeting of our stockholders until 9:00 a.m. Pacific Time on August 3,2009 in order to allow for further discussions with two parties about atransaction that would be an alternative to liquidation and dissolution.

 

If our stockholders approve our Plan of Dissolution, we expect to filea Certificate of Dissolution with the Delaware Secretary of State.  Thereafter, we will not engage in anybusiness activities except for the purpose of preserving the value of ourassets, prosecuting and defending lawsuits by or against us, winding up ourbusiness and affairs, selling and monetizing our non-cash assets, including ourintellectual property, paying or otherwise settling our liabilities, includingcontingent liabilities, terminating agreements and relationships, and preparingto make distributions to our stockholders, in accordance with the Plan ofDissolution. If the Company’s stockholders do not approve the Plan ofDissolution, the board of directors will explore the strategic alternativesavailable to the Company.

 

**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***

 

Todate, we have not generated any revenue from the sale of our stent systems.Revenue generation is subject to commercial launch of our product inEurope.  Even though we received CE Mark in March 2009, wedo not have adequate resources to commercialize our product in the EuropeanUnion.

 

***Research and Development***

 

Since inception, we have devoted a significant amount of resources todevelop our Custom NX DES Systems. From our inception through June 30,2009, we incurred $110.8 million in research and development expensesrelated to developing our products, including the clinical trials necessary tosupport regulatory approval.  We expectminimal research and development expenditures as we wind up our clinical trialsand research and development activities.

 

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***General andAdministrative***

 

General and administrative expenses consist primarily of compensationfor executive, finance, marketing and administrative personnel includingstock-based compensation. Other expenses include professional fees foraccounting and legal services associated with our efforts to obtain andmaintain protection for intellectual property related to our Custom NX DESSystems. From our inception through June 30, 2009, we incurred$38.8 million in general and administrative expenses.  We expect minimal general and administrativeexpenditures as we wind up our operations.

 

***Loss on Impairmentof Long-Lived Assets***

 

During the quarter ended March 31,2009, we terminated 94% of our workforce. Weevaluate therecoverability of property and equipment in accordance with FAS 144, “*Accounting for the impairment, or disposal, oflong-lived assets*” whenever events or changes in circumstancesindicate that the carrying value of a long-lived asset may not be recoverable.We recorded a non-cash charge of $2.5 million relating to the impairment oflong-lived assets, which is included in continuing operations for the quarterended March 31, 2009.  An estimate of fair value was based on amarket approach obtained through an external assessment of long-lived assetvalues by considering the market participant assumptions affecting the value tobe realized through an auction of property and equipment.  Management’sassessment of fair value has not changed as of June 30, 2009. Inaccordance with SFAS 157-2, the $1.5 million valuation of long-lived assets isassessed based on unobservable inputs, and grouped as level 3 within the fairvalue hierarchy.

 

**RESULTS OF OPERATIONS**

 

**COMPARISON OF THREE MONTHS ENDED JUNE30, 2009 AND 2008**

 

***Revenue***

 

We did not generate anyrevenue during the three months ended June 30, 2009 or 2008.

 

***Research andDevelopment***

 
| ** **                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Dollar** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|------------|------------|
| ** **                        | ** ** | **2009**                                        | ** ** | **2008**   | ** ** | **Change** | ** ** |
| ** **                        | ** ** | **(in thousands)**                         | ** ** | ** ** | ** ** |
|                              |       |                                            |       |       |       |   |   |
| Research and development expenses |       | $                                               | 519        |       | $          | 9,818 |   | $ | (9,299 | ) |
|                                   |            |                                                 |            |            |            |  |  |  |  |  |

 

The $9.3 million decrease in research and developmentexpenses for the three months ended June 30, 2009, compared to the threemonths ended June 30, 2008, was primarily attributable to:

 

·             A decrease of $3.8 million for prototypeparts, supplies, and outside services related to product development for ourCustom NX DES systems, based on the reduced operations activity related tothe reduction in force substantially completed in March 2009;

 

·             A decrease of $4.1 million in personnelcosts offset by a $0.1 million increase in costs related to the reduction inforce substantially completed in March 2009;

 

·             A decrease of $0.4 million in expensesrelated to the support of our clinical research;

 

·             A decrease of $0.3 million in employeestock-based compensation; and

 

·             A decrease of $0.8 million in facilitiesand other miscellaneous expenses.

 

***General andAdministrative***

 
| ** **                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Dollar** | ** ** |
|-------------------------------------|------------|-------------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2009**                                        | ** ** | **2008**   | ** ** | **Change** | ** ** |
| ** **                          | ** ** | **(in thousands)**                         | ** ** | ** ** | ** ** |
|                                |       |                                            |       |       |       |   |   |
| General and administrative expenses |       | $                                               | 1,578      |       | $          | 3,331 |   | $ | (1,753 | ) |
|                                     |            |                                                 |            |            |            |  |  |  |  |  |

 

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The $1.8 million decrease in general andadministrative expenses for the three months ended June 30, 2009, comparedto the three months ended June 30, 2008, was primarily attributable to:

 

·             A decrease of$0.7 million in personnel costs, facilities, insurance and other miscellaneousspending, offset by a$0.2 million increase in costs related to the reduction in force substantiallycompleted in March 2009;

 

·             A decrease of $0.4 million in legal,accounting, consulting and other expenses;

 

·             A decrease of $0.5 million due tospending for trade shows, travel and marketing materials; and

 

·             A decrease of $0.4 million in employeestock-based compensation expense.

 

***Interest and OtherIncome (Expense), Net***

 
| ** **                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Dollar** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|------------|------------|
| ** **                     | ** ** | **2009**                                        | ** ** | **2008**   | ** ** | **Change** | ** ** |
| ** **                     | ** ** | **(in thousands)**                         | ** ** | ** ** | ** ** |
|                           |       |                                            |       |       |       |   |   |
| Interest and other income, net |       | $                                               | (20        | )          | $          | 263 |   | $ | (283 | ) |
|                                |            |                                                 |            |            |            |  |  |  |  |  |

 

The $0.3 million decrease in interest and otherincome, net, for the three months ended June 30, 2009, compared to thethree months ended June 30, 2008, was primarily attributable to a decreasein the levels of cash, cash equivalents and short-term investments, as well aslower average interest rates.  Inaddition, we experienced approximately $23,000 in foreign exchange lossassociated with our clinical trial liabilities due to changes in value of theeuro.

 

**COMPARISON OF SIX MONTHS ENDED JUNE30, 2009 AND 2008**

 

***Revenue***

 

We did not generate anyrevenue during the six months ended June 30, 2009 or 2008.

 

***Research andDevelopment***

 
| ** **                        | ** ** | **Six Months Ended  June 30,** | ** ** | **Dollar** | ** ** |
|-----------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **                        | ** ** | **2009**                                      | ** ** | **2008**   | ** ** | **Change** | ** ** |
| ** **                        | ** ** | **(in thousands)**                       | ** ** | ** ** | ** ** |
|                              |       |                                          |       |       |       |   |   |
| Research and development expenses |       | $                                             | 5,173      |       | $          | 19,239 |   | $ | (14,066 | ) |
|                                   |            |                                               |            |            |            |  |  |  |  |  |

 

The $14.1 million decrease in research and developmentexpenses for the six months ended June 30, 2009, compared to the sixmonths ended June 30, 2008, was primarily attributable to:

 

·             A decrease of $6.8 million for prototypeparts, supplies, and outside services related to product development for ourCustom NX DES systems, based on the reduced operations activity related tothe reduction in force substantially completed in March;

 

·             A decrease of $5.5 million in personnelcosts offset by a $0.7 million increase in costs related to the reduction inforce substantially completed in March 2009;

 

·             A decrease of $0.8 million in expensesrelated to the support of our clinical research;

 

·             A decrease of $0.4 million in employeestock-based compensation; and

 

·             A decrease of $1.0 million in facilitiesand other miscellaneous expenses; and

 

·             A decrease of $0.3 million in travelrelated expenses.

 

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***General andAdministrative***

 
| ** **                          | ** ** | **Six Months Ended  June 30,** | ** ** | **Dollar** | ** ** |
|-------------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2009**                                      | ** ** | **2008**   | ** ** | **Change** | ** ** |
| ** **                          | ** ** | **(in thousands)**                       | ** ** | ** ** | ** ** |
|                                |       |                                          |       |       |       |   |   |
| General and administrative expenses |       | $                                             | 4,341      |       | $          | 6,773 |   | $ | (2,432 | ) |
|                                     |            |                                               |            |            |            |  |  |  |  |  |

 

The $2.4 million decrease in general andadministrative expenses for the six months ended June 30, 2009, comparedto the six months ended June 30, 2008, was primarily attributable to:

 

·             A decrease of$1.2 million in personnel costs, facilities, insurance and other miscellaneousspending, offset by a$0.7 million increase in costs related to the reduction in force substantiallycompleted in March 2009;

 

·             A decrease of $0.6 million in legal,accounting, consulting and other expenses;

 

·             A decrease of $0.7 million due tospending for trade shows, travel and marketing materials; and

 

·             A decrease of $0.6 million in employeestock-based compensation expense.

 

***Loss on Impairmentof Long-Lived Assets***

 
| ** **                              | ** ** | **Six Months Ended  June 30,** | ** ** | **Dollar** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **                              | ** ** | **2009**                                      | ** ** | **2008**   | ** ** | **Change** | ** ** |
| ** **                              | ** ** | **(in thousands)**                       | ** ** | ** ** | ** ** |
|                                    |       |                                          |       |       |       |   |   |
| Loss on impairment of long-lived assets |       | $                                             | 2,494      |       | $          | — |   | $ | 2,494 |   |
|                                         |            |                                               |            |            |            |  |  |  |  |  |

 

The $2.5 million increase in loss on impairment oflong-lived assets for the six months ended June 30, 2009, compared to thesix months ended June 30, 2008, was attributable to the non-cash charge of$2.5 million relating to the impairment of long-lived assets which have beendetermined to be impaired. The fair value of long-lived assets was based on amarket approach obtained through an external assessment of long-lived assetsvalues by considering the market participant assumptions affecting the value tobe realized through an auction of property and equipment.

 

***Interest and OtherIncome (Expense), Net***

 
| ** **                               | ** ** | **Six Months Ended  June 30,** | ** ** | **Dollar** | ** ** |
|------------------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **                               | ** ** | **2009**                                      | ** ** | **2008**   | ** ** | **Change** | ** ** |
| ** **                               | ** ** | **(in thousands)**                       | ** ** | ** ** | ** ** |
|                                     |       |                                          |       |       |       |   |   |
| Interest and other income (expense), net |       | $                                             | 35         |       | $          | 669 |   | $ | (634 | ) |
|                                          |            |                                               |            |            |            |  |  |  |  |  |

 

The $0.6 million decrease in interest and otherincome, net, for the six months ended June 30, 2009, compared to the sixmonths ended June 30, 2008, was primarily attributable to a decrease inthe levels of cash, cash equivalents and short-term investments, as well aslower average interest rates.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

Our cash and cash equivalents, and short-terminvestments balances as of June 30, 2009 and December 31, 2008 aresummarized as follows:

 
| ** **                                                  | ** ** | **As of   June 30,  2009** | ** ** | **As of  December 31,  2008** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                  | ** ** | **(in thousands)**                   | ** ** |
| ** **                                                  | ** ** | ** **                                | ** ** | ** **                              | ** ** |
| Cash and cash equivalents                                   |       | $                                         | 9,968      |                                    | $          | 13,373 |   |
| Short-term investments                                      |       | —                                    |       | 5,752                                   |       |
|                                                        |       |                                      |       |                                    |       |
| Total cash and cash equivalents and short-term  investments |       | $                                         | 9,968      |                                    | $          | 19,125 |   |

 

***Sources of Liquidity***

 

We are in the development stage and have incurredlosses since our inception in June 2002. As of June 30, 2009, we hadan accumulated deficit of $146.0 million. Prior to our Initial Public Offeringin February 2007, we funded our operations from the private placements ofour convertible preferred stock resulting in aggregate net proceeds of $75.6million through December 31, 2006. Upon completion of the reduction inforce in April 2009, our cash requirements were greatly reduced. On May 11,2009, our board of directors concluded that a statutory dissolution andliquidation was in the best interests of our stockholders and therefore adopteda Plan of Complete Liquidation and Dissolution, or Plan of Dissolution, andrecommended approval of the Plan of Dissolution by our stockholders. The Planof Dissolution is subject to approval at a special meeting of our stockholders,which is expected to be held on August 3, 2009.  If the Company’s stockholders do not approvethe Plan of Dissolution, the board of directors will explore the strategicalternatives available to the Company.

 

As of June 30, 2009, we did not have anyoutstanding or available debt financing arrangements, we had working capital of$9.2 million, and our primary source of liquidity was $10.0 million in cash andcash equivalents. The Company believes the existing cash and cash equivalentsare sufficient to meet the anticipated cash requirements through at least December 31,2009.

 

***Cash Flows***

 

Our operating, investing and financing activities forthe six months ended June 30, 2009 and June 30, 2008 are summarizedas follows:

 
| ** **                                | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **(in thousands)**                       | ** ** |
|                                      |       |                                          |       |   |   |
| Net cash used in operating activities     |       | $                                             | (9,012     | ) | $ | (22,926 | ) |
| Net cash provided by investing activities |       | 5,539                                         |       | 21,017 |   |
| Net cash provided by financing activities |       | 68                                            |       | 203 |   |
|                                      |       |                                          |       |   |   |
| Net decrease in cash and cash equivalents |       | $                                             | (3,405     | ) | $ | (1,706 | ) |

 

***OperatingActivities***

 

Net cash used in operating activities was$9.0 million for the six months ended June 30, 2009, compared to$22.9 million for the six months ended June 30, 2008. The net cash used inoperating activities for the six months ended June 30, 2009 and 2008primarily reflects expenses related to product development and clinical trials. These expenses were partially offset by depreciation and amortization,amortization of securities discounts, gain on sale of investments, non-cashstock-based compensation and non-cash charges in operating assets andliabilities, including an asset impairment charge of $2.5 million, based on theestimated liquidation value of long-lived assets.

 

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***Investing Activities***

 

Net cash provided by investing activities was$5.5 million for the six months ended June 30, 2009, compared to$21.0 million for the six months ended June 30, 2008. Net cash provided byinvesting activities for the six months ended June 30, 2009 wasattributable to the proceeds from the maturities of investments of $5.7million, which were partially offset by the purchase of property and equipmentof $0.2 million. Net cash provided by investing activities for the six monthsended June 30, 2008 was primarily attributable to the sale of investmentsof $10.0 million and the proceeds from maturities of investments of $23.8million, which were partially offset by the purchase of short-term investmentsof $11.9 million and the purchase of property and equipment of $0.9 million.

 

***FinancingActivities***

 

Net cash provided by financing activities for the sixmonths ended June 30, 2009 was $68,000, compared to $203,000 for the sixmonths ended June 30, 2008. Net cash provided by financing activities foreach of the six months ended June 30, 2009 and 2008 was attributable tothe proceeds from the exercise of stock options, and purchase of stock throughthe Employee Stock Purchase Plan in May 2008.

 

***Operating Capitaland Capital Expenditure Requirements***

 

To date, we have not commercialized any products. Wedo not anticipate generating any revenue unless and until we secure additionalfunding to commercialize our products in the European Union and obtain FDAmarketing approval for, and begin selling, our Custom NX DES Systems. If wewere to continue our operations, we anticipate that we would continue to incursubstantial net losses for the next several years as we develop our products,conduct and complete 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. Our currentcash and cash equivalents are not sufficient to meet the cash requirements ofthese activities.

 

In January 2009, we notified our employees that we were initiatinga headcount reduction that would impact 94% of our employees.  We completed this reduction by April 30,2009.  With this reduction, we believethat our cash and cash equivalents and short-term investments will besufficient to meet our anticipated cash requirements through at least December 31,2009.  Our board of directors approvedthe Plan of Dissolution on May 11, 2009. We filed a definitive proxy statement with the United States Securitiesand Exchange Commission on June 8, 2009 and on or about that date wemailed the proxy statement to our stockholders of record for the purpose ofobtaining stockholder approval of the Plan of Dissolution at a meetingoriginally scheduled to occur on July 9, 2009.  On July 7, 2009, we announced that wehad postponed the special meeting of our stockholders until 9:00 a.m.Pacific Time on August 3, 2009 in order to allow for further discussionswith two parties about a transaction that would be an alternative toliquidation and dissolution.  If the Company’s stockholders donot approve the Plan of Dissolution, the board of directors will explore thestrategic alternatives available to the Company.

 

Our forecasts for the period of time through which our financialresources will be adequate to support our operations are forward-lookingstatements and involve risks and uncertainties, and actual results could varymaterially and negatively as a result of a number of factors, including thefactors discussed in the “Risk Factors” contained in Item 1A of Part Iof this report. We have based these estimates on assumptions that may prove tobe wrong, and we could utilize our available capital resources sooner than wecurrently 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 clinical trials and successfullydeliver a commercial product to market. If we do not dissolve and liquidate ourassets, our future funding requirements will depend on many factors, includingbut 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 otherintellectual property rights;

 

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

 

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

 

·                  the cost and timing of regulatory approvals;

 

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·                  the cost and timing of establishing sales,marketing and 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; and

 

·                  licensing technologies for future development.

 

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, 2009consist of obligations under operating leases and purchase obligations that weenter into through the normal course of business. See Note 7 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).

 

***Liquidation and Dissolution***

 

In the event that our stockholders approved the Planof Dissolution, we intend to liquidate all of our remaining non-cash assetsand, after paying or making reasonable provision for the payment of claimsagainst and obligations of XTENT as required by law, distribute any remainingcash to our stockholders. We may defend suits and incur claims, liabilities andexpenses (such as salaries and benefits, directors’ and officers’ insurance,payroll and local taxes, facilities expenses, legal, accounting and consultingfees, rent, clinical trial termination and related expenses and miscellaneousoffice expenses) following approval of the Plan of Dissolution and during thethree years following the date on which we file our certificate of dissolutionwith the Delaware Secretary of State, or the Effective Date. Satisfaction ofthese claims, liabilities and expenses will reduce the amount of assetsavailable for ultimate distribution to stockholders. While we cannot predictthe actual amount of our liabilities, other obligations and expenses and claimsagainst us, we believe that available cash and any amounts received from thesale of our remaining non-cash assets will be adequate to provide for thesatisfaction of our liabilities, other obligations and expenses and claimsagainst us and that we will make one or more cash distributions tostockholders. The estimated range of approximately $0.11 and $0.40 per share isour best current estimate of the aggregate amount of cash that will ultimatelybe available for distribution to stockholders.

 

Assuming that the Plan ofDissolution is approved by the requisite vote of our stockholders, we intend tosell, liquidate or otherwise dispose of our remaining non-cash assets,consisting of our drug eluting stent systems and related intellectual property,pre-clinical and clinical trial data and related regulatory filings, Custom NXDES Systems designs and related documentation, tooling, manufacturing and testequipment, furniture and supplies, and pay or make reasonable provision for thepayment of claims against and obligations of XTENT. Although we are not able topredict with certainty the precise nature, amount or timing of any distributions,we presently expect to make an initial distribution, as soon as reasonablypracticable following the initial sale of our non-cash assets, to holders ofrecord of our common stock as of the close of business on the Effective Date.We currently estimate that the amount ultimately distributed will be betweenapproximately $0.11 and $0.40 per share of common stock, assuming we are unableto sell our non-cash assets. We are not able to predict with certainty theprecise nature, amount or timing of any distributions, primarily due to ourinability to predict the amount of our remaining liabilities or the amount thatwe will expend during the course of the liquidation, the timing of any sales ofour remaining non-cash assets and the net value, if any, of our remainingnon-cash assets. To the extent that the amount of our liabilities or theamounts that we expend during the liquidation are greater than we anticipate,our stockholders may receive substantially less than the amount we currentlyestimate. Our board of directors has not established a firm timetable for anyfinal distributions to our stockholders. Subject to contingencies inherent inwinding up our business, our board of directors intends to authorize anydistributions as promptly as reasonably practicable in our best interests andthe best interests of our stockholders. Our board of directors, in itsdiscretion, will determine the nature, amount and timing of all distributions.

 

***Recent and AdoptedAccounting Pronouncements***

 

In February 2007,the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities—Including anamendment of FASB Statement No. 115* (“SFAS No. 159”). SFASNo. 159 expands the use of fair value accounting but does not affectexisting standards which require assets or liabilities to be carried at fairvalue. The objective of SFAS No. 159 is to improve financial reporting byproviding companies with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions. Under SFAS No. 159, acompany may elect to use fair value to measure eligible items at specifiedelection dates and report unrealized gains and losses on items for which thefair value option has been elected in earnings at each subsequent reportingdate. Eligible items include, but are not limited to, accounts and loansreceivable, available-for-sale and held-to-maturity securities, equity methodinvestments, accounts payable, guarantees, issued debt and firm commitments. Ifelected, SFAS No. 159 is effective for fiscal years beginning after November 15,2007. The adoption of SFAS 159 has not impacted our results of operations andfinancial condition as we have not elected the fair value option for any of oureligible items.

 

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On April 1, 2009, we adopted FSP SFAS 107-1 andAPB 28-1, *Interim Disclosures about FairValue of Financial Instruments.*  This FSP amends SFAS No. 107,*Disclosures about Fair Value of FinancialInstruments*, to require publicly-traded companies, as defined in APBOpinion No. 28, *Interim FinancialReporting*, to provide disclosures on the fair value of financialinstruments in interim financial statements.  Prior to the issuanceof FSP FAS No. 107-1 and APB Opinion No. 28-1, the fair values ofthose assets and liabilities were disclosed only once each year. With theissuance of FSP FAS No. 107-1 and APB Opinion No. 28-1, we will nowbe required to disclose this information on a quarterly basis, providingquantitative and qualitative information about fair value estimates for allfinancial instruments not measured in the Condensed balance sheets at fairvalue. The adoption of the new disclosure requirements did not have a materialimpact on our condensed financial condition, results of operations, or cashflows.

 

On January 1, 2009, the we adopted SFAS No. 157-2,*Effective Date of FASB Statement No. 157*,(“FSP SFAS 157-2”), which delays the effective date of SFAS No. 157 forall nonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on a recurringbasis to fiscal years beginning November 15, 2008.  The adoption of FSP SFAS No. 157-2 didnot have a material impact on our financial position, operating results or cashflows.

 

On January 1, 2009,we adopted SFAS No. 157-3, *Determining the Fair Valueof a Financial Asset When the Market for That Asset Is Not Active,* (“FSPSFAS 157-3”), which clarifies theapplication of Statement 157 in a market that is not active and provides anexample to illustrate key considerations in determining the fair value of afinancial asset when the market for that financial asset is not active.  The adoption of FSP SFAS No. 157-3did not have a material impact on our financial position, operating results orcash flows.

 

On April 1, 2009, we adopted FSP SFAS 157-4, *Determining Fair Value When the Volume and Level ofActivity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly,* or FSP SFAS 157-4,which provides additional guidance for estimating fair value in accordance withSFAS 157 when the volume and level of activity for the asset or liability havesignificantly decreased.  This FSP re-emphasizes that regardless ofmarket conditions the fair value measurement is an exit price concept asdefined in SFAS 157.  This FSP clarifies and includes additionalfactors to consider in determining whether there has been a significantdecrease in market activity for an asset or liability and provides additionalclarification on estimating fair value when the market activity for an asset orliability has declined significantly.  The scope of this FSP does notinclude assets and liabilities measured under level 1 inputs.  FSPSFAS 157-4 is applied prospectively to all fair value measurements whereappropriate.  The adoption of FSP SFAS 157-4 did not have a materialimpact on our condensed financial condition, results of operations, or cashflows.

 

On April 1, 2009, we adopted FSP SFAS No. 115-2and SFAS No. 124-2, *Recognition andPresentation of Other-Than-Temporary Impairments* (“FSP SFAS No. 115-2and SFAS No. 124-2”).  FSP SFAS115-2 and SFAS No. 124-2 amends the other-than-temporary impairmentguidance in U.S. GAAP for debt securities to make the guidance more operationaland to improve the presentation and disclosure of other-than-temporaryimpairments on debt and equity securities in the financial statements.  The adoption of FSP SFAS no 115-2 and SFAS No. 124-2did not have a material impact on our financial position, operating results orcash flows.

 

On April 1, 2009, we adopted SFAS No. 165, *Subsequent Events* (“SFAS 165”).  SFAS No. 165 is intended to establishgeneral standards of accounting for and disclosure of events that occur afterthe balance sheet date but before financial statements are issued or areavailable to be issued.  It requires thedisclosure of the date through which an entity has evaluated subsequent eventsand the basis for selecting that date, that is, whether that date representsthe date the financial statements were issued or were available to beissued.  The adoption of SFAS No. 165did not have a material impact on our condensed financial condition, results ofoperations or cash flows.

 

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

 

**Interest rate 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, 2009 consist of liquid money market funds and U.S.government securities. We did not have short-term investments as of June 30,2009. Due to the short-term nature of our investments, we believe that there isno material exposure to interest rate risk.

 

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**Exchange rate 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, andpayments for clinical trial expenses are also paid and accrued 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 IDE approval from the FDA. In May 2009, the Company received a conditional IDE approval fromthe FDA which requires the Company to address certain technicalissues about which the FDA has questions before a full IDE approval will begranted.  As a policy, we do not engage in speculativeor leveraged transactions, nor do we hold financial instruments for tradingpurposes.

 

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, 2009.

 

**Changes in Internal Control OverFinancial 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, 2009 thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PART II:OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

None.

 

**ITEM 1A. RISK FACTORS**

 

On May 11, 2009 ourboard of directors approved a Plan of Complete Liquidation and Dissolution, orPlan of Dissolution.  We filed adefinitive proxy statement with the United States Securities and ExchangeCommission on June 8, 2009 and on or about that date we mailed theproxy statement to our stockholders of record for the purpose of obtainingstockholder approval of the complete liquidation and dissolution of XTENTpursuant to the Plan of Dissolution at a meeting originally scheduled to occuron July 9, 2009.  On July 7,2009, we announced that we had postponed the special meeting of ourstockholders until 9:00 a.m. Pacific Time on August 3, 2009 in orderto allow for further discussions with two parties about a transaction thatwould be an alternative to liquidation and dissolution.

 

If our stockholdersapprove the Plan of Dissolution, we will pursue a revenue clearancecertificate from the Department of Finance of the State of Delaware and, once received, file a Certificateof Dissolution with the State of Delaware Secretary of State. The risksdescribed below under the caption “Risks Related to the Plan of Dissolution”address risks we and our stockholders face if the Plan of Dissolution isapproved.  Additional risks related tothe Plan of Dissolution may be found in our proxy statement filed with theSecurities and Exchange Commission on June 8, 2009, under the heading, “RiskFactors.”

 

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**RisksRelated to Our Plan of Dissolution**

 

***Theamount we distribute to our stockholders pursuant to the Plan of Dissolutionmay be substantially less than the amount we currently estimate if the amountsof our liabilities, other obligations and expenses and claims against us arehigher than we currently anticipate.***

*** ***

The amount of cashultimately distributed to stockholders pursuant to the Plan of Dissolutiondepends on the amount of our liabilities, obligations and expenses and claimsagainst us, contingency reserves that we establish, during the liquidationprocess, and the amount we generate from the sale of our remaining non-cashassets and intellectual property.  Wehave attempted to estimate reasonable reserves for such liabilities,obligations, expenses and claims against us, but those estimates may beinaccurate.  Factors that could impactour estimates include the following:

 

·                  If any of the estimates regarding thePlan of Dissolution, including the net proceeds from the sale of our tooling and manufacturingand test equipment, furniture and supplies, and the expense of satisfyingoutstanding obligations, liabilities and claims during the liquidation processare inaccurate, the amount we distribute to our stockholders may besubstantially less than the amount we currently estimate.  Given the current macroeconomic conditions,for purposes of our estimates we have assigned no value to our drug elutingstent systems and related intellectual property.  If claims are asserted against us, includingany claims related to payments to suppliers or other vendors or claims frompatients in our clinical trials, we will have to defend or resolve such claimsbefore making distributions to our stockholders, which will reduce amountsotherwise available for distribution to our stockholders;

 

·                  We have made estimates regarding theexpense of personnel required and other operating expenses (including legal,accounting and other professional fees) necessary for us to dissolve andliquidate.  Our actual expenses couldvary significantly and depend on the timing and manner of the sale of ournon-cash assets.  If the timing differsfrom our plans, we may incur additional expenses above our current estimates,which could substantially reduce funds available for distribution to ourstockholders; and

 

·                  We have assumed that all materialcontract rights can be effectively transferred to third parties.  If we are unable to obtain any requiredconsents with the counterparties to those contracts, our ability to transfersuch rights may be impaired.

 

***We may continueto incur the expenses of complying with public company reporting requirements,which may be economically burdensome.***

*** ***

Whether or not the Planof Dissolution is approved, we have an obligation to continue to comply withthe applicable reporting requirements of the Exchange Act, even thoughcompliance with such reporting requirements may be economically burdensome andof minimal value to our stockholders.  Ifthe Plan of Dissolution is approved by our stockholders, in order to curtailexpenses, we intend to seek relief from the SEC, as soon as reasonablypractical, to suspend our reporting obligations under the Exchange Act, andultimately to terminate the registration of our common stock.  We anticipate that, if granted such relief,we would continue to file current reports on Form 8-K to disclose materialevents relating to our dissolution and liquidation along with any other reportsthat the SEC might require.  To theextent that we are unable to suspend our obligation to file periodic reportswith the SEC, we will be obligated to continue complying with the applicablereporting requirements of the Exchange Act and, as a result, will be requiredto continue to incur the expenses associated with these reporting requirements,which will reduce the cash available for distribution to our stockholders.  These expenses include, among others, thosecosts relating to:

 

·                  the preparation, review, filing anddissemination of SEC filings;

 

·                  maintenance of effective internalcontrols over financial reporting; and

 

·                  audits and reviews conducted by ourindependent registered public accountants.

 

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***If theamount of our contingency reserve is insufficient to satisfy the aggregateamount of our liabilities and other obligations, each stockholder may be liableto our creditors for the amount of liquidating distributions received by suchstockholder under the Plan of Dissolution, which could also have adverse taxconsequences.***

*** ***

After the date upon whichwe file a certificate of dissolution with the Delaware Secretary of State, orthe “Effective Date,” our corporate existence will continue, but we will not beable to carry on any business except for the purpose of winding up our businessand affairs.  Following the EffectiveDate, we will pay or make reasonable provision to pay all claims andobligations, including all contingent, conditional or unmatured contractual orstatutory claims, known to us.  We alsomay obtain and maintain insurance coverage or establish and set aside areasonable amount of cash or other assets as a contingency reserve to satisfyclaims against us or other obligations. In the event that the amount of the contingency reserve, insurance andother measures calculated to provide for the satisfaction of liabilities andclaims are insufficient to satisfy the aggregate amount ultimately foundpayable in respect of our liabilities and claims against us, each stockholdercould be held liable for amounts due to creditors up to the amounts distributedto such stockholder under the Plan of Dissolution.  In such event, a stockholder could berequired to return all amounts received as distributions pursuant to the Planof Dissolution and ultimately could receive nothing under the Plan ofDissolution.  Moreover, for U.S. federalincome tax purposes, payments made by a stockholder in satisfaction of ourliabilities not covered by the cash or other assets in our contingency reserveor otherwise satisfied through insurance or other reasonable means generallywould produce a capital loss for such stockholder in the year the liabilitiesare paid.  The deductibility of any suchcapital loss generally would be subject to limitations under the InternalRevenue Code of 1986, as amended, or the Code.

 

***Liquidatingdistributions to our stockholders could be delayed or diminished.***

*** ***

All or a portion of anydistributions to our stockholders could be delayed, depending on many factors,including, without limitation:

 

·                  if a creditor or other third party seeksan injunction against the making of distributions to our stockholders on theground that the amounts to be distributed are needed to provide for thesatisfaction of our liabilities or other obligations;

 

·                  if we become a party to lawsuits or otherclaims asserted by or against us, including any claims or litigation arising inconnection with our decision to liquidate and dissolve, payments to suppliersor other vendors or claims from patients in our clinical trials;

 

·                  if we are unable to sell our remainingnon-cash assets or if such sales take longer than expected;

 

·                  if we are unable to resolve claims withcreditors or other third parties, or if such resolutions take longer thanexpected; or

 

·                  if the issuance of the revenue clearancecertificate required to file our certificate of dissolution with the Secretaryof State is delayed.

 

Any of the foregoingcould delay or substantially diminish the amount available for distribution toour stockholders.  In addition, under theDelaware General Corporation Law, or DGCL, claims and demands may be assertedagainst us at any time during the three years following the EffectiveDate.  Accordingly, our board ofdirectors may obtain and maintain insurance coverage or establish and set asidea reasonable amount of cash or other assets as a contingency reserve to satisfyclaims against us or other obligations that may arise during the three-yearperiod following the Effective Date.  Asa result of these factors, we may retain for distribution at a later date, someor all of the estimated amounts that we expect to distribute to stockholders.

 

***Stockholderswill lose the opportunity to capitalize on potential growth opportunities fromthe continuation of our business.***

*** ***

Although our board ofdirectors believes that the Plan of Dissolution is more likely to result ingreater returns to stockholders than if we continued as a stand-alone entity orpursued other alternatives, if the Plan of Dissolution is approved,stockholders will lose the opportunity to capitalize on our business andpossible future growth opportunities that may have arisen if we had continuedour drug eluting stent business or pursued other alternatives.  It is possible that these opportunities couldprove to be more valuable than the liquidating distributions our stockholderswould receive pursuant to the Plan of Dissolution.

 

***Stockholdersmay not be able to recognize a loss for U.S. federal income tax purposes untilthey receive a final distribution from us.***

*** ***

As a result of ourdissolution and liquidation, for U.S. federal income tax purposes, ourstockholders generally will recognize gain or loss equal to the differencebetween (i) the sum of the amount of cash and the fair market value (atthe time of distribution) of property, if any, distributed to them, and (ii) theirtax basis for their shares of our common stock. Liquidating distributions pursuant to the Plan of Dissolution may occurat various times and in more than one tax year. Any loss generally will be recognized by a stockholder only when thestockholder receives our final liquidating distribution to stockholders, andthen only if the aggregate value of all liquidating distributions with respectto a share is less than the stockholder’s tax basis for that share.  Stockholders are urged to consult their owntax advisors as to the specific tax consequences to them of our dissolution andliquidation pursuant to the Plan of Dissolution.

 

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***Recordationof transfers of our common stock on our stock transfer books will be restrictedas of a future date that our board of directors will determine, and thereafterit generally will not be possible for stockholders to change record ownershipof our stock.***

*** ***

Our board of directorsmay direct that our stock transfer books be closed and recording of transfersof common stock discontinued as of the earliest of (x) the close ofbusiness on the record date fixed by our board of directors for the first orany subsequent installment of any liquidating distribution, (y) the closeof business on the date on which our remaining assets are transferred to aliquidating trust, or (z) the date on or as reasonably practicable afterthe date on which we file our certificate of dissolution under the DGCL.  We expect that our board of directors willclose our stock transfer books on or around the Effective Date.  The Effective Date will be determinedfollowing the receipt of a revenue clearance certificate from the Department ofFinance and will be announced as soon as reasonably practicable after thattime.  Thereafter, certificates representingshares of our common stock will not be assignable or transferable on our booksexcept by will, intestate succession or operation of law, and we will not issueany new stock certificates, other than replacement certificates.  In addition, we anticipate that we willrequest that our common stock be delisted from the NASDAQ Global Market andthat trading will be suspended on the Effective Date or as soon thereafter asis practicable.

 

***Furtherstockholder approval may not be required in connection with the implementationof the Plan of Dissolution, including for the sale of all or substantially allof our non-cash assets as contemplated in the Plan of Dissolution.***

*** ***

The approval of the Planof Dissolution by our stockholders also will authorize, without furtherstockholder action, our board of directors to do and perform, or to cause ourofficers to do and perform, any and all acts and to make, execute, deliver oradopt any and all agreements, resolutions, conveyances, certificates and otherdocuments of every kind that our board of directors deems necessary,appropriate or desirable, in the absolute discretion of the board of directors,to implement the Plan of Dissolution and the transactions contemplated thereby,including, without limitation, all filings or acts required by any state orfederal law or regulation to wind up its affairs.  Accordingly, depending on the timing of astockholder vote on the Plan of Dissolution, we may dispose of our drug elutingstent systems and related intellectual property and any and all of our otherremaining non-cash assets without further stockholder approval.  As a result, our board of directors mayauthorize actions in implementing the Plan of Dissolution, including the termsand prices for the sale of our drug eluting stent systems and relatedintellectual property and our other remaining non-cash assets, with which ourstockholders may not agree.

 

***Ourboard of directors may revoke implementation of the Plan of Dissolution even ifit is approved by our stockholders.***

*** ***

Even if our stockholdersapprove the Plan of Dissolution at the special meeting of our stockholders, iffor any reason our board of directors determines that such action would be inour best interests and the best interests of our stockholders, our board ofdirectors may, in its sole discretion and without requiring further stockholderapproval, revoke the Plan of Dissolution and all action contemplatedthereunder, to the extent permitted by the DGCL.  A revocation of the Plan of Dissolution wouldresult in our stockholders not receiving any liquidating distributions pursuantto the Plan of Dissolution.

 

**RisksRelated to Our Continuing Business Operations if the Plan of Dissolution is NotApproved by Our Stockholders**

 

If our stockholders donot approve the Plan of Dissolution, our board of directors will explore what,if any, alternatives are available for our future, particularly in light of thefact that we have terminated substantially all of our employees, would needsignificant additional capital to support our U.S. pivotal clinical trials andefforts to commercialize our products in Europe, commenced the process ofwinding up our business and will continue to incur net losses for theforeseeable future. There iscurrently no active business left to operate and rehiring employees may not bepossible, or may take several months at a cost we are unable to estimate.

 

Possiblealternatives include selling all of our stock or assets, changing our businessfocus, conducting an issuer tender offer, continuing our efforts to identify amerger partner or a reverse merger partner, or seeking voluntary dissolution ata later time and with diminished assets. At this time, our board of directors has considered all of these optionsand has determined that it is in the best interests of our stockholders for usto dissolve and return the cash to stockholders.  The board of directors, however, retains theright to consider other alternatives should a more attractive offer arisebefore or after the filing of our Certificate of Dissolution, if the Plan ofDissolution is approved by our stockholders. If our stockholders do not approve the Plan of Dissolution, we expectthat our cash resources will continue to diminish and we would face risksrelated to continuing our historical business described below.  These risks could materially and adverselyaffect our business, financial condition or operating results and the value ofour common stock, and you may lose all or part of your investment.  Moreover, any alternative we select may haveunanticipated negative consequences.

 

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**Therisks below describe the risks related to our business if the Plan ofDissolution is not approved and we continue to pursue a strategy of using ourcash on hand, any cash generated from financing activities, and any cash thatmay be generated by our drug eluting stent business to support our continuedoperations while we continue to explore whether there may be opportunities torealize potential value from our remaining business assets.**

 

The risks anduncertainties described below are not the only ones facing us, and our risksand uncertainties may change if the Plan of Dissolution is not approved and we alterour business strategy. Additional considerations not presently known to us orthat we currently believe are immaterial may also impair our businessoperations. If any of the following risks actually occurs, our business,financial condition or operating results could be materially and adverselyaffected, the value of our common stock could decline and our stockholders maylose all or part of their investment.

 

**Risks Related to Our Business**

 

**We areexploring strategic alternatives such as a potential merger or a sale of someor all of our assets, and have reduced our headcount significantly.  If we are not successful in completing astrategic transaction or securing adequate funding, we may have to wind up andliquidate our business.**

 

We engaged Piper Jaffray &Co. to help us explore potential strategic alternatives such as a sale of someor all of our assets or a merger transaction. There can be no assurance that we will be able to complete such atransaction on terms acceptable to us, or at all.  We do not have sufficient cash tocommercialize our product in Europe or to initiate our U.S. pivotal clinicaltrials.  If we are unsuccessful inidentifying and completing a strategic transaction or securing adequate funding,we may not be able to continue our operations and may need to wind up ourbusiness and liquidate our assets.

 

In January 2009, wenotified our employees that we would reduce our headcount by eliminating 115 of122 positions, effective March 23, 2009. We currently have only threeemployees, including Gregory D. Casciaro, our President and Chief ExecutiveOfficer, and two non-executive employees. The significant reduction in headcount may make it less likely that wewill be able to complete a strategic transaction.  Certain third parties who might otherwiseconsider a strategic transaction may be unwilling to do so if they are not ableto retain certain of our employees. Likewise, certain third parties who might otherwise consider a strategictransaction may be unwilling to do so in light of the fact that we haveannounced the approval of the Plan of Dissolution by our board of directors.

 

**Even if we are successful incompleting a strategic transaction, the nature of such a transaction mayrequire us to significantly alter or cease our current operations**.

 

Among other strategicalternatives, we are considering the sale of individual assets, such as ourCustom NXP peripheral stent technology, our bioabsorbable stent technology, ourcustomizable drug eluting balloon technology and our principal product, theCustom NX coronary stent system.  Todate, our activities have primarily focused on the development of the Custom NXsystems.  If we sell our Custom NXproduct, we will need to refocus our efforts and dedicate significant resourcesto the development of one or more of our non-core products.  There can be no assurance that we will beable to successfully develop, market and commercialize any or all of suchproducts.  If, pursuant to a strategictransaction, we sell one of our non-core products, we may not receivesufficient consideration to fund the European commercialization of our CustomNX system or the initiation of our IDE trials.

 

**Even ifwe****obtainadditional funding or complete a strategic transaction that provides adequateresources, it may be a year or more before we are able to commercialize ourproduct in Europe.**

 

We have significantlyreduced our headcount and limited our business activities.  Before we could resume the operationsrequired in order to commercialize our product, we would need to rehire asignificant number of employees or hire and train new employees that canperform their jobs according to our specifications.  There can be no assurance that we will beable to rehire our former employees or hire and train qualified new employeesin a timely manner, or at all.  Inaddition, before we can commercialize our product in Europe, we need toincrease our manufacturing capacity and validate our manufacturing process todemonstrate compliance with applicable quality standards.  This validation would likely take six to ninemonths to complete.  Further, under theterms of the agreements we have with several of our suppliers, we are requiredto provide regular forecasts of the components we plan to purchase from themduring a particular period.  Thesesuppliers are obligated to supply us only with the number of components that wepreviously forecasted.  Therefore, oncemanufacturing operations commence, it may take several months before we haveadequate supplies of critical components required to make our products.

 

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**We needsubstantial additional funding and may be unable to raise capital in adequateamounts, or at all, which would force us to delay, reduce or eliminate ourproduct development programs or commercialization efforts.**

 

Due to the ongoing creditcrisis and general deterioration of the capital markets we have been unable todate to secure additional financing.  Wehave engaged Piper Jaffray & Co. to help us explore strategicalternatives, including raising additional capital, however we can provide noassurance that any strategic alternative will result in adequate, or any,capital being made available to us. We need to raise substantial additionalcapital to:

 

· fund our operations and clinical trials;

 

· continue our research and development;

 

· scale-up our manufacturing operations;

 

· defend, in litigation or otherwise, anyclaims that we infringe third-party patent or other intellectual propertyrights;

 

· commercialize our products, if any suchproducts receive regulatory approval for commercial sale; and

 

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

 

After our reduction inheadcount, we believe our existing cash and cash equivalent balances andinterest we earn on these balances will be sufficient to meet our cashrequirements through at least December 31, 2009, although our businessactivities will be limited until such time as further financing is obtained, ifat all. Our future funding requirements will depend on many factors, including:

 

· the nature and timing of any strategictransaction we may complete, if any;

 

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

 

· the cost of filing and prosecutingpatent applications and defending and enforcing our patent and otherintellectual property 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 technologicaland market developments;

 

· licensing technologies for futuredevelopment; and

 

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

 

If we raise additionalfunds by issuing equity securities, our stockholders may experiencedilution.  Debt financing, if available,may involve restrictive covenants.  Anydebt financing or additional equity that we raise may contain terms that arenot favorable to us or our stockholders, or may not be available at all.  To raise capital, we may decide to sellunregistered stock at a discount to market with or without the issuance ofwarrants. The sale of securities at a discount or the issuance of warrants mayresult in additional dilution to our existing stockholders. In connection withthis type of financing, we would likely be obligated to register such sharesfor resale at a later date. If we raise additional funds through collaborationand licensing arrangements with third parties, it may be necessary torelinquish some rights to our technologies or our products, or grant licenseson terms that are not favorable to us. If we are unable to raise adequatefunds, we may have to liquidate some or all of our assets or delay, reduce thescope of or eliminate some or all of our development programs.

 

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We require additionalcapital beyond our current cash balance. For example, we will need to raiseadditional funds in order to commercialize our products. Any such requiredadditional capital may not be available on reasonable terms, if at all. Weestimate that it would cost approximately $45.0 million to complete ourCUSTOM IV and V clinical trials. In addition, we would need to spend additionalfunds for regulatory approvals and for activities to commercialize our CustomNX DES Systems. The development of any new applications of our custom lengthstent technology and new products will also require the expenditure ofsignificant financial resources and take several years to complete.

 

If adequate funds are notavailable, we may have to delay development or commercialization of ourproducts or license to third parties the rights to commercialize products ortechnologies that we would otherwise seek to commercialize. We also may have toreduce marketing, customer support or other resources devoted to our products.Any of these factors could harm our financial condition.

 

**We are adevelopment stage company with a history of losses, and we expect to incur netlosses for the foreseeable future.**

 

We have incurred netlosses since our inception in June 2002. For the years ended December 31,2008, 2007, and 2006, we had net losses of $41.1 million,$38.8 million and $25.0 million, respectively. As of June 30,2009, we had an accumulated deficit of $146.0 million. To date, we havefinanced our operations primarily through private placements of our equitysecurities and our Initial Public Offering, completed on February 1, 2007,and have devoted substantially all of our resources to research and developmentand clinical studies related to our Custom NX DES Systems, which consist of theCustom NX 36 and the Custom NX 60.  Sincewe have only recently received CE Mark and we do not have approval from theFood and Drug Administration, or FDA, or any other regulatory authority for ourproducts, we are only authorized to market our current products in the EuropeanUnion and certain other countries that recognize CE Mark, and we have notgenerated any revenues since our inception. If we continue as an operatingbusiness, we expect our research and development expenses to increasesignificantly in connection with our clinical trials and other productdevelopment activities. If we obtain additional funding or complete a strategictransaction that provides adequate resources, we expect to incur significantsales and marketing expenses and manufacturing expenses as we commercialize ourproducts. As a result, we expect to continue to incur significant andincreasing operating losses for the foreseeable future. These losses willcontinue to have an adverse effect on our stockholders’ equity.

 

**We arewholly dependent on a third party for the development of the drug coatingplaced on our drug eluting stents and any delay or failure by such third partyto successfully develop the drug coating or to submit acceptable Drug MasterFiles, or MAFs, to regulatory authorities could delay commercialization of ourCustom NX DES Systems in the United States.**

 

In May 2004, weentered into a license agreement with Biosensors. In December 2007, weentered into an amended and restated license agreement with Biosensors whichsuperseded the prior agreement. Pursuant to the agreement, we obtainednon-exclusive rights to use Biosensors’ drug coating on our stent platform. Thedrug coating consists of Biolimus A9 ®,an anti-inflammatory drug that is a derivative of rapamycin, and PolyLacticAcid, or PLA, a biodegradable polymer used to release the drug over time. In January 2008,Biosensors announced that it had received CE Mark approval for its BioMatrixdrug eluting stent which uses the Biolimus A9 and PLA drug coating. The drugcoating has not been approved for any use in the United States or anyjurisdiction other than the European Union. In March 2009, we received CEMark approval for our Custom NX DES Systems authorizing us to market our CustomNX DES Systems in the European Union and certain other countries that recognizeCE Mark.

 

In order to obtain IDEapproval from the FDA allowing us to initiate our CUSTOM IV clinical trial inthe United States and in order to obtain the premarket approval, or PMA,allowing us to commercialize our Custom NX DES Systems in the United States, weneed Biosensors to submit acceptable MAFs related to our drug coating to theFDA on our behalf.  We expect theFDA to conduct additional assessments of the MAF as part of our PMA review, andthey may have additional questions at that time.  Any delaysBiosensors experiences or problems it has in responding to questions the FDAmay have concerning the MAF may substantially delay the commercial launch ofour product in the United States.

 

**Wecurrently do not have, and may never have, any products available for sale andour efforts to obtain product approvals and commercialize our products may notsucceed or may result in delays for many reasons.**

 

We are a developmentstage medical device company with a limited history of operations and wecurrently do not have any products available for sale or other sources ofrevenue. Our ability to generate revenue depends entirely upon the successfulclinical development, regulatory approval and commercialization of our CustomNX DES Systems. Our products under development and any other products that wedevelop will require extensive additional clinical testing, regulatory approvaland significant marketing efforts before they can be sold and generate anyrevenue. Our efforts to commercialize our products may not succeed for a numberof reasons including:

 

· our products may not demonstrate safetyand efficacy in our clinical trials;

 

· we are wholly dependent on the effortsundertaken by the supplier of the drug coating for our products, and may besignificantly impacted by any regulatory delays or barriers that our suppliermay encounter in submitting an adequate or acceptable MAF for the drug coatingto the regulatory authorities on our behalf;

 

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· we may not be able to obtain regulatoryapprovals for our products, or the approved indications for our products may benarrower than we seek;

 

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

 

· any products that are approved may notbe accepted in the marketplace by physicians and patients;

 

· physicians may not receive adequatecoverage and reimbursement for procedures using our products;

 

· any rapid technological change may makeour technology and products obsolete;

 

· we may not be able to manufacture ourCustom NX DES Systems in commercial quantities or at an acceptable cost;

 

· we may not have adequate financial orother resources to complete the development and commercialization of our CustomNX DES Systems; and

 

· we may be sued for infringement ofintellectual property rights and could be enjoined from manufacturing orselling our products.

 

We cannot market ourproducts in the United States until we receive PMA. If we are not successful inthe initiation and completion of clinical trials for the development, approvaland commercialization of our Custom NX DES Systems for the treatment ofcoronary artery disease, or CAD, we may never generate any revenue and may beforced to cease operations.

 

**We havenot received, and may never receive, FDA or other regulatory approvals tomarket our Custom NX DES Systems.**

 

Our Custom NX DES Systemsare combination products, incorporating both a drug element and a medicaldevice, and the combination device will be regulated as a Class IIImedical device in the United States. Information regarding the drug coating forour stents will be reviewed by the FDA’s Center for Drug Evaluation andResearch, or CDER, based on the MAF submitted by Biosensors on our behalf, andthe device will be reviewed by the FDA’s Center for Devices and RadiologicalHealth, or CDRH, with the overall product subject to approval by CDRH as amedical device. We believe that no separate approval for the drug independentof the device is required.

 

We do not currently havethe necessary regulatory approvals to market our Custom NX DES Systems or anyother products in the United States or in any foreign markets, other than theEuropean Union and certain other countries that recognize CE Mark. If we obtainthe necessary regulatory approvals and provided we obtain additional funding orcomplete a strategic transaction that provides adequate resources, we planinitially to launch our products in the European Union and later in the UnitedStates.

 

The regulatory approvalprocess in the United States for our products involves, among other things,successfully receiving authorization from the FDA to conduct clinical trialsunder an IDE, completing pre-clinical and clinical trials, and applying for andobtaining PMA from the FDA. The PMA process requires us to demonstrate thesafety and efficacy of our products to the FDA’s satisfaction. This process isexpensive and uncertain and requires detailed and comprehensive scientific andhuman clinical data. While the FDA review process generally takes one to threeyears after filing the PMA application, our PMA application review could takemuch longer and may never result in the FDA granting PMA. The FDA could delay,limit or deny approval of our PMA application for many reasons, including:

 

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

 

· the data from our pre-clinical studiesand clinical trials may be insufficient to support approval;

 

· the manufacturing process or facilitieswe or our suppliers use may not meet stringent regulatory requirements;

 

· the information provided by the supplierof the drug coating in the MAF it submits to the FDA on our behalf may beinadequate; and

 

· changes in FDA approval policies oradoption of new regulations may require us to provide additional data.

 

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We will also have toobtain similar, and in some cases more stringent, foreign regulatory approvalin order to commercialize our products outside of the United States. Even ifapproved, our Custom NX DES Systems may not be approved for the indicationsthat are necessary or desirable for successful commercialization. We may notobtain the necessary regulatory approvals to market our products in the****United States or in foreign markets other than the EuropeanUnion and certain other countries that recognize CE Mark. Any delay in, orfailure to receive or maintain approval for our products could prevent us fromgenerating revenue or achieving profitability.

 

**Preliminarythird-party data has raised concerns that drug eluting stents may cause anincrease in late-stent thrombosis. In response to these concerns, regulatory authoritiesin the United States and Europe have issued statements and developed enhancedguidelines for the approval of drug eluting stents.  As a result of these enhanced guidelines wemay experience further delays in obtaining regulatory clearances for ourproducts and, even if approved, the preliminary third-party data concerninglate-stent thrombosis may significantly impair market acceptance of ourproducts.**

 

On September 14,2006, the FDA issued a *Statement on CoronaryDrug-Eluting Stents*, which discusses 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 new position todate regarding the safety of drug eluting stents. Although more recent studieshave suggested that the safety of drug eluting stents is comparable to that ofbare metal stents, the FDA and the European regulatory agencies have issued newguidelines for the approval of drug eluting stents which require additionalclinical data and may prolong the process for obtaining regulatory approval.

 

In March 2007, the EuropeanMedicines Agency proposed new guidelines for the approval of drug elutingstents. These new guidelines, which are more rigorous than the previousstandards, were finalized in May 2008 and became effective in December 2008.

 

In March 2008, theFDA published draft guidance regarding non-clinical and clinical studies fordrug eluting stents.  The draft guidance includes recommendationsregarding the following areas:

 

· Engineering testing,

 

· Biocompatibility testing,

 

· Animal studies,

 

· Chemistry and manufacturing controls,

 

· Clinical pharmacology and drug release,

 

· Drug pharmacology, toxicology and safetydata,

 

· Clinical studies, and

 

· Post approval studies.

 

In April 2008, theFDA also conducted a public workshop on the draft guidance documents andprovided clarification on the above matters. Although the draft guidelines arecurrently considered non-binding recommendations, they have been published forpublic comment and it is expected that the FDA will conduct any applicationreview for new drug eluting stent catheter systems following the generalprinciples highlighted in the guidance.

 

Complying with the newand more rigorous standards in the United States and Europe may require us toobtain additional data or conduct further studies.  This may delay regulatory approval of ourproducts.  In addition, if in the future,new studies raise questions concerning the safety of drug eluting stents, theDES market in general may shrink and market acceptance of our products may besignificantly impaired.

 

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**IfBiosensors fails to supply us with sufficient quantities of our drug coating,development and commercialization of our Custom NX DES Systems may be preventedor delayed as a result.**

 

We obtain our entiresupply of the drug coating, PLA and BA9 for our stents from Biosensors and weare unaware of any alternative source for this drug coating. Under the amendedand restated license agreement which we entered into with Biosensors in December 2007,we have the right to purchase the components of the drug coating, which are thedrug and the PLA, from Biosensors in order to perform the coating formulationourselves. 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 commercial use outside the United States. We donot have the right to use alternate suppliers for this drug coating that weobtain from Biosensors, or the components of the drug coating which we plan topurchase from them in the future. In addition, there is no other source for thedrug coating or components and we are contractually restricted from obtainingBiolimus A9 from any other source and we have not in-licensed an alternativedrug for use in the event we are unable to obtain a sufficient supply of BiolimusA9. Currently, Biosensors relies on a sole-source, Nippon Kayaku, a third-partyJapanese pharmaceutical company, to manufacture and supply them withBiolimus A9, which Biosensors mixes with the PLA. We have no relationshipwith, control over, or contact with this pharmaceutical company and cannotcontract directly with it to obtain Biolimus A9 if we are unable to obtainBiolimus A9 from Biosensors. In addition, the pharmaceutical company is subjectto significant legal and regulatory requirements with regard to the productionof Biolimus A9, including onerous current Good Manufacturing Practicesregulations, or GMP, which are strictly enforced by the FDA, and the Ministryof Health, Labor, and Welfare in Japan and any failure on the part of the pharmaceuticalcompany to comply with these requirements may interrupt Biosensors’ supply ofBiolimus A9 and ultimately, our supply of the drug coating. Biosensors has alsoentered into, and may continue to enter into, agreements to supply the drugcoating to other licensees. Our clinical trials and the development andcommercialization of our Custom NX DES Systems could be prevented or delayedif:

 

· the supplier of our drug coating isunable or refuses to meet our demand;

 

· our license agreement with Biosensorsterminates for any reason, including insolvency; or

 

· the supplier of our drug coating doesnot meet regulatory quality requirements and other specifications, certainregulatory approvals need to be obtained.

 

To date, our drug coatingrequirements have been limited to small quantities that we need to conduct ourdevelopment and pre-clinical and clinical trials. If we obtain market approval forour products, and we are able to launch our product commercially, we wouldrequire substantially larger quantities of the drug coating or the componentsof the drug coating. Biosensors may not provide us with sufficient quantitiesof the drug coating or components and such supply may not meet our qualityrequirements or other specifications. For example, we have, in the past,experienced interruptions in the supply of adequate quantities of acceptabledrug coating.  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 toobtain and there can be no assurance that we will obtain such regulatoryapproval. The inability to obtain sufficient quantities of the drug coating orcomponents, or any delay in obtaining such supply could delay our clinicaltrials or affect the commercialization of our Custom NX DES Systems, whichcould have a significant adverse affect on our future operations.

 

**We relyon third parties to test the drug coating for our stents, and these thirdparties may use test methods that others may claim as their own. If we mustobtain a license to use these methods or develop new testing methods, we mayexperience delays in our ability to initiate clinical trials or to obtainregulatory approvals for our products as a result.**

 

Certain tests related tothe drug coating on our stents must be performed before the stents can be usedin clinical trials or approved for commercial sale. We have agreed withBiosensors that we will be responsible for performing some of these tests. Wehave not developed the technology or methods to perform all this testingin-house, and plan to rely on third parties to conduct some of the testing. Wehave identified certain third parties who we believe have the capability toconduct this testing using methods that do not violate the proprietary rightsof others. We can provide no assurance, however, that these testing methodswill not violate such rights. If others assert rights to these testing methods,we may need to obtain a license giving us the right to use the testing methodsor identify or develop other methods for performing the required testing. Wecannot assure you that a license will be available to us or that it will beavailable on terms that are agreeable to us. If we are unable to obtain alicense, we cannot assure you that we will be able to identify or developalternate testing methods that meet our needs without delaying our regulatorysubmissions or approvals. This may result in a delay in the release of, or aninability to release, our stents for use in U.S. clinical trials or commercialproducts and our ability to generate revenue would be adversely affected as aresult.

 

**We donot have long-term data regarding the safety and efficacy of our Custom NX DESSystems. Any long-term data that is generated may not be consistent with ourlimited short-term data, which could affect the regulatory approval of ourproducts or the rate at which our products are adopted.**

 

An important factor inour clinical trials, upon which the safety and efficacy of our Custom NX DESSystems may be measured, is the rate of restenosis, or the renarrowing of thetreated artery over time, and the rate of reintervention, or retreatmentfollowing the procedures using the Custom NX DES Systems. We believe thatphysicians and regulators will compare the rates of long-term restenosis andreintervention for our Custom NX DES Systems against other drug eluting or baremetal stent procedures and other alternative procedures.

 

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If, in our large-scalecomparative pivotal clinical trial, we fail to demonstrate restenosis andreintervention rates, as well as other clinical trial end-points andperformance, comparable to other drug eluting and bare metal stents that havebeen approved by the FDA, our ability to successfully market our Custom NX DES Systemsmay be significantly limited. If the long-term rates of restenosis andreintervention do not meet regulators’ or physicians’ expectations, our CustomNX DES Systems may not receive regulatory approval or, if approved, may notbecome widely adopted and physicians may recommend that patients receivealternative drug eluting stents, such as the Cypher ® stent, the Taxus ® Express2TM stent, the Taxus Liberte stent, the Endeavor ® stent, theXienceTM Vstent and the PromusTM stent, the six 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 information on the risks,timing and incidence rates of late-stent thrombosis. In March 2008, theFDA published draft guidance regarding non-clinical and clinical studies fordrug eluting stents See “Preliminary third-party data has raised concerns thatdrug eluting stents may cause an increase in late-stent thrombosis.” We cannotassure you that our long-term data, once obtained, will be different than thatsuggested in the recent studies regarding late-stent thrombosis.

 

Additionally, otherefficacy factors may influence a physician’s decision over what stents todeploy. Our Custom NX DES Systems’ stent segments may separate excessively atthe time of deployment in the artery or over time. Any such separation may leadto restenosis occurring between the segments or other adverse events. If theresults obtained from our clinical trials indicate that our products are not assafe or effective as other treatment options or as current short-term datawould suggest, our products may not be approved, adoption of our products maysuffer and our business would be harmed.

 

**If ourpre-clinical studies or clinical trials do not meet safety or efficacyendpoints, or if we experience significant delays in completing these studiesor trials, our ability to commercialize our Custom NX DES Systems or otherproducts and our financial position will be impaired.**

 

Before marketing andselling our Custom NX DES Systems or any other products, we must successfullycomplete pre-clinical studies and clinical trials that demonstrate that ourproducts are safe and effective. We currently have a very limited amount ofclinical data regarding the safety and efficacy of our Custom NX DES Systems,and no published data beyond three years. The results from our limitedshort-term clinical experience for our Custom NX DES Systems do not necessarilypredict long-term clinical benefit and may not be replicated in subsequentclinical trials. Furthermore, all of our existing data has been produced instudies that involve relatively small patient groups, and the data may not bereproduced in wider patient populations. We need to conduct additionallarge-scale clinical trials to determine whether our products are safe andeffective and to support our applications for regulatory approval in the UnitedStates. We expect that one or more of these additional clinical studies will bea comparative study comparing the safety and efficacy of our stents to the XienceV stent, the Promus stent, the Cypher stent, the Taxus Express2 stent, theTaxus Liberte stent or the Endeavor ® stent, the six drug eluting stents marketed inthe United States, or to other stents that may become approved for marketing inthe United States, and that these studies will involve large patientpopulations of approximately 2,100 patients implanted with our device.

 

The commencement orcompletion of any of our clinical trials may be delayed or halted for numerousreasons, including, but not limited to, the following:

 

· insufficient personnel and financialresources to conduct and fund our clinical trials;

 

· in connection with our PMA application,Biosensors fails to respond in a timely manner, if at all, to questions thatthe FDA may have concerning a MAF Biosensors submits to the FDA on our behalf;

 

· the FDA or other regulatory authoritiesdo not approve our clinical trial protocols or our clinical trials, or suspendor place a clinical trial on hold;

 

· patients do not enroll in clinical trialsat the rate we expect;

 

· third-party clinical investigators donot conduct follow-up visits with patients or patients drop out of the clinicaltrial at rates we do not expect;

 

· patients experience adverse events,which may or may not be related to our products;

 

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· patients die during a clinical trial fora variety of reasons, including the advanced stage of their disease and medicalproblems, which may or may not be related to our products;

 

· third-party clinical investigators donot perform our clinical trials on our anticipated schedule or consistent withthe clinical trial protocol, good clinical practices or other regulatoryrequirements, or other third-party organizations do not perform data collectionand analysis in a timely or accurate manner;

 

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

 

· changes in governmental regulations oradministrative actions;

 

· the interim results of our clinicaltrials are inconclusive or negative; or

 

· our clinical trial designs, althoughapproved, are inadequate to demonstrate safety and/or efficacy.

 

IDE approval from the FDA is required before we cancommence our planned pivotal clinical trials in the United States for ourCustom NX DES Systems.   In May 2009,we received a conditional IDE approval from the FDA which requires the Company to address certain technicalissues about which the FDA has questions before a full IDE approval will begranted. Even if we were to address all of the FDA’s questions, we currently do not have adequateresources to initiate our CUSTOM IV or CUSTOM IV Angio clinical trials unlesswe obtain additional funding or complete a strategic transaction that providesadequate resources. We cannot guarantee that such a financing or strategictransaction will be available on terms agreeable to us, or at all.

 

Product development,including pre-clinical studies and clinical testing, is a long, expensive anduncertain process and is subject to delays. It may take us several years tocomplete our testing, if we complete it at all, and a clinical trial may failat any stage. Furthermore, data obtained from any clinical trial may beinadequate to support a PMA application or any foreign regulatory applications.Additionally, pre-clinical and clinical data can also be interpreted indifferent ways, which could delay, limit or prevent regulatory approval for ourproducts.

 

**Clinicaltrials necessary to support a PMA application will be expensive and willrequire the enrollment of large numbers of patients, and suitable patients maybe difficult to identify and recruit.**

 

Clinical trials necessaryto support a PMA application for our Custom NX DES Systems will be expensiveand will require the enrollment of large numbers of patients, and suitablepatients may be difficult to identify and recruit. The clinical trialssupporting the PMA applications for the Cypher stent, the Taxus Express2 stentand the Endeavor stent, which are approved by the FDA and currently marketed,involved patient populations of approximately 1,000, 1,300 and 1,100respectively. We expect that we will need to provide the FDA with data onapproximately 2,100 patients implanted with our device, with 12-month follow-upto support our PMA application. The FDA may require us to submit data on agreater number of patients or a longer follow-up period. For example, at an FDAworkshop held in April 2008, the FDA recommended 18 month follow-up on atleast 50% of patients. Patient enrollment in clinical trials and completion ofpatient follow-up depend on many factors, including the size of the patientpopulation, the nature of the trial protocol, the proximity of patients toclinical sites and the eligibility criteria for the clinical trial and patientcompliance. For example, patients may be discouraged from enrolling in ourclinical 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.

 

**Physiciansmay not widely adopt our Custom NX DES Systems unless they determine, based onexperience, long-term clinical data and published peer reviewed journalarticles, that the use of our Custom NX DES System provides a safe andeffective alternative to other existing treatments for coronary artery disease,and meets other physician expectations.**

 

Physicians tend to beslow to change their medical treatment practices because of perceived liabilityrisks arising from the use of new products and the uncertainty of third-partycoverages and reimbursement. We believe that physicians will not widely adoptour Custom 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 Systems provides a safe and effective alternative to otherexisting treatments for coronary artery disease, including coronary arterybypass grafting, or CABG, balloon angioplasty, bare metal stents and other drugeluting stents, such as Johnson & Johnson’s Cypher stent and Boston Scientific’sTaxus Express2 stent. In particular, the use of bare metal stents hasreportedly increased, and the use of drug eluting stents has reportedlydecreased, at certain hospitals in the United States and elsewhere as a resultof recent clinical data indicating a higher incidence rate of late stentthrombosis. We cannot predict the effect that this or other data questioningthe safety of drug eluting stents will have on the drug eluting stent market.

 

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We cannot provide anyassurance that the data collected from our current and planned clinical trialswill be sufficient to demonstrate that our Custom NX DES Systems are anattractive alternative to other drug eluting stent procedures. If we fail todemonstrate safety and efficacy that is at least comparable to other drugeluting or bare metal stents that have received regulatory approval and thatare available on the market, our ability to successfully market our Custom NXDES Systems will be significantly limited. Even if the data collected fromclinical studies or clinical experience indicate positive results, eachphysician’s actual experience with our Custom NX DES Systems will vary.Clinical trials conducted with our Custom NX DES Systems have involvedprocedures performed by physicians who are technically proficient and arehigh-volume users of drug eluting stents. Consequently, both short- andlong-term results reported in these clinical trials may be significantly morefavorable than typical results of practicing physicians, which could negativelyimpact rates of adoption of our products. In addition to safety and efficacy,we believe that product characteristics such as ease of use and consistency ofperformance are also important. If we are not able to meet physicianexpectations with respect to these characteristics, market acceptance andadoption of our products may be impacted. We also believe that publishedpeer-reviewed journal articles and recommendations and support by influentialphysicians regarding our Custom NX DES Systems will be important for marketacceptance and adoption, and we cannot assure you that we will receive theserecommendations and support, or that supportive articles will be published.

 

**Problemswith the stent to be used in the control group during our U.S. pivotal clinicaltrial could adversely affect its outcome.**

 

We expect our pivotalclinical trial in the United States to compare the performance, includingsafety and efficacy, of our products against that of a currently marketed drugeluting stent, or a drug eluting stent that becomes approved for marketing inthe near future. Our planned pivotal clinical trial could be significantlydelayed or harmed if the stent we use for the control group experiencesproblems. We may use one of the six currently marketed drug eluting stents, theXience V stent, the Promus stent, the Cypher stent, the Taxus Express2 stent,the Taxus Liberte stent or the Endeavor stent, or a drug eluting stent thatbecomes approved for marketing in the near future, as the control stent in ourplanned pivotal clinical trial. In July 2004, Boston Scientific announcedthe recall of approximately 85,000 Taxus stent systems and approximately 11,000Express2 stent systems due to characteristics in the delivery catheters thathad the potential to impede balloon deflation during a balloon angioplastyprocedure. In August 2004, Boston Scientific announced that it wouldrecall an additional 3,000 Taxus stents. If prior to or during the enrollmentand treatment period for our planned pivotal clinical trial, there is a recallof the control stent or the control stent is removed from the market, our trialwould likely be substantially delayed. The FDA could also require us toredesign the clinical trial based on an alternative control stent. Anysignificant delay or redesign could impair our ability to commercialize ourCustom NX DES Systems.

 

**Ourproducts are based on a new technology, and we have only limited experience inregulatory affairs, which may affect our ability or the time required to obtainnecessary regulatory approvals, if at all.**

 

Drug eluting stents wereintroduced in the United States in 2003. To date, the FDA has approved only theTaxus Express2, the Taxus Liberte, the Cypher, 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.Treatments may exhibit a favorable measure using one metric and an unfavorablemeasure using another metric. Any change in the accepted metrics may result inreconfiguration of, and delays in, our clinical trials. Furthermore, the resultof recent studies suggesting a correlation between drug eluting stents andincidents of late-stent thrombosis may further delay and complicate theregulatory pathway for our products. Additionally, we have limited experiencein filing and prosecuting the applications necessary to gain regulatoryapprovals, and we have limited personnel and resources to dedicate to thefiling and prosecution of these applications. As a result, we may experience along regulatory process in connection with obtaining regulatory approvals forour products.

 

**If thethird parties on which we rely to conduct our clinical trials and to assist uswith pre-clinical development do not perform as contractually required orexpected, we may not be able to obtain regulatory approval for or commercializeour products.**

 

We do not have theability to independently conduct clinical trials for our products, and we mustrely on third parties, such as contract research organizations, medicalinstitutions, clinical investigators and contract laboratories to conduct ourclinical trials. In addition, we rely on third parties to assist with the pre-clinicaldevelopment of our products. If these third parties do not successfully carryout their contractual duties or regulatory obligations or meet expecteddeadlines, if these third parties need to be replaced, or if the quality oraccuracy of the data they obtain is compromised due to the failure to adhere toour clinical protocols or regulatory requirements or for other reasons, ourpre-clinical development activities or clinical trials may be extended,delayed, suspended or terminated, and we may not be able to obtain regulatoryapproval for or successfully commercialize our products on a timely basis, ifat all. Furthermore, our third-party clinical trial investigators may bedelayed in conducting our clinical trials for reasons outside of their control.

 

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**Even ifour products are approved by regulatory authorities, if we or our suppliersfail to comply with ongoing regulatory requirements, or if we experience unanticipatedproblems with our products, these products could be subject to restrictions orwithdrawal from the market.**

 

Any product for which weobtain marketing approval, along with the manufacturing processes,post-approval clinical data and promotional activities for such product, willbe subject to continual review and periodic inspections by the FDA and otherregulatory bodies. In particular we and our suppliers are required to complywith the Quality System Regulation, or QSR, for the manufacture of our CustomNX DES Systems and GMP for the manufacture of our drug coating and otherregulations, which cover the methods and documentation of the design, testing,production, control, quality assurance, labeling, packaging, storage andshipping of any product for which we obtain marketing approval. The FDAenforces the GMP and QSR through unannounced inspections. We and ourthird-party manufacturers and suppliers have not yet been inspected by the FDAand will have to successfully complete such inspections before we receiveregulatory approvals for our products. Failure by us or one of our suppliers,including the supplier of our drug coating, to comply with statutes andregulations administered by the FDA and other regulatory bodies, or failure totake adequate response to any observations, could result in, among otherthings, any of the following enforcement actions:

 

· warning letters or untitled letters;

 

· fines and civil penalties;

 

· unanticipated expenditures;

 

· delays in approving, or refusal toapprove, our products;

 

· withdrawal or suspension of approval bythe FDA or other regulatory bodies;

 

· product recall or seizure;

 

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

 

· interruption of production;

 

· operating restrictions;

 

· injunctions; and

 

· criminal prosecution.

 

If any of these actionswere to occur it would harm our reputation and cause our product sales andprofitability to suffer. Furthermore, our key component suppliers may notcurrently be or may not continue to be in compliance with applicable regulatoryrequirements.

 

Even if regulatoryapproval of a product is granted, the approval may be subject to limitations onthe indicated uses for which the product may be marketed. If the FDA determinesthat our promotional materials, training or other activities constitutepromotion of an unapproved use, it could request that we cease or modify ourtraining or promotional materials or subject us to regulatory enforcementactions. It is also possible that other federal, state or foreign enforcementauthorities might take action if they consider our training or otherpromotional materials to constitute promotion of an unapproved use, which couldresult in significant fines or penalties under other statutory authorities, suchas laws prohibiting false claims for reimbursement.

 

Moreover, anymodification to a device that has received FDA approval that couldsignificantly affect its safety or effectiveness, or that would constitute amajor change in its intended use, design or manufacture, requires a newapproval from the FDA. If the FDA disagrees with any determination by us thatnew approval is not required, we may be required to cease marketing or torecall the modified product until we obtain approval. In addition, we couldalso be subject to significant regulatory fines or penalties.

 

In addition, we may berequired to conduct costly post-market testing and surveillance to monitor thesafety or efficacy of our products, and we will be required to report adverseevents and malfunctions related to our products. Later discovery of previouslyunknown problems with our products, including unanticipated adverse events oradverse events of unanticipated severity or frequency, manufacturing problems,or failure to comply with regulatory requirements such as QSR or GMP, mayresult in restrictions on such products or manufacturing processes, withdrawalof the products from the market, voluntary or mandatory recalls, fines,suspension of regulatory approvals, product seizures, injunctions or theimposition of civil or criminal penalties. For example, Boston Scientific hasinitiated significant recalls of its stent products due to manufacturing andother quality issues associated with the products.

 

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Further, healthcare lawsand regulations may change significantly in the future. Any new healthcare lawsor regulations may adversely affect our business. A review of our business bycourts or regulatory authorities may result in a determination that couldadversely affect our operations. Also, the healthcare regulatory environmentmay change in a way that restricts our operations.

 

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

 

Subject to theavailability of sufficient resources, we intend to market our products ininternational markets. Although we have received CE Mark authorizing us tomarket our Custom NX DES Systems in the European Union and certain othercountries that recognize CE Mark, in order to market our products in many otherforeign jurisdictions, we must obtain separate regulatory approvals, and mayneed to conduct additional clinical trials. The approval procedure varies amongcountries and can involve additional testing, and the time required to obtainapproval may differ from that required to obtain FDA approval. The foreignregulatory approval process may include all of the risks associated withobtaining FDA approval in addition to other risks. We may not obtain foreignregulatory approvals on a timely basis, if at all. Approval by the FDA does notensure approval by regulatory authorities in other countries, and approval byone foreign regulatory authority does not ensure approval by regulatoryauthorities in other foreign countries or by the FDA. We may not be able tofile for regulatory approvals and may not receive necessary approvals tocommercialize our products in any markets other than the European Union.

 

**Risks Related to Our IntellectualProperty**

 

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

 

Intellectual propertyrights, including in particular patent rights, play a critical role in themedical device industry, and therefore in our business. We face significantrisks relating to patents, both as to our own patent position as well as topatents held by third parties. If any third-party intellectual property claimagainst us is successful, we could be prevented from commercializing our CustomNX DES Systems or other products.

 

There are numerous U.S.and foreign issued patents and pending patent applications owned by thirdparties with patent claims in areas that are the focus of our productdevelopment efforts. We are aware of patents owned by third parties, to whichwe do not have licenses, that relate to, among other things:

 

· use of rapamycin or its analogs to treatrestenosis;

 

· stent structures and materials;

 

· catheters used to deliver stents; and

 

· stent manufacturing and coatingprocesses.

 

Cordis, a subsidiary ofJohnson & Johnson, is the owner of a number of patents and patentapplications directed to the use and delivery of rapamycin or its analogs mixedin a polymer coating on a drug eluting stent for the treatment of restenosis.These include, without limitation, the “Wright” family of patents and the “Falotico”family of patents.  Wyeth owns, and has licensed to Cordis, the “Morris”family of patents which are directed to the use of rapamycin for the treatmentof restenosis, including the delivery of rapamycin from a stent impregnatedwith the 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 bythird parties are directed to stent structures and materials. These patentsinclude a group of “Lau” patents that were owned by Guidant Corporation, asubsidiary of Boston Scientific whose stent technology has been acquired byAbbott Vascular subject to certain rights retained by Boston Scientific, whichare directed to flexible stent structures. The “Boneau” family of patents,owned by Medtronic, are directed to stents comprising multiple closed-loopelements. The “Fariabi” family of patents, formerly owned by Guidant, aredirected to stents 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.

 

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Other third-party patentsare directed to stent delivery catheter technology. There are also a number ofpatents that were held by Guidant Corporation directed to rapid exchangecatheters for angioplasty and stent delivery. These include, without limitation,the “Yock” and “Horzewski” families of patents, directed to rapid exchangeangioplasty catheters, and the “Lau” family of patents directed to rapidexchange stent catheters. Boston Scientific owns other patents directed torapid exchange angioplasty catheters, including, the “Bonzel” family ofpatents. Medtronic owns certain patents directed to guidewire handlingtechnology in stent delivery catheters, including certain patents issued toCrittenden and Kramer. A patent issued to Fischell is directed to a sheathedstent delivery catheter. Guidant Corporation also held a patent issued to Cox,directed to a stent delivery catheter having an adjustable-length balloon.Certain patents owned by Boston Scientific or its subsidiaries are alsodirected to stent delivery catheters having adjustable-length balloons. Certainpatents owned by third parties relate to methods for coating stents. Forexample, the “Hossainy” family of patents that were held by Guidant Corporationare directed to methods of coating stents with a primer layer and a reservoirlayer.

 

While one of the Yock patents directed torapid exchange angioplasty catheters was due to expire in October 2008,Abbott has filed an application for patent extension under theHatch-Waxman Act and was recently granted an interim extension of the patentterm for a period of one year by the US Patent and Trademark Office. BeforeOctober, 2009, the US Patent and Trademark Office will determine the totallength of the extension to which Abbott may be entitled under the Hatch-WaxmanAct. This could result in an extension of the term of this patent even beyond October 2009.

 

The patents describedabove could be found to cover our technology and may materially and adverselyaffect our business. In addition, these patents are given only as examples andthere may be other patents in addition to those described above that maymaterially and adversely affect our business. Moreover, because patentapplications can take many years to issue and remain confidential for the first18 months after filing, there may be currently pending applications, unknown tous, which may later result in issued patents that pose a material risk to us.

 

**Many ofour competitors are much larger than we are, with significant resources andincentives to initiate litigation 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 havemaintained their position in the market by, among other things, establishingintellectual property rights relating to their products and enforcing theserights aggressively against their competitors and new entrants into the market.All of the major companies in the stent and related markets, including AbbottVascular (which acquired Guidant’s stent technology), Boston Scientific,Johnson & Johnson and Medtronic, have been repeatedly involved inpatent litigation relating to stents since at least 1997.  For example, inthe past year Boston Scientific, Medtronic, and Abbott Vascular have each beensued by Johnson & Johnson and/or Wyeth for infringement of the Morris,Wright, and/or Falotico patents. The stent and related markets have experienced rapidtechnological change and obsolescence in the past, and our competitors havestrong 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.

 

**Anylawsuit, whether initiated by us to enforce our intellectual property rights orby a third party against us alleging infringement, may cause us to expendsignificant financial and other resources, and may divert our attention fromour business.**

 

In any infringementlawsuit, a third party could seek to enjoin, or prevent, us from commercializingour Custom NX DES Systems or any future products, may seek damages from us andany such lawsuit would likely be expensive for us to defend against. Ourinvolvement in intellectual property litigation could result in significantexpense. Some of our competitors, such as Boston Scientific, Johnson &Johnson, Abbott Vascular and Medtronic, have considerable resources availableto them and a strong economic incentive to undertake substantial efforts tostop or delay us from bringing our Custom NX DES Systems to market andachieving market acceptance. We, on the other hand, are a development stagecompany with comparatively few resources available to us to engage in costlyand protracted litigation. A court may determine that patents held by third partiesare valid and infringed by us and we may be required to:

 

· pay damages, including up to trebledamages and the other party’s attorneys’ fees, which may be substantial;

 

· cease the development, manufacture, useand sale of products that infringe the patent rights of others, including ourCustom NX DES Systems, through a court-imposed sanction called an injunction;

 

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· expend significant resources to redesignour technology so that it does not infringe others’ patent rights, or todevelop or acquire non-infringing intellectual property, which may not bepossible;

 

· discontinue manufacturing or otherprocesses incorporating infringing technology; or

 

· obtain licenses to the infringedintellectual property, which may not be available to us on acceptable terms, orat all.

 

Any development oracquisition of non-infringing products or technology or licenses could requirethe expenditure of substantial time and other resources and could have amaterial adverse effect on our business and financial results. If we arerequired to, but cannot, obtain a license to valid patent rights held by athird party, we would likely be prevented from commercializing the relevantproduct. We believe that it is unlikely that we would be able to obtain alicense to any necessary patent rights controlled by companies against which wewould compete directly. If we need to redesign products to avoid third-partypatents, we may suffer significant regulatory delays associated with conductingadditional studies or submitting technical, manufacturing or other informationrelated to the redesigned product and, ultimately, in obtaining regulatoryapproval.

 

While our products are inclinical trials, and prior to commercialization, we believe our activities inthe United States related to the submission of data to the FDA could fallwithin the scope of the statutory infringement exemption that covers activitiesrelated to developing information for submission to the FDA. However, thisstatutory exemption would not cover our stent manufacturing or other activitiesin the United States that support overseas clinical trials or commercial salesif those activities are not also reasonably related to developing informationfor submission to the FDA. Currently available drug eluting stents aremanufactured outside of the United States, which may insulate manufacturersfrom adverse rulings on U.S. patent infringement claims. In an adverse ruling,a court may order an injunction requiring a company to stop its U.S. domesticmanufacturing operations. We currently do not have any plans to manufacture ourstents outside of the United States and any finding of patent infringementagainst us in the United States could result in our being enjoined frommanufacturing our products in the United States and could affect our ability tosell our products in the European Union. In any event, the fact that no thirdparty has asserted a patent infringement claim against us to date should not betaken as an indication, or provide any level of comfort, that a patentinfringement claim will not be asserted against us prior to or uponcommercialization.

 

In addition, some of ouragreements, including our agreement with Biosensors for the supply of the drugcoating and our agreement with SurModics for the supply of the lubriciouscoating on our catheter require us to indemnify the other party in certaincircumstances where our products have been found to infringe a patent or otherproprietary rights of others. An indemnification claim against us may requireus to pay substantial sums to our licensor or supplier, including its attorneys’fees.

 

**If weare unable to obtain and maintain intellectual property protection covering ourproducts, others may be able to make, use or sell our products, which wouldadversely affect our revenue.**

 

Our ability to protectour products from unauthorized or infringing use by third parties dependssubstantially on our ability to obtain and maintain valid and enforceablepatents. As of June 30, 2009 we had seven issued U.S. patents, one ofwhich is under exclusive license, covering certain aspects of the technologythat we intend to commercialize and a number of other issued patents andpending patent applications in the United States and abroad. Due to evolvinglegal standards relating to the patentability, validity and enforceability ofpatents covering medical devices and pharmaceutical inventions and the scope ofclaims made under these patents, our ability to obtain and enforce patents isuncertain and involves complex legal and factual questions. Accordingly, rightsunder any of our issued patents may not provide us with commercially meaningfulprotection for our products or afford us a commercial advantage against ourcompetitors or their competitive products or processes. In addition, patentsmay not issue from any pending or future patent applications owned by orlicensed to us, and moreover, patents that have issued to us or may issue inthe future may not be valid or enforceable. Further, even if valid andenforceable, our patents may not be sufficiently broad to prevent others frommarketing products like ours, despite our patent rights.

 

The validity of ourpatent claims depends, in part, on whether prior art references exist thatdescribe or render obvious our inventions as of the filing date of our patentapplications. We may not have identified all prior art, such as U.S. andforeign patents or published applications or published scientific literature,that could adversely affect the validity of our issued patents or thepatentability of our pending patent applications. For example, patentapplications in the United States are maintained in confidence for up to18 months after their filing. In some cases, however, patent applicationsremain confidential in the United States Patent and Trademark Office, or USPTO,for the entire time prior to issuance as a U.S. patent. Patent applicationsfiled in countries outside the United States are not typically published untilat least 18 months from their first filing date. Similarly, publication ofdiscoveries in the scientific or patent literature often lags behind actualdiscoveries. Therefore, we cannot be certain that we were the first to invent,or the first to file patent applications relating to, our stent technologies.In the event that a third party has also filed a U.S. patent applicationcovering our stents or a similar invention, we may have to participate in anadversarial proceeding, known as an interference, declared by the USPTO todetermine priority of invention in the United States. It is possible that wemay be unsuccessful in the interference, resulting in a loss of some portion orall of our position in the United States. The laws of some foreignjurisdictions do not protect intellectual property rights to the same extent asin the United States, and many companies have encountered significantdifficulties in protecting and defending such rights in foreign jurisdictions.If we encounter such difficulties or we are otherwise precluded fromeffectively protecting our intellectual property rights in foreignjurisdictions, our business prospects could be substantially harmed.

 

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We may initiatelitigation to enforce our patent rights, which may prompt our adversaries insuch litigation to challenge the validity, scope or enforceability of ourpatents. If a court decides that our patents are not valid, not enforceable orof a limited scope, we will not have the right to stop others from using ourtechnology.

 

We also rely on tradesecret protection to protect our interests in proprietary know-how and forprocesses for which patents are difficult to obtain or enforce. We may not beable to protect our trade secrets adequately. In addition, we rely onnon-disclosure and confidentiality agreements with employees, consultants andother parties to protect, in part, trade secrets and other proprietarytechnology. These agreements may be breached and we may not have adequateremedies for any breach. Moreover, others may independently develop equivalentproprietary information, and third parties may otherwise gain access to ourtrade secrets and proprietary knowledge. Any disclosure of confidential datainto the public domain or to third parties could allow our competitors to learnour trade secrets and use the information in competition against us.

 

We are aware that anothermedical business that holds patents to certain stent designs has used the nameXTENT for limited purposes in the past. If it turns out that the other businesshas superior trademark rights in the name, and if the other business were tochallenge our use of the XTENT name, we would then need to convince a courtthat there is no likelihood of consumer confusion. If we were unsuccessful incourt, then we could be held liable for trademark infringement and we mightthen have to change our name as well as pay monetary damages. If we were forcedto change our name, we may suffer from a loss of brand recognition, we may berequired to retrieve product and interrupt supply, and may have to devotesubstantial resources advertising and marketing our products under a new brandname.

 

**RisksRelated to Commercialization**

 

**Themedical device industry is highly competitive and subject to rapidtechnological change. If our competitors are better able to develop and marketproducts that are safer, more effective, less costly or otherwise moreattractive than any products that we may develop, our commercial opportunitywill be reduced or eliminated.**

 

The medical deviceindustry is highly competitive and subject to rapid and profound technologicalchange. Our success depends, in part, upon our ability to maintain acompetitive position in the development of technologies and products for use inthe treatment of CAD.

 

We face competition fromestablished pharmaceutical and biotechnology companies, as well as fromacademic institutions, government agencies and private and public researchinstitutions in the United States and abroad. Most of the companies developingor marketing competing products are publicly traded or divisions of publicly-tradedcompanies, and these companies enjoy several competitive advantages, including:

 

· greater financial and human resourcesfor product development, sales and marketing, and patent litigation;

 

· significantly greater name recognition;

 

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

 

· additional lines of products, and theability to offer rebates or bundle products to offer higher discounts orincentives to gain a competitive advantage;

 

· established distribution networks; and

 

· greater experience in conductingresearch and development, manufacturing, clinical trials, obtaining regulatoryapproval for products and marketing approved products.

 

For example,Johnson & Johnson, Boston Scientific, Medtronic and AbbottLaboratories, four companies with far greater financial and marketing resourcesthan we possess, have each developed, and are actively marketing, drug elutingstents that have been approved by the FDA. We may be unable to demonstrate thatour Custom NX DES Systems offer any advantages over Johnson & Johnson’sCypher stent, Boston Scientific’s Taxus Express2, Taxus Liberte or Promusstents, Abbott Laboratories’ Xience V stent or Medtronic’s Endeavor stent.Smaller or early-stage companies may also prove to be significant competitors,particularly through collaborative arrangements with, or mergers with oracquisitions by, large and established companies or through the development ofnovel products and technologies.

 

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The industry in which weoperate has undergone, and is expected to continue to undergo, rapid andsignificant technological change, and we expect competition to intensify astechnical advances are made. Our competitors may develop and patent processesor products earlier than us, obtain regulatory approvals for competing productsmore rapidly than us, and develop more effective or less expensive products ortechnologies that render our technology or products obsolete ornon-competitive. For example, we are aware of companies that are developingvarious other less-invasive technologies for treating CAD, which could make ourstent platform obsolete. We also compete with our competitors in recruiting andretaining qualified scientific and management personnel, establishing clinicaltrial sites and patient registration for clinical trials, as well as inacquiring technologies and technology licenses complementary to our programs oradvantageous to our business. If our competitors are more successful than us inthese matters, our business may be harmed.

 

**If weare unable to establish sales and marketing capabilities or enter into andmaintain arrangements with third parties to sell and market our Custom NX DESSystems, our business may be harmed.**

 

We do not have a salesorganization and have no experience as a company in the sales, marketing anddistribution of stent systems or other medical devices. To be successful incommercializing our products we must either develop a sales and marketing infrastructureor enter into distribution arrangements with others to market and sell ourproducts. Subject to the availability of adequate resources, we plan to marketour product in Europe through independent distributors.  We have not hired any European sales peopleor entered into any third-party distribution agreements.

 

Subject to theavailability of adequate resources, after establishing our European saleschannels, if our Custom NX DES Systems are approved for commercial sale in theUnited States, we currently plan to establish our own direct U.S. sales force.If we develop our own marketing and sales capabilities, our sales force will becompeting with the experienced and well-funded marketing and sales operationsof our more established competitors. Developing a sales force is expensive andtime consuming and could delay or limit the success of any product launch. Wemay not 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, ourproduct 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 havelimited device manufacturing and drug coating capabilities and manufacturingpersonnel, and if our device manufacturing and drug coating facilities or oursuppliers are unable to provide an adequate supply of products, our growthcould be limited and our business could be harmed.**

 

We currently have limitedresources, facilities and experience to commercially manufacture the devicecomponent of our products and apply the drug coating to the stents. Inaddition, pursuant to the terms of the restated license agreement withBiosensors, we plan to perform our own drug coating formulation.  Furthermore, we completed a reduction in ourheadcount from 122 to 3 employees as of June 30, 2009 .  None of the remaining employees will bemanufacturing personnel.  In order toproduce our Custom NX DES Systems in the quantities that we anticipate will berequired to meet anticipated market demand, we will need to increase, orscale-up, the production process by a significant factor over our current levelof production. There are technical challenges to scaling-up manufacturingcapacity and developing commercial-scale manufacturing facilities that willrequire the investment of substantial additional funds and hiring and retainingadditional management and technical personnel who have the necessarymanufacturing experience. We may not successfully complete any requiredscale-up in a timely manner or at all. If we are unable to do so, we may not beable to produce products in sufficient quantities to meet the requirements forthe launch of the product or to meet future demand, if at all. If we developand obtain regulatory approval for our products and are unable to manufacture asufficient supply of our products, our revenue, business and financialprospects would be adversely affected. In addition, if the scaled-up productionprocess is not efficient or produces stents that do not meet quality and otherstandards, our future gross margins may decline.

 

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We have in the past andmay again in the future assemble our Custom NX DES Systems and apply the drugcoating at our facilities in Menlo Park, California. Under the terms of ourlease agreement for these facilities, our landlord may terminate our lease atany time on or after May 1, 2010 by giving us 180 days’ notice, if it hasobtained certain redevelopment rights with respect to the leased premises.Prior to the commercial launch of our product, our leased premises will have tobe inspected and approved by the FDA, and will likely require additionalcertifications by the State of California Department of Health Services, orCDHS. Our facility and quality systems are also required to pass annual auditsfor purposes of International Standardisation Organization, or ISO, compliance.We were scheduled to be audited in the third quarter of 2009, but we cancelledthat audit because we do not believe that we have adequate personnel to passthe audit. We will not be able to commercialize our product until wesuccessfully pass the audit. If audits and inspections of our facilitiesdetermine that our facility does not meet applicable standards, or if there isa disruption to our existing manufacturing facility, or if our landlord electsto terminate our lease on or after May 1, 2010, we will have no othermeans of manufacturing our products until we are able to restore themanufacturing capability at our facility or lease alternative manufacturingfacilities and obtain regulatory approval for these facilities. Because ourMenlo Park facilities are located in a seismic zone, we face the risk that anearthquake may damage our facilities and disrupt our operations. If we are unableto produce 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 bedelayed.

 

**If thecost of our drug coating or other components of our stent systems increasesignificantly, our business and our 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 and wemay experience additional increases in the future. If we experience significantincreases in the cost of our drug coating or other key components of our stentsystems, our business and our results of operations may be harmed.

 

**Ourmanufacturing facilities and the manufacturing facilities of our suppliers mustcomply with strictly enforced regulatory requirements. If we fail to achieveregulatory approval for these manufacturing facilities, our business and ourresults of operations would be harmed.**

 

Completion of ourclinical trials and commercialization of our products require access to, or thedevelopment of, manufacturing facilities that comply with QSR and GMP. We mayestablish a manufacturing facility outside of the United States and can provideno assurance 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.

 

**Wedepend on single-source suppliers for some of the components in our Custom NXDES Systems. The loss of these suppliers could delay our clinical trials orprevent or delay commercialization of our Custom NX DES Systems.**

 

Although we haveidentified several vendors for the components of our products, some of ourcomponents are currently provided by only one vendor, or a single-sourcesupplier. In addition to our reliance on Biosensors as the only source for thesupply of our drug coating, we also depend on SurModics, which provides theslippery coating on our sheath. Our current agreement with SurModics, allowsSurModics to terminate the agreement since we did not commercialize our productby July 1, 2009. We do not have long-term contracts with some of ourthird-party suppliers of components used in the manufacture of our stentdelivery catheters or the cobalt chromium tubing and laser-precision cuttingprocess required to produce the stent segments included in our device. Inaddition, we do not have long-term contracts with our third-party suppliers ofsome of the equipment and components that are used in our manufacturing processand we do not carry a significant inventory of most components used in ourproducts. Establishing additional or replacement suppliers for thesecomponents, and obtaining any additional regulatory approvals that may resultfrom adding or replacing suppliers, will take a substantial amount of time. Wemay also have difficulty obtaining similar components from other suppliers thatare acceptable to the FDA or foreign regulatory authorities. Furthermore, sincesome of these suppliers are located outside of the United States, we aresubject to foreign export laws and U.S. import and customs regulations, whichcomplicate and could delay shipments to us. Some of our suppliers are also ourcompetitors and may be reluctant to supply components to us on favorable terms,if at all.

 

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If we have to switch toreplacement suppliers, we will face additional regulatory delays and themanufacture and delivery of our Custom NX DES Systems would be interrupted foran extended period of time, which would delay completion of our clinical trialsor commercialization of our products. In addition, we will be required toobtain prior regulatory approval from the FDA or foreign regulatory authoritiesto use different suppliers or components that may not be as safe or aseffective. As a result, regulatory approval of our products may not be receivedon a timely basis or at all.

 

**If we donot achieve our projected development goals in the time frames we announce andexpect, the commercialization of our products may be delayed and, as a result,our stock price may decline.**

 

From time to time, we mayestimate and publicly announce the anticipated timing of the accomplishment ofvarious clinical, regulatory and other product development goals, which wesometimes refer to as milestones. These milestones could include the initiationof our pivotal U.S. clinical trial for our Custom NX DES Systems, theenrollment of patients in our clinical trials, the release of data from ourclinical trials and other clinical and regulatory events. The actual timing ofthese milestones could vary dramatically compared to our estimates, in somecases for reasons beyond our control. We cannot assure you that we will meet ourprojected milestones and if we do not meet these milestones as publiclyannounced, the commercialization of our products may be delayed and, as aresult, our stock price may decline.

 

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

 

One element of ourstrategy is to discover, develop and commercialize a portfolio of new productsin addition to our Custom NX DES Systems. If we continue as an operatingbusiness, as our resources permit, we would plan to conduct such activitiesthrough our internal research programs and intend to explore strategiccollaborations for the development of new products utilizing our stenttechnology. Research programs to identify new disease targets, products and deliverytechniques require substantial technical, financial and human resources,whether or not any products are ultimately identified. We may determine thatone or more of our pre-clinical programs do not have sufficient potential towarrant the allocation of resources. 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 besuccessful in identifying potential products;

 

· competitors may develop alternativesthat render our products obsolete;

 

· our products may not be deployed safelyor effectively;

 

· products may on further study be shownto have harmful side effects or other characteristics that indicate they areunlikely to be effective;

 

· our clinical trials may not besuccessful; and

 

· we may not receive regulatory approval.

 

**Wedepend on our President and Chief Executive Officer, and if we are not able toretain him or recruit additional qualified personnel, our business will suffer.**

 

We are dependent on ourPresident and Chief Executive Officer, Gregory D. Casciaro. Due to thespecialized knowledge Mr. Casciaro possesses with respect tointerventional cardiology and our business activities, the loss of his servicecould delay or prevent the successful completion of a fundraising event, astrategic transaction, or provided that we can continue with our ongoingoperations, our clinical trials and the commercialization of our Custom NX DESSystems. Mr. Casciaro may terminate his employment without notice andwithout cause or good reason. We carry key person life insurance on Mr. Casciaro.  In connection with ourreduction in force and our plans to explore strategic alternatives, we enteredinto retention and severance agreements with the three remaining employees,including Mr. Casciaro.  Pursuant tothese agreements, we have agreed to make retention payments to each of theseemployees, provided their employment is not terminated for cause prior to thedate upon which we complete a strategic transaction, or the employee’s expectedtermination date, whichever is earlier.

 

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**Risks Related to Our Industry**

 

**If wefail to obtain an adequate level of reimbursement for our products fromthird-party payors, there may be no commercially viable markets for ourproducts or the markets may be much smaller than expected.**

 

Our failure to receiveadequate reimbursement or pricing approvals in the United States orinternationally would negatively impact market acceptance of our products inthe markets in which those approvals are sought. The efficacy, safety,performance and cost-effectiveness of our products under development and of anycompeting products are some of the factors that will determine the availabilityof coverage and level of reimbursement. In the United States, a preliminarythreshold for coverage and payment of medical devices and drugs generallyincludes approvals or clearances from the FDA. In addition, there issignificant uncertainty concerning third-party coverage and reimbursement of newlyapproved medical products and drugs. Future legislation, regulation or coverageand reimbursement policies of third-party payors may adversely affect thedemand for our products currently under development and limit our ability toprofitably sell our products. Third-party payors continually attempt to containor reduce healthcare costs by challenging the prices charged for healthcareproducts and services, resulting in a downward pressure of reimbursement ratesgenerally. Under recent regulatory changes to the methodology for calculatingpayments for current inpatient procedures in certain hospitals, Medicarepayment rates for surgical and cardiac procedures have been decreased,including approximately 10% to 14% reductions for those procedures using drug elutingstents. The reductions are being transitioned over a three year period thatbegan in fiscal year 2007. In 2007, The Centers for Medicare and Medicaid Services, orCMS, which is responsible for administering the Medicare program, alsoimplemented revised reimbursement codes that better reflect the severity of thepatient’s condition in the hospital inpatient prospective payment system. If coverage and reimbursement for ourproducts is unavailable, insufficient or limited in scope or amount, or if pricingis set at unsatisfactory levels, market acceptance of our products would beimpaired 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 andin certain foreign jurisdictions, there have been a number of legislative andregulatory proposals to change the regulatory and healthcare systems in waysthat could impact our ability to sell our products profitably, if at all. Inthe United States in recent years, new legislation has been proposed at thefederal and state levels that would effect major changes in the healthcaresystem. In addition, new regulations and interpretations of existing healthcarestatutes and regulations are frequently adopted. Post-payment reviews of claimsalso are conducted. For example, in 2005 the Office of Inspector General of theU.S. Department of Health and Human Services, or OIG, audited certain sampleclaims paid by Medicare contracts for in-patient and out-patient claimsinvolving arterial stent implantation to determine whether Medicare paymentsfor these services were appropriate. The OIG found that 20 of 72 reviewedclaims did not meet Medicare reimbursement requirements. Findings of ongoing orwidespread inappropriate billing of arterial stents could lead to increasedscrutiny in this area, which in turn, could affect our ability to raisecapital, obtain additional collaborators and market our products. We alsoexpect to experience pricing pressures in connection with the future sale ofour products due to the trend toward managed health care, the increasinginfluence of health maintenance organizations and additional legislativeproposals. Our results of operations could be adversely affected by these andother future healthcare reforms.

 

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

 

Our business exposes usto the risk of product liability claims that is inherent in the testing,manufacturing and marketing of medical devices. We may be subject to productliability claims if our stents cause, or merely appear to have caused, aninjury. Claims may be made by patients, consumers, healthcare providers,third-party strategic collaborators or others selling our products. Although wehave product liability and clinical trial liability insurance that we believeis appropriate, this insurance is subject to deductibles and coveragelimitations. Our current product liability insurance may not continue to beavailable to us on acceptable terms, if at all, and, if available, thecoverages may not be adequate to protect us against any future productliability claims. In addition, if any of our products are approved formarketing, we may seek additional insurance coverage. If we are unable toobtain insurance at acceptable cost or on acceptable terms with adequatecoverage or otherwise protect against potential product liability claims, wewill be exposed to significant liabilities, which may harm our business. Aproduct liability claim, recall or other claim with respect to uninsuredliabilities or for amounts in excess of insured liabilities could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

We may be subject toclaims against us even if the apparent injury is due to the actions of others.For example, we rely on the expertise of physicians, nurses and otherassociated medical personnel to perform the medical procedure and relatedprocesses to implant our coronary stents into patients. If these medicalpersonnel are not properly trained or are negligent, the therapeutic effect ofour stents may be diminished or the patient may suffer critical injury, whichmay subject us to liability. In addition, an injury that is caused by theactivities of our suppliers, such as those who provide us with cobalt chromiumtubing for our stents, those that laser cut our stents or the supplier of ourdrug coating, may be the basis for a claim against us.  Pursuant to some of the written agreementsthat we have entered into with medical institutions and physiciansparticipating in our clinical trials, we have agreed to indemnify thoseinstitutions and physicians from and against losses that result from thirdparty claims seeking compensation for certain injuries incurred by studysubjects.  We may have to indemnifymedical institutions and physicians in connection with future clinical trials.

 

These liabilities couldprevent or interfere with our product commercialization efforts. Defending asuit, regardless of merit, could be costly, could divert management’s attentionfrom our business and might result in adverse publicity, which could result inthe withdrawal of, or inability to recruit, clinical trial patient participantsor result in reduced acceptance of our products in the market.

 

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**RisksRelated to Our Operations**

 

**Ouroperations involve hazardous materials, and we must comply with environmentallaws and regulations, which can be expensive.**

 

We are subject to avariety of federal, state and local regulations relating to the use, handling,storage, disposal, and human exposure to hazardous and toxic materials. Wecould incur costs, fines, and civil and criminal sanctions, third-partyproperty damage or personal injury claims, or could be required to incursubstantial investigation or remediation costs, if we were to violate or becomeliable under environmental laws. We do not have insurance for environmentalliabilities and liability under environmental laws can be joint and several andwithout regard to comparative fault. Environmental laws could become morestringent over time, imposing greater compliance costs and increasing risks andpenalties associated with violations, which could harm our business. Compliancewith current or future environmental and safety laws and regulations couldrestrict our ability to expand our facilities, impair our research, developmentor production efforts, or require us to incur other significant expenses. Therecan be no assurance that violations of environmental laws or regulations willnot occur in the future as a result of the inability to obtain permits, humanerror, accident, equipment failure or other causes.

 

**We havelimited experience complying with public company obligations, includingrecently enacted changes in securities laws and regulations. Compliance withthese requirements will increase our costs and require additional managementresources, and we still may fail to comply.**

 

We operated as a privatecompany until February 2007 and prior to that, we were not subject to manyof the requirements applicable to public companies. Recently enacted andproposed changes in the laws and regulations affecting public companies,including the provisions of the Sarbanes-Oxley Act of 2002 and rules relatedto corporate governance and other matters subsequently adopted by the SEC andNASDAQ Global Market, will result in increased administrative costs to us andincreased legal and accounting fees. The impact of these events and heightenedcorporate governance standards could also make it more difficult for us toattract and retain qualified persons to serve on our board of directors, ourboard committees or as executive officers.

 

As directed by Section 404of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring us toinclude a report of management on our internal control over financial reportingin our annual report on Form 10-K for the year ended December 31,2008. In addition, in our annual report on Form 10-K for the year ending December 31,2009, the independent registered public accounting firm auditing our financialstatements must attest to the effectiveness of our internal control overfinancial reporting. We may be unable to comply with these requirements by theapplicable deadlines. We will be testing our internal control over financialreporting in connection with Section 404 requirements and could, as partof that documentation and testing, identify material weaknesses, significantdeficiencies or other areas requiring further attention 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;

 

· statements made by Biosensors relatingto regulation or supply of the drug coating;

 

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

 

· quarterly variations in our or ourcompetitors’ 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 commonstock;

 

· developments in our industry, includingchanges in third-party reimbursement; and

 

· general market conditions and otherfactors unrelated to our operating performance or the operating performance ofour competitors.

 

Thesefactors may materially and adversely affect the market price of our commonstock.

 

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**Ourdirectors, officers and principal stockholders have significant voting powerand may take actions that may not be in the best interests of our otherstockholders.**

 

As of June 30, 2009, our officers, directors andprincipal stockholders each holding more than 5% of our common stockcollectively controlled approximately 69.6% of our outstanding common stock. Asa result, these stockholders, if they act together, will be able to control themanagement and affairs of our company and most matters requiring stockholderapproval, including the election of directors and approval of significantcorporate transactions. This concentration of ownership may have the effect ofdelaying or preventing a change in control and might adversely affect themarket price of our common stock. This concentration of ownership may not be inthe 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 recent months, has experienced significant volatility,including with respect to medical technology, pharmaceutical, biotechnology andother life science company stocks. The volatility of medical technology,pharmaceutical, biotechnology and other life science company stocks often doesnot relate to the operating performance of the companies represented by thestock. Further, there has been particular volatility in the market price ofsecurities of early stage and development stage life science companies. These broadmarket and industry factors may seriously harm the market price of our commonstock, regardless of our operating performance. In the past, following periodsof volatility in the market price of a company’s securities, securities classaction litigation has often been instituted. A securities class action suitagainst us could result in substantial costs, potential liabilities and thediversion of management’s attention and resources.

 

**Anti-takeoverprovisions in our amended and restated certificate of incorporation and amendedand restated bylaws, and Delaware law, contain provisions that could discouragea takeover.**

 

Anti-takeover provisionsof our amended and restated certificate of incorporation and amended andrestated bylaws and Delaware law may have the effect of deterring or delayingattempts by our stockholders to remove or replace management, engage in proxycontests and effect changes in control. The provisions of our charter documentsinclude:

 

· a classified board so that only one ofthe three classes of directors on our board of directors is elected each year;

 

· elimination of cumulative voting in theelection of directors;

 

· procedures for advance notification ofstockholder nominations and proposals;

 

· the ability of our board of directors toamend our bylaws without stockholder approval;

 

· a supermajority stockholder voterequirement for amending certain provisions of our amended and restatedcertificate of incorporation and our amended and restated bylaws; and

 

· the ability of our board of directors toissue up to 10,000,000 shares of preferred stock without stockholder approvalupon the terms and conditions and with the rights, privileges and preferencesas our board of directors may determine.

 

In addition, as aDelaware corporation, we are subject to Delaware law, including Section 203of the Delaware General Corporation Law. In general, Section 203 prohibitsa Delaware corporation from engaging in any business combination with anyinterested stockholder for a period of three years following the date that thestockholder became an interested stockholder unless certain specificrequirements are met as set forth in Section 203. These provisions, aloneor together, could have the effect of deterring or delaying changes inincumbent management, proxy contests or changes in control.

 

**We havenot paid dividends in the past and do not expect to pay dividends in thefuture, and any return on investment 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 OFEQUITY SECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3. DEFAULTS UPON SENIORSECURITIES**

 

None.

 

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

 

None.

 

**ITEM 5. OTHER INFORMATION**

 

None.

 

**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.                                                                                                |
| 10.13(5)            |       | Amended  2006 Equity Incentive Plan and form of stock option agreement used  thereunder.                                                                                                                                                                                  |
| 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.

 

(5)          Incorporated by referencefrom our Quarterly Report on Form 10-Q for the quarter ended September 30,2008, filed on November 12, 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:  July 24, 2009 | By:                  | /s/ GREGORY D.  CASCIARO |
|                                |                 | **GREGORY  D. CASCIARO** |
|                                |                 | **President  and Chief Executive Officer** |
|                                |                 | **(Principal  Executive Officer)** |
|                                |                 |   |
|                                |                 |   |
| Date:  July 24, 2009 | By:                  | /s/ TIMOTHY D.  KAHLENBERG |
|                                |                 | **TIMOTHY  D. KAHLENBERG** |
|                                |                 | **Chief  Financial Officer** |
|                                |                 | **(Principal  Accounting and Financial Officer)** |

 

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